A Day in the Life of a Chapter 7 Trustee: A Drama

ArizonA Bankruptcy American Inn of Court

Pupillage 8 – March 10, 2016

Anthony Peter Cali David Engelman

Elizabeth Fella Michael J. Gordon

Heather Macre Kevin Christopher McCoy

Jared G. Parker Teresa Pilatowicz

Steven R. Schneider Hon. Madeleine C. Wanslee

TABLE OF CONTENTS

COVERAGE COUNSEL ………………………………………………….…………………………..1

CONSUMER DEBTS AND QUALIFYING TO BE A CHAPTER 7 DEBTOR ………..………...……………4

FIDUCIARY DUTIES OF A CHAPTER 7 TRUSTEE …………………………………………………….7

TRUSTEE’S DUTIES, DAY-TO-DAY REPORTING AND COMPLIANCE OBLIGATIONS …....……………9

EXEMPTIONS ……………………………………..........................................................................13

CHECKLIST FOR SCHEDULES / DOCUMENT PRODUCTION / EXEMPTIONS …………………………13

AMENDMENTS TO SCHEDULES …………………...........................................................................16

DUTY TO DISCLOSE ……………………………...........................................................................17

IMMUNITY / LIABILITY / COURT SUPERVISION ……………………………………………...........20

SINGLE MEMBER LLC’S: CHAPTER 7 TRUSTEE’S RIGHTS .……………………………………....23

CHAPTER 7 TRUSTEE SURVEY RESULTS .………………………………………………..….…… 25

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ArizonA Bankruptcy American Inn of Court

Coverage Counsel

I. Client preparation/when coverage counsel1 appears at the 341 a. General Prep:

i. Go over schedules and statements ii. Meet with the client, explain your limited role and secure their consent to your

appearance iii. Prepare client to talk about issues that you may see or may want to flag for the

trustee iv. Go over the general line of questioning the trustees follow/what to expect v. Go over how to dress, need to be on time, and what to bring (ID, SSN, etc.)

vi. Be prepared to amend/supply the trustee more info if it comes up at the meeting vii. Stress honesty, full disclosure and accuracy

b. Coverage counsel: i. Must file notice of limited appearance prior to the 341 meeting

ii. Must file a detailed, separate fee disclosure in keeping with 11 U.S.C. § 329. As always, the fee must be reasonable

1. Local Rule 2084-3: in Chapter 13, must describe the type of fee (flat, contingent, hourly, etc.), amount sought and services rendered; fee must be reasonable

iii. Best practices: 1. Coverage counsel is subject to the same ethical obligations as the filing

attorney – Bankr. Local Rule 9011-1 2. coverage counsel should review the file/schedules/statements, talk to

the filing attorney and client 3. coverage counsel should make sure the client consents to his or her

appearance at the 341 and be sure the client understands the limit and scope of representation

4. the hiring lawyer has the duty to supervise coverage counsel 5. coverage counsel should communicate the outcome to client and hiring

counsel iv. Anecdotally, this practice is discouraged by trustees:

1. Use of coverage counsel is allowed in Arizona and occurs frequently 2. Florida has a local rule prohibiting the practice 3. CA’s Chapter 13 trustees discourage it:

Attorney Responsibilities: Attorney representing debtors at the Meeting of Creditors must have the debtor’s file and backup documents and be familiar with the case to assist the debtors in responding to questions of the Trustee and/or creditors. The use of special appearance counsel for a debtor is highly discouraged. In the rare instance where an attorney

1 As used herein, the term “coverage counsel” refers to an attorney who is not the attorney who filed/signed the petition and is not in the same firm as the attorney who filed/signed the petition.

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makes a special appearance for debtor’s counsel, the attorney appearing specially on behalf of a debtor must fulfill the following requirements for the matter to proceed to examination:

1. Must be fully prepared and knowledgeable of the particular facts and issues in the debtor’s case;

2. Must be in possession of the original file of the debtor in the case;

3. Must have discussed the case with the attorney of record;

4. Must have met with the debtor prior to the time of the scheduled creditor meeting at a place and time other than the 341(a) room environs just prior the 341(a) Meeting. “Meeting with the debtor” does not include telephonic meetings.

Source:http://www.justice.gov/sites/default/files/ust-regions/legacy/2012/12/12/ch13_admin_guidelines.pdf (emphasis added).

v. But, coverage attorneys help meet the client’s constitutional right to representation

c. But what if no attorney goes to the 341 hearing or the case is “unbundled?” i. Previously allowed in AZ. US Trustee has recently informed the panel trustees

that, if a debtor is represented by counsel, and counsel does not appear, trustees now must continue the 341. Meeting may not go forward unless counsel is present. In the past, our US Trustee had taken the position that debtor should not be punished because their counsel failed to appear, as many debtors need to get the time off from work to attend and may have other issues. If a represented debtor appeared, they were informed that they had the right to be represented at the 341 meeting, and if they wished, the meeting would be continued to a later date so that their counsel could appear; on the other hand, if they wished to go forward with the meeting without their counsel, and they consented on the record, the meeting could proceed.

ii. But not everywhere! Interesting case out of Minnesota re: attorneys not going to 341. Minn. BK Court stated that the debtor’s attorney MUST attend the 341 hearing:

1. Attorney started offering clients a “discounted” option for bankruptcy wherein he would not appear at the 341.

2. Attorney did not, however, amend his fee applications to reflect this option; the fee app still showed a charge for the 341 appearance, even when clients selected not to have him present.

3. Chapter 7 trustee raised the issue: “Based on a complaint raised by a standing Chapter 7 trustee, and relying on 11 U.S.C. § 329(b), Fed. R. Bankr.P.2017, and Local Rule 9010–3(e), the United States Trustee (UST)

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brought a motion in these four cases seeking to have attorney Johnson return payment for his failure to attend and represent his debtor clients at the 341 meetings of creditors in violation of the terms of his own Rule 2016(b) statements. Johnson offered to amend his Rule 2016(b) statements but withheld from doing so on the UST's suggestion that the original misstatements constituted Rule 9011(b)4 sanctionable violations and that amendment at this late hour would be insufficient to demonstrate that Johnson did not file the initial compensation statements fraudulently.” In re Johnson, 291 B.R. 462, 465 (Bankr. D. Minn. 2003).

4. Court took issue with the idea of contracting-away 341 meeting attendance: “In other words, under [Minnesota] Local Rule 9010–3(e), may an attorney discount compensation and contract away the service of attendance and representation at the 341 meetings? The answer is no. In this District, attendance and representation at the meeting of creditors is mandatory in most circumstances, and may not be avoided by discounting compensation and modifying the Rule 2016(b) statement.” In re Johnson, 291 B.R. 462, 466 (Bankr. D. Minn. 2003).

