May 31, 2016 Articles

Lawful Searches by Bankruptcy Trustees

A growing body of law has expanded the powers of the bankruptcy court to authorize home searches for the discovery of hidden assets or cash.

By Thad Davis and Peter Bach-y-Rita

Curtis James Jackson III, also known as 50 Cent, filed a chapter 11 case in the District of Connecticut on July 13, 2015, listing zero cash on hand. But he later posted photographs on social media in which he posed with piles of cash, including one ironically arranged to form the word “Broke”. In February 2016, the United States Trustee filed a motion for an order compelling Jackson to appear for an examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure. Jackson filed an opposition arguing that the cash depicted in the photos was not real and that “[p]rop money is routinely used in the entertainment industry, including in movies, television shows, videos, and social media postings.” (In re Curtis James Jackson, III, Case No. 15-21233 (Bankr. D. Conn. Mar. 8, 2016 [Docket No. 388].)

There is something especially interesting about Jackson’s case that goes beyond the usual celebrity factor. It raises all sorts of post-modern questions about what the court should believe in a bizarre celebrity culture that deliberately bends distinctions between real personality and public persona. Did Jackson pose with piles of cash or was that just 50 Cent?

However fascinating those questions are, this article deals with a much more practical one. Assuming that the court did appoint an examiner or a trustee (as requested by a group of unsecured creditors), the next obvious step would be for that person to go and find the piles of bills in Jackson’s house to conclusively determine whether they are real or fake. And that raises a question that rarely comes up but blurs the boundaries between criminal law and Title 11 of the United States Code: Can the bankruptcy court authorize the trustee to search a debtor’s home?

Home Searches
The short answer is that courts are divided. In In re Trustee in Bankruptcy for a Search Warrant, 173 B.R. 341 (N.D. Ohio 1994), the district court rejected the trustee’s application to conduct a home inspection on the grounds that any issuance of a warrant would have to be regulated by Rule 41 of the Federal Rules of Criminal Procedure. That rule provides that “[u]pon the request of a federal law enforcement officer or an attorney for the government, a search warrant authorized by this rule may be issued.” But the court pointed out that the bankruptcy trustee is neither a federal law enforcement officer nor an attorney for the government.

Perhaps unsurprisingly, the bankruptcy courts have been more willing to authorize home inspections by trustees. In most reported decisions, bankruptcy courts have held that they can authorize home inspections within limits, stressing the overwhelming importance of bringing all property into the estate, and the practical difficulties faced by trustees in attempting to carry out their duties.

What is the source of those limits? The obvious answer is the Fourth Amendment prohibition on unreasonable searches and seizures. But the Fourth Amendment only applies to state actors, and bankruptcy trustees occupy an ambiguous position. Depending on the circumstances of the case, they are appointed by the office of the United States Trustee (part of the Department of Justice) or through a meeting of creditors, and are heavily regulated by the United States Code, yet they are generally private citizens who serve as fiduciaries of the estate for the benefit of the private parties involved in the case.

Some courts have held that the trustee is a government actor subject to the strictures of the Fourth Amendment—and some have gone the other way. Compare Taunt v. Barman (In re Barman), 252 B.R. 403, 411 (Bankr. E.D. Mich. 2000) (holding Fourth Amendment applied to search for property including furniture and video machines) with In re Bodeker, 2013 Bankr. LEXIS 2336, No. 12-60137-7, at *34 (Bankr. D. Mont. June 7, 2013) (holding that trustee’s search for gold and silver did not implicate Fourth Amendment because “no evidence exists in the record that the [trustee] intended to assist law enforcement efforts . . .”). Clearly a bankruptcy court is less inclined to find the Fourth Amendment applicable where the trustee is merely inspecting a house in preparation for auctioning the house itself, as opposed to searching for hidden gold, jewelry or piles of cash. Draper v. Brown (In re Draper), No. 06-2860, 2007 U.S. Dist. LEXIS 12341, at *4-5 (D. Ariz. Feb. 20, 2007).

