On a question where the bankruptcy courts are divided, Bankruptcy Judge Maria Elena Chavez-Ruark of Greebelt, Md., decided that the calculation of the compensation of a chapter 7 trustee is based upon all distributions made by the trustee, including distributions made to co-owners of property, but, of course, excluding distributions to the debtor.

The individual chapter 7 debtor was a joint tenant in the ownership of a poultry farm. Without objection from the nonbankrupt co-tenant, the trustee sold the farm for $350,000, generating net proceeds of about $54,000. Also without objection from the co-tenant, the trustee distributed half of the net proceeds, some $27,000, to the co-tenant.

The trustee filed an application for payment of about $21,500 in commissions, based on total disbursements of approximately $363,500. The total disbursements included the $27,000 that the trustee had turned over to the nonbankrupt co-tenant.

The U.S. Trustee objected, contending that the basis for calculating the chapter 7 trustee’s commissions should not include the $27,000 that the trustee had disbursed to the nonbankrupt co-owner. As authority, the U.S. Trustee cited a decision from the Eastern District of Virginia, In re Eidson, 481 B.R. 380 (Bankr. E.D. Va. 2012), where the bankruptcy court disallowed commissions to the trustee based on distributions made by the trustee to the debtor’s nonbankrupt spouse on account of the spouse’s interest in property that was sold.

In her October 15 opinion, Judge Chavez-Ruark said that the outcome depended on whether the calculation of the trustee’s commissions would be controlled by Section 326(a) or by Section 363(j).

In chapter 7 cases, Section 326(a) provides that “the court may allow reasonable compensation . . . for the trustee’s services [calculated 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.”

Following the sale of property, Section 363(j) says that “the trustee shall distribute to the debtor’s spouse or the co-owners of such property . . . , and to the estate, the proceeds of such sale, less the costs and expenses, not including any compensation of the trustee, of such sale, according to the interests of such spouse or co-owners, and of the estate.”

Citing Section 363(j), the U.S. Trustee argued that the trustee’s commissions should not be based on distributions to a co-owner because Section 363(j) provides, in substance, that a co-owner does not pay any of a trustee’s commissions.

To Judge Chavez-Ruark’s way of thinking, “Sections 363(j) and 326(a) . . . are not mutually exclusive.” Rather, she said that the “court can — and should — apply both provisions in a situation such as the one presented here because they involve different calculations and have different purposes.”

Judge Chavez-Ruark said that “Section 363(j) governs the distribution of sale proceeds to the bankruptcy estate and any co-owners of the property sold,” while “Section 326(a) governs the calculation of the trustee’s compensation.” [Emphasis in original.] She saw “[n]othing in Sections 363(j) and 326(a) [to] suggest[] that the statutes are mutually exclusive.”

Judge Chavez-Ruark paraphrased an opinion by Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., as follows:

[T]he distribution of the sale proceeds is made pursuant to Section 363(j), while the calculation of a trustee’s compensation is an entirely separate statutorily-based calculation dependent on the total disbursements made by the trustee under Section 326(a).

In re Robert Plan Corp., 493 B.R. 674, 686-87 (Bankr. E.D.N.Y. 2012), rev’d on other grounds sub nom. U.S. Dep’t of Lab. v. Kirschenbaum, 508 B.R. 257 (E.D.N.Y. 2014), aff’d sub nom. In re Robert Plan Corp., 777 F.3d 594 (2d Cir. 2015).

Under Section 326(a), Judge Chavez-Ruark said that “the only item” excluded from the calculation of commissions “is moneys disbursed to the debtor.” She refused to “read limitations into it that are belied by the statute’s plain language.”

“Respectfully” disagreeing with Eidson, Judge Chavez-Ruark approved the chapter 7 trustee’s calculation of her commissions and held:

A co-owner can receive his or her share of the sale proceeds in accordance with Section 363(j) and those proceeds can then be included in the calculation of a trustee’s compensation because they were “disbursed” by the trustee as described in Section 326(a).