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U.S. Department of Justice

Executive Office for United States Trustees

Handbook for Chapter 7 Trustees

Acknowledgments

We gratefully appreciate the assistance of many individuals in the writing and production of this Handbook. Members of the Chapter 7 Subcommittee of the Advisory Committee of United States Trustees and particularly the Chapter 7 Handbook Working Group have worked hard and well to issue this edition of the Chapter 7 Handbook.

Although it is not feasible to acknowledge the efforts of all the people to whom thanks are due for their labor, we recognize J. Christopher Marshall, Jr., United States Trustee, Region 1, Boston, Massachusetts, and Chair of the Chapter 7 Subcommittee, for providing leadership in the development of this revised Handbook. Acknowledgment and appreciation for the considerable work in the preparation of this edition of the Handbook also are given to: Sandra J. Forbes, Assistant Director for Review and Oversight, Executive Office for United States Trustees (EOUST); and members of the Chapter 7 Subcommittee: W. Clarkson McDow, Jr., United States Trustee, Region 4, Columbia South Carolina; Janice Chenier Taylor, United States Trustees, Region 5, New Orleans, Louisiana; Kevin P. Dempsey, Acting United States Trustee, Region 10, Indianapolis, Indiana; Joel Pelofsky, Region 13, Wichita, Kansas; Jan S. Ostrovsky, United States Trustee, Region 18, Seattle, Washington; Beth R. Derrick, Assistant United States Trustee, Region 8, Nashville, Tennessee; Daniel J. Casamatta, Assistant United States Trustee, Region 9, Grand Rapids, Michigan; and Peter H. Carroll, III, Assistant United States Trustee, Region 17, Fresno, California.

Special acknowledgment for their ongoing contributions goes to Suzanne M. Hazard, Deputy Assistant Director for Chapter 7 Oversight, Office of Review and Oversight, EOUST, and to John Daugherty, Trial Attorney, Office of the General Counsel, EOUST.

Additionally, we recognize and thank many panel trustees from the National Association of Bankruptcy Trustees (NABT) for their valuable assistance and perceptive suggestions for this Handbook.

This Handbook should well serve to update and enhance the administration of chapter 7 cases.

Lawrence A. Friedman

Director

Executive Office for

United States Trustees

June 2002

HANDBOOK FOR CHAPTER 7 TRUSTEES

TABLE OF CONTENTS

INDEX

TABLE OF AUTHORITIES

CHAPTER 1

INTRODUCTION

CHAPTER 1 - INTRODUCTION

A. PURPOSE

The United States Trustee ⁽¹⁾ is charged with the responsibility of establishing, maintaining, and supervising panels of private trustees, and of monitoring and supervising cases under chapter 7 of title 11 of the United States Code ("Bankruptcy Code"). The chapter 7 trustee, as the estate representative responsible for the recovery, preservation, liquidation, and distribution of chapter 7 estates, serves as a fiduciary to various parties in interest in a case. The goal of the United States Trustee is to establish a system that allows for the complete, economical, equitable and expeditious administration of chapter 7 cases, while allowing the trustee to exercise appropriate business and professional judgment in performing the trustee's fiduciary duty.

This Handbook represents a statement of operational policy and is intended as a working manual for chapter 7 trustees under United States Trustee supervision. This Handbook is not intended to represent a full and complete statement of the law. It should not be used as a substitute for legal research and analysis. The trustee also should be familiar with the Bankruptcy Code, Federal Rules of Bankruptcy Procedure ("FRBP"), any local bankruptcy rules, and relevant case law.

B. THE BANKRUPTCY LAWS

The Bankruptcy Code consists of eight chapters:

Chapter 1: General Provisions;

Chapter 3: Case Administration;

Chapter 5: Creditors, the Debtor and the Estate;

Chapter 7: Liquidation;

Chapter 9: Adjustment of Debts of a Municipality;

Chapter 11: Reorganization;

Chapter 12: Adjustment of Debts of a Family Farmer with Regular Annual Income; and;

Chapter 13: Adjustment of Debts of an Individual with Regular Income.

The provisions of chapters 1, 3, and 5 apply to all cases under chapters 7, 11, and 13 and, with the exception of § 361, apply to cases under chapter 12. The provisions of chapter 7, chapter 9, chapter 11, chapter 12, and chapter 13 apply only to cases under that specific chapter. The trustee is most concerned with the provisions of chapters 1, 3, 5, and 7. Because chapter 11, 12 and 13 cases may be converted to chapter 7 cases, however, familiarity with these chapters is strongly recommended.

C. JURISDICTION AND VENUE

Pursuant to 28 U.S.C. § 1334, the district court has original and exclusive jurisdiction of all cases under title 11.

All bankruptcy cases and all proceedings arising under, arising in, or related to a title 11 case may be automatically referred by rule of the district court to the bankruptcy court, pursuant to 28 U.S.C. § 157. Section 157 makes further distinctions by the use of the terms "core" and "non-core" proceedings. Bankruptcy judges may hear and determine, subject to appeal, all cases under title 11 and core proceedings arising under or in a title 11 case. The bankruptcy judge may hear non-core proceedings, but the judge's findings of fact and conclusions of law must be submitted to the district court for entry of the final order.

Cases involving claims based on state law may or may not be heard in the bankruptcy court. The trustee may be required to collect certain assets (e.g., accounts receivable) through actions in state court. 28 U.S.C. §§ 1408-1412.

The appropriate location for a bankruptcy filing is governed by 28 U.S.C. § 1408 which establishes four alternate tests for venue: (1) the location of the debtor's domicile; (2) the location of the debtor's residence; (3) the location of the debtor's principal place of business in the United States; or (4) the location of the debtor's principal assets in the United States. Venue is appropriate either in the district in which one of these tests has been satisfied for the 180-day period preceding the filing or in the district in which one of these tests has been satisfied for the longest portion of the 180-day period preceding the filing. Venue is also appropriate in the district in which there is a pending bankruptcy case concerning the debtor's affiliate, general partner, or partnership. The trustee should be alert for cases purposely filed in the wrong venue to accommodate the debtor's attorney, to inconvenience the debtor's creditors, or to obtain a perceived advantage in trustee or judge assignments. The trustee should report such cases to the United States Trustee.

D. ROLE OF THE UNITED STATES TRUSTEE

A major reason for the enactment of the Bankruptcy Reform Act of 1978 was to remove the bankruptcy judges from the responsibilities for day-to-day administration of cases.

Debtors, creditors, and third parties litigating against bankruptcy trustees were concerned that the court, which previously appointed and supervised the trustee, may not impartially adjudicate their rights as adversaries of that trustee. To address these concerns, judicial and administrative functions within the bankruptcy system were bifurcated.

The administrative functions were placed within the Department of Justice through the creation of the United States Trustee Program ("USTP"). The USTP acts in the public interest to promote the efficiency and to protect and preserve the integrity of the bankruptcy system. It works to secure the just, speedy, and economical resolution of bankruptcy cases; monitors the conduct of parties and takes action to ensure compliance with applicable laws and procedures; identifies and investigates bankruptcy fraud and abuse; and oversees administrative functions in bankruptcy cases.

Pursuant to 28 U.S.C. § 586, the United States Trustee shall:

1. establish, maintain and supervise a panel of private trustees that are eligible and available to serve as trustees in cases under chapter 7 of title 11;

2. serve as and perform the duties of a trustee in a case under title 11 when required under title 11 to serve as trustee in such a case;

3. supervise the administration of cases and trustees in cases under chapter 7, 11, 12, or 13 of title 11 by, whenever the United States Trustee considers it to be appropriate:

A. (i) reviewing, in accordance with procedural guidelines adopted by the Executive Office of the United States Trustee (which guidelines shall be applied uniformly by the United States Trustee except when circumstances warrant different treatment), applications filed for compensation and reimbursement under § 330 of title 11; and

(ii) filing with the court comments with respect to such applications and, if the United States Trustee considers it to be appropriate, objections to such application;

B. monitoring plans and disclosure statements filed in cases under chapter 11 of title 11 and filing with the court, in connection with hearings under § 1125 and § 1128 of such title, comments with respect to such plans and disclosure statements;

C. monitoring plans filed under chapters 12 and 13 of title 11 and filing with the court, in connection with hearings under § 1224, § 1229, § 1324, and § 1329 of such title, comments with respect to such plans;

D. taking such action as the United States Trustee deems to be appropriate to ensure that all reports, schedules, and fees required to be filed under title 11 and this title by the debtor are properly and timely filed;

E. monitoring creditors' committees appointed under title 11;

F. notifying the appropriate United States Attorney of matters which relate to the occurrence of any action which may constitute a crime under the laws of the United States and, on the request of the United States Attorney, assisting the United States Attorney in carrying out prosecutions based on such action;

G. monitoring the progress of cases under title 11 and taking such actions as the United States Trustee deems to be appropriate to prevent undue delay in such progress; and

H. monitoring applications filed under § 327 of title 11 and, whenever the United States Trustee deems it to be appropriate, filing with the court comments with respect to the approval of such applications;

4. deposit or invest under § 345 of title 11 money received as trustee in cases under title 11;

5. perform the duties prescribed for the United States Trustee under title 11 and this title, and such duties consistent with title 11 and this title as the Attorney General may prescribe; and

6. make such reports as the Attorney General directs.

CHAPTER 2

CHAPTER 2 - APPOINTMENT TO THE PANEL OF TRUSTEES

The United States Trustee establishes a panel of qualified individuals to be appointed to cases on a fair and equitable basis.

Each United States Trustee is authorized to increase or decrease the total membership of the panel. In addition, each United States Trustee is authorized to institute a system of rotation of membership or the like to achieve diversity of experience, geographical distribution or other characteristics among the persons on the panel. 28 C.F.R. § 58.1. The number of individuals on the panel is governed by the need to ensure the prompt, competent, and complete administration of cases, as well as by the need for fair distribution of case assignments.

A. ELIGIBILITY

To be eligible for membership on a panel, a person must possess all of the qualifications established by the Attorney General of the United States under 28 U.S.C. § 586(d) and published in the Code of Federal Regulations at 28 C.F.R. § 58.3. Panel members must also be able to satisfy the eligibility requirements of § 321 for serving in a case. See Chapter 5. Anyone who was employed by the United States Trustee Program within the preceding one-year period is not eligible for appointment. 28 C.F.R. § 58.3. Prior to appointment, each person will be interviewed and informed of the performance expected, as well as the method by which that person will be assigned cases.

The trustee must successfully undergo initial and five-year background checks which include name and fingerprint checks, a tax check with the Internal Revenue Service, and a report on credit history (with disclosure authorization), including any subsequent credit reports requested by the United States Trustee. The trustee's appointment to the panel or the assignment of cases may be terminated based on unresolved problems discovered during background checks.

B. QUALIFICATIONS

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.

6. be either:

a. a member in good standing of the bar of the highest court of a state or of the District of Columbia;

b. a certified public accountant;

c.a college graduate with a bachelor's degree from a full four-year course of study (or the equivalent) of an accredited college or university, (accredited as described in Part II, § III of Handbook X118 promulgated by the U.S. Office of Personnel Management) with a major in a business-related field of study or at least 20 semester-hours of business-related courses; or hold a master's or doctoral degree in a business-related field of study from a college or university of the type described above;

d. a senior law student or candidate for a master's degree in business administration recommended by the relevant law school or business school dean and working under the direct supervision of:

(1) a member of a law school faculty;

(2) a member of the panel of private trustees;

(3) a member of a program established by the local bar association to provide clinical experience to students; or

e. have equivalent experience as deemed acceptable by the United States Trustee.

7. be willing to provide reports as required by the United States Trustee.

8. have submitted an application under oath, in the form prescribed by the Director, to the United States Trustee for the district in which appointment is sought: Provided, that this provision may be waived by the United States Trustee on approval of the Director.

C. TERM

All panel members are generally appointed for one-year renewable terms. The appointment may be for less than one year. Short-term appointments are often used to adjust a trustee's renewal appointment date or as a compliance measure. Service during the term and the renewal of the appointment are at the discretion of the United States Trustee, subject to the "Procedures for Suspension and Removal of Panel Trustees and Standing Trustees" 28 C.F.R. § 58.6. See Appendix E.

D. PERFORMANCE REVIEW

The United States Trustee prepares a written review of the trustee's performance. The goal of the review is to provide information about the trustee's competency, adherence to fiduciary standards, and commitment to pursue assets for the benefit of creditors. The performance review takes into account a variety of factors, including (but not limited to):

1. the size and age of the trustee's caseload;

2. the trustee's progress in closing cases;

3. the trustee's performance in § 341(a) meetings and in court;

4. the trustee's procedures for safeguarding of estate assets;

5. professional costs incurred by the trustee and maximization of funds distributed to creditors;

6. the number and nature of complaints against the trustee as well as the trustee's responsiveness in addressing the complaints;

7. the trustee's cooperation in furnishing reports and requested information to the United States Trustee;

8. the trustee's judgment in determining whether to administer assets; and

9. the trustee's demeanor in administering his or her cases, including dealing with the debtor's creditors, parties in interest, and other parties pertinent to the trustee performing his or her duties.

The trustee will receive a copy of the performance review and may discuss it with the United States Trustee personally. Any written response by the trustee concerning issues raised in the performance review will become part of the United States Trustee's trustee oversight file, which will be made available to the trustee for review, upon request.

E. TRAINING

The United States Trustee provides ongoing training for all trustees. The training should help trustees keep abreast of recent developments in bankruptcy law and issues which affect chapter 7 estate administration. Training also covers USTP standards and other requirements for trustee performance, including record keeping and reporting. The training for new trustees includes initial training prior to case assignments and periodic one-on-one training thereafter, as appropriate. Trustees may request specific types of training from the United States Trustee, and new trustees may seek to participate in a mentoring program with an experienced member of the panel.

CHAPTER 3

APPOINTMENT OF

PANEL TRUSTEES TO CASES

CHAPTER 3 - APPOINTMENT OF PANEL TRUSTEES TO CASES

A. APPOINTMENT AND QUALIFICATION OF INTERIM TRUSTEES

Section 701 of the Bankruptcy Code mandates that the United States Trustee appoint one disinterested panel member to serve as interim trustee in a chapter 7 case immediately after the order for relief. § 701(a). See Chapter 3.D regarding the appointment of an interim trustee in an involuntary case.

To qualify to serve, the trustee must furnish a bond in favor of the United States that is conditioned on the faithful performance of the trustee's duties. § 322. Unless the United States Trustee directs otherwise, a panel trustee covered by a regional or district blanket bond does not have to file a separate bond in each case. See Chapter 5.E for bonding requirements.

The interim trustee serves until a trustee is elected under § 702 and qualifies under § 322. If no trustee is elected at the § 341 meeting of creditors, then the interim trustee becomes the trustee under § 702(d). The interim trustee has all the duties and powers of a permanent trustee. See Chapter 4 for Elections of Trustees.

B. ASSIGNMENT OF CASES

The United States Trustee appoints panel members to chapter 7 cases on a fair and equitable basis by utilizing a blind rotation system that includes all chapter 7 cases, whether asset or no-asset. As cases are filed, they are assigned to panel members in a manner predetermined by the United States Trustee. A system of blind rotation avoids the appearance of favoritism and eliminates the need to make individual judgments about case assignments. Over a reasonable period of time, this system normally results in asset cases being fairly and equally distributed among the panel. Because the order of assignment is not available to the public, the "blind" rotation also reduces the likelihood that debtors can engage in "trustee shopping" - that is, timing the filing of a petition in order to have a specific trustee appointed in the case. The United States Trustee reviews the processing of chapter 7 cases periodically to evaluate the efficiency and fairness of assignment procedures.

Exceptions to the blind rotation system may be warranted on occasion. Reasons which may warrant such exception include:

1. the unique characteristics of a specific case;

2. the goal of achieving equity in the assignment of cases among panel members;

3. suspension of a trustee from case assignments;

4. previous service in a reopened or converted case;

5. geographic considerations; and

6. training for new panel members.

The United States Trustee documents the reasons for an exception to the blind rotation and will make this information available for review upon request.

There may be circumstances when a trustee may wish to be excluded from the blind rotation system for a limited period of time. In this event, the trustee should submit a Notice of Voluntary Suspension. See Appendix F. Voluntary suspensions are not subject to 28 C.F.R. § 58.6 (Appendix E).

C. TIME AND DURATION OF INTERIM APPOINTMENT

A member of the panel is appointed as an interim trustee upon:

1. the entry of an order for relief under chapter 7;

2. the conversion of a case to chapter 7;

3. the entry of an order directing the United States Trustee to appoint an interim trustee in an involuntary case pursuant to § 303(g); or

4 the resignation, death or removal of the prior trustee, pursuant to § 703.

The interim trustees will be sent a notice of appointment. A panel member who is covered by a regional or district blanket bond is deemed to have accepted the appointment unless the appointment is rejected within five days after receipt of the notice. If a trustee cannot accept the appointment, e.g., where the trustee has a conflict of interest or was an examiner in the case, then the trustee must expressly reject the appointment. FRBP 2008.

A trustee is expected to accept all cases assigned, unless there is a conflict of interest or other extraordinary circumstance.

If the person selected is not covered by a blanket bond ⁽²⁾, the trustee shall notify the court and the United States Trustee in writing of acceptance within five days after receipt of the notice of selection or shall be deemed to have rejected the appointment. If applicable, a copy of the trustee's acceptance of appointment should accompany the notice of appointment, so that the form can be filed in the clerk's office.

