[REDACTED] (hereinafter "trustee"),
a member of the chapter 7 panel for the United States Bankruptcy Court for the
Middle District of [REDACTED], [REDACTED] Division, seeks review of a decision
by the United States Trustee to suspend his receipt of new case assignments
while he works to improve the performance of his trustee duties and the administration
of his existing caseload.(1) I affirm the United
States Trustee's decision based upon the record before me.(2)
I. Course of this Proceeding
The trustee has been a member of
the panel of chapter 7 trustees for the United States Bankruptcy Court for the
Middle District of [REDACTED], [REDACTED] Division, since November of 1989.
On July 31, 1998, the United States Trustee issued the 1997 Review for the trustee.
On August 11, 1998, the United States Trustee notified the trustee that new
case assignments would be suspended until completion of an assessment of the
trustee's fitness or December 31, 1998, whichever occurs first. The suspension
was based upon deficiencies in trustee performance detailed in the Performance
Review(3). The trustee timely filed his Request
for Review with the Director of the Executive Office for United States Trustees.
On September 10, 1998, the United States Trustee filed his Response.
II. Standard of Review
In conducting this review, the Director must consider two factors:
(1) Did the United States Trustee's decision constitute an appropriate exercise of discretion; and,
(2) Was the United States Trustee's decision supported by the record.
See 28 C.F.R. § 58.6(i) (specifying the scope of the Director's
United States Trustees supervise
panel trustees. 28 U.S.C. § 586(a)(1). They carefully "monitor the performance
of panel members . . . in order to determine whether they should be continued
in or removed from panel membership." H.R. Rep. No. 95-595, 95th Cong., 1st
Sess. 102 (1977). Under the law, "[t]he United States trustee is permitted to
conduct his own investigation . . . to exercise effective supervision and make
an effective evaluation of the performance of the private trustees on the panel."
Id. at 110.
Trustees are fiduciaries with wide-ranging
responsibilities to effectuate the goals of the particular chapter under which
a bankruptcy case is filed. Because they are fiduciaries, trustees are held
to very high standards of honesty and loyalty. See generally Woods
v. City National Bank & Trust Co., 312 U.S. 262, 278 (1941); Mosser
v. Darrow, 341 U.S. 267 (1951). See also Meinhard v. Salmon,
249 N.Y. 458, 464, 164 N.E. 545, 546 (1928) (Cardozo, C.J.).
The United States Trustee based his suspension upon the following deficiencies in the trustee's performance:
(1) a failure to safeguard and account for estate assets;
(2) a failure to adequately monitor the work of professionals and others employed by the trustee;
(3) a failure to perform duties in a timely and consistently satisfactory manner; and
(4) a failure to perform corrective action in a timely manner.
Each of these deficiencies may be
a factor supporting suspension or termination of assignment of cases. 28 C.F.R.
§ 58.6(a). The evidence supporting these deficiencies, and the trustee's
response, will be addressed in turn.
A. Failure to safeguard and account for estate assets
A trustee must safeguard and account
for all estate assets. 11 U.S.C. § 704(2); Handbook for Chapter 7 Trustees
20 (April 1992) ("Handbook"). The United States Trustee relates three instances
in which the trustee failed to safeguard and recover estate assets. In the case
of In re [REDACTED] , the debtor listed a 41' sailboat valued at $52,000
on his schedules. Notice, Exhibit P. The trustee successfully objected to the
debtor's claimed exemption of the sailboat, but was informed by his appraiser
that both the sailboat and the debtor were missing. Notice 8-9. The debtor's
employer advised the trustee that the debtor may have sailed to Hawaii. Notice
9. Upon learning this information, the trustee should have taken immediate action
by initiating a search for the missing sailboat, objecting to the debtor's discharge,
and contacting the local Office of the United States Trustee. Instead, the trustee
made no attempt to locate the sailboat and merely filed a report of no distribution.
Notice, Exhibit P. The local Office of the United States Trustee eventually
discovered the discrepancy between the asset value of the estate and the filing
of a report of no distribution and contacted the trustee about this case in
January and April of 1998. Notice 9. The trustee still took no action until
June when he sought to revoke the debtor's discharge. Id.
The trustee does not dispute the
United States Trustee's recitation of facts other than to note that he could
not locate the debtor soon after the meeting of creditors, and to state his
belief that recovery of the sailboat was unlikely. June 3 letter. The trustee
does not indicate that he undertook any affirmative action to find the sailboat.
