This article originally appeared in the American Bankruptcy Trustee Journal (Winter 2023).

Key Points

• The October 2021 updates to the Handbook for Chapter 7 Trustees enhance enforcement of the Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases and underscore and strengthen the “meaningful distribution to creditors” requirement for the sales of encumbered assets.
• The banking and investment sections of the Handbook were updated in March 2022 to refect current banking practices and economic conditions.
• The June 2022 updates to the Uniform Transaction Codes—made at the request of the National Association of Bankruptcy Trustees—aim to reduce their complexity and make it easier for trustees to accurately apply them.

Introduction

To promote the integrity and efficiency of the bankruptcy system, the U.S. Trustee Program (“USTP”) works to provide chapter 7 trustees with comprehensive and up-to- date information and guidance to better enable to perform their duties. Three updates occurred over the past year: First, the October 2021 updates to the Handbook for Chapter 7 Trustees (“Handbook”) that enhance enforcement of the Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases and underscore and strengthen the “meaningful distribution to creditors” requirement for the sales of encumbered assets. Second, the March 2022 updates to the banking and investment sections of the Handbook to reflect current banking practices and economic conditions. And, finally, the June 2022 updates to the Uniform Transaction Codes (“UTCs”) that were made at the request of the National Association of Bankruptcy Trustees.

The updated Handbook, detailed descriptions of the changes, and the new list of UTCs is available on the USTP Website.

Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases

In 2012, the USTP developed and issued the Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases (“Best Practices”) in consultation with key stakeholders: consumer bankruptcy attorneys through the National Association of Consumer Bankruptcy Attorneys and chapter 7 and 13 trustees through their professional associations. The Best Practices provide specific, strongly suggested guidance governing the production of documents and requests for information in consumer bankruptcy cases. They identify common examples of potentially unreasonable or burdensome document requests, including the use of trustee questionnaires in every case regardless of any particularized need for the requested information or documents.

At the outset, the USTP incorporated the Best Practices into its guidance and training for trustees. The Best Practices are not intended to override the requirements of the Bankruptcy Code and Rules, or local rules or guidelines by courts. Nor were they intended to interfere with the reasonable judgment of trustees based on the particular facts and circumstances of a case.

The Best Practices were endorsed in the final report issued by the American Bankruptcy Institute Commission on Consumer Bankruptcy (“ABI Commission”), which concluded that they strike the right balance and provide “sound guiding principles” for document production. The ABI Commission also recommended that the Best Practices be incorporated in the USTP’s trustee handbooks to make the guidance more prominently available as well as aid in enforcement both against trustees who make unreasonable documentation requests and against debtors who fail to provide reasonable documentation.

The USTP adopted the ABI Commission’s recommendation, and the Best Practices were formally incorporated into the chapter 7 and 13 trustee handbooks in October 2021 and revisions were made to the trustee performance review forms to specifically evaluate trustee compliance with the Best Practices. Handbook section E now states:

In an effort to control the cost of bankruptcy without interfering with a trustee’s obligation to investigate the financial affairs of the debtor or modifying the debtor’s duty to cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties, the Best Practices for Document Pro- duction Requests by Trustees in Consumer Bankruptcy Cases, which provides sound guiding principles for document-production requests, is incorporated as policy into this Handbook. A copy of the Best Practices may be found in the Supplementary Materials.

These efforts were undertaken to strengthen compliance with the Best Practices and the USTP continues to evaluate trustee performance in this area.

Sales of Fully Encumbered Property

The ABI Commission also recommended that the USTP define the circumstances in which trustees can properly sell fully encumbered property and set a bar on these sales when they do not produce a distribution for unsecured creditors in excess of what the trustees receive for their fee and expenses from these sales After evaluating the ABI Commission’s recommendations and reviewing the underlying issues presented in these asset sales, the USTP revised the Handbook to provide more examples of appropriate sales and to highlight the Handbook requirement that trustees sell assets only if the sale will result in a meaningful distribution to unsecured creditors or provide some other significant benefit. Specific changes were made in the areas of asset sales, trustee compensation, performance, supervision, and evaluation.

