[House Report 105-663]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     105-663
_______________________________________________________________________


 
                   PRIVATE TRUSTEE REFORM ACT OF 1997

_______________________________________________________________________


 July 31, 1998.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Gekas, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                        [To accompany H.R. 2592]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 2592) to amend title 11 of the United States Code to 
provide private trustees the right to seek judicial review of 
United States trustee actions related to trustee expenses and 
trustee removal, having considered the same, reports favorably 
thereon with an amendment and recommends that the bill as 
amended do pass.


                           TABLE OF CONTENTS

                                                                   Page
The Amendment..............................................           2
Purpose and Summary........................................           2
Background and Need for the Legislation....................           3
Hearings...................................................           9
Committee Consideration....................................          10
Vote of the Committee......................................          10
Committee Oversight Findings...............................          10
Committee on Government Reform and Oversight Findings......          10
New Budget Authority and Tax Expenditures..................          10
Congressional Budget Office Cost Estimate..................          10
Constitutional Authority Statement.........................          11
Section-by-Section Analysis and Discussion.................          11
Changes in Existing Law Made by the Bill, as Reported......          13

    The amendment is as follows:
    Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SUSPENSION AND TERMINATION OF PANEL TRUSTEES AND STANDING 
                    TRUSTEES.

    Section 586(d) of title 28, United States Code, is amended--
            (1) by inserting ``(1)'' after ``(d)'', and
    (2) by adding at the end the following:
    ``(2) A trustee whose appointment to the panel or as a standing 
trustee is terminated or who ceases to be assigned to cases filed under 
title 11 may obtain judicial review of the final agency decision by 
commencing an action in the United States district court for the 
district in which the panel member or standing trustee resides, after 
first exhausting all available administrative remedies, which if the 
trustee so elects, shall also include an administrative hearing on the 
record. Unless the trustee elects to have an administrative hearing on 
the record, the trustee shall be deemed to have exhausted all 
administrative remedies for purposes of this section if the agency 
fails to make a final agency decision within 90 days after the trustee 
requests administrative remedies. The Attorney General shall prescribe 
procedures to implement this paragraph.''.

SEC. 2. EXPENSES OF STANDING TRUSTEES.

    Section 586(e) of title 28, United States Code, is amended by 
adding at the end the following:
    ``(3) After first exhausting all available administrative remedies, 
an individual appointed under subsection (b) of this section may obtain 
judicial review of final agency action to deny a claim of actual, 
necessary expenses under this paragraph by commencing an action in the 
United States district court in the district where the individual 
resides.
    ``(4) The Attorney General shall prescribe procedures to implement 
this subsection.''.

SEC. 3. PROCEDURES FOR AND STANDARD OF REVIEW.

    Section 157 of title 28, United States Code, is amended--
            (1) by redesignating subsections (d) and (e) as subsections 
        (e) and (f), respectively, and
            (2) by inserting after subsection (c) the following:
    ``(d) In conducting judicial review under section 586(d)(2) or 
section 586(e)(3) of this title, the district court shall determine 
whether to retain the case or to refer the case to a bankruptcy judge 
or magistrate judge in the district: Provided, however, That in any 
district where fewer than 3 bankruptcy judges have been appointed under 
section 152(a) of this title, a referral shall only be made to a United 
States magistrate judge in the district. Any bankruptcy judge or 
magistrate judge to whom a case is referred shall submit a 
recommendation for disposition to the district court based solely on a 
review of the administrative record before the agency, and a final 
order or judgment shall be entered by the district court after 
considering the bankruptcy judge's or magistrate judge's 
recommendation, and after reviewing those matters to which any party 
has timely and specifically objected. The decision of the agency shall 
be affirmed unless it is unreasonable and without cause based upon the 
administrative record before the agency.''.

                          Purpose and Summary

    H.R. 2592, as amended by an amendment in the nature of a 
substitute, creates a procedural mechanism for administrative 
and judicial review of certain decisions made by United States 
trustees with regard to their supervision of bankruptcy 
trustees, fiduciaries who administer bankruptcy cases. The bill 
permits an individual whose appointment to the trustee panel or 
as a standing trustee is terminated by the United States 
trustee or who ceases to be assigned cases by the United States 
trustee to obtain administrative review of such action, 
including an administrative hearing on the record, and review 
by the district court of a final agency decision. It also 
allows a standing trustee, after exhausting all available 
administrative remedies, to obtain district court review of a 
final agency action denying a claim of actual, necessary 
expenses by such trustee. In addition, H.R. 2592 specifies the 
standard of judicial review and authorizes a district court to 
refer these matters for a recommendation to a bankruptcy judge 
or a magistrate judge in districts with at least three 
bankruptcy judges or to a magistrate judge in districts with 
less than three bankruptcy judges. Further, the bill directs 
the Attorney General to promulgate rules implementing its 
provisions concerning the suspension and termination of panel 
and standing trustees as well as its provisions concerning the 
expenses of standing trustees.

