IN RE: LAN ASSOCIATES XI, L.P. PATRICIA A. STAIANO, UNITED STATES TRUSTEE v. JAMES J. CAIN, TRUSTEE FOR LAN ASSOCIATES XI, L.P., Appellant
No. 98-5434
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
October 5, 1999
On Appeal from the United States District Court for the District of New Jersey D.C. Civil Action No. 98-CV-2286 (Honorable Joseph E. Irenas) Argued April 29, 1999
Before: SCIRICA, ROTH, and McKAY, Circuit Judges.
ROBERT J. SCHNEIDER, ESQUIRE (ARGUED) PATRICIA A. STAIANO, UNITED STATES TRUSTEE DONALD F. WALTON, ASSISTANT U.S. TRUSTEE Office of the United States Trustee One Newark Center, Suite 2100 Newark, New Jersey 07102 Attorneys for Appellee
JOSEPH I. WITTMAN, ESQUIRE National Association of Bankruptcy Trustees “NABT” 435 S. Kansas Avenue - 2nd Floor Topeka, Kansas 66603-3401 Attorney for Amicus Curiae-Appellant
OPINION OF THE COURT
McKAY, Circuit Judge.
The standing trustee in this matter, Appellant James J. Cain, appeals from a district court order which reversed a bankruptcy court award of final compensation in the amount of $184,888.25 and $999.40 in costs. Based on the language of
I.
The debtor, Lan Associates XI, L.P., commenced this action on July 6, 1992, by filing a voluntary petition under Chapter 11 of the Bankruptcy Code. Mr. Cain was subsequently appointed as Chapter 11 trustee. The debtor‘s principal asset was a parcel of property consisting of two office complexes in Marlton, New Jersey, which was subject to a mortgage in favor of First Fidelity Bank, N.A. Although the debtor initially valued the property at $9,000,000.00, it was later appraised at a fair market value of $9,727,000.00 with a liquidation value of $7,781,200.00. During the bankruptcy proceedings, First Fidelity asserted a secured claim of $12,865,434.55.
Pursuant to the Chapter 11 proceedings, the trustee acted as landlord for the office complexes for eighteen months. Accordingly, by Order dated April 8, 1993, the trustee was awarded interim compensation of $28,665.51 based on disbursements of $949,183.54. Because the trustee had rendered approximately 163.5 hours of service as of the date of that award, his compensation
On May 21, 1993, the Chapter 11 proceeding was converted into a Chapter 7 proceeding and Mr. Cain was reappointed as Chapter 7 trustee. Although the trustee alleged that he was prepared simply to abandon the property and allow First Fidelity to foreclose on it, First Fidelity offered to purchase the property through a credit bid at the liquidation price of $7,781,200.00.1 In connection with the purchase, First Fidelity offered to allow the trustee to retain $372,387.00 from the cash collateral provided to the trustee by First Fidelity to cover administrative expenses and provide a distribution for unsecured creditors.2 First Fidelity also offered to waive any deficiency claim it had remaining against the estate after the sale.
In response to First Fidelity‘s credit bid offer, the trustee filed a motion and a certificate in support of the motion to sell the property at a private sale. See J.A. at 76-85. The certificate itemized the anticipated administrative expenses of the sale, including the trustee‘s anticipated commission of $233,616.00 based on the total sale price of $7,781,200.00 and an additional $70,000.00 in commissions based on rents received for the property. The certificate also referred to the $372,387.00 in cash collateral which First Fidelity agreed the trustee could retain for payment of administrative expenses and distribution to unsecured creditors and indicated that the remaining $7,408,813.00 of the sale price would be applied to the mortgage. See id. at 80. The trustee further explained in the certificate that he agreed to contribute $83,346.00 out of his anticipated compensation to provide a distribution for the unsecured creditors. According to the trustee, once the administrative expenses were paid, $62,500.39 would remain for the unsecured creditors,
which would amount to “a distribution of approximately 25%” of the $250,000.00 in unsecured claims. Id.
To prepare for the sale, the trustee forwarded a Notice of Private Sale to all creditors and parties in interest, including the United States Trustee, Appellee in this action. The notice stated that the sale was to be “free and clear of all liens.” Id. at 88. Although the bankruptcy court received an objection to the sale from one creditor, the court approved the sale by Order dated February 14, 1994, see id. at 92, and the sale took place on April 18, 1994.
