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BANKRUPTCY TRUSTEE, INCLUDING DUTIES
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
Every client deserves competent advice in order to plan their life, but they also need to be able to avoid unforeseen results. They also deserve to be treated with respect and compassion by everyone involved in the bankruptcy process.
Helping a client protect important assets before filing bankruptcy has always been seen as appropriate “pre-bankruptcy planning. To quote Ret. Bankruptcy Judge Sarah Curley “it is malpractice not to provide competent pre-bankruptcy counsel”.
A good friend of mine, Larry Karandreas, said “are we at a time that good advice = bad faith?”. This is a warning to all consumer debtor attorneys and their clients. The adage refers to the reality that the consumer bankruptcy world is changing. Reduced bankruptcy filings result in the bankruptcy trustees, their attorneys and the US Trustee’s Office having more time to spend nit-picking every bankruptcy case filed. What was good solid good faith pre-bankruptcy planning yesterday may result in a bankruptcy action alleging “bad faith” today.
When a bankruptcy case is filed a panel trustee is selected (by a computer, unless there is only one trustee in that county) to “over-see” that case.
The trustee’s job is to their best to make sure the debtor is being honest and to maximize the return of funds to the creditors. As with all groups of humans, some of the group are fair and balanced in their interpretation of their job, others not so much. If there is a predisposition for a trustee, or their attorney, to assuming that anyone who files for bankruptcy is a bad person, then that clouds how that trustee, or their attorney, treats honest debtors assigned to their oversight. There are trustee guidelines, but those guidelines are not equally followed by all trustees. Arizona has some great trustees, and their attorneys, who treat honest debtors with respect and compassion. Unfortunately, there are other trustees, and their attorneys, who treat honest debtors very differently. The end result is that an honest debtor has a different result depending on which trustee, or trustee attorney, is assigned to their case. But, the experienced debtor’s attorney is well aware to that significant difference.
What are the Qualifications to be a Panel Trustee?
From the Handbook for Chapter 7 Trustees (page 2-1):
QUALIFICATIONS FOR PANEL MEMBERSHIP
The minimum qualifications for membership on the panel are set forth in 28 C.F.R § 58.3(b).
The panel member must:
1. Possess integrity and good moral character.
2. Be physically and mentally able to satisfactorily perform a trustee’s duties.
3. Be courteous and accessible to all parties with reasonable inquiries or comments about a case for which such individual is serving as private trustee.
4. Be free of prejudices against an individual, entity, or group of individuals or entities which would interfere with unbiased performance of a trustee’s duties.
5. Not be related by affinity or consanguinity within the degree of first cousin to any employee of the Executive Office for United States Trustees of the Department of Justice, or to any employee of the Office of the United States Trustee for the district in which he or she is applying.
Below are links to these and other documents:
- Handbooks and Reference Materials for Chapter 7 Trustees,
- List of Changes to Handbook for Chapter 7 Panel Trustees (October 2021)
- Chapter 7 Trustees Play Important Role in Enforcement Against Bankruptcy Crimes
- The US Trustee’s Guidance to Chapter 7 trustee’s use of short sales.
- Update to Handbook for Chapter 7 Trustees
- LT Clifford White, Director of US TE re burdensome document requests (2580 downloads )
Georgia Bankruptcy Judge Paul Bonapfel Lowers Boom On Chapter 7 Trustee and Counsel Fees
In what certainly will be one of most important and talked-about orders to come out of the Northern District of Georgia in some time, Judge Paul Bonapfel eviscerated a fee application filed by a Chapter 7 Trustee and counsel. The case is In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019). The local panel trustees and their attorneys are very concerned about the impact of the case, and other Bankruptcy judges in the district have already referenced the Order in other hearings. The Orders discussed below strongly indicate that the issues have been brewing among the local judges for some time.
How are the bankruptcy estate funds used?
The funds are paid first to the trustee, then to the trustee’s attorney and, lastly, to the creditors. The trustee is paid 25% of the first $5,000 collected, with a sliding scale from there. The trustee’s attorney (if any) is usually paid all of their fees and costs. How about the creditors? Once the trustee and their attorney are paid, the balance is distributed to creditors (in a pro rata fashion, depending on the type of debt). In some chapter 7 cases there is very little left to pay to the creditors.
Now don’t get me wrong, I believe that everyone, especially the hardworking panel trustees should get paid a decent wage (see link below to the US Trustees’ report of those fees). Currently a panel trustee is paid a menial fee $60 for a huge amount of work. Which is ridiculous and should be increased significantly, but when you look at the Professional Fee Report you will see a significant difference between the annual fee paid to some trustees and their attorneys ($120,000 compared to $1,000,000).
TIMING IS EVERYTHING
Unlike the majority of other states, Arizona law, as of this writing, does not protect tax refunds (including child care credit) from seizure by a bankruptcy trustee. It is only after filing the bankruptcy that the desperate person looking for protection from their creditors, finds out that the trustee is going to take a portion, if not all, of their tax refunds. Had that person talked to a good bankruptcy attorney before filing the case, they would have learned about this problem and been able to make an informed decision when, or if, to file for bankruptcy protection.
