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Ninth Circuit Bankruptcy Appellate Panel:
Statutes Restricting Fees to Trustees Are Constitutional
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals’s Bankruptcy Appellate Panel has held that two statutes that provide for compensating, in part, regularly-employed Chapter 13 trustees with a percentage of monies that a bankrupt hands over under a plan for gradual satisfaction of debts, is not violative of due process by conditioning entitlement to such pay on the plan being confirmed.
Bankruptcy Judge Robert J. Faris of the District of Hawaii authored the opinion, filed Tuesday, in which Bankruptcy Judges William Lafferty, of the Northern District of California, and Gary Spraker of the District of Hawaii, joined.
The opinion repudiates the reasoning put forth by Bankruptcy Judge Brenda Moody Whinery of the District of Arizona who found that the constitutional challenge fails in light of the stare decisis effect of the Ninth Circuit’s 2023 decision in Evans v. McCallister.
But that case is not binding, Faris declared, because, in interpreting the statutes in issue—28 U.S.C. §586(e)(1) and 11 U.S.C. §1326(b)(2)—it says “nothing about the constitutionality” of them. He noted that the parties in Evans “did not raise any constitutional question until a post-decision motion” and the denial of that motion, Faris said, has no precedential value.
Merits Reached
Addressing the merits of the due-process contention put forth by trustee Dianne C. Kerns, who serves in the District of Arizona, Faris found inapposite cases cited by her for the proposition that due process is violated where a decisionmaker has a personal stake in the outcome.
A prime example of such a situation is where justices of the peace, in days gone by, were compensated with an award to them of a portion of the fines they assessed.
Rejecting Kerns’s characterization of her role as “quasi-judicial,” Faris said that a trustee in bankruptcy “is not a quasi-judicial officer because another officer—the bankruptcy judge—makes the decisions.”
He explained:
“The chapter 13 trustee is undoubtedly an asset to the bankruptcy court and often persuades the bankruptcy court to follow his or her recommendation. But the chapter 13 trustee is not the person who hears all of the arguments and decides the case. The bankruptcy judge is ultimately and solely responsible for deciding whether to confirm a plan. The Trustee’s recommendation in a particular case is only that: a recommendation to the court that the court may or may not follow. It is beyond the pale to suggest that the Trustee’s recommendation is ‘dispositive’ or that bankruptcy judges do not independently consider and decide the merits of each case.”
Faris added that although a trustee enjoys quasi-judicial immunity, that “does not make one a quasi-judicial officer for purposes of the Due Process Clause.”
Voices Criticism
While finding no constitutional infirmity in the statutory scheme, Faris did point to drawbacks of it, saying:
“The percentage fee system in chapter 13 cases undoubtedly has some anomalous features. The amount generated by the percentage fee depends entirely on the amount of the plan payments, which often has nothing to do with the amount of effort and expense required of the trustee in any particular case. Therefore, the chapter 13 trustee may be overpaid in easy cases and underpaid in hard ones. The percentage fee also often has little or nothing to do with the debtor’s ability to pay: many debtors file chapter 13 cases to cure defaulted mortgage debts; many of them need every penny of their disposable income to pay their current mortgage payments and cure their arrears; and therefore the trustee’s percentage fee may make chapter 13 relief too costly for debtors who badly need it.”
He continued, however, to proclaim:
“We cannot say, however, that Congress violated the Trustee’s (or anyone’s) due process rights when it adopted the ‘rough justice’ of a percentage fee system for chapter 13 cases.”
Kerns brought her challenge to the statutes following the Ninth Circuit’s filing of its opinion in Evans interpreting the statutes to require no compensation to the trustee if a plan is not confirmed. In five cases she handled, there was either a dismissal or a conversion of the case to a Chapter 7 bankruptcy under which there is no repayment plan; what assets exist are liquidated to pay off creditors.
The case is In Re: Chapter 13 Trustee’s Motions for Declaratory Relief Challenging the Constitutionality of 28 U.S.C. § 586(e) and 11 U.S.C. § 1326(b)(2), AZ-24-1012.
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