STATEMENT OF THE AMERICAN BANKRUPTCY INSTITUTE|
NATIONAL BANKRUPTCY REVIEW COMMISSION
JUNE 20, 1996
Good morning, members of the Commission. My name is Robert M. Zinman and I am the President of the American Bankruptcy Institute (ABI). As you know, the ABI is the nation's largest multi-disciplinary organization devoted to research and education on issues related to insolvency, with over 5,200 members. In addition to my current role at ABI, I teach bankruptcy and creditor's rights at St. John's University School of Law and am Senior Counsellor at Thacher, Proffitt & Wood in New York City.
With me today are: Deborah D. Williamson, ABI's Vice President for Publications and a partner at Cox & Smith, Incorporated in San Antonio; Richard M. Meth, another member of the ABI Board of Directors and a partner at Friedman Siegelbaum in Roseland, New Jersey; and the Hon. Ralph H. Kelley, a former member of the ABI Board, who has served as a bankruptcy judge in the Eastern District of Tennessee since 1969.
On behalf of our 60 member Board of Directors, we are honored to appear before you this morning. As we said to you last fall in New Orleans, we are pleased to assist in your thoughtful and important work. The ABI continues to strongly support the Commission concept. We applaud the most recent efforts of Chairman Williamson and the Commission to provide focus and direction to the Commission's sizeable task.
As you know, the ABI is not a lobby group and, as such, does not generally take advocacy positions on matters of substantive bankruptcy policy. We carry no brief for any particular constituency, but rather are committed to the simple notion that a modern commercial society must have a method for dealing with financial failure, and that whatever mechanism we select ought to at least be fair, efficient and effective. To extent that we appear to take positions today on any particular issue, we will be giving you our best judgement as individuals, rather than official ABI positions.
THE ABI BANKRUPTCY REFORM STUDY PROJECT
For more than a year, ABI has been engaged in a series of analytical and survey projects -- captured under the name of the ABI Bankruptcy Reform Study Project -- designed to help frame the issues most in need of attention by this Commission. Before turning to my colleagues for their presentations, I would like to provide you with a brief update of these projects, two of which are completed. Mr. Meth will describe the third project, a comprehensive survey of our entire membership on current bankruptcy issues.
The National Symposia Series
The first project the nine-part series of national symposia held around the country on key bankruptcy issues. The series covered the following issues and questions:
* Defining Success in Business Bankruptcy
* Should the Automatic Stay Be Abolished?
* The Biased Business of Venue Shopping
* Professional Compensation - Does Bankruptcy Cost Too Much?
* Administrative Oversight: Who Should Guard the Hen House?
* Exclusivity and DIP Management: Too Much Debtor Control?
* Labor Unions and Bankruptcy: Too Much Leverage?
* How Consensual Workouts Are Shaped By Business Bankruptcy
* The Impact of Bankruptcy on Free Market Competition
The coordinator of the symposia series is Jack Butler of Skadden, Arps, Slate, Meagher & Flom in Chicago. Much like the roundtable approach favored by this Commission, each symposium featured leading practitioners, judges and academics in a roundtable discussion. The debates were lively, as we intentionally chose people we knew would be in substantive disagreement. Each symposium was a multi-hour program and all of the participants submitted detailed papers in advance, defending their respective positions. These papers were bound and published. All of the materials, including the transcripts of the debates in the series, have been submitted to the Commission. Appended to our statement is an Executive Summary of the nine symposia programs. (Exhibit "A")
The American Bankruptcy Institute Law Review
Also completed are two issues of the American Bankruptcy Institute Law Review devoted to the Bankruptcy Reform Study Project. As one who also serves as Chairman of the Advisory Board of the Law Review, I am proud of the quality of the topical analyses contained in these volumes, written by some of our leading judges, academics and practitioners. Topics covered include: employee interests in bankruptcy; the appropriate cramdown interest rate; product liability, mass tort and environmental obligations in bankruptcy, and bankruptcy's clash with tax policy.
Two articles are of special note in that they report on empirical work initiated in the Central District of California, the single largest district for bankruptcy filings. Judge Samuel L. Bufford analyzes the data on the effect of aggressive judicial case management techniques, finding that even modest case management can squeeze a substantial amount of delay out of Chapter 11 cases. Judge Lisa Hill Fenning studied 500 Chapter 11 cases on her docket and found a striking similarity among a large proportion of her docket: similarities of size, predominance of real estate related issues, chances for confirmation and length of time to termination. This consistency suggests that roughly 80 percent of Chapter 11 debtors need a simplified, standardized "off the rack" Chapter 11 process, rather than a custom-made "designer" Chapter 11 process.
As with the symposia, attached to our statement is an Executive Summary of the articles contained in these issues of the Law Review. (Exhibit "B")
The ABI Membership Survey
Coming this summer is the third major component of the Bankruptcy Reform Study Project, a comprehensive survey of all 5,200 ABI members, aimed at identifying current problems and potential solutions facing the Commission. The survey is unique; we are aware of no other organization attempting to survey a broad cross-section of bankruptcy professionals.
The survey is designed to solicit views on a variety of bankruptcy policy issues, such as the causes of business and consumer bankruptcies, what the objectives of bankruptcy should be, and whether the scope of the automatic stay or exclusivity period should be limited. Members' impressions of various hot issues in consumer and business bankruptcy will be covered, as well as claims rules, preferences, exemptions, dischargeability, employment rules for professionals, jurisdictional and administrative issues, and perceptions of abuses in the system. Attached to this testimony is a draft copy of the survey questions. (Exhibit "C")
A team of ABI members, led by Richard M. Meth, Esq., have helped design the survey, with the help of social science professionals at St. John's University. We expect that the survey will take most people about 30 minutes to complete. Responses will be analyzed and cross tabbed by researchers at St. John's and the results will be released in time for the ABI's Winter Leadership Conference, December 5-7, in Rancho Mirage, California.
Of course, we plan to share the results with this Commission. The findings may well support the judgements the Commission has made with respect to the issues in need of reform or otherwise assist the Commission in the writing of your final report.
OTHER ANALYTICAL ASSISTANCE
Many of ABI's over 20 standing committees have been at work preparing analyses of interest to the Commission. In particular, our committees were directed by Immediate Past President Robin E. Phelan, Esq. to identify areas where a particular bankruptcy provision is subject to conflicting interpretation in different jurisdictions.
