Detroit Chapter 7 Bankruptcy Trustees | Bankruptcy Trustees in Detroit Michigan

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Detroit Chapter 7 and Chapter 13 Consumer Bankruptcy Filings

CHAPTER 9

FINANCIAL POLICIES,

PROCEDURES AND REPORTING REQUIREMENTS

A. DEPOSIT AND INVESTMENT OF ESTATE FUNDS

As set out in § 345, the trustee must immediately open a separate account for each estate as soon as funds are received. The accounts must be maintained under the direction and control of the trustee at all times. Accounts may only be maintained at depositories which have agreed to abide by the requirements established by the United States Trustee (see below). The trustee must notify the United States Trustee of the identity of the banking institution in which estate funds are held and thereafter must immediately notify the United States Trustee of an intent to transfer estate accounts to another banking institution.

Generally, a trustee should utilize a single banking institution⁽⁷⁾ and should initially deposit funds to an interest-bearing account in order to maximize the return to creditors. Under no circumstances may monies of separate estates be aggregated or commingled. Bankruptcy-related funds may not be deposited to the trustee's business, personal or trust account.

A cash⁽⁸⁾ receipts log must be used to track all incoming receipts (except wire transfers). This log must be used exclusively for the chapter 7 operation and may not be combined with a law firm or business receipts log. Generally, entries to a cash receipts log are handwritten, preferably in pen. However, a cash receipts log may also be kept electronically if it has programmed controls to prevent the deletion and modification of previously entered data and the insertion of transactions out of date sequence. Both types of logs must be maintained by the person who opens the mail and endorses incoming checks. The log must contain columns for the payer, date received, case number or name, amount, and remarks. The trustee should keep copies of the payers' checks (or other instruments), together with supporting documentation (if any) such as transmittal letters, in the appropriate estate files. For additional requirements pertaining to the receipts log, see Handbook Chapter 9.D (particularly sections 9.D.1, 9.D.3, 9.D.4, and 9.D.6).

Funds are to be deposited to the estate bank account promptly after receipt (generally, mailed or taken to the bank within two business days) and must not be placed in a file while the trustee waits for subsequent events to occur. In those rare instances where funds cannot or should not be immediately deposited, see Handbook Chapter 9.D.6.

All disbursements are made by estate checks drawn on estate accounts, with limited exceptions (see Handbook Chapter 9.D.8). The trustee should not approve conversion of estate checks to ACH transactions or electronic funds transfers. In addition, the trustee should instruct the bank to refuse any attempt to make such debits to estate accounts.

The trustee must monitor bank account activity on a regular and ongoing basis. For further information, see Handbook Chapter 9.D.

The trustee must retain all original bank account statements, duplicate deposit slips, and canceled checks for a period of at least two years after the date on which the trustee was discharged and during which a proceeding on the trustee's bond may be commenced, unless the original documents are submitted to the court or United States Trustee.

1. TYPES OF ACCOUNTS

Interest Bearing

Section 345(a) provides that a trustee may invest monies of an estate. Estate funds should be deposited or invested in order to provide a maximum, reasonable net return to creditors. Interest-bearing estate accounts are either money market accounts or savings accounts. The interest rate should be no less than that available for other similar accounts.

See Chapter 8.S.1 of this Handbook regarding the continued investment of estate funds after the TFR has been filed for an estate.

The trustee may be held personally liable for lost interest. See, In re Charlestown Home Furnishing, 150 B.R. 226, (Bkrtcy.E.D.Mo. 1993).

Non-Interest Bearing Accounts

Under certain circumstances, the trustee may maintain money of the estate in a non-interest bearing checking account. Some of those circumstances are:

a. The interest bearing account only allows a limited number of withdrawals each month and the trustee needs to pay administrative expenses in excess of the monthly limit;

b. The trustee will be making an interim distribution to creditors; or

c. The trustee is directed by court order to make an immediate distribution.

Investment Accounts

When substantial funds (e.g., $50,000) are received by the estate which will not be distributed for an extended period of time (e.g., six months), the trustee shouldconsider higher yield investments such as Certificates of Deposit or Treasury Bills.

In general, investments are to be as risk free as possible. The trustee should exercise care that no withdrawal of funds results in a loss to the estate. The trustee should not make an investment that will predictably delay closing.

Investment vehicles must be opened, issued or purchased in the name of the trustee as trustee of the estate.

Prohibited Investment Accounts

There are certain types of investments that cannot be utilized by a trustee, such as repurchase agreements, reverse repurchase agreements, non-bank money market accounts, mutual funds, stocks, corporate bonds, and commercial paper.

Bond Recovery Account

Some banks offer a concentration account, or "bond recovery account," to expedite the payment of bond premiums for trustees. This type of account is permitted for this limited purpose, if authorized by the United States Trustee in writing. The trustee must keep detailed records concerning the calculation, allocation, and payment of the premium, and must not let a balance accumulate in the account. In addition, the account should be listed by the bank on its monthly or quarterly bank balance report to the United States Trustee (see below).

2. OPENING THE ACCOUNT

In order to open the account, the bank may require some proof of appointment to the case. The bank also requires a tax identification number for any interest bearing account. When the debtor is a corporation or partnership, the trustee should use the debtor's tax identification number. However, when the debtor is an individual, the bankruptcy estate is a separate taxable entity and, therefore, the debtor's personal social security number may not be used to establish the estate bank account. Rather, the trustee must complete an IRS Form SS-4 to obtain a federal identification number for the bankruptcy estate individual debtor. Failure to provide the tax identification number to the bank results in back-up withholding being assessed and remitted to the Internal Revenue Service by the bank institution.

Estate bank accounts should be free of any service charges for maintaining the accounts, supplying check stock, providing monthly bank statements and canceled checks, and providing computer hardware and software. Subject to United States Trustee approval, service charges may be assessed under certain circumstances, such as for a chapter 7 operating case.

All bank statements, deposit slips and checks should be readily identifiable as pertaining to a bankruptcy estate. They should be captioned with the bankruptcy case name and number and the chapter 7 trustee's name. The terms "Debtor" and "Trustee" should appear, unabbreviated, in the caption, as illustrated in the following example: "Case Number 02-12345; Jane Smith, Debtor; John Jones, Trustee." (Each item in this example is required, in no particular order. The term "Case Number" is desirable, but may be abbreviated or omitted.)

