Key Points:

1. Tax-qualified retirement plans are subject to complex regulatory requirements and strict fiduciary standards with which a Chapter 7 trustee must comply in terminating a plan.

2. Accordingly, a trustee must proceed carefully—and with competent professional assistance—in carrying out its plan termination responsibilities.

3. The termination process will vary with the type and size of the plan and other facts and circumstances, but some aspects of the process—and key considerations for the trustee—are common to all retirement plan terminations.

Many businesses maintain tax-qualified retirement plans—such as 401(k) plans or pension plans—to help employees accumulate funds for retirement. When a company maintaining such a plan is liquidated in bankruptcy, the Chapter 7 trustee must oversee the termination of the plan and the application of its assets for the benefit of the plan’s participants. Retirement plans are subject to complex regulatory requirements enforced by three different federal agencies. Accordingly, the trustee must proceed carefully—and with competent professional assistance—in carrying out its plan termination responsibilities. This article examines the steps a Chapter 7 trustee must undertake to terminate a tax-qualified retirement plan in a bankruptcy case and provides practical pointers to help ensure those tasks are accomplished in accordance with all applicable federal laws, including the Bankruptcy Code, the tax code, and the comprehensive federal employee benefits law known as ERISA.

A. Background: Types of Plans and the Regulatory Scheme

Retirement plans generally fall into two categories based on how benefits are determined under the plan’s design: defined contribution plans and defined benefit plans. Defined contribution plans are individual account plans under which a participant’s benefit is determined by the contributions that have been credited to the participant’s account (whether made by the employer, the employee or both) and the investment earnings and losses on those contributions. Under a defined contribution plan, the investment risk falls on the participant, and most defined contribution plans allow participants to direct the investment of their accounts among a set of investment options selected by the employer or other plan fiduciary. A 401(k) plan is the most common type of defined contribution plan.

Under a defined benefit plan, a participant’s benefit is determined under a formula, and the employer’s required contributions to the plan are determined actuarially, based on certain assumptions set forth in the plan and selected in accordance with prescribed standards. Because plan contributions are determined actuarially—under assumptions that might not turn out to be completely accurate—defined benefit plans may be overfunded (having assets greater than required to pay the promised benefits) or (more commonly) underfunded (having assets insufficient to pay all promised benefits). Each year, the plan’s actuary must certify the plan’s funding status to determine, among other things, the amount of the minimum required contribution for the year and whether any restrictions must be placed on plan distributions. But the annual funding certification relates to the plan’s funding status on an ongoing basis, rather than if the plan were to be terminated. A plan that is adequately funded on an ongoing basis may be underfunded on a termination basis.  

Tax-qualified retirement plans are subject to a complex regulatory scheme involving two different comprehensive federal laws and three different regulatory agencies. The federal tax code (the Internal Revenue Code or IRC) imposes substantive requirements on retirement plans in exchange for the favorable tax treatment they receive. Those rules are enforced by the Internal Revenue Service (IRS). In overseeing a plan’s termination, the trustee must ensure that the termination does not adversely affect the plan’s tax-favored status (which would harm plan participants). This may include correcting any material operational failures that occurred while the debtor administered the plan. One way to ensure that a plan’s termination does not adversely affect its tax-favored status is to file an application for determination with the IRS (on Form 5310).

ERISA (the Employee Retirement Income Security Act of 1974, as amended) imposes fiduciary responsibilities on the plan administrator, including duties to act prudently, solely in the best interests of plan participants and beneficiaries and in accordance with the plan’s governing documents (to the extent not inconsistent with ERISA). Enforced by the U. S. Department of Labor’s Employee Benefits Security Administration (DOL/EBSA), these fiduciary standards also require that all plan assets be held in trust and used solely for the provision of benefits to participants and beneficiaries and the payment of reasonable administrative expenses. ERISA also prohibits certain fiduciary transactions (such as loans, sales and exchanges and certain other uses of plan assets) between a plan and a party closely related to the plan (such as fiduciaries, service providers, and sponsoring or participating employers), unless an exemption applies. Plan fiduciaries may be personally liable for losses resulting from a breach of their fiduciary duties. The Bankruptcy Code limits a trustee’s liability under ERISA when it acts as a plan administrator, and a trustee may be held personally liable only if the trustee willfully and deliberately violates the trustee’s fiduciary duties. The willful and deliberate standard requires trustees to possess the requisite intent to breach their fiduciary duties. Out of an abundance of caution, a trustee may wish to seek an order from the bankruptcy court specifically limiting the trustee’s liability as a fiduciary with respect to the administration of the debtor’s benefit plans.

Title IV of ERISA creates an insurance system for defined benefit pension plans, administered by a separate agency, the Pension Benefit Guaranty Corporation (PBGC). Defined benefit plans pay required premiums to the PBGC, which guarantees the payment of plan benefits (up to certain maximum limits) in the event a defined benefit plan terminates without funds sufficient to pay all plan benefits. The PBGC oversees termination of all defined benefit plans (whether or not underfunded) and steps in to help provide for benefit continuity in terminations of underfunded plans through payment of guaranteed benefits and enforcement actions against persons who may be responsible under ERISA for unfunded plan obligations. As discussed in greater detail in Part D. below, if the PBGC determines that a debtor’s defined benefit plan has sufficient assets to pay all benefit liabilities upon termination, the PBGC will direct the trustee to terminate the plan in a “standard termination,” with PBGC oversight. If the PBGC determines that the debtor’s defined benefit plan is underfunded on a termination basis, however, the PBGC will either approve and oversee a distress termination of the plan, or it will take trusteeship of the plan and conduct an involuntary termination of the plan, depending on whether or not the plan has sufficient assets to pay all benefits guaranteed by the PBGC. The PBGC will also take over trusteeship of a plan in certain distress terminations.

B. General Considerations and Practical Pointers for
All Plan Terminations

The particular actions a trustee must take to terminate a retirement plan—and the issues the trustee will confront in doing so—will vary with the facts and circumstances of the particular case, including the type and size of the plan, the plan’s funding status, the size of the bankruptcy estate, the extent to which plan assets may be used to pay administrative expenses in connection with the termination (such as the cost of filing an application for determination with the IRS), and the extent to which the trustee is confident that the plan was previously administered in compliance with its terms and applicable law. But there are certain actions that a Chapter 7 trustee must take or consider when the debtor maintained any type of qualified retirement plan that will need to be terminated. They include the following:

