Statement on Issues Related to the U.S. Trustee Program
Subcommittee on Commercial & Administrative
October 9, 1997
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 nations 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 SystemThe U.S. Trustee System was created by Congress as part of the Bankruptcy Reform Act of 1978. [ FN: P.L. 95-593, 92 Stat. 1549 (1978) ( "The Bankruptcy Code ").] 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. [ FN: See H.R. Rep. No. 595, 95 th Cong., 2d Sess. 88-89 (1978).] 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 [ FN: P.L. 99-5554, 100 Stat. 3095 (1986)], 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 SystemThe U.S. Trustee System is funded by revenues paid by participants in the bankruptcysystem. 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. Trustees appropriation to be remitted to the Treasury.
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 havefallen 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 Programs heavy reliance on chapter 11 cases for its funding presents a dilemma. While chapter 11 cases are responsible for the bulk of the Programs 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 Programs caseload has a disproportionate effect on the Programs revenues. For example, chapter 11 filings declined by 20 percent in FY 1995 with a commensurate decline in the Programs 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.
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:
Prior to January 1996, the statute authorizing the collection of quarterly fees [ FN: 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 FeesAfter 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.
Until January 1996, chapter 11 debtors paid quarterly fees only until the reorganizationplan 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 104-91 and 104-99, to provide as follows, with the language stricken by Public Law 104-99 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 [
Retroactivity Concerns[ FN: This section is adapted from "ABI 1997 Northeast Bankruptcy Conference Educational Materials " on file with the ABI and available to subscribers in ABI On-Line.]
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 104-99 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.
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).
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 inthis 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:
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).
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 debtors 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).
The 1997 LegislationIn 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 104-208, 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 104-91, as amended by Section 211 of Public Law 104-99, 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. 104-208, 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 previouslyconfirmed plans. Illustrative cases include:
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 104-208, clearly manifests Congress intent that quarterly fees be collected in all pending cases, including those with previously confirmed plans).
Effect of Retroactive Quarterly FeesBankruptcy 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.
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 eithercontemporaneous 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. Trustees 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.
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 BankruptcyCourt 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 Post-Confirmation FeesIt is probably unrealistic to expect Congress to repeal or substantially modify the post-confirmation U.S. Trustees 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. Trustees 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. Trustees 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. Trustees 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.
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.