U.S. Department
of Justice
The Important Role of the Chapter 7 Trustee in Helping the USTP Protect and Preserve the Integrity of the Bankruptcy System
This article originally appeared in the American Bankruptcy Trustee Journal (Winter 2022).
Key Points
- Collaboration between chapter 7 trustees and the U.S. Trustee Program is essential to the efficient functioning of the bankruptcy system.
- Panel trustees have uncovered unscrupulous bankruptcy petition preparers, underperforming attorneys and abuse or fraud by debtors.
- The chapter 7 trustee is a key player at the § 341 meeting of creditors.
- Referrals from panel trustees can result in criminal prosecution and civil enforcement actions.
As you begin your § 341 meeting docket, you ask a debtor to tell you about his credit counseling experience. The debtor does not respond. You repeat the question. The debtor finally responds that he does not know what you are talking about.
You continue with your docket and ask another debtor the same question with the same response. By your mid-morning break, three debtors have known nothing about the credit counseling course that they certified that they completed. All three debtors are pro se. You contact the local USTP office to report what has transpired. The U.S. Trustee attends the continued meetings, beginning a collaborative effort to investigate the anomaly.
Several months, § 341 meeting dockets, and Rule 2004 examinations later, you have helped the U.S. Trustee identify the involvement of an unscrupulous bankruptcy petition preparer (BPP) who not only admonished all clients to not disclose the involvement of the BPP, but who also completed the credit counseling course for the clients. That critical referral from the panel trustee ultimately led to the criminal prosecution of the BPP, who harmed more than 400 consumers and ultimately was sentenced to prison. This actual example, from the Southern District of Illinois, demonstrates the vital role that chapter 7 trustees serve in helping the USTP protect the integrity of the bankruptcy system.
Collaboration
Collaboration between the USTP and the panel trustee is key to preserving the integrity of the bankruptcy process. The invaluable partnership between the USTP and chapter 7 trustees regularly manifests itself on a local and national basis. Given the volume of chapter 7 cases filed nationally, it is impossible for USTP personnel to appear at most meetings of creditors. Panel trustees often have earlier access than the U.S. Trustee to debtor documents and case-related information. Panel trustees serve as the “eyes and ears” of the U.S. Trustee in their cases, often obtaining information that the U.S. Trustee would never learn about if it were not for their timely referrals.
Frequently, it is the panel trustee who uncovers the involvement of an undisclosed and sometimes unscrupulous BPP, such as the case described at the beginning of this article. So, too, is the panel trustee crucial in identifying potential harm to consumers caused by some attorneys. Counsel-related issues may include poorly prepared or deficient petitions, schedules and other filed documents; dilatory responses to trustee inquiries; failure to timely attend § 341 meetings; failure to maintain required bar standing; and general noncompliance with the Bankruptcy Code and federal and local rules.
Cooperative efforts between panel trustees and the USTP involving underperforming attorneys have reaped meaningful results. In early 2021, the USTP negotiated a settlement with a national consumer bankruptcy law firm. Panel trustees submitted numerous civil referrals to the USTP’s local field office over allegations of misconduct relating to the firm’s representation of consumers as debtors or prospective debtors in bankruptcy cases. Those referrals, and the trustees’ invaluable involvement in the investigative process, led the USTP to file actions against the firm. Under the settlement, the firm will pay more than $300,000 in monetary relief and is barred from providing bankruptcy services in a particular state for six years. This result would not have been possible without the front-line assistance of trustees every step of the way.
Panel trustees also have uncovered debtors who are engaged in abusive or fraudulent conduct through lack of disclosure or improper transfers. These referrals frequently lead to the investigation and litigation of such matters. In certain cases, panel trustees have testified as witnesses in support of USTP actions.
Effective Communication
Regular, constructive and ongoing lines of communication between USTP field offices and panel trustees must exist. The sooner the panel trustee alerts the USTP field office to a potential matter or an unusual issue in a case, the better chance the U.S. Trustee has in addressing the matter or providing guidance. Trustees should not wait until after the meeting of creditors is concluded to alert the USTP field office of issues or unusual circumstances. In certain instances, the trustee should conduct the initial examination of the debtor and continue the meeting so USTP attorneys may appear and question the debtor regarding suspected deficiencies or misconduct.
Often, trustees can sense something is unusual in a case even if they cannot pinpoint the exact issue. If things do not add up or make sense, refer the matter to the USTP field office. This is true even if you believe the issue is a one-time occurrence in your assigned case. The USTP field office can identify trends when similar fact patterns or unusual occurrences are taking place in multiple cases referred by several panel trustees.