5. Court referenced similar local rules in Virginia, Illinois and Idaho – in those states, attorneys are not allowed to “unbundle” bk services and MUST attend the 341. This is construed as necessary for proper and full representation of clients: “Appearance at Section 341 meetings is important for debtors and is required under Section 343. The debtors are put under oath, and testimony is recorded. The meeting, for most debtors, is the only direct contact that the debtors will have with the trustee and with the bankruptcy system. The trustees request information [from the debtor] at the meeting for administration of the estate.” While the 341 meeting may, in some very basic no-asset cases, admittedly be an event of small consequence, the meeting is an important tool for identifying possible factual matters and attendant legal issues that may indeed be of major significance to the debtor.” In re Johnson, 291 B.R. 462, 469 (Bankr. D. Minn. 2003).

iii. Even the 9th Circuit has expressed some concern about un-bundling, although is it is allowed: In Hale v. United States Trustee (In re Basham ), 208 B.R. 926, 932 (9th Cir. BAP 1997), aff'd 152 F.3d 924, 1998 WL 382843 (9th Cir.1998), the Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's decision ordering the return of payments as excessive for, among other reasons, the attorney's failure to represent the debtors at the 341 meeting because the debtors did not pay additional compensation. Affirming, the BAP explained that “the bankruptcy court expressed grave concern” over the attorney's practice of filing “petitions, schedules, and statement of affairs and then leaving [debtors] to represent themselves.” Id. The attorney “had an obligation to either handle the cases from beginning to end and perform the services for whatever amounts the clients could afford, or refer the cases to another attorney.” Id. at 932–33 (emphasis added).

1. This case came out of Idaho, which has since changed its rules and now requires attorneys to attend their client’s 341 hearings.

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2. This case has some negative treatment: Colorado has disagreed, stating that its bankruptcy courts do not have a problem with this type of “unbundling:” “A debtor's counsel may limit the scope of services to be provided in the main bankruptcy case but must specify the limitation in the Rule 2016 disclosure.” In re Merriam, 250 B.R. 724, 736 (Bankr. D. Colo. 2000). Not attending a 341(as counsel) is acceptable as long as the client knows and is not charged. Id. at 738-39.

Consumer Debts and Qualifying for a Chapter 7

I. Standing to qualify for Chapter 7 – what is a “consumer” debt?

a. Does the debtor qualify for a Chapter 7? i. The Means Test only applies if the debtor’s debts are primarily consumer debts.

ii. Under Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th Cir.1988), a debtor is considered to have “primarily consumer debts” under § 707(b) when consumer debts constitute more than half of the total debt.

iii. So, if more than half of your debts are non-consumer (i.e. business) debts, you can file for Chapter 7 without taking or passing the means test.

b. So, what is, and isn’t, a “consumer debt”? i. Zolg v. Kelly (In re Kelly), 841 F.2d 908, 912–13 (9th Cir.1988): A “consumer debt”

under § 707(b) depends on the purpose of the debt. Consumer debt includes all secured debt incurred for personal, family, or household purposes, whereas non-consumer debts stem from a “profit motive.”

1. Likewise, under the Bankruptcy Code, “consumer debt” is “debt incurred by an individual primarily for a personal, family or household purpose[.]” § 101(8).

2. Compare: ““Consumer debt” is further distinguished from “non-consumer” debt as a debt incurred with a “profit motive.” Citizens Nat'l Bank v. Burns (In re Burns), 894 F.2d 361, 363 (10th Cir.1990); accord Cypher Chiropractic Ctr. v. Runski (In re Runski), 102 F.3d 744, 747 (4th Cir.1996); In re Booth, 858 F.2d at 1054–55.” In re Stewart, 175 F.3d 796, 806 (10th Cir. 1999).

ii. Rule of thumb: 1. If the money was used to pay a personal, family or household expense or

to purchase personal, family or household goods, it is probably a consumer debt.

2. If it was used to pay something else, it is likely non-consumer and therefore, "business."

iii. But, there are some “tricky” categories: 1. Taxes. Taxes, including income taxes, are generally not consumer debts.

Most courts consider taxes to be non-consumer debt as they are not “voluntary,” concern the public wealth and arise from earning money (as opposed to spending it). Personal income tax debts are not consumer debts. In re Westberry 215 F.3d 589, 591 (6th Cir. 2000).

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2. Student loans. There is a split as to whether or not student loans are per

se non-consumer debts. Rather, the Courts will look at how the money was spent. See In re Stewart, 175 F.3d 796 (10th Cir. 1999); cf. In re Wisher, 222 B.R. 634 (Bankr. D.Colo. 1998) [there was no testimony or evidence as to how the student loan funds were spent, so the Court classed it as a consumer debt]; In re Vianese, 192 B.R. 61 (Bankr. N.D.N.Y. 1996) [student loan for children’s education is a consumer debt]. In Stewart, 175 F.3d 796 (10th Cir. 1999), the Tenth Circuit took evidence and noted that the majority of the student loans at issue were used for family expenses, as opposed to tuition, books or other direct educational expenses. This suggests that documentation is needed to show what a student loan was used to pay for (tuition and books, or living expenses and food) in order to defend the categorization.

3. Business-related credit card debt. The Court in In re Traub, 140 B.R. 286 (Bkrtcy.D.N.M. 1992) looked at the debtor’s (undisputed) testimony that he used the subject credit card solely for business. As a result, the Traub Court ruled that the subject credit card debt was business, or non-consumer, in nature. Similarly, another court ruled that the use of an overdraft line and credit cards for “dabbling” in the stock market was consumer debt in In re Berndt, 127 B.R. 222 (Bankr. D. N.D. 1991). If the debtor were careful to use only certain cards for business expenses, this determination will be easier. That said, it seems that the debtor and counsel will need to go through credit card statements carefully to determine whether the individual purchases were for consumer or non-consumer purposes at the time the purchase was made. Purchases of business inventory and equipment, or cash advances deposited into the business to pay business expenses, are not consumer debt. Items like lunches and gas for the debtor’s commute are probably consumer debt. Documentation is key.

4. Mortgages. Mortgages on a debtor’s residence are consumer debt. Mortgages on the debtor’s business property are business debt. This gets tricky when the two are mixed. A mortgage on a property that the debtor resided in when he or she mortgaged it, but is now a rental property, remains a consumer debt. A mortgage on property the debtor purchased as an investment property to rent out is a business debt. Mortgages taken out to pay for business expenses, incl. such a mortgage against the debtor’s residence, may be business debts. Matter of Booth, 858 F.2d

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1051, 1054 (5th Cir. 1988) (relying on the “for profit” distinction in Kelly, supra.). Again, documentation of how the money was spent is the key.

5. Car loans. If the debtor purchased a vehicle to use only in his or her business, this is a business debt. If the debtor simply uses the “family car” to make business sales calls, it is a consumer debt.

6. Domestic support obligations. Most courts consider these to be consumer debts as they lack a profit motivation. In weighing whether alimony is a consumer debt, the Courts generally opine that support obligations have a “non-profit” motive. In re Stewart, 175 F.3d 796, at 807 (10th Cir. 1999). In Stewart, the Court found that alimony is consumer debt. It had been awarded to a former spouse for her support and benefit, so it lacked the “profit motive.” See also In re Kestell, 99 F.3d 146, 149 (4th Cir.1996).

7. Personal Guarantees. Personal guarantees of business debts are not consumer debts; they remain business debts. However, co-signing on a child’s car loan or apartment lease would be consumer debt because it is incurred for a “non-profit” purpose.

