[Federal Register Volume 62, Number 191 (Thursday, October 2, 1997)]
[Rules and Regulations]
[Pages 51740-51751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26172]
[[Page 51739]]
_______________________________________________________________________
Part III
Department of Justice
_______________________________________________________________________
28 CFR Part 58
Procedures for Suspension and Removal of Panel Trustees and Standing
Trustees; Final Rule
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 /
Rules and Regulations
[[Page 51740]]
DEPARTMENT OF JUSTICE
28 CFR Part 58
RIN 1105-AA54
Procedures for Suspension and Removal of Panel Trustees and
Standing Trustees
AGENCY: Department of Justice.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The United States Trustee Program (``Program''), a component
of the Department of Justice, is formalizing procedures to govern the
suspension and termination of future case assignments to panel and
standing trustees. The final rule enables a trustee to obtain a
determination by the Director of the Executive Office for United States
Trustees whether a decision by a United States Trustee to suspend or
terminate future case assignments is supported by the record and is an
appropriate exercise of the United States Trustee's discretion. This
rule specifies the method by which United States Trustees shall
announce suspension and termination decisions. It also formalizes the
procedure by which a trustee obtains review by the Director, the manner
in which that review will be conducted, and the standard the Director
will employ in reaching a determination.
The Director's decision will constitute final agency action by the
Department of Justice. If the agency's final action is adverse, this
rule enables a trustee to obtain judicial review of it pursuant to the
Administrative Procedure Act. 5 U.S.C. 552, et seq.
EFFECTIVE DATE: This rule is effective November 3, 1997.
ADDRESSES: Office of the General Counsel, Executive Office for United
States Trustees, 901 E Street, NW., Room 740, Washington, D.C. 20530.
FOR FURTHER INFORMATION CONTACT:
Martha L. Davis, General Counsel, or P. Matthew Sutko, Attorney, (202)
307-1399. This is not a toll free number.
SUPPLEMENTARY INFORMATION: This final rule provides a method and a
review process for suspending and terminating future case assignments
to panel and standing trustees. A proposed rule on this subject was
published in the Federal Register on May 23, 1997 (62 FR 28391) (the
``proposed rule''). A summary of background information, public
comment, and agency response follows.
I. Background and Rulemaking History
A. The United States Trustee Program
Congress enacted the United States Trustee Program on a pilot basis
in the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549
(1978), as a component of the Department of Justice and charged it with
the responsibility of supervising the administration of bankruptcy
cases and trustees. The success of the pilot program led Congress to
expand the Program nationwide in 1986 as a permanent component within
the Department of Justice. Bankruptcy Judges, United States Trustees,
and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat.
3088 (1986).
The Program consists of the Executive Office for United States
Trustees, which is headed by the Director, and 21 United States
Trustees. The Director is a Justice Department official who acts under
authority delegated by the Attorney General. United States Trustees are
Justice Department officials appointed by, and who serve at the
pleasure of, the Attorney General. 28 U.S.C. 581(a) and (c). United
States Trustees supervise the administration of bankruptcy cases and
case trustees within specified geographic regions. 28 U.S.C. 581.
Congress created the Program to remedy two longstanding weaknesses
that had impaired the efficient and fair administration of bankruptcy
cases. The prior system's first weakness was its requirement that
bankruptcy courts engage in both judicial and administrative functions
in bankruptcy cases. Under the prior system, bankruptcy courts
litigated disputes among parties, including trustees. At the same time,
bankruptcy courts were responsible for appointing trustees to cases and
awarding their compensation.
For nearly a century it was widely acknowledged that a separation
of administrative and judicial functions was necessary to ensure the
integrity of the system, to preserve its effective and fair
administration, and to protect the innocent debtors and creditors for
whose benefit the system exists. See, e.g., William J. Donovan, House
Committee on the Judiciary, Administration of Bankrupt Estates, 71st
Cong. 3d Sess. (Comm. Print 1931) (recommending--based upon an
examination of 4,000 witnesses and interviews with 19 federal judges,
102 bankruptcy referees and 200 current or former trustees--that
Congress rectify the inadequate and corrupt administration of
bankruptcy cases by creating a Federal Bankruptcy Commissioner);
Solicitor General Thomas Thacher, Report to the President on the
Bankruptcy Act and its Administration in the Courts of the United
States, Dated December 5, 1931, reprinted in S. Doc. No. 65, 72nd Cong.
1st Sess. (1932) (recommending legislation that would remedy cronyism
and the lack of administrative oversight in bankruptcy cases by
authorizing career civil servant bankruptcy administrators to oversee
the administration of bankruptcy cases); Report of the Commission of
the Bankruptcy Laws of the United States, H.R. Doc. No. 137, 93d Cong.
1st Sess. (1973) (recommending legislation to improve bankruptcy
administration and reduce cronyism by transferring administrative
functions to an administrative body staffed by civil servants).
The prior system's commingling of trustee supervision and the
adjudication of disputes between trustees and third parties in
bankruptcy courts resulted in a widespread perception that an unduly
close relationship existed between bankruptcy judges and trustees, and
this fostered cornyism and insider influence and abuse. See H.R. Rep.
No. 595, 95th Cong. 2d Sess. 92 (1977). The House of Representative's
Report on the proposed Bankruptcy Code concluded that ``[a]s
administrator of bankruptcy cases, and the individual responsible for
the supervision of the trustee or debtor in possession, it is an easy
matter for a bankruptcy judge to feel personally responsible for the
success or failure of a case * * * The institutional bias thus
generated magnifies the likelihood of unfair decisions in the
bankruptcy court * * *.'' H.R. Rep. No. 595, 95th Cong., at 91, 1st
Sess. (1977), reprinted in 1978 U.S.C.C.A.N. 5963.
The Bankruptcy Code fixed this problem by transferring
administrative functions, including the appointment and supervision of
trustees, to the United States Trustee Program within the Department of
Justice. The Program now appoints and supervises trustees, and, if
appropriate, suspends or terminates future case assignments to them.
The second reason Congress created the Program was the recognition
that the wide-ranging administrative aspects of the system should be
committed to one accountable agency. Congress charged the Program and
the Department with the task of supervising the administrative aspects
of the system in order to protect debtors and creditors by providing a
more accountable and consistent focus, and by supplanting the disparate
procedures emanating from separate judicial districts. As one court has
noted, in creating the United States Trustee Program, ``Congress
specified
[[Page 51741]]
that the U.S. Trustees were to be independent of direct court
supervision, as `executives of the bankruptcy network.' '' United
States Trustee v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d
498, 500 (6th Cir. 1990) (quoting in part H.R. Rep. No. 595, 95th Cong.
88-89).
B. The Program's Supervision of Trustees
Among the most important administrative functions assumed by the
Program are the appointment and supervision of trustees who administer
cases under chapters 7, 12, and 13 of the Bankruptcy Code. 28 U.S.C.
509, 510 and 586. The United States Trustee Program has enacted
standards that set minimum qualifications for appointment. 28 CFR 58.3
and 58.4.
Trustees are fiduciaries with wide-ranging responsibilities to
effectuate the goals of the particular chapter under which a bankruptcy
case is filed. Because they are fiduciaries, trustees are held to very
high standards of honesty and loyalty. See generally Woods v. City
National Bank & Trust Co., 312 U.S. 262, 278 (1941); Mosser v. Darrow,
341 U.S. 267 (1951). See also Meinhard v. Salmon, 249 N.Y. 458, 464,
164 N.E. 545, 546 (1928) (Cardozo, C.J.).
Trustees are held to high standards not only because of their
fiduciary duties to debtors and creditors but because they take charge
of debtors' property and they hold large amounts of other people's
money. In 1996, chapters 7, 12, and 13 trustees held combined receipts
of well over three and a half billion dollars:
1996 Receipts Held by Trustees by Chapter
------------------------------------------------------------------------
Chapter 7 trustees Chapter 12 trustees Chapter 13 trustees
------------------------------------------------------------------------
$1,479,531,213......... $52,372,261 $2,147,407,093
------------------------------------------------------------------------
Trustees exist not for their own benefit but to collect, protect,
account for, and distribute these revenues to creditors in accordance
with the payment provisions set forth in the Bankruptcy Code. Trustees
often oversee many cases; some chapter 13 trustees, for example,
administer many thousands of cases. Given the large amounts of money
they control and the many duties they perform, dishonest trustees and
trustees who do not manage their estates properly diminish the
integrity of the bankruptcy system and jeopardize the assets of the
honest debtors and creditors whose property they hold. For this reason,
it is crucial that trustees be monitored; if necessary, those who
cannot fulfill their duties must stop receiving new cases.
