In today’s email inbox came this message:

Message from UST Regarding Necessary Documentation for Chapter 7 Section 341 Meetings of Creditors

The Chapter 7 Panel Trustees for the District of Nebraska have standardized the documents that they will request in every chapter 7 case. The following documents must be submitted to the appointed trustee prior to the section 341 meeting of creditors by email or the trustee’s system for receiving documents:

1. The most recently filed Federal and State Tax Return with all schedules. Tax transcripts will not be accepted. Social Security Numbers should not be redacted from the tax return provided to the trustee. If the debtor is not required to file tax returns, counsel shall notify the trustee by email. Tax returns are required to be sent to the trustee at least seven days prior to the scheduled meeting of creditors.
2. Bank statements and electronic debit card statements covering ninety days (90) of activity up to and including the petition filing date on all accounts listed in the schedules, including checking and savings accounts. Bank statements should be provided to the trustee at least seven days prior to the scheduled meeting of creditors.
3. If the debtor is a business or owns an interest in a business (corporation, LLC, PC, partnership etc.), the debtor shall provide a current Balance Sheet and Profit and Loss Statement and detailed inventory and accounts receivable lists at least seven days prior to the scheduled meeting of creditors.

In any given case, the appointed trustee may request additional information.  The list above, however, pertains to all cases.

Every person who files bankruptcy must attend a court meeting before the Trustee appointed to review their case. We call these “341 Meetings” because they are required under Section 341 of the Bankruptcy Code, and they are also called “creditor meetings” because creditors may attend the meetings (although creditors rarely attend).

Over time the amount of information requested by the Trustees to supplement the bankruptcy petition has grown larger, and this notice is largest demand for documents yet. At some point the Trustees will probably demand a video of a person’s home! (Shoot, they already look at Google Earth and Maps to get pictures of the outside.)

• Tax Returns:  We already send Trustees copies of a debtor’s last two tax returns, but what is different about this request is that the trustees will no longer accept Tax Transcripts provided by the IRS.  This is strange.  How exactly are we to supply tax returns that have been lost? Providing trustees with an official tax transcript from the IRS which contains all the information that appears on the tax return itself appears to meet the trustee’s requirements.  What does a debtor do if there is no available copy of an electronically filed return?  I would guess they will have to get a transcript, prepare the return again, and print a copy of the copy.  Yeah, this is a stupid rule.  There is no valid reason for trustee to refuse to accept tax transcripts when a copy is not available. Good grief, tax transcripts are provided by the federal government. Does the US Trustee not trust the records of its own government?
• Bank Statements and Debit Card Statements: Years ago we provided no bank statements to the trustee unless requested. Then, a few years ago we had to start providing statements showing the balance on the day the case was filed. Recently we had to start supplying statements for the past 90 days so the trustee’s could track down Preference Payments.  (A preference payment is a payment made to a creditor in excess of $600 made within 90 days of filing bankruptcy, and trustees have special powers to reclaim those payments.)  Now they are adding the requirement to provide Debit Card statements for the past 90 days.  Many debtors do not use traditional bank accounts and rely on the use of prepaid debit cards, and those same debtors generally lack access to their online accounts.  This is going to be a nightmare to produce all these records.  It’s already a mess, but at least this requirement makes sense.
• Balance Sheets, Profit & Loss Statements and Accounts Receivable Lists.  Self-employed debtors and their attorneys will be faced with additional paperwork production burdens. The trustees are trying to figure out what a business is worth, and these documents will help inform them of the business value.  But what is also true is that this almost requires the preparation of two bankruptcy cases–one for the individual debtor and one for their business–and that extra burden will significantly increase the cost of filing bankruptcy for the business owner. No guidelines have been provided for the preparation of these financial statements.  Are these statements submitted under penalties of perjury as are the bankruptcy schedules? Is the debtor’s attorney liable for the accuracy of the business schedules?

Bankruptcy Rule 9011

Debtor attorneys must verify the accuracy of the documents they submit to the court. Bankruptcy rule 9011 provides the following:

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

Does Rule 9011 apply to Balance Sheets, Profit & Loss Statements and Account Receivables Lists emailed to the trustees? If so, it would appear that the debtor’s attorney now must undertake the burden of verifying the accuracy of the balance sheets, profit and loss statements and accounts receivable lists of the non-debtor business entity, and that burden is going to be very, very expensive.

Bankruptcy Code 707(b)(4)(C)

Section 707(b)(4)(C) of the Bankruptcy Code states that “[t]he signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has – (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading or written motion; and (ii) determined that the petition, pleading, or written motion – (I) is well grounded in fact; and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1), [i.e., an abuse of the provisions of Chapter 7 of the Bankruptcy Code]”.

Does Section 707(b)(4)(C) apply to this new rule of emailing the trustee the business records of a non-debtor corporation? Must the debtor’s attorney now perform a “reasonable investigation” into the debtor’s corporations?

 

These new rules were promulgated without seeking any input from the attorneys who prepare the cases. What are debtors to do if they cannot reproduce copies of the electronic tax returns they actually filed?  Are they prohibited from filing bankruptcy even though they fulfilled their legal duty to file returns and even though the Internal Revenue Service can provide detailed transcripts of what they actually filed? And why do Chapter 7 trustees believe that an unverified copy of a tax return is superior to a transcript provided by the federal government? What is the duty of a debtor’s attorney to verify the accuracy of corporate records of a company owned by the debtor that is not actually involved in the bankruptcy case? Does Bankruptcy Rule 9011 and Bankruptcy Code Section 707(b)(4)(C) apply?  Gosh, I wonder if this rule might have benefited from just a little bit of input by the people who actually prepare the cases? Are debtor attorneys the enemy?

 

Image courtesy of Flickr and Alexander Baxevanis.