When Michael Mastro fled to France to avoid turning over assets in an involuntary bankruptcy case filed against him, the chapter 7 trustee appointed in his case turned to the bankruptcy court for help in retrieving those assets. To do so, the trustee requested “unusual assistance” by asking the bankruptcy court to compel Mastro to sign a consent directive, allowing the trustee to request documents from international banks and financial institutions. This request led to an issue of first impression for the Ninth Circuit Bankruptcy Appellate Panel (BAP) — do bankruptcy courts have the authority to compel debtors to sign consent directives? According to the BAP, they do.
1. Consent Directives
A consent directive authorizes a third party to release information or documents anywhere in the world. Generally, a directive asks any bank or financial institution to disclose any accounts held by the signatory. Consent directives are often used as investigatory tools, and non-bankruptcy courts have compelled parties to sign them. In In re Mastro, the trustee sought a consent directive signed by Mastro to locate any international bank accounts that Mastro failed to disclose.
The Supreme Court held in Doe v. United States that courts may compel parties to sign consent directives, without violating the Fifth Amendment privilege against self-incrimination. Since Doe, several circuit courts of appeals have held that they have the power to compel parties to sign consent directives. Both the Second and Ninth Circuit Courts of Appeal have found that the All Writs Act (28 U.S.C. § 1651), in conjunction with the recalcitrant witness statute (28 U.S.C. § 1826), provides district courts with the authority to compel consent directives in criminal cases. In addition, the Second Circuit has held that the district court’s inherent supervisory power over a grand jury provides the court with the power to enforce consent directives in criminal cases. In civil litigation, courts have also authorized consent directives based on their broad discretion to supervise discovery.
Various government agencies have also used consent directives, including the Commodity Futures Trading Commission, the Federal Trade Commission, the Consumer Financial Protection Bureau, the Securities Exchange Commission and the Internal Revenue Service. By statute, each of these agencies has investigative powers, such as the ability to issue subpoenas and compel witnesses to testify, and rely on these powers to authorize them to request and obtain consent directives.
2. Bankruptcy Courts’ Authority to Issue Consent Directives
Before In re Mastro, no bankruptcy court had considered whether it had the authority to compel consent directives. The bankruptcy court in In re Mastro found that it did not have the power to issue consent directives under Rule 2004, and that it was limited to issuing subpoenas. The BAP, however, found that bankruptcy courts do have the power to compel debtors to sign consent directives for the trustee’s use in carrying Code-imposed obligations.
The BAP found that this power arises under the statutory investigatory duties that chapter 7 trustees are vested with and a debtor’s obligation to provide recorded information to the trustee. Under sections 704(a)(1) and (4) of the Bankruptcy Code, the trustee has the statutory duty to collect property of the estate and investigate financial affairs, while debtors have a duty to surrender all property of the estate to the trustee under section 521(a) of the Bankruptcy Code. The BAP analogized this power to the investigatory power of government agencies, to support that bankruptcy courts have the same authority to compel consent directives.
Furthermore, the BAP found that section 105 of the Bankruptcy Code and Bankruptcy Rule 2004 both provide bankruptcy courts with broad authority to issue consent directives. Section 105 confers broad residual power on bankruptcy courts to take any action that is necessary to carry out the provisions of the Bankruptcy Code or prevent an abuse of process. Thus, when carrying out the Bankruptcy Code’s investigatory and disclosure requirements in sections 521 and 704, bankruptcy courts have the authority to compel a debtor to sign a consent directive.
In addition, Bankruptcy Rule 2004 gives bankruptcy courts “unfettered and broad” discovery powers (subject to certain limits that were not implicated in the case). The BAP also found that Rule 2004 allows bankruptcy courts to compel consent directives to inquire into debtors’ financial affairs, in furtherance of the trustee’s section 704 statutory duties.
3. Limits on This Authority
The BAP remanded the case back to the bankruptcy court to consider whether to issue a consent directive. The BAP advised that bankruptcy court’s discretion is twofold. First, in considering whether to issue a consent directive, the court may need to consider international comity, as information, such as foreign banking records, may be sought from international institutions. Second, a court should consider how the order should be issued, and whether to add additional procedural safeguards. Rule 2004 provides a lot of power to the court, without many of the procedural safeguards normally applicable to discovery under the Federal Rules of Civil Procedure. Accordingly, the BAP suggested it may be appropriate in some circumstances for a bankruptcy court to “borrow” procedural protections from the Civil Rules (although the BAP did not elaborate on what circumstances would merit such additional procedural safeguards).
This decision confirms the broad authority of bankruptcy courts to carry out the statutory rights and duties created by the Bankruptcy Code. Borrowing from government agencies’ playbook to conduct statutorily required investigations, the BAP has given bankruptcy courts a tool to assist trustees with their investigatory obligations and to obtain documents and data that a debtor may not voluntarily disclose. Thus, while Michael Mastro may have fled to France, his foreign accounts may still be within the reach of the trustee.