8. Legal fees. If legal fees are incurred for family or household purposes, such as divorce, child custody and support obligations, they will most likely be considered consumer debt. If they are incurred in connection with business disputes, they are non-consumer or business debt.

9. Tort liabilities. Like taxes, such liabilities are not incurred “voluntarily,” so they are not consumer debts and are considered business debts. In re Marshalek, 158 B.R. 704, 707 (Bankr. N.D. Ohio 1993); In re White, 49 B.R. 809, (Bankr. W.D.N.C., 1985).

10. Medical Bills. Like taxes or accident liabilities, medical bills are not “voluntary,” so they do not seem to be “consumer” debts, but they also lack the “for profit” aspect. Case law suggests that there is a split on this issue:

a. In In re Morse, after laying out the Kelly rule regarding substantial abuse, the court stated that “medical debts are personal expenses” in the same way as food and gas. 164 B.R. 651 (Bankr. E.D. Wash 1994). Accord, In re Martinez, 171 B.R. 264, 267 (Bankr. N.D. Ohio 1994).

b. But, in In re Dickerson, after stating that Kelly is the leading case interpreting the term consumer debt, medical debts were listed as “non-consumer debts.” 193 B.R. 67 (Bankr. M.D. Fla. 1996).

c. Using this analysis, bills relating to elective and cosmetic surgery are most certainly consumer debts.

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Fiduciary Duties of a Chapter 7 Trustee

The Fiduciary Duties and To Whom They Are Owed.

A bankruptcy trustee is the “representative of the estate.” 11 U.S.C. § 323(a). The chapter 7 trustee’s statutory duties are enumerated in 11 U.S.C. § 704(a). Among other things, the trustee shall:

(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;

(2) be accountable for all property received;

(3) ensure that the debtor shall perform his intention as specified in section 521(a)(2)(B) of this title;

(4) investigate the financial affairs of the debtor;

(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;

(6) if advisable, oppose the discharge of the debtor;

(7) unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest;

(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;

(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;

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(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);

(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; and

(12) use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that—

(A) is in the vicinity of the health care business that is closing;

(B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and

(C) maintains a reasonable quality of care

11 U.S.C. § 704(a).

Additionally, the trustee has a fiduciary obligation to conserve the assets of the estate and to maximize distribution to creditors. In re Rigden, 795 F.2d 727, 729 (9th Cir. 1986). The trustee also has a duty to treat all creditors fairly and to exercise that measure of care and diligence that an ordinarily prudent person under similar circumstances would exercise. Id. (citing In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir.1983)).

As set forth in the United States Trustee’s Handbook for Chapter 7 Trustees, the Trustee is a fiduciary that is “charged with protecting the interests of all estate beneficiaries - namely, all classes of creditors, including those holding secured, administrative, priority, and non-priority unsecured claims, as well as the debtor's interest in exemptions and in any possible surplus property.” However, a chapter 7 trustee does not have a fiduciary obligation to honor an exemption that the debtor has failed to properly claim as it is the debtor’s responsibility to properly file a list of claimed exemptions. In Re Wisdom, 478 B.R. 394, 399 (Bankr. D. Idaho 2012) aff’d, 490 B.R. 412 (D. Idaho 2013).

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A Trustee May Contact a Represented Debtor.

In Arizona, a trustee, even if a lawyer, may communicate directly with persons who are represented by counsel concerning the subject matter of the bankruptcy case. This direct communication is limited to situations where an attorney is appointed to act exclusively as a bankruptcy trustee. If the attorney has a dual appointment to act also as attorney for the trustee, then Ethical Rule 4.2 applies and prohibits ex parte contacts and communications, unless otherwise authorized by law. See State Bar of Arizona Ethics Opinion 03-02.

Day to day reporting and compliance obligations of the trustee re: UST and audits

The information in this section of the written materials are drawn primarily from two sources: the United States Trustee Program Policy and Practices Manual (“Manual”), specifically chapter 2-2, and the Handbook for Chapter 7 Panel Trustees (“Handbook”).

USTP Oversight

A. Trustee’s Duties

Section 704(a) of the Code lists the chapter 7 trustee’s duties:

“(a) The trustee shall—

(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;

(2) be accountable for all property received;

(3) ensure that the debtor shall perform his intention as specified in section 521(a)(2)(B) of this title;

(4) investigate the financial affairs of the debtor;

(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;

(6) if advisable, oppose the discharge of the debtor;

(7) unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest;

(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business,

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including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;

(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;

(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);

(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; and

(12) use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that—

(A) is in the vicinity of the health care business that is closing;

(B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and

(C) maintains a reasonable quality of care.”

Additionally, section 521(a)(2)(B) provides that:

(2) if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate—

(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; and

(B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as the court, for cause, within such 30-day period fixes, perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph;

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except that nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h)

B. Reporting Procedures

The USTP has certain reporting requirements of trustees administering an asset case. The USTP’s system uses Uniform Transaction Codes (UTCs) and three main forms that trustees must use for reporting: the Individual Estate Property Record and Report (Form 1), the Cash Receipts and Disbursements Record (Form 2), and the Summary Interim Asset Report (Form 3). According to the Handbook:

For purposes of these record keeping and reporting requirements, a chapter 7 case is considered an asset case when: (1) the trustee expects to, or has, declared the case to be an asset case; (2) the trustee is in possession of property or funds, or expects to receive property or funds; or (3) a no-asset report has not been filed with the United States Trustee and the court, and 120 days have passed since the initial examination of the debtor at the § 341(a) meeting.

C. Trustee Evaluation

The USTP has established certain uniform reporting procedures for chapter 7 trustees, and a system of trustee evaluation based on trustee’s compliance with these procedures, effectiveness of representation, and efficiency of case management. From chapter 2-2 of the Manual:

Trustee supervision is an ongoing process. It requires monitoring the trustee’s caseload and the trustee’s service as a fiduciary in each case. The standard against which a trustee’s performance should be evaluated is found in the Bankruptcy Code, Bankruptcy Rules, local rules, case law in the jurisdiction, and the Handbook. Trustee supervision and performance evaluation take into account the factors described in this chapter, including but not limited to:

1. Civil and criminal enforcement;

2. The trustee’s performance in meetings of creditors and in court;

3. The trustee’s supervision of professionals;

4. The size and age of the trustee’s caseload;

5. The trustee’s progress in closing cases;

6. The trustee’s maximization of funds distributed to creditors;

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7. The accuracy, timeliness, and completeness of the trustee’s NDRs, TFRs, TDRs, TIRs, and operating chapter 7 reports;

8. The trustee’s procedures for safeguarding estate assets;

9. The trustee’s judgment in determining whether to administer assets;

10. The trustee’s compliance with banking and bonding policies and procedures;

11. The trustee’s cooperation and responsiveness regarding audits, examinations, and reviews;

12. The trustee’s conduct in administering the trustee’s cases, including dealing with debtors, creditors, attorneys, the court, and the United States Trustee; and

13. The number and nature of complaints against the trustee as well as the trustee’s responsiveness in addressing the complaints.

These criteria can be grouped into a few broader categories of trustee evaluation: (1) quality of legal services, (2) efficiency of case administration, (3) compliance, and (4) conduct.

