How are subchapter V trustees compensated? The answer under the Code depends on whether the trustee is a standing or nonstanding subchapter V trustee. In reality, though, the answer should be the same in all cases, because, while 28 U.S.C. § 586(b) authorizes the appointment of “standing” trustees in subchapter V, so far all subchapter V cases have involved case-by-case, or nonstanding, trustees. No standing trustees have been appointed to date.[1]
Assuming the subchapter V trustee is a nonstanding trustee, how should he or she be compensated? According to a recent case, In re Tri-State Roofing,[2] subchapter V case-by-case trustees should be compensated on an hourly basis; such compensation is not tied to the amount of funds the trustee receives or disburses and is not capped.
The Tri-State Roofing case involved a dismissed subchapter V case in which no plan had been confirmed. The subchapter V trustee applied for allowance of compensation under §§ 503 and 330(a) based on an hourly rate. The court began its analysis by looking at the applicable Code provisions.
To begin, § 330(a) permits a bankruptcy court to award compensation to trustees.[3] Section 326(a) and (b) imposes limits on the compensation of trustees. Section 326(a) sets out sliding-scale compensation for trustees in chapters 7 and 11, but the section specifically excludes trustees under Subchapter V.[4] The Tri-State Roofing court concluded that § 326(a) thus excludes subchapter V trustees from receiving compensation based on a percentage of disbursements.
Section 326(b) then provides that the court in a subchapter V case “may not allow compensation” for a U.S. Trustee or a standing trustee “but may allow reasonable compensation under Section 330 ... of a trustee appointed under section 1202(a) or 1302(a) of” the Code.[5] While this section can be open to interpretation, the court in Tri-State Roofing concluded that § 326(b) does “not prevent an award of compensation to the Trustee under § 330(a)(1), nor does it place a cap [on] such compensation.”[6] The court held that a subchapter V trustee who is not a standing trustee is entitled to “reasonable” compensation under § 330(a)(1) that is not subject to the 5% cap in § 326(b).[7] The court found the fee in the amount of $1,920 to be reasonable and approved the application.
That analysis makes sense. Reading these sections together, a nonstanding subchapter V trustee is entitled to “reasonable compensation for actual, necessary services rendered” and “reimbursement for actual, necessary expenses” under § 330(a), and § 326(a) and (b) does not impose any limits on compensation. While § 326(b) limits compensation for certain trustees to “five percent upon all payments under the plan,” the Small Business Reorganization Act of 2019 (SBRA) amendments to § 326(b) did not make this limitation applicable to nonstanding subchapter V trustees.
The Executive Office for U.S. Trustees has published its Handbook for Small Business Chapter 11, Subchapter V Trustees, which likewise states § 330 applies to subchapter V non-standing trustee compensation regardless of whether the case-by-case trustee makes disbursements of estate funds. Further, subchapter V case-by-case trustees are not subject to the § 326(b) limitation of compensation to five percent of plan payments that is applicable to chapter 12 and 13 case trustees. The Handbook explains that courts should determine the reasonableness of a subchapter V nonstanding trustee’s fee request by considering various factors, such as the time spent on such services and the rates charged for such services.
Note that the Consumer Bankruptcy Reform Act of 2020, proposed in December 2020, suggests that compensation in chapter 10 would be similar to that which chapter 13 and 12 trustees currently receive.
To summarize, if the trustee in a subchapter V case is a standing trustee (if such a trustee is appointed), the trustee’s fees are a percentage of the payments the trustee makes to creditors under the same provisions that govern compensation of standing chapter 12 and chapter 13 trustees. If the subchapter V trustee is not a standing trustee (as will generally be the case), the trustee is entitled to fees and reimbursement of expenses under the provisions of § 330(a), without regard to § 326(a)’s limit on compensation to a percentage of money the trustee disburses in the case.
[2] No. BR 20-40188-JMM, 2020 WL 7345741 (Bankr. D. Idaho Dec. 7, 2020).
[3] 11 U.S.C. § 330.
[4] 11 U.S.C. § 326(a).
[5] 11 U.S.C. § 326(b).
[6] 2020 WL 7345741 at *4.
[7] Id.