C. Assignment of Cases to Trustees
Chapters 7, 12, and 13 trustees receive cases through a two step
process. The first step entails appointment of a trustee to the pool of
individuals eligible to receive future cases. The second step involves
assigning specific cases to individuals from those pools.
The first step in receiving chapter 7 cases is to be selected as a
member of the panel of chapter 7 trustees for a specific geographic
area. 28 U.S.C. 586(a)(1). A panel is the group of persons within a
specific geographic region who are eligible to receive cases.
A United States Trustee selects the persons who serve on the
chapter 7 panels in each region. When a person becomes a panel member,
the person is eligible for appointment as an interim trustee in chapter
7 cases. 11 U.S.C. 701(a)(1).
Chapters 12 and 13 standing trustees are appointed by United States
Trustees, with the approval of the Attorney General, to act as trustees
within a specific geographic area. In some districts only one chapter
12 or 13 standing trustee is appointed to receive future cases. Other
districts have multiple standing trustees. Once appointed to be a
standing trustee for a specific district by a United States Trustee,
that trustee will then receive specific cases within that judicial
district.
Chapter 7 trustees are appointed to a chapter 7 panel for a
renewable one year term. Chapters 12 and 13 standing trustees currently
serve no fixed term; they generally remain eligible to receive future
cases until that eligibility is terminated. The appointment documents
signed by every trustee, whether a chapter 7 panel trustee, or a
chapter 12 or a chapter 13 standing trustee, specifically provides that
the trustee's appointment may be terminated at any time.
Chapter 7 panel trustees, and a chapters 12 and 13 standing
trustees, effectively function as economic monopolists, must like
public utilities. Debtors cannot select who will act as their trustee.
They must accept the trustee who is appointed for them. With one
exception, chapters 7, 12, and 13 trustees do not have to compete in
the marketplace for cases as they arise. This single exception applies
to chapter 7 cases where creditors may elect a chapter 7 trustee to
replace the interim chapter 7 trustee initially appointed by the United
State Trustee. 11 U.S.C. 701. Such elections are exceedingly rare: the
Administrative Office of U.S. Courts reports that 3,944,893 chapter 7
cases were filed from January 1, 1991 through December 31, 1996 while
Program reports show only 251 elections in chapter 7 cases between
January 1, 1991 and February 3, 1997.
Rather than requiring trustees to compete for the assignment of
specific cases based upon competence or price, Congress created the
Program to appoint trustees and to regulate and assure their
competence. United States Trustees act to protect debtors and creditors
through careful and thorough trustee selection and supervision. Under
existing law, trustees have no right or entitlement to receive future
cases. 28 U.S.C. 586. See Joelson v. United States, 86 F.3d 1413 (6th
Cir. 1996) (holding that trustees have no statutory or constitutionally
protected interest in their positions as trustees); Richman v. Straley,
48 F.3d 1139, 1143 (10th Cir. 1995) (trustees have no constitutional
right to continue acting as trustees); Shaltry v. United States, 182
B.R. 836, 842 (D. Ariz.) (same), aff'd, 1995 WL 866862 (9th Cir. 1995).
This enables United States Trustees to stop assigning cases to current
trustees if there are others who could do a better job protecting
debtors and creditors or who could represent their interests as a lower
cost. It also enables United States Trustees to stop assigning cases to
trustees whose performance is weak or who engage in improper conduct.
The Program has carefully developed its structure and procedures
for supervising trustees. Ensuring that trustees are competent is a
time consuming process. It requires United States Trustees to observe
all facets of a trustee's operation, often over a long period of time.
It requires United States Trustees to have audits or similar reviews
performed to analyze trustees' operations. Often, United States
Trustees take months or even years to evaluate all information, to
alert a trustee to problems, to attempt to assist a trustee in
rectifying those problems, and to determine whether a trustee has
[[Page 51742]]
performed, or will be able to perform, his or her functions
effectively.
The Program's structure enables it to carry out these functions
more effectively than isolated bankruptcy courts were able to carry
them our under the old system. Bankruptcy courts lacked the resources
and the institutional structure to perform those tasks. For this
reason, Congress charged United States Trustees with the administrative
responsibilities of appointing and supervising panel and standing
trustees. Although current law gives trustees no right or expectation
to future cases, neither does it give any third party, no matter how
better qualified or more cost effective than the trustee, any statutory
or constitutional right to demand that future cases be assigned to that
individual.
D. Suspension and Termination of Trustees
It is the Program's responsibility to protect debtors and creditors
by ensuring that trustees are the appropriate individuals to continue
receiving future cases. The Program is also responsible for ensuring
that the system is operating smoothly and that cases are being
administered efficiently. To fulfill these responsibilities, the
Program closely monitors trustees' performance by regularly reviewing
their administration of cases. Indeed, Program employees work with
trustees almost on a daily basis.
As part of their supervisory responsibilities, United States
Trustees must ensure that the Program does not devote inordinate
amounts of its resources to supervising a limited number of chronically
under-performing trustees. The Bankruptcy Code places many
responsibilities upon the Program beyond simply supervising trustees.
Trustees who are deficient in basic case administration, or who have to
be coaxed, reminded, or prodded into fulfilling their responsibilities,
force the Program to divert its limited resources from its other
statutory tasks. Although problem trustees may tax the patience of the
other participants in the bankruptcy system only occasionally, and
those participants may not be fully aware of the shortcomings in those
trustees' performance, deficient trustees need constant supervision,
which drains the Program's limited resources. Consequently, the
efficient administration of the bankruptcy system requires that United
States Trustees cease assigning cases to them.
When appropriate, including when a trustee engages in improper
conduct or fails to perform adequately, the Program will stop assigning
future cases to trustees. Sometimes, a suspension is an appropriate
regulatory tool that is used to give a trustee an opportunity to
improve performance; in other circumstances termination is appropriate.
The Program also may stop assigning future cases to trustees when the
caseload in a judicial district declines, resulting in too many
trustees for too little work. The Program also may stop assigning
future cases when it determines that more competent, better qualified
candidates may be available.
E. Effect of Suspension or Termination on Current Caseload
A decision to terminate or suspend a trustee's appointment to
future cases has no legal impact upon a trustee's ability to continue
administering cases that were previously assigned to the trustee.
Current law allows trustees to continue administering cases to which
they have been appointed unless the court issues an order removing the
trustee in one or more specific cases pending under title 11 of the
U.S. Code. 11 U.S.C. 324. Thus, suspensions and terminations are
prospective only, and do not affect existing cases that have been
assigned to panel and standing trustees.
F. Procedures for Determining Suspensions and Terminations
The Program has always had informal procedures through which an
affected trustee could ask the Director of the Executive Office for
United States Trustees to review a termination or suspension. The final
rule formalizes these procedures. The final rule benefits the Program
by allowing it to ensure that its final decision not to assign cases in
the future will be based upon a deliberate consideration of all
relevant factors at the highest level within the Program. It also has
the effect of benefiting trustees by ensuring that a United States
Trustee does not suspend or terminate trustees inappropriately or
without support in the record.
Panel and standing trustees asked the Program to adopt more formal
procedures regarding such decisions. In response to those requests, the
Program began in July of 1996 to devise comprehensive written
procedures. Prior to issuing its proposed rule, the Program solicited
comments from trustees and others regarding what form those procedures
should take The result of this lengthy process culminated in the
publication of a proposed rule in the Federal Register for notice and
comment. See 62 FR 28391 (May 23, 1997).
II. Purpose of the Final Rule
Through this rulemaking, the Program is devising a procedure by
which it will reach a final determination whether a trustee should
receive cases in the future. This rule does not affect a United States
Trustee's decision to continue assigning future cases to existing panel
and standing trustees. The rule applies when a United States Trustee
concludes cases should not be assigned to a trustee. In such a case,
the United States Trustee must notify the trustee why the decision has
been reached. If a United States Trustee stops assigning cases to a
trustee and the trustee chooses not to dispute the propriety of that
decision, the decision becomes final and is not subject to review. If
the trustee disputes the action, the final rule provides a process for
review.
The rule sets forth fourteen non-exclusive examples of conduct or
circumstances which may constitute reasons why a United States Trustee
might reach such a decision. Those reasons fall into three general
categories. The first relates to dishonesty or lack of competence. The
second relates to circumstances in which the trustee's performance may
meet minimal levels of competence but other more qualified persons may
be available to better serve debtors and creditors. The third involves
external factors that can reduce the demand for trustees in a specific
geographic area, such as when the area's volume of cases declines.
