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Trustee Seeks Order Preventing Chapter 7 Debtor from Obtaining Information About Bankruptcy Estate

By Jacob Davies [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsIn a personal bankruptcy case filed under Chapter 7 or Chapter 13 of the federal Bankruptcy Code, all of a debtor’s non-exempt property becomes the property of a new entity known as the bankruptcy estate. The court will appoint a person to serve as the trustee of the bankruptcy estate. The trustee’s duties depend on the type of case the debtor selects. In some situations, a trustee may find it necessary to keep a debtor “out of the loop” regarding all or part of a bankruptcy proceeding. This occurred in a Chapter 7 case that recently went before a California federal judge, In re Zinnel, No. 2:12-cv-00249, mem. order (E.D. Cal., Nov. 17, 2015). The court found that the trustee was entitled to a “protective order” preventing the debtor from formally requesting information about estate activities. However, this does not occur often. In most cases, the fact that a Debtor’s property is considered ‘property of the estate’, is actually a good thing since this fact will also allow the debtor to enjoy certain benefits and protection from creditors while the bankruptcy case is pending.

Protective orders—which protect information in the context of a bankruptcy case—are available in a variety of situations. The Bankruptcy Code authorizes courts to issue orders sealing case materials, which would ordinarily be public record, if they involve trade secrets, “scandalous or defamatory” information, or information that could be used in identity theft. 11 U.S.C. § 107. Procedural rules allow protective orders for information that might not become part of the public court file, if a court finds that the request for information will cause “annoyance, embarrassment, oppression, or undue burden or expense.” Fed. R. Bankr. P. 7026, Fed. R. Civ. P. 26(c). This type of order states that a party is not obligated to respond to discovery requests, or is only obligated to respond to a limited extent.

The debtor in Zinnel originally filed a Chapter 7 bankruptcy petition in July 2005. The case was closed at some point prior to June 2011, which was when the Office of the U.S. Trustee applied to the court to reopen the case on the grounds that the debtor might not have included certain assets in his schedules. Prosecutors had recently indicted the debtor for several bankruptcy-related offenses.

The court appointed a new trustee, who began reviewing information about a corporate entity in which the bankruptcy estate might own an interest. The exact “nature and scope of the estate’s rights and/or interests in [the corporation] were the subject of disputes between” the debtor and a third party. Zimmel, mem. order at 2. The trustee entered into an agreement with this third party to sell the estate’s interest in the corporation, which could be nothing, for $350,000. The debtor served the trustee with discovery requests seeking information about the proposed sale.

After a series of bizarre procedural hurdles, the court granted the trustee’s motion for a protective order in October 2011, finding that the debtor lacked standing to object to the sale and therefore to request discovery regarding the sale. It specifically found that the sale would have little to no pecuniary effect on the debtor. The debtor appealed to the district court, but the case was stayed to allow the criminal case to finish. In November 2015, the district court affirmed the bankruptcy court’s ruling, finding that the uncertainty on all sides regarding whether the bankruptcy estate even owned an interest in the corporation deprived the debtor of standing.

Since 1997, bankruptcy and foreclosure lawyer Devin Sawdayi has guided individuals and families in the Los Angeles area through the Chapter 7 and Chapter 13 bankruptcy processes, helping them find their way out of financial distress. To schedule a free and confidential consultation with an experienced, skilled, and compassionate financial advocate, contact us today online, at (800) 474-6050, or at (310) 475-9399.

More Blog Posts:

Trustee for Debtor Convicted of Investment, Bankruptcy Fraud Cannot Claim Usury Against Investors, Court Rules, Los Angeles Bankruptcy Lawyer Blawg, December 2, 2015

How a Business Bankruptcy in Los Angeles Can Affect Individual Owners, Shareholders, Los Angeles Bankruptcy Lawyer Blawg, November 24, 2015

Appellate Court Rules that Inheritance Received After Filing of Chapter 13 Bankruptcy Petition is Part of Bankruptcy Estate, Los Angeles Bankruptcy Lawyer Blawg, October 26, 2015

Photo credit: Jacob Davies [CC BY-SA 2.0], via Wikimedia Commons.