National Bankruptcy Review Commission
THE NATIONAL BANKRUPTCY REVIEW COMMISSION
MINUTES OF MEETING HELD:
Thursday, June 20, 1996
Friday, June 21, 1996
NOTE: THESE MINUTES HAVE NOT YET BEEN
APPROVED OR ACCEPTED BY THE COMMISSION
Prepared by: Susan Jensen-Conklin
Dated: July 15, 1996
MEETING - THURSDAY, JUNE 20, 1996
Georgetown University Law Center
Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Babette A. Ceccotti
John A. Gose
Jeffery J. Hartley
Hon. Edith Hollan Jones
James I. Shepard
Commission Reporter and Staff Present:
American Bar Association - Business Law Section
American College of Bankruptcy
Commercial Law League of America
National Bankruptcy Conference
National Conference of Bankruptcy Judges
Small Business, Partnership
Approximately seventy-five people were in attendance including
from the Administrative Office of the United States Courts, Executive
for United States Trustees, the Securities and Exchange Commission,
and 7 trustee offices, state government, professional and trade
private industry, law firms, and the media.
Chair Williamson called the meeting to order at approximately 9:10 a.m.
made preliminary comments. He thanked Dean Judith Areen for making the
facilities at Georgetown University Law Center available to the
then described the meeting agenda and format. He stated that if the
proved to be productive, it would be continued throughout the
life. The minutes of the May 16-17, 1996 meeting were approved by oral
of the Commissioners, subject to certain technical corrections being
Chair Williamson then reported on the Commissions budget and
an adjusted budget may be prepared for the next meeting. With regard to
Commission members speaking engagements, Chair Williamson reminded
Commissioners to keep the staff apprised of these matters. Thereafter,
Jensen-Conklin, Deputy Counsel, gave a brief update on the status of
Technical Corrections Act, proposed legislation pending in the Senate.
Chair Williamson concluded his introductory remarks by discussing the
frame and content of future mailings to the Commissioners. He
Commissioners as well as interested parties to assist the Commission in
efforts to hear viewpoints not previously expressed. Chair Williamson
introduced the representatives appearing on behalf of the American
Professor Zinman began his remarks by noting that the ABI did not
take advocacy positions on matters of substantive bankruptcy policy as
organization represents all constituencies in the bankruptcy area. He
however, that the ABI was committed to the notion that modern commercial
society must have a method for dealing with financial failure.
Professor Zinman observed that the ABI has sponsored over the past year
Bankruptcy Reform Study Project designed to frame the issues most in
review by the Commission. He then identified the components of the
Project. First, he noted that the ABI had sponsored nine symposia as
its National Symposia Series, the results of which were reported in
format. Second, the ABI Law Review devoted two of its issues to the
Reform Study Project. Among the articles included in these publications
two empirical studies from the Central District of California. As the
component of the Study Project, Professor Zinman discussed the ABI
survey. The fourth component comprising the Study Project that he
were the analytical studies being performed by 20 committees. In
his opening remarks, Professor Zinman emphasized that ABI and its
anxious to help the Commission, they supported the Commissions
and they wanted to see that the Commission succeeded in those
Judge Kelley discussed various issues presented in bankruptcy law and
practice. With regard to Chapter 13, he recommended that the minimum
percentage under a plan be determined by the bankruptcy judges. He
the standing trustee system generally worked well. Referring to certain
statistics supplied by the Administrative Office of the United States
Judge Kelley observed that 98.5 percent of all cases filed in 1995 were
Chapter 7 or Chapter 13 consumer cases. Based on the projected one
cases that are anticipated to be filed this year, he estimated that 32
individuals, families, and businesses would be affected. Concerning
filings, Judge Kelley said that while they were troublesome, bankruptcy
could devise remedies under the present law to deal with this problem
was not an area that had to be addressed by the Commission. As to
exemption planning, he observed that 95 percent of the consumer filings
asset cases and that he was not aware that much exemption planning
most of these cases. He suggested that a law which prohibited exemption
planning would be difficult to enforce.
Turning to Section 707(b) of the Bankruptcy Code, Judge Kelley noted
provision was awkwardly worded, but reasonably useful. With regard to
the scope of the discharge should be further constrained or restored to
original dimension, he observed that the a bankruptcy court did not need
specific nondischargeability provisions to prevent abuse.
Ms. Williamson prefaced her remarks by noting that they were not on
the ABI and in some instances were not her personnel positions, but
consensual responses to Professor Warrens issues memoranda. In
of improving jurisdiction and procedure, Ms. Williamson reported that
complete consensus that many of the issues presented therein would be
by giving bankruptcy courts Article III status over a reasonable period
time. Absent Article III status, she noted that the means for
jurisdictional and procedural issues were more complex. For example,
observed that the current system of appeals to the district court was
viewed as being time-consuming, expensive and lacking precedential
addition, she said that there was a perception that a majority of
court judges do not afford bankruptcy appeals the requisite degree of
analytical review. There should be some form of reference system, she
With regard to jury trials, she proposed that bankruptcy courts should
permitted to conduct jury trials, but only with the consent of all
Additionally, bankruptcy courts should have limited contempt powers,
district court review. With regard to venue selection, Ms. Williamson
that the consensus was that there should be some restrictions imposed
the debtors principal place of assets as opposed to the state of
The primary goal of Chapter 11, Ms. Williamson noted, should be to
going concern value and jobs as well as to provide for the orderly
of a business entity. She observed that there was a perception that
was being utilized to extort participation for equity or junior holders
have no continuing economic stake in the debtor. The issue of whether
entities with no continuing economic stake in the debtor should have a
participate in the process is one that the bankruptcy judge should
early in the case.
As to claims trading, Ms. Williamson said that it should be clear that
court has the authority to adjust the rights of claimants if adequate
disclosure is not made to the persons selling their claims. Likewise,
stated that the court should have the ultimate authority to change the
composition of committee members and to review the appointment decisions
United States Trustees.
