The opinion of the court was delivered by: Joseph E. Irenas United States District Judge
HONORABLE JOSEPH E. IRENAS
Presently before this Court is the United States Trustee's appeal from an order of the bankruptcy court awarding compensation to the trustee. This Court has jurisdiction pursuant to 28 U.S. 158(a)(1).
Title 11, § 326(a), of the United States Code, sets a cap on allowable bankruptcy trustee compensation in chapter 7 and 11 bankruptcy cases. The cap is calculated in a given case by reference to the amount of "moneys disbursed or turned over in the case by the trustee to parties in interest." Specifically, trustee compensation may not exceed certain specified percentages of the amount of moneys disbursed to parties in interest. Pursuant to Title 11, § 363(k), when a trustee sells property to a secured claimholder whose claim is secured by a lien on that property, the secured party may use his lien to pay for the property by offsetting the amount of his lien against the full purchase price of the property. The principal question in this case is whether the maximum allowable compensation for a trustee who sells property in such a "credit bid sale" may be based on the full purchase price. The bankruptcy court held that it may. This Court holds that it may not and will reverse the bankruptcy court's order and remand this case for a new determination of the trustee's compensation award.
On July 26, 1992, Lan Associates XI, L.P. ("the debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code. James J. Cain ("the trustee") was appointed Chapter 11 trustee on September 1, 1992. The bankruptcy court granted the trustee's motion to convert the debtor's case to a Chapter 7 bankruptcy on May 14, 1993, and reappointed Mr. Cain as the Chapter 7 trustee on June 3, 1993.
The trustee took over the operation and management of two office buildings owned by the debtor known as Marlton Executive Park, Route 73 and Executive Drive, Evesham Township, New Jersey, serving as landlord for the property for approximately eighteen months. The debtor had scheduled this property with a value of $9,000,000, encumbered by a first mortgage held by First Fidelity Bank. The property was later appraised, on September 18, 1992, with a fair market value of $9,727,000 and a liquidation value of $7,781,200. The mortgagee, First Fidelity, filed a proof of claim on November 30, 1992 in the amount of $12,865,434.55.
The trustee moved for and was granted permission to use cash collateral secured by First Fidelity by order dated December 4, 1992; the cash collateral authorization was extended by order dated March 24, 1993. On February 23, 1993, the trustee filed his first application for compensation for Chapter 11 services in the amount of $28,665.51 in fees and $437.96 in costs, most of which related to the trustee's services as landlord for Marlton Executive Park. The trustee's request was granted by order dated April 8, 1993.
In October of 1993, the trustee - now the Chapter 7 trustee - moved under 11 U.S.C. § 506(c) to compel First Fidelity to pay attorneys fees and costs, accountants fees and costs, and the trustee's fees and costs from the cash collateral held by the trustee. First Fidelity voiced no objection, except to clarify that the § 506(c) relief sought was limited to the Second Interim Allowance application of trustee's counsel, which would be paid from funds held by the trustee. By order entered December 17, 1993, the trustee was authorized to pay professional compensation previously allowed, from funds on hand. The order was corrected to limit § 506(c) payment authorization to trustee's counsel by order entered January 31, 1994.
By motion made returnable on February 14, 1994, the trustee sought authorization to sell the real property of the estate. The trustee recognized that the property was substantially overencumbered but noted that he had "received a proposal to purchase the real estate from the secured creditor. First Fidelity would credit bid the liquidation value and would actually pay the sum of $372,387.00. This payment would be made
by allowing the Trustee to retain this amount from the cash collateral on hand."
The trustee supported First Fidelity's proposal on three grounds. First, he characterized the proposal as an opportunity for other bidders to submit higher and better offers. Second, he believed that disposing of the property in a commercially reasonable manner was a predicate to the ability of the trustee to pursue the general partner of the debtor on a deficiency claim under 11 U.S.C. § 723. He sought to avoid the delay that would ensue during a foreclosure to determine the amount of the deficiency that would be borne by the estate, which in turn would delay the commencement of a § 723 action. Third, the lender agreed to waive its deficiency claim against the estate, and to allow the trustee to retain the sum of $372,387.00 to contribute toward the expenses of sale and to provide a distribution to general unsecured creditors.
