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VS. TRUSTEE PROGRAM H.J 89/1:304/87 "* Tpust" '"Jrw. Sena n . 8? .^RING BEFORE THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW OP THE COMMITTEE ON THE JUDICIARY HOUSE OP REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS SECOND SESSION JULY 24, 1996 Serial No. 87 ''trtffi 'sag*. Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 35-307 CC WASHINGTON : 1996 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-053733-9 i\ TRUSTEE PROGRAM U.S. H.J 89/1: 104/87 •* Trustee Crojran, Serial No. 87.. \RING BEFORE THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS SECOND SESSION JULY 24, 1996 Serial No. 87 JA/ » 2 S 1997 ttjCtff* Printed for the U9e of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 35-307 CC WASHINGTON : 1996 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-053733-9 COMMITTEE ON THE JUDICIARY HENRYJ. HYDE, Illinois, Chairman CARLOS J. MOORHEAD, California JOHN CONYERS, JR., Michigan F. JAMES SENSENBRENNER, Jr., PATRICIA SCHROEDER, Colorado Wisconsin BARNEY FRANK, Massachusetts BILL McCOLLUM, Florida CHARLES E. SCHUMER, New York GEORGE W. GEKAS, Pennsylvania HOWARD L. BERMAN, California HOWARD COBLE, North Carolina RICK BOUCHER, Virginia LAMAR SMITH, Texas JOHN BRYANT, Texas STEVEN SCHIFF, New Mexico JACK REED, Rhode Island ELTON GALLEGLY, California JERROLD NADLER, New York CHARLES T. CANADY, Florida ROBERT C. SCOTT, Virginia BOB INGLIS, South Carolina MELVIN L. WATT, North Carolina BOB GOODLATTE, Virginia XAVIER BECERRA, California STEPHEN E. BUYER, Indiana ZOE LOFGREN, California MARTIN R. HOKE, Ohio SHEILAJACKSON LEE, Texas SONNY BONO, California MAXINE WATERS, California FRED HEINEMAN, North Carolina ED BRYANT, Tennessee STEVE CHABOT, Ohio MICHAEL PATRICK FLANAGAN, Illinois BOB BARR, Georgia Alan F. COFFEY, Jr., General Counsel/StaffDirector JULIAN EPSTEIN, Minority StaffDirector Subcommittee on Commercial and Administrative Law GEORGE W. GEKAS, Pennsylvania, Chairman HENRYJ. HYDE, Illinois JACK REED, Rhode Island BOB INGLIS, South Carolina JERROLD NADLER, New York STEVE CHABOT, Ohio ROBERT C. SCOTT, Virginia MICHAEL PATRICK FLANAGAN, Illinois ZOE LOFGREN, California BOB BARR, Georgia Raymond V. Smietanka, ChiefCounsel Charles E. Kern II, Counsel Roger T. Fleming, Counsel AGNIESZKA FRYSZMAN, Minority Counsel (ID CONTENTS HEARING DATE Page July24, 1996 1 OPENING STATEMENT Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Adminis- trative Law 1 WITNESSES Bodoh, Hon. William T., U.S. bankruptcy judge, on behalf of the American Bankruptcy Institute 92 FitzSimon, Jean K., on behalfofthe Business Bankruptcy Committee, Amer- ican BarAssociation 97 , Freedman, Jeffrey M., Esq., vice president, National Association ofConsumer BankruptcyAttorneys 45 Greenfield, HarryW., onbehalfofthe Commercial Law League ofAmerica .... 106 Hildebrand, Henry E., Ill, chapter 13 trustee, U.S. Bankruptcy Court the Middle District ofTennessee 20 Kennedy, Frank, professor, University of Michigan School of law, on behalf ofthe National Bankruptcy Conference 100 McDow, W. Clarkson Jr., U.S. Trustee forRegion4, Department ofJustice 11 Michel, M. Scott, U.S. Trustee forRegion 11, DepartmentofJustice 7 Morin, Lawrence P., president, AssociationofBankruptcyProfessionals 26 Patchan, Joseph, Director, Executive Office for U.S. Trustees, Department ofJustice 2 Ray, David, board member, National Association ofBankruptcyTrustees 49 LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING Bodoh, Hon. William T., U.S. bankruptcy judge, on behalf of the American Bankruptcy Institute: Prepared statement 94 FitzSimon, Jean K., on behalfofthe Business Bankruptcy Committee, Amer- ican BarAssociation: Prepared statement 98 Freedman, Jeffrey M., Esq., vice president, National Association ofConsumer BankruptcyAttorneys: Prepared statement 46 Greenfield, Harry W., on behalf of the Commercial Law League ofAmerica: Prepared statement 107 Hildebrand, Henry E., Ill, chapter 13 trustee, U.S. Bankruptcy Court the Middle DistrictofTennessee: Prepared statement 22 Kennedy, Frank, professor, University of Michigan School of law, on behalf ofthe National Bankruptcy Conference: Prepared statement 101 McDow, W. Clarkson Jr., U.S. Trustee for