Chapter 7 Trustee Fee Application Denied

Posted by NCBRC - August 11, 2015

Where the chapter 7 trustee did not make distributions or turn over any money to parties in interest he cannot recover fees for time spent prior to conversion to chapter 13. In re Mingledorff, No. 12-41543 (Bankr. S.D. Ga. June 23, 2015).

Ida Mingledorff filed a chapter 13 plan which contemplated 100% payments to unsecured creditors. When she failed to keep up with plan payments the case was converted to chapter 7. As the chapter 7 trustee, Mr. Roach filed an adversary complaint seeking to compel sale of unencumbered property the debtor owned with her sons. Instead, Ms. Mingledorff obtained a reverse mortgage, contingent upon her filing a chapter 13 case, and filed a motion to reconvert.

In the converted chapter 13 case Mr. Roach sought reimbursement for administrative expenses in the amount of $3,000.00 incurred pre-conversion. The court instructed him to file a fee application and had the debtor remove language in the proposed plan providing for the $3,000.00 fee.

In his fee application the trustee enumerated his activities while administering the chapter 7 case and calculated his compensation based on the lodestar approach of time and expenses paid at a reasonable rate. He argued that, under 503(b)(2), the fee request should be granted as reasonable compensation for actual and necessary services.

Though neither the debtor nor the chapter 13 trustee objected to Mr. Roach’s fee application the court found that, under section 330(a), it had an independent duty to review the application and, unlike a proof of claim, such application is not deemed accepted absent objection.

The court turned to section 326 which provides that a chapter 7 trustee’s compensation shall be calculated as a percentage of “moneys disbursed or turned over in the case by the trustee to parties in interest excluding the debtor, but including holders of secured claims.” The court discussed three ways cases such as the one before it have been treated by other courts: 1) the chapter 7 trustee is not entitled to any compensation; 2) the trustee is entitled to compensation because the section 326 cap no longer applies once the case is converted; and 3) the cap still applies but is applied to any distribution made by any trustee after conversion.

In adopting the first treatment of such cases, the court relied on the plain language of section 326(a) and found that a chapter 7 trustee is entitled to compensation only when he makes distributions or turns money over to parties in interest. Putting it another way, the court applied the formula provided by section 326(a) for calculation of trustee fees and found that the result owed was $0. Recognizing the seemingly harsh result of its conclusion the court found that it was not absurd to believe that Congress may have intended just such a result. In support of this conclusion, the court noted the prior to 2005, section 330(a)(3) dealt with trustee compensation using the lodestar approach. BAPCPA removed chapter 7 trustees from the formula provided in that paragraph and specified instead the formula based on percentages set forth in section 326.

The court rejected the debtor’s argument on behalf of the trustee’s fee application that once the case was converted to chapter 13 the formula set forth in section 326 no longer applied. Rather, the court found that the language in section 326 limiting its application to chapter 7 (and chapter 11) cases, referred to the type of trustee not the type of case. Therefore, the formula applied to the chapter 7 trustee without regard to the chapter the fee application was filed under. “It would be absurd to find that Congress intended to limit a Chapter 7 trustee’s compensation in cases where the trustee fully administered all assets in the case but did not intend to limit that trustee’s compensation if the case was converted before any distributions were made.”

The court, therefore, concluded that because the trustee made no distributions nor turned over any money to parties in interest, he was not entitled to compensation for his time.

MIngledorff Bky SD Ga opinion


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