US Trustee Changes Bankruptcy Rules In COVID-19 Response

By Vince Sullivan
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Law360 (April 13, 2020, 7:15 PM EDT) -- The Department of Justice's United States Trustee Program announced Monday a series of steps it has taken to help safeguard the viability of the bankruptcy process in the midst of the COVID-19 outbreak, including limiting in-person meetings normally conducted with debtors.

In the announcement, the director of the United States Trustee Program said the steps taken in reaction to the pandemic have the support of the courts and are designed to protect both the public and the integrity of the bankruptcy process.

"Our first priority is the safety and health of the general public and all individuals involved in the bankruptcy process," director Cliff White said. "In partnership with the courts, private trustees, and other stakeholders, the U.S. Trustee Program has taken steps to protect safety while keeping the bankruptcy system functioning for businesses and consumers who need financial relief."

The most impactful change will be the cancellation of more than 60,000 in-person administrative proceedings that normally include numerous parties to a bankruptcy case — among them debtors, creditors, their respective counsel and advisory teams, and trustee's office personnel — and shifting them to telephone conferences or some other form to accommodate social distancing mandates.

According to the office's statement, these Section 341 meetings allow the debtor to be questioned on various aspects of its bankruptcy and financial condition by the trustee and others, and the meetings are open to the public and can involve dozens of people. The changes require that all currently scheduled Section 341 meetings and meetings for any new bankruptcy cases filed through May 10 take place by telephone or videoconference, affecting more than 1 million parties.

The shift to electronic forms of communication has required the acquisition of new equipment to facilitate the remote meetings, the statement said.

Additional efforts to limit the exposure of bankruptcy professionals and debtors to the coronavirus include the trustee's office's suspension of audits of Chapter 7 and Chapter 13 debtors, designed to detect fraud and abuse in the bankruptcy system. These audits are conducted on a random sample of such cases and are required by federal law. The trustee's office contracts with an auditing firm that confers with a debtor, its attorneys and financial advisers and could potentially create an avenue for exposure to those professionals involved in the process.

With the passage of the Coronavirus Aid, Relief and Economic Security Act, the trustee is working to ensure that debtors who receive distributions under the $2.2 trillion stabilization bill are not required to turn those funds over during the pendency of their bankruptcy cases, the statement said.

Tasked with protecting the integrity of the bankruptcy process in the United States, the trustee's office said it will continue to work to prevent fraud and abuse in the courts by referring potential criminal violations to law enforcement partners and to assist in any prosecutions.

The trustee's procedural amendments mirror efforts taken by the courts themselves to comply with stay-at-home and shelter-in-place orders issued in many states and jurisdictions by embracing remote technology to convene necessary hearings on the telephone and with videoconferencing.

In Delaware and the Southern District of New York — two of the busiest bankruptcy jurisdictions in the country — all hearings have moved to telephone and videoconferencing with noncritical proceedings scheduled during the lockdown pushed back to at least May.

--Editing by Jack Karp.

For a reprint of this article, please contact reprints@law360.com.

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