The Program relied upon a number of sources in devising these
categories, the foremost of which is its considerable experience in
supervising trustees. The Program also considered procedures adopted by
the Judicial Branch for supervising trustees in North Carolina and
Alabama. Under section 302(d)(3)(I)(i) of the Bankruptcy Judges, United
States Trustees, and Family Farmer Bankruptcy Act of 1986, Bankruptcy
Administrators, who are Judicial Branch officials, supervise trustees
in those two states until 2002, at which time those supervisory
responsibilities shall transfer to the Program. In reaching their
decisions, Bankruptcy Administrators may consider 16 factors that are,
in large measure, identical to many of the factors set forth in the
final rule.
The Administrative Office procedure differs from this rule in at
least one significant respect. The judicial procedure allows the
trustee to seek reconsideration only from the Bankruptcy Administrator
who made the initial decision, but it does not provide for any further
review. In contrast, this rule provides that review
[[Page 51743]]
of a United States Trustee's decision shall be conducted by the
Director and a trustee may obtain judicial review of the Director's
final decision under the Administrative Procedure Act.
If a trustee disagrees with a United States Trustee's decision not
to assign cases to the trustee in the future, the trustee must notify
the Director within 20 days of the trustee's decision to seek review of
the United States Trustee's conclusions. If review under the rule is
triggered, the rule entitles the trustee and the United States Trustee
to explain to the Director their position on the propriety of a
cessation of future case assignments. Both may provide the Director
with any material they believe supports their conclusion.
Under the rule, the Director will review those submissions to
determine whether a decision not to assign cases in the future is an
appropriate exercise of a United States Trustee's discretion and
whether that decision is supported by the record before the Director.
Neither party bears the burden of proof in such a proceeding. After
reviewing the material, the Director will reach a decision, which shall
constitute final agency action. The agency's administrative record will
consist of the materials provided by the trustee and the United States
Trustee and the Director's decision.
Before this rule became effective, such a decision would have been
final and unreviewable because 28 U.S.C. 586 commits such termination
decisions to the Program's discretion and does not create a standard
that a court can use to review the reasonableness of the Program's
administrative decision. Joelson v. United States, 86 F.3d 1413 (6th
Cir. 1996).
This rule creates a standard that courts can review pursuant to the
Administrative Procedure Act by providing that the Director shall
determine whether a challenged decision not to assign future cases
constitutes an appropriate exercise of the United States Trustee's
discretion and is supported by the record. See, e.g., Clifford v. Pena,
77 F.3d 1414, 1417 (D.C. Cir. 1996) (providing that an agency can
facilitate judicial review by creating a standard in a rule); Block v.
Securities and Exchange Commission, 50 F.3d 1078, 1084-85 (D.C. Cir.
1995) (same).
In preparing this rule, the Program has been mindful that trustees
hold billions of dollars of other people's money, yet the interests
they represent have little or no say in their hiring or their firing.
The Program also has been mindful of Congress' charge that the Program,
as the primary regulator of trustees, ensure that future cases be
assigned only to trustees who are honest and capable. The Program also
has been mindful of the need to balance the number of cases and the
number of trustees. Finally, the Program has concluded that the best
interests of the bankruptcy system are fostered by an open process
which encourages competent, qualified individuals to apply to serve as
trustees. As the United States courts of appeals have recognized, case
assignment is not a government entitlement program created so the first
person appointed to act as a trustee will always get future cases.
Instead, trustees are service providers to debtors and creditors,
selected by the Program for the benefit of those debtors and creditors.
This rule allows the Program to ensure that appropriate decisions
are made about whether to stop assigning cases to a trustee. It gives
affected trustees meaningful input in that process and allows for
judicial review of the Program's final decision. This comprehensive
process will maximize rational decision-making by the Program, promote
a fair and efficient system of case administration, and protect the
intended beneficiaries of the bankruptcy process, the debtors and
creditors for whom the bankruptcy laws were created.
III. Summary of Major Changes in Final Rule
The final rule makes a number of changes based upon the comments
submitted to the Program. Three changes are major.
First, subsection (c) of the final rule provides that suspensions
and terminations will not become effective, and trustees will continue
to receive cases, until a trustee's time to seek administrative review
from the Director has expired or, if such review is sought, until the
Director issues a final written decision; the proposed rule had
suggested making suspensions and terminations effective upon the date
specified in the notice of suspension or termination, which could have
been a date earlier than the completion of the review process. In order
to protect innocent debtors and creditors, however, the final rule
provides that upon issuing a notice of suspension or termination a
United States Trustee may issue an interim directive immediately
suspending case assignments during the review process if the United
States Trustee determines that a trustee is placing estate assets at
risk, has lost his eligibility status, or has engaged in fraudulent,
illegal or other gross misconduct. The final rule enables a trustee to
obtain a stay of an interim directive from the Director.
Second, the rule allows a trustee to ask that specific documents in
the United States Trustee's possession be included in the record. This
will enable trustees to rely upon documents they believe are relevant
but which are under the United States Trustee's control.
Third, the final rule cuts the time necessary to complete the
review process roughly in half. If must now be completed no more than
45 days from the date on which a trustee requests administrative
review. This has been accomplished by (a) reducing the time for, and
the scope of, the United States Trustee's response to the trustee's
request for review, (b) deleting the trustee's reply brief, and (c)
making optional the use of a reviewing official, who was to have been a
Program employee who had 30 days in every case to prepare and submit a
report to the Director before the Director could issue a final decision
on a trustee's request for review. In order to permit resolution of
more complex disputes, the 45 day deadline may be extended by the
Director, but only if all parties, including the trustee, agree.
In addition, the commentary to the final rule clarifies that the
Director, or his designee, may conduct a face to face meeting with the
trustee and the United States Trustee if the Director determines that
there is a genuine dispute over facts material to the Director's
determination. The level of formality and complexity of a meeting in a
particular case will turn upon the nature of the factual dispute
presented.
IV. Discussion of Public Comments
A. Overview
The Program received 12 comments on the proposed rule. Three
comments were written by lobbyists or associations that represent the
interests of trustees. Eight trustees submitted comments. One member of
Congress wrote to express ``strong support for th[e] proposed rule.''
Although one comment was submitted late, the late submission
reflects ideas raised in timely comments. The Program has considered
each comment carefully and appreciates the time taken to provide them.
The Program's responses to the comments are discussed below.
B. Specific Comments
1. Some comments questioned the power of United States Trustees to
suspend or terminate the assignment of future cases to trustees.
Section 586(a)(1) of title 28 allows the Program to ``establish,
maintain, and supervise a
[[Page 51744]]
panel of private trustees that are eligible and available to serve as
trustees in cases under chapter 7'', and section 586(b) allows it to
``appoint one or individuals to serve as standing trustee'' in cases
filed under chapter 12 and chapter 13 of the Bankruptcy Code. Section
586 commits appointment decisions to the discretion of the Program and
section 701(a)(2) of the Administrative Procedure Act shields these
termination decisions from judicial review under the APA. Joelson v.
United States, 86 F.3d 1413, 1415-18 (6th Cir. 1996) (termination of a
chapter 7 trustee's eligibility to receive cases is not subject to
judicial review under the APA). See also Richman v. Straley, 48 F.3d
1139, 1143 (10th Cir. 1995) (removal of chapter 12 and 13 trustees from
eligibility to receive future cases is committed to the discretion of
the United States Trustee and is not subject to review under the Due
Process clause). As one court has declared, ``Sec. 586 `fairly exudes
deference to the [United States Trustee], and appears to [the court] to
foreclose the application of any meaningful judicial standard of
review.' '' Shaltry v. United States, 182 B.R. 836, 842 (D. Ariz.)
(quoting in part Webster v. Doe 486 U.S. 592, 600 (1988)), aff'd, 1995
WL 866862 (9th Cir, 1995). Cf. North Dakota ex rel. Bd of Univ. and
School Lands v. Yeutter, 914 F.2d 1031, 1035 (8th Cir. 1990), cert.
denied, 500 U.S. 952 (1991) (statute authorizing an agency to waive
eligibility requirement for participation in a soil conservation
program committed to agency discretion); Scalise v. Thornburgh, 891
F.2d 640, 648-49 (7th Cir. 1989), cert. denied, 494 U.S. 1083(1990)
(statute authorizing Attorney General ``to make regulations for the
proper implementation of * * * treaties'' not subject to review); First
Family Mortgage Corp. of Florida v. Earnest, 851 F.2d 843, 845 (6th
Cir. 1988) (statute authorizing VA Administrator to make refunds at his
option provided no standards for review); Schneider v. Richardson, 441
F.2d 1320, 1321 & n.2 (6th Cir.), cert. denied, 404 U.S. 872 (1971)
(statute authorizing an agency to prescribe maximum fees by regulation
committed to agency discretion).
