Nice Tentative From Judge Scott Clarkson re Chapter 7 Trustee’s Commission

6:14-19644 Banning at 8th Street LLC Chapter 7

Hrg. on Chapter 7 Trustees First Interim Fee Application filed 8/12/15 For The Period From July 29, 2014 To August 11, 201 for Todd A. Frealy, Trustee Chapter 7, Period: 7/29/2014 to 8/11/2015, Fees: $164,686.51
Docket 235

Tentative for 9/2/2015:

The Chapter 7 Trustee has presented an interim fee application [Dk. 235] (“Interim Application”) to the Court, citing sections 326 and 330 of the Bankruptcy Court for support of his cause.  Of course, the Trustee means section 331, which guides interim fee applications.  This is anticipated to be a surplus estate.  All creditor and administrative claims are anticipated to be paid in full.  Equity will most likely be receiving a significant distribution.  As described below, the Trustee is requesting an interim maximum commission in an amount of approximately $164,686.00 based on distributions already made.  The carefully documented time and charge records of the Trustee indicate that his services to the estate as of this application can be calculated to be in the amount of approximately $75,000.00.  Equity objects that the approximate $85,000.00 difference is a windfall that should not be permitted.  The Chapter 7 Trustee has presented his reply.

The Chapter 7 Trustee requests that he be provided the full amount of a calculated commission under the terms provided by section 326(a) of the Bankruptcy Code. His application states as follows:

B. Fees and Expenses Requested
Compensable disbursements from the estate total $4,714,550.64. [FN1 omitted.] Disbursements have been made for debt service to Preferred Bank pursuant to its promissory notes and deeds of trust which encumbered the Property, for insurance premiums for the Property, bank fees, bond premiums, the payoff of Preferred Bank’ [sic] first and second deeds of trust, closing costs and broker’s commissions.

. . . Pursuant to 11 U.S.C. Section 326(a), the statutory commission for the bankruptcy trustee for these disbursements is $164,686.51. Therefore, the Trustee is respectfully requesting fees in the amount of $164,686.51 from funds on hand in the estate.

Interim Application [Dk. 235 at page 10, lines 13-24] (emphasis added).

The Trustee’s request for the maximum amount of commission based on section 326(a) is presently both premature and incorrect, to the extent he advocates that the fees are subject only to the calculation set forth in section 326(a).  It is premature because this Court finds judicial economy in discussing the fine points of trustee fees once, not twice, and endeavors to do so only at the final fee hearing stage.

Further, the Trustee’s application for fees, solely based on the calculations set out in section 326(a) in this interim fee application, may very well be premised in part on a misinterpretation of sections 326(a) and 330, coupled with the Ninth Circuit B.A.P. decision, In re Salgado-Nava, 473 B.R. 911 (9th Cir. B.A.P. 2012), for which this court is appreciative but respectfully believes deserves additional consideration and thought.

For instance (and most likely), section 326(a) is a statutory cap of commissions, and not a minimum prix fixe as apparently suggested by the Applicant. One impact of the Salgado-Nava decision was the apparent reaction to it by a recent and well-circulated decision arising from the Eastern District of California, In re Scroggins, 517 B.R. 206 (E.D. Bankr. 2014). Another apparent impact is, perhaps, the need for a further nuanced discussion of the statutory framework involving sections 326(a) and 330 which addresses certain of the concerns articulated in Scroggins. This remains a developing area of legal interpretation (witness recent cases arising from bankruptcy, district, and circuit courts both in and outside of the Ninth Circuit) and deserves our complete attention. Indeed, this Court desires to explore several stated views that the United States Trustee’s Handbook for Chapter 7 Panel Trustees somehow has become part of the statute, rules, or legislative history of the United States Bankruptcy Code. This is especially important in light of the fact that the United States Trustee hires and fires Chapter 7 Trustee panel members, and that the United States Trustee is an active advocate on statutory and regulatory matters before this, and every other Bankruptcy Court in the country.

Both the Salgado-Nava and Scroggins decisions righteously and thoughtfully sought to answer the difficult questions arising from sections 326 and 330; however, this Court believes that exploration, further analysis, and perhaps moderation on all sides (including and especially this Court’s perceived undue escalation and distortion of what the 9th Circuit B.A.P. said and meant in that case) is required.

But, these issues are for another day, and specifically the day of the Trustee’s final fee application.  There will be plenty to discuss on the topics of whether the results of the section 326(a) calculus are maximums or minimums, whether the fees are subject to review for reasonableness, when are “reasonableness” considerations by the court triggered, and the overall grand (but perhaps unnecessary) debate surrounding In re Salgado-Nava and In re Scroggins.  Exploration of how a policy handbook of a party in interest before this Court (a party in interest which is interested in maintaining its panel of Chapter 7 Trustees with a policy of not objecting to the full commission calculated under section 326(a) – and thus maximizing financial remuneration to its panel trustees – except for unstated “extraordinary circumstances”) should or could affect or limit the discretion of this Court to exercise its judgment on reasonableness of fees, as required by section 330 of the Bankruptcy Code.  While it may be a good idea for the U.S. Trustee not to object to panel trustee fees if they want them to stay as panel trustees and slough though thousands of unpaying and money-losing no-asset cases, it also just might be a good idea for courts to understand ‘why” the U.S. Trustee has that policy, and whether that policy should or should not control or limit a court’s discretion to award reasonable and proper fees under section 330.

In the interim, the Court has carefully considered the trustee’s interim fee application and the limited opposition thereto.  The Court believes that, on an interim basis, an award of $75,000.00, which is the approximate amount set out in the Trustee’s carefully constructed time and charge records accompanying the Interim Application, is reasonable and warranted, based on the entirety of the record in this case.  The Court also finds that because significant distribution has been conducted, an interim fee application by the Applicant is proper at this time under section 331.  But not because the U.S. Trustee Handbook for Chapter 7 Panel Trustees says it is.  The Trustee shall prepare an order and lodge same within seven days from the hearing date.

One Reply to Nice Tentative From Judge Scott Clarkson re Chapter 7 Trustee’s Commission

  1. I hate to say it but Judge Clarkson is definitely onto something. Section 326(a) says the Court “may allow reasonable compensation” which means the Court must determine whether the fee is reasonable. The code then seems to say that whatever compensation the Court deems is reasonable, that compensation may not exceed the percentages set forth within the statute, “… not to exceed 25% … and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000…”

    Incidentally, in Hokulani Square, Inc. the 9th Circuit referred to the statutory compensation scheme as a “cap” twice! “The bankruptcy court has discretion to award a trustee fees up to a cap…” and “In re England, 153 F.3d 232, 235 (5th Cir. 1998). It reasoned that ‘[t]he plain language of § 326(a) indicates that the statute caps a trustee’s compensation based upon…”

    What doesn’t make sense to me is why there needs to be a cap at all? Why not allow Trustees to either receive “reasonable” fees which *might* mean the lodestar system OR give them a straight percentage where there is a reduction in rare circumstances where the facts warrant it.

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