Trustee who withdraws must wait for fees

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If a trustee withdraws from a bankruptcy case, he has to wait until the case is finished to be paid.

Earlier this year, U.S. Bankruptcy Judge Robert D. Martin rejected an application for payment from a trustee who withdrew due to a conflict of interest after making significant disbursements, concluding it would not be fair to the successor trustee.

David A. Calhoun filed for bankruptcy in 2007. In May 2009, the initial trustee resigned, after having disbursed more than $141,000 to creditors, and a successor trustee was appointed.

The initial trustee then sought compensation of more than $10,000 in fees and $2,000 in costs. The fees were calculated pursuant to the formula in 11 U.S.C. 326(a): 25 percent of the first $5,000 disbursed; 10 percent on amounts up to $50,000; and 5 percent on subsequent amounts up to $1 million.

While the Code caps compensation to this level even if more than one person serves as trustee, the Code does not provide how to divide compensation when that happens.

Judge Martin looked to how other bankruptcy courts have handled the issue and found, “the few courts to reach the issue have treated trustee compensation as a pot and divided it between the trustees after the case concludes. Thus, the initial trustee usually gets no compensation until the case closes.”

Judge Martin agreed that this was a more equitable method of dividing fees than that requested by the initial trustee.

If the application of the initial trustee were granted, the successor trustee would only earn 5 percent of disbursements up to $1 million, because the initial trustee had already disbursed more than $50,000 – a result the court found inequitable.

Martin wrote, “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. … Simply stated, the more successful the first trustee, the lower the return for the successor trustee.”

Accordingly, the court denied the application, and ordered that fees be calculated at the close of the case based on the formula in sec. 326(a), with the fees apportioned between the two trustees pro rata, based on the total disbursements made by each.

David Ziemer can be reached at [email protected].