American Bankruptcy Institute
REPORT ON THE STATE
OF THE
AMERICAN BANKRUPTCY SYSTEM

Sections of the Report

Introduction

This report is the capstone of the ABI's three-year Bankruptcy Reform Study Project. The Project was designed to inform the process of bankruptcy reform, which is currently the subject of proceedings before the National Bankruptcy Review Commission. The ABI Bankruptcy Reform Study Project produced dozens of academic papers and sponsored ten symposia on a wide range of hotly debated bankruptcy issues.

The Project's efforts culminated this August with a 65-question survey covering a broad spectrum of possible areas of reform. The survey was designed to balance the theoretical approach of the scholarly papers and symposia with the practical insights of a broad range of professionals who are most familiar with the strengths and weaknesses of our nation's bankruptcy system.

No group is better suited to make this evaluation than the ABI membership. As the nation's largest organization of insolvency professionals, the ABI's 5,200 members represent both a substantial segment of the nation's bankruptcy professionals and a broad cross-section of practice specialties. All members received the survey, and the high response rate (1465 respondents) demonstrates the seriousness with which these professionals approach the subject of bankruptcy reform.[1]

The ABI's diversity is reflected in the survey results. The respondents include attorneys, accountants, academics, judges, trustees, lenders, credit managers, turnaround consultants, and several other types of bankruptcy professionals. They practice in all fifty states, the District of Columbia, Puerto Rico, and the Virgin Islands. In their professional capacities they represent the interests of creditors, debtors, investors, and governmental entities. Almost all respondents have at least five years of bankruptcy experience and half have 15 years or more of bankruptcy experience. Their practice experience ranges from the simplest of consumer bankruptcies in rural America, to the most complex business bankruptcies in our major urban centers. This report reflects the collective judgment of this rich and varied pool of bankruptcy talent and experience.


Summary of Conclusions

In the view of these professionals, the Bankruptcy Code of 1978 is working well. While there are several areas where reform is indicated, the current law receives high marks, and there is little support for major revision. This view is shared by the range of ABI members, with both debtor and creditor representatives endorsing the general thrust of the current law. However, problems of delay, excessive costs, unfairness, and abuse need to be addressed in the current round of reforms.

Abuse appears to be a small but significant problem in both consumer and business bankruptcy cases. Both debtor and creditor representatives expressed general support for strict deadlines and for either dismissal or the appointment of trustees to help combat abuse.

Similarly, both debtor and creditor representatives strongly supported the reorganization policy embodied in Chapter 11 of the current law. The debtor-in-possession concept, the automatic stay, the policy of granting an exclusive plan period to the debtor, and the cram down power were all favored. However, endorsement of the reorganization policy is tempered by strong support for reforms aimed at making the process quicker, cheaper, and more effective. Strict time limits are supported as a response to excessive delays that are a major problem in Chapter 11 cases. Further, while the technical requirements of Chapter 11 do not appear to be interfering with the reorganization of economically viable entities, those requirements need to be modified to filter out non-viable debtors and to deal with debtor management problems more effectively. The business reorganization process also needs to be reformed to address the problem of excessive professional fees. However, on these issues there was only modest support for specific reforms such as appointing an independent financial advisor or sharing professionals.

Although there is general support for relaxing the eligibility requirements for consumer reorganizations under Chapter 13, the current law is favored in most other respects. Time limits are strongly endorsed, as is the concept of a limited discharge. The current discharge provisions of Chapter 13 are generally supported, although there is backing for requiring a minimum distribution to unsecured creditors. There is also modest support for a uniform national exemption list.

There is strong support for the imposition of high standards of integrity for all professionals. The current law's "disinterestedness" standard for attorneys is generally endorsed, as is its extension to most other professionals. Court review of professional appointments and U.S. Trustee review of both professional appointments and fee requests are also supported.

The general support for a balance between the rights of creditors and debtors carries over to fairness among creditors. The principle of equality of distribution in bankruptcy is strongly embraced and there is strong opposition to the creation of priority classes of claimants.

The consensus is that, after almost 20 years, the Bankruptcy Code still works well and needs only minor reform.


Overall Rating

Perhaps the most surprising result of the survey is the very high overall rating of the current bankruptcy system. Half of the respondents rated it either "excellent" or "very good." Another 37 percent rated it "good," with only 3 percent rating it "poor" and 11 percent rating it "fair." Although the rating remained positive regardless of the type of bankruptcy experience, there were some significant differences. Creditor representatives rated the system less highly than debtor representatives, but still 40 percent rated it either excellent or very good, and 41 percent rated good.[2] Similarly, respondents practicing in the ten largest U.S. cities rated the system less highly than those from mixed or rural districts, with 44 percent rating it either excellent or very good and 39 percent rating it good.[3] Geography also played a role, with relatively less satisfaction in the Second Circuit and relatively greater satisfaction in the Third, Fourth, and Tenth Circuits.