These revisions were designed to underscore and strengthen the “meaningful distribution to creditors” requirement for trustee sales, while also providing flexibility in cases where some other significant benefit may justify the sale. For example, the administration of blighted property in a community undergoing revitalization may be of significant benefit to that community. The revisions also highlight the importance of full disclosure and transparency by the trustee to explain the benefit to the estate at the time the trustee proposes to administer a fully encumbered asset.

The USTP also carefully reviewed and debated the ABI Commission’s recommendation for a specific formula-based approach to the sale of fully encumbered property, but ultimately rejected the recommendation. Complicated issues are often presented in cases and trustees need flexibility and discretion in their decision- making. Accordingly, meaningful distribution is best determined on a case-by-case basis after evaluating differences in exemption statutes and the specific circum- stances of each debtor. As revised, the Handbook section 4.C.9.a now states: “A trustee may sell assets only if the sale will result in a meaningful distribution to creditors or provides some other significant benefit.” . . . “If the sale or carve-out will not result in a meaningful distribution to creditors, the trustee must abandon the asset.  However, there may be instances wherein a sale of such property would be appropriate to alleviate potential liability even if such property is fully encumbered.” It further states in section 4.C.9.d: “Trustees should not only consider the commission earned on a sale of estate property in relation to the anticipated distribution to unsecured creditors but also take into account all expenses incurred by the estate such as professional fees, even tax liabilities associated with a sale because professional fees are an unsecured creditor priority claim. The distribution to creditors should be meaningful.” [Changes are shown in italics.]

To assist trustees in identifying the limited circumstances in which a trustee may properly sell fully encumbered property that would result in a significant benefit other than a meaningful distribution to creditors, additional examples were added to Handbook section 4.C.9.d. They include:

1. A trustee may be able to satisfy in full a blanket security interest on multiple units of property by selling only one unit.
2. A trustee may be able to obtain a higher price from an aggregate sale of assets than from selling the assets individually.
3. In a case with other funds available for unsecured creditors, a trustee also may sell fully encumbered property to eliminate a deficiency, if the secured creditor agrees to waive any unsecured claim for a deficiency in the event the sale does not fully satisfy the security interest.
4. In a case wherein selling encumbered assets aids in the sale of other estate assets to the benefit of the estate.
5. A trustee may attempt to sell or transfer blighted property in order to protect other assets of the estate from liability.
6. In a case wherein a sale of property would result in full payment of all priority creditors.

In addition, in the interest of promoting transparency, disclosure, and accountability, the following language was added to Handbook section 4.C.9.d:

When selling fully encumbered property, the trustee must administer the sale to avoid a diminution of funds otherwise available for unsecured creditors. 11 U.S.C. § 704, 28 U.S.C. § 586. The trustee should obtain an agreement in writing from the secured creditor to recover the costs of sale from the collateral pursuant to section 506(c). The trustee must disclose the terms of any agreement between the trustee and the secured creditor and notify the United States Trustee at the outset, for example, in the notice of pro- posed sale, and in the trustee’s final report and request for compensation and reimbursement of expenses. 11 U.S.C. § 363, Fed. R. Bankr. P. 6004. The sale motion should disclose whether the sale will result in any meaningful distribution to creditors and explain the reasons why the trustee is selling the encumbered property if the sale will not result in a meaningful distribution to creditors. Any sums recovered from the collateral under section 506(c) are property of the estate and must be deposited in the estate account.” [Changes are shown in italics.]

The USTP will continue to monitor and evaluate trustee performance in this area, identify areas for greater USTP focus and enforcement, and address specific problem cases as they arise, including objecting to a trustee’s request for compensation and reimbursement of expenses in “cases in which the trustee has administered fully encumbered property primarily for the benefit of the trustee and the trustee’s professionals, and not for the reasons identified in [Handbook] section C.9.d above, and with no meaningful distribution to creditors.”

