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.”