Justice News

Remarks of Acting Director Ramona Elliott (Via Video Teleconference) at the 2022 Annual Conference of the National Association of Bankruptcy Trustees
Washington, DC
United States
~
Friday, June 10, 2022

INTRODUCTION

Thank you for inviting me to address the NABT’s 2022 Annual Conference. I want to begin by extending my sincere appreciation to your outgoing President, Leslie Gladstone, for her steady leadership of your organization over the past year and her partnership with the U.S. Trustee Program (USTP or Program) as we have worked through the challenges presented by the pandemic and, more importantly, prepared for a return to post-pandemic normalcy. I look forward to maintaining that partnership with your incoming President, Gary Seitz, as we continue to collaborate to ensure the smooth and improving functioning of the bankruptcy system.

On a personal note, I also want to extend my appreciation for the warm welcome I received as I stepped into the role of Acting Director. Since joining the USTP in 1994 as a Trial Attorney in the Miami office, I have had the opportunity to cross paths with many of you, including your former President Bob Furr. In 1997, I moved to the Greenbelt office, where the section 341 meeting rooms were in our office suite. That gave me the opportunity to witness up close the important work that you perform in consumer cases. After a stint at the Federal Trade Commission, I returned to the Program in 2007 as the Deputy General Counsel in the Executive Office before ultimately becoming the Deputy Director/General Counsel. Since then, I have had the pleasure of working with your leadership on countless issues concerning the administration of chapter 7 cases. And I am pleased to see that the NABT membership has now expanded to include our new subchapter V trustees.

As you know, former Director Cliff White retired about two months ago after 17 years at the Program’s helm. He left behind a strong legacy of enforcing the Bankruptcy Code as written and applying it in a balanced manner that protects the rights of all stakeholders in the bankruptcy system. I am grateful for that legacy, as well as the strong leadership team he built to oversee our supervision of trustees, including Acting Deputy Director for Field Operations and U.S. Trustee Bill Neary, Assistant Director for Oversight Bob Gebhard, Deputy Assistant Director Suzanne Hazard, Acting United States Trustees Tiffany Carroll and Greg Garvin, and former United States Trustee Sam Crocker, whom we have brought back from retirement. While I cannot be there in person with you today, I hope you take the opportunity to connect with Greg and Sam who are in Vancouver.

Shortly after assuming the Acting Director’s role, I sent a message to the USTP that we would continue with “business as usual” in meeting our mission. My message to all of you is the same—our mission and the way we carry it out will continue as it always has. And so will the productive and collaborative relationship we have with the NABT.

BANKRUPTCY ADMINISTRATION IMPROVEMENT ACT

Let me turn now to an issue that I know is of great importance to all of you. I am pleased to report that, within just weeks of receiving the request, the USTP transferred more than $13 million to the Administrative Office of the U.S. Courts (AOUSC) to pay trustees the full $60 of additional compensation for chapter 7 cases administered from the January 2021 enactment of the new 11 U.S.C. § 330(e) through September 30, 2021. This is the first increase in chapter 7 trustee compensation since 1994 and a doubling of the no-asset fee for these cases. Congratulations!

These payments are pursuant to the Bankruptcy Administration Improvement Act of 2020 (BAIA). I know that Cliff was pleased to celebrate BAIA’s passage with you at last year’s conference. It took several years of hard work by the NABT, the USTP, and Congress to get legislation enacted to make section 330(e) a reality. I want to especially recognize former NABT Presidents Ray Obuchowski, Jason Gold, and Neville Reid, as well as Marc Albert on the Legislative Committee and many others over the years, for their perseverance in helping bring this legislation to the finish line. I also am grateful to all those in the USTP who have worked tirelessly since BAIA’s enactment to ensure its successful implementation, including coordinating with colleagues within the Department of Justice, the Treasury Department, the Office of Management and Budget, and the AOUSC, to get us to the point where these payments can be made. With the USTP’s recent transfer of funds to the AOUSC, I understand that the courts are beginning to process trustees’ requests for payment pursuant to their published regulations.

BANKRUPTCY FILING TRENDS

Of course, chapter 7 trustees’ compensation is closely linked to filing rates, which we all know have been on a downward slide since the early days of the pandemic. For chapter 7 cases specifically, fiscal year 2022 filings in USTP districts through May 31 are more than 50 percent lower than three years ago. On the other hand, chapter 11 small business case filings—including cases filed under subchapter V of chapter 11—have bucked that trend, with an increase of 15 percent during the two-year period following the effective date of the Small Business Reorganization Act (as compared to the two years preceding it), perhaps due to the effectiveness and popularity of subchapter V.

