United States Trustee Program
Annual Report of Significant accomplishments
Fiscal Year
2004
U.S. Department of Justice
U.S. Trustee Program
i
United States Trustee Program
Annual Report of Significant accomplishments
Fiscal Year
2004
ii
Table of Contents
Mission Statement . . . . . . . . . . . . . . . . . . . . . v
Message from the Acting Director . . . . . . . . . . . . . . . . vi
Executive Summary . . . . . . . . . . . . . . . . . . . . vii
Chapter 1. The United States Trustee Program
Mission of the United States Trustee Program . . . . . . . . . .
1
Largest Federal Caseload . . . . . . . . . . . . . . . . 1
Bankruptcy Chapters . . . . . . . . . . . . . . . . . 1
Chapter 7 . . . . . . . . . . . . . . . . . . . 1
Chapter 11 . . . . . . . . . . . . . . . . . . . 2
Chapter 12 . . . . . . . . . . . . . . . . . . . 2
Chapter 13 . . . . . . . . . . . . . . . . . . . 2
Chapter 2. Organization and Administration
Executive Office for U.S. Trustees . . . . . . . . . . . . . .
5
Regions and Field Offices . . . . . . . . . . . . . . . . 5
Budget and Appropriations . . . . . . . . . . . . . . . 6
Chapter 3. Civil Enforcement
Combating Fraud and Abuse . . . . . . . . . . . . . . .
9
Civil Enforcement Actions . . . . . . . . . . . . . . . . 9
Denial or Revocation of Discharge . . . . . . . . . . . . . 9
Dismissal for ‘Substantial Abuse’ . . . . . . . . . . . . . 12
Improper Conduct by Attorneys . . . . . . . . . . . . . 13
Violations by Bankruptcy Petition Preparers . . . . . . . . . . 14
Serial Filings and Identity Fraud . . . . . . . . . . . . . 15
Abuses by Creditors and Others . . . . . . . . . . . . . 17
Chapter 4. Criminal Enforcement
Fighting Bankruptcy Crimes . . . . . . . . . . . . . . .
21
Criminal Enforcement Actions . . . . . . . . . . . . . . 21
Concealment of Assets . . . . . . . . . . . . . . . . 21
Crimes by Attorneys and Bankruptcy Petition Preparers . . . . . . . 22
Credit Card ‘Bust-Outs’ and Identity Fraud . . . . . . . . . . 24
Creation of False Documents . . . . . . . . . . . . . . 25
Other Crimes . . . . . . . . . . . . . . . . . . 26
Multi-Agency Working Groups . . . . . . . . . . . . . . 28
chapter 5. Litigation in Chapter 11 Business Reorganizations
U.S. Trustee Duties in Chapter 11 Cases . . . . . . . . . . . .
31
Appointment of Trustee or Examiner . . . . . . . . . . . . . 32
Employment and Compensation of Professionals . . . . . . . . . 34
Preventing Delay and Preserving Assets . . . . . . . . . . . . 36
iii
Chapter 6. Trustee Oversight
Chapter 7 Trustees . . . . . . . . . . . . . . . . . . 39
Appointment . . . . . . . . . . . . . . . . . . 39
Oversight Duties . . . . . . . . . . . . . . . . . . 39
Chapter 12 and Chapter 13 Trustees . . . . . . . . . . . . . 40
Appointment . . . . . . . . . . . . . . . . . . 40
Oversight Duties . . . . . . . . . . . . . . . . . . 40
Computer Security . . . . . . . . . . . . . . . . . 41
Trustee Training . . . . . . . . . . . . . . . . . . 41
Chapter 7. Planning, Evaluation, and Communications
Planning . . . . . . . . . . . . . . . . . . . .
43
Performance Measurement . . . . . . . . . . . . . . . 44
Evaluation . . . . . . . . . . . . . . . . . . . . 44
Data Collection and Statistics . . . . . . . . . . . . . . 44
Debtor Audit Pilot Project . . . . . . . . . . . . . . . 45
National Study on Fraud, Abuse, and Error . . . . . . . . . . 45
Communications . . . . . . . . . . . . . . . . . . 45
Congressional Affairs . . . . . . . . . . . . . . . . 45
Public Affairs . . . . . . . . . . . . . . . . . . 45
Financial Education Outreach . . . . . . . . . . . . . . 46
Chapter 8. Information Systems and Technology
Criminal Enforcement Tracking System . . . . . . . . . . . . 49
Automated Case Management System . . . . . . . . . . . . 49
Electronic Case Filing . . . . . . . . . . . . . . . . . 49
Digital Recording . . . . . . . . . . . . . . . . . . 50
Chapter 9. Training
National Bankruptcy Training Institute . . . . . . . . . . . .
53
Training for Private Trustees . . . . . . . . . . . . . . . 53
Training for Other Professionals . . . . . . . . . . . . . . 54
Chapter 10. Appendix
United States Trustee Program Map of Regions and Offices . . . . . . .
57
United States Trustee Program Nationwide Office Locator . . . . . . . 58
Civil Enforcement Actions FY 2004 . . . . . . . . . . . . . 59
Total Bankruptcy Filings Nationwide FY 1994-2004 . . . . . . . . . 60
Total Bankruptcy Filings by Chapter FY 1994-2004 . . . . . . . . . 60
Chapter 11 Filings Nationwide FY 1994-2004 . . . . . . . . . . 61
Chapter 11 Quarterly Fee Collections FY 1994-2004 . . . . . . . . . 61
Chapter 7 Asset Cases Closed FY 1994-2004 . . . . . . . . . . . 62
Chapter 7 Cases, Total Disbursements FY 1994-2004 . . . . . . . . . 62
Chapter 13 Cases, Total Disbursements FY 1994-2004 . . . . . . . . 63
Bankruptcy Filings Relative to Population by State FY 2004 . . . . . . . 64
Peak Fiscal Years for Bankruptcy Filings by State . . . . . . . . . . 64
Standing Trustee Pledge of Excellence . . . . . . . . . . . . . 65
Chapter 7 Panel Trustee Pledge of Excellence . . . . . . . . . . . 66
iv
v
Mission Statement
The United States Trustee Program’s mission is to promote integrity and efficiency in the nation’s
bankruptcy system by enforcing bankruptcy laws, providing oversight of private trustees, and maintain
-
ing operational excellence.
vi
Clifford J. White, III
Message from the Acting Director
In Fiscal Year (FY) 2004, the United States Trustee Program moved forward with new achieve-
ments as it carried out its mission of promoting integrity, efficiency, and excellence in the nation’s
bankruptcy system.
During FY 2004, the third year of the Program’s National Civil Enforcement Initiative, the dedi-
cated men and women of the Program continued to pursue fraud and abuse in the bankruptcy system.
Under the Initiative, the Program seeks civil remedies against debtors who engage in fraud or who abuse
the bankruptcy system, and takes action to protect consumer debtors from misconduct by attorneys,
bankruptcy petition preparers, creditors, and others who seek to take advantage of the debtors’ financial
difficulties. Since FY 2002, the Program’s skilled and experienced personnel have increased the number
and quality of enforcement actions while maintaining a success rate of over 90 percent. In FY 2004, the
Program initiated over 52,400 informal inquiries and formal civil enforcement and related activities,
resulting in more than $521 million in potential benefit to creditors.
FY 2004 also marked the second year of the Program’s Criminal Enforcement Unit, which assists
staff as they coordinate with federal investigative agencies and United States Attorneys’ offices on crimi-
nal case referral, development, and prosecution. Since the Unit was established in FY 2003, its members
have trained Program staff in fraud detection, investigation, and referral; helped build relationships
with prosecutors and others in the criminal justice system; and participated in criminal cases as Special
Assistant United States Attorneys. Moreover, as in the civil enforcement arena, the Program has enhanced
its data collection to track criminal enforcement actions and measure results.
While devoting increased attention to civil and criminal enforcement, Program employees also
carried out a range of other activities in FY 2004 that included monitoring Chapter 11 business reorga-
nizations, supervising private trustees, engaging in strategic planning and measurement, improving and
updating automation systems, participating in public outreach and education, and providing profes-
sional development training for employees and private trustees.
I am grateful to the Attorney General, the Bush Administration, and the Congress for their support
of the Program and its mission, and to our Program’s talented employees who strive to make the nation’s
bankruptcy system fair, effective, efficient, and free from fraud and abuse.
I invite you to learn more about the United States Trustee Program by reading our Fiscal Year 2004
Annual Report of Significant Accomplishments.
Clifford J. White, III
Acting Director, Executive Office for United States Trustees
vii
Executive Summary
During Fiscal Year 2004 the U.S. Trustee Program pressed ahead with its transformation to a
high-performance litigating component of the Department of Justice. The Program concentrated on
increasing its effectiveness in civil and criminal enforcement, taking a balanced and fair approach to
combating fraud and abuse in the bankruptcy system while fine-tuning the standards used to measure
enforcement performance.
Civil enforcement continued as a paramount focus of the Program. U.S. Trustees initiated more
than 52,400 informal inquiries and formal civil enforcement and related actions, resulting in potential
benefits to creditors exceeding $521 million. That amount included more than $192.5 in unsecured
debt barred from discharge due to Program activity to obtain denial, revocation, or waiver of discharge,
and more than $275 million in unsecured debt not discharged as a result of Program activity relating
to dismissal for substantial abuse. To protect consumers, the Program’s took action against bankruptcy
petition preparers that resulted in more than $3 million in fines imposed and fees recovered, and the
issuance of 249 injunctions. Moreover, U.S. Trustees obtained disgorgement of more than $4.3 million
in attorneys’ fees and over $309,000 in monetary sanctions against attorneys.
Criminal enforcement also increased significantly as the Program’s Criminal Enforcement Unit
of veteran prosecutors entered its second year. The Program continued to coordinate with other law
enforcement entities to detect and prosecute a diverse range of bankruptcy-related criminal conduct,
including concealment of assets, crimes by attorneys and bankruptcy petition preparers, credit card
bust-outs, identity fraud, and the creation of false documents. This coordination included participation
in bankruptcy fraud working groups, where Program personnel serve as a resource for information,
education, and training.
The Program effectively supervised the private trustees who administer cases filed under Chapters
7, 12, and 13. In FY 2004, trustees administering Chapter 13 repayment plans and Chapter 12 family
farmer cases collected more than $5 billion, and trustees administering Chapter 7 liquidations closed
more than 47,000 asset cases to generate $1.63 billion in funds.
The Program monitored Chapter 11 business reorganizations, appointing trustees and examiners
where necessary to protect the bankruptcy estate and taking other steps to help ensure timely and effi-
cient case processing. The Program began developing its strategic plan for FY 2005 through FY 2010,
with the primary goals of protecting the integrity of the nation’s bankruptcy system, promoting effec-
tiveness and efficiency within the nation’s bankruptcy system, and maintaining operational excellence.
In addition, existing information technology systems crucial to maintaining high performance within
the Program were modernized while new systems were pilot-tested or launched, and professional train-
ing initiatives were expanded to include the first national training session for Chapter 7 trustees.
viii
Chapter 1
The United States Trustee Program
Photo 1: Peter Lumaghi, Paul Randolph, Gloria Simmons, Vanessa Denton
Photo 2: U.S. Capitol
Photo 3: Glyn Miller, Carolyn Cole
1
Chapter 1
Mission of the United States Trustee
Program
The mission of the United States Trustee
Program is to promote integrity and efficiency
in the nation’s bankruptcy system by enforcing
bankruptcy laws, providing oversight of private
trustees, and maintaining operational excellence.
The mission of the United States Trustee Program
is to promote integrity and efficiency in the nation’s
bankruptcy system by enforcing bankruptcy laws,
providing oversight of private trustees, and main-
taining operational excellence.
The Program is a litigating component of
the U.S. Department of Justice. It carries out
Objective 2.6 of the Department of Justice’s Stra-
tegic Plan for Fiscal Years 2003-2008: “Protect the
integrity and ensure the effective operation of the
Nation’s bankruptcy system.” The Department’s
Strategic Plan provides these four strategies to
achieve that objective:
• Enforce compliance with federal bank-
ruptcy laws and take civil actions against parties
who abuse the law or seek to defraud the bank-
ruptcy system.
• Pursue violations of federal criminal laws
pertaining to bankruptcy by identifying, evaluat-
ing, referring, and providing investigative and
prosecutorial support of cases.
• Promote the effectiveness of the bankrupt
-
cy system by appointing and regulating private
trustees who administer bankruptcy cases expedi-
tiously and maximize the return to creditors.
• Ensure financial accountability, compli
-
ance with the Bankruptcy Code, and prompt
disposition of Chapter 11 bankruptcy cases.
Largest Federal Caseload
Every year since 1996, more than one million
individuals and businesses have filed bankruptcy,
making the bankruptcy caseload the largest in the
federal court system. By law, the U.S. Trustee has
standing to participate in every bankruptcy case
within the Program’s jurisdiction. To help protect
the public interest in maintaining an effective
and efficient bankruptcy system, the U.S. Trustee
participates in almost all cases either directly or
through trustee oversight.
In FY 2004, U.S. Trustees processed 1,539,741
new bankruptcy case filings. More than 72 per-
cent of those cases were filed as Chapter 7 liq-
uidations (1,114,622); approximately 27 percent
were Chapter 13 repayment plans (414,747); and
less than one percent were Chapter 11 reorgani-
zations (10,043). The remaining cases were filed
under Chapter 9, Chapter 12, or ancillary to a
foreign proceeding.
Bankruptcy Chapters
The federal Bankruptcy Code appears in
Title 11 of the United States Code, beginning at
11 U.S.C. § 101. Most cases are filed under either
Chapter 7, 11, 12, or 13.
Chapter 7
Chapter 7 bankruptcy is a liquidation pro
-
ceeding available to consumers and businesses.
Those assets of a debtor that are not exempt from
creditors are collected and liquidated (reduced to
money), and the proceeds are distributed to cred-
itors in accordance with a priority established by
the Bankruptcy Code. A consumer debtor receives
a complete discharge from debt under Chapter 7,
except for certain debts that are prohibited from
discharge by the Bankruptcy Code.
2
Chapter 11
Chapter 11 bankruptcy provides a procedure
by which an individual or a business can reorga-
nize debts while continuing to operate. The vast
majority of Chapter 11 cases are filed by busi-
nesses. The debtor, often with participation from
creditors, creates a plan of reorganization under
which it proposes to repay part or all of its debts.
Chapter 12
Chapter 12 allows a family farmer to file for
bankruptcy, reorganize the farm’s business affairs,
repay all or part of the farm’s debts, and continue
operating.
Chapter 13
Chapter 13, often called wage-earner bank
-
ruptcy, is used by individual consumers to reorga-
nize their financial affairs under a repayment plan
that must be completed generally within three to
five years. To be eligible for Chapter 13 relief, a
consumer must have regular income and may not
have more than a specified amount of debt.
3
4
Chapter 2
Organization and Administration
Photo 1: U.S. Courthouse, Seattle
Photo 2: Donald Walton; Clifford J. White, III; W. Clarkson McDow, Jr.; Jeffrey Miller; Dan Casamatta; Roberta DeAngelis
5
The U.S. Trustee Program consists of an
Executive Office in Washington, D.C., and 21
regions operating out of 95 offices across the
country, covering 88 judicial districts in 48 states,
the District of Columbia, and four territories.
The U.S. Trustee Program consists of an Executive
Office in Washington, D.C., and 21 regions operat
-
ing out of 95 offices across the country, covering 88
judicial districts in 48 states, the District of Colum
-
bia, and four territories.
Executive Office for U.S. Trustees
The Executive Office for U.S. Trustees
(EOUST) provides comprehensive policy and
management direction to the U.S. Trustees and
their staff, as well as administrative support and
central coordination to the regional and field
offices. The EOUST is headed by a Director who
reports to the Associate Attorney General. There
are approximately 75 permanent employees in
the EOUST, which includes the following offices
and units.
• Office of General Counsel coordinates
the Program’s litigation activities and provides
legal counsel to the Program. It advises U.S.
Trustees and Assistant U.S. Trustees in order to
ensure consistency in the Program’s legal posi-
tions, coordinates responses on significant legal
issues, decides whether to take appeals of court
decisions to district courts or bankruptcy appel-
late panels, and coordinates with other Depart-
ment of Justice components where necessary.
• Office of Review and Oversight coor-
dinates the supervision of private trustees who
administer cases under Chapters 7, 12, and 13.
It helps ensure that trustees satisfy fiduciary
standards through the regulation and auditing of
trustee financial and administrative operations.
• Office of Research and Planning engages
in strategic planning, analyzes management and
case data, conducts research, and provides public
information.
• Office of Administration provides a wide
range of services for the Program, including bud-
get, personnel, procurement, facilities, travel, and
security. It offers administrative guidance and
support to the U.S. Trustees and their staffs.
• Information and Technology Unit sup-
ports the Program’s automation activities.
• Civil Enforcement Unit assists with and
coordinates the Program’s civil enforcement
activities.
• Criminal Enforcement Unit assists with
and coordinates the Program’s criminal enforce-
ment activities.
Regions and Field Offices
The Program’s 21 regions are defined pur-
suant to 28 U.S.C. § 581(a). Each region is
headed by a U.S. Trustee who is appointed by
the Attorney General and whose basic authority
is conferred under 28 U.S.C. § 586. By statute,
the six judicial districts in Alabama and North
Carolina do not participate in the Program. In
those districts, bankruptcy case administration is
overseen by a court official called a Bankruptcy
Administrator.
The U.S. Trustees serve under the Director
of the EOUST to ensure national uniformity in
policies and procedures, while allowing for neces-
sary variances due to local case precedent, prac-
tices, and rules. They also represent the Program
locally in dealing with other participants in the
bankruptcy system, including bankruptcy judges,
private trustees, and bankruptcy practitioners.
The number of Program offices in each
region varies. Most states within the jurisdiction
of the Program have at least one Program office.
Many offices are responsible for handling cases
in more than one location. Program staff appear
Chapter
2
6
in court in more than 160 locations around the
country, and conduct or oversee proceedings in
about 280 other sites.
Each Program office is headed by an Assis-
tant U.S. Trustee. The Program’s role in bank-
ruptcy administration melds aspects of law and
financial analysis, and Program staff include trial
attorneys, bankruptcy analysts, paralegals, and
administrative, technical, and support staff. At the
conclusion of FY 2004, the Program was staffed
by 104 Assistant U.S. Trustees, 230 trial attorneys,
214 bankruptcy analysts, 237 paralegals, and 310
administrative, technical, and support staff.
