[1]Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), bankruptcy courts have struggled with how to follow certain provisions of the Bankruptcy Code directing the compensation of chapter 7 bankruptcy trustees.[2] On Jan. 12, 2015, the U.S. District Court for the Eastern District of Wisconsin weighed in on the issue by finding that the bankruptcy court correctly presumed that the trustee was entitled to a commission calculated using the formula proscribed in 11 U.S.C. § 326.[3] The decision in Mohns, Inc. v. Lasner illustrates the statutory scheme from which courts have struggled to determine chapter 7 trustee compensation, and correctly sets the stage for courts to award trustee compensation as a commission pursuant to the percentages contained in 11 U.S.C. § 326.[4]
BAPCPA made two important changes that should have eliminated some of this uncertainty. Significantly, Congress amended 11 U.S.C. § 330(a)(3) to illustrate that the factors used to determine “reasonable compensation” do not apply to chapter 7 trustees.[5] As amended, 11 U.S.C. § 330(a)(3) applies only to examiners, chapter 11 trustees and professionals who render services in a bankruptcy case.[6] BAPCPA added a new provision to the Code — 11 U.S.C. § 330(a)(7) — which provides: “In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.”[7]
Congressional Intent: Trustee Compensation to Be Incentive-Based
Congressional intent to influence trustees to maximize the estate with incentive-based compensation is apparent from reading 11 U.S.C. § 326 in conjunction with 11 U.S.C. § 330. The legislative history and amendments to the Bankruptcy Code validate a congressional intent that trustees should be awarded compensation that is incentive-based. Under the former Bankruptcy Act, as is the case under the current Bankruptcy Code, maximum compensation is determined as a percentage of “all moneys disbursed by the trustee to parties in interest, excluding the debtor, but including secured creditors.”[8]
In enacting 11 U.S.C. §§ 330 and 326 of the Bankruptcy Code, Congress continued the policy that trustees should have incentive-based compensation. Congress stated in the 1978 legislative history to the Bankruptcy Code that “[i]n order to provide an incentive to trustees to collect assets for the estate, trustees are compensated out of money of the estate.”[9] Congress again supported incentive-based trustee compensation in the 1994 amendments to the Bankruptcy Code by increasing the percentages used to calculate the maximum trustee compensation under 11 U.S.C. § 326(a).[10] Not surprisingly, the title of this section of the 1994 law is “Increased incentive compensation for trustees.”[11] Finally, under BAPCPA, Congress amended 11 U.S.C. § 330(a) and added 11 U.S.C. § 330(a)(7) to provide that, “[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.”[12]
Role of the Chapter 7 Trustee
A chapter 7 trustee is the primary administrator of the bankruptcy estate and is required to perform a vast array of services in the administration of the bankruptcy case, including the liquidation of assets for the benefit of creditors.[13] Upon the filing of the chapter 7 petition, an impartial case trustee is appointed by the U.S. Trustee (or by the court in Alabama and North Carolina) to administer the case and liquidate the debtor's nonexempt assets.[14] If, as is often the case, all of the debtor's assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors.
Typically, most chapter 7 cases involving individual debtors are "no asset" cases. The primary role of a chapter 7 trustee in an "asset" case is to liquidate the debtor's nonexempt assets in a manner that maximizes the return to the debtor's unsecured creditors. To accomplish this, the trustee attempts to liquidate the debtor's nonexempt property — in other words, the property that the debtor owns free and clear of liens and that has market value above the amount of any security interest or lien and any exemption that the debtor holds in the property. The trustee also pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee's own causes of action to recover money or property under the trustee's "avoiding powers."[15]
Chapter 7 trustees are compensated for their services in two ways. Trustees receive a flat-rate payment of $60 per case pursuant to 11 U.S.C. § 330(b).[16] Generally speaking, the $60 flat-rate fee is the only compensation a trustee may receive for his or her services in the administration of a chapter 7 case.[17] In certain cases where the debtors have filed an Application to Waive Chapter 7 Filing Fees, the trustee is not compensated at all for any of his or her services.[18] In cases where assets are liquidated for the benefit of creditors, a second form of compensation is available under 11 U.S.C. §§ 326(a) and 330(a).[19]
A chapter 7 trustee’s primary duty is to maximize the value of the estate for its creditors.[20] This requires a trustee to have a stake in the results of his or her efforts so that his or her interests are always aligned with those of the estate’s creditors. Accordingly, when determining reasonable compensation under an incentive-based system, one of the most important factors in the court’s analysis should be the benefit of the trustee’s services to the estate.
