The successful outcome of a chapter 7 case that pays creditors in full does not justify compensating the trustee’s attorney for performing duties imposed on the trustee, the Fifth Circuit said in a January 14 opinion.
The bankruptcy court approved the trustee’s retention of general counsel. At the conclusion of the case, creditors were paid in full, and the trustee made a distribution to the individual chapter 7 debtor.
The trustee’s attorney filed an application for a final allowance of about $16,000 for almost 58 hours of service. The debtor objected to the application, arguing that the attorney performed some services assigned by statute to the trustee.
The bankruptcy court acknowledged the court’s obligation to determine whether the attorney’s services were legal in nature or were administrative duties belonging to the trustee.
Having reviewed the time records, the bankruptcy judge observed that some of the attorney’s work could have fallen into the category of the trustee’s duties. Nonetheless, the court granted the requested fees in full.
The bankruptcy judge advanced two rationales: First, the dividing line between a trustee’s duties and legal services is not black and white. Second, the case was particularly successful, permitting the court to give the lawyer “some leeway” by assuming that the services were legal in nature.
The district court affirmed for the same reasons. The debtor appealed, and the Fifth Circuit reversed in a per curiam opinion, because “the bankruptcy court did not apply” the correct legal standard under Section 330(a).
[Note: The debtor had standing to appeal because reversal would increase the surplus for distribution to the debtor. Otherwise, the debtor would not have been an “aggrieved person” with standing to appeal.]
Section 330(a) allows the court to award “reasonable compensation for actual, necessary services rendered,” but the statute does not define “necessary.”
The circuit said that a narrower understanding of the word is clear from the statutory context. That is to say, services are necessary only if they could not be performed without a professional’s expertise.
The appeals court adopted the narrower construction in view of commissions granted to a trustee under Section 326(a). A trustee cannot increase his or her commissions by delegating the trustee’s services to an attorney who would be paid on an hourly basis. “[L]imiting § 330(a) compensation to services requiring professional expertise maintains the integrity of the commission-based compensation scheme that Congress established for Chapter 7 trustees,” the appeals court said.
Citing the Fourth Circuit, the Ninth Circuit and several bankruptcy courts, the Fifth Circuit held that “a court may compensate an attorney under § 330(a) only for services requiring legal expertise that a trustee would not generally be expected to perform without an attorney’s assistance.”
Addressing the bankruptcy court’s opinion, the appeals court said it was error to assume that the lawyer’s services were legal in nature rather than to make the required fact findings. Further, the court cannot permit the lawyer to recover for administrative services just because the case was successful.
The appeals court admitted there is “often no easy way to distinguish legal from non-legal services, and a bankruptcy court is entitled to substantial deference in its determination as to whether a particular service required attorney expertise.” Still, the circuit court said, “a court cannot simply decline to make the required determination because the line is murky.”
Finally, the bankruptcy court did not recognize that the attorney bore the burden of proof. That is to say, “it was improper for the bankruptcy court to assume that [the attorney’s] services required legal expertise rather than requiring [the attorney] to meet its burden.”
The appeals court vacated and remanded for further proceedings consistent with the opinion.
The successful outcome of a chapter 7 case that pays creditors in full does not justify compensating the trustee’s attorney for performing duties imposed on the trustee, the Fifth Circuit said in a January 14 opinion.
The bankruptcy court approved the trustee’s retention of general counsel. At the conclusion of the case, creditors were paid in full, and the trustee made a distribution to the individual chapter 7 debtor.
The trustee’s attorney filed an application for a final allowance of about $16,000 for almost 58 hours of service. The debtor objected to the application, arguing that the attorney performed some services assigned by statute to the trustee.
The bankruptcy court acknowledged the court’s obligation to determine whether the attorney’s services were legal in nature or were administrative duties belonging to the trustee.