Attachment 2A Appendix 1 Handbook for Chapter 7 Trustees.pdf

U.S. DEPARTMENT OF JUSTICE

EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES

Handbook for Chapter 7 Trustees Effective October 1, 2012

TABLE OF CONTENTS

i

1. INTRODUCTION ...............................................................................................................1-1

A. PURPOSE ...............................................................................................................1-1

B. ROLE OF THE UNITED STATES TRUSTEE ......................................................1-1

C. STATUTORY DUTIES OF A TRUSTEE .............................................................1-2

2. APPOINTMENT TO THE PANEL OF TRUSTEES .........................................................2-1

A. ELIGIBILITY TO SERVE ON A PANEL .............................................................2-1

B. QUALIFICATIONS FOR PANEL MEMBERSHIP ..............................................2-1

C. APPOINTMENT TO A PANEL .............................................................................2-3

D. ELIGIBILITY TO SERVE IN A CASE .................................................................2-3

E. APPOINTMENT OF PANEL TRUSTEES TO CASES ........................................2-3

F. METHOD OF CASE ASSIGNMENT ....................................................................2-4

G. NON-PANEL TRUSTEES IN CONVERTED CASES .........................................2-5

H. INVOLUNTARY CASES ......................................................................................2-5

I. SUCCESSOR TRUSTEES .....................................................................................2-6

J. RESIGNATION OF A TRUSTEE ..........................................................................2-6

K. TRUSTEE PROFESSIONALISM AND ETHICS .................................................2-7

CONFLICTS OF INTEREST .....................................................................2-7

USE OF TRUSTEE DESIGNATION .........................................................2-8

SOLICITATION OF GRATUITIES, GIFTS, OR OTHER

REMUNERATION OR THING OF VALUE ............................................2-8

SELF-DEALING AND INSIDER TRANSACTIONS ...............................2-8

L. TRUSTEE BONDS .................................................................................................2-9

3. DUTIES OF DEBTORS AND MEETING OF CREDITORS ...........................................3-1

A. ELIGIBILITY FOR CHAPTER 7 AND VENUE ..................................................3-1

B. INITIAL DOCUMENTS ........................................................................................3-1

C. APPLICATIONS TO WAIVE THE BANKRUPTCY FILING FEE .....................3-4

D. FINANCIAL DOCUMENTS ..................................................................................3-4

E. MEETING OF CREDITORS ..................................................................................3-4

PRESIDING OFFICER ...............................................................................3-5

SCHEDULING, NOTICING, RESCHEDULING, AND

CONTINUANCES ......................................................................................3-5

MEDIA AND THIRD PARTY RECORDING ...........................................3-5

APPEARANCES .........................................................................................3-5

VERIFICATION OF DEBTOR IDENTITY AND

SOCIAL SECURITY NUMBER ................................................................3-6

LANGUAGE INTERPRETERS .................................................................3-6 ii

DISABILITY ...............................................................................................3-7

OATH ..........................................................................................................3-7

CONDUCTING THE MEETING ...............................................................3-7

QUESTIONING THE DEBTOR ................................................................3-8

INVOCATION OF FIFTH AMENDMENT BY THE DEBTOR ..............3-8

RECORD OF MEETING ............................................................................3-9

NON-ATTENDANCE BY DEBTORS ....................................................3-10

NON-ATTENDANCE BY ATTORNEYS ...............................................3-10

4. DUTIES OF A TRUSTEE IN THE ADMINISTRATION OF A CASE ...........................4-1

A. INTRODUCTION ...................................................................................................4-1

B. STATUTORY AND GENERAL DUTIES .............................................................4-1

C. COLLECTION AND LIQUIDATION OF ASSETS, 11 U.S.C. § 704(a)(1), AND ACCOUNTABILITY OF THE TRUSTEE FOR ALL PROPERTY

RECEIVED , 11 U.S.C. § 704(a)(2) .......................................................................4-2

DETERMINATION AND ADMINISTRATION OF ASSET CASES ......4-3

DETERMINATION AND ADMINISTRATION OF NO-ASSET

CASES .........................................................................................................4-3

FURTHER CONSIDERATIONS IN DETERMINING WHETHER

TO ADMINISTER ASSETS .......................................................................4-3

a. INVENTORY OF ESTATE PROPERTY ............................................4-3