The check stock used by the trustee must be capable of being digitally reproduced in a legible image. In addition, if the check stock is pre-printed with the check number or it contains a pre-printed serial number, adequate precautions must be instituted and maintained to ensure that the check stock, including voided checks, is accounted for and that every check in each estate account is consecutively numbered.

Requirements for Depositories Holding Bankruptcy Estate Funds

The trustee may only use a depository that has agreed to comply with § 345, 31 C.F.R. Part 225, and the requirements of the United States Trustee. The United States Trustee can provide the trustee with a list of depositories that meet these requirements. If a bank wishes to be added to the list, it should contact the appropriate United States Trustee for the current requirements. If a depository fails to comply with the United States Trustee requirements, the trustee should promptly notify the United States Trustee and arrange to move the funds to another depository.

Collateralization of the Trustee's Deposits

It is the responsibility of the trustee to ensure that the banking institution is in compliance with § 345 to the extent of the trustee's deposits. If the aggregate funds on deposit for an estate in a single institution exceed the $100,000 FDIC insurance limit, the excess funds must be bonded or be collateralized by securities deposited with the appropriate Federal Reserve Bank. The trustee must notify the United States Trustee if the amount on deposit in any individual estate in any single depository exceeds or is expected to exceed $100,000.

As required by § 345(b)(2), securities used as collateral must be the kind specified in 31 U.S.C. § 9303, which specifies that government obligations, which are valued at par, may be used as security. A government obligation is defined in 31 U.S.C. § 9301(2) as a public debt obligation of the United States Government and an obligation whose principal and interest is unconditionally guaranteed by the Government. Public debt obligations consist of United States Treasury Bills, Bonds, or Notes. Zero-coupon Treasury Bonds as collateral are not acceptable collateral. While not public debt obligations, banks may also pledge a limited number of other bonds issued or guaranteed by the Government that contain an unconditional guarantee of principal and interest. The Treasury Department's web site at http://www.publicdebt.treas.gov/gsr/gsrttl.htm#31cfr225 lists acceptable collateral. The United States Trustee may request an opinion from bank counsel or contact the Executive Office before accepting bonds that purportedly contain an unconditional Government guarantee.

If a bond in favor of the United States is filed to protect the deposit of estate funds, § 345 requires the United States Trustee to approve the corporate surety securing the bond. The United States Trustee can only select a surety listed in Treasury Circular 570.

The United States Trustee obtains summaries of the amounts on deposit from each bank being used by a trustee to assist in monitoring trustee accounts and bonding requirements. The United States Trustee also receives a report from the Federal Reserve to review the sufficiency of the collateral posted by the banking institutions. The trustee must assist the United States Trustee in obtaining bank statements or summaries of amounts on deposit. An authorization for the bank's release of information to the United States Trustee may be required from the trustee.

Other Depository Requirements

In addition to the foregoing, these requirements include, but are not limited to:

a. Providing canceled checks⁽⁹⁾ with the monthly bank statements mailed to the trustee in whose name the account was opened. The bank statements and canceled checks must be provided in paper form.

b. Ensuring that the authorized signer for estate checks and other account withdrawals is the trustee in whose name the account was opened, unless the bank is otherwise instructed in writing by the United States Trustee.

c. Providing a substitute check or an enlarged electronic check image in paper form to a Trustee, upon request.

d. Provide the trustee, for each account maintained, a minimum of thirty (30) days from the date of receipt of each monthly bank statement to: (1) examine the statement and all canceled checks for alteration and unauthorized use of the trustee's signature, and (2) notify the Depository of any problem, notwithstanding anything to the contrary contained in any signature card, account contract, applicable account rules and regulations, or other agreement between the trustee and the depository.

e. Certifying annually, and upon request, that the trustee has not and will not receive favorable treatment (e.g., special interest rates or loan terms) from the bank on non-bankruptcy related personal or business accounts because of the trustee's bankruptcy accounts.

f. Transferring funds between bankruptcy estates or between bankruptcy estate accounts and non-bankruptcy estate accounts only when presented with an estate check signed by the trustee (except for incoming wire transfers from an independent third party). Verbal or written requests for funds transfers are not acceptable, unless the transfer of funds is between accounts of the same estate.

g. Providing notice to the United States Trustee by phone of any cash withdrawals and all overdrafts.

h. Releasing to the United States Trustee, upon request, any and all information pertaining to bank accounts, deposits, instruments, transactions and withdrawals of funds entrusted to or pertaining to the trustee or the United States Trustee or designee in performance of their official duties, and to provide further information including, but not limited to, copies of statements, deposit slips, canceled checks and account agreements as the United States Trustee may from time to time require in the performance of the United States Trustee's official duties at no cost to the United States Trustee.

i. Waiving all service charges (with the possible exception of chapter 7 operating business accounts) or fees for supplying pre-numbered check and deposit slip stock, computer hardware or software, canceled checks or monthly bank statements.

j. Implementing adequate controls over estate bank accounts such that:

1. new accounts may only be opened by the trustee and one other authorized staff person;

2. there are no electronic transfers between estates;

3. there are no electronic transfers between bankruptcy and non-bankruptcy accounts;

4. accounts that have activity are not deleted;

5. accounts that have activity are not closed until the balance is zero, unless approved by the trustee; and

6. account numbers are not changed if the account has activity.

k. Complying with any subsequent requirements established by the United States Trustee, including supplying copies of trustee computer software to the United States Trustee for purposes for evaluation and oversight.

B. FINANCIAL REPORTING AND RECORD KEEPING

To properly perform the trustee's duties and effectively administer an asset case, the trustee must establish an appropriate accounting system and maintain financial records on a contemporaneous basis for each estate. The USTP has developed a uniform record keeping and reporting system that the trustee must use. It consists of Uniform Transaction Codes (UTCs), akin to a uniform chart of accounts, and three primary records: the Individual Estate Property Record and Report (Form 1), the Cash Receipts and Disbursements Record (Form 2), and the Summary Interim Asset Report (Form 3). This system is used throughout the country and should not be altered.

For purposes of these record keeping and reporting requirements, a chapter 7 case is considered an asset case when: (1) the trustee expects to, or has, declared the case to be an asset case; (2) the trustee is in possession of property or funds, or expects to receive property or funds; or (3) a no-asset report has not been filed with the United States Trustee and the court, and 60 days have passed since the initial examination of the debtor at the § 341(a) meeting.

