Justice News

Remarks of Director Cliff White Before the 2018 Annual Conference of the National Association of Bankruptcy Trustees
AMELIA ISLAND, FL
United States
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Thursday, August 16, 2018

INTRODUCTION

Good morning. I am grateful for the opportunity to be with you today to talk about some of the major issues facing both you and the United States Trustee Program (USTP or Program) in our day to day practice, which in FY 2017 involved the administration of about 1.6 million pending bankruptcy cases. At the outset, I want to extend a special thank you to Ron Peterson for working with me over this past year – not only as the NABT President, but also on the American Bankruptcy Institute’s (ABI) Commission on Consumer Bankruptcy. Ron is a member of the Commission and I serve in an ex officio capacity. I can assure you, Ron has done an excellent job representing the NABT. With the conclusion of Ron’s term, I want to congratulate fellow New Englander, Ray Obuchowski, who will be assuming the position of NABT President for the coming year. All of us in the USTP look forward to working with you, Ray.

Let me also take this opportunity to recognize three critical players within the USTP who are here with us and from whom you heard earlier this morning – United States Trustee Bill Harrington, Acting Assistant Director for Oversight Tiffany Carroll, and Tiffany’s Deputy, the inestimable Suzanne Hazard, who is well known to all of you. Notably missing from the USTP line-up this week is Sam Crocker, former NABT President and United States Trustee. Sam has been a major part of the chapter 7 community for so many years that it was with mixed emotions that I wished him a long and prosperous retirement earlier this year. If Sam is somewhere lurking in the back of the room now as a private citizen, let me say again, “Sam, we appreciate all you did for the USTP and we miss you.”

Now please indulge me for just a moment to mention that we reached an important milestone in the Program this year. It has been 30 years since the national expansion of the USTP. As I told your chapter 13 colleagues when I addressed their annual meeting last month, we are celebrating this milestone modestly, but meaningfully. Among other things, I have recognized those colleagues who have been on board for all of the past three decades. I take pride in the fact that 10 percent of our current staff joined us 30 or more years ago. I think that is a testament to their dedication, and the dedication of the entire USTP, to our mission of upholding the integrity and efficiency of the bankruptcy system. I also am grateful to the NABT and chapter 7 trustees for working alongside the USTP right from the start.

ELEVATING THE QUALITY OF CONSUMER ATTORNEY PRACTICE

One of the themes I have been trying to sound in recent months is the importance for all of us in the consumer bankruptcy system to confront and address the problems created by the small percentage of consumer lawyers who harm debtors, creditors, and the courts by their inadequate representation of clients and failure to comply with bankruptcy law and rules. As trustees who are on the front lines, you know that many of the biggest problems we confront are a result of bad lawyering. Most debtors are honest and in need of the bankruptcy relief contemplated in the United States Constitution. But lawyers who are incompetent or dishonest, or who fail to satisfy minimal professional obligations, impede the debtor’s “fresh start” and add costs to creditors and the entire system.

USTP Enforcement Actions

The USTP has for many years addressed attorney violations of the Bankruptcy Code and Rules. Most commonly, we brought disgorgement actions under section 329, sanctions motions under Rule 9011, contempt actions, and other litigation aimed at remedying violations by an individual lawyer or law firm.

Around 2015, I asked the NABT and other stakeholders to tell me their views on the most important issues emerging in the bankruptcy system that should be addressed by the USTP. I received one common answer – a rise in bad consumer lawyering that hurts the bankruptcy system and all involved in it. You told me that. Chapter 13 trustees told me that. Bankruptcy judges told me that. And staff in our field offices told me that.

In response, I asked all USTP field offices to set a local civil enforcement priority to identify and address improper attorney conduct. We also designed a national strategy to share information and to coordinate actions involving law firms that operate on a multi-jurisdictional or nationwide basis. As a result, the number of attorney misconduct and related enforcement actions brought by the USTP rose by 30 percent in FY 2016, and we have continued to sustain a higher level of activity.

We also have employed the wider variety of laws that Congress provided us in our statutory toolbox. For example, we have made greater use of section 526, which was enacted as part of the 2005 bankruptcy reform amendments. It protects debtors by placing disclosure and other obligations on debtor’s counsel. It also imposes civil penalties and injunctions against lawyers who intentionally and habitually violate statutory requirements, fail to perform promised services, or make misrepresentations to their clients or the courts. It is ironic to me that some consumer attorneys opposed section 526 as burdensome and even challenged one provision of that law that we, as part of the Justice Department, litigated successfully all the way to the Supreme Court.

