ABI - National Bankruptcy Review Commission National Bankruptcy Review Commission



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

Federal Judicial Center, Education Center
Thurgood Marshall Federal Judiciary Center
Washington, D.C.


Commission Members Present:

Honorable Robert E. Ginsberg, Acting Chair
Jay Alix, CPA
Babette A. Ceccotti, Esq.
John A. Gose, Esq.
Jeffery J. Hartley, Esq.
Honorable Edith Hollan Jones
James I. Shepard, Esq.

Commission Reporter Staff and Present:

Professor Elizabeth Warren, Reporter/Consultant
Jarilyn C. Dupont, Executive Director/General Counsel
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer

ROUND TABLE Participants:

Honorable Richard Arnold, Chief Judge, United States Court of Appeals - Eighth Circuit
Honorable Leif M. Clark, United States Bankruptcy Judge, San Antonio, Texas
Barbara Houser, Esq., Dallas, Texas
Professor Frank Kennedy, University of Michigan School of Law
Professor Lawrence P. King, New York University School of Law
Honorable Robert D. Martin, United States Bankruptcy Judge - Madison, Wisconsin
Gerald Munitz, Esq., Chicago, Illinois


Ilene F. Goldstein, Esq. on behalf of Commercial Law League of America
Richard Bartel on his own behalf

Public Attending:

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.


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.


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 Warren introduced this topic by observing that the bankruptcy court structure is costly and may not be an effective system for resolving bankruptcy cases, independent of its constitutional vulnerability. She then presented the first discussion issue proposal: whether to extend Article III status to the bankruptcy court. In conjunction with this proposal, Professor Warren asked the Commission members and participants to consider whether there was a problem with the current bankruptcy court system, whether the problem was overstated or different from how it has been stated, and what the appropriate solution should be.

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.
Judge Martin, citing the National Conference of Bankruptcy Judges NBRC Liaison Committee Report previously distributed to the Commission, observed that the problem has been overstated. With regard to Article III status, Judge Martin said that disputes arise in two forms: fraudulent and preferential transfer actions where there is a jury trial right. Statistically, Judge Martin estimated that the jury trial issue is presented in less than five percent of the cases. In general, Judge Martin noted, the system worked perfectly well.

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.

In response to Judge Arnold’s query as to why bankruptcy was special, Judge Martin cited the need for bankruptcy matters to be treated on an expedited basis. Professor King, agreeing with Judge Martin, noted that attorneys, bankruptcy judges and professors testified at congressional hearings held during the seventies that bankruptcy matters would not be handled expeditiously by district court judges. Professor King also explained that bankruptcy matters would be pushed to the end of the district court judge’s calendar. To assist the district courts in handling bankruptcy matters, referees may be required and then, he noted, the entire process will just repeat itself.

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.
Professor King observed that there was also a competing force. Specifically, he noted that if you start removing pieces from the bankruptcy court’s jurisdiction, it impacts adversely on speed.

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.


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.
Commissioner Gose, referring to the National Conference of Bankruptcy Judges NBRC Liaison Committee Report submitted by Judge Carlson, asked the group to discuss bankruptcy appellate panels and the possibility of having the panels staffed by Article III judges. Judge Martin noted that there would still be the fundamental problem of two levels of appeal. Professor King observed that in addition to being Article III judges, the panel members would have to be a part of the bankruptcy judicial system. Judge Arnold noted that although his judicial council had voted to establish a bankruptcy appellate panel system, the system was not liked because it adds another level of complexity to an already complex appellate system.

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.

With regard to the anticipated workload increase that would result if appeals from bankruptcy court decisions were made directly to the circuit courts, Judge Clark noted that the summary calendar procedure utilized by the circuit courts may be a more efficient mechanism for dealing with the error correction feature of appellate review.

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.


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.


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.

Commissioner Gose noted that the United States Trustee’s Office in the Northern District of California did exactly what was proposed for the case administrator. Commissioner Alix said that this was only a small case problem. He noted that the United States Trustee system was designed to remove case administration from the courts. The problem may be, according to Commissioner Alix, that the system may not be functioning properly because there was no money in these cases and creditors did not want to spend any money on them. Commissioner Shepard observed that nobody had a very clear picture of the exact role and mission of the United States Trustee particularly in this regard.

