ALERT
September 12, 2012
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit has held that under Bankruptcy Code section 330(a)(7), trustee compensation in a chapter 7, 12 or 13 case absent “extraordinary circumstances” is presumed reasonable if requested at the rates set forth in Section 326(a) of the Code, and should be approved “without any significant additional review.” The Panel further clarified, however, that trustee fees sought in a chapter 11 case remain subject to a reasonableness analysis even if “extraordinary circumstances” are not present. Notably, the Panel expressly did not determine what facts might qualify as “extraordinary” for the purposes of triggering the bankruptcy court’s reasonableness analysis. Hopkins v. Asset Acceptance LLC (In re Salgado-Nava), B.R. , 2012 Bankr. LEXIS 3664 (B.A.P. 9th Cir. Jul. 25, 2012). To read the decision, click here:
Salgado-Nava
Facts
On October 29, 2009, debtor Andy N. Salgado-Nava filed his voluntary petition for relief under chapter 7 of the Bankruptcy Code. R. Sam Hopkins was appointed to serve as the trustee. After completing his initial analysis of the debtor’s financial condition, the trustee filed a “no-asset” report. However, Hopkins also sent routine notices to various taxing authorities asking to be notified if the debtor was owed any refunds. After receiving notice that the debtor had overpaid his 2009 and 2010 taxes by approximately $10,000, the trustee withdrew his “no-asset” report and instructed creditors to file proofs of claim.
Hopkins ultimately collected $11,099 in tax refunds of which he returned $5,445 to the debtor on account of a claimed exemption, leaving $5,654 for distribution to creditors and payment of trustee fees and costs. The trustee then filed his final report in which he sought statutory fees of $1,315.41 and $46.10 in actual expenses, which were calculated based on Bankruptcy Code Section 326(a)’s compensation structure.
Concluding that it had an obligation to determine the reasonableness of a trustee’s fees and that Section 326(a) simply “caps” the amount of permissible fees, the bankruptcy court found the $1,315.41 fee request unreasonable in light of the services rendered and the time spent on such services. The bankruptcy court approved reimbursement of the full amount of the trustee’s actual expenses, but awarded fees of only $750.00. Hopkins appealed.
The BAP’s Ruling.
Reversing the bankruptcy court’s decision, the BAP concluded that Bankruptcy Code Section 326(a) fixes the compensation for all trustees in chapter 7, 12 and 13 cases absent “extraordinary circumstances”. In reaching its decision, the Panel addressed the interplay between that section and Section 330(a)(7), which directs courts to treat a trustee’s compensation rates as a “commission.” Noting that Section 330(a)(7) was adopted with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCA”), the Panel engaged in a detailed statutory construction analysis to divine the Congressional intent behind Section 330(a)(7).
Examining the statute’s plain language, the BAP viewed Section 330(a)(7) as containing two separate clauses: (1) the dependent clause (“In determining the amount of reasonable compensation to be awarded to a trustee”); and (2) the independent clause or, as coined by the BAP, the “commission clause” (“the court shall treat such compensation as a commission, based on section 326”). Separately analyzing each clause, the Panel opined that the independent (or commission) clause states a mandatory rule, while the dependent clause states when that mandatory rule should apply. Based on this reasoning, the BAP concluded that a trustee’s fee is fixed absent “extraordinary circumstances”.
More specifically, the Panel found that BAPCPA’s addition of the commission clause changed the function of Section 326(a) and its relationship with Section 330(a). In particular, the BAP determined that this clause required courts to treat a trustee’s fee request as a commission – a fixed amount – “based on” the compensation schedule in Section 326(a). Importantly, the BAP acknowledged that this statutory construction altered the former view (adopted by the bankruptcy court in this case) that Section 326 simply served to “cap” a trustee’s compensation. The BAP noted that if Congress did not want to link a trustee’s commission to the rates in Section 326(a), it simply could have: (1) omitted the phrase “based on section 326(a);” or (2) used the words “subject to section 326(a)” (rather than “based on section 326(a)”), which would have confirmed that a trustee’s commission merely was subject to the caps set forth in Section 326(a). In short, the Panel concluded that the plain language of the commission clause confirms that Section 330(a)(7) fixes the commissions for bankruptcy trustees based on the rates set forth in Section 326.
Reviewing the statutory construction of Section 330(a)(7)’s dependent clause, the BAP noted that, at a minimum, the dependent clause suggests courts still must assess the reasonableness of a trustee’s fee request rather than merely submit to the rates in Section 326(a). Indeed, the dependent clause states that courts must apply the commission clause “in determining the amount of reasonable compensation to be awarded to a trustee.” According to the BAP, the plain language of the dependent clause must be read in context.
To that end, the Panel pointed out that BAPCA substantively changed Section 330(a)(3), the section which lays out factors to consider in determining the reasonableness of a trustee’s fees. As noted by the Panel, Section 330(a)(3) as drafted pre-BAPCA required an assessment of its factors in evaluating fees for all trustees in all cases. Post-BAPCA, however, assessment of the factors is limited to fees sought by chapter 11 trustees only. Therefore, the Panel concluded, while Section 330(a)(3) has been limited, Section 330(a)(7) has not; it continues to apply to all trustees under all chapters, including chapter 11 trustees. Still, the BAP could not construe paragraph (a)(7) as requiring a fixed commission in all cases without consideration of Section 330(a)(3)’s “reasonableness” factors. To conclude otherwise, the BAP reasoned, would create a situation in which Section 330(a)(3) mandates what Section 330(a)(7) appears to prohibit.
Compelled to interpret Section 330(a)(7) in a manner which harmonizes these various provisions, the BAP examined situations outside of bankruptcy in which federal law requires courts to evaluate the reasonableness of percentage-fee or commission-based compensation. The BAP noted that in such non-bankruptcy contexts, courts are instructed to determine whether there is a rational relationship between the duties to be compensated by the commission rate and the nature and range of services actually provided. When a rational relationship exists, the fee is presumed reasonable and no lodestar-type analysis is employed.
While acknowledging that these non-bankruptcy scenarios are not directly comparable to Section 326(a)’s commission rates, the BAP saw no reason to second-guess Congress’ “clearly expressed intent” to fix trustee commission rates for the vast majority of cases (i.e., all cases save chapter 11), particularly in light of the Bankruptcy Code’s identification of the duties trustees must perform to earn that commission. In other words, Congress would not have set commission rates for trustees in Sections 326(a) and 330(a)(7), and taken them out of the considerations set forth in Section 330(a)(3), unless Congress considered those commission rates reasonable in most instances.
Ultimately, the BAP held that absent “extraordinary circumstances”, chapter 7, 12 and 13 trustee fees should be presumed reasonable if consistent with the rates set forth in Section 326(a), and further noted that bankruptcy courts should approve such fees without any significant additional review. Remanding the matter, the Panel ordered that the bankruptcy court award the trustee the full amount of his fees “based on” Section 326(a)’s calculations.
Author’s Commentary.
Trustees should note that in a chapter 11 case, or if “extraordinary circumstances” exist in a chapter 7, 12 or 13 case, the court’s examination of the relationship between the commission rate and the services rendered may, but need not necessarily include, Section 330(a)(3)’s factors and a lodestar analysis. The question of what facts constitute the kind of “extraordinary circumstances” warranting the court’s more detailed review of the requested fees has been left for another day, however, as the BAP expressly declined to address that issue in this opinion.