Opinion
No. 99-11881
November 2, 2000
Memorandum re Compensation of Chapter 7 Trustee
This case was originally filed as a Chapter 7 case, and it initially appeared that there would be no dividend to creditors. However, the Chapter 7 trustee discovered that some of the debtors' retirement accounts might not be validly exempt, and objected to the claim of exemption. The debtors then exercised their right to convert the case to Chapter 13. Their plan, providing for a 47% dividend to unsecured creditors, has been approved.
The Chapter 7 trustee, Jeffry Locke, has asked for compensation in the amount of $1,268.09. This amount seems extremely reasonable in light of the time he spent on the case and the fact that the creditors owe their dividend entirely to his diligence. However, the U.S. Trustee has objected. She argues that the court is without the power to properly compensate Locke.
In a Chapter 7 case, the trustee's compensation is limited by the amount of money he or she distributes to creditors. The U.S. Trustee argues that since the debtors converted the case before Locke could actually liquidate and distribute anything, he can have no compensation even though there is a substantial dividend to creditors as a direct result of his efforts.
The U.S. Trustee concedes that there are no appellate cases on the issue. She acknowledges that there are numerous reported bankruptcy court cases which, on various theories, have allowed compensation to the Chapter 7 trustee in cases like this. She argues: "It may well be that the Congress overlooked the necessity to compensate trustees [in cases converted to Chapter 13], however, the strict or literal reading of the statute cannot be obviated based on equitable concerns."
The court finds Judge Montali's decision in In re Hagis, 252 B.R. 789 (Bkrtcy.N.D.Cal. 2000) to be particularly persuasive.
There are two flaws in the U.S. Trustee's argument. Firstly, a literal reading of the Bankruptcy Code does not forbid compensation in this situation; it is merely silent on the subject. Secondly, the Ninth Circuit has made it clear in at least two cases that equitable concerns do come into play in compensation issues.
There is no provision in the Bankruptcy Code for the payment of fees to a debtor's counsel in a Chapter 7 case, even where that counsel provides valuable services to the estate. Nonetheless, in In re Century Cleaning Services, Inc., 195 F.3d 1053, 1060 (9th Cir. 1999), the court allowed such fees, determining that omission of a provision for such fees was a "mistake" and that policy considerations dictate that such compensation be allowed. Likewise, in In re Hines, 147 F.3d 1185, 1190-91 (9th Cir. 1998), the court ruled that Congress' failure to correct a compensation issue "in express terms" justified the allowance of compensation seemingly at odds with the Bankruptcy Code.
The policies at issue here are even stronger than those considered by the courts in Century Cleaning and Hines. Those cases dealt with compensation of attorneys who are free to accept or reject cases and who have no statutory duties to the estate. This case involves a panel trustee assigned to a case and charged with statutory responsibilities to maximize return to creditors. There is no justice in denying him compensation for a job done diligently and effectively.
Moreover, the Bankruptcy Code does not contain the prohibitions the U.S. Trustee says it does. It is certainly true that § 326(a) provides that in a Chapter 7 case the court may not award a trustee more than specified percentages of moneys disbursed. However, this is not a Chapter 7 case. The Bankruptcy Code places no restriction on the compensation which may be paid to a Chapter 7 trustee when the case is no longer in Chapter 7.
When the Bankruptcy Code does not specifically forbid compensation, Century Cleaning makes it clear that the court should do what is right, just, and consistent with the intent of Congress and the policies underlying the Bankruptcy Code. Statutory justification lies in § 105(a), if nowhere else. Injustice is not, as the U.S. Trustee argues, mandated in this situation. Accordingly, the objection of the U.S. Trustee to Locke's compensation will be overruled. Counsel for Locke shall submit an appropriate form of order.