Controls Over Estate Bank Accounts and Investment of Estate Funds

Handbook section 5.E was updated to reflect the fact that interest-bearing ac- counts were discontinued by banks holding estate funds. That section now reads that the “trustee may deposit or invest monies of an estate….” Similarly, “must” was removed in subsection 5.E.1.b relating to investment accounts and now reads: “The trustee should consider higher yield investments.” Also, in subsection 5.E.1.c on non-interest-bearing accounts, was clarified to state that trustees may maintain estate funds in non-interest-bearing checking accounts when interest-bearing checking accounts are not available or the benefit to the estate is de minimis. While these changes were made to give trustees more flexibility in managing estate funds, the onus remains on the trustee to exercise appropriate business judgment in maximizing the return on estate funds for creditors in the cases they administer.

Finally, updates also were made in Handbook sections 5.B and 5.G and Chapter 7 Bank Account Review and Reconciliation Procedures in the Supplementary Materials in recognition of the shift in recent years away from the requirement to maintain in paper format bank statements and canceled checks, provided the USTP has online access to estate bank records. For example, section 5.B now states the trustee’s review of bank statements and canceled checks for unusual items, forgery, or alteration before they are accessible to other staff members may be done electronically if evidence of the review is recorded electronically, such as with a time stamp showing the trustee’s User ID and date. Similarly, section 5.G was amended to state that bank statements and canceled checks are required to be kept in paper form only if the USTP cannot review these documents via an online portal provided by the trustee’s bank. In addition, bank reconciliations were removed from the list of documents that must be kept in paper form and Part 3 of the Chapter 7 Bank Account Review and Reconciliation Procedures now states explicitly that bank reconciliations can be documented electronically.

Uniform Transaction Codes

At the request of the NABT, the USTP undertook a review of its uniform transaction codes (UTCs) with an eye towards reducing their complexity and making it easier for trustees to accurately apply them. The UTCs are accounting codes used by trustees to record and account for receipts and disbursements in their cases. Former NABT President Ronald Peterson summed up the frustration with them when he said, “the unending search for the correct UTC is excruciating” (or words to that effect).

Based on 20 years’ experience, the Program eliminated 24 UTCs that were rarely used by trustees or that did not provide meaningful information to the USTP. Fourteen of those related to chapter 7 administrative fees and expenses and 10 related to prior chapter administrative fees and expenses. Sub-codes and regional lists also were eliminated to stream- line reporting requirements.

Following is a rundown of the eliminated UTCs for cases filed on or after June 1, 2022 (only the first four digits of the seven-digit UTC is used in this article):

• Chapter 7 administrative fee and expense UTCs 2410, 2420, 3420, 3520, 3620, 3630, 3640, 3701, 3702, 3712, 3721, 3722, 3731, and 3732 were eliminated.
  • Chapter 7 professional fees formerly captured in UTC 3630 are now captured by UTC 3610.  Chapter 7 professional fees formerly captured in UTCs 3701, 3721 and 3731 are now captured by UTC 3991.
  • Chapter 7 professional expenses formerly captured in UTCs 3420, 3520, 3620, 3640, 3702, 3712,3722, and 3732 are now captured by UTC 3992.
  • Chapter 7 administrative expenses formerly captured in UTCs 2410 and 2420 are now captured by UTC 2990.
• Prior chapter administrative fee and expense UTCs 6220, 6420, 6510, 6520, 6610, 6620, 6630, 6640, 6910, and 6920 were eliminated.
  • Prior chapter professional fees formerly captured in UTCs 6510, 6610, and 6630 are now captured by UTC 6700.
  • Prior chapter professional expenses formerly captured in UTCs 6220, 6420, 6520, 6620, and 6640 are now captured by UTC 6710.
  • Prior chapter administrative expenses formerly captured in UTCs 6910 and 6920 are now captured by UTC 6990.

