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THE NATIONAL BANKRUPTCY REVIEW COMMISSION MINUTES OF MEETING HELD: Friday, February 23, 1996, Washington, D.C. Saturday, February 24, 1996, Washington, D.C. Prepared by: Susan Jensen-Conklin Deputy Counsel Approved: April 19, 1996
MEETING - FRIDAY, FEBRUARY 23, 1996
Commission Reporter Staff and Present:
ROUND TABLE Participants:
Witnesses:
Ilene F. Goldstein, Esq. on behalf of Commercial Law League of America
Approximately sixty people were in attendance including representatives from
the Administrative Office of the United States Courts, Federal Judicial Center,
Executive Office for United States Trustees, Department of Justice, Internal
Revenue Service, various trade associations, private industry, law firms, and
the media.
PRELIMINARY COMMENTS AND INTRODUCTIONS
Acting Chair Ginsberg called the meeting to order at 10:04 a.m. and made
preliminary comments. Thereafter, each of the Commission Members, Professor
Warren and Invited Participants together with the Executive Director/General
Counsel and Deputy Counsel introduced themselves.
RULES OF ENGAGEMENT
Professor Warren opened the discussion by identifying the rules of engagement
and topics slated for discussion. She explained that the purpose of the
meeting was to serve as a forum for the exchange of thoughts, opinions and
ideas to enable the Commission to become better informed and to decide where it
wanted to focus its attention in the future. Professor Warren suggested that
the Commission should simply address the four discussion issues listed in her
memorandum and that the discussion of these topics should take as long as is
appropriate. She reminded the Commission that it should consider alternative
proposals as well. Professor Warren concluded her introductory remarks by
setting forth the first topic for discussion: whether to extend Article III
status to the bankruptcy courts
Professor Kennedy had five proposals. Citing his article, Bankruptcy Court
and Its Jurisdiction, which was published in the 1995-96 Annual Survey of
Bankruptcy Law, Professor Kennedy stated that the jurisdictional provisions as
originally proposed in the Bankruptcy Reform Act of 1978 should be reenacted,
notwithstanding Marathon. Second, Professor Kennedy suggested that
Article III status be extended to the bankruptcy court to eliminate issues
regarding its authority to conduct jury trials or exercise contempt power.
Third, Professor Kennedy stated that he supported efforts to establish binding
appellate precedent and eliminate doubts regarding venue. As to the United
States Trustee Program, Professor Kennedy cited his article in which he stated
that he strongly favored retaining the Program in the Department of Justice.
Professor Kennedy concluded his remarks by stating that he supported the
National Bankruptcy Conference’s proposals regarding the bankruptcy court
system and jurisdiction.
The more important issue, according to Judge Martin, was the appellate
structure and whether the solution should be extending Article III status to
the bankruptcy courts. At this point, Commissioner Hartley noted that Judge
Clark had previously stated that the system was working on a consent basis and
that it could break down at any time without there being a ready solution. In
response, Judge Martin recalled that he and Judge Clark have disagreed on this
issue.
Judge Clark agreed with Judge Martin that this problem was not evident on a
day-to-day basis. While not a massive problem, Judge Clark nevertheless
observed that it was a pernicious problem which was biting at the edges of the
system. In support of this observation, Judge Clark discussed various cases
concerning jurisdictional issues with regard to filing proofs of claim and
jury trials. He also mentioned the adverse impact that a jury trial demand has
on preference and fraudulent conveyance litigation commenced by trustees.
Judge Martin responded that if there was a strategic advantage to jury trial
demands, then there would be many more of these demands. Nevertheless, he
noted that the National Conference of Bankruptcy Judges NBRC Liaison
Committee’s Report did not find that this was happening. In addition,
Judge Martin explained that the other danger was to exaggerate what de
novo review by the district court entailed. In most courts, he observed,
the parties generally proceeded in the same way regardless of whether the
action was a core proceeding or a non-core proceeding subject to de novo
review.
Professor Warren then asked the participants to expound upon Judge
Clark’s comments concerning whether jury trial demands were strategic
tools used to slow down a case and enhance one’s position in terms of
negotiating a settlement.
Gerald Munitz observed that delay was a defendant’s weapon so that if one
was entitled to demand a jury trial in a bankruptcy case, that tactic would be
utilized because of the attendant delay it would cause. He agreed with Judge
Clark that it had an adverse impact on the value of estate litigation. Barbara
Houser noted that her experience was similar, but that it depended on the case,
the issues, and the case’s merits. Mr. Munitz recalled instances where he
has advised clients to have their matters tried in the bankruptcy court rather
than risk having them tried in the district or state court. Judge Clark
mentioned a recent case wherein the parties could have demanded a jury trial
with respect to a multimillion dollar issue, but the parties elected instead to
have the bankruptcy court try the matter.
Mr. Munitz stated that bankruptcy courts should be accorded Article III status
and that he agreed with Professor Kennedy’s recommendations.
Nevertheless, he noted that on a practical level he would be satisfied if there
were direct appeals to the circuit courts even if the bankruptcy courts
retained their Article I status. Commissioner Hartley queried whether the
appellate structure could be addressed without first solving the jurisdictional
question. Mr. Munitz said that there could be mandatory direct appeals from
the bankruptcy court to the circuit court and there was also merit to the
bankruptcy appellate circuit court as well.
Judge Arnold observed that bankruptcy courts ought to be Article III courts,
but that they should be required to hear nonbankruptcy matters in addition to
bankruptcy matters. Although Judge Clark commented that he did not have a
problem with that proposition, Judge Martin said that Judge Arnold’s
proposal would vitiate the specialized nature of the bankruptcy court and the
priority accorded to bankruptcy cases.
Professor King stated that he did not think Article III status was the most
important issue that should be considered by the Commission. He said that
extending Article III status to the bankruptcy courts would easily resolve
issues concerning jurisdiction, withdrawal, jury trials and waiver. He noted,
for example, a computer search of cases published over the period of June 1995
to either February or January 1996 revealed that there were 250 cases involving
a jury trial issue or related issue. Professor King attributed this to the
bankruptcy court’s Article I status. Additionally, he agreed with Mr.
Munitz that if there was something to be gained by delay, the parties would
take advantage of it. Rather than dealing with the problem as an Article
I/Article III matter, he suggested it could be approached through restructuring
the appellate system by making binding rules on all lower courts.
Commissioner Jones and Judge Arnold recalled instances in the past where
bankruptcy judges have been poorly regarded by the district courts.
Commissioner Jones also observed that bankruptcy practice was different in that
it was paper-intensive and did not easily mesh with the work of district court
judges. In addition, Commissioner Jones cited the commercial law expertise of
the bankruptcy bench. She noted, however, that she was not sympathetic to
Article III status for bankruptcy court.
Ms. Houser viewed the issue as one that should be bifurcated into its
theoretical and practical aspects. While theoretically there may be support
for extending Article III status to the bankruptcy courts, she asked whether
there was a solution short of Article III status for bankruptcy courts given
the practical considerations of having to sell this concept. From a personal
perspective, Ms. Houser supported bankruptcy courts having Article III status,
but she did not favor giving the bankruptcy courts nonbankruptcy case dockets.
On a practical level, however, Ms. Houser restated the question as whether or
not the concerns can be addressed short of extending Article III status to the
bankruptcy courts. Ms. Houser identified jury trials as one of the most
critical areas that required consideration on a pragmatic basis as it was
presented in avoidance actions as well as personal injury claims.
In response, Judge Clark had two comments. First, he noted that there was
domestic and international precedent for specialized commercial courts.
Second, he observed that little fixes could help make the bankruptcy court
system work better. For example, Judge Clark mentioned proposed legislation
which would authorize bankruptcy courts to exercise contempt powers. He also
described the increasingly prevalent process of having substantial portions of
bankruptcy cases being tried by courts other than bankruptcy courts.
Commissioner Ceccotti observed that the notion of bankruptcy has changed from
what it was when the 1973 Commission considered these issues. Specifically,
she noted that the notion of bankruptcy now includes rather creative areas
beyond mere debt restructuring. Examples cited by Commissioner Ceccotti
included the Dow and LTV cases and their respective impact on
tort and pension issues. She disagreed that withdrawal and jury trial
demands were made solely for delay purposes. She stated that such undertakings
may have nothing to do with delay, but relate solely to the merits.
