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A Panel Trustee's Ability to Uncover Potential Debtor Abuse
Bankruptcy Law Meets the Fourth Amendment

Code to Code Contributing Editor:
Michael D. Sousa
1
U.S. Bankruptcy Court; Newark, N.J.
michael_d_sousa@njb.uscourts.gov

Web posted and Copyright © September 1, 2004, American Bankruptcy Institute.

n his remarks preceding the signing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), President Bush asserted a need to restore "integrity to the bankruptcy process" by noting that "[i]n recent years, too many people have abused the bankruptcy laws." According to the president, BAPCPA will "stop those who try to commit fraud." The need to remedy abusive conduct by debtors raises the issue of the extent to which bankruptcy trustees can uncover and potentially prevent such behavior. One potential mechanism a trustee may utilize in attempting to uncover and foil abusive conduct is to request that the bankruptcy court issue a warrant in order to search the debtor's residence if the trustee suspects the debtor is hiding or misappropriating assets of the estate. Although an extreme measure, the question remains unresolved as to whether a bankruptcy trustee has the authority to seek a search warrant, and in turn whether this raises the specter of the debtor's privacy rights under the Fourth Amendment of the U.S. Constitution. The few reported decisions addressing this issue have reached contrasting results. Nevertheless, and despite the divergent judicial opinions, a guiding principle can be extrapolated from the thicket of bankruptcy and constitutional law to guide trustees, debtors and the courts.

Fourth Amendment Principles

The Fourth Amendment provides: "The right of the people to be secure in their persons, houses, papers and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched and the persons or things to be seized."2 The basic purpose of the Fourth Amendment's prohibition against unreasonable searches and seizures is to safeguard the privacy and security of individuals against arbitrary intrusions
by government officials.3 The Fourth Amendment protects people from unreasonable searches and seizures of their person and property, as well as privacy.4 To invoke the protections of the Fourth Amendment, a person must demonstrate a legitimate expectation of privacy with respect to the subject of the search.5 It is well-settled that a legitimate expectation of privacy requires both a "subjective expectation of privacy" and "an objectively reasonable expectation of privacy."6 Notably, an individual's home is "'accorded the full range of Fourth Amendment protections.'"7

The touchstone in evaluating the permissibility of any search and seizure under the Fourth Amendment is the notion of "reasonableness."8 Reasonableness within the context of the Fourth Amendment requires a balancing of the public interest against an individual's right to be free from arbitrary intrusions.9 In most instances, the reasonableness standard requires a search warrant and a finding of probable cause.10 The protections against unreasonable searches and seizures under the Fourth Amendment proscribes only governmental action.11 That is, the Fourth Amendment is entirely inapplicable "to a search or seizure, even an unreasonable one, effected by a private individual not acting as an agent of the government or with the participation or knowledge of any governmental official."12 Significantly, the Fourth Amendment protection against unreasonable searches and seizures fully applies in the civil context.13

Civil search warrants and bankruptcy court "search and seizure orders" have been held not to be exempted from the principles of the Fourth Amendment or the Federal Rules of Criminal Procedure.14 As the court stated in Spacone v. Burke (In re Truck-A-Way), "[t]he Fourth Amendment accords no exemption to the bankruptcy court or its trustee, nor shortcuts around probable cause, due process, jurisdiction or Rule 41 of the Federal Rules of Criminal Procedure."15 Rule 41 sets forth a stringent process for the application and issuance of a search warrant. Under Rule 41, a search warrant may be issued "at the request of a federal law enforcement officer or an attorney for the government" based on a showing of probable cause for any of the following: (1) evidence of a crime; (2) contraband, fruits of a crime or any other items unlawfully possessed; (3) property designated for the use or intended use in committing a crime; or (4) a person to be arrested or a person who is unlawfully restrained.16 Rule 41(a) defines "federal law enforcement officer" as a "government agent (other than an attorney for the government) who is engaged in enforcing the criminal laws and is within any category of officers authorized by the Attorney General to request a search warrant."17

Bankruptcy Trustee Role

When an individual files for bankruptcy protection under chapter 7 of the Code, §701(a)(1) provides that the Office of the U.S. Trustee (DOJ) shall appoint one disinterested person to serve as trustee who is a member of the panel of private trustees established under 28 U.S.C. §586(a)(1).18 The Office of the U.S. Trustee (OUST) plays a significant role in the context of a bankruptcy case. Under 28 U.S.C. §586(a)(1), the OUST establishes, maintains and supervises the eligible panel of private trustees available to serve as trustees in cases under chapter 7.19 Pursuant to 28 U.S.C. §586(a)(3), the OUST is charged with the responsibility of supervising the administration of both cases and trustees in chapter 7 proceedings.20 Although panel trustees operate under the direction of the OUST, the OUST considers panel trustees to be private parties and not governmental employees.21

