Protecting the Integrity of the System the Civil Enforcement Initiative

Journal Issue

Sep 2002

Column Name

Journal HTML Content

The U.S. Trustee Program (USTP) launched the Civil Enforcement Initiative on Oct.
1, 2001, as part of its continuing effort to improve the effectiveness of
bankruptcy administration. The goal of the Initiative is to ensure that the bankruptcy
system is fair to all and to bolster public confidence by taking civil actions to
remedy abuses. As part of the Initiative, certain national enforcement priorities were
established upon which the USTP will focus its energies and resources. This article
provides an update on the USTP's civil enforcement activities 10 months into the
Initiative, and a look at future plans.

<h3>Priorities</h3>

The priorities of the Civil Enforcement Initiative are:

<ul>
<li>Ensuring that chapter 7 is not abused and that chapter 7 debtors are held
accountable. Chapter 7 debtors who do not comply with the law will have their
cases converted or dismissed, or their bankruptcy discharges denied or revoked.

</li><li>Protecting consumer debtors, creditors and others who are victimized by those who
mislead or misinform debtors, make false representations in connection with a
bankruptcy case or otherwise abuse the bankruptcy process. Attorneys and bankruptcy
petition preparers (non-attorneys who prepare bankruptcy documents for a fee) must
engage in full disclosure, be free of conflicts of interest and engage in ethical
practices.

</li><li>Ensuring that chapter 11 debtors proceed with their cases promptly and are
informed of and held accountable for their obligations under the Bankruptcy Code.
</li></ul>

While increased civil enforcement of the bankruptcy laws is a national initiative,
the specific issues of greatest concern to each of the USTP's 95 field offices and
the corresponding strategies have varied by location. The U.S. Trustees have worked
to identify problems or abuses of concern for each field office, as well as possible
civil enforcement solutions to those problems and abuses. Areas of civil enforcement
that were consistently identified include debtor misconduct and abuse, misconduct by
attorneys and other professionals, problems associated with bankruptcy petition preparers,
and instances where a debtor's discharge should be challenged.

Reports for the first six months following the launch of the Initiative on Oct. 1,
2001, revealed that the USTP has hit the ground running, with more than
15,000 civil enforcement actions taken or inquiries leading to compliance.
Moreover, activities associated with the non-discharge of debts (including denial of
discharge actions and dismissals prior to discharge) and reductions in professional fee
requests accounted for more than $47 million during this six-month period.

<h3>Emerging Issues</h3>

Thus far, several issues have emerged that present new or particularly significant
challenges for civil enforcement. These issues include debtor identification, serial
filers, substantial abuse under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §707(b)</a>, credit card bustouts and
consumer protection.

Debtor Identification. From Oct. 1, 2001-March 30, 2002, more than
2,100 cases were identified in which the debtor had listed an incorrect Social
Security number (SSN) on the bankruptcy petition. To support the Civil Enforcement
Initiative, in January 2002 the USTP started implementing a nationwide procedure
to require all individual debtors to provide proof of their identity and proof of SSN
at the first meeting of creditors. This requirement is based on procedures the USTP
tested in its Debtor Identification Pilot Program, which ran in 18 districts from
Jan. 1-June 30, 2001.<a href="#3" name="3a">3</a>

Closer scrutiny of debtors' identities has resulted in (1) denial of discharge
of some $79,000 in unsecured debt, where a chapter 7 trustee discovered at the
§341 meeting that the debtor had used a false SSN on the petition, (2) dismissal
with prejudice of a chapter 7 case where the debtor used a false SSN that he
admitted having used for several years and (3) sanctions against a law firm that
listed incorrect SSNs on at least six different debtors' petitions.

The USTP also takes steps to protect innocent third parties from having a bankruptcy
erroneously attributed to them. Debtors who use an incorrect SSN are required to amend
their petition to reflect the correct number, notify all their creditors of the
amendment, and notify all three major credit reporting agencies of the error. If this
is not done in a reasonable time period, action is taken to compel the debtor to
make the correction and notify all the parties, or face other sanctions.

