In what certainly will be one of most important and talked-about orders to come out of the Northern District of Georgia in some time, Judge Paul Bonapfel eviscerated a fee application filed by a Chapter 7 Trustee and counsel. The case is In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019). The local panel trustees and their attorneys are very concerned about the impact of the case, and other Bankruptcy judges in the district have already referenced the Order in other hearings. The Orders discussed below strongly indicate that the issues have been brewing among the local judges for some time. The Trustee has appealed the Order to the District Court (Case No. 1:21-cv-00304-AT (N.D. Ga)) and the United States Trustee and perhaps the National Association of Bankruptcy Trustees are expected to appear. It is important to read the full, very detailed opinions – the initial twenty-four page Order and Notice (click here for .pdf) and the seventy-three page Final Order (click for .pdf or the Westlaw link). Otherwise, here is a not-so-brief summary:
The Debtor filed a Chapter 7 case in October 2019 and scheduled ownership of his residence at a value of $117,962.00 and secured debt totaling $105,566.00. Debtor claimed an exemption for the equity in the amount of $12,126.00. His schedules reflected net monthly income of $2,988.00 and expenses in the same amount. The Trustee believed, based on sources regularly used by trustees, the property could be worth $215,000.00, and the Debtor testified at the creditor meeting that he really did not know the true value. Based on these facts, the Trustee filed an application to employ a real estate agent to market and sell the property. In turn, the Debtor filed a motion to convert the case to Chapter 13 to retain his interest and equity in the residence. It is important to note going forward that the parties and Judge apparently assumed that there was significant equity in the property and unsecured creditors, totaling less than $20,000.00, would be paid in full in either a Chapter 7 or confirmed Chapter 13 plan.
The Trustee objected to the Debtor’s motion to convert to Chapter 13 on three primary grounds: 1) a Chapter 13 would not be feasible because Debtor had no net monthly income to fund a plan according to his schedules, 2) conversion would not be in the best interests of creditors, and 3) the motion was filed in bad faith because Debtor undervalued the property in his schedules and could not propose a feasible Chapter 13 plan. The Trustee also argued that creditors would be prejudiced by the delay in getting paid. The Court ultimately granted the Debtor’s motion and converted the case to a Chapter 13, noting that debtors often make adjustments to their budgets to make plan payments and there was no real evidence of bad faith. If Debtor could not propose a confirmable plan that paid all unsecured creditors in full, based on the equity in the property, the case would likely be re-converted back to Chapter 7 and the Trustee could sell the property. (The Debtor’s Chapter 13 was ultimately confirmed in November 2020).
The Trustee filed an Applications for compensation for himself, as Trustee, and his law firm as counsel for the Trustee. The Trustee requested compensation of $1,915.00 based on his hourly fee and 30 cents of expenses. He also requested $13,304.00 in fees and $210.50 in expenses for his law firm as counsel for the Trustee. No objections to the Application were filed. Judge Bonapfel specifically pointed out in the Order and Notice discussed below that “[n]either the United States Trustee (whose duties include supervising Chapter 7 trustees and reviewing applications for compensation, 28 U.S.C. §586(a)(1), (3)), nor the debtor (who must bear the burden of payment of allowed fees given the value of nonexempt in this case) objected.”
After conversion to Chapter 13 and the filing of the Trustee’s Application, the Court entered a 24 page Order and Notice setting a hearing on the Application. The Judge discussed in detail the statutory standards for allowance of compensation for trustees and counsel, and the “lodestar” factors normally reviewed by the Court. See Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974); Speights & Runyan v. Celotex Corp. In re Celotex Corp.), 227 F.3d 1336, 1341 (11th Cir. 2000). The Court also questioned whether the relatively high hourly rates charged by the Trustee and counsel (a large Atlanta law firm) were appropriate for a consumer Bankruptcy case, especially one that is neither difficult nor novel. Judge Bonapfel included an attachment to the Order and Notice showing the hourly rates of other law firms representing trustee based on fee applications filed in early 2020 and noted that other law firms charged hourly rates significantly less than the $575.00 hourly rate requested by the Trustee. The Court continued and discussed whether the services for which fees were requested were “necessary and beneficial” to the estate as 11 U.S.C. §330(a) and the Johnson factors require. Although Judge Bonapfel spent several pages in the Order and Notice on these issues, they are discussed again in more detail in the final Order. The final hearing on the Application was set for October 1, 2020.
