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

A sign is seen outside the U.S. District Bankruptcy Court for the Southern District of New York in Manhattan, New York, U.S., January 9, 2020. REUTERS/Brendan McDermid
  • Panel joins 2nd Circuit in rejecting law increasing U.S. Trustee fees
  • Circuit City recently asked Supreme Court to weigh in
  • Judges blame politics for Chapter 11 program discrepancies

(Reuters) - A U.S. appeals court on Tuesday ruled that a 2017 law that increased government fees for many Chapter 11 debtors is unconstitutional because it fails to apply the fees uniformly.

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

The decision comes a couple of weeks after a liquidating trust for Circuit City Stores Inc, which filed for bankruptcy in 2008, petitioned the U.S. Supreme Court to review the U.S. Trustee fee increase under the 2017 law. The 4th and 5th Circuits have issued rulings upholding the law, while the 2nd Circuit determined it is unconstitutional. The 10th Circuit decision, penned by U.S. Circuit Judge Gregory Phillips, largely falls in line with the 2nd Circuit finding.

The U.S. Trustee’s office declined to comment.

The hotel company, John Q. Hammons Hotels & Resorts, filed for Chapter 11 protection in 2016 in the U.S. Bankruptcy Court for the District of Kansas. The company said that in 2018 it was forced to pay higher quarterly fees to the U.S. Trustee than it had in prior years due to the 2017 law that increased the U.S. Trustee fees for Chapter 11 debtors in most states. But the law failed to do the same for North Carolina and Alabama, which use a different governmental entity, known as the Bankruptcy Administrator program, to perform similar duties as the U.S. Trustee in overseeing large corporate bankruptcies.

The company said it had to pay $2.5 million more in quarterly fees than what 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 decision, Phillips wrote that the 2017 law, by creating an inconsistency across government bankruptcy overseer programs, violates the U.S. Constitution’s requirement that bankruptcy laws 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 said.

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

In a dissent, U.S. Circuit Judge Robert Bacharach said he does not believe the 2017 law violates the Constitution's bankruptcy uniformity requirement, saying it allowed Congress to recoup funds by targeting U.S. Trustee districts specifically.

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, rather than the U.S. Trustee, program. While Congress intended to eventually bring them into the U.S. Trustee program, that effort ultimately failed.

The case is John Q. Hammons 2006 LLC v. Office of the United States Trustee, U.S. 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 U.S. Trustee: Jeffrey Sandberg, Mark Stern, Ramona Elliott, Matthew Sutko, Andrew Beyer and Brian Boynton of the U.S. Department of Justice

Read more:

Circuit City trustee seeks Supreme Court review of bankruptcy fee hikes

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.