Utilizing these records, the trustee provides an interim report (also known as the Trustee Interim Report or TIR) to the United States Trustee at least annually and upon request. The TIR consists of the Form 3, which is a summary listing of all pending asset cases (as defined above), a Form 1 for each listed case, and a Form 2 for each case with an estate bank account. However, Form 1 and Form 2 do not need to be submitted if:

1. A final account (TDR) was filed for an asset case during the current or prior reporting period;

2. A final report (TFR) was submitted for an asset case during the current or prior reporting period;

3. A final report was filed for an asset case that was converted, dismissed, or reassigned during the current reporting period; or

4. A no-asset report (NDR) was filed for an asset case during the current reporting period.

Such cases need only be listed on Form 3. To illustrate, in each of the following instances, the case is listed on Form 3 for the current reporting period and omitted from future reporting periods, and Form 1 and Form 2 are not required:

1. A TDR is submitted to the United States Trustee during the current reporting period.

2. An NDR is filed in a case that has been open longer than 60 days after the initial examination of the debtor at the § 341(a) meeting.

3. An NDR is filed in a case declared to be an asset case, even though the time elapsed since the initial examination of the debtor at the § 341(a) meeting is 60 days or less.

4. A case open longer than 60 days after the initial examination of the debtor at the § 341(a) meeting is converted, dismissed or reassigned during the current reporting period.

5. A case declared to be an asset case is converted, dismissed, or reassigned during the current reporting period within 60 days of the initial examination of the debtor at the § 341 (a) meeting.

A case is not listed on Form 3 if:

1. It is an open no-asset case and the time elapsed since the initial examination of the debtor at the § 341 (a) meeting is 60 days or less.

2. An NDR is filed within 60 days of the initial examination of the debtor at the § 341 (a) meeting.

3. It is a no-asset case that is converted, dismissed, or reassigned within 60 days of the initial examination of the debtor at the § 341(a) meeting.

The TIR must be submitted to the United States Trustee no later than thirty days after the end of the reporting period. It may be provided in either hard-copy or electronic form. If the trustee elects to submit the report electronically, it must be in PDF formatand attached to an e-mail from the trustee stating: "I certify that I have filed and reviewed Forms 1 and 2 for all cases listed on Form 3 and they are accurate and correct to the best of my knowledge." The trustee's electronic signature (e.g., /s/ trustee name) and the date should appear at the bottom of the Form 3.

If the trustee cannot submit the report by the due date, the trustee should obtain a date specific extension in writing from the United States Trustee prior to the deadline. The United States Trustee reviews the report within sixty days of receipt and provides written notice of any deficiencies to the trustee.

FRBP 2012(b) requires a successor trustee to file with the United States Trustee an accounting of the prior trustee's administration of the estate. This accounting should be a separate and distinct record of the activities which were solely within the control of the prior trustee. The rule does not have a deadline for submission of the accounting. Absent some evidence of defalcation or other harm to the estate, the accounting can be submitted in conjunction with the submission by the successor trustee of the standard reports required by the United States Trustee.

Detailed instructions and samples are provided in the Forms and Instructions and Sample Case sections of the Handbook. A brief overview of the individual reporting forms is presented below.

1. INDIVIDUAL ESTATE PROPERTY RECORD AND REPORT (FORM 1)

The Individual Estate Property Record and Report (Form 1) provides a blueprint for each asset case. It details all estate assets, both scheduled and unscheduled, and reflects the status of their disposition. It compares the debtor's opinion of each scheduled asset's value, the trustee's estimated net value to the estate for each estate asset, and the actual value realized by the trustee. It also supports the decision regarding administration of each asset. For assets not administered, Form 1 reflects abandonments, whether past or future, formal or informal. For assets administered or to be administered, Form 1 reflects the amounts realized and the anticipated remaining value of assets not completely liquidated.

Form 1 must be prepared for each asset case. All assets of the debtor, as shown on the debtor's original petition, schedules, and statement of financial affairs, must be listed. These are referred to as "scheduled" assets. In addition, all assets added by the debtor on amended schedules and statements and all other assets identified by the trustee must be recorded. These are referred to as "unscheduled" assets.

In a case converted from chapter 11, assets reported in the final report required by FRBP 1019(5), or in any schedules submitted post-conversion, should be listed. If no such report or schedules are filed, the trustee will list the assets remaining in the case and keep a record in the estate file which describes how the trustee determined the assets remaining in the case. If the trustee is serving as a successor trustee, Form 1 should list the funds turned over by the prior trustee and all property of the estate not administered by the prior trustee.

A reference number should be assigned to each asset listed on Form 1.

Form 1 includes the dollar value of each asset, whether assigned by the debtor in the petition, schedules, and statement of financial affairs, or by the trustee as to unscheduled property. Form 1 also shows the estimated net value determined by the trustee which is the dollar amount of the property less any security interest,

the debtor's allowed exemption in the property, and any other appropriate adjustment, such as costs to sell, realtor commission, property taxes, or capital gains tax.

The disposition of assets is recorded by indicating the abandonment of any asset pursuant to § 554, or the gross amount received from the sale or other liquidation of assets.

The status of the liquidation process should be reflected as either (a) the value determined by the trustee prior to liquidation, (b) the remaining value of an asset that has been partially liquidated, or (c) that an asset has been fully administered by the trustee.

Form 1 should reflect other information such as the status of assets not fully administered or abandoned, specific matters pending, dates of hearings or sales, projected date of TFR, and other actions.

A sample Form 1 with instructions is provided in the Forms and Instructions section of this Handbook.

2. CASH RECEIPTS AND DISBURSEMENTS RECORD (FORM 2)

The trustee must prepare a Cash Receipts and Disbursements Record (Form 2) to show all receipts, disbursements, and bank account transfers in each asset case. All receipts are to be identified by the reference number assigned on Form 1, and consecutive check numbers should be listed for each disbursement. Each entry also should include the name of the payer or payee, the date of the transaction, a description of the transaction, and the applicable UTC. The trustee must maintain a separate Form 2 for each estate bank account, including Certificates of Deposit.

All transactions must be entered on Form 2 in chronological order, as soon as they occur. Transactions should not be back-dated, except for interest (which should be posted within 30 days of the period to which it applies).

If the trustee is serving as a successor trustee, Form 2 should begin with the balance turned over by the previous trustee, thereby remaining consistent with the successor trustee's bank statements.

