The U.S. Bankruptcy Court for the Northern District of Georgia recently issued an opinion detailing the reimbursement limitations under the Bankruptcy Code for services provided by a trustee’s law firm in a chapter 7 case. In In re McConnell,[1] the court denied the trustee’s request for attorneys’ fees and expenses because such services were either part of the trustee’s statutory duties under 11 U.S.C. § 704(a) or such services were not necessary or beneficial to the estate.[2]
In McConnell, the debtor filed a voluntary chapter 7 petition on Oct. 28, 2019. A trustee was appointed and subsequently hired its own law firm as counsel.[3] After a short period of time, the debtor moved to convert the case into a chapter 13 filing. Following the conversion, the trustee and the law firm filed an application for compensation and reimbursement of fees and expenses incurred as a result of the services they performed during the chapter 7 case.
The opinion focused on the services provided by the law firm and the court’s basis for denying the request for reimbursement. Among the services provided, the law firm reviewed files and documents relating to the financial state of the debtor, drafted a legal work memo regarding the debtor’s claimed exemptions, reviewed title examination reports of the debtor’s residence, reviewed and revised the trustee’s notice of interest in real estate, and served as lead counsel in opposition of the debtor’s motion to convert the case to chapter 13.[4]
In rejecting the application for reimbursement, the court focused heavily on the duties required of a trustee under 11 U.S.C. § 704(a) and reiterated the general rule that a professional employed by a trustee, including its own law firm, is not entitled to compensation for performing duties that are already statutorily required. Given that the trustee is already compensated for such duties through its commission, the court found that compensating the trustee’s counsel for performance of those same duties would be duplicative.[5]
In analyzing the performed services, the court understood the trustee’s duties listed in § 704(a) of the Bankruptcy Code to include all the usual and common tasks required to complete such duties.[6] For example, the law firm’s performance of negotiations in connection with the sale of the debtor’s residence, drafting of special stipulations for the listing agreement, and filing of an agreement with the court to retain a real estate broker was not eligible for compensation because all such tasks fell under the trustee’s duty to “collect and reduce to money the property of the estate.”[7] The controlling factor in this decision was that all the services performed, regardless of the fact that some required knowledge of specific legal issues, were routine for a chapter 7 trustee who needed to sell property of the estate.[8]
The court specified that “[i]n distinguishing trustee work from legal work, it is useful to note that some of the trustee’s statutory duties do not require any legal services at all while others clearly do.”[9] The court also cited a “gray area” where reimbursement for legal services is allowed provided that the trustee justifies that such help was required based on the “scope of the Trustee’s statutory duties” and the necessity of legal expertise.[10]
Additionally, per § 330(a)(4)(A) of the Bankruptcy Code, the attorney or law firm must show that the services they provided were “necessary and beneficial” to the estate in order to be reimbursed.[11] The court explained that this statutory requirement precludes the reimbursement for services that do not affect the outcome for creditors. For example, the law firm was unable to receive reimbursement for services performed in connection with opposing the motion to convert the case to chapter 13 because the creditors were going to be paid in full regardless of how the court ruled. Therefore, the opposition to the motion was not necessary or beneficial to the estate.[12]
Given the limiting effect of this decision, law firms seeking reimbursement for their services in a chapter 7 case may try to apply common law theories, such as quantum meruit.[13] The court cautioned, however, that the addition of §§ 330(a)(7) and 1326(b)(3) to the Bankruptcy Code in 2005 would likely preclude the ability to argue for reimbursement under quantum meruit. Further, even if it is available, it should be reserved for “extraordinary or unique situations.”[14]
[1] Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D. Ga. Jan. 4, 2021).
[2] The summary contained in this article is merely meant to be educational and is not attributable to King & Spalding LLP or any of its clients.
[3] In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 at *6 (Bankr. N.D. Ga. Jan. 4, 2021) (citing 11 U.S.C. § 327(d) (2021) in stating that the court may authorize the trustee to employ itself as an attorney or accountant if doing so “is in the best interest of the estate”).
[4] Id. at *7-11.
[5] Id. at *6, *30; see also 11 U.S.C. § 326(a) (2021) (a trustee is paid a commission based on “all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including the holders of secured claims”).
[6] In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331, at *12-16.
[7] 11 U.S.C. § 704(a)(1) (2021); id.
[8] In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331, at *14-20.
[9] Id. at *7.
[10] Id.
[11] Id. at *12; see also 11 U.S.C. § 330(a)(4)(A) (2021).
[12] In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331, at *27-28.
[13] See id. at *32 (a quantum meruit theory would provide for compensation based on “substantial services” of benefit to the estate).
[14] Id.