In re GERALD ANTHONY SMITH v. Gerald Anthony Smith

*The Honorable Curtis L. Collier, United States District Judge for the Eastern District
of Tennessee, sitting by designation.
No. 03-6248
File Name: 05a0762n.06
Filed: August 30, 2005
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
In re GERALD ANTHONY SMITH, Debtor.
J. BAXTER SCHILLING, Trustee, et al.,
Appellants,
v.
GERALD ANTHONY SMITH, Debtor;
RICHARD CLIPPARD, United States Trustee,
Appellees.
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ON APPEAL FROM THE
UNITED STATES DISTRICT
COURT FOR THE WESTERN
DISTRICT OF KENTUCKY
Before: NELSON and BATCHELDER, Circuit Judges, and COLLIER, District
Judge.*
DAVID A. NELSON, Circuit Judge. This is an appeal from an order affirming a
bankruptcy court’s denial of compensation to the attorney for a trustee in bankruptcy. We
are not persuaded that the bankruptcy court committed clear error in finding, as it did, that
the attorney took certain actions out of self-interest, breaching the duties he owed to the
parties who had an interest in the bankruptcy estate. Nor do we think the court abused its
discretion by denying compensation to the attorney. The challenged order will be affirmed.

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I
The debtor, Gerald Anthony Smith, filed a voluntary petition under Chapter 7 of the
Bankruptcy Code in February of 2001. Mr. Smith’s petition listed assets totaling $786,195,
of which $710,545 was claimed to be exempt. The listed liabilities came to a total of
$175,057; there were three secured claims aggregating $92,929 and eight unsecured
nonpriority claims aggregating $82,128. The petition stated that Mr. Smith did not anticipate
that there would be any funds available for distribution to unsecured creditors after the
exclusion of exempt property and the payment of administrative expenses.
This was not Mr. Smith’s first bankruptcy filing. He filed a petition under Chapter
13 of the Code in 1999. The Chapter 13 petition, which listed the same eight unsecured
claims later listed in the Chapter 7 petition, was ultimately dismissed.
J. Baxter Schilling was appointed bankruptcy trustee in the Chapter 7 case. Mr.
Schilling informed the bankruptcy court that the estate had assets to be distributed to
unsecured creditors, and the court issued a “Notice of Last Day to File Claims” to all
creditors named in the petition. The notice indicated that claims were to be filed by June 11,
2001. Only one unsecured claim, for about $25,000, was filed by that deadline.
With the bankruptcy court’s approval, Mr. Schilling engaged himself as counsel for
the trustee. Wearing his counsel’s hat, Mr. Schilling conducted discovery which indicated
that Mr. Smith had attempted to conceal certain assets. On the strength of this information
Mr. Schilling filed a complaint objecting to Mr. Smith’s discharge.

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The objection was filed in October of 2001. Mr. Schilling subsequently moved for
payment of attorney fees and expenses through November 8, 2001. These fees and expenses
had been incurred primarily in the taking of discovery and the preparation of motions seeking
inclusion of various assets in the bankruptcy estate. Mr. Smith objected to the fee motion on
the ground that the amount requested (approximately $17,000) appeared excessive. The
bankruptcy court awarded Mr. Schilling the bulk of the requested fees and all of the
requested expenses — about $15,000 in total.
Through additional discovery Mr. Schilling determined that Mr. Smith had
fraudulently conveyed a mortgage to his brother, Robert W. Smith. Schilling commenced
an adversary proceeding against the brother to have the conveyance set aside.
In March of 2002 Mr. Schilling, Gerald Smith, and Robert Smith agreed to settle all
of the trustee’s claims against the Smiths. The settlement agreement, which was drafted by
Mr. Schilling, required Gerald Smith to pay $50,000 into the bankruptcy estate as non-
exempt assets. The estate had already collected approximately $22,500 from Mr. Smith, and
the parties agreed that those funds were also non-exempt assets, to be used for payment of
administrative expenses and unsecured claims.
The settlement agreement obligated the Smiths not to object to the allowance of any
claim filed against the estate. In addition, the agreement required Mr. Smith to support an
application by Mr. Schilling for “final compensation,” including the fees that had been
disallowed following Schilling’s initial motion for attorney fees. This last provision was not

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negotiated between the parties; Mr. Schilling inserted it into the settlement agreement
without discussing the matter with Mr. Smith or his lawyer. The bankruptcy court approved
the settlement agreement in April of 2002.
Mr. Schilling filed a second and final motion for payment of attorney fees and
expenses in May of 2002. Schilling sought about $8600 in new fees, $1700 in fees
disallowed initially, and expenses of about $135. The motion emphasized that through Mr.
Schilling’s efforts the estate had recovered over $72,500 from Mr. Smith and that “the
distribution to creditors, after payment of all costs of administration, will be 100% of the
allowed timely filed claims, and a substantial percentage to all tardily filed claims.”
There were no tardily filed claims at that time. On June 10, 2002, however, Mr.
Schilling filed claims on behalf of the seven unsecured creditors that had been named in the
petition but had not filed claims.
There were no objections to the application for attorney fees. Before ruling on the
application, however, the bankruptcy court ordered the United States Trustee to investigate
and report on the propriety of the provision in the settlement agreement that required Mr.
Smith to support the fee request.
The U.S. Trustee reported that “it is not unheard of for Chapter 7 trustee compensation
to be included in a settlement agreement.” But the Trustee also reported that Mr. Schilling
had obtained more money from Mr. Smith than was necessary to pay the timely filed claims.
The seven claims filed by Mr. Schilling in June of 2002, the Trustee stated, were unallowable

