Trustee Ordered to Disgorge Fees for Failing to Pay the U.S. Trustee’s Fees

The trustee of a distribution trust was required to disgorge some of his fees because he failed to pay fees owing to the U.S. Trustee.

In his July 31 opinion, Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., ruled that he was not ordering disgorgement of interim or final fees under Sections 330 or 331. Rather, he was ordering disgorgement as a remedy under Section 105(a) in the enforcement of a chapter 11 plan and confirmation order.

The chapter 11 plan created a liquidating trust and a distribution trust. The distribution trust was funded with contributions from the liquidating trust. The distribution trust made distributions to creditors and professionals.

Judge Trust said that the distribution trust had responsibility for paying quarterly fees to the U.S. Trustee. As it turned out, the trustee of the distribution trust did not file operating reports, nor did he pay the U.S. Trustee’s fees.

When the time came for entry of a final decree, the U.S. Trustee submitted a statement saying fees had not been paid for about five years. Judge Trust directed the distribution trustee to file an accounting, along with a program to pay the U.S. Trustee fees.

When the distribution trustee did not comply, Judge Trust converted the case. Four months later, the distribution trustee filed the accounting required by Judge Trust. However, the chapter 7 trustee filed a motion asking Judge Trust to order disgorgement of the fees paid to the distribution trustee.

Judge Trust observed that the distribution trustee had paid hundreds of thousands of dollars to himself, his accountants and his counsel while failing to pay the U.S. Trustee’s fees. Of significance, the distribution trustee did not claim he was not obligated to pay the U.S. Trustee’s fees.

Judge Trust identified his power to order disgorgement. He said that Sections 330 and 311 were not applicable because this “is not a proceeding for approval of a professional compensation award.”

Judge Trust said he was not engaging in a roving commission to do equity that might be prohibited by Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105, 1112 (2007). Instead, he said that authority under Section 105(a) included the power to enforce the court’s own orders, such as the confirmation order and the plan.

Next, Judge Trust said that disgorgement may be used to take ill-gotten gains from a wrongdoer or remedy a breach of fiduciary duty. He said that the broad language in Section 105(a) includes the power to “require disgorgement [from someone] who is entrusted with estate funds to make those payments [and] fails to do so.”

Judge Trust said that disgorgement was not a remedy arising from administrative insolvency, because the distribution trustee did not claim he had no funds to pay the U.S. Trustee. Rather, Judge Trust said he was ordering disgorgement to enforce the plan and confirmation order, not because the distribution trustee had breached his fiduciary duties.

Judge Trust ordered the distribution trustee to disgorge $30,000. On the chapter 7 trustee’s receipt of the $30,000, he directed the chapter 7 trustee to pay $21,000 owing to the U.S. Trustee. He directed the chapter 7 trustee to retain the remainder for payment of the chapter 7 trustee’s fees and expenses.