If creditors fail to elect a trustee at the first scheduled § 341(a) meeting, the interim trustee becomes the permanent trustee pursuant to § 702(d).

If a permanent trustee is elected and qualifies, the interim trustee must turn over all records and property of the estate to the elected trustee. Within 30 days after the qualification of the elected trustee, the interim trustee should submit the final report and account for review by the United States Trustee and transmittal to the court.

D. NON-PANEL TRUSTEES IN CONVERTED CASES

When a case converts to chapter 7, the trustee administering the case immediately prior to conversion may be appointed by the United States Trustee to serve as the interim trustee, regardless of whether the person is a member of the chapter 7 panel. § 701(a)(1). Upon conversion of a chapter 11 case in which a trustee was serving, the United States Trustee will assess the advisability of reappointing the chapter 11 trustee to serve as the chapter 7 trustee. The United States Trustee considers the trustee's performance as the chapter 11 trustee, including compliance with the reporting requirements, and the trustee's ability to carry out the duties of a chapter 7 trustee in the case. Appointing the chapter 11 trustee to serve in the chapter 7 case does not relieve the trustee of the reporting requirements under FRBP 1019. See Chapter 8.U for additional information about the trustee's reporting obligations.

E. INVOLUNTARY CASES

Generally, the United States Trustee does not appoint an interim trustee in an involuntary case until the order for relief is entered. However, if the court orders the appointment of a trustee pursuant to § 303(g), the United States Trustee should appoint an interim trustee in accordance with § 701. If it appears that assets are being dissipated and that an order for relief will be entered, the United States Trustee should consider moving for the appointment of an interim trustee under § 303(g), if the creditors do not.

In an involuntary case, the period of time between the filing of the petition and the order for relief is known as the "gap" period. During the gap period, the interim trustee takes possession of the property of the estate and operates any business of the debtor. If there is a business to operate, the trustee should apply to the court for authority to operate the business and file operating reports as required by the United States Trustee and § 704(8). (Where applicable, see Chapter 8.J for additional considerations when operating a business in a chapter 7 case.)

The debtor can regain possession of the property if the debtor files such bond as the court requires. If a debtor reclaims possession of the property of the estate, and an order for relief in chapter 7 is subsequently entered, the debtor must account for and deliver to the trustee all of the property, or its equivalent value as of the date the debtor regained possession.

Upon the entry of an order for relief under chapter 7 in an involuntary case, the trustee administers the case in the same manner as a voluntary chapter 7 case. If the debtor has not complied with FRBP 1007(c) by filing required schedules and statements, the court may order the trustee, a petitioning creditor, a committee, or other party to file the schedules and statements pursuant to FRBP 1007(k).

F. SUCCESSOR TRUSTEES

When a trustee dies, resigns, fails to qualify under § 322, or is removed from a case under § 324, the creditors have a right to elect, in the manner specified in § 702, a person to serve as successor trustee. In the event an election is requested, the United States Trustee will call a special meeting of creditors for the purpose of electing a successor trustee. FRBP 2003(f). Only creditors holding eligible claims may request and vote in the election. The procedures set forth in § 702 must be strictly observed when electing a successor trustee. Any person elected by the creditors must be eligible under § 321 to serve as trustee. See Chapter 4 for more information about trustee elections.

Pending the election of a successor trustee, the United States Trustee will appoint an interim trustee under § 703(b) to preserve or prevent loss to the estate. The interim trustee must be a disinterested person who is a member of the panel of private trustees established under 28 U.S.C. § 586(a)(1).

Section 703(c) provides that if creditors do not elect a successor trustee, or if a trustee is needed in a case reopened under § 350, the United States Trustee shall appoint one disinterested person that is a member of the panel of private trustees established under 28 U.S.C. § 586(a)(1) to serve as trustee in the case. This section appears to apply only if the United States Trustee has not appointed an interim trustee under § 703(b). If creditors do not elect a successor trustee in the manner specified in § 702, the interim trustee appointed under § 703(b) should serve as successor trustee by operation of § 702(d). If creditors elect a successor trustee under § 703(a), the services of an interim trustee appointed under § 703(b) terminate when the successor trustee qualifies under § 322.

FRBP 2012(b) requires a successor trustee to file with the United States Trustee an accounting of the prior trustee's administration of the estate. This accounting should be a separate and distinct record of the activities which were solely within the control of the prior trustee. The rule does not have a deadline for submission of the accounting. Absent some evidence of defalcation or other harm to the estate, the accounting can be submitted in conjunction with the submission by the successor trustee of the standard reports required by the United States Trustee.

CHAPTER 4

ELECTION OF A TRUSTEE

CHAPTER 4 - ELECTION OF A TRUSTEE

A. ELIGIBILITY TO REQUEST AN ELECTION AND TO VOTE

Creditors in a chapter 7 case may request the opportunity to elect a trustee at the § 341(a) meeting. The election is properly requested if creditors having 20 percent in amount of the eligible claims request the election. To request an election and to vote in an election, a creditor:

1. must hold an allowable, undisputed, fixed, liquidated, non-priority unsecured claim of a kind entitled to distribution under §§ 726(a)(2)-(4), § 752(a), § 766(h), or § 766(i); ⁽³⁾

2. must not have an interest materially adverse, other than an equity interest that is not substantial in relation to the creditor's interest as a creditor, to the interest of creditors entitled to distribution;

3. must not be an insider; and

4. must have "filed a proof of claim or a writing setting forth facts evidencing a right to vote pursuant to § 702(a) unless objection is made to the claim or the proof of claim is insufficient on its face." FRBP 2003.

A candidate for trustee is elected if the candidate receives the votes of creditors holding the majority in amount of those claims voted. See § 702 and FRBP 2003.

B. TRUSTEE ELECTION PROCEDURE

If an election is requested, the United States Trustee presides over the election. This eliminates the possible conflict of the interim trustee presiding while having an interest in the outcome of the election. Neither the Bankruptcy Code or Rules requires creditors to provide any advance notice of an intent to request an election.

If the interim trustee anticipates or receives a request for an election, the trustee shall immediately contact the United States Trustee, and the United States Trustee shall preside over the election.

If the creditors move to elect a trustee during the § 341(a) meeting without prior notice, the interim trustee shall adjourn the meeting and immediately notify the United States Trustee, who shall preside over the election then or at a later date. If the clerk of the bankruptcy court has notified creditors that no proof of claim is required in the case pursuant to FRBP 2002(e), the United States Trustee will consider continuing the § 341(a) meeting and notifying the creditors of the requested election and of the need to file a proof of claim in order to participate in the election.

The trustee should notify the United States Trustee if the trustee perceives that an election is being suggested in an attempt to influence the trustee's actions.

When the election is concluded, the interim trustee or the United States Trustee may still examine the debtor or allow the creditors to examine the debtor. However, the United States Trustee will consider continuing the examination of the debtor until the election report is filed and any election dispute is resolved, so that the elected trustee may conduct the examination. Once all parties in interest have had an opportunity to examine the debtor, the meeting should be concluded.

C. DISPUTED ELECTIONS

The United States Trustee does not resolve any dispute in the election process. The United States Trustee, as the presiding officer, promptly informs the court in writing that a dispute exists. Pending the resolution of the dispute, the interim trustee continues to serve. If no motion for resolution of such election dispute is made within 10 days after the election report is filed, the interim trustee shall serve as the trustee in the case. FRBP 2003(d).

D. QUALIFICATION OF ELECTED TRUSTEES

The elected trustee is considered qualified once the trustee has returned a notice of acceptance of election, accompanied by a bond. See § 322. The United States Trustee will notify the person elected concerning how to qualify and the amount of the bond. FRBP 2008.

E. DUTIES AND RESPONSIBILITIES OF ELECTED TRUSTEES

The statutory duties of an elected trustee are the same as the duties of an interim trustee who becomes trustee by operation of § 702(d). An elected trustee must also comply with the requirements of the United States Trustee and will be requested to submit to a background investigation.

CHAPTER 5

QUALIFICATIONS

AND ACCEPTANCE

CHAPTER 5 - QUALIFICATIONS AND ACCEPTANCE

A. QUALIFICATIONS

To be eligible to serve as a trustee in a chapter 7 case, a person must be: (1) competent to perform the duties of a chapter 7 trustee, (2) reside or have an office in the district where the cases are pending or in an adjacent district, and (3) be an individual or a corporation authorized by corporate charter or by-laws to act as a trustee. § 321

While corporations are eligible under § 321 for appointment as interim trustees in specific cases, each individual in a corporation who performs the duties of a trustee must individually satisfy the requirements of 28 C.F.R. § 58.3. In view of the fiduciary duties of the trustee, the responsibility of the individual trustee to preside at § 341(a) meetings, possible complications as to coverage under blanket or separate bonds, and possible increases in expenses imposed on estates, corporate entities are rarely appointed. The regulation provides that no professional corporation, partnership, or similar entity organized for the practice of law or accounting is eligible for appointment as a chapter 7 trustee.