A sample Form 2 with instructions is provided in the Forms and Instructions section of this Handbook.

3. SUMMARY INTERIM ASSET REPORT (FORM 3)

Form 3 is prepared at least annually for submission to the United States Trustee as part of the interim report. Most entries on Form 3 can be made from Forms 1 and 2.

Form 3 is a summary list of pending asset cases, as described in Handbook Chapter 9.B starting at page 9-7.

Cases are entered in sequence by case number.

A sample Form 3 with instructions is provided in the Forms and Instructions section of this Handbook.

C. SPECIAL CONSIDERATIONS FOR COMPUTER SYSTEMS

1. SELECTION OF A COMPUTER SERVICE PROVIDER

There are numerous private companies that offer computer systems capable of producing Forms 1, 2, and 3 and handling the other requirements outlined in this Handbook. Many of these systems are offered in conjunction with the banking services chosen by the trustee. The trustee also may wish to develop an in-house computer system.

The United States Trustee does not endorse or recommend any particular computer system or service provider.

2. PROVISION OF COMPUTER HARDWARE AND SOFTWARE

Some banking institutions have contractual arrangements with computer service providers whereby the bank provides certain computer hardware and software to the chapter 7 trustee for use free of charge in consideration for depositing bankruptcy estate funds with the bank. The trustee's use of computer equipment is not prohibited provided it is reasonable and necessary for, and devoted exclusively to, the trustee's administration of chapter 7 cases. In addition, selection of a banking institution or computer service provider should be based upon customary business considerations, such as competitive interest rate, quality and service, and not on premiums or personal gain.

3. PARTICIPATION IN CASE MANAGEMENT SOFTWARE DEVELOPMENT

The trustee may periodically be requested by the computer service provider to test new versions of the case management software and to participate in other software development efforts. When such software development activities occur away from the trustee's office, the following conditions apply:

a. The trustee must be a current user of the computer service provider's software.

b. Travel is limited to the service provider's information technology center, which may also be the location of the company's headquarters.

c. Annual participation away from the trustee's office may occur no more than two times per year or not more than ten days, whichever is less.

d. The trustee may accept reimbursement of reasonable transportation, accommodations and meal costs.

e. The trustee may accept gifts or promotional items up to $50 in total value per trip.

4. COMPUTER EQUIPMENT RECOMMENDATIONS FOR CM/ECF⁽¹⁰⁾

The bankruptcy court can provide the trustee with a list of recommendations for computer hardware and software that will enable the trustee to effectively operate in the CM/ECF environment. Some items for the trustee to consider are: a CD burner, additional memory for the hard drive, a scanner with an automatic sheet feeder, and a laptop with a CD-Rom drive. These items may be provided by the trustee's computer service provider in accordance with Handbook Chapter 9.C.2, above. The trustee may also want to consider, at the trustee's own expense, a high speed internet line, such as DSL, cable or a T-1 line.

D. OTHER RECORD KEEPING PROCEDURES AND INTERNAL CONTROLS

Each trustee must establish and maintain an appropriate system of internal controls to safeguard estate funds and property, to ensure the integrity of financial record keeping and reporting, and to discourage employee theft. This section of the Handbook discusses segregation of duties and internal controls over banking, receipts, receivables, disbursements, computer operations, and estate files.

In addition to the cash receipts log described in Handbook Chapter 9.A on page 9-1, the trustee should utilize additional record keeping tools which include, but are not limited to:

1. A receivables ledger or other tracking mechanism for monitoring collections and following up on delinquent payments. A receivables ledger is used whenever there are numerous receivables or other assets (i.e., monies due from installment sales, preferences) with multiple payments received over time. An acceptable receivables ledger identifies the customer or payer, the balance due, amounts collected, and the status of collection efforts. It may be kept electronically or in paper format.

2. A numbered, duplicate receipt book for payers who request a receipt. A numbered, duplicate receipt must be provided for currency payments.

A strong internal control environment includes, but is not limited to, the components described below:

1. SEGREGATION OF DUTIES

a. The trustee shall oversee the entire trustee operation and shall actively supervise employees and independent contractors in the performance of their cash management and accounting duties. The trustee operation is normally conducted in a single location (e.g., at the trustee's business office) to facilitate adequate trustee supervision, to maintain strong internal controls, and for ease of case administration.

b. At a minimum, the trustee must:

1. Verify, on a test basis, that incoming receipts are promptly and properly deposited by comparing the cash receipts log to the bank statements. For a handwritten cash receipts log, the trustee should initial the receipts that are tested and indicate the date deposited. For a computerized cash receipts log, the trustee's initials and date deposited can be entered in the "remarks" column.

2. Review and sign all checks.

3. Authorize stop payment requests and cancellations in writing.

4. Review, date, and initial the monthly bank account reconciliations in accordance with the guidelines provided in Appendix J. For reconciliations prepared by a staff member, the trustee's initials and the date should appear on the summary account reconciliation and on a sample of individual account reconciliations.

5. Receive the monthly bank statements, unopened; review the statements and canceled checks for errors, unusual transfers and endorsements, alterations, and forged or unauthorized signatures within 10 days of receipt; and immediately report discrepancies to the bank. Evidence of alterations, forgeries, and similar concerns must also be reported to the United States Trustee. If a canceled check image is illegible, the trustee should request a clearer image or a substitute check. (The trustee is not required to initial and date every bank statement.)

6. Ensure that unique case management system and ECF passwords are established for each authorized employee. Passwords are to be changed at least annually and when an employee leaves or no longer works on chapter 7 matters. Additional password controls are appropriate for certain functions, such as initiating bank account transfers or generating disbursement checks.

7. Have sole responsibility for setting up passwords and access rights within the computer system used for chapter 7 case management, record keeping, and reporting. Access to sensitive data fields, such as creditor name and address, distribution amounts, etc., should be limited to only those employees who need access to these fields to perform their assigned job duties.

c. Wherever possible, cash handling duties should be separated from the record keeping functions. In other words, the person who maintains Forms 1 and 2 should not also have access to cash receipts and disbursements. Internal controls are strengthened when the following duties are divided among the trustee and several employees: receiving and logging receipts in the cash receipts log; restrictively endorsing checks; preparing deposit slips; making deposits; reconciling bank statements; maintaining Forms 1 and 2; reconciling the cash receipts log to bank statements and Form 2; preparing interim reports, and having custody of check stock. When small staff size precludes segregating duties, the trustee must be more actively involved. Suggestions for segregating duties in a small office are included in Appendix D.

d. Documenting routine staff procedures and developing written job descriptions are good internal control measures that help ensure consistent staff performance.

