Thank you for inviting me to address the NABT’s Annual Conference. It certainly has been an eventful year since we met virtually last August due to the pandemic. And, while I had hoped to be there with you in person, I made the personal decision not to travel out of an abundance of caution for my grandchildren, who are not yet eligible for vaccinations. I know that the NABT has put important safety protocols in place for those of you who are attending in Chicago today, and I know that all of you will enjoy being together and having the opportunity to engage one-on-one.
I extend my deepest appreciation to your outgoing President Neville Reid for his exceptional advocacy for the chapter 7 trustee community and his partnership with the U.S. Trustee Program (USTP or Program) as we grappled with the challenges presented by the pandemic. I look forward to a similarly productive relationship with your incoming President, Leslie Gladstone, as we seek to finish the job and move forward.
In doing just that, we will apply the lessons learned during the pandemic to future bankruptcy practice. I am pleased to be joined in this effort by our new United States Trustee for Region 21, Mary Ida Townson. Many of you may know Mary Ida from her 18 years as a chapter 13 trustee in Atlanta and as a leader in the National Association of Chapter 13 Trustees (NACTT). We also are pleased to have on-board two new Assistant United States Trustees—Tim Niarhos in Nashville and Karen Walsh in Tulsa—who are former chapter 7 trustees. These new additions to our team bring a practical sense of how to make the bankruptcy system work and a deep understanding of the challenges faced by trustees that will be helpful to our national policymaking. I hope that you will join me in welcoming them to their new roles.
BANKRUPTCY ADMINISTRATION IMPROVEMENT ACT
I understand that some of you were greeted by a shocking sight when you arrived at the conference—the famous beard of your former President, Ray Obuchowski, was gone. That can mean only one thing: after a 27-year wait, chapter 7 trustees are finally going to get a pay raise. Ray was true to his word when he said he would not shave his beard until the $60 no asset fee was increased. And the USTP kept its word by working closely with Congress to make the legislation a reality.
Last year presented a set of circumstances that allowed for innovation and the ability to achieve multiple objectives in one law. The chapter 11 quarterly fee schedule was expiring, bankruptcy judgeships required new funding, and the crisis in chapter 7 trustee compensation became even more acute. By identifying a new source of funding that did not negatively affect consumer debtors or creditors, we got the job done.
The Bankruptcy Administration Improvement Act (BAIA), which became law this past January, accomplishes three important goals. First, it lowers quarterly fees for nearly all chapter 11 debtors and raises fees for none. Second, it uses chapter 11 revenue to fund 25 bankruptcy judgeships. And third, it provides that quarterly fee revenue that exceeds the USTP’s appropriation will be used to fund an increase in the chapter 7 no asset fee up to $60 per case. That means the no asset fee paid to trustees can double.
I know that the Administrative Office of the United States Courts (AO), which cuts the checks to trustees, has been diligently crafting the process for sending out those payments. And I am confident that the USTP’s quarterly fee revenue will exceed its appropriation this year in an amount that will be sufficient to fund a full doubling of the no asset fee, which the AO should be able to pay out by early 2022.
It is nice when a plan finally comes together. I know how hard many of you, and many members of Congress and their staffs from both sides of the aisle, worked on this legislation. I could not be more grateful that House Judiciary Subcommittee Chairman Cicilline, former Senate Judiciary Chairman Graham, and others were able to guide this legislation to the finish line.
Ray, I must say that I will miss your Santa Claus beard (or as my staff tell me, your ZZ Top beard), but I am glad you had good reason to shave it off.
BANKRUPTCY FILING TRENDS
I know that the compensation increase comes at an especially important time for chapter 7 trustees. Bankruptcy filings have been on a steep downward slide, although most experts predict an increase on the horizon. We need to have a stable corps of trustees who can administer current caseloads and address future caseload gyrations. Hopefully, enhanced compensation will help prevent an outflow of trustees.
In the immediate aftermath of the pandemic—from mid-March through the end of September 2020—chapter 7 filings dropped by 26 percent. And, over the first three quarters of FY 2021, filings have continued to decline, with chapter 7s down by 23 percent. There likely are many reasons for this decrease. Among other things, direct government payments to individuals, business loans that kept workers employed, higher unemployment checks, and a moratorium on foreclosures and evictions have allowed debtors to put off filing for bankruptcy and, for some, to avoid it altogether. I guess time will tell, but we will continue to monitor filings closely so that we are prepared to handle any future increase in filings.