In his certification, the trustee provided a break-out of anticipated administrative claims, totaling $393,232.61. Trustee "commissions" from the sale of the property, calculated on the credit bid of $7,781,200, amounted to $233,616. In addition, trustee compensation of $70,000 was anticipated on the basis of rental payments received. The trustee proposed that his "commissions" be reduced in order to afford unsecured creditors a payment of approximately $62,500, which he calculated would provide a dividend of approximately 25 percent to the unsecured creditors.
The Notice of Private Sale sent to creditors reflected the trustee's proposal - subject to higher and better offers - to "sell" the property to First Fidelity "for a bid of $7,781,200.00," and advised, inter alia, that First Fidelity would permit the trustee to retain $372,387 from cash collateral. The 25 percent distribution mentioned in the Notice was based on the trustee's estimate of unsecured claims in the amount of $250,000. The sale was approved by court order dated February 14, 1994. The order authorized the trustee to contribute $83,346.00 from his commissions to facilitate a meaningful distribution to unsecured creditors.
The credit bid sale took place on April 18, 1994, and the purchaser was the assignee subsidiary of First Fidelity, Marlton Fidoreo - L.S., Inc.. The trustee forwarded a Report of Private Sale to the United States Trustee.
The trustee applied for approval of his compensation on October 17, 1994, seeking compensation based on the credit bid sale and the operating expenses throughout the trustee's tenure. The trustee requested fees in the amount of $204,522.76, and expenses in the amount of $999.40. There were no objections by the unsecured creditors or by the United States Trustee. At the fee hearing held on December 1, 1994, the bankruptcy court questioned the amount of the trustee's compensation, as it translated into an hourly rate of $403.09 per hour, and questioned the amount of the distribution intended for unsecured creditors. The issue of the permissibility of the trustee's use of a credit bid in the calculation of his § 326(a) fee cap was not raised. By letter dated December 2, 1994, the trustee's counsel addressed the open issues, reflecting that the trustee's compensation is earned not only by the hours of service, but also by the extent of potential liability undertaken. Counsel reaffirmed the prospect that the trustee's efforts would result in a 25% distribution to unsecured creditors. The trustee's fee application was approved by order entered December 2, 1994, and the trustee was paid his requested commission on December 6, 1994.
On notice to creditors and the United States Trustee, the trustee sought authorization from the court by motion returnable April 17, 1995, to make an interim distribution to the unsecured creditors representing a 19 percent dividend. The disbursement was approved without objection, and was made on May 15, 1995. Thereafter, the trustee determined to abandon any cause of action against the debtor's general partner, and filed his Final Report with the Office of the United States Trustee.
The United States Trustee objected to the Final Report on the ground that the trustee's interim compensation grossly exceeded the maximum allowable commission under 11 U.S.C. § 326(a) which limits a trustee's commissions to a percentage of "all moneys disbursed or turned over in the case by the trustee." The United States Trustee argued that the trustee's improper utilization of First Fidelity's credit bid resulted in an over payment of $142,449.40. The trustee responded by arguing that the credit bid calculation was proper, and that the United States Trustee could not challenge the allowance after having received with silence several notices about the credit bid and interim fee, and after the trustee actually had received the interim allowance.
In an opinion dated March 16, 1998, the bankruptcy court first determined that the trustee's utilization of the credit bid to determine his compensation was proper. The bankruptcy court then conducted an assessment of the reasonableness of the trustee's fee request. The court stated that its reasonableness assessment was "influenced" by the procedural history of the case, including four notices to the United States Trustee concerning the contemplated compensation, the objection by the United States Trustee nearly two years after the award had been entered and paid, and the potential for hardship to the trustee that substantial disgorgement would entail.
The bankruptcy court found that the trustee's requested compensation was reasonable with one qualification: the trustee had predicted a 25 percent dividend to the unsecured creditors, but in fact had disbursed only a 19 percent dividend. This 6 percent shortfall traced to the trustee's use of an amount of allowable unsecured claims in making its calculations that proved to be less than the actual amount of allowable unsecured claims. Because by December, 1994, when the trustee represented that there would be a 25 perecent dividend, the trustee should have known that the actual amount of allowable unsecured claims was greater than it had projected ...