Bankruptcy trustees often perform a thankless job, scrubbing through thousands of no-asset files looking for that one case that will earn them a sizeable commission. While Chapter 7 trustees are paid a commission on funds distributed to creditors, compensation for Chapter 11 trustees more closely resembles an hourly fee engagement. A recent case from Judge Tony Davis of the Western District of Texas illustrates how the two forms of compensation may dramatically differ. In re WC Met Center, LLC, Case No. 21-10698 (Bankr. W.D. Tex. 7/15/22). The opinion can be found here.
WC Met Center, LLC was one of dozens of cases filed in Austin relating to Nate Paul and World Class Capital. On March 31, 2022, the U.S. Trustee appointed Randolph Osherow as Chapter 11 trustee. The assignment was undesirable because the Debtor faced a deadline of April 15, 2022 at noon to sell or refinance its properties. The diligent trustee found a buyer for the property with just three days to go. Following an auction, the properties were sold to an affiliate of the Debtor for $53.5 million. The sale exceeded the liens on the property by approximately $9.5 million. Then the case was converted to Chapter 7 and Mr. Osherow was appointed as Chapter 7 trustee.
Mr. Osherow requested compensation of $1.3 million based upon the commission structure set out in 11 U.S.C. Sec. 326. Rather than commending the Trustee for his exceptional service, the Debtor objected that the fee was too high. The Court agreed, at least in part. The Court found that because the case was in Chapter 11, that the fee was determined based upon the factors set out in 11 U.S.C. Sec. 330(a). The Court explained:
Section 330(a)(7) states that “[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on Section 326.” Section 326(a) then limits compensation to a chapter 7 or chapter 11 trustee to reasonable compensation under Section 330, not to exceed certain percentages based on monies disbursed or turned over in the case. So the compensation awarded is capped at the 1.3-million-dollar amount calculated using the formula in section 326(a).In other words, a Chapter 11 trustee's fee is based on the lodestar method, but is capped by the amount recoverable under section 326(a).
In this case, the Trustee testified that he spent 125 hours and that he has billed as much as $1,500 per hour. The Debtor did not put on testimony to contest the rate even though it clearly exceeded customary rates in the Austin area. Based on 125 hours x $1,500/hr., the lodestar came out to $187,500. However, the court also considered the customary fee that a real estate broker would charge. The Trustee contended that a broker would have charged 4-6%. However, the Court countered that "the Court has routinely seen broker commissions and breakup fees of much lower than 3% when the transactions are priced at $50 million or higher." The Court found that a commission of 1% was reasonable.
Thus, the Court awarded the Trustee $437,124.46 based on a 1% commission. While this was much lower than the $1.3 million the Trustee would have received if the sale had been concluded in Chapter 7, it was more than the $187,500 that a straight lodestar would have produced.
The takeaway here is that compensation for a Chapter 11 Trustee is different than compensation for a Chapter 7 Trustee. However, the Court has the ability to adjust the lodestar based on the facts of the case. In this case, because the Trustee fulfilled the role of both Chapter 11 Trustee and real estate broker, he got paid at the low end of what a broker would have received but considerably higher than what he would have received on a straight hourly basis. Parties can also use this opinion as authority for the proposition that hourly rates of up to $1,500 per hour are permissible in extraordinary cases in the Western District of Texas and that real estate commissions on transactions above $50 million should be in the 1-3% range.
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