Bankruptcy Trustees Have a Duty to Disclose Information Concerning the Estate to Creditors under Section 704(a)(7) of the Bankruptcy Code

Joel Cardoz 

St. John's University School of Law 

American Bankruptcy Institute Law Review Staff

In In re Pearlstein, a bankruptcy court in Oregon held that a Trustee must “provide all of the information in [their] records and files” to a creditor upon the creditor’s request.[i] On July 26, 2017, Debtors Irwin Robert Pearlstein and Chris Ramsower-Pearlstein (“Debtors”) filed a joint petition for relief under chapter 7 of the Bankruptcy Code. The case was designated “as a no-asset chapter 7 case.”[ii] The Debtors were discharged, and “the case was closed later in 2017.”[iii] In May 2019, an unsecured creditor, Robert L. Sanders Professional Law Corporation (“Creditor”), filed a motion to reopen the case and asserted that a “Chapter 7 trustee should be appointed to administer assets that were ‘either hidden or not fully investigated due to inadequate disclosure by Debtors.’”[iv] The Court granted the motion and a chapter 7 trustee was appointed. The appointed chapter 7 trustee, Amy E. Mitchell (“Trustee”), commenced an investigation and concluded that this “case should be treated as an asset case.”[v] In March of 2022, Trustee filed a motion and notice to enter into a settlement agreement with Debtors to settle the case. [vi] Creditor objected to the settlement, stating that “Trustee had failed to provide an adequate factual basis to support the settlement.”[vii] Specifically, Creditor contended that the Trustee failed to provide any information they gathered from their investigation prior to hearing on the settlement.[viii] In response, Trustee contended that there were issues of confidentiality and the documents contained sensitive information.[ix] Following oral arguments, the Court concluded that Creditor was entitled to such information and that “the parties should work together to draft an appropriate protective order to address Trustee's concerns about confidentiality.”[x]

            Section 704(a)(7) of the Bankruptcy Code provides that the “Trustee shall – (7) unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest.” Based on this textual language, and as a fiduciary of the estate, the Bankruptcy Court found that an obligation to provide information to interested parties, such as creditors, upon request.[xi] The disclosure requirement can be overridden, however, when the trustee has a “countervailing fiduciary duty.”[xii] Furthermore, courts generally recognizes there is a need to “provide appropriate safeguards for confidential information” that could potentially harm the estate or the trustee.[xiii] Courts also will “protect trustees from providing information when the request for information is not made in good faith.”[xiv] “If the trustee and the party in interest do not agree, then the Bankruptcy Code gives the trustee two [options.]”[xv] First, to “provide the information anyway, even though the trustee does not want to do so.”[xvi] Second, “seek entry of an appropriate protective order.”[xvii] The burden is on the trustee to obtain the court order to be excused from the duty to provide information.[xviii]

            In the instant case, Trustee had a duty to provide information to the objecting creditor.[xix] Moreover, while Trustee had a countervailing fiduciary duty, the Court ruled that an appropriate protective order would protect the Trustee’s interest in keeping certain information confidential.[xx] Since Creditor has agreed to enter into such a protective order, the Trustee can fulfill his duty to provide information to  Creditor.[xxi] Additionally, the Court ruled that the Creditor’s request was made in good faith.[xxii] Creditor “reasonably” requested information about the Trustee’s investigation so that they could “evaluate Trustee's proposed settlement.”[xxiii] The Court also noted that “Trustee has not questioned Creditor's good faith, and the record shows no reason to do so.”[xxiv]

            The holding of the Oregon bankruptcy court is consistent with long-standing bankruptcy practice.[xxv] Courts generally maintain that the Trustee’s duty to provide information is a “broad and extensive” duty.[xxvi] In holding that the Trustee has to provide information to the Creditor, the bankruptcy court followed general public policy in keeping the duty to provide information broad and expansive.[xxvii]