Bankruptcy is Watchdog Friendly
by Mary Fran Durham and Lisa L. Lambert
The United States Trustee Program serves as the “watchdog over the bankruptcy process,” H.R. Rep. No. 989, 95th Cong., 2d Sess. at 88 (reprinted in 1978 U.S. Code Congressional & Admin. News at 5787, 5963, 6049). Generally, the United States Trustees (the “U.S. Trustees”) “promote integrity and efficiency in the nation’s bankruptcy system.” United States Trustee Program Mission Statement.
To achieve this transparency, the U.S. Trustees’ statutory duties include investigating cases for hidden assets or other abuse, reviewing employment and fees, appointing and overseeing trustees, and overseeing administrative compliance. Each U.S. Trustee is appointed by the Attorney General. Locally, William T. Neary has served as the U.S. Trustee in Region 6, which encompasses the Northern and Eastern Districts of Texas, since 1986.
Bankruptcy cases depend on the debtor’s affirmative disclosure of assets and liabilities. The U.S. Trustees may respond to abusive conduct by seeking civil remedies from the bankruptcy court. The U.S. Trustees review chapter 7 liquidation cases to determine whether the case is a substantial abuse because the debtor could repay creditors or otherwise resolve debts. In both chapter 7 liquidation and chapter 13 repayment cases, the U.S. Trustees also evaluate whether the debtor has disclosed all assets and liabilities, has filed multiple cases in violation of the Bankruptcy Code, or has otherwise failed to comply with bankruptcy requirements.
Just as the U.S. Trustees monitor for debtor abuses or errors, the U.S. Trustees monitor creditors’ proofs of claim, motions to lift stay, and other pleadings for accuracy and sufficiency. On February 9, 2012, United States Attorney General Eric Holder cited these efforts when announcing the national foreclosure settlement: “The U.S. Trustees Program . . . was one of the first federal agencies to investigate mortgage servicer abuse of homeowners . . . Trustees reviewed more than 37,000 documents filed by major mortgage servicers in federal bankruptcy court—and took discovery in more than 175 cases across the country.” The efforts to monitor claim accuracy continue.
In addition to seeking civil remedies, U.S. Trustees must report to the United States Attorneys if they have “reasonable grounds to believe” that a federal crime has been committed in connection with a bankruptcy case. The national hotline at www.justice.gov/ust/eo/fraud makes it easy to refer bankruptcy fraud to a Trustee’s office.
In any type of bankruptcy case, the U.S. Trustees review professionals’ fees. Since bankruptcy filings create an estate like a probate estate or a trust, the Bankruptcy Code requires professionals to be employed and to have their fees approved by the court. The U.S. Trustees have a statutory duty to review employment arrangements and fee requests. In addition to other legal standards for these requests, the U.S. Trustees have promulgated fee guidelines, at www.justice.gov/ust/eo/rules_regulations/index.htm. (Proposed guideline revisions for large cases are posted at www.justice.gov/ust/eo/rules_regulations/guidelines/proposed.htm.) To avoid jeopardizing their fees, counsel handling personal injury or other legal issues should assess whether a client’s bankruptcy filing means their ongoing employment requires court approval.
In certain types of bankruptcy cases the U.S. Trustees appoint a trustee to administer the bankruptcy estate. The U.S. Trustee selects and oversees panel trustees, who liquidate chapter 7 assets for distribution, and standing trustees, who oversee cases and distribute funds in chapter 13 individual repayment cases and chapter 12 family farmer cases. Trustees are subject to background checks, auditing, and periodic review. While trustees often are attorneys, they are not required to be.
Accuracy is also monitored in business cases. When a business entity seeks to reorganize rather than liquidate, it seeks bankruptcy protection under Chapter 11. Absent unusual circumstances, the debtor becomes a debtor-in-possession, meaning the debtor generally retains control of the estate. The U.S. Trustees conduct initial debtor interviews to go over the debtor’s obligations, including banking, maintaining insurance, working toward reorganization, and preparing monthly operating reports. The Dallas Office of the U. S, Trustee developed a two-hour Monthly Operating Report Workshop for debtors, attorneys, and financial personnel. The schedule for these classes and the U. S. Trustee’s Local Guidelines for Chapter 11 Cases are available at www.justice.gov/ust/r06/.
The U.S. Trustees’ duties are further detailed at the links provided. Education helps to prevent problems, so we encourage you to review the national and local websites for further information.
Mary Fran Durham is a Trial Attorney with the Office of the U.S. Trustee and Lisa L. Lambert is the Assistant United States Trustee. They can be reached at MaryFrances.Durham@usdoj.govand Lisa.L.Lambert@usdoj.gov, respectively.