Region 4, Department of Justice: Prepared statement 13 Michel, M. Scott, U.S. Trustee forRegion 11, Department ofJustice: Prepared statement 10 Morin, Lawrence P., president, Association ofBankruptcy Professionals: Pre- paredstatement 28 Patchan, Joseph, Director, Executive Office for U.S. Trustees, Department ofJustice: Prepared statement 4 Ray, David, board member, National Association of Bankruptcy Trustees: Preparedstatement 52 (HI) IV Page APPENDIX DepartmentofJustice responses to subcommittee questions 119 TRUSTEE PROGRAM U.S. WEDNESDAY, JULY 24, 1996 House of Representatives, Subcommittee on Commercial and Administrative Law, Committee on the Judiciary, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2226, Rayburn House Office Building, Hon. George W. Gekas (chairman ofthe subcommittee) presiding. Present: Representatives George W. Gekas, Bob Inglis, and Jack Reed. Also present: Representative Bob Goodlatte. Staff present: Raymond V. Smietanka, chief counsel; Charles E. Kern II, counsel; Peter J. Levinson, counsel; Rebecca Ward, sec- retary, and Agnieszka Fryszman, minority counsel. OPENING STATEMENT OF CHAIRMAN GEKAS Mr. Gekas. The hour of 10 o'clock having arrived, this hearing ofthe Subcommittee on Commercial and Administrative Law ofthe House Committee on the Judiciary will come to order. We recognize the gentleman from Rhode Island, Mr. Reed, the ranking minority member, whose presence here, along with that of the Chair, constitutes a hearing quorum. We will proceed. Does the gentleman wish to make an opening statement? Mr. Reed. Yes, thank you, Mr. Chairman. I just want to welcome the witnesses and apologize in advance for having to leave early. Mr. Scott and I have a markup going on in another committee, and I know there are other members on our side who also have conflicts with other subcommittee assignments, but I want to assure the witnesses that we will review the transcript carefully. I'd also ask, Mr. Chairman, unanimous consent that any member who has questions, but is unable to be here because of a conflict, be allowed to submit them in writing to the panel. Mr. Gekas. Without objection, so ordered. Mr. Reed. Thank you, Mr. Chairman. Thank you. Mr. Gekas. Everyone knows that we have responsibility in this subcommittee for the bankruptcy system. More and more, almost every day, we see evidence that it is important to give the public the clearest possible view of a system that we hope equitably and efficiently discharges its duties. And how do we go about doing the things necessary to ensure the confidence ofthe public? Since 1978, the form, functions, and structure ofthe U.S. Trustee Program have been examined many times, (1) mostly by our predecessor subcommittee. Most recently, we have the 1993 GAO study, the National Academy of Public Administra- tion report, the American Bankruptcy Institute's symposium, and the forthcoming analysis by the National Bankruptcy Review Com- mission. We all hope that the record of this hearing, with as many witnesses as we have before us today, will add to the understand- ing of these reports and help clear up misunderstandings, if any there be. Now we notice that 10 ofour 11 witnesses have come from places outside Washington: Los Angeles, CA; Phoenix, AR, Ann Arbor, MI; Chicago, IL; and near Newcastle, PA, Youngstown and Cleveland, OH; also Nashville, TN; Buffalo, NY; Lynchburg, VA; and Colum- bia, SC. This is a national forum we're conducting here today, and we appreciate your adjusting your own schedules to appear before us. We'll begin with the first panel, which is made up of Joseph Patchan, Director, Executive Office for U.S. Trustees; M. Scott Michel, Regional U.S. Trustee, and Clarkson McDow, Regional U.S. Trustee. I thought I recognized the name Michel. Actually, Bob Michel is better known as the soloist accompanying my performances on the piano than he was as minority leader, and I want you to know that and remind him ofthat. Mr. Michel. He reminded me. [Laughter.] Mr. Gekas. Well, all right, thank you. Why don't we begin in the order that we announced the member- ship of the panel, with Mr. Patchan, the Director of the Executive Office for U.S. Trustees. You may proceed. STATEMENT OF JOSEPH PATCHAN, DIRECTOR, EXECUTIVE