Sylvester v. Chaffe McCall, L.L.P. (In re Sylvester), 23 F.4th 543 (5th Cir. 2022)

The following is a case update written by the Gary B. Rudolph, of Sullivan Hill in San Diego analyzing a recent decision of interest:  Sylvester v. Chaffe McCall, L.L.P. (In re Sylvester), 23 F.4th 543 (5th Cir. 2022).

SUMMARY

Attorneys for trustees can be paid for rendering legal services but not for performing trustee duties. That line, however, is not always easy to identify. The U.S. Court of Appeals for the Fifth Circuit recently addressed the issue and vacated orders from the U.S. District Court for the Eastern District of Louisiana and the bankruptcy court, which awarded the trustee’s law firm fees for services performed on behalf of the trustee, and remanded the matter to require trustee’s law firm to delineate which services were legal in nature versus administrative or ministerial duties of the trustee. In its decision, the Court of Appeals found that the bankruptcy court applied the wrong legal standards for determining the propriety of the attorney’s fee award.

To read the full published decision, click here.

FACTS

In the debtor’s chapter 7 case, the trustee filed an application to employ Chaffe McCall (“Chaffe”) as her general counsel. The application stated that Chaffe would investigate, review, and liquidate the debtor’s real property and act as general counsel for the trustee to assist in evaluating other bankruptcy issues affecting the estate. The application was granted by the bankruptcy court. The chapter 7 bankruptcy proceeding was successful, having paid all the debtor’s debts and providing a surplus to the debtor. After the creditors were paid in full, Chaffe filed a fee application seeking $16,085 in fees for 57.6 hours of attorney services. While the fee application included an itemized description of services performed, the debtor objected to the fee application arguing that many or most of the services performed by Chaffe were duties statutorily assigned to the trustee and did not require legal expertise. 

The bankruptcy court granted Chaffe’s fee application, awarding the fees in full. 

Even though the bankruptcy court confirmed that it had a duty to determine whether the services rendered by Chaffe were legal in nature, or were actually administerial duties of the trustee, the court stated that Chaffe’s time entries revealed that some of the tasks could fall into the broad categories of trustee duties under 11 U.S.C Section 704(a).  Nevertheless, the court granted Chaffe all of its fees primarily relying on two considerations; (1) that the demarcation between what tasks constitute duties to be performed solely by the trustee and what can and should be delegated to an attorney is not black and white; and (2) the court noted that the bankruptcy proceeding was “particularly successful with all creditors paid in full and a surplus for the debtor.” With these facts, the bankruptcy court chose to give Chaffe and the trustee “some leeway” and “assume the task performed by Chaffe required legal expertise.” 

The debtor appealed the bankruptcy court’s order to the district court, who affirmed the order. In its decision the district court relied on essentially the same reasoning as the bankruptcy court, giving particular emphasis to “the successful result” of the bankruptcy proceeding. The debtor appealed to the 5^th Circuit which vacated the award and remanded the case for further proceedings. 

REASONING

The 5^th Circuit commenced its analysis by confirming that it applied the same standard of review as the district court in reviewing the bankruptcy court’s decision, which is an abuse of discretion. In defining “abuse of discretion,” the appellate court pronounced that abuse of discretion occurs where the bankruptcy court (1) applies an improper legal standard, reviewed de novo, or follows improper procedures in calculating the fee award, or (2) rests its decision on findings of fact that are clearly erroneous. 

In applying that definition to the case sub judice, the 5^th Circuit held that the bankruptcy court did not apply the appropriate standard. 

The appellate court began its ruling by analyzing the applicable statutory provisions.  Section 704 of the Bankruptcy Code set forth the duties of the bankruptcy trustee.  Section 327 allows the trustee to employ certain professionals to help with the trustee’s statutory duties. Section 330(a) governs compensation of all professionals whose fees are paid by the bankruptcy estate. However, it does not define what services are “necessary” and that word’s meaning is not immediately clear from the statute. Even the Supreme Court described Section 330(a) as “awkward and even ungrammatical.”  Lamie vs. U.S. Trustee, 540 U.S. 526, 534 (2004). The 5^th Circuit applied the narrow reading of the definition of “necessary” to mean services that a trustee could not perform without the professional’s specific expertise. In upholding its rationale, the appellate court opined that limiting compensation to services requiring professional expertise does maintain the integrity of the commission-based compensation scheme which Congress established for chapter 7 trustees. This was buttressed by Section 328 of the Bankruptcy Code, which reinforces the distinction between necessary professional services and those that are generally performed by a trustee without the assistance of an attorney or an accountant. The appellate court further confirmed that precedent allows courts to compensate an attorney under Section 330(a) only for services requiring legal expertise that a trustee would not generally be expected to perform without an attorney’s assistance. 

Next, the 5^th Circuit considered whether the bankruptcy court applied the appropriate legal standard. First, the bankruptcy court appeared to permit Chaffe to recover fees for the performance of ordinary trustee duties because of the successful result of the bankruptcy proceeding. The bankruptcy court did state that a review of Chaffe’s time entries revealed that some of the tasks could fall into the broad categories identified in Section 704(a) as trustee’s duties. Yet, the bankruptcy court declined to attempt to identify and separate Chaffe’s non-compensable services because the line between compensable and non-compensable services “is often not black and white” and because “all creditors in this case have been paid in full, with the debtor even receiving a distribution herself.” 

Albeit there is often no easy way to distinguish legal from non-legal services, a court cannot simply decline to make the required determination because the line is murky.  Nor should it permit an attorney to bill the estate for non-legal services because the bankruptcy proceeding was successful. 

Finally, the 5^th Circuit determined that the bankruptcy court ignored the burden placed upon the attorney requesting compensation to justify the necessity of the services rendered. Instead, the court afforded Chaffe and the trustee leeway and assumed the tasks performed by Chaffe required legal expertise. This failure removed the burden on Chaffe to demonstrate that the services for which compensation was sought involved legal services beyond the scope of the trustee’s statutory duties. It was therefore improper for the bankruptcy court to assume that Chaffe’s services required legal expertise, rather than requiring Chaffe to meet its burden. Accordingly, the appellate court vacated the award of attorney’s fees and remanded the matter for further presentation by Chaffe to distinguish in its application those services requiring a legal expertise and those that were merely administrative or administerial duties of the trustee. 

AUTHOR’S COMMENTARY

The blurred line between services rendered by trustee’s counsel that require legal expertise, as opposed to administrative or administerial duties of the trustee, is highlighted in this decision. The 5th Circuit carefully analyzed the interplay of several sections of the Bankruptcy Code in reaching its determination that the bankruptcy court should have required Chaffe to delineate in its fee application the type of services rendered. While this author agrees with that portion of the decision because that burden falls on Chaffe as the applicant, he disagrees regarding consideration of the outcome of the case, which should be included as a component in awarding the fees. It is this author’s opinion that the bankruptcy court was correct in utilizing the results of the case as a factor in determining the propriety of the award, especially when all creditors were paid in full and there was a surplus to the debtor. Other courts have considered “results obtained” in granting fee applications of professionals, most recently in In re Village Apothecary, Inc., 21-1555 (6^th Cir. August 16, 2022).

Separately, many courts have Local Rules that address what it considers to be trustee services. See, Rule 2016-2(f)(2) of the Local Bankruptcy Rules for the Central District of California for a non-exclusive list of approximately 45 specific tasks the court considers to be trustee services. See also, Boldt v. United States Tr. (In re Jenkins), 130 F.3d 1335 (9th Cir. 1997); In re CMR Mortg. Fund, LLC, 2015 Bankr. LEXIS 622 (Bankr. N.D. Cal. Feb. 27, 2015).

These materials were written by Gary B. Rudolph of Sullivan, Hill, Rez & Engel APLC, in San Diego, California (rudolph@sullivanhill.com).  Editorial contributions were provided by D. Edward Hayes of Marshack Hays, LLP in Irvine, California (ehays@marshackhays.com).