                Background and Need for the Legislation

                               Background

    The United States Trustee Program, a component of the 
Department of Justice, is charged with the administrative 
oversight of bankruptcy cases.\1\ Created by Congress on a 
pilot basis in 1978,\2\ the Program was thereafter expanded 
nationwide in 1986,\3\ with the exception of two states.\4\ 
Under the former Bankruptcy Act of 1898,\5\ bankruptcy judges--
or referees as they were called prior to 1973--performed 
various administrative duties in addition to their judicial 
responsibilities. Included among their administrative 
responsibilities was the duty to appoint individuals to serve 
as trustees in bankruptcy cases and to award compensation to 
such individuals for their work as trustees.\6\ Based on their 
dual administrative and judicial roles, bankruptcy judges, 
under the former system, were often required to determine 
issues involving their appointed trustees. The necessarily 
close working relationship between the bankruptcy bench and 
trustees led to a widespread perception of cronyism and insider 
influence.\7\
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    \1\ 28 U.S.C. Sec. 586.
    \2\ Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 
2549 (1978).
    \3\ Bankruptcy Judges, United States Trustees, and Family Farmer 
Bankruptcy Act of 1986, Pub. L. No. 99- 554, 100 Stat. 3088 (1986). 
Organizationally, the Program functions through 21 regions, each of 
which is headed by a United States trustee who is appointed by the 
Attorney General to serve a five-year term. 28 U.S.C. Sec. 581.
    \4\ The nationwide expansion of the United States Trustee Program 
was not made effective in the judicial districts for the States of 
North Carolina and Alabama for a period of six years, unless such 
districts elected to make it effective prior thereto. Bankruptcy 
Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986 
Sec. 302(d)(3), Pub. L. No. 99-554, 100 Stat. 3088, 3121 (1986). The 
period was extended pursuant to the Judicial Improvements Act of 1990 
Sec. 317(a), Pub. L. No. 101-650, 104 Stat. 5089, 5115 (1990).
    \5\ 30 Stat. 544 (1898 as amended) (repealed 1978).
    \6\ See, e.g., Bankruptcy Act of 1898 Sec. 2(17), 11 U.S.C. 
Sec. 11(17) (repealed 1978) (authorizing bankruptcy bankruptcy judges 
to appoint and remove trustees); former Fed. Bankr. R. 13-205(a)(1) 
(authorizing bankruptcy judges to appoint standing trustees and to 
terminate such appointments ``at any time''); former Fed. Bankr. R. 13- 
209(b) (authorizing the bankruptcy judge to fix compensation of 
standing and other trustees). Bankruptcy judges under the former 
Bankruptcy Act were advised as follows:

    Referees should carefully review expenses of Chapter XIII trustees 
to the end that such expenses shall be reasonable and necessary and 
exclude such items as bar association dues, association membership 
dues, travel and subsistence expenses incident to attending meetings of 
professional associations, entertainment, purchase of law books, 
subscriptions to publications, and the like. Referees should likewise 
periodically review the compensation allowance of the trustee to the 
end that it will be reasonable and not in excess of the maximum 
compensation of a full-time referee.

    Manual for Bankruptcy Judges, Guideline Procedures for Chapter XIII 
Operations 1001.19 (Administrative Office of the U.S. Courts 3rd ed. 
1974).

    \7\ See, e.g., H.R. Rep. No. 95-595, at 91 (1977), reprinted in 
1978 U.S.C.C.A.N. 5963, 6052 (``As the 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[.]''); Report of 
the Commission on the Bankruptcy Laws of the United States, H.R. Doc. 
No. 93-137, at 93 (1973) (``When the referee has appointed, or approved 
the appointment of, a trustee to take charge of the property of the 
estate, has supervised and perhaps instructed the trustee in the 
performance of his duties, and has approved the trustee's choice of 
counsel and the initiation of an action, the referee may not appear to 
the trustee's adversary as one fitting the model of judicial 
objectivity. . . . [T]he Commission believes that making an individual 
responsible for conduct of both administrative and judicial aspects of 
a bankruptcy case is incompatible with the proper performance of the 
judicial function.''). As the Director of the Executive Office for 
United States Trustees explained at the hearing on H.R. 2592 before the 
Subcommittee on Commercial and Administrative Law:

    The combination of the administrative and the judicial functions in 
bankruptcy court produced perceptions of improprieties and charges of 
cronyism, since trustees were considered court favorites and bankruptcy 
insiders. Those perceptions, those charges, plagued and diminished the 
system, and it diminished as well the bench and the bar who worked in 
bankruptcy law.

                                              * * *
    The structural separation of the judicial from the administrative 
work of the bankruptcy court is the foundation, the basic structural 
reason for much of the great progress made in preventing and 
eliminating cronyism and insiderism claims of the past.

    Private Trustee Reform Act of 1997: Hearing on H.R. 2592 and Review 
of Post-Confirmation Fees in Chapter 11 Cases Before the Subcomm. on 
Commercial and Admin. Law of the House Comm. on the Judiciary, 105th 
Cong. 62 (1997) (statement of Joseph Patchan, Director, Executive 
Office for United States Trustees) [hereinafter ``Hearing''].
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    Congress responded to this problem by transferring the 
administrative responsibilities for bankruptcy cases to United 
States trustees,\8\ ``to serve as bankruptcy watch-dogs to 
prevent fraud, dishonesty, and overreaching in the bankruptcy 
arena.'' \9\ As one of its ``core functions,'' \10\ the United 
States trustees were specifically given the authority to 
appoint trustees in bankruptcy cases and to supervise these 
individuals.\11\
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    \8\ For example, United States trustees have the following 
responsibilities with regard to consumer bankruptcy cases:
    supervising the administration of these cases and monitoring their 
progress, 28 U.S.C. Sec. 586(a)(3)(G);
    reviewing applications for compensation and reimbursement of 
expenses by professionals, including trustees, 28 U.S.C. 
Sec. 586(a)(3)(A);
    notifying the United States Attorney about any criminal matters and 
assisting the United States Attorney in the prosecution of such 
matters, 28 U.S.C. Sec. 586(a)(3)(F); and
    ensuring that monetary assets in a bankruptcy estate are properly 
secured and invested, 11 U.S.C. Sec. 345, 28 U.S.C. Sec. 586(a)(4).