2. MONITORING BANK ACCOUNTS AND CHECK STOCK

a. The trustee or an assistant should reconcile all bankruptcy estate accounts before the end of the following month. The reconciliation may be documented on the face of the bank statement or on another form created for this purpose, but it may not be done electronically. Both the Form 2 and bank statement balances must be shown on the reconciliation, and all differences must be explained. Multiple debits for the same amount, unauthorized debits and credits, and other unusual entries on the bank statements should be identified and promptly investigated. Errors should be reported to the bank within 30 days of receiving the statements. The trustee should ask the bank to reverse any service charges and back-up withholding taxes that appear on the statements. The preparer should initial and date each bank reconciliation. The trustee, if not the preparer, should initial and date as described above under Handbook Chapter 9.D.1.b(4). The reconciliations may be kept with the bank statements in the estate file or in a separate folder or notebook designated for this purpose. For additional information, see Appendix J for bank account reconciliation guidelines.

b. Only the trustee and, at most, one employee should be authorized to: (1) open and close bank accounts, and (2) transfer funds between accounts of the same estate. These actions may be handled by letter, phone, or computer (e.g., via a dial-in or web-based computer system).

Care should be taken to ensure that estate bank accounts are promptly closed after the bank account has a zero balance and the TDR has been filed.
Regarding transfers, only intra-estate transfers between accounts are permitted. All other transfers must be by estate check (except for certain wire transfers discussed under Disbursements).

c. Check stock and deposit slips should be kept in a secure location to prevent unauthorized access and use. Checks should be consecutively numbered either by the bank or by the trustee's case management system.

1. If checks are drawn on more than one account in an estate, the numerical sequence of the checks should be unique for each account (e.g., 101, 102, 103, etc. for the interest bearing checking account; 10001, 10002, 10003, etc., for the money market account.

2. Blank check stock, if pre-printed with a bank logo, account number, and other identifying information, should contain a control number. The trustee should maintain a log of these control numbers and account for every check used. At a minimum, the log should indicate the control number and the bankruptcy case number/name. If the blank check stock is completely blank (i.e., the account number, bank logo and other identifying information are printed when the trustee prints the check), a control number is not necessary. The trustee should, however, keep both types of check stock in a limited access, secure area.

c. Generally, voided checks should be maintained in the estate files. However, checks that are used for printer alignment, damaged, or rendered useless during the check printing process should be voided and retained with the check control log (if the checks contain a control number - if no control number and other identifying information, the useless check paper should be torn up and thrown away). The numbers of voided checks may not be re-used.

d. Checks that have been outstanding for more than 90 days or checks returned by the post office (i.e., for inadequate address or some other reason) should be processed by an individual uninvolved with initial check preparation and authorization. The checks should be voided and the cause of the problem researched and corrected before the checks are re-issued. Documentation should be maintained to verify the efforts undertaken.

e. Stop payment requests and cancellations thereof must be approved by the trustee. Either the trustee or an employee may initiate the telephonic or electronic request regarding a stop payment, but the request must be followed up in writing either by: (1) the trustee's written confirmation to the bank (with a copy maintained in the estate file), or (2) by the trustee initialing and dating the computer system's transmission log (which serves as evidence of the electronic transmittal of the stop payment or cancellation request).

3. RECEIPTS

a. Immediately upon receipt, checks must be restrictively endorsed by writing or stamping "For deposit only to the Estate of _______." In addition, both currency and checks are to be recorded in the cash receipts log (see Handbook Chapter 9.A at page 9-1).

b. Payers should be instructed to makes checks payable to "Jane Doe, Trustee" or to the "Estate of _______."

c. Currency and checks must be kept in a safe or locked cabinet until deposited.

d. Funds are to be deposited as soon as possible after receipt (generally mailed or taken to the bank within two business days). See Chapter 9.D.6 for an exception to this policy.

e. NSF checks should be formally recorded and monitored until resolved.

f. Supporting documentation for receipts, such as copies of checks and transmittal letters, must be kept in the estate file. Sale orders or notices and reports of sale must also be kept in the estate file if not available electronically from the court or if they contain other information that supports the receipt, such as the trustee's handwritten notations about the sale. Supporting documentation should contain the related docket entry number or date, when applicable.

4. HANDLING CURRENCY

(See also Appendix G.)

a. The trustee should discourage payments in currency.

b. When a trustee cannot avoid accepting currency, the following procedures apply:

(1) Provide a duplicate, numbered receipt to the payer and immediately deposit the funds in the estate account. Both the payer and trustee should keep a copy of the receipt.

(2) If it is not possible to deposit funds immediately, either because the trustee uses a remote bank or because an estate account has not been opened, immediately convert the currency to a cashier's check or money order and place it in a secure location until deposited. When possible, the trustee should attempt to obtain the cashier's check or money order free of charge. If this is not possible, the service charge may be deducted from the funds received, with the cashier's check or money order issued for the net amount. The service charge is a cost of administering the estate. The trustee should record the gross amount received and the amount of the service charge in the transaction description column on Form 2 and in the receipts log.

(3) If currency is received late in the day and it is impossible or impractical to follow the above procedures, secure the funds in a safe or locked drawer until the next business day when these procedures can be carried out. The trustee also may want to investigate the possibility of using the bank's night depository or 24 hour services if the bank is not in a remote location.

c. All supporting documentation in connection with handling currency should be kept together in the estate file to provide an audit trail. When an employee handles currency, the trustee needs to verify that the amount of the check or money order matches the amount of funds initially turned over to the employee, less any applicable service charge.

5. EARNEST MONIES

(See also Appendix G.)

a. In connection with the sale of estate assets, the trustee may occasionally receive and hold earnest monies. These funds are held in trust until the sale is consummated in accordance with applicable bankruptcy law. The funds must be deposited to the estate account immediately upon receipt. They may not be held, undeposited, in the trustee's office or commingled with a law firm's trust account.

b. As an alternative, the trustee may, upon approval of the United States Trustee, deposit earnest monies to a separate trust account established specifically for this purpose. A separate account for each estate is necessary. Specific accounting and record keeping requirements have been established for these accounts. The trustee should discuss this option and obtain approval from the United States Trustee prior to opening such an account.

