Friday, March 22, 2019
David R. Hague recently published an Article entitled, Milking the Estate, 121 West Virginia Law Review 83-134 (2018). Provided below is an abstract of the Article.
Recent Chapter 7 bankruptcy cases are exposing a widespread problem. Chapter 7 trustees are retaining their own law firms to represent them and then-in clear breach of their fiduciary duties to creditors-requesting illegitimate legal fees to be paid by the estate. This practice is immoral and particularly harmful to creditors. Indeed, every dollar paid to the trustee and his firm is a dollar that will not be distributed to creditors. The Bankruptcy Code, remarkably, allows a trustee to retain his own law firm to represent him in his capacity as a trustee. But this inherently conflicted arrangement is not a license for the trustee and his firm to milk the estate for all it is worth. While courts have recognized the dangers attendant to the trustee's retention of himself to serve as his own paid employee, they are routinely allowing it and only requiring the trustee to make one opaque showing: that the selection of the trustee's own law firm is in the "best interest of the estate."
This approach is significantly flawed. In nearly all cases, the trustee is able to satisfy the nebulous "best-interest" standard and secure employment of his law firm. However, the impropriety of such arrangement does not manifest itself until months or years later, when the trustee and his firm have already milked the estate. Instead of dealing with this issue when the damage to the estate .has already been done-or in some cases ignoring it-courts need to adopt protective measures, and this Article outlines several. Abusive fee tactics in bankruptcy will never disappear, but implementing the safeguards discussed herein will curtail the milking (and the bilking).