Bankruptcy Fraud
Bankruptcy Trustees

The Predators Within

When you file bankruptcy, the court assigns your case a trustee to administer the case. These people are legally known as Panel Trustees, but commonly referred to as a trustee, or bankruptcy trustee.

They are contract employees. We Repeat: They are not government employees. They are on contract.

During the 1930s, a new division within the U.S. Justice Department called the U.S. Trustee Office was created to deal with the rampant fraud by bankruptcy trustees against citizens and businesses.

But something is very wrong with the U.S. Trustee program. Graft and corruption among the panel trustees has not lessened and victims still have no recourse. Most victims report their evidence of criminal activity goes into a black hole and the U.S. Trustee does nothing.

See the ATP, Whistleblower, Sturman, Solder, cases of the crimes against these people while the U.S. Trustee's Office is either covering up the crimes or turning a blind eye. Also see our section called Breeding Ground for Corruption.

Redefining Panel Trustee Fraud

The FBI defines one of their duties as investigating bankruptcy trustee fraud. The U.S. Trustee Program, however, redefined what constitutes Panel Trustee Fraud.

They define fraud as Panel Trustees who recover assets, and divert those assets to the Panel Trustee’s personal enrichment without approval of the court. The operative words are without court approval. Too many cases have emerged where judges approved.

It could be because the bankruptcy judges are rubber stamping cases because the system operates like a cattle call. As an example, see the Smoking Gun case of how Judge Jane McKeag rubber stamped a motion by a trustee that involved flagrant fraud.

An example:

If a Panel Trustee deposits assets from a case in their personal account without the court first approving it, that is fraud. If the Panel Trustee alleges a mistake and replaces the money, no criminal charges are filed.

If the court approves a trustee's Final Report where the Panel Trustee diverts all assets to his or her personal enrichment, even without evidence of where the assets are deposited, that is not Panel Trustee fraud.

This is why the term "under color and claim of official right" applies. In numerous cases involving real estate, Panel Trustees sold real estate property not owned by debtors , or, they sold portions owned by non-debtors without their knowledge.

As long as the bankruptcy court approves it, giving it color of official right, the U.S. Trustee Program and U.S. Attorneys turn a blind eye. Debtors lack standing to appeal the decisions of bankruptcy courts in the selling of property, and those parties who did not know what happened have a difficult and costly trek ahead of them in the appellate process. Breeding Ground for Corruption.

The bankruptcy system is allowing bankruptcy attorneys representing clients in the BK court to also do business in the same court as a Panel Trustee. According to the GAO report the position and language for it, was intended for CPA professional to hold that position. Instead, according to the GAO, the majority of Panel Trustees are also bankruptcy attorneys.

In the GAO report, they warned of the danger of "double dipping" in bankruptcy asset cases by Panel Trustees, who are also attorneys. As licensed attorneys, trustees can hire themselves or their law firm as attorney for trustee.

This emphatically makes the trustee his own legal representative, prosecutor of litigants, and defender of him or herself. He or she is paid once as attorney for trustee and again by commission from assets in the very same cases.

Chapter 7 Panel Trustees receive $60 for each bankruptcy case they administer. If there are no assets, they file a "No-Asset Report" and collect the $60. They do about 2.5 hours work and average $600 for less than a day's work.

Most courts rotate Panel Trustee’s time in three-day intervals. This results in each trustee presiding over meetings of creditors three days per month. This equates to roughly $2,000 per month for working less than 8 hours.

Pursuing Justice in the BK System

Because they were not parties in the underlying bankruptcy case, they must prove to the appellate court to financially harm by the bankruptcy court's decision. Even if they prevail on that issue, the appellate court will not overturn the BK Court’s ruling to sell your property. There are no remedies available. Your property is gone.

Criminal charges against the Panel Trustee are to be filed with the U.S. Trustee’s Office. Victims report that evidence of fraud goes into a black hole. Other government agencies refuse to address the crime, directing victims to either file with the U.S. Trustee, or, file a civil action against the Panel Trustee.

People that have attempted civil action against Panel Trustees report they encounter a flawed system where they are knocked out of court because the Panel Trustee sold the property with the bankruptcy court's approval, giving it the “color and claim of official right.”