b. AUTOMATIC STAY ...........................................................................4-4

c. EXEMPTIONS .....................................................................................4-4

d. VALUATION OF PROPERTY ...........................................................4-5

e. ABANDONMENT OF ESTATE PROPERTY ....................................4-5

f. CONTROL AND PRESERVATION OF ESTATE PROPERTY ........4-6

g. ENVIRONMENTAL ISSUES .............................................................4-7

CLAIMS BAR DATE .................................................................................4-7

TAX CONSIDERATIONS IN THE ADMINISTRATION OF

ESTATE ASSETS .......................................................................................4-7

a. OVERVIEW .........................................................................................4-7

b. INCOME TAXES .................................................................................4-8

c. EMPLOYMENT TAXES AND OTHER TAX FORMS .....................4-9

d. EMPLOYEE W-2 FORMS ................................................................4-10

e. SALES AND ABANDONMENTS ....................................................4-10

f. PROPERTY TAXES ...........................................................................4-10 iii

g. PROCEDURES FOR DETERMINING ESTATE TAX LIABILITY .........................................................................................4-11

TURNOVER DEMANDS ........................................................................4-11

EXECUTORY CONTRACTS AND UNEXPIRED LEASES .................4-12

AVOIDANCE POWERS ..........................................................................4-12

SALE OF ASSETS ...................................................................................4-14

a. GENERAL STANDARDS .................................................................4-14

b. SALE FREE AND CLEAR OF LIENS .............................................4-16

c. SALE OF JOINTLY OWNED PROPERTY ......................................4-16

d. SALE OF ENCUMBERED PROPERTY ..........................................4-16

e. INTERNET AUCTIONS AND SALES .............................................4-17

f. SALE OR LEASE OF PERSONALLY IDENTIFIABLE INFORMATION .................................................................................4-18

g. CONDUCT OF SALES ......................................................................4-18

h. PERIODIC PAYMENTS ...................................................................4-18

EMPLOYMENT OF PROFESSIONALS .................................................4-19

a. GENERAL STANDARDS .................................................................4-19

b. DEFINITION OF PROFESSIONALS ...............................................4-19

c. EMPLOYMENT STANDARDS ........................................................4-20

d. EMPLOYMENT PROCEDURES ......................................................4-20

e. SUPERVISION OF PROFESSIONALS ............................................4-21

f. TRUSTEE AS ATTORNEY OR ACCOUNTANT FOR THE ESTATE ..............................................................................................4-21

g. AUCTIONEERS .................................................................................4-22

COMPENSATION AND EXPENSES OF TRUSTEES ..........................4-24

COMPENSATION OF PROFESSIONALS .............................................4-25

CASE PROGRESS ....................................................................................4-26

D. EXAMINE THE DEBTOR’S STATEMENT OF INTENTION,

11 U.S.C. § 704(a)(3) ............................................................................................4-26

E. INVESTIGATE THE FINANCIAL AFFAIRS OF THE DEBTOR,

11 U.S.C. § 704(a)(4) ............................................................................................4-27

F. EXAMINE PROOFS OF CLAIM, 11 U.S.C. § 704(a)(5) ....................................4-27

REVIEW OF CLAIMS .............................................................................4-27

OBJECTIONS TO CLAIMS .....................................................................4-28 iv

TRUSTEE FILING PROOFS OF CLAIM ...............................................4-29

UNPAID QUARTERLY FEES ................................................................4-29

SUBORDINATION OF CLAIMS ............................................................4-29

G. OPPOSE THE DISCHARGE OF THE DEBTOR, 11 U.S.C. § 704(a)(6) ...........4-30

H. FURNISH INFORMATION CONCERNING THE ESTATE,

11 U.S.C. § 704(a)(7) ............................................................................................4-30

I. PROVIDE OPERATING REPORTS, 11 U.S.C. § 704(a)(8) ...............................4-30

J. MAKE A FINAL REPORT AND FINAL ACCOUNT OF THE ESTATE,

11 U.S.C. § 704(a)(9) ............................................................................................4-32

TRUSTEE’S FINAL REPORT (TFR) ......................................................4-32

DISTRIBUTION OF FUNDS ...................................................................4-34

TRUSTEE’S FINAL ACCOUNT (TDR) .................................................4-35

K. PROVIDE NOTICES OF DOMESTIC SUPPORT OBLIGATIONS (DSOs), 11 U.S.C. § 704(a)(10) ..........................................................................................4-35

