Aaron Caillouet v. JFK Capital Holdings, L.L.C., e
Aaron Caillouet v. JFK Capital Holdings, L.L.C., e
Opinion
This bankruptcy appeal presents a question of statutory interpretation concerning “reasonable compensation” of Chapter 7 bankruptcy trustees under
FACTUAL AND PROCEDURAL BACKGROUND
John F. Kelly, III allegedly operated an 80-plus entity single business enterprise to defraud his investors of millions of dollars. Kelly filed Chapter 7 bankruptcy, in October 2014, and Barbara Rivera-Fulton was appointed as trustee to represent his estate (“the Kelly Trustee”).
Unlike most of Kelly’s business entities, JFK Capital Holdings, LLC, was solvent. JFK Capital was awaiting the receipt of a $876,000 settlement check related to a separate bankruptcy proceeding. Despite the incoming check, the Jaw firms that negotiated the settlement on behalf of JFK Capital had not yet received their $320,000 in legal fees. The Kelly Trustee, seeking to preserve the $876,000 settlement, attempted to negotiate with the law firms, but the firms eventually filed a state-court lawsuit to secure their claim against the settlement proceeds. In response to that lawsuit, in April 2015, the Kelly Trustee filed Chapter 7 bankruptcy on behalf of JFK Capital, which, resulted in an automatic stay on the state litigation. Aaron Caillouet, whose executrix is the appellant in this case, was appointed as the trustee of the JFK Capital estate (“the JFK Trustee”).
The Kelly Trustee sought to consolidate the JFK Capital bankruptcy with the Kelly bankruptcy. She argued John Kelly was the alter ego of JFK Capital, JFK Capital was part, of a single business enterprise-with Kelly, and any JFK Capital funds, would be paid to John Kelly’s creditors. The JFK Trustee opposed consolidation. Recognizing that the law firms that had represented JFK Capital during the $876,000 settlement proceedings were JFK Capital’s only creditors, the JFK Trustee sought to prioritize the law firms’, interests to the settlement proceeds. The Kelly Trustee viewed this as “an abdication of [the JFK Trustee’s] fiduciary duty to Kelly’s creditors" because she believed the two bankruptcies should be consolidated. Moreover, she had already expended time and resources over JFK Capital’s legal issues before JFK Capital filed for bankruptcy. Both the Kelly -Trustee- and the JFK Trustee hired lawyers to resolve these issues.-
Tensions between the parties' grew. As a result, “nearly every -aspect of the JFK Bankruptcy was contested.” The bankruptcy court’s frustrations were apparent in the hearing for the JFK Trustee’s First Interim Application for Chapter 7 Trustee’s Fees. There, in addition to the JFK Trustee’s application for just over $15,000 in trustee fees, the JFK Trustee’s lawyers sought their, own fees. The Kelly Trustee objected to the reasonableness of the fees sought by the JFK Trustee’s lawyers. The bankruptcy court agreed that some of the work done in the course of the proceedings was “absolutely ridiculous,” basically “arguing about ... commas and semicolons.” Eventually, after questioning the JFK Trustee’s lawyers about the amount of fees requested, the bankruptcy court explained: “[W]hat I’m going to do right now is I’m going to award $5,000 in fees plus costs. When [the Kelly Trustee’s lawyer’s] fee application comes up, I’m going to have a similar deduction on his.”
The court then addressed the fee application, which had not been contested. Without any explanation, the court entered an order reducing the trustee’s requested *751 fee from $15,597,74 to $6,491.82, or from 7% to 3% of the money distributed. The JFK Trustee appealed that order to the district court.
The district court vacated and remanded the bankruptcy court’s order because the order contained no explanation for reducing the JFK Trustee’s fees. In doing so; the district court engaged in extensive analysis of the relevant statutory provisions for Chapter 7 trustee compensation. It directed the bankruptcy court to “redetermine” fees according to the district court’s order on remand. The JFK Trustee appealed.
