Medina

Background

Jose Medina appealed an order of the United States Bankruptcy Court for the Northern District of California denying his Motion for Disgorgement of Excess Trustee Fees from Estate Property Sale. The motion concerned fees withheld by Devin Derham-Burk, the Chapter 13 trustee, after the sale of Medina’s residential property. Medina claimed that the trustee breached her fiduciary duty by calculating her statutory fee from an earlier proof of claim that listed a secured debt of $241,437.23.

The earlier proof of claim, Claim #10-1, was filed before the sale and included loan documents, a promissory note endorsement, a recorded deed of trust, and a recorded assignment of deed of trust. The trustee found the documents internally consistent and did not object to the claim. Four days before the property sale, Medina’s counsel told the trustee that the debt’s maturity date had been extended and that an amended proof of claim would be filed. The sale closed on April 11, 2023, and the trustee calculated a ten-percent statutory fee of $24,143.72 using Claim #10-1.

Three days after the sale, the creditors’ counsel filed Claim #10-2, listing the amount needed to cure the default as $10,722.21. The trustee would have withheld $1,072.22 if she had used that amount. Medina sought to recover the $23,071.50 difference. The bankruptcy court denied the motion and later dismissed Medina’s bankruptcy case for lack of prosecution because he had not filed a Chapter 13 plan.

Issues and Arguments

On appeal, Medina argued that the trustee improperly retained a larger fee, failed to investigate the later proof of claim, and acted to protect a financial windfall. He also argued that the trustee’s failure to object to Claim #10-2 showed that she knew Claim #10-2 was valid and had acted improperly by relying on Claim #10-1.

The district court reviewed factual findings for clear error and legal conclusions and mixed legal-and-factual questions without deference. The bankruptcy court had relied on two factual findings: only Claim #10-1 was on file when the trustee distributed the sale proceeds, and the trustee did not act outside her usual business practices when making the distribution.

Court’s Analysis

The district court concluded that neither factual finding was clearly erroneous. Claim #10-2 was filed three days after the distribution. The court also found that the trustee had investigated Claim #10-2 and reasonably concluded that it was insufficiently supported and legally deficient. Unlike Claim #10-1, Claim #10-2 contained only a one-page itemized document and did not include a written agreement showing that the loan’s balloon-payment maturity date had been extended.

The court stated that California law required an extension of the maturity date of a balloon payment to be in writing. It also noted that the bankruptcy rules require a copy of a writing underlying a claim to be filed with the proof of claim. Medina’s counsel referred to a document called a “Maturity Notice,” but no copy of that document had been provided to either court. The district court therefore concluded that the trustee was justified in treating Claim #10-1 as the controlling claim and had no need to object to Claim #10-2 while Medina could have objected to Claim #10-1 but did not.

The court rejected the argument that the trustee personally benefited from retaining the larger fee. It explained that the fee is set by statute, cannot exceed ten percent of the sale receipt, is automatically calculated and deposited into the trustee’s office operating account, and does not determine the compensation of the individual appointed to serve as trustee in a particular case. The court also relied on the bankruptcy court’s finding that the trustee followed the normal statutory process for distributing the sale proceeds.

Disposition

The district court affirmed the bankruptcy court’s denial of Medina’s Motion to Disgorge and found no basis in the record to hold that the trustee breached her fiduciary duty.

The court separately discussed a prior related proceeding holding that when a Chapter 13 plan is never confirmed, the trustee must return fees collected before dismissal. The district court did not decide whether that rule applied to Medina’s fees because the bankruptcy court denied the Motion to Disgorge before dismissing Medina’s case. The court stated that Medina should seek return of those fees in the bankruptcy court in the first instance.