Opinion
Case No. 98-18266-RGM
August 15, 2003
MEMORANDUM OPINION
This case was before the court on August 12, 2003, for a hearing on the approval of the Trustee's Final Report and Proposed Distribution and Applications for Compensation and Reimbursement of Expenses. The United States Trustee objected to the trustee's requested compensation of $41,382.90 arguing that the amount is too high. He notes that the requested fee is approximately four times the amount computed by multiplying the trustee's hourly rate by the number of hours expended, which would be $10,151.50.
Background
John Edward Ryan is a practicing attorney. He filed a voluntary petition in bankruptcy under chapter 7 of the United States Bankruptcy Code in this court on November 16, 1998 and converted the case to a chapter 13 case on December 17, 1999. After having failed to obtain confirmation of two chapter 13 plans, the case was re-converted to chapter 7 on September 11, 2000. The chapter 7 trustee sold two properties, one for $370,000.00 on April 12, 2001 and the other for $372,000 on July 13, 2001. The debtor objected to the sale of the first property and sought to purchase it from the estate for a net value to unsecured creditors that he asserted was greater than the net value to unsecured creditors under the trustee's proposed contract. After a hearing, the court overruled the objection. See, In re Ryan, 261 B.R. 867 (Bankr.E.D.Va. 2001). In the course of considering the debtor's objection and competing offer, the court found that the debtor had undertaken "a course of conduct to retain investment property so as to benefit himself and not his creditors." Id. at 871. The court also found that the debtor had been recalcitrant; had unjustifiably hindered and delayed the administration of the case; and had sought to manipulate the case for his own benefit. Id. at 876. The course of the proceedings are more fully set out in the Memorandum Opinion.
The trustee received $762,657.97 and has disbursed $597,812.51, principally to the creditors secured by the two properties sold by the trustee, but also for income taxes arising from the sales of the properties and for the costs of the sales.
The trustee has on hand $164,845.46. He proposes to pay administrative expenses of $56,839.39, a secured claim of $109.45, priority claims of $21,408.02 and unsecured claims of $86,488.60. The distribution to the unsecured creditors is about 54.1% of their allowed claims. The trustee's time records reflect that he devoted 6.0 hours to the administration of this case as trustee; that an attorney in his office devoted 1.2 hours (excluding the time devoted as counsel to the trustee and separately compensated); and that the trustee's paralegal devoted 61.4 hours not separately compensated as a trustee expense. The first property was sold the day that the real estate agent placed it on the market. Id. at 871 n. 8. The second property was sold within four months of being placed on the market.
This consists of $41,382.90 for trustee's fees, $950.53 for trustee expenses, $517.24 for accountant's fees and expenses and $13,988.72 for the trustee's attorney's fees and expenses. The trustee employed his own law firm as his counsel.
The allowed unsecured claims total $159,768.70.
Discussion
It is not uncommon for a trustee to sell real property in a bankruptcy case. It generally results in significant cash to the estate although the lion's share is usually immediately paid to the lenders secured by the property sold. The balance — typically a fraction of the sales price — pays the administrative expenses of the estate and provides the distribution to the unsecured creditors. Because of the large sales price, the maximum compensation that may be paid to a trustee in such a case is significant. Judge Mitchell fully addressed the issue in In re Lewis S. Lauria, III, Case No. 00-10550-SSM (Bankr.E.D.Va. 2002) (unpublished memorandum opinion filed April 17, 2002, Docket Number 96). The analysis is clearly correct and the court could only needlessly repeat what Judge Mitchell wrote in that case without improving upon it. The court adopts his reasoning and analysis. See Lauria at 5-8.
The United States Trustee relies, in part, on In re Computer Learning Centers, Inc., 285, B.R. 191 (Bankr.E.D.Va. 2002), particularly in the discussion of the application of the lodestar approach. He recognizes that the factors enumerated in § 330(a) must take into account the trustee's duties under § 704, some of which do not necessarily bear a direct relationship to the hours expended in a case. He also recognizes, as Judge Mitchell points out in Lauria, that the trustee often, at least initially, has a risk of non-payment — that is, the trustee's compensation is somewhat contingent. The United States Trustee does not, therefore, argue here that the chapter 7 trustee's compensation is limited to the lodestar calculation of multiplying the hours expended by the reasonably hourly rate; rather he suggests that the appropriate compensation is higher than the lodestar calculated rate but less than the maximum permitted by 11 U.S.C. § 326 is appropriate. No specific amount was suggested.
Three comments peculiar to this case are in order. First, in this case the contingency factor deserves consideration. In Computer Learning Centers, there was no risk of non-payment of trustee's or professional's fees. Assets were sold early in the case that assured the payment of all professional fees and administrative expenses. In this case, there was risk. The debtor made a proposal to purchase one property subject to the existing mortgage. This would have resulted in far less money coming into the estate and a cap on the trustee's compensation imposed by § 326 that was about a quarter of the cap computed from the trustee's sale of the property to a third party and the pay-off of the existing mortgage. Had the debtor acted promptly and in good faith he could have avoided unnecessary administrative expenses and could have prevailed. If that had occurred and everything else remained the same the trustee would have expended about $10,000 of effort but had his compensation capped at $5,000. Nor was there a certainty that the second property would sell before the lender was entitled to relief from the automatic stay. As things turned out, there are sufficient funds to pay the trustee and make a distribution to the unsecured creditors. This, however, is not always the case. Often the trustee fully performs his duties but is left unpaid. For this and other reasons, the calculation of a fee must be flexible enough, when appropriate, to permit considerations other than only the time expended and the reasonable hourly rate. Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 720 (5th Cir. 1974)("[W]e do not attempt to reduce the calculation of a reasonable fee to mathematical precision."); In re King, 88 B.R. 768, 770 (Bankr.E.D.Va. 1988)("The above guidelines, however, have not been applied in a mechanical fashion.").
These assumptions are contrary to the premises of this hypothetical. However, the hypothetical — which is a real concern in many cases — is intended to reflect one type of risk that should be considered.
The second comment concerns the debtor's recalcitrance. The trustee's time records reflect that the debtor's recalcitrance increased the time that it took the trustee and his staff to administer this case. Since the effect of the debtor's recalcitrance is reflected in the total time expended, it cannot be considered a second time without some "double counting" resulting. Daly v. Hill, 790 F.2d 1071, 1077 (4th Cir. 1986). However, the debtor's conduct did increase the risk to the trustee of payment of his full fee without increasing the time the trustee expended. Care needs to be exercised in evaluating this factor.
The final comment concerns the trustee's efficiency in utilizing his legal assistant to perform many of the functions that he would otherwise have performed. This is to be commended and encouraged. The trustee's compensation should reward the trustee for this efficiency but not so much as to eliminate the effect of it. Having carefully considered all the circumstances, the court determines that appropriate compensation for the trustee in this case is $22,000.00 plus expenses of $950.53.
If one were to look at the premium or risk multiplier, as did Judge Mitchell in Lauria, the multiplier is larger here. In Lauria it was 1.57; here it is 2.17. There are differences in the two cases. In Lauria the trustee apparently "inherited" a sales contract from a converted chapter 13 debtor for the sale of a parcel of real estate. Here, that did not occur. In Lauria, the debtor was cooperative; here he was not. While the additional time required is accounted for and should not itself be grounds for enhancement, the recalcitrance increased the risk factor. There is no standard multiple. It depends on the nature of the particular case. It is a helpful measurement, however, as a check on consistency and uniformity in fee awards.