DISCUSSION
“This Court reviews the district court’s decision ‘by applying- the same standard of review to the bankruptcy court’s conclusions of law and findings of fact that the district court applied,’ ”
Barron & Newburger, P.C. v. Tex. Skyline, Ltd. (In re Woerner),
I. Standing to Participate in the Appeal
The JFK Trustee argues that the creditors of the Kelly Estate, who are appellees in this case, do not have standing to participate in this appeal. He refers specifically to HMC Fund I, LLC; JHP Investments, LLC; ISIS, LLC; Jeffery T. Summers; and Chris Etheridge. The JFK Trustee reasons that the Kelly bankruptcy was not substantively consolidated with the JFK Capital bankruptcy until after the bankruptcy order that gave rise to this appeal, so “the Kelly Creditors had no direct economic interest in the JFK Trustee’s compensation at the time of the Order at issue.”
We use the “person aggrieved” test to determine whether a party has standing to appeal an order of the bankruptcy court.
See Fortune Nat’l Res. v. U.S. Dept of Interior,
II. “Reasonable Compensation” for Chapter 7 Trustees
The district court held that because the bankruptcy court failed to provide reasons for reducing the JFK Trustee’s fee, it was unable to determine if the correct legal standard’ had been applied. Accordingly, the court remanded with instructions to determine a reasonable award fee in accordance with the standards expressed in its order] Both parties agree that the district court’s decision to remand is proper, but dispute the legal standard‘requiréd on remand.
The two statutory provisions at issue are
Chapter 7 Trustees may receive two different types of compensation under Section 330.
Section 330(a) governs compensation for various categories of bankruptcy court professionals, including Chapter 7 trustees. It states that, “subject to sections 326, 328, and 329, the court may award to a trustee ... reasonable compensation for actual, necessary services rendered by the trustee ... and ... reimbursement .for actual, necessary expenses.” § 330(a)(1). Prior to BAPCPA, the statute provided factors for the court to consider when determining whether a Chapter 7 trustee’s fee was indeed reasonable. Section 330(a)(3) directed courts to consider all relevant factors, including time spent on services, the rates charged for the services, whether they were necessary and beneficial,-whether they were performed in a reasonable amount of time, the complexity of the case, the skill of the professional, and customary compensation rates. § 330(a)(3) (2005).
In enacting BAPCPA, however, Congress removed Chapter 7 trustees from the list of professionals subject to the Section 330(a)(3) factors. Notwithstanding the removal of Chapter 7 trustees, the Section 330(a)(3) factors still apply when determining reasonable compensation for Chapter 11 trustees and other professionals. § 330(a)(3) (2012).
In concert with the removal of Chapter 7 trustees from Section 330(a)(3), BAPC-PA introduced a new provision to Section 330 requiring courts to treat the reasonable compensation awarded to trustees as a “commission, based on Section 326.” § 330(a)(7). Section 326, in turn, sets a cap on the maximum amount payable to trustees. Section 326(a) provides:
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.
§ 326(a). While Sections 330(a)(7) and 326(a) apply to both Chapter 7 and Chapter 11 trustees, BAPCPA removed only Chapter 7 trustees from the list of professionals evaluated according to the Section 330(a)(3) factors. Courts have since struggled to determine the appropriate method
*753
for determining “reasonable compensation” for Chapter 7 trustees in light of the amendments. As one court put it: “Herein lies the rub. What do the combined: (a) omission of chapter 7 trustees from subsection (a)(3) of Section 330; and (b) addition of subsection (a)(7) of Section 330 accomplish?”
In re Coyote Ranch Contractors, LLC,
Two approaches for determining the appropriate “commission” for Chapter 7 trustees have emerged in recent years. Under the first approach, some courts hold that Section 326(a) is not simply a maximum but also a presumptively reasonable fixed commission rate to be reduced only in rare instances.
See, e.g., Mohns, Inc. v. Lanser,
The second approach, adopted and articulated by the district court here, declines to presume Section 326(a) percentages as reasonable because the “bankruptcy court has discretion to award reasonable compensation
only
for actual and necessary services, and may award an amount less than that requested by the trustee.” At least two courts in our circuit have endorsed this approach in determining Chapter 7 trastee awards.
See In re King,
Today, however, we adopt an interpretation aligned with the first -approach, that the percentage amounts listed in.Section 326 are presumptively reasonable for Chapter 7 trustee awards. In particular, we find the reasoning of the court in
Mohns
persuasive in addressing the statutory provisions at issue. In
Mohns,
the court evaluated the same approach adopted by the district court here, “that the trustee is not presumptively entitled to the maximum allowable commission and to require the bankruptcy court to determine the commission by ‘grading’ the trustee’s performance.”
