51740 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

DEPARTMENT OF JUSTICE

28 CFR Part 58

RIN 1105–AA54

Procedures for Suspension and

Removal of Panel Trustees and

Standing Trustees

AGENCY: Department of Justice.

ACTION: Final rule.

SUMMARY: The United States Trustee

Program (‘‘Program’’), a component of

the Department of Justice, is formalizing

procedures to govern the suspension

and termination of future case

assignments to panel and standing

trustees. The final rule enables a trustee

to obtain a determination by the

Director of the Executive Office for

United States Trustees whether a

decision by a United States Trustee to

suspend or terminate future case

assignments is supported by the record

and is an appropriate exercise of the

United States Trustee’s discretion. This

rule specifies the method by which

United States Trustees shall announce

suspension and termination decisions. It

also formalizes the procedure by which

a trustee obtains review by the Director,

the manner in which that review will be

conducted, and the standard the

Director will employ in reaching a

determination.

The Director’s decision will constitute

final agency action by the Department of

Justice. If the agency’s final action is

adverse, this rule enables a trustee to

obtain judicial review of it pursuant to

the Administrative Procedure Act. 5

U.S.C. 552, et seq.

EFFECTIVE DATE: This rule is effective

November 3, 1997.

ADDRESSES: Office of the General

Counsel, Executive Office for United

States Trustees, 901 E Street, NW.,

Room 740, Washington, D.C. 20530.

FOR FURTHER INFORMATION CONTACT:

Martha L. Davis, General Counsel, or P.

Matthew Sutko, Attorney, (202) 307–

1399. This is not a toll free number.

SUPPLEMENTARY INFORMATION: This final

rule provides a method and a review

process for suspending and terminating

future case assignments to panel and

standing trustees. A proposed rule on

this subject was published in the

Federal Register on May 23, 1997 (62

FR 28391) (the ‘‘proposed rule’’). A

summary of background information,

public comment, and agency response

follows.

I. Background and Rulemaking History

A. The United States Trustee Program

Congress enacted the United States

Trustee Program on a pilot basis in the

Bankruptcy Reform Act of 1978, Pub. L.

No. 95–598, 92 Stat. 2549 (1978), as a

component of the Department of Justice

and charged it with the responsibility of

supervising the administration of

bankruptcy cases and trustees. The

success of the pilot program led

Congress to expand the Program

nationwide in 1986 as a permanent

component within the Department of

Justice. Bankruptcy Judges, United

States Trustees, and Family Farmer

Bankruptcy Act of 1986, Pub. L. No. 99–

554, 100 Stat. 3088 (1986).

The Program consists of the Executive

Office for United States Trustees, which

is headed by the Director, and 21 United

States Trustees. The Director is a Justice

Department official who acts under

authority delegated by the Attorney

General. United States Trustees are

Justice Department officials appointed

by, and who serve at the pleasure of, the

Attorney General. 28 U.S.C. 581(a) and

(c). United States Trustees supervise the

administration of bankruptcy cases and

case trustees within specified

geographic regions. 28 U.S.C. 581.

Congress created the Program to

remedy two longstanding weaknesses

that had impaired the efficient and fair

administration of bankruptcy cases. The

prior system’s first weakness was its

requirement that bankruptcy courts

engage in both judicial and

administrative functions in bankruptcy

cases. Under the prior system,

bankruptcy courts litigated disputes

among parties, including trustees. At the

same time, bankruptcy courts were

responsible for appointing trustees to

cases and awarding their compensation.

For nearly a century it was widely

acknowledged that a separation of

administrative and judicial functions

was necessary to ensure the integrity of

the system, to preserve its effective and

fair administration, and to protect the

innocent debtors and creditors for

whose benefit the system exists. See,

e.g., William J. Donovan, House

Committee on the Judiciary,

Administration of Bankrupt Estates,

71st Cong. 3d Sess. (Comm. Print 1931)

(recommending—based upon an

examination of 4,000 witnesses and

interviews with 19 federal judges, 102

bankruptcy referees and 200 current or

former trustees—that Congress rectify

the inadequate and corrupt

administration of bankruptcy cases by

creating a Federal Bankruptcy

Commissioner); Solicitor General

Thomas Thacher, Report to the

President on the Bankruptcy Act and its

Administration in the Courts of the

United States, Dated December 5, 1931,

reprinted in S. Doc. No. 65, 72nd Cong.

1st Sess. (1932) (recommending

legislation that would remedy cronyism

and the lack of administrative oversight

in bankruptcy cases by authorizing

career civil servant bankruptcy

administrators to oversee the

administration of bankruptcy cases);

Report of the Commission of the

Bankruptcy Laws of the United States,

H.R. Doc. No. 137, 93d Cong. 1st Sess.

(1973) (recommending legislation to

improve bankruptcy administration and

reduce cronyism by transferring

administrative functions to an

administrative body staffed by civil

servants).

The prior system’s commingling of

trustee supervision and the adjudication

of disputes between trustees and third

parties in bankruptcy courts resulted in

a widespread perception that an unduly

close relationship existed between

bankruptcy judges and trustees, and this

fostered cornyism and insider influence

and abuse. See H.R. Rep. No. 595, 95th

Cong. 2d Sess. 92 (1977). The House of

Representative’s Report on the proposed

Bankruptcy Code concluded that ‘‘[a]s

administrator of bankruptcy cases, and

the individual responsible for the

supervision of the trustee or debtor in

possession, it is an easy matter for a

bankruptcy judge to feel personally

responsible for the success or failure of

a case * * * The institutional bias thus

generated magnifies the likelihood of

unfair decisions in the bankruptcy court

* * *.’’ H.R. Rep. No. 595, 95th Cong.,

at 91, 1st Sess. (1977), reprinted in 1978

U.S.C.C.A.N. 5963.

The Bankruptcy Code fixed this

problem by transferring administrative

functions, including the appointment

and supervision of trustees, to the

United States Trustee Program within

the Department of Justice. The Program

now appoints and supervises trustees,

and, if appropriate, suspends or

terminates future case assignments to

them.

The second reason Congress created

the Program was the recognition that the

wide-ranging administrative aspects of

the system should be committed to one

accountable agency. Congress charged

the Program and the Department with

the task of supervising the

administrative aspects of the system in

order to protect debtors and creditors by

providing a more accountable and

consistent focus, and by supplanting the

disparate procedures emanating from

separate judicial districts. As one court

has noted, in creating the United States

Trustee Program, ‘‘Congress specified
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51741

that the U.S. Trustees were to be

independent of direct court supervision,

as ‘executives of the bankruptcy

network.’ ’’ United States Trustee v.

Revco D.S., Inc. (In re Revco D.S., Inc.),

898 F.2d 498, 500 (6th Cir. 1990)

(quoting in part H.R. Rep. No. 595, 95th

Cong. 88–89).

B. The Program’s Supervision of

Trustees

Among the most important

administrative functions assumed by the

Program are the appointment and

supervision of trustees who administer

cases under chapters 7, 12, and 13 of the

Bankruptcy Code. 28 U.S.C. 509, 510

and 586. The United States Trustee

Program has enacted standards that set

minimum qualifications for

appointment. 28 CFR 58.3 and 58.4.

Trustees are fiduciaries with wideranging responsibilities to effectuate the

goals of the particular chapter under

which a bankruptcy case is filed.

Because they are fiduciaries, trustees are

held to very high standards of honesty

and loyalty. See generally Woods v. City

National Bank & Trust Co., 312 U.S.

262, 278 (1941); Mosser v. Darrow, 341

U.S. 267 (1951). See also Meinhard v.

Salmon, 249 N.Y. 458, 464, 164 N.E.

545, 546 (1928) (Cardozo, C.J.).

Trustees are held to high standards

not only because of their fiduciary

duties to debtors and creditors but

because they take charge of debtors’

property and they hold large amounts of

other people’s money. In 1996, chapters

7, 12, and 13 trustees held combined

receipts of well over three and a half

billion dollars:

1996 RECEIPTS HELD BY TRUSTEES BY CHAPTER

Chapter 7 trustees Chapter 12 trustees Chapter 13 trustees

$1,479,531,213 $52,372,261 $2,147,407,093

Trustees exist not for their own

benefit but to collect, protect, account

for, and distribute these revenues to

creditors in accordance with the

payment provisions set forth in the

Bankruptcy Code. Trustees often

oversee many cases; some chapter 13

trustees, for example, administer many

thousands of cases. Given the large

amounts of money they control and the

many duties they perform, dishonest

trustees and trustees who do not manage

their estates properly diminish the

integrity of the bankruptcy system and

jeopardize the assets of the honest

debtors and creditors whose property

they hold. For this reason, it is crucial

that trustees be monitored; if necessary,

those who cannot fulfill their duties

must stop receiving new cases.