Judge Martin mentioned one fix with regard to jury trials had been tried in
his district. When a jury trial demand is made in his district, he stated that
the action remained with the bankruptcy court up through final pretrial and
thereafter is transferred to the district court jury trial calendar. Professor Warren summarized that there were three possible proposals that the Commission could consider. First, the Commission could recommend Article III status in some form. Second, the Commission could fix those problem areas requiring the greatest attention. Third, the system could be left as it is.
Professor King noted that the fix alternative could make the system better
without raising constitutional concerns. In particular, he suggested that the
Commission should consider removing from the Bankruptcy Code those items having
nothing to do with the system that were put in at the insistence of special
interest groups. Examples of these provisions included mandatory abstention and
withdrawal as well as the allowance of personal injury claims, according to
Professor King.
Commissioner Ceccotti observed that there appeared to be a raging debate about
the meaning of Marathon and the three areas mentioned by Professor King.
She also stated that she did not necessarily favor Professor King’s
suggestion. Judge Clark stated that the mandatory abstention provision was
especially problematic in light of Conejo Enterprises and that the
Article III dispute lurked behind the issue of mandatory abstention.
When asked by Professor King as to whether contempt power was a major issue
for bankruptcy judges, Judge Martin stated that the answer varied greatly from
circuit to circuit. Judge Martin said that the solution was statutory although
it had been phrased in constitutional terms. Judge Clark stated that the issue
consisted of several parts. He noted that if the bankruptcy court was viewed
as a quasi-legislative court under Article I, then all that was necessary was
to enact a statute giving the bankruptcy court contempt power. If one viewed
the bankruptcy court as an adjunct of the district court from which it derived
its power and authority, then a statute which gave too much authority to a
non-Article III court adjunct was unconstitutional, he observed.
Commissioner Alix discussed the origins of bankruptcy law and the impact of
technological change, international business, NAFTA, GATT and global
competitiveness. He also noted that bankruptcy concerned many other areas of
substantive law including tax, personal injury, and commercial law.
Commissioner Alix stated that the global competitiveness of business in the
United States required that there be certainty not only when business is
conducted, but when it fails as well. If the system of how business problems
are resolved lacks certainty, then the global competitiveness of the business
infrastructure of the United States will be adversely affected, according to
Commissioner Alix. He concluded that the focus should be on the certainty of
the recovery of investment, capital and credit.
Commissioner Jones asked the participants and the Commissioners their thoughts
regarding the process of referrals at trials by consent and whether that would
be another useful little fix. Mr. Munitz responded that once a litigant is
asked for consent, the party would likely consider the tactical consequences of
giving such consent. Commissioner Jones observed that many parties now consent
to trial before magistrate judges. Judge Martin, however, expressed concern
about how quickly would bankruptcy matters be heard compared to other cases.
He noted that the referral system worked comfortably well to the extent that it
was premised on consent, provided that it did not reach the constitutional
endpoint on implying consent.
Judge Clark analogized the process as coercion and explained that this was why
express consent was necessary which, in turn, provided an opportunity for
delay. Ms. Houser noted that there was some concern among practitioners with
regard to consenting to a jury trial before a bankruptcy judge who had limited
experience in conducting them. Judge Clark observed that there was also a cost
factor to be considered. By consenting to the jury trial in the bankruptcy
court, the litigant had three levels of review as opposed to two levels of
review if the district court heard the action, he noted.
In response to Commissioner Hartley’s question, Judge Clark said that a
solution other than Article III status would look a lot like the Emergency Rule
which, in turn, would require various parts of the bankruptcy case to be tried
in various venues. Although Judge Clark stated that he would have liked to
have found an alternative to Article III status, he had not yet found one.
Commissioner Shepard suggested that the approach could be to restrict the
bankruptcy court’s jurisdiction. Judge Clark, noting that this tinkering
approach is difficult, gave the example of Section 1129 which sweeps various
areas outside of bankruptcy law into the confirmation order.
Commissioner Alix stated that his reference to certainty meant certainty of
time, speed, cost, possible outcomes and delays. Commissioner Jones noted that
the sources of the uncertainty regarding the issue of Article III status were
the Supreme Court and the Constitution itself. Nevertheless, she observed that
the system was working. Commissioner Jones stated that she favored fixes
rather than recommending Article III status for several reasons. First, this
approach could cause a statutory diversion in Congress which would have the
effect of taking the focus off other areas that the Commission may also seek to
address, she noted. Second, certain fixes could be made that would assist the
system, according to Commissioner Jones.
Commissioner Alix asked whether the Commission would deal with the bankruptcy
court system at a strategic, managerial or tactical level. Judge Arnold
questioned whether Article III status for bankruptcy courts was politically
realistic given the opposition of the Judicial Conference. He also expressed
concern regarding the fix route which could bring into play the agendas of
special interest groups. With regard to doing nothing, Judge Arnold noted that
the Commission would be offering no help in a situation where Congress has been
hesitant to act. Judge Clark acknowledged that all three alternatives were
fraught with danger. Commissioners Gose, Shepard and Alix agreed that the
Commission should focus on what had to be addressed in the system and not on
whether Congress would accept certain recommendations. Professor King
suggested that further debate on the issue of Article III status await the
discussion of the appellate process.
APPELLATE PROCESS
After a brief recess, Professor Warren introduced the appellate process as
the next topic for discussion and suggested that the issue of Article III
status for bankruptcy courts be held in suspension. She described the
discussion issue proposal as a court of appeals for the bankruptcy circuit
which would hear appeals taken directly from the bankruptcy court. Appeals from
the bankruptcy circuit court, an Article III status court, would be heard by
the United States Supreme Court.
Judge Arnold said the present system was ridiculous and that having two
appeals as of right was absurd. He mentioned that while some district courts
did the job right, others merely rubber stamped bankruptcy court judgments or
delayed acting upon them. Judge Arnold stated that he would be happy to see
the district courts taken out of the bankruptcy appellate process.
Nevertheless, he did not favor the idea of a bankruptcy appellate circuit
because it sent a message that the circuit court was not capable of handling
bankruptcy matters. Judge Arnold observed that it was important to have a
court of generalists to review bankruptcy appeals. He also noted that the
circuit court would be able to take on the additional burden of hearing direct
appeals from bankruptcy court decisions. Professor King suggested that the
issue of interlocutory appeals should also be addressed. Specifically, he
recommended that it was necessary to permit the review of many other types of
interlocutory appeals than are currently authorized.
Responding to Commissioner Shepard’s question as to why a specialized
bankruptcy appellate court was necessary, Judge Clark stated that he supported
Judge Arnold’s position in that a specialized court was needed only at the
bankruptcy court level. He acknowledged that there was nothing unique about
bankruptcy appeals that should prevent them from being heard by district
courts, but for the volume and need to move cases expeditiously. He noted that
the need for specialized courts did not extend to the appellate level and that
bankruptcy appeals required review by a generalist. Judge Martin agreed with
this statement.
Mr. Munitz noted that he could not recall any issue ever going up to the
circuit court that did not involve a specific provision of the Bankruptcy Code.
Commissioner Jones, on the other hand, disagreed. She stated that many
bankruptcy appeals involve state court issues at the district court level.
Based on her experience, Commissioner Jones estimated that one-third of the
bankruptcy appeals involved state law issues on the circuit court level. Judge
Clark noted that courts must deal with the construction of leases and other
executory contracts that arise in the context of assumption and rejection
actions. Citing Orion Pictures as an example, Judge Clark observed that
the case required the bankruptcy judge to decide the issue of assumption or
rejection, but that it could not make the decision because the underlying issue
had to be tried elsewhere.
Professor Kennedy asked if there was a way of avoiding the use of the
pejorative word specialized. He suggested that as the concept simply
consisted of a single appellate court, staffed by generalist judges, that had
national jurisdiction of bankruptcy appeals and accordingly was not in any
sense specialized. Professor Kennedy stated that he agreed with Commissioner
Jones in that appellate courts hearing bankruptcy appeals need not be staffed
by specialists. At the bankruptcy court level, he noted there was much
paperwork and administrative matters which made it special, but that these
factors did not exist at the appellate level. The nationwide binding effect of
a decision from a bankruptcy circuit court was one benefit that he cited. This
would, in turn, cut down on litigation at the lower level. Judge Martin
observed that there would be a front load effect that would taper off
eventually.