The question as to small businesses and partnerships, Ms. Williamson
was how they should be treated differently. She noted that a majority
courts have concluded that a partnership agreement is an executory
subject to Section 365 of the Bankruptcy Code. There was a growing
that non-debtor partners were often financial investors and management
absolutely fungible. A Chapter 11 trustee should be able to succeed to
rights of a debtor/general partner and the partnership agreement should
capable of being assumed, she stated. In addition, she suggested that
contribution in partnership cases should be clarified as well as the
basis for temporary or plan injunctions to protect partners. It was
recommended, she noted, that the rights of a Chapter 7 trustee be
available to Chapter 11 trustees, but that the actual extent of
determined under state law. Further, the Bankruptcy Code should be
ensure that a limited liability corporation is an eligible debtor.
Concerning mass torts and future claims, Ms. Williamson reported that
consensus was that the bankruptcy system was the most appropriate forum
process these claims. Proffered suggestions included having the
a claim bind both present and future claimants under a plan or legal
representative for future claimants. The failure to deal with future
has resulted in the unintended policy decision to elevate the rights of
creditors over known creditors with injuries, she observed. The
believed that claims should not be given a priority over administrative
other unsecured claims, she reported. Likewise, punitive damages should
have a priority over compensatory and contract-based claims. Ms.
said that there should be a clear preemption of state-based access or
claims against the purchasers of assets from a debtor or trustee. Given
uncertainty of such liabilities, she noted that this resulted in
discounts in the prices paid for assets. Concluding her remarks, Ms.
Williamson noted that many of the concerns she discussed regarding mass
and future claims pertained as well to environmental issues.
Mr. Meth noted that he was a member of the ABI Bankruptcy Reform Study
Steering Committee which prepared a membership survey for dissemination.
result of a two-year effort, the survey reflected input from judges,
for debtors and creditors, representatives of the United States Trustee
trustees, accountants, and turnaround professionals, he noted. The
version of the survey, he observed, will be released in the July/August
of the American Bankruptcy Institute Journal and distributed to more
members. He explained that the survey attempts to deal with overall
policy issues to determine how the process works and to identify the
Judge Kelley suggested that while it would be catastrophic if Chapter 7
combined with Chapter 13, he supported expanding Chapter 13 to apply to
corporations and partnerships with a limited amount of debt.
AMERICAN BAR ASSOCIATION - BUSINESS LAW SECTION
Judge Roger Whelan, speaking on behalf of the American College of
ACB ), described the work of his organization and standards for
stated that the ACB was very concerned about the future of bankruptcy
that it had formed a steering committee chaired by Gerald Smith. The
committee, in turn, has instructed several focus groups to examine those
substantive and procedural areas that were problematic, he noted. These
groups, Judge Whelan reported, prepared an exhaustive study with
Appearing on behalf of the National Bankruptcy Conference ( NBC ) were
M. Rosen and J. Ronald Trost. Mr. Trost explained that the NBC had been
working on improving the administration of bankruptcy law since 1934 and
active in assisting the 1973 Commission. He said that the NBC had seven
on which it wanted the current Commission to focus. First, the NBC
supported according Article III status to the bankruptcy court, he
Second, the Commission should recommend amending 28 U.S.C. § 2075
permit the Supreme Court to promulgate rules of practice consistent with
Bankruptcy Code. Third, the United States Trustee Program should be
very carefully to make sure that it is properly administered and that
duties are clearly delineated, Mr. Trost said. Fourth, Section 105(d)
Bankruptcy Code should be expanded to put the bankruptcy judges into
management. Fifth, he noted that the provisions concerning executory
contracts, partnerships and future claims should be totally revised.
the special purpose legislation that has been engrafted upon the
Code since its enactment in 1978 has eroded the equality of
rehabilitation and discharge protections of the Code, he observed. As
NBCs seventh concern, Mr. Trost said that he hoped the Commission
address the bankruptcy appellate process.
Judge Thomas E. Carlson, appearing on behalf of a committee formed by
National Conference of Bankruptcy Judges ( NCBJ ) to assist the
noted that the views he was expressing represented a consensus of the
committees views and not the official views of the NCBJ.
Hug Ray spoke on behalf of the Business Law Section of the American Bar
Association. He explained that the Section has 50,000 members and that
advised the Commission in writing about its positions on various
At this point, the panelists then discussed several topics and used
Warrens issue memoranda as the framework for their discussion.
regard to whether or not the district court should be eliminated from
bankruptcy appellate process, Ms. Goldstein said that the League viewed
issue to be a priority that should be considered by the Commission.
Carlson said that his Committee believed that the best approach was to
direct appeal to the circuit as the current system did not establish a
body of precedent. In addition, he noted that the appellate review
conducted by a generalist, not specialized court. Further, there should
provision for discretionary review of interlocutory orders. He
a provision similar to Section 158(a) of Title 28 would satisfy that
Judge Whelan, for the ACB, reviewed appellate procedure under the
Bankruptcy Act and noted that a direct appeal to the circuit court
makes sense given current bankruptcy law developments as well as
in travel and mass communication. He suggested, however, that the issue
be addressed in connection with the constitutionality of the court
Mr. Rosen commented that the NBC agreed with the previously articulated
positions regarding appellate structure and explained that a direct
the circuit court would avoid the double appeal and waste of judicial
addition, he said that the NBC believed that the bankruptcy court should
Article III court.
Given the apparent consensus regarding the bankruptcy appellate process
Commissioner Shepard asked the panelists whether it should be presented
Congress prior to the time when the Commission submits its report.
his personal capacity, Mr. Ray responded that the appellate and venue
should, perhaps, not await the Commissions report. Disagreeing,
Trost said that as there was no crisis, it should await the completion
report as he wanted to see how it would be affected by the Article III
Ms. Goldstein noted that there was a danger to using up Congress
attention. Mr. Rosen observed that the legislative history of the
issue with regard to the 1978 Bankruptcy Code should be remembered and
this recommendation will be a political issue. He suggested that the
procedure issue should be considered in conjunction with the Article III
and that it would be better to incorporate them in an overall bill.
