Wednesday and Thursday, September 18-19, 1996
State Capitol Building
Santa Fe, New Mexico

Approved: December 17, 1996
Prepared by: Susan Jensen-Conklin












State Capitol Building
Santa Fe, New Mexico


Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Jay Alix
Babette A. Ceccotti
Jeffery J. Hartley
James I. Shepard

Commission Advisors and Staff Present:
Professor Elizabeth Warren, Reporter/Senior Advisor
Professor Lawrence P. King, Senior Advisor
Stephen H. Case, Senior Advisor
Susan Jensen-Conklin, Deputy Counsel
Jennifer C. Frasier, Staff Attorney
Elizabeth I. Holland, Staff Attorney
Melissa B. Jacoby, Staff Attorney
Judith K. Benderson, Legislative Counsel
Carmelita Pratt, Administrative Officer

Public Attending:

Approximately one hundred people were in attendance including representatives from the American Bankers Association, American Bankruptcy Institute, American Bar Association, Association of Bankruptcy Professionals, Virginia Treasurers Association, California Association of County Tax Collectors, International Council of Shopping Centers, National Association of Attorneys General, National Association of Bankruptcy Trustees, National Association of chapter 13 Trustees, National Association of Consumer Bankruptcy Attorneys, National Association of County Treasurers and Finance Officers, National Association of Credit Management, National Retail Federation, States’ Association of Bankruptcy Attorneys, among others. Federal agencies such as the Administrative Office of the United States Courts, United States Department of Justice, the Securities and Exchange Commission, and the Treasury Department were represented. The federal judiciary, professors of law, United States Trustee representatives as well as chapter 7, 12 and 13 trustees attended. Representatives from state government, credit unions, banking and credit industry, the Pension Benefit Guaranty Corporation, professional and trade associations, private industry, accounting firms, law firms, and the media were also present.


At approximately 8:30 a.m., Chair Williamson called the meeting to order and acknowledged the contribution of the States’ Association of Bankruptcy Attorneys to making the meeting facilities available to the Commission. He also noted that the American Bankruptcy Institute was concurrently holding its regional program in Santa Fe. After reviewing the meeting agenda, Chair Williamson then discussed the second quarter bankruptcy filing statistics recently released by the Administrative Office of the United States Courts and the attention accorded them by the media.

Chair Williamson reported that he had testified at a hearing held the prior week on consumer credit and bankruptcy before the House Committee on Banking and Financial Institutions. Responding to his request for a brief report on the House hearing, Deputy Counsel Susan Jensen-Conklin stated that ten witnesses testified, including representatives from the American Bankers Association, Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The thrust of the hearing, she observed, was the impact of the surge in consumer bankruptcies on the health of the consumer credit lending industry. She noted that there were matters discussed at the hearing where there was no agreement among the panelists such as whether the credit industry should be more conservative in its credit granting and extension practices. Ms. Jensen-Conklin concluded her remarks by reporting that the Committee Chair was very interested in the Commission’s focus on consumer education programs.

On oral motion by Commissioner Hartley, the minutes of the June and July meetings were approved by the Commissioners. Among other administrative matters addressed by Chair Williamson was the introduction of Staff Attorney Jennifer C. Frasier. He also announced that Staff Attorney George H. Singer was leaving for private practice, but would still serve as a resource for the Commission. As to budgetary matters, Chair Williamson reported that the Commission’s expenditures continued to be less than projected. He reported that the pending appropriations legislation, which passed the House and was slated for consideration by the Senate the following week, provided for $490,000 in additional funding for the Commission.

At the conclusion of his opening remarks, Chair Williamson introduced the first speaker at the Open Forum.



Francis Allegra, Deputy Associate Attorney General at the United States Department of Justice, discussed his agency’s previously submitted report to the Commission on bankruptcy issues. He explained that this report was the product of a bankruptcy working group convened by the Justice Department that included 60 of its "most experienced" bankruptcy attorneys. He observed that theJustice Department bankruptcy working group, in preparing this report, sought to maintain a balance between providing debtors with a "fresh start" and preserving the integrity of important government interests. He said that the report should be considered a starting point and was intended to spur dialogue with the Commission and other interested parties.

Summarizing the report’s contents, he noted that there were many areas that coincided with the approach taken and issues identified by the Commission. In addition, he mentioned two thematic points of the report: constitutional issues and the issue of notice. He explained that providing notice to the government involved more than just concepts of due process or fundamental fairness as it also related to many of the problems discussed elsewhere in the report. He acknowledged that notice was a "two-way street" and that the government had the responsibility to make it easier for people to identify the proper government representatives to receive notice. Mr. Allegra concluded his remarks by noting that the Attorney General was very committed to "access to justice" concepts and that his agency was available to assist the Commission in exploring ways to improve access.


Ms. Bauchner, Assistant Chief Counsel for General Litigation at the Internal Revenue Service, explained that her office was responsible for the oversight and management of the Service’s bankruptcy program as well as making recommendations to the Solicitor General on all appellate matters relating to bankruptcy and tax cases. She then described the Service’s report to the Commission as a "starting point" in an ongoing dialogue between the Service and the Commission. The report, she explained, consisted of 24 proposals and was the result of collaborative efforts among field offices, members of the Office of Chief Counsel, and the Treasury Department. She observed that many of the proposals focused on improving the bankruptcy system’s efficiency and curtailing abuses.

In particular, she noted that several proposals concerned chapter 13, which she said had become known as the "tax shelter of the nineties." She suggested that if chapter 13 was "brought into line" with the Bankruptcy Code’s other chapters, it would become more equitable for all participants. She stated that the Service did not see "any logic" in allowing a chapter 13 debtor, who filed a fraudulent tax return or did not file any tax returns, to obtain a discharge that otherwise would be denied had the debtor filed for relief under chapter 7. In addition, the Service was also concerned about the ability of a chapter 13 debtor to discharge trust fund taxes, she said. She also mentioned that some courts interpreted 11 U.S.C. §1328 as not requiring the payment of priority taxes.

Another proposal discussed by Ms. Bauchner concerned authorizing the setoff of prepetition tax refunds against prepetition tax liabilities. The current practice, she noted, entailed filing of pro forma motions that consumed the time and resources of bankruptcy trustees, courts and others. She advised that it would be more efficient and effective to permit such setoff by amending 11 U.S.C. § 362.

The third proposal addressed by Ms. Bauchner involved requiring chapter 13 debtors to filetax returns as a prerequisite of confirmation. This would eliminate the need for courts to conduct claim estimation hearings and for the Service to file estimated claims, she asserted.

Following up on her "two-way street" reference, Commissioner Alix asked Ms. Bauchner whether the Service would be amenable to considering possible changes in its operating procedures based on suggestions from the Commission. Ms. Bauchner said that the Service would be willing to "hear anything" that the Commission wanted to be adopted and that the Service would respond thereto. While the Service had much more control over its own procedures, she explained that matters relating to the Internal Revenue Code would involve the consideration of overall tax policy matters and, thus, would have to be coordinated with the Treasury Department. Commissioner Shepard noted that he had discussed with the Service the possibility of focusing on Internal Revenue Code issues at a subsequent Commission meeting.

Concerning the interplay between bankruptcy and the Internal Revenue Code, Commissioner Alix recalled that he had personal experience in this area as the result of being found to be a responsible person. To avoid litigation, Commissioner Alix stated that he personally had to pay nearly $50,000 in taxes because someone else failed to pay these taxes. He suggested that the entire concept of requiring bankruptcy professionals to be responsible persons needed to be examined by the Internal Revenue Service. Ms. Bauchner promised to convey any messages from the Commission to her agency as it was interested in maintaining a dialogue with the Commission.

At the conclusion of Ms. Bauchner’s remarks, Chair Williamson explained that the Commission’s report would not be draft legislation, but an effort to call Congress’ attention to those areas that needed direction, supplementation or adjustment. He said that he wanted to echo Commissioner Alix’s point that the Commission was trying to identify problems and to provide practical solutions for solving them. He stated that it was not the Commission’s goal to amend the Internal Revenue Code.


Mark Segal of the law firm of Segal & McMahon located in Las Vegas, Nevada explained that he was a tax attorney with a substantial bankruptcy practice. He emphasized that debtors were the "engine that drives the bankruptcy system" and that chapter 13, in particular, assisted debtors in getting their lives "back on track." While chapter 13 did not require debtors to repay their creditors 100 percent, he noted that nearly $1 billion had been paid to the Internal Revenue Service through the bankruptcy process. He observed that the interest and penalties imposed under the Internal Revenue Code generally exceeded the taxes owed by his clients. After reviewing the reasons why debtors fail to file their tax returns, he said that all of his clients filed their missing tax returns. He also asked the Commission to remember that the consumer bankruptcy system involved debtors who were "real people" and that chapter 13 leveled the playing field for them when dealing with taxing authorities. He concluded his comments by observing that the current bankruptcy system did not require any revisions.

