UST Manual Volume 3 Chapter 9: Monitoring the Case

CHAPTER 3-9: MONITORING THE CASE

3-9.1 CASE ADMINISTRATION
The United States Trustee is charged by statute with the responsibility of supervising the administration of chapter 11 cases. 28 U.S.C. § 586(a)(3). The administrative process should be designed to ensure that cases move through the system in an expeditious manner. Cases that lack a realistic prospect of reorganization within a reasonable period of time must be identified and appropriate action taken to seek the dismissal or conversion of such cases.

3-9.2 STANDING
Section 307, added to the Bankruptcy Code in 1986, explicitly grants the United States Trustee standing in bankruptcy cases, including those under chapter 11. Several cases have also clarified the United States Trustee's standing. See In re Columbia Gas Sys., Inc., 33 F.3d 294, 296-97 (3d Cir. 1994); In re Clark, 927 F.2d 793, 796 (4th Cir. 1991); In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 824 (1st Cir. 1990); In re Revco D.S., Inc., 898 F.2d 498, 499-500 (6th Cir. 1990); Hayes and Son Body Shop, Inc. v. United States Trustee, 124 B.R. 66, 68 (W.D. Tenn. 1990), aff'd, 958 F.2d 371 (6th Cir. 1992). A challenge to the United States Trustee's standing in a chapter 11 case may be sanctionable. See Hayes and Son Body Shop, 124 B.R. at 68.

3-9.3 OBTAINING EVIDENCE

3-9.3.1 Section 341 Meeting
The efficacy of the United States Trustee's enforcement actions is dependent upon the compilation of a comprehensive evidentiary record. The foundation of that record most often consists of documents such as schedules and operating reports. In some instances, however, it may be necessary to obtain additional material for use at an evidentiary hearing. 11 U.S.C. § 341 requires that the United States Trustee convene a meeting of creditors in each case. The business of the meeting includes the examination of the debtor under oath. See 11 U.S.C. § 343 and Fed. R. Bankr. P. 2003(b)(1). The scope of the examination that can be conducted at the meeting is very broad. Questioning that relates to the acts, conduct, property, liabilities and financial condition of the debtor; the administration of the estate; or the debtor's right to a discharge is permissible. The examination may also relate to the operation of the debtor's business and issues relevant to the formulation of a plan. See Fed. R. Bankr. P. 2004(b). As a result, the examination of the debtor at the section 341 meeting is often a vital and productive source of information. Because the United States Trustee schedules and presides over the meeting, may continue the meeting from time to time to allow for additional questioning, and may even convene a special meeting if necessary, the meeting has great importance as a discovery device. See Fed. R. Bankr. P. 2003(e) and (f). For a further discussion of section 341 meetings, see USTM 3-5.

3-9.3.2 Fed. R. Bankr. P. 2004 Examination
Fed. R. Bankr. P. 2004 provides that the court, on motion of any party in interest, may order the examination of any entity. In addition to obtaining a court order, a subpoena should be issued to the person sought for examination, unless the examination is by agreement. The permissible scope of an examination under Fed. R. Bankr. P. 2004 is very broad. See In re Isis Foods, Inc., 33 B.R. 45, 46-47 (Bankr. W.D. Mo. 1983). However, the examination must not stray into matters irrelevant to the basic inquiry and cannot be utilized for purposes of abuse or harassment. See In re Mittco, Inc., 44 B.R. 35, 36 (Bankr. E.D. Wis. 1984). See also In re M4 Enters., Inc., 190 B.R. 471, 475 (Bankr. N.D. Ga. 1995).
If the United States Trustee wishes to participate in a Fed. R. Bankr. P. 2004 examination scheduled by another party in interest, a separate order from the court permitting such participation should be obtained unless all parties stipulate that the United States Trustee may participate.
A Fed. R. Bankr. P. 2004 examination may not be available if a contested matter has already been commenced. Some courts have ruled that a party to a contested matter has to use the procedures for taking a deposition rather than those for a Fed. R. Bankr. P. 2004 examination when that party seeks information after filing its motion. See In re Blinder, Robinson & Co., 127 B.R. 267, 274 (D. Colo. 1991); In re Ecam Publications, Inc., 131 B.R. 556, 559 (Bankr. S.D.N.Y. 1991). Accordingly, the United States Trustee should conduct appropriate Fed. R. Bankr. P. 2004 examinations prior to filing a motion or application.

3-9.3.3 Other Discovery Devices and Orders to Compel Attendance for Examination
Pursuant to Fed. R. Bankr. P. 9014, the discovery devices found in Fed. R. Bankr. P. 7028 through 7037 are available in all contested matters. A contested matter must have been commenced before these discovery tools can be used. However, the speed with which contested matters are set by many courts may preclude the effective use of discovery tools other than Fed. R. Bankr. P. 2004 examinations.
A debtor may attempt to avoid questioning by fleeing the jurisdiction or by evading service of a subpoena or order to appear for examination. Fed. R. Bankr. P. 2005 sets forth the procedures to be followed to obtain an order directing the apprehension and, if necessary, removal of the debtor to compel attendance at an examination.

3-9.4 PROBLEMS AND RESPONSES
This section contains a list of some of the most frequent problems encountered by the United States Trustee during the course of administering chapter 11 cases. The list is not exhaustive and the United States Trustee retains discretion to develop an appropriate response for any situation.

3-9.4.1 Failure to File Schedules
The schedules and statements contain significant information about the debtor and its financial condition as of the filing date. 11 U.S.C. § 521 and Fed. R. Bankr. P. 1007 require the debtor to file these documents within certain time frames. If the debtor fails to file timely, the United States Trustee should apply to the court for an order fixing a date by which the schedules and statements must be filed, or to dismiss or convert the case.
If the debtor seeks an extension of time within which to file schedules, the United States Trustee should assess whether an extension is justified in light of the size and complexity of the case. If the extension does not appear reasonable given the circumstances of the case, an objection should be filed.
The United States Trustee should seek to ensure that the schedules are on file prior to the first section 341 meeting. However, even if the schedules have not been filed by that date, the section 341 meeting must be conducted as scheduled. The meeting can then be continued to a later date to allow for further examination of the debtor regarding the content of the schedules.

3-9.4.2 Failure to Attend Section 341 Meeting
Section 343 of the Bankruptcy Code requires the debtor to appear and be examined by creditors, the United States Trustee, and other parties in interest at the section 341 meeting. If the debtor fails to appear, cause exists for the dismissal or conversion of the case. See In re Rust, 1 B.R. 656, 657 (Bankr. M.D. Tenn. 1979). The totality of the circumstances must be considered when determining the appropriate action to take. See In re Vilt, 56 B.R. 723, 725 (Bankr. N.D. Ill. 1986).

3-9.4.3 Failure to Designate Corporate Official
A corporate or partnership debtor must designate an official to act on its behalf during bankruptcy proceedings, as, for example, by appearing at the first section 341 meeting or a Fed. R. Bankr. P. 2004 examination, or by signing appropriate documents as required by rule or order of the court. The failure to designate a corporate official occurs most frequently in involuntary cases.
Pursuant to Fed. R. Bankr. P. 9001(5), any one of the officers, a member of the board of directors, a controlling stockholder of a corporate debtor, or any person in control may be designated by court order to perform certain acts or to appear for examination. Such an order may help lay the groundwork for a motion to dismiss a case. For example, if an order is entered compelling a corporate officer to attend a section 341 meeting and the officer fails to attend, then cause may exist to dismiss the case.
Rather than obtaining an order directing an individual to appear on behalf of the debtor, the United States Trustee may immediately move for the conversion or dismissal of the case. The debtor's failure to designate an individual may indicate significant problems with the debtor and its operations that would constitute "cause" under 11 U.S.C. § 1104 or 1112.

