U.S. Supreme Court justices seemed skeptical of a bankrupt company’s claim that court fees that it paid should be refunded after the nation’s highest court struck down the law authorizing the fee schedule in 2022.
The case is Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, and the oral arguments took place at the Supreme Court on Jan. 9.
The U.S. Department of Justice (DOJ) runs the U.S. Trustee Program, which it describes as “the component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees.”
A group of hotels argued that it was treated unfairly when it filed for Chapter 11 bankruptcy in Kansas. Bankruptcy courts in every judicial district outside of Alabama and North Carolina operate under the DOJ program.
The company involved, Circuit City, a now-defunct technology retail chain, filed in 2008 for Chapter 11 bankruptcy in the Eastern District of Virginia, and its trustee argued that the company wasn’t treated fairly in the process, as compared with bankruptcy filers in Alabama and North Carolina.
The 2022 ruling didn’t address the issue of whether any fees should be refunded because of the disparity. However, various courts of appeal have held in the ruling’s aftermath that overcharged bankruptcy filers deserve refunds.
The DOJ asked the Supreme Court to review the $2.5 million refund given to John Q. Hammons Hotels and Resorts, which sought Chapter 11 protection in 2016 in Kansas and paid the increased bankruptcy fees after 2017.
In the Hammons case, the legal issue is whether the appropriate remedy for the lack of uniformity in the program is to issue refunds of the higher fees paid by some bankruptcy filers.
Hammons attorney Daniel L. Geyser told the justices that his client is “entitled to a refund for the unconstitutional fees paid under the 2017 Act.”
“Under a century of this court’s jurisprudence, prospective-only relief is insufficient to redress a past monetary injury. If the government unlawfully collects funds, it is required to rectify that violation with meaningful backward-looking relief. It cannot simply keep the unconstitutional fees and promise not to do it again.”
The government is wrong to argue that the client forfeited its rights by “failing to invoke a pre-deprivation remedy,” according to Mr. Geyser.
“Due process requires retrospective relief unless an exclusive pre-deprivation remedy is both clear and certain,” he said.
The government’s suggestion that the court should authorize “a clawback program seeking 800 percent higher fees in administrator districts over a half decade after the fact” is misguided, Mr. Geyser said.
“[The] extreme proposal invites chaos in bankruptcy courts and promises an administrative morass,” he said.
DOJ attorney Masha G. Hansford said the case is about “the question that this court left open in Siegel, what the appropriate remedy is for the uniformity violation that resulted when debtors in a small sliver of cases, four dozen cases, in the two states that use bankruptcy administrators did not pay the increased quarterly fees mandated by Congress in the U.S. Trustee districts.”
The court has repeatedly recognized that “the touchstone of the remedial inquiry is congressional intent” and that “there’s unusually strong evidence that Congress would choose to fix the constitutional violation by mandating uniformly higher fees.”
The other side’s proposal would lead to about $326 million in taxpayer-funded refunds “to fund windfalls for the largest users of the bankruptcy system ... like [Hammons] who paid exactly what Congress intended that they pay,” Ms. Hansford said.
Resolving the case that way would “actually make the disparity larger” and go “directly” against congressional intent, she said.
“Congress has for decades sought to make the bankruptcy system self-sustaining at no cost to the taxpayer, and it enacted the 2017 act fee increase for that reason,” Ms. Hansford said.
Justice Elena Kagan told Mr. Geyser that because Congress “never wants to impose burdens on the taxpayer with respect to bankruptcy ... it thinks that the people who use bankruptcy should pay for bankruptcy.”
“[So] it seems to me that there is a pretty strong case that Ms. Hansford says that it should be equalization by collection,” Justice Kagan said.
Justices Brett Kavanaugh and Ketanji Brown Jackson told Mr. Geyser that Congress could have dealt with the fee disparity and offered a refund in 2020 when it amended the law but chose to not do so.
Congress didn’t act “presumably because it’s $326 million and ... that would be inconsistent with the usual principle that bankruptcy pays for itself,” according to Justice Kavanaugh.
Justice Sonia Sotomayor suggested that the fact that bankruptcy filers in two states managed to temporarily avoid a fee increase hadn’t harmed Hammons.
“I’m sorry,” she told Mr. Geyser.
“Why do we care? Why do you care? I mean, you cared about being treated unequally. You’re being told you will be treated equally—that someone else may get a pass—why is that hurting you?”
The Supreme Court is expected to rule on the case by June.