L. SERVE AS PLAN ADMINISTRATOR, 11 U.S.C. § 704(a)(11) ........................4-36

M. USE BEST EFFORTS IN TRANSFERRING PATIENTS WHEN

SHUTTING DOWN A HEALTH CARE BUSINESS, 11 U.S.C. § 704(a)(12) ..4-36

N. OTHER DUTIES OF A CHAPTER 7 TRUSTEE ................................................4-36

DISMISSALS OR CONVERSIONS OF A CHAPTER 7 CASE .............4-36

CONVERSION OF CASES FROM ANOTHER CHAPTER

TO CHAPTER 7 .......................................................................................4-37

REOPENING CLOSED CASES ..............................................................4-38

TRANSMISSION OF DOCUMENTS .....................................................4-38

REVIEW OF DEBTOR’S ATTORNEY FEES ........................................4-39

REVIEW FOR PETITION PREPARERS ................................................4-39

REVIEW FOR ABUSE UNDER § 707(b) ...............................................4-40

a. DETERMINATION OF “PRIMARILY CONSUMER DEBT” ........4-40

b. DETERMINING ABUSE ..................................................................4-41

c. BAD FAITH AND TOTALITY OF THE CIRCUMSTANCES, 11 U.S.C. § 704(b)(3) .........................................................................4-42

DEBTOR AUDITS ...................................................................................4-42

REFERRAL OF POTENTIAL BANKRUPTCY CRIMES .....................4-43

a. DETECTING CRIMINAL ACTIVITY .............................................4-43

b. TYPES OF CRIMINAL CONDUCT .................................................4-43

c. COMPLIANCE WITH TRUSTEE’S DUTY TO REPORT CRIMINAL CONDUCT ....................................................................4-45 v

5. FINANCIAL POLICIES, PROCEDURES AND REPORTING REQUIREMENTS ........5-1

A. ADEQUATE RECORDKEEPING AND REPORTING ........................................5-1

B. CONTROL PROCEDURES TO BE PERSONALLY PERFORMED BY

TRUSTEE ...............................................................................................................5-2

C. SEGREGATION OF DUTIES/DOCUMENTATION OF PROCEDURES ..........5-3

D. CONTROLS OVER INCOMING RECEIPTS .......................................................5-3

CASH RECEIPTS LOG ..............................................................................5-3

SAFEGUARDING RECEIPTS UNTIL DEPOSITED ...............................5-4

HANDLING EARNEST MONIES AND SETTLEMENT PROCEEDS

PENDING COURT APPROVAL OF SALE/SETTLEMENT ...................5-5

HANDLING FUNDS WHICH CANNOT OR SHOULD NOT BE

DEPOSITED IMMEDIATELY ..................................................................5-6

SUPPORTING DOCUMENTS FOR RECEIPTS ......................................5-7

E. CONTROLS OVER ESTATE BANK ACCOUNTS AND INVESTMENT

OF ESTATE FUNDS ..............................................................................................5-7

TYPES OF ACCOUNTS ............................................................................5-7

c. Non-Interest-Bearing Accounts ............................................................5-8

d. Bond Recovery Account .......................................................................5-8

OPENING THE ACCOUNT ......................................................................5-9

BANK STATEMENTS, DEPOSIT SLIPS, AND CHECK STOCK .........5-9

REQUIREMENTS FOR DEPOSITORIES HOLDING

BANKRUPTCY ESTATE FUNDS ............................................................5-9

BANK ACCOUNT RECONCILIATIONS ..............................................5-10

OTHER INTERNAL CONTROLS OVER BANK ACCOUNTS ............5-10

F. CONTROLS OVER DISBURSEMENTS ............................................................5-11

DISBURSEMENTS BY ESTATE CHECKS ...........................................5-11

OTHER FORMS OF DISBURSEMENT .................................................5-11

SUPPORTING DOCUMENTS FOR DISBURSEMENTS ......................5-12

OTHER INTERNAL CONTROLS OVER DISBURSEMENTS .............5-12

G. OTHER RECORDKEEPING PROCEDURES AND INTERNAL

CONTROLS ..........................................................................................................5-13

ESTATE RECEIVABLES ........................................................................5-13

INTERNET AUCTIONS AND SALES ...................................................5-13

COMPUTER SYSTEMS ..........................................................................5-14

a. SELECTION OF A COMPUTER SERVICE PROVIDER ...............5-14

b. PROVISION OF COMPUTER HARDWARE AND SOFTWARE .............................................................................5-14 vi