Ms. Houser noted that she did not understand why a bankruptcy appeal was any
different from other appeals. She suggested that the appeal ought to be heard
in the circuit court and that this would create binding precedent. She
recommended that the two levels of appeals should be eliminated and that there
should simply be a direct appeal to the circuit court.
Commissioner Shepard observed that it was beneficial to develop a split among
the circuits so that the Supreme Court could then resolve it. He expressed
concern that a national bankruptcy circuit court would become a mini-Supreme
Court. Commissioner Hartley agreed with this statement and noted that the
proposal did not take account of geographical or regional differences.
Judge Clark also agreed that there was value to developing an issue that had
national impact through a percolating effect. In addition, he noted that this
would speed the appellate process by eliminating the district court level yet
still provide for review by generalists. He explained that the Supreme Court
waited for a conflict to develop among the circuits it considered the issue in
order to assure that it was fully developed.
Commissioner Ceccotti asked whether the circuit courts would be able to handle
the additional work created by allowing direct appeals from the bankruptcy
court level. Judge Martin responded that the answer was tied to the issue of
access. As noted in the National Conference of Bankruptcy Judges NBRC Liaison
Committee Report, Judge Martin stated that there were two parts of the
appellate process: error correction and law declaration. As for error
correction, he observed that it was very important that there be an opportunity
for review even in the most minor cases. Judge Martin noted that there may be
a reduction in the opportunity for review if there were direct appeals to the
circuit court based on geographical factors.
Commissioner Jones did not agree that access to appeals would be adversely
affected. She stated that direct appeals to the circuit court would have the
opposite effect given the fact that appeals were used largely for delay
purposes. Commissioner Jones noted that the potential volume of appeals needed
to be considered and that the finality concept as well as the interlocutory
appeal issues should be addressed.
Commissioner Alix suggested that the Commission should consider the cost of
setting up a new system and the attendant risk that it may never be funded. He
observed that working within the current system would be the least expensive
solution as it would require only an increase in variable costs instead of
fixed costs.
Mr. Munitz stated that if there was a concern that district courts merely
rubber stamped bankruptcy court decisions, then direct access to the circuit
courts may solve this problem. With regard to Commissioner Jones’
observation concerning issues of finality and interlocutory appeals, Mr. Munitz
suggested that the distinction could be made along the same lines pursuant to
the former Bankruptcy Act’s jurisdictional provisions. Mr. Munitz then
asked Professor Kennedy to address this matter. In response, Professor Kennedy
observed that there should be some mechanism to diminish the appellate load.
Specifically, he said there would be a need to deal with interlocutory appeals,
but he was unsure whether the old distinction would work. Professor King noted
that the problem did not just involve interlocutory appeals, but extended to
the question of mootness.
Professor Warren observed that there appeared to be some consensus to have the
district courts eliminated from the appellate process so that there could be
direct appeals to the circuit courts. She also noted that there appeared to be
little support at this time for either the bankruptcy appellate panel system or
a specialized circuit court. Given these positions, Professor Warren suggested
that the Commission should consider the increased workload factor as well as
the issue of de novo review.
With regard to de novo review, Mr. Munitz said that the bankruptcy
court could enter a final order if it was a core proceeding or if the parties
consented. Otherwise, the district court would enter the final order which,
in turn, would be immediately appealable to the circuit court. Commissioner
Hartley agreed with this analysis.
Judge Clark likened this process to a time bomb. He cited several cases
standing for the proposition that if a non-Article III tribunal makes the
initial decision, the appellate standard of review cannot be as deferential
without running afoul of Article III. He also expressed concern about circuit
courts having to conduct jury trials.
Professor King agreed with Judge Clark and noted that it would be a mistake to
change current law with respect to reference, core and non-core proceedings,
and de novo review as it would raise constitutional issues.
Nevertheless, he concluded that there would not be a constitutional problem if
the only change was that direct appeals to the circuit court were authorized
and that an appeal requiring de novo review would still be heard by the
district court.
Commissioner Ceccotti clarified the process as one that permitted direct
appeals to the circuit court for core proceedings and noted that this would
solve much of the problem. Professor King commented that it might even provide
an incentive for parties to consent to the bankruptcy court entering final
orders in non-core proceedings.
Judge Clark stated that he was concerned about consent as it related to the
Article III issue. To the extent that Article III was a personal right, a
party could waive it, he noted. To the extent that the Article III issue was
structural, he observed that consent would not vitiate the problem.
In response to Commissioner Hartley’s request for clarification,
Professor King explained that appeals of core proceedings would be made
directly to the court of appeals and appeals of non-core proceedings would be
heard in the district court on a de novo review basis. Regarding the
latter, Professor King observed that there would be two exceptions: where
parties consented to the entry of a final order by the bankruptcy court and
where there was a failure to timely object to the findings of the bankruptcy
court. He acknowledged that this revised appellate structure would be a big
accomplishment.
Professor Warren asked whether a constitutional problem would result if there
was a direct appeal to the circuit court of a non-public right that is
nonetheless a core proceeding. As a bankruptcy court can enter a final order
in such actions presently, Ms. Houser noted that a new constitutional issue
would not be presented. Mr. Munitz explained that where a party refused to
consent to the entry of a final order by a bankruptcy court, the district court
would have jurisdiction to enter the final order. Where the action is a core
proceeding or the parties consent to the bankruptcy court entering a final
order, then a direct appeal to the circuit court would be authorized.
Commissioner Ceccotti observed that the Commission may have to comment in its
report about the Article I/Article III issue as opposed to developing an
extensive proposal on it. She noted that the report could state that the
Commission considered the issue and explain why it was important for various
reasons, but that, given the realities, the Commission propounded its proposals
based on the assumption that the bankruptcy court’s Article I status would
be retained.
Commissioner Hartley expressed concern as to whether the proposal was more
than just tinkering around the edges of the Article I/III problem. Acting
Chair Ginsberg suggested that the proposal should be taken under advisement by
the Commission pending further discussion.
In response to Commissioner Alix’s question as to what was being taken
under advisement, Professor Warren summarized the three potential approaches
that the Commission could take with regard to the Article III issue. One was
to recommend Article III status for the bankruptcy courts. The second was to
try to put together a series of tinkerings that would at least ameliorate some
of the problems, such as contempt power and jury trials, without going over the
constitutional edge. The third approach was for the Commission to stand behind
the current system.
Commissioner Gose asked whether this issue would present itself repeatedly
throughout the various hearings. He stated that it was too early to formulate
a plan and that it should therefore be tabled. Agreeing with this statement,
Chair Ginsberg observed that although it was a major item, it was not clear at
this point how it would integrate into the report.
The Meeting recessed from 12:13 p.m. for lunch and reconvened at 1:30 p.m.
VENUE
Professor Warren described the next topic as alleged forum shopping whereby
corporate debtors, in particular, chose the venue in which they wish to have
their bankruptcy cases commenced. The discussion issue proposal, according to
Professor Warren, would be to eliminate several of the alternative ways of
establishing venue and to limit venue to the debtor’s principal place of
business or location of its principal assets.
Commissioner Hartley wondered whether the venue forum shopping problem could
be addressed by just having stricter standards imposed on the bankruptcy
judges. Mr. Munitz, in response, stated that it had been his experience that
transfer motions were not well received and frequently were denied because the
bankruptcy judge was already involved in the case and there were inefficiencies
associated with transfer. He also suggested that a preventive approach should
be utilized whereby the venue provisions would be strictly enforced at the
filing of the case rather than having more liberal or mandatory transfer
provisions imposed at the motion stage.
Professor King stated that the problem could be answered two ways. One answer
would be to return to what the law used to be prior to enactment of the
Bankruptcy Code, that is, venue for a corporation would be simply the location
of the debtor’s principal place of business or principal assets. He
stated that a statutory solution was necessary because the bankruptcy courts
did not transfer appropriate cases. Mr. Munitz agreed. Likewise, Judge
Martin stated that one could not trust bankruptcy judges on this issue based on
their jealousy about these cases and the pride they take in them. He expressed
concern, however, that the cure should not stimulate extensive collateral
litigation. To this end, he recommended that any statutory revision reflect
the greatest amount of simplicity possible. Ms. Houser commented that abuses
have resulted from the flexibility and that a good solution would be to make
the system more rigid.