OFFICE FOR U.S. TRUSTEES, DEPARTMENT OF JUSTICE Mr. Patchan. Mr. Chairman, Mr. Reed, thank you for this opportunity to talk to you about the U.S. Trustee Program. My name is Jerry Patchan, and as you've mentioned, I am the Director of the Executive Office for U.S. Trustees. I have held that position since December 1994. I have been a bankruptcy lawyer for more than 40 years, served on the bankruptcy bench, and recently before I came to the U.S. Trustee Program, served as Deputy General Counsel for the Resolution Trust Corporation, where I had charge ofthe RTC's large bankruptcy docket, among other things. With me are Scott Michel and Clarkson McDow, both U.S. Trust- ees. Mr. Michel is headquartered in Chicago, and pending the swearing in of the new U.S. Trustee, he is also covering our Phila- delphia region. Mr. McDow is headquartered in Columbia, SC. They will provide their own perspective on the program based on their experience. The U.S. Trustee Program was established to be the watchdog over bankruptcy administration. The bankruptcy system today faces a dramatic increase in bankruptcy filings. Over the 12-month period ending March 31 this year, chapter 7 and chapter 13 filings have increased approximately 17 percent, and during that same period the decline that we've seen in recent past years of chapter 11 business filings seems to have leveled off and may, indeed, begin to rise. For the first time in our Nation's history, bankruptcy filings may well exceed 1 million cases within a 12-month period. The U.S. Trustee Program faces increased workload after several years ofausterity. The program's full-time, onboard personnel have been reduced by more than 15 percent over the past 3 years. Our budget remains virtually flat, as it has remained during the fiscal years 1994, 1995, 1996, and our 1996 appropriation is some half million dollars less than the program's 1995 appropriations. With our budget the way it is, the coming year will require that the U.S. Trustee Program balance the increase in workload using our de- pleted resources and traditional role as watchdog in the bankruptcy administration process. Since its establishment as a nationwide program in 1986, U.S. Trustees have acted in the public interest to promote the efficiency and to protect and preserve the integrity ofthe bankruptcy system. It was created to correct longstanding and systemic past abuses in the administration of bankruptcy cases. U.S. Trustees work to assure full and honest disclosure by all parties, prudent administration by trustees and vigilance by creditors. Charges of cronyism, insider dealings, bankruptcy rings, so com- monly heard in the past have disappeared from the vocabulary of bankruptcy reform, and, indeed, those words, those concepts, those situations are not even on the agenda of the current Bankruptcy Review Commission. We submit that the work ofthe U.S. Trustees has not only been successful, it is essential to the bankruptcy system's integrity and credibility. There is speculation that this current increase in bankruptcy filings we are now seeing is the result of too much consumer credit card debt, but there is no certainty as to the real cause of the filings. There may, in fact, be many causes. The odd contrast of an expanding economy, low unemployment, and rapidly-increasing bankruptcy filings raises the possibility that a number ofthese new bankruptcy case filers may be seeking relief that may be undeserved. The U.S. Trustee Program is the first line of defense for the bankruptcy system's integrity, and it will continue to be vigilant in detecting and rooting out fraud and abuse. The program's long-term contribution to the integrity of the bankruptcy process was recognized by the National Academy for Public Admin- istration in their report last year on the U.S. Trustee Program. Our funding, I understand, is today before the House. We pro- pose to seek to stabilize our resources as far as money and personnel, and to fill some ofthe financial holes we presently have in that funding. We have requested that chapter 11 quarterly fees be re- structured. This proposal we estimate would raise approximately some $13 million in chapter 11 quarterly fees that we feel are criti- cally needed to