c. PARTICIPATION IN CASE MANAGEMENT SOFTWARE DEVELOPMENT ...............................................................................5-14

d. COMPUTER EQUIPMENT RECOMMENDATIONS .....................5-15

e. COMPUTER SECURITY MEASURES ............................................5-15

BUSINESS INTERRUPTION PLAN [Amended September 8, 2016.] ...5-17

RECORDS SECURITY AND RETENTION ...........................................5-18

a. RECORDS SECURITY ......................................................................5-18

b. FORM OF RECORDS .......................................................................5-19

c. INDIVIDUAL CASE RECORDS RETENTION ...............................5-20

d. TRUSTEE ACCESS AND CONTROL OF DEBTOR TAX RETURNS .................................................................................5-21

e. DUTY TO REPORT LOSS OR POTENTIAL LOSS OF

PERSONALLY IDENTIFIABLE INFORMATION (PII) .................5-22

6. UNITED STATES TRUSTEE OVERSIGHT ....................................................................6-1

A. TRAINING ..............................................................................................................6-1

B. PERFORMANCE REVIEW ...................................................................................6-2

C. INDEPENDENT AUDITS AND OTHER REVIEWS ...........................................6-3

AUDIT AND FIELD EXAM REPORTS ...................................................6-3

CASE ADMINISTRATION REVIEW REPORTS ....................................6-4

D. COMPLIANCE MEASURES .................................................................................6-4

REMEDIAL ACTIONS ..............................................................................6-4

PROCEDURES FOR SUSPENSION AND TERMINATION

(28 C.F.R § 58.6) .........................................................................................6-5

VOLUNTARY SUSPENSION ...................................................................6-5 E. DEATH OR INCAPACITY OF TRUSTEE ........................................................... 6-6

Handbook for Chapter 7 Trustees Page 1-1

1. INTRODUCTION

A. PURPOSE

The United States Trustee appoints and supervises trustees, and monitors and supervises cases under chapter 7 of title 11 of the United States Code (Bankruptcy Code). 28 U.S.C. § 586.

This Handbook is intended to establish or clarify the views of the United States Trustee Program (Program) on the duties owed by a chapter 7 trustee to the debtors, creditors, other parties in interest, and the United States Trustee. The Handbook does not present a full and complete statement of the law; it should not be used as a substitute for legal research and analysis.

The Handbook has been updated to incorporate provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Trustees are encouraged to visit the Program’s web site and review the Supplementary Materials to this Handbook at http://www.usdoj.gov/ust/eo/private_trustee/ library/ chapter07/ and the bankruptcy reform materials at http://www.usdoj.gov/ust/.

Nothing in this Handbook should be construed to excuse the trustee from complying with all duties imposed by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure (Rules), local rules, and orders of the court. Further, the trustee must be familiar with relevant provisions of the Bankruptcy Code, Rules, any local bankruptcy rules, and case law. 28 U.S.C.

§ 586(a), 28 C.F.R. § 58.6(a)(3). Whenever the provisions of the Handbook conflict with the local rules or orders of the court, the trustee should notify the United States Trustee. The trustee is accountable for all duties set forth in this Handbook, but need not personally perform any particular duty unless the Handbook so states. The Trustee need not perform any duty set forth in this Handbook that is performed by the Bankruptcy Court or United States Trustee, but the trustee remains accountable and must assume the responsibility for that duty if it is no longer performed by those entities. 28 U.S.C. 586(a). For example, if the Bankruptcy Court discontinues sending notices of the meeting of creditors, the trustee would assume that function.

All statutory references in this Handbook refer to the Bankruptcy Code, 11 U.S.C. § 101 et seq., unless otherwise indicated.

This Handbook does not create additional rights against the trustee or United States Trustee in favor of other parties.