Office caseloads and the type of cases filed
vary significantly. During FY 2004, the New York
City office handled the largest number of Chap-
ter 11 filings, followed by Dallas, Newark, and
Wilmington; Cleveland had the largest number
of Chapter 7 filings, followed by Chicago and
Detroit; and Atlanta, Memphis, and Dallas had
the largest number of Chapter 13 filings.
Budget and Appropriations
The U.S. Trustee Program is funded through
fees paid in bankruptcy cases. No general rev-
enues are appropriated to support the Program.
The Program has two principal sources of
revenue. First, each debtor pays a filing fee in an
amount set under 28 U.S.C. § 1930(a)(1)-(5).
Pursuant to a statutory formula, the fees are
allocated among the Program, the U.S. Treasury,
the court system, and the Chapter 7 trustees.
Second, the Program receives quarterly fees from
each Chapter 11 debtor throughout the life of
the Chapter 11 case, as set forth in 28 U.S.C.
§ 1930(a)(6). In addition, smaller amounts of
revenue are generated from interest on U.S.
Trustee System Fund balances and investments in
Treasury notes and bills, Chapter 7 case adminis-
tration receipts, and excess operating reserves of
Chapters 12 and 13 trustees.
Funds allocated to the Program are deposited
into the U.S. Trustee System Fund, established in
the United States Treasury. Congress makes annu
-
al appropriations to the Program from this fund,
and revenues in excess of the amount appropri-
ated by Congress remain in the fund.
The Program’s appropriation for FY 2004
totaled $173.6 million, with 1,198 authorized
positions. Approximately 86 percent of the bud-
get was needed to cover costs relating to person-
nel and facilities, including rent for the offices
and for approximately 450 meeting rooms where
the first meetings of the debtors and creditors are
held as required under 11 U.S.C. § 341.
The Department’s budget process incorpo-
rates performance planning and reporting, in
compliance with the Government Performance
and Results Act of 1993. This ensures that per-
formance measures are used when resource deci-
sions are made and that resource allocations are
consistent with the Department’s FY 2003-2008
Strategic Plan. In addition, the Program’s man-
agement decisions reflect the President’s Man-
agement Agenda, issued in August 2001, and
the Attorney General’s Management Initiatives,
announced in November 2001.
7
8
Patricia Dugan
Chapter 3
Civil Enforcement
Photo 1: Darryl Lewis, Paris Duffy
Photo 2: Sam Wray
Photo 3: Beth Kramer
9
Chapter 3
Combating Fraud and Abuse
One of the Program’s top priorities is to
combat fraud and abuse in the bankruptcy system
through civil enforcement. The Program seeks
civil remedies against debtors who engage in fraud
or who abuse the bankruptcy system, and takes
action to protect consumer debtors from miscon-
duct by attorneys, bankruptcy petition preparers,
creditors, and others who seek to take advantage
of the debtors’ financial difficulties.
One of the Program’s top priorities is to combat
fraud and abuse in the bankruptcy system through
civil enforcement.
The Program pursues actions under the fol-
lowing provisions of the Bankruptcy Code:
• 11 U.S.C. § 727 to deny or revoke a Chapter
7 discharge.
• 11 U.S.C. § 707 to dismiss a case for abuse
of Chapter 7.
• 11 U.S.C. § 110 for improper conduct by
bankruptcy petition preparers.
• 11 U.S.C. § 329 for disgorgement of pay
-
ments to professionals employed by the debtor or
the bankruptcy estate.
• 11 U.S.C. §§ 109(g) and 349(a) for abusive
repeat filings and other bad faith filings.
• Federal Rule of Bankruptcy Procedure
9011 for sanctions against professionals.
To help ensure that civil enforcement
actions are coordinated across the country, a
Civil Enforcement Resource Team of more than
20 attorneys, analysts, and paralegals with exten-
sive experience in civil enforcement share their
expertise with other Program staff. Team mem-
bers assist with civil enforcement issues and
cases nationwide; answer questions from staff
members; provide forms and examples; advise
on specific cases; provide training; make public
presentations; and assist with litigation, includ-
ing multi-jurisdictional litigation against those
who violate the bankruptcy laws in more than
one judicial district.
As part of its civil enforcement activities,
the Program encourages “best practices” that
improve bankruptcy administration by fostering
the provision of more accurate information and
making bankruptcy proceedings more transpar-
ent. In FY 2004, the Program proposed changes
to the Federal Rules of Bankruptcy Procedure
and the Official Bankruptcy Forms that would
require consumer debtors to disclose additional
information and documents that are in their pos-
session, such as tax returns, pay stubs, and bank
statements. This additional information and doc-
umentation would help the private trustees con-
firm the accuracy of the debtors’ schedules, deter-
mine whether assets exist, and assess whether the
debtor is entitled to a discharge. The information
and documentation are already required under
many local bankruptcy rules, standing court
orders, or local practice.
The rule changes would enhance the provi-
sion of accurate information, facilitate process-
ing of bankruptcy cases by private trustees, and
help prevent abuse of the bankruptcy system.
The rule making process, which is conducted by
the United States Judicial Conference’s Advisory
Committee on Bankruptcy Rules, will continue
beyond FY 2004.
Civil Enforcement Actions
Denial or Revocation of Discharge
A primary reason an individual files for
bankruptcy is to obtain a bankruptcy “discharge,”
which releases the debtor from personal liability
for payment of certain debts and prevents credi
-
tors from taking action to collect those debts.
Chapter 7 is designed to give a fresh start to the
10
Joe Buzhardt
honest but unfortunate debtor by granting such
a discharge.
A Chapter 7 discharge is usually issued 60
days after the first date set for a meeting of
creditors, unless a complaint seeking denial of the
debtor’s discharge has been filed under 11 U.S.C.
§ 727. A bankruptcy discharge may be denied if
the debtor engaged in improper conduct includ-
ing: concealing assets; withholding information
on the bankruptcy petition, schedules, or state-
ment of affairs; destroying property to hinder or
defraud a creditor or trustee; knowingly making
a false oath; or refusing to obey a court order.
In addition, a previously granted discharge may
be revoked as a result of information discovered
after the discharge was entered. Actions to deny
or revoke discharge provide one of the strongest
remedies available against debtors who under-
mine the integrity of the bankruptcy system.
A bankruptcy discharge may be denied if the debtor
engaged in improper conduct including: concealing
assets; withholding information on the bankruptcy
petition, schedules, or statement of affairs; destroy-
ing property to hinder or defraud a creditor or
trustee; knowingly making a false oath; or refusing
to obey a court order.
In FY 2004, U.S. Trustees filed 1,056 com-
plaints objecting to the entry or seeking revo-
cation of the debtor’s discharge under Section
727. Of the 915 complaints that were resolved
by judicial decision or by debtor consent dur-
ing FY 2004, the discharge was denied, waived,
or revoked in 865 or 94.5 percent of the cases.
In total, U.S. Trustees initiated 3,465 informal
inquiries and formal court actions pursuant to
Section 727. In addition, in some cases criminal
proceedings were instituted against the debtors
based on the same conduct that led to denial or
revocation of discharge. (These figures represent
a snapshot in time; for example, the numbers of
Section 727 actions filed and Section 727 actions
decided during FY 2004 may not match because
some were filed before the reporting period and
some were decided afterward.)
U.S. Trustee activity under Section 727 pre-
vented 1,387 debtors from discharging more than
$192.5 million in general unsecured debt in FY
2004 as a result of formal complaints or investi-
gations that resulted in voluntary waivers of dis-
charge, dismissals, or conversions to Chapter 13.
Actions brought by the Program to deny or
revoke discharge include the following:
• The Bankruptcy Court for the District
of Colorado approved a waiver of discharge by
a Chapter 7 debtor who attempted to discharge
over $3.3 million in debt including a $906,000
civil judgment award, a $906,000 punitive dam
-
age award, and $982,436 in criminal restitution.
The debtor had pleaded guilty to embezzling
almost $1 million from his former employer,
who successfully filed an action to except the
civil judgment and punitive damages from being
discharged in bankruptcy. The Denver office filed
the action to deny discharge, alleging the debtor
concealed an offshore bank account, a family
trust, a self-settled trust, lawsuits, and business
interests, and failed to preserve business records
or satisfactorily explain the loss of his assets.
• The Bankruptcy Court for the District
of South Carolina granted the motion of the
Columbia office to prevent Chapter 7 discharge
of almost $500,000 in unsecured debt, about
half of which was credit card debt. The debtor
failed to disclose that, four months before filing
bankruptcy, he pre-paid $19,800 on a two-year
lease on a 2004 Chrysler vehicle. He also failed to
disclose the transfers of a condominium in New
York, a 2001 Chrysler, and two personal water
-
craft, all of which were sold within five months
pre-petition for a total net profit of over $50,000.
The debtor gave false testimony at his Section 341
“Often, the information
that leads to a complaint
to deny discharge is
provided by an outside
source, such as a creditor
or case trustee. Here, the
information was devel
-
oped solely by our staff.
Bankruptcy Analyst Julie
Smoak, who was conduct
-
ing a routine evaluation
of the case for substantial
abuse or other potential
problems, recognized
the name of a business
that the debtor listed as
closed. One telephone
call confirmed her belief
that the business was still
operating. A thorough
investigation ensued and
numerous grounds for
denial of discharge were
discovered.”
Joe Buzhardt, Assistant
U.S. Trustee, Columbia
11
Sarah Wencil
meeting and omitted numerous other material
disclosures in his schedules and statements.
• On a complaint filed by the Indianapolis
office, the Bankruptcy Court for the Southern
District of Indiana entered default judgment to
revoke a debtor’s discharge, preventing Chapter
7 discharge of $538,395 in unsecured debt. The
debtor did not disclose that, shortly before fil-
ing, he sold a limousine business for a $70,000
down payment and a $100,000 promissory note.
In addition, less than two months after his bank-
ruptcy was closed, the debtor–still president of
the business–participated in a second sale of the
business, receiving almost $60,000.
• A complaint to deny Chapter 7 discharge
filed by the Portland, Ore., office of the U.S.
Trustee and the Chapter 7 trustee was resolved by
a stipulated judgment entered by the Bankruptcy
Court for the District of Oregon, resulting in non-
discharge of over $1.8 million in unsecured debt.
The debtor participated in a scheme to solicit
investors to buy certificates of deposit from an
offshore bank. In his bankruptcy case, he allegedly
concealed assets, failed to keep adequate books
and records regarding his financial activities and
business, and made false statements about his
income.
• The Bankruptcy Court for the District of
Minnesota denied a debtor’s discharge for false
oath, concealment with intent to defraud, and
failure to explain a deficiency in assets after the
Minneapolis office filed an action against her.
The debtor’s bankruptcy petition stated she had
no jewelry, and the debtor initially denied own-
ing jewelry, other than an anniversary band and
gold earrings, when questioned at the Section
341 meeting. Based upon a tip, however, the
Chapter 7 trustee asked her if she owned a four-
carat diamond ring. The debtor testified she
owned such a ring, but the stone was fake. When
the debtor delivered the ring to the trustee, she
admitted the ring was genuine. After further
investigation, the trustee discovered the debtor
owned several other pieces of jewelry, and recov
-
ered some of them for the bankruptcy estate. The
debtor could not account for all of her jewelry,
which was valued on her homeowner’s insurance
policy at more than $34,000.
• A Chapter 7 debtor in the Northern Dis-
trict of Georgia who scheduled only $6,500 in
assets and over $249,531 in unsecured debt on
49 credit cards agreed to convert to Chapter 13
with a three-year payment plan. The Atlanta office
reviewed the debtor’s partial credit card records,
which revealed over $30,000 in cash withdrawals
and $10,000 in purchases of electronics, furniture,
and hardware. After the U.S. Trustee objected to
discharge, the debtor testified at a Bankruptcy
Rule 2004 examination that he lost the cash
through gambling and the credit card purchases
were for strangers who paid him half the purchase
price in cash. The debtor agreed to convert his
case in lieu of going to trial on the U.S. Trustee’s
complaint.
• The Bankruptcy Court for the Middle Dis-
trict of Tennessee granted the Nashville office’s
motion to deny a debtor’s discharge of $233,065 in
unsecured debt. The debtor initially filed Chapter
11 cases on behalf of himself and a corporation
and limited liability company he controlled. He
then used bankruptcy estate funds to finance his
hobby of racing “Modified Lite” cars, and for
Caribbean cruises, clothing, moving costs, rental
payments, a stereo sound system, and landscap-
ing, stating on the monthly operating reports that
these were business expenses. The U.S. Trustee
successfully moved to convert these cases to Chap-
ter 7 and then sought denial of discharge.
• Based on a complaint by the San Antonio
office, the Bankruptcy Court for the Western
District of Texas entered default judgment deny
-
ing discharge of almost $1.7 million in unsecured
debt. After the debtor’s restaurants were put into
receivership, he filed Chapter 11 bankruptcy for
“In this case, effective
civil enforcement resulted
from the coordinated
efforts of the Chapter
7 trustee and the U.S.
Trustee. The private
trustee focused on recov
-
ering the jewelry and
administering the estate
for the benefit of credi
-
tors, and the U.S. Trustee
focused on pursuing the
dischargeability action to
uphold the integrity of the
bankruptcy system.”
Sarah Wencil, Trial
Attorney, Minneapolis
12
Brad Perdue
“The large amount of
unsecured debt listed in
the debtors’ bankruptcy
papers–$609,014–and
numerous inconsistencies
in the case attracted my
attention as I reviewed
Chapter 7 petitions. The
debtors stated they were
unemployed and had
minimal assets, yet they
also reported owing over
$100,000 for purchases
at jewelry stores.”
Brad Perdue, Bankruptcy
Analyst, Dallas
himself and two entities. A Chapter 11 trustee
was soon appointed in all three cases, and quickly
determined that the debtor took cash from the
restaurant business and could not fully account
for it. The U.S. Trustee further investigated and,
after the debtor’s individual case was converted
to Chapter 7, sought denial of discharge based
on lack of records and inability to explain where
money went in all three cases.
Dismissal for ‘Substantial Abuse’
A Chapter 7 consumer case may be dismissed
under 11 U.S.C. § 707(b) for “substantial abuse.”
Bankruptcy courts generally determine the exis-
tence of “substantial abuse” based upon a consid-
eration of the totality of a debtor’s circumstances,
including the debtor’s financial ability to repay
creditors. Only the U.S. Trustee or the court may
seek dismissal for substantial abuse.
Bankruptcy courts generally determine the existence
of substantial abuse based upon a consideration of
the totality of a debtor’s circumstances, including
the debtor’s financial ability to repay creditors.
In FY 2004, U.S. Trustees filed 4,753 motions
to dismiss for substantial abuse under Section
707(b). Of the 3,211 motions to dismiss that were
resolved by judicial action or by debtor consent
during FY 2004, U.S. Trustees were successful in
3,058 or 95.2 percent of the motions. (As with
Section 727 complaints to deny discharge, these
figures reflect a snapshot in time; the numbers
of motions filed and motions decided during
FY 2004 may not match because some were
filed before the reporting period and some were
decided afterward.)
In the aggregate, during FY 2004 U.S. Trustees
initiated 28,181 informal inquiries and formal
court actions pursuant to Section 707(b). U.S.
Trustee activity under Section 707(b) prevented
8,336 debtors from obtaining immediate Chap
-
ter 7 discharge of more than $275 million in
general unsecured debt. The amount of debt not
discharged in Chapter 7 as a result of actions taken
by U.S. Trustees pursuant to Section 707(b) is the
actual amount of unsecured debt listed on the
debtors’ schedules where the cases were either dis-
missed or voluntarily converted to Chapter 13.
Examples of actions by the Program include
the following:
• The Bankruptcy Court for the Northern
District of Texas granted a motion to dismiss the
case of married debtors with $609,014 in credit
card debt. The debtors listed $750 in real and per-
sonal property, with no income. Their credit card
statements, obtained by the Dallas office, showed
jewelry purchases in excess of $113,000 although
the debtors listed only $50 worth of jewelry on
their schedules. The court barred the debtors
from refiling bankruptcy for two years.
• Ruling for the Indianapolis office, the
Bankruptcy Court for the Southern District of
Indiana dismissed, with prejudice and a one-year
bar to refiling, the Chapter 7 case of a debtor
listing $407,000 in unsecured debt. Of that debt,
$184,000 was for “non-sufficient funds” checks
and much of the balance was for goods purchased
with NSF checks. This was the debtor’s second
bankruptcy case in four weeks; she wrote 16 NSF
checks between the dismissal of her first case and
the filing of the second. The U.S. Trustee discov
-
ered she used multiple names and Social Security
numbers to open bank and credit card accounts.
At the conclusion of the hearing, state officials
arrested the debtor on an outstanding warrant for
criminal check deception.
13
Greg Zipes
“Manhattan and the
New York City area pro
-
vide special challenges
for civil enforcement
because certain living
expenses that appear to
be on the high side are
reasonable for the area.
Nevertheless, in New
York City we have identi
-
fied debtors who have
lived lavishly off credit
card debt, and who have
the ability to repay debts
with some old-fashioned
belt tightening under a
Chapter 13 or Chapter
11 plan. My office
aggressively investigates
and pursues actions
against these abusive
debtors.”
Greg Zipes, Trial
Attorney, New York City
• The Bankruptcy Court for the Northern
District of Florida dismissed the case of a yacht
broker, finding that he chose to live an extravagant
lifestyle and could have found a way to resolve his
federal income tax debt. The debtor listed income
of between $150,000 and $226,000, a house val-
ued at $425,000, $304,013 owed in personal fed-
eral income taxes for 1991 through 1999, and one
unsecured creditor owed $1,514. The Tallahassee
office argued that the debtor’s $10,593 in monthly
expenses, including a $2,903 mortgage payment
and car payments of $1,298, were excessive.
• Ruling for the Kansas City office after a
hearing, the Bankruptcy Court for the Western
District of Missouri dismissed the Chapter 7 case
of a registered nurse who worked sporadically for
several years while receiving $72,000 per year plus
a rent-free $434,000 house as beneficiary of three
trusts. The debtor contended at trial that she
required more than $9,000 per month to meet
her living expenses, including a second home in
Florida leased for $2,000 per month. After the
court’s ruling, the debtor filed a Chapter 13 plan
to repay her scheduled debt in full.
• Ruling for the Buffalo office, the Bank-
ruptcy Court for the Western District of New
York dismissed the Chapter 7 case of debtors who
incurred over $320,000 in unsecured debt on
more than 65 credit cards while earning less than
$20,000 per year.
