Bankruptcy Technical Corrections Act
before the House Committee on the Judiciary
Subcommittee on Commercial & Administrative Law
April 30, 1997 Presented by:
Roger M. Whelan
Chairman, Legislative Committee
Shaw, Pittman, Potts & Trowbridge
Washington, D.C.
Web posted and Copyright © April 28, 1997, American
Bankruptcy Institute.
Summary
The Technical Corrections Act of 1997 generally seeks to correct
technical errors arising out of the passage of the Bankruptcy Reform Act
of 1994. These changes are not controversial and will reduce confusion
in the interpretation of certain sections.
The Act would also make some modest additional changes that serve to
clarify Congressional intent after court interpretations made clear the
need for these changes. These changes, which are also generally not
controversial, cover issues such as the transfer of liens in property,
the scope of actions by the trustee, and the ability of the debtor's
attorney to be paid out of assets of the estate.
The Act, however, contains some clerical errors of its own which
should be corrected.
The Act proposes to clarify that in passing the Reform Act in 1994,
Congress intended to permit a trustee to assume a contract without
curing penalty provisions. There may be a simpler way to achieve this
stated goal, by modifying section 365(b)(2)(D) to read: "the
satisfaction of any penalty rate or penalty provision relating to a
default arising from any failure to the debtor to perform nonmonetary
obligations under the executory contract or unexpired lease."
The most substantive provision in the Act is to remove the $4 million
cap now applicable to the special treatment of single asset real estate
cases. In single asset cases, the real estate constitutes the sole or
primary asset of the entity. Examples include office buildings,
apartment complexes, shopping centers, hotels and warehouses. Much of
the frustration created by single asset bankruptcy cases arises from the
secured creditor's perception that the debtor can use Chapter 11 to
significantly delay foreclosure proceedings without offering any
compensation for the use of collateral pending such delay. The $4
million cap, offered as part of a political compromise in the 1994
amendments, is simply too low to afford much relