by “Trustee’s plan of action from the minute he was assigned these Chapter 7 cases was abundantly clear: he sought to manufacture equity through the Stipulations and Carve-Outs with the IRS in order to sell the Homesteads and generate funds that would primarily benefit Trustee, Counsel, and other bankruptcy professionals, while only minimally benefitting unsecured creditors.” Based on this conclusion, the Bankruptcy Appellate Panel for the Tenth Circuit, in a lengthy opinion, upheld the denial of over $65,000.00 in fees for the chapter 7 trustee and his counsel. Jubber v. Bird (In re Bird), Nos. 16-39, Jubber v. Christensen (In re Christensen), 16-40 (B.A.P. 10th Cir. Nov. 30, 2017).
In two cases consolidated on appeal for purposes of briefing and arguing, the chapter 7 debtors, John Bird, and Brent and JoAnn Christensen, listed their residences on their bankruptcy schedules as having outstanding mortgages and other liens in excess of the value of the properties. Mr. Bird and the Christensens claimed homestead exemptions, and the trustee, Gary Jubber, objected due to lack of equity. After the debtors received their discharges, the trustee entered into a $10,000 carve-out agreement with the IRS and sought leave to sell the homesteads. The debtors responded with a request, among other things, for an order compelling the trustee to abandon the properties. The bankruptcy court approved appointment of counsel from the trustee’s firm to act as the trustee’s counsel. The bankruptcy court overruled Mr. Jubber’s objections to the exemptions and he appealed to the district court.
Meanwhile, competing motions to abandon and to sell remained before the bankruptcy court. The trustee presented evidence of sales contracts on both residences which would exceed the total indebtedness by approximately $4,000 in the case of the Bird home, and $7,000 for the Christensens’ home. Prior to distribution, however, the proceeds would be reduced by realty fees and commissions in the amount of approximately $52,000, and the trustee and his attorneys’ fees in the amount of approximately $65,000.
The debtors sought to reopen their bankruptcies to allow them to convert to chapter 13 in order to avoid sale of their homesteads and to pay their mounting attorney fees. The court granted the motion to convert.
The current appeal was of the bankruptcy court’s denial of the trustee’s $65,000 fee application for his and his counsel’s fees. All the fees related to Mr. Jubber’s efforts to sell the debtors’ homesteads. The bankruptcy court found the fees were not incurred for services that were necessary or likely to benefit the bankruptcy estates as required by section 330(a)(4).
The BAP began with a look at whether the trustee’s fees were incurred for actions necessary to the administration of the estate. It noted that, as a general rule, properties that are over-encumbered should be abandoned under section 554. In fact, the Trustee Handbook admonishes trustees to abandon over-encumbered property both to avoid waste of resources and to allow secured creditors to take steps to protect their interests. The panel rejected the trustee’s argument that the carve-out with the IRS provided the benefit to creditors necessary to justify the sale of the properties. For a carve-out to justify sale, the sale must result in a meaningful distribution to unsecured creditors taking into consideration expected fees and costs. Here, a substantial portion of the expected sale proceeds would have gone to pay realty fees and commissions and the trustee and his counsel with little leftover for unsecured creditors. The panel, therefore, found no reason to deviate from the rule that fully encumbered property should not be sold.
Arguing that his efforts to sell the debtors’ property were for the benefit of the estate, the trustee maintained that the proposed sale was sanctioned by section 363(f). In the alternative, he argued that his right to sell was found in an exception to homestead exemptions created by sections 724(b) and 522. The panel disagreed.
The panel was unconvinced by the trustee’s arguments that the sale was justified under section 363(f)(4) based on a genuine dispute as to the debtors’ right to the exemption despite having no equity. Under Utah law, the debtors’ homestead exemption was tied to the property itself and not contingent upon equity. Furthermore, to the extent the trustee’s challenge to the homestead exemptions due to lack of equity constituted a genuine dispute, that dispute was resolved by 1) the trustee’s proposed sale in excess of the encumbrances, 2) the bankruptcy court’s allowance of the exemptions, and 3) the debtors’ conversion to chapter 13 and removal of the claimed exemptions.
The trustee’s reliance on section 363(f)(5), was also unavailing. That section provides for forced sale if the property is otherwise subject to forced sale in a “legal or equitable proceeding.” While Utah law permits forced sales to benefit certain creditors, neither the IRS nor the unsecured creditors in this case were the creditors contemplated by the state law. Furthermore, Utah does not permit sale of a homestead where the resulting price would not satisfy the exemption amount. In this case, after the mortgages were paid and all costs associated with the sale were distributed, the sale would not have met that requirement.
Addressing the trustee’s remaining arguments, the panel found that, while section 522(c)(2)(B) provides that the exempt homestead remains subject to tax liens, that provision does not eliminate the exemption or permit sale of the property. Nor does section 724’s subordination of other liens to a tax lien provide the authority for the trustee to sell exempt property. It simply provides the order in which creditors should be paid out of sale otherwise authorized under section 363.
The panel found that the bankruptcy court did not err in denying the fee applications in their entirety. Review of the applications confirmed that all the fees sought related to the trustee’s “inappropriate scheme” to sell the exempt properties. Noting that the job of a chapter 7 trustee carries the risk of little to no compensation under section 326(a), the panel addressed whether likewise depriving the trustee’s counsel of its fees was reasonable where counsel was not subject to those statutory limitations. Here, the fact that the trustee was member of his counsel’s firm and, in fact, performed over 70% of the services listed under counsel hours, “mitigate[d] fairness concerns.”
The panel concluded: “The obvious dictate here is that it makes no sense whatsoever to sell the Homesteads and incur administrative expenses of $57,284.97 in the Bird case, and $61,513.63 in the Christensens’ case, in order to get only $10,000 to unsecured creditors and at the same time deny Debtors their Homesteads.”
NCBRC filed an amicus brief in this case on behalf of the NACBA membership.
Jubber 10th BAP opinion Nov 2017