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105th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 105-663
_______________________________________________________________________
PRIVATE TRUSTEE REFORM ACT OF 1997
_______________________________________________________________________
July 31, 1998.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Gekas, from the Committee on the Judiciary, submitted the following
R E P O R T
[To accompany H.R. 2592]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 2592) to amend title 11 of the United States Code to
provide private trustees the right to seek judicial review of
United States trustee actions related to trustee expenses and
trustee removal, having considered the same, reports favorably
thereon with an amendment and recommends that the bill as
amended do pass.
TABLE OF CONTENTS
Page
The Amendment.............................................. 2
Purpose and Summary........................................ 2
Background and Need for the Legislation.................... 3
Hearings................................................... 9
Committee Consideration.................................... 10
Vote of the Committee...................................... 10
Committee Oversight Findings............................... 10
Committee on Government Reform and Oversight Findings...... 10
New Budget Authority and Tax Expenditures.................. 10
Congressional Budget Office Cost Estimate.................. 10
Constitutional Authority Statement......................... 11
Section-by-Section Analysis and Discussion................. 11
Changes in Existing Law Made by the Bill, as Reported...... 13
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SUSPENSION AND TERMINATION OF PANEL TRUSTEES AND STANDING
TRUSTEES.
Section 586(d) of title 28, United States Code, is amended--
(1) by inserting ``(1)'' after ``(d)'', and
(2) by adding at the end the following:
``(2) A trustee whose appointment to the panel or as a standing
trustee is terminated or who ceases to be assigned to cases filed under
title 11 may obtain judicial review of the final agency decision by
commencing an action in the United States district court for the
district in which the panel member or standing trustee resides, after
first exhausting all available administrative remedies, which if the
trustee so elects, shall also include an administrative hearing on the
record. Unless the trustee elects to have an administrative hearing on
the record, the trustee shall be deemed to have exhausted all
administrative remedies for purposes of this section if the agency
fails to make a final agency decision within 90 days after the trustee
requests administrative remedies. The Attorney General shall prescribe
procedures to implement this paragraph.''.
SEC. 2. EXPENSES OF STANDING TRUSTEES.
Section 586(e) of title 28, United States Code, is amended by
adding at the end the following:
``(3) After first exhausting all available administrative remedies,
an individual appointed under subsection (b) of this section may obtain
judicial review of final agency action to deny a claim of actual,
necessary expenses under this paragraph by commencing an action in the
United States district court in the district where the individual
resides.
``(4) The Attorney General shall prescribe procedures to implement
this subsection.''.
SEC. 3. PROCEDURES FOR AND STANDARD OF REVIEW.
Section 157 of title 28, United States Code, is amended--
(1) by redesignating subsections (d) and (e) as subsections
(e) and (f), respectively, and
(2) by inserting after subsection (c) the following:
``(d) In conducting judicial review under section 586(d)(2) or
section 586(e)(3) of this title, the district court shall determine
whether to retain the case or to refer the case to a bankruptcy judge
or magistrate judge in the district: Provided, however, That in any
district where fewer than 3 bankruptcy judges have been appointed under
section 152(a) of this title, a referral shall only be made to a United
States magistrate judge in the district. Any bankruptcy judge or
magistrate judge to whom a case is referred shall submit a
recommendation for disposition to the district court based solely on a
review of the administrative record before the agency, and a final
order or judgment shall be entered by the district court after
considering the bankruptcy judge's or magistrate judge's
recommendation, and after reviewing those matters to which any party
has timely and specifically objected. The decision of the agency shall
be affirmed unless it is unreasonable and without cause based upon the
administrative record before the agency.''.
Purpose and Summary
H.R. 2592, as amended by an amendment in the nature of a
substitute, creates a procedural mechanism for administrative
and judicial review of certain decisions made by United States
trustees with regard to their supervision of bankruptcy
trustees, fiduciaries who administer bankruptcy cases. The bill
permits an individual whose appointment to the trustee panel or
as a standing trustee is terminated by the United States
trustee or who ceases to be assigned cases by the United States
trustee to obtain administrative review of such action,
including an administrative hearing on the record, and review
by the district court of a final agency decision. It also
allows a standing trustee, after exhausting all available
administrative remedies, to obtain district court review of a
final agency action denying a claim of actual, necessary
expenses by such trustee. In addition, H.R. 2592 specifies the
standard of judicial review and authorizes a district court to
refer these matters for a recommendation to a bankruptcy judge
or a magistrate judge in districts with at least three
bankruptcy judges or to a magistrate judge in districts with
less than three bankruptcy judges. Further, the bill directs
the Attorney General to promulgate rules implementing its
provisions concerning the suspension and termination of panel
and standing trustees as well as its provisions concerning the
expenses of standing trustees.
Background and Need for the Legislation
Background
The United States Trustee Program, a component of the
Department of Justice, is charged with the administrative
oversight of bankruptcy cases.\1\ Created by Congress on a
pilot basis in 1978,\2\ the Program was thereafter expanded
nationwide in 1986,\3\ with the exception of two states.\4\
Under the former Bankruptcy Act of 1898,\5\ bankruptcy judges--
or referees as they were called prior to 1973--performed
various administrative duties in addition to their judicial
responsibilities. Included among their administrative
responsibilities was the duty to appoint individuals to serve
as trustees in bankruptcy cases and to award compensation to
such individuals for their work as trustees.\6\ Based on their
dual administrative and judicial roles, bankruptcy judges,
under the former system, were often required to determine
issues involving their appointed trustees. The necessarily
close working relationship between the bankruptcy bench and
trustees led to a widespread perception of cronyism and insider
influence.\7\
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\1\ 28 U.S.C. Sec. 586.
