It is well-established that the commission for bankruptcy trustees appointed in Chapter 7 cases is dictated by 11 U.S.C. § 326(a)[1], which provides for a staggered commission based upon the amount of assets disbursed to creditors[2]:
(a) 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.
While the commission under Section 326(a) is not controversial when only one trustee has been appointed in a case, an issue arises as to how the commission earned under Section 326(a) should be divided when more than one trustee has been appointed in a single case. The only guidance on this issue appears in Section 326(c), which simply states that the “aggregate compensation” shall not exceed the formula dictated in Section 326(a) “[i]f more than one person serves as trustee in the case”. [3] In other words, the appointment of multiple trustees in a bankruptcy case does not increase the commission owed under Section 326(a). The statute, however, is silent as to how to divide the commission when more than one bankruptcy trustee is appointed in a case. Bankruptcy courts have been faced with two differing legal theories presented by bankruptcy trustees concerning the most appropriate method in apportioning fees.[4]
The first approach is premised on the accounting principle “first in, first out” (the “FIFO Approach”) and dictates that the initial trustee is entitled to receive the benefit of the statutory language that provides a higher commission for the first disbursements made to creditors, i.e. a twenty-five percent commission on the first $5,000 and a ten percent commission on any amount in excess of $5,000 but not in excess of $50,000. The FIFO Approach is most beneficial to the trustee initially appointed due to the decreasing commission earned on larger sums disbursed to creditors.
The second approach calculates the total commission earned under Section 326(a) and then allows for a pro rata apportionment (the “Pro Rata Approach”) to each trustee based upon the funds that each of them disbursed. The Pro Rata Approach is most beneficial to the successor trustee as it based on the total amounts ultimately disbursed to creditors and does not provide any consideration to the timing of the collection of funds.
Unsurprisingly, a bankruptcy trustee’s decision to argue the FIFO Approach or the Pro Rata Approach largely depends on whether the trustee initially appointed or a successor trustee.
In In re Calhoun, 430 B.R. 536 (Bankr. W.D. WI. 2010) the United States Bankruptcy Court for the Western District of Wisconsin was faced with determining the most equitable way to apportion fees between initial and successor trustees. In Calhoun, the initial trustee administered the bankruptcy case for approximately twenty months and made disbursements to creditors totaling $141,000. The initial trustee was forced to resign due to a conflict of interest. A successor trustee was then appointed. The initial trustee then filed a request for compensation in the amount of $12,599.76, which was comprised of $10,303.08 in fees and $2,296.68 in expenses. The initial trustee calculated his commission using the formula under Section 326(a) after accounting for $141,000 in disbursements. While the successor trustee had not made any disbursements to creditors, he expected to receive additional funds for the bankruptcy estate. Unsurprisingly, the initial trustee argued that the Court should apply the FIFO Approach and award him the full amount of the compensation due under Section 326(a) based upon the disbursement of $141,000 to creditors. The Initial Trustee then argued that the successor trustee would receive a commission based on any additional funds disbursed to creditors, which would be calculated at the rate of five percent up to $1,000,000 in disbursements.
The bankruptcy court in Calhoun denied the initial trustee’s application for compensation and adopted the Pro Rata Approach after succinctly describing the inequities of the FIFO Approach:
It appears that no court has adopted the method proposed by the initial trustee, in which the successor trustee simply picks up where the first trustee leaves off. This silence may be explained by the inequitable results of this approach. Section 326(a) awards compensation on a percentage basis, which diminishes at certain monetary thresholds. If the successor trustee simply continues where the first trustee leaves off, he will earn a lower percentage return than if he had been the initial trustee. For example, the initial trustee in this case disbursed more than $50,000. This entitled him to 25% of the first $5,000 disbursed, 10% on amounts up to $50,000, and 5% on subsequent amounts up to $1 million. If the successor trustee simply steps into these shoes, then he will earn only 5% on disbursements up to $1 million. Simply stated, the more successful the first trustee, the lower the return for the successor trustee.
Id. at 538.
The United States Bankruptcy Court for the Eastern District of Arkansas reached a similar result in In re Turner Grain Merchandising, Inc., 568 B.R. 96 (Bankr. E.D. AR 2017). Just as in Calhoun, the facts in Turner Grain dealt with the appointment of a successor trustee in a bankruptcy case where the initial trustee had already made disbursements to creditors. The initial trustee filed an application seeking compensation in the amount of $45,496.07 based on the trustee compensation percentages outlined in Section 326(a). The successor trustee opposed the request for compensation based upon the percentages that were used to calculate the commission. In essence, the initial trustee advocated for the FIFO Approach and the successor trustee contended that the Pro Rata Approach was more equitable. The bankruptcy court first noted the potentially inequitable result of the FIFO Approach and held that “extraordinary circumstances” existed to rebut the reasonableness of the trustee fee. Id. at 104. The bankruptcy court then adopted the approach articulated by the court in Calhoun and denied the request for compensation of the initial trustee, without prejudice, and held the trustee commission will be calculated at the end of the case based upon the total funds disbursed to creditors and apportioned between the trustees on a pro rata basis.
Following the decisions in Calhoun and Turner Grain, the approach that is most likely to be adopted by bankruptcy courts in apportioning fees between bankruptcy trustees when interim disbursements have been made is the Pro Rata Approach.
[1] Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
[2] In addition to the commission formula outlined in this article, Section 327(d) also permits a trustee “to act as attorney or accountant for the estate if such authorization is in the best interest of the estate.” A trustee that is employed as attorney or accountant for the estate, however, must maintain detailed time records of the tasks performed as attorney or accountant and may receive compensation only for services performed in that capacity and not for the performance of regular trustee duties. See 11 U.S.C. § 328(b); see also U.S. Trustee Handbook, Chapter 4(C)(10)(f).
[3] Section 326(c) provides: “If more than one person serves as trustee in the case, the aggregate compensation of such persons for such service may not exceed the maximum compensation prescribed for a single trustee by subsection (a) or (b) of this section, as the case may be.”
[4] This article will not address situations in which there are allegations of misconduct or negligence by the initial trustee, which may be cause to deny an award all together. See In re Bluewater Palmas Ltd., 2006 WL 3909925 (Bankr. D.P.R. 2006) (trustee did not show how services benefited the estate). Further this article will not address a situation where the initial trustee did not make any disbursements to creditors, which may also result in that trustee not being awarded any commission. See In re Evans, 344 B.R. 440 (Bankr. W.D. Va. 2004).