With regard to Article III status for bankruptcy courts, Ms. Goldstein
that while the CLLA has historically supported this concept, it has
Commission to treat this as a non-priority item as it was a political
potato. The Commissions resources should be directed to those
which will produce meaningful improvements, she added.
Judge Whelan reported that the overwhelming consensus of opinion from
ABC supported Article III status for bankruptcy courts as this protected
integrity of the court system which currently does not address
issues out of economic necessity. He recalled that H.R. 8200
provided for Article III status for bankruptcy courts and that the issue
eventually have to be addressed by Congress or the Supreme Court. In
noted that the bankruptcy court system would operate more efficiently as
Article III court.
Mr. Trost observed that the Commission may want to examine into the
judicial resources consumed by the need to determine whether the
court is the proper forum to resolve certain disputes. The NBC, he
supported Judge Whelans views.
Commissioner Hartley asked Judge Carlson whether his Committee
inconvenience of parties if required to appeal to circuit courts distant
their venues and whether this widens the gap geographically and
Judge Carlson agreed, but noted that every proposal has advantages and
disadvantages. He noted that the opt out rate for the bankruptcy
panel in the Ninth Circuit is higher in Montana and Idaho than it is in
Angeles because of the location of the appellate panels. Although the
inconvenience to parties presented by the appellate proposal is a
concluded that more was gained from it on balance.
Citing the example of the Fourth Circuit which conducts appellate
various locations, Judge Whelan responded that travel considerations are
problematic. He acknowledged that it would be more of a problem for
individuals with relatively small disputes and resources.
Commissioner Hartley asked Judge Carlson whether this constituted a
cop-out as he was not sure if the Commission should be concerned with
political viability of a recommendation. Judge Carlson said he was just
suggesting that the Commission keep these concerns in mind. He also
how the Commission would be able to inform Congress that Article III
necessary, but if it was able to do this, then it should definitely
Commissioner Shepard asked whether there were sufficient reasons to
distinguish bankruptcy courts as a specialized Article I court from
specialized Article I courts. Commissioner Alix noted that
should also be given to the economic and practical impact of this issue
court room size and other accutrements as well as its budgetary aspects.
Whelan said he was unaware of any constitutional requirement that all
III judges must have the same court facilities and the problem could be
addressed in a constructive and imaginative way.
When asked by Commissioner Ginsberg as to whether the bankruptcy judges
solicited for their views on this issue, Judge Carlson said no.
Ginsberg then asked whether the specter of possible dissent among the
bankruptcy judges themselves on this issue is problematic. Judge
acknowledged that there was division among the bankruptcy judges.
Ginsberg wondered whether the opposition stemmed from some bankruptcy
judges fear that they would not receive Article III appointments.
Mr. Trost reminded Commissioner Ginsberg that the impetus for recommending Article III status was that people involved in the bankruptcy system believed that the bankruptcy court should have pervasive jurisdiction to limit the litigation resulting from the present statutory scheme. He also recalled that pervasive jurisdiction of the bankruptcy court was a pivotal point in many of the prior Commissions recommendations. This proposal was joined with the concept that bankruptcy court judges have Article I status and a 14-year term of appointment because it was deemed to be constitutional. The reason H.R. 8200 provided for Article III status was because the House Judiciary Committee felt that there was a constitutional problem if pervasive jurisdiction was accorded to a court with only Article I status, he said. The Senate, however, did not support Article III status and Congress enacted the Bankruptcy Reform Act to see what would happen, Mr. Trost stated. As a practicing attorney, he said that there was a significant problem presented by the fact that bankruptcy courts do not have pervasive jurisdiction. He said the NBC would present a white paper on its position which could include a statistical analysis of the issue and how it manifests itself. Mr. Rosen cautioned that while cases and instances of where there are problems could be identified in this paper, he was not sure if the NBC had the capacity to analyze the percentage of judicial time consumed by this issue. Commissioner Alix suggested that the NBC could employ its resources to produce a meaningful overview of the problem and the system.
Mr. Ray noted that if the Commission makes this proposal the
its report, then there was a good chance that the political process will
a lot of good work that the report will cover in other areas.
Alix stated that he agreed with Commissioner Hartley on this matter and
the Commission, representing both sides of the political spectrum, has a
study and report on the bankruptcy system regardless of whether the body
politic agrees or disagrees with the report. In addition, he said that
issue and everything involved in the process was political.
Mr. Ray asked if there was a specialized court or non-court for the
consumer cases, would the Article I/Article III issue work out
Commissioner Gose asked why was the bankruptcy court referred to as
specialized. Judge Carlson responded that he did not think the
court was highly specialized as it considers a broad spectrum of areas,
that it did have limited jurisdiction and did not have to deal with
matters such as criminal, anti-trust and prisoner civil rights cases.
agreed with Commissioner Goses characterization of the bankruptcy
as a generalist commercial court.
Seeking to clarify his prior statements, Judge Carlson noted that he
suggesting that the Commission should not address an issue simply
was unpopular. Rather, he said the Commission should consider whether,
the likely opposition, it can make a case that this recommendation is
and not something that some people merely want. Commissioner Alix
the NBC, among other entities, is prepared to brief the Commission on
issue and suggested to Mr. Trost that he coordinate with the appropriate
working group that is assigned this issue.
Commissioner Shepard asked whether the Commission had the duty to
needs of the public in general rather than just the players such as the
debtors counsel, creditors counsel, judges and related
thought that others may not agree that expanding the bankruptcy
jurisdiction would be in the interest of the public in general.