How much are the trustees and their attorneys paid?
See – Link to Professional Fee Report from 2012
How Can I Help You?MUSINGS FROM DIANE:
The point of this blog? A good bankruptcy attorney is supposed to give their clients good legal and practical advice. Unfortunately, even if they give good advice and the client correctly follows that advice, bad things may happen. Filing bankruptcy needs to be done carefully and with lots of forethought. Some of the stakeholders in any bureaucracy are easier to deal with than others, After all, we are all humans. I don’t have the answer to this problem, other than to stand up to those who are over-reaching and force them into court. We can only hope the judge will see what is really happening and send a message to the trustee and their attorneys. Only time will tell.We have several videos on this site. Such as the following:
- “The Chapter 7 Process”
- “The Chapter 13 Process”
- “Arizona Exemptions”
11/2020 – ACBC has been actively working with Tara Twomey of NACBA (National Association of Consumer Bankruptcy Attorneys) and NCLC (National Consumer Law Center), to shine a spotlight on the abusive practices of many of Arizona’s Chapter 7 trustees, with respect to their unreasonable and burdensome document requests.
Handbook for chapter 7 Panel Trustees
In June, 2020, ACBC and NACBA jointly submitted a letter to Clifford J. White, III (Director, Executive Office for the U.S. Trustees) and Ilene Lashinsky (United States Trustee for the District of Arizona), regarding the burdensome requests, which are contrary to the “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases” (adopted by the United States Trustee Program and provided to all the trustees).
At the NABT Conference on August 27, 2020, Mr. White presented the following comments, which can be viewed HERE.
Excerpt from Mr. White’s presentation:
DOCUMENT PRODUCTION REQUESTS:
“The final topic I want to raise with you also is a familiar one. In 2012, the USTP adopted and provided to you “Best Practices for Document Production Request by Trustees in Consumer Bankruptcy Cases,” which were developed in concert with the trustee organizations. Our purpose was to promote the efficiency and effectiveness of the bankruptcy system for both trustees and debtors. There is no point served when trustees make overly burdensome and blanket request for documents beyond those required by the statue, rules or circumstances of a particular case. Conversely, the system also suffers when debtors’ counsel fail to satisfy reasonable document requests from the trustees.
The NABT provided us with key insights in developing the best practices. Trustees overwhelmingly support and abide by these best practices that save the resources of trustees, debtors and the courts. But compliance is not universal. Occasionally the USTP receives complaints about the reasonableness of document production requests and sometimes we find the complaints valid. Even though the majority of trustees act with prudence and economy in managing their cases, a small number act contrary to the best practices.
In the past, we have handled those instances one-on-one with trustees and obtained corrective action. But more recently, it has become clear that we need to do more. In the coming months, we will work with the NABT and other stakeholders to amend the USTP’s trustee Handbooks to make adherence to the best practices mandatory and to make clear that we will take action against those few recalcitrant trustees who continue to ignore them.
I should note that the American Bankruptcy Institute Commission on Consumer Bankruptcy – – on which I served as an ex officio member – made a similar recommendation last year. By strengthening the relevant Handbook provisions, the bankruptcy system will benefit, and the reputation of the trustee community for fairness and efficiency will be enhanced.”
Handbook for Chapter 7 Trustees.
Update and changes to Handbook for Chapter 7 Trustees (October 2021)
In re Bird, and In re Christensen adv Gary Jubber BAP No. UT-16-039 and UT16-040 (consolidated) (10th Cir.) Underscoring the bankruptcy court’s conclusion that the services provided by Trustee and Counsel were not necessary to the administration of the Debtors’ estates is a recognition that, on the facts of these cases, abandonment of the Homesteads would have better comported with a Chapter 7 trustee’s ultimate duties and responsibilities. The Bankruptcy Code, an abundance of case law, and express language in the Handbook for Chapter 7 Trustees prepared by the Office of the United States Trustee (“Trustee Handbook”) all emphatically support the bankruptcy court’s decision.
“A chapter 7 trustee is a fiduciary of the estate whose principal duty is to administer estate property so as to maximize distribution to unsecured creditors, whether priority or general unsecured. Section 704, which prescribes the duties of a Chapter 7 trustee, directs a trustee to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” To make this possible, § 363 authorizes a trustee, after notice and a hearing, to sell property of the estate “other than in the ordinary course of business.” The purpose of liquidating the estate’s assets is so that the proceeds may be distributed to the debtor’s creditors. But a trustee’s duty to liquidate property of the estate is not without its limits. In certain situations, such as when liquidation will result in little to no payment to the unsecured creditors, the proper course of action is for a trustee to abandon the property pursuant to § 554.