In Carlucci v. Doe, 488 U.S. 93, 99 (1988), the Supreme Court held
that a statute granting a public official the power to appoint an
individual also confers the power to terminate that individual unless
the statute expressly provides otherwise. The Court held that ``as a
matter of statutory interpretation [] absent a `specific provision to
the contrary, the power of removal from office is incident to the power
of appointment.' '' Carlucci v. Doe, 488 U.S. at 99 (Secretary of
Defense had power to terminate employee under provision of National
Security Agency Act of 1959 that mentioned only appointment) (quoting
in part Keim v. United States, 177 U.S. 290, 293 (1900)). Accord
Joelson v. United States, 86 F.3d at 1422 (holding that the Program's
power to appoint chapter 7 trustees to rotating panels gives it the
power to remove them from panels); Richman v. United States, 48 F.3d at
1144 (relying upon Carlucci to hold that the power to appoint chapter
12 and 13 standing trustees includes the power to stop appointing them
to future cases). Given the power to appoint trustees to future cases
exists under section 586, that power carriers with it the power to
cease assigning future cases to trustees because no provision in title
28 expressly precludes such action.
2. A number of comments suggested that the rule violates trustees'
due process rights. This is incorrect. Trustees have no right to be
appointed to future cases. Neither section 586 nor any provision of the
Bankruptcy Code creates a government entitlement program that
guarantees trustees any right to future cases.
The United States courts of appeals have consistently reached this
conclusion. See Joelson v. United States, 86 F.3d at 1415-18 (no right
or expectation to future cases); Richman v. Straley, 48 F.3d at 1143
(removal of chapter 12 and 13 trustees from eligibility to receive
future cases is committed to the discretion of the United States
Trustee and is not subject to review under the Due Process clause);
Shaltry v. United States, 182 B.R. at 842 (D. Ariz.) (same), aff'd,
1995 WL 866862 (9th Cir. 1995).
3. A number of comments suggested that the proposed rule created a
review process that took too long to complete. The Program recognizes
that prompt final agency action benefits creditors, debtors, and
trustees. Therefore, the final rule has been significantly streamlined
to mandate that review shall be completed within 45 days of receipt by
the Director of a trustee's request for review. The rule achieves this
reduction by (a) reducing the time for, and the scope of, the United
States Trustee's response to the trustee's request for review, (b)
deleting the trustee's reply, and (c) making optional the use of a
reviewing official, who was to have been a Program employee who had 30
days in every case to prepare and submit a report to the Director
before the Director could issue a final decision on a trustee's request
for review.
Under the final rule, a United States Trustee must provide an
affected trustee with a statement of the reasons for a suspension or
termination and supporting materials in a notice of suspension or
termination that is to be sent to the trustee by overnight courier. The
trustee then has 20 days to file a request for review. That request for
review describes why the trustee disagrees with the United States
Trustee's decision, and is accompanied by the documents and materials
the trustee wishes the Director to consider.
Under the proposed rule, the United States Trustee then had 20
calendar days to respond to the trustee's position and the United
States Trustee was free to provide the Director with all material the
United States Trustee wished the Director to consider. Because the
United States Trustee could submit material that might address matters
not initially raised in the notice of suspension or termination, or in
the trustee's request for review, the trustee was given 10 days to
provide a response.
The final rule reduces the United States Trustee's time to respond
to a trustee's request for review to 15 days. Under the final rule, the
United States Trustee may now respond only to matters raised in the
trustee's request for review. Unlike the proposed rule, the final rule
makes clear that the United States Trustee cannot raise new matters,
the 10 day reply period for the trustee has been deleted as
unnecessary. These changes reduce the time to reach a final decision by
at least 15 days.
At least 20 additional days have been saved by giving the Director
the option whether to use a reviewing official in a particular case.
Under the proposed rule, the reviewing official was to have been a
Program employee who would have acted as the Director's point of
contact with the trustee and the United States Trustee and who would
have prepared a report that the Director would use in deciding the
request for review. The reviewing official had 30 days to prepare the
report under the proposed rule. In addition, a number of days would
have been expended in selecting a reviewing official and having the
reviewing official transmit the trustee's materials to the United
States Trustee. The Director then had an additional 20 days to reach a
final decision.
The final rule gives the Director the option of using a reviewing
official on a case by case basis. This allows the Director to reach his
final decision more promptly without having to wait for a report from a
reviewing official in every case.
[[Page 51745]]
Because he will no longer have a report before beginning his
determination in every case, the Director's time to reach a final
decision has been increased from 20 to 30 days. This produces a net
savings of 20 days over the proposed rule because the reviewing
official and the Director had a combination period of 50 days to
conduct a review, and the final rule gives the Director only 30.
In addition, the final rule eliminates the delay that arose under
the proposed rule while a reviewing official was selected and the delay
that resulted from the reviewing official having to transmit materials.
These changes respond to comments expressing concerns about those time
delays.
The final rule also shortens the review process by deleting the
ability of a reviewing official to grant extensions. Under the proposed
rule, the reviewing official had discretion to extend the United States
Trustee's or the trustee's time for response to a date certain.
Comments expressed concern this provision could significantly lengthen
the review process. The Program revised the final rule to respond to
those concerns. The final rule provides that the Director will issue a
final decision no later than 45 days from receipt of a trustee's
request for review. The rule does, however, allow the trustee and the
United States Trustee to jointly agree that the time for final agency
action should be extended. Time might be extended, for example, to
enable the Director to conduct a face to face meeting.
4. Comments suggested the proposed rule did not require notice
before adverse action is taken and did not provide adequate interim
relief during the review process. The final rule addresses these
concerns. Subsection (c) of the final rule provides that suspensions
and terminations will not become effective, and trustees will continue
to receive cases, until a trustee's time to seek administrative review
from the Director has expired or, if such review is sought, until the
Director issues a final written decision; the proposed rule had
suggested making suspensions and terminations effective upon the date
specified in the notice of suspension or termination, which could have
been a date earlier than the completion of the review process. In order
to protect the integrity of the system and thereby the debtors and
creditors it serves, the final rule provides that a United States
Trustee may issue an interim directive suspending case assignments
during the review process if the United States Trustee determines that
a trustee is placing estate assets at risk, ineligible to serve as a
trustee, or has engaged in fraudulent, illegal or other gross
misconduct. A trustee may seek a stay of an interim directive from the
Director upon filing a timely request for review.
5. One comment questioned whether a trustee must institute the
review process to obtain a stay of a suspension or termination. Under
the final rule, a termination or suspension will not take effect until
the time to seek review has expired. If a trustee does not seek review,
the suspension or termination decision will become final and
unappealable and not subject to further agency action or judicial
review. It a trustee does seek review, a suspension or termination will
not take effect until the Director issues a final decision. Upon
issuing a notice of suspension or termination, a United States Trustee
may issue an interim directive ceasing the assignment of cases to the
trustee during the review process if the United States Trustee
specifically finds that one of the criteria in section (d) (1) through
(4) of the rule are met. The trustee may seek a stay of an interim
directive but needs to submit a timely request for administrative
review to do so. The final rule authorizes the Director to stay an
interim directive.
6. One comment suggested that the rule does not provide for the
creation of an official record for judicial review. This is incorrect.
The United States Trustee's notice of termination, the trustee's
request for review, the United States Trustee's response, the
Director's final determination, and the documents and materials
provided by the participants with those submissions constitute the
agency record for purposes of subsequent judicial review.
7. Comments suggested the rule places an improper burden of proof
upon the trustee. This is incorrect. Although the trustee must
affirmatively seek review, the rule requires the Director to determine
whether a decision not to assign cases in the future is an appropriate
exercise of a United States Trustee's discretion and whether that
decision is supported by the record before the Director. Neither party
bears the burden of proof in convincing the Director whether the
applicable standard is met. To the extent a burden fell upon any party,
it would fall upon the United States Trustee whose decision must
constitute an appropriate exercise of discretion and must be supported
to the record.
