American Bankruptcy Institute
July 24, 1996
Statement of Judge William T. Bodoh
on the U.S. Trustee System
Subcommittee on Commercial and Administrative Law
of the House Committee on the Judiciary
Chairman Gekas and members of the Subcommittee, my name is William T. Bodoh.
I have served as a Bankruptcy Judge in the Northern District of Ohio since
1985. Between 1988 and 1993, I served on the Board of Governors of the
National Conference of Bankruptcy Judges. I have served on the Board of
Directors of the American Bankruptcy Institute since 1995 and on behalf of the
over 5,200 members of the ABI, I am pleased to present the ABI's views at this
oversight panel on the United States Trustee program.
The ABI is the nation's largest multi-disciplinary organization devoted to
research and education on issues related to insolvency. We are non-profit and
non-partisan. Our members come from the fields of law, accounting, finance,
banking, the judiciary, academia and others. Our members represent both
debtors and creditors, individuals and businesses, in bankruptcy cases around
the country. The diversity of our membership provides depth and perspective to
our views of the many challenges facing the bankruptcy system and dictates that
we take no advocacy positions before the Congress.
Thus we are neither advocates or critics of the current role of the United
States Trustee. Rather, we serve as interested but dispassionate observers of
the form and function of the trustee system, and the role played by the U.S.
Trustee within it.
Last fall, the ABI published a thorough analysis of the U.S. Trustee system as
part of a national symposium series on current bankruptcy issues. This
analysis, in the form of a series of white papers prepared by leading advocates
for and against the U.S. Trustee system, was presented at the ABI's Southwest
Bankruptcy Conference in Santa Fe, New Mexico. As is customary with ABI
research efforts, all viewpoints were represented: a principal legislative
architect of the U.S. Trustee Program, a former U.S. Trustee, a standing
Chapter 13 Trustee, a sitting bankruptcy judge, practitioners from both systems
and the Deputy Director of the U.S. Trustee Program. The product of this
effort, a bound volume, entitled "Administrative Oversight
in the Bankruptcy System: Who Should Guard the Hen House?", has been made
available to the Subcommittee's members and staff.
Under the Bankruptcy Reform Act of 1978, Congress established, within the
Department of Justice, the U.S. Trustee Pilot Program in 18 judicial districts,
to relieve bankruptcy judges of many administrative duties and to separate the
functions of trustee appointment and oversight from the judicial functions. In
1986, Congress extended the pilot program nationwide, with the exception of
judicial districts in North Carolina and Alabama.
The legislative history on the creation of the U.S. Trustee program suggests
that the office was to be decentralized, allowing semi-autonomous offices to
exercise independent judgment, largely along the lines of U.S. Attorney
offices. The local U.S. Trustees would be supervised by a Washington office,
headed by an Assistant Attorney General.
The mission of the U.S. Trustee program has been and remains to help ensure
the integrity of the bankruptcy system -- a system that is projected to absorb
well over a million new cases this year, an all time record number of filings.
The program was also intended to permit bankruptcy judges to focus on judicial
rather than administrative matters and to eliminate favoritism arising from the
close relationship that was perceived to have existed between trustees and
judges under the prior administrative arrangement.
The United States Trustee's role in individual cases is to appoint case
trustees, monitor the actions of private panel and standing trustees as well as
creditor's committees, to comment on and review fee petitions, and generally
help ensure the integrity of the bankruptcy process. Parallel to the U.S.
Trustee system, Congress has created (and extended) a separate Bankruptcy
Administrator program in North Carolina and Alabama, where the administrator is
an employee of the courts. A debate has ensued over which of the two systems
is superior. There are also questions over whether these divergent systems run
afoul of the uniformity requirement in the bankruptcy clause of the U.S.
CRITIQUE OF THE PROGRAM
As was acknowledged by the National Academy of Public Administrators (NAPA) in
its report on the U.S. Trustee program last year, the program has struggled
since its inception to gain acceptance within the bankruptcy community. It has
also suffered at various times over the years from neglect by the Justice
Department, political considerations surrounding the choice of Director of the
EOUST, lack of focus on the program's central mission, occasional poor
appointments of U.S. Trustees and inexperienced field staff, disuniformity of
policy pronouncements and budget shortfalls. Occasionally, there have been
calls to abandon the current U.S. Trustee program and to return the
administrative role to the courts. Recently, trustees in Chapters 7 and 13
have complained that the EOUST has sought to "micromanage" decisions that are
more appropriately left to the discretion of the panel trustees themselves.
In response to criticism, the U.S. Trustee program has sought to improve its
outreach to the constituent parts of the bankruptcy system. Director Patchan
and his staff deserve credit for their sincere efforts to improve the system.
We understand, for example, that the EOUST has revised its Chapter 13 trustee
guidelines in response to suggestions from the panel trustees. Recently, there
has been an acknowledgement by the EOUST that more can and will be done to make
public certain dispute resolution procedures that can be used when disputes
arise between the Executive Office and individual trustees. The on-going
dialogue among trustees, the EOUST and other interested parties is a healthy
development which we applaud.
There is also criticism of the program from the participants in larger Chapter
11 cases. The critics here complain that the U.S. Trustee's involvement in
substantive matters simply adds to the costs of the case, without adding any
benefit to the estate or creditors, especially in cases where there is already
active creditor involvement. In such cases, perhaps Congress should clarify
the U.S. Trustee's role by creating a distinction between economic and ethical
concerns, with the latter always appropriate for U.S. Trustee involvement,
while the former only appropriate in smaller Chapter 11's where there is
typically little oversight of the debtor. It may always be appropriate for the
U.S. Trustee to closely scrutinize professional fees and retention issues, to
ensure that there are no conflicts of interest.
Despite criticism of the program, many observers credit the very presence of
the U.S. Trustee as a deterrent to fraud by debtors, trustees, creditors and
professionals employed in bankruptcy cases. There are numerous illustrations
of the U.S. Trustee, in concert with the U.S. Attorney and other federal
entities, serving a vital role in identifying and prosecuting bankruptcy fraud.
This "watchdog" function is particularly important in smaller cases, where
there is limited creditor involvement.
The National Bankruptcy Review Commission, created by Congress as part of the
1994 Code amendments, is considering the effectiveness of the U.S. Trustee
system, and possible changes to the laws affecting the work of both the U.S.
Trustee and various private panel trustees, who are appointed and monitored by
the U.S. Trustee.
CURRENT ISSUES FOR CONSIDERATION
There are a number of questions for the Commission, and this committee to
1. Is the Justice Department reasonably fulfilling the congressional mandate
in administering the United States Trustee program, or has the oversight
function evolved into one of unduly burdensome direction and control? To what
extent can and should the program reconcile national policies and guidelines
with the need for local flexibility in practice?
2. Should the Justice Department continue to administer the entire U.S.
Trustee program, or have the North Carolina and Alabama Bankruptcy Court
Administrator programs met with sufficient success to consider transferring all
programs to the U.S. Courts? Does the existing bankruptcy administrator
program in these two states create a constitutional problem in that the
bankruptcy laws are not "uniform" as required by Article I, Section 8?
3. Assuming the United States Trustee program remains under the jurisdiction
of the U.S. Justice Department, should Congress require greater involvement by
the private sector (privatization) of certain functions?
4. Should decisions made by the U.S. Trustee in the administration of a case
be subject to "de novo" review by the Bankruptcy Court, or should they be
subject to reversal in a U.S. District Court only upon a finding of an abuse of
discretion? To what extent should the Administrative Procedures Act apply to
U.S. Trustee decisions, requiring the exhaustion of administrative remedies
before seeking judicial review in the federal courts?
5. Should the attempted removal of a panel or standing trustees by the U.S.
Trustee for cause, as to future cases, culminate in a "judicial hearing" to
assure that due process concerns are met?
6. How active should the U.S. Trustee be in Chapter 11 cases where an active
creditors' committee is already appointed?
7. Should legislation be enacted to limit the liability of panel trustees to
intentional wrongful acts constituting gross negligence? Should legislation be
enacted to insulate trustees from pre-bankruptcy estate environmental clean up
costs and pension plan terminations?
8. Should the tax laws be amended to insulate the estate from liability upon
abandonment of assets, specifying that abandonment is a nontaxable event if
abandonment occurs during case administration? Should the tax laws be further
amended to limit a fiduciary's responsibility to file returns and pay taxes
which were due to be filed or paid prior to the fiduciary's appointment?
9. Does a trustee's retaining him/herself or law firm to represent the
trustee create an irreconcilable conflict? Further, does 11 U.S.C. 327(d)
preclude a bankruptcy court from authorizing a Chapter 11 trustee to retain his
or her firm as real estate broker to an estate in which he or she is serving as
The U.S. Trustee subcommittee of the American Bankruptcy Institute has
prepared a draft analysis of several of these issues. I ask that a copy of the analysis be
included as part of my statement.
The operations of the U.S. Trustee system are funded by user fees, paid by
participants in the bankruptcy system. Sources of these funds include debtor
filing fees in Chapters 7, 11, 12 and 13, and quarterly fees paid by Chapter 11
debtors during the pendency of these cases. The greatest source of funds are
the quarterly fees in Chapter 11 cases. However, as the number of Chapter 11
cases has declined in recent years, there
has been a revenue shortfall for the U.S. Trustee program.
On several occasions, Congress has enhanced the program's ability to produce
more revenue by raising filing fees and, most recently, permitting the
quarterly fee to be extended post-confirmation. This change became effective
immediately in late January, when it was included in a stopgap appropriations
bill. Some practitioners representing debtors with confirmed plans have been
surprised by the retroactive nature of this development, since it has resulted
in an additional fee which was not anticipated. The 1997 budget request of the
U.S. Trustee program, now included in H.R. 3814, calls for a further increase
in the cap on quarterly fees.
After nearly 17 years, the U.S. Trustee program is, in many respects, still in
its developmental stage, attempting to identify a clear mission and searching
for the respect of all the parties to bankruptcy proceedings. We commend the
committee for its interest in investigating the U.S. Trustee program and urge
you to thoughtfully consider and take the lead in resolving the many questions
that surround the U.S. Trustee program. The American Bankruptcy Institute is
pleased to assist in this continuing analysis and appreciates the opportunity
to appear before you today.
I would be pleased to answer any questions you might have.