United States. Congress. House. Committee on the J.

U.S. trustee program : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Fourth Congress, second session, July 24, 1996 online

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VS. TRUSTEE PROGRAM



H.J 89/1:304/87

"*■ Tpust " '"Jrw. Sena n . 8?



.^RING

BEFORE THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OP THE

COMMITTEE ON THE JUDICIARY
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



JULY 24, 1996




''trtffi



Serial No. 87

'sag*.

Printed for the use of the Committee on the Judiciary




U.S. GOVERNMENT PRINTING OFFICE
35-307 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053733-9



i\



U.S. TRUSTEE PROGRAM



H.J 89/1: 104/87

■•*■ Trustee Crojran, Serial No. 87..



\RING

BEFORE THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



JULY 24, 1996



Serial No. 87





JA/ » 2 S 1997



ttjCtff*



Printed for the U9e of the Committee on the Judiciary



U.S. GOVERNMENT PRINTING OFFICE
35-307 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053733-9



COMMITTEE ON THE JUDICIARY



HENRY J. HYDE, Illinois, Chairman



CARLOS J. MOORHEAD, California
F. JAMES SENSENBRENNER, Jr.,

Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
MARTIN R. HOKE, Ohio
SONNY BONO, California
FRED HEINEMAN, North Carolina
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
MICHAEL PATRICK FLANAGAN, Illinois
BOB BARR, Georgia



JOHN CONYERS, JR., Michigan
PATRICIA SCHROEDER, Colorado
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JOHN BRYANT, Texas
JACK REED, Rhode Island
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
XAVIER BECERRA, California
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California



Alan F. COFFEY, Jr., General Counsel /Staff Director
JULIAN EPSTEIN, Minority Staff Director



Subcommittee on Commercial and Administrative Law

GEORGE W. GEKAS, Pennsylvania, Chairman



HENRY J. HYDE, Illinois

BOB INGLIS, South Carolina

STEVE CHABOT, Ohio

MICHAEL PATRICK FLANAGAN, Illinois

BOB BARR, Georgia



JACK REED, Rhode Island
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
ZOE LOFGREN, California



Raymond V. Smietanka, Chief Counsel

Charles E. Kern II, Counsel

Roger T. Fleming, Counsel

AGNIESZKA FRYSZMAN, Minority Counsel



(ID



CONTENTS



HEARING DATE



Page

July 24, 1996 1

OPENING STATEMENT

Gekas, Hon. George W., a Representative in Congress from the State of
Pennsylvania, and chairman, Subcommittee on Commercial and Adminis-
trative Law 1

WITNESSES

Bodoh, Hon. William T., U.S. bankruptcy judge, on behalf of the American

Bankruptcy Institute 92

FitzSimon, Jean K., on behalf of the Business Bankruptcy Committee, Amer-
ican Bar Association , 97

Freedman, Jeffrey M., Esq., vice president, National Association of Consumer

Bankruptcy Attorneys 45

Greenfield, Harry W., on behalf of the Commercial Law League of America .... 106
Hildebrand, Henry E., Ill, chapter 13 trustee, U.S. Bankruptcy Court the

Middle District of Tennessee 20

Kennedy, Frank, professor, University of Michigan School of law, on behalf

of the National Bankruptcy Conference 100

McDow, W. Clarkson Jr., U.S. Trustee for Region 4, Department of Justice 11

Michel, M. Scott, U.S. Trustee for Region 11, Department of Justice 7

Morin, Lawrence P., president, Association of Bankruptcy Professionals 26

Patchan, Joseph, Director, Executive Office for U.S. Trustees, Department

of Justice 2

Ray, David, board member, National Association of Bankruptcy Trustees 49

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Bodoh, Hon. William T., U.S. bankruptcy judge, on behalf of the American

Bankruptcy Institute: Prepared statement 94

FitzSimon, Jean K., on behalf of the Business Bankruptcy Committee, Amer-
ican Bar Association: Prepared statement 98

Freedman, Jeffrey M., Esq., vice president, National Association of Consumer
Bankruptcy Attorneys: Prepared statement 46

Greenfield, Harry W., on behalf of the Commercial Law League of America:
Prepared statement 107

Hildebrand, Henry E., Ill, chapter 13 trustee, U.S. Bankruptcy Court the

Middle District of Tennessee: Prepared statement 22

Kennedy, Frank, professor, University of Michigan School of law, on behalf
of the National Bankruptcy Conference: Prepared statement 101