SUCCESS OF THE SMALL BUSINESS REORGANIZATION ACT
In addition to the BAIA, let me touch on another legislative success story. As you know, in 2019, Congress passed the bi-partisan Small Business Reorganization Act (SBRA). Under that law, the USTP selected about 250 eligible trustees whose main job is to facilitate the negotiation and confirmation of consensual plans of reorganization at a lower cost. For the job of the SBRA trustee, we needed businesspeople more than we needed bankruptcy lawyers. Our expanded recruitment efforts were successful and, as I reported to you last year, the SBRA appears to be working as the draftspersons intended.
One indicator of its success is that three-quarters of all small businesses that seek chapter 11 relief file under the streamlined SBRA procedures. And there are other indicators as well. For example, subchapter V cases are confirming plans at double the historical rate—with a median confirmation time to date of 6 months versus 11 months historically for non-subchapter V small business cases. And those businesses that cannot survive are being identified more quickly—with a median dismissal time of 4 months compared to 6 months historically for non-subchapter V small business cases. In addition, about two-thirds of subchapter V confirmed plans have been consensual with creditors. Clearly our SBRA trustees are getting the job done.
I congratulate the NABT leadership for opening its membership to SBRA trustees. Of course, some chapter 7 trustees have separately been appointed as SBRA trustees. This cross-pollination of chapter 7 and chapter 11 trustees can only bolster the expertise of each group.
POST-PANDEMIC CHANGES IN SECTION 341 MEETINGS
Right on the heels of implementing the SBRA we faced the pandemic. For the entire USTP, our top priority became the safety of every participant in the bankruptcy process. That caused all of us to have to pivot dramatically. Together with you, we took steps to make sure that the bankruptcy system remained operational. On a dime, we moved all section 341 meetings from in-person to an audio and video environment. We quickly equipped you with necessary resources despite having to navigate government procurement procedures and supply chain issues along the way. We worked with the clerks of court to re-notice about 60,000 meetings that had already been scheduled at the onset of the pandemic and crafted updated noticing for millions of debtors and parties for subsequent cases and section 341 meetings.
Throughout it all, chapter 7 trustees were our partners, along with the courts, chapter 12 and 13 trustees, and the consumer bar. You deserve—all of us deserve—a big pat on the back for helping to protect public health and assisting consumer debtors, while at the same time upholding the integrity of the bankruptcy system.
As we begin to see the end of the tunnel of this awful pandemic, we have been consulting internally and with external stakeholders to assess the effectiveness of remote meetings. Among the options being considered are for initial section 341 meetings for chapter 7 debtors to proceed remotely, with the trustee or United States Trustee having the option to continue the meeting to either another remote meeting or to an in-person meeting as circumstances dictate. In addition, we are reviewing the practicality of requiring that initial meetings be conducted by video, instead of the currently prevalent telephonic means.
While our current pandemic emergency procedures have shown that most meetings can be successfully conducted without ever meeting face-to-face, telephonic meetings are not a perfect substitute for in-person meetings. For example, they present real challenges with respect to debtor identification that could impact the evidentiary value of testimony—admissibility, weight, or credibility. Furthermore, having the opportunity to sit across from a debtor at the section 341 meeting can be advantageous with respect to questioning, reviewing documents, and conducting other fact finding. And insofar as most debtors never set foot in a courtroom, there is intrinsic value in an in-person meeting because it can convey the solemnity of the bankruptcy process in a way that is not otherwise easily replicated in a remote meeting, particularly one conducted by phone. These aspects must be balanced against the benefits of virtual meetings.
On the likely assumption that remote meetings will continue post-pandemic, we will bolster our current guidance for trustees governing the conduct of these meetings to promote consistent procedures and criteria for determining when to continue meetings in person. In addition, if the overwhelming number of meetings will continue to be conducted remotely, then we need to explore video options, ensure that appropriate security protocols are in place, determine which section 341 meeting sites should be closed, and make a whole host of other technical and practical decisions. For now, the current directive mandating that section 341 meetings be conducted by telephone or video appearance applies until further notice.
POST-PANDEMIC CHANGES IN DEBTOR AUDITS
Another area that the USTP is working on that will be of interest to consumer practitioners relates to debtor audits. As you know, the USTP contracts with independent audit firms to sample consumer filings to determine the accuracy, veracity, and completeness of filings and to identify if the debtor made any “material misstatements.” Debtor audits are just one element of the Program’s overall fraud and abuse detection and enforcement program. These audits were suspended during the pandemic and that cessation will continue until a future date when we are less concerned about the additional personal interaction and other steps that are less practical under current conditions. When debtor audits do resume, they will be conducted under modified procedures designed to provide additional flexibilities.
UPCOMING CHANGES TO CHAPTER 7 TRUSTEE HANDBOOK
Unrelated to the pandemic are two other noteworthy changes to chapter 7 trustee practice that I want to bring to your attention.
