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Statement on Issues Related to the U.S. Trustee Program

before the

Subcommittee on Commercial & Administrative Law
House Committee on the Judiciary

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 nation’s 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 System

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 System

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 Program’s heavy reliance on chapter 11 cases for its funding presents a dilemma. While chapter 11 cases are responsible for the bulk of the Program’s 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 Program’s caseload has a disproportionate effect on the Program’s revenues. For example, chapter 11 filings declined by 20 percent in FY 1995 with a commensurate decline in the Program’s 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.

Quarterly Fees

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:
[ FN: The quarterly fee schedule was restructured by Public Law 104-208, the FY 1997 Consolidated Omnibus Appropriations Act. The Act raised the maximum fee to $10,000 and created finer distinctions within the fee ranges, pursuant to suggestions made in 1995 by the National Academy of Public Administration.]

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 Fees

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 [a plan is confirmed or] the case is converted or dismissed, whichever occurs first....

Retroactivity Concerns

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.

• S. Rep No. 104-139, 104th Cong., 1st Sess. at 15 (1995)("extension of the quarterly fee payments made under chapter 11 to include the period after a reorganization plan has been confirmed by the bankrupcty court until the case has been dismissed.) (emphasis added)

• H.R. Conf. Rep. 104-378, 104th Cong., 1st Sess., 141 Cong. Rec. H13894 (December 4, 1995)("extension of post-confirmation quarterly fee payments made under chapter 11 as proposed in both the House and Senate bills and expect thatthese fees will apply to all pending chapter 11 cases with confirmed reorganization plans." (emphasis added).

• H.R. Conf. Rep. 104-378, 104th Cong., 1st Sess.; 141 Cong. Rec. H13899 (December 4, 1995) ("extends the quarterly fee payments for debtors under chapter 11...to include the period from when a reorganization plan is confirmed...until the case is converted or dismissed. The conferees intend that this fee will apply to both pending and new cases.") (emphasis added).

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).

In re Foxcroft Square Co., 198 B.R. 99, 103 (Bankr. E.D. Pa. 1996)(legislative history clearly indicates that Congress intended the amended statute to apply to a debtor with a confirmed reorganization plan; amendment justified by the valid purpose of increasing revenues for U.S. Trustee program).

In re Flatbush Associates Inc., 198 B.R. 75,77 n.1 (S.D.N.Y. 1996)(legislative history indicates that amendment to section 1930 (a)(6) "will apply as of the effective date to ‘all pending chapter 11 cases with confirmed reorganization plans.’")(citing H.R. Conf. Rep. No. 104-378 and Central Florida Electric Inc.)

In re Upton Printing, 197 B.R. 616-618 (Bankr. E.D. La. 1996)("the plain meaning of the Conference Report [for Public Law 104-99] provides that the new fees set forth in the amended statute are to apply to pending chapter 11 cases with confirmed reorganization plans").

Central Florida Electric, 197 B.R. 380, 381 (M.D. Fla. 1996)(legislative history indicates Congress intended the Amended Statute to include all pending chapter 11 cases including all cases with or without confirmed chapter 11 reorganization plans).

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).

In re CF&I Fabricators of Utah Inc., 199 B.R. 986 (Bankr. D. Utah 1996)(holding, inter alia, that application of amended section 1930 (a)(6) to debtor with confirmed plan is retroactive and impermissible due to lack of clear Congressional intent that it be so applied).

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 debtor’s 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).

In re CF&I Fabricators of Utah Inc. 199 B.R. 986, 993 (Bankr. D. Utah 1996)(relying, in part, on In re C n’ B of Florida Inc.).

In re Boone, 201 B.R. 499 (Bankr. W.D. Tenn. 1996)(same).

But see In re Burke, 205 B.R. 778 (Bankr. M.D. La. 1977)(criticizing the reasoning of In re C n’ B of Florida and those cases following that line of reasoning.

The 1997 Legislation

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).

United States Trustee v.In re CF&I Fabricators of Utah Inc., District Court No. 2:96-CV-920 C (D. Utah, April 24, 1997)(unpublished decision)(relying on legislative history of January 1996 amendment and clarifying legislation contained in Public Law 104-208 in holding that amended 1930(a)(6) applies to all cases, including those with previously confirmed plans), reversing In re CF&I Fabricators of Utah Inc., 199 B.R. 986, 993 (Bankr. D. Utah 1996)

In re Driggs, et al., No. 91-4-2718-PM (Bankr. D. Md., Jan. 27, 1997)(Bankruptcy Court, sitting en banc, held that application of amendment to § 1930(a)(6) to cases with plans confirmed before effective date was prospective only).

Effect of Retroactive Quarterly Fees

The Rush to "Closure"

What Does"Closing" Mean in a chapter 11 Case?

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 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. Trustee’s 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. Trustee’s 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.