Similarly, the trustee's inattention
in the case In re [REDACTED] resulted in a loss to this estate. In that
case, the trustee retained special counsel in New York to pursue
a personal injury action but did not obtain an order of employment until December
1996, almost six months after the debtor's discharge in May. Notice 9, Exhibit
Q. When special counsel was informed of entry of the order, he corresponded
with the trustee and informed him that he had already settled the case, deducted
his fee, and remitted the balance to the debtor because he assumed the debtor's
case was closed due to the debtor's discharge. Id. This correspondence
also appears to indicate that special counsel lacked a general familiarity with
several aspects of the bankruptcy code and had no contact with the trustee until
entry of the order appointing special counsel. Id. The local Office of
the United States Trustee eventually discovered the loss and informed the trustee
in March of 1998 to take immediate action to recover these funds. Id.
The trustee did not send out a demand letter until April 1998 and did not file
a turnover complaint until June. Id.
In response, the trustee contends
that the loss resulted from special counsel's error of law, and special counsel's
failure to consult with the trustee regarding this issue. June 3 letter. The
trustee also states that he has filed an adversary proceeding that he believes
will result in payment of all estate claims with interest. June 3 letter. The
trustee has provided no adequate explanation for his failure to timely obtain
an order of employment from the bankruptcy court and properly instruct special
counsel. Instead, the trustee shifts all the blame upon special counsel. The
trustee cannot fulfill his statutory duty to safeguard estate property by leaving
a valuable cause of action in the hands of a poorly informed professional. The
trustee could have probably avoided the loss if he had promptly obtained an
order of employment and clearly instructed him of the estate's interest in the
personal injury claim.
Finally, the trustee failed to secure
the debtor's premises and view the debtor's assets in the case of In re [REDACTED],
Inc. The debtor in that case stated that its assets were worth $36,693.55.
Notice 7. The trustee's failure was significant because subsequently he could
not locate the assets or the auctioneer/appraiser he had retained. Id.
As in the other cases, the trustee did not inform the local Office of the United
States Trustee of the loss, even though other trustees were using the same auctioneer.
Id. In response, the trustee states that he was a victim of the auctioneer's
dishonesty, and had no previous indication that the auctioneer was untrustworthy.
June 3 letter. The trustee also states that "it seems apparent" that the value
of the assets was "an optimistic retail value" instead of a liquidation value.
Id. A trustee fails to safeguard property when he blindly places assets
in the control of third parties. Once again, although the trustee's assertions
regarding value may have some merit, his prior failure to examine the assets
seriously weakens any claim he may be able to assert against the auctioneer
or his bond.
These losses are not isolated incidents,
but reflect a common pattern. In all of these cases the loss was triggered by
the trustee's inattention, and his failure to aggressively remedy the losses
when they were discovered. The losses also call into question the trustee's
willingness or ability to address problems when they are discovered.
B. Failure to adequately monitor professionals and other persons employed
by the trustee
In addition to reflecting the trustee's
failure to safeguard estate assets, the incidents in the [REDACTED] and [REDACTED]
cases also reflect the trustee's failure to adequately monitor the professionals
he employs. In particular, the acts of special counsel in the [REDACTED] case
reveal that the trustee selected counsel lacking a basic knowledge of the operations
of the bankruptcy code and failed to clearly instruct special counsel regarding
C. Failure to perform duties in a timely and consistently satisfactory manner
The United States Trustee detailed
numerous instances where the trustee failed to timely and satisfactorily perform
his responsibilities as a trustee in addition to the deficiencies described
above. Trustees have an express statutory duty to assist in the discovery and
prosecution of criminal referrals and object to discharge if advisable. 11 U.S.C.
§ 704(6); 28 U.S.C. § 3057. The trustee failed to promptly notify
the local Office of the United States Trustee of potential criminal activity
by the auctioneer in the [REDACTED] case discussed above. The same auctioneer
also failed to remit sales proceeds to the trustee in the case of [REDACTED],
Inc. In both cases, the trustee cooperated only after the local Office of
the United States Trustee discovered discrepancies. The trustee does not respond
specifically to his initial failure to disclose or report this activity.
The trustee exhibited a similar
failure in 1996 when an employee of the trustee's law firm embezzled funds.
The trustee did not report this embezzlement to the local Office of the United
States Trustee, and the local Office only discovered the loss from other sources.
The trustee in his response recognizes that "the better course of action would
have been to immediately notify [the Office of the U.S. Trustee]" about the
embezzlement. Fortunately, an on-site review of the trustee's books and records
by United States Trustee staff later confirmed that no estate funds were embezzled.
The trustee's repeated failures
to initially notify the United States Trustee of wrongdoing by employed professionals
and other employees evidence either an unwillingness to correct existing problems
(with the hope that they will "go away") or a desire to actively conceal his
inattention to trustee duties. Neither alternative is consistent with the high
standards of a fiduciary.
