Bankruptcy Technical Corrections Act

before the House Committee on the Judiciary
Subcommittee on Commercial & Administrative Law

April 30, 1997 Presented by:
Roger M. Whelan
Chairman, Legislative Committee
Shaw, Pittman, Potts & Trowbridge
Washington, D.C.

Web posted and Copyright © April 28, 1997, American Bankruptcy Institute.


Summary


The Technical Corrections Act of 1997 generally seeks to correct technical errors arising out of the passage of the Bankruptcy Reform Act of 1994. These changes are not controversial and will reduce confusion in the interpretation of certain sections.

The Act would also make some modest additional changes that serve to clarify Congressional intent after court interpretations made clear the need for these changes. These changes, which are also generally not controversial, cover issues such as the transfer of liens in property, the scope of actions by the trustee, and the ability of the debtor's attorney to be paid out of assets of the estate.

The Act, however, contains some clerical errors of its own which should be corrected.

The Act proposes to clarify that in passing the Reform Act in 1994, Congress intended to permit a trustee to assume a contract without curing penalty provisions. There may be a simpler way to achieve this stated goal, by modifying section 365(b)(2)(D) to read: "the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure to the debtor to perform nonmonetary obligations under the executory contract or unexpired lease."

The most substantive provision in the Act is to remove the $4 million cap now applicable to the special treatment of single asset real estate cases. In single asset cases, the real estate constitutes the sole or primary asset of the entity. Examples include office buildings, apartment complexes, shopping centers, hotels and warehouses. Much of the frustration created by single asset bankruptcy cases arises from the secured creditor's perception that the debtor can use Chapter 11 to significantly delay foreclosure proceedings without offering any compensation for the use of collateral pending such delay. The $4 million cap, offered as part of a political compromise in the 1994 amendments, is simply too low to afford much relief from the perceived abuses arising out of these cases.


Mr. Chairman and Members of the Subcommittee:

I am Roger M. Whelan, a practicing bankruptcy and insolvency attorney with the Washington law firm of Shaw Pittman Potts & Trowbridge. Prior to my involvement in the private practice of law, I served as United States Bankruptcy Judge for the District of Columbia from 1972 through 1983. I was on the bench when new bankruptcy rules were enacted in 1973 and continued to serve when the new Bankruptcy code was enacted in 1978, and first became effective in October 1979. I also served on the United States Bankruptcy Court for the District of Maryland from August 1981 through December 1982. I have written and lectured extensively on numerous consumer and business bankruptcy matters and have been a Distinguished Lecturer at the Columbus School of Law (Catholic University of America) where I have taught bankruptcy and insolvency classes continuously since 1975.

I am appearing here today on behalf of the American Bankruptcy Institute (ABI) a 5,500 person professional association of academicians, judges, practitioners and public policy makers who have a professional interest in the field of bankruptcy law and practice, and particularly in the organization and efficiency of the nation's bankruptcy courts. The ABI is a bipartisan, non-profit educational institute. I am a Director of the Institute and am presently serving as Chairman of its Legislative Committee. Because the ABI is not an advocacy organization, some of the views expressed here are solely those of the author and not necessarily those of the ABI or its other Directors.

I shall discuss certain provisions of the Bankruptcy Law Technical Corrections Act of 1997, [ FN: For ease of reference, I shall refer to both HR 120 (introduced on January 7, 1997 by Rep. Conyers) and HR 764 (introduced on February 13, 1997 by Rep. Hyde) as the Technical Corrections Act because each bill is not identical with respect to each document. A comparison of both bills with respect to Sections set forth in one bill but not the other is attached for reference.] which generally seeks to correct errors that arose when Congress passed the Bankruptcy Reform Act of 1994, [ FN: Pub. L. No. 103-394, 108 Stat. 4106 ] which became effective October 22, 1994. Thus, the Technical Corrections Act would insert proper punctuation that was inadvertently omitted, correct inaccurate references to other Bankruptcy Code sections and correct the numbering/ lettering of Bankruptcy Code subsections. The American Bankruptcy Institute supports these changes, which will alleviate confusion that resulted from what appear to be typographical errors.

The American Bankruptcy Institute also supports certain minor changes that will clarify Congress' intent. For example, the Technical Corrections Act modifies Bankruptcy Code Section 101(51B) to clarify that the definition of single asset real estate cases (i.e., cases where the debtor's main asset is a single development, such as an apartment building or office complex) does not include family farms. The Technical Corrections Act also clarifies that in 1994, when Congress overruled the Deprezio line of cases, it intended the new law to apply to transfers of liens in property. [ FN: The Technical Corrections Act proposes to modify the definition of "transfer" in Section 101(54) to include the "creation of a lien," and further amends Sections 550(c) and 547(b).] Moreover, the Technical Corrections Act also expands the ability of a trustee to assist the estate by modifying Section 327(d) to allow a trustee to act as an attorney, accountant, appraiser, auctioneer or other professional person rather than as just the "attorney or accountant for the estate." In particular, the American Bankruptcy Institute supports the proposed revision that would allow bankruptcy professionals to receive fixed and contingent fees, rather than requiring that suchprofessionals charge hourly rates, [ FN: Revised Section 328(a) would provide that a professional may be employed on "any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis , or a contingent fee basis."] as well as the provision that clarifies that debtor corporations may recover punitive damages for willful violations of the automatic stay. [ FN: Section 362(h) replaces "individual" with "entity," thereby clarifying that a debtor that is an individual, corporation, partnership or other entities may recover punitive damages and shall recover actual damages for willful violations of the automatic stay. Thus, the Act eliminates the construction of Section 362(h) that prevents non-individual debtors from recovering for willful stay violations.] The American Bankruptcy Institute also supports Congress' efforts to clarify that the 1994 amendments to Bankruptcy Code Section 525(c) apply only to bar discrimination concerning student loans and grants because of prior bankruptcies, and not all loans.

