Pelofsky v. WallacePelofsky v. Wallace
MEMORANDUM AND ORDER
This is a consolidated appeal of three decisions from the United States Bankruptcy Court for the Eastern District of Missouri. The appeal is before the undersigned United States Magistrate Judge by consent of the parties pursuant to
Statement of Subject Matter and Appellate Jurisdiction
The original appeals, before consolidation, arose from decisions in three bankruptcy cases in the Eastern District of Missouri. The cases of In re Milus and Wanda Wallace, Case No. 1:94CV00086LMB [hereinafter Wallace I ]; In re Samuel and Shirley McAnally, Case No. 4:94CV01188TIA [hereinafter Mc Anally ]; and In re Jackie and Jacqueline Wallace, Case No. 1:94CV00099LMB [hereinafter Wallace II] each involve the same discrete issue and have been consolidаted for purposes of appeal. These appeals were taken from the final orders of the Bankruptcy Court entered in each case.
In
Wallace I,
on May 9, 1994, the Bankruptcy Court entered on its docket the May 5,1994 Memorandum Opinion and Order,
In
McAnally,
on May 20, 1994, the Bankruptcy Court entered on its docket the May 18, 1994 Order of the Court overruling the United States Trustee’s Objection to the
*84
Confirmation of the Debtor’s Fifth Amended Plan. A timely Notice of Appeal was filed with the Court. This Court has jurisdiction over this appeal pursuant to
In
Wallace II,
the Bankruptcy Court entered its June 12, 1994 Order
overruling
the United States Trustee’s Objectiоn to Debtors’ Amended Plan of Reorganization. A timely Notice of Appeal was filed. As with the cases above, this court has jurisdiction over this matter pursuant to
Statement of the Issues Presented
Whether the Bankruptcy Court erred in its determination that the percentage fee fixed pursuant to the authority of the Attorney General and payable to the Chapter 12 standing trustee pursuant to
Statement of the Case
A. Procedural Background in Bankruptcy Court
1.Wallace I.
In
this case, the Debtors filed their voluntary petition under Chapter 12 of the United States Bankruptcy Code [hereinafter “Bankruptcy Code”] on April 2, 1993. William H. Frye, the Chaрter 12 standing trustee for the Southeastern Division of the Eastern District of Missouri, was assigned the case. The Debtors’ Plan was confirmed without objection by the Trustee or the U.S. Trustee and the plan proposed a specific dollar amount to be paid to the Trustee as Trustee’s commission pursuant to
2. McAnally.
This case began as a voluntary petition for relief under Chapter 12 of the Bankruptcy Code on July 2, 1992. The Debtors’ Second Amended Plan was confirmed by the Court without objection by the UST. The feasibility portion of the plan specified a 10% payment and 10% was paid until the Debtors filed for modification of the original confirmed plan because the Debtors had sold some of them farmland. The Debtors filed their Fifth Modified Chapter 12 Plan on April 29, 1994. The United States Trustee filed its Objection to Debtors’ Amended Plan of Reorganization, arguing that the Plan failed to calculate correctly fees payable to the standing trustee in the case. On May 31, 1994, the Bankruptcy Court entered on its docket the Order of thе Court overruling the United States Trustee’s Objection to the Plan for the reasons set forth in its decision in Wallace I.
3. Wallace II.
This case began as a voluntary petition for relief under Chapter 12 of the Bankruptcy Code on September 30, 1994. The Debtors filed their Amended Chapter 12 Plan on April 29, 1994. The United States Trustee objected to the Plan arguing that the method of calculating the fee due the trustee under the plan was in error. The plan provided for the fee to be based on the amount the trustee disbursed rather than the amount paid to the trustee. AT the hearing to consider the confirmation of the Debtors’ Plan, the Court announced it would overrule the United States Trustee’s objection fоr the reasons *85 expressed in Wallace I. On June 3,1994, the Court entered on its docket the Order of the Court overruling the United States Trustee’s Objection.
Statutory and Regulatory Background
Chapter 12 of the Bankruptcy Code,
The Chapter 12 family farm provisions of the Bankruptcy Code, set out in Title II of the 1986 Act, became effective on November 26, 1986. 3 Although § 1202(c) initially provided for the appointment of a standing trustee by the Bankruptcy Court, the 1986 Act also provided that the United States Trustee would ultimately take charge of functions, then performed by the Court, regarding the appointing and setting fees for Chapter 12 standing trustees.
