TESTIMONY OF W. STEVE SMITH
PRESIDENT
NATIONAL ASSOCIATION OF BANKRUPTCY TRUSTEES
3008 MILLWOOD AVENUE
COLUMBIA, SOUTH CAROLINA 29205
(1-800-445-8629)

I want to thank the Chairman and the Subcommittee for allowing the National Association of Bankruptcy Trustees NABT the opportunity to address the importance of maintaining the independence of the Chapter 7 private trustee. My name is Steve Smith and I am president of NABT. NABT represents the interests of the over 1300 private trustees who administer bankruptcy cases filed under Chapter 7 of the Bankruptcy Code. In this calendar year alone, approximately 800,000 new Chapter 7 cases will be filed.

Chapter 7 trustees currently serve on panels for a one-year term and are appointed by and serve under the supervision of the United States Trustee ("UST"). For a number of years, panel 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. NABT has repeatedly called for the establishment of meaningful "due process" rights for panel trustees in such situations.

The Role of the Private Panel Trustee

The concept of a private trustee to administer liquidating bankruptcy estates under Chapter 7, as opposed to reorganizing bankruptcy estates, has been retained throughout all bankruptcylegislation. The congressional scheme as I have always viewed it is to appoint a private trustee as the bankruptcy estate fiduciary he or she bringing to the assignment more business, if not worldly, experience than a government employee. The congressional scheme continues by motivating the private trustee through a compensation program which rewards initiative and ingenuity; it is based upon a percentage of what is recovered and distributed by the private trustee to the creditors. Finally, the congressional scheme adds to the mix the potential liability of the private trustee for any mistake or mis-step, either by suit against the private trustee as representative of the estate, by suit against the private trustee individually, or upon the bond secured by the private trustee to protect the estate on which bond the trustee has personally indemnified the surety from loss.

There is much involved in administering a Chapter 7 bankruptcy case, whether it is an asset or ultimately closed as a no-asset case. Some of this administration is routine; much of it is not. Routine or not, asset or not, the buck stops at the Chapter 7 trustee. A wrong step can mean denial of compensation, no matter how much time we or our staff have spent, and even denial of expenses advanced out of our pockets. It can mean defending a lawsuit as the estate representative or individually for breach of the fiduciary duty imposed upon us by the Bankruptcy Code. It can mean personally paying our bonding company who suffered a loss on our bond and now seeks payment under our agreement to indemnify the bonding surety.

The Role of the United States Trustee

Congress created the United States Trustee program, including the Executive Office for the United States Trustees, a governmental agency within the Department of Justice, to appoint and supervise the Chapter 7 panel trustees. But the agency has done more than supervise panel trustees. Recent procedures, called Initiatives and more recently the EOUST's rule for suspension and removal of trustees, enables, or allows, the U.S. Trustee to micromanage the private trustee's administration of his or her Chapter 7 bankruptcy estate and to determine what is or is not appropriate practice or procedure by the private trustee. In essence, it substitutes the U.S. Trustee's decision-making ability for the Chapter 7 trustees.

Under the present conditions, a private panel trustee who resists the United States Trustee, even for cause, faces the loss of cases and possible removal from the panel. This power can surely destroy the independence desired by Congress for the Chapter 7 trustees. Without that independence, a governmental employee, in most if not all instances having less experience in the bankruptcy arena and in litigation matters, will be substituted in all but name and liability for the private trustee. This will destroy the initiative and ingenuity of the private trustees who distribute a billion dollars annually from the Chapter 7 estates to the creditors. Without some control over their destiny, especially in view of the fact that the private trustee, not the U.S. Trustee, continues to be exposed to suit or bond claim, there will be a loss of experienced Chapter 7 trustees from the panel.

To give effect to the congressional scheme, there must be independence granted to the private trustee. To deny the independence and allow the government through the office of the United States Trustee to dictate what is appropriate or not destroys this independence. What need is there for the private trustee's greater experience if procedure is dictated by the U.S. Trustee? How can the trustee continue to be motivated if ingenuity and initiative are removed? Why should the private trustee continue to be exposed to liability as the estate representative if his discretion is taken away? If the U.S. Trustee's experience, qualifications and drive are to be substituted for those of the private trustee, then the government should accept the liability that goes with the job.

The Need for Due Process for Panel Trustees

A. Maintain Trustee Independence

As I have already indicated, the panel trustee serves as the fiduciary of the estate. Trustees can be sued for actions they take or fail to take in connection with the administration of the estate. It is therefore vital that panel trustees be able to exercise their best independent judgment in a particular matter.

