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It is very important that you obtain legal advice from an experienced attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.

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.

know the lawWhat 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:


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:

bankruptcy attorneyThe 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.
Update – February, 2021 several of the chapter 7 trustees filed complaints with the State Bar of Arizona because of the things I said in this website.  These complaints were immediately dismissed by the State Bar.  One of their complaints is that in this post I used some rather stirring pictures and words.  Such as “blackmail” and pictures of a man with a gun to his head or a woman being strangled.  Note – this post was written five years ago.  But, given the current political atmosphere (Trump and the horrific attack on the US Capital and Congress) I agreed that those pictures were not the best for the current times and removed them.  Most likely this attack by the trustees was prompted because I was a signor on a letter to Clifford J. White, III, Director of the US Trustees Program, which pointed out to Mr. White that some Arizona panel trustees were making extremely burdensome document requests of every debtor, not just the few debtors who should produce more extensive documents.  This letter came from the National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center and Arizona Consumer Bankruptcy Counsel (I am the founding co-Executive Director). LT Clifford White, Director of US TE re burdensome document requests (34 downloads)

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:

“Occasionally the USTP receives complaints about the reasonableness of document production requests and sometimes we find those 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.”

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. 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


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.

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.