Opinion
NOT FOR PUBLICATION
ORDER ON TRUSTEE'S FEE APPLICATION
Peter W. Bowie, Chief Judge, United States Bankruptcy Court
The debtor's estate included real property which was subject to a secured claim. The chapter 7 trustee sold the equity in the property to the debtor and the property remained subject to the secured claim. The trustee and the United States Trustee disagree on whether the amount of the secured claim should be included in the disbursements used to calculate the trustee's maximum allowable fee award under Bankruptcy Code § 326(a). After consideration, the Court concludes that it should not.
This Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
BACKGROUND
On October 14, 2005, Christina M. Roll (Debtor) filed a petition and this case was commenced as a chapter 7. The chapter 7 trustee, Leslie Gladstone (Trustee) filed a motion to compel turnover, and Debtor responded by converting to a chapter 13. However, on October 3, 2006, the case was reconverted due to Debtor's failure to actively participate in the chapter 13 process. The Trustee was reappointed.
Debtor's estate included her residential real property at 9438 Pearlwood Rd., Santee, CA (Property). The Property was encumbered by a mortgage in favor of Countrywide Mortgage in the approximate amount of $225,000. Debtor claimed a homestead exemption of $75,000.
On January 22, 2007, the Court granted the Trustee's application to employ a broker to market the Property. On April 9, 2007, the Trustee filed and served a Notice of Intended Action indicating her intent to "sell the Estate's equity in the debtor's [Property] for a net purchase price of $35,000 to the debtor, calculated using a gross purchase price of $365,000, less $225,000 estimated mortgage, less $75,000 exemption, and less $30,000 approximate costs of sale." The Trustee provided a copy of the "Residential Purchase Agreement" which provided:
Buyer agrees to purchase and Seller agrees to sell the Estate's equity in the Property for a net purchase price of ... $35,000.00...
The Notice of Intent was unopposed and on May 24, 2007, the Court entered an Order authorizing the Trustee to sell the Estate's interest in the Property to the Debtor for a net payment of $35,000 "subject to all liens and encumbrances, including .. . the lien by Countrywide Mortgage having an approximate balance of $225,000.00." The Order provided that the "Countrywide Mortgage lien and real property taxes will remain the responsibility of the Debtor."
On August 8, 2007, the Trustee filed her initial fee application seeking fees of $12,755.32. The Trustee calculated her fees "based upon receipts of the estate in the sum of $365,106.39; less exemption of $75,000.00, and less a voluntary reduction of fees of $5,000..." The $365,106.39 figure was a hypothetical "gross purchase price" which included the secured claim of Countrywide Mortgage. The application was unopposed, and approved by the Court.
On October 9, 2007, the United States Trustee filed a motion for reconsideration of the fee application and order setting aside approval of the fees. The Court granted the motion, and set a briefing schedule on the issue of whether the Trustee's fee calculation could be based upon a gross sales price which included the secured claim, or whether it was limited to the amount actually paid to (and eventually disbursed by) the estate. The United State Trustee filed an Objection to the Application and the Trustee filed her response thereto. A hearing was held and the Court took the matter under submission.
DISCUSSION
Bankruptcy Code Section 326 fixes the maximum compensation payable to a trustee. Section 326(a) provides in relevant part that "... the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's services, not to exceed [a set percentage] 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). Thus, the Court must determine the amount of "all moneys disbursed or turned over" in this case.
The only asset in this case of any material value was the Property. After some efforts to market the Property to third parties, the Trustee sold the estate's equity in the Property to the Debtor for the net price of $35,000.00. The price was calculated using a hypothetical gross price of $365,000 which included the secured claim of Countrywide Mortgage. However, the fact remains that the only money actually paid to the estate (and ultimately disbursed to creditors) was the $35,000.
In making her cap calculation under § 326(a) the Trustee used the gross sale price, which included the amount owed to secured creditor Countrywide Mortgage though no money was ever actually disbursed or turned over to Countrywide Mortgage.
The Trustee acknowledges that these moneys never actually passed through the estate. Nevertheless, the Trustee contends that since the Property was sold to the Debtor subject to the secured claim, the amount of the secured claim ought to be treated as a distribution under § 326(a) as a sort of "constructive distribution" to the secured creditor. In support of this contention Trustee cites two Ninth Circuit cases - Southwestern Media, Inc., 708 F.2d 419 (9th Cir. 1983) and Matter of York International Building, Inc., 527 F.2d 1061 (9th Cir. 1975).