The overall satisfaction rating was also reflected in the results of specific survey questions. For most of the potential areas of reform investigated by the survey, the respondents preferred the current law over various alternative reform proposals. The only generalizable exceptions were that there was strong support for simplifying bankruptcy law and for speeding up the bankruptcy process.


Abuse in the Bankruptcy System

Historically, many bankruptcy reforms have been driven by concern over perceived abuses. The survey results confirm that abuse is a problem in our current bankruptcy system, but that it is not rampant. In both business and individual cases, more than half of the respondents indicated that abuse occurs only rarely or occasionally. Roughly a third reported that abuse occurs sometimes. And, abuse was reported as occurring frequently or usually by only 13 percent for business cases, and a somewhat higher 17 percent for individual cases.

However, the view changed dramatically depending on the nature of practice. While more than two-thirds of debtor representatives stated that abuse occurs only rarely or occasionally, only about one-third of creditor representatives agreed. However, even among creditor representatives only 17 percent thought abuse occurred frequently or usually in business cases and 29 percent thought it occurred frequently or usually in consumer cases. Since the survey did not attempt to define "abuse," some of the difference may represent differing views about what constitutes abuse, rather than differing views about its frequency. The differences in the views of the trustee representatives and judges were not statistically significant.

Geography played a small role, with abuse in business cases reported as relatively more frequent in the Second, Third, and Eleventh Circuits, and as relatively less frequent in the Seventh Circuit. There was no statistically significant difference among circuits with respect to consumer bankruptcy. However, in both consumer and business cases, abuse was reported as relatively more frequent in the ten largest cities. Consumer abuse was relatively rarer in rural districts, and business abuse was relatively less frequent in mixed districts.

Several specific areas of perceived abuse were investigated by the survey. While a majority felt that serial filings by individual debtors were not a significant problem, 40 percent disagreed. Although debtor representatives overwhelmingly dismissed it as a problem, almost two-thirds of creditor representatives, and slightly more than half of the judges, viewed it as a significant problem. Geographically, the problem was relatively greater in the Second, Ninth and Eleventh Circuits, and significantly smaller in the First and Seventh Circuits. Thus, serial filings are a significant problem that needs to be addressed.

In terms of abuses in business cases, more than a third reported excessive professional fees and expenses as a problem that arose always or often, with half reporting that it sometimes arose. Abusive filings were not a problem, or were rarely a problem according to a majority (55 percent), with only 8 percent stating they were always or often a problem. Further, only 29 percent listed abuse of the system by debtors as one of the top five reasons why plans are not confirmed, with 12 percent listing abuse of the system by creditors. Finally, fraud was not ranked as a major reason why confirmed plans fail.

Thus, it appears that abuse is a problem that needs to be addressed and that some aspects of the problem need to be addressed by local initiatives, rather than by federal legislation. However, abuse does not appear to be the type of systemic problem justifying the wholesale revision of bankruptcy law.


Goals of Bankruptcy Law

Although modern legal scholarship focuses on many non-traditional goals of bankruptcy law, only the traditional objectives received widespread support. Approximately three-quarters of the respondents said the traditional goals of providing a fresh start to debtors and of enhancing distribution to creditors should be primary objectives of a bankruptcy system. Maintaining equality of treatment for similarly situated creditors ranked a close third. Only one-half endorsed efficient claims resolution and preservation of going concern values as primary objectives, with only one-third endorsing job preservation and resolution of fraud.


Causes of Bankruptcy

The proper design of a bankruptcy system depends, in part, on the causes of financial distress. Mismanagement ranked first as a primary cause of business bankruptcy, with 89 percent listing it. Market forces ranked second at 68 percent. No other cause was endorsed by a majority, although litigation/legal action and operational problems were a distant third and fourth, at 48 and 33 percent, respectively. Overall, the causes did not vary greatly from urban to rural districts. However, market forces, litigation/legal action, and operational problems were relatively more likely to be cited as a primary cause in the ten largest cities. Undercapitalization and mismanagement were relatively more likely to be cited in mixed districts. And, mismanagement, litigation/legal action, and government regulation or policy were relatively less likely to be cited in rural districts.

For consumer bankruptcy, three primary causes were each cited by two-thirds of the respondents. They were the ease of obtaining personal credit and credit cards, loss of a job, and financial mismanagement. Two additional reasons -- medical problems and marital/family problems -- were each endorsed by 57 percent of the respondents. However, the reported causes of consumer bankruptcy did vary by type of district. In rural districts, job loss, litigation/legal action, and disaster/catastrophic event were relatively less likely to be cited. In mixed districts, medical problems and marital/family problems were relatively more likely to be cited. In contrast, medical problems and marital/family problems were relatively less likely to be cited in the ten largest cities, but job loss, litigation/legal action, business/employer failure, and disaster/catastrophic event were relatively more likely to be cited. Interestingly, there was no statistically significant difference among these types of districts with respect to either financial mismanagement or the ease of obtaining personal credit and credit cards.


