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A Trustee's Guide to Selected Legal Issues
in Chapter 7 Final Reports
Written by: Richard C. Friedman
Office of the United States Trustee
Once a Chapter 7 case has been fully administered, it is time for the
trustee to submit the final report to the United States Trustee. Before
submitting the report, the trustee should be confident that there are no legal
issues that could cause the United States Trustee to return the report or, worse
yet, object to it. This article highlights a number of legal issues that
trustees should keep in mind when preparing a final report in a Chapter 7 case.
Some of the issues discussed below pertain to every Chapter 7 final
report. Other issues, however, arise only in complex cases. For purposes of this
article, a complex case is defined as one that was either commenced
involuntarily or converted from another chapter. Of course, while the issues
identified below are important and recurring, they should not be considered
exhaustive. For your convenience, a quick checklist of the final report issues
discussed here appears at the end of the article.
1. IS THE FINAL REPORT PREMATURE?
The trustee submits the final report when the case is fully
administered. As a working definition, a case may be considered "fully
administered" once all assets have been reduced to cash, all claims objections
resolved and all applicable tax returns accepted. Therefore, it is premature to
submit the final report if some property still needs to be reduced to cash, if
abandonments need to be done (other than at case closing), if a bar date for
claims has not been set and expired, if there are unresolved claims objections,
if any fee applications remain to be submitted, or if adversary proceedings that
may result in cash for the estate have not been concluded. Remember that the
pendency of dischargeability complaints or objections to discharge ordinarily
should not delay case closing, because they have no effect on the dividend
creditors will receive from the estate.
2. IS THE APPROPRIATE FEE BEING REQUESTED?
The trustee's fee request is submitted as part of the final report. The
compensation requested is subject to 11 U.S.C. §326. Amendments to §326 have
changed the maximum allowable fee over time. One scale applies to cases filed
from October 1, 1979, through October 7, 1984. Another applies for cases filed
from October 8, 1984, through October 21, 1994. The current one applies only to
cases filed on or after October 22, 1994. To avoid an objection, request the
appropriate fee for the date your case was filed.
Remember that the fee limitation of §326 cannot be circumvented by use
of 11 U.S.C. §506(c). That section permits a trustee to surcharge secured
creditors for benefits conferred by the estate upon their collateral. Section
506(c), however, is not a compensation statute and funds recovered pursuant to
it inure to the estate. The trustee receives fees pursuant to 11 U.S.C. §330 as
capped by §326 and those fees cannot exceed the percentage permitted therein.
3. IS THE REQUESTED FEE IN CONFORMITY WITH UNITED STATES TRUSTEE FEE
The Executive Office for United States Trustees has promulgated
guidelines for reviewing fee applications and reimbursement of expenses filed
under §330. To avoid an objection, the trustee's fee request should conform to
the guidelines. Because Guideline I., F. allows for regional variations in
format, an applicant should consult with the United States Trustee regarding
Be sure that trustee time does not appear in the fee requests of other
professionals, such as the trustee's accountants or attorneys. Also keep in mind
that while the time spent by a paraprofessional may be used to justify allowance
of the trustee's statutory cap, paraprofessional time is not separately
4. HAS CASH BEEN MANAGED APPROPRIATELY?
The estate account should not have been depleted by unauthorized bank
charges or debits, such as service charges or fees for supplying check stock or
providing computer software and hardware. The trustee should attempt to have the
bank reverse any such charges before submitting the final report.
The trustee should have had estate funds invested during the pendency
of the case. If the trustee has lost an amount of interest, the trustee's own
fees may be surcharged for the loss. In the final report, the trustee should
explain why interest was not earned. Further, the trustee should consider
voluntarily reducing fees requested in order to avoid being surcharged for the
5. HAVE THE APPROPRIATE TAX RETURNS BEEN FILED AND TAXES PAID?
In corporate cases the trustee must file tax returns or obtain waivers
from the IRS, regardless of whether the corporation has income. Where the
estate's gross income equals or exceeds the exemption amount plus the standard
deduction, federal and state tax returns also have to be filed in individual
cases. The final report should note that tax returns have been filed and
accepted, that a tax waiver was obtained, or that no tax return was necessary
given the debtor's tax status.