Statutory Framework
11 U.S.C. § 326(a) provides that a court “may allow” reasonable compensation for the trustee’s services and that such compensation should “not exceed” certain percentages of “all moneys disbursed or turned over in the case by the trustee.”[21] The compensation scheme is broken down as a sliding-scale commission: 25 percent of the first $5,000 disbursed or turned over, 10 percent of any amount over $5,000 and up to $50,000, 5 percent of any amount over $50,000 and up to $1 million, and 3 percent of any amount over $1 million.[22] Most would agree that reasonable compensation in asset cases is intended to serve, to some extent, as reasonable compensation for the trustee’s administration in no-asset cases.[23]
11 U.S.C § 326 of the Bankruptcy Code (entitled “Limitation on compensation of trustee”) applies to trustee compensation only. Pursuant to the Code, the trustee has no entitlement to receive an hourly rate, contingency fee, flat fee or any other method of compensation. Instead, trustee compensation is always determined at the end of the case. More importantly, unlike 11 U.S.C. § 328, 11 U.S.C. § 326 imposes a true limit on trustee compensation that is determined exclusively by the size of the estate.[24] The trustee’s compensation is capped at a dollar amount determined as a percentage of the amount of “moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.”[25] Therefore, compared to the hourly professional, trustees face a much greater risk that reasonable and necessary services will not be compensated.[26]
Based on these differences and in light of the clear language of BAPCPA, it is clear now that Congress generally did not intend for trustee compensation to be a lodestar calculation subject to a cap, but intended it to be a commission based on distributions to creditors.[27] Due to the enactment of BAPCPA, bankruptcy courts should place less emphasis on factors such as time spent and rates charged when determining reasonable trustee compensation. Since the trustee has no right to obtain from the estate a lodestar payment, the value to the creditors in terms of a distribution of a trustee’s services is far more relevant when determining reasonable compensation than the lodestar value of the trustee’s services.[28]
Trustee Compensation Must Be Reasonable
The trustee’s requested compensation must be “reasonable” under 11 U.S.C. § 330(a).[29] The Bankruptcy Code does not explain how the facts are to be weighed in determining reasonableness. The court has wide discretion in considering the facts, weighing them and then awarding reasonable compensation to a trustee under the Bankruptcy Code.[30] The courts that have considered this question conclude that they retain some discretion to award a lower commission. The general reasoning underlying this conclusion is based on 11 U.S.C. § 330(a)(2), which states that courts may “award compensation that is less than the amount of compensation that is requested,” along with the fact that 11 U.S.C. § 326 states that the trustee’s compensation is “not to exceed” the specified percentages.[31] Courts also point to the fact that the Code still requires that the trustee’s compensation be “reasonable,” and they interpret this as granting them discretion to set the commission percentages on a case-by-case basis.[32]
The Fourth Circuit and the Bankruptcy Appellate Panel for the Ninth Circuit have followed an approach taken by the U.S. Trustee Program, which is to presume that the trustee is entitled to the maximum commission and to reduce the commission only in “extraordinary circumstances.”[33] These courts have not identified what constitutes extraordinary circumstances, but routinely, such circumstances are, for example, instances where the trustee performed his or her duties negligently, or delegated a substantial portion of those duties to an attorney or other professional.[34]
The decision in Mohns Inc. nicely illustrates the analysis for employing adherence to a strict percentage commission approach pursuant to 11 U.S.C. §§ 326 and 330(a)(7).[35] In Mohns Inc., the trustee requested reasonable compensation under 11 U.S.C. § 326 in the amount of $28,030.33.[36] In this case, the debtors’ largest unsecured creditor objected to the trustee’s request. The district court affirmed the bankruptcy court’s order allowing the trustee’s compensation.[37] It is notable that the district court, while affirming the bankruptcy court’s decision, did not adopt the “extraordinary circumstances” test as proscribed by the Fourth Circuit in Rowe.[38] Instead, the Mohns Inc. court seems to adopt a strict percentage commission approach in accordance with 11 U.S.C. §§ 326 and 330(a)(7).
