The U.S. Trustee: The Rodney Dangerfield of the Bankruptcy System
Moses, Max G., Bernstein, Robert S., Business Credit
Virtually every bankruptcy case in the United States is touched by the U.S. Trustee. The U.S. Trustee Program exists in every jurisdiction (except Alabama and North Carolina). U.S. Trustees have some responsibility in every Chapter 7, 11, 12 or 13 bankruptcy case, yet their activities are not often discussed in current bankruptcy literature, and like Rodney Dangerfield, they get no respect.
Created under the Bankruptcy Reform Act of 1978 as a pilot program in 10 judicial districts, the U.S. Trustee system was designed to allow bankruptcy judges to handle judicial functions without being burdened by administrative tasks. Perhaps more significantly, this new bureaucracy was intended to eliminate potential conflicts of interest that existed prior to the 1978 code. For example, private trustees, who had the responsibility to liquidate and manage a debtor's assets, were appointed by bankruptcy judges. Subsequently, these trustees might subsequently need to appear before the very same judge who appointed them as advocates on issues which required that judge to make rulings.
New Structure Set by Law
This pilot program was scrutinized during its first five years of existence. When Congress passed the Bankruptcy Amendments Act of 1984, the program's life was extended from its original 1984 expiration date to 1986. Finally, with the passage of the Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986, the system was expanded to 48 of the 50 states. Over the ensuing two years, the permanent national program was phased in and 21 regional U.S. Trustees were appointed by the U.S. Attorney General, each for initial terms of 5 years.
Alabama and North Carolina were excluded and use the Bankruptcy Administrator Program. Current law provides for the Bankruptcy Administrator Program to continue until the year 2002. However, S1559, the Bankruptcy Technical Amendments Act of 1995, which passed the U.S. Senate late in July of this year, would extend the program until 2012. Of concern is the 1994 9th Circuit Court of Appeals decision (St. Angelo vs Victoria Farms, Inc., 38 F. 3rd 1525), which found the statute that delayed the effective date for the entry of Alabama and North Carolina into the U.S. Trustee system to be unconstitutional because it violates the uniformity clause of the U.S. Constitution.
Although there is an Executive Office for U.S. Trustees (EOUST) in the Department of Justice (and the director has the right to appoint the regional U.S. Trustees as well as issue operative guidelines), the reality is that each regional U.S. Trustee exercises an immense amount of power. As a result, the system has become rather fragmented, and it sometimes seems that the one consistent thing about the U.S. Trustee system is its inconsistency.
The U.S. Trustees: Power and Criticism
In light of the power of the U.S. Trustees, it is no wonder that there has been a significant amount of criticism of the system and the individuals working within it. It is also not surprising that Congress has held at least five separate oversight hearings about the U.S. Trustee system in the last three years, the most recent in July of this year. Because of the U.S. Trustee's potential impact on fee requests, it is also not surprising that the vast majority of professionals would rather not comment publicly about the system or the individual U.S. Trustees for fear of retribution in the form of removal from the panel of private trustees, reduction in appointments or increased scrutiny of fee applications.
The Merit System Versus Political Appointments
As a general rule, those who like the system are those who have a cordial working relationship with their individual regional U.S. Trustee. It is these same people who have been most vocal in seeking to keep partisan politics out of the process for appointing regional U.S. Trustees. They have suggested strongly that a merit system be used and that those regional U.S. Trustees who are doing a good job be retained. The Attorney General has seen differently on this issue and has, through policy statements, made it clear that the regional U.S. Trustee positions are political appointments and that a merit selection process will not be instituted.
Adding to the institutional problems for the U.S. Trustee system is the purported desire of the courts to run the U.S. Trustee system. The administrative Office for U.S. Courts, which currently has authority over the Alabama and North Carolina Bankruptcy Administrator programs, has made little secret of its desire to have the entire system moved from the Department of Justice to its jurisdiction. Those who argue against this transfer of authority contend that to put it again under the auspices of the court would open up the system to the same complaints of cronyism and, at least, the appearance of conflicts of interest for judges. At this writing, it is most likely that the U.S. Trustee system will remain under the Department of Justice.