In response to Commissioner Hartley’s question, Mr. Segal stated that he did not oppose a requirement that chapter 13 debtors file tax returns. When asked by Commissioner Hartley if there should be any amendments to deal with the dishonest debtor who evaded paying his or her taxes, Mr. Segal responded that evasion was a very difficult concept. Although the Internal Revenue Service had the burden of proving fraud, he explained that under the Bankruptcy Code the mere allegation of fraud by the Service in a deficiency assessment constituted fraud under chapter 7 even though a debtor may not be guilty of committing fraud. Commissioner Shepard noted that the process was not automatic and entailed a dischargeability determination. Mr. Segal said, however, that his clients could not afford to attack the Service’s allegation of fraud underlying a deficiency assessment.

Commissioner Alix inquired of Mr. Segal about the quality of the bankruptcy bar in his area. Mr. Segal answered that most attorneys who performed chapter 13 tax work had extensive backgrounds in tax issues and that, therefore, the level of practice was "very high."

Mr. Segal noted that all but one of the questions listed in Roundtable Discussion packet were biased against debtors and in favor of government interests. Commissioner Shepard said he had drafted a substantial portion of this material. He observed that he prepared tax returns for 15 years for clients with less income than many of Mr. Segal’s clients and that it would be very difficult to explain to his clients that they had to pay their taxes while Mr. Segal’s clients did not. Mr. Segal responded that he did not advise his clients that they did not have to pay their taxes and, in fact, they did pay these obligations. He said that the issue involved a question of how much they must pay.

Commissioner Alix observed that the Commission, in devising its vision and mission statements, focused its attention on the bankruptcy system as it related to all users of the system, not just debtors. He explained that these users also included banks, credit card companies, governmental units, landlords and other parties. Accordingly, he said to Mr. Segal that the Commission was not "siding up" to the government, but was just trying to balance these interests to achieve a system that worked for its users.


Noting that the increase in consumer bankruptcy filings would likely continue, Heidi Heitkamp, Attorney General for the State of North Dakota, asked the Commission to consider who among the creditors was in the best position to avoid the consequences of these bankruptcies. She acknowledged that state and county governments had the responsibility to prevent large tax liabilities "from getting into bankruptcy" and that they were diligently working to encourage greater collection efforts on the "front end." She also noted that there were substantial efforts by government tax agencies to apply innocent spouse provisions, agree to repayment plans, and forgive tax liabilities where hardships truly existed.

Clarifying that she was appearing in her capacity as an attorney general and as Chair of the Bankruptcy and Taxation Committee for the National Association of Attorneys General, Ms. Heitkamp said that she had a large number of procedural and substantive suggestions for amendmentsto the Bankruptcy Code. She noted that a letter dated September 11, 1996 from nearly 30 attorney generals set forth four basic principles. First, the debtor should be required to provide adequate notice to creditors and regulators as this would reduce much of the unnecessary litigation generated by inadequate notice. In her prior experience as a tax commissioner, Ms. Heitkamp recalled that 80 percent of the state sales tax returns were timely filed and that the government’s resources were largely expended in dealing with those taxpayers who did not honor their obligations.

Second, she said that the claims filing provisions should not result "in the erection of a maze" where creditors lost their rights. In particular, she endorsed the Commission Government Working Group proposal that would expand the "deemed filed" provisions of 11 U.S.C. § 1111(a) to other Chapters of the Bankruptcy Code.

Third, procedures should be designed so that pro forma motions and adversary proceedings should not be necessary, she stated. Rather, she maintained that there should be notice provisions that offer an opportunity for the other side to object.

As the fourth area of concern, Ms. Heitkamp noted that bankruptcy should not allow debtors to avoid generally applicable law. She said that some debtors use bankruptcy as a further avenue of procrastination.

Chair Williamson inquired whether Ms. Heitkamp noticed any emerging tensions between the federal, state or local taxing authorities. She responded that there was always a "race" to "file first" and competition for the limited funds available for distribution in bankruptcy cases. Nevertheless, she said that there generally was cooperation among federal and other taxing authorities.


William Beyer, Deputy General Counsel with the Pension Benefit Guarantee Corporation ("PBGC"), began his remarks by explaining the work of the PBGC. He observed that the vast majority of plan terminations were "standard terminations," that is, the pension plans were fully funded and the benefits were distributed to all participants. With regard to standard terminations, he said that the PBGC played no role except for conducting audits.

In bankruptcy reorganization cases, Mr. Beyer explained, the PBGC had three goals: encourage the employer to continue the pension and its contributions thereto, maintaining the plan during the pendency of the bankruptcy case, and having the plan continue after the debtor reorganizes. If the plan terminated in order for the debtor to reorganize or as a result of the debtor’s liquidation, then the PBGC became the claimant, he said. In these situations, the PBGC served in two capacities, that is, as a successor trustee and as a governmental agency and guarantor with a statutory claim for the underfunding of the plan calculated at the present value of all benefits less the present value of all assets, he observed. Frequently, he opined, the PBGC has held the largest claim in a bankruptcy case and currently it was participating in nearly 800 bankruptcy cases nationally.

In response to Chair Williamson’s question as to whether he was satisfied with the present bankruptcy law and process, Mr. Beyer said that he was in most cases. He maintained that the PBGC wanted to work with the Commission with regard to clarifying the status of its claims in bankruptcy cases and to amend those provisions in the Internal Revenue Code, Employee Retirement Income Security Act, and Bankruptcy Code so that they provided parallel treatment for PBGC’s claims. He said that the 1994 amendment to the Bankruptcy Code that allowed the PBGC to serve on creditors’ committees was "very helpful."

Commissioner Alix asked Mr. Beyer to comment on the Commission’s chapter 11 Working Group claims classification proposal. Mr. Beyer surmised that it could cause the PBGC to be "fairly well exposed" in those cases where the debtor sought to maintain an ongoing relationship with its trade creditors as opposed to dealing with liabilities resulting from the termination of a pension plan.

Turning to the Commission’s Jurisdiction and Procedure Working Group proposal eliminating mandatory withdrawal of the reference provision of 28 U.S.C. § 157(d), Mr. Beyer said that mandatory withdrawal should not be eliminated. Instead, he suggested that the present provisions should be amended to deal with the delay that resulted from the current process.

In response to Commissioner Alix’s query as to whether the PBGC had the independent authority to negotiate on its own behalf in a bankruptcy case, Mr. Beyer answered in the affirmative. Commissioner Alix then observed that his experience in dealing with the PBGC had been "very favorable."


While Pat Barsalou, Assistant Attorney General for the State of Texas, was unable to present her oral remarks in full due to time constraints, she referred the Commission to her previously submitted proposal concerning the scope of the chapter 13 discharge. Ms. Barsalou urged the Commission to recognize that this provision currently "provides a head start, not a fresh start" to debtors who fail to file tax returns.


Ronald M. Tucker, an attorney with the Simon Deburtolo Group, a large shopping center developer, explained that he was speaking on behalf of the International Council of Shopping Centers ("ICSC"), a trade association of shopping centers whose 29,000 members included owners, developers, retailers, lenders and others with interests in 41,000 shopping centers across the nation. He observed that these shopping centers accounted for $914 billion in retail sales which represented 58 percent of total retail sales, excluding automotive dealers and service stations. In addition, he said that these centers employed nearly 11 million people in the United States.

Mr. Tucker observed that the large increase in retail bankruptcies had a "serious impact" on all elements of the shopping center industry. In particular, he noted that ICSC was concerned aboutthe proliferation of bankruptcy filings, the bankruptcy system’s cost, delay and failure to produce results consistent with the law, and the use of bankruptcy by those who were solvent. He explained that shopping centers represented a special type of commercial real estate interest that involved a unique form of interdependence between landlords and their tenants. He said that his group had special concerns with regard to the erosion of Section 365's protections for its members. A landlord, for example, must continue to provide services to the debtor until the lease was assumed or rejected without the protection and assurance of receiving contract rents. In addition, a landlord was ineligible to serve on a creditors’ committee even though it may be one of the largest creditors in a bankruptcy case and have special knowledge of the debtor’s estate. Further, the Bankruptcy Code severely limited the amount of a landlord’s claim against a bankruptcy estate, usually to one year’s damages or less, Mr. Tucker maintained.

Notwithstanding the 60-day period within which debtors must assume or reject leases, he noted that bankruptcy courts routinely extended this time period without regard to the payment of postpetition rents. Despite the requirements of the Bankruptcy Code and the underlying contractual agreement, non-conforming assignments were permitted and debtors were "invariably" excused from performing certain operational requirements otherwise required of other solvent tenants. Increasingly, he observed, solvent tenants were filing for bankruptcy relief to reject their under-performing leases and to assume their performing leases solely as a means of improving their profitability. He concluded his remarks by noting that the problem was compounded by the delay caused by the bankruptcy system and operation of the bankruptcy courts.

