On an issue where the courts are split, Bankruptcy Judge Guy R. Humphrey of Dayton, Ohio, decided that a chapter 7 trustee was entitled to no compensation because the trustee had made no distributions to creditors, even though the chapter 7 trustee had identified assets prompting the debtor to convert to chapter 13 and file a 100% plan.

However, Judge Humphrey decided in his March 10 opinion that the chapter 7 trustee’s counsel was entitled to compensation, although the trustee wasn’t.

The individual debtor had filed a chapter 7 petition and claimed an exemption for her interest in a trust created by her parents. The chapter 7 trustee investigated and sought an extension of time to object to the exemption claim. The trustee was taking the approach that it was not a spendthrift trust exempt under Section 541(c)(2).

Claiming that she had received a raise at work and could afford chapter 13, the debtor moved for conversion. Initially objecting to conversion, the chapter 7 trustee later dropped her opposition, and the case converted. In chapter 13, the debtor immediately filed a 100% plan.

The chapter 7 trustee filed an application for an allowance of compensation. Counsel for the chapter 7 trustee also filed a fee application. The debtor objected, contending that the chapter 7 trustee was entitled to no compensation because she had made no distributions to creditors.

In chapter 7, a trustee’s compensation is governed by Sections 330(a)(1), 330(a)(7), and 326(a) and (c). Section 330(a)(1) permits “reasonable compensation” plus reimbursement of expenses, but Section 330(a)(7) says that “the court shall treat such compensation as a commission, based on section 326.”

‘No Soup for You!’

Pivotal for Judge Humphrey, Section 326(a) gives the trustee “reasonable compensation” on a sliding scale based “upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.”

Judge Humphrey pointed out how the BAPCPA amendments in 2005 changed the landscape for chapter 7 trustees. For the most part, the amendments favored chapter 7 trustees by locking in compensation as “a commission, based on section 326,” and thereby removing other considerations under Section 330(a) that might result in reducing a trustee’s compensation.

Similarly, the amendments removed chapter 7 trustees from the list of professionals subject to the factors in Section 330(a)(3). Now, the subsection only refers to trustees under chapter 11.

In the case before him, Judge Humphrey framed the question as “whether the Trustee is entitled to a statutory fee when no assets were ‘disbursed or turned over’ during the Chapter 7 case. 11 U.S.C. § 326(a).”

“Multiple courts,” Judge Humphrey said, “have found that a Chapter 7 trustee that has not collected any assets cannot be compensated for a commission under § 326(a).” On the other hand, he acknowledged that “some courts, largely considering pre-BAPCPA law, have allowed § 326 fees to Chapter 7 trustees in this type of situation under various theories.”

Judge Humphrey cited courts applying a quantum meruit theory, and others using a “composite trustee” approach, to compensate a chapter 7 trustee up to the maximum after first deducting the chapter 13 trustee’s fee. He also cited the “lodestar” approach utilized to compensate the chapter 7 trustee in In re Cummings, 659 B.R. 895 (Bankr. D.N.M. May 22, 2024). To read ABI’s report on Cummings, click here.

Judge Humphrey said that he “respectfully” disagreed with Cummings, because:

1)    [T]he specific statutory exception and directive of § 330(a)(7) prevails over the language in § 330(a)(1); and

2)    § 330(a)(3) specifically applies to Chapter 11 trustees, and does not reference a Chapter 7 trustee.

“While there may have been a basis to award such compensation prior to the enactment of BAPCPA,” Judge Humphrey ruled that the trustee was not entitled to commissions because the “Chapter 7 Trustee did not distribute any funds to creditors or [turn over] such funds to parties in interest.”

Ok to Pay the Chapter 7 Trustee’s Counsel

Compensation for the chapter 7 trustee’s counsel was a different kettle of fish, Judge Humphrey said, because counsel’s fee awards are “an administrative expense under §§ 503(b)(2), 507(a)(2), and 330(a) of the Code,” and Section 326(a) “does not apply to counsel to the trustee.”

The debtor conceded that counsel’s services were actually rendered and that the hourly rates were reasonable.

Judge Humphrey found as a fact that the trustee’s investigation “did have a bearing on the Debtor’s decision to convert the case to Chapter 13” and the debtor’s consequent 100% plan. He also decided that the chapter 7 trustee’s responsibilities did not end with the conversion motion because the trustee “was sufficiently within her responsibilities to conduct an analysis of the merits of the Debtor’s motion to convert.”

Judge Humphrey personally reviewed counsel’s time records and allowed the requested compensation after one small deduction, because “the services benefitted the bankruptcy estate by resulting in a Chapter 13 plan providing the unsecured creditors with a 100% dividend.”