Here, the district court concluded that while Congress designated Chapter 7 trustee compensation as a “commission,” the amendments did not alter the role of Section 326 as a mere compensation ceiling, nor did they alter the bankruptcy court’s “broad discretion” to determine what is “reasonable,” In adopting the opposing approach, our interpretation is guided by the nature of a commission-based award as amended in BAPCPA contrary to a compensation-based award pre-BAPCPA.
At the time BAPCPA was passed, “commission” was defined as a “fee paid to an agent or employee for a particular transaction, [usually] as a percentage of the money received from the transaction[.]”
Commission, Black’s Law Dictionary
(8th ed. 2004), As noted in
Mohns,
commission percentages “are usually agreed to at the beginning of an engagement, before the actual amount- of time spent on the matter could even be known.”
The Kelly creditors argue that additional provisions of Section 330 permit broad discretion in determining Chapter 7 trustee compensation. Even if Section 330(a)(7) now designates trustee awards as a commission, they posit that additional requirements placed on trustee awards, in effect, still require the same type of reasonableness analysis ' facilitated by Section 330(a)(3) pre-BAPCPA. The district court agreed, providing the following list of remaining provisions requiring such an approach: “330(a)(1) instructs courts to award fees for ‘actual’ and ‘necessary’ services; 330(a)(4) prohibits fees for duplica-tive and unnecessary services; and 330(a)(2) grants the Court wide discretion to award less than a trustee’s requests.” These provisions nonetheless fail to support the district court’s conclusion and the Kelly creditors’ interpretation.
Our interpretation of the.remaining provisions listed by the district court is guided by their application in Section 330, not only to Chapter 7 trustees but to all bankruptcy professionals governed by the statute. This includes professionals paid on an hourly or per-transaction basis.
See
§ 330(a)(1);
Mohns,
To conclude that Sections 330(a)(1), (a)(2), and (a)(4) maintain a de facto reasonableness inquiry post-BAPCPA is to disregard the operative language of the statute. Indeed, habitual judicial reyiew of the statutory commission for reasonableness would run counter to BAPCPA’s statutory scheme in which bankruptcy professionals cannot be compensated for time spent litigating their fees.
See Baker Botts L.L.P. v. ASARCO LLC,
— U.S. —,
While compensation for Chapter 7 trustees must be “reasonable,” the district court’s approach fails to articulate what sort of factors the bankruptcy court should utilize when exercising its “broad discretion.” Indeed, the sort of reasonableness analysis required would tend to mirror the Section 330(a)(3) factors. Congress, though, explicitly - rejected application of Section 330(a)(3) to Chapter 7 trustees. Indeed, BAPCPA coupled Chapter 7 trustee removal from Section 330(a)(3) with the designation of compensation as a “commission.” § 330(a)(7).
We pause to recall that the added language of Section 330(a)(7) requires the trustee’s commission to be “based on Section 326.” Because Section 326 uses the language “not to exceed” when listing the maximum percentages to be awarded, the district court concluded that Section 330(a)(7) .is not signaling a standard commission rate to be applied in every case but rather a maximum which, the court may not exceed. This interpretation of “based on” renders the language superfluous, however, because Section 330(a)(1) already requires awards to be “subject to Section 326[.]” Because a different word is used in each provision, we assume that different meanings were intended.
See Sosa v. Alvarez-Machain,
The Kelly creditors rely on one of our pre-BAPCPA cases for the proposition that “Section 326(a)’s intended role within the Bankruptcy Code is simply to set a maximum limit on the Trustee’s compensation.”
Pritchard v. U.S. Tr. (In re England),
In the alternative, the Kelly creditors ask us to adopt the approach of some courts in leaving open the possibility of a reduced commission based on “extraordinary circumstances.”
See In re Rowe,
While we recognize that Section 330 still allows a reduction or denial of compensation, this should be a rare event. We acknowledge that exceptional circumstances can alter the compensation, but “exceptional” is the. key. The commission-based framework established by Congress facilitates more efficient Chapter 7 trustee compensation in the courts by placing the burden on the trustees to avoid wasting resources, as their commission remains the same regardless of potentially duplicative or unnecessary services.
We AFFIRM the district court’s order vacating the bankruptcy court order and REMAND for redetermination of an award consistent with the standards expressed in this opinion.
Case-law data current through December 31, 2025. Source: CourtListener bulk data.