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

(Reuters) – Federal court panel proposes to require bankruptcy trustees to take additional steps to locate creditors before handing funds over to courts, as amount of unclaimed money held by the court reaches 404.4 millions of 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 in the courts each year.

These funds belong to thousands of individuals and entities and are in federal custody until claimed. But the report warned that in the absence of further action, deposits will continue to rise, posing “reputational risks” to the courts.

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

The report, by the Unclaimed Funds Expert Panel, a subgroup of the Administrative Office’s Financial Managers task force, was based on a 2020 survey of bankruptcy courts to determine “pain points” regarding unclaimed funds.

The report was attached to a rule proposal now before the judiciary advisory committee on bankruptcy rules submitted Wednesday by panel chairman Dana McWay, the clerk of the US bankruptcy court for the eastern district of Missouri.

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

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

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

“Courts have repeatedly expressed that the correct addresses of creditors were easily found by court staff at the time the funds were deposited by the trustee, although the trustee said he could not find a creditor address. correct, “the report says.

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 have expressed confidence in their local trustees, the panel recommended passing a new rule requiring trustees to file petitions seeking court approval before releasing funds and taking more action to locate the trustees. creditors beforehand.

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

And the panel said courts should no longer be allowed to accept deposits unless trustees comply with a provision in federal bankruptcy 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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