American Bankruptcy Institute
Congressional Testimony

April 24, 1996

Statements of Robin E. Phelan, ABI
Henry E. Hildebrand, III, Chapter 13 Trustee
Roger L. Efremsky, National Creditors, At Large
Laurence P. Morin, Assn. of Bankruptcy Professionals
Joseph Patchan, Director, EOUST

on Role of the U.S. Trustee System


the Senate Judiciary Committee

We are neither advocates nor critics of the current role of the United States Trustee, however, 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.

In response to criticism, the United States Trustee program has sought to improve its outreach to the constituent parts of the bankruptcy system. Jerry Patchan and his staff deserve credit for their sincere efforts to improve the system.

In addressing the issues confronting the U.S. Trustee system, this committee should keep ten (10) principles in mind:

First, somebody has to do the job. Someone has to appoint trustees, form committees, check compensation requests, watch for fraud and incompetence and perform the other tasks currently required of the U.S. Trustee.

Second, it is not an easy job. The U.S. Trustee is criticized for micromanagement and lack of local autonomy and is then criticized for a lack of uniformity in the system.

Third, it is easier to manage a small program, like the Bankruptcy Administrator program, than a large one like the U.S. Trustee program.

Fourth, wherever Congress decides to put the program, there will be conflicts. The realistic objective is to minimize conflicts.

Fifth, programs are administered by people. The program should allow for the continuity of good people and provide the flexibility to get rid of mistakes.

Sixth, it doesn't matter if the program is in the Judiciary or the Executive, the objective is to get people with judgment and let them exercise that judgment at all levels of the system.

Seventh, good communicators are better than bad communicators. The EOUST has revised the Chapter 13 Guidelines in response to suggestions by panel trustees. Two-way communication of this sort is the only way to make the system work.
Eighth, even good people need adequate funding. However, excess paperwork and rigidity waste money. Random spot checks are more effective than extensive audits. Don't make the user fees so expensive that they will impede access to the system by the parties the system is designed to protect.

Ninth, no system will work if you run off the private trustees.

Tenth, judges should judge and administrators should administrate. We don't need another layer of judges called United States Trustees.

Statement of Henry E. Hildebrand, III, Chapter 13 Trustee

The U.S. Trustee program, originally established as a small administrative program to facilitate bankruptcy proceedings, has succeeded in meeting some of its early goals -- to remove cronyism and to open up the bankruptcy process. Despite these successes, the U.S. Trustee program has experienced "mission creep", expanding its "oversight" involvement to a degree better termed "micromanagement". This has eroded the confidence in and the efficiency of the program.

The U.S. Trustee program should: (1) appoint independent, qualified trustees; (2) designate independent auditors of the trustees operations; (3) expedite Chapter 11 cases which have no creditor involvement; (4) monitor Chapter 7 cases for instances of substantial abuse; (5) monitor and comment upon professional compensation requests; (6) bring any disagreement over compliance with fiduciary standards to the attention of the bankruptcy courts.

The U.S. Trustee program should not: (1) substitute its discretion and judgment for that of the fiduciary; (2) duplicate the efforts of a private trustee; (3) seek to centralize its operations, defeating the goal of autonomous, regional offices; (4) increase its cost and size when the principal filings in which it is involved -- Chapter 11s -- are declining; (5) micromanage the offices of Chapter 13 trustees.

Statement of Roger L. Efremsky, National Creditors, At Large

Chapter 13 standing trustees recover more dollars for national creditors, with a lower cost factor, than is recovered through any of the other bankruptcy chapters.

The focus of the budget directives established by the U.S. Trustee is flawed. The emphasis is placed on a reduction of costs in the operations of the individual Chapter 13 standing trustees, rather than upon achievements which are attainable.

Even with technological advances, the burdens placed upon the Chapter 13 standing trustees have significantly increased due to the dramatic increase in bankruptcy filings, the efforts of government and business to reduce their costs of operations, and the bankruptcy community expecting and requiring more services, rather than less, from the Chapter 13 standing trustees.

A polling of national creditors disclosed that they are strongly opposed to the proposal of the U.S. Trustee that its program be funded by adding to and then charging the Chapter 13 standing trustees one-half of 1 percent of their allowed administrative fee.

Statement of Laurence P. Morin, Assn. of Bankruptcy Professionals

The U.S. Trustee, having been given the responsibility for general supervision and oversight of standing Chapter 12 and 13 bankruptcy trustees, has exceeded its authority. The U.S. Trustee has determined that it has the absolute power to determine and fix expenses which standing trustees may incur in the administration of their trusts. The U.S. Trustee has also assumed that it has unfettered authority to remove trustees without any application of due process or determination that cause may exist for such removal.

The Chapter 13 program has been and continues to be the most successful aspect of the entire bankruptcy system. More than $2 billion each year are distributed to creditors, at a cost of less than seven percent. The program is funded entirely by payments made by debtors to the trustees, with no government or appropriated funds used for standing trustee operations.

A dispute resolution procedure, utilizing the bankruptcy court, is essential to safeguard the integrity of this successful and cost-effective program, and to curtail excessive interpretations and abuses of power by the U.S. Trustee.

Statement of Joseph Patchan, Director, EOUST

Since its establishment as a nationwide program in 1986, the U.S. Trustee program has acted in the public interest to promote the efficiency and to protect and preserve the integrity of the bankruptcy system. It has enjoyed many successes in the past year including increased investigation and detection of bankruptcy fraud, improved monitoring and standards for chapter 7 trustees, the issuance of nationwide Professional Fee Guidelines, and continued efforts to significantly reduce the number of lingering chapter 11 cases.

We do not micromanage the trustees' substantive work. Rather, our guidelines are an attempt to define the appropriate uses of fiduciary money that belongs to others -- either the debtors or creditors in individual cases.

Congress created the program as a self-funding operation. Currently, approximately two-thirds of the funds for the program come from chapter 11 filing fees and quarterly assessments. To remain a self-funded system, additional revenues are necessary to support its operations.

The EOUST's 1997 budget contains three major initiatives: a structural reorganization of the program to streamline its operations; a chapter 13 disbursement assessment to raise an estimated $6.2 million in fiscal '97 by imposing a small surcharge on chapter 13 receipts; and a chapter 11 quarterly fee restructuring that would raise an estimated $13.4 million in chapter 11 quarterly fees to fund operations. The proposed chapter 13 surcharge will have a minimal effect on creditor distributions, while allowing the program to maintain its level of operations. The proposed changes to the chapter 11 fee structure would rationalize the fee scale by creating additional levels, as recommended by NAPA, with the most sizeable cases paying more. In cases where the quarterly disbursements are at $5 million and above, the fee would rise from $5,000 to $10,000.