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1Under 11 U.S.C. § 326(a), a trustee’s maximum compensation is keyed to the amount
of money disbursed to parties in interest other than the debtor.
under Fed. R. Bankr. P. 3004. The Trustee concluded that Schilling had filed unallowable
claims in order to justify his attorney fees and to maximize his trustee commission.1
Mr. Schilling objected to the U.S. Trustee’s report, arguing that he had acted properly
in filing the tardy claims. Under 11 U.S.C. § 726(a)(3), Mr. Schilling pointed out, unsecured
creditors may receive a distribution even if their claims are untimely. Schilling also said his
review of the file from Mr. Smith’s Chapter 13 case revealed that four of the unsecured
claims listed in the Chapter 7 petition had been assigned to other entities before that petition
was filed. The assignees were not named in Chapter 7 petition and had not received notice
of the deadline for filing claims. Finally, Mr. Schilling noted that two of the unsecured
creditors named in the Chapter 7 petition had filed claims in the Chapter 13 proceeding, and
he expressed uncertainty as to whether those claims might be allowable in the Chapter 7 case.
Schilling emphasized that the settlement agreement, which designated the $72,500 paid by
Mr. Smith as non-exempt assets of the estate, required him to distribute those assets to
unsecured creditors.
On September 17, 2002, the bankruptcy court awarded Mr. Schilling less than one-
fifth of the amount he requested in his May 2002 fee application. Finding that Schilling’s
hourly rates and the time he had spent on certain tasks were excessive, the court reduced the
“lodestar” fee amount from $8599.50 to $4095. The court then reduced that amount by 50

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percent to reflect its finding that Schilling had “acted in his own self-interest” in two ways:
(1) by drafting the settlement agreement so as to “silence objections to his actions in
execution of his duties as Trustee . . . , to garner support for his counsel fees,” and to
“eliminate[] the Debtor as a potential beneficiary of the estate,” and (2) by filing tardy claims
“in breach of his duty to the estate and the Debtor as a party in interest.” The court did not
reconsider the fees it had previously disallowed. It awarded all of the expenses sought by
Mr. Schilling.
The U.S. Trustee filed a motion to alter or amend the judgment on the ground that the
bankruptcy court’s findings required denial of all compensation to Mr. Schilling. On
December 6, 2002, the bankruptcy court granted the U.S. Trustee’s motion, denied all
requested fees, and ordered Mr. Schilling to disgorge the fees he had been awarded
previously.
The district court affirmed the bankruptcy court’s orders of September 17 and
December 6, 2002, and Mr. Schilling filed a timely appeal.
II
This court reviews a bankruptcy court’s compensation orders for abuse of discretion.
See In re Federated Department Stores, Inc., 44 F.3d 1310, 1315 (6th Cir. 1995). We must
accept the bankruptcy court’s factual findings unless they are clearly erroneous, but the
court’s legal conclusions are not entitled to deference. See id.

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A
Under 11 U.S.C. § 327(a), a trustee in bankruptcy may employ an attorney “that
do[es] not hold or represent an interest adverse to the estate, and that [is a] disinterested
person[], to represent or assist the trustee in carrying out the trustee’s duties.” The trustee
may employ himself as the attorney if such an arrangement “is in the best interest of the
estate.” 11 U.S.C. § 327(d).
Section 330(a)(1) provides for “reasonable compensation” of a trustee’s attorney “for
actual, necessary services.” The bankruptcy court may award less than what the attorney has
requested, however, and the court may deny compensation altogether if the attorney “is not
a disinterested person, or represents or holds an interest adverse to the interest of the estate
. . . .” Id. §§ 330(a)(2), 328(c).
“Disinterestedness,” in this context, must be analyzed “against the backdrop of the
equitable duties that apply to positions of trust.” In re Big Rivers Electric Corp., 355 F.3d
415, 431 (6th Cir. 2004). Accordingly, persons required by the Bankruptcy Code to be
disinterested “must satisfy the unbending standards of fiduciary duty” to which trustees are
held. Id. The statutory provision for “reasonable compensation” likewise “suggests that
[trustees’ attorneys] must remain loyal to all relevant parties in the bankruptcy and must act
as fiduciaries in doing so.” Id. at 432.

