When one trustee succeeds another in a chapter 7 case, how should the court apportion the commissions earned by each trustee? Should the first-appointed trustee alone benefit from the sliding scale in Section 326(a) and receive compensation at an overall higher rate, on the theory of first in-first out?
Bankruptcy Judge Phyllis M. Jones, sitting in Helena, Ark., rejected the fifo method and decided to apportion commissions pro rata, based on each of the trustee’s disbursements compared with the total.
In a converted chapter 11 case, the first-appointed trustee took in about $620,000 turned over by the outgoing debtor in possession. Before resigning, the first trustee had made total distributions of some $845,000, composed primarily of the money turned over by the debtor. The first trustee’s distributions were mostly made to one secured creditor.
The first trustee filed an application for about $45,000 in fees, using the sliding scale in Section 326(a), where the commission starts at 25% and declines to 3%. The successor trustee objected, in part because the estate might eventually turn out to be administratively insolvent.
Because Section 326(c) prohibits distributing more than the maximum commission even when there has been more than one trustee, Judge Jones began from the proposition that fees in Section 326(a) are a “presumptively reasonable” commission under Section 330(a)(7).
To decide how much in fees should be paid to the two trustees, she said there must be “extraordinary circumstances” to depart downward from the statutory formula. Because the second trustee might end up serving three times longer and bear a greater administrative burden, Judge Jones found the required extraordinary circumstances, especially since the first trustee “expended minimal effort” in taking in $620,000 from the debtor and making a distribution essentially to one creditor.
Using the fifo method, Judge Jones said, would overcompensate the first trustee and undercompensate the second trustee, because there was no evidence “of a rational relationship” between the fees sought by the first trustee and the services he rendered.
Judge Jones decided to follow In re Calhoun, 430 B.R. 536 (Bankr. W.D. Wis. 2010), by apportioning the trustees’ commissions pro rata, based on each trustee’s distributions compared with the total. That method, she said, “will typically require waiting until the end of the case.”
Judge Jones therefore denied the first trustee’s application for a commission and told him to resubmit an application at the end of the case.
Because a chapter 11 trustee’s fees are calculated on the same statutory formula, Judge Jones’ rationale would seem equally applicable if there were a succession of chapter 11 trustees. Under the “extraordinary circumstances” test in either chapter 7 or chapter 11, a court might give the successor trustee smaller relative compensation if the first trustee provided the bulk of the administrative services. When there has been more than one trustee, “extraordinary circumstances” appears to invite the judge to exercise discretion in apportioning the maximum commission permitted by statute.