fund operations of the program. Indeed, the proposal itself is a restatement of the recommendation made by NAPA, National Academy of Public Administration, presented to rationalize the chapter 11 fee structure. If adopted, the new fee structure would finetune the quarterly fee charges by creating additional steps in the fee scale. It would increase fees in the largest cases, but leave unchanged the fees ofthe smallest cases. —— Congress created the U.S. Trustee Program as a self-funding operation. To remain a self-funded system, additional revenues are necessary to support its operation. We are aware of a proposal currently pending in the Senate that will permit trustees to seek a judicial determination of their fees and expenses. I would only say one comment about it. As you, Mr. Chairman, have heard Mr. Gekas. You may proceed. We'll give you an extra time here, but I should have said at the beginning that we try to restrict our witnesses to 5 minutes, so that we can expedite the hearings. Mr. Patchan. Thank you, Mr. Chairman. I just want to finish one thought. As you have stated earlier, the Bankruptcy Commission is at work. This amendment we consider not a technical amendment as it is proposed, but a serious, fundamental change in the foundation of the Bankruptcy Code. We suggest that the matter be first con- sidered by the Commission ana then the Congress review of the recommendations ofthe Commission in that regard. Thank you for your reception Mr. Gekas. Thank you. Your written statement will be accepted for the record, without objection. Mr. Patchan. Thank you. [The prepared statement ofMr. Patchan follows:] PreparedStatementofJoseph Patchan, Director, Executive Office forU.S. Trustees, DepartmentofJustice I thank you for this opportunity to make this submission to the Subcommittee. I amjoined by Clarkson McDow, United States Trustee for Region IV (South Caro- lina, Virginia, West Virginia, the District of Columbia, and Maryland), and Scott Michel, United States Trustee for Region XI (Northern Illinois and Wisconsin). Mr. Michel is also serving as Acting United States Trustee forRegion III (Pennsylvania, New Jersey, and Delaware). Mr. McDow and Mr. Michel are each submitting statements discussingtheirexperience as UnitedStatesTrustees The UnitedStatesTrustee Program and thebankruptcysystemtoday face agreat increase in bankruptcy filings. Over the 12 month period ending March 31, 1986, chapter 7 and chapter 13 filings have increased approximately 17 percent. We are also seeing signs that chapter 11 business filings may increase over the next year. For the first time in our nation's history bankruptcy filings will exceed one million cases. There is no consensus as to exactly why the numberofcases is increasing so dra- matically. The phenomenon seems at odds with the overall health ofthe economy inflation andunemployment are low, yetbankruptcies are up. The Program faces this increased workload after several years of austerity. The Program's on-board personnel have been reducedby 145 since September30, 1992 we now stand at 1050 on-board personnel. Ourbudget remainedvirtually flat in fiscal year 1994, 1995, and 1996. Our 1996 appropriation of $ 102,—272,000 is half a million dollars less than the—Program's 1995 appropriation and based on traditional budgetary calculations $4.7 million less than would be needed for the Pro- gramto performthe same work asin fiscalyear 1995. The comingyearwill require thatthe UnitedStatesTrustee Programbalance this increase in workload with its streamlined resources and its traditional role as "watchdog" ofthe bankruptcy system. Since its establishment as a nationwide program in 1986, the United States Trustee Program has acted in the public interest to promote the efficiency andto protect and preserve the integrityofthebankruptcy system. Created to correct long-standing and systemic past abuses in the administration ofbankruptcycases, the United States Trustee Program worksto assure full and honest disclosure by all parties, prudent administration by trustees, and vigi- lancebycreditors. The need for the Program springs from the nature of bankruptcy itself: unlike typical litigation, that involves few parties who directly protect their self-interest,