In connection with the UTC updates, the USTP also updated its Primary Uniform Transaction Code Guide to cover new types of transactions initiated or encountered by trustees and to add new instructions and examples for recording the liquidation of real property in Attachment 3 of the guide. Among the examples are:

Real estate sales

• UTC 1110/1210 - The trustee sells a scheduled residence as a short sale for $250,000 plus a $25,000 buyer’s premium. The estate receives the buyer’s premium, with all other funds going to administrative costs or the secured lender. Form 2 should reflect $275,000 applied to UTC 1110. Each closing cost item should be reported on Form 2 under the appropriate code. The $25,000 deposit that is reported in column 5 of Form 2 should not have a UTC assigned to it.
• UTC 1290 - If the buyer’s contributed portion for property taxes exceeds the estate’s payment of property taxes, the amount is added as a new asset on Form 1 and recorded on Form 2 with a UTC of 1290. This is important in order to eliminate negative numbers in the Trustee Distribution Report exhibits.
• UTC 4110 - The trustee sells a residence. The estate is charged $1,400 in past due HOA fees. In addition to any mort- gage lien payoff, Form 2 should reflect a disbursement of $1,400 applied to UTC 4110 for the HOA dues.
• UTC 2500 applies when a trustee disburses estate funds to cover expenses incurred during the chapter 7 proceeding that relate to the sale of estate property. Examples of disbursements to be reported under UTC 2500 include but are not limited to: (1) advertising expenses paid by the estate; (2) real estate closing costs (other than utility and real estate tax costs); and (3) reasonable one-time costs (as opposed to ongoing maintenance costs) to prepare the property for sale. It is important to remember, however, that real estate sales typically provide an escrow closing statement that separately breaks out realtor fees and expenses, auctioneer fees and expenses, and post-petition real estate taxes that are reportable under separate UTCs and should not be lumped into UTC 2500.

Earnest money/bid deposits

• UTC 1290 - If an earnest money sale offer is received, the earnest money or bid deposits are not considered to be estate funds until the sale is approved by the court and consummated. Initially, the earnest monies or bid depos- its should be coded to UTC 1290. However, once accepted and approved, the sale should be recorded as a split transaction, with the gross proceeds assigned to the UTC for the particular asset class and the applied earnest money shown as a deduction with UTC 1290. This treatment of the escrow monies for deposit and the application of the deposit to the sale will net to zero in UTC 1290.
• UTC 1290 – The trustee receives two $5,000 earnest money bid deposits on the sale of real property. The Form 2 should reflect two $5,000 receipts applied to UTC 1290. Neither receipt is referenced to Form 1. One of the two bids is eventually accepted, and the sale closes. When the remaining funds from the sale are received, record the gross amount of the total sale in Column 4 using UTC 1110/1210 (as applicable), with a negative entry of $5,000 under UTC 1290 to reverse the initial winning bid. The unaccepted bid would be returned, with a negative entry for $5,000 under UTC 1290. Thereby, the earnest money and the application of the earnest money to the sale will net to zero in 1290.

Notes Receivable

• UTC 1121/1221–An estate owns a note receivable which earns 7% interest per year and receives $785 a month. Each payment includes a principal and interest component. The trustee should have an amortization schedule that tracks the declining balance as payments are received. As each payment is received, Form 2 should record the full payment to UTC 1121-000 or 1221-000.

Royalties and Dividends

• UTC 1123/1223 - –Pursuant to state law, the trustee liquidates a wholly owned limited liability company (LLC). Once completed, the estate receives $4,300 in dividends. Form 2 should reflect receipts applied to 1123 or 1223, depending on whether the LLC was listed on the Schedule B that was initially filed with the court.

