‘Could Be a Mess’: Logistics of Potential Mass Tariff Refunds and Other Considerations for Claims Trading

Last week’s Supreme Court arguments on challenges to the Trump administration’s tariffs under the International Emergency Economic Powers Act, or IEEPA, provided hope for the tariffs’ challengers.

Since the cases were first filed in lower courts, legal commentators have described the challenges as “strong,” but until Nov. 5 it was hard to imagine the Supreme Court, which has consistently sided with the administration on issues of executive power, actually overturning the signature centerpiece of Trump’s economic policy. Skepticism that the tariffs would be found illegal was underscored by a lack of unanimity at the Federal Circuit on one of the case’s last stop before the Supreme Court.

For some, that understanding shifted when Chief Justice John Roberts, Justice Neil Gorsuch and Justice Amy Coney Barrett raised pointed questions cutting to the core of the administration’s case.

Justice Gorsuch warned that the president’s use of IEEPA to impose the tariffs amounted to a “one-way ratchet toward the gradual but continual accretion of power in the executive branch.” Justice Barrett expressed similar concerns. Chief Justice Roberts remarked that the major questions doctrine, which requires Congress to provide explicit authority to the president for actions of economic significance, “might be directly applicable” in this case.

The justices also closely scrutinized the core arguments presented by the tariffs’ opponents. Justices Gorsuch and Barrett questioned the parties on whether the language in IEEPA empowering the president to license imports had any practical distinction from collecting tariffs. Justice Barrett also quizzed the tariffs’ opponents on why IEEPA, which allows the president to prohibit trade with a country altogether, does not also allow the “weaker medicine” of tariffs. The chief justice also acknowledged that the tariffs were “quite effective in achieving a particular objective.”

The high court’s ultimate decision remains to be seen. A ruling striking down the tariffs, however, would raise a question with considerable resonance for distressed debt funds and investment banks: What happens to tariff money that has already been collected? According to U.S. Customs and Border Protection, $90 billion has been collected via IEEPA tariffs through Sept. 23 – a number that rises every day.

The logistics of potential tariff returns was touched on by the justices and counsel at the Nov. 5 arguments. We imagine that returning $100 billion or more will be incredibly complicated and, in the words of Justice Barrett, a “mess.”

Nevertheless, we understand a market has emerged for the purchase of claims for future tariff refunds. This may be familiar territory for distressed investors, who are always looking for new markets to monetize. Returns for these types of trades can be healthy, and, importantly, the returns on them are uncorrelated with the markets, something every GP wants to show its LPs.

There are sharp contrasts, however, between the market for tariff refund claims and the trade claims markets that investors may be more familiar with (for example, FTX, Lehman, Madoff and the Icelandic bank failures). Below, we explore a few of these differences and discuss a series of questions that must be resolved before any tariff refunds are actually delivered – whether to the commercial party that paid the tariff in the first place or a claims trader stepping in later.

Even assuming the challengers prevail, fundamental threshold questions remain, such as whether the Supreme Court would even order widespread refunds and how a party might state a claim to a refund if one is available.

There is little precedent for a mass tariff refund process and, unlike the claims transfer process in chapter 11 proceedings, there is no established framework for claims trading or legal certainty of the ability of a transferee to “stand in the shoes” of a transferor. Relatedly, this nascent market appears to involve counterparty risks unlike those seen in more traditional claims trading settings.

Below, we discuss: (i) if last week’s arguments provide any clues as to the justices’ approach to refunds, (ii) the existing administrative process for preserving tariff refund claims and why it may not be the final procedure in the event of mass refunds, and (iii) the unique counterparty and durational risks facing funds attempting to stake a position in the refund claim market.

Refund Discussion During SCOTUS Arguments

During the Nov. 5 oral arguments, Justice Amy Coney Barrett said that a tariff refund process “could be a mess,” and pressed counsel on how it could work. Neal Katyal of Milbank, counsel for the private party plaintiffs, was careful to demand a refund for his specific clients and – with respect to other tariff payers – remarked that a class action could serve as a mechanism or vehicle whereby importers could assert refund claims via a court-supervised process. Katyal also noted that the government previously stipulated that the plaintiffs would receive a refund in the event they ultimately prevail on the merits.