Sale of Secured Property
After much discussion with the NABT and others, we soon will revise the Handbook for Chapter 7 Trustees (Handbook) to reflect the Program’s updated policy regarding the sale of secured property. As you know, the policy for many years has discouraged such sales unless there is either a meaningful distribution to creditors or a public policy imperative for the trustee to perform the sale for a fee. This policy avoids the perception of bankruptcy insiders administering the system for their benefit instead of the benefit of the estate. You may also know that the American Bankruptcy Institute’s Commission on Consumer Bankruptcy (ABI Commission) recommended that the Program prohibit sales of fully encumbered property that do not yield a distribution for unsecured creditors that exceeds the amount used to pay the trustee’s fees and expenses.
After review and analysis, rather than adopt a per se bar or formula approach to evaluating the appropriateness of the sale of secured property as advocated by the ABI Commission, we will continue to assess trustee performance in this area under the “meaningful distribution” standard. We will revise the Handbook, however, to provide more specificity and “teeth” to this criterion. Among other things, we will require trustees to provide detailed reasons for the sale and the anticipated benefit to the estate. Importantly, we also will set guardrails to avoid sales in which trustees and their professionals are the primary financial beneficiaries, except in extraordinary circumstances such as public health and safety. These changes will allow the USTP, trustees, debtors, and other parties to make more informed decisions of whether to object to the sale. And they also will provide the court with a more complete record on which to base its decision to approve or disapprove the transaction.
Here is the bottom line. There must be exceptional circumstances present in a case to justify the sale of fully encumbered property. These circumstances do not include ensuring a financial benefit to bankruptcy estate fiduciaries; nor do they include furthering any scheme whereby sharp lenders and speculators can make a quick dollar through a sale that may deprive a debtor of a fighting chance to retain his/her home. The sale of fully encumbered property is a rarity and we will be closely scrutinizing any request to conduct such a sale.
Best Practices on Document Production Requests
The other important change we will make to the Handbook is to incorporate the “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases,” which were issued by the USTP in 2010. These best practices were twice endorsed by the NABT and the NACTT. In addition, the ABI Commission recommended that they be elevated into the Handbook.
We understand that trustees, by and large, have embraced the best practices. But there is a small number who continue to routinely make requests for information from debtors beyond what the Bankruptcy Code and Rules require and without a particularized need for additional information. The best practices by their terms accommodate special needs on a case-by-case basis. But importantly, they provide a valuable yardstick and industry standard for conserving trustee, debtor, and judicial resources in the vast majority of cases.
By adding the best practices to the Handbook, we want to make clear that there is an expectation that they should be followed, except where the specific facts of a case warrant further investigation and thus additional documents.
We have jaw-boned about best practices for long enough. Now is the time to strengthen compliance by making them a Handbook requirement.
CONSUMER PROTECTION AND THE EMERGING ISSUE OF BIFURCATION OF DEBTOR ATTORNEYS’ FEES
As you know, the USTP is committed to ensuring that the bankruptcy system works for all stakeholders. Consumer debtors, who are especially vulnerable to exploitation by creditors, third parties, and even their own lawyers, must be protected. We have a long track record of success in this area that continues today. In fact, since the beginning of FY 2020, the USTP has taken more than 5,000 consumer protection actions, including those not requiring court adjudication, for a potential financial impact of more than $10 million. And that does not include the December 2020 settlement reached with three mortgage lenders that collectively provided $74 million in remediation to approximately 60,000 borrowers in bankruptcy for violations relating to missing, untimely, or inaccurate payment change notices, escrow analyses, and post-bankruptcy fee notices.
Our approach to protecting consumer debtors is multi-faceted and ever evolving. One emerging area that we are focusing on is the bifurcation of fees and the challenge of distinguishing between those consumer debtor lawyers who bifurcate fees within the rules and those who violate the rules at the expense of their clients. The USTP is committed to ensuring compliance with extant statutes and rules, with a focus on combatting violations that cause, or are likely to cause, real harm.
Although nothing in the Bankruptcy Code prohibits a bifurcation of fees into pre- and post-petition services, the law is clear that fee arrangements must be disclosed accurately and completely. Debtor lawyers’ fees also must be reasonable. The USTP brings many cases each year seeking disgorgement of fees back to the consumer debtor or the estate because the debtor’s lawyer did not provide services commensurate with the legal fees charged.
The advantage of bifurcation is that it sometimes allows debtors to pay a smaller fee at the start of the case. As you know, however, any fees for services unpaid upon filing the petition are discharged. Proper bifurcation requires the lawyer to ensure that the debtor is properly advised on his/her obligations and rights in bankruptcy, including the duty to file complete and accurate schedules and statements describing both assets and liabilities. The lawyer also must describe the fee arrangement forthrightly, both to the client before receiving an informed consent and to the court. Services to be provided pre-petition and those to be provided post-petition, as well as the allocation of fees between pre- and post-petition services, must be clearly set out. And the lawyer absolutely may not charge post-petition fees for pre-petition services. That would be dishonest, impermissible under disclosure and fee rules, and subject the attorney to sanctions. Perhaps even worse, billing debtors for pre-petition services would vitiate the debtor’s fresh start.