• Identify the type(s) of retirement plan(s) maintained by the debtor. Today, most retirement plans are defined contribution plans (particularly 401(k) plans, which have employee elective deferrals), but employers in some industries still maintain defined benefit pension plans, some of which are still active but many of which have been frozen to new participants or accruals.
• Evaluate each plan’s funding status and identify any funding issues. With respect to a 401(k) plan, that will include determining whether all elective deferrals and plan loan repayments withheld from employees’ pay have been timely deposited in the plan’s trust.
• Determine the location of, obtain access to, and arrange for the retention of, all plan documents and records. Some plan records will be held by third party recordkeepers, such as the records of contributions and earnings credited to, and loans and disbursements taken from, individual participant accounts and records of vesting and forfeitures. Other records, however, are typically retained by the employer, including records relating to eligibility, payroll deductions, marital status (relevant to beneficiary determinations and available forms of benefit), and in many cases beneficiary designations. Also, because ERISA generally requires record retention for at least 6 years (longer than the typical bankruptcy case), the trustee may need to arrange with a third party for retention of plan records for some period following plan termination.
• Locate and review all plan-related service contracts, including trustee and custodian agreements, administrative services (recordkeeping) agreements, and agreements with other service providers (such as investment managers, investment advisors, consultants, actuaries, and accountants).
• Determine whether all required annual reports (on Form 5500) have been filed (along with audited financial statements, if required) and when the next annual filing is due. Determine whether and to what extent the debtor engaged service providers (e.g., record keepers and accountants) to prepare the annual reports and any required audits.
• Determine what orders should be requested from the bankruptcy court in connection with the plan termination. This should include an order authorizing the trustee to perform all necessary actions to administer, terminate and wind up the debtor’s benefit plans to comply with section 704(a)(11) of the Bankruptcy Code. The trustee may also wish to seek an order limiting the trustee’s liability as a fiduciary with respect to the administration of the benefit plans. Such a “comfort order” protects the trustee from exposure to acts or omissions of prior administrators or agents and protects the trustee from being held personally liable for issues relating to the administration of the benefit plans prior to the date of appointment as trustee in the bankruptcy case and from the petition date to the date of substantial completion of the termination of the plans. Finally, the trustee should seek approval to retain key professionals in the bankruptcy case for assistance in administering, terminating and winding up the benefit plans and handling participant inquiries. The professionals retained by the trustee should file fee notices and applications for services performed even when the fees are paid out of the plan.
• Retain qualified professional service providers to assist with the evaluation and termination of the plan. This will include legal counsel (preferably ERISA counsel with experience in the bankruptcy context) and may also include consultants or investment services providers, actuaries (for defined benefit plans) and independent accountants (if audited financial statements are required in connection with annual reports). The trustee should consider whether to retain some of the same service providers that were previously retained by the debtor, to maintain continuity of service, facilitate continued access to records and obtain institutional knowledge of the plan’s historical operations. Also, depending on the circumstances, the trustee may want to consider retaining the services of an experienced professional plan administrator (firm or individual) to fulfill the administrative support role formerly performed by the debtor’s human resources or finance staff. Even where most administrative services have been outsourced to a third party recordkeeper, the debtor’s staff likely performed some plan administration tasks that may need to continue through completion of the plan’s termination.
• Consider whether to retain the services of former member(s) of the debtor’s human resources or finance staff to assist with plan administrative tasks, facilitate access to historical records and provide institutional knowledge about the plan.
• Continue to maintain an ERISA bond for the plan and consider whether to obtain/retain fiduciary liability insurance. Under ERISA, a plan administrator must obtain a fidelity bond to protect the plan against theft by persons handling plan funds. The trustee must ensure that the plan continues to maintain an ERISA fidelity bond until all plan assets have been distributed. In addition, some plan sponsors obtain fiduciary liability insurance (often as a rider to a directors and officers liability insurance policy). A trustee should investigate whether the debtor maintained such insurance and, if so, whether and at what cost the trustee can continue to maintain the coverage (or purchase tail coverage under the policy). Where no such coverage has been obtained or where it has been canceled, the trustee should consider whether it would be advisable and feasible to obtain the trustee’s own fiduciary liability insurance coverage.
• Respond to governmental audits and investigations of the plan. Where a debtor maintained a tax-qualified retirement plan, a bankruptcy filing typically triggers an examination or investigation by DOL/EBSA and, if the plan was a defined benefit pension plan, the bankruptcy will trigger an investigation by the PBGC. A DOL/EBSA investigation will typically examine, among other things, whether the debtor complied with its fiduciary responsibilities under ERISA in operating the plan, including, in the case of a 401(k) plan, whether the debtor timely remitted all employee deferrals and loan repayments to the plan’s trust and, for all types of plans, whether the trustee is taking appropriate steps to locate missing plan participants/beneficiaries and ensure they receive their plan benefits. A PBGC investigation will seek information required for the agency to determine the plan’s funding status on a termination basis so that it can determine whether to direct the trustee to undertake a standard or distress termination of the plan or take trusteeship of the plan and initiate an involuntary termination.
• If the trustee maintains a website for the bankruptcy, consider whether to include a section for plan participants, to provide information on the process for and status of the plan termination. Particularly if the debtor had a large number of employees or multiple or complex plans (such as a defined benefit plan), the trustee may want to consider including on the bankruptcy website a set of frequently asked questions and answers (FAQs), updated periodically, to address the most common questions participants will have about the effect of the bankruptcy on their plan benefits.

C. Defined Contribution Plan Terminations

The following is a list of additional steps a trustee should take or consider in connection with the termination of a 401(k) plan or other defined contribution plan (in addition to those discussed in Part B, above):

• Review the plan documents, trust agreement and recordkeeper services agreement to determine the steps required to amend the plan to provide for its termination and to provide timely notice to the recordkeeper and trustee of the plan’s termination.
• Notify participants of the termination of the plan and the effect of the termination on their plan accounts. All plan accounts become 100% vested upon the plan’s termination.
• Determine whether to apply to the IRS for a determination letter, on Form 5310 (Application for Determination for Terminating Plan) to confirm that the plan’s termination will not adversely affect the plan’s qualified status. Obtaining a determination can help protect the interests of plan participants (by confirming the tax-qualified status of their benefits) and help the trustee identify and address potentially disqualifying errors before the plan’s assets are distributed—important considerations particularly where the trustee is uncertain whether the debtor appropriately administered the plan. The application process can take as long as a year, however, and an IRS user fee and other costs will apply. The trustee should consult with counsel to determine whether an application is prudent, appropriate and feasible under the facts and circumstances.
•  If an application for determination will be filed, provide advance notice of the application to participants (in the form of a “notice to interested parties,” with content and timing prescribed by IRS rules). A cover letter to the notice, or other appropriate communication, should also explain the nature and reason for the application and any suspension of benefit distributions that will apply pending issuance some of the favorable determination letter.
• If application for determination will be filed, determine whether distributions will be suspended pending receipt of a favorable determination. As a part of their standard procedures, many recordkeepers automatically suspend benefit distributions pending receipt of a favorable determination letter. Suspending distributions may be prudent and appropriate, because adjustments to participants accounts may be required to address issues discovered during the termination process (and particularly where the plan sponsor is bankrupt, necessary adjustments may not be possible once plan assets have been distributed). Suspension, however, may spark complaints from plan participants who have lost their jobs and want access to their plan accounts. Whether to suspend distributions is ultimately a fiduciary decision about which the trustee should consult counsel.
• If plan distributions will be suspended pending issuance of a favorable IRS determination letter, consider and decide whether any exceptions will apply (for example, for hardship withdrawals or required minimum distributions), and work with the plan’s recordkeeper to develop and implement appropriate administrative procedures.
• In cooperation with the plan’s recordkeeper, implement a procedure for orderly distribution of participant accounts and preparation and distribution of appropriate distribution notices/election forms to all participants and beneficiaries.
• Provide oversight of distribution of plan accounts in accordance with participants’ elections and, where applicable, forced cash-outs of small accounts.
• Address legal and administrative issues arising in the distribution process, including issues relating to qualified domestic relations orders and determination of beneficiaries of deceased participants.
• Select and contract with a qualified custodian of rollover individual retirement accounts (IRAs) for forced cash-outs over $1,000, missing participants’ accounts, and accounts of those who fail to make timely distribution elections.
• Design and implement procedures to address missing participant issues, including search protocols and procedures for distribution of missing participant accounts to rollover IRAs

D. Defined Benefit Plan Terminations

If the debtor maintains a defined benefit pension plan, the PBGC will play a prominent role in the plan’s termination. Under Title IV of ERISA, the PBGC becomes responsible for payment of a certain portion of participants’ benefits (known as “guaranteed benefits”) when an underfunded plan terminates. Accordingly, the PBGC oversees all defined benefit plan terminations, and in some situations, the agency assumes trusteeship of the plan and takes over the termination process. The degree of PBGC oversight, and the Chapter 7 trustee’s role with respect to the plan termination, will depending on the extent to which the plan’s assets are sufficient to pay plan benefit liabilities. 

Because a contributing plan sponsor’s Chapter 7 bankruptcy filing is a “reportable event” under Title IV of ERISA, the plan administrator must provide certain information to the PBGC within 30 days of the event, including information and documents relating to the plan, the sponsoring employer, all members of the plan sponsor’s controlled group and the Chapter 7 trustee. The PBGC uses the information to assess the plan’s funding status and the status of all controlled group members. This leads to a determination of whether plan assets are sufficient for the trustee to apply for a standard termination, whether the circumstances would permit the trustee to apply for a distress termination, or whether the PBGC will assume trusteeship of the plan and undertake an involuntary plan termination.