It is especially critical that a trustee alert the USTP of any comments or communications made regarding the safety and well-being of the trustee and his or her staff. It can sometimes be difficult to discern whether someone is simply “blowing off steam” or intending to act on the threat. For any immediate threat, call 911, and in non- emergency situations, also consider contacting local law enforcement. Trustees should also report all threatening communications to the U.S. Trustee. The ongoing safety of our trustees, their staff and all parties are of paramount concern to the USTP.
The § 341 Meeting
Each U.S. Trustee, by appointing the trustee to the panel in the district, delegates to the trustee the authority to conduct the required § 341 meeting. As such, it is extremely important that trustees follow the protocols provided by the USTP, including those in The Handbook for Chapter 7 Panel Trustees (Handbook).[Footnote 1] Trustees presiding over creditor meetings must ask, at a minimum, all the mandatory questions of each debtor during the meeting.[Footnote 2] The responses to these questions are essential and often open avenues for inquiry to ensure the answers provided are truthful.
For nearly the past two years, verifying the identification of the debtor has required additional diligence by trustees because § 341 meetings have primarily been conducted telephonically. This remains a critical role for the trustee. The administration of the oath before examining debtors during the § 341 meeting has also required adjustments, including verifying that debtors have raised their right hand when instructed to do so. Perceptions of the bankruptcy system of most debtors is based primarily on their experience during the § 341 meeting. The panel trustee serves a critical role in maintaining an atmosphere that conveys the gravity and importance of the debtor’s accurate and truthful testimony.
Inconsistent information or unusual facts contained within the bankruptcy documents or that arise during the meeting must be explored by the trustee. These areas of inquiry often lead to a referral to the USTP field office or a more extensive Rule 2004 examination.
Bankruptcy Crime and Fraud Prevention
Like the U.S. Trustee, panel trustees have a statutory duty to report suspected violations of federal law to the U.S. Attorney. The panel trustee fulfills that obligation by making a referral to the U.S. Trustee, who will then investigate the matter, often with help from the panel trustee. Trustees need not be certain that the criminal wrongdoing has occurred but should make a referral when there are “reasonable grounds” to believe that a crime may have been committed. See 18 U.S.C. § 3057(a)[Footnote 3] and Handbook, §§ 4.41-4.45. In many cases, referrals also result in civil enforcement investigations or other actions by USTP offices. The referral of suspected criminal violations by trustees to the USTP is vital to preserving the integrity of the bankruptcy process. Criminal enforcement actions provide additional paths to address fraud and abuse and bring perpetrators to justice.
A review of the USTP’s report to Congress on criminal referrals underscores the key role that trustees play in uncovering and referring suspected criminal activity. [Footnote 4] During Fiscal Year 2020, and for the eighth year in a row, the most common referral allegation was tax fraud. That is a direct result of trustee reviews and analyses of the tax returns provided by debtors. The second most common allegation in U.S. Trustee referrals for the past eight years is a false oath or declaration. These oftentimes stem from the debtor’s testimony at the § 341 meeting. Artful examinations by trustees often establish that bankruptcy documents have material misstatements and that the testimony is not truthful.
Conclusion
Panel trustees are on the front line of the bankruptcy process. They make invaluable contributions to the USTP’s enforcement efforts. The ongoing fight against fraud and abuse in the bankruptcy system is strengthened by the collaboration between panel trustees and the USTP, effective and ongoing communication, and the diligent and effective completion of the § 341 meeting in assigned cases. When in doubt, refer matters to the USTP field office. Together, we’ll be more effective at protecting consumers and the integrity of the bankruptcy system.
Footnotes:
[1] Available at https://www.justice.gov/ust/private-trustee-handbooks-reference-materials/chapter-7-handbooks-reference-materials.
[2]The mandatory questions cover basic topics such as the debtor’s name and identification, as well as broader affirmations about the bankruptcy filing, including whether the debtor is familiar with and signed his or her bankruptcy filing and related documents, whether all assets and creditors are identified, and similar questions. Section 341(a) Meeting of Creditors: Required Statements/Questions, United States Trustee Program, available at https://www.justice.gov/sites/default/files/ust/legacy/2012/11/29/Section_341%28a%29_Meeting_Questions.pdf.
[3] “Any judge, receiver, or trustee having reasonable grounds for believing that any violation under chapter 9 of this title or other laws of the United States relating to insolvent debtors, receiverships or reorganization plans has been committed, or that an investigation should be had in connection therewith, shall report to the appropriate United States attorney all the facts and circumstances of the case, the names of the witnesses and the offense or offenses believed to have been committed. Where one of such officers has made such report, the others need not do so.”
[4] Report to Congress: Criminal Referrals by the United States Trustee Program, Fiscal Year 2020, United States Trustee Program (Aug. 2021), at https://www.justice.gov/d9/pages/attachments/2021/09/09/criminal_report_fy2020.pdf .