On Nov. 4, a group of businesses filed a proposed class-action lawsuit in D.C. federal court on behalf of importers paying the IEEPA tariffs on imports from China and the European Union. The businesses are represented by the New Civil Liberties Alliance, a nonprofit that has brought several other challenges to the IEEPA tariffs. That docket is available on Octus HERE. We note, however, that the path toward any type of class certification would be long and could move the case to an entirely different court.

Following a Supreme Court opinion, additional class actions or individual actions will likely be filed, possibly in the U.S. Court of International Trade. Other challenges to the IEEPA tariffs that have been stayed pending the outcome of the V.O.S. Selections and Learning Resources cases before the Supreme Court.

During arguments, Katyal asserted that for “everyone else where you don’t have a class action,” there is a “very complicated” administrative process for importers to lodge a protest with the U.S. Customs and Border Protection under 19 U.S. Code § 1514 (discussed further below). Katyal also noted the Supreme Court’s 1998 decision in United States Shoe Corp., which required refunds for harbor maintenance fees collected on exports that were deemed illegal, could be a useful comparison but warned that the reimbursement process there “took a long time.”

The Supreme Court could limit its decision on the IEEPA tariffs to “prospective relief,” Katyal added. He noted the Supreme Court’s 2023 John Q. Hammons decision, which held that “prospective parity is the appropriate remedy” for a “short-lived and small disparity.” In that case, the “small disparity” involved differing U.S. Trustee fees across court districts depending on whether the district was part of the U.S. Trustee program or the Bankruptcy Administrator program. The court found this to violate the Bankruptcy Clause’s uniformity requirement.

Katyal also posited that the court could stay its decision “for a while” to “let the congressional process unfold.” However, leaving the matter of tariff refunds to the gridlocked Congress could lead to delays and politicization of any refund process.

The discussion of remedies took up only a small portion of the Nov. 5 arguments, but the widely divergent options suggested by Katyal highlights the procedural uncertainty that would result from a Supreme Court ruling that requires mass refunds. Additionally, the Supreme Court may not initially weigh in on the appropriate remedies and instead remand the cases to the lower courts to address the remedy process.

In a Nov. 6 client alert following the arguments, Orrick suggests that “tariff claim prices may increase in response to the perception that the oral arguments went well for the parties challenging the tariffs.” The law firm notes that prior to oral arguments, refund claims based on reciprocal tariffs “were generally trading higher” than claims based on fentanyl trafficking tariffs.

Orrick observes that the administration “only mentioned fentanyl three times during oral arguments, and none of the justices asked questions seeking to distinguish between reciprocal tariffs and fentanyl-based tariffs.” The law firm adds that “if the market believes that fentanyl tariffs and reciprocal tariffs are not legally distinguishable, the pricing for fentanyl-based tariff claims may begin to converge.”

The plaintiffs in the cases before the Supreme Court are challenging the president’s April 2 “Liberation Day” reciprocal tariffs as well as separate fentanyl trafficking tariffs imposed on China, Canada and Mexico. The reciprocal tariffs are underpinned by an emergency declaration aimed at addressing “persistent trade deficits” while the fentanyl tariffs are supported by emergency declarations related to the synthetic opioid. A lower court invalidated the fentanyl tariffs on the separate basis that they did not directly “deal with” the drug trafficking crisis.

Orrick also observes that the market for tariff refund claims has grown since it first emerged over the summer and that “some investment banks are acting as brokers to match sellers and buyers.” Additionally, the law firm says that the “diligence process and deal documents should be better developed and more consistent throughout the market now than just a few months ago.”

We now turn to the “very complicated” existing process for tariff refunds.

Considerations for Refund Process

We reiterate that the existing procedures – even if followed perfectly – do not guarantee that a refund claim resulting from a Supreme Court ruling will ultimately lead to compensation.

In an earlier alert, Orrick explained that if the IEEPA tariffs are invalidated, there is “no statutorily provided process or timeline that would govern how a tariff refund program would be administered.” Additionally, the law firm says that the administration may “take the position that only the named parties in the case and/or parties that have timely challenged their tariffs are eligible for a refund.” Orrick recommends that claims traders “review any tariff protests or liquidation extensions during due diligence” and “make sure their purchase contracts obligate the seller to timely file these items.”

