SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOCPRIVATE TRUSTEE REFORM ACT OF 1997, AND REVIEW OF POSTCONFIRMATION FEES IN CHAPTER 11 CASES
THURSDAY, OCTOBER 9, 1997
House of Representatives,
Subcommittee on Commercial and
Committee on the Judiciary,
The subcommittee met, pursuant to notice, at 10:00 a.m., in Room 2141, Rayburn House Office Building, Hon. George W. Gekas, (chairman of the subcommittee) presiding.
Present: Representatives George W. Gekas, Lamar S. Smith of Texas, Ed Bryant, Steve Chabot, Jerrold Nadler, Sheila Jackson Lee, Martin T. Meehan, and William D. Delahunt.
Also present: Representative John Conyers, Jr.
Staff present: Raymond V. Smietanka, subcommittee chief counsel; Charles E. Kern II, subcommittee counsel; Susana Gutierrez, clerk; Daniel M. Freeman, counsel/parliamentarian; Peter J. Levinson, committee counsel, Julian Epstein, committee minority staff director, and Perry Apelbaum, committee minority general counsel.
[The bill, H.R. 2592 follows:]
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INSERT OFFSET RING FOLIOS 1 TO 3 HERE
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS. The hour of 10:00 having arrived, the subcommittee will come to order.
We note the presence of the gentleman from New York, Mr. Nadler, the ranking member of the subcommittee, and the gentleman from Ohio, Mr. Chabot, thus constituting a hearing quorum. We will proceed with the hearing as scheduled, but with a slight modification. As soon as enough members appear, whereby we would have a markup or reporting quorum, we will recess the hearing and proceed with a quick markup of a pending piece of legislation. Then we will return to the hearing. If that's confusing to anybody, it is to me, too. So we can proceed in a confused state.
We will begin with an opening statement by the Chair on the subject matter of the hearing.
The first witness who is scheduled is our colleague, Bob Goodlatte, of Virginia, on whose piece of legislation the hearing rests, so that we can hear all sides of the questions that are raised and the issues joined.
We are engaged in an examination of two matters related to bankruptcy. Mr. Goodlatte's distinguished predecessor in office, former Congressman Caldwell Butler, used to say that he knew of no better way to clear a room than to mention the subject of bankruptcy. But today we have both a sizable audience and a large and historic room in which to meet.
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And let it be known that I take, as do most of the members, in fact, all of the members on this subcommittee, we take the subject matter of bankruptcy very seriously and consider it from here to the end of this term as the prime focus of this subcommittee and, thereafter with the full Judiciary Committee.
The primary subject of this hearing is the question of providing judicial review of private trustee removals and expenses. That's the subject of Congressman Goodlatte's bill.
We are sympathetic to the concerns of the private trustees. I think everybody who thinks about it knows that there is a serious problem. At the same time, we need to understand what the United States Trustees' final rule for administrative review provides. And we need to know how both this bill and the final rule fit into the administrative law context. Here, the expert testimony to be presented by Professor Jeffrey Lubbers, formerly with the Administrative Conference of the United States, will be especially helpful.
The other matter with which we are concerned is the assessment of post-confirmation fees in Chapter 11 casesthat is, quarterly fees collected after a reorganization plan has been confirmed by the court and the debtor is proceeding on its own to resuscitate the business enterprise. The question of the quarterly fee collections is a difficult one with no clear answer. Post-confirmation fees cover nearly one-fourth of the United States Trustee program costs. Although Chapter 11 cases bear a disproportionate share of the cost of running the office, there is an understandable reluctance to shift the burden to Chapters 7 and 13.
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In closing, I would state that there were many others who offered to testify, and we regret that time factors would not permit that. I have in mind, particularly, a request from the Commercial Law League of America, whose testimony before this subcommittee, perhaps yet to come, would be very helpful.
With that, I would yield to the gentleman from New York if he should have an opening statement.
[The prepared statement of Mr. Gekas follows:]
PREPARED STATEMENT OF HON. GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
I want to welcome the witnesses who appear before us today, including my friend and colleague on the Judiciary Committee, Congressman Bob Goodlatte of Virginia. We are engaged in an examination of two matters related to bankruptcy. Mr. Goodlatte's distinguished predecessor in office, former Congressman Caldwell Butler, used to say that he knew of no better way to clear a room than to mention the subject of bankruptcy. But today we have both a sizable audience and a large and historic room in which to meet. So far, so good. And let it be known that I take the subject of bankruptcy very, very seriously indeed.
The primary subject of this hearing is the question of providing judicial review of private trustee removals and expenses. That is the subject of Congressman Goodlatte's bill, H.R. 2592, which would provide such review.
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I am sympathetic to the concerns of the private trustees. I think we all are. At the same time, we need to understand what the United States Trustees' final rule for administrative review provides, and we need to know how both H.R. 2592 and the final rule fit into the administrative law context. Here the expert testimony to be presented by Professor Jeffrey Lubbers, formerly with the Administrative Conference of the United States, will be especially helpful.
The other matter with which we are concerned is the assessment of post-confirmation fees in Chapter 11 casesthat is, quarterly fees collected after a reorganization plan has been confirmed by the court and the debtor is proceeding on its own to resuscitate the business enterprise. The question of the quarterly fee collections is a difficult one, with no clear answer. Post-confirmation fees cover nearly one-fourth of the United States Trustee program costs. Although Chapter 11 cases bear a disproportionate share of the cost of running the UST office, there is an understandable reluctance to shift the burden to Chapters 7 and 13.
In closing, I would state that there were many others who offered to testify today, and I regret that time factors did not permit that. I have in mind particularly the Commercial Law League of America, whose testimony before this Subcommittee has always been both useful and constructive.
Mr. NADLER. Thank you, Mr. Chairman. Mr. Chairman, I am very concernedI think we all arethat we correctly balance the rights of trustees with the very important duty of the Executive Office of the U.S. Trustees to ensure sound, honest, and judicious administration of bankruptcy estates. The assets and obligations of those estates are a trust which we must do all we can to safeguard.
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I think we will all be very interested in hearing comments from today's witnesses on the final rule published by the Executive Office of the U.S. Trustee, where they see its shortfalls, if any, and how those shortfalls might be remedied. We're also anxious to hear comments from the witnesses about the legislation proposed by our colleague from whom we are about to hear, Mr. Goodlatte.
I might add that this subcommittee had seriously considered acting on this issue in the Technical Corrections bill. We concluded then that this matter was not appropriate to that bill and required a careful hearing. We begin that process today, even as we prepare to file the report on the Technical Corrections bill.
So I look forward to this hearing and it's beginning a real process to get to, hopefully, balance the rights of trustees and the Executive Office of the U.S. Trustee equitably. Thank you, Mr. Chairman.
[The prepared statement of Mr. Nadler follows:]
PREPARED STATEMENT OF JERROLD NADLER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Thank you, Mr. Chairman. I want to commend you for scheduling this hearing today. I am especially concerned that we correctly balance the rights of trustees with the very important duty of the Executive Office of the U.S. Trustee to ensure second, honest, and judicious administration of bankruptcy estates. The assets and obligations of those estates are a trust which we must do all we can to safeguard.
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I will be interested to hear from today's witnesses their comments on the final rule published by the EOUST, where they see its shortfalls, if any, and how those shortfalls might be remedied. I am also anxious to hear comments from the witnesses about the legislation proposed by our colleague, Mr. Goodlatte. I might add that this Subcommittee had seriously considered acting on this issue in the Technical Corrections bill. We concluded that this matter was not appropriate to that bill and required a careful hearing. We begin that process today even as we prepare to file the report on the Technical Corrections bill.
Mr. GEKAS. We thank the gentleman. Mr. Chabot or Mr. Smith?
Mr. SMITH of Texas. I don't have an opening statement.
Mr. GEKAS. In that case, we will begin the testimony by recognizing the gentleman from Virginia, Mr. Goodlatte, who as a distinguished member of the Judiciary Committee has been in the forefront of many issues over the last several years, and not the least of which is this particular one.
So, we start with the recognition that this whole hearing is based on the issues that are raised by the bill offered by the gentleman from Virginia, and his being the first witness is very propitious. We recognize the gentleman for as much time as he may consume, restricted to 3 minutes. [Laughter.]
STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
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Mr. GOODLATTE. Mr. Chairman, first let me thank you for holding this hearing, and I very much appreciate the opportunity to testify before the subcommittee today on the issues of post-confirmation fees and reform of the private trustee review process. I would like to discuss each of these very important issues in turn, starting with private trustee reform.
I have, as you mentioned, recently introduced H.R. 2592, the Private Trustee Reform Act of 1997, to restore fairness and equity to the relationship between the United States Trustee and private standing trustees. Specifically, this legislation amends title 11 of the U.S. Code to provide private trustees the right to seek judicial review in bankruptcy court, following an administrative hearing on the record, of U.S. Trustee actions related to trustee expenses and trustee removal.
As you know, the U.S. Trustee appoints both panel trustees under Chapter 7, and standing trustees under Chapters 12 and 13. Additionally, the U.S. Trustee has the authority to set the percentage fee and level of compensation for standing trustees. H.R. 2592 does nothing to change that.
This legislation, however, seeks to restore fairness to a system in which the U.S. Trustee has unfettered discretion to not only judge the appropriateness of expenses incurred by private trustees, but also to remove private trustees from cases assigned to them and to cease assigning cases in the future. I do not believe that the U.S. Trustee should be unaccountable in this process.
Page 9 PREV PAGE TOP OF DOC It is important to understand that private trustees are running a business, not engaging in a hobby. In many instances, private trustees are required to devote 100 percent of their time to their duties as trustees. When the U.S. Trustee decides to cease assigning cases to a private trustee, that private trustee is being deprived of his or her livelihood.
While there are certainly situations in which removal from case assignments is warranted, these decisions should not be made lightly, and they should be subject to judicial review in bankruptcy court.
There are several reasons why bankruptcy court is the proper forum for reviewing U.S. Trustee decisions regarding expenses and removal. First and foremost, bankruptcy courts are best situated to make informed judgments about these issues. Bankruptcy judges understand which expenses are justified and which are not, as well as the nature and purpose of those expenses.
Additionally, bankruptcy judges understand the full ramifications of a decision to cease assigning cases to a private trustee since bankruptcy courts have the background knowledge and understanding necessary to adjudicate these issues; therefore, they will provide the fairest and fastest resolution of disputes between the U.S. Trustee and private trustees.
I would also like to note that under H.R. 2592 the phrase, ''cease assigning cases'' is intended to include decisions by the U.S. Trustee not to renew the term appointment of private trustees. Judicial review should not only be available in situations where private trustees' cases are terminated, but also when trustees are denied reappointment to the panel in Chapter 7 situations. The U.S. Trustee should not be allowed to avoid the due process requirements of the bill simply by refusing to reappoint a trustee to the panel at the end of the trustee's term.
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As I mentioned at the outset, H.R. 2592 is simply about fairness, fairness to those who dedicate themselves to their duties as private trustees. It is also about fairness in the review process, as the U.S. Trustee should be subject to the same checks and balances as other Government agencies are required to bear. This is the intent and effect of H.R. 2592.
And Mr. Chairman, with your forbearance, I'd also like to speak for a moment about post-confirmation fees. Regarding the issue of post-confirmation fees, the 1995 Balanced Budget Downpayment Act made a change to Chapter 11 that is minor in scope, yet significant in terms of its cost to debtors. Prior to passage of the act, during the reorganization phase, a debtor-in-possession was required to pay quarterly fees to the U.S. Trustee while the case was pending, but prior to confirmation of the reorganization plan. The fees ceased upon confirmation of the plan, because the Trustee's involvement in the case ceased upon confirmation of the plan.
The 1995 Budget Act changed the law to require that Trustee's quarterly fees continue to be paid until the entry of the final decree. This seemingly small change has very large implications. For example, it may take 6 to 9 months to reorganize a company in Chapter 11, but it may take several years to resolve claims, litigate pre-petition disputes, implement the plan, and wrap up all outstanding issues prior to the entry of the final decree. As a result, debtors are now required to pay quarterly Trustee fees well beyond the period during which the Trustees are actually involved in their cases.
Additionally, last year's omnibus appropriations bill applied the new requirement to all pending bankruptcy cases, effectively making the law retroactive. With bankruptcy filings having reached an all-time highat over 1 million last yearwe are looking at an enormous burden on debtors who are simply struggling to survive.
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Businesses struggling to stay alive in Chapter 11 reorganization efforts should not be burdened with additional taxes in the form of quarterly trustee fees, for which debtors receive nothing in return. Quarterly trustee fees are certainly appropriate during the time that a Trustee is involved in a casein other words, until confirmation of a reorganization plan. After the Trustee's involvement has ceased, however, it makes no sense to continue to require businesses to pay quarterly fees.
Mr. Chairman, thank you for allowing me the opportunity to testify, and I would be happy to answer any questions.
[The prepared statement of Mr. Goodlatte follows:]
PREPARED STATEMENT OF BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. Chairman, I appreciate the opportunity to testify before the Subcommittee today on the issues of post-confirmation fees and reform of the private trustee review process. I would like to discuss each of these very important issues in turn.
Private Trustee Reform
I have recently introduced H.R. 2592, the ''Private Trustee Reform Act of 1997'', to restore fairness and equity to the relationship between the United States Trustee and private standing trustees. Specifically, this legislation amends title 11 of the U.S. Code to provide private trustees the right to seek judicial review in bankruptcy court, following an administrative hearing on the record, of U.S. Trustee actions related to trustee expenses and trustee removal.
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As you know, the U.S. Trustee appoints both panel trustees under Chapter 7, and standing trustees under Chapters 12 and 13. Additionally, the U.S. Trustee has the authority to set the percentage fee and level of compensation for standing trustees. H.R. 2592 does nothing to change that.
This legislation, however, seeks to restore fairness to a system in which the U.S. Trustee has unfettered discretion to not only judge the appropriateness of expenses incurred by private trustees, but also to remove private trustees from cases assigned to them and to cease assigning cases in the future. I do not believe that the U.S. Trustee should be unaccountable in this process.
It is important to understand that private trustees are running a business, not engaging in a hobby. In many instances, private trustees are required to devote 100 percent of their time to their duties as trustees. When the U.S. Trustee decides to cease assigning cases to a private trustee, that private trustee is being deprived of his or her livelihood. While there are certainly situations in which removal from case assignments is warranted, these decisions should not be made lightly, and they should be subject to judicial review in bankruptcy court.
There are several reasons why bankruptcy court is the proper forum for reviewing U.S. Trustee decisions regarding expenses and removal. First and foremost, bankruptcy courts are best situated to make informed judgments about these issues. Bankruptcy judges understand which expenses are justified and which are not, as well as the nature and purpose of those expenses.
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Additionally, bankruptcy judges understand the full ramifications of a decision to cease assigning cases to a private trustee. Since bankruptcy courts have the background knowledge and understanding necessary to adjudicate these issues, therefore, they will provide the fairest and fastest resolution to disputes between the U.S. Trustee and private trustees.
I would also like to note that under H.R. 2592, the phrase ''cease assigning cases'' is intended to include decisions by the U.S. Trustee not to renew the term appointment of private trustees. Judicial review should not only be available in situations where private trustees' cases are terminated, but also when trustees are denied reappointment to the panel in Chapter 7 situations. The U.S. Trustee should not be allowed to avoid the due process requirements of the bill simply by refusing to reappoint a trustee to the panel at the end of the trustee's term.
As I mentioned at the outset, H.R. 2592 is simply about fairnessfairness to those who dedicate themselves to their duties as private trustees. It is also about fairness in the review process, as the U.S. Trustee should be subject to the same checks and balances as other government agencies are required to bear. This is the intent and effect of H.R. 2592.
Regarding the issue of post-confirmation fees, the 1995 Balanced Budget Downpayment Act made a change to Chapter 11 that is minor in scope, yet significant in terms of its cost to debtors. Prior to passage of the Act, during the reorganization phase, a debtor-in-possession was required to pay quarterly fees to the U.S. Trustee while the case was pending, but prior to confirmation of the reorganization plan. The fees ceased upon confirmation of the Plan, because the Trustee's involvement in the case ceased upon confirmation of the Plan.
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The 1995 Budget Act changed the law to require that Trustee's quarterly fees continue to be paid until the entry of the Final Decree. This seemingly small change has very large implications. For example, it may take 6 to 9 months to reorganize a company in Chapter 11, but it may take several years to resolve claims, litigate pre-petition disputes, implement the Plan, and wrap-up all outstanding issues prior to the entry of the Final Decree. As a result, debtors are now required to pay quarterly Trustee fees well beyond the period during which the Trustees are actually involved in their cases.
Additionally, last year's Omnibus Appropriations bill applied the new requirement to all pending bankruptcy cases, effectively making the law retroactive. With bankruptcy filings having reached an all-time high at over 1 million last year, we are looking at an enormous burden on debtors who are simply struggling to survive.
Businesses struggling to stay alive in Chapter 11 reorganization efforts should not be burdened with additional taxes in the form of quarterly trustee fees, for which debtors receive nothing in return. Quarterly trustee fees are certainly appropriate during the time that a Trustee is involved in a casein other words, until confirmation of a reorganization Plan. After the Trustee's involvement has ceased, however, it makes no sense to continue to require businesses to pay quarterly fees.
Mr. Chairman, thank you for allowing me the opportunity to testify, and I would be happy to answer any questions that you or the other subcommittee members may have.
Mr. GEKAS. We thank the gentleman, for his continued interest. In the bill, removal of a trustee or examineron page 2where the situation should occur where the U.S. Trustee decides to not assign cases. At that point you provide for the review that is the core of your bill. What I'm wondering is, in those cases, isn't it more helpful to provide for supersedeas or injunctive relief at that time to stop any further action until the review has been completed? That isperhaps a situation where the cases would continue to be assigned until the final decision.
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Mr. GOODLATTE. Mr. Chairman, I think that's a fine idea, and certainly we would be interested in working with the chairman to see if that additional protection for the private trustee could be granted. Because you are correct; it could take a period of time between when a decision was made by the U.S. Trustee to cease assigning cases and when that matter might be resolved by the court, and during that time, obviously, a good deal of damage could be done to someone's law practice by diminishing the amount of work that they could perform during that time.
Mr. GEKAS. I have no further questions. Does any member wish to cross-examine our colleague?
Mr. NADLER. Mr. Chairman.
Mr. GEKAS. The gentleman from New York.
Mr. NADLER. Mr. Chairman, I don't think we're talking about cross-examination. I still think he's a friendly witness.
Congressman Goodlatte, I think you correctly pointed outI agree with youthat it's really unfair to burden debtors who are struggling to reorganize and to stay alive with paying the quarterly Trustee fees after the confirmation of the reorganization plan and up until the entry of final judgment. And I think this was done, basically, as a budget measure in the Balanced Budget bill which, I am proud to say, I voted against.
Page 16 PREV PAGE TOP OF DOC But let me ask you a question. If we were to undo this inequity and to say that quarterly Trustee fees are only payable until the confirmation of the reorganization plan, how much would this cost? I mean, what are we talking about? How much are we going to have to talk to the Budget Committee people about?
Mr. GOODLATTE. It's a significant amount of money, and we have not yet submitted legislation. We are in the process of trying to figure that out, but it's my understanding that it could be up to as much as $20 million out of the
Mr. NADLER. Twenty million?
Mr. GOODLATTE. Yes.
Mr. NADLER. Per year?
Mr. GOODLATTE. Yes.
Mr. NADLER. And out of a $1.6 trillion Federal budget, I don't know that that's a very significant amount.
Mr. GOODLATTE. Certainly there are plenty of places where it could be found, but it does need to be dealt with. And I'd also point out that perhaps in the drafting of this legislation, we might take into account that there are circumstances in which the U.S. Trustee does get involved in post-confirmation if there is some failure to perform under the plan, and under those circumstances, then, the fees, I think, would be more appropriate.
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Mr. NADLER. Let me ask you just one other follow-up question on this. Do you have any idea of how we could solve this? I mean, we're going to be asked, obviously, for a set-off to make this revenue neutral. Do you have any idea what such a set-off might be and where the money would come from?
Mr. GOODLATTE. At this point in time, Mr. Nadler, I don't have that, and that's one reason why we have not yet introduced the bill.
Mr. NADLER. Thank you.
Mr. GEKAS. We thank the gentleman, and he does not have to stand by for the remainder of the hearing.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Ms. JACKSON LEE. Excuse meMr. Chairman?
Mr. GEKAS. The subcommittee stands in recess
Ms. JACKSON LEE. Mr. Chairman.
Mr. GEKAS. We're going to
Ms. JACKSON LEE. Are we recessing?because I have questions.
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Mr. GEKAS. Yes, we're recessing for purpose of a markup.
Ms. JACKSON LEE. All right, but you said he does not have to stand by, so do we not get a chance to ask him any questions?
Mr. GEKAS. The lady is recognized for 5 minutes.
Ms. JACKSON LEE. Thank you very much.
Mr. Goodlatte, I noticed there is a commendable reason for lifting the burden on the debtors as it relates to these fees. What would be the solution or resolution in the work that needed to be done? How would that be handled?
Mr. GOODLATTE. In post-confirmation there is a significant reduction, and in many cases very little, if any, work done by the U.S. Trustee once the plan is implemented and operating. As I just noted to Mr. Nadler, there are circumstances where the debtor may fail to perform after the plan is confirmed, in which case the U.S. Trustee may have a substantial amount of work, and under those circumstances I think it would be appropriate to continue the fees or reinstate the fees during those portions of the case.
So, the budget of the U.S. Trustee is going to remain intact because we're going to have to address the other point raised by Mr. Nadler, and that is to come up with the offsetting amount of money that it takes to handle the U.S. Trustee's budget that will be lost if we make this change in the law. So they will be able to continue to perform their work without interruption, assuming that's the approach we take, which is to find alternative sources of revenue as opposed to reducing their activities.
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Ms. JACKSON LEE. Well, that is the focus of my inquiry, and I know we'll have an opportunity to look at that. I think the overwhelming results of easing the burden of the debtor is a very positive result. I think we should answer the question that the work or the responsibilities that have to be done are also assured as occurring.
Mr. GOODLATTE. Well, absolutely. You make a very good point about easing the burden on the debtor, because these are the debtors who have done something positive. They have utilized our bankruptcy laws for the purpose of rehabilitating their business, maintaining that business, maintaining the jobs of the employees, and we shouldn't add an additional tax or an additional burden if they are operating under the plan without causing any additional costs to the U.S. Trustee system.
Ms. JACKSON LEE. They help to knock down all the stereotypes of what people do to get into bankruptcy and how they respond. They actually are trying to make good on their word.
Mr. GOODLATTE. That's right, and we should help them in that regard.
Ms. JACKSON LEE. I thank the gentleman and thank the chairman.
Mr. GEKAS. We thank the lady.
Mr. CONYERS. Mr. Chairman. Could I say good morning to you, Mr. Gekas, our chairman of the subcommittee?
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Mr. GEKAS. In written form, if you want. [Laughter.]
The gentleman from Michigan is recognized.
Mr. CONYERS. But I'd need a return request signature from you to know that you got it.
I don't mean to prolong this, Mr. Goodlatte, but there is a sense over here on our side that you're up to something good[Laughter]and that we might need to support you on this. Usually, out of the Department of Justice and the U.S. Attorneys and the Judiciary, things are usually not managed, and they're slipping away, and nobody has a grip. What you're presenting to us seems to be accurate, that here it's the reverse. It's micro-management going on.
And I'm trusting and depending that you will be coming forward with cases, and when we get into this in more detail we'll see what the nature of the problem that led you to introduce this measure is. But I just wanted to indicate to you that I think you're onto something that should be dealt with by the Judiciary Committees in the Congress.
Mr. GOODLATTE. Well, I thank the gentleman, and we will certainly supply you with the documentation of the impact on debtors of requiring them to pay these substantial new fees. I'll send it to you by encrypted communication.
Mr. CONYERS. Now what would you imagine the bankruptcy judgeshow do you think they would react to this legislation? Not that any of us are going to ask them, but what do you think?
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Mr. GOODLATTE. Are you referring now to H.R. 2592, dealing with the rights of the private trustees? My conversations with the bankruptcy judges that I have met with, including some in the western district of Virginia in my congressional district, have been positive. They have not expressed a reservation about the fact that this could entail some additional work for them. Obviously, they're going to have to review some cases that they don't have jurisdiction over now, but the reaction of the one judge, in particular, in my district that I spoke with at length about this was that he felt that it was only fair that there be an independent arbiter, and he felt it should be the bankruptcy judges as opposed to district court judges or other arbitrators because the bankruptcy judges have a greater familiarity with what those U.S. Trustees do, who they are. They have their own background knowledge about what they do and which ones do a good job and which ones don't.
Mr. CONYERS. What's the aggregate number of U.S. Trustees in the country?
Mr. GOODLATTE. I don't have the answer to that; in fact, we were discussing that on our way over here. I would
Mr. CONYERS. Two thousand? Fifteen hundred?
Mr. GOODLATTE. I would guess that that would be the range. I suspect some of our other witnesses will have the answer to that.
Mr. CONYERS. I thank you very much.
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Mr. GOODLATTE. Thank you.
Mr. CONYERS. Thank you, Mr. Chairman.
Mr. GEKAS. We thank the gentleman.
The subcommittee now stands in recess as to H.R. 2592.
[Whereupon, at 10:20 a.m., the subcommittee proceeded to other business.]
Mr. GEKAS. We now reconvene the hearing on H.R. 2592.
We invite to the witness table panel number 2. Judge Frank W. Koger is president of the National Conference of Bankruptcy Judges on whose behalf he appears today. He is the Chief U.S. Bankruptcy Judge for the Western District of Missouri and recently testified before us on our bill to provide 18 additional bankruptcy judgeships, H.R. 1596. I am pleased to note that H.R. 1596 passed the House on July 28 and is now awaiting action in the Senate.
Joining him will be Ford Elsaesser, the vice president for research at the American Bankruptcy Institute on whose behalf he appears before us. He is a practicing lawyer and a Chapter 7 panel trustee in Sandpoint, Idaho, and will direct his prepared statement to the post-confirmation fee issue.
Professor Jeffrey Morris is also a member of the panelyou may be seated, gentlemena professor of law at the University of Dayton Law School since 1981, and appears on behalf of the National Bankruptcy Conference. He has published numerous articles and books and made many presentations on the subject of bankruptcy.
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And Professor Jeffrey Lubbers, of the Washington College of Law at American University, was for over 13 years the director of research for the Administrative Conference of the United States, the U.S. Government's advisory agency on procedural improvement in Federal programs. He received numerous awards for his Government service and has published extensively in the field of administrative law and procedure.
We assert to the gentlemen that we will begin in the order in which they were introduced, with Judge Frank Koger going first. We will accept the written statements submitted by the witnesses for inclusion in the record, without objection. We will ask each witness to limit the time of his testimony to 5 minutes, and then we respectfully ask them to submit to examination by the members of the panel.
With that we ask Judge Koger to begin.
STATEMENT OF HON. FRANK W. KOGER, PRESIDENT, NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
Mr. KOGER. Thank you, Mr. Chairman. I want to thank you for all of the courtesies which you have shown me in the past when I have appeared, and I also want to thank you for your interest in what many people regard as a very unexciting area of the law, to wit, bankruptcy.
I am Frank Koger, the Chief Bankruptcy Judge from the western district of Missouri, and for 10 more days I will serve as the President of the National Conference of Bankruptcy Judges. Before becoming a judge, I was the president of the Commercial Law League at one time, chairman of the Missouri Commercial Law and Bankruptcy Committee, and a practitioner for 30 years, representing both debtors and creditors. As my granddaughter would say, I was into bankruptcy long before it was cool.
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Today I would like to speak very briefly on two issues. The first is the resolution of disputes between the United States Trustees and the individual panel trustees and standing trustees whom they appoint to serve as Chapter 7 panel trustees, Chapter 12 and Chapter 13 standing trustees.
Last year more than 1.3 million bankruptcy cases were filed. In more than 98 percent of those cases a trustee was appointed. With that volume I think it's inevitable that there are conflicts which arise between the standing trustees, the panel trustees, and the U.S. Trustees and supervisors; hence, the need for some kind of mechanism to resolve these differences.
An administrative mechanism has been created by the Executive Office for the United States Trustees. Unfortunately, the trustees who are subject to this process feel it is not quite complete as it is at its present status. They feel that it should have an independent review and that review should be seated in the bankruptcy court where they practice and where they do their work.
Legislation now pends to permit a trustee to seek judicial review of a determination of the Attorney General regarding the actions of the private trustee. I think there are three factors that are very important if such is instituted. Number one, the process should provide for an impartial objective review of the actions of the private trustee and of the removing authority.
Second, the process should provide for a relatively quick and inexpensive resolution of disagreements. I think this particular factor favors the review being in the bankruptcy court because we are accustomed to speedy hearings and fast resolution.
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Third, the scope of the review should be limited. The issues should include only substantive, major matters such as removal or termination of private trustees, not squabbles over the procedure followed by the parties. Whatever is done should have the review and input of this committee because of its impact on the entire bankruptcy system.
The second issue is that of post-confirmation fees. When Congress expanded the Pilot Trustee program in 1986, it determined that the program should be self-supporting and established a system of user fees. Prior to the enactment of the Federal Balanced Budget Down Payment Act of January 1996, the obligation to pay quarterly fees to the United States Trustee ended at confirmation. However, the act extended the debtors' obligations by requiring debtors to pay quarterly fees to the U.S. Trustees until the case is converted or dismissed.
Unfortunately, those are unfortunate words, in that many cases are not converted or dismissed. Hopefully, many cases are confirmed, and there is no clear point at which we can determine what to do as to fees after a case is confirmed. So at a minimum, that area should be cleared up. This has led to a lot of litigation. It has led to at least four different viewpoints by various courts, and I hope that this committee will undertake to clarify that situation.
I will be more than happy to answer any questions, Mr. Chairman.
[The prepared statement of Judge Koger follows:]
Page 26 PREV PAGE TOP OF DOCPREPARED STATEMENT OF HON. FRANK W. KOGER, PRESIDENT, NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
Mr. Chairman, members of the Subcommittee, I want to thank you for allowing me to appear before you for a second time this year, and I commend you for your leadership and interest in what to many is an extremely dry and boring arena, i.e., the Bankruptcy System. (In regard to my earlier appearance, I want to thank you and your colleagues on the Judiciary Committee for your expeditious consideration of H.R. 1596, which will provide additional bankruptcy judgeships in districts sorely in need of additional personnel.)
I am Frank Koger,the Chief Judge of the Bankruptcy Court for the Western District of Missouri. For two more weeks I serve as President of the National Conference of Bankruptcy Judges, a voluntary organization of over 95% of the sitting bankruptcy judges, and an organization receiving no government funding.
Before my appointment, I was President of the Commercial Law League of America, Chairman of the Missouri Commercial Law and Bankruptcy Committee, and a practitioner for both creditor and debtor clientsunder both the old and new Bankruptcy Acts. As my granddaughter would say. I was into bankruptcy long before it was cool.
Today, I will address the two topics at issue in today's hearing: the resolution of trustee disputes and the assessment of post-confirmation fees in chapter 11 cases.
Resolution of Trustee Disputes
I'd like to first discuss the resolution of disputes between the United States Trustee program and the individuals they appoint to serve as chapter 7 panel trustees and chapter 13 standing trustees.
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In the year ended June 30, 1997, more than 1.3 million bankruptcy cases were filed in the bankruptcy courts of this nation. In more than 98% of these cases, a trustee was appointed to administer the estate. These individuals are professionals who are fiduciaries. In order to maintain the integrity of the bankruptcy system, trustees must make numerous, complex judgments regarding the appropriate disposition of the property of the estate; the degree of scrutiny to give to the actions and statements of each debtor; and whether to pursue litigation.
These are not easy decisions. They are difficult exercises of professional judgment. Given the millions of transactions and decisions that take place in our bankruptcy system, it is inevitable that there will be disagreements between trustees and those who supervise the overall administration of the bankruptcy system. Hence, as a matter of fundamental due process and simple equity, there needs to be some mechanism to resolve these differences.
The harder question, though, involves the nature, scope and operation of that mechanism, and where it should be located. It is my understanding that an administrative mechanism was created by the Executive Office for the United States Trustees. We hear the trustees who are subjected to this process are concerned it is neither fair nor equitable. While I am not familiar with any of these conflicts, I acknowledge there is a perception ''on the street'' that this is the case. However. I am confident that if this is the case, the trustees can provide you with the specifics.
I am also aware that Representative Goodlatte introduced legislation last week to permit a trustee to seek judicial review disputes related to trustee expenses and trustee removal. Individual trustees believe judicial review is needed, and Rep. Goodlatte's bill, H.R. 2592, would place that review in the hands of the Bankruptcy Court; others have suggested that such review should occur in the District Court. Both the district judges and bankruptcy judges in my district see this as a bankruptcy issue and one that we are well equipped to handle. I cannot speak for any other bench, but I would imagine some judges in other districts would express some reluctance to take on an added burden in light of their tremendous case loads.
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Whatever the venue, it seems that parameters should be in place which adhere to three basic principles to ensure that such review is just? speedy and limited in scope.
(1) JUST. The process should provide for an impartial, objective review of the actions of the private trustee and/or the U.S. Trustee, both in actual operation and in the perception of outsiders;
(2) SPEEDY. The process should provide for a relatively quick and inexpensive resolution of agreements and not drag on for months or years. I suspect that this is the most telling reason for placing the final step in the bankruptcy court, as we are accustomed to speedy hearings and fast resolution; and
(3) LIMITED IN SCOPE. The issues elevated for external review should include only substantive major matters such as removal or termination of private trustees and exclude minor disagreements.
Mr. Chairman, it is my hope that the personnel from the Executive Office for the United States Trustees and representatives of private trustees could mutually agree on a mechanism that would be acceptable to everyone. If this is not possible, and legislation is needed, I would suggest that it take into account the principles I have just outlined. Whatever is done should have the review and input of this subcommittee because of its impact on the entire bankruptcy system.
Post Confirmation Chapter 11 Fees
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When Congress expanded the pilot United States Trustee program in 1986, it determined that the program should be self-supporting and thus established a system that relied upon user fees.
Fees related to chapter 11 cases have always been a significant source of revenue for the program. These fees are paid by the debtor each calendar quarter and are calculated by application of a sliding-scale statutory percentage fee against total disbursements. Prior to the enactment of the Federal Balanced Budget Down Payment Act on January 26, 1996, the obligation to pay quarterly fees to the United States Trustee ended when a plan was confirmed. However, this Act extended debtors' obligations by requiring them to pay the quarterly fees to the U.S. Trustee ''until the case is converted or dismissed.''
When Congress enacted this provision, rather than considering this complex subject within the hearing process of the Judiciary Committee, and specifically your subcommittee, Mr. Chairman, it tacked this major change of enormous impact on chapter 11 debtors onto an appropriations bill. The result, I can assure you, has been confusion, extensive litigation on a number of issues, and possibly the failure of some confirmed reorganizations.
One of my colleagues, wrestling with the problems created by the Act and a subsequent amendment that attempted to clarify the Act, described the infirmities of the process as follows:
The January 1996 amendment was part of a budget bill. Although normally an amendment to Title 28 of the U. S. Code would be carefully considered in congressional committee hearings, apparently no hearings were conducted on the amendment's wording. Congressional hearings undoubtedly would have generated comment on the irrational wording of the amended statute in the context of other provisions of the Bankruptcy Code. Thoughtful consideration of the proposed statute would have included discussion of issues of constitutionality, res judicata problems' and the limits of Bankruptcy Court jurisdiction in the post-confirmation phase of a Chapter 11 case. In re Uncle Bud's Inc., 206 B.R. 889, 896 (Bankr. M.D. Tenn. 1997).
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Following these enactments, a number of regional U.S. Trustee offices commenced collection efforts to obtain post confirmation quarterly fees from reorganized debtors. It was their interpretation that all chapter 11 cases filed on or after November 27, 1986, were affected by the new assessment. (This date marked the effective date of the Bankruptcy Judges and United States Trustees, and Family Farmer Act of 1986.)
This means cases confirmed as many as ten years ago would owe monies not called for in court-ordered plans that bound debtors and creditors to a contract of repayment. I firmly believe that this was neither intended by Congress, nor contemplated by either debtors or creditors created within the last eleven years.
This approach by the U.S. Trustees has generated substantial litigation. Not surprisingly, the courts have reached inconsistent conclusions. I am submitting my colleague's entire opinion with my testimony, in which he refers to four different approaches used by various bankruptcy judges to resolve the conflict of the amendments, while he takes a fifth approach. I can assure you this isn't done to tout his wisdom, but rather to underscore his frustration in wrestling with a problem that never would have occurred had this committee been made a partner in the process.
If Congress considers legislative action in this area, Mr. Chairman, 1 would recommend that, at a minimum, there should be clarification as to which confirmed cases the fees apply.
Lastly is the issue of whether to have post-confirmation fees at all. We believe this is a matter best left to the sound discretion of Congress. However, considerations Congress should keep in mind as it undertakes this investigative and deliberative process are as follows:
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(1) Is this the most equitable method of creating revenues?
(2) Will it lead to increased litigation costs, as it did here, enriching lawyers at the expense of creditors who are already taking a loss?
(3) Will the revenue source be stable and predictable, or will a decreased caseload mean future underfunding?
(4) Will the fee reduce the chance of successful reorganizations for small and large companies seeking to remain viable? For every unsuccessful case, there is a devastating loss of jobs to employees who are your constituents and an adverse impact on the community where the company is located.
(5) Why should debtors, those least able to afford it, and creditors, those already hurt by a business failure, bear the burden of''revenue enhancements'' for the entire federal Budget? This is best reflected in the rapid and dramatic increase in filing fees in the bankruptcy court with no similar increase in the district court, the latter which is often utilized by large and extremely solvent corporations and individuals.
(6) Should there be a similar tax paid on judgments and settlements in the district court where we routinely read of multi-million dollar payouts?
(7) Are there too many fees to gain access to justice in the bankruptcy court, and are they too high? Anecdotally, we hear from lawyers about clients who have used such state court devices as assignments for the benefit of creditors, rather than bankruptcy, simply because of the out of pocket expense.
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Congress has expressed its concern in this area and has required the Judicial Conference of the United States to conduct a study of the estimated effect of implementing a graduated bankruptcy filing fee system for chapter 11 and 13 cases. That report will be submitted to Congress by March 31, 1998. This report could provide a number of possible alternatives for funding in lieu of the post-confirmation fees.
Thank you again, Mr. Chairman, for the invitation to appear before the Subcommittee. I'd be happy to respond to any questions you may have.
INSERT OFFSET RING FOLIOS 4 TO 18 HERE
Mr. GEKAS. We thank the Judge, and we turn to Mr. Elsaesser.
STATEMENT OF FORD ELSAESSER, VICE PRESIDENT FOR RESEARCH, AMERICAN BANKRUPTCY INSTITUTE
Mr. ELSAESSER. Mr. Chairman, members of the subcommittee, thank you for allowing the ABI to testify today. The American Bankruptcy Institute is the largest organization of the participants in the bankruptcy system. Our membership includes lawyers of all stripesconsumer, business, creditor, and debtor. We count among our members a substantial percentage of our sitting bankruptcy judges, as well as many if not most of the U.S. Trustees throughout the country and a great number of the panel trustees throughout the country.
While the ABI does not take a position on the pending legislation, we are always here to provide you with what we believe we can do, which is to tell you what's happening on the ground, out there in the field in the world of bankruptcy, and the impact of the proposed changes on current law.
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With regard to the issues before the subcommittee today, the ABI does not have testimony concerning the due process treatment of panel trustees, although we are available to answer the subcommittee's questions should you have any.
I am personally well-familiar with the operation of the U.S. Trustee system on both of these issues, because I represent both debtors and creditors in Chapter 11 cases, serve as a Chapter 11 trustee, a Chapter 7 panel trustee with approximately 6,000 completed cases, and a Chapter 12 trustee in two different States.
The U.S. Trustee Office is the sentinel, the guardian, and the auditor of the bankruptcy system. Adequate funding of that system is essential. However, based on my very unscientific and anecdotal survey of a great number of practitioners and judges, as well as some U.S. Trustees in connection with the Chapter 11 post-confirmation fees, that it is fair to say that there is a consensus that the post-confirmation fees are more in the nature of an excise tax on confirmed, unclosed cases than a true user fee, because at the present time the U.S. Trustee really has no significant role in what occurs with a debtor once a case is confirmed and consummated.
To give the committee some examples, if there is misconduct by a debtor or a debtor's counsel in a Chapter 7 consumer casemisrepresentation in the schedules, that sort of thingthe U.S. Trustee's police powers and their duties are very clear to correct that situation. If a Chapter 13 trustee or a Chapter 12 trustee is not monitoring cases or dispersing to creditors the way that they should, again, the U.S. Trustee is the cop on the beat for that particular problem.
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And in a Chapter 11 case that has not yet been confirmed, the U.S. Trustee's duties are many and they are somewhat clearer. That is, they are there to look at the professional fees, make sure that they are not overcharging the estate, and make sure that the debtor is not slowing the process to the detriment of the creditors. And in all those areas, the quarterly fees paid to the U.S. Trustee are appropriate.
Contrast that with the post-confirmation situation, where the debtor is a new, non-bankrupt business. There is no estate, and there is no official continuing supervision of the business affairs unless contracted for in the plan. In those situations, essentially what is happening is that there is no relationshipat least this is the consensus that we see in the bankruptcy communityor relationship between the fee that is paid and any services that are provided by the U.S. Trustees Office. To our knowledge, there is really no official monitoring process to determine what goes on.
Now, we're all realistic and we realize, as one of the members of the subcommittee mentioned in response to Congressman Goodlatte's testimony earlier, the first question is, What would be the off-set or the balance if this fee were to go away? The solution to that is not readily apparent, and so no one anticipates that this fee will go away, but we think that there might be some ways that this subcommittee could look at resolving some of the unintended consequences of the current situation.
One of those unintended consequences, Mr. Chairman, I believe, is that the cases are being closed before their time, and that people are rushing to close cases when they shouldn't. And one of the things that might be done to clarify this matter is to create more of a true exit fee situation that may or may not be paid in installments, but would be a fairer way to determine the fee rather than just a gross disbursement tax, which this fee is.
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I see that my time is up; thank you for the opportunity to present the views of the ABI.
[The prepared statement of Mr. Elsaesser follows:]
PREPARED STATEMENT OF FORD ELSAESSER, VICE PRESIDENT FOR RESEARCH, AMERICAN BANKRUPTCY INSTITUTE
Mr. Chairman and members of the Subcommittee, my name is Ford Elsaesser, a member of the firm of Elsaesser, Jarzabek & Anderson in Sandpoint, Idaho and the Vice President for Research of the American Bankruptcy Institute (ABI). The ABI is the nation's largest organization of bankruptcy and insolvency professionals, with nearly 5,800 members attorneys, accountants, trustees, judges, lenders, academics and others with an interest in the bankruptcy system. The ABI is non-profit and non-partisan, and we generally take no advocacy positions before Congress, although we frequently are asked to testify in an effort to assist your understanding of bankruptcy issues and trends. To the extent I provide an opinion on the operation of the U.S. Trustee System, I am speaking as a practicing lawyer and panel trustee, rather than providing an official ABI position.
The ABI is the current recipient of a grant of less than $50,000 from the State Justice Institute, to provide educational programs on bankruptcy law for state court judges. This grant expires in 1997.
The U.S. Trustee System
Page 36 PREV PAGE TOP OF DOC The U.S. Trustee System was created by Congress as part of the Bankruptcy Reform Act of 1978.(see footnote 1) Congress' emphasis in transferring certain administrative functions from the bankruptcy judges to that of a separate entity within the Department of Justice was to enhance the integrity of the bankruptcy courts and to improve their efficiency.(see footnote 2) A pilot U.S. Trustee program was created in 18 of the 94 federal judicial districts. The purpose of the pilot was to measure the effects of the program before implementing the system nationwide.
After approximately six years of operation under the pilot program, Congress enacted the Bankruptcy Judges, United States Trustees and Family Farmer Act of 1986,(see footnote 3), providing for the nationwide expansion of the U.S. Trustee Program in all districts except the judicial districts of Alabama and North Carolina. These six districts were permitted to operate a separate Bankruptcy Administration program, and given additional time (until October 1, 2002) to opt-in to the U.S. Trustee System.
Funding of the System
The U.S. Trustee System is funded by revenues paid by participants in the bankruptcy system. The program receives a portion of the filing fee paid by those commencing the case and, additionally, receives quarterly fees paid by debtors-in-possession or trustees in Chapter 11 cases. Revenues for the program obtained from filing and Chapter 11 quarterly fees are deposited into the United States Trustees System Fund. From that fund, program expenditures are paid in a total amount as specified in appropriation acts. Since 1989, Congressional appropriations for the U.S. Trustee Program have grown. During the years of greatest bankruptcy activity where fees in excess of the appropriate amounts were collected, approximately $46 million in program revenues were transferred to the General Treasury pursuant to rules requiring revenues in the U.S. Trustee System Fund in excess of 110% of the U.S. Trustee's appropriation to be remitted to the Treasury.
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The U.S. Trustee System is designed to be paid for by those who use it, rather than the taxpayers. The users are the debtors who pay a filing fee and in Chapter 11 cases, a quarterly fee, as well as the creditors in Chapter 11 whose potential distributions are being used to pay the U.S. Trustee fees.
In spite of the funds available to the U.S. Trustee Program through the bankruptcy fees, and a substantial increase in the total number of bankruptcy filings, the Program is experiencing a revenue shortfall. The recent drop in Chapter 11 filings means that revenues in the Program have fallen from the high of 118.7 million in 1993 to just $96.2 million in 1996. Since 1992, expenses have increased from $81 million to $102 million in 1996. This financial pattern has contributed to the inability of the Program to staff appropriately and manage its resources effectively.
The Program's heavy reliance on Chapter 11 cases for its funding presents a dilemma. While Chapter 11 cases are responsible for the bulk of the Program's funding, they represented only 1.5 percent of the total bankruptcy caseload in FY 1995. In 1996, the percent of Chapter 11 cases in relation to the total bankruptcy caseload declined to 1.3 percent. Thus, a decline in a relatively small portion of the Program's caseload has a disproportionate effect on the Program's revenues. For example, Chapter 11 filings declined by 20 percent in FY 1995 with a commensurate decline in the Program's revenues. At the same time, total bankruptcy filings grew by 5.8 percent. An even greater disparity occurred in 1996 when the bankruptcy caseload overall grew by 21.3 percent for the 12 months ending June 30, 1996, while the Chapter 11 caseload declined by 2.7 percent over the same period. Overall, the total bankruptcy caseload is at an all-time high, and expected to exceed 1.3 million filings for calendar year 1997.
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Chapter 11 debtors pay quarterly fees to the U.S. Trustee System in the 88 districts where the program operates, pursuant to the following schedule:(see footnote 4)
Prior to January 1996, the statute authorizing the collection of quarterly fees [28 U.S.C. §1930 (a) (b)] provided as follows:
A quarterly fee shall be paid to the United States trustee . . . in each case under Chapter 11 of title 11 for each quarter (including any fraction thereof) until a plan is confirmed or the case is converted or dismissed, whichever occurs first. . . .
Post Confirmation Fees
After confirmation of the Chapter 11 plan, there are a number of steps to be completed. First, the confirmation of the plan brings with it a discharge of various claims and allows property of the estate to be vested in the debtor and subsequently, the reorganized entity, free and clear of all claims and interests, except those created under the plan. Further, the proponent of the plan will normally have the duty to make the distributions provided for under the plan. The proponent will also have the burden of executing the plan and insuring completion of the consummation process.
