To: National Bankruptcy Review Commission
Professor Elizabeth Warren
Stephen H. Case
From: Professor Lawrence P. King
Elizabeth I. Holland
Date: August 6, 1997
Re: Bankruptcy Administrator Program and the United States Trustee Program [ FN: Jean FitzSimon provided invaluable assistance in the preparation of these materials.]
For eleven years, the bankruptcy system has operated under two separate systems of bankruptcy administration. The United States Trustee [ FN: Throughout this memorandum, the United States Trustees are referred to as "U.S. trustees" to distinguish them from chapter 7 panel trustees, chapter 11 case trustees and chapter 12 and 13 standing trustees.] system resides in the Executive Branch as part of the Department of Justice ("DOJ"), and covers 48 states as well as Puerto Rico, the U.S. Virgin Islands, and Guam. The remaining federal judicial districts in North Carolina and Alabama operate under Bankruptcy Administrators under the direction of the Judicial Conference of the United States. [ FN: Section 302(d)(3)(I) of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 authorized the Judicial Conference of the United States to establish a bankruptcy administrator program.] The current statutory schedule requires North Carolina and Alabama to incorporate into the U.S. Trustee system by 2002, which is a ten-year extension from the original deadline. [ FN: The six judicial districts in Alabama and North Carolina were exempted from application of the U.S. Trustee program in the Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986, § 302(d)(3). These two states were, however, required to opt - in to the U.S. Trustee program no later than 10/1/92, with the mandatory opt - in becoming effective no later than 10/1/93. See 1986 Bankruptcy Act, § 302(d)(3)(a)(ii). The mandatory opt - in date for Alabama and North Carolina was extended to 10/1/2002 in the Judicial Improvements Act of 1990, § 317, with a corresponding extension of the effective date until 10/1/2003.] An understanding of the circumstances surrounding the creation of these two bankruptcy administration systems is necessary prior to any recommendation.
A. U.S. Trustee Pilot Program
The U.S. Trustee program was created as a pilot program by the 1978 Bankruptcy Reform Act. [ FN: Pub. L. No. 95 - 598, § 224 (1978); 28 U.S.C. § 581 (amended 1986).] A principal goal of that legislation was to remove the bankruptcy judges from their role in the administration of bankruptcy matters and to have them perform purely judicial functions. The administrative role was placed in the executive branch. [ FN: Congressional concern arose from problems of cronyism and partiality which appeared due to the judges performance of both judicial and administrative roles. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 88 - 115 (1977) [hereinafter cited as 1977 House Report ].] The U.S. trustees were charged with supervising the administration of bankruptcy cases in eighteen of the ninety-four federal judicial districts ("pilot districts"). The Reform Act did not provide for the performance of administrative duties in those districts for which no U.S. trustee was authorized ("non-pilot districts"). To the extent these duties were performed, they were divided between bankruptcy judges, bankruptcy court clerks, estate administrators, and the Administrative Office. The decision to place the pilot program in the DOJ resulted from consideration of the foregoing history and studies, [ FN: See Report of the Commission on the Bankruptcy Laws of the United States , H.R. Doc. No. 137, 93d Cong., 1st Sess. 7, 103 - 56 (1973). See also P. Fish, The Politics of Federal Judicial Administration (1973); Kennedy, Restructuring Bankruptcy Administration: The Proposals of the Commission on Bankruptcy Laws , 30 Bus. L. 398, 401 - 405 (1975).] as well as the executive nature of the duties assigned. [ FN: See 1977 House Report, at 111.] Initially, the program was to sunset on April 1, 1984, unless extended by Congress. [ FN: Pub. L. No 95 - 598, § 224, 28 U.S.C. § 581 (amended 1986).] The Attorney General was directed to submit a report to Congress, the President and the Judicial Conference no later than January 3, 1984, on the feasibility, cost and effectiveness of the program, along with recommendations as to its implementation in all federal judicial districts. [ FN: Pub. L. No. 95 - 598, § 408(b), 92 Stat. 2687 (1978) (repealed 1986).]
In order to fulfill this responsibility, the DOJ commissioned an in-depth study of the pilot program. [ FN: JYUST - 82 - C - 001. The study included data collected in 20 federal judicial districts, and an analysis of over 1500 bankruptcy cases. Abt Associates of Cambridge, MA was retained to perform the study.] The study, completed in 1983, concluded that the program had been successful in that case administration within the pilot districts was better than in the non-pilot districts. [ FN: See Abt Associates Inc., An Evaluation of the U.S. Trustee Pilot Program for Bankruptcy Administration: Findings and Recommendations 280 (1983) [hereinafter cited as Abt Report ].] The report recommended nationwide expansion of the program on a regional basis under the auspices of the DOJ. [ FN: Id. at 280.] Subsequently, various professional organizations adopted and seconded the recommendation. [ FN: See , e.g. letter from Leonard M. Rosen, Chairman, and Frank R. Kennedy, Secretary, National Bankruptcy Conference, to Attorney General William French Smith (November 5, 1984).]