Compliance with USTP-Mandated Accounting Procedures

The Handbook

According to one of the trustees surveyed, compliance-related tasks consumed 50% of his/her office-time, and s/he described the process of preparing and submitting TFRs as “time consuming.” According to a different trustee, “UST and regulatory compliance tasks take up over 75% of my office and personal working hours.”

The Handbook is more or less the trustee’s Bible re: how to run his/her operation. Its 100 pages lay out rules and procedure re: nearly every aspect of a trustee’s duties, from eligibility for appointment to the panel, to conducting 341 meetings, and office/accounting controls and procedures, in minute detail (which might explain why compliance is such a significant portion of a trustee’s daily work). Chapter 5 of the Handbook is titled “Financial Policies, Procedures and Reporting Requirements.” It deals with recordkeeping and reporting, certain control procedures a trustee must handle personally, segregation of duties and documentation procedures, the logging and safeguarding of incoming receipts, handling of earnest monies and settlement proceeds, and many, many more topics. The Handbook can be found at: https://www.justice.gov/ust/private-trustee-handbooks-reference-materials/chapter-7-handbooks-reference-materials

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Exemptions

I. State/residency and its impact on exemptions

a. Federal bankruptcy law states that a debtor may “exempt” some property under federal law or under the laws of the debtor’s home state. 11 U.S.C. §522(b).

b. Arizona requires its residents to use state law exemptions, instead of federal exemptions. Thus, debtors filing bankruptcy in Arizona are allowed the exemptions in the Arizona statutes and federal non-bankruptcy statutes.

i. On the top of Schedule C, a debtor claiming Arizona exemptions should check the second box next to 11 U.S.C. §522(b)(3).

c. Residency is an issue: i. To claim Arizona exemptions, debtor must have lived in Arizona for two years

prior to the filing date. ii. If the debtor did not live in Arizona for two years prior to the filing date, then the

debtor must claim the exemptions provided by the state where the debtor lived for the greater part of the six months between two years and two and a half years before the bankruptcy filing. 11 U.S.C. § 522(b)(3)(A).

iii. If the debtor is ineligible to claim exemptions provided by that state’s law (or if the state’s laws allow it), then the debtor may claim exemptions provided in Bankruptcy Code §522(d).

d. Attorney must determine which exemptions should apply and discuss same with client. i. Weigh the options – some forums are more beneficial to certain types of debtors.

ii. Federal exemptions (which apply as “gap fillers” if a state does not have exemptions; other states allow the debtor to choose) can also be useful

1. Federal exemptions include the “Wild Card,” which can be applied to any type of property. It can be used to “save” anything – a car, art, jewelry, etc. The federal wildcard exemption is currently $1,225 plus any unused portion of the federal homestead exemption up to $12,250 (if you are married and filing a joint bankruptcy these amounts are doubled).

Checklist for Schedules / Document Production / Exemptions

- Schedules: o Bankruptcy Rule 1007: schedules must be filed with the petition or within 14 days of the filing

of the petition o New forms:

The new forms seek more information and more detail • This includes information not addressed in the debtor questionnaires

attached to the major programs o More detail is better – be sure to get mileage on vehicles, the last 4

digits of any and all accounts, etc. Typically this detail is left out of the debtor questionnaires

o The questionnaires also omit much of the information needed for the new SOFA

• Need to go over and discuss with clients carefully • Verify values listed on schedules and keep some record of the source

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o KBB/Edmonds o Kelly Blue Book

The new forms used differently numbered forms for individuals and entities: • Schedules for Individuals: 106A-106J • Statement of Financial Affairs for Individual: 107 • Statement of Intent for Chapter 7 debtors: 108 • Schedules for entities: 206A-J • SOFA 207

List EVERYTHING! Amend if anything is accidentally omitted • This includes all bank accounts, pension information, children’s bank

accounts, joint accounts with a former spouse (as applicable), etc. When in doubt, list it.

Pull a credit report to check for old accounts that the debtor may not remember Form B2000 has a good checklist of what you need to include with the petition as

well as filing fees. It is a good reminder of what one needs. o Check for old bankruptcy cases for the debtor o Check for lawsuits involving the debtor – judgments as well as current or inchoate claims o Check for UCC filings and the county recorder’s office for info. re: secured liens o UST looks for:

Undervalued assets and undisclosed property Income that does not match the debtor’s tax returns and pay stubs Excessive expenses Recent payments to creditors Recent transfers of property Eligibility for the chapter under which the case was filed

o Key points are disclosure and accuracy o Do not be afraid to flag an issue for the UST either before or at the 341 Meeting.

Transparency can head off issues. o Failure to disclose assets may lead to criminal charges or no discharge. o For the 341 meeting:

Make sure debtor is familiar with the process in advance Make sure the debtor is on time and dressed properly Make sure the debtor brings his or her photo ID, SSN information

- Document Production in Response to UST Questionnaire: o Quite a bit of this is predictable, so use the requests as an opportunity to keep track of what

each trustee typically wants/needs UST Debtor Compliance cover sheet has a good list

o Have clients gather this info while they are working on their questionnaires as there is a lot of overlap in materials And be sure the overlapping materials matches up

o Gather tax returns and bank statements o Obtain documents dealing with any property settlements and/or domestic support

obligations and/or trust agreements o Obtain and send the appropriate DIP account info and proof of closure of pre-petition

accounts. o Obtain Certificate(s) of insurance and declaration pages from all insurance policies.

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o Obtain copies of any real property lease agreements for preparing UST Real Estate Questionnaire. The UST requires this information even if the Debtor only leases property.

o Be sure to include copies of any professional licenses or certificates for the Debtor. o Be sure to get all docs to at least 5 days prior to the 341 hearing o Be responsive – explain why something may take longer to find, respond promptly, etc.

Again, disclosure and accuracy are important

- Dealing with Exemption Issues: o Federal bankruptcy law states a debtor may “exempt” some property under federal law or

under the laws of the debtor’s home state. 11 U.S.C. §522(b). Arizona requires its residents to use state law exemptions, instead of federal exemptions. Thus, debtors filing bankruptcy in Arizona are allowed the exemptions in the Arizona statutes and federal non-bankruptcy statutes. On the top of Schedule C, a debtor claiming Arizona exemptions should check the second box next to 11 U.S.C. §522(b)(3).

o Residency is an issue: To claim Arizona exemptions, debtor must have lived in Arizona for two years prior

to the filing date. If the debtor did not live in Arizona for two years prior to the filing date, then the

debtor must claim the exemptions provided by the state where the debtor lived for the greater part of the six months between two years and two and a half years before the bankruptcy filing. 11 U.S.C. § 522(b)(3)(A).

