Good morning. Thank you once again for allowing me to help kick off your Annual Seminar. This is the thirteenth time you have invited me to speak as Director and I always appreciate your hospitality. I very much respect the work performed by chapter 13 trustees and am thankful for the cooperative and productive relationship the United States Trustee Program (USTP) enjoys with the NACTT and its leadership.
It is my custom each year to thank your outgoing President and to welcome your incoming President. But this year, that involves recognizing more people than usual. Last year, I told you how much I looked forward to working with then-incoming President Sims Crawford. Well, within weeks of that event, Sims became Judge Crawford and Mary Ida Townson returned as your President until the mid-winter meeting in January. Thereafter, Joyce Babin rose to the position. You are indeed fortunate to have such a deep bench of talent among your ranks.
In many meetings over the years, I was the beneficiary of the expertise and sound judgment of Judge Crawford, Mary Ida, Joyce, and others as we tackled whatever problems or opportunities confronted chapter 13 trustee practice. Joyce, I look forward to working with you over the coming year. I appreciate your immense graciousness and wise analysis that have been such an important factor in addressing challenges of mutual concern.
Now, let me turn to a few topics that may be of special interest to all of you.
MARIJUANA ASSETS IN BANKRUPTCY
As you know, in April, I sent a letter to all chapters 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 to us, 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 in the form of the salary paid by an employer engaged in a marijuana business, an ownership interest in a marijuana business, and income derived from a lease to a marijuana operation. 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 will take enforcement action even if the debtor exempts the marijuana asset or proposes to fund a repayment plan without relying on the 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 yours – 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 wasted 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 and did not address the USTP’s ongoing litigation in which we assert that the intentional filing of a large volume of stale debt claims is an abuse of process. But the Court did describe the bankruptcy process and the expectation that trustees would object to these claims in bankruptcy court.
Although ongoing litigation may provide a systemic solution to the practice, a final resolution may not be achieved in the near term. If ultimately the courts do not find that the intentional filing of these claims is an abuse of process or other violation of bankruptcy law, then the USTP still will be satisfied that it has done its job because we will have identified a system-wide issue and policymakers can consider whether it is prudent to change the law.
That still leaves us with the issue of the chapter 13 trustees’ obligation to review claims. Stale debt filers rely upon these claims proceeding undetected through the claims payment process. Most chapter 13 trustees already routinely file objections to stale debt claims. As a result, it appears that claims filers are avoiding filing such claims in the districts of those trustees.
Even though it increases the cost of administration, and those costs ultimately are borne by legitimate creditors, I am calling upon all chapter 13 trustees to identify stale debt claims and to object to stale debt claims that they uncover. Formal guidance is being considered.
I greatly appreciate your assistance in protecting the integrity of the bankruptcy process through your diligent efforts.
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 merits 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.
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 Chase Bank 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.
Just as our field offices will continue to oversee mortgage servicer conduct, I ask chapter 13 trustees also to identify and report to your United States Trustee patterns of violations and egregious violations. Often, your referrals at the local level help us match patterns of behavior on a national basis so that we can take appropriate action to address systemic misconduct.
Underperforming Consumer Attorneys
I announced last year 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 crack down 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.
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 13 trustees to communicate regularly with your United States Trustee about your observations of debtor counsel 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. Many chapter 13 trustees provided debtors with financial education well before financial education became a requirement under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Currently, more than 50 chapter 13 trustees provide financial education to their debtors free of charge.
After passage of 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 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 a credit counseling certificate 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 bankruptcy 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 providers, 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 13 PRACTICE
The final topic I would like to cover is consistency in chapter 13 practice. It has long been the USTP’s observation that local legal culture and court practices create far more inconsistency in chapter 13 than in other aspects of bankruptcy practice. That is why the Department of Justice endorsed a proposal for a uniform national chapter 13 plan. Although a compromise was reached within the Judicial Conference’s Bankruptcy Rules Committee, and a modified form plan will take effect this December, we understand that most districts are “opting out” of the prescribed plan. On a positive note, at least the new rules require some commonality among the plans throughout the country.
In so many ways chapter 13 practices diverge from district to district, and even from judge to judge. For example, local practices vary with respect to the re vesting of estate property at confirmation, use of conduit or non-conduit plans, and varying applications of confirmation standards. Sometimes, this may place chapter 13 trustees in the crossfire between disagreeing judges. Some suggest the USTP should take a more active role in forging consistent chapter 13 practice. That is advice we will keep in mind.
Recently, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, on which I serve ex officio, 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. In particular, the discussion pointed out to me the importance of additional training on the USTP’s “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases.” The discussion also identified some chapter 13 practices that the USTP should correct, such as refusal to accept electronic documents. Other issues pertained to lack of coordination among trustees in the same district with respect to document requests, attorney’s fees, service requirements, objection practices, and other actions that arguably should be more consistent. We are following up on some of the specific complaints heard at the meeting.
Overwhelmingly, chapter 13 trustees perform superbly and with great efficiency. I would ask all of you to consider whether there is maximum coordination and consistency within your district and how the USTP may promote greater consistency that makes sense. I also look forward to receiving a report on the public meeting that will be held in conjunction with this conference by a committee of the ABI Consumer Commission. I hope a number of members of the NACTT will express their thoughtful views on chapter 13 issues.
I appreciate the chance to cover so much ground with you about matters vital to the USTP in the chapter 13 realm. You are an essential part of the solution of so many issues arising in the consumer bankruptcy practice.
Our continued collaboration with your President and the NACTT leadership will benefit greatly the USTP. Your steady and professional approach to business, your diligence in maximizing returns to creditors, and your determination in protecting the rights of vulnerable consumer debtors are what make chapter 13 practice such an important part of the economy.
I wish you a productive conference in the beautiful city of Seattle. All the best, and thank you so much for your time.
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