[Federal Register: June 2, 1997 (Volume 62, Number 105)]
[Rules and Regulations]               
[Page 30171-30184]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jn97-11]
[[Page 30171]]
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                        Part IV
                Department of Justice
_______________________________________________________________________
                     28 CFR Part 58
Qualifications and Standards for Standing Trustees; Final Rule
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                DEPARTMENT OF JUSTICE
                28 CFR Part 58
                RIN 1105-AA32
 
        Qualifications and Standards for Standing Trustees
        AGENCY:  United States Trustees, Department of Justice.
        ACTION: Final rule.
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SUMMARY: This final rule amends the qualifications for appointment as a 
standing trustee, sets forth the continuing qualifications for 
appointment and standards of conduct for standing trustees, and 
corrects certain typographical errors in part 58.
    The qualifications for appointment as a standing trustee are 
amended to provide that certain persons who are related to standing 
trustees and bankruptcy judges and clerks cannot be appointed as 
standing trustee. The rule also sets forth fiduciary standards that 
govern a standing trustee's operation. These fiduciary standards 
address the employment of relatives, dealings with related parties, and 
employment of other standing trustees. The rule will aid the Director 
of the Executive Office for United States Trustees and the United 
States Trustees in supervising standing trustees in the administration 
of cases and in evaluating the actual, necessary expenses of standing 
trustees relative to fixing appropriate percentage fees and 
compensation. Adherence to the rule will help to ensure the fair, 
impartial administration of the office of the standing trustee, to 
maximize the efficiency of case administration, and to avoid 
improprieties, whether actual or perceived, that could diminish the 
integrity of the standing trustee system and the administration of 
chapter 12 and chapter 13 bankruptcy cases.
EFFECTIVE DATE: This rule is effective July 2, 1997 to those standing 
trustees who are appointed as of July 2, 1997, this rule will be 
applicable on the first day of the next fiscal year (i.e., October 1, 
1997 for chapter 13 trustees, and January 1, 1998 for chapter 12 
trustees).
ADDRESSES: Office of the General Counsel, Executive Office for United 
States Trustees, 901 E Street, N.W., Room 740, Washington, D.C. 20530.
FOR FURTHER INFORMATION CONTACT: Martha L. Davis, General Counsel, or 
Jeanne M. Crouse, Attorney, (202) 307-1399. This is not a toll-free 
number.
SUPPLEMENTARY INFORMATION: This final rule amends the qualifications 
for appointment as standing trustee and establishes standards for 
standing trustees appointed and supervised by United States Trustees. 
Finally, it corrects typographical errors in part 58. A proposed rule 
on these subjects was published in the Federal Register on July 18, 
1996 (61 FR 37426) (the ``proposed rule''). A summary of background 
information, public comment, and agency response follows.
I. Background and Rulemaking History
    Chapter 13 makes bankruptcy relief available to individuals with 
regular income and limited debt. Chapter 13 debtors propose plans to 
repay their creditors over a three-year period, unless the court, for 
cause, approves a longer period that cannot exceed five years. The 
plans must meet certain requirements and must be confirmed by the 
court. 11 U.S.C. 1322, 1325. Cases are administered by a private 
trustee appointed by the United States Trustee.
    Chapter 12 of the Bankruptcy Code provides for the adjustment of 
debts of a family farmer with regular income. Like chapter 13, chapter 
12 enables debtors to devote their disposable income to a repayment 
plan over a three-year period, unless the court, for cause, approves a 
longer period that cannot exceed five years. As in chapter 13, debtors' 
payments in chapter 12 are collected and disbursed by a private trustee 
appointed by the United States Trustee.
    When the Bankruptcy Code was adopted pursuant to the Bankruptcy 
Reform Act of 1978, Public Law 95-598, 92 Stat. 2549 (1978), Congress 
established a pilot United States Trustee Program in 18 districts. 
Congress created this system to assume administrative tasks that the 
bankruptcy courts had performed previously. Congress' review of the 
prior bankruptcy system had led it to conclude that court oversight did 
not work well and created the appearance of bias. See H.R. Rep. No. 
595, 95th Cong., 1st Sess. 88-109 (1977), reprinted in 1978 
U.S.C.C.A.N. 5787, 6049-71.
    The success of the pilot Program led Congress in 1986 to expand it 
nationwide as a permanent component of the Department of Justice. 
Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy 
Act of 1986, Public Law 99-554, 100 Stat. 3088 (1986). Today, United 
States Trustees are appointed by the Attorney General to serve in 21 
regions defined in 28 U.S.C. 581. The Attorney General provides general 
supervision, coordination and assistance to the United States Trustees, 
28 U.S.C. 586(a)(5)-(6), (c), and is assisted by the Director of the 
Executive Office for United States Trustees (``Director''). 28 CFR 
0.38. Throughout this Preamble, the Department will refer to the 
Director and the United States Trustees collectively as the 
``Program.''
    With regard to the administration of chapter 12 and 13 cases, the 
United States Trustee is authorized to appoint one or more standing 
trustees, subject to the Attorney General's approval, if ``the number 
of cases * * * commenced in a particular region so warrants * * *'' 28 
U.S.C. 586(b). Once appointed, the standing trustee administers all 
chapter 12 or 13 cases filed in a designated geographic area unless a 
conflict exists. The United States Trustees supervise ``any such 
individual appointed as standing trustee in the performance of the 
duties of standing trustee.'' 28 U.S.C. 586(b). If a standing trustee 
has not been appointed or has a conflict of interest, the United States 
Trustees appoint individuals to serve as trustees on a case-by-case 
basis pursuant to 11 U.S.C. 1202(a) or 1302(a) or will themselves serve 
as trustee.
    Standing trustees appointed under 28 U.S.C. 586(b) serve the same 
function in administering cases as trustees appointed under 11 U.S.C. 
1202(a) or 1302(a) to handle a particular case, but the method by which 
standing trustees receive compensation and reimbursement of expenses is 
entirely different. Trustees appointed on a case-by-case basis are 
awarded compensation and reimbursement of expenses from each specific 
estate by order of the bankruptcy court, after application, notice and 
hearing. See 11 U.S.C. 326(b), 330 (authorizing bankruptcy courts to 
award compensation to trustees appointed on a case-by-case basis under 
sections 1202(a), 1302(a)). In contrast, standing trustees collect a 
flat percentage of plan payments made by debtors in all cases that they 
administer to fund their compensation and expenses. 28 U.S.C. 586(e); 
see also 11 U.S.C. 326(b) (prohibiting courts from awarding 
compensation or reimbursement of expenses to standing trustees 
appointed under 28 U.S.C. 586(b)).
    The percentage fee that each standing trustee collects is set by 
the Director as the Attorney General's delegatee, in consultation with 
the United States Trustee for the region in which the standing trustee 
operates. 28 U.S.C. 586(e)(1)(B). The Attorney General also has 
authorized the Director to set the maximum annual compensation of each 
standing trustee at an amount not to exceed the highest annual rate of 
basic pay in effect for level V of the Executive Schedule and the 
comparable cash value of employment benefits. 28 U.S.C. 586(e)(1)(A).
[[Page 30173]]
    To determine which expenses are actual and necessary, the Director 
and the United States Trustee have adopted certain procedures. Before 
each fiscal year, standing trustees submit proposed budgets with 
projected revenues and expenses to the United States Trustee in their 
region. Program employees analyze the budgets and supplemental 
documents that are submitted and request additional information when 
appropriate. The Director ultimately determines which expenses appear 
to be ``actual'' and ``necessary.'' The Director, in consultation with 
the appropriate United States Trustee, also establishes the annual 
compensation for each standing trustee. Once compensation and expenses 
are determined, a percentage fee for each standing trustee is 
calculated and memorialized.
    In a chapter 13 case, the fee may not exceed ten percent of 
payments received under the plan. 28 U.S.C. 586(e)(1)(B)(i). In a 
chapter 12 case, the fee may not exceed 10 percent of all payments made 
by the debtor up to $450,000 and three percent of all payments over 
$450,000. 28 U.S.C. 586(e)(1)(B)(ii). The funds collected pursuant to 
the percentage fee can be used only to pay the standing trustee's 
compensation and ``actual, necessary expenses.'' 28 U.S.C. 586(e)(1). 
If excess funds are collected, they must be turned over to the United 
States Trustee System Fund. 28 U.S.C. 586(e)(2).
    Therefore, regardless of the number of cases that a standing 
trustee administers, the trustee's maximum annual compensation cannot 
exceed the statutory limit, nor can the total amount of compensation 
and expenses exceed 10% of total plan payments (or whatever lesser 
percentage has been fixed by the Attorney General). The legislative 
history notes that this system was enacted ``to encourage the standing 
trustees to keep costs low at the risk of reduced compensation.'' H.R. 
Rep. No. 595, 95th Cong., 1st Sess. 107 (1977), reprinted in 1978 
U.S.C.C.A.N. 6068.
    The need for adequate safeguards has become increasingly important 
in chapter 13 standing trustee operations given the numbers of cases 
and the sums of monies entrusted to standing trustees. According to 
information published by the Administrative Office of the United States 
Courts in 1983, ``Chapter XIII flourished under the Bankruptcy Act[,] 
increasing from 3,260 cases in 1940 to 39,442 cases in 1979.'' V-A 
Administrative Office of U.S. Courts, Guide to Judiciary Policies and 
Procedures, Bankruptcy Manual, Ch. III, app. 1 at 2 (Jan. 17, 1983). 
For the year ending September 30, 1996, annual national filings climbed 
to 336,615 new chapter 13 cases and more than $2 billion was 
administered. In FY 96, the entire chapter 13 system was managed by 
approximately 170 individuals who served as standing trustees. Their 
use of trust funds requires adequate safeguards to ensure the debtors' 
monies are expended appropriately.