If the debtor is ineligible to claim exemptions provided by that state’s law, then the debtor may claim exemptions provided in Bankruptcy Code §522(d).

o Attorney must determine how exemptions should apply and discuss same with client. Arizona exemptions found at A.R.S. §33-1101 (homestead) and A.R.S. § 33-1123 –

A.R.S. §33-1132 • Some “special” exemptions:

o Certain types of Arizona-state pensions: Pensions for members of the Arizona Board of Regents:

A.R.S. §15-1628(I) Police pensions: A.R.S. § 9-931 Fire Fighters’ Relief and Pension Funds: A.R.S. §9-968 ASRS pensions: A.R.S. §38-782 Public Safety Personnel Retirement System: A.R.S. §38-

850(C) Arizona Rangers’ Pension: A.R.S. §41-955

o Public benefits: Unemployment: A.R.S. §23-783 Workers’ compensation benefits: A.R.S. §23-1068 Welfare assistance benefits: A.R.S. §46-208

o Likewise, federal laws provide for exemptions for federal pensions and certain federal benefits (incl. some military benefits)

o Again – ask questions and be sure to carefully value all items

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Amendments to Schedules

Amendments to Schedules

a. Pursuant to 11 U.S.C. § 521(a)(1)(B) and Rule 7001(b)(c), Fed.R.Bankr.P., debtors have a duty to file a complete and accurate schedule of their assets and liabilities.

b. Bankruptcy Rule 1009 provides that debtors may amend their schedules “as a matter of course at any time before the case is closed.”

c. Unfortunately, it is a fact of life that bankruptcy schedules are not always complete and accurate. To accommodate this reality, we have Rule 1009 which supplements Rule 7001. It provides: “[a] voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.” The right to amend under Rule 1009 includes the right to amend the debtor's list of exempt property. Goswami v. MTC Distributing (In re Goswami), 304 B.R. 386, 393 (9th Cir. BAP 2003), citing In Re Michael, 163 F.3d 526, 529 (9th Cir. 1998).

d. In Law v. Seigel, 134 S.Ct. 1188 (2014), the Supreme Court abrogated the authority of

bankruptcy courts to deny exemptions or amendments to exemptions based on a debtor’s bad faith. See also In re Gray, 523 B.R. 170 (9th Cir. BAP 2014) (bankruptcy court had no federal authority to disallow amended exemption based on debtors’ bad faith); In re Elliot, 523 B.R. 188 (9th Cir. BAP 2014) (bankruptcy court could not deny debtor’s exemption claim on the ground that debtor acted in bad faith, absent statutory basis for its denial).

In Law, the Chapter 7 trustee successfully avoided a lien that debtor had fraudulently placed against his homestead, which left no equity available to creditors. Law, 134 S.Ct. at 1191-93. The court granted the trustee’s motion to “surcharge” the debtor’s $75,000 homestead exemption, making those funds available to defray attorney’s fees incurred by the estate in overcoming debtor’s fraudulent conduct. Id. On appeal, the U.S. Supreme Court overruled the court’s decision, holding that the court exceeded its authority in granting the motion to surcharge. Id. The court held that federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Bankruptcy Code. Id. at 1197. However, the court noted that when a debtor claims a state-created exemption, the exemption’s scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption. Id. at 1196-97; see also Elliot, 523 B.R. at 194-195.

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Duty to Disclose

Duty to disclose

a. Debtor’s duty to disclose

i. A debtor's duty to disclose assets begins with the filing of a petition for protection under the Bankruptcy Code. See 11 U.S.C. § 521.

ii. The debtor is required to disclose all assets that could be property of the

bankruptcy estate. As to property of the estate, the debtor's duty to disclose is an ongoing one. In re Foreman, 378 B.R. 717, 720 (Bankr. S.D. Ga. 2007)

iii. A bankrupt when ordered to file schedules could not simply claim that

information was unknown to him, if with reasonable diligence he could secure the information. In re John Lakis, Inc., 228 F.Supp. 918 (S.D.N.Y.1964,).

iv. Any asset not properly scheduled remains property of bankruptcy estate, and

debtor loses all rights to enforce claims relating to assets in his own name. In re Drexel Burnham Lambert Group, Inc., 160 B.R. 508 (S.D.N.Y.1993).

v. 18 U.S.C. § 152. Concealment of assets; false oaths and claims; bribery

A person who--

(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;

(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

(4) knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity or as or through an agent, proxy, or attorney;

(5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11;

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(6) knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 11;

(7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation;

(8) after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; or

(9) after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor, shall be fined under this title, imprisoned not more than 5 years, or both.

b. Attorney’s ethical responsibilities

i. ER 3.3. Candor Toward the Tribunal

(a) A lawyer shall not knowingly:

(1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; (2) fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel; or

(3) offer evidence that the lawyer knows to be false. If a lawyer, the lawyer's client or a witness called by the lawyer has offered material evidence and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal. A lawyer may refuse to offer evidence, other than the testimony of a defendant in a criminal matter, that the lawyer reasonably believes is false.

(b) A lawyer who represents a client in an adjudicative proceeding and who knows that a person intends to engage, is engaging or has engaged in criminal

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or fraudulent conduct related to the proceeding shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal.

(c) The duties stated in paragraphs (a) and (b) continue to the conclusion of the proceeding, and apply even if compliance requires disclosure of information otherwise protected by ER 1.6.

ii. ER 1.6. Confidentiality of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted or required by paragraphs (b), (c) or (d), or ER 3.3(a)(3). (b) A lawyer shall reveal such information to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal act that the lawyer believes is likely to result in death or substantial bodily harm. (c) A lawyer may reveal the intention of the lawyer's client to commit a crime [18 U.S.C. § 152] and the information necessary to prevent the crime.

(d) A lawyer may reveal such information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;

(2) to mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

(3) to secure legal advice about the lawyer's compliance with these Rules;

(4) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client; or

(5) to comply with other law or a final order of a court or tribunal of competent jurisdiction directing the lawyer to disclose such information.

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(6) to prevent reasonably certain death or substantial bodily harm.

(7) to detect and resolve conflicts of interest arising from the lawyer's change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.

(e) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

iii. Practice Pointers: (1) Don’t become entangled in your client’s fraudulent conduct, (2) knowingly and fraudulently concealing assets is a crime; lawyer is permitted to disclose, (3) take affirmative steps to correct any inaccuracies in the record, (4) let your client know that if he won’t tell the truth then you will.

Bankruptcy Trustee Immunity and Liability

Trustee Immunity

The Bankruptcy Code does not explicitly confer personal immunity upon bankruptcy trustees. The Code does, however, incorporate fundamental liability principles that were applicable to common law receivers and developed under the Bankruptcy Act. See Schechter v. Illinois (In re Markos Gurnee P’ship), 182 B.R. 211, 214 (Bankr. N.D. Ill. 1995). Bankruptcy Code § 323, for example, provides that bankruptcy trustees have the capacity to sue or be sued in their official capacities as representatives of their estates. 11 U.S.C. § 323. This provision derives from 19th century Supreme Court holding that (1) treated actions against receivers as implicitly involving on the receiver’s official capacity; and (2) as a corollary, recognized the receiver’s personal immunity from suit for actions arising out of the operation of the receivership. See Markos Gurmee, 182 B.R. at 215–217, 224 (discussing McNulta v. Lochridge, 141 U.S. 327, 331–32 (1891)).

Over the years a number of principles have been distilled with respect to trustee immunity:

• Trustees are generally immune from suit for actions arising out of the administration of their bankruptcy estates. Bankruptcy trustees are often named as defendants in their official capacities as estate representatives, but the estates rather than the trustees are liable for the corresponding claims.