    \9\ H.R. Rep. No. 95-595, at 88 (1977).
    \10\ Hearing, supra note 7, at 64 (prepared statement of Joseph 
Patchan, Director, Executive Office for United States Trustees).
    \11\ 28 U.S.C. Sec. 586(a)(1), (3), (b).
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    A bankruptcy trustee is a fiduciary who is ``held to the 
highest standards of honesty.'' \12\ As the ``representative'' 
of a bankruptcy estate,\13\ a trustee can sue and be sued.\14\ 
The trustee must comply with any applicable State law in his or 
her administration of the bankruptcy case and is subject to all 
applicable Federal, State and local taxes.\15\
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    \12\ Hearing, supra note 7, at 64 (prepared statement of Joseph 
Patchan, Director, Executive Office for United States Trustees).
    \13\ 11 U.S.C. Sec. 323(a). This has been interpreted to mean that 
a trustee ``represents all the creditors of the estate generally and is 
entitled to administer the property of the estate wherever located.'' 3 
Collier on Bankruptcy para. 323.02[1], at 323-3 (Lawrence P. King et 
al. eds. 15th ed. rev. 1997).
    \14\ 11 U.S.C. Sec. 323(b), 28 U.S.C. Sec. 959(a).
    \15\ 28 U.S.C. Sec. 959(b).
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    For consumer bankruptcy cases, there are two types of 
trustees. One type consists of individuals appointed by the 
United States trustee to serve on a ``panel of private 
trustees'' who are responsible for administering cases filed 
under chapter 7 of the Bankruptcy Code (a form of bankruptcy 
relief in which the debtor's non-exempt assets are liquidated 
and distributed to the debtor's creditors).\16\ Qualifications 
for panel membership are specified by regulation.\17\ Upon 
appointment to a panel, a trustee is assigned chapter 7 cases 
by the United States trustee to administer.\18\ Panel trustees 
are appointed for a one-year term, subject to renewal.\19\ As 
of 1997, there were approximately 1,200 panel trustees.\20\
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    \16\ 28 U.S.C. Sec. 586(a)(1); Authorization To Establish Panels of 
Private Trustees, 28 C.F.R. Sec. 58.1 (1998).
    \17\ Qualification for Membership on Panels of Private Trustees, 28 
C.F.R. Sec. 58.3 (1998).
    \18\ 28 U.S.C. Sec. 586(a)(1). The Bankruptcy Code specifies a 
chapter 7 trustee's administrative duties:

    (1) collect and reduce to money the property of the estate for 
which such trustee serves, and close such estate as expeditiously as is 
compatible with the best interests of parties in interest;
    (2) be accountable for all property received;
    (3) ensure that the debtor shall perform his intention as specified 
in section 521(2)(B) of this title;
    (4) investigate the financial affairs of the debtor;
    (5) if a purpose would be served, examine proofs of claims and 
object to the allowance of any claim that is improper;
    (6) if advisable, oppose the discharge of the debtor;
    (7) unless the court orders otherwise, furnish such information 
concerning the estate and the estate's administration as is requested 
by a party in interest;
    (8) if the business of the debtor is authorized to be operated, 
file with the court, with the United States trustee, and with any 
governmental unit charged with responsibility for collection or 
determination of any tax arising out of such operation, periodic 
reports and summaries of the operation of such business, including a 
statement of receipts and disbursements, and such other information as 
the United States trustee or the court requires; and
    (9) make a final report and file a final account of the 
administration of the estate with the court and with the United States 
trustee.
    11 U.S.C. Sec. 704.

