tenth Circuit deepens circuit break up over chapter charges with resort ruling

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  • Panel joins 2nd Circuit in rejecting legislation rising U.S. Trustee charges
  • Circuit City lately requested Supreme Court to weigh in
  • Judges blame politics for Chapter 11 program discrepancies

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

The 2-1 tenth U.S. Circuit Court of Appeals decision reversed a Kansas chapter courtroom’s ruling on charges {that a} Missouri-based resort firm needed to pay the U.S. Department of Justice’s chapter watchdog, the U.S. Trustee.

The choice comes a few weeks after a liquidating belief for Circuit City Stores Inc, which filed for chapter in 2008, petitioned the U.S. Supreme Court to overview the U.S. Trustee charge improve beneath the 2017 legislation. The 4th and fifth Circuits have issued rulings upholding the legislation, whereas the 2nd Circuit decided it’s unconstitutional. The tenth Circuit choice, penned by U.S. Circuit Judge Gregory Phillips, largely falls consistent with the 2nd Circuit discovering.

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

The resort firm, John Q. Hammons Hotels & Resorts, filed for Chapter 11 safety in 2016 within the U.S. Bankruptcy Court for the District of Kansas. The firm mentioned that in 2018 it was compelled to pay larger quarterly charges to the U.S. Trustee than it had in prior years because of the 2017 legislation that elevated the U.S. Trustee charges for Chapter 11 debtors in most states. But the legislation didn’t do the identical for North Carolina and Alabama, which use a special governmental entity, referred to as the Bankruptcy Administrator program, to carry out related duties because the U.S. Trustee in overseeing giant company bankruptcies.

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

In Tuesday’s choice, Phillips wrote that the 2017 legislation, by creating an inconsistency throughout authorities chapter overseer packages, violates the U.S. Constitution’s requirement that chapter 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 mentioned.

The panel remanded the case to the chapter courtroom so the debtors may search a refund of the charges paid that exceed what they’d have owed had their case been in a Bankruptcy Administrator district.

In a dissent, U.S. Circuit Judge Robert Bacharach mentioned he doesn’t consider the 2017 legislation violates the Constitution’s chapter 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 programs exist is political maneuvering. North Carolina and Alabama opted in 1986 for the Administrator, quite than the U.S. Trustee, program. While Congress supposed to ultimately deliver them into the U.S. Trustee program, that effort in the end failed.

The case is John Q. Hammons 2006 LLC v. Office of the United States Trustee, U.S. tenth 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 extra:

Circuit City trustee seeks Supreme Court overview of chapter charge hikes

Maria Chutchian

Maria Chutchian studies on company bankruptcies and restructurings. She will be reached at maria.chutchian@thomsonreuters.com.

REUTERS/Brendan McDermid