Fifth Circuit Clarifies Scope of Permissible Compensation of Estate Professionals Under 11 U.S.C. § 330(a)

On January 14, 2022, a three-judge panel of the Fifth Circuit in In the Matter of Sharon Sylvester (Sylvester vs Chaffe McCall LLP) held that a trustee’s attorney is entitled to compensation under Bankruptcy Code § 330(a) “only for services requiring legal expertise that a trustee would not generally be expected to perform without an attorney’s assistance.” [1]

In the bankruptcy proceeding below, the chapter 7 trustee employed Chaffe McCall pursuant to Bankruptcy Code § 327(a). At the conclusion of a successful chapter 7, with creditors paid in full and a surplus to the debtor, Chaffe filed a fee application pursuant to Bankruptcy Code § 330(a), which permits a bankruptcy court to “award ... a professional employed under section 327 ... reasonable compensation for actual, necessary services ....”

The debtor opposed the fee application, claiming that it sought compensation for work that was not “necessary” because it overlapped with the trustee’s duties under Bankruptcy Code § 704(a). The bankruptcy court overruled the debtor’s objection and granted Chaffe’s fee application in full, reasoning that (1) “the demarcation between what tasks constitute duties to be performed solely by the trustee and what can and should be delegated to an attorney is often not black and white[;]” and (2) the bankruptcy was successful. [2] The debtor appealed, but the district court affirmed.

On appeal from the district court, the Fifth Circuit vacated the award and remanded back to the bankruptcy court to determine what fees were duplicative of the trustee’s statutory duties and thus improperly awarded. The court based its decision on two interrelated rationales. First, while “[i]t’s true that there is often no easy way to distinguish legal from non-legal services,... under § 330(a), a court cannot simply decline to make the required determination because the line is murky[,] [n]or can it permit an attorney to bill the estate for nonlegal services because the bankruptcy proceeding was successful.” [3] Second, “the bankruptcy court ignored that the burden rests on the attorney requesting compensation under § 330(a) to justify the services rendered.” [4]

The court decided in favor of a narrow reading of “necessary services” in part because the trustee’s compensation under Bankruptcy Code § 326(a) is effectively a commission — a percentage of funds distributed to creditors. If the trustee was allowed to hire out its duties under this compensation structure, “[t]he debtor’s estate would be essentially double-billed, paying a substantial commission to the trustee for doing little more than hiring and delegating to professionals.” [5]

This decision, in line with Fourth and Ninth Circuit precedent, provides important guidance to trustees and estate professionals in performing work and seeking compensation.