    Beginning in late 1994, the United States Trustee and the Director 
considered the standing trustees' practices of hiring relatives, 
engaging in related-party transactions, and allocating expenses between 
related parties. They also considered revising the qualifications for 
appointment. A subcommittee of United States Trustee analyzed these 
issues. The United States Trustee and the Director concluded that 
promulgation of a rule would provide standards, achieve greater 
consistency in the application of Program policies, and open the 
bankruptcy system.
    Before the rule was published, the Program engaged in wide-ranging 
consultation on the issues to be addressed by the rulemaking. Various 
United States Trustee, the Director, the Deputy Directory, and other 
Program employees met with standing trustees and representatives from 
the National Association of Chapter 13 Trustees and the Association of 
Chapter 12 Trustees. On August 1, 1995, the United States Trustees 
distributed draft standards to all standing trustees and solicited 
written comments.
    Upon consideration of the submitted comments, the standards were 
revised. Throughout the revision period, members of the subcommittee 
and the Executive Office continued to meet with standing trustees, 
their associations, bankruptcy judges, and other interested parties at 
meetings across the country to discuss the proposed standards and 
obtain additional comments. The result of this lengthy process 
culminated in the publication of a proposed rule in the Federal 
Register for notice and comment. See 61 FR 37426 (July 18, 1996) (to be 
codified at 28 CFR 58.4).
II. Purpose of the Rule
    Through this rulemaking, the Program is adopting a prophylactic 
rule to prohibit standing trustees from hiring relatives and from 
engaging in dealings with themselves and related parties. Under the 
compensation mechanism set forth in 28 U.S.C. 586, standing trustees 
collect a percentage of all payments made by debtors to fund their 
operations. These monies are used, first, to pay all actual and 
necessary expenses of the trustee, and, second, to pay the trustee's 
compensation.
    When the Code was first adopted in 1978, standing trustee 
operations were much smaller than they are today. At that time, 
substantial economic incentive existed for standing trustees to 
minimize their expenses because every dollar that funded expenses meant 
one less dollar was available to pay the standing trustee's 
compensation.
    This built-in incentive to minimize costs has largely vanished. 
Chapter 13 case filings have surged without a corresponding increase in 
the total number of standing trustees appointed. Standing trustees now 
administer significantly greater numbers of cases and handle vastly 
larger sums of money.
    Trustee operations have grown so large and handle so much money 
that, in FY 97, 83 percent of chapter 13 standing trustees are eligible 
to earn maximum compensation (which the Attorney General has fixed at 
$126,473). With larger operations, however, comes a potential for 
misuse of trust funds and an opportunity for standing trustees to 
augment their personal or family's income by using trust funds to hire 
relatives or otherwise engage in self-dealing. These situations may 
also tempt standing trustees to expand the concept of necessary 
personnel benefits. For example, one commenter stated that standing 
trustees should be permitted to use trust funds to purchase such items 
as flowers, alcohol, food, party supplies, and gifts for their staff 
members. The Program believes that such items are not normally 
necessary to the administration of bankruptcy cases. When the items are 
purchased to benefit relatives of the trustee, it becomes even more 
difficult to determine whether the items are actually necessary for the 
administration of the trust or whether the trustee's relationship with 
relatives played a role in the decision to purchase the items.
    Because the use of trust funds in connection with related parties 
raises similar issues that are far more difficult to identify and 
evaluate, the Program is adopting a rule prohibiting future employment 
of relatives and future contracts or expense allocations between 
related parties. A prophylactic rule avoids situations in which United 
States Trustees have to micromanage daily or monthly expenditures by 
the standing trustees and bolsters public confidence that the 
bankruptcy system is not being operated to benefit the standing 
trustees at the expense of the debtors and creditors they are appointed 
to serve.
    However, application of this rule change current operations in some 
standing trustee offices and, thus, certain provisions of the rule 
minimize possible disruption and allow a gradual transition. All 
spouses who were hired
[[Page 30174]]
prior to August 1, 1995, are excepted from the rule prohibiting the 
hiring of relatives. Standing trustees also may seek two-year waivers 
from their United States Trustees to allow them to retain other 
currently employed relatives if the trustees can demonstrate that the 
relative's continued employment is necessary to the trust and the cost 
of the relative's compensation is reasonable.
    The differing treatment of existing spouses and non-spousal 
relatives is attributable to several concerns that standing trustees 
raised during the informal consultation period. Some trustees located 
in rural areas have come to rely on their spouses to provide necessary 
office support; if spouses can no longer serve this function, the local 
employment base may make it difficult for the standing trustees to find 
replacements with comparable skills and experience. To require their 
replacement may visit a unique disruption on the standing trustees' 
operations. Standing trustees also argued that spouses generally played 
a vital role in starting their operations and thus acquired knowledge 
about the standing trustee operation that cannot be easily replaced.
    To minimize possible disruption and allow a gradual transition to 
implement the rule governing related-party transactions, standing 
trustees may also seek an extension of time for compliance, not to 
exceed specified deadlines. The rule prohibiting all related-party 
transactions also gives United States Trustees the discretion to grant 
a waiver in situations involving a newly-appointed trustee who is 
starting operations. Finally, the rule prohibiting allocations among 
related parties gives the United States Trustees discretion to grant a 
limited waiver in appropriate circumstances, such as when a standing 
trustee is not able to earn compensation or when a standing chapter 13 
trustee also serves as a chapter 12 trustee.
III. Summary of Major Changes in Final Rule
    The final rule differs from the proposed rule in the following 
ways: First, the Program has modified the rule's effective date. The 
final rule will be effective 30 days after publication except as to 
current standing trustees. With respect to existing chapter 13 standing 
trustees, the rule is effective on October 1, 1997, the first day of 
their next fiscal year. As to current chapter 12 standing trustees, the 
rule is effective January 1, 1998, the first day of their fiscal year. 
Second, the final rule changes the definition of ``relative'' by 
identifying the relatives so as to provide clearer guidance to those 
who must abide by and implement the rule.
    The final rule also incorporates certain technical changes to 
clarify that, to obtain a waiver, a standing trustee must demonstrate 
that the expense is being used to purchase a good or service that is 
necessary to the administration of the bankruptcy cases and that the 
price is reasonable. This clarification comports with the statutory 
requirement that expenses be ``actual'' and ``necessary.'' The Program 
believes that an expense is an ``actual, necessary expense'' if it is 
actually used to purchase a good or service that is necessary for the 
administration of the bankruptcy cases, and the amount of the expense 
is reasonable for that particular good or service. Other technical 
changes clarify the definition of ``region'' and clarify that the rule 
applies to individuals only in their capacity as standing trustees.
IV. Discussion of Public Comments
    The Program received 20 comments on the proposed rule. Although 
four comments were submitted late, the Program noted that the late 
submissions either reflected concerns that had been raised in timely 
comments or reflected amendments to earlier comments. The Program chose 
to consider these submissions even though they were untimely. One 
comment was submitted by an attorney who represents standing trustees; 
one comment was submitted by a bankruptcy judge; and two comments were 
submitted by trustee organizations. The remaining comments were 
submitted by standing trustees. 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, either in the ``General 
Comments'' section or in the ``Section-by-Section Analysis''.
A. General Comments
    1. A number of commenters questioned whether the Department has the 
authority to promulgate the rule. One commenter added that only the 
Attorney General has the authority to issue the proposed regulation.
    The Program has determined that it possesses ample statutory 
authority to promulgate this regulation pursuant to these sources: 5 
U.S.C. 301, which enables the Attorney General to issue regulations 
governing the conduct of Department employees and the performance of 
agency business; 28 U.S.C. 509, which vests in the Attorney General all 
functions of her employees; 28 U.S.C. 586, which authorizes the 
Attorney General and the United States Trustees to appoint and 
supervise standing trustees, to fix compensation and the percentage fee 
of standing trustees based on their actual, necessary expenses, and to 
prescribe by rule the qualifications for appointment of standing 
trustees; and 28 U.S.C. 586(c), which obligates the Attorney General to 
supervise United States Trustees and provide them with general 
coordination and assistance. The Attorney General has delegated her 
authority to issue this rule to the Director. Order No. 2041-96 (July 
5, 1996). See also 28 U.S.C. 510.
    2. Several commenters stated that the promulgation of the rule 
exceeds the authority that Congress granted to the Program in that 
Congress did not intend the United States Trustees to supervise the 
conduct of standing trustees. This position is not supported by either 
the statute or its legislative history.
    Section 586 confers broad powers on the United States Trustees to 
review the conduct of standing trustees that they have appointed. Each 
United States Trustee ``shall * * * supervise the administration of 
cases and trustees in cases under chapter * * * 12 or 13.'' 28 U.S.C. 
586(a)(3). Moreover, ``[t]he United States Trustee * * * shall 
supervise any such individual appointed as standing trustee in the 
performance of the duties of standing trustee.'' 28 U.S.C. 586(b). 
Finally, the Program is authorized to set both the compensation of the 
standing trustee and the fee that may be collected from cases to cover 
the standing trustee's compensation and ``actual, necessary expenses.'' 
28 U.S.C. 586(e)(1). The legislative history supports this conclusion:
    The nature of the duties of the United States trustees makes 
them the administrative officers of the bankruptcy system * * *. The 
United States trustees will, * * * be responsible for the day-to-day 
operations of the bankruptcy system. They will supervise trustees, 
assist them in the performance of their duties, oversee their 
actions, and see to it that the bankruptcy laws are properly 
executed * * *.