Ultimately, however, it might not really matter whether the court conducts a Fourth Amendment analysis. Courts holding that the trustee is bound by the Fourth Amendment generally have also pointed out that debtors have reduced expectation of privacy and correspondingly weakened Fourth Amendment protections. Meanwhile, courts that treat the trustee as a private actor have commonly insisted that debtors still have some reasonable expectation of privacy in their homes. In other words, whether courts apply the Fourth Amendment or not, they tend to converge on a similar standard that recognizes the trustee’s special circumstances without giving the trustee unfettered license to invade the debtor’s private spaces.

Statutory Authority
Few published decisions have addressed a trustee’s authority to inspect a debtor’s home, and fewer still have addressed the statutory basis for that authority. As mentioned above, the bankruptcy courts cannot look to the Federal Rules of Criminal Procedure for authority to authorize these inspections, because bankruptcy trustees are neither federal law enforcement officers nor attorneys for the government. An obvious source of authority is Section 105(a) of the Bankruptcy Code, which grants wide latitude to the bankruptcy court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the title.” Home inspections are arguably necessary and appropriate to enable the trustee to carry out its duties of investigating the financial affairs of the debtor and collecting the property of the estate. 11 U.S.C. § 704(a). Similarly, Section 105(a) has historically served as the basis for obtaining orders of ejectment and writs of possession against debtors.

One might wonder whether a general grant of powers should really serve as cover for bankruptcy courts to authorize such extraordinary action. Furthermore, the extent of the bankruptcy court’s powers under 105(a) remains a subject of dispute. While these concerns are well taken, however, it is important to appreciate that section 105(a) operates in conjunction with other sections of the code. In fact, when it comes to the authority for home searches, other sections of the Code probably do most of the heavy lifting. Under Bankruptcy Code Section 541, upon commencement of the bankruptcy case, all property of the debtor becomes property of the bankruptcy estate. Therefore, when the bankruptcy court is asked to authorize a home inspection under Section 105(a), it is really being asked to allow the trustee to enter a residence in which the trustee already has a property interest. Even when the debtor takes a so-called “homestead” exemption, the home is usually treated as property of the estate that later re-vests in the debtor, creating a legal relationship between the trustee and the debtor that has been analogized to that of tenants in common. (This legal fiction is created to spare debtors from having to pay rent to the trustee for the duration of the case.) While it is unclear how far this analogy can be pressed, under state law, each tenant in common has a right to occupy and use the entire property.

It is also worth mentioning that bankruptcy courts have resisted the idea that they can authorize inspections of homes in which the debtor and the estate have no legal or equitable interest. In re Skinner, 336 B.R. 316 (N.D Ohio 2005). This provides further support for the notion that it is the trustee’s property interest, and the debtor’s special duties and relationship to the trustee that ground the debtor’s reduced expectations of privacy and the trustee’s right to inspect.

Filing for bankruptcy exposes a debtor to potentially extensive discovery by the trustee, the statutory and constitutional boundaries of which can be less clear than in the criminal context in which there is well developed authority. Home inspections are rare. Trustees are mostly private citizens who are not accustomed to using home inspections in discovery, and while they have a fiduciary duty to bring all assets into the estate, trustees are understandably wary of missteps that could result in sanctions or disqualification. Still, there will always be debtors who brag in public about hidden assets or post apparent images of undisclosed cash on social media. In the most extreme cases, a determined trustee might just get a court order authorizing a home search, adding to a small but growing body of precedent that has expanded the powers of the bankruptcy court and its appointed officers.

Keywords: criminal litigation, Fourth Amendment, bankruptcy, 50 Cent, trustees

Thad Davis is a partner and Peter Bach-y-Rita is an associate with Gibson, Dunn & Crutcher LLP in San Francisco, California.

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