To assure that all of the arguments were heard by the Commission before it
reached a consensus on this proposal, Professor Warren presented arguments
against it. One advantage to the present system was that it allowed larger
companies to choose those courts that specialize in dealing with large cases
and have the resources so that such cases are moved through the system
expeditiously.
Ms. Houser rejected that argument based on her experience. Agreeing with Ms.
Houser, Judge Clark stated that Federated Department Stores, one of the
more successful mega cases, was filed in Cincinnati, Ohio. Mr. Munitz noted
that when debtors forum shopped, they looked for courts that were
debtor-friendly.
Professor Warren asked whether the effort to find debtor-friendly courts had a
pernicious effect on the rulings of these courts. Mr. Munitz answered that it
demeaned the entire system by suggesting that bankruptcy courts were for
sale.
Commissioner Hartley noted that this was an important issue and asked whether
the proposal went far enough to correct the problem. Mr. Munitz responded that
the system on which the proposal was based worked eminently well between 1973,
when the bankruptcy rules were promulgated, until the adoption of the
Bankruptcy Code.
Judge Clark mentioned a problem peculiar with consumer cases filed in his
district. He said that debtors who resided in New Mexico preferred to file in
El Paso simply because it was more convenient. The question presented,
according to Judge Clark, was whether these debtors ought to be able to file in
El Paso. He therefore wondered whether a venue provision could address this
particular aspect of the venue issue without opening the flood gates to big
cases.
Commissioner Shepard summarized Judge Clark’s suggestion as one which
would permit individual debtors to file their cases within 100 miles of their
residence. Ms. Houser recalled that it has become vogue to make a strategic
decision as to whether to file a bankruptcy case in the Northern or Eastern
District of Texas. Commissioner Alix observed that every court and judge
throughout the nation had a reputation and that it was a prevalent practice to
make venue decisions are made based on a court’s prior rulings on
professional fees or debtor orientation.
Judge Clark clarified that his statements regarding El Paso were not intended
to describe an abuse of the bankruptcy process, but a response to geographic or
convenience concerns. Professor King stated that Eastern Airlines was
not just a matter of forum shopping. He explained that the only way a
corporate debtor has a connection with a forum was where it did business or
where its principal assets were located and that with state of incorporation,
there was no real connection to the district. With regard to Judge
Clark’s concerns with regard to the convenience of consumer debtors,
Professor King said that he was not quite sure how to handle them. To the
extent that there was no abuse involved, he stated that it would be an easy
matter to use residence, domicile or some distance factor such as the 100-mile
radius suggestion. Mr. Munitz also thought a certain mileage radius may be
appropriate for individual cases.
Commissioner Hartley noted some courts have adopted procedural safeguards,
such as telephonic hearings, which limit the need for actual appearances.
Commissioner Jones was concerned about having a bankruptcy court in Texas rule
on homestead exemptions under New Mexico law. She asked if there was some way
to eliminate this problem while dealing with the convenience factor.
Acting Chair Ginsberg asked whether there was anything unseemly about having,
in effect, venue for sale. He noted that knowledgeable creditors filed
involuntary cases in creditor-friendly districts. Professor Warren responded
that venue motions made in involuntary cases were granted much more
frequently.
Commissioner Gose observed that the discussion of venue had become split into
two areas: the corporate and consumer cases. As for the latter, he suggested
that the Commission’s consideration await the hearing that will focus on
Chapter 13 cases. With regard to corporate cases, Commissioner Alix noted that
there were significant differences between small and large business bankruptcy
cases. He thought that the proposal may not take into account these
differences and that this could lead to litigation regarding the meaning of
principal place of business and assets. On the other hand, he observed that
this problem would affect only a small percent of the business bankruptcies
filed annually.
Ms. Houser noted that venue shopping was rampant in the late eighties and
early nineties particularly in the real estate area. She agreed with
Commissioner Alix that this may be a situation where one proposal cannot solve
every problem, but that those which would not be resolved would only constitute
a handful of cases. For these cases, Ms. Houser noted that the system would
have to rely on the courts to enforce the venue rules.
Acting Chair Ginsberg, recalling that Professor Warren stated that there was a
higher transfer rate for involuntary cases, said that this was a problem.
Where the movant agreed to the transfer, an obvious opportunity for corruption
and fraud was presented, Acting Chair Ginsberg observed. He stated that the
bankruptcy judge should be no more willing to transfer an involuntary case than
a voluntary mega case. He was concerned that the statistics showing a higher
rate of transfer for involuntary cases could indicate misconduct and that this
should be an area that ought to be examined closely. Commissioner Alix asked
what was the fraud if the parties agreed to transfer a case. Acting Chair
Ginsberg explained that if the agreement to transfer the case was part of a
plan to pay off the petitioning creditors in full or to fulfill other promises,
then there was a problem.
Mr. Munitz noted that the failure to disclose such arrangements could
constitute a violation of Title 18 of the United States Code. Commissioner
Jones asked Acting Chair Ginsberg why he suspected fraud when it may be just a
matter where the involuntary debtor wants to be in its home venue. Ms. Houser
asked whether Acting Chair Ginsberg’s concerns could be addressed by
requiring full disclosure of these matters prior to the transfer of an
involuntary case. Absent full disclosure, she noted that there would be a
clear violation of Title 18. Acting Chair Ginsberg agreed with Ms. Houser as a
matter of legal analysis and logic. Nevertheless, he still wanted to know why
the statistics for involuntary cases were somewhat skewed.
Summarizing, Professor Warren noted that on the corporate side there was a
consensus that there be a narrowing of venue options with the recognition that
there will be some litigation at the margins over what constituted principal
assets and location. With regard to consumer cases, Professor Warren observed
that the Commission may possibly favor being more generous regarding forum
choice, but that she did not hear a consensus on that issue and that the
Commission may want to discuss the issue further with consumer attorneys.
Commissioner Shepard suggested that the Commission may have to discuss this
issue with other constituencies as well.
Judge Martin sought clarification from Professor Warren as to whether the
proposal eliminated the affiliate filing option as well. Professor Warren
answered in the affirmative. Commissioner Alix then observed that this would
prevent the Ionosphere Club filing. Professor Warren clarified that the
subsidiary would have to file where the parent’s case was pending and that
the opposite scenario would not be permitted.
Professor King, however, noted that this presented the possibility of separate
petitions being filed in different districts and that could result in parallel
Chapter 11 cases pending simultaneously before different courts. He recalled
that this happened prior to the enactment of the Bankruptcy Code and that it
created difficulties. He suggested that the Commission examine whether the
affiliate filing was a real problem.
Commissioner Alix cited the Cardinal Industries case in which he served
as the operating trustee. He stated that the debtor was a general partner
which was located in Columbus, Ohio and had 1,000 separate limited
partnerships. These limited partnerships, according to Commissioner Alix, had
their own assets and they were located in twenty-five states. Given the need
to file 350 separate Chapter 11 cases, he stated that the question was where to
file them, that is, in the states where the properties and secured creditors
were located or where the general partner was located. For case management and
cost reasons, Commissioner Alix said that the limited partnership cases were
filed in Columbus, Ohio, the situs of the general partner. This was done, he
noted, notwithstanding the fact that the creditors in these cases would have
preferred that they were filed in their home states. Accordingly, Commissioner
Alix shared Professor King’s concern with regard to affiliates.
Judge Clark noted that there was a parallel problem with regard to
transnational insolvencies and that the European Union had recently promulgated
a proposal or treaty to deal with this problem. He noted that if the companies
were sufficiently interrelated, it would be a problem to have competing
insolvency proceedings pending in different nations. He observed that the
venue issue as applied to affiliates had some of the same elements presented by
transnational bankruptcies.
Professor Warren suggested that the issue was only one of initiating the
bankruptcy case and not whether one could join a pending case. The proposal,
she stated, was that one cannot use the hook of a subsidiary as an automatic
entre into that jurisdiction. Commissioner Alix was concerned how the proposal
may impact on the system and whether it would foster other problems such as
allowing a debtor to stagger the case by filing its numerous corporate
subsidiaries in various venues. Commissioner Ceccotti stated that it was
difficult to conceive that a debtor, thinking as an integrated entity, would
intentionally choose to have its subsidiaries filed in diverse venues.
