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Emory Bankruptcy Developments Journal

Hannah L. Fink

Abstract

Standing trustees provide a critical function of fairness in chapter 13 bankruptcy, but a jurisdictional split regarding their fees means that trustees in multiple circuits are not paid for a large percentage of their work. Under Ninth and Tenth Circuit precedents, standing trustees may not collect the percentage fee when the debtor’s case is dismissed before confirmation. This creates a different result for standing trustees as opposed to single-case trustees, hurts debtors and creditors, creates adverse incentives, and even constitutional conundrums.

Permitting some debtors to enjoy the benefits of chapter 13 without paying their fair share creates a system where standing trustees must work on their cases, potentially for extended periods of time. Further, trustees risk going uncompensated if the debtor decides he wants to leave chapter 13 or refuses to propose a viable plan for confirmation. When these debtors do not pay the trustee fee, the trustee must find another source to fund her office operations. Thus, trustees resort to increasing their percentage fee to compensate for these losses, meaning other debtors must pay more to use chapter 13 and unsecured creditors get a lower payout.

The Ninth and Tenth Circuit approaches further create nonsensical incentives where debtors are motivated to draw out the confirmation process as long as possible with no intention of confirming their plan to avoid paying the trustee fee. It also creates an incentive for trustees to confirm plans regardless of their feasibility, working counter to their role as a keeper of fairness in chapter 13. Additionally, by only awarding trustees their fees in the event of confirmation, a constitutional issue arises due to the trustee’s role as a quasi-judicial officer. This Comment untangles the various approaches courts have taken in awarding trustee fees in the event of pre-confirmation dismissals and delves into the harmful consequences of the Ninth and Tenth Circuit precedents.

This Comment argues that standing trustee compensation in chapter 13 should not be denied merely because a debtor’s proposed plan does not pass confirmation muster. Such an approach creates absurd and undesirable outcomes across the board in the chapter 13 system. Rather, courts should endorse the approach of other bankruptcy and district courts that allow for payment of standing chapter 13 trustee fee awards regardless of plan confirmation status. Even better, Congress should settle the issue by crafting a simple amendment to the Bankruptcy Code that resolves this issue entirely.

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