To qualify, the trustee must file with the court a bond in favor of the United States. § 322. (See Chapter 5.E below.)

B. ACCEPTANCE UPON APPOINTMENT

A panel member who is covered by a blanket bond filed with the court and who fails to reject the appointment within five days after receipt of notice of selection is deemed to have accepted the appointment. FRBP 2008. No additional appointment is provided if the interim trustee becomes the permanent trustee by operation of law pursuant to § 702.

A trustee is expected to accept all cases assigned, unless there is a conflict of interest or other extraordinary circumstance.

C. CONFLICTS OF INTEREST

A trustee must be knowledgeable of § 701(a)(1), § 101(14), and § 101(31), as well as any other applicable law or rules, and must decline any appointment in which the trustee has a conflict of interest or lacks disinterestedness. A trustee should have in place a procedure to screen new cases for possible conflicts of interest or lack of disinterestedness upon being appointed.

If a trustee discovers a conflict of interest or a lack of disinterestedness after accepting the appointment, the trustee should immediately file a notice of resignation in the case. Conflict waivers by either the debtor or creditor are not effective to obviate the trustee's duty to resign.

The trustee must advise the United States Trustee upon the discovery of any potential conflict or lack of disinterestedness so that a determination can be made as to whether the appointment of a successor trustee is necessary. In addition, the trustee must disclose any potential conflicts on the court record or at the § 341(a) meeting, or both on the court record and at the § 341(a) meeting. The trustee should also advise the United States Trustee upon discovery of any circumstances which might give rise to the appearance of impropriety.

While it is not possible to list all situations presenting an actual or potential conflict of interest or lack of disinterestedness, a non-exclusive list of examples follows:

1. the trustee represents or has represented the debtor, a creditor, an equity security holder, or an insider in other matters;

2.the debtor or creditor is an employee of the trustee or of a professional providing services to the trustee in the case;

3. the trustee is appointed to serve as trustee for a corporate debtor and for a debtor who is an insider, officer, director or guarantor of the corporate debtor;

4. the estate has a potential cause of action against the trustee, an employee of the trustee, a client of the trustee or the trustee's firm or other person or entity with whom the trustee has a business or family relationship;

5. the trustee was an officer, director, or employee of the debtor or of the debtor's investment banker within two years before the commencement of the case;

6. the trustee is a creditor or an equity security holder of the debtor; or

7. the trustee had been an investment banker for a security of the debtor within three years before the commencement of the case or the trustee has represented such an investment banker in connection with the offer, sale, or issuance of a security of the debtor.

Several courts have addressed the issue of whether an actual or potential conflict of interest or lack of disinterestedness of a trustee's partner or associate may be imputed to the trustee. Therefore, the trustee should disclose to the United States Trustee all situations presenting an actual or potential conflict of interest or lack of disinterestedness for his partners or his firm.

FRBP 2008 allows the appointment of one trustee in jointly administered cases. The existence of interdebtor claims in jointly administered cases must be examined closely because such claims do not automatically disqualify the trustee. See, e.g., In re BH & P Inc., 949 F.2d 1300 (3rd Cir. 1991). However, these cases should be monitored because conflicts can develop and require the appointment of separate trustees.

In districts in which the standing chapter 13 trustee is also a panel trustee, appointment of the chapter 7 trustee in cases converted from chapter 13 should be monitored so that the chapter 13 trustee is not appointed as the chapter 7 trustee.

D. SOLICITATION OF GRATUITIES, GIFTS, OR OTHER REMUNERATION OR THING OF VALUE

Neither a trustee nor any employee of the trustee may solicit or accept any gratuity, gift, or other remuneration or thing of value from any person, if it is intended or offered to influence the official actions of the trustee in the performance of the trustee's duties and responsibilities. For specific concerns regarding receipt of computer hardware and software, see Chapter 9.C.

E. BONDS

Pursuant to § 322(a), a trustee does not qualify for appointment until the trustee has filed with the court a bond in favor of the United States of America conditioned on the trustee's faithful performance of the trustee's official duties. The United States Trustee determines the amount and terms of the bond and the sufficiency of the surety on each bond. § 322(b)(2). The trustee has an obligation to continually review the adequacy of bond coverage and to inform the United States Trustee of any situation, such as an upcoming asset sale, which may necessitate an increase in bond coverage.

Each trustee is a principal on the bond, and all bonds are written in favor of the United States of America. The following are the most common types of bonds available for chapter 7 trustees:

1. individual case bond - A single trustee is bonded for a single case for a scheduled amount which includes a cushion based upon a percent of funds on deposit. The deposits are monitored and the bond is adjusted as the deposits significantly increase or decrease. This type of bond is often used for trustees who are operating a business under chapter 7 (see Chapter 8.J), trustees who are not panel active, and for trustees who have a case in which the funds on hand exceed the per case limit under a schedule bond.

2. blanket bond - This bond may cover multiple cases for one or more trustees.

a. schedule bond - This bond covers all trustees of a particular group, district, region or other unit, based upon the discretion of the United States Trustee. Each trustee within the group is bonded for an individually scheduled amount and the premium paid by the trustee is based upon the scheduled amount. The scheduled amount should include a cushion based upon a percent of funds on deposit by trustee at the time the bond is renewed. Because of the cushion, there should be no need to adjust a scheduled amount during the term of the bond absent a dramatic fluctuation in the funds on deposit with a particular trustee. These bonds generally have a per-case cap which means an individual case bond is required for cases with funds over a designated amount.

b. aggregate bond - The term "aggregate" means that the trustee is covered for the full amount of the bond, regardless of the premium actually paid by the trustee and regardless of the amount the trustee had on deposit at the time the bond was obtained. There are two general types of aggregate bonds which are distinguishable by the method used to calculate the total amount of the bond. In one type, the United States Trustee will fix the amount of the bond based upon 100 percent of the funds on deposit for all of the trustees covered by the bond, with no cushion included. In the second type, the United States Trustee will fix the bond at an amount which is lower than the total amount of the funds on deposit held by all of the trustees, but significantly higher than the total deposit held by any one of the trustees covered by the bond.

In each aggregate bond, the trustee's share of the premium is based upon the amount of the trustee's deposits used to determine the amount of the bond. The amount of the bond and the trustee's premium share are recalculated each time the bond is renewed, usually annually. There is usually no need to adjust the covered amount during the term of the bond, unless the United States Trustee finds that the total funds on deposit have changed dramatically.

The foregoing types of bonds are illustrative only. Ultimately, § 322 and the language of the bond will determine what is covered. Therefore, the language of every bond, including riders and amendments, should be carefully reviewed. Any new or questionable term, such as a limitation on liability or a requirement to give notice, should be brought to the attention of the United States Trustee immediately.

The United States Trustee ensures that the bond premiums are competitive by periodically seeking bids or making other price comparisons. The United States Trustee also periodically considers changing bonds and sureties for reasons other than price. Most bonds contain a clause that regardless of the number of years the bond is in effect, the surety's liability is limited to the face amount of the bond. Some refer to it as a non-aggregation clause. Thus, if a $10 million bond is renewed every year for five years, the surety is only liable for $10 million - not for $10 million each year for a total of $50 million. See In re Endeco, 718 F.2d 879 (8^th Cir. 1983).

The trustee may recover appropriate portions of the bond premium as an administrative expense in the estates with assets subject to its protection. For blanket bonds, the trustee should allocate the blanket bond premium to all of the estates with assets covered by the bond. This includes all chapter 7 asset cases and any chapter 11 cases covered by the bond. The allocation methodology is determined by the United States Trustee, but the allocations are normally based on the funds on hand as of a particular date.

The bond is intended to cover the faithful performance of the trustee's duties. The bonding company will likely seek indemnification from the trustee for any payments the bonding company is required to make to third parties. Since the bond protects the estate beneficiaries and not the trustee, a trustee may wish to consider obtaining professional liability insurance coverage.

CHAPTER 6

DUTIES OF A TRUSTEE

CHAPTER 6 - DUTIES OF A TRUSTEE

A. INTRODUCTION

Pursuant to 28 U.S.C. § 586(a), the United States Trustee supervises the actions of trustees in the performance of their responsibilities. The principal duty of the trustee is to collect and liquidate the property of the estate and to distribute the proceeds to creditors. The trustee is a fiduciary charged with protecting the interests of the various parties in the estate.

A chapter 7 case should be administered to maximize and expedite dividends to creditors and facilitate a fresh start for the debtors entitled to a discharge. A trustee should 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. Chapter 7 trustees 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 creditors before administering a case as an asset case.

