iStock_000003598256_LargeCompensation to be paid to a bankruptcy estate professional is many times subject to intense dispute. In the case of a bankruptcy trustee, section 326 of the Bankruptcy Code provides for a tiered system of compensation based upon the amount of money distributed by the trustee to parties in interest. However, as demonstrated by the recent decision in In re Virgin Offshore U.S.A., Inc., 2015 Bankr. LEXIS 233 (Bankr. E.D. La. Jan. 26, 2015), this tiered system is still subject to review for reasonableness based on section 330 of the Bankruptcy Code.

In Virgin Offshore, the chapter 11 trustee requested compensation in the amount of $224,758.46. This amount was calculated as the maximum statutory percentage allowable under section 326 of the Bankruptcy Code. Section 326 provides that the court may allow reasonable compensation to a trustee, not to exceed the following:

  • 25% on any amount disbursed by the trustee up to $5,000.00;
  • 10% on any amount disbursed by the trustee between $5,000.01 and $50,000.00;
  • 5% on any amount disbursed by the trustee between $50,000.01 and $1,000,000.00, and
  • 3% on any amount disbursed by the trustee in excess of $1,000,000.01.

No parties objected to the trustee’s request. Nor did any parties question the trustee’s reliance upon section 326 in the calculation of the requested compensation. Unfortunately for the trustee, however, the bankruptcy court held that section 326 simply sets forth the maximum compensation allowed a trustee for services rendered to the bankruptcy estate, but that it does not require that maximum fee to be awarded. Instead, the court held that the trustee’s compensation request was still subject to review under section 330 of the Bankruptcy Code for reasonableness. Section 330(a) provides, in part, that the court may award a trustee “reasonable compensation” for actual, necessary services rendered to the estate. In order to determine what is “reasonable compensation”, section 330 requires the court to consider a number of factors, including: the time spent; the rate charged; the necessity of the services to the administration of the case; whether the services were performed in a reasonable time; and if the compensation is reasonable based on customary compensation in similar cases. Despite the trustee’s argument to the contrary, the court noted that section 330(a) is the more specific provision, and therefore controls over the more general maximum limitation of section 326.

After reviewing the section 330 factors, the bankruptcy court found that the trustee’s services, and the time spent providing those services, were reasonable. However, the court rejected the trustee’s billing rate, lowering the billing rate to the rate identified in the trustee’s employment application. Also driving the court’s decision was the fact that the trustee’s law firm represented the trustee, and due to the firm’s own approved fee application, the trustee would earn additional income from the case.

This case highlights the importance of chapter 11 (and chapter 7) trustees in maintaining accurate, detailed and proper time sheets. Virgin Offshore also may signal a shift away from a sometimes blind process of simply allowing fees at the statutory maximum amount. Additionally, it bears remembering that the court always has the independent ability to review professional fees and make its own determinations, regardless of the positions of the parties involved and regardless of whether the parties object to fee applications.