1. Standard Terminations

If the PBGC determines that plan assets are sufficient to pay all benefit liabilities, the Chapter 7 trustee may proceed with a standard termination of the plan. The following is a list of steps a trustee will need to take or consider in connection with the standard termination of a defined benefit pension plan (in addition to those discussed in Part B, above):     

• Review the plan documents, trust agreement and service provider agreements to determine the steps required to amend the plan to provide for its termination and provide notice to the trustee and other service providers of the plan’s termination. The trustee will need to work closely with legal counsel and the plan’s actuary to ensure the amendment includes all necessary provisions relating to the termination.  
• Retain all necessary professional service providers to assist with the plan termination process, including a qualified actuarial firm to assist with the termination process and the calculation of plan benefits and an advisor or consultant to assist with the selection of an annuity carrier to pay plan benefits after the termination. To comply with its fiduciary responsibilities, the trustee may need to conduct a search and request for proposal (RFP) process to ensure that the actuarial firm and other service providers are appropriately qualified and experienced and that the fees they will charge are reasonable for the services they will perform. Where prudent and appropriate, the trustee should consider, among others, the actuary and other service providers that have previously provided services to the plan, because they will have institutional knowledge and historical records that may make the termination process more efficient.
• Develop a timeline for the termination process and select the proposed termination date, in consultation with the plan’s actuary and legal counsel to ensure adequate time to prepare and distribute all required notices and complete all required governmental filings. The plan termination process includes many required steps, some of which have strict deadlines, so the trustee must develop and adhere to an appropriate timetable to ensure that all required steps are timely completed.
• Amend the plan to provide for its termination and adopt resolutions to approve and adopt the amendment. If the plan does not normally permit lump sum distributions or distributions before a participant has reached normal or early retirement age, the trustee may want to consider including in the termination amendment a provision for a “lump sum window,” assuming the actuary determines that plan assets would be sufficient to support that option.
• Prepare and timely distribute to participants the required Notice of Intent to Terminate the plan and the notice to interested parties of the intent to apply to the IRS for a determination letter in connection with the plan termination.
• Prepare and file a Form 5310 Application for Terminating Plan with the IRS, seeking a determination that termination of the plan will not adversely affect its tax-qualified status and respond to all IRS inquires and requests for additional information in connection with the application.
• File Form 500 with the PBGC in connection with the standard termination.
• If requested, enter into an agreement with the PBGC for a pre-distribution audit of the termination process and complete the audit in accordance with the terms of the order. The PBGC generally conducts a post-distribution audit in connection with a standard termination, but where a standard termination occurs in the bankruptcy liquidation context, the PBGC typically asks the trustee to enter into an agreement and jointly apply to the bankruptcy court for an order to conduct a pre-distribution PBGC audit of the plan.
• Prepare and send Notices of Plan Benefits and Notices of Annuity Information to plan participants and beneficiaries in accordance with PBGC requirements.
• If the termination process includes a lump sum window, implement the lump sum window process upon receipt of a favorable IRS determination letter. The trustee will need to provide oversight of the distribution of participants’ benefits in accordance with elections made during the window period and will also need to address legal and administrative issues that arise during the election and distribution process.
• Address legal and administrative issues arising in the termination process, including issues relating to qualified domestic relations orders and determination of beneficiaries of deceased participants.
• Design and implement procedures to address missing participant issues, including search protocols and procedures for distribution of missing participant benefits to the annuity carrier (discussed below) or, in the case of small benefits, to rollover IRAs.
• Select an insurance company from which to purchase a group annuity contract to pay future benefits after completion of the termination and notify participants of the carrier selection. Strict fiduciary standards apply to the evaluation and selection of the annuity carrier, so the trustee must enlist the services of a qualified consultant to assist in the evaluation and selection of the annuity carrier and documentation of the selection process. The trustee must also select a qualified custodian of rollover IRAs for participants who fail to make timely elections with respect to the forced cash-out of small benefit amounts.
• File Form 501 with the PBGC following the distribution of all plan benefits.
• Finalize the group annuity contract with the selected insurance carrier and ensure that the insurance carrier distributes certificates to participants and beneficiaries covered by the contract.

2. Distress and Involuntary Terminations

The PBGC will generally expect the Chapter 7 trustee to apply for a distress termination of the plan if (1) the plan sponsor and all controlled group members are in bankruptcy liquidation or insolvency proceedings, and (2) the PBGC concludes that plan assets are not sufficient to satisfy all benefit liabilities but are sufficient to pay all guaranteed benefits. Many of the steps in a distress termination are similar to those in a standard termination, but there is greater PBGC oversight, and different PBGC forms and timelines apply. The PBGC’s website (www.pbgc.gov) includes a forms package for distress terminations (as well as for standard terminations.) Steps in a distress termination include the following:

• Select a proposed termination date.
• Prepare and timely send a Notice of Intent to Terminate (PBGC Form 600) to participants and beneficiaries and the PBGC.
• Reduce the benefits of participants in pay status (those who are already receiving periodic pension payments) to their estimated guaranteed benefit amounts, beginning on the proposed termination date.
• File a Distress Termination Notice (PBGC Form 601) with the PBGC no later than 120 days after the proposed termination date.
• File participant and benefit information with the PBGC by the later of (1) 120 days after the proposed termination date, or (2) 30 days after receipt of the PBGC’s notice that the requirements for a distress termination have been satisfied.
• Notify participants and distribute benefits in accordance with PBGC requirements, assuming the PBGC has determined that the plan has sufficient assets to pay all guaranteed benefits. 
• File a Post-Distribution Certificate (PBGC Form 602) with the PBGC.

If the PBGC determines that a plan does not have sufficient assets to pay at least the guaranteed benefits, it will initiate an involuntary termination of the plan or, if a distress termination has commenced, convert the distress termination to an involuntary termination. The PBGC will also initiate an involuntary termination if it determines that the plan does not have sufficient assets to pay current benefits when due. In an involuntary termination, the PBGC (or an independent trustee appointed by the PBGC) takes over trusteeship of the plan. In such a case, the Chapter 7 trustee’s role will be to cooperate with the PBGC, including by providing all requested documents and records and entering into a trusteeship agreement with the PBGC. The Chapter 7 trustee will need to consider whether to seek an order from the bankruptcy court approving and authorizing the Chapter 7 trustee to execute the trusteeship agreement with the PBGC.

About the Authors

Gayle L. Skolnik is a partner at Faegre Baker Daniels LLP. She represents employers, plan fiduciaries and service providers with respect to all aspects of employee benefits law, and she regularly works with the firm’s Finance and Restructuring group to address benefits issues arising in the context of bankruptcy and restructuring. Her experience includes advising bankruptcy trustees and other plan fiduciaries in benefit plan matters arising in bankruptcy and insolvency, including plan terminations. Gayle graduated with highest distinction from Indiana University and summa cum laude from Indiana University Maurer School of Law. She has been listed in The Best Lawyers in America since the 2005-2006 edition.

Elizabeth M. Little is an attorney with Faegre Baker Daniels LLP in Indianapolis. She represents clients in financial matters, including complex financial transactions, corporate debt restructurings, and related litigation matters. Little holds a bachelor’s degree from Indiana University-Purdue University of Indianapolis and a law degree from Indiana University Robert H. McKinney School of Law.

By: Victoria Roytenberg, Esq., Project on Predatory Student Lending at the Legal Services Center at Harvard Law School, Jamaica Plain, Massachusetts

Key Points:

1. Students are the true victims in a for-profit school 
   bankruptcy case.
2. The trustee can work with counsel for the students to pursue causes of action that will maximize the recovery for the estate and address the student loan issues.