In October 1994, the trustee filed an interim application for an additional $204,522.76 in commissions and $999.40 in expenses. See id. at 106, 109. To calculate the amount of the commissions, the trustee first added the $7,781,200.00 from the credit bid sale to $2,763,942.42 in operating revenues from the property. He then requested $316,534.27 in compensation based on the maximum percentages set forth in
Having received no objection to the interim fee application, the bankruptcy court held a hearing on the application on December 1, 1994. At the hearing, “the court questioned the amount of the trustee‘s commission, as it translated into an hourly rate, and questioned the amount of the distribution intended for unsecured creditors.” Attach. to Appellant‘s Br. (Bankr. Ct. Op. at 7 (footnote omitted)). However, no one raised the issue of whether the credit bid could be included in the base on which the trustee‘s fee was calculated at the hearing. See id. (Bankr. Ct. Op. at 8). The bankruptcy court approved the trustee‘s application by Order filed December 2, 1994, see J.A. at 159, and he was paid on December 6, 1994. See Attach. to Appellant‘s Br. (Bankr. Ct. Op. at 8).
On April 17, 1995, the trustee sought authorization to make an interim distribution to the unsecured creditors in the amount of $62,500.39. Because the unsecured claims which remained outstanding amounted to $328,538.03, this payment amounted to only a 19% dividend to the unsecured creditors. The bankruptcy court approved the distribution without objection, and the payments were made on May 15, 1995. See id.
On November 13, 1995, the trustee submitted a final report to the bankruptcy court. See J.A. at 173. In the report, the trustee sought confirmation for the two prior interim payments he had received, but he did not seek additional compensation. One year later, on November 13, 1996, the U.S. Trustee submitted an objection to the final report. See id. at 226. The U.S. Trustee argued that the amount of the credit bid was improperly included in the base on which the trustee‘s compensation was calculated, and as a result, the trustee had been overpaid by $142,449.40.3 The U.S. Trustee requested the court to order the trustee to disgorge this amount with interest and to disburse the disgorged funds to the unsecured creditors.
Following a hearing on December 12, 1996, the bankruptcy court approved the trustee‘s final report and ordered final compensation in the amount of $184,888.25 and $999.40 in costs. See Attach. to Appellant‘s Br. (Bankr. Ct. Order at 2). Because the trustee had anticipated a 25% dividend to the unsecured creditors but, in fact, provided only a 19% dividend, the court ordered the trustee to disgorge an additional 6% dividend of $19,634.51.4 In making its determination, the bankruptcy court first reviewed the language of
readily acknowledge[d] that [it was] influenced . . . by the procedural history of this case, including four notices to the [U.S. Trustee] of the contemplated compensation, the timing of the first objection by the [U.S. Trustee], nearly two years after the award was entered and paid, and the potential hardship to the trustee in the event that substantial disgorgement [was] required.
Id. (Bankr. Ct. Op. at 33-34).
The U.S. Trustee appealed the bankruptcy court‘s fee award to the United States District Court for the District of New Jersey which reversed the bankruptcy court‘s decision and remanded for a new determination of the trustee‘s compensation. See In re Lan Assocs. XI, L.P., No. CIV. A. 98-2286, 1998 WL 467100, at *10 (D.N.J. Aug. 12, 1998). Noting that “[t]here is no ambiguity in
In this appeal, the trustee challenges both the district court‘s determination that the credit bid should not have been used to calculate the trustee‘s compensation and its conclusion that the bankruptcy court erred by considering the maximum percentages set forth in
Because the district court sat as an appellate court reviewing an order of the bankruptcy court, we exercise plenary review of its decision. See Interface Group-Nev., Inc. v. TWA, Inc. (In re TWA, Inc.), 145 F.3d 124, 130 (3d Cir. 1998). This court reviews the bankruptcy court‘s findings of fact for clear error and its conclusions of law under a plenary standard. See id. at 131; Precision Steel Shearing, Inc. v. Fremont Fin. Corp. (In re Visual Indus., Inc.), 57 F.3d 321, 324 (3d Cir. 1995).
II.
This court has not previously addressed the appropriateness of including the value of a credit bid in the base on which a trustee‘s compensation is calculated under
Sections
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 fifteen percent on the first $1,000 or less, six percent on any amount in excess of $1,000 but not in excess of $3,000, and three percent on any amount in excess of $3,000, 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.