Although the concept of abandonment was not expressly provided for in the early Bankruptcy Acts, it has been long recognized that bankruptcy courts should not administer encumbered property and authorize its sale “unless it is made to appear that there is a fair prospect of the property being sold for substantially more than enough to discharge the lien or liens upon it.” Instead, the possession and control of fully or over-encumbered property should be released and surrendered.……the unsecured creditors, the proper course of action is for a trustee to abandon the property pursuant to § 554.
In its introduction to a Chapter 7 trustee’s duties, the Trustee Handbook admonishes:
A chapter 7 case must be administered to maximize and expedite dividends to creditors. A trustee shall not administer an estate or an asset in an estate where the proceeds of liquidation will primarily benefit the trustee or the professionals, or unduly delay the resolution of the case. The trustee must be guided by this fundamental principle when acting as trustee. Accordingly, the trustee must consider whether sufficient funds will be generated to make a meaningful distribution to unsecured creditors, including unsecured priority creditors, before administering a case as an asset case. 28 U.S.C. § 586
The Trustee Handbook further provides that “a trustee should not sell property subject to a security interest unless the sale generates funds for the benefit of unsecured creditors. A secured creditor can protect its own interests in the collateral subject to the security interest.” That guidance is underscored by another of the Trustee Handbook’s directives:
In asset cases, when the property is fully encumbered and of nominal value to the estate, the trustee must immediately abandon the asset and contact the secured creditor immediately so that the secured creditor can obtain insurance or otherwise protect its own interest in the property 11 U.S.C. §§ 554, 704.
A trustee may sell assets only if the sale will result in a meaningful distribution to creditors. In evaluating whether an asset has equity, the trustee must determine whether there are valid liens against the asset and whether the value of the asset exceeds the liens. The trustee may seek a “carve-out” from a secured creditor and sell the property at issue if the “carve-out” will result in a meaningful distribution to creditors. The trustee must also consider whether the cost of administration or tax consequences of any sale would significantly erode or exhaust the estate’s equity interest in the asset. If the sale will not result in a meaningful distribution to creditors, the trustee must abandon the asset. Trustee Handbook at 4-14.
As a result, we conclude the bankruptcy court did not err in determining Trustee’s and Counsel’s services, for which the Fee Applications sought compensation, were not necessary to the administration of Debtors’ estates.
Clifford J. White, Director of the US Trustee Program, Annual conference remarks, 8/23/19
Document Production Requests
“Let me move on to another important topic we have discussed before. The USTP will accelerate its oversight to ensure that document production requests made by trustees to debtors are limited to the extent necessary to ensure proper administration of the estate. Overly burdensome requests increase the costs for everyone, including the court.
The issue of document requests is probably the biggest complaint I hear from the consumer bar. In fact, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy has recommended that the USTP impose stricter controls on routine trustee document demands. The complaints go not only to the documents themselves, but also to the modes of transmission. Some trustees, for example, are reluctant to accept electronic transmissions, though they may be perfectly adequate.
Over the next year, we will be consulting with the NABT about incorporating our previously issued “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases” into the Handbook to provide greater authority and consequences in our policing of wasteful, unproductive document demands.”
Sale of Fully Secured Property
“I received Congressional correspondence attaching a complaint from a debtor constituent about a trustee who sold her home even though payment of the liens and administrative costs consumed 99.3 percent of the sale proceeds, leaving only $6,600 for distribution to unsecured creditors.
Let me be clear that the USTP will not defend, and in fact will oppose, sales that primarily benefit the professionals who administer the case. The Program was created to break up “bankruptcy rings” that engaged in self-dealing behavior, and we will be faithful to our mission. Additionally, in the coming year, we will consult with the NABT as we consider strengthening our Handbook guidance in this area. Of relevance, the ABI Consumer Commission mentioned earlier has recommended that the USTP adopt a strict percentage test to determine whether the distribution unfairly favors professionals over other stakeholders.”
FRAUD AND ABUSE BY CONSUMER BANKRUPTCY LAWYERS
“I recently told your chapter 13 trustee colleagues that, if I had to describe the biggest problem in consumer bankruptcy practice as I see it, it would be the small number of consumer debtor lawyers who put their interests ahead of the interests of their clients. Both chapter 7 and 13 trustees have been vital partners with the USTP in identifying bad consumer debtor practices—whether they be committed by solo practitioners or multi-district bankruptcy mills.
Thanks in part to you, USTP offices around the country have been able to obtain court orders to redress attorney misconduct and even fraud. Your referrals have assisted us greatly over the last year as we have brought nearly 600 actions in court and taken more than 2,100 additional out-of-court actions.
Our actions have addressed a wide array of improper practices. Examples include failing to obtain clients’ signatures before filing a bankruptcy petition; failing to file cases in a timely manner once paid; and making a mockery of credit counseling by directing paralegals to take credit counseling courses for clients and then filing false certificates with the court. Recently, the United States Court of Appeals for the Fifth Circuit affirmed a judgment in favor of the USTP imposing sanctions for attorney misconduct. The court characterized the defendant’s conduct as “appalling.”
