The United States Trustee Program is responsible for the efficient administration of bankruptcy cases throughout most of the country. Since 1986, the Trustee Program has covered all states except North Carolina and Alabama, where an Administrator Program oversees bankruptcy filings instead. Although there are many similarities between the two programs, there is a significant difference in the funding structure. The Trustee Program is entirely self-funded through quarterly fees paid by debtors that file in the Trustee Program districts. In contrast, the Administrator Program is funded through the judiciary’s general budget.
Debtors in the Administrator Program districts pay quarterly fees as well, but those fees offset the judicial branch disbursements rather than directly funding the program. When quarterly fees were enacted in the Administrator Program, the Judicial Conference, which oversees the Administrator Program, entered a standing order requiring the Administrator Program’s fees to be the same as the fees charged to similarly situated debtors in the Trustee Program.
However, in 2017, Congress enacted a temporary fee increase for large chapter 11 cases in the Trustee Program districts. The fee increase began on January 1, 2018, and it applied to all newly filed and pending cases. Despite the Judicial Conference’s standing order, a corresponding fee increase did not take effect in the Administrator Program districts until October 1, 2018, and then it only applied to newly filed cases.
In June 2022, the Supreme Court of the United States heard a challenge to this disparate treatment. See Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022). In Siegel, a liquidating trustee argued that the fee increase violated the United States Constitution because it did not apply uniformly across the country. The Supreme Court agreed and found that the Article I of the U.S. Constitution required uniformity in bankruptcy laws, but the Court’s ruling did not specify a remedy for the constitutional violation.
Prior to Siegel, both the Second and Tenth Circuits held that debtors in Trustee Program districts were entitled to refunds from the United States Trustee. After Siegel, both Circuits reaffirmed their prior rulings. See In re Clinton Nurseries, Inc., 53 F.4th 15 (2d Cir. 2022);In re John Q. Hammons Fall 2006, LLC, No. 203203, 2022 WL 3354682 (10th Cir. Aug. 15, 2022). In June and August of this year, the Eleventh and Ninth Circuits, respectively, also held that refunds are the appropriate remedy. See S. Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp., Inc.), 71 F. 4th 1341 (11th Cir. June 23, 2023); USA Sales, Inc. v. Off. of United States Tr., 76 F.4th 1248 (9th Cir. 2023).
The United States Trustee has asserted that the better remedy would be the so-called “level-down” approach, which means collecting additional fees from debtors in the Administrator Program districts. One benefit of this approach, according to the United States Trustee, is that it would impact a significantly smaller pool of debtors. But no court has adopted the United States Trustee’s preferred level-down remedy.
Despite this apparent consensus, the office of the United States Trustee is pursuing Supreme Court review. A petition for a writ of certiorari from the John Q. Hammons decision was filed on June 23, 2023—the same day that the Eleventh Circuit’s decision was issued. In its petition, the United States Trustee acknowledged that no circuit split had emerged but insisted that one was likely.
On July 14, the United States Trustee filed a petition for a writ of certiorari from the Clinton Nurseries decision. Again, the Trustee acknowledged that there was no circuit split but requested that if the Supreme Court prefers to wait for one, the petition be held until that time. Notably, when this petition was filed, the United States Trustee was awaiting decisions from both the Fourth and Ninth Circuits. Now the Ninth Circuit has joined the other circuits in ruling in favor of refunds. On September 15, the Clinton Nurseries respondents filed their opposition brief, criticizing the United States Trustee’s proposed remedies as “so fraught with constitutional and other infirmities that they are not worthy of the Court’s consideration.”
Most recently, on September 21, the United States Trustee filed a petition for a writ of certiorari from the Eleventh Circuit decision. This petition does not reference the pending Fourth Circuit ruling or suggest that a circuit split may be imminent. Instead, it merely references the prior John Q. Hammons and Clinton Nurseries petitions and requests that all cases raising the question of remedies be held pending resolution of John Q. Hammons.
As noted above, every court that has addressed this issue has ruled in favor of refunds. Although the United States Trustee appears intent on pursuing its arguments, given the current trajectory of these cases, hundreds of debtors may soon become entitled to refunds for excess fees paid.