by In three consolidated chapter 7 cases, the Bankruptcy Court, finding that carve-out or short sale agreements did not lead to any meaningful distribution to creditors, reduced the trustee’s fee by 50% of the requested amount. In re Scoggins, No. 12-42158 (Bankr. E.D. Cal. Sept. 8, 2014) (the court approved the fee request in a fourth, business, case).
In the lead case, Scoggins, the trustee sold the debtor’s residence with a “carve-out” provision for the estate in the amount of $26,750. The trustee sought a fee of $16,000 leaving $8,572 for the unsecured creditors: a 5% dividend. The other two individual cases similarly involved sales of the debtor’s encumbered residence and a trustee fee request substantially exceeding the amount remaining for unsecured creditors. (In re Ruelas, No. 13-21100, In re Popescu, No. 12-41237). Noting that a trustee fee request “has no natural enemies,” the court sought briefing from the trustee and the U.S. trustee to address issues of appropriate compensation.
The court began its analysis with the statutory context. Section 326(a) provides for maximum trustee fees based on percentages of estate assets. Section 330(b) provides that a trustee may receive $60.00 from the initial filing fee which may serve as compensation in a no-asset case. Section 330(a)(1)(A) provides that the court may award reasonable fees and expenses to the trustee for his services. Where those sections describe some of the methods for awarding fees, other sections provide a foundation for reduction or denial of fees. Section 330(a)(2) permits a court to “award compensation that is less than the amount of compensation than is requested.” Section 330(a)(4)(A)(ii)(I) provides that a court shall not compensate a trustee for services that were not “reasonably likely to benefit the debtor’s estate.”
Section 330(a)(7) introduced the interpretative difficulty. That section provides: “In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.” The trustee argued that the “commission” is a fixed amount as authorized by section 326(a). He reasoned that Congress included section 330(a)(7) to create a subsidy for the “unreasonably low” $60 fee in no-asset cases.
The court disagreed. It noted that the average yearly trustee fee in the district is $190,185.87, 76% of which comes from asset cases. The court also questioned the trustee’s argument that the $60 no-asset fee is inherently inadequate compensation where those cases often require less than one hour’s work for the trustee. Instead, the court found: 1) that the “commission” language of section 330(a)(7) creates a rebuttable presumption that the maximum fee provided by section 326(a) is reasonable (citing In re McKinney, 383 B.R. 490 (Bankr. N.D. Cal. 2008)); and 2) that section 330(a)(2) entitles a court to reduce this rate if the fee is unreasonably disproportionate, or as some courts have expressed it, “extraordinary circumstances” exist. In re Rowe, 750 F.3d 392 (4th Cir. 2014); relying on Appeal of Hopkins, Ch. 7 Trustee (In re Salgado-Nava), 473 B.R. 911 (B.A.P. 9th Cir. 2012).
The court identified a number of possible circumstances under which the trustee fee may be “unreasonable” or “extraordinary,” such as:
1) Where the services fall below an acceptable standard
2) Where the trustee delegates his or her duties to an attorney or other professional
3) Trustee fees are greater than the amount left for unsecured creditors
4) The case has a lot of cash or liquid assets
5) The trustee operates the estate business
6) There are significant distributions without commensurate effort on the part of the trustee
7) There is artificial inflation of the estate by a “carve-out” agreement.
With respect to the “carve-out” example—which applies to the individual debtors in this case—the trustee sought to take his commission from the entire amount of the sale rather than from the portion left after the secured creditor is paid. The court found that permitting the fee to be calculated according to the trustee’s request, would violate the “fundamental principle” that the trustee shall not administer an asset where liquidation of the asset will primarily benefit the trustee. The court went on to find that “a trustee fee greater than distributions to unsecured priority and general claims . . . could be viewed as substantially disproportionate and an ‘extraordinary’ circumstance.”
Turning to the individual cases before it, the court noted that in the preceding year, the trustee involved in each of the cases received substantially more in fees than the average trustee compensation in the district. This alone, the court found, constituted an “extraordinary circumstance” requiring further examination into the fee request. The court concluded that where the trustee would receive more than the amount remaining for unsecured priority and general claims, there is no “meaningful” distribution to creditors and the fees are unreasonably disproportionate. The court noted that if it reduced the trustee’s fee by half, he would still receive $315.00/hour for his services; a reasonable fee. Thus, the court reduced the fee to the highest amount that would not exceed the amount received by unsecured priority and general creditors.
Taking the case beyond its own boundaries, the bankruptcy judge, joined by six other judges in the district, established a set of Local Rules requiring that the trustee file a formal fee application in cases where:
a) the request is for more than $10,000;
b) the fee exceeds the amount remaining for unsecured priority and general claims;
c) the case involves a “carve-out” or “short sale”;
d) the trustee operates a business;
or
e) the court orders a formal application.
Scoggins Bankr. E.D. Cal opinion