Office of the United States Trustee v. John Q. Hammons Fall 2006, LLC

Issues

Should the government compensate the bankruptcy debtors who paid higher fees than some other debtors by refunding the higher fees or by retrospectively charging the other debtors higher fees, or is prospective uniformity in fees sufficient?

Oral argument:

January 9, 2024

Court below:

United States Court of Appeals for the Tenth Circuit

This case asks the Supreme Court to decide the proper remedy for bankruptcy debtors who were treated differently, paying higher fees under a statute enacted by Congress without constitutional authority. John Q. Hammons Hotels & Resorts entities filed for Chapter 11 Bankruptcy in 2016 and paid $2.5 million higher fees than debtors in some federal districts, before the Judiciary and Congress resolved the disparate treatment. The U.S. Trustee argues that prospective equality in fees is a sufficient remedy, but if a retrospective remedy is required, the Court should extend the higher fees to debtors previously exempt from it. Hammons argues that the only proper remedy for fees paid under an unconstitutional statute is to refund them and that the remedies the U.S. Trustee proposes violate due process. The outcome of this case will affect how the bankruptcy system is funded—by debtors or taxpayers—and the remedial schemes for debtors who received unequal treatment.

Questions as Framed for the Court by the Parties

Whether the appropriate remedy for the constitutional uniformity violation found by this court in Siegel v. Fitzgerald is to require the United States Trustee to grant retrospective refunds of the increased fees paid by debtors in U.S. Trustee districts during the period of disuniformity, or is instead either to deem sufficient the prospective remedy adopted by Congress or to require the collection of additional fees from a much smaller number of debtors in Bankruptcy Administrator districts.

Facts

The United States is divided into ninety-four judicial districts. John Q. Hammons Fall 2006 LLC v. Office of the U.S. Trustee (“CA10”) at 7. Before 1978, the Judicial Conference funded bankruptcy courts and appointed bankruptcy judges (“BAs”) in all districts. Id. at 7, 8; Brief for Petitioner, Office of the U.S. Trustee (“U.S. Trustee”) at 2. In 1978, Congress started the pilot Trustee Program (“UST”) to administer bankruptcy proceedings. Id. at 7–8. It exercised power under the Bankruptcy Clause, which permits Congress to “establish . . . uniform Laws on the subject of Bankruptcies throughout the United States,” in 18 of the 94 federal judicial districts. Id. at 9; Bankruptcy Clause. In 1986, Congress expanded the program to all districts but allowed six in Alabama and North Carolina to join later. CA10 at 8. In 2000, Congress permanently exempted those six, which are known as BA districts. Id.

Congress also enacted 28 U.S.C. § 1930(a)(6) (“the Statute”), imposing quarterly fees on debtors. Id. at 8–9. Since those fees applied to UST but not BA districts, the Statute was not “uniform” under the Bankruptcy Clause. Id. at 9. Congress added § 1930(a)(7) to permit the Judicial Conference to impose equal fees in BA districts as well. Id. at 9. The Conference issued a “standing order” to collect fees equal to UST districts, which BAs did until 2017. Brief for Petitioner at 4; CA10 at 9. In 2017, Congress amended the Statute, temporarily increasing reduced fees to prevent taxpayers paying for any shortfall. CA10 at 9; Brief for Petitioner at 4–5. The Judicial Conference implemented the fee increase in BA districts late in 2018. CA10 at 10–11.

Debtors soon began to challenge the fee increase in some district courts. Brief for Petitioner at 6. They argued, and courts held, that the amendment was not uniform because it did not mandate BA districts to also increase fees. Id. In 2020, Congress amended § 1930(a)(7) from permitting to requiring the Judicial Conference to impose equal fees in BA districts. Id. In 2022, the United States Supreme Court held in Siegel v. Fitzgerald that the 2017 amendment violated the uniformity requirement of the Bankruptcy Clause. Siegel v. Fitzgerald at 12. The Court reserved judgment on what remedy injured debtors were entitled to. Id. at 15.