    * * * [The United States trustees] will be responsible for 
determining the needs of the chapter 13 system, and whether a 
particular judicial district is best served by a private standing 
trustee or an assistant United States trustee. They will enforce the 
qualifications prescribed by the Attorney General for service as a 
chapter 13 trustee, and will supervise the performance of chapter 13 
trustees. They will consult with the Attorney General to fix the 
fees that a private standing chapter 13 trustee may charge, and the 
salary that the private trustee may receive.
H.R. Rep. No. 595, 95th Cong., 1st Sess. 109 (1977), reprinted in 1978 
U.S.C.C.A.N. 6070-71. See also H.R. Rep. No. 595, 95th Cong., 1st Sess. 
102
[[Page 30175]]
(1977), reprinted in 1978 U.S.C.C.A.N. 6063 (``United States trustees 
will also monitor the performance of panel members and standing chapter 
13 trustees in order to determine whether they should be continued in 
or removed from panel membership or office.'').
    The Program's authority over the compensation and expenses of 
standing trustees is further necessitated by the express lack of court 
authority over these matters. Section 326(b) of title 11, U.S. Code, 
prohibits a court from awarding compensation and expenses to a standing 
trustee appointed under 28 U.S.C. 586(b). Thus, unless the Program 
exerts supervision in this critical area, standing trustees would be 
unsupervised in their use of debtors' funds for the expenses of their 
trust operations.
    Several standing trustees also averred in their comments that the 
standards run contrary to Congressional intent in that Congress did not 
expect a centralized office to run the Program and that the rule 
eliminates the flexibility that Congress intended to build into the 
system. These comments reflect a misunderstanding of the statute and 
mistake the genesis of the rule. As noted above, Congress gave the 
Attorney General the authority to prescribe the qualifications for 
appointment as standing trustee, establish the compensation of standing 
trustees, determine the ``actual, necessary expenses'' that may be 
compensated from chapter 12 and 13 estates, and set the percentage fee 
to be charged to each bankruptcy case. 28 U.S.C. 586 (d), (e)(1). The 
Attorney General also established the Executive Office for United 
States Trustees to fulfill her responsibility of providing ``general 
coordination and assistance to the United States Trustees'' who 
supervise the standing trustees. 28 U.S.C. 586(c).
    The rule was proposed by the United States Trustees after they 
considered the problems caused when standing trustees hire relatives 
and engage in related-party transactions. The proposed rule was then 
considered and issued by the Director, pursuant to the authority 
delegated to him by the Attorney General. Thus, promulgation of the 
rule does not contravene the administrative scheme that Congress 
envisioned in 1978.
    On the contrary, the rule helps fulfill Congress' original intent 
to create a standing trustee fee system that provided an incentive to 
minimize administrative expenses: ``The fee system [for standing 
trustees] is designed to encourage the standing trustees to keep costs 
low at the risk of reduced compensation.'' H.R. Rep. No. 595, 95th 
Cong., 1st Sess. 107 (1977), reprinted in 1978 U.S.C.C.A.N. 6068. When 
limited funds are available, a standing trustee theoretically will 
minimize costs to maximize the funds available to pay compensation.
    As we explain in Section II of this preamble, the concept of the 
limited funds no longer exists. Standing trustees who receive maximum 
compensation, as most do today, have no institutional incentive to 
minimize costs. Without a profit motive to hold down expenses and with 
compensation set at maximum levels, the potential exists to augment 
compensation through expenses that accrue to the benefit of the 
standing trustee or a related party. As one commenter candidly 
admitted, ``This [rule] is an attempt to prohibit a non government 
employee from achieving additional income at no detriment to the 
debtors and/or taxpayers.'' This attitude ignores the fact that 
unnecessary costs hurt creditors by diminishing the amounts they 
receive on their claims or hurt debtors by requiring them to make 
larger payments under confirmed plans. Furthermore, when those costs 
are paid to the standing trustee or a related entity, they are 
perceived to compromise the standing trustee's fiduciary obligations.
    3. Several commenters stated that the Program is improperly issuing 
retroactive rules. These commenters misapprehend the concept of 
retroactivity.
    As discussed previously, the rule will be implemented 
prospectively. Generally, the rule will go into effect 30 days after 
the date of publication. With respect to current standing trustees, the 
rule will not be effective until the first day of the trustees' next 
fiscal year. That date is October 1, 1997, for standing trustees who 
serve in chapter 13 cases and January 1, 1998, for standing trustees 
who serve in chapter 12 cases. All budgeted expenses that have been 
submitted and approved for the current fiscal year will be unaffected 
by this rule. Moreover, certain standards, such as those prohibiting 
the hiring of relatives and prohibiting related-party transactions, 
provide for limited waivers in appropriate circumstances. Thus, 
provisions of the rule will be applied prospectively and are not 
retroactive rulemaking.
    4. One commenter argued that the rulemaking is unconstitutional 
because the final rule will not apply to bankruptcy cases in two states 
(Alabama and North Carolina) and, thus, will violate the Uniformity 
Clause of the U.S. Constitution, art. I, Section 8, cl. 4 (``The 
Congress shall have Power * * * [t]o establish * * * uniform Laws on 
the subject of Bankruptcies throughout the United States; * * *'').
    The Program disagrees with this legal conclusion. Congress 
initially established the Program in 1978 as a pilot program in 18 
federal judicial districts. Bankruptcy Reform Act of 1978, Public Law 
95-598, Sec. 1501, 92 Stat. 2652 (1978). After evaluating the pilot 
program, Congress in 1986 made the Program permanent in all federal 
judicial districts but decided to phase in implementation, bringing 
some federal districts in later than others. Bankruptcy Judges, United 
States Trustees, and Family Farmer Bankruptcy Act of 1986, Public Law 
99-554, 100 Stat. 3118-24, Sections 301-02 (1986). The last six 
judicial districts, which covered the states of Alabama and North 
Carolina, were scheduled to come into the Program no later than October 
1, 1992. In 1990, Congress extended the deadline for the final six 
districts to October 1, 2002. Judicial Improvements Act of 1990, Public 
Law 101-650, 104 Stat. 5115, Section 317(a) (1990). It is the statute, 
not this rulemaking, that creates the distinction between cases in 
Alabama and North Carolina and those in the rest of the country.
    These rules are promulgated in furtherance of the Program's 
statutory obligations to oversee the administration of bankruptcy cases 
and standing trustees. The statute does not alter substantitive 
bankruptcy law but simply authorizes the United States Trustees to 
further the efficient administration of bankruptcy matters. The United 
States Trustees' statutory duties are described in terms such as 
``supervise,'' ``monitor,'' ``appoint,'' and ``make * * * reports.'' 28 
U.S.C. 586. The organic statute creating the Program leaves the 
substantive debtor-creditor relationship unchanged; it simply provides 
for an administrative watchdog, the Program, to ensure the fairness and 
efficacy of the process through which debtors and creditors resolve 
their rights and obligations under substantive bankruptcy law. This 
does not violate the Uniformity Clause.
    Furthermore, Congress' decision to implement the Program gradually 
was rational. Congress has applied the statute in all federal 
districts; it has simply phased in its application. The Uniformity 
Clause does not preclude such a phase-in. Cf. City of New Orleans v. 
Dukes, 427 U.S. 297, 303 (1976) (per curiam) (``Legislatures may 
implement their program step by step''). Accordingly, the Program finds 
no merit to this constitutional concern.
    5. A few commenters implied that many actual abuses had to exist 
before the Program had a right to promulgate
[[Page 30176]]
standards. One stated, ``A few instances of abuse cannot in any
reasonable mind be considered as grounds for national standards * * 
*.'' Another asserted that the United States Trustees presently have 
all the tools they need to combat fraud and abuses within the standing 
trustee system.
    The Department of Justice, through the Program, is responsible for 
supervising standing trustees and establishing their compensation and 
percentage fees. Congress established and then expanded the Program to 
improve and strengthen the integrity of the bankruptcy system and 
eliminate the problems that arose when the system was administered by 
the courts.
    Based on the United States Trustees' expertise and experience in 
supervising standing trustees, a prophylactic rule is desirable and 
necessary, particularly in the area of related-party dealings. These 
dealings foster recurring problems such as hiring relatives at above 
market rates, hiring relatives where the United States Trustee could 
not verify that the relatives performed services, renting office space 
to trustee operations at above the market rate to cover mortgage 
payments and taxes, and using bankruptcy trust funds to subsidize 
another business in which the trustee is involved.
    When the trustee decides to hire a relative as a new employee, 
establishes a salary for that employee, and ultimately analyzes the 
relative's advancement within the trustee's organization, the trustee 
as decisionmaker has a conflict of interest. For similar reasons, 
nepotism is prohibited within the Federal government and in many 
private sector organizations. When trustees employ relatives, it is 
difficult for the supervising United States Trustees to review the 
trustees' employment decisions and to assess whether the expense is 
``actual'' and ``necessary'' without micromanaging the trustees' 
operations. A prophylactic rule is needed to prevent the problems 
widely associated with nepotism and related-party dealings.
    Experience has taught that the overall impact of a relative's 
hiring cannot be easily evaluated or discovered through any review or 
other documentary process. Nor can such problems be identified through 
personal interviews with the trustees' employees. Employees are 
understandably reluctant to critize the trustee's relative or to 
describe the deleterious effects on office morale.
    Standing trustees who contract or otherwise do business with 
related parties face a similar conflict of interest that is exacerbated 
because the trustee derives income or other financial benefits from 
these transactions. The current system, in which more than three-
fourths of the standing trustees earn maximum compensation, offers no 
economic incentive to minimize or reduce expenses. Related-party 
arrangements increase a trustee's personal or family income and are 
paid for by the bankruptcy estates. Yet chapter 12 or 13 debtors cannot 
challenge these expenses; nor can they select a trustee through a 
competitive process. The bankruptcy system does not allow a debtor to 
retain the service provider (standing trustee) whose expenses are lower 
or less questionable.