B. ROLE OF THE UNITED STATES TRUSTEE

The Bankruptcy Reform Act of 1978 removed the bankruptcy judge 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, would not impartially adjudicate their rights as adversaries of that trustee. To address these concerns, judicial and administrative functions within the bankruptcy system were bifurcated.

Handbook for Chapter 7 Trustees Page 1-2

Many administrative functions formerly performed by the court were placed within the Department of Justice through the creation of the Program. Among the administrative functions assigned to the United States Trustee were the appointment and supervision of chapter 7 trustees. This Handbook is issued under the authority of the Program’s enabling statutes.

C. STATUTORY DUTIES OF A TRUSTEE

Although this Handbook is not intended to be a complete statutory reference, the trustee’s primary statutory duties are set forth in part in section 704 of the Bankruptcy Code and are detailed more thoroughly in other parts of this Handbook. A chapter 7 trustee must be personally involved in carrying out the trustee’s duties and other fiduciary responsibilities. 28 U.S.C. § 586(a). If the trustee is or becomes unable to be directly involved in the performance of these duties and responsibilities for any time period, the trustee must advise the United States Trustee immediately. 28 U.S.C. § 586(a), 28 C.F.R.§ 58.3(b).

Handbook for Chapter 7 Trustees Page 2-1

2. APPOINTMENT TO THE PANEL OF TRUSTEES

The United States Trustee establishes a panel of individuals qualified to be appointed as trustee in chapter 7 cases. 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.

The United States Trustee maintains and conducts an open system for the recruitment of persons interested in serving on the panel of private trustees. The United States Trustee may not discriminate on the basis of race, color, religion, sex, national origin, or age in appointments to the panel, and, in this regard, must assure equal opportunity for all appointees and applicants.

28 C.F.R. § 58.5.

Upon appointment to the panel, the trustee’s name, address, and phone number are posted on the Program’s web site at: http://www.usdoj.gov/ust/eo/private_trustee/locator/7.htm.

A. ELIGIBILITY TO SERVE ON A PANEL

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. Further, panel members must be able to satisfy the eligibility requirements of section 321 of the Bankruptcy Code for serving in a case. 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’s appointment to a panel is subject to the successful completion of an initial background investigation, and subsequent background checks conducted every five years. A background investigation includes a Background Questionnaire and a Questionnaire for Public Trustee Positions (Form SF-85P), name and fingerprint checks, a tax check with the Internal Revenue Service (IRS), and a report on credit history (with disclosure authorization), including any subsequent credit reports requested by the United States Trustee. The trustee must provide an Update to the Background Questionnaire annually. The trustee’s appointment to the panel or the assignment of cases may be terminated based on unresolved problems discovered during the background investigation or subsequent background checks.

B. QUALIFICATIONS FOR PANEL MEMBERSHIP

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.

Handbook for Chapter 7 Trustees Page 2-2

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 X1181 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 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:

i. A member of a law school faculty;

ii. A member of the panel of private trustees;

iii. 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, Executive Office for United States Trustees, to the United States Trustee for the district in which appointment is

1 Or as described in materials promulgated by the U.S. Office of Personnel Management available at www.opm.gov.

Handbook for Chapter 7 Trustees Page 2-3 sought; provided, that this provision may be waived by the United States Trustee on approval of the Director.

C. APPOINTMENT TO A PANEL

The trustee will receive an appointment to the panel of chapter 7 trustees for the district(s) in which he or she was selected to serve. The appointment may be suspended or terminated at any time pursuant to 28 C.F.R. § 58.6.

D. ELIGIBILITY TO SERVE IN A CASE

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. 11 U.S.C. § 321.

While corporations are eligible under section 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 meetings of creditors, possible complications as to coverage under blanket or separate bonds, and possible increases in expenses imposed on estates, corporate entities are rarely appointed. 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 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. 11 U.S.C. § 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. More information on bonds is provided later in this chapter.

In addition, the trustee must undergo an initial background investigation and subsequent background checks every five years. 11 U.S.C § 586(a), 28 C.F.R. § 58.3(b)(8).

