Section 704(a) of the Bankruptcy Code enumerates the essential duties of a bankruptcy trustee in a chapter 7 case, requiring that the trustee “collect and reduce to money the property of the estate for which such trustee serves.” The courts have occasionally been asked to interpret whether this provision gives a governmental dimension to the functions of the trustee, and as a result, whether constitutional restrictions apply to the trustee. In conflicting opinions, courts have answered in the affirmative and negative. In In re Bursztyn,366 B.R. 353 (Bankr. D. N.J. 2007) the U.S. District Court for the District of New Jersey recently held that for the purposes of searching the debtor’s property, a trustee was an agent of the government, but that the search and seizure of the debtor’s property was not unreasonable under the Fourth Amendment of the U.S. Constitution. 366 B.R. 353 (Bankr. D. N.J. 2007). Although the court acknowledged a substantial number of cases where it was held that a trustee was not an agent of the government, the court enforced an exception to such a rule in situations where the trustee was acting to maximize asset availability to creditors. Id. at 368. The court considered the trustee’s actions under the “reasonableness” standard of the Fourth Amendment and found that the search and seizure by the trustee was appropriate. Id. at 373.
Case Background
On Oct. 14, 2005, Miriam Bursztyn filed a voluntary chapter 7 petition. Id. at 355. About two weeks later, Catherine E. Youngman was appointed trustee of Bursztyn’s bankruptcy estate. Id. Based on an investigation of court records of the debtor's recent divorce, the trustee suspected that the debtor was hiding valuable jewelry and artwork that was not listed in the bankruptcy petition or financial affairs statements. Id. at 356.
The trustee requested from the court, ex parte, an order allowing her to search the debtor’s home with the help of a U.S. Marshal in the hopes of obtaining the art and jewelry that now belonged to the estate. In re Bursztyn, 366 B.R. 353, 359 (Bankr. D. N.J. 2007). Youngman provided five grounds for soliciting an ex parte search of the debtor’s property:
(1) the Debtor's repeated and unjustified refusal to turn the jewelry and artwork over for appraisal despite numerous court orders; (2) her frequent violations of discovery orders; (3) her disregard for the entirety of the judicial process; (4) her dishonesty in identifying the property's whereabouts; and (5) her failure to list the items on her petition as currently in her possession or transferred therefrom within one year prepetition.
Id. at 360.
Giving consideration to the prior insubordination by Bursztyn and considering the evidence presented, the court granted authorization, permitting the trustee to “photograph the property seized and requiring her to account for the property within two days of the search by providing an inventory to the debtor, the debtor's counsel and the United States Marshal.” Id. The U.S. Marshals Service and the trustee served the order on the debtor at her residence and, following repeated denials of possession by the debtor, proceeded to search her bedroom and closets. Id. at 361. The search uncovered nearly 200 pieces of fine jewelry and 10 works of art, valued at nearly $250,000. Id. at 362.
Claiming that the search and seizure violated her Fourth Amendment rights, the debtor sought to suppress all evidence uncovered by the trustee’s search. In re Bursztyn, 366 B.R. 353, 362 (Bankr. D. N.J. 2007). The court held that Fourth Amendment limitations apply to a trustee’s conduct in seeking to search a debtor’s residence with the intention of seizing undisclosed assets. Id. at 368. However, the court reasoned that by filing for bankruptcy, the debtor had reduced her reasonable expectations of privacy, and in turn held that the trustee’s actions did not exceed the Fourth Amendment standards of reasonableness. Id. at 373.
Ruling
Following an extensive recitation of the facts, the court began by dividing the analysis of the Bursztyn issues into two prongs, with the first considering whether the Fourth Amendment is applicable to a chapter 7 trustee. Id. at 366. Finding that it was, the court next considered what standard applies to bankruptcy trustees like Youngman, and whether the search by the trustee in Bursztyn met that standard. Id. at 368. The court began by finding that a bankruptcy trustee is bound by the Fourth Amendment. In re Bursztyn, 366 B.R. 353, 366 (Bankr. D. N.J. 2007). However, it went on to find that the search by the trustee in Bursztyn was not unreasonable under the court’s established standard. Id. at 373.
Fourth Amendment Applies to a Trustee
The first part of the Bursztyn decision considered whether the Fourth Amendment applied to a trustee. In this portion of the court’s analysis, the court found that a bankruptcy trustee is bound by the Fourth Amendment. Id. at 366. Judge Donald H. Steckroth noted that “[i]t is fundamental that the protections stemming from the Fourth Amendment to the United States Constitution only proscribe governmental action.Id. at 364. The result of this, the judge pointed out, is total inapplicability of the Fourth Amendment to searches and seizures effected by private citizens. Id. Accordingly, as neither side was disputing whether a search and seizure had occurred, the first issue raised was whether a bankruptcy trustee is essentially a private citizen, or is in fact an agent or representative acting under the government. Id. Noting that frequently a “gray area” exists between clear participation by the government and an absolutely private actor, the court began by highlighting In re Barman, 252 B.R. 403 (Bankr. E.D. Mich. 2000), the only other case having previously dealt with the issues at hand. In re Bursztyn, 366 B.R. 353, 365 (Bankr. D. N.J. 2007).