McDow, W. Clarkson Jr., U.S. Trustee for Region 4, Department of Justice:
Prepared statement 13

Michel, M. Scott, U.S. Trustee for Region 11, Department of Justice: Prepared

statement 10

Morin, Lawrence P., president, Association of Bankruptcy Professionals: Pre-
pared statement 28

Patchan, Joseph, Director, Executive Office for U.S. Trustees, Department

of Justice: Prepared statement 4

Ray, David, board member, National Association of Bankruptcy Trustees:

Prepared statement 52

(HI)



IV

Page

APPENDIX
Department of Justice responses to subcommittee questions 119



U.S. TRUSTEE PROGRAM



WEDNESDAY, JULY 24, 1996

House of Representatives,
Subcommittee on Commercial and

Administrative Law,
Committee on the Judiciary,

Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2226, Rayburn House Office Building, Hon. George W. Gekas
(chairman of the subcommittee) presiding.

Present: Representatives George W. Gekas, Bob Inglis, and Jack
Reed.
Also present: Representative Bob Goodlatte.

Staff present: Raymond V. Smietanka, chief counsel; Charles E.
Kern II, counsel; Peter J. Levinson, counsel; Rebecca Ward, sec-
retary, and Agnieszka Fryszman, minority counsel.

OPENING STATEMENT OF CHAIRMAN GEKAS

Mr. Gekas. The hour of 10 o'clock having arrived, this hearing
of the Subcommittee on Commercial and Administrative Law of the
House Committee on the Judiciary will come to order.

We recognize the gentleman from Rhode Island, Mr. Reed, the
ranking minority member, whose presence here, along with that of
the Chair, constitutes a hearing quorum. We will proceed.

Does the gentleman wish to make an opening statement?

Mr. Reed. Yes, thank you, Mr. Chairman. I just want to welcome
the witnesses and apologize in advance for having to leave early.
Mr. Scott and I have a markup going on in another committee, and
I know there are other members on our side who also have conflicts
with other subcommittee assignments, but I want to assure the
witnesses that we will review the transcript carefully.

I'd also ask, Mr. Chairman, unanimous consent that any member
who has questions, but is unable to be here because of a conflict,
be allowed to submit them in writing to the panel.

Mr. Gekas. Without objection, so ordered.

Mr. Reed. Thank you, Mr. Chairman. Thank you.

Mr. Gekas. Everyone knows that we have responsibility in this
subcommittee for the bankruptcy system. More and more, almost
every day, we see evidence that it is important to give the public
the clearest possible view of a system that we hope equitably and
efficiently discharges its duties.

And how do we go about doing the things necessary to ensure the
confidence of the public? Since 1978, the form, functions, and struc-
ture of the U.S. Trustee Program have been examined many times,

(1)



mostly by our predecessor subcommittee. Most recently, we have
the 1993 GAO study, the National Academy of Public Administra-
tion report, the American Bankruptcy Institute's symposium, and
the forthcoming analysis by the National Bankruptcy Review Com-
mission. We all hope that the record of this hearing, with as many
witnesses as we have before us today, will add to the understand-
ing of these reports and help clear up misunderstandings, if any
there be.

Now we notice that 10 of our 11 witnesses have come from places
outside Washington: Los Angeles, CA; Phoenix, AR, Ann Arbor, MI;
Chicago, IL; and near Newcastle, PA, Youngstown and Cleveland,
OH; also Nashville, TN; Buffalo, NY; Lynchburg, VA; and Colum-
bia, SC. This is a national forum we're conducting here today, and
we appreciate your adjusting your own schedules to appear before
us.

We'll begin with the first panel, which is made up of Joseph
Patchan, Director, Executive Office for U.S. Trustees; M. Scott
Michel, Regional U.S. Trustee, and Clarkson McDow, Regional U.S.
Trustee.

I thought I recognized the name Michel. Actually, Bob Michel is
better known as the soloist accompanying my performances on the
piano than he was as minority leader, and I want you to know that
and remind him of that.

Mr. Michel. He reminded me.

[Laughter.]

Mr. Gekas. Well, all right, thank you.

Why don't we begin in the order that we announced the member-
ship of the panel, with Mr. Patchan, the Director of the Executive
Office for U.S. Trustees. You may proceed.