Serial Filers. Many USTP field offices are now using computer-matching programs to
identify debtors who have filed bankruptcy numerous times within a short period of time,
and they are working to improve coordination with the bankruptcy clerks' offices. Some
serial filers fail to list all their previous bankruptcy cases, or file in neighboring
districts and/or use variations on their name or different names to avoid detection.
In addition, serial filers may have received a discharge in a case filed within the
previous six years, making them ineligible for a discharge.

Once a serial filer is identified, the filer's previous cases may be analyzed. If
it is determined that the current case is an abusive filing, action may be taken to
either dismiss the case with prejudice, deny the debtor's discharge, or seek an
injunction against filing another bankruptcy case without prior court approval.

For example, the U.S. Trustee's action resulted in dismissal with prejudice of
a case filed by a debtor who sought bankruptcy relief four times in the last three
years, and eight times in the last 12 years. Most of his prior cases had been
dismissed for failure to file schedules. Another action involved a debtor who had
filed chapter 13 five times since January 2001. The court granted the U.S.
Trustee's motion to dismiss with a two-year bar to refiling and with prejudice to
future discharge of debts that could have been scheduled in the most recent case.

Substantial Abuse. The pending bankruptcy reform legislation reflects the concerns
of Congress and the public regarding debtors who are capable of repaying at least a
substantial portion of their debts, but are not doing so. In the past, most USTP
offices could test only a sample of the chapter 7 cases filed. However, an
increasing number of offices are now reviewing all chapter 7 petitions for substantial
abuse and other indicia of problems. This has resulted in more debtors converting their
cases to chapter 13 and more dismissals of chapter 7 cases, either by the court
or by debtors who voluntarily dismiss their cases when the U.S. Trustee scrutinizes
their income and expenses.

One case involved debtors with a monthly income of $7,000 who scheduled
$350,000 in unsecured debt, of which $200,000 was credit card debt and
$150,000 was owed to individuals for personal loans. Banking records showed
regular withdrawals from automatic teller machines at local casinos. In another case
the debtor was a commercial airline pilot who earned $11,500 per month, paid
$3,100 per month on her mortgage, and—just before filing bankruptcy—bought a
$50,000 Mercedes to replace her repossessed $90,000 Mercedes. Dismissal of
her case prevented the discharge of more than $122,500 in consumer credit card
debt. In yet another case, debtor spouses filed for chapter 7 relief, listing more
than $11,000 in tax debt, $4,450 in non-priority unsecured debt, and
monthly expenses of $1,000 for recreation, $900 for food for a family of five
and $355 for transportation other than auto loan payments.

Credit Card Bustouts. Bankruptcy filings are being monitored for possible "credit
card bustout" schemes. These are cases in which an individual, acting alone or in
connection with a group, acquires several credit cards simultaneously. The individual
makes substantial use of the credit cards and seeks to establish a good credit record
and increased credit limits in a short period of time. The bustout occurs when the
individual "maxes out" on all the credit cards, getting cash advances or purchasing
readily resalable merchandise. When the credit cards exceed their limit and are no
longer accepted, the individual often files for bankruptcy protection. When a bustout
is identified, the USTP takes action to dismiss the case or deny the debtor's
discharge.

In a recent case, the bankruptcy court denied the discharge, based on the U.S.
Trustee's investigation and ensuing complaint, of more than $617,000 in credit
card debt listed by the debtor. Credit card records for just one major credit card
company revealed that in a one-month period the debtor shopped at a different Costco
Wholesale Store almost every day, incurring more than $62,000 in debt.
Additional investigation indicated that the debtor had purchased consumer goods for
resale. The U.S. Trustee's complaint to deny the debtor's discharge was based on the
debtor's false oaths, inability to explain the disposition of estate property and
failure to keep records.