\2\ Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat.
2549 (1978).
\3\ Bankruptcy Judges, United States Trustees, and Family Farmer
Bankruptcy Act of 1986, Pub. L. No. 99- 554, 100 Stat. 3088 (1986).
Organizationally, the Program functions through 21 regions, each of
which is headed by a United States trustee who is appointed by the
Attorney General to serve a five-year term. 28 U.S.C. Sec. 581.
\4\ The nationwide expansion of the United States Trustee Program
was not made effective in the judicial districts for the States of
North Carolina and Alabama for a period of six years, unless such
districts elected to make it effective prior thereto. Bankruptcy
Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986
Sec. 302(d)(3), Pub. L. No. 99-554, 100 Stat. 3088, 3121 (1986). The
period was extended pursuant to the Judicial Improvements Act of 1990
Sec. 317(a), Pub. L. No. 101-650, 104 Stat. 5089, 5115 (1990).
\5\ 30 Stat. 544 (1898 as amended) (repealed 1978).
\6\ See, e.g., Bankruptcy Act of 1898 Sec. 2(17), 11 U.S.C.
Sec. 11(17) (repealed 1978) (authorizing bankruptcy bankruptcy judges
to appoint and remove trustees); former Fed. Bankr. R. 13-205(a)(1)
(authorizing bankruptcy judges to appoint standing trustees and to
terminate such appointments ``at any time''); former Fed. Bankr. R. 13-
209(b) (authorizing the bankruptcy judge to fix compensation of
standing and other trustees). Bankruptcy judges under the former
Bankruptcy Act were advised as follows:
Referees should carefully review expenses of Chapter XIII trustees
to the end that such expenses shall be reasonable and necessary and
exclude such items as bar association dues, association membership
dues, travel and subsistence expenses incident to attending meetings of
professional associations, entertainment, purchase of law books,
subscriptions to publications, and the like. Referees should likewise
periodically review the compensation allowance of the trustee to the
end that it will be reasonable and not in excess of the maximum
compensation of a full-time referee.
Manual for Bankruptcy Judges, Guideline Procedures for Chapter XIII
Operations 1001.19 (Administrative Office of the U.S. Courts 3rd ed.
1974).
\7\ See, e.g., H.R. Rep. No. 95-595, at 91 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6052 (``As the administrator of bankruptcy
cases, and the individual responsible for the supervision of the
trustee or debtor in possession, it is an easy matter for a bankruptcy
judge to feel personally responsible for the success or failure of a
case. . . . The institutional bias thus generated magnifies the
likelihood of unfair decisions in the bankruptcy court[.]''); Report of
the Commission on the Bankruptcy Laws of the United States, H.R. Doc.
No. 93-137, at 93 (1973) (``When the referee has appointed, or approved
the appointment of, a trustee to take charge of the property of the
estate, has supervised and perhaps instructed the trustee in the
performance of his duties, and has approved the trustee's choice of
counsel and the initiation of an action, the referee may not appear to
the trustee's adversary as one fitting the model of judicial
objectivity. . . . [T]he Commission believes that making an individual
responsible for conduct of both administrative and judicial aspects of
a bankruptcy case is incompatible with the proper performance of the
judicial function.''). As the Director of the Executive Office for
United States Trustees explained at the hearing on H.R. 2592 before the
Subcommittee on Commercial and Administrative Law:
The combination of the administrative and the judicial functions in
bankruptcy court produced perceptions of improprieties and charges of
cronyism, since trustees were considered court favorites and bankruptcy
insiders. Those perceptions, those charges, plagued and diminished the
system, and it diminished as well the bench and the bar who worked in
bankruptcy law.
* * *
The structural separation of the judicial from the administrative
work of the bankruptcy court is the foundation, the basic structural
reason for much of the great progress made in preventing and
eliminating cronyism and insiderism claims of the past.
Private Trustee Reform Act of 1997: Hearing on H.R. 2592 and Review
of Post-Confirmation Fees in Chapter 11 Cases Before the Subcomm. on
Commercial and Admin. Law of the House Comm. on the Judiciary, 105th
Cong. 62 (1997) (statement of Joseph Patchan, Director, Executive
Office for United States Trustees) [hereinafter ``Hearing''].
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Congress responded to this problem by transferring the
administrative responsibilities for bankruptcy cases to United
States trustees,\8\ ``to serve as bankruptcy watch-dogs to
prevent fraud, dishonesty, and overreaching in the bankruptcy
arena.'' \9\ As one of its ``core functions,'' \10\ the United
States trustees were specifically given the authority to
appoint trustees in bankruptcy cases and to supervise these
individuals.\11\
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\8\ For example, United States trustees have the following
responsibilities with regard to consumer bankruptcy cases:
supervising the administration of these cases and monitoring their
progress, 28 U.S.C. Sec. 586(a)(3)(G);
reviewing applications for compensation and reimbursement of
expenses by professionals, including trustees, 28 U.S.C.