In January 1984, the Attorney General issued a report which concluded that the pilot program had been successful. [ FN: See United States Dep't. of Justice, Report of the Attorney General on the United States Trustee System Established in the Reform Act of 1978 for the Period October 1, 1979 to December 31, 1983 , 53 - 55 (1984).] Although the Attorney General's Report set forth a proposed organizational structure for a nationwide U.S. Trustee program, [ FN: Id. at 61 - 66.] it made no firm recommendation as to which government agency should house the program [ FN: Id. at 57 - 61.] and refused to make a recommendation regarding nationwide expansion until Congress resolved the problem of the bankruptcy courts' jurisdiction in light of the Northern Pipeline decision. [ FN: Id. at 55 - 57. Northern Pipeline Construction Co. v. Marathon Pipe Line Co. , 458 U.S. 50 (1982).] Shortly thereafter, the General Accounting Office assessed the effectiveness of the bankruptcy process and concluded that more guidance and supervision of private trustees was necessary. [ FN: U.S. General Accounting Office, Report to the Attorney General and the Director, Administrative Office of the U.S. Courts: Greater Oversight of Bankruptcy Process Needed (1984).]
Deliberations on the jurisdiction and structure of the bankruptcy courts occupied Congress until July of 1984. In the meantime, the expiration date of the U.S. Trustee program was twice extended. [ FN: The program was extended until September 30, 1984 by Pub. L. No. 98 - 166, 97 Stat. 1081 (1983). It was later extended until September 30, 1986 by Pub. L. No. 98 - 353, § 323, 98 Stat. 333 (1984).] In 1985, Abt Associates conducted an additional study and confirmed its earlier findings and recommendations. [ FN: See Abt Associates Inc., An Evaluation of the U.S. Trustee Pilot Program for Bankruptcy Administration: August 1985 Update (1985).] Finally, with the restructuring of the jurisdiction of the bankruptcy courts completed in the 1984 amendments, the executive branch prepared legislation to establish a national U.S. Trustee system and Congress turned its attention to the U.S. trustees.
B. Expansion of the Pilot Program
1. The House of Representatives
In July, 1985, hearings on the U.S. Trustee program were held by the Subcommittee on Monopolies and Commercial Law of the House Judiciary Committee. [ FN: The U.S. Trustees Act of 1985: Hearings on H.R. 2660 and H.R. 3664 Before the Subcomm. on Monopolies and Commercial Law of the House Comm. on the Judiciary, 99th Cong., 1st and 2d Sess. 1 - 154 (1985 and 1986) [hereinafter cited as House Hearings ].] All of the witnesses favored expansion of the program. [ FN: All of the witnesses, except one, were current or former members of the U.S. Trustee program. The exception, Judge Jeremiah Berk, heard cases in both pilot and non - pilot districts.] Although there appeared to be no question that some entity was required to handle the administrative aspects of bankruptcy cases, the placement of that entity was the subject of contention among the branches of the federal government. Six witnesses, including the Associate Attorney General of the DOJ, testified in favor of continuation of the U.S. trustee program within the DOJ, [ FN: See House Hearings , at 195 - 275 (testimony and prepared statements of Arnold I. Burns, Associate Attorney General, DOJ; J. Ronald Trost, Esq., and Professor Lawrence P. King of the National Bankruptcy Conference; Joseph Matz, Esq., and Arthur Ungerman, Esq. of the Commercial Law League of America; Richard J. Leighton, Esq. of the U.S. Chamber of Commerce; and the Hon. Cornelius Blackshear, bankruptcy judge for the Southern District of New York).] while two other witnesses, both judges, stressed that the program should be located within the judicial branch. [ FN: See id. at 275 - 316 (testimony and prepared statement of the Hon. Robert E. DeMascio, on behalf of the Judicial Conference of the U.S. and the Hon. G. William Brown, bankruptcy judge for the Western District of Kentucky).]
The main issue raised throughout the hearings was the potential for conflicts of interest should the program be administered by the DOJ, since that agency represents most governmental agencies in bankruptcy cases. [ FN: Id. at 65 - 66, 115 - 116, 204, 215 - 16, 279, 289 - 290. This issue, first raised by the DOJ, had been considered and rejected by Congress in 1977 when it initially considered the placement of the program. See 1977 House Hearings , at 111, 114 - 15.] Proponents argued that placement of the program in the executive branch had not given rise to any of the theoretical problems cited by the opponents, including, formerly, the DOJ, which had vehemently opposed responsibility for the pilot program in 1978.
The bill passed by the House, H.R. 5316, set the term of office of a U.S. trustee at five years, rather than the four-year term originally proposed in other House bills. This was done in order to minimize politicization of the office of U.S. trustee. The bill required the Attorney General to find "cause" to remove a U.S. trustee, again to minimize undue political influence. While retaining the duties set forth for the U.S. trustees in general, the bill enumerated eight specific duties to be performed where appropriate.