Commissioner Alix responded that the debtor’s decision depended on which
judge was assigned the case. He and Judge Clark agreed that this was a
prevalent practice. In addition, Judge Clark warned against enacting a law
that would encourage or make it easier for litigants to choose the bankruptcy
judge for their cases.
Commissioner Jones asked for clarification as to how the proposal would affect
partnership entities. Likewise, Ms. Houser asked whether holding companies
should be treated differently. Professor Warren stated that the plan would be
to bind them by the same set of rules. With regard to partnerships, Mr. Munitz
suggested that a general partner could file where the partnership case was
pending. Commissioner Jones noted that would be within the framework of the
principal place of business or assets rule. While agreeing with this
interpretation, Commissioner Alix stated that the question as to how principal
asset and place of business are defined should be left open for further
discussion.
Mr. Munitz suggested that the Commission consider making a recommendation that
immediate appeals of venue determinations be permitted. Judge Clark agreed
that such appeals ought to be expedited. Judge Arnold noted that review of
venue transfer decisions could be accomplished by mandamus. Disagreeing, Ms.
Houser explained that mandamus was not an effective review mechanism given the
very discretionary parameters of venue determinations. Commissioner Jones
noted that as venue determinations involve issues of fact, the clearly
erroneous standard of review would apply. Accordingly, she suggested that the
statute be tightly written to avoid interlocutory appeals. Ms. Houser and
Commissioner Alix agreed with this suggestion.
Summarizing, Professor Warren noted that there was interest by the Commission
to eliminate venue provisions that permit a debtor to follow its subsidiary
into a district, to restrict venue based and to make the test of a
debtor’s venue based on the location of its principal assets or place of
business. Commissioner Gose agreed with Commissioner Alix that the definition
of principal place of business should be reserved for further development.
Commissioner Alix also noted that the Commission may want to consider further
the impact of the venue proposal on larger cases.
CASE ADMINISTRATION
The theory underlying the Bankruptcy Reform Act of 1978, according to
Professor Warren, was that creditors’ committees would play an active role
in Chapter 11 cases, based on information readily supplied to them, and that
they would work to move these cases more quickly and efficiently through the
system. Professor Warren noted, however, that there was a widespread perception
that in many Chapter 11 cases, no creditors’ committees were formed, there
was no involvement by the United States Trustee, and there was no way to move
these cases along. She observed that this may be part of the impetus for
courts to become more involved in case management. There was also a
perception, Professor Warren observed, that the United States Trustee was
overly involved in certain cases where there was already a great deal of
involvement by other parties.
The discussion issue proposal, as described by Professor Warren, was to have
case administrators appointed automatically in every Chapter 11 case lacking a
committee. The case administrator would assure that the debtor filed all
required papers and that it would review the sufficiency of such papers as well
as move for dismissal of the case if the debtor did not abide by the guidelines
or make progress toward a plan. Professor Warren noted that the impact of
this proposal would potentially shrink the duties of the United States Trustee
and cause it to serve more in an oversight capacity, that is, making certain
that trustee panels were monitored, bank accounts were properly maintained, and
appropriate fee guidelines were in place, among other duties.
Commissioner Shepard noted that this proposal did not address all of the
issues relating to complaints regarding the United States Trustee Program.
Professor Warren acknowledged that it did not, but that it addressed a number
of them. Judge Martin observed that the proposal ignored a precept of the
Bankruptcy Reform Act of 1978, namely, that every time the court or United
States Trustee intervenes, it chills the incentive of the creditors to act. He
noted that it did not really matter to most people as to whether these cases
were closed or not.
In response to Commissioner Alix’s query as to whether this was a big or
small case problem, Commissioner Ceccotti stated that it was not a big case
problem. Professor Warren agreed. Commissioner Shepard observed that in small
cases there was naturally less money to spend for such items as professional
fees and thus less incentive for creditors’ committees to act. He also
noted that this lack of interest also derived from the fact that government
representatives were precluded from serving on committees. In sum,
Commissioner Shepard said that creditors’ committees did not work in
moderately smaller Chapter 11 cases.
To address Commissioner Shepard’s concerns, Professor Warren posited that
the proposal could be modified in that the mere formation of a creditors’
committee would not insulate the debtor from having a case administrator
appointed. In effect, Professor Warren noted the system would have case
administrators appointed until some point where it appeared that the
creditors’ committee was active.
Judge Martin asked why anyone was surprised that creditors’ committees
did not work in cases where there was nothing to reorganize. He noted that
many Chapter 11 cases were filed mostly as winding up proceedings.
Commissioner Shepard said one of the purposes of the creditors’ committee
was to investigate whether the case should be liquidated, a function that was
not typically performed.
Professor King stated that he had difficulty understanding the proposal. On
one hand, he observed, there was an argument that the United States Trustee
should do this and should not do that. On the other hand, Professor King
noted, this proposal just created another layer which would have to be paid a
meager fee out of a meager case. Professor King suggested that if there was a
role for a case administrator, the title ought to be changed from case
administrator to the United States Trustee. For those cases without a
creditors’ committee or lacking an active creditors’ committee, he
asked why the United States Trustee could not determine whether these cases
should remain in Chapter 11 or be converted to Chapter 7.
Professor Kennedy stated that the 1973 Commission had in mind a new
administrative agency, but that the United States Trustee took over that role.
He noted that the United States Trustee had more limited functions than the
administrative agency envisioned by the prior Commission.
Commissioner Jones stated that she did not think a case administrator would
solve those cases where debtor’s counsel gets paid up front and disappears
after these cases are filed. Commissioner Jones posited that the problem may
be one involving case management. She noted that bankruptcy judges could
conduct conferences and issue form scheduling orders requiring the debtors to
file plans by dates certain.
Commissioner Ceccotti observed that the 1994 amendments to the Bankruptcy Code
provided for such case management. Commissioner Hartley noted that this was
the driving force behind the amendments to Section 105. With regard to the
United States Trustee Program, Commissioner Ceccotti queried what it was doing.
She cited a study by the National Association of Public Administration entitled
Alternative Structures for the United States Trustee Program which made a
number of recommendations and identified areas of weakness. She said that this
report suggested having the system prioritized and it mentioned the
Program’s lack of focus. She noted that the Government Accounting Office
had also studied the Program. Accordingly, Commissioner Ceccotti suggested
that the Commission may want to examine studies of the United States Trustee
Program.
Professor Warren noted that the Commission could decide to review the United
States Trustee Program as a whole, but the approach reflected in the discussion
issue proposal was to address a specific concern, namely, Chapter 11 cases that
languish. With regard to languishing cases, Professor Warren stated that there
were several approaches. One approach, she noted, was to do nothing about them
and to shift the burden to those who care to act. Another approach, she
observed, was to conclude that factually there was no problem of languishing
cases. Professor Warren noted, however, that there was a lot of data
evidencing that cases are languishing and that the longer they languished the
less likely they successfully reorganized. Alternatively, the Commission could
conclude that the solution was a bureaucratic approach, that is, the United
States Trustee should address the problem or a private entity should be
utilized similar to that currently done in Chapter 7 and 13 cases.
Commissioner Shepard said there was a perception among smaller creditors that
debtors can run into bankruptcy court and hide forever, operate their
businesses, strip off all the assets with the professionals taking all the
money and running, and that the whole system was a fraud. Judge Clark agreed,
but noted that there were less single asset real estate cases of the kind
described by Commissioner Jones. Nevertheless, he observed that there were
many cases that languished as there was little or no creditor oversight based
on insufficient assets. Judge Clark stated that he felt at times that he was
presiding over fraud and that he was playing host to an unsavory system.
Commissioner Alix asked whether the problem could simply be addressed by a
show cause order directing the filing of a plan or dismissal of the case.
Judge Clark stated that he did not have to do this because the problem has been
ameliorated by the United States Trustee’s actions in his district. With
regard to the three approaches outlined by Professor Warren, Judge Clark
expressed concern with the laissez faire approach because it would basically
invite fraud. Rather than this approach, Judge Clark suggested that systems
and controls should be put in place so that there is a disincentive to debtors
to commit fraud.
Commissioner Alix recommended that before the Commission begins to fashion
solutions for languishing cases, it should focus on whether this was a tactical
or managerial issue in terms of how the current system executed its
responsibilities. He suspected that a good number of these cases could be
handled by a show cause order or by inviting the United States Trustee to
expend its efforts in a specific area. Commissioner Alix stated that
implementing and executing was what this issue involved, not strategy.
