Tamm v. U.S. Trustee (In re Hokulani Square, Inc.)
Tamm v. U.S. Trustee (In re Hokulani Square, Inc.), ___F.3d___, 2015 WL 305540 (9th Cir. 2015): On 1/26/15, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Tamm v. U.S. Trustee (In re Hokulani Square, Inc.),. On appeal from the U.S. Bankruptcy Appellate Panel of the Ninth Circuit, the Ninth Circuit affirmed the BAP’s reversal of the bankruptcy court’s compensation award to a chapter 7 trustee that included fees calculated on a secured creditor’s credit bid on real property of the bankruptcy estate. The Ninth Circuit held that Bankruptcy Code section 326(a) allows reasonable compensation for "moneys" disbursed by the trustee, which does not include property disbursed to a secured creditor on a credit bid. This is a significant decision because secured creditors often “credit bid” (ie, bid the amount the bankruptcy debtor owes the creditor, secured by the property the debtor’s property that the bankruptcy trustee is selling), to purchase the property, from the “bankruptcy estate” of the debtor.
The Ninth Circuit framed the issue on appeal as whether or not the trustee’s compensation, per 11 USC 326(a), may reflect the value of a credit bid. The court stated that section 326(a) authorizes the bankruptcy court to award a trustee fees "up to a cap that is calculated as a percentage of ‘all moneys disbursed or turned over in the case by the trustee to parties in interest.’" (Emphasis added by the court). Applying the ordinary meaning to "moneys disbursed or turned over," the Ninth Circuit concluded that "moneys" means a medium of exchange, "disbursed" means to pay out, and "turned over" means to deliver or surrender. Thus, the statute seems to say that the trustee can only collect fees for those transactions where interested parties are paid "in some form of generally accepted medium of exchange."
In a credit bid transaction, only the property is "disbursed or turned over" to the secured creditor. "However broadly we define ‘moneys,’ the term can’t be expansive enough to encompass real estate, which is about as far from a ‘medium of exchange’ as one can get." The statute, as written, specifically uses the narrow term "moneys." Congress could have used the broader terms "property" or "assets" but chose not to do so.
The court stressed that both the legislative history of section 326(a) and the decisions of other circuit courts that have analyzed the issue confirm the Ninth Circuit’s interpretation. A House Judiciary Committee report explicitly states that section 326(a) does not include cases where the trustee turns over the property to the secured creditor or abandons the property permitting the secured creditor to foreclose. H.R. Rep. No. 95-595, at 327 (1977). Both the Fifth Circuit and Third Circuit held that section 326(a) does not allow the trustee to collect compensation based upon the value of property turned over to a secured creditor on a credit bid. See In re England, 153 F.3d 232, 235 (5th Cir. 1998); In re Lan Assocs. XI, L.P., 192 F.3d 109, 117-118 (3d Cir. 1999).
The trustee argued that pre-Bankruptcy Code cases demonstrated that section 326(a) should be interpreted to include compensation even where no money changes hands. The Ninth Circuit rejected that argument. Historical practice cannot overcome clear language in the Bankruptcy Code. Moreover, the historical practice showed conflicting evidence, with courts coming out on both sides of the issue with regards to a trustee being compensated for credit bids. No prior Ninth Circuit case had addressed the credit bid question. Finally, the Ninth Circuit disagreed with the trustee’s argument that not counting credit bids resulted in the "absurd" result that the trustee could be compensated for a third party cash bid at auction, but not for a credit bid that exceed the cash bid by a dollar. Congress could have intended to motivate trustees to seek out third party buyers. The court will disregard the text of a statute only where it is impossible that Congress intended the result and where the alleged absurdity is so clear as to be obvious. That is not the situation here, where the text is rational.
Every circuit court that has decided this issue, to date, has refused to pay trustee fee on the “credit bid” amount. As the Ninth Circuit pointed out, this could motivate trustees to seek third party buyers, which would benefit bankruptcy estates.