C. Assignment of Cases to Trustees

Chapters 7, 12, and 13 trustees receive

cases through a two step process. The

first step entails appointment of a

trustee to the pool of individuals

eligible to receive future cases. The

second step involves assigning specific

cases to individuals from those pools.

The first step in receiving chapter 7

cases is to be selected as a member of

the panel of chapter 7 trustees for a

specific geographic area. 28 U.S.C.

586(a)(1). A panel is the group of

persons within a specific geographic

region who are eligible to receive cases.

A United States Trustee selects the

persons who serve on the chapter 7

panels in each region. When a person

becomes a panel member, the person is

eligible for appointment as an interim

trustee in chapter 7 cases. 11 U.S.C.

701(a)(1).

Chapters 12 and 13 standing trustees

are appointed by United States Trustees,

with the approval of the Attorney

General, to act as trustees within a

specific geographic area. In some

districts only one chapter 12 or 13

standing trustee is appointed to receive

future cases. Other districts have

multiple standing trustees. Once

appointed to be a standing trustee for a

specific district by a United States

Trustee, that trustee will then receive

specific cases within that judicial

district.

Chapter 7 trustees are appointed to a

chapter 7 panel for a renewable one year

term. Chapters 12 and 13 standing

trustees currently serve no fixed term;

they generally remain eligible to receive

future cases until that eligibility is

terminated. The appointment

documents signed by every trustee,

whether a chapter 7 panel trustee, or a

chapter 12 or a chapter 13 standing

trustee, specifically provides that the

trustee’s appointment may be

terminated at any time.

Chapter 7 panel trustees, and a

chapters 12 and 13 standing trustees,

effectively function as economic

monopolists, must like public utilities.

Debtors cannot select who will act as

their trustee. They must accept the

trustee who is appointed for them. With

one exception, chapters 7, 12, and 13

trustees do not have to compete in the

marketplace for cases as they arise. This

single exception applies to chapter 7

cases where creditors may elect a

chapter 7 trustee to replace the interim

chapter 7 trustee initially appointed by

the United State Trustee. 11 U.S.C. 701.

Such elections are exceedingly rare: the

Administrative Office of U.S. Courts

reports that 3,944,893 chapter 7 cases

were filed from January 1, 1991 through

December 31, 1996 while Program

reports show only 251 elections in

chapter 7 cases between January 1, 1991

and February 3, 1997.

Rather than requiring trustees to

compete for the assignment of specific

cases based upon competence or price,

Congress created the Program to appoint

trustees and to regulate and assure their

competence. United States Trustees act

to protect debtors and creditors through

careful and thorough trustee selection

and supervision. Under existing law,

trustees have no right or entitlement to

receive future cases. 28 U.S.C. 586. See

Joelson v. United States, 86 F.3d 1413

(6th Cir. 1996) (holding that trustees

have no statutory or constitutionally

protected interest in their positions as

trustees); Richman v. Straley, 48 F.3d

1139, 1143 (10th Cir. 1995) (trustees

have no constitutional right to continue

acting as trustees); Shaltry v. United

States, 182 B.R. 836, 842 (D. Ariz.)

(same), aff’d, 1995 WL 866862 (9th Cir.

1995). This enables United States

Trustees to stop assigning cases to

current trustees if there are others who

could do a better job protecting debtors

and creditors or who could represent

their interests as a lower cost. It also

enables United States Trustees to stop

assigning cases to trustees whose

performance is weak or who engage in

improper conduct.

The Program has carefully developed

its structure and procedures for

supervising trustees. Ensuring that

trustees are competent is a time

consuming process. It requires United

States Trustees to observe all facets of a

trustee’s operation, often over a long

period of time. It requires United States

Trustees to have audits or similar

reviews performed to analyze trustees’

operations. Often, United States

Trustees take months or even years to

evaluate all information, to alert a

trustee to problems, to attempt to assist

a trustee in rectifying those problems,

and to determine whether a trustee has
51742 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

performed, or will be able to perform,

his or her functions effectively.

The Program’s structure enables it to

carry out these functions more

effectively than isolated bankruptcy

courts were able to carry them our

under the old system. Bankruptcy courts

lacked the resources and the

institutional structure to perform those

tasks. For this reason, Congress charged

United States Trustees with the

administrative responsibilities of

appointing and supervising panel and

standing trustees. Although current law

gives trustees no right or expectation to

future cases, neither does it give any

third party, no matter how better

qualified or more cost effective than the

trustee, any statutory or constitutional

right to demand that future cases be

assigned to that individual.

D. Suspension and Termination of

Trustees

It is the Program’s responsibility to

protect debtors and creditors by

ensuring that trustees are the

appropriate individuals to continue

receiving future cases. The Program is

also responsible for ensuring that the

system is operating smoothly and that

cases are being administered efficiently.

To fulfill these responsibilities, the

Program closely monitors trustees’

performance by regularly reviewing

their administration of cases. Indeed,

Program employees work with trustees

almost on a daily basis.

As part of their supervisory

responsibilities, United States Trustees

must ensure that the Program does not

devote inordinate amounts of its

resources to supervising a limited

number of chronically under-performing

trustees. The Bankruptcy Code places

many responsibilities upon the Program

beyond simply supervising trustees.

Trustees who are deficient in basic case

administration, or who have to be

coaxed, reminded, or prodded into

fulfilling their responsibilities, force the

Program to divert its limited resources

from its other statutory tasks. Although

problem trustees may tax the patience of

the other participants in the bankruptcy

system only occasionally, and those

participants may not be fully aware of

the shortcomings in those trustees’

performance, deficient trustees need

constant supervision, which drains the

Program’s limited resources.

Consequently, the efficient

administration of the bankruptcy system

requires that United States Trustees

cease assigning cases to them.

When appropriate, including when a

trustee engages in improper conduct or

fails to perform adequately, the Program

will stop assigning future cases to

trustees. Sometimes, a suspension is an

appropriate regulatory tool that is used

to give a trustee an opportunity to

improve performance; in other

circumstances termination is

appropriate. The Program also may stop

assigning future cases to trustees when

the caseload in a judicial district

declines, resulting in too many trustees

for too little work. The Program also

may stop assigning future cases when it

determines that more competent, better

qualified candidates may be available.

E. Effect of Suspension or Termination

on Current Caseload

A decision to terminate or suspend a

trustee’s appointment to future cases

has no legal impact upon a trustee’s

ability to continue administering cases

that were previously assigned to the

trustee. Current law allows trustees to

continue administering cases to which

they have been appointed unless the

court issues an order removing the

trustee in one or more specific cases

pending under title 11 of the U.S. Code.

11 U.S.C. 324. Thus, suspensions and

terminations are prospective only, and

do not affect existing cases that have

been assigned to panel and standing

trustees.

F. Procedures for Determining

Suspensions and Terminations

The Program has always had informal

procedures through which an affected

trustee could ask the Director of the

Executive Office for United States

Trustees to review a termination or

suspension. The final rule formalizes

these procedures. The final rule benefits

the Program by allowing it to ensure

that its final decision not to assign cases

in the future will be based upon a

deliberate consideration of all relevant

factors at the highest level within the

Program. It also has the effect of

benefiting trustees by ensuring that a

United States Trustee does not suspend

or terminate trustees inappropriately or

without support in the record.

Panel and standing trustees asked the

Program to adopt more formal

procedures regarding such decisions. In

response to those requests, the Program

began in July of 1996 to devise

comprehensive written procedures.

Prior to issuing its proposed rule, the

Program solicited comments from

trustees and others regarding what form

those procedures should take The result

of this lengthy process culminated in

the publication of a proposed rule in the

Federal Register for notice and

comment. See 62 FR 28391 (May 23,

1997).

II. Purpose of the Final Rule

Through this rulemaking, the Program

is devising a procedure by which it will

reach a final determination whether a

trustee should receive cases in the

future. This rule does not affect a United

States Trustee’s decision to continue

assigning future cases to existing panel

and standing trustees. The rule applies

when a United States Trustee concludes

cases should not be assigned to a

trustee. In such a case, the United States

Trustee must notify the trustee why the

decision has been reached. If a United

States Trustee stops assigning cases to a

trustee and the trustee chooses not to

dispute the propriety of that decision,

the decision becomes final and is not

subject to review. If the trustee disputes

the action, the final rule provides a

process for review.

The rule sets forth fourteen nonexclusive examples of conduct or

circumstances which may constitute

reasons why a United States Trustee

might reach such a decision. Those

reasons fall into three general categories.

The first relates to dishonesty or lack of

competence. The second relates to

circumstances in which the trustee’s

performance may meet minimal levels

of competence but other more qualified

persons may be available to better serve

debtors and creditors. The third

involves external factors that can reduce

the demand for trustees in a specific

geographic area, such as when the area’s

volume of cases declines.

