### Applicability of Conflict of Interest Laws to Current and

Former Executive Branch Employees Serving as Trustees in

Bankruptcy Cases

S e c tio n s 203 and 205 o f title 18 do not pro h ib it c u rre n t e x ecu tiv e b ranch e m p lo y e es fro m serv in g as b an k ru p tc y tru ste e s, if the U n ite d S tates is not a party to and lacks a “d ire c t a n d su b stan tial in te re st” in the particular bank ru p tcy p ro ceed in g . O th e rw ise, th e sec tio n s b a r c u rre n t em ployees, except fo r U nited S tates T rustees and th e ir em p lo y e es, fro m serv in g as tru ste e s in bankruptcy.

S u b se ctio n s (a) a n d (b) o f 18 U .S .C . § 207 do not p ro h ib it form er e x ecu tiv e b ra n c h e m p lo y e es from serving as trustees, if the U nited S tates is not a party to and d o e s not have a “d irect a n d su b sta n tia l in te re st” in the particular bank ru p tcy p ro ceed in g . W h ere the U n ite d S tates h a s such an interest, the su b sectio n s w ould p ro h ib it a fo rm er e xecutive branch e m p lo y e e fro m se rv in g as a tru ste e in m atters with respect to w hich he partic ip a te d , o r w hich fell u n d e r h is s u p erv isio n , w h ile he w as in g overnm ent service.

T h e narrow class o f fo rm er h igh-level e x ecu tiv e officials co v ered by 18 U .S .C . § 2 0 7 (c ) m ay n o t serve as tru stees w here the m a tte r involved is one p en d in g b efore th e o fficial’s fo rm e r a g e n c y o r is one in w h ich th at a gency has a "d ire c t and su b stan tial interest.”

June 7,1990

M e m o r a n d u m O p i n i o n f o r t h e A c t i n g D i r e c t o r

O f f i c e o f G o v e r n m e n t E t h i c s

This memorandum responds to your predecessor’s request for our opinion on the applicability of the federal conflict of interest laws to current and former executive branch employees who serve as trustees in bankruptcy cases.1 The restrictions of 18 U.S.C. §§ 203, 205, and 207 — the conflict of interest provisions that prompted this inquiry2 — limit the representational activities of current and former executive branch employees.

1 See L etter for C harles J C ooper, Assistant Attorney G eneral, Office o f Legal C ounsel, from Frank Q. N ebeker, D irector, O ffice o f G overnm ent Ethics (Feb. 23, 1988). 2 S ince the tim e o f that inquiry. Congress has enacted m inor m odifications to the relevant portions o f
sections 203 and 205. See Ethics Reform A ct o f 1989, Pub. L. No. 101-194, §§ 402 & 404, 103 Stat. 1716, 1748, 1750. We have based our analysis upon the text currently in force.



### 121For the reasons set forth below, we conclude that the limitations upon

current employees in 18 U.S.C. §§ 203 and 205 do not prohibit such persons from serving as trustees where the United States lacks a substantial interest in the particular bankruptcy proceeding. In cases where the United States does have such an interest, sections 203 and 205 do not prohibit United States Trustees or subordinates acting under their authority from acting as trustees; all other current employees, however, would be barred from servingas trustees. Pursuant to 18 U.S.C. § 207, former executive branch employees generally may serve as trustees unless the United States has a substantial interest in the particular bankruptcy proceeding.3



### I. Background

The trustee in a federal bankruptcy case represents the estate as a whole, rather than the interest of any particular claimant upon the estate. See 11 U.S.C. § 323(a). See also Bauer v. Commerce Union Bank , 859 F.2d 438, 441 (6th Cir. 1988), cert, denied , 489 U.S. 1079 (1989); In re Dominelli, 820 F.2d 313, 316 (9th Cir. 1987). In this capacity, the trustee acts as

a fiduciary to serve and protect the financial interests of all groups who have some claim upon the estate. The trustee is a fiduciary to protect the interests of all the classes of creditorsincluding wage creditors, tax creditors, creditors holding secured claims, and creditors holding unsecured claims. The trustee is a fiduciary fo r the debtor to protect the debtor’s rights in exempt property and to the extent that the estate is solvent, to protect the debtor’s rights to the surplus o f the

estate. The trustee is a fiduciary, to the extent that reorganization value exists, for all equity security holders of an estate
and to the debtor itself.

In re Nuckolls, 67 B.R. 855, 857 (Bankr. W.D. Va. 1986) (quoting C ollier’s Handbook fo r Trustees and Debtors in Possession, § 4.02 (L. King Ed. 1982) (emphasis added by court)). Accord Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355 (1985); In re WHET, Inc., 750 F.2d 149 (1st Cir. 1984).4 The bankruptcy laws provide four methods for selection of a trustee. See generally Cowans Bankruptcy Law & Practice, §§ 2.4 & 2.10 (1989).

