Opinion ID: 419205
Heading Depth: 2
Heading Rank: 2

Heading: The Trustee's Fiduciary Duty

Text: 11 The SWM Group argues that Rau as trustee was guilty of a conflict of interest and breached his fiduciary duty by structuring the sale in a way that both increased his fee by $22,722, and cost the estate an additional $30,084 in extra commissions paid to the referees' salary and expense fund. 3 12 The appellants' challenge to the trustee's actions in this case is based upon the following theory. Under the Bankruptcy Act, a trustee's maximum compensation is calculated as a percentage of all moneys disbursed or turned over by [the trustee] to any persons, including lienholders. 11 U.S.C. Sec. 76(c) (1976). When assets of the estate are sold free and clear of liens held by secured creditors, the entire sale price, including the amount used to pay off the liens, is counted for purposes of establishing the trustee's fee base. See 2 Collier on Bankruptcy p 326.01[b] (15th ed. 1982); see also H.R.Rep. No. 595, 95th Cong., 1st Sess. 327 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787 (similar rule applies under Bankruptcy Reform Act). The appellants, however, contend that when an encumbered asset is sold to a third party purchaser subject to the existing lien, only the equity proceeds from the sale may be considered in calculating the trustee's maximum fee. Therefore, the appellants argue, by selling the radio station free and clear of the KBUZ lien, rather than subject to that lien, Rau as trustee chose to structure the transaction in a way that resulted in his own personal gain at the expense of the estate. The appellants maintain that this was a breach of fiduciary duty by the trustee. 13 The contention that a sale subject to existing liens does not incorporate the value of the encumbered portion of an asset into the trustee's fee base finds some support in existing authorities. See 2 Collier on Bankruptcy p 326.01[b] (15th ed. 1982); American Surety Co. v. Freed, 224 F. 333, 338-39 (3d Cir.1915). The proffered interpretation, however, is not necessarily consistent with the policy underlying the statutory provision allowing sale proceeds used to liquidate liens to be counted in determining the trustee's fee maximum. Under the old Bankruptcy Act as under the new Reform Act, the provision serves the purpose of insuring to trustees compensation commensurate with the trustees' services. 2 Collier on Bankruptcy p 326.01[b], at 326-17 (15th ed. 1982). The statute recognizes that the trustee's administration of an estate containing encumbered assets may sometimes prove equally difficult and time-consuming as if the assets were unencumbered. Insofar as it is solely designed to procure a just fee for the trustee, this policy appears to be unaffected by whether the eventual disposition of the encumbered assets is free and clear of or subject to the liens. 4 For this reason, courts have sometimes treated the sale of an encumbered asset as one that includes a constructive disbursement to the lien creditor, even as to the portion of the asset's value that does not actually enter the estate and is not distributed to the creditor by the trustee. See, e.g., In re Lowell Textile Co., 288 F. 989, 990 (D.Mass.1923); In re Breakwater Co., 220 F. 226, 228-29 (E.D.Pa.1915); In re Morse Iron Works & Dry Dock Co., 154 F. 214 (E.D.N.Y.1906); but see American Surety, 224 F.2d at 338-39; In re Old Oregon Manufacturing Co., 236 F. 804, 805 (W.D.Wash.1916) (refusing to apply such a constructive disbursement theory to a sale subject to mortgage). These cases involved the sale of encumbered property to the lien creditor in exchange for release of the lien, rather than sale to a third party subject to the lien. But this court held in York that the encumbered portion of an asset could be included in the trustee's fee base, even though the asset was sold by the trustee subject to the mortgage. 527 F.2d at 1074 & n. 12 (9th Cir.1975). We see no persuasive reason why an equity sale subject to an existing lien should not be considered a constructive disbursement to the lien creditor. 14 However, we need not decide how the trustee's fee base would have been defined had the stations been sold subject to KBUZ's lien, because the sale by Rau did not in any event constitute a breach of fiduciary duty. 11 U.S.C. Sec. 76(c) (1976) does not require the trustee's fee to comprise a fixed percentage of disbursements, including payments on liens. Rather, it merely imposes a maximum limit on the trustee's compensation. See In re Schautz, 390 F.2d 797, 800-01 (2d Cir.1968). If the court were to determine that the trustee has manipulated the management of the estate to inflate his fee base, rather than to benefit the estate, or that the trustee's services were not commensurate with the maximum fee, the court need not award the maximum fee. Id. at 801. As the court wisely observed in In re Lowell Textile Co., 288 F. 989 (D.Mass.1923), a case that involved a sale of mortgaged property: 15 Whether fees ought to be allowed on such sales is a very different question from whether they can be allowed. It by no means follows that, if trustees selfishly or improvidently seek and obtain authority to take and liquidate property subject to liens, they ought to be allowed commissions on the gross amount if there has been no proportionate benefit to the estate. Where, as here, the net result of the trustee's efforts has been to increase the amount of the estate, [we] see no sufficient reason why [the trustee] should not be paid for the work and responsibility of the liquidation. A commission upon only the surplus realized would in most cases be entirely inadequate. Id. at 990. 5 16 Since the form of the sale transaction only increased the maximum fee that could be awarded to Rau as trustee, and did not govern the amount he would actually receive, his decision to structure the transaction as he did was not the product of a conflict of interest. For the same reason, his decision did not breach any fiduciary duty. The bankruptcy court, not the form of the sale, ultimately determined the fee that Rau received. 17 The appellants further challenge Rau's sale of the radio station free and clear of the KBUZ lien because it resulted in a higher payment from the estate to the referees' salary and expense fund. 6 Unlike the trustee's fee, which rests within the court's discretion, the contribution of a bankrupt estate to the referees' fund is fixed according to a scheduled percentage of the net proceeds realized on the sale of assets of the estate. Net proceeds realized includes the entire sale price of encumbered property when sold free and clear of all liens. In re Riverside Investment Partnership, 674 F.2d 634, 636 (7th Cir.1982) (emphasis deleted) (quoting Reports of the Proceedings of the Judicial Conference of the United States 22 (1966)). The Judicial Conference rule further provides that where property is sold or transferred subject to a valid existing mortgage, lien or other encumbrance, the amount of such mortgage, lien or other encumbrance not affected by such sale shall not be included in determining the amount of net proceeds realized. Id. (emphasis deleted). Based on this distinction, the appellants argue that by selling the radio station free and clear of the KBUZ lien, rather than subject to the lien in a manner that would leave the lien unaffected, Rau unnecessarily increased the commission due the referees' fund and thereby breached his duty to conserve assets of the estate. 18 We cannot accept the appellants' argument. 7 By so holding, we would effectively rule that a trustee (under the Bankruptcy Act) must sell encumbered property subject to rather than free and clear of existing liens whenever it is reasonably possible for him to do so. In some cases, however, a trustee may have good reasons for selling estate assets free and clear of liens, while in other cases a sale subject to liens may provide the more profitable approach. In this instance, it appears that the trustee had sound reasons for selling the stations free and clear of the lien. 8 The decision concerning the form of sale therefore rested within the business judgment of the trustee. Liability will not be imposed for the exercise of such judgment, absent negligence. See Mosser v. Darrow, 341 U.S. 267, 272-73, 71 S.Ct. 680, 682, 95 L.Ed. 927 (1951); In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir.1983). The bankruptcy court in this case did not find any negligence by Rau as trustee; 9 in fact, it specifically approved all relevant transactions. Given the substantial profit realized by Rau on the liquidation of a previously insolvent estate, we cannot find error in the bankruptcy court's approval of his conduct.