Noting that it was in the best interest of attorneys to have existing
Mr. Trost suggested that pervasive jurisdiction would eliminate
which would be bad for lawyers but further the public interest. He
that some areas require too much time to be resolved and that justice
is justice denied. Ms. Goldstein said that there was no question that
Commission should consider what is in the public interest. To that end,
noted that chaos does not enhance either the reorganization or
process. Nevertheless, she observed that in the majority of cases, the
of Article I/Article III status never arises. While the CLLA believes
issue should not be ignored, she noted that it should not be
the detriment of the Commissions limited time and resources.
Mr. Ray observed that society demands two things from its legal system:
stability and some form of measured change. He characterized the
I/Article III issue is an unstable element. With regard to the current
appellate structure, he noted that this was an enormous problem. When
Commissioner Shepard if it was in the public good to have a more
bankruptcy court, Mr. Ray said that it ties into the appellate structure
that if you have a stable structure, it is in the public good. Mr.
that the Supreme Court could find tomorrow that the current system is
unconstitutional. When this last happened, he recalled that there was
He said that the effort to divide jurisdiction on basis of core and
was not working and that bankruptcy judges were doing things that they
not be doing because they were not Article III judges. He cautioned
one anticipated the Marathon decision.
Judge Whelan noted that there was significant historical precedent for
pervasive jurisdiction of the bankruptcy court and cited the Bankruptcy
1841. Noting that the perspective of bankruptcy is much different than
was contemplated historically, Commissioner Shepard cited Section 105 as
example. Commissioner Ceccotti explained that the bankruptcy laws are
being applied in virtually limitless areas where traditionally they were
applied in a more limited fashion. Commissioner Alix observed that this
uncertainty conflicted with the Commissions vision statement.
The panelists then addressed consumer bankruptcy. Ms. Goldstein opened
discussion by asking whether or not there should be some form of
counseling. Based on her experience as a trustee, she noted that many
do not understand how they encountered financial difficulty and how to
Mr. Ray mentioned the possibility of having consumer Chapter 7 cases
by an administrative system, rather than the judicial system. Ms.
said as there were so many legal and substantive issues presented in
cases, these cases must remain in the judicial system. When asked if a
needed to hear all these issues, Judge Whelan responded that a lot of
did not have to be heard by a bankruptcy judge, but that it would be a
mistake to have all of the issues determined in a non-judicial
With regard to financial counseling, Judge Whelan said that the local
his district participated in pro bono programs which assisted
Mr. Bernstein noted that many bar associations were involved because
trying to ease the burden on the system. He also observed that
court calendar congestion can consume time and money. Accordingly, he
concluded that mediation is important whether it is supported by the
the trustee. He also agreed with Ms. Bernstein in that he did not
there was a need for a separate administrative system for consumer
Judge Carlson likewise concurred that there was no need. He explained
disputes arising in Chapter 7 and Chapter 13 cases that require judicial
determination do no unduly impose on the courts time. He said
a dispute involving a legal issue arises, the parties should have the
access to a judge as parties have in the larger cases. In addition, Mr.
Bernstein observed that the increased debt limits in Chapter 13 made it
applicable not just to consumer cases as it was being used with greater
frequency by small businesses, professionals and sole proprietorships.
turn, would create more complicated issues, he noted.
Ms. Goldstein said there were three issues in the consumer bankruptcy
that the CLLA deemed to be important. The first concerned whether or
should be uniform exemptions, considered to be a priority issue to the
according to Ms. Goldstein. The lack of uniformity among the states on
matter encouraged debtors to engage in forum shopping and concealing
The second issue that she identified concerned Section 707(b) and its
implementation. The third issue pertained to various tax issues
Mr. Ray asked whether any of the panelists had a position on whether or
separate Chapter or procedure for small business Chapter 11 cases should
created. Mr. Trost reported that the NBC opposed this proposal. He
problems presented by these cases could be addressed through case
techniques and an expanded version of Section 105(d).
Judge Whelan said that the position of the ACB was that the overall
of Chapter 11 was working reasonably well and that some time should pass
following the enactment of the 1994 amendments to the Bankruptcy Code.
Personally, he expressed concern about the high failure rate of Chapter
cases as well as the delay and expense incurred in smaller Chapter 11
that were doomed to failure from the date of filing.
Judge Carlson reported that there was a strong consensus among members
NCBJ that Chapter 11 was not working well in small cases as there was
little involvement by creditors and nominal oversight. He suggested
should be some form of review as to whether or not there can be some
devised either within Chapter 11 or in an expanded version of Chapter
13, or by
the creation of a separate Chapter, to deal with these cases.
Mr. Bernstein noted that the CLLA has been supportive of separate
for small business Chapter 11 cases. As the problem of creditor
in small cases would not be resolved by moving these cases into Chapter
said that a separate Chapter for these cases would be acceptable. In
he noted that the CLLA deems the partnership issues identified in its
submission as priority matters for the Commission.
Commissioner Shepard asked whether the high failure rate of Chapter 11
was attributable to the complexity of the system or a lack of
existed at the commencement of these cases. Mr. Rosen said that the
judges in the Southern District of New York recognized the concern about
lingering Chapter 11 cases and accordingly utilized Section 105 status
conferences early in these cases. In smaller Chapter 11 cases, the
conference serves to identify those cases that should be weeded out of
system, while in larger Chapter 11 cases it serves a different purpose.
Trost recalled that NBCs position during the 1970s was that if
judges were granted pervasive jurisdiction, then they should be removed
case administration. The NBC, however, now favors broader use of
105(d), he stated. Under current law, Mr. Trost noted that a bankruptcy
can actively manage a case by holding a status conference at the initial
of the case. Referring to previous comments regarding the courts
equitable power under Section 105, Mr. Trost specified that this
should be limited to authorizing the bankruptcy court to effectuate the
Bankruptcy Codes provisions. While ordinarily the NBC wanted the
bankruptcy judges to not become involved in active case management, it
favored such active involvement as the United States Trustee system and
creditor interest had not generated sufficient oversight.
Commissioner Ceccotti asked whether the problem was that there was a
no one was managing these cases or that the court should do this
Section 105(d) rather than have the United States Trustee perform it.