Chair Williamson noted that the areas of concern addressed by Mr. Tucker had attracted much attention from the media and suggested that he submit written recommendations for reform to the Commission.


Ronald R. Del Vento, an Assistant Attorney General with the Texas Attorney General’s Office, said that he was appearing on behalf of the States’ Association of Bankruptcy Attorneys ("SABA"). In preparation for this meeting, he said that SABA circulated a survey to all state tax administrators who were members of the Federation of Tax Administrators. The survey, he noted, asked each state tax administrator to identify the number of taxpayers currently in bankruptcy, the gross amount of all tax claims in pending bankruptcy cases, the amount of state tax revenues annually collected from taxpayers in bankruptcy, and his or her experience with regard to post-confirmation default rates in chapter 11 and chapter 13 cases. SABA, he said, had compiled the survey responses and would provide them to the Commission. He then summarized some of the initial survey results. He said that the survey showed that 356,000 taxpayers were currently in bankruptcy with pending claims totaling approximately $3.5 billion. This figure, he explained, did not include tax liabilities that were the subject of no asset chapter 7 cases and that these claims were estimated to total an additional $1 billion. The survey also found that the states reported collecting nearly $233 million annually from debtors in the bankruptcy system. The range of responses varied from Alaska, which reported just five taxpayers in bankruptcy with total claims of $750,000, to New York, whichreported 30,000 taxpayers in bankruptcy with claims in excess of $1 billion. With regard to default rates in chapter 11 and chapter 13 cases, the survey found that not all states tracked this information and thus were not able to respond. Nevertheless, certain states reported default rates as high as 90 to 95 percent while others reported default rates in the range of 70 to 75 percent range. Many states reported problems with serial chapter 13 filers and noted their frustration with the inability or unwillingness of the bankruptcy courts to dismiss these cases with prejudice. Commissioner Hartley asked Mr. Del Vento how he defined the term "serial filers." Mr. Del Vento said that it included debtors who file chapter 13 cases more than once over their lifetime.

Upon the conclusion of Mr. Del Vento’s remarks, Chair Williamson announced that the Commission would reconvene after a brief recess to conduct simultaneously its Government Roundtables on Regulation/Taxation and General Government Issues. After the Roundtable session concluded, he explained, the Commission would once again resume its meeting in plenary session. The recess commenced at approximately 10:30 a.m.


At approximately 10:40 a.m., the General Government Issues Roundtable began its discussions. Led by Professors Warren and King, the Roundtable discussion was attended by Commissioners Babette Ceccotti, Judge Robert Ginsberg and Jeffery Hartley. Commission Staff Attorneys Liz Holland and Melissa Jacoby were also present. Roundtable participants included Kathleen Ayres, Tennessee Attorney General’s Office; Thomas Bean, U.S. Department of Justice; J. Christopher Kohn, U.S. Department of Justice; Berry D. Spears, Winstead, Sechnest & Minick; Judith Starr, Securities and Exchange Commission; James Starzynski, Francis and Starzynski; Alan Tenenbaum, U.S. Department of Justice; and Valerie Venable, on behalf of Wyman-Gordon Company and representing the National Association of Credit Management.

Professor Warren commenced the Roundtable session by explaining that the discussion would focus on non-tax governmental issues with a view toward identifying those issues that should be addressed given the limited time and resources of the Commission. She noted that the Roundtable discussion would relate to Commissioner Shepard’s 32-page issue memorandum as well as to the prioritization efforts that resulted from the Government Working Group Planning Session that occurred on Monday, September 16.

The first issue discussed concerned notice to government agencies as creditors. Mr. Starzynski observed that debtors in his district, New Mexico, did not need to list an address for the Internal Revenue Service on their creditor matrices because the Service had an arrangement with the bankruptcy court specifying where such notice should be directed. This system could be created throughout the country, he asserted.

Professor Warren asked if this issue should be addressed through statutory change or by the Rules Committee. Ms. Ayres responded that it should be addressed statutorially based on her experience in Tennessee where it was addressed by local rule. The problem, she explained, was thateven where the local rules direct to whom in state government notice should be sent, some debtors’ counsel failed to follow these local rules. She said that the issue presented a substantive due process problem for state government entities.

Professor King noted that having the Rules Committee address the problem had nothing to do with making it easier to solve this problem. The issue, he observed, remained the same whether it was corrected by statute or by the Bankruptcy Rules. In addition, he said that Congress decided that notice should be addressed by the Bankruptcy Rules and that it would be difficult to separate some aspects of notice for statutory treatment when there were rules concerning the entire issue of notice. He did not see any problem in having the Rules Committee handle this issue as it would be in a much better position to discern various aspects involved with it and because the Committee was staffed with individuals who encountered these aspects on a daily basis. In addition, he recalled that the Committee was also reviewing electronic processes for noticing.

Noting that he has served as an ex officio member of the Rules Committee, Mr. Kohn explained that he had previously made a proposal to the Rules Committee and that the Committee had some difficulties with it. In addition to the technical nature of the proposal, the Committee was concerned why the federal government should receive special treatment as it already received more notice than other creditors. Nevertheless, Mr. Kohn averred that the notice currently given to federal agencies was ineffectual and "really spotty." As an example, he cited the current provisions of Bankruptcy Rule 2002 that only require notice be provided in chapter 11 cases. His proposal would require that meaningful notice be given not only to U.S. Attorney’s Offices, but be provided in a meaningful way to the client agencies.

Professor King noted that Rule 2002 did provide for giving notice to agencies and that it was not limited to chapter 11. He recalled that this Rule had been constantly revised by the Rules Committee in response to suggestions for change emanating from the Justice Department and the Securities and Exchange Commission.

Clarifying that he had not intended to be critical of the Rules Committee, Mr. Kohn explained that Rule 2002 did not provide effective notice because it allowed parties to serve notice on federal agencies without specifying that it should be served on someone with knowledge of the underlying action or claim. Commissioners Ginsberg and Hartley queried whether or not other creditors had this same problem. Mr. Kohn responded that other creditors could build into their cost of doing business the risk of not receiving notice. Mr. Kohn also recalled that the Rules Committee was concerned about "crossing the line to substantive law" by prescribing notice requirements that could trigger nondischargeability consequences.

Assuming the problem could be addressed statutorially, Commissioner Hartley asked Mr. Kohn what would this statute mandate. Mr. Kohn answered that his proposal had two components. The first specified that the notice identifies the agency affected by the bankruptcy filing. This requirement would address those situations where the notice merely stated the "United States" without indicating whether the notice should be directed, for example, to the Small BusinessAdministration, Internal Revenue Service or some other agency. Commissioner Hartley and Professor King asked how this requirement would impact on those debtors who simply did not know the name of the creditor agency. In those instances, Mr. Kohn said these debtors would be required to specify the agency to the best of their knowledge. He suggested that the Commission may want to review the interplay between this requirement and Section 523's provisions as they relate to informal notice.

The second prong of Mr. Kohn’s proposal would require addresses for the most frequently listed federal agencies to be promulgated locally and provide that if used for notice purposes, it would be deemed to constitute effective notice. Although his agency attempted to approach various local rules committees to implement this aspect of his proposal, Mr. Kohn reported that the range of receptiveness was varied.

Mr. Starzynski discussed the operations of the National Noticing Center, a centralized bankruptcy notice clearinghouse which, for a fee, provided notice to subscribing state and municipal agencies. Professor Warren suggested that this would further support the implementation of noticing requirements by rule rather than by statute as the latter had less flexibility to respond to these technological innovations. To the extent that the Bankruptcy Rules needed some reform, Professor King observed that it would be a "good idea" to have the Commission’s imprimatur behind such proposals to the Rules Committee.

David Allard, a member of Allard and Fish and a bankruptcy trustee who was appearing on behalf of the National Association of Bankruptcy Trustees, stated that since the new centralized noticing system went into effect in his district, there had been ten times as many instances where debtors failed to receive notice that, in turn, caused them to fail to appear for their Section 341 examinations. Also, he observed, there was reduced flexibility regarding the contents of the notice and less information than previously supplied was being disseminated.

From an environmental protection perspective, Mr. Tenenbaum said that it was important that the notice be meaningful. He mentioned that some large law firms had a practice of routinely giving his agency notice of every bankruptcy case they participated in whether or not a potential environmental claim existed. He suggested that the debtor be required to supply certain core information about the claim such as the category of environmental liability and to list any environmental permits as well as any administrative or judicial orders. Professors Warren and King suggested that Mr. Tenenbaum circulate a draft form of the disclosure requirements contemplated by his proposal.

Ray Valdes, a tax collector in Seminole County, Florida, asserted that the debtor should be required to describe real property interests by parcel number. Professor King observed that it would be a relatively easy matter to include that requirement on the schedules. Bernard Shapiro, an attorney from Los Angeles, stated that the Commission should not encourage Congress to become involved in the rulemaking process.