8. Comments suggested the rule suffers from the absence of review
by a neutral party, an on the record hearing, mandatory discovery, or
the requirements of sworn testimony. The Program does not view this as
a weakness. Indeed, such procedures would significantly lengthen the
time it would take to determine a request for review. The final rule
allows the parties to provide whatever material they think is
appropriate.
Section (h) of the rule authorizes the Director to request
additional information, which could include a face to face meeting.
This allows the Director, or his designee, to conduct a face to face
meeting with the trustee and the United States Trustee if the Director
determines that there is a genuine dispute over facts material to the
Director's determination. The level of formality and complexity of a
meeting in a particular case will turn upon the nature of the factual
dispute presented. In some cases a meeting could involve a trustee
appearing with a representative, submitting documentary evidence,
presenting witnesses, and confronting any witnesses the agency
presents. See generally 28 CFR 67.313 (authorizing a similar meeting in
the debarment context but only if the government first determines a
dispute of material fact exists). In the Program's experience, the
facts underlying termination or suspension decisions are rarely in
dispute. Instead, most requests for review involve a disagreement
whether the facts support such action. In those cases, as in the
debarment context, a meeting likely would not take place. The Program
thus believes that final rule strikes an appropriate balance between
the need for an effective and an efficient review process.
The final rule enables the Program to reach a final decision
whether to suspend or terminate the assignment of future cases promptly
so a trustee can test that decision, if appropriate, in subsequent
judicial review under the Administration Procedure Act. This process
makes possible ultimate review by a United Stats district court, a
United States court of appeals, and potentially by the United States
Supreme Court. Each is a neutral party.
The final rule merely creates a mechanism by which the agency can
determine the appropriateness of its decision before that decision can
be tested through subsequent judicial review if the trustee wishes to
obtain judicial review under the APA. The final rule gives a trustee
significant input into that final decision, but it is entirely
appropriate for the Director, as the head of the Program, to render a
final decision.
Other regulators use precisely this process. Agency commissions,
boards, and heads routinely act as the ultimate decision-maker on what
action an
[[Page 51746]]
agency should take. Agencies do not delegate the agency's decision
making to a third party outside the agency. While various agencies use
differing procedures to gather the data for, or make recommendations
to, the ultimate decision-maker, in every relevant instance, the agency
decides for itself what is the appropriate decision to make.
The proposed rule called for the creation of a reviewing official
who was to have been a Program employee who would have reviewed the
materials provided by the participants and recommend whether the
Director should affirm, modify, or reverse the United States Trustee's
suspension or termination. A number of comments criticized the
reviewing official position for lack of independence because it was to
have been staffed by a Program employee. These criticisms failed to
recognize the significance of the fact that the reviewing official
reports directly to the Director, not to the United States Trustee who
made the initial determination. The Director is the head of the Program
and acts under independent authority delegated by the Attorney General.
The Director is not directed or supervised by a United States Trustee.
Consequently, the Director has the ability to decide whether a United
States Trustee's suspension or termination decision is one that the
agency should implement. In making that determination, the Director
bears a heavy responsibility. He must independently decide whether the
United States Trustee's decision is appropriate and is supported by the
record.
In response to these comments, the final rule has been revised to
allow, rather than to require, the Director to select a reviewing
official who was neither involved in the United States Trustee's
decision nor employed by the Program in the United States Trustee's
region. In addition, nothing in the final rule prohibits the Director
from calling upon his staff to assist him in reaching his
determination. This does not represent a change from the proposed rule.
The final rule creates strong institutional incentives for the
Director to reach an independent determination because his decision
shall be subject to judicial review. The final rule enables the
Director to reach his decision after considering all materials the
participants which to submit. As discussed above, the final rule makes
it optional for the Director to employ a reviewing official in a
particular case. This was done in order to respond to requests that the
final rule reduce the time it takes for the Director to reach a final
decision on a request for review. Under the final rule, however, the
director retains the same power he had under the proposed rule to
independently determine whether a United States Trustee's decision
constitutes an appropriate exercise of discretion and is supported by
the record. Making optional the reviewing official, who simply advised
the Director under the proposed rule, does not diminish the Director's
responsibility to exercise independent judgment in making this final
determination, nor does it dilute the trustee's ability to obtain
independent review by the Director.
The procedure set forth in the rule meets accepted notions of
federal administrative law. The Director's review under the final rule
constitutes ``an informal adjudication.'' Zotos International, Inc. v.
Young, 830 F.2d 350, 353 (D.C. Cir. 1987). ``[Although] [t]he
Administrative Procedure Act does not use the term `informal
adjudication[,]' [courts use it as] a residual category [to describe]
'all agency actions that are not rule making and that [are not
expressly required by statute to] be conducted through `on the record'
hearings.' '' United States v. Article of Device * * * Diapulse, 768
F.2d 826, 829 n.4 (7th Cir. 1985), (quoting in part, Izzaak Walton
League of America v. Marsh, 655 F.2d 346, 361 n.37 (D.C. Cir. 1981)).
``[N]o procedures are specified'' in the APA for conducting
informal adjudications. Zotos, 830 F.2d at 353. The Supreme Court held
in PBGC v. LTV Corp., 496 U.S. 633 (1990) that an agency need not
conduct an informal adjudication as a formal, on the record, hearing
with full discovery or sworn witnesses.
To the contrary, section 554 of the Administrative Procedure Act
requires an on the record adjudication only in a case where an
adjudication is required by statute to be determined on the record.
Neither section 586 of title 28 nor any other provision of the United
States Code requires the United States Trustee to reach a decision
whether to suspend or terminate future case assignments in an on the
record evidentiary hearing. Thus, the Program may conduct this
decision-making process in the manner it determines is the best way to
enable it to reach final agency action. This rule implements the
procedures the Program determines to be most appropriate. Similarly,
the Bankruptcy Administrator program does not allow for review by a
neutral party, evidentiary hearings, sworn testimony, or discovery.
The Program has modified the final rule in one major way to assist
trustees in presenting relevant material to the Director for
consideration. The final rule allows a trustee to ask that specific
documents in the United States Trustee's possession be included in the
record. This will enable trustees to rely upon documents they believe
to be relevant but which are under the United States Trustee's control.
9. Comments suggested that the Program should adopt the procedures
used for debarments for participation in government contracting or
government entitlements. These suggestions fail to appreciate the
differences between debarment and a cessation of assignment of future
cases to trustees, which are fundamental. First, debarment involves
government contracting and government entitlements. Trustees have no
contract with the government. Receiving future cases is not a
government entitlement program.
Moreover, courts have indicated that a debarment, which has severe
government-wide consequences, may implicate a constitutionally
protected interest. See, e.g., ATL, Inc. v. United States, 736 F.2d
677, 683 (Fed. Cir. 1984); Transco Security, Inc. v. Freeman, 639 F.2d
318, 321 (6th Cir. 1981); Old Dominion Dairy v. Secretary of Defense,
631 F.2d 953, 966 (D.C. Cir.), cert. denied, 454 U.S. 820 (1981). In
contrast, a trustee has no constitutional interest in being assigned
future cases. Joelson v. United States, 86 F.3d at 1415-18; Richman v.
Straley, 48 F.3d at 1143; Shaltry v. United States, 182 B.R. at 842 (D.
Ariz.) (same), aff'd, 1995 WL 866862 (9th Cir. 1995).
A debarment is far more significant than mere case cessation
because it can have dramatic, government-wide, consequences. As a
matter of federal law, someone who has been debarred in a government
contracting proceeding cannot bid on any government contract from any
agency. The Department of Justice's debarment procedures for debarment
from nonprocurement programs, 28 CFR part 67, which one comment
specifically cited, provides that ``[a] person who is debarred or
suspended [under the rule] shall be excluded from Federal financial and
nonfinancial assistance under Federal programs and activities.'' 28 CFR
67.100. Indeed, ``debarment or suspension of a participant in a program
by one agency shall have government wide effect.'' Id. In many
instances a debarment has even greater significance because some states
refuse to contract with persons who have been debarred by an agency of
the federal government.
[[Page 51747]]
A cessation of future case assignments to a trustee has no such
effects. Unlike a debarment, it does not prevent a trustee from
applying for or participating in any other program administered by the
Department of Justice or any other part of the United States
government. As discussed previously, it does not even affect their
ability to administer existing cases.
Indeed, the entire purpose of debarment is fundamentally different
from termination of case assignments. Debarments protect the federal
government from those who have committed serious wrongdoing. See 28 CFR
67.115(b) (Department of Justice's debarment procedures). In contrast,
suspensions and terminations of future case assignments foster an
efficient system of case administration and ensure that debtors and
creditors, the intended beneficiaries of the bankruptcy system, receive
the best service from trustees that is possible.