Scope and Design of Bankruptcy Law

While there was general support both for the current law's limitations on eligible debtors and for the Code's "one-size-fits-all" approach, there was also significant support for changes in the eligibility provisions and for special provisions for certain types of debtors. The survey asked whether 19 different types of entities should be permitted to be debtors under the bankruptcy laws. Although a significant number of respondents chose the "no opinion" response for several of the entities, the respondents generally opposed permitting banks and pension plans to be debtors. However, the respondents slightly favored the inclusion of governmental entities, insurance providers, labor unions, and foreign entities; and a majority favored the inclusion of bank holding companies, securities industry entities, trusts, and health maintenance organizations. Approximately two-thirds supported the inclusion of utilities and charitable/not-for-profit organizations; and, there was even stronger support for including airlines, railroads, single asset real estate entities, partnerships, family farmers, small businesses, and mass tort/product liability defendants.

Although two-thirds of the respondents supported a special chapter or provisions for governmental entities, there was not majority support for separate chapters for any of the other 18 types of entities listed in the survey. The respondents were about evenly split on whether special provisions should be available for insurance providers and family farmers. However, a majority of those with an opinion on the issue favored continuing the current Chapter 12 beyond its 1998 expiration date. In addition, there was significant minority support for special provisions for banks, utilities, securities industry entities, railroads and small businesses.

The lack of consensus regarding the inclusion of special chapters or provisions for various types of entities carried through to other questions about specific areas where special provisions might be appropriate. Thus, half of the respondents felt that the length of the debtor's exclusive period to file a plan should differ depending on the type of business. Of those favoring such a special provision, the substantial majority favored shorter exclusivity periods for single asset real estate entities, but favored longer exclusivity periods for publicly-held companies, regulated industries (e.g., airlines) and governmental entities. On a related question about time limits for confirming plans, only half felt that the length of the time limit should differ depending on the type of business.

In general, there was support for expanding the scope of Chapter 13. Fifty-seven percent supported permitting family businesses to use Chapter 13, regardless of corporate form or structure. In addition, there was significant minority support for permitting partnerships, privately-held corporations, professional corporations, and limited liability companies to obtain the type of relief currently available for individuals under Chapter 13. There was also strong minority support for increasing the Chapter 13 debt limits. While half supported the current limits of $250,000 in unsecured debts and $750,000 in secured debts, 38 percent supported increased debt limits. Further, only half supported the current distinction between secured and unsecured debts in the Chapter 13 ceiling. Those supporting the secured/unsecured distinction were asked to indicate the appropriate debt limits. While the median figures were at the current $250,000/$750,000 level, the average (mean) figures were $365,450/$765,690, and the figures at the 75th percentile were $500,000/$999,000.


Administrative and Professional Appointment Issues

Although the automatic stay has been the subject of continual amendments and reform proposals, there was strong support for preserving the current law. First, 98 percent thought that bankruptcy law should provide an automatic stay. Further, two-thirds supported keeping the scope of the stay the same as it is under current law, with the rest split evenly between narrowing and broadening its scope. Finally, almost two-thirds rejected the proposition that the stay should be for a finite period of time. However, even those supporting a finite stay strongly supported (by 90 percent) making discretionary extensions available.

The problems of professional appointment and compensation, and perceptions of abuses and excessive fees, have long plagued bankruptcy law and have provided the impetus for many reform proposals. The results confirm that this area continues to be problematic. Several professional issues were listed in response to the open-ended question about the three most significant problems in the current bankruptcy system. These ranged from complaints about professionals, such as excessive compensation and lack of competency (especially in Chapter 11 cases), to complaints by professionals about delays in payment and compensation procedures that are too cumbersome.

The excessive fee concern was mirrored in the question about the frequency of various problems in reorganization cases. Excessive professional fees and expenses ranked as the second most frequent problem in business reorganization cases, behind excessive delays and immediately ahead of existing management. Thirty-nine percent of respondents indicated that excessive professional fees were a problem "often" or "always", and 50 percent indicated they were "sometimes" a problem. Only 11 percent indicated that this problem did not arise or arose rarely. Further, creditor representatives viewed this problem as relatively more frequent, with 48 percent stating it occurred often or always.

However, two partial solutions to the excessive fee issue were rejected by the respondents. Sixty-two percent rejected the suggestion that, in cases with multiple committees, the committees be required to use the same professionals (e.g., accountants, appraisers, investment bankers). Opposition to the proposal spanned practice specialties, with a majority of both business Chapter 11 debtor and creditor representatives opposing it.[4] Committee representatives strongly opposed it (74 percent), and it was slightly opposed by judges. In addition, professionals specializing in the largest Chapter 11 cases [5] were also strongly opposed (81 percent).

A majority also opposed the suggestion that the bankruptcy court appoint an independent financial advisor in reorganization cases to analyze and provide information to the court and creditors concerning the debtor's financial condition and viability. Here, however, significant differences were observed, with judges being slightly in favor of the proposal, business Chapter 11 creditor representatives being slightly opposed, business Chapter 11 debtor representatives being relatively more opposed, and committee representatives being the most opposed. While attorneys were opposed to the proposal, both accountants and investment bankers strongly supported it, and a majority of turnaround consultants supported it.

