Ch. 7 Trustee, Counsel Denied Fees for Improper Efforts

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By Daniel Gill

A Chapter 7 trustee and his appointed counsel had their fees denied because they tried to sell debtors’ homes in a manner that would serve only to compensate the trustee and his lawyers, but not unsecured creditors ( In re Christensen, In re Bird , 2016 BL 415584, Bankr. D. Utah, No. 15-29773, 12/14/16 ).

Judge R. Kimball Mosier of the U.S. Bankruptcy Court for the District of Utah Dec. 14 found that the trustee and his counsel improperly objected to homestead exemptions claimed by the debtors and then improperly sought to sell the homes of the debtors. The trustee and his counsel stipulated with the Internal Revenue Service that the trustee could “carve out” $10,000 sale proceeds from the IRS’ junior liens on the subject properties.

Judge Mosier said that those services “were not necessary to the administration of the estates, were not reasonably likely to benefit the estates, and could work a substantial harm on the debtors if they were approved.” The judge issued a single opinion for the two cases.

Judge Mosier noted that Congress enacted Section 554 of the Bankruptcy Code in 1978 “to prevent trustees from unnecessarily administering assets that bring no value to the estate and to thwart the practice of trustees increasing their own commissions by not abandoning valueless property on their own.”

Gary E. Jubber, a Salt Lake City attorney, was appointed as Chapter 7 trustee in each case. Jubber objected to the homestead exemptions claimed by the debtors on the grounds that there was no equity in the properties to which the exemptions might attach, the court said.

However, despite arguing that there was no equity in the properties, Jubber hired real estate professionals to market and sell the properties. The trustee then filed motions to approve stipulations he entered with the IRS, pursuant to which Jubber would sell the properties, and he would be entitled to carve out $10,000 from the sale of each property from the IRS’ tax liens. Having found buyers who would purchase the homes in amounts that in fact would produce some equity, Jubber also filed motions to approve sales of the two homes. The debtors objected to these motions.

Before the properties could be sold or the court could consider the trustee’s objection to exemptions and the debtors’ objections to the trustee’s proposed sale, the debtors converted their two cases to Chapter 13, which allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtors must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

The trustee—and his own law firm, which the trustee employed to represent him in these cases—filed claims in the Chapter 13 cases. Jubber and his firm sought to have their fees allowed as administrative expense claims in the Chapter 13 cases, which would give them priority over the debtors’ other general unsecured creditors.

The court found that the trustee did not state any legitimate grounds to support his objection to the debtors’ claimed homestead exemptions.

Nor could the court approve the proposed sales, because there wasn’t enough equity to pay the debtors all of their exemption claim as required by Utah exemption law. “Because the Trustee could not have paid the Debtors’ homestead exemptions in full, the Homes were exempt from the Trustee’s forced sale,” the court said.

The court said that Chapter 7 trustees should not “act as liquidating agents for secured creditors, who have their own remedies and could liquidate their own collateral if they so desired.”

The court found that because there was no benefit to unsecured creditors, “administration of the Homes was neither necessary nor reasonably likely to benefit the Debtors’ estates.” Accordingly, the court denied the fee requests of the trustee and his firm in their entirety.

Gary Jubber, trustee, was represented by Douglas J. Payne, Fabian VanCott, Salt Lake City. The debtors, Brent and Jo-Ann Christensen and John Thomas Bird, were represented by Paul James Toscano, Salt Lake City.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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