We also have brought actions in which lawyers improperly bifurcated their fees in chapter 7 cases into pre- and post-petition services. Typically, this allows the lawyer to obtain a competitive advantage by advertising low- or no-money down bankruptcy filings. In some cases, the lawyers sell their post-petition accounts receivable—at a discount offset by unjustifiably higher fees—to a factoring company that can sue the debtor irrespective of the discharge injunction and “fresh start.”
Courts predominantly agree with our position on attorney misconduct and have supported the enforcement actions we have brought. But there is one notable decision in a case in which we did not prevail. In the District of Utah, the bankruptcy court handed down a decision in In re Hazlett, 2019 WL 1567751 (Bankr. D. Utah April 10, 2019). I commend that opinion to your attention because the careful reasoning of the court actually highlights the factors we look for and which are almost always absent in the cases we bring.
In the Hazlett case, the court upheld the bifurcated fee because it found that four essential elements were present: (1) the lawyer’s dealings with the client were based on the client’s best interests; (2) all fees charged for post-petition services were reasonable and did not include fees for pre-petition services; (3) the arrangement was fully disclosed in the lawyer’s Rule 2016(b) statement; and (4) the lawyer complied with local rules governing substitution or withdrawal. Moreover, in the context of factoring, the court found that the fees charged to the client were reasonable on a lodestar basis and did not reflect a markup to offset the premium charged to the lawyer by the financing company.
Although one may argue over the findings of fact made by the judge, or the propriety of debtors’ lawyers contracting with a factoring agency under any circumstances, the court’s opinion provides an important four-part analysis in assessing bifurcation practices. It is instructive to the USTP and should be instructive to the bar as well.”
Professional Fee Report (2012 to present)
| Chapter 7 Trustee or trustee’s attorney (not all inclusive) | Income for 2021 |
|---|---|
| Dina Anderson | $330,696.54 |
| Ryan Anderson (trustee attorney) | $530,968.82 |
| David Birdsell | $277,169.73 |
| Roger Brown | $150,194.12 |
| Steven Brown (trustee attorney) | $475 740.85 |
| Terry Dake (trustee attorney) | $825 805.01 |
| Constantino Flores | $68,223.53 |
| Jill Ford | $268,870.69 |
| Maureen Gaughan | $390,656.34 |
| Lothar Goernitz | $103,433.54 |
| Eric Haley | $234,859.64 |
| Stanley Kartchner | $395,244.60 |
| Robert Mackenzie | $146,730.75 |
| Dawn Maguire | $19,725.00 |
| Anthony Mason | $95,348.36 |
| Gayle Mills | $20,563.60 |
| Brian Mullen | $142,226.07 |
| Adam Nach (trustee attorney) | $579,461.98 |
| Trudy Nowak | $257,666.29 |
| David Reaves (includes very unusual distribution of $1,131,742.62. Normally his fees are never this high.) | $1,512,453.34 |
| Bradley Stuart Rodgers | $348,898.11 |
| Jim Smith | $99,277.46 |
| Dale Ulrich | $220,465.04 |
| Lawrence Warfield | $224,194.89 |
| Theodore Witthoft | $202,369.01 |
| Grand total collected from debtors in 2021 | $12,472,975.56 |
Trustee entitled to fee even if the case is dismissed prior to confirmation
In re Douglas Harmon, 9th Cir BAP No. ID-20-1168-LSG (7/20/21) The 9th Cir BAP held We hold that a standing trustee is entitled to collect the statutory fee under § 586(e) upon receipt of each payment under the plan and is not required to disgorge the fee if the case is dismissed prior to confirmation. Accordingly, we VACATE and REMAND for entry of an order consistent with this decision. The majority concluded that § 586(e) establishes a percentage fee which must be collected from all Chapter 13 plan payments to compensate standing trustees for administrative tasks which they must perform regardless of whether a plan is confirmed.
__________
McCallister v. Evans, et al., No. 20-112 (D. Ida. Feb. 8, 2022). Chief Judge Nye of the District of Idaho, held that the chapter 13 trustee is entitled to retain her commission on funds collected from the debtors even though the debtors’ case was dismissed prior to confirmation. While recognizing the split of authority, the court followed in the footsteps of the Ninth Circuit Bankruptcy Appellate Panel in In re Harmon, favoring the language of 28 U.S.C. § 586(e)(2) and dodging the clear textual differences between section 1326(a)(2)-applicable in chapter 13-and section 1226(a)(2)-applicable in chapter 12.
To read more about this case and find a copy of the opinion, go to http://www.ncbrc.org/
The chapter 7 trustee is paid a flat fee for every bankruptcy case, plus a percentage of collections from any asset case. The trustee’s attorney is paid an hourly fee from the funds collected by the chapter 7 trustee. Here is a link to the fees paid over the last several years to the trustees and their attorneys: Professional Fee Report.
