Handbook for Chapter 7 Trustees: Appendix G

APPENDIX G

POLICY STATEMENTS FOR EARNEST MONIES AND HANDLING CASH

I.
EARNEST MONIES

In connection with the sale of bankruptcy estate assets, a chapter 7 trustee may occasionally receive and hold earnest monies. These funds are held in trust until the sale is consummated in accordance with applicable bankruptcy law. They may not be held, undeposited, in the trustee's office nor commingled with a law firm's trust account⁽¹⁾ . Trustees should handle earnest monies as follows:

Recommended Option

The funds may be deposited to the bankruptcy estate account immediately upon receipt. The deposit is recorded on Form 2 and described as "earnest monies." The description also identifies the related asset. Earnest monies are not recorded on Form 1.

When the related asset is sold, the earnest monies paid by the successful bidder become an estate asset. They are then reported on Form 1 under "Sale/Funds Received by the Estate" (column 5) and referenced on Form 2 using the applicable Form 1 reference number.

If earnest monies were received from other bidders, refunds to the unsuccessful bidders are made via estate checks⁽²⁾ . These checks are recorded on Form 2 and described as "return of earnest monies received in connection with the sale of x asset."

If earnest monies are received late in the day and it is impossible or impractical to follow the above procedure, the trustee must ensure that the funds are kept overnight in a safe or locked drawer until the next business day when they can be deposited to the estate account. The trustee may also want to investigate the possibility of using the bank's night depository or 24 hour services if the bank is not in a remote location.

Second Option

The funds may be deposited to a separate trust account established for each individual estate. The trust account is to be opened and the earnest monies deposited immediately upon

receipt. Of course, Chapter 7 trustees must comply with applicable state laws and banking or other regulations when depositing bankruptcy-related earnest monies to trust accounts.

The following minimum requirements for trust accounts used to hold bankruptcy-related funds have been established:

The account must be in the name of the trustee and clearly designated as a trust account, with pre-printed checks and deposit slips reflecting this status. The trustee shall notify the United States Trustee of the name and address of the financial institution and the account number(s) of the trust account(s).

Generally, these trust accounts are not interest bearing due to the short-term nature of the deposits and the difficulty of apportioning interest. Some states, however, require attorneys to utilize interest bearing accounts for funds held in trust (in these instances, the interest is usually remitted to the state). If the trustee deposits earnest monies in an interest-bearing trust account and is not required to remit interest to the state, the trustee must keep sufficiently detailed records to be able to allocate interest to each individual deposit.

The trustee shall maintain original or duplicate deposit slips, copies of the checks deposited to the account, original canceled checks, bank statements, and cash receipts/disbursements records that identify the payer/payee, amount, purpose, and date for each deposit to and disbursement from the account. Monthly, the trust accounting records shall be reconciled to the bank statements. These records are subject to audit by the United States Trustee and shall be retained by the trustee for a period of two years after the related bankruptcy estate is closed.

Quarterly, the trustee shall report to the United States Trustee all bankruptcy-related deposits and disbursements pertaining to the trust account in a format as from time-to-time prescribed by the Executive Office.

The trustee will authorize the financial institution to provide periodic reports, bank statements, and all other records pertaining to the account as may be requested by the United States Trustee.

II. PROCEDURES FOR HANDLING CASH

Program policy has long discouraged cash payments because, in the vernacular, "cash walks." Whenever possible, a trustee is to encourage debtors and other parties to convert cash to a money order or cashier's check before surrendering it to the trustee.

When a trustee cannot avoid accepting cash, they must provide a numbered receipt to the payer and immediately deposit the funds in the estate account. If they are unable to do so, either because the trustee uses a remote bank or because an estate account has not been opened, the trustee or an employee should immediately convert the cash to a cashier's check or money order. All of the supporting documentation should be kept together in the estate file to provide an audit trail. When an employee handles the transaction, the trustee needs to verify that the amount of amount of the check or money order matches the amount of funds initially turned over to the employee.

If cash is received late in the day and it is impossible or impractical to follow the above procedure, the trustee must ensure that the funds are kept overnight in a safe or locked drawer until the next business day when the cash can be deposited to the estate account or converted to a cashier's check or money order. The trustee may also want to investigate the possibility of using the bank's night depository or 24 hour services if the bank is not in a remote location.

ENDNOTES

1. Commingling of bankruptcy-related funds with a law firm's funds is not sound business practice and exposes the trustee to unnecessary risk. Consequently, depositing bankruptcy-related funds to a law firm's trust account, even for a short time, should be avoided. Additionally, the Program does not have access rights to the records of the law firm's accounts because they are not estate accounts, and because such accounts also raise questions of attorney/client privilege and related confidentiality concerns. Indeed, in the past we have had difficulty reconstructing trustee embezzlements due to our inability to gain access to law firm trust accounts, and some courts have even ruled against the Program on this issue.

2. Depending upon local rules, the trustee may need to obtain a court order to return earnest monies to the unsuccessful bidders.

Handbook for Chapter 7 Trustees
Effective 10/1/98