In re Christensen

• Decision Date: 14 December 2016
• Docket Number: Bankruptcy No. 15–29773, Bankruptcy No. 15–29783
• Citation: 561 B.R. 195
• Parties: In re: Brent David Christensen and Jo–Ann Hall Christensen, Debtors. In re: John Thomas Bird, Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

561 B.R. 195

In re: Brent David Christensen and Jo–Ann Hall Christensen, Debtors. In re: John Thomas Bird, Debtor.

Bankruptcy No. 15–29773

Bankruptcy No. 15–29783

United States Bankruptcy Court, D. Utah.

Filed December 14, 2016

Paul James Toscano, The Law Office of Paul Toscano, P.C., Salt Lake City, UT, for Debtors.

MEMORANDUM DECISION

R. KIMBALL MOSIER, U.S. Bankruptcy Judge

The matters before the Court are applications for compensation and reimbursement of expenses by the former chapter 7 trustee and his counsel. Because these two bankruptcy cases have the same procedural background and raise the same issue, the Court elects to deal with them together in this memorandum decision. Although applications for compensation are typically straightforward and without much controversy, the ones in these cases are different. The services the trustee and his counsel rendered, and for which they now seek compensation, were not necessary to the administration of the estates, were not reasonably likely to benefit the estates, and could work a substantial harm on the debtors if they were approved.

In each of these cases, the debtors' residences were encumbered by liens in amounts that exceeded the properties' values on the petition date and were properly exempted by the debtors. The primary encumbrances are mortgages, but the Internal Revenue Service (IRS) has substantial tax liens on both properties. At the behest of the IRS, the trustee agreed to market and sell the debtors' homes despite the fact that they were over-encumbered. In exchange, the IRS agreed to subordinate its lien insofar as necessary to provide $10,000 to each estate, while the trustee and his counsel would use 11 U.S.C. § 724(b) to have their fees and costs paid in full from the sale proceeds prior to the IRS. The debtors, however, would not receive any payment in satisfaction of their claimed homestead exemptions. Instead, they would lose their homes without any funds in return with which to acquire a new place to live, and proceeds from the sale of the homes would go to the trustee and his counsel instead of toward the IRS's claim.

These types of arrangements between trustees and the IRS have the potential to cause another devastating consequence for debtors. In cases where the IRS would not be paid in full from such sales, tax debts would remain. Some of these debts might be dischargeable, but where they are not, the burden of estate administration would shift from the estate to the debtors. In essence, by paying a trustee and trustee's counsel before the IRS, the value in the debtor's home that would ordinarily be available to pay tax debts would instead be used to pay the trustee's administrative expenses, leaving unpaid tax debts that are foisted onto that debtor's shoulders. If this bargain were permitted, trustees would sell debtors' homes, potentially force debtors to pay for it, and give nothing to debtors from the sales. This is hardly the fresh start that the Code contemplates. For the reasons that follow, the Court will deny the applications for compensation in their entirety.

I. JURISDICTION

The jurisdiction of this Court is properly invoked under 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (O), and this Court may enter a final order. Venue is proper under the provisions of 28 U.S.C. §§ 1408 and 1409.

II. BACKGROUND

Brent and Jo–Ann Christensen (Christensens) filed a voluntary chapter 7 petition on October 19, 2015. On the same day, John Thomas Bird also filed a voluntary chapter 7 petition.¹ Gary E. Jubber (Trustee) was appointed as trustee in each case. The Court authorized the employment of Fabian VanCott, a law firm where the Trustee is employed, as the Trustee's general counsel on December 28, 2015.

In their schedule of assets, the Christensens listed a home with a value of $351,000.00. As of the petition date, the Christensens' home was encumbered by a deed of trust with an outstanding balance of approximately $300,000.00, a tax lien in favor of the IRS in the principal amount of $115,531.85,² and a tax lien in favor of the Utah State Tax Commission (USTC) in the principal amount of $1,962.99.³ The Christensens claimed a homestead exemption of $51,000 in their home.

In his schedule of assets, Mr. Bird listed a home with a value of $240,400.00. As of the petition date, Mr. Bird's home was encumbered by a deed of trust with an outstanding balance of approximately $144,275.17,⁴ a second deed of trust with an outstanding balance of $20,550.05,⁵ a tax lien in favor of the IRS in the principal amount of $147,661.33,⁶ and judgment liens in the total amount of $5,383.93.⁷ Mr. Bird claimed a homestead exemption of $30,000 in his home.