    \19\ Hearing, supra note 7, at 98 (prepared statement of W. Steve 
Smith, President, National Association of Bankruptcy Trustees).
    \20\ Hearing, supra note 7, at 95 (testimony of Kevyn D. Orr, 
Deputy Director, Executive Office for United States Trustees).
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    Another type of trustee consists of individuals appointed 
to administer chapter 13 (individual debt reorganization) and 
chapter 12 (family farmer) cases.\21\ In addition to performing 
many of the same duties as private trustees, these individuals, 
known as ``standing trustees,'' are responsible for collecting 
payments due under the debtor's repayment plan and distributing 
these payments to the debtor's creditors.\22\ A standing 
trustee's compensation and expenses attributable to the 
trusteeship are fixed by the Attorney General.\23\ These 
expenses are not case-specific, but relate to the operation of 
the trusteeship.\24\ As of 1997, there were approximately 200 
standing trustees.\25\
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    \21\ 28 U.S.C. Sec. 586(b). Qualifications for appointment are 
specified by regulation. Qualifications for Appointment as Standing 
Trustee and Fiduciary Standards, 28 C.F.R. Sec. 58.4 (1998).
    \22\ 11 U.S.C. Sec. 1302 (b), (c).
    \23\ 28 U.S.C. Sec. 586(e). Under this statutory scheme, a standing 
chapter 13 trustee, for example, is required to collect a ``percentage 
fee'' of up to ten percent from payments made by debtors pursuant to 
their repayment plans in cases that the trustee administers. 28 U.S.C. 
Sec. 586(e)(1)(B)(i), (2). Out of this fee, the trustee is authorized 
to receive annual compensation in a specified amount as well as 
``actual, necessary expenses incurred by such individual as standing 
trustee.'' 28 U.S.C. Sec. 586(e)(1), (2)(B)(ii).
    In the two states not included in the United States Trustee 
Program, the standing trustee is required to submit a budget report by 
a prescribed date to the Bankruptcy Administrator, who then must make a 
recommendation to the bankruptcy judge regarding the ``setting of 
percentage fees, annual compensation, and other relevant expenditure 
requests.'' Guidelines of the Director of the Administrative Office for 
United States Courts Relating to the Administration of the Bankruptcy 
Administrator Program, at II-V-6 (Mar. 1993).
    \24\ Typical chapter 13 trustee budget expense items include, for 
example, office rent, employees' salaries and benefits, equipment 
purchases and maintenance (e.g., computers, photocopiers, postage 
meters), utility services (e.g., telephone, electricity), training, and 
travel. Hearing, supra note 7, at 77-78 (prepared statement of Ellen B. 
Vergos, United States Trustee--Region 8), 161 (response of Laurence P. 
Morin, President, Association of Bankruptcy Professionals, to Rep. 
Lamar Smith's questions for the record). Depending on the number of 
cases administered by a chapter 13 trustee, such trustee's annual 
expense budget can range from $20,000 to $2.7 million. Id. at 77-78.
    \25\ Hearing, supra note 7, at 95 (remarks of Kevyn D. Orr, Deputy 
Director, Executive Office for United States Trustees).
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    The United States trustee is responsible for supervising a 
trustee's performance.\26\ To this end, the United States 
Trustee Program has promulgated ``initiatives'' imposing 
stringent standards of accountability for these fiduciaries 
\27\ who, in turn, are entrusted with the responsibility to 
administer billions of dollars in bankruptcy estate assets.\28\ 
A trustee determined to be derelict in discharging his or her 
administrative or fiduciary duties may be suspended by the 
United States trustee from active case assignment until the 
problem is rectified.\29\ In addition, the United States 
trustee may decline to reappoint a panel trustee upon the 
expiration of his or her one-year appointment.\30\ These 
actions, however, only relate to the assignment of future 
cases. In contrast, a trustee may be removed from pending 
bankruptcy cases in which he or she is serving only by the 
court ``for cause,'' after notice and hearing.\31\
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    \26\ 28 U.S.C. Sec. 586(a)(1), (3), (b).
    \27\ As the result of one initiative, for example, the number of 
chapter 7 cases ten years old or more in 1992 was reduced from 4,000 to 
171 as of 1997. Hearing, supra note 7, at 68 (statement of W. Clarkson 
McDow, Jr., United States Trustee--Region 4).
    \28\ In 1996, for example, chapter 7, 12 and 13 trustees 
administered $3.9 billion in estate assets. Hearing, supra note 7, at 
64 (prepared statement of Joseph Patchan, Director, Executive Office 
for United States Trustees).
    \29\ See Procedures for Suspension and Removal of Panel Trustees 
and Standing Trustees, 28 C.F.R. Sec. 58.6 (1998). Reasons warranting 
suspension--as viewed by the United States Trustees--include the 
pendency of a criminal investigation concerning a trustee, failure to 
administer estate assets, an audit of the trustee's bankruptcy estate 
administrative operations indicating certain inadequacies, and 
excessive delay in closing cases, among other administrative reasons. 
Hearing, supra note 7, at 71 (statement of W. Clarkson McDow, Jr., 
United States Trustee--Region 4).
    \30\ See Procedures for Suspension and Removal of Panel Trustees 
and Standing Trustees, 28 C.F.R. Sec. 58.6 (1998). For example, a 
United States trustee may decide not to reappoint a panel trustee 
solely for managerial necessity, such as the need to reduce the size of 
a panel, given prevailing case filing rates. See, e.g., Authorization 
To Establish Panels of Private Trustees, 28 C.F.R. Sec. 58.1(b) (1998).
    \31\ 11 U.S.C. Sec. 324(a). Although the Bankruptcy Code does not 
define ``for cause,'' the courts have interpreted this term to imply 
some degree of malfeasance. As Collier notes:

    Causes for removal include situations in which the trustee is found 
to be incompetent or unwilling to perform the duties of a trustee; the 
trustee is not disinterested or holds an interest adverse to the 
estate; the trustee violates the fiduciary duty to the estate; and 
where the trustee is guilty of misconduct in office or personal 
misconduct.
    Generally, the courts will not remove a trustee absent actual fraud 
or injury. A trustee will not be removed for mistakes in judgment where 
the judgment is discretionary and reasonable under the circumstances.

    3 Collier on Bankruptcy para. 324.02, at 324-3-4 (Lawrence P. King 
et al. eds. 15th ed. rev. 1997).
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                        Need for the Legislation