In Chapter 12 cases, as in Chapter 13 cases, Congress expressly has denied the bankruptcy courts any authority to allow compensation or reimbursement of expenses either to a United States Trustee acting as a case-by-ease trustee or to a standing trustee appointed pursuant to
In setting the percentage fee for standing trustees, the U.S. Trustee program is guided by two concerns. First, the percentage fee must be set high enough to provide for a trustee’s maximum allowable compensation and allowable expenses.
See In re Savage,
Applicable Standard of Appellate Review
The applicable standard of review on appeal is de novo with respect to this issue, which is a question of law.
Miller v. Farmers Home Administration,
*86 Discussion
The Memorandum Opinion and Order in Wallace I is the basis for the Bankruptcy Court’s ruling in all three of these cases.
The parties have agreed to the wording of the Statement of the Issue Presented set out above. To repeat, the question is whether the percentage fee of the standing trustee pursuant to
United States Bankruptcy Judge Barry S. Sehermer, who wrote the opinion and entered the orders appealed from in these cases, illustrated the differing interpretations of
Farmer (“Farmer”) a debtor under Chapter 12 proposes in his plan to pay Bank, a creditor in the bankruptcy, $100 in a lump sum. In order to assure that Bank receives $100, Farmer must actually pay more than $100 to the trustee because of his 10% fee imposed by§ 586(e)(1) . Under the Debtors’ reading of the statute, Farmer should pay $110 to the trustee with $100 representing the payment from the trustee to the Bank ie. the “payments made under the plan” contemplated by§ 586(e)(l)(B)(ii)(I) and $10 being the 10% (of $100) trustee fee on the payments made under the plan.
The UST bases the 10% fee on the monies received by the trustee regardless of whether they were intended to be distributed to creditors under the plan or if they were intended to be the trustee’s 10% commission. Under the UST’s position, the Farmer must pay $111.11 to the trustee to insure a $100 payment to Bank (a 10% trustee fee on $111.11 is $11.11 with a remainder of $100.00 for Bank). If the Farmer pays $110 to the trustee, with $100 intended for the Bank under the plan and $10 for the 10% commission, under the trustee’s theory of entitlement to 10% of monies received, he would then assess a 10% fee against that $10 (ie. $1). Once the trustee obtains this additional $1, another 10% fee would be charged (ie. 10 cents). Again, when Farmer transfers the 10 cents, the trustee would charge a 10% fee (ie. 1 cent). Thus it would cost the Farmer $111.11 to ensure that Bank receives its promises $100. The UST’s calculation amounts to multiple 10% fees upon 10% fees.
In re Wallace,
Judge Sehermer held that the phrase “payment under the plan” of such debtor contained in
The Bankruptcy Court held that the interpretation of
The Bankruptcy Judge held that the trustee’s reading of
The Bankruptcy Judge pointed out that Chapter 12 of the Bankruptcy Code is similar to Chapter 13, citing
In re Kerwin,
Consequently, the Bankruptcy Court in Wallace I denied the United States Trustee’s Motion to Compel Debtors to Pay Appropriate Fees. In McAnally, based upon the reasoning in the Memorandum Opinion and Order of Wallace I, the Court overruled the United States Trustee’s Objection to Debtors’ Amended Plan of Reorganization. For the same reason and on the same basis, the Bankruptcy Court overruled the United States Trustee’s Objection to the Second Amended Chapter 12 Plan in Wallace II and approved the calculation of the trustee’s fee set forth in the plan and the fee percentage to be included in the Debtors’ Third Amended Chapter 12 Plan.
The Appeal
The United States Trustee, Appellant, argues that the conclusion of the Bankruptcy Court that a standing trustee’s percentage fee is calculated according to the disbursements made by the trustee is incorrect as a matter of law. He asserts that the Bankruptcy Court failed to give effect to the plain .meaning of the section in controversy,
It appears to this Court that the United States Trustee is interpreting
The Court of Appeals for the Eighth Circuit, in
In re Wagner,
The United States Trustee urges that three errors in the Bankruptcy Court’s reasoning regarding the interpretation of
In response to the three allegations by the UST of error on the part of the Bankruptcy Court, the debtors argue that first, Congress did limit the trustee’s compensation to a percentage of the payments made under the plan, in that under
With reference to the appellant’s second attribution of error on the part of the Bankruptcy Court that the phrase “payment under the plan” includes both payments by debtors and disbursements by trustees, the debtors point to the interpretation of the Bankruptcy Court that the trustee acts as a conduit between a debtor’s payments under the plan and the creditors who will eventually be paid under the plan and that it is only the channeling of payments and the services performed by a trustee that should generate the payment of a fee. The debtors also allude to the fact that under the UST’s interpretation, the trastee would be receiving a fee for paying himself a fee, a subject this Court will refer to later in this Memorandum.