    Because of the difficulties inherent in related-party transactions, 
other agencies have promulgated prophylactic rules in similar 
circumstances: 42 CFR 413.153(b), (c) (Medicare regulation prohibiting 
reimbursements for interest expenses on loans between related parties); 
29 CFR 2550.408b-2 (Department of Labor regulations prohibiting self-
dealing of ERISA trustees).
    Bankruptcy trustees under the common law are held to the highest 
fiduciary standards of loyalty, which standards have been implemented 
and applied with ``[u]ncompromising rigidity.'' Meinhard v. Salmon, 249 
N.Y. 458, 464, 164 N.E. 545, 546 (1928) (Cardozo, C.J.). In Woods v. 
City National Bank & Trust Co., 312 U.S. 262, 278, reh'g denied, 312 
U.S. 716 (1941), the Supreme Court held that trustees who violated the 
duty of loyalty are not entitled to any compensation for services to 
the bankruptcy estate regardless of whether the estate had been harmed. 
Woods, 312 U.S. at 268.
    The Court reemphasized this principle in Mosser v. Darrow, 341 U.S. 
26 (1951), when it found that a bankruptcy trustee could be surcharged 
for $40,000 in profits he permitted his employees to earn using 
fiduciary monies. The Court rejected the trustee's argument that his 
actions had not damaged the estate:
    Equity tolerates in bankruptcy trustees no interest adverse to 
the trust. This is not because such interest are always corrupt but 
because they are always corrupting. By its exclusion of the trustee 
from any personal interest, it seeks to avoid such delicate 
inquiries as we have here into the conduct of its own appointees by 
exacting from them forbearance of all opportunities by exacting from 
them forbearings of all opportunities to advance self-interest that 
might bring the disinterestedness of their administration into 
question.
    These strict prohibitions would serve little purpose if the 
trustee were free to authorize others to do what he is forbidden. 
While there is no charge of it here, it is obvious that this would 
open up opportunities for devious dealings in the name of others 
that the trustee could not conduct in his own. The motives of man 
are too complex for equity to separate in the case of its trustees 
the motive of acquiring efficient help from motives of favoring 
help, for any reason at all or from anticipation of counterfavors 
later to come. We think that which the trustee had no right to do he 
had no right to authorize, and that the transactions were as 
forbidden for benefit of others as they would have been on behalf of 
the trustee himself.
Id. at 271-72. These principles remain viable today. See, e.g., United 
States Trustee v. Bloom (In re Palm Coast, Matanza Shores Ltd. 
Partnership), 101 F.3d 253, 257-58 (2d Cir. 1996) (applying common law 
of trusts).
    A prophylactic rule is needed to address the standing trustees' 
current practices of hiring relatives and engaging in other related-
party transactions. Promulgation of the rule will provide direction to 
standing trustees about permissible uses of fiduciary funds and will 
prevent abuses, thereby benefitting creditors and debtors. The rule 
also will assist the United States Trustees' supervision of standing 
trustees by providing direction on these important issues. This rule 
will bolster public confidence in a bankruptcy system that is operated 
fairly and impartially and not for the financial benefit of the 
professionals involved.
    6. One commenter asked whether the Program intended through the 
rule to make standing trustees employees of the United States Trustees. 
By promulgating this rule, the Program does not make standing trustees 
federal employees.
    7. Several commenters submitted their thoughts on handbook 
provisions that the United States Trustees implemented in 1996. The 
revisions to the handbooks were not published in the Federal Register 
and are not within the scope of this rulemaking.
    8. One commenter noted that the proposed rule contains no protocol 
for starting a chapter 13 office or for the transfer of an existing 
office. With respect to related-party allocations, the final rule 
provides that United States trustees may, in appropriate circumstances, 
permit a newly-appointed standing trustee to contract with or allocate 
expenses between related parties. To the extent that this commenter 
seeks detailed procedures for starting a standing trustee operation, 
that matter is beyond the scope of this rulemaking.
    9. One standing trustee described the rule as inequitable because 
it ``clearly'' restricts the standing trustees' discretion but does not 
decrease their liability.
[[Page 30177]]
    The Program believes that this comment misapprehends the scope of 
the rule. Section 586 of title 28 requires the United States Trustees 
to appoint and supervise the conduct and expenses of standing trustees. 
The Program is promulgating the rule in furtherance of these 
responsibilities and pursuant to statute.
    10. One commenter amended its earlier objections to suggest 
detailed factors for the United States trustees to analyze when 
considering whether to grant a waiver from the rule's application in 
limited situations. The Program has not incorporated the precise 
factors suggested because the standard set forth in the rule provides 
sufficient flexibility to United States Trustees to consider waiver 
requests in light of local or unique circumstances. However, the 
Program has made a few technical changes to the standard for waiver by 
deleting the requirement of ``extraordinary'' and by clarifying that 
waivers may be granted if the standing trustees can demonstrate a 
compelling need to the trustee operation and the necessity and 
reasonableness of the expense. These technical changes will bolster the 
United States Trustees' discretion in these matters and cause the rule 
to track more closely the statute's requirements that expenses be 
``actual'' and ``necessary.''
B. Comments on Specific Subsections of the Proposed Rule
1. Definition of Relative
    Comment: In connection with the initial qualifications for 
appointment and the prohibition on hiring of relatives, several 
standing trustees commented that they were unclear as to which 
relatives were encompassed by the proposed rule.
    Response: In response to this comment, the Program has revised the 
definition of ``relative'' in 58.4(a)(2) to list each specific 
relationship that is subject to the rule. The definition of 
``relative'' set forth in the proposed rule was derived from 11 U.S.C. 
101(45), which defines ``relative'' as an ``individual related by 
affinity or consanguinity within the third degree as determined by the 
common law, or individual in a step or adoptive relationship within 
such third degree''.
    The final rule lists the specific relationships encompassed within 
the word ``relative'' to provide clearer guidance to those who must 
implement or abide by the rule. Furthermore, the adoption of this 
definition will establish a uniform, national standard. Although the 
final definition excludes certain relationships that were covered by 
the definition in the proposed rule as applied in some jurisdictions 
(e.g., great-grandparents, great-aunts, great-uncles, second cousins), 
the goal of prohibiting favored treatment and any appearance of 
impropriety will be better attained through this more specific 
approach.
    The language in the final rule is derived from the definition of 
``relative'' that applies to United States Trustees with respect to 
their hiring, promotion and salary practices. The Civil Service Reform 
Act makes nepotism a prohibited personnel practice. 5 U.S.C. 
2302(b)(7). Section 3110(b) also prevents a United States Trustee from 
appointing, employing, promoting, or in any way advancing one of their 
relatives. 5 U.S.C. 3110(b). The term ``relative'' is defined for both 
statutory subsections in 5 U.S.C. 3110(a)(3).
    In the final rule, the definition of ``relative'' expands the 
language in 5 U.S.C. 3110(a)(3) to include ``an individual whose close 
association is the equivalent of a spousal relationship.'' This 
additional definitional category comports with those courts that have 
extended the Bankruptcy Code provisions restricting pre-petition 
transfers to insiders or relatives to include those persons living with 
debtors in the equivalent of spousal relationships. See, e.g., Gennet 
v. Docktor (In re Levy), 185 B.R. 378, 384-85 (Bankr. S.D. Fla. 1995); 
Freund v. Heath (In re McIver), 177 B.R. 366, 370-71 (Bankr. M.D. Fla. 
1994); Wiswall v. Tanner (In re Tanner), 145 B.R. 672, 677-78 (Bankr. 
W.D. Wash. 1992); Loftis v. Minar (Matter of Montanino), 15 B.R. 307, 
310-11 (Bankr. D.N.J. 1981).
    The definition of ``relatives'' in the final rule is consistent 
with federal law and rationally relates to the legitimate governmental 
goal of reducing potential or actual improprieties within the standing 
trustee employment system. The rest of the definitions in 58.4(a) 
remain unchanged.
2. Qualifications for Appointment
    Comment: One standing trustee commented that the qualifications for 
appointment should be stated in the positive rather than the negative.
    Response: The qualifications for appointment are intended to 
restrict the United States Trustees' discretion to appoint individuals 
as standing trustees. It would be awkward and unclear to express these 
restrictions in a positive manner. Accordingly, we reject this comment.
    Comment: Several standing trustees commented that the proposed 
qualifications for initial appointment of standing trustees are too 
narrow and should be expanded. These standing trustees did not agree, 
however, as to the scope of expansion. Several standing trustees 
believed that the qualifications should prohibit the appointment of 
individuals who are relatives of district court and circuit court of 
appeals judges; one even suggested that relatives of Supreme Court 
justices should not be deemed qualified for appointment.
    Response: The Program does not find it necessary to expand the 
restriction beyond the bankruptcy judges and clerks in the region where 
the standing trustee serves. Through this regulation, the Program seeks 
to strengthen the integrity of the bankruptcy administrative process by 
circumscribing the United States Trustees' discretion to appoint 
certain individuals who are related to standing trustees and other 
frequent participants in the federal bankruptcy system. As previously 
discussed, the Program was created to remove administrative functions 
from the bankruptcy courts and to remedy the existence and perceptions 
of cronyism that existed within the prior administrative system. The 
rule will promote an appointment process that is based on merit, 
untainted by perceptions that appointments are restricted to insiders. 
Moreover, it will enhance the integrity of the current system by 
reducing--if not eliminating--the opportunities for a bankruptcy court 
to be faced with real or perceived conflicts of interest that arise if 
the court were to rule on bankruptcy cases in which a relative was the 
case trustee.
    Finally, promulgation of this rule is consistent with the policies 
codified in Fed. R. Bankr. P. 5002, which prohibits nepotism in 
bankruptcy court appointments and employment. See 18 U.S.C. 1910 
(making it a criminal offense for a judge to appoint a relative as 
trustee); 28 U.S.C. 458 (prohibiting judicial appointments or 
employment in court offices of relatives of judges).