3-9.4.4 Failure to File Operating Reports
Pursuant to 11 U.S.C. § 704(7) and (8) (made applicable in chapter 11 cases by 11 U.S.C. §§ 1106(a)(1) and 1107(a) and Fed. R. Bankr. P. 2015), the debtor is required to file financial reports on a periodic basis. See In re Cloisters of Brevard, Inc., 117 B.R. 722, 723 (Bankr. M.D. Fla. 1990); In re Modern Office Supply, Inc., 28 B.R. 943, 945-46 (Bankr. W.D. Okla. 1983). If a debtor does not file these reports, then the ability of parties in interest and the United States Trustee to monitor the operations of the debtor is impaired. For example, the United States Trustee will not be able to determine if the debtor is current with postpetition obligations, is making improper payments to professionals, or has paid the correct United States Trustee quarterly fee.
If a debtor fails to file complete financial reports, the United States Trustee may seek an order compelling the filing of the reports or may request more drastic relief, such as the appointment of a trustee or examiner, conversion, or dismissal. If the United States Trustee elects to request an order compelling filing, that order should also direct the debtor to file all future reports timely. Violation of such an order may be cause for dismissal or conversion.
The failure to file complete financial reports may constitute cause for the appointment of a trustee or an examiner. See In re Cumberland Inv. Corp., 118 B.R. 3, 7-8 (Bankr. D.R.I. 1990), aff'd and appeal dismissed, 133 B.R. 275 (D.R.I. 1991); In re Cohoes Indus. Terminal, Inc., 65 B.R. 918, 922-23 (Bankr. S.D.N.Y. 1986); In re Pittman, 58 B.R. 502, 502-03 (Bankr. S.D. Tex. 1986). The failure to file reports may also constitute cause for the conversion or dismissal of a case. See In re Berryhill, 127 B.R. 427, 433-34 (Bankr. N.D. Ind. 1991); In re Cloisters of Brevard, Inc., 117 B.R. at 723-24; In re Vallejo, 77 B.R. 365, 367 (Bankr. D.P.R. 1987); In re Wells, 71 B.R. 554, 557-58 (Bankr. N.D. Ohio 1987). See also In re Tornheim, 181 B.R. 161, 164 (Bankr. S.D. N.Y. 1995).

3-9.4.5 Failure to Maintain Insurance or to Pay Administrative Taxes
The chapter 11 debtor is authorized to continue to operate its business, unless the court orders otherwise. 11 U.S.C. § 1108. A debtor has all of the duties and responsibilities of a trustee, including the obligation to maintain insurance and pay taxes. 11 U.S.C. § 1107(a).
A debtor's failure to maintain proper insurance is a breach of its fiduciary obligations. See In re Caroline Desert Disco, Inc., 5 B.R. 536 (Bankr. C.D. Cal. 1980). The insurance required of a debtor extends beyond property insurance to protecting the tangible assets of the estate from loss. For example, if the debtor's business is open to the public and the debtor does not have liability insurance, the business should be closed until such time as insurance is obtained and written verification submitted to the United States Trustee. In order to minimize the risk to innocent third parties, any motion seeking to terminate the debtor's operations should also request an expedited hearing. If the debtor is unable to purchase insurance, then a motion to convert or dismiss is appropriate.
Failure to remit taxes is also a breach of the debtor's statutory obligations and fiduciary duties. See 11 U.S.C. § 346(f); 28 U.S.C. §§ 959 and 960. A debtor is presumed to be aware of the withholding requirements of federal and state law. See In re WPAS, Inc., 6 B.R. 40, 44 (Bankr. M.D. Fla. 1980). Unpaid postpetition taxes are administrative claims, and failure to make payment prejudices the estate and creditors. Nicholas v. United States, 384 U.S. 678 (1966); In re Laub Baking Co., 642 F.2d 196, 197 (6th Cir. 1981). But see 11 U.S.C. § 305(b)(1)(A). A failure to remit taxes may indicate the absence of a reasonable likelihood of rehabilitation, which constitutes grounds for conversion or dismissal pursuant to 11 U.S.C. § 1112(b)(1).
When the United States Trustee commences a proceeding to convert or dismiss a case because of the failure to pay postpetition taxes, the United States Attorney, the State's Attorney General, or any appropriate taxing authorities should be notified so that they may respond to the motion. The United States Trustee's arguments may be strengthened by the participation at the hearing of other governmental agencies and taxing authorities.

3-9.4.6 Failure to File a Plan of Reorganization and/or Disclosure Statement
Section 1121(d) of the Bankruptcy Code authorizes the court, for cause, to extend, shorten, or fix the time during which only the debtor may file a plan and disclosure statement. 11 U.S.C. § 1121(b) and (e), which establish the exclusive period within which only the debtor may file a plan, do not impose any requirement that the debtor actually file a plan or suffer specific consequences. See In re Fernandez, 97 B.R. 262, 263 (Bankr. E.D.N.C. 1989). The bankruptcy court has the authority to set a deadline for the filing of a plan and disclosure statement. See In re Hollander, 50 B.R. 15 (Bankr. S.D. Fla. 1985).
In some districts, local rules or standing orders set deadlines for the filing of plans and disclosure statements. If no previous order or rule has established a deadline, then the United States Trustee may apply to the court for an order fixing a date for the debtor to file a plan and disclosure statement. Such a motion should be filed only after giving due consideration to the size and complexity of a case, as well as to the status of any outstanding litigation and ongoing negotiations. If an order is entered directing the debtor to file a plan and disclosure statement and those documents are not filed by the time set forth in the order, cause exists to convert or dismiss the case. 11 U.S.C. § 1112(b)(4). See also In re Kang, 18 B.R. 680, 680-81 (Bankr. N.D. Ind. 1982).
The United States Trustee may also object to an application of the debtor to extend the exclusivity period. A debtor seeking an extension of the exclusivity period must demonstrate that "cause" justifying the extension exists. See In re All Seasons Indus., Inc., 121 B.R. 1002 (Bankr. N.D. Ind. 1990); In re United Press Int'l, Inc., 60 B.R. 265, 269 (Bankr. D.D.C. 1986). Cause might include an unusually large case or recalcitrance among creditors. The debtor must demonstrate some promise of probable success in the reorganization effort. S. Rep. No. 989, 95th Cong., 2d Sess. 118 (1978). A request for an extension must be made prior to the expiration of the exclusivity period. 11 U.S.C. § 1121(d). The United States Trustee should object to an untimely request for an extension. See In re Cramer, Inc., 105 B.R. 433, 434 (Bankr. W.D. Tenn. 1989).
Section 158(a) of title 28, as amended by the Bankruptcy Reform Act of 1994, allows an immediate appeal as of right to the district court from a bankruptcy court's order extending or reducing the debtor's exclusivity period. Participation by the United States Trustee in such an appeal must be authorized by the Executive Office.

3-9.4.7 Failure to Give Proper Notice of a Settlement Agreement, the Disposition of Property, or a Cash Collateral/Adequate Protection Agreement
Fed. R. Bankr. P. 2002 and 4001 require specific notice of certain actions by the debtor. The technical requirements of these rules may be violated, intentionally or not, in three common situations: use/sale/lease of property other than in the ordinary course of business; settlement of a controversy; or settlement of a cash collateral or adequate protection dispute.
If notice of a transaction has not been given, the United States Trustee should alert the parties involved. If these parties fail to remedy the notice problem, the United States Trustee should apply to the court for an appropriate remedy, such as setting aside the transaction. The fact that a sale may have been for full value or that the settlement is appropriate does not excuse failure to comply with Fed. R. Bankr. P. 2002 and 4001, but may influence the choice of remedial action.

3-9.4.8 Failure to Deposit or Invest Funds as Required by 11 U.S.C. § 345
Usually the debtor in possession is required to open new bank accounts in an authorized depository, which is a bank that agrees to post collateral or a bond to protect uninsured amounts or deposits and also to report on a debtor's bank activity on a monthly basis. Protection may also be provided by a deposit or investment "insured or guaranteed by the United States . . . or backed by the full faith and credit of the United States. . . ." 11 U.S.C. § 345(b). The court, for cause, may modify these requirements.
Each region should have in place an authorized depository program. Banks participating in the program must agree to pledge appropriate securities to the Federal Reserve Bank to protect any bankruptcy estate funds not covered by deposit insurance (any amount over $100,000 per debtor is not insured) or to post a bond. As required by 11 U.S.C. § 345(b)(2), securities used as collateral must be of the kind specified in 31 U.S.C. § 9303. Section 9303 specifies that government obligations may be used as security. A "government obligation" in turn is defined in 31 U.S.C. § 9301(2) as a public debt obligation of the United States Government and an obligation whose principal and interest is unconditionally guaranteed by the government. In light of this definition, only United States Treasury Bills, Bonds, or Notes are deemed to constitute acceptable securities for purposes of the authorized depository system. See In re Columbia Gas Sys., Inc., 33 F.3d 294 (3d Cir. 1994).
If a debtor fails to deposit funds in an insured account or otherwise fails to comply with 11 U.S.C. § 345, the United States Trustee must take action. The United States Trustee should seek an order of the court directing the debtor to comply with the requirements of 11 U.S.C. § 345. The debtor's failure to comply constitutes cause for the United States Trustee to seek conversion, dismissal, or the appointment of a trustee.
Foreign bank accounts present special problems and concerns. In cases requiring the maintenance of foreign accounts, consideration should be given to the development of investment guidelines. Such guidelines (in the form of a court order) can be utilized to establish maximum deposit levels for foreign accounts and minimum ratings for banks which the debtor proposes to utilize. The guidelines should also set forth any additional reporting or oversight procedures necessary for the United States Trustee to properly monitor the overseas accounts. See In re Interco, Inc., 130 B.R. 301, 303 (Bankr. E.D. Mo. 1991).
If the depository elects to provide protection by posting a bond, the United States Trustee must ensure that the amount of the bond is adequate. It should exceed, by a healthy margin, the total of all deposits. The United States Trustee should also ensure that the surety has adequate reserves to make good on the bond. Before approving the surety, the United States Trustee should inquire as to the amount of other bonds issued for this purpose to be certain the surety is not overextended.