The independence of panel trustees is being compromised by the current practice that permits the UST to remove a panel trustee from rotation, deny reappointment to the panel or otherwise deny the trustee future cases arbitrarily or simply because the UST disagrees with the business judgment of the trustee in a particular case. Panel trustees who disagree with the course of action demanded by the UST face the prospect of being taken "off rotation," being denied reappointment or otherwise being denied future cases if they do not comply with the UST's demands. In a recent survey conducted by NABT of its members, 74 percent of those responding said they feared being removed from the panel or taken off rotation if they opposed UST directives. Nearly one-third also felt that they had been instructed by the UST to take positions that conflicted with their independent business judgment.

The power to remove a trustee is far-reaching because it threatens the trustee's current livelihood and carries with it a serious stigma of incompetence or wrongdoing. Congress placed checks on the power to remove a trustee from a case under section 324 by providing that a trustee may only be removed by the court for cause and after notice and a hearing. The UST, however, has been taking administrative actions to deny cases to panel trustees other than formally removing them from a case, and thereby avoiding the due process requirements of section 324. These actions may include "suspending" the trustee, placing the trustee "off rotation," refusing to assign the trustee new cases, or refusing to renew a trustee's appointment to the panel. Whatever the action may be called, the effect is the same: the trustee is being denied cases and trustee independence is being challenged and compromised.

B. Maintain the Integrity of the Bankruptcy System

The integrity of the bankruptcy system requires the continuing presence of experienced, qualified private panel trustees. Experienced trustees currently are subject to being removed arbitrarily and without cause for almost any reason, including personality conflicts, disagreements over the administration of a case, political affiliation, or failure to comply with the dictates of a particular UST. The entire bankruptcy system is weakened by actions that impair the ability of trustees to perform their duties and responsibilities and that result in the loss of these experienced professionals.

The typical panel trustee today is a college graduate with a law or other post-graduate degree who has served as a trustee for 11 years and handled over 4,000 cases. In the past five years, one of the principal reasons cited by trustees for resigning from the panel or for leaving the trustee practice is the absence of a mechanism to address abuses of panel trustees by the UST. Panel trustees often are placed in a position where they feel they must "maintain the party line" or face the possibility of suspension or nonrenewal of appointment. Because there is often no way that the panel trustee can challenge abuses by the UST, trustees are leaving the practice to pursue other endeavors.

Courts have been reporting a steady increase in Chapter 7 filings over the past year, with a record number of filings so far in 1997. A decrease in the number of experienced trustees will be keenly felt if these trends continue.

C. Provide Needed Fairness and Protection for Trustees

Panel trustees must invest significant time, money and resources to serve on the panel. This includes employing and training qualified staff and maintaining up-to-date equipment, including computers and accounting systems. Trustees must pay for these support services as part of overhead.

Trustees also must carry huge bonds which threaten their financial security if they are ever found liable for breach of their fiduciary duty. At the beginning of most cases, trustees are required to underwrite the expense and expend the time to administer the cases, much of which goes unreimbursed or uncompensated. Trustees often must sacrifice other professional endeavors in order to serve on the panel.

Having made a substantial commitment to serve as a trustee, the panel trustee needs the assurance that he or she will not be arbitrarily removed from the panel or otherwise deprived of a livelihood without cause. The only way to guarantee this needed protection is to provide panel trustees with the basic rights of due process in all situations of removal, suspension, non-assignment of cases, and non-renewal of appointment to the panel.

The Need For Congressional Action

NABT has tried to work with the U.S. Trustee's office to correct the problems in the UST system. I regret to say that these efforts have not been successful. Earlier this year, the EOUST published so-called Initiatives dealing with the supervision of private panel trustees. NABT filed pages of suggestions to the Initiatives, which many U.S. Trustees felt were appropriate for inclusion and in many cases better clarified the situation. Only a single sentence out of all we submitted was included in the published Initiatives.

The EOUST for years also resisted establishing a formal procedure by which panel trustees could obtain meaningful due process before being denied future cases or removed from the panel. Only in the past few months, and in response to the concerns expressed by this Subcommittee and other members of Congress, has the EOUST published proposed procedures for the suspension and removal of panel trustees and standing trustees. This too has been a failure.

