Opinion
Case No. 12-54775
07-30-2015
In re: John Wilbur McCarty, and Sharon Rose McCarty, Debtors.
Copies to: Default List Edward Cahill, counsel for CitiMortgage, Inc. (via CM/ECF)
Chapter 7 MEMORANDUM OPINION AND ORDER ON TRUSTEE'S MOTION TO RESOLVE ISSUE OF CLOSING COSTS RELATIVE TO TRUSTEE'S COMMISSION
This cause came on for hearing on December 12, 2014, for consideration of Case Trustee, Clyde Hardesty's Motion for the Court to Resolve Issue of Closing Costs Relative to the Sale of the Real Estate Located at 2650 Stone Creek Circle, Zanesville, Ohio 43701 as Approved by Order of July 16, 2014 (Doc. 123) (the "Motion for Closing Costs"), the response (Doc. 124) of CitiMortgage, Inc., the Chapter 7 Trustee's reply (Doc. 130), and the United States Trustee's response in support (Doc. 132) of the Motion for Closing Costs. Present at the hearing were the Chapter 7 Trustee, Clyde Hardesty ("Trustee"), attorneys Brent Stubbins and Mark Stubbins as counsel for Trustee, attorney Edward Cahill as counsel for CitiMortgage, Inc. ("Creditor"), and MaryAnne Wilsbacher for the United States Trustee (the "UST"). The only outstanding issue in the Motion for Closing Costs is whether Trustee may recover a commission calculated pursuant to 11 U.S.C. § 326 from the proceeds of the sale of a fully encumbered asset.
All other issues in the Motion for Closing Costs were resolved by agreed order entered January 7, 2015 (Doc. 137).
At the request of the Court, Trustee, the UST, and Creditor submitted post-hearing briefs in support of their respective positions (Docs. 139, 140 & 141, respectively). Consistent with their position at the hearing, Trustee and the UST contend that Trustee is entitled to the statutory commission under 11 U.S.C. § 326 for distribution of the proceeds of sale of the asset, and that, pursuant to 11 U.S.C. § 506(c), such commission may be recovered from the proceeds of sale. Creditor argues that Trustee's requested commission is unreasonable for the services performed, and thus, pursuant to § 330(a), contends that the commission must be disallowed. Given the arguments of the parties, the Court finds it appropriate to determine both whether Trustee is entitled to a commission pursuant 11 U.S.C. §§ 326 and 330, and whether any such commission may be recovered from proceeds of the sale pursuant to 11 U.S.C. § 506(c).
Generally, compensation to a Chapter 7 trustee under 11 U.S.C. §§ 326 and 330 is requested, with notice to all creditors and parties in interest, within the trustee's final report. However, given that the Court is not awarding the requested commission to Trustee, notice to all creditors and parties in interest is not needed.
For the reasons stated below, the Court finds that Trustee is not entitled to a commission for the sale of the asset in question. Further, even if Trustee is entitled to a commission, the commission cannot be recovered from proceeds of the sale of the asset.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02, entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (M), and (O).
II. Factual and Procedural Background
As of the petition date, Debtor owned various parcels of real estate, including the property located at 2650 Stone Creek Circle, Zanesville, Ohio 43701 (the "Property"). The Property was encumbered by a first mortgage held by Creditor, and a second mortgage granted to one Gerald E. Alfman, deceased. According to Debtors' schedules, as of the commencement of the case, the balance of the first mortgage loan was $187,001.94, and the balance of the second mortgage loan was $40,000.00. Debtors listed the value of the Property on schedule A as $223,300.00.
On February 24, 2014, Trustee filed a motion (Doc. 103) seeking to sell the Property free and clear of liens for $150,000.00 (hereinafter, the "Motion to Sell"). The Motion to Sell also sought authority to pay a real estate commission of $10,500.00 to McCollister and Associates Real Estate from the sale proceeds, and to deduct from the proceeds a "carve-out" of $15,000.00 for the benefit of the bankruptcy estate. On March 24, 2014, Trustee filed a supplement (Doc. 104) to his Motion to Sell, asserting that, as Creditor failed to file a response to the Motion to Sell, Creditor "has consented to the Trustee's proposed sale and all of its terms." At no time during the sale process did a party in interest file an objection or response to the Motion to Sell. Nonetheless, on April 25, 2014, the Court held a hearing to address various concerns it had with Trustee's Motion to Sell (hereinafter, the "April Hearing"). Attorney Mark Stubbins appeared on behalf of Trustee.