On January 4, 2021 Judge Bonapfel entered a 73-page final Order denying virtually all fees and expenses requested by the Chapter 7 Trustee and counsel. Again, it is very important to read the Order, and the previous Order and Notice, especially if you are a trustee or represent trustees in Georgia. In the Order, Judge Bonapfel expanded upon the issues discussed in the Order and Notice and analyzed the Trustee’s fees and expenses in much greater detail. Part I of the Order discusses the role and duties of Chapter 7 trustees under 11 U.S.C. §704(a), employment of professionals and standards of compensation of trustees and professionals (pp. 3-12). In Part II, the facts and events in the case were discussed (pp. 12-19). Part III discusses compensation of the Trustee’s law firm (pp. 19-51) and Part IV discusses the compensation of the Trustee (pp. 52-57). This post will focus on Parts III and IV.
Part III – Compensation of Trustee’s Law Firm.
A Chapter 7 panel trustee’s law firm is not entitled to compensation for “trustee work” (section 704(a)), and services that are not trustee work must be necessary and beneficial pursuant to §330(a) and Johnson. In the Application, the Trustee’s law firm charged $1,679.50 for what appears to the Judge be trustee work. This includes time for reviewing files, documents, and title report, drafting a “legal work action memo re exemptions, turnover, etc.,” and revising the Trustee’s §549(c) notice of interest in the real property. As the Handbook for Chapter 7 Trustees provides:
The trustee must investigate the debtor’s financial affairs by reviewing the debtor’s schedules of assets and liabilities, statement of financial affairs, and schedules of current income and expenditures which the debtor must file pursuant to section 521 and Fed. R. Bankr. P. 1007 and by examining the debtor at the meeting of creditors. The trustee must also conduct such other investigation as necessary, such as following up on credible tips about unscheduled assets.
The Court found that the Trustee had not met his burden of showing the above services involved legal analysis or unique difficulties, so the $1,679.50 in fees were disallowed. The Trustee’s law firm next requested $1,320.00 in fees related to the proposed sale of the Debtor’s residence. This included time spent drafting and filing an employment application for the Trustee’s real estate broker, negotiating the listing agreement, and sending a “settlement/demand letter” (not in the record) to Debtor’s counsel.
Chapter 7 trustees regularly sell residential real estate in a consumer bankruptcy case. As in this case, “special” stipulations that are necessary in a listing agreement for a trustee’s sale of estate property are not special at all. They are routine in the course of any case involving the sale of a residence… the United States Trustee selects chapter 7 trustees who necessarily have the competence, experience, and skill to negotiate the terms of a listing agreement to include terms that bankruptcy cases routinely require. The Trustee and his law firm have not justified why the Trustee required legal advice to know what routine provisions should be included in the listing agreement in this case or legal assistance to “draft” special stipulations that appear to be standard in the context of a panel trustee’s sale of residential real estate…
To panel trustees, the requirements for employment of professionals are well-known and in almost all cases routine. Unless unusual circumstances exist, a panel trustee can determine that a broker is disinterested and has no conflict with the estate as § 327(a) requires, can prepare and file a routine application for approval of the broker’s retention, and can submit a proposed order in a standard form that approves it. Unless an objection to the application is filed or the bankruptcy court declines to approve the application for some reason, the process does not involve any litigation. In this case, the record reflects that the application to employ the real estate broker, the broker’s verified statement, and the order approving it are routine. The Trustee and his law firm have not established any unique difficulties or circumstances that justify this work as legal in nature. Accordingly, the law firm is not entitled to compensation for filing the application to employ the broker
The Court disallowed $1,320.00 for this category of fees. The Trustee’s law firm next requested $6,802.50 in fees for opposing the Debtor’s motion to convert to Chapter 13.