A briefing by Squire Patton Boggs explains that there are two main processes for seeking tariff refunds under existing regulations: corrections for unliquidated (open) customs entries and protests for liquidated (closed) customs entries. “Liquidation” is a final reconciliation of the tariff amount and often occurs almost a year after an item is imported and the tariff is paid.

For unliquidated entries, importers can submit “post-summary corrections” to U.S. Customs and Border Protection, or CBP, according to Squire.

For liquidated entries, importers typically can file protests within 180 days after liquidation, Squire adds. If CPB denies a protest, importers can seek review of the decision from the U.S. Court of International Trade, or CIT, by filing a summons within 180 days, the law firm notes.

Squire says that entries typically liquidate and become final 314 days after entry, which means that the earliest entries with IEEPA tariffs will begin to liquidate in mid-December 2025.

While importers can request a liquidation extension, Squire notes that “historically CBP does not view pending litigation as [a] basis for extension.”

The American Association of Exporters and Importers says that any IEEPA tariff refund process “would likely proceed along two parallel tracks” with one process for plaintiffs in litigation obtaining refunds via court order and another process for nonplaintiff importers through a CBP-administered process.

AAEI notes that for the IEEPA tariff lawsuits, the CIT is able to enter a money judgment or other relief such as directing CPB to “reliquidate the plaintiffs’ covered entries and return unlawfully collected duties.” AAEI adds that “the plaintiffs’ refunds would include both principal and statutory interest, as CBP must pay interest on excess duties at the IRS overpayment rate.” We would note that the issue of statutory interest against the United States is more complex than other defendants and that interest may be disallowed due to sovereign immunity.

With respect to the administrative refund process for nonplaintiffs, AAEI states that “presumably, CBP would have to implement a new regulatory process to accept refund requests or it could rely on preexisting procedures for protests or duty refunds.” The organization warns that either way, “the volume of refunds will likely be daunting.”

Advisory firm BDO USA, for its part, says that the 1998 United States Shoe Corp. decision referenced during oral arguments could be “instructive” for any IEEPA tariff refund process. The advisory firm says that “refunds were only issued to companies that had filed timely claims or lawsuits and had provided proof of payment” of the harbor maintenance fee. The firm cautions that the process “was not automatic and required Congressional appropriations to fund repayments.”

Meanwhile, policy researchers at the Cato Institute suggested in an amicus brief that the Supreme Court could direct CBP to issue “broad, automatic refunds” in order to avoid an “administratively burdensome” and “highly inequitable” refund process. They argue that an individual refund process involving separate corrections for each unliquidated entry and separate protests for each liquidated entry would unfairly advantage well-resourced large importers over smaller ones.

The Trump administration could seek to preserve as much of the proceeds from its signature economic policy as possible, which could result in a drawn-out process for claimholders.

During a recent interview with “Fox Business,” U.S. Trade Representative Jamieson Greer said that “specific plaintiffs will get a refund,” and that for other importers, “we’ll have to figure out, probably with the court, what a schedule might look like, what the rights are of these parties and what rights the government has to that money” (emphasis added). Greer also noted that a refund process would primarily fall under the remit of Treasury Secretary Scott Bessent.

A client alert from Covington & Burling cautions that the administration may seek to avoid issuing refunds by arguing that some of the IEEPA tariffs remain effective under other statutes not explicitly cited in the president’s original executive orders – such as section 122 of the Trade Act of 1974, which allows up to 15% tariffs for 150 days, or section 338 of the Tariff Act of 1930, which could allow up to 50% tariffs but has not been used in decades.

Covington also notes that the administration “may withhold refunds while subsequent efforts to justify the tariffs are being litigated.” Covington warns that the administration may try to issue new executive orders to apply tariffs under other statutory authorities retroactively, but that this would “likely face significant legal obstacles.”

There is also the risk that lawmakers alter the tariff refund landscape.