Sec. 586(a)(3)(A);
notifying the United States Attorney about any criminal matters and
assisting the United States Attorney in the prosecution of such
matters, 28 U.S.C. Sec. 586(a)(3)(F); and
ensuring that monetary assets in a bankruptcy estate are properly
secured and invested, 11 U.S.C. Sec. 345, 28 U.S.C. Sec. 586(a)(4).
\9\ H.R. Rep. No. 95-595, at 88 (1977).
\10\ Hearing, supra note 7, at 64 (prepared statement of Joseph
Patchan, Director, Executive Office for United States Trustees).
\11\ 28 U.S.C. Sec. 586(a)(1), (3), (b).
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A bankruptcy trustee is a fiduciary who is ``held to the
highest standards of honesty.'' \12\ As the ``representative''
of a bankruptcy estate,\13\ a trustee can sue and be sued.\14\
The trustee must comply with any applicable State law in his or
her administration of the bankruptcy case and is subject to all
applicable Federal, State and local taxes.\15\
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\12\ Hearing, supra note 7, at 64 (prepared statement of Joseph
Patchan, Director, Executive Office for United States Trustees).
\13\ 11 U.S.C. Sec. 323(a). This has been interpreted to mean that
a trustee ``represents all the creditors of the estate generally and is
entitled to administer the property of the estate wherever located.'' 3
Collier on Bankruptcy para. 323.02[1], at 323-3 (Lawrence P. King et
al. eds. 15th ed. rev. 1997).
\14\ 11 U.S.C. Sec. 323(b), 28 U.S.C. Sec. 959(a).
\15\ 28 U.S.C. Sec. 959(b).
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For consumer bankruptcy cases, there are two types of
trustees. One type consists of individuals appointed by the
United States trustee to serve on a ``panel of private
trustees'' who are responsible for administering cases filed
under chapter 7 of the Bankruptcy Code (a form of bankruptcy
relief in which the debtor's non-exempt assets are liquidated
and distributed to the debtor's creditors).\16\ Qualifications
for panel membership are specified by regulation.\17\ Upon
appointment to a panel, a trustee is assigned chapter 7 cases
by the United States trustee to administer.\18\ Panel trustees
are appointed for a one-year term, subject to renewal.\19\ As
of 1997, there were approximately 1,200 panel trustees.\20\
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\16\ 28 U.S.C. Sec. 586(a)(1); Authorization To Establish Panels of
Private Trustees, 28 C.F.R. Sec. 58.1 (1998).
\17\ Qualification for Membership on Panels of Private Trustees, 28
C.F.R. Sec. 58.3 (1998).
\18\ 28 U.S.C. Sec. 586(a)(1). The Bankruptcy Code specifies a
chapter 7 trustee's administrative duties:
(1) collect and reduce to money the property of the estate for
which such trustee serves, and close such estate as expeditiously as is
compatible with the best interests of parties in interest;
(2) be accountable for all property received;
(3) ensure that the debtor shall perform his intention as specified
in section 521(2)(B) of this title;
(4) investigate the financial affairs of the debtor;
(5) if a purpose would be served, examine proofs of claims and
object to the allowance of any claim that is improper;
(6) if advisable, oppose the discharge of the debtor;
(7) unless the court orders otherwise, furnish such information
concerning the estate and the estate's administration as is requested
by a party in interest;
(8) if the business of the debtor is authorized to be operated,
file with the court, with the United States trustee, and with any
governmental unit charged with responsibility for collection or
determination of any tax arising out of such operation, periodic
reports and summaries of the operation of such business, including a
statement of receipts and disbursements, and such other information as
the United States trustee or the court requires; and
(9) make a final report and file a final account of the
administration of the estate with the court and with the United States
trustee.
11 U.S.C. Sec. 704.
\19\ Hearing, supra note 7, at 98 (prepared statement of W. Steve
Smith, President, National Association of Bankruptcy Trustees).
\20\ Hearing, supra note 7, at 95 (testimony of Kevyn D. Orr,
Deputy Director, Executive Office for United States Trustees).
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Another type of trustee consists of individuals appointed
to administer chapter 13 (individual debt reorganization) and
chapter 12 (family farmer) cases.\21\ In addition to performing
many of the same duties as private trustees, these individuals,
known as ``standing trustees,'' are responsible for collecting
payments due under the debtor's repayment plan and distributing
these payments to the debtor's creditors.\22\ A standing
trustee's compensation and expenses attributable to the
trusteeship are fixed by the Attorney General.\23\ These
expenses are not case-specific, but relate to the operation of
the trusteeship.\24\ As of 1997, there were approximately 200
standing trustees.\25\
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\21\ 28 U.S.C. Sec. 586(b). Qualifications for appointment are
specified by regulation. Qualifications for Appointment as Standing
Trustee and Fiduciary Standards, 28 C.F.R. Sec. 58.4 (1998).
\22\ 11 U.S.C. Sec. 1302 (b), (c).
\23\ 28 U.S.C. Sec. 586(e). Under this statutory scheme, a standing
chapter 13 trustee, for example, is required to collect a ``percentage
fee'' of up to ten percent from payments made by debtors pursuant to
their repayment plans in cases that the trustee administers. 28 U.S.C.
Sec. 586(e)(1)(B)(i), (2). Out of this fee, the trustee is authorized
to receive annual compensation in a specified amount as well as
``actual, necessary expenses incurred by such individual as standing
trustee.'' 28 U.S.C. Sec. 586(e)(1), (2)(B)(ii).