2. The Senate
On March 25, 1986, the Senate held hearings on its bill, S. 1961. [ FN: The U.S. Trustee System: Hearing Before the Subcomm. on Courts of the Senate Comm. on the Judiciary , 99th Cong., 2d Sess. (1986).] Testimony in favor of the program's expansion was received from representatives of the DOJ and various professional groups, while representatives from the Judicial Conference and members of the bench voiced concerns regarding expansion of the program and its placement. [ FN: The witnesses who testified in favor of the program's expansion included Associate Attorney General Arnold I. Burns and Thomas J. Stanton, Director and Counsel of the Executive Office for U.S. Trustees for the DOJ; Professor Lawrence P. King of the National Bankruptcy Conference; Richard K. Kaufman, Esq. of the National Association of Credit Management; Benjamin Zion, Esq., and Hal Coskey, Esq. of the Commercial Law League of America; Robert Anderson, Esq. of the National Association of Bankruptcy Trustees and the Hon. Robert Ginsberg, bankruptcy judge for the Northern District of Illinois. Witnesses opposed to the continuation or expansion of the U.S. Trustee system included the Hon. Robert DeMascio of the Judicial Conference; the Hon. James Hancock, district judge for the Northern District of Alabama; the Hon. William Brown, bankruptcy judge for the Western District of Kentucky; the Hon. T. Glover Roberts, bankruptcy judge for the Southern District of Mississippi; the Hon. Thomas M. Moore, bankruptcy judge for the Eastern District of North Carolina; the Hon. Algernon Butler, representing the North Carolina Bar Association and Robert Sawdey, Esq., representing the Michigan State Bar Association.]
The Judicial branch strongly opposed placement of the U.S. Trustee program in the DOJ, proposing a system of "bankruptcy administrators" housed within the judicial branch instead. [ FN: See S. 443, 98th Cong., 1st Sess. (1983).] In April 1986, the Director of the Administrative Office forwarded a proposal to Congress titled the "Bankruptcy Administration Improvements Act of 1986". [ FN: 132 Cong. Rec. S4216 (daily ed. April 14, 1986; 132 Cong. Rec. H1632 (daily ed. April 8, 1986). See letter from L. Ralph Meacham, Director of the Administrative Office of the U.S. Courts, to the Hon. Thomas P. O'Neill, Speaker of the House of Representatives (March 28, 1986), reprinted in House Hearings , supra , n. 22, at 461.]
The proposal authorized the Judicial Conference to determine the number of bankruptcy administrators (with a maximum limit of one per judicial district), who would be appointed for a term of five years and were removable only for cause by the courts of appeals. [ FN: Id. at 434.] The proposal strongly resembled earlier proposals for separate administrative systems, especially with regard to the duties to be performed by the bankruptcy administrators. [ FN: Id. at 438 - 441 .] It gave bankruptcy administrators the duty of reviewing all pleadings filed with the court and reporting whether a matter involved a dispute and whether the administrator objected to it. [ FN: Id.] Bankruptcy clerks were empowered to enter final orders in matters to which no objection had been filed. [ FN: Id.] The bankruptcy administrators were given standing to raise, appear and be heard on issues [ FN: Id . at 447.] and were allowed to present to the court, on the record and with notice, any views or recommendations regarding matters within the scope of their duties. [ FN: Id . at 440 - 41.] Finally, the administrators were authorized to investigate any allegations of fraud and misconduct. The court was empowered sua sponte to take any action it deemed necessary in a case to ensure its expeditious disposition. [ FN: Id . at 447.] This proposal was never introduced in either house of Congress, although its presence influenced some of the final provisions in the 1986 Amendments.
On May 7, 1986, the Senate began consideration of its version of bankruptcy judgeship legislation, S. 1923. [ FN: Id .] An amendment to establish the U.S. Trustee system nationwide [ FN: Amendment No. 1844, 132 Cong. Rec. S5628 (daily ed. May 8, 1986) (introduced by Sen. Thurmond) This amendment added the text of S. 1961, with a modification by Sen. Heflin which provided individual districts the opportunity to "opt out" of the U.S. Trustee program.] was adopted. On May 8, the Senate also began consideration of H.R. 2211 relating to family farmer bankruptcies, [ FN: H.R. 2211, 99th Cong., 1st Sess., 131 Cong. Rec. H2530 (daily ed. April 24, 1985).] a companion bill passed by the House and referred to the Senate. [ FN: 131 Cong. Rec. 16,923 (1985). The bill's principal proponent was Sen. Mike Synar.] The Senate passed H.R. 2211, striking out everything after the enacting clause, and substituting the text of S. 1923, as amended. [ FN: 132 Cong. Rec. S5643 (daily ed. May 8, 1986).] The Senate insisted on its amendments and asked for a conference. [ FN: Id . at S11,907. The Senate conferees were Sens. Thurmond, Hatch, Grassley, DeConcini and Heflin. 132 Cong. Rec. H6488 (daily ed. Sept. 9, 1986). The House conferees were Reps. Rodino, Edwards, Hughes, Synar, Glickman, Feighan, Fish, Shaw, Moorhead and Hyde.]
As passed by the Senate, the provisions in H.R. 2211 pertaining to the U.S. Trustee program differed substantially from other bills. As a compromise to satisfy those who opposed the U.S. Trustee program's expansion -- principally members of the judiciary and attorneys in certain jurisdictions [ FN: See letter from Robert C. Vaughan, Jr., President, North Carolina Bar Association, to Attorney General Edwin Meese (Jan. 16, 1986) (requesting that the judicial districts in North Carolina be excluded from any legislation extending the U.S. Trustee program).] -- the bill provided an "opt out" alternative. [H.R. 2211 § 255, 99th Cong., 2d Sess., 132 Cong. Rec. S5632 (daily ed. May 8, 1986).] In districts which chose to "opt out", the duties proposed to be performed by the U.S. trustees were to be performed by officers of the courts. [ FN: Id . § 255(d)(1).]