In the event the court invalidates the IEEPA tariffs but stays its decision to allow time for a congressional process, the administration could ask Congress to pass legislation that redistributes or repurposes the IEEPA tariff proceeds. The president this year has repeatedly floated the idea of sending tariff rebate checks to taxpayers, most recently in a Nov. 9 Truth Social post where he suggested a tariff “dividend of at least $2000 a person (not including high income people!)”. However, Bessent told ABC News that he had not yet spoken to the president about the matter. The Treasury Secretary said that any “dividend could come in lots of forms,” such as via the tax cuts passed earlier this year. Any plan to distribute tariff revenues from IEEPA duties invalidated by the Supreme Court could face legal challenges because of its novelty.

While it is theoretically possible that the president asks Congress to retroactively apply any IEEPA tariffs that get invalidated, such an effort would face an uphill battle to garner sufficient votes. A handful of Republican senators recently joined Democrats in approving largely symbolic resolutions to revoke the global reciprocal tariffs as well as other duties on Canada and Brazil. A vote on legislation to affirmatively reinstate IEEPA tariffs set aside by the Supreme Court could see even more Republican defections.

Even if passed, retroactive relief could be challenged legally. However, some retroactive taxes have been approved in the past.

Uncertainties of Purchasing a Tariff Refund Claim

As described above, tariff claims share certain similarities with types of claims that distressed desks are very familiar with trading. However there are important differences to consider. Distressed investors often look for opportunities to interpose themselves in transactions where one entity is owed money from another with a level of uncertainty regarding the quantum and timing of the ultimate payment.

This describes well both a bankruptcy trade claim and a tariff refund claim. However, whereas trade claims have a tried-and-true transfer process, including rules about notice and who should be paid by the estate, these threshold questions (as discussed above) have yet to be resolved regarding tariff refund claims.

The purchaser of a trade claim will file with the court a notice of the transfer under Bankruptcy Rule 3001(e) and pay a $25 fee for the filing of evidence of transfer. The seller then has a 21-day period to object to the transfer unless this has previously been waived. Absent an objection, the transferee is considered the owner of the claim and will be included on the claims register and receive any recovery on account of the claim.

As described in detail above, there is no established analogous process for a tariff refund claim. Absent the question of who is actually due the tariff refund (more on that later), there does not appear any way to obligate the ultimate payor of the refund to pay the transferor of the refund claim. The Madoff cases provide a cautionary tale on this point: There, the victims’ trust established from criminal lawsuits (and administered separately from the Madoff bankruptcy) paid distributions directly to victims in order to explicitly avoid payment to claims purchasers who had bought victims’ claims against the fund.

While we do not know how any tariff refunds will ultimately be handled, we do think it wise for purchasers to consider all the risks attendant with such a purchase, especially the counterparty risk. Ideally for them, the government would recognize and pay claims purchasers.

This is probably overly optimistic. Even if parties anticipated these issues and attempted to structure the trade to contemplate that the refund will be transferred to an entity that is beneficially owned by the claim buyer, there is no guarantee that the U.S. government will make its payment to the parties’ designated entity. As such, the purchaser may instead only have a claim against the seller for amounts that they received from the U.S. government.

This may be especially salient because the companies most likely to sell a potential tariff refund claim at the prices necessary for the trade to be profitable are those most likely to be in some level of cash need. At worst, it is possible that the purchaser of a tariff refund claim would be in a similar situation to an unsecured lender to the seller, and so it likely makes sense that there be some amount of counterparty underwriting taken into consideration.

The above assumes that tariff refunds will be paid to the party that paid the tariff, according to CBP records. There are added complexities beyond that. It does not strain the imagination to think that companies farther down the supply chain, which paid for the tariff through higher prices from their suppliers, will look to get a piece of any forthcoming tariff refund. Companies that receive a refund on tariffs might have to deal with their customers who might feel spurned if the importer receives the ultimate benefit. When it comes to fighting with your customers or the folks who bought your tariff refund claim, the path of least resistance seems clear.

Again, it is very important to keep in mind that the companies most apt to tap the liquidity of their tariff refund claims are those in bad financial shape, especially given the heavy discount they are likely going to be asked to take and the likelihood that they have not engaged in nearly as much legal due diligence as the purchaser.

Prior to a refund process coalescing, investors will need to heed whether something is too good to be true and consider whether they are being properly compensated for the various risks they are taking with these transactions, even if the price is quite low.