Agreeing, Commissioner Gose said that this was his point about mentioning the
performance of the United States Trustee in the Northern District of
California. Commissioner Shepard also agreed and stated that the approach
should not require someone else do what the United States Trustee should be
doing.
Professor King suggested that there could be a rather simple solution. The
Commission could recommend, for example, that the United States Trustee Program
be more centralized out of the national office, he noted. With or without this
occurring, Professor King observed that the United States Trustee’s
defined duties could specify time deadlines and detail how these cases should
be monitored. This way, Professor King noted, if there was no problem, then
the United States Trustee would not be required to act, and if there was a
problem, then it would have to act.
Judge Clark stated that he would like to see more people in the United States
Trustee Program who could understand business and interpret financial
statements. In other parts of the world, he noted, case administrators were
accountants who could make business evaluations. Although Commissioner Jones
agreed with the concept, she observed that one may not want to have the United
States Trustee making business decisions. To achieve the same objective,
however, she suggested that Section 105(d) should be amended to require the
bankruptcy court to hold a status conference and set deadlines.
Judge Martin did not agree that the requirement should be mandatory and he was
not sure what would change if the statute was made mandatory. Commissioner
Shepard stated that a radical solution to the problem of languishing cases
would be to require that all cases be filed under Chapter 7 unless the debtors
could demonstrate cause to be in Chapter 11. Judge Clark mentioned that this
was reminiscent of adjudication hearings.
Judge Martin asked whether the debtor in possession model should continue or
revert back to the trustee model. His preference was that the debtor in
possession model should continue notwithstanding its failings. Professor King
noted that the suggestion was not based on the trustee model, but to have
someone be responsible for reviewing those Chapter 11 cases where nothing was
happening. Judge Martin stated that another recourse could be to move for the
appointment of a trustee, although he noted that the courts were reluctant to
grant such motions. Commissioner Shepard stated that this type of motion
should be made by the United States Trustee because the creditors did not have
the money to do it themselves. Judge Clark said that the problem related to
the economics of the case and that it could not bear the expense of a trustee.
Judge Martin then asked why anyone was worried about such cases, if these cases
could not even afford trustees.
Judge Clark recalled that practitioners who appear before him have expressed a
strong desire that he conduct more status hearings in Chapter 11 cases.
Commissioner Hartley noted that Professor King’s suggestion that the
United States Trustee’s role be strengthened and clarified could be
coupled with Commissioner Jones’ suggestion with regard to having
mandatory status conferences. Acting Chair Ginsberg observed that the
mandatory status conference reflected a prior system which was specifically
rejected. Under this prior law, the bankruptcy judge was involved in case
administration and required to hold the first meeting of creditors at which
inadmissible evidence was presented and prejudicial statements occurred.
Judge Martin noted that the discussion issue proposal was initially directed
at trying to deal with languishing cases and that it was now aimed at dealing
with cases from their outset. He distinguished between holding a status
conference at the beginning of a case which could have a chilling effect on
participation and a status conference held in a languishing case. He suggested
that holding status conferences after some period of time had elapsed in these
cases would be the best way to rid the system of such cases.
Judge Clark disagreed because he thought Commissioner Jones’ point was
that, under the Speedy Trials Act for federal civil litigation, these
conferences were intended to held early in cases so that they did not languish.
Acting Chair Ginsberg distinguished the two types of status conferences. Under
the Speedy Trial Act, he observed, the conference is held as part of the
discovery scheduling process in connection with discreet pieces of litigation
where the parties are appropriately represented. Acting Chair Ginsberg also
noted that the bankruptcy bench has been doing this for years and this process
was called case management. In contrast, he explained that the status
conference in Chapter 11 cases as proposed would be freewheeling and that the
bankruptcy judge would be exposed to matters which should not be heard by the
judge prior to going into litigation. Such conferences, he stated, were very
much different from discovery conferences where the bankruptcy judge was aware
of the issues and could control those matters that he or she did not want to
hear.
Commissioner Shepard stated that holding the status conference after the case
has languished would be tantamount to addressing the abuse after it had
occurred. Ms. Houser said that feasibility could be discussed at the Section
341 examination and that she shared Judge Martin’s and Acting Chair
Ginsberg’s opposition to having the bankruptcy judge at the outset being
hands on in the case. Rather, it was more appropriate for the United States
Trustee or some other entity to do this in the context of the Section 341
examination, Ms. Houser stated.
Acting Chair Ginsberg noted that another model that the 1973 Commission
considered and rejected was a threshold test concerning the debtor’s
likelihood of reorganization which required the debtor to establish that the
petition was filed in good faith. Commissioner Shepard stated that the answer
may be that the United States Trustee should immediately have its business
advisory person in place who could then carefully examine the assets and
recommend a fixed period of time within which a plan should be filed so that
the case did not languish. Professor King suggested that this would not have
to happen in every Chapter 11 case in that it could be limited to those cases
where, for example, the United States Trustee was unable to form a
creditors’ committee. Acting Chair Ginsberg and Ms. Houser agreed with
this approach. Judge Clark, noted, however, that there were some districts
where the United States Trustee system was largely ineffective because it is
undercut by the courts and that there was a perception that the courts did not
like the United States Trustee. Accordingly, he expressed concern for those
districts where the United States Trustee attempts to enforce deadlines without
the support of the courts.
Commissioner Shepard agreed with Judge Clark, but noted that the current
perception about the United States Trustee Program’s problems was that
many positions were political appointments and that it was not staffed by
competent professionals. He stated that these problems had to be solved before
the United States Trustee system could earn respect.
After a brief recess in the meeting, Professor Warren summarized that the
perceptual approaches that the Commission discussed including having an
administrator or the United States Trustee charged with the responsibility of
Chapter 11 case administration. As to the latter approach, she noted that the
Commission may decide to make recommendations about what should be done.
Commissioner Jones stated that many Chapter 11 cases were doomed from the
outset and that the status conference would cause the debtors to inform the
bankruptcy court what deadlines they needed. She also noted that there was a
very big public perception problem with regard to those debtors who file
bankruptcy, obtain the benefit of the automatic stay, and then go to Hawaii or
Florida.
Judge Martin responded that it was very hard to base any policy on public
perception because anyone who has lost money in the system had a bad perception
of it. Judge Clark disagreed that nobody had a good perception of the system.
He stated that the perception problem was that bankruptcy was a place where one
loses money and where cases disappear. In addition, Judge Clark noted that
bankruptcy was not like any other form of litigation, including civil
litigation, and that it required financial analysis of the debtor enterprise
with regard to its reorganizational prospects. He also agreed with Judge
Martin and Acting Chair Ginsberg that there was a need to make sure that the
bankruptcy judge did not become counsel for the debtor. He postulated whether
there was a way to have the Section 105(d) conference provide an opportunity to
conduct the financial analysis of the case.
Ms. Houser responded that this financial analysis should be performed by the
United States Trustee first at the initial debtor interview stage. She noted
that the second opportunity should occur at the Section 341 meeting. In
addition, Ms. Houser observed that the exclusivity extension hearing presented
an opportunity for the bankruptcy judge in a contested forum to determine the
debtor’s reorganization prospects and that the court could issue its own
show cause order after exclusivity expired in a case. Nevertheless, Ms. Houser
stated that a mandatory status conference at the outset of every case may
reverse the presumption. Judge Clark agreed with this statement and noted that
the status conference requirement should be discretionary. Commissioner
Shepard observed that the Section 341 examination was not conducive to
meaningful financial analysis.
Professor King reminded the Commissioners that any case where the United
States Trustee was unable to form a creditors’ committee should be
immediately identified as a problem case. For such cases, the entity
responsible for reviewing case administration, such as the United States
Trustee, should closely monitor the financial statements and make
recommendations.
Commissioner Alix observed that there were several aspects to bankruptcy
cases. He noted that one pertained to the litigation aspect of bankruptcy
cases, but that small business bankruptcies were generally not the source of
this aspect. The second aspect, he explained, related to the level of creditor
participation, particularly those cases that had essentially been abandoned
because there was not active creditor participation. Commission Alix said that
the third aspect involved analysis of financial factors which drove the case:
profitability, positive cash flow, and a balance sheet reflecting sufficient
assets available for distribution to creditors. For abandoned Chapter 11
cases, this financial analysis should be utilized to determine whether the case
should be eliminated from the system. Commissioner Alix noted that the United
States Trustee should not be permitted to be a business manager for the case,
but instead focus on ways to move the case through the system so that there is
certainty.
