American Bankruptcy Institute
Congressional Testimony

Statement of Judge William T. Bodoh

on the U.S. Trustee System

before the

Subcommittee on Commercial and Administrative Law
of the House Committee on the Judiciary

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.

BACKGROUND

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. Constitution.

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 consider, including[1]:

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 trustee?[2]

The U.S. Trustee subcommittee of the American Bankruptcy Institute has prepared a draft analysis of several of these issues.[3] I ask that a copy of the analysis be included as part of my statement.

FUNDING ISSUES

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,[4] 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.

CONCLUSION

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.