3-9.4.9 Continuing Losses or Other Diminution of the Estate
If the debtor is operating at a deficit during the pendency of a case, the United States Trustee should consider filing a motion to convert the case. However, before filing such a motion, the United States Trustee must consider any special circumstances that exist in the case. For example, the debtor may possess assets which would return value over the long term but do not contribute much to cash flow or may possess intangible assets of value (e.g., tax benefits) or may be able to obtain an infusion of third party funds that would allow it to emerge successfully from chapter 11.

3-9.4.10 Improper Postpetition Transfers
Generally, if a debtor transfers property of the estate after the commencement of the case outside the ordinary course of business and the transfer is not authorized pursuant to an order of the court or under the Bankruptcy Code, the debtor has entered into a voidable postpetition transaction. 11 U.S.C. § 549. For example, a debtor may pay all or part of its prepetition obligations to its suppliers for fear that they might otherwise refuse to do business with the debtor. Such conduct "raises serious questions as to the ability and motivation of the debtor in possession. . . ." See In re E. Paul Kovacs and Co., 16 B.R. 203, 205 (Bankr. D. Conn. 1981).
If the debtor fails to take any corrective action, the United States Trustee should seek the appointment of a trustee or an examiner with the power to review and pursue such postpetition payments. In the alternative, such complete disregard for the requirements of the Bankruptcy Code constitutes cause for conversion or dismissal of the case under 11 U.S.C. § 1112. See In re Sal Caruso Cheese, Inc., 107 B.R. 808, 821 (Bankr. N.D.N.Y. 1989).

3-9.4.11 Failure to Comply with Court Order
If an order has been entered directing the debtor to file operating reports, schedules, a plan, etc., and the debtor has failed to comply with such an order, the United States Trustee should move to convert or dismiss the case or seek the appointment of a trustee. Failure to comply with a court order may demonstrate both an inability to reorganize, as well as a lack of adherence to fiduciary standards. Such a failure has been held to be cause justifying dismissal or conversion of a case. See In re Bayou Self, Inc., 73 B.R. 682, 683-84 (Bankr. W.D. La. 1987); In re Coram Graphic Arts, 11 B.R. 641, 645 (Bankr. E.D.N.Y. 1981). Some courts have held that failure to pay postpetition taxes may constitute cause to convert or dismiss under 11 U.S.C. § 1112(b). See In re Berryhill, 189 B.R. 463, 465-66 (N.D. Ind. 1995).

3-9.4.12 Unauthorized Postpetition Payments to Professionals
If a debtor pays any of its professionals subsequent to the commencement of the case and without court approval, the United States Trustee should first ask the professional to remit the amount received. If the professional ignores the request, the United States Trustee may apply to the bankruptcy court for an order directing disgorgement of the payments. See Lavender v. Wood Law Firm, 785 F.2d 247, 249 (8th Cir. 1986); Matter of Kero-Sun, Inc., 58 B.R. 770, 780-81 (Bankr. D. Conn. 1986). Such payments also qualify as improper postpetition transfers and the remedies discussed at USTM 3-9.4.10 should be considered.

3-9.4.13 Ongoing Insolvency Proceedings in Another Forum
A chapter 11 case may be commenced for or against a debtor that is already subject to similar proceedings in another state or country, or against a partnership that is already winding up its affairs pursuant to state law. 11 U.S.C. § 305 permits the bankruptcy court to abstain from hearing such a case or to suspend the proceedings in the case for a period of time.
11 U.S.C. § 305 can be invoked when: (1) the debtor is involved in a bankruptcy case in a foreign country; or (2) the debtor is a partnership that has dissolved pursuant to state law and is "winding up" under applicable state statutes. See In re AXL Indus., Inc., 127 B.R. 482, 485 (S.D. Fla. 1991), aff'd in part dismissed in part, 977 F. 2d 598 (11th Cir. 1992); In re Trina Assocs., 128 B.R. 858, 867-68 (Bankr. E.D.N.Y. 1991).
Suspension of all proceedings in a case pursuant to 11 U.S.C. § 305 also suspends the debtor's obligation to pay United States Trustee quarterly fees.

3-9.4.14 Sale of Substantially All of a Debtor's Assets
The sale of all or substantially all of a debtor's assets is usually accomplished through a plan of reorganization. However, in some instances, debtors have sought court authority to consummate such a sale by motion. Obviously, a motion to sell can be addressed and resolved more quickly than a plan can be brought to confirmation. Many courts do not find a sale of most or all of a debtor's assets by motion to be objectionable. See Stephens Indus., Inc. v. McClung, 789 F.2d 386, 388-90 (6th Cir. 1986); In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). Other courts, however, have found such sales objectionable on the grounds that they short circuit the protections for creditors crafted into the plan confirmation requirements of the Bankruptcy Code. See In re Braniff Airways, Inc., 700 F.2d 935, 939-40 (5th Cir. 1983), reh'g denied, 705 F.2d 450 (5th Cir. 1983). Such sales may also have significant tax consequences that must be considered.
The United States Trustee must become familiar with the prevailing case law regarding this issue in his/her district(s). If significant asset sales outside the context of a plan are allowed in a district, the United States Trustee must ensure that the sales are properly noticed. If a previous order has been entered in the case limiting notice, consider whether notice of the proposed transaction should be expanded to include all creditors and parties in interest. If the sale is a private sale, consideration should be given as to how value was determined. The United States Trustee should assess whether an auction of the assets is likely to generate more for the estate. If the sale is to an insider, valuation methods should be closely scrutinized to guard against the potential for fraud and/or criminal violations, as well as to ensure that full value is provided to the estate. Similarly, greater scrutiny by the United States Trustee of valuation methods is required in cases where there is no active creditors' committee.

3-9.4.15 Failure to Pay Quarterly Fees
Prior to confirmation, if informal efforts to obtain payment of delinquent quarterly fees are not successful, the United States Trustee should consider filing a motion to convert or dismiss or seek an order of the court directing payment, depending on the circumstances. A debtor that is not paying quarterly fees most likely has other outstanding postpetition obligations. The motion to convert or dismiss should identify all the deficiencies. The United States Trustee should not favor conversion over dismissal merely because quarterly fees have not been paid in full. See In re Markhon Indus., Inc., 100 B.R. 432, 434-36 (Bankr. N.D. Ind. 1989). A reorganization plan cannot be confirmed unless provision is made for the payment of all outstanding quarterly fees no later than the effective date of the plan. See 11 U.S.C. § 1129(a)(12).
The issue of performance by the reorganized debtor under the confirmed plan is complex. Very often creditors lose contact and are unaware that the reorganized entity is not doing what the plan requires. Creditors are also unsure as to how to remedy such a problem. Complaints to the United States Trustee may lead to temporary relief, but remedies are limited. Some courts will not entertain a motion compelling performance.
The issue of requesting conversion or dismissal as a remedy for nonperformance is more complex. The courts are split in their analysis of the effect of conversion upon a chapter 11 case with a confirmed plan. Some courts take the position that, upon conversion of a chapter 11 case postconfirmation, only those assets remaining that did not revest in the debtor become part of the chapter 7 estate. See In re T.S.P. Indus., Inc., 117 B.R. 375, 378-79 (Bankr. N.D. Ill. 1990). In most cases, this would leave the chapter 7 trustee with nothing to administer.
Some courts, however, have found that assets in which "the Debtor had a cognizable legal or equitable ownership interest on the date of confirmation will be properties of the estate in a Chapter 7 case, but properties which are clearly acquired by the Debtor postconfirmation will not be subject to administration by the Chapter 7 trustee." See In re Calania Corp., 188 B.R. 41, 43 (Bankr. M.D. Fla. 1995).
Other cases appear to have gone even further and hold that assets acquired after confirmation but before conversion are also subject to chapter 7 administration. See In re Midway, Inc., 166 B.R. 585, 590 (Bankr. D.N.J. 1994). In order to avoid this potential problem, the United States Trustee should consider language in the confirmation order that revests all property in the estate upon conversion.
In all likelihood, if a debtor is not paying postconfirmation quarterly fees, the debtor is not making payments under the confirmed plan. If, in fact, there is no money to pay anyone and there is no property for a chapter 7 estate, dismissal is most appropriate in those jurisdictions where case law would leave nothing in the estate of a converted debtor. See In re Motorworks, Inc., 85 B.R. 661, 662 (Bankr. S.D. Ga. 1988).