STATEMENT OF JOSEPH PATCHAN, DIRECTOR, EXECUTIVE
OFFICE FOR U.S. TRUSTEES, DEPARTMENT OF JUSTICE

Mr. Patchan. Mr. Chairman, Mr. Reed, thank you for this oppor-
tunity to talk to you about the U.S. Trustee Program. My name is
Jerry Patchan, and as you've mentioned, I am the Director of the
Executive Office for U.S. Trustees. I have held that position since
December 1994. I have been a bankruptcy lawyer for more than 40
years, served on the bankruptcy bench, and recently before I came
to the U.S. Trustee Program, served as Deputy General Counsel for
the Resolution Trust Corporation, where I had charge of the RTC's
large bankruptcy docket, among other things.

With me are Scott Michel and Clarkson McDow, both U.S. Trust-
ees. Mr. Michel is headquartered in Chicago, and pending the
swearing in of the new U.S. Trustee, he is also covering our Phila-
delphia region. Mr. McDow is headquartered in Columbia, SC.
They will provide their own perspective on the program based on
their experience.

The U.S. Trustee Program was established to be the watchdog
over bankruptcy administration. The bankruptcy system today
faces a dramatic increase in bankruptcy filings. Over the 12-month
period ending March 31 this year, chapter 7 and chapter 13 filings
have increased approximately 17 percent, and during that same pe-
riod the decline that we've seen in recent past years of chapter 11
business filings seems to have leveled off and may, indeed, begin



to rise. For the first time in our Nation's history, bankruptcy filings
may well exceed 1 million cases within a 12-month period.

The U.S. Trustee Program faces increased workload after several
years of austerity. The program's full-time, onboard personnel have
been reduced by more than 15 percent over the past 3 years. Our
budget remains virtually flat, as it has remained during the fiscal
years 1994, 1995, 1996, and our 1996 appropriation is some half
million dollars less than the program's 1995 appropriations. With
our budget the way it is, the coming year will require that the U.S.
Trustee Program balance the increase in workload using our de-
pleted resources and traditional role as watchdog in the bankruptcy
administration process.

Since its establishment as a nationwide program in 1986, U.S.
Trustees have acted in the public interest to promote the efficiency
and to protect and preserve the integrity of the bankruptcy system.
It was created to correct longstanding and systemic past abuses in
the administration of bankruptcy cases. U.S. Trustees work to as-
sure full and honest disclosure by all parties, prudent administra-
tion by trustees and vigilance by creditors.

Charges of cronyism, insider dealings, bankruptcy rings, so com-
monly heard in the past have disappeared from the vocabulary of
bankruptcy reform, and, indeed, those words, those concepts, those
situations are not even on the agenda of the current Bankruptcy
Review Commission. We submit that the work of the U.S. Trustees
has not only been successful, it is essential to the bankruptcy sys-
tem's integrity and credibility.

There is speculation that this current increase in bankruptcy fil-
ings we are now seeing is the result of too much consumer credit
card debt, but there is no certainty as to the real cause of the fil-
ings. There may, in fact, be many causes. The odd contrast of an
expanding economy, low unemployment, and rapidly-increasing
bankruptcy filings raises the possibility that a number of these new
bankruptcy case filers may be seeking relief that may be
undeserved. The U.S. Trustee Program is the first line of defense
for the bankruptcy system's integrity, and it will continue to be
vigilant in detecting and rooting out fraud and abuse. The pro-
gram's long-term contribution to the integrity of the bankruptcy
process was recognized by the National Academy for Public Admin-
istration in their report last year on the U.S. Trustee Program.

Our funding, I understand, is today before the House. We pro-
pose to seek to stabilize our resources as far as money and person-
nel, and to fill some of the financial holes we presently have in that
funding. We have requested that chapter 11 quarterly fees be re-
structured. This proposal we estimate would raise approximately
some $13 million in chapter 11 quarterly fees that we feel are criti-
cally needed to fund operations of the program. Indeed, the pro-
posal itself is a restatement of the recommendation made by
NAPA, National Academy of Public Administration, presented to
rationalize the chapter 11 fee structure. If adopted, the new fee
structure would finetune the quarterly fee charges by creating ad-
ditional steps in the fee scale. It would increase fees in the largest
cases, but leave unchanged the fees of the smallest cases.



Congress created the U.S. Trustee Program as a self-funding op-
eration. To remain a self-funded system, additional revenues are
necessary to support its operation.

We are aware of a proposal currently pending in the Senate that
will permit trustees to seek a judicial determination of their fees
and expenses.