At the April Hearing, the Court, among other things, expressed concern with the bankruptcy estate taking a carve-out from the sale proceeds without the express consent of Creditor in light of Creditor's lien on the Property (and consequently, any proceeds of sale of the Property). The Court differentiated a request for a carve-out from other situations, such as a request to approve a "short-sale," in which failure of a party to object may be deemed consent to the relief requested. April Hearing Audio at 12:21:05-38. The Court viewed carve-outs as distinguishable because a carve-out takes property from the lienholder, whereas in a short-sale, the balance due the lienholder may not be paid in full but the lienholder receives the full value of its property interest. April Hearing Audio at 12:21:40-12:22:10. The Court indicated that without Creditor's express consent, the Court would not approve a carve-out. April Hearing Audio at 12:22:38-45. However, the Court allowed Trustee to submit authority in support of his position, but advised Mr. Stubbins that any such authority must "be directly on point." April Hearing Audio at 12:22:45-55.
On May 30, 2015, Trustee filed a supplement (Doc. 112) in support of the Motion to Sell (hereinafter, the "Supplement"). The Supplement identified a multitude of cases, most of which stand for the proposition that a lienholder's failure to object to a motion to sell property free and clear of liens constitutes consent to such a sale. Trustee did not cite any case holding that in absence of an objection, a lienholder impliedly consents to a carve-out or other eradication of its lien rights. Notably, at a continued hearing held June 27, 2014 on Trustee's Motion to Sell (hereinafter, the "June Hearing"), attorney Mark Stubbins conceded that "the cases cited were not directly on point." June Hearing Audio at 1:20:50-1:22:20. Thus, at the June Hearing, the Court approved the sale, but denied Trustee's request for a carve-out. The order (Doc. 119), docketed on July 16, 2014, authorized the sale of the Property for $150,000.00, denied the requested carve-out to the estate, provided that Trustee may pay the real estate commission of $10,500.00, ordered that all liens and encumbrances on the Property were transferred to proceeds in the order of priority, and directed Trustee to retain the sale proceeds pending further order of the Court. Trustee filed a Report of Sale (Doc. 122) confirming that the Property was sold on August 25, 2014 for the price of $150,000.00 (hereinafter, the "Sale").
On September 29, 2014, Trustee filed the Motion for Closing Costs. Prior to the Sale, Trustee had collected funds totaling $70,280.00 for the benefit of the estate. Thus, based on the formula set forth in 11 U.S.C. § 326, Trustee seeks a commission of $7,500.00 for services performed in relation to the Sale, which is five percent (5%) of the $150,000.00 sale price of the Property. As stated above, the only outstanding issues raised by the Motion for Closing Costs and responses are whether Trustee is entitled such commission for the sale of a fully encumbered asset, and whether the commission may be recovered from proceeds of the sale pursuant to 11 U.S.C. § 506(c).
III. Analysis
Section 330 of the Bankruptcy Code grants a court vast discretion in awarding compensation to a professional, including a trustee. That section provides, in pertinent part:
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee . . . --
(A) reasonable compensation for actual, necessary services rendered by the trustee . . . .
11 U.S.C. § 330(a) (emphasis added).
(2) The court may, on its own motion or on the motion of the United States Trustee, the United States Trustee for the District or Region, the trustee for the estate, or any other party in interest, award compensation that is less than the amount of compensation that is requested.
Prior the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), 11 U.S.C. § 330(a)(3) directed courts, when determining the amount of reasonable compensation, whether for a Chapter 7 trustee or any other professional, to "consider the nature, the extent, and the value of such services, taking into account all relevant factors[.]" 11 U.S.C. § 330(a)(3) (2004). The statute then went on to list a number of factors, including the time spent on services and the rate for such services. BAPCPA amended § 330(a)(3) to make it applicable only to examiners, Chapter 11 trustees, and professional persons. Also added was 11 U.S.C. § 330(a)(7), which provides that "[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326." 11 U.S.C. § 330(a)(7). Post-BAPCPA, courts have struggled with how to determine reasonable compensation for a Chapter 7 trustee under § 330; however, "courts that have considered the question have uniformly concluded that they retain some discretion to award a lesser commission [than the statutory maximum set forth in § 326]." In re Wilson, 522 B.R. 594, 597 (E.D. Wis. 2015). These determinations have been based on the explicit language of § 330(a)(2).