5 A som ew hat m ore com plicated set o f principles governs the class o f form er high-level executive b ran ch em ployees w hose activities are subject to 18 U .S.C . § 207(c). See infra pp. 125-26 . 'T h e trustee is deem ed to be an officer o f the bankruptcy court, see, e.g.. In re Beck Indus., Inc., 725 F.2d 880, 888 (2d Cir. 1984) (citing King v. United Slates. 379 U.S. 329, 337 n.7 (1964)), and the court m ay rem ove him for cause, 11 U.S.C. § 324(a).

122He may be elected by the creditors of the estate. 11 U.S.C. § 702. He may be appointed by the bankruptcy court. Id. § 1104(a). He may be appointed by the United States Trustee from a panel of “private trustees” selected and overseen by the United States Trustee. 28 U.S.C. § 586(a)(1) & (3); 11 U.S.C. § 701(a)(1). Finally, the United States Trustee may serve as a trustee, 28 U.S.C. § 586(a)(2), 11 U.S.C. § 701(a)(2), as may his employees, 28 U.S.C. § 586(b).



### II. Analysis

The conflict of interest laws distinguish between the activities of current executive branch employees and those of former employees.

A. Current Federal Employees

Section 205 of title 18 imposes criminal sanctions upon current federal employees who, “other(] than in the proper discharge o f [their] official
duties ,” act as “agent[s] or attomey[s] for anyone before any . . . court” in connection with any matter “in which the United States is a party or has a
direct and substantial interest .” (Emphases added.) All bankruptcy trustees serve as fiduciaries of the estate as a whole before the bankruptcy court and, hence, clearly would come within the meaning of “agent[s]” in section 205.Similarly, section 203(a) of title 18 imposes criminal sanctions upon current federal employees who, “otherwise than as provided by law for the proper discharge of official duties . . . demand[], seek[], receive[], accept[], or agree[] to receive or accept any compensation for any representational services, as agent or attorney or otherwise, rendered or to be rendered” in relation to any proceeding “in which the United States is a party or has a direct and substantial interest, before any . . . court.” The activities of an employee acting as a trustee would implicate section 203, because trustees— other than United States Trustees and their employees5 — receive compensation for their services from the court-supervised distribution of assets
in the estate. See 11 U.S.C. § 326. The activities of a current federal employee as trustee will fall outside the scope of sections 203 and 205 in two instances. First, sections 203 and 205 are inapplicable where the United States is not a party to and does not have a “direct and substantial interest” in the bankruptcy proceeding in question.6 The determination of whether these two conditions obtain in a particular bankruptcy proceeding will turn upon a fact-specific inquiry. Whether the

5 On the applicability of both sections 203 and 205 to such officials, see infra p. 124. 6 In the event that sections 203 and 205 are inapplicable for this reason, there are also restrictions upon outside em ploym ent and incom e for a lim ited class o f high-level executive em ployees w ho are not career civil servants and “ whose rate o f basic pay is equal to o r greater than the annual rate o f basic pay in effect for grade G S-16 o f the G eneral Schedule.” See Ethics R eform Act o f 1989, Pub. L. No. 101- 194, § 601, 103 Stat. 1716, 1760-62 (adding 5 U .S.C app. §§ 501-502).

123United States is a creditor o f the estate or otherwise has a “direct and substantial interest” in the bankruptcy proceeding from the standpoint of tax liability are merely two examples of the considerations that may come into play. Second, sections 203 and 205 are inapplicable where a current federalemployee is engaged in “the proper discharge of official duties” in his capacity as trustee. This language permits a United States Trustee and his subordinates to serve as trustees in bankruptcy. The United States Trustee is an officer of the Department of Justice7 and is expressly authorized to “serve as and perform the duties of a trustee in a case under title 11 when required under title 11 to serve as trustee in such a case.” 28 U.S.C. § 586(a)(2).Thus, when a United States Trustee or an employee acting under his authority serves as a trustee pursuant to 28 U.S.C. § 586(a)(2), such representationalactivities constitute “official duties” under the statute and, hence, fall outside of sections 203 and 205. Conversely, when the trustee is either (1) an individual drawn from the panel of private trustees by the United States Trustee or (2) an individualselected by the court or by the creditors, he does not perform official government duties; instead, he acts solely in the fiduciary capacity of trustee on behalf of a private estate. Given the multitude of potentially competing interests to which a trustee owes a fiduciary duty, we believe that a trustee who is not a United States Trustee or an employee acting under his authority cannot be said to be performing official duties, even when the United States happens to be among the creditors of the estate. Under such circumstances, the trustee must be viewed as “a representative of the estate, not an officer, agent, or instrumentality of the United States.” In re Hughes Drilling Co., 75 B.R. 196, 197 (Bankr. W.D. Okla. 1987). These conclusions are consistent with advice we provided in 1977, in which we noted that Congress intended sections 203 and 205 to guard against the risk that federal employees might ally themselves with private interests
in matters of concern to the Government. See 1 Op. O.L.C. 110, 111 (1977).8 In light of this purpose, we concluded that neither section 203 nor section205 prohibits an Assistant United States Attorney from temporarily exchanging duties with an Assistant Federal Public Defender: “Instead of acting asprivate individuals or affiliates of a nongovernmental organization, participating Assistant U.S. Attorneys would be assigned by th[e] Department [of Justice] to the Public Defender Office, another Federal Government agency,and would perform the official duties of that organization under its supervision.” Id. (emphasis added).9 By contrast, we noted that our analysis would

