LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 17, 1999, Wednesday

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1974 words

HEADLINE: TESTIMONY March 17, 1999 ROBERT H. WALDSCHMIDT PRESIDENT NATIONAL ASSOCIATION OF BANKRUPTCY TRUSTEES HOUSE JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW BANKRUPTCY REVISION

BODY:
TESTIMONY OF ROBERT H. WALDSCHMIDT President, National Association of Bankruptcy Trustees Subcommittee on Commercial and Administrative Law March 17, 1999 The National Association of Bankruptcy Trustees (NABT) represents the interests of over 1300 private trustees who administer cases filed under Chapter 7 of the Bankruptcy Code. By statute, a trustee is appointed in every Chapter 7 case, and they are responsible for administering the case. Over one million bankruptcy proceedings were administered by Chapter 7 trustees last year. The trustee's responsibilities include the reviewing of the petition and schedules, presiding over the meeting of creditors, examining the debtor, investigating assets, liquidating property, contesting the debtor's discharge (where appropriate), pursuing avoidance actions, and any other matter which facilitates the purposes of Chapter 7, as the law mandates. In 95 percent of all Chapter 7 cases, there are no assets to administer, and the trustee performs all these investigatory functions for a flat $60 fee. In asset cases, trustees are entitled to a statutory fee established under Sec. 326 of the bankruptcy code, based on a percentage of the value of assets administered. In recent years, trustees have distributed over one billion dollars annually to creditors. It is the Chapter 7 trustee who becomes the chief facilitator and the driving force that allows Chapter 7 cases to be administered. Trustees are not employees of the court, nor are they employees of any other governmental agency. The use of private trustees allows the system to be administered by individuals who can exercise their independent business judgment. The structure of the code encourages trustees to investigate the debtor's financial affairs and to administer assets for the benefit of creditors. The independence of Chapter 7 trustees and the incentives provided within the code to motivate trustees are the cornerstones to the effective operation of Chapter 7 cases. NABT has already drafted a "response" to the Conference Report, outlining fourteen areas for comments and concerns as the bill would affect Chapter 7 Trustees. That response is still relevant in H.R. 833 and is attached to this submission as Exhibit 1. (Exhibit is available on hard copy only). The goals of NABT have been focused on the effective application of reform measures. Thus, our goals may be summarized as follows: 1. The rules should be clear, such that trustees can administer Chapter 7 estates without ambiguity. 2. The reform legislation should not place an unfair or impossible burden on trustees. 3. The compensation for trustees should be adequate, particularly if new duties are imposed. 4. Trustees should not be exposed to personal liability or attack as a result of their good faith attempt to administer cases. However, the most debated issue in the bill is the "needs-based" approach to bankruptcy reform, which is contained in section 102. The comments of NABT at this hearing will be focused on the Mechanics of such a system in day-to-day practice. First, trustees agree that any approach to "needs-based" bankruptcy should revolve around a modification to Sec. 707(b) of Title 11. H.R. 833 starts with this concept, and then attempts to create objective standards for determining abuse. These "tests" have been a major source of controversy. Regardless of the intentions of any bill, the methods for implementation of any reforms are a serious concern to Chapter 7 trustees. Any amendments must provide for a vehicle through which the purposes of the bill can be satisfied. Otherwise, the statute will become dysfunctional, which would defeat one of the primary functions of this bill -- to improve the administration of bankruptcy cases. The mechanism for enforcement of this new "needs-based" bankruptcy system is the Chapter 7 panel trustee. The bill essentially "deputizes" trustees to ensure that debtors file under the appropriate chapter. However, the implementation of these new duties by trustees creates a new layer of issues which could prevent the changes from becoming effective and functional. Under the bill, trustees must (1) review the debtor's income and expenses prior to five days before the Sec. 341 hearing, (2) file a "certification" that the debtor is qualified to be a Chapter 7 debtor at least five days before the Sec. 341 hearing, and (3) file motions to dismiss under Sec. 707(b) where the debtor's disposable income would yield a $5,000 payment to a Chapter 13 trustee over a five-year plan. This is a great deal of work for trustees who only receive $60 in the typical Chapter 7 case. In addition, the plight of the trustee is multiplied when, even if he is successful, he cannot count on any compensation. The bill only allows fees in cases where the debtor's counsel has acted improperly, which is not an effective way to mitigate the time and efforts of the Chapter 7 trustee. Trustees are not employees of the government. They do not receive salaries but are dependent upon the results achieved in their cases in order to earn any meaningful compensation. Most trustees hire staff to help them with their caseload, but these assistants and paralegals must be paid directly by the trustee from fees generated in the cases. Therefore, multiplying the duties and functions of trustees will require additional staff and deplete more, if not all, of the fees generated by trustees. Furthermore, since they do not work under the umbrella of the government, they currently do not have any immunity from lawsuits by disgruntled debtors or creditors. If trustees are compelled to file motions to dismiss under Sec. 707(b), they face a real threat of being sued. First, if the trustee (due to the sheer