Predatory Funding

Originally, the system operated under the Bankruptcy Administrator Program, (BA). Janet Reno or her predecessor, that got Congress to adopt the newer U.S. Trustee Program, (UST) based on it being a self-supported system from BK filing fees and quarterly fees paid by corporations in chapter 11, and commission from asset sales.

Two states, however, rejected it and continue operating under the original plan. In the GAO report, it states that the BA Program is less expensive to operate with fewer reports of Panel Trustee fraud and court corruption.

Many victims, and yes, they’re finding each other, feel the system is inherently flawed because its survival is based on feeding off people or businesses in financial distress.

Remember how the California Legislature in the mid 1990s had to change the structure for its EPA because of widespread complaints about the enforcement and citation tactics of the EPA?

It’s division was supported by the penalties fined against manufacturers and businesses. An investigation revealed that evidence had been plant in order to fine a company. Most companies pointed out that the enforcers were on a hunt to find problems and blow them out of proportion in order to generate fees. The findings was that the agency was activity seeking problems to fine companies as a means to support the agency. That policy was changed.

Equally, the DEA supported itself on the funds generated from asset seizures after a drug-related arrest. When it was learned that the DEA had stripped too many people or companies of all their assets and then the charges were dropped, or the person was found innocent of the charges, and in some cases it was a mistaken arrest, the laws had to be changed to stop that predatory practice.

Look at correlation between the recent focus on bankruptcy debtors and petition preparers as the “problem the U.S. Trustee” is addressing while turning a blind eye to evidence of Panel Trustee’s misconduct or people and entities using the bankruptcy system to wash their hands of their fraud against others.

Panel Trustees Pay Formula

Chapter 13 trustees receive 10 percent of money the debtor paid in his/her Chapter 13 plan. If the case is later converted to chapter 7, the chapter 13 trustee still "earns" the 10 percent commission.

The Chapter 7 trustees receive a commission from the 10 percent as it is considered assets of the bankruptcy estate. They are paid a sliding scale commission from assets "recovered" from debtors. The commission begins with 25 percent of the first $5,000. This means that "recovering" an income tax refund of $1,000 results in $250 of it going to the chapter 7 trustee.

Let's not assume that the remaining $750 will be distributed to unsecured creditors. Trustees are allowed to hire attorneys to represent them. Some trustees hire themselves or their law firms. Seldom do trustees administer an asset case without hiring an attorney. They are also allowed reimbursement of expenses.

Because all creditors named in bankruptcy cases must receive copies of documents filed, this includes copy costs and postage. Hence, if there are 20 creditors, and a document is 10 pages, the trustee can charge 25 cents per page for copying for a total of $50 and about $13 in postage. The Taking of Real Estate

Property of the bankruptcy estate is generally defined as all and any property owned by the debtor or which may become property of the debtor, wherever it is located.

In a current case administered in Los Angeles, CA, the Chapter 7 trustee presented herself as trustee for the debtor, Linda Fogh. No court order ruling gave the trust that owned the property as "property of the bankruptcy estate."

Neither did the bankruptcy trustee void the trust. The bankruptcy trustee signed the deed as trustee for the debtor. Lawfully, in bankruptcy, debtors are not property under jurisdiction of the bankruptcy trustee. The trustee DOES NOT represent the debtor.

The debtor, however, lacks standing. The signing of the Deed as Trustee for the debtor, (which is a non-existent position, non-judicial position in bankruptcy), is deemed "semantics" because the bankruptcy judge approved the sale of the property based on the bankruptcy trustee obtaining the deed.

Bankruptcy Asset Exemptions

Debtors exemptions have become so confusing, that U.S. Trustees have argued and prevailed in court that discussing them is "practicing law." Many states have their own exemption provisions and the one most challenged by trustees is the homestead exemption.

California has homestead exemption options. If a person is a senior citizen or disabled, they are afforded a higher homestead exemption.

Arizona has a blanket $90,000 cap exemption that can apply to one or more properties. Other states force debtors to liquidate all residences except the one they reside.

Florida allows 100 percent exemption in houses where debtors reside.
If a state does not have it's own homestead exemption, then it "defaults" to the federal exemption which is presently $7,500 for a single filer, and $15,000 for a joint case.