In Barman, a debtor filed for chapter 7 and claimed that his only asset was clothing valued at about $500. In re Barman, 252 B.R. at 407. The bankruptcy trustee filed a complaint against the debtor, accusing him of wrongfully transferring funds to his wife and concealing assets belonging to the bankruptcy estate. Id. at 410. Like the Bursztyn court, the Barman court allowed the trustee to enter the debtor’s home and search, inventory and appraise his property. Id. The debtor claimed that the inspection violated his constitutional rights against unreasonable search and seizure. Id. In a finding on which the Bursztyn court relied, the court in Barman stated that “the statutory provisions relating to the trustee's status…suggest a relationship sufficiently close to the government that the Fourth Amendment applies, even though the trustee is not technically an employee of the government.” In re Barman, 252 B.R. 403, 412 (Bankr. E.D. Mich. 2000). The Bursztyn court ultimately chose to follow this finding, concurring with the debtor that the trustee is essentially a hybrid figure acting with a “sufficient nexus” to government power; it did so despite several opinions holding the contrary. In re Bursztyn, 366 B.R. at 366.
Beyond Barman, the Bursztyn court also examined three cases where the courts were presented with the question of whether a trustee was a government agent and declined to find as much. Id. In Cromelin v. United States, the court stated that “[t]he trustee, like a receiver, is an officer of court, appointed by the court, directed by the court and paid by the court from the funds in the court. He is in no sense an agent or employee or officer of the United States.” Cromelin v. U.S., 177 F.2d 275, 277 (5th Cir. Ct. App. 1949). In this case, the plaintiff sought to recover against the U.S. for the actions of a federal bankruptcy judge and his bankruptcy trustee for malfeasance as related to the plaintiff’s reorganization. Id. at 276. Reasoning that neither federal judges nor trustees are employees of the government, the court found that recovery against the United States was impossible. Id. at 277.
The court took note of a second case where a trustee was found to not be an agent of the government. In Wells v. United States, a debtor sought to shift blame for unpaid taxes to a bankruptcy trustee who had collected assets from him during the bankruptcy process. Wells v. United States, 98 B.R. 806 (N.D. Ill. 1989). Relying on support from Cromelin,the court reasoned that mere payment of the salary of a trustee by the U.S. government is not sufficient to find that the trustee acts on behalf of the government. Id. at 807. Asserting that “a contrary result would continually put a trustee in an untenable position with regard to fiduciary duties owed both the United States and the bankrupt estate when treating governmental claims against the estate,” the court held that funds held by a bankruptcy trustee “are not in the control of the government.” Id. at 810.
Faced with an application for a search warrant to uncover property concealed by a debtor, an Ohio district court held in In re Application of Trustee in Bankruptcy that as a trustee is neither a federal law enforcement official nor an attorney for the federal government, there can be no authority for a trustee to obtain a search warrant. 173 B.R. 341, 342 (N.D. Ohio 1994). In a similar case, the court in In re Kerlo asserted that “[a]lthough trustees may seek the assistance of governmental officials in carrying out their statutory and fiduciary duties and orders of the court, they do not act to assist the government in its investigatory or administrative activities.” 311 B.R. 256, 265 (Bankr. C.D. Cal. 2004). The court set two requirements that must be met before a trustee is made subject to the Fourth Amendment: “Accordingly, a trustee or agent to a trustee is only subject to the Fourth Amendment if (1) the government knew of and acquiesced in the conduct and (2) the trustee acted with the intent to assist the government in its investigatory or administrative purposes.” Id.
Despite these preceding cases, the Bursztyn court relied on Barman and held that for the purposes of searching and seizing the property of a debtor, a trustee is bound by the Fourth Amendment to the U.S. Constitution. In re Bursztyn, 366 B.R. at 368. Offering only that a bankruptcy trustee’s work is overseen by both the Office of the U.S. Trustee and the court, the court agreed with the Barman court that “the statutory provisions relating to the trustee’s status…suggest a relationship sufficiently close to the government that the Fourth Amendment applies, even though the trustee is not technically an employee of the government.” Id. at 367. Further, the court distinguished Bursztyn from the cases finding that a trustee was not an agent of the government by highlighting that the court order obtained by the trustee, Youngman, provided for the assistance from U.S. Marshal’s Service and that as asserted in Barman, “[s]uch participation would establish both state action and action under color of state law.” Id. Making note of the authorities holding that a bankruptcy trustee is a private actor and not an instrumentality of the government, the Bursztyn court found that “in instances where the trustee is carrying out his or her functions under the Bankruptcy Code to investigate the financial affairs of the Debtor and maximize available assets for distribution to creditors, the Court is not prepared to conclude that a bankruptcy trustee is free from the strictures of the Fourth Amendment and forfeit a debtor's expectations of privacy.” Id. at 368.
