Connolly v. Morreale (In re Morreale)

• Decision Date: 15 May 2020
• Docket Number: No. 19-1072,19-1072
• Citation: 959 F.3d 1002
• Parties: IN RE: Samuel Jesse Christian MORREALE, Debtor. Tom H. Connolly, Appellant, v. Samuel Jesse Christian Morreale, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

959 F.3d 1002

IN RE: Samuel Jesse Christian MORREALE, Debtor.Tom H. Connolly, Appellant,

v.Samuel Jesse Christian Morreale, Appellee.

No. 19-1072

United States Court of Appeals, Tenth Circuit.

May 15, 2020

Michael J. Pankow of Brownstein Hyatt Farber Schreck, LLP, Denver, Colorado, for Appellant.

Jordan D. Factor of Allen Vellone Wolf Helfrich & Factor, P.C., Denver, Colorado (Patrick D. Vellone, Matthew M. Wolf, Vandana S. Koelsch, and Brenton L. Gragg with him on the brief), for Appellee.

Before LUCERO, PHILLIPS, and MORITZ, Circuit Judges.

MORITZ, Circuit Judge.

The Bankruptcy Code permits a bankruptcy court to pay a Chapter 7 trustee using a formula based "upon all moneys disbursed or turned over in the case by the trustee to parties in interest." 11 U.S.C. § 326(a). Appellant Tom Connolly, the trustee for the Chapter 7 case of Appellee Samuel Morreale, seeks compensation based upon moneys disbursed not only in Morreale’s Chapter 7 case, but also upon moneys disbursed in a related Chapter 11 case. The bankruptcy court and the Tenth Circuit’s bankruptcy appellate panel (the BAP) both rejected Connolly’s request, concluding that the language of § 326(a) did not support it. For the reasons discussed below, we agree that the plain language of § 326(a) permits awarding compensation to a Chapter 7 trustee based only on moneys disbursed in the case in which that trustee serves, and not on moneys disbursed in a related Chapter 11 case in which the trustee does not serve. Accordingly, we affirm the bankruptcy court’s order.

Background

Morreale owned the sole membership interest in Morreale Hotels, LLC (Hotels LLC), which in turn owned two properties in Denver, Colorado. Morreale also acted as Hotels LLC’s manager and personally guaranteed certain loans that Hotels LLC obtained on the properties it owned. In 2012, Hotels LLC filed a petition for Chapter 11 bankruptcy protection (the Chapter 11 Case) and pursued reorganization. In 2013, Morreale filed his own Chapter 11 bankruptcy petition, which the bankruptcy court later converted to Chapter 7 (the Chapter 7 Case). The U.S. Trustee appointed Connolly as the Chapter 7 trustee in the Chapter 7 Case.

As trustee, Connolly assumed Morreale’s membership interest in Hotels LLC. Exercising that interest, Connolly appointed himself the new manager of Hotels LLC, thereby replacing Morreale. The bankruptcy court approved this replacement. Connolly abandoned reorganization of Hotels LLC and decided instead to liquidate Hotels LLC’s properties.

Initially, Connolly anticipated that claims in the Chapter 7 Case would not be paid in full. But as the proceedings progressed, the market for commercial real estate in Denver "improved." App. vol. 3, 631. Hotels LLC’s two properties ultimately sold for far higher prices than their estimated value just a few years earlier.

As a result, the claims in the Chapter 11 Case were paid in full, Morreale’s personal guaranties on the secured loans were satisfied, surplus funds in the Chapter 11 Case became part of the estate in the Chapter 7 Case (by virtue of Morreale’s membership interest in Hotels LLC), and claims in the Chapter 7 Case were also likely to be paid in full. "By all objective measures, [the Chapter 11 Case] was a resounding success," according to the bankruptcy court. Id. at 632.

Connolly sought payment for his work as the manager of Hotels LLC in two ways. He first asked to be paid as part of the reorganization plan in the Chapter 11 Case. He withdrew that request after Morreale and the U.S. Trustee objected, and he ultimately received no payment in the Chapter 11 Case. Second, Connolly filed an interim compensation application in the Chapter 7 Case. In that application, he sought $260,000, an amount based on the moneys disbursed in both the Chapter 7 Case and to creditors who also held claims in the Chapter 11 Case.

The bankruptcy court granted Connolly’s request in part. Specifically, it approved about $81,660 in compensation, an amount based only on moneys disbursed in the Chapter 7 Case. The bankruptcy court rejected the remainder of Connolly’s request, concluding that the unambiguous language of "the statute simpl[y] does not allow the [bankruptcy c]ourt to approve additional compensation for the Chapter 7 [t]rustee on the basis of disbursements that were made to creditors in a separate Chapter 11 bankruptcy case." App. vol. 3, 639. The BAP agreed, finding that the plain language of the statute "means what it says[:] A Chapter 7 trustee’s § 326(a) compensation is limited to that trustee’s services in the case in which he or she was appointed to serve and must be calculated solely upon the moneys the trustee disbursed in that case." Connolly v. Office of the U.S. Tr. (In re Morreale) , 595 B.R. 409, 419 (10th Cir. B.A.P. 2019).