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.
Commissioner Jones stated that Section 105(d) was different from a first meeting of creditors, because the flaw in the prior system was that judges ran these meetings as clubby status conferences where they gave advisory opinions and conducted them without creditor participation. Rather, Commissioner Jones likened the Section 105(d) status conference to the mandatory status conferences conducted pursuant to the Speedy Trial Act.

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 asked Ms. Houser what was wrong with Section 105(d). Ms. Houser answered absolutely nothing, but that she did not favor it being made mandatory. She explained that the bankruptcy judge should remain a jurist who would hear admissible evidence rather than participate in a conference at the outset of the case, like the old first meeting of creditors, and preside over what is an informal discussion about the case. Judge Martin noted that there was a distinction between managing litigation where there was a contested matter with parties on each side, and setting up a Chapter 11 case. In addition, Judge Martin observed that a rigid rule in terms of scheduling interfered with the flexibility that was intended when Chapter 11 was enacted. Ms. Houser said that there were cases where the Section 105 status conference was necessary, such as where the case was languishing, and others where it was not. Also, she noted that there were other management tools available such as determinations of exclusivity motions.

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.



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.


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.



Federal Judicial Center, Education Center
Thurgood Marshall Federal Judiciary Center
Washington, D.C.


Commission Members Present:

Honorable Robert E. Ginsberg, Acting Chair
Jay Alix, CPA
M. Caldwell Butler, Esq. (Joined the meeting by telephonic conference at approximately 11:00 a.m.)
Babette A. Ceccotti, Esq.
John A. Gose, Esq.
Jeffery J. Hartley, Esq.
Honorable Edith Hollan Jones
James I. Shepard, Esq.

Commission Reporter and Staff Present:

Professor Elizabeth Warren, Reporter/Consultant
Jarilyn C. Dupont, Executive Director/General Counsel
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer

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.



Professor Warren, referencing her February 18, 1996 memorandum, stated that she attempted to set out an approach as to how the Commission may decide what issues it will review in the future. With regard to yesterday’s portion of the meeting, Professor Warren noted that the round table format worked fairly well as a way to get information and to push fairly hard on issues. As the process is time-consuming, Professor Warren stated four issues or proposals may be all that can be covered during the course of a meeting. As a result, she stated that the Commission would have to decide what it would be able to accomplish based on these time constraints.

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.


Commissioner Alix noted that the Commission was like a group of trustees or board of directors in that it must study issues, create guidance on them and then make recommendations that will lead to action. To further this process, Commissioner Alix suggested that the Commission must have (1) structure and framework, (2) process and procedures, and (3) some common shared language agreeable to all members. In addition, he stated that the Commission needed a method of setting priorities and making decisions given time and money constraints.

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.
Once the Commission has a mission statement, Commissioner Alix stated that the Commission should formulate its goals which are the qualitative expression and specific form of its mission which serves as a statement of how the Commission views how its views itself at its future best. Among the examples cited by Commissioner Alix were the improvement of the venue selection process, reducing the length of the bankruptcy litigation process by improving the appellate process, and improving the process for small Chapter 11 cases. He stated that a definite goal has to be the issuance of a usable report that leads to legislation and changes the system. Another practical goal that he identified was dealing with and solving the financial constraints on the Commission and its staff.
After defining its goals, the Commission, according to Commissioner Alix, should focus on its objectives which specify how goals are effectuated into reality. An example of an objective proffered by Commissioner Alix would be to design the words, numbers and process to improve and monitor the venue selection process. Another objective could be to design and structure a new appellate process which has only one level of appeal, works to reduce the number of appeals, and is efficient.

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.


Professor Warren confirmed that the next substantive meeting would focus on consumer bankruptcy and the round table approach would be continued to be utilized. She noted that the tentative discussion issues for the meeting as set forth in her November 2 memorandum would form the basis of the consumer bankruptcy meeting. She suggested that pre-bankruptcy planning is an additional issue that should be included among the discussion issues slated for the consumer bankruptcy meeting.

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