Improvements Rolled Out by the Bankruptcy Administration Improvement Act of 2020

On Jan. 12, 2021, President Donald J. Trump signed the “Bankruptcy Administration Improvement Act of 2020” into law. The bipartisan legislation was introduced in the Senate by Sen. Lindsey Graham (R-S.C.) and cosponsored by Sens. Christopher A. Coons (D-Del.), Marco Rubio (R-Fla.), Benjamin L. Cardin (D-Md.), Marsha Blackburn (R-Tenn.) and Thomas R. Carper (D-Del.). The Bankruptcy Administration Improvement Act of 2020 moved quickly through Congress, with passage in the Senate on Dec. 9, 2020, and passage in the House on Dec. 21, 2020.

The stated purpose of the law is to ensure the continued funding of the U.S. Trustee Program and to extend 25 temporary bankruptcy judgeships for an additional five years. Other key provisions of the law include the first increase in compensation for chapter 7 trustees since 1994, and the establishment of a Chapter 7 Trustee Fund to facilitate administration of the pay increase by the Director of the Administrative Office of the U.S. Courts.

This article summarizes the key provisions of the Bankruptcy Administration Improvement Act of 2020, and provides observations on the temporary bankruptcy judgeship model and the adequacy of the legislation in light of the ongoing COVID-19 pandemic.

Bankruptcy Administration Improvement Act of 2020

The Bankruptcy Administration Improvement Act of 2020 is, at its core, another temporary bankruptcy judgeship extension bill aimed at preventing overloaded dockets and ensuring adequate judicial resources to provide fair and accessible justice to all parties in bankruptcy cases and proceedings. The creation and subsequent preservation of temporary bankruptcy judgeships is intended to accomplish the judicial goal set forth in Federal Rule of Bankruptcy Procedure 1001 “to secure the just, speedy, and inexpensive determination of every case and proceeding.”

Beginning with the Bankruptcy Judgeship Act of 1992, Congress has routinely created and extended temporary bankruptcy judgeships to address substantial workload increases in bankruptcy courts nationwide. Congress has passed subsequent legislation to maintain bankruptcy bench numbers and to prevent a shortage of judicial resources, including the Bankruptcy Judgeship Act of 2005, the Temporary Bankruptcy Judgeships Extension Act of 2012, the Bankruptcy Judgeship Act of 2017 and, most recently, the Bankruptcy Administration Improvement Act of 2020.

As of Sept. 30, 2019, pursuant to the Annual Report of the Director of the Administrative Office of the United States Courts, 31 of the 347 total bankruptcy judgeships authorized by law were temporary. Temporary bankruptcy judgeships expire when the appointee dies, retires, resigns or is removed from office five years after the seat is created or extended. The Bankruptcy Administration Improvement Act of 2020 preserves temporary bankruptcy judgeships that would otherwise lapse as vacancies begin to occur in certain judicial districts in 2022. Specifically, the bill extends temporary bankruptcy judgeships that have not already lapsed in the Districts of Delaware, Maryland, New Jersey, Nevada, Puerto Rico and South Carolina, and in certain judicial districts in Florida, Georgia, Michigan, New York, North Carolina, Tennessee and Virginia.

Unlike prior legislation, however, the bill does not add new temporary judgeships or convert any of the existing ones to permanent status. As recently as April 2020, pursuant to 28 U.S.C. § 152(b)(2)–(3), the Judicial Conference of the United States recommended to Congress that it convert 14 temporary bankruptcy judgeships to permanent status in the Districts of Delaware, Maryland, Michigan and Puerto Rico, and in specified judicial districts in Florida. This recommendation did not account for the anticipated impact of COVID-19 on bankruptcy court filings and bankruptcy court operations. Notably, the Bankruptcy Administration Improvement Act of 2020 does not incorporate the Judicial Conference’s first recommendation to convert certain temporary bankruptcy judgeships to permanent status based on pre-pandemic workloads.

Notwithstanding the fact that the Bankruptcy Administration Improvement Act of 2020 only extends 25 temporary bankruptcy judgeships, which were arguably needed prior to the impact of COVID-19 on the bankruptcy system, the bill’s co-sponsors have applauded its passage and referenced the COVID-19 pandemic as a driving force for its enactment. However, if economic predictions are correct for 2021 and 2022, the legislation might not reflect the post-pandemic economic reality. If the pandemic conditions outlast the temporary federal relief provided by the government stabilization programs under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act of 2021, 25 temporary bankruptcy judgeships may still be too few.