Page 39 PREV PAGE TOP OF DOC Until January 1996, Chapter 11 debtors paid quarterly fees only until the reorganization plan was confirmed. However, the decline in funding available through quarterly fees led the U.S. Trustee Program to seek fees in post-confirmation Chapter 11 cases.
On January 26, 1996, Congress amended section 1930 (a)(6) pursuant to Public Laws 10491 and 10499, to provide as follows, with the language stricken by Public Law 10499 redlined in the text:
In addition to the filling fees paid to the clerk, a quarterly fee shall be paid to the United States trustee in each case under chapter 11 of title 11 for each quarter (including any fraction thereof) until [a plan is confirmed or] the case is converted or dismissed, whichever occurs first. . . .
Retroactivity Concerns(see footnote 5)
A number of Courts addressed the issue of whether the application of amended section 1930 (a)(6) to debtors with plans confirmed prior to enactment of Public Law 10499 constituted an impermissible retroactive application of that amendment.
The statutory language of amended section 1930 (a)(6) did not expressly address its application to cases with previously confirmed plans. The legislative history demonstrated, however, that the amendment was intended to apply to all cases, including those with confirmed plans.
Page 40 PREV PAGE TOP OF DOC S. Rep No. 104139, 104th Cong., 1st Sess. at 15 (1995)(''extension of the quarterly fee payments made under chapter 11 to include the period after a reorganization plan has been confirmed by the bankruptcy court until the case has been dismissed.) (emphasis added)
H.R. Conf. Rep. 104378, 104th Cong., 1st Sess., 141 Cong. Rec. H13894 (December 4, 1995)(''extension of post-confirmation quarterly fee payments made under Chapter 11 as proposed in both the House and Senate bills and expect that these fees will apply to all pending Chapter 11 cases with confirmed reorganization plans.'' (emphasis added).
H.R. Conf. Rep. 104378, 104th Cong., 1st Sess.; 141 Cong. Rec. H13899 (December 4, 1995) (''extends the quarterly fee payments for debtors under Chapter 11 . . . to include the period from when a reorganization plan is confirmed . . . until the case is converted or dismissed. The conferees intend that this fee will apply to both pending and new cases.'') (emphasis added).
A number of courts agreed with the United States Trustees that amended section 1930(a)(6) was intended to apply to all cases, including those with previously-confirmed plans. Below is a list of the reported cases holding to that effect:
McLean Square Associates, C.P., 201 B.R. 436, 439 (Bankr. E.D. Va. 1996)(holding the plain language of amended section 1930(a)(6) requires payment of quarterly fees in previously-confirmed cases; no retroactive effect of applying amendment to confirmed cases; amendment justified by legitimate government purpose of ensuring adequately self-funded bankruptcy system).
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In re Foxcroft Square Co., 198 B.R. 99, 103 (Bankr. E.D. Pa. 1996)(legislative history clearly indicates that Congress intended the amended statute to apply to a debtor with a confirmed reorganization plan; amendment justified by the valid purpose of increasing revenues for U.S. Trustee program).
In re Flatbush Associates, Inc., 198 B.R. 75,77 n.1 (S.D.N.Y. 1996)(legislative history indicates that amendment to section 1930(a)(6) ''will apply as of the effective date to 'all pending Chapter 11 cases with confirmed reorganization plans.' '')(citing H.R. Conf. Rep. No. 104378 and Central Florida Electric, Inc.)
In re Upton Printing, 197 B.R. 616618 (Bankr. E.D. La. 1996)(''the plain meaning of the Conference Report [for Public Law 10499] provides that the new fees set forth in the amended statute are to apply to pending Chapter 11 cases with confirmed reorganization plans'').
Central Florida Electric, 197 B.R. 380, 381 (M.D. Fla. 1996)(legislative history indicates Congress intended the Amended Statute to include all pending Chapter 11 cases including all cases with or without confirmed Chapter 11 reorganization plans).
A number of other bankruptcy courts, however, held that amended section 1930(a)(6) was retroactive as applied to debtors with previously confirmed plans. A widely cited opinion in this regard was In re Precision Autocraft, Inc., 197 B.R. 901 (Bankr. W.D. Wash. 1996). In that case, the bankruptcy court held that confirmation of a plan was a completed transaction in that it vested the rights of the parties. Because requiring payment of post-confirmation quarterly fees by debtors with the confirmed plans would impose new obligations with respect to a completed transaction, the bankruptcy court held application of amended section 1930(a)(6) to debtors with confirmed plan was retroactive. Applying the presumption against retroactive application, the bankruptcy court concluded that requiring debtors with confirmed plans to pay post-confirmation fees was impermissible because Congress had not clearly manifested, either in statute or its legislative history, its intent that the statute be applied retroactively. Other cases on point include:
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In re Hudson Oil Company, Inc., 200 B.R. 52 (Bankr. D. Kan. 1996)(following the reasoning of the bankruptcy court in In re Precision Autocraft).
In re CF&I Fabricators of Utah, Inc., 199 B.R. 986 (Bankr. D. Utah 1996)(holding, inter alia, that application of amended section 1930(a)(6) to debtor with confirmed plan is retroactive and impermissible due to lack of clear Congressional intent that it be so applied).
A number of courts held particularly that the removal of the words ''a plan is confirmed or,'' from 28 U.S.C. §1930(a)(6) had the effect of limiting a chapter 11 debtor's obligation to pay post-confirmation quarterly fees to only those cases which are dismissed or converted.
In re C n' B of Florida, Inc., 198 B.R. 836 (Bankr. M.D. Fla. 1996)(holding that on the face of the amended statute alone quarterly fees are permitted only after a case is either dismissed or converted).
In re CF&I Fabricators of Utah, Inc. 199 B.R. 986, 993 (Bankr. D. Utah 1996)(relying, in part, on In re C n' B of Florida, Inc.).
In re Boone, 201 B.R. 499 (Bankr. W.D. Tenn. 1996)(same).
But see In re Burke, 205 B.R. 778 (Bankr. M.D. La. 1977)(criticizing the reasoning of In re C n' B of Florida and those cases following that line of reasoning.
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The 1997 Legislation
In response to such cases as In re Precision Autocraft and In re C n' B of Florida, Inc., Congress enacted clarifying legislation pursuant to Title I of the Omnibus Appropriations Act for Fiscal Year 1997. Public Law 104208, 110 Stat. 3009 (September 30, 1996). Section 109(d) of the General Provisions for the Department of Justice contained in Title I provides as follows:
Section 101(a) of Public Law 10491, as amended by Section 211 of Public Law 10499, is further amended by inserting: ''Provided further, That, notwithstanding any other provision of law, the fees under 28 U.S.C. 1930(a)(6) shall accrue and be payable from and after January 27, 1996, in all cases (including, without limitation, any cases pending as of that date), regardless of confirmation status of their plans'' after ''enacted into law.'' Pub. L. 104208, 110 Stat. 3009 (September 30, 1996) (emphasis added)
Section 109(d) was enacted to ''clarify that fees collected under post-confirmation status are to be assessed in all pending Chapter 11 cases.'' H.R. Conf. Rep. No. 3620, 104th Cong. Sess., 142 Cong. Rec. H11644, H11850 (daily ed. September 28, 1996). Thus, pursuant to amended section 1930 (a)(6), quarterly fees now accrue and are payable from and after January 27, 1996, in all pending Chapter 11 cases, with or without confirmed plans until the case is closed, converted, or dismissed, whichever occurs first.
With the enactment of this clarifying legislation, no court has declined to require payment of post-confirmation quarterly fees on retroactivity grounds. Neither have courts continued to follow the construction of amended section 1930(a)(6) espoused by the bankruptcy court in In re C n' B of Florida. Instead, the courts recognize that Congress has clearly manifested its intent that the amendment should be applied to all pending cases, including those with previously confirmed plans. Illustrative cases include:
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United States Trustee v. Precision Autocraft, Inc., et al., 207 B.R. 692 (W.D. Wash. 1997)(reversing bankruptcy court and holding that amended section 1930(a)(6), as clarified by Public Law 104208, clearly manifests Congress' intent that quarterly fees be collected in all pending cases, including those with previously confirmed plans).
United States Trustee v. In re CF&I Fabricators of Utah, Inc., District Court No. 2:96CV920 C (D. Utah, April 24, 1997)(unpublished decision)(relying on legislative history of January 1996 amendment and clarifying legislation contained in Public Law 104208 in holding that amended 1930(a)(6) applies to all cases, including those with previously confirmed plans), reversing In re CF&I Fabricators of Utah, Inc., 199 B.R. 986, 993 (Bankr. D. Utah 1996)
In re Driggs, et al., No. 9142718PM (Bankr. D. Md., Jan. 27, 1997)(Bankruptcy Court, sitting en banc, held that application of amendment to §1930(a)(6) to cases with plans confirmed before effective date was prospective only).
Effect of Retroactive Quarterly Fees
Bankruptcy lawyers, bankruptcy judges, and even U.S. Trustees were caught off-guard by the decision to assess quarterly fees on confirmed Chapter 11 cases and to do so retroactively on existing confirmed cases. It was a consensus view of many within the bankruptcy system, including several U.S. Trustees, that the retroactivity was unfair. Successful, confirmed Chapter 11 debtors are usually on a very strict budget and the fees assessed are, one way or the other, going to be funded by creditors receiving distributions in those cases.
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The Rush to ''Closure''
The surprising enactment of the law in January 1996 created a stampede of Chapter 11 debtors moving to close confirmed Chapter 11 cases. At the same time, most experienced members of the Chapter 11 bar began to work toward closing of the Chapter 11 case either contemporaneous with or very shortly after the effective date of confirmation, and structuring Chapter 11 plans to ensure that significant distributions to creditors would occur ''post-closing.'' These tactics have two potentially negative impacts: (1) cases are closed before they should be closed, i.e. at a time when continued scrutiny by the Bankruptcy Court and the U.S. Trustee's Office would be appropriate; and (2) distributions to creditors may be substantially delayed (even with creditors' consent) to avoid the imposition of a fee.
What Does ''Closing'' Mean in a Chapter 11 Case?
In a great number of Chapter 11 cases, particularly large and complex cases, as well as ones involving a trustee or liquidating agent, post-confirmation litigation often ends up as a substantial source of distribution to creditors. In addition, real and personal property of the debtor may be sold, post-confirmation, with the efficiencies of a ''sale free and clear of liens'' under Section 363 of the Bankruptcy Code. Often, bankruptcy court jurisdiction is ''retained'' for numerous other purposes. Although some courts have ruled that continued litigation in the bankruptcy courts is not hampered by the closing of a Chapter 11 case, certainly, the substantial retention of bankruptcy court jurisdiction over matters, such as allowance of claims, determination of fees, and recovery of improper payments under Bankruptcy Code provisions would seem to be inconsistent with the idea of a ''closed case.'' However, that is what may be happening in a number of cases simply to avoid the U.S. Trustee fee.
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At this time, there is no uniform system of how to close a Chapter 11 case, or even who is responsible for it. In some jurisdictions, as a matter of efficiency, the Clerk of the Bankruptcy Court notices a proposed order to close a case unless parties object. In other districts, courts take no action to close a case unless a party makes a motion to do so.
Suggested ''Fee for Service'' Approach to PostConfirmation Fees
It is probably unrealistic to expect Congress to repeal or substantially modify the post-confirmation U.S. Trustee's fees, simply because, as previously noted, the revenues are essential in funding the U.S. Trustee system. However, it is reasonable to ask that the U.S. Trustee's Offices perform meaningful post-confirmation monitoring in exchange for these fees.
No one seriously disputes that many Chapter 11s, from the smallest to the large, publicly-traded cases, need post-confirmation monitoring. Creditors are reluctant to do this work, with the fear of losing good money after bad, coupled with exhaustion from the pre-confirmation process.
A simple and fair methodology of post-confirmation monitoring of Chapter 11 cases could be developed that provides a benefit to those provided for in the plan. Stepped up oversight does not mean, however, that the U.S. Trustee would improperly intrude on the parties' ability to effectuate the plan. One way to reduce tactics aimed solely at reducing the impact of post-confirmation fees is to impose a flat fee rather than one based on the percentage of distribution. In any event, the U.S. Trustee's Offices need to be able to enhance its capability to share data between U.S. Trustee Offices, and to permit both the U.S. Trustee and Chapter 11 debtors to be on-line. With such modernization, the U.S. Trustee's Offices could monitor compliance by both the pre-confirmation and post-confirmation Chapter 11 entity, and in the case of substantial defaults, would be able to act directly rather than requiring the substantial costs and energy of creditors to do so.
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The ABI commends the Subcommittee for its interest in the operation of the bankruptcy system and stands ready to assist in any way the Subcommittee deems fit.
Mr. GEKAS. We thank the witness, and we turn to Professor Morris.
STATEMENT OF JEFFREY W. MORRIS, PROFESSOR, UNIVERSITY OF DAYTON LAW SCHOOL, ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE
Mr. MORRIS. Thank you, Mr. Chairman, members of the committee.
I'm here on behalf of the National Bankruptcy Conference, a voluntary association of lawyers, judges, and law professors, whose goal it is to promote the improvement of the bankruptcy laws and their administration, and we appreciate this opportunity to present our position to the subcommittee concerning both the oversight of private trustees by the United States Trustee, as well as the assessment of post-confirmation quarterly fees in Chapter 11 proceedings.
Since H.R. 2592 is so recent, the Conference has not had an opportunity to take a formal position on the bill. However, we have considered the role of the United States Trustee in the administration of the bankruptcy laws, and in some ways we think that the bill is inconsistent with former policy choices that Congress has made with respect to the U.S. Trustee system.
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Central among the goals of Congress in creating the U.S. Trustee program was the removal of bankruptcy judges from the day-to-day administration of bankruptcy proceedings. Judicial oversight, including the appointment of trustees, created the impression among many that the judges were too involved in the administration of the cases. The 1978 Code removed the judges from that administrative oversight to provide additional independence for the courts as they exercised their judicial function.
We believe that injecting the bankruptcy courts back into the oversight of trustee actions in the administration of cases could be a step backward, in that it would re-create the appearance of impropriety that Congress sought to remove through the 1978 Bankruptcy Code and the creation of the U.S. Trustee program.
It seems that the bulk of problems with the current system are of two kinds. First, private panel trustees have expressed concerns that the U.S. Trustee is improperly determining whether to remove trustees from the panel or discontinue assigning cases to particular Chapter 7 trustees.
With respect to Chapter 13 trustees, there is significant conflict between the standing trustees and U.S. Trustee over the extent and propriety over certain expenditures to operate the Chapter 13 offices.
In my personal opinion only, and not on behalf of the conference, I think many of these concerns are well-founded. These are concerns expressed by a variety of people whom I know and whose integrity in my mind is unquestionable, as is their knowledge of bankruptcy law and process. I think the U.S. Trustees should take these concerns very seriously.
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Additionally, I believe the U.S. Trustee's Office has, perhaps, insufficiently recognized the good work of a number of private trustees who have generated significant recoveries for creditors and assisted debtors in many, many ways. Perhaps recognition of those positive accomplishments would go a long way towards improving the currently strained relationship.
Nonetheless, the U.S. Trustee has just issued extensive rules, which were referred to earlier, and it might be appropriate to see whether those rules can operate effectively. We do not believe, ultimately, however, that placing bankruptcy courts in the position of evaluating these administrative decisions is necessarily in the best interest of the bankruptcy process.
Regarding the quarterly fees payable to the United States Trustee in Chapter 11 cases, we strongly believe that 28 USC 1930(a)(6) is seriously flawed. We recognize that the fees represent a significant portion of the revenues necessary to operate the program, and we have long urged that the program be properly funded so that it can meet the goals that Congress has set for it. Thus, we don't wish to recommend a solution that would cripple or unduly hamper the U.S. Trustee program; but the statute, as currently drafted, overcharges some reorganized debtors and is in many ways based on erroneous foundations.
First, the statute contains no explicit cut-off date, as Judge Koger mentioned earlier. The fees continue to accrue under the plain meaning of the statute, in many cases indefinitely. The courts certainly have suggested that when the case is closed those fees will be cut off, but there may be other points in time that are more appropriate. Certainly we want to encourage Chapter 11 debtors to close their cases, but not to the detriment of the process generally.
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Additionally, we don't know what disbursements these fees are based upon. We would suggest that quarterly fees be based on the value of the pre-petition debtor's interest in the property transferred to the reorganized debtor. That's the value that really goes through the Chapter 11 proceeding, and post-confirmation the U.S. Trustee really should have very little to do in the case. To the extent monitoring is necessary, that's certainly something that creditors themselves can provide for in the plan process.
I see my time has expired. I'd be happy to answer any questions, to the extent that I can.
[The prepared statement of Mr. Morris follows:]
PREPARED STATEMENT OF JEFFREY W. MORRIS, PROFESSOR, UNIVERSITY OF DAYTON SCHOOL OF LAW, ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE
I am Professor Jeffrey W. Morris of the University of Dayton School of Law, and I am offering this testimony on behalf of the National Bankruptcy Conference. I would like to thank Committee Chairman Hyde, Subcommittee Chairman Gekas, and the members of the Subcommittee for this opportunity to present the Conference's position on the pending matters. I hope that this testimony is of assistance to the Subcommittee, and I am available by mail, telephone, or e-mail to respond to any questions that you might have about this testimony.
The National Bankruptcy Conference (the ''Conference'' or ''NBC'') is a voluntary association of approximately 65 sitting judges, law professors, and practicing attorneys from all parts of the United States. Our members are selected for demonstrated professional and technical excellence in the field of bankruptcy law. The Conference was founded in the middle 1930's to promote the improvement of the bankruptcy laws and their administration. The NBC has been active in the legislative process ever since. It has assisted and advised Congress in the drafting of the Chandler Act of 1938 and played a major role in the enactment of the Bankruptcy Code in 1978 and several of the most significant amendments to the Bankruptcy Code since then. The Conference also has provided support to the National Bankruptcy Review Commission in its current study of the bankruptcy laws. Neither I nor the NBC are receiving or have received any federal grant, contract, or subcontract during the current or preceding two fiscal years.
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The Subcommittee has before it two separate matters, each relating to the operating of the United States Trustee (''UST'') program. The first issue is the judicial review of UST decisions regarding both the removal/suspension of private panel trustees or standing trustees, and the disallowance of standing trustees' expenses. The second issue regards the post-confirmation accrual of quarterly fees payable to the UST in Chapter 11 cases. The NBC has not yet taken any formal position on these specific issues. Our annual meeting will be held here in Washington later this month, and these items will be on the agenda. Nevertheless, in our study of the Bankruptcy Code, we have come to several conclusions regarding the UST program that bear on the matters before the Subcommittee.
JUDICIAL REVIEW OF UST ACTIONS RELATED TO TRUSTEE EXPENSES AND TRUSTEE REMOVAL
The enactment of the Bankruptcy Code brought with it a significant change in the relationship between the bankruptcy judges and the administration of bankruptcy cases. The significant expansion of bankruptcy court jurisdiction in the 1978 Code made it particularly appropriate to separate the administrative and adjudicatory functions. The UST program was established to assume many of those administrative responsibilities. Section 586 of Title 28 sets out the duties of each United States trustee. Among those duties are the obligation to ''establish, maintain and supervise a panel of private trustees that are eligible to serve as trustees in cases under Chapter 7 of Title 11.'' 28 U.S.C. §586(a)(1). Certainly, this statutory obligation includes a duty on the part of the United States trustee to take appropriate action if a panel trustee is failing to discharge the duties of that position in a proper manner. Placing this oversight responsibility in the UST program rather than with the bankruptcy judge is a fundamental component of the system that intentionally removed bankruptcy judges from the administration of bankruptcy cases. It was also intended to reduce the perception that bankruptcy trustees were in any way ''favored'' by bankruptcy judges. Taking these oversight responsibilities from bankruptcy judges would permit them to direct more attention to judicial matters as well as to be perceived as a more neutral participant in disputes between trustees and third parties.
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It is the view of the NBC that the UST system should be employed in a manner to promote uniformity in the administration of bankruptcy cases. The Constitution directs Congress to make ''uniform laws on the subject of bankruptcies'', and it is appropriate to carry that uniformity forward, to the extent reasonable, to the administration of bankruptcy matters. Vesting the Attorney General with that authority and responsibility, through the Director of the Executive Office of the United States Trustee, is consistent with that position.
This does not, however, address the issue of the proper standard for review of UST actions. Effective administration of bankruptcy cases through the UST program clearly precludes any system of de novo review of UST decisions by any court. Some degree of deference is appropriate to be accorded to the decisions made within the powers of the UST. As an agency of the Executive Branch, the UST program should be governed by the same principles that govern other administrative agencies, including judicial review of agency decisions.
By providing explicitly in §586 that the UST has a wide range of oversight responsibility for private trustees, both standing trustees and panel trustees, Congress clearly intended that the UST and not the courts promulgate and apply the guidelines applicable to the private trustees acting in cases under Chapters 7, 11, 12, and 13 of the Bankruptcy Code. The UST's duties set out in 28 U.S.C. §586 extend well beyond the obligation to supervise the activities of panel trustees in pending bankruptcy cases. The UST is directed also to establish standards for eligibility for persons to serve as trustees in both Chapter 7 and 13 cases. Section 586(e)(1) directs the Attorney General to consult with the UST to fix the compensation of standing trustees and the percentage fee to be collected from payments made under confirmed plans to cover both the standing trustee's compensation and actual and necessary expenses.
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These obligations are separate and apart from the UST's obligation to supervise the administration of bankruptcy cases and the fiduciaries who operate in those cases. Yet, all of those duties are set out in 28 U.S.C. §586. Those administrative responsibilities of the UST are separate from the standing of the UST to seek removal for cause of a trustee or examiner under 11 U.S.C. §324 through a judicial proceeding in a particular case. Those actions are contested matters pursuant to Rules 2020 and 9104 of the Federal Rules of Bankruptcy Procedure. The availability of a removal remedy in §324 of the Bankruptcy Code should not operate as a limitation on the UST's exercise of his/her obligations under 28 U.S.C. §586. To that end, the decisions of the UST under §586 should be accorded the same deference provided to other agencies of the executive branch.
Congressman Goodlatte has proposed in the ''Private Trustee Reform Act of 1997'' that the court determine the actual and necessary expenses of standing trustees. In reaching its conclusion on these matters, the proposal directs the courts to evaluate whether the expense will benefit the administration of cases and whether the expense is reasonable ''based upon the customary and usual expenses incurred by fiduciaries providing services of comparable nature in matters other than cases under [Bankruptcy Code].'' Since this proposal is so recent, the NBC has not had an opportunity to take a formal position on the proposal. Nonetheless, it is inconsistent with the prior position of the Conference in several respects. First, it would transfer primary responsibility for administrative oversight of standing Chapter 12 and Chapter 13 trustees from the UST to the courts. This places the bankruptcy judges back in the position of ''running the cases,'' which is inconsistent with the goals of Congress in establishing the UST system on a nationwide basis in 1986.
Page 54 PREV PAGE TOP OF DOC The proposal also may be difficult to apply on its own terms. For example, the direction that the courts consider the customary and usual expenses of similarly situated fiduciaries is problematic. That direction is similar to the direction contained in §330(a)(3)(E). However, the Bankruptcy Code otherwise limits compensation for trustees, and §330(a)(3)(E) is primarily applied to attorneys and other professionals acting on behalf of the trustee or the estate. In those circumstances, the legal or accounting services for which compensation is being awarded are comparable to legal and accounting services provided to other clients. Thus, an analogous situation exists against which the compensation requested can be evaluated. Even in the case of a Chapter 7 or Chapter 11 trustee, the role of a receiver in a state law proceeding might provide some means for comparing compensation of those fiduciaries. There is no comparable fiduciary to a standing trustee appointed under 28 U.S.C. §586(b). Therefore, directing the court to compare a standing trustee's expenses to those of fiduciaries providing services of a comparable nature would not seem helpful.
Yet another problem exists with regard to the proposal. That is, the provisions of proposed §330(e) authorize the bankruptcy court to determine the standing trustee's actual and necessary expenses. Those expenses are attributable to all of the cases to which the trustee is assigned. They are not attributable to any single case. In fact, the expenses may vary from case to case. The expectation of §586(b) and (e)(2) is that the standing trustee's expenses are attributable to the trusteeship generally rather than to any particular case. Bankruptcy Court jurisdiction, on the other hand, is centered on cases commenced under Title 11. See 28 U.S.C. §1334(a). Thus, it is unclear how the bankruptcy courts would have jurisdiction to oversee and evaluate the determination of the actual and necessary expenses of standing trustees without matching those expenses to specific cases. Any procedure requiring the noticing of interested parties in all pending cases in which the trustee is serving as the standing trustee is at the very least extremely cumbersome, if not impossible. The cost of providing the notice would likely outweigh the benefits that arguably would be available through any change in the allowance of expenses.
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The proposal also would provide both individually appointed trustees and standing trustees an opportunity for judicial review of a UST decision regarding the assignment of cases. The review apparently is by the bankruptcy court which ''may reverse the decision only if the United States trustee has acted unreasonably or without cause.'' Again, questions persist as to the wisdom of the bankruptcy court hearing such matters. Furthermore, an existing body of law exists with regard to the appropriate standard of review of administrative agency decisions by the district courts. There is no reason why those standards should not apply as well to decisions of the UST, and crafting a special standard of review for one agency could create unknown or unintended problems when it is subsequently applied to specific matters. Thus, on balance, it would seem that the benefits that might accrue from the proposed legislation would come only at the cost of significantly undercutting many of the goals that Congress established for the UST system in 1986.
CHAPTER 11 POSTCONFIRMATION UST FEES
Section 1930(a)(6) of Title 28 establishes a sliding scale of fees based on the amount of disbursements made in each quarter of a year in which the Chapter 11 case is pending. The fees are payable ''until the case is converted or dismissed, whichever occurs first.'' Prior to 1996, confirmation of the case cut off the accrual of these quarterly fees. In 1996, however, the reference to confirmation of a Chapter 11 plan was deleted from this section. Under the ''plain meaning'' of the statute, the obligation to pay these fees would continue without end if the case is neither converted nor dismissed. The courts have not adopted this literal stance, and have instead held that the accrual of these fees is cut off by the closing of the case. See In Re Foxcroft Square Co., 198 B.R. 99 (Bankr. E.D. Pa. 1996). It would be helpful to provide explicitly in the statute that the closing of the case, at the very latest, is the cutoff mark for the accrual of these fees; however, other cutoff dates are also possible.
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The language of the section presents other problems as well. For example, the statute provides that these fees shall be paid by ''the parties commencing the case.'' If the case were initiated as an involuntary Chapter 11, the petitioning creditors would appear to be responsible for the fees accruing under §1930(a)(6). Requiring the petitioning creditors to pay these fees makes no sense. The fees are payable based on disbursements occurring during the case, and the petitioning creditors would have no control over those amounts, and indeed may not receive any benefit from the disbursements being made during the pendency of the case.
Other factual scenarios demonstrate the shortcomings of this portion of the statute. For example, a debtor could initiate a voluntary Chapter 11 case, but the assets of the debtor could be sold to a third party who continued the business in place. The new entity would not have commenced the case, and the entity that had commenced the case would be only a corporate shell with no assets. Certainly the corporate shell could not pay the quarterly fee, and under a literal interpretation of the statute, the party with ownership of the assets could continue to conduct the Chapter 11 proceedings without incurring the obligations set out in §1930(a)(6). Other problems arise when a Chapter 11 debtor seeks to liquidate assets when the amount received from the sale of the assets is insufficient to pay claims secured by those assets. The transfer of funds from the debtor to the secured creditor could be considered a disbursement, and the fee apparently would accrue on that amount. Nevertheless, there would be no funds available to pay that fee. The transfer of the funds to the secured creditor is in payment of their secured claim. Arguably, using those funds to pay the quarterly fee would result in the payment of those fees by a party who had not commenced the case.
There appear to be two important purposes for the assessment and collection of the UST quarterly fee. First, the collection of the fee generates significant amounts to support the operation of UST offices. A significant portion of the annual UST budget comes from these payments. Second, continuing the accrual of these fees after confirmation of the Chapter 11 plan provides a strong incentive for the parties to the proceeding to close the case as quickly as is possible under the circumstances.
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Under the statute as currently drafted, however, the interpretational difficulties are substantial. The statute should be revised to define more specifically what ''disbursements'' trigger the accrual of the quarterly fee. Additionally, the party responsible for paying the fee should be more carefully set out. Simply indicating that the party commencing the case is responsible for the quarterly fee is insufficient, if not improper.
To resolve these problems, we recommend that the UST quarterly fee continue to accrue until the effective date of the plan rather than permitting the payment obligation to accrue until the closing of the case. Accrual of the fee beyond the plan's effective date penalizes debtors in possession whose cases remain open for a variety of legitimate reasons, but whose disbursements (however that is defined) would lead to substantial additional fees with no corresponding benefit. While the ''effective date'' is not defined in the Bankruptcy Code, it nearly always coincides with the time when a plan is substantially consummated as that notion is defined under §1101(2) of the Bankruptcy Code. In Chapter 11 cases, substantial consummation of the plan essentially represents the debtor's going forward as the reorganized entity governed by the new contractual relationship with its creditors as set out in the plan and the order confirming the plan. From that point forward, the expectation is that the reorganized debtor will operate its business as if it were not in bankruptcy and instead were like any other comparable entity engaged in commerce. In most cases, the plan itself will set out its effective date so that there will be very little confusion as to when the quarterly UST fees will no longer accrue. Furthermore, §1129(a)(12) of the Bankruptcy Code provides that the plan cannot be confirmed unless the fees payable under §1930 (including §1930(a)(6)) either have been paid or provisions for their payment have been made. Under the current system, those fees cannot even be ascertained at the time of confirmation never mind paid. If instead of permitting these fees to accrue until the closing of the case the ''effective date of the plan'' is substituted as the cutoff for the accrual of these fees, it would be possible for those fees to be estimated or set such that the court could actually determine whether the fees were paid or whether provision was made for the payment of those fees as necessary.
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Simply substituting the plan's effective date for the closing of the case, however, does not resolve all the problems presented by current §1930(a)(6). This section bases the fees payable on the amount of ''disbursements'' made during each quarter. As noted previously, disbursements are not defined by the section. One could assert that disbursements are any payments made by the debtor or from property of the estate until the case is closed. This would create enormous expenses for many Chapter 11 debtors that are incurring ordinary and necessary expenses, and paying those amounts while the case is open, even after confirmation. This would place a burden on Chapter 11 reorganized debtors inconsistent with the basic notion that they operate their business in an ordinary manner notwithstanding the pendency of the proceedings. Moreover, the liquidation of estate property subject to fully enforceable mortgages and security interests would not generate any assets to pay these nonetheless accruing expenses.
In place of this very broad notion of ''disbursements'', one could base the obligation on the amount of value of the estate's interest in property that it will either transfer to other entities or have retested in it upon confirmation of the plan. The plan proponent generally must prove these values as a part of the confirmation process, so basing the amount of fees payable to the UST on this number should not create significant additional burdens on the courts or the confirmation process generally. It would also have the benefit of establishing at the time of confirmation the amount of money necessary to transfer to the UST. This assists the court in making its feasibility determination under §1129(a)(11), and also makes it possible to determine whether the fees payable under §1930 will be paid or provided for under the plan as required by §1129(a)(12).
Substituting the effective date of the plan for the closing of the case and basing disbursements on the value of the estate at confirmation would still generate significant revenue to support the UST system. Additionally, setting the fee in this manner avoids the problem often faced by the UST in obtaining payment of its fees from the sale of property subject to properly perfected liens. If the revenues payable to the UST system are maintained, or possibly increased, through such a system, then it is more likely that the system can effectively monitor Chapter 11 cases after confirmation to ensure that they are closed in a timely fashion.
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Finally, some difficulties remain with respect to the priority status to be afforded unpaid quarterly fees upon the conversion of a case from Chapter 11 to Chapter 7. The administrative expense claims incurred in the Chapter 11 case are subordinated to the administrative expense claims in the Chapter 7 proceeding. The quarterly fee, however, is not a priority claim under §503(b) of the Bankruptcy Code, so it is not included in the subordination provision of §726(b) governing the payment of claims in Chapter 7 cases. Arguably, the accrual of the quarterly fees are in the nature of an administrative expense of the Chapter 11 proceeding, and they should receive comparable treatment to other Chapter 11 administrative expense claims in the distribution in any Chapter 7 case to which the original Chapter 11 was converted. Any other rule would serve as a deterrent to professionals to accept appointments as trustees or counsel for trustees in those Chapter 7 cases.
Given the language difficulties of 28 U.S.C. §1930(a)(6) and the negative impact of the current statute on several aspects of Chapter 11 cases, we strongly urge the Congress to amend the provision. Clarifying the section will reduce transaction costs to the benefit of all interested parties, including the United States Trustee. Adjusting the period when the quarterly fee accrues and defining more properly the scope of disbursements will improve the statute by furthering the rehabilitation goals of Chapter 11 without diminishing support for the operation of the UST system.
Mr. GEKAS. We thank the gentleman, and turn to Professor Lubbers.
STATEMENT OF JEFFREY LUBBERS, PROFESSOR, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSTIY
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Mr. LUBBERS. I'm very pleased to be here today, representing only myself, to try to present some administrative law commentary on the issues presented by H.R. 2592. But first, Mr. Chairman, I wish to take this opportunity to thank you and the subcommittee for the support you gave to my former agency, the Administrative Conference, for so many years.
H.R. 2592 raises several fundamental questions with respect to the procedures by which trustees are removed from eligibility for future case assignments. First, should a ''for cause'' standard be imported into the removal process? Second, if so, where should hearings to determine such cause take place? Third, should the hearing be a formal administrative law judge hearing, or would a somewhat less formal hearing be advisable? And, fourth, what sort of judicial review should be prescribed?
Importation of the ''for cause'' standard will likely serve to transform the system from one of managerial oversight by the U.S. Trustees into one that will give the trustees more independence and autonomy. If that is the desired goal, then this is one way to achieve it.
On the other hand, if it is more important to ensure close supervision of trustee fiduciary activities, then this step will clearly reduce managerial discretion in the program. Without a better understanding of the need for this change, i.e., a demonstration of abuses by the program and arbitrarily removing trustees, I wonder whether such a dramatic change needs to be taken. This is not to say, however, that some changes should not be made by the program to address the potential for abuses.
Page 61 PREV PAGE TOP OF DOC Now, the first question I'd like to address is where should hearings to challenge suspensions and removals take place? Assuming that the ''for cause'' standard is imported into the suspension and removal process, should the opportunity for a hearing to challenge it be in the bankruptcy court or in the agency?
H.R. 2592's approach is to require that the Department of Justice offer the trustee an APAAdministrative Procedure Acthearing to challenge the allegation of cause. The APA hearing requirement is invoked by the bill's use of the phrase, ''administrative hearing on the record.'' Such language triggers the provisions of 5 U.S.C., sections 554, 556, and 557, the formal adjudication provisions of the APA. This requires a formal trial-type adjudication and the assignment of an administrative law judge to preside over such hearings and make initial decisions. The institution of such a hearing program would undoubtedly require the hiring of one or more administrative law judges to handle the caseload and would lengthen the process for decision on removals.
Assuming that such a hearing is to be required, which court should be the forum for judicial review, and what should be the scope of judicial review? The bill's answer is that judicial review should be in the bankruptcy court and that the court may reverse the decision only if the U.S. Trustee has acted unreasonably or without cause.
The forum and scope of judicial review of any type of agency action should be tailored to fit the type of action being reviewed. Under the APA's scope of judicial review provisions, agency fact-findings made after formal hearings are subject to review based on the substantial evidence test, and fact-findings made in informal adjudications are reviewed under the arbitrary, capricious, and abuse of discretion test. And normally, formal adjudicatory actions are reviewed directly in the courts of appeals; informal adjudicatory actions in the Federal district courts.
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Thus, because this bill requires a formal APA hearing, it would be best if it specified that judicial review be available directly in the courts of appeals. This seems quite preferable to having review in the bankruptcy courts, which could raise some constitutional questions and also would lead to multiple levels of review.
One week ago the Department of Justice published a new procedural rule establishing an informal adjudication process for making agency determinations on such removals. The Department's proposed procedure is a classic example of informal adjudication, and it's permitted by the Administrative Procedure Act in the sense that if the statute does not require a hearing on the record, it's up to the Department to create informal procedures that meet the requirements of due process.
I'm pleased to see that the Department now agrees that a two-tiered procedure, similar to that used in debarment cases, might be appropriate in trustee removal cases: a written appeal in most cases, but a fact-finding hearing if the trustee's response raises disputed issues of material fact that are necessary to resolve. I think, however, that this provision should be put in the text of the rule, and not just referenced in the preamble to the rule.
In summary, I believe that the bill's requirement for a formal APA hearing in trustee suspension and removal cases, not to mention in disputes over expense reimbursement, may inject too much formality into the process. The informal adjudication process established by the Department's recent rulemaking provides a basically sound approach, so long as the right to a face-to-face hearing on disputed issues of material fact is included in the terms of the rule. And I agree that perhaps it would be wise to see how the new process works before enacting legislation.
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However, if this bill's approach is followed, then several changes should be made to the bill, and I'll just mention, briefly, three. First, the time limit for exhaustion of remedies should probably be eliminated, except where suspensions are made immediately effective, and then any time limits should be made long enough to permit the agency to conduct the hearing.
Second, judicial review should be provided for in the courts of appeals and not the bankruptcy courts, and, third, the scope of review for agency fact-finding should be the APA's usual substantial evidence test.
I apologize for running a little long, and I'd be pleased to answer any questions you may have.
[The prepared statement of Mr. Lubbers follows:]
PREPARED STATEMENT OF JEFFREY LUBBERS, PROFESSOR, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY
Mr. Chairman and Members of the Subcommittee, my name is Jeffrey Lubbers and I am currently Visiting Associate Professor of Law and a Fellow in Administrative Law at the Washington College of Law, American University. From 1975 until 1995, I was an attorney and then Research Director of the Administrative Conference of the United Statesthe government's advisory agency on administrative procedure. As you know, despite this subcommittee's valiant efforts, the agency was ''sunset'' by the appropriations committees. We always had an excellent working relationship with this subcommittee, and I was very pleased to be asked by your staff to present some administrative law commentary on the issues presented by the legislation before you.
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Your letter of invitation asked me to note any federal grant, contract, or subcontract I have received in this fiscal year or the preceding two fiscal years. Since I left the government in 1995, I have received one government contractwhich was in 1996 from the U.S. Department of Agriculture (in the amount of $19,500) to assist its National Appeals Division in drafting a Hearing Officer's Manual.
Previous to this testimony, I have had no involvement in the issues surrounding the bankruptcy trustees, and am not representing any interested party in these proceedings.
Indeed, Mr. Chairman, I do not claim to be an expert in bankruptcy law or in the operations of the overall United States Trustee Program, and I defer to those on today's panels who are far more expert than I on those matters. If I have anything to contribute, it is to provide some context and comparisons with other analogous administrative agency procedures and judicial review provisions.
I. Background. The principal purpose of the H.R. 2592 is to amend 11 U.S.C. §324, to provide that decisions of the U.S. Trustee to cease assigning cases to bankruptcy trustees appointed under 28 U.S.C. §586 (a) and (b) may be taken only for ''cause'' after an opportunity for an ''administrative hearing on the record,'' with judicial review of such decisions available in the bankruptcy court.(see footnote 6)
To fully understand the implications of this change, it is necessary to briefly mention some of the history of the creation of the U.S. Trustee Program. The Program was created on a pilot basis in the Bankruptcy Reform Act of 1978, Pub. L. No. 95598, 92 Stat. 2549, and expanded to near nationwide application as a permanent component within the Department of Justice in 1986, Pub. L. No. 99554, 100 Stat. 3088. The Program is administered by the Executive Office for United States Trustee (EOUST) and is headed by the Director (who acts under authority delegated by the Attorney General) and 21 United States Trustees, each of whom serve at the pleasure of the Attorney General and supervise the administration of bankruptcies and the activities of trustees within defined geographic regions. 28 U.S.C. §581.
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Congress created the Program after a series of studies showed that the earlier system that relied upon direct judicial oversight of bankruptcy proceedings resulted in inadequate monitoring of debtors and trustees. Because the judges were unable to spend the time overseeing the detailed administration of the bankruptcy laws, the activities of the largely unsupervised trustees and of some unscrupulous attorneys managing estates led to abuses and scandals. Moreover it was thought to be inappropriate for the judges to be involved in appointing and passing on the administrative activities of trustees who later would be litigating before them. Thus the 1978 reform legislation created an administrative pilot program to handle the administrative functions, leaving the judicial functions with the bankruptcy judges. Studies of the original pilot program indicated that the separation of functions was a success. The testimony of two leading bankruptcy scholars of the day made that clear:
There is no longer any serious controversy over whether the 1978 Congressional policy decision to separate judicial and administrative functions was in the public interest. We have not heard or seen of a single suggestion that we should go back to the pre-code system of entrusting the dispute-resolving and administrative functions to the same individual. The perceived vices of the that system were real. We have better administration of justice when administrative and judicial functions are performed by separate institutions.(see footnote 7)
The pilot program was made permanent in 1986 under the stewardship of the U.S. Trustee Program, which was given the responsibility of appointing and supervising trustees who administer cases under chapters 7, 12, and 13 (and occasionally chapter 11) of the Bankruptcy Code.
Page 66 PREV PAGE TOP OF DOC Chapter 12 and 13 ''standing trustees'' are appointed by the one of the 21 United States Trustees with the approval of the Attorney General, to act as trustees within a specific geographical area. Some districts only have one chapter 12 or 13 standing trustees; some have more than one. Once appointed, a trustee will then receive chapter 12 or 13 cases(see footnote 8) within that judicial district. These standing trustees have no fixed term, but generally remain eligible until their eligibility is terminated.
Chapter 7 trustees, who administer the more numerous cases filed under the debt liquidation provisions of chapter 7 of the Bankruptcy Code are appointed by U.S. Trustees for renewable one-year terms to serve on panels serving specific judicial districts within that U.S. Trustee's area. Once on a panel they are eligible to serve in cases filed after their appointment. There are over 1200 persons on Chapter 7 panels nationwide.
Trustees are appointed to handle bankruptcy proceedings, and except in rare cases the debtors have no say in the appointment of the trustees. Standing trustees receive a percentage fee for their services, subject to annual compensation ceilings set by the Attorney General, and reimbursement for expenses.(see footnote 9) Most Chapter 13 standing trustees receive the maximum allowable annual compensation of over $124,000 in addition to expenses. Chapter 7 trustees are awarded compensation in each case by the bankruptcy court within statutorily prescribed limits.
II. Suspension and removal of trustees: pending cases/future cases. Under Section 324 of the Bankruptcy Code, trustees may not be removed from cases to which they have been assigned unless removed for cause by the bankruptcy court. Section 324 also provides that such a removal also constitutes a removal from all other pending cases unless the court rules otherwise. Because ''cause'' is not defined by the Code, its meaning must be determined by the courts on a case-by-case basis. A recent decision explained:
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Cause has been found to exist, inter alia, where the trustee is not disinterested, and where the trustee fails to perform his or her duties, or unreasonably delays in the performance of those duties. In general, a party seeking the removal of a trustee must prove that there has been some actual injury or fraud. A trustee should not be removed for mistakes in judgment where that judgment was discretionary and reasonable under the circumstances, and courts should consider the best interests of the estate, rather than those of a single movant-creditor, when determining whether to remove a trustee.(see footnote 10)
On the other hand the Program has consistently taken the position that with respect to future assignments, trustees do not have a right to any continuing entitlement to them, and that correspondingly, the U.S. Trustee may remove a panel member from ''rotation,'' suspend a trustee, or stop assigning cases to a trustee, after notice to the trustee.
The Program ''recognizes that trustees may not always agree with these decisions'' and ''[a]ccordingly . . . has always allowed a trustee to request [EOUST] review'' of the decision.(see footnote 11) One week ago, the Program promulgated rules (discussed below) to make this review somewhat more formal.(see footnote 12) These changes, at least in their proposed form, were not deemed sufficient by the trustee organizations who instead favor the approach taken by this proposed legislation which would essentially make suspension or removal decisions relating to future casework subject to hearings held under the formal hearing provisions of the Administrative Procedure Act (APA) before agency administrative law judges. The trustee organizations had also concomitantly urged the Department of Justice, through comments filed in the rulemaking proceeding, to provide more formal trial-type procedures at the agency level. The Department has made several significant steps in that direction, but the final rules intentionally fall far short of an APA formal hearing.
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III. Federal court decisions regarding trustee ''removal'' from future cases. Individual trustees have also gone to court to challenge decisions of the U.S. Trustees to stop assigning future cases to them. In each of the three reported cases, however, the courts have ruled that the plaintiffs could obtain no relief under either the Administrative Procedure Act (APA) or the Due Process Clause.
In Shaltry v. United States, 182 B. R. 836 (D. Ariz.), aff'd 87 F.3d 1322 (unpublished opinion); 1996 U.S. App. LEXIS 15666 (9th Cir. 1996), a Chapter 7 trustee was advised by the U.S. Trustee in Arizona that she was being removed from the panel due to performance problems, some of which were detailed in the letter. She sought review under the APA claiming a violation of its provision [(5 U.S.C. §558(c)] that allows license holders an opportunity to demonstrate or achieve compliance with all lawful requirements, unless the violation was willful or the public interest requires otherwise, and under the Fifth Amendment's Due Process Clause on the grounds that she was deprived of a property and liberty interest without adequate process.
The court first held that her APA claim was unreviewable because the agency's action was ''committed to agency discretion'' under APA §701(a)(2). The court arrived at this conclusion after examining the broad powers given to the U.S. Trustees under 28 U.S.C. §586 and concluding that ''the statute is drawn so that a court would have no meaningful standard against which to judge the agency's exercise of discretion.'' [Citing Heckler v. Chaney, 470 U.S. 821, 830 (1985).]
With respect to the plaintiff's constitutional claims, the court found that she was not deprived of either a property or liberty interest. The court found that a property interest was lacking because ''an appointment to the panel means solely that an individual is 'eligible and available' to serve as a private trustee; it does not grant her an affirmative right to perform a particular act.'' 182 B.R at 843. The plaintiff's complaint that her liberty interest in her reputation was also affected by the removal and by the letter's explanation for it was also rejected. The court relied on the Supreme Court decisions of Paul v. Davis, 424 U.S. 693 (1976), and Siegert v. Gilley, 500 U.S. 226 (1991), for the rule that ''the alleged injury to reputation 'must be accompanied by the loss or alteration of a right or status recognized by  law before the Due Process Clause is implicated.' '' This test (known as the ''stigma-plus'' test) was not met in this case, the court ruled, because the plaintiff could not demonstrate a loss of a property right or a right (such as free speech) specifically secured by the Bill of Rights.
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In Richman v. Straley, 38 F.3d 1139 (10th Cir. 1995), the Court of Appeals for the Tenth Circuit made a similar ruling in a case brought by a standing (chapter 12/13) trustee. Richman had alleged that the U.S. Trustee's appointment of a new standing trustee constituted a de facto removal without due process. The court rejected this claim, first citing Carlucci v. Doe, 488 U.S. 93, 99 (1988), for the rule that ''[g]enerally the power of removal is implicit in the power of appointment unless the appointment carries with it a definite term of office or a constitutional or statutory provision limits the removal power.'' The court found no such limitation (except as regards removal from those cases in which the trustee is already serving).(see footnote 13) The court also found an absence of any property right and pointed specifically to the plaintiff's official ''Designation of Appointment'' which contained the caveat that ''this appointment may be terminated at any time.''