The Program relied upon a number of

sources in devising these categories, the

foremost of which is its considerable

experience in supervising trustees. The

Program also considered procedures

adopted by the Judicial Branch for

supervising trustees in North Carolina

and Alabama. Under section

302(d)(3)(I)(i) of the Bankruptcy Judges,

United States Trustees, and Family

Farmer Bankruptcy Act of 1986,

Bankruptcy Administrators, who are

Judicial Branch officials, supervise

trustees in those two states until 2002,

at which time those supervisory

responsibilities shall transfer to the

Program. In reaching their decisions,

Bankruptcy Administrators may

consider 16 factors that are, in large

measure, identical to many of the factors

set forth in the final rule.

The Administrative Office procedure

differs from this rule in at least one

significant respect. The judicial

procedure allows the trustee to seek

reconsideration only from the

Bankruptcy Administrator who made

the initial decision, but it does not

provide for any further review. In

contrast, this rule provides that review
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51743

of a United States Trustee’s decision

shall be conducted by the Director and

a trustee may obtain judicial review of

the Director’s final decision under the

Administrative Procedure Act.

If a trustee disagrees with a United

States Trustee’s decision not to assign

cases to the trustee in the future, the

trustee must notify the Director within

20 days of the trustee’s decision to seek

review of the United States Trustee’s

conclusions. If review under the rule is

triggered, the rule entitles the trustee

and the United States Trustee to explain

to the Director their position on the

propriety of a cessation of future case

assignments. Both may provide the

Director with any material they believe

supports their conclusion.

Under the rule, the Director will

review those submissions to determine

whether a decision not to assign cases

in the future is an appropriate exercise

of a United States Trustee’s discretion

and whether that decision is supported

by the record before the Director.

Neither party bears the burden of proof

in such a proceeding. After reviewing

the material, the Director will reach a

decision, which shall constitute final

agency action. The agency’s

administrative record will consist of the

materials provided by the trustee and

the United States Trustee and the

Director’s decision.

Before this rule became effective, such

a decision would have been final and

unreviewable because 28 U.S.C. 586

commits such termination decisions to

the Program’s discretion and does not

create a standard that a court can use to

review the reasonableness of the

Program’s administrative decision.

Joelson v. United States, 86 F.3d 1413

(6th Cir. 1996).

This rule creates a standard that

courts can review pursuant to the

Administrative Procedure Act by

providing that the Director shall

determine whether a challenged

decision not to assign future cases

constitutes an appropriate exercise of

the United States Trustee’s discretion

and is supported by the record. See, e.g.,

Clifford v. Pena, 77 F.3d 1414, 1417

(D.C. Cir. 1996) (providing that an

agency can facilitate judicial review by

creating a standard in a rule); Block v.

Securities and Exchange Commission,

50 F.3d 1078, 1084–85 (D.C. Cir. 1995)

(same).

In preparing this rule, the Program

has been mindful that trustees hold

billions of dollars of other people’s

money, yet the interests they represent

have little or no say in their hiring or

their firing. The Program also has been

mindful of Congress’ charge that the

Program, as the primary regulator of

trustees, ensure that future cases be

assigned only to trustees who are honest

and capable. The Program also has been

mindful of the need to balance the

number of cases and the number of

trustees. Finally, the Program has

concluded that the best interests of the

bankruptcy system are fostered by an

open process which encourages

competent, qualified individuals to

apply to serve as trustees. As the United

States courts of appeals have

recognized, case assignment is not a

government entitlement program

created so the first person appointed to

act as a trustee will always get future

cases. Instead, trustees are service

providers to debtors and creditors,

selected by the Program for the benefit

of those debtors and creditors.

This rule allows the Program to

ensure that appropriate decisions are

made about whether to stop assigning

cases to a trustee. It gives affected

trustees meaningful input in that

process and allows for judicial review of

the Program’s final decision. This

comprehensive process will maximize

rational decision-making by the

Program, promote a fair and efficient

system of case administration, and

protect the intended beneficiaries of the

bankruptcy process, the debtors and

creditors for whom the bankruptcy laws

were created.

III. Summary of Major Changes in Final

Rule

The final rule makes a number of

changes based upon the comments

submitted to the Program. Three

changes are major.

First, subsection (c) of the final rule

provides that suspensions and

terminations will not become effective,

and trustees will continue to receive

cases, until a trustee’s time to seek

administrative review from the Director

has expired or, if such review is sought,

until the Director issues a final written

decision; the proposed rule had

suggested making suspensions and

terminations effective upon the date

specified in the notice of suspension or

termination, which could have been a

date earlier than the completion of the

review process. In order to protect

innocent debtors and creditors,

however, the final rule provides that

upon issuing a notice of suspension or

termination a United States Trustee may

issue an interim directive immediately

suspending case assignments during the

review process if the United States

Trustee determines that a trustee is

placing estate assets at risk, has lost his

eligibility status, or has engaged in

fraudulent, illegal or other gross

misconduct. The final rule enables a

trustee to obtain a stay of an interim

directive from the Director.

Second, the rule allows a trustee to

ask that specific documents in the

United States Trustee’s possession be

included in the record. This will enable

trustees to rely upon documents they

believe are relevant but which are under

the United States Trustee’s control.

Third, the final rule cuts the time

necessary to complete the review

process roughly in half. If must now be

completed no more than 45 days from

the date on which a trustee requests

administrative review. This has been

accomplished by (a) reducing the time

for, and the scope of, the United States

Trustee’s response to the trustee’s

request for review, (b) deleting the

trustee’s reply brief, and (c) making

optional the use of a reviewing official,

who was to have been a Program

employee who had 30 days in every

case to prepare and submit a report to

the Director before the Director could

issue a final decision on a trustee’s

request for review. In order to permit

resolution of more complex disputes,

the 45 day deadline may be extended by

the Director, but only if all parties,

including the trustee, agree.

In addition, the commentary to the

final rule clarifies that the Director, or

his designee, may conduct a face to face

meeting with the trustee and the United

States Trustee if the Director determines

that there is a genuine dispute over facts

material to the Director’s determination.

The level of formality and complexity of

a meeting in a particular case will turn

upon the nature of the factual dispute

presented.

IV. Discussion of Public Comments

A. Overview

The Program received 12 comments

on the proposed rule. Three comments

were written by lobbyists or associations

that represent the interests of trustees.

Eight trustees submitted comments. One

member of Congress wrote to express

‘‘strong support for th[e] proposed rule.’’

Although one comment was

submitted late, the late submission

reflects ideas raised in timely

comments. The Program has considered

each comment carefully and appreciates

the time taken to provide them. The

Program’s responses to the comments

are discussed below.

B. Specific Comments

1. Some comments questioned the

power of United States Trustees to

suspend or terminate the assignment of

future cases to trustees. Section

586(a)(1) of title 28 allows the Program

to ‘‘establish, maintain, and supervise a
51744 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

panel of private trustees that are eligible

and available to serve as trustees in

cases under chapter 7’’, and section

586(b) allows it to ‘‘appoint one or

individuals to serve as standing trustee’’

in cases filed under chapter 12 and

chapter 13 of the Bankruptcy Code.

Section 586 commits appointment

decisions to the discretion of the

Program and section 701(a)(2) of the

Administrative Procedure Act shields

these termination decisions from

judicial review under the APA. Joelson

v. United States, 86 F.3d 1413, 1415–18

(6th Cir. 1996) (termination of a chapter

7 trustee’s eligibility to receive cases is

not subject to judicial review under the

APA). See also Richman v. Straley, 48

F.3d 1139, 1143 (10th Cir. 1995)

(removal of chapter 12 and 13 trustees

from eligibility to receive future cases is

committed to the discretion of the

United States Trustee and is not subject

to review under the Due Process clause).

As one court has declared, ‘‘§ 586 ‘fairly

exudes deference to the [United States

Trustee], and appears to [the court] to

foreclose the application of any

meaningful judicial standard of

review.’ ’’ Shaltry v. United States, 182

B.R. 836, 842 (D. Ariz.) (quoting in part

Webster v. Doe 486 U.S. 592, 600

(1988)), aff’d, 1995 WL 866862 (9th Cir,

1995). Cf. North Dakota ex rel. Bd of

Univ. and School Lands v. Yeutter, 914

F.2d 1031, 1035 (8th Cir. 1990), cert.

denied, 500 U.S. 952 (1991) (statute

authorizing an agency to waive

eligibility requirement for participation

in a soil conservation program

committed to agency discretion); Scalise

v. Thornburgh, 891 F.2d 640, 648–49

(7th Cir. 1989), cert. denied, 494 U.S.

1083(1990) (statute authorizing Attorney

General ‘‘to make regulations for the

proper implementation of * * *

treaties’’ not subject to review); First

Family Mortgage Corp. of Florida v.

Earnest, 851 F.2d 843, 845 (6th Cir.

1988) (statute authorizing VA

Administrator to make refunds at his

option provided no standards for

review); Schneider v. Richardson, 441

F.2d 1320, 1321 & n.2 (6th Cir.), cert.

denied, 404 U.S. 872 (1971) (statute

authorizing an agency to prescribe

maximum fees by regulation committed

to agency discretion).