The Coming Bankruptcy Wave

Experts generally agree that a wave of individual and commercial bankruptcy filings, including traditional chapter 11 filings and subchapter V filings in the latter category, is coming. Their predictions vastly differ as to when this surge in filings will occur and which sectors will drive the increase in commercial filings nationwide. Some of the variables that deserve mention include the rollout and efficiency of the COVID-19 vaccine, changes in fiscal policy that may be implemented by the new administration, and the continuation of government-stabilization programs under existing and/or new relief measures.

At the very beginning of the COVID-19 crisis, a group of bankruptcy academics endorsed a report written by three professors on the potential pressure on bankruptcy judicial capacity due to the COVID-19 pandemic, which was then forwarded to Congress. [1] The authors used an empirical approach to assess the increased stress on the bankruptcy system, and recommended a corresponding increase in bankruptcy judges to handle the extra caseload. They based their analysis on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a subsequent rise in bankruptcy filings.

The authors surmise that an unprecedented increase in unemployment resulting from the COVID-19 pandemic could have driven, or correlated with, a rapid surge in financial distress. That increase in financial distress is likely to lead to increased consumer and commercial bankruptcy case filings. In turn, this increase could challenge the bankruptcy system’s ability to provide crucial relief to the American public. The authors projected that the bankruptcy system is expected to need between 20 additional temporary bankruptcy judgeships under the best-case scenario, and 72 additional temporary bankruptcy judgeships under the worst-case scenario.

While the enactment of the Bankruptcy Administration Improvement Act of 2020 offers some relief to the nation’s busiest commercial bankruptcy venues, it does not bolster the capacity of the bankruptcy system to address the full impact of this unprecedented national crisis. If 2021 and 2022 bring a dramatic rise in bankruptcy filings, the federal judiciary could be knocking on the doors of available retired bankruptcy judges to serve in recall appointments.

Notably, Congress broke its federal statutory naming convention by calling this the Bankruptcy Administration Improvement Act of 2020 rather than the Bankruptcy Judgeship Act of 2020 or the Bankruptcy Judgeships Extension Act of 2020. This raises the question of what systemic “improvements” this law in fact enacts. The Bankruptcy Administration Improvement Act of 2020 also addresses funding of the U.S. Trustee Program, amends and simplifies the calculation of chapter 11 quarterly fees, and provides for additional compensation for chapter 7 trustees in a manner that ensures that the bankruptcy system remains self-funded, with costs fairly allocated among those who seek bankruptcy relief. This portion of the law is a sunset provision in place for five years. With respect to funding, the law directs monies from the U.S. Trustee System Fund established by 28 U.S.C. § 589a to be used to fund temporary bankruptcy judgeships, and it offsets the U.S. Trustee Program appropriations from U.S. Trustee quarterly fees. It also transfers any excess U.S. Trustee quarterly fee balance to fund a long-awaited per-case increase for chapter 7 trustees.

Of particular importance for present and prospective non-subchapter V chapter 11 debtors, the bill amends and makes uniform the calculation of chapter 11 quarterly fees payable to the U.S. Trustee System Fund used to fund the U.S. Trustee Program for the five-year period beginning on Jan. 1, 2021. The current chapter 11 quarterly fee schedule enacted by the Bankruptcy Judgeship Act of 2017, temporarily effective for fiscal years 2018-22, resulted in a dramatic increase in chapter 11 quarterly fees payable by chapter 11 debtors. The Bankruptcy Administration Improvement Act of 2020 reduces quarterly fees paid by chapter 11 debtors for a five-year period beginning on Jan. 1, 2021, with the maximum fee amount staying at $250,000 per quarter.

Chapter 7 Trustee Compensation

As a final and long-awaited measure, the Bankruptcy Administration Improvement Act of 2020 provides for additional compensation for chapter 7 trustees by amending 11 U.S.C. § 330 to establish a Chapter 7 Trustee Fund in the U.S. Treasury, to be administered by the Director of the Administrative Office of the U.S. Courts. The chapter 7 trustee fee increase is immediate and applies to any case filed under or converted to chapter 7 on or after Jan. 12, 2021. This is great news for approximately 800 active chapter 7 trustees. As reported recently by Clifford J. White III, director of the U.S. Trustee Program, at the 2020 Annual Conference of the National Association of Bankruptcy Trustees, this marks the first increase in the chapter 7 no-asset case fee in 26 years. [2]

For fiscal years 2021-26, the Chapter 7 Trustee Fund is earmarked to pay the case trustee in a case filed under chapter 7 or a case converted to chapter 7 in the most recent fiscal year. The bill increases total chapter 7 trustee compensation by awarding the lesser of $60 or a pro rata share of quarterly fees collected by the U.S. Trustee Program and deposited into the U.S. Trustee System Fund, in addition to the statutory $60 compensation paid to the chapter 7 trustee under 11 U.S.C. § 330(b), to the chapter 7 trustee in each case.