The UST is interpreting “payments made under the plan” to include all funds transferred from the debtor to the trustee, *89 whereas this Court feels the proper interpretation of “payments made under the plan” is the usual meaning of “payment” when used in the context of debtor and creditor, which is basically the context of bankruptcy proceedings. “Payments” in this context refer to amounts paid to creditors.
In the decision
In re Edge,
The primary impetus behind amending the language in28 U.S.C. § 586(e)(2) appears to have been a desire to clarify against what funds a standing trustee is entitled to assess his percentage fee. The prior language suggested the standing trustee could assess his percentage fee against paymеnts made directly by the debtor to a creditor under a repayment plan even though the standing trustee performed no service with regard to those payments. This interpretation was possible because28 U.S.C. § 586(e)(2) directed that standing trustees could assess then’ percentage fees against “all payments under plans.” Since the direct payments were made under a repayment plan, the standing trustee could assess his fee against them.
The 1986 amendment limited the standing trustee’s assessment to “all payments received by such individual [the standing trustee] under plans.” A majority of the courts confronting the issue have interpreted this amendment to mean that the standing trustee cаnnot assess his fee against payments made directly by the debtor to a creditor because he does not “receive” them. [Citations omitted].
While funds the standing trustee does not receive are not subject to the percentage fee, it does not necessarily follow that all funds he receives are subject to the fee as appellee contends. The statutory language used both before and after the 1986 amendment was addressed to payments “under plans.” We find as a matter of law that funds paid to a standing trustee for purposes of paying the standing trustee’s percentage fee are not payments under a Chapter 13 repаyment plan. Thus, they are not subject to the standing trustee’s percentage fee.
Additionally, the UST characterizes the Bankruptcy Court’s interpretation of
However, § 1226 does not say “payments received” by the trustee shall be retained until confirmation or denial of confirmation. Section 1226(a) states, “Payments and funds received by the trustee shall be retained by the trustee until confirmation or denial of confirmation of a plan.” (emphasis supplied). The UST is interpreting payments as all monies paid to the trustee. Section 1226, when it uses the additional words “and funds”, indicates that there are monies turned over to the trustee other than “pay *90 ments.” This Court interprets “and funds” to include the amount delivered to the trustee as the trustee’s fee. Again, under this Court’s reading, the word “payment” has the ordinary meaning of payment in the creditor-debtor situation. Section 1226(c) continues, “Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” To this Court’s understanding, that is what the word “payment” means, “payments to creditors.”
The Edge case, which actually involved a Chapter 13 bankruptcy, found that § 1326, which has the same wording as § 1226, supports the Bankruptcy Court’s finding in the instant cases that the trustee’s fee is only to be assessed on disbursements to creditors:
11 U.S.C. § 1326 , governing Chapter 13 payments, further suggests that only payments which are intended to be disbursed to creditors pursuant to a repayment plan are payments made “under” that plan.11 U.S.C. § 1326(a)(2) directs that “[a] payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan. If a plan is confirmеd, the trustee shall distribute any such payment in accordance with the plan.”11 U.S.C. § 1326(b)(2) expressly *222 distinguishes between payments under a plan and the payment of a standing trustee’s percentage fee: “Before or at the time of each payment to creditors under the plan, there shall be paid ... the percentage fee fixed for such standing trustee.... ”
In re Edge, at 221-222.
The editors of Collier on Bankruptcy do not appear to agree with the UST’s contention that the standing trustee is entitled to receive a fee of 10% assessed on the amount paid by the debtors as the trustee’s fee. They state:
The Attorney General is required to fix a percentage fee, which in chapter 13 cases is not to exceed ten percent, “based on such maximum annual compensation and the actual necessary expenses incurred by such individual as standing trustee.” In chapter 12 cases, the fee is not to exceed ten percent of the first $450,000 paid under the plan, and three percent of any payments in excess of $450,000. The percentage fee is intended to cover the maximum salary and actual necessary expenses of the standing trustee. The Attorney General will have to set the percentage fee based on the standing trustee’s salary and estimated expenses. The percentage fee charged to each estate will dеpend on factors such as a projection of the number of cases that will be filed in the ensuing year and the total amount that will be paid out to creditors under confirmed plans. The percentage fee is to be computed on and payable out of the payments actually made by or for a debtor under the plan and may not exceed ten percent of such payments, (emphasis supplied)
Collier on Bankruptcy ¶ 6.11 (15th ed.1995).
