a creditor’s point of view: the bankruptcy trustee | Nelson Mullins Riley & Scarborough LLP

The bankruptcy trustee is responsible for the administration of all bankruptcy cases for which he is elected or appointed to serve. The duties of the trustee are generally twofold: 1. To administer the assets of the debtor; and 2. Investigate the financial affairs of the debtor. In a typical liquidation case – most Chapter 7 cases – the cash resulting from the sale of assets or recoveries of recovery claims is distributed to creditors after payment of the costs of administering the case. To enable the trustee to effectively administer the assets, bankruptcy law confers broad powers on the trustee.

As a creditor, you should know the role of the trustee, his powers and how the trustee can affect your rights.

The role of the trustee

In Chapter 7 consumer and business cases, an interim or temporary trustee is chosen from a panel of trustees appointed by the United States Office of the Trustee, which is a division of the United States Department of Justice. Those selected to sit on the panel are usually local lawyers or accountants with experience in bankruptcy or finance law. But any unsecured creditor with a valid and fixed claim who is not an insider of the debtor and who does not have a material conflict of interest with other creditors may request the election of a different person to perform the duties. of trustee in place of the interim trustee. In Chapter 13 cases, there is usually a single person who serves as the permanent trustee to administer all matters in the particular jurisdiction. Chapter 11 cases often do not have an administrator unless a party to the case requests one, and the judge agrees and orders that an administrator be appointed.

In all cases, the bankruptcy trustee is a trustee and a representative of the bankruptcy assets that are created when filing a bankruptcy case. The bankruptcy estate consists of almost all of the debtor’s assets at the date of filing the business. It is the responsibility of the trustee to maximize the assets available for liquidation and distribution to creditors.

Once appointed, the trustee will make a preliminary decision as to whether there will be any assets available for distribution to creditors. The trustee will review the debtor’s bankruptcy returns to help with this determination. The next step is for the trustee to inquire with the debtor about the information listed in the bankruptcy declarations and its assets and liabilities. This investigation is conducted at the Section 341 meeting, sometimes referred to as the “first meeting of creditors”. The Section 341 meeting is also the first opportunity for creditors to question the debtor under oath.

The powers of the trustee

Creditors should know that the bankruptcy trustee has significant legal powers. In addition to the responsibility to sell the debtor’s non-exempt property, the most important powers of the trustee are explained below.

Avoidance powers
Perhaps the trustee’s most feared power is the power to avoid – or reverse – transfers made by the debtor before the bankruptcy case was filed, also known as recovery claims. The trustee can also seek a court order through litigation to avoid a mortgage or other security that has not been perfect on the date of filing for bankruptcy. Likewise, the trustee can avoid a sale of real estate if the deed has not been correctly registered before the request.

The most widely used avoidance power is the avoidance of preferential transfers. A preferential transfer is a transfer that occurs while the debtor is insolvent and that is made within 90 days of filing for bankruptcy to a creditor because of a pre-existing debt or the granting of security to a creditor. previously unsecured. Sometimes longer time limits apply, especially where the transfer has been made to someone close to the debtor, such as a relative or other “insider”. Of course, there are exceptions and defenses to preference actions which can be invoked in appropriate cases.

Trustees also have the power to request the reversal or rescission of a fraudulent transfer. These may be transfers made where the debtor defrauded creditors in connection with the transfer or simply did not receive a reasonably equivalent value for the transferred property. This latter basis is called a constructive fraudulent transfer. Note that these cases can be very fact specific.

Abandonment
The trustee can give up property that is bulky or worthless to the bankruptcy estate. For example, the trustee is likely to give up privileged assets when there is no equity. In cases where real estate property is collateral for a loan, lenders would most often be in favor of a abandonment, which would then allow the lender / creditor to sell the collateral to collect the loan repayment. Secured creditors should do everything possible to contact the trustee prior to the section 341 meeting and obtain the consent of the trustee to relinquish the security in these cases at the outset of the case. This can often be accomplished without the help of a lawyer and without going to court if the trustee is satisfied that the creditor has valid security interest and that there is a reliable valuation of the security.

Work with the trustee

Creditors can often help the trustee and vice versa. Creditors can help locate assets for liquidation and distribute to the general body of creditors. For example, creditors often have financial statements on file that disclose assets or sources of income that the debtor has not disclosed on their bankruptcy papers. The objectives of the trustee and unsecured creditors in general are generally the same and the sharing of information can be mutually beneficial. Most trustees are willing to provide information regarding both the details of the case as well as the status of the trustee’s efforts to administer the case.

Remuneration of the trustee

Trustees are paid on commission. The more money the trustee is able to pay to creditors, the higher the commission.

The scale of trustee fees is defined as follows in Article 326 (a) of the Bankruptcy Code:

In a case referred to in Chapters 7 or 11, other than a case referred to in Subchapter V of Chapter 11, the court may award reasonable compensation under article 330 of this title of the trustee for the services of the trustee, payable after the trustee has rendered these services, without exceeding 25% on the first tranche of $ 5,000 or less, 10% on any amount exceeding $ 5,000 but not exceeding $ 50,000 , 5% on any amount in excess of $ 50,000 but not exceeding $ 1,000,000, and a reasonable indemnity not exceeding 3 percent of such sums exceeding $ 1,000,000, on all amounts disbursed or remitted in the case by the trustee to the interested parties, excluding the debtor, but including holders of secured debts.

Jennifer R. Strohm

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