• The Bankruptcy Court for the Southern
District of New York approved a stipulation
between a Chapter 7 debtor and the New York
City office, converting the case to Chapter 13.
The debtor, who earned at least $120,000 a year,
incurred $116,837 in credit card debt and made
extravagant expenditures, dining at expensive res-
taurants and paying her fiancé’s living expenses.
The debtor’s representations to the U.S. Trustee
that her fiancé was unemployed were contra-
dicted in her wedding announcement published
in the New York Times.
Improper Conduct by Attorneys
Lawyers who engage in unethical conduct
or provide substandard representation harm
their clients and undermine the integrity of the
bankruptcy system. The U.S. Trustee monitors
attorney conduct and adherence to professional
standards, and takes action against inadequate
representation and unlawful activity by counsel.
Civil enforcement actions by the U.S. Trustee
include asking the court to temporarily or per
-
manently bar the attorney from appearing in
bankruptcy cases and coordinating with state
bar associations or other regulatory bodies as
they pursue attorney disciplinary proceedings.
Enforcement actions also include requesting
reduction or disgorgement of debtors’ attorneys’
fees under 11 U.S.C. § 329 and seeking sanctions
or similar remedies.
Lawyers who engage in unethical conduct or provide
substandard representation harm their clients and
undermine the integrity of the bankruptcy system.
In FY 2004, U.S. Trustees filed 707 motions
seeking disgorgement of attorney fees under Sec-
tion 329, in both consumer and business cases. Of
the 629 motions resolved by judicial decision or
consent during FY 2004, U.S. Trustees were suc-
cessful in 567 motions against debtors’ attorneys
or 90.1 percent of the motions resolved. During
FY 2004, U.S. Trustees initiated 1,458 informal
inquiries and formal actions against debtors’
attorneys that resulted in the disgorgement of
more than $4.3 million in attorney fees.
These are examples of Program actions:
• Debtors’ counsel agreed to disgorge and
waive $36,350 in fees and expenses in approxi-
mately 10 Chapter 13 cases, under a settlement
with the Newark office that was entered by the
Bankruptcy Court for the District of New Jersey.
14
Paul Randolph
“Many of the attor-
ney misconduct issues
we encounter in St.
Louis involve ‘mill’ law
firms–that is, firms that
handle a high volume
of consumer cases. We
attempt to educate and
develop corrective action
plans when possible. Our
goals are not only to help
ensure that the profes
-
sional is held account
-
able, but also to help
‘pick up the pieces’ for
the clients and to identify
ways to prevent future
attorney misconduct. In
this case, members of
the local bankruptcy bar
stepped up to provide
free services to more than
170 of the attorneys’
clients.”
Paul Randolph, Assistant
U.S. Trustee, St. Louis
An 18-month inquiry by the U.S. Trustee revealed
the attorney closed on the sale of debtors’ real
property and paid himself without court approv-
al or the disclosure required by the Bankruptcy
Code and Rules.
• A debtors’ attorney who signed and filed
approximately 90 bankruptcy cases, without
meeting with the debtors or obtaining their
consent to file, agreed to settle two adversary pro-
ceedings and one motion to show cause brought
by the St. Louis office. The Missouri Supreme
Court suspended the attorney from the practice
of law, and the U.S. Trustee created a panel of
volunteer private attorneys to help more than 170
of the attorney’s former bankruptcy clients.
• A lawyer who filed over 1,200 bankruptcy
petitions for clients in one year agreed to a vol-
untary suspension from practicing bankruptcy
law in the Central District of California for 30
months and to the sale of her bankruptcy prac-
tice. The bankruptcy court previously found
that the lawyer’s non-attorney husband pro-
vided legal advice to a debtor, and concluded
the lawyer aided in the unauthorized practice of
law and failed to adequately supervise the work
of non-attorneys and competently perform legal
services. The court also found that the law-
yer and other attorneys in her office failed to
provide legal services to a debtor or meet with
the debtor before filing the petition. The court
referred the lawyer to the Discipline Panel for
the Bankruptcy Court for the Central District of
California, which approved the agreement. The
Los Angeles office investigated and prosecuted
the matter.
Violations by Bankruptcy Petition Preparers
A bankruptcy petition preparer is a non-attor
-
ney who prepares debtors’ bankruptcy documents
for a fee. Petition preparers are governed by 11
U.S.C. § 110, which requires, among other things,
that they disclose in court filings their identities
and the fees they receive. Section 110 also limits
the practices that petition preparers may engage
in, barring them from activities such as advertising
“legal” services, charging excessive fees, collecting
clients’ payments for court filing fees, or engag-
ing in unfair, deceptive, or fraudulent conduct.
Nonetheless, some petition preparers charge exor-
bitant rates, fail to make necessary disclosures, and
engage in other prohibited conduct.
To curb such conduct, U.S. Trustees bring
civil actions to obtain orders to disgorge docu-
ment preparation fees, impose fines, and enjoin
prohibited conduct by petition preparers. A new
challenge is the emergence of Internet-based tech-
nologies that may be employed by bankruptcy
petition preparers. Cases filed with the involve-
ment of Internet-based preparers are appearing
with increasing frequency across the country. A
petition preparer operating through an Internet
site may be located virtually anywhere, including
in a foreign country.
In FY 2004, U.S. Trustees filed 894 motions
and/or complaints seeking relief against petition
preparers under Section 110. Of the 797 matters
resolved by judicial decision or consent during FY
2004, U.S. Trustees were successful in 748 actions
against petition preparers or 93.9 percent of the
matters resolved.
During FY 2004, U.S. Trustees pursued peti-
tion preparers through informal inquiries and for-
mal court actions in 2,254 cases. U.S. Trustee activ-
ity under Section 110 resulted in the imposition of
fines and the recovery of fees totaling almost $3
million, and the issuance of 249 injunctions.
15
Elizabeth Amorosi
“For me, one of the most
meaningful aspects of
this case was the profes
-
sional dedication of so
many members of our
staff. The case presented
logistical difficulties due
to the sheer number of
debtors upon whom these
individuals had preyed.
From the careful inter
-
viewing of many debtor
witnesses through the
preparation of exhibits
to the final civil judg
-
ment and criminal
referral, our legal clerks,
paralegals, analysts, and
attorneys all assisted
when needed. Due to
this impressive effort,
and attorney Renee
Shamblin’s tenaciousness,
we obtained significant
results with respect to the
wrongdoers.”
Elizabeth Amorosi,
Assistant U.S. Trustee,
Phoenix
U.S. Trustee activity under the statute that
governs bankruptcy petition preparers resulted
in the imposition of fines and the recovery of fees
totaling almost $3 million, and the issuance of
249 injunctions.
Examples of Program actions against peti-
tion preparers include:
• The Bankruptcy Court for the District of
Arizona assessed $302,000 in fines and sanctions
against father and son bankruptcy preparers at
the request of the Phoenix office. The court pre-
viously fined the petition preparers more than
$1.8 million for 3,657 violations of Section 110,
and ordered them to disgorge fees to approxi-
mately 204 debtors within 30 days. When the
petition preparers failed to do so, the court fined
them $500 per violation, or $102,000, and issued
civil contempt sanctions totaling $200,000 for
intentional and flagrant violation of four prior
injunctions. The preparers’ violations included
abandoning their clients; collecting filing fees
from clients and then forging their names on
applications to pay filing fees with the court;
causing the dismissal of clients’ cases by failing to
timely prepare documents; and filing documents
for clients without having the clients review
them. In addition to the civil penalties, a grand
jury in Maricopa County, Ariz., indicted the pre-
parers on 20 felony counts of theft and one count
of fraudulent schemes and artifices, for allegedly
taking money from approximately 20 customers
and then abandoning them. The father ulti-
mately pleaded guilty to theft and was sentenced
to three and a half years in state prison; the son
pleaded guilty to attempted illegal enterprise and
was sentenced to six months in jail and three
years probation and ordered to pay restitution.
The U.S. Trustee referred the criminal matter to
the county attorney and provided information
leading to the arrest of the preparers.
• The Bankruptcy Appellate Panel of the
Ninth Circuit Court of Appeals affirmed a bank
-
ruptcy court order upholding an injunction
obtained by the Oakland office against a web-
based bankruptcy petition preparer that engaged
in the unauthorized practice of law and fraudu-
lent, unfair, or deceptive conduct. The panel
upheld the bankruptcy court’s certification of
such conduct to the district court, as well as the
disgorgement of all fees received from debtors in
the Northern District of California, estimated at
more than $57,000. The case is pending before the
Court of Appeals for the Ninth Circuit.
• Ruling for the Norfolk office, the Bank-
ruptcy Court for the Eastern District of Virginia
permanently enjoined three individuals from act-
ing as petition preparers and engaging in the
unauthorized practice of law in Virginia, fined
them $21,000, and ordered them to disgorge all
fees paid by clients. Operating out of a hotel room,
the petition preparers used radio and television
advertisements to lure potential clients experi-
encing financial difficulties. Some clients joined
a $23-per-month club, received financial advice,
and were referred to a “paralegal” who prepared
skeleton bankruptcy petitions that would have
been dismissed under local bankruptcy rules
but for the intervention of the bankruptcy court
clerk and the U.S. Trustee. The cases were initially
identified by the court clerk, who noticed one
individual repeatedly delivering pro se filings
to the court. At the request of the U.S. Trustee,
members of the local bankruptcy bar stepped in
to represent most of the victims.
Serial Filings and Identity Fraud
Serial filing and bankruptcy-related iden-
tity fraud are two types of abusive conduct
that sometimes, but not always, occur together.
Serial filing means repeatedly filing bankruptcy
solely for the purpose of frustrating creditors’
attempts to obtain payment or to foreclose on real
16
B. Amon James
“This case turned out so
well because of signifi
-
cant contributions by our
detail-oriented Paralegal
Ann Britton; several
visiting attorneys who
drew upon their many
contacts throughout the
Program; Chapter 13
trustee Elaina Massey;
and staff from the Social
Security Administration.
Clearly, our ability to
combat fraud and abuse
in the bankruptcy sys
-
tem is enhanced by the
full use of the resources
available to us, combined
with the development
of constructive working
relationships with other
governmental agencies
and the bankruptcy com
-
munity.”
B. Amon James, Assistant
U.S. Trustee, Savannah
property. Bankruptcy-related identity fraud can
take various forms, but one of the simplest is to
file bankruptcy under a false name and/or Social
Security number. Serial filings and bankruptcy-
related identity fraud occur in both Chapter 7
and Chapter 13 cases.
Often serial filers do not complete their cases,
but remain in bankruptcy just long enough to
obtain the automatic stay’s temporary protection
from collection activity by creditors. The Bank-
ruptcy Code prohibits a debtor from refiling for
bankruptcy within 180 days if the court dismissed
the prior case because the debtor failed to appear
before the court, failed to abide by court orders,
or asked to have the case dismissed after a third
party requested relief from the automatic stay.
Moreover, many courts will bar a debtor from
refiling for a period longer than 180 days if the
debtor acted in bad faith. Some serial filers use
false names and/or Social Security numbers in
some or all of their bankruptcy cases to escape
this prohibition against immediate refiling. How-
ever, the U.S. Trustee monitors its own data bases
as well as court records for evidence of abusive
refiling, and seeks dismissal or denial of discharge
in such cases.
Often serial filers do not complete their cases, but
remain in bankruptcy just long enough to obtain the
automatic stay’s temporary protection from collec
-
tion activity by creditors.
To curb bankruptcy-related identity fraud,
the U.S. Trustee Program requires all debtors to
produce documents at the Section 341 meeting
in an effort to confirm their names and Social
Security numbers.
Examples of cases involving serial filing and/
or bankruptcy-related identity fraud include the
following:
• The Bankruptcy Court for the Southern
District of California denied the discharge of
a debtor who filed bankruptcy every year since
1995, and barred him from refiling bankruptcy
for 11 years, based on a complaint filed by the
San Diego office. At trial, the U.S. Trustee estab
-
lished that the debtor solicited homeowners who
were facing foreclosure, induced them to convey
their property interests to him, and transferred
partial property interests into a pending bank-
ruptcy case to stall foreclosure. The court denied
the debtor’s discharge for failure to keep books
and records relating to the transactions. It also
found his actions were an improper use of the
bankruptcy system and were grounds to bar him
from refiling.
• Based on a referral from the Chapter
13 trustee, the Savannah office investigated and
determined that a debtor filing in the Southern
District of Georgia had used six different Social
Security numbers in seven bankruptcy cases she
filed since 1994, as well as 13 other SSNs for
non-bankruptcy purposes. The debtor also failed
to disclose prior bankruptcies in all of her prior
cases. Her husband used different SSNs in his
two bankruptcy cases and for non-bankruptcy
purposes, and failed to disclose prior bankrupt
-
cies in his present case. Between the two of them,
the spouses filed Chapter 13 bankruptcy in each
17
Miriam Suarez
“This case was troubling
because of the number
of victims involved, as
opposed to the dollar
amounts at issue. After
filing actions in several
cases to help the victims
of identity theft, we
decided steps needed to
be taken to prevent the
debtors’ further fraud
and abuse of the system.
With assistance from
Paralegal Specialists
Kathleen Appel and
Maureen Gimenez, we
gathered the evidence
and presented it to the
court. Persistence paid
off, and we obtained the
injunctions necessary to
stop the abuse.”
Miriam Suarez, Trial
Attorney, Orlando
of the previous six years. In response to the U.S.
Trustee’s motion to dismiss their case, the debtors
consented to dismissal with prejudice, barring
discharge of all claims that were or could have
been asserted in the present case.
• On motion of the Sacramento office, the
Bankruptcy Court for the Eastern District of
California dismissed a Chapter 7 case where the
debtor listed $91,000 in unsecured debt but only
$576 in monthly fixed income for the previous
three years. The U.S. Trustee contacted the debtor
and learned she had not lived in California for
more than three years, had not seen or signed the
bankruptcy documents, and had unsecured debts
of less than $6,000. The U.S. Trustee determined
that the debtor’s son incurred more than $85,000
in credit card debt in her name and filed bank-
ruptcy to hide his action. With the U.S. Trustee’s
assistance, the victim filed a police report and
notified the Federal Trade Commission and the
credit reporting agencies of the identity theft.
• Ruling for the Orlando office in two related
proceedings, the Bankruptcy Court for the Middle
District of Florida enjoined two married debtors
from filing bankruptcy for five years. The debtors
had filed 18 cases in nine years in two divisions
of the judicial district. They filed individual and
corporate cases to stop foreclosures of prop-
erty personally owned, using nine Social Security
numbers and using incorrect Taxpayer Identifica-
tion Numbers in the corporate cases. The court
found they flagrantly abused the Bankruptcy Code
and repeatedly perpetrated frauds upon the court,
victimizing the SSNs’ true holders.
Abuses by Creditors and Others
To protect consumers, the Program and the
private trustees whom it oversees take actions
against improper conduct by creditors and other
third parties. These actions include: objecting
to claims filed by creditors who chronically or
willfully fail to demonstrate they are entitled to
payment in the amount or priority asserted in the
proof of claim; seeking to avoid liens and bring-
ing actions for creditors’ failure to timely release
liens; addressing violations of the automatic stay;
challenging improper reaffirmation agreements;
pursuing violations of the Truth in Lending Act,
the Homeowners Equity Protection Act, and the
Federal Credit Reporting Act; and challenging
the unauthorized use of official court language in
written solicitations to consumer debtors.
To protect consumers, the Program and the
private trustees whom it oversees take actions
against improper conduct by creditors and other
third parties.
These are examples of Program and trustee
actions against abuses by creditors and others:
• Based on a referral by the Newark office,
the U.S. Attorney for the District of New Jersey
issued a cease and desist letter to a car dealer-
ship, advising it of the prohibition against the
unauthorized use of the words “United States
Bankruptcy Court” to convey the impression
that the court approves or endorses a publication.
The cease and desist letter also required the deal-
ership to send a disclaimer to all who received
the mailing. A Chapter 7 debtor complained to
the bankruptcy court after receiving a pamphlet
from a financing company that used the let-
terhead “United States Bankruptcy Court, Main
Office of Disbursement, Automobile Financial
Department.”
18
Mary May
“When the Assistant
District Attorney learned
that several of the credit
counselor’s victims had
also filed bankruptcy, she
contacted the Wichita
office for assistance in
understanding bank
-
ruptcy parlance and the
impact of the automatic
stay upon her enforce
-
ment proceeding. We
were more than happy
to share our expertise.
While the Assistant
District Attorney
deserves all of the credit
for this consumer victory,
we take pride in the sup
-
porting role we played in
the case.”
Mary May, U.S. Trustee,
Region 20
• A county district court in Kansas imposed
civil sanctions on a consumer credit counselor
and two of its agents for violating the Kansas
Consumer Protection Act. The court ordered
payment of $190,000 in civil penalties, more than
$120,000 in restitution, and approximately $9,300
in investigative fees. The agents violated state law
by failing to provide three-day right-to-cancel
contracts or to inform clients that the credit
counselor’s theories of debt avoidance were not
deemed valid by any appellate court. The Wichita
office provided the county district attorney with
technical assistance regarding bankruptcy law
and the role of consumer counselors in the bank-
ruptcy context.
19
20
Chapter 4
Criminal Enforcement
Photo 1: Nancy Resnick
Photo 2: Bill Goldman, Richard Byrne
Photo 3: Celeste Miller
21
Chapter 4
Fighting Bankruptcy Crimes
Federal law directs the Program to refer
criminal activity to the U.S. Attorneys and other
law enforcement agencies and, upon request of
the U.S. Attorney, to assist in prosecuting crimi-
nal violations of the bankruptcy laws.
The U.S. Trustee Program’s role in criminal
enforcement is multi-faceted. The Program’s
Criminal Enforcement Unit, created in FY 2003,
assists staff as they coordinate with federal inves-
tigative agencies and U.S. Attorneys’ offices on
criminal case referral, development, and prose-
cution. The Criminal Enforcement Unit consists
of former federal prosecutors located in several
offices across the country. Members of the unit
train Program staff in fraud detection, investiga-
tion, and referral; help build relationships with
prosecutors and others in the criminal justice
system; and participate in criminal cases as Spe-
cial Assistant U.S. Attorneys.
With guidance from the Criminal Enforce-
ment Unit, Program staff help investigate cases
of suspected bankruptcy fraud, often providing
documentary evidence along with their referrals
to the U.S. Attorneys’ offices. Program attorneys
who are designated as Special Assistant U.S.