In the two states not included in the United States Trustee
Program, the standing trustee is required to submit a budget report by
a prescribed date to the Bankruptcy Administrator, who then must make a
recommendation to the bankruptcy judge regarding the ``setting of
percentage fees, annual compensation, and other relevant expenditure
requests.'' Guidelines of the Director of the Administrative Office for
United States Courts Relating to the Administration of the Bankruptcy
Administrator Program, at II-V-6 (Mar. 1993).
\24\ Typical chapter 13 trustee budget expense items include, for
example, office rent, employees' salaries and benefits, equipment
purchases and maintenance (e.g., computers, photocopiers, postage
meters), utility services (e.g., telephone, electricity), training, and
travel. Hearing, supra note 7, at 77-78 (prepared statement of Ellen B.
Vergos, United States Trustee--Region 8), 161 (response of Laurence P.
Morin, President, Association of Bankruptcy Professionals, to Rep.
Lamar Smith's questions for the record). Depending on the number of
cases administered by a chapter 13 trustee, such trustee's annual
expense budget can range from $20,000 to $2.7 million. Id. at 77-78.
\25\ Hearing, supra note 7, at 95 (remarks of Kevyn D. Orr, Deputy
Director, Executive Office for United States Trustees).
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The United States trustee is responsible for supervising a
trustee's performance.\26\ To this end, the United States
Trustee Program has promulgated ``initiatives'' imposing
stringent standards of accountability for these fiduciaries
\27\ who, in turn, are entrusted with the responsibility to
administer billions of dollars in bankruptcy estate assets.\28\
A trustee determined to be derelict in discharging his or her
administrative or fiduciary duties may be suspended by the
United States trustee from active case assignment until the
problem is rectified.\29\ In addition, the United States
trustee may decline to reappoint a panel trustee upon the
expiration of his or her one-year appointment.\30\ These
actions, however, only relate to the assignment of future
cases. In contrast, a trustee may be removed from pending
bankruptcy cases in which he or she is serving only by the
court ``for cause,'' after notice and hearing.\31\
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\26\ 28 U.S.C. Sec. 586(a)(1), (3), (b).
\27\ As the result of one initiative, for example, the number of
chapter 7 cases ten years old or more in 1992 was reduced from 4,000 to
171 as of 1997. Hearing, supra note 7, at 68 (statement of W. Clarkson
McDow, Jr., United States Trustee--Region 4).
\28\ In 1996, for example, chapter 7, 12 and 13 trustees
administered $3.9 billion in estate assets. Hearing, supra note 7, at
64 (prepared statement of Joseph Patchan, Director, Executive Office
for United States Trustees).
\29\ See Procedures for Suspension and Removal of Panel Trustees
and Standing Trustees, 28 C.F.R. Sec. 58.6 (1998). Reasons warranting
suspension--as viewed by the United States Trustees--include the
pendency of a criminal investigation concerning a trustee, failure to
administer estate assets, an audit of the trustee's bankruptcy estate
administrative operations indicating certain inadequacies, and
excessive delay in closing cases, among other administrative reasons.
Hearing, supra note 7, at 71 (statement of W. Clarkson McDow, Jr.,
United States Trustee--Region 4).
\30\ See Procedures for Suspension and Removal of Panel Trustees
and Standing Trustees, 28 C.F.R. Sec. 58.6 (1998). For example, a
United States trustee may decide not to reappoint a panel trustee
solely for managerial necessity, such as the need to reduce the size of
a panel, given prevailing case filing rates. See, e.g., Authorization
To Establish Panels of Private Trustees, 28 C.F.R. Sec. 58.1(b) (1998).
\31\ 11 U.S.C. Sec. 324(a). Although the Bankruptcy Code does not
define ``for cause,'' the courts have interpreted this term to imply
some degree of malfeasance. As Collier notes:
Causes for removal include situations in which the trustee is found
to be incompetent or unwilling to perform the duties of a trustee; the
trustee is not disinterested or holds an interest adverse to the
estate; the trustee violates the fiduciary duty to the estate; and
where the trustee is guilty of misconduct in office or personal
misconduct.
Generally, the courts will not remove a trustee absent actual fraud
or injury. A trustee will not be removed for mistakes in judgment where
the judgment is discretionary and reasonable under the circumstances.
3 Collier on Bankruptcy para. 324.02, at 324-3-4 (Lawrence P. King
et al. eds. 15th ed. rev. 1997).
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Need for the Legislation
H.R. 2592 was introduced on October 1, 1997 as the
``Private Trustee Reform Act of 1997'' by Representatives Bob
Goodlatte (R-Va) (for himself and Representatives Lamar Smith
(R-Tex.) and Bob Barr (R-Ga.)). At the subsequent hearing on
this bill, Mr. Goodlatte explained that the legislation was
intended ``to restore fairness to a system in which the U.S.
Trustee has unfettered discretion to not only judge the
appropriateness of expenses incurred by private trustees, but
also . . . to cease assigning cases in the future'' to such
trustees.\32\ He noted, for example, that ``[i]n many
instances, private trustees are required to devote 100 percent
of their time to their duties as trustees'' and that when a
United States trustee ``decides to cease assigning cases to a
private trustee, that private trustee is being deprived of his
or her livelihood.'' \33\ Accordingly, these decisions, he
observed, ``should not be made lightly'' and should be subject
to judicial review.\34\
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\32\ Hearing, supra note 7, at 9.