    H.R. 2592 was introduced on October 1, 1997 as the 
``Private Trustee Reform Act of 1997'' by Representatives Bob 
Goodlatte (R-Va) (for himself and Representatives Lamar Smith 
(R-Tex.) and Bob Barr (R-Ga.)). At the subsequent hearing on 
this bill, Mr. Goodlatte explained that the legislation was 
intended ``to restore fairness to a system in which the U.S. 
Trustee has unfettered discretion to not only judge the 
appropriateness of expenses incurred by private trustees, but 
also . . . to cease assigning cases in the future'' to such 
trustees.\32\ He noted, for example, that ``[i]n many 
instances, private trustees are required to devote 100 percent 
of their time to their duties as trustees'' and that when a 
United States trustee ``decides to cease assigning cases to a 
private trustee, that private trustee is being deprived of his 
or her livelihood.'' \33\ Accordingly, these decisions, he 
observed, ``should not be made lightly'' and should be subject 
to judicial review.\34\
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    \32\ Hearing, supra note 7, at 9.
    \33\ Id. at 8.
    \34\ Id. at 9.
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Judicial Review of United States Trustee Decisions Regarding 
Future Case Assignments and Reappointment. Prior to the 
issuance of a regulation last year specifying the procedures 
for the suspension and termination of a trustee's 
appointment,\35\ the courts generally recognized that the 
United States trustee's discretion with regard to future case 
assignments and reappointment decisions was not subject to 
judicial review.\36\ Upon the promulgation of this rule, 
however, these decisions are now generally viewed as being 
subject to judicial review \37\ in accordance with the 
Administrative Procedure Act.\38\ Thus, they can be set aside 
if found to be arbitrary, capricious or an abuse of discretion, 
among other reasons.\39\ De novo review, however, is not 
available.\40\
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    \35\ Procedures for Suspension and Removal of Panel Trustees and 
Standing Trustees, 28 C.F.R. Sec. 58.6 (1998).
    \36\ See, e.g., Joelson v. United States, 86 F.3d 1413, 1419 (6th 
Cir. 1996) (``Decisions regarding the discharge of private panel 
trustees from future case assignments are . . . committed to the 
discretion of the U.S. Trustees.''); Richman v. Straley, 48 F.3d 1139, 
1143 (10th Cir. 1995) (``Because the standing trustee serves no 
definite term and Congress made no explicit provision to the contrary, 
the party with the power of appointment may terminate that appointment 
at any time by refusing to assign new cases to the standing 
trustee.''); Shaltry v. United States, 182 B.R. 836, 841 (D. Ariz. 
1995) (noting that the statutory and legislative history indicated that 
``Congress intended to delegate decisions as to panel membership to the 
individual U.S. Trustees''), aff'd, 87 F.3d 1322 (9th Cir. 1996). 
Collier observes that panel membership ``is not a property right or 
liberty interest'' and, thus, the ``due process clause of the Fifth 
Amendment does not apply when the United States trustee removes a 
trustee from a chapter 7 panel.'' 1 Collier on Bankruptcy para. 324.01 
n. 2 (Lawrence P. King et al. eds. 15th ed. rev. 1997).
    Procedures in effect in those states that are not included in the 
United States Trustee Program similarly provide that panel trustees who 
are not reappointed by a Bankruptcy Administrator have ``no right to a 
hearing.'' Practice and Procedures for Chapter 7 Trustees in Bankruptcy 
Administrator Districts, III-7 (Administrative Office of the United 
States Courts Jan. 1997).
    \37\ Hearing, supra note 7, at 54-55 (statement of Professor 
Jeffrey Lubbers, Washington College of Law, American University, and 
former Research Director, Administrative Conference of the United 
States).
    \38\ Pub. L. No. 89-554, 80 Stat. 381 (1966) (codified as amended 
in scattered sections of 5 U.S.C.).
    \39\ 5 U.S.C. Sec. 706.
    \40\ Hearing, supra note 7, at 94 (testimony of Joseph Patchan, 
Director, Executive Office for United States Trustees).
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    At the October 9, 1997 hearing before the Subcommittee, 
various trustee representatives testified that neither the 
current law nor the recently promulgated rule protected their 
interests.\41\ As one trustee explained, ``[P]anel trustees 
have become justifiably concerned with being removed from 
rotation, denied reappointment to the panel or otherwise denied 
cases without being afforded the opportunity to challenge the 
action being taken against them by the UST.'' \42\ These 
representatives cited instances where the United States trustee 
abused its discretion in this area and intimidated 
trustees.\43\ The United States trustee's decisions in these 
matters were described as ``far-reaching'' as they threaten a 
trustee's livelihood and present ``a serious stigma of 
incompetence or wrongdoing.'' \44\ The trustee representatives 
also stated that the scope of judicial review, largely premised 
on determining whether the action was an ``abuse of 
discretion,'' was not ``meaningful review.'' \45\
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    \41\ See, e.g., id. at 97-98 (statement of W. Steve Smith, 
President, National Association of Bankruptcy Trustees), 127 (statement 
of Henry E. Hildebrand, III, National Association of Chapter 13 
Trustees). One trustee explained:
    The reasons we oppose this rule may be summarized as follows:

    1. it does nothing more than ``rubber stamp'' lower level agency 
decisions;
    2. the agency has uncontrolled authority for its decisions as to 
case termination having immediate affect [sic];
    3. the criteria for termination are highly subjective and subject 
to arbitrary interpretation and abuse;
    4. the burden of proof is on the trustee to prove that the U.S. 
Trustee's actions and opinions are unwarranted--in other words, the 
``accused'' has to prove that he or she should neither be accused nor 
found ``guilty'';
    5. there is no meaningful, timely, affordable judicial review.

    Id. at 165 (response of Laurence P. Morin, President, Association 
of Bankruptcy Professionals, to Rep. Lamar Smith's questions for the 
record).
    \42\ Id. at 98 (prepared statement of W. Steve Smith, President, 
National Association of Bankruptcy Trustees).
    \43\ A poll conducted by the National Association of Bankruptcy 
Trustees indicated that 74 percent of the respondents ``feared removal 
or non-reappointment if they opposed a UST directive, and nearly one-
third felt they had been instructed to take a position that conflicted 
with their independent business judgment.'' Id. at 98 (statement of W. 
Steve Smith, President, National Association of Bankruptcy Trustees). A 
standing trustee recounted instances of ``de facto removals'' where the 
United States trustee ceased assigning cases to trustees. Id. at 164-66 
(responses of Laurence P. Morin, President, Association of Bankruptcy 
Professionals, to Rep. Lamar Smith's questions for the record).
    \44\ Id. at 99 (prepared statement of W. Steve Smith, President, 
National Association of Bankruptcy Trustees); see id. at 105 (prepared 
statement of Laurence P. Morin, President, National Association of 
Bankruptcy Trustees) (``The lifeblood of a trustee's business is the 
assignment of new cases.'').
    \45\ Id. at 101 (prepared statement of W. Steve Smith, President, 
National Association of Bankruptcy Trustees).
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Chapter 13 Trustee Expenses. The Subcommittee heard testimony 
from trustees at its October 9, 1997 hearing on H.R. 2592 that 
United States trustees micromanage standing trustees' budgets, 
substitute their judgment for that of the standing 
trustees,\46\ and thereby restrict the ability of standing 
trustees to function and adversely impacts the bankruptcy 
system.\47\ Examples of the types of disputes that can arise 
include the following:
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    \46\ As one standing trustee observed:

    [T]he U.S. Trustee has developed a practice of not supervising, but 
of imposing the agency's judgment over expenses to be incurred by the 
standing trustee, for example:
    (1.) rental of office space, including but not limited to the 
location, type of property, number of square feet per case, per 
employee, or both;
    (2.) personnel decisions such as: who should be hired to serve as 
an employee, what qualifications are too much or not enough, how much 
employees should be paid, what type(s) and amounts of benefits should 
be provided, job descriptions and training requirements[.]

    Id. at 106 (prepared statement of Laurence P. Morin, President, 
Association of Bankruptcy Professionals).
    \47\ See, e.g., id., 129 (prepared statement of Henry E. 
Hildebrand, III, National Association of Chapter 13 Trustees).
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          the proper proration of expenses between the 
        operation of the trusteeship (e.g., rent, use of a 
        photocopier) and other activities that occur at that 
        same location, such as the operation of the trustee's 
        law firm;
          the amount of salary and benefit payments that should 
        be paid to an employee of the trustee; and
          whether the trustee's provision of certain services 
        not specifically related to his or her statutory duties 
        is a proper expense item that should be 
        compensated.\48\
---------------------------------------------------------------------------
    \48\ See, e.g., Administrative Oversight in the Bankruptcy System: 
Who Should Guard the Hen House? 106-110 (American Bankruptcy Institute 
1995).
---------------------------------------------------------------------------
While the United States trustee representatives testified at 
the Subcommittee hearing that these disputes were typically 
handled within the United States Trustee Program through an 
informal dispute resolution process,\49\ the trustees did not 
concur that the Program had such procedures.\50\
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    \49\ See, e.g., Hearing, supra note 7, at 80-86 (prepared statement 
of Ellen B. Vergos, United States Trustee--Region 8).
    \50\ A standing trustee explained:

    Please do not be misled by any representations by the U.S. Trustee 
that there are procedures to resolve disputes. . . . [T]he current 
process necessitates that the private trustee . . . capitulate to the 
decision of the U.S. Trustee or the requested expense item will be 
disallowed. In many instances, even if the expense was necessary for 
the trustee operation or reasonable by criteria other than those 
applied by the U.S. Trustee, the private trustees have been required to 
pay the expense from personal funds.

    Id. at 162 (response of Laurence P. Morin, President, Association 
of Bankruptcy Professionals, to Rep. Lamar Smith's questions for the 
record).
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Amendment in the Nature of a Substitute to H.R. 2592. As 
introduced, H.R. 2592 consisted of two substantive components. 
First, the bill would have allowed a private trustee to obtain 
administrative review of a decision by a United States trustee 
to cease assigning cases to such trustee and, after an 
opportunity for an administrative hearing on the record, to 
obtain judicial review by a bankruptcy court of the final 
administrative disposition. Second, the bill would have 
permitted a standing trustee, after an administrative hearing 
on the record, to have a bankruptcy court determine the actual, 
necessary expenses of such trustee.
    The Amendment in the nature of a substitute to H.R. 2592 
reflects a compromise between the private trustees and the 
United States trustees that resolves some of the most 
contentious issues with respect to the assignment of future 
cases and expense requests of standing trustees. It establishes 
a procedural mechanism for administrative and judicial review 
that balances the parties respective interests. In addition, it 
allows interstitial details concerning the Amendment's 
implementation to be defined through the promulgation of rules 
by the Attorney General.

                                Hearings

    On October 9, 1997, the Committee's Subcommittee on 
Commercial and Administrative Law held a hearing on H.R. 2592 
in conjunction with a review of postconfirmation fees in 
chapter 11 cases. In connection with H.R. 2592, 12 witnesses 
testified: Congressman Bob Goodlatte, Representative from the 
State of Virginia; Ford Elsaesser, Vice President for Research, 
American Bankruptcy Institute; Henry R. Hildebrand, III, 
National Association of Chapter 13 Trustees; United States 
Bankruptcy Judge Frank W. Koger, President, National Conference 
of Bankruptcy Judges; Professor Jeffrey Lubbers of Washington 
College of Law, American University; W. Clarkson McDow, Jr., 
United States Trustee for Region 4; Laurence P. Morin, 
President, Association of Bankruptcy Professionals; Professor 
Jeffrey W. Morris, University of Dayton Law School, on behalf 
of the National Bankruptcy Conference; Kevyn D. Orr, Deputy 
Director, Executive Office for United States Trustees; Joseph 
Patchan, Director, Executive Office for United States Trustees; 
W. Steve Smith, President, National Association of Bankruptcy 
Trustees; and Ellen B. Vergos, United States Trustee for Region 
8.

                        Committee Consideration

    On April 30, 1998, the Subcommittee on Commercial and 
Administrative Law met in open session and ordered reported 
favorably the bill H.R. 2592, without amendment, by voice vote, 
a quorum being present. Thereafter, the Committee met in open 
session on July 21, 1998 and ordered reported favorably the 
bill, with an amendment in the nature of a substitute, by voice 
vote, a quorum being present.

                         Vote of the Committee

    There were no recorded votes.

