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     Section 321 of the Bankruptcy Code sets forth the eligibility requirements for a person to be a bankruptcy trustee. That person must be competent to perform the duties of a trustee, and reside in the judicial district in which the case is pending. Corporations can also act as trustees. Such a corporation must be authorized by its own charter and/or bylaws to act as a trustee, and it also must have an office in the judicial district in which the case is pending. A person who has acted as an examiner cannot later serve as a trustee in the same case (see Chapter 11).

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.

 

Qualifications

     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:

  • Pass a 5-year background check, including a fingerprint check, a tax check with the IRS, and a review of credit history;
  • Have strong financial, administrative, and interpersonal skills;
  • Be able to obtain a fidelity bond to ensure the faithful performance of duties;
  • Have integrity and good character;
    Be physically and mentally able to perform the trustee's duties;
  • Be courteous and accessible to all parties in the case;
    Be free of prejudices and act as trustee in an unbiased manner;
  • Not have a relative in the U.S. Trustee's Office in that district within the third degree of consanguinity (first cousin); and
  • Be at least one of the following: a lawyer in good standing in any state or the District of Columbia; a certified public accountant; a college graduate with a business major, or with an advanced business degree; a law student or MBA candidate working for a qualified professor; or, a person with equivalent experience to the foregoing, as determined by the U.S. Trustee's Office.
Duties

     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 Bankruptcy Trustee

     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.

Compensation

     Trustees are paid a base or minimum fee, for handling each case. Then, they are paid a percentage of any disbursements they make to creditors in the case, as follows: 25% on the first $ 5k; 10% on amounts over $5k and up to $50k; 5% on amounts over $50k up to $ 1 million; and 3% thereafter. For instance, if the trustee collects and distributes $ 79,250.00 in a case, he will be paid a total of $ 7,212.50, paid as follows: $5k x .25 = $ 1250; $45k x .10 = $4500.00; and $ 29,250 x .05 = $ 1,462.50. Most cases, however, are "no asset" cases, and the trustee simply receives the minimum nominal fee.

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.

 
341 and Trustee Articles
Written by Henry Rendler





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