Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

The duties of a Chapter 7 trustee are described in Section 704. Those duties include: (i)collecting and liquidating the property of the estate, distributing it according to the schemeprovided by the Code, and closing the case; (ii) investigating the financial affairs of the Debtor;(iii) examining proofs of claim and objecting to the allowance of claims, where appropriate; (iv)assuming or rejecting executory contracts of the Debtor; (v) pursuing preference, fraudulentconveyance or other avoidance actions; (vi) continuing to perform the obligations of theadministrator of an employee benefit plan, if the Debtor served as such an administrator; and(vii) if Debtor is a health care business that is being closed, using reasonable and best efforts totransfer patients to a facility in the vicinity providing substantially similar services at areasonable quality of care. Section 704 also provides that if the trustee operates the Debtor'sbusiness, the trustee must provide certain information concerning that operation to the court, tothe United States Trustee, and to governmental taxing authorities. In all Chapter 7 cases, thetrustee must file a final report and a final account of the administration of the estate with thecourt and with the United States Trustee. These reports will provide the Bankruptcy Court withan overview of the liquidation and disposition of the Debtor's assets, as well as the proposedcash distributions, if any, to eligible creditors.Generally a Chapter 7 trustee will not operate a Debtor's pre-petition business during thebankruptcy proceeding. There are a number of reasons for this. Primarily, the Debtor'sbankruptcy estate may not contain sufficient funds to operate the business. Moreover, thepurpose of Chapter 7 is to liquidate the Debtor's assets to cash for distribution to creditors, notto reorganize the Debtor's business so that it will emerge from the bankruptcy proceeding as agoing concern. With respect to small nonprofit businesses, it is not uncommon that strainedfinances will have forced the business to terminate employees and shut down businessoperations in the weeks or days before the filing of the bankruptcy petition. In such cases, thereis no business to operate in Chapter 7.The trustee may determine that running the Debtor's business operations for a limited period oftime during the bankruptcy case is in the best interest of the Debtor's creditors. This may occurif it is determined that the continued operation of the business would increase the sale price ofthe business to a third party during the bankruptcy proceedings. If the trustee determines thatcontinued operation of the Debtor's business for a limited period of time during the bankruptcycase is in the best interest of creditors, the trustee must file a motion seeking the BankruptcyCourt's authorization to run the business. A Chapter 7 trustee is extremely unlikely to seekCourt authorization to operate a nonprofit business during the bankruptcy proceedings.The Chapter 7 trustee is compensated by a formula set forth in Section 326(a). Imprecisely, thatcompensation is 5% of the first million dollars disbursed to creditors, and 3% of the balance.Estate ProfessionalsBankruptcy Code Section 327 requires prior Court approval for the trustee's employment of any"professional person." The term professional is not defined in the Code. Professionals include,but are not limited to, attorneys, accountants, appraisers, auctioneers, consultants, investmentbankers, and real estate brokers. Professionals are compensated with funds from the Debtor'sestate. The professionals' fees become administrative expenses of the bankruptcy estate, whichare paid before distributions are made to Debtor's pre-petition general unsecured creditors.28