seeks review of a decision by the United States Trustee for Region [REDACTED]
not to reappoint him to the panel of chapter 7 trustees for the United States
Bankruptcy Court for the District of [REDACTED].(2)
Based upon the record before me,(3) I conclude
that the trustee should be returned to the panel.
I. Course of this Proceeding
Prior to his non-renewal, the trustee
had been a member of the panel of chapter 7 trustees for the United States Bankruptcy
Court for the District of [REDACTED]. On March 18, 1997, the United States Trustee
notified the trustee that she was not reappointing him to the panel when his
current one year appointment expired. By letter dated October 7, 1997, the trustee
sought administrative review of that decision from the Director of the Executive
Office for United States Trustees. By letter dated November 7, 1997, the United
States Trustee set forth her bases for not renewing the trustee (the "Notice").
The trustee responded to the Notice on December 12, 1997 (the "12/12/97 response").
The United States Trustee responded to the trustee's letter by letter dated
January 9, 1998 (the "1/9/98 response").
II. Standard of Review
In reviewing the United States Trustee's decision, I consider two factors:
1. Did the United States Trustee's decision constitute an appropriate exercise
of discretion ; and,
2. Was the United States Trustee's decision supported by the record.
I apply these factors because they
are identical to those the Director must consider pursuant to a final Rule the
Department of Justice recently promulgated to formalize the procedures to be
used by the Director in reviewing decisions by United States Trustees to cease
assigning future cases to panel and standing trustees. Procedures for Suspension
and Removal of Panel Trustees and Standing Trustees, 62 Fed. Reg. 51740
(Oct. 2, 1997). The final Rule, which is codified at 28 C.F.R. 58.6, is not
effective for non-renewal decisions, like the trustee's, that were made prior
to November 3, 1997. 62 Fed. Reg. at 51740. Nevertheless, I apply the Rule's
factors, which are set out in subsection 58.6(i), because they constitute a
rational basis upon which to review the United States Trustee's decisions in
The United States Trustee decided
not to renew the trustee's one year appointment to the chapter 7 panel based
upon her conclusion that he was placing his interest in obtaining personal remuneration
for his trustee services above the interests of the creditors -- particularly
the unsecured creditors -- of the estates placed under his charge. Notice at
1-16. She concluded the trustee's conduct constituted a breach of fiduciary
duty and a violation of United States Trustee Program policy. Id. The
United States Trustee specifically determined that the trustee had administered
fully encumbered assets in cases to obtain a larger fee and this was done to
the detriment of those estates' general unsecured creditors. Id. She
relied primarily upon statistical data to establish this point. Id. at
9-12; 1/9/98 response at 8-12. The United States Trustee also was concerned
that the compensation sought by the trustee in one particular case, [REDACTED],
was improper. Notice at 2-5; 1/9/98 response at 12-15.
United States Trustees supervise
panel trustees. 28 U.S.C. 586(a)(1). They carefully "monitor the performance
of panel members . . . in order to determine whether they should be continued
in or removed from panel membership." 1/9/98 response at 2 (quoting H.R.
Rep. No. 95-595, 95th Cong., 1st Sess. 101, 101-02 (1977)).
Under the law, "[t]he United States trustee is permitted to conduct his own
investigation . . . to exercise effective supervision and make an effective
evaluation of the performance of the private trustee on the panel." 1/9/98 response
at 2-3 (quoting id. at 110).
Trustees are fiduciaries with wide-ranging
responsibilities to effectuate the goals of the particular chapter under which
a bankruptcy case is filed. Because they are fiduciaries, trustees are held
to very high standards of honesty and loyalty. See generally Woods
v. City National Bank & Trust Co., 312 U.S. 262, 278 (1941); Mosser
v. Darrow, 341 U.S. 267 (1951). See also Meinhard v. Salmon,
249 N.Y. 458, 464, 164 N.E. 545, 546 (1928) (Cardozo, C.J.). Any trustee who
administers estates for his personal interest rather than the creditors' interests
has violated his fiduciary duties and should be subject to appropriate supervisory
A chapter 7 case should be administered
to maximize and expedite the payment of dividends to creditors and facilitate
a fresh start for debtors entitled to a discharge. In this case, it was wholly
appropriate for the United States Trustee to scrutinize the trustee's administration
of assets, including fully encumbered assets, to determine whether the trustee
was fulfilling his fiduciary duties. A fully encumbered asset is one in which
a secured creditor's liens equal or exceed the asset's value. A trustee should
not administer a fully encumbered asset if the proceeds obtained from its liquidation
will primarily benefit the trustee or the professionals, or will unduly delay
the resolution of the case. Administering an asset in such circumstances will
not produce a meaningful distribution to unsecured creditors and may well reduce
distributions due to delay; liability arising from the maintenance of the asset;
the trustee's increased compensation (if he sought to charge the estate for
administering the asset); or "adverse tax consequences." Handbook for Chapter
7 Trustees at 58. For these reasons, the Handbook provides that "[g]enerally,
a trustee should not administer or sell assets that are fully encumbered unless
the secured creditor has requested the trustee to administer its collateral
and the trustee determines that administering the property would benefit the
estate." Handbook at 58.