Thus, we doubt the comments seriously intended to suggest that the
Department of Justice should adopt a rule that would debar trustees
from all government contracting and entitlement programs if they are
terminated from future case assignment. Nor do we believe trustees want
to be subject to government contracting rules in seeking future case
assignments. Certainly, this final rule has no such effect.
Consequently, the Program declines to implement more costly and time
consuming debarment-type procedures in this rule.
Notwithstanding the fundamental differences that exist between the
effect of a debarment and a cessation of future case assignments, the
final rule adopts procedures that embody many of the concepts that
underlie the Department's debarment procedures. Both allow the
Department, as opposed to a third party, to reach a final decision.
Both favor quick, informal dispute resolution instead of overly
formalized, litigation-type procedures. See 28 CFR 67.310 (``Department
of Justice shall process debarment actions as informally as
practicable''). Neither authorize discovery. Both enable the Department
to conduct face to face proceedings if disputed issues of material fact
exist.
10. One comment suggested that a cessation of future cases places a
stigma of incompetence or wrongdoing on trustees. It certainly places
no stigma in any constitutional sense. Nor does the Program cease case
assignments in order to stigmatize trustees. There are many reasons why
a trustee may stop receiving cases in the future. The decline in volume
of cases may demand it, or the existence of candidates who can better
represent debtors or creditors may result in a cessation of cases. None
of these instances involve the imposition of a sanction or a finding of
wrongdoing in any criminal sense.
In addition, many trustees are engaged in other professions or
occupations in addition to administering bankruptcy cases so cessation
of case assignments does not prevent them from engaging in their other
jobs. No one seriously suggests that a businessperson in the private
sector is impermissibly stigmatized simply because a client stops using
their product or services. Nor can any businessperson sue to force a
client to use their services forever. The same is true for trustees.
11. One comment, submitted by a trustee, seemed to suggest that the
reviewing official that was suggested by the proposed rule should not
review suspensions and terminations because the official was not
located within the region where the trustee worked and would ignore
local customs and policies. The final rule has made the position of
reviewing official optional in order to shorten the time necessary for
the Program to decide a trustee's request for review. If a trustee who
files a request for review believes local customs and policies are
relevant, that trustee would be free to raise those matters, and such
contentions would be considered by the Director in reaching a final
determination.
12. One comment suggested that the proposed rule allowed no input
by experts. This is not correct. A trustee seeking review is free to
provide whatever materials he or she wishes the Director to consider in
reaching a determination.
13. One comment suggested the rule is ineffective without
meaningful judicial review before the bankruptcy court. This is not
true. The final rule creates final agency action that is subject to
judicial review under the Administrative Procedure Act. There are
serious constitutional questions about a system that would allow
bankruptcy judges, who are not Article III judges, to review an
agency's decision to cease the assignment of future bankruptcy cases to
trustees. The Program also recognizes that United States district
courts have far more familiarity with review of final agency actions
than do bankruptcy courts. We further note that the Judicial Branch's
own system by which Bankruptcy Administrators suspend and terminate
trustees does not provide for any court review, bankruptcy or
otherwise, of a Bankruptcy Administrator's decision.
Moreover, engrafting bankruptcy court review onto the post-
termination judicial review process would do nothing more than delay
final judicial determination of trustee suspension and termination
decisions. This is so because a bankruptcy court decision could be
appealed to a district court, which would review the agency's action
and record using a de novo standard of review, and thence review could
be had in the courts of appeals under the same standard. In sum, the
Program sees no advantage to be gained and many disadvantages that
would result from bankruptcy court involvement.
14. One comment asked whether the rule applies to all adverse
actions or just formal suspensions and terminations. The rule applies
to any decision by a United States Trustee to actually stop assigning
cases to a trustee. It does not apply to other regulatory actions such
as providing the trustee with an unfavorable review, a letter of
warning or reprimand, or other actions that fall short of ceasing the
assignment of cases.
15. One comment suggested that the United States Trustee Program
should use a progressive system of discipline. The Program does this.
This suggestion falls outside the intended scope of this rule, however,
because this rule applies only to decisions to suspend or terminate the
assignment of future cases to trustees. It does not apply to
disciplinary actions that fall short of case cessation.
16. One comment suggested the rule compromises trustee
independence. The rule neither enlarges nor reduces permissible trustee
independence. Instead, it establishes a procedure by which a trustee
can obtain a final determination by the Program whether a United States
Trustee's decision to cease the assignment of future cases is an
appropriate exercise of the United States Trustee's discretion and is
supported by the record. If anything, the final rule will give trustees
greater independence because it gives them a formal procedure for
obtaining a final agency determination and allows them thereafter to
obtain judicial review under the Administrative Procedures Act, two
thing they lacked prior to the implementation of the rule.
17. One comment suggested the rule violated 11 U.S.C. 324. This is
incorrect. Section 324 established a judicial procedure for removing a
trustee from one or more specific cases that have been previously
assigned to a trustee. Section 324 is not relevant to this rule because
the rule only pertains to future case assignments and does not stop a
trustee from continuing to administer present cases.
[[Page 51748]]
18. One comment suggested the rule suffers form a lack of objective
standards or criteria. The Program does not believe this to be the
case. Section (a) of the final rule sets forth a non-exhaustive list of
14 criteria that a United States Trustee may employ in deciding whether
to suspend or terminate the assignment of future cases to trustees. The
final rule has revised the language of section (i) slightly due to the
elimination of the mandatory use of a reviewing official. The language
in the final rule makes clear that the standard the Director will
employ in deciding a request for review is ``whether the Untied States
Trustee's decision is supported by the record and the action is an
appropriate exercise of the United States Trustee's discretion.'' The
quoted language creates a standard which would enable a court to review
the Program's final action under the Administrative Procedure Act.
19. One comment suggested the rule should apply a reasonable man
standard. The comment did not suggest specific language. The Program
believes that section (i) sets forth an appropriate standard.
20. Various comment questioned the breadth and reasonableness of
the factors set forth in section (a) (2), (4), (5), (6), (7), (11),
(12), (13), and (14). These comments are not well taken for the reasons
that follow.
Before addressing the specific comments, it is appropriate to note
that the rule does not require termination or suspension for a single
or isolated violation of any one of these factors. Section (a)(6)
provides, for example, that a trustee ``display proper temperament in
dealing with judges, clerks, attorneys, creditors, debtors, the United
States Trustee and the general public.'' Trustees are service providers
and are important participants in the federal bankruptcy system. They
often are the only person a debtor sees as a representative of that
system. It is important they interact appropriately with the other
participants in the bankruptcy system. This provision does not mean,
however, the at a United states Trustee would appropriately exercise
discretion by terminating a trustee for a single isolated instance of
mere discourtesy. That will depend on the circumstances and the record.
In some cases, one egregious act might warrant a suspension or
termination. For example, a single instance of using racial slurs
against a debtor might, given the specific facts and circumstances,
justify a suspension or a termination. So too might a single instance
of assault. On the other hand, multiple instances of discourtesy also
might justify suspension or termination. The factors set forth in
section (a) simply constitute a non-exhaustive list of reasons that
might form a basis for suspension or termination. In many cases the
reasons for the United States Trustee's decision may involve a
combination of factors. In every request for review, the Director will
decide whether the suspension or termination constituted an appropriate
exercise of the United States Trustee's discretion and is supported by
the record.
Section (a)(2) addresses trustees who fail to ``perform duties in a
timely and consistently satisfactory manner.'' Some comments questioned
the appropriateness of this factor. First, depending upon the conduct
at issue, it is wholly appropriate to suspend or terminate a trustee
who cannot perform his or her trustee duties in a timely and
consistently satisfactory manner. To decide otherwise would be to place
the interests of debtors and creditors at serious risk. Moreover, one
of the qualifications to be appointed to act as a trustee is the
physical and mental capacity to ``perform a trustee's duties.'' 28 CFR
58.3(b)(2).
Section (a)(4) addresses trustees who fail to cooperate and to
comply with instructions and policies of the Code, the Bankruptcy
Rules, and local rules of court. Contrary to comments received, this is
an appropriate factor to consider in deciding whether to suspend or
terminate a trustee. Trustees are required to manage debtors' estates
in accordance with applicable standards. Failure to comply with
applicable law, rules, and regulations can have disastrous consequences
for debtors and creditors. Depending upon the conduct at issue, it is
wholly appropriate to suspend or terminate a trustee who does not
comply with applicable standards.
