Remarks of Director Tara Twomey at the 42nd Annual Conference of the National Association of Bankruptcy Trustees

Speech

Tuesday, August 20, 2024

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Remarks as Prepared for Delivery

INTRODUCTION

Good morning. I appreciate the opportunity to join you for your annual conference again this year.

The last time that I addressed bankruptcy community stakeholders was on July 4-a day that symbolizes new beginnings and fresh starts. As I prepared for today's remarks, I considered drawing inspiration from significant events on this date in history. But as it turns out, August 20 doesn't hold much historical significance in the bankruptcy world. There were some notable moments on this date, like in 1896, when a patent application was submitted for the telephone rotary dial, and 1938, when Lou Gehrig hit his 23^rd career grand slam-a record that stood for 75 years. Without a hook, I pivoted away from history, and being in Tennessee, I thought surely there must have been at least one extraordinary bankruptcy case here. And true enough, in 2018, an iconic Nashville-based guitar company drowning in debt filed for bankruptcy. It successfully navigated reorganization and continues to produce guitars today. But it actually filed in Delaware.

And then I thought that sometimes the most seemingly ordinary things can be quite extraordinary. I glanced at all the businesses that had filed subchapter V cases in Tennessee over the past year. I saw the cabinet design company, the excavator, the pediatric therapist, the tree trimmer, the jeweler, and the Nashville hot chicken eatery. Some had consensual confirmed plans, some had nonconsensual confirmed plans, and some fell out-converted or dismissed-but all these small businesses had a second chance.

Then I turned to chapter 7. Between October 1, 2023, and June 30, 2024, there were nearly 6,000 chapter 7 cases filed in Tennessee alone-an average of just over 150 per week. That's more than 20 individuals or families in Tennessee seeking a fresh start each day. More than 95 percent of these debtors had below-median incomes, and almost three-quarters of them have already received their discharges. These debtors included a grocery store clerk, a plumber, an electrician, a human resources analyst, and a shipping coordinator. Each of them got a fresh start, too. Now widen the lens beyond Tennessee across the entire United States, and we see hundreds of thousands of individuals and families and thousands of businesses each year that get a second chance through the bankruptcy process.

Indeed, the United States has always stood as a beacon of second chances and a testament to the transformative power of fresh starts. We see that through today's Bankruptcy Code, Congress has provided individuals and businesses a chance to reassess, restructure, and re-emerge. Here, financial failure doesn't dictate one's future. Instead, bankruptcy serves as a reminder that we can learn from the past while looking forward with renewed hope and determination. And what may seem quite ordinary to many of us in this room-a garden-variety bankruptcy-is actually quite extraordinary and life-changing for many individuals, families, and small business owners.

But these second chances don't happen without you. Whether you are a chapter 7 trustee or a subchapter V trustee, your contributions are critical to a well-functioning bankruptcy system.

TRUSTEE COMPENSATION

This leads me to a matter that is most likely on everyone's mind as I stand here-trustee compensation. We can expect that more than 95 percent of those nearly 6,000 chapter 7 cases filed in Tennessee over nine months will end up as no-asset cases. And for most of those no-asset cases, the chapter 7 trustee receives $60 in base compensation. The same is true for the hundreds of thousands of no-asset cases filed across the country. I have talked with many of you, and I know that because the base amount has not changed since 1994, this is one of your biggest frustrations and one of your highest priorities.

So let me start with the top line on where we are today. As you know, filings have continued to increase after reaching a historic low in Fiscal Year 2022. The USTP is currently projecting that for FY 2024 the Program will fully offset our appropriations and that there will be some excess quarterly fees available for additional chapter 7 trustee compensation. Of course, this remains a projection subject to the final receipts for the year. In addition, under the President's budget estimates for FY 2025, it is projected that, after offsetting appropriations, there will also be excess quarterly fees available for additional chapter 7 trustee compensation. Again, these are the published figures for FY 2025, but they remain an estimate. That's the top line.

Now, I want to take a step back from the headline for just a minute. In 2017, Director White testified before the U.S. House of Representatives Judiciary Committee and expressed the USTP's support for an increase in the fee received by chapter 7 trustees in no-asset cases. Nothing on that score has changed.