In Carlucci v. Doe, 488 U.S. 93, 99

(1988), the Supreme Court held that a

statute granting a public official the

power to appoint an individual also

confers the power to terminate that

individual unless the statute expressly

provides otherwise. The Court held that

‘‘as a matter of statutory interpretation

[] absent a ‘specific provision to the

contrary, the power of removal from

office is incident to the power of

appointment.’ ’’ Carlucci v. Doe, 488

U.S. at 99 (Secretary of Defense had

power to terminate employee under

provision of National Security Agency

Act of 1959 that mentioned only

appointment) (quoting in part Keim v.

United States, 177 U.S. 290, 293 (1900)).

Accord Joelson v. United States, 86 F.3d

at 1422 (holding that the Program’s

power to appoint chapter 7 trustees to

rotating panels gives it the power to

remove them from panels); Richman v.

United States, 48 F.3d at 1144 (relying

upon Carlucci to hold that the power to

appoint chapter 12 and 13 standing

trustees includes the power to stop

appointing them to future cases). Given

the power to appoint trustees to future

cases exists under section 586, that

power carriers with it the power to

cease assigning future cases to trustees

because no provision in title 28

expressly precludes such action.

2. A number of comments suggested

that the rule violates trustees’ due

process rights. This is incorrect.

Trustees have no right to be appointed

to future cases. Neither section 586 nor

any provision of the Bankruptcy Code

creates a government entitlement

program that guarantees trustees any

right to future cases.

The United States courts of appeals

have consistently reached this

conclusion. See Joelson v. United States,

86 F.3d at 1415–18 (no right or

expectation to future cases); Richman v.

Straley, 48 F.3d at 1143 (removal of

chapter 12 and 13 trustees from

eligibility to receive future cases is

committed to the discretion of the

United States Trustee and is not subject

to review under the Due Process clause);

Shaltry v. United States, 182 B.R. at 842

(D. Ariz.) (same), aff’d, 1995 WL 866862

(9th Cir. 1995).

3. A number of comments suggested

that the proposed rule created a review

process that took too long to complete.

The Program recognizes that prompt

final agency action benefits creditors,

debtors, and trustees. Therefore, the

final rule has been significantly

streamlined to mandate that review

shall be completed within 45 days of

receipt by the Director of a trustee’s

request for review. The rule achieves

this reduction by (a) reducing the time

for, and the scope of, the United States

Trustee’s response to the trustee’s

request for review, (b) deleting the

trustee’s reply, and (c) making optional

the use of a reviewing official, who was

to have been a Program employee who

had 30 days in every case to prepare and

submit a report to the Director before

the Director could issue a final decision

on a trustee’s request for review.

Under the final rule, a United States

Trustee must provide an affected trustee

with a statement of the reasons for a

suspension or termination and

supporting materials in a notice of

suspension or termination that is to be

sent to the trustee by overnight courier.

The trustee then has 20 days to file a

request for review. That request for

review describes why the trustee

disagrees with the United States

Trustee’s decision, and is accompanied

by the documents and materials the

trustee wishes the Director to consider.

Under the proposed rule, the United

States Trustee then had 20 calendar

days to respond to the trustee’s position

and the United States Trustee was free

to provide the Director with all material

the United States Trustee wished the

Director to consider. Because the United

States Trustee could submit material

that might address matters not initially

raised in the notice of suspension or

termination, or in the trustee’s request

for review, the trustee was given 10 days

to provide a response.

The final rule reduces the United

States Trustee’s time to respond to a

trustee’s request for review to 15 days.

Under the final rule, the United States

Trustee may now respond only to

matters raised in the trustee’s request for

review. Unlike the proposed rule, the

final rule makes clear that the United

States Trustee cannot raise new matters,

the 10 day reply period for the trustee

has been deleted as unnecessary. These

changes reduce the time to reach a final

decision by at least 15 days.

At least 20 additional days have been

saved by giving the Director the option

whether to use a reviewing official in a

particular case. Under the proposed

rule, the reviewing official was to have

been a Program employee who would

have acted as the Director’s point of

contact with the trustee and the United

States Trustee and who would have

prepared a report that the Director

would use in deciding the request for

review. The reviewing official had 30

days to prepare the report under the

proposed rule. In addition, a number of

days would have been expended in

selecting a reviewing official and having

the reviewing official transmit the

trustee’s materials to the United States

Trustee. The Director then had an

additional 20 days to reach a final

decision.

The final rule gives the Director the

option of using a reviewing official on

a case by case basis. This allows the

Director to reach his final decision more

promptly without having to wait for a

report from a reviewing official in every

case.
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51745

Because he will no longer have a

report before beginning his

determination in every case, the

Director’s time to reach a final decision

has been increased from 20 to 30 days.

This produces a net savings of 20 days

over the proposed rule because the

reviewing official and the Director had

a combination period of 50 days to

conduct a review, and the final rule

gives the Director only 30.

In addition, the final rule eliminates

the delay that arose under the proposed

rule while a reviewing official was

selected and the delay that resulted

from the reviewing official having to

transmit materials. These changes

respond to comments expressing

concerns about those time delays.

The final rule also shortens the review

process by deleting the ability of a

reviewing official to grant extensions.

Under the proposed rule, the reviewing

official had discretion to extend the

United States Trustee’s or the trustee’s

time for response to a date certain.

Comments expressed concern this

provision could significantly lengthen

the review process. The Program revised

the final rule to respond to those

concerns. The final rule provides that

the Director will issue a final decision

no later than 45 days from receipt of a

trustee’s request for review. The rule

does, however, allow the trustee and the

United States Trustee to jointly agree

that the time for final agency action

should be extended. Time might be

extended, for example, to enable the

Director to conduct a face to face

meeting.

4. Comments suggested the proposed

rule did not require notice before

adverse action is taken and did not

provide adequate interim relief during

the review process. The final rule

addresses these concerns. Subsection (c)

of the final rule provides that

suspensions and terminations will not

become effective, and trustees will

continue to receive cases, until a

trustee’s time to seek administrative

review from the Director has expired or,

if such review is sought, until the

Director issues a final written decision;

the proposed rule had suggested making

suspensions and terminations effective

upon the date specified in the notice of

suspension or termination, which could

have been a date earlier than the

completion of the review process. In

order to protect the integrity of the

system and thereby the debtors and

creditors it serves, the final rule

provides that a United States Trustee

may issue an interim directive

suspending case assignments during the

review process if the United States

Trustee determines that a trustee is

placing estate assets at risk, ineligible to

serve as a trustee, or has engaged in

fraudulent, illegal or other gross

misconduct. A trustee may seek a stay

of an interim directive from the Director

upon filing a timely request for review.

5. One comment questioned whether

a trustee must institute the review

process to obtain a stay of a suspension

or termination. Under the final rule, a

termination or suspension will not take

effect until the time to seek review has

expired. If a trustee does not seek

review, the suspension or termination

decision will become final and

unappealable and not subject to further

agency action or judicial review. It a

trustee does seek review, a suspension

or termination will not take effect until

the Director issues a final decision.

Upon issuing a notice of suspension or

termination, a United States Trustee

may issue an interim directive ceasing

the assignment of cases to the trustee

during the review process if the United

States Trustee specifically finds that one

of the criteria in section (d) (1) through

(4) of the rule are met. The trustee may

seek a stay of an interim directive but

needs to submit a timely request for

administrative review to do so. The final

rule authorizes the Director to stay an

interim directive.

6. One comment suggested that the

rule does not provide for the creation of

an official record for judicial review.

This is incorrect. The United States

Trustee’s notice of termination, the

trustee’s request for review, the United

States Trustee’s response, the Director’s

final determination, and the documents

and materials provided by the

participants with those submissions

constitute the agency record for

purposes of subsequent judicial review.

7. Comments suggested the rule

places an improper burden of proof

upon the trustee. This is incorrect.

Although the trustee must affirmatively

seek review, the rule requires the

Director to determine whether a

decision not to assign cases in the future

is an appropriate exercise of a United

States Trustee’s discretion and whether

that decision is supported by the record

before the Director. Neither party bears

the burden of proof in convincing the

Director whether the applicable

standard is met. To the extent a burden

fell upon any party, it would fall upon

the United States Trustee whose

decision must constitute an appropriate

exercise of discretion and must be

supported to the record.

8. Comments suggested the rule

suffers from the absence of review by a

neutral party, an on the record hearing,

mandatory discovery, or the

requirements of sworn testimony. The

Program does not view this as a

weakness. Indeed, such procedures

would significantly lengthen the time it

would take to determine a request for

review. The final rule allows the parties

to provide whatever material they think

is appropriate.

Section (h) of the rule authorizes the

Director to request additional

information, which could include a face

to face meeting. This allows the

Director, or his designee, to conduct a

face to face meeting with the trustee and

the United States Trustee if the Director

determines that there is a genuine

dispute over facts material to the

Director’s determination. The level of

formality and complexity of a meeting

in a particular case will turn upon the

nature of the factual dispute presented.

