Court Opinion

ID: 6103912
Source: CourtListenerOpinion
Date Created: 2022-01-15 01:02:23.550021+00
Date Added: 2024-06-11T08:53:41.568312
License: Public Domain

Case: 21-30186     Document: 00516168259          Page: 1    Date Filed: 01/14/2022

           United States Court of Appeals
                for the Fifth Circuit
                                                                     United States Court of Appeals
                                                                              Fifth Circuit

                                                                            FILED
                                                                     January 14, 2022
                                   No. 21-30186                        Lyle W. Cayce
                                                                            Clerk

   In the Matter of: Sharon Sylvester

                                                                           Debtor,

   Sharon Sylvester,

                                                                      Appellant,

                                       versus

   Chaffe McCall, L.L.P.,

                                                                         Appellee.

                  Appeal from the United States District Court
                     for the Eastern District of Louisiana
                           USDC No. 2:20-CV-2469

   Before Smith, Elrod, and Oldham, Circuit Judges.
   Per Curiam:
          Sharon Sylvester went bankrupt. At the end of her Chapter 7
   proceeding, the bankruptcy court ordered her to pay certain fees to a law firm
   that assisted the Chapter 7 trustee. Sylvester argues that the bankruptcy
   court applied the wrong legal standard. We agree and vacate the award.
Case: 21-30186      Document: 00516168259            Page: 2    Date Filed: 01/14/2022

                                      No. 21-30186

                                           I.
          Sharon Sylvester filed for bankruptcy in 2018. The bankruptcy court
   converted Sylvester’s case to a Chapter 7 proceeding on April 18, 2019, and
   appointed Barbara Rivera-Fulton as trustee. The trustee filed an application
   with the court to employ Chaffe McCall (“Chaffe”) as general counsel. The
   application stated that Chaffe would help investigate, review, and liquidate
   Sylvester’s real property, and also “act as general counsel for [trustee] and
   . . . assist [trustee] in evaluating other bankruptcy issues affecting the estate.”
   The court granted the trustee’s application. The bankruptcy proceeding
   went well—the trustee and Chaffe fully paid Sylvester’s debts and were able
   to preserve some funds to disburse to Sylvester at the conclusion of the
   proceedings.
          After the creditors were fully paid, Chaffe filed a fee application with
   the bankruptcy court, seeking $16,185 in fees for 57.6 hours of attorney
   services. Chaffe’s application included an itemized description of services
   performed. Sylvester opposed Chaffe’s fee application, arguing that many or
   most of the services Chaffe performed for the trustee were duties statutorily
   assigned to the trustee that did not require legal expertise.
          The bankruptcy court granted Chaffe’s fee application in full. The
   court agreed with Sylvester that:
          [A] court may not compensate an attorney appointed to
          represent the trustee for services which coincide or overlap
          with the ministerial and administrative duties of the trustee
          delineated in § 704 of the Bankruptcy Code—except where
          services are necessarily performed by an attorney due to
          reasons of complexity or difficulty, and only then to the extent
          legal expertise is required.
   Moreover, it stated that it had “a duty to determine whether the services
   rendered by Chaffe were legal in nature or whether they were actually

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   administrative or ministerial duties of the Trustee.” And the court stated
   that “a review of Chaffe’s time entries reveals that some of the tasks could
   fall into the broad categories identified as § 704(a) trustee duties.” But the
   court nevertheless granted Chaffe all of its requested fees, primarily relying
   on two considerations. First, it emphasized 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 often not black and white.”
   Second, the court noted that the bankruptcy proceeding was particularly
   successful, with all creditors paid in full and some money left over for the
   debtor. So the court chose to give Chaffe and the trustee “some leeway” and
   “assume the tasks performed by Chaffe required legal expertise.”
            Sylvester appealed the bankruptcy court’s order to the district court,
   and the district court affirmed. The district court used substantially the same
   reasoning as the bankruptcy court, giving particular emphasis to “the
   successful result” of the bankruptcy proceeding. Sylvester timely appealed
   to us.
                                          II.
            We apply the same standard of review as the district court in reviewing
   the bankruptcy court’s decision. In re Woerner, 783 F.3d 266, 270 (5th Cir.
   2015) (en banc). We review the bankruptcy court’s award of attorney’s fees
   for abuse of discretion. Id. “An 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.” Id. at 270–71
   (quotation omitted).
            We first consider the appropriate legal standard for an award of
   attorney’s fees under § 330(a) of the Bankruptcy Code. Then we hold that
   the bankruptcy court did not apply that standard.