Trost said that this position resulted from the conclusion that there
vacuum. Commissioner Ginsberg asked whether Mr. Trost was proposing to
to the practice under the former Bankruptcy Act. Agreeing, Mr. Ray
how these conferences were conducted. Mr. Rosen said that their
regarding status conferences did not obviate the ex parte contact
but would provide an opportunity for every interested party to attend.
thrust of these conferences should not be to deal with issues that may
litigated, but to focus on whether the case should remain in the system,
clarified. Mr. Trost recognized that while there was a risk to having
bankruptcy court engage in case management, the Commission should
or better alternatives. Commissioner Ceccotti said that this was not
different than the status conference conducted by district courts where
discovery schedules are set and the possibility of settlement is
She expressed concerns about who would attend the 105(d) status
whether all parties interests would be represented.
Commissioner Alix stated that there was a big difference between how
conferences are conducted in district court as opposed to how they are
conducted in bankruptcy court. Whereas in district court considers
pertaining to litigation and historical fact, the bankruptcy court looks
ongoing situations with a lot of future aspects to it. Accordingly, he
a status conference in the beginning of a case would permit parties to
rehabilitative prospects, creditworthiness, cash flow, valuation, and
factors. Debtors counsel would have a professional responsibility
argue in support of the debtors rehabilitation.
Judge Carlson explained that in his district the court provides notice
parties that a status conference will be held in a case. He said that
usually scheduled about 60 to 90 days into the case and conducted on the
record. Basic questions asked are what does the debtor need to
before it can file a plan and how long will it take? He noted that it
different from trying to administer the debtors business.
Shepard that it would be appropriate to require that tax returns be
Chapter 11 debtors and that all postpetition taxes be paid. This would
a useful way of determining feasibility.
Ms. Goldstein said that while much of case management depends upon the
bankruptcy judge, the CLLA would be opposed to extending case management
non-legal issues, that is, administrative matters. It is very difficult
status conference held in a bankruptcy case to isolate all these issues.
Ray recalled that under Chapter X, the district court conducted these
conferences without anyone impermissibly crossing any lines. Ms.
responded that Mr. Ray was referring to the preliminary hearing and that
concern pertained to bankruptcy judges crossing the line from case
to administrative matters. Judge Whelan said the latter was the
of the United States Trustee. In response to Judge Carlsons
clarification, Ms. Goldstein stated that a bankruptcy judge should be
set a timetable for filing a plan as part of the courts case
responsibilities. Mr. Trost observed that bankruptcy courts, in
Section 105(d) status conferences, were utilizing the services of
mediators as part of case management.
Addressing Commissioner Ceccottis comments regarding access to
status conferences, Mr. Bernstein suggested that a system that
access should pertain to whatever process is instituted. In addition,
noted, the conference should be on the record.
Commissioner Alix asked the panelists if they thought creditors wanted to participate. Ms. Goldstein responded in the affirmative, but that creditors did not want to spend good money after bad. She suggested that creditors committee counsel should be permitted to be paid some form of retainer from the estate. She said the greatest impediment to creditor participation is lack of money. Commissioner Alix asked that if there was money for creditors, then there would be funds for a creditors attorney.
In concluding the morning session, Chair Williamson introduced the
Commissions staff attorneys: Elizabeth Holland, Melissa Jacoby and
Singer. He then explained the working group concept and its goal,
refine and define the issues as well as explore possible directions that
full Commission should consider. He observed that the working groups
further the focus and analysis process and that each would be assisted
professionals who would share their experience with the groups. He
this pool of resources will change depending on the focus of the working
groups. He stated that the working group approach was an experiment
successful would be continued indefinitely. He also noted that the
group sessions were open to the public and that the discussions were not
transcribed because the intent was to have a free-flowing exchange. He
that Professor Warren, the Commissions reporter, along with
Larry King and Steve Case will each be assisting the working groups as
senior counsel. He then reviewed the schedule for the remainder of the
MEETING - FRIDAY, JUNE 21, 1996
Commission Reporter and Staff Present:
Approximately sixty people were in attendance including representatives
the Administrative Office of the United States Courts, Executive Office
United States Trustees, the Securities and Exchange Commission, Chapter
7 trustee offices, state government, professional and trade
private industry, law firms, and the media.
Commissioner Alix noted that the Commission had received invitations
various groups. He recalled that Chair Williamson would be reviewing the
as to how the meeting expenses were running and noted that the
want to consider taking advantage of some of these invitations to defer
cost of these meetings.
After asking if there were any other comments, Chair Williamson
content of future mailings of materials to the Commissioners and their
frames. He said that if any Commissioner wanted materials distributed
working groups, he or she could simply request the staff to forward
CONSIDERATION OF CONCEPTUAL PROPOSALS
Chair Williamson stated the appellate structure proposal as follows:
current system which provides two appeals as of right from final orders
bankruptcy cases should be changed to eliminate district court review.
then asked the Commissioners to discuss the proposal.
Commissioner Alix questioned whether the proposal should be phrased as
statement of position as opposed to a question. The former conveyed a
direction, he noted. While the Commission had generally heard from
in support of these proposals, he observed that the Commission had not
endeavored to find or hear opposing opinions. He expressed concern that
phrasing the proposal as a statement of position would have a chilling
on the research conducted by the staff. Although he was not
against the proposal, it appeared that by adopting this format the
was effectively taking a position before having analyzing it.
Commissioner Jones analogized the format to reading bench memoranda and
writing opinions. If one starts with a hypothesis, then one must
arguments against it, she observed. During the course of that writing
it may ultimately appear that the hypothesis was wrong. Accordingly,
not believe that this format would constrain the staff from eliciting
disagreement with this proposal. Indeed, she noted that it requires the
to focus on the opposing views in order to make a persuasive case to the
Commission and then perhaps to Congress. While it may tend to push
things in a
certain direction, Commissioner Jones observed that it would not deter
furnishing of other viewpoints and may actually inspire viewpoints.