The for-profit school model has shown that it is unsustainable. Indeed, several of the largest predatory for-profit school chains have shut their doors.1 In the wake of their collapse, these schools leave behind students who have private and federal student loan debts, often insurmountable, for valueless degrees or no degrees at all. Students’ options for dealing with their unenforceable debt are limited. They can demand that the Department of Education discharge their federal loans based on the schools’ state law violations (known as Borrower Defense to Repayment), but the department is sitting on a pile of over 158,000 applications that it refuses to process. And, although students may have causes of action against their school, they are often trapped by arbitration clauses and statutes of limitations. But the inevitable bankruptcy, or receivership, of a school does not have to be another dead-end for students. As the recent bankruptcy proceedings of the shuttered for-profit school ITT Educational Services, Inc. (“ITT”)2 demonstrate, trustees can and should do everything in their power to protect the most important and largest group of creditors, the students.  
 
For-Profit Schools
For-profit schools are not new. They have been around since even before the federal government became a loan lender, expanding greatly in numbers shortly before the end of World War II to take advantage of the G.I. Bill.3 The schools generally offer associate and bachelor’s degrees in a variety of areas. Many are publicly traded or owned by private equity firms,4 and nearly all of their revenue comes from federal financial aid programs and military and veterans’ benefits.5

Their bottom-line depends on getting and keeping students in seats for as long as possible. They do this by spending more money on marketing than education,6 and by purposely misleading students about things like: transferability of credits; job placement rates and expected salaries; quality of equipment and education; and cost of attendance, as well as the burdens of taking out federal and private financial aid.7 These schools prey on veterans,8 people of color,9 low-income students,10 and first-generation college attendees11, all in order to increase their revenue—revenue that is tied to compensation for executives, who can make more than 22 times their public university counterparts.12 Students, on the other hand, are left with debts for a worthless education that the schools’ teams of high-pressure salespersons touted as a golden ticket.

Outcomes for students who attend for-profit colleges are bleak. These students are four times more likely to be in default on their loans13 and are forced to take out more loans and in higher amounts than students who attend public schools.14 Given the financial consequences and poor job outcomes, some students would have fared better by not attending school at all.15

The debt that students incur for a valueless education has serious consequences. When students default on these illegitimate and unenforceable debts, the government seizes their wages and tax refunds.16 Students also suffer embarrassment,17 loss of opportunities,18 mental and physical health issues,19 and strained familial relationships, all as result of attending predatory for-profit schools.20 Students are unable to move forward in their lives, crushed by an unenforceable debt, with few paths to relief.

As more and more of these schools turn to bankruptcy, trustees need to understand the predatory for-profit school landscape and how to proactively protect these students.
 
ITT Technical Institute
Around since 1969, ITT was a publicly traded national chain of schools which operated 140 campuses in 35 states. A particularly bad actor in a sea of wrongdoers, by September 2016, numerous federal and state entities had been investigating ITT.21

For instance, in 2012 the Senate Committee on Health, Education, Labor, and Pensions conducted an investigation into for-profit schools, finding that ITT behaved unlawfully and unscrupulously.22 The committee found, among other things, that ITT misled students about the cost of attendance, the types of jobs graduates could get and job placement rates, and transferability of credits.23 Notably, the committee found that ITT manipulated students’ emotions to get them to attend by using a “pain funnel” designed to locate a student’s “pain point.”24

In September 2016, with the Department of Education cutting off all Title IV federal aid funding, ITT filed for bankruptcy. On January 3, 2017, with no other place to turn, five former ITT students sought to represent a class of over 750,000 students in the bankruptcy. 25 Along with their motion for class treatment and their complaint, the students submitted over 1,000 pages of excerpts from their Borrower Defense Applications (the same ones that have been sitting for years at the department).

Counsel for the students worked with the ITT trustee and, after two years, the court approved the parties’ settlement. As part of the settlement, the trustee returned approximately $3 million dollars in student receivables collected during the bankruptcy, approved a $1.5 billion claim, and discharged approximately $560 million in student receivables.

Although students will never be made whole, the settlement was an important victory. It also provides important lessons for trustees who may find themselves dealing with bankrupt, predatory for-profit schools.

What can trustees do to help students?

Consent to Rule 23 treatment: The reality is that many students, if not all, will be pro se creditors in a bankruptcy. Given that few students can and will file proofs of claims, trustees should not oppose any filing for class treatment. Student creditors are entitled to file a class proof of claim26 and should have the benefit of proceeding as a class in order to protect the rights of all student creditors.

Be generous with the proof of claim deadline: Students must have ample time to learn about their rights in the bankruptcy. This is particularly important for students who may have attended the school years ago and who may not be aware of the school’s closure. And, because this may also be the students’ first experience with the legal process, let alone a bankruptcy, students may not understand what it means to be a creditor or that they even can be one.

Extending the filing deadline protects students’ rights by providing ample opportunity to seek counsel and file a claim. In the ITT case, for example, if class counsel had not filed a class proof of claim within the applicable deadline, thousands of students of a school that was open for decades would have potentially seen their claims extinguished. 

Further, students may need access to the school’s documents to gather evidence for third-party suits or for Borrower Defense to Repayment applications. A trustee should ensure efficient and easy access to them. Critically, in the ITT bankruptcy, the trustee preserved all of the paper and electronically-stored documents and made them available to counsel for students and other parties to the bankruptcy.

Make the school’s business records readily available: A bankruptcy may be the last chance for students to gather any evidence or records they need, including transcripts and diplomas. A trustee should work to ensure that they hire a company that can swiftly process these requests. Further, students may need access to the school’s documents to gather evidence for third-party suits or for Borrower Defense to Repayment applications. A trustee should ensure efficient and easy access to them. Critically, in the ITT bankruptcy, the trustee preserved all of the paper and electronically-stored documents and made them available to counsel for students and other parties to the bankruptcy.

Stop collections on all accounts receivable and discharge debts: At the time of bankruptcy, most schools will have at least some outstanding student accounts receivable (i.e., debts that the school claims students owe). A trustee, in her business judgment, has an obligation to discern which debts are enforceable and which are not. A trustee should not wait for or rely on a lawsuit to make this determination.

In the ITT bankruptcy, the trustee put all the student receivable payments that she received into an escrow account; she returned all of this to students as part of the settlement. The trustee also agreed, as part of the settlement, to discharge the outstanding student receivables. While this relief is only a small fraction of what these students are owed, it is important to students’ day-to-day financial lives; it is also an acknowledgment of these students’ experiences.

Include students in third-party settlements and negotiations: In the ITT bankruptcy, the trustee was involved in litigation with third parties whose outcomes could impact students. This will inevitably occur in comparable bankruptcies. When the trustee is negotiating with other parties, students should have a seat at the table as often as possible. And, if relief for students is part of the calculus, the trustee should do everything to protect the interest of students in those negotiations.

Any outcome in a bankruptcy will never come close to fully compensating students. But former students of predatory for-profit schools should not be an afterthought when a school files for bankruptcy. Trustees should serve as the first line of defense in protecting students throughout the bankruptcy and take steps to ensure they are served by the bankruptcy process. 

ENDNOTES:

 
1 In the last several years the following schools have all shut down: Allied American University, Altierus Career Colleges, American College of Commerce and Technology, American School of Technology, Atonelli Medical and Professional Institute, Bradford School, Briarcliffe College, Brightwood Career Institute, Brightwood College, Brooks Institute, Brown Mackie College, Cambria-Row Business College, Cameron College, Career Point College, Carousel Beauty College & Spa Institute, Charlotte School of Law, Corinthian Colleges, Daniel Webster College, DuBois Business College, Duluth Business University, Ferrara’s Beauty Institute, Fountainhead College of Technology, Freemont College-Los Angeles, Gallipolis Career College, Globe Institute of Technology, Globe University/Minnesota School of Business, Golden State College of Court Reporting and Captioning, Graham Webb International Academy of Hair, Harrison College, Heald College, Heritage College, Hickey College, International Career Development Center College, ITT Educational Services, Inc., John Marshall Law School, Keystone Technical Institute, Le Cordon Bleu Colleges of Culinary Art, Marinello Schools of Beauty, Mattia College, McCann School of Business & Technology, McNally Smith College of Music, Medtech Colleges/Institutes, New England Institute of Art, Parker West Barber School, Radians College, Regency Beauty Institute, Ridley-Lowell Business and Technical Institute, Sage College, Santa Fe University of Art and Design, Star Career Academy, Trumbull Business College, Tucson College, Utica School of Commerce, Vantage College, Vatterott College, Virginia College, West Virginia Business College, Westech College, Westwood College, Wood Tobe-Coburn School, WyoTech, and YTI Career Institutes.