Rather than administering fully
encumbered assets, trustees should obtain a court order to abandon them whenever
the administration of such an asset would produce "inconsequential value and
benefit to the estate." 11 U.S.C. 554(a). Abandonment enables a secured creditor
to protect its security interest in the secured property by exercising its rights
under applicable state law and maximizes the distribution available for unsecured
In this case, the United States
Trustee relied primarily upon statistical evidence to justify non-renewal. Notice
at 9-12; 1/9/98 response at 8-12. She contends the trustee distributed a lower
percentage of total distributions to general unsecured creditors in his cases
than the regional and national average for distributions to unsecured creditors
in chapter 7 cases. Id.; Notice at Exhibits A and B.
In reviewing trustee performance,
however, statistics should be the beginning point, not the ending point. A United
States Trustee is right to be concerned when statistics indicate that a panel
trustee has returned a lower average distribution to unsecured creditors than
have other trustees. That may mean the trustee is not diligently representing
the interests of the creditors, there is a fundamental defect in the trustee's
ability to administer cases, or the trustee is engaging in some scheme, such
as over-administering cases, to produce excessive fees. Alternatively, there
may be a legitimate reason why a particular trustee has achieved a lower average
When faced with a history of low
return to unsecured creditors, a United States Trustee should analyze the trustee's
specific cases to determine the cause. Where the United States Trustee encounters
instances in which a trustee is seeking improperly to administer fully encumbered
assets, it is incumbent upon the United States Trustee to file motions objecting
to that conduct. The United States Trustee also should provide the trustee notice
and guidance concerning this important deficiency, giving the trustee an opportunity
to reform. When those admonishments result in no change in objectionable case
handling procedures, the United States Trustee should take appropriate supervisory
In this situation, the distribution
data cited by the United States Trustee provides support for her conclusion.
In 1997, the trustee's payments to unsecured creditors fell below regional and
national averages, while his payments to secured creditors exceeded them, as
did his payments to outside professionals.(5)
In 1996, by contrast, while the trustee's distributions to unsecured creditors
were below national and regional averages, so were his distributions to secured
creditors and to himself. Yet, the trustee's payments to outside counsel and
professionals that year were well above national and regional levels. This type
of fluctuating data does not enable me to draw firm conclusions regarding the
trustee's conduct. While I am troubled by his low return to unsecured creditors,
I believe that disciplinary action would need to be based upon a detailed analysis
of this trustee's handling of individual cases. The United States Trustee did
an analysis of the trustee's administration of a few cases originally filed
under chapter 11 and later converted to chapter 7, but that analysis was not
determinative of the issues raised by the United States Trustee, and the trustee
raised legitimate points in response. See Notice at 11-12; 12/12/97 response
at 17-20; 1/9/98 response at 9-10.
The United States Trustee also bases
non-renewal upon the trustee's administration of the [REDACTED] case,
in which the United States Trustee believes the compensation the trustee seeks
is excessive and contravenes 11 U.S.C. 326(a). Notice at 2-5. On November 14,
1996, the United States Trustee filed an objection to the trustee's proposed
compensation with the bankruptcy court. Id. at 3. At the time of her
November 7, 1997 Notice in this matter, the bankruptcy court had not ruled upon
the United States Trustee's motion. Id. at 4.
The United States Trustee acted
appropriately in the [REDACTED] case by opposing compensation she concluded
was inappropriate. Although there is no evidence in the record that the trustee
has consistently sought inappropriate compensation in other cases, supervisory
action could be fully warranted if the record established that he had engaged
in such conduct.
The United States Trustee chose
not to reappoint the trustee over a year ago and the trustee appealed seven
months later, which was still prior to the effective date of the formal Procedures
for Suspension and Removal of Panel Trustees and Standing Trustees. I acknowledge
that it is difficult to develop a record to support actions taken long before
a trustee calls them into question. Thus, while this record does not justify
a non-renewal action, it is incumbent upon the United States Trustee to provide
close scrutiny over this trustee's case handling procedures. If she finds improper
conduct that diminishes distributions to unsecured creditors, unjustified payments
to secured creditors or outside counsel or professionals, then she should take
appropriate disciplinary action, based upon a fully developed record.
Based upon my review of the record,
including the written submissions of the United States Trustee and the trustee,
I determine that Mr. [REDACTED] should be returned to the panel of individuals
available for appointment as trustee in chapter 7 cases in the United States
Bankruptcy Court for the District of [REDACTED].
The foregoing conclusions and decisions constitute final agency action in this
Dated: April 22, 1998
Executive Office for
United States Trustees
1. For ease of reference, hereinafter "the trustee."
2. United States Trustees are Justice Department officials appointed by, and who serve at the pleasure of, the Attorney General. 28 U.S.C. 581(a) and (c). The Director of the Executive Office for United States Trustees is a Justice Department official who acts under authority delegated by the Attorney General. Panel trustees, such as the trustee, serve under appointments that have a term not to exceed one year.
3. The record in this matter includes the United States Trustee's decision; the trustee's request for review; the United States Trustee's response; correspondence submitted by the trustee to the Director; materials that the parties produced at the request of the Director; and documents that accompanied those various submissions.
4. A secured creditor also has the right to seek a lifting of the automatic stay, 11 U.S.C. 362, and then employ its state law remedies to realize on its security interest.
5. In 1997, the trustee's payments to outside counsel and himself were below national and regional averages.