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                                          A.
          We begin with the text of the applicable statutory provisions. See, e.g.,
   Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121, 131 (2015). Five
   interrelated provisions of the Bankruptcy Code make clear that a court may
   compensate an attorney under § 330(a) only for legal services—that is, for
   activities requiring legal expertise that a trustee would not generally be
   expected to perform without an attorney’s assistance. See, e.g., In re J.W.
   Knapp Co., 930 F.2d 386, 388 (4th Cir. 1991).
          Section 704 of the Bankruptcy Code sets forth the duties of the
   bankruptcy trustee. It provides that “[t]he trustee shall,” among other
   things, “collect and reduce to money the property of the estate for which
   such trustee serves,” “be accountable for all property received,” and
   “investigate the financial affairs of the debtor.” 11 U.S.C. § 704(a). Section
   327 allows the trustee to employ certain professionals to help with the
   trustee’s statutory duties. It provides that the trustee may, with the court’s
   approval, “employ one or more attorneys, accountants, appraisers,
   auctioneers, or other professional persons . . . to represent or assist the
   trustee in carrying out the trustee’s duties under this title.” Id. § 327(a).
          Section 330(a) is the provision at the heart of this case. That section
   “governs compensation of all professionals whose fees are paid by the
   bankruptcy estate.” In re ASARCO, LLC, 751 F.3d 291, 299 (5th Cir. 2014),
   aff’d, 576 U.S. 121 (2015). It provides that a court may award “a professional
   person employed under section 327 . . . reasonable compensation for actual,
   necessary services rendered.” 11 U.S.C. § 330(a)(1). Section 330(a) thus
   limits permissible attorney compensation to fees for “necessary services.”
   Id.; see also Baker Botts, 576 U.S. at 131 (stressing that § 330(a) “does not
   authorize courts to award ‘reasonable compensation’ simpliciter, but

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   ‘reasonable compensation for actual, necessary services rendered by’ the
   § 327(a) professional” (emphasis in original)).
          Section 330(a) does not define what services are “necessary,” and
   that word’s meaning is not immediately clear from the statute. On the one
   hand, “necessary services” might refer broadly to any service that is essential
   or indispensable to the trustee’s functions. See Webster’s New
   International Dictionary 1635 (2d ed. 1934; 1950) (defining
   “necessary” as “indispensable to some purpose”). Or the phrase might refer
   more narrowly to professional services that are “necessary” because a
   trustee could not perform them without the professional’s specific expertise.
   See id. (defining “necessary” as “a requisite; an essential”). Section
   330(a)—which the Supreme Court has described as “awkward, and even
   ungrammatical,” Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004)—does not
   specify which reading is correct, although the statute’s restriction on
   compensation to limited classes of professionals arguably favors the narrower
   reading.
          Statutory context, however, makes clear that the narrower reading is
   the better one. Start with § 326 of the Bankruptcy Code. That section lays
   out the compensation scheme for Chapter 7 trustees and expressly limits
   their compensation to a percentage of the funds distributed to creditors. 11
   U.S.C. § 326(a). We have said that § 326(a) “direct[s] courts to treat the
   trustee’s compensation as a commission” and that the percentage amounts
   in § 326(a) are “presumptively reasonable” amounts that should be awarded
   absent truly exceptional circumstances. Matter of JFK Capital Holdings,
   LLC, 880 F.3d 747, 753–54 (5th Cir. 2018) (quotation omitted). The upshot
   is that § 326(a) almost always provides both a floor and a ceiling for a Chapter
   7 trustee’s compensation.