A. The maximum allowable commission under § 326 is $7,500.00.
Section 326(a) of the Bankruptcy Code sets forth the maximum allowable compensation for a trustee. That section states:
In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, 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.11 U.S.C. § 326(a) (emphasis added). Thus, "[s]ection 326(a) makes clear that for the Trustee to be eligible to receive a commission[,] he must have disbursed or turned over moneys to 'parties in interest,' which expressly includes the holders of secured claims." In re McCombs, 436 B.R. 421, 435 (Bankr. S.D. Tex. 2010).
As stated above, prior to the Sale, Trustee in the instant case collected funds totaling $70,280.00 for distribution in accordance with the provisions of the Bankruptcy Code. Accordingly, Trustee is eligible for a five percent (5%) commission on any additional funds up to $1,000,000.00, collected and distributed to parties in interest. Upon distribution of the proceeds of the Sale to parties in interest, including Creditor, Trustee will become eligible for a commission of $7,500.00. For purposes of calculating the maximum allowable commission under § 326, it is immaterial that the Sale resulted in no benefit to unsecured creditors or to the bankruptcy estate in general. The Court must therefore determine whether a commission of $7,500.00 is reasonable compensation. 11 U.S.C. §§ 326, 330. The Court must also determine whether Trustee rendered actual and necessary services. 11 U.S.C. § 330.
B. Under the particular circumstances, Trustee is not entitled to a commission based upon distribution of the proceeds of the Sale.
Courts have struggled with the application of 11 U.S.C. § 330 in determining a Chapter 7 trustee's allowable compensation post-BAPCPA. Several different approaches have developed for determining whether, under § 330(a)(2), a trustee should be awarded a commission of less than the maximum set forth in § 326(a). Some courts presume that a trustee is entitled to maximum compensation under § 326, and hold that such compensation may be reduced only in "extraordinary circumstances." See Hopkins v. Asset Acceptance, LLC (In re Salgado-Nava), 473 B.R. 911, 921 (B.A.P. 9th Cir. 2012); In re Rowe, 750 F.3d 392, 397 (4th Cir. 2014). Other courts apply the factors under 11 U.S.C. § 330(a)(3) to determine the reasonable fee, if there is a showing that an award of the statutory maximum would be disproportionate or inequitable. See In re McCombs, 436 B.R. at 443-46. At least one court has concluded that a trustee's compensation should be adjusted on a case by case basis in light of a particular trustee's performance. See In re Phillips, 392 B.R. 378, 391 (Bankr. N.D. Ill. 2008) (stating, "[t]he maximum [statutory] amount should only be awarded in those instances of truly excellent work and efforts by a trustee.").
In In re Wooten, 2014 WL 7342686 (W.D. Ky. Dec. 23, 2014), appeal docketed, No. 15-5066 (6th Cir. Jan. 23, 2015), the trustee obtained authorization to sell various properties owned by the debtors free and clear of liens. There was no equity in the properties; however, in exchange for selling the properties, the secured creditor agreed to a carve-out of $50,000.00 from the sale proceeds, for the benefit of bankruptcy estate. After the sale, the trustee discovered that one of the sold properties had a low tax basis, thus resulting in a substantial taxable gain to the estate. After payment of the capital gains tax, the debtors' homestead exemption of $7,500.00, and other miscellaneous expenses, the trustee was left with $22,964.97. The trustee sought to retain the full balance remaining as a Trustee's commission, noting that the statutory commission based on the total disbursements (including disbursements to secured creditors) was $23,830.00. The UST objected to the trustee's request. The bankruptcy court awarded the trustee a commission of $5,000, which was the statutory commission based on the $50,000.00 carve-out, less the amount paid to the debtors for their homestead exemption. Notably, the bankruptcy court stated that "extraordinary circumstances" is not the law in the Sixth Circuit, "but if it were, this case would qualify as an extraordinary circumstance." Id . at *2.