Appellant UST argues in his next point that even if ambiguity exists, the Attorney General’s reasonable construction of
Further, the parties all agree that
In his argument, the UST, among other eases, cites
In re BDT Farms, Inc.,
As mentioned earlier, all parties in this appeal have stated that
There are historical and policy considerations which militate against the UST’s interpretation of
The interpretation of the United States Trustee, that he should receive a fee for his fee, seems to run counter to the intention of Congress to give family fаrmers a fighting-chance to reorganize their debts as stated above in Stahn v. Haeckel. Under the UST’s interpretation, the standing trustee receives a fee but performs no service. A farmer attempting to pay off his debts might find it difficult to understand why he should pay the trustee a fee when the trustee has done nothing to earn the fee.
As stated earlier in the statutory and regulatory background, Congress has taken from the courts the authority to set the compensation for the standing trustee in a Chapter 12 bankruptcy. The House Report accompanying the Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986 stated Congress’s reason for its action. The report stated, “The handling of both administrative and judicial functions by the bankruptcy courts had eroded the public confidence in the bankruptcy system.... This awkward relationship between trustees and judges created an improper appearance of favoritism, cronyism, and bias, and generated great disrespect for the bankruptcy system.” H.R.Rep. No. 554, 99th Cong., 1st Sess. 1, 18-22 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5229-34.
The United States Trustee is under the jurisdiction of the Department of Justice. The Attorney General, the head of the Department of Justice, has interpreted the statute to allow the trustee to obtain a fee for no services. One wonders if this might not create the appearance of favoritism and cronyism that prompted Congress to remove the ability to set the compensation for standing-trustees from the courts in 1986.
In Wagner, supra at 726, the Eighth Circuit recognized that trustee’s fees are amounts to be earned by the efforts of the trustee when it said, “Trustee’s fees are not ‘debts provided for by the plan,’ but are fees *92 levied for services provided in administering the plan.”
In the case of
In re Erickson Partnership,
I note, however, that this reduction in fees corresponds to a reduction in wоrk. Chapter 12’s trustee fee scheme contemplates compensating trustees only for services performed. See28 U.S.C. § 586(b) (standing trustees should only be appointed “if the number of cases ... so warrants.”) This decision is entirely consistent with that scheme. This decision recognizes that the language of Chapter 12 authorizes debtors to undertake some of the standing trustee’s duties themselves, thereby saving the fees standing trustees would be entitled to if the trustees had performfed] the work. This was Congress’s intent, as evidenced by the language of the provisions analysed above. If giving effect to this intent will undermine the funding of the trustee system, as the trustees suggest, a remedy must be sought in Congress, not the courts.
Upon de novo review of the Bankruptcy Court’s legal conclusion that the proper calculation of a Chapter 12 Trustee’s fee is based on a percentage of the payments made by the Chapter 12 Trustee to the creditors, this Court finds no error. Therefore, the final Orders of the Bankruptcy Court entered in each of the captioned cases and appealed from will be affirmed in a Judgment entered separately.
IT IS HEREBY ORDERED that Joel Pelofsky be substituted as United States Trustee for John R. Stonitsch in accordance with the Memorandum to Clerk filed by the United States Trustee and pursuant to
Notes
. Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 ("1986 Act”), P.L. 99-554, 100 Stat. 3088, 3104 et seq,
. Although a trustee must be appointed in every Chapter 12 case, not all trustees appointed are standing trustees. In a judicial district where a sufficient number of farm bankruptcy petitions are expected to be filed, the United States Trustee will appoint one or more standing trustees; if no standing trustee has been appointed, "the United States Trustee shall appoint one disinterested person to serve as trustee in the case or the United States Trustee may serve as trustee in the case if necessary."
.Where payments under the plan exceed $450,-000, the maximum percentage fee to which the standing trustee is entitled is 3% of that amount which exceeds $450,000.