HAR-BD, LLC v. Leslie

The following is a case update analyzing a recent case of interest:

Summary

In HAR-BD, LLC v. Leslie (In re TBH19, LLC), 668 B.R. 881 (9th Cir. BAP 2025), the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) reaffirmed that administrative fees such as the trustee’s statutory commission or attorneys’ fees in a chapter 7 case should not necessarily be reduced simply because those professionals will ultimately receive more than unsecured creditors.  To read the full published opinion, click here.

Facts

In 2021, a bankruptcy court approved a settlement between a chapter 7 trustee (the “Trustee”) and the holder of a senior lien on over-encumbered real property.  The settlement fixed the lienholder’s allowed claim, allowed the Trustee to sell the property, and provided for a “carveout” to ensure that funds would be available to pay administrative expenses and make a distribution to unsecured creditors.

Later that year, the Trustee sold the property for $63.1 million.  This resulted in a carveout of $3.75 million available for the benefit of the estate.

The bankruptcy case involved a significant amount of litigation and resolution of disputes.  In 2024, estate professionals filed final fee applications and the Trustee filed his final report.  Pursuant to 11 U.S.C. § 326(a), the Trustee’s statutory fee was about $1.8 million.  The Trustee’s attorneys and accountants sought allowance of approximately $1.52 million and $297,000 in fees, respectively.  The Trustee and his professionals also sought allowance of their costs.

Earlier in the case, the Trustee advised the court that he and his professionals agreed to a $700,000 set-aside of the total carveout to guarantee some distribution to unsecured creditors.  Thus, the Trustee’s final report reflected that he and chapter 7 professionals would be paid approximately 80% of their total fees and general unsecured creditors would receive $700,000.  The Trustee would receive about $1.43 million of his $1.8 million statutory fee.  Other chapter 7 professionals would be paid fees of about $1.47 million.  Because there were over $64.4 million of general unsecured claims, general unsecured creditors would receive approximately 1.1% of their allowed claims.  Four general unsecured creditors (collectively the “Appellants”) would receive $501,848.63 of the total $700,000 available for general unsecured creditors.

The Appellants objected to the Trustee’s final report and the final fee applications.  Among other things, they argued that the Trustee violated a “cardinal rule” against administering an asset where the proceeds would primarily benefit a trustee and professionals.  They argued that under In re KVN Corp., 514 B.R. 1 (9th Cir. BAP 2014), the carveout needed to result in a meaningful distribution to unsecured creditors, but that the Trustee’s proposed distribution to general unsecured creditors was miniscule.  They also urged the bankruptcy court to adopt the analysis given in In re Scoggins, 517 B.R. 206 (Bankr. E.D. Cal. 2014), and not allow the Trustee’s fee to exceed the amount of funds that would be paid to unsecured creditors.

The bankruptcy court, the Hon. Vincent Zurzolo, overruled all of the Appellants’ objections.  In doing so, the bankruptcy court noted that if it was not for the carveout negotiated by the Trustee with the lienholder, there would be no distribution at all to general unsecured creditors.  Judge Zurzolo’s decision included detailed factual findings about the Trustee’s efforts and the efforts of his professionals to create value out of a case that otherwise would have been a no-asset case. The Appellants appealed to the BAP.

The BAP’s Holding and Reasoning

The BAP affirmed.  It published its decision “to clarify that the fact that a chapter 7 and the trustee’s professionals are receiving more money than unsecured creditors does not necessarily justify a reduction of a chapter 7 trustee’s statutory commission or the professionals’ fees.”

First, with respect to the amount of the Trustee’s fee, the BAP reiterated its prior holdings that trustee compensation calculated under section 326(a) is presumptively reasonable and should be allowed absent extraordinary circumstances.  See Fear v. U.S. Trustee (In re Ruiz), 541 B.R. 892 (9th Cir. BAP 2015); Hopkins v. Asset Acceptance LLC (In re Salgado-Nava), 473 B.R. 911 (9th Cir. BAP 2012).  Only if the court finds that extraordinary circumstances exist, the court may need to determine whether a “rational relationship” exists between the amount of the commission and the type and level of services rendered by the trustee.

In Scoggins, the bankruptcy court stated that if there is a material disproportion sufficient to rebut the presumption in favor of the statutory commission, that is an “extraordinary” circumstance justifying allowance of the trustee’s fee in a lower amount.  The Scoggins court also stated that an extraordinary circumstance may exist when the trustee’s statutory commission exceeds the proposed payout to unsecured claims.  However, adhering to its prior precedent, the BAP rejected Scoggins’ approach.  According to the BAP, while the relationship between trustee compensation and distributions to unsecured creditors may be relevant to a finding of extraordinary circumstances, it cannot be the sole basis for departing from the statutory commission.