A candid recitation of the facts in this case at the originally scheduled hearing would have conclusively shown no basis for denial of conversion based on bad faith. Indeed, the facts utterly belie the Trustee’s accusation of bad faith, as later text demonstrates…The question is whether the opposition to conversion in the circumstances of this case was necessary or beneficial to the estate in view of the facts: (1) that the Debtor’s plan would have to provide for full payment of creditors to meet requirements for confirmation in a chapter 13 case; (2) that conversion to chapter 13 followed by a nonconfirmable plan would have resulted in reconversion to chapter 7; and (3) that the prospects for preventing conversion based on feasibility were predictably remote…
The Trustee’s conclusion that the services he and his law firm provided are the cause of full payment of creditors is also wrong… The cause of full payment to creditors in this case is the value of the residence. It is of course true that the Trustee’s investigation of the value of the residence brought its substantial nonexempt equity to light, but that is a routine part of a chapter 7 trustee’ job. In any event, as later text explains, there is no causal connection between the Trustee’s opposition to conversion and the fact that creditors will receive payment in full… Conversion of this case to chapter 13 could have only two consequences. Both were obvious when the Debtor moved to convert. One possible consequence was confirmation of a plan providing for the payment of all unsecured claims in full, and the Debtor’s completion of plan payments. All creditors would be paid in full. The second possible consequence was reconversion of the case to chapter 7 because of denial of confirmation of a plan or the Debtor’s default under a confirmed plan. Sale of the residence would then proceed in the reconverted chapter 7 case. All creditors would be paid in full…
The Trustee nevertheless opposed conversion, asserting that the Debtor filed the conversion in bad faith, that the Debtor had no disposable income such that he could not propose a feasible plan, and that conversion would not be in the best interest of creditors… The facts known by the Trustee when he filed his opposition to conversion do not support these allegations of bad faith and actually contradict them…the Debtor could not possibly avoid paying creditors by converting to chapter 13. His attorney must have explained, and the Debtor therefore must have known, that he would have to pay his creditors in full in a chapter 13 case. He could not have sought conversion with the intent to avoid paying creditors because he could not have intended to do what he knew he could not do…
In the circumstances of this case, the legal services rendered to oppose conversion were neither beneficial to the estate nor necessary. The prospects of prevailing were remote, at best. More important, conversion posed no risk to creditors. And if, as the Trustee alleged, the debtor could not fund a plan, the eventual result would be denial of confirmation or default after confirmation, either of which would have led to reconversion to chapter 7, all without any cost to the estate. Accordingly, the Court will not allow compensation for legal services in connection with the Trustee’s opposition to conversion.
The Trustee next requested fees for his law firm in the amount of $300.00 for the application to employ the firm and $3,202.00 for the application for compensation.
In Section III(B), the Court concluded that the Trustee’s law firm was not entitled to compensation for filing an application to employ a real estate broker. The same principles require denial of compensation for filing the application to retain the Trustee’s law firm… Because the Court has concluded that the Trustee’s law firm is not entitled to any compensation, it is not entitled to compensation for preparing the unsuccessful application for fees… In this case, however, all of the expenses appear to be expenses that are properly classified as trustee expenses. In this circumstance, it is appropriate to expect the Trustee to apply for reimbursement of expenses in his capacity as trustee… In summary, the Trustee’s law firm is not entitled to compensation for services that were trustee work, the services in opposing conversion were neither necessary nor beneficial, and it is not entitled to fees for seeking compensation that is not allowed.
All compensation requested by the Trustee’s law firm was disallowed.
Part IV – Compensation of the Trustee.
The Trustee requested $1,485.20 for his fees and $210.00 for expenses.
In this case, the Trustee made no disbursement other than the Debtor’s $1,624 federal tax refund he sent to the Chapter 13 Trustee pursuant to the conversion order. The Court assumes, without deciding, that § 326(a) provides for compensation based on this disbursement. The Court concludes, therefore, that the Trustee is entitled to compensation of $406 under § 330(a)(7) as a commission based on § 326(a).
The Trustee contends that he is entitled to additional compensation for the services he rendered on a quantum meruit theory, which permits compensation of a chapter 7 trustee in a converted case without regard to disbursements by the trustee… None of the cases cited by the Trustee to support the quantum meruit theory considered amendments that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to add § 330(a)(7) and § 1326(b)(3) that arguably preclude use of the quantum meruit theory… The trustee work in this case was the performance of the normal duties of a trustee in a chapter 7 case during the limited period of time before the filing of the motion to convert. As Section III(C) explains, the filing of the conversion motion came before any substantive activity in the case occurred and should have ended the Trustee’s work. Nothing in the case was difficult or unique. The Trustee did not discover undisclosed assets or claims of the estate for fraudulent or other avoidable transfers. The Trustee did not devote extensive time over an extended period prosecuting claims of the estate or dealing with problems in the liquidation of assets before the filing of the conversion motion. The Debtor caused no problems in the administration of the case. Accordingly, the Court concludes that, even if quantum meruit is a permissible basis for allowance of compensation for chapter 7 trustee’s services in the absence of disbursements, the circumstances of this case do not justify its application here. The Court concludes that compensation for the Trustee in the amount of $ 406, representing the statutory commission of the tax refund disbursed to the Chapter 13 Trustee, is appropriate.
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