\33\ Id. at 8.
\34\ Id. at 9.
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Judicial Review of United States Trustee Decisions Regarding
Future Case Assignments and Reappointment. Prior to the
issuance of a regulation last year specifying the procedures
for the suspension and termination of a trustee's
appointment,\35\ the courts generally recognized that the
United States trustee's discretion with regard to future case
assignments and reappointment decisions was not subject to
judicial review.\36\ Upon the promulgation of this rule,
however, these decisions are now generally viewed as being
subject to judicial review \37\ in accordance with the
Administrative Procedure Act.\38\ Thus, they can be set aside
if found to be arbitrary, capricious or an abuse of discretion,
among other reasons.\39\ De novo review, however, is not
available.\40\
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\35\ Procedures for Suspension and Removal of Panel Trustees and
Standing Trustees, 28 C.F.R. Sec. 58.6 (1998).
\36\ See, e.g., Joelson v. United States, 86 F.3d 1413, 1419 (6th
Cir. 1996) (``Decisions regarding the discharge of private panel
trustees from future case assignments are . . . committed to the
discretion of the U.S. Trustees.''); Richman v. Straley, 48 F.3d 1139,
1143 (10th Cir. 1995) (``Because the standing trustee serves no
definite term and Congress made no explicit provision to the contrary,
the party with the power of appointment may terminate that appointment
at any time by refusing to assign new cases to the standing
trustee.''); Shaltry v. United States, 182 B.R. 836, 841 (D. Ariz.
1995) (noting that the statutory and legislative history indicated that
``Congress intended to delegate decisions as to panel membership to the
individual U.S. Trustees''), aff'd, 87 F.3d 1322 (9th Cir. 1996).
Collier observes that panel membership ``is not a property right or
liberty interest'' and, thus, the ``due process clause of the Fifth
Amendment does not apply when the United States trustee removes a
trustee from a chapter 7 panel.'' 1 Collier on Bankruptcy para. 324.01
n. 2 (Lawrence P. King et al. eds. 15th ed. rev. 1997).
Procedures in effect in those states that are not included in the
United States Trustee Program similarly provide that panel trustees who
are not reappointed by a Bankruptcy Administrator have ``no right to a
hearing.'' Practice and Procedures for Chapter 7 Trustees in Bankruptcy
Administrator Districts, III-7 (Administrative Office of the United
States Courts Jan. 1997).
\37\ Hearing, supra note 7, at 54-55 (statement of Professor
Jeffrey Lubbers, Washington College of Law, American University, and
former Research Director, Administrative Conference of the United
States).
\38\ Pub. L. No. 89-554, 80 Stat. 381 (1966) (codified as amended
in scattered sections of 5 U.S.C.).
\39\ 5 U.S.C. Sec. 706.
\40\ Hearing, supra note 7, at 94 (testimony of Joseph Patchan,
Director, Executive Office for United States Trustees).
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At the October 9, 1997 hearing before the Subcommittee,
various trustee representatives testified that neither the
current law nor the recently promulgated rule protected their
interests.\41\ As one trustee explained, ``[P]anel trustees
have become justifiably concerned with being removed from
rotation, denied reappointment to the panel or otherwise denied
cases without being afforded the opportunity to challenge the
action being taken against them by the UST.'' \42\ These
representatives cited instances where the United States trustee
abused its discretion in this area and intimidated
trustees.\43\ The United States trustee's decisions in these
matters were described as ``far-reaching'' as they threaten a
trustee's livelihood and present ``a serious stigma of
incompetence or wrongdoing.'' \44\ The trustee representatives
also stated that the scope of judicial review, largely premised
on determining whether the action was an ``abuse of
discretion,'' was not ``meaningful review.'' \45\
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\41\ See, e.g., id. at 97-98 (statement of W. Steve Smith,
President, National Association of Bankruptcy Trustees), 127 (statement
of Henry E. Hildebrand, III, National Association of Chapter 13
Trustees). One trustee explained:
The reasons we oppose this rule may be summarized as follows:
1. it does nothing more than ``rubber stamp'' lower level agency
decisions;
2. the agency has uncontrolled authority for its decisions as to
case termination having immediate affect [sic];
3. the criteria for termination are highly subjective and subject
to arbitrary interpretation and abuse;
4. the burden of proof is on the trustee to prove that the U.S.
Trustee's actions and opinions are unwarranted--in other words, the
``accused'' has to prove that he or she should neither be accused nor
found ``guilty'';
5. there is no meaningful, timely, affordable judicial review.
Id. at 165 (response of Laurence P. Morin, President, Association
of Bankruptcy Professionals, to Rep. Lamar Smith's questions for the
record).
\42\ Id. at 98 (prepared statement of W. Steve Smith, President,
National Association of Bankruptcy Trustees).
\43\ A poll conducted by the National Association of Bankruptcy
Trustees indicated that 74 percent of the respondents ``feared removal
or non-reappointment if they opposed a UST directive, and nearly one-
third felt they had been instructed to take a position that conflicted
with their independent business judgment.'' Id. at 98 (statement of W.
Steve Smith, President, National Association of Bankruptcy Trustees). A
standing trustee recounted instances of ``de facto removals'' where the
United States trustee ceased assigning cases to trustees. Id. at 164-66
(responses of Laurence P. Morin, President, Association of Bankruptcy
Professionals, to Rep. Lamar Smith's questions for the record).