Professor Warren summarized the comments with regard to notice. She said that the Commission would draft a proposal recommending that the Rules Committee devise procedures concerning the notice issues discussed. Mr. Kohn stated that the federal government, with the Commission’s assistance, could approach the Rules Committee on parallel tracks. Professor Warren observed that it would "make sense" to include state governments in this process as well. Professor King added that the proposal should include suggestions to change the official forms. Karen Cordry noted that as her organization, the National Association of Attorneys Generals, had previously submitted its notice proposals to the Committee, her group would be "very happy" to work with the federal government in this endeavor.

The next issue addressed by the roundtable discussants was whether a debtor should be explicitly required to obey non-bankruptcy laws pursuant to 28 U.S.C. § 959. Mr. Bean explained that some courts entered orders enjoining state or federal actions to enforce police and regulatory powers under 11 U.S.C. § 105 to promote the debtor’s reorganization. He said that the National Association of Attorneys General proposed that Section 105 be clarified to state expressly that bankruptcy judges lacked the authority to enjoin the government in the enforcement of its police and regulatory powers. Professor Warren asked Mr. Bean to quantify the number of cases in which this happened. Although he said that he did not have this information, Mr. Bean responded that the government was expending time and resources by having to appeal cases to the circuit court level. Additionally, he observed that 28 U.S.C. § 959(b), which requires trustees to administer property in their possession in accordance with law, was not enforced by many courts. As an example, he said that bankruptcy judges often failed to require chapter 7 trustees to comply with state environmental laws. In addition, he cited the practice of chapter 7 trustees to seek court authorization allowing them to conduct going out of business sales not in compliance with state or local regulations.

In the environmental law area, Mr. Tenenbaum said that his agency generally prevailed on the compliance issue and that it was "not a huge problem." Occasionally, however, he recalled that there were recalcitrant debtors or trustees who caused his agency to have to litigate this issue and incur the attendant costs. In addition, he noted that the 11th Circuit held that 28 U.S.C. § 959 did not apply to a chapter 7 trustee who liquidated, as opposed to operated, a debtor’s business. Mr. Starzynski added that the 10th Circuit held that an estate, for which a trustee spent two years trying to sell certain real property that was then abandoned, did not have to pay the real estate taxes because the trustee was not operating the debtor’s business. Mr. Bean opined that his proposal to amend Section 959(b) would make it apply to chapter 7 cases and to property in control of the trustee.

Speaking from the position of a chapter 7 trustee, Mr. Allard reminded the discussants that chapter 7 trustees did not choose their cases and that they performed a public service by often serving in cases where there were insufficient funds to comply with the state law. He asked why should a trustee be required to comply with state going out of business laws when the bankruptcy laws and judge regulated the sale. In the environmental area, the cases have been "fairly reasonable," he observed. He said that where there were sufficient funds and an issue of public safety, then the trustee would act.

Commissioner Ceccotti observed that this compliance issue may concern an important consumer interest that should be protected. Professor King asked whether there were examples of consumers being "cheat[ed]" in bankruptcy sales that had been judicially approved and supervised. Mr. Bean could not state whether consumers were harmed by such sales. Mr. Starzynski explained that going out of business regulations were designed to protect other merchants. Commissioner Ceccotti recalled that the sales notice that was judicially approved in the second Herman’s case essentially stated that the sale did not have to comply with any laws.

Approaching the issue from a conceptual level, Professor Warren posited a hypothetical situation where a state’s going out of business sale regulations could interfere with the priority of distribution scheme under bankruptcy law. Ms. Ayres explained that the going out of business statutes address false advertising by preventing the seller from extending the sale by purchasing new inventory. She suggested that the modification apply not to all laws, but only to police and regulatory powers up to the assessment of liability.

Ms. Starr said that many of her government colleagues were "very comfortable" with the "dividing line" between pecuniary purpose and police action that the courts had developed under Section 362(b)(4) and (5). Nevertheless, she noted that they were concerned about the bankruptcy court’s utilization of Section 105 to encroach upon the government’s police and regulatory powers. While observing that enjoining a state or federal law enforcement regulatory action was "very different" from enjoining a private action, Ms. Starr noted that Section 105 was silent regarding governmental actions. As a result, counsel have taken advantage of this fact to urge positions that have been accepted by some courts. Professor Warren clarified that Ms. Starr sought an exception to Section 105 against enjoining police and regulatory powers.

Mr. Kohn stated that 28 U.S.C. § 959 was not as important for the federal government as was 11 U.S.C. § 105. As an example, he cited Mohawk Airlines, a case where an ex parte injunction was entered to prevent the Federal Aviation Administration from withdrawing an airline’s operating license. Professor King asked if there was any situation in which it would be appropriate for the bankruptcy court to issue an injunction under Section 105. Mr. Kohn mentioned an action that would be enjoinable outside of bankruptcy such as to prevent harassment or discrimination. Noting that there were circumstances where a federal court could enjoin state actions, Larry Kaiser said that the issue of which law governs was largely about the party’s choice of forum.

Professor Warren asked the Commissioners if there was a consensus for an amendment to Section 105 limiting the authority of the bankruptcy judge to enjoin police and regulatory functions. Observing that the issue was "critical," Commissioner Ceccotti said this recommendation was "certainly favorable." Commissioner Ginsberg was troubled by the fundamental effect of a bankruptcy judge determining social policy. He said that there were "lots of problems" with this and that it was "very dangerous." Professor Warren acknowledged Commissioner Ginsberg’s characterization of Section 105 as the "last bastion of a desperate lawyer." Summarizing Commissioner Ginsberg’s comments, Professor Warren noted that he wanted "auditory and precatory" language in the report, but did not recommend that there be an amendment to the Code. Commissioner Hartley agreed with this conclusion as well.

The next issue addressed at the Roundtable discussion was successor liability and release of third party claims. Mr. Bean explained that this problem concerned a debtor’s ability to enjoin any action that could be asserted against the purchaser of the debtor’s assets either pursuant to Section 363 or as part of a reorganization plan. Specific examples that he mentioned were product liability claims and Medicaid recoupment for overpayments made to nursing homes.

Professor Warren inquired whether or not there was anything unique to government entities about these issues. She noted that the Mass Torts and Future Claims Working Group was reviewing the issue of successor liability and that the use of chapter 11 to discharge third party claims may possibly be discussed by the chapter 11 Working Group.

Ms. Ayres responded that when government claims, such as Medicaid overpayment liabilities and claims for AFDC fraud, were discharged, the funds available to service the needs of other people in need were diminished. Mr. Spears said he had a "hard time differentiating" between commercial and government claims. Ms. Ayres opined that there were protections in the commercial area that did not exist for governmental entities and that the commercial creditor/debtor relationship was voluntary. Mr. Tenenbaum said that additional concerns were presented when the government was involved in a police or regulatory context. He cited a case where the debtor proposed to conduct a sale under Section 363 pursuant to which the purchaser would have been immunized from having to comply with the environmental laws for three years.

Donald Bernstein, an attorney from New York, suggested that the discussants were possibly "mixing apples and oranges." He observed that while some of these concerns about the scope of discharge were very legitimate, the issue also involved increasing value to the estate by reducing liabilities against its assets. He said that one issue concerned "how you divide the pie," while the other was really about prioritization.

Professor Warren asked the Commissioners if there was consensus or guidance as to whether this issue should be addressed by the Mass Torts and Future Claims Working Group. Commissioner Ceccotti agreed that it should be considered by that Working Group with the reservation that if there was a specific recurrent aspect of the issue that should be addressed in the Government forum, then it should be re-referred.

The Roundtable participants then discussed the definition of a claim and whether or not the current definition was adequate. Noting that the definition of a claim included equitable remedies for breach of performance, Mr. Tenenbaum acknowledged that most circuit courts of appeal had correctly held that a breach of a cleanup order did not give rise to a right of payment within the meaning of this definition. Although there was "only a handful" of lower court cases holding to the contrary, he said that the definition could use "some clarification."

Professor Warren asked if advisory language, rather than statutory amendment, may beappropriate given the consistency at the circuit court level. Ms. Cordry questioned whether the courts had reached the right decision in spite of the definition. Given the significant role the claims definition had under the Bankruptcy Code, she said that the issue was "fundamentally important" and should be addressed by the Commission.

Commissioner Ginsberg said that changing the definition would open up "a whole other area" and that accordingly it should not be altered. When asked by Professor Warren if he was in favor of having auditory and precatory language about the issue appear in the Commission’s report, he said that he would be "perfectly happy to do that," but was unsure what weight it would be given. Although agreeing with Commissioner Ginsberg, Commissioner Ceccotti was not sure how she felt about this approach if there was just "a sentence floating out there" and thought, instead, that the Commission may want to consider making a recommendation regarding the issue as it applied to the environmental area. Commissioner Hartley agreed that the language should not be changed as it would lead to more litigation.