I would only say one comment about it. As you, Mr. Chairman,
have heard

Mr. Gekas. You may proceed. We'll give you an extra time here,
but I should have said at the beginning that we try to restrict our
witnesses to 5 minutes, so that we can expedite the hearings.

Mr. Patchan. Thank you, Mr. Chairman. I just want to finish
one thought.

As you have stated earlier, the Bankruptcy Commission is at
work. This amendment we consider not a technical amendment as
it is proposed, but a serious, fundamental change in the foundation
of the Bankruptcy Code. We suggest that the matter be first con-
sidered by the Commission ana then the Congress review of the
recommendations of the Commission in that regard.

Thank you for your reception

Mr. Gekas. Thank you. Your written statement will be accepted
for the record, without objection.

Mr. Patchan. Thank you.

[The prepared statement of Mr. Patchan follows:]

Prepared Statement of Joseph Patchan, Director, Executive Office for U.S.
Trustees, Department of Justice

I thank you for this opportunity to make this submission to the Subcommittee.
I am joined by Clarkson McDow, United States Trustee for Region IV (South Caro-
lina, Virginia, West Virginia, the District of Columbia, and Maryland), and Scott
Michel, United States Trustee for Region XI (Northern Illinois and Wisconsin). Mr.
Michel is also serving as Acting United States Trustee for Region III (Pennsylvania,
New Jersey, and Delaware). Mr. McDow and Mr. Michel are each submitting state-
ments discussing their experience as United States Trustees

The United States Trustee Program and the bankruptcy system today face a great
increase in bankruptcy filings. Over the 12 month period ending March 31, 1986,
chapter 7 and chapter 13 filings have increased approximately 17 percent. We are
also seeing signs that chapter 11 business filings may increase over the next year.
For the first time in our nation's history bankruptcy filings will exceed one million
cases.

There is no consensus as to exactly why the number of cases is increasing so dra-
matically. The phenomenon seems at odds with the overall health of the economy —
inflation and unemployment are low, yet bankruptcies are up.

The Program faces this increased workload after several years of austerity. The
Program's on-board personnel have been reduced by 145 since September 30, 1992 —
we now stand at 1050 on-board personnel. Our budget remained virtually flat in fis-
cal year 1994, 1995, and 1996. Our 1996 appropriation of $ 102,272,000 is half a
million dollars less than the Program's 1995 appropriation and — based on tradi-
tional budgetary calculations — $4.7 million less than would be needed for the Pro-
gram to perform the same work as in fiscal year 1995.

The coming year will require that the United States Trustee Program balance this
increase in workload with its streamlined resources and its traditional role as
"watchdog" of the bankruptcy system. Since its establishment as a nationwide pro-
gram in 1986, the United States Trustee Program has acted in the public interest
to promote the efficiency and to protect and preserve the integrity of the bankruptcy
system. Created to correct long-standing and systemic past abuses in the adminis-
tration of bankruptcy cases, the United States Trustee Program works to assure full
and honest disclosure by all parties, prudent administration by trustees, and vigi-
lance by creditors.

The need for the Program springs from the nature of bankruptcy itself: unlike
typical litigation, that involves few parties who directly protect their self-interest,



a bankruptcy case regularly affects many creditors whose small stake in the pro-
ceeding or distance from the bankruptcy forum too often gives them little incentive
to participate. For these parties with the true economic stake in the bankruptcy
case, it commonly takes too much time or costs too much money to serve as watch-
dogs for their interests.

Vast sums of money — billions of dollars — are at stake in the bankruptcy system.
Fraud, embezzlement, insider dealings, excessive compensation of professionals at
the expense of creditors, and undue delay, would add to the cost of the system, and
threaten to corrupt it.

Before the creation of the Program, the judges were the only watchdogs. To do
the job, judges often had to be involved in the administration of the cases before
them, to engage in ex parte contacts, interview and select trustees, and participate
in a host of nonjudicial functions. There were widely reported stories 01 cronyism,
bankruptcy rings, and other scandals that tainted the entire system.

Congress wisely decided to separate the judicial and administrative functions of
the bankruptcy process. With these reforms, judges would rule on particular dis-
putes within a bankruptcy case; the United States Trustee would undertake most
of the administrative functions, and serve as a buffer to protect the integrity of the
judicial process. Judges are now left to judge, and their rulings cannot be questioned
on the grounds that they were trying to protect a trustee appointed by them, or
were influenced thorough improper contacts. With this system in place, charges of
cronyism, insider dealing, and bankruptcy rings — so commonly heard in the past —
have largely disappeared from the vocabulary of bankruptcy reform and, indeed, are
not even on the agenda of the current Bankruptcy Review Commission..