The BAP declined to define or enumerate any circumstances that are “extraordinary” per se.  Instead, bankruptcy courts must exercise their discretion to determine whether extraordinary circumstances exist in a particular case.  In this case, the BAP ruled that the bankruptcy court’s findings in favor of the trustee were not clearly erroneous, and it did not abuse its discretion.

With respect to fees sought by the Trustee’s attorneys and accountants, the Appellants argued that the bankruptcy court erred by awarding them fees that were more than twice the amount distributed to unsecured creditors.  The BAP rejected this argument because, among other things, professionals are under no obligation to guarantee any particular result for unsecured creditors.  The BAP, relying on Judge Zurzolo’s factual findings, noted that by promising to reduce their fees to provide $700,000 for unsecured creditors, the professionals actually “went above and beyond the call of duty.”  The BAP found no fault in the bankruptcy court’s determination that the services rendered were reasonable, actual and necessary, and therefore affirmed the fee awards and the Trustee’s final report.

Author’s Commentary

On June 4, 2025, the Appellants filed a notice of appeal to the Ninth Circuit (No. 25-3553).  Thus, the ultimate outcome of this case is yet to be decided.  However, these authors support the BAP’s holding here, primarily because it is consistent with the Bankruptcy Code and prior BAP authority, and the BAP rightly deferred to the bankruptcy court’s analysis of the benefits provided to the estate by the professionals during the Trustee’s administration.

Pragmatically, if the Ninth Circuit ultimately adopts the Appellants’ position, qualified professionals will have less incentive to be chapter 7 trustees or represent chapter 7 trustees, and fewer cases will be administered (and thus fewer creditors will be paid on account of their claims). The vast majority of chapter 7 cases are “no asset” cases, where the chapter 7 trustee’s statutory fee is $60 per case under 11 U.S.C. § 330(b)—and has been since the 1990s.  When the debtor’s filing fee is waived, the trustee receives nothing for that case.  Thus, the asset cases are often seen to “make up” for the pittance received by trustees from their everyday cases.  Indeed, the trustee compensation approved in TBH19 is an outlier; it is not the everyday chapter 7 case where a trustee sells a piece of real property for over $60 million and is entitled to a statutory fee of over $1 million, even in southern California.

The concept that chapter 7 administrative professionals may receive more than general unsecured creditors is not “extraordinary” by any measure.  Section 330(a)(3) provides that professionals are entitled to reasonable compensation based on, taking into account all relevant factors including: time spent; rates charged; and whether the services were necessary or beneficial at the time the services were rendered.  Although the list of factors in section 330(a)(3) is not exclusive, it is noteworthy that Congress did not include the dividend to be paid to general unsecured creditors on the list.  While a court may consider the ultimate recovery to unsecured creditors as a factor—including priority creditors such as taxing authorities—a bright line rule such as the one urged by the Appellants is inconsistent with the Bankruptcy Code.

Data published by the U.S. Trustee’s office indicates that, for calendar year 2023, of all chapter 7 asset cases closed that year, 63.1% of all distributions were made to non-professionals—i.e., secured creditors, priority unsecured creditors, general unsecured creditors, the debtor, and other third parties.  In contrast, 36.9% of distributions were made to pay administrative fees and costs, including but not limited to professional fees.  This data is published annually at the national level by the U.S. Trustee, and may be found here:  UST Data Re Chapter 7 Asset Cases.  Interestingly, the data shows that general unsecured creditors received approximately 19.7% of all funds distributed in cases that closed in 2023, whereas trustees’ statutory fees accounted for less than 5% of all funds distributed.  

While the TBH19 case involves a higher-than-normal statutory fee, the fact that the Trustee’s attorneys incurred over $1.5 million of fees and his accountants incurred almost $300,000 of fees reflects that this was not a normal case.  And as Judge Zurzolo noted, had the trustee and his professionals not expended significant effort in working to sell the property and resolve outstanding disputes (and had they not agreed to discount their fees by 20%), general unsecured creditors would have received nothing.  See, e.g., TBH19, 668 B.R. at 892.  The fact that the Trustee’s and his professionals’ fees exceed the amount to be paid to general unsecured creditors should not render the fee “extraordinary” or justify an analysis into the reasonableness of the Trustee’s fee.

These materials were written by current ILC Co-Chair Jessica Bagdanov of BG Law LLP in Woodland Hills, California, and former ILC Co-Chair John N. Tedford, IV, of Levene, Neale, Bender, Yoo & Golubchik L.L.P., in Los Angeles, California.  Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC in Palm Desert, California and the Hon. Meredith Jury (ret.). 

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