2 ITT has also owned and operated Daniel Webster College since 2009.

3 See Bob Shireman, The For-Profit College Story: Scandal, Regulate, Forget, Repeat, The Century Foundation (January 24, 2017), https://tcf.org/content/report/profit-college-story-scandal-regulate-forget-repeat/?session=1&session=1#easy-footnote-bottom-16 (last visited June 6, 2019).

4 Staff of S. Comm. On Health, Educ., Labor, and Pensions, 112th Cong., For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success 1 (Comm. Print 2012), Executive Summary, https://www.help.senate.gov/imo/media/for_profit_report/ExecutiveSummary.pdf [hereinafter Senate HELP Report] (last visited June 6, 2019).

5 Id. at 3.

6 Id. at 5.

7 Id. at 3-4.

8 Id. at 4.

9 See Peter Smith & Leslie Parrish, Center for Responsible Lending, Do Students of Color Profit from For-Profit College? (October 2014), http://www.responsiblelending.org/student-loans/research-policy/CRL-For-Profit-Univ-FINAL.pdf (last visited June 6, 2019).

10 Luis Armona, Rajashri Chakrabarti, Michael F. Lovenheim, How Does For-Profit College Attendance Affect Student Loans, Defaults and Labor Market Outcomes? National Bureau of Economic Research 1, https://www.nber.org/papers/w25042.pdf (September 2018) (last visited June 6, 2019).

11 Id.

 
12 Senate HELP Report, ITT Educational Services 519-20, https://www.help.senate.gov/imo/media/for_profit_report/PartII/ITT.pdf (“In 2009, ITT CEO Kevin Modany received $7.6 million in compensation, more than 22 times as much as the president of Indiana University at Bloomington, who received $337,144 in total compensation for 2009-10.”) (last visited June 6, 2019).

13 Judith Scott-Clayton, The Looming Student Loan Default Crisis is Worse Than We Thought, Brookings Institute 6, https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf (last visited June 6, 2019).

14 Armona et al., supra note 10, at 25.

15 Stephanie Riegg Cellini, Gainfully Employed? New Evidence on the Earnings, Employment, and Debt of For-profit Certificate Students, Brookings Institute, https://www.brookings.edu/blog/brown-center-chalkboard/2018/02/09/gainfully-employed-new-evidence-on-the-earnings-employment-and-debt-of-for-profit-certificate-students/ (last visited June 6, 2019).
16 Exhibit 23, Villalba et al. v. ITT Educational Services, Inc., et al. (In re ITT Educational Services, Inc., et al), Ch. 7 Case No. 16-07207-JMC-7A, Adv. No. 17-50003(S.D. Indiana 2019).

17 Exhibit 29, Id.

18 Exhibit 27, Id.

19 Exhibit 24, Id.

20 Exhibit 26, Id.

21 The Consumer Financial Protection Bureau, the Securities and Exchanges Commission, the Massachusetts, California, and New Mexico Attorneys General, and the Department of Justice had all investigated or were investigating ITT at the time it closed.  ITT was also sued by a number of private litigants for its unlawful actions.

22 Senate Help Report, ITT Educational Services 515-42, https://www.help.senate.gov/imo/media/for_profit_report/PartII/ITT.pdf (last visited June 6, 2019).

23 Id.

24 Id. at 527-29.

25 Villalba et al. v. ITT Educational Services, Inc., et al. (In re ITT Educational Services, Inc., et al), Ch. 7 Case No. 16-07207-JMC-7A, Adv. No. 17-50003(S.D. Indiana 2019.).

26 Fed. Bankr. R. P. 3002, 9014, and 7023. See also In re Am. Reserve Corp., 840 F.2d 487, 493 (7th Cir. 1988) (“It follows that there may be class proofs of claim in bankruptcy”).

Key Points

1. Implicit bias is real and it matters.
2. Implicit bias contributes to disproportionality and unfairness in many areas of society, including bankruptcy decisions.
3. Being motivated to limit impact of implicit bias in critical decisions works. Training works.
4. Become aware, take the test, IAT, https://implicit.harvard.edu/.

So, what does this have to do with bankruptcy and bankruptcy trustees? This introductory exercise sets the stage for understanding how our brains work both implicitly and explicitly, what some researchers describe as Thinking Fast/Thinking Slow, System 1/System 2 Thinking.4 This in turn offers new science-based insight into how we make our decisions, and this insight helps explain the kind of disproportionalities and inequities we see manifested in society. This new science starts from a position of no blame where no one is called an -ist of any kind, but where the manifestations and other evidence of inequities can be addressed.5

We know these manifestations only too well. Most often cited is the criminal justice data, for example, the fact that the prison population is disproportionate to the population and over five times more African American than white.6 For another example, consider the data from the Office for Civil Rights showing that in preschool African American children are suspended or expelled far more often than their white peers and far out of proportion to their representation in the population (18% of the preschoolers, 48% of preschoolers suspended more than once).7

Some of the data in bankruptcy filings offers analogous statistics. For example, researchers Jean Braucher and her colleagues asked consumer bankruptcy attorneys what advice they would give a couple; they were presented with a description of ambiguous financial information (such that filing chapter 7 or 13 were equally likely). The results? Reggie and Latisha were advised to file chapter 13 more than twice as often as Todd and Allison.8 This is a classic kind of study, where facts are held equal and the prime and schema of a race-oriented name produces different results.9 On a broader scale, Paul Kiel and Hannah Fresques, writing in ProPublica, concluded that “Black people struggling with debts are far less likely than their white peers to gain lasting relief from bankruptcy.”10 Other researchers have put the difference at half: “Blacks have less than half the chance of bankruptcy success as non-blacks; this worsens the recent insight that blacks are overrepresented in bankruptcy because of attorney steering to chapter 13,” 11 where “only one variable significantly predicted chapter choice—race, as measured by the racial composition of the debtor’s zip code.”12 In other words data analysis is clear: “More than amount of debt, prior bankruptcies, or having a job—all features that the bankruptcy system does account for in considering a person’s eligibility for chapter 13—race matters.”13 While these analyses attribute much of this to lawyers and to the choice between chapter 7 and 13,14 the culture of bankruptcy proceedings more generally also plays a role. Trustees can, for example, look more closely at the filings, can recognize when chapter 13 proceedings are apt to fail, especially given five-year settlements. They can perhaps look as (or more) closely to the debtor’s situation than to the creditors and attorneys’ fees.

Whatever the source of these kinds of disproportionalities, it’s important to recognize that they do not necessarily reflect real behavioral differences.15 Nor do they reflect that school administrators, teachers, lawyers, judges, or bankruptcy trustees, are racially biased.16

What is the explanation, then, for this kind of intransigent disproportionality? While explanations are multifaceted and grounded in long-standing culture and practice, one explanation from the emerging science is that these disproportionalities result in part from implicit bias: “As psychology research in recent decades suggests, one reason for this divide is that much discrimination may be driven by implicit bias rather than explicit prejudice.”17 We may respond implicitly to a client or petitioner with a mental schema of a black debtor just as we responded to the prime doctor with a picture of a white male, that is, before we focus (if we do) consciously on that person and situation in an individualized way.