Privatization of Some Functions
Another issue brewing with respect to the U.S. Trustee system is that of privatization. The National Academy of Public Administration (NAPA) recently issued its review, funded by a grant from the Department of Justice, of the U.S. Trustee program. In direct response to that study, EOUST has begun to implement privatization programs in selected judicial districts. The types of activities that best lend themselves to privatization include reviewing and monitoring financial reporting by debtors, collecting the quarterly fees required to be paid by Chapter 11 debtors, auditing of members of the panel of private trustees, reviewing no-asset cases and monitoring monthly operating reports required of debtors-in-possession in Chapter 11 cases.
Creditors' Committee Appointments
Of particular concern to the credit grantors who are members of NACM is the power of the U.S. Trustee to appoint members of Creditors' Committees. As providers of unsecured credit to businesses, NACM members are most likely to become creditors in a Chapter 11 bankruptcy and, unfortunately, may be some of the larger creditors. The right to appoint and the determination of who to appoint to serve on those committees rest with the U.S. Trustee.
It is important to note that the existence of an active Creditors' Committee in a Chapter 11 case is one of the primary factors that leads to the successful consummation of a Chapter 11 plan. This is crucial to all unsecured creditors because, in its most simple terms, "consummation" means that the unsecured creditors have been paid what was promised under the plan. This was established clearly in the watershed empirical study of Chapter 11 plans conducted by Susan Jensen-Conklin in "Do Confirmed Chapter 11 Plans Consummate? The Results of a Study and Analysis of the Law," 96 Commercial Law Journal, 297, 324 (1992). In that study, which was the first to address the actual consummation of Chapter 11 plans, the existence of an active Creditors' Committee was cited as one of the important factors that led to creditors ultimately being paid what they were promised under the plan.
Some critics of the U.S. Trustee Program have called for changes in the law to allow for a "de novo" review of decisions relating to the administration of a case as made by the U.S. Trustee. Specifically cited are decisions relative to the appointment of Creditors' Committees and, in particular, situations where the U.S. Trustee appoints an insider, a holder of a questionable claim or a competitor who intends to liquidate the debtor for its own benefit only. Currently, courts are limited to reviewing cases where the U.S. Trustee acted arbitrarily, capriciously or abused his or her discretion. While it is not contended that there are a significant number of instances where the U.S. Trustee has made inappropriate appointments, the mere lack of statutory authority to review these administrative decisions causes additional litigation and cost to the estate due to the need to litigate the standard of review rather than the decisions themselves.
Operation Total Disclosure To Fight Bankruptcy Fraud
All creditors are concerned with those who would use the bankruptcy system to defraud creditors. One of the duties of the U.S. Trustee is to inform the U.S. Attorney of instances of suspected bankruptcy fraud. However, the question is whether the U.S. Trustee is effective in complying with this mandate. Unfortunately, the answer is that more could and should be done in this area. While a few jurisdictions have created bankruptcy fraud units, the vast majority have no real mechanisms for identifying potential bankruptcy fraud and providing the U.S. Attorney with the information needed to proceed with criminal actions. The Attorney General has recently recognized this failing and has created a new program called Operation Total Disclosure, specifically designed to identify, report and discourage fraud in the bankruptcy system.
The U.S. Trustees and Panels of Private Trustees Strained Relationships
Many of the affiliates in NACM have individuals who serve on the panel of private trustees and thus have a keen interest in the relationship between the U.S. Trustee Program and the rights and administration of the activities of the private trustees. Unfortunately, this is one area where there has been a long-simmering dispute between the private trustees and the U.S. Trustees. For years, private trustees contended that they were regarded as less than second-class citizens by the U.S. Trustees. They were not employees and had no contract rights. For all practical purposes, they served at the whim of the regional U.S. Trustee. As a result, both real and perceived grievances by private trustees would oftentimes lead to what many contended were arbitrary and capricious actions by the U.S. Trustee.