Taking into account the court’s belief that the trustee had a sufficient nexus to a government agent, Judge Steckroth held that the trustee’s actions in seizing the undisclosed property from Bursztyn, which belonged to the bankruptcy estate, required analysis under the Fourth Amendment. Id.
The Search of the Debtor’s Property Was Reasonable
Having found that the Fourth Amendment applied to the search and seizure of Bursztyn’s property, the court turned to the reasonableness analysis of trustee Youngman’s actions. Id. The court found that the trustee’s acquisition of a court order to search Bursztyn’s home was reasonable, and as such was not a violation of the Fourth Amendment rights of the debtor. In re Bursztyn, 366 B.R. at 368.
Noting that neither party disputed that Bursztyn was constitutionally protected from unreasonable search and seizure, the second issue before the court turned on whether the actions of the trustee were reasonable. The court began its analysis by highlighting the Supreme Court’s decision in T.L.O.: “The fundamental command of the Fourth Amendment is that searches and seizures be reasonable, and although ‘both the concept of probable cause and the requirement of a warrant bear on the reasonableness of a search…in certain limited circumstances neither is required.’” N.J. v. T.L.O., 469 U.S. 325, 340-41 (1985). The Court noted that often “a balancing of governmental and private interests suggests that the public interest is best served by a Fourth Amendment standard of reasonableness that stops short of probable cause.” Id. This standard, the Bursztyn court noted, requires that what is a reasonable search be determined based on the context of the situation in which the search occurs. In re Bursztyn, 366 B.R. at 368.
In considering the context of the search, the Bursztyn court looked for guidance to another decision by the U.S. Supreme Court, U.S. v. Knights, 534 U.S. 112, 118, (2001), which opined that whether a search is reasonable is measured by comparing “the degree to which it intrudes upon an individual’s privacy and…the degree to which it is needed for the promotion of legitimate governmental interests.” With this, Judge Steckworth returned to the Barman decision’s analysis, which noted that compared to those who have not filed for bankruptcy relief, a debtor who has filed for bankruptcy relief must have a significantly reduced expectation of privacy in his or her “houses, papers and effects” that society is prepared to recognize as reasonable.” In re Barman, 252 B.R. at 414. While emphasizing that a debtor does not give up all rights to privacy, as well as the possibility of massive intrusions by a trustee searching a debtor’s home for potentially small items, the Bursztyn court subsequently highlighted the “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.” In re Bursztyn, 366 B.R. at 371. In advocating for a meticulous examination of debtor property, Judge Steckworth called attention to In re Tully, 818 F.2d 106, 110 (1st Cir. 1987), in which a debtor repeatedly lied on several schedules of assets. The appeals judge stated that “[t]hose who seek the shelter of the Bankruptcy Code [must] not play fast and loose with their assets or with the reality of their affairs” before refusing to discharge the debtor’s bankruptcy. In re Tully, 818 F.2d 106, 110.
For holding that the search and seizure of the property by the trustee was reasonable under the circumstances, the court offered several reasons. Starting with a procedural history, which the court found showed the debtor to be neither “honest nor credible,” and a divorce proceeding where the debtor’s behavior evidenced a “disdain for the judicial process,” the court believed that the trustee was entirely justified in believing that there was a substantial need to search the Bursztyn house. In re Bursztyn, 366 B.R. at 372-73. The court also highlighted the fact that the items being sought by the debtor were physically small and easily concealed, and made further note of the repeated requests to the debtor to turn over the items. Id. at 373. With this rationale as a foundation, the court held that the search and seizure of the debtor’s jewelry and artwork by the trustee and U.S. Marshal were reasonable and constitutional, and accordingly that none of the evidence uncovered in the search should be suppressed. Id.
Conclusion
Although the Bursztyn court addressed an issue previously raised only once before, in Barman, its decision raises significant questions about the powers of bankruptcy trustees, as well as the privacy rights of debtors. By holding that, for the purpose of search and seizure of bankruptcy estate assets, trustees are bound by the strictures of the Fourth Amendment, the court would seem to be granting constitutional protection to debtors accused of harboring estate assets, even in light of numerous holdings finding that a trustee is not an agent of the U.S. government. Despite this, in analyzing the reasonableness of the actions by the trustee here, the court made clear its feeling that the search of the Bursztyn house and its fruits were a net-positive, and that prior bad behavior in the judicial matters—even those unrelated to the bankruptcy process—may be used as support for this kind of extraordinary search of a debtor’s property. Despite cautioning that they will not allow the practice of executing search warrants on the houses of debtors to become commonplace, the court left the procedure available as a potential tool to trustees, sounding notice to debtors who may seek to conceal assets in the future.