Attorneys act as lead or assistant prosecutors in
bankruptcy fraud cases. Program staff serve on
inter-agency working groups, providing infor-
mation on how bankruptcy interrelates with
crimes such as federal benefits fraud, identity
theft, mortgage fraud, money laundering, and
credit card fraud. In addition, they conduct
training and outreach programs, where they
teach law enforcement personnel and others how
to recognize and pursue cases of potential crimi-
nal bankruptcy fraud.
With guidance from the Criminal Enforcement
Unit, Program staff help investigate cases of sus
-
pected bankruptcy fraud, often providing documen
-
tary evidence along with their referrals to the U.S.
Attorneys’ offices.
Criminal Enforcement Actions
Bankruptcy fraud often is linked to other
crimes, such as credit card fraud, tax fraud, iden-
tity fraud, federal benefits fraud, mortgage fraud,
and money laundering. Further, the bankruptcy
system is susceptible to fraud by individuals and
entities who prey upon unsophisticated consum-
ers in financial distress.
Criminal enforcement actions include pros-
ecutions relating to:
• Concealment of assets.
• Crimes by attorneys and bankruptcy peti-
tion preparers.
• Credit card bust-outs and identity fraud.
• Creation of false documents.
• Various other crimes including tax fraud,
bank fraud, mail fraud, money laundering,
embezzlement, and perjury.
Concealment of Assets
Some debtors try to hide assets from credi-
tors and from bankruptcy trustees by failing to
disclose assets on their bankruptcy documents
and by lying about their assets at the Section
341 meeting or in bankruptcy court. Sometimes,
concealment of assets is only one part of a
complex fraudulent scheme that includes other
offenses such as wire fraud, mail fraud, securities
fraud, real estate fraud, and tax fraud.
Some debtors try to hide assets from creditors and
from bankruptcy trustees by failing to disclose
assets on their bankruptcy documents and by lying
about their assets at the Section 341 meeting or in
bankruptcy court.
Concealment cases that were resolved in FY
2004 included the following:
• In the District of Colorado, a former Colo-
rado police officer was found guilty of bankruptcy
22
Leigh Lichtenegger
“This case shows how
the U.S. Trustee, Chapter
7 trustee, and U.S.
Attorney worked together
efficiently to achieve
justice in the bankruptcy
system. After receiving a
tip that the police officer
failed to disclose prop
-
erty in her bankruptcy
case, the private trustee
promptly informed the
U.S. Trustee, who veri
-
fied the allegations and
referred the matter to
the U.S. Attorney. The
private trustee took legal
action to recover the
vehicle in the bankruptcy
case, and the prosecutor
went forward with the
criminal case.”
Leigh Lichtenegger, Trial
Attorney, Denver
fraud as well as fraudulent transfer and conceal-
ment of property. Weeks before filing bankruptcy,
the officer received $30,000 from her parents,
transferred this money to her roommate, and had
her roommate buy a new $32,700 vehicle for her.
After the bankruptcy proceedings concluded and
the officer received a discharge of approximately
$64,000 in debt, the roommate gifted title to the
vehicle back to her. The officer was sentenced to
five months in prison, five months home deten-
tion, and three years supervised release, and was
ordered to pay $22,000 in restitution to the Chapter
7 trustee. The Denver office referred the case for
prosecution.
• An architect pleaded guilty in the Eastern
District of Arkansas to conspiracy to commit
bankruptcy fraud and tax evasion. The architect
filed a Chapter 11 bankruptcy case that was sub-
sequently converted to Chapter 7. He continued
to live a luxurious life style, taking a cruise, a trip
to the Cayman Islands, and a casino trip, by dis-
guising personal expenses as business expenses.
A referral by the Little Rock office led to the dis-
covery of nine bank accounts and up to 40 credit
cards issued or owned by various corporations
and partnerships operated by the architect, who
also failed to file tax returns for 1996 through
1999 on income of more than $602,000.
• A Chapter 7 debtor pleaded guilty to con-
cealment of assets in the District of Kansas. The
debtor admitted concealing the pre-bankruptcy
transfer of two mobile home parks to a fictitious
corporation in a scheme to cheat his ex-wife out
of a $250,000 property settlement. He fabricated
a Mexican marriage to a non-existent individual,
established a false residence in Nevada, obtained
a false divorce awarding the non-existent wife all
his assets, and filed bankruptcy to discharge his
true wife’s claim. An investigation by the Chapter
7 trustee revealed the debtor’s false schedules,
statements, and Section 341 meeting testimony.
The Reno office assisted in the investigation and
referred the case for prosecution.
• A debtor in the District of Arizona was
sentenced to 46 months in prison and two years
supervised release, and ordered to pay $240,382
in restitution, after being convicted of bankruptcy
fraud, money laundering, and false declarations
before a court. The debtor, who filed Chapter 11
bankruptcy twice, purchased property instead of
paying creditors under his first reorganization
plan; failed to disclose the property in his sec-
ond bankruptcy; failed to report the sale of the
property; and testified under oath that neither
he nor his corporation owned the property when
he filed bankruptcy. Staff from the Phoenix office
worked with the IRS to investigate the case, and
testified at trial.
Crimes by Attorneys and Bankruptcy Petition
Preparers
On occasion, bankruptcy attorneys, bank-
ruptcy petition preparers, and their employees
engage in criminal activities to unjustly enrich
themselves at the expense of the debtor, credi-
tors, and/or other participants in the bankruptcy
proceeding. Such actions include embezzling
from the bankruptcy estate, assisting debtors in
concealing assets, and engaging in activities that
abuse the integrity of the bankruptcy process.
Crimes by attorneys, bankruptcy petition prepar-
ers, or their employees include embezzling from the
bankruptcy estate, assisting debtors in concealing
assets, and engaging in activities that abuse the
integrity of the bankruptcy process.
The following are examples of crimes by
bankruptcy professionals in FY 2004:
• An attorney was sentenced in the South-
ern District of Mississippi to 26 months in
prison followed by three years supervised release,
and ordered to pay $395,000 in restitution, after
pleading guilty to embezzling from bankruptcy
23
Maria Baronich
“The attorney diverted
funds from court-
approved sales of bank
-
ruptcy estate property,
and commingled them in
various ‘trust’ accounts
with funds from non-
bankruptcy clients. We
identified court orders
showing the source of the
funds in the attorney’s
accounts and the parties
legally entitled to pay
-
ment, and the FBI recon
-
structed the accounts.
We showed that certain
funds were clearly the
proceeds of asset sales,
and that pay-outs from
the accounts were not
related to a court order
approving attorney fees.”
Maria Baronich,
Bankruptcy Analyst,
Jackson
clients. The court also ordered the attorney to
surrender his law license and not apply for read-
mission to the bar. The Jackson office assisted in
the investigation and prosecution of the matter.
• An attorney who had filed bankruptcy
pleaded guilty to bankruptcy fraud in the Eastern
District of Tennessee. After filing Chapter 7 bank-
ruptcy with her husband, the attorney lied under
oath at the Section 341 meeting and at a Bank-
ruptcy Rule 2004 exam regarding missing funds
she placed in her attorney trust account. The
attorney was also charged with money launder-
ing and conspiracy with her husband, who was
serving time in prison. The Chattanooga office
assisted in the investigation and prosecution
of the case. The attorney was sentenced to five
months in prison, five months home detention,
and two years supervised release.
• An attorney pleaded guilty in the District
of Arizona to one count of embezzlement of pub-
lic money. The attorney received debtors’ funds
into his trust account for payment of creditors
and U.S. Trustee quarterly fees. He embezzled
$74,500 in funds intended for quarterly fee pay-
ments, by taking a client’s certified check and
having the bank reissue it payable to his trust
account. The attorney was ultimately disbarred
and sentenced to 21 months in prison and three
years supervised release, and ordered to pay more
than $76,000 in restitution. The Phoenix office
referred the matter to the U.S. Attorney and
assisted in the investigation.
• A former attorney and Chapter 7 trustee
pleaded guilty to one count of embezzlement in
the District of Rhode Island, after an investiga
-
tion by the Providence office revealed he engaged
in defalcation of $7,500 from a bankruptcy
estate and paid his home mortgage with some
of the proceeds. The trustee made restitution,
consented to disbarment, and was sentenced to
one year probation.
• A jury in the Northern District of Cali
-
fornia returned a guilty verdict on all counts of
bankruptcy fraud against a bankruptcy petition
preparer who advertised his services to individu-
als facing eviction. The Oakland office and the
bankruptcy clerk had noticed that a number
of bankruptcy filings listed the same mailing
address. Further investigation revealed that the
petition preparer had filed bankruptcy cases on
behalf of individuals facing eviction without
their knowledge or consent and without disclos-
ing his involvement in preparing the documents.
The Oakland office assisted in the investigation
and prosecution of the case.
• Chapter 11 debtor’s counsel was charged
in the Southern District of New York on one
count of embezzling over $101,000 from the
debtor’s estate, and was subsequently sentenced
to five months in jail and five months home
confinement. Earlier, the attorney resigned from
the New York Bar and was disbarred. Both the
disbarment and the criminal charges resulted
from the efforts of the New York City office in
reviewing the attorney’s conduct in the Chapter
11 case.
• A retired Atlanta police officer who became
a bankruptcy petition preparer was sentenced to
18 months in prison and ordered to pay $89,022
in restitution after pleading guilty in the Northern
District of Georgia to one count of bankruptcy
fraud. The petition preparer solicited business
from homeowners by promising to save their
homes from foreclosure, but instead he filed
bankruptcies in their names without their knowl-
edge. The Atlanta office discovered the fraudulent
filings, obtained an injunction against the petition
preparer, and assisted in the investigation that led
to the petition preparer’s indictment.
• A Chapter 13 trustee’s employee in the
Northern District of California pleaded guilty to
embezzling from the trustee. The employee mis-
appropriated cashier’s checks and money orders,
endorsed them, and deposited them into his own
24
Jeff Lodge
“The Chapter 13 trustee
in Fresno discovered
that his legal clerk had
embezzled a money
order. He advised the
U.S. Trustee’s Regional
Analyst in San Francisco,
who coordinated an
audit and reconstruc
-
tion of records. Lawyers
in my office subpoenaed
bank records and traced
missing funds to the
employee’s bank account.
Our efforts revealed that
the employee had actu
-
ally misappropriated
over a dozen debtor pay
-
ments. The Fresno office
and the Regional Analyst
presented the case to the
U.S. Attorney, resulting
in the employee’s arrest
and conviction.”
Jeff Lodge, Trial
Attorney, Fresno
account. He was sentenced to five years probation,
community service, and full restitution of the
amount embezzled. The Fresno office, along with
the regional bankruptcy analyst in San Francisco,
provided information leading to the conviction.
Credit Card ‘Bust-Outs’ and Identity Fraud
Bankruptcy-related credit card fraud often
consists of a debtor’s attempt to discharge credit
card debt that was incurred through fraudulent
conduct. Sometimes this is part of a scheme
called a credit card bust-out, in which an indi-
vidual runs up a significant amount of consumer
credit card debt for purchases and cash advances.
The individual may file bankruptcy in an attempt
to discharge the entire debt. To obtain the credit,
an individual engaging in a credit card bust-out
may make false statements on credit applications,
such as giving a false name and/or Social Security
number, false employment history, and inflated
salary information to qualify for a higher credit
limit. Typically, the purchases and cash advances
occur within a two- or three-month period, with
charges often incurred on multiple credit card
accounts on the same day. Eventually, a bank-
ruptcy case will be filed.
Sometimes this fraud is part of a scheme called a
credit card bust-out, in which an individual runs up
a significant amount of consumer credit card debt
for purchases and cash advances, and then files for
bankruptcy to discharge the debt.
Bust-out schemes may be small local opera-
tions or may be run by organized rings as a part
of a larger criminal enterprise. In some cases,
the money is transferred overseas. Sometimes,
individuals are approached by “recruiters” to par-
ticipate in the scheme. The individual agrees to
use personal credit cards and to obtain additional
credit cards under his or her name or under a false
name. The recruiter causes the individual to use
the cards to obtain cash advances or merchandise
that is sold for cash, and the individual receives
cash or merchandise as payment for participat-
ing in the scheme. The recruiter may instruct
the individual to pay credit card bills with checks
drawn on bank accounts with insufficient funds,
and then to obtain additional cash advances
or purchase additional merchandise before the
checks are returned for insufficient funds. In
addition, credit card bust-outs may involve collu-
sive merchants who process fictitious credit card
purchases for a portion of the proceeds, with or
without the individual card holder’s knowledge.
After the fraud is accomplished, the recruiter
may suggest that the individual file Chapter 7
bankruptcy to discharge the unsecured credit
card debts.
These are examples of cases involving credit
card bust-outs and/or identity fraud:
• A debtor whose fraud led to the discharge
of millions of dollars in debt was sentenced in
the Central District of California to 12 months
in prison and three years supervised release
and ordered to pay $775,668 in restitution. The
debtor made false statements and concealed more
than $725,000 in foreign and domestic bank
accounts in his bankruptcy case. His fraud led to
the bankruptcy discharge of debts including $14
million owed to a national clothing retailer and
abatement of $3.6 million he owed to the IRS.
A jury convicted the debtor of bankruptcy fraud
and use of false Social Security numbers to open
bank counts. The Program’s Regional Criminal
Coordinator from the Los Angeles office pros
-
ecuted the case.
• A debtor was sentenced in the Eastern
District of Wisconsin to 28 months in prison and
ordered to pay more than $200,000 in restitu
-
tion following her conviction for engaging in a
scheme to defraud mortgage lenders. The debtor
used a Social Security number, falsely obtained
for her deceased infant, to obtain mortgage loans
25
David Asbach
“The debtor used the
identity of her deceased
infant to obtain mort
-
gage loans, and then
filed bankruptcy in the
infant’s name to dis
-
charge the mortgage
debt. We assisted the
U.S. Attorney and FBI
with the bankruptcy
aspect of the criminal
case, including drafting
the plea agreement and
interviewing the debtor
about related bankruptcy
issues.”
David Asbach, Assistant
U.S. Trustee, Milwaukee
she then discharged through bankruptcy. She was
indicted on charges of Social Security fraud; con-
spiracy to commit mail, wire, and Social Security
fraud; and false statement in bankruptcy. The
Milwaukee office assisted the U.S. Attorney and
FBI in the investigation.
• An illegal alien from Jordan was sentenced
in the District of New Jersey to nine years in pris-
on for recruiting dozens of individuals to engage
in fraudulent credit card bust-outs that resulted,
over a seven-year period, in approximately $6.8
million in fraudulent purchases of merchandise
and cash advances. The defendant opened, and
directed his recruits to open, more than 1,000
credit card accounts in their names. He used 30
aliases and 60 fraudulent driver’s licenses to apply
for credit cards. At least a dozen of the recruits
have been prosecuted. The Newark office assisted
in the investigation and prosecution of the case.
• In the Northern District of Georgia, two
individuals were sentenced to 60 months and 18
months, respectively, in prison and ordered to pay
almost $3 million in restitution to mortgage lend-
ers. One individual pleaded guilty to conspiracy
to defraud the United States, bankruptcy fraud,
and fraudulent use of a Social Security num-
ber; the other pleaded guilty to wire fraud. The
two were part of a group that bought, sold, and
encumbered houses either by using stolen identi-
ties or by arranging for “straw sellers” and “straw
borrowers.” The defendants gave false identifica-
tion, forged releases and quitclaim deeds, and
false financial information to qualify for and close
mortgage loans. To further the scheme and pre-
vent foreclosure of the properties, they often filed
bankruptcy in the names of purported owners.
The Atlanta office assisted the FBI and the U.S.
Attorney in the case.
• A husband and wife who were involved in
both a business and personal credit card bust-out
scheme that resulted in $11 million in losses were
sentenced in the Central District of California.
The husband was sentenced to 41 months in
prison and ordered to pay $4.9 million in resti-
tution; the wife was sentenced to 12 months in
prison and ordered to pay nearly $450,000 in res-
titution. The couple provided false information
when they sought millions of dollars in credit for
their business from credit card companies, banks,
and high-end national retail stores. Once they
obtained credit, the couple accumulated large
balances with no intent to repay. They spent more
than $350,000 of the fraud proceeds on luxury
items such as watches, diamonds, and designer
clothing. When the bust-out was complete, the
couple filed bankruptcy for themselves and the
company to avoid paying the debts. Two other
individuals also pleaded guilty to conspiracy
charges for participating in this bust-out scheme
as well as bust-out schemes for three other com-
panies that declared bankruptcy after millions of
dollars worth of merchandise was purchased on
credit. The Program’s Regional Criminal Coor-
dinator from the Los Angeles office assisted in
prosecuting the case.
Creation of False Documents
The creation and use of false documents
strikes at the integrity of the bankruptcy courts,
wastes court resources, and undermines public
trust in the bankruptcy process. Individuals may
falsify documents to stop a foreclosure, sheriff’s
sale, or other lawful activity; collect payments
on non-existent debts; or defraud an individual
or a company.
The creation and use of false documents strikes at
the integrity of the bankruptcy courts, wastes court
resources, and undermines public trust in the bank
-
ruptcy process.
These cases involve the creation of false
documents:
• The chief financial officer of a construc-
tion company in bankruptcy pleaded guilty to
26
Gail Geiger
“This case was an excel-
lent example of agencies
working together to crack
the debtors’ scheme to
defraud the bankruptcy
system and creditors. The
U.S. Trustee Program,
the FBI, and the U.S.
Attorney each had part
of the picture, starting
with a tip that the debt
-
ors were trying to sell
jewelry they had claimed
was stolen. Initially, the
case appeared to be one
of insurance fraud. By
coordinating our efforts,
however, we determined
the debtors used bank
-
ruptcy as one element of
a scheme to pocket the
money they hoped to
receive from selling the
jewelry.”
Gail Geiger, Assistant
U.S. Trustee, Eugene
bank fraud in the Western District of Louisiana.
The CFO wrote two-party checks to a sham com-
pany, signing both required names. The Shreve-
port office referred the matter after a pre-peti-
tion scheme to defraud the company of at least
$568,000 was revealed during discovery for an
adversary proceeding to recover preferential pay-
ments made to a shell business.