3-9.4.16 Environmental Problems
State or federal regulatory agencies may be pursuing a debtor because the debtor's operations generate or have generated toxic waste. The debtor may be liable for cleanup costs of environmentally contaminated sites. See generally the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. § 9601 et. seq. If significant litigation regarding environmental problems is ongoing in another forum, parties may ask the bankruptcy court to abstain from exercising jurisdiction in the case or to suspend all proceedings pursuant to the provisions of 11 U.S.C. § 305(a). In most instances, the United States Trustee should not initiate such an action.
If the environmental problems present in a particular case are of such magnitude that the debtor has no realistic prospect of reorganization, the United States Trustee should seek dismissal of the case. Conversion would create significant problems and potential liability for a chapter 7 trustee.

3-9.5 CHOICE OF REMEDY--DISMISSAL OR CONVERSION

3-9.5.1 11 U.S.C. § 1112
Section 1112 of the Bankruptcy Code contains the statutory provisions applicable to the conversion or dismissal of chapter 11 cases. 11 U.S.C. § 1112(a) gives the debtor the absolute right to convert a voluntary chapter 11 case in which the debtor remains in possession to a case under chapter 7. In re Dieckhaus Stationers of King of Prussia, Inc., 73 B.R. 969, 971 (Bankr. E.D. Pa. 1987). 11 U.S.C. § 1112(b) provides that the court, on request of a party in interest or the United States Trustee and after notice and a hearing, may dismiss or convert a chapter 11 case for "cause." The statute contains a list of ten factors which may constitute cause, including the inability to effectuate a plan and unreasonable delay by the debtor. The list is not exclusive. Additional benchmarks of cases unlikely to confirm a plan include failure to comply with a court order, failure to timely satisfy filing or reporting requirements, failure to appear before the court or the United States Trustee for scheduled hearings or meetings, failure to pay postpetition taxes or file postpetition tax returns, and failure to act diligently in proposing a plan. The court is able to consider other factors as they arise and use its equitable powers to reach an appropriate result in a particular case. See H. Rep. No. 595, 95th Cong., 1st Sess. 405 (1977).
Once cause has been established, the decision whether to dismiss or convert a case is made by determining which of these remedies is in the best interest of creditors and the estate in the matter under consideration. In the event that cause is established after a plan is confirmed, additional considerations may apply. See USTM 3-10.7 on postconfirmation monitoring. 11 U.S.C. § 1112(c) provides that the court may not convert a chapter 11 case to a case under chapter 7 if the debtor is a farmer or is not a moneyed, business, or commercial corporation, unless the debtor requests such conversion. 11 U.S.C. § 1112(d) sets forth the conditions under which a chapter 11 case may be converted to a case under chapter 12 or chapter 13. Finally, 11 U.S.C. § 1112(f) provides that a chapter 11 case may not be converted to a case under any other chapter of the Bankruptcy Code unless the debtor is eligible to be a debtor under that chapter. See 11 U.S.C. § 109.

3-9.5.2 Dismissal
Dismissal of a chapter 11 case is preferable to conversion if no assets remain to be administered by a chapter 7 trustee. In addition, conversion of a case should be avoided when such an action would subject a chapter 7 trustee to risk of liability, such as when the debtor holds property contaminated by toxic waste.
The effect of an order dismissing a bankruptcy case is governed by 11 U.S.C. § 349. Section 349(a) provides, in general, that the dismissal of a case is without prejudice. However, a dismissal with prejudice can be imposed if the court, for cause, so orders. A dismissal with prejudice bars the discharge in a later case of debts that were dischargeable in the case dismissed. 11 U.S.C. § 349(b) provides that an order of dismissal operates to undo the bankruptcy case, in so far as practicable, and restores the status quo regarding property rights that existed at the commencement of the case.
The United States Trustee should ensure that an order of dismissal is conditioned on payment of any unpaid quarterly fees. If the order conditions dismissal upon the filing of a report of all unpaid administrative expenses and the payment of those sums, the United States Trustee should ensure that those conditions are met.

3-9.5.3 Conversion
Conversion of a case from chapter 11 to chapter 7 may be appropriate if assets exist which can be liquidated for the benefit of creditors. Conversion is not appropriate if the debtor merely seeks to unburden itself of environmental problems and saddle a trustee with those liabilities.
The effect of an order converting a bankruptcy case is governed by 11 U.S.C. § 348. Section 348(a) provides that conversion constitutes an order for relief under the new chapter. However, except as provided in 11 U.S.C. § 348(b) and (c), the conversion of a case does not effect a change in the filing date, the commencement of the case, or the date of the order for relief. Under 11 U.S.C. § 348(d), a claim arising after the order for relief under chapter 11, but before conversion of the case under 11 U.S.C. § 1112 (other than a claim specified in 11 U.S.C. § 503(b)), "shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition."
Most claims arising in the chapter 11 case have a lower priority than those arising under the new chapter. An exception is United States Trustee quarterly fees. Conversion terminates the service of any trustee or examiner appointed in the chapter 11 case. See 11 U.S.C. § 348(e). However, that trustee may be reappointed as the chapter 7 trustee. See 11 U.S.C. § 701(a)(1).
Conversion does not negate all actions taken while the case was pending in chapter 11. The schedules, statement of financial affairs, and statement of executory contracts filed in the prior case are deemed to be filed in the converted case. If any of these documents were not filed, the debtor is required to comply with Fed. R. Bankr. P. 1007 as if an order for relief had been entered on the date of the order of conversion. See Fed. R. Bankr. P. 1019(1).
The conversion of a case to chapter 7 results in the immediate ouster of the debtor in possession and the appointment of an interim trustee as provided in 11 U.S.C. § 701. Unless the interim chapter 7 trustee seeks a court order authorizing the continued operation of the business, the business operations of the debtor must cease immediately upon conversion of the case. See 11 U.S.C. § 721. In the event the assets of a partnership debtor are insufficient to pay claims, a trustee may have a claim against the general partner to the extent of the general partner's personal liability under applicable non-bankruptcy law. See 11 U.S.C. § 723 and Fed. R. Bankr. P. 1007(g).
If a case is converted to one under chapter 7, 12, or 13 pursuant to 11 U.S.C. § 1112, the debtor is required to file a schedule of unpaid obligations incurred after the commencement of the chapter 11 case. See Fed. R. Bankr. P. 1019(5). The United States Trustee should file a proof of claim for unpaid quarterly fees in the converted case. Pursuant to 11 U.S.C. § 726(b), fees assessed under 28 U.S.C. § 1930 (including United States Trustee quarterly fees) are not subordinated to chapter 7 administrative expenses. See, e.g., In re Juhl Enters., Inc., 921 F.2d 800, 803 (8th Cir. 1990); In re K & M Printing & Lithographing, Inc., 135 B.R. 404, 406-07 (Bankr. D. Or. 1992); In re AM-PM Photo Camera Fashions, Inc., 116 B.R. 222, 222 (Bankr. D. Idaho 1990). See also In re Endy, 104 F.3d 1154, 1157-58 (9th Cir. 1997).

3-9.6 APPOINTMENT OF A TRUSTEE OR EXAMINER

3-9.6.1 11 U.S.C. § 1104
Section 1104 of the Bankruptcy Code sets forth the statutory provisions regarding the appointment of a trustee or examiner. 11 U.S.C. § 1104(a)(1) permits the court, upon request by the United States Trustee or a party in interest, to order the appointment of a trustee "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause . . . ."
In the alternative, the court can order the appointment of a trustee pursuant to the provisions of 11 U.S.C. § 1104(a)(2). This subsection provides that the court may order the appointment of a trustee if such an appointment is determined to be in the interests of creditors, any equity security holders, and other interests of the estate.
If the court does not order the appointment of a trustee, subsection (c) permits the court, on request of a party in interest or the United States Trustee, to order the appointment of an examiner. Such an appointment shall be ordered: (i) if it is determined to be in the interests of creditors, any equity security holders, and other interests of the estate; or (ii) if the debtor's fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000.
If the court orders the appointment of a trustee or examiner, the United States Trustee shall select one disinterested person to serve in the position. 11 U.S.C. § 1104(d).

