Subchapter V Trustees: Compensated On Hourly Fee, Not Percentage of Disbursements (In re Tri-State & Subchapter V Handbook)

By: Donald L Swanson

Subchapter V trustee compensation is based on an hourly fee. Unlike compensation for a Chapter 7, Chapter 12 or Chapter 13 trustee, a Subchapter V trustee’s compensation has nothing to do with the amount of funds disbursed.

That’s the conclusion of a Bankruptcy Court opinion: In re Tri-State Roofing, Case No. 20-40188, Idaho Bankruptcy Court (decided 12/07/2020, Doc. 86).  

It is also the conclusion of the Handbook for Subchapter V Trustees prepare by the Department of Justice

In re Tri-State Roofing

–Facts

The In re Tri-State Roofing opinion involves a dismissed Subchapter V case in which no plan was ever confirmed.  

The Subchapter V Trustee applies for allowance of an hourly-rate compensation under 11 U.S.C. §§ 503 and 330(a) in the amount of $1,920.00.  The Bankruptcy Court finds the itemized fee to be reasonable.

[Note: The Court does not know whether funds exist to pay the fee and explains that allowed fees entitle the claimant to receive a distribution from the bankruptcy estate—but are not a money judgment. (citing In re Soelberg, Case No 15-01355-TLM (Bankr. D. Idaho August 13, 2019) (citing In re 3109, LLC, 2014 WL 1655415 (Bankr. D.C. Apr. 25, 2014)).]

In allowing the Subchapter V Trustee’s fee, the Bankruptcy Court engages in the following analysis.

–Legal Standards

11 U.S.C. § 503(b)(2) provides (emphasis added): “(b) . . . there shall be allowed administrative expenses . . . (2) . . . under section 330(a) of this title.”

11 U.S.C. § 330(a)(1)&(3) provide (emphasis added):

  • “(1) . . . subject to sections 326, 328, and 329, the court may award to a trustee . . . —(A) reasonable compensation for actual, necessary services rendered by the trustee . . . “; and
  • “(3) In determining the amount of reasonable compensation to be awarded to . . . trustee under chapter 11, . . . the court shall consider . . . (A) the time spent on such services; (B) the rates charged for such services.”

–A Legal Issue

After finding the trustee’s requested fees to be reasonable, the Bankruptcy Court addresses a legal issue under § 330(a)(1), which says that allowance of compensation is “subject to sections 326 . . . ”

Language in § 326 can, at first read, be confusing.  However, the spoiler alert is that nothing in § 326 applies to Subchapter V trustees.  

  1. Subpart (a) of § 326 [Fn. 1] authorizes trustee compensation based on a percentage of funds distributed by the trustee.  However, it explicitly excludes Subchapter V trustees from such authorization: “In a case under chapter 7 or 11, other than a case under subchapter V of chapter 11, the court may allow” compensation based on a percentage of funds disbursed by the trustee.
  2. Subpart (b) of § 326 [Fn. 2] is more confusing because it begins with the words, “In a case under subchapter V . . . ” and refers to “a standing trustee appointed under section 586(b) of title 28.”  But nothing in subpart (b) has any application to a Subchapter V trustee.  Here are two reasons why.

First.  The first part of § 326(b) says: in a Subchapter V case, “the court may not allow compensation” to (i) the U.S. trustee, or (ii) “a standing trustee appointed under section 586(b) of title 28.”  All Subchapter V trustees are case-by-case trustees (they are neither U.S. trustees nor “standing” trustees under 28 U.S.C. § 528(b)); therefore, the first part of § 326(b) has nothing to do with Subchapter V trustees.

Second.  The second part of § 326(b) (after the second comma) applies only to Chapter 12 and Chapter 13 trustees—not to Subchapter V trustees.