Like the prime and response exercise we started with, implicit bias and its correlates in group dynamics and communication are all about our quick, indirect unconscious responses. Implicit bias is defined as learned associations that affect our understanding, actions, and decisions. These associations are absorbed from all around us from a very early age, and they are outside direct awareness or control. In contrast, explicit bias is defined as deliberately generated understanding, actions, and decisions. These decisions are verbally endorsed evaluations, directly experienced as our own.18 It used to be that if we wanted to know if you were biased, we asked, Are you biased against poor people? Most likely you answered that you were not, because you sincerely believe you are not biased or because you do not want to appear biased or even because you do not know you are biased; but whatever the cause, these representations were apt to be inaccurate.19

Starting in the mid-1990s, psychologists developed a new approach, one that measured instead of asked.20 The most common measure is the Implicit Association Test (IAT). The IAT is an online test that measures the speed of your response pairing a prime (word/picture, like the prompt lawyer) with another word (for example, good/bad). The speed of your response shows how comfortable you are with an association.21 The comparative result reflects your implicit bias. Millions of people taking the IAT have shown that implicit biases are pervasive.22 Aggregated results indicate that a majority demonstrate an automatic preference for the dominant group, European American over African American, women and families over women and careers, young over elderly, abled over disabled, etc.23

We urge everyone to take the IAT available at https://implicit.harvard.edu/. There are many test choices: race, age, weight, working-women, etc. The test takes about ten minutes, and at the end you get a message about your results. For example, you might learn that you show a slight bias in favor of women and families as compared to women and careers (Professor Redfield’s results). These results can be surprising or even disturbing. (Professor Redfield has worked since she was 14 and often with very successful professional women). So, a heads up: take your results as information to consider, to increase your own awareness, nothing more.

But more important than IAT results is the more basic idea—a game-changer: the understanding that as humans we can and do hold two views at the same time, and we may be influenced by our implicit view without our awareness. This insight from the IAT and similar efforts is supported by the physical neuroscience research as well.24 So when Professor Redfield says she is a strong supporter of women lawyers and judges, she is telling us the truth, her consciously held view (explicitly), and at the same time she may have implicit biases that mediate in favor of women and families. To reiterate, both are true at the same time.

This means that we may be making decisions where our implicit bias unbeknownst to us leads to a result different from our conscious intention—what scientists describe as an action disassociated from our consciously held attitudes and beliefs. As Dr. Mahzarin Banaji and her colleague Dr. Calvin Lai describe this discovery:

Using a variety of methods to get at these associations has led to a striking set of discoveries. Among the most central of these discoveries is that within the same individual mind there exists multiple actors: a deliberative decision-maker who aspires to egalitarian ideals and a less conscious partisan who is attentive to the similarity, familiarity, and social standing of those who are judged.25

Do we believe that the bankruptcy figures mentioned above are because the decisionmakers along the way are biased against individuals because of their race or ethnicity or biased against people on the basis of their socioeconomic status? We do not. Rather we acknowledge that we are all human, that as humans we are implicitly biased, and that it is this implicit bias that cumulates and manifests itself negatively without our conscious intention.

We note here one other point of particular relevance to legal decisionmakers. The science shows we are most likely to respond with implicit bias and rely on our stereotypes in certain situations: those where we have the opportunity to exercise discretion and those where the information is ambiguous.26 This is, of course, exactly what lawyers and judges and trustees do all the time. Given this tendency to fall into stereotypes in these situation, it is all the more important for us to be particularly mindful, what we call, taking time to stare at the information/situation before us; and it is also all the more reason for us to ask how else this implicit bias can be interrupted, and how.

Implicit bias can be successfully interrupted. We know this from training efforts that have documented changed results. For just one example, training judges about implicit bias and providing tools to help limit discretion, produced a measurable change in their juvenile detention decisions to meet the stated goal of keeping children with their families over an extended period of time.27 Good training that is data and science-driven can help us learn when to focus on our quick, System 1 implicit responses and use our slower, conscious System 2 thinking to reach a sound result.28 Good training can offer strategies for interruption. We make a few suggestions here and invite folks to reach out to us for more detail on actual approaches or on training suggestions:29

1.  Become aware. This article is a short beginning, but do more: read more, observe more. Notice times when you might be reacting implicitly when you meet a new person. Take time to ask a few more questions, clarify ambiguity.

2.  Decide in your own context what decision points may be places where bias need be interrupted. We are all cognitive misers, saving our mental energy;30 for each person/institution focus points will vary.

3.  Be mindful of confirmation bias, watch for how you respond to ambiguity. Know that there is a strong tendency toward confirmation bias, where we tend to hear and pay attention more to information that confirms our view and to disregard information that doesn’t. Ask for more information, slow down at key decision points.

4.  Be mindful around discretion. Consider where you can limit your discretion so as to limit opportunities to let implicit bias or stereotypes take over without your conscious intent.31 Take for example, the blinding approach used in orchestras, where once auditions were held behind screens increasing numbers of women who got seats.32 While we can’t make all our decisions with such a dramatic approach, we can try to limit unnecessary cues that could prompt implicitly biased responses.

5.  Be watching your messaging. Take for example, the well-documented impact of negative micromessages—small messages that implicitly send signals that can cumulate in negative results—and change them as you can: shake hands with everyone if  you shake hands with anyone; call everyone by title, Mr. Smith, Ms. Smith, Attorney Smith. 33

As we said, these are a very few, fairly simple, pointers; they come from data-based work on successful approaches for training to interrupt implicit bias. There are others that are more complex and more systemic in nature that need to await a longer article and approach.

But here is #6. Be trained.

A note on notes: One aspect of implicit bias is invisibility of the stigmatized individual. We make a small step toward addressing this by trying to include all authors in notes rather than reverting to the Bluebook suggested et al.

* Bernice Donald, U.S. Court of Appeals for the 6th Circuit (and former judge for the U.S. Bankruptcy Court for the Western District of Tennessee) and Sarah Redfield, Professor of Law, University of New Hampshire, worked together on the ABA’s book on implicit bias, which work underlies this piece. Enhancing Justice: Reducing Bias (Sarah E. Redfield ed., 2017). The authors are co-chairs of the ABA Criminal Justice Section’s Implicit Bias Initiative.

1   
Christine Hauser, Black Doctor Says Delta Flight Attendant Rejected Her; Sought ‘Actual Physician’, NY Times, Oct. 15, 2016.

2   
Bureau of Labor, Labor Force Statistics from the Current Population Survey, Household Data, Annual Averages, Table 11. Employed Persons by Detailed Occupation, Sex, Race, and Hispanic or Latino Ethnicity (for doctors/surgeons, 70.8% white and 60% male).

3   
Prime, Psychology, http://psychology.iresearchnet.com/social-psychology/social-cognition/priming/.

4   
Daniel Kahneman, Thinking Fast and Slow (2011).

5   
Corinne A. Moss-Racusin, Jojanneke van der Toorn, John F. Dovidio, Victoria L. Brescoll, Mark J. Graham & Jo Handelsman, A “Scientific Diversity” Intervention to Reduce Gender Bias in a Sample of Life Scientists, 15 Life Sci. Educ. 1 at Table 1 (2016).

6   
E.g., Alison Walsh, The Criminal Justice System Is Riddled with Racial Disparities (Aug. 15, 2016), https://www.prisonpolicy.org/blog/2016/08/15/cjrace/; Ashley Nellis, The Color of Justice: Racial and Ethnic Disparity in State Prisons 3-4 (2016).

7   
U.S. Dep’t of Educ. Off. for C.R., Civil Rights Data Collection, Data Snapshot: School Discipline. Preschool Students Receiving Suspensions, by Race and Ethnicity 7 (2014), http://ocrdata.ed.gov/Downloads/CRDC-School-Discipline-Snapshot.pdf.

8   
Jean Braucher, Dov Cohen & Robert M. Lawless, Race, Attorney Influence, and Bankruptcy Chapter Choice, 9 J. Empirical Legal Stud. 393, 395-96 (2012).

9   
Marianne Bertrand & Sendhil Mullainathan, Are Emily and Greg More Employable than Lakisha and Jamal? 94 Am. Ec. Rev. 991 (2004).