Commissioner Shepard indicated that he agreed with Commissioner Jones.
Chair Williamson explained that there was no issue that could not be
reconsidered at a later time in the Commissions process. He said,
example, the research memorandum on the appellate structure would have
include a discussion of the problems associated with its implementation.
Responding to Commissioner Jones comments, Commissioner Alix
there were always instances where a hypothesis can tend to become a
self-fulfilling prophesy. Commissioner Ginsberg observed that the
must start to define the direction in which it is going as this is the
in which it will get the feedback that it needed. He said that
there was a problem with the proposal as it did not discuss the current
bankruptcy appellate panel system.
Chair Williamson responded that the next level of research would fully
and address the issues. To the extent the proposals attracted
debate, he said that was good because it established a model for full
discussion and review as well as provide a good way to test the
he added, if the process was insufficient, then the Commission should
reconsider changing it.
Commissioner Hartley stated that he agreed with Judge Ginsberg in that
Commission must begin somewhere. While the proposals concerned fairly
positions on very important matters, the attendant controversy, debate
discussion was exactly what should result, he observed.
Commissioner Ceccotti observed that the question format espoused by
Commissioner Alix would just ensure that the public understood that the
proposal was open for further discussion.
Chair Williamson suggested that the proposal be considered as a rough
consensus without an actual vote. Hearing no objection, he said that
Commission would tentatively approve the appellate structure conceptual
proposal subject to having a fully developed issue paper for further
discussion at a subsequent meeting.
Chair Williamson read the conceptual proposal into the record: The
venue system should be modified to prohibit corporate debtors from
relief in a district based solely on the debtors incorporation in
state where that district is located, or based solely on a earlier
filing by a
subsidiary in the district. All other venue options should be left
the courts discretionary power to transfer venue in the interest
justice and for the convenience of the parties should not be restricted.
Observing that this proposal attracted more comment in the prior week
had in the previous three months, Chair Williamson explained that this
important aspect of the process of encouraging debate and
Commissioner Alix stated that he had even greater concerns with the
proposal than he had with regard to the prior proposal. He said that
Commission had heard from no one who represented an opposing view during
two-hour discussion of the proposal in February. He specifically
the transcript of that meeting. Explaining that he was not an
and in favor of progress, Commissioner Alix stated that the proposal was
presented in the form of a position and that this was objectionable.
Responding to Commissioner Alixs comments, Commissioner Gose
he did not view the proposal as a final position, but rather as teeing
discussion. While observing that the proposal as stated was not cast
stone, Commissioner Ginsberg indicated that he would not be opposed to
it phrased as a potential proposal if that would make Commissioner Alix
comfortable. Commissioner Alix responded that his approach would save
Commission a lot of inconvenience if it would stay neutral in the
of its proposals. This proposal, he noted, was very alarming to certain
and that the Commission had an obligation to represent all interests.
suggested that the Commission should follow a process where all the
heard and the research is performed prior to stating positions.
Commissioner Gose recommended that the word should appear at the
of the proposals wording. Commissioners Jones, Shepard and
concurred with this suggestion. Chair Williamson stated that he had no
objection to the change as it was semantic. He reminded the
they did not have the time or resources to fully research and brief
and that he considered this process as a way of having the staff expend
valuable time and resources on issues on which the Commission saw a
Stating that he was uncomfortable with having to equivocate on every
statement, Commissioner Butler noted that the Commission would not make
progress if the proposals were not stated as positions. Specifically,
that by changing the statement into a question, the process itself was
entirely. Commissioner Hartley noted that he agreed to an extent with
Commissioner Butler. He also noted that Commissioner Alix was correct
the Commission should hear every view on an issue.
Responding to Commissioner Butlers comments, Commissioner Alix
that the Commissions proposals should be phrased as questions.
Commissioner Hartley observed that the Commission was not making law,
making some recommendations on bankruptcy policy for the future.
Professor Warren stated that Commissioner Alix was correct in that
literally hundreds of issues that the working groups were in the process
winnowing and deciding. The question, she noted, was how to involve
in this process. This can be done, she suggested, by making the
specific enough to draw fire. Although the venue proposal had been
since January in question form, no one opposed to the proposal voiced
opposition until it was put in the form of a stronger statement. She
this was a perfect example of where a stronger statement forced the
to confront disagreement early in the process. She also noted that
no intent in the affirmative wording of the proposal to limit the scope
On motion of Commissioner Gose, a majority of the Commission voted to
rephrasing the proposal to begin with the word should. Chair
Commissioner Butler opposed the motion.
At approximately 9:48 a.m., the meeting recessed and the Jurisdiction,
Procedure; Government; and Chapter 11 working groups thereafter
CHAPTER 11 WORKING GROUP SUMMARY
Professor Warren stated that the working group began with the query as
whether or not Chapter 11 should remain in the bankruptcy system in its
form, whether there should be minor or major changes, or none at all.
mentioned that the working group discussed replacing it with an auction
as well as reviewed the advantages and disadvantages of the present
system. She noted that there was general agreement that the Chapter 11
should stay intact and that the group aimed to identify some moderate
She identified this as the groups basic working principle.
The working group also identified the goals that Chapter 11 should
and attempted to divide the issues into three categories. These
consisted of those issues where there was consensus and where the group
to move forward on them, issues that warranted further consideration,
issues that should be eliminated from consideration. In the first
there was consensus on a proposal that the Bankruptcy Code clearly
permit a new
value exception to the absolute priority rule and that this provision be
to terminating exclusivity if a new value plan is made in the context of
cramdown. The second proposal, where there was working consensus,
the need to clarify the claims classification provisions. Specifically,
proposal would permit separate classification of legally similar claims
providing there was a business justification supporting separate
and that such classification did not unfairly discriminate among the
Professor Warren then identified issues warranting further
those pertaining to labor/employees rights, claims trading and
contracts. She noted that amending plan exclusivity provisions was
in the third category as the working group presently did not want to
them except as noted in connection with the new value exception to the
Commissioner Ceccotti added that several areas were identified as
the Chapter 11 issues list, namely, the use of mediators and examiners
expanded powers, the issue of what is ordinary course, and valuation.