“It is axiomatic that our interpretation of any statute begins with the language of the statute.” Director, Office of Workers’ Comp. Programs v. Sun Ship, Inc., 150 F.3d 288, 291 (3d Cir. 1998) (citing Consumer Prod. Safety Comm‘n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980)). Having reviewed the language of
Our primary area of concern with the district court‘s determination is its confident assertion that the language of
Because we have concluded that the language of
It should be noted that the base on which the maximum fee is computed includes moneys turned over to secured creditors, to cover the situation where the trustee liquidates property subject
to a lien and distributes the proceeds. It does not cover cases in which the trustee simply turns over the property to the secured creditor, nor where the trustee abandons the property and the secured creditor is permitted to foreclose.
H.R. REP. NO. 95-595, at 327 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6283-84. We think that a credit bid transaction is more analogous to the latter situation described in this passage, in which the trustee simply turns over or abandons the property to the secured creditor, than it is to the former, in which the trustee sells the property to a third party and then distributes the proceeds. Whether the secured creditor purchases the property through a credit bid or whether the property is turned over or abandoned to it by the trustee, the end result is the same--in either case, the secured creditor receives the property in satisfaction of its secured claim. In contrast, when the trustee sells the property free and clear of liens to a third party and then disburses the proceeds, the secured creditor receives a payment, presumably of money (cash or its equivalent), in satisfaction of its claim, which brings the transaction within the literal language of the statute.
The legislative history also indicates that, in imposing the primary duty on the trustee to reduce property to money, Congress intended to distinguish between the concepts of property and money. See United States Trustee v. Messer (In re Pink Cadillac Assocs.), Nos. 96 CIV. 4571, 95-B-4243, 1997 WL 164282, at *3 (S.D.N.Y. Apr. 8, 1997) (“The emphasis on `moneys,’ rather than property or value, accords with the drafter‘s understanding that `[t]he trustee‘s principal duty is to collect and reduce to money property of the estate for which he serves.’ ” (quoting H.R. REP. NO. 95-595, at 379 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6335); see also Pritchard v. United States Trustee (In re England), 153 F.3d 232, 237 (5th Cir. 1998) (citing
In addition to analyzing what the secured creditor receives, our reading of the legislative history focuses on the role played by the trustee in the transaction. See In re Leedy Mortgage Co., 126 B.R. 907, 916 (Bankr. E.D. Pa. 1991) (“The crucial issue in determining whether certain payments should be considered in the calculations [of trustee compensation] is whether the Trustee was himself actually engaged in the process of making disbursements to secured creditors, as opposed to a situation where sums paid to such creditors do not actually pass through the Trustee‘s hands.“); cf. Pink Cadillac Assocs., 1997 WL 164282, at *3 (stating that the legislative history of
Although we recognize that there may be cases in which the trustee‘s arrangement and negotiation of a credit bid transaction may prove to be as complex and time consuming as liquidating estate assets by selling them to third parties, cf. Southwestern Media, Inc. v. Rau, 708 F.2d 419, 423 (9th Cir. 1983) (noting potential difficulty of administering encumbered estate assets), these difficulties do not change our analysis.
Further, if Congress had chosen to include property or other consideration in the trustee‘s compensation base, it certainly knew how to do so. Under the section of the Bankruptcy Act which was replaced by
For these reasons, we are satisfied that Congress did not intend to include credit bids in the trustee‘s compensation base. Stated differently, we think that Congress intended to limit trustee compensation to “moneys” in the narrow sense, i.e., in the sense of “sums of money,” “something generally accepted as a medium of exchange,” or “assets or compensation in the form of or readily convertible to cash.” WEBSTER‘S THIRD NEW INT‘L DICTIONARY 1458 (1986).