On appeal, the trustee contended that the facts do not raise an extraordinary circumstance, inasmuch as at the time of the sale, the trustee believed that the $50,000.00 carve-out would benefit the estate; it was not until after the sale that he learned of the tax implications. The District Court rejected the trustee's argument, stating:
This very statement illustrates that indeed an extraordinary circumstance exists. The Trustee's failure to appreciate the tax ramifications of the sale resulted in the projected return to unsecured creditors being cannibalized. . . . The essence of Trustee's argument is that he should not be held to a standard of certainty in the result reached. However, he does not suggest that he could not or should not have known, prior to the sale, of the taxable gains which would result. Thus we agree with the bankruptcy court that the Trustee's requested compensation based upon the unmodified application of the formula set forth in § 326 yields an unreasonable result, as the Trustee should not be rewarded for providing services to benefit only the secured creditor, the debtors, and himself.Id. at *3 (emphasis added). The District Court affirmed the bankruptcy court's decision to disallow the statutory commission, but remanded the case, directing the bankruptcy court to calculate the trustee's commission based on $24,992.00 - the sum actually realized after payment of the capital gains tax and debtors' homestead exemption. Id. at *4.
Trustee and the UST cite In re McCombs, 436 B.R. 421, 439-41 (Bankr. S.D. Tex. 2010), for the proposition that, by failing to object to a sale, a secured creditor waives its right to object to a trustee receiving a commission under § 326 for distributions resulting from the sale. While the McCombs court does so conclude, this Court must respectfully disagree. In the instant case, the Motion to Sell did not give any notice that Trustee would be seeking a commission for distribution of the proceeds of the Sale, and, even if Creditor could assume that Trustee would seek a commission, the Motion to Sell did not state, and Creditor certainly could not predict, that Trustee would seek to surcharge Creditor's collateral - the proceeds of the Sale - under § 506(c) for payment of the commission. Without notice of a proposed action, a party, by failing to object, does not waive its right to do so. However, even if Creditor is deemed to have waived its right to object, any commission awarded to Trustee must nonetheless meet the reasonableness standard under § 330. After determining that the creditor waived its right to object to the trustee's request for commission under § 326, the court in McCombs undertook an analysis to determine whether the maximum statutory commission was reasonable. See id. at 443-46.
In the instant case, even under the extraordinary circumstance test - the most stringent of the tests described above - Trustee is not entitled to a commission relating to Trustee's sale of the Property. At the time Trustee filed his Motion to Sell, he was well aware that there was no equity in the Property and that the only benefit for the unsecured creditors would be from the $15,000.00 carve-out, if approved. At the April Hearing, the Court advised Trustee that, absent Creditor's express consent, the Court would not consider approving the carve-out unless Trustee could provide persuasive authority that was "directly on point." Also at the April Hearing, the Court distinguished between a creditor's failure to object to a proposed sale and a creditor's failure to object to a requested carve-out: The Court made it clear to Trustee's counsel that it views such situations quite differently, noting that the Court commonly approves short-sales when a secured creditor fails to object, but that the Court lacks authority to avoid a creditor's lien on proceeds of a sale of property in the context of a motion to sell that property. Nonetheless, in the Supplement to the Motion to Sell, Trustee cited authority that primarily stands for the proposition that a secured creditor's failure to object to a proposed sale amounts to consent to the sale. As conceded by Trustee's counsel at the June Hearing, Trustee did not cite any authority that was "directly on point." It is plain that all proceeds of the Sale are subject to the lien of Creditor, and Trustee's attempt to obtain a carve-out from the proceeds without any statutory basis to do so, was in derogation of Creditor's property interest.
This Court is not adopting the extraordinary circumstances test, but is simply applying the most stringent test to demonstrate that Trustee would not be entitled to compensation under any test described above.
The Court finds that, based on the Court's statements at the April Hearing, and the research conducted by Trustee or his counsel thereafter, Trustee knew or should have known that the Court would not approve the Sale with the carve-out, and thus, prior to approval of the Sale, Trustee knew or should have known that the Sale would return no benefit to unsecured creditors. See also U.S. Trustee Handbook, ch. 7 at 4-16 ("Generally, a trustee should not sell property subject to a security interest unless the sale generates funds for the benefit of unsecured creditors."). Accordingly, the Court finds that extraordinary circumstances exist that warrant denial of Trustee's request for a commission.
C. Even if Trustee were entitled to a commission, Trustee has not demonstrated that the commission, or any portion thereof, may be properly surcharged to Creditor's collateral under § 506(c).