10 
Paul Kiel & Hannah Fresques, Data Analysis: Bankruptcy and Race in America, ProPublica Sept. 27, 2017, https://projects.propublica.org/graphics/bankruptcy-data-analysis [https://perma.cc/KK6C-K75X]; see also Annie Waldman & Paul Kiel, Racial Disparity in Debt Collection Lawsuits: A Study of Three Metro Areas ProPublica, Oct. 8, 2015.

11 
Sara S. Greene, Parina Patel & Katherine Porter, Cracking the Code: An Empirical Analysis of Consumer Bankruptcy Outcomes, 101 Minn. L. Rev. 1031, 1036, 1062 (2017).

12 
Robert M. Lawless & Angela Littwin, Local Legal Culture from R2D2 to Big Data, 96 Tex. L. Rev. 1353, 1357 (2018).

13 
Sara S. Greene, Parina Patel & Katherine Porter, Cracking the Code: An Empirical Analysis of Consumer Bankruptcy Outcomes, 101 Minn. L. Rev. 1031, 1036, 1062 (2017). {{OR supra note 11 at 1036, 1962}}

14 
Jean Braucher, Dov Cohen & Robert M. Lawless, Race, Attorney Influence, and Bankruptcy Chapter Choice, 9 J. Empirical Legal Stud. 393, 395-96 (2012). {{OR supra note 8 at 395-6}}

15 
Walter S. Gilliam, Angela N. Maupin, Chin R. Reyes, Maria Accavitti & Frederick Shic, Do Early Educators’ Implicit Biases Regarding Sex and Race Relate to Behavior Expectations and Recommendations of Preschool Expulsions and Suspensions? Yale Research Study Brief (2016).

16 
See Jeffrey J. Rachlinski, Chris Guthrie & Andrew Wistrich, Inside the Bankruptcy Judges' Mind, 88 B.U. L. REV. 1227, 1230 (2006).

17 
B. Keith Payne, Laura Niemi & John M. Doris, How to Think About “Implicit Bias,” Sci. Am., March 27, 2018.

18 
Bernice B. Donald & Sarah E. Redfield, Framing the Discussion in Enhancing Justice: Reducing Bias 13-14 (Sarah E. Redfield ed., 2017).

19 
David M. Amodio & Saaid A. Mendoza, Implicit Intergroup Bias: Cognitive, Affective, and Motivational Underpinnings 4 (2010), http://www.psych.nyu.edu/amodiolab/Publications_files/Amodio_Mendoza_Implicit_Intergroup_Bias.pdf.

20 
Anthony G. Greenwald, Debbie E. McGhee & Jordan L.K. Schwartz, Measuring Individual Differences in Implicit Cognition: The Implicit Association Test, 74 J. Personality & Soc. Psychol. 1464, 1465 (1998).

21 
Project Implicit, https://implicit.harvard.edu/implicit/
iatdetails.html.

22 
E.g., Brian A. Nosek, Frederick L. Smyth, Jeffrey J. Hansen, Thierry Devos, Nicole M. Lindner, Kate A. Ranganath, Colin Tucker Smith, Kristina R. Olson, Dolly Chugh, Anthony G. Greenwald & Mahzarin R. Banaji, Pervasiveness and Correlates of Implicit Attitudes and Stereotypes, 18 Eur. Rev. Soc. Psychol. 36, 36 (2007).

23 
Bernice B. Donald & Sarah E. Redfield, Implicit Bias: Should the Legal Community Be Bothered?, 2 PLI Current 615, 619(2018).

24 
Matthew D. Lieberman, Social Cognitive Neuroscience: A Review of Core Processes, 58 Ann. Rev. Psychol. 259, 262 (2007).

25 
Calvin K. Lai & Mahzarin R. Banaji, The Psychology of Implicit Intergroup Bias and the Prospect of Change 4 (2018), http://www.people.fas.harvard.edu/~banaji/research/publications/articles/2017_Lai.pdf.

26 
Id. at 10-11. {Lai & Banaji}

27 
Jesse Russell & Alicia Summers, Reflective Decision-Making and Foster Care Placements, 19 Psychol. Pub. & Law 2 (2013).

28 
Bernice B. Donald & Sarah E. Redfield, Implicit Bias: Should the Legal Community Be Bothered?, 2 PLI Current 615, 625-26 (2018). {{OR Donald supra note 23 at 625-26}}

29 
Sarah E. Redfield & Bernice B. Donald, Ten Tips for Interrupting Implicit Response (Bias) (on file with authors).

30 
E. Philip Tetlock, Accountability: A Social Check on the Fundamental Attribution Error, 48 Soc. Psychol. Q. 227, 228 (1985).

31 
Mark W. Bennett, Manifestations of Implicit Bias in the Courts in Enhancing Justice: Reducing Bias 65 (Sarah E. Redfield ed., 2017).

32 
Claudia Goldin & Cecilia Rouse, Orchestrating Impartiality: The Impact of “Blind” Auditions on Female Musicians, 90 Am. Econ. Rev. 715 (2000).

33 
Mary Rowe, The Saturn’s Rings Phenomenon, 50 Harv. Med. Alumni Bull. 14 (1975).

About the Authors

Hon. Bernice Donald is a judge on the U.S. Court of Appeals for the 6th Circuit. She was nominated to that position by President Barack Obama and was confirmed by a vote in the Senate on September 6, 2011. Prior to that, Judge Donald sat on the U.S. District Court for the Western District of Tennessee. She was appointed to the district court by President William Jefferson Clinton in December 1995. She was sworn into office in January 1996. She previously served as judge of U.S. Bankruptcy Court for the Western District of Tennessee, becoming the first African American woman in the history of the United States to serve as a bankruptcy judge. In 1982, she was elected to the General Sessions Criminal Court, where she became the first African American woman to serve as a judge in the history of the State of Tennessee. She received her law degree from the University of Memphis School of Law where she has served as an adjunct faculty member. She also serves as faculty for the Federal Judicial Center and the National Judicial College. In 1996, Chief Justice Rehnquist appointed Judge Donald to the Judicial Conference Advisory Committee on Bankruptcy Rules where she served for six years. She is extremely active in the American, Tennessee, and Memphis Bar Associations, serving in vital leadership roles in key committees. She currently serves as secretary of the 430,000 member American Bar Association estate and business planning.

Sarah Redfield is professor emerita at the University of New Hampshire School of Law and affiliate professor at the University of New Hampshire College of Education and Women’s Studies Program. She is a member of the Maine Bar.

Education law is her primary practice and teaching area. Her research and scholarship are focused on diversity and inclusion in the legal profession and along the education pipeline. Her current work continues her long-standing interest in Diversity, Equity & Inclusion and concentrates on implicit bias and on strategies to interrupt that bias and reduce the negative consequences of its manifestations in legal, medical, education, and workplace environments.

With Judge Bernice Donald, Professor Redfield is co-chair of the Criminal Justice Section Implicit Bias Initiative. She also currently serves on several high-level American Bar Association (ABA) diversity initiatives including the Diversity and Inclusion Advisory Council; the ABA Commission on Disability Rights; and the Criminal Justice Section Women’s Task Force.

The Trustee Assistant Program is a multifaceted, multifunctional part of NABT. The “TAC” is the Trustee Assistant Committee which consists of assistants who have served in the
Trustee Assistant Liaison (“TAL”) position. This committee is responsible for the education components at conventions, membership and social outreach, communications (i.e. journal articles, emails, website updates etc.) and mentoring. The current TAC committee is compromised of Lori Grahl, Darlene Anderson and Steven Bridgett.

The “TAL” is the Trustee Assistant Liaison, who acts as the ‘team leader’ of the TAC and serves a minimum of a two-year term. The position is presently being served by Roberta Kickbush. The TAL attends all board meetings, provides reports to the NABT Board of the activities of the Trustee Assistant Program and serves as the point of contact with the vendors and the board regarding the education program and budgetary issues of the Trustee Assistant Program for the convention. In addition, the TAL works closely with the management team (which has recently changed–make sure to meet Jennifer and her team if you haven’t already) and the trustee chairs for each convention. The TAL is the ambassador for the Trustee Assistant’s Program at NABT receptions, breakfasts, etc. and generally serves on additional committees of NABT.

