October 28, 2024
Patterson Belknap Attorney Served as
Independent Examiner in FTX Bankruptcy Case
Firm Serves as Counsel to the Examiner
Independent Examiner in FTX Bankruptcy Case
Firm Serves as Counsel to the Examiner
Case Summaries
New Ruling on Remedy for Disparity in Bankruptcy Fees
May 30, 2023
We have blogged a few times about the Supreme Court’s decision in Siegel v. Fitzgerald and its implications. In Siegel, the Supreme Court invalidated the disparity in debtor-paid fees prevailing in most of 2018 between the 88 judicial districts that use the U.S. Trustee system (“UST Districts”) and the six judicial districts that rely on Bankruptcy Administrators (“BA Districts”). Siegel left open the question of what the appropriate remedy was, and lower courts since Siegel have ruled on the question, so far deciding in favor of refunding the fee. On May 18, the United States Bankruptcy Court for the District of Delaware issued the latest decision in this trend, also concluding that the excess fee should be refunded. Pitta v. Vara (In re VG Liquidation, Inc.), Adv. Pro. No. 22-50416 (JTD), 2023 Bankr. LEXIS 1320 (Bankr. D. Del. May 18, 2023).
The debtors filed chapter 11 petitions in May 2018 in the District of Delaware, a U.S. Trustee district. A plan was confirmed in July 2018, and in August 2019 the VG Liquidating Trust (the “Trust”) was established. The confirmation order required that the Liquidating Trustee pay the statutory fees required under federal law until the case was closed. Because the case was commenced before October 2018, when a fee increase for BA Districts brought those fees in line with those in UST Districts, a similar case filed in a BA District would have been subject to lower fees. On June 6, 2022, the Supreme Court invalidated the fee disparity in Siegel. On September 16, 2022, the Liquidating Trustee filed an adversary proceeding against the U.S. Trustee and the U.S. Trustee program (“Defendants”) seeking a refund. The U.S. Trustee filed a motion to dismiss, arguing that the remedy of a refund was unavailable.
The bankruptcy court denied the motion to dismiss. First, the bankruptcy court rejected Defendants’ argument that the only appropriate remedy was prospective relief equalizing fees going forward, which Congress had already provided. The bankruptcy court reasoned that, here, plaintiff sought relief for a monetary injury and the appropriate remedy for a monetary injury was a refund. It distinguished cases in which the Supreme Court had held prospective equalizing relief sufficient, noting that those cases did not involve a monetary injury. Second, the bankruptcy court rejected Defendants’ argument that, if retrospective relief was appropriate, it should consist in obtaining higher fees from debtors in BA Districts. The bankruptcy court noted legal and practical obstacles with obtaining higher fees from such debtors, including that it had no jurisdiction over the BA Districts and that it was unaware of any effort by Defendants in those districts to collect additional fees. The bankruptcy court also emphasized that it was unreasonable to expect bankruptcy trustees to refuse to pay a potentially unconstitutional fee and make a prospective constitutional challenge instead.
The bankruptcy court’s decision repeatedly referenced and agreed with the reasoning in a similar decision in Siegel v. United States Trustee Program (In re Circuit City Stores, Inc.), Adv. Pro. No. 19-03091-KRH, 2022 Bankr. LEXIS 3544 (Bankr. E.D. Va. Dec. 15, 2022), the decision on remand in the case decided by the Supreme Court. The bankruptcy court also noted that the Second and Tenth Circuits had reached similar conclusions, though summarily. For now, it appears that no court has come out the other way.