We have obtained some important litigation successes in our effort to address consumer attorney abuse of the system. We are defending some decisions that are now on appeal. And, we have tried to expose bad practices, including addressing what one bankruptcy court called “a focus on cash flow over professional responsibility.”

Access to Justice – Client Interests Over Lawyer’s Economic Interests

In our attorney enforcement practice, the USTP often is confronted with the “access to justice” argument as a defense against our actions in and out of court. We are asked to excuse improper or incompetent professional conduct, and told that better lawyering would cost too much because it would take too much of the attorney’s time. It appears that some consumer lawyers believe their economic concerns trump their professional obligations. To that, the USTP simply responds that the need for reasonable attorneys’ fees does not justify bad lawyering or twisting the Bankruptcy Rules for the financial gain of the lawyers. To be crystal clear: “Access to justice” should be about helping the client. Period.

Each of you has seen the adverse consequences for a debtor who has a lawyer who does not show up for a section 341 meeting or who sends all the legal work to a back room operation without attorney oversight. Some of you have seen the failure to disclose fees for court review. Some of you have seen the disservice to clients that excessive unbundling of services can bring. Some of you have seen disingenuous bifurcation of services following the filing of bare bones petitions. And, some of you have seen factoring arrangements that are used to circumvent the debtor’s discharge by allowing a third party to pursue collection actions for attorney’s fees, or where fees are inflated to offset the discount the attorney paid to the factoring company.

The problem of bad lawyering is exacerbated by the ease with which some law firms can reach unwary debtors through extensive advertising, including on the Internet. In many cases, the debtors have no previous experience with a lawyer and understandably have a difficult time distinguishing between adequate representation and a bankruptcy mill that is good on client recruitment, but abysmal on meeting ethical obligations to clients. As chapter 13 trustee Mary Ida Townson put it in her statement this past spring to the ABI Commission on Consumer Bankruptcy, “extensive advertising does not constitute adequate representation.”

All Stakeholders Should Promote Quality Consumer Practice

We must stop tolerating unsatisfactory lawyering in bankruptcy court and work to elevate consumer practice. Enforcement of the law is a key component of that effort. The USTP will continue its aggressive efforts to address misconduct, but we cannot police it all by ourselves. We rely on chapter 7 and chapter 13 trustees to provide referrals, share practical insights, and support the USTP in addressing attorney violations. You have been of immense help. But, we also need more help from the consumer bar, which should have a strong interest in ensuring that bad lawyers are confronted and held to account.

I welcome ideas for the kinds of joint actions we could take with other stakeholders, including training and outreach initiatives with our partners in every corner of the bankruptcy system. The USTP can and will continue to bring enforcement actions. But education, a pervasive community attitude of intolerance for bad lawyering, and other approaches to addressing this problem also can pay dividends for debtors, creditors, and the entire bankruptcy system.

CRIMINAL ENFORCEMENT

There is another important priority of the Program in which chapter 7 trustees are critical partners with us. That is, identifying bankruptcy crimes. Last year, the USTP made 2,171 criminal referrals to federal law enforcement authorities, including to United States Attorneys, the FBI, and Postal Inspectors. Since we began publicly reporting on criminal referrals for FY 2006, the Program has seen an increase in the number of referrals in 11 of 12 years.

This could not have been accomplished without the assistance of both chapter 7 and chapter 13 trustees. A significant percentage of the referrals we make each year to our law enforcement partners are based on information we receive from private trustees. But the work of private trustees can go well beyond just a referral. You often work closely with us as we develop the case, are called upon to provide documentation, meet with law enforcement, or even testify at trial.

Let me share with you just two examples of the kind of cooperation between the USTP and private trustees that has led to important results. Further details on these two cases are included in an article written by USTP Trial Attorneys for the upcoming issue of the NABT’s American Bankruptcy Trustee Journal.

First, in a matter out of the Northern District of Illinois, chapter 7 trustee Stephen Balsley aggressively pursued inconsistencies in statements made by a debtor, who was a former physician, regarding undisclosed assets. The trustee’s outstanding work – from questioning at the section 341 meeting, to filing turnover requests, to conducting a 2004 examination, to bringing adversary proceedings – not only identified additional acts of fraud by the debtor and resulted in the recovery of assets for creditors, but also provided information that formed the foundation of the criminal referral made by the USTP to the United States Attorney (USA). A USTP trial attorney assisted the USA’s office in the investigation and was scheduled to testify at the criminal trial. The debtor ultimately pled guilty to making false statements in a bankruptcy case and was sentenced to 30 months in prison and ordered to pay restitution of more than $850,000. But for the outstanding work of the trustee in a case that on first blush appeared to be a no-asset case, the outstanding civil and criminal results might not have been achieved.

