Allowing Subchapter V Trustee Fees In A Dismissed Case As “Reasonable” and “Necessary” (In re Besthost)

A reasonable and necessary path (photo by Marilyn Swanson)

By: Donald L Swanson

A Subchapter V Trustee is entitled to allowance of fees, even when the Subchapter V case is dismissed for lack of authority to file the case.

That’s the December 16, 2021, ruling in In re Besthost Inn LLC, Case No 21-12158 in the Central California Bankruptcy Court (Doc. 153).

That ruling, and another relating ruling, in the In re Besthost case are:

  • Debtor’s Subchapter V case is dismissed as an unauthorized filing: only one of two 50% owners authorized the filing, while the authorization of both is required (issued November 29, 2021, Doc. 127)—this ruling is on appeal to the Ninth Circuit BAP; and
  • The Subchapter V Trustee’s fees are approved as reasonable and necessary (notwithstanding dismissal of the bankruptcy) in the amount of $25,000, based on hourly rates of $545 for Trustee and $195 for a paralegal (Doc. 124).

Notably, the Subchapter V Trustee had opposed dismissal of the case, arguing instead for removal of the Debtor as a debtor in possession under § 1185(a) (see Doc. 113, at 2 of 17).

Objections to the Trustee’s Application are filed by both the owner who obtained dismissal of the case (Doc. 130) and the Debtor (Doc. 132).

Objection by Owner

Debtor’s non-authorizing owner objects to the Trustee’s fee application, in its entirety, on the following grounds:

  • Debtor’s Operating Agreement requires both 50% owners to vote in favor of filing bankruptcy—and that didn’t happen—therefore, the Subchapter V Trustee’s fee application should be denied;
  • Trustee services incurred in a bankruptcy filed without authorization are neither “reasonable” or “necessary” because the case should not have been filed in the first place;
  • Bankruptcy trustees assume a known, inherent risk of having a “no asset” case in which they receive only a nominal fee; and
  • Early in this case, the Trustee had notice of the owner’s intent to file a dismissal motion, and the Trustee incurred the bulk of his fees and expenses thereafter.

Objection by Debtor

Debtor argues that the Trustee (i) had only “minimal” or “sparse” involvements in the case, and (ii) did not confer a substantial benefit upon the Debtor. 

A disparity between the nature and type of service performed and the claimed compensation of $25,000 allegedly appear from the following:

  • Awarding $25,000 to Trustee will exacerbate Debtor’s financial calamity, since Debtor operates an 86 room hotel on leased land, whose business suffers under Covid-19, with nine million dollars of debt and twenty-plus creditors;
  • Trustee attended the Initial Debtor Interview and Debtor’s 341 Meeting—the time involved in such efforts should be minimal and limited to time spent in the meetings;
  • Trustee had no involvement (other than a cursory review of documents) in preparing, filing or prosecuting such items as, (i) Debtor’s Emergency Motion for Use of Cash Collateral, the objections thereto, and the Court’s granting Order, (ii) Debtor’s Motion for continuation of utility services, the objections thereto, and the Court’s granting Order, and (iii) various filings by the non-authorizing owner;
  • Trustee participated in negotiations and preparation of a stipulation for payment of insider compensation but had no involvement in addressing the objection thereto;
  • Trustee’s actions on the following matters were neither necessary nor beneficial: (i) filing comments and recommendations on the dismissal motion, and (ii) unnecessary investigations into value of Debtor’s leased property and viability of exercising a purchase option and financing sources;
  • Trustee was in this case for a total of 83 days, and his efforts, beyond reviewing pleadings, are a “cart before the horse” futility;
  • Trustee compensation must not burden a financially struggling Debtor with excessive fees; and
  • Trustee’s $545 hourly rate is excessive.

Bankruptcy Court Ruling

The Bankruptcy Court’s “Tentative Ruling” grants the Subchapter V Trustee’s fee application as filed—in its entirety.  Here is the rationale:

  • United States Trustee has a mandatory duty to appoint a Subchapter V Trustee in every Subchapter V case;
  • A trustee’s statutory duties, under § 1183(a), do not allow for a pre-screening of whether the case was properly filed;
  • Statutory duties of a Subchapter V trustee include investigating the “acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case”;
  • Based on all available information and relevant circumstances, the requested fees are reasonable;
  • Owner’s objections (relating to no-filing-authority) lack legal authority and ignore the Trustee’s statutory duties, and a trustee is not excused from performing such duties by a challenge to the efficacy of the petition;
  • Debtor’s objections (relating directly to the services rendered) are without foundation—such services are reasonable (given given the level of activity in this case) and necessary (for the administration of the case); and
  • The $545 hourly rate is reasonable for the Trustee (an experienced attorney)—Debtor’s own counsel, for example, has an $595 rate, with a senior associate at $525.

Conclusion

The In re Besthost facts and ruling provide welcome news to all Subchapter V trustees everywhere.

Granted, getting fees allowed and getting fees paid are two entirely-different things. 

But allowance must happen before payment can even be considered.  So, the In re Besthost ruling is a very-good thing for Subchapter V trustees.

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