The next issue discussed concerned amending 11 U.S.C. § 362(b)(4) to mention specifically Section 362(a)(3) and (a)(6). Mr. Kohn explained that current Section 362(b)(4) did not apply to subsections (a)(3) and (a)(6). In response to Professor King’s concern that including Section 362(a)(6) would be "awfully broad," Mr. Kohn said that there were administrative actions that should be permitted to proceed. Ms. Ayres explained that this amendment would permit a taxing authority to assess a claim. Mr. Bean commented that subsection (a)(6) should be amended to clarify that it neither overlapped with Section 362(a)(1) nor undermined subsection (b)(4). Disagreeing, Professor King said that the application of Section 362(a)(6) was limited to collecting a prepetition claim and that Section 362(a)(1) was excepted because it applied under Section 362(b)(4).

Professor Warren inquired whether the Commissioners agreed that Section 362(b)(4) should be amended to include a reference to Section 362(a)(3). Commissioner Ginsberg suggested that further thought should be given to this recommendation. Messrs. Starzynski and Bernstein expressed concern about the applicability of this recommendation to governmental property seizures. Mr. Bernstein favored that Section 362(b)(4) be limited to including language pertaining to the exercise of control, a suggestion concurred with by Ms. Starr. Commissioner Hartley was concerned that folding together the vast case law of Section 362(a)(3) with that of Section 362(b)(4) could create a problem. He favored incorporating a reference to "exercising control" in Section 362(b)(4).

Mr. Bean asked how this proposal would impact on the government’s power to revoke licenses. He explained that where the license was deemed to be property of the estate, the government cannot revoke it. Thus, to the extent Section 362(b)(4) was amended to include "control over property of the estate," he wanted to know if this would then permit a government entity to revoke a debtor’s license. Professor Warren said that answer depended on whether the revocation was a regulatory function.

The next issue discussed was whether an action taken in violation of the automatic stay should be void ab initio or voidable. Mr. Kohn said that his agency recommended that the violation bedeemed voidable as it would help avoid the gamesmanship that currently occurred. Noting that the purpose of the automatic stay was not just to protect the debtor, but was for the benefit of the entire bankruptcy estate and other creditors as well, Professor King asked whether the recommendation would affect other creditors. While Mr. Kohn acknowledged that it could, he said that the court could consider these factors in determining whether the action should be deemed voidable or void ab initio. Bernard Shapiro of Los Angeles stated that he was unaware of any court that specifically addressed the court’s power to annul the stay. He suggested that the problem arose where the case was closed and the bankruptcy judge viewed the closure as "some kind of bar." He expressed concern that this proposal may give rise to a lot of litigation.

Karen Cordry of the National Association of Attorneys General explained that this issue addressed the problem of gamesmanship. She also discussed the propriety of setting a time limit on how long a debtor can delay in challenging a violation of the automatic stay.

Professor Warren asked whether this issue presented any special governmental concerns or whether it was encountered by other creditors as well. In case management terms, Commissioner Ginsberg observed that this issue had not been "a serious problem" as the courts in egregious cases found ways to address it properly such as by annulment of the automatic stay. Accordingly, his recommendation was to leave the issue alone. Commissioners Ceccotti and Hartley agreed.

The next topic reviewed concerned recoupment and setoff in the Medicaid context. Mr. Bean explained the process of how health care providers were reimbursed by state Medicaid agencies and the substantial claims that these agencies incurred based on overpayments made on provider agreements. Once bankruptcy intervened, he opined, there was an issue as to whether or not the state had the right to recoup these overpayments and that there was a "terrible split of authority" with regard to this issue.

Professor King asked whether a further problem was presented when a provider treated this agreement as an executory contract that could be assumed and assigned that, in turn, created the problem of whether the assignee was liable for those overpayments. Commissioner Ceccotti asked whether the one-year agreements were renewed and if there was an analogous problem with the Medicare program as well. Both Messrs. Bean and Kohn agreed that the Medicare program presented the same problem, one that would become "increasingly large."

When asked by Professor Warren as to whether this was reflective of an industry-wide bankruptcy boom in the health care industry as it consolidated, Samuel Maizel, with the U.S. Department of Justice, said that the issue had two components. First, it required assessment of whether recoupment should remain outside of the Bankruptcy Code’s purview or whether Section 553 or some other provision of the Code should be amended to cover all types of offsets, setoffs and recoupment. He said the issue involved not just the federal government, but other creditors as well. Professor Warren analogized the concept to another form of security interest. He explained that the second aspect of the problem was that Medicare required bankruptcy judges to decide competing social interests of providing health care out of a fixed health care trust fund or reorganization ofhealth care providers. In response to Professor Warren’s query, Mr. Maizel explained that Medicare did not stop payments merely because there was an overpayment situation.

Professor Warren then explored with Mr. Maizel how recoupment should be dealt with under the Bankruptcy Code. The concept discussed was whether the Bankruptcy Code should utilize the nonbankruptcy definition of recoupment and whether an action for recoupment should be subject to the automatic stay. Mr. Maizel observed, however, that recoupment was different from setoff, which concerned conflicting claims and debts, whereas recoupment involved just a "netting" or adjustment to determine what was actually owed to the debtor. He opined that recoupment was a defense, rather than an assertion, of a right to payment.

Mr. Bernstein was not sure whether recoupment should be subject to the automatic stay and how 11 U.S.C. § 542 related to the issue. Mr. Maizel observed that recoupment did not concern the assertion of an opposing claim, but focused on the determination of what was actually owed. He was not sure if there should be a distinction between setoff and recoupment with regard to the applicability of the automatic stay. Where there was a distinction, he observed, it was because of the ongoing nature of the relationship between the debtor and creditor. He explained that the injection of the bankruptcy process into the executory contract context allowed the debtor to control the timing of the assumption or rejection, while continuing to be paid under this unassumed, unrejected contract. In addition, the debtor could obtain an adjustment of the amounts owed under these contracts to which the creditor was compelled to remain a party. Rather than having a claim based on a right to payment, he said that the government entity had a defense to payment. Professor King clarified that as the government did not hold a claim, its right to recoup was not dischargeable. Professor Warren acknowledged that there was a consensus that this issue should be further considered by the chapter 11 Working Group.

The Roundtable session concluded at approximately 12:45 p.m. with Professor Warren’s thanks to the participants and other attendees for their contribution to the discussion.


At approximately 10:40 a.m., the Regulation and Taxation Roundtable session commenced. Commissioners present included Messrs. Alix, Shepard and Williamson. In addition, Stephen H. Case, Advisor, served as moderator and he was assisted by Jennifer C. Frasier, Staff Attorney. Participants included John Akin, Supervising Counsel with the California Franchise Tax Board; Joyce Bauchner, Assistant Chief Counsel for General Litigation at the Internal Revenue Service; Daniel Behles, a bankruptcy trustee with a solo practice in Albuquerque, New Mexico; Karrie Bercik, an attorney from San Francisco and adjunct professor of law at Golden Gate University; Mark Browning, Assistant Attorney General of the State of Texas; Stephen Csontos, Senior Legislative Counsel with the Justice Department - Tax Division; Heidi Heitkamp, Attorney General for the State of North Dakota; James Newbold, with the Illinois Attorney General Office; Professor Grant Newton from Pepperdine University; and Mark Segal, of the law firm of Segal & McMahon located in Las Vegas, Nevada.

Mr. Case began the discussion with a "philosophical" question: should governmental creditors be treated any differently from other creditors and, if so, why? Answering in the affirmative, Ms. Heitkamp said that the government entities, unlike the private sector, did not choose its debtors. Ms. Bauchner added that government agencies were involuntary creditors and that the Code recognized this difference. Mr. Browning, noting that government agencies outside of bankruptcy have extraordinary powers that nongovernment creditors do no have, said that the question should be whether the filing of a bankruptcy case should give debtors special privileges that nondebtors do not have absent bankruptcy.

From the debtor’s perspective, Mr. Behles said that he had no problem with tax claims being treated preferentially in bankruptcy and that he was interested in having as much of the tax liability discharged or paid so that his clients’ fresh start meant something. He did not want the government’s ability to avoid the requirements of Section 362 to be expanded as debtors needed a breathing spell to get their taxes paid and to make their tax return filings current.

Mr. Csontos noted that many consumer bankruptcy filings were no asset cases and that governmental agencies were accordingly "stopped in their box." He said the difference between the government and private sector creditor was that the former was a representative of the public. Disagreeing with Mr. Csontos, Ms. Bercik stated that when a business succeeded, society benefitted through the creation of jobs and payment of taxes. Ms. Heitkamp was concerned about good taxpayers having to subsidizing those who did not pay and abused the bankruptcy system through repeat filings.

