Good morning. It is always a special occasion for me to come to the NABT Annual Convention and share some updates and thoughts with you about the United States Trustee Program (USTP) and bankruptcy practice.
Let me begin by expressing my deep appreciation to NABT President Dwayne Murray for his service to the bankruptcy community over the past year. He is not just an advocate for trustees, but also an advocate for the best interests of the bankruptcy system. I am grateful for the opportunity to have worked with him during his term. Your incoming President Ron Peterson fits the same profile as his predecessor. He has a keen understanding of the needs of trustees and also a deep knowledge of broader bankruptcy practice. I am indebted to Ron for coming to Washington, DC, a few months ago to make a presentation to a group of insolvency administrators from China that was visiting the Executive Office. I look forward to working with Ron during the coming year.
We are meeting during a time of great concern for our fellow citizens who were affected by the devastation of Hurricanes Harvey and Irma. Some lost lives, and many more lost their homes or property. Our heart goes out to all of those who were adversely impacted by these horrible storms. I will have more to say about the hurricanes in a few minutes.
This year marks a special anniversary for the NABT. For 35 years, this association has played a vital role in serving trustees through, among other things, an annual educational program, a regular newsletter that is now a quarterly magazine covering important legal and practice issues, and amicus briefs filed in cases of critical interest to your members. The NABT serves as a focal point on chapter 7 practice for the entire bankruptcy community.
Let us think for just a moment about all the changes in the world of chapter 7 trustees over the history of NABT.
- Although my numbers may not be exact, at least 38 of your members are sitting bankruptcy judges, and at least 10 from your ranks joined the United States Trustee Program. In fact, three of your former Presidents came to the USTP, including past Director Larry Friedman, former United States Trustee Saul Eisen, and the current United States Trustee for Regions 8 and 20, the legendary Sam Crocker.
- The number of active chapter 7 panel trustees has gone up and down, reaching a high of about 1,200 trustees in 2001 to the near low of 918 trustees today. This has been a function both of fluctuating caseloads and regional United States Trustees taking a more analytical approach to the management of local panels.
- From 2001 – when the USTP began posting distribution data – to 2015, chapter 7 trustees administered about 875,000 asset cases and distributed more than $37 billion.
- With your help, we have established a comprehensive Handbook on trustee responsibilities, implemented a financial and case management auditing system, instituted performance reviews, and taken other steps to document that trustees are satisfying the highest fiduciary standards.
- Together, we collaborated in implementing many of the far-reaching changes enacted in the 2005 bankruptcy reform amendments, revised the Uniform Depository Agreement so bank fees could better reflect market conditions, and played a key role in many other important projects. More recently, we worked together on new policies on trustee succession and best practices for collecting documents from debtors.
The USTP and chapter 7 trustees have not always agreed on everything over the years. But I think we all have learned that not every difference merits an argument, and our foremost role is to ensure that the bankruptcy system is serving its stakeholders, which includes the American public whose national economy depends upon its effectiveness.
You have had a noteworthy 35 years and I know the next 35 years promise further accomplishments.
USTP Staff Changes
Our effective working relationship is due both to the good works of the NABT and the outstanding trustee oversight team in the USTP. All of us have enormous respect for Deputy Assistant Director Suzanne Hazard, who has expertly guided chapter 7 practice for so many years. And, of course, Assistant Director for Oversight Doreen Solomon is another essential ingredient in our trustee oversight system. That is why it pains me more than I can say that Doreen has announced that she will be retiring at the end of the year. Her common sense and collegial approach, both within the USTP and in her dealings with chapter 7 and 13 trustees and other constituencies, have made her an invaluable asset. We will miss her greatly.
Please join me in a round of applause to thank Doreen for her many years of service to the bankruptcy community.
Now let me turn to a few topics that may be of special interest to all of you.