Once appointed, the trustee serves as an officer of the court and as a representative of the debtor's creditors who has a duty to maximize the value of the estate for distribution to creditors.22 Several sections of the Bankruptcy Code facilitate the trustee's duty to administer the bankruptcy estate. Section 704 of the Code provides in part that the trustee shall collect and reduce to money the property of the estate and investigate the financial affairs of the debtor.23 Moreover, §§542 through 552 of the Bankruptcy Code clothe the trustee with significant avoidance and recovery powers to collect property of the estate for the benefit of creditors.24 Further, §363 enables a trustee to use, sell or lease property of the estate, albeit with certain restrictions.25 Section 365 of the Code enables the trustee to assume or reject any executory contract or unexpired lease of the debtor, while §725 permits a trustee to dispose of property in which the estate and an entity other than the estate have an interest.26

Is a Trustee an Instrument or Agent of the Government?

For purposes of the Fourth Amendment and Rule 41, a chapter 7 trustee represents a unique hybrid between private actor and government official. On one hand, a trustee is ordinarily an attorney or accountant engaged in private practice, and is not employed by the federal government. On the other hand, in performing his or her duties, a chapter 7 trustee is under the supervision of the OUST, an extension of the U.S. Department of Justice. Throughout the landscape of a bankruptcy case, the OUST monitors the performance of the panel trustee.27 Moreover, while a private trustee is not an employee or officer of the United States, a bankruptcy trustee is an officer of the court and remains under the supervision and direction of the bankruptcy court.28 Even in his or her "private" capacity, on occasion courts have extended quasi-judicial immunity to private bankruptcy trustees for actions that are functionally comparable to those of judges, namely those functions that involve "discretionary judgment," since the trustee "is performing an integral part of the judicial process."29 Thus, a panel trustee possesses characteristics of the executive branch, the judicial branch and of a private party. As a result, this presents the complicated issue of whether a bankruptcy trustee can seek a search-and-seizure order from the bankruptcy court in fulfilling his or her duties to collect the property of the estate and to investigate the financial affairs of the debtor under §704 of the Code. Courts have reached different conclusions in addressing this issue.

Review of the Conflicting Cases

In In re Trustee in Bankruptcy for a Search Warrant to Uncover Property of the Estate in Violation of 18 U.S.C. §152, the trustee requested the issuance of a search warrant based on his belief that the debtors were unlawfully secreting assets belonging to the bankruptcy estate.30 As the trustee's application made clear, the trustee sought the issuance of a search warrant in order to uncover a possible federal bankruptcy crime.31 Relying on the language contained within Rule 41, the court concluded that a bankruptcy trustee is neither a "federal law enforcement officer" nor an "attorney for the government."32 Significantly, the court implicitly recognized a distinction between a request for a search warrant to aid in the administration of a bankruptcy case and a request for a warrant to unearth possible criminal conduct. The court concluded to the extent a bankruptcy trustee's application for a search warrant is aimed at demonstrating a violation of federal criminal law, the responsibility for investigating and prosecuting such illegal activity reposes with the U.S. Attorney's Office, and not with a private person or an attorney acting on behalf of a party to litigation.33 Consequently, the court held that a bankruptcy trustee does not have the authority to apply for a search warrant.

The court in Taunt v. Barman (In re Barman) reached a different result.34 In In re Barman, the debtor engaged in multiple schemes to fraudulently transfer and conceal assets from discovery by the trustee. Contemporaneous with the filing of an adversary proceeding against the debtor and others, the trustee filed an ex parte application for an order authorizing him to enter the debtor's residence in order to "inspect, inventory and appraise personal property."35 After the bankruptcy court granted the application, the debtor filed a motion to suppress the evidence recovered in the search on the ground that the inspection violated his Fourth Amendment rights against unreasonable searches and seizures.36

In deciding the debtor's suppression motion, the court relied on §704 of the Code and 28 U.S.C. §586 in concluding "that every aspect of a trustee's position and function is subject to either statutory obligation or to federal executive or judicial branch control."37 Consequently, the court held the "circumstances surrounding the status and function of a trustee in a chapter 7 case all suggest a sufficient nexus to the government and its power that it is necessary and appropriate to apply to the trustee the Fourth Amendment limits on government power."38 Therefore, while the trustee would be limited by the protections afforded to debtors under the Fourth Amendment, the court's conclusion that the trustee shared a sufficiently close nexus to the government also means a bankruptcy trustee has authority to seek a search warrant under Rule 41.

