5.1 The Trustee in Case Administration

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

5.1 THE TRUSTEE IN CASE ADMINISTRATION

5.101 Role of United States Trustee in Appointment and Supervision of Trustees. Administration of a bankruptcy case is undertaken by a fiduciary, in most cases a trustee. Understanding the role of the trustee, including the trustee's powers and duties conferred by the Bankruptcy Code, is key to advising a client to file or not to file a petition. ¹ The United States Trustee (UST) in each region is required to appoint a panel of private trustees to administer Chapter 7 cases filed in the region for which the UST is responsible. ² Chapter 3 of the Bankruptcy Code sets forth the test for eligibility to serve as a trustee, how qualification is accomplished, the trustee's role and capacity, procedures for removing a trustee, and conditions and limitations pertaining to a trustee's compensation. ³ When a case is filed under Chapter 11 of the Code, it is expected that the debtor will remain in control of the business and administer the case as a debtor-in-possession. ⁴

Subject to approval by the United States Attorney General, the UST also appoints one or more individuals to serve as standing trustee to administer all Chapter 13 cases, which involve the adjustment of debts of an individual with regular income (often known as a "wage earner plan"), that are filed within a given geographic area, assuming the number of cases warrants the appointment of a standing trustee. ⁵ The same is true for cases under Chapter 12 for adjustment of debts for a family farmer or fisherman.

The UST supervises the work of all of the trustees appointed, regardless of the chapter under which they administer cases. The UST also monitors the work of a debtor-in-possession. ⁶ A debtor-in-possession acquires all of

[Page 226]

the fiduciary duties of a trustee and, therefore, is subject to scrutiny and supervision by the UST. ⁷

5.102 Election of Trustee at Meeting of Creditors.

A. Eligibility Criteria for Elected Trustee. A Chapter 7 trustee appointed by the UST upon the filing of a bankruptcy petition is an interim trustee until the meeting of creditors required by section 341 of the Code. ⁸ At the meeting of creditors, the creditors may elect a person to serve as trustee in the case. ⁹ In order to be appointed, the person elected must be eligible to serve under section 321 and must qualify under section 322. ¹⁰ Section 321 provides that a trustee of a case under Chapter 7 must be an individual who is competent to perform the duties and resides or has an office in the judicial district in which the case is pending or in an adjacent district. ¹¹ For a case under Chapter 7, a trustee may be a corporation that has an office in one of the described districts and is authorized in its charter to act as a trustee. ¹² If the creditors do not elect a person to serve, which is almost always what happens, the panel trustee appointed as interim trustee will be the trustee for the case. ¹³ The UST may also serve as trustee in a case, if necessary. ¹⁴

B. Reasons for Requesting Election. It would be unusual to see a request for an election of a trustee in a consumer Chapter 7 case. An election is more likely in a case where there are significant assets to be administered or serious concerns among the creditors about the debtor's activities and the potential for significant undisclosed assets, given that this process generally requires more advanced planning and organization among creditors. It is also not uncommon to see a request for an election where a case under Chapter 11 converts to a case under Chapter 7. A request for an election often indicates that the creditors feel the case requires more time

[Page 227]

and scrutiny than a panel trustee with many responsibilities can give or that particular knowledge of a given industry would be beneficial in maximizing recovery for the creditors.

C. Eligibility Criteria for Voting Creditors. A creditor is eligible to vote in an election of a trustee only if the creditor holds an unsecured, undisputed, allowable, fixed, liquidated claim of the kind entitled to distribution under 11 U.S.C. §§ 726(a)(2), 726(a)(3), 726(a)(4), 752(a), 766(h), or 766(i). ¹⁵ Eligible creditors requesting an election must hold at least 20 percent of such claims; they and other voting creditors must be disinterested, and no such creditor may be an insider. ¹⁶

D. Election Disputes. If there is an election, the UST will file a report with the court. ¹⁷ If a dispute arises over the election results, the court will rule on the issues in dispute. Disputable issues might include whether a voting creditor was in fact eligible to vote, ¹⁸ whether the elected person is eligible to serve, ¹⁹ and whether the elected person is disinterested. ²⁰ A motion for resolution of the dispute must be filed no later than 14 days from the date that the report of the disputed election was filed. If no motion for resolution is filed, the interim trustee will serve as trustee. ²¹

5.103 Administration by Debtor-in-Possession. The only fiduciary that may administer a case and not be a disinterested party is a debtor

[Page 228]

in-possession in a case under Chapter 9 or 11. The debtor-in-possession still has the same fiduciary duties as any appointed trustee. ²² A debtor-in-possession can be removed and a trustee appointed upon motion by a creditor, the UST, or other interested party. ²³ The moving party must show cause for the appointment of a trustee or that the appointment of a trustee is in the best interests of the creditors, equity security holders, and other interests of the estate. ²⁴ Cause for removal of a debtor-in-possession includes fraud, dishonesty, incompetence, or gross mismanagement. ²⁵ Section 1104 of the Code also provides for election of a trustee should the court find that appointment of a trustee is appropriate. Such election will be conducted in the...