Section (a)(5) recognizes the need to suspend or terminate trustees
who engage in substandard performance of general duties and case
management in comparison to other members of the chapter 7 panel or
other standing trustees. Although some commentors expressed concern
about using this as a basis for suspensions or terminations, the
Program believes this is an important provision. It was created to
reflect that a United States Trustee may consider, in making
termination or suspension decisions, statistical or other evidence that
a trustee is not performing at the same level of competence and
efficiency as other trustees.
Section (a)(6) addresses the termination or suspension of trustees
who fail to display proper temperament. Some comments expressed concern
with the application of this factor. The bases for this factor has been
described above. Trustees have daily contact with debtors, creditors,
court personnel, courts, Program employees, and the public at large. A
trustee cannot effectively represent the interests of debtors and
creditors if the trustee fails to display proper temperament. This is
such an important factor that it is one of the qualifications that a
trustee must possess to be appointed to act as a trustee. See 58 CFR
58.3(b)(3) (a trustee must ``[b]e courteous and accessible to all
parties. * * *''). See also 58 CFR 58.3(b)(4) (trustee must ``[b]e free
of prejudices against any individual, entity, or group of individuals
or entities which would interfere with unbiased performance of a
trustee's duties.'').
Section (a)(7) is directed at trustees who fail to supervise the
work of their employees. Some comments contended that inadequate
supervision should not form a basis for suspension or termination or
that the provision's scope was unclear. The Program rejects these
suggestions. Many trustees routinely employ persons or hire
professionals to assist them in the performance of their trustee
duties. However, if they delegate responsibilities to professionals and
employees and do not monitor those individuals or take proper
precautions, this can amount to an abdication of their
responsibilities. It is important to hold trustees accountable for
failing to supervise those they choose to employ. In order to respond
to other comments received, the Program has revised this provision
slightly in the final rule to make clear that a suspension or
termination may issue, in an appropriate circumstance, if a trustee
fails to monitor the work of professionals or others employed by the
trustee.
One comment questioned whether section (a)(11) should condone a
suspension or termination that occurs because an allegation of
misconduct is pending before a court or state licensing agency when
such allegation calls the trustee's competence, financial
responsibility or trustworthiness into question. The Program believes
credible allegations that a trustee lacked honesty, competence,
financial responsibility or trustworthiness could form a basis for
suspension or termination in appropriate circumstances. See generally
28 CFR 58.3(b)(6) (which establishes certain educational or licensing
requirements for chapter 7 trustees). While it is difficult to act on
the basis of mere allegations, neither can the gravity of charges made
against a trustee be ignored. The rule recognizes that in some
instances, a United States
[[Page 51749]]
Trustee may conclude that a temporary suspension of cases is warranted
pending the final outcome of a proceeding. Whether the decision is made
to terminate the assignment of cases will depend upon the circumstances
and a fair consideration of all relevant factors. At the very least,
the United States Trustees' statutory responsibilities to the
bankruptcy system and their roles as officers of the court and as
Department of Justice officials make it entirely appropriate for them
to consider such allegations before entrusting future bankruptcy
estates to a particular trustee's care.
It was suggested that section (a)(12) should be deleted and
trustees should not be suspended or terminated if they are unable to
take assigned case. The Program agrees that an isolated conflict of
interest that results in an inability to take an assigned case should
not result in case cessation. Therefore, this section has been modified
in the final rule to provide that a ``routine inability to accept
assigned cases'' is a factor that may result in suspension or
termination. If a trustee has so many other interests that he or she
cannot or will not accept cases as regularly assigned it could be
appropriate to suspend the trustee while those other matters or
interests are resolved. If conflicts or an inability to takecases arise
so frequently that a trustee cannot function effectively as a trustee,
termination could be appropriate. Chapter 7 trustees function as part
of a panel of chapter 7 trustees. If one trustee on the panel does not
accept a fair share of case assignments, that may place an undue or
unfair strain on other chapter 7 trustees. Most chapter 12 and chapter
13 standing trustees are the only standing trustee of their type in a
specific geographic region, or one of only a very few. A standing
trustee who does not regularly accept assignment places an undue burden
on the bankruptcy system. It should be stressed, however, that the
enumeration of this particular factor is not a limitation upon a United
States Trustee's ability to consider other conflict questions,
including those that involve an appearance of a conflict of interest.
Section (13) allows suspension or termination of case assignment if
there is a change in composition of the chapter 7 panel pursuant to a
system established by the United States Trustee under 28 CFR 58.1. It
was questioned whether this should form the basis for case cessation.
This provision merely makes clear that a United States Trustee may
create a system to periodically reconstitute the whole panel, to retire
a certain percentage of the panel at fixed intervals, or the like, and
thereby to invite new membership.
It was suggested that section (a)(14)'s factor allowing case
cessation for efficient case administration or a decline in the number
of cases should be deleted from the final rule. The Program has
modified this factor slightly to clarity that both efficient
administration and a decline in caseload may constitute bases for case
cessation. It is important to maintain an appropriate balance of
expertise and number of trustees for the caseload. Otherwise, good
trustees might not apply or might resign their positions. The type and
number of bankruptcy filings fluctuate significantly over time and from
one location to another. The Program needs the ability to respond to
those fluctuations by adjusting the number of trustees accordingly.
21. It was suggested that this rule is a significant regulatory
action that requires more formal review under Executive Order 12866;
that the rule does not comply with the Regulatory Flexibility Act; and
that the rule does not comply with the Paperwork Reduction Act. These
assertions are incorrect.
This rule has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation.
Executive Order 12866 defines ``significant regulatory action'' as a
rulemaking that is likely to have (1) an annual effect on the economy
of $100 million or more or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, or tribal
governments or communities; (2) create a serious inconsistency or
otherwise interfere with an action taken or planned by another agency;
(3) materially alter the budgetary impact of entitlements, grants, user
fees, or loan programs or the rights and obligations of recipients
thereof; or (4) raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles of Executive
Order 12866.
This rule formalizes the procedures by which trustees may obtain
administrative review by the Director of suspension and termination
decisions. This process will be available to all of the 1,500 or so
existing trustees but only those trustees whose appointment to future
cases are suspended or terminated will have any reason to invoke these
procedures. We believe the number of trustees so affected to represent
no more than approximately 5% of the 1,500 existing trustees
(approximately 75). Further, the core group (that is all 1,500
bankruptcy trustees) do not comprise a sector of the economy as that
phrase is used in Executive Order 12866.
The rule complies with the Regulatory Flexibility Act. The Director
has reviewed this rule and by approving it certifies that it will not
have a ``significant economic impact upon a substantial number of small
entities'' as that phrase is used in the Regulatory Flexibility Act (5
U.S.C. 605(b)). Individuals serving as trustees are frequently
attorneys, accountants, or other financial professionals. Some of these
individuals may be associated with law or accounting firms of varying
size while others may be independent. Some of these individuals may
derive all or a substantial amount of their income from serving as
trustees while others may derive a smaller portion of their income from
such service. Even assuming that all 1,500 trustees are small entities,
the number of trustees affected by suspensions and terminations is far
smaller--likely less than 5%, or 75 in any year. This is not a
significant number when considered against the number of existing
trustees nor when considered against the number of attorneys,
accountants, and other financial professionals in this country.
Further, the Director has no information regarding which trustees
derive a substantial amount of their income from administering
bankruptcy cases and consequently whether the suspension or termination
of case assignments would have a significant economic impact on them. A
number of trustees engage in other full-time professions and engage in
bankruptcy work part-time. Because of the variation in other activities
that trustees might engage in professionally, the number of entities
which might experience a significant economic impact from the
suspension or termination of case assignments could be less than 75.
Additionally, it should be emphasized that this rule is intended to
provide a review process for trustees whose future case assignments are
suspended or terminated because of improper conduct or failure to
perform adequately, although the Program also may stop assigning future
cases to trustees for other reasons such as when more qualified
candidates are identified or when the caseload in a judicial district
declines, resulting in too many trustees for too little work. As
discussed in the supplementary information, those trustees have no
legal right to be appointed in future cases.
Finally, this rule also complies with the Paperwork Reduction Act.
It contains no new information collection or record keeping
requirements under
[[Page 51750]]
the Paperwork Reduction Act (44 U.S.C. 3501, et seq.). The rule will
not require affected trustees to complete new forms or to retain
records as that phrase is used in the Paperwork Reduction Act.