6. HANDLING OF FUNDS WHICH CANNOT, OR SHOULD NOT, BE DEPOSITED IMMEDIATELY

a. Funds are to be deposited to the estate bank account promptly after receipt (generally mailed or taken to the bank within two business days) and must not be placed in a file while the trustee waits for subsequent events to occur. However, in a rare instance funds may be received which cannot or should not be immediately deposited. Such instances may include, but are not limited to: (1) receipt of a settlement offer, the acceptance of which will be deemed acceptance of the terms of the proposed settlement; (2) garnished funds received from court clerks or employers in cases with nominal or no other assets; and (3) funds paid in settlement of sanctions imposed in petition preparer cases.

b. When a trustee cannot immediately deposit funds received, the following procedures apply:

(1) Note receipt of the funds in the cash receipts log and place the funds in a safe place until deposited or turned over to the debtor or other party.

(2) Immediately convert any currency received to a cashier's check or money order (any charge to purchase the cashier's check or money order is treated as a cost of administration).

(3) Dispose of the funds within 30 days after receipt of the funds or, in cases requiring a court order for disposition, 21 days after entry of a final order.

(4) If a court order for disposition of the funds is required, the trustee must obtain such order without undue delay.

(5) Record the final disposition of the funds in the cash receipts log.

(6) If the funds are turned over to the debtor or another party and the case will not be administered as an asset case, keep a copy of the check with the cash receipts log. If the NDR has already been filed, keep a copy of the check with the cash receipts log or in a separate file.

7. RECEIVABLES

a. A receivables ledger or other tracking mechanism, as described at Handbook Chapter 9.D on page 9-12, should be maintained when multiple payments are being collected (e.g., accounts receivable, notes receivable, installment sales). The tracking system should reflect a running balance of amounts owed and be updated as payments are received.

b. If the trustee intends to turnover the receivables to a third party for collection, the initial demand letter should be sent by the trustee. In addition, the trustee should retain a control copy of the receivables turned over and should request a periodic status report and accounting of the collection efforts undertaken, monies collected, and remaining balances due.

8. DISBURSEMENTS

a. All disbursements should be made by estate checks drawn on the estate account (with the exception of items below discussed at Handbook Chapter 9.D.8.c and 8.f) and be fully supported by appropriate documentation (e.g., invoice, fee application, court order).

The trustee should review all supporting documentation and personally sign all checks. No signature stamp may be used.
Checks may not be pre-signed by the trustee before the date, payee, and amount are written in.
Checks must be made payable to a specific payee and not payable to "cash," "bearer," or "currency.
The supporting documentation should indicate the trustee's review and approval, which may be recorded electronically or by hand.
The supporting documentation must be kept in the estate file. Court orders for disbursements (when required) do not need to be kept in the estate file if available electronically from the court. But if the amount on the invoice or fee application differs from the amount approved in the court order, an explanation of the difference must appear on the supporting documentation. If there is no supporting documentation other than the court order electronically available from the court, a copy of the check may serve as supporting documentation. The supporting documentation should contain the related docket entry number or date, when applicable.

b. "Starter" checks (the initial check book provided by some banks for new accounts) should only be used when absolutely necessary and should be hand-numbered by the trustee upon receipt. Starter checks should be voided and maintained in the estate file upon receipt of bank-numbered checks or checks that are printed from the trustee's case management system.

c. Cashier's checks and wire transfers may only be used under extraordinary circumstances, upon approval of the United States Trustee. "Extraordinary circumstances" can include, but are not limited to: (1) an immediate payment by a trustee is necessary to prevent loss to the estate or injury to a person or property and the service provider will not accept an estate check; (2) a wire transfer is required by applicable law or regulation (e.g., tax deposits in excess of $50,000 per 26 C.F.R. Parts 1, 31, and 40); and (3) a payment must be made to an overseas creditor or a foreign corporation. A copy of the cashier's check or wire transfer bank advice and related documentation must be maintained in the estate file.

d. Counter checks may never be used.

e. All checks must be captioned with the bankruptcy case name and number and the chapter 7 trustee's name. The terms "Debtor" and "Trustee" should appear, unabbreviated, as illustrated in the following example: "Case Number 02-12345; Jane Smith, Debtor; John Jones, Trustee." (Each item in this example is required, in no particular order. The term "Case Number" is desirable, but may be abbreviated or omitted.) The checks also must include a statement that the check will be void if not cashed within 90 days.

f. Court fees, such as filing fees for adversary proceedings, may be paid electronically using the trustee's personal or firm credit card. The trustee may be seek reimbursement and be paid in accordance with local rules.

g. Currently, payments to the court for unclaimed dividends and dividends less that $5 must be paid by estate check. Alternate forms of payment are under consideration. The trustee should contact the United States Trustee for more information.

h. As an additional control, the trustee should consider asking the bank to obtain verbal approval from the trustee when checks over an established dollar amount (e.g., $50,000) are presented for payment.

9. COMPUTER SYSTEM

a. The trustee, employees, and independent contractors must have unique passwords for their case management system and the bankruptcy court's CM/ECF system. Passwords must be changed at least annually and when the person leaves or no longer works on chapter 7 matters.

b. Access to the case management system should be limited according to the duties performed by the user. The ability to set up and change passwords and access settings should be limited to the trustee.

c. All users should be familiar with the computer system user's manual. The manual should explain the system's features and how it operates.

d. The computer should be safeguarded from unauthorized access and use. Computer hardware and software should be kept in a secure, limited access area. Certain peripherals (such as a MICR toner cartridge) should be kept under lock and key. Only authorized users should be able to gain access to the chapter 7 computer programs and data via the terminal, network or modem.

e. The data within the case management system and all electronically maintained estate files must be backed-up daily. A copy of the back-up must be maintained in a secure off-site location at least weekly. The trustee is responsible for ensuring that the data and estate files are protected and recoverable. The trustee also needs to ensure the continued availability of the software needed to access the files.

(1) If the back ups are conducted by the software provider, the trustee must obtain written assurances from the provider regarding data integrity, security, and recovery within a reasonable amount of time (e.g., 24 - 48 hours). The trustee may want to keep local back ups for use in the event that the service provider cannot restore the data within the necessary time frame.