Maryland, opted out of federal exemptions and provide a cap of $6,000. This exemption could be divided between vehicles, houses, clothes, and personal belongings.

In those states providing a comfortable homestead exemption, Panel Trustees found creative ways to object to the exemption. In the previous case mentioned where the trustee signed the deed, the trustee first objected to the debtor's homestead exemption on the basis that the debtor did not own the property.

After getting the court to approve the objection, the trustee then sold the same house as property of the bankruptcy estate after signing the transferring the deed to herself as trustee for the debtor.

The BAP for the Ninth Circuit, (California’s Bankruptcy Appellate Panel), overturned the bankruptcy court's decision and awarded the debtor her homestead exemption. The bankruptcy court, however, had already approved the trustee's attorney's legal fees, which almost exhausted proceeds from the sale.

Why find creative ways to object to the homestead exemption? This is money that Panel Trustees will not need to pay to debtors and thus, more money for them to justify selling the property "for the benefit of creditors."

Using the Panel Trustees formula:

A house sells for $300,000

Their mortgage is $150,000.

$300,000 minus $150,000 = $150,000.

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Actual Legal Formula that should be used:

The homestead exemption is $125,000.

Home sells for $300,000 minus $150,000 mortgage = $150,000.

Then subtract the homestead exemption of $125,000 = $25,000.

If realtor’s commission is standard 6 percent of the sale price, that leaves $18,000.

Panel Trustee’s commission should only be $18,000.

(Panel Trustees receive 25 percent of the first $5,000; 10 percent of the next $50,000; and 5 percent of the balance up to one million.)

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There is a financial incentive to deny homestead exemptions. Panel Trustees and Bankruptcy Judges ignore state court orders, such as divorce decrees that divides the home to each party.

If one person files a bankruptcy, the divorced spouse loses everything too because the Panel Trustee seizes and sells.

Bankruptcy Structure

Bankruptcy is federal statutory law (Title 11, U.S. Code) Constitutional requirement for uniform laws. [Article I, Section 8].

Bankruptcy system is strictly federal (No state or local involvement or jurisdiction).

The Bankruptcy system operates on a budget generated from debtor’s filing fees.

Every Federal District Court in the country has a bankruptcy division.* Legal challenges in bankruptcy court are known as Adversary Proceedings.

US. Trustee’s prosecute cases against people or businesses known as Civil Enforcement.

Civil Enforcement cases are “Core” cases. (Defendant has no rights to a court appointed attorney or right to jury of his peers.)

Bankruptcy Plans

The Bankruptcy Code has many chapters, each with different procedures for debt resolution.

Chapter 7: liquidation of assets and debts.

Chapter 9: Municipality reorganization plan.

Chapter 11: Business reorganization plan.

Chapter 12: Farmer’s reorganization plan. (Slated for elimination in 2004, but revived because of bad economy.)

Chapter 13: Individual reorganization plan. (Typically five-year repayment plan)

Command Structure

U.S. Attorney General appoints the Director of the Office for U.S. Trustees.

Director of the Executive Office for U.S. Trustees, (EOUST) presides over all U.S. Trustees nationwide.

U.S. Attorney General appoints Regional U.S. Trustees.

U.S. Trustee’s serve federal divisions, which coincides with the federal district courts.

California has two U.S. Trustees - north and south state. (two serving in a state is unusual).

California has Assistant U.S. Trustees managing each federal division in Calif.

Regional U.S. Trustees appoint Bankruptcy Panel Trustees. (These are trustees that administer BK cases)

Panel Trustees are selected for bankruptcy cases on a random pick by the clerk’s office.

U.S. Federal Circuit Court Judges appoint Bankruptcy Judges. (The voters have no say).

Responsibilities and Duties. US Trustee’s Responsibilities

The U.S. Trustees and supporting staff are a division of the U.S. Department of Justice. Their directive is to police the bankruptcy system for compliance with relevant laws.

U.S. Trustee’s mission statement states they are the “watchdogs” against graft and corruption within the system. 28 U.S.C. §§ 586(a)(3)(F) requires U.S. Trustees to investigate and report crimes and forward evidence of crimes to the U.S. Attorney for prosecution.

