Magazine article Business Credit

The U.S. Trustee: The Rodney Dangerfield of the Bankruptcy System

Magazine article Business Credit

The U.S. Trustee: The Rodney Dangerfield of the Bankruptcy System

Article excerpt

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. …

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