In reaching its conclusion, the court also addressed the significance of a trustee's purpose in seeking a search-and-seizure order. The court noted that in carrying out the task of fully administering the bankruptcy estate under §704 of the Code, a trustee may need to inspect a debtor's residence when the trustee has reason to believe there are undisclosed assets to be administered for the benefit of the estate.39 In some cases, a trustee will have no way to perform his or her statutory obligation to account for all of the property of the estate without an inspection of the debtor's residence.40 Thus, the court noted that an examination of a debtor's residence in a particular case may be a crucial part of the bankruptcy process and a matter of substantial need.41 Given the "strong public interest in the full and proper administration of a bankruptcy case by a trustee, including a full investigation of the debtor's assets," the court concluded that the inspection order properly balanced the trustee's interests against the privacy rights of the debtor.42 In apparent harmony with the decision reached by the court in In re Trustee in Bankruptcy for a Search Warrant to Uncover Property of the Estate Held in Violation of 18 U.S.C. §152, the In re Barman court, in approving the inspection order, specifically noted that the trustee's application was not for the purpose of discovering evidence of crime, but for the purpose of administering the bankruptcy estate.43 The import of this contrast suggests the court would have reached a different result if the trustee's stated purpose in seeking a warrant to search the debtor's residence had been to uncover the debtor's possible violation of federal criminal law.44

Finally, in In re Kerlo, the bankruptcy court confronted the issue of whether turnover orders accompanied by writs of possession and orders of ejectment directed against the debtor implicated the debtor's privacy rights under the Fourth Amendment.45 The trustee obtained two orders requiring the debtor to turn over real property to the trustee.46 After the debtor failed to comply with both orders, the trustee moved for a finding of civil contempt, sanctions against the debtor and a writ of possession and order of ejectment to enforce the orders.47 Prior to ruling on the trustee's motion, the court, sua sponte, required the trustee to submit a supplemental brief addressing whether enforcing the orders implicated possible Fourth Amendment rights of the debtor.48

In deciding whether the trustee acted as an instrument or agent of the government, thereby implicating the Fourth Amendment and the need to comply with Rule 41, the court recognized the existence of a "'gray area' between the extremes of overt governmental participation in a search and the complete absence of such participation."49 For the Kerlo court, resolving cases falling within this "gray area" require a case-by-case inquiry, utilizing a two-part test for determining whether a private individual is acting as a government instrument or agent for Fourth Amendment purposes.50 A court must inquire as to (1) whether the government knew of and acquiesced in the intrusive conduct and (2) whether the private party intended to assist law enforcement efforts or further his or her own ends.51 The court appropriately focused on the second prong in the analysis, noting that "'where the private party has had a legitimate independent motivation for 'engaging in the challenged conduct, the Fourth Amendment would not apply.'"52 Stated differently, for the conduct of a non-law enforcement government party, such as a bankruptcy trustee, to be subject to the Fourth Amendment, the complaining party must show that the official acted "with the intent to assist the government in its investigatory or administrative purposes, and not for an independent purpose."53

Applying the foregoing standard, the court in Kerlo concluded that the bankruptcy trustee did not seek to act to assist the government in its criminal investigatory or administrative duties, but rather sought to act independently under the trustee's statutory mandate in the Bankruptcy Code to assemble assets of the estate, liquidate those assets for the benefit of creditors, and distribute proceeds of the estate to creditors.54 Because the trustee sought the enforcement orders for the independent reason of maximizing the value of the assets of the estate for distribution to creditors and not to assist the government in performing its administrative or law enforcement functions, the court concluded that the trustee was not subject to the limitations of the Fourth Amendment.55

Additionally, the court held that the trustee's utilization of the U.S. Marshals Service to assist in implementing the enforcement orders did not transform the trustee's actions into a governmental search or seizure.56 Consequently, the involvement of government officials by a bankruptcy trustee "does not necessarily transform private conduct into a government search or seizure."57 This is especially true where the purpose of the government presence is to ensure the safety of the private party and not to "reap the benefits" of the search or seizure.58