In some cases a meeting could involve

a trustee appearing with a

representative, submitting documentary

evidence, presenting witnesses, and

confronting any witnesses the agency

presents. See generally 28 CFR 67.313

(authorizing a similar meeting in the

debarment context but only if the

government first determines a dispute of

material fact exists). In the Program’s

experience, the facts underlying

termination or suspension decisions are

rarely in dispute. Instead, most requests

for review involve a disagreement

whether the facts support such action.

In those cases, as in the debarment

context, a meeting likely would not take

place. The Program thus believes that

final rule strikes an appropriate balance

between the need for an effective and an

efficient review process.

The final rule enables the Program to

reach a final decision whether to

suspend or terminate the assignment of

future cases promptly so a trustee can

test that decision, if appropriate, in

subsequent judicial review under the

Administration Procedure Act. This

process makes possible ultimate review

by a United Stats district court, a United

States court of appeals, and potentially

by the United States Supreme Court.

Each is a neutral party.

The final rule merely creates a

mechanism by which the agency can

determine the appropriateness of its

decision before that decision can be

tested through subsequent judicial

review if the trustee wishes to obtain

judicial review under the APA. The

final rule gives a trustee significant

input into that final decision, but it is

entirely appropriate for the Director, as

the head of the Program, to render a

final decision.

Other regulators use precisely this

process. Agency commissions, boards,

and heads routinely act as the ultimate

decision-maker on what action an
51746 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

agency should take. Agencies do not

delegate the agency’s decision making to

a third party outside the agency. While

various agencies use differing

procedures to gather the data for, or

make recommendations to, the ultimate

decision-maker, in every relevant

instance, the agency decides for itself

what is the appropriate decision to

make.

The proposed rule called for the

creation of a reviewing official who was

to have been a Program employee who

would have reviewed the materials

provided by the participants and

recommend whether the Director should

affirm, modify, or reverse the United

States Trustee’s suspension or

termination. A number of comments

criticized the reviewing official position

for lack of independence because it was

to have been staffed by a Program

employee. These criticisms failed to

recognize the significance of the fact

that the reviewing official reports

directly to the Director, not to the

United States Trustee who made the

initial determination. The Director is the

head of the Program and acts under

independent authority delegated by the

Attorney General. The Director is not

directed or supervised by a United

States Trustee. Consequently, the

Director has the ability to decide

whether a United States Trustee’s

suspension or termination decision is

one that the agency should implement.

In making that determination, the

Director bears a heavy responsibility. He

must independently decide whether the

United States Trustee’s decision is

appropriate and is supported by the

record.

In response to these comments, the

final rule has been revised to allow,

rather than to require, the Director to

select a reviewing official who was

neither involved in the United States

Trustee’s decision nor employed by the

Program in the United States Trustee’s

region. In addition, nothing in the final

rule prohibits the Director from calling

upon his staff to assist him in reaching

his determination. This does not

represent a change from the proposed

rule.

The final rule creates strong

institutional incentives for the Director

to reach an independent determination

because his decision shall be subject to

judicial review. The final rule enables

the Director to reach his decision after

considering all materials the

participants which to submit. As

discussed above, the final rule makes it

optional for the Director to employ a

reviewing official in a particular case.

This was done in order to respond to

requests that the final rule reduce the

time it takes for the Director to reach a

final decision on a request for review.

Under the final rule, however, the

director retains the same power he had

under the proposed rule to

independently determine whether a

United States Trustee’s decision

constitutes an appropriate exercise of

discretion and is supported by the

record. Making optional the reviewing

official, who simply advised the

Director under the proposed rule, does

not diminish the Director’s

responsibility to exercise independent

judgment in making this final

determination, nor does it dilute the

trustee’s ability to obtain independent

review by the Director.

The procedure set forth in the rule

meets accepted notions of federal

administrative law. The Director’s

review under the final rule constitutes

‘‘an informal adjudication.’’ Zotos

International, Inc. v. Young, 830 F.2d

350, 353 (D.C. Cir. 1987). ‘‘[Although]

[t]he Administrative Procedure Act does

not use the term ‘informal

adjudication[,]’ [courts use it as] a

residual category [to describe] ’all

agency actions that are not rule making

and that [are not expressly required by

statute to] be conducted through ‘on the

record’ hearings.’ ’’ United States v.

Article of Device * * * Diapulse, 768

F.2d 826, 829 n.4 (7th Cir. 1985),

(quoting in part, Izzaak Walton League

of America v. Marsh, 655 F.2d 346, 361

n.37 (D.C. Cir. 1981)).

‘‘[N]o procedures are specified’’ in the

APA for conducting informal

adjudications. Zotos, 830 F.2d at 353.

The Supreme Court held in PBGC v.

LTV Corp., 496 U.S. 633 (1990) that an

agency need not conduct an informal

adjudication as a formal, on the record,

hearing with full discovery or sworn

witnesses.

To the contrary, section 554 of the

Administrative Procedure Act requires

an on the record adjudication only in a

case where an adjudication is required

by statute to be determined on the

record. Neither section 586 of title 28

nor any other provision of the United

States Code requires the United States

Trustee to reach a decision whether to

suspend or terminate future case

assignments in an on the record

evidentiary hearing. Thus, the Program

may conduct this decision-making

process in the manner it determines is

the best way to enable it to reach final

agency action. This rule implements the

procedures the Program determines to

be most appropriate. Similarly, the

Bankruptcy Administrator program does

not allow for review by a neutral party,

evidentiary hearings, sworn testimony,

or discovery.

The Program has modified the final

rule in one major way to assist trustees

in presenting relevant material to the

Director for consideration. The final rule

allows a trustee to ask that specific

documents in the United States

Trustee’s possession be included in the

record. This will enable trustees to rely

upon documents they believe to be

relevant but which are under the United

States Trustee’s control.

9. Comments suggested that the

Program should adopt the procedures

used for debarments for participation in

government contracting or government

entitlements. These suggestions fail to

appreciate the differences between

debarment and a cessation of

assignment of future cases to trustees,

which are fundamental. First,

debarment involves government

contracting and government

entitlements. Trustees have no contract

with the government. Receiving future

cases is not a government entitlement

program.

Moreover, courts have indicated that

a debarment, which has severe

government-wide consequences, may

implicate a constitutionally protected

interest. See, e.g., ATL, Inc. v. United

States, 736 F.2d 677, 683 (Fed. Cir.

1984); Transco Security, Inc. v.

Freeman, 639 F.2d 318, 321 (6th Cir.

1981); Old Dominion Dairy v. Secretary

of Defense, 631 F.2d 953, 966 (D.C. Cir.),

cert. denied, 454 U.S. 820 (1981). In

contrast, a trustee has no constitutional

interest in being assigned future cases.

Joelson v. United States, 86 F.3d at

1415–18; Richman v. Straley, 48 F.3d at

1143; Shaltry v. United States, 182 B.R.

at 842 (D. Ariz.) (same), aff’d, 1995 WL

866862 (9th Cir. 1995).

A debarment is far more significant

than mere case cessation because it can

have dramatic, government-wide,

consequences. As a matter of federal

law, someone who has been debarred in

a government contracting proceeding

cannot bid on any government contract

from any agency. The Department of

Justice’s debarment procedures for

debarment from nonprocurement

programs, 28 CFR part 67, which one

comment specifically cited, provides

that ‘‘[a] person who is debarred or

suspended [under the rule] shall be

excluded from Federal financial and

nonfinancial assistance under Federal

programs and activities.’’ 28 CFR

67.100. Indeed, ‘‘debarment or

suspension of a participant in a program

by one agency shall have government

wide effect.’’ Id. In many instances a

debarment has even greater significance

because some states refuse to contract

with persons who have been debarred

by an agency of the federal government.
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51747

A cessation of future case assignments

to a trustee has no such effects. Unlike

a debarment, it does not prevent a

trustee from applying for or

participating in any other program

administered by the Department of

Justice or any other part of the United

States government. As discussed

previously, it does not even affect their

ability to administer existing cases.

Indeed, the entire purpose of

debarment is fundamentally different

from termination of case assignments.

Debarments protect the federal

government from those who have

committed serious wrongdoing. See 28

CFR 67.115(b) (Department of Justice’s

debarment procedures). In contrast,

suspensions and terminations of future

case assignments foster an efficient

system of case administration and

ensure that debtors and creditors, the

intended beneficiaries of the bankruptcy

system, receive the best service from

trustees that is possible.

Thus, we doubt the comments

seriously intended to suggest that the

Department of Justice should adopt a

rule that would debar trustees from all

government contracting and entitlement

programs if they are terminated from

future case assignment. Nor do we

believe trustees want to be subject to

government contracting rules in seeking

future case assignments. Certainly, this

final rule has no such effect.