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          “It is well established that a trustee may not evade the [compensation
   ceiling] imposed by section 326(a) by hiring other people to perform the
   trustee’s duties.” In re Jenkins, 188 B.R. 416, 420 (B.A.P. 9th Cir. 1995). But
   § 330(a) would allow the trustee to do just that if it allowed a court to pay
   other professionals for performing tasks that the trustee could have
   accomplished without professional help. A trustee could delegate most or all
   of her duties to an attorney or accountant and still receive her § 326(a)
   commission, while the attorney or accountant would also receive their hourly
   rate for time spent performing the trustee’s duties. See 11 U.S.C. § 328(a)
   (allowing professionals employed by a trustee to bill on an hourly basis). The
   debtor’s estate would be essentially double-billed, paying a substantial
   commission to the trustee for doing little more than hiring and delegating to
   professionals. Sylvester contends that something comparable happened in
   this case. Whether that’s true or not, limiting § 330(a) compensation to
   services requiring professional expertise maintains the integrity of the
   commission-based compensation scheme that Congress established for
   Chapter 7 trustees.
          Section 328 of the Bankruptcy Code, titled “Limitation on
   compensation of professional persons,” sheds further light on the meaning
   of “necessary services” in § 330(a). Subsection (b) provides:
          If the court has authorized a trustee to serve as an attorney or
          accountant for the estate under [Section 327], the court may
          allow compensation for the trustee’s services as such attorney
          or accountant only to the extent that the trustee performed
          services as attorney or accountant for the estate and not for
          performance of any of the trustee’s duties that are generally
          performed by a trustee without the assistance of an attorney or
          accountant for the estate.
   11 U.S.C. § 328(b). Section 328(b) reinforces the Bankruptcy Code’s
   distinction between necessary professional services and those which are

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   “generally performed by a trustee without the assistance of an attorney or
   accountant.” Id. And it emphasizes that only the former are compensable
   under § 330(a)—even when the attorney (or accountant) and the trustee are
   the same person. See also Jenkins, 188 B.R. at 420 (“Section 328(b) provides
   that an attorney or accountant may not receive compensation for the
   performance of any of the trustee’s duties that are generally performed by a
   trustee without the assistance of an attorney or accountant” (quotation
   omitted)).
          Precedent confirms that § 330(a) allows a court to compensate an
   attorney only for services requiring legal expertise. The Fourth Circuit, for
   example, has held that “courts may not compensate an attorney for services
   statutorily required by the trustee. Only when unique difficulties arise may
   compensation be provided for services which coincide or overlap with the
   trustee’s duties, and only to the extent of matters requiring legal expertise.”
   J.W. Knapp Co., 930 F.2d at 388. Similarly, the Ninth Circuit has required
   that “the services which are the subject of the application [be] properly
   compensable as legal services” in order for a court to grant an attorney’s
   § 330(a) fee application. Unsecured Creditors’ Comm. v. Puget Sound Plywood,
   Inc., 924 F.2d 955, 957–58 (9th Cir. 1991). And bankruptcy courts often note
   that compensable services under § 330(a) must require legal expertise and
   not be services ordinarily performed by a trustee. E.g., In re Route 22
   Readington Holdings, LLC, No. 18-30155, 2021 WL 112756, at *6 (Bankr.
   D.N.J. Jan. 11, 2021); In re Cmty. Home Fin. Servs., Inc., No. 1201703EE, 2015
   WL 6511183, at *11 (Bankr. S.D. Miss. Oct. 27, 2015); In re D’Amico, No. 05-
   19217, 2009 WL 2982987, at *4 (Bankr. N.D.N.Y. Sept. 14, 2009).
   Accordingly, we hold that a court may compensate an attorney under
   § 330(a) only for services requiring legal expertise that a trustee would not
   generally be expected to perform without an attorney’s assistance.

