When a debtor files for bankruptcy, a U.S. bankruptcy court assigns a trustee to administer the case. To carry out her duties, a trustee must be impartial. If you personally know the trustee assigned to your bankruptcy case, your relationship with that trustee presents an ethical issue that she must resolve immediately.
Trustees have a great deal of authority in the bankruptcy process. A trustee’s duties may include reviewing the debtor’s court filings, drafting a plan for the debtor to repay creditors, searching for the debtor’s assets, holding a meeting of creditors, and selling the debtor’s assets and distributing the proceeds to creditors.
Impartiality of Trustee
U.S. Justice Department rules require a bankruptcy trustee to decline an appointment if the trustee is not a disinterested person, or has a conflict of interest in the case. The U.S. Bankruptcy Code defines a “disinterested person” as someone who does not have a significant interest that is adverse to the interests of creditors or debtors, someone who is not a creditor of the debtor or a stockholder of any of the debtor’s creditors, and someone who has not been an employee of the debtor in the past two years. A conflict of interest arises when a case presents a potential clash between a trustee’s professional obligations and her personal interests. These ethical rules help ensure fair treatment of the debtor and creditors in bankruptcy proceedings.
Ethical Duties of Trustees
When a trustee becomes aware of an actual or potential conflict of interest or lack of disinterestedness, including the existence of a prior relationship with the debtor, she must advise the supervising U.S. Trustee in writing. U.S. Trustees are Justice Department officials who supervise the administration of bankruptcy cases by appointed trustees. In some instances, the trustee must also disclose at a creditors meeting, or for the court record, any conflicts of interest due to a prior relationship with the debtor. If a trustee discovers an obvious conflict of interest or a clear case of lack of disinterestedness due to a prior relationship with the debtor, she must immediately file a notice with the U.S. Trustee resigning from the case.
Other Prior Relationship Cases
Not all potential conflicts of interest or lack of disinterestedness involving a prior relationship between the trustee and debtor result in the dismissal of the trustee. Court cases have established that the precise nature of the relationship determines whether the trustee can continue to administer the bankruptcy case or must be removed from it. A close relationship, such as the trustee having substantial past or present financial dealings with you or being a close friend, would almost certainly disqualify the trustee. A casual relationship, such as the trustee coaching your child’s soccer team a few years earlier or the trustee being a member of the same civic organization as you, likely would not disqualify the trustee. However, some U.S. Trustees and bankruptcy courts may prefer to avoid any possible appearance of impropriety and dismiss the trustee, even if your relationship with her is casual.
Informing the Trustee
A debtor who already knows the trustee assigned to his bankruptcy case should inform the trustee of their prior relationship to ensure she is aware of the ethical issue. The trustee may not know your full name or immediately recognize your name, so it’s best to have this ethical issue addressed early in your case.