Remarks of Director Cliff White at the 2019 Annual Conference of the National Association of Bankruptcy Trustees

INTRODUCTION

Good morning.  I appreciate the invitation to speak with you at your 2019 Annual Conference.  There is much to talk about.  Bankruptcy practice plays such an important role in the smooth functioning of our national economy, and the work of chapter 7 trustees is widely recognized as a vital component of the bankruptcy system.    

Over the past year, I have worked with your out-going President Ray Obuchowski on a wide variety of matters.  He has been an effective advocate on your behalf.  I thank him for his partnership with the United States Trustee Program (USTP or Program) and for his commitment to the betterment of chapter 7 practice.  I also have worked with your new President, Jason Gold, during his many years as a leader in this organization and as a prominent practitioner in Washington, DC.  I look forward to collaborating with Jason on the issues I will highlight today, along with other pressing matters that I am sure both the USTP and NABT will confront during his term in office.

Sharing in this effort with me will be the newest addition to the USTP team.  Let me introduce Bob Gebhard, who recently joined the Program as our Assistant Director for Oversight.  As you know, that office oversees the Program’s chapter 7 trustee activities, ranging from developing policies in the Handbook to reviewing the results of audits completed by our field offices.  Bob is no stranger to chapter 7 practice.  He has a 30-year career as a bankruptcy lawyer, including past service as an Assistant U.S. Trustee in charge of our San Jose office.

I am deeply grateful to Bob’s Deputy, Suzanne Hazard, for her continued leadership in the chapter 7 arena.  And I thank Acting U.S. Trustee Tiffany Carroll, who served for about 18 months as the Acting Assistant Director and who will continue her outstanding work on the USTP-NABT Liaison Committee.

CHAPTER 7 TRUSTEE COMPENSATION

Let me start with a topic that I know is on the minds of every chapter 7 trustee— compensation.  Overall, there are about 1.5 million ongoing bankruptcy cases each year, which represents about two-thirds of the entire federal court caseload. 

Yet, despite those numbers, total chapter 7 trustee compensation has been decreasing.  Trustee compensation from trustee and professional fees has gone down by 18 percent over the last five years.  It plummeted two years ago and then rose by five percent last year.  It is important to note, however, that last year’s increase was due to just a handful of cases.  If those cases were taken out of the calculation, trustee compensation stayed about the same.

As you well know, 25 years have passed since the last no‑asset fee increase.  During that time, Congress expanded your mandatory duties with the 2005 bankruptcy reform amendments and you will play an important role in implementing some additional changes to the Bankruptcy Code that are imminent.   I was pleased to testify before the House Judiciary Committee late last year and again voice my support for an increase in trustee compensation.  I should add that Judge Alan Stout, a former NABT President, along with Chicago trustee Neville Reid, testified very effectively at that same hearing.

Compensation is important not only to retain qualified chapter 7 trustees, but also to recruit qualified people when vacancies occur.  Over ten years, the total number of chapter 7 panel positions has been reduced by about 20 percent due to declining caseloads.  And, each year, about 45 trustees leave the panel for various reasons.  But the days of declining caseloads may be over.  We should be prepared for increases in the number of filings in the future, which may mean we will appoint more chapter 7 trustees. 

Our staff in the Program’s field offices tell me that it is much harder to recruit new trustees these days.  And aggregate numbers prove their point.  Even with the USTP’s customary broad public solicitation to fill trustee vacancies, the number of applicants continues to decline.  Last year, there were only about 13 candidates on average for each vacancy we posted.  That is down from the previous year and only one-quarter of the average number of applicants we received about ten years ago.

It is fair to speculate that low compensation is a major reason for the declining interest in chapter 7 trustee positions by bankruptcy and business professionals.  The $60 no-asset fee, which is the sole compensation received by trustees in about 95 percent of their cases, should be $100 if we were to account for inflation alone.  As I testified to Congress, if we consider the added duties imposed upon trustees over the years, then the NABT request of $120 per no-asset case is entirely reasonable.

As you know, the stumbling block has been the source of funding.  The USTP has suggested that an increase in the filing fee, the percentage fee charged in cases with assets to liquidate, or other fees would be appropriate.  It is very important, however, that the fee for no-asset cases be substantially raised.  The fact is, it is often only through a trustee’s careful review of cases, particularly those that on first glance appear to have no value, that potential assets are identified for  distribution to unsecured creditors.

