A district judge in New Jersey held that a chapter 7 trustee isn’t entitled to a commission based on disbursements to the trustee’s own counsel. The judge believes that counsel for a trustee is not a party in interest.
On the other hand, and more importantly, District Judge Robert Kirsch of Trenton, N.J., threw the trustee a bone by following other circuits and holding that a trustee’s commissions are reduced only in rare and extraordinary circumstances where the percentage commission is “offensive.”
In a case converted from chapter 11, the trustee sold real estate for more than $3 million. At the conclusion of the case, the trustee sought almost $117,000 in commissions. The owner of the corporate debtor objected, contending that allowance of a large commission would be unreasonable and that the court should employ a lodestar analysis based on the number of hours expended. After all, the trustee’s counsel’s fees were but a fraction of the trustee’s proposed commission.
Finding nothing “extraordinary” in the case, Bankruptcy Judge Kathryn C. Ferguson awarded the full statutory commission. However, Judge Ferguson disallowed commissions based on payments of compensation to the trustee’s counsel. The debtor’s owner appealed, and the trustee cross appealed.
In his July 10 opinion, Judge Kirsch recounted how a trustee’s compensation had been governed by the reasonableness standard in Section 330(a)(1)(A) until the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. BAPCPA added Section 330(a)(7), which says that “the court shall treat [the trustee’s] compensation as a commission, based on section 326,” in “determining the amount of reasonable compensation to be awarded to a trustee.”
Section 326(a) grants “reasonable compensation” to a trustee based “upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.” The commission is based on a sliding scale that begins with 25% of the first $5,000 in disbursements and tops off with 3% of disbursements over $1 million.
Although the Third Circuit has not ruled on the subject, Judge Kirsch said that “each of the Circuit Courts of Appeals to have considered the issue have found that the 2005 amendments to the Bankruptcy Code express a congressional intent to remove chapter 7 trustees from the 330(a)(3) factors altogether.”
Citing the Ninth Circuit Bankruptcy Appellate Panel and the Courts of Appeals for the Fourth and Fifth Circuits, Judge Kirsch “agreed” and held “that the percentage commission under section 326 must be considered presumptively reasonable and may be reduced only in extraordinary circumstances.”
To base the trustee’s compensation on the hours spent by the trustee, Judge Kirsch said, “would undermine Congress’s intent in codifying the BAPCPA amendments.”
Judge Kirsch said that granting compensation lower than the statutory commission should occur in “the rare instance where extraordinary circumstances warrant reduction.” He went on to quote Bankruptcy Judge Ferguson, who said that the court should reduce the commission “only in the rare cases when the amount of the commission is offensive based on the particular circumstances of the case.”
Finding no reason “to disturb Judge Ferguson’s well-reasoned conclusion,” Judge Kirsch upheld the allowance of commissions provided by Section 326.
Next, Judge Kirsch ruled on the cross appeal, where the trustee claimed it was error to disallow commissions based on disbursements of compensation to the trustee’s own counsel. The governing statute is Section 326(a), which says that the commission is based “upon all moneys disbursed . . . by the trustee to parties in interest.”
For guidance about the definition of “parties in interest,” Judge Kirsch consulted Section 1109(a), which says that a “party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”
Deferring to the Third Circuit’s “understanding of the term,” Judge Kirsch declined to adopt an “expansive definition” to encompass a trustee’s counsel. He cited the Third Circuit for saying that a party in interest is someone who has a “sufficient stake” in the case “so as to require representation.”
Judge Kirsch did not believe that a person providing representation is someone who might “require” representation. He therefore upheld Judge Ferguson’s decision to exclude the trustee’s counsel’s fees from the calculation of commissions to avoid “inappropriate double-dipping.”
A district judge in New Jersey held that a chapter 7 trustee isn’t entitled to a commission based on disbursements to the trustee’s own counsel. The judge believes that counsel for a trustee is not a party in interest.
On the other hand, and more importantly, District Judge Robert Kirsch of Trenton, N.J., threw the trustee a bone by following other circuits and holding that a trustee’s commissions are reduced only in rare and extraordinary circumstances where the percentage commission is “offensive.”
In a case converted from chapter 11, the trustee sold real estate for more than $3 million. At the conclusion of the case, the trustee sought almost $117,000 in commissions. The owner of the corporate debtor objected, contending that allowance of a large commission would be unreasonable and that the court should employ a lodestar analysis based on the number of hours expended. After all, the trustee’s counsel’s fees were but a fraction of the trustee’s proposed commission.
Finding nothing “extraordinary” in the case, Bankruptcy Judge Kathryn C. Ferguson awarded the full statutory commission. However, Judge Ferguson disallowed commissions based on payments of compensation to the trustee’s counsel. The debtor’s owner appealed, and the trustee cross appealed.
In his July 10 opinion, Judge Kirsch recounted how a trustee’s compensation had been governed by the reasonableness standard in Section 330(a)(1)(A) until the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. BAPCPA added Section 330(a)(7), which says that “the court shall treat [the trustee’s] compensation as a commission, based on section 326,” in “determining the amount of reasonable compensation to be awarded to a trustee.”