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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.

Question: do the Chapter 7 Trustees if they plan on administering stimulus checks for filings after the law passed and here are the results so far:

No, I will not:  Ford, Warfield, MacKenzie, Mason, Brown, Reaves, Flores, Smith, Nowak, Anderson:  No, absent extraordinary circumstances

No response to question:  Haley, Goernitz, Gaughan, Kartchner

Ulrich:  answered question with a question:  “Just curious, are you scheduling the stimulus checks as estate property?”  Will be scheduling them as non-estate property.

Every Chapter 7 or 13 bankruptcy case has a trustee is assigned to ‘administrate’ the case (or estate). The approach taken by each assigned trustee may differ based on the chapter under which the bankruptcy was filed. A main difference between a Chapter 7 and Chapter 13 trustee is that a Chapter 7 trustee is responsible for liquidating (selling) non-exempt property for distribution to the creditors, but not a Chapter 13 trustee (11 U.S.C. §704(a)(1) and 11 U.S.C. §1302(b)(1).
The Chapter 13 trustee’s primary job is to manage the case and distribute plan payments to creditors (11 U.S.C. §1302 & 1326.)  In Chapter 13, the debtor is granted many of the rights, duties and powers that would properly be delegated to a bankruptcy trustee in other chapters (11 U.S.C. §1303; 11 U.S.C. §1306(b)).  Therefore, if there are non-exempt assets the debtor must pay the value to creditors (11 U.S.C. §1302 & 1326).

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.”

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.

Sample property sold by the trustee

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.  Professional Fee Report For instance Terry Dake (attorney for several trustees) made $896,120.80 in 2018; during that same period Patrick Derksen (attorney for trustees) made $153,008.05; Maureen Gaughan (chapter 7 trustee) made $260,927.31, Stan Kartchner (Tucson chapter 7 trustee) made $289,079.45, Robert MacKenzie (chapter 7 trustee) made $113,065.53 and Dawn McGuire (attorney for several trustees) made $470,924.99.

Here is another link at US Department of Justice

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.

In re Tillman (Warfield vs IRS and Tillman), 3:19-bk-01074 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.