The USTP continues to strongly support your just efforts to increase the chapter 7 trustee no-asset fee.

BANKRUPTCY LEGISLATION

Though Congress has not yet advanced legislation regarding chapter 7 trustee compensation, it did approve four bills recently that are expected to be signed by the President at any moment.    

First, the Small Business Reorganization Act of 2019 creates a new subchapter within chapter 11 of the Code for small business debtors.  Under the bill, the U.S. Trustees will be responsible for appointing and overseeing either standing or case-by-case trustees in those cases in which small business debtors elect the special treatment afforded them under the new subchapter.  The duties of the new small business trustee will include aiding negotiation of a consensual plan, appearing in court on significant matters in the case, and performing certain other duties that trustees now perform under chapters 11 and 12. 

These new provisions will take effect 180 days after enactment.  The USTP currently is developing implementation plans to ensure consistent action by all of our field offices.  Among other things, this fall we will recruit a pool of small business trustees.  We estimate that we may appoint and oversee more than 200 new trustees with specialized skills to guide small businesses through a successful reorganization.  The recruitment will be open to chapter 7 trustees, chapter 11 practitioners, and other qualified legal and business professionals.  Stay tuned for further developments. 

Next, the Family Farmer Relief Act of 2019 expands the availability of chapter 12 relief.  The Act increases the debt limit for an individual or entity to be considered a “family farmer” to $10 million, subject to indexing with the Consumer Price Index.

Congress also passed two bills designed to protect our country’s servicemembers.  The Honoring American Veterans in Extreme Need Act of 2019, also known as the HAVEN Act, excludes certain veterans’ benefits from “current monthly income” for purposes of both the chapter 7 means test and the chapter 13 disposable income calculation.  Basically, it treats veterans’ benefits like similar non-veteran disability and certain other government benefits.  The HAVEN Act will be effective upon enactment.  We will work closely with the NABT and the NACTT to ensure that the words of the statute and public policy embodied in the HAVEN Act are faithfully implemented for the benefit of those who have selflessly served our country.    

Finally, the National Guard and Reservists Debt Relief Extension Act of 2019 simply extends the current exemption from the means test of certain active duty members of the National Guard and Reserve for an additional four years.  This extension will continue to make chapter 7 trustees a key player in ensuring that members of the military have the ability to file bankruptcy and avoid some requirements that would be particularly difficult to satisfy while on active duty. 

SECTION 341 MEETING ROOM SECURITY

Another topic of vital concern to both case trustees and U.S. Trustees is security at mandatory administrative proceedings held under section 341 of the Bankruptcy Code.  As you know, most debtors never see the inside of a courtroom.  It is critical that the conduct of section 341 meetings be professional, efficient, and conducive to fact-finding.  To achieve these objectives, section 341 meetings should be held in safe places.  Tensions and emotions can run high in these meetings, so concerns about security should be paramount in all our minds. 

As you know, the USTP maintains about 400 section 341 meeting rooms.  Many of these are in federal courthouses and federal buildings.  But many also are in less secure private locations.  Over the past three years, we have committed substantial funding to provide security guards at 30 of these less secure locations.  We also have moved a number of section 341 meeting rooms into secured federal space.

I am pleased to announce that just a few weeks ago, on August 1^st, we added security guards at 10 additional sites.  As we continue to expand permanent security, please remember that we also can respond when there are advance indications of specific security threats.  Since 2016, we have provided guard service in 20 instances in which trustees provided advanced notice of a specific threat. 

Beyond the importance of security at these meetings, trustees, practitioners and others continue to tell us that the security presence also adds a proper solemnity to the meetings.  Bankruptcy is serious business, the stakes are large, and the need for decorum and honesty is essential.  Added security enhances those important goals.

ELEVATING CHAPTER 7 PRACTICE

During the balance of my time, I want to discuss a few topics that highlight why it is so important that chapter 7 trustees continue to be effective partners with the USTP in carrying out the law and elevating chapter 7 practice generally.

Lessons Learned from Defalcations

As you know, defalcations by trustees are almost unheard of these days, and defalcations by trustee staff are extremely rare.  Over thirty years, there have been 94 defalcations under all chapters of the Code.  Three-quarters of those occurred before the year 2000. 

