It’s Only Fair – Recent Case Reasserts Limits on Chapter 7 Trustee Commissions

When a debtor files a Chapter 7 bankruptcy case, all of the debtor’s property, subject to certain exemptions and exceptions, becomes property of the “bankruptcy estate”. A Chapter 7 Trustee is then appointed to collect the property of the estate, liquidate it, and distribute the proceeds among the debtor’s unsecured creditors. While a Trustee has obligations to all creditors, secured creditors are presumed to have the ability to take care of themselves[1].

As payment for their services, Trustees are eligible for a commission. The maximum commission allowed is a percentage of the “moneys disbursed” by the Trustee during the case. Bankruptcy Courts may, however, assess the “reasonableness” of a trustees’ commission and modify it in certain circumstances. This protection is in place to prevent Trustees from earning commissions for services which do not benefit a debtor’s unsecured creditors. A recent case, Reisz v. Crocker, 2014 WL 7342686 (W.D.Ky. 2014) dealt with just such a situation and disposed of it fairly; at least from a creditors’ perspective.

In Reisz, the bankruptcy estate included certain real estate fully encumbered by a mortgage. In most situations, a Trustee would simply abandon this property as the sale of it would only benefit the secured creditor, however the Reisz Trustee had a better idea. The Trustee here convinced the secured creditor to take $50,000.00 less than what it was owed if the Trustee sold the property in the bankruptcy case[2]. The Trustee’s plan was smart, and he would split that $50,000.00 to: (a) make a distribution to unsecured creditors and; (b) pay his own commission – everybody wins. Unfortunately, the Trustee miscalculated certain closing costs and taxes due on the transaction, and was left with only $23,000.00 after paying off the secured creditor. The Trustee promptly made application for that entire amount as his commission.

After an objection, the Court reduced the commission significantly. In so doing, the Court re-affirmed that courts can assess the reasonableness of trustee’s commission and determined that the commission sought here was unreasonable. The Court came to this conclusion because, among other things, allowing the commission would reward the Trustee for providing services that would benefit the secured creditor and himself, while leaving the unsecured creditors with nothing.

This decision reasserts that a Chapter 7 Trustee’s commission must be “reasonable” and that unsecured creditors should be aware of their right to object if a Trustee is seeking payment for services which didn’t benefit them. It’s only fair.

[1] I.e. by satisfying their claims directly from existing collateral.

[2] Trustees in bankruptcy typically have the ability to sell property of the estate in a more efficient manner than a secured creditor could through foreclosure or execution.