Chapter 7 Trustee Is Paid in a Case Converted to Chapter 13

Courts are split on whether a chapter 7 trustee earns a fee if the case converts to chapter 13 before the trustee makes distributions. In a case pending before Bankruptcy Judge Elizabeth D. Katz of Springfield, Mass., the chapter 7 trustee and his counsel ran up some $12,000 in time charges investigating the debtor’s potentially nonexempt assets. Before the trustee collected any assets or made any distributions, the debtors converted the case to chapter 13 over the trustee’s objection. The trustee sought an allowance of compensation for himself and his attorneys as an expense of administration in the chapter 13 case. Although not contesting the reasonableness of the fees, the debtor argued that the trustee was not entitled to compensation under Section 326(a). “In a case under chapter 7 or 11,” that section provides that the court “may allow reasonable compensation under section 330 . . . for the trustee’s services not to exceed” a sliding scale that begins at 25% and shrinks to 3% “upon all moneys disbursed or turned over in the case by the trustee . . . .” The courts are split, Judge Katz said. A majority allow reasonable compensation based on quantum meruit for pre-conversion work. More recently, she said, courts are shifting away from quantum meruit and disallowing compensation under Section 326(a) if the trustee has made no disbursements. Judge Katz took a different tack. She did not read Section 326(a) as precluding an award of compensation in a converted case. The section, she said, “is explicitly reserved for limiting trustee compensation ‘[i]n a case under chapter 7 or 11.’” [Emphasis in original.] Judge Katz therefore allowed the full amount of compensation sought by the trustee because the debtor had only objected under Section 326(a).

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