However, I believe that certain "technical" amendments are erroneous or misleading and, before addressing the more substantive issues, I would like to draw your attention to these errors. First, the Technical Corrections Act proposes to replace language in Bankruptcy Code Section 108(c)(2) with identical language--"922, 1201 or" would be replaced with "922, 1201 or...."

Second, the Technical Corrections Act proposes to change Bankruptcy Code section 327(c) by replacing "In a case under chapter 7, 11 or 12 of this title" to "In a case under chapter 7, 12, or 12 of this title." Moreover, the Technical Corrections Act proposes to delete the word "section" in Section 327(b), such that Section 327(b) would read, "If the trustee is authorized to operate the business under 721, 1202 or 1108 of this title...." These changes will only create confusion.

Third, the Technical Corrections Act proposes to amend Section 423(a) with several corrections and modifications. However, the Act is somewhat confusing in proposing to move subsection (a)(15) to follow subsection (a)(14), which it already does.

Fourth, the Technical Corrections Act proposes to replace language in Bankruptcy Code Section 524(a)(3) with identical language-- "523, 1228(a)(1), or 1328(a)(1) of this title, or that..." would be replaced with "523, 1228(a)(1), or 1328(a)(1) of this title, or that...."

Now, I would like to briefly address my main substantive comment regarding an important proposed amendment. The Bankruptcy Code allows the trustee to assume or reject the debtor's contracts with third parties. However, there are certain exceptions to protect the third parties. Thus, in order to assume a contract, the trustee must first "cure," which requires the trustee to bring all outstanding arrearages current and otherwise be in compliance with the debtor's contractual obligations under the contract. However, to prevent third parties from creating artificial contractual obligations to prevent a debtor from assuming a contract, Congress relieved the trustee of curing certain obligations, including those conditioned on the debtor's remaining solvent. Furthermore, the Bankruptcy Reform Act of 1994 amended Bankruptcy Code Section 365(b) to provide that a trustee need not cure "a penalty rate or provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease." The amendment was intended to allow a trustee to assume a contract without curing penalty rates or penalty provisions.

Certain case law interpreted the word "penalty" in the 1994 amendments to modify only "rate" and not "provision." Thus, at least one court allowed a trustee to assume contracts without curing certain nonmonetary defaults that it would previously have been required to cure, notwithstanding that the provisions were not penalty provisions. See In re Claremont Acquisition Corp., 186 B.R. 977, 989-90 (C.D. Cal. 1995), appeal granted. This inaccurate interpretation could wreak havoc for creditors that enter into contract provisions that require that the debtor do morethan pay a fee (e.g., maintain insurance).

The Technical Corrections Act seeks to clarify that in passing the Bankruptcy Reform Act of 1994, Congress intended "penalty" to modify both "rates" and "provisions." However, the proposed modifications in the Technical Corrections Act do not accomplish Congress' goal. In fact, the proposed change may have the opposite result of the one Congress intends. Currently, the Technical Corrections Act would replace Section 365(b)(2)(D) with the following two provisions:

(D) the satisfaction of any penalty rate in any contract or unexpired lease; or

(E) the satisfaction of any provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under any executory contract or unexpired lease other that an unexpired lease of personal property."

Subsection (E) does not artfully accomplish the House's expressed intent of allowing a trustee to assume a contract without curing penalty provisions.

I would propose that correcting the interpretation of Bankruptcy Code Section 365(b)(2)(D) is more readily accomplished by simply modifying Bankruptcy Code Section 365(b)(2)(D) to read:

the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease. (emphasis added).

Because Congress has already chosen to address the problem area of Single Asset Real Estate cases in the Bankruptcy Reform Act of 1994, and because there is also an amendment that would remove the statutory $4 million cap in Bankruptcy Code Section 101(51B), I would refer the Committee to my chapter in the American Bankruptcy Institute's recently published work "Single Asset Real Estate Bankruptcies - Current Developments and Legislative Issues," published by the American Bar Association in 1997 (Chapter 12 is referenced and attached to this testimony). Because single asset cases lack economic substance in that the only significant creditor is the securedlender, legislation is sorely needed to address this significant issue.

Finally, I commend Congress for its efforts to pass the Boating and Aviation Operation Act of 1997 (the "Safety Act"), introduced on January 7, 1997 by Rep. Ehlers. The Safety Act would bar discharge in bankruptcy of a debt for death or personal injury caused by the debtor's operation of watercraft or aircraft while intoxicated. This amendment is urgently needed to overrule cases like In re Greenway (Boyce v. Greenway), 71 F.3d 1177 (5th Cir.), cert. denied , where the court determined that provisions of the Bankruptcy Code that prohibit discharge for debts incurred while intoxicated from the operation of a motor vehicle do not apply to debts from operating a boat. Thus, in Greenway, the court allowed discharge of claims against the debtor who, while intoxicated, crashed his boat into the claimants' vessel, killing one person and injuring several more.

I thank you for the opportunity of appearing before this subcommittee and hope that these remarks will be of some assistance to you in this important work. If I can be of further assistance to you or the subcommittee, please do not hesitate to call upon me or the American Bankruptcy Institute.