• Trustees are not personally liable to injured parties for negligence in carrying out estate duties, but they may be personally liable for deliberate violation of applicable non-

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bankruptcy law. See 28 U.S.C. § 959 (requiring trustees to manage and operate property in their possession in accordance with state law).

• Trustees are personally liable to injured parties for conduct outside the scope of their duties (i.e. ultra vires acts).

• Aside from deliberate violations of applicable non-bankruptcy law and ultra vires acts, the other general exception to the personal immunity rules is a claim for breach of fiduciary duty.

• Trustees are immune from personal liability for breach of fiduciary duty claims when the bankruptcy court authorizes their actions after providing notice to affected parties and disclosing relevant facts. See Kashani v. Fulton (In re Kashani), 190 B.R. 875, 883 (B.A.P. 9th Cir. 1995).

Trustee Liability for Breach of Fiduciary Duty.

The Ninth Circuit has held that bankruptcy trustees are subject to personal liability for intentional and negligent violations of duties imposed upon them by law. Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339 (9th Cir. 1983); but see In re Continental Coin Corp., 380 B.R. 1, 15 (Bankr. C.D. Cal. 2007) (stating that Cochise may no longer be applicable for simple negligence cases). The First and Second Circuit have adopted the same standard. LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 7 (1st Cir. 1999); In re Gorski, 766 F.2d 723, 727 (2d Cir. 1985).

The Fourth, Sixth, Seventh, and Tenth Circuits have held that bankruptcy trustees are only personally liable for willful and deliberate violations of their fiduciary duties. Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977); In re Hutchinson, F.3d 750 (4th Cir. 1993); In re Chicago Pac. Corp., 773 F.2d 909 (7th Cir. 1985); Ford Motor Credit Co. v. Weaver, 680 F.2d 451 (6th Cir. 1982).

The Fifth Circuit has taken an intermediate approach, holding that bankruptcy trustees are personally liable for grossly negligent violations of fiduciary duties to the estate. Dodson v. Huff (In re Smyth), 207 F.3d 758 (5th Cir. 2000).

The Courts of Appeals for the Third, Eighth, and Elevenths Circuits have yet to take a position on the issue. The courts in those circuits are divided on the applicable standard for breach of fiduciary duty claims against trustees. See, e.g., Barbee v. Price Waterhouse, LLP (In re Solar Fin. Servs., Inc.), 255 B.R. 801, 804 (Bankr. S.D. Fla. 2000) (applying gross negligence standard); In re Charlestown Home Furnishing, 150 B.R. 226, 227 (Bankr. E.D. Mo. 1993) (applying negligence standard).

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The Seventh Circuit’s Warning In Maxwell

In 2008, Judge Posner issued an opinion that sent shockwaves in the bankruptcy trustee community. Maxwell v. KPMG, LLP, 520 F.3d 713 (7th Cir. 2008) (“Maxwell I”). The heart of the opinion was the dismissal of a bankruptcy trustee’s $600 million accounting malpractice claim against KMPG, In dicta, however, Judge Posner instructed bankruptcy judges to “be vigilant in policing litigation judgment exercised by trustees in bankruptcy,” and suggested that it might be appropriate to personally sanction trustees that file frivolous lawsuits. Id. at 718–19.

In Maxwell I, the trustee sued KPMG for malpractice in connection with its auditing services for one of the debtor’s predecessors. The trustee argued that if KPMG had property disclosed overstated income and earnings reports prior to the predecessor’s acquisition of another company, the ill-fated acquisition would not have occurred and the predecessor would have continued in business. The trustee’s complaint sought more than $600 million in damages based on the estimated value that the predecessor would have had on the petition date had it not been for the acquisition.

The Seventh Circuit found no law would permit an auditor to serve as “the insurer against the folly . . . of a business decision . . . unrelated to what an auditor is hired to do.” Id. at 717. The court was “particularly disturbed” by the damages claim, which it described as “outlandish,” “groundless,” and “intimidating.” Id. at 717–18. The court then noted that it was “[t]he extreme weakness of the trustee’s case, both on liability and on damages, [that] invite[d] consideration of the exercise of litigation judgment by a Chapter 7 trustee.” Id. at 717.

The Seventh Circuit subsequently issued an unpublished order on KPMG’s motion for sanctions against the trustee and his attorneys. See Maxwell v. KPMG, LLP, Case No. 07-2819, Aug. 19, 2008 (“Maxwell II”). In Maxwell II, the court determined that the trustee was not personally liable for sanctions because he did not willfully violate his fiduciary duties in pursuing the underlying lawsuit and appeal. The court applied the willful and deliberate standard and found that the trustee did not willfully violate his fiduciary duties. The court found that the trustee did not have expertise in the areas of accounting or auditing malpractice and that he ultimately relied upon counsel’s judgment that the lawsuit was in the best interest of creditors.

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Single-Member LLC's: Chapter 7 Trustee Rights

The Debtor's Membership Rights in the LLC—Including Management Rights—Become Property of the Estate.

If the sole member of a single-member LLC files a Chapter 7 petition, the Chapter 7 trustee obtains all rights the single member previously held relating to the LLC, including without limitation the rights to manage the LLC and to obtain profits and distributions from the LLC, if any.

Under Arizona law, a judgment creditor can obtain a charging order to attach a judgment debtor's interest in an LLC. A.R.S. § 29-655(A). However, the charging order allows the judgment creditor to obtain only the "member's interest" in the LLC. Id. Arizona law defines the "member's interest" as "a member's share of the profits and losses of a limited liability company and the right to receive distributions of limited liability company assets." A.R.S. § 29-601(13). A judgment creditor therefore does not obtain any management rights in the LLC with a charging order under state law. Similarly, the rights an assignee of a member's interest may obtain are limited to economic rights or dictated by the LLC's operating agreement and other governance documents. A.R.S. § 29-732(A), (B).

The Chapter 7 scenario is different, because all legal and equitable rights of a debtor become property of the estate under 11 U.S.C. § 541—not just those rights that a judgment creditor or assignee would be granted. In re B&M Land & Livestock, LLC, 498 B.R. 262, 266 (9th Cir. B.A.P. 2013). Section 541(c)(1)(A) "overrides state and contract law restrictions on the transfer of [a] [d]ebtor's interests in order to transfer all property interests into the bankruptcy estate." Id., citing In re First Protection, Inc., 440 B.R. 821, 830 (9th Cir. B.A.P. 2010). Therefore, a Chapter 7 trustee has the right to control and make decisions for a single member LLC, regardless of state law provisions or restrictions set forth in an operating agreement. Id.; First Protection, 440 B.R. at 830.

Note that a different result could pertain for a multi-member LLC, because the rights and interests of persons other than just the debtor are at stake. See, e.g., In re Albright, 291 B.R. 539 (Bankr.D.Colo. 2003); In re Modanlo, 412 B.R. 714 (Bankr.D.Md. 2006) (discussing relevant concepts in the context of a Chapter 11 case).

The Operating Agreement for a Single-Member LLC Is Not an Executory Contract.

Where a single-member LLC alleges, through its member, that the trustee's rights are controlled by the operating agreement under 11 U.S.C. § 365, Judge Haines' decision in In re Ehmann, 319 B.R. 200

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(Bnkr.D.Ariz. 2005) puts the argument to rest. In Ehmann, Judge Haines held that the operating agreement couldn't be an executory contract because it didn't impose any obligations on anyone under the Countryman test. Id., 204-05.