Connolly appeals. "[W]e review the bankruptcy court’s interpretation of [a] statute de novo." First Nat’l Bank of Durango v. Woods (In re Woods) , 743 F.3d 689, 693 (10th Cir. 2014) ; see also Mathai v. Warren (In re Warren) , 512 F.3d 1241, 1248 (10th Cir. 2008) (noting that we review decision of bankruptcy court, not decision of BAP, "whose rulings are not entitled to any deference (although they certainly may be persuasive)").

Analysis

In a Chapter 7 bankruptcy proceeding, a bankruptcy court may award a trustee "reasonable compensation" for the trustee’s services. 11 U.S.C. § 330(a)(1)(A).¹ A Chapter 7 trustee’s "reasonable compensation" is a "commission" determined by a statutory formula. § 330(a)(7). The formula caps the trustee’s compensation:

[T]he court may allow reasonable compensation under [§] 330 of this title of the trustee for the trustee’s services, payable after the trustee renders such services, not to exceed 25[%] on the first $5,000 or less, 10[%] on any amount in excess of $5,000 but not in excess of $50,000, 5[%] on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3[%] of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest , excluding the debtor, but including holders of secured claims.

§ 326(a) (emphasis added). In other words, compensation for a Chapter 7 trustee is pinned to certain percentages of what we will call the § 326(a) "base"—the "moneys disbursed or turned over in the case by the trustee to parties in interest."² Id.

Applying this formula to Connolly, the bankruptcy court first compensated Connolly in the amount of $53,250 based on the first $1 million in "moneys" he "disbursed or turned over," id. : 25% of the first $5,000 he disbursed, or $1,250; 10% of the next $45,000, or $4,500; and 5% of the next $950,000, or $47,500. The bankruptcy court further awarded an additional 3% of moneys over $1 million that Connolly disbursed. See id. And because the bankruptcy court considered only the $1.947 million in moneys disbursed in the Chapter 7 Case, that additional 3% came to about $28,410 (3% of $947,000), for a total compensation of about $81,660.

Of course, Connolly had asked to be compensated based on a combined $10.379 million: the $1.947 million disbursed in the Chapter 7 Case and the $8.432 million disbursed in the Chapter 11 Case. But the bankruptcy court found that § 326(a) precluded Connolly from including moneys disbursed in the Chapter 11 Case in the § 326(a) base for the Chapter 7 Case. Relying on dictionary definitions and other provisions of the Bankruptcy Code, the bankruptcy court found that "the plain and ordinary meaning of the phrase ‘in the case’ under [§] 326(a) and as applied in this dispute is simple and clear. ‘In the case’ means in this case: In re Morreale , Case No. 13-27310 (Bankr. D. Colo.)," that is, the Chapter 7 Case. App. vol. 3, 636. The bankruptcy court also found that none of the cases Connolly cited supported his argument to the contrary.

The BAP affirmed the bankruptcy court’s decision. Relying on principles of grammar and the context of the Bankruptcy Code, the BAP found that "as trustee in the Chapter 7 [C]ase, Connolly’s compensation is based upon the amounts he disbursed or turned over in the Chapter 7 [C]ase." In re Morreale , 595 B.R. at 417. Further, the BAP noted that "[n]othing in § 326(a) or § 330(a)(7) speaks to additionally compensating a Chapter 7 trustee who is simultaneously acting as a manager of a separate or related Chapter 11 debtor under a court order." Id. Specifically, because Connolly was the manager of Hotels LLC and neither a trustee nor a professional person appointed under 11 U.S.C. § 327 in the Chapter 11 Case, his work in the Chapter 11 Case was "voluntary" and could not form the basis of his § 326(a) compensation in the Chapter 7 Case. Id. at 417–18.

On appeal, Connolly challenges the bankruptcy court’s and the BAP’s interpretation of § 326(a) on three principal grounds. First, he contends that the word "in," which appears in § 326(a) ’s description of moneys disbursed "in the case," permits a bankruptcy court to include in the § 326(a) base moneys that "relate to" or "[a]rise from" the trustee’s performance of his Chapter 7 duties. Aplt. Br. 25. Second, he argues that the bankruptcy court and the BAP misconstrued caselaw that supports awarding the compensation he seeks here. Third, he asserts that excluding the $8.432 million from the § 326(a) base will create a conflict between § 326(a) and a trustee’s 11 U.S.C. § 704(a)(1) duty to maximize the value of the bankruptcy estate. We consider each argument in turn.

We begin our interpretation of § 326(a) of the Bankruptcy Code as we do any other statute: by considering its plain language in the context of the overall Code. See In re Woods , 743 F.3d at 693–94. If the Code does not define a word, we give that word its "ordinary, contemporary, common meaning." Id. at 698 (quoting Sandifer v. U.S. Steel Corp. , 571 U.S. 220, 227, 134 S.Ct. 870, 187 L.Ed.2d 729 (2014) ).

Section 326(a) provides that a Chapter 7 trustee may receive...