Mr. Behles did not oppose refunds being credited against prepetition taxes, but he did not want the government to interfere with ongoing reorganization efforts. He suggested that the United States Trustee should play a more active role in monitoring the debtors’ postpetition performance with respect to the payment of tax obligations and filing requirements in chapter 11 and chapter 13 cases. He also noted chapter 13's failure to provide for dismissal with prejudice. In response to Commissioner Alix’s question as to whether the standing chapter 13 trustee monitored the debtor’s payment of postpetition taxes, both Mr. Browning and Mr. Behles agreed that there was no uniformity. Mr. Browning said that it was ultimately up to the taxing authority to perform this function.

Mr. Segal observed that many of his clients were "well-beaten up" by the time they came to him and that usually the government had already seized their bank accounts and filed nonconsensual liens against their property. Accordingly, he said that his clients needed chapter 13 to "level that playing field." Commissioner Shepard asked Mr. Segal whether the governmental and private sector creditor should be treated equally. In response, Mr. Segal opined that as his clients did not start out equally with their governmental creditors, he tried to make it more equal. He stated that he was not opposed to government creditors receiving dividends larger than other creditors.

Acknowledging that some government creditors had administrative collection powers greater than virtually all other creditors, Mr. Newbold said that government creditors were among the fewcreditors where the debtors informed them how much they are owed. In addition, he noted that only one or two percent of all income tax returns were audited and that approximately 30 percent of income was unreported. Mr. Segal observed that a "great majority" of debtors did tell the government what they owe and, if they did not, the government told them what they owe.

The second "philosophical question" posed by Mr. Case to the participants was whether it was fair for some people to escape their tax obligations through bankruptcy, while others paid all of their taxes each year. Ms. Bauchner responded that the Internal Revenue Service had many programs designed to permit people, suffering from hardship, to compromise their liabilities. She said that the question should not be directed at those who really cannot pay their taxes or were willing to work out an arrangement with the tax authorities. She stated that there was "nothing wrong" with the Bankruptcy Code’s spirit of compromise, but her agency’s proposals were addressed to other issues such as the failure to file returns and the inability to setoff tax claims against refunds.

Mr. Behles said that he used chapter 13 to get his clients a better installment deal than the Internal Revenue Service was initially willing to offer outside of bankruptcy. Commissioner Alix observed that the chapter 13 process fostered speed and certainty. Mr. Behles also noted that there was a "huge amount of variance" among the districts regarding offers to compromise. Commissioner Alix, while acknowledging that there was greater public awareness of the Service’s offer and compromise efforts, agreed that there were great variances in the implementation of this process.

Commissioner Shepard asked whether it would be fair to require all debtors to pay taxes to the best of their ability. Mr. Behles said that the bankruptcy system encouraged a higher rate of repayment from debtors than from those not in the system as there was greater control and oversight. He said that chapter 20 helped, rather than hurt the government. Mr. Browning concurred and said that he received more efficient collections from chapter 13 debtors then from chapter 7 debtors or others who did not file bankruptcy. He suggested that there should be incentives to attract debtors into chapter 13 and that he was not "personally troubled" by the concept of providing relief from interest payments in chapter 13 cases.

Commissioner Shepard asked whether there should be a requirement that 100 percent of a debtor’s tax obligations be paid. Mr. Segal explained that his clients used chapter 13 as their last resort after they have exhausted their offer and compromise options with the Internal Revenue Service. In addition, his clients devoted all of their disposable income to fund plans that, in turn, paid the taxing authorities. He did not think that an arbitrary amount such as 100, 60 or 40 percent minimum repayment should be decreed as long as the debtor was paying his or her disposable income into the plan.

Ms. Heitkamp observed that the focus should be on the whole universe of taxpayers and what the system is doing to encourage general good public behavior. Professor Newton said that there should be economic or policy incentives that facilitate the fresh start process. A "good" example of such an incentive was not requiring the debtor to pay interest in chapter 13.

Commissioner Shepard reiterated his concern about a system that required some taxpayers to pay their taxes while it allowed others to avoid paying them. In response to Professor Newton’s query as to whether he objected to the Internal Revenue Service’s offer and compromise program, Commissioner Shepard said that the Service "certainly can do that." Professor Newton noted that he did not oppose priority status for tax claims in bankruptcy and suggested that the consequences of this prioritization should be examined on a case-by-case basis. While in many cases it may be justified, he said that there were some cases where it would not be justifiable. Professor Newton and Commissioner Shepard agreed that debtors should be required to repay their taxes to the extent of their ability and that rules should be crafted to eliminate perceived abuses from the system.

Mr. Csontos observed that chapter 13 involved an issue of leverage. While outside of bankruptcy the Internal Revenue Service controlled the amount that the debtor must repay, chapter 13 gave that control to the debtor subject to confirmation standards, he noted. He said that taxpayers should use the Internal Revenue Service’s administrative procedures. Mr. Segal responded that the "great majority" of his clients’ chapter 13 were filed because nothing could be worked out with the Internal Revenue Service.

The panelists who were debtors’ counsel then discussed the ratio of chapter 13 cases they filed for their clients compared with compromises obtained from the Internal Revenue Service. Commissioner Shepard referred to a study which revealed significant geographic variations in the number of offers and compromises. Mr. Segal recalled that in the past it was a "badge of honor" for a local district office to boast that it rejected all offers and compromises. The situation, however, had changed over the past three years, he said. On the other hand, he noted that the Internal Revenue Service had issued national standards that defined the amount to be expended on food, clothing, personal grooming and housing. He said that in Las Vegas the housing limit was $1,000, an amount that did not take into account utility expenses. Given this rigidity, debtors found chapter 13 offered an alternative way to work out a repayment plan. Recognizing that chapter 13 was a bankruptcy event that would appear as a "black mark" on their credit reports for ten years, they tried to avoid filing for relief under chapter 13 "at all costs" and used this alternative only because they could not avoid it, he said. Ms. Bercik agreed with this statement.

Commissioner Shepard said that in many cases taxpayers fund litigation to dispute their tax liabilities yet fail to pay their taxes because they did not want to pay them as opposed to being unable to pay them. Ms. Bercik said her clients were unable to pay their taxes.

Mr. Browning stated that there were "two absolute requirements" always imposed by the tax authorities in all non-bankruptcy work outs. First, the taxpayer must be current with all of his or her returns. Second, the taxpayer may not incur new liabilities while paying off the old ones. If these requirements were imposed in bankruptcy cases, this would eliminate abusers from the bankruptcy system, he suggested.

The Roundtable discussion then focused on 28 U.S.C. § 960. Mr. Csontos said that as this provision was located in Title 28 of the United States Code, it seemed "to get lost in the shuffle" insome bankruptcy cases. He suggested that the Bankruptcy Code should itself reflect the sentiments set out in Section 960 and that it specify that a bankruptcy trustee or debtor in possession was liable for federal and state taxes regardless of whether or not such trustee or debtor conducted a business.

Mr. Behles did not oppose a provision being added to the Bankruptcy Code that required the dismissal of a bankruptcy case would be dismissed if the debtor failed to timely file his or her tax returns or pay postpetition tax liabilities.

Commissioner Alix then relayed two personal accounts of his experience with this issue. One involved an operating moving and storage company for which the principals failed to pay any trust fund taxes for two years prior to his involvement. Upon entering the case, Commissioner Alix determined that the company owed $150,000 in back taxes and reported this to the local Internal Revenue Service agent in Detroit. He explained to the agent that as part of the company’s rehabilitation, he wanted to work out a voluntary repayment plan. Pursuant to this arrangement, payments in the amount of $2,000 per month commenced. The company then filed for relief under chapter 11 and ultimately the case was converted to one under chapter 7. Thereafter, he was served with a notice stating that he was a responsible person for the unpaid back taxes in the amount of $150,000 and that a lien would be obtained against his assets. Rather than litigate the issue, he agreed to settle the matter with the Internal Revenue Service for $40,000. Based on this experience, Commissioner Alix said that there should be some protection for those professionals, such as turnaround specialists, accountants and attorneys, who deal with troubled companies.

The second instance concerned Cardinal Industries, a bankruptcy case where he served as the operating trustee. The debtor, consisting of more than 1,000 separate entities, had operated in chapter 11 for nine months prior to his appointment as trustee. As trustee, he determined that many of these entities had not paid their taxes. As there were insufficient funds in the estate to pay these taxes, he was faced with the issue that he may have personal liability for these taxes even though they were not incurred during his tenure. His alternative as a trustee was to convert the case to one under chapter 7, liquidate the assets and "get out from under that personal liability."

Agreeing with the concerns expressed by Commissioner Alix, Mr. Behles recounted a chapter 7 case where he was appointed a successor trustee and the estate consisted of 300 gas stations, most of which had environmental problems. As posited by Commissioner Alix, he said that the manager of an estate should not be turned into a responsible person. In response to Commissioner Shepard’s request for clarification, Commissioner Alix explained that the trustee should have whatever liability attendant to the trusteeship, but should be immune from whatever happened prior to his or her assumption of the trusteeship. Although Ms. Bauchner alluded to certain case law which limited the extent of a trustee’s liability, Commissioner Alix explained that there may be insufficient funds in the estate to fund such a defense.