3. Final Passage
A Conference was called to reconcile the differences between the House and Senate versions of the Bill. The Conference Report created a U.S. Trustee program consisting of 21 regions. [ FN: Id. §§ 101 and 111(b).] U.S. trustees were to be appointed for five-year terms by the Attorney General, [ FN: Id. § 111(b).] who was granted completely unfettered discretion to remove both U.S. trustees and assistant U.S. trustees. [ FN: Id. § 111(c) and (d).] Although it did not contain an "opt out" provision, it provided that the judicial districts in Alabama and North Carolina would not come into the U.S. Trustee program until 1992, unless they decide to "opt in" sooner. [ FN: Id .] The "opt in" provision has since been extended to October 1, 2002. [ FN: See Note 4, supra .]
On October 27, 1986, President Reagan signed Pub. L. No. 99-554, the "Bankruptcy Judges, U.S. Trustees, and Family Farmer Bankruptcy Act of 1986" into law. [ FN: Pub. L. No. 99 - 554, 99th Cong., 2d Sess., 100 Stat. 3088 (1986) ( " 1986 Amendments " ).] The 1986 Amendments provided for the national and permanent expansion of the U.S. Trustee system to 48 states, Puerto Rico, the U.S. Virgin Islands, and Guam. [ FN: Id. § 111; 28 U.S.C. § 581. All federal judicial districts were placed under the jurisdiction of the U.S. Trustee system except those in North Carolina and Alabama. Those two states are to come under the program's jurisdiction in 2002, unless they opt to do so sooner.]
C. The Bankruptcy Administrator System
In North Carolina and Alabama, bankruptcy administration is handled by the Bankruptcy Administrator. The Bankruptcy Administrator for a judicial district establishes and maintains a panel of private trustees and supervises the administration of cases and trustees in chapters 7, 11, 12 and 13. Unlike the U.S. trustees, the Bankruptcy Administrator does not appoint trustees, examiners, or committee members. Instead, the judges of the bankruptcy court make such appointments, just as they did prior to the Code. Further, the Bankruptcy Administrator acts in accordance with regulations promulgated by the Judicial Conference of the U.S., the principal policy making body of the Judiciary. These regulations include extensive guidelines prescribed by the Director of the Administrative Office, a person appointed and subject to removal by the Chief Justice in consultation with the Judicial Conference. [ FN: See 28 U.S.C. §§ 331, 601 and 604.]
The Bankruptcy Administrator is appointed to a five-year renewable term by the applicable court of appeals. The Bankruptcy Administrator is also subject to removal by the court of appeals. Generally, appointment and renewal are contingent upon receiving favorable evaluations from the bankruptcy judges, clerks and trustees in the district, as well as the Director of the Administrative Office. [ FN: Chapters 2-5, Manual for Bankruptcy Administrators (MBA). There is no reported decision which indicates that a Bankruptcy Administrator has appealed an order of a bankruptcy judge to the district court, and therefore no decisions have been appealed to the court of appeals. However, Linda Simpson, a bankruptcy administrator from North Carolina indicated at the discussion in Chicago that she currently has a case on appeal to the district court in North Carolina.]
D. Analysis of the Two Bankruptcy Administration Systems
Since 1986, four reports concerning bankruptcy administration have been issued by the following entities: the General Accounting Office; a panel of the National Academy of Public Administration; the Judicial Conference of the United States; and the Federal Courts Study Committee.
In 1992, the General Accounting Office studied the U.S. Trustee programs first years as a national operation. [ FN: U.S. General Accounting Office, Report to the Chairman, Permanent Subcommittee on Investigations, Committee on Governmental Affairs, U.S. Senate, Bankruptcy Administration: Justification Lacking for Continuing Two Parallel Programs (September, 1992) (hereinafter " GAO Report " ).] The GAO Report recommended that the BA system be incorporated into the U.S. Trustee system in order to create a national bankruptcy administration system. In 1995, the National Academy of Public Administration conducted a study of alternative structures for the U.S. Trustee program. [ FN: National Academy of Public Administration, Alternative Structures for the U.S. Trustee Program: Report by a Panel of the National Academy of Public Administration for the DOJ, May 1, 1995 (hereinafter " NAPA Report " ).] The NAPA Report made a number of recommendations relating to the U.S. Trustee program but it did not discuss the relationship between the Bankruptcy Administrator system and the U.S. Trustee program.