B. STATUTORY AND GENERAL DUTIES

The specific statutory duties of a trustee are set forth at § 704. The trustee shall:

1. collect and reduce to money the property of the estate and close the estate as expeditiously as is compatible with the best interests of parties in interest;

2. be accountable for all property received;

3. ensure that the debtor performs his intentions as to the retention or surrender of property of the estate that secures consumer debts;

4. investigate the financial affairs of the debtor;

5. if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;

6. if advisable, oppose the discharge of the debtor (but not the discharge of a particular debt since only the creditor to whom it is owed may do so);

7. unless the court orders otherwise, furnish such information concerning the estate and the estate's administration as is requested by a party in interest;

8. if the business of the debtor is authorized to be operated, file with the court and with any governmental unit charged with the responsibility for collection or determination of any tax arising out of such operations, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the court or the United States Trustee requires; and

9. make a final report (TFR) and file a final account (TDR) of the administration of the estate with the United States Trustee and the court.

Section 323(a) provides that the chapter 7 trustee is the representative of the estate. The trustee is a fiduciary charged with protecting the interests of all estate beneficiaries - namely, all classes of creditors, including those holding secured, administrative, priority, and non-priority unsecured claims, as well as the debtor's interest in exemptions and in any possible surplus property. The trustee's duties enumerated under § 704 are specific, but not exhaustive. To properly represent the estate, the trustee must secure for the estate all assets properly obtainable under applicable provisions of the Bankruptcy Code, object to the debtor's discharge where appropriate, defend the estate against improper claims or other adverse interests, and liquidate the estate as expeditiously as possible for distribution to creditors.

1. COLLECTION AND LIQUIDATION OF ASSETS, § 704(1)

A trustee has a duty to ensure that a debtor files all schedules and statements required under § 521 and FRBP 1007. A trustee must also ensure that a debtor surrenders non-exempt property of the estate to the trustee, and that records and books are properly turned over to the trustee.

The trustee should be familiar with the definition of property of the estate as set forth in § 541. Under § 541, all legal and equitable interests of the debtor, wherever located and by whomever held, are property of the estate. Property of the estate also includes any property that the debtor acquires or becomes entitled to acquire within 180 days after the petition date by way of inheritance, property settlement or divorce decree, or life insurance.

Property of the estate is defined more broadly in chapter 13 cases under § 1306 to include property and earnings acquired post-petition. However, if a chapter 13 case is converted to a chapter 7 case, the § 1306 definition does not apply. Upon conversion, property of the chapter 7 estate consists of property of the estate, as of the date of the chapter 13 petition, that remains in the possession of or is under the control of the debtor on the date of conversion, unless the case was converted in bad faith. § 348(f). See also Chapter 8.U for more on conversions.

In reviewing the schedules, the trustee should make a preliminary determination as to whether there appear to be assets in the case or areas warranting further inquiry at the § 341(a) meeting. The trustee should not rely upon the designation by the clerk of the bankruptcy court as to whether the case is an asset or no-asset case. The trustee should conduct an independent investigation to make this determination.

A trustee performs the duty of collecting and reducing to money property of the estate in a variety of ways. For example, the trustee may object to improper exemptions, seek disgorgement of unreasonable attorney fees paid to the debtor's counsel, compel the turnover of non-exempt property, and use the avoidance powers of § 544, et seq., to recover assets. After a trustee has collected all assets of an estate, the assets must be reduced to cash for eventual distribution to creditors under § 726.

2. ACCOUNTABILITY OF THE TRUSTEE FOR ALL PROPERTY RECEIVED, § 704(2)

Section 704(2) requires the trustee to be accountable for all property received, and FRBP 2015 imposes a duty on a trustee to keep records, make reports, and give notice of a case to persons holding property of the estate.

Control and Preservation of Property

The trustee has the duty and responsibility to insure and safeguard all estate property and property that comes into the trustee's hands by virtue of his appointment.

In those cases where the property appears to have value for the estate, the trustee should obtain control over the property (which may include changing locks at the premises, hiring guards, etc.) and determine the extent and value of the property. The trustee also should immediately obtain insurance in an amount sufficient to protect the estate property (which may include insurance against fire, theft, vandalism, liability and other possible hazards) and take any other steps which may be reasonably necessary to preserve the assets. The trustee should request proof of insurance from the debtor and should ensure that it is continued for the benefit of the estate.

If there is no insurance and there are no estate funds available, the trustee should contact the secured creditor immediately, so that the secured creditor can obtain insurance or otherwise protect its own interest in the property. Where the uninsured property has value, the trustee may consider seeking (a) an agreement with the secured creditor to fund the expense of insurance and provide proper safeguarding under § 506(c); or (b) a court order allowing the trustee to insure or safeguard the property at the expense of the secured creditor pursuant to § 506(c). When the property cannot be insured, the trustee should liquidate the property as quickly as possible in a reasonable manner. Under these circumstances, the trustee is strongly encouraged to file motions to reduce the time within which objections may be filed to the proposed sale.

When the property is fully secured and of nominal value to the estate, the trustee should contact the secured creditor immediately so that the secured creditor can obtain insurance or otherwise protect its own interest in the property. The trustee should immediately abandon fully secured property or uninsured property of no value to the estate. See Chapter 8.D for further information on abandonments. Note that an order granting relief from stay does not automatically constitute abandonment.

If a loss occurs as a result of the trustee's failure to insure or protect estate property, the trustee could be subject to liability including a surcharge.

Inventorying Property

Pursuant to FRBP 2015(a)(1), a trustee must file a complete inventory of the debtor's property within 30 days after qualifying as a trustee, unless such inventory has already been filed. The nature and extent of the inventory depends upon the type and value of the debtor's assets. The inventory should be sufficient to enable the trustee to later verify whether an auctioneer or other liquidator has accounted for all property turned over for sale.

Generally, the debtor's schedules A and B will satisfy the requirements of FRBP 2015(a)(1) as long as the trustee is able to verify at the § 341(a) meeting that the debtor's inventory, as shown on Schedules A and B or other documents, is complete and satisfactory. The Form 1 ⁽⁴⁾ maintained by the trustee, may provide a sufficient inventory of the debtor's assets. Nonetheless, there may be instances when the trustee will need to obtain a more detailed inventory in order to properly administer the assets. For example, if the debtor has listed Furs and Jewelry at $10,000 in the schedules, the trustee will need to obtain a detailed list of the items. In addition to the written list, the trustee should consider using other methods to document the assets, such as videotaping the assets.

Environmental Issues

When appropriate, the trustee should take the necessary steps to abate or prevent environmental contamination by or to estate property. If property of the estate has no value and may be hazardous to the health or safety of the general public, the trustee should give immediate consideration to abandoning property under § 554(a). Before abandoning the property, however, the trustee should take all precautions possible in light of the available assets of the estate and consult with appropriate federal, state and local authorities. Consultation is advised to ensure adequate notice and appropriate consideration of public policy issues. A notation of the consultation in the estate file is recommended.

3. EXAMINING THE DEBTOR'S EXEMPTIONS AND STATEMENT OF INTENTION, § 704(3)

Initial Review of Exemptions

The trustee must object to improper debtor exemptions within 30 days after the conclusion of the § 341(a) meeting or the filing of any amendment to the list or supplemental schedules, unless, within such period, further time is granted by the court. FRBP 4003(b). If the trustee does not file a timely objection to an exemption, it is deemed allowed. See Taylor v. Freeland and Krontz, 503 U.S. 638 (1992). See Chapter 8.C for further information about exemptions.

Review of Statement of Intention

Section 521(2) requires an individual debtor to file a statement within 30 days of the bankruptcy petition disclosing his intention with respect to the retention or surrender of property of the estate securing consumer debts, and further, to perform such intention within 45 days of the filing of the notice of intent. § 521. The trustee must ensure the performance of such intentions and should examine the statement of intention early in the case and seek the debtor's verification at the § 341(a) meeting that the intentions have been performed.

4. INVESTIGATE THE FINANCIAL AFFAIRS OF THE DEBTOR, § 704(4)

The trustee investigates the debtor's financial affairs in the following ways:

a. reviews 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 § 521 and FRBP 1007 (see Chapter 6.C)

b. examines the debtor at the § 341(a) meeting (see Chapter 7); and

c. conducts such other investigation as necessary, such as following up on tips about unscheduled assets.

5. EXAMINE PROOFS OF CLAIM, § 704(5)

Section 704(5) requires a trustee to examine proofs of claim and object to the allowance of any claim that is improper, if a purpose would be served by doing so. For example, if it is clear that there are only sufficient assets to pay priority creditors, then no purpose would be served by examining or objecting to general unsecured claims. See Chapter 8.O for more information about reviewing claims.

