Remarks of Director Cliff White at the 2020 Annual Conference of the National Association of Bankruptcy Trustees (Virtual)

INTRODUCTION

Good afternoon. It is a pleasure to be with you today for the 2020 Annual Conference of the National Association of Bankruptcy Trustees (NABT). Although it would have been nice to welcome you to Washington, DC―a place that has been my home now for more than 40 years―I appreciate the chance to talk to you through this live Webinar. All of us have adapted to virtual communications these days, but I must admit that I look forward to the day when we can return to some good, old fashioned, in-person conversations.

I would like to begin by first thanking Jason Gold for his outstanding work as President of the NABT during these unprecedented times. He has been an important partner with the United States Trustee Program (USTP) as we have addressed the many unique challenges that have emerged over these past five and a half months. You are fortunate that your new President, Neville Reid, is equally up to the task as we plan for a return to some normalcy in the months ahead. I have worked with Neville on many occasions and hold him in the highest regard.

These past months have been difficult for all of us. But I think the pandemic and its accompanying economic dislocation have highlighted the central role played by the bankruptcy system in our national economy. I want to share a few reflections on the challenges we have faced together in navigating this pandemic and offer a few thoughts on the future.

NAVIGATING THE EARLY PERIOD OF THE PANDEMIC CRISIS

Together with our partners in the bankruptcy system―including judges, clerks of court, the bar, and, of course, trustees―the USTP took several significant actions beginning back in March to protect all parties to bankruptcy cases and to ensure continuity of operations.

Section 341 Meetings

Understanding that it would be unsafe to gather debtors, creditors, lawyers, trustees, and others together in a section 341 meeting room at one time, the USTP moved with alacrity to transition meetings from in-person to telephonic and video.

As you know, the section 341 meeting is a pivotal proceeding in bankruptcy that provides an important forum to meaningfully question debtors. Any postponements disadvantage both debtors and creditors by delaying discharge and case closure. Within just a few weeks, the USTP was able to procure about 1,200 conference lines and 500 additional digital recorders so trustees would be equipped to conduct these proceedings in compliance with law.

We worked closely with trustees and the courts to re-notice thousands of already scheduled meetings and developed, with the clerks, new template notices that were sent to literally hundreds of thousands of parties who have a right to participate in these meetings. Finally, the USTP adopted new best practices for trustees to conduct section 341 meetings to ensure that the identity of debtors was properly verified and fact-finding was effectively pursued.

I am pleased to report that all of us adapted and got the job done. Of course, there were hiccups along the way. But with the cooperation of all parties, including the debtor and creditor bars, the meetings have been timely conducted and are effective. Among other things, it appears that often there is greater participation by creditors. And if there are future increases in filings, as many predict, the ability to conduct telephonic or video meetings may provide much needed scheduling flexibility so that we can satisfy legal deadlines. In contrast, physical facilities may restrict our ability to hold enough meetings to accommodate future needs.

But as well as things have worked out, trustees often remind us that there are some inefficiencies in reviewing documents over a conference call or even on video. And sometimes there is no substitute for direct observation of a debtor where there are concerns about a filing. That is why our section 341 scheduling policy provides for continuances to hold in person meetings where the U.S. Trustee and private trustee believe it is necessary to ensure the protection of estate property or completeness of the meeting. In-person meetings should be rare and conducted in a manner that complies with local public health guidance.

Currently, telephonic and video section 341 meetings will remain in place for cases filed through October 10^th. But I have some news. Within the next day or two, we will officially extend the current telephonic and video requirement to all cases filed within 60 days after the termination the President’s “Proclamation on Declaring a National Emergency Concerning the COVID-19 Outbreak.” The Proclamation was issued on March 13^th and continues until the President declares we are beyond the national health emergency. In addition, we will continue to learn from our experiences, consult with the trustee associations and other stakeholders, and consider possible changes to our long-standing policy regarding in-person meetings once the pandemic is behind us.