Trustees also are required to do the appropriate withholding when
paying wage claims. The proposed or pre-distribution report should identify how
the withholdings were computed and show both the gross and net amount of wage
claims to be paid.
Further, the trustee may need to file sales, excise, and other tax
returns to establish the amount of the taxing authority's claim.
6. HAVE SECURED CLAIMS BEEN ADDRESSED?
Secured creditors are not required to file proofs of claims. Although
secured debt is not mentioned in 11 U.S.C. §726, secured claims must be paid
first if the secured creditors' liens attach to cash held by the trustee--for
example, if a creditor had a blanket lien on the debtor's assets. If an
undersecured creditor has a lien on property that has not yet been abandoned,
the trustee should abandon the property before closing to enable the creditor to
assert an unsecured deficiency claim.
7. IS THE PROPOSED DISTRIBUTION TO CREDITORS CONSISTENT WITH SECTIONS
726 AND 507 OF THE BANKRUPTCY CODE?
Because 11 U.S.C. §507, the priority section, is amended from time to
time with additional priorities being incorporated, it is important that the
trustee's dividends conform to the priority scheme in place on the date the case
was filed. Of course, the trustee must separately classify claims of different
priority. For example, unsecured claims should not be lumped with tax claims.
Note that with respect to tax claims, priority treatment is accorded
8. HAVE DUTIES OTHER THAN LIQUIDATION OF ASSETS BEEN PERFORMED?
Trustees are responsible for policing debtors' attorneys' fees for
excessiveness, bankruptcy petition preparers for conformance to 11 U.S.C. §110
and debtors for appropriateness of discharge or dismissal in case of substantial
abuse. Trustees are also required to refer instances of possible criminal
violation. Although time spent performing these duties does not necessarily
result in cash for the estate, it can be used to justify the trustee's fee
allowance. Such time should be recorded in the trustee's fee application.
Issues in Complex Cases
9. HAVE ISSUES PECULIAR TO THE INVOLUNTARY CASE BEEN ADDRESSED?
Cases commenced by involuntary petitions may raise problems not found
in Chapter 7 cases filed voluntarily. In some but not all cases a "custodian"
may have been in place before the petition was filed. A typical custodian is an
assignee for the benefit of creditors or receiver. Bankruptcy Rule 6002 requires
a custodian to file an accounting and the court to rule on the propriety of the
custodian's administration. The custodian's accounting and the court's order
should be included in the final report. The trustee may have to compel the
filing of these papers since they are often not filed voluntarily.
Creditors and their attorneys and/or accountants can be compensated for
filing the involuntary case. Their fee applications should be included with the
final report, unless they already have been ruled on or were administratively
10. HAVE ISSUES PECULIAR TO CASES WITH SUCCESSOR TRUSTEES BEEN
Cases involving two or more trustees also raise problems not ordinarily
found in Chapter 7 cases. Bankruptcy Rule 2012(b) requires the successor trustee
to "file" with the court an accounting of the prior trustee's
administration. This may be a separate document or part of the final report. The
trustee should clearly differentiate between his or her administration and that
of the predecessor trustee. Note that although the successor administration
starts with what was received from the predecessor, the Rule 2012(b) accounting
starts with what the predecessor received from the debtor or his or her
Where the trustee served both as Chapter 11 trustee and Chapter 7
trustee, the trustee is technically his or her own successor because 11 U.S.C.
§348(e) automatically terminates the service of a Chapter 11 trustee upon
conversion. Accordingly, the final report should delineate and distinguish the
Chapter 11 administration from the Chapter 7 administration. This may be
important if there are enough funds to pay Chapter 7 costs of administration,
but not enough to fully pay debtor-in-possession claims, including Chapter 11
Keep in mind that while the Chapter 11 trustee may be reappointed as
the Chapter 7 trustee, there is no legal requirement that this be done. Nor does
such reappointment relieve the trustee from complying with the requirement, in
Bankruptcy Rule 1019 and Chapter 8-35 of the Handbook for Chapter 7 Trustees,
for the Chapter 7 trustee to submit a final report after a case is dismissed,
converted, or reassigned.