A frequent complaint of bankruptcy professionals is that procedures relating to the retention of professionals are cumbersome and that the current law's "disinterestedness" standard is too strict. That view was only partly supported by the survey data. In general, the respondents supported the existing "disinterestedness" standard. Approximately 90 percent of respondents indicated that attorneys should not be disqualified for having previously represented the debtor in cases where all unpaid pre-petition fees or expenses were waived, or where the attorney is not owed pre-petition fees or expenses. Also, 84 percent indicated that previous representation of a creditor in an unrelated matter should not disqualify the attorney. Further, two-thirds indicated that an attorney should not be disqualified in cases where the attorney previously represented the debtor, but is owed pre-petition fees or expenses.

In contrast, approximately two-thirds felt that an attorney should be disqualified in cases where the attorney has previously represented the debtor and has received a potentially avoidable pre-petition transfer. Also, a majority felt that disqualification was appropriate where: (1) the attorney represents an affiliate or a principal of the debtor; (2) the attorney, or another lawyer in the attorney's firm, previously served on the debtor's board of directors; or (3) the attorney currently represents a creditor in an unrelated matter. Both professionals specializing in the largest Chapter 11 cases and business Chapter 11 debtor representatives were slightly in favor of disqualifying attorneys who represent an affiliate or a principal of the debtor, and those who previously served on the debtor's board of directors. However, both groups supported the appointment of an attorney who currently represents a creditor in an unrelated matter.

Interestingly, the respondents supported the extension of the current attorney "disinterestedness" standard to other types of professionals. While a majority supported application of the "disinterestedness" standard to auctioneers and brokers, almost two thirds supported applying the standard to appraisers and liquidators, and almost three-fourths supported applying the standard to accountants, investment bankers, and turnaround specialists. Perhaps more importantly, the professionals in each profession also supported application of the "disinterestedness" standard to their own professions. With the exception of brokers, where there were no data, there was no statistically significant difference between the views of the professionals in the subject profession and the pool of respondents on the question of whether the "disinterestedness" standard should be applied to that profession.

Similarly, the respondents supported requiring court approval of the debtor's retention of each of these seven types of professionals. A requirement for court approval was supported by 56 percent overall for appraisers, 60 percent for brokers, 61 percent for auctioneers, 76 percent for liquidators, 78 percent for accountants, and 83 percent for both investment bankers and turnaround specialists. Further, with the exception of auctioneers, brokers, and liquidators, a majority of the professionals in each profession supported a court appointment requirement. Auctioneers and liquidators did oppose a court approval requirement, but the number of respondents was too small for the difference to be statistically significant. There were no data on brokers' views.

Finally, 69 percent of the respondents felt that trustees should be able to retain their own firms as professionals in the cases where they are serving as trustee. Approval was even stronger among trustees, with 88 percent supporting this proposition.


Consumer Issues

The survey investigated a range of consumer bankruptcy issues. As noted above, there was significant support for increasing the Chapter 13 debt limits and for expanding the types of entities eligible for Chapter 13-style relief. Although many consumer debtors currently are permitted to pay their filing fees in installments, and the possibility of filing bankruptcy in forma pauperis is currently being tested in some districts, the respondents slightly opposed permitting individuals to file voluntary bankruptcy cases without first paying the full filing fee. The views of debtor representatives were not different in a statistically significant way.

Almost half of the respondents felt that the exemptions provided to individual debtors under federal bankruptcy law should be uniform for all states. Thirty-six percent supported continuation of the current "opt-out" mechanism, and only 12 percent felt that bankruptcy exemptions should be governed exclusively by state law. Dramatic differences emerged when respondents from selected states with liberal exemption policies (Florida and Texas) were compared with those from states with modest exemption policies (New York and Pennsylvania). The modest exemption respondents strongly supported uniform exemptions (67 percent), with only seven percent supporting state law and 27 percent supporting the "opt-out." In contrast, the liberal exemption respondents supported the current "opt-out" rule by a bare majority (52 percent), with 20 percent supporting state law and 29 percent supporting a uniform rule. Similar results were found in a comparison of two contiguous states, one with a modest exemption policy (Missouri) and one with a liberal exemption policy (Kansas).

In general, the respondents supported a limited discharge of debts. Respondents were asked whether various types of debts should be dischargeable "always," "sometimes," or "never." Of the 13 listed types of debts, the only type of debt that a significant number of respondents thought should "always" be dischargeable were future condominium fees or dues (39 percent). For family obligations, a strong majority felt that child support arrearages (74 percent) and alimony/spousal and child support obligations (67 percent) should never be dischargeable, but 70 percent thought that marital property settlements should sometimes be dischargeable. Sixty-nine percent thought that fraud should never be dischargeable. However, for false financial statements, only 48 percent thought that such debts should never be dischargeable, with 49 percent stating that they should sometimes be dischargeable. Other types of debts that a majority thought should never be dischargeable were drunk driving/boating liability (59 percent), intentional torts (52 percent), and restitution/criminal fines (52 percent). Approximately three-quarters thought that taxes, educational loans, and environmental liability should sometimes be dischargeable, and two-thirds thought that bank officer/director liability should sometimes be dischargeable.