\44\ Id. at 99 (prepared statement of W. Steve Smith, President,
National Association of Bankruptcy Trustees); see id. at 105 (prepared
statement of Laurence P. Morin, President, National Association of
Bankruptcy Trustees) (``The lifeblood of a trustee's business is the
assignment of new cases.'').
\45\ Id. at 101 (prepared statement of W. Steve Smith, President,
National Association of Bankruptcy Trustees).
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Chapter 13 Trustee Expenses. The Subcommittee heard testimony
from trustees at its October 9, 1997 hearing on H.R. 2592 that
United States trustees micromanage standing trustees' budgets,
substitute their judgment for that of the standing
trustees,\46\ and thereby restrict the ability of standing
trustees to function and adversely impacts the bankruptcy
system.\47\ Examples of the types of disputes that can arise
include the following:
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\46\ As one standing trustee observed:
[T]he U.S. Trustee has developed a practice of not supervising, but
of imposing the agency's judgment over expenses to be incurred by the
standing trustee, for example:
(1.) rental of office space, including but not limited to the
location, type of property, number of square feet per case, per
employee, or both;
(2.) personnel decisions such as: who should be hired to serve as
an employee, what qualifications are too much or not enough, how much
employees should be paid, what type(s) and amounts of benefits should
be provided, job descriptions and training requirements[.]
Id. at 106 (prepared statement of Laurence P. Morin, President,
Association of Bankruptcy Professionals).
\47\ See, e.g., id., 129 (prepared statement of Henry E.
Hildebrand, III, National Association of Chapter 13 Trustees).
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the proper proration of expenses between the
operation of the trusteeship (e.g., rent, use of a
photocopier) and other activities that occur at that
same location, such as the operation of the trustee's
law firm;
the amount of salary and benefit payments that should
be paid to an employee of the trustee; and
whether the trustee's provision of certain services
not specifically related to his or her statutory duties
is a proper expense item that should be
compensated.\48\
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\48\ See, e.g., Administrative Oversight in the Bankruptcy System:
Who Should Guard the Hen House? 106-110 (American Bankruptcy Institute
1995).
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While the United States trustee representatives testified at
the Subcommittee hearing that these disputes were typically
handled within the United States Trustee Program through an
informal dispute resolution process,\49\ the trustees did not
concur that the Program had such procedures.\50\
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\49\ See, e.g., Hearing, supra note 7, at 80-86 (prepared statement
of Ellen B. Vergos, United States Trustee--Region 8).
\50\ A standing trustee explained:
Please do not be misled by any representations by the U.S. Trustee
that there are procedures to resolve disputes. . . . [T]he current
process necessitates that the private trustee . . . capitulate to the
decision of the U.S. Trustee or the requested expense item will be
disallowed. In many instances, even if the expense was necessary for
the trustee operation or reasonable by criteria other than those
applied by the U.S. Trustee, the private trustees have been required to
pay the expense from personal funds.
Id. at 162 (response of Laurence P. Morin, President, Association
of Bankruptcy Professionals, to Rep. Lamar Smith's questions for the
record).
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Amendment in the Nature of a Substitute to H.R. 2592. As
introduced, H.R. 2592 consisted of two substantive components.
First, the bill would have allowed a private trustee to obtain
administrative review of a decision by a United States trustee
to cease assigning cases to such trustee and, after an
opportunity for an administrative hearing on the record, to
obtain judicial review by a bankruptcy court of the final
administrative disposition. Second, the bill would have
permitted a standing trustee, after an administrative hearing
on the record, to have a bankruptcy court determine the actual,
necessary expenses of such trustee.
The Amendment in the nature of a substitute to H.R. 2592
reflects a compromise between the private trustees and the
United States trustees that resolves some of the most
contentious issues with respect to the assignment of future
cases and expense requests of standing trustees. It establishes
a procedural mechanism for administrative and judicial review
that balances the parties respective interests. In addition, it
allows interstitial details concerning the Amendment's
implementation to be defined through the promulgation of rules
by the Attorney General.
Hearings
On October 9, 1997, the Committee's Subcommittee on
Commercial and Administrative Law held a hearing on H.R. 2592
in conjunction with a review of postconfirmation fees in
chapter 11 cases. In connection with H.R. 2592, 12 witnesses
testified: Congressman Bob Goodlatte, Representative from the
State of Virginia; Ford Elsaesser, Vice President for Research,
American Bankruptcy Institute; Henry R. Hildebrand, III,
National Association of Chapter 13 Trustees; United States
Bankruptcy Judge Frank W. Koger, President, National Conference
of Bankruptcy Judges; Professor Jeffrey Lubbers of Washington
College of Law, American University; W. Clarkson McDow, Jr.,
United States Trustee for Region 4; Laurence P. Morin,
President, Association of Bankruptcy Professionals; Professor
Jeffrey W. Morris, University of Dayton Law School, on behalf
of the National Bankruptcy Conference; Kevyn D. Orr, Deputy
Director, Executive Office for United States Trustees; Joseph
Patchan, Director, Executive Office for United States Trustees;
W. Steve Smith, President, National Association of Bankruptcy
Trustees; and Ellen B. Vergos, United States Trustee for Region
8.