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2In reliance on this provision of the settlement agreement, Schilling’s May 2002 fee
motion suggested that the previously disallowed fees should be awarded simply because
Smith no longer objected to them.
An attorney for a bankruptcy trustee must thus eschew “all opportunities to advance
self-interest,” and he owes a fiduciary duty of loyalty to those parties with an interest in the
bankruptcy estate. Id. at 433-34 (internal quotation marks omitted). If the attorney fails in
these duties, the bankruptcy court must deny all compensation unless “peculiar and unique
circumstances” are present. Id. at 436 (internal quotation marks omitted).
B
We are not persuaded that the bankruptcy court committed clear error in its finding
that Mr. Schilling acted in his own interest, rather than in the interest of the bankruptcy
estate. The insertion of the provision in the settlement agreement under which Mr. Smith
was required to support Mr. Schilling’s request for attorney fees had no purpose, it seems to
us, other than to minimize (or attempt to minimize) judicial scrutiny of that request.2
Insulation of the trustee’s attorney’s fee motion from scrutiny is obviously not to the benefit
of parties with an interest in the bankruptcy estate.
At first blush, the provision of the settlement agreement prohibiting the Smiths from
objecting to the allowance of any claim does not seem to promote Mr. Schilling’s self-
interest. The same can be said of the provision requiring the estate’s assets to be used “to pay
administrative [expenses] and unsecured claims.” But in the light of later events — i.e.,

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3Mr. Schilling argues that the claims were not late because the “Notice of Last Day
to File Claims” was without legal effect. We are not persuaded that the notice was a nullity.
The notice misstated the law by saying that tardy claims “will be barred from receiving any
distribution of assets.” (As Mr. Schilling has pointed out, tardy claims may be paid after
payment of all timely claims. See 11 U.S.C. § 726(a)(3).) But we can conceive of no reason
why this misstatement should invalidate the notice or the deadline that it established.
Schilling’s filing of unallowable claims, a matter to which we shall turn next — these
provisions can reasonably be viewed as part of an effort to justify higher fees. Under 11
U.S.C. § 726(a), any surplus that remains after the payment of creditors’ claims must be
distributed to the debtor. Ordinarily, therefore, a debtor will have an incentive to object to
unallowable claims. The settlement agreement effectively eliminates that incentive, both by
prohibiting objections to claims and by barring (or purporting to bar) any distribution to Mr.
Smith. As a result of these provisions, Schilling could file tardy claims — thereby bolstering
his request for fees — with the assurance that Mr. Smith would not interfere.
Turning to Mr. Schilling’s filing of claims, we do not think the bankruptcy court
committed clear error in finding that Schilling acted out of self-interest. These claims were
eleven months late. See Rule 3004, Fed. R. Bankr. P. (allowing bankruptcy trustees to file
claims “within 30 days after expiration of the time” for creditors to file).3 And claims filed
late by a trustee — even claims filed on behalf of creditors without notice — are not eligible
for distributions from the bankruptcy estate. See 11 U.S.C. §§ 726(a)(2)(C) and (a)(3)
(allowing payment of tardy claims that are filed by a creditor under § 501(a)); In re Drew,
256 B.R. 799, 804-05 (10th Cir. BAP 2001) (“No provision is made for the payment of claims

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4Mr. Schilling objects that he filed the tardy claims in his capacity as trustee, and that
the compensation for his legal services should not be affected by that action. We rejected
a similar objection in Big Rivers Electric:
“What is true of Schilling is also true of ‘The Law Firm of J. Baxter Schilling,’
the sole member of which is J. Baxter Schilling. . . . The district court did not
abuse its discretion in concluding that, for these purposes, Schilling and his
counsel (Schilling) were one and the same . . . .” Big Rivers Electric, 355 F.3d
at 437.
filed tardily [by a trustee] under § 501(c).”). It can fairly be inferred, we believe, that the
purpose of Mr. Schilling’s filings was not to maximize distributions to unsecured creditors,
but to justify Schilling’s request for fees — the total of which exceeded the amount of the
single timely unsecured claim.4
In short, the record permits a finding that Mr. Schilling filed unallowable claims to
bolster his fee request and used the settlement agreement to ensure Mr. Smith’s acquiescence
in that course of conduct. Regardless of whether we would make such a finding ourselves,
we cannot say that the bankruptcy court was precluded from doing so.

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C
Mr. Schilling’s actions, as found by the bankruptcy court, violated his fiduciary duties.
Instead of displaying “single-minded devotion to the interests of those on whose behalf [he]
act[ed],” Schilling embraced “opportunities to advance self-interest.” Big Rivers Electric,
355 F.3d at 434 (internal quotation marks omitted). Absent “peculiar and unique
circumstances,” therefore, the bankruptcy court was required to “deny all compensation.”
Id. at 436 (internal quotation marks omitted). We are aware of no unusual circumstances
suggesting that the denial of compensation in this case was an abuse of discretion.
AFFIRMED.

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