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 multibilliondollar 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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