Is a chapter 7 trustee paid anything if the trustee discovers nonexempt property that would pay creditors in full but the case converts to chapter 13 before the trustee makes distributions?

In his May 22 opinion, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., said that courts have adopted six theories that range from paying nothing to the commission the trustee would have earned. Judge Jacobvitz settled on an allowance governed by Section 330(a)(3) adjusted by the so-called Johnson factors.

The debtor filed a chapter 7 petition and scheduled her home with a value that would have resulted in a “no-asset” case with no distribution to unsecured creditors. The chapter 7 trustee suspected that the debtor had undervalued her home. So, the trustee consulted a real estate broker who concluded that the house was worth $100,000 more than the debtor’s declared value.

The trustee began making arrangements to obtain court approval for retention of the broker and a sale of the home, at a price that would have paid unsecured creditors in full on their $20,000 in claims, after payment of the mortgage, the brokerage commission and the trustee’s commission. To fend off a sale of the home, the debtor converted the case to chapter 13 before the home was sold or the broker was retained.

After conversion, the chapter 7 trustee filed an application for compensation, seeking payment of about $15,000 that would have been his commission had he sold the home and made distributions to the lender and unsecured creditors.

When a chapter 7 trustee has made no distributions before conversion to chapter 13, Judge Jacobvitz said that “bankruptcy courts have taken a variety of approaches” to the trustee’s compensation based on six different theories. To decide which course to follow, he laid out the possibly relevant statutes.

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.”

In turn, 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.”

In the case at hand, though, Judge Jacobvitz said that the trustee “ha[d] not actually disbursed or turned over any amount to parties in interest.” He decided that Section 326(a) was inapplicable because the “plain meaning of § 326(a) prevents a court from employing a legal fiction that moneys disbursed by a chapter 13 trustee to parties in interest constitute moneys disbursed by the chapter 7 trustee.”

Similarly, Judge Jacobvitz decided that the “Bankruptcy Code does not permit allowance of compensation to a chapter 7 trustee in quantum meruit” because “Section 330, and § 326 if applicable, exclusively govern allowance of compensation to a chapter 7 trustee.”

Judge Jacobvitz therefore turned to “§ 330(a)(1), pursuant to which the Court, subject to § 326, is authorized to award ‘reasonable compensation’ to a trustee for ‘actual, necessary services rendered by the trustee’ and to § 330(a)(7),” which provides that “reasonable compensation” is a commission based on Section 326. He did not see Section 326(a) as a bar to compensation because it only applies while the case is in chapter 7.

Judge Jacobvitz latched onto Section 330(a)(1) because it “expressly applies to compensation of trustees, and no other statutory provision makes § 330(a)(1) inapplicable to a chapter 7 trustee in a converted chapter 13 case who did not earn a commission while the case was pending under chapter 7.”

Using Section 330(a)(1), Judge Jacobvitz applied the standards in Section 330(a)(3) together with Johnson factors adopted by the Tenth Circuit. He recognized that the trustee had expended 7.2 hours at his ordinary hourly rate of $250 when acting as an attorney, resulting in a “lodestar” fee of $1,800.

Even when Section 330(a)(3) and the Johnson factors apply, Judge Jacobvitz cited the Tenth Circuit for saying that the bankruptcy court still retains “broad discretion” in fixing a fee. He gave “particular weight” to the “substantial benefit” to the estate that the trustee had provided.

Without the trustee’s investigation of the value of the home, creditors would have received nothing, but the trustee’s work meant that unsecured creditors likely would be paid in full in chapter 13. Judge Jacobvitz therefore decided that “the lodestar amount should be approved and further should be adjusted upward by a $700 fee enhancement.”

In total, Judge Jacobvitz awarded $2,500 plus reimbursement of expenses and the state gross receipts tax.