Commissioner Alix recalled that the working group was split on the
claims trading and that it was directed at the amount of disclosure
not at restricting claims trading. With regard to valuation in Chapter
said that there should be a way to provide some structure to this
Concerning exclusivity, Commissioner Alix stated that he was personally
interested in hearing more from the creditors side, especially
creditors, as the resource participants that assisted the working group
primarily represented the debtors perspective.
Chair Williamson then asked the Commissioners not serving on the
working group to comment on the summary. Commissioner Jones noted that
were a number of areas that were not mentioned and observed that the
that were identified by the working group did not address the principal
problems that exist in Chapter 11 such as the extent of debtor control
amount of time and transaction costs associated with the system. She
observed that working groups resource participants mostly
Professor Warren explained that the working group had not completed its
of the issues list and that any issues not presently listed that
wanted added would be included on the list. She noted that the new
classification issues would be presented to the full Commission at the
meeting in the form of a short memorandum which would include an
SERVICE, ETHICS WORKING GROUP SUMMARY
The working group examined the question of who are professionals and
attempted to devise a working-type definition, Professor King reported.
example, there were continuing relationships with attorneys, accountants
others who had nothing to do with the Chapter 11 process, then court
of their continued retention may not be necessary. Left for further
was how to treat turnaround management. He noted, however, that none of
concepts did away with the need at the outset of the case for proper
disclosure. Concerning disclosure, the working group generally agreed
current rules were very broad. The working group also discussed dual
representation by professionals and that it may not be necessary for
committees, for instance, to have their own sets of accountants and
professionals, he noted. Also with regard to multiple representation,
working group considered the propriety of the simultaneous
debtor affiliates, such as the corporate entity and shareholder.
In addition, the working group considered and resolved without
provision which would not require the use of local counsel where the
attorney is not admitted to the district where the case is pending. The
working group also considered having a national admission policy for
bankruptcy courts. Left for further consideration was the general issue
compensation and the rights and responsibilities of the debtor in
and its counsel.
Commissioner Ginsberg explained that the working groups
regarding the conceptual relationship of various officers of the Chapter
estate and the debtor in possession highlighted the difficulties
this issue. Commissioner Alix commented that the working groups
discussion regarding compensation concerned the idea of value billing
giving professionals optimum fees in exchange for optimum results. The
compensation scheme he described would move more toward a market-based
and less toward a straight hourly system. The second component to this
concept was tying compensation to the amount of time it takes to achieve
Commissioner Jones suggested that the working group consider the issue
trustee compensation. Commissioner Shepard noted that it should also
Noting that there were areas where the interests of different working
would overlap, Chair Williamson suggested there may be combined meetings
these working groups at future meetings. Professor King noted that the
and duties of the United States Trustee may be suited to having a
working group appointed.
With regard to partnerships, Mr. Case noted that there was a consensus
working group members that the most effective use of the
resources would be to review the detailed studies of partnership
issues prepared by the American Bar Association Business Bankruptcy
and the National Bankruptcy Conference and to ask these groups to
their differences for the Commission.
Concerning small business and single asset real estate cases, Mr. Case
reported that there was a clear consensus that the Bankruptcy Code did
well for either. Among the issues that the working group identified in
small business area were: how should small business be defined;
absolute priority rule automatically apply in all small business cases;
creditors have a right to vote in a small business case; should small
cases be given a separate track inside Chapter 11 or have its own
should business entities such as corporations be permitted to file
petitions; how should the Section 105(d) status conference be utilized;
should there be some form of business analog for the Chapter 13
Under the single asset real estate category, Mr. Case noted that the
group expressed concern that there were instances where these cases were
abusive and extortionate, although there was not a consensus as to how
concern should be addressed. Among the ideas discussed was whether
sufficient a federal interest in single asset real estate cases to
extending the protection of the bankruptcy laws to them; whether
controls should be imposed on these types of cases to require automatic
dismissal should these debtors fail to pay postpetition taxes and some
debt service on the mortgage; should there be an automatic trustee for
debtors; should there be different rules for cases where the debtor aims
repay the mortgage debt in full as opposed to those that want to
mortgage claim; and what protection should be given to junior lien
Commenting on the issue with regard to defining small business,
Alix noted that generally 80 percent of the value was in 20 percent of
cases and suggested that the Pareto analysis may provide a
Commissioner Gose said that the working group concluded that this issue
warranted further analysis and that the staff would research previous
legislative efforts in this regard. Commissioner Shepard added that the
examined the definition from two perspectives: cases that should never
been filed and cases entitled to fast track treatment.
Thomas Ambro with Richards, Layton & Finger spoke on behalf of the
Delaware Bar Association. As his organization intended to submit a
paper with regard to the venue proposal, he asked that the Commission
further consideration of this proposal until its September meeting.
He noted that the discussion concerning venue has largely centered
Delaware. He then reviewed the venue provisions under prior law and
He stated that the current bankruptcy venue provisions were essentially
same as those for non-bankruptcy matters. He recalled that after
Airlines filed its case in Delaware, other large, national corporations
filed their cases in Delaware.
He expressed concern regarding the perception of those that oppose
state of incorporation be a venue filing option. Although he described
practice as being primarily creditor oriented, he said that the
judges in Delaware were no more pro-reorganization than bankruptcy
elsewhere. He said that cases are filed in Delaware because the
judges are consistent, experienced and have demonstrated their ability
with large cases. In addition, Delaware is chosen to file bankruptcy
because it is convenient, its court scheduling staff is efficient and
responsive, and the clerks office is well-organized. Further,
and other creditors are comfortable in Delaware, he observed.