Depending upon the jurisdiction and the philosophy of the regional U.S. Trustee, even the question of how many private trustees should serve on the panel became a bone of contention. For example, for years there were only a half dozen members of the panel of private trustees in the Los Angeles area. At the same time, there were more than 60 in the Chicago area. The practical result was that each trustee in Chicago received an average of 300 cases per year, 90 percent of which were no-asset cases resulting in little potential for income to the trustee. On the other hand, in Los Angeles, each trustee could count on being assigned nearly 3,000 cases per year. Not only was there a greater potential for receiving the potentially lucrative Chapter 7 asset cases, but because of the volume of no-asset cases, each private trustee could potentially turn a profit simply on the minimum fee received for each no-asset case.
The removal of members of the panel and the significant reduction of caseload assigned, often without either explanation or right of appeal, have strained the relationship between panel trustees and the regional U.S. Trustee. Legislation was recently proposed that would have given members of the private panel, as well as standing Chapter 12 and 13 trustees, the right to have the court review actions taken by the U.S. Trustee in the removal of the trustee or the assignment of cases. After significant objections from EOUST, a watered down version of the proposal was added to S1559, the Bankruptcy Technical Amendments Act, which passed the Senate and is now on its way to the House of Representatives. As contained in S1559, Chapter 12 and 13 standing trustees would have some limited right of appeal to the U.S. District Court for determinations made by the Attorney General of the actual, necessary expenses of the standing trustees and in situations where the U.S. Trustee ceases assigning cases to those standing trustees. However, the court may only reverse if there was an abuse of discretion.
New Guidelines on Professional Compensation
Recent guidelines published by EOUST on professional compensation have also put a strain on the relationship between private trustees and the U.S. Trustee Program by giving the regional U.S. Trustees even more opportunities to alienate members of the private panel. The guidelines, which outline significant additional record keeping and reporting requirements for time spent on a case, apply to private trustees as well as other professionals. However, each regional U.S. Trustee may determine what, if any, exceptions should be made to the guidelines for private trustees, who normally are compensated according to a formula based upon a percentage of funds distributed by the estate rather than by time worked. Needless to say, this will result in significant differences of requirements among the various regions.
Increase in Quarterly Fees Proposed
EOUST, in its quest for additional income for the program, has been pushing for increases in fees paid by the debtor-in-possession. This ultimately reduces the amount of funds available to pay unsecured creditors. Contained in HR3814, the appropriations bill for the Departments of Commerce and Justice, the quarterly fees paid by debtors in Chapter 11 would be increased significantly, in some cases by as much as 60 percent over previous requirements. This bill, which passed the House late in July of this year awaits consideration in the Senate after the summer recess.
Earlier this year, EOUST was successful in extending the time during which these same quarterly fees must be paid. Under prior law, the responsibility to pay quarterly fees ended upon confirmation of the plan. The new law extends the time until either the conversion or dismissal of the case. Enough concern has been expressed by members of the bar and some members of the bench that Joseph Patchan, executive director of the Office for U.S. Trustees, recently called together members of a half dozen leading bankruptcy organizations to discuss alternatives to lessen the impact of this new provision. Among the suggestions discussed was limiting the requirement of payment of these quarterly fees until the effective date of confirmation (i.e., when everything required under the plan is supposed to happen). Another suggestion was that the estate's value be used to determine the amount that would be subject to the extended quarterly fee rather than all ongoing disbursements for an operating company that effectively isn't even under the eye of the Bankruptcy Court. Needless to say, the cost of this extension will ultimately be borne by unsecured creditors.
Funds Lacking for Garden Variety Chapter 11 Cases
One of the complaints frequently voiced about the U.S. Trustee Program is that it devotes too many of its limited resources to the large, highly visible Chapter 11 cases and not enough to fulfilling its responsibility to monitor the financial and operational activities of the more typical, garden variety Chapter 11 ones. It is in the latter type of case that most members of NACM find themselves involved. In the large public cases there are not only literally hundreds of attorneys and other professionals watching out for the interests of the various parties, but the media helps to make certain that the business world is regularly informed about the ongoing activities in the case.
