Operating the Estate

• Author: Gregory Germain
• Pages: 120-151

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Chapter 7: Operating the Estate

7.1. The United States Trustee.

The Office of the United States Trustee is part of the executive branch of the federal

government supervised by the Attorney General of the United States. A United States Trustee is

appointed by the Attorney General for each judicial district, and the people who work in the United

States Trustee’s office are civil servants. The job of the United States Trustee is to supervise the

bankruptcy system; not to administer individual bankruptcy cases (which is the job of the similarly

titled “trustee.”). The United States Trustee reviews bankruptcy petitions for compliance with the

rules (and carefully scrutinizes compliance with the means test), reviews fee applications, plans

and disclosure statements, refers cases for criminal prosecution to the United States Attorney,

supervises the appointment and election of trustees, maintains statistics on bankruptcy cases, and

generally appears in bankruptcy cases to protect the integrity of the bankruptcy system from abuse.

The specific duties of the United States Trustee are set forth in 28 U.S.C. § 586. Although the

United States Trustee has the power to act as a case trustee by administering cases, the exercise of

that power would be extremely unusual. Because of the United States Trustee’s independence and

expertise, a competent bankruptcy attorney must endeavor to address any concerns raised by the

Office of the United States Trustee in a prompt and courteous manner, because an objection by the

United States Trustee is generally given significant weight by the courts.

7.2. The Case Trustee

The case trustee’s primary job is to maximize the value of the bankruptcy estate for

unsecured creditors in a liquidation. The trustee must question the debtor to make sure the filed

schedules are accurate and reflect all of the debtor’s property. As will be discussed in Chapter 8,

the trustee is also given avoiding powers to set aside prepetition transactions that are presumed to

have been made in contemplation of bankruptcy and have harmed other unsecured creditors.

A trustee is appointed automatically in every Chapter 7 case. The United States Trustee

maintains a panel of private attorneys or other professionals who have qualified to serve as

trustees in bankruptcy cases. The cases are generally assigned randomly to a trustee on the panel

to act as the “interim trustee.” See 11 U.S.C. § 701.

The Bankruptcy Code contains an elaborate procedure for the election of a permanent

trustee who is different from the interim trustee if creditors holding 20% of undisputed liquidated

unsecured claims timely request an election. See 11 U.S.C. § 702. Such elections are very

unusual in Chapter 7 cases. Elections generally happen only in large cases where sophisticated

organized creditor groups seek the appointment of professionals experienced in a particular

industry. In most ordinary cases, the interim panel trustee will automatically serve as the

permanent trustee in the case because no election is requested.

Trustees must be independent and disinterested, bonded, and have no conflicts of interest

with the debtor or the creditors. See 11 U.S.C. §§ 321, 322, 701. The trustee is a fiduciary of the

estate, holds legal title to property of the estate in trust, and has the capacity to sue and be sued in

his or her official trustee capacity. A trustee receives a flat fee (currently $60) from the debtor’s

filing fees for acting as a trustee in the case. In addition, the trustee is entitled to reasonable

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compensation for services rendered in the case limited to a percentage of the money or property

distributed to creditors. 11 U.S.C. § 326(a). Payment must come from the estate as an

administrative claim. Trustees routinely seek to be paid the maximum percentage allowed based

on the amount of money distributed, but the statute by its terms only allows compensation for the

value of services rendered, limited by the maximum percentage fee. For significant compensation

requests, judges should require the trustee to show the fees earned on a case, based on the hours

worked on the case multiplied by an appropriate hourly rate. Trustees are expected to maintain

time records just like other professionals.

The Trustee will review the debtor’s petition and schedules, review the debtor’s tax returns,

and often will request additional documentation from the debtor to review (commonly 90 days of

bank statements, copies of insurance policies, title documents for real estate, and pay stubs). A

good lawyer will endeavor to provide the trustee with whatever documentation the trustee requests

to avoid additional scrutiny and trustee objections.

7.3. The Section 341 Meeting

The first major event in most Chapter 7 bankruptcy cases is the Section 341 meeting (after

11 U.S.C. § 341), also known inappropriately as the first meeting of creditors. The meeting is

badly named because, in most cases, creditors do not bother to come to the first meeting of

creditors. At the meeting, the debtor is sworn in, provides identification documents to the trustee

(driver’s license and social security card), and is questioned by the trustee about the schedules.