Income Tax Refunds

• UTC 1124/1224 - –The trustee collects $300 in income tax refunds, 90% of which is determined to be property of the estate. Form 2 should reflect $300 in receipts applied to UTC 1124 or 1224. Note that the $30 check transmit- ting the debtor’s portion of the tax refund is coded with UTC 8500 if it is non-exempt. If the debtor’s portion is exempt, the payment is coded to UTC 8100.

Operating Chapter 7 Cases

• UTC 1130/1230 - –The trustee operates a chapter 7 business involving a 40-unit apartment building. The trustee employs a property manager who, pursuant to the operating order, deducts $4,000 in operating expenses and remits a net check of $26,000 to the trustee. No UTC should be assigned to the net receipt. In Column 4, a UTC of 1130 or 1230 is assigned to the gross receipt of $30,000, and the $4,000 withheld is coded to UTC 2690.

Funds Paid to Third Parties

• UTC 8500 applies to funds, other than exemptions and excess funds, disbursed to the debtor (including shareholders or partners), as well as funds disbursed or turned over in the case by the trustee to third parties who are not parties in interest (e.g., creditors or professionals). It does not include checks issued to transfer mis-deposited funds to the correct account or to return funds sent to the estate in error; UTC 1280 is used for these checks.
• UTC 8500 - The chapter 7 case in which the trustee is assigned is converted to chapter 13. The trustee disburses funds held of $1,000 to the chapter 13 trustee. Form 2 should reflect a $1,000 disbursement applied to UTC 8500.
• UTC 8500 - The trustee has $7,300 in funds available to pay corporate share- holders. The payments to the share- holders are reported using UTC 8500.

Other Professional Fees and Expenses

• UTC 3991 applies when, under 11 U.S.C. §330, a trustee disburses estate funds to pay a fee to a chapter 7 professional employed under 11 U.S.C. §327 and not identified under UTCs 3110, 3210, 3310, 3410, 3510, 3610, or 3711, who provided services to the chapter 7 estate. Thus, this UTC applies to all chapter 7 professionals, other than attorneys, accountants, realtors, auctioneer/liquidators, or appraisers. Further, it only applies to fees; whereas expenses incurred by this type of professional fall under UTC 3992 (Other Professional’s Expenses). UTC 3991 includes, but is not limited to, the following categories of professionals: (1) arbitrator or mediator for trustee; (2) consultant for trustee; (3) collection agent for trustee; (4) field representative/adjuster for trustee; (5) harvester for trustee; (6) management company for trustee; (7) personal property broker for trustee, including stockbroker, consigner, and wholesaler; (8) petroleum landman for trustee; (9) private investigator for trustee; (10) surveyor for trustee; (11) investment banker for trustee, and (12) attorney or accountant for the debtor.
• UTC 3992 applies to trustee disbursements of estate funds to reimburse a chapter 7 professional employed under 11 U.S.C. §327 that are not identified under UTCs 3120, 3220, or 3320, for expenses incurred in carrying out the professional’s duties [i.e., expenses originally incurred as out-of-pocket for which the professional seeks reimbursement under 11 U.S.C. §330(a)(1) (B)]. Expenses include, but are not limited to, long distance telephone, postage charges, costs incurred for mileage, and the usage of photocopying and facsimile machines. UTC 3992 applies to a chapter 7 professional other than the estate attorney (Trustee firm or outside counsel) or the trustee acting as the accountant for the estate. UTC 3992 includes, but is not limited to the following categories of professionals: (1) outside accountant for trustee; (2) realtor for trustee; (3) auctioneer for trustee; (4) arbitrator or mediator for trustee; (5) consultant for trustee; (6) collection agent for trustee; (7) field representative/adjuster for trustee; (8) harvester for trustee; (9) management company for trustee; (10) personal property broker for trustee, including stockbroker, consigner, and wholesaler; (11) petroleum landman for trustee; (12) private investigator for trustee; (13) surveyor for trustee; (14) investment banker for trustee; and (15) attorney or accountant for debtor.