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A bankruptcy trustee who is removed cannot retroactively receive administrative expenses, the Fourth Circuit has ruled, blocking former bankruptcy trustee Donald King from filing an application for professional fees after being relieved of his duties.

Split Decision on Trustee Fees

In a split opinion Friday, a three-judge panel on the Fourth Circuit reversed a district court decision that allowed former bankruptcy trustee Donald King to apply for legal fees for his counsel after his duties were terminated when the case was converted to a Chapter 13. The majority, composed of U.S. Circuit Judges A. Marvin Quattlebaum and Julius N. Richardson, determined that only a current trustee can submit fee applications.

Conversely, U.S. Circuit Judge J. Harvie Wilkinson dissented, labeling the majority's decision a "rigid reading" that "firmly closes off the path to fair compensation for attorney work already performed simply because the trustee who oversaw that work is no longer the active trustee."

Donald King bankruptcy Fees : Origins of the Dispute

The case originates from a Chapter 7 liquidation filing by Byron David in 2018, with King appointed as the Chapter 7 trustee. King sought court approval to retain Odin Feldman & Pittleman PC, which was granted. In 2019, David applied to convert his case to Chapter 11, and King was reappointed as Chapter 11 trustee but did not seek permission to retain the same firm for the Chapter 11 representation.

"Naturally, then, the bankruptcy court never approved the law firm's retention," the majority wrote. "Even so, the law firm provided legal work for King as the Chapter 11 Trustee."

By May 2020, David's case was converted to Chapter 13, with King not continuing as trustee. The Chapter 13 conversion order allowed King, as Chapter 11 trustee, to apply for reimbursement for Chapter 11 administrative expenses. King then sought $43,598 in legal fees, predominantly for Chapter 11 work.

Legal and Equity Arguments

David objected, stating the firm was only approved for Chapter 7 work. The bankruptcy court ruled that while the firm wasn't properly retained for Chapter 11, King could apply retroactively. After rounds of legal exchanges, King initially succeeded in the Virginia district court.

The Fourth Circuit panel, however, overturned this, arguing that the bankruptcy code's language about trustees refers to "the" trustee, implying only one current trustee can retain counsel and apply for fees. The majority found King's cited precedents unavailing as they involved current trustees applying retroactively.

The majority acknowledged that King's attorneys legitimately worked and deserved compensation, but the law did not permit retroactive applications from former trustees. "The decision seems harsh to the law firm and produces an arguable windfall for the estate," the majority wrote, but noted King's application was "out of time."

Donald King bankruptcy Fees : Dissenting Opinion

Judge Wilkinson's dissent emphasized the majority's excessive focus on the trustee's status at the time of application rather than the work performed. He argued that the conversion to Chapter 13 didn't erase the Chapter 11 case and that King remained responsible for wrapping it up. Wilkinson warned the decision undermined bankruptcy courts' discretion to grant or deny fee applications based on merit, favoring a strict rule instead.

"If the application is in some way undeserving, the bankruptcy court can exercise its equitable discretion to deny it," Wilkinson wrote. "But a bright-line rule is both textually and practically untenable."

Donald King bankruptcy Fees : Conclusion

The Fourth Circuit's ruling underscores the strict interpretation of the bankruptcy code concerning trustee applications for fees, affecting how former trustees like Donald King can seek compensation.