                      Committee Oversight Findings

    In compliance with clause 2(l)(3)(A) of rule XI of the 
Rules of the House of Representatives, the Committee reports 
that the findings and recommendations of the Committee, based 
on oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

         Committee on Government Reform and Oversight Findings

    No findings or recommendations of the Committee on 
Government Reform and Oversight were received as referred to in 
clause 2(l)(3)(D) of rule XI of the Rules of the House of 
Representatives.

               New Budget Authority and Tax Expenditures

    Clause 2(l)(3)(B) of House Rule XI is inapplicable because 
this legislation does not provide new budgetary authority or 
increased tax expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 2(l)(3)(C) of rule XI of the 
Rules of the House of Representatives, the Committee sets 
forth, with respect to the bill, H.R. 2592, the following 
estimate and comparison prepared by the Director of the 
Congressional Budget Office under section 403 of the 
Congressional Budget Act of 1974:
                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 27, 1998.
Hon. Henry J. Hyde,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2592, the Private 
Trustee Reform Act of 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susanne S. 
Mehlman, who can be reached at 226-2860.
            Sincerely,

                                           June E. O'Neill, Director.  
    Enclosure.

    cc: Hon. John Conyers, Jr.,
         Ranking Minority Member.
H.R. 2592--Private Trustee Reform Act of 1997
    CBO estimates that implementing H.R. 2592 would result in 
no significant impact on the federal budget. Because this bill 
could affect direct spending, pay-as-you-go procedures would 
apply, but CBO expects that any such effects would be 
negligible. H.R. 2592 contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act 
and would have no impact on the budgets of state, local, or 
tribal governments.
    The Executive Office for United States Trustees (U.S. 
Trustees) is responsible for administering and supervising 
private trustees. H.R. 2592 would enable private trustees to 
seek judicial review when disputes arise over actions taken by 
the executive office with regard to expenses of trustees and 
their assignment to and removal from cases. Based on 
information from the U.S. Trustees, CBO estimates that fewer 
than 20 cases involving such disputes would occur each year and 
that only a few such cases would eventually lead to judicial 
review. Thus, CBO estimates that enacting H.R. 2592 would not 
impose any significant additional costs on the federal court 
system and the U.S. Trustees.
    Expenses associated with private trustees are paid through 
bankruptcy fees, and any fees not used by the private trustees 
are paid to the U.S. Trustee System Fund as offsetting 
collections. To the extent that access to the judicial process 
provided by this bill might enable private trustees to prevail 
in disputes regarding expenses, the U.S. Trustee System Fund 
could receive fewer offsetting collections. This potential loss 
of collections would reduce the amounts available for spending 
by the U.S. Trustees, but would result in no net change in 
outlays from direct spending. Furthermore, CBO expects that any 
loss of offsetting collections would not be significant because 
so few cases would reach judicial review each year.
    The staff contact for this estimate is Susanne S. Mehlman, 
who can be reached at 226-2860. This estimate was approved by 
Robert A. Sunshine, Deputy Assistant Director for Budget 
Analysis.

                   Constitutional Authority Statement

    Pursuant to Rule XI, clause 2(l)(4) of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in Article I, section 8, clause 4 and Article 
III, section 2, clause 1 of the Constitution.

                      Section-By-Section Analysis

Section 1. Suspension and Termination of Panel Trustees and 
Standing Trustees. Section 1 adds a provision to section 586(d) 
of title 28 of the United States Code permitting a panel or 
standing trustee to obtain administrative and judicial review 
of United States trustee actions terminating such trustee's 
appointment or the assignment of cases to such trustee. The 
intent of this section is to trigger, where applicable, 
provisions of the Administrative Procedure Act (``APA'').\51\
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    \51\ Pub. L. No. 89-554, 80 Stat. 381 (1966) (codified as amended 
in scattered sections of 5 U.S.C.).
---------------------------------------------------------------------------
    With regard to the trustee's administrative remedies, this 
provision allows the trustee to require the agency to hold an 
administrative hearing on the record.\52\ Where the trustee 
does not elect to have an administrative hearing on the record, 
such trustee will be deemed to have exhausted all 
administrative remedies if the agency fails to make a final 
agency decision within 90 days after the trustee requests 
administrative review.
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    \52\ An agency decision determined on the record after opportunity 
for an agency hearing, 5 U.S.C. Sec. 554(a), triggers a trial-type 
hearing that must be conducted by the agency, agency members or an 
administrative law judge. 5 U.S.C. Sec. 556(b). Other procedural 
safeguards include certain notice requirements, 5 U.S.C. Sec. 554(b); 
the opportunity to supplement the agency's hearing record, 5 U.S.C. 
Sec. 554(c); prohibition of ex parte communications, 5 U.S.C. 
Sec. 554(d); opportunity to be represented by counsel, 5 U.S.C. 
Sec. 555(b); and other trial-type protections (e.g., depositions, 
subpoenas, alternative dispute resolution, official transcript), 5 
U.S.C. Sec. Sec. 555, 556.
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    Upon exhaustion of his or her administrative remedies, the 
trustee may commence an action in the United States district 
court where the trustee resides. The applicable procedures and 
standard of review are specified in section 3 of the bill.
    This section also requires the Attorney General to 
prescribe procedures to implement its provisions.
Section 2. Expenses of Standing Trustees. Section 2 amends 
section 586(e) of title 28 of the United States Code to allow a 
standing trustee to obtain administrative and judicial review 
of a decision by the United States trustee denying such 
trustee's request for actual, necessary expenses. The intent of 
this section is to trigger, where applicable, provisions of the 
APA. Upon exhaustion of all available administrative remedies, 
the trustee may obtain judicial review of the final agency 
action by commencing an action in a United States district 
court located in the district where the trustee resides. 
Section 3 of the bill prescribes the applicable procedures and 
standard of review for this action.
    This section also requires the Attorney General to 
prescribe procedures to implement its provisions.
Section 3. Procedures for and Standard of Review. Section 3 
amends section 157 of title 28 of the United States Code to 
specify the procedures for judicial review as provided under 
sections 1 and 2 of the bill. This section permits a district 
court to retain an action described in sections 1 or 2 of the 
bill or to refer it to a bankruptcy or magistrate judge,\53\ if 
there are three or more bankruptcy judges serving in the 
district. If there are less than three bankruptcy judges 
serving in the district, the district court may retain the 
action or refer it to a magistrate judge. Upon referral, the 
bankruptcy or magistrate judge must submit a recommendation for 
disposition to the district court that is based solely on a 
review of the agency's administrative record. The district 
court is required to enter a final order or judgment after 
considering the referring judge's recommendation and any 
matters to which a party has specifically objected.
---------------------------------------------------------------------------
    \53\ The Committee contemplates that in most instances these 
matters will be referred to a bankruptcy judge, unless the district 
court determines such referral to be inappropriate.
---------------------------------------------------------------------------
    With regard to the standard of review, Section 3 requires 
the final agency decision to be affirmed unless it is (1) 
unreasonable and (2) without cause based upon the agency's 
administrative record.\54\ It is not the intent of the 
Committee that courts, in reviewing final agency decisions, 
should be restricted to interpretations of similar language in 
the Bankruptcy Code in applying this standard. The standard 
also is not intended to be synonymous with the arbitrary and 
capricious standard under the APA.
---------------------------------------------------------------------------
    \54\ As originally introduced, H.R. 2592's standard of judicial 
review for case assignment decisions was whether the United States 
trustee ``acted unreasonably or without cause.''
---------------------------------------------------------------------------