There was no consensus about the "super discharge" available in Chapter 13 cases. While 44 percent thought the Chapter 13 discharge should remain the same, 29 percent thought it should be narrowed and 21 percent thought it should be broadened. These results broke down along debtor vs. creditor lines, with 51 percent of creditor representatives favoring a narrower discharge and 37 percent of debtor representatives favoring a broader discharge. A slight majority also felt that there should be a required minimum distribution to unsecured creditors in exchange for a Chapter 13 discharge. Again, the results broke down along debtor vs. creditor lines, with 79 percent of creditor representatives favoring a minimum distribution requirement and 67 percent of debtor representatives opposing it.

Both consumer debtor representatives and consumer creditor representatives supported a time limit for confirming plans, with 86 percent of creditor representatives and 56 percent of debtor representatives in favor of time limits. Forty-three percent of those supporting time limits favored a limit of 120 days or less, with an additional 34 percent favoring a 180-day limit, and 20 percent favoring a one-year limit. Of those favoring time limits, half thought that a trustee should be appointed if no plan was confirmed within the time limit; the remedies of liquidation and dismissal were each supported by about a quarter. On the question of what circumstances would justify dismissal of a liquidation case, there was general agreement between debtor and creditor representatives. Strong majorities supported dismissal for (1) nonpayment of required fees and charges, (2) failure to file required schedules of assets and liabilities and/or statements of financial affairs, (3) "bad faith" filings, and (4) unreasonable delay by the debtor that is prejudicial to creditors. A strong majority of creditor representatives, and a 56 percent majority of debtor representatives supported dismissal based on serial filings. And, while a majority of creditor representatives supported dismissal where the debtor had current ability to repay debt, only 38 percent of debtor representatives supported dismissal on that ground.


Business Reorganization Issues

Although the debtor-in-possession concept has come under significant criticism, the survey respondents strongly supported allowing debtors in business reorganizations to remain in possession of their property, retain all of their rights and powers, and operate their businesses. Almost three-quarters of creditor representatives and 93 percent of debtor representatives supported the debtor-in-possession concept. However, despite wide support for the basic concept, it appears that there are substantial problems in practice. Mismanagement ranked first among the causes of business bankruptcy. Further, existing management was ranked as the third most common problem in business reorganization cases, with 37 percent stating that existing management was "often" or "always" a problem, and 53 percent stating that it was "sometimes" a problem. Only 10 percent indicated that existing management was not a problem or rarely a problem. In addition, mismanagement was ranked second among the reasons why confirmed plans in business reorganizations fail. These results suggest that reform efforts need to be directed towards the early identification and resolution of management problems in business reorganization cases.

The respondents expressed mixed views on granting special rights or remedies to post-petition lenders. The only rights with majority support were the granting of origination and other "up front" fees (60 percent), validation of pre-petition liens/interests (57 percent), and binding effect on a subsequently appointed trustee (67 percent). The respondents slightly favored granting liens on avoidance action recoveries. However, a majority opposed granting veto power over payments to professionals (82 percent), bootstrapping of liens and claims from pre-petition to post-petition (61 percent), the waiver of avoidance actions against the lender (53 percent), and the waiver of other claims against the lender (such as lender liability claims) (53 percent). Except for relatively stronger opposition to bootstrapping, there was no statistically significant difference in the views of the professionals specializing in the largest Chapter 11 cases. However, opposition to bootstrapping, waiver of avoidance actions, and waiver of other claims was relatively stronger in the districts with the largest reorganization cases.[6]

Only a minuscule three percent supported elimination of the debtor's exclusivity period for filing a plan of reorganization. Forty-five percent supported the current law's 120-day exclusive period, with 24 percent supporting a longer 180-day period and 17 percent supporting a slightly shorter 90-day period. Only half thought that the exclusivity period should differ depending upon the type of the debtor's business. Of those, a majority thought that publicly-held companies, regulated industries (such as airlines, etc.), and governmental entities should have more than 120 days. Only single asset real estate cases garnered majority support for an exclusivity period of less than 120 days.

A majority (62 percent) of all respondents supported a time limit for confirming a plan in reorganization cases. The time limit was supported by 75 percent of business Chapter 11 creditor representatives, but by only 39 percent of business Chapter 11 debtor representatives. Of those supporting a time limit for confirmation, half supported time limits of 180 days or less, with 38 percent supporting a one-year limit and 11 percent supporting a two-year limit. A slight majority thought that the time limit for confirming a plan should differ depending upon the type of the debtor's business.

The respondents were split on the consequence of missing the time limit. A plurality (41 percent) thought that a trustee should be appointed, with 19 percent supporting dismissal of the case and another 19 percent supporting liquidation. Finally, 15 percent thought there should be no consequence. Among those who favored time limits on confirmation, half thought that the consequence should be appointment of a trustee, with about one-quarter each supporting liquidation and dismissal. Among those opposing time limits, about one-third each supported appointing a trustee and doing nothing.