Most recently in Joelson v. United States, 86 F.3d 1413 (6th Cir. 1996), the Court of Appeals for the Sixth Circuit agreed with Richman. Plaintiff was a Chapter 7 trustee who was removed from active case rotation and was told after a request for reconsideration that ''there continue to be numerous concerns. As a result I am unable to return you to the active case rotation.'' Plaintiff sought review under the APA and under the Due Process Clause. The court ruled against Joelson on the APA claim after performing the same analysis as the court did in Shaltry, concluding that ''[d]ecisions regarding the discharge of private panel trustees from future case assignments are instead committed to the discretion of the U.S. Trustees.'' 86 F.3d at 1419. Joelson's due process claims were also rejected. His claim that his reputational liberty interests were affected was rejected for several reasons. First because the allegedly stigmatizing information was not disclosed to the public. And second, because:
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''Liberty interests 'are not implicated . . . by allegations of improper or inadequate performance or, in some cases, by charges of incompetence, neglect of duty or malfeasance. A charge that merely makes a plaintiff less attractive to other employers but leaves open a definite range of opportunity does not constitute a liberty deprivation.' '' (Citations omitted) id., at 142021.
Finally, plaintiff's claim of a property interest deprivation was rejected because he was ''unable to 'offer one rule or understanding which explicitly confers upon [him] an expectancy of appointment in future cases.' '' (citing Richman) id., at 1422.
Faced with these losses in court, the trustee organizations have sought relief from Congress via this proposed legislation and have also sought to persuade the Department of Justice to formalize its procedures for challenging such suspensions and removals.
IV. The proposed legislation. H.R. 2592 raises several fundamental questions with respect to the procedures by which trustees are removed from eligibility for future cases. First, should a ''for cause'' standardsimilar to the standard set forth in section 324 of the Bankruptcy Codebe imported into the removal process? Second, if so, where should hearings to determine such cause take place? And third, should the hearing be a formal APA hearing or would a somewhat less formal hearing be advisable?
A. The ''for cause standard.'' H.R. 2592 would introduce the ''for cause'' standard by amending 11 U.S.C. §324 to add a provision that ''Upon review, the [bankruptcy] court may reverse the decision only if the United States trustee has acted unreasonably or without cause.'' As noted, there is a similar provision now in §324 pertaining to removals of trustees from pending cases, and the court has produced case law limiting such removals to cases of actual injury or fraud.(see footnote 14) Similarly, disciplinary action against administrative law judges (who are federal employees) can be taken ''only for good cause'' shown before the Merit Systems Protection Board. (5 U.S.C. §7521). Decisions by that Board upholding removal or discipline of administrative law judges have largely been limited to misconduct and insubordination charges, and complaints involving low productivity have been very difficult to sustain.(see footnote 15)
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Thus, importation of the ''for cause'' standard will likely serve to transform the system from one of managerial oversight by the U.S. Trustees into one where the private trustees will, in effect, obtain an entitlement to the position. Whether this is good public policy in that it will produce better results for debtors and creditors is difficult for me to say. I leave it to commentators more knowledgeable about the trustee system to judge that. Clearly it will give the trustees more independence and autonomy. If that is the desired goal, then this is one way to achieve it. On the other hand if it is more important to ensure close supervision of trustee fiduciary activities, then this step will clearly reduce managerial discretion in the Program. Without a better understanding of the need for this change, i.e., a demonstration of abuses by the Program in arbitrarily removing trustees, I wonder whether such a dramatic change needs to be taken. This is not to say, however, that some changes should not be made by the Program to address the potential for abuses. One legislative possibility would be to add some language to the U.S. Trustee's authorities in 28 U.S.C. §586 to make clear that trustees may be removed from eligibility for future cases or rotated on panels or replaced, but only for appropriate reasons such as misconduct, mismanagement, inefficiency, or for programmatic reasons such as the need to downsize or increase diversity. I also assess the Department's recent procedural changes below.
B. Where should hearings to challenge suspensions and removals take place? Assuming that the ''for cause'' standard is imported into the suspension and removal process, should the opportunity for a hearing to challenge it be in the bankruptcy court or in the agency? Earlier drafts of this legislation supplied to me by staff, would have required such hearings to be in the bankruptcy court. This has now been changed in H.R. 2592 to require an ''administrative hearing on the record,'' with judicial review in the bankruptcy court. It is probably wise to not have hearings relating to suspension and removal of trustees from future cases in the bankruptcy courts. To do so would seem to run counter to the original purpose of the creation of the U.S. Trustee Programnamely to remove the judges from participation in the administrative aspects of the system. Not doing so also avoids the question, raised by the Justice Department as to whether the bankruptcy courts even would have subject-matter jurisdiction over such claims given the fact that under 28 U.S.C. 1334, those courts only have jurisdiction over bankruptcy casesdefined as cases in which a petition for relief has been filed under chapter 7, 11, 12, or 13 of the Bankruptcy Code. These claims of course would be divorced from any pending cases (unlike challenges to removals of trustees from pending cases).(see footnote 16)
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H.R. 2592's alternative is to mandate that the Department of Justice offer the trustee an APA hearing to challenge the allegation of ''cause.'' This APA hearing requirement is invoked by H.R. 2592's use of the phrase ''administrative hearing on the record.'' Such language triggers the provisions of 5 U.S.C. §554, 556 and 557the formal adjudication provisions of the APA.(see footnote 17) This requires a formal adjudication according to the procedures in §556557 of the APA, and the assignment of an administrative law judge (ALJ) to preside over such hearings and make initial decisions.(see footnote 18) Institution of such a hearing program would undoubtedly require the hiring of one or more ALJs (since the Department currently employs only a fewlocated in its Executive Office of Immigration Review).(see footnote 19)
C. Judicial review issues. Assuming that an administrative agency hearing is to be required, which court should be the forum for judicial review, and what should be the scope of judicial review? H.R. 2592's answer is that judicial review should be in the bankruptcy court, and that the court ''may reverse the decision only if the United States Trustee has acted unreasonably or without cause.''
The forum and scope of judicial review of agency action should be tailored to fit the type of action being reviewed. Under the APA's scope-of-judicial-review provision, 5 U.S.C. §706, agency actions made after formal hearings are subject to factual review based on the ''substantial evidence'' test, and agency action based on informal adjudicatory procedures are reviewed under the ''arbitrary, capricious, an abuse of discretion'' test. Normally, formal adjudicatory actions are best reviewed directly in the court of appeals, and informal adjudicatory actions (especially if they are voluminous) in the district courts.(see footnote 20)
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Thus, because H.R. 2592 requires a formal APA hearing, it would be best if judicial review were made available directly in the courts of appeals (either the regional courts or, if consolidation were desired, perhaps in the Court of Appeals for the Federal Circuit, which already hears all federal employee adverse action appeals). This seems quite preferable to having review in the bankruptcy courtswhich would not only raise constitutional questions,(see footnote 21) but would also lead to multiple levels of review.
As for the scope of review, the bill's standard is rather vague and uncertain. It would be far better to either invoke the APA's judicial review provision (5 U.S.C. §706) or, to the same effect, specify that the U.S. Trustee's decision be upheld if it is based on substantial evidence.
In sum, if the bill's reliance on formal APA hearings at the agency level is maintained (a position I question below), then judicial review in the courts of appeals, based on the substantial evidence test should also be incorporated. If an informal adjudication process is desired, as called for by the Department of Justice's rule, then review in the district courts on the basis of the arbitrary and capricious test would be appropriate. In either case, judicial review in the bankruptcy court with a new, vague standard would not be desirable.
V. Should the hearing be a trial-type, APA hearing? What about the DOJ's rule establishing an informal adjudication option? As mentioned above, the U.S. Trustee Program has recognized the concern among trustee organizations about the procedures allowed by the agency for challenging removals and has made some changes in a rulemaking finalized a week before this hearing. The new process, (to be codified at 28 CFR §58.6) Procedures for suspension and removal of Panel Trustees and Standing Trustees, establishes an informal adjudication process for making agency determinations on such removals.
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The process calls for:
1. written notice from the U.S. Trustee to the trustee containing a statement of reasons and copies of any pertinent materials upon which the U.S. Trustee has relied;
2. opportunity to request, within 20 days, administrative review by the Director;
3. opportunity to submit written arguments and materials in support of the arguments to the Director;
4. opportunity to request that specific documents in the possession of the U.S. Trustee be transmitted to the Director for inclusion in the record.
5. allowing the U.S. Trustee 15 days to respond and to the matters raised in the trustee's request for review;
6. allowing the Director to appoint a reviewing official, not involved in the case or employed in the region of the U.S. trustee who made the decision, to make recommendations to the Director or otherwise assist in the Director's decision;
7. allowing the Director to seek any additional information from any party (the preamble to the rulebut not the textindicates that this may include having the Director or his designee conduct a face-to-face meeting with the trustee and the U.S. Trustee ''if the Director determines that there is a genuine dispute over facts material to the Director's determination'');(see footnote 22)
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8. issuance of a written decision by the Director within 30 days of the U.S. Trustee's response to the trustee's request for review (extensions are permitted if both parties agree). The final decision ''shall determine whether the United States Trustee's decision is supported by the record and is an appropriate exercise of the United States Trustee's discretion, and shall adopt, modify or reject the United States Trustee's decision. . . .''(see footnote 23)
The final rule also contains a change that, absent a special finding by the Director in an ''interim directive,'' postpones the effectiveness of any such suspensions and removals until the expiration of the time for the trustee to seek review (i.e. 20 days) or if review is timely sought, until issuance of a final decision of the Director.(see footnote 24)
In addition, the rule sets out a list of 14 ''reasons'' for action by the U.S. Trustee. The rule states, however, that ''[t]he reasons may include, but are in no way limited to'' the items on that list.
Finally, although the text of the rule is silent as to judicial review, the preamble states the expectation that judicial review will be available:
Before this rule became effective, such a decision would have been final and unreviewable. . . . This rule creates a standard that courts can review pursuant to the Administrative Procedure Act. . . .(see footnote 25)
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A. Does the DOJ proposal provide enough process? The Department's proposed procedure is a classic example of informal adjudication. Under the Administrative Procedure Act, if the relevant statute does not require the agency to offer a hearing on the record, then the APA's formal adjudication procedure does not apply. And because the APA prescribes little in the way of informal adjudication procedures, the agency is free to design its own decisionmaking procedures, provided of course that the process meets the requirements of due process of law. See, e.g., PBGC v. LTV Corp., 496 U.S. 633 (1990).
Most agency actions classified as ''adjudicative'' under the APA are made through informal adjudications. Two decades ago Paul Verkuil described the variety of processes used in 42 such informal adjudication programs in four departments.(see footnote 26) Almost all provided notice, an impartial decisionmaker,(see footnote 27) and a statement of findings and reasons. About half provided an opportunity for oral presentation of arguments. Only about a fourth allowed for confrontation of adverse witnesses and cross-examination.(see footnote 28) Also, it is typical for such informal adjudications to be reviewed in district court on the basis of the administrative record assembled by the agency. See Camp v. Pitts, 411 U.S. 138, 142 (1973) (informal agency action ordinarily must be reviewed only on the basis of the administrative record already in existence''). So it is not unusual, in many programs, for agency informal adjudication to be limited to the sort of written procedures offered by the DOJ's proposed rule. The question is whether the nature of this particular proceedingaffecting as it may some important interests of the trusteesshould require a greater degree of formality. For example the comments on the proposed rule by the National Association of Bankruptcy Trustees stated: ''the power to remove a trustee is far-reaching because it threatens the trustee's current livelihood and carries with it a serious stigma of incompetence and wrongdoing.'' Other commenters pointed to the significant investments in time, personnel and foregone clients that trustees make when they accept the position. These arguments were found wanting, of course, in the due process cases cited above, but they deserve new attention in connection with the Department's discretionary development of its own procedures.
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B. The new procedural rule has itself changed the reviewability of such decisions. With the issuance of the procedural rule, the situation for the trustees has changed in some important ways. For one thing, the Department has explicitly abandoned its contention (that proved to be a winning one in the Shaltry and Joelson cases) that decisions in removal cases are unreviewable under the APA because they are ''committed to agency discretion.'' Indeed, the publication of the list of 14 reasons (even though not exclusive) likely provides enough ''law to apply'' to overcome that hurdle anyway. Once the agency action is deemed reviewable, this will give rise to review under the APA's scope of review standards specified in 5 U.S.C. §706(2)(A)(D). This means that the U.S. Trustee's determination (or more properly the Director's final determination) will be reviewable in the district courts and can be set aside if it is arbitrary, capricious or an abuse of discretion. Thus, a decision based on impermissible or arbitrary factors (e.g., political party affiliation, long-hair) would likely be set aside, and the Director will have to demonstrate a reasonable basis for decision to withstand judicial scrutiny.
Even if the Department had not abandoned its position that such suspension and removal decisions are unreviewable, it could be argued that it will now be easier for trustees to show that a property or liberty interest is implicated by removal. Notwithstanding the broad language in the Joelson case about the type of statements necessary to implicate liberty interests, a removal based on some of the ''failures'' mentioned in the list might appear stigmatizing to other courts. Moreover the mere existence of the list (albeit a non-exclusive one) could lead trustees to make the claim more convincingly that they were ''entitled'' to renewals or continuing service if they were not in violation of these criteria. To counter this, the Department may have to do even more than it does now to inform the trustees, at the time of their initial appointment, about the discretionary, temporary nature of their appointments.
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Even if the courts do become more receptive to claims of infringement of property and liberty interests by trustees, that simply means that some appropriate administrative procedure will be required for removals. This does not necessarily mean a trial-type hearing. Under Mathews v. Eldridge, 424 U.S. 319 (1976), a balancing test must be employed by the courts to arrive at an appropriate procedure, once a protected property or liberty interest has been shown to be affected. The balance involves three factors: (1) the private interest affected by the official action, (2) the risk of an erroneous result and the probable value of additional procedural safeguards, and (3) the government's interest in avoiding administrative burdens. Given the existence of both important private and governmental interests in trustee supervision and removals, the key due process factor here would be an analysis of the value of additional procedures. It is, of course, unclear how a court might rule if it scrutinized the new DOJ procedures. But regardless of the need to anticipate a judicial determination of this question, it is appropriate to examine and evaluate the new procedures from a public policy standpoint.
C. The debarment analogy. A number of commenters have suggested that trustee removal cases are similar to government debarment of contractors and grantees. In some ways, the debarment programs are quite different in that anyone has a right to compete for a government contract or grant, and a debarred government contractor suffers the indignity of being placed on a government-wide debarment list. Nonetheless, there are some definite parallels between the arguments made by the government contract bar and the trustee associations.(see footnote 29) Courts were similarly reluctant to find that government contract debarment cases required APA adjudication,(see footnote 30) but with some exceptions, were somewhat more open to claims that debarmentsat least those based on charges of dishonestywere stigmatizing to the point of affecting liberty interests.(see footnote 31) Perhaps because of these decisions, and because of pressures from the bar, both the Federal Acquisition Regulation (FAR) Procedures for procurement debarment and suspension(see footnote 32) and the uniform debarment and suspension rules for non-procurement programs(see footnote 33) provide for a two-tiered approach to debarment and suspension hearings.(see footnote 34) In general, suspensions may occur before the hearing, while debarments must follow the hearing. In either case, the contractor may submit information and argument in opposition to the proposed debarment within 30 days. If the action is not premised on a conviction or civil judgment (as most are) the contractor is entitled to an additional fact-finding hearing, but only if its initial presentation raises a genuine dispute over facts material to the dispute. (Similar procedures are required in the non-procurement debarment context.) The Department of Justice's procedure for contesting non-procurement debarments, 28 C.F.R. §67.313, which I attach, is a typical example of these procedures. Note that this rule (as well as the FAR and the uniform rule for non-procurement debarment) fails to identify the type of official to be employed in such fact-finding hearing.(see footnote 35) But as Professor Brian Shannon noted in his study of debarment procedures for the Administrative Conference, the percentage of cases requiring such fact-finding hearings is very low: ''Very few suspension or debarment cases actually involve disputes over material facts.''(see footnote 36)
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I am pleased to see that the Department now agrees that a similar two-tiered procedure might be appropriate in trustee removal casesa written appeal, with a fact-finding hearing offered if the trustee's response raises disputed issues of material fact that are necessary to resolve. Given the importance of the appointment to the trustees, the significant amount of investment made by some trustees in undertaking this work, and the fact that removals usually are based on some sort of allegation of inappropriate behavior, it is appropriate for the Department to offer some additional form of fact-finding (at least an opportunity for a face-to-face meeting with the Director) when the trustee's response raises factual issues that are necessary to resolve. My only reservation with the Department's action in this regard is that this opportunity is not included in the actual rule, but only in the preamble to the rule. Preambles to rules are not codified in the Code of Federal Regulations so trustees in prospective cases may not know about this right. I would hope the Department would consider including a provision similar to 28 CFR 67.313 in Part 58.
VII. Exhaustion of administrative remedies. H.R. 2592, in effect, gives the Program only 30 days to make a final decision after the trustee requests a reconsideration. This is because the failure by the U.S. Trustee to make a final decision in 30 days is deemed to exhaust administrative remedies and allow judicial review. This seems unrealistically shortif the agency must offer an APA hearing before taking final action against the trustee. Moreover, now that the Department's rule specifies that the suspension or removal normally will not take effect until the Director makes a final decision, the need for this provision is lessened considerably. Moreover, under the Department's new informal process, there is a 30 day time limit on final action. This time limit is feasible only if the process remains informal.
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1. H.R. 2592's requirement for a formal APA hearing in trustee suspension and removal cases may inject too much formality into the process. The informal adjudication process established by the DOJ's recent rulemaking provides a basically sound approachso long as the right to a face-to-face hearing when disputed issues of material fact is included in the terms of the rule.
2. If the APA hearing approach of H.R. 2592 is followed, then several changes should be made to the bill: (a) the time limit for exhaustion of remedies should be eliminated except where suspensions are made immediately effective, and then the time limit should be long enough to permit the agency to conduct the hearing, (b) judicial review should be provided for in the courts of appeals and not the bankruptcy courts, and (c) the scope of review for agency fact-finding should be the APA's usual substantial evidence test.
3. While there may be a need for some statutory guidance in the law as to what are appropriate grounds for removal of trustees, H.R. 2592's importation of the ''for cause'' standard would run the risk of limiting removals to only misconduct cases, and make it too difficult to remove for inefficiency or to make changes in chapter 7 panel rotations for other legitimate reasons.
INSERT OFFSET RING FOLIOS 19 HERE
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Mr. GEKAS. We thank the witnesses. I have a question for each of you.
Professor Lubbers, you said that following the judicial review recommendations of the current billthe one that's before usthat that would lead to multiple court reviews. Is that correct?
Mr. LUBBERS. Yes.
Mr. GEKAS. But then I thought you were saying that the current system, in applying administrative relief under the APA, is also subject to review in later stages, is it not?
Mr. LUBBERS. Yes, it would be, but under the bill's approach, you'd first have review in a bankruptcy court, which would then have to be reviewed by the district court judge.
Mr. GEKAS. That's one.
Mr. LUBBERS. Bankruptcy court, district court, court of appeals, Supreme Courtthat's four.
Mr. GEKAS. All right; now, the other way.
Page 82 PREV PAGE TOP OF DOC Mr. LUBBERS. If we just followed the current state of the law under the rule issued by the Department of Justice, there would be review in the district courts, so you'd eliminate one level of review that way. You wouldn't have to go to the bankruptcy court first; you'd go directly to the district court.
Now, if the bill's approach of having a formal APAALJ hearing were followed, then I think it would be better to go directly to the courts of appeals because you wouldn't need to go to the district courts. You would just review based on the full, trial-type record assembled before the administrative law judge.
So, there are basically three different approaches you could take here. First, going to the bankruptcy court, which I disfavor; second, following this bill's approach of having a formal trial-type of hearing at the agency, direct review in the court of appeals. Third, under the current systemif this bill were not to be enactedunder the current system you would have the default rule which is reviewed by the district courts under the arbitrary and capricious test. I personally think that probably makes the most sense.
Mr. GEKAS. I'm not sure, butlet's see, Professor Morris, you mentioned that the U.S. Trustee is reluctant to praise good work, et cetera. If good work is accomplished, the one who accomplishes good workis he less subject to removal or less subject to sanctions by the U.S. Trustee? Is that what you're saying?
Mr. MORRIS. I think presumably so, Mr. Chairman. What I was really thinking was that the U.S. Trustee program had an initial obligation to take a look at the entire system, to see who was out there. Many, many people are private trustees, and over the years the United States Trustee has changed the make-up of those panels, and with respect to people I've spoken to around the country, most think that the private trustee panels today are vastly improved over what they were some years agovery capable people by and large doing a good job. And so the U.S. Trustee program, to that extent, has done an excellent job of culling some of the deadwood, perhaps.
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But now, I think, it's time, perhaps, for phase two. We've got a lot of very talented people doing a good job. That doesn't mean there won't ever be problems, but I think that the focus of the agency has been a little bit more on sort of a negative evaluationWhere are the problems? We've got to cull these things outas opposed to recognizing a number of people who do some very excellent work, and then trying to get the benefit of that work and say, ''Hey, we have somebody here who's done some wonderful things. How did they accomplish it? Let's recognize that accomplishment and see if we can transfer that to other places in the country.''
Mr. GEKAS. So you would not at this juncture support this bill.
Mr. MORRIS. I wouldn't support it at this juncture, and, again, the National Bankruptcy Conferenceand that's my own personal opinionthe conference hasn't had an opportunity to address it, but I do think that not much is lost initially if we provide an opportunity for the new rule to be in place and see if it works.
I see some management problems, certainly, but I think that these kinds of hearings can provide exactly the kind of reminder to the U.S. Trustee and others of the fact that we're all trying to work through this together to increase returns to creditors and provide true assistance to debtors.
Mr. GEKAS. I would yield to the gentleman from Texas.
Page 84 PREV PAGE TOP OF DOC Mr. SMITH OF TEXAS. Mr. Chairman, very briefly, I know we have three votes coming up, and I have another Judiciary Committee meeting at noon that I need to attend, and with your permission what I'd like to do is to submit a series of questions to our witnesses today.
Mr. GEKAS. Yes, we will ask the gentleman to submit them, without objection, and we would trust that the witnesses would be glad to respond.
Mr. GEKAS. Does the lady from Texas have any questions?
Ms. JACKSON LEE. Mr. Chairman, very quickly, and I would like to also be allowed not only to submit questions for the record, but I would invite the gentlemen and ladies that we engage in discussions about this issue withI'm very interested, coming from the southern district of Texasand Mr. Chairman, apologetically, I may not be here for the complete hearing. I do want to get to Judge Koger and Professor Morrisand I came in, Professor Morris, as you were finishing your remarksto just answer the question of rush, the question of failing to do the job and how seriously that is impacted by this legislation. And I'm not sure if the Judge answered that in his remarks.
Judge, would you respond?
Judge KOGER. I don't think that we have very many of the panel trustees or standing trustees who are not doing the job, as has been said. They have been really pared down from where they were and with new appointments in the past few
Page 85 PREV PAGE TOP OF DOC Ms. JACKSON LEE. The question is, How would this legislation impact them rushing to finish their work or not finishing it completely?
Judge KOGER. I doubt that this legislation would have effect on them rushing forward.
Ms. JACKSON LEE. Thank you. Professor Morris.
Mr. MORRIS. I'm not sure if I understand the question. Are you talking about if you stop assigning cases to trustees? Will that encourage them to finish their work more quickly? I don't know that it would. I doubt that it would. If the problem that the United States Trustee sees is that a particular trustee is not being effective in their work and no more cases are assigned, I don't think that that would improve that person's personal work ethic or anything else.
The U.S. Trustee, it seems to me, has other means by which to oversee that person's workload and offer lots of demands about reports, and so forth, and can move toward removal of a particular trustee in a case if that's necessary.
Ms. JACKSON LEE. What about any work after post-confirmation?
Mr. MORRIS. OK, now if you're talking about the Chapter 11 quarterly fee that's a slightly different issue, and that is the problem of Chapter 11 cases that linger. And certainly, I think, one aspect of the post-confirmation Chapter 11 quarterly fee is that it does encourage the confirmed Chapter 11 debtor to be more aggressive in closing the case. As Mr. Elsaesser said earlier, they may, in some people's view, move too quickly, but there may be other means by which to address that issue.
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Our suggestion would be to base these obligations on disbursements equal to the value of the reorganized debtor above the claims of secured creditors. Clearly, there has to be some source of income to run the United States Trustee system. The Chapter 11 quarterly fee is a way to do it, but having it just run on indefinitely without a real definition of what disbursements are is not the way to do it.
And I think while there could be some problem about these cases lingering on or a problem of them closing too quickly, those should go away if you switch the emphasis to the effective date of the plan to some extent, because that's something that the plan proponent and the creditors who vote on the plan can have some impact on.
Ms. JACKSON LEE. Thank you, Mr. ChairmanMr. Elsaesser, do you want to briefly answer the question?
Mr. ELSAESSER. I just want to supplement it, Congresswoman Jackson Lee, and say that it's important to recognize that a closing order in a Chapter 11 case is often a meaningless piece of paper. It enables a clerk to send a file to central storage, and it enables statistics to look good for a particular district, as Judge Lisa Hill Fenning pointed out in her written comments to me, but in many ways it has absolutely no impact on the post-confirmation obligations of the debtor. So, I think it's important that the committee not put too much weight on the idea that the post-confirmation fees are an incentive to close a case, because getting a closing order in a case in many districts means just a clerk signing a closing order. It has no meaning as far as the debtor's future obligations to pay creditors. It might make a district's statistics look good, but that's all that's being accomplished.
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Ms. JACKSON LEE. Thank you, Mr. Chairman.
Mr. GEKAS. We thank the panel. We discharge them with our gratitude.
We will recess this hearing and reconvene after 11:35 a.m.
Mr. GEKAS. The hour of 11:35 having arrived and passed, we can declare an end to the recess, but we must await the presence of one more member so that we may have a hearing quorum. That's an arcane rule which I will try to change when I become chairman of the full committee. [Laughter.]
In 1998? No, 2010.
We'll use the time, at least for the record, to introduce the members of the third panel and try to flesh each one out for half-an-hour.
Mr. Joseph Patchan is the Director of the Executive Office for United States Trustees. He practiced bankruptcy law for many years, served as a judge and as a Chapter 7 and Chapter 13 trustee, and brings to this hearing a useful historical perspective as well as the viewpoint of the pivotal person in the operation of the U.S. Trustee system.
Page 88 PREV PAGE TOP OF DOC We note the presence of the gentleman from Tennessee, Mr. Bryant, who now constitutes with the Chair a hearing quorum.
Mr. Clarkson McDow is on the panel and is the United States Trustee for Region 4, which is headquartered in Columbia, South Carolina. He serves as chairman of the UST Chapter 7 Subcommittee, and as such I'm told he has worked diligently to improve Chapter 7 administration. He has appeared earlier before this subcommittee, and we welcome him back.
Ms. Ellen Vergos is Region 8 United States Trustee, located in Memphis, Tennessee. She is Chair of the UST Chapter 13 Subcommittee and is a member of the liaison group that has helped negotiate agreement between the UST and the Chapter 13 trustees on a number of issues, as she undoubtedly will relate.
Kevyn Orr has been the Deputy Director of the Executive Office for United States Trustees for a number of years and previously served elsewhere in the Department of Justice. He will direct his remarks to, among other things, the post-confirmation fee issue.
With that we will begin, as we had previously indicated, in the order in which we introduced the panel of witnesses. Their written statements will become a matter of the record, without objection, and each will be allotted 5 minutes or so for the presentation of the summary of their testimony.
STATEMENT OF JOSEPH PATCHAN, DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, DEPARTMENT OF JUSTICE
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Mr. PATCHAN. Thank you, Mr. Chairman, for this opportunity to appear before you to address the issues of bankruptcy administration and the United States Trustee program.
We now have a rule in place that newly provides a reasoned administrative process to review appointment disputes. The rule provides for final agency action at the highest level of the United States Trustee program. That should result in consistency in the determinations as they are made, and it provides for court review without jeopardizing the integrity of the bankruptcy system.
By the rule, court review would be in the article III district court under the well-established provisions of the Administrative Procedure Act. That act provides the appropriate manner of judicial review of a final action of an executive branch agency. We have heard the concerns of the private trustees. The rule provides for prior notice by the U.S. Trustee to the private trustee. The notice will contain the reasons for any action taken, and the action, per the notice, is stayed unless the reason is of critical concern, such as assets of an estate are at risk, or that there is dishonesty or gross misconduct.
The rule provides for a request by the private trustee that the Director of the program review the decision, and the Director will review the decision and test the U.S. Trustee's action, whether it is supported by the record, and whether it is an appropriate exercise of the U.S. Trustee's discretion. The private trustee may give the Director whatever information or materials or the like that would support the private trustee's position in regard to the matter.
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I have heard from some that the rule does not provide for meaningful review. That criticism misunderstands the process. The purpose of the rule is to establish an administrative process to enable the program to determine its final agency position and to do so with dispatch. Once that final determination is made, then the private trustee may take the matter to court. To have an evidentiary hearing as part of this administrative process would, in effect, result in multiple trials and level of appeal. We agree that trustees should have their day in court, and this rule provides for that. Heretofore, court decisions said there was no court review. I submit that the rule should be given the opportunity to work.
Unlike H.R. 2592, the rule respects the absolute need to keep separate administrative from judicial work and to have bankruptcy judges stick solely to the judicial work they do under the Bankruptcy Code. The separation of the judicial from the administrative work of bankruptcy judges was one of the major achievements of the Bankruptcy Code.
It took some 80 years from the time of the passage of the 1898 Bankruptcy Act to attain that separation. During those pre-code days of judicial involvement and trustee appointments, the integrity of the bankruptcy system suffered greatly.
The combination of the administrative and the judicial functions in bankruptcy court produced perceptions of improprieties and charges of cronyism, since trustees were considered court favorites and bankruptcy insiders. Those perceptions, those charges, plagued and diminished the system, and it diminished as well the bench and the bar who worked in bankruptcy law.
Page 91 PREV PAGE TOP OF DOC The U.S. Trustee program was established to relieve the bankruptcy judges from the appointment and oversight of trustees, and we have done so. Only after establishment of the program were private trustees audited on a regular basis, and only after the U.S. Trustee appeared on the scene was the long list of old, lingering cases substantially reduced, and they remain reduced today.
Indeed, everybody who has studied this programand there have been many studies madehas concluded that our trustee oversight has improved the system. The structural separation of the judicial from the administrative work of the bankruptcy court is the foundation, the basic structural reason for much of the great progress made in preventing and eliminating cronyism and insiderism claims of the past.
H.R. 2592 would break apart that foundation, for it would return to the bankruptcy court the determination of who would be appointed as a trustee in future cases; that is, in cases yet to be filed. H.R. 2592 would also have the bankruptcy judge determine the quality of a trustee's performance. In addition, based on Professor Lubber's comments, it would actually give the trustee, in effect, two trials and three levels of appeal.
In my view, sir, placing the bankruptcy judge into the picture as presented by 2592 would set the stage for the return of those pre-code plagues that seriously infected the bankruptcy system. Thank you.
[The prepared statement of Mr. Patchan follows:]
PREPARED STATEMENT OF JOSEPH PATCHAN, DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, DEPARTMENT OF JUSTICE
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Thank you Mr. Chairman for the opportunity to appear before you this morning. With me today are Kevyn D. Orr, the Deputy Director of the Executive Office for United States Trustees; Clarkson McDow of Columbia South Carolina, chair of our Chapter 7 Subcommittee, and United States Trustee for Region 4, comprised of the states of Virginia, West Virginia, Maryland, and the District of Columbia; and Ellen Vergos of Memphis, Tennessee, chair of our Standing Trustee Subcommittee and NACTT Liaison Committee, and United States Trustee for Region 8, comprised of Kentucky and Tennessee. My remarks and those of Mr. McDow and Ms. Vergos will focus on the issue of judicial review of suspension, terminations' and private trustee expenses. Mr. Orr will discuss the issue of post-confirmation fees.
On October 2 we published a final rule to make formal a process by which standing trustees and chapter 7 panel trustees may seek administrative review if they disagree with a United States Trustee's decision to stop assigning cases to them. The day before, on October 1, Congressman Goodlatte introduced the Private Trustee Reform Act of 1997, H.R. 2592. Both our rule and the proposed bill represent attempts to address concern among chapter 7 panel trustees and Standing Trustees that their appointments hang on a whimthat the United States Trustees who supervise them may act inappropriately in deciding whether to terminate or suspend the assignment of cases to a trustee. I will discuss later the lack of basis for those fears, but regardless of their validity, we are firmly committed to providing a reasonable process that protects against arbitrary action.
The legislation addresses one other issuedecisions regarding the actual and necessary expenses of standing trustees. Ms. Vergos will discuss an alternative dispute resolution procedure for these issues that has been negotiated through a Liaison Committee composed of United States Trustees and representatives of the National Association of Chapter 13 Trustees.
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We believe our proposed rule reasonably addresses the trustees' concerns with due regard for the efficiency and integrity of the bankruptcy system and the fiduciary duties of the private trustees without the necessity for legislation. Although our rule and the proposed legislation might initially appear to be complementary, they in fact are not. The proposed legislation will thwart our administrative procedures; more importantly, I believe the proposed legislation will make a crippling breach in the wall that separates judicial and administrative functionsthe wall that is the basis of the integrity of the current bankruptcy system, and that has worked so well to date.
The Department of Justice is firmly opposed to any legislation that would permit the bankruptcy court to review its decisions to suspend or terminate assignment of cases or that would permit any court to review our decision without the appropriate deference.
THE SEPARATION OF THE ADMINISTRATIVE AND JUDICIAL FUNCTIONS
To understand the dangers posed by the proposed legislation, it is necessary to understand why the United States Trustee Program was created, its role in supervising and overseeing trustees, and how the new administrative procedures will work.
At the time the Bankruptcy Code was enacted in 1978, formation of the USTP and its independence from the courts was viewed as a means to respond to critics of the bankruptcy system whose judges previously had dual responsibilities: judicial, as deciders of litigated and contested matters; and administrative, as appointers of trustees who were parties, plaintiff or defendant, in those matters. The trustees and their counsel were seen in many districts as bankruptcy insiders, part of a ring encircling and diminishing the validity and credibility of the bankruptcy process. Too often there was the perceptionindeed sometimes the factthat the court was partial to its appointees and had inappropriate ex parte discussions and relationships that affected pending matters.
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The existence of the United States Trustee Program permits the judge to shed administrative functions and focus on judicial functions. As one court has noted, in creating the Program, ''Congress specified that the U.S. Trustees were to be independent of direct court supervision, as 'executives of the bankruptcy network.' ''(see footnote 37) The separation of administrative and judicial functions has had beneficial results. It raised respect for the integrity of the bankruptcy process. It also enhanced both the stature of the court and the level and professional status of the practitioners.
Among the core functions of the United States Trustees is the appointment and oversight of trustees who handle bankruptcy cases. Most of the private trustees are appointed in chapter 7 and chapter 13 cases, cases used largely by individual consumers seeking bankruptcy relief. Trustees are fiduciaries with wide-ranging duties, and are held to the highest standards of honesty.
Standing trustees for chapter 12 and 13 cases are appointed by United States Trustees, with the approval of the Attorney General, to act as trustees within a specific geographic area. In some districts there is only one standing trustee appointed to receive future cases within the district in which the trustee was appointed. Other districts may have two, and there are seldom more than three. Since chapters 12 and 13 call for administration of a debtor payment plan and regular distributions to creditors over a three-to-five year period, it is more efficient and economical to centralize plan administration in an office run by a particular trustee. Standing trustees currently serve no fixed term; they generally remain eligible to receive future cases until that eligibility is terminated.
Page 95 PREV PAGE TOP OF DOC Chapter 7 trustees are drawn from a panel whose members are selected by the United States Trustee. They receive appointments to the panel for a one-year term, renewable at the option of the United States Trustee. The panel consists of private persons, usually lawyers or accountants, eligible to receive appointments in future bankruptcy cases.
The appointment documents signed by every standing and panel trustee specifically provide that the trustee's appointment may be terminated at any time.
All panel and standing trustees enjoy something akin to a monopoly in their defined territories. Debtors cannot select who will act as their trustee; they must accept the trustee who is appointed for them. In chapter 7 cases, creditors may elect a trustee to replace the trustee selected from the panel, but elections are exceedingly rare. Chapter 7 and standing trustees do not compete in the marketplace for individual cases that arise.
Congress created the United States Trustee Program to appoint trustees and to regulate and assure their competence. United States Trustees act to protect debtors and creditors through careful trustee selection and supervision. The need for oversight and supervision has grown tremendously as the caseload has burgeoned. There have recently been a spate of articles commenting on the number of bankruptcy cases filed over the past year, spurred by the crossing of the 1 million case mark. Similarly the amount of money flowing through the bankruptcy system and under the care of private trustees has reached phenomenal heights. In calendar year 1996, 24,451 chapter 7 cases were closed that generated $1.5 billion. For chapter 13 cases, which we measure by fiscal year, gross receipts totaled $2.4 billion.
Chapter 7 and Chapter 13 bankruptcy, in short, has become big business. With the number of cases and the amount of money in the system increasing, trustee compensation has also increased. Standing trustees are compensated and their expenses are covered through a percentage fee, established by the Attorney General and the United States Trustees, of up to 10% of the payments made under plans administered by a standing trustee based on the actual, necessary expenses incurred by the trustee. Because of the explosion of the case load, most chapter 13 trustees would receive a sum far in excess of their actual and necessary expenses if it were pegged at the 10% mark. For example, for the FY 1996, the combined actual percentage fee revenue for chapter 13 trustees was $113,145,378, as compared to $198,391,795 that would have been received at the 10% mark. Out of this percentage fee, standing trustees cover the costs of their operation, plus their personal salary. Almost all chapter 13 trustees in fiscal year 1997 earned the maximum $126,473 in salary and benefits authorized by the Attorney General.
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Chapter 7 trustees are compensated on a case by case basis. For calendar 1996, chapter 7 trustees and their firms received over $100 million as compensation from all asset cases closed during the period, plus an additional $48 million collected as a portion of the filing fee in each case, regardless of whether assets are collected or not.
With the explosion in the caseload, the amount of money in the system, and the high compensation at stake, it is perhaps to be expected that tensions will develop between the United States Trustees and the private trustees. One expression of this concern among private trustees is that their income from bankruptcy cases may be terminated by inappropriate or unsupported action of their United States Trustee. The Program has always had informal internal procedures in place to protect against such action. However, many private trustees stated that they were unaware that these procedures existed and they, together with members of Congress and others, called upon the Program to adopt more formal procedures that would govern decisions to suspend or terminate the assignment of cases.
THE UNITED STATES TRUSTEE PROGRAM ADMINISTRATIVE REVIEW PROCESS
The United States Trustee Program rule, published and taking effect on November 3, 1997, provides for administrative review procedure and for prompt final agency action. The standards embraced within the rule will enable a trustee to seek judicial review under the Administrative Procedure Act of our administrative decision as an agency of the executive branch. Jurisdiction for such review lies with the United States district court.
We believe this rule will give trustees what they have recently sought from this Congress, without the necessity of further legislation. The formal procedures establish several important concepts.
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Every trustee will receive a written notice and reasons for the United States Trustee's decision to suspend or terminate the assignment of cases to the trustee.
Every affected trustee can ask the Director to review the United States Trustee's decision.
The Director will determine whether the United States Trustee's decision is supported by the record and is an appropriate exercise of discretion.
The review will be done promptly, within 45 days after the trustee submits a request.
The trustee's status will be held in abeyance during the review unless estate assets appear to be at risk, the trustee is not eligible to serve, or the trustee has engaged in gross misconduct.
Finally, as I indicated earlier, the standards created in the rule will enable a trustee to seek further review in court under the Administrative Procedure Act.
We have strived to develop a rule that is both fair and workable. This procedure avoids unnecessary bureaucracy and costs, and it minimizes litigation.
Let me emphasize one point that I think is crucial. This rule does not apply to cases already assigned to the case trustee. Removal of a trustee from his existing cases remains the province of the bankruptcy court, as provided for in section 324 of the Bankruptcy Code. This rule only applies to the United States Trustee's decision to appoint a trustee to cases yet to be filed and to which the private trustee has yet to be appointed.
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I believe our rule represents a fair balance between the need for a process to assure fair treatment for the private trustees who have served in the past, and the need for discretion and flexibility on the part of the United States Trustees to maintain the integrity and vitality of the bankruptcy system.
We could always add more processmore procedural provisionsas some in the trustee community have asked for. But more process means, among other things, more cost, more delay. It is unclear how a more cumbersome and protracted process would benefit the bankruptcy system and the millions of debtors and creditors it serves. They, the debtors and creditors, are the true beneficiaries of this system and should have primacy in consideration of any change to that system.
I believe it would be unwise for the rule to go further to meet these concerns for three reasons.
First, the rule establishes a procedure that is consistent with accepted notions of administrative law. The rule can be characterized as an ''informal adjudication,'' employed by other federal agencies in similar circumstances.
Second, there is little objective evidence that arbitrary removals are generally occurring. Indeed most trustees enjoy a long tenure. If arbitrary suspensions or removals are occurring, then I believe our procedure will serve to rectify them. At the very least, the rule deserves a chance to be tried and tested.
Page 99 PREV PAGE TOP OF DOC Finally, the case law is abundantly clear that trustees do not hold any kind of constitutional or statutory right to future cases, and for good reason. Trustees are fiduciaries. They are not contractors or employees. In the exercise of their statutory responsibilities, the United States Trustees need to have the flexibility to manage and oversee the private trustees in a manner consistent with the interests of the intended beneficiaries of the systemthe debtors and creditors.
We have had an informal process in place since 1992. As an organization that has worked to hold others accountable for their obligations under the Bankruptcy Code, we recognize the need to hold ourselves accountable as well. For that reason we investigate complaints about inappropriate actions taken by our employees.
During my three year tenure as Director, although a majority of decisions to suspend or terminate trustees have been sustained, a few were not because the facts did not warrant the sanction. We did not need a formal rule or the prospect of judicial review to reach these decisions. Nevertheless, the new formal rule should give added assurance to the public and to trustees of our commitment to responsible deliberation.
THE PROPOSED PRIVATE TRUSTEE REFORM ACT OF 1997
Our rule will provide a measure of fairness to the private trustees and safeguard against arbitrary action. It also is built upon one of the cornerstones of our current bankruptcy systemthe separation of the judicial and administrative functions.
The proposed ''Private Trustee Reform Act of 1997,'' however, is a major step in the other directionthe reintroduction of judges back into administration and trustee oversight. If enacted, its operation will eventually return us to the time when the bankruptcy system was perceived as serving the insiders of the system rather than serving debtors and creditors, and trustees and judges were perceived as cronies rather than as litigants and adjudicators.
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While there is still some concern about the operation of the bankruptcy system, this concern no longer flows from the view that the system is being manipulated purely by an inner circle. For the first time in this country's history, and as a result of the separation of the judicial and administrative functions in bankruptcy, we had a major commission review the bankruptcy laws and its discussion was not dominated by claims that the bankruptcy system was being corrupted by inappropriate relationships between judges and trustees.
The most recent study of this Program, conducted in 1995 by the National Academy of Public Administration, noted this accomplishment:
[T]he USTP was established to improve bankruptcy administration and to increase the public's confidence in the bankruptcy system. The overwhelming weight of testimonial evidence supports the conclusion that the program has achieved this primary mission. Although systemwide problems persist and bankruptcy fraud remains a major concern, most observers credit the very presence of the U.S. Trustee (UST) as a deterrent to impropriety by debtors, creditors, trustees, and professionals employed in bankruptcy cases. The role of the UST is especially important in smaller cases in which creditors have insufficient resources or incentive to police the conduct of other parties. As one practitioner put it, ''Integrity is the key concept. . . . Creditors know that there is some independent entity to guard their rights, to monitor and oversee the process.'' . . .
I know of no study of the United States Trustee Program, and there have been many, that has not reached a similar conclusion.
Page 101 PREV PAGE TOP OF DOC The proposed legislation places this hard-fought progress in jeopardy. By its terms, bankruptcy judges will now be determining the expenses of standing trustees and reviewing the United States Trustee's decision to remove or suspend the assignment of cases. In the debate leading up to the introduction of this legislation, it was often argued that this step was merely an extension of protections afforded other bankruptcy professionals. This argument ignores the fact that standing trustees and chapter 7 trustees are not just another group of bankruptcy professionalsthey do not have to go out and compete for their business. Chapter 7 and standing trustees are part of a select group eligible to receive appointments automatically in all cases within their districts.
Furthermore, unlike other bankruptcy professionalswho receive only compensation and expenses arising in a particular casechapter 13 trustees recover the costs of their entire operation. Every aspect of their operationevery piece of paper, every paper clip, every computer, every desk, and every chairis by statute funded by the percentage fee earned out of the payments received from debtors. These expenses do not come out of the standing trustee's pocket.
The ''Private Trustee Reform Act'' would thus introduce judges back into a process they have not occupied since the creation of the United States Trustee Programthe assignment of future cases to trustees and review of the overall operations of the standing trustees. On ''motion'' by a standing trustee, the judge will decide, without any regard for the decision of the United States Trustee, the actual necessary expenses of the moving trustee. In decisions by United States Trustees to ''cease assigning cases to a trustee,'' the United States Trustee Program is given only 30 days to provide ''an administrative hearing on the record''apparently a full evidentiary hearing with opportunity for examination of witnessesbefore the aggrieved trustee can seek judicial review. Not only is this legislation impractical, it is fraught with structural problems that could infect the entire bankruptcy system.
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I have practiced bankruptcy law for over 40 years. I have been on the bench and in court before the bar. I have served as a trustee in cases under chapter 7 and chapter 13, and I have practiced under the Bankruptcy Act and under the current Bankruptcy Code. I recall the comfortable relationships that were fostered under the old system. I also recall how the court and the bankruptcy process suffered over perceptions of impropriety and allegations of cronyism and rings of professional insiders, and how debtors, creditors, bankruptcy professionals and trustees also suffered from these perceptions.
I am confident that if given a chance, our administrative process will evolve and work effectively. There will always be some areas for improvement, but to reintroduce the bankruptcy court into the appointment process and review of chapter 13 expenses is an invitation to involve the bankruptcy court in areas that are purely administrative. Bankruptcy court involvement in this context would represent a major step backward to what were, for some, the ''good old days'' of the pre-1978 system.
My comments are not meant at all to disparage the quality of the bankruptcy judges or their courts, for bankruptcy judges might well be as strict or stricter than I in their conclusions. But there are serious functional and structural problems that arise by returning the administrative processes to the bankruptcy court, and these problems should not be ignored.
We recognize that disagreements will arise. And we agree that the corps of chapter 7 panel trustees and standing trustees should know what to expect and how to handle and resolve any disputes that arise from our supervisory role as ''bankruptcy watchdog.'' As we have indicated, we are not opposed to judicial review, but it needs to be in the appropriate forum and must employ the appropriate standard of review for executive branch agency action.
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We believe a well-established functioning process already exists under the Administrative Procedure Act without resort to additional legislation. However, if the Subcommittee believes legislation is still appropriate, we strongly urge the resolution of these issues be committed to the district court with a deferential standard of review. To endorse bankruptcy court review or a de nova standard of review would represent a major departure from the structural reforms that were made in 1978 to improve the integrity of the bankruptcy system and the appointment and supervision of bankruptcy trustees.
Mr. Chairman, after you have heard from my colleagues, we would be pleased to respond to any questions you and the member of the Subcommittee may have for us. Thank you.