6. OPPOSE THE DISCHARGE OF THE DEBTOR, § 704(6)

The trustee has a duty under § 704 to object to the debtor's discharge if advisable. Whenever appropriate, the trustee should examine the acts and conduct of the debtor to determine whether grounds exist for denial of discharge. § 727(c).

Section 727(a) provides that the court shall grant a discharge unless the debtor:

a. is not an individual (corporations and partnerships do not receive a discharge under chapter 7);

b. conceals property with intent to defraud;

c. fails to preserve or conceals financial records;

d. makes a false oath or account; presents or uses a false claim; gives, offers, receives money, property, or advantage for acting or forbearing to act; or withholds books and records;

e. fails to explain satisfactorily the loss or deficiency of assets;

f. refuses to obey an order of the court or to testify after being granted immunity;

g. commits any of the acts in a through f above within one year of the date of the filing of the petition or during the case, in connection with another case concerning an insider;

h. receives a chapter 7 or chapter 11 discharge in a case commenced within the previous six years;

i. receives a chapter 12 or chapter 13 discharge in a case commenced within the past six years under certain circumstances; or

j. submits a written waiver of discharge approved by the court.

A complaint objecting to discharge must be filed within 60 days of the date first set for the § 341(a) meeting. FRBP 4004(a). The court may extend this time but the motion for extension must be filed before expiration of the 60-day period. FRBP 4004(b). An order granting a creditor's motion to extend the time to file an objection does not necessarily amount to an extension of time for the trustee. The trustee must obtain a separate extension.

A discharge can be revoked within one year after it was granted if the discharge was obtained by fraud and the requesting party was not aware of it until after the discharge was granted. § 727(d)(1) and (e)(1). Alternately, pursuant to § 727(d)(2) and (3) and (e)(2), before the later of one year after the granting of a discharge or the date the bankruptcy case is closed, the discharge may be revoked on the following grounds:

a. the debtor acquired or became entitled to property that would be property of the estate and knowingly and fraudulently concealed it from the trustee; or

b. the debtor refused to obey a court order or to respond to a material question after a grant of immunity if the privilege against self-incrimination was invoked.

Section 727 also authorizes the United States Trustee to object to the discharge of a debtor or to seek revocation of the discharge. If the trustee has information that would support an objection to discharge but deems such an action inadvisable, the trustee should promptly bring such facts to the attention of the United States Trustee. In some cases, the United States Trustee has been held to have constructive notice of information acquired by a trustee and has been precluded from bringing an action to revoke the discharge. FRBP 7041 states that a complaint objecting to the debtor's discharge shall not be dismissed at the plaintiff's insistence without notice to the United States Trustee.

7. FURNISH INFORMATION CONCERNING THE ESTATE, § 704(7)

The trustee should reply in an expeditious manner to inquiries from creditors and other parties in interest.

8. OPERATING REPORTS, § 704(8)

Where the trustee is operating a business under § 721, the trustee must meet report filing requirements as described in Chapter 8.J.

9. FINAL REPORT AND FINAL ACCOUNT OF THE ESTATE, § 704(9)

After liquidating all estate assets, converting those assets to cash, and properly investing the cash pending an examination of claims and complete performance of other duties under § 704, the trustee must make a final report and file a final account of the administration of the estate with the United States Trustee and the court. These requirements are more fully discussed in Chapter 8.S.

C. REVIEW OF PETITION, SCHEDULES, AND STATEMENTS

The trustee is responsible for reviewing the sufficiency of the petition, matrix (list of creditors' names and addresses) and statements and schedules.

The debtor's petition must include the debtor's name, social security number, employer's tax identification number and all other names used by the debtor within six years prior to the filing. FRBP 1005.

In addition to the petition, the following schedules and statements must be filed:

Schedule A - Real Property

Schedule B - Personal Property

Schedule C - Property Claimed as Exempt

Schedule D - Creditors Holding Secured Claims

Schedule E - Creditors Holding Unsecured Priority Claims

Schedule F - Creditors Holding Unsecured Non-priority Claims

Schedule G - Executory Contracts and Unexpired Leases

Schedule H - Co-Debtor

Schedule I - Current Income of Individual Debtor(s)

Schedule J - Current Expenditures of Individual Debtor(s)

Statement of Financial Affairs.

If the schedules and statements do not accompany the petition, the petition should, at a minimum, be submitted with a list containing the names and addresses of all the debtor's creditors. If such a list is filed, FRBP 1007(c) grants the debtor fifteen days from the filing to supply complete schedules and statement(s) of affairs. Under FRBP 1007(a)(4) and (c), the trustee must receive notice of any request for an extension of time to file documents.

An individual debtor also must file a statement of intention with respect to the retention or surrender of property securing consumer debts. § 521. In addition, the attorney or the petition preparer for the debtor must disclose any fees received or promised in connection with the bankruptcy proceeding. See § 110(h)(1) and FRBP 2016(b). The trustee must verify submission of the above-referenced documents and take action in the event of non-compliance.

The trustee also must be aware of the following issues of special concern:

1. only a husband and wife can file a joint petition, pursuant § 302;

2. in a filing by a corporation, the petition should be accompanied by a copy of the resolution authorizing the filing;

3. in a partnership case, if fewer than all general partners of a partnership consent to the petition for relief on behalf of the partnership, the trustee should notify the United States Trustee. It is an involuntary petition under § 303(b)(3) and FRBP 1004; and

4. upon conversion of a chapter 11, chapter 12 or chapter 13 case to a chapter 7 case, unless otherwise ordered by the court, the previously filed statements and schedules are deemed filed in the chapter 7. If the case is converted from chapter 13, the debtor must file a statement of intention. In addition, the debtor-in-possession or the superseded trustee must file the final report and account and schedule of post-petition debts.

If there is no individual who is performing the duties of the corporate or partnership debtor, the trustee should request the bankruptcy court to designate a party (officer, director, partner, or person in control) to perform the duties of the debtor. FRBP 9001(5). The person who is the subject of the designation should be given notice of the trustee's application to the court.

D. REVIEW OF DEBTOR'S ATTORNEY FEES

The debtor's attorney in a bankruptcy case, whether or not the attorney intends to apply for compensation post-petition, must file a statement in compliance with § 329(a) and FRBP 2016(b) setting forth the amount of compensation paid or agreed to be paid for services in connection with the case. This statement must be filed within 15 days after the order for relief, or as otherwise ordered. The trustee should review this disclosure of compensation and make an independent determination whether the fee paid or agreed to be paid is excessive. If the fee is questionable, the trustee or the United States Trustee should move, pursuant to § 329(b) and FRBP 2017(a), to have the court review the fee for reasonableness. To the extent the fee is excessive, the court may order cancellation of the fee agreement or the return of all or any portion of the fee.

Claims for unpaid attorney fees for pre-petition services provided to the debtor generally will be discharged in a chapter 7 case. The trustee should advise the United States Trustee if a debtor's attorney attempts to collect fees from the debtor for pre-petition services.

Some courts hold that a chapter 7 debtor's attorney may not be compensated for post-petition services from estate assets in light of a 1994 revision to § 330 which eliminated chapter 7 debtors' attorneys from the list of professionals who may be awarded compensation pursuant to that section. See, e.g., Inglesby, Falligant, Horne, Courington & Nash, P.C. v. Moore (In re American Steel Products, Inc.), 197 F.3d 1354 (11th Cir. 1999); Andrews & Kurth L.L.P. v. Family Snacks, Inc. (In re Pro-Snax Distributors, Inc.), 157 F.3d 414 (5th Cir. 1998). Contra In re Top Grade Sausage, Inc., 227 F.3d 123 (3rd Cir. 2000); U.S. Trustee v. Garvey, Schubert & Barer (In re Century Cleaning Services, Inc.), 195 F.3d 1053 (9th Cir. 1999).

The trustee should be alert for retainers held by debtors' attorneys. While courts generally hold that an unearned retainer on hand at the commencement of a case constitutes estate property, the trustee may have to initiate action to obtain the balance of the retainer.

E. REVIEW FOR PETITION PREPARERS

In 1994, Congress enacted legislation to regulate the conduct of lay persons who assist debtors in preparing bankruptcy petitions. Section 110 requires bankruptcy petition preparers to disclose their name, address, social security number, and fee. It prohibits preparers from signing documents for debtors, from collecting fees if court fees have not been paid, and from using the word "legal"or similar terms in advertisements. It requires preparers to provide a copy of the bankruptcy documents to the debtor at least by the time that documents are presented for the debtor's signature. The section also authorizes the court to order the return of excessive fees. The court may impose fines of up to $500 for each statutory violation.

Section 110 also provides remedies to address certain petition preparer abuses. Damages include the debtor's actual damages, the greater of $2,000 or twice the amount the debtor paid for the preparer's service, and reasonable attorney fees and costs. The trustee can pursue actions under § 110 and may receive an additional $1,000 plus reasonable attorney's fees and costs.