The Trustee objected to the Debtors' claimed homestead exemptions, asserting that the exemptions were "ephemeral" because there was no equity in the Debtors' homes (the homes are collectively referred to as the "Homes" or "Properties") to which any exemption might attach. As a consequence, the Trustee concluded that the "Debtors are not entitled to claim a homestead exemption."⁸ The Trustee did not schedule hearings on his objections to the Debtors' exemptions, but his intentions soon became apparent. About a month after filing the objections to exemptions, the Trustee filed applications to authorize the employment of a real estate agent for the purpose of selling the Homes,⁹ to which the Debtors objected. Although the Trustee had based his objections to exemptions on the Debtors' lack of equity, because he also asserted that there may be equity in the Homes, the Court approved the applications to employ.

The Debtors responded to the Trustee's objections to their exemptions and filed motions to abandon the Homes, and set those matters for hearing. On March 1, 2016, the Court entered orders overruling the Trustee's objections to the Debtors' homestead exemptions and allowing the claimed exemptions. The Trustee appealed this Court's orders allowing the exemptions.¹⁰

Next, the Trustee filed motions to approve stipulations he had entered into with the IRS concerning the sale of the Homes (the Stipulations). An essential term of the Stipulations provided that:

[T]he Trustee shall be entitled to recover and shall recover from the proceeds of any sale of the Property the sum of $10,000 (the "Carve Out" )¹¹ as unencumbered funds for the benefit of the bankruptcy estate to be distributed in accordance with the priorities of the Bankruptcy Code.¹²

The Stipulations also provided that:

The IRS hereby subordinates any lien or claim it may have to the Property and the proceeds from the sale of the Property to the extent of the Carve–Out and hereby waives and releases any and all claims it may have to the Carve–Out other than those claims it may have as a general unsecured creditor of the estate.¹³

The Debtors filed objections to the Stipulations. Among other things, the Debtors argued that the Stipulations and a sale of the Properties would dispossess them of their Homes while leaving nothing for their homestead exemptions, thereby making it unlikely that they could rent or purchase another residence.

Having found potential buyers for the Homes, the Trustee filed motions under 11 U.S.C. § 363(b) and (f) to sell the Homes (Sale Motions). The Sale Motions expressly provided that the real estate purchase contracts entered into with the buyers were conditioned on the Court's approval of the Stipulations. The Trustee proposed to sell the Christensens' home for $425,000.00 and Mr. Bird's home for $322,000.00. The Sale Motions stated that the proceeds of each sale would be used first to pay the 6% realtor commission, then the outstanding balance owed to consensual mortgage creditors, with the balance of the sale proceeds to be held by the Trustee pending further order of the Court. The Debtors objected to the Sale Motions on basically the same grounds as their objections to the Stipulations.

As it turned out, the proposed sales resulted in equity in the Homes. A basic calculation of the equity in the Homes is as follows:

                Christensen
                       Purchase Price:                               $425,000.00
                       Total Liens:                                  $417,494.84
                              1st Mortgage:          $300,000.00
                              IRS Lien:              $115,531.85
                              USTC:                  $  1,962.99
                       Value in excess of liens:                     $7,505.16
                Bird
                       Purchase Price                                $322,000.00
                       Total Liens:                                  $317,870.48
                              1st Mortgage:          $144,275.17
                              2nd Mortgage           $20,550.05
                              IRS Lien:              $147,661.33
                              Judgments              $ 5,383.9314
                       Value in excess of liens:                     $4,129.52
                

[Editor's Note: The preceding image contains the reference for footnote¹⁴ ]

Before the Court could rule on the outstanding motions and objections, the Debtors converted their cases to cases under chapter 13 of the Bankruptcy Code (Code). They also amended their bankruptcy schedules to remove their claims for homestead exemptions. After conversion the Trustee and Fabian VanCott filed fee applications in the Debtors' cases requesting that their fees be allowed as administrative expense claims under 11 U.S.C. § 503(b).¹⁵

In the Christensens' case, the Trustee seeks fees of $2,765.00, and Fabian VanCott seeks fees of $28,249.65 and costs of $748.98.¹⁶ In Mr. Bird's case, the Trustee seeks fees of $3,634.00, and Fabian VanCott seeks fees of $30,450.60 and costs of $660.37.¹⁷ The Debtors filed objections to these fee applications.

III. DISCUSSION

A chapter 13 plan "shall provide for the full payment, ... of all claims entitled to priority under section 507 of this title."¹⁸ Administrative expense claims allowed under § 503(b), which would include compensation and reimbursement awarded to trustees and their counsel under § 330(a),¹⁹ are entitled to...