22. It was suggested that it is unfair to require trustees to bear
their own costs when seeking administrative review. That provision of
the rule is consistent with applicable law. It also is fair. It would
be fundamentally unfair to permit a trustee to tax the estates of the
debtors he or she oversees so the trustee can fund his or her attempt
to secure other, unrelated, cases in the future. In seeking review, a
trustee is pressing his economic self advantage. It is appropriate for
the trustee to pay his own costs in pursuing those self interests.
Certifications
Executive Order 12866
This rule has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Director, Executive Office for United States Trustees, (``Director'')
has determined that this rule is not a ``significant regulatory
action'' under Executive Order 12866, section 3(f), Regulatory Planning
and Review, and, accordingly, this rule has not been reviewed by the
Office of Management and Budget.
Regulatory Flexibility Act
In accordance with the Regulatory Flexibility Act (5 U.S.C.
605(b)), the Director has reviewed this rule and by approving it
certifies that it will not have a significant impact on a substantial
number of small entities. The only parties affected are the less than
2,000 individuals who serve as panel and standing trustees. The effect
it will have on them is to formalize a procedure that enables them to
obtain review by the Director of a notice by a United States Trustee to
suspend or terminate the assignment of future cases to the trustee.
Paperwork Reduction Act
This rule contains no new information collection or recordkeeping
requirements under the Paperwork Reduction Act (44 U.S.C. 3501, et
seq.).
Unfunded Mandates Reform Act of 1995
This rule will not result in the expenditure by State, local and
tribal governments, in the aggregate, or by the private sector, of
$100,000,000 or more in any one year, and it will not significantly or
uniquely affect small governments. Therefore, no actions were deemed
necessary under the provisions of the Unfunded Mandates Reform Act of
1995.
Small Business Regulatory Enforcement Fairness Act of 1996
This rule is not a major rule as defined by section 804 of the
Small Business Regulatory Enforcement Fairness Act of 1996. This rule
will not result in an annual effect on the economy of $100,000,000 or
more; a major increase in costs or prices; or significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of United States-based companies to
compete with foreign-based companies in domestic and export markets.
List of Subjects in 28 CFR Part 58
Bankruptcy, Trusts and trustees.
For the reasons set forth in the preamble, the Department of
Justice proposes to amend 28 CFR part 58 as follows:
PART 58--REGULATIONS RELATING TO THE BANKRUPTCY REFORM ACTS OF 1978
AND 1994
1. The authority citation for Part 58 is revised to read as
follows:
Authority: 5 U.S.C. 301; 28 U.S.C. 509, 510, 586.
2. New section 58.6 is added to read as follows:
Sec. 58.6 Procedures for suspension and removal of panel trustees and
standing trustees.
(a) A United States Trustee shall notify a panel trustee or a
standing trustee in writing of any decision to suspend or terminate the
assignment of cases to the trustee including, where applicable, any
decision not to renew the trustee's term appointment. The notice shall
state the reason(s) for the decision and should refer to, or be
accompanied by copies of, pertinent materials upon which the United
States Trustee has relied and any prior communications in which the
United States Trustee has advised the trustee of the potential action.
The notice shall be sent to the office of the trustee by overnight
courier, for delivery the next business day. The reasons may include,
but are in no way limited to:
(1) Failure to safeguard or to account for estate funds and assets;
(2) Failure to perform duties in a timely and consistently
satisfactory manner;
(3) Failure to comply with the provisions of the Code, the
Bankruptcy Rules, and local rules of court;
(4) Failure to cooperate and to comply with orders, instructions
and policies of the court, the bankruptcy clerk or the United States
Trustee;
(5) Substandard performance of general duties and case management
in comparison to other members of the chapter 7 panel or other standing
trustees;
(6) Failure to display proper temperament in dealing with judges,
clerks, attorneys, creditors, debtors, the United States Trustee and
the general public;
(7) Failure to adequately monitor the work of professionals or
others employed by the trustee to assist in the administration of
cases;
(8) Failure to file timely, accurate reports, including interim
reports, final reports, and final accounts;
(9) Failure to meet the eligibility requirements of 11 U.S.C. 321
or the qualifications set forth in 28 CFR 58.3 and 58.4 and in 11
U.S.C. 322;
(10) Failure to attend in person or appropriately conduct the 11
U.S.C. 341(a) meeting of creditors;
(11) Action by or pending before a court or state licensing agency
which calls the trustee's competence, financial responsibility or
trustworthiness into question;
(12) Routine inability to accept assigned cases due to conflicts of
interest or to the trustee's unwillingness or incapacity to serve;
(13) Change in the composition of the chapter 7 panel pursuant to a
system established by the United States Trustee under 28 CFR 58.1;
(14) A determination by the United States Trustee that the
interests of efficient case administration or a decline in the number
of cases warrant a reduction in the number of panel trustees or
standing trustees.
(b) The notice shall advise the trustee that the decision is final
and unreviewable unless the trustee requests in writing a review by the
Director, Executive Office for United States Trustees, no later than 20
calendar days from the date of issuance of the United States Trustee's
notice (``request for review''). In order to be timely, a request for
review must be received by the Office of the Director no later than 20
calendar days from the date of the United States Trustee's notice to
the trustee.
(c) A decision by a United States Trustee to suspend or terminate
the assignment of cases to a trustee shall take effect upon the
expiration of a trustee's time to seek review from the Director or, if
the trustee timely seeks such review, upon the issuance of a final
written decision by the Director.
(d) Notwithstanding paragraph (c) of this section, a United States
Trustee's
[[Page 51751]]
decision to suspend or terminate the assignment of cases to a trustee
may include, or may later by supplemented by an interim directive, by
which the United States trustee may immediately discontinue assigning
cases to a trustee during the review period. A United States Trustee
may issue such an interim directive if the United States Trustee
specifically finds that:
(1) A continued assignment of cases to the trustee places the
safety of estate assets at risk ;
(2) The trustee appears to be ineligible to serve under applicable
law, rule, or regulation;
(3) The trustee has engaged in conduct that appears to be
dishonest, deceitful, fraudulent, or criminal in nature; or
(4) The trustee appears to have engaged in other gross misconduct
that is unbefitting his or her position as trustee or violates the
trustee's duties.
(e) If the United States Trustee issues an interim directive, the
trustee may seek a stay of the interim directive from the Director if
the trustee has timely filed a request for review under paragraph (b)
of this section.
(f) The trustee's written request for review shall fully describe
why the trustee disagrees with the United States Trustee's decision,
and shall be accompanied by all documents and materials that the
trustee wants the Director to consider in reviewing the decision. The
trustee shall send a copy of the request for review, and the
accompanying documents and materials, to the United States Trustee by
overnight courier, for delivery the next business day. The trustee may
request that specific documents in the possession of the United States
Trustee be transmitted to the Director for inclusion in the record.
(g) The United States Trustee shall have 15 calendar days from the
date of the trustee's request for review to submit to the Director a
written response regarding the matters raised in the trustee's request
for review. The United States Trustee shall provide a copy of this
response to the trustee. Both copes shall be sent by overnight courier,
for delivery the next business day.
(h) The Director may seek additional information from any party in
the manner and to the extent the Director deems appropriate.
(i) Unless the trustee and the United States Trustee agree to a
longer period of time, the Director shall issue a written decision no
later than 30 calendar days from the receipt of the United States
Trustee's response to the trustee's request for review. That decision
shall determine whether the United States Trustee's decision is
supported by the record and the action is an appropriate exercise of
the United States Trustee's discretion, and shall adopt, modify or
reject the United States Trustee's decision to suspend or terminate the
assignment of future cases to the trustee. The Director's decision
shall constitute final agency action.
(j) In reaching a determination, the Director may specify a person
to act as a reviewing official. The reviewing official shall not be a
person who was involved in the United States Trustee's decision or a
Program employee who is located within the region of the United States
Trustee who made the decision. The reviewing official's duties shall be
specified by the Director on a case by case basis, and may include
reviewing the record, obtaining additional information from the
participants, providing the Director with written recommendations, or
such other duties as the Director shall prescribe in a particular case.
(k) This rule does not authorize a trustee to seek review of any
decision to increase the size of the chapter 7 panel or to appoint
additional standing trustees in the district or region.
(l) A trustee who files a request for review shall bear his or her
own costs and expenses, including counsel fees.
Dated: September 29, 1997.
Joseph Patchan,
Director, Executive Office for United States Trustees.
[FR Doc. 97-26172 Filed 10-1-97; 8:45 am]
BILLING CODE 4410-40-M