3-9.6.2 Choice of Remedy -- Trustee or Examiner
Trustees and examiners perform distinct functions. A trustee displaces the debtor in possession and assumes responsibility for estate assets and for the operation of the business. An examiner reviews specific transactions or circumstances as directed by the order authorizing appointment. Accordingly, a determination of whether to request the appointment of a trustee or an examiner will depend on the results desired.
Section 1104(a)(1) of the Bankruptcy Code enumerates several specific grounds, including fraud, dishonesty, and incompetence, which can constitute cause and justify the appointment of a trustee. This list of factors constituting cause is not exclusive. See 11 U.S.C. § 1104(a). Other situations which may constitute cause include the debtor's violation of a court order or breach of fiduciary duties, failure of the debtor to cooperate with the United States Trustee's efforts to supervise the administration of the case, or internal dissension in the corporate hierarchy resulting in failure to operate properly. See In re Colorado-Ute Elec. Ass'n, Inc., 120 B.R. 164, 175-76 (Bankr. D. Colo. 1990); In re Sullivan, 108 B.R. 555, 556 (Bankr. E.D. Pa. 1989); In re St. Louis Globe-Democrat, Inc., 63 B.R. 131, 137-38 (Bankr. E.D. Mo. 1985).
Under 11 U.S.C. § 1104(a)(2), a trustee may also be appointed if it is in the interest of creditors. In cases where the principal dies or resigns, the United States Trustee should apply for an order directing the appointment of a trustee. See In re William A. Smith Constr. Co., 77 B.R. 124, 127-28 (Bankr. N.D. Ohio 1987); In re Martin, 26 B.R. 39, 40-41 (Bankr. S.D. W. Va. 1982). The United States Trustee should also consider moving for the appointment of a trustee in those cases in which the debtor's property is in the possession of a receiver or custodian. For example, if the debtor has not sought a turnover of property of the estate under 11 U.S.C. § 543 and the United States Trustee has reason to believe that the receiver has acted wrongfully or is not rendering satisfactory reports, then the United States Trustee should seek the appointment of a trustee to oust the receiver. See In re WPAS, Inc., 6 B.R. 40, 42-43 (Bankr. M.D. Fla. 1980).
The United States Trustee should consider seeking the appointment of an examiner to investigate any questionable management activities or any unexplained irregularity in the debtor's financial history. See In re Gilman Servs., Inc., 46 B.R. 322, 327-28 (Bankr. D. Mass. 1985).
Section 1104(c) of the Bankruptcy Code requires the court to order the appointment of an examiner if a request for the appointment is made by the United States Trustee or other party in interest, and the debtor's fixed, liquidated, unsecured debts (other than debts for goods, services, taxes, or owing to an insider) exceed $5 million. See In re Revco D.S., Inc., 898 F.2d 498, 500-01 (6th Cir. 1990). The United States Trustee should not automatically request the appointment of an examiner in each case in which the dollar ceiling is exceeded, but should give careful consideration of all relevant circumstances, including whether the tangible benefit of an examiner warrants the additional administrative costs.
The United States Trustee should consider taking a position on another party's motion for the appointment of a trustee or an examiner; however, the United States Trustee should not file joint pleadings with other parties in interest. Nor should the United States Trustee adopt verbatim the allegations and arguments contained within the pleadings filed by other parties. A separate pleading setting forth the position advocated by the United States Trustee should be filed.

3-9.6.3 Selection Process
If a motion requesting the appointment of a trustee or an examiner is granted by the court, an order directing the appointment will be entered. The statutory duties of both chapter 11 trustees and examiners are set out in 11 U.S.C. § 1106. Section 1106(a)(3) grants the court the authority to restrict the scope of the investigation that a trustee is authorized to conduct. 11 U.S.C. § 1106(b) contains similar language authorizing the court to limit the scope of the investigation to be conducted by an examiner. Court-imposed limitations on the permissible scope of an examination are most frequently set forth in the same order which authorizes the appointment of the trustee or examiner. The United States Trustee should ensure that any restrictions and limitations contemplated by the court are clearly set forth in the order. This will avoid the delay and expense that would be engendered by having to return to the court for clarification of the original order.
Section 1106(b) of the Bankruptcy Code also allows for the expansion of an examiner's duties to encompass any other duties of a trustee that the court orders the debtor in possession not to perform. Again, the United States Trustee should ensure that the precise scope of the expanded duties contemplated for the examiner is clearly set forth in the order of appointment.
Section 1104(d) of the Bankruptcy Code requires the United States Trustee to consult with parties in interest prior to appointing a chapter 11 trustee or examiner. The United States Trustee should try to schedule a meeting with representatives of the major parties participating in a case. If a meeting is conducted, a written record should be maintained indicating who attended the meeting, the substance of the discussion, and the list of nominees suggested by the parties. If a meeting is impractical to schedule, the United States Trustee should telephone parties in interest and ask them to identify any particular qualifications they believe a candidate should possess. The focus should be on the needs of the particular case, not the candidate.
The United States Trustee should give full and fair consideration to each candidate. The United States Trustee is not required to select one of the candidates nominated by the parties, and the qualifications of the person chosen should always be a paramount consideration in the selection process. However, the consultation process must be meaningful and the views of parties in interest must be accorded great weight in the decision-making process. Other significant factors to be considered include the nature of the task to be performed and the amount of time that the appointee will be able to devote to the case.
The statute speaks to the appointment of a disinterested person. The definition of the word "person" set forth in 11 U.S.C. § 101(41) includes partnerships and corporations, as well as individuals. While partnerships and corporations may be eligible to serve as trustees or examiners, the United States Trustee should, in most circumstances, appoint only individuals to fill these positions. By appointing an individual, responsibility and accountability are centered on one person rather than being diffused throughout a larger organization.
The implementation of this policy raises an important issue. The Bankruptcy Code does not expressly authorize the employment of professionals by examiners. Some courts hold that examiners may not employ professionals under 11 U.S.C. § 327. In some instances, this problem has been avoided by appointing a partnership or corporation to serve as an examiner. Such an appointment allows a number of professionals in the firm selected to assist with an investigation without requiring a resolution of the employment issue. At the same time, the accountability that comes with the appointment of an individual is sacrificed. Since the language of the Bankruptcy Code does not specifically prohibit the employment of professionals by examiners, the United States Trustee should not oppose such requests without adequate justification. See In re Tarkowski, 104 B.R. 828, 829-30 (Bankr. E.D. Mich. 1989); In re Tighe Mercantile, Inc., 62 B.R. 995, 999-1002 (Bankr. S.D. Cal. 1986). The appointment of an individual who shall retain professionals satisfies the need for accountability while ensuring that the examiner shall have adequate resources to conduct a thorough investigation.
Relatives of either the bankruptcy judge making the appointment or the United States Trustee responsible for the case cannot be appointed to serve as trustees or examiners. See Fed. R. Bankr. P. 5002. 11 U.S.C. § 1104(d) prohibits the United States Trustee from serving as a trustee or an examiner in a chapter 11 case. In addition, a person who has served as the examiner in a case may not subsequently serve as trustee in the same case. See 11 U.S.C. § 321(b).
Treasury Circular 570 lists those companies holding certificates of authority as acceptable sureties on federal bonds. Only companies appearing on this list should be approved as sureties on trustee bonds by the United States Trustee.
All persons appointed to serve as trustees or examiners in a chapter 11 case must undergo a security clearance. In addition to their initial application form, they will be required to complete an affidavit in a format prescribed by the Executive Office and provide the information necessary to conduct name, fingerprint, tax, and credit checks. This information should be forwarded to the Office of Review and Oversight ("ORO") within ten working days after an appointment is made. ORO will notify the United States Trustee of any background information that requires additional clarification by the trustee or examiner. The resolution of questionable information will require an affidavit from the trustee or examiner.
Application forms are not required of any individual for whom a background investigation is already in progress or has been completed within the preceding five (5) years in connection with another chapter 11 appointment or as part of being appointed as a panel or standing trustee.

3-9.6.4 Court Approval of Trustee and Examiner Appointments
The United States Trustee's selection of a chapter 11 trustee or examiner is subject to court approval. 11 U.S.C. § 1104(d). After the selection has been made, the United States Trustee must prepare an application for approval of the appointment as prescribed by Fed. R. Bankr. P. 2007.1(c). The application must contain the following information:

1. the name of the person appointed; and

2. a statement, made to the best of the applicant's knowledge, of all the appointee's connections with the debtor, creditors, any other parties in interest, their respective attorneys and accountants, the United States Trustee, and all persons employed in the Office of the United States Trustee.

