New rules needed to deal with unclaimed bankruptcy funds, panel says

(Reuters) – A federal court panel is proposing to require trustees in bankruptcy to take additional steps to locate creditors before releasing funds to court, with the amount of funds unclaimed in court reaching $404.4 million dollars.

A panel convened by a U.S. Courts Administrative Office task force in a report released this week said new measures could help reduce the roughly $20 million in unclaimed funds deposited with the courts each year.

These funds belong to thousands of individuals and entities and are held by federal justice until claimed. But the report warned that without new measures, filings will continue to grow, posing “reputational risks” to the justice system.

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Without further efforts, “the balance will continue to grow,” the report says.

The report, from the Unclaimed Funds Expert Group, a subgroup of the Administrative Office’s Financial Managers Task Force, was based on a 2020 survey of bankruptcy courts to determine “pain points” involving unclaimed funds.

The report was attached to a proposed rules now before the Judicial Advisory Panel on Bankruptcy Rules submitted Wednesday by panel chair Dana McWay, the court clerk of the United States Bankruptcy Court for the Eastern District of Missouri.

McWay did not respond to a request for comment, and the administrative office had no immediate comment on the proposal.

Much of the report focused on the role of trustees in bankruptcy, who are appointed by the US Department of Justice’s bankruptcy watchdog, the US Trustee, to represent a debtor’s estate in bankruptcy proceedings. .

The panel’s investigation found that several bankruptcy courts were concerned about the variability in how trustees locate parties before depositing funds with the courts and expressed skepticism about whether trustees were doing enough.

“Courts have repeatedly stated that correct creditor addresses were easily found by court staff at the time funds were deposited by the trustee, although the trustee indicated that he could not locate a correct address of the creditor,” the report said.

This was especially the case when the creditors were utilities, city and state government entities, and even the Internal Revenue Service, according to the report.

While some courts expressed confidence in their local trustees, the panel recommended the adoption of a new rule requiring trustees to file motions seeking court approval before handing over funds and to take more steps to locate creditors beforehand.

The panel also recommended considering a rule change that would prohibit the deposit of funds below a threshold amount and instead redirect those funds to other creditors or, if their claims are fully satisfied, to the debtor.

And the panel said courts should no longer be allowed to take filings unless trustees comply with a provision of federal bankruptcy procedure rules that requires them to provide the names and last known addresses of creditors.

This will avoid creating “black hole records”, the panel said.

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