Recently, we have seen case law develop that sets forth criteria for determining whether a bifurcated—or low money down—arrangement is permissible. In general, the legal holdings are consistent with the USTP’s enforcement strategy and reading of the applicable statutes and rules. Two years ago, I commended to your attention a bankruptcy court decision in Utah, In re Hazlett. Although the USTP disagreed with some of the findings of fact by the court, the legal standards set forth by the judge were thoughtful and faithfully adhered to the law. The court was uncompromising in insisting on accurate disclosures and disapproving bills for services performed pre-petition. The court also made abundantly clear that fees must be reasonable and not increased merely because the debtor paid a smaller initial payment.
In three recent decisions, other courts provided additional guardrails that debtor’s counsel should follow. In In re Prophet, the bankruptcy court in the District of South Carolina struck down bifurcation because a local rule requires debtors’ attorneys to perform all necessary services throughout the case, thereby preventing counsel from bifurcating fees. This consumer-friendly local rule has much to commend and the USTP will go to court to enforce it and other similar local rules.
The Eighth Circuit BAP in In re Allen made clear that an attorney’s decision to factor post-petition fees—that is, to sell the account receivable at a discount—does not justify a higher fee on the debtor to make up for that discount. And the bankruptcy court in the Southern District of Florida in In re Brown set forth detailed guidelines on evaluating bifurcated fees. Among other things, the court clearly stated fees must be properly disclosed, consented to by the debtor, and exclude any mark-ups for factoring.
Consumer lawyers and the factoring agencies with which they do business are well advised to closely study emerging case law. The USTP will continue to protect the debtor’s fresh start and will oppose attempts to expand these court decisions for the benefit of the lawyer and financier at the expense of the consumer debtor. As these recent cases make clear, the client’s best interests must always take precedence over the interests of the professional. Though these recent court decisions may leave some room for legal disagreement around the edges and all cases will be fact-sensitive, the courts’ guidance is welcomed and helpful.
DIVERSITY AND INCLUSION
Last but not least, I want to discuss with you the need for greater diversity and inclusion in the bankruptcy system. I think that all of us who have attended professional bankruptcy conferences, and especially gatherings of chapter 11 business reorganization professionals, can agree that the lack of diversity is apparent. With about 1.3 million pending bankruptcy cases on average annually in the United States, it is fair to say that bankruptcy affects a broad cross-section of our populace—not only debtors who file for bankruptcy, but the tens of millions of creditors who are parties in cases.
In an effort to promote greater diversity and inclusion, the USTP is taking steps to broaden outreach, recruitment, and training for trustees. I am grateful for the interest and assistance of the NABT, NACTT, and the National Conference of Bankruptcy Judges in this endeavor. If we are to attract the widest pool of talent to the bankruptcy profession, then we need to enhance our efforts. This will involve participating in career and job fairs, including at high schools, colleges, and law schools, to showcase the opportunities for service as a bankruptcy trustee. We also will sharpen our trustee recruitment procedures to target less represented populations through affinity publications and the like. If experts are right that bankruptcy filings will rise in the near future, then we will need to replace departing trustees and, in some districts, expand the number of trustees. Conducting broad searches for potential trustee talent will be critical.
Beyond outreach and recruitment, we also plan to enhance our training regimen for trustees. The USTP’s National Bankruptcy Training Institute is developing a module that every local USTP office will deliver as part of its routine training to sensitize trustees on the special impacts that case administration may have on disadvantaged communities. Each of us can do a better job when we better understand the effect our actions have on real people in real life.
We look forward to working closely with the NABT’s leadership team on promising new approaches we can take to ensure that the bankruptcy laws are applied strictly, equitably, and with appreciation for the diversity of our fellow citizens whom we serve. So stayed tuned.
I appreciate the opportunity to talk with you today about some of the major consumer practice issues in which the USTP is engaged. We look forward to partnering with the NABT as we move forward together in improving chapter 7 practice and administration.
I know that service as a trustee is often unheralded. But your service is indispensable. Your dedication, especially in recent years of lower compensation, is a testament to your professionalism and spirit of service to the bankruptcy system.
I wish you another productive annual meeting and congratulations again on the long overdue and well deserved no-asset fee increase. I hope to be able to see many of you in the year ahead as the pandemic subsides and I am able to visit with our field offices.
Thanks again for your time and attention.
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