While we all wait to see the impact that the expiration of pandemic relief programs and other economic variables will have on filings, it is clear that we must continue to maintain and support a strong corps of experienced trustees to address the demands of today and tomorrow. The USTP will continue to monitor case filing trends and be prepared to adjust to any shifts.

VIRTUAL 341 MEETINGS

Next, I want to turn to a topic that marks a major development in bankruptcy practice and that I believe benefits all involved in the bankruptcy system—the future of section 341 meetings of creditors. As you know, the onset of the pandemic quickly required the USTP and chapter 7, 12, and 13 trustees to pivot from in-person to virtual meetings, mostly by phone, some by video conference. That we were able do this quickly and without significant disruption or negative impact on the administration of bankruptcy cases is a testament to your hard work and our productive working relationship. Your flexibility, cooperation, and dedication during those initial disruptions were critical to making that transition a success.

We learned during the pandemic that, especially in consumer cases, virtual 341 meetings resulted in greater debtor attendance at first meetings, with fewer continued and rescheduled meetings. We also learned that virtual meetings facilitated greater creditor participation. We heard from you and other stakeholders that virtual meetings enjoyed widespread support, resulted in substantial cost and time savings for all participants, and generally were as effective as in-person meetings from a case administration standpoint.

Last year Cliff mentioned that the Program was considering continuing virtual 341 meetings post-pandemic. We carefully reviewed alternatives and evaluated and resolved countless legal, administrative, technical, security, budgetary, and practical issues. And after much deliberate consideration and analysis, we determined that video meetings were preferable to telephonic meetings for a variety of reasons, most notably in the areas of verifying the debtor’s identity, preserving the evidentiary value of that testimony, and retaining the formal and public nature of the meeting. We also determined that there will continue to be a need for in person meetings in particular cases, for example, when the trustee has determined it is necessary to complete the identification of the debtor or to obtain testimony or necessary information to enable the trustee to properly complete the administration of the case.

I am pleased to confirm that the new, permanent USTP section 341 meeting policy will be to conduct first meetings of creditors by video in chapter 7, 12, and 13 cases. When this policy is fully implemented, most 341 meetings will be conducted by Zoom videoconference (with a telephonic option for debtors unable to participate by video). Trustees also will have limited discretion to continue the virtual meeting to an in-person meeting when necessary and appropriate and as health and safety concerns related to COVID-19 abate.

The benefits of this new policy cannot be understated. Debtors will no longer need to take a day off work (and potentially lose much-needed pay) or arrange childcare and travel to a meeting site. Debtors’ counsel and other participants will benefit from similar efficiencies. Video meetings will result in reduced costs across the bankruptcy system and improved access for debtors and other stakeholders. In addition to satisfying the specific requirements of the Bankruptcy Code and Rules, conducting these meetings by video accomplishes the larger purposes of transparency and accountability that are so central to the administration of bankruptcy cases. At the same time, flexibility will be retained to permit trustees to conduct in person meetings in those few cases when circumstances dictate. In short, the new section 341 meeting policy will promote greater access, while preserving the integrity of the system and furthering the expeditious administration of cases.

Currently, we are completing preparations to begin a test phase of the new policy in a single region, Region 19 (Colorado, Wyoming, and Utah). In conjunction with this initial rollout, we have developed interim procedures for trustees to follow in conducting the meetings and best practices for parties and their counsel, including requirements for maintaining the solemnity and decorum of the meetings.

After we complete the pilot, we will draw on lessons learned and focus attention on complete implementation of the new 341 meeting policy in all regions, which will include ensuring that all trustees have sufficient equipment, infrastructure, and security to conduct and provide safe and secure public access to the video meetings; coordinating with selected vendors, the trustee organizations, and others to deliver training on the conduct of video 341 meetings in compliance with the USTP’s procedures; working with the courts to ensure that video meetings are adequately noticed to creditors and properly scheduled; and implementing trustee oversight protocols to ensure that video 341 meetings are conducted fairly, consistently, and in a way that ensures access by debtors, their counsel, and other participants.

We will keep you updated and appreciate your continued input and cooperation as we move towards a nationwide rollout.

TRUSTEE HANDBOOK REVISIONS

The USTP has made several changes to the Handbook for Chapter 7 Trustees. These changes are designed to promote a uniform, efficient approach to the administration of cases, clarify the Program’s position on important chapter 7 issues, and ensure fair access to the bankruptcy system. I would like to highlight two key changes on topics that we have discussed before.