One area where there appears to be a great number of conflicts is consumer bankruptcy. Today we are submitting for your review a set of short white papers on a number of consumer topics, including valuation under §506(a); the impact of serial and simultaneous filings; the conflict between the claims allowance process and the binding effect of confirmation in Chapter 13; mixed collateral under §1322(b)(2); who may be a debtor under §109(g); and the appropriate rate of interest for secured claims. (Exhibit "D")
Finally, we are submitting a series of papers which suggest specific reforms from the perspectives of a variety of different players in the bankruptcy system: secured creditors, unsecured creditors, consumer debtors, commercial debtors, tax and accounting professionals, and bankruptcy judges, among others. Departing from our usual practice, we asked each of these writers to become advocates; to not simply identify problems, but to suggest solutions from their perspective. This work product, titled "The Bankruptcy Review Commission's Agenda", was first released at the 1995 ABI Annual Spring Meeting, and is also included with our statement today. (Exhibit "E")
DISCUSSION OF QUESTIONS RAISED IN THE COMMISSION'S MAY 12, 1996 "ISSUE BASKETS" MEMO
We have reviewed the draft summary of eight discrete topical areas, prepared by the Commission's reporter, Prof. Elizabeth Warren. We have asked a number of ABI leaders to comment directly on the questions raised by Prof. Warren's paper.Philadelphia); Hon. John K. Pearson (U.S. Bankruptcy Court; Wichita, Kans); Richard M. Meth (Friedman Siegelbaum; Roseland, N.J.); and Mary Jo Heston (Lane Powell Spears Lubersky; Seattle). What follows is a summary of the responses in each of the topic areas:
Improving Jurisdiction and Procedure
It is the opinion of most experienced bankruptcy practitioners that appeals to the U.S. District Court are not only time consuming and expensive, but because the appeal is conducted by another trial judge, albeit an Article III district judge, the resulting appeal lacks precedential value and is frequently not afforded the degree of analytical review that it receives by an appellate panel. The historical background behind the present appellate structure to the U.S. District Court is largely based on outdated reasons that were valid only during the period of the Bankruptcy Act.
With respect to the Article I/Article III issue, the most significant recommendation that can be made by the Review Commission should be directed to the existing problems arising out of an Article I court system. There are many unanswered questions and unresolved issues concerning the exercise of jurisdiction that can only be resolved by the restructuring of the court as an Article III court. Such restructuring need not be disruptive and a transition period could eliminate many of the existing concerns that bankruptcy judges presently voice. Should bankruptcy judges remain as Article I judges, the exercise of greater judicial powers will only add to the already existing jurisdictional problems that exist with respect to such matters as contempt, jury trials, and related issues.
With respect to the questions surrounding the withdrawal of the district court's reference to the bankruptcy court, as long as the bankruptcy court remains as an Article I court, the vesting of jurisdiction initially in the U.S. District Court would seemingly mandate some form of reference system. On the matter of mandatory abstention, if the bankruptcy power is to be exercised in such a way as to deal with the often comprehensive and complex issues that arise in Chapter 11 cases, abstention should be discretionary and not mandatory.
The Article I/Article III choice also has implications for such related questions as personal injury jurisdiction, jury trials and contempt powers. To the extent that the bankruptcy court is restructured as an Article III court, there would appear to be no rational basis for excluding personal injury claims from the court's jurisdiction. Similarly, because of constitutional concerns, Article I bankruptcy courts should only be permitted to conduct jury trials with the consent of the parties, and should exercise contempt powers only as strictly circumscribed with review by the district court.
Finally, there should be some additional restrictions place on venue options, because of the perceived abuse resulting from forum shopping. Ultimately, the exercise of more discretion by the bankruptcy court would permit the proper transfer of cases when needed.
To summarize, the development of bankruptcy law is becoming more significant in both the commercial and consumer areas because of the changing and complex nature of evolving economic and business structures. These developments, together with the many unanswered questions discussed above, mandate that the court system be reconstituted as an Article III court. A court system that deals with significant economic issues, as well as its impact on individual consumer rights and duties, deserves the full array of protections afforded only by an Article III court.
What is the goal of consumer bankruptcy?
To goal should be to provide rehabilitation to the honest but overextended debtor. The rehabilitation may occur under chapter 7, straight bankruptcy, or chapter 13, adjustment of debts of an individual with regular income.
Should audits of debtor's financial backgrounds become a part of the consumer bankruptcy system?
It would be a monumental and expensive task to audit 1,600,000 husbands and wives who will file bankruptcy cases this year. Most debtors are insolvent and have little property, but every debtor is required to attend a meeting of creditors. The debtors may be questioned by the trustee and interested parties. The answers given by the debtors, along with their sworn schedules, should indicate whether or not the trustee should seek an audit.
Is repeat filing a significant problem? How can it be controlled?
While there are repeat filings, in most jurisdictions it is not a significant problem. One of the ABI Consumer Bankruptcy Committee papers addresses "The Effect and Impact of Successive or Serial Bankruptcy Filings." While there are case citations from all circuits, the cases are relatively few and seem to be concentrated in the first circuit.
As to how repeat filings can be controlled, Congress amended the Bankruptcy Code with Section 109(g) which provides that an individual may not be a debtor is during the preceding 180 days if (1) a case was dismissed by the court for failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title. This is a reasonable attempt by Congress to control repeat filings.
Should the bankruptcy system explicitly permit or prohibit pre-bankruptcy planning in consumer cases?
As a practical matter it would be difficult to "prohibit pre-bankruptcy planning." There is little need for pre-bankruptcy planning in most consumer cases because the debtors do not have any property which is available for creditors. They are truly insolvent. In most cases creditors and a good trustee can set aside pre-bankruptcy transfers. It is problematic whether additional legislation could cure this problem.
Does section 707(b) of the Bankruptcy Code in its current form serve a useful function?
Most people believe this section is awkwardly written, but on a few occasions it has been used in some jurisdictions to dismiss a bankruptcy case where there was "substantial abuse". It has been of little use in the regions, such as the southeast, where there are so many chapter 13 cases.
What are the consequences to debtors and creditors of decreasing the scope of the bankruptcy discharge? Should it be further constrained? Should it be restored to its original scope?
Adjusting the scope of the bankruptcy discharge is essentially a political question. Often special interest groups have secured amendments to exclude their debts from discharge. Decreasing the scope of a discharge in a chapter 7 is somewhat different from decreasing the scope of a discharge in a chapter 13. In 95% of chapter 7 cases there is no dividend to creditors and if there is a discharge, the creditors receive nothing. In chapter 13, the discharge is granted only after all payments have been made under the plan.