• A debtor was charged in the Southern Dis-
trict of Ohio with bankruptcy fraud and tamper-
ing with a witness. The debtor sent bankruptcy
notices to a creditor falsely stating she had filed
bankruptcy, and then told a witness to lie about
her conduct. The debtor ultimately pleaded guilty
to bankruptcy fraud and was sentenced to eight
months in prison on that count, followed by
14 months in prison for violating terms of her
supervised release for a prior bank fraud convic-
tion. The Cincinnati office referred the case to the
U.S. Attorney.
• In the District of West Virginia, an indi-
vidual was found guilty of engaging in a scheme
to defraud the bankruptcy court by filing an
involuntary Chapter 7 petition against another
person, while falsely claiming to be a creditor and
fraudulently making a false declaration and state-
ment under penalty of perjury. The individual
purchased real estate from a trust in which an
attorney was named trustee, but he failed to make
payments and the attorney gave a notice of fore-
closure. The individual then filed an involuntary
petition against the attorney, claiming she owed
$4 million to him and $2 million to two assign-
ees. The Charleston office obtained dismissal of
the case, arguing that the individual and the two
assignees did not have undisputed, non-contin-
gent claims. The office also referred the case for
prosecution and participated in the trial, at which
the Assistant U.S. Trustee testified.
Other Crimes
Virtually any type of criminal conduct can
arise in connection with a bankruptcy case. Often
the bankruptcy filing is the last violation in a series
of crimes that may include tax fraud, bank fraud,
mail fraud, securities fraud, money laundering,
embezzlement, real estate fraud, and perjury.
Virtually any type of criminal conduct can arise
in connection with a bankruptcy case, including
tax fraud, bank fraud, mail fraud, securities fraud,
money laundering, embezzlement, real estate fraud,
and perjury.
The following are examples of cases involv-
ing various other crimes:
• Chapter 7 debtors pleaded guilty to one
count of bankruptcy fraud in the District of
Oregon. When the married debtors filed bank-
ruptcy, they claimed that $80,000 in jewelry was
stolen before they filed and that the loss was unin-
sured. Approximately one year after their case was
closed as a no asset case, the debtors apparently
began trying to sell the jewelry. The Eugene office
worked with the U.S. Attorney’s office to unravel
the debtors’ use of the bankruptcy system in their
scheme to defraud. Ultimately, the debtors nego-
tiated a sale of the jewelry to an undercover FBI
agent posing as a “fence.”
• The mayor of East Cleveland, Ohio, was
convicted on 22 counts for using his public
position to conduct a racketeering enterprise.
He was charged with receiving bribes, kickbacks,
and secret payoffs that were often funneled
through intermediaries. A jury in the Northern
District of Ohio found him guilty of rack-
eteering, mail fraud, extortion, filing false tax
returns, and falsification of bankruptcy records,
including failure to disclose interests in real
estate and receipt of income from the real estate.
An attorney from the Cleveland office served as
a Special Assistant U.S. Attorney in the case.
27
“All of the petitions filed
by this preparer raised
red flags because they
lacked basic information
typically included when
a debtor lists a property
interest in a home, such
as the amount of secured
debt, mortgage debt, or
property taxes owed.
When the debtors failed
to show up for their
Section 341 meetings, we
investigated further. We
checked all of the Social
Security numbers listed
on the debtors’ petitions
and none matched up
with the named debtors.
Eventually we identified
a pattern of abuse that
led back to the petition
preparer.”
Michael Hauser, Trial
Attorney, Santa Ana
• After five days of trial, the former presi-
dent of a corporation pleaded guilty in the Dis-
trict of South Carolina to 22 counts of state law
securities fraud. The corporation filed Chapter 11
bankruptcy following the collapse of its parent, a
holding company for sub-prime lenders and the
primary lending arm for the businesses. The
corporation sold subordinated debentures and
notes to the public and transferred the money
to the parent entity. When the corporation filed
bankruptcy, it owed investors nearly $280 mil-
lion dollars. Federal and state law enforcement
authorities coordinated efforts to investigate and
prosecute criminal violations. An Assistant U.S.
Trustee from the Columbia office testified at the
trial. A tape from the Section 341 meeting was
identified and played for the jury to counter the
defendant’s claim that he knew little about cor-
porate governance and financial issues.
• In the Eastern District of Tennessee, a
97-month sentence was imposed on a company’s
principal officer for his part in an investment
scheme that came to light when he filed a Chap-
ter 11 petition for the purported gold refining
corporation. The officer and a co-defendant
preyed upon elderly investors, promising their
investments would double in 90 days. Investor
losses totaled around $7 million. The co-defen-
dant, who was a Chapter 7 debtor, was ultimately
sentenced to 72 months in prison and ordered
to pay almost $4.85 million in restitution. The
Chattanooga office obtained conversion of the
corporate case from Chapter 11 to Chapter 7 and,
along with the Chapter 7 trustees, assisted in the
criminal investigations.
• A defendant was sentenced in the Central
District of California to 13 months in prison
followed by three years supervised release, and
ordered to pay a $10,000 fine to the United States,
after pleading guilty to bankruptcy fraud. The
defendant engaged in a scheme to defraud credi
-
tors of his business’s “clients,” who were facing
foreclosure. The defendant caused the clients
to sign deeds temporarily transferring a partial
interest in their homes to a fictitious person in
whose name the defendant had filed bankruptcy,
thus temporarily delaying foreclosure proceed-
ings. His scheme was discovered by the Santa Ana
office, which referred the matter to the U.S. Attor-
ney. Previously, the U.S. Trustee had obtained an
injunction and a fine against the defendant for his
abuse of the bankruptcy process.
• A jury in the District of New Jersey con-
victed a physician on 23 counts of tax evasion and
bankruptcy fraud. The physician failed to disclose
transfers, disbursements, and other transactions
that occurred during the year before he filed
Chapter 7 bankruptcy for his medical clinic. The
jury found that $41,000 in checks written by the
physician to his father on the medical practice’s
operating account were cashed, and the money
was funneled back to the physician. The jury also
found the physician deposited $64,975 of the
practice’s receipts into his personal bank account.
Further, he failed to file 22 federal tax forms
and employee withholding documents and owed
back taxes that exceeded $750,000. The Newark
office assisted with the investigation and wit-
ness preparation. The physician had previously
been placed on probation for two years and fined
$10,000, after the New Jersey State Board of Medi-
cal Examiners charged him with administering
unnecessary treatments and submitting inaccu-
rate bills to insurance companies.
• A 24-year veteran of a city police depart-
ment was sentenced in the Northern District
of Indiana to nine years and seven months in
prison after pleading guilty to conspiracy to dis-
tribute cocaine and marijuana, honest services
fraud, and bankruptcy fraud. The police officer
used his position on a drug task force to provide
information to drug traffickers, and he provided
protection to illegal gambling and liquor estab-
lishments. The bankruptcy fraud charges arose
from his false statements in his bankruptcy doc-
uments regarding more than $43,000 in casino
gambling losses. The South Bend office assisted
in the prosecution. The police officer received
Michael Hauser
28
a Chapter 7 discharge in October 2002, but the
U.S. Trustee and the Chapter 7 trustee obtained
revocation of the discharge the following year.
Multi-Agency Working Groups
Many successful criminal enforcement
actions result from the work of national and local
bankruptcy fraud working groups. As a member
of these law enforcement working groups, the
Program serves as a resource for information,
education, and training on the bankruptcy system
and specific law enforcement initiatives.
U.S. Trustee field offices participate in local bank-
ruptcy fraud working groups along with representa
-
tives from other law enforcement agencies.
The National Bankruptcy Fraud Working
Group provides a coordinated mechanism for
sharing information and assisting in the inves-
tigation and prosecution of bankruptcy crimes.
This working group focuses on emerging areas
of bankruptcy fraud such as corporate fraud,
mortgage fraud, credit card bust-outs, and iden-
tity fraud. It includes members from Department
components such as the U.S. Trustee Program,
the U.S. Attorneys’ offices, the Criminal Division,
and the FBI, as well as representatives from a
variety of federal agencies including the Internal
Revenue Service, the Department of Housing
and Urban Development’s Office of Inspector
General (HUD OIG), the Treasury Department,
the Social Security Administration’s Office of
Inspector General (SSA OIG), the Postal Inspec-
tion Service, the Veterans Administration, the
Federal Trade Commission, the Securities and
Exchange Commission, and the Commodities
Futures Trading Commission.
U.S. Trustee field offices participate in
approximately 60 local bankruptcy fraud working
groups, which may include representatives from
the U.S. Attorney’s office, FBI, Secret Service, IRS,
HUD OIG, U.S. Postal Inspection Service, SSA
OIG, and other federal law enforcement agen
-
cies. The local working groups discuss emerging
issues, develop criminal referrals, and provide
bankruptcy fraud training.
“Over the past year, the
Program enhanced its
criminal enforcement
efforts through increased
coordination and coopera
-
tion with the U.S. Attorney
community and our
federal law enforcement
partners. At the forefront
of these efforts has been
our participation in the
local bankruptcy fraud
working groups estab
-
lished in many districts.
Equally as important are
the dedicated efforts of
many Program attorneys,
paralegals, and analysts
who readily assist in the
investigation and prosecu
-
tion of bankruptcy fraud.
The synergy achieved
through this coordination
substantially advances the
Department’s ability to
protect the integrity of the
bankruptcy system.”
Richard E. Byrne, Chief
of Criminal Enforcement,
EOUST
Richard E. Byrne
29
30
Chapter 5
Litigation in Chapter 11 Business Reorganizations
Participants in Examiner Roundtable at Executive Office for U.S. Trustees
31
Litigation in Chapter 11 Business Reorganizations
Chapter 5
U.S. Trustee Duties in Chapter 11 Cases
The U.S. Trustee oversees many activities in
Chapter 11 reorganizations. The type and degree
of oversight activity depends on the size and nature
of the case. In all Chapter 11 cases, the U.S. Trustee
seeks to ensure that the case moves through the
system in a timely and efficient manner.
The U.S. Trustee oversees many activities in Chapter
11 reorganizations to ensure that cases move through
the system in a timely and efficient manner.
The U.S. Trustee performs certain tasks in all
Chapter 11 cases. These duties include:
• Reviewing First Day Orders. The U.S.
Trustee closely reviews the debtor’s requests for
emergency orders early in a bankruptcy case, and
ensures that the requested relief is tailored to the
circumstances. For example, debtors may seek
immediate court approval to retain professionals,
obtain emergency financing, and pay certain sup-
pliers. These requests may affect the rights of credi-
tors and alter their ability to negotiate the terms of
the debtor’s reorganization later in the case.
• Conducting Initial Debtor Interviews.
Immediately after a case is filed, the U.S. Trustee
contacts the debtor’s attorney to schedule an
“initial debtor interview” to discuss the debtor’s
financial situation and reasons for filing the case,
consider the debtor’s plans for reorganization, and
advise the debtor of its fiduciary obligations and
the U.S. Trustee’s role in case administration.
• Appointing Official Committees. As soon
as possible after a case is filed, the U.S. Trustee
appoints a committee of unsecured creditors.
The U.S. Trustee also evaluates whether addi-
tional official committees should be appointed
and engages in oversight of committee actions.
Each committee upholds the interests of the
creditor group it represents.
• Conducting Meetings of Creditors.
Within 20 to 60 days after a case is filed, the U.S.
Trustee schedules and presides at a meeting of
creditors, where the debtor or its representative is
examined under oath by the U.S. Trustee, the case
trustee, creditors, or other parties in interest.
• Appointing Chapter 11 Trustees and
Examiners. Although the debtor generally
remains in possession of its assets while reor-
ganizing in Chapter 11, the court may order the
appointment of a Chapter 11 trustee if it deter-
mines that cause exists or that the appointment
is in the best interest of creditors, equity holders,
and others with an interest in the estate. A trustee
“steps into the shoes” of the debtor’s operat-
ing management, and acts as a fiduciary for all
interested parties. As an alternative, the court
may decide to leave the debtor’s management in
place, but direct the appointment of an examiner
to investigate and report on the debtor’s conduct,
assets, liabilities, business operations, and finan-
cial conditions. If the court orders the appoint-
ment of a trustee or examiner, the U.S. Trustee,
after consultation with the parties and subject to
court approval, appoints a disinterested person
to serve in that capacity. In FY 2004, the U.S.
Trustee filed 123 motions to appoint a trustee
or examiner. During that period, 112 motions to
appoint a trustee or examiner were granted and
eight were denied.
• Monitoring Employment and Compen-
sation of Professionals. The U.S. Trustee reviews
and, if appropriate, objects to applications filed
by professionals seeking employment in the case,
payment of compensation, and/or reimburse-
ment of expenses. Professionals who serve in the
case and receive payment from the bankruptcy
estate might include attorneys, accountants, auc-
tioneers, financial advisors, turnaround special-
ists, and real estate brokers. The Bankruptcy
Code requires these professionals to be free of
interests adverse to the bankruptcy estate. Dur-
ing FY 2004, 5,402 formal actions and informal
32
inquiries initiated by U.S. Trustees regarding
employment and compensation of professionals
in both Chapter 7 and Chapter 11 cases resulted
in professional fee reductions and disgorgements
totaling over $50 million.
• Reviewing Reorganization Plans and
Disclosure Statements. The U.S. Trustee reviews
reorganization plans and disclosure statements
filed by parties to determine whether they pro-
vide adequate information. During FY 2004,
U.S. Trustees filed 702 objections to disclosure
statements and 345 objections to confirmation
of debtors’ plans. Objections to disclosure state-
ments were sustained in 518 cases, while con-
firmation was denied or plans were voluntarily
amended in 224 cases after a formal objection
had been filed. In 133 cases, debtors voluntarily
amended their plans of reorganization to comply
with the U.S. Trustee’s concerns without the need
for formal court action.
• Ensuring Compliance. The U.S. Trustee
determines whether all required schedules, state-
ments, and reports are timely filed, and that the
debtor manages money and assets consistent with
the Bankruptcy Code and with its fiduciary duty
to creditors. The debtor must file monthly oper-
ating reports that detail its financial condition
and allow the U.S. Trustee, the court, and par-
ties in interest to monitor the debtor’s progress
toward reorganization.
• Preventing Delay and Preserving Assets.
The U.S. Trustee takes action to prevent undue
delay by, for example, filing a motion to dismiss a
case, to convert a case to a Chapter 7 liquidation,
or to appoint a Chapter 11 trustee. During FY
2004, U.S. Trustees filed 3,307 motions to dismiss
or convert Chapter 11 cases. During the same
period, 2,771 motions to dismiss or convert were
granted and 131 were denied.
• Combating Fraud. The U.S. Trustee inves-
tigates criminal, fraudulent, or abusive conduct
for possible civil or criminal prosecution. The
U.S. Trustee pursues civil penalties, and refers
cases of apparent criminal fraud to the U.S. Attor-
ney for investigation and criminal prosecution.
In FY 2004 the Program dealt with a wide
range of Chapter 11 cases, including cases filed
by at least four major airlines and by two dio
-
ceses of the Roman Catholic Church. During
this period, two of the largest legacy air carriers,
United Air Lines Inc. and U.S. Airways Inc., as
well as Hawaiian Airlines and Aloha Airlines,
operated under bankruptcy protection. Major
issues in the airline cases included retaining or
rejecting labor agreements, renegotiating aircraft
lease payments, and retaining or terminating
defined benefit pension plans. The bankruptcy
filings by the Archdiocese of Portland, Ore., and
the Diocese of Tucson, Ariz., also raised complex
matters, primarily with respect to claims by vic-
tims of sexual abuse. Issues included the identi-
fication of potential sexual abuse claimants and
future claimants, the valuation of claims, and the
scope of bankruptcy estate assets available for
distribution to creditors.
Appointment of Trustee or Examiner
Pursuant to 11 U.S.C. § 1104, the U.S. Trustee
or any party in interest may seek the appointment
of a Chapter 11 trustee for cause including fraud,
dishonesty, incompetence, or gross mismanage-
ment of the affairs of the debtor by current man-
agement, either before or after the commence-
ment of the case. Alternatively, the U.S. Trustee or
any party may seek appointment of an examiner
to investigate the conduct of the debtor. Gener-
ally, an examiner is appointed where there are
questionable management activities, unexplained
irregularities in the debtor’s financial history or
practices, or other special factors. In certain cases,
the appointment of an examiner is mandated by
the Bankruptcy Code if an examiner is requested
by a party in interest.
33
John Daugherty
“This case called for
immediate action. The
debtor was being sued
by the Federal Trade
Commission and by
Attorneys General from
five states, and its tax-
exempt status was under
review by the Internal
Revenue Service. While
the FTC and state offi
-
cials had a wealth of
knowledge concerning
the debtor’s practices, we
were uniquely positioned
to investigate its cur
-
rent management. Our
analysts quickly learned
from a site visit that the
management had no
experience in managing
a distressed company and
no viable plan to emerge
from Chapter 11.”
John Daugherty,
Assistant U.S. Trustee,
Greenbelt
The Program works to ensure uniform moni-
toring of Chapter 11 cases throughout the coun-
try. This includes ongoing review of significant
legal issues, and consideration of future “best
practices” to ensure consistent application of the
bankruptcy laws. For example, in FY 2004 the
Executive Office for U.S. Trustees planned and
implemented a roundtable discussion on the role
of examiners, held in October 2004. The discus-
sion reviewed selected issues relating to the role
of the examiners in the high-profile and complex
cases of Enron Corp. and WorldCom Inc., and
identified lessons learned to inform future prac-
tices and procedures. The examiners in Enron
and WorldCom successfully carried out their
mission and produced final reports that were of
value to creditors, law enforcement agencies, and
the public. Roundtable participants included rep-
resentatives from the Department of Justice and
other federal agencies, as well as the Enron and
WorldCom examiners.
The roundtable discussion addressed five
major topics: the appointment and selection of an
examiner; terms of appointment orders; the coor-
dination of investigations with law enforcement
and regulatory authorities; the examiner’s interim
and final reports; and the disclosure of infor-
mation by the examiner outside of the reports.
Particular items of interest included delineating
the scope of the examiner’s duties; communi-
cating with other governmental participants in
the case; expressly providing that the examiner’s
investigation has primacy over the work of other
non-government agencies; limiting disclosure of
the examiner’s work product during and after the
investigation; sequencing the investigation and
producing smaller reports on specific or targeted
issues; and determining the examiner’s role in
investigating potential claims held by or against
the estate.
The U.S. Trustee may seek the appointment of a
Chapter 11 trustee for cause including fraud, dis
-
honesty, incompetence, or gross mismanagement of
the debtor’s affairs by current management. Alterna
-
tively, the U.S. Trustee may seek appointment of an
examiner to investigate the debtor’s conduct.