What are the qualifications of the TAL? Qualifications must include: membership in the NABT for at least 5 years and attendance at (at least) two conferences or seminars during
that time; a willingness to serve on the board for a two year term unless otherwise extended by agreement of the TAC and NABT board; the ability to shadow current TAL during his/her
second year to become familiar with policies and procedures to provide a quality conference; the permission of his/her trustee to serve before accepting the positions (this is a non-paid position and you will spend a lot of hours doing this job), AND FINALLY, the ability to remain organized, dedicated, innovative and a team player.

Could the TAL position be a prospect for you? Contact the TAC team and let us know you are interested. Want to be involved but don’t feel the TAL is right for you? NO PROBLEM! There are many ways to get involved with the NABT. Are you qualified to speak on a specific topic–LET US KNOW. Do you have time to serve on one of the many committees that comprise NABT? LET US KNOW. Darlene Anderson- danderson@furrcohen.com; Lori Grahl- lori@rhwlawoffice.com; Steve Bridgett– sbridgett@burtchtrustee.com or Roberta Kickbush- roberta@ladfislaw.com

The trustee assistant’s had a very educational and informative program at Amelia Island! Amelia Island was the first conference offered via webinar. Like with the start of every
new program, there are some bugs to work out but we are well on our way to being able to provide long distance learning for assistants who cannot come to the conference live. You
do miss out on the networking and fun social times attending via the webinar so make your plans now to attend the Denver Convention in August 2019!

NEWS FROM THE ADVISORY COMMITTEE ON BANKRUPTCY RULES

Bankruptcy Rules Restyling

At its fall 2017 meeting, the Advisory Committee established a subcommittee to consider restyling the Federal Rules of Bankruptcy Procedure. The proposed project follows similar restyling projects that produced comprehensive amendments to the Federal Rules of Appellate Procedure in 1998, the Federal Rules of Criminal Procedure in 2002, the Federal Rules of Civil Procedure in 2005, and the Federal Rules of Evidence in 2011.

To inform its decision, the Restyling Subcommittee worked with Federal Judicial Center (FJC) and the Standing Rules Committee’s style consultants to solicit feedback from the bankruptcy community on whether to restyle the bankruptcy rules.  A survey, along with a restyled version of Rule 4001(a) offered as an exemplar of the final product, was sent to all bankruptcy judges and clerks of court, as well as leaders of interested organizations, such as the NCBJ, NACBA, CLLA, NABT, NACTT, ABI, ABA Business Law Section, Bankruptcy Committee, American College of Bankruptcy, National Bankruptcy Conference, and AALS Debtor-Creditor Committee.  The survey was also posted on the court public website as an Invitation for Comments.  

The FJC received and analyzed completed surveys from 307 respondents, including 142 bankruptcy judges, 40 bankruptcy clerks, 19 respondents to the organization survey, and 109 respondents to the website survey.  Over two-thirds of all respondents in every category supported the idea of restyling the bankruptcy rules.  Respondents noted, however, that the rules incorporate a great deal of statutory language which cannot be restyled, and expressed concern that the project could introduce unintended consequences.  They cautioned, therefore, that project members should take great care to avoid changing a rule’s meaning.  

Given the positive response to the survey, the Restyling Subcommittee recommended going forward with the project.  It advised, however, giving presumptive deference to continuing the use of existing statutory language and terms of art even if the retention of such language in the rules may sometimes run counter to restyling principles.  Both the Advisory Committee and Standing Committee supported the recommendation. 

At the Standing Committee’s January 2019 meeting, the Advisory Committee presented a tentative restyling timeline that anticipates publishing the rules for public comments in three batches beginning in August 2020 as follows:

Although the Advisory Committee expects to restyle the rules in batches and obtain public comment on each group as it is restyled, under the proposed timeline none of the restyled rules would become effective until all groups have been approved.  Absent delays and assuming approvals by the Advisory Committee, the Standing Committee, the Judicial Conference and no contrary action by Congress, the full set of restyled rules would go into effect December 1, 2024.  These dates are aspirational, however, and may change as the project develops.

The world of international shipping and customs is often extraordinarily complex – and that is without any bankruptcy issues to consider. But, in understanding the generalized players, rules and expectations for international shipping, those who become involved with the industry when a bankruptcy occurs will be able to navigate the field efficiently and effectively.

This article will provide some nuts and bolts of what to expect should the bankruptcy and international shipping worlds intersect.

Background & Terms:

In the United States, the two most common forms of international shipping for goods being shipped into or out of the United States are by air and sea. Significantly smaller amounts of goods come through our borders by rail or land. In all cases, though, for importing and exporting, the goods must pass through a customs-clearance process. The clearance process is governed by the U.S. Customs and Border Protection Agency.

Each of these modes of transportation has its own set of protocols and procedures. As one might expect, ocean freight moves through sea ports; air freight moves through airports; and rail and truck carriers have multiple ports of entry into and out of the United States. Understanding the basic details of a particular shipment (or set of shipments) is critical to understanding what steps may need to be taken if any of the players are involved in a bankruptcy proceeding.

The shipping industry is very terms-of-art intensive. The experts in the field (and the documents associated with it) speak a language that may be difficult for the average layperson to understand. A general glossary of some of the most frequently used terms may serve as useful for newcomers:

The Players:

As evidenced from the glossary, one of the most complex things to understand in international shipping is that there are often many different entities involved in just one shipment. The smaller a player is in the market of importing or exporting, the more likely it is that there will be several entities involved in facilitating even just one shipment. The bigger the player – like the Walmart's or Amazons of the world – the fewer parties will be involved, because the size of their market share allows for a fairly centralized and often internalized process for their international shipping needs.

Understanding the basic roles of each type of entity is important if any one of them becomes involved in a bankruptcy of any sort. As an example, let’s track an exemplar shipment of goods from China to the United States. Company A is a Chinese company that is the exporter in China. Company A may or may not be the manufacturer or the original warehouse location of the goods when they start off, but for our purposes assume that Company A delivers the goods to the sea port. A Freight Forwarder is hired, Company B, to facilitate the movement from Company A to the end user. Company B helps Company A arrange delivery to the Chinese sea port.

At the sea port in China, the goods are put onto Sea Carrier C’s boat. While on the water for the three-week voyage, the shipment paperwork is being prepared for customs clearance. While awaiting arrival at the sea port in the United States, Company B hires Company D to handle customs clearance. Company D is a licensed broker, and is obligated to pay duties on behalf of Company F, the end user. Company D pays duties and taxes on behalf of Company F, the end user. Once customs has been cleared, Company E picks up the freight from the American port and delivers it to Company F.

With this example, no fewer than six companies have ‘touched’ the goods – either physically or technologically. At any point during the shipment, if any one of those companies makes any missteps, the goods can be whisked away by the carrier, or the government, for storage and/or penalties. If any of the involved parties' files bankruptcy, it will most certainly delay the goods from proper processing, and fees will be incurred that likely will be attributable to the defaulting party.

The Expectations:

If any bankruptcy issue comes into play with a company that is involved in international shipping, understanding what role that company plays is the first question to ask. Next, determining whether any shipments are in process is a time-sensitive and critical issue to evaluate. Any delays at any phase could cause significant penalties. If any duties, taxes or penalties are due to the United States Government at the time that an entity files bankruptcy, the United States may have a priority claim.

Since international shipping is already a complex process, it is important to balance any expectations one might have in the event of a bankruptcy. Resolving issues can be time consuming and challenging. Having a generalized understanding of the different parties and stages should help facilitate the process.

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Leah A. Brndjar worked in the international shipping industry for several years before become an attorney, serving in both operational and management capacities for an international logistics firm. A 2010 graduate of Seton Hall University, Leah trained as a bankruptcy attorney in the early years of her legal career, and has since transitioned to a civil defense litigator. This insider experience, combined with her legal training, provides clients with creative solutions to the ever-changing field of play as an associate in the firm of Goldberg Segalla, practicing in their office in Princeton, NJ.