A corollary of adopting a strict reading of
We are not persuaded by these authorities’ adoption of the constructive disbursement theory for several reasons. First, because the constructive disbursement theory allows the trustee to be compensated for disbursements of property and other types of consideration, rather than simply for money disbursements as Congress defined them, it conflicts with our narrow interpretation of
Third, the majority of district and bankruptcy court cases have limited the basis of a trustee‘s compensation to cash or its equivalent which the trustee actually disburses to parties in interest. See, e.g., In re Barnett, 133 B.R. 487, 489-90 (Bankr. N.D. Iowa 1991) (strictly interpreting
Our interpretation of
As several courts have noted, ” `[t]he crucial test [for whether a trustee is entitled to compensation] 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 423 n.4 (quoting In re Schautz, 390 F.2d 797, 800 (2d Cir. 1968)); see 3 Collier on Bankruptcy S 326.02[2][f][ii]. In turn, whether a property or fund is justifiably administered depends on whether administering the asset benefits the general estate. Generally, if no estate benefit is anticipated, then the proper course of action is to abandon the property. See
It follows from these principles that a trustee who expends time and effort administering fully encumbered assets should not receive compensation except to the extent that his actions provide an actual benefit to the estate. See Music Merchandisers, 131 B.R. at 378 (“One general rule seems to be that the base for calculation of compensation for a sale `subject to liens or encumbrances’ excludes the amount of liens and includes only the net or surplus actually paid to (and presumably `disbursed or turned over’ by) the trustee.“); In re National Enter. Wire Co., 103 B.R. 56, 59 (Bankr. N.D.N.Y. 1989) (“Bankruptcy courts have generally taken the position that a trustee is not entitled to collect statutory commissions and expenses under Code SS 326 and 330 on the sale of fully secured property since the estate would not receive any proceeds to distribute to those creditors holding unsecured.“); Landreneau, 74 B.R. at 13 (“The trustee . . . should be compensated [for administering fully encumbered assets] only to the extent his actions actually benefitted the secured creditor.“); cf. Pink Cadillac Assocs., 1997 WL 164282, at *4 (“[C]ourts have found that a trustee may not count as `moneys disbursed or turned over’ the proceeds of a sale of property that is fully encumbered or that has only slight equity, because the proper course is to abandon or turn over such property.“); Barnett, 133 B.R. at 488 (noting that “trustees have been denied a statutory fee based upon the sale price of fully encumbered property or the sale of property enjoying only slight equity“). An additional reason for disallowing compensation for the sale of fully encumbered property is that “there is no justification for the estate, which is created for the benefit of the unsecured creditors, to bear the fee for the benefit of the secured creditor.” In re Palm Beach Resort Properties Inc., 73 B.R. 323, 324 (Bankr. S.D. Fla. 1987); see also Stanley, 120 B.R. at 411 (explaining that selling property in which there is no equity “would not result in any benefit to the unsecured creditors and on the contrary can in certain instances result in an actual detriment if the aggregate amount of a Chapter 7 Trustee‘s commission from the sale of property with only slight equity exceeds the paper equity that appears to exist“).
In this case, we agree that the trustee may have achieved a benefit for the estate beyond what it would have received if he had simply abandoned the property to First Fidelity. However, the trustee will receive compensation based on the benefit he achieved for the estate. Not only do the principles outlined above dictate that the trustee should receive compensation for any actual benefit the trustee achieved for the estate but also the U.S. Trustee does not dispute that the compensation base should include this amount. See supra note 2 (indicating that neither U.S. Trustee nor district court disputes that the $372,387.00 in cash collateral which First Fidelity contributed to administrative costs and payment to the unsecured creditors may be counted as part of the trustee‘s compensation base (citing Lan Assocs., 1998 WL 467100, at *8 n.8; Appellee‘s Br. at 6 n.2)). Moreover, while there may be instances in which a trustee receives less compensation than he deserves when measured against the amount and complexity of work he performed, see Southwestern Media, 708 F.2d at 423 (“[T]he policy underlying the statutory provision allowing sale proceeds used to liquidate liens to be counted in determining the trustee‘s fee maximum . . . serves `the purpose of insuring to
In conclusion, despite our disagreement with the district court regarding the ambiguity of the term “moneys,” we are persuaded by the legislative history of
III.
We now address whether the district court erred in concluding that the bankruptcy court considered improper factors in conducting its reasonableness analysis of the trustee‘s fee pursuant to
A.
With respect to the bankruptcy court‘s consideration of the
We agree with the district court‘s determination that consideration of the maximum fees set forth in
[Section 326(a)] simply fixes the maximum compensation of a trustee. Proposed 11 U.S.C. S 330 authorizes and fixes the standard of compensation.. . .
The limits in this section, together with the limitations found in section 330, are to be applied as outer limits, and not as grants or entitlements to the maximum fees specified.
H.R. REP. NO. 95-595, at 327, reprinted in 1978 U.S.C.C.A.N. 5963, 6283. This passage indicates that while Congress intended S 330 to prescribe the standard pursuant to which trustee compensation is awarded, S 326(a) merely caps the fees awarded pursuant to S 330. Congress’ description of the separate functions of the statutes demonstrates that a fee determination must involve independent consideration of each statute.
