[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]]

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Part III





Department of Justice





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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

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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