Mr. GEKAS. We thank the gentleman, and Mr. McDow is next on our panel.
STATEMENT OF W. CLARKSON MCDOW, JR., UNITED STATES TRUSTEE REGION 4, COLUMBIA, SOUTH CAROLINA
Mr. MCDOW. Thank you, Mr. Chairman, and members of the committee. I appreciate the opportunity to be here today. I chair the Chapter 7 Subcommittee, and my testimony will concentrate on Chapter 7.
Chapter 7 is where we see the greatest increase in filings, supervise the largest number of trustees, and encounter most of the debtor fraud and abuse. There are two points I'd like to make. First, we are successfully carrying out our statutory duty of establishing, maintaining, and supervising a panel of Chapter 7 trustees. We have good trustees.
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Second, the proposed legislation will adversely affect our ability to supervise panel trustees and our ability to make and enforce policy. Our goal in Chapter 7 is to establish a system that allows for the complete economical, equitable, and expeditious administration of cases, while allowing the panel trustee to exercise appropriate business judgment.
To accomplish this, we have to recruit and maintain qualified trustees, train the trustees, audit their records, review the administration of assets, and, when necessary, take appropriate enforcement action to address trustee deficiencies.
Chapter 7 trustees are to collect and sell the property of the bankruptcy estates, and they are to distribute the proceeds to creditors and other parties. They're required to do this as quickly as possible. Before the United States Trustee focused attention on Chapter 7, delay in administering cases plagued the bankruptcy system.
In early 1992, there were approximately 4,000 Chapter 7 cases that were 10 years old or older, and by July of this year our initiatives and the efforts of the trustees had reduced the cases to 171. Our success in this area has greatly enhanced the integrity of the bankruptcy system, but not without a price. Many trustees have resented our efforts to encourage the closing of old cases.
Why is closing old cases and prompt administration of cases so important? Experience has shown that delays diminish returns to creditors, undermine confidence in the bankruptcy system, increase the exposure to liability, increase the cost of professionals, and often prejudice the debtor. Older cases disburse a larger percentage of receipts to professionals and pay a smaller percentage to creditors.
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While in private practice, I observed the frustration that creditors sometimes experience when administration of estates is drawn out and administrative costs consume most of the funds.
The duty to supervise must include the ability to do something with a problem trustee. Some remedies require court action, like a motion to compel the closing of a case or a motion for removal of a trustee from existing cases. Others are purely administrative. Two enforcement actions which will be subject to H.R. 2592 are the suspension of case assignments, sometimes referred to as the removal from rotation, and the non-reappointment of a trustee at the end of the 1-year term. Both of these actions are administrative.
Since my appointment in June 1994, I've temporarily suspended trustees from case assignments 14 times. One of these was during the pendency of a criminal investigation; others were for such things as inadequate audits, failure to administer assets, excessive delay in case closure, and other administrative reasons. Last year, of approximately 82 panel trustees in Region 4, only one was not reappointed. The vast majority of trustees in Region 4 have never been suspended or been the subject of any enforcement action.
In the past several years there has been a call by trustees to increase protection against suspensions and non-reappointment decisions. Recently, we have published a final rule which establishes formal procedures allowing review of such decisions, and the procedures will allow for ultimate judicial review. This marks a significant change and, we believe, provides protection for the trustee without jeopardizing our ability to supervise.
One of the unintended consequences of H.R. 2592 would be to render uniform national policies non-uniform. For example, the national policy requires that Chapter 7 trustees provide an interim report of each asset case every 180 days. These reports allow us to determine that the trustee records and the bank records agree as to the amount held by the trustee. They sometimes uncover fraud, provide an audit trail if later reports use different figures, and also allow us to monitor case progress.
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Because of the importance of these reports, policy provides that the failure of the trustee to timely file the 180-day reports calls for the suspension from further case assignments until the report is submitted. Under the proposed legislation, a bankruptcy judge could find that the suspension for failure to provide these reports was unreasonable and without cause. In other words, the decision could be reversed, although the U.S. Trustee was following legitimate national policy.
The bankruptcy judge could dictate how often we are entitled to reports and whether such reports were required at all. The result would be disparate treatment of trustees in different areas and the inability of U.S. Trustees to formulate effective national policy. Routine bankruptcy court review of trustee suspensions and non-reappointments would also create a more adversarial system, and the ''for cause'' standard may create virtual lifetime appointments in some districts.
While much has improved in the Chapter 7 world, there's always room for improvement. The system works best when the players work together. We should enhance our efforts to work with the National Association of Bankruptcy Trustees. This past year we learned much from the trustees and tried to include them in a more meaningful way in our meetings and discussions. In the future we hope to continue and improve this dialogue.
While neither I nor anyone else can assure you that the rule adopted by the U.S. Trustee program will satisfy whatever fears the trustees might have or express, I can assure you that Mr. Patchan runs a tight ship, and neither he nor any of the U.S. Trustees takes lightly our obligation to treat trustees fairly, openly, and honestly. Our ability to properly supervise the panel trustees and to formulate effective policy is crucial; otherwise, we will return to a system in which 10-year-old cases were the norm.
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Thank you very much.
[The prepared statement of Mr. McDow follows:]
PREPARED STATEMENT OF W. CLARKSON MCDOW, JR., UNITED STATES TRUSTEE REGION 4, COLUMBIA, SOUTH CAROLINA
Mr. Chairman, Members of the Subcommittee on Commercial and Administrative Law, I have served as United States Trustee for more than three years. For twenty-three years before my appointment as United States Trustee for Region Four, I was a lawyer in Rock Hill, South Carolina. My practice involved commercial law and bankruptcy. Representing both debtors and creditors gave me a healthy respect for the work panel trustees do and the important responsibilities placed upon them by the Bankruptcy Code. I also gained an appreciation of the problems and frustrations that parties, particularly creditors, experience with the bankruptcy system.
I chair the Chapter 7 Subcommittee of United States Trustees and my testimony will concentrate on the United States Trustee's role in chapter 7 administration. Chapter 7 is where we have experienced the greatest increase in filings, supervise the largest number of trustees, and encounter most of the debtor fraud and abuse of system. United States Trustees and their staffs spend much time in overseeing the administration of chapter 7 cases by trustees.
There are two primary points I would like to emphasize today. First, the U.S. Trustees were given the important task of establishing, maintaining and supervising a panel of private trustees eligible and available to serve in chapter 7 case, and we are successfully carrying out this duty. Second, the proposed Private Trustee Reform Act will adversely effect our ability to supervise panel trustees and our ability to make and enforce policy for administering chapter 7 cases.
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To address these issues a brief review of how we carry out our duties in chapter 7 cases may be helpful. Our goal in chapter 7 is to establish a system that will allow for the complete, economical, equitable, and expeditious administration of chapter 7 cases, while allowing the panel trustee to exercise appropriate business judgement in performing the trustee's fiduciary duty.(see footnote 38) This is accomplished by a system which includes recruitment of qualified trustees, training of trustees, trustee performance review, audits of trustees, maintenance of statistics, review of the trustee's administration of estate assets, and, when necessary, appropriate enforcement action to address trustee deficiencies.
The primary duties of chapter 7 trustees are to collect and sell the property of the bankruptcy estates in which they serve. They are required to complete this process as expeditiously as is compatible with the best interests of the parties to the case. Much of the criticism and much of the success of our role in chapter 7 results from our efforts to insure timely administration of chapter 7 cases.
Before the United States Trustees focused attention on the number of old cases, delay in administering cases plagued the bankruptcy system. In March of 1992 the United States Trustees adopted chapter 7 initiatives which encouraged U.S. Trustees to monitor chapter 7 cases more closely and to seek the closure of cases more expeditiously. When the initiatives were adopted there were approximately 4,000 chapter 7 cases which were ten years old or older. As the result of our initiatives and the efforts of trustees, by July of this year, there were only 171 cases pending which were 10 years old. During this period, we have also greatly reduced the number of cases which reach the age of three years. Our success in this area, which we believe has greatly enhanced the integrity of the bankruptcy system, was not without a price. Many trustees have resented the efforts of the United States Trustees to encourage the closing of old cases and the prompt administration of new cases. Most trustees, however, recognize the need of supervision by the United States Trustee.
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Why do the U.S. Trustees seek the closure of old cases and the prompt administration of all cases? First, the trustee has a statutory duty to ''close [an] estate as expeditiously as is compatible with the best interest of parties in interest.''(see footnote 39) Second, experience has shown that delays in administration diminish returns to creditors, undermine confidence in the bankruptcy system, increase the exposure to liability, increase the costs to professionals and other administrative expenses, and often prejudice the debtor. A 1994 study by the General Accounting Office found that older cases generally disbursed larger percentages of receipts to professionals and paid a smaller percentage to creditors.(see footnote 40) While in private practice, I observed the frustrations that creditors experience when administration of estates is drawn out and administrative costs consume most of the funds.
Occasionally, there is justification for a case staying open for a number of years, and we do not interfere when valid reasons exist. However, the expeditious administration of case remains a fundamental part of U.S. Trustee policy.
In the course of performing our duty to supervise trustees, we sometimes find it necessary to take enforcement actions against a trustee to compel the trustee to comply with the Bankruptcy Code or fiduciary duties. The term ''enforcement actions'' refers to those remedial actions that U.S. Trustees take against panel trustees to require the trustee to comply with the Bankruptcy Code or fiduciary duties. Some of these actions are brought in bankruptcy court, and others are purely administrative. While the concern of the panel trustees about certain of these actions has raised some controversy, these enforcement actions are the tools by which the U.S. Trustees do their jobs. Without these enforcement actions we would remain the ''watch dog'' but would have neither bark nor bite. We would not be able to do our jobs in chapter 7 administration.
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The various enforcement actions used by U.S. Trustees, many of which are not controversial, include the following:
Motions to Compel Filing of Final Report and Final Account. These motions are brought in the bankruptcy court and, while sometimes contested, no one seriously contests the procedure or the appropriateness of such motions.
Suspension From Case Assignment. This is a temporary suspension and may be done without court approval. The reasons for suspension may include failure to file required reports; failure to respond or correct audit deficiencies; receipt of an inadequate audit opinion from the OIG; failure to expeditiously close cases; and failure to administer cases in accordance with administrative standards. Region Four has 82 trustees and the vast majority have never been suspended or been the subject of any enforcement action. Since my appointment in June of 1994, I have used this remedy 14 times. One of these suspensions was during the pendency of a criminal investigation and I wished to await the results of the FBI's investigation before permanently removing the trustee.
Removal From All Pending Cases. The trustee may be removed from pending cases only by the bankruptcy court after notice and hearing and the removal must be ''for cause.''(see footnote 41) During my term as U.S. Trustee I have not had to bring a removal action, although on several occasions we have presented the trustee with our case and a voluntary resignation was immediately submitted.
Resignation. We consider this an enforcement action although it is not imposed, but sometimes voluntarily entered to prevent a removal action from being filed.
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Non-renewal of Appointment. Chapter 7 trustees are appointed for a term of one year and their reappointment is within the discretion of the U.S. Trustee. Existing case law provides that a trustee has no right to receive future cases. Joelson v. United States, 86 F.3d. 1413 (6th Cir. 1996); Shaltry v. United States, 183 B.R. 836(D. Ariz.) Aff'd, 1995 WL 866862 (9th Cir. 1995). The United States Trustee program has issued a proposed regulation found at 28 CFR Part 58, entitled ''Procedures for Suspension and Removal of Panel Trustees and Standing Trustees ''(the Administrative Procedures),'' which provides, among other things, that a trustee shall be notified in writing of any decision not to renew an appointment and shall be entitled to appeal such non renewal to the Director of the EOUST. This will ultimately allow court review of the U.S. Trustee's decision. This regulation was published on October 2, 1997 at 62 Federal Register 51740 and becomes effective on November 3, 1997.
Disallowance of Fees, Disgorgement of Fees, and Surcharge. These are actions which are brought in the bankruptcy court and properly decided by the bankruptcy court. If a trustee acted improperly or failed to carry out the trustees duties, the U.S. Trustee may object to fees or seek disgorgement of fees previously approved. A common use of this remedy is to seek reimbursement if the trustee caused a loss to the estate by failure to deposit funds in an interest bearing account.
Other Enforcement Actions. The U.S. Trustee may seek sanctions or refer misconduct to a state licensing authority if conduct so warrants. Also, if the trustee engages in criminal conduct the violation is referred to the U.S. Attorney. In the time I have been the U.S. Trustee for Region Four we have referred three panel trustees to U.S. Attorneys and all three were convicted. While the great majority of trustees are honest and beyond reproach, we must remain on guard for the occasional dishonest trustee or dishonest trustees employee.
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IS THERE A PROBLEM?
In the last several years, there has been a call by trustees for increased protection against unfair or arbitrary suspensions or non-reappointment decisions by the United States Trustee through more formalized administrative or judicial review. This call has apparently arisen from a fear by some that trustees may be subjected to arbitrary actions by the United States Trustee. I will be frank in stating to you today that I do not believe that trustees have ever produced evidence which supports this fear. The fact is, most trustees were appointed many years ago and continue to serve without reason to fear that they will be deprived of the opportunity to be appointed to cases in the future.
Having said this, I want to ensure you that the United States Trustee program has heard the concerns of the trustees and has taken meaningful action to address them. We have proposed and implemented formalized administrative review procedures which protect a trustee should a United States Trustee act arbitrarily in suspending or terminating the assignment of cases to the trustee. These procedures specify the manner in which the United States Trustee must notify a trustee of the decision to suspend or terminate the assignment of cases and the manner by which a trustee may request further review and decision by the Director of the program. Judicial reviewby the United States District Courtcan be sought after the trustee exhausts these administrative remedies. The district court could reverse the United States Trustee's action if the court finds that it was arbitrary, capricious or an abuse of discretion.
We believe the procedures we have formalized are fair and responsive to concerns which the trustees may have. In a hearing before this subcommittee in July 1996 the NABT stated that ''the EOUST has not recognized that a panel trustee has any right to an independent review, or access to the APA or the courts.''(see footnote 42) The procedures respond to this testimony and provide the trustees with access to the APA and the district court. The Private Trustee Reform Act, in contrast, would essentially place the ultimate decision of who will serve as trustees back into the hands of bankruptcy judges. This is precisely the type of administrative decision Congress sought to take from bankruptcy judges so that they could focus on being judges, not administrators.
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Under the law, the United States Trustee is charged with establishing, maintaining and supervising the panel of trustees. I do not mean to sound our horn too loudlysurely we have much to learnbut the United States Trustee program has become by far the most knowledgeable authority with regard to the effective administration of chapter 7 cases by trustees. There is no doubt that we filled a void in this area, and as a result of our supervision the administration of chapter 7 cases and trustee performance is far superior today to that of the system we inherited. We have been given the authority to supervise trustees effectively and we have used that authority responsibly. We should continue to have the authority to make administrative decisions which will ensure that trustees are discharging their fiduciary duties in a competent manner.
UNINTENDED CONSEQUENCES OF PRIVATE TRUSTEE REFORM ACT
One of the unintended consequences of the Private Trustee Reform Act would be to render uniform national policies non-uniform. For example, national policy, as enunciated in the Chapter 7 Initiatives, requires that chapter 7 trustees provide an interim report on each asset case every 180 days, or six months. These reports allow us, among other things, to determine that the trustee's records and the banks records agree as to the amount held by the trustee. These 180 day reports have uncovered fraud and have provided an audit trail when later reports used different figures. The 180 day reports also allow us to monitor case progress. Because of the importance of these reports, the Chapter 7 Initiatives provide that the failure of the trustee to timely file the 180 day reports calls for the suspension from further case assignment until the report is submitted.
Page 114 PREV PAGE TOP OF DOC Under the proposed Act, a bankruptcy judge could find that, by removing the panel trustee from rotation because of failure of the panel trustee to provide 180 day reports, the United States Trustee acted ''unreasonably and without cause.'' In other words, the United States Trustee's decision could be reversed, although the United States Trustee was following legitimate national policy. By making this finding, the bankruptcy judge could dictate how often we were entitled to the reports or whether such reports were required at all. The 180 day reports could become yearly reports or even biennial reports. Nothing in the Act would prevent an activist judge from effectively dictating the form of the report. The Act would therefore provide each of over four hundred bankruptcy court judges veto power over this important part of chapter 7 policy. The result would be disparate treatment of trustees and the inability of U.S. Trustees to formulate effective national policy.
Routine bankruptcy court review of trustee suspensions and non-reappointments could create a more adversarial system. Litigation will replace cooperation. The ''for cause'' standard will create virtual lifetime appointments in some districts.
WAYS WE CAN WORK TO IMPROVE CHAPTER 7 ADMINISTRATION
While much has improved in the chapter 7 world there is always room for improvement. The system works best when the players work together. We should enhance our efforts to work with the National Association of Bankruptcy Trustees (NABT). This past year we have learned much from the trustees and tried to include them in a more meaningful way in our events. Some of these efforts include:
The President of NABT and President-elect met with all the U.S. Trustees;
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Panel trustees spoke at our manager's conference, which involved all of the U.S. Trustees and Assistant U.S. Trustees;
We are working with NABT on ways to better keep and interpret statistics;
We are exploring with trustees ways to better educate debtors.
In the future we should consult trustees at an earlier stage in policy development; use trustees as mentors for newer trustees; involve panel trustees in training UST employees; focus on ways to encourage aggressive and economical administration of estates; maintain statistics that better measure trustee performance; and generally work with trustees to benefit from their vast experience and to build trust.
While neither I nor anyone else can assure you that the rule adopted by the UST program will satisfy whatever fears the trustees might express, I can assure you that Mr. Patchan runs a tight ship and that neither he nor any of the U.S. Trustees takes lightly our obligation to treat trustees fairly, openly and honestly. Our ability to properly maintain and supervise the panels of trustees and to formulate effective policies for the administration of cases is crucial, if we are not to return to those exciting days of yesteryear when ten year old cases were the norm.
Thank you for your time and interest in the administration of bankruptcy cases. I will be glad to answer any questions you may have.
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Mr. GEKAS. And Ms. Vergos.
STATEMENT OF ELLEN B. VERGOS, UNITED STATES TRUSTEE REGION 8, MEMPHIS, TENNESSEE
Ms. VERGOS. Thank you, Mr. Chairman. I appreciate the opportunity to appear before the committee today. I'm going to address Chapter 13 issues.
I serve as the U.S. Trustee in Tennessee and Kentucky. In my region, Chapter 13 is big business. Substantial dollars flow through the hands of the standing trustees. In the western district of Tennessee, Chapter 13's constitute 80 percent of all bankruptcy filings, and in the past year the three standing trustees in that district disbursed $132 million to creditors. Nationwide, Chapter 13 disbursements totalled $2.4 billion. Those billions of dollars administered by the trustees come from the debtors who file Chapter 13 cases. The compensation of the standing trustees and their overhead comes from these funds.
U.S. Trustees are charged with monitoring and supervising the standing trustees' use of the funds to assure that expenses incurred by the trustees are actual and necessary. Approximately 80 percent of the standing trustees in the nation are paid maximum compensation of $126,000, in addition to having all of their overhead paid from the percentage fees. Many trustees derive additional income by serving as panel trustees, maintaining a law practice, or from other sources.
Standing trustees frequently describe themselves as independent entrepreneurs whose exercise of business judgment has been limited through the micro-management by United States Trustees. This is a fundamental mis-statement of the nature of the standing trustee operation. While a true entrepreneur operating a business in the private sector assumes the risks, most standing trustees operate in a risk-free environment. A standing trustee does not compete for customers or profits, but instead administers a trust created by statute and funded by payments from debtors. Accountability is inherent in any position of trust, and as fiduciaries standing trustees should understand that their activities are subject to reasonable oversight and supervision. In exercising our duty to supervise, we work withrather than againstthe standing trustees. This year United States Trustees and a group of eight standing trustees worked together on a very active liaison committee. One year ago this group met to identify and prioritize issues of common concern. Through the joint efforts of the two groups, who met six times through the year, we accomplished the goals that we set.
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Together we developed a mediation process to be used by a standing trustee who disputes a budget decision the United States Trustee has made. We approved the use of trust funds to buy employment practices liability insurance. We've addressed concerns of the trustees relating to the budget process and other issues, and we are now working with them on the development of performance standards for the standing trustees. To me, it seems preferable to resolve these administrative budget disputes by negotiation and mediation, rather than by litigation.
In setting up the standing trustee compensation system, Congress recognized the differences between compensation of a standing trustee and the compensation of trustees under Chapters 7 and 11. Standing trustee budget decisions are committed to the Attorney General and to the United States Trustee, while decisions concerning Chapter 7 and 11 trustee compensation are committed to the bankruptcy court. This distinction is appropriate and should not be disturbed.
The differences are illustrated by a few examples. A Chapter 7 trustee seeks reimbursement of the cost of making 1,000 copies at $.05 cents a copy, in a particular case. A standing trustee will seek authorization to purchase a copier, or in some cases 13 copiers. A Chapter 7 trustee moves for authority in a particular case to retain and pay an accountant an hourly rate, but a Chapter 13 standing trustee seeks permission to hire a full-time employees with salaries and benefits and annual raises that must be evaluated.
In a Chapter 7 fee request, the court evaluates the time spent, services performed, and results achieved in a particular case. A United States Trustee evaluates each standing trustee's annual budget and amended budgets, ranging from $20,000 to $2.5 million, to determine whether proposed expenditures are actual and necessary under section 586.
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The U.S. Trustee is in the best position to make this administrative evaluation because the U.S. Trustee has intimate knowledge of the standing trustee's operation, overall needs, and budgetary situation.
I see my time is up. Thank you.
[The prepared statement of Ms. Vergos follows:]
PREPARED STATEMENT OF ELLEN B. VERGOS, UNITED STATES TRUSTEE REGION 8, MEMPHIS, TENNESSEE
A. PERSONAL PERSPECTIVE
I have served as a United States Trustee for nearly three years. For 19 years before that, I was a practicing lawyer in Nashville and Memphis, Tennessee. My practice centered on bankruptcy and commercial litigation. While my bankruptcy practice focused primarily on chapter 11, since becoming a United State Trustee, I have become heavily involved in chapter 13 issues.
Upon my appointment as United States Trustee, I was asked to serve on the subcommittee for chapter 12 and 13 standing trustees. Since January, 1997, I have been chair of the subcommittee. I have also been active on the liaison committee comprised of United States Trustees and chapter 13 standing trustees.
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Part of my perspective on chapter 13 comes from practicing bankruptcy law in the state of Tennessee. The state of Tennessee has had a pivotal role in chapter 13. The Chandler Act of 1938, which first provided for the payment of debt through a wage earner plan, was designed by Walter Chandler, who was at the time a Congressman from Memphis and a former Memphis mayor. The judges in Tennessee have played a supportive and pioneering role in the development of chapter 13 practice. Two of the 12 currently sitting Tennessee bankruptcy judges are former chapter 13 trustees.
The state of Tennessee has long led the nation in the number of chapter 13 filings and in the dollar amount of chapter 13 distributions to creditors. The district in which I reside, the Western District of Tennessee, has historically been a leader in chapter 13 filings and disbursements. In fiscal year 1996, of the 21,886 bankruptcies filed in this District, 17,017or almost 80%were chapter 13 filings. This represents an increase of 21% over the number of chapter 13's filed in 1995. We expect another 20% increase in chapter 13 filings for fiscal year 1997.
All of these cases are administered by three standing trustees, who have a total of 74 employees and administer budgets in excess of $4 million. Together, they have a pending caseload of 30,000 as of the end of fiscal year 96. The total disbursements to creditors by these three West Tennessee standing trustees during fiscal year 96 totaled $121,859,314. Projected disbursements for this year total $132,880,416. Nationwide, the chapter 13 standing trustees disbursed approximately $2.4 billion.
The U.S. Trustee's office is responsible for overseeing the trustees' budgets as well as reviewing their administration of cases. The United States Trustees evaluate the trustees and their budgets; handle questions and complaints from the public concerning bankruptcy issues; detect and refer cases of bankruptcy fraud to the U.S. Attorney's office and work with the U.S. Attorney's office on these cases; provide training for and assist the standing trustees in case administration and in office management; and monitor professional fees to be paid from bankruptcy estate funds. If a trustee dies or resigns, the United States Trustees may be responsible for running the trustee operations.
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B. HOW CHAPTER 13 WORKS
Chapter 13 of the Bankruptcy Code affords individuals with regular income the opportunity to reorganize their financial affairs. Chapter 13 relief is available to individuals with secured debts of less than $750,000 and unsecured debts of less than $250,000.
The debtors propose plans which devote all disposable income over a three to five year period to the repayment of debts. Creditors benefit by realizing a greater return on their claims than in a chapter 7 liquidation case. Debtors benefit from the opportunity to retain property as well as to obtain a broader discharge of debt than that available under chapter 7.
Chapter 13 bankruptcy cases are administered by a trustee appointed by the United States Trustee. There is no fixed term of appointment for the standing trustee. The duties of a chapter 13 trustee are set forth in Section 1302 of the Bankruptcy Code and include collection of the debtor's plan payments, review of the plans and ensuring compliance of the plan with the Bankruptcy Code and Rules. Once a debtor's chapter 13 plan is confirmed, the standing trustee disburses funds collected from the debtor, less the percentage fee set by the Attorney General, to the debtor's creditors in accordance with the provisions of the plan. If a debtor fails to maintain the required plan payments or otherwise defaults with respect to the terms of the plan, the standing trustee may move to have the case dismissed or converted to a liquidation case under chapter 7.
C. STANDING TRUSTEE SUBCOMMITTEE OF UNITED STATES TRUSTEES
Page 121 PREV PAGE TOP OF DOC This year, it has been my pleasure to serve as chair of the standing trustee subcommittee. This subcommittee is comprised of six United States Trustees, three Assistant United States Trustees and Executive Office personnel involved in chapter 13 administration. The Standing Trustee Subcommittee reviews and strengthens supervisory policies and resolves issues brought before it by United States Trustee personnel. Members of this subcommittee serve as the United States Trustees' chief point of contact and liaison with the National Association of Chapter 13 Trustees (NACTT).
In the past three years, some of the projects undertaken by the United States Trustees through the Standing Trustee Subcommittee include developing ethical standards to guide the standing trustees, as fiduciaries, in the administration of their trust and to address such issues as limiting the use of trust funds to hire relatives or to contract with insiders. The Subcommittee is currently revising and updating its policy handbook for chapter 13 trustees and has recently completed revisions of policy initiatives designed to help program personnel in supervisory responsibilities and to assist the standing trustees with their performance and adherence to appropriate standards of fiduciary conduct. The Subcommittee develops training to ensure that United States Trustee personnel are current with respect to developments in chapter 13 supervisory issues.
D. UST/NACTT LIAISON COMMITTEE
In the past year, a group of United States Trustees and standing trustees have met six times as the UST/NACTT Liaison Committee to address common issues of concern. The standing trustees on the liaison committee include Kathleen McDonald of Reno, Nevada, NACTT president last year; Henry Hildebrand, of Nashville, Tennessee; Al Olson of San Antonio, Texas; Jerry O'Donnell of Alexandria, Virginia; Tim Truman of Dallas, Texas; Keith Rodriguez of Lafayette, Louisiana; and Walter O'Cheskey of Lubbock, Texas. The liaison committee has made progress on a number of issues. It:
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developed a mediation process to be utilized by a standing trustee who disputes a decision the U.S. Trustee has made concerning a budget issue;
reached agreement on the utilization of trust funds to purchase employment practices liability insurance to protect the trust funds;
addressed concerns of the trustees relating to the budget process and other issues; and
is now developing performance standards for the standing trustees. Attached as Exhibit A is a copy of one of the policies issued by the United States Trustee Program which resulted from this process. It clarifies that when a standing trustee and United States Trustee have budget issues that remain unresolved when the budget is submitted, the Director will not issue a zero or reduced compensation order except to the extent that a standing trustee expends funds without authorization.
Attached as Exhibit B is the mediation procedure developed and approved by the liaison committee for use when a standing trustee and a United States Trustee are unable to resolve a budget issue. The United States Trustees and standing trustees on the committee have agreed on a format which entails mediation by a two person panel consisting of a United States Trustee and a standing trustee. These panels will be chosen from United States Trustees and standing trustees who have received formal mediation training. It is contemplated that the two groups will receive training together, thereby furthering cooperation between the two groups. This process is to be the preferred, first, quick, and low cost method to resolve informally individual budget issues and disputes prior to commencement of any legal or formal administrative proceeding.
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The liaison committee's performance standards project entails working with the standing trustees and others involved with the bankruptcy system to come up with performance standards for standing trustees. These standards will cover the areas of litigation, fiduciary responsibilities, information, education and case administration.
II. Role of the United States Trustee in Standing Trustee
The Attorney General and the United States Trustees are vested by statute with significant supervisory and oversight responsibilities over chapter 13 standing trustees in the following areas:
the administration of cases (28 U.S.C. §586(a)(3));
the performance of the duties of the standing trustee (28 U.S.C. §586(b)); and
budgetary matters (28 U.S.C. §586(e)).
A. U.S. TRUSTEE SUPERVISION OF STANDING TRUSTEES' CASE ADMINISTRATION AND PERFORMANCE OF TRUSTEE DUTIES
The United States Trustee's office is responsible for reviewing the trustees' case administration and evaluating the trustees in the performance of their duties. United States Trustee personnel handle questions and complaints from the public concerning bankruptcy issues; detect and refer cases of bankruptcy fraud to the United States Attorney's office and work with the United States Attorney's office on these cases; provide training for and assist the standing trustees in their case administration and in the management of their offices; and monitor professional fees to be paid from bankruptcy estates funds. If a trustee dies or resigns, United States Trustee personnel may be responsible for running the trustee operation until the appointment of a new standing trustee.
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B. U.S. TRUSTEE SUPERVISION OF STANDING TRUSTEE COMPENSATION AND EXPENSES
The primary objective of the United States Trustee supervision in budgetary matters has been to ensure the reasonableness of the costs of bankruptcy administration to benefit debtors and creditors. It is important to keep in mind that the funds being expended by standing trustees are not the trustees' funds, but are funds received from the debtors in cases assigned to them. While the percentage fees are capped at 10%, standing trustees with a large caseload are able to run an effective and efficient operation with a percentage fee of as little as 3% to 5%. Obviously, keeping a trustee's percentage fee low results in a correspondingly higher return to creditors and increases the likelihood that the debtors' plans will succeed.
The United States Trustees are assisted in their scrutiny of the standing trustees' budgets and administrative costs by national data on standing trustees' costs. Typically, the United States Trustees and their staff work with the trustee to make the most cost effective choice, so that the process is collaborative rather than adversarial, if possible. The process to mediate budget disputes that cannot be worked out between the U.S. Trustee and the standing trustee will facilitate the collaborative nature of this process.
C. KEY POINTS PERTAINING TO THE STATUTORY SYSTEM FOR STANDING TRUSTEE COMPENSATION AND EXPENSES:
Standing trustee compensation and expenses come from a prescribed percentage (from 3% to 10%) of the plan payments the trustee receives from the debtor. The funds used by the standing trustee in the trustee operation do not come from or belong to the standing trustee.
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Approximately 80% of the nation's standing trustees are paid maximum compensation of $126,000 in addition to having all of their overhead (ranging up to $2.7 million annually) paid out of the percentage fees. Many of the trustees derive additional compensation by serving as panel trustees, maintaining a law practice or from other sources.
The standing trustee compensation system, designed in 1979 ''to encourage the standing trustees to keep costs low at the risk of reduced compensation,'' no longer works this way. The significant increase in chapter 13 filings, without a corresponding increase in the number of standing trustees, along with advances in automation, has caused this built-in incentive to vanish.
Standing trustees are not independent entrepreneurs. They have a monopoly on chapter 13 filings in their district, they are assured maximum compensation in most jurisdictions, they have no fixed term, and they are subject to removal in pending cases only upon order of the bankruptcy court following a showing of cause. 11 U.S.C. §324.
D. THE ADMINISTRATIVE PROCESS FOR COMPENSATING STANDING TRUSTEESVERSUSTHE JUDICIAL PROCESS FOR COMPENSATING CHAPTER 7 AND 11 TRUSTEES
The direct involvement of the Attorney General and the United States Trustee in fixing the compensation of standing trustees in chapters 12 and 13 contrasts with the system which exists in chapters 7 and 11 where final decisions concerning trustee compensation are committed to the discretion of the Bankruptcy Court. In chapters 7 and 11 cases the trustees must apply to the bankruptcy court for approval of fees earned and expenses incurred in a particular case. Fee requests are awarded only after notice and hearing to interested parties and, unlike standing trustees, chapter 7 and chapter 11 trustees cannot recover overhead. The compensation of a chapter 7 and 11 trustee is limited to a maximum amount per case; but there is no limitation on the expenses they might have to incur in the case.
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In contrast to trustees appointed under chapters 7 and 11, chapter 12 and chapter 13 standing trustees collect a percentage of all the monies they receive in all cases to pay for their compensation, office expenses and other overhead. Their percentage fee, which applies across-the-board in all cases, is determined by an overall assessment of factors and not with regard to the work done in specific cases.
For example, a chapter 7 trustee may seek reimbursement for the cost of making 1,000 copies at .05 a copy in a particular case, but a standing trustee will seek authorization from the United States Trustee to purchase a copieror, in one case, thirteen copiers. A chapter 7 trustee may seek court authority in a particular case to retain and pay an accountant at an hourly rate, but chapter 13 standing trustees seek permission to hire full time employees with salaries and benefits. In a chapter 7 and 11 fee request, the court will evaluate the request in light of the time spent and the results achieved in a particular case. By way of contrast, a United States Trustee must evaluate each trustee's annual budget ranging from $20,000 to $2,700,000 to determine whether proposed expenditures for employees, computers, furnishings, copiers, fax machines, couriers, service charges, janitorial service, training, and the like meet the ''actual and necessary'' test of section 586 of title 28, U.S. Code.
The differences between the compensation of chapters 7 and 11 trustees and standing trustees underscores why the former is committed to the judicial sphere while the other is committed to our agency.
A bankruptcy court, in determining the propriety of a particular fee request, looks at the request in the context of duties performed in a particular case. This is in contrast to the factors a United States Trustee must take into consideration in evaluating whether a particular budget item submitted by a standing trustee meets the statutory requirements of ''actual and necessary.'' The budget item must be viewed in the context of the entire annual budget of the standing trustee. If the United States Trustee is asked to approve the purchase of a computer, for example, the United States Trustee evaluates that request by ensuring that the trustee obtained bids and is proposing the most cost effective choice; whether the computer requested is suitable for the trustee's needs; other costs that will flow from the purchase of the computer in question; service costs; and any other relevant factors. The United States Trustee is in the best position to undertake such an administrative evaluation because the United States Trustee has intimate knowledge of the standing trustee's operation, overall needs and budgetary situation.
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III. Comments on H.R. 2592
The proposed bill, H.R. 2592, contains three features that, if enacted, would cause far reaching changes in the oversight system for standing trustees. The salient features are:
amendment of 11 U.S.C. §330 would authorize bankruptcy court to determine the actual necessary expenses of a standing trustee utilizing the standard of expenses of fiduciaries who are not standing trustees;
amendment of 11 U.S.C. §324 would authorize a standing trustee to obtain an opportunity for an administrative hearing and judicial review before the bankruptcy court of the decision of a UST to cease assigning cases to the standing trustee;
amendment of 11 U.S.C. §324 would authorize the court to order injunctive relief in favor of the trustee.
I will offer my personal views on each of these features from the standpoint of the effect it will have on standing trustee oversight.
A. THE PROPOSAL TO ALLOW THE BANKRUPTCY COURT TO DETERMINE A STANDING TRUSTEED EXPENSES (H.R. 2592 §2(e))
The proposed bill would rewrite section 330 of the Bankruptcy Code to permit the bankruptcy court to determine standing trustee expenses and would stand in conflict with 28 U.S.C. §586. Section 330, in its current form, pertains only to professionals and other trustees seeking to recover compensation and expenses in a particular case. Section 330 currently does not deal with overhead, annual budgets, salary and benefits of employees, purchases of computer equipment, office furniture, supplies, employee training expenses or any other type of ongoing expense to a business.
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The legislation conflicts with 28 U.S.C. §586(e) which requires the Attorney General to set the standing trustees percentage fee and with 11 U.S.C. §326(b) which states that the bankruptcy court may not allow compensation for services or reimbursement of expenses of the standing trustee.
The legislation would create a redundant process. As it is currently written, the bankruptcy court is not reviewing the United States Trustee's determination but is hearing the trustee's budget submission de novo. This gives every standing trustee ''two bites of the apple''one from the United States Trustee under the 28 U.S.C. 586 standard and another from the bankruptcy court judge under the proposed 11 U.S.C. 330 standard.
The United States Trustee receives and acts upon budget requests annually in the budget process and periodically throughout the year. If the proposed bill passes, each one of these requests may be made to the United States Trustee and the bankruptcy court and litigated in an ''administrative hearing on the record,'' subject to appeal rights. The standard of review to be used by the bankruptcy court is a curious one. The court is to look to ''whether the expense is reasonable, based upon the customary and usual expenses incurred by fiduciaries providing services of comparable nature in matters other than cases under this title.'' (Emphasis added). Apparently the court is not to evaluate the standing trustee's request by comparing it with other standing trustee operations (upon which there exists regional and national data), but instead must look to some other unspecified fiduciary. This standard is ambiguous and will lead to an endless variety of interpretations and continuous litigation.
The bill seems to make every expense subject to determination in the first instance by the bankruptcy court. This has the potential to weigh down the system. Budgets will not be determined in a timely fashion and percentage fees will be subject to constant fluctuation.
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The proposed statute creates an incentive for litigation rather than collaboration and cooperation. As I have indicated, wemeaning a group of United States Trustees and the standing trusteeshave worked hard this past year to devise a mediation process to work out budget disputes. It is a fair process and I think it is a process should be tried before imposing the bankruptcy court in budgetary issues.
B. PROPOSAL FOR BANKRUPTCY COURT REVIEW OF THE TERMINATION OF CASE ASSIGNMENTS:
The standing trustees in Region 8 and in other regions receive hundreds of new cases each month. With each new case received, wage assignments are entered, debtors begin making regular payments of money to the standing trustees and disbursements are made in accordance with the provisions of confirmed plans to creditors. These events happen in chapter 13 very quickly. It is essential to preserve the United States Trustee's ability to determine whether to continue assigning cases to a standing trustee whose records may be in financial disarray, whose case administration may be disorganized and problematic or who may be guilty of gross misconduct, fraud or mismanagement. In terms of carrying out my own statutory responsibilities, I am deeply concerned with the prospect that I might be forced to use my authority to appoint new cases to a trustee in whom for good reason I have lost trust and confidence. To me, that would be an act of irresponsibility.
In view of the numbers of cases being assigned to standing trustees on a daily basis, and considering the substantial amounts of dollars flowing through the standing trustee operations on a daily basis, it is essential that the United States Trustee have the flexibility in appropriate circumstances to suspend the assignment of new cases to a problem trustee immediately. A United States Trustee will not make the decision to cease assignments of new cases lightly. The United States Trustee manual instructs a United States Trustee considering enforcement actions against a standing trustee to:
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consider the nature of the problem, the resources to be committed, and the effect the enforcement action will have on the system. If the nature of the trustee's misconduct reflects dishonesty, deceit, fraud, or the serious mishandling of estate funds, a single substantiated incident justifies immediate action by the United States Trustee. These remedies include ceasing to assign cases to the trustee, moving to seek the removal of the trustee, temporary restraining orders, orders to turnover books and records, and referral to the United States Attorney. Any decision to take an enforcement action must consider the available evidence, including documentation of efforts and communications between the United States Trustee and the standing trustee.
Enforcement actions with regard to the standing trustee may involve circumstances unique to the standing trustee. The large number of cases typically assigned to a standing trustee heightens the need to pursue appropriate remedies as expeditiously as possible due to the substantial monies at stake as well as the numbers of parties affected. Any enforcement action that Precludes the assignment of future cases, even for a short period of time, however, presupposes that a capable individual to administer those cases must first be appointed.
Whenever the United States Trustee seeks to remove a trustee from existing cases under 11 U.S.C. §324, or to terminate the trustee's receipt of future case assignments, the United States Trustee must be prepared to have a successor trustee appointed who can respond to the exigencies of the circumstances. The alternative of having an Assistant United States Trustee serve must be considered in the context of the resources available to adequately administer cases. The United States Trustee may designate one or more Assistant United States Trustees to serve in cases under chapters 12 and 13.
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Typically, a particular jurisdiction has a single standing trustee. If the UST decided to cease assigning cases, either the UST would have to take over the operation or an existing standing trustee would have to be enlisted to assist. The unique characteristics of a standing trustee operation act as a practical check on the UST's exercise of power to cease assigning cases.
It should be remembered that the UST does not have the power to remove a standing trustee from existing cases. This may be done only with court order under 11 U.S.C.§324. Statistics reflect that a trustee with fewer than 1,000 cases per year will receive maximum compensation of $126,000 and 80% of the standing trustees receive maximum compensation. In Memphis, each standing trustee has a pending caseload of approximately 11,000 cases. Therefore, a cessation of the assignment of new cases would have no effect on the compensation of a standing trustee for a considerable period of time, until the cases they have wind down.
Finally, we note that the U.S. Trustee has recently issued a regulation, ''Procedures for Suspension and Removal of Panel Trustees and Standing Trustees.'' this regulation provides an indication of our willingness to act to address perceived problems in his area.
C. PROPOSAL TO AUTHORIZE THE BANKRUPTCY COURT TO ORDER INJUNCTIVE RELIEF IN FAVOR OF THE TRUSTEE PENDING RESOLUTION OF THE TRUSTEE'S APPEAL:
The proposed legislation includes a provision stating:
Page 132 PREV PAGE TOP OF DOC Notwithstanding any other provision of law, and pending the exhaustion of available administrative remedies or a judicial determination on the merits, the court may order injunctive relief in favor of the trustee.
If this bill were to become law, a United States Trustee's decision to suspend or terminate the assignment of new cases could be enjoined pending the ultimate resolution of the trustee's case. Under the bill an ''exhaustion of all administrative remedies'' will take at least thirty days. The trustee would then have a right to appeal the administrative disposition to bankruptcy court. The median time for concluding an adversary proceeding in bankruptcy court is seven months. Either party would have the right to appeal to district court The median time for resolving a bankruptcy appeal in district court is seven months. Either party would have the right to appeal to a Circuit Court of Appeals where the median disposition time is just short of one year.
The bankruptcy system operates for the benefits of the debtors and creditors rather than for the benefit of the standing trustee. This bill would operate for the benefit of the standing trustee.
Thank you for your interest in this matter. I would be pleased to respond to any questions that you might have.
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|U.S. Department of Justice,|
|Executive Office for United States Trustees,|
|Washington, DC, January 30, 1997.|
TO: All United States Trustees
FROM: Kevyn D. Orr, Deputy Director
SUBJECT: Policy concerning Orders Fixing Compensation and Percentage Fee when there is a Budget Dispute with the Standing Trustee
During 1996, the Program and the National Association of Chapter Thirteen Trustees reconstituted the Standing Trustee Liaison Committee. The Committee provides a mechanism to discuss areas of concern in the standing trustee arena and is comprised of United States Trustees, Executive Office representatives, and standing trustees.
During Committee discussions, the standing trustees expressed concern that their compensation orders could be arbitrarily reduced by the Program in the event of a budget dispute. To remedy this misperception, we believe it beneficial to formalize our policy concerning the use of compensation orders when standing trustees are engaged in budget disputes with United States Trustees. The below policy was drafted by the Committee and is consistent with the Program's current practice.
The policy reads as follows:
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Zero and reduced compensation orders for budget disputes.
With respect to budget disputes, zero or reduced compensation orders will be issued when, and only to the extent that a standing trustee expends trust funds without prior approval of the United States Trustee or prior to the final resolution of any disputed budget amount. In the event that there is an unresolved dispute between the standing trustee and the United States Trustee concerning a particular budget item, the parties will explore resolution of the dispute by informal means or utilize applicable formal dispute resolution procedures. Pending final resolution of the dispute, the standing trustee will not expend trust funds for any disputed portion of a line item. In the event the trust funds are expended without final approval, the expense fund may be reimbursed by deduction from the standing trustee's future compensation.
Please communicate this policy to the standing trustees in your region. If you have any questions, call Sandra Forbes at (202) 3072829. Thank you for your assistance.
cc: Jerry Patchan,
Martha L. Davis,
Sandra J. Forbes,
Acting Assistant Director for Review and Oversight.
Page 135 PREV PAGE TOP OF DOC Joseph Guzinski,
Assistant Director for Research and Planning.
Standing Trustee Coordinator.
INFORMAL BUDGET DISPUTE RESOLUTION PROCESS (PROPOSED)
1. The Informal Budget Dispute Resolution Process (''Process'') is intended as the preferred, first, quick, and low cost method to resolve informally individual budget issues and disputes prior to commencement of any legal or formal administrative proceeding.
2. The Process will be optional and non-binding for both the United States Trustee and the Standing Trustee (the ''Parties'').
3. Upon the request of either Party, initiated as hereinafter provided, a two-member Panel will be named, consisting of one United States Trustee and one Standing Trustee from outside the region (the ''Panel''). At their option, the Parties may have a one-member Panel.
4. The Standing Trustee Panel member will be selected by the Assistant Director of the Office for Review and Oversight (''Assistant Director of ORO'') from a list of three (3) Standing Trustees named by the disputing Standing Trustee from the roster of qualified Standing Trustees, each of whom has had formal mediation training and agreed to serve.
Page 136 PREV PAGE TOP OF DOC 5. The U.S. Trustee Panel member will be selected by the NACTT Chair of the Informal Budget Dispute Resolution Process Committee (''NACTT Chair'') from a list of three (3) U.S. Trustees named by the disputing U.S. Trustee from the roster of qualified U.S. Trustees, each of whom has had formal mediation training and agreed to serve.
6. The Process will be initiated by either Party completing and serving a ''REQUEST FOR INFORMAL BUDGET DISPUTE RESOLUTION'' in the form of Exhibit ''A'' hereto. Service shall be by FAX on each of the following:
(1) The other disputing Party;
(2) Assistant Director of ORO (EOUST at (202) 3072185);
(3) The NACTT Chair (call the Administrative Assistant to the Board of NACTT at (501) 7536135 for name, fax number, etc.).
7. Within five (5) working days after receipt of such notice, the other Party will complete and similarly serve a ''REQUEST FOR INFORMAL BUDGET DISPUTE RESOLUTION'' in the form of Exhibit ''A'' hereto.
8. Within five (5) working days after receipt of notice of their selection, the Standing Trustee Panel member will call the UST Panel member and the Parties to schedule a Dispute Resolution Conference (DRC) at the earliest practical mutually convenient time and date, to discuss: (a) How, when and what documents or information are to be exchanged prior to the DRC; (b) the estimated time needed for the DRC; (c) whether the DRC will be telephonic or in person; and (d) any other procedural matter related to the DRC. The Panel shall have thirty (30) days from the date of its appointment to attempt to mediate the dispute. This thirty-day period may be extended only upon the agreement, in writing, of both Parties, prior to the expiration of the thirty (30) day period.
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9. The Process shall be conducted in accordance with the decisions and procedures established by the Panel pursuant to paragraph 8, and the ''Suggested Procedure For Conducting Informal Budget Dispute Resolution,'' Exhibit ''B'' hereto.