Summarizing, Professor Warren observed that the Commission was concerned
about languishing cases, but that there was no consensus with regard to
utilizing case administrators to solve this problem. She noted that the
Commission expressed some interest in promulgating certain admonitions to the
United States Trustee to be more aggressive and more detailed, and that the
Commission was convinced that United States Trustee was the appropriate locus
for dealing with this problem.
Commissioner Jones stated that she did not think the Commission was convinced
that there was any definitive way to address the problem. Acting Chair
Ginsberg observed that there was the alternative system of the bankruptcy
administrators which had not yet been considered by the Commission. He noted
that the Commission would not be able to decide on which alternative to focus
until all sides were fully presented.
Professor Warren therefore concluded that the Commission would holdover
questions about court participation and whether or not the United States
Trustee or some other alternative was the appropriate locus for dealing with
this problem. Judge Clark mentioned that there was also the question of cost
of the United States Trustee Program and the extensive bureaucracy that has
grown in connection therewith.
Professor Warren and Acting Chair Ginsberg extended their thanks to the
participants for their very thoughtful and helpful insights. Thereafter the
meeting recessed until 4:06 p.m., at which time the public hearing portion of
the meeting began.
PUBLIC HEARING
ILENE GOLDSTEIN
Ms. Goldstein testified as Chair of the Bankruptcy and Insolvency Section of
the Commercial Law League of America. She identified herself as a partner with
the Chicago law firm of Richards, Ralph, Eiden, Eckert & O’Donnell.
Ms. Goldstein stated the Commercial Law League of America was the largest and
oldest creditor’s rights professional organization which was created in
1885. Of its 5,000 members, Ms. Goldstein noted that 2,000 were members of the
Bankruptcy and Insolvency Section.
The League’s focus with respect to bankruptcy, according to Ms.
Goldstein, was twofold. She said that the League was in favor of the
efficient, timely and equitable administration of the bankruptcy system. In
addition, the League favored a return to creditors.
According to Ms. Goldstein, her purpose in appearing was to suggest certain
matters that the Commission should consider as substantive issues for future
meetings. Although there was understandably a large focus on Chapter 11, Ms.
Goldstein asked the Commission to equally consider issues dealing with Chapter
7. In addition to presenting issues with regard to private trustees, Chapter 7
processed incredible amounts of money, according to Ms. Goldstein.
Ms. Goldstein observed that an issue presented in a joint paper by the League
and Philip Hendel dealt with the imposition of capital gains taxes in the
Chapter 7 context and how it affected the administration of these cases. Ms.
Goldstein, who was herself a trustee, stated that the League and she prepared a
survey of the National Association of Bankruptcy Trustees membership. Based on
the results of this survey, the League would be presenting a paper to the
Commission regarding the inability of the Chapter 7 trustees to liquidate
assets because of the imposition of capital gains taxes. Trustees who
responded to the survey stated that as a result of capital gains taxes, they
had not administered $350 million in assets, of which $70 million on a net
basis would have been available for distribution to creditors.
With regard to Chapter 11 cases, Ms. Goldstein stated that the League totally
supported the creditors’ committee system. Among the reasons why there
were few committees, she noted were the reluctance of creditors to throw good
money after bad and to take time from their businesses to participate on the
committee. Another reason she cited was their inability to retain counsel
without having to pay for the representation with their own funds in cases
where were insufficient estate assets. In support of her statements with
regard to the value of the creditors’ committee process, Ms. Goldstein
cited the law review article by Susan Jensen-Conklin from the Commercial Law
Journal that was included in the League’s submission to the Commission.
In response to Commissioner Alix’s question as to why trustees could not
pay the capital gains taxes, Ms. Goldstein explained that this occurred because
there were insufficient funds available in the estate to make the tax payments
to the Internal Revenue Service. As the trustees were responsible for making
these payments, she noted that they were forced to abandon estate property
because of their inability to pay the taxes. Commissioner Alix and Ms.
Goldstein discussed a hypothetical where the value of the real property was
$200,000, the original purchase price was $70,000 and the property was
encumbered by a $125,000 mortgage. Part of the $75,000 spread would be
utilized to pay brokers’ fees and other costs of sale so that $30,000
would be the net amount available to creditors. Under these facts, the
trustee would have to pay capital gains taxes on $130,000 which, in turn, could
not be satisfied in full out of the net $30,000 available for distribution.
Commissioner Shepard asked whether Ms. Goldstein was suggesting that all
administrative expenses, including the trustee’s fees, be paid except for
the taxes owed to the Internal Revenue Service. Ms. Goldstein disagreed and
noted that the Internal Revenue Service was not an administrative expense
creditor until the sale was effectuated. She stated that as a result of the
Internal Revenue Service’s position that the trustee was not allowed to
use the over 55 exemption, the debtor is able to keep the equity in his or her
home because the trustee is not permitted to utilize the exemption. A possible
solution that Ms. Goldstein suggested was to emulate the federal estate tax
exemption that applies in the context of probate and will estates. Ms.
Goldstein also mentioned the problem that trustees did not get the information
from the debtors to step up the basis because the debtors generally did not
want their property sold.
RICHARD BARTEL
Mr. Bartel, speaking his own behalf, introduced himself as a private
investigator in Washington, D.C. He said that his firm specialized in
bankruptcy fraud issues and that it generally did work for creditors.
Mr. Bartel explained that he had been an investigator in the field of
bankruptcy fraud for five years and that he was shocked at what he has found in
that capacity. He suggested that the Commission should have public hearings on
the issue and that an interdisciplinary approach should be utilized which
involved Congress, the judiciary and the executive branch.
He stated that bankruptcy was used as a strategic and tactical tool rather
than to relieve financial stress. Mr. Bartel agreed with the notion that the
investment community should have more certainty with regard to reorganization
cases and that they proceed expeditiously.
Mr. Bartel observed that bankruptcy fraud may be becoming pandemic and that
organized crime was utilizing bankruptcy as an avenue of opportunity. He
stated that the filing of a bankruptcy case served to stem the attention of the
state regulators and police organizations because there was a perception that
the federal entities monitored matters after bankruptcy intervened. He said,
however, that this was not the case as the United States Trustee had too many
cases to administer. He noted that the public viewed bankruptcy as a matter of
throwing good money after bad and that there was no reason to become involved.
As problem areas, he cited creditors’ committees that were not active and
debtors in possession who used the filing to continue or initiate fraudulent
schemes. Mr. Bartel suggested that Section 586 of Title 28 should specifically
define what the United States Trustee’s obligations were with regard to
case administration.
Mr. Bartel mentioned that his firm had just finished an investigation into
asset stripping in the Eastern Airlines case. He noted that when the
case was commenced, there was a report of $1.2 billion missing which to this
day had not yet been found and that an examiner identified $400 million of this
amount, but did not recover these monies. He observed that the professionals
in the case received millions of dollars in compensation while creditors were
paid between eight and eleven cents on the dollar.
Summarizing, Mr. Bartel stated that liquidating Chapter 11 cases should not be
permitted, Section 586 of Title 28 should be more specific, and that the
executive branch as well as individual agencies should be permitted to
intervene as a matter of right.
MEETING ADJOURNED AT 4:27 P.M. TO RECONVENE ON FEBRUARY 24, 1996 AT 9:00 A.M.
CONTINUED MEETING - SATURDAY, FEBRUARY 24, 1996
Commission Reporter and Staff Present:
Public Attending:
Approximately fifteen people were in attendance including representatives from
the Administrative Office of the United States Courts, Executive Office for
United States Trustees, trade associations, and law firms.
At 9:05 a.m., Acting Chair Ginsberg called the meeting to order and stated that the substantive nature of future meetings was the first order of business.
SUBSTANTIVE NATURE OF FUTURE MEETINGS
After clarifying that Professor Warren sought suggestions for both topics and
methods, Commissioner Shepard stated that he liked the round table method as it
was informative and productive. He asked what was the effect when a particular
view was not expressed during the discussion. Professor Warren responded that
the round table approach could not substitute for reading the materials
distributed to the Commission members.