    Comment: One standing trustee commented that the standards for 
appointment of United States Trustees and standing trustees should be 
the same.
    Response: The Program does not find this comment to be apposite. 
United States Trustees are senior officials of the Department of 
Justice who serve at the pleasure of the Attorney General. United 
States Trustees are appointed to a five-year term pursuant to 28 U.S.C. 
581 and their obligations to supervise bankruptcy administration and 
trustees encompass a wide range of matters detailed in 28 U.S.C. 586. 
Their duties cover all chapters of the Bankruptcy Code and include the 
duty to assist the
[[Page 30178]]
United States Attorney, upon request, to carry out the prosecution of 
federal criminal actions. Because United States Trustees have the 
responsibility under 11 U.S.C. 307 to appear in court, the Attorney 
General appoints attorneys to these positions. United States Trustees 
also serve as policy-making, policy-advocating officers.
    Standing trustees are private individuals appointed pursuant to 28 
U.S.C. 586(b) to serve as fiduciaries in cases commenced under chapter 
12 or chapter 13 of the Bankruptcy Code. Standing trustees must honor 
the administrative duties that are outlined in 11 U.S.C. 1202 and 1302; 
and the law specifically states that they need not be attorneys. 28 
U.S.C. 586(d). Given these differences, we do not find any comparison 
between the two positions to be relevant for purposes of analyzing the 
rule. We note, however, that applicable law prohibits a United States 
Trustee from hiring relatives or taking official actions that affect 
their personal or their family's financial interests. 5 U.S.C. 
2302(b)(7), 3110(b); 18 U.S.C. 208.
    Comment: One standing trustee asked why the initial qualifications 
for appointment were being revised.
    Response: The rule updates current appointment policy and informs 
all prospective applicants of the restrictions applicable to the United 
States Trustees' appointment authority. Moreover, as explained above, 
the rule avoids many of the actual or perceived conflicts of interest 
that arise when a standing trustee is related to other frequent 
participants in the bankruptcy system. It therefore promotes the fair 
and efficient administration of chapter 12 and chapter 13 estates.
    Comment: One standing trustee raised questions concerning the legal 
basis for a United States Trustee's refusal to reappoint a standing 
trustee. This standing trustee also asked how section 324 of the 
Bankruptcy Code affects the United States Trustee's authority to refuse 
to reappoint a standing trustee.
    Response: Currently there is no reappointment process for standing 
trustees once they are appointed. Standing trustees are appointed and 
serve until they retire or resign, the Untied States Trustee stops 
assigning cases to them, or the bankruptcy court removes them from 
their existing cases for cause under 11 U.S.C. 324. See generally 
Richman v. Straley, 48 F.3d 1139, 1143-44 (10th Cir. 1995) (discussing 
the distinction between removal under section 324 and termination of 
future case assignments).
    Comment: One standing trustee contended (without discussion) that 
the imposition of initial qualifications for appointment violates the 
equal protection guarantees in the Federal Constitution.
    Response: The Program has the authority under 28 U.S.C. 586 to 
promulgate regulations governing the initial qualifications for 
appointment. The qualifications contained within this final rule do not 
violate the Equal Protection guarantees in the Fifth Amendment to the 
Constitution because they do not classify individuals based on 
impermissible criteria; nor do they improperly deny applicants a 
fundamental constitutional right.
    The qualifications promulgated here advance the legitimate 
governmental goal of appointing standing trustees who can perform their 
fiduciary and statutory obligations free from any actual bias or 
potential conflict of interest. The qualifications also further the 
legitimate governmental goal of ensuring that its programs, here the 
appointment of standing trustees, are administered in a fair and open 
manner. The legislative history for the 1978 Bankruptcy Reform Act 
chronicled the problems inherent in a closed bankruptcy network run by 
insiders. See, e.g.,  H.R. Rep. No. 595, 95th Cong. 1st Sess. 88-99 
(1977). Accordingly, we do not agree with this comment.
    Comment: One standing trustee stated that there is no rational 
basis for the prohibition against appointing a standing trustee who is 
related to another standing trustee.
    Response: The Program is a young agency that does not have the 
regulatory history of other agencies; however, it does have the benefit 
of a century of history of bankruptcy administration and repeated 
studies of pre-existing abuses. See, e.g., H.R. Rep. No. 595, 95th 
Cong. 1st Sess. (1977), reprinted in 1978 U.S.C.C.A.N. 5963; Report of 
the Commission of Bankruptcy Laws of the United States, H.R. Doc. No. 
137, 93d Cong. 1st Sess. (1973); 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, 72d Cong. 
1st Sess. (1932); William J. Donovan, House Committee on the Judiciary, 
Administration of Bankrupt Estates, 71st Cong. 3d Sess. (Comm. Print 
1931). In the past, United States Trustees have appointed individuals 
as standing trustees who were related to other standing trustees, but, 
based on this experience, they have concluded that such appointments do 
not create an optimal situation. For example, certain standing trustees 
have indicated that they believed one of their relatives should be 
appointed as their successor. These circumstances tend to perpetuate 
the perception, if not the existence, of a closed bankruptcy network. 
The rule prohibiting appointments of individuals who are relatives of 
standing trustees fosters the congressional policy of encouraging an 
open bankruptcy system, untainted by cronyism in any form.
3. Hiring of Relatives
    Comment: Two standing trustees asserted that the restriction on 
their hiring of relatives was unconstitutional. One of these standing 
trustees argued that this restriction discriminates against a suspect 
class, that of women over the age of 40. The other stated that the 
Program is discriminating against a class created by birth or marriage. 
Finally, a third standing trustee contended that any individuals 
terminated after this rule is promulgated would be denied their rights 
to due process. In a variation on this theme, a different standing 
trustee argued that, if he is forced to fire his daughter, she will 
have a difficult time obtaining comparable employment because her 
skills are so specialized.
    Response: The prohibition against hiring relatives is intended to 
ensure that standing trustees comply with the fiduciary duty of loyalty 
and to minimize any incentive or opportunity for standing trustees to 
incur unreasonable or unnecessary expenses at the expense of bankruptcy 
debtors and creditors. That prohibition does not discriminate against 
my suspect class. The rule does not impinge any fundamental rights; and 
it does not employ any improper characteristics (such as race, national 
origin, citizenship, or sex) to define the affected persons. Indeed, 
non-spousal relatives who will be affected by the rule include men and 
women.
    Second, promulgation of the rule does not violate the Due Process 
Clause, U.S. Const. amend. V. The rule does not deprive the affected 
relatives of any liberty or property interest; and it rationally 
relates to the legitimate governmental interest in the fair, impartial, 
and efficient administration of chapter 12 and chapter 13 bankruptcy 
estates. Nor do standing trustees have any such liberty or property 
interest because expenses are budgeted and approved on a year-to-year 
basis. There is no guarantee that a standing trustee will get new cases 
or a similar number of cases every year, that the same expenses will be 
approved from year to year, or that the percentage fee will be 
sufficient each year to cover long-term expenses that the standing 
trustee has incurred. Thus, a standing trustee has
[[Page 30179]]
no entitlement to have future expenses compensated in precisely the 
same manner that they were compensated in the past.
    Finally, the affected relatives are employed in jobs requiring 
legal, clerical, administrative, accounting or computer skills that can 
be transferred to other positions within the public or private sectors. 
Since the relatives are presumed to be paid market salaries (or even 
less than market rates, as some commenters suggest), these relatives 
should be able to obtain other similar positions during the transition 
period provided.
    Comment: One standing trustee asserted without evidentiary support 
that the prohibition on employment of relatives is not necessary 
because situations in which standing trustees employ relatives are more 
the exception than the rule. This standing trustee also contended, 
again without evidence, that relatives in smaller offices are paid less 
than market rate and bear more responsibility than the average 
employee.
    Response: In FY 1996, 50 of the 170 appointed chapter 13 trustees 
had hired relatives to work for them as employees. This represents 30 
percent of all chapter 13 trustees, not an insignificant percentage.
    With respect to salaries, the Program has no evidence--and the 
standing trustees presented no evidence--to support the position that 
relatives in smaller offices currently receive less than market rate 
and bear more responsibility than their counterparts in larger offices. 
Moreover, the relationship between the standing trustee and his or her 
relatives may affect the exercise of the standing trustee's judgment 
and may make it difficult, if not impossible, for the standing trustee 
to make a fair and unbiased assessment of the work performed by his or 
her relative.
    Comment: Several standing trustees and their associations 
criticized the application of this rule to relatives other than 
spouses. These commenters argue that imposition of the rule on non-
spousal relatives will lead to unfair and inappropriate results; that 
there is no rational distinction between spouses and other relatives; 
and that the implementation of this standard will cause standing 
trustees to lose experienced and valuable personnel who they cannot 
quickly replace. One standing trustee argued that the rule should be 
modified to address nepotism issues on a case-by-case basis. Others 
contended that all relatives currently employed by standing trustees 
should be exempted from the rule's application.
    Response: The Program does not find these arguments persuasive. The 
rule proscribes the employment of all relatives in the future, spouses 
and non-spousal relatives alike. This comment is addressed to 
subsection (d)(1)(iii) of the rule in which the Program exempted those 
spouses employed as of August 1, 1995, from the rule's application. 
With respect to relatives who are not spouses, the Program has delayed 
implementation until October 1, 1998 to provide a transition period.