In light of the legislative history and the cases described above, we conclude that the S 330(a) and the S 326(a) analyses must be conducted separately. Although it is difficult to tell whether or how the bankruptcy court relied on S 326(a) in assessing reasonableness under S 330(a), we affirm the district court‘s determination that the reasonableness determination under S 330(a) should not include consideration of the caps set forth in S 326(a). Thus, we instruct the bankruptcy court to consider S 326(a) independently of its reasonableness assessment under S 330(a) on remand.
B.
The trustee also argues that the district court incorrectly held that the bankruptcy court erred in considering both the U.S. Trustee‘s delay in objecting to the trustee‘s final report and the potential hardship to the trustee caused by a disgorgement order under S 330(a). Specifically, the trustee claims that because the factors set forth in S 330(a) are not all-inclusive, the bankruptcy court‘s apparent consideration of these factors was not erroneous.
“In employing the fee setting criteria of Section 330(a), the bankruptcy judge is accorded wide discretion.” Financial Corp. of Am., 114 B.R. at 224; see also In re C & A Enters., Inc., 132 B.R. 303, 307 (Bankr. W.D. Pa. 1991) (“The bankruptcy court has the independent authority and responsibility to determine the reasonableness of compensation.“). At least in part, the bankruptcy court‘s broad discretion is due to the fact that “no matter how close the [c]ourt comes to an objective determination of a reasonable fee, [the fee determination] is still, in the final analysis, a substantially subjective exercise.” In re Garland Corp., 8 B.R. 826, 831 (Bankr. D. Mass. 1981); see In re Gillett Holdings, Inc., 137 B.R. 475, 481 (Bankr. D. Colo. 1992)
Although many cases apply only the factors enumerated in S 330(a), our research has not revealed any case--apart from the district court opinion in this case--which has expressly stated that a bankruptcy court‘s reasonableness assessment is limited to only those factors. In fact, we have located two cases which have concluded that the factors set forth in S 330(a) are not exhaustive and that bankruptcy courts may consider relevant factors beyond those listed in the statute. See Roco Corp., 64 B.R. at 504 (“[T]he elements set out in
(stating that courts have relied on Johnson factors to assess the reasonableness of compensation under both the Bankruptcy Act and the Bankruptcy Code and that “[m]any courts continue to follow Johnson“); see, e.g., Garland Corp., 8 B.R. at 831 (employing twelve Johnson factors to determine trustee‘s fee under S 330(a)); cf. Grant v. George Schumann Tire & Battery Co., 908 F.2d 874, 877-78 (11th Cir. 1990) (considering Johnson factors in determining trustee‘s attorneys’ fees pursuant to S 330(a)); First Nat‘l Bank of Lea County v. Niccum (In re Permian Anchor Servs., Inc.), 649 F.2d 763, 768 (10th Cir. 1981) (adopting Johnson factors for purposes of determining attorneys’ fees in bankruptcy cases); In re Malewicki, 142 B.R. 353, 355 (Bankr. D. Neb. 1992) (employing twelve Johnson factors to determine fee for Chapter 13 debtor‘s counsel pursuant to S 330(a)); Gillett Holdings, 137 B.R. at 481 & n.10 (assessing fees for debtor‘s investment banker based on Johnson reasonableness factors). Mindful of these cases and of the broad discretion bestowed on bankruptcy courts to determine appropriate trustee fees, we hold that the factors enumerated in section S 330(a) are not all-inclusive.
The changes Congress made to S 330 pursuant to the Bankruptcy Reform Act of 1994 support our determination. The amended version of S 330 clearly indicates that in determining a reasonable fee, the court must “consider the nature, the extent, and the value of such services, taking into account all relevant factors.”
Even though we have held that S 330, even in its pre-1994 amendment
IV.
In conclusion, the trustee is not entitled to receive compensation on the amount of First Fidelity‘s credit bid. Additionally, the bankruptcy court should conduct its reasonableness assessment independently of the maximum percentages set forth in S 326(a) and should confine its S 330(a) analysis to factors which have some relevance to the services provided by the trustee. We therefore AFFIRM the district court‘s reversal of the bankruptcy court‘s fee award and REMAND to the bankruptcy court for a determination of the final trustee compensation award consistent with this opinion.
A True Copy: Teste:
Clerk of the United States Court of Appeals for the Third Circuit