Consequently, the Program declines to

implement more costly and time

consuming debarment-type procedures

in this rule.

Notwithstanding the fundamental

differences that exist between the effect

of a debarment and a cessation of future

case assignments, the final rule adopts

procedures that embody many of the

concepts that underlie the Department’s

debarment procedures. Both allow the

Department, as opposed to a third party,

to reach a final decision. Both favor

quick, informal dispute resolution

instead of overly formalized, litigationtype procedures. See 28 CFR 67.310

(‘‘Department of Justice shall process

debarment actions as informally as

practicable’’). Neither authorize

discovery. Both enable the Department

to conduct face to face proceedings if

disputed issues of material fact exist.

10. One comment suggested that a

cessation of future cases places a stigma

of incompetence or wrongdoing on

trustees. It certainly places no stigma in

any constitutional sense. Nor does the

Program cease case assignments in order

to stigmatize trustees. There are many

reasons why a trustee may stop

receiving cases in the future. The

decline in volume of cases may demand

it, or the existence of candidates who

can better represent debtors or creditors

may result in a cessation of cases. None

of these instances involve the

imposition of a sanction or a finding of

wrongdoing in any criminal sense.

In addition, many trustees are

engaged in other professions or

occupations in addition to

administering bankruptcy cases so

cessation of case assignments does not

prevent them from engaging in their

other jobs. No one seriously suggests

that a businessperson in the private

sector is impermissibly stigmatized

simply because a client stops using their

product or services. Nor can any

businessperson sue to force a client to

use their services forever. The same is

true for trustees.

11. One comment, submitted by a

trustee, seemed to suggest that the

reviewing official that was suggested by

the proposed rule should not review

suspensions and terminations because

the official was not located within the

region where the trustee worked and

would ignore local customs and

policies. The final rule has made the

position of reviewing official optional in

order to shorten the time necessary for

the Program to decide a trustee’s request

for review. If a trustee who files a

request for review believes local

customs and policies are relevant, that

trustee would be free to raise those

matters, and such contentions would be

considered by the Director in reaching

a final determination.

12. One comment suggested that the

proposed rule allowed no input by

experts. This is not correct. A trustee

seeking review is free to provide

whatever materials he or she wishes the

Director to consider in reaching a

determination.

13. One comment suggested the rule

is ineffective without meaningful

judicial review before the bankruptcy

court. This is not true. The final rule

creates final agency action that is

subject to judicial review under the

Administrative Procedure Act. There are

serious constitutional questions about a

system that would allow bankruptcy

judges, who are not Article III judges, to

review an agency’s decision to cease the

assignment of future bankruptcy cases

to trustees. The Program also recognizes

that United States district courts have

far more familiarity with review of final

agency actions than do bankruptcy

courts. We further note that the Judicial

Branch’s own system by which

Bankruptcy Administrators suspend and

terminate trustees does not provide for

any court review, bankruptcy or

otherwise, of a Bankruptcy

Administrator’s decision.

Moreover, engrafting bankruptcy

court review onto the post-termination

judicial review process would do

nothing more than delay final judicial

determination of trustee suspension and

termination decisions. This is so

because a bankruptcy court decision

could be appealed to a district court,

which would review the agency’s action

and record using a de novo standard of

review, and thence review could be had

in the courts of appeals under the same

standard. In sum, the Program sees no

advantage to be gained and many

disadvantages that would result from

bankruptcy court involvement.

14. One comment asked whether the

rule applies to all adverse actions or just

formal suspensions and terminations.

The rule applies to any decision by a

United States Trustee to actually stop

assigning cases to a trustee. It does not

apply to other regulatory actions such as

providing the trustee with an

unfavorable review, a letter of warning

or reprimand, or other actions that fall

short of ceasing the assignment of cases.

15. One comment suggested that the

United States Trustee Program should

use a progressive system of discipline.

The Program does this. This suggestion

falls outside the intended scope of this

rule, however, because this rule applies

only to decisions to suspend or

terminate the assignment of future cases

to trustees. It does not apply to

disciplinary actions that fall short of

case cessation.

16. One comment suggested the rule

compromises trustee independence. The

rule neither enlarges nor reduces

permissible trustee independence.

Instead, it establishes a procedure by

which a trustee can obtain a final

determination by the Program whether a

United States Trustee’s decision to cease

the assignment of future cases is an

appropriate exercise of the United States

Trustee’s discretion and is supported by

the record. If anything, the final rule

will give trustees greater independence

because it gives them a formal

procedure for obtaining a final agency

determination and allows them

thereafter to obtain judicial review

under the Administrative Procedures

Act, two thing they lacked prior to the

implementation of the rule.

17. One comment suggested the rule

violated 11 U.S.C. 324. This is incorrect.

Section 324 established a judicial

procedure for removing a trustee from

one or more specific cases that have

been previously assigned to a trustee.

Section 324 is not relevant to this rule

because the rule only pertains to future

case assignments and does not stop a

trustee from continuing to administer

present cases.
51748 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

18. One comment suggested the rule

suffers form a lack of objective

standards or criteria. The Program does

not believe this to be the case. Section

(a) of the final rule sets forth a nonexhaustive list of 14 criteria that a

United States Trustee may employ in

deciding whether to suspend or

terminate the assignment of future cases

to trustees. The final rule has revised

the language of section (i) slightly due

to the elimination of the mandatory use

of a reviewing official. The language in

the final rule makes clear that the

standard the Director will employ in

deciding a request for review is

‘‘whether the Untied States Trustee’s

decision is supported by the record and

the action is an appropriate exercise of

the United States Trustee’s discretion.’’

The quoted language creates a standard

which would enable a court to review

the Program’s final action under the

Administrative Procedure Act.

19. One comment suggested the rule

should apply a reasonable man

standard. The comment did not suggest

specific language. The Program believes

that section (i) sets forth an appropriate

standard.

20. Various comment questioned the

breadth and reasonableness of the

factors set forth in section (a) (2), (4), (5),

(6), (7), (11), (12), (13), and (14). These

comments are not well taken for the

reasons that follow.

Before addressing the specific

comments, it is appropriate to note that

the rule does not require termination or

suspension for a single or isolated

violation of any one of these factors.

Section (a)(6) provides, for example,

that a trustee ‘‘display proper

temperament in dealing with judges,

clerks, attorneys, creditors, debtors, the

United States Trustee and the general

public.’’ Trustees are service providers

and are important participants in the

federal bankruptcy system. They often

are the only person a debtor sees as a

representative of that system. It is

important they interact appropriately

with the other participants in the

bankruptcy system. This provision does

not mean, however, the at a United

states Trustee would appropriately

exercise discretion by terminating a

trustee for a single isolated instance of

mere discourtesy. That will depend on

the circumstances and the record. In

some cases, one egregious act might

warrant a suspension or termination.

For example, a single instance of using

racial slurs against a debtor might, given

the specific facts and circumstances,

justify a suspension or a termination. So

too might a single instance of assault.

On the other hand, multiple instances of

discourtesy also might justify

suspension or termination. The factors

set forth in section (a) simply constitute

a non-exhaustive list of reasons that

might form a basis for suspension or

termination. In many cases the reasons

for the United States Trustee’s decision

may involve a combination of factors. In

every request for review, the Director

will decide whether the suspension or

termination constituted an appropriate

exercise of the United States Trustee’s

discretion and is supported by the

record.

Section (a)(2) addresses trustees who

fail to ‘‘perform duties in a timely and

consistently satisfactory manner.’’ Some

comments questioned the

appropriateness of this factor. First,

depending upon the conduct at issue, it

is wholly appropriate to suspend or

terminate a trustee who cannot perform

his or her trustee duties in a timely and

consistently satisfactory manner. To

decide otherwise would be to place the

interests of debtors and creditors at

serious risk. Moreover, one of the

qualifications to be appointed to act as

a trustee is the physical and mental

capacity to ‘‘perform a trustee’s duties.’’

28 CFR 58.3(b)(2).

Section (a)(4) addresses trustees who

fail to cooperate and to comply with

instructions and policies of the Code,

the Bankruptcy Rules, and local rules of

court. Contrary to comments received,

this is an appropriate factor to consider

in deciding whether to suspend or

terminate a trustee. Trustees are

required to manage debtors’ estates in

accordance with applicable standards.

Failure to comply with applicable law,

rules, and regulations can have

disastrous consequences for debtors and

creditors. Depending upon the conduct

at issue, it is wholly appropriate to

suspend or terminate a trustee who does

not comply with applicable standards.

Section (a)(5) recognizes the need to

suspend or terminate trustees who

engage in substandard performance of

general duties and case management in

comparison to other members of the

chapter 7 panel or other standing

trustees. Although some commentors

expressed concern about using this as a

basis for suspensions or terminations,

the Program believes this is an

important provision. It was created to

reflect that a United States Trustee may

consider, in making termination or

suspension decisions, statistical or other

evidence that a trustee is not performing

at the same level of competence and

efficiency as other trustees.