The United States Trustee also states
the trustee failed to timely resign as trustee in two cases due to a conflict
of interest. 1997 Review. In his defense, the trustee contends that the incidents
were isolated. June 3 letter. The trustee, however, does not respond to the
local Office's inquiry whether he checks assigned cases for conflicts within
a week of receipt. Notice, Exhibit J. A failure to promptly resign from a case
leaves a successor trustee little time to take appropriate action such as securing
and recovering estate property and objecting to claimed exemptions. In the two
cases mentioned, the trustee did not resign until after he conducted the meeting
of creditors. It is unclear from the record whether the incidents were isolated
and whether the trustee routinely checks cases for conflicts within a week of
assignment. Even if the late resignation in these two cases were isolated instances,
the other examples described above support the United States Trustee's contention
that the trustee failed to perform his duties in a timely and consistently satisfactory
The United States Trustee also states
that the trustee failed to promptly close "old"(4)
cases (during 1997 the number of old cases increased from 10 to 28). 1997 Review.
In response, the trustee states that his old caseload is within acceptable Trustee
guidelines and that he has implemented appropriate corrective action to increase
case closings. June 3 letter. Although the timely closing of cases is a significant
trustee duty, the record does not reflect whether the trustee's failure to close
his old cases is unjustified.
D. Failure to perform corrective action in a timely manner
The United States Trustee also asserts
that the trustee has failed to promptly remedy other long-standing deficiencies.
The record reflects that personnel in the local Office of the United States
Trustee have spent inordinate amounts of time ensuring that the trustee has
undertaken appropriate corrective action. For example, the trustee met with
the local Office of the United States Trustee on June 25, 1998 and agreed to
withdraw as trustee in the [REDACTED] case by July 1, amend the adversary proceeding
against special counsel in the [REDACTED] case by July 3, file a complaint for
turnover and related pleadings in the [REDACTED], Inc. case by July 9,
and meet with a Tampa Office staff attorney on July 9. The trustee failed to
completely adhere to this schedule, although he ultimately completed all corrective
action by July 10.
In a vacuum, the trustee's mere
failure to meet the deadlines that were established and agreed to at the June
25 meeting would not support his suspension. In light of the history of the
trustee's failure to disclose problems, however, and his apparent past unwillingness
to address serious deficiencies, this inability to adhere to simple deadlines
is further cause for concern and evidence of the trustee's general failure to
adequately perform his duties. Therefore, the imposition of a suspension is
appropriate to ensure that the trustee addresses his inadequacies in administering
existing cases before assuming additional cases.
The trustee states a willingness
to remedy specific deficiencies in his performance. Request for Review. The
United States Trustee has recognized the trustee's stated willingness to improve
his performance and intends to meet with him to consider whether the trustee's
ability to perform is commensurate with his stated intentions. Response 2-3.
It is anticipated that the trustee will use this suspension to correct his deficiencies
and endeavor to improve his performance.
The decision to suspend this trustee
was an appropriate exercise of the United States Trustee's discretion. The record
supports the conclusion that the trustee has failed to safeguard and account
for estate assets, failed to adequately monitor the work of professionals and
others employed by the trustee, failed to perform his duties in a timely and
consistently satisfactory manner, and failed to perform corrective action in
a timely manner. A suspension will give the trustee an opportunity to undertake
corrective action in pending cases, and work to resolve his performance deficiencies.
Accordingly, based upon my review
of the record, including the written submissions of the United States Trustee
and the trustee, I affirm the United States Trustee's decision to suspend the
trustee's eligibility for assignment to chapter 7 cases while the trustee attempts
to improve his performance.
The foregoing conclusions and decisions
constitute final agency action in this matter.
Dated: October 2, 1998
Executive Office for United States Trustees
1. United States Trustees are Justice Department officials who are appointed by and serve at the pleasure of the Attorney General. 28 U.S.C. § 581(a) and (c). The Director of the Executive Office for United States Trustees is a Justice Department official who acts under authority delegated by the Attorney General. Panel trustees generally serve under appointments that have a term not to exceed one year.
2. The record in this matter includes the United States Trustee's Notice of Suspension with 21 exhibits ("Notice"); the 1997 Trustee Performance Review ("1997 Review"); the trustee's Request for Review ("Request for Review"), which includes a June 3, 1998 letter to the local Assistant United States Trustee ("June 3 letter"); and the United States Trustee's Response ("Response").
3. The trustee continues to receive new case assignments during the pendency of this review absent the issuance of an interim directive. 28 C.F.R. § 58.6(c). The United States Trustee did not issue an interim directive in this matter.
4. This term is defined in the 1997 Review as cases filed in 1993 or before.