Administrative Disaster At Bankruptcy Courts May Be In Sight

A feature article by Tripp Scott's Charles Tatelbaum as published nationally in LAW360

A recent Law360 Bankruptcy Authority headline, "Already Lean US Trustee Program Sees 58 Take Buyouts," may be revealing the tip of the iceberg in an ocean of uncertainty concerning the effective administration of the bankruptcy courts as we move forward in this uncharted territory. 

Separately, it has been reported that the executive director of the U.S. Trustee's Office was terminated in March as part of the government efficiency program — she has sued in federal court to undo the termination. This has left the U.S. Trustee's Program 
without seasoned leadership and direction, and with decreasing legal, executive, accounting and administrative help. To many of us who practice throughout the country, this is frightening.

 Having practiced bankruptcy law under the former Bankruptcy Act of 1898 — yes, it was not substantially updated until 1978 — for more than a decade prior to the Bankruptcy Code's effective date in 1979, I remember far too well the administrative burdens that were placed upon the bankruptcy referees who were part-time arbiters and part-time court administrators in a much less sophisticated bankruptcy process. 

The advent of Chapter 11 and the separation of roles so that the bankruptcy judge was a true jurist — albeit with limited jurisdiction — was a welcome relief. 

The U.S. trustee's role has evolved into a somewhat bifurcated set of responsibilities — one for the large megacases and the other for the small to medium individual and business liquidation and reorganization cases. Since the vast majority of cases before the bankruptcy courts are in this latter category, the loss of experienced staff in the U.S. Trustee's Office will have a much greater and more significant impact on the administration of these cases. 

Unsecured creditors and their attorneys have come to rely on members of the U.S. Trustee's Office to supervise Subchapter V small business reorganizations, Chapter 7 cases and Chapter 11 cases, as well as monitor fees and expenses, and the liquidation of assets for creditors' benefit. 

Far too often, the claims of unsecured creditors are sufficiently small that it does not pay for them to take an active or even aggressive role in bankruptcy cases where any distribution to them will be speculative, and, at best, just a few cents on the dollar. Without the active participation of trained and experienced attorneys and analysts within the U.S. Trustee's Office, these functions may be delayed or even abandoned. This will have a significantly detrimental effect on the rights and remedies of the vast majority of the creditor body. 

While some, like attorneys for debtors and creditor constituencies in Chapter 11 cases that have been the subjects of objections to fee applications and plan confirmation objections, believe that the U.S. Trustee's Office only serves to slow down cases moving through the bankruptcy process and claim that bankruptcy judges are in the best position to police the system, that may not be the case in actuality. 

Most practitioners in the bankruptcy court are unfamiliar with the radically different, helter skelter administrative processes that predated the creation of the U.S. trustee system. 

Under the former Bankruptcy Act, the bankruptcy referees, who were sometimes called judges, were required to conduct all meetings of creditors under the predecessor of Section 341 of the current Bankruptcy Code. The secretarial and administrative staff of the bankruptcy judge analyzed trustee reports for the distribution to creditors in a liquidation case. 

The bankruptcy judge had to analyze and rule on fee requests without any input from an independent watchdog or agency, was required to appoint and supervise trustees, and was required to review the dockets and all the cases in order to determine if timely and appropriate pleadings were being filed. 

Without the advent of the U.S. Trustee's Office in 1979, albeit on an initial limited basis, the bankruptcy judges of today would be saddled with a combination of administrative and judicial functions. If we are now faced with a drastic shortage of experienced staff members in the U.S. Trustee's Office, will some of these responsibilities revert to the bankruptcy judge and the judge's staff? 

As with any governmental agency, a detailed review of policies and procedures can always lead to suggestions to create more efficiency. This is true in the private sector as well. 

However, with the uniqueness of the bankruptcy process and the need for Article I bankruptcy judges to be arbiters and judicial officers and to not be required to be nonjudicial administrators, having the independent U.S. Department of Justice agency is a necessity for the smooth and effective administration of the bankruptcy process. 

For those of us who practice in bankruptcy courts throughout the country in the vast majority of the non-megacases, the adequate staffing of trained professionals in the U.S. Trustee's Office is a critical requirement for protecting the rights of debtors and creditors. As such, the ongoing and continuing impetus to scale down the quantity and quality of the professionals in the U.S. Trustee's Office may lead to an administrative disaster. 

If, as a result of voluntary resignations or terminations, the professional staff of the U.S. Trustee's Office is depleted, it will undoubtedly cause a slowdown in the administrative process for the significant majority of bankruptcy cases and also impose on the bankruptcy judges an administrative role that should not exist for Article I judicial officers. Delays in the bankruptcy process impose unnecessary costs on all constituents of the system.