Henderson v. U.S. Trustee (In re VCR I, L.L.C.)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
1 day 4 hours ago

Case Type:

Business

Case Status:

Affirmed

Citation:

25-60204 (5th Circuit, Mar 27,2026) Not Published

Tag(s):

Ruling:

A Fifth Circuit majority upheld an order stating a Chapter 7 Trustee could not include surplus funds paid to a debtor's equity security holder in calculating a commission under 11 U.S.C. § 326(a). A surplus is payable only "to the debtor" under 11 U.S.C. § 726(a)(6). Here, the equity holder served as a stand-in for the dissolved debtor and a trustee may not receive a commission on a surplus distribution to a debtor. As the equity holder stood in the debtor's shoes, Trustee could not receive a commission on the disbursement. The dissent would have allowed Trustee a commission on the payment.

Procedural context:

After Appellant/Chapter 7 Trustee filed a final report seeking seeking $269,993.75 in total compensation based on disbursements totaling $8,224,791.60, Appellee U.S. Trustee (among others) filed an objection to the commission arguing, in part, that the distribution to the equity security holder could not be included in computing Appellant's statutory commission. In affirming the ruling upholding Appellee's objection, the Fifth Circuit explained the standard of review as follows: “'We review the decision of a district court, sitting in its appellate capacity, by applying the same standards of review to the bankruptcy court’s finding of fact and conclusions of law as applied by the district court.' . . . Conclusions of law are reviewed de novo while findings of fact are reviewed for clear error.” The short dissent took issue with the majority's interpretation of the Code's plain language: "I agree with the majority opinion that [the equity security holder] is NOT the debtor and that the compensation can be made based on all payments except to the debtor. Thus, because 11 U.S.C. § 326(a) very clearly says THE debtor (emphasis added), the denial of being able to allow [Appellant] to receive a percentage from what was paid to [the equity security holder] is wrong."

Facts:

Debtor VCR I, L.L.C. filed a chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Mississippi. The case converted to chapter 7 and the court appointed Appellant/Chapter 7 Trustee Derek Henderson as the case trustee. The Rai family owned and operated Debtor's business and, in the course of the bankruptcy case, "[a] dispute among the Rai family concerning ownership of VCR resulted in an Agreed Judgment stipulating that LULU I, LLC — a Mississippi company formed by members of the Rai family in 2011 — held [a] 100% ownership interest in VCR and was entitled to receive any and all 'distribution[s] made by the Trustee to such holder.'" After family members filed proofs of claim in the bankruptcy case, a settlement was reached "and the bankruptcy court entered a Settlement Order allowing only two [family] proofs of claim[.]" Appellant made distributions to creditors, "filed a proof of claim on behalf of LULU in an amount to be determined after payment of all VCR creditors[, and] later amended that proof of claim to specify the amount payable to LULU as $2,643,066.16." Appellant then filed a final report seeking a commission based, in part, on the amount paid to LULU. The bankruptcy court sustained Appellee/U.S. Trustee's objection to the final report, "concluding that because the 'effect of the Settlement Order was to make LULU the stand in for VCR,' the final disbursement to LULU fits only within the category of payments under Section 726(a)(6), a provision the bankruptcy court stated was for 'the return of equity to the debtor.' The [U.S.] District Court for the Southern District of Mississippi affirmed and denied [Appellant]’s motion for rehearing." Appellant then took a further appeal to the Fifth Circuit.

Judge(s):

King, Southwick, and Haynes

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