The following are examples of cases involving
appointment of a trustee or examiner:
• The Bankruptcy Court for the District
of Maryland granted a motion by the Greenbelt
office to appoint an examiner and, subsequently, a
trustee in the Chapter 11 case of a major national
credit counseling agency. The agency adminis
-
tered debt management plans for approximately
60,000 consumers when it filed bankruptcy. The
examiner concluded that the debtor had no plan
to reorganize, and that its former president may
have engaged in fraud by transferring a large part
of the debtor’s assets to a for-profit affiliate. After
the examiner issued this report, the debtor con-
sented to appointment of the trustee.
• The examiner appointed by the New York
office in the bankruptcy case of WorldCom Inc.
filed a report with the Bankruptcy Court for the
Southern District of New York. The report con-
tained findings regarding civil liability for World-
Com’s collapse and the appropriateness of the
company’s ongoing tax minimization program.
• The Bankruptcy Court for the Southern
District of Florida granted the Miami office’s
motion for appointment of a Chapter 11 trustee,
which was supported by secured lenders. The
debtors operated offshore gambling via the day
cruise industry. The debtors’ owner was murdered
before the bankruptcy filing; after the filing, his
probate estate sought removal of current manage-
ment. The probate estate held ownership interests
in the debtors as well as approximately $60 million
in subordinated secured debt that was subject
34
to an agreement with the other lenders. Despite
objections by the U.S. Trustee, the secured lend-
ers, and the creditors’ committee, the bankruptcy
court approved a settlement replacing current
management with management controlled by the
probate estate. The district court affirmed that
ruling, but the Eleventh Circuit Court of Appeals
reversed and vacated the settlement. The Eleventh
Circuit held that a conflict was created by the
relationship between the new management and
the debt held by the probate estate, and that the
replacement of management violated the lenders’
agreement. The motion to appoint a trustee was
based upon the Eleventh Circuit’s decision.
• An examiner appointed by the Wilm-
ington office filed a report with the Bankruptcy
Court for the District of Delaware containing
findings regarding the debtors’ concealment of
nonperforming loan receivables, double pledging
of collateral, and improper accounting practices,
and the complicity of certain officers and direc-
tors in those activities.
• The Brooklyn office appointed a Chapter
11 trustee in a case where a debtor’s law firm failed
to disclose that, before filing the case, it obtained a
“waiver letter” from the debtor’s secured creditor,
a bank that also provided financing during the
Chapter 11 case. The waiver letter stated that the
law firm would not represent the debtor in any
“disagreement” with the bank. The letter was not
disclosed until the U.S. Trustee, after learning that
the firm also represented the bank in an unrelated
Chapter 11 case, requested an affidavit detailing
the relationship between the firm and the bank in
this case. In addition to the issue of the waiver let-
ter, the case involved allegations that the debtor’s
insiders were directing business from the debtor
to non-debtor related companies.
Employment and Compensation of
Professionals
The Program monitors professionals who
serve in bankruptcy cases–such as attorneys,
accountants, auctioneers, real estate brokers, and
financial advisors–to ensure full disclosure of
potential conflicts that may affect a professional’s
disinterestedness, compliance with the law, and
reasonable compensation.
The Program monitors professionals who serve
in bankruptcy cases to ensure full disclosure of
potential conflicts that may affect a professional’s
disinterestedness, compliance with the law, and rea-
sonable compensation.
Examples of cases involving professional fees
include the following:
• The Court of Appeals for the Sixth Circuit
determined that a former Chapter 11 profes-
sional was compelled to disgorge interim com-
pensation after the debtor’s case was converted
to Chapter 7 and there were insufficient funds
to pay all administrative costs. The Bankruptcy
Code requires pro rata payment within simi-
larly situated classes of claimants. The debtor’s
attorney had received a retainer from which his
hourly compensation was to be drawn after court
approval. After the case was converted to Chapter
7, the court approved interim payment from the
retainer. At the end of the case, the bankruptcy
estate did not have enough to pay all administra-
tive costs. The attorney was ordered to return
the difference between his interim compensation
and his pro rata share, so that all five entities
with administrative claims in the Chapter 11
case could receive payment. He objected to the
disgorgement. The bankruptcy court, district
court, and court of appeals all agreed with the
U.S. Trustee, ruling that the disgorgement was
35
mandatory to achieve pro rata payment of all
administrative claimants.
• The Court of Appeals for the Seventh
Circuit ruled for the U.S. Trustee in a case where
the debtor sought administrative expense prior-
ity for attorneys’ fees incurred in defending an
action against the bankruptcy trustee. The debtor
relied upon a U.S. Supreme Court decision in
which a trustee’s negligence gave rise to dam-
ages that were entitled to priority payment. The
appeals court affirmed the decisions by both the
bankruptcy court and the district court that the
Supreme Court case did not apply here.
• Citing the Tulsa office’s arguments regard-
ing the need for counsel to be free of conflicting
loyalties, the Bankruptcy Court for the Northern
District of Oklahoma denied a law firm’s appli-
cation as counsel for a Chapter 11 debtor. The
firm disclosed it intended to serve as debtor’s
counsel while continuing to represent the parent
company, which held a $9 million claim against
the debtor. In the same case, the bankruptcy
court significantly modified the terms of employ-
ment for the debtor’s chief restructuring officer.
The U.S. Trustee argued the proposed expansive
indemnity agreement far exceeded the protec-
tions that should reasonably be provided under
the circumstances of the case. The court struck
the indemnity agreement, as well as a provision to
award a $300,000 success fee if a substantial por-
tion of the estate’s assets were sold. The court indi-
cated the Bankruptcy Code provides procedures
under which professionals who achieve excep-
tional results may request fee enhancements.
• The Bankruptcy Court for the Northern
District of Georgia denied in part the compensa
-
tion requested by a Chapter 11 debtor’s consultant
and tax service provider that sought $834,593 in
fees and $15,981 in expenses. The Atlanta office
objected to the request, seeking partial denial
because the provider was not continuously dis-
interested: for part of the time during which the
debtor marketed its assets, the provider repre-
sented the debtor as well as a potential acquirer of
the assets. Finding the provider not continuously
disinterested, the court denied $324,384 in com-
pensation and $3,764 in expenses.
• A law firm agreed to withdraw as Chapter
11 debtor’s counsel after the Wilmington office
filed an objection challenging the retention for
lack of disinterestedness and actual conflicts of
interest. The firm also agreed not to seek approxi-
mately $160,000 in compensation for the value of
services provided to the debtor, or to seek out-of-
pocket expenses. The firm regularly represented
the debtor’s largest shareholder, which held 62
percent of the debtor and became a secured credi-
tor within two months before the bankruptcy
filing. In addition, it simultaneously represented
multiple parties, including the largest shareholder
and the debtor’s CEO, in a proposed merger
transaction that terminated on the eve of bank-
ruptcy. The firm failed to fully disclose much of
this information in its application for retention.
• The Boston office obtained professional
fee reductions totaling $896,899 in five related
Chapter 11 cases. A Chapter 11 trustee had been
appointed to conduct sales of, and/or shut down,
the debtors’ facilities. Six financial advisors and
attorneys employed by the debtor and the credi-
tors’ committee sought fees exceeding $3 million,
but the U.S. Trustee objected, arguing their efforts
did not benefit the estate, which had become
administratively insolvent. The U.S. Trustee
obtained reductions averaging 30 percent, and
certain professionals further agreed to subordi-
nate part of their approved fees to administrative
claims asserted by post-petition trade creditors.
• The Bankruptcy Court for the District
of Nevada reduced by 50 percent the fees of the
general bankruptcy counsel for a Chapter 11
debtor and disqualified two other firms as special
counsel–in total, saving the estate $521,000 in
fees. The general bankruptcy counsel had failed
“This case highlighted
the U.S. Trustee’s key role
in providing oversight in
Chapter 11 cases, protecting
the interests of unsecured
creditors, and helping to
ensure that parties adhere
to the requirements of the
Bankruptcy Code. The
proposed debtor’s counsel
had served as the law firm
for the parent company
and all of its subsidiaries
for over 50 years. The firm
thought it could continue
in that role regardless of
the intervening bankruptcy,
even though for decades it
had presided over the inter
-
twined transactions of the
related entities.”
Katherine Vance, Assistant
U.S. Trustee, Tulsa
Katherine Vance
36
Jennifer Braun
“The debtors provided
hundreds of photocopied
pictures of what they
claimed were Ming and
Song dynasty artifacts,
which they called ‘the
treasure.’ They said they
recovered the artifacts
from underwater wrecks
and stored them in Kuala
Lumpur, New Jersey, Los
Angeles, Las Vegas, and
Tampa. Trial Attorney
Marjorie Lakin Erickson
and Bankruptcy Analyst
George Griffith showed
that the debtors’ repeated
inconsistent statements
regarding which individu
-
als and companies alleg
-
edly owned these assets,
and their failure to prop
-
erly insure ‘the treasure’
or account for their finan
-
cial affairs, required the
conversion of the case and
appointment of a Chapter
7 trustee.”
Jennifer Braun,
Assistant U.S. Trustee,
Woodland Hills
to timely seek his or special counsel’s appoint-
ment. Eleven months into the case, on the eve of
a hearing, two firms sought retroactive approval
of appointment as special counsel. The Las Vegas
office objected due to conflicts and the lack of a
basis for retroactive appointment, but the court
approved limited appointments. The U.S. Trustee
sought reconsideration and moved for disquali-
fication based on actual conflicts and one firm’s
lack of candor regarding its prior representation
of insiders. The court found the firms had actual
conflicts, vacated the prior orders, and disquali-
fied the firms.
• The Bankruptcy Court for the District of
Delaware sustained the Wilmington office’s objec-
tions to almost $2.5 million in applications for
compensation and reimbursement from various
professionals and others in a Chapter 11 case. The
court denied requests from the debtor’s financial
adviser for a $1.5 million success fee; a creditors’
committee member and associated parties who
argued they made a “substantial contribution” to
the bankruptcy estate; and two shareholders and
their counsel who argued they made a “substan-
tial contribution” by seeking appointment of an
examiner.
• A law firm withdrew as Chapter 11 debt-
or’s counsel and withdrew its application for
compensation of $83,710 and reimbursement
of $6,782 in expenses, after the Sioux Falls office
moved to vacate the appointment order. In the
application for employment and affidavit of dis-
interestedness, the debtor and the law firm indi-
cated the firm had no prior relationship with any
creditor. However, the U.S. Trustee discovered a
prior relationship between the firm and a group
of investors in the debtor who were also creditors
in the case. It appeared that the investors directed
much of the law firm’s work. After withdrawing
as debtor’s counsel, the law firm filed a notice of
appearance for the investors.
Preventing Delay and Preserving Assets
The U.S. Trustee takes action to prevent
undue delay in Chapter 11 cases and to ensure
that proper procedures are followed to preserve
and enhance the value of estate assets for poten-
tial distribution to creditors. For example:
• On motion of the Woodland Hills office,
the case of a married couple who recovered
ancient artifacts from wrecks at sea was con-
verted from a Chapter 11 reorganization to a
Chapter 7 liquidation by the Bankruptcy Court
for the Central District of California. The court
ordered the debtors to cease all business opera-
tions and turn over all assets to the Chapter 7
trustee. The debtors listed $10 million in artifacts
allegedly located around the United States and in
Kuala Lumpur. At the Section 341 meeting they
disclosed they may have an additional $5 million
in other antiquities, as well as approximately 400
pieces they might own in the Philippines. They
conceded they had no inventory list or insurance,
had not filed tax returns, and may have put the
assets in the name of one of their companies.
The U.S. Trustee takes action to prevent undue delay
in Chapter 11 cases and to ensure that proper pro
-
cedures are followed to preserve and enhance the
value of estate assets for potential distribution
to creditors.
• In a ruling that ensured priority pay-
ment of approximately $190,000 in gift certificate
claims, the Bankruptcy Court for the District of
Delaware sustained the Wilmington office’s objec-
tion to a Chapter 11 liquidation plan proposed by
the debtor and the unsecured creditors’ commit-
tee. The bankruptcy court agreed with the U.S.
Trustee that the meaning of the statutory term
“deposits” was not limited to down payments or
partial payments for specific merchandise.
37
38
the debtor. At the Section 341 meeting, more than
400 angry investors and purchasers of cars with
no titles confronted the debtors’ principals.
Security officers from the U.S. Marshal were
present to keep the peace.
• Based on the U.S. Trustee’s objections, Chap
-
ter 11 debtor Lagniappe Hospital Inc. and its
owner Camelot Healthcare LLC agreed to return
$600,000 to the debtor and the debtor’s health
insurance claims account and to pay $940,790 in
post-petition federal and state taxes. The bank-
ruptcy analyst in the Shreveport office discovered
unauthorized payments and misdirected funds,
and negotiated the stipulations for the pay-
ments.
• Agreeing with the Pittsburgh office and the
Chapter 11 trustee for Life Service Systems Inc.,
the Bankruptcy Court for the Western District of
Pennsylvania ruled that a transaction involving a
member of the unsecured creditors’ committee
may constitute a breach of fiduciary duty even
if the transaction does not involve bankruptcy
estate property. A member of the creditors’ com
-
mittee in the bankruptcy case of Life Service Sys-
tems conspired with an entity that controlled the
debtor to transfer valuable Housing and Urban
Development grants from the debtor to the com-
mittee member. The Court of Appeals for the
Third Circuit ruled that the grants did not belong
to the bankruptcy estate, but sent the case back
for the bankruptcy court to determine whether
the committee member nonetheless breached its
fiduciary duty. On remand, the bankruptcy court
upheld the position of the U.S. Trustee and the
Chapter 11 trustee that the committee member’s
actions violated its fiduciary duty to act on behalf
of all unsecured creditors.
Chapter 6
Trustee Oversight
Photo 1: Linda Aguilar, Darlene Walker
Photo 2: First row: RaNae Inghram, assistant to Chapter 7 trustee Jim Inghram; Chapter 7 trustees Jim Inghram, Cindy Hagan; Second row: Chapter 7 trustees Bob Bruegge, John Swartz;
Third row: Chapter 7 trustees John Maloney, Glenn Barmann; Vicky Giesen, assistant to Chapter 7 trustee Michelle Vieira; Chapter 7 trustees Michelle Vieira, Laura Grandy; Fourth row:
Mark Skaggs, Sabrina Petesch, Eulunice Boddie, Jennie Gallagher, Joyce Barnett
39
Chapter 6
Bankruptcy cases in Chapters 7, 12, and 13
are administered by private bankruptcy trustees
appointed and supervised by the U.S. Trustee.
The private trustee administers assets for the
benefit of creditors and has the legal duty to act
in the best interest of creditors and the estate.
The U.S. Trustee Program promotes the effec-
tiveness of the bankruptcy system by appointing
and supervising private trustees who administer
bankruptcy cases expeditiously and maximize the
return to creditors. The Program trains trustees
and evaluates their overall performance, reviews
their financial operations, ensures the effective
administration of estate assets, and intervenes to
prevent loss of estate assets when embezzlement,
mismanagement, or other improper activity is
discovered. In such cases, the Program organizes
a team of professionals to reconstruct finan-
cial records and assist in any civil and criminal
enforcement actions.
Chapter 7 Trustees
Trustees administering Chapter 7 cases
closed more than 47,000 asset cases during FY
2004, generating $1.63 billion in funds. This is
the largest number of asset cases closed in one
year since the Program began keeping these
records in 1992.
Trustees administering Chapter 7 cases closed more
than 47,000 asset cases during FY 2004, generating
$1.63 billion in funds.
Appointment
Chapter 7 trustees are often referred to as
“panel trustees” because they are appointed by
the U.S. Trustee to a panel in each judicial dis-
trict, for a one-year renewable term. Panel trust-
ees are not government employees, and many
of them have a separate business or profession
such as a law or accounting practice. A trustee’s
appointment to the panel is conditioned upon the
successful completion of a background investiga-
tion, and trustees are subject to re-investigation
every five years.
Once the trustees are appointed to the panel,
Chapter 7 cases generally are assigned to each
trustee through a blind rotation process. The
Chapter 7 trustee collects the debtor’s assets that
are not exempt from creditors, liquidates them,
and distributes the proceeds to creditors. As of
September 30, 2004, 1,222 trustees served on
Chapter 7 panels throughout the United States
and its territories (excluding North Carolina and
Alabama). Chapter 7 trustees were appointed to
1,114,622 cases in FY 2004.
Oversight Duties
In FY 2004, the Program focused on strength
-
ening panel trustee accountability, increasing the
number of smaller asset cases administered for
the benefit of creditors, and further streamlining
panel trustee oversight.
The Program worked with the National Asso-
ciation of Bankruptcy Trustees, a membership
organization of panel trustees, to obtain adop-
tion of a Chapter 7 Trustee Pledge of Excellence.
Modeled after the Standing Trustee Pledge of
Excellence adopted in FY 2002 by the trustees
who administer cases under Chapters 12 and 13,
the Chapter 7 Pledge of Excellence serves as a
reminder that Chapter 7 trustees are committed
to excellence in the administration of bankruptcy
cases and carry out their duties with integrity, dil-
igence, and professionalism. Copies of the pledge
were distributed to all Program field offices and
Chapter 7 trustees in the geographic areas served
by the Program.
Program staff conducted numerous local
conferences and meetings to help trustees improve
their administration of cases. Many of these ses-
sions focused on the proper administration of
smaller asset cases, which generally results in a
40
significant return to unsecured creditors at a rela-
tively low cost.
Since FY 2001, the Program has undertaken
steps to streamline its oversight of Chapter 7
trustees, continuously reviewing its activities and
procedures for cost- and time-saving oppor-
tunities. In FY 2004, the Program made policy
changes to facilitate electronic record keeping and
maintenance of paperless accounting systems by
Chapter 7 trustees, and to reduce administrative
requirements relating to review of trustee final
reports and final accounts. The Program also
implemented policies governing the applicability
of the Check Clearing for the 21st Century Act to
Chapter 7 case administration.
Chapter 12 and Chapter 13 Trustees
Nationwide, the standing Chapter 13 trustees
collected almost $5 billion in FY 2004, averaging
approximately $26 million per trustee, with the
largest trustee operations administering over $100
million. During the same period, the Chapter 12
trustees collected almost $33 million, averaging
more than $634,000 per trustee.