(2) The trustee must ensure that the backup and recovery procedures are tested periodically. The trustee is advised to routinely back up computer files that are not part of the daily back up described above.

(3) If the trustee upgrades the chapter 7 computer software or hardware, or converts to a new system, the trustee must ensure continued access to archived electronic case information. This may require retention of the prior hardware and/or software. As a security matter, unused prior software generally should not be retained on the new system.

f. The computer system and data should be protected from viruses, intrusion via the internet, and power disruptions. The trustee should have virus protection software that is updated at least monthly.

g. The software should contain a tamper-proof feature that consecutively numbers estate account checks as the checks are created or printed by the computer system. The numbers of voided checks should not be able to be re-used. The number sequence on manual checks should not duplicate the computer-generated numbers.

h. The software should prevent any changes to the date, check number, payer/payee, and amount of a transaction, as well as the deletion of a transaction, after the check has been printed, or deposit has been made, or the transaction has appeared on Form 2⁽¹¹⁾. Some changes are permissible.

On Form 2, the trustee may change a transaction description, reference number, and uniform transaction code.

(1) If the trustee needs to change the date, check number, payer/payee, or amount, or void a deposit or check, reversing and correcting entries to void the transaction must be made. A "void" transaction reverses the previously entered transaction. By showing the original and void transaction, Form 2 will provide a clear record of what happened.

(2) If a transaction has been posted to the wrong estate (e.g., a deposit to the correct estate, but the entry is recorded for the wrong estate), it may not be deleted by the trustee or the software vendor. The trustee must enter a correcting entry to provide the appropriate audit trail.

(3) If a deposit was made to the wrong estate, the correction cannot be made electronically or by bank transfer. The trustee must write an estate check equal to the amount deposited in error and deposit the check to the correct estate and the correcting entry must be recorded on Form 2.

(4) If the deposit was made to the wrong account, but the correct estate, the trustee may correct the error in the customary way for transferring money between accounts within the same estate (e.g., electronically or by bank transfer).

(5) If an incorrect account number or case number is entered for an estate (e.g., numbers are transposed), the software may enable the trustee to delete or change the account or case number as long as no transactions or other activity have been entered. If transactions and other activity have been entered, there are two ways to correct the mistake:

(a) With the trustee's written authorization, which should explain how the error occurred, the software provider may correct the account number or case number for the trustee, or

(b) The trustee can void and reverse all of the transactions entered to the incorrect account or case and re-enter the transactions to the correct account or case.

i. The software should prevent deletion and re-use of an asset reference number on Form 1. If an incorrect asset is listed on Form 1, the trustee should replace the asset's description in Column 1 with the word "void" to indicate that there is no asset associated with the reference number. All reference numbers should continue to print sequentially on Form 1; that is, there should be no gap in the reference number sequence.

j. The software should enable the trustee to generate Forms 1, 2 and 3 as of any cut-off date, excluding transactions and events that occurred after the cut-off date.

10. MAINTAINING ESTATE RECORDS

a. Savings certificates, savings account books, investments, cash, blank checks, estate checks, and other items of value should be kept in a safe or locked cabinet.

b. All estate files, including paper and electronic accounting records, should be stored in secure facilities, not accessible to the public.

c. The trustee should develop and maintain a written business interruption (or disaster recovery) plan for the estate financial and administrative records, as well as for the computer system and data. A printed copy of the plan should be stored in the trustee's office and at an offsite location known to the trustee and staff.

d. Generally, unless otherwise noted in this Handbook, the trustee may keep estate records in paper form, electronic form, or some combination of both. Except for the items listed below, original documents may be scanned and discarded after the scanned image has been verified against the original. Following is a non-exhaustive list of items that must be kept in paper form:

(1) Bank reconciliations, bank statements, canceled checks and returned items, if any;

(2) Blank deposit slips and check stock; voided checks (if in the trustee's possession);

(3) Investment certificates and other evidence of estate investments;

(4) Promissory notes for installment sales and other original documents evidencing estate assets;

(5) Business interruption/disaster recovery plan; and

(6) Any original documents the trustee is required to keep pursuant to local rules.

e. Estate files should be logically organized and readily accessible. Filing should be up-to-date. Financial records should be segregated from the other case administration records (such as pleadings). In general, records available electronically from the court (e.g., bankruptcy petitions, schedules, and statements; court orders for sales and disbursements) do not need to be kept in the trustee's estate files, unless these documents contain the trustee's notes about the administration of the case. See Handbook Chapter 9.D.3 and D.8 for related discussion and exceptions.

f. For an asset case, the trustee is required to retain the paper and electronic case files and estate accounting records for a period of at least two years after the date on which the trustee was discharged and during which a proceeding on the trustee's bond may be commenced. Following is a non-exhaustive list of items that must be maintained for each asset case:

(1) All documents relating to the financial transactions of the estate (e.g., cash receipts log; receivables ledger; copies of incoming checks, transmittal letters, and other supporting documentation for receipts; bills or invoices for estate expenses; tax returns or waivers, etc.).

(2) All documents relating to the possession and maintenance of assets (e.g., receipts for property turned over to trustee, appraisals, inventories, casualty insurance, etc.).

(3) All documents relating to the supervision of professionals.

(4) All documents relating to the disposition of assets (e.g., lien documentation; collection letters; notices or advertisements of sales or abandonments; court orders as to the disposition of assets and the payment of expenses [except as noted above]; offers received, auctioneer's reports, etc., and all supporting documentation relating thereto).

(5) All notes and internal memos created in connection with the above, including case notes contained in the memo and note fields of the trustee's chapter 7 computer system, notations written on correspondence or memos to the file, records of telephone conversations, and time records.

g. For a no-asset case, the trustee should retain in paper or electronic estate files all of the documentation that supports the trustee's independent investigation and determination that the case is a no-asset case, for a period of at least two years after the date on which the trustee was discharged and during which a proceeding on the trustee's bond may be commenced. Such documentation may include: payoff letters, lien search results, appraisals, blue book values, § 341(a) meetings notes, etc. The trustee is not required to keep documents that are part of the official court file (e.g., the petition, schedules and statements), unless these documents contain the trustee's notes regarding the no-asset determination.