John Q. Hammons Fall 2006, LLC and seventy-six other debtors related to John Q. Hammons Hotels & Resorts (“Hammons”) filed for Chapter 11 bankruptcy in a UST district in Kansas in 2016. CA10 at 11. Hammons paid increased fees under the 2017 amendment: $2.5 million more than it would have in BA districts. Id. In 2020, before Siegel, Hammons moved for a refund for that amount arising from the disuniformity. Brief for Petitioner at 8. The bankruptcy court rejected the motion. CA10 at 11. On appeal, the United States Court of Appeals for the Tenth Circuit reversed and remanded for a refund of the excess fees that Hammons paid. Id. at 26–27.

The Office of the United States Trustee (“U.S. Trustee”) petitioned for certiorari while Siegel was pending, asking the Supreme Court to resolve the disuniformity and remedy questions after deciding Siegel. Brief for Petitioner at 9. The Court did, remanding this case to the Tenth Circuit to decide the remedy for the disuniformity. Id. The Tenth Circuit upheld its decision to remand for a refund. John Q. Hammons Fall 2006 LLC v. Office of the U.S. Trustee (“CA10”) at 7.

The Supreme Court granted the U.S. Trustee’s second petition for certiorari on September 29, 2023. Brief for Petitioner at 1–2.

Analysis

CONGRESSIONAL INTENT

The U.S. Trustee argues that when courts decide a remedy to be an unequal treatment by a statute in violation of the Constitution, courts should do what Congress would have done “had it been apprised of the constitutional infirmity.” Brief for Petitioner, U.S. Trustee at 14. The U.S. Trustee notes that the choice is between extending the higher fees to BA districts (“leveling down” the benefit) and refunding them to UST districts (“leveling up”). Id. at 15, 35. Here, the U.S. Trustee maintains, Congress would have leveled down—it would have increased the fees in BA districts in 2017. Id. at 14–15. The U.S. Trustee contends that when Congress increased fees in UST districts in 2017, it expected the BA districts to increase fees as well. Id. at 16. When the BA districts did not, the U.S. Trustee posits, Congress amended the Statute in 2020 to require the Judicial Conference to match fees in BA districts to UST districts. Id. at 17.

Hammons cautions that congressional intent is not unbounded and that any choice posed may only include permissible options. Brief for Respondent, Hammons at 14. Hammons asserts that the choice for Congress is not whether to level up or level down, but whether to collect higher fees from BA districts over the period in which UST districts paid higher fees—2017 through 2018. Id. at 31. Hammons contends that Congress explicitly refused to do so when it amended the Statute in 2020 and only mandated equal fees going forward. Id. Hammons argues that the U.S. Trustee has not pointed to any congressional consideration of the practical difficulties associated with collecting fees from prior bankruptcy cases that may be closed by now. Id. at 35–36. It is reasonable to conclude, Hammons claims, that Congress would not have chosen to collect those fees when the practical difficulties make that option implausible. Id. at 41. Hammons adds that Congress has not responded to the Court’s opinion in Siegel v. Fitzgerald. Id. at 21.

PROSPECTIVE REMEDY

The U.S. Trustee argues that the proper remedy is prospective: requiring uniform fees going forward (i.e. leveling down). Brief for Petitioner at 20. The U.S. Trustee points to two recent cases in which the Supreme Court ensured equal treatment going forward by removing an unequal benefit previously granted to a small group by exception. Id. at 22–23. According to the U.S. Trustee, the Court refused to extend unequal benefits to the larger group and acknowledged that its resolution “granted no tangible benefit to the challengers.” Id. at 23. The U.S. Trustee also notes that the Court upheld prospective relief in a previous uniformity case. Id. at 23.