When dishonest behavior is identified, the USTP sends in an accounting reconstruction team and refers the matter to law enforcement as appropriate.  Reconstruction teams describe in detail the nature and magnitude of the defalcation.  They also report on lessons learned. 

A recent reconstruction team identified some important lessons that I want to share with you today.  These lessons are reflected in long-standing guidance and in the employee fraud indicators posted on our Web site.  They also will be incorporated into the trustee training that the USTP and its field offices regularly provide to you.

These lessons include the following.  First, trustees must establish and abide by internal controls, such as reviewing backup documents like proofs of claim, invoices, court orders, and claims registers before signing checks.  Second, trustees must review bank statements, transaction documents, and bank account reconciliations carefully—not just in a perfunctory way.  This includes reviewing cancelled checks for alteration, investigating unauthorized transfers, and following up on any missing items, illegible or blanked out descriptions, or inconsistent endorsements.  Third, trustees must be conscientious in compiling and reviewing required financial and case administration reports, responding to audit findings, and correcting identified issues.  It is your responsibility to ensure that the information provided by staff is verified and monitored for unauthorized changes.  Innocent mistakes happen, but it is important to ensure that is exactly what they are—innocent.

In trustee work, small things matter.  The most important duties often seem to be the most mundane.  Trustees cannot delegate their fiduciary responsibilities.  I know that you know this, but recent experience commends these reminders.

Document Production Requests

Let me move on to another important topic we have discussed before.  The USTP will accelerate its oversight to ensure that document production requests made by trustees to debtors are limited to the extent necessary to ensure proper administration of the estate.  Overly burdensome requests increase the costs for everyone, including the court.

The issue of document requests is probably the biggest complaint I hear from the consumer bar.  In fact, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy has recommended that the USTP impose stricter controls on routine trustee document demands.  The complaints go not only to the documents themselves, but also to the modes of transmission.  Some trustees, for example, are reluctant to accept electronic transmissions, though they may be perfectly adequate.

Over the next year, we will be consulting with the NABT about incorporating our previously issued “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases” into the Handbook to provide greater authority and consequences in our policing of wasteful, unproductive document demands. 

Sale of Fully Secured Property

Last year, we spent some time talking about the USTP’s long-standing policy against the sale of fully secured property.  The main purposes of chapter 7 are to liquidate property for the benefit of unsecured creditors and to provide a “fresh start” for debtors.  The touchstone principle for liquidating assets is that the sale must provide a “meaningful distribution” to unsecured creditors.  The trustee Handbook describes the kinds of circumstances in which the sale of secured property may be appropriate.  It encompasses such situations as cases involving environmental remediation or combining parcels of real estate for a single sale that will yield a greater value for the estate.  

I mentioned to you last summer that all UST’s were enhancing their efforts to review sales and financial reports that may reveal inappropriate sales so that we could notify the trustee and, if necessary, object.  I think our reviews largely have been effective.  About two months ago, though, I received Congressional correspondence attaching a complaint from a debtor constituent about a trustee who sold her home even though payment of the liens and administrative costs consumed 99.3 percent of the sale proceeds, leaving only $6,600 for distribution to unsecured creditors. 

Let me be clear that the USTP will not defend, and in fact will oppose, sales that primarily benefit the professionals who administer the case.  The Program was created to break up “bankruptcy rings” that engaged in self-dealing behavior, and we will be faithful to our mission.  Additionally, in the coming year, we will consult with the NABT as we consider strengthening our Handbook guidance in this area.  Of relevance, the ABI Consumer Commission mentioned earlier has recommended that the USTP adopt a strict percentage test to determine whether the distribution unfairly favors professionals over other stakeholders.

One of the reasons I am such an advocate for chapter 7 trustees is because you maintain the highest ethical standards.  My concerns about sales practices do not in any way suggest that I think that bad practices are common.  They are not. My best advice to you is that, if you are offered a carve out for the sale of a home by a third party purchaser, or otherwise are contemplating the sale of fully secured property, it would be wise to provide advance notice to your local U.S. Trustee’s office.

FRAUD AND ABUSE BY CONSUMER BANKRUPTCY LAWYERS

I recently told your chapter 13 trustee colleagues that, if I had to describe the biggest problem in consumer bankruptcy practice as I see it, it would be the small number of consumer debtor lawyers who put their interests ahead of the interests of their clients.  Both chapter 7 and 13 trustees have been vital partners with the USTP in identifying bad consumer debtor practices—whether they be committed by solo practitioners or multi-district bankruptcy mills.

