Litigants Beware: Filing an Involuntary Bankruptcy Could Make You a Debtor Rather Than a Creditor

Litigants Beware:  Filing an Involuntary Bankruptcy Could Make You a Debtor Rather Than a Creditor

Last week, the Second Circuit Court of Appeals affirmed a decision by the Bankruptcy Court for the Southern District of New York in In re TPG Troy, LLC, 2015 U.S. App. LEXIS 12085 that awarded over a half-million dollars in legal fees and expenses to the subjects of an improper involuntary bankruptcy filing. 

Will the Trustee Come to My Home?

By | Texas Bankruptcy Blog | July 28, 2015
Will the Trustee Come to My Home?

Debtors commonly ask, “Will the trustee come to my home?” The quick answer is “No.” Well, that’s the correct answer almost always. Just like every other “certain” rule in bankruptcy, there are exceptions.

Section 704(a) of the Bankruptcy Code directs the bankruptcy trustee to “collect and reduce to money the property of the estate for which such trustee serves.” Sometimes that duty requires the trustee to visit the site of the property. A trustee may do a drive-by on real estate, or may arrange for an appraiser to inspect a vehicle, or may ask to enter a debtor’s home to view a high dollar item, such as a grand piano. The circumstances will dictate when a trustee’s visit is reasonable or likely.

Another time the trustee may decide to do a home visit is when the debtor has demonstrated dishonesty or a lack of candor regarding his property. That occurred in the case of In re Bursztyn, 366 B.R. 353 (Bankr. D. N.J. 2007). The trustee in Bursztyn found discrepancies between the filings in the debtor’s recent dissolution case and her bankruptcy schedules. Specifically, the trustee suspected that the debtor was hiding valuable jewelry and artwork.

After many fruitless requests for information and turnover of property, the Trustee sought a warrant to search the debtor’s home. The bankruptcy court issued the search warrant, and the trustee, with the help of a U.S. Marshall, recovered jewelry and art at the debtor’s home worth approximately $250,000.

The debtor claimed that the trustee’s search violated her Fourth Amendment rights. The bankruptcy court disagreed. It found that while the bankruptcy trustee is bound by the Fourth Amendment, the search of the debtor’s home was not unreasonable. The court pointed to the reduced expectation of privacy in a bankruptcy debtor’s “houses, papers and effects.” While a bankruptcy debtor does not give up all rights to privacy, there is a “strong public interest and policy in full, open and proper administration of a bankruptcy case by a trustee, including a thorough investigation of the debtor’s assets.” The court found that under the circumstances of the case (including a finding that the debtor had not acted “honest nor credible” during the bankruptcy; that there was reason to believe that the debtor was concealing property; that the items were physically small and easily concealed; and that the trustee had made repeated requests for turnover) the search was reasonable and the evidence would not be suppressed.

Courts have both approved and rejected requests for search warrants. For instance, in Spacone v. Burke (In re Truck-A-Way), 300 B.R. 31 (E.D. Cal. 2003), the bankruptcy court refused to issue a search warrant. While recognizing the civil nature of the bankruptcy trustee’s search, the court nonetheless concluded that the only avenue for a trustee to seek a search warrant is through Rule 41 of the Federal Rules of Criminal Procedure. The court held that a bankruptcy trustee has no authority under Rule 41 because a trustee is neither a federal “law enforcement officer” nor “an attorney for the government” as required by that Rule. The court stated, “Clearly the explicit requirements of Rule 41 reflect the exacting mandate of the Fourth Amendment and cannot be circumvented by the statutory structure created by the Bankruptcy Code.” At least one author disagrees with this analysis and points to the Federal All Writs Act and Section 105 of the Bankruptcy Code as providing the authority for a bankruptcy court to issue a search order. See Michael D. Sousa, A Casus Omissus in Preventing Bankruptcy Fraud: Ordering a Search of a Debtor’s Home, 73 Ohio St. L.J. 93 (2012).

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.