UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF NEW YORK

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In Re: Chapter 7

ROBERT A. ANDERSON and

NANCY ANDERSON, Case No. 803-83614-511

Debtors.

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MEMORANDUM OF LAW

Kirschenbaum & Kirschenbaum, P.C.

By: Kenneth Kirschenbaum (SS-5082)

200 Garden City Plaza

Garden City, New York 11530

(516) 747-6700

On May 29, 2003, the debtors filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code. At that time, the trustee was appointed. In Schedule A of the debtor’s petition, they listed their joint interest in real property and estimated the market value of their interest in the Property at the time of the filing to be $385,000.00. Although the secured debt which was listed by the debtors in the petition totaled the sum of $370,534.00 and the debtors claimed an aggregate $20,000.00 homestead exemption, the trustee decided to conduct and independent investigation concerning the value of the Property. Based on communications with a real estate broker familiar with the values of residential real estate in the neighborhood where the Property is located the trustee believed that the Property could be sold for at least $425,000.00. Based upon the broker’s opinion the trustee obtained a court order authorizing him to retain a real estate broker to market the property. Upon the entry of the order authorizing the broker’s retention, the trustee instructed the broker to contact the debtors and make arrangements for access to the premises to list the Property for sale, and to start marketing the Property. However, the debtors were not willing to communicate with the broker and no arrangement was made for access to the premises by the real estate broker. After being advised of the situation the trustee contacted the debtors’ attorney to discuss the matter with him. The debtors’ counsel provided the trustee with an appraisal which estimated the market value of the property at $385,000.00. Following a review of the debtors’ appraisal by the trustee’s real estate broker the trustee did not agree with the value contained in the debtors’ appraisal. The trustee believed that if the property was marketed at that point in time a meaningful estate could have been created. The trustee informed debtors’ counsel to contact the debtors and inform them that the broker was going to be contacting them to schedule an interior inspection. Debtors’ counsel asked that the real estate broker contact him to schedule any appointments with the debtors. Following the trustee’s discussion with the debtors’ counsel the trustee’s real estate broker was instructed to call the debtors’ counsel to arrange for access into the premises, as requested by the debtors’ counsel. Only a few moments later the real estate broker called the trustee back to tell him that the debtors’ attorney informed her that he would not schedule an appointment for her to inspect the premises, that she could not have access to the Property, and that it was his intention to seek an order converting the debtors’ case to one under Chapter 13 of the Bankruptcy Code.

The trustee created an asset case out of what appeared, on its face, to be a “no asset” case. The debtors converted their Chapter 7 case to one under Chapter 13 only after their effort, through their schedules, appraisals, testimony and their counsel’s efforts, to dissuade the trustee from administering the property. On October 20, 2003, Bankruptcy Judge Melanie L. Cyganowski signed an order converting the debtors’ case to Chapter 13. As a result of the conversion the trustee was prevented from fully administering the Chapter 7 case. As such, no assets were converted to cash and no disbursements were made.

Issue:

Whether a Chapter 7 Trustee should receive compensation on a quantum meruit basis in a bankruptcy case that was not fully administered by the trustee due to a conversion of the case at the debtors’ request to another chapter, and where no assets were converted to cash during the pendency of the Chapter 7 proceeding and no disbursements were made by the Chapter 7 trustee.

Analysis:

11 U.S.C. § 330 provides in pertinent part:

(a) The court may award to a trustee, ...

(1) reasonable compensation for actual, necessary services rendered by such trustee, ... based on the nature, extent and the value of such services, the time spent on such services and the cost of comparable services other than in a case under this title; and

(2) reimbursement for actual, necessary expenses.

(b) There shall be paid from the filing fee in a case under Chapter 7 of this title, $60 to the trustee serving in such case, after such trustee’s services are rendered.

11 U.S.C. § 326(a) states:

In a case under chapter 7 or 11, the court may allow reasonable compensation

under section 330 of this title of the trustee for the trustee’s services , payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000, but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