volume of cases) misreads the income level of a debtor and certifies that the debtor may proceed under Chapter 7 (when in reality, they should convert to Chapter 13), then the trustee can expect that creditors will blame the trustee if a discharge is entered in the case, and the trustee will have no protection from these actions. Next, if the trustee files a Sec. 707(b) action and does not prevail, debtors may accuse the trustee of harassment and force the trustee to defend a frivolous suit. In either case, the trustee under the current proposal will have to perform these new duties under a real cloud of increased exposure to suit. Furthermore, the "test" established under the proposed Sec. 707(b) is not easy to apply, and if trustees have to make subjective estimates, the problem of enforcement increases. The use of IRS guidelines does not cover many of the factors and expenses which need to be considered in order to establish a debtor's disposable income. Thus, trustees will have to make substantive judgments concerning a debtor's lifestyle and expenses, in order to comply with their new duties. This quasi- judge-like function is not appropriate for trustees in the bankruptcy system. Private trustees are motivated to administer cases because they are rewarded when they obtain results through the administration of assets. The benefits to trustees are contingent upon the trustee's performance. Under the proposed bill, qualified trustees may elect to leave the panel. The risk of liability may become too great for practitioners, and the additional monetary burden may make trustee practice too costly. Furthermore, there is no motivation for trustees to be aggressive in pursuing Sec. 707(b) motions, since their compensation would not be altered regardless of the result. Thus, although trustees who remain on the panel would satisfy their statutory duties, the incentive for actively prosecuting Sec. 707(b) motions is lacking. If "needs-based" reform is going to be effective, the enforcement provisions need to be reconsidered. If the trustee's role becomes optional, and if the certification process is removed, or included as a form on the debtor's schedules, the risks to trustees would be minimized. However, if the panel trustee is supposed to become the driving force for the enforcement of these new provisions, NABT would suggest certain noncontroversial amendments: 1. The liability of trustees should be redefined. Under current law "a trustee in a case under this title has capacity to sue and be sued." There is no standard nor does the trustee have any immunity. Many courts have held that there are limitations on the trustee's exposure, but the decisions are inconsistent. Now, with a dramatic increase in the trustee's potential liability, there is an appropriate opportunity to clarify the trustee's capacity to be sued and to protect the trustee for acts taken in furtherance of the trustee's duties, or pursuant to court order. NABT would suggest amendments to Sec. 322 and Sec. 323 which are consistent with decisions from several courts of appeal. The inclusion of this language would eliminate one of the major impediments in section 102 of the bill. 2. Trustees need to be compensated for their efforts. The additional duties currently suggested by section 102 will greatly increase the time and expense incurred by the trustee in administering the typical Chapter 7 case. Since trustees are limited to a $60 fee in no-asset cases (and since 95 percent of all Chapter 7 cases are no-asset cases), the extra work will jeopardize the financial feasibility of remaining on the panel. The costs for additional staff, or the time diverted from other fee-producing work, render Chapter 7 trustee practice much less attractive. In cases where actions are commenced under Sec. 707(b), trustees should be awarded a reasonable fee if the case is converted to Chapter 13, and this fee should not be subject to the cap contained under Sec. 326 (this cap currently prohibits the award of a fee in a no-asset case). Then, since every case will require investigation and certification (even where no motions are filed), the trustee's fee in the basic no-asset case should be reconsidered. An increase in the no-asset fee would defray many of the costs of the increased duties and responsibilities. 3. The definition of "disposable income" needs further clarification. If trustees are compelled to review the income and expenses of debtors, then the "test" needs to be clear such that the trustee does not have to pass judgment on the reasonableness of the certain expenses. The lack of such clarity may cause trustees to file Sec. 707(b) motions where they should not be pursued or to certify a debtor as qualified when certain expenses may be exaggerated. Trustees do not have the judicial authority to make such subjective determinations concerning possible abuse. Furthermore, if trustees are required to certify the eligibility of debtors, the report should not have to be filed until five to seven days after the Sec. 341 hearing. Many trustees learn a great deal about the debtor at these hearings, and the examination allows the trustee to clarify any ambiguities within the debtor's schedules. A report filed after the Sec. 341 hearing would be more accurate than the trustee's blind "guess" (based solely on the debtor's schedules). H.R. 833 constitutes a major modification of the balance of rights between debtors and creditors. The bill seeks to establish a new standard for obtaining relief under the bankruptcy code. However, in the midst of the debate over the new approach to bankruptcy, it is important to ensure that the methods for implementing these new measures will accomplish the goals that Congress intends. The current draft contains several "gaps" in this regard, but this bill can be made efficient if the considerations mentioned herein are adopted. Thank you for inviting me to participate in these hearings, and NABT welcomes the opportunity to contribute further in this legislative process.

LOAD-DATE: March 19, 1999