Subsequently, the Bankruptcy Administration Improvement Act of 2020 was enacted. That bill provided a mechanism to increase the no-asset chapter 7 fee up to $120. And in its first year, BAIA worked as intended. Following FY 2021, the USTP transferred more than $13 million to the Administrative Office of the U.S. Courts to pay trustees the full $60 of additional compensation for chapter 7 cases administered from the January 2021 enactment of BAIA through September 30, 2021.

However, in 2021 and 2022, bankruptcy filings collapsed in the wake of the unprecedented global pandemic. In FY 2022, the total number of chapter 7 bankruptcies had fallen more than 50 percent since FY 2019. Fees in no-asset cases similarly dropped, from nearly $27 million in FY 2019 to almost $13 million in FY 2022. Commissions in asset cases declined to a lesser extent, from $126 million to $116 million, during the same period. And finally, professional fees paid to trustees in cases in which they serve as attorney or accountant also slipped from $117 million to $113 million during the same period. Those are difficult numbers.

But 2022 was the nadir for case filings. Since then, we have seen a steady increase in chapter 7 and chapter 13 cases and a more significant increase in chapter 11 cases. That has meant more available funds for offsetting appropriations and for compensating chapter 7 trustees. Again, the top takeaway is that we currently project fully offsetting appropriations in FY 2024 and FY 2025, with excess quarterly fees available for additional chapter 7 trustee compensation. This is where we currently stand under BAIA.

I'll also note as most of you are probably aware that on July 25, U.S. Rep. Glenn Ivey introduced H.R. 9154, which provides a new mechanism to fund and double the base compensation in no-asset cases from $60 to $120. Here I will again echo prior remarks by Director White: while we cannot comment on pending legislation or specific proposals, the NABT has been active in presenting its views to Congress and other policymakers. We know that there is keen interest in the issue of trustee compensation and the USTP looks forward to providing assistance, as requested, as Congress decides the most effective course of action.

OTHER OPERATIONAL MATTERS

DOL Abandoned Plan Program: As you know, the Bankruptcy Code requires chapter 7 trustees to perform the duties of an ERISA plan administrator. In May of this year, the Department of Labor published interim final rules designed to streamline the trustee's performance of these duties. Safe to say, we recognize that these are often complicated and time-consuming duties, but they are nonetheless essential to ensure that plan participants, who may have worked for many years at a now-bankrupt company, receive the retirement funds to which they are entitled. The new rules, which create a voluntary streamlined process, will hopefully ease trustee burdens while ensuring that plan participants receive what is rightfully theirs. Additionally, the rules permit trustees to pay themselves reasonable compensation from plan assets for services rendered in terminating and winding up plans.

The USTP provided technical assistance to DOL during the rulemaking process. USTP will continue to facilitate trainings to chapter 7 trustees. For example, we were pleased that DOL representatives joined our USTP/NABT liaison meeting to discuss the new rules shortly after the publication.

Corporate Transparency Act: Over this past year, we know that many of you have had questions about the application of the Corporate Transparency Act to your work in administering estates. We are pleased to have a strong working relationship with the Treasury Department's Financial Crimes Enforcement Network, the entity charged with oversight of the CTA.

By way of background, in 2021 Congress enacted the CTA, creating an obligation for certain entities to report identifying information about the individuals who directly or indirectly own or control a company. By creating this reporting system, the legislation deters bad actors who seek to hide ill-gotten gains in shell companies and other corporate fronts. For businesses created or registered before 2024, compliance is required by January 1, 2025. For businesses created or registered during 2024, compliance is required within 90 days of their formation.

As you can imagine, the CTA generally applies outside the bankruptcy system, and FinCEN has provided public guidance on its website. Nonetheless, and as I noted, many of you have asked how the CTA applies to you in your capacity as trustees. We remain engaged with our DOJ colleagues and FinCEN officials on such matters. And we appreciate that NABT has made FinCEN aware of the views of the trustees. But for now, I can paraphrase a few things that FinCEN has suggested in public pleadings in specific cases:

• The obligation to report beneficial ownership information lies with the reporting company itself, and the company must decide which individual will file the beneficial ownership information report with FinCEN.
• Becoming a chapter 7 trustee for a corporate debtor does not, in and of itself, automatically make the trustee a "senior officer" for the company.
• Accordingly, chapter 7 trustees will not typically be responsible for fulfilling the company's duty to report beneficial ownership information.
• However, there could be circumstances where a chapter 7 trustee might become liable for a company's failure to file beneficial ownership reports-for example, telling a company you'll file the reports but then willfully failing to do so or preventing the company from filing the required information.