GUIDANCE ON NATURAL DISASTERS
A moment ago I mentioned the terrible damage inflicted by Hurricanes Harvey and Irma. Some of those affected are or will become parties in bankruptcy cases. Accordingly, today, I reissued the USTP’s enforcement guidelines for debtors affected by natural disasters. The guidelines were developed to ensure that we administer bankruptcy cases in a manner that takes into account the hardships experienced by victims of hurricanes and other natural disasters. The guidelines comply with our statutory authorities and follow principles of prudent prosecutorial discretion.
Among the areas addressed by the guidelines are:
- We will not take enforcement action against debtors who are unable to file or produce documents required by the Code as a result of a natural disaster, if they otherwise are eligible for relief.
- We will not move to dismiss under the “means test” if income loss, increased expenses, or other consequences of a natural disaster constitute “special circumstances” sufficient to rebut the presumption of abuse.
- Even if conditions do not justify a United States Trustee granted statutory waiver of the credit counseling requirements under 11 U.S.C. § 109(h)(2) for a district, we will exercise prosecutorial discretion in considering whether to take action to dismiss the case of a debtor who, as a result of a natural disaster, experiences difficulty in obtaining a credit counseling certificate or whose filing was delayed beyond the 180-day period following the debtor’s receipt of credit counseling.
- We will not seek to convert or dismiss small business cases in which the debtor cannot attend an initial debtor interview or timely file financial reports because of the natural disaster. Moreover, we will not oppose reasonable and necessary extensions of time to file a disclosure statement or reorganization plan as a result of the natural disaster, assuming there are reasonable prospects for reorganization.
- And, we will be flexible on how we allow debtors dislocated by a natural disaster to attend mandatory section 341 meetings. Trustees should be flexible in scheduling meetings by alternative means – such as by telephone or appearance outside the district – as long as the debtor takes an oath and produces proper identification.
We also are mindful of the disruption the recent hurricanes may have caused chapter 7 and chapter 13 trustees themselves. We will be flexible in our oversight of trustee requirements and assist those trustees affected by the hurricanes in any way we can to ensure they can perform their fiduciary duties.
MARIJUANA ASSETS IN BANKRUPTCY
Another bankruptcy topic sometimes in the news pertains to marijuana. As you know, in April, I sent a letter to all chapter 7 and 13 trustees restating the USTP’s long-standing legal position that marijuana assets cannot be administered in bankruptcy. It has been the Program’s practice to move to dismiss, object to confirmation, or take other appropriate action when there are marijuana assets in a case. Although small in number in relation to the many hundreds of thousands of bankruptcy cases filed each year, it is important that the USTP be consistent in its position on these matters. That requires that we be informed of all cases that involve marijuana assets.
The point of my letter to you was two-fold: to direct your cooperation by informing your United States Trustee when you think a marijuana asset case has been assigned to you; and to reassure you that we will intervene to protect private trustees from the untenable position of administering assets, or proceeds from assets, that are prohibited by the federal Controlled Substances Act.
I can tell from communications with our field offices that you have been conscientious in reporting these cases to us. Our offices are analyzing every case that you refer, or that we uncover through our ordinary oversight, and we are handling them consistently in every district where they arise.
As you review cases assigned to you, please keep a few points in mind. First, state law and regulations are immaterial to whether a case involves an illicit marijuana asset. It does not matter if the state in which the case was filed has legalized marijuana in any way. We operate in federal courts under federal law that designates marijuana as an illicit substance. Second, a marijuana asset does not merely include the marijuana plant. In some cases, the marijuana asset is a by-product of the plant, such as oil. In other cases, the asset is equipment used to grow marijuana or an ownership interest in a marijuana asset. There are many other potential fact scenarios in which the bankruptcy case may involve a marijuana asset in some form. Third, a debtor with a marijuana asset cannot obtain bankruptcy relief even if that debtor intends to take the marijuana asset out of the bankruptcy estate. That means we may take enforcement action even if the debtor exempts the marijuana asset or the proceeds of a marijuana asset.