Thanks in part to you, USTP offices around the country have been able to obtain court orders to redress attorney misconduct and even fraud.  Your referrals have assisted us greatly over the last year as we have brought nearly 600 actions in court and taken more than 2,100 additional out-of-court actions. 

Our actions have addressed a wide array of improper practices.  Examples include failing to obtain clients’ signatures before filing a bankruptcy petition; failing to file cases in a timely manner once paid; and making a mockery of credit counseling by directing paralegals to take credit counseling courses for clients and then filing false certificates with the court.  Recently, the United States Court of Appeals for the Fifth Circuit affirmed a judgment in favor of the USTP imposing sanctions for attorney misconduct.  The court characterized the defendant’s conduct as “appalling.”

We also have brought actions in which lawyers improperly bifurcated their fees in chapter 7 cases into pre- and post-petition services.  Typically, this allows the lawyer to obtain a competitive advantage by advertising low- or no-money down bankruptcy filings.  In some cases, the lawyers sell their post-petition accounts receivable—at a discount offset by unjustifiably higher fees—to a factoring company that can sue the debtor irrespective of the discharge injunction and “fresh start.” 

Courts predominantly agree with our position on attorney misconduct and have supported the enforcement actions we have brought.  But there is one notable decision in a case in which we did not prevail.  In the District of Utah, the bankruptcy court handed down a decision in In re Hazlett, 2019 WL 1567751 (Bankr. D. Utah April 10, 2019).  I commend that opinion to your attention because the careful reasoning of the court actually highlights the factors we look for and which are almost always absent in the cases we bring.

In the Hazlett case, the court upheld the bifurcated fee because it found that four essential elements were present:  (1) the lawyer’s dealings with the client were based on the client’s best interests; (2) all fees charged for post-petition services were reasonable and did not include fees for pre-petition services; (3) the arrangement was fully disclosed in the lawyer’s Rule 2016(b) statement; and (4) the lawyer complied with local rules governing substitution or withdrawal.  Moreover, in the context of factoring, the court found that the fees charged to the client were reasonable on a lodestar basis and did not reflect a markup to offset the premium charged to the lawyer by the financing company.

Although one may argue over the findings of fact made by the judge, or the propriety of debtors’ lawyers contracting with a factoring agency under any circumstances, the court’s opinion provides an important four-part analysis in assessing bifurcation practices.  It is instructive to the USTP and should be instructive to the bar as well.

CRIMINAL ENFORCEMENT

Beyond our civil enforcement practice, the USTP also has a duty to refer instances of suspected criminal conduct, and to assist our law enforcement partners with investigations and prosecutions as needed.  Each year we make more than 2,000 criminal referrals to U.S. Attorneys, the FBI, or other enforcement agencies.  These referrals cover a wide array of criminal activity.

Indictment of Towing Company that Harmed Debtors and Creditors

Sometimes bad consumer bankruptcy practices even constitute crimes.  Let me highlight one indictment that is related to the USTP’s initiative to scrutinize national bankruptcy mills.  Just about two months ago, the U.S. Attorney in Indianapolis announced the indictment of two non-attorney defendants for carrying out a scheme against financially distressed individuals, some of whom were debtors in bankruptcy, as well as against their creditors.  Under the scheme, borrowers who were upside down on their automobile loans were induced to turn over their cars to a towing company in return for full payment of their bankruptcy attorneys’ fees.  The defendants then allegedly exploited Indiana’s mechanic’s lien law to strip the vehicles of the banks’ liens and conducted phony auctions, so that the lenders were deprived of their collateral.

Of course, an indictment is only a charge and is not evidence of guilt.  All defendants are presumed innocent until proven otherwise in federal court.  The allegations do point, however, to the importance of scrutinizing the behavior of those who might exploit bankruptcy debtors to the detriment of debtors and creditors alike.

Elder Abuse and Financial Fraud

Another area where we can identify bad actors in bankruptcy relates to elder abuse and financial fraud, which is an important area of focus for the Department and the USTP right now.  It is estimated that at least ten percent of older Americans are affected by such fraud and abuse each year.  The Department of Justice has established multi-jurisdictional task forces to address this growing area of concern.    

