Court Takes Self-Enriching Chapter 7 Trustee to Task

Posted by NCBRC - May 21, 2018

The district court went beyond the issue of whether the bankruptcy court properly denied the debtor’s motion for reconsideration, and addressed the unappealed substantive issue of whether the chapter 7 trustee, Kevin McCarthy, properly discharged his duties when he generated substantial fees and costs in pursuit of certain creditor claims. Skubal v. McCarthy, No. 1:17-cv-936 (E.D. Va. May 16, 2018).

Chapter 7 debtor, Megan Skubal, co-owned two real estate parcels as joint tenants with her father, Thomas Skubal. When she filed for bankruptcy, two unsecured creditors filed proofs of claim for a total of approximately $600. The trustee then contacted two additional unsecured creditors to urge them to file proofs of claim. Those creditors were Ms. Skubal’s student loan lender, ASC Education Services, to whom Ms. Skubal owed $46,171.47, and Midland Credit Management, for a credit card debt of $25,818.06. As both creditors declined to file proofs of claim, and despite the U.S. Trustee’s opposition, Mr. McCarthy filed the proofs of claim on their behalf. Mr. McCarthy then sought to sell Ms. Skubal’s real property to pay the $600 claims, the student loan claim, the credit card claim, and his fees and administrative expenses.

Thomas Skubal filed an objection to the credit card proof of claim citing the potential sale of his real property as his interest in the matter. The U.S. Trustee objected to the proofs of claim for both claims on the bases that 1) the Midland claim was barred by the statute of limitations, and 2) Ms. Skubal was current on the student loan debt and therefore would reap no benefit from having the claim filed. The U.S. Trustee went so far as to argue that Mr. McCarthy’s motivation in filing the proof of claim and incurring the costs associated with it, was simply to pad his own fees.

The bankruptcy court sustained the objection to the Midland claim and went on to find, without addressing the U.S. Trustee’s arguments to the contrary, that because ASC’s claim was allowed, there was some benefit to the debtor in having it treated in her chapter 7.

As a result of the ruling, Mr. Skubal purchased the real property he owned with his daughter at the trustee’s sale and paid off his daughter’s student loan.

Mr. McCarthy then filed his fee application listing $5,895.46 in commissions and expenses, $34,500 in attorney’s fees owed to his law firm for its representation in the case, and $4,600 in costs associated with the sale of Ms. Skubal’s property. Mr. Skubal objected to the fees and the bankruptcy court overruled the objection on the bases that he lacked standing and that the fees were reasonable. Both Ms. Skubal and her father filed a motion for reconsideration which the bankruptcy court denied finding that its decision with respect to Mr. Skubal’s lack of standing was correct, that Ms. Skubal waived her right to move for reconsideration since she did not join in the objection. Ms. Skubal and her father appealed the denial of reconsideration.

On appeal, the court quickly dispensed with the denial of the motion for reconsideration finding that Mr. Skubal was neither debtor, creditor nor guarantor with respect to any of the bankruptcy debts and was therefore not a proper party in interest. Ms. Skubal’s not-legally-enforceable promise to repay the money he used to pay off her student loan was insufficient to confer standing.

The court then turned to the more concerning matter of Mr. McCarthy’s conduct as chapter 7 trustee. It began with the general principle in section 704(a)(1) that a “chapter 7 trustee’s duties include ‘collecting and reducing to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the bests interests of the parties in interest.” The efficacy of liquidation must be balanced against the best interest of parties, including the debtor. Obviously, a chapter 7 trustee may not conduct the case for the sole purpose of self-enrichment.

Here, the trustee admitted to the U.S. Trustee that he was motivated, at least in part, by a desire to increase his fees. Under its power under section 105(b) to oversee the operation of the court, the appellate court remanded to the bankruptcy court to determine whether Mr. McCarthy’s conduct was driven by a desire to generate fees for himself and his law firm and was contrary to the best interests of the parties, including Ms. Skubal and her father.

The court thus affirmed the denial of the motion for reconsideration and remanded for proceedings relevant to Mr. McCarthy’s conduct.

Skubal ED Va opinion May 2018

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