The proceeding is tape recorded. No judge is present during the meeting. Creditors may attend the

meeting and ask a few questions, but will be told by the trustee to schedule an examination if the

creditor starts to take up too much time. The election of a trustee is supposed to occur at the 341

meeting, but elections are only rarely requested. In typical consumer cases, there are 20-50 341

hearings scheduled back to back, and the hearings take about 10 -15 minutes, with the following

procedure:

(1) Debtor sworn in.

(2) Debtor provides driver’s license and social security card to the trustee. Trustee verifies

the numbers.

(3) Trustee gives tax returns back to the debtor and asks whether the returns correctly

reflect what was filed with the tax authorities.

(4) Debtor is shown signature page from petition and is asked to verify signature. Debtor

is asked if he or she read and reviewed the petition before signing it, and if it is true

and complete, or if the debtor is aware of any inaccuracies or changes.

(5) Debtor is asked general questions about other possible assets: does the debtor have any

claims for personal injury or property damage against anyone; did the debtor own any

real property in the past several years (and if so, what happened to the property); what

is the debtor’s employment status; does the debtor expect any tax refunds; what is the

status of the debtor’s secured loans; does the debtor have liability insurance to protect

the public from the debtor’s continued operation of a vehicle?

(6) Debtor is asked about valuable property listed in schedules, such as vehicles and

collections.

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(7) If information in the Debtor’s schedules raises suspicions, the trustee will inquire

further.

It is important to remember that most trustees have handled many cases, and can often tell when

debtors are not telling the truth or are trying to hide something. It is important for debtor lawyers

to ask thorough questions when preparing the petition and schedules to avoid the embarrassment

caused at the 341 hearing when information not reflected in the schedules comes to light.

7.4. No Asset Cases

In many cases, the trustee will determine at the 341 hearing that all of the debtor’s assets

that have any value are exempt, and will file a “no asset” report. The “no asset” report indicates

that the trustee has determined that nothing will be available to distribute to creditors. Following

the trustee’s “no asset” report, the debtor simply waits for the time period for parties in interest to

object to the debtor’s discharge to run, and then the discharge will be issued automatically by the

bankruptcy court. Shortly thereafter, the case will be closed and the bankruptcy concluded. Most

consumer debtors will complete their bankruptcy cases without ever appearing before a judge, and

after having had to endure only brief gentle questioning by the trustee at the Section 341 meeting.

The primary job of the debtor’s lawyer in consumer Chapter 7 cases is to properly complete the

petition and schedules.

7.5. Use, Sale and Lease of Property

The trustee has broad powers to use, sell and lease property of the estate in the ordinary

course of business. 11 U.S.C. § 363(c)(1). The statutory starting place for this power is Section

363(c)(1), which gives the trustee the power to use, sell or lease property of the estate in the

ordinary course of business without a court order, unless the court requires otherwise (or unless

the court has prohibited the trustee from continuing to operate the debtor’s business). Business as

usual continues after bankruptcy under the trustee’s supervision.

But the trustee’s power to use, sell or lease property of the estate are limited by three

automatic statutory restrictions.

First, under Section 365(b)(1), the trustee must obtain court approval, on notice to creditors

and an opportunity for hearing, to use, sell or lease property of the estate outside of the ordinary

course of business. When is the trustee’s use, sale or lease of property within the “ordinary course”

of business, and when is it outside the “ordinary course” of business (requiring court

authorization)? Unfortunately, there is no clear line here. If it is the type of transaction that the

debtor conducted on a regular basis in connection with the operation of its business before

bankruptcy, then it will generally be within the ordinary course. For example, for a grocery store

debtor, the sale of food to ordinary customers at regular prices would be in the ordinary course of

business, but the sale of all of the store’s inventory to a single buyer (or the sale of store’s real

property) would not be in the ordinary course of business. The line between what is ordinary and

what is not can easily become blurred, however. A cautious law yer will advise a client to obtain

approval when in doubt.