Under a literal reading of 11 U.S.C § 326(a), a trustee who neither collects nor disburses any funds is not entitled to any commissions. The statute, unfortunately, does not address the appropriate trustee compensation in a case where the trustee discovers assets, but is prevented from completing his administration of the case and making distribution by a conversion. The courts have generally reasoned that a literal reading of § 326(a) should be used only in fully administered cases and that in cases which were not fully administered, through no fault of the trustee, compensation should be awarded to the trustee on a quantum meruit basis when the trustee performed substantial services but did not disburse any funds In the Matter of Parameswaran, 64 B.R. 341, S.D. Ny, 1986 (Chapter 7 trustee, who created asset from no asset case would be awarded $1,000 for her services as trustee, even though debtor chose to convert case to one under Chapter 13 and no assets of debtor were converted to cash during pendency of Chapter 7 proceeding); In re Smith, 51 B.R. 273, 275, Bankr.D.D.C., 1984 (In Chapter 13 case wherein trustee had expended substantial time and effort, but where trustee had neither collected nor disbursed any funds, Bankruptcy Court had equitable power to allow compensation to trustee on quantum meruit basis); Matter of Pray, 37 B.R. 27, Bankr.M.D.Fla., 1983 (Bankruptcy court was empowered to award compensation to trustee on basis of quantum meruit in spite of fact that all funds were returned to debtor and trustee made no distribution to creditors); In re Rennison, 13 B.R. 951, Bankr.W.D.Ky., 1981 (In case where debtors seek voluntary dismissal and trust funds are to be disbursed to the debtors and no others, the trustee is entitled to the statutory commission which may be retained out of the trust funds). Where a case is converted courts have deemed it proper to compensate the trustee even where no money has been disbursed to creditors upon a showing that the trustee has performed considerable services on the estate’s behalf In re Woodworth, 70 B.R. 361, N.D. Ny, 1987 (Chapter 7 trustee was not entitled to compensation because only routine duties customarily performed by trustees were rendered). Compensating a trustee under these circumstances will discourage a debtor’s intentional concealment of assets as well as encouraging a trustee’s diligent discovery of assets In re Moore, 235 B.R. 414, W.D. Ky, 1999 (Chapter 7 trustee is entitled to be compensated on a quantum meruit basis for substantial services that he/she performs when a bankruptcy case is converted to another chapter before it can be fully administered).

There appears to be two criteria established by the courts for quantum meruit compensation under these circumstances, either one of which would be sufficient to entitle a trustee to quantum meruit compensation. Courts refer to “substantial services” and “considerable services”. The issue, then, is what constitutes substantial services or considerable services? We respectfully suggest that this Court find that substantial or considerable services are those that exceed the most minimal services that a trustee routinely performs in fulfilling his statutory, fiduciary obligation. The Bankruptcy Code requires a trustee to perform certain services and those obligations are found in 11 U.S.C. § 704. The United States Trustee’s office has promulgated additional obligations to be performed by a panel of Chapter 7 trustees and those are found in the Handbook for Chapter 7 Trustees in Chapter 6 - Duties of a Trustee. Chapter 7 trustees have a myriad of responsibilities and obligations imposed upon them by the United States Trustee, including record keeping, reporting, audits, attending meetings and seminars, all without compensation.

In a routine case a trustee will review the debtor’s schedules and examine the debtor at a first meeting of creditors. The administration of most cases is concluded at that point and the trustee files a final report referred to as a “no distribution report”. We suggest that those services in the routine case constitute minimal services rendered by the trustee. Once a trustee performs services beyond the first meeting of creditors, either in connection with investigation regarding abuse or administration of potential undisclosed or undervalued assets, or disclosed assets, the trustee should be deemed to have performed substantial or considerable services. Compensation on a quantum meruit basis would of course be commensurate with the actual services rendered beyond those performed in a routine case as described hereinabove. Thus, considerable services or substantial services may have been performed for one hour or hundreds of hours and the quantum meruit compensation should be commensurate with the services rendered.

Trustees perform many services in connection with investigation, particularly involving abuse, where compensation, even on a quantum meruit basis, is not sought. Where, however, services performed beyond routine services involve identification and administration of an asset of the estate there is no equity in denying a trustee compensation on a quantum meruit basis when the debtor converts to Chapter 13 in order to circumvent or avoid the Chapter 7 trustee’s administration of an asset. The equities become even more imbalanced in favor of the trustee when the trustee has uncovered and begins to administer an undisclosed or undervalued asset, which is the case here. In fact, because of the trustee’s efforts in this case the debtors converted to Chapter 13 and will have to formulate a plan that pays the unsecured creditors at least what they would have received in Chapter 7. The creditors were protected in this case by the trustee and will receive payment only because of the trustee’s diligence in fulfilling his fiduciary obligations. The trustee is a private attorney and not on the government payroll, and unless the court awards quantum meruit compensation, the trustee will not be compensated for over five hours of his time.

In this case, the trustee did not accept the debtors’ valuation in their schedules nor their testimony at the first meeting of creditors. The trustee sought out a professional real estate broker to evaluate the property and once the trustee’s suspicion that the property had been undervalued was confirmed, the trustee took appropriate steps to obtain the Court’s permission to engage counsel and to engage a real estate broker to market the real property. The trustee spent considerable time engaging these professionals and engaging in negotiations with the debtors’ counsel regarding the administration of the real property. The trustee’s time records reveal that the trustee expended an excess of five hours of his time.