Section (a)(6) addresses the

termination or suspension of trustees

who fail to display proper temperament.

Some comments expressed concern

with the application of this factor. The

bases for this factor has been described

above. Trustees have daily contact with

debtors, creditors, court personnel,

courts, Program employees, and the

public at large. A trustee cannot

effectively represent the interests of

debtors and creditors if the trustee fails

to display proper temperament. This is

such an important factor that it is one

of the qualifications that a trustee must

possess to be appointed to act as a

trustee. See 58 CFR 58.3(b)(3) (a trustee

must ‘‘[b]e courteous and accessible to

all parties. * * *’’). See also 58 CFR

58.3(b)(4) (trustee must ‘‘[b]e free of

prejudices against any individual,

entity, or group of individuals or

entities which would interfere with

unbiased performance of a trustee’s

duties.’’).

Section (a)(7) is directed at trustees

who fail to supervise the work of their

employees. Some comments contended

that inadequate supervision should not

form a basis for suspension or

termination or that the provision’s scope

was unclear. The Program rejects these

suggestions. Many trustees routinely

employ persons or hire professionals to

assist them in the performance of their

trustee duties. However, if they delegate

responsibilities to professionals and

employees and do not monitor those

individuals or take proper precautions,

this can amount to an abdication of their

responsibilities. It is important to hold

trustees accountable for failing to

supervise those they choose to employ.

In order to respond to other comments

received, the Program has revised this

provision slightly in the final rule to

make clear that a suspension or

termination may issue, in an

appropriate circumstance, if a trustee

fails to monitor the work of

professionals or others employed by the

trustee.

One comment questioned whether

section (a)(11) should condone a

suspension or termination that occurs

because an allegation of misconduct is

pending before a court or state licensing

agency when such allegation calls the

trustee’s competence, financial

responsibility or trustworthiness into

question. The Program believes credible

allegations that a trustee lacked honesty,

competence, financial responsibility or

trustworthiness could form a basis for

suspension or termination in

appropriate circumstances. See

generally 28 CFR 58.3(b)(6) (which

establishes certain educational or

licensing requirements for chapter 7

trustees). While it is difficult to act on

the basis of mere allegations, neither can

the gravity of charges made against a

trustee be ignored. The rule recognizes

that in some instances, a United States
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51749

Trustee may conclude that a temporary

suspension of cases is warranted

pending the final outcome of a

proceeding. Whether the decision is

made to terminate the assignment of

cases will depend upon the

circumstances and a fair consideration

of all relevant factors. At the very least,

the United States Trustees’ statutory

responsibilities to the bankruptcy

system and their roles as officers of the

court and as Department of Justice

officials make it entirely appropriate for

them to consider such allegations before

entrusting future bankruptcy estates to a

particular trustee’s care.

It was suggested that section (a)(12)

should be deleted and trustees should

not be suspended or terminated if they

are unable to take assigned case. The

Program agrees that an isolated conflict

of interest that results in an inability to

take an assigned case should not result

in case cessation. Therefore, this section

has been modified in the final rule to

provide that a ‘‘routine inability to

accept assigned cases’’ is a factor that

may result in suspension or termination.

If a trustee has so many other interests

that he or she cannot or will not accept

cases as regularly assigned it could be

appropriate to suspend the trustee while

those other matters or interests are

resolved. If conflicts or an inability to

takecases arise so frequently that a

trustee cannot function effectively as a

trustee, termination could be

appropriate. Chapter 7 trustees function

as part of a panel of chapter 7 trustees.

If one trustee on the panel does not

accept a fair share of case assignments,

that may place an undue or unfair strain

on other chapter 7 trustees. Most

chapter 12 and chapter 13 standing

trustees are the only standing trustee of

their type in a specific geographic

region, or one of only a very few. A

standing trustee who does not regularly

accept assignment places an undue

burden on the bankruptcy system. It

should be stressed, however, that the

enumeration of this particular factor is

not a limitation upon a United States

Trustee’s ability to consider other

conflict questions, including those that

involve an appearance of a conflict of

interest.

Section (13) allows suspension or

termination of case assignment if there

is a change in composition of the

chapter 7 panel pursuant to a system

established by the United States Trustee

under 28 CFR 58.1. It was questioned

whether this should form the basis for

case cessation. This provision merely

makes clear that a United States Trustee

may create a system to periodically

reconstitute the whole panel, to retire a

certain percentage of the panel at fixed

intervals, or the like, and thereby to

invite new membership.

It was suggested that section (a)(14)’s

factor allowing case cessation for

efficient case administration or a

decline in the number of cases should

be deleted from the final rule. The

Program has modified this factor

slightly to clarity that both efficient

administration and a decline in caseload

may constitute bases for case cessation.

It is important to maintain an

appropriate balance of expertise and

number of trustees for the caseload.

Otherwise, good trustees might not

apply or might resign their positions.

The type and number of bankruptcy

filings fluctuate significantly over time

and from one location to another. The

Program needs the ability to respond to

those fluctuations by adjusting the

number of trustees accordingly.

21. It was suggested that this rule is

a significant regulatory action that

requires more formal review under

Executive Order 12866; that the rule

does not comply with the Regulatory

Flexibility Act; and that the rule does

not comply with the Paperwork

Reduction Act. These assertions are

incorrect.

This rule has been drafted and

reviewed in accordance with Executive

Order 12866, section 1(b), Principles of

Regulation. Executive Order 12866

defines ‘‘significant regulatory action’’

as a rulemaking that is likely to have (1)

an annual effect on the economy of $100

million or more or adversely affect in a

material way the economy, a sector of

the economy, productivity, competition,

jobs, the environment, public health or

safety, or state, local, or tribal

governments or communities; (2) create

a serious inconsistency or otherwise

interfere with an action taken or

planned by another agency; (3)

materially alter the budgetary impact of

entitlements, grants, user fees, or loan

programs or the rights and obligations of

recipients thereof; or (4) raise novel

legal or policy issues arising out of legal

mandates, the President’s priorities, or

the principles of Executive Order 12866.

This rule formalizes the procedures

by which trustees may obtain

administrative review by the Director of

suspension and termination decisions.

This process will be available to all of

the 1,500 or so existing trustees but only

those trustees whose appointment to

future cases are suspended or

terminated will have any reason to

invoke these procedures. We believe the

number of trustees so affected to

represent no more than approximately

5% of the 1,500 existing trustees

(approximately 75). Further, the core

group (that is all 1,500 bankruptcy

trustees) do not comprise a sector of the

economy as that phrase is used in

Executive Order 12866.

The rule complies with the Regulatory

Flexibility Act. The Director has

reviewed this rule and by approving it

certifies that it will not have a

‘‘significant economic impact upon a

substantial number of small entities’’ as

that phrase is used in the Regulatory

Flexibility Act (5 U.S.C. 605(b)).

Individuals serving as trustees are

frequently attorneys, accountants, or

other financial professionals. Some of

these individuals may be associated

with law or accounting firms of varying

size while others may be independent.

Some of these individuals may derive

all or a substantial amount of their

income from serving as trustees while

others may derive a smaller portion of

their income from such service. Even

assuming that all 1,500 trustees are

small entities, the number of trustees

affected by suspensions and

terminations is far smaller—likely less

than 5%, or 75 in any year. This is not

a significant number when considered

against the number of existing trustees

nor when considered against the

number of attorneys, accountants, and

other financial professionals in this

country. Further, the Director has no

information regarding which trustees

derive a substantial amount of their

income from administering bankruptcy

cases and consequently whether the

suspension or termination of case

assignments would have a significant

economic impact on them. A number of

trustees engage in other full-time

professions and engage in bankruptcy

work part-time. Because of the variation

in other activities that trustees might

engage in professionally, the number of

entities which might experience a

significant economic impact from the

suspension or termination of case

assignments could be less than 75.

Additionally, it should be emphasized

that this rule is intended to provide a

review process for trustees whose future

case assignments are suspended or

terminated because of improper conduct

or failure to perform adequately,

although the Program also may stop

assigning future cases to trustees for

other reasons such as when more

qualified candidates are identified or

when the caseload in a judicial district

declines, resulting in too many trustees

for too little work. As discussed in the

supplementary information, those

trustees have no legal right to be

appointed in future cases.

Finally, this rule also complies with

the Paperwork Reduction Act. It

contains no new information collection

or record keeping requirements under
51750 Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations

the Paperwork Reduction Act (44 U.S.C.

3501, et seq.). The rule will not require

affected trustees to complete new forms

or to retain records as that phrase is

used in the Paperwork Reduction Act.

22. It was suggested that it is unfair

to require trustees to bear their own

costs when seeking administrative

review. That provision of the rule is

consistent with applicable law. It also is

fair. It would be fundamentally unfair to

permit a trustee to tax the estates of the

debtors he or she oversees so the trustee

can fund his or her attempt to secure

other, unrelated, cases in the future. In

seeking review, a trustee is pressing his

economic self advantage. It is

appropriate for the trustee to pay his

own costs in pursuing those self

interests.

