Here is how a bankruptcy liquidation is supposed to work: a trustee sells a debtor’s non-exempt assets and distributes the proceeds to the debtor’s creditors based on the order of priority set forth in the bankruptcy code. It makes sense that, for his trouble in orchestrating the sale and making the proper distributions, the trustee be paid for his work. But with what money is he paid? The debtor can’t really pay – he’s broke, remember? And not the court system, either – the government doesn’t have that kind of money. The answer is that the trustee is paid out of the proceeds he collects from the sale of the debtor’s assets. Again, that makes sense. If the trustee liquidates a furniture store and collects $100k, he should be the first one in line able to dip into that $100k for his fees. But how are his fees determined? Often, he’s paid hourly, just like any other attorney. If the liquidation and disbursement process goes smoothly, maybe he only does a few hours of work and only gets a one or two thousand dollars. Other times, he does lots of work – litigating with the debtor and other creditors, perhaps, over how the proceeds of the estate should be distributed. In these cases, the trustee might earn much more money. And again, this makes sense. That’s his job.
But what happens when his fees reach 50%, 80%, even 100% of the proceeds of the estate? What happens, in other words, when a liquidation in bankruptcy results in only one person – the trustee – getting paid? Usually nothing. Everyone shrugs their shoulders and moves on to the next case.
But in the case of Reisz v. Crocker, in Kentucky (W.D. Ky., No. 3:14-cv-00293-CRS), the judge had seen enough. A liquidation in that case resulted in $23,000 that should have been paid to unsecured creditors. The trustee’s bill? $23,000. The judge, though, said that that was unacceptable, cut the trustee’s bill to $5,000, and required that the rest be paid to the general unsecured creditors.
It’s about time.