The combined results of the debtor-in-possession, exclusivity, and time limit questions indicate strong support for a limited right to reorganize. The results suggest a reorganization provision that, in the typical case, grants a short exclusivity period to the debtor, followed by the appointment of a trustee within six months to a year if no plan is confirmed. Longer periods, or discretionary extensions could be available in more complex cases, such as those involving publicly-held companies, regulated industries, and governmental entities.

Consistent with the general support for time limits on exclusivity and plan confirmation, time-related issues ranked first and fourth among the most common problems in business reorganization cases. Excessive delays ranked first, with 46 percent indicating that they were "often" or "always" a problem, and an additional 46 percent indicating that they were "sometimes" a problem. Excessive professional fees and expenses ranked second, with 39 percent indicating that they were often or always a problem, and an additional 50 percent indicating that they were sometimes a problem. Existing management ranked third, with 37 percent indicating that it was often or always a problem, and an additional 53 percent indicating that it was sometimes a problem. Excessive time in bankruptcy before conversion or dismissal ranked fourth, with 36 percent indicating that it was often or always a problem, and an additional 47 percent indicating that it was sometimes a problem. Excessive secured creditor influence ranked fifth, with 31 percent indicating that it was often or always a problem, and an additional 49 percent indicating that it was sometimes a problem. There were no other issues for which the combined percentage of "often" and "always" responses significantly exceeded the percentage of "rarely" and "not at all" responses. However, the remaining issues garnering the greatest percentage of often and always responses were (6) ADR underutilization, (7) insufficient access to information; (8) exclusivity extensions; (9) insufficient committee involvement; and (10) insufficient uniformity (e.g., local rules).

The respondents strongly supported both the "cram down" power and a "new value" exception to the absolute priority rule. Eighty percent thought that a plan should be confirmable without acceptance by all impaired classes of claims. Although an overwhelming 95 percent of business Chapter 11 debtor representatives supported the cram down power, it also was supported by 73 percent of business Chapter 11 creditor representatives. A new value exception to the absolute priority rule was supported by three-quarters of respondents. It was supported by 91 percent of business Chapter 11 debtor representatives, and also was supported by 70 percent of business Chapter 11 creditor representatives.

When asked to identify reasons why plans are not confirmed, only three reasons were endorsed by a majority of respondents. Eighty-five percent listed lack of economic viability, 77 percent indicated that the plan was not feasible, and 71 percent listed insufficient financing. Four other reasons were endorsed by approximately one-quarter of the respondents. They were (1) abuse of the system by the debtor, (2) inability to obtain requisite votes, (3) desired results obtained without need for confirmed plan, and (4) loss of collateral through foreclosure. Only 12 percent indicated that plans are not confirmed because confirmation standards are too technical. Confirmation is only one of the steps towards a successful reorganization and, unfortunately, a very large percentage of confirmed plans in business reorganization cases fail. The primary reason that confirmed plans fail, according to the survey respondents, is unrealistic financial projections. Mismanagement ranked a distant second, with unforeseen external events or circumstances coming in a very distant third. These responses suggest that the confirmation process is working in the sense that economic problems, rather than technical or procedural problems, are the primary impediment to plan confirmation. However, the confirmation process is not filtering out enough of the plans with significant economic problems and is not dealing effectively enough with management problems.


Court Issues

Granting Article III status to bankruptcy judges was supported by 62 percent of respondents. However, there was a significant difference in opinion by professions, with 78 percent of judges supporting Article III status and 64 percent of attorneys supporting it, but only 48 percent of other professionals supporting it. While granting Article III status to bankruptcy judges would permit simplification of the bankruptcy jurisdictional provisions, jurisdictional battles were rated as the least frequent of 19 surveyed problems in business reorganization cases. Further, while those supporting Article III status reported a slightly higher frequency of jurisdictional battles as problems in business reorganization cases, even among those respondents jurisdictional battles were rated as a problem "rarely" or "not at all" by 70 percent, and as a problem "often" or "always" by only seven percent.

There was strong support for Bankruptcy Appellate Panels as the initial venue for appeals from the bankruptcy court. Overall, 56 percent felt that bankruptcy appeals initially should be taken to the Bankruptcy Appellate Panel, with only 20 percent favoring the United States District Courts, and only 21 percent favoring direct appeals to the Circuit Court of Appeals. An even stronger endorsement of Bankruptcy Appellate Panels comes from Ninth Circuit professionals, who have long had a Bankruptcy Appellate Panel. Among Ninth Circuit professionals, 70 percent favor the Bankruptcy Appellate Panels, with only 14 percent favoring the United States District Courts, and only 16 percent favoring direct appeals to the Circuit Court of Appeals. The high level of satisfaction in the Ninth Circuit suggests that the Bankruptcy Appellate Panel reform should be carried forward.