11. HAVE ISSUES RAISED BY ESTATE SURPLUS OR INSOLVENCY BEEN ADDRESSED?
Surplus and insolvent estates raise unique issues. When the estate has
a surplus and there are sufficient funds to pay creditors in full, interest at
the legal rate must be provided to them before funds are turned over to the
debtor. When the estate is insolvent and lacks sufficient funds to pay Chapter 7
costs of administration in full, the trustee and associated professionals will
have to share pro rata with the bankruptcy clerk and, if applicable,
the United States Trustee. If any professionals previously received interim
compensation, the trustee should move to disgorge such sums so that all may
share pro rata.
12. HAVE ISSUES ARISING IN CONVERTED CASES BEEN ADDRESSED?
Cases converted from Chapters 11, 12, and 13 raise problems not found
in other Chapter 7 cases. First, those cases are not ready to close until the
final report and schedule of post-petition debts are filed pursuant to Rule
1019(5), the bar date has been set and expired for such claims, and the claims
have been reviewed and determined. A copy of the Rule 1019(5) report should be
included in the final report. Note that this report is in addition to the final
report filed by the standing trustee pursuant to the same rule.
Second, professional fees incurred before conversion must be dealt with
in the final report, if they have not already been determined by the court. If
professionals have received retainers or had their retention approved by the
court, their fee applications should be included with the final report or an
administrative bar date order should be included to justify not paying them.
Professional fees cannot simply be paid through filing a proof of claim, as they
require a judicial determination for their allowance.
Remember that in cases converted from Chapter 11 prior to August 1,
1987, creditors did not need to file proofs of claims in order to receive a
dividend. If the Chapter 11 debtor listed the claims as undisputed, the trustee
must pay them.
Finally, in cases converted from Chapter 11 there are often unpaid
United States Trustee quarterly fees. These amounts have the same priority as
Chapter 7 costs of administration and clerk of court fees. Therefore, if the
estate is insolvent, Chapter 7 costs of administration must share pro rata with
the United States Trustee. These fees should not be overlooked in the trustee's
Trustees must exercise professional judgment in implementing the
suggestions set forth in this article. For the most part, however, addressing
these issues should result in trustees' final reports being processed more
smoothly and cases being closed more quickly.
SELECTED LEGAL ISSUES
IN CHAPTER 7 FINAL REPORTS - QUICK CHECKLIST
_ _ 1. IS THE FINAL REPORT PREMATURE?
_ _ 2. IS THE APPROPRIATE FEE BEING REQUESTED?
_ _ 3. IS THE TRUSTEE'S FEE REQUEST IN CONFORMITY WITH UNITED STATES TRUSTEE
_ _ 4. HAS THE CASH BEEN MANAGED APPROPRIATELY?
_ _ 5. HAVE APPROPRIATE TAX RETURNS BEEN FILED AND PAYMENTS MADE?
_ _ 6. HAVE SECURED CLAIMS BEEN ADDRESSED?
_ _ 7. IS THE PROPOSED DISTRIBUTION TO CREDITORS CONSISTENT WITH SECTIONS 726
AND 507 OF THE BANKRUPTCY CODE?
_ _ 8. HAVE DUTIES OTHER THAN LIQUIDATION OF ASSETS BEEN PERFORMED?
ISSUES SPECIFIC TO COMPLEX CASES
_ _ 9. HAVE ISSUES PECULIAR TO INVOLUNTARY CASES BEEN
_ _ 10. HAVE ISSUES PECULIAR TO CASES WITH SUCCESSOR TRUSTEES BEEN ADDRESSED?
_ _ 11. HAVE ISSUES RAISED BY ESTATE SURPLUS OR INSOLVENCY BEEN ADDRESSED?
_ _ 12. HAVE ISSUES ARISING IN CONVERTED CASES BEEN ADDRESSED?
Bankruptcy Basics - For Cases Filed on or after October 17, 2005 (pdf)
Basics - For Cases Filed before October 17, 2005 (pdf)
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