Next, the U.S. Trustee maintains that requiring uniform fees going forward would be consistent with congressional intent. Id. at 25. Because Congress already amended the Statute, the U.S. Trustee argues, the Court need not do anything. Id. at 26. If the Court grants further remedies, the U.S. Trustee asserts, it would circumvent congressional intent. Id.

Hammons counters that a prospective remedy only prevents additional injury in the future and cannot cure a past constitutional monetary injury. Brief for Respondent at 9, 10. Hammons contends that a prospective remedy on its own is not uniform—although required by the Constitution—because it leaves the past disparity between UST and BA districts in place. Id. at 15. Hammons also posits that a prospective remedy results in more disuniformity if debtors in UST districts who have not yet paid the higher fees are freed from that obligation. Id. at 17. Hammons next argues that a prospective remedy allows the government to keep unlawfully collected funds in the public treasury. Id. at 11. Hammons maintains that injured debtors should be able to recover those funds. Id.

According to Hammons, instead of the prospective remedy, the government must return those funds to the injured parties to rectify the unequal treatment during the period in which the higher fees were collected. Id. at 11, 12. Hammons asserts that the Court “routinely remands for States to implement meaningful backward-looking relief.” Id. at 15.

RETROSPECTIVE REMEDY: REFUNDING OR COLLECTING ADDITIONAL FEES

The U.S. Trustee posits that a plaintiff is not always entitled to a retrospective remedy for unequal treatment in violation of the Constitution. Brief for Petitioner at 20. Monetary compensation for past injury is rare, the U.S. Trustee asserts, whereas orders requiring future acts or omissions are more common. Id. at 21. The U.S. Trustee highlights obstacles to monetary compensation, including a lack of cause of action and the ability to challenge fees at a pre-deprivation hearing. Id. at 21–22. The U.S. Trustee argues that a plaintiff is entitled to “meaningful backward-looking relief” as part of due process only when the plaintiff did not have a meaningful opportunity to challenge taxes at a pre-deprivation hearing. Id. at 29. The U.S. Trustee asserts that that reasoning applies here and that, because Hammons had a full opportunity to challenge the higher fees at a pre-deprivation hearing, meaningful backward-looking relief is inapplicable to Hammons. Id.

The U.S. Trustee posits that even if the Court decides to impose a retrospective remedy, it should still level down by ordering the Judicial Conference to collect higher fees from BA districts over 2017 through 2018. Id. at 34, 35. The U.S. Trustee argues that the Constitution permits such a remedy to ensure equal treatment. Id. at 34. Because the Constitution is silent on how to achieve equal treatment, the U.S. Trustee asserts, congressional intent should govern. Id. at 35. The U.S. Trustee adds that Congress intended to impose higher fees on BA districts starting in 2017. Id.

Hammons counters that the government must refund the higher fees that it paid. Brief for Respondent at 9. Hammons argues that the government misstates the standard for meaningful backward-looking relief. Id. at 22. According to Hammons, a pre-deprivation hearing is not enough, and debtors are entitled to a post-deprivation remedy. Id. at 23. Hammons contends that a pre-deprivation hearing is sufficient only when it is clear, certain, and exclusive—that it is the only available remedy. Id. at 24. Hammons asserts that a debtor thus has a right to backward-looking relief when a post-deprivation hearing is available, which holds true under the Bankruptcy Code. Id. Hammons also posits that here, any pre-deprivation hearing is not clear and certain because a debtor would have to challenge and withhold the fees under threat of dismissal or conversion of the case into liquidation. Id. at 26. Hammons concludes that such a threat fails due process requirements. Id. Hammons additionally disputes that a debtor needs a cause of action to challenge fees unlawfully collected during a pending case. Id. at 18.

Hammons also counters that the government has no authority to collect higher fees from BA districts over 2017 through 2018. Id. at 29. Hammons notes that neither the Statute nor the amendments authorize the Treasury Department to collect higher fees retrospectively. Id. at 34. Hammons asserts that reopening closed cases to collect higher fees violates due process. Id. at 38. Hammons argues that Congress explicitly refused to do so in 2020 and that congressional intent thus points the other way. Id. at 31, 35.