Chapter 13 trustees collected almost $5 billion in FY
2004, averaging approximately $26 million per trust
-
ee, with the largest trustee operations administer
-
ing over $100 million. Chapter 12 trustees collected
almost $33 million, averaging more than $634,000
per trustee.
Appointment
Chapter 12 and Chapter 13 cases are filed by
debtors who are, respectively, family farmers and
individuals with regular income. Chapter 12 and
Chapter 13 trustees are called “standing trustees”
because, pursuant to statute, they have a standing
appointment from the U.S. Trustee to administer
cases within a particular geographic area. Stand-
ing trustees evaluate the financial affairs of the
debtor, make recommendations to the court
regarding confirmation of the debtor’s repayment
plan, and administer the court-approved plan by
collecting payments from the debtor and disburs-
ing the funds to creditors.
Standing trustees are not government employ-
ees. The qualifications for appointment as a stand-
ing trustee are established by the Attorney General
under 28 U.S.C. § 586(d) and published at 28 C.F.R.
§ 58. A standing trustee appointment may result
from the departure of a prior trustee or the need
for an additional trustee in a geographic area. The
appointment of a standing trustee is conditioned
upon the successful completion of a background
investigation, and standing trustees are subject to
re-investigation every five years. During FY 2004,
there were 189 Chapter 13 standing trustees and
48 Chapter 12 standing trustees.
Standing trustee operations vary from place
to place. For example, some trustees are assigned
an entire state, while others handle cases in a sin-
gle metropolitan area. Some are the sole trustee
in a geographic area; some share a geographic
area with other trustees. Staff sizes range from
two employees to 49. These differences arise from
the need to accommodate variances in filing rates
and population density.
Oversight Duties
The Program is responsible for maintaining
the integrity of the bankruptcy system, and thus
its standing trustee oversight activities emphasize
supervision of standing trustees and cases, as well
as control of the trust funds.
Given the significant volume of funds flow
-
ing through the standing trustee operations, the
Program must ensure that trust funds are ade-
quately protected from theft and from incorrect
disbursement caused by inadequate or faulty pro-
cedures. The Program uses several mechanisms
to review case administration, financial controls,
and other aspects of trust activity.
41
Chapter 13 trustees are audited annually
by independent accounting firms; Chapter 12
trustees, who administer a significantly lower
volume of receipts, are audited every three years.
These audits cover not only financial matters but
also management issues such as compliance with
Program policies and internal control processes.
Program staff work with standing trustees to
resolve deficiencies disclosed in the audits. During
FY 2004, audits were conducted on all Chapter 13
trustees.
As an additional monitoring tool, Program
staff periodically evaluate the standing trustees
in several key performance areas. The trustees
receive a written evaluation report. All Chapter 13
trustees were evaluated in FY 2004.
Moreover, local Program staff visit trustee
offices to review and report upon case administra-
tion and financial controls. In addition, in special
circumstances the Program may send a team of
attorneys and analysts with expertise in Chapter
13 oversight to review a standing trustee’s prac-
tices and procedures and make recommendations.
Two such reviews were conducted in FY 2004.
The principles set forth in the Standing Trust-
ee Pledge of Excellence, adopted by the standing
trustees in FY 2002, continue to guide the standing
trustees in the administration of cases. The prin-
ciples identify core themes in terms of a Chapter
13 trustee’s commitment to service. They make
clear that the standing trustees agree to provide
creditors, debtors, attorneys, judges, and others
with service that adheres to the highest standards
of professional, moral, and ethical conduct.
Computer Security
Distribution of fiduciary funds in a manner
that ensures accuracy and safety requires increas
-
ing reliance upon information technology. To help
standing trustees protect their computer systems
and mitigate risks to both funds and data, in FY
2003 the National Association of Chapter Thir-
teen Trustees (NACTT), with the assistance of the
Program, launched an information technology
security initiative, the Standing Trustee Alliance
for Computer Security or STACS. STACS is run
by an independent contractor selected by NACTT
after a competitive bid process. By the end of FY
2004, more than half of the Chapter 13 trustees
participated in STACS.
Distribution of fiduciary funds in a manner that
ensures accuracy and safety requires increasing reli
-
ance upon information technology.
STACS features include annual security
assessments of all information technology ser-
vices, including Internet and telecommunica-
tions services; security awareness training and
materials; assistance with implementation and
maintenance of security tools such as firewalls
and intrusion detection systems; computer virus
noticing and remedies; and a unique set of best
practices for the standing trustees.
Trustee Training
The Program conducts and participates in
local and regional training sessions and helps
to establish mentoring relationships between
experienced and “newer” trustees. Program staff
regularly coordinate with the trustees’ profes-
sional organizations to provide programs with a
national perspective during their conferences.
In FY 2003, the Program launched a uniform
national training session for recently appointed
Chapter 13 trustees at the National Bankruptcy
Training Institute, which is located at the Nation-
al Advocacy Center, a Department training facil-
ity on the campus of the University of South
Carolina in Columbia. In FY 2004, the Program
initiated a similar training session for recently
appointed Chapter 7 trustees. (See Chapter 9.)
42
Chapter 7
Planning, Evaluation, and Communications
Photo 1: Clifford J. White, III; Bankruptcy Judge A. Thomas Small, Eastern District of North Carolina; Christopher Cannon, Chairman, Subcommit-
tee on Commercial and Administrative Law, Committee on the Judiciary, U.S. House of Representatives
Photo 2: Jeanne Howell, Karen Bakewell, Ed Flynn, Pat Santos, Steven Dillingham, Jane Limprecht, Bonita Soley, Sondra Martin-Holley
43
The need to demonstrate and measure results
is imperative for all federal programs. The Pro-
gram engages in planning to ensure that it car-
ries out its mission with clear goals and achieves
measurable results. In addition, the Program
conducts and coordinates research and evalua-
tion, and engages in public outreach, to ensure
accountability in its activities, improve its poli-
cies and practices, and expand general knowledge
about the bankruptcy system.
Planning
The mission of the U.S. Trustee Program, as
set forth in the Department of Justice’s Strategic
Plan for Fiscal Years 2003-2008, is to “Protect the
integrity and ensure the effective operation of the
Nation’s bankruptcy system.”
In FY 2004, the Program began to develop its
strategic plan covering FY 2005 through FY 2010,
with goals clearly aligned with specific objectives
and measures. The Program’s plan reflects its
continuing transformation into a high-perfor-
mance, litigating component of the Department.
Pursuant to the plan, the Program’s primary
goals are to:
• Protect the integrity of the nation’s bank
-
ruptcy system.
• Promote effectiveness and efficiency with
-
in the nation’s bankruptcy system.
• Maintain operational excellence that
achieves desired results through continuous
improvements in administration and services.
The Program began to develop its strategic plan cov-
ering FY 2005 through FY 2010, with goals clearly
aligned with specific objectives and measures. The
Program’s plan reflects its continuing transforma-
tion into a high-performance, litigating component
of the Department of Justice.
The Program’s strategic plan, to be dis-
tributed to all employees in FY 2005, discusses
the Program’s mission, vision, values, goals,
challenges, evaluations, and partnerships. The
plan provides a foundation for future strategic
planning and continuous operational improve-
ments. It will be reviewed and revised annually,
and will be consistent with the requirements of
the Government Performance and Results Act of
1993 and the President’s Management Agenda.
It will also tie into the Department’s Strategic
Plan and the Attorney General’s Management
Initiatives. The plan will be integral to the Office
of Management and Budget’s (OMB) Program
Assessment Rating Tool (PART) review of the
U.S. Trustee Program.
In FY 2004 the Program began preparing
for the OMB’s PART review, to be completed in
FY 2005. The PART was developed to assess and
improve program performance so the federal
government can achieve better results. The review
helps identify a program’s strengths and weakness-
es, to inform funding and management decisions
aimed at making the program more effective.
Factors that affect and reflect a program’s
performance review include:
• Purpose and design, to assess whether
the program’s purpose and design are clear and
sound.
• Strategic planning, to assess whether the
program has valid long-term and annual mea
-
sures and targets.
• Management, to rate agency manage-
ment, including financial oversight and program
improvement efforts.
• Results/accountability, to rate program
performance on measures and targets reviewed
in the strategic planning section and through
evaluations.
The review includes a consistent series of
analytical questions and allows programs to show
improvements over time.
Chapter 7
44
Performance Measurement
The measurement of agency performance is
central to ensuring that the Program successfully
implements performance-based management
practices and operates as a high-performance
organization. The Program recognizes that the
potential of its strategies and plans ultimate-
ly depends upon execution and performance.
Accordingly, performance measures are critical
to closing potential strategy-to-performance gaps
often experienced in organizations.
In FY 2004 the Program began implement-
ing a “balanced scorecard” approach to tracking
its performance. This approach involves consid-
ering and weighing competing and alternative
factors, including: financial and non-financial
factors, internal and external factors, and lag and
leading indicators of performance. The develop-
ment and enhancement of Program performance
measures was the topic of briefings to senior
Department officials, senior Program managers,
and Program employees. The discussions focused
upon the use and importance of performance
measures and the development of improved mea-
surement systems.
The Program embraced three primary goals
and identified various objectives that promote
those goals. For example, the first Program goal
of “protecting the integrity of the bankruptcy
system” is served through the objective of “ensur-
ing compliance with bankruptcy laws and rules.”
Measures for this objective include formal and
informal enforcement actions, such as: substan-
tial abuse motions, objections to debt discharge,
and motions/complaints against petition prepar-
ers, attorneys, creditors, and others. Other mea-
sures of compliance include: criminal referrals
and case assistance; dollars discharged and not
discharged; and results of financial reviews and
audits. Throughout its performance enhancement
initiatives, the Program seeks to identify and mea-
sure objectives that are vital to the Program’ s goals
and that evidence progress in obtaining results.
The Program continues to analyze opera-
tional data, both nationally and at regional and
field levels, for the purpose of measuring orga-
nizational performance. The types of analytical
reports include staffing and workload analyses
used internally to allocate resources and increase
efficiency. Similarly, Program analyses and per-
formance data are used in reporting externally
to oversight entities and the public. The Program
continues to align its goals, objectives, and mea-
sures–and to link them to its strategies–as part
of its long-term commitment to performance
improvements.
Evaluation
Data Collection and Statistics
To measure and evaluate performance, the
Program maintains various databases to sup-
ply statistical information. This information is
used in various ways, including preparing the
Program’s budget requests and responding to
Congressional inquires. Additionally, operational
analysis and reports are provided to manage-
ment. Ensuring and maintaining data integrity
on a continuing basis is, therefore, paramount.
To measure and evaluate performance, the Program
maintains various databases to supply statistical
information. Ensuring and maintaining data integ
-
rity on a continuing basis is paramount.
To assist with this process, the Program has
established working groups such as the Signifi-
cant Accomplishments Reporting System Work-
ing Group. These working groups, which include
Assistant U.S. Trustees and staff from the Execu-
tive Office, review reports, data entries, and defi-
nitions to identify common errors and incorrect
or incomplete entries. The working groups also
45
recommend solutions and provide training to
address deficiencies or changes to data and/or
definitions.
The Program will create a Data Integrity
Group in FY 2005 to oversee the data integrity
operations of major databases such as the Sig-
nificant Accomplishments Reporting System, the
Criminal Enforcement Tracking System, and the
Professional Timekeeping System. Once data is
reviewed, it is made available to the Program and
is often posted on the Program’s Intranet site. A
summary of key data is provided to the public
and made available on the Program’s public
Internet site.
Debtor Audit Pilot Project
During FY 2004, the Program engaged in a
six-month pilot project to assess the most effec
-
tive methods for verifying the accuracy, verac-
ity, and completeness of information reported
by individual Chapter 7 debtors in their peti-
tions, schedules, and statements. Program staff
in 10 pilot offices selected 1,561 cases, either
randomly or via targeted criteria, for review by
certified public and forensic accounting and
investigative firms.
Debtors whose cases were chosen for audit
were requested to answer a number of questions
and provide certain documents. The accounting
and investigative firms reviewed the responses
and documents, and searched commercial and
public databases to determine whether debtors
had materially misstated income, expenditures,
or assets.
Results from the pilot project informed the
Program regarding the use of external auditors in
identifying misstatements and errors commonly
found on debtors’ schedules and statements. This
project is critical to the Program’s future efforts
to assess types and potential levels of fraud,
abuse, and error in the bankruptcy system, as
well as options for safeguarding the accuracy of
bankruptcy filings.
National Study on Fraud, Abuse, and Error
Building upon the result of the debtor audit
pilot project, in FY 2004 the Program began its
plans for a national study to examine fraud, abuse,
and error in the bankruptcy system. The study will
be conducted by a reputable research entity and
coordinated by the National Institute of Justice,
an evaluation component of the Department. The
research effort will include scholars, practitioners,
and representatives of organizations and entities
responsible for ensuring accountability and integ-
rity within the bankruptcy system.
The national study will focus on two pri-
mary areas. First, the study will obtain practical,
applied information through methods such as
reviewing research literature and practices per-
tinent to bankruptcy fraud, abuse, and errors.
Second, the study will engage in evaluation and
research, identifying promising approaches for
preventing and responding to fraud, abuse, and
errors in the bankruptcy system.
Communications
Congressional Affairs
Program staff coordinate with the Depart-
ment’s Office of Legislative Affairs (OLA) to
respond to inquiries regarding bankruptcy-relat-
ed legislative initiatives. Responses on behalf of
the Program are prepared and submitted through
OLA to requests and inquiries from Congres-
sional committees, members of Congress, and
their staffs. In addition, Program staff provide
guidance to field personnel regarding communi-
cations with local officials.
Public Affairs
Program staff participate in a variety of out
-
reach activities that increase public knowledge
about the nation’s legal and bankruptcy systems,
ranging from hosting foreign officials to provid-
ing information at community fairs.
46
Program staff participate in outreach activities that
increase public knowledge about the nation’s legal
and bankruptcy systems, ranging from hosting for
-
eign officials to providing information at commu
-
nity fairs. The Program also promotes financial edu
-
cation outreach efforts that help consumers improve
their money management skills.
The Program’s web site at www.usdoj.gov/ust
provides a convenient resource for bankruptcy
practitioners, consumers, the media, and other
site visitors. The site’s contents include: the Pro-
gram’s Annual Report of Significant Accomplish-
ments; contact information for every Program
office and every private Chapter 7, 12, and 13
trustee; links to U.S. Trustee regional web sites,
which contain information on local procedures
and issues; a library of bankruptcy-related articles
written by Program staff; press releases and fact
sheets; Program manuals, handbooks, forms, and
similar materials; and regulations promulgated
by the Program, as well as administrative rulings
issued under those regulations.
To increase public understanding about
bankruptcy and the U.S. Trustees’ responsibilities
and policies, the Program serves as a resource for
media inquiries about bankruptcy and publishes
regular columns in several publications. Program
employees also write articles for bar association
journals, accountancy journals, and other profes-
sional publications.
Financial Education Outreach
The Program also promotes financial educa
-
tion outreach efforts that help consumers under-
stand how to manage their money and perhaps
avoid the financial distress that leads to bank-
ruptcy. The Program embraces and encourages
financial education programs that help consum-
ers improve their money management skills. Pro-
gram staff work with judges, bankruptcy trustees,
lawyers, and others to encourage educational
programs for consumers. In addition, the Pro
-
gram forms partnerships with other government
agencies and community groups to promote
financial management education.
In FY 2004 the Program developed a bro-
chure providing basic financial education point-
ers and linking to other online resources. This
brochure was widely distributed and was posted
on the Program’s Internet site. The Program also
worked with Chapter 13 trustees who conduct
financial education classes for debtors in repay-
ment plans. In addition, Program employees
volunteered to teach basic financial education
information in schools, community fairs, and
other locations.
The following are examples of Program
involvement in financial education outreach:
• Lawrence Friedman, Director of the Exec
-
utive Office for U.S. Trustees in FY 2004, joined
Chief Bankruptcy Judge John C. Ninfo, II, of the
Western District of New York and other offi-
cials to present a financial education program
to approximately 500 high school juniors and
seniors in West Bloomfield, Mich. The presenta-
tion was drawn from the Credit Abuse Resis-
tance Education (CARE) Program developed
by the judge, and was videotaped for the school
district’s cable television network. The CARE
Program enlists bankruptcy judges, U.S. Trustee
personnel, private trustees, and attorneys to alert
middle school, high school, and college students
to the serious consequences of financial illiteracy
and mismanagement of money.
• Working with immigrant societies, the
Chicago office gave presentations on money man
-
agement and the wise use of credit to groups of
immigrants from China, Cambodia, and Russia.
• The Rochester Assistant U.S. Trustee par
-
ticipated in CARE Program presentations to
educate high school and college students on basic
47
principles of financial management, with the goal
of helping them avoid future financial distress
that can lead to bankruptcy.
• A trial attorney in Wilmington provided
volunteer financial education training to Chap
-
ter 13 debtors in cooperation with a Chapter
13 trustee and a bankruptcy judge’s law clerk.
He discussed financial planning, budgeting, and
money saving techniques to assist Chapter 13
debtors in completing their repayment plans.
48
Chapter 8
Information Systems and Technology
Photo 1: Mary McKinnon, Linda Petronchak, Krishna Singho, Linda Johnson, Monique Bourque
Photo 2: First row: Dan Ebright, Keith Manikowsk; Second row: Bernadette Onstad, Debbie Malik, Mary McKinnon
49
The sustained growth in bankruptcy case
filings, the federal court system’s migration to
electronic case filing, and the Program’s increased
focus upon civil and criminal enforcement require
continued enhancement of information technol-
ogy systems. During FY 2004, the Program con-
tinued to modernize its automated case manage-
ment system, pilot-tested and implemented the
new Criminal Enforcement Tracking System, and
pilot-tested digital recording technology, while
launching several other new automation efforts
and enhancing existing ones. The Program also
maintained the automated systems it uses to per-
form core functions that include managing more
than one million new cases each year, supervising
private trustees, appearing as a party in court,
and collecting statutorily imposed fees.
The Program continued to modernize its automated
case management system, pilot-tested and imple
-
mented the new Criminal Enforcement Tracking
System, and pilot-tested digital recording technol
-
ogy, while launching other new automation efforts
and enhancing existing ones.
Criminal Enforcement Tracking System
In FY 2004, after conducting a pilot test
in several offices, the Program implemented a
nationwide Criminal Enforcement Tracking Sys-
tem (CETS) to track preliminary allegations, the
Program’s criminal referrals, and the Program’s
assistance in investigations by law enforcement
agencies. CETS allows a user to initiate a file on
a preliminary allegation or assistance with an
investigation; enter basic information concern-
ing the allegation or assistance; enter actions and
events such as referral, assignment of case num-
ber, indictment, disposition, and sentencing; and
record comments.