Unfortunately, in the more typical bankruptcy case, there is no one watching, and often there is not enough money available to fund an active Creditors' Committee. As a result, the U.S. Trustee becomes the most important party--the one who is charged with keeping the debtor's feet to the fire and operating properly. It is in this type of case that the U.S. Trustee should be monitoring the operations and cash situation of the debtor and making certain that not only are the operating reports filed but that the debtor is moving forward toward formulating a plan and obtaining confirmation.
Trustee Appointments in Chapter 11 Cases
Another one of the duties of the U.S. Trustee is the appointment of a trustee in Chapter 11 cases. While the opportunity to make this appointment does not occur frequently, the U.S. Trustee's selection of the Chapter 11 operating trustee can have a significant impact on the course that the case will take. Under the Bankruptcy Reform Act of 1994, Congress attempted to give unsecured creditors additional clout in selecting that trustee. Under a very complex procedure, creditors can elect someone other than the individual chosen by the U.S. Trustee to serve as trustee. Although the process may be complicated and the law somewhat flawed, this new provision gives unsecured creditors and their representatives significant clout in negotiating with the debtor and the trustee. It is something that should be considered whenever a trustee is to be appointed in a Chapter 11 case.
A further consideration is that the opportunity to force an election of the Chapter 11 trustee opens up some additional business avenues for the NACM affiliates as well. (Contained in S1559, the Bankruptcy Technical Amendments Act of 1996, are a couple of provisions designed to address some flaws noted in the Bankruptcy Reform Act of 1994. These would specifically give the Bankruptcy Court the power to resolve disputes in the election of a new trustee and would specifically provide that if a new trustee is elected, the service of the prior trustee would terminate.)
Without a doubt, everyone involved in the bankruptcy process is impacted by the activities of the U.S. Trustee. Unsecured creditors as well as credit and bankruptcy professionals, including the NACM affiliates, can feel the impact even more than the typical party in a bankruptcy case. A better understanding of the duties and responsibilities of the U.S. Trustee can ultimately lead to a more successful participation in the bankruptcy process and perhaps even earn the system more respect.
RELATED ARTICLE: The many rights, duties and responsibilities of each regional U.S. Trustee:
* Create a panel of private trustees who will serve in all Chapter 7 cases.
* Appoint trustees or examiners in those few, but potentially lucrative, Chapter 11 cases in which a trustee or examiner is required.
* Determine who may be added or removed from the private panel.
* Establish the method of assigning cases, both for the non-asset and the asset Chapter 7 cases as well as Chapter 11 cases.
* Appoint standing trustees in Chapter 12 (farm bankruptcy cases) and in Chapter 13 (consumer cases) and help to determine the compensation to be paid to those individuals.
* Serve as trustee if none can be found to serve
* Review all applications for compensation and reimbursements by professionals in all Chapter 7, 11, 12 and 13 cases, file comments and, if appropriate, object to these fee applications.
* Monitor all plans and disclosure statements in Chapter 11 cases and file comments about them with the court.
* Monitor Chapter 12 and 13 plans and in certain circumstances file comments with the court.
* Appoint the Creditors' Committee in Chapter 11 cases.
* Take whatever action as the U.S. Trustee deems appropriate in making certain that all reports and schedules are filed and all U.S. Trustee fees paid.
* Notify U.S. Attorneys of any activities in bankruptcy cases that might constitute criminal action.
* Monitor the cases to make certain that progress is being made.
* Monitor applications filed for the employment of professionals in bankruptcy cases, and file appropriate comments with the court.
* Appear and be heard on any issue in any bankruptcy case.
Max G. Moses, an attorney and a certified public accountant, is executive vice president of the Commercial Law League of America. Robert S. Bernstein, the immediate past president of the Commercial Law League of America, is managing partner in the law firm of Bernstein and Bernstein, PC., Pittsburgh.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The U.S. Trustee: The Rodney Dangerfield of the Bankruptcy System. Contributors: Moses, Max G. - Author, Bernstein, Robert S. - Author. Magazine title: Business Credit. Volume: 98. Issue: 9 Publication date: October 1996. Page number: 20+. © 1999 National Association of Credit Management. COPYRIGHT 1996 Gale Group.
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