’ T he A ttorney G eneral has authority both to appoint and to rem ove U nited States Trustees. 28 U.S.C. § 5 8 1 (a) & (c). In addition, the Attorney General supervises and provides assistance to U nited States
T rustees. Id. § 586(c). ‘ T he versions o f section 203 and 205 then in force w ere virtually identical, in relevant part, to the current provisions. 9 A ttorneys em ployed by a Federal public defender organization are officers o f the judicial branch. See 18 U .S .C . § 3006A (g)(2)(A ).


### 124not apply “to the assignment of Department of Justice attorneys to a private legal services organization.” Id. at 111 n.4 (emphasis added).Thus, under our 1977 opinion, United States Trustees and their employees who serve as trustees would not be subject to sections 203 and 205 because they would be performing their official duties required by statute. In contrast, other current federal employees who serve as trustees would notbe performing official duties in that capacity absent express statutory authorization such as is found in the United States Trustee statute. Moreover, itcannot be said that such employees, when serving as trustees, are performing duties of some other federal agency empowered to undertake trustee activities. Rather, current federal employees who serve as trustees act solelyas fiduciaries for private estates and, as such, are analogous to the government attorneys acting on behalf of private legal service organizations whom we noted would run afoul of sections 203 and 205.

B. Former Federal Employees

Section 207 of title 18 governs the representational activities of former executive branch employees. Under subsection (a) of section 207, a former executive employee may not “make[] any oral or written communication on behalf of any other person (except the United States) to . . . any department, agency, [or] court . . . of the United States” in connection with any matter “in which the United States . . . is a party or has a direct and substantial
interest" and in which the employee “participated personally and substantially” during his government service. (Emphasis added.) Similarly, subsection (b) bars a former executive branch employee for two years from acting as “agent or attorney for . . . any other person (except the United States)” in connection with any matter “in which the United States . . . is a party or has a direct and substantial interest” and which was either “pending under [the employee’s] official responsibility” within one year prior to his departure from the Government or in which the employee “participated personally and substantially.” Given that a trustee in bankruptcy would act as the fiduciary of an entity other than the United States, subsections (a) and (b) would prohibit a former executive branch employee from serving as a trustee in matters that were under his supervision or with respect to which the employee participated while in government service, unless the particular bankruptcy proceeding isone in which the United States is not a party and lacks a “direct and substantial interest.” Again, the determination of whether the United States has such an interest will turn upon the facts of the particular case. Finally, subsection (c) of section 207 forbids certain high-level executivebranch officials for one year from communicating with their former departments or agencies on behalf of anyone other than the United States in any matter “pending before such department or agency or in which such department

125or agency has a direct and substantial interest.” (Emphasis added.) As noted

above, we believe that a former employee acting as trustee does act on behalf of parties other than the United States. Thus, such an employee would be prohibited from acting as trustee for one year in any matter in which his former department or agency has a “direct and substantial interest” or which is currently pending before that department or agency.



### III. Conclusion

We conclude that:

(1) Sections 203 and 205 of title 18 do not prohibit current executive branch employees from serving as bankruptcy trustees, if the United States is not a party to and lacks a “direct and substantial interest” in the particularbankruptcy proceeding. Otherwise, sections 203 and 205 bar current employees, except for United States Trustees and their employees, from serving as trustees in bankruptcy.

(2) Subsections (a) and (b) of 18 U.S.C. § 207 do not prohibit former executive branch employees from serving as trustees if the United States is not a party to and does not have a “direct and substantial interest” in the particular bankruptcy proceeding. Where the United States has such an interest, however, section 207(a) and (b) would prohibit a former executive branch employee from serving as a trustee in matters with respect to which he participated, or which fell under his supervision, while he was in government service. With respect to the narrow class of former high-level executive officials within subsection (c) of 18 U.S.C. § 207, such persons may not serve as trustees where the matter involved is one pending before the official’s former agency or is one in which that agency has a “direct and substantial interest.”

LYNDA GUILD SIMPSON Deputy Assistant Attorney General Office o f Legal Counsel

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