While agreeing, Commissioner Ceccotti stated that it was important to have
representation of divergent views because it served to focus the issues
presented in the written materials. Accordingly, she suggested that the
Commission ought to make an effort to have representational viewpoints at the
round table discussion.
Commissioner Gose also agreed that the round table format was productive.
Acting Chair Ginsberg asked the Commission to consider what it would do if the
round table format was not utilized, for without the interplay of ideas the
Commission would be presented with a series of isolated testimonial
presentations. Commissioner Jones commented that the round table discussions
went very well and that the exchange of ideas was helpful. She was concerned,
however, that the Commission not confine itself to just four or five issues in
future meetings.
Based on the comments set forth today, Professor Warren stated that she would
continue to organize these round table discussions and will do a follow-up
memorandum that summarizes the results. She said that it would be circulated
next week and suggested that it be used as a format for future meetings.
ORGANIZATIONAL AND ISSUE SELECTION PROCESSES
Without structure, Commissioner Alix warned, the Commission may not hit the
points at the right time and in the right case. Therefore, he suggested that
the Commission should have a plan and then a process for executing the plan.
He noted that the Commission presently did not yet have that plan and process,
primarily due to Chairman Mike Synar’s long illness and death.
Nevertheless, Commissioner Alix stated that the Commission should have an
approach as to how it should expend its limited time. In addition, he stated
that the Commission should have a shared view on its process as well as its
goals and priorities. Commissioner Alix recommended that the Commission
develop a framework for viewing its work plan and that it devise a process by
which the Commission would identify its priorities. He observed this must be
done before the Commission can choose topics for consideration. This was also
important for the Commission’s staff and consultant so that limited
resources were allocated to their best and highest use. He also suggested that
the Commission should form subcommittees to select the topics to be heard.
There should also be a process for choosing experts as well, he noted.
Commissioner Alix stated that the Commission’s work product should be
readable, useable and informative. He said that the Commission should utilize
the opportunity to not just address the problem in its present sense, but to
take advantage of the opportunity to consider the future and international
aspects of the problem such as technological development and changes in the
marketplace and their impact on bankruptcy.
In sum, Commissioner Alix stated that the Commission had two issues: its own
governance and the process for conducting its activities with regard to setting
priorities and sequencing its work. As for the former, he stated that
basically five areas should be considered. The Commission in this regard must
develop a shared vision of what it will accomplish, according to Commissioner
Alix. A vision involved the Commission’s philosophy and how it wanted to
imagine itself at its future best. Typically, crisp words are used in
drafting a vision statement, often in bullet format. Examples proffered by
Commissioner Alix were that the bankruptcy system should work efficiently,
speedily and at low cost, with certainty in it, and that it is user-friendly,
utilizes technology, eliminates frustrating problems, and uses the current
infrastructure as opposed to designing a new system.
After the vision statement is formalized, Commissioner Alix suggested that the
Commission should next consider its mission statement. As an example,
Commissioner Alix stated that the Commission’s mission was to study the
bankruptcy system and to produce a report that is useable, understandable,
practical and credible that leads to legislative or systemic change. The
report, according to Commissioner Alix, should promote and advance the
Commission’s vision in all areas so that the bankruptcy system and capital
recovery process, as well as the business, debt recovery and business
resolution process of individuals and businesses, have relative certainty of
speed, cost, timing, execution and range of offerings. He then analyzed key
words in his proposed mission statement such as study, report, practical
and leads to legislation.
Objectives, in turn, lead to tasks, according to Commissioner Alix. He said
that tasks are the specific marching orders to the workers who do the actual
work. As an example, Commissioner Alix stated that the venue task involved
nine steps: (1) outline the Commission’s detailed position, goals and
objectives for the venue selection process; (2) select a task force leader; (3)
select a task force; (4) set priorities, deadlines and work target objectives
for the task force; (5) assign a Commissioner to participate and monitor the
task force on an ongoing basis; (6) review the results produced by the task
force with the entire Commission; (7) make and accept recommendations on this
topic to the Commission; (8) decide as a Commission on the final position and
legislative changes or system changes for inclusion in a report; and (9)
proofread the final report section on this issue for accuracy of the
Commission’s view and recommendations.
With regard to topics for consideration, Commissioner Alix stated that this
fundamentally involved having a process and making choices. He described this
process as having to choose among issues, problems and opportunities or IPOs.
Before this process can be accomplished, Commissioner Alix recommended that the
Commission have a common view of the bankruptcy system and to have a frame of
reference and context within which to put it. To implement this process, he
said that the Commission needed a shared language to avoid miscommunication and
misunderstandings. The language recommended by Commissioner Alix operated at
four levels. The first and highest level, according to Commissioner Alix, was
the strategic level where one provides broad direction to the system and where
the Commission’s vision and parts of its mission were expressed
pragmatically and effectuated. He noted that eighty percent of the value in a
system is created at the strategic level. Once strategic decisions were
formulated, the Commission must consider managerial decisions which involve
managerial issues, problems and opportunities, according to Commissioner Alix.
Managerial decisions concerned how one measures progress and provides
incentives and punishment, he explained. Commissioner Alix said that the next
level was operational and dealt with the systems or processes that are in place
or that need to be put into place. Using the bankruptcy court system as an
example, Commissioner Alix said operational issues were those that concern the
people who are responsible for effectuating the system such as bankruptcy
judges and United States Trustees. The fourth level was the implementation and
execution of the tasks, noted Commissioner Alix. Whereas eighty percent of the value was created at the strategic level, Commissioner Alix observed that eighty percent of all the problems and issues was at the task level. In describing how to analyze a problem, he gave the example of Chapter 13 trustees who hired their family members. This problem, according to Commissioner Alix, was at best an operational issue in the system, but no more than a managerial issue in the United States Trustee system. Accordingly, Commissioner Alix suggested that the Commission may want to send a message to the United States Trustee in its report that this issue be resolved. Depending on how it viewed the problem as impacting on its vision of the system, the Commission may make a stronger or weaker recommendation, he noted.
Regarding the Article I/III issue, Commissioner Alix observed that the
Commission may view it as interfering with the actual execution of the entire
system and thus classify it as a strategic issue. As the Commission identifies
issues, problems and opportunities and thereafter classifies them as strategic
or otherwise, this process would enable it to categorize them in a matrix.
Commissioner Alix suggested that the matrix, once completed, would probably
reflect enough strategic and management issues where the value would be
created. As a result, the Commission may not be able to expend much time on
the task and even the operational level issues other than making a
recommendation in the report which acknowledges that a problem exists and that
it should be either corrected or studied further.
While the first day of this meeting was fun, Commissioner Alix recommended
that the Commissioners should concentrate on formulating its vision, mission,
goals and objectives. He observed that this process would jump start the
Commission’s work.
After a brief recess, the meeting was reconvened at 10:41 a.m. Commissioner
Alix stated that he would reduce to writing what he discussed at the meeting
and circulate it to the Commissioners. He requested the Commissioners to
submit their thoughts with regard to the Commission’s vision and mission
to him. He, in turn, will attempt to develop a consensus vision which will be
presented at the next meeting.
Commissioner Alix said that the second major area to be addressed was to
create an outline of topics and with subheadings on the proposed matrix and to
determine where they fit on the grid as to classification, e.g., strategic,
managerial, operational or task. The third project was to think about issues,
problems and opportunities and whether they were strategic, managerial,
operational or task oriented. He suggested having his assistant Linda Hamel
coordinate this project with the assistance of Professor Warren, Ms. Dupont,
and Melissa Jacoby, Judge Ginsberg’s law clerk.
The Commissioners then discussed particulars regarding the location and cost
arrangements of the consumer bankruptcy meeting. Commissioner Alix expressed
concern with the notion of the Commission holding a meeting at its own expense
with a particular group when there were numerous groups who have expressed
interest in having the Commission appear at their functions.
Acting Chair Ginsberg urged the Commissioners to accept this arrangement
because it was the annual meeting of the consumer group provided a unique
opportunity to meet with this constituency which generally cannot afford to
attend other functions. He noted the public hearing would be Thursday, May 16,
and the business meeting could be either Friday, May 17, or Wednesday, May 15.
The Commis |