Policing the System

Although current law relies on both the Office of the U.S. Trustee and, in business reorganization cases, official committees to help ensure that the bankruptcy system operates fairly and efficiently, both received mixed reviews from survey respondents. In response to an open-ended question, the U.S. Trustee system was cited by many respondents as one of the three most significant problems in the current bankruptcy system. However, there was strong support for an active U.S. Trustee role in cases without committees, and moderate support for such a role in cases with committees. Further, the U.S. Trustee appears to be actively performing its role, since few respondents listed lack of U.S. Trustee involvement as a problem in reorganization cases.

With respect to the scope of that role, more than two-thirds of respondents indicated that the U.S. Trustee should be responsible for protecting non-debtor interests in cases without committees. There was very strong support for an active U.S. Trustee role in virtually all aspects of such cases, with only post-confirmation matters (at 54 percent) falling below the two-thirds support level. While the level of support for an active U.S. Trustee role diminished for cases with committees, approximately half or more supported an active role in virtually all aspects of such cases, except post-confirmation matters (29 percent), compensation of debtor's management (43 percent), and the plan confirmation process (44 percent). Although professional compensation and retention issues are often a source of conflict between bankruptcy professionals and the U.S. Trustee, there was very strong support in cases without committees for U.S. Trustee involvement in the retention of professionals (74 percent) and compensation of professionals (72 percent). There was far less support for those roles in cases with committees. Only 49 percent supported a role in the retention of professionals, while 53 percent supported a role in the compensation of professionals. On the range of issues, business Chapter 11 debtor representatives tended to be the least supportive of the U.S. Trustee's role in cases with committees, while judges tended to be the most supportive.

The official committees were generally viewed as providing a necessary balance (59 percent) and serving a necessary function (64 percent). Only 2 percent said they were never necessary. However, professionals specializing in the largest Chapter 11 cases viewed the committees much more favorably, with 80 percent stating that committees provide a necessary balance and 75 percent stating that they perform a necessary function. Also, committee representatives were much more likely to indicate that committees provided a necessary balance (79 percent) and performed a necessary function (85 percent). Respondents from the ten largest cities were relatively more likely to indicate that committees were necessary, while those from rural districts were relatively less likely to do so.

The majority indicated that the level of committee utilization was about right, although a substantial minority indicated that committees were appointed in fewer cases than necessary (35 percent) and a small minority indicated that they were appointed more often than necessary (16 percent). Interestingly, the views of committee representatives varied from the overall pool of respondents only slightly, with committee representatives less likely to indicate that committees were appointed more often than necessary.

The extent of committee involvement appears to be a problem in many cases, with 27 percent listing insufficient committee involvement as a problem that always or often occurs in business reorganization cases. An additional 35 percent listed it as a problem that sometimes occurs. These results suggest that the committee concept needs rethinking. While the committee vehicle may work satisfactorily in larger districts, or bigger cases, it may not be the best method for protecting non-debtor interests in other cases.


Preferential Transfers

There was general agreement that intent to prefer a creditor should not be added as a necessary element for avoiding a preferential transfer. Overall, only 26 percent of respondents supported such a change in the law. Even among business Chapter 11 creditor representatives only 30 percent favored an intent requirement.


Valuation

The majority (52 percent) did support a change to provide a specific valuation standard in bankruptcy cases, with fair market value being the preferred standard for most purposes. While creditor representatives were more supportive of adopting a specific valuation standard (58 percent) and trustee representatives were less supportive (43 percent), there was no statistically significant difference in the views of debtor representatives or judges.

The respondents were deeply divided on the question of what valuation standard should be adopted. However, a plurality favored a fair market valuation for all purposes except confirmation. For solvency determinations, more than 40 percent favored a fair market valuation, with about a third favoring a liquidation valuation and about a quarter favoring a going concern valuation.

On exemption issues, the pool was more divided, with 47 percent favoring a fair market value and 42 percent favoring a liquidation value. Here the views divided along debtor vs. creditor lines, with 62 percent of debtor representatives favoring a liquidation value and 57 percent of creditor representatives favoring a fair market value.

For confirmation issues, a plurality of 45 percent favored a going concern valuation, with 36 percent favoring a fair market valuation. A going concern valuation for confirmation issues was the most favored choice of both debtor representatives and creditor representatives; however, debtor representatives were almost evenly divided among the three standards, while creditor representatives were almost evenly split between a going concern valuation and a fair market valuation.

With respect to secured creditor issues, fair market valuation was the most favored choice for cash collateral and adequate protection purposes, and was the majority choice (53 percent) for valuing collateral. On all three issues, creditor representatives favored a fair market valuation, whereas debtor representatives were split with approximately two-fifths favoring a liquidation standard and two-fifths favoring a fair market standard.