Best Practices

In May 2012, the USTP and the NABT—along with the National Association of Chapter 13 Trustees (NACTT) and the National Association of Consumer Bankruptcy Attorneys (NACBA)—developed the “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases” (Best Practices). The Best Practices represent specific, strongly encouraged recommendations for trustees regarding the production of documents and requests for information in consumer bankruptcy cases. Critically, the Best Practices are not intended to interfere with the reasonable judgments made by trustees in light of the facts and circumstances in specific cases, nor are they intended to override the requirements of the Bankruptcy Code and Rules, or local rules or court guidelines. They identify common examples of potentially unreasonable or burdensome document requests, including the use of trustee questionnaires in every case regardless of any particularized need for the requested information or documents.

Overall, the Best Practices have been successful and generally accepted and followed. The American Bankruptcy Institute’s Commission on Consumer Bankruptcy (ABI Commission), in its 2019 Final Report, endorsed the Best Practices as providing “sound guiding principles” for document production. The Commission went on to recommend that the Best Practices be incorporated in the trustee Handbooks to make them more prominently available and enforceable, which we completed in October 2021. We also revised our trustee performance review forms to specifically evaluate compliance with the Best Practices. The Program undertook these efforts to strengthen compliance and enforcement with the Best Practices as recommended by the ABI Commission, and we will continue to evaluate trustee performance in this area.

Secured Property Sales

The other area we have recently clarified in the Handbook’s guidance relates to the sale of over-encumbered estate property. This clarification underscores and strengthens our longstanding requirement that, absent some special circumstances, sales of estate property must generate a meaningful distribution for unsecured creditors and not be undertaken primarily for the benefit of trustees and their professionals. Over the past year, we have discussed this issue in our NABT liaison meetings and vetted these specific changes with your senior leadership prior to implementing them.

The focus here is on property for which—after accounting for security interests, liens, administrative expenses, and exemptions—no value remains for unsecured creditors absent a consensual “carveout” from amounts that would otherwise be paid to secured creditors, trustees, or professionals. While appropriate in certain circumstances, these sales have long been the subject of heightened scrutiny and concern because they present the potential for overreaching without providing a benefit to the estate. As a result, the Program has discouraged carveout sales unless there is a meaningful distribution to creditors or an overriding public policy benefit favoring the sale.

The ABI Commission was highly critical of these sales in many circumstances and recommended that the Program adopt either a per se prohibition against them or a formulaic approach to evaluating their appropriateness. We did not adopt either recommendation because our view is that trustees must be afforded discretion in their decision-making, especially because of differing exemption statutes and the need to review the specific facts and circumstances of a particular case. But, to address the legitimate concerns about secured property sales, we did revise the Handbook to strengthen the “meaningful creditor distribution requirement” for trustee sales while retaining flexibility for trustees to conduct these sales in appropriate cases where some other significant benefit may justify the sale. More examples of when these sales may be appropriate were added. We also placed greater emphasis on transparency and disclosure by requiring the sale motion to disclose whether the sale will result in a meaningful distribution to unsecured creditors and, when it will not, to explain the reasons why the trustee is selling the encumbered property. Experience has taught us that these issues are better addressed at the time of the sale, rather than months or years later when the trustee submits their final report.

The USTP will continue to monitor trustee performance in this area, identify systemic issues or trends, address specific problems in cases as they arise, and use the trustee evaluation process to strengthen compliance.

TRUSTEE RECRUITMENT

The requirement to establish and maintain a panel of private trustees to serve in chapter 7 cases is a foundational statutory responsibility of the USTP, and we are committed to recruiting and appointing private trustees whose background and experiences reflect our nation’s rich diversity. We are expanding our efforts to engage in broad outreach to attract candidates for panel membership that represent a range of personal and professional backgrounds, experiences, and perspectives. These efforts include increasing the USTP’s presence at business conferences and other similar gatherings that provide recruitment opportunities, enhancing engagement with various affinity and other professional groups to showcase opportunities for service as a bankruptcy trustee, and further refining our trustee recruitment procedures to better reach historically underrepresented populations.