Consumer Protection. Consumer protection is another area of increasing civil
enforcement activity. The USTP takes action against attorneys who charge excessive or
undisclosed fees, engage in sloppy lawyering or attempt to restrict their liability
to the debtor; bankruptcy petition preparers who violate <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §110</a> and/or
engage in the unauthorized practice of law; and creditors who file false proofs of
claim.

For example, the U.S. Trustee assisted in state bar proceedings resulting in the
resignation of an attorney who violated a series of bankruptcy court judgments and
orders totaling more than $190,000 in sanctions and disgorgements. The prior
actions against the attorney included nine sanctions orders, two judgments of
disgorgement, a judgment of contempt, a disgorgement order, two disqualification orders,
an order obtained by the U.S. Trustee conditionally disbarring the attorney from
bankruptcy court, and finally, an order barring the attorney from bankruptcy court.

In another case, the U.S. Trustee's actions led to an order, limited to the
cases before the judge, that required disgorgement of fees and realty net sale proceeds
as well as payment of a $20,000 sanction by an attorney who took undisclosed
liens in the real and personal property of more than 90 debtors in order to secure
his fees. The U.S. Trustee discovered that the attorney had actually acquired the
residences of five of his debtor clients by redeeming his liens after foreclosure sales.

With respect to bankruptcy petition preparers, the USTP continues to pursue §110
cases against preparers who operate in a specific locality, while it grapples with new
enforcement issues caused by the emergence of Internet bankruptcy petition preparers.
Historically, in many areas of the country there were either no bankruptcy petition
preparers practicing or the conduct of local petition preparers was controlled through
local guidelines regulating fees and practices. However, the ability to market such
services anywhere in the country and the anonymity provided by the Internet makes it
difficult to impose local restrictions and seek remedies. Internet providers can hide
behind a web of false identities and mail drops to prevent a victim from obtaining
a return of an excessive fee or from suing if the petition preparer causes the debtor
harm. With its national presence, the USTP can better identify, investigate and pursue
violations of the bankruptcy laws.

<h3>A Look at the Next Phase</h3>

To ensure that the success of the initiative is sustained over the long term,
Lawrence Friedman, director of the Executive Office for U.S. Trustees, recently
selected the authors to coordinate the next stage of the USTP's national civil
enforcement efforts. We will be working to focus the USTP's efforts, provide
assistance and build on successful practices.

The goal of the Civil Enforcement Initiative is to improve the bankruptcy system
at large, and therefore all members of the bankruptcy community have a vested interest
in the USTP's success. Attorneys, trustees, creditors and others affected by the
bankruptcy system often have the opportunity to see an emerging problem in a specific
case before the problem is revealed on a larger scale. Raising these issues or
concerns with the local office of the U.S. Trustee helps ensure that they are
identified and addressed systematically. The resulting fairer and more efficient bankruptcy
system is a worthy and achievable goal we all can support.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Ms. Darling is the Assistant U.S. Trustee in the USTP's field office located in Sacramento, Calif. Mr. Redmiles is a trial
attorney in the Executive Office for U.S. Trustees, Office of the General Counsel, located in Washington, D.C. <a href="#1a">Return to article</a>

<a name="2">2</a> The views expressed in this article are those of the authors and are not intended to represent the views of the Department of
Justice, the Executive Office for U.S. Trustees or any other U.S. Trustees. <a href="#2a">Return to article</a>

<a name="3">3</a> The Executive Office for U.S. Trustees's report on the Debtor Identification Pilot Program is posted on the USTP's web site at <a href="http://www.usdoj.gov/ust/otherinitiatives/debtorid/report.html" target="window2">www.usdoj.gov/ust/otherinitiatives/debtorid/report.html</a>.

Journal Authors

Antonia G. Darling

Journal Date

Sunday, September 1, 2002 - 12:00

Bankruptcy Rule

2002