It might be useful to "increase the scope" of the bankruptcy discharge in chapter 13 because this may be the only hope of rehabilitation for the debtor and the only hope of any payment to the creditor. Confirmation would require good faith and substantial payment. Substantial payment would mean simply as much as the debtor could afford to pay for a period of up to five years.
Should the bankruptcy system permit in forma pauperis filing of bankruptcy petitions?
As you know there is an experimental program in several test districts at this time. Filings have not been substantial under the pilot program. Unless there is a very good legal aid program in a community where there are in forma pauperis filings, it means that each bankruptcy petition will be filed pro se. The debtor's lack of understanding may lead to many problems, questions, and corrections. It will impose extra work on the clerks' offices and extra work on the judges. It may even result in injustice. When a debtor files bankruptcy, there is almost always a need for a lawyer.
Should property exemptions in bankruptcy be uniform in all fifty states? If not, should the federal exemptions provide a floor to state exemptions? Should the federal exemptions provide a ceiling on state exemptions?
If we have uniform laws of bankruptcy in all 50 states, it would appear to be equitable to have uniform federal exemptions in all 50 states. This, however, is a difficult political issue.
Should consumer bankruptcy be organized around a Chapter 7/Chapter 13 split? If so, should the differences between the chapters be expanded or contracted? Should individuals be steered into one chapter or the other?
Consumers need two separate and distinct chapters. Chapter 7 is meant for debtors with catastrophic debt, but no income stream to service the debt. In such cases there would be no probability of a debtor having a plan which would pay a substantial amount of the debt. Only a chapter 7 for an honest debtor would allow relief in this situation.
On the other hand, chapter 13 is meant for individuals with disposable income who may be able to pay a reasonable dividend to creditors. In the most successful chapter 13 jurisdictions, most of the plans which we confirm not only pay secured creditors, but propose payments of 100% to unsecured creditors. Millions of dollars are paid to creditors across the United States. There is real rehabilitation where families are held together, homes are not foreclosed, automobiles are not repossessed, and wages are not garnisheed. In many jurisdictions chapter 13 is not only good for debtors, it is good for creditors.
Should more be done to provide consumer counseling alternatives to bankruptcy?
Consumer counseling is a good thing, but in many sections of the United States it simply is not available to many debtors. Some chapter 13 trustees do a good job of consumer counseling after the debtor is in a chapter 13. This practice needs to be specifically authorized by statute or it may be discontinued by the United States Trustee program.
Should consumer education become a part of the bankruptcy process? Who should perform this function?
Again, consumer education would be a good thing. As to who should perform the function for both chapter 7 and chapter 13 debtors, it would seem that the Office of the United States Trustee, a neutral government agency, is best situated to provide such consumer education. In particular, if the United States Trustee system iss going to be funded in part by fees from from each chapter 13 case totaling millions of dollars each year, perhaps a portion of the fund could be used to provide consumer counseling.
Should small businesses ber permitted to reorganize in Chapter 13? Or should business bankruptcies be handled in other chapters?
There are a number of advantages to both debtors and creditors by allowing small businesses to use chapter 13. Chapter 11, in contrast, is more costly, cumbersome and time consuming. However, there would need to be several further changes made to chapter 13 to make it a fully effective alternative. First, the eligibility limits would have to be broadened to include corporations and partnerships and the debt limit should be increased to $1.5 million, the same amount used for family farmers in chapter 12. Second, payment for non-consumer secured claims should include periods longer than five years in order to adequately deal with commercial real estate and equipment loans, much as section 1229(b)(9) does in chapter 12. Third, section 1304, which defines "debtor engaged in business" should be expanded to include corporations and partnerships; for those debtors, the U.S. Trustee should be given the power, if it is deemed appropriate, to appoint a creditors committee in the manner provided under section 1102 and having the powers under section 1103. Finally, section 1321, which provides for filing of plans, should be amended to require the debtor engaged in business to file its plan within 60 days of filing the petition, which period may be extended an additional 60 days upon substantial justification.
Is retail or wholesale valuation more appropriate for determining a creditor's allowed secured claim for property that a debtor wants to keep in a Chapter 13?
An exhaustive look into this question is provided in one of the ABI Consumer Bankruptcy Committee white papers. Courts have answered the question in many ways and it continues to be a case by case decision. It would be very difficult to find a legislative solution to the valuation problem.
Chapter 11: Uses and Consequences
What role does Chapter 11 serve in the American economy? How do parties use the system to reorder business relationships? Can the benefits of job preservation and preservation of going-concern value be strengthened?
The primary role of Chapter 11 is to preserve going concern value for the benefit of the interested parties and to provide a forum for the orderly disposition of a business entity as a going concern. Normally parties utilize Chapter 11 to extend the payment of obligations, convert debt into equity or to compromise debt. However, increasingly Chapter 11 has been utilized to extort participation for former equity or junior interests that have no continuing economic stake in the debtor. Jobs can only be preserved if there is a viable economic entity that is capable of preserving. In addition, efficiency will often dictate that jobs be eliminated to preserve going concern value.
Does the Bankruptcy Code adequately protect employee benefits?
Employee benefits are, in general, adequately protected by the bankruptcy system but the position of those benefits should be simplified and clarified. The PBGC should not get a springing partial lien when the minimum funding payments are not made. Either ERISA should give the PBGC a lien on specific categories of assets or Congress should decide that the minimum funding obligations should be unsecured. It would be better to limit employers from withdrawing excess funding from plan assets when times are good so that funds will exist when times are bad.
Should old equity be permitted to paticipate in the reorganization of a business if it contributes new value? How should such participation be regulated?
Old equity should be allowed to bid on the equity of the reorganized debtor in connection with a plan of reorganization but exclusivity should be eliminated at that point in time and the other interests should also be allowed to bid on the equity by filing their own plans. The exception should be if the old equity files a 100% payment plan. In essence, when a debtor files a Chapter 11 case it should be up for bid as a going concern unless the equity proposes a 100% plan.
What should be the rules for including claims together in the same class? How much freedom should the plan proponents have to make classification decisions?
Similar claims should be classified together unless there is a real good reason for separate classification. Gerrymandering should not be permitted.
Small Businesses and Partnerships: A Special Case?
Is a partnership agreement an executory contract?
While this issue has generated some debate, as the First Circuit noted in the Leroux case, virtually every court to consider the question has found a partnership agreement to be an executory contract, thus triggering the general applicability of section 365 of the Bankruptcy Code.
Does the trustee exercise the rights of partners who are debtors or are those rights reserved to the debtor?