    A prophylactic rule is needed to address the employment of 
relatives because, in the Program's experience, abuses within the 
system are not readily discovered or easily remedied. When the standing 
trustee decides to add a new employee to the payroll, selects an 
applicant for the job, establishes compensation, and determines an 
employee's advancement, the standing trustee's objectivity inevitably 
is called into question when the decision involves the trustee's 
relative. It is also difficult for the United States Trustee to 
evaluate the necessity of the expense without inquiring into the 
standing trustee's motives or at least the determination that the 
relative was hired on the basis of merit, that the employed relative 
was performing duties commensurate with the relative's salary, or that 
an employed relative deserved a raise or promotion. The United States 
Trustees do not have the resources to conduct such examinations every 
time a standing trustee wants to hire, promote, or increase the salary 
of a relative; and, even if resources were available, such examinations 
would likely be perceived as micromanagement of the standing trustee 
operations.
    We also note that employees in offices where relatives have left 
the trustees' employ have commented on the improvement in office morale 
after the relative no longer worked in the office. Such comments 
support our conclusion that the implementation of this rule will help 
ensure that chapter 12 and chapter 13 cases are administered fairly and 
efficiently and solely for the benefit of the debtors and creditors who 
have an interest in the property of the estates.
    The rule recognizes, however, that to impose this regulation 
immediately on all relatives may cause some disruption to the 
operations of standing trustees. Standing trustees argued that the 
local employment base in rural areas may make it difficult for those 
standing trustees to find personnel with comparable skills and 
experience to replace their spouses. Moreover, because many spouses are 
employed in supervisory or management positions and because spouses 
generally helped the standing trustees to start their operations, the 
rule excepts all spouses employed by the standing trustees as of August 
1, 1995, the date on which the Program first distributed draft 
standards prohibiting the employment of relatives. To minimize any 
disruption with respect to non-spousal relatives, the Program has 
delayed implementation of this rule concerning those relatives until 
October 1, 1998. This period will give standing trustees time to hire 
and train other employees and has the added benefit of enabling 
affected relatives to find alternative employment in an orderly 
fashion. Finally, in situations where standing trustees can demonstrate 
the existence of compelling circumstances for the trustee operations 
and can show that the employees are being paid no greater than market 
rates, the rule gives the United States Trustees the discretion to 
grant a two-year waiver for those standing trustees to continue to 
employ a non-spousal relative. This waiver can be renewed if the 
standing trustee continues to satisfy the waiver requirements in the 
rule.
    Comment: One standing trustee contended that the rule prohibiting 
nepotism should not be applied because no government funds are involved 
in a chapter 13 trustee operation and, thus, the Program is interfering 
in what is essentially a private enterprise.
    Response: The Program disagrees with this analysis. A standing 
trustee operation differs dramatically from a private enterprise in 
that it is funded entirely from debtor receipts and is not subject to a 
competitive market. Debtors are not allowed to choose their standing 
trustee. Most areas have only one standing trustee and chapter 13 or 
chapter 12 debtors are forced to use the standing trustee in their 
area, regardless of the debtor's satisfaction with services rendered. 
Even in the minority of areas where more than one standing trustee 
serves, a debtor is assigned to a specific trustee and there is no 
administrative mechanism to transfer the case if a debtor is unhappy 
with the trustee's performance or expenditures, short of asking the 
court to remove the trustee under 11 U.S.C. 324. Indeed, the standing 
trustee system is the only system within the Bankruptcy Code that does 
not permit election of case trustees. Cf. 11 U.S.C. 702, 1104. In 
conclusion, competition, which helps keep private enterprises' expenses 
low, does not operate in the standing trustee system.
    Moreover, as fiduciaries, the standing trustees owe their 
allegiance to the bankruptcy estates they administer, not to third 
parties such as their relatives. The Program has a statutory
[[Page 30180]]
responsibility to establish the maximum annual compensation of standing 
trustees and to establish a percentage fee that will cover the standing 
trustees' compensation and ``actual, necessary expenses incurred by'' 
the standing trustees. 28 U.S.C. 586(e)(1). The Program is promulgating 
this rule to ensure that the percentage fees collected from chapter 12 
and chapter 13 cases are used to pay only those expenses that are 
``actual'' and ``necessary'' and that standing trustees fulfill their 
fiduciary duties undistracted by their own self-interests or familial 
interests.
    Comment: Several standing trustees asserted that the imposition of 
this standard will interfere unnecessarily with employment 
relationships. One standing trustee commented that if employees are 
receiving market rates as salaries, their hiring should not be 
prohibited merely because they are related to the standing trustee.
    Response: The rule does not unduly interfere with the standing 
trustee's employment relationships. A standing trustee who hires 
relatives has dual and perhaps competing loyalties: loyalties to his or 
her family members and loyalties to debtors and creditors in bankruptcy 
cases. As noted above, such conflicts of interest are inconsistent with 
the standing trustee's duty of undivided loyalty to the trust. 
Moreover, because debtors do not choose their trustee, there are no 
market forces to ensure that the standing trustee minimizes the costs 
to the estate. Although the United States Trustees supervise standing 
trustees and review the appropriateness of all expenses, they do not 
have the resources to examine the day-to-day expenses of each standing 
trustee to make sure that each payment to the standing trustee's 
relative is, indeed, an ``actual, necessary expense'' that is properly 
charged to the estate.
    Comment: One standing trustee argued that he should be permitted to 
hire his children at minimum wage for a limited number of hours per 
quarter ``to accomplish tasks around the office that would be too 
expensive or inefficient to contract for and too far outside the job 
descriptions of staff members to assign to them.'' He cited as an 
example the task of stuffing envelopes.
    Response: The Program does not question the standing trustee's 
purported need to stuff envelopes or perform other ministerial tasks. 
It is unclear why a relative is better suited than other regular 
employees to perform these tasks or why regularly employed clerical 
staff do not already perform these duties. The rule does not interfere 
with a standing trustee's ability to hire necessary staff, whether 
temporary, part-time or full-time; it prohibits only the employment of 
relatives.
    Comment: One association asserted that the rule does not account 
for local considerations or the economic detriment to bankruptcy 
estates that will be caused if trustees can no longer employ relatives.
    Response: The rule prohibiting employment of non-spousal relatives 
will not be enforced until October 1, 1998, which should give the 
standing trustee time to hire a suitable replacement. After that date, 
the Program has accounted for local considerations and economic factors 
by permitting a standing trustee to seek a wavier of the rule 
prohibiting employment of non-spousal relatives in situations where 
compelling circumstances exist.
4. Related Party Transactions
    Comment: Several standing trustees and their organizations contend 
that it is unfair to forbid related party transactions and allocations 
when certain transactions and allocations have been permitted in the 
past. These commenters also assert that implementation of this standard 
will violate and interfere with vested contract rights of related 
parties. Finally, one association characterizes the rule as unfair 
because it terminates contracts for no legal or valid basis.
    Response: The Program has concluded that, in the future, it should 
not permit contracts or allocations between standing trustees and 
related third parties except in narrow circumstances. A prophylactic 
rule is desirable because, when a trustee purchases or leases goods or 
services from himself or a related party, it is difficult to detect or 
remedy circumstances in which estate funds are being used 
inappropriately.
    The rule will go into effect with respect to existing standing 
trustees on the first day of their next fiscal year. However, because 
some standing trustees have contractual relationships with related 
parties, and, in some cases, it would pose an undue hardship to end 
those contractual relationships by the first day of the next fiscal 
year, the rule provides for delayed implementation in appropriate 
situations. For instance, the rule permits a United States Trustee to 
grant a reasonable extension to a standing trustee who needs additional 
time to comply with this rule. To obtain an extension, the standing 
trustee must submit written evidence, satisfactory to the United States 
Trustee, to demonstrate that the expense is necessary and at or below 
market rate.
    The rule also provides for waiver in certain limited situations 
where the standing trustee has a natural incentive to conserve 
expenses. For instance, a newly-appointed trustee can apply for a 
waiver from the prohibition on related-party transactions and 
allocations if the standing trustee can demonstrate in writing that the 
waiver is necessary for the trustee operation and the cost for which 
the trustee seeks permission is at or below market rate. United States 
Trustees are given the flexibility to permit an exception in these 
circumstances because trustees who are starting their operations and 
are not receiving maximum compensation have an inherent incentive to 
keep their expenses low. This flexibility also will assist new trustees 
in starting their operations.
    The rule also permits a standing trustee who has not earned maximum 
compensation to seek a provisional waiver from the prohibition on 
related-party allocations. Economic reality requires distinguishing in 
appropriate circumstances between standing trustees who are earning 
maximum compensation and those who are not. Under the fee structure 
established in 28 U.S.C. 586, a standing trustee must pay expenses 
first, his or her compensation second, and any excess monies to the 
United States Trustee System Fund. When a standing trustee is earning 
less than maximum allowable compensation, every dollar used to pay for 
expenses is one less dollar that is available to fund compensation. The 
incentive to minimize expenses because the standing trustee otherwise 
will receive reduced compensation is lacking for the approximately 80 
percent of chapter 13 trustees who in FY 96 received maximum 
compensation of $124,333, plus all expenses.
    Once standing trustees are earning maximum compensation, the only 
way they can increase their compensation is indirectly. A standing 
trustee who is also a practicing attorney could offer a justification 
to acquire a law library payable out of the trustee expense funds when, 
in fact, the library is intended to benefit the law firm primarily, 
thereby subsidizing the law firm's expenses and increasing the profit 
to the firm's members. One standing trustee justified unfettered 
expenses by asserting that the system does ``not cost taxpayers a 
penny.'' Although the costs of operating the standing trustee system 
are not paid by a direct appropriation from Congress, they are borne by 
debtors' payments under the financing mechanism in 28 U.S.C. 586.
    Because the economic pressures to minimize expenses cease to exist 
once
[[Page 30181]]
standing trustees are earning maximum compensation, there is a rational 
basis to permit trustees who are not earning maximum compensation to 
allocate certain expenses while simultaneously prohibiting trustees who 
receive maximum compensation from allocating expenses.