Given the wide variety of fact scenarios in which marijuana assets may be present, it is vital that you promptly notify us whenever you think a case may involve a marijuana asset. It is the USTP’s job – not a job we are transferring to you – to analyze the particular facts of the case to decide if it is a marijuana case and what enforcement action we should take.
From the USTP’s perspective, our position can be summed up by saying that we simply will not allow the Bankruptcy Code to be used to evade federal law regardless of state statutes. This also means that we will not allow trustees to be misused by possessing, selling, or in any way administering marijuana assets. This has been our position under three Attorneys General and we will vigorously advocate this position in the bankruptcy and appellate courts. I am grateful for your continuing assistance in this very important matter.
STALE DEBT CLAIMS
I reported to you last year on the Program’s efforts to curb the practice of a small number of consumer debt buyers filing a large volume of stale debt claims knowing that those claims must be withdrawn or denied upon objection. These claims are beyond state statutes of limitations and may not be pursued through state court action.
This practice of intentionally filing stale claims may harm debtors in some circumstances, but its certain harm is to legitimate creditors and the integrity and efficiency of the bankruptcy system. These claims may cause legitimate creditors to receive a lower distribution either because a stale debt claim is paid from their share of the distribution or the trustee’s cost of objecting to such a claim is passed on to creditors. Furthermore, judicial resources are expended in processing these claims and objections.
In mid-May, the Supreme Court ruled in Midland Funding, LLC v. Johnson, __ U.S. __, 137 S. Ct. 1407 (2017), that filing stale debt claims in bankruptcy does not violate the Fair Debt Collection Practices Act. It is important to note that the Court was not called upon to address, and did not address, the USTP’s litigation in which we have asserted that the intentional filing of a large volume of stale debt claims is an abuse of process. But the Court did express the expectation that trustees would object to these claims in bankruptcy court.
Just two weeks ago, a bankruptcy court made a similar point when declining to impose sanctions requested by the United States Trustee against a volume stale debt filer. The court described the relevant conduct at issue as “unsettling and perhaps even distasteful or unseemly in some respects.” But the court decided that the sole remedy is disallowance on a claim-by-claim basis.
That still leaves us with the issue of the trustees’ obligation to review claims. Because stale debt claims are indisputably subject to disallowance, stale debt filers rely upon these claims progressing undetected through the claims payment process. Under the Bankruptcy Code, trustees have a fiduciary duty “if a purpose would be served, [to] examine proofs of claims and object to the allowance of any claim that is improper.” 11 U.S.C. § 704(a)(5). In chapter 13, that duty is more clear-cut because the costs of administration are more broadly spread out among perhaps millions of creditors across many thousands of cases. But, in chapter 7, deciding whether “a purpose would be served” by objecting to stale claims is more complex.
If a chapter 7 trustee determines that the cost of objecting to stale claims is greater than the additional recovery that will be realized by legitimate creditors in that case, then the stale claim often will be paid. In the aggregate of all cases, the effect is to deprive legitimate creditors of millions of dollars in distributions that instead are paid to a small number of stale debt filers whose collection efforts would be subject to sanctions if filed in state courts. These filers operate only in the bankruptcy system – and nowhere else – because they know that some objectionable claims will slip through the system.
Without a system-wide solution, this problem will persist. For now, I ask all chapter 7 trustees to consider their fiduciary obligations in a case and their role in the bankruptcy system. Once present litigation is resolved, the USTP will consider formal guidance.
OTHER USTP EFFORTS TO COMBAT FRAUD AND ABUSE
The USTP remains involved on a number of other fronts in its mission to combat fraud and abuse by debtors, creditors, professionals, and other participants in the bankruptcy system. More than half of the 31,000 formal and informal enforcement actions we took last year were against debtors, including actions based upon the means test and more serious misconduct, such as concealment of assets, that merited the denial of discharge. Many of the remainder focused on the protection of debtors, including actions to address continuing issues in the mortgage servicing arena and the problem of underperforming consumer attorneys.