A bankruptcy trustee, in a chapter 7 or 11 case, will succeed to the economic rights of the debtor-general partner, i.e. the right to surplus, profits or distributions and the right to proceeds of the sale of the partnership interests held by the debtor. A growing number of cases suggest that a chapter 11 trustee may also, in an appropriate case, succeed to the rights of the debtor-general partner to manage the partnership, and that a partnership agreement is capable of assumption and assignment by a chapter 11 trustee where the nondebtor partners will not be prejudiced by assumption and assignment and adequate assurance of future performance by the assignee is clearly established. The courts are more split on this point, however, and the case law is still developing. This trend probably reflects an increasing realization that--at least in mature limited partnerships with real estate or like investments--the nondebtor partners are financial investors, and, in some cases, management is fungible.
Are clauses automatically converting a general partner's interest to a limited partnership enforceable in bankruptcy? Clauses compelling the sale of the bankrupt partner's interest?
Most courts have found such "automatic conversion" clauses, and similar clauses in partnership agreements, to be unenforceable "ipso facto" clauses. An excellent discussion of the applicable statutory construction and bankruptcy policy issues relevant to this issue is found in the First Circuit's Leroux decision, authored by Circuit Judge Cyr, a former bankruptcy judge. Some courts have upheld the compelled sale of the debtor's partnership interest, particularly where the case was under chapter 7, provided the sale mechanism was designed to generate fair market value for the sale of the interest. (These same courts are usually in the minority which hold that a general partner's filing dissolves a partnership and/or that a partnership agreement is not capable of assumption). A growing number of decisions hold that compelled sale provisions are unenforceable in chapter 7 and 11 cases, even if designed to sell the interest at market value, such courts stating that the debtor-partner's bankruptcy estate--and its creditors--are entitled to any premium upon the sale of the interest.
Under what circumstances may the bankruptcy court stay creditor actions against non-debtor partners for their liability for partnership debts? Are there differences during the pendency of the case and after a plan is confirmed and the case is closed?
The majority of cases hold that the automatic stay does not protect the nondebtor partners when the partnership files for relief under the Bankruptcy Code. However, courts will issue injunctions where necessary to protect the partnership's--and the partnership bankruptcy estate's--right to contribution from general partners as necessary to satisfy partnership debts. In chapter 7, this right is clearly derived from section 723 of the Bankruptcy Code, which provides the trustee with a right to pursue partners, to the extent they are liable under state law, for any deficiency amount to the extent partnership assets are insufficient to satisfy claims against the partnership. In a chapter 11 case, where section 723 does not apply, the partnership's--and the trustee's or debtor-in-possession's--right to seek contribution from partners is derived from state law. The bankruptcy courts have issued temporary injunctions under section 105 preventing partnership creditors from pursuing general partners so that the trustee's rights would be preserved or a plan negotiated whereby such partners make net worth contributions to fund the partnership's plan of reorganization. Such injunctions are usually conditioned upon an injunction directed to partners preventing disposition of assets. Such injunctions for the benefit of and against partners were a central feature of the large professional partnership cases. Those cases also featured a permanent injunction protecting partners from claims of partnership creditors, as part of the plan of reorganization, provided such partners contributed a predetermined amount to the funding of the plan. Partners who did not contribute, or who default on contribution promises, lose the benefit of the injunction. Proposed statutory provisions clarifying the right of contribution in a chapter 11 case, and providing a clear statutory basis for the temporary and plan injunctions noted above, are central features of the proposed amendments of the ABA's Ad Hoc Committee on Partnerships in Bankruptcy, and these particular provisions are supported by the ABI's Subcommittee on Partner and Partnership Reorganization.
Should the bankruptcy court have the power to prohibit general partners of the bankruptcy partnership from transferring non-partnership assets during the pendency of the case?
The bankruptcy courts do and should have the power to enjoin nondebtor general partners from transferring their assets during the pendency of the partnership's bankruptcy case. Such an injunction is a necessary quid pro quo for the injunction protecting such partners. The affected partner should have the ability to seek relief from such an injunction, as should such partner's nonpartnership creditors. Provisions clarifying the court's power in this respect in chapter 11 cases, and providing conditions and procedures for such a stay and relief from such stay, are part of the ABA proposed amendments. The proposed amendments do need to be clarified to allow both partner and partner creditor requests for relief.
Should the bankruptcy court have the power to compel non-debtor general partners to disclose information about their financial condition? Should this information be sealed?
Rule 1007(g) of the Rules of Bankruptcy Procedure provides that the court presiding over a partnership bankruptcy case "may order any general partner to file a statement of personal assets and liabilities within such time as the court may fix." The ABA proposals also provide a statutory disclosure requirement for general partners when the partnership seeks bankruptcy relief. Such disclosure is essential to the functioning of the partnership case, and the court's power to order such disclosure should be preserved and strengthened. Except in rare cases, for cause shown, such information should not be sealed, since the information is relevant to many issues in the liquidation or reorganization of the debtor partnership.
What rights should the Chapter 7 trustee have against general partners? What rights should the Chapter 11 estate have against the partners?
The rights of the trustee currently contained in section 723 of the Code should be equally available to chapter 7 and chapter 11 trustees, a result which would accomplished if the ABA proposals on partnership bankruptcy, as published in the April, 1996 draft, were adopted.
Should non-partnership creditors have priority over partnership creditors as to non-partnership assets of general partners who are in bankruptcy? Not in bankruptcy? As to partnerships in Chapter 7? Chapter 11?
Nonpartnership creditors and partnership creditors should have equal priority claims to the assets of general partners; any return to the "jingle rule" should be avoided. In partnership chapter 11 cases, however, such a priority is often, in fact, the result of requiring the general partner to contribute an amount equal to his or her net worth.
Should section 1111 be clarified to provide that conversion of non-recourse debt to recourse debt does not create general partner liability on such debt?
While there is no substantial authority that section 1111 creates general partner liability on otherwise nonrecourse debt, the section should be clarified to avoid any argument that such liability is created. One of the ABA proposals would provide such clarification.
Should the Code authorize creation of committees of partners?
In large partnership cases, partner committees are helpful and the court should have the power to authorize such committees. Appointment of a committee should not be mandatory, and should be considered on a case-by-case basis.
What is the status of new partners, former partners, special partners and partners by estoppel?
