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Government does not have to pay back unconstitutional bankruptcy fees, Supreme Court rules

The justices threw out a $326 million refund for bankruptcy debtors who paid fees under an unconstitutional funding scheme.

WASHINGTON (CN) — The Supreme Court ruled on Friday that the government does not have to refund bankruptcy debtors who paid more than their counterparts in other states.

Led by Justice Ketanji Brown Jackson, the six-justice majority said taxpayers shouldn’t be stuck with a $326 million bill because Congress made errors when raising fees in U.S. Trustee districts. 

“We cannot remedy an old constitutional problem by creating a new one, so due process and other constitutional protections undoubtedly will limit the possible remedies in many cases,” the Joe Biden appointee wrote. 

Chief Justice John Roberts and Justices Samuel Alito, Sonia Sotomayor, Elena Kagan and Brett Kavanaugh joined Jackson’s opinion. 

The United States Trustee Program is a component of the Justice Department overseeing federal bankruptcy cases in the 88 federal judicial districts. While the program operates under the DOJ, it is entirely funded by user fees, mostly from debtors in Chapter 11 bankruptcy cases. 

Six districts do not utilize the trustee program and instead use the Bankruptcy Administrator Program. This program uses judicially appointed administrators. It follows a different fee than the trustee program because its shortfall comes out of the judiciary budget. 

A 2017 law allowed debtors in the administrator program to pay lower fees than those in the trustee program. The Supreme Court ruled that this was unconstitutional in 2022 because Congress is required to provide uniform bankruptcy laws nationwide. 

The court’s 2022 ruling said the higher fees for debtors in certain locations was unconstitutional. The current case answered what the remedy should be for those unconstitutional fees

In 2016, a group of companies associated with John Q. Hammons Hotels and Resorts filed for bankruptcy in Kansas. Because of where they filed, these companies paid higher fees than debtors in other states. The companies tried to say this system was unconstitutional in 2020, asking a bankruptcy court to refund the discrepancy between the fees. 

The court rejected the request but an appeals court reversed. The government asked the Supreme Court to review the case. 

Noting that it was important to consider the limited nature of the constitutional problem, Jackson said only 50 out of over 2,000 cases involving large Chapter 11 debtors were impacted by the monetary disparity. 

The court’s goal, Jackson said, was to remedy the error in line with congressional intent and Congress likely would not have intended impractical relief.

Citing the government’s estimates, Jackson said issuing refunds would signal fiscal distress in the U.S. Trustee Program and trigger higher fees. 

“Thus, in mandating such a remedy, we would transform a program Congress designed to be self-funding into an enormous bill for taxpayers,” Jackson wrote. “It is hard to imagine a remedy more diametrically opposed to clear congressional intent.” 

Jackson said the best evidence of Congress’s intent comes from lawmakers’ actions. In 2021, Congress revised the fee scheme, mandating equal fees prospectively. 

“Congress’s choice makes sense,” Jackson wrote. “Because fees collected in Bankruptcy Administrator districts go toward offsetting the Judiciary’s appropriation, not to supporting the U. S. Trustee Program, retrospectively raising fees in Bankruptcy Administrator districts would do nothing to achieve Congress’s goal of keeping the U. S. Trustee Program self-funding.” 

In a fervent dissent, Justice Neil Gorsuch said the court was backtracking on the government’s promise to provide relief to the debtors if their case prevailed. 

“Two years ago, we held that this geographically discriminatory treatment violated the Constitution’s Bankruptcy Clause — a provision that, we stressed, was not ‘toothless,” the Donald Trump appointee wrote. “Today, however, the court performs a remedial root canal, permitting the government to keep the cash it extracted from its unconstitutional fee regime.”  

Gorsuch accused his colleagues of not wanting to put in the work to provide the appropriate solution for the debtors, characterizing the ruling as an “alien approach to remedies.” 

The traditional remedial principles, Gorsuch said, would have given the debtors a refund. Gorsuch chastised the majority’s deference to the government, noting that the legal system gives plaintiffs the right to choose what kind of relief to seek. 

“I struggle to understand why today the majority so readily dismisses any remedy in this case — all to save the government from the trouble of issuing funds the Legislature has appropriated and the Executive has promised to pay,” Gorsuch wrote. 

Gorsuch said it's possible that the court thinks Bankruptcy Clause violations are less worthy of relief than other constitutional violations. The other option, Gorsuch said, is that the court thought supplying relief wasn’t worth the trouble. 

“It’s not hard to imagine today’s decision receiving a warm welcome from those who seek to engage in only a dash of discrimination or only a brief denial of some other constitutionally protected right,” Gorsuch wrote. “The rest of us can only hope that the court corrects its mistake before it metastasizes too far beyond the bankruptcy context.” 

Follow @KelseyReichmann
Categories / Appeals, Business, Law

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