Committee Consideration
On April 30, 1998, the Subcommittee on Commercial and
Administrative Law met in open session and ordered reported
favorably the bill H.R. 2592, without amendment, by voice vote,
a quorum being present. Thereafter, the Committee met in open
session on July 21, 1998 and ordered reported favorably the
bill, with an amendment in the nature of a substitute, by voice
vote, a quorum being present.
Vote of the Committee
There were no recorded votes.
Committee Oversight Findings
In compliance with clause 2(l)(3)(A) of rule XI of the
Rules of the House of Representatives, the Committee reports
that the findings and recommendations of the Committee, based
on oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
Committee on Government Reform and Oversight Findings
No findings or recommendations of the Committee on
Government Reform and Oversight were received as referred to in
clause 2(l)(3)(D) of rule XI of the Rules of the House of
Representatives.
New Budget Authority and Tax Expenditures
Clause 2(l)(3)(B) of House Rule XI is inapplicable because
this legislation does not provide new budgetary authority or
increased tax expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 2(l)(3)(C) of rule XI of the
Rules of the House of Representatives, the Committee sets
forth, with respect to the bill, H.R. 2592, the following
estimate and comparison prepared by the Director of the
Congressional Budget Office under section 403 of the
Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 27, 1998.
Hon. Henry J. Hyde,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2592, the Private
Trustee Reform Act of 1997.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susanne S.
Mehlman, who can be reached at 226-2860.
Sincerely,
June E. O'Neill, Director.
Enclosure.
cc: Hon. John Conyers, Jr.,
Ranking Minority Member.
H.R. 2592--Private Trustee Reform Act of 1997
CBO estimates that implementing H.R. 2592 would result in
no significant impact on the federal budget. Because this bill
could affect direct spending, pay-as-you-go procedures would
apply, but CBO expects that any such effects would be
negligible. H.R. 2592 contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act
and would have no impact on the budgets of state, local, or
tribal governments.
The Executive Office for United States Trustees (U.S.
Trustees) is responsible for administering and supervising
private trustees. H.R. 2592 would enable private trustees to
seek judicial review when disputes arise over actions taken by
the executive office with regard to expenses of trustees and
their assignment to and removal from cases. Based on
information from the U.S. Trustees, CBO estimates that fewer
than 20 cases involving such disputes would occur each year and
that only a few such cases would eventually lead to judicial
review. Thus, CBO estimates that enacting H.R. 2592 would not
impose any significant additional costs on the federal court
system and the U.S. Trustees.
Expenses associated with private trustees are paid through
bankruptcy fees, and any fees not used by the private trustees
are paid to the U.S. Trustee System Fund as offsetting
collections. To the extent that access to the judicial process
provided by this bill might enable private trustees to prevail
in disputes regarding expenses, the U.S. Trustee System Fund
could receive fewer offsetting collections. This potential loss
of collections would reduce the amounts available for spending
by the U.S. Trustees, but would result in no net change in
outlays from direct spending. Furthermore, CBO expects that any
loss of offsetting collections would not be significant because
so few cases would reach judicial review each year.
The staff contact for this estimate is Susanne S. Mehlman,
who can be reached at 226-2860. This estimate was approved by
Robert A. Sunshine, Deputy Assistant Director for Budget
Analysis.
Constitutional Authority Statement
Pursuant to Rule XI, clause 2(l)(4) of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in Article I, section 8, clause 4 and Article
III, section 2, clause 1 of the Constitution.
Section-By-Section Analysis
Section 1. Suspension and Termination of Panel Trustees and
Standing Trustees. Section 1 adds a provision to section 586(d)
of title 28 of the United States Code permitting a panel or
standing trustee to obtain administrative and judicial review
of United States trustee actions terminating such trustee's
appointment or the assignment of cases to such trustee. The
intent of this section is to trigger, where applicable,
provisions of the Administrative Procedure Act (``APA'').\51\
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\51\ Pub. L. No. 89-554, 80 Stat. 381 (1966) (codified as amended
in scattered sections of 5 U.S.C.).
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With regard to the trustee's administrative remedies, this
provision allows the trustee to require the agency to hold an
administrative hearing on the record.\52\ Where the trustee
does not elect to have an administrative hearing on the record,
such trustee will be deemed to have exhausted all
administrative remedies if the agency fails to make a final
agency decision within 90 days after the trustee requests
administrative review.
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\52\ An agency decision determined on the record after opportunity
for an agency hearing, 5 U.S.C. Sec. 554(a), triggers a trial-type
hearing that must be conducted by the agency, agency members or an
administrative law judge. 5 U.S.C. Sec. 556(b). Other procedural
safeguards include certain notice requirements, 5 U.S.C. Sec. 554(b);
the opportunity to supplement the agency's hearing record, 5 U.S.C.
Sec. 554(c); prohibition of ex parte communications, 5 U.S.C.
Sec. 554(d); opportunity to be represented by counsel, 5 U.S.C.
Sec. 555(b); and other trial-type protections (e.g., depositions,
subpoenas, alternative dispute resolution, official transcript), 5
U.S.C. Sec. Sec. 555, 556.
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Upon exhaustion of his or her administrative remedies, the
trustee may commence an action in the United States district
court where the trustee resides. The applicable procedures and
standard of review are specified in section 3 of the bill.
This section also requires the Attorney General to
prescribe procedures to implement its provisions.