For purposes of considering the applicability of the Bankruptcy Code to them and the jurisdiction of the court over them, no distinctions should be made among current, former, new or special partners, or partners by estoppel. However, the liability of any general partner for partnership debts is a matter of state law, and should remain so, and such state law may--and usually does--make such distinctions in determining which type of partner is liable for which debts of the partnership. The extent of the partner's liability for partnership debts at state law determines whether, and to what extent, the partner may be compelled to contribute to a deficiency under current section 723, and is a critical factor in determining the partner's required contribution, if any, to the funding of a plan for the partnership.
Are any statutory amendments needed to deal with LLPs and limited liability companies?
Modest statutory amendments may be advisable with respect to LLPs and LLCs. The Bankruptcy Code should be clarified to ensure that an LLC is an eligible debtor under the Code. Based on the limited current case law on the bankruptcy of members of llcs, the same issues arise in such cases as are present when a general partner seeks relief under the Bankruptcy Code, i.e. does the filing dissolve the LLC, is the LLC operating agreement an executory contract capable of assumption and/or assignment, are ipso facto clauses enforceable, etc.
Government As Creditor Or Debtor
Prof. Warren's memorandum asks what priority, if any, should the claims of the PBGC have upon termination of an insured pension plan. Currently, the PBGC asserts several types of claims in the bankruptcy proceeding of a debtor that maintains a pension plan with insufficient assets to satisfy all of its benefits promises: a claim for the total shortfall (contingent on termination of the plan) (the "underfunding claim"), a claim for any unpaid "minimum funding contributions" owed the plan under the requirements of the Internal Revenue Code (the "contributions claim"), and a claim for any unpaid insurance premiums due the PBGC (the "premium claim"). The PBGC asserts a variety of priorities for these claims.
Underfunding claim: In the usual case, where the pension plan terminates after the bankruptcy petition is filed, PBGC contends that it is entitled to first priority for at least a portion of the underfunding claim, in the amount of the smaller of (a) the amount of the underfunding claim, or (b) 30 percent of the aggregate "net worth" (as defined in ERISA) of the debtor and all members of its "controlled group" (as defined in ERISA and the Internal Revenue Code). The balance of the claim in asserted as a general unsecured claim.
Contribution claim: If an employer fails to make required pension contributions of $1 million or more, the Internal Revenue Code ("IRC") states that a lien arises in favor of the pension plan, enforceable by the PBGC. The IRC also provides that the amount with respect to which this lien is imposed is, in bankruptcy, "to be treated as taxes due and owing the United States". In the typical case, an employer will file its bankruptcy petition before the lien is triggered; based on the IRC language, the PBGC then contends that is entitled to first priority for any contribution claims as to which the lien would have been imposed if the employer were not in bankruptcy. The PBGC further contends that any contribution claim attributable to the post-petition period is an administrative expense, entitled to first priority; that any contribution claim attributable to the period within 180 days prior to the bankruptcy filing is entitled to fourth priority; and that all other contribution claims are general unsecured claims.
Premium claim: The PBGC contends that a premium claim attributable to a pension plan year beginning after the petition is filed is an administrative expense, i.e., an ordinary and necessary expense of the estate, entitled to first priority. For premium claims attributable to plan years beginning prior to the filing of the petition, the agency asserts general unsecured status.
Because the PBGC's claims are often among the largest in a bankruptcy, they lead to litigation in numerous cases. And this litigation increases both the duration and expense of many bankruptcies. Repeatedly over the past few years, the courts have rejected priority for any of these claims. However, because the PBGC has colorable arguments for the claims it makes (many of them are based on interpretations of statutory language that are not unreasonable), the PBGC continues to assert the same priorities in every case, notwithstanding the many adverse court decisions.
We recommend that the Bankruptcy Review Commission clarify the existing state of the law and make clear that the claims of the PBGC are not entitled to priority. Since PBGC already has a claim for all contributions or benefit claims, according it a priority will be at the expense of the unsecured creditors and not the shareholders. Expansion of the priority to include plan termination claims would result in the elimination of any distribution to unsecured creditors in some cases and greatly impair any such distribution in others. It is not at all evident why amounts due to the PBGC should be accorded a priority over amounts due to, for example, other government agencies (without such a priority), labor unions (under section 1113), or other creditors. In fact, the PBGC has more opportunities before bankruptcy to enforce obligations due to it, such as through its right to insist on obtaining liens before providing funding waivers, than many other creditors. An expansion of PBGC's priority would be at the expense of these other creditors. This is, at bottom, a policy issue for the Commission and ultimately Congress to decide but from the standpoint of increasing the chances of successful reorganizations, an expansion of the priority would be ill-advised.
A similar issue arises with respect to PBGC's claim that, if a plan is terminated post-petition, all obligations due under the plan are entitled to administrative expense status. Virtually all courts that have addressed this issue have rejected PBGC's claim to administrative expense status on the ground that, under generally applicable law, only claims related to post-petition services are entitled to administrative expense status. Under those cases, contributions due with respect to post-petition service would be entitled to administrative expense status, but contributions respecting pre-petition service would not be, even if the plan is terminated post-petition. This issue should be clarified by the Commission to endorse the position taken by these cases.
As a result of the 1994 amendments to the Bankruptcy Code, the PBGC has been entitled to representation on creditors' committees. There is some reason for concern that PBGC represents such a special interest that it cannot represent the interests of unsecured creditors generally. If PBGC is accorded priority status, it would appear inappropriate for it to serve as a representative of the unsecured creditors. If it does not have such status, then its service on creditors' committees would not appear to be inappropriate in cases where it holds a substantial unsecured claim.
There are several factors that should be considered in developing bankruptcy tax laws. As a general rule taxes should not be the driving force that would cause companies to file one petition over another. Thus, bankruptcy laws should as much as possible be designed to preclude debtors from chapter shopping for the greatest tax advantage. For example, under current law some individuals might find it an advantage to file a chapter 13 petition over chapter 11 due to the advantage offered by the discharge of taxes.
Tax laws should not be a major hindrance to the bankruptcy process (providing a way for the debtor to reorganize or giving the debtor the right to a fresh start). As much as possible, without creating a situation where debtors file only because of the tax advantages, the tax laws should facilitate the restructuring process. Most importantly, tax laws in a bankruptcy case should not be more burdensome on the debtor than is the case in a nonbankruptcy situation.
The extent to which the tax law is used to facilitate a successful reorganization, or fresh start, should not be so great as to create a situation where healthy companies find it an advantage to file a bankruptcy petition or unhealthy companies find it a real advantage to file a bankruptcy petition for the tax benefits rather than develop an out of court workout. Thus, any special tax considerations that are given to companies in a bankruptcy petition, should, to the extent possible, be available in an out-of-court workout.