Audits

In addition to conducting section 341s by alternative means, the USTP also changed its approach to both debtor and trustee audits during the public health crisis. Prior to the declaration of the national pandemic emergency, the USTP was on pace to approach the largest number of debtor audits it has ever conducted. As you know, debtor audits are an important tool in our toolbox for ensuring the integrity of the consumer bankruptcy process. Through contracts with private firms that verify the accuracy of financial information filed by consumer debtors, we are able to identify material misstatements in filings and take action as appropriate.

In light of the pandemic, however, we decided that it would not be reasonable or safe to require debtors to engage in additional interaction with their lawyers, financial institutions, and others that likely would be needed in order to provide the supplementary documentation that the audit process commands. So, we suspended the audits in March. Currently, we are reviewing alternative protocols that would allow us to resume the audits later this year.

Likewise, we suspended on-site audits of chapter 7 trustee operations by independent CPAs so we could consider appropriate adjustments that would help ensure the safety of you and your staffs. In concert with the audit firms, we have revised the statements of work to resume the audits remotely. This may not completely eliminate the need for a staff member to go to the office, for instance, to scan records needed for the audit. But these changes will eliminate the need for ongoing, in person interaction with the auditors.

I am confident that we can perform the necessary checks on internal controls, financial accountability, and asset administration, while still allowing you and your staffs to follow health protocols established for your local community. Before the end of the calendar year, we hope to complete 180 remote trustee audits. You can be assured that U.S. Trustees will appropriately evaluate any audit findings that can be justified or explained by the disruptions caused by the displacement of staff due to the public health emergency. There should be no penalty for keeping your staffs safe.

CARES Act Guidance

Another important step we took was to issue a statement of position to protect consumer debtors against the possible loss of recovery rebates under the CARES Act. Our view is that the bankruptcy process does not compel trustees to administer the rebates. I hope that this guidance was helpful to you by providing arguments against any assertions that there was an obligation to redirect the rebates away from their intended purpose of assisting consumers and, thereby, the national economy.

BANKRUPTCY FILING TRENDS

For all the reasons just explained, I think the USTP and its partners have acted as good stewards of the bankruptcy system during this period of abrupt change. The question now is “what about the future?” All of us have read in the newspaper―and USTP attorneys know from their caseloads―that large chapter 11 cases have been rising. Public reports suggest that large public company filings more than tripled from the first to second calendar quarter of this year.

For the first three quarters of this fiscal year (October 1^st to June 30^th), overall chapter 11 filings rose by seven percent compared to the previous year. Almost all of that increase was attributable to filings made after stay-at-home orders and other pandemic restrictions went into effect in mid-March. Small business chapter 11 cases, on the other hand, initially saw a decline in filings with COVID restrictions―after they had more than doubled in the month following the effective date of the Small Business Reorganization Act (SBRA). Since then, though, they have rebounded with an overall seven percent increase in the first three quarters of the fiscal year. Notably, approximately 75 percent of chapter 11 small business debtors are opting to proceed under the new subchapter V provisions of SBRA.

And, as you know from your caseloads, chapter 7 cases are down this fiscal year. After being flat through mid-March, chapter 7 filings have dropped by 30 percent since the pandemic fully manifested and were down by 12 percent cumulatively through June. Chapter 13 cases have fallen even more precipitously, by 60 percent from mid-March through June, and 25 percent cumulatively through June. Of course, most analysts are predicting a rise in consumer bankruptcy filings this fall and beyond. The stimulus payments and additional unemployment benefits that started in April, along with small business relief, are often credited with delaying the need for consumer filings. Our job is not to predict future filings, but to be prepared for any fluctuations that may occur.

