Forfeiture of Office by Buying Estate Property: The Bankruptcy Crime and the Civil Punishment: Part I
by Alec P. Ostrow
Stevens & Lee, P.C.; New York
Among the listed “Bankruptcy Crimes” in chapter 9 of title 18 of the U.S. Code is one for “knowingly purchas[ing] directly or indirectly, any property of the estate of which the person is . . . an officer in a case under title 11.” The criminal fiduciary does not go to jail; he or she is fined. Significantly for present purposes, the fiduciary who violates this prohibition automatically forfeits his or her office. Although prosecutions may be extremely rare, the forfeiture of office can nevertheless be enforced civilly in the bankruptcy court.
There is an express provision in the Bankruptcy Code for removal of trustees and examiners “for cause.” Other fiduciaries are removable under other provisions of the Bankruptcy Code. Chapter 11 debtors-in-possession (DIPs) are replaceable by trustees for cause, and if not replaced, are subject to the imposition of restrictions on their operation of the business. Committee members – if the prohibition applies to them – can be removed. Professional persons, including attorneys, accountants, appraisers and auctioneers, may be employed only with the court's approval, which, presumably for cause, may be withdrawn. In the absence of any specific authority, the court has the power to issue any order “necessary or appropriate to carry out the provisions” of the Bankruptcy Code. Notably for offending trustees and examiners, if a trustee or examiner is removed in one case, that person is simultaneously “removed in all cases in which such trustee or examiner is then serving unless the court orders otherwise.”
Secured Party Sales: Fraudulent Conveyances?
by Patricia B. Fugée
Roetzel & Andress; Toledo, Ohio
Secured creditors routinely foreclose upon and sell personal property under Article 9 of the Uniform Commercial Code (UCC), mindful of the requirement that they must do so in a “commercially reasonable” manner. UCC §§9-607 and 9-610. The usual penalty for failing to be commercially reasonable is that any deficiency judgment is reduced, or perhaps the secured creditor might be liable for whatever damages could be shown, but that is usually a remote possibility. See UCC §9-625. However, a recent decision from Delaware, In re American Business Financial Services Inc., 2007 WL 528859 (Bankr. D. Del. 2007), should serve as a reminder that the penalty may be worse: The secured party sale could be avoided as a fraudulent transfer, thus potentially destroying the secured creditor’s recovery altogether.
Ethical Duties Regarding ESI in Bankruptcy Pursuant to the ABA’s Model Rules of Professional Conduct
by Lee Barrett
Forshey & Prostok LLP; Fort Worth, Texas
The ethical obligations of debtor’s counsel, particularly in the context of practical situations where the client may believe its best interests are in opposition to counsel’s obligations— the focus and the dynamics of ESI (electronically Stored information), places attorneys at risk. One such instance is the debtor who belatedly discovers undisclosed sources of ESI on the eve of trial. Believing the information to be irrelevant, and hopefully unresponsive, the client doesn’t believe disclosure is necessary. Given that bankruptcy practitioners are officers of the court, perhaps even more so than in other practice areas, ABA Model Rule 3.3 dictates that candor toward the tribunal trumps the client’s instructions. The panel briefly discussed the alternative of essentially doing nothing in the way of exploring and developing the client’s ESI disclosure. Aside from the carryover concerns of Rule 3.3, taking such an approach is destructive to the credibility of both debtor and counsel and undermines a series of counsel obligations under the ABA rules, including the duty of communication (Rule 1.4) and the duty to provide frank legal advice (Rule 2.1).
Minutes from 2007 Annual Spring Meeting
On April 14, 2007, ABI’s Commercial Fraud Task Force Committee met in conjunction with the 2007 Annual Spring Meeting in Washington, DC. The panel presented “Understanding Debtor Responsibilities in Consumer and Business Cases: Providing Electronically Stored Information.”
Co-chair Jack Seward announced the addition of eight contributing editors for the committee’s e-newsletter and that, after many years of service, Co-chair Sandra Rasnak would be leaving the committee. Francis A. Monaco, Jr. of Monzack and Monaco, PA (Wilmington, Del.) and Sheryl L. Toby of Dykema Gossett PLLC (Bloomfield Hills, Mich.) have joined as co-chairs of the committee.
The panel was comprised of moderator Bruce L. Weiner of Rosenberg Musso & Weiner, LLP (New York), Lee Barrett of Forshey & Prostok LLP (Fort Worth, Texas), Michael D. Fielding of Blackwell Sanders Peper Martin LLP (Kansas City, Mo.), Patricia B. Fugée of Roetzel & Andress (Toledo, Ohio), David P. Leibowitz, of Leibowitz Law Center (Waukegan, Ill) and a chapter 7 trustee, and Jack Seward of Jack Seward & Assoc., LLC (New York). The panel covered the responsibilities that bankruptcy counsel and professionals have to make use of electronically stored information and how to find the assets in the 21st century for the estate, along with the responsibilities of the debtor and debtor counsel with practical use and application for debtor’s counsel, panel trustees and creditors and creditors’ counsel as it relates to §§707, 542 and 727, Rule 9011 and 18 U.S.C.
Jack Seward introduced our topic by discussing electronically stored information and its importance in bankruptcy cases, and drew on his experience as a digital forensic accounting technologist by discussing why electronically stored information is often the only information in a bankruptcy case and how that information can be recovered even if the debtor tried to hide or remove it. David Leibowitz then gave two fact patterns based on actual cases he handled as a trustee where the debtor tried to conceal information, including electronically stored information. The panel used the fact patterns to discuss the various roles of attorneys in a bankruptcy case.
The panel designated Lee Barrett and Michael Fielding to be our debtor’s attorneys. Michael discussed how he would advise a debtor before and after filing about ESI and the attorney’s role in preserving ESI and protecting the privileged nature of electronically stored attorney-client communications. The attorney’s ethical duties regarding ESI in bankruptcy proceedings, including what does an attorney do if you discover that your client has attempted to delete ESI and the ESI may lead to assets, was discussed by Lee Barrett and led to many questions from the audience and a spirited discussion by all panel members.
The need to discuss ESI issues with a client before a bankruptcy petition was addressed. Patricia Fugée, our creditors’ counsel, discussed what an attorney for creditor should do to collect and preserve information, including ESI, as that job begins long before a bankruptcy filing. She said she advises her clients to start collecting and preserving information when the creditor enters into the financial relationship with a borrower, including saving all e-mails and e-mailed documents. She also explained that in her experience, after a filing she uses the documents and communications received at the time of the loan and compares them to the bankruptcy schedules and other filings in the case, including requests for use of cash collateral. This is important, because often there are contradictions between the information at the time of the loan and the information at and during the filing, and those contradictions may lead to discoverable information and even to a motion to appoint a trustee.
David Leibowitz, a panel trustee in Chicago, explained how a trustee collects and reviews information, including ESI. He discussed some of the trustee cases that he has handled where ESI was important, including one case where he used ESI to find several related businesses that the debtor failed to disclose. Following up on using ESI, Bruce Weiner discussed a case that Jack Seward worked on where the debtor’s principals tried to remove documents from the computers at 4:00 a.m. the day after the case was converted to chapter 7, and most, if not all, of those documents were recovered and led directly to assets for the estate.
The panel and the audience agreed that every bankruptcy attorney has new opportunities and responsibilities in our “digital age,” and we all need to learn about ESI and the new ethical issues raised by ESI. Keep watching the eNewsletter for more on this topic and for information on our next panel presentation, which will be at ABI’s Winter Leadership Conference in December.