Certifications

Executive Order 12866

This rule has been drafted and

reviewed in accordance with Executive

Order 12866, section 1(b), Principles of

Regulation. The Director, Executive

Office for United States Trustees,

(‘‘Director’’) has determined that this

rule is not a ‘‘significant regulatory

action’’ under Executive Order 12866,

section 3(f), Regulatory Planning and

Review, and, accordingly, this rule has

not been reviewed by the Office of

Management and Budget.

Regulatory Flexibility Act

In accordance with the Regulatory

Flexibility Act (5 U.S.C. 605(b)), the

Director has reviewed this rule and by

approving it certifies that it will not

have a significant impact on a

substantial number of small entities.

The only parties affected are the less

than 2,000 individuals who serve as

panel and standing trustees. The effect

it will have on them is to formalize a

procedure that enables them to obtain

review by the Director of a notice by a

United States Trustee to suspend or

terminate the assignment of future cases

to the trustee.

Paperwork Reduction Act

This rule contains no new

information collection or recordkeeping

requirements under the Paperwork

Reduction Act (44 U.S.C. 3501, et seq.).

Unfunded Mandates Reform Act of 1995

This rule will not result in the

expenditure by State, local and tribal

governments, in the aggregate, or by the

private sector, of $100,000,000 or more

in any one year, and it will not

significantly or uniquely affect small

governments. Therefore, no actions were

deemed necessary under the provisions

of the Unfunded Mandates Reform Act

of 1995.

Small Business Regulatory Enforcement

Fairness Act of 1996

This rule is not a major rule as

defined by section 804 of the Small

Business Regulatory Enforcement

Fairness Act of 1996. This rule will not

result in an annual effect on the

economy of $100,000,000 or more; a

major increase in costs or prices; or

significant adverse effects on

competition, employment, investment,

productivity, innovation, or on the

ability of United States-based

companies to compete with foreignbased companies in domestic and

export markets.

List of Subjects in 28 CFR Part 58

Bankruptcy, Trusts and trustees.

For the reasons set forth in the

preamble, the Department of Justice

proposes to amend 28 CFR part 58 as

follows:

PART 58—REGULATIONS RELATING

TO THE BANKRUPTCY REFORM ACTS

OF 1978 AND 1994

1. The authority citation for Part 58 is

revised to read as follows:

Authority: 5 U.S.C. 301; 28 U.S.C. 509,

510, 586.

2. New section 58.6 is added to read

as follows:

§ 58.6 Procedures for suspension and

removal of panel trustees and standing

trustees.

(a) A United States Trustee shall

notify a panel trustee or a standing

trustee in writing of any decision to

suspend or terminate the assignment of

cases to the trustee including, where

applicable, any decision not to renew

the trustee’s term appointment. The

notice shall state the reason(s) for the

decision and should refer to, or be

accompanied by copies of, pertinent

materials upon which the United States

Trustee has relied and any prior

communications in which the United

States Trustee has advised the trustee of

the potential action. The notice shall be

sent to the office of the trustee by

overnight courier, for delivery the next

business day. The reasons may include,

but are in no way limited to:

(1) Failure to safeguard or to account

for estate funds and assets;

(2) Failure to perform duties in a

timely and consistently satisfactory

manner;

(3) Failure to comply with the

provisions of the Code, the Bankruptcy

Rules, and local rules of court;

(4) Failure to cooperate and to comply

with orders, instructions and policies of

the court, the bankruptcy clerk or the

United States Trustee;

(5) Substandard performance of

general duties and case management in

comparison to other members of the

chapter 7 panel or other standing

trustees;

(6) Failure to display proper

temperament in dealing with judges,

clerks, attorneys, creditors, debtors, the

United States Trustee and the general

public;

(7) Failure to adequately monitor the

work of professionals or others

employed by the trustee to assist in the

administration of cases;

(8) Failure to file timely, accurate

reports, including interim reports, final

reports, and final accounts;

(9) Failure to meet the eligibility

requirements of 11 U.S.C. 321 or the

qualifications set forth in 28 CFR 58.3

and 58.4 and in 11 U.S.C. 322;

(10) Failure to attend in person or

appropriately conduct the 11 U.S.C.

341(a) meeting of creditors;

(11) Action by or pending before a

court or state licensing agency which

calls the trustee’s competence, financial

responsibility or trustworthiness into

question;

(12) Routine inability to accept

assigned cases due to conflicts of

interest or to the trustee’s unwillingness

or incapacity to serve;

(13) Change in the composition of the

chapter 7 panel pursuant to a system

established by the United States Trustee

under 28 CFR 58.1;

(14) A determination by the United

States Trustee that the interests of

efficient case administration or a

decline in the number of cases warrant

a reduction in the number of panel

trustees or standing trustees.

(b) The notice shall advise the trustee

that the decision is final and

unreviewable unless the trustee requests

in writing a review by the Director,

Executive Office for United States

Trustees, no later than 20 calendar days

from the date of issuance of the United

States Trustee’s notice (‘‘request for

review’’). In order to be timely, a request

for review must be received by the

Office of the Director no later than 20

calendar days from the date of the

United States Trustee’s notice to the

trustee.

(c) A decision by a United States

Trustee to suspend or terminate the

assignment of cases to a trustee shall

take effect upon the expiration of a

trustee’s time to seek review from the

Director or, if the trustee timely seeks

such review, upon the issuance of a

final written decision by the Director.

(d) Notwithstanding paragraph (c) of

this section, a United States Trustee’s
Federal Register / Vol. 62, No. 191 / Thursday, October 2, 1997 / Rules and Regulations 51751

decision to suspend or terminate the

assignment of cases to a trustee may

include, or may later by supplemented

by an interim directive, by which the

United States trustee may immediately

discontinue assigning cases to a trustee

during the review period. A United

States Trustee may issue such an

interim directive if the United States

Trustee specifically finds that:

(1) A continued assignment of cases to

the trustee places the safety of estate

assets at risk ;

(2) The trustee appears to be ineligible

to serve under applicable law, rule, or

regulation;

(3) The trustee has engaged in

conduct that appears to be dishonest,

deceitful, fraudulent, or criminal in

nature; or

(4) The trustee appears to have

engaged in other gross misconduct that

is unbefitting his or her position as

trustee or violates the trustee’s duties.

(e) If the United States Trustee issues

an interim directive, the trustee may

seek a stay of the interim directive from

the Director if the trustee has timely

filed a request for review under

paragraph (b) of this section.

(f) The trustee’s written request for

review shall fully describe why the

trustee disagrees with the United States

Trustee’s decision, and shall be

accompanied by all documents and

materials that the trustee wants the

Director to consider in reviewing the

decision. The trustee shall send a copy

of the request for review, and the

accompanying documents and

materials, to the United States Trustee

by overnight courier, for delivery the

next business day. The trustee may

request that specific documents in the

possession of the United States Trustee

be transmitted to the Director for

inclusion in the record.

(g) The United States Trustee shall

have 15 calendar days from the date of

the trustee’s request for review to

submit to the Director a written

response regarding the matters raised in

the trustee’s request for review. The

United States Trustee shall provide a

copy of this response to the trustee.

Both copes shall be sent by overnight

courier, for delivery the next business

day.

(h) The Director may seek additional

information from any party in the

manner and to the extent the Director

deems appropriate.

(i) Unless the trustee and the United

States Trustee agree to a longer period

of time, the Director shall issue a

written decision no later than 30

calendar days from the receipt of the

United States Trustee’s response to the

trustee’s request for review. That

decision shall determine whether the

United States Trustee’s decision is

supported by the record and the action

is an appropriate exercise of the United

States Trustee’s discretion, and shall

adopt, modify or reject the United States

Trustee’s decision to suspend or

terminate the assignment of future cases

to the trustee. The Director’s decision

shall constitute final agency action.

(j) In reaching a determination, the

Director may specify a person to act as

a reviewing official. The reviewing

official shall not be a person who was

involved in the United States Trustee’s

decision or a Program employee who is

located within the region of the United

States Trustee who made the decision.

The reviewing official’s duties shall be

specified by the Director on a case by

case basis, and may include reviewing

the record, obtaining additional

information from the participants,

providing the Director with written

recommendations, or such other duties

as the Director shall prescribe in a

particular case.

(k) This rule does not authorize a

trustee to seek review of any decision to

increase the size of the chapter 7 panel

or to appoint additional standing

trustees in the district or region.

(l) A trustee who files a request for

review shall bear his or her own costs

and expenses, including counsel fees.

Dated: September 29, 1997.

Joseph Patchan,

Director, Executive Office for United States

Trustees.

[FR Doc. 97–26172 Filed 10–1–97; 8:45 am]

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