Taxing authorities may need and deserve special consideration to preserve the rights provided them through nonbankruptcy laws; however, special considerations beyond these rights infringe on the rights of both secured and unsecured creditors and on the ability for reorganization or fresh start and as a result should be minimized.
Should traceable payments of trust fund taxes to segregated funds be immunized from voidable preference recapture?
The Supreme Court in Begier v. IRS, 495 U.S. 53 (1990), finding tax collected as a trust not to property of the debtor, placed the taxing authorities in a position that is superior to that which they could obtain in a nonbankruptcy environment. While in general taxing authorities have not used this power to the extent that it is available, it appears that it is not good law and should be modified. This law has the potential of placing the taxing authority above the rights of a secured lender. It allows the IRS to take unsecured assets, while staying the actions of secured lenders. See also, McQueen & Williams, Tax Aspects of Bankruptcy Law and Practice, Chapter 14, §14.08 (McGraw Hill 1994).
This provision can have a major impact on business that are operating in bankruptcy. Companies often use some of the float created by not being required to remit all trust fund taxes at the time they are collected. However, once a company filed bankruptcy, any taxing authority can have an immediate impact on the ability of the debtor to reorganize by requiring these companies to make immediate payments of their trust fund taxes. Little recourse is available for the debtor since the property sought by the taxing authorities is not property of the estate. Under the current law, bankruptcy creates a situation that is considerably different in bankruptcy than outside of bankruptcy. Thus giving the taxing authorities an advantage in bankruptcy that does not exist in nonbankruptcy situations. Furthermore, the Service has other remedies that are available such as these taxes have a priority over other unsecured creditors, have no time limit for priority, and can be collected from responsible persons. Thus, it appears that the Service obtained from Begier a right that is not needed from effective collection and could be a burden to the estate at a time when cash is critical to effective reorganization.
Two possible changes that might eliminate or minimize the problems described include: (i) modify section 541 to provide that trust fund taxes are property of the estate. Under this change the trustee or debtor in possession would be required to provide for the taxes in liquidation or reorganization as a priority tax item. This requires the taxing authorities to use the general tax provisions for their collection efforts; or (ii) modify section 541 to provide that trust fund taxes are property of the estate unless such taxes have been paid. This approach would preclude the trustee or debtor-in-possession for recovering previous payments, but it would prohibit any immediate efforts to collect the trust fund taxes. This solution will encourage the taxing authorities to preserve debtors to made payments as they are due, especially from troubled business that might file. It also protects the responsible person by not allowing the trustee or debtor-in-possession recover taxes as a preference for which the officer may be personally liable.
Should the debtor be permitted to allocate payments under a plan?
The purpose of Chapter 11 is to provide a basis for the debtor to reorganize. Whether it is involuntary or voluntary is irrelevant. In an out of court workout, the debtor is allowed to allocate such payments, and there appears no justification to handle the situation any differently in a Chapter 11 filing. Allocation is a right that is given to the taxpayer and as a result there is no reason to why it should be different in a reorganization case. There is likewise no reason to burden the debtor with the obligation to show that allocation is necessary for the plan to work. This is an example of a situation where we have made bankruptcy more burdensome. Accordingly, the I.R.C. should be changed to provide that payments under a plan (Chapter 11, Chapter 12 or Chapter 13) are voluntary and thus give the debtor the authority to allocate them. The change could possibly be made through section 505(a) of the Bankruptcy Code rather than through the I.R.C.
Should the list of the anti-injunction provisions of the I.R.C. be amended to incorporate Bankruptcy Code section 505(a)?
The anti-injunction provision should be modified to recognize the preemptive jurisdiction of the bankruptcy court over tax matters. This would facilitate the process of resolving tax issues along with other nontax issues. It does not deny the right for the IRS to be heard. See, 11 U.S.C. §§ 505, 362(a)(8); see also McQueen & Williams, Id. at §§ 3.20-3.22.
Should section 505(a) be amended to empower the bankruptcy court to enjoin the IRS from collecting trust fund taxes from responsible persons if this injunction would aid rehabilitation of the debtor?
While it may seem inappropriate, the Service has in the past been very aggressive in collecting the I.R.C. section 6672 penalty from responsible persons even though the amounts are still collectible from the employer. The Service has generally claimed that it has no obligation to pursue the employer before imposing the 100 percent penalty. Sowell ("A Road Map for Employment Tax Audit", 71 Tax Notes 1091 at 1098,(1966)) notes that the Service has indicated that it generally will not impose the 100 percent penalty on responsible persons where the Service has entered into an installment agreement or bankruptcy payment plan with the company as long as the company adheres to the plan.
It would appear that giving the bankruptcy court the power to enjoin the IRS from collecting trust fund taxes if this injunction would aid rehabilitation is not unreasonable and should be in line with the policy set forth by the IRS. On the other hand if there is limited prospect for a successful reorganization, the IRS would not be denied its efforts to collect the tax. See, McQueen & Williams, Id. at §§ 10.18-10.19.
Mass Torts, Future Claims and Bankruptcy
The bankruptcy system is the most appropriate forum to process mass tort obligations. Historically, it has been equipped to liquidate claims of all sorts and provide equal distribution to creditors of equal priority.
Tort claims are merely a specie of claims. Known tort claims, like any unliquidated unsecured claim, are capable of being liquidated through traditional litigation or by an alternative claims resolution process. This presents no particularly unique problem (although tort claims often have certain insurance implications). Problems arise, however, because of the uncertainty regarding whether, and how, so-called "future claims" can be dealt with in bankruptcy.
Future claims are incapable of being presently liquidated because (i) the claimant is presently unknown; (ii) the claimant may not be known for years (as with diseases with long latency periods like asbestosis); and (iii) there may be problems with establishing causation when manifestation is so far removed from the underlying actions and/or events which gave rise to the injurious conditions. Future claims arising from products placed into commerce pre-petition (e.g. post-confirmation crashes of airplanes manufacturer pre-petition) present another aspect of the problem. In order to preserve "going concern value" for the benefit of all creditors, to provide certainty that a reorganized business is not subject to successor liability, and for a reorganized business to have access to capital and credit markets, future claims must be capable of being dealt with conclusively and comprehensively in the reorganization process. The solution lies in a comprehensive definition of "claim" so that both present and future tort claims can be bound with certainty in the reorganization process, not left to be dealt with afterward.
Future claims must definitely be dealt with in reorganizations. In liquidations, however, they should only be dealt with if distributions can be based on actuarial models which permit partial distributions to presently known claimants, while preserving appropriate assets for fair distributions to future claimants whose entitlement arise subsequently. In either reorganizations or liquidations, future claimants' interests must be protected by a legal representative in order to provide constitutionally-minimum due process to bind them to the terms of the distribution scheme.