E. APPOINTMENT OF PANEL TRUSTEES TO CASES

The United States Trustee appoints a disinterested member of the panel as an interim trustee immediately upon:

1. The entry of an order for relief under chapter 7, pursuant to section 701(a);

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 section 303(g); or

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

A trustee is expected to accept all cases to which the trustee is appointed, unless there is a conflict of interest or other extraordinary circumstance. An in-depth discussion of conflicts of

Handbook for Chapter 7 Trustees Page 2-4 interest is provided later in this chapter. When a trustee wishes to decline case assignments for a limited period of time, the trustee must submit a Notice of Voluntary Suspension. See Handbook Chapter 6.D.3. Voluntary suspensions are not subject to 28 C.F.R. § 58.6.

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.

Fed. R. Bankr. P. 2008.

The interim trustee serves until a trustee is elected under section 702 and qualifies under section 322, or until the interim trustee becomes the permanent trustee under section 702(d).

Advance notice of an intent to request an election is not required by the Bankruptcy Code and Rules. 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. 28 U.S.C. § 586. [Language amended September 8, 2016.]

If no trustee is elected at the meeting of creditors, the interim trustee becomes the trustee under section 702(d). The interim trustee has all the duties and powers of a permanent trustee.

If a trustee dies or resigns, fails to qualify under section 322, or is removed under section 324, a successor trustee may be appointed by the United States Trustee. 11 U.S.C. §§ 703(b) and (c). Successor trustees ensure that case administration continues in an efficient manner and estate assets are accounted for and secured for the benefit of creditors. Further guidance for successor trustees is provided in Chapter 2.I (Successor Trustees), Chapter 4.C.10.c (Employment of Professionals – Employment Standards), and Chapter 4.C.11 (Compensation and Expenses of Trustees). [Paragraph added September 8, 2016.]

F. METHOD OF CASE ASSIGNMENT

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. 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 or avoid a specific trustee appointed to the case. The United States Trustee periodically reviews the processing of chapter 7 cases 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;

Handbook for Chapter 7 Trustees Page 2-5

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 system and will make this information available for review upon request.

G. 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. 11 U.S.C. § 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 described in this Handbook and in Fed. R. Bankr. P. 1019.

H. 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 section 303(g), the United States Trustee will appoint an interim trustee in accordance section 701.

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, if the court has directed the appointment of an interim trustee, 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 must apply to the court for authority to operate the business and file operating reports as required by the United States Trustee and section 704(8). (See Handbook Chapter 4.I regarding operating a debtor’s business.)

Before an order for relief is entered, 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. 11 U.S.C. § 303(g).

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 Fed. R. Bankr. P. 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 Fed. R. Bankr. P. 1007(k).

Handbook for Chapter 7 Trustees Page 2-6

I. SUCCESSOR TRUSTEES

When a trustee dies, resigns, fails to qualify under section 322, is removed from a case under section 324, or otherwise ceases to hold office, and until creditors elect a new trustee, the United States Trustee will appoint an interim successor trustee under section 703(b) to preserve or prevent loss to the estate. The successor trustee must be a disinterested person who is a member of the panel of private trustees. 11 U.S.C. § 703(c)(1). If no member of the panel is willing to serve, the United States Trustee may serve as successor trustee. [Language amended September 8, 2016.]

The successor trustee must promptly take control of the cases and ensure that the estate files, accounting records, and estate funds are expeditiously transferred to the successor trustee. If the prior trustee is not available due to death or incapacity, the successor trustee will need to work with the prior trustee’s staff, family, or law firm; the prior trustee’s bank and computer software vendor; the United States Trustee; and the estate’s professionals to assure a smooth transition of the records and bank accounts. The successor trustee must consult with the estate’s professionals to identify pending court hearings involving adversary proceedings and contested matters, sales and auctions, and other important issues. See also Chapter 4.C.10.c (Employment of Professionals – Employment Standards). In addition, the successor trustee must consider whether it is in the best interests of the estate to continue the employment of the current professionals where, for example, the retention of new counsel would lower the cost of administration or increase the dividend for creditors. [Added September 8, 2016.]

Fed. R. Bankr. P. 2012(b) requires a successor trustee to file with the court and transmit to the United States Trustee an accounting of the prior trustee’s administration of the estate. This accounting must be a separate and distinct record of the activities which were solely within the control of the prior trustee. Rule 2012(b) does not specify a deadline for submission of the accounting or a form of accounting to be used. Absent some evidence of defalcation or other harm to the estate, the successor trustee should include an accounting of the prior trustee’s administration as part of his or her next scheduled Trustee Interim Report (TIR). The accounting filed with the court can be the standard Form 1 and Form 2 required by the United States Trustee, even in jurisdictions where they are not normally filed with the court, or a form approved by the United States Trustee or the local bankruptcy court. See Forms and Instructions under Supplementary Materials on the Program’s web site. [Language amended September 8, 2016.]