Here is another link at US Department of Justice
In re Alejandro Rivera & Brenda Jimenez-Conteras, BAP No. AZ-23-1047-LCF (9th Circuit, December 19, 2023) Not published Jim D. Smith, trustee of the chapter 71 estate of Alejandro Rivera and Brenda Jimenez-Conteras, was employed to serve as attorney for the estate with the approval of the bankruptcy court. Smith later filed a fee application seeking attorney’s fees of $3,390, incurred during his administration of the estate. Based on the U.S. Trustee’s (“UST”) opposition to the fee application and the bankruptcy court’s independent analysis of the requested fees, the bankruptcy court reduced the fees to $870. Smith
appeals the reduction. Seeing no error, we AFFIRM.
Georgia Bankruptcy Judge Paul Bonapfel Lowers Boom On Chapter 7 Trustee and Counsel Fees
In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019) On January 4, 2021 Judge Bonapfel entered a 73-page final Order denying virtually all fees and expenses requested by the Chapter 7 Trustee and counsel.
A Chapter 7 panel trustee’s law firm is not entitled to compensation for “trustee work” (section 704(a)), and services that are not trustee work must be necessary and beneficial pursuant to §330(a) and Johnson. In the Application, the Trustee’s law firm charged $1,679.50 for what appears to the Judge be trustee work. This includes time for reviewing files, documents, and title report, drafting a “legal work action memo re exemptions, turnover, etc.,” and revising the Trustee’s §549(c) notice of interest in the real property. As the Handbook for Chapter 7 Trustees provides:
The trustee must investigate the debtor’s financial affairs by reviewing the debtor’s schedules of assets and liabilities, statement of financial affairs, and schedules of current income and expenditures which the debtor must file pursuant to section 521 and Fed. R. Bankr. P. 1007 and by examining the debtor at the meeting of creditors. The trustee must also conduct such other investigation as necessary, such as following up on credible tips about unscheduled assets.
The Court found that the Trustee had not met his burden of showing the above services involved legal analysis or unique difficulties, so the $1,679.50 in fees were disallowed. The Trustee’s law firm next requested $1,320.00 in fees related to the proposed sale of the Debtor’s residence. This included time spent drafting and filing an employment application for the Trustee’s real estate broker, negotiating the listing agreement, and sending a “settlement/demand letter” (not in the record) to Debtor’s counsel.
Chapter 7 trustees regularly sell residential real estate in a consumer bankruptcy case. As in this case, “special” stipulations that are necessary in a listing agreement for a trustee’s sale of estate property are not special at all. They are routine in the course of any case involving the sale of a residence… the United States Trustee selects chapter 7 trustees who necessarily have the competence, experience, and skill to negotiate the terms of a listing agreement to include terms that bankruptcy cases routinely require. The Trustee and his law firm have not justified why the Trustee required legal advice to know what routine provisions should be included in the listing agreement in this case or legal assistance to “draft” special stipulations that appear to be standard in the context of a panel trustee’s sale of residential real estate…
To panel trustees, the requirements for employment of professionals are well-known and in almost all cases routine. Unless unusual circumstances exist, a panel trustee can determine that a broker is disinterested and has no conflict with the estate as § 327(a) requires, can prepare and file a routine application for approval of the broker’s retention, and can submit a proposed order in a standard form that approves it. Unless an objection to the application is filed or the bankruptcy court declines to approve the application for some reason, the process does not involve any litigation. In this case, the record reflects that the application to employ the real estate broker, the broker’s verified statement, and the order approving it are routine. The Trustee and his law firm have not established any unique difficulties or circumstances that justify this work as legal in nature. Accordingly, the law firm is not entitled to compensation for filing the application to employ the broker
13 Trustee is not paid if dismissed before onfirmation, 10th Circuit
In re Doll, 10th Cir Ct of Appeals, 1/18/23 This bankruptcy appeal presents a question of statutory interpretation involving the fee a debtor pays to a standing trustee appointed in the debtor’s Chapter 13 reorganization case. A Chapter 13 debtor makes payments to a trustee who then disburses those payments to creditors according to a confirmed reorganization plan. A Chapter 13 standing trustee is compensated through fees he collects by taking a percentage of these payments the trustee receives from the debtor. 28 U.S.C. § 586(e)(2) directs that the standing trustee “shall collect” his fee “from all payments received . . . under” Chapter 13 reorganization plans for which he serves as trustee. 11 U.S.C. § 1326(a)(1) provides that a Chapter 13 debtor “shall commence making payments” to the standing trustee within thirty days of the date the debtor files a proposed reorganization plan. Often these payments begin before the confirmation hearing on the proposed plan occurs. In light of that, 11 U.S.C. § 1326(a)(2) directs the standing trustee to “retain” these pre-confirmation payments until the confirmation hearing, when the proposed reorganization plan is either confirmed or confirmation is denied. Id. § 1326(a)(2). “If a plan is confirmed, the trustee shall distribute any such [pre-confirmation] payment in accordance with the plan . . . .” Id. But “[i]f a plan is not confirmed, the trustee shall return any such [pre-confirmation] payments . . . to the debtor.” Id. The question presented here is: If a plan is not confirmed, can the standing trustee deduct and keep his fee before returning the rest of the pre-confirmation payments to the debtor or must the trustee instead return the entire amount of pre-confirmation payments to the debtor without deducting his fee? We conclude that, read together, 28 U.S.C. § 586(e)(2) and 11 U.S.C. § 1326(a)(2) unambiguously require the trustee to return the pre-confirmation payments to the debtor without deducting the trustee’s fee when a plan is not confirmed. Our conclusion is bolstered by the fact that, in bankruptcies under Chapter 12 and Chapter 11 (Subchapter V), Congress expressly directed a standing trustee to deduct his fee before returning pre-confirmation payments to the debtor when a proposed plan is not confirmed, but Congress did not direct Chapter 13 standing trustees to deduct their fee before returning pre-confirmation payments to the debtor. Having jurisdiction under 28 U.S.C. § 158(d)(1), we, therefore, AFFIRM the district court’s decision denying the trustee his fee in this case.