    Finally, the United States Trustee has the power to grant a 
provisional waiver of the allocation prohibition to a standing trustee 
who serves in both chapter 12 and chapter 13 cases. These circumstances 
do not involve a trustee who is contracting or allocating with a 
related party. Trustees in these situations are sharing or allocating 
expenses between two trusts. Thus, the conflicts of interest inherent 
when a standing trustee contracts or allocates with himself or a 
related party do not exist.
    Comment: One standing trustee commented that the rule as to 
related-party transactions is unreasonable when applied to standing 
trustees who are also attorneys. This standing trustee asserted, 
without evidence, that if he is forced to move the trustee operations 
from his law office, the trustee will incur larger rent expenses. 
Another standing trustee argued that the present policy allowing 
allocations permits standing trustees to ``effect economies not 
otherwise available.''
    Response: Whether a standing trustee administers 1,000 cases or 
10,000 cases, the trustee's maximum annual compensation cannot exceed 
the statutory limit, nor can the total amount of compensation and 
expenses exceed 10% of the total plan payments. Although the numbers of 
cases being administered certainly allows standing trustees to achieve 
economies of scale, the Program has not found that allocation of 
expenses among related parties, itself, has permitted ``economies of 
scale not otherwise available.'' To the contrary, the Program has found 
that this is a very difficult and troubling area to monitor.
    Many trustees engage in other occupations, particularly as 
attorneys. The desire to keep both the standing trustee office and the 
law firm operating under the same roof is understandable, because the 
situation is convenient, and likely well-intentioned. Once the standing 
trustee operations grow to the point that they are able to support 
maximum compensation for the trustee and all the trustee's costs, the 
trustee can increase his or her compensation by having the trustee 
operation enter into a contract with a person or entity who is related 
to the trustee. For example, the trustee could have his or her law 
partnership lease office space or equipment to the trustee operation. 
The trustee would then receive compensation and the income derived from 
the lease, a situation too easily susceptible to manipulation and 
difficult to detect. Accordingly, related-party transactions and 
allocations in the future will be permitted only in limited 
circumstances that are amenable to adequate supervision or where the 
incentive ``to keep costs low at the risk of reduced compensation'' 
still exists.
    Comment: A standing trustee and one association stated that, 
although standing trustees should not profit from the trust, neither 
should they incur a loss. These commenters hypothesized that it might 
not be practical for smaller standing trustees to purchase separate 
equipment, computers, furniture, etc. for the exclusive use of the 
trustee's office and argued that the United States Trustee should 
permit some reasonable allocation of cost sharing. Finally, the 
association stated that the United States Trustee has offered standing 
trustees no real opportunity to try to refute the conclusion that 
allocations are inappropriate.
    Response: As discussed above, under the rule, a standing trustee 
who is not earning maximum compensation may seek a provisional waiver 
from the supervising United States Trustee. A provisional waiver also 
may be requested if the standing trustee serves in chapter 13 and 
chapter 12 cases and the trustee wishes to allocate between these two 
operations. Therefore, the Program has provided for allocations in 
warranted circumstances.
    Regarding the comment that trustees should not be forced to operate 
at a loss, all actual and necessary expenses are funded by debtors' 
payments under the statutory scheme set out in 28 U.S.C. 586. Standing 
trustees do not personally pay expenses. All expenses are paid out of 
the trust fund, including any monies that the standing trustee advanced 
for expenses during the start-up phase of a new trustee operation. 
Trustees who administer a large number of cases will be able to absorb 
any cost differential in operational and overhead expenses. The Program 
cannot assess the economic impact on the standing trustee's personal 
interests in related entities, however.
    The Program has made a policy decision, based on its experience, to 
prohibit future transactions and expense allocations between related 
parties. This decision will provide clearer direction to those who must 
abide by and those who must administer the strictures of 28 U.S.C. 
586(e).
    Comment: Several standing trustees and an association commented 
that this rule violates the Bankruptcy Code because United States 
Trustees do not have the jurisdiction to decide whether expenses are 
``actual and necessary''. Pursuant to this perspective, the United 
States Trustees can only rubber-stamp the expenses submitted by the 
standing trustees; if there is any dispute about these expenses, only 
the bankruptcy courts have the authority to decide the question. The 
association added that the standing trustee's role is to seek a court 
ruling on any items that the United States Trustee disputes as 
unnecessary.
    Response: These comments do not comport with the compensation 
scheme outlined in 28 U.S.C. 586(e), which both empowers and obligates 
the Attorney General, in consultation with the United States Trustees, 
to establish compensation and a percentage fee for standing trustees.
    As discussed in the General Comments above, the Attorney General--
not bankruptcy courts--is empowered to establish compensation for each 
standing trustee. Once compensation has been set, the statute then 
requires the Attorney General to establish a percentage fee sufficient 
to pay the trustee's compensation and all actual, necessary expenses. 
28 U.S.C. 586(e)(1).
    The language ``actual, necessary'' is language of limitation that 
modifies the noun ``expenses.'' Thus, Congress did not want to permit 
standing trustees to recoup every expense no matter how remotely 
related to the trustee operation. Moreover, Congress did not define the 
words ``actual'' and ``necessary.'' Cf. 11 U.S.C. 330 (where Congress 
engrafted various factors for the bankruptcy courts to consider when 
awarding fees to trustees in chapter 7 and 11 cases and other 
professionals). See also Patterson v. Shumate, 504 U.S. 753, 758 (1992) 
(use of broad language supports more expansive reading especially when 
Congress has used narrower language in other subsections of statute). 
Instead, Congress authorized the Attorney General to decide which 
expenses are ``actual'' and ``necessary'' and thus are appropriately 
factored into the percentage fees charged to the bankruptcy cases. At 
the same time, Congress mandated in section 326(b) that ``[i]n a case 
under chapter 12 or 13 of this title, the court may not allow 
compensation for services or reimbursement of expenses of the United 
States trustee or of a standing trustee appointed under section 586(b) 
of title 28, * * *'' Congress entrusted the administration of the 
standing trustee system, including the calculation of compensation and 
percentage fees, to
[[Page 30182]]
the Attorney General, not the bankruptcy courts.
    Comment: One standing trustee argued that the need to prohibit 
related-party transactions is undercut by the fact that this standard 
is not to be implemented until 2005 in certain situations. This 
standing trustee concluded that the United States Trustees must not 
believe that related-party transactions are really a problem.
    Response: The delayed implementation of this rule in limited 
situations involving real estate is not a reflection of the need for 
the rule. Instead, it reflects the Program's desire to minimize the 
disruption in the administration of chapter 12 and chapter 13 estates 
that might otherwise result from immediate implementation.
    Comment: Two standing trustees asserted there is no rational 
justification for the distinction in treatment between smaller trustees 
and those who earn maximum compensation. A variation on this assertion 
was the comment that existing budgeting and auditing procedures should 
be sufficient to prevent improper expenditures.
    Response: As explained in detail earlier in this subsection, there 
are valid economic reasons to distinguish between standing trustees who 
are earning maximum compensation and those who are not. Those standing 
trustees who are earning less than maximum allowable compensation have 
an incentive to minimize expenses because every dollar that is used on 
expenses means one less dollar is available to pay for the trustee's 
compensation.
    Comment: One commenter stated that the rule with respect to 
allocations is unfair because chapter 7 trustees are permitted to 
allocate costs among their individual chapter 7 cases.
    Response: There are different methods for allocating costs and 
expenses in chapter 7 cases and chapter 12 or 13 cases. As noted above, 
section 586(e) directs the Attorney General to establish a percentage 
fee that is collected from all plan payments received by the standing 
trustee. The monies generated by these fees are then used to pay the 
compensation of the standing trustee and the ``actual, necessary 
expenses incurred by such individual as standing trustee'' in 
administering all chapter 12 or chapter 13 cases. 28 U.S.C. 586(e)(1).
    In contrast, the compensation and reimbursement of expenses of 
chapter 7 trustees are determined on a case-by-case basis after an 
application, notice, a hearing, and a court order. Courts generally 
allow a chapter 7 trustee to be reimbursed for expenses that he or she 
incurs to administer a discrete and identifiable chapter 7 estate. The 
chapter 7 trustee is prohibited from recovering overhead or ``general 
`stay in business' costs''. See, e.g., Sousa v. Miguel (In re United 
States Trustee), 32 F.3d 1370, 1376-77 (9th Cir. 1994). As the Ninth 
Circuit has observed, standing trustees operate under a different 
mechanism, which makes their compensation and expenses inapposite to 
the analysis required to award compensation in chapter 7 cases. Id. at 
n. 5. See also Dunivent v. Schollett (In re Schollett), 980 F.2d 639, 
643-45 (10th Cir. 1992); In re Savage. 67 B.R. 700, 706-07 (D.R.I. 
1986) (Selya, J.).
    Comment: One standing trustee asserted, without proof, that the 
commercial reasonableness of contractual relationships, including those 
between related parties, is ``easily and objectively measurable'' and, 
therefore, should be permitted.
    Response: As discussed in other responses to this subsection, 
contractual relationships between related parties are not ``easily and 
objectively measurable.'' Moreover, when standing trustees use 
fiduciary funds to lease property from themselves or related parties, 
the trustees are using fiduciary funds for their own personal or 
family's benefit, and are abrogating their fiduciary duty of loyalty. 
Even where these dealings are well-intentioned and not motivated by a 
desire for personal profit, standing trustees in these circumstances 
have created an irreconcilable conflict and, at the very least, an 
appearance of impropriety.
5. Employment of Other Standing Trustees
    Comment: One standing trustee questioned the basis for this 
standard.