–Standing Trustees Under 28 U.S.C. § 586(b)

Some confusion arises from § 326(b) because of its reference to “a standing trustee.”  Standing trustees are addressed in great detail in 28 U.S.C. § 586(b)—which provides for their appointment and for their annual compensation from the U.S. Government plus a percentage of funds disbursed. [Fn. 3] 

[Editorial Note.  28 U.S.C. § 586(b) authorizes the appointment of “standing” trustees in Subchapter V, if and when “the number of cases under subchapter V . . . so warrants.”  So far, however, all Subchapter V trustees are case-by-case trustees—no “standing trustee” has yet been appointed for Subchapter V.  Here is a link to the current list of “Subchapter V Case-By-Case Trustees.”]

Handbook for Subchapter V Trustees

The Executive Office for United States Trustees, in the Department of Justice, has published a “Handbook for Small Business Chapter 11, Subchapter V Trustees,” dated February 2020.

–Table of Contents

The Table of Contents for this Subchapter V Handbook includes the following:

“TRUSTEE COMPENSATION AND BENEFITS…….. 3-21

1. CASE-BY-CASE TRUSTEE COMPENSATION….. 3-21

2. STANDING TRUSTEE COMPENSATION…………. 3-22”

–Explanations

On pages 3-21 and 3-22, the Subchapter V Handbook provides explanations that include the following (emphasis added):

“The statutory basis of subchapter V trustee compensation is 11 U.S.C. § 330 for case-by-case trustees and 28 U.S.C. § 586(e) for standing trustees. Case-by-case trustees must apply to the court for an award of compensation similar to the application process that is used by professionals. Standing trustee compensation is set by statute.”

“Case-by-case trustees are compensated through § 330(a)(1)(A) which allows for ‘reasonable compensation for actual, necessary services rendered by the trustee … and by any paraprofessional person employed by any such person.’ In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including: a. the time spent on such services; b. the rates charged for such services . . . ”

“These section 330 compensation provisions apply regardless of whether the case-by-case trustee makes disbursements of estate funds. SBRA specifically excludes all subchapter V trustees from section 326(a), which sets limits on other chapter 11 trustees’ compensation based on the moneys they disburse or turn over.”

“And subchapter V case-by-case trustees are not subject to the section 326(b) limitation of compensation to five percent of plan payments that is applicable to chapter 12 and 13 case trustees.”

Conclusion

Subchapter V case-by-case trustees are compensated on an hourly basis.  The measure of their compensation has nothing to do with the amount of funds they receive or disburse.

————————

Footnote 1.  11 U.S.C. § 326(a) provides in full (emphasis added):

“(a) In a case under chapter 7 or 11, other than a case under subchapter V of chapter 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.”

Footnote 2.  11 U.S.C. § 326(b) provides in full (emphasis added):

“(b) In a case under subchapter V of chapter 11 or chapter 12 or 13 of this title, the court may not allow compensation for services or reimbursement of expenses of the United States trustee or of a standing trustee appointed under section 586(b) of title 28, but may allow reasonable compensation under section 330 of this title of a trustee appointed under section 1202(a) or 1302(a) of this title for the trustee’s services, payable after the trustee renders such services, not to exceed five percent upon all payments under the plan.”

Footnote 3.  28 U.S.C. § 586(b)&(e) provide (emphasis added):

“(b) If the number of cases under subchapter V of chapter 11 or chapter 12 or 13 of title 11 commenced in a particular region so warrants, the United States trustee for such region may, subject to the approval of the Attorney General, appoint one or more individuals to serve as standing trustee, or designate one or more assistant United States trustees to serve in cases under such chapter.”

“(e)(1) The Attorney General, after consultation with a United States trustee that has appointed an individual under subsection (b) of this section to serve as standing trustee in cases under subchapter V of chapter 11 or chapter 12 or 13 of title 11, shall fix—(A) a maximum annual compensation for such individual consisting of—(i) an amount not to exceed the highest annual rate of basic pay in effect for level V of the Executive Schedule; and (ii) the cash value of employment benefits comparable to the employment benefits provided by the United States to individuals who are employed by the United States at the same rate of basic pay to perform similar services during the same period of time; and (B) a percentage fee not to exceed— . . . “

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