10. If the Parties resolve their dispute, the Panel will assist the Parties in reducing to writing a description of that resolution for signatures. That document will become part of the United States Trustee's proposed budget submission to the Director. The submission will conclude the Process. In the event the Parties are unable to arrive at an agreement to resolve the dispute, the Panel may, on unanimous agreement of the Panel, within five (5) working days of conclusion of the attempted mediation, issue a non-binding joint written recommendation to the Parties. The Parties may either accept or reject the recommendation or use it as the basis for further negotiation between themselves. The issuance of the recommendation by the Panel will conclude the Process. At the conclusion of the Process, the Panel will complete and serve on the Assistant Director of ORO and the NACTT Chair a ''Report on Result of Informal Budget Dispute Resolution Process,'' Exhibit ''C'' hereto.
11. The expenses of the Process approved by the Panel, including telephone, travel, etc., will generally be paid by the Standing Trustee out of his/her expense funds subject to approval of his or her United States Trustee as reasonable and necessary.
12. Pending final resolution of the dispute, the United States Trustee shall submit to the Director, or the Director's designee, for approval the Standing Trustee's budget, excluding any disputed amount(s). The Standing Trustee shall not expend trust funds for any disputed portion of a budget line item. In the event the Parties reach an agreement in the budget dispute, and that agreement is approved by the Director or the Director's designee, the budget will be deemed amended to reflect the agreement.
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13. The Parties and the Panel shall sign an agreement that evidence of (1) furnishing or offering or promising to furnish, (2) accepting or offering or promising to accept a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, or (3) any recommendation that may be made to the Parties by the Panel is not admissible in any subsequent administrative or legal proceeding in which the issue is the budget dispute being mediated. Evidence of conduct or statements made in compromise negotiations are likewise not admissible. This provision does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This provision also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution. The agreement will not apply to documents, work papers and other evidentiary materials related to the underlying dispute and prepared by the Parties in the ordinary course of business and not generated in connection with or in anticipation of the Process.
INSERT OFFSET RING FOLIOS 20 TO 21 HERE
SUGGESTED PROCEDURE FOR CONDUCTING INFORMAL BUDGET DISPUTE RESOLUTION
1. Dispute Resolution Conference(s) (DRC) should be telephonic whenever possible to conserve time and expense.
Page 139 PREV PAGE TOP OF DOC 2. A DRC should normally begin by each Party acknowledging that he/she has recently read and understands the United States Trustees' ''Informal Budget Dispute Resolution Process'' and the exhibits thereto, including this ''Suggested Procedure for Conducting Informal Budget Dispute Resolution.''
3. Both Parties should acknowledge to the Panel:
a. that they have exclusively reserved the amount of time previously agreed for the DRC that day;
b. that they each are willing to attempt in good faith to reach a compromise.
4. Normally, a brief opening statement of the issue, the reasons supporting the position of, and the desired outcome by the Standing Trustee should be stated.
5. Normally, a brief response to the issue, the reasons supporting the position of and the desired outcome by the U.S. Trustee should be stated.
6. Normally, the Panel will then speak separately and confidentially to each side privately, to explore the strengths and weaknesses of the case, to discuss the time, expense, delay and any other disadvantages of other forms of dispute resolution, and to determine what is needed for acceptable compromise, and to convey with permission, the irreducible needs of the other side.
7. Normally, the Panel will then carry settlement offers and counter offers back and forth until agreement of the parties is reached or the Panel determines the proceedings to be at an impasse.
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8. If the Parties resolve their dispute, the Panel will assist the Parties in reducing to writing a description of that resolution for signatures. That document will become part of the United States Trustee's proposed budget submission to the Director. The submission will include the Process. In the event the Parties are unable to arrive at an agreement to resolve the dispute, the Panel may, on unanimous agreement of the Panel, within five (5) working days of conclusion of the attempted mediation issue a non-binding joint written recommendation to the Parties. The Parties may either accept or reject the recommendation or use it as the basis for further negotiation between themselves. The issuance of the recommendation by the Panel will conclude the Process. At conclusion of the Process, the Panel will complete and serve on the Assistant Director of ORO and the NACTT Chair a ''Report On Result Of Informal Budget Dispute Resolution Process,'' Exhibit ''C'' hereto.
9. The initial task of the Panel is to facilitate, if possible, the Parties reaching a compromise agreement themselves.
10. These procedures may be varied in the discretion of the Panel.
11. If in the opinion of the Panel an impasse is reached, the Panel may issue a written, non-binding recommendation only to the Parties which they may accept or reject or use as the basis for further negotiations between themselves. If not ''accepted'' by both, the Process will be reported by the Panel as ''no agreement reached.'' If the recommendation is ''accepted'' by both, the Agreement should be reduced to writing and a signed copy retained by each of the disputing parties only and a Report (Exhibit ''B'') immediately sent to the Assistant Director ORO and the NACTT Chair by the Panel.
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12. The Parties should not have any direct or indirect communication with the Panel on the issue in question prior to the DRC.
INSERT OFFSET RING FOLIOS 22 HERE
Mr. GEKAS. We thank the lady, and we turn to Mr. Orr.
STATEMENT OF KEVYN D. ORR, DEPUTY DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, DEPARTMENT OF JUSTICE
Mr. ORR. Good morning, Mr. Chairman. Before I begin my prepared comments, I would like to clarify a point raised earlier by Representative Conyers.
There are 21 United States Trustees as authorized by the Code and appointed by the Attorney General. There are, by contrast, 1,200 private panel trustees and approximately 200 private standing trustees as appointed by the United States Trustees throughout the 48 United States.
Mr. Chairman, I am pleased to have the opportunity to appear before you and the subcommittee today to discuss the funding structure of the United States Trustee program.
As you know, the bankruptcy judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 established a self-funding mechanism for the program. That is, the program is funded entirely by fees from users of the bankruptcy system. While the funding structure of the program has changed several times in recent years, the original concept remains intactthat the U.S. Trustee program be entirely funded by user fees.
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Two categories of fees generate most of the fund's revenue: filing fees paid at the inception of each bankruptcy case for Chapters 7, 11, 12, and 13, and quarterly fees paid by Chapter 11 debtors based upon the cash disbursement levels of the debtor. In Fiscal Year 1996, income to the fund totaled $96.3 million. Our estimate for Fiscal Year 1997 is $114.9 million. That number will vary based upon the actual filing fees for the month of September, which will not be transmitted from the courts to Treasury until tomorrow.
Chapter 11 quarterly fees accounted for 57.2 percent of our total income in Fiscal Year 1996, and approximately 58.1 percent in Fiscal Year 1997.
The most recent changes in the program's funding structure were made by the Congress in Fiscal Year 1996 and Fiscal Year 1997 appropriations acts. Quarterly fees were extended to post-confirmation cases and the fee schedule was restructured. All fees were re-classified as ''offsetting collections,'' and a provision requiring a transfer to the general fund of the United States Treasury in years when deposits to the fund exceeded appropriations from the fund by more than 110 percent, was repealed.
These changes were necessary to stabilize the program's funding. Significantly, the program relies disproportionately on Chapter 11 for its funding. Quarterly and filing fees from Chapter 11 cases provide more than 60 percent of the program's annual funding, yet Chapter 11 cases represent only 1.1 percent of total caseload. Chapter 11 filings, as a result of program revenues, substantially declined at the same time that the program's other workload was increasing at unprecedented rates. As a result of the decline in Chapter 11, appropriations from the fund exceeded deposits to the fund by just over $12 million during Fiscal Year 1995.
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Policy reasons also played a role in the changes to the fees. The Chapter 11 fee schedule changes resulted in a more equitable distribution of this charge among debtors. In terms of the post-confirmation fee, some cases were lingering in bankruptcy court for a considerable period of time after confirmation of the plan had been ordered by the court. A number of the largest defalcations had occurred after confirmation of a plan when there was little, if any, monitoring of cases as well.
The post-confirmation provision initially brought some strong reactions. The program encountered significant legal challenges along the way in some judicial districts. Although the case law is still evolving, things seem to have settled down somewhat. Indeed, there has been some positive anecdotal feedback from bankruptcy judges regarding the impact of the post-confirmation fee. Some judges have recognized that the fees are an incentive for the debtors to close their cases. This is supported by the program's initial post-confirmation data.
Since the enactment of this provision, 10,165 post-confirmation Chapter 11 cases have been closed. Approximately 50 percent of these cases had pre-1995 confirmation dates. Indeed, some of these cases had confirmation dates going back as far as 1981, with even earlier filing dates.
I am hopeful that we will soon be able to provide empirical evidence that the fees have had a positive impact on case administration, as well. Moreover, from a purely financial standpoint, the post-confirmation fee has been an unqualified success. In Fiscal Year 1997, the program collected $24.3 million from post-confirmation debtors36 percent of total quarterly fee collection.
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While the post-confirmation fee may be unpopular with some Chapter 11 debtors, the reality is that many debtors are paying the fees on a regular and timely basis, and those fees account for a substantial portion of the program's annual funding.
Briefly, I must also clarify that the United States Trustees program is entering its second decade. In its short history our progress has been scrutinized by many. We have been studied by the Congress, the General Accounting Office, the Department of Justice Office of Inspector General, the National Academy of Public Administration, and the National Bankruptcy Review Commission.
Generally, these assessments have been favorable. The prevailing view has been that the U.S. Trustee program, created by this committee over a decade ago, has been successful. Many of the problems that existed with the bankruptcy system at the program's inception are no longer an issue. It is just that success, in some quarters, has generated controversy and provoked attacks on our funding.
It is critical that any changes to the bankruptcy fee structure ensure that sufficient funding continues to permit the U.S. Trustee program to adequately carry out its mission of ensuring the integrity of the bankruptcy system and providing an adequate level of oversight to a system that annually handles billions of dollars of debtor and creditor money.
In short, we appreciate the support that Congress has provided the program in the past and look forward to continuing that relationship in the future.
Page 145 PREV PAGE TOP OF DOC Mr. Chairman, we would be pleased to answer any questions you or the committee might have.
[The prepared statement of Mr. Orr follows:]
PREPARED STATEMENT OF KEVYN D. ORR, DEPUTY DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, DEPARTMENT OF JUSTICE
Mr. Chairman and Members of the Subcommittee, Good morning. I am pleased to have the opportunity to appear before the Subcommittee today to discuss the funding structure of the United States Trustee Program.
As you know, the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 (Public Law 99554), which expanded the United States Trustee Program nationwide, also established the United States Trustee System Fund (''the Fund'') as a self-funding mechanism for the Program. While the funding structure of the Program has changed several times in recent years, the original concept remains intactthat the U. S. Trustee Program would be entirely funded by user fees paid by participants in the Bankruptcy System.
Two categories of fees generate almost all of the revenue for the Fund
1. Filing fees paid at the inception of each bankruptcy case for chapters 7, 11, 12, and 13; and
Page 146 PREV PAGE TOP OF DOC 2. Quarterly fees paid by chapter 11 debtors for which the amounts paid are determined by the cash disbursement levels of the debtor.
The other significant source of income to the Fund is the interest earned on investments.
In fiscal year 1996, income to the Fund totaled $96.3 million. While accounting for fiscal year 1997 is not yet complete (filing fees for September will not be transmitted from the Courts until October 10th), we estimate that income to the Fund in fiscal year 1997 will total $114.9 million. Chapter 11 quarterly fees, alone, accounted for 58.1 percent of the Fund's total income in fiscal year 1996 and are estimated to comprise approximately 58 percent of total income in fiscal year 1997.
The most recent changes to the Program's funding structure were made by Congress in the Fiscal Year 1996 and the Fiscal Year 1997 Appropriations Acts.
The 1996 Act extended chapter 11 quarterly fees to cases which had reorganization plans approved by the Bankruptcy Courtthe post-confirmation period. The 1997 Act clarified that the 1996 provision was intended to apply to all pending cases.
The 1997 Act also restructured the Chapter 11 Quarterly Fee schedule to raise the maximum fee from $5,000 to $10,000 and to create finer distinctions within the bands of the fee schedule to more equitably distribute fees among debtors based on disbursements. (Attachment A). In addition, it reclassified all of the fees as ''offsetting collections'' and repealed the provision requiring a transfer to the General Fund of the United States Treasury if deposits to the Fund exceeded appropriations from the Fund by more than 110 percent.(see footnote 43)
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These changes were needed to put the U. S. Trustee Program on a more sound financial footing. Quarterly and filing fees from Chapter 11 cases provide more than 60 percent of the Program's annual funding, yet they represent only a small fraction of the Program's caseload. During fiscal year 1996, there were 1.1 million bankruptcy filings. Of these cases only, 12,639or 1.1 percentwere filed under chapter 11. At the time the Program's fee structure was created in 1986, chapter 11 filings represented 4.8 percent of the total filings for that year. The decline in chapter 11 filings, which at the present time are at 1981 levels, resulted in a substantial decline in revenues at the same time that the Program's other workload was increasing. In fiscal year 1995, income to the Fund had decreased so precipitously that, for the first time, appropriations from the Fund exceeded deposits to the Fund, a shortfall of just over $12 million.
There were also policy reasons behind the extension of chapter 11 quarterly fees to cases with confirmed reorganization plans. In some instances, cases were lingering in the bankruptcy court for a considerable period of time after confirmation of the plan had been ordered by the court. The Program was also concerned that a number of the largest defalcations had taken place after confirmation of a plan, when there was very little, if any, monitoring of the cases. Two such cases occurred in the Eastern District of Pennsylvania by prominent bankruptcy attorneys who were serving as debtors' attorneys or liquidating agents in chapter 11 post-confirmation cases.
We believed that the proposal to extend chapter 11 fees into post-confirmation would have the salutary effect of getting parties to conclude their cases more expeditiously and clear the dockets of the Bankruptcy Courts. And, indeed, we believe the change has started to have the effect of helping to clear the dockets of the Bankruptcy Courts.
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The post-confirmation provision initially brought some strong reactions. The Program has encountered significant legal challenges along the way in some judicial districts. Although the case law is still evolving, things seem to have settled somewhat, and there has been some positive anecdotal feedback from Bankruptcy Judges regarding the impact of the provision.
For instance, Bankruptcy Judge Lisa Hill Fenning of the Central District of California recently wrote this Subcommittee to suggest that the post-confirmation fee requirement has had a positive impact on the progress of cases in her court. (ATTACHMENT B) In her letter, Judge Hill noted that the fees have turned out to be a good reason for debtors to be sure to close their cases as quickly as possible. The Judge also suggested that
''For most confirmed debtors, the amount of the fee is not material, but the nuisance value of writing the check does seem to inspire debtors to want to finish whatever requires finishing in court. Thus, the system offers the end of those fee obligations as the quid pro quo for cooperating with the final closing steps.''
A similar view was noted by the Bankruptcy Court for the Eastern District of Virginia. See In re McLean Square Associates, G.P., 201 BR 436, 443 (Bankr. E.D. Va. 1996). The discussion in that decision cited an observation by the Bankruptcy Court for the Eastern District of Pennsylvania which found:
''The incidence of post-confirmation fees, when the administration of a case lags in its post-confirmation stages, is a powerful incentive for debtors to complete administration of cases in this court and then depart from our protective jurisdiction. Expedition of post-confirmation administration will benefit creditors anxiously awaiting full distribution in most cases. Imposition of what is effectively a modest user fee upon dilatory debtors is therefore quite easily justified.
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In re Foxcroft Square, 198 BR 99, 105 (Bankr. E.D. PA 1996)
From a purely financial standpoint, the post-confirmation fee has been an unqualified success. In fiscal year 1996, the Program collected $6.3 million from post-confirmation debtors over a 6-month period from April through September 30, 1996.
That amount has grown to $24.3 million in fiscal year 1997, 36.5 percent of total quarterly fee collections for this fiscal year.(see footnote 44) We attribute the growth in the post-confirmation fee collections from 1996 to 1997 to the following factors
Fiscal year 1997 represents a full-year of collections rather than half a year;
the restructured fee schedule was implemented effective October 1, 1996, resulting in higher case payments;
we are getting beyond the legal hurdles;
some judges are openly supportive of the fees; and
debtors are aware of the fees.
While the post-confirmation fee may well be unpopular with some chapter 11 debtors, the reality is that many debtors are paying the fees on a regular and timely basis and those fees account for a substantial portion of the Program's annual funding. Because the system is self-funded, there is no impact to the Federal deficit.
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I am hopeful that we will soon be able to provide empirical evidence that the fee has had a positive impact on case administration, as well. We have a new Fee Information and Collection System that provides new tools to query the chapter 11 database. We are limited, however, in the amount of data currently available on post-confirmation cases. That data goes back only to January 27, 1996, the date of the enactment of the provision, so that we are unable at this time to determine with any certainty how long, on average, it takes a chapter 11 case to complete its plan of reorganization and close. We believe that as we have more time with the data, we will be able to make those kinds of projections. Nonetheless, our initial data shows that since the enactment of this provision 10,165 post-confirmation chapter 11 cases have been closed. Approximately 50% of these cases had pre1995 confirmation dates. Indeed, some of these cases had confirmation dates going back as far as 1981, with even earlier filing dates.
In sum, the United States Trustee Program is entering its second decade. In its short history our progress has been scrutinized by many. We have been studied by the Congress, the General Accounting Office, the Department of Justice Office of Inspector General, the National Academy of Public Administration, and the National Bankruptcy Review Commission. While some of the reviews have recommended small changes, generally those assessments have been favorable. The prevailing view has been that the U. S. Trustee Program, created by this Committee a decade ago, has been successful. Many of the problems that existed with the bankruptcy system at the Program's inception are no longer an issue. It is just that success that in some quarters has generated controversy and provoked attacks on our funding.
It is critical that any changes to the bankruptcy fee structure ensure that sufficient funding continues to permit the U. S. Trustee Program to adequately carry out its important mission of ensuring the integrity of the bankruptcy system and providing an adequate level of oversight to a system that handles billions of dollars of debtor and creditor money. We appreciate the support this Subcommittee has provided the Program in the past, and we look forward to continuing this cooperative working relationship.
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I would be pleased to answer any questions you may have.
Congressman Gekas, Chair,
|United States Bankruptcy Court|
|Los Angeles, CA, April 30, 1997.|
House Judiciary Subcommittee,
Commercial and Administrative Law,
RE: Hearings re United States Trustee Program and Chapter 11 Case Administration
DEAR REPRESENTATIVE GEKAS: It has come to may attention that your subcommittee is considering the question of whether to continue the requirement of post-confirmation U.S. Trustee fees in Chapter 11 cases. I am writing to inform you about the positive impact this fee requirement has had on the progress of cases in my court. Although the imposition of the fees was intended to defray some of the administrative costs of continuing to monitor Chapter 11 cases until closing, the fees have turned out to be a good reason for debtors to be sure to close their cases as quickly as possible.
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I am serving my twelfth year as a bankruptcy judge in the nation's busiest courtthe Central District of California. In 1996, more than 102,000 cases were filed here, of which more than 1,000 were Chapter 11 cases. My own docket includes every type of Chapter 11 case from film industry megacases to local gas station operators.
In many of these cases, the notice to pay the post-confirmation U.S. Trustee fee is an effective reminder to the debtor that the Chapter 11 case is still pending and requires attention. Confirmation day in Chapter 11 cases is usually cause for celebration by debtors and their professionals. All too often, however,the debtor and its counsel treat the case as over on that date,forgetting about or ignoring the follow up matters that must be resolved before a case is ready for closing. Final fee applications must be filed, objections to claims often remain to be resolved, adversary proceedings sometimes continue. After the confirmation hearing, the Chapter 11 case itself often goes on the debtor and lawyer's back burners.
Completing post-confirmation fee payments is the reward to debtors for cooperating in the final winding up of their Chapter 11 cases. The existence of the fee requirement gives a modest amount of real financial and psychological leverage to the courts in this effort. While the courts do nudge the debtors toward final decree and closing by setting post-confirmation status conferences, debtors are rarely impressed by the abstract proposition that cases need to be completely finished and closed. Preoccupied with running their reorganized businesses, debtors do not want to be bothered by court matters, after the plan has taken care of their creditors. For most confirmed debtors, the amount of the fee is not material, but the nuisance value of writing the check does seem to inspire debtors to want to finish whatever requires finishing in court. Thus, the system offers the end of those fee obligations as the quid pro quo for cooperating with the final closing steps.
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Based upon this experience, I favor leaving the fee requirement in place. The fees are helping the system functioning of the Chapter 11 process. Please do not hesitate to contact me if I can be of further assistance in connection with this matter.
Very truly yours,
|Lisa Hill Fenning,|
|United States Bankruptcy Judge.|
Mr. GEKAS. Yes, thank you, and thank you for offering that. The first question is for you. You and others have emphasized the lingering effect of post-confirmation fees. What adverse impact does the lingering that you describe have?
Mr. ORR. Oftentimes, Mr. Chairman, when a case lingers in court, not only does it skew the statistics in terms of closing the case, but it does create some ancillary tasks to be performed in terms of some minimum monitoring of the case, as well as tracking it. When a case reaches confirmation and if there are no other matters that need to be adjudicated by the court, it should be closed, and our anticipation is that the fee would spur that incentive for debtors to close out their cases and move forward with a new entity and get out of bankruptcy.
Mr. GEKAS. Would this bill cover that at all?
Page 154 PREV PAGE TOP OF DOC Mr. ORR. Well, 2592 doesn't speak to post-confirmation fees, but there was some discussion earlier about the fees and their charges, and there are discussions, we understand, about amending that provisionsection 1930, which is post-confirmation feesand we would just ask the committee to recognize that this has a significant impact upon the programthose discussions.
Mr. GEKAS. I thank the gentleman.
Ms. Vergos, you place a lot of emphasis on the ability under the current system for negotiation and conciliation when a problem arises, while Mr. Goodlatte's bill calls for the possibility of judicial review. Is there anything in this bill that would prevent negotiation and consultation and the normal bi-play of someone alleging something and the other trying to determine how best to fight that allegation?
Ms. VERGOS. Well, there's nothing that prevents it; however, the mediation process that the liaison committee has worked out with the standing trustees would not have timethere would not be time to explore that under the short fuse for the administrative hearing under H.R. 2592.
In addition, the bill would, we feel, ensure continuous litigation over budget issues, no matter how small, and return the bankruptcy court to being an administrator as opposed to an adjudicator, and which the Code was designed to separate those functions.
Mr. GEKAS. Would you feel better about it if we amended it to provide for a conciliatory period, a negotiation period, prior to the ability to trigger judicial review?
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Ms. VERGOS. Well, I do believe that it would be beneficial to go through the mediation process and allow us to try it and see how that works. We've just now come up with it and haven't had an opportunity to avail ourselves of it. However, the fact that the bill exists would allow the standing trustee to bring up budget disputes before the bankruptcy court, and, we feel, would bring a lot of delay into the budget system.
There are a lot of questions that would arise, such as what happens if a standing trustee proposes to hire five new employees and the U.S. Trustee feels that this is excessive? If the bankruptcy court says those employees can be hired and the trustee goes ahead and hires them, and if the U.S. Trustee is ultimately upheld on appeal, what happens to the employees? Who pays for the expenses? Does the trust fund pay for that? Who pays for the expense of this litigation?
Mr. GEKAS. Well, we'll have another hearing on thatthat's all. [Laughter.]
Ms. VERGOS. We feel it makes it an adversary situation and injects court hearings into what should be an administrative process.
Mr. GEKAS. Mr. McDow, in fact, you assert in different waysthat adoption of this legislation would rob you, so to speak, of supervisory capacity that you now enjoy to supervise the body of trustees, et cetera. I infer from that that the institution of judicial review, per force, robs you of that supervisory power.
Page 156 PREV PAGE TOP OF DOC My question isthe current system of reviewing the complaints of trustees would go through the administrative rule through a process. During that time are you not robbed of supervisory capacity? In other words, you seem to fear that the posture of judicial review, as this bill calls for, takes away your powers of supervision. Are you talking about the pendency of it, or the actual result of the judicial review?
Mr. MCDOW. I think it could be both. Our powers of supervision include the ability to make rules and to determine how the trustees report to us and different things of that nature. What will happen when we put that in the court, the court can then decide whether our rules are good rules or not. It puts the court squarely in the administration. But the differenceto go back to the original questionas a U.S. Trustee, of course, I like the current system without the administrative rule that we've submitted, but I think the administrative rule goes half way towards doing that. It allows supervision of what we do, but at a different standard.
Mr. GEKAS. But that's my point. It does go half way, you say?
Mr. MCDOW. From the standard of that review, though, of whether we acted unreasonably or without cause, is based on 324 and how we remove a trustee. When we're doing these minor things, which is removing a trustee from rotation for a very short period of time, the standard has to allow us a little more discretion. I think the rule that we have allows us some discretion, but it allows oversight and it allows them to get to court.
Right now the trustee can't take us to court, but with our rule that we've just adopted they will get to court under the Administrative Procedure Act, but not under the standard that goes into bankruptcy court. I think the standard is more important than what court it is.
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Mr. PATCHAN. Mr. Chairman, may I supplement some of the comments?
Mr. GEKAS. Yes.
Mr. PATCHAN. What the bill does, also, is freeze final agency action at the regional level, at the operational level. It really precludes what I would consider final agencyfinal, final agency action, which should be at the highest level, at the executive office. It also, by the 30-day timeframe, as alluded to by Ms. Vergos, it hurries people into court, that by itself fosters litigation.
It would also dampen any desire, I would think, to engage in ADRalternative dispute resolutionbecause we're on our way to court and we've got to be there within three or four weeksotherwise, why talk? It has an enormous dampening effect and the fact of placing final agency action at the regional level will also, I think, produce enormous varieties of approach to the same problem. Certainly we want a uniform system in bankruptcy, and this, I think, would oppose that philosophy.
Mr. GEKAS. Mr. Patchan, since you're partially answering the question that I posed, I'm wondering, in conjunction with something else that you've said, you emphasized that there is judicial review under the current regime of the administrative rule here.
Mr. PATCHAN. Right.
Page 158 PREV PAGE TOP OF DOC Mr. GEKAS. Questionwhen it reaches appellate review, it does not in any way imply de novo review, does it?
Mr. PATCHAN. That's correct.
Mr. GEKAS. Under your system, under the administration
Mr. PATCHAN. This system follows
Mr. GEKAS [continuing]. That it is purely whether or not the panel abused its discretion or not. Is that correct?
Mr. PATCHAN. Whether the U.S. Trustee properly applied his or her discretionthat's correct. We're following a tried and true path to
Mr. GEKAS. I understand.
Mr. PATCHAN [continuing]. Test, or at least test.
Mr. GEKAS. Do you see anything different in the judicial review organ that is offered by this legislation?
Mr. PATCHAN. Yes, I do see considerable difference.
Page 159 PREV PAGE TOP OF DOC Mr. GEKAS. And isn't that difference found in full ability to explore the factual situations, where yours only allows the appellate court to determine whether there's an abuse of discretion?
Mr. PATCHAN. Well, when you say mine, Mr. Chairman, the APA has been long-established, following well-regarded processes of testing determinations by executive agency decisions. Why depart from that? Professor Lubbers may be far better than I to discuss the background and how that rule works.
But we are following a well-established patternestablished long ago by this Congressfor reviewing agency decisions, and this is an executive agency that has made a decision in that it protectsapparently it protects both sides quite well, not the least of which is the discretion that is within an agency to proceed with the statutory duties that it already has been given. Anything else, I would submit, is really separating responsibility from authority.
Mr. GEKAS. I think I'll look up Professor Lubbers at lunchtime, then. [Laughter.]
Does the gentleman from Tennessee have any questions?
Mr. BRYANT. Thank you, Mr. Chairman, just a few. I know we have a vote. I apologize to the panel, and especially to Ms. Vergos. I've been in and out as you can see; we've had different meetings that conflict, and votes now.
Page 160 PREV PAGE TOP OF DOC I have received input from both sides of this, and I certainly, having practiced in bankruptcy many years ago, have an affection for this system and certainly don't want to do anything that would go back to the old days, yet I'm wondering if we can't make the system better.
I have not taken a public position on this at this point, and I have a number of questions that the, quote, ''other side,'' unquote, would like me to ask you, just as I have questions from your side that I need to ask the fourth panel here, and I'm not going to be able to get to all of those.
But very quickly, I want to verifyand if one of you would just answer, it would be finethat these private trustees, especially the standing trustees, are audited each year by independent auditors selected by your agency and paid for by the private trustee. And there's not a reason, I assume, to question these audits in terms of whether they could uncover wrongdoing or any breach of fiduciary capacity. I assume that that was a problem once before, perhaps, that caused the changes, but are they not in fact subjected to independent audit? Mr. Orr?
Mr. ORR. Yes, Mr. Bryantthat's a good questionthey are audited by the Office of the Inspector General, and to give some context to this discussion, of our 1,200 panel trusteesI went back and looked up the figures last night; we have 1,200 panel trustees and 200 standing trusteesin the past year I believe 8 were suspended for inadequate audits. And if they clear up the inadequate audit issue, oftentimes they can be returned to the panel.
Page 161 PREV PAGE TOP OF DOC Thirty-six were suspendedapproximately, say, 3 percent more or less of the total panel trustee corefor other reasons. Some actually asked for a suspension on the rotation so that they stop getting cases and can clean up the cases they have. Some have health reasons, personal reasons. We've had cases where people are going through divorces and what-not and have asked for a suspension.
Of our standing trusteesthe 200 standing trustees were also auditedin the past yearI went back and lookedthere were three who were asked to resign, so our audits are a tool for us to get a snapshot of the trustee's operation. Oftentimes, other instances do occur in the interregnum between the audits that require our attention, and oftentimes require some level of oversight and supervision and some corrective action.
Mr. BRYANT. OK. Let me ask, if I couldand I would encourage any of you to supplement your testimony in writing if you would like toif the supervisorythe word says ''tactics'' here; I would say the supervisory ''authorities''of the United States Trustee are not in check and subject to review by authorities outside the agency, do you agree that the effect of the administration of cases may be significantly affected? Did you all understand that question?
Mr. ORR. Yes, and if I may againI don't mean to monopolize the discussion
Mr. BRYANT. I'll try to take the slant out of it as much as I can.
Page 162 PREV PAGE TOP OF DOC Mr. ORR. RightI'll stay away from ''tactics'' and focus more on oversight.
We recognize that there have been calls for some level of oversight in terms of the agency's exercise of discretion, and I think what we're saying is that the rule is traditional agency action that allows the agency the opportunity to take a second look at its own action, to create a proper administrative record that can be taken up to a court of competent jurisdiction, to oftentimeswhich we've done in the past yearinstitute some corrective action at the executive level with our United States Trustees, and that issue is then taken up to a court.
We're not saying that under all circumstances there should be no court review, but it should be only after there's an appropriate record made and through traditional administrative procedure and in a court of competent jurisdiction. And that's what our rule, as opposed to the bill, will allow us to do.
Mr. BRYANT. OK, good. We are really pressing our time on voting, and I would thank the panel for being here today, and I'm sure this panel will be released while we're gone.
Mr. GEKAS. We thank the panel. We think you've reconfirmed some of the problem areas and increased the headache level for us, but with that we express our gratitude and we dismiss the panel.
We now will recess for the purpose of a vote until 12:50 p.m.
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Mr. GEKAS. The time of the recess having expired, the subcommittee will come to order. Pending the arrival of a second member of the subcommittee, we will indulge in introducing the members of the final panel.
Steve Smith is president of the National Association of Bankruptcy Trustees, which represents the chapter 7 panel trustees. He is a partner in a Houston, Texas law firm and serves there as a chapter 7 panel trustee.
Lawrence Morin serves as the Chapter 13 standing trustee in Lynchburg, Virginia, and appears before us as President of the Association of Bankruptcy Professionals. He has been in private practice for nearly 30 years and has been a standing trustee for nearly 20.
Henry Hildebrand is a partner in a Nashville, Tennessee law firm and has served as the Chapter 13 standing trustee for the middle district of Tennessee since 1982. He has been a Chapter 12 standing trustee since 1986. He appears here today representing the National Association of Chapter 13 trustees.
The Orioles defeated the[Laughter]well, we have to pass the time somehow. The Yankees are out of it.
The gentleman from Tennessee has graciously accompanied us; therefore, a hearing quorum is constituted, and we will proceed in the order in which we made the introductions.
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STATEMENT OF W. STEVE SMITH, PRESIDENT, NATIONAL ASSOCIATION OF BANKRUPTCY TRUSTEES
Mr. SMITH. Thank you. I want to thank the chairman and subcommittee for allowing the National Association of Bankruptcy Trustees, NABT, the opportunity to address the importance of maintaining the independence of the Chapter 7 private trustee.
NABT represents the interests of over 1,200 private trustees who administer bankruptcy cases filed under Chapter 7 of the Bankruptcy Code. In this calendar year alone, approximately 800,000 new Chapter 7 cases will be filed.
Congress has already seen fit to provide in its bankruptcy legislation that a private trustee be appointed to administer the liquidating or Chapter 7 bankruptcy estate. YouCongresshave required the private trustee to pass stringent background checks and that he be able to obtain bonds equal to the value of the estates he administers.
The private trustee must be competent in what he does because youCongresshave made him subject to fiduciary standards as the estate representative. A wrong move by the trustee can expose him to denial of compensation, denial of the reimbursement of the expense that he must underwrite in each case. Worse, a wrong move can expose him, not the U.S. Trustee, to a lawsuit for damages or require him to reimburse his bonding company for a claim made that he has to indemnify.
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The private trustee must have drive and ingenuity because youCongresshave established that the trustee's payment, or commission, be a percentage of what has been recovered and distributed by him to the creditors of a particular estatenothing recovered, nothing paid.
Finally, you protected the bankruptcy estates while providing us with due process through section 324 of the Bankruptcy Code. We can be removed as trustees, but only upon a showing of cause and after notice and a hearing before the bankruptcy court.
I do not believe that we, the private trustees, have let you down in any way. You have had a mature, experienced, competent, law-abiding panel of trustees, whose distributions to creditors annually is now up to or over the $1 billion mark. But recent pronouncements of the Executive Office of the United States Trustee, the EOUST, threatened what I believe was and is the intent of Congress for a private trustee, a private trustee exercising his business judgment in administering the estates under his care.
The first, called the Initiatives, substitutes the business judgment of the regional UST for the panel trustee in determining what is or is not appropriate practice or procedure. Inappropriate practice or procedure requires the UST to take what is called remedial action, which includes removal from the panel, suspension of assignment of cases, or non-reappointment of the panel trustee. There is no due process afforded the panel trustee under the Initiatives.
The second pronouncement, which I believe came only as the result of the concerns expressed by this subcommittee and other Members of Congress, is the Rule for Suspension and Removal or Non-Reappointment of Panel Trustees. No meaningful due process has been provided by this rule either. NABT provided extensive comment and suggestion, and has met at its own expense with U.S. Trustees and the EOUST in an effort to work out something administratively to carry out what I think has been the congressional mandate to the U.S. Trustee to appoint and supervise a private panel, and the congressional mandate to the private trustee to be independent fiduciaries.
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We believed and still believe both can be accomplished by requiringbefore punishing a trusteeone, prior notice; two, a right to a hearing on the record; three, a ''for cause'' standard for any punishment meted out; four, judicial review by the bankruptcy court; and, five, interim review based on an objective standard, where the UST's decision becomes effective before the review process is complete.
I am extremely sorry to report that our efforts have been unsuccessful. The bankruptcy system has lost a number of experienced, qualified, competent trustees over the years, and the principal reason given is the absence of a mechanism to address any UST abuse. In a recent poll NABT conducted, 74 percent of the respondents feared removal or non-reappointment if they opposed a UST directive, and nearly one-third felt they had been instructed to take a position that conflicted with their independent business judgment.
Without some balancing, some due process, we will lose more of these good trustees, and we will likely see less dividend distribution to creditors as the ingenuity of an independent trustee is stifled. Congressional action is warranted. NABT believes that H.R. 2592 provides the balance needed between the UST's appointment and supervisory powers and the panel trustee's fiduciary duty. It provides both with the meaningful due process addressed earlier in my statement.
NABT supports this bill and urges approval by this subcommittee. Thank you very much for this opportunity to testify.
[The prepared statement of Mr. Steve Smith follows:]
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PREPARED STATEMENT OF STEVE SMITH, PRESIDENT, NATIONAL ASSOCIATION OF BANKRUPTCY TRUSTEES
I want to thank the Chairman and the Subcommittee for allowing the National Association of Bankruptcy TrusteesNABTthe opportunity to address the importance of maintaining the independence of the Chapter 7 private trustee. My name is Steve Smith and I am president of NABT. NABT represents the interests of the over 1300 private trustees who administer bankruptcy cases filed under Chapter 7 of the Bankruptcy Code. In this calendar year alone, approximately 800,000 new Chapter 7 cases will be filed.
Chapter 7 trustees currently serve on panels for a one-year term and are appointed by and serve under the supervision of the United States Trustee (''UST''). For a number of years, panel trustees have become justifiably concerned with being removed from rotation, denied reappointment to the panel or otherwise denied cases without being afforded the opportunity to challenge the action being taken against them by the UST. NABT has repeatedly called for the establishment of meaningful ''due process'' rights for panel trustees in such situations.
The Role of the Private Panel Trustee
The concept of a private trustee to administer liquidating bankruptcy estates under Chapter 7, as opposed to reorganizing bankruptcy estates, has been retained throughout all bankruptcy legislation. The congressional scheme as I have always viewed it is to appoint a private trustee as the bankruptcy estate fiduciaryhe or she bringing to the assignment more business, if not worldly, experience than a government employee. The congressional scheme continues by motivating the private trustee through a compensation program which rewards initiative and ingenuity; it is based upon a percentage of what is recovered and distributed by the private trustee to the creditors. Finally, the congressional scheme adds to the mix the potential liability of the private trustee for any mistake or mis-step, either by suit against the private trustee as representative of the estate, by suit against the private trustee individually, or upon the bond secured by the private trustee to protect the estate on which bond the trustee has personally indemnified the surety from loss.
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There is much involved in administering a Chapter 7 bankruptcy case, whether it is an asset or ultimately closed as a no-asset case. Some of this administration is routine; much of it is not. Routine or not, asset or not, the buck stops at the Chapter 7 trustee. A wrong step can mean denial of compensation, no matter how much time we or our staff have spent, and even denial of expenses advanced out of our pockets. It can mean defending a lawsuit as the estate representative or individually for breach of the fiduciary duty imposed upon us by the Bankruptcy Code. It can mean personally paying our bonding company who suffered a loss on our bond and now seeks payment under our agreement to indemnify the bonding surety.
The Role of the United States Trustee
Congress created the United States Trustee program, including the Executive Office for the United States Trustees, a governmental agency within the Department of Justice, to appoint and supervise the Chapter 7 panel trustees. But the agency has done more than supervise panel trustees. Recent procedures, called Initiatives and more recently the EOUST's rule for suspension and removal of trustees, enables, or allows, the U.S. Trustee to micromanage the private trustee's administration of his or her Chapter 7 bankruptcy estate and to determine what is or is not appropriate practice or procedure by the private trustee. In essence, it substitutes the U.S. Trustee's decision-making ability for the Chapter 7 trustees.
Under the present conditions, a private panel trustee who resists the United States Trustee, even for cause, faces the loss of cases and possible removal from the panel. This power can surely destroy the independence desired by Congress for the Chapter 7 trustees. Without that independence, a governmental employee, in most if not all instances having less experience in the bankruptcy arena and in litigation matters, will be substituted in all but name and liability for the private trustee. This will destroy the initiative and ingenuity of the private trustees who distribute a billion dollars annually from the Chapter 7 estates to the creditors. Without some control over their destiny, especially in view of the fact that the private trustee, not the U.S. Trustee, continues to be exposed to suit or bond claim, there will be a loss of experienced Chapter 7 trustees from the panel.
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To give effect to the congressional scheme, there must be independence granted to the private trustee. To deny the independence and allow the government through the office of the United States Trustee to dictate what is appropriate or not destroys this independence. What need is there for the private trustee's greater experience if procedure is dictated by the U.S. Trustee? How can the trustee continue to be motivated if ingenuity and initiative are removed? Why should the private trustee continue to be exposed to liability as the estate representative if his discretion is taken away? If the U.S. Trustee's experience, qualifications and drive are to be substituted for those of the private trustee, then the government should accept the liability that goes with the job.
The Need for Due Process for Panel Trustees
A. Maintain Trustee Independence
As I have already indicated, the panel trustee serves as the fiduciary of the estate. Trustees can be sued for actions they take or fail to take in connection with the administration of the estate. It is therefore vital that panel trustees be able to exercise their best independent judgment in a particular matter.
The independence of panel trustees is being compromised by the current practice that permits the UST to remove a panel trustee from rotation, deny reappointment to the panel or otherwise deny the trustee future cases arbitrarily or simply because the UST disagrees with the business judgment of the trustee in a particular case. Panel trustees who disagree with the course of action demanded by the UST face the prospect of being taken ''off rotation,'' being denied reappointment or otherwise being denied future cases if they do not comply with the UST's demands. In a recent survey conducted by NABT of its members, 74 percent of those responding said they feared being removed from the panel or taken off rotation if they opposed UST directives. Nearly one-third also felt that they had been instructed by the UST to take positions that conflicted with their independent business judgment.
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The power to remove a trustee is far-reaching because it threatens the trustee's current livelihood and carries with it a serious stigma of incompetence or wrongdoing. Congress placed checks on the power to remove a trustee from a case under section 324 by providing that a trustee may only be removed by the court for cause and after notice and a hearing. The UST, however, has been taking administrative actions to deny cases to panel trustees other than formally removing them from a case, and thereby avoiding the due process requirements of section 324. These actions may include ''suspending'' the trustee, placing the trustee ''off rotation,'' refusing to assign the trustee new cases, or refusing to renew a trustee's appointment to the panel. Whatever the action may be called, the effect is the same: the trustee is being denied cases and trustee independence is being challenged and compromised.
B. Maintain the Integrity of the Bankruptcy System
The integrity of the bankruptcy system requires the continuing presence of experienced, qualified private panel trustees. Experienced trustees currently are subject to being removed arbitrarily and without cause for almost any reason, including personality conflicts, disagreements over the administration of a case, political affiliation, or failure to comply with the dictates of a particular UST. The entire bankruptcy system is weakened by actions that impair the ability of trustees to perform their duties and responsibilities and that result in the loss of these experienced professionals.
The typical panel trustee today is a college graduate with a law or other post-graduate degree who has served as a trustee for 11 years and handled over 4,000 cases. In the past five years, one of the principal reasons cited by trustees for resigning from the panel or for leaving the trustee practice is the absence of a mechanism to address abuses of panel trustees by the UST. Panel trustees often are placed in a position where they feel they must ''maintain the party line'' or face the possibility of suspension or nonrenewal of appointment. Because there is often no way that the panel trustee can challenge abuses by the UST, trustees are leaving the practice to pursue other endeavors.
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Courts have been reporting a steady increase in Chapter 7 filings over the past year, with a record number of filings so far in 1997. A decrease in the number of experienced trustees will be keenly felt if these trends continue.
C. Provide Needed Fairness and Protection for Trustees
Panel trustees must invest significant time, money and resources to serve on the panel. This includes employing and training qualified staff and maintaining up-to-date equipment, including computers and accounting systems. Trustees must pay for these support services as part of overhead.
Trustees also must carry huge bonds which threaten their financial security if they are ever found liable for breach of their fiduciary duty. At the beginning of most cases, trustees are required to underwrite the expense and expend the time to administer the cases, much of which goes unreimbursed or uncompensated. Trustees often must sacrifice other professional endeavors in order to serve on the panel.
Having made a substantial commitment to serve as a trustee, the panel trustee needs the assurance that he or she will not be arbitrarily removed from the panel or otherwise deprived of a livelihood without cause. The only way to guarantee this needed protection is to provide panel trustees with the basic rights of due process in all situations of removal, suspension, non-assignment of cases, and non-renewal of appointment to the panel.
The Need For Congressional Action
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NABT has tried to work with the U.S. Trustee's office to correct the problems in the UST system. I regret to say that these efforts have not been successful. Earlier this year, the EOUST published so-called Initiatives dealing with the supervision of private panel trustees. NABT filed pages of suggestions to the Initiatives, which many U.S. Trustees felt were appropriate for inclusion and in many cases better clarified the situation. Only a single sentence out of all we submitted was included in the published Initiatives.
The EOUST for years also resisted establishing a formal procedure by which panel trustees could obtain meaningful due process before being denied future cases or removed from the panel. Only in the past few months, and in response to the concerns expressed by this Subcommittee and other members of Congress, has the EOUST published proposed procedures for the suspension and removal of panel trustees and standing trustees. This too has been a failure.
The procedures published for comment by the EOUST in May 1997 failed to provide panel trustees with meaningful due process protections. Under that proposal, trustees could be removed from the panel, denied reappointment or otherwise denied future cases without cause, without a hearing and without judicial review by the bankruptcy court. NABT filed extensive comments on the proposed rule and came to Washington to meet with officials of the EOUST. Once again, however, the EOUST rejected most of NABT's comments. Under the final rule adopted by the EOUST, a panel trustee can still be removed from the panel, denied reappointment or otherwise denied future cases without cause, without a hearing and without judicial review by the bankruptcy court. The preamble to the final rule makes clear that congressional action is necessary if trustees are to obtain the right to a hearing on the record.
Page 173 PREV PAGE TOP OF DOC The judicial review offered under the rulereview by a federal district court under an ''abuse of discretion'' standardis not meaningful review. The path to the district court would take too long and be too expensive for a trustee to pursue. Worse, the court in most cases would have no choice but to rubber-stamp the U.S. Trustee's decision since there would have been no administrative hearing on the record and no requirement that the U.S. Trustee demonstrate cause for the action.
Basic Due Process Protections
Congress has already determined that panel trustees are entitled to due process protection in actions to remove them from a case under section 324. These same principles should be applied to any decision by the United States Trustee to suspend or terminate the assignment of cases to the panel trustee, including where applicable, any decision not to renew the trustee's term appointment. The minimum safeguards, tailored to the situation which exists when the UST proposes to take an adverse action against a trustee, are:
(1) prior notice;
(2) a right to a hearing on the record;
(3) the requirement that the adverse action be ''for cause''; and
(4) judicial review by the bankruptcy court.
The panel trustee also should be given the opportunity to obtain interim relief based on an objective standard in circumstances where the U. S. Trustee's decision becomes effective before the review process is complete.
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H.R. 2592 would provide meaningful due process protections for panel trustees necessary to allow them to maintain their independence. We support the bill and urge approval by the Subcommittee.
Subsection (b) of the bill provides bankruptcy trustees with a right to judicial review of a United States Trustee decision to cease assigning the trustee future cases. It amends section 324 of the Bankruptcy Code to provide that, in the event the United States Trustee decides to cease assigning cases to a panel trustee or a standing trustee, the trustee, after an opportunity for an administrative hearing on the record, may seek judicial review of such decision before the bankruptcy court. Upon review, the court may reverse the decision only if the United States Trustee has acted unreasonably or without cause. The bill also provides that the court may grant injunctive relief in favor of the trustee in appropriate circumstances.
We feel strongly that the due process protections of the bill must be applicable to any decision by the United States Trustee to suspend or terminate the assignment of cases to the panel trustee, including where applicable any decision not to renew the trustee's term appointment. The EOUST has acknowledged in its rule that panel trustees should have the right to judicial review in situations involving the decision not to renew the trustee's term appointment, and we agree. Unless there is a right to judicial review of a decision not to renew the trustee's term appointment, the United States Trustee would be able to circumvent the requirements of the law by simply refusing to reappoint the panel trustee at the end of his or her one-year term.
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Finally, I would like to address briefly some of the arguments that I have heard offered by representatives of the EOUST against this bill.