    Response: This rule simply memorializes current practice pursuant 
to which the Program prohibits one standing trustee from hiring 
another. The rationale behind this policy is to eliminate any conflicts 
of interest or dual loyalties and to prevent a reoccurrence of the 
closed bankruptcy network that existed prior to the Program's creation.
    Comment: Two commenters asserted that imposition of this standard 
has the potential to restrict standing trustees from hiring their most 
effective or cost-efficient counsel. One of these commenters cited as 
an example his use of another standing trustee as an expert witness in 
a bankruptcy case. The commenter noted that the standing trustee who 
served as the expert witness received no fee.
    Response: The imposition of this rule should not create additional 
costs. Indeed, the standing trustee and the association who made this 
comment conceded no existing attorney-client relationships were 
affected by the rule. Furthermore, the promulgation of the rule will 
not prevent a standing trustee from serving as an expert witness in the 
circumstances that one commenter described because the testifying 
trustee did not receive a fee. The rule permits one standing trustee to 
assist another provided no compensation is paid. Expenses for the 
assisting standing trustee can be reimbursed provided that the United 
States Trustee has pre-approved this expenditure.
    Comment: One standing trustee argued against the imposition of this 
standard, alleging that the Department of Justice currently has a 
conflict of interest in that the Department represents major federal 
claimants in bankruptcy and the United States Trustees. Alternatively, 
this commenter contended that this dual representation by the 
Department should be banned.
    Response: Congress has determined as a matter of public policy that 
the Program most appropriately resides in the Department of Justice. 
The legislative history for the Bankruptcy Reform Act of 1978 
demonstrates that ``[t]he decision to place the United States trustee 
system in the Department of Justice was reached as a result of thorough 
deliberations'', including careful consideration of the same conflicts 
of interest raised by these commenters. H.R. Rep. No. 595, 95th Cong., 
1st Sess. 111 (1977), reprinted in 1978 U.S.C.C.A.N. 6072-73. After 
analyzing this issue, Congress rejected the concern about such 
conflicts of interest as being ``theoretical, not real.'' H.R. Rep. No. 
595, 95th Cong., 1st Sess. 114 (1977), reprinted in 1978 U.S.C.C.A.N. 
6075. This issue was raised and again rejected when Congress expanded 
the Program nationwide in 1986. See, e.g., The United States Trustee 
System: Hearing Before the Subcomm. on Courts of the Senate Comm. on 
the Judiciary, 99th Cong., 2d Sess. (1986). Thus, in deciding to place 
the Program within the Department, Congress considered and rejected the 
very argument this standing trustee raised in objection to the rule.
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,
[[Page 30183]]
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. 
Sec. 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 
approximately 200 individuals who serve as standing trustees. Moreover, 
the rule provides direction to standing trustees in the performance of 
their fiduciary duties and, thus, will not have a significant economic 
impact.
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 Sec. 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: 28 U.S.C. 509, 510, 586, 5 U.S.C. 301.
    2. In Sec. 58.1, paragraph (a) is revised to read as follows:
Sec. 58.1  Authorization to establish panels of private trustees.
    (a) Each U.S. Trustee is authorized to establish a panel of private 
trustees (the ``panel'') pursuant to 28 U.S.C. 586(a)(1).
* * * * *
    3. Section 58.4 is revised to read as follows:
Sec. 58.4  Qualifications for appointment as standing trustee and 
fiduciary standards.
    (a) As used in this section--
    (1) The term standing trustee means an individual appointed 
pursuant to 28 U.S.C. 586(b).
    (2) The term relative means an individual who is related to the 
standing trustee as father, mother, son, daughter, brother, sister, 
uncle, aunt, first cousin, nephew, niece, husband, wife, father-in-law, 
mother-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-
law, stepfather, stepmother, stepson, stepdaughter, stepbrother, 
stepsister, half brother, half sister, or an individual whose close 
association to the standing trustee is the equivalent of a spousal 
relationship.
    (3) The term financial or ownership interest excludes ownership of 
stock in a publicly-traded company if the ownership interest in not 
controlling.
    (4) The word region means the geographical area defined in 28 
U.S.C. 581.
    (b) To be eligible for appointment as a standing trustee, an 
individual must have the qualifications for membership on a private 
panel of trustees set forth in Secs. 58.3 (b)(1)-(4), (6)-(8). An 
individual need not be an attorney to be eligible for appointment as a 
standing trustee. A corporation or partnership may be appointed as 
standing trustee only with the approval of the Director.
    (c) The United States Trustee shall not appoint as a standing 
trustee any individuals who, at the time of appointment, is:
    (1) A relative of another standing trustee in the region in which 
the standing trustee is to be appointed;
    (2) A relative of a standing trustee (in the region in which the 
standing trustee is to be appointed), who, within the preceding one-
year period, died, resigned, or was removed as a standing trustee from 
a case;
    (3) A relative of a bankruptcy judge or a clerk of the bankruptcy 
court in the region in which the standing trustee is to be appointed;
    (4) An employee of the Department of Justice within the preceding 
one-year period; or
    (5) A relative of a United States Trustee or an Assistant United 
States Trustee, a relative of an employee in any of the offices of the 
United States Trustee in the region in which the standing trustee is to 
be appointed, or a relative of an employee in the Executive Office for 
United States Trustees.
    (d) A standing trustee must, at a minimum, adhere to the following 
fiduciary standards:
    (1) Employment of Relatives. (i) A standing trustee shall not 
employ a relative of the standing trustee.
    (ii) A standing trustee shall also not employ a relative of the 
United States Trustee or of an Assistant United States Trustee in the 
region in which the trustee has been appointed or a relative of a 
bankruptcy court judge or of the clerk of the bankruptcy court in the 
judicial district in which the trustee has been appointed.
    (iii)(A) Paragraphs (d)(1) (i) and (ii) of this section shall not 
apply to a spouse of a standing trustee who was employed by the 
standing trustee as of August 1, 1995.
    (B) For all other relatives employed by a standing trustee as of 
August 1, 1995, paragraphs (d)(1) (i) and (ii) of this section shall be 
fully implemented by October 1, 1998, unless specifically provided 
below:
    (1) The United States Trustee shall have the discretion to grant a 
written waiver for a period of time not to exceed 2 years upon a 
written showing by the standing trustee of compelling circumstances 
that make the continued employment of a relative necessary for a 
standing trustee's performance of his or her duties and written 
evidence that the salary to be paid is at or below market rate.
    (2) Additional waivers, not to exceed a period of two years each, 
may be granted under paragraph (d)(1)(iii)(B)(1) of this section 
provided the standing trustee makes a similar written showing within 90 
days prior to the expiration of a present waiver and the United States 
Trustee determines that the circumstances for waiver are met.
    (3) No waivers will be granted for a relative of the United States 
Trustee or of an Assistant United States Trustee.
    (2) Related Party Transactions. (i) A standing trustee shall not 
direct debtors or creditors of a bankruptcy case administered by the 
standing trustee to an individual or entity that provides products or 
services, such as insurance or financial counseling, if a standing 
trustee is a relative of that individual or if the standing trustee or 
relative has a financial or ownership interest in the entity.
[[Page 30184]]
    (ii) A standing trustee shall not, on behalf of the trust, contract 
or allocate expenses with himself or herself, with a relative, or with 
any entity in which the standing trustee or a relative of the standing 
trustee has a financial or ownership interest if the costs are to be 
paid as an expense out of the fiduciary expense fund.
    (iii) (A) The United States Trustee may grant a waiver from 
compliance with paragraph (d)(2)(ii) of this section for up to three 
years following the appointment of a standing trustee if the newly-
appointed standing trustee can demonstrate in writing that a waiver is 
necessary and the cost is at or below market.
    (B) The United States Trustee may grant a provisional waiver from 
compliance with the allocation prohibition contained in paragraph 
(d)(2)(ii) of this section if one of the following conditions is 
present:
    (1) A standing trustee has insufficient receipts to earn maximum 
annual compensation as determined by the Director during any one of the 
last three fiscal years and provides the United States Trustee with an 
appraisal or other written evidence that the allocation is necessary 
and the allocated cost is at or below market rate for that good or 
service, or
    (2) A Chapter 13 standing trustee also serves as a trustee in 
Chapter 12 cases and provides the United States Trustee with an 
appraisal or other written evidence that the allocation is necessary 
and the allocated cost is at or below market rate for that good or 
service.
    (C) Except as otherwise provided in this paragraph, a standing 
trustee may seek a reasonable extension of time from the United States 
Trustee to comply with paragraph (d)(2)(ii) of this section. To obtain 
an extension, a standing trustee must demonstrate by an appraisal or 
other written evidence, satisfactory to the United States Trustee, that 
the expense is necessary and at or below market rate. In no event shall 
an extension be granted for the use and occupation of real estate 
beyond October 1, 2005. For personal property and personal service 
contracts, no extension shall be granted beyond October 1, 1998.
    (3) Employment of Other Standing Trustees. A standing trustee shall
not employ or contract with another standing trustee to provide 
personal services for compensation payable from the fiduciary expense 
fund. This section does not prohibit the standing trustee from 
reimbursing the actual, necessary expenses incurred by another standing 
trustee who provides necessary assistance to the standing trustee 
provided that the reimbursement has been pre-approved by the United 
States Trustee.
    (e) Paragraph (d) of this section is effective July 2, 1997. As to 
those standing trustees who are appointed as of July 2, 1997, paragraph 
(d) will be applicable on the first day of their next fiscal year 
(i.e., October 1, 1997 for chapter 13 trustees and January 1, 1998 for 
chapter 12 trustees).
    Dated: May 22, 1997.
Joseph Patchan,
Director.
[FR Doc. 97-13970 Filed 5-30-97; 8:45 am]
BILLING CODE 4410-40-M