Please ensure Javascript is enabled for purposes of website accessibility
Home / Opinion Digests / Ch. 7 Trustee Gets Commission-Based Fee

Ch. 7 Trustee Gets Commission-Based Fee

A bankruptcy court erred when it rejected the Chapter 7 bankruptcy trustee’s request for a fee of $17,254 and instead awarded an hourly-based fee of $8,020 because it found the trustee did not properly supervise the case; in a case of first impression in the federal appellate courts, the 4th Circuit says that absent extraordinary circumstances, a bankruptcy court is required to compensate Chapter 7 trustees on a commission basis.

The trustee contends the bankruptcy court erred in failing to award him a commission-based fee. He contend he is entitled to a commission, pursuant to 11 U.S.C. § 330(a)(7), based on the percentage set forth in § 326(a).

The current version of § 330(a)(3) speaks only to the compensation of Chapter 11 trustees. Thus, § 330(a)(3) is generally immaterial in determining the compensation for a Chapter 7 trustee. Section 330(a)(4) is the same as it was before enactment of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It says the court shall not allow compensation for unnecessary duplication of services, or services that were not reasonably likely to benefit the debtor’s estate, or necessary to the administration of the estate.

The BAPCPA added § 330(a)(7) to the Code. This section instructs that in determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on § 326.

Congress chose to employ the mandatory term “shall” in § 330(a)(7) when speaking of compensation for Chapter 7 trustees. Yet, it used the word “may” in other portions of the statute. It is uncontroversial that the term “shall” customarily connotes a command, whereas the term “may” typically indicates authorization without obligation. Accordingly, we can rightly assume that Congress said what it meant and meant what it said when it chose to include the term “shall” in § 330(a)(7), thus making its application in the determination of Chapter 7 trustee fee awards mandatory. Examining the other operative words in § 330(a)(7), we note that a commission is a fee paid to an agent or employee for a particular transaction, usually as a percentage of the money received from the transaction. And “based upon” means “derived from.” These definitions lead us to the unmistakable conclusion that, absent extraordinary circumstances, a Chapter 7 trustee fee award must be calculated on a commission basis, as those percentages are set forth in § 326(a).

But what extraordinary circumstances might allow the § 326(a) commission rates to be reduced? The court below stated that extraordinary circumstances include not performing trustee duties, performing them negligently or inadequately. It bears noting that the term “extraordinary circumstance” is absent from the statute. Nevertheless, its employment in the Chapter 7 fee determination scheme appears to be an attempt to reconcile § 330(a)(7) and § 326(a) with § 330(a)(1) and § 330(a)(2). Section 330(a)(7) creates a presumption, but not a right, to a statutory maximum commission-based fee for Chapter 7 trustees.

Here, the bankruptcy court based the trustee’s compensation on an hourly rate, as opposed to a commission-based rate, based on findings that the trustee did not properly discharge his duties, did not administer the state expeditiously and neglected to adequately supervise the case. In light of the plain meaning of § 330(a)(7), however, this was legal error.

The bankruptcy court ought to have first determined what the maximum statutory commission rate for this case was, pursuant to § 326(a). Only after doing that should it have decided whether any extraordinary circumstances existed such that the proper commission rate set out in § 326(a), which is presumptively reasonable, was in fact unreasonable and thus should have been reduced.

We reverse the district court decision affirming the bankruptcy court’s non-commission-based fee award and remand with instructions to vacate the trustee’s fee and remand to the bankruptcy court so it can determine the proper commission-based fee to award to the trustee.

Reversed and remanded.

In re: Geoffrey A. Rowe (Floyd) No. 13-1270, April 28, 2014; USDC at Alexandria, Va.; Brett Shumate for appellant; Patrick M. Wallace for amicus U.S. VLW 014-2-079, 16 pp.

Leave a Reply