In re Wright (6th Cir. BAP) 4/17/18 The Court first considered whether the trustee did, in fact, abandon the personal injury claim pursuant to Section 554(c). The Court explained that, unless a court “orders otherwise,” abandonment under Section 554(c) occurs statutorily. Ruling in favor of the debtor on this issue, the Court explained that “[t]he plain language of the statute unambiguously states that if an asset was properly scheduled and not administered by the trustee, upon closing the case, the asset is abandoned as a matter of law.” Simply mentioning the asset in the NDR, as the trustee did in this case, “did not suffice to preserve the trustee’s right to pursue the claim on the bankruptcy estate’s behalf.”
The bankruptcy trustee may elect to sell non-exempt property by either a standard auction process (either at an auction house or at the Bankruptcy Court), or by offering the debtor the opportunity to pay fair market value. This is the discretion of the trustee.
In re Badea (Badea v. Schwartzer) , BAP No. NV-18-1183-BKuTa (9th Circuit, Mar 05, 2019)
Ninth Circuit BAP affirmed bankruptcy court order sanctioning chapter 7 debtor for suing chapter 7 trustee, without bankruptcy court approval, based upon the Barton doctrine, but reversed and remanded the portion of the decision awarding attorneys’ fees.
“For nearly 140 years, the United States Supreme Court has barred suits against a court-appointed receiver in a non-appointing court for acts within the receiver’s official capacity if brought without the appointing court’s prior permission. Barton v. Barbour, 104 U.S. 126, 128 (1881). The Ninth Circuit has extended the Barton doctrine to bankruptcy trustees and their professionals.”
In re Koshkalda v. Schoenmann, BAP NO. NC-19-1234-BTaF (4/14/20) Chapter 11 converted to 7. Debtor ‘fixed and flipped” property. Financed $3,685,000 with Arch. Debtor moved to have the trustee abandon the properties so he could sell them, trustee objected. Trustee entered into a settlement with lender and Debtor objected. BAP for 9th Circuit dismissed appeal of chapter 7 debtor who objected to trustee’s settlement with creditors. Debtor lacked standing to appeal the order approving settlement. Finding that the Bankruptcy court properly applied balancing test to determine that settlement was fair, equitable, and in best interest of estate. Debtor lacked standing because he failed to demonstrate that he was pecuniarily affected by the settlement. There was unlikely to be a surplus in estate and non-dischargeable claim against debtor did not affect analysis.
We hold that a trustee MAY NOT use 11 U.S.C. §§ 724(a) and 551 to avoid and preserve a tax penalty lien on a debtor’s exempt property for the benefit of the bankruptcy estate. Reversing lower court
In re Tillman (Warfield vs IRS and Tillman), 3:19-bk-01074 11/18/22 the 9th Cir Court of Appeals Reversed the District Court. Finding: the posed question was “may a trustee use 11 U.S.C. §§ 724(a) and 551 to avoid and preserve a tax penalty lien on a debtor’s exempt property for the benefit of the bankruptcy estate? We hold that a trustee may not. Therefore, we reverse the decision of the District Court affirming the Bankruptcy Court.
District Court’s decision “On June 19, 2020, this Court heard oral argument on this matter. Having heard the parties’ arguments and having reviewed their briefs, this Court now holds there exists no genuine issue of material fact and the Trustee may avoid the Tax Lien for the benefit of the estate pursuant to § 551. The Debtor is only entitled to claim as exempt value over and above the voluntary 1st lien and the involuntary IRS lien against her residence. After avoidance of its Tax Lien, the IRS holds an unsecured (but possibly nondischargeable) claim against the Debtor in the amount of the avoided Tax Lien. The Debtor may not employ §522(g) because the Debtor may not exempt that portion of the value of the Property occupied by the Tax Lien, whether that Tax Lien is held by the IRS or is avoided and then held by the Trustee for the benefit of this bankruptcy estate. Trustee’s Motion for Summary Judgment is hereby granted.