We also look forward to working with the leadership of NABT, as well as like-minded organizations such as the NACTT, the American College of Bankruptcy, NCBJ, ABI, ABA, and NACBA in the newly formed Bankruptcy Diversity, Equity, and Inclusion Consortium. And I want to commend this organization for your efforts in establishing the NABT Foundation to implement a scholarship program designed to encourage law students from diverse backgrounds to pursue clerkships with bankruptcy judges and careers in bankruptcy law. I urge you all to join in the effort to build on your legacy and ensure that the bankruptcy system continues to benefit from the services of a group of superb trustees drawn from all segments of our populace.

ACCESS TO JUSTICE

The Program’s core mission is to protect and preserve the integrity of the bankruptcy system. In fulfilling that mission, attention to “access to justice” is paramount—meaning, we strive to promote full access to the bankruptcy system and fair treatment of all participants in the system. Enhancing access to justice not only includes removing barriers to entry but also ensuring that all debtors who seek bankruptcy protection in good faith and comply with the Bankruptcy Code’s requirements receive the relief the law affords them.

The Program’s oversight and civil enforcement efforts have always been consistent with the idea of promoting access to justice. We have successfully engaged in civil enforcement activity to redress violations by debtors, creditors, and professionals alike. In recent years, we have focused on combatting inadequate representation and misconduct by consumer debtor lawyers to prevent financially vulnerable consumers from being taken advantage of as they enter the bankruptcy system to obtain needed relief. We continue to develop new strategies, approaches, and tools to improve the quality of consumer bankruptcy practice.

The Program also has undertaken specific steps to improve access to justice in the bankruptcy system. In addition to the move to video 341 meetings discussed earlier, another initiative is our recent release of enforcement guidelines to our staff related to bifurcated fee agreements in chapter 7 cases. As many of you have seen in your cases, the bifurcation of fees in chapter 7 cases is a growing trend. While some bankruptcy courts have found these arrangements impermissible, in jurisdictions where they are allowed, they can provide an alternative to debtors who need relief but simply are unable to pay the fees for a chapter 7 case in full before filing. Unfortunately, these arrangements also may present opportunities for abuse by debtors’ counsel, including by charging excessive or inappropriate fees, failing to obtain their debtor clients’ fully informed consent, and inadequately disclosing the terms of the arrangement.

Our enforcement guidelines strike a balance between providing flexibility to debtors while guarding against misconduct and are generally consistent with the Program’s litigating positions and prior public comments regarding bifurcated agreements. I encourage you to review the enforcement guidelines, which are available on the USTP’s website.

Another important aspect of access to justice is environmental justice. The President made clear in his Executive Order issued in January 2021, Tackling the Climate Crisis at Home and Abroad, that securing environmental justice is a key Administration priority. The Department’s commitment to seeking equal justice under the law includes reducing disproportionate adverse public health and environmental burdens borne by underserved communities, including communities of color, low-income communities, and Tribal and indigenous communities. This work is needed to enable people across the country to live in healthy, thriving communities and to confirm that justice under the law is justice for all. While enforcement cannot redress all these harms, it can and should play an important part.

Environmental issues can and do intersect with the cases you administer and with our collective efforts to promote and ensure the integrity of the bankruptcy system. As you probably know, we have developed a trustee training module that focuses on diversity, inclusion, and environmental justice. The training includes real life examples that demonstrate how these issues can impact stakeholders and other participants in the bankruptcy system. The training also highlights the trustee’s role in helping address environmental justice in underserved and underrepresented communities. Given your front-line role in administering bankruptcy cases, you are in a unique position to observe and report to us patterns that may suggest community-wide environmental issues. And because economically distressed communities may be underserved or underrepresented, your ability to observe and report is critical to directing federal government resources. We therefore encourage you to flag and report cases that implicate environmental justice issues as soon as you become aware of them.

Finally, our partnership with chapter 7 trustees also is critical to our efforts to ensure fair access to the bankruptcy system. Your careful and efficient administration of cases and your referrals of possible fraud and misconduct aid us in our watchdog duties. Your compliance with the Handbook—including, and especially, the revisions I previously discussed related to the Best Practices and secured property sales—also serves to advance these goals by ensuring that the bankruptcy system functions smoothly and equitably for the benefit of all its participants. We appreciate your continued cooperation.

CONCLUSION

I thank you for the opportunity to share with you some of the USTP’s recent activities on the oversight and consumer protection fronts. We look forward to continuing our close partnership with the NABT in maintaining and improving chapter 7 practice. More challenges lay ahead as we continue to navigate through this period of uncertainty and change but I know that, together, we will be able to meet them.

Thank you again for the warm welcome and for your time and attention.

Updated June 16, 2022