The appointee must also prepare a verified statement setting forth any connections, which should be attached to and filed with the United States Trustee's application. The term "connections" is not defined in the rules, however, the Advisory Committee note accompanying the rule contains the following explanation:

The requirement that connections with the United States trustee or persons employed in the United States trustee's office be revealed is not intended to enlarge the definition of "disinterested person" in § 101(13) [redesignated as § 101(14)] of the Code, to supersede executive regulations or other laws relating to appointments by United States trustees, or to otherwise restrict the United States trustee's discretion in making appointments. This information is required, however, in the interest of full disclosure and confidence in the appointment process and to give the court all information that may be relevant to the exercise of judicial discretion in approving the appointment of a trustee or examiner in a chapter 11 case.

Fed. R. Bankr. P. 2007.1 Advisory Committee Note (1991).
If the appointee is a former employee of the United States Trustee's office responsible for the case, or has a past professional relationship with either the United States Trustee or an employee of the United States Trustee in the region where the case is pending, that relationship must be disclosed. Other factors may be significant and any reasonable doubts regarding the relevance of a particular set of circumstances should be resolved in favor of full disclosure. See In re The Leslie Fay Cos., Inc., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994).
While 11 U.S.C. § 1104(d) grants the court authority to approve the United States Trustee's appointment of a chapter 11 trustee or examiner, the scope of the court's review is not unlimited. See In re Lathrop Mobile Investors, 55 B.R. 766, 768-69 (B.A.P. 9th Cir. 1985). In determining whether to approve an appointment, it is permissible for the court to consider factors including: (1) whether the United States Trustee has properly consulted with parties in interest; (2) whether the appointee is a disinterested person; and (3) whether the United States Trustee has abused his/her discretion by appointing an unqualified or inexperienced person. See In re Capital Servs. & Invs., Inc., 90 B.R. 382, 384-86 (Bankr. C.D. Ill. 1988). The court, however, may not usurp the appointment process or otherwise seek to supplant the judgment exercised by the United States Trustee during that process. See In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 830-32 (1st Cir. 1990).

3-9.6.5 Termination of a Trustee's Appointment
Under 11 U.S.C. § 1105, the court, on request of the United States Trustee or a party in interest and after notice and a hearing, may terminate the trustee's appointment and restore the debtor to possession. The removal of the trustee may reflect a change in the circumstances under which the appointment was made. See In re Eastern Consol. Utils., Inc., 3 B.R. 591, 592-93 (Bankr. E.D. Pa. 1980). While the result of this order would place the debtor in possession back in control of the operation of the business, the court may nevertheless order the operation of the business to cease under 11 U.S.C. § 1108.

3-9.6.6 Removal of a Trustee or Examiner
Pursuant to 11 U.S.C. § 324(a) the court may, for cause, remove a trustee or an examiner. Notice and a hearing regarding the matter must be provided as required by 11 U.S.C. § 102(1).
The Bankruptcy Code does not list specific grounds constituting cause for removal. Determining whether circumstances warrant the removal of a trustee or examiner is necessarily left to the court on a case-by-case basis. Many of the reported decisions on the application of 11 U.S.C. § 324 arise in the context of chapter 7 cases. See USTM 2-2.16.3. As with chapter 7 trustees, the United States Trustee must ensure that chapter 11 trustees and examiners are appropriately supervised and held accountable for their actions. To the extent that these individuals are not filing reports or otherwise complying with their fiduciary obligations, a motion seeking their removal should be filed. Unless the court orders otherwise, the removal of a trustee or an examiner in any one bankruptcy case effects their removal in all other cases in which they are then serving. 11 U.S.C. § 324(b).
A trustee who has been removed must still file a final report and account of the administration of the estate. See 11 U.S.C. § 704(9) made applicable to chapter 11 trustees by 11 U.S.C. § 1106(a)(1). The removed trustee must also turn over all books, records, and other assets of the estate to a successor trustee, and indeed can be compelled to do so if necessary. See 11 U.S.C. § 542(a); In re Grand Jury Proceedings, 119 B.R. 945, 952-55 (E.D. Mich. 1990); Matter of Jim's Garage, 118 B.R. 949, 951-53 (Bankr. E.D. Mich. 1989). The successor trustee appointed in any such case must also file an accounting of the prior administration of the estate. Fed. R. Bankr. P. 2012(b)(2).

3-9.7 ELECTION OF A TRUSTEE
The Bankruptcy Reform Act of 1994 amended 11 U.S.C. § 1104 to allow creditors to elect a trustee in chapter 11 cases. Pursuant to 11 U.S.C. § 1104(b), the election of the chapter 11 trustee is to be conducted in the same manner as the election of a chapter 7 trustee. See Fed. R. Bankr. P. 2007.1 for procedures for the election of a chapter 11 trustee.

3-9.7.1 Requests for Election
Any party in interest may request the election of a trustee after the court orders the appointment of a trustee under 11 U.S.C. § 1104(a). The request must be made no later than 30 days after the court orders the appointment. See Fed. R. Bankr. P. 2007.1(b)(1).
If a timely request for election is made, the United States Trustee must convene a meeting of creditors. Notice should be given in the same manner as for any section 341 meeting. See Fed. R. Bankr. P. 2007.1(b)(2). Parties should be able to request the court to shorten the normal 20 day notice period. See Fed. R. Bankr. P. 9006(c)(1).
There appears to be a conflict in the statute regarding the determination of the number of creditors required to request an election. 11 U.S.C. § 1104(b) indicates that an election shall be held "on the request of a party in interest." This would seem to indicate an election should be held even if only one eligible creditor requests the election. However, 11 U.S.C. § 1104(b) further states, "the election of a trustee shall be conducted in the manner provided in subsections (a), (b), and (c) of section 702 of this title." 11 U.S.C. § 702(b) provides that:

[C]reditors may elect one person to serve as trustee in the case if election of a trustee is requested by creditors that may vote under subsection (a) of this section, and that hold at least 20 percent in amount of the claims specified in subsection (a)(1) of this section that are held by creditors that may vote under subsection (a) of this section.