Argued to the court of Appeals – 7/5/22: https://youtu.be/4U9y_A8rtlA
Trustee Avoids IRS tax lien – preserved for the benefit of the estate
Hutchinson v. Internal Revenue Service, 19-60065 (US Ct Appeals 9th Cir, 10/19/21) The IRS recorded liens for unpaid taxes, interest, and penalties against the debtors’ residence. After debtors filed for bankruptcy, the IRS filed a proof of claim. The portion of the claim that was secured by liens on the residence and attributable only to penalties was $162,000. The debtors filed an adversary proceeding, asserting that the IRS’s claim for penalties was subject to avoidance by the trustee and that because the trustee had not attempted to avoid this claim, debtors could do so under 11 U.S.C. 522(h). The trustee cross-claimed to avoid the liens and alleged their value should be recovered for the benefit of the bankruptcy estate. The bankruptcy court dismissed the adversary complaint. The trustee and the IRS agreed that the penalty portions of the liens were avoided under 11 U.S.C. 724(a). The Bankruptcy Appellate Panel and Ninth Circuit affirmed. Section 522(h) did not authorize the debtors to avoid the liens that secured the penalties claim to the extent of their $100,000 California law homestead exemption. Section 522(c)(2)(B), denies debtors the right to remove tax liens from their otherwise exempt property. Under 11 U.S.C. 551, a transfer that is avoided by the trustee under 724(a) is preserved for the benefit of the estate; this aspect of 551 is not overridden by 522(i)(2), which provides that property may be preserved for the benefit of the debtor to the extent of a homestead exemption.
A dangerous trap out there. If the IRS is an unsecured creditor–even to the extent of a dollar, the trustee can use his strong arm powers to avoid a transfer under the Arizona Uniform Fraudulent Transfers Act (AUFTA) (A.R.S §44-1001 et seq), using the IRS as the “golden creditor”. See, Section 544(b)(1) is an enabling statute; its role in the Code is not to identify the specific laws a bankruptcy trustee may use to avoid a transfer. Rather, its purpose is to allow trustees to generally invoke applicable laws, i.e. all statutes that an unsecured creditor with an allowed claim in the case could utilize outside of bankruptcy. In re CVAH, Inc., 570 B.R. 816, 829 (Bankr. D. Idaho 2017). Under that section, a trustee can step into the shoes of any unsecured creditor, including the IRS, to invoke the Internal Revenue Code as the “applicable law”. The Internal Revenue Code, under section 26 U.S.C. § 6502, provides a ten-year period for collecting a tax. The great majority of bankruptcy courts that have considered the issue hold that “applicable law” under §544(b) includes the Internal Revenue Code and its 10-year statute of limitations. The trustee must show that the IRS was a creditor at time the transfers were made that still had a viable claim against debtor at the time the bankruptcy petition was filed. Of course the trustee still has to prove a fraudulent transfer took place.
Cases that walk through the analysis. The Vaughan case is helpful to debtors but unfortunately not the majority view. I have also attached an article from ABI Journal. I had a case with Dake recently involving this issue. Pay the unsecured taxes first if possible, removing the “golden creditor” wait 91 days and then file. Of course sometimes that isn’t possible.
In re Kipnis(1458041.1).pdf (279.8 KB)
In re Vaughan Co(1348840.1).pdf (365.0 KB)
New Article re 10 yr IRS SOL from ABI(1338108.1).pdf
In re Kendall, 14-40920 (D. Idaho, 1/8/15 Judge Pappas issued the Order denying the Chapter 7 Trustee’s motion for turnover of $155 in cash because it was inconsequential to the bankruptcy estate even thought the Trustee was going to receive $4kish in tax refunds.
In re Thomas Perez, BAP NO CC-20-1280 (9th Cir., June 17, 20201) Under Hitt v. Glass (In re Glass), 164 B.R. 759, 765 (9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995), a trustee may defeat a debtor’s exemption on property released from a lien or security interest only if the release occurs after the trustee states or indicates that she will invoke her avoidance powers to recover the property. Otherwise, a debtor may exempt the property under 11 U.S.C. § 522(g).
A Trustee Can’t Always Avoid and Preserve an Unrecorded Mortgage for the Estate. An unrecorded mortgage is merely an “unsecured personal obligation”.
In re Miranda v. Banco, (In re Cancel) 20-9006 (1st Dir. Aug 6, 2021) Bankruptcy law may be uniform throughout the U.S., but results around the country aren’t always the same, even when the facts are identical. Why? Because many questions under bankruptcy law actually turn on state law.