Conclusion: Look to the Trustee's Purpose

The decisive factor of whether a bankruptcy trustee has the authority to seek a search-and-seizure order, and whether such application implicates a debtor's Fourth Amendment rights, is not whether a particular court views a trustee as a government actor or as a private party, but the trustee's actual purpose for seeking the search-and-seizure order. If the trustee's stated purpose is to uncover assets in the full administration of the bankruptcy estate for the benefit of creditors, a court will likely conclude that the Fourth Amendment is not implicated and does not serve as an impediment to the trustee's request. By contrast, where a trustee's aim in seeking a search-or-seizure order is to uncover criminal conduct or assist the government in uncovering criminal bankruptcy fraud by a debtor, a court will likely conclude that the Fourth Amendment and Rule 41 preclude the trustee's disruption of the privacy rights of the debtor.


Footnotes

1 The author is currently serving a judicial clerkship with Hon. Rosemary Gambardella, Chief Bankruptcy Judge for the U.S. Bankruptcy Court for the District of New Jersey. He is also pursuing an LL.M. in Bankruptcy from St. John's University School of Law, where he was recently named the ABI Scholar. In addition, Mr. Sousa is an adjunct professor of law at Seton Hall University School of Law and an assistant adjunct professor at New York University, where he teaches a course on bankruptcy and business reorganizations. Mr. Sousa is also a contributing editor for ABI's Third Circuit Case Update. Return to article

2 U.S. Const. Amend. IV. Return to article

3 Camara v. Mun. Court of San Francisco, 387 U.S. 523, 529, 87 S.Ct. 1727, 1730, 18 L.Ed.2d 930 (1967). Return to article

4 Soldal v. Cook County, 506 U.S. 56, 62, 113 S.Ct. 538, 544, 121 L.Ed.2d 450 (1992). Return to article

5 In re Kerlo, 311 B.R. 256, 265 (Bankr. C.D. Cal. 2004) (citing Smith v. Maryland, 442 U.S. 735, 740, 99 S.Ct. 2577, 61 L.Ed.2d 220 (1979)). Return to article

6 Id. Return to article

7 Id. at 266 (quoting Lewis v. United States, 385 U.S. 206, 211, 87 S.Ct. 424, 17 L.Ed.2d 312 (1966)). Return to article

8 United States v. Lifshitz, 369 F.3d 173, 178 (2d Cir. 2004) (citing Griffin v. Wisconsin, 483 U.S. 868, 873, 107 S.Ct. 3164, 3168, 97 L.Ed.2d 709 (1987)). Return to article

9 United States v. Brigham, 382 F.3d 500, 507 (5th Cir. 2004) (citation omitted). Return to article

10 Id. at 178 (citation omitted). A warrantless entry into a private home constitutes a search and is presumptively unreasonable under the Fourth Amendment. Leaf v. Shelnutt, 400 F.3d 1070, 1081 (7th Cir. 2005) (citations omitted). Return to article

11 Jacobsen, 466 U.S. at 113, 104 S.Ct. at 1656, 80 L.Ed.2d 85. Return to article

12 Id. (citation omitted). Return to article

13 Soldal, 506 U.S. at 67, 113 S.Ct. at 546, 121 L.Ed.2d 450. Return to article

14 See, e.g., Spacone v. Burke (In re Truck-A-Way), 300 B.R. 31, 36 (E.D. Cal. 2003) (citations omitted). Return to article

15 Id. at 37. Return to article

16 See Fed. R. Crim. P. 41 (West 2005). Return to article

17 Fed. R. Crim. P. 41(a) (West 2005). Return to article

18 11 U.S.C. §701(a)(1) (West 2005); Dickerson, Prof. A. Mechele, "Can the 'Public Interest' Justify Nonconsensual Searches of Homes in Bankruptcy Cases?," 11 Wm. & Mary Bill Rts. J. 267, 280 (2002). Section 702 of the Code alternatively provides that the creditors of the debtor can elect the trustee. See 11 U.S.C. §702 (West 2005). However, this procedure is rarely invoked. Return to article