As the language of 11 U.S.C. § 1104(b) specifically refers to 11 U.S.C. § 702(b), it would appear that Congress intended that eligible voters holding at least 20 percent in the amount of claims must request the election at the meeting convened upon the request of a party in interest. Therefore, although any single party in interest may request the United States Trustee to convene a meeting of creditors for the purpose of electing a trustee, the 20 percent "requesting" requirement of 11 U.S.C. § 702(b) must be met before the election may proceed. This interpretation comports with the policy underlying the enactment of 11 U.S.C. § 702(b), namely, "to insure that a trustee is elected only in cases in which there is true creditor interest, and to discourage election of a trustee by attorneys for creditors." H.R. Rep. No. 595, 95th Cong., 1st Sess. 102 (1977).
Chapter 7 practice is also instructive on voting rights. In chapter 7 cases, the right to vote is determined pursuant to Fed. R. Bankr. P. 2003(b)(3). That rule provides that an unsecured creditor is only entitled to vote if, at or before the meeting, a proof of claim has been filed or a writing setting forth facts evidencing a right to vote has been provided by the creditor. An objection may be made to the claim at the election. If an objection is made to the amount or allowability of a claim for the purposes of voting, the United States Trustee shall tabulate the votes for each alternative presented by the dispute, and if resolution of such dispute is necessary to determine the result of the election, the tabulations for each alternative shall be reported to the court. See Fed. R. Bankr. P. 2003(b)(3).
Because of the necessity for prompt disposition of objections to claims for the purposes of voting in an election, courts may make a temporary or provisional allowance of a claim without determining the amount or allowability of a claim for purposes of distribution. See In re Cohoes Indus. Terminal, Inc., 90 B.R. 67, 69-70 (S.D.N.Y. 1988); In re DB Drilling, Inc., 73 B.R. 953, 955 (Bankr. N.D. Tex. 1987). A claim or interest is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). A claim executed and filed in accordance with the rules constitutes prima facie evidence of the amount and validity of the claim. See Fed. R. Bankr. P. 3001(f). Accordingly, most courts have concluded that a claim that is prima facie valid may not be denied the right to vote because of a mere general assertion that the claim is invalid. See, e.g., In re Poage, 92 B.R. 659, 664 (Bankr. N.D. Tex. 1988). The party objecting to the claim for voting purposes must go forward with the evidence to establish the invalidity of the claim. See In re Metro Shippers, Inc., 63 B.R. 593, 599 (Bankr. E.D. Pa. 1986).
Unlike in chapter 7, a creditor in chapter 11 does not need to file a proof of claim unless the claim is disputed, contingent, or unliquidated. The schedules constitute prima facie evidence of the validity and the amount of the claim. See Fed. R. Bankr. P. 3003(b)(1). Accordingly, an eligible unsecured creditor who has a claim that is not disputed, contingent, or unliquidated should be deemed to have the right to vote.
The first step in determining whether a sufficient number of creditors has made a request for an election is to determine the proper "claims base" against which the 20 percent "requesting" requirement may be measured. There has been disagreement among courts over the method of calculating this percentage.
The court in In re Tartan Constr. Co., 4 B.R. 655 (Bankr. D. Neb. 1980), used as a base figure all scheduled non-priority unsecured creditors without regard to whether proofs of claim had been filed. The court included both wholly unsecured claims and the unsecured portion of secured claims in calculating the base figure. The court in Tartan determined that the intent of true creditor control would be frustrated if the determination was based only on claims filed. The court noted that the time period for filing a proof of claim extends well beyond the first meeting and, therefore, the claim cannot be considered "nonallowable" until the period has passed. Id. at 658. Several courts have agreed that the amount of scheduled unsecured claims should be used as the base figure. See In re Lindell Drop Forge Co., 111 B.R. 137, 144-45 (Bankr. W.D. Mich. 1990); In re DB Drilling, Inc., 73 B.R. 953, 955 (Bankr. N.D. Tex. 1987).
The opposite conclusion was reached in In re I.J.F., Inc., 1 C.B.C. 2d 907 (Bankr. S.D. Fla. 1980). The court determined that the calculation of the total amount of unsecured claims is limited to those claims on file at the time of the creditors' meeting. Id. at 908. The court based this conclusion on the language of Fed. R. Bankr. P. 2003(b)(3), which provides that a creditor is only entitled to vote if a proof of claim has been filed. Id. A court has agreed with the line of cases which look to the proofs of claims on file as of the date of the section 341 meeting to determine the base of eligible claims. See In re Lake States Commodities, Inc., 173 B.R. 642, 646 (Bankr. N.D. Ill. 1994).
The Tartan line of cases is more persuasive in the context of the election of a chapter 11 trustee. As there is no requirement for filing a proof of claim in chapter 11, if the claim is not disputed, unliquidated, or contingent, the base for determining eligible claims should be the amount of scheduled unsecured claims.

3-9.7.2 Election Procedures
The United States Trustee presides at the election. See 11 U.S.C. § 1104(b) and Fed. R. Bankr. P. 2007.1(b)(2). The meeting should be recorded, as is done with the first meeting of creditors. See Fed. R. Bankr. P. 2003(c). The following information should be obtained and recorded:

1. the case name and number;

2. the date of the meeting;

3. the names of all parties in attendance;

4. the name of the individual requesting the election and the claim represented, including the amount of the claim;

5. the name of the claimant requesting an election, a copy of the claim, and a copy of any power of attorney; and

6. if an attorney is voting a claim, a statement from the attorney that the claimant is a regular client of that attorney or a solicitation statement from the attorney.

Upon completion of an undisputed election, the United States Trustee shall promptly file with the court a report of the election including the name and address of any person elected as trustee and a statement that the election is undisputed. See Fed. R. Bankr. P. 2007.1(b)(3)(A). If it is necessary to resolve a dispute regarding the election,

the United States trustee shall promptly file a report stating that the election is disputed, informing the court of the nature of the dispute, and listing the name and address of any candidate elected under any alternative presented by the dispute. The report shall be accompanied by a verified statement by each candidate elected under each alternative presented by the dispute, setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys, the United States trustee, and any person employed in the office of the United States trustee.

Fed. R. Bankr. P. 2007.1(b)(3)(B).

All parties in interest who have made a request to convene a meeting under 11 U.S.C. § 1104(b) are to receive a copy of the report, and all committees appointed under 11 U.S.C. § 1102 are to be served with the report as well. Id. A motion for resolution of the dispute must be filed within 10 days after the date the United States Trustee files the report. If no motion for resolution of the dispute is filed within the 10 day period, the person appointed by the United States Trustee in accordance with 11 U.S.C. § 1104(d) and approved in accordance with Fed. R. Bankr. P. 2007.1(c) shall serve as trustee. If a motion is timely filed and the court approves the person elected, "the report will constitute appointment of the elected person as of the date of entry of the order approving the appointment." See Fed. R. Bankr. P. 2007.1(b)(3)(B). Pending disposition by the court of a disputed election, the interim trustee shall continue in office. See Fed. R. Bankr. P. 2007.1(b)(1).

3-9.7.3 Eligible Voters
Eligible voters are those unsecured creditors who have allowable, undisputed, fixed, liquidated claims which would be entitled to distribution under 11 U.S.C. § 726(a)(2), 726(a)(3), 726(a)(4), 752(a), 766(h), or 766(i). See 11 U.S.C. § 702(a)(1). Given that these provisions of chapter 7 are not applicable in chapter 11 cases, some confusion regarding this portion of the statute may arise. It would appear that Congress intends to allow unsecured, non-priority creditors to be eligible to vote.
A priority unsecured creditor or a secured creditor is clearly not eligible to vote. However, there is some dispute as to whether an undersecured creditor should be allowed to vote the unsecured portion of its claim. See In re Tartan Constr. Co., 4. B.R. 655, 658 (Bankr. D. Neb. 1980) (undersecured creditor allowed to vote unsecured portion of claim as Congress intended to allow all unsecured creditors the right to vote). But see In re Lindell Drop Forge Co., 111 B.R. 137 (Bankr. W.D. Mich. 1990).
An unsecured creditor with an interest materially adverse to the estate may not vote in a trustee election. 11 U.S.C. § 702(a)(2). For example, an unsecured creditor has a material adverse interest when facts indicate that the creditor has received a voidable preferential transfer. See In re Lang Cartage Corp., 20 B.R. 534, 536 (Bankr. E.D. Wis. 1982). However, the suspicion of an avoidable preference is insufficient to prohibit a creditor from voting. See In re Poage, 92 B.R. 659, 665 (Bankr. N.D. Tex. 1988).
A creditor with a small equity position is not automatically excluded from voting solely because of the equity interest. 11 U.S.C. § 702(a)(2). The equity interest may be disregarded if it is de minimus when compared with the unsecured claim. See H.R. Rep. No. 595, 95th Cong., 2d Sess. 378 (1977). A creditor who is an insider of the debtor is not eligible to vote. See 11 U.S.C. § 702(a)(3).

3-9.7.4 Determining Election Results
The election is void unless creditors holding at least 20 percent in the amount of eligible claims actually vote. 11 U.S.C. § 702(c)(1). The successful candidate must receive votes from creditors holding a majority in the amount of claims that are held by creditors actually voting. 11 U.S.C. § 702(c)(2). The number of creditors voting for or against a candidate is irrelevant, as only the dollar amount of the claim is counted for voting purposes.
The 20 percent "requesting" requirement of 11 U.S.C. § 702(b) is independent of the 20 percent "quorum" requirement of 11 U.S.C. § 702(c)(1). See In re Oxborrow, 913 F.2d 751, 753-54 (9th Cir. 1990). At least 20 percent of eligible creditors must request an election regardless of the number of creditors who actually cast votes at an election. Id.

3-9.7.5 Solicitation of Proxies
In most cases, not all creditors who wish to vote for a trustee will be in attendance. It is likely that in cases with a significant number of creditors the election will be requested by a creditor holding proxies. Proxies are defined in Fed. R. Bankr. P. 2006(b)(1) as a "written power of attorney authorizing any entity to vote the claim or otherwise act as the owner's attorney in fact in connection with the administration of the estate." The validity of a proxy is determined under Fed. R. Bankr. P. 9010.
Proxy holders who have solicited proxies for voting at the election of a trustee must follow the rules set forth in Fed. R. Bankr. P. 2006. The court may reject any proxies, on motion of a party in interest or on its own motion, if there has been a failure to comply with this rule. Fed. R. Bankr. P. 2006 applies in chapter 11 trustee elections. See Fed. R. Bankr. P. 2007(b)(2).
The strict rules regulating the solicitation of proxies must be enforced to ensure that a trustee is elected only in cases where there is true creditor interest. The Advisory Committee Note to Fed. R. Bankr. P. 2006 states:

Creditor control was a basic feature of the Act and is continued, in part, by the Code. Creditor democracy is perverted and the congressional objective frustrated, however, if control of administration falls into the hands of persons whose principal interest is not in what the estate can be made to yield to the unsecured creditors but in what it can yield to those involved in its administration or in other ulterior objectives.

