REUTERS/Brendan McDermid

10th Circuit deepens circuit split over bankruptcy fees with hotel ruling

(Reuters) – A U.S. appeals court docket on Tuesday dominated {that a} 2017 legislation that elevated authorities fees for a lot of Chapter 11 debtors is unconstitutional as a result of it fails to use the fees uniformly.

The two-1 10th U.S. Circuit Courtroom of Appeals decision reversed a Kansas bankruptcy court docket’s ruling on fees {that a} Missouri-based hotel firm needed to pay the U.S. Division of Justice’s bankruptcy watchdog, the U.S. Trustee.

The choice comes a few weeks after a liquidating belief for Circuit Metropolis Shops Inc, which filed for bankruptcy in 2008, petitioned the U.S. Supreme Courtroom to evaluation the U.S. Trustee payment enhance beneath the 2017 legislation. The 4th and fifth Circuits have issued rulings upholding the legislation, whereas the 2nd Circuit decided it’s unconstitutional. The 10th Circuit resolution, penned by U.S. Circuit Choose Gregory Phillips, largely falls in line with the 2nd Circuit discovering.

The U.S. Trustee’s workplace declined to remark.

The hotel firm, John Q. Hammons Motels & Resorts, filed for Chapter 11 safety in 2016 within the U.S. Bankruptcy Courtroom for the District of Kansas. The corporate stated that in 2018 it was pressured to pay increased quarterly fees to the U.S. Trustee than it had in prior years as a result of 2017 legislation that elevated the U.S. Trustee fees for Chapter 11 debtors in most states. However the legislation didn’t do the identical for North Carolina and Alabama, which use a distinct governmental entity, often known as the Bankruptcy Administrator program, to carry out comparable duties because the U.S. Trustee in overseeing giant company bankruptcies.

The corporate stated it needed to pay $2.5 million extra in quarterly fees than what it could have paid if its case was pending in North Carolina or Alabama and requested U.S. Bankruptcy Choose Robert Berger to recalculate the fees, which he denied.

In Tuesday’s resolution, Phillips wrote that the 2017 legislation, by creating an inconsistency throughout authorities bankruptcy overseer applications, violates the U.S. Structure’s requirement that bankruptcy legal guidelines be uniform.

“We hold that the 2017 Amendment is unconstitutionally nonuniform, because it allows higher quarterly disbursement fees on Chapter 11 debtors in Trustee districts than charged to equivalent debtors in Bankruptcy Administrator districts,” he stated.

The panel remanded the case to the bankruptcy court docket so the debtors may search a refund of the fees paid that exceed what they might have owed had their case been in a Bankruptcy Administrator district.

In a dissent, U.S. Circuit Choose Robert Bacharach stated he doesn’t imagine the 2017 legislation violates the Structure’s bankruptcy uniformity requirement, saying it allowed Congress to recoup funds by concentrating on U.S. Trustee districts particularly.

He additionally famous, as did the bulk, that the one purpose the 2 separate methods exist is political maneuvering. North Carolina and Alabama opted in 1986 for the Administrator, fairly than the U.S. Trustee, program. Whereas Congress meant to ultimately convey them into the U.S. Trustee program, that effort in the end failed.

The case is John Q. Hammons 2006 LLC v. Workplace of the USA Trustee, U.S. 10th Circuit Courtroom of Appeals, No. 20-3203.

For John Q. Hammons Motels: Nicholas Zluticky, Zachary Hemenway, Michael Pappas, and Nicci Warr of Stinson

For the U.S. Trustee: Jeffrey Sandberg, Mark Stern, Ramona Elliott, Matthew Sutko, Andrew Beyer and Brian Boynton of the U.S. Division of Justice

Learn extra:

Circuit Metropolis trustee seeks Supreme Courtroom evaluation of bankruptcy payment hikes

Maria Chutchian

Maria Chutchian experiences on company bankruptcies and restructurings. She could be reached at [email protected]