The Judicial Conferences Long Range Plan for the Federal Courts recommended placing all oversight of bankruptcy administration in the judiciary. [ FN: Judicial Conference of the United States, Long Range Plan for the Federal Courts, 51a, at 86 (December 1995).] Similarly, the Report of the Federal Courts Study Committee of 1990 [ FN: See Report of the Federal Courts Study Committee (April 2, 1990).] recommended that the U.S. Trustee program be transferred to the judiciary. This recommendation was made over the dissent of the DOJ representative on the Committee, Edward S. G. Dennis, Jr., with whom Senator Grassley, also a Committee member, joined. [ FN: Mr. Dennis served as the Assistant Attorney General for the Criminal Division.] Mr. Dennis noted that it was clearly Congresss view that the responsibilities of the U.S. trustee "were preeminently administrative or executive functions, which are properly the responsibility of the executive branch of the federal government." [ FN: Report of the Federal Courts Study Committee, at 78 .] Mr. Dennis, in urging that the Program not be transferred, also noted that the establishment of the U.S. Trustee program inevitably created tensions "with bankruptcy judges, clerks, private trustees and professionals" because of everyones overlapping roles in the bankruptcy system; however, legislative history makes clear that Congress considered the issue and chose to separate those functions. [ FN: Id. at 78-79.]
Two alternative bankruptcy administration proposals:
The current statutory schedule providing for the incorporation of the Bankruptcy Administrator system into the U.S. Trustee system on October 1, 2002 should remain unchanged; or
The Bankruptcy Administrator system should be incorporated into the U.S. Trustee system earlier than the current statutory schedule.
Reasons for the Alternative Proposals
The judicial districts in North Carolina and Alabama currently have until October 1, 2002 to "opt-in" to the U.S. Trustee program. The first proposal would leave that current schedule unchanged. During the discussion of this issue, questions were raised whether incorporation of these six judicial districts into the U.S. Trustee system (i) should be completed earlier than the current statutory schedule, or (ii) is necessary (or even desirable). Arguments were made favoring both alternatives. A complete discussion below outlines these arguments. Regardless of which proposal is ultimately chosen, it is important that these two bankruptcy administration programs work together to coordinate their efforts to promote a uniformity of practice and to ensure as smooth a transition as possible at some point in the future.
A. The Case for No Change in the Statutory Schedule
There are two prevailing arguments proffered for continuation of the Bankruptcy Administration system: (1) the Bankruptcy Administrators in North Carolina and Alabama operate more efficiently and are more cost effective than the U.S. trustees; and (2) the U.S. trustees may encounter conflicts of interest between their obligations as neutral administrators and the federal governments role as creditor in bankruptcy cases. [ FN: See , e.g. , Report of the Federal Courts Study Committee, at 74.] In addition, the Bankruptcy Administrator system arguably provides a good forum to test alternative bankruptcy administration methods that might otherwise be difficult to implement in the U.S. Trustee system.
The GAO addressed some of these issues in its 1992 report. [ FN: See , GAO Report, supra at Note 56.] While it noted that the cost to operate the U.S. Trustee program in the districts examined appeared to be higher than the Bankruptcy Administrator districts in North Carolina and Alabama, the GAO also found that distributions to unsecured creditors were higher in the U.S. trustee districts. The GAO could find no clear pattern of superior performance in either the Bankruptcy Administrator or U.S. trustee districts examined. [ FN: GAO Report at 6-12 .] The GAO concluded that the risk of conflicts of interest between the U.S. trustees and the federal governments position as creditor in bankruptcy cases was, at most, "negligible." [ FN: GAO Report at 16.] In sum, the GAO report concluded that there should be only one system of bankruptcy administration and that it should be the U.S. Trustee program. [ FN: GAO Report at 17.]
In addition to the official analysis, there has been some criticism of the U.S. Trustee program in the scholarly and trade press. [ FN: Two examples are Why Is the U.S. Trustee Program Such a Lightning Rod? , Bankr. Ct. Dec., Oct. 22, 1996 at A1; Richard B. Levin & Kenneth N. Klee, The Original Intent of the U.S. Trustee System , 1 Norton Bankr. L. Adviser, 2, 4, (1993). Both articles focus on the problems of the U.S. Trustee program and share a conclusion: the problem of the U.S. Trustee program is that it is chronically under funded and understaffed.] This literature focuses on the performance of the U.S. Trustee program and on specific actions or policies. It does not address the rationale underlying the creation of the program and the need to separate the judicial and administrative functions in bankruptcy cases.
Significantly, the Commission has held numerous sessions on the U.S. Trustee program throughout its deliberations, including specific open forum sessions at every one of its meetings since January 1997. None of these opportunities has attracted much in the way of serious comment on the programs performance, and nothing in any way approaching the vehemence contained in some of the past literature. [ FN: See, e.g., Peter C. Alexander, A Proposal to Abolish the Office of U.S. Trustee, 30 Mich. L. Rev. 1 (1996).]
As discussed in a separate memorandum, issues about the performance of the U.S. Trustee can be addressed by relatively minor changes in the U.S. Trustee programs organizational structure.
B. The Case for an Earlier Statutory Schedule
a. The Uniformity Clause
The Constitution authorizes Congress to "establish...uniform Laws on the subject of Bankruptcies throughout the U.S." [ FN: U.S. Const. Art. I., § 8, cl. 4 (emphasis added) ( " Bankruptcy Clause " ).] One United States Court of Appeals has already found that the North Carolina and Alabama exception violates the Bankruptcy Clause. In St. Angelo v. Victoria Farms, [ FN: 38 F.3d 1525 (9th Cir. 1994) ( " Victoria Farms " ).] the debtor challenged, as a violation of the Bankruptcy Clause, the U.S. trustees collection of quarterly fees under 28 U.S.C. § 1930(a)(6), because the quarterly fees only apply to debtors in cases under the U.S. Trustee program.