Another example comes out of the Southern District of New York. Chapter 7 trustee, Al Togut, successfully pursued a now former bankruptcy lawyer who embezzled funds from a chapter 11 estate. After the USTP’s Manhattan office investigated the lawyer for a lack of proper accounting of sales proceeds, it obtained a court order converting the case to chapter 7 and appointed the trustee. In coordination with the USTP, the chapter 7 trustee immediately commenced discovery and obtained court orders holding the attorney in contempt and issuing a bench warrant for his failure to turn over documents and funds paid without court approval. Meanwhile, the USTP continued to investigate the conduct of the attorney in the converted case, as well as his representation of clients in other bankruptcy cases. The investigation revealed many financial irregularities, and the USTP referred the lawyer’s conduct to its federal and state law enforcement partners. In March 2018, the lawyer pled guilty in federal district court to one count of embezzlement from a bankruptcy estate and, in May 2018, pled guilty to two state charges relating to his embezzlement of funds from his attorney escrow account. Sentencing is scheduled for later this year.

These examples highlight the importance of identifying potential criminal activity and notifying your local United States Trustee’s office. Prosecution not only remedies economic harm to victims, but also vindicates the integrity of the bankruptcy system. And when a case is prosecuted, it sends a strong message of deterrence to others who would misuse the bankruptcy process to advance a criminal scheme.

With so many new United States Attorneys taking office over the past year, now is a good time for us to focus our efforts on criminal referrals. All United States Trustees are meeting with the new USAs in their districts to communicate the importance of prosecution of bankruptcy crimes and the assistance that both the USTP and private trustees can provide to law enforcement.

The USTP also is continuing its extensive training on bankruptcy fraud. Last year, we trained approximately 2,400 law enforcement personnel, Program employees, private trustees, and members of the bar and other professional associations throughout the country. This year, we have undertaken a series of joint training programs with the FBI’s Complex Financial Crimes Unit. Through this project alone, we have reached more than 600 United States Attorney, FBI, and other federal agency personnel in more than 40 locations across the country. I also was invited to make a presentation to the Attorney General’s Advisory Committee of United States Attorneys on our criminal enforcement efforts. At that meeting, I was pleased to hear from several USAs about their positive experiences in dealing with United States Trustees and private trustees.

Finally, I am very pleased to report to you that the March 2018 issue of the USA Bulletin, a bimonthly publication of the Executive Office for U.S. Attorneys’ Office of Legal Education, was devoted exclusively to bankruptcy and bankruptcy fraud. The USTP contributed many of the articles. The publication, which is available to the public online, is widely read by federal law enforcement and should help a great deal in garnering attention to the criminal investigation and prosecution of bankruptcy crimes.

SALE OF SECURED PROPERTY

Let me now turn to an issue we have discussed many times over the years: the sale of secured property. More than 20 years ago, the USTP issued guidance to trustees, and incorporated that guidance into the Handbook, that made clear that trustees should not administer fully secured property. The rationale for that guidance is well known. Chapter 7 bankruptcy administration pertains to the liquidation of non-exempt property and the distribution of proceeds to unsecured creditors in the priority order established by Congress. Fully secured creditors have the ability to take back their property through state court foreclosure processes without the aid of the bankruptcy trustee.

Of course, there are limited exceptions to this rule. Every case is fact sensitive. In our guidance, we provide for the sale of fully secured property if there will be a “meaningful distribution” to unsecured creditors. That sometimes occurs when the secured lender “carves out” an allowance for administrative costs and a distribution to unsecured creditors from the sale proceeds. In making a reasonable determination about “meaningful distribution,” the trustee should consider many factors, such as the number of unsecured creditors, the distribution of debt among creditors, and the total amount of debt. In rare cases, the sale may benefit the estate without directly generating cash proceeds, such as when the sale satisfies a blanket security interest on multiple units, eliminates a deficiency, or yields a higher price through the aggregate sale of related properties.

After some initial growing pains in implementing this guidance, chapter 7 trustees and USTs have not had many significant disagreements on this issue. When we do disagree, the matter most likely will be resolved by the court on our objection to sale motions and applications for fees.