As with many other crimes, those who exploit the elderly use the bankruptcy system as part of their scheme.  Let me share with you two recent matters of suspected wrongdoing that were reported to the Program by chapter 7 trustees based on information gleaned from the meeting of creditors.  In one case, the chapter 7 trustee was advised by the daughter of the 80‑year old debtor that a family member had stolen her father’s Social Security and pension income, and had taken out loans and credit cards in her father’s name without his knowledge or permission.  When the scheme was uncovered, his daughter, serving as guardian ad litem, placed her father into bankruptcy in order to discharge the unauthorized debt.  In the second case, the trustee learned at the first meeting of creditors that the debtor had been a victim of an online-romance scheme following the death of her husband.  The perpetrator preyed on her emotions and convinced her to send him thousands of dollars over the course of several months, eventually contributing to her need to file for bankruptcy.  I commend the trustees in these two matters for their diligence and commitment to bringing these cases of elder abuse to light.   

Detection of such schemes are critical and we need your help.  We ask that you notify your local U.S. Trustee’s office whenever you suspect that a case may involve financial or other abuse, including physical abuse, of an elderly person. 

BANKRUPTCY CASES WITH MARIJUANA ASSETS

The final topic I would like to address with you is how to deal with bankruptcy cases with marijuana assets, including income.  We have spoken before about this subject.  Since my letter in April 2017 to all private trustees highlighting the need to refer cases involving marijuana assets to their U.S. Trustee, we have received scores of referrals.  That is not surprising given the cooperation we receive from trustees on so many issues.  It also is not surprising because state legalization of medicinal and even recreational marijuana has grown.  In 2012, Colorado was the first state to legalize recreational marijuana and, since then, nine other states and the District of Columbia have followed suit.  Similarly, medical marijuana legalization on the state level has accelerated.  Some form of marijuana is now legal in 31 states, the District of Columbia, Puerto Rico, and Guam.   

Our position is simple.  As long as the possession, use, and sale of marijuana is a federal crime, then the USTP will protect the bankruptcy system from facilitating such illegal behavior.  Federal courts may not be used to advance criminal enterprises.  We have prevailed in almost every consumer and business case we have brought involving marijuana.  Our actions have protected trustees from having to administer marijuana assets in violation of federal law, prevented proceeds from illegal marijuana activities from entering the bankruptcy system, and denied the privilege of bankruptcy reorganization to people and companies who seek to use the federal courts to perpetuate criminal activity.

There is an exception to our success.  We recently lost a marijuana bankruptcy case in the United States Court of Appeals for the Ninth Circuit.  In Garvin v. Cook Investments, Garvin v. Cook Invs. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019), the Ninth Circuit decided that the Bankruptcy Code allows approval of a chapter 11 reorganization plan for a marijuana business.

It is important to note that the Cook Investments decision does not pertain to the dismissal of chapter 7 cases.  Instead, the decision involved an interpretation of the chapter 11 confirmation requirement in section 1129(a)(3) that the plan be “proposed in good faith and not by any means forbidden by law.”  It is also important to note that the Cook Investments decision does not apply beyond the borders of the Ninth Circuit.  Furthermore, some lower courts outside the Ninth Circuit have cast doubt on the Cook Investments decision or narrowly construed it.  One court within the Ninth Circuit even limited the impact of the Cook Investments holding. 

The USTP will apply the Cook Investments decision within the Ninth Circuit as long as it remains controlling law.  Otherwise, the USTP’s position remains steady, and we will continue to oppose the administration of marijuana assets in the bankruptcy system in appropriate cases. 

It remains very important that chapter 7 and 13 trustees continue to refer cases involving marijuana assets to their U.S. Trustee for appropriate action.  That directive remains valid even within the Ninth Circuit.  Your continued cooperation is both essential and appreciated.

CONCLUSION

Thank you for listening.  I cannot tell you enough how much I admire and respect the work of chapter 7 trustees and your fidelity to the law.  You carry out your fiduciary duties with great skill and sensitivity to the debtors before you, who often appear under great emotional strain.  The USTP strives not only to carry out its statutory supervisory authority, but also to work as partners with a common goal to ensure that bankruptcy serves all stakeholders and bolsters the American economy for benefit of all of our fellow citizens. 

I wish you a successful Annual Conference.

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