Section 506(c) is an exception to the general rule that administrative expenses may not be charged against a secured creditor's collateral. In re Kessler, Inc., 142 B.R. 796, 800 (W.D. Mich. 1992) (citation omitted). That section provides:
Pursuant to § 503(b)(2), compensation awarded under § 330(a), which includes a trustee's commission, is treated as an administrative expense. --------
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.11 U.S.C. § 506(c). Thus, for a trustee to surcharge a creditor's collateral under § 506(c), (1) the cost or expenditure must be necessary, (2) the amount of the cost or expenditure must be reasonable, and (3) the creditor must have benefitted from the cost or expenditure. In re P.C., Ltd., 929 F.2d 203, 205 (5th Cir. 1991). The burden of demonstrating the foregoing elements is on the trustee. Id.
Section 506(c), however, does not allow a trustee to recover personal compensation directly from the secured creditor. In re Pink Cadillac Assocs., 1997 WL 164282, at *5 (S.D.N.Y. Apr. 8, 1997). "Rather, it allows a trustee, acting in his statutory role as representative of the estate . . . to recover the expenses incurred by the estate in preserving or disposing of the property securing the creditor's claim." Id . (emphasis added). Any reimbursement to the bankruptcy estate of costs and expenses becomes available as an unencumbered asset for distribution to unsecured creditors. In re JKJ Chevrolet, Inc., 26 F.3d 481, 484 (4th Cir. 1994). The trustee may then seek any personal compensation awarded under § 330 from the funds of the estate. Id. at 485 ("[T]rustees are administrative claimants who are paid from the funds of the estate.").
The Court notes that there is a split of authority as to whether a trustee's statutory commission relating to the sale of particular property falls within the parameters of "costs and expenses of preserving, or disposing of, such property," and thus may be surcharged to a creditor's collateral and recovered for the estate pursuant to § 506(c). Compare In re Lambert Implement Co., Inc., 44 B.R. 860, 861 n.3 (Bankr. W.D. Ky. 1984) ("Section 506(c) addresses only costs and expenses, not commissions."), and In re Truitt, 15 B.R. 169, 170 (Bankr. N.D. Ga. 1981) (bluntly stating, "[t]he trustee is not entitled to collect his commission from secured property administered in bankruptcy."), with In the Matter of Stable Assocs., 49 B.R. 395, 406 (Bankr. S.D.N.Y. 1985) ("While § 506(c) does not expressly refer to commissions, the phrase 'costs and expenses of preserving, or disposing of,' collateral would seemingly contemplate payment of commissions."), and In re Allen, 203 B.R. 925, 929 n.5 (W.D. Va. 1997) ("[T]he appropriate procedure appears to be for the trustee to charge his commission to the secured creditor's claim under § 506(c)."). However, assuming arguendo that Trustee in the instant case is entitled to a commission relating to the Sale, the Court need not decide whether, as a matter of law, a trustee's commission relating to the sale of certain property may be surcharged to a creditor's collateral as a "cost[] or expense[] of preserving or disposing of, such property" under § 506(c).
The party seeking to surcharge collateral under § 506(c) has the burden of proving that the requested surcharge is proper under such section. Trustee, however, did not present any evidence regarding whether, and to what extent (1) the services for which Trustee seeks compensation were necessary, (2) the amount of the compensation sought for the services is reasonable, and (3) Creditor benefitted from Trustee's services. See McCombs, 436 B.R. at 450 (expressly rejecting that a trustee may obtain a § 506(c) surcharge in the amount of the statutory maximum commission, and noting that, due to the lack of evidence presented by the trustee as to whether the requested surcharge was reasonable, the court could not quantify the exact amount the trustee was entitled to recover under § 506(c)). Accordingly, even if Trustee were entitled to the $7,500.00 requested commission, Trustee has not met his burden of proving that such amount is a proper surcharge to Creditor's collateral under § 506(c).
IV. Conclusion
For the foregoing reasons, the Court finds that Trustee may not be awarded a statutory commission based on 11 U.S.C. § 326(a) for the sale of the Property. Therefore, it is
ORDERED AND ADJUDGED that, to the extent that the Motion for Closing Costs seeks payment of Trustee's commission out of the proceeds of the Sale, the motion is denied. It is further
ORDERED AND ADJUDGED that any commission of Trustee under 11 U.S.C. §§ 326 and 330(a) relating to the Sale, and/or the distribution of the proceeds thereof, is disallowed.
IT IS SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the South ern District of Ohio.
IT IS SO ORDERED.
/s/ _________
C. Kathryn Preston
United States Bankruptcy Judge Dated: July 30, 2015 Copies to: Default List Edward Cahill, counsel for CitiMortgage, Inc.
(via CM/ECF)