19 28 U.S.C. §586(a)(1) (West 2005). Return to article

20 28 U.S.C. §586(a)(3) (West 2005). Return to article

21 Dickerson, supra note 22 at 281 (citations omitted). Return to article

22 In re Benny, 29 B.R. 754, 760 (N.D. Cal. 1983) (citations omitted). Return to article

23 11 U.S.C. §704 (West 2005). Return to article

24 See, generally, 11 U.S.C. §§542-552 (West 2005). Return to article

25 See, generally, 11 U.S.C. §363 (West 2005). Return to article

26 See, generally, 11 U.S.C. §365 (West 2005); see, also, 11 U.S.C. §725 (West 2005). Return to article

27 Shaltry v. United States, No. 95-15340, 1995 WL 866862, at *3 (9th Cir. 1995) ("U.S. Trustees will also monitor the performance of panel members...in order to determine whether they should be continued in or removed from panel membership...") (citation omitted). See, also, In re Crosby, 93 B.R. 798, 801 (Bankr. S.D. Ga. 1988) (reviewing the legislative history of the U.S. Trustee's Program and noting one of the functions is to monitor the performance of private trustees) (citation omitted). Return to article

28 In re Med. Sterile Prods., 310 F. Supp. 262, 264 (D. P.R. 1970) (citation omitted); see, also, Cromelin v. United States, 177 F.2d 275, 277 (5th Cir. 1949), cert. denied, 339 U.S. 944, 70 S.Ct. 790, 94 L.Ed. 1359 (1950). Return to article

29 See Balser v. Dep't. of Justice, 327 F.3d 903, 909 (9th Cir. 2003), cert. denied, 541 U.S. 1041, 124 S.Ct. 2159, 158 L.Ed.2d 729 (2004). See, also, Lonneker Farms Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986). Return to article

30 173 B.R. 341, 342 (N.D. Ohio 1994). Return to article

31 18 U.S.C. §152 provides in pertinent part that a person who "knowingly and fraudulently conceals from a...trustee...any property belonging to the estate of a debtor...shall be fined under this title, imprisoned not more than five years, or both." 18 U.S.C. §152 (West 2005). Return to article

32 173 B.R. at 342. Return to article

33 Id. Return to article

34 252 B.R. 403 (Bankr. E.D. Mich. 2000). Return to article

35 Id. at 407. Return to article

36 Id. at 410. Return to article

37 Id. at 412. Return to article

38 Id. at 412-13. Return to article

39 Id. at 416 (citing In re Washington, 232 B.R. 814, 815 (Bankr. S.D. Fla. 1999). Return to article

40 Id. at 417. Return to article

41 Id. Return to article

42 But, see Dickerson, Prof. A. Mechele, "Using Criminal Law Remedies to Unearth Hidden Assets," 10 J. Bankr. L. & Prac. 541, 557 (2001) (arguing that the decision in In re Barman "focused too much on the trustee's duties and too little on the debtor's fundamental privacy rights"). Return to article

43 252 B.R. at 417. Return to article

44 In Spacone v. Burke (In re Truck-A-Way), while the U.S. District Court for the Eastern District of California never reached the issue of whether a bankruptcy trustee has the authority to seek a search and seizure order under Rule 41 and the Fourth Amendment, the court stated that it "strongly disagree[d] with Barman's interpretation of a bankruptcy court's authority under the Fourth Amendment...." 300 B.R. 31, 38 (E.D. Cal. 2003). Return to article

45 311 B.R. 256 (Bankr. C.D. Cal. 2004). Return to article

46 Id. at 259. Return to article

47 Id. at 259-60. Return to article

48 Id. at 260. The trustee did not apply for the writ of possession and order of ejectment under Rule 41, but rather pursuant to Federal Rules of Bankruptcy Procedure 7069 and 7070. In granting the trustee's motion, the court relied on Federal Rule of Bankruptcy Procedure 7070 and §105(a) of the Bankruptcy Code. Id. at 267. Return to article

49 Id. at 263 (quoting United States v. Walther, 652 F.2d 788, 791-92 (9th Cir. 1981)). Return to article

50 Id. Return to article

51 Id. Return to article

52 Id. (citations omitted) (emphasis in original). The first prong of the two-part test is not as significant because it is readily satisfied; namely, it can be argued that knowledge of the trustee's conduct should be imputed to the OUST in its capacity as supervisor of the panel trustee under 28 U.S.C. §586. Return to article

53 Id. at 265 (citing Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 924 (9th Cir. 2001)). Return to article

54 Id. at 265. Return to article

55 Id. Return to article

56 Id. Return to article

57 Id. at 264. Return to article

58 Id. (citation omitted). Return to article



 

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