The U.S. Trustees are the federal equivalent of the district attorney’s offices.

The U.S. Attorney’s Office has prosecutors whose sole function is to prosecute bankruptcy-related crimes.

The U.S. Trustees directive is policing Panel Trustees. (Trustee program began circa 1930s because of reports that Panel Trustees used their position to steal from debtors.)

U.S. Trustees recently adopted the “Civil Enforcement Program.” They target bankruptcy petition preparers. There is controversy regarding this campaign. The argument has been these preparers are running mills and perpetuating fraud. The petition preparers say it is a witch hunt because bankruptcy attorneys don’t like the lower cost service cutting into their business.

Job Description

Director of the Executive Office: The EOUST establishes policy and reports to Congress about the status of the bankruptcy system and the progress of the U.S. Trustee Program. Many critics argue that Congress is only getting news of the hen house from the Fox.

Regional U.S. Trustees: Executive figure heads for each region. In smaller divisions of the country they have a more hands on role. In California, the two are figure heads. The Assistant U.S. Trustees report to them. All U.S. Trustees report the progress and operations of their division to the national Director.

Assistant U.S. Trustees: Are administrative heads of the division they head. They have attorneys underneath them. The structure is similar to a D.A.’s Office. They police the system.

Panel Trustees: Aka: Bankruptcy Trustees or Trustees. Contract bankruptcy administrators. They typically receive $60 per case. Their contract requires “due diligence” when processing bankruptcy filings to insure accuracy and no fraud.

Bankruptcy Judges: Review bankruptcy cases and then decide whether to approve or dismiss. See the SMR study on WJFA web site. Judges are not examining the petitions. It appears they rubber stamp based on the Panel Trustee’s recommendation. The judges also preside over Adversary Proceedings and U.S. Trustee’s Civil Enforcement cases.

Bankruptcy Filing Pitfalls

Bankruptcy victims report they filed bankruptcy for debt relief, or, to reorganize through a payment plan, but Panel Trustee’s either keep their cases open to provide themselves an unjust enrichment, or denied exemptions and then turn around and sell those items that were denied.

Once a person files bankruptcy, they have unknowingly signed away all rights to everything they own. All their assets are now called an “estate” belonging to the bankruptcy court, with the panel trustee in complete control.

Because debtors own nothing upon filing bankruptcy, law enforcement will not take complaints that a Panel Trustee stole property. FBI and U.S. Trustee view it as a non-theft because the property belongs to the estate owned by the bankruptcy system with the Panel Trustee in full control of its destiny.

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The UST's Pledge for Bankruptcy Trustees to Adopt

Standing Trustees are committed to excellence and to providing a high level of trust and service to chapter 13 debtors and creditors. Creditors, debtors, attorneys,judges and others who come into contact with Standing Trustees are entitled to service which adheres to the highest standards ofprofessional,moral and ethical conduct.

1. The trustee’s office should be open and operating Monday through Friday during regular business hours.

2. The trustee should have a system in place to promptly respond in a meaningful manner to inquiries from debtors,creditors,attorneys,and other interested parties.

3. Ifthe trustee is not personally available,the trustee should have competent staff available to assist or to respond to inquiries.

4. The trustee should work to ensure that debtors comply with their obligations under the Bankruptcy Code and Rules.

5. The trustee should work to ensure that debtors comply with the provisions oftheir plan and should take appropriate action ifthe debtor fails to commence plan payments when required or ifthere is a subsequent default in plan performance.

6. The trustee should maintain a system which efficiently tracks the progress and the receipts and disbursements in every chapter 13 case,from the time it is filed until the case is closed.

7. The trustee should have a system to timely and accurately record all receipts and disbursements on the appropriate debtor ledger.

8. The trustee should disburse plan payments to creditors on a monthly basis,and should have procedures in place to properly classify and pay creditors’claims and to detect and recover any erroneous payments.

9. The trustee should ensure that all trust account ledgers and accounts are balanced on a monthly basis and should have a procedure to regularly review all cases with significantly large balances on hand or other fund irregularities.

10. The trustee should maintain a reasonably comprehensive system ofinternal controls over accounting and office operations,both paper and electronic,to safeguard estate assets and trust funds. Standing Trustee Pledge of Excellence

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