“Time Is Money”: Chapter 7 Fee Application Denied and Trustee Attorneys’ Fees Drastically Reduced as Not Reasonable

The chapter 7 trustee, in a July 2018 ruling, was denied compensation for services that were held to be “customary and statutory duties” that provided no further benefit to the bankruptcy estate and were not outside of those normal duties. The chapter 7 trustee’s attorneys were allowed reasonable compensation; however, the court noted that many of the entries provided with the application for compensation were not related to legal services requiring an attorney license and were not allowed.

Procedural Background

A chapter 13 was filed for the debtor, and the debtor paid into the chapter 13 plan for approximately two years. The plan provided for payment of a car, mortgage arrearage and 100 percent dividend to unsecured creditors. Subsequently, the case was converted by the chapter 13 trustee to chapter 7, and a chapter 7 trustee was appointed. A meeting of creditors was scheduled in the chapter 7 but was not held due to the debtor’s nonappearance.

The debtor then obtained new counsel to reconvert the case back to chapter 13 in an effort to continue making payments to her creditors. Upon responding to the motion to re-convert, the chapter 7 trustee submitted an application for administrative expenses in the amount of $1,716.50, and the chapter 7 trustee’s attorneys submitted an application for administrative expenses in the amount of $13,607.09 plus $31.59 in expenses. Debtor’s counsel objected to both requests for compensation, arguing that little or no work was completed to warrant such high expenses.

One fact that is noteworthy in reviewing the timeline of this matter is that from the time the case was converted to chapter 7 and the motion to reconvert was filed, only one month had passed.

By What Standard Are Chapter 7 Trustee Fees Determined?

The court in this case went through an extremely detailed analysis outlining what Code sections control the compensation of chapter 7 trustees. Specifically, the court analyzed the compensation authorized under 11 U.S.C. §§ 326-330 and noted that, although the duties of the chapter 7 trustee can only be done by the trustee, the trustee’s attorneys can “assist him where satisfying those duties requires legal assistance.”[1]

The court reviewed the fee applications using the following characteristics of reasonable compensation: the “time and labor, novelty and difficulty of the issues, the requisite skill, the preclusion of other employment, the customary fee, whether the fee is fixed or contingent, the risk incurred, time limitations, the amount involved and the results obtained, the experience, reputation and ability of the counsel, the desirability of the case, the nature and length of the case, and awards obtained in similar cases.”[2]

Was Compensation Reasonable in This Case?

Under the aforementioned test for reasonableness of fees, the court in this case held that the chapter 7 trustee was not entitled to any compensation as it related to the fees requested in his fee application. Ultimately, the court determined that the chapter 7 trustee was attempting to seek compensation for tasks that would be customary for a chapter 7 trustee to complete in a chapter 7 case. The trustee’s request for the $1,716.50 was not allowed in its entirety.

The trustee’s attorneys, however, were allowed around half of what they requested in their fee application. The court again noted that in the fee application for the trustee’s attorney, “approximately $10,000 of it is actually for legal services, while the remaining $3,575.50 is for trustee services and not allowable under the analysis discussed above.”[3]

Only $10,000 of the $13,706.09 was determined to be related to legal services. Of that $10,000, only $7,000 plus the expenses met the reasonableness test primarily due to the court believing that duplicate work was being done to respond to the debtor’s motion to convert. The court did not go so far as to say that the trustee’s attorneys could not receive any compensation, but the court did say that they would only be entitled to the $7,000 and “question[ed] why the Trustee needed to be the one to incur so much time and legal expense in opposing the motion.”[4]

Takeaway

Whenever submitting an application for fees, always analyze your expenses and confirm that they are in fact reasonable and necessary. Also, when determining if employing outside counsel is necessary to assist in prosecuting the matter, always contemplate whether or not that outside counsel will be able to contribute in ways that you cannot handle yourself. Otherwise, those fees might not be awarded, and professionals will be stuck with wasted time and no compensation.