Acknowledging that the rules ought to be clear on the extent of a trustee’s liability, Mr. Csontos observed that government entities may be amenable to this concept and suggested that it "would be well worth the effort" for the Commission’s report to include something that outlines thetrustee’s responsibilities and liabilities. Ms. Bauchner agreed that clarity may provide everyone involved with the system a "better sense of security" and serve to move the system forward.

Commissioner Shepard asked whether anyone disputed the requirement that chapter 11 and chapter 7 estates file returns and pay taxes. Commissioner Alix explained that the issue involved defining the period for which returns must be filed and who was responsible for the tax that resulted from the filing of such returns. There was also the problem of having to complete returns without having access to any records that supplied the information necessary to complete the returns. Mr. Behles noted that many of his clients had tax liabilities because they did not keep records. Mr. Browning suggested that a provision be crafted that limited a trustee’s liability to the date of appointment and protect them from pre-appointment liability.

In the states that she worked in, Ms. Heitkamp explained that this did not occur as the trustee’s good faith and best efforts to deal with any prepetition tax liabilities were considered. Mr. Behles said that Commissioner Alix’s "horror story" was not an isolated event and suggested that a poll of chapter 7 and chapter 11 operating trustees would reveal that everyone has experienced this problem.

The next topic discussed by the Roundtable panelists was Section 724 of the Bankruptcy Code. Mr. Newbold stated that the main problem with this provision was that was difficult for tax lienholders in chapter 13 and chapter 11 cases to determine whether to seek adequate protection. If the case failed, the tax lien can be subordinated, for example, to fund unpaid chapter 11 administrative expenses. He likened it to being the "antithesis" of Section 506(c).

Professor Newton observed that the real problem was the system’s inability to determine whether a case was viable or not and asked whether the issue related to taxes or the failure to assess a debtor’s viability. Commissioner Shepard said the problem involved both. He posited that there were substantial Constitutional issues presented by this provision as it constituted a form of taking and that it also had a "devastating" effect on local tax revenue. Mr. Newbold observed that Section 724 did not improve the treatment of general unsecured creditors. Professor Newton emphasized that unsecured creditors would not receive anything in a case that was not viable, but would if it was liquidated. Ms. Bauchner noted that Section 724(b) encouraged bankruptcy cases to continue longer than they should because it protected administrative expense claimants. Nevertheless, she said as that the determination of a business’s viability was not easy and required money, she was not sure who would perform this task.

Commissioner Alix remarked that as Section 724(b) enabled trustees to pay their fees, hire professionals and manage their estates, they may be "violently" opposed to its elimination. Stating that he had been a panel trustee since 1982, Mr. Behles said that he had never used the provision. Likewise, Mr. Newbold said that it was rarely used in the Northern District of Illinois. He noted, however, that he had heard that it was used "all the time" in Texas. Mr. Browning added that the application of Section 724(b) to individual debtors resulted in a diversion of funds that would have ordinarily been allocated to pay nondischargeable taxes secured by a lien on the debtor’s property.

The next area addressed by the Roundtable discussants concerned the allocation of the burden of proof with regard to tax issues. Mr. Csontos suggested that there should not be any difference in the way tax issues were determined by bankruptcy judges as opposed to how they were decided by non-bankruptcy tribunals. He acknowledged that bankruptcy trustees must administer cases with incomplete records and that small business debtors usually did not have adequate records.

Commissioner Alix noted that debtors frequently did not know how much they owed because they had not filed their returns and lacked records. While Mr. Behles agreed with Commissioner Shepard that the debtor should have the burden of proof in those instances where the debtor has filed tax returns, he averred that the tax authority should be required to prove the reasonableness of its estimated claim. Ms. Bauchner explained that when the tax authority filed an estimated proof of claim, this was the best it could do based on the information available.

Ms. Heitkamp said that an incentive is created for debtors who have not filed their tax returns to seek bankruptcy relief because there was still a question about who had the burden of proof. Mr. Behles said that he never had a client file for bankruptcy in order to shift the burden of proof on a disputed tax return to the Internal Revenue Service.

Ms. Bauchner explained that as the tax system was premised on voluntary compliance, very conscious decisions had been made about who should have the burden of proof based on who had the information. Bankruptcy, she observed, did not change this premise.

The panelists then discussed the issue as it applied to trustees. Commissioner Alix agreed with Ms. Bauchner that an objection to an estimated proof of claim should have some basis other than to extract a settlement or to cause delay. Commissioner Shepard described a case where the debtor, consisting of corporations and partnerships, had the records, but not the funds to enable the trustee to determine the exact amount of the debtor’s tax liability. Observing that she was "usually very pro-debtor," Ms. Bercik said that assigning the burden to the government would encourage irresponsibility and forum shopping. Commissioner Alix expressed concern with those cases where the trustee had insufficient funds to prepare the missing tax returns. Mr. Behles observed that where there were insufficient funds to dispute a claim and there would be a de minimis benefit to the general unsecured creditors in the case, then the trustee should not bother objecting to the tax claim.

The next issue discussed by the Roundtable panelists was whether the "super discharge" of chapter 13 should be amended so that it did not apply to tax claims. With regard to the prior issue, Mr. Segal agreed that the burden of proof should be the same in bankruptcy as it was outside of bankruptcy. Nevertheless, with regard to the scope of the chapter 13 discharge, he said that only those claims where the government met its burden of proving fraud should be excepted from discharge. He said that the mere allegation of fraud by the Internal Revenue Service was sufficient to establish fraud and thereby prevent the taxpayer from using chapter 7 because the practical effect was that the taxpayer cannot afford to litigate the fraud issue. While he agreed in principal that fraud should not be dischargeable in bankruptcy, the government should be required to prove its case. Ms. Bauchner noted that if there was an assessed liability with a fraud penalty, this meant that the issuehad already been litigated in tax court or the taxpayer had received his or her statutory notice and signed off on it. Mr. Segal averred that his clients generally had not previously litigated the issue and many failed to exercise their administrative rights because they lacked counsel.

Mr. Behles observed that the tax creditor had much more "economic clout" than the typical taxpayer who was a bankruptcy debtor. This may support the reallocation of the attorneys fees incurred in a successful defense, similar to that available to debtors under Section 523(d), he argued. Ms. Bauchner said that there were provisions that awarded fees where the government’s position was not substantially justified.

Mr. Csontos expressed concern with a bankruptcy system that permitted debtors who were not current in the filing of their tax returns to obtain a discharge of their tax liabilities. Mr. Segal explained that when the non-filer was brought into the bankruptcy system, he or she was offered the "carrot" of chapter 13 and, more importantly, the system encouraged the filing of returns for periods that would otherwise be dischargeable. He said that his clients voluntarily paid 100 percent of their priority tax claims, although the percent paid to non-priority tax claims depended on the debtor’s disposable income.

In response to Commissioner Shepard’s query, Mr. Segal said that many of his clients’ plans paid zero percent to general unsecured creditors. Commissioner Shepard then asserted that this made chapter 13 a "tax haven" for taxpayers who have not filed their returns. They can accrue eight to ten years of outstanding returns and then have to pay only for three years in a bankruptcy case, he observed. Mr. Segal responded that employment taxes were not dischargeable and that he was "somewhat disturbed" by the references to "recidivists." He asked the Commissioners to identify clearly who these recidivists were and whether they were business people "jumping in and out" of bankruptcy to save their businesses as opposed to the typical wage earner who may have lost his or her job and could not make the first chapter 13 case work. Commissioner Shepard said that Bankruptcy Judge Polly Higdon has maintained statistics for the state of Oregon and that the Southern District of California had "rampant problems" with serial filings to forestall foreclosure.

To determine whether there was any consensus on this issue, Mr. Case asked each of the panelists to summarize their positions. Mr. Segal said he was not in favor of eliminating the super discharge for "non-filers" and that fraud was the only exception that he supported, provided the government was able to prove it. Mr. Newbold recommended that having all prepetition returns filed should be a requirement for confirmation of chapter 11 and 13 plans. In addition, he said that there should be an exception to the super discharge for fraud and for failing to file tax returns. The only issue that Mr. Behles raised with respect to this recommendation was that there should be some statute of limitations for those situations where, for example, the debtor did not file returns for more than twenty years. Commissioner Shepard disagreed with this suggestion as it would protect tax protestors and that he did not have "much compassion" for debtors who fail to file returns.

The Roundtable panelists then discussed the issue of serial filings. Mr. Behles asked whether any of the tax government representatives objected to a debtor using chapter 20 primarily for thepurpose of enabling the debtor to repay. In response to Mr. Case’s request for clarification, Mr. Behles explained that this would pertain to a debtor who first filed a chapter 7 case to eliminate all other unsecured debts and then filed a chapter 13 case to pay the nondischargeable tax liabilities and obtain a chapter 13 discharge. Ms. Bauchner observed that there was much geographical disparity across the country with respect to serial filings; in some districts it was a problem, while in others it was not.