CHAPTER 7 TRUSTEE COMPENSATION

The rollercoaster of consumer bankruptcy filing trends has put a premium on having a corps of highly qualified chapter 7 trustees. We are privileged to have approximately 800 active chapter 7 panel trustees across the country that fit that bill. For trustees to do their jobs―and for U.S. Trustees to recruit qualified candidates where we have trustee vacancies―there must be fair compensation. Unfortunately, with the recent drop in filings, your revenues have decreased.

I know you do not need to be reminded that the chapter 7 no-asset case fee has not increased in 26 years. Both Neville Reid and I have testified before Congress in favor of a raise, but it has yet to occur. Total trustee compensation―including the no-asset fee, the asset case commission, and fees for serving as a professional―decreased by 13 percent over the last five years. While total compensation was up by two percent last year, that increase was driven primarily by a few anomalous cases.

This downward trend is unsettling and may compromise the effectiveness of the bankruptcy system at the precise time when the American public― both debtors and creditors―depend on it most. I hope that next year I can report to you that chapter 7 trustees received their well-deserved pay raise.

DOCUMENT PRODUCTION REQUESTS

The final topic I want to raise with you also is a familiar one. In 2012, the USTP adopted and provided to you “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases,” which were developed in concert with the trustee organizations. Our purpose was to promote the efficiency and effectiveness of the bankruptcy system for both trustees and debtors. There is no point served when trustees make overly burdensome and blanket requests for documents beyond those required by the statute, rules, or circumstances of a particular case. Conversely, the system also suffers when debtors’ counsel fail to satisfy reasonable document requests from trustees.

The NABT provided us with key insights in developing the best practices. Trustees overwhelmingly support and abide by these best practices that save the resources of trustees, debtors, and the courts. But compliance is not universal. Occasionally the USTP receives complaints about the reasonableness of document production requests and sometimes we find those complaints valid. Even though the majority of trustees act with prudence and economy in managing their cases, a small number act contrary to the best practices.

In the past, we have handled those instances one-on-one with trustees and obtained corrective action. But more recently, it has become clear that we need to do more. In the coming months, we will work with the NABT and other stakeholders to amend the USTP’s trustee Handbooks to make adherence to the best practices mandatory and to make clear that we will take action against those few recalcitrant trustees who continue to ignore them.

I should note that the American Bankruptcy Institute Commission on Consumer Bankruptcy―on which I served as an ex officio member―made a similar recommendation last year. By strengthening the relevant Handbook provisions, the bankruptcy system will benefit, and the reputation of the trustee community for fairness and efficiency will be enhanced.

TRUSTEE LIAISON ACTIVITIES

In support of these and other efforts related to the trustee community, I want to share some news about a recent appointment in the Executive Office. Soon we will be joined by someone who I think most of you know well―former United States Trustee, chapter 7 panel trustee for the Middle District of Tennessee, and NABT member and past president, Sam Crocker.

After a brief retirement, Sam decided he was missing all the fun and, beginning Monday, will come back to work with the USTP part-time. He will work with United States Trustee Bill Neary, who also serves as our Deputy Director for Field Operations, with a focus on trustee related matters. Sam will be a member of our liaison groups and internal trustee working group. He also will assist regions across the country in developing and presenting effective trustee orientation and training programs. And he will consult on a whole host of trustee issues as they arise. We are excited to have Sam back on the team.

CONCLUSION

That concludes my formal remarks. As stewards of the bankruptcy system during this unprecedented period, the pressures on you have never been greater, but you have risen to the challenge. We in the USTP support and respect all that you do every day to ensure that the bankruptcy laws are faithfully followed by debtors and creditors alike, and that assets are efficiently liquidated and distributed to creditors.

I know that you would prefer to be in person for this important meeting. But I hope that you will capitalize on this virtual opportunity to engage and share information on a variety of bankruptcy issues, as well as provide tips to your colleagues on how to address the myriad challenges presented by the pandemic.

Thanks for letting me “beam in” to chat with you. And thanks for all you do and for the exceptional professionalism with which you do it.

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