Claims

There was general opposition to granting specific categories of claimants priority over unsecured creditors. Respondents were asked to indicate whether 19 types of claims should always, sometimes, or never be given priority over general unsecured claims. The majority supported always prioritizing only two classes of claims: (1) the expenses of administration (77 percent), and (2) alimony/spousal and child support claims (50 percent). Seven additional classes garnered majority support for at least sometimes receiving priority. In descending order of their combined "sometimes" and "always" percentages, they were: (1) wages (92 percent); (2) employee benefits (82 percent); (3) taxes (77 percent); (4) pension/retirement claims (74 percent); (5) reclamation claims (62 percent); and (6 & 7) a tie between restitution/criminal fines and marital property settlement claims (each at 54 percent).

Consumer debtors often attempt to prioritize non-dischargeable claims and health care claims in their Chapter 13 plans. However, with the exception of the family obligations and restitution/criminal fines noted above, a majority rejected priority treatment of such other non-dischargeable claims as drunk driving/boating liability and educational loans, and rejected priority treatment of health care claims.

In business cases, priority is granted to fishermen. Certain other claims often receive a de facto priority because of restrictions on contract rejection for collective bargaining agreements, restrictions on abandonment for environmental liabilities, and statutory "trust" provisions such as the Perishable Agricultural Commodities Act (PACA). A majority rejected priority treatment for each of these types of claims. Finally, there have been reform proposals advocating a priority for non-tax governmental claims and a priority for involuntary creditors such as tort claimants. However, three-quarters of the respondents rejected priority treatment of non-tax governmental claims and of mass tort/products liability claims.

Difficult policy choices and practical problems are presented by tort claims, environmental liability, and certain other claims that are not yet liquidated at the time of plan confirmation. The majority (52 percent) favored estimating such claims for both voting purposes and distribution purposes. Approximately one-quarter favored estimating the claims for voting purposes only. Only eight percent felt that the claims should be unaffected by confirmation, with less than five percent supporting either disallowance of such claims or delaying confirmation until the claims could be liquidated. There was no statistically significant difference in the views of those professionals specializing in the largest Chapter 11 cases.

With respect to claims trading, 56 percent of respondents felt that the transfer or sale of claims (other than publicly-traded claims) should not be subject to court approval. Opposition was even stronger in the districts with the largest reorganization cases, with 63 percent opposing a court approval requirement. Of those favoring a court approval requirement, there was no consensus as to the nature of the court's review. Respondents favoring court review were asked about four possible standards for that review and were asked to identify all that should be considered by the court. However, none was endorsed by even a third of those respondents. Only 30 percent thought the court should review the adequacy of disclosure, and only 29 percent thought the court should review the impact that the transfer would have upon the reorganization process. Only 15 percent thought that the court should review the price paid and only 12 percent thought that the court should review the impact that the transfer would have upon competition.

Further, although claims are often purchased at a price well below face value, 68 percent believed that the rights of the purchaser (the transferee) of a claim should be based upon the face amount of the claim, rather than the price paid for the claim. There was no statistically significant difference in the views of those prof essionals specializing in the largest Chapter 11 cases.

Finally, in both claims trading and in certain other situations, the same claimant may hold multiple different claims that are included in a single class under the plan of reorganization. A small majority (52 percent) felt that in such cases the owner should not be treated as a single claimant, but rather as one claimant with respect to each claim owned. However, the opposite view prevailed among those professionals specializing in the largest Chapter 11 cases, with 57 percent favoring treating the holder of multiple claims as a single claimant.


FOOTNOTES

[1]The survey was designed and conducted in accordance with generally accepted survey techniques and statistical principles by Dr. Louis H. Primavera, Ph.D., and Dr. Bernard S. Gorman, Ph.D., of the St. John's University Graduate School of Arts and Sciences. A detailed explanation of the survey methodology is contained in the report of Dr. Primavera and Dr. Gorman, titled "Methodology for the Membership Survey for the American Bankruptcy Institute." For the purposes of this Report, and following accepted statistical procedure, the probability level of less than or equal to .05 was selected as the test of significant association.

[2]Respondents devoting at least 50 percent of their practice to debtor representation, creditor representation, or trustee representation were defined as debtor representatives, creditor representatives, or trustee representatives, respectively. Respondents devoting at least 25 percent of their practice to the representation of official committees were defined as committee representatives.

[3]The ten largest cities were defined as the districts that included the ten largest U.S. cities by population based on the 1990 Census. Mixed districts were those including cities ranked 11th through 50th, unless the district was already included in the "ten largest" cohort. The remaining districts were defined as rural.

[4]Business Chapter 11 professionals were defined as those devoting at least 50 percent of their practice to business Chapter 11 cases. Those who also devoted at least 50 percent of their practice to the representation of debtors or creditors were defined as business Chapter 11 debtor representatives or business Chapter 11 creditor representatives, respectively.

[5]As a proxy for this group, this cohort was defined to include respondents who both devoted at least 75 percent of their practice to business Chapter 11 cases and who listed their primary districts as either the Central District of California, the District of Delaware, the Northern District of Illinois, or the Southern District of New York.

[6]Those districts were the Southern District of California, the District of Delaware, the Northern District of Illinois, and the Southern District of New York.