In Southwestern Media, Inc., the court stated that an equity-sale subject to an existing lien should be considered a constructive disbursement to the lienholder for purposes of cap calculations. 708 F.2d at 423-24. However, as the United States Trustee points out, the statement is dictum. The Southwestern Media case did not involve a sale subject to a lien. Rather, the trustee in that case had sold the property free and clear and actually paid off the lienholders.
The court in Matter of York International Building, Inc., however, did suggest that where property was sold subject to a secured claim the amount of the claim was to be included in the cap calculation. York is, in its own way, a form of dictum. The court explained that it was trying to determine a reasonable trustee's fee in a chapter X proceeding. It noted:
Although § 48 of the Bankruptcy Act (11 U.S.C. § 76), dealing with the compensation of trustees in ordinary bankruptcy, is expressly made inapplicable to fees allowed in Chapter X proceedings by 11 U.S.C. § 641, there is no sound reason we cannot also look to the former for some guidance in arriving at a reasonable fee on the record before us.
527 F.2d at 1073. The panel then reviewed the percentage structure applicable in ordinary bankruptcies, then noted that in chapter X cases fees could not "exceed twice the maximum allowance permitted in a normal administration." The reason why-fees in a chapter X case may have been higher is because the trustee had conducted the business of the bankrupt, with all that entails. 527 F.2d at 1074.
Then the court said:
Applying this formula to the record before us, we find that as of January 31, 1974, the trustee had disbursed a subtotal of $1,071,401.19. To this we add the sum of $1,750,000.00 (footnote 12), the total sales price of the property as authorized by the court order of March 2, 1973.
Id. Footnote 12, in turn, reads:
FN 12. For the purpose of calculating the trustee's fee under this section, we treat the assumption of the existing mortgages as a disbursement.
Id. Importantly, the last section referenced immediately preceding the foregoing was 11 U.S.C. § 76(c)(1), (2), which was the section which imposed the cap on chapter X cases at not more than two times the maximum for normal administration.
The York panel does not disclose where the substance of footnote 12 came from. To whatever extent it may have been applicable in a chapter X case, it does not help us in an "ordinary bankruptcy", which this case is, nor does it help us in the circumstances of this case with its hypothetical "gross sales price" that left the mortgage untouched.
The Court has some problem with the notion that a transfer of property subject to a secured claim is a "disbursement," "constructive" or otherwise, to that secured creditor where no actual payment is made. It is the Court's view that the present case is distinguishable. In both the hypothetical situation in Southwestern Media and the actual sale in York International, the property of the estate was sold to a third party. In such a case, although the secured creditor may receive no actual distribution, there is at least an impact on the secured creditor in that the "borrower" has changed. In the case at hand, Countrywide Mortgage's position was not changed at all. As far as Countrywide's secured claim is concerned, nothing happened.
It is to be noted that the Third Circuit Court of Appeals considered a somewhat similar fee request by a trustee in In re Lan Associates XI, L.P., 192 F.3d 109 (1999). There, the question was whether the trustee could seek fees when the secured creditor credit bid its debt because the debt of the estate was thereby eliminated. The Third Circuit said "no". Many years before, the Third Circuit had considered a case factually analogous to the instant one. In American Surety Co. v. Freed, 224 F. 333 (1915), the court focused on what the estate received. It observed: "The trustee sold for a small consideration his only salable interest in the property, namely, the value of the property, over and above the liens on the property." 224 F. at 337. To the same effect is In re Old Oregon Mfg. Co., 236 F. 804 (W.D. Wash. 1916).
The Court concludes that on facts such as in this case, where the equity in property of the debtor's estate is sold to the debtor with no actual distribution to the secured creditor, the amount used in calculating the § 326(a) cap is the amount actually paid to the trustee, regardless of how the transaction is structured. In this case, that amount was $35,000, not $365,000. Accordingly, the maximum compensation under § 362(a) in this case is $4,260.64.
The Court adopts the calculations which are set forth at Exhibit 2 to the January 14, 2008 Declaration of Randall Horton filed in support to the United States Trustee's Objection to the Application.
CONCLUSION
For the reasons set forth above, the Court sustains the United States Trustee's Objection to the Trustee's Application. The prior award of fees in the amount of $12,755.32 is hereby reduced to $4,260.64.
IT IS SO ORDERED.