Mortgage Servicer Misconduct
Our field offices continue to monitor mortgage servicer misconduct. We have a number of actions and negotiations pending. As you know, in early May, we filed a settlement with JPMorgan Chase Bank, N.A., resolving additional violations of the Bankruptcy Code and Rules. Chase will remediate about 16,000 homeowners by making approximately $2.8 million in refunds or credits for two violations. First, Chase sent inaccurate account statements to customers in bankruptcy; and, second, Chase filed certificates of service with inaccurate dates of mailing that resulted in debtors receiving less than the mandatory 21 days’ notice before imposing a mortgage payment change.
Underperforming Consumer Attorneys
You may recall that last year I announced a new initiative to address the persistent problem of poor performance by some debtors’ lawyers. Their failure to satisfy their obligations under the Bankruptcy Code and Rules is detrimental to their clients, trustees, creditors, the courts, and the entire bankruptcy system.
Last year, the USTP increased by about 30 percent the number of actions taken under the disgorgement provisions of section 329 and the debt relief agency provisions of section 526. Although we cannot expect such a magnitude of increases in actions in the future, it does show a concerted crackdown by the Program. We also formed teams to address special problems created by national law firms, including those who recruit clients through advertisements on the Internet. We attacked system-wide violations and sought broad relief. We have enjoyed success in court, but remain in some protracted litigation.
In one recent chapter 7 case, we obtained a bankruptcy court ruling that may help deter bad attorney behavior. The attorney attempted to bifurcate fees for core services into pre-petition and post-petition amounts, and threatened to take action against the debtor for non-payment that would violate the automatic stay and discharge injunction. The attorney also failed to properly disclose fees to be paid under the retention agreement. The bankruptcy judge called the law firm’s conduct “reprehensible” and ordered disgorgement of all fees. The bankruptcy court’s ruling is on appeal.
One of the fruits of our initiative has been uncovering evidence of the use of schemes to reel in clients by offering unneeded, if not fraudulent, legal and non-legal services. I ask all chapter 7 trustees to communicate regularly with your United States Trustee about your observations of debtor counsels’ practices. As in the mortgage servicer and other areas, sometimes we identify national patterns that allow us to address problems on a system-wide basis. You stand as a bulwark against fraud, abuse, and bad practices. Your continued assistance in this joint endeavor is much needed and appreciated.
CREDIT COUNSELING AND DEBTOR EDUCATION
Our work to protect debtors from bankruptcy petition preparers and legal professionals who fail to serve their clients highlights for us the vulnerability of those in financial distress. Honest and needy debtors deserve comprehensive advice and assistance about financial options, including bankruptcy.
After passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the USTP retooled its operations to carry out our substantial new duties under the law. To do our jobs properly, we considered both objectives of the Congress: to combat abuse and to protect consumers. Those are consistent goals because many scams perpetrated against debtors also harm creditors and the integrity of the whole bankruptcy system.
Currently, there is some renewed attention on the requirement for debtors to obtain credit counseling before filing bankruptcy. The purpose of the requirement is to ensure that debtors are made aware of any feasible alternatives to bankruptcy, including repayment plans. The USTP is charged with the responsibility to approve credit counselors who will deliver the counseling services mandated in the statute. The good news is that there are about 120 credit counseling agencies that provide services through 700 walk-in facilities, over the telephone, and over the Internet. Basically, there is universal access to credit counseling. The other good news is that the average cost of credit counseling is about $25. While that is not inconsequential to a consumer in dire financial straits, it is as affordable as any one of us would have imagined when BAPCPA was passed. Moreover, that average cost calculation excludes about 19 percent of debtors whose fees are reduced or waived entirely based upon income, as required by our regulations.
Bankruptcy commentators often opine upon the effectiveness of the counseling. That is a legitimate inquiry that deserves scholarly research. Initial reviews comparing the number of petitions to the number of certificates issued indicated that about 10 to 15 percent of debtors seeking a credit counseling certificate do not file bankruptcy, at least not immediately. There are challenges to calculating this percentage, including our inability to track the same debtor through the process. But the number does suggest that counseling may assist some individuals in identifying non-bankruptcy options to resolve their financial turmoil.