H.L.C.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                      TITLE 28, UNITED STATES CODE



           *       *       *       *       *       *       *
PART I--ORGANIZATION OF COURTS

           *       *       *       *       *       *       *


CHAPTER 6--BANKRUPTCY JUDGES

           *       *       *       *       *       *       *


Sec. 157. Procedures

    (a) * * *

           *       *       *       *       *       *       *

    (d) In conducting judicial review under section 586(d)(2) 
or section 586(e)(3) of this title, the district court shall 
determine whether to retain the case or to refer the case to a 
bankruptcy judge or magistrate judge in the district: Provided, 
however, That in any district where fewer than 3 bankruptcy 
judges have been appointed under section 152(a) of this title, 
a referral shall only be made to a United States magistrate 
judge in the district. Any bankruptcy judge or magistrate judge 
to whom a case is referred shall submit a recommendation for 
disposition to the district court based solely on a review of 
the administrative record before the agency, and a final order 
or judgment shall be entered by the district court after 
considering the bankruptcy judge's or magistrate judge's 
recommendation, and after reviewing those matters to which any 
party has timely and specifically objected. The decision of the 
agency shall be affirmed unless it is unreasonable and without 
cause based upon the administrative record before the agency.
    [(d)] (e) The district court may withdraw, in whole or in 
part, any case or proceeding referred under this section, on 
its own motion or on timely motion of any party, for cause 
shown. The district court shall, on timely motion of a party, 
so withdraw a proceeding if the court determines that 
resolution of the proceeding requires consideration of both 
title 11 and other laws of the United States regulating 
organizations or activities affecting interstate commerce.
    [(e)] (f) If the right to a jury trial applies in a 
proceeding that may be heard under this section by a bankruptcy 
judge, the bankruptcy judge may conduct the jury trial if 
specially designated to exercise such jurisdiction by the 
district court and with the express consent of all the parties.

           *       *       *       *       *       *       *


PART II--DEPARTMENT OF JUSTICE

           *       *       *       *       *       *       *


CHAPTER 39--UNITED STATES TRUSTEES

           *       *       *       *       *       *       *


Sec. 586. Duties; supervision by Attorney General

    (a) * * *

           *       *       *       *       *       *       *

    (d)(1) The Attorney General shall prescribe by rule 
qualifications for membership on the panels established by 
United States trustees under paragraph (a)(1) of this section, 
and qualifications for appointment under subsection (b) of this 
section to serve as standing trustee in cases under chapter 12 
or 13 of title 11. The Attorney General may not require that an 
individual be an attorney in order to qualify for appointment 
under subsection (b) of this section to serve as standing 
trustee in cases under chapter 12 or 13 of title 11.
    (2) A trustee whose appointment to the panel or as a 
standing trustee is terminated or who ceases to be assigned to 
cases filed under title 11 may obtain judicial review of the 
final agency decision by commencing an action in the United 
States district court for the district in which the panel 
member or standing trustee resides, after first exhausting all 
available administrative remedies, which if the trustee so 
elects, shall also include an administrative hearing on the 
record. Unless the trustee elects to have an administrative 
hearing on the record, the trustee shall be deemed to have 
exhausted all administrative remedies for purposes of this 
section if the agency fails to make a final agency decision 
within 90 days after the trustee requests administrative 
remedies. The Attorney General shall prescribe procedures to 
implement this paragraph.
    (e)(1) * * *

           *       *       *       *       *       *       *

    (3) After first exhausting all available administrative 
remedies, an individual appointed under subsection (b) of this 
section may obtain judicial review of final agency action to 
deny a claim of actual, necessary expenses under this paragraph 
by commencing an action in the United States district court in 
the district where the individual resides.
    (4) The Attorney General shall prescribe procedures to 
implement this subsection.

           *       *       *       *       *       *       *


                                
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