Tort claims should not be given priority over administrative or other unsecured claims. This would make reorganization much more difficult, if not impossible, considering the sheer magnitude of liability arising from most mass torts. With respect to giving tort claims priority over secured claims, it would probably be an unconstitutional taking and set off a firestorm of controversy (rightly so) by the secured lending industry. If there is some legitimate policy reason for treating tort claims more favorably than other unsecured claims, one possible solution is to clarify the relationship between tort claims and insurance proceeds. Some courts have suggested that tort claims have some type of direct claim to insurance proceeds, in effect channelling the insurance proceeds to particular tort claims covered by insurance.
Punitive damages should not be given priority over compensatory tort claims and contract-based claims. The effect of giving punitive damages priority would be to effectively skew distribution in favor of tort claimants. Besides, isn't having to put a company through bankruptcy, as well as wiping out equity, punishment enough to holders of those economic interests who should be punished? Why punish other creditors too?
Future tort claims should not be able to "ride through" a bankruptcy proceeding. If all tort claims, both present and future, cannot be conclusively dealt with by the reorganization process, what's the point? This is a prescription for "Chapter 22" as the next round of maturing future tort claims will similarly overwhelm the newly "reorganized" debtor. How will any debtor subject to future tort claims ever be able to demonstrate feasibility in the face of the next tidal wave of tort liability? Besides, the cloud of uncertainty from future tort claims will likely extinguish any possible marketability of "going concern value" and foreclose the newly "reorganized" debtor's access to credit and capital markets. Would you buy, or lend money to, a company subject to a zillion dollars of future tort liability?
A sale free and clear of liens should be able to cut off future claims for past tort liabilities; provided, however, that it is done "right." See Fairchild Aircraft Corp. v. Campbell (In re Fairchild Aircraft Corp.), 184 B.R. 910 (Bankr. W.D. Tex. 1995). If the point of a sale "free and clear" is to maximize value for the benefit of creditors by unburdening the assets of successor liability, then the process must encourage and facilitate that result. Value cannot be maximized if the price being paid is discounted, often heavily, for the uncertainty of unliquidated future tort liabilities.
To a certain extent, a specific "channeling injunction" to bring property into a bankruptcy estate may be unnecessary if that property is already "property of the estate" under 11 U.S.C. $541(a). However, to the extent that a "channelling injunction" seeks to, in effect, create lien rights in specific assets (e.g., insurance proceeds) for the benefit of specific classes of otherwise unsecured creditors (e.g., tort claimants), this raises more complex questions. Presumably, federal law can create such rights to protect favored classes of creditors (e.g., the Perishable Agricultural Commodities Act protects growers with the so-called "PACA lien"). However, this may affect underlying state law contract rights among a debtor-insured, its insurers and its tort claimants. It might also effectively create insurance coverage for certain tort claims which are not otherwise covered. Moreover, in situations where tort liabilities exceed policy limits, such a "channelling injunction" may skew distribution in ways not foreseen or intended. These are difficult issues and require much more study. Often, for smaller businesses especially, insurance is effectively the only asset available for unsecured tort claimants, because other assets are already subject to existing secured claims. Clearly, insurance policies are property of the estate; however, the proceeds thereof may not be. If proceeds of insurance policies cannot be made subject to pro-rata distribution among all tort claimants, equality of distribution among similarly situated creditors may not be possible.
Bankruptcy courts should have the discretion to defer to multi-district litigation whenever progress in such proceedings can be utilized to facilitate the reorganization process. In some respects, they may be parallel proceedings to the extent that "global" settlements among the debtor, tort claimants and other tortfeasor-defendants are reached. In cases such as Dow Corning, where the multi-district litigation preceded the bankruptcy case, certain "global" settlement structures could be preserved and incorporated into a bankruptcy reorganization plan. Why duplicate effort, or "re-invent the wheel," if all, or a part of, a comprehensive settlement is already in place?
To date, Chapter 11 has proven to be the most effective method of ensuring that aggressive creditors can not force liquidation and distribution of a company's assets to the detriment of future claimants. We are not aware of any other judicial or non-judicial means of effectively binding such aggressive creditors, who are likely to be dissenters from any mass tort settlement. (Even class action settlements have mandatory opt-out provisions. Isn't that what killed the "global" breast implant settlement and pushed Dow Corning into bankruptcy?) The ability to effectively reorganize, and bind future claims while insulating "going concern value" from successor liability, appears to be the best method to preserve the opportunity to presently capture future value for the benefit of future claimants. Otherwise, the "pie" inevitably gets smaller and the aggressive known tort claimants will eat it all, with no regard for those future claimants yet to come.
Service to the Estate: Ethical and Economic Choices
The Global Economy: Preparing for Transnational Insolvencies
The ABI National Symposia Series
Defining Success in Business Bankruptcy
May 6, 1995
Defining success in business bankruptcy is an elusive proposition, defying generalization or quantification. The process is complex and nonlinear, giving rise to different perceptions of success based on the multiple goals of the conflicting players in a case. To the extent it can be measured, success must be defined based on the results achieved in the bankruptcy and related proceedings, independent of the failure of the business which occurred prior to the use of the bankruptcy process to attempt to fix it.
One measurement of success is the amount distributed to creditors through a successful reorganization. When competing creditor interests are not satisfied in full, as is typically the case, success for one party often comes at the expense of another. Creditors frequently divide into competing camps depending on whether they are secured or unsecured; whether it is in their interests to quickly take the largest short-term cash distribution possible, or whether they should work with the debtor in the hopes of building a future relationship, and maximizing the recovery over the long run.
Debtors' views of success may depend on such factors as job preservation (including the jobs of incumbent management), future returns to equity, tax savings, or reducing liability exposure for the principals and the business, among other considerations. Success for them may be based less on short-term returns than on the long-term restructuring goals of returning a company to profitability.
While a confirmed plan of reorganization is one element of success, this is not the norm. Yet the failure of a business to reorganize might not be deemed a failure if the business is liquidated in time to maximize assets for distribution. Conversely, even a confirmed plan may be viewed as less than successful, if the costs of professional services are too high or attendant delays too long. However, it is important to remember that business bankruptcies in chapter 11 can also create a flexible framework to negotiate an out of court restructuring that will preserve the business, without the litigation expenses.