1. The EOUST argues that to grant the bankruptcy judges the right to review decisions on removal, cessation of assignment of cases, or non-reappointment would put the bankruptcy judges back into the very administrative process earlier removed by Congress with the adoption of the Bankruptcy Code. This is not true. A dispute such as this is not administrative. It is a controversy which may be determined by the bankruptcy court, and appropriately so. The bankruptcy court possesses the expertise in bankruptcy matters such as section 324 removals, fiduciary standards, business judgment, and estate administration. Resolution by the bankruptcy court also will be quicker and less costly. Furthermore, the bill would not eliminate any authority granted to the United States Trustee under Title 28, including the authority to appoint, maintain and supervise private panel trustees. It only provides a check against abuse and arbitrary action.
2. The EOUST maintains that sufficient safeguards are provided under the EOUST's administrative procedures for the suspension and removal of panel trustees. As I have said, the EOUST's administrative procedures are totally inadequate.
3. The EOUST claims that panel trustees are seeking an appointment for life. Trustees are not asking for a lifetime appointment, and it is clear that under the bill a trustee can be removed from the panel and denied cases for cause. We do feel strongly, however, that given the investment that a trustee makes in terms of both time and money, a trustee who is performing his or her job well should not be removed or denied reappointment arbitrarily and without cause.
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I would like to thank the Subcommittee again for this opportunity to testify, and I would be happy to try to answer any questions you might have.
Mr. GEKAS. We thank the witness, and I want to re-assert that the written statements will become a part of the record, and the questioning that will follow should flesh out some of the narrative that you've provided.
STATEMENT OF LAURENCE P. MORIN, PRESIDENT, ASSOCIATION OF BANKRUPTCY PROFESSIONALS
Mr. MORIN. Mr. Chairman, thank you, once again, for inviting me in my capacity as the president of ABP to appear before you. I also would like to thank the staff members, Mr. Kern and Mr. Levinson, who are present, for the courtesy and the interest they've shown to us over a period of almost 4 years now.
And I would also like to thank Congressman Goodlatte for introducing this bill. He's my congressman, and I feel very fortunate in that regard.
I would also like to address a comment made by Mr. Orr, briefly, dealing with the staffing level at what we're talking about. There are 21 regions of U.S. Trustees; there are 93 satellite offices. Of the 1,050 employees in the United States Trustee program, they supervise approximately 1,400 chapter 7 and 13 trustees.
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We are here today in our capacity as a representative organization, and we are asking this committee and this Congress to exercise its oversight functions with respect to this agency. We strongly support H.R. 2592. Congressman Goodlatte made the comment that this was to restore fairness. We suggest that something cannot be restored if it never existed initially, and in this respect we contend that there has been no fairness, not only in the way we as private trustees have been treated, but also in the proposed rule that has been introduced. This rule lacks fairness with respect to its substance and its procedure.
Mr. Chairman, when we first met with you, right after you became the Chair of this subcommittee in January of 1995, you observed, aptly so, that oversight was at hand. This is the second time that you've been able to hold oversight hearings. Senator Grassley, last summer, introduced what was a substantially similar bill to this bill. That bill did not make it through the Congress, but that's not the problem. The problem is that it took that bill to prompt this agency to promulgate in writing their position with respect to administrative review.
Prior to that time there had been no discussion about it. There had been not even an idea that there would be any written procedures, so this whole oversight process has made this agency aware that this need has to be responded to in order for this agency to be responsive to you.
The essence of our criticism of the rule can be summarized, primarily with respect to the following points, and they are in the written testimony. We contend that the criteria for reviewexcuse mefor removal are highly subjective. Secondly, there's no procedural safeguards with respect to obtaining document or subpoening witnesses, and so forth. Third, there's no burden of proof on the agency to prove anything, and, fourth, to whatever extent a record might exist, it's not a record worthy of an impartial review at a higher level.
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We strongly urge that bankruptcy court is the appropriate jurisdiction. You have heard prior to this testimonyI guess that's an advantage for me being at the end of the hearingthat this bankruptcy court jurisdiction and the court itself, with its level of expertise, is something that needs to be taken seriously. Bankruptcy court would be a least expensive and most efficient way of hearing the matter, and the bankruptcy judges are the ones that really watch what we as trustees do.
If we're not doing our job, they're going to want to be rid of us. And if we're not doing our job, we're not going to want to initiate a matter before them in piecemeal litigation or over small issues that are going to bring into light the fact that we're not doing what we're supposed to do.
We contend that by giving bankruptcy court jurisdiction, this is not granting to them an administrative function. The legislation is couched in terms of having the bankruptcy judge decide disputes. That's what judges do. They resolve disputes. The disputes would have to be couched (in clear terms), and Judge Koger made that very clear as to how that should be done.
We could reciteand I can't take the time today, but there is evidence of abuses by the United States Trustees as to how they exercise their authority. It is these situations that have caused us great concern. They have occurred in various places throughout the country, and to the extent that those are matters that could be addressed, they've not shown an inclination to do it fairly or effectively.
Page 179 PREV PAGE TOP OF DOC Also, there is an exaggerated concern as to the volume of these hearings that may take place, and to the extent that the U.S. Trustee claims that this Code provision would generate an adversarial situation, the adversarial situation already exists. That's why we're here.
Thank you, sir.
[The prepared statement of Mr. Morin follows:]
PREPARED STATEMENT OF LAURENCE P. MORIN, PRESIDENT, ASSOCIATION OF BANKRUPTCY PROFESSIONALS
Mr. Chairman and Members of the Committee:
My name is Larry Morin, I am a chapter 13 bankruptcy trustee and President of The Association of Bankruptcy Professionals (''ABP''). For the preceding 27 years, I have been engaged in the practice of law, primarily as a sole practitioner. Starting on October 1, 1997, I began my 19th year as the Standing Chapter 13 Trustee in Lynchburg, Virginia.
It is an understatement for me to say ''thank you'' to you. But, on behalf of almost two hundred other standing trustees, their employees and families, I express our great appreciation not only that this Committee is holding oversight hearings on this important issue, but also that the Members and their Staffs have shown such courtesy to us and interest in our concerns for three years.
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During the 104th Congress, I testified before both the Senate and House Judicary Committees as to the very issues before you todaynamely, oversight by Congress as to the role and extent of authority of the United States Trustee as to the supervision of private trustees. The issues have not changed, rather they have gained new clarity and focus, with slightly different areas of emphasis.
Why are we here now?
In simple terms, we are asking for a legislative remedy that will enable us, as private citizens, to be treated FAIRLY, to be subject to objective criteria for our performance, and to be entitled to procedural safeguards in the determination of disputes as to our duties, responsibilities and performance.
Since the convening of the 104th Congress, ABP representatives have been fortunate enough to meet often with Members and their staffs as to Congress' oversight of the Executive Office of United States Trustees (EOUST). We believe that as a result, Congress has become aware of the problems that not only call for the exercise of Congressional oversight of this agency, but also necessitate a legislative remedy to curtail the abuses of the authority of this agency. As a result, the message has been sent to the EOUST that their actions and policies ARE subject to the review and judgment of others. And we believe that if this pending legislation was not before this Committee, that this agency would not have shown any interest in or willingness even to CONSIDER a formal dispute resolution process, or to discuss any of the issues either with the Congress or with us as private trustees.
Page 181 PREV PAGE TOP OF DOC However, please do not be mislead by any representations from the U.S. Trustee that they have ''met with us'' and engaged in any meaningful discussions. True, we have ''met'' with some of their representatives. And true there have been ''discussions'' about most of the germane issues under consideration by this Committee. But, there has NEVER been any suggestion from this agency that there would be any ''negotiation'' or ''compromise''rather, we have been TOLD what they will accept and what they will not accept, and as for our comments to proposed rules, for the most part they have been given short shrift.
Why is this legislation needed now?
From the very first time we met with Congressman Gekas, as the Chair of this Committee, as well as with other Members and their staffs, the problem stated to you has intensified and become magnified. This legislation addresses two distinct areas of case administration:
(1.) the removal or termination of case assignments to private standing and panel trustees, and
(2.) disagreements between the private trustees and the U.S. Trustee as to expenses to be incurred in the operation of each trustee's office.
The first of these issues affects both chapter 7 panel, and chapters 12 and 13 standing, trustees, while the second issue affects only chapter 12 and 13 standing trustees.
Why Bankruptcy Court jurisdiction?
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This legislation specifically provides for judicial review after the exhaustion of all available administrative remedies. We believe that provided the procedures for administrative review are FAIR, and are implemented fairly, most disputes between private trustees and this supervisory agency will be resolved at the administrative level. However, for those few cases that require judicial review, we believe strongly that the Bankruptcy Court is the proper forum.
In the case of expenses, the Bankruptcy Court already hears issues concerning both Chapter 7 trustees and all professionals in Chapter 11 cases [11 U.S.C. Sec 330]; Chapter 13 Trustees are the only fiduciaries under the Bankruptcy Code who are treated differently, and we do not believe there is any rational explanation for this disparate treatment. Further, the Bankruptcy Court not only is familiar with the type and nature of expenses that trustees should incur, but also is acutely aware of the results to be achieved as a result of expenses that are to be incurred, and the consequences that will result if the necessary services are not provided by the trustee. A private trustee will think twice before asking the Bankruptcy Court to adjudicate an expense if the trustee cannot show how that expense will benefit the performance of the trustee's statutory duties. This legislation will make the U.S. Trustee think similary before refusing to approve a necessary budget expense and forcing the issue to be heard before the Bankruptcy Court. Obviously, neither side will want to bring a frivolous matter before the Bankruptcy Court.
Concerning the process of removal of a private trustee, which includes the termination of case assignments, we believe that the Bankruptcy Courts are the judicial forum most familiar with the issues and personnel involved, and will offer the quickest and least expensive route to resolve these disputes, thereby assuring a fair and speedy procedure. Further, it is the Bankruptcy Court that will be the first to experience the IMPACT of cessation of case assignments to a chapter 13 trustee, for in most instances, the smooth flow of case adminstration will be seriously disrupted. If a trustee has performed in such a manner that the continued assignment of cases is no longer justified, then the Bankruptcy Court will want to be aware of the criteria used by the agency to make such a determination, as well as the anticipated consequences of such an action. Further, the U.S. Trustee should be basing its decision on sound facts and criteria which will withstand scrutiny of an impartial party (the Court), since the private trustee will be facing accusations of malfeasance or misfeasance that will challenge the reputation and credibility of the trustee before the Court.
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This legislation does not, in any way, interfere with the U.S. Trustee's authority to appoint trustees. Rather, this agency is attempting, in its challenge to this legislation, to squelch any review of the exercise of their authority by mischaracterizing the essence of the requested judicial review. Congress has stated clearly [11 U.S.C. Sec. 324] that for a trustee to be removed, the moving party must offer evidence for the Bankruptcy Court to find CAUSE for such removal. Yet, by this agency's rule, they have given themselves unfettered discretion to terminate case assignments to a private trustee, thereby bringing about a ''de facto removal'' which ignores and circumvents the criteria which Congress has clearly prescribed for such a drastic action. The policies and practices of this agency, as applied to chapter 7 (panel) trustees, is evident as to the annual ''reappointment process'' employed with private trustees, whereby this agency, to circumvent any semblance of fairness, or to be required to base a decision to cease case assignment on ascertainable criteria, simply refuses to ''reappoint'' the trustee.
Why is this agency opposing Bankruptcy Court review of its administrative decisions? The opposition by the U.S. Trustee to any sort of judicial oversight or review of the exercise of their discretion, particularly such review by the Bankruptcy Court, is based on their determination to enhance and preserve their power. They want to extend their duties to the point that the agency becomes the sole arbiter as to any decision involving administration of bankruptcy cases, and that bankruptcy judges be limited to dealing solely with questions of bankruptcy law in an individual case. But, this ''expanded authority approach'' by this agency will work to destroy the very essence and nature of bankruptcy practice, for bankruptcy cases are founded on returning as much money as possible to the creditors, while affording debtors the time and opportunity to obtain a ''fresh start''. It is this flow of money that this agency hungers to control; they want this control to solidify and justify their existence, and in the process, to relegate all othersjudges, trustees, creditors and creditor committees, and debtorsto THEIR CONTROL as to how funds are to be disbursed. Yet, we believe that it has always been the intent of Congress that the Bankruptcy Courts, NOT this agency, should have ultimate control over the flow and distribution of money in a case. If the U.S. Trustee succeeds in keeping this legislation from being enacted, it is just another step for this agency towards its goal of total domination and control. It is imperative that this federal agency be subject to the same types of checks and balances that other federal agencies bear. In this case, the appropriate checks and balances is judicial review by the Bankruptcy Court because this special court was created by Congress to have the particular expertise to understand and deal with these types of issues.
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The Effect of Termination or Removal from Case Assignment
The lifeblood of a trustee's business is the assignment of new cases. For chapter 7 (panel) trustees, it is customary that cases are ''rotated'' so that there will be some sort of balance not only as to the number of cases, but also as to those cases that may yield assets, and hence may generate greater commissions than a ''no-asset'' case. For standing trustees, usually there is just one trustee for a particular area within a jurisdiction, so that all filed cases are assigned to that trustee. But, it is the new cases that generate receipts, and for the most part, the receipts become disbursements to creditors, with commissions to the trustee resulting from those distributions. Therefore, if a trustee is ''cut off'' from new case assignments, eventually the ''well will run dry'', and there will no longer be revenues to support the staff or cover the overhead and infrastructure for which the private trusteeNOT the government or the U.S. Trusteehas incurred the liability.
Yet, as to removal, the Bankruptcy Code [11 U.S.C. Sec. 324] already provides that in order to remove a private trustee from cases, a proceeding must be commenced in the Bankruptcy Court, and that the moving party must offer evidence to show that cause exists for such removal. It is all too clear that the U.S. Trustee not only does not want to be bound by such criteria, but also fears having to face such a burden of proof. After all, the government cannot afford to lose. But, if a trustee is ''so bad'' that he or she ''deserves'' to no longer receive new case assignments, then should not that trustee also be subject to removal as to existing cases? In effect, if the U.S. Trustee is allowed to be subject ONLY to its self-serving rule for termination, then in effect not only will such decisions ''terminate''even though on a gradual, atrophying basisa private trustee, but also this rule will enable this agency to circumvent and DEFY what Congress has already enacted to provide for due process and fairness to the removal/termination process. In effect, the U.S. Trustee cannot be allowed to accomplish indirectly what it is prohibited from doing directly.
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Expenses and ''Micromanagement''
As we have stated before, this agency already has the power to appoint private persons to serve as either panel (chapter 7) or standing (chapters 12 and 13) trustees. And, as to standing trustees, to set the percentage fee and level (dollar amount) of compensation to be paid during a fiscal year. ABP does not contest that authority, rather we only challenge the manner in which this agency has grown to interpret, then to expand and enforce its authority beyond what we believe Congress intended.
The expense issues are easier to identify and describe because they appear in the trustee's operating budgets. It is important to recognize that each private standing trustee is running a BUSINESS. He or she does not have the insulation from liability that either a government agency or corporate entity may enjoy under federal or state law.
In many areas of the country, the EOUST has required chapter 13 trustees to give up any other area of outside work and to devote all of their time to trustee duties. For most of the standing trustees, they have made a career choice to be able to serve as a trustee, and in the process, they have reduced if not eliminated the potential to build and maintain other sources of business.
In addition, each trustee must incur personal liability as well as financial obligations, must make personnel hiring, firing and management decisions, and must serve the needs, demands and expectations of ''multiple masters''ie. the Courts, debtors, creditors, and the U.S. Trustee (just to name the more obvious). Yet, the U.S. Trustee has developed a practice of not supervising, but of imposing the agency's judgment over expenses to be incurred by the standing trustee, for example:
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(1.) rental of office space, including but not limited to the location, type of property, number of square feet per case, per employee, or both;
(2.) personnel decisions such as: who should be hired to serve as an employee, what qualifications are too much or not enough, how much employees should be paid, what type(s) and amounts of benefits should be provided, job descriptions and training requirements, just to name the basics as to personnel matters.
In simple terms, ''micro management'' as practiced by the U.S. Trustee means that if the standing trustee does not ''agree'' with (ie. ''capitulate to'') the position taken by the U.S. Trustee, then the trustee's budget does not get approved, and the trustee either has to operate without authority to cover those expenses, including his or her own compensation, or be subject to further restrictions as to operating authority.
July 1996 through September 1997
Since we last appeared before this Committee [July 24, 1996], we offer the following chronology as to the events leading to this hearing and the ever-present need for a legislative solution now.
At the end of the 104th Congress, our legislative remedy to address the excesses of U.S. Trustee oversight and policy first appeared in the form of ''The Grassley Amendment'' (S. 1559). At that time, and even today, private trustees realistically have ''no place to go'' if a disagreement arises with their U.S. Trustee. There is no way that this proposed rule for administrative dispute resolution can be viewed as providing for any meaningful vehicle by which the decisions of an employee of this agency can be reviewed or challenged. By the time The Grassley Amendment arrived at the House of Representatives, there was not enough time for this body to consider fully the issues which would enable you to render your own judgment on these matters.
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In our hearing before this Subcommittee, Chairman Gekas conducted an impromtu ''straw vote'' to determine how the panel participants felt about The Grassley Amendment. The only unequivocal objection came from the very agency whose actions and authority was being questionedthe United States Trustee. At this time, while we would be interested in a ''straw vote tally'', what we really want and need is a REAL VOTE in favor of enactment of this legislation.
Also, last year there was no administrative dispute resolution pending, either in draft of published form, available for comment or consideration. And, there were no discussions or meetings even being offered by this agency to discuss these issues with those of us who would be most directly affected by such policy pronouncements.
The U.S. Trustee's ''Rush to Publish''
During discussions of the Grassley Amendment (S. 1559 of the 104th Congress), Mr. Patchan, the Director of the Executive Office of United States Trustees, made a commitment to Senator Grassley that the agency would publish proposed rules on administrative dispute resolution. Just prior to the convening of the 105th Congress, the EOUST circulated for preliminary comment its Draft Procedure for Dispute Resolution. Although members of the EOUST met with some Chapter 13 Trustees, the discussions quickly deteriorated over the issue of the proper forum for judicial review, and no further discussions ever were held.
On May 22, 1997, a proposed rule was published with a 60 day comment period. ABP timely filed our comments to this rule (see Exhibit ''A'' attached), and as of the writing of this testimony, we are awaiting the response of the agency to our comments. Again, at the request of the EOUST, we met with them in Washington, D.C., on September 16, 1997, for the stated purpose of discussing and negotiating changes to the proposed rule. A group of Chapter 13 and Chapter 7 Trustees from around the country came to Washington for what we expected would be fruitful discussions. When we met, the EOUST quickly informed us that they would not negotiate any changes to the core areas of disagreement, and that the publication of the final rule was imminent. They told us that certain changes had been made, but that they were not at liberty to share those changes with us due to possible legal implications. What we did not know was that a version of the revised rule, dated four days earlier (September 12th), was already being circulated to those members of the bankruptcy community with whom the EOUST had some comfort level. Again, the representations of this agency display an astonishing example of bad faith or, better yet, bureaucratic arrogance. We all felt that we had been invited to this meeting under false pretenses and that the EOUST had acted in bad faith. We remain unsure as to WHY we were invited to such a meeting, on the eve of the date first set for this hearing, except that this agency wanted to be able to tell youthe Congressthat they had attempted to discuss these issues with us.
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The most recent Rule promulgated by this agency deals only with the ''termination'' or ''case assignment'' issue; as yet, the agency has not proposed any rule to deal with the administrative resolution of disputes as to expenses. Yet, for reasons known only to the agency representatives who drafted this outrageous rule, they have totally ignored procedures in effect in OTHER agencies of the federal government for similar type actions, notably those dealing with debarment or suspension [45 CFR 1229] (see Exhibit ''B'' attached). Why does this agency feel that the guidelines, criteria and procedures already in effect in other agencies of the federal government do not apply to them or to those of us subject to their ''supervision''? Aside from such comments that ''. . . they are not relevant'', or ''. . . that private trustees are not the same as government contractors'', their stated explanations mask their real reasons: they either fear or are not willing to be subject to such basic and fundamental safeguards as:
requiring an adequate evidentiary basis for decisions,
defining the burden of proof (ie. as more than just an abuse of their discretion), or
providing such other basic procedures as the right to:
have documents produced,
cross examine witnesses against the private trustee,
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to require that a record be made of the entire proceeding to enable meaningful appellate review by a higher authority.
Unless and until a legislative remedy is enacted, this problem and area of disagreement between this government agency and the private sector persons who provide these services to the courts and others will not go away. And, we believe that ONLY by enacting this legislation will this agency ever come to understand AND accept the fact that they must afford a level of fairness and due process, and that their decisions, actions and policies ARE subject to the review of others, whether it be the Congress, the Courts, or others in the government and private sectors.
This proposed rule as to the termination of case assignments is patently UNFAIR. If this is the only procedure available for dispute resolution, it can hardly be considered as any sort of an ''improvement'', for it puts into ''stone'' a published declaration that gives this agency unfettered discretion. This rule as written reveals the arrogance of this agency, not only towards those over whom it is to have ''general supervisory authority'', but also towards the duties, authority and responsibilities of the Bankruptcy Courts who already have been given jurisdiction as to many of these areas as they apply to persons under chapters other than 12 and 13 of the Code. Also, this rule is so subjective as to the ''criteria for removal'', and so lacking as to any documentation required to justify agency action, that an appeal to a higher tribunal would be without the benefit of any required criteria or record on which the decision to terminate could be reviewed.
Page 190 PREV PAGE TOP OF DOC However, even if this Rule becomes modified before it becomes final, and even if some semblance of ''fairness'' and procedural safeguards find its way into the final version, the problem always will remain as to the manner in which this agency seeks to interpret and implement its own rules and policies. The history of excessive exercise of authority, supervisory treatment replete with intimidation and harrassment, and arrogance as to immunity from judicial review, can only be arrested by this legislation.
It is safe to conclude from a reading of this Rule as well as other communications with and from this agency, that they are determined to solidify their power and control, to create a set of criteria and procedures that will render them immune from attack or criticism, and that will accordingly insure their invincibility.
Attached to this testimony is a copy of ABP's comments to this Rule (Exhibit ''A''). As a summary of these comments, this rule:
1. is void of substantive or procedural due process;
2. contains an improper imposition and shifting of burden of proof;
3. lacks the absence of review by a neutral or impartial hearing official;
4. lacks objective standards or criteria on which the agency's actions and decisions may be based;
5. lacks defined standards of proof;
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6. unjustly imposes upon the private trustee the costs of such an administrative review, without regard as to whether or not actions and decision of this agency bear any semblance of justification.
Yet, it is by this Rule, and with this attitude, that this agency comes before this Committee, stating that NOW it HAS put into place a means by which disputes can be resolved, so that this Committee and this Congress need not be bothered any more by the rumblings of lack of fairness or due process. To this we can only say ''NONSENSE!'' and we hope that this Committee will look beyond the rhetoric of this agency to their written policies and prior actions and attitudes.
Scope of Support for Proposed Legislation
To some extent, a small portion of the bankruptcy community has been invited to appear before you today. Certainly it is important and relevant to have the Bankruptcy Judiciary represented, and to have representatives of chapter 7, 12 and 13 trusteesas the very ones who will be most directly affected by the Rule and legislative remedyappear before you. And, we recognize the role that representatives from the academic world can provide to offer their comments, notably as to the workings of the Administrative Procedures Act.
But, the Committee needs to recognize those individuals and segments of active bankruptcy practice who, for whatever reasons, have NOT been invited here today. Many of these individuals have or will be sending in letters or reports to enable the Committee to be aware of their positions, and they include:
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1. additional members of the Bankruptcy Bench;
2. from the Commercial Law League of America (CLLA), the Chairs of both the U.S. Trustee Committee, and of the Bankruptcy and Insolvency Section;
3. representatives of eight (8) major creditor groups or firms, all of whom have daily dealings with trustees, and who rely on the private trustees to provide them with information and to the extent covered in the Code, to look after their interests; the names, addresses and phone numbers of these creditor representatives are set forth on the Exhibit ''C'' attached to this testimony; and
4. representatives of consumer debtor counsel.
While we recognize that if all of these groups or persons were able to testify before you, then it might be necessary to hold these hearings in the newly dedicated Jack Kent Cooke Stadium, but the point is, that there are MANY interested groups and individuals who understand and support the purpose of and need for this legislation, and we can only urge the Members of this Committee to consider their opinions seriously.
|Laurence P. Morin,|
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July 22, 1997
THE ASSOCIATION OF BANKRUPTCY PROFESSIONAL'S COMMENTS TO THE DEPARTMENT OF JUSTICE PROPOSED RULE 28 CFR PART 58.6
PROCEDURES FOR SUSPENSION AND REMOVAL OF PANEL AND STANDING TRUSTEES
The following comments are presented by the Association of Bankruptcy Professionals, Inc. (''ABP''), which are filed in response to the above-stated proposed rule, as published on May 23, 1997, in the Federal Register Vol. 82, No. 10, pp. 2839128393].
Pursuant to rule making under the Administrative Procedures Act, the United States Trustee Program seeks to legitimize and expand its own unauthorized assumption of broad ranging and far reaching powers. In the past, the United States Trustee Program has asserted that its decisions were unreviewable by any court in the land. Apparently, now realizing that such a position was virtually without foundation, the United States Trustee Program seeks to limit the scope of judicial review of its administrative decision to a determination of whether the United States Trustee's decision is supported by ''the record'' (which it attempts to define and limit), and whether such a decision is an appropriate exercise of the United States Trustee's discretion. To that end, United States Trustee Program has published a proposed rule under the Administrative Procedures Act which purportedly is to give the appearance of establishing a procedure to support or justify this agency's position for the removal or suspension (ie. termination of case assignments to) of private panel [chapter 7] and private standing [chapters 12 and 13] trustees. This procedure also is intended to provide a system and method for administrative appeal within the agency from the decision of the United States Trustee to remove or suspend a panel or standing trustee. The published proposed rule is silent as to the availability of, or avenue towards, any judicial review of such administrative decisions.
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SUMMARY OF: FLAWS OF PROPOSED RULE
(including but not limited to:)
1. Total absence of substantive or procedural due process
2. Improper imposition and shifting of burden of proof
3. Absence of review by a neutral or impartial hearing official
4. Lack of objective standards or criteria on which agency's actions and decisions may be based
5. Lack of defined standards of proof
6.Unjustified imposition of costs to trustee without regard as to whether or not the agency's actions bear any semblance of justification.
7. Lack of, or inherently unfair, time limits on agency review
LACK OF DUE PROCESS AND OVERVIEW OF COMMENTS
The proposed rule is fatally flawed in several respects, but most notably in that it does not provide basic minimum due process requirements in the following ways:
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1. The proposed rule does not provide objective standards and criteria regarding suspension or removal.
The ''reasons'' enumerated in the subparagraphs under (a) are totally open to the determination by the agency's employees not only as to what the performance level and services of the trustee are to be, but also as to what ways they are to be measured. There is no suggestion of an ascertainable standard by which a private trustee's ''failure to . . . (do anything)'' can be measured. Under this section (a), 14 illustrations are recited. It is the choice of terms, the lack of reference to any other generally acceptable definitions of duties applicable either in a fiduciary or business sense, and the prior actions and reactions of this agency which renders each one of these illustrations as potential traps for the unwary.
2. The rule improperly places the burden of proof on the panel or standing trustee.
The provision under paragraph (c) calls for the private trustee, as the aggrieved party, not only to take the initiative, but also to have to PROVE that the agency's decision is unfounded. However, even if the private trustee does undertake such an effort, and even if the reasons of the private trustee far outweigh, by any objective standard, the agency's reasons for its decision, this still leaves the private trustee ''no where to go''.
[See further comments below under 3. as to the private trustee's access to documents, persons and other matters which may be exculpatory].
Page 196 PREV PAGE TOP OF DOC 3. The proposed rule contains no evidentiary standards.
Even under customary tenets of administrative law practice, there are basic evidentiary standards by which an agency's decision is to be founded. There is not even a hint-of any balancing or weight of the evidence or persuasion, all of which simply confirms this agency's view that its decision, once made, is unassailable.
But, even before a private trustee could ever attempt to defend himself or herself, there must be a way and means by which the trustee can be assured that all materials used by the agency in reaching its decision to terminate have been provided to the private trustee. The agency, in sending its Notice to the private trustee [under paragraph (a)], is supposed to provide to the trustee copies of ''pertinent materials'' upon which the U.S. Trustee has relied; yet, again it is this very agency that has the sole power to decide what is or is not ''pertinent'', and there is no apparent way under this rule that the private trustee could compel discovery or disclosure of all of the factors (including those which would support the private trustee) which were available to the agency. On the other hand, the private trustee is expected to produce [under paragraph (c)] ''all material that the trustee wants the Director to consider . . .''; such a policy is not only patently unfair, but also totally defeats the aggrieved party's right to be assured that the agency's decision has any merit whatsoever; and in the end, if the matter ever were to be considered by a neutral/judicial party, where and how could the trustee ever produce a ''record'' upon which such a review could be founded?
The comments expressed in the preceding paragraph are confirmed by the very essence of paragraph (f), namely that only the reviewing official [who is defined under paragraph (d) as an appointee of the Director of this agency] is the party who may ''seek additional information''. Unless the private trustee has at least an equivalent right to seek and compel the production of such ''additional information'', this power being limited to the reviewing official renders this entire procedure unjust.
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4. The proposed rule does not provide for an opportunity to appear with a representative and confront any witnesses the agency presents.
It can be presumed that the agency will have marshalled its resources to justify its decision, and to repel any attack on its judgment. On the other hand, the private trustee not only cannot gain meaningful access to ''all pertinent materials'', but also must shoulder the entire burden of his or her own costs and expenses, including counsel fees [paragraph (j)], regardless of the lack of merit of the agency's position.
5. The proposed rule does not provide for the creation of an official record for judicial review.
There is no suggestion that a record might be created, or if it was, how it would be made available for the trustee to take to the next level.
Moreover, it is our position that any final decision of the director should be challengeable de nova in a bankruptcy court.
I. THE PROPOSED RULE DOES NOT PROVIDE OBJECTIVE STANDARDS
As mentioned above, the proposed rule sets up fourteen (14) suggested reasons for which a panel or standing trustee may be removed or suspended (but removal or suspension are not limited to those fourteen reasons alone). The reasons or standards for removal are at best totally subjective and discretionary and at worst they are an abuse of power. The standards vest in the regional United States Trustees unfettered power to be used as he or she determines in their relationship with panel or standing trustees. The standards make it impossible for a reviewing official or any court to be able to reach its own decision as to whether the U.S. Trustee's decision to suspend or remove a trustee should be sustained or overruled.
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Without limiting our comments to each and every one of these ''reasons'', the most egregious would include:
(2) What does ''failure to perform duties in a consistently satisfactory manner'' mean?
How many times can a trustee perform ''unsatisfactorily'' before it becomes ''consistently''?
What does a trustee need to do to perform ''satisfactorily''?
What are the objective criteria for satisfactory performance?
How are these criteria communicated to a trustee?
(4) Failure to cooperate and to comply with instructions and policies of the court, the bankruptcy clerk or the United States Trustee.
It is beyond dispute that the phrase ''failure to cooperate'' is vague, ambiguous and subject to a myriad of interpretations. It could be interpreted to mean that any disagreement a panel or standing trustee has with the United States Trustee could result in removal or suspension. It is tantamount to a loaded pistol at the temple of a panel or standing trustee forcing capitulation and a plea for forgiveness as to any issues the United States Trustee decides to weigh in on. Panel and standing trustees, by their very nature, are required to formulate independent judgments in order to properly perform their duties in a timely and consistent manner. (Failure to do so is another stated reason for removal.) This reason, however, destroys any semblance of independence between the U.S. Trustee, and panel and standing trustees, and will in fact make them little more than puppets of the United States Trustee.
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On what grounds or basis must a private trustee be required to comply with instructions or policies of the Clerk of the Court? Under this reason, someone who previously had absolutely no responsibility with regard to the conduct of a panel or standing trustee now has acquired under this abuse of rule-making the ability to cause the suspension or removal of that trustee. What is the statutory basis for this assumption of power? Of utmost concern is the total and complete absence of any objective standard or criteria to measure the level of cooperation required by this reason.
(5) Substandard performance of general duties and case management in comparison to other members of the chapter 7 panel or other standing trustees.
What does ''substandard performance'' in comparison to other trustees mean? Which other trusteestrustees located in the same judicial district, in the same United States Trustee region, or across the United States?
Who decides who are comparable trustees? How many of the trustees are to be considered comparable?
What is standard performance?
What is standard case management?
Are all regions viewed the same?
Are there regional or geographic differences in performance or case management standards?
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(6) Failure to display proper temperament in dealing with judges, clerks, attorneys, creditors, debtors, the United States Trustee, and the general public.
The phrase ''failure to display proper temperament'' is likewise vague and ambiguous. On what basis does this agency have the power or right to decide what is or is not ''proper temperament''?
Does this mean the decibel level of someone's voice?
Does it mean the tone of voice?
Does it mean you do not like the way I speak to you?
Who defines what ''proper temperament'' is and what criteria make up ''proper temperament''?
What objective standards define ''proper temperament''?
No such objective standards or criteria are offered in this rule making proceeding.
While in many instances the private trustee is called upon to act as a ''neutral party'' or ''mediator'', in the vast majority of instances the trustee MUST take a position which is inherently adversarial to at least one other party involved in the case. And, assuming for an instance that a trustee may not display ''proper temperament'' in dealing with a judge, what entitles this agency to assume or usurp the power and role of the judge in dealing with such situations?
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Because other comments are not offered at this time in response to specific provisions under this section (a) shall not be construed as acceptance or approval of these so-called ''reasons''. Virtually all of the other stated reasons in this proposed role making suffer from the same disability. They all need to be better defined so the panel or standing trustees have some objective criteria by which to judge their actions.
LACK OF REFERENCE TO CRITERIA RELIED UPON BY OTHER GOVERNMENT AGENCIES RENDERS THIS RULE ARBITRARY AND CAPRICIOUS
Rather than come up with a list of subjective or discretionary criteria as this agency has done, we question why the agency has not used the criteria found in the government wide debarment and suspension (non-procurement) regulations promulgated government wide, including the Department of Justice, see 28 CFR Section 67. The policy behind the suspension and debarment regulations has been developed so that the Federal Government will conduct business only with responsible individuals. Debarment and suspension (analogous to suspension and removal) are serious actions which should be used only in the public interest and for the Federal Government's protection and not for purposes of punishment.
The causes for debarment can be found in 28 CFR Section 67.305. These causes provide objective standards and criteria for an action as serious as suspension or removal.
II. BURDEN OF PROOF AND OPPORTUNITY TO BE HEARD
The proposed rule places the burden of proof on the panel or standing trustee to disprove the reasons for removal or suspension. If the trustee asks for a review, he or she is entitled to provide written submissions to a reviewing official appointed by the Director from within the United States Trustee Program. The reviewing official makes a report and recommendation and the Executive Director then determines whether the United States Trustee's decision is supported by the record and the action is an appropriate exercise of the United States Trustee's discretion.
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We believe that the burden prescribed by the rule is backwards. Like the suspension and debarment regulations where the burden of proof is on the agency proposing debarment [see 28 CFR Section 67.314(c)(2)], we believe the agency does have and must provide by its rule that it has an affirmative burden in an action as serious as this, to show why such action is justified. For this to remain solely within the discretion of the agency is simply unfair and does not meet basic minimum due process requirements. Furthermore, if there are genuine disputes over facts material to the proposed termination, the trustee should be afforded an opportunity to appear with a representative, submit documentary evidence, present witnesses and confront any witnesses the agency presents.
Like the government wide debarment and suspension procedures, we believe in a trustee termination case this is a minimum due process procedure. Such a process will also provide for a proper record for the purposes of judicial review.
The United States Trustee in the past has justified many of its decisions and actions with regard to trustees in its quest to identify and then to avoid the appearance of impropriety. If the agency is to maintain any credibility in justifying its actions on this basis, then it must also avoid the appearance of impropriety with regard to its own conduct. Such is the case with the proposed administrative review process. One would be naive at best, and foolish indeed, to believe that a United States Trustee will decide to remove or suspend a trustee without first having discussed and received approval of such action from the Executive Office. To argue that the review process is fair and impartial because a member of the United States Trustee Program, other than the (Regional) United States Trustee issuing the suspension or removal order, reviews that United States Trustee's decision, is absurd. Even if that reviewing official recommends a reversal of the United States Trustee's decision, the Director need not accept that recommendation. Remember, the Director has already approved the United States Trustee's suspension or removal order. In effect, this process is nothing more than ''ask me to reconsider''.
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III. STANDARD OF PROOF
The proposed rules imposes no standard of proof on the agency. It simply leaves everything within the discretion of the United States Trustee and all further reviews are based on whether or not the United States Trustee appropriately exercised his or her discretion. In the suspension and debarment procedures, the standard of proof of cause for debarment must be established by a preponderance of the evidence. A similar standard must exist in these proposed regulations in order to meet minimum due process standards.
IV. TIME LIMITS FOR AGENCY ACTION ARE UNREASONABLY BURDENSOME ON PRIVATE TRUSTEES
There are a tedious series of time frames and delays, all of which are within the control of the agency, and, considering that the agency will have already ''terminated'' the trustee by its Notice, which is to ''take immediate effect'', the financial and occupational rights of the private trustee are immediately (and probably intentionally) at risk. On the other hand, the agency and those acting in its behalf are void of risk.
First, the private trustee may seek a ''stay of the decision of the Director'' [paragraph (b)]; yet, where is the time limit or deadline for the Director to act and either grant or deny the request? And, in the interim, must the trustee also initiate his or her more formal ''appeal''? [paragraph (c)]?
Second, from the time the private trustee files his/her written request for administrative review, where is the time limit within which time the Director is to respond?
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Third, once the ''timely request for review'' has been filedand the ''timeliness'' requirement is all one sided herehow much time does the Director have to ''appoint'' his reviewing official? [paragraph (d)].
Fourth, the first stated time limittwenty (20) daysthen is placed, by the reviewing official, on the (Regional) U.S. Trustee to respond to the matters raised by the private trustee. But, how many days have elapsed before that 20 period begins?
Then, the private trustee is given ten (10) days to respond to the comments and justifications of the U.S. Trustee; of course, ONLY the reviewing official [as an appointee of the agency] has the discretion to extend times for responses, and all without any regard as to whether or not any stay may or may not have been granted.
Fifth, once the ''record'' has been ''reviewed'', the reviewing official is to provide a written report within thirty (30) days of the last date fixed under (e); then,
Sixth, the Director has another twenty (20) days to issue a written decision in response to the reviewing official's report.
This proposed rule for suspension and removal of panel and standing trustees is a mockery of fairness, impartiality and due process. It is nothing more than an attempt by the United States Trustee to bootstrap itself into a position from which it can claim unfettered discretion to decide any issue as it chooses. It is clear that this agency has proposed a rule which is incapable of objective definition because it proposes no objective standards or criteria in the rule. The agency wants nothing more than to give itself the ability to subjectively review its own subjective decisions, and then to conclude that its decision was correct in the first instance.
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The only way to avoid the disastrous consequences such a rule will have is to provide for swift de nova review of the United States Trustee's decisions by the bankruptcy court.
Further, based on the totally unfair and unrealistic time limits for agency action, there must be a fair reasonable, and cost effective limit from the date of the agency's Notice before the private trustee may consider that all available administrative remedies have been exhausted. Otherwise, the agency has given itself the power to suffocate the trustee and to obtain its desired result without being subject to review or oversight. Such a policy clearly violates 11 USC Section 324.
pcs: Distribution List
|Laurence P. Morin, President|
INSERT OFFSET RING FOLIOS 23 TO 35 HERE
Mr. GEKAS. We thank the gentleman and turn to Mr. Hildebrand.
STATEMENT OF HENRY E. HILDEBRAND III, ON BEHALF OF THE NATIONAL ASSOCIATION OF CHAPTER 13 TRUSTEES
Mr. HILDEBRAND. I appreciate the opportunity to be here today on behalf of the NACTT.
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I've been here before to appear before the committee, particularly in areas that deal with bankruptcy, substantive bankruptcy as well as the procedural aspect in the United States Trustee, and in the times that I've been here and had the opportunity to read the testimony and listen to the witnesses, I hear of a burgeoning agency that has, historically, operated unchecked except by this committee. It is an agency, as Mr. Orr said, that's been around for a decade, and, yet, for the first time, they have recently promulgated the rule that establishes some kind of procedure for removing a trustee from a rotation. It didn't happen during the 10-year's of the agency's existence, and I believe it only happened because this committee and its companion Senate committee have expressed an interest in this particular issue.
It's an agency that created and promulgated a rule that's filled with subjective and non-exclusive criteria for evaluating trustees. For example, the rule promulgated said the U.S. Trustee can remove a trustee if the trustee does not ''cooperate'' with the U.S. Trusteewhatever that means. The rule says that if a trustee displays an inappropriate temperament it is grounds for removal. Now I confess to the Chair that there are many times when I am involved in a bankruptcy case where I have lost my temper, particularly when I'm dealing with somebody that I believe is not telling the truth. Now I'm concerned about what this rule means and how this rule might be interpreted.
And how about failure to perform in a ''consistently, satisfactory manner?'' Satisfactory to who? To the creditors? To the debtors? Or to the governmental bureaucracy that's been established in Washington?
How many of us, if we had had the chance to review another agency that has operated essentially unchecked, would welcome the opportunity to put checks inwhen we established the Internal Revenue Service? Now, this body is seeking to place some checks on a governmental agency that was too long operating without sufficient review.
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We've got to recognize the fact that there can be a difference of opinion between the bureaucrat that is in charge of supervision and the fiduciary that's responsible for administering the case. If there is a difference of opinion, to whom is that ultimate decision deferred? I think that the Government panel here has said, ''You defer to us. That's where it belongs; we have the expertise.'' And that harkens back to the old saw, ''I'm from the Government; I'm here to help you; trust me.''
I think that what Representative Goodlatte has done is said we believe there ought to be a review in court. Which court? The court which has the expertise and the ability to do thisthe bankruptcy court.
I've heard Professor Morris testify, and I've heard members of the governmental panel testify, that this would involve the bankruptcy court in things that they were intended to get out ofthe administering of casesand I respectfully disagree with that view. The bill establishes a review based on a statutory test. The review of a standing trustee's expenses, which would be actual and necessary expenses, would present the court with two advocates taking divergent positions in front of a judge.
One advocate might be the Government, which indicates that an expense might be inappropriateit doesn't meet with a national standard; that there is inadequate demonstration of need. The other advocate would be the trustee, the fiduciary charged with the responsibility of administering cases before that court. Is that appropriate? I submit that it is. Is it administrative? I submit that it is not. Will it bog down the courts? The answer is clearly, no.
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We don't have to speculate on that. We can look at the two States in which these issues are still before the bankruptcy courtAlabama and North Carolina, which isn't, so far, part of the U.S. Trustee program. My review indicated there are few, if anydisputes which have been litigated before the bankruptcy court.
Ms. Vergos mentioned in her testimony, that the court is used to reviewing these things in Chapter 11 cases: How is the case administered? How should it be run? What are the business decisions in a Chapter 11? It's appropriate for the bankruptcy court to do this in Chapter 13 cases as well.
So, in sum, I submit to you that Representative Goodlatte's legislation is appropriate. Maybe it does need tinkering as to whether you're talking about administration on the record, or a general administrative review, but, in fact, it does establish for the first time the opportunity for some independent party to review the decisions that are made by the Government when there's a disagreement with a fiduciary.
[The prepared statement of Mr. Hildebrand follows:]
PREPARED STATEMENT OF HENRY E. HILDEBRAND III, ON BEHALF OF THE NATIONAL ASSOCIATION OF CHAPTER 13 TRUSTEES
I am Hank Hildebrand and I currently serve as the standing Chapter 12 and Chapter 13 Bankruptcy Trustee in the Middle District of Tennessee. The Middle District encompasses the central portion of Tennessee, our court housed in Nashville, Tennessee. I have served as a bankruptcy trustee since 1982 and during my tenure as trustee I have administered approximately 60,000 Chapter 13 cases. Currently I serve as Chapter 13 trustee in about 14,000 active cases and my office disburses approximately $75 million per year to creditors who are located throughout the nation. The operations of my office are funded entirely by a portion of the proceeds contributed to the Chapter 13 plans of the debtors cases administered and the office spends no public funds in the administration of this important consumer bankruptcy task. The cost of operation of my office has declined, over all, from approximately 10% of receipts in 1982 to 3.51% of receipts during the current fiscal year.
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I appear today on behalf of the National Association of Chapter 13 Trustees (''NACTT''), a not for profit association of consumer bankruptcy professionals. Notwithstanding its name, the NACTT is composed of all participants in the consumer bankruptcy process: debtors' attorneys, creditors' representatives, attorneys appearing principally on behalf of creditors, and Chapter 13 trustees. The NACTT is principally an educational organization, seeing as its basic goal the providing of information and assistance to practitioners in providing education and training to standing trustees, their staffs, and members of the bar. In the past, the NACTT has provided written and oral testimony to various committees of Congress as consideration has been given to the consumer bankruptcy system in the United States. The NACTT has been requested to provide both substantive and procedural assistance to Congress considering changes in the law.
I am delighted to have the opportunity to provide for you one view on the pending proposal for judicial review of private trustee's expenses and judicial review of the removal of a private trustee by the government.
The last time I appeared before this committee, I warned the committee that the United States Trustee Program, originally established as a small, non-intrusive, administrative program to facilitate bankruptcy proceedings and remove the bankruptcy court from the purely administrative tasks of bankruptcy administration, had experienced what I termed ''mission creep.'' I told this committee that the United States Trustee Program had expanded its oversight of trustees into an area better termed as ''micro-management.''
Since I last appeared, the United States Trustee Program has sought ways to avoid arbitrary, Washington based decision making which has seriously impaired the ability of many trustees to efficiently operate their offices. In so doing, however, the United States Trustee Program has sought to exclude the judiciary and the participants whose economic interests and, in fact, entire economic future may hinge upon the decisions. The program has assumed that its decisions, however well reasoned, are final and should not be subject to review.
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In 1996 I suggested that Congress should clarify the law. Congress should indicate that the removal of any trustee, whether in a specific case or by way of a cutoff of future cases, should be subject to judicial review. I am now encouraged by the interest that some members of Congress have in recognizing the need for a clear opportunity for judicial review of decisions made which directly relate to the administration of hundreds of thousands of bankruptcy cases across the United States and the people who administer them.
A standing trustee is a fiduciary of the highest order. A trustee is required to meticulously observe a fiduciary relationship and perform the obligations of a trustee with respect to the administration of a trust.(see footnote 45) From the earliest cases related to bankruptcy administration, the courts have held that the trustee in bankruptcy stands as a fiduciary, obligated to conserve assets and maximize distribution to creditors.(see footnote 46) A Chapter 13 trustee owes a fiduciary obligation to both debtors and creditors,(see footnote 47) but the enforced neutrality often means that the trustee is regarded as an officer of the court which is accountable to all but responsible to none.
The duties of a standing trustee under Chapter 13 are extensive and require the trustee to be an active litigant.(see footnote 48) A Chapter 13 trustee must be an advisor and assist debtors on matters other than legal in the performance of a Chapter 13 plan.(see footnote 49) Some Chapter 13 trustees have provided educational programs to assist debtors in learning basic money management skills while they are in Chapter 13 so that when they leave the program, the likelihood of financial mismanagement is reduced. A Chapter 13 trustee often requires the trustee to assume the duties of a Chapter 11 trustee for debtors engaged in business.(see footnote 50)
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The United States Trustee for each region is required, by statute, to ''supervise'' the standing trustees in the performance of the duties of a standing trustee.(see footnote 51) Chapter 13 trustees provide both monthly and annual reports, to the U.S. Trustee, the annual reports being audited by an independent audit firm. Chapter 13 trustees submit budgets to the United States Trustee, outlining projected expenses of the trusteeship for the ensuing year providing means to determine an appropriate percentage fee for that particular trustee.
The United States Trustee Program has now been transformed into a one-size fits all operation where decisions are made, not at the regional or local level, but in Washington. The United States Trustee Program has read the obligation to ''supervise'' mandating a second guess of the decisions of the private trustee.
A private Chapter 13 trustee is an officer of the court.(see footnote 52) As an officer of the court, the trustee is accountable to the court. Parties in interest, creditors and debtors, can call upon the bankruptcy court to review the actions of the trustee, both in individual cases and in all cases.(see footnote 53)
Sometimes the obligations of a fiduciary in administering a case or cases may conflict with the decisions of the governmental ''supervisors.'' The United States Trustee should have every opportunity to call into question decisions made by the Chapter 13 trustee in which the Chapter 13 trustee may be in breach of its responsibility to debtors and creditors and as an officer of the court. But it is important to remember that the trust administered by a standing trustee is property that is subject to the jurisdiction of the federal judiciary. The decisions made about the administration of that property are directly related to the functions of the court. As one court recently stated:
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Bankruptcy is inherently a judicial process. From the moment a debtor's petition is filed in the bankruptcy court, the debtor's property is in custodia legis . . . From that point forward, the bankruptcy court is charged with overseeing the trustees management in order to insure that the interests of the bankruptcy estate are served.(see footnote 54)
It is altogether fitting and proper that the United States Bankruptcy Court be given specific statutory authority to resolve conflicts between the United States Trustee, as supervisor of the trustees and the trustee who acts as fiduciary over cases conferred to the jurisdiction of the bankruptcy court. Courts have recognized that they have a responsibility to review the decisions of the U.S. Trustee as to whether expenses of a Chapter 13 trustee are actual and necessary expenses of the standing trustee.(see footnote 55) The fact that the statute has reserved exclusively to the United States Trustee the authority to fix the percentage fee of a trustee,(see footnote 56) does not mean that Congress intended the bankruptcy court to abdicate its responsibility to resolve disputes concerning the actions of a trustee that administers cases before the court.
It is also appropriate for Congress to provide judicial review of the United States Trustee's decision to remove a trustee from a rotation of receiving cases. Congress has already articulated the need for judicial review of the removal of a trustee from an existing case.(see footnote 57) The power of the court to remove a trustee is upon a showing of cause and provides to all parties the opportunity for appeal.
Page 213 PREV PAGE TOP OF DOC When a trustee, standing or panel, has found himself or herself at odds with the United States Trustee, the U.S. Trustee has, on some occasions, elected to remove the trustee from the panel of trustees receiving future cases or appointed a second Chapter 13 trustee in a given area. The decision of the United States Trustee, though effectively removing a trustee, has avoided judicial scrutiny.(see footnote 58) For those trustees, particularly standing trustees, who have been forced to make significant sacrifices in accepting the position offered by United States Trustee, the arbitrary nature of future case removal, without judicial review, is appalling.(see footnote 59) Further, when the United States Trustee elects to appoint a second standing trustee in a given area, avoiding the necessity of establishing cause under 11 U.S.C. §324, debtors, creditors, and debtors' attorneys are certainly not well served. The new Chapter 13 trustee must establish separate offices, hire staff and obtain business equipment and computers. This imposes an unnecessary cost on the system.
It cannot be argued that the court lacks the wherewithal or the ability to remove a trustee when such action is appropriate.(see footnote 60)
IMPACT OF THE PRIVATE TRUSTEE REFORM ACT OF 1997
Representative Goodlatte has now introduced H.R. 2592 providing judicial review of United States Trustee's action related to trustee expenses and trustee removal. The legislation introduced appears to simply codify the action that is previously been taken by the bankruptcy courts and district courts when confronted with such disputes.(see footnote 61)
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It is hard to see where an objection could be had to Representative Goodlatte's language. It should be noted that such disputes between the United States Trustee and the fiduciary over what constitutes and appropriate expenditure for the benefit of the administration of Chapter 13 cases in a given district are rare.(see footnote 62)
Some might argue that Representative Goodlatte's legislation would run counter to the intent of Congress when it established the United States Trustee system because it would involve the bankruptcy court in the day to day administration of cases. This is not true. Clearly, representative Goodlatte's legislation contemplates a justiciable issue: the United States Trustee advocating one position and the fiduciary advocating another. The bankruptcy court would be given the opportunity to consider evidence presented by both and, applying the standards in the legislation, would determine whether the proposed expense is reasonable and would benefit the administration of cases. The bankruptcy court making decisions over the administration of cases where advocates for both sides appear in front of it is not an overly intrusive involvement of the bankruptcy court into the day to day administration of bankruptcy cases assigned to them.(see footnote 63)
Subsection (b) of Section 2 of Representative Goodlatte's bill provides a judicial review of the decision of the United States Trustee to cease appointing a trustee to new cases. The standard, however, would be to determine whether the United States Trustee has acted unreasonably or without cause. This simply appears to codify what Congress intended when 11 U.S.C. §324 was passed: that trustees may be removed for cause by motion of a party in interest. The United States Trustee could not avoid this scrutiny simply by refusing to appoint a trustee to new cases.
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In sum, this legislation does not impose a burden on the courts, does not run counter to the existing scheme of law, and imposes no additional cost or requirement on anyone in the system. The legislation does provide to the administrative body, the United States Trustees, clear direction on how disputes between the government bureaucracy and the fiduciary can be resolved efficiently, quickly, and at low costs.
Mr. GEKAS. We thank the gentleman.
Mr. Smith, you say that the U.S. Trustee cries aloud when some procedural mistake is made by a trustee, a mistake in the eyes of the U.S. Trustee. How does the U.S. Trustee hear about that? For instance, if in the course of administering a bankrupt estate, the trustee inadvertently fails to notify a creditor, shall we say, a procedural mishap, how would the U.S. Trustee ever hear about that?
Mr. SMITH. Mr. Chairman, the U.S. Trustee was made to be a party-in-interest. It was created as another entity to participate in each and every bankruptcy proceeding. It has standing in each case. How it would hear about some failure to comply with procedure would either come from the affected partythe one not given noticeor from the trustee, himself, or herself, by having to re-notice a particular group of creditors before a court could act on it.
Mr. GEKAS. Is there a mechanism within the U.S. Trustee structure for a creditor to complain directly to the U.S. Trustee?
Page 216 PREV PAGE TOP OF DOC Mr. SMITH. Yes, there is.
Mr. GEKAS. Does the trustee get notice of that?
Mr. SMITH. The U.S. Trustee is supposed to give us notice of any complaints. The complaints that are filed by parties-in-interest or creditors, or anybody, for that matter, must be investigated under their Initiatives. A complaint can also be treated as a basis for removal. We have been working with the U.S. Trustee on that to advise them and make them aware of the fact that by using that ploy, some disgruntled debtors can make life very miserable for us. We many times face debtors, against who we must bring suit, bringing a complaint against us in the U.S. Trustees office. We then must take the time to respond to that. But, yes, sir; they do receive that; they do give us notice, and we are given an opportunity to respond.
Mr. GEKAS. Let's assume that under the proposed law, you come to an impasse with the U.S. Trustee on the question of notification to creditors. Would that be something that would wind up in the judicial review process that we're talking about?
Mr. SMITH. No, sir
Mr. GEKAS. Or is that something that can be worked out prior to that kind of court situation?
Mr. SMITH. It's somethingit would have to be worked out before. If we don't give notice, then we haven't given proper notice under the Bankruptcy Code and there could not be an act authorized by the court, so, yes, sir; I don't think there's going to be the flood that is talked about here. Most things are going to be worked out.
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Mr. GEKAS. If the question were on the amount of expenses, which seems to be part of the problem here, do you envision a full evidentiary hearing before the bankruptcy judge, pursuant to the proposed law?
Mr. SMITH. Mr. Chairman, I do Chapter 7 work
Mr. GEKAS. Oh, yes.
Mr. SMITH [continuing]. So my application for expense reimbursement would be
Mr. GEKAS. Mr. Morin, or Mr. Hildebrand?
Mr. MORIN. Mr. Chairman, your question was whether there would be a full hearing on the record?
Mr. GEKAS. Yes.
Mr. MORIN. I do not. First of all, I believe that the statute as well as the proposed rule contemplate some exhaustion of remedies and some narrowing of issues. I think by the time it ever came to the attention of a court, it would only be a full hearing on those issues to which the matter had been limited.
Mr. GEKAS. I would envision a full stipulation of facts
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Mr. MORIN. Right.
Mr. GEKAS [continuing]. And a simple court order to follow.
Mr. MORIN. There may be an informal conference on it. It depends. The expenses we incur are service oriented: service to the court, debtors, and creditors. And to the extent that that's an expense that we consider as necessary to provide that service, and to the extent the United States Trustee didn't agree with that, the court would probably really want to hear both sides, but I should think it would be stated succinctly.
Mr. GEKAS. We wouldn't be arguing between $140 and $280, would we?
Mr. MORIN. Absolutely not; they would be over very significant expenses.
Mr. GEKAS. Mr. Hildebrand.
Mr. HILDEBRAND. And if I could interject, that is exactly why I checked with the trustees in Alabama and North Carolina, to see what type of history they have had and, essentially, it's non-existent. The court provides a backstopa place that you can go, to when a dispute a rises and that backstop will promote a reasonable dialogue between the fiduciary and the Government, and that has historically workedwe've already seen it.
Page 219 PREV PAGE TOP OF DOC Mr. GEKAS. The time of the Chair has expired. The gentleman from Tennessee is recognized.
Mr. BRYANT. Thank you, Mr. Chairman, and before I get into my comments and questions, I'd like to also welcome Mr. Hildebrand, from Nashville, Tennessee, and Ms. Vergos was here earlier from Memphis. I'm not sure I actually represent the part of Memphis that the bankruptcy court is inI'm sure I don'tand I know I don't go quite to Nashville, so you're right on the fringes.
Mr. HILDEBRAND. You do represent some debtors in cases that I administer, however.
Mr. BRYANT. I'm sure there's one or two out there. I know, certainly, in west Tennessee, which usually leads the pack.
I'm not sure. Maybe Mr. Hoke does that; I'm not sure. Mr. Hoke was the author of that bill that delayed us quite a bit in Nashville.
But I did want to just comment. I do come from a very basic practice of bankruptcy, and it's become a lot more sophisticated since I left. And I'm one of those folksand I know there are other people on these committeeswhen we have hearings, we actually come in here with an open mind and to listen, but I have found out in Washington that you don't do that. You usually come in here with your mind made up, and every word you say, or every question you ask, the people on the other side say, ''Well, he's made up his mind on this issue, and he's for that side.''
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I can tell you I am listening to both sides. I met yesterday with some of the folks on the U.S. Trustees' side. I will be meeting next week with George Stevenson and George Emerson and Bill Guy, on your side. We do have a division dispute here a little bit on these issues, but I do have an open mind on this and I'm trying to decide what is best.
I truly don't want to go back to the days priorI guess to 1986when there were questions about the handling of funds, and the audit sure helps that out. But, also, another question that keeps cropping up is the coziness that, in the old days, the trustees had with the judges. And here you're suggesting, sort of, not that we get back into that relationship, yet you are putting yourselves in a position where the judge whom you appear before quite often, I guess, is the arbiter of disputes, and I'm not sure.
And one other comment before I open that upMr. Smith, you mentioned a couple of times, independent trustee or independent fiduciary. I think that's almost an oxymoron. I'm not sure I want a fiduciary that is independent that is holding funds for somebody. I don't want too much independence. I think I'm misconstruing what you mean as independent there, because I think there very clearly is a need for oversight and some fences built around it. I don't want independence in the sense I think of an independent personan independent prosecutor, for instance. I don't really want that, in terms of a person who operates in a fiduciary capacity.
Mr. SMITH. May I respond to that?
Mr. BRYANT. Yes, please.
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Mr. SMITH. Mr. Bryant, reallyI want a level playing field. The U.S. Trustee was introduced 10 years back or so as another party-in-interest. The main reason that it was created was to bring about some balance to the smaller Chapter 11 cases. That was supposed to be its major function where you didn't have an active creditor's committee involved. But they also were appointed to appoint and supervise a private panel.
You can submit me to any kind of reporting, auditing, investigation. I've been doing this for a long time. I will continue to abide by any rules. I just don't want to have an unlevel playing field, and when I am subject to the removal at the whim, if you will, for failing to perform this, or some inappropriate temperament, those are things I don't understand. I just need to have something that's subject to review by a court, someone disinterested, someone who's not there micro-managing what I do.
No, sir; I was not trying to imply by independence that I don't want somebody looking over my shoulder. The U.S. Trustee has accomplished a lot with the audits. We welcome those. I want to be given a clean bill of health every year because I have got bonds out there that I have indemnified my bonding companies on; so, no, I don't want to have any of that. And the case closingsthat's another good thing that has been accomplished. They came in there and they put the pressure on us, and we got them closed.
Mr. BRYANT. OK. Mr. Hildebrand, when I started talking about coziness, you had some comments.
Mr. HILDEBRAND. Because we've been talking about the difference and the difference of opinion between the U.S. Trustee and the panel and the standing trustees, I don't want to ignore the fact that there are many areas in that we get along. I think that the focus that both of us have herethe U.S. Trustee, and the panel and the private trusteeis, how can we get the system to work as best as it possibly can? That's a common goal that we both have, and I respect that.
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I have to say that I'm fortunate, because in Region 8, which is the Tennessee and Kentucky region, we've worked fairly well with the United States Trustee, and they've been fairly receptive to our suggestions and concerns. As a matter of fact, my problems have tended to come from the step above that, where Washington tells Region 8 what to do instead of Region 8 telling the trustees what to do.
But with that said, I do not want to get back to the way it used to be, where the judges would appoint trustees, or the judges would interfere in the day-to-day administration operation of a case. I don't want that. I appear regularly before a bankruptcy judge, sometimes I win and sometimes I lose, and I would expect the judges to extend the same type of adjudicatory independence that they do when I appear in individual cases in the issues, if they're ever raised, that Representative Goodlatte's bill would present.
Mr. BRYANT. Mr. Chairman, can I have some additional time?
Mr. GEKAS. Without objection.
Mr. BRYANT. Thank you, and I know we've been here a while but I'm trying to learn more about this.
Do any of you gentlemen maintain private law offices?
Mr. MORIN. Yes, sir.
Page 223 PREV PAGE TOP OF DOC Mr. BRYANT. Do any of you practice any other type of law, or are you totally involved in bankruptcy as a trustee in some capacity? Do you practice other types of law?
Mr. MORIN. Yes, sir; I do real estate work; I do small business, corporate work, tax workwhatever comes in the door, but mostly it's bankruptcy.
Mr. BRYANT. Because generally, I think, there is some law out there that says that you all have no entitlement to future assignment of cases, and that's what I get out of this, is that we'd like to maybe remove some of that uncertainty, because many of you have made large commitments of your practice overheadfirm, building, staff, and personnelmaybe as much as 100 percent in some casesyou, not that much, Mr. Morin.
Mr. MORIN. It's true, sir. I've given up a lot of private practice.
Mr. BRYANT. And you want some certainty, and not just to be removed at the whim of a Trustee, and I understand that.
Mr. MORIN. And we're not asking for that.
Mr. BRYANT. Nor is it like a U.S. Attorney, who can be removed like that, but at least they just walk into an office that's already paid for. They don't have to hire staff. It's somewhere in between that, and I think trying to work through this and set out some ground rulesand I'm glad to see that the Executive Office has at least made an effort now in some.
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Again, it apparently is not satisfactory, but that's a step in terms of some due process, and that would maybe be a step, is it not, toward this idea of some certainty in terms of your future employment as well as the expense side? Is that right?
Mr. HILDEBRAND. It's all one.
Mr. MORIN. It's both. It's certainty, but it's also certainty in terms of being treated fairly from the beginning, and fairness in terms of the manner in which things are discussed with us. That has not always been the case. There has been some reference here that, ''Oh, we've sat down and talked, and we've got this mediation proposal.'' I beg to differ. It's true; there have been some discussions; there have been some accomplishments, but there's not been the type of situation until very recently where there's even been an intimation that we can sit down and discuss some of these things.
And that's the level playing field that Mr. Smith is talking about, and until that happens, then we believe that it's going to continue to be worse. And if we do not have this type of legislation, this agency is then going to run rampant with its own wild interpretations and we'll have no place to go to get their position interpreted.
May I answer a comment about the coziness issue?
Mr. BRYANT. Please.
Mr. MORIN. Many of us appear in front of one judge. Hank appears in front of more than one judge. Those judges have grown to rely upon our judgment with respect to the substantive issues in bankruptcy cases, especially with the ever-increasing volume of cases that we're handling. But we don't take that lightly. It's our credibility. Now there are instances where we are ruled against, and I would hope so. We should not be the final arbiter; that's why we have judges.
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But to the extent that a dispute arose outside of the substantive area of bankruptcy and the cases we administer, but it arose as to how we provide that service, that credibility is at stake just as much, if not more so, if we bring before a judge a dispute that the judge is going to look at us and say, ''What are you bringing that before me for? You know, I value your judgment, this, now I'm going to start looking at what you tell me about other things.'' And that's the controlling thing, from our point of view.
But 324 as it now exists tells the U.S. Trustee, if they want to remove a trustee for cause, bring it before the bankruptcy court on a hearing. What's to keep them from doing that again? What are they afraid of? Are they afraid of losing? I don't know. But if there's an issue there that should be heard, let it be heard. Bring it out in the open, and they should have the confidence in their position. And if they run the risk of losing, maybe everybody will learn something from it.
Mr. BRYANT. I wasn't around up here when the law was passed in 1978, and apparently there was a 6-year period of timeand apparently the law was changed to create the Executive Office of the United States Trustees and given power to assign or not to assign cases, as opposed to the section of law that you referenced on the removal provisions. And I don't know why that was done that way, but, it tells me that maybe there was a reason for it, and I don't know. So, I guess if either of you know, why would we want to go back there?
Mr. MORIN. I don't look at it that we're going back. I look at it that we're clarifying what the removal process really means, because from our point of view, both the Chapter 7 and Chapter 13 trusteesand we've worked together on these issueswe're in complete harmony on that. It's the de facto removal; it's the concept of a removal by atrophy''if we (U.S. Trustee) stop assigning you (private trustees) cases, you're going to dry up, and we're going to accomplish what we want to accomplish anyway.''
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There may be some differing criteria by which a trustee should no longer get cases, but that doesn't mean that an impartial person shouldn't be called upon to make that determination if it's a dispute that the other side can't agree to. Basically, now, it's a capitulation process.
Mr. BRYANT. So the sectionwhat was that, section 324?
Mr. MORIN. Section 324; yes.
Mr. BRYANT. That's still applicable; they can still do that. It's just that there has been added onto that a layer that they can now assign or not assign cases.
Mr. MORIN. But they just get around it, in our view, by not assigning cases.
Mr. BRYANT. I understand.
Mr. HILDEBRAND. There's a real cost that's involved in a decision by the U.S. Trustee not to assign cases to a Chapter 13 trustee, because that means there's another trustee that has to establish a new office, purchase new equipment, hire the personnel, while there's another trustee with a diminishing caseload. So, essentially, the creditors and the debtors are having to pay the costs of two because the U.S. Trustee has elected not to pursue a section 324 removal.
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Mr. BRYANT. OK, one final question. Mr. Smith, do you have any statistics on that particular issue, in terms of how many trustees have been weaned-off, so to speak, or cold-turkeyed off, if there is such a phrase?
Mr. SMITH. No, I do not.
Mr. BRYANT. Does anybody have any numbers of how frequently that occurs?
Mr. SMITH. Just the NABT poll. The big problem is the chilling effect; the lack of due process has upon panel trustees. But I don't have any hard numbers.
Mr. HILDEBRAND. To answer that, there are two situations where the court acted under 324 to remove a standing Chapter 13 trustees. There are several situations where the U.S. Trustee elected toand remove the trustee, some of these are in my written materials because I've footnoted to themand then they appointed another trustee with a diminishing caseload, but for the most part, because there's no review, the U.S. Trustee will come in and say, ''I'm going to do this. I'm going to remove you from getting future cases.'' And if the trustee is thinking about the costs, like I just mentioned, they'll probably resign.
I know that in my region, before Ms. Vergos became the Trustee, the United States Trustee went and visited one of the Chapter 13 trusteesactually after consultation with other trustees saying, ''Is this a problem?'', and we all said, ''Yes, there's a problem''went and said, ''You're not going to get any more cases unless you resign.'' And that person resigned.
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Mr. BRYANT. All right; thank you gentlemen. Thank you, Mr. Chairman, for the additional time.
Mr. GEKAS. We thank the gentleman. We yield to the gentleman from New York.
Mr. NADLER. Thank you, Mr. Chairman.
Let me first say that I regret not having been able to be here for much of the testimony. It's been a very busy day. I will, obviously, review all the testimony. I have no questions for you at this time, but I will review all the testimony. I want to thank you for your participation, and I want to ask Mr. Chairman for unanimous consent that all members have seven legislative days to submit additional questions for the record.
Mr. GEKAS. Hearing no objection, it is so ordered.
We thank the panel for the testimony. We thank everyone for their attendance, and we will review, as Mr. Nadler has indicated, both the written texts and the questions and answers that will be found in the record. We thank you very much.
Mr. GEKAS. This meeting stands adjourned.
[Whereupon, at 1:30 p.m., the subcommittee adjourned.]
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Material Submitted for the Hearing
MR. SMITH'S QUESTIONS FOR THE RECORD FOR JEFFREY W. MORRIS REPRESENTING THE NATIONAL BANKRUPTCY CONFERENCE
Q: To what extent do the bankruptcy judges depend upon experienced, qualified private trustees in the handling of the rapidly increasing volume of cases before the courts?
A: Bankruptcy judge reliance on trustees varies according to the judge, the trustee, and most importantly according to the chapter under which the case is proceeding. In chapter 7 cases, there is no reason for the judge to depend on the trustee to any significant extent. The trustee has the duties set out in §704 of the Bankruptcy Code, and among those duties is the obligation to close the case as expeditiously as possible. While the failure to close cases in an expeditious manner could have some impact on the judge, that impact should not be substantial. Rather, the burdens created by such a lag would be borne most significantly by administrative personnel in the clerk's office and by employees in the office of the United States Trustee.
In chapter 13 cases, however, I believe that the judges do rely to a significant extent on the standing trustee. The standing trustee assists the court by evaluating proposed plans and monitoring the debtor's performance under the plan. This is a particular benefit to the court because the judge must enter appropriate orders in every chapter 13 case either confirming or denying confirmation of the plan, or taking other specific action such as converting the case to chapter 7 or dismissing the case entirely. In chapter 7 cases, the court may not be called on to order any particular action. Thus, the judges do rely on chapter 13 trustees to handle the increasing volume of those cases.
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Q: If the supervisory tactics of the Trustees are not checked or subject to review by authorities outside the agency, do you agree that the administration of cases may be significantly affected?
A: In a word, yes. The United States Trustee is directed to supervise the administration of cases and trustees pursuant to 28 U.S.C. §586(a)(3). I am convinced that in the exercise of that authority, some employees of the United States Trustee have acted inappropriately. I have been told by a number of standing trustees that ''micro management'' by the United States Trustee is a problem. Any institution that relies on individuals to review the work of other individuals will at some time improperly exercise its authority. Moreover, anyone whose work is being evaluated (myself included) is frequently likely to perceive that the evaluation given is not as favorable as is deserved. Independent oversight of the evaluation process should not be necessary on a regular basis, but it should always be available. Just as the presence of the United States Trustee serves as a deterrent to improper action by panel trustee, so too should the availability of judicial review of that action serve as a deterrent against arbitrary action by the United States Trustee. The issue presented by H.R. 2592 is not whether judicial review is appropriate, but whether the proper reviewing court is the bankruptcy court or the district court. As I indicated in my remarks to the Subcommittee, the National Bankruptcy Conference considers the district court to be the proper forum in which to decide these disputes.
My response to the first question provides support for this conclusion, at least with respect to the review of the United States Trustee actions concerning standing trustees. Those standing trustees of necessity have a close relationship with the bankruptcy judges before whom they appear on a regular basis. While it is true that the regularity of those appearances informs the judge of the needs of the standing trustee through that frequent contact, it can also be viewed as creating too close a relationship. The judge over time comes to rely on the trustee's ability and judgement in opposing or supporting confirmation of chapter 13 plans. The efficient operation of the court makes this reliance essential. The judge does not, however, evaluate the efficiency or propriety of the administrative operation of the standing trustee's office. There is not reason to believe that the bankruptcy judge is better able to review United States Trustee decisions on those matters than is a district judge. Furthermore, the necessarily, an appropriate, close relationship between the bankruptcy judge and the standing trustee permits one to conclude (whether rightly or wrongly) that the bankruptcy judge will ''look out'' for the interests of the trustee who appears before that judge on a weekly or even daily basis. Consequently, we believe that judicial review of United States trustee supervisory decisions is both necessary and proper, but we believe also that the review should take place in the district court.
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Hon. George W. Gekas, Chairman,
|U.S. Department of Justice|
|Office of the Assistant Attorney General|
|Washington, DC, January 27, 1998.|
Subcommittee on Commercial and Administrative Law,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: This letter responds to your November l9, 1997, request to Joseph Patchan, Director of the Executive Office for United States Trustees to answer certain questions pertaining to Mr. Patchan's testimony before your Subcommittee on October 9, 1997. Responses to the questions are attached to this letter. The information in these answers is being furnished pursuant to your Subcommittee's oversight of the United States Trustee Program (USTP) and the bankruptcy system.
We also want to thank you for the opportunity to appear before the Subcommittee on Commercial and Administrative Law to discuss the Department of Justice's new rule, 28 C.F.R. 58.6. The rule provides a quick, inexpensive mechanism for an affected bankruptcy trustee to obtain review of the decision of a United States Trustee by the Director, the ranking Justice Department official in the United States Trustee Program. Under the new rule, the Director's decision constitutes final agency action and a trustee has the right and the ability to obtain judicial review of it from a United States district court judge pursuant to the Administrative Procedure Act, 5 U.S.C. 552, et seq. Enclosed is a copy of the final rule, which became effective on November 3, 1997. The Department is committed to making the rule work effectively and fairly.
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Please let me know if we can be of further assistance. The Office of Management and Budget has advised that there is no objection from the standpoint of the Administration's program to the presentation of this report.
|Assistant Attorney General.|
cc: Hon. Jerrold Nadler,
Ranking Minority Member.
1. Assuming that it is only the United States Trustee that objects to providing judicial review in the bankruptcy courts as to disputes between private panel and standing trustees and the United States Trustees, can you explain to this Committee why it is only your agency that opposes due process legislation for the private trustees?
The United States Trustee Program does not oppose giving trustees the right to seek judicial review in district court. Indeed, the Program drafted its recent administrative rule not only to provide private panel and standing trustees with a procedure to obtain final review of agency actions, but also to allow these individuals to proceed to district court, with review under the Administrative Procedure Act, 5 U.S.C. 552, et seq. (''APA''), if they are not satisfied with the decision of the Director of the United States Trustee Program (USTP or Program).
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Our opposition to H.R. 2592 stems from the fact that it would reestablish a system in which bankruptcy judges performed the two incompatible functions of judge and administrator. For nearly a century, it was widely acknowledged that this scheme failed to foster a fair or effective Bankruptcy System, and failed both the debtors and creditors for whose benefit the system existed.(see footnote 64) As a House of Representatives report on the proposed Bankruptcy Code concluded in 1977, ''[a]s administrator of bankruptcy cases, and the individual responsible for the supervision of the trustee or debtor in possession, it is an easy matter for a bankruptcy judge to feel personally responsible for the success or failure of a case . . . The institutional bias thus generated magnifies the likelihood of unfair decisions in the bankruptcy court. . . .'' H.R. Rep. No. 595, 95th Cong., at 91, 1st Sess. (1977), reprinted in 1978 U.S.C.C.A.N. 5963. This system should not be reconstituted under the misnomer of trustee due process.
Congress fixed the problem of judges doubling as judges and administrators by transferring administrative functions, including the appointment and supervision of trustees, to the United States Trustee Program within the Department of Justice. The Program now appoints and supervises trustees and, if appropriate, suspends or terminates future case assignments to them. Giving bankruptcy judges judicial review over the Program's decisions to suspend or terminate trustees, as H.R. 2592 proposes, would effectively reinstate the old system that generated so much congressional criticism and would undermine the Program's efforts to serve as a watchdog of the Bankruptcy System. The Program exists to protect the interests of debtors, creditors, and the public. For the Bankruptcy System to work, debtors and creditors must have faith in it. By all accounts, including numerous individuals who have testified before this Subcommittee, the Program has performed its mission well and has inspired public confidence in the administration of the Bankruptcy System.
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The Department's final rule strikes an appropriate balance between the ability of trustees to obtain review of case cessation decisions and the right of debtors' and creditors' to effective representation by the best possible group of trustees. The rule establishes a fair process and it should be afforded the opportunity to succeed.
2. The criteria or grounds for termination of case assignments to a private trustee, as contained in the rules recently published by your agency, contains a non-exclusive list of 14 actions for which your agency may cease assigning cases. The private trustees have argued that this list is highly subjective and therefore is subject to unfair application and interpretation. The rules for debarment and suspension of other agencies of the Federal government do not contain such subjective criteria. On what basis has your agency decided that it.does not need to follow the criteria, as well as procedural safeguards, adopted and followed by other agencies as to suspension and debarment?
The Program devoted considerable effort to identifying the instances in which it might be appropriate to cease assigning future cases to trustees. The rule sets forth 14 non-exclusive examples of such conduct or circumstances. Those 14 grounds are not arbitrary. To the contrary, the reasons why trustees may be terminated under the rule fall into three general categories: (1) situations involving dishonesty or lack of competence; (2) circumstances in which the trustee's performance may meet minimal levels of competence but other more qualified persons may be willing to become a trustee; and (3) instances of reduced demand for trustees in a specific geographic area, such as when the area's volume of cases declines. The grounds specified in the final rule will guide United States Trustees in the exercise of their discretion. They underscore important principles that benefit the proper administration of cases and the efficient functioning of the Bankruptcy System.(see footnote 65)
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The Program relied upon a number of sources in devising these categories, the foremost of which is its considerable experience in supervising trustees. The Program also considered procedures adopted by Bankruptcy Administrators that supervise trustees in North Carolina and Alabama. Under section 302(d)(3)(I)(I) of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Bankruptcy Administrators, who are Judicial Branch officials, supervise trustees in those two states until 2002, at which time their supervisory responsibilities shall transfer to the Program. In reaching their decisions, Bankruptcy Administrators may consider 16 non-exclusive factors that are, in large measure, identical to the factors set forth in the final rule. We are surprised that the trustees express dissatisfaction with the final rule's criteria, as Bankruptcy Administrators have applied virtually the same criteria for years to evaluate whether to terminate case assignments to trustees in North Carolina and Alabama. To our knowledge, the trustees have never alleged these criteria have produced odd or unintended results in those states.
The Bankruptcy Administrators' procedure differs from the Department's final rule in at least one significant respect. Their procedure allows the trustee to seek reconsideration only from the Bankruptcy Administrator who made the initial decision; it provides no further avenue for a trustee to seek review by another officer or court. Indeed, the Bankruptcy Administrators' procedure expressly prohibits any form of judicial review. In contrast, the Department's final rule provides that review of a United States Trustee's decision shall be conducted by the Director and a trustee may thereafter obtain judicial review of the Director's final decision from a United States district court under the Administrative Procedure Act.
Page 236 PREV PAGE TOP OF DOC The Program did consider the Department of Justice's debarment regulations, 28 C.F.R part 67, in drafting its final rule. Although the final rule bears some significant similarities to debarment proceedings, the Program concluded that debarment was an imperfect analogy to the cessation of case assignments and determined it would be unwise to adopt a pure debarment model. In any event, the Department's final rule far more closely resembles the procedures used in the Department of Justice's own debarment rule than do the procedures proposed by H.R. 2592, as outlined in more detail below.
Important differences exist between debarment and a cessation of future case assignments to trustees. First, debarment involves government entitlements or government contracts. The Bankruptcy Code does not create a government entitlement program that guarantees a small group of trustees a right to continue receiving cases forever. Nor do trustees have a contract with the government. Thus trustee case assignment decisions fall outside the two circumstances in which the government uses a pure debarment model to resolve disputes.
Moreover, courts have indicated that a debarment, which has severe government-wide consequences, may implicate a constitutionally protected interest. See, e.g., ATL. Inc. v. United States, 736 F.2d 677, 683 (Fed. Cir. 1984); Transco Security. Inc. v. Freeman, 639 F.2d 318, 321 (6th Cir. 1981); Old Dominion Dairy v. Secretary of Defense, 631 F.2d 953, 966 (D.C. Cir.), cert. denied, 454 U.S. 820 (1981). In contrast, a trustee has no constitutional interest in being assigned future cases. Brooks v. United States, 127 F.3d 1192 (9th Cir. 1997); Joelson v. United States, 86 F.3d 1413, 141518 (6th Cir. 1996); Richman v. Straley, 48 F.3d 1139, 1143 (10th Cir. 1995); Shaltry v. United States, 182 B.R. at 842 (D. Ariz.), affd, 1995 WL 866862 (9th Cir. 1995).
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In addition, debarment carries far more significant consequences than mere case cessation. Debarments have dramaticgovernment-wideconsequences. As a matter of federal law, someone who has been debarred in a government contracting proceeding cannot bid on any government contract from any agency. The Department of Justice's procedures for debarment from nonprocurement programs, 28 C.F.R. part 67, provide that ''[a] person who is debarred or suspended [under the rule] shall be excluded from Federal financial and nonfinancial assistance under Federal programs and activities.'' 28 C.F.R. 67.100. Indeed, ''debarment or suspension of a participant in a program by one agency shall have government wide effect.'' Id. In many instances a debarment has even greater significance because some states refuse to contract with persons who have been debarred by an agency of the federal government.
A cessation of future case assignments to a trustee has no such effects. Unlike a debarment, it does not prevent a trustee from applying for or participating in any other program administered by the Department of Justice or any other part of the United States government. The United States Trustee's decision does not even affect a trustee's ability to handle other bankruptcy cases to which he has already been assigned. Removal from existing cases is dealt with separately under section 324 of the Bankruptcy Code.
Indeed, the entire purpose of debarment is fundamentally different from termination of case assignments. Debarments protect the federal government from those who have committed serious wrongdoing. See 28 C.F.R. 67.115(b) (Department of Justice's debarment procedures). In contrast, suspensions and terminations of future case assignments foster an efficient system of case administration and ensure that debtors and creditors, the intended beneficiaries of the bankruptcy system, receive the best service from trustees that is possible.
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Notwithstanding the fundamental differences that exist between debarment and a cessation of future case assignments, the USTP's final rule adopts procedures that embody many of the concepts that underlie the Department's debarment procedures. Both ensure that the affected party will be made aware of the Department's action. Both allow the affected party to provide whatever material they want the Department to consider before it reaches a final decision. Both allow the Department, as opposed to a third party, to reach a final decision. Both favor quick informal dispute resolution instead of overly formalized, litigation-type procedures. See 28 C.F.R. 67.310 (''Department of Justice shall process debarment actions as informally as practicable''). Neither authorize discovery. Neither use an ''on the record'' hearing, with all the time and cost that entails. In summary, each constitutes a fair mechanism for the Department to reach final decisions.
Both also authorize the Department to gather all relevant data before reaching a decision in a particular case. In fact, section (h) of the final rule, like a debarment proceeding, authorizes the Director to request additional information, which could include a face to face meeting. This allows the Director or his designee to conduct a face to face meeting with the trustee and the United States Trustee if the Director determines that there is a genuine dispute over facts material to the Director's determination. The level of formality and complexity of a meeting in a particular case will turn upon the nature of the factual dispute presented. In some cases a meeting could involve a trustee appearing with a representative, submitting documentary evidence, presenting witnesses, and confronting any witnesses the agency presents. This is similar to the Department's debarment regulation, 28 C.F.R. 67.313, which authorizes a similar meeting in the debarment context but only if the government first determines a dispute of material fact exists.
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By way of contrast, H.R. 2592 deviates fundamentally from the debarment model. Unlike a debarment proceeding, the proposed legislation requires a full blown on the record trial in every case. Under the sections 556557 of the Administrative Procedure Act, 5 U.S.C.556557, such a hearing would require discovery and a full evidentiary trial before the agency. Unlike the procedures used for debarments and those adopted in the final rule, H.R. 2592 is neither expeditious nor cost effective.
Even more important, H.R.2592 would be very difficult to administer from a practical standpoint. As Professor Lubbers indicated in his testimony, H.R. 2592's 30 day deadline for the Department to conduct an on the record hearing is ''unrealistically short.'' H.R. 2592 mandates that the Department conduct a full administrative trial within 30 days. It can take years for agencies to conduct such complex ''on the record'' hearings.(see footnote 66) In civil litigation, the United States is given 60 days simply to answer a written complaint.
Not only is the process mandated by H.R. 2592 unrealistic in its time deadlines, it also bears no resemblance to any debarment proceeding used anywhere in the federal government. Debarment proceedings, like the Department's final rule, use streamlined procedures for reaching final agency decisions. Indeed, under the final rule's stream-lined procedures, the Director will issue a final decision within 45 days of receiving a trustee's request for review.
As Professor Lubbers also noted, H.R. 2592 deviates from accepted notions of administrative law in another fundamental respect. Normally, an agency decision which is based upon a full blown trial before an administrative law judge, as H.R. 2592 proposes, is then reviewed directly by a United States court of appeals. H.R. 2592, however, proposes starting review three levels lower, before the bankruptcy court. Justice would not be served by forcing a bankruptcy court to re-review an agency decision that already has undergone a full blown trial before an administrative law judge. This would simply increase the time and the cost necessary to reach a final decision. The procedure used by the Judicial Branch's own Bankruptcy Administrator program does not authorize any type of trial, does not allow for any type of discovery, and prohibits all forms of judicial review, either by a bankruptcy court or a district court. Thus, H.R. 2592 has no grounding in debarment, administrative law, or in the method by which the Program or Bankruptcy Administrators currently resolve trustee termination disputes.
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In sum, the Department's final rule gives trustees a quick and meaningful method of agency review. It ensures that case cessations will occur only when they are appropriate and supported by the record and it gives trustees the opportunity to dispute the Program's final decision before a federal court. The criteria upon which the rule is based draw upon a number of accepted standards both in agency and bankruptcy law and the procedures parallel existing administrative law models. We are confident that the rule provides a fair and workable mechanism through which trustees can obtain meaningful review.
3. You have stated that your agency wants to treat private trustees 'fairly,' yet from our review of your rule, and the criticisms of that rule, it appears to us that your agency defines 'fairness' quite differently than most of us do. Can you explain and justify to this committee why your concept of 'fairness' appears to be so lacking as to substantive and procedural due process?
We believe the final rule is fair in that it strikes an appropriate balance between the interests of trustees and the interests of the bankruptcy system. Section (I) of the rule ensures that a decision to stop assigning cases must be an appropriate exercise of a United States Trustee's discretion. The United States Trustee's decision must be supported by the record. If it is not, the Director of the United States Trustee Program will not affirm the decision. To ensure fairness, the rule provides a mechanism by which a United States district court and a United States court of appeals will be able to review the Program's decisions to cease assigning future cases. The rule is supported by the National Bankruptcy Conference and was endorsed by Professor Lubbers who testified before the Subcommittee.
As discussed above, it would be unwise to return to the old system that Congress discarded with the enactment of the Bankruptcy Code and the creation of the United States Trustee Program. That system was put to rest because it failed to protect the interests of the debtors and creditors for whom the Bankruptcy System was created. It would be unfair to debtor and creditor alike to re-institute such a discredited model of bankruptcy administration.
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4. One of the announced missions of your agency is to ferret out bankruptcy crime. Yet, we have received disturbing reports that little, if any instances of crime, once referred to your agency, ever get addressed or prosecuted. Can you explain to us any way in which the proposed changes contained in H.R. 2592 will detract from the announced mission of your mission of your agency to discover and pursue fraud.
The United States Trustee Program devotes considerable time and resources to detecting bankruptcy crimes. While we do not know to what reports you refer, we disagree that few if any instances of crime referred to the Program get addressed or prosecuted. This Attorney General has been especially aware of the need to provide a strong deterrent to bankruptcy fraud and has made prosecution of these offenses a priority. Indeed, in February 1996, the Attorney General announced ''Operation Total Disclosure'' a nationwide law enforcement initiative aimed at prosecuting people who illegally conceal assets, file fraudulent bankruptcy petitions, or otherwise abuse the bankruptcy system.
It has been and will remain Program policy that every allegation of a bankruptcy crime shall be investigated by the Program. When credible evidence of a crime is uncovered, the Program refers that evidence to the Federal Bureau of Investigation and the United States Attorney for further review and prosecution. Since 1995, the Program's investigations have led to approximately 265 convictions, which we believe serve as an important deterrent to bankruptcy fraud.
We would point out, however, that, if enacted into law, H.R. 2592 could affect our efforts to combat bankruptcy fraud if the fraud involved a trustee. While we recognize that most trustees are honest, and that trustee fraud is a small percentage of the overall bankruptcy fraud problem, trustees are fiduciaries who occupy important positions of trust in the bankruptcy system; therefore their conduct must be above reproach.(see footnote 67)
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The major obstacle H.R. 2592 will impose in our fight against bankruptcy fraud is the creation of a standard of review that is not sufficiently deferential to the agency. Under H.R. 2592, a bankruptcy judge could overturn the decision to cease assigning cases to a panel trustee if the Trustee acted ''unreasonably and without cause.'' This may lead a bankruptcy court to substitute its judgment of what is ''reasonable'' for that of the Program in matters regarding a possible or alleged violation of the Federal criminal law.
We do not dispute the bankruptcy court's prerogative under 11 U.S.C. 324 to determine whether there is ''cause'' to remove a trustee from existing cases because, in that instance, the court must decide what is in the best interest of the estates. However, insofar as future cases are concerned, there are no estates whose interests must be considered. It is appropriate, indeed essential, that judicial review of the Program's decision to decline to appoint trustees to future cases be governed by an adequate standard that recognizes the Program's expertise and responsibilities in overseeing the administration of bankruptcy cases. That expertise extends not only to administrative matters that impede efficiency but to conduct that fosters fraudulent or grossly negligent practices.
5. In fact, each private trustee, especially standing trustees, is audited each year by independent auditors selected by your agency and paid for by the private trustee. Is there any reason why those audits do not or should not uncover any indication of wrongdoing or breach of fiduciary duties by private trusted?
Chapter 13 standing trustees undergo an annual financial audit. The audit is designed to detect material misstatements in financial statements of the trustee's operations. Any reported financial misstatement or weakness in internal controls is investigated by the United States Trustee. A financial statement audit provides the United States Trustee with a snapshot of the trustee's fiscal operation; it is, however, only one aspect of the United States Trustee's oversight. Audits do not negate the need to review individual bankruptcy case files to determine whether a trustee is satisfactorily performing his or her trustee duties. Those aspects of the trustee's performance are judged by other means, including annual evaluations, reviews of complaint resolution and management reviews. Thus, for example, if a trustee is negligent in handling a particular case, has problems dealing with debtors or creditors, or disburses incorrect dividends to creditors, those problems ordinarily would not be detected by the annual financial audit absent some financial irregularity.
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Chapter 7 panel trustees also undergo periodic examinations by the Department of Justice Office of Inspector General. These examinations, together with a myriad of other reviews, enable the United States Trustee to protect against fraud.
To augment audits and examinations, United States Trustees employ a host of supervisory tools to monitor trustee performance. This encompasses more than mere theft. An honest but incompetent trustee can be just as dangerous as a crooked one because an under performing trustee requires constant supervision. While the majority of trustees perform their duties quite well, the types of mistakes problem trustees may make are legion. For example, they may overlook assets, they may be slow to administer a case and distribute funds to creditors, they may disburse incorrect dividends, or they may not object to improper claims, to name just a few problems commonly associated with problem trustees.
The Program's structure and procedures for supervising trustees are time consuming. They require United States Trustees to observe all facets of a trustee's operation, often over a long period of time. They require United States Trustees to analyze the trustees' operations. Thus, while audits assist the United States Trustee in ensuring that a trustee's financial records are in order, they are only one of the many supervisory tools that United States Trustees employ to ensure that debtors and creditors are served by competent trustees.
6. Under Section 324 as currently enacted, the court '. . . may remove a trustee, other than the United States trustee . . . for cause.' If this Code section were changed to permit the court to consider removal of the United States trustee based upon excessive use of authority against a private trustee, would your agency oppose such a change?
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We think the proposal is unnecessary and inappropriate. Congress consciously placed the Program within the Department of Justice in order to preserve its independence to act in the public interest. court has noted, in creating the United States Trustee Program, ''Congress specified that the U.S. Trustees were to be independent of direct court supervision, as 'executives of the bankruptcy network.' '' United States Trustee v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (quoting in part H.R. Rep. No. 595, 95th Cong. 8889).
United States Trustees are Justice Department officials who are appointed by and who serve at the pleasure of the Attorney General. 28 U.S.C. 581 (a) and (c). In Carlucci v. Doe. 488 U.S. 93, 99 (1988), the Supreme Court held that a statute granting a public official the power to appoint an individual also confers the power to terminate that individual unless the statute expressly provides otherwise. The Court held that ''as a matter of statutory interpretation  absent a 'specific provision to the contrary, the power of removal from office is incident to the power of appointment.' '' Carlucci v. Doe, 488 U.S. at 99 (Secretary of Defense had power to terminate employee under provision of National Security Agency Act of 1959 that mentioned only appointment) (quoting in part Keim v. United States, 177 U.S. 290, 293 (1900)). Thus, as a matter of federal law, the power to replace United States Trustees resides in the Attorney General.
Allowing the bankruptcy courts to remove U.S. Trustees for 'excessive use of authority against a private trustee,' thereby placing concurrent removal authority over U.S. Trustees in the bankruptcy courts and the Attorney General, would raise a significant question of constitutional law. Under 28 U.S.C. §581 & 586(c), U.S. Trustees are executive branch officers. See also Lawline v. American Bar Ass'n, 956 F.2d 1378, 1384 (7th Cir. 1992), cert. denied, 510 U.S. 992 (1993). It could be argued that vesting in the bankruptcy courts concurrent removal power over such executive branch officials would violate the principle of separation of powers by inappropriately interfering with the ability of the executive branch to perform its constitutionally assigned functions. Cf Morrison v. Olson, 487 U.S. 654, 68283 (1988) (Special Division's power to terminate the office of the independent counsel not a sufficient threat of judicial intrusion into the executive branch to violate Article III because power does not extend to removal of independent counsel while his investigation is underway; only Attorney General has that removal power). Moreover, even if the U.S. Trustee's role is redefined (at least implicitly) as not solely executive, a serious issue remains. Although we recognize that, in certain circumstances, one branch may exercise removal power over a member of another branch, see Mistretta v. United States, 488 U.S. 361, 411 n.35 (1989), there is a serious question whether Congress can vest control over an officer in two separate branches and thereby diminish the accountability of each branch for the actions of that officer. Finally, the Justice Department carefully monitors the performance of United States Trustees. It has removed and has not reappointed United States Trustees in the past and will do so again whenever the circumstances make that appropriate.
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We should also note that if a problem arose, the final rule protects private trustees since a United States Trustee's case cessation decision is subject to review by the Director and by a district court judge, neither of whom would condone excessive use of authority.
7. Under the proposed changes to section 324 in H.R. 2592, there is no language or even an inference that the Bankruptcy court has the power to 'appoint' a person to serve as a private trustee, yet in the statements from your agency in opposition to this change, you have inferred that the change does create a power to appoint. Do you have any qualifying language you would suggest to ensure the Bankruptcy court does not have any power to appoint? Do you contend that this change, if enacted, creates a 'power to appoint' in terms of preventing the agency from 'unappointing'
a private trustee?
As presently draped, some bankruptcy courts would use H.R. 2592 to prevent the Department from ''unappointing'' trustees, perhaps even those who have engaged in dishonest or incompetent conduct. In very real terms, H.R. 2592 places the power to hire and fire trustees or to continue trustees' appointments in future cases back into the hands of bankruptcy courts and thereby resurrects a system that Congress discarded two decades ago with the All support of, and praise from, all segments of the bankruptcy community.
INSERT OFFSET RING FOLIOS 36 TO 48 HERE
MR. SMITH'S QUESTIONS FOR THE RECORD FOR LAURENCE P. MORIN REPRESENTING THE ASSOCIATION OF BANKRUPTCY PROFESSIONALS
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Q: Would you please give this committee an historical perspective on the relationship between the Executive Office for U.S. Trustees and the Chapter 13 Trustees?
A: Before undertaking a narrative discussion on this point, perhaps a chronological list would help put this topic in perspective.
The following abbreviations are used throughout the answers to the questions submitted to Laurence P. Morin, President of Association of Bankruptcy Professionals.
The Executive Office of U.S. Trustees is referred to herein as ''EOUST'' or ''the Executive Office'';
The Association of Bankruptcy Professionals, Inc. is referred to herein as ''ABP'';
The National Association of Chapter 13 Trustees is referred to herein as ''NACTT'';
The National Association of Bankruptcy Trustees (Chapter 7) is referred to herein as ''NABT.''
1978: U.S. Trustee program was created as a Pilot Program, covered twelve locations with minimal dealings with private chapter 13 trustees;
1986: Congress authorized U.S. Trustee to cover all regions and judicial districts in the United States (except for North Carolina and Alabama which still are outside U.S. Trustee jurisdiction);
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19861988: supervision of private chapter 7 and 13 trustees was phased in by U.S. Trustee; concentration was on standardizing the budget and audit processes, very little supervision or controversy during this period;
19891991: chapter 11 case filings were peaking which kept U.S. Trustees in the regions fully occupied, and the Executive Office did not deal with private trustees to any measurable extent;
19911992: as chapter 11 filings declined, EOUST, under John Logan as Director, turned its attention towards increased supervision of chapter 7 and 13 trustees; a Handbook was promulgated for chapter 13 trustees and was based on the work of just a few individuals in the field for the U.S. Trustee, and outside of EOUST; during this period, the chapter 13 trustee organization (NACTT) formed a liaison group, and met with designated representatives from the U.S. Trustee program to discuss Issues of common interest;
19921993: encouraged and promoted by John Logan's style and interest, an adversarial atmosphere quickly emerged as between the EOUST and private trustees; this attitude was intensified at the lower, local levels of this agency, with virtually no procedure for review or appeal by a private trustee, and no apparent concern over the actions or tactics of a U.S. Trustee;
19941996: the NACTTUST liaison process collapsed as certain key liaison committee members left the U.S. Trustee program; during this period, there were virtually no meetings or discussions of any substance between the EOUST and chapter 13 trustee organizations
Page 248 PREV PAGE TOP OF DOC19951996: as Mr. Patchan assumed his duties, meetings were set up at the initiative of the private trustee organizations; NACTT continued as a 501(c)(3) organization, and Association of Bankruptcy Professionals (ABP) was formed at this time to engage actively in seeking legislative changes to address these concerns. While dialogue with Mr. Patchan or his designees became more frequent, there was no indication of any agency willingness to consider compromise; ABP made it very clear that dispute resolution procedures with due process assurances were essential to any future meetings and discussions;
1996: In July, Senator Grassley introduced legislation (S. 1559) to provide for judicial procedures for private trustees to resolve disputes with the U.S. Trustee; to this, the U.S. Trustee reacted by seeking its own code provision for judicial review. However, there never was any discussion between the U.S. Trustees and private trustees as to these matters and during the 104th Congress, the U.S. Trustee sent letters to Congress which seriously misrepresented many material facts in support of the legislation they proposed;
19961997: after the fall elections of 1996, the issue of ''Private Trustee Due Process'' was presented to and taken up in the House of Representatives. Chairman Hyde asked for the U.S. Trustee's proposed procedures for resolving these disputes; when received, Chairman Hyde asked ABP to provide comments, and those comments then were forwarded to Mr. Patchan for the agency's response. Eventually, a response was provided, but close on the heels of that letter, the agency published a proposed rule [See Question #4] which did not differ in any material way from its initial position on such a procedure.
There has been very little direct dealings between an individual private trustee (chapter 7 or 13) and the EOUST; rather, it has been the trustee organizationsABP and NACTT for the chapter 13 trustees, and NABT for the chapter 7 trusteeswho have been involved in meetings with EOUST representatives.
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Using this chronology as a guide, perhaps it is evident that with the decline of chapter 11 cases to administer and supervise, this agency has turned towards the chapter 13 trustees who, for many years prior to the existence of this agency, have operated a very successful program disbursing billions of dollars to creditors, enable deserving debtors to retain homes and get a true ''fresh start'', and managing large caseloads for the benefit of the Courts.
Gradually, this agency became increasingly active, targeting certain areas of trustee operations to become ''nationalized''. The EOUST encouraged the local/field people to ''go out and look for problems'' without giving these federal bureaucrats any meaningful criteria, or taking steps to ensure that they were trained to exercise such authority appropriately. For example, trustee expenses such as personnel, office rent, equipment purchases, training and travel have all been the object of excessive scrutiny by overzealous staff members of the U.S. Trustee. To a noticeable extent, the U.S. Trustee has attempted to equate the expenses of trustees in the private sector with those customarily incurred by agencies of the federal government. The most noticeable areas deal with personnel, such as:
(1.) limited job descriptions and assignment of duties without regard to whether an office may cross-train or adopt employment practices to suit their own needs;
(2.) setting salary amounts and ranges;
(3.) limiting employee benefits such as health insurance and retirement programs without regard to the customs in the particular area.
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Also, even though a Handbook had been published (in 1991), no attempt was made to put into place a fair, consistent procedure to make revisions or amendments to this guideline which the private trustees were expected to follow. Rather, the agency made decisions as to trustee expenses or practices based upon isolated transactions, and then applied those individual decisions to all trustees, but without notifying all trustees that such a practice would be followed.
During the early 1990s, the private trustees not only sensed the tension and problems as to budgets and micro management, but in response to that, sought through the U.S. Trustee Liaison to draft, in conjunction with agency representatives, a fair and meaningful dispute resolution procedure. This agency would have nothing to do with such a concept! Not only did they oppose allowing any judge to decide disputes, but they did not even take the initiative to promulgate an internal review procedures within the agency. As noted in the chronology, in 1995, ABP made it very clear that such a procedure was and would be the foundation of our effort, but it took the Grassley Amendment (S. 1559) to get this agency to move at all towards such a concept.
Then, only when Chairman Hyde directed certain questions towards the Director of this agency, Mr. Patchan, were any internal procedures ever made known.
If the U.S. Trustee discovers either a practice or transaction which they construe as improper, rather than give the trustee a reasonable opportunity to correct the situation, this agency now has given itself the power to make a final decision terminating case assignments to, or removing the trustee from administering cases.
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It may reasonably be anticipated that the EOUST will tell you a different story. We do not believe their story is credible. They exaggerate every problem and issue, and focus all of their efforts and position papers on justifying their continued existence, both as an agency, and for individual positions and budget considerations. They will tell you that they have found and erased fraud; yet, when asked to list the instances they have ''cleaned up'' there is no list to be found.
This is an agency afflicted with an incurable case of ''mission creep'', even to the point that recent rule making and legislative proposals are focused on enabling this agency to expand its duties into areas where, the problems have been exaggerated.
Even though this agency has been ''around'' for from ten to eighteen years, they still have many people assigned to supervisory positions who have little or no experience in the areas over which they are to ''supervise''; and they are attempting to tell experienced private trustees how to do their job in the process.
Q. Would you please explain to this committee what the present process is if a trustee gets into a dispute with the U.S. Trustee over expenses?
A. There really is none at this time, nor has there been in the past. Further, it is only because of the interest and inquiry of this Committee that this agency has taken any steps to promulgate procedures for any time of dispute resolution as between private trustees and employees of this agency.
Page 252 PREV PAGE TOP OF DOC Please do not be misled by any representations by the U.S. Trustee that there are procedures to resolve disputes. As will be shown below, the current process necessitates that the private trustee to capitulate to the decision of the U.S. Trustee or the requested expense item will be disallowed. In many instances, even if the expense was necessary for the trustee operation or reasonable by criteria other than those applied by the U.S. Trustee, the private trustees have been required to pay the expense from personal funds.
The essence of this position is that the U.S. Trustee takes the position that it is allowed, without review by anyone, to impose its judgment over that of the private, independent trustee, and this authority is not limited to matters of expenses.
As you may know, there are 21 regional U.S. Trustee offices, under those offices there are many local offices, the number of which varies based on the number of courts, number of private trustees, case filings, and population centers. Those who head up each local office usually are titled ''Assistant U.S. Trustees'', and there is a wide variety of titles for other persons at the local level. For each region, there is a Trustee Co-ordinator who handles the chapter 13 trustee budgets for all trustees within the region; the Co-ordinator also will work with the local office employees, and the authority of each Co-ordinator varies based on the attitude and management style of the Regional Trustee.
The process for resolving disputes should not be driven by personality. Rather, there must be a system instituted which is based upon an underlying fairness and due process.
If the Regional Trustee is reasonable, the private trustee can discuss differences, the basis of the positions taken by each side, and can reach workable compromises in some instances. But, if the Regional Trustee or his designee is NOT willing to take a reasonable approach, there is NO procedure by which the denial of a budget request can be reviewed.
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Just so you will not be misled, however, the U.S. Trustee recently has indicated that it does now have an informal review process by which the decision from a Regional office may be reviewed within the office, or taken to the EOUST. [see further discussions under Question #4]. Unless and until this agency proves otherwise, however, it is the position of the private trustees that this is nothing but a ''rubber-stamp'' ratification process, with little likelihood that any decision of a lower level agency employee will be overturned.
If the Regional Trustee is NOT reasonable, there is no chance of discussion at the local level, and a strong probability that the decision from the Regional Office will be automatically supported by the EOUST.
All trustee expenses are budget item issues, and usually the disagreements arise over specific line items rather than the budget as a whole. The policies and practices vary between the regions as to preliminary budget reviewas to who is to look at it first, and who has the final say.
While there are many disputes that occur and remain at the local or Regional level, that does not mean that the EOUST does not also get into the act. Several private trustees can report that their budgets were approved at the Regional level, only to be rejected from Washington, based on some sort of ''national standard''. But, whether or not this occurs often, almost every trustee can report that the Regional office, when it does approve a budget or line item request, will do so with the caveat, ''it still depends on Washington''.
The EOUST's new procedures do nothing to encourage private trustees to report abuses or to take expense disputes to the next level. In fact, it is believed that some of the Regional Trustees actually control the budget process to the extent that the EOUST has little say over the decisions of a particular regional trustee.
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Further, even if the U.S. Trustee procedure did appear workable, there is no confidence that if a trustee appeals a dispute to the EOUST that a meaningful review would occur that would:
cause the abusive or unreasonable U.S. Trustee behavior to cease;
increase the likelihood that the private trustee will experience retaliation or recrimination from the assistant or regional trustee;
promote a better result of level of communication.
In simple terms, the U.S. Trustee considers that it has the authority to cut off a trustee's compensation and expense funds for any questioned expense incurred, even if the expense may be proven to be reasonable and/or necessary for the operation of the trustee's office.
if a trustee decides that it is necessary to hire additional staff to meet the demands for providing services to creditors, debtors and the Court, unless the U.S. Trustee approves such a request in advance, the private trustee is prohibited from incurring such an expense;
if a trustee needs to purchase replacement equipment on an emergency basis, the U.S. Trustee has been known to oppose such a purchase, without making a determination as to its need, simply because the Regional U.S. Trustee was not consulted first;
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if a trustee seeks to pay for membership in a local business organization to promote the services of the Chapter 13 Trustee and enable the local business community to become more familiar with those services, the U.S. Trustee has rejected such a nominal expense as being ''unnecessary.''
Disputes are not limited to expense items. For example:
if the private trustee refuses to or delays in responding to a demand letter for information, the private trustee is subject to the wrath of the agency; however, if a private trustee makes a request for a response from the office of the Regional U.S. Trustee, there is no similar obligation of this agency to provide a response at all;
if the private trustee questions the wisdom or necessity of a U.S. Trustee policy, the U.S. Trustee still takes the position that the private trustee must follow it or risk suspension from case assignment; this is true even if the private trustee suggests an alternative practice or explains the basis for declining to follow the policy; and
if the Regional or Assistant U.S. Trustee directs the private trustee to disregard certain provisions of the Code as to his fiduciary duties, or to overlook certain reporting requirements from debtors as to plan feasibility, disclosure of income or assets, or other material matters, the private trustee has little choice but to capitulate to such policy demands from the very agency who does not assume any of the liability for the consequences of such decisions.
Page 256 PREV PAGE TOP OF DOC Q. How is removal or termination handled?
A. First, let me explain the process by which trustees receive cases, and then define the difference between ''removal'' and ''termination.''
Case Assignment Process
As a new case is filed with the Clerk's Office of the Court, the U.S. Trustee assigns cases to private trustees. For chapter 7 cases, there is a panel of private trustees and cases usually are assigned on a rotating basis. For chapter 13 cases, there is a standing trustee, usually one for a specific geographic area, though in some larger metropolitan areas and/or areas where case filings are unusually large, there may be more than one standing trustee.
Removal for Cause under the Code
The term ''removal'' contemplates taking all active cases away from a trustee. Under the Bankruptcy Code as currently enacted, there exists a specific provision (11 U.S.C. Sec 324) that prescribes the method and criteria for removal of a trustee. It is based on a 'for cause' standard, and is a decision to be made by the Bankruptcy Court based on the presentation of evidence and cross examination of witnesses in open court. If such a procedure takes place, AND IF the trustee is removed, then removal applies to all cases previously assigned to the trustee. The consequences are severe, and the COURT must be satisfied that such a remedy is just. The very essence of both procedural and substantive DUE PROCESS protects the rights and interests of BOTH sides. There are very few known or published opinions dealing with such removals, and those that are known have been reported either in published court decisions or in information released by the U.S. Trustee.
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There are very few instances where the U.S. Trustee has sought removal under Sec. 324 as currently enacted. The reasons appear obvious:
lack of evidence,
cannot meet any objective criteria,
risk that due process to be afforded to trustee and lack of evidence will cause the agency to LOSE, and
risk that an open hearing, on the record, will disclose the subjective basis of the agency's attempted action.
Under Sec. 324, the grounds for removal are much too limited for the U.S. Trustee to acceptthey want morethey want to be able to ''terminate'' case assignments to a trustee based on THEIR subjective reasons. Rarely do such facts or grounds exist as fraud, theft, or even gross mismanagement of cases. More often, the U.S. Trustee's threat of removal will be based on conflict in management style, the trustee disputing or challenging the U.S. Trustee's authority, or case management practices that conflict with the personal attitudes or preferences of an assistant or regional trustee.
''De Facto Removal'' by Agency Action
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The term ''termination'' means that future case assignments to private trustees cease; the trustee continues to administer those cases previously assigned, but the result is that with no new cases, the trustee's overhead must be covered entirely by what remains to be administered in previously assigned cases.
As to ''termination of case assignment'', as distinguished from ''removal from all pending and future cases'', the control lies solely within the discretion of the U.S. Trustee. This is where the problem lies. The U.S. Trustee, by its unilateral decision to cease case assignment, does in effect bring about a DE FACTO REMOVAL of a private trustee. The basis of such decisions is rarely known or made public; the private trustee is up against the entire Justice Department, and in most instances, cannot or chases not to ''fight the fight.''
This ''termination'' process occurs as follows: the U.S. Trustee just ceases assigning cases to the private trustee, the trustee may continue to administer the cases he or she already has, but without new cases, receipts dry up, the expenses can no longer be covered, and the trustee just ''goes away.'' Thus, the U.S. Trustee's objective is accomplished, and the private trustee is removed without any due process or the application of objective criteria or judicial review. The U.S. Trustee avoids the more formal due process procedures by ''terminating'' future case assignments, thereby bringing about a removal of the trustee.
There are a few known instances where these ''de facto removals'' have occurred. Two recent examples may be summarized as follows:
(1.) for several years, a trustee had performed without any complaint; there were no reported audit discrepancies, and cases were managed efficiently both in the Courts and internally in the trustee's office. However, when the Regional U.S. Trustee put pressure on the private trustee to ''do things his way'', a major conflict ensued, and eventually the trustee stopped receiving new case assignments;
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(2.) another trustee had served for more than 10 years without any complaint from the court, creditors or debtor bar, and without any audit discrepancies. However, it was reported that the U.S. Trustee, at the urging of a party outside the U.S. Trustee system, and for reasons not based on performance, sought the elimination of this trustee so that another preferred person could be considered. Based on this pressure, the U.S. Trustee set out to ''make a case'' against the private trustee, and the result was predictable: the trustee is no longer receiving case assignments.
Only by enacting legislation giving the private trustee both procedural and due process rights, and by having a neutral judicial party (the Bankruptcy Court) make the final determination as to the justification of agency action, will this deliberate circumvention of the ''for cause'' standard of the Code be stopped and corrected.
Q. Hasn't the U.S. Trustee recently published proposed regulations? Don't these cover your issues?
A. The recently published regulations as to removal do not even come close to addressing the underlying problems between this agency and private trustees. This is so not only as to termination of trustee case assignments, but also as to trustee confidence and trust in the U.S. Trustee program.
Our reasons have been expressed extensively in prior ABP letters, memos, and official Comments, and for the benefit of this Committee, they will be restated later in this answer in summary form.
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The evolution of this rule is simple:
from 19941996, we asked for and insisted upon due process and fair dispute resolution procedures;
not only were our requests denied, they were ignored, and this agency made it abundantly clear that they would not consider or discuss this issue with us;
the essence of our request and their resistance was judicial reviewthis agency has never been willing to consider that judges, let alone bankruptcy judges, should ever question their judgment and decisions;
the Grassley Amendment (S. 1559) changed the flow of this process, and actually forced this agency to make its own proposal by which they would be granted ''deference'' and the judicial process would be limited to the U.S. District Court;
both Senator Grassley and Congressman Hyde then asked this agency to produce an administrative dispute resolution procedure for Congressional review;
this agency, while agonizing over this, finally produced a draft proposal early in 1997; Chairman Hyde asked ABP to give its comments, and when received, Chairman Hyde sent those comments to this agency for further comment;
to this inquiry, the agency's letter to Chairman Hyde side-stepped direct answers, and then the agency promulgated its rule with a comment period to follow;
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making it appear that ''Congress was pushing the U.S. Trustee for action'' (which Congress was NOT doing), the agency placed this proposed rule on a fast track to try to get it promulgated before Congress could enact legislation.
What's Wrong with this Rule?
The reasons we oppose this rule may be summarized as follows:
1. it does nothing more than ''rubber stamp'' lower level agency decisions;
2. the agency has uncontrolled authority for its decisions as to case termination having immediate affect;
3. the criteria for termination are highly subjective and subject to arbitrary interpretation and abuse;
4. the burden of proof is on the trustee to prove that the U.S. Trustee's actions and opinions are unwarrantedin other words, the ''accused'' has to prove that he or she should neither be accused nor found ''guilty'';
5. there is no meaningful, timely, affordable judicial review.
The U.S. Trustee wants to persuade Congress to NOT enact legislation (H.R. 2592, in particular) NOW, but to ''give us a chance''! The fear of this agency is that this legislation will take away its unfettered authority which IT has created and defined.
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The fear of the private, independent trustees is that without this legislation, the U.S. Trustee can never be made accountable, or to have to answer to any higher authority, because they have decided that THEY ARE that higher, and unreviewable, authority.
But, to ''give this agency more time'' or to ''give the new rule a chance to work'' is the very reason why this agency does not deserve to be believed. They have had a great deal of time prior to now to show their true intent and willingness to be ''just'' and ''fair'', and it simply is foreign to their makeup and attitude to allow such concepts to apply to their decisions. Were it not for the introduction of this and prior legislation, this ruleas bad as it iswould not even have been promulgated, and we would not even have a proposed procedure to discuss.
Q. Are the Chapter 13 Trustees looking for lifetime jobs?
A. Absolutely not. The private trustees are only seeking reasonable assurances that we will be able to retain our positions as long as we meet reasonable, objective standards and levels of performance, AND that if our appointments are to be subject to ''termination'' or ''removal'' [see Question no. 3], that we will be treated fairly and with due process.
We believe that this Committee has the authority and opportunity to enact legislation that will remedy this situation. H.R. 2592, as introduced, will send a clear message to the agency of the U.S. Trustee that they MUST treat appointees from the private sector fairly and objectively.
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The problem with the procedures as they currently exist is that private trustees are subject to being removed without any adequate safeguards or review by a neutral, impartial party. Judicial review must exist, and it must be by the Bankruptcy court.
There are many trustees who have given up other areas of practice or business to serve as a private trustee. In fact, for most of the recent trustees who have been appointed by the U.S. Trustee, this agency has required the person to give up other areas of professional practice or income as a pre-condition of receiving the appointment. If termination is based on a subjective standard, and one less than ''for cause'', the private trustee will have little likelihood of being able to rebuild his or her former practice or business. With the increasing case filings and administrative reporting requirements, the time required to be spent by the trustee to do this job has grown to the point that there is no realistic possibility of doing anything else. Therefore, for those trustees who may still have a private practice, the time available to spend as a practitioner has been taken away by the increased demands of being a trustee.
Of equal concern is the fear that these trustee appointments are becoming politicized. The U.S. Trustee program came into being to remove the perception of cronyism associated with judicial appointments. Now, this agency is operating with its own level of favoritism or cronyism. There may be alternative solutions to keep this agency from abusing their powers to appoint trustees that are directly related to defining limits to their supervisory powers.
Not every attorney, CPA or other business person is interested in being, or qualified to become, a bankruptcy trustee. While a person's qualifications and performance cannot be determined until after he or she has served, most of the recent instances of those trustees who have shown to be disqualified are those who have been appointed by this agency rather than those trustees who were appointed by the court under the old system. In other words, this agency's record as to seeking and appointing qualified persons is far from distinguished or exemplary.
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Q. Are you aware of specific examples of excessive use of authority by United States Trustees involving supervision of private trustees?
A. Yes! In that virtually all of the dealings between the private trustees and the U.S. Trustee occur at the local level, and in that many instances of such abuse are not disclosed by the private trustees for fear of recrimination, the known examples of excessive use of authority by the U.S. Trustee are not as many as we believe actually exist. Also, to list each known incident in this response would be burdensome both to the writer and reader. Most instances have occurred between the private trustee and the Regional or assistant U.S. Trustee.
While in some instances the excessive use of authority may be described as personality differences or disputes, most known examples occur where the offensive U.S. Trustee desires and is determined to rule and to control the private trustee, and to impose his personal judgment or management style on the private trustee.
There is a common theme to many of the examples of abuse of authority by employees of this agency: that first they look for something to criticize, then no matter how small or correctable the situation may be, rather than seek a resolution of the problem and enable the private trustee to ''save face'', the agency employee sets out to ''make an example'' of the trustee by exaggerating the problem to the point that a workable solution becomes impossible.
What follows are a few examples, and if necessary, the specifics as to these situations can be provided. No attempt is made to provide an exhaustive list, and the ''he'' pronoun is used exclusively to avoid identifying any particular chapter 13 trustee, U.S. Trustee, or region of the country.
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(1.) a practicing attorney, at the request of the U.S. Trustee, took over for a chapter 13 trustee who resigned; the outgoing trustee left his bank statements unbalanced, and while taking on new cases and organizing the office, new trustee was faced with trying to trace funds over several years to reconcile these differences. Over a period of several months, the new trustee resolved most of the discrepancies, but the assistant U.S. Trustee was very impatient. He told the chapter 13 trustee:
WHAT he should do, HOW to do it, WHEN to do it, etc. Several cases never could be reconciled, at which time the assistant U.S. Trustee accused the chapter 13 trustee of being responsible for the errors, and threatened removal. During this time period, the U.S. Trustee also appeared regularly, and unannounced, at the trustee's office to ''make sure he was getting the job done right''.
A similar situation also occurred in the same part of the country, this time with a chapter 7 trustee, who was accused of being responsible for the errors of his predecessor; rather than stand up to the assistant U.S. Trustee, the chapter 7 trustee just quit.
(2.) both an assistant and Regional U.S. Trustee met with a chapter 13 trustee to discuss why more chapter 13 cases were not being filed in his district. The Chapter 13 trustee was one of three trustees serving a larger area, all of whom were under the supervision of the same assistant and regional U.S. Trustee. However, there were significant differences between the quality of debtor's counsel, the demographics of the population in the different counties, and the type of debtors (ie. business, professional, consumer) filing cases in the different districts.
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Many of the cases being assigned were self-employed debtors, operating their own businesses, and these cases required much closer examination from the outset, then on-going supervision while being administered. This means that the debtor (and debtor's counsel) had to provide more information and periodic reports to enable the Chapter 13 trustee to make proper evaluations and recommendations to the Court, and to otherwise meet his fiduciary duties.
However, on the pretext of removing obstacles to case filings, the U.S. Trustee representatives directed the chapter 13 trustee to STOP verifying the wages of debtors, to STOP monitoring the cash flow and filing of POST-petition tax returns by self-employed debtors; in other words, just to ''lighten up'' so that debtor's counsel would not have to work as hard. Little or no regard was given to the statutory duties of a trustee as to these matters.
(3.) a Regional trustee decided to target a particular chapter 13 trustee to show that the office being rented had to conform to the particular U.S. Trustee's ideas as to the size, square foot allowances per employee and/or per case, just to name the basics. The office being rented by the chapter 13 trustee was more than adequate, the rent was reasonable, and there was room for expansion if needed. The U.S. Trustee required that the trustee move his office so that the rent to be paid would be less, and that the ''size'' (ie. square foot per employee, etc.) would be ''less''; the U.S. Trustee was not concerned with how much the MOVING EXPENSES from one office to another would be, so long as the new office fit his idea of what ''it should look like''. Clearly, the U.S. Trustee decided that the judgment of the Chapter 13 Trustee did not deserve any merit or consideration.
(4.) an assistant U.S. Trustee decided that there were too many chapter 13 trustees in a large metropolitan area, even though they covered a large area in terms of number of counties and courts; actually, there were only three, but the assistant U.S. Trustee selected one of them to be ''eliminated''. To do this, the assistant U.S. Trustee required the chapter 13 trustee to meet with him once a month in a ''closed door session''; the chapter 13 trustee was not allowed to have any of his staff members present, while the assistant U.S. Trustee (along with another U.S. Trustee employee) made the chapter 13 trustee DEFEND EVERY SINGLE CHECK written from the expense account during the preceding month. Eventually, the chapter 13 trustee had had enough and announced his resignation. At that point, the Court and other members of the local bankruptcy community intervened, called the matter to the attention of higher authority, and the assistant U.S. Trustee was required to ''back off''.
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There are MANY other known instances of excessive use of authority by either assistant or Regional U.S. Trustees, which we will gladly provide to the Committee if additional information is needed.
Q. How do you feel the Executive Office for U.S. Trustees should deal with these abuses by members of their own agency?
A. First, they have to acknowledge that they do occur and admit that a procedure must be formulated to deal with these situations.
Second, the EOUST must encourage private trustees to communicate these abuses without fear of retaliation or recrimination.
Third, once such a complaint is made, the alleged abusive action or conduct must be stopped. If the U.S. Trustee claims [in its rule regarding trustee removal] that it should be entitled to cease case assignment to a trustee ''immediately'', then the standard for a response to abusive conduct by a U.S. Trustee should be no less immediate.
Fourth, the EOUST must be made to understand and accept that it owes to the private trustee a report as to its findings and proposed resolution or action.
Fifth, if the EOUST refuses or fails to take any action, why should not the private trustee be able and authorized, using trustee funds if necessary, to seek injunctive relief in the courts?
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PRIVATE TRUSTEE REFORM ACT OF 1997, AND REVIEW OF POSTCONFIRMATION FEES IN CHAPTER 11 CASES
COMMERCIAL AND ADMINISTRATIVE LAW
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
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PRIVATE TRUSTEE REFORM ACT OF 1997, AND REVIEW OF POSTCONFIRMATION FEES IN CHAPTER 11 CASES
October 9, 1997
Serial No. 52
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
Page 270 PREV PAGE TOP OF DOCSONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
Page 271 PREV PAGE TOP OF DOCJULIAN EPSTEIN, Minority Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
STEVEN SCHIFF, New Mexico
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
CHARLES E. KERN II, Counsel
JAMES W. HARPER, Counsel
C O N T E N T S
October 9, 1997
TEXT OF BILL
Page 272 PREV PAGE TOP OF DOC H.R. 2592
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and Chairman, Subcommittee on Commercial and Administrative Law
Elsaesser, Ford, Vice President for Research, American Bankruptcy Institute
Goodlatte, Hon. Bob, a Representative in Congress from the State of Virginia
Hilebrand, Henry E., III, on behalf of The National Association of Chapter 13 Trustees
Koger, Hon. Frank W., President, National Conference of Bankruptcy Judges
Lubbers, Jeffrey, Professor, Washington College of Law, American University
McDow, W. Clarkson, Jr., United States Trustee Region 4, Columbia, South Carolina
Page 273 PREV PAGE TOP OF DOC Morin, Lawrence P., President, Association of Bankruptcy Professionals
Morris, Jeffrey W., Professor, University of Dayton Law School, on behalf of the National Bankruptcy Conference
Orr, Kevyn D., Deputy Director, Executive Office for United States Trustees, Department of Justice
Patchan, Joseph, Director, Executive Office for United States Trustees, Department of Justice
Smith, W. Steve, President, National Association of Bankruptcy Trustees
Vergos, Ellen B., United States Trustee Region 8, Memphis, Tennessee
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Elsaesser, Ford, Vice President for Research, American Bankruptcy Institute: Prepared statement
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and Chairman, Subcommittee on Commercial and Administrative Law: Prepared statement
Goodlatte, Hon. Bob, a Representative in Congress from the State of Virginia: Prepared statement
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Hilebrand, Henry E., III, on behalf of The National Association of Chapter 13 Trustees: Prepared statement
Koger, Hon. Frank W., President, National Conference of Bankruptcy Judges: Prepared statement
Lubbers, Jeffrey, Professor, Washington College of Law, American University: Prepared statement
McDow, W. Clarkson, Jr., United States Trustee Region 4, Columbia, South Carolina: Prepared statement
Morin, Lawrence P., President, Association of Bankruptcy Professionals: Prepared statement
Morris, Jeffrey W., Professor, University of Dayton Law School, on behalf of the National Bankruptcy Conference: Prepared statement
Nadler, Jerrold, a Representative in Congress from the State of New York: Prepared statement
Orr, Kevyn D., Deputy Director, Executive Office for United States Trustees, Department of Justice: Prepared statement
Page 275 PREV PAGE TOP OF DOC Patchan, Joseph, Director, Executive Office for United States Trustees, Department of Justice: Prepared statement
Smith, W. Steve, President, National Association of Bankruptcy Trustees: Prepared statement
Vergos, Ellen B., United States Trustee Region 8, Memphis, Tennessee: Prepared statement
Material Submitted for the Hearing
(Footnote 1 return)
P.L. 95593, 92 Stat. 1549 (1978) (''The Bankruptcy Code'').
(Footnote 2 return)
See H.R. Rep. No. 595, 95th Cong., 2d Sess. 8889 (1978).
(Footnote 3 return)
P.L. 995554, 100 Stat. 3095 (1986).
(Footnote 4 return)
The quarterly fee schedule was restructured by Public Law 104208, the FY 1997 Consolidated Omnibus Appropriations Act. The Act raised the maximum fee to $10,000 and created finer distinctions within the fee ranges, pursuant to suggestions made in 1995 by the National Academy of Public Administration.
(Footnote 5 return)
This section is adapted from ''ABI 1997 Northeast Bankruptcy Conference Educational Materials'' on file with the ABI.
(Footnote 6 return)
Section 2(a) of H.R. 2592 also contains a provision permitting Section 12 or 13 Trustees to seek bankruptcy court review, after an ''administrative hearing on the record,'' of Program determinations relating to reimbursement for expenses. Bankruptcy court review (though not an administrative hearing on the record) is now afforded to trustees serving in chapter 7 or 11 cases. The EOUST seeks to retain supervision over these determinations because, in contrast to chapter 7 and 11 cases, the annual expense budgets submitted by standing trustees involve complicated and diverse questions of administration of large operations. I express no opinion on whether some bankruptcy court review is appropriate of these decisions. However, I am extremely dubious that it is wise to subject all such decisionsnow matter how small the reimbursement at issueto potential APA hearings before administrative law judges. Moreover, the provision seems to require the court to ''determine'' these matters on a de novo basis. This standard of review would be inappropriate if the matter were first heard in a formal adjudication by the agency.
(Footnote 7 return)
Statement of J. Ronald Trost and Lawrence King Before the Subcomm. on Monopolies and Commercial Law, Comm. on the Judiciary, U.S. House of Representatives, concerning H.R. 2660 and H.R. 3664, ''United States Trustees Act of 1986'' (March 20, 1986).
(Footnote 8 return)
Chapter 13 cases involve individual and small business debtors who propose a plan to pay off their debts over the next three to five years from disposable income after deducting necessary living expenses. Eligibility is limited to debtors whose liabilities do not exceed certain limits. Chapter 12 has a similar process for family farm bankruptcies. Chapter 13 cases are far more numerous than chapter 12 cases.
(Footnote 9 return)
See note 1, supra.
(Footnote 10 return)
In re Lundborg, 110 B.R. 106, 108 (D. Conn. 1990) (citations omitted).
(Footnote 11 return)
Letter from Joseph Patchan, Director, EOUST, to Hon. Henry J. Hyde, Chairman, House Judiciary Committee, April 25, 1997, at 3.
(Footnote 12 return)
62 Fed Reg. 51740 (October 2, 1997). The proposed rules were published in 62 Fed. Reg. 28391 (May 23, 1997).
(Footnote 13 return)
For a case involving the removal of high-level government officials without a hearing, see Kalaris v. Donovan, 697 F.2d 376, 397 (D.C. Cir. 1983), cert. denied 462 U.S. 1119 (1983), finding that members of the Department of Labor's Benefit Review Board ''in the absence of a congressional statement to the contrary, . . . serve indefinite terms at the discretion of their appointing officers'' and could thus be summarily removed from their positions.
(Footnote 14 return)
See text at note 5, supra.
(Footnote 15 return)
See Lubbers, The Federal Administrative Judiciary: Establishing an Appropriate System for Performance Evaluation for ALJs, 7 Admin. L.J. Am. U. 589, 599600 (1994). It is unclear whether ''cause'' under this bill is intended to include managerial factors such as a reduction in caseload, routine rotation of trustees, or other non-conduct-based examples on the DOJ's list of reasons in §58.6(a) of its new regulation.
(Footnote 16 return)
Constitutional questions might also be raised if such actions were assigned to the bankruptcy court, see Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (invalidating statute assigning the trial of all issues in a bankruptcy case, including disputes arising out of breaches of contract, to bankruptcy judges lacking Article III life tenure and salary protection).
(Footnote 17 return)
See section 554(a) which says that section 554 applies ''in every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing. See e.g., City of West Chicago v. United States Nuclear Regulatory Commission, 701 F2d 632, 641 (7th Cir. 1983) (describing ''on the record'' to be the three magic words'' that trigger the APA adjudication requirements). Section 554(c) incorporates the hearing and agency review provisions of sections 556 and 557.
(Footnote 18 return)
The APA also permits the agency head to preside over such hearings, §556(b)(1). This would allow the Director of EOUST to preside personally, but the hearing would still have to conform to the procedures in §556 and 557.
(Footnote 19 return)
The APA also permits Congress to designate other boards or employees to preside over specified types of APA hearings, §556(b), but H.R. 2592 does not do so. As another alternative, Congress could opt to assign the hearings to another agency such as the Merit Systems Protection Boardwhich now employs a fleet of hearing officers to hear cases involving federal employee appeals from adverse actions. I also note that the bill also would require disputes over trustee expenses to be heard by ALJs (or the Director)and such cases could be quite voluminous. See note 1, supra.
(Footnote 20 return)
See ACUS Recommendation 753, The Choice of Forum for Judicial Review of Administrative Action, 40 Fed. Reg. 27926 (July 2, 1975).
(Footnote 21 return)
See note 11, supra.
(Footnote 22 return)
Preamble to §58.6(h), 62 Fed. Reg. 51745. This elaboration was added to the final rule's preamble, it was not included in the proposed rule.
(Footnote 23 return)
(Footnote 24 return)
§58.6(c). Such an interim directive must be based on egregious circumstances spelled out in §58.6(d). Provision is made for a trustee to seek a stay of an interim directive, §58.6(e).
(Footnote 25 return)
62 Fed. Reg. 52743.
(Footnote 26 return)
Verkuil, A Study of Informal Adjudication, 43 U. Chi. L. Rev 739 (1976)
(Footnote 27 return)
''Impartiality,'' Verkuil notes, citing Goldberg v. Kelly, 397 U.S. 254, 271 (1970), ''does not require total independence from the government agency or the presence of an administrative law judge . . . [but] only decisionmaker independence . . . from the individual action to be decided.) Id., at 750, n. 45. The EOUST Director would clearly qualify, as would an uninvolved and otherwise qualified employee designated as hearing officer.
(Footnote 28 return)
Id., at 760, n.80.
(Footnote 29 return)
See generally, Shannon, Debarment and Suspension revisited: Fewer Eggs in the Basket? 44 Cath. U. L. Rev. 363 (1995).
(Footnote 30 return)
See, e.g., Girard v. Klopfenstein, 930 F.2d 738 (9th Cir.) cert. denied, 502 U.S. 858 (1991) (APA does not apply to debarment proceedings because no statute requires a hearing on the record).
(Footnote 31 return)
See cases cited in Shannon, supra note 24 at 394400. However Professor Shannon speculates that the decision in Siegert v. Gilley, 500 U.S. 226 (1991), ''may cast doubt on lower court opinions that held that a suspension or debarment implicates a contractor's protected liberty interests.'' Id. at 398.
(Footnote 32 return)
See 48 C.F.R. §9.406 (debarment) and §9.407 (suspension).
(Footnote 33 return)
See 53 Fed. Reg 19,160 (May 26, 1988) (28 agencies); 54 Fed. Reg. 4722 (Jan. 30, 1989) (6 more agencies).
(Footnote 34 return)
See 48 C.F.R. §9.4063; 9.407.3.
(Footnote 35 return)
Shannon, supra note 24 at 414, n.267. The Administrative Conference recommended that ''cases involving disputed issues of material fact [be] referred to administrative law judges, military judges, administrative judges of boards of contracts appeals or other hearing officers who are guaranteed similar independence for hearing and for [initial decision].'' ACUS Recommendation 952, ''Debarment and Suspension from Federal Programs'' 60 Fed. Reg. 13,695 (March 14, 1995). See also note 13, supra.
(Footnote 36 return)
Id. at 415, n. 269. In the preamble to the new rule, the Department makes the same contention about trustee removal cases: ''In the Program's experience, the facts underlying termination or suspension decisions are rarely in dispute. Instead, most requests for review involve a disagreement whether the facts support such action.'' 62 Fed. Reg. 51745.
(Footnote 37 return)
United States Trustee v. Revco D.S., Inc. In re Revco D.S., Inc., 898 F. 2d 498, 500 (6th Circ. 1990) (quoting in part H.R. Rep. No. 595, 95th Cong. 8889).
(Footnote 38 return)
United States Trustee Program Revised Chapter 7 Initiatives, dated March 1, 1997.
(Footnote 39 return)
See 11 U.S.C. §704(a).
(Footnote 40 return)
Letter from GAO to The Honorable Jack Brooks, dated July 13, 1994.
(Footnote 41 return)
See 11 U.S.C. §324.
(Footnote 42 return)
Testimony of David Ray of July 24, 1996 at page 4.
(Footnote 43 return)
With the reclassification of the fees as ''offsetting collections,'' the transfer provision was no longer necessary.
(Footnote 44 return)
Actual quarterly fee collections from October 1, 1996 through September 15, 1997.
(Footnote 45 return)
90 CJS Trusts Sec. 247, page 238.
(Footnote 46 return)
In re Rigdon, 795 F.2d 727 (9th Cir. 1986).
(Footnote 47 return)
Germain v. Connecticut National Bank, 988 F.2d. 1323 (2nd Cir. 1993).
(Footnote 48 return)
11 U.S.C. §1302(b) obligates a Chapter 13 trustee to appear and be heard at any hearing that concerns the value of property, confirmation of a plan, or modification of a plan after confirmation.
(Footnote 49 return)
11 U.S.C. §1302(b)(4).
(Footnote 50 return)
11 U.S.C. §1106(a)(3) and §1106(a)(4) are applicable to Chapter 13 trustees for debtors engaged in business, as such is defined in 11 U.S.C. §1304.
(Footnote 51 return)
See, 28 U.S.C. §586(b). That statute provides, in pertinent part ''. . . the United States trustee for such region may, subject to the approval of the Attorney General, appoint one or more individuals to serve as standing trustee, . . . The United States Trustee for such region shall supervise any such individual appointed as standing trustee in the performance of the duties of standing trustee.''
(Footnote 52 return)
In re Beck Industries, Inc. 725 F.2d 880 (2nd Cir. 1984). As officers of the Court, trustees must maintain high fiduciary standards. See Matter of Topco, Inc. 894 F.2d 727 (5th Cir. 1990); Matter of Evangeline Refining Co. 890 F.2d 1312 (5th Cir. 1989).
(Footnote 53 return)
Matter of Happy Time Fashions, Inc. 7 B.R. 665 (Bankr. S.D. N.Y 1980).
(Footnote 54 return)
In re Thinking Machines, Corp. 67 F.3d 1021 (1st Cir. 1995).
(Footnote 55 return)
See, Berry v. Chapter 13 Trustee, 153 B.R. 66 (W.D. Wash. 1993); In re Myers, 147 B.R. 221 (Bankr. D. Or. 1992).
(Footnote 56 return)
See, In Schollett, 980 F.2d 639 (10th Cir. 1992); In re Savage, 67 B.R. 700 (D. R.I. 1986).
(Footnote 57 return)
11 U.S.C. §324 provides, in part: ''The court, after notice and a hearing, may remove a trustee, other than the United States Trustee, or an examiner, for cause.''
(Footnote 58 return)
See, Richman v. Straley, 48 F.3d 1139 (10th Cir. 1995); Shaltry v. United States, 182 B.R. 836 (D. Ariz. 1995); Joelson v. United States, 179 B.R. 857 (N.D. Ohio 1995); Lindquist v. United States, 174 B.R. 236 (Bankr. W.D. Mich. 1994).
(Footnote 59 return)
Standing trustees who receive all of the cases under Chapter 13 in a given district are rated by the United States Trustee on the number of cases in which they possess a conflict. Accordingly, most Chapter 13 trustees have abandoned any private practice or have so restricted their private practice so as to avoid any such conflict.
(Footnote 60 return)
The standing trustee in the Western District of Massachusetts and the standing trustee in the Northern District of Texas were both removed under 11 U.S.C. §324 promptly and efficiently by the bankruptcy court.
(Footnote 61 return)
See, Berry v. Chapter 13 Trustee, supra; In re Myers, supra.
(Footnote 62 return)
In fact, in the two states into which the United States Trustee Program has not yet expanded, Alabama and North Carolina, judicial disputes between the bankruptcy administrator and the standing trustee which, by definition, are resolved by the bankruptcy court, are almost non-existent.
(Footnote 63 return)
As the Second Circuit noted, ''The trustee may sing all he wants, but it is the court that must call the tune.'' In re Thinking Machines Corp., supra.
(Footnote 64 return)
See, e.g., William J. Donovan, House Committee on the Judiciary, Administration of Bankrupt Estates, 71st Cong. 3d Sess. (Comm. Print 1931) (recommendingbased upon an examination of 4,000 witnesses and interviews with 19 federal judges, 102 bankruptcy referees and 200 current or former trusteesthat Congress rectify the inadequate and corrupt administration of bankruptcy cases by creating a Federal Bankruptcy Commissioner); Solicitor General Thomas Thacher, Report to the President on the Bankruptcy Act and its Administration in the Courts of the Untied States. Dated December 5. 1931, reprinted in S. Doc. No. 65, 72nd Cong. 1st Sess. (1932) (recommending legislation that would remedy cronyism and the lack of administrative oversight in bankruptcy cases by authorizing career civil servant bankruptcy administrators to oversee the administration of bankruptcy cases); Report of the Commission of the Bankruptcy Laws of the United States, H.R. Doc. No. 137, 93d Cong. 1st Sess. (1973) (recommending legislation to improve bankruptcy administration and reduce cronyism by transferring administrative functions to an administrative body staffed by civil servants).
(Footnote 65 return)
The trustees confuse decisions that are made through the exercise of judgment, which they call ''subjective actions,'' with decisions that are arbitrary. The two are not synonymous. Indeed, the Bankruptcy Code is full of provisions that require the exercise of similar judgment in evaluating performance. See, e.g., 11 U.S.C. 704 (describing trustee's duty to administer and close an estate as expeditiously as possible); 11 U.S.C. 707(b)(authorizing the United States Trustee to bring a motion to dismiss a bankruptcy case if the United States Trustee concludes ''substantial abuse'' exists); and 11 U.S.C. 521(3) (requiring a debtor to ''cooperate'' with a trustee).
(Footnote 66 return)
Under administrative law, a statute requiring a hearing ''on the record'' means it must be conducted pursuant to sections 556 and 557 of the Administrative Procedure Act. That means discovery, a full trial, a recommendation by an administrative law judge, and a determination by the Director. Under H.R. 2592 then, within 30 days the Department would have to: (1) give notice to trustee of its intended action; (2) give the trustee time to file a pleading seeking on the record administrative review; (3) then select an administrative law judge; (3) have the administrative law judge oversee pre-trial discovery, in which the parties will draft, promulgate and respond to written discovery, including interrogatories, requests for admissions, and requests for production of documents; (4) set up a schedule during which the parties will identify witnesses, notice depositions, produce witnesses, and conduct depositions; (5) allow the parties to prepare pre-trial statements and draft summary motions; (6) have the administrative law judge consider and rule upon all those motions; (7) have the administrative law judge arrange a trial schedule; (8) have the administrative law judge conduct a full on the record trial; (9) await the generation of a trial transcript; (10) based upon that transcript, allow the administrative law judge to prepare a written recommendation that must then be transmitted to the Director for review; and (11) upon receipt of that written recommendation, have the Director review both the recommendation and the underlying evidence and, based upon that review, issue the agency's final written decision.
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Since 1985 we have successfully prosecuted a total of 43 trustees for embezzlement of estate funds.