Because we agree that an unrecorded mortgage in Puerto Rico is not “[a] transfer of property of the debtor. . . that is voidable by a bona fide purchaser” that triggers the bankruptcy trustee’s authority to avoid and preserve the lien, we affirm. Under Puerto Rico (and Arizona*) law, recording a mortgage is a “constitutive” act, and an unrecorded mortgage is merely an “unsecured personal obligation.” Id. at *2 (quoting Soto-Rios v. Banco Popular de Puerto Rico, 662 F.3d 112, 121 (1st Cir. 2011)).
Example: A trustee has the right to avoid and preserve an unrecorded mortgage for the benefit of the estate under Section 551. But as shown in an August 6 opinion from the First Circuit, the trustee cannot preserve an unrecorded mortgage when state law says that an unrecorded mortgage confers no interest in property. (NOTE- such is the law in Arizona*)
The facts: a couple in Puerto Rico purchased a home and took down a mortgage. However, the lender never recorded the mortgage.The couple filed a chapter 7 petition and claimed a homestead exemption. The lender filed a secured claim. The debtors objected to the claim, contending it was not secured. The bankruptcy court granted the objection, ruling that the claim was unsecured because the mortgage had not been recorded.
The trustee filed an action to avoid the unrecorded mortgage under Section 544(a)(3) and preserve the mortgage for the benefit of the estate under Section 551. The bankruptcy court ruled that the trustee could not preserve the mortgage, even though it was unrecorded. The Bankruptcy Appellate Panel affirmed, and so did Circuit Judge Sandra L. Lynch.
The decisions in the lower courts turned on a few key words in Section 544(a) and (a)(3). The sections says that the trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor . . . that is voidable by—
(c) a bona fide purchaser of real property [that] obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. [Emphasis added.]
Judge Lynch began from the proposition that “[s]tate law governs interested parties’ property rights.” She demonstrated the difference that state law makes by comparing Massachusetts law with the law in Puerto Rico.
Massachusetts has a “title theory” of mortgages. A mortgage is a conditional transfer of title. Recording makes the lien a matter of public record and gives notice to third parties. If a mortgage is not recorded in Massachusetts, the lender retains superior title compared to the mortgagor and anyone with actual knowledge of the mortgage.
On the other hand, the holder of an unrecorded mortgage in Massachusetts has inferior title compared to anyone without actual knowledge. Nonetheless, the lender “retains an interest in the underlying real property,” even though the mortgage was not recorded, Judge Lynch said. Puerto Rico (and Arizona*) has a different system, known as the “property registry system.” Recording in Puerto Rico does more than provide public notice. Recording is part of the process of creating a valid property interest. Under Puerto Rico law, Judge Lynch said that “a mortgage must be recorded for it to confer any interest in the underlying real property.” Consequently, an unrecorded mortgage in Puerto Rico (and Arizona*) only gives the lender an unsecured personal guarantee.
Judge Lynch therefore held that “an unrecorded mortgage in Puerto Rico (and Arizona*) does not trigger the trustee’s avoidance powers under 11 U.S.C. §§544(a) and (a)(3) [because] the holder of the unrecorded mortgage lacks any title to the underlying property.” She ruled that the unrecorded mortgage did not transfer property, thus preventing the trustee from avoiding the unrecorded mortgage while preserving the mortgage for the benefit of the estate.
*In Arizona, is it land recording – or land Registration? Article by Christopher Charles (January 27, 2020)
NOTICE TO CHAPTER 7 AND 13 TRUSTEES REGARDING TREATMENT OF RECOVERY REBATES AND TAX CREDITS FOR CONSUMER BANKRUPTCY DEBTORS UNDER THE AMERICAN RESCUE PLAN ACT OF 2021
In Summary: (March 25, 2021 from US Trustee’s Office)
Chapter 7 and 13 trustees should not consider recovery rebates (stimulus money) or child tax creditors in administering estate assets or calculating disposable income in chapter 13 repayment plans. Trustees who believe that the specific facts in a case may require a different result are directed to contact the US Trustee prior to taking any action to administer recover rebates or to object to a chapter 13 plan based on the treatment of recovery rebates or the additional tax credit under ARP. Additionally, the US Trustees will not consider recover rebates or additional child tax credits under the ARP in making means test calculations, filing motions to dismiss for abuse under sections 707(b)(2) and (3), objecting to chapter 13 plans, or taking related actions.
The USTP oversees approximately 1,100 private trustees who administer chapter 7 asset and no-asset cases. Chapter 7 trustees are responsible for the collection and liquidation of non-exempt assets, and the distribution of funds to creditors in accordance with the Bankruptcy Code’s distribution scheme.
When a chapter 7 case with assets is closed, the trustee files a final report that accounts for the disposition of assets, as well as the distribution of funds to creditors and to administrative expenses. The data from these final reports are compiled by the USTP for oversight and statistical reporting purposes. Data are provided in delimited text files. Please review the codebook for variable information.
Chapter 7 Trustee Final Reports
Professional Fee Report (2012 to present)