We remain engaged with FinCEN, and if we learn more, we'll share it with you.

Uniform Depository Agreements: The USTP recently updated safeguards for bankruptcy funds by introducing a revised and modernized depository agreement for banks and financial institutions that accept bankruptcy estate deposits.

In June, the USTP began transmitting the new agreement to existing authorized depositories and any banks that have expressed interest in signing up. The modernized agreement reflects the evolution in the way that the USTP, the Department of the Treasury, and financial institutions conduct business. It also expressly covers subchapter V trustees for the first time. Additionally, the new agreement aims to simplify the process for banks to become authorized depositories and streamlines two versions of the prior agreement into a single document.

While we want you to be aware of this effort, you should not otherwise recognize any material changes to your practice as a result of the new UDA. Your estate deposits remain protected under the new UDA-just as they were under the prior UDA and through last year's banking turmoil.

Finally, and thanks to robust engagement from banks and software providers, I am happy to report that all banks that work with the major trustee software providers have already signed the new UDA.

Virtual 341 Meetings: I will say a few words about virtual 341 meetings in chapter 7, 12, and 13 cases. At this conference last year, I previewed the nationwide expansion of virtual 341 meetings in two waves. Most second-wave jurisdictions began noticing virtual meetings for new cases filed in May-so we are nearly at the end of the rollout.

Last year, I assured you that there would be no game of "gotcha" when it came to virtual meetings. Instead, your commitment-as well as the commitment from other system stakeholders, including court clerks and practitioners-shows that the system can improve for the mutual benefit of all. I want to thank NABT again for its efforts in providing further instruction and support to membership.

But we are not done yet. As we go forward, the USTP will continue to assess the effectiveness of its guidance and processes. This will include changes to manuals and handbooks, as well as the potential expansion of a live operator for language translation-subject to results from a current pilot effort.

Additionally, based on feedback from a listening session with legal aid providers, the USTP will soon release professionally produced videos, including a sample chapter 7 meeting of creditors and Zoom connection instructions, designed to demystify 341 meetings for debtors. I appreciate your leadership, particularly Marc Albert and Russ Garrett, taking the time to review the simulated virtual chapter 7 meeting. We hope to finalize these videos soon and have them up on our website in the near future. After that, we will work towards translating the videos into Spanish and other commonly requested languages.

SUBCHAPTER V

Since the Small Business Reorganization Act took effect in February 2020, subchapter V has provided small businesses a more flexible, efficient and cost-effective path through chapter 11. Nearly 8,500 debtors have elected subchapter V treatment since 2020, and their plans have been confirmed at more than twice the rate and their cases dismissed at about half the rate of other small business cases.

The USTP is committed to continuing our efforts to enhance the administrative and operational functions of subchapter V. This includes offering training to subchapter V trustees, improving the monthly reporting spreadsheet, and evaluating other reporting requirements.

Let me say on training, we are interested in identifying areas that need additional attention or focus, particularly areas where the USTP is well-positioned to provide the training. To that end, we recently sent out a very short survey to all subchapter V trustees. If you are one of those trustees, I encourage you to share your insights with us, as it will help us design better educational programs. I also encourage you to share any other ideas you may have on subchapter V operations.

CONCLUSION

I greatly appreciate the opportunity to speak with you today. I want to thank all of you and the NABT leadership for your ongoing partnership with the Program. A special thank you to your outgoing president, Marc Albert, for his leadership over the past year. I am confident that our strong partnership with NABT will continue under the stewardship of your incoming president, Russ Garrett. Russ-we look forward to working with you. Also, thank you to all the members of the liaison committee. We have regularized meetings with the NABT liaison group and that has yielded productive conversations, including ideas for ways we can make administration of chapter 7 cases more efficient. Yesterday's liaison meeting proved that once again. Your colleagues shared ideas on how to modernize and enhance the security of trustee payments, including using forms of electronic payment. Our discussions also brought greater focus in avoiding delay on potential BAIA payments.

I'll conclude by letting you know that we have several people from USTP attending the conference, and I want to specifically mention Mike Bujold, our Deputy Director for Field Operations, and Bob Gebhard, our Assistant Director for Oversight. I encourage you to seek out any of us to share your ideas and suggestions on how we can work with you to improve the bankruptcy system.

Thank you again, and best wishes for a successful meeting.

Tara Twomey, Director of the United States Trustee Program

Updated September 10, 2024