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The Bankruptcy Trustee -
A Panel Trustee is Different from the U.S. Trustee
The panel trustee or bankruptcy trustee is not to be confused with the Office of the United States Trustee. The U.S. Trustee is an office of the U.S. Department of Justice charged with the responsibility of supervising the administration of bankruptcy cases. It is a so-called "watchdog agency". The U.S. Trustee's Office is broken into 21 different Regions across the country and U.S. Territories.
The U.S. Trustee's Office in each district maintains a panel of persons who are qualified to serve as bankruptcy trustees. The trustee for a particular case will be appointed from that panel. The appointment is good for one year, and then usually renewed. The trustee is not a federal employee. The majority of panel trustees tend to be lawyers/attorneys, accountants, real estate brokers, or involved in the financial services field.
Federal regulations (28 CFR 58.1-5) state that a person wanting to be a trustee must:
The trustee's job duties are listed in Section 704 of the Bankruptcy Code. Essentially, he is to collect the nonexempt property of the estate, sell it, and distribute the money to the persons entitled to it, per the distribution scheme set forth in Section 726 of the Bankruptcy Code. Under Section 726, administrative expenses of the case are paid first, and then the creditors.
The trustee can also generate money by exercising the so-called "avoidance powers" to recover money from third parties. This can include "preference" complaints under Section 547 of the Bankruptcy Code, "fraudulent transfers" under Section 548 of the Bankruptcy Code, and canceling otherwise valid security interests under underlying state law by using the trustee's "strong-arm powers" set forth in Section 544 of the Bankruptcy Code.
The trustee has numerous additional duties, including examining the debtor's financial affairs, investigating the debtor's right to a discharge, checking to see if the debtor complies with his statement of intention concerning personal property, inspecting proofs of claim, and making accounts and reports to the court.
Interim Trustees and Successor Trustees
The trustee is named early on in the case. Technically, from that time up to the meeting of creditors (341 meeting), he serves as an "interim trustee", per Section 701 of the Bankruptcy Code. At the meeting of creditors, usually the appointment is then made permanent. The only time this does not happen is if a creditor moves to elect another person as trustee at the meeting of creditors, under Section 702 of the Bankruptcy Code. In this instance, the new, successor trustee, assuming that he is otherwise eligible to act as a trustee, would take over from the interim trustee. This is quite rare, but it has been known to occur.
Removal of Trustees
Under Section 324(a) of the Bankruptcy Code, a trustee can be removed from a case for cause shown. Cause can include, for instance, failure to disclose past associations with insiders of a debtor corporation, creating the appearance of impropriety, and resulting in ongoing disharmony in the administration of the estate. It can also include a trustee's inability to properly perform his duties, breach of his fiduciary duties, and failure to bring actions which should be brought. If a trustee is removed from one case, then, unless the court orders otherwise, he will likewise be removed from all pending cases in which he is acting as trustee.
Careful Monitoring of Trustees Needed
A trustee is given an immense amount of power. It is important that the trustee not abuse these powers. For instance, a trustee may be tempted to bring an action against a third party that is not well-grounded in law or fact. The defendant may be tempted to simply settle the case, instead of having to employ an attorney to defend himself. He will often agree to pay the "nuisance value", or "cost of defense" of the suit. The net proceeds of the settlement are then often just enough to ensure payment to the trustee and his own attorney, with no payment to the legitimate creditors. This is known as the trustee "churning" the file, and is frowned upon. Unless there is some discernible benefit to creditors to be derived through an action, it should not be brought. Bringing the action merely to fill the coffers of the trustee and his own attorneys and accountants is not a good reason for such a suit.
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