Section 341 Meeting for a Business: 5 Questions the Trustee Asks Every Owner

An owner who answers for a company at its meeting of creditors is giving sworn testimony, and the recording is kept after everyone logs off. Region 21 of the United States Trustee Program states in its chapter 11 guidelines that the meeting is recorded electronically and that the record stays available for public access until two years after the meeting concludes.

The meeting itself is short and unceremonious. Section 341(a) directs the United States Trustee to "convene and preside," section 341(c) forbids the judge to preside or even attend, and section 343 requires the debtor to "appear and submit to examination under oath," with creditors, any trustee, and the United States Trustee all permitted to ask questions. Under Bankruptcy Rule 2003, a chapter 7 or chapter 11 meeting falls no sooner than 21 days and no later than 40 days after relief is ordered; the Program reports that almost all 341 meetings are now held by Zoom. For an entity, the person under oath is whoever speaks for it. The five questions below are drawn from the Program's own required list for chapter 7 trustees, which trustees must cover in substance and on the record, and from the scope rules that govern the examination in every chapter.

1. The Trustee First Asks Who Is Speaking for the Company

The Program's 2023 best practices for virtual meetings state that when the debtor is a business entity, "the trustee will ask the responsible party for the debtor to identify themself and to testify that they are the responsible individual whose name appears on the voluntary petition." Region 21's chapter 11 guidelines describe who may appear for a corporation: officers, directors, a controlling stockholder or member, or "any other person in control."

The question sounds administrative. It is the foundation of everything that follows, since a company can testify only through a person, and the person must be one with authority. In Price v. Gurney, decided in 1945, the Supreme Court located the authority to put a corporation into bankruptcy in state law and said that a court finding no such authority "has no alternative but to dismiss the petition." Whether an LLC's operating agreement in fact authorized the member who signed is a question some owners discover they cannot answer on the record.

2. The Trustee Asks Whether You Signed, and Whether You Read

The required list asks, in substance, whether the debtor signed the petition, schedules, and statements, whether the signature is the debtor's own, and whether the debtor read the documents before signing them. Two questions, joined. The first is easy.

The second catches owners who let a bookkeeper or controller assemble the schedules and signed the declaration page at the end, and the answer cannot be adjusted afterward, because Rule 1008 requires every schedule and statement to be verified or to carry an unsworn declaration under penalty of perjury.

In June 2018 the regional office for the Northern and Eastern Districts of California and Nevada wrote to its panel trustees that a written questionnaire may not stand in for the required questions, "because only verbal questions and answers are part of the audio recording." The answer has to be spoken.

3. The Trustee Asks Whether Everything Is There, and Whether Anything Is Wrong

Two of the required items reach the heart of the schedules. The trustee asks whether the witness is personally familiar with the information in the petition and schedules, whether to the best of the witness's knowledge it is true and correct, and whether there are "any errors or omissions to bring to my attention at this time." Then the trustee asks whether all assets are identified and all creditors listed.

That third clause is the most generous sentence in the meeting, and an unprepared witness is the one most likely to let it pass.

For a business with merchant cash advances, the creditor question has real texture. A funder may have sold its position, a second funder may have paid off the first under a consolidation, and a broker may have taken a fee from proceeds the owner never saw, so that the schedules, prepared from the contracts in a drawer and the debits on a statement, list a creditor who no longer holds the claim, omit one who does, and describe as liquidated an amount the owner intends to dispute, which is the kind of discrepancy a creditor's counsel sitting on the call will notice before the trustee does, and which the witness is better off raising than hearing raised. The meeting is the cheapest moment in the case to say that a schedule needs amending.

The trustee's question about errors is an invitation. Declined, it becomes the first entry in someone else's timeline.

Federal law sets penalties of up to five years in prison for a knowing and fraudulent false oath in a bankruptcy case, under 18 U.S.C. 152. Most errors at a 341 meeting are neither knowing nor fraudulent (whatever a hostile creditor may later suggest about a missing account). They are unexamined, which is a different problem and a curable one.

4. The Trustee Asks What Left the Business Before the Filing

Among the Program's sample questions are whether the debtor transferred or gave away any property within the past year, and whether it made any large payment, over $600, to anyone in that period. Official Form 207, which a non-individual debtor files as its Statement of Financial Affairs, has already asked the same thing in more detail: payments to creditors within 90 days before filing, payments within one year that benefited an insider, and transfers outside the ordinary course within two years. In chapter 11, Region 21 requires a list of every disbursement and transfer in the 90 days preceding the petition to be produced before the initial debtor interview.

The owner at the meeting is, therefore, being asked to confirm under oath what the paperwork already said. Some of those payments may be recoverable by the estate. Whether the trustee or a creditor will pursue them is a question the meeting leaves open.

5. The Trustee Asks Where the Records Are and Whether the Business Can Go On

The required list for debtors engaged in business turns to bookkeeping: who maintained the financial records, which journals and ledgers were kept, where they are now, which bank accounts existed within the last three years, where the statements and canceled checks sit, where the corporate minutes are, and whether receivables remain and can be collected. In chapter 11, Bankruptcy Rule 2004(b) extends the permitted scope of examination to "the operation of any business and the desirability of its continuing" and to the source of any money the debtor will use to consummate a plan.

In a small business case, section 1116(2) requires the debtor to attend through its senior management and counsel, and section 1112(b)(4)(G) counts failure to attend the meeting without good cause as cause to convert or dismiss. The witness who knows where the ledgers are and what the next six months of receipts look like has answered this question before it was asked. Region 21 asks for a six-month projected cash budget before the initial debtor interview, and the witness should expect to be held to it.

What the Meeting Tells an Owner About the Alternatives

The Program's required questions reward preparation, and preparation for them is bankruptcy counsel's work. Delancey Street, which negotiates business debt, is not a law firm, and plays no part in a 341 meeting, has a narrower role: for owners who have not filed, it offers a review, free and confidential, of whether merchant cash advance balances and other business debt might be resolved by negotiation, with independently licensed attorneys taking any legal question. For some businesses that review ends with a referral to bankruptcy counsel. The meeting of creditors is, in the end, a room in which a business explains itself, and it is easier to do that once the books have been read.