Although the 9th Circuit concluded that the U.S. trustee was entitled to collect the quarterly fees in this case, it carefully weighed the constitutional issues and held that the North Carolina and Alabama exception to the U.S. Trustee program was invalid. Relying primarily on two Supreme Court decisions, [ FN: Railway Labor Executives v. Gibbons , 455 U.S. 457 (1982) ( " Gibbons " ); Vanston Bondholder Protective Comm. v. Green , 329 U.S. 156 (1946) ( " Vanston " ).] the 9th Circuit emphasized the lack of any sound basis in policy for distinguishing North Carolina and Alabama from the rest of the country in matters of bankruptcy administration:
In this case, however, Congress has provided no indication that the exemption in question was intended to deal with a problem specific to North Carolina and Alabama, nor can we discern such a purpose in the structure of the statute or the legislative history of the amendment. [ FN: Victoria Farms , at 1531-32.]
The two key cases relied on by the Victoria Farms court - Gibbons and Vanston - would permit Congress to pass a bankruptcy law that "may have different effect in various states due to dissimilarities in state law as long as the federal law itself treats creditors and debtors alike." [ FN: Id. At 1531. Since at least Hanover Nat l Bank v. Moyses , 186 U.S. 181 (1902), the Supreme Court has recognized that the bankruptcy law can incorporate differences in state laws. Hanover upheld the Bankruptcy Act of 1898 and its recognition of state exemptions as consistent with the uniformity provision of the Bankruptcy Clause. Hanover s reasoning, however, has been strongly criticized as undercutting the Bankruptcy Clause. See Dan J. Shulman, The Constitution, Interest Groups, and the Requirements of Uniformity: The U.S. Trustee and the Bankruptcy Administration Programs , 74 Neb. L. Rev. 91, 105-08 (1995).] However, as the 9th Circuit noted, the North Carolina and Alabama exception did not arise "due to differences in the laws of these two states." [ FN: Victoria Farms, at 1531 .]
The U.S. trustee in Victoria Farms as well as some commentators have argued that the Bankruptcy Clauses uniformity requirement does not apply to the North Carolina and Alabama exception because the issue is exclusively administrative, rather than the substantive rights of debtors and creditors. This argument was rejected by the Victoria Farms court. There does not appear to be any basis to conclude that the Bankruptcy Clauses uniformity provision applies with any less force to bankruptcy administration than to substantive law. Further, this distinction may not be practical; it will always be difficult to separate administrative issues from substantive issues, and many issues will be a hybrid of administrative and substantive concerns.
b. Separation of Powers
The Constitution arguably requires executive branch placement of the administrative oversight system unless its duties are to be substantially curtailed. [ FN: The duties of the Bankruptcy Administrators are substantially similar to those of the U.S. trustees, including the responsibility to ensure enforcement of all federal laws. See , Regulations of the Judicial Conference of the U.S. Governing the Establishment, Duties and Functions of Bankruptcy Administrators.] In 1792, the Supreme Court first enunciated the separation of powers doctrine and determined that constitutional courts may not be invested with administrative functions, [ FN: Hayburn's Case , 2 U.S. 4091 (1792).] but only may decide cases or controversies and may not exercise the powers of the executive or legislative branches. The powers of the Federal Government are divided into legislative, executive, and judicial. The Constitution grants one of these powers to each of the three branches of government. [ FN: U.S. CONST. art. I, § 1; art. II, § 1; art. III, § 1.] No combination of these powers in any single branch is permissible. [ FN: Buckley v. Valeo , 424 U.S. 1, 120-20 (1976) ("Buckley"); U.S. v. Nixon , 418 U.S. 683, 704 (1974); Youngstown Sheet and Tube Co. v. Sawyer , 343 U.S. 579, 587-88 (1952).] "Each of the three branches of our Government must restrict itself to its allocated sphere of activity: legislating, executing the law, or seeing to its interpretation." [ FN: Testimony of Antonin Scalia, Asst. Atty. General, Office of Legal Counsel on Reform of the Administrative Procedure Act, Before the Subcomm. on Administrative Practice and Procedure of the Senate Comm. on the Judiciary, 94th Cong., 2d Sess. 3 (Apr. 28, 1976).]
For example, in Buckley v. Valeo, the Supreme Court held unconstitutional the Federal Elections Act's vesting of the appointment power in the Congress, because the Act allowed Congress to write the law and then see to its execution by the appointment of the officers charged with enforcement of that law. [ FN: See Springer v. Philippine Islands , 277 U.S. 189 (1928).] The Court also held that the Federal Election Commission was a congressional agency, because it was subject to Congress' control, and thus it could exercise only legislative, not legislative and executive, functions. [ FN: The Court invalidated the Federal Election Commission's rule-making and adjudicatory functions, 424 U.S. at 137-43, leaving untouched its investigative function, which is clearly within the legislative domain. Anderson v. Dunn , 19 U.S. (6 Wheat.) 204 (1821).] The Supreme Court further has prohibited Congress from conferring executive duties upon the courts, [ FN: Hayburn's Case, 2 U.S. (2 Dall.) 409 (1792) (authorization for the courts to decide a matter subject to later executive review was not a grant of "the judicial Power of the U.S." and could not be exercised by constitutional courts).] and has prohibited the President from exercising legislative powers [ FN: Youngstown Sheet and Tube Co. v. Sawyer , 343 U.S. 579 (1952).] or judicial powers. [ FN: U.S. v. Nixon , 418 U.S. 683 (1974).] Though the doctrine is clear, it is difficult to apply because of the uncertainty surrounding the nature of each of the powers conferred by the Constitution, and because "there are few activities which are inherently executive, legislative, or judicial." [ FN: Scalia, supra , n. 80, at 6.]
