Circuit 10 Deepens Circuit Division on Bankruptcy Fees with Hotel Decision

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  • Panel Joins Circuit 2 In Rejecting U.S. Administration Fee Bill
  • Circuit City recently asked the Supreme Court for a ruling
  • Judges Blame Politics For Chapter 11 Program Gaps

(Reuters) – A U.S. appeals court ruled on Tuesday that a 2017 law that increased government fees for many Chapter 11 debtors was unconstitutional because it did not apply fees consistently.

U.S. 10th Circuit Court of Appeals 2-1 decision overturned a Kansas bankruptcy court ruling over fees a Missouri hotel company had to pay to the US Department of Justice’s bankruptcy watchdog, the US Trustee.

The decision comes weeks after a liquidation trust for Circuit City Stores Inc, which filed for bankruptcy in 2008, asked the United States Supreme Court to review the increase in United States trustee fees by under the 2017 law. The 4th and 5th circuits issued rulings upholding the law, while the 2nd circuit ruled that it was unconstitutional. The 10th Circuit decision, written by US Circuit Judge Gregory Phillips, largely matches the conclusion of Circuit 2.

The US trustee’s office declined to comment.

The hotel company, John Q. Hammons Hotels & Resorts, filed for Chapter 11 protection in 2016 with the United States Bankruptcy Court for the District of Kansas. The company said that in 2018 it was forced to pay higher quarterly fees to the US trustee than in previous years due to the 2017 law that increased US trustee fees for Chapter 11 debtors. in most states. But the law did not do the same for North Carolina and Alabama, which use a different government entity, known as the bankruptcy administrator program, to perform similar functions as the US trustee in supervision of major corporate bankruptcies.

The company said it had to pay $ 2.5 million more in quarterly fees than it would have paid if its case was pending in North Carolina or Alabama and asked U.S. bankruptcy judge Robert Berger to recalculate the fees, which he denied.

In Tuesday’s ruling, Phillips wrote that the 2017 law, by creating an inconsistency between government bankruptcy monitoring programs, violates the U.S. Constitution’s requirement that bankruptcy laws be uniform.

“We believe the 2017 Amendment is unconstitutionally non-uniform, as it allows higher quarterly disbursement fees for Chapter 11 debtors in trustee districts than those charged to equivalent debtors in bankruptcy administrator districts.” , did he declare.

The panel referred the case back to bankruptcy court so debtors can seek reimbursement of fees paid that exceed what they would have had if their case had been in a bankruptcy administrator district.

In a dissent, US circuit judge Robert Bacharach said he did not believe the 2017 law violated the constitutional uniformity requirement for bankruptcy, saying it allowed Congress to recover funds by specifically targeting the US trustee districts.

He also noted, as did the majority, that the only reason the two separate systems exist is political maneuvering. North Carolina and Alabama opted in 1986 for the Administrator program rather than the US Trustee program. While Congress intended to eventually bring them into the U.S. Directors’ Program, that effort ultimately failed.

The case is John Q. Hammons 2006 LLC v Office of the United States Trustee, US 10th Circuit Court of Appeals, No. 20-3203.

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

For the US Trustee: Jeffrey Sandberg, Mark Stern, Ramona Elliott, Matthew Sutko, Andrew Beyer and Brian Boynton of the US Department of Justice

Read more:

Circuit City trustee asks Supreme Court to reconsider bankruptcy fee hikes



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