Discussion

COST TO THE TAXPAYER

The U.S. Trustee argues that refunding fees to all injured debtors in UST districts would cost the government, and thus taxpayers, an estimated $326 million. Brief for Petitioner, U.S. Trustee at 35–36. Although the actual cost may be lower because not every affected UST debtor may seek a refund, the U.S. Trustee contends that the total cost to taxpayers would still be in the hundreds of millions of dollars. Id. at 36. On the other hand, the U.S. Trustee asserts that the cost could exceed $326 million because debtors may seek refunds for fees paid at any time, including for bankruptcy proceedings filed after the required uniformity was restored. Id. at 37. Finally, the U.S. Trustee points out that any cost to taxpayers would contravene Congress’s policy of having a self-funded bankruptcy system without cost to the taxpayer. Id.

Acadiana Management Group and others (“Acadiana”) counter, in support of Hammons, that Congress is only allowed to enact legislation that comports with the Constitution and cannot circumvent that constraint with a policy not to spend money on the bankruptcy system. Brief of Amici Curiae Acadiana Management Group, et al., in Support of Respondents at 17–18. MF Global Holdings Ltd. (“MF Global”) argues, in support of Hammons, that the U.S. Trustee overstates the potential cost to taxpayers because many debtors, including MF Global, have never paid the unconstitutional fees or have already received refunds another way. Brief of Amicus Curiae MF Global Holdings Ltd., in Support of Respondents at 15. MF Global further posits that debtors with closed Chapter 11 cases who have not challenged the fees are unlikely to seek refunds because the cost of reopening cases would exceed the amount of any refund. Id. at 15–16.

PRACTICALITY CONSIDERATIONS

The U.S. Trustee argues that offering refunds in UST districts would disrupt the statutory scheme, whereas retrospective higher fees in BA districts would not. Brief for Petitioner at 38. The U.S. Trustee asserts that Chapter 11 debtors in BA districts comprise less than 3% of such debtors nationwide. Id. The U.S. Trustee notes that in the first three quarters of 2018, 17,000 cases were pending in UST districts and 500 in BA districts. Id. The U.S. Trustee contends that 12% of cases in UST districts—about 2,100—qualified for the higher fees. Id. at 38–39. Assuming a similar percentage for BA districts, the U.S. Trustee asserts that retrospective higher fees would affect only forty cases, whereas refunds would affect 2,100. Id. at 39. The U.S. Trustee acknowledges that refunds would be easier to implement but insists that it would not result in more uniformity than retrospective higher fees or a prospective remedy because the number of affected UST and BA cases differs so significantly. Id.

MF Global counters, in support of Hammons, that retrospectively increased fees in BA districts would enforce an unconstitutional statute against debtors who, like MF Global, have not yet paid the higher fees. Brief of MF Global Holdings Ltd. at 10. MF Global also asserts that if the Court does not award refunds, more litigation will ensue because parties will raise takings claims. Id. at 18. USA Sales, Inc. argues, in support of Hammons, that if courts do not refund payments even in cases of clear constitutional violations, Chapter 11 debtors will have no incentive to challenge future unconstitutional fee collections by Congress. Brief of Amicus Curiae USA Sales, Inc., in Support of Respondents at 18. Former Bankruptcy Judges contend, in support of Hammons, that retrospective fees are practically difficult because many bankruptcy proceedings have closed, with confirmed reorganization plans and distributions, and debtor entities have ceased to exist. Brief of Amici Curiae Former Bankruptcy Judges, in Support of Respondents at 5. The Judges add that bankruptcy courts would have to reopen closed cases, contravening the fundamental principle of finality in bankruptcy proceedings—that the debtors, creditors, and third parties all rely on claims being resolved. Id. at 6–7.