The procedures published for comment by the EOUST in May 1997 failed to provide panel trustees with meaningful due process protections. Under that proposal, trustees could be removed from the panel, denied reappointment or otherwise denied future cases without cause, without a hearing and without judicial review by the bankruptcy court. NABT filed extensive comments on the proposed rule and came to Washington to meet with officials of the EOUST. Once again, however, the EOUST rejected most of NABT's comments. Under the final rule adopted by the EOUST, a panel trustee can still be removed from the panel, denied reappointment or otherwise denied future cases without cause, without a hearing and without judicial review by the bankruptcy court. The preamble to the final rule makes clear that congressional action is necessary if trustees are to obtain the right to a hearing on the record.

The judicial review offered under the rule review by a federal district court under an "abuse of discretion" standard is not meaningful review. The path to the district court would take too long and be too expensive for a trustee to pursue. Worse, the court in most cases would have no choice but to rubber-stamp the U.S. Trustee's decision since there would have been no administrative hearing on the record and no requirement that the U.S. Trustee demonstrate cause for the action.

Basic Due Process Protections

Congress has already determined that panel trustees are entitled to due process protection in actions to remove them from a case under section 324. These same principles should be applied to any decision by the United States Trustee to suspend or terminate the assignment of cases to the panel trustee, including where applicable, any decision not to renew the trustee's term appointment. The minimum safeguards, tailored to the situation which exists when the UST proposes to take an adverse action against a trustee, are:

(1) prior notice;

(2) a right to a hearing on the record;

(3) the requirement that the adverse action be "for cause"; and

(4) judicial review by the bankruptcy court.

The panel trustee also should be given the opportunity to obtain interim relief based on an objective standard in circumstances where the U. S. Trustee's decision becomes effective before the review process is complete.

H.R. 2592

H.R. 2592 would provide meaningful due process protections for panel trustees necessary to allow them to maintain their independence. We support the bill and urge approval by the Subcommittee.

Subsection (b) of the bill provides bankruptcy trustees with a right to judicial review of a United States Trustee decision to cease assigning the trustee future cases. It amends section 324 of the Bankruptcy Code to provide that, in the event the United States Trustee decides to cease assigning cases to a panel trustee or a standing trustee, the trustee, after an opportunity for an administrative hearing on the record, may seek judicial review of such decision before the bankruptcy court. Upon review, the court may reverse the decision only if the United States Trustee has acted unreasonably or without cause. The bill also provides that the court may grant injunctive relief in favor of the trustee in appropriate circumstances.

We feel strongly that the due process protections of the bill must be applicable to any decision by the United States Trustee to suspend or terminate the assignment of cases to the panel trustee, including where applicable any decision not to renew the trustee's term appointment. The EOUST has acknowledged in its rule that panel trustees should have the right to judicial review in situations involving the decision not to renew the trustee's term appointment, and we agree. Unless there is a right to judicial review of a decision not to renew the trustee's term appointment, the United States Trustee would be able to circumvent the requirements of the law by simply refusing to reappoint the panel trustee at the end of his or her one-year term.

Finally, I would like to address briefly some of the arguments that I have heard offered by representatives of the EOUST against this bill.

1. The EOUST argues that to grant the bankruptcy judges the right to review decisions on removal, cessation of assignment of cases, or non-reappointment would put the bankruptcy judges back into the very administrative process earlier removed by Congress with the adoption of the Bankruptcy Code. This is not true. A dispute such as this is not administrative. It is a controversy which may be determined by the bankruptcy court, and appropriately so. The bankruptcy court possesses the expertise in bankruptcy matters such as section 324 removals, fiduciary standards, business judgment, and estate administration. Resolution by the bankruptcy court also will be quicker and less costly. Furthermore, the bill would not eliminate any authority granted to the United States Trustee under Title 28, including the authority to appoint, maintain and supervise private panel trustees. It only provides a check against abuse and arbitrary action.

2. The EOUST maintains that sufficient safeguards are provided under the EOUST's administrative procedures for the suspension and removal of panel trustees. As I have said, the EOUST's administrative procedures are totally inadequate.

3. The EOUST claims that panel trustees are seeking an appointment for life. Trustees are not asking for a lifetime appointment, and it is clear that under the bill a trustee can be removed from the panel and denied cases for cause. We do feel strongly, however, that given the investment that a trustee makes in terms of both time and money, a trustee who is performing his or her job well should not be removed or denied reappointment arbitrarily and without cause.

I would like to thank the Subcommittee again for this opportunity to testify, and I would be happy to try to answer any questions you might have.

October 9, 1997