This issue has garnered greater attention more recently because of solicitations made to trustees by companies that seek “short sales” of debtors’ houses. In some cases, a short sale may be beneficial and welcomed by the debtor who needs relief from mounting debts related to home ownership that cannot be discharged along with other general unsecured debt. But in other cases, the sale can violate a cardinal precept of the modern Bankruptcy Code – that is, cases should be administered for the benefit of the estate and not for the insiders who administer the estate. In fact, the USTP was established as a pilot program in the 1978 Bankruptcy Reform Act largely to break up the consumer and business “bankruptcy rings” that churned the administration of cases to enrich themselves at the expense of debtors and creditors alike.

Thanks to the USTP and to the dedicated corps of private trustees like you the bankruptcy rings of many years ago no longer exist. But that does not mean we should be any less vigilant today in policing the system to ensure that, intentionally or unintentionally, we do not allow self dealing to occur.

I recently have been alerted to a small number of cases that trouble me greatly. I recognize these are outlier cases and not in the least representative of work we do in the bankruptcy system. In one case, the cost of administering the secured asset was six times the amount proposed for return to unsecured creditors. In another case I find hard to explain, the trustee, professional, and realtor fees were about 33 times the return to unsecured creditors.

I am certain that all of you are as perplexed and bewildered at these two examples as I am. Just as the USTP will have no patience for debtors’ lawyers who enhance their fees by disserving their clients and the bankruptcy system, we also will have no tolerance for private trustees who administer an estate primarily for their own benefit. That would be a clear breach of fiduciary duty and a clear violation of the principles that gave rise to the modern Bankruptcy Code.

In a meeting with all United States Trustees (USTs) last May, I directed that USTs review their oversight practices to ensure the identification and careful analysis of any proposed sale of secured property. I encourage any trustees who believe they have a valid reason to sell fully secured property to contact their local USTP office in advance so we can avoid the need to file an objection to the payment of fees after the sale is consummated.

SECURITY AT SECTION 341 MEETINGS

Let me now pivot from issues of law and policy to a couple of very important issues of system administration. As you know, the USTP has taken steps to expand security at the statutory public meetings of creditors held under section 341. Beginning in 2015, we contracted with the Federal Protective Service (FPS) to provide guards at 14 meeting room locations, followed shortly thereafter at another three sites. I am pleased to report that we expect to add security guards at 10 additional sites in the coming months. Moreover, since 2015, eight meeting sites have moved into secure space and six additional moves are planned by 2019. That means we will have expanded security at 38 sites within about three years.

CHAPTER 7 TRUSTEE COMPENSATION

A report to the NABT is not complete without a discussion of trustee compensation. As Ron Peterson reminds everyone in the bankruptcy community regularly, the “no-asset” fee has not been increased in 24 years. As I have testified before Congress and am prepared to testify again, we favor an increase in the no-asset fee. If adjusted for inflation alone, the no-asset fee would be $100. And, if one considers the increased duties under BAPCPA, the $120 proposed in pending legislation would be a reasonable amount.

Each year I provide some data to you about overall trustee compensation, including income from the no-asset fee, the section 326 commission in asset cases, and professional fees paid to trustees in cases in which they serve as attorney or accountant. Over the past five years, total trustee compensation is down, in nominal dollars, by about 23 percent. In fact, last year, total trustee compensation plummeted by 18 percent.

After reviewing these data, we decided to probe more deeply into possible consequences of the decrease in compensation. Among other things, we found that the number of applicants per chapter 7 trustee vacancy has fallen from 58 candidates in 2010 to 20 candidates last year. Although we cannot establish a cause and effect relationship, it does stand to reason that continual decreases in compensation may threaten the financial viability of chapter 7 trustee operations and impede recruitment of the best-qualified candidates. Given the crucial role that chapter 7 trustees play as fiduciaries, it is essential that the USTP be able to recruit the most highly qualified candidates and that we have an adequate number of trustees to cover anticipated future increases in consumer filings.

I know that policymakers have a keen interest in the issue of chapter 7 trustee compensation. The USTP looks forward to providing assistance as they decide the most effective course of action.

CONCLUSION

I thank you very much for listening to me this morning, and working with the USTP throughout the year. You are the direct point of contact between debtors and creditors, and the bankruptcy system on which they both rely. You carry out your duties with efficiency and you uphold the highest fiduciary standards. The system cannot function without you, and you deserve far more praise than most of you ever receive.

I wish you a successful meeting at which you update your knowledge, obtain valuable practice tips, and share fellowship with others in the bankruptcy community. My colleagues in the USTP and I look forward to working with the NABT, and with each of you, throughout the coming year.

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Updated August 22, 2018