The petition preparer statute also authorizes injunctive relief against preparers under certain circumstances. If a case is dismissed as the result of a preparer's knowing attempt to disregard bankruptcy requirements, the preparer may be subject to criminal liability under 18 U.S.C. § 156.

Section 110 in no way permits the unauthorized practice of law.

The trustee should report potential violations of § 110 to the United States Trustee.

F. REVIEW FOR SUBSTANTIAL ABUSE UNDER § 707(b)

The trustee must review the schedules, statements of financial affairs, and statements of current income and expenses in each case, for any evidence of substantial abuse that may provide the basis for a motion to dismiss pursuant to § 707(b). Such evidence may also arise or be confirmed at the § 341(a) meeting. If such evidence exists, the trustee should notify the United States Trustee. The United States Trustee determines whether to move for the dismissal of the case under § 707(b).

The following guidelines are provided to assist the trustee in determining whether a case involves substantial abuse.

1. DETERMINATION OF "PRIMARILY CONSUMER DEBT"

Consumer Debt

Section 707(b) applies only to a case filed by an individual with debts incurred primarily for personal, family, or household purposes.

The trustee should be aware that credit card debts may not in all instances constitute consumer debts. When the credit transaction involves a profit motive, it is outside the definition of a consumer credit transaction. Mortgage debt is considered a consumer debt, In re Kelly, 841 F. 2d 908, 915 (9th Cir. 1988), unless the proceeds are used for a business purpose. In re Funk, 146 B.R. 118 (D.N.J. 1992). The trustee should be alert to residential mortgage borrowing that is used to finance business operations or investments and, therefore, constitutes a non-consumer obligation.

Primarily Consumer Debt

The term "primarily consumer debt" is not defined in the Bankruptcy Code. One court has held that a debtor's obligations may be adjudged primarily consumer debts not only by the aggregate amount, but by their relative number as well. Other courts have concluded, however, that it is appropriate to give more weight to the aggregate amount than the number of debts. The trustee should be alert to any decisions on this point within the trustee's judicial district.

2. DETERMINING SUBSTANTIAL ABUSE

The precise meaning of "substantial abuse" is presently left to judicial interpretation. The following factors have been considered by the courts in determining if there is substantial abuse under § 707(b) and should, therefore, be considered by the trustee:

Ability to Repay Debts

The trustee should examine the statement of financial affairs and statement of income and expenses of the debtor for any evidence that indicates that the debtor could pay a meaningful percentage of debts owed to creditors over a period of time. The 9th Circuit Court of Appeals, in In re Kelly, 841 F. 2d 908, 915 (9th Cir. 1988), held that "a finding that a debtor is able to pay his debts, standing alone, supports a conclusion of substantial abuse," justifying dismissal under § 707(b). In addition, several other courts have indicated that the primary factor to be considered in determining the existence of substantial abuse is whether the debtor would have sufficient disposable income to repay a meaningful part of the debtor's debts within the context of a chapter 11 or chapter 13 plan.

In analyzing the ability to repay debts, the trustee should review the debtor's statement of income and expenditures for reasonableness and accuracy. The trustee also should consider the future earnings potential of the debtor, even if the earnings arise from an exempt source. To the extent possible, consideration should be given to the debtor's experience, education, background, skills, health, and aptitude.

In determining disposable income, the trustee should be guided by the provisions of § 1325(b), which define disposable income as income which is received by the debtor and which is not reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor.

The Fourth Circuit, however, has held that an ability to repay standing alone will not support a finding of substantial abuse. In re Green, 934 F.2d 568 (4th Cir. 1991).

Motivation and Factors Surrounding Filing

Some courts have also sustained a finding of substantial abuse if the debtor's motivation for filing evidences a lack of honesty. One leading case stated:

Substantial abuse can be predicated upon either lack of honesty or want of need.

It is not possible, of course, to list all the factors that may be relevant to ascertaining a debtor's honesty. Counted among them, however, would surely be the debtor's good faith and candor in filing schedules and other documents, whether he has engaged in "eve of bankruptcy purchases," and whether he was forced into Chapter 7 by unforeseen or catastrophic events.

In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989). Accord, First USA v. Lamanna (In re Lamanna), 153 F.3d 1 (1st Cir. 1998).

3. TIMING

The trustee should notify the United States Trustee of any reasonable basis for a motion to dismiss pursuant to § 707(b) as soon as possible. If the United States Trustee decides to bring an action, it must be filed within 60 days of the date originally scheduled for the first meeting of creditors, not the date on which the meeting was actually held. FRBP 1017(e)(1).

The trustee should refer cases which appear to be abusive, but do not meet the criteria for § 707(b), to the United States Trustee for consideration under § 707(a).

G. TRANSMISSION OF DOCUMENTS

In the administration of a case, the trustee or the attorney for the trustee should transmit to the United States Trustee a copy of all notices, motions, applications, pleadings and orders filed, prepared or served by the trustee (unless otherwise notified by the United States Trustee). FRBP 2002(k). Electronically filed documents generally shall be served on the United States Trustee in the manner prescribed for such documents under local rule. The United States Trustee may also require the trustee to transmit all documents through other means. The method of transmittal will be determined locally by the United States Trustee. In addition, the method of transmittal for Forms 1, 2 and 3, as well as for the NDRs, TFRs, and TDRs, shall be determined locally by the United States Trustee.

Although FRBP 5005(c) provides a safety net for creditors filing proofs of claim with the trustee, the trustee should encourage creditors to file claims with the clerk of the bankruptcy court. The trustee should not generally accept claims at the § 341(a) meeting or at any other time. If the trustee receives an original proof of claim, the trustee should note the date of receipt, retain a copy, and transmit the claim to the clerk. The trustee should not electronically file the mis-transmitted claim.

CHAPTER 7

SECTION 341(a) MEETING

CHAPTER 7 - SECTION 341(a) MEETING

Section 341(a) states that the United States Trustee shall preside at the meeting of creditors. The meeting of creditors provided for in § 341(a) is the official forum where the debtor must appear and answer under oath questions from the trustee, creditors, and other parties in interest regarding the estate. The trustee is the presiding officer at the § 341(a) meeting as designee of the United States Trustee. The trustee may not delegate the duty to preside at the § 341(a) meeting. A trustee may not unilaterally waive a debtor's appearance at the creditors' meeting. The trustee must seek prior approval, confirmed in writing, from the United States Trustee if the trustee is unable to preside at a scheduled meeting. If the United States Trustee designates another to serve at the § 341(a) meeting, the trustee is responsible for ensuring that the designated presiding officer is qualified and trained to conduct the meeting.

The § 341(a) meeting is held for the benefit of creditors and parties in interest. It is their opportunity to question the debtor regarding the debts and assets of the estate. It also provides them with the chance to learn about the debtor's financial situation in greater detail through questioning by other creditors. Prior to the § 341(a) meeting, the trustee can ask the debtor to provide documents to corroborate the information contained in the petition, statements, and schedules. See § 521(4). Such documents may include, but are not limited to: tax returns, financial statements, loan documents, trust deeds, titles, insurance policies, and wage and bank statements.

Additionally, at the § 341(a) meeting each individual debtor must present original government-issued photo identification and confirmation of the social security number. Any document used to confirm a debtor's identity and social security number must be an original (copies may not be accepted, except that in the discretion of the trustee, a copy of a W-2 Form, an IRS Form 1099, or a recent payroll stub may be accepted). This helps ensure an accurate court record and deters identity theft. Acceptable forms of picture identification (ID) include: driver's license, U.S. government ID, state ID, passport (and current U.S. visa, if not a U.S. citizen), military ID, resident alien card, and identity card issued by a national government authority (if authorized by the United States Trustee). Acceptable forms of proof of social security number include: social security card, medical insurance card, pay stub, W-2 Form, IRS Form 1099, and Social Security Administration (SSA) Statement. When debtors state that they are not eligible for a social security number, the trustee will need to inquire further in order to verify identity. In this situation, proof of an Individual Tax Identification Number (ITIN) issued by the Internal Revenue Service for those people not eligible for a social security number would be acceptable documentation.