Adding to the factors to be considered are community needs, speed, hidden costs such as delay, procedural fairness (in addition to and in contrast with distributive, substantive fairness) and public policy concerns, including the impact of bankruptcy on competitors of the business operating while in bankruptcy.
Should the Automatic Stay Be Abolished
June 1, 1995
Traverse City, Michigan
The automatic stay has been an integral part of the bankruptcy system since 1973 and the Bankruptcy Code since 1978. Unique to bankruptcy, the device is intended to promote both the debtor's fresh economic start and the fair and equitable distribution of assets among creditors. Litigation over the scope of the stay, its various exceptions, and its application to particular facts is among the most common features of a bankruptcy case.
The breathing spell provided by the stay may assist the debtor's ability to put its economic house back in order free from collection efforts, or provide time to determine the fair market value of the estate in a liquidation. Since 1978, section 362 has been amended five times, each time chipping away at the breadth of the stay. Recently, it has been proposed that single asset real estate cases should to subject to a more limited stay period than in other types of business bankruptcy cases.
Where the debtor does not have a reasonable likelihood of a successful reorganization, the delays resulting from the stay disadvantage secured creditors who lose cash flow, incur expenses and see the value of the collateral decline. To critics, the stay becomes a sword rather than a shield against creditor actions. Accordingly, some suggest a lesser scope for the stay in liquidation cases rather than reorganizations, or proffer that some conditions or limitations be placed on the debtor to prevent potential excess harm to creditors, particularly secured creditors.
At the same time, there is widespread acknowledgement that to severely restrict the effect of the stay would be to invite chaos at the outset of a case, to the ultimate detriment of the estate. Indeed, even in liquidation cases, the stay may actually add value that would not be available if the business were to be immediately liquidated. Defenders of a muscular automatic stay reason that secured creditors will receive their collateral back should the reorganization fail and that any losses attendant to this delay are the result of free market economic factors rather than the stay itself. They also point to the stay's positive effect on facilitating time for the parties to negotiate workouts outside of bankruptcy.
While there may be a consensus that a judge should (early in the case) find as a threshold matter that there is a reasonable chance for an effective reorganization, there is disagreement over how certain this "chance" should be. In the final analysis, the problem may not be with the Code, but rather in an abuse of discretion by the judge about whether the stay should continue or be lifted in particular cases.
The Biased Business of Venue Shopping
July 21, 1995
Cape Cod, Massachusetts
The statute governing venue in bankruptcy cases offers a choice, to some individual debtors, and to almost all corporate debtors, as to where the case should be filed. Under existing law, a case is properly venued in a district in which the debtor is domiciled or incorporated; has a residence; has its principal place of business; where its principal assets are located; or where there is a pending case concerning an affiliate. The debtor's choice of venue often controls where millions of dollars will be administered and can determine where important issues of commercial law will be decided.
Many assert that, particularly in larger Chapter 11 cases, the current rules encourage forum shopping, (or, more insidiously, judge shopping) and hence breed disrespect for a uniform bankruptcy law. An empirical study by LoPucki & Whitford found extensive forum shopping in business cases. Venue shopping is often driven by the debtor's perception that the outcome of a particular issue (e.g. exclusivity, professional fees) or the entire case can be manipulated. But debtors may have more neutral reasons for a flexible venue rule, such as the caliber or speed of the judge, predictability with which some of the issues will be handled, or to avoid adverse publicity in the local media surrounding the Chapter 11 filing.
In cases where the forum is improper or inconvenient, the present rules allow venue to be transferred, upon the motion of a party in interest. Is current law adequate?
Some speculate that a broad venue choice has the effect of pressuring judges to decide cases and issues in a way to attract future desirable cases. Others disagree, arguing that there is no recent data to suggest that judges are reluctant to transfer cases or dismiss improperly venued cases. They generally find that, except in some highly celebrated cases, the current system of debtor choice of forum, with appropriate opportunities to challenge improperly venued cases, works well. In any event, they find nothing wrong in the notion that a company, when presented with options, will prefer the one most favorable to it.
One suggestion for reform might be a kind of "center of gravity" test, weighing many factors, for judging where venue is proper. Such a test would not permit the place of incorporation as a proper venue, if this is the only nexus.
The United States Trustee may be in a good position to raise venue problems and file motions to change venue. One possible reform might include mandating this more active role, or to empower the judge to transfer venue on his own motion, where appropriate.
Professional Compensation: Does Bankruptcy Cost Too Much?
September 15, 1995
Among the most extraordinary costs associated with bankruptcy reorganization and liquidation cases are professional fees. Under the former Bankruptcy Act, an "economy of administration" standard was utilized to determine professional fees, resulting in the lowest reasonable fee paid to professionals. With the 1978 Code came a "cost of comparable services" standard, which permits a court to award fees at the same hourly rates paid to professionals providing services outside the bankruptcy context.
Currently, the debtor or the estate must pay not only the fees and expenses of its own professionals (attorneys, accountants, investment bankers, etc.), but also those of professionals hired by official committees of creditors and equity holders, and those retained by secured creditors. While the fees paid in large cases receive national scrutiny and much criticism, this may be an area of more "heat" than "light". A national survey by the ABI in 1991 suggests that (a) there is ample scrutiny of fee requests by interested parties and the courts; (b) there is broad evidence of disuniformity in the courts' fee practice around the country, but little evidence of professionals' abuse, except in rare mega cases, and (c) the burden of fees falls most disproportionately on smaller business cases and is often a factor in the failure of these cases. For example, fees as a percentage of available assets are no more than 5% in most average to large sized cases, but 25-33% in smaller chapter 11's. There is also evidence that market competition among professionals in the larger cases is driving down some costs as the number of these cases decline.
In the consumer bankruptcy area, a study of panel trustees finds that a combination of the lawyer marketplace (including advertising and certification), trustees and the courts have worked to control fees, largely to the debtor's benefit. Because effective lawyering can increase the distribution to creditors beyond the expense to the estate, it is probably unwise to impose fee caps or other arbitrary controls. Bankruptcy "mills" continue to be a problem for both the courts and debtors, due to the costs needed to repair errors in the representation by the mills.
The U.S. Trustee is responsible for conducting a rigorous review of professional fee applications. They can play an especially useful role in smaller cases lacking active creditor involvement. Some believe uniform national fee guidelines can help, while others prefer the standards to be flexible enough to reflect local practice. Fee auditors are employed in some larger cases to good effect to find abusive practices. Another recent development is the concept of "fee budgeting" in large cases. While potentially helpful, budgets may not be flexible enough to deal with the unpredictability of bankruptcy practice.