Id.
Any communication concerning a proxy for electing a trustee is deemed solicitation unless the communication is between a creditor and an attorney acting for the creditor. Fed. R. Bankr. P. 2006(b)(2). A communication between an attorney and his/her regular client would not be a solicitation. Id.
The requirements for an authorized solicitation are set forth in Fed. R. Bankr. P. 2006(c). The solicitation must be in writing. Fed. R. Bankr. P. 2006(c)(2).
A proxy may only be solicited by the following individuals or committees:

(A) a creditor owning an allowable unsecured claim against the estate on the date of the filing of the petition; (B) a committee elected pursuant to § 705 of the Code; (C) a committee of creditors selected by a majority in number and amount of claims of creditors (i) whose claims are not contingent or unliquidated, (ii) who are not disqualified from voting under § 702(a) of the Code, and (iii) who were present or represented at a meeting of which all creditors having claims of over $500 or the 100 creditors having the largest claims had at least five days notice in writing and of which meeting written minutes were kept and are available reporting the names of the creditors present or represented and voting and the amounts of their claims; or (D) a bona fide trade or credit association, but such association may solicit only creditors who were its members or subscribers in good standing and had allowable unsecured claims on the date of the filing of the petition.

Fed. R. Bankr. P. 2006(c)(1).
A committee of unsecured creditors appointed under 11 U.S.C. § 1102 is also entitled to solicit a proxy for the purposes of the election of a chapter 11 trustee. See Fed. R. Bankr. P. 2007.1(b)(2).
The purpose of these restrictions is to protect creditors from the loss of control of the administration of the case to holders of proxies having interests different from the general unsecured creditors. This rule restricts solicitation to those who were creditors at the commencement of the case. Advisory Committee Note, Rule 2006(c).
Fed. R. Bankr. P. 2006(d) expressly prohibits solicitation by five types of persons. First, any entity holding any interest other than that of a general creditor is prohibited from soliciting proxies. Under this provision, secured and priority creditors and the debtor are prohibited from solicitation. Solicitations are prohibited by or on behalf of any custodian. Further, the interim trustee appointed under 11 U.S.C. § 701 is prohibited from soliciting proxies. Under that same subdivision, any entity not entitled to vote under 11 U.S.C. § 702 is prohibited from solicitation. Solicitation is not permitted by or on behalf of a transferee of a claim for collection only.
In addition, the solicitation of proxies is also not permitted by or on behalf of an attorney at law. Fed. R. Bankr. P. 2006(d). This rule does not regulate communications between an attorney and his/her regular client. Fed. R. Bankr. P. 2006(b)(2). Any other communication between an attorney and any other person or group requesting a proxy from a creditor, however, is a regulated solicitation.
The case of In re Darland Co., 184 F. Supp. 760 (S.D. Iowa 1960), is cited in the Advisory Committee Note to Fed. R. Bankr. P. 2006. In that case, the district court stated that the solicitation of a proxy by an attorney from a creditor who was not a client may be objectionable as unethical conduct. Id. at 763-64. The Advisory Committee Note further states that solicitation by an attorney "carries a substantial risk that administration will fall into the hands of those whose interest is in obtaining fees from the estate rather than securing dividends for creditors."
A number of bankruptcy courts have refused to recognize proxies that were solicited by attorneys at law. See In re Oxborrow, 104 B.R. 356, 362 (E.D. Wash. 1989), aff'd, 913 F.2d 751 (9th Cir. 1990); In re Brent Indus., Inc., 96 B.R. 193, 196 (Bankr. N.D. Iowa 1989); In re Phillips, 24 B.R. 715, 717 (Bankr. E.D. Cal. 1982). These courts recognized that the drafters of the Bankruptcy Rules made a conscious and deliberate decision to prohibit solicitation by attorneys.
A solicitation statement must be filed with the court and served upon the United States Trustee by a holder of two or more proxies prior to the time voting commences at any meeting of creditors. Fed. R. Bankr. P. 2006(e). Delivering the proxy statement to the presiding official at the meeting is not the equivalent of filing the statement with the clerk of the court. See In re Brent Indus., Inc., 96 B.R. at 196. The solicitation statement must include the following:
. . . ;

1. a copy of the solicitation;

2. identification of the solicitor, the forwarder, . . . and the proxy holder. . . . If the solicitor, forwarder, or proxy holder is an association, there shall also be included a statement that the creditors whose claims have been solicited . . . were members in good standing and had allowable unsecured claims . . . ;

3. a statement that no consideration has been paid or promised by the proxy holder for the proxy;

4. a statement as to whether there is any agreement . . . for the payment of any consideration in connection with voting the proxy, or for the sharing of compensation with any entity, other than a member or regular associate of the proxy holder's law firm, which may be allowed the trustee
5. if the proxy was solicited by an entity other than the proxy holder . . . . a statement signed and verified by the solicitor or forwarder that no consideration has been paid or promised . . . ;
6. if the solicitor, forwarder, or proxy holder is a committee, a statement signed and verified by each member as to the amount and source of any consideration paid or to be paid . . . .

Fed. R. Bankr. P. 2006(e).

3-9.7.6 Qualifications of an Elected Trustee
An elected trustee must be "disinterested." 11 U.S.C. § 1104(b). In addition, the elected trustee must meet the qualifications of 11 U.S.C. § 321. The person elected to be trustee must be competent to perform the duties. 11 U.S.C. § 321(a)(1). If the elected trustee is a corporation, the corporation must be authorized by the corporation's bylaws or charter to act as a trustee. 11 U.S.C. § 321(a)(2). Additionally, the person cannot have served as an examiner in the case. 11 U.S.C. § 321(b). The elected trustee must post a bond in favor of the United States. 11 U.S.C. § 322(a). The amount of the bond and sufficiency of the surety shall be determined by the United States Trustee. 11 U.S.C. § 322(b)(2). If the elected trustee has provided no indication of his/her ability or intent to comply with the Bankruptcy Code and Rules and to adhere to fiduciary standards, the court may refuse to certify the election. See In re Frederick Petroleum Corp., 92 B.R. 273, 275-76 (Bankr. S.D. Ohio 1988) (court refused to approve election of trustee who had no bankruptcy experience and had never served as trustee); In re Kam Kuo Seafood Corp., 42 B.R. 558, 563 (Bankr. S.D.N.Y. 1984). However, the individual chosen as trustee by the creditors through the election process should be given the highest consideration and the creditors' choice should not be overruled without substantial reasons. 4 Lawrence P. King, Collier on Bankruptcy, ¶ 702.05 at 702-27, 28 (15th ed. rev. 1998).

Page last updated on January 25, 1999
United States Trustee Program/Department of Justice
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	1.	the name of the person appointed; and
	2.	a statement, made to the best of the applicant's knowledge, of all the appointee's connections with the debtor, creditors, any other parties in interest, their respective attorneys and accountants, the United States Trustee, and all persons employed in the Office of the United States Trustee.

	1.	the case name and number;
	2.	the date of the meeting;
	3.	the names of all parties in attendance;
	4.	the name of the individual requesting the election and the claim represented, including the amount of the claim;
	5.	the name of the claimant requesting an election, a copy of the claim, and a copy of any power of attorney; and
	6.	if an attorney is voting a claim, a statement from the attorney that the claimant is a regular client of that attorney or a solicitation statement from the attorney.

	1.	a copy of the solicitation;
	2.	identification of the solicitor, the forwarder, . . . and the proxy holder. . . . If the solicitor, forwarder, or proxy holder is an association, there shall also be included a statement that the creditors whose claims have been solicited . . . were members in good standing and had allowable unsecured claims . . . ;
	3.	a statement that no consideration has been paid or promised by the proxy holder for the proxy;
	4.	a statement as to whether there is any agreement . . . for the payment of any consideration in connection with voting the proxy, or for the sharing of compensation with any entity, other than a member or regular associate of the proxy holder's law firm, which may be allowed the trustee
	5.	if the proxy was solicited by an entity other than the proxy holder . . . . a statement signed and verified by the solicitor or forwarder that no consideration has been paid or promised . . . ;
	6.	if the solicitor, forwarder, or proxy holder is a committee, a statement signed and verified by each member as to the amount and source of any consideration paid or to be paid . . . .