WORKING GROUP SUMMARIES CONTINUED
Mandatory abstention and the exclusion of personal injury claims from
bankruptcy court jurisdiction were two areas which the working group
require further analysis and discussion. The working group determined
recommend permitting bankruptcy courts to conduct jury trials without
of the parties would be not be worth examining at this time because of
constitutionality concerns. He noted that the group discussed the
certain districts where there is some cooperative effort between the
and district courts concerning jury trials.
Professor King said there was consensus that the bankruptcy courts
contempt powers to the broadest extent permitted constitutionally.
the rulemaking provisions of 28 U.S.C. § 2076, the working group
concluded that they not be changed. And, with respect to status
the working group found the present provision to be clear enough and
should not be changed to make the conference mandatory.
While agreeing with Professor Kings summary, Commissioner Butler
that much of the discussion would be moot if the bankruptcy courts had
III status. Commissioner Jones was dubious about granting life tenure
bankruptcy judges. She noted that if status conferences were not to be
monitor cases, the Commission should develop other ways to accomplish
Observing that Professor King outlined some areas with respect to the
appellate proposal that will be subissues for further development,
Ceccotti recommended that standing be added to this list. She also
the rules with respect to the appealability of interlocutory orders in
bankruptcy and non-bankruptcy cases be reviewed. Expressing
with the groups proposal to delete the mandatory withdrawal
28 U.S.C. § 157(d), she asked the group to reconsider this
In response to Chair Williamsons question, Professor King said
contempt powers concept was ripe for further preliminary analysis.
GOVERNMENT WORKING GROUP SUMMARY
Mr. Case prefaced his remarks by complimenting the resource
their contributions to the working group. He then noted that there was
consensus that Chapter 9 did not require enough substantive attention to
it a priority at this time. Given the enormous numbers of bankruptcy
filed, Mr. Case observed that the bankruptcy system imposes a double
the federal government in that it must follow all the cases and the
taxes lost when these cases are not monitored. He then identified
issues of concern to the government including serial filings, whether
Chapter 13 discharge favors tax defrauders, and whether the automatic
should be waived to permit offsets of tax refunds.
The noticing problems were particularly acute in the environmental
Case noted. In major cases, for example, the Department of Justice must
dragnet letter to its 120 agencies to determine whether any have claims
the debtor. Another adverse impact of bankruptcy in the environmental
the need to conduct studies and other remedial efforts before it was
appropriate to do so, he observed. He noted that there was a need for
relatively minor clarification of those provisions regarding claims for
liability. The group also discussed the need to provide some form of
protection for bankruptcy trustees of toxic site facilities. He
the Justice Department believes that Section 105 is used excessively by
bankruptcy judges to interfere with its regulatory processes.
In the pension area, there were issues regarding the debtor in
possessions obligation to pay prepetition pension liabilities and
current on these obligations postpetition. There was also a need to
the treatment of employee benefit plans such as health and uninsured
In the tax area, Mr. Case mentioned several issues as being illustrative of the extensive and broad-ranging concerns presented therein. These included whether Section 505 should be expanded to permit the bankruptcy court to adjudicate the tax liability of non-debtors and how the endemic lack of uniformity in the treatment of tax issues in Chapter 13 should be addressed.
Commissioner Alix suggested that the net operating loss carry forwards
rules pertaining to them often constituted the key asset in the
estate that can create value for creditors. He noted that if it will
addressed by this group, then the Chapter 11 working group may have to
it. Commissioner Shepard said that the Government working group would
reviewing these matters as they were intertwined with other tax issues
was considering. Commissioner Alix also suggested that the group
area of trustee liability. Commissioner Jones agreed and also noted
were some real problems in ERISA in that context as well.
CONSUMER BANKRUPTCY WORKING GROUP SUMMARY
As there was much resistance to combining Chapter 7 and 13, the group
to sharpen the distinction between them and to narrow the variability
each. To this end, Chapter 7 was described as an asset-based system
with the liquidation of assets and the provision of a discharge within
approximately 40 days. Chapter 13 was viewed as a income-based system
concerned with payout and the treatment of other items over a long
The group then reviewed what could be moved out of each of these
Professor Warren reported. Reaffirmation of debt in Chapter 7, for
encumbered future income in an asset-based Chapter. If the effect was
encumber future income, then it belonged in Chapter 13.
As to other areas, Professor Warren noted that the group considered the
appropriate role for consumer credit counseling and whether it could be
integrated into the system. There was also discussion regarding changes
consumer credit reporting to create incentives for debtors to deal with
In an effort to learn more about consumer bankruptcy, Commissioner Alix
that he and his associate, Linda Hamel, met with their local Chapter 13
trustee and attended hearings before the three bankruptcy judges in his
district. He noted that the quality of the bar that practices in these
varied to a significant degree. The judges and trustees concurred with
observation as well. Accordingly, he suggested that the group consider
or not there should be certain minimum standards for practitioners in
given the fact that the bankruptcy area is complex, requiring some
specialization and a minimum level of competence. Commissioner Ginsberg
with Commissioner Alixs comments. Commissioner Alix suggested
should be some form of certification process which provided economic
to move people toward a higher level of practice. Commissioner Ginsberg
observed that the ABI has made some strong efforts in this area.
On behalf of the Commission, Chair Williamson expressed appreciation to
resource participants. He noted that many of them would be asked to
again at the next meeting and that there would be others invited as well
because the Commissions goal was diversity in its broadest sense.
Commissioner Alix said that he personally appreciated having the
the audience and the participants as the interchange was useful.
Commissioner Alix also extended his appreciation to Chair Williamson
leadership and efforts in ensuring that the process is open and
addition, Commissioner Alix noted that Chair Williamson had committed
substantial personal time and expense to make himself available to
wishing to meet with him. Commissioner Alix also commended Chair
for his style of leadership as well. He believed that it was a
Chair Williamsons and Professor Warrens leadership which
the Commission to reach the point where it is now functioning.
After thanking Commissioner Alix for his comments, Chair Williamson
the meeting at approximately 2:31 p.m.