The Ninth Circuit agreed in In re First Protection, Inc., 440 B.R. 821 (2010). In that case, there were married debtors that were the only members of an LLC. The B.A.P. also employed the Countryman test. Its analysis noted that because the debtors were the only members, there was no counterparty to the operating agreement. The LLC didn't count as another party because the debtors made all the decisions for it. The B.A.P. held that because there was no other party to the operating agreement, no obligations could be owing, and the agreement was not an executory contract. 440 B.R. 831.

A Trustee Should Not Manage an LLC When Its Activities Are Illegal Under State OR Federal Law, i.e., Medical Marijuana Businesses.

A Chapter 7 trustee should not attempt to step into the shoes of a debtor that is managing a single-member LLC medical marijuana business. Even though medical marijuana is legal under Arizona law, it remains illegal under federal law. See Controlled Substance Act, 21 U.S.C. § 801. As a result, courts have been dismissing bankruptcy cases that directly involve medical marijuana businesses or funds derived from those businesses. See In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bnkr.D.Colo 2012).

Courts, including Judge Collins here in the District of Arizona, have held that allowing medical marijuana businesses to file Chapter 7 bankruptcies would force Chapter 7 trustees to either violate the Controlled Substance Act or to risk seizure of assets of a medical marijuana estate, potentially subjecting a Chapter 7 trustee to liability either way. See In re Medpoint Management, LLC Case No. 2:14-bk-15234-DPC at **8-11 (Bankr.D.Ariz., April 6, 2015); In re Arenas, 514 B.R. 887, 891-92 (Bankr.D.Colo. 2014). Therefore, Chapter 7 trustees should consider abandonment of any membership interests in medical marijuana LLC's. Alternatively, the Chapter 7 trustee should consider moving to dismiss the case, since the Chapter 7 trustee cannot fully administer all of the assets of the debtor.

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Survey Results :: A Day in the Life of a Chapter 7 Trustee Trustees expect that schedules and statements will be complete, accurate, and

truthful, and that debtors’ testimony at 341(a) hearings will be complete, accurate, and truthful.

1. The things attorneys do (or should be doing) to make a 341 meeting run more efficiently.

a. File Schedules as soon as possible after filing the Petition. Extensions cause delays in reviewing, especially in complicated cases.

b. Assist debtor in responding to the initial trustee packet and questionnaire, and make sure it is timely submitted to the trustee. The packets are sent by the trustee directly to the debtors. Most attorneys allow their clients to respond directly to the trustee without ever looking at the questionnaire or documents provided. The better practice is to have the debtor send the documents to their lawyer so that they can review the documents and responses together before sending to the trustee. This way, both the lawyer and debtor are prepared for the 341, and there will be no surprises. The lawyer should always know exactly what is being sent to the trustee and know the potential issues. Also, the trustee needs to receive the packet timely, and not the day before the 341.

c. Prior to the meeting, make sure debtors have provided the requested documents (bank statements, tax returns, etc.).

d. Make sure debtor understands the 341(a) process and brings photo id and SS verification.

e. Inform your client what questions are going to be asked.

f. Provide pictures, prints not email copies, that show complete views of outside and inside of nonexempt autos, along with pictures of odometer reading. Pictures of “dents and scratches” are not helpful. Pictures of ATVs, Boats, Motorcycles and RVs also help determine values.

g. The attorney needs to appear at the 341 (you’d be surprised at how many no shows there are). If debtor is represented by counsel, and counsel does not appear, the trustee is required to continue the 341 to a future date.

h. The attorney should be familiar with their client’s schedules and the information they were required to provide to the trustee.

i. Advise your clients about trustee time constraints.

j. Be on time.

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2. Biggest issues in working with debtors' attorneys.

a. Attorneys meeting the debtors for the first time at the 341 meeting.

b. Attorneys being surprised that debtors have not provided documents that trustees have requested.

c. Attorneys not having a copy of schedules and statements at the 341 meeting.

d. Attorneys that advise the debtor not to disclose something unless the trustee asks.

e. Schedules and statements that are incomplete and/or inaccurate.

f. Lack of communication between debtor and debtor’s counsel, including lack of responsiveness to trustee by debtor’s counsel.

g. Attorneys who fail to explain the entire bankruptcy process to the debtor before the filing.

h. Not informing their clients on what the trustee’s role is in the bankruptcy filing process.

i. Listing an asset as 100% exempt but with an unknown value.

j. Putting debtor on a filing fee installment plan and then when the trustee locates an asset, having the debtor not pay so that the case gets dismissed.

k. Failing to make sure debtors have complied with the trustee's request for documents and/or have a valid government issued ID.

l. Not timely or adequately responding to trustee’s requests for information.

m. Lack of knowledge about the case.

n. Mistakes in the schedules that lead trustees on a wild goose chase.

3. What can a debtor's attorney do to make a consumer Chapter 7 case run more smoothly from your perspective?

a. Communication between attorney and client is critical. Debtor needs to understand the entire process, and cooperate with the trustee. Many debtors believe that the case is essentially over upon entry of the discharge, and that there is no further obligation to cooperate or respond to the trustee. Debtors need to understand that the process of administration may continue long after entry of the discharge in cases where assets are administered, and that the debtor’s failure to cooperate further or to abide by court orders may lead to the revocation of the discharge. Debtors need to understand how important it is to keep their address current on file with the court.

b. Fully prepare the schedules.

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c. If the attorney doesn't know the value of an asset such as a vehicle or pension, find out.

d. Disclose the amount of debt instead of stating “unknown”.

e. As soon as trustee is assigned, provide your client with the applicable packet of requested information – then the Attorney will be able to answer any questions at that time regarding what is requested and why trustee requested information. Stress the need to provide the trustee with the requested information a minimum of 15 days prior to the 341. When there are many filings, receiving information at last minute creates a real problem reviewing it in time for the 341.

4. What can a debtor's attorney do to make a corporate Chapter 7 case run more smoothly from your perspective?

a. If the business is still operating when you file the case, immediately call or email the trustee. It may take the trustee a day or two to receive electronic notice of the case.

b. Get in touch with the trustee as soon as possible after filing to go over the business and what actions may need to be taken prior to the 341(a) to protect corporate assets, if any.

c. Advise of any urgent matters and provide landlord contact information.

d. Turn over corporate records and computers, if any, immediately.

e. Close corporate bank accounts and turn over any remaining funds to the trustee.

f. Provide tax returns, bank statements, business records, and pension info., if there is one.

g. Whether the business or LLC is operating or recently closed, give the trustee a call or email so that immediate action can be taken to preserve assets or deal with secured creditors up front – don’t let the trustee find out about the business in the review of schedules. The same applies to anything that you know will require an urgent response by the trustee.

h. Don't wait until right before the 341 Meeting to file schedules and the SOFA.

i. It is important for a debtor’s attorney to give the trustee a heads up in a corporate case rather than relying on notice from the court. Often there is a delay in preparing schedules and it is not uncommon for a corporation to continue operating and doing business beyond the filing date. It is not uncommon for a trustee to receive notice of appointment in a business case and go to the business location for an inspection and find the premises totally unsecured.