J. RESIGNATION OF A TRUSTEE

A trustee may voluntarily resign from a pending case or from the trustee panel. The procedures for suspension and termination, 28 C.F.R. § 58.6 (described at Handbook Chapter 6.D.2), do not apply. A resignation must be submitted to the United States Trustee in writing to be effective. 28 U.S.C. § 586. Local rules or practice may also prescribe a form or notice to be filed with the Court.

A trustee must take reasonable steps to ensure that a resignation from a pending case does not unduly impede its administration. 28 U.S.C. § 586.

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K. TRUSTEE PROFESSIONALISM AND ETHICS

CONFLICTS OF INTEREST

A trustee must be knowledgeable of sections 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. The trustee must have in place a procedure to screen new cases for possible conflicts of interest or lack of disinterestedness upon being appointed. 28 U.S.C. § 586.

If a trustee discovers a conflict of interest or a lack of disinterestedness after accepting the appointment, the trustee shall immediately resign from the case. Conflict waivers by either the debtor or creditor do not 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 meeting of creditors, or both. The trustee also must advise the United States Trustee upon discovery of any circumstances which might give rise to the appearance of impropriety. 28 U.S.C. § 586.

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:

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

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

c. 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;

d. 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;

e. The trustee was an officer, director, or employee of the debtor within two years before the commencement of the case; or

f. The trustee is a creditor or an equity security holder 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 needs to disclose to the United States Trustee all situations presenting an actual or potential conflict of interest or lack of disinterestedness for the trustee’s partners or law firm.

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Fed. R. Bankr. P. 2009 allows the appointment of one trustee in jointly administered cases. The trustee should be aware of the existence of inter-debtor claims and must monitor them because conflicts can develop and require the appointment of separate trustees.

USE OF TRUSTEE DESIGNATION

Care must be taken to avoid confusion in the public’s mind between the trustee who is a private individual and a fiduciary for bankruptcy estates and the Program, its officials and employees, and other government personnel.

The trustee may not use on business cards, stationery, advertising, publications, offices, and web sites any likeness of the Great Seal of the United States, the Department of Justice seal, or any other government-like seal, emblem, logo, insignia, words, or phrase from which the public might infer that such trustee is a government official or employee. In addition, if the trustee is also a professional such as an attorney or an accountant, the trustee’s professional firm’s stationery and business cards may not contain references to the additional role as trustee. The phrase “United States Bankruptcy Trustee,” or similar text, may appear on letterhead, business cards, and web sites used for the chapter 7 trustee operation.

The Program will issue a photo identification card to the trustee when first appointed to the panel. This Trustee Identification Card is intended to aid the trustee in the performance of official duties and must be surrendered upon expiration, resignation, termination or request of the United States Trustee. The trustee must inform the United States Trustee if the ID card is lost or stolen. 28 U.S.C. § 586. The ID card is considered to be the trustee’s primary means of identification as a trustee and may only be used in this capacity.

SOLICITATION OF GRATUITIES, GIFTS, OR OTHER REMUNERATION

OR THING OF VALUE

Neither a trustee nor any of the trustee’s employees 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. The incidental receipt of unsolicited advertising and promotional material of a nominal intrinsic value, along with the receipt of food and refreshments in the ordinary course of a business meeting, generally would not create an impermissible conflict or an appearance thereof. For a discussion of the acceptance of computer hardware and software, see Handbook Chapter 5.G.3.b.

SELF-DEALING AND INSIDER TRANSACTIONS

It is a violation of federal criminal law for a trustee to purchase directly or indirectly or otherwise deal in property of the estate for which the trustee serves. 18 U.S.C. § 154.

The trustee may not purchase assets from an estate administered by another trustee. In addition, the trustee may not knowingly sell estate property to another trustee or a professional regularly employed by the trustee, including the auctioneer, a family member of the trustee or professional, or an employee of the trustee or professional.

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If the trustee becomes aware of any indications of sales to insiders or of collusion in bidding, the sale must immediately be stopped, and the matter reported to the United States Trustee. 28 U.S.C. § 586.