Section 2. Expenses of Standing Trustees. Section 2 amends
section 586(e) of title 28 of the United States Code to allow a
standing trustee to obtain administrative and judicial review
of a decision by the United States trustee denying such
trustee's request for actual, necessary expenses. The intent of
this section is to trigger, where applicable, provisions of the
APA. Upon exhaustion of all available administrative remedies,
the trustee may obtain judicial review of the final agency
action by commencing an action in a United States district
court located in the district where the trustee resides.
Section 3 of the bill prescribes the applicable procedures and
standard of review for this action.
This section also requires the Attorney General to
prescribe procedures to implement its provisions.
Section 3. Procedures for and Standard of Review. Section 3
amends section 157 of title 28 of the United States Code to
specify the procedures for judicial review as provided under
sections 1 and 2 of the bill. This section permits a district
court to retain an action described in sections 1 or 2 of the
bill or to refer it to a bankruptcy or magistrate judge,\53\ if
there are three or more bankruptcy judges serving in the
district. If there are less than three bankruptcy judges
serving in the district, the district court may retain the
action or refer it to a magistrate judge. Upon referral, the
bankruptcy or magistrate judge must submit a recommendation for
disposition to the district court that is based solely on a
review of the agency's administrative record. The district
court is required to enter a final order or judgment after
considering the referring judge's recommendation and any
matters to which a party has specifically objected.
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\53\ The Committee contemplates that in most instances these
matters will be referred to a bankruptcy judge, unless the district
court determines such referral to be inappropriate.
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With regard to the standard of review, Section 3 requires
the final agency decision to be affirmed unless it is (1)
unreasonable and (2) without cause based upon the agency's
administrative record.\54\ It is not the intent of the
Committee that courts, in reviewing final agency decisions,
should be restricted to interpretations of similar language in
the Bankruptcy Code in applying this standard. The standard
also is not intended to be synonymous with the arbitrary and
capricious standard under the APA.
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\54\ As originally introduced, H.R. 2592's standard of judicial
review for case assignment decisions was whether the United States
trustee ``acted unreasonably or without cause.''
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H.L.C.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3 of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
TITLE 28, UNITED STATES CODE
* * * * * * *
PART I--ORGANIZATION OF COURTS
* * * * * * *
CHAPTER 6--BANKRUPTCY JUDGES
* * * * * * *
Sec. 157. Procedures
(a) * * *
* * * * * * *
(d) In conducting judicial review under section 586(d)(2)
or section 586(e)(3) of this title, the district court shall
determine whether to retain the case or to refer the case to a
bankruptcy judge or magistrate judge in the district: Provided,
however, That in any district where fewer than 3 bankruptcy
judges have been appointed under section 152(a) of this title,
a referral shall only be made to a United States magistrate
judge in the district. Any bankruptcy judge or magistrate judge
to whom a case is referred shall submit a recommendation for
disposition to the district court based solely on a review of
the administrative record before the agency, and a final order
or judgment shall be entered by the district court after
considering the bankruptcy judge's or magistrate judge's
recommendation, and after reviewing those matters to which any
party has timely and specifically objected. The decision of the
agency shall be affirmed unless it is unreasonable and without
cause based upon the administrative record before the agency.
[(d)] (e) The district court may withdraw, in whole or in
part, any case or proceeding referred under this section, on
its own motion or on timely motion of any party, for cause
shown. The district court shall, on timely motion of a party,
so withdraw a proceeding if the court determines that
resolution of the proceeding requires consideration of both
title 11 and other laws of the United States regulating
organizations or activities affecting interstate commerce.
[(e)] (f) If the right to a jury trial applies in a
proceeding that may be heard under this section by a bankruptcy
judge, the bankruptcy judge may conduct the jury trial if
specially designated to exercise such jurisdiction by the
district court and with the express consent of all the parties.
* * * * * * *
PART II--DEPARTMENT OF JUSTICE
* * * * * * *
CHAPTER 39--UNITED STATES TRUSTEES
* * * * * * *
Sec. 586. Duties; supervision by Attorney General
(a) * * *
* * * * * * *
(d)(1) The Attorney General shall prescribe by rule
qualifications for membership on the panels established by
United States trustees under paragraph (a)(1) of this section,
and qualifications for appointment under subsection (b) of this
section to serve as standing trustee in cases under chapter 12
or 13 of title 11. The Attorney General may not require that an
individual be an attorney in order to qualify for appointment
under subsection (b) of this section to serve as standing
trustee in cases under chapter 12 or 13 of title 11.
(2) A trustee whose appointment to the panel or as a
standing trustee is terminated or who ceases to be assigned to
cases filed under title 11 may obtain judicial review of the
final agency decision by commencing an action in the United
States district court for the district in which the panel
member or standing trustee resides, after first exhausting all
available administrative remedies, which if the trustee so
elects, shall also include an administrative hearing on the
record. Unless the trustee elects to have an administrative
hearing on the record, the trustee shall be deemed to have
exhausted all administrative remedies for purposes of this
section if the agency fails to make a final agency decision
within 90 days after the trustee requests administrative
remedies. The Attorney General shall prescribe procedures to
implement this paragraph.
(e)(1) * * *
* * * * * * *
(3) After first exhausting all available administrative
remedies, an individual appointed under subsection (b) of this
section may obtain judicial review of final agency action to
deny a claim of actual, necessary expenses under this paragraph
by commencing an action in the United States district court in
the district where the individual resides.
(4) The Attorney General shall prescribe procedures to
implement this subsection.
* * * * * * *
