If a chapter 7 trustee manages the business of a subsidiary in chapter 11, the trustee is not entitled to compensation based on disbursements made by the chapter 11 debtor, according to a May 15 opinion by the Tenth Circuit.
The trustee presided over two successful bankruptcies. Unfortunately, the trustee failed to lock in his compensation from the big money-maker.
A man owned a business. He and the company both filed in chapter 11, but the owner’s case was converted to chapter 7. Succeeding to the rights of the owner, the owner’s chapter 7 trustee obtained bankruptcy court approval to become the manager of the business in chapter 11. However, the trustee did not have the bankruptcy court approve a compensation arrangement for services as the manager of the chapter 11 business.
The trustee presided over the sale of the assets of the business, generating enough to pay all claims in the chapter 11 case in full, with a surplus for the chapter 7 estate. The Tenth Circuit’s opinion said that claims in the chapter 7 case were also “likely” to be paid in full.
The trustee filed an application for compensation under the formula contained in Section 326(a). He sought a total of $260,000, composed of some $82,000 for disbursements of about $2 million in the chapter 7 case and about $178,000 based on $8.5 million disbursed in the chapter 11 case.
The bankruptcy court granted the trustee $82,000 in compensation for what he disbursed in the chapter 7 case. Under the unambiguous language of the statute, the bankruptcy court disallowed compensation for disbursements in the chapter 11 case.
The Bankruptcy Appellate Panel affirmed on the same grounds, commenting that the trustee worked as a volunteer in the chapter 11 case because he was not retained by the court as either a chapter 11 trustee or as a professional. The trustee appealed again.
The Tenth Circuit affirmed in an opinion by Circuit Judge Nancy L. Moritz.
The opinion by Judge Moritz is based on the “plain language” of Section 326(a). The statute contains a formula to calculate compensation based “upon all moneys disbursed or turned over in the case by the trustee to parties in interest . . . .” [Emphasis added.]
The trustee based his argument on the word “in.” He saw himself entitled to compensation for disbursements brought within the bounds of the chapter 7 case.
Judge Moritz found the argument “curious, at best.” She ruled that “the meaning of ‘in’ is plain” and does not “implicate physical boundaries.”
The trustee also argued that he should be compensated for fulfilling his statutory duty of maximizing the value of the estate under Section 704(a)(1).
Judge Moritz countered by saying that the section “did not specifically impose a duty on [the trustee] to manage [the chapter 11 debtor].” In other words, the trustee could have hired someone to manage the chapter 11 debtor. Perhaps the chapter 7 trustee could have been appointed as a chapter 11 trustee for the business, assuming there were no ethical issues. (Maybe the chapter 7 trustee avoiding being appointed as a chapter 11 trustee to preclude the owner from filing a plan.)
Whatever the reason might have been, it would be best to secure court approval for compensation arrangements in both cases at the outset, given the potential ethical issues.
If a chapter 7 trustee manages the business of a subsidiary in chapter 11, the trustee is not entitled to compensation based on disbursements made by the chapter 11 debtor, according to a May 15 opinion by the Tenth Circuit.
The trustee presided over two successful bankruptcies. Unfortunately, the trustee failed to lock in his compensation from the big money-maker.
A man owned a business. He and the company both filed in chapter 11, but the owner’s case was converted to chapter 7. Succeeding to the rights of the owner, the owner’s chapter 7 trustee obtained bankruptcy court approval to become the manager of the business in chapter 11. However, the trustee did not have the bankruptcy court approve a compensation arrangement for services as the manager of the chapter 11 business.
The trustee presided over the sale of the assets of the business, generating enough to pay all claims in the chapter 11 case in full, with a surplus for the chapter 7 estate. The Tenth Circuit’s opinion said that claims in the chapter 7 case were also “likely” to be paid in full.
The trustee filed an application for compensation under the formula contained in Section 326(a). He sought a total of $260,000, composed of some $82,000 for disbursements of about $2 million in the chapter 7 case and about $178,000 based on $8.5 million disbursed in the chapter 11 case.
The bankruptcy court granted the trustee $82,000 in compensation for what he disbursed in the chapter 7 case. Under the unambiguous language of the statute, the bankruptcy court disallowed compensation for disbursements in the chapter 11 case.