L. TRUSTEE BONDS

As discussed earlier in this chapter, a trustee does not qualify for appointment to a case 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 his or her official duties. 11 U.S.C. § 322(a). The United States Trustee may authorize a blanket bond to cover multiple cases for one or more trustees. Fed. R. Bankr. P. 2010(a).

The trustee is a principal on the bond, and all bonds are written in favor of the United States of America. The bonding company will generally require 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, the trustee may wish to consider obtaining professional liability insurance and employee fidelity coverage.

The United States Trustee determines the amount and terms of the bond and the sufficiency of the surety on each bond. 11 U.S.C. § 322(b)(2). Usually the bond is less costly if acquired in aggregation with similar trustee bonds in a United States Trustee region. Although the United States Trustee sets the amount of the bond, 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. The trustee may not cancel or decrease the amount of the bond without United States Trustee authorization.

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 must 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 approved by the United States Trustee, but the allocations are normally based on the funds on hand as of a particular date. 28 U.S.C. § 586.

A blanket bond might not cover the trustee in a case that involves operating a business in chapter 7. In such instances, the trustee must consult the United States Trustee and bonding company for further information, including whether an individual case bond is appropriate.

28 U.S.C. § 586.

A claim on the trustee’s bond is made via an adversary proceeding (Fed. R. Bankr. P. 9025) and may be commenced up to two years after the date on which the trustee is discharged.

11 U.S.C. § 322(d). As soon as the trustee becomes aware of an incident which may give rise to a bond claim, the trustee must notify the United States Trustee and the bonding company.

28 U.S.C. § 586.

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3. DUTIES OF DEBTORS AND MEETING OF CREDITORS

The trustee must ensure that the debtor complies with the debtor’s duties set forth in section 521.

11 U.S.C. § 704. The failure of the debtor to comply with the requirements of section 521 can have significant adverse results for both the debtor and the trustee. If there is no individual who is performing the duties of the corporate or partnership debtor, the trustee may request that the Bankruptcy Court designate a party (officer, director, partner, or person in control) to perform the duties of the debtor. See definition at Fed. R. Bankr. P. 9001(5). The person who is the subject of the designation must be given notice of the trustee’s application to the court.

A. ELIGIBILITY FOR CHAPTER 7 AND VENUE

The trustee must review the schedules in each case to verify that the debtor is eligible to file for relief under the chosen chapter, has filed the credit counseling certificate or a certification of exigent circumstances in support of a waiver, and that the debtor has filed the petition in the proper judicial district. 11 U.S.C. § 704.

If the debtor is not eligible to be a debtor for the reasons stated in section 109, the trustee may move to dismiss or take other appropriate action. If venue is improper, the trustee may move to dismiss or take other appropriate action, which may include referral to the United States Trustee. The trustee may also file a motion to have the debtor’s attorney disgorge any compensation received if counsel was responsible for filing the case in an improper venue.

B. INITIAL DOCUMENTS

The trustee is responsible for reviewing the timeliness and sufficiency of the documents filed by the debtor. The trustee also must review these documents for any evidence of abuse that may provide the basis for a motion to dismiss pursuant to section 707(b). 11 U.S.C. § 704.

Such evidence may also arise or be confirmed at the meeting of creditors. Guidelines for determining whether a case involves abuse are provided at Handbook Chapter 4.N.7.

Ideally, the debtor should file all required documents with the petition. In many circumstances, however, this will not be possible. The Bankruptcy Code and Rules set out several different deadlines by which the debtor must file documents or face dismissal of the bankruptcy case.

1. On the petition date (in addition to the petition), the debtor must file:

a. The list of creditors to be included on Schedules D, E, F, G and H (Fed. R.

Bankr. P. 1007(c));

b. The certificate of credit counseling, certification of exigent circumstances or request for a waiver of the requirement under section 109(h) (Fed. R. Bankr.

P. 1007(c)); and

c. The statement of Social Security number or that the debtor does not have one (Fed. R. Bankr. P. 1007(f)).

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2. On the petition date, or within 15 days of filing the petition, the debtor must file:

a. Schedules A through J, including: (1) statement of the amount of monthly net income itemized to show how the amount is calculated (at the end of Schedule I); (2) statement…