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                                          B.
          We next consider whether the bankruptcy court applied the proper
   legal standard below. Even though the court recognized its “duty to
   determine whether the services rendered by Chaffe were legal in nature or
   whether they were actually administrative or ministerial duties of the
   trustee,” it chose to “assume the tasks performed by Chaffe required legal
   expertise” rather than make the required determination. In doing so, the
   court deviated from the proper legal standard in two respects.
          First, the bankruptcy court appeared to permit Chaffe to recover for
   the performance of ordinary trustee duties because of the successful result of
   the bankruptcy proceeding. The court stated that “a review of Chaffe’s time
   entries reveals that some of the tasks could fall into the broad categories
   identified as § 704(a) trustee duties, including reviewing the Debtor’s
   records, liquidating property of the estate, and investigating the financial
   affairs of the Debtor.” But the court declined to attempt to identify and
   separate Chaffe’s non-compensable services, both 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.” It’s true that there is often no easy way
   to distinguish legal from non-legal services, and a bankruptcy court is entitled
   to substantial deference in its determination as to whether a particular service
   required attorney expertise. See, e.g., In re Evangeline Refin. Co., 890 F.2d
   1312, 1327 (5th Cir. 1989). But under § 330(a), a court cannot simply decline
   to make the required determination because the line is murky. Nor can it
   permit an attorney to bill the estate for nonlegal services because the
   bankruptcy proceeding was successful. Cf. Baker Botts, 576 U.S. at 131
   (refusing to “excise the phrase ‘for actual, necessary services rendered’ from
   the statute”—even when the firm seeking fees had obtained a multibillion-
   dollar fraudulent transfer judgment for the debtor and allowed the debtor to

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   emerge solvent from bankruptcy proceedings); ASARCO, 751 F.3d at 301–
   02 (similar).
          Second and relatedly, the bankruptcy court ignored that the burden
   rests on the attorney requesting compensation under § 330(a) to justify the
   services rendered. In light of the successful outcome of the bankruptcy
   proceeding, the court chose to “allow Chaffe and the Trustee some leeway
   and . . . assume the tasks performed by Chaffe required legal expertise.” But
   it is well established that “it is [the] applicant’s burden to demonstrate that
   services for which professional compensation is sought involve legal service
   beyond the scope of the trustee’s statutory duties.” In re Wildman, 72 B.R.
   700, 707 (Bankr. N.D. Ill. 1987); see also, e.g., In re Boulder Crossroads, LLC,
   No. 09-10381, 2010 WL 4924745, at *13 (Bankr. W.D. Tex. Dec. 1, 2010)
   (“[A]ll applicants for awards of professional compensation under 11 U.S.C.
   § 330 bear the burden of proof on the elements of ‘reasonable
   compensation.’”); In re Shades of Beauty, Inc., 56 B.R. 946, 949–50 (Bankr.
   E.D.N.Y. 1986) (“[I]t is the burden of the applicant to demonstrate that the
   services for which professional compensation is sought involve some legal
   service beyond the scope of the trustee’s statutory duty.”); In re New Boston
   Coke Corp., 299 B.R. 432, 438 (Bankr. E.D. Mich. 2003) (“[T]he burden of
   proof is upon the applicant to justify the requested fees.”); In re Whitney, 27
   B.R. 352, 354 (Bankr. D. Me. 1983) (“It is the applicant’s burden to show his
   entitlement to fees.”). Accordingly, it was improper for the bankruptcy court
   to assume that Chaffe’s services required legal expertise rather than
   requiring Chaffe to meet its burden. If “insufficient explanatory information
   is provided for determining the precise nature of the services rendered, the
   court is compelled to determine that the services are not compensable as legal
   services.” Whitney, 27 B.R. at 354.

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                               *        *         *
         For the foregoing reasons, we VACATE the award of attorney’s fees
   and REMAND this case for further proceedings consistent with this
   opinion.

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