Professor Newton said that there was "something wrong" with a system that required the filing of two bankruptcy cases to address a problem. Nevertheless, he was not opposed to the concept. He then discussed possible solutions to the problem, such as redesigning chapter 13 so that it allowed creditors to benefit from the debtor’s future income by providing tax incentives to the debtor. One such incentive, he suggested, was not having to pay interest.

Ms. Bercik inquired whether the problem presented by serial filings impacted on tax interests or foreclosure efforts. Ms. Heitkamp said the system perpetuated refiling and permitted people to avoid their public responsibilities. Commissioner Shepard discussed the concept of suspending the three-year period under Section 507(a)(8) during the pendency of the prior bankruptcy case. As a solution to avoiding serial filings, Mr. Segal suggested eliminating the bifurcated aspect of the $1 million eligibility limit for chapter 13. Mr. Behles supported this suggestion. Mr. Browning was not sure if there should be an "absolute bar" on repeat filings and recommended that a bankruptcy judge could apply a "material change of circumstances" test based on the facts of the case. The panelists then discussed whether there should be a time limit and, if so, what it should be.

Mr. Csontos wondered why it was necessary to eliminate the bifurcation between secured and unsecured debt for chapter 13 eligibility purposes. Mr. Segal said that the interest and penalties can cause the tax claim to exceed the current $250,000 limit for unsecured debt. Commissioner Shepard expressed concern that this would protect the tax shelter investor who hid taxable income for many years. Mr. Segal said he did not like the term "dishonest taxpayers" as only those who commit fraud were defined to be dishonest by the tax system.

In response to Commissioner Shepard’s query, Professor Newton discussed the possibility of having a taxable gain when property is abandoned. Both he and Commissioner Shepard agreed that chapter 18 was not a proper use of the Bankruptcy Code. Ms. Bercik addressed the possibility of reclassifying the status of the tax claim in the chapter 11 case that results from a sale of estate property from administrative expense to priority.

The next issue discussed at the Roundtable session pertained to the setoff of tax obligations against tax refunds. As the current system required a motion to assert this setoff, Ms. Bauchner explained that the result was very expensive and time consuming for everyone involved. In those districts where the Internal Revenue Service had standing orders, the system worked well, she observed. Ms. Bercik, while not opposed to allowing prepetition refunds to be setoff against pre- or postpetition taxes, questioned whether the tax authorities would allow other creditors to setoff their claims and whether this constituted a voluntary payment that the debtor could direct its allocation. Ms. Bauchner responded that the proposal was limited in scope and did not involve an issue of allocation. Ms. Bercik said that her only concern was that the government was allowed to obtain funds that other creditors should be getting. Ms. Bauchner also noted that the concept did not involve an issue of whether the payment was voluntary or involuntary. Agreeing, Ms. Heitkamp explained that although the system was voluntary as it was self-assessed, there were "involuntary consequences" when the taxpayer did not voluntarily comply.

The last issue addressed by the Roundtable panelists was whether a debtor should be required to file all tax returns as a condition of obtaining the benefits bestowed by the Bankruptcy Code. Mr. Segal expressed concern about the word "all" as he thought there should be some limitation on the number of years. He said that many people did not have the records and sometimes the Internal Revenue Service did not have these records as well. He suggested that the reach back period be defined at some specific point. Ms. Heitkamp noted that wage earning information could be obtained from social security records. Commissioner Shepard was concerned that a "bright line" could establish a "goal for the tax evader." Professor Newton said that the issue did not concern the dischargeability of debt, but related to getting the information for the filings. Accordingly, he thought six years may be a "reasonable period." Mr. Csontos observed that there had to be some balance because the proposal would enable the Internal Revenue Service to avoid filing "thousands of motions."

At the conclusion of Mr. Csontos’ remarks, Mr. Case brought the Roundtable discussion to a close at approximately 12:49 p.m.


At approximately 2:00 p.m., Chair Williamson reconvened the afternoon session. He announced that the meeting would begin with those open forum speakers who could not be heard earlier that day.


Ray Valdes, appearing on behalf of the National Association of County Treasurers and Finance Officers, said his Association represented "probably the widest group of people affected by legislation in the bankruptcy area." He explained that property taxes were the "life blood" of local government’s revenue stream. If a major contributor to this revenue source can avoid or delay its property tax payment for a long period, this can have a dramatic impact at the local level, he said. For instance, small counties may have to curtail educational programs and firefighting services. He noted that Section 724(b) was "especially disadvantageous" to local governments. To document the problems associated with this provision, Mr. Valdes stated that his Association and the National Association of Attorneys General conducted a national survey and that the results would be submitted to the Commission. He said that the government’s postpetition taxes should not subsidize the debtor’s payment of its prepetition creditors. He summarized that taxes and special assessments by local governments should be exempted from inclusion in a bankruptcy case or should be treated moreequitably.

Commissioner Shepard asked Mr. Valdes to explain how Section 724(b) impacted on local education and firefighting programs. Mr. Valdes said that the nonpayment or delay in the payment of local property taxes had a direct effect on the budget for counties and municipalities and, in turn, caused them to have to redirect their resources.

Chair Williamson inquired whether Mr. Valdes had difficulty collecting property taxes assessed against real estate or personal property sold either in bankruptcy or outside of bankruptcy. Mr. Valdes responded that there were reported cases emanating from the Middle District of Florida where, for example, the bankruptcy judge authorized the sale of tax certificates, but reduced the interest rate to eight percent. This ruling affected all of the investors who purchased the tax certificates and changed the revenue stream for the county. In addition, he mentioned that judges had "stayed the taxes" during the pendency of bankruptcy cases. He concluded his presentation by recommending that a parcel number be supplied for real property interests listed in any bankruptcy estate as it was very difficult and time consuming to research these interests when the parcel number was not disclosed.


Ms. Romero and Mr. Ford appeared on behalf of the California Association of County Tax Collectors. Mr. Ford began his remarks by noting that California was "under attack" since the enactment of the Bankruptcy Reform Act of 1978 and the 9th Circuit’s ruling in Glass. He said that more than 85,000 claims representing more than $83 million in taxes were filed in bankruptcy cases by California counties last year. He also mentioned that California was a unique state in that it has Proposition 13 that restricted the taxes on assessed property.

Ms. Romero said that the statistics that Mr. Ford referred to did not include Los Angeles County which received 150 bankruptcy cases per day. She explained that the revenues generated by property taxes fund hospitals, schools, police and fire protection services. Where there was a loss or delay in the payment of these taxes, essential services had to be downsized, she observed. She mentioned one town where funding for the school district, fire and police protection, and road maintenance was reduced by 25 percent as a result of the two-year delay in the payment of postpetition taxes by a local company that filed for relief under chapter 11. In response to Chair Williamson’s question as to whether any efforts were made to collect these monies, Mr. Ford said that several attempts were made, but as the case was pending in Houston, Texas, it was burdensome given the number of times the town’s attorney had to appear. Another example was then discussed.

Among the specific concerns that Ms. Romero cited was the need for improved noticing requirements, the necessity for counties to increase their borrowing as a result of reduced property tax collection, and the fact that local taxes were not receiving the priority that they were intended to receive in bankruptcy cases. She suggested that the noticing requirements for adversary proceedings under Bankruptcy Rule 7004 should be clarified regarding their applicability to state and localgovernments. In addition, she observed that Section 506(b) neither provided for the state interest rate nor attorneys’ fees. Further, she said that postpetition taxes should have priority status under Section 507(a)(1) because the fees of professionals were usually paid during the pendency of the case before any tax payments were made. She explained that certain bankruptcy judges have held in rem property taxes to be unsecured. Moreover, she said bankruptcy judges could redetermine tax liabilities pursuant to Section 505(a). Finally, she said that debtors used Section 1129(b)(2)(A)(2) to stretch out payments for "as long as they want."


Ike Shulman, President of the National Association of Consumer Bankruptcy Attorneys, initially discussed the dischargeability of tax debts, a topic considered at the Regulation and Taxation Roundtable Session that he attended earlier that day. Specifically, the issue was whether the chapter 13 "super discharge" provisions should be changed to prevent the discharge of tax obligations. He strongly opposed preventing debtors with unfiled tax returns from obtaining a discharge under chapter 13. He said that substantial payments, amounting to $230 million, were made to taxing authorities through the chapter 13 process for the fiscal year ending last September. Commissioner Shepard asked what was the amount of claims discharged. Although Mr. Shulman did not know, he said that it was also not clear what would have been collected outside of chapter 13. He said that many of these debtors would not have been eligible for chapter 13 relief if they had been required to pay 100 percent of their taxes. He said that the government benefitted from the chapter 13 process by having these debtors re-enter the tax system and pay their priority taxes in full.

Mr. Shulman