E. AUDITS, EXAMINATIONS, AND REVIEWS⁽¹²⁾

Audits, examinations, and reviews of each chapter 7 trustee's accounting and case administration activities are conducted periodically. The audits are performed by independent certified public accountants or the Department of Justice's Office of the Inspector General. The examinations and reviews are performed by United States Trustee personnel (e.g., a "UST Field Exam" or a "Case Administration Review").

The trustee will be advised at least two weeks in advance of when the audit, examination, or review will be conducted. The trustee must have all records available and make every effort to ensure that all appropriate employees are on hand. If the trustee maintains a paperless filing system, the trustee should be prepared to download to CD-Rom the estate files and records for the cases selected by the auditor, examiner, or reviewer. The trustee also may be asked to print documents from the trustee's case management system or the court file.

An audit or an examination lasts approximately 2-3 days in the trustee's office; a review is more flexible, but generally will not exceed three (3) days. The auditor, examiner, or reviewer will examine case files and accounting records and conduct interviews with the trustee and employees.

An exit conference will be held at the conclusion of the audit, examination, or review. The findings will be explained and the trustee may receive recommendations to improve internal controls, record keeping, and case administration procedures.

1. RESOLUTION OF AUDITS AND UST FIELD EXAMS

A written report on the results of the audit or examination is issued usually within 30 days of the exit conference. The United States Trustee forwards the report to the trustee. The trustee must provide a written response to the United States Trustee within 45 days of the date of the written report describing and documenting the corrective actions taken and the procedural changes implemented.

The United States Trustee may arrange a follow-up visit to verify the implementation of the corrective actions described in the trustee's response.

If an inadequate audit opinion or examination conclusion is issued, the trustee will be suspended from the active rotation for receiving new cases in accordance with the procedures described in 28 C.F.R. § 58.6. An inadequate opinion or conclusion means that the quality of the trustee's accounting and cash management practices and procedures was inadequate for the safeguarding of bankruptcy estate funds. The trustee will receive written notice of the suspension pursuant to 28 C.F.R. § 58.6, and an interim directive requiring immediate suspension of case assignments may be issued, if the circumstances under § 58.6(d) exist. Implementation of corrective actions, a follow-up visit by the United States Trustee, and the approval of the Deputy Director, Executive Office for United States Trustees, are required in order for case assignments to resume.

2. RESOLUTION OF CASE ADMINISTRATION REVIEWS

When applicable, the trustee will receive a written notice of deficiencies with deadlines for implementing corrective actions. The trustee should provide a written response to the United States Trustee within 45 days of the date of the written notice.

The United States Trustee may arrange a follow-up visit or accept documentation to verify implementation of the corrective actions described in the trustee's response.

CHAPTER 10

COMPLIANCE MEASURES

A. REMEDIAL AND ENFORCEMENT ACTIONS

The United States Trustee is responsible for supervising trustees. 28 U.S.C. § 586. Trustees are fiduciaries who are held to very high standards of honesty and loyalty. Trustees who fail to maintain this high standard or who are otherwise deficient in their administration of cases will be subject to a wide range of corrective action by the United States Trustee or the court.

If the nature of the trustee's actions reflect dishonesty, deceit, fraud, or serious mishandling of estate funds, a single substantiated incident justifies immediate action by the United States Trustee to protect the bankruptcy estates. The remedies considered by the United States Trustee include motions to remove the trustee from his case(s), temporary restraining orders, orders for turnover of books and records, and referral to the United States Attorney and state licensing authorities.

Trustee conduct that does not rise to the level of dishonesty, fraud, or immediate asset risk merits the use of progressive or cumulative remedies that range in severity from meetings with the trustee to filing motions to compel, seeking disgorgement or surcharge, temporarily suspending the trustee from rotation, not reappointing the trustee to the panel, or seeking to permanently remove the trustee from all cases. Imposition of these remedies is at the discretion of the United States Trustee. The types of conduct that may warrant one or more of these remedies include substandard reporting or asset investigation efforts, repeated instances of underbonding, inadequate internal controls, or weak case administration. For example, if a trustee has a large number of older cases that appear ready for closure, the United States Trustee may address the situation by meeting with the trustee to discuss why the cases have not been closed. Depending upon the results of the meeting and the trustee's subsequent efforts to close older cases, the United States Trustee may find it necessary to file motions to compel the filing of final reports (TFRs) or to temporarily suspend the trustee from panel rotation until the older caseload is reduced. If these remedies do not produce the desired results, the United States Trustee may decide not to renew the trustee's appointment to the panel and also may seek the trustee's removal from the case(s).

There may be circumstances when a trustee voluntarily seeks temporary suspension from case assignments. In this event, the trustee should submit a Notice of Voluntary Suspension. See Appendix F. Voluntary suspensions usually result under three scenarios. The first scenario is the situation where the trustee requests a suspension for personal reasons. For example, the trustee may have health concerns, wish to take maternity leave or need to care for a family member. In the second scenario, the trustee requests suspension for case administration reasons. For instance, the trustee has a temporarily large caseload or an unusually large, complex case. In the third scenario, the trustee requests a suspension for the purpose of correcting a deficiency or

deficiencies in the trustee's administration of bankruptcy estates. If the United States Trustee agrees, 28 C.F.R. § 58.6 is not invoked as an enforcement tool. Under this scenario, Appendix F may be modified to delete the time period, so that the United States Trustee determines when the deficiency has been resolved and the suspension may be lifted. If a time period is set and the deficiency has not been remedied, the United States Trustee may need to pursue suspension or non-reappointment.

Suspension from panel rotation is required in the following situations:

· Failure to timely file interim reports.

· Issuance of an inadequate opinion as a result of an OIG audit or UST field examination.

B. PROCEDURES FOR SUSPENSION AND TERMINATION (28 C.F.R. § 58.6)

The United States Trustee will notify a panel trustee in writing of any decision to suspend⁽¹³⁾ the trustee from panel rotation or not renew the trustee's appointment to the panel. The panel trustee will continue to receive cases for the next twenty days, or longer if the panel trustee appeals the United States Trustee's decision to the Director, EOUST. In cases where estate assets are at risk or there appears to be gross misconduct, the United States Trustee may issue an interim directive for the immediate cessation of case assignments. The trustee may seek a stay of the interim directive from the Director if the trustee has timely filed a request for review under 28 C.F.R § 58.6(b). See Appendix E.

FORMS AND INSTRUCTIONS

GENERAL INSTRUCTIONS FOR INTERIM REPORTS (TIRs)