CETS helps the Program track criminal enforce
-
ment efforts and provides more accurate and
timely information to the Department, Congress,
and others concerned about the investigation and
prosecution of bankruptcy fraud.
Automated Case Management System
The Program’s work has long been support
-
ed by a decentralized case management system
called the Automated Case Management System
(ACMS), designed to support the U.S. Trustees’
role in managing bankruptcy cases and monitor-
ing the work of private trustees. In FY 2001, the
Program began modernizing ACMS to improve
user access, integrate multiple data bases, and
meet the long-term goal of a centralized comput-
ing system.
The first step in this process involved rewrit-
ing the original code to allow ACMS data to
be combined with information in other data
bases and applications. In FY 2003, the Program
began to copy or “replicate” daily data from three
pilot regions to a central data base. This effort
was expanded and completed in FY 2004, and
the Program now has a central repository of all
critical ACMS data. Also in FY 2004, the Program
procured the equipment necessary to function as
the centralized computing system and provide a
duplicate system at an offsite location in the event
of a disaster.
Electronic Case Filing
Over the past several years, the federal courts
have moved toward the use of an Internet-based
electronic case filing system (ECF or e-filing) for
the electronic submission of documents to, from,
and within the courts. The bankruptcy courts
are at the forefront of this move. By the end of
FY 2004, 13 more bankruptcy courts had imple-
mented ECF, for a total of 70 out of 94.
ECF offers many advantages, including the
ability of parties to file pleadings and retrieve
Chapter 8
50
electronically filed documents from any loca-
tion at any time. Further, ECF reduces the delay
between the time a document is electronically
filed with the court and the time it is available to
the public for review.
Nevertheless, ECF also creates some dif-
ficulties that Department and Program officials
continue to address. For example, because of
the large volume of bankruptcy filings, Program
offices must manage thousands of e-mail mes-
sages they receive as a result of electronic service.
Other issues include the use of electronic signa-
tures and authentication of documents, e-fraud,
privacy concerns, and new case management and
archiving techniques. The Program also faces new
costs for its basic operations, including court-
imposed access fees, and costs for required soft-
ware and hardware such as scanners, personal
computers, and printers.
In FY 2004, senior Program officials contin-
ued to work with representatives of the Depart-
ment and the Judiciary to address these matters
and recommend policy changes. In addition,
Program technical personnel consulted regularly
with an ECF technical group from the Adminis-
trative Office of the U.S. Courts (AOUSC) and
participated in an ECF working group within the
Department. For all bankruptcy courts that have
implemented ECF, the technical group imple-
mented a new procedure that streamlined the
daily exchange of case management data between
the courts and the Program. A long-term goal
of the Program is to enhance the data exchange
process with the courts by developing national
standards for “data enabling” portable document
format (PDF) documents. To that end, during
FY 2004 the Program continued to research and
work toward collaborating with the AOUSC on
a national specification for data tags that can be
embedded within a PDF document before it is
filed with the court, so data can be easily located
and extracted later.
Digital Recording
During FY 2004, the Program conducted a
10-office pilot test of possible digital recording
options to enhance the official record of the Sec
-
tion 341 meeting of creditors. The pilot offices
implemented parallel tests with existing tape
recording technology; reviewed for ease of use,
logistics, and functionality; and made recom-
mendations. At the end of FY 2004, the Program
procured digital recording technology to sup-
port all secured Section 341 meeting rooms.
51
52
Chapter 9
Training
Photo 1: Dianna Chavez, Henry Hobbs
Photo 2: Ernest F. Hollings National Advocacy Center, Columbia, S.C.
Photo 3: Mary Tom, Deirdre Martini, Guy Van Baalen, Kim Lefebvre, Kathy Schmitt, Terese Cavanagh
53
National Bankruptcy Training Institute
Employee training sessions are held at the
National Bankruptcy Training Institute, where the
Program offers a full range of courses to enhance
professional, technical, and management skills.
The Institute, which opened in February 1999,
is a part of the National Advocacy Center (NAC)
located on the campus of the University of South
Carolina in Columbia. The NAC, which is a coop-
erative partnership of the U.S. Attorney’s Office
of Legal Education, the Institute, and the National
District Attorneys Association, offers training
to federal, state, and local prosecutors and their
staffs. Its state-of-the-art training facilities include
five lecture halls, multi-purpose assembly and
class rooms, mock trial court rooms, five com-
puter labs, a video production studio, and other
specialized spaces.
The Program offers a full range of courses to
enhance employees’ professional, technical, and
management skills at the National Bankruptcy
Training Institute.
The Institute offers courses for all Program
employees, including secretaries, legal clerks, legal
data technicians, case management specialists,
computer specialists, standing trustee coordina-
tors, paralegals, administrative assistants, finan-
cial analysts, and attorneys. During FY 2004, the
Institute hosted more than 500 Program employ-
ee attendees at 10 training courses. It continued
to provide civil enforcement training courses
developed during the past several years, and
introduced a new course on criminal bankruptcy
fraud to enhance participants’ skills in combating
fraud and abuse in the bankruptcy system.
These employee training sessions were offered
at the Institute in FY 2004. Some courses were
offered more than once:
• Advanced Civil Enforcement
• Criminal Bankruptcy Fraud Training
• Negotiation Skills
• Finance Fundamentals
• Information Technology Specialist/Case
Manager Training
• Litigation Support Seminar
• Support Staff Development
Training for Private Trustees
In FY 2003, the Institute provided its first
training course for recently appointed Chapter
13 trustees, designed to enhance their skill lev-
els, promote uniform standards, and supplement
training on civil and criminal enforcement. In
FY 2004, the Institute launched a similar training
course for recently appointed Chapter 7 trustees.
In FY 2004 the Institute provided its first training
course for recently appointed Chapter 7 panel trust
-
ees, covering all facets of case administration.
The prior year’s Chapter 13 training session
helped newer Chapter 13 trustees better under
-
stand their responsibilities, how to carry out those
responsibilities, and the standard of performance
to which they will be held. It provided a forum
for newer trustees to learn from the experiences
of seasoned trustees, while sharing their own
experiences and posing questions and concerns.
Taking into account the various roles fulfilled
by the Chapter 13 trustee–including fiduciary,
business person, purchasing agent, disbursing
agent, manager, and legal reviewer–the agenda
offered sessions on case administration, includ-
ing case set-up, claims administration, and case
monitoring and closing; office administration,
including personnel issues and the trustee’s roles
Chapter 9
54
as manager and fiduciary; internal controls; civil
and criminal enforcement; emerging issues in
Chapter 13; and the standing trustee standards
of excellence.
Similarly, the Chapter 7 training sessions
helped newer Chapter 7 trustees enhance their
ability to administer cases and, in particular, to
identify assets. Taught primarily by seasoned
trustees, the training sessions covered all facets of
case administration, including conducting Sec-
tion 341 meetings, finding assets and maximizing
the return to creditors, monitoring cases, setting
up an office with strong internal controls and effi-
cient reporting systems, and fighting bankruptcy
fraud and abuse. Chapter 7 training sessions were
held in November 2003 and May 2004, teaching
81 recently appointed trustees.
Training for Other Professionals
In addition to its various training activities
at the NAC, the Program offers regional and
local presentations to inform and educate about
the bankruptcy system and Program activities.
U.S. Trustees and Program staff are often invited
to speak to law enforcement agencies, bar asso-
ciations, professional organizations, law schools,
other government agencies, and other groups.
The Program offers regional and local presentations
to inform and educate about the bankruptcy system
and Program activities.
Examples of the Program’s activities in FY
2004 include the following:
• The Assistant U.S. Trustee in Indianapolis
helped organize and spoke at a seminar for attor-
neys volunteering to handle pro bono bankruptcy
cases. The seminar focused on basic consumer
bankruptcy law and included a presentation on
alternatives to bankruptcy such as credit counsel
-
ing and debtor education.
• At the request of the Internal Revenue
Service, staff from the Dallas office conducted
training for Internal Revenue Service insol-
vency specialists regarding basic bankruptcy law,
bankruptcy documents and procedures, and the
detection and investigation of fraud in bank-
ruptcy cases.
• The Oakland Assistant U.S. Trustee par-
ticipated in a panel discussion on identity theft at
a meeting of the San Francisco Federal Executive
Board, an organization of federal agencies. Other
participants included representatives from the
U.S. Attorney’s office, Federal Trade Commission,
U.S. Postal Inspectors, and Secret Service.
• At a regional training program for Nation-
al Labor Relations Board staff attorneys and
investigators, the St. Louis Assistant U.S. Trustee
and a Chapter 7 trustee provided an overview of
the bankruptcy system, the financial information
available in a bankruptcy case, and the role of the
U.S. Trustee with emphasis upon civil enforce-
ment. NLRB attorneys confront issues such as
the application of the automatic stay in labor law
enforcement proceedings and attempts to dis-
charge judgments for back wages and penalties.
• The Houston Assistant U.S. Trustee joined a
bankruptcy judge and a Chapter 13 trustee before
the Houston Association of Debtors’ Attorneys,
to discuss issues including the implementation of
changes in the Federal Rules of Bankruptcy Proce-
dure relating to privacy and the redaction of Social
Security numbers from bankruptcy documents.
• Attorneys who handle farm loan mat-
ters for the Department of Agriculture’s Office
of General Counsel received training from staff
in the Harrisburg office on the role of the U.S.
Trustee and the identification of bankruptcy
fraud and abuse.
55
• An analyst and an attorney from the Wich-
ita office spoke to approximately 200 accountants
at a conference on accounting and auditing at
Wichita State University. They discussed the U.S.
Trustee’s role in combating fraud in the bank-
ruptcy system.
• The Atlanta Assistant U.S. Trustee spoke
to members of the Georgia Real Estate Fraud
Prevention and Awareness Coalition about the
U.S. Trustee’s civil enforcement initiative, focusing
on the role of petition preparers, serial filers, and
identity thieves in mortgage fraud schemes.
• Upon invitation from the Dean of the
University of Oklahoma School of Law, the Okla-
homa City Assistant U.S. Trustee participated in
a presentation on “practical skills in bankruptcy”
for third-year law school students.
56
Chapter 10
Appendix
57
United States Trustee Program Map of Regions and Offices
Chapter 10
Regional
District
Region Number
s
Note: The districts in North
Carolina and Alabama currently
are not part of the United States
Trustee Progra
m
Alexandria
Norf
olk
Richmond
Greenbelt
EOUS
T
Wilmington
Baltimore
Harrisbur
g
Central Islip
New Have
n
Providenc
e
Worceste
r
Mancheste
r
Po
rtland
Charleston
Le
xington
Chattanoog
a
Nashville
Little Rock
Ty
ler
Jackson
San Juan
Miam
i
Ta
mpa
Orlando
Ta
llahassee
Savannah
St. Louis
Peoria
Utica
Grand Rapids
Rochester
Buffalo
Detr
oit
Albuquer
que
Des Moines
Co
rpus Christi
San Antoni
o
Austin
Tu
lsa
Omaha
Sioux F
alls
Spokane
Bois
e
Eugene
Las V
egas
Salt Lake City
Fr
esno
Sacramento
Reno
Grea
t Falls
Chey
enne
Anchorage
Ag
ana
Honolulu
Santa An
a
Woodland Hills
San J
ose
Oakland
Po
rtland
Oklahoma City
Shreveport
South Bend
Co
lumbus
Louisvill
e
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58
Executive Office
for U.S. Trustees
Washington, D.C.
Regional and Field
Offices (BY STATE)
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Please visit our web site
at www.usdoj.gov/ust
for office phone numbers
and addresses.
U.S. Trustee Program Nationwide Office Locator
59
U.S. Trustee Program Civil Enforcement Actions–Fiscal Year 2004
Type of Action Number of Inquiries Estimated Financial
and Formal Actions Impact
11 U.S.C. § 707(a) Dismissal for Cause 6,618 N/A
11 U.S.C. § 707(b) Dismissal for Substantial Abuse 28,181 $275,012,979
11 U.S.C. § 727 Denial or Revocation of Discharge 3,465 $192,500,983
11 U.S.C. § 110 Actions Against Bankruptcy Petition Preparers 2,254 $2,917,755
11 U.S.C. § 329 Disgorgement of Attorneys’ Fees 1,458 $4,320,874
11 U.S.C. § 1104 Appointment of Trustee or Examiner 167 N/A
Actions for Attorney Misconduct 697 N/A
Total 42,840 $474,752,591
60
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1,800,000
1,500,000
1,200,000
900,000
600,000
300,000
0
Fiscal Year
Total Filings
843,646
1,060,725
1,307,719
1,376,998
1,297,493
1,203,442
1,367,704
Total Filings
Total Bankruptcy Filings Nationwide
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
1,470,430
Total Bankruptcy Filings by Chapter
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
Fiscal Year
Chapter 7 Chapter 13 Chapter 11 Chapter 12
800,847
1,580,825
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1,800,000
1,500,000
1,200,000
900,000
600,000
300,000
0
1,539,741
61
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
$125
$100
$75
$50
$25
$0
Fiscal Year
Total Collected (In Millions)
$68.2
$55.9
$53.4
$66.7
$70.2
$67.9
$73.9
Chapter 11 Quarterly Fee Collections
Total Collected Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
$82.5
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
18,000
15,000
12,000
9,000
6,000
3,000
0
Fiscal Year
Chapter 11 Filings Nationwide
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
Total Filings
$108.4
15,598
12,377
12,296
10,949
8,529
8,820
9,621
10,225
11,380
9,782
$115.0
10,043
$118.5
62
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
$2,000
$1,600
$1,200
$800
$400
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
50,000
40,000
30,000
20,000
10,000
0
Fiscal Year
Total Asset Cases Closed
29,771
24,679
24,365
24,593
29,500
32,692
38,100
35,918
39,006
Chapter 7 Asset Cases Closed
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
Total Disbursed (Millions)
$1,409
$1,287
$1,478
$1,386
$1,480
$1,642
$1,774
$1,528
$1,378
Chapter 7 Cases - Total Disbursements
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
40,559
$1,467
Fiscal Year
47,126
$1,632
63
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Fiscal Year
Total Disbursed (Millions)
$1,885
$1,917
$2,105
$2,444
$2,918
$3,274
$3,469
$3,640
$3,859
Chapter 13 Cases - Total Disbursements
Fiscal Years 1994-2004
Totals do not include Alabama & North Carolina
$4,198
$4,694
64
Bankruptcy Filings Relative to Population
(Cases Filed Per 1,000 Population Fiscal Year 2004)
National Average = 5.44
8.0 or more 6.0 - 7.9
4.0 - 5.9 Under 4.0
Peak Fiscal Years for Bankruptcy Filings
2004 2003
1999 or 2000 1997 or 1998
Standing Trustees are committed to excellence and to providing a high level
of trust and service to chapter 13 debtors and creditors. Creditors, debtors, attor
-
neys, judges and others who come into contact with Standing Trustees are entitled
to service which adheres to the highest standards of professional, moral and ethi
-
cal conduct.
The trustee’s office should be open and operating Monday through Friday
during regular business hours.
The trustee should have a system in place to promptly respond in a mean
-
ingful manner to inquiries from debtors, creditors, attorneys, and other
interested parties.
If the trustee is not personally available, the trustee should have competent staff
available to assist or to respond to inquiries.
The trustee should work to ensure that debtors comply with their obligations
under the Bankruptcy Code and Rules.
The trustee should work to ensure that debtors comply with the provisions
of their plan and should take appropriate action if the debtor fails to com
-
mence plan payments when required or if there is a subsequent default in
plan performance.
The trustee should maintain a system which efficiently tracks the progress and
the receipts and disbursements in every chapter 13 case, from the time it is filed
until the case is closed.
The trustee should have a system to timely and accurately record all receipts
and disbursements on the appropriate debtor ledger.
The trustee should disburse plan payments to creditors on a monthly basis, and
should have procedures in place to properly classify and pay creditors’ claims
and to detect and recover any erroneous payments.
The trustee should ensure that all trust account ledgers and accounts are bal
-
anced on a monthly basis and should have a procedure to regularly review all
cases with significantly large balances on hand or other fund irregularities.
The trustee should maintain a reasonably comprehensive system of internal
controls over accounting and office operations, both paper and electronic, to
safeguard estate assets and trust funds.
Standing Trustee Pledge of Excellence
8.0 or more 6.0 - 7.9
4.0 - 5.9 Under 4.0
2004 2003
1999 or 2000 1997 or 1998
65
66
Chapter 7 Panel Trustees are committed to excellence in the administration
of bankruptcy cases and carry out their duties with the utmost integrity, diligence,
and professionalism. Creditors, debtors, attorneys, judges, and others who come
into contact with Chapter 7 Trustees are entitled to service which adheres to the
highest standards of professional, moral, and ethical conduct.
The trustee should identify and administer assets in a timely and comprehen
-
sive manner to produce maximum benefits for creditors and relief to debtors.
The trustee should conduct meaningful § 341(a) meetings of creditors and
maintain a professional atmosphere that conveys the significance of the
proceedings.
The trustee should act as a fiduciary who administers assets and makes deci
-
sions that are in the best interests of the estate.
The trustee should actively participate in every facet of the trustee operation
and maintain efficient systems that accurately track case administration, chart
the progress of cases, account for all property that comes into the trustee’s pos
-
session, and generate accurate reports.
The trustee should maintain an appropriate and reasonably comprehensive
system of internal controls over accounting and office operations to safeguard
estate assets and trust funds.
The trustee should always be courteous in dealings with debtors, creditors, and
other parties in interest.
The trustee should work to ensure that debtors comply with their obligations
under the Bankruptcy Code and Rules.
The trustee should promote and preserve the integrity of the bankruptcy sys
-
tem by helping to detect fraudulent or abusive conduct.
The trustee should encourage debtors, creditors, attorneys, and other partici
-
pants in the bankruptcy process to diligently perform their respective respon
-
sibilities according to the highest standards of professional, moral, and ethical
conduct.
The trustee should diligently perform his or her responsibilities according to
the Bankruptcy Code and Rules, and Handbook for Chapter 7 Trustees.
Chapter 7 Panel Trustee Pledge of Excellence
United States Trustee Program
Annual Report of Significant accomplishments
Fiscal Year
2004
U.S. Department of Justice
U.S. Trustee Program