Except in rare circumstances, the debtor (or debtors, in a joint case) must appear in person before the trustee at the § 341(a) meeting. The trustee should consult with the United States Trustee regarding the general procedures for approving a debtor's alternative appearance when extenuating circumstances prevent the debtor from appearing in person. Extenuating circumstances may include military service, serious medical condition, or incarceration. In such instances, a debtor's appearance at a § 341(a) meeting may be secured by alternative means, such as telephonically. When the debtor(s) cannot personally appear before the trustee, arrangements should be made for an independent third party authorized to administer oaths to be present at the alternate location to administer the oath and to verify the debtor's identity and state the social security number on the record. Examples of individuals who may serve in this capacity include: employees of the United States Trustee or bankruptcy trustees situated in the debtor's locale; court reporters; notaries; or others authorized by law to administer oaths in the jurisdiction where the debtor will appear. A "Declaration Regarding Administration of Oath and Confirmation of Identity and Social Security Number" shall be completed by the individual performing this function. A sample declaration is provided in Appendix H. The "declarant" shall indicate on the form the type of original documents used for proof. On the rare occasion when other arrangements need to be made to address a particular situation, the trustee should consult with the United States Trustee about the appropriate safeguards to follow. The trustee also may allow such debtors to provide proof of identity and social security numbers at the trustee's office at their convenience anytime before the next scheduled meeting.

When a trustee becomes aware of a debtor's disability, including hearing impairment, the trustee must notify the United States Trustee immediately so that reasonable accommodation can be made. The United States Trustee has procedures in place to address the special needs of debtors.

There is no statutory obligation to provide language interpreters at § 341(a) meetings. However, the trustee should attempt to communicate with a non-English speaking debtor by seeking the assistance of third parties present such as attorneys and family members. All parties who offer to interpret must be placed under oath. The parties should raise their right hands and respond affirmatively as the trustee administers the oath. A suggested oath is:

"Do you solemnly swear or affirm that you will truthfully and impartially act as an interpreter for the debtor during this meeting?"

If a non-English speaking debtor is unable to communicate with the trustee, or the trustee plans to take any adverse action against a non-English speaking debtor, the trustee should consult with the United States Trustee.

A. CONDUCTING THE MEETING

The trustee must conduct the meeting in an orderly, yet flexible manner, and to provide for questioning of the debtor as to matters affecting the debtor's financial affairs and conduct. The trustee's demeanor toward all parties should be appropriate and professional.

All § 341(a) meetings must be electronically recorded. The trustee is responsible for ensuring that the recording equipment is operating properly. The trustee should announce that testimony is being recorded and must require parties to speak clearly. The spelling of the names of any parties formally entering their appearance on the record should be obtained in case a transcript is requested at a later date. The trustee must provide the recording to the United States Trustee upon conclusion of the day's meetings. The recording will be retained by the United States Trustee for a period of two years. FRBP 2003(c).

At the beginning of each § 341(a) session, the trustee should make an introductory statement. A suggested introductory statement is:

"My name is _______________, and I have been appointed by the Office of the United States Trustee, a component of the United States Department of Justice, to serve as interim trustee in the cases scheduled for this morning/afternoon. I will preside at these meetings and examinations of the debtors. Debtors are here today because the Bankruptcy Code requires that they be examined under oath with respect to the petitions they have filed. All persons appearing must sign the appearance sheet. All persons questioning the debtor must state their name and whom they represent for the record, and speak clearly. All examinations will be electronically recorded and testimony is under penalty of perjury."

The trustee must administer the oath to each debtor individually, not to the debtors collectively. The trustee should require the debtor to raise his right hand and respond affirmatively to the following:

"Do you solemnly swear or affirm to tell the truth, the whole truth, and nothing but the truth?"

FRBP 2003(b) states that the presiding officer has the authority to administer oaths. There is no requirement that the trustee must be a notary or bring a notary to the meeting to administer the oath.

After administering the oath, the trustee must ask the debtor to verify that the signatures appearing on the petition and schedules are the debtors and that the debtor reviewed the documents before signing them. Trustees must examine the debtor's documents offered for proof of identity and social security number and compare them with the information on the petition.

The trustee must note for the record that proof of identity and social security number has been provided. A suggested statement is:

"I have viewed the original drivers license (or other type of original photo ID) and original social security card (or other original document used for proof) and they match the name and social security number on the petition."

If the trustee determines that the names or social security numbers do not match the information on the petition, the trustee must ask the debtor to explain why the name or social security number on the document used for proof does not match the name or number on the petition and try to determine if it is a typographical error or a possible misuse or falsification. See Appendix A Questions 4 and 10. The trustee shall not read the social security number into the record, unless it does not match the one on the petition. A suggested statement for the trustee to put on the record is:

"I have viewed the original social security card (or other original document used for proof) and the number is 000-00-000. It does not match the number on the petition. I have instructed the debtor (or debtor's counsel)to file an amended petition by [date], serve all creditors and the trustee, and send a 'Notice of Correction of Social Security Number in Bankruptcy Filing' and a copy of the amended petition to the three major credit reporting agencies, with a copy to the United States Trustee."

A sample notice of correction is provided in Appendix I.

If a debtor fails to provide the required forms of identification, the trustee may proceed with the normal questioning at the § 341(a) meeting but must continue the meeting to the trustee's next scheduled meeting date for production of the identification. At the trustee's discretion, the trustee may allow the debtor to present the required identification at the trustee's office before the next scheduled meeting. If the debtor provides the required documentation at the trustee's office, the trustee should have the continued meeting deemed concluded, provided that there are no other pending issues that warrant holding the meeting. The trustee must have procedures in place to note in the debtor's case file that the debtor's identification and social security number matched the petition and that the continued meeting was cancelled.

In cases where the debtor provides an incorrect social security number, the trustee may proceed with the normal questioning at the § 341(a) meeting but must continue the meeting and instruct the debtor to file an amended petition before the next scheduled meeting, and to provide copies to all creditors, the trustee, United States Trustee, and the three major credit reporting agencies. Also, the trustee must instruct the debtor to send a "Notice of Correction of Social Security Number in Bankruptcy Filing" along with a file-stamped copy of the amended petition to the credit reporting agencies and the United States Trustee.

The trustee should examine the debtor to the extent appropriate to determine the existence of estate assets, transfers, exemptions, prior filings, possible fraud, abuse, and other matters. Sample § 341(a) questions for individuals and businesses are provided in Appendix A. The first ten questions listed on Appendix A are required. The trustee shall ensure the debtor answers the substance of each of the ten questions, and that the answers are recorded.

A trustee may use a questionnaire to supplement the information obtained during the oral examination of the debtor. The questionnaire may not substitute for the oral examination. If a questionnaire is used, the trustee should use discretion with respect to which answers on the questionnaire should be verified or explored further on the § 341(a) meeting recording, which is the official record of the meeting. The trustee should ensure that the recording clearly reflects the nature of the matter under discussion without the necessity of referring to the questionnaire, which in most cases will not be part of the official records. When in doubt, the trustee should place the information on the recording. In the rare instance when the trustee thinks it is appropriate or it is requested that the questionnaire be made part of the official record,the trustee must so designate this on the record and deliver the questionnaire to the United States Trustee along with the recording at the conclusion of the meeting.

Paraprofessionals, such as a paralegal or a petition preparer, may not sit next to the debtor at the table, advise the debtor, or stand-in for the debtor's attorney at the meeting. Representatives of the media are permitted to be present, but no one is permitted to televise, photograph, or electronically record the proceedings (other than certified court reporters). Questions by creditors and other parties in interest are allowed. Individuals who represent creditors but who are not attorneys may be present at the meeting. Generally, the trustee should permit these persons to examine the debtor. Some jurisdictions, however, may view this as the unauthorized practice of law. The trustee should consult with the United States Trustee regarding local practices.

During the § 341(a) meeting, the trustee should not answer questions seeking legal advice and should avoid actions which would result in the perception that the trustee is a judge or has judicial power. If an election is requested, the trustee should follow the procedures set forth in Chapter 4.

The trustee must exercise control over the demeanor of the debtors, attorneys, and creditors during the course of the § 341(a) meeting. Uncooperative or recalcitrant debtors should be reminded of their duties under § 521 and FRBP 4002, especially the duty to cooperate with the trustee in the administration of the estate. Questioning should not be allowed to deteriorate to a level constituting harassment or to focus exclusively on the dischargeability of a particular debt.

Pursuant to § 341(d), the trustee must establish on the record that the debtor acknowledges an awareness of:

1. the potential consequences of seeking a discharge in bankruptcy, including the effects that this action may have on the debtor's credit history;

2. the ability to file a bankruptcy petition under a different chapter of the Bankruptcy Code;

3. the effect of receiving a discharge of debts under chapter 7 of the Bankruptcy Code; and

4. the effect of reaffirming a debt, including the debtor's knowledge of the provisions of § 524(d).

This information is contained in the information sheet available from the United States Trustee. At the § 341(a) meeting, the trustee must verify on the record that the debtor has received the information sheet and that the debtor is aware of the matters set forth in§ 341(d). Establishing the debtor's awareness of these items by a questionnaire is not sufficient.

If the debtor responds in the negative, the trustee must provide a copy of the information sheet and adjourn the meeting to the end of the calendar or another appropriate time. The meeting cannot be concluded until the information has been conveyed.

If a debtor asserts the Fifth Amendment privilege in response to a particular question, the trustee should proceed with th