Group of bankruptcy trustees chart course through troubled waters

Among the hordes of professionals called in to help sort out the affairs of bankrupt companies are a small cadre of lawyers and accountants who make up the panel of private bankruptcy trustees.

Part referee, detective, auctioneer and business executive, trustees are appointed by the U.S. Trustee, an arm of the Justice Department, to liquidate the assets of bankrupt companies, and occasionally to oversee their operations.

“It’s problem-solving, it’s trying to collect and liquidate assets so you can pay the creditors. There’s legal challenges often in accomplishing that, and sometimes you meet really sympathetic people,” said Amy Goldman, a trustee in the San Fernando Valley and a partner with Lewis D’Amato Brisbois & Bisgaard LLP in downtown L.A.

There are about 50 trustees in California’s Central District, which stretches south from San Louis Obispo to Orange County. Applicants must go through an extensive screening, including an FBI background check once they apply to become a member of the panel.

“You have to have a level of business experience or expertise, particularly in troubled companies, and I think you really have to be a good communicator,” said Richard Diamond, a trustee who is a partner with Danning Gill Diamond & Kollitz in Century City.

It’s a small club, but not as exclusive as it once was. Before reforms were made in 1979, the bankruptcy judge would appoint trustees on their own. “It was a matter of the judge’s patronage,” said David Gould, a partner with McDermott, Will & Emery who often serves as counsel for trustees. “It used to be almost exclusively white and male and now it’s much more diverse.” Now the trustees are appointed by the Justice Department.

Most work Chapter 7

Most of the cases are routine. Chapter 7 liquidations get assigned to a trustee automatically. Many trustees are assigned 150 or more of these cases per month, and have staffs to help with the paperwork. The trustee will hire accountants, lawyers, real estate agents or auctioneers, as needed, to help wind up the bankrupt estate.

For their services, bankruptcy trustees are paid $60 per liquidation, plus court-approved hourly fees when the trustee makes a distribution. Overhead is handled differently by each firm, but the trustee designation, and ownership of the cases, resides with the trustee, not the firm.

In most Chapter 11 cases intended as reorganizations the existing management is allowed to continue operating the company, but with fiduciary duties to the creditors. Eventually, about two-thirds of these cases convert to Chapter 7 liquidations as well, and a trustee is appointed.

In some Chapter 11 cases, management can be removed for cause allegations of fraud or mismanagement, for instance and a trustee brought in to manage a company that might survive reorganization.

Challenges created

At this point, the job can become more challenging. “It’s a lot more work,” said David Seror, partner at Seror & Levine in Woodland Hills. Though rare, Chapter 11 cases call on a variety of skills. “You have to use business judgment and evaluate risk,” said Diamond. In some cases the debtor still has a voice, and may wear a hat as a creditor themselves. “You may find yourself negotiating with the debtor over whether they’re going to contribute something new to the reorganization,” he added.

As the name implies, one of the most important qualities is trustworthiness.

“You have the relatively tough job of balancing competing interests,” Diamond said. Creditors want to be paid off at the highest rate possible, and the debtors want something to remain for them.

Seror recently was assigned a car dealership in Chapter 11, where there is a dispute between two people who both claim ownership. One of the parties still runs the business, and Seror will have to decide whether to allow that person to continue or bring in someone else.

Seror takes steps to ensure he’s seen as fair-minded, for instance polling each side’s attorneys to get their view on the issues. “I want everyone to know what I’m doing and why I’m doing it,” he said. “If there’s a problem, they can always go to the judge.”

Occasionally, the debtor will try to hide assets. Once, Diamond closed a seemingly routine case, but later discovered that some of the liens on the listed real estate were fraudulent. Diamond was able to locate about $2 million in cash that had been hidden through a series of transfers. “We ended up paying creditors in full in that case,” he said.

More often, debtors will be forgetful or just stubborn, said Goldman, who was among a group of 10 trustees named as part of an expansion of the Central District panel in 1998. Recently, she had to evict a debtor twice once from a second home, and also from his business premises. “Sometimes,” she said, “they think that by being difficult or obstreperous that the trustee may go away.”