The denial of compensation to a chapter 13 trustee when dismissal precedes confirmation does not offend the Due Process Clause of the Fifth Amendment, for multiple reasons explained by the Ninth Circuit Bankruptcy Appellate Panel.

As Bankruptcy Judge Robert J. Faris said in the BAP’s November 12 opinion:

[T]he Ninth Circuit held that a chapter 13 trustee is only entitled to receive the percentage fee if the plan is confirmed; otherwise, if the case is dismissed or converted prior to confirmation, the trustee must return all of the debtor’s plan payments to the debtor, and the trustee receives nothing.

Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023), cert. denied sub nom. McCallister v. Evans, 144 S. Ct. 1004 (2024). To read ABI’s report, click here.

In five cases, the standing chapter 13 trustee filed motions for declaratory relief, arguing that 28 U.S.C. § 586(e)(1) and 11 U.S.C. § 1326(b)(2) violate the Due Process Clause. Judge Faris described the trustee as contending that “due process bars giving quasi-judicial officers a direct and substantial pecuniary interest in plan confirmation.”

Without reaching the merits, the bankruptcy judge denied the motions, believing that stare decisis required the court to follow Evans. The trustee appealed.

The BAP decided that Evans did not preclude examination of the Due Process challenge. Nonetheless, the BAP found no constitutional violation and affirmed.

Stare Decisis

Judge Faris said that stare decisis requires lower courts to follow decisions of higher courts on questions of law. Quoting the Ninth Circuit, he said that the principle “applies only where the appellate court ‘confronts an issue germane to the eventual resolution of the case, and resolves it after reasoned consideration in a published opinion . . . .’”

The bankruptcy court was not bound by stare decisis, Judge Faris said, “because the Ninth Circuit [in Evans] did not engage in a ‘reasoned consideration’ of, let alone decide, the constitutional question.” He therefore held “that stare decisis was inapplicable and that the bankruptcy court erred in declining to consider the Trustee’s declaratory relief motions.”

Immediately, Judge Faris said that the error was harmless because the trustee’s “constitutional arguments are meritless.”

How Much Are Chapter 13 Trustees Paid?

Judge Faris explained how 28 U.S.C. § 586(e)(1) and 11 U.S.C. § 1326(b)(2) work in concert to provide compensation for a chapter 13 trustee “in an amount fixed by the Attorney General (after consulting with the United States Trustee) that is equal to the compensation paid to senior employees in the executive branch, plus corresponding benefits.” In addition, the trustee “is also entitled to payment of actual, necessary expenses under a budget approved by the Attorney General after consultation with the United States Trustee. 28 U.S.C. § 586(e)(1)(A).”

To fund compensation, Judge Faris said that “the trustee collects post-confirmation a percentage of each plan payment.” The percentage, he said, “is fixed by the Attorney General (not to exceed ten percent of plan payments) . . . . If the total percentage fees collected by the trustee exceeds the trustee’s approved compensation and expenses, the excess is deposited into the United States Trustee System Fund.”

Trustee Isn’t a Quasi-Judicial Officer

Primarily, the chapter 13 trustee contended that she was a quasi-judicial officer, making it “constitutionally impermissible to give her a direct pecuniary interest in the outcome of a case,” Judge Faris said. The trustee saw her role as “indistinguishable from that of the bankruptcy judge,” citing cases from the Supreme Court in 1927 and 1977.

Judge Faris said that the cases cited by the trustee were “inapplicable,” because the trustee’s role was unlike that of a justice of the peace, a mayor or a magistrate judge. A chapter 13 trustee, he said, is not the person who “decides the case.”

Instead, Judge Faris said that the case on appeal was “analogous” to a case in the Supreme Court involving an administrative prosecutor in the Labor Department. In that case, there was no constitutional violation because the decision was made by an administrative law judge, not by the prosecutor. Judge Faris therefore held that a chapter 13 trustee was “not equivalent to a federal magistrate judge or any other federal judicial officer.”

Judge Faris also rejected the argument that the trustee was a quasi-judicial officer because she enjoyed quasi-judicial immunity. Citing the Ninth Circuit, he said that “‘immunity is extended in appropriate circumstances to non-jurists who perform functions closely associated with the judicial process.”

Even if she were not a quasi-judicial officer, the chapter 13 trustee contended that “due process prohibits a funding scheme where standing trustees must compromise their free and fair exercise of prosecutorial discretion.”

Judge Faris rejected the argument, saying that “the Trustee has not shown that her financial stake raises due process concerns.” The trustee’s maximum salary and expense reimbursement are set every year by the Attorney General, and any excess is paid to the government, obviating the possibility of earning a profit.

Regarding the possibility of collecting too little after Evans to pay what the Attorney General allows, Judge Faris said that the trustee “produced no evidence that her total percentage fee collections . . . will be less than her maximum compensation plus her approved expenses.” Likewise, he said that there was no evidence of the existence of a trustee with low caseloads who would be disadvantaged by Evans.

No Standing to Raise Constitutional Claims

Even if the chapter 13 trustee were a quasi-judicial officer, Judge Faris said that the rights she was asserting “are not hers.”

In cases on the topic, the parties raising the Due Process claims were not the judge or the judicial officer. The trustee, he said, “is not among the parties who could conceivably be injured by the type of due process violation identified” by the Supreme Court.

Even if the system of fees violated the Due Process Clause, Judge Faris said that the remedy proposed by the trustee “would not resolve the issue.” He explained that keeping a case alive longer by confirming a plan would produce more money for the trustee, still giving her “a financial interest in plan confirmation.”

Furthermore, upsetting the payment system for chapter 13 trustees, Judge Faris said, “would also call into question the fee system in chapter 7 cases,” because chapter 7 trustees are paid a percentage of distributions to creditors under Section 326(a). Conceivably, therefore, chapter 7 trustees would have an incentive to increase their compensation by attacking debtors’ exemptions or taking “other actions” adverse to “certain creditors.”

“If a financial incentive favoring such behavior violates due process,” Judge Faris said, “the chapter 7 compensation system would be questionable.”

Judge Faris affirmed the bankruptcy court, not seeing how “Congress violated the Trustee’s (or anyone’s) due process rights when it adopted the ‘rough justice’ of a percentage fee system for chapter 13 cases.”