There probably are a number of reasons why counseling does not lead to more debt repayment plans or other alternatives to bankruptcy. Let me suggest two possible explanations. First, most debtors choose bankruptcy as a last resort, not as a preferred option out of extreme financial difficulties. As almost every consumer practitioner will tell you, by the time debtors visit a lawyer, their situation is usually pretty dire. The second reason I suggest is a bit more subject to dispute. Consumer lawyers generally are very critical of credit counseling. If that is reflected in their legal counsel to the clients or in their interactions with counseling agencies, then perhaps the counseling process becomes less valuable, thereby only adding to the criticism of its ineffectiveness.
Loss mitigation by mortgage servicers, fair and reasonable debt repayment plans, and other alternatives to bankruptcy are worthwhile pursuits. I think that current commentaries about credit counseling would benefit from a more balanced consideration of the potential consumer benefits of counseling and more consideration of how the content of the counseling sessions could be more useful for debtors and creditors alike.
CONSISTENCY IN CHAPTER 7 PRACTICE
The next topic I would like to cover is consistency in chapter 7 trustee practices. Earlier this year, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, on which I serve ex officio as a non-voting member, held a public meeting in conjunction with the annual conference of the National Association of Consumer Bankruptcy Attorneys. Many consumer lawyers appeared at the public meeting to express their views on consumer issues. There were a fair number of comments about inconsistencies among trustees supervised by the USTP. The problems cited included overly burdensome document production requests.
The USTP had many long discussions with the NABT and others before issuing its “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases.” Too often, debtors’ counsel fail to act with the necessary alacrity to provide records that trustees legitimately need to value assets and to complete the administration of the case. And some trustees impose unreasonable burdens on debtors by making blanket document requests that should not be required absent a particularized need. The “Best Practices” were designed to guide both debtors’ lawyers and trustees in making reasonable judgments and taking reasonable actions.
Several weeks ago, I learned about an isolated instance of trustees in one district making a new and unusual demand of all debtors that was intrusive and unnecessary. We did not support the new practice and the trustees promptly ceased collecting the information before further corrective action was required. After all the emphasis both the USTP and NABT have placed on this topic, I am disappointed to hear about instances of trustees unilaterally imposing new routine requirements and issuing new forms for debtors to fill out that are not required under the Bankruptcy Code and Rules. Many times, additional documentation is required. But there needs to be a reason for those requests.
Almost all trustees administer their cases efficiently and effectively. I ask all of you to consider whether there is maximum coordination and consistency within your district and also how the USTP may promote greater consistency in document production and other trustee practices.
CHAPTER 7 TRUSTEE COMPENSATION
No discussion of chapter 7 practice is complete without consideration of chapter 7 trustee compensation. Last year, total trustee compensation – including payments to trustees for trustee work and for legal services – rose by five percent. That was good news because compensation had been down in the previous three years and we have no indication that compensation will be up again this year.
In June, I testified before Congress on general oversight matters. In my prepared statement and in response to a question from a member of Congress, I noted that the chapter 7 trustee “no asset” fee has not increased since 1994 and that the amount of the fee should be increased. It seems that everyone agrees that the fee should be increased, but there has been no consensus on the best method for funding the increase. And while I cannot comment on pending legislation or specific proposals, the NABT has been forceful in presenting its views to Congress and other policymakers.
Thank you again for the opportunity to discuss my appreciation for all that chapter 7 trustees do to serve debtors, creditors, and the public. My job is so much easier because I can rely on the NABT leadership for sound advice and collaboration.
You have a difficult job and you do it well. Your work contributes to our national economic well-being. Your sensitivity to the hardships faced by debtors and small creditors in chapter 7 cases is a mark of your professionalism and your humanity.
I congratulate the NABT for 35 years as an important advocate and problem-solver. I look forward to seeing your accomplishments over the next 35 years.
You have my best wishes for a very productive and enjoyable annual convention.
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