Our administrative functions are manifold. The U.S. Trustee now appoints private
trustees and handles administration. All private trustees undergo FBI background
investigations before being appointed. Their books are regularly audited and, if nec-
essary, corrective steps are taken. In extraordinary cases of fraud or misconduct, the
U.S. Trustee will actually take over the private trustee's operation, reconstruct the
books and records, and "clean up" the operation for delivery to a new trustee. Re-
quests for compensation out of bankruptcy estates are reviewed by the Program
and, where necessary, objections are filed and reductions are sought. We monitor
the pace of cases through the system to assure delay is minimized. Since the Pro-
gram was instituted nationwide in 1987, we have helped to substantially decrease
the average time it takes to close a chapter 7 or chapter 11 case.

This work by the United States Trustees is essential to the bankruptcy system's
integrity and credibility. As the nation's bankruptcy "watchdog," the Program is
carefully monitoring the current increase in bankruptcy filings. There is speculation
that this increase is the result of too much consumer debt, but no one is certain
as to the cause. There may in fact be many causes. The odd juxtaposition of a ex-
panding economy, low unemployment, and rapidly increasing bankruptcy filings
raises the possibility that a number of these new debtors may be seeking relief that
is undeserved. The United States Trustee Program is the first line of defense of the
bankruptcy system's integrity, and it will be vigilant in assuring that fraud and
abuse does not contribute to the increase in filings.

OUR CONTRIBUTIONS TO THE BANKRUPTCY SYSTEM OVER THE PAST YEAR

In the past year, the Program has enjoyed many successes. For example:

The Program has increased investigation and detection of bankruptcy fraud.
On February 29, Operation Total Disclosure announced 112 indictments for
bankruptcy fraud throughout the country, including several against "bank-
ruptcy mills" under the newly enacted provisions of 18 U.S.C. § 156.

The Program has pursued civil enforcement actions and obtained recoveries

against petition preparers under the newly enacted provisions of 11 U.S.C. 110.

The Program has improved monitoring and standards for chapter 7 trustees,

and has begun to reduce the number and burden of these audits, while main-

tainingthe quality of supervision.

The Program formulated and issued nationwide Professional Fee and Expense
Guidelines.

The Program continued its efforts to significantly reduce the number of lin-
gering chapter 11 cases.
In addition to these accomplishments, the Program's long term contribution to the
integrity of the bankruptcy process was recognized recently by the National Acad-
emy for Public Administration ("NAPA"). According to NAPA, the Program has en-
hanced the integrity of the bankruptcy system; improved case administration,
through improved standards and accountability for private trustees; and recruited
a staff of dedicated professionals and established effective management controls.



Also in 1995, the Program fundamentally changed its process for devising and im-
plementing policy: For the first time in its history it publicly invited comments from
interested parties outside the Program. An advisory board consisting of judges and
United States Trustees was created to review comments and hear presentations on
proposed policy changes, and suggest revisions to the Director based on its delibera-
tions. Only after comments are received and considered is a final policy issued. The
Program used this process of consultation and revision in drafting the Professional
Fee Guidelines and its proposed standards for standing trustees (for chapters 12,
for family farmers, and 13, for individuals with regular income).

As this Subcommittee is aware, our proposed standing trustee standards have
generated some controversy, and have led to claims that the United States Trustee
Program is attempting to "micro-manage" Chapter 13 standing trustees. I want to
emphasize, however, that our proposed Standards — which are ethically oriented —
attempt only to have chapter 13 operations conducted in a manner consistent with
the most basic of fiduciary obligations. Mr. McDow will address some of the prob-
lems presented in chapter 13 administration.

We will continue to seek input from the bar and other bankruptcy professionals
as we develop policy. We will meet with representatives of interested groups. We
will tell them what we are thinking and planning. We will ask them for their views
and concerns, and consider those views carefully as we move forward.

THE COMING YEAR

Our fiscal 1997 budget includes the following initiatives:

A Structural Reorganization of the Program. This initiative would implement reor-
ganization of the United States Trustee Program to streamline its operations. Cer-


1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Online LibraryUnited States. Congress. House. Committee on the JU.S. trustee program : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Fourth Congress, second session, July 24, 1996 → online text (page 1 of 17)