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5. What are the most important considerations in deciding whether there is value to pursue in a non-exempt asset?

a. Whether any particular asset will warrant administration by the trustee depends upon (i) the value of the asset, (ii) the cost of recovery/liquidation of the asset, and/or (iii) the value of all other non-exempt assets. If an asset in and of itself does not hold enough value to warrant administration, the asset may still be administered if there are other non-exempt assets, and the collective value warrants administration.

b. Value of an asset; Costs of sale (Fees/Location, etc.); and Partial exemptions.

c. Amount of asset, ability to collect and whether there are other assets in the case. I also look at DSO claims.

d. Will the liquidation of a non-exempt asset provide enough benefit to the unsecured creditors.

e. The total combined value of nonexempt assets.

6. What things do you consider in deciding whether there is value to pursue in an asset claimed as exempt but where the claim of exemption is arguably improper?

a. Value of the asset and the cost in litigating the disputed claim of exemption. If the debtor’s counsel improperly claims an asset exempt as to 100% of its value when the applicable statute does not call for an exemption of 100% of the value but instead only allows for a certain dollar amount to be exempt, trustees may be forced to object to preserve the estate’s interest in the asset in the event there may be significant equity for the estate.

b. Contact the attorney and ask him/her to revisit the exemption or if the debtor is pro se, advise them of the volunteer attorney program.

c. Exemption claims are pretty straightforward.

d. Whether the value would provide a meaningful distribution after costs of litigating the exemption dispute.

7. Apart from sending the initial trustee packet with questionnaire, do you ever directly communicate with represented debtors? If so, in what situations?

a. I send an email to the attorney with a courtesy copy to the debtor requesting missing information prior to the 341 meeting.

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b. Unfortunately, trustees often speak with debtors that are represented because they claim their attorney will not call them back.

c. Trustees often have to explain why a debtor may have to turn over their tax refunds or a portion thereof. The debtors say that their attorney did not explain that to them.

d. Trustees often receive calls on where and what time their creditor hearing is scheduled.

e. Yes. Unfortunately, many debtor’s attorneys prefer that the trustee follow up directly with the debtor on most issues. As an attorney, I am sensitive to the issue of communicating directly with represented debtors, and if debtor’s counsel specifically requests that I communicate through counsel, I will honor that request. If there is litigation pending with the debtor, I will not communicate directly with the debtor unless counsel consents.

f. I have no problem communicating directly with a debtor, but it depends on (1) the information I am seeking; (2) if I have contact info for the debtor; and (3) if there is an adversary on going.

g. Yes, regarding turnover issues like tax refunds and nonexempt bank/wages.

8. On average, what percentage of your and your staff's working hours are spent working on UST or other regulatory compliance tasks, including reporting and audits?

a. 85-90%.

b. I would say 50% of my time is spent on preparing for the 341 meetings and follow up (including liquidation of assets, etc.), and 50% is spent on reports. For each case, we must prepare and submit a Final Report and Proposed Distribution (referred to as the “TFR”) to the UST’s office upon completion of estate administration, and after distributions are made, we must then prepare and submit our Distribution Report and Request for Closing (referred to as the “TDR”). With the TDR, we must submit copies of checks, bank statements, etc. These tasks are time consuming. We are required to report to the UST once a year on all of our outstanding asset cases, which is very time consuming. Approximately once every 4 years we must undergo an audit by an outside CPA firm hired by the Dept. of Justice, of all outstanding cases, as well as our internal practices and procedures.

c. 15%.

d. UST and regulatory compliance tasks take up over 75% of my office and personal working hours.

e. Everything that trustees do is governed by the trustee handbook.

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e. Actual reports to the UST are turned in once or twice a year and do take a considerable amount of time to prepare.

9. On average, what percentage of your and your staff's working hours are spent dealing with pro se parties?

a. 50-60%.

b. 75%.

c. Pro se petitioners do require a lot of special attention at my office.

d. Assuming pro se cases make up 10% of my caseload, I would say 15% of staff hours devoted to pro se cases.

e. Pro se parties do take up a little more time than represented parties, as they call often with general questions, etc., and communication can be difficult. Often times they move and do not provide the court with an updated address, so we have no way of getting in touch with them.

f. There really isn’t any extra time spent on a case where a debtor is not represented by counsel - Most of the same issues arise in cases whether a debtor is represented or not.

10. Please name the top three legal issues on which you spend most of your time.

a. Incorrect or incomplete schedules or exemptions.

b. Incorrect legal advice given to debtors (ex: dump all your bank funds from various accounts into an account, call it your social security account and claim a 100% exemption).

c. Turn over issues, fraudulent transfers, claims disputes and lawsuits that require hearings and possible mediation.

d. Exemption issues; Turn over issues; and Avoidance issues (preference, fraudulent transfers).

e. Debtors who transfer assets for no consideration or who repay debts to friends or relatives within the preference period.

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11. What criteria do you use in deciding whether you should hire counsel on a particular case?

a. Some attorneys will never settle short of a complaint being filed by trustee’s counsel; others promise to discuss a settlement offer from the trustee with his/her client and never follow through.

b. Class actions, personal injury litigation or complex legal issues.

c. I hire counsel when legal issues arise. If complaints or motions are filed, counsel generally will be needed (in cases of uncontested motions/applications, counsel is not always needed, such as applications to employ professionals or auctioneers).

d. Whether hiring an attorney will bring about results that will benefit unsecured creditors.

e. No set criteria; case-by-case basis; Just kind of a feeling that there will be issues on which assistance will be required.

f. When there is a legal dispute requiring a court hearing or ruling that is more involved than just a turnover issue.

g. If there is a legal issue in the case that the attorney is already handling and involving the attorney will help wrap all issues up for a lower cost.

h. If the debtor or creditor is not cooperating with my initial request.

12. Are there any other practice pointers you believe attorneys should know in order to make cases run more smoothly? What are those?

a. Meet your clients, ask questions or have debtors fill out an intake questionnaire (class action cases, pre-petition pending litigation, and potential inheritances should not come as a surprise).

b. I believe it is important that debtors’ counsel and panel trustees have a mutual fiduciary role and responsibility for petitioners and creditors to make the bankruptcy practice run smoothly and harmoniously.

c. Good communication between counsel and the debtor is key, and between counsel and the trustee. The biggest complaint I hear from debtors about their own counsel is that the lawyers are difficult to get in touch with and/or will not return phone calls. As a trustee, I am frustrated when debtor’s counsel fails to respond to my requests or inquiries.

d. Complete and accurate Schedules and Statements is critical. Failure to do so can lead to large problems for the debtor, such as the denial or revocation of the discharge.

e. Review all documents and info your client gives to the trustee so there are no surprises.

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f. If there are obvious issues, be pro-active and discuss them with the trustee. There are some attorneys that will contact me immediately and say, “here are the issues in this case, let’s talk about how we resolve them.” This will often lead to a much faster resolution of the case in general then if the issues are not addressed out of the box. I certainly don’t expect debtor’s counsel to concede on all contested issues, but often times we come to an agreement without the need for filing an adversary complaint.