Significantly, the district court in Mohns Inc. outlined numerous cases and various approaches and concluded that “because Congress has not identified any circumstances in which a court should reduce the compensation of a chapter 7 trustee below the amount given by the formula in 11 U.S.C. § 326, courts should be reluctant to award less than that amount.[39] The absence of instructions for reducing that amount implies that Congress viewed a commission calculated under the formula in 11 U.S.C. § 326 as the right amount of compensation in nearly every case.”[40] The district court correctly illustrates that Congress set a directive to base the commission on 11 U.S.C. § 326 and to apply these percentages in every case. The district court determined that “[i]n removing Chapter 7 trustees from 11 U.S.C. § 330(a)(3) and directing courts to treat the trustee’s compensation as a commission, Congress made clear that a trustee’s compensation should be determined on the basis of a percentage, rather than on a factor-based assessment of the trustee’s services or on the basis of the lodestar method.”[41] This approach correctly takes the discretion out of grading a trustee’s performance on a case-by-case basis, and strictly applies provisions of 11 U.S.C. §§ 326 and 330(a)(7), which adhere to the congressional intent of applying incentive-based compensation.
Chapter 7 trustees play integral roles in the administration of bankruptcy cases. They work efficiently, diligently and creatively in administering assets for the benefit of creditors in “asset” cases and by administering “no asset” cases. Awarding percentage-based compensation under 11 U.S.C. §§ 326(a) and 330(a)(7) ensures that trustees are adequately compensated for the work they perform for the benefit of all stakeholders in the administration of chapter 7 bankruptcy cases.
[1]The views expressed herein are those of the author alone.
[2] See, e.g., In re Rowe, 750 F.3d 392 (4th Cir. 2014); In re Ward, 418 B.R. 667 (W.D. Pa. 2009); In re Salgado-Nava, 473 B.R. 911 (B.A.P. 9th Cir. 2012); In re Scoggins, 517 B.R. 206, 60 Bankr. Ct. Dec. 30 (Bankr. E.D. Cal. 2014); In re B & B Autotransfusion Services Inc., 443 B.R. 543 (Bankr. D. Idaho 2001); In re Coyote Ranch Contractors LLC, 400 B.R. 84 (Bankr. N.D. Tex. 2009); In re Phillips, 392 B.R. 378 (Bankr. N.D. Ill. 2008); In re McKinney, 382 B.R. 490 (Bankr. N.D. Cal. 2000).
[3] Mohns Inc. v. Lanser, 522 B.R. 594 (E.D. Wis. 2015).
[4] Id.
[5] 11 U.S.C. § 330(a)(3) (emphasis added).
[6] 11. U.S.C. § 330.
[7] 11 U.S.C. § 330(a)(7).
[8] See H.R. Rep. 95-595 at 93; 1978 U.S.C.C.A.N. 5963, 6054-55.
[9] Id. (emphasis added).
[10] PL 103-394, Oct. 22, 1994, 108 Stat. 4106, § 107.
[11] Id. (emphasis added).
[12] 11 U.S.C. § 330(a)(7) (2005).
[13] See Richard I. Aaron, Bankruptcy Law Fundamentals, 236 (6th ed. 2013).
[14] 11 U.S.C. §§ 701 and 704.
[15] See 11 U.S.C. §§ 544, 545, 546, 547, 548 and 549.
[16] See 11 U.S.C. § 330(b).
[17] See John Silas Hopkins, III, Effective Review of Compensation in Large Bankruptcy Cases, 88 Am. Bankr. L. J. 127, 134-135 (2014).
[18] 28 U.S.C. § 1930(f)(1) (emphasis added).
[19] See 11 U.S.C. § 326(a); 11 U.S.C. § 330(a).
[20] See Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 (1985).
[21] 11 U.S.C. § 326.
[22] Id.
[23] Mohns Inc., 522 B.R. at 597.
[24] See 11 U.S.C. § 328; 11 U.S.C. § 326.
[25] 11 U.S.C. § 326(a).
[26] See In re Hance Meyer Inc., 161 B.R. 839, 840 (Bankr. N.D. Cal. 1993) (bankruptcy court has no discretion to award trustee compensation in excess of maximum set forth in § 326(a)).
[27] Mohns Inc., 522 B.R. at 598.
[28] Id.
[29] See 11 U.S.C. § 330(a).
[30] In re Borrego Springs Development Corp., 253 B.R. 271, 276-277 (Bankr. S.D. Cal. 2000).
[31] Rowe, 750 F.3d at 398.
[32] Scoggins, 517 B.R. at 212.
[33] Rowe, 750 F.3d at 397; Salgado-Nava, 473 B.R. at 921.
[34] Id.
[35] Mohns Inc., 522 B.R. 594.
[36] Id.
[37] Id.
[38] Id.
[39] Id.
[40] Id.
[41] Id.