Getting Paid: Section 326 and the Limits of Trustee Compensation

Chapter 7 panel trustees play an integral role in the bankruptcy system and perform a number of duties to effectively liquidate an estate for a debtor’s discharge. One of the trustee’s most important duties is to “collect and reduce to money the property of the estate ... and close such estate as expeditiously as is compatible with the best interests of parties in interest.” [1] Chapter 7 trustees must also investigate the financial affairs of the debtor and evaluate any potential assets. [2]

The Bankruptcy Code provides a statutory framework that governs trustee compensation and is used to calculate a trustee’s commission for the disbursements made by the trustee in a given case. [3] Notably, this framework provides a “maximum” percentage that a panel trustee may collect as commission on disbursements: 25% of the first $5,000; 10% of additional amounts up to $50,000; 5% of additional amounts up to $1 million; and reasonable compensation not to surpass 3% exceeding $1 million. [4] The business of being a trustee can be risky, with a $60 no-asset fee sometimes being the only form of compensation received for the extensive work performed in a case. [5]

The trustee compensation scheme becomes more complex when the trustee seeks to hire himself or his own firm as counsel to the trustee. [6] The employment of professionals, including attorneys, for the trustee is governed by § 327(d), which requires a demonstration that the employment of the proposed professional be in the “best interest of the estate.” [7] A trustee may hire an attorney to assist in the execution of his duties, but he cannot delegate those duties to an attorney who will later seek compensation for such performance, even if that attorney for the estate is himself. [8]

The compensation of chapter 7 panel trustees has become a highly litigated issue in recent years, with the Fifth Circuit Court of Appeals having taken up the issue in January. [9] The Bankruptcy Code provides a statutory scheme for the payment of trustees under all chapters, but the recent litigation has addressed almost exclusively chapter 7 trustees. The scheme for estate professionals’ compensation requires that the payment be for “actual, necessary services rendered by the trustee.” [10] This requirement ensures that a trustee, or other estate professional, does not overcharge the already distressed estate (by virtue of existing in bankruptcy) and acts as a check on the potential costs passed on to the debtor. [11]

A common thread in the recent cases analyzing trustee compensation is the problem of payment for services where a trustee acts in their capacity as both a trustee and an attorney for the trustee. In In re McConnell, the chapter 7 trustee sought fees for services rendered following the conversion of the debtor’s case to chapter 13. [12] When the trustee filed his fee application, he asked the court to approve fees both for himself in his capacity as trustee for the estate, representing a commission for the sale of property, and also attorneys’ fees for his firm for work performed as counsel for the trustee. [13]

However, upon closer examination, the bankruptcy court found that the services for which the trustee’s firm sought compensation were largely those statutory duties assigned solely to a panel trustee. [14] The Fifth Circuit Court of Appeals in Sylvester v. Chaffe McCall similarly found that where an attorney was hired as counsel for the trustee, that attorney could not properly collect fees for services that fall within the duties of a trustee, particularly where the services rendered did not require more expertise than that expected of a panel trustee. [15] A chapter 7 trustee cannot avoid the compensation ceiling imposed under the Code by hiring professionals to complete duties statutorily required to be executed by the trustee. The Bankruptcy Code specifies that where a professional’s employment has been approved by the court, a professional may only be paid for services requiring expertise beyond that of the panel trustee. [16] This restriction on payment for services rendered also applies when the trustee hires himself as attorney for the estate.

The court in In re Gage recently addressed the issue of trustee time vs. attorney time where the trustee hired himself as counsel for the estate in two separate cases, but failed to specify how the time billed as attorney time fell outside his duties as a trustee, finding that much of the billed-for time was not compensable. [17] Courts addressing the issue of dual trustee/attorney compensation continue to find that trustees must clearly delineate in their “attorney” time records what each entry is for and how the services performed therein fall outside the purview of the duties statutorily assigned to the trustee. [18]

Each of these cases emphasized the inherent gray area that exists when a trustee attempts to perform both the attorney and trustee roles in a given case, and the corresponding need for increased scrutiny of billing records to ensure the estate is not being charged for duplicate services. As the courts continue to inspect fees for compensation by trustees serving in dual capacities, it is important for trustees in such roles to keep diligent and distinct time records throughout the case to ensure their applications for compensation are approved by the court.