Opinion
Bankruptcy Case No. 99-31450SCDM, Chapter 7.
March 12, 2001.
MEMORANDUM DECISION
INTRODUCTION
In this matter the court determines that when a trustee sells property that is jointly owned by a debtor and a co-tenant, the co-tenant's share of the sale price may be considered "money disbursed or turned over by the trustee" such that it can be included in the trustee's maximum compensation base under 11 U.S.C. § 326(a).
Unless otherwise indicated, all section and rule references are to the Bankruptcy Code, 11 U.S.C. § 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
FACTS
E. Lynn Schoenmann ("Trustee") is the trustee in this Chapter 7 case. The administration of Debtor's estate resulted in payment of all claims and administrative expenses in full, with interest, and a return of a substantial surplus to Debtor (in addition to her homestead exemption). (Trustee's Supplemental Brief to Trustee's Final Report and Application for Final Compensation ("Supp. Brief"), p. 2). Debtor's sole asset was her residence (the "Residence"), which was unencumbered, but held in co-tenancy with Debtor's brother, Craig Chapman ("Co-owner"). (Trustee's Final Report and Application for Compensation ("Final Rpt."), p. 1). Trustee entered into an agreement with Co-owner whereby Trustee would list, market and sell the Residence, execute all closing documents, pay all closing costs, taxes and other expenses, and distribute 50% of the remaining net proceeds to the Co-owner. (Supp. Brief, p. 2). The "Order Authorizing and Approving Sale of Real Property, Disbursement of Sales Proceeds, and Compromise of Controversy" ("Order") stated that "The Trustee through the First American Title Company is authorized to pay to Craig Kimball Chapman fifty percent of the net sales proceeds of the {Residence} directly from the escrow account without further order of the court." (Order, p. 3).
Trustee performed a site inspection and marketed the Residence for sale. (Final Rpt., p. 2). Trustee presided over the bidding by two competing buyers, and the Residence was ultimately sold to the successful bidder for $600,000. (Final Rpt., p. 2). Trustee proceeded to close the sale by working with the title company and helping to execute all closing documents. (Final Rept., p. 2). Co-owner was then given his 50% share of the net proceeds from the sale, which amounted to $279,508.59.
Trustee now requests $24,526.77 as her final compensation. That amount is the maximum compensation payable pursuant to section 326(a), and is calculated by using $425,535.42 as the total amount distributed by Trustee. The court has been asked by Trustee to approve her fee request, and neither the creditors, Debtor, nor the U.S. Trustee has taken a position in this matter.
The total is computed by adding the sums disbursed to creditors ($146,026.83) to the amount paid to the Co-owner ($279,508.59), for a total of $425,535.42.
Trustee states that as she "understood the court's remarks, the court is satisfied that the full amount of $24,526.77 constitutes reasonable compensation under section 330 . . ." (Supp. Brief p. 3). Therefore, this analysis does not address the reasonableness of the fee under section 330. Section 326(a) establishes maximum fees which may be awarded to a trustee for services but creates no entitlement to commission in that amount. See In re Roco Corp., 64 B.R. 499, 502 (D.R.I. 1986). If the court finds that the maximum fee is unreasonably high based on the amount of work Trustee performed, a lesser amount can and should be awarded. No adjustment will be made here.
ANALYSIS
Section 326(a) provides:
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. (Emphasis added).
The phrase "party in interest" is used in forty-six (46) different sections of the Bankruptcy Code, but it is not actually defined therein. In re Citi-Toledo Partners II, 254 B.R. 155, 162-63 (Bankr.N.D.Ohio 2000). Several courts have indicated that the term "party in interest" is expandable, and should be evaluated on a case-by-case basis. In re Chandler Airpark Joint Venture I, 163 B.R. 566, 569 (Bankr.D.Ariz. 1992); In re Rook Broadcasting of Idaho, Inc., 154 B.R. 970, 972 (Bankr.D.Idaho 1992); In re Zaleha, 162 B.R. 309, 313 (Bankr.D.Idaho 1993); In re River Bend-Oxford Assocs., 114 B.R. 111, 113 (Bankr.D.Md. 1990). In In re North American Oil Gas, Inc., 130 B.R. 473, 479 (Bankr.W.D.Tex. 1990) the bankruptcy court stated, "Party in interest, in the context of Section 326(a), should . . . include an entity to whom distribution of estate assets is legitimately made in furtherance of the overall distribution process contemplated in bankruptcy{.}"
Here, Debtor's only estate asset was the Residence, and Co-owner owned half. It was necessary to sell the Residence to complete liquidation of Debtor's estate, and Co-owner received half of the net proceeds resulting from the sale. Accordingly, Co-owner is considered a party in interest in the instant case.
The phrase "party in interest" is used in forty-six (46) different sections of the Bankruptcy Code, but it is not actually defined therein. In re Citi-Toledo Partners II, 254 B.R. 155, 162-63 (Bankr.N.D.Ohio 2000). Several courts have indicated that the term "party in interest" is expandable, and should be evaluated on a case-by-case basis. In re Chandler Airpark Joint Venture I, 163 B.R. 566, 569 (Bankr.D.Ariz. 1992); In re Rook Broadcasting of Idaho, Inc., 154 B.R. 970, 972 (Bankr.D.Idaho 1992); In re Zaleha, 162 B.R. 309, 313 (Bankr.D.Idaho 1993); In re River Bend-Oxford Assocs., 114 B.R. 111, 113 (Bankr.D.Md. 1990). In In re North American Oil Gas, Inc., 130 B.R. 473, 479 (Bankr.W.D.Tex. 1990) the bankruptcy court stated, "Party in interest, in the context of Section 326(a), should . . . include an entity to whom distribution of estate assets is legitimately made in furtherance of the overall distribution process contemplated in bankruptcy{.}"
Here, Debtor's only estate asset was the Residence, and Co-owner owned half. It was necessary to sell the Residence to complete liquidation of Debtor's estate, and Co-owner received half of the net proceeds resulting from the sale. Accordingly, Co-owner is considered a party in interest in the instant case.
The phrase "distributed or turned over" is not defined in Section 326(a), and it is susceptible to multiple interpretations. Trustee argues that Co-owner's share of the net sale proceeds does constitute money distributed by the Trustee under the reasoning set forth in the case of In re Schautz, 390 F.2d 797 (2d Cir. 1968). In Schautz, the joint tenant of a debtor consented to the sale of property co-owned by her and the debtor. Id. at 797. The joint tenant gave a quitclaim deed for her interest in the property to the bankruptcy trustee, and the trustee sold the property to a third party free and clear of liens. Id. at 797. After the sale, "the Trustee apparently deposited the proceeds to his account as trustee, and paid all the mortgages, liens, and the {joint tenant's} share from his account." Id.
The court of appeals held that the trustee could include the joint tenant's interest in the property in calculating the maximum fee of the trustee. Id. at 799. The court stated:
"If the money comes lawfully into the hands of the trustee, as such, and if he in the performance of his duty as such is required to protect, preserve, and care for it, and eventually disburse it pursuant to the order of the court, and does so, there is no reason why he should not have his commissions, if the court allows them, even if the funds are subject to a lien which in law and equity the court is required to recognize and enforce."
Id., quoting In re Cramond, 145 F. 966, 972 (N.D.N.Y. 1906).
While Trustee appropriately argues that the facts in Schautz are similar to those in the instant case, she glosses over some determinative differences between the two cases. In Schuatz, the co-tenant gave a quit-claim deed for her interest in the property to the trustee, whereas here, Co-owner never conveyed his interest in the property to the bankruptcy estate. Also, in Schautz, the sale proceeds were deposited directly into the trustee's account and then later distributed by the trustee to the co-owner and other creditors. In this case, on the other hand, Trustee did not actually disburse any money to Co-owner. Instead, half of the net sale proceeds were paid to Co-owner directly from the escrow account.
The Trustee seemingly could have tailored the Order so that Co-owner's share was first deposited in her account, and then distributed by her to Co-owner. If that had been the case, the Co-owner's share of the sale proceeds would certainly be considered "disbursed by the trustee" under Schautz. That simply did not happen here.
Support for the proposition that Trustee could have fashioned the Order in this manner can be found in the section of the actual Order which authorized the title company to "release to the Trustee fifty percent of the net proceeds generated from the sale of the Foster City Property, less the Debtor's allowed homestead exemption of $75,000. (Order, p. 3). Since the Order did authorize some of the sale proceeds to be paid directly to her so that she could disburse the money to creditors, Trustee likely could have had all the sale proceeds paid directly to her for her subsequent disbursement to the co-owner, creditors, and Debtor.
In Southwestern Media Inc. v. Rau, 708 F.2d 419, 423-24 (9th Cir. 1983), the Ninth Circuit held that a trustee does not breach his fiduciary duties by structuring a sale transaction in a way that, compared with other forms of sale, potentially increases the maximum fee that he could be awarded.
Still, Trustee finds support for her position in Schautz dicta. The Schautz court explained that courts liberally interpret the fee statute in deciding whether to include an item in the basis of compensation allowed to the trustee. Schautz, 390 F.2d at 799. "If the trustee handled the money, either in fact, or constructively, courts included that amount in computing the fee." Id. (Emphasis added).
Courts are split on whether a Trustee's constructive disbursement of money to a party in interest is included in the trustee's compensation base. In the case of In re Indoor-Outdoor Dining, Inc., 77 B.R. 952 (Bankr.S.D.Fla. 1987), the trustee handled the sale of debtor's property. The sale was closed through a title company which disbursed the sale proceeds to secured creditors and turned over the remaining funds to the trustee for the estate. The trustee argued that the funds disbursed by the title company should be equated with funds disbursed by the trustee because the title company was acting as an agent of the trustee. Id. at 953. The Court, in citing In re New England Fish Co., 34 B.R. 899 (Bankr.W.D.Wash. 1983), stated that the trustee's compensation is based on monies actually administered by him, and not on assets constructively disbursed. Id.
Alternatively, the Ninth Circuit has allowed a Trustee's fee base to include constructive disbursements. See Southwestern Media, 708 F.2d at 422-23. In Southwestern Media, a debtor's property, which was subject to a lien, was sold to a third party free and clear of liens. On the final closing day of the sale, the total purchase price was collected and the lien was paid off that same day. Id. at 422. The court held that the amount of the lien could be included in the trustee's compensation base, stating, "We see no persuasive reason why an equity sale subject to an existing lien should not be considered a constructive disbursement to a lien creditor." Id. at 423.
Citing Schautz, the Southwestern Media court further explained that it "agree{d} with the Second Circuit that from a policy standpoint, `The crucial test seems to be . . . whether or not the particular property or fund has been justifiably administered in the bankruptcy court, or whether or not the trustee has properly performed services in relation thereto.'" Southwestern Media, 708 F.2d at 424, n. 4, quoting Schautz, 390 F.2d at 800 (in turn quoting Collier on Bankruptcy ¶ 48.07, at 1802 (14th ed. 1966)). Thus, while the Southwestern Media court recognized constructive disbursements in the context of section 326(a), it also indicated that the trustee must perform services in relation to the constructive disbursements before such amounts could be included in the trustee's fee base.
Allowing the inclusion of constructive disbursements in a trustee's fee base when the trustee performs services in relation to those disbursements makes sense from a policy standpoint. The sale of a jointly owned property can prove even more time consuming and difficult than the sale of property held by a single owner. It follows that a trustee should be able to include the full sale price of a property into the maximum compensation base, regardless of whether the property is individually or jointly owned, so long as the trustee performed services in relation to the full sale. Additionally, the safeguards precluding excessively high or bad faith fees are still available. "If the court were to determine that the trustee has manipulated the management of the estate to inflate his fee base, rather than to benefit the estate, or that the trustee's services were not commensurate with the maximum fee, the court need not award the maximum fee." Southwestern Media, 708 F.2d at 424.
As noted in footnote 3, a trustee's fee must not only be within the proscribed limits of section 326(a), it must also meet the reasonableness requirements of section 330. In re McNar, Inc., 120 B.R. 149, 152 (Bankr.S.D.Cal. 1990).
Here, Trustee substantially worked on every stage of the sale. She entered into an agreement with the Co-owner whereby she agreed to handle all selling details. She then marketed, performed a site inspection on, and presided over the bidding of the Residence, which was ultimately sold for $600,000. Trustee proceeded to close the sale by working with the title company and helping to execute all closing documents. Finally, through the title company, Trustee distributed 50% of the net proceeds from the sale to the Co-owner, which amounted to $279,508.59. Even though Trustee did not actually hand over the sale proceeds to Co-owner, she constructively distributed the money by actively participating in the complete sale.
CONCLUSION
Following Southwestern Media, the court will permit Trustee to include the full sale price of the Residence in her maximum potential fee base. Trustee distributed $279,508.59 to Co-owner and $146,026.83 to creditors, the added total of which is $425,535.42. The maximum allowed commission on that amount is $24,526.77, which is the exact amount the Trustee is requesting. Thus, Trustee's application for compensation in the amount of $24,526.77 will be granted.
Trustee should submit an order awarding her the fees requested, for the reasons stated in this Memorandum Decision.