When one considers an award on equitable principles, one should examine the nature and the extent of the services performed by the trustee Matter of Pray, supra. In the case Matter of Stabler, 75 B.R. 135, M.D. Fla., 1987 (Chapter 7 trustee was entitled to receive $250 for substantial services performed by trustee prior to date case was converted to one under Chapter 13, even though trustee did not disburse any monies), the court awarded the Chapter 7 trustee compensation based on a quantum meruit basis even though the trustee did not distribute any monies. That case is remarkably similar to this case. In Matter of Stabler, supra, the court found that the fees requested were not excessive, and the trustee deserved to be compensated on a quantum meruit basis. The trustee in that case attended the § 341 meeting of creditors, engaged in a telephone conference with the attorney for the debtor, filed an objection to exempt property, held several conferences with the appraiser for the bankruptcy estate, and attended a hearing on a motion. In this case, substantial services were rendered by the trustee and the trustee engaged in considerable efforts while this case was in Chapter 7. Subsequent to his appointment, the trustee engaged in a diligent inquiry concerning the fair market value of the debtors’ real property, he ascertained the sum necessary to satisfy each lien against the subject property, he examined records, questioned the debtors at the § 341 meeting, engaged in numerous contacts with the debtors’ counsel, retained general counsel, and retained a real estate broker to sell the debtors’ residence. The trustee was more actively involved in this case due to the debtors’ lack of cooperation with the trustee’s real estate broker, and ultimately instructed his counsel to file a motion, which sought an order to compel the debtors and their counsel to cooperate with the trustee and the trustee’s real estate broker with respect to the sale of the debtors’ residence.

In the case In re Berry, 166 B.R. 932 D. Or., 1987 (Chapter 7 trustee was entitled to compensation even though no funds were distributed to creditors by trustee), the court held that the Chapter 7 trustee was entitled to be compensated for the reasonable value of his actual and necessary services when the debtor converted his case to one under Chapter 13. In that case, the trustee filed his inventory and report of assets in the Chapter 7 proceeding. He also retained a real estate broker to sell the debtor’s residence and then filed a motion for an order requiring the debtor to turnover certain personal property. In apparent response to the trustee’s action, the debtor converted the case to a Chapter 13 proceeding. The court found that the trustee’s compensation should be set on a quantum meruit basis because the services performed by the trustee would clearly not be considered minimal. In that case a Chapter 13 plan was confirmed, and if it was performed by the debtor, the creditors would be receiving a percentage of their claims. The facts in that case are similar to the current set of facts. The services rendered by the trustee in this case were beyond minimal and were substantial and considerable. Here, all of the creditors will receive payment only because of the trustee’s efforts fulfilling his fiduciary responsibilities. Therefore, the trustee is entitled to receive compensation on a quantum meruit basis as was the case in In re Berry, supra.

In the case In re Woodworth, supra, the court denied the trustee compensation, but explained that the denial of fees was based on the minimal services actually performed by the trustee. In that case, only routine, basic services were rendered. The trustee in that case did not prepare any inventory and was not required to collect any tangible assets of the estate. Furthermore, it was revealed that almost all matters concerning the status of the potential asset were handled by the trustee’s attorney. In the present case, however, an asset was discovered because of the trustee’s diligent efforts. The trustee in this case was actively involved in locating and engaging the broker and discussing the value of the property with the broker and his counsel. The trustee spent considerable time negotiating with the debtors’ counsel. The trustee spent considerable time conferencing with his counsel and directing their actions. The trustee conducted research and assisted in the preparation of this memorandum of law. Furthermore, we submit that the Court should be mindful that the debtors’ motive for converting their case to one under Chapter13 was obviously for the purpose of avoiding the trustee’s administration and liquidation of the debtors’ home, which they not only undervalued in their schedules, but vigorously continued to try and convince the trustee to abandon. The debtors listed their real property in their voluntary petition as having a value significantly lower than what the true value turned out to be. If not for the trustee’s time and investigation into the value of the real property the creditors would not have received any distribution. It is clear that the trustee’s services have not been minimal as was the case in In re Woodworth, supra. If a Chapter 13 plan is confirmed in this case, and the plan is successfully completed by the debtors, the general unsecured creditors will receive a substantial dividend, which if not for the trustee’s efforts, they would not have received. The trustee should be given compensation for this favorable result as well as the time he devoted. There is simply no equity in a position that suggests that the trustee should volunteer his time in this or any other Chapter 7 case under these circumstances. Without the strong efforts of the trustee, this case would have likely been administered as a no-asset Chapter 7 proceeding.

The trustee’s services and involvement in this case should not go unrewarded. Even though the trustee did not distribute any monies, his time, efforts and results are well documented and the trustee is entitled to compensation based on a quantum meruit basis.