There are some matters, however, which may be performed only by one branch of the government. Chief Justice Marshall noted that there is a line [ FN: Wayman v. Southard , 23 U.S. (10 Wheat.) 1, 46 (1825).]
which separates those important subjects, which must be entirely regulated by the legislature itself, from those of less interest, in which a general provision may be made, and power given to those who are to act under such general provisions, to fill up the details.
The executive power clearly consists of the power to see that the laws are faithfully executed, to recommend to Congress those laws that the President thinks wise, and to veto those the President thinks bad. [ FN: Id . at 587.] The Constitution also explicitly grants the appointment power (subject to some regulation by Congress), the pardon power, the power to call forth the militia, and the position of Commander-in-Chief of the armed forces, to the President. [ FN: U.S. CONST. art. II, § 2.] All of these specific powers are attributes of the executive power and may only be exercised by that branch of the government.
As set forth in the 1977 House Committee Report to the Bankruptcy Code,
The nature of the duties of the U.S. trustees makes them the administrative officers of the bankruptcy system. They will not concern themselves with the processing of disputes in bankruptcy cases through the courts, and will not become involved in the administration of the courts. Those functions will continue to reside in the Administrative Office of the U.S. Courts. The U.S. trustees will, however, be responsible for the day-to-day operations of the bankruptcy system. They will supervise trustees, assist them in the performance of their duties, oversee their actions, and see to it that the bankruptcy laws are properly executed. They will concern themselves with the administrative aspects of bankruptcy cases, and not with the judicial aspects. They will serve as enforcers of the bankruptcy laws by bringing proceedings in the bankruptcy courts in particular cases in which a particular action taken or proposed to be taken deviates from the standards established by the proposed bankruptcy code. In this sense, they operate much as the Securities and Exchange Commission operates under current chapter X of the Bankruptcy Act, protecting the public interest and ensuring that bankruptcy cases are conducted according to the law . . .
The U.S. trustee is also given a function currently performed by U.S. attorneys -- that of investigating allegations of facts that would lead to a denial of the discharge of the debtor. [cite omitted] In this way, too, the U.S. trustee will be policing the bankruptcy system and its participants.
The sum of all of these duties suggests strongly that the U.S. trustees will be the executives of the bankruptcy network. Their functions are unrelated to and divorced from the bankruptcy courts as assistants or as arms of the court. The functions described above are not a part of the courts' duties in bankruptcy cases under the proposed law. The courts' duties relate solely to resolving disputes that arise in bankruptcy cases. Instead, the U.S. trustees' responsibilities will be to operate the bankruptcy system and to executive the bankruptcy laws. As such, the U.S. trustee is created in the Executive Department, as an Executive Branch officer, and is not placed in the Judicial Branch. [ FN: 1977 House Report, at 109-110.]
The Supreme Court's most recent forays into the murky area of separation of powers suggest that the role now performed by the U.S. trustees and the Bankruptcy Administrators must be performed by the Executive Branch. [ FN: See , Buckley , supra , n. 79. Myers v. U.S. , 272 U.S. 52 (1962), and Matter of Hennern , 38 U.S. 230 (1939). Morrison v. Olson , 487 U.S. 654 (1987) ("Morrison").] In Morrison, the Supreme Court examined at some length the question of what constitutes an exercise of the "executive" power, which, under Buckley, may not be exercised by officials of the courts or the legislature. Under the independent counsel statute at issue, 28 U.S.C. §§ 591 et seq., a special court was created to appoint, at the request of the Attorney General, independent prosecutors and determine their jurisdiction, but was specifically prohibited from hearing any other matters related to the prosecutor, except to review a challenge to the Attorney General's removal of the prosecutor. In discussing whether the involvement of the courts under the statute was constitutional, the Court stated:
The final question to be addressed is whether the Act, taken as a whole, violates the principle of separation of powers by unduly interfering with the role of the Executive Branch. Time and again we have reaffirmed the importance in our constitutional scheme of the separation of governmental powers into the three coordinate branches. See, e.g., Bowsher v. Synar, 478 U.S. at 725 (citing Humphrey's Executor, 295 U.S. at 629-630). As we stated in Buckley v. Valeo, 424 U.S. 1 (1976), the system of separated powers and checks and balances established in the Constitution was regarded by the Framers as 'a self-executing safeguard against the encroachment or aggrandizement of one branch at the expense of the other.' Id., at 122. We have not hesitated to invalidate provisions of law which violate this principle. See id., at 123. On the other hand, we have never held that the Constitution requires that the three branches of Government 'operate with absolute independence.' U.S. v. Nixon, 418 U.S., at 707; See also Nixon v. Administrator of General Services, 433 U.S. 425, 442 (1977) (citing James Madison in The Federalist No. 47, and Joseph Story in 1 Commentaries on the Constitution § 525 (M. Bigelow, 5th ed. 1906)). In the often-quoted words of Justice Jackson:
'While the Constitution diffuses power the better to secure liberty, it also contemplates that practice will integrate the dispersed powers into a workable government. It enjoins upon its branches separateness but interdependence, autonomy but reciprocity.' Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 635 (1952) (concurring opinion). . .
Of particular note is the analysis of the executive power in Justice Scalia's dissent:
. . .In what other sense can one identify 'the executive Power' that is supposed to be vested in the President (unless it includes everything the Executive Branch is given to do) except by reference to what has always and everywhere -- if conducted by government at all -- been conducted never by the legislature, never by the courts, and always by the executive. There is no possible doubt that the independent counsel's functions fit this description. She is vested with the 'full power and independent authority to exercise all investigative and prosecutorial functions and powers of the DOJ [and] the Attorney General.' 28 U.S.C. § 594(a) (1982 ed., Supp. V) (emphasis added). Governmental investigation and prosecution of crimes is a quintessentially executive function. See Heckler v. Chaney, 470 U.S. 821, 832 (1985); Buckley v. Valeo, 424 U.S. 1, 138 (1986); U.S. v. Nixon, 418 U.S. 683, 693 (1974). [ FN: Morrison , at 706.]
The Court relied on a combination of important factors, i.e., the Executive's (through the Attorney General) control of the appointment process (no independent counsel absent a request from the Executive Branch), the lack of the court's power to supervise or control the independent counsel and the Executive's power to control and remove the independent counsel, in order to determine that the special court's limited role was appropriate under the separation of powers doctrine. No such limitations are provided for bankruptcy administrators, who are charged with ensuring that the laws are faithfully executed, yet are wholly creatures of the judicial branch.
C. Comparative Costs of the Two Systems
Cost comparison between these two systems is difficult because the U.S. Trustee system encompasses a broader range of bankruptcy districts than the Bankruptcy Administrator system. The GAO attempted to correct for this difference by choosing U.S. Trustee districts that more closely tracked the six Bankruptcy Administrator districts. While the GAO Report concluded that the U.S. Trustee program costs more than the Bankruptcy Administrator system, it noted that the program was paid for by the users of the system and did more in areas of trustee oversight and criminal enforcement. The GAO report also noted that differences in caseload composition, differences in the local economy, and demographics could significantly affect district costs and efficiencies, [ FN: See GAO Report at 5 & 16.] thereby limiting the impact of the comparison between the two programs. Notably, the GAO had to select small, rural districts for purposes of comparison because of the nature of the Bankruptcy Administrator districts. [ FN: GAO Report at 5.] Yet, the U.S. Trustee program also has large urban districts with very different caseload profiles from the Bankruptcy Administrator districts. The GAO Report concluded that "[t]hese differences limit the validity of camparing the two programs in total." [ FN: Id.]
With respect to staffing and oversight among program offices, there are honest differences of opinion about how uniform the administration of bankruptcy cases must be. The original concept called for loose supervision of regional and local offices by the EOUST. General policies, however, need to be fairly uniform, as it is a fundamental principle of justice that like cases be treated alike. [ FN: The Administrative Office Director s Guidelines also " suggest procedures and make recommendations on estate administration oversight matters in order to encourage uniformity in judicial districts served by bankruptcy administrators. " See Vol. II, §§ 4.01-4.034. It is unclear whether such uniformity exists in practice.]
In 1997, the National Bankruptcy Conference recommended that the Attorney General establish national policy for the administration of bankruptcy cases. [ FN: Reforming the Bankruptcy Code, The National Bankruptcy Conference s Code Review Project, Final Report, revised edition, May 1, 1997, p. 11.] Further, the Bankruptcy Reform Act of 1994 amended 28 U.S.C. § 586(a)(3)(A) to require the Executive Office to promulgate procedural guidelines for fee applications to "be applied uniformly by the U.S. trustee except when circumstances warrant different treatment." [ FN: 28 U.S.C. § 586 (1994).] It is clear that a delicate balance exists between too much supervision and not enough.
Virtually all of the independent studies of the systems of bankruptcy administration reached one key conclusion: the separation of the administrative and judicial functions in bankruptcy cases, and the placement of the administrative function in the DOJ, has significantly improved the integrity of the bankruptcy system. Unfortunately, there have been no in-depth studies or reports analyzing operations in the Bankruptcy Administrator districts.
The rationale for strict separation of the judicial and administrative functions of the
bankruptcy system remains as vital as it did almost 23 years ago. The constitutional issues
discussed above may require a single bankruptcy administration system. If so, the Bankruptcy
Administrator districts can be incorporated earlier than the current statutory schedule of 2002.
While there are reports of problems with inconsistency in approach, policy, and quarterly fees
between the Bankruptcy Administrator system and the U.S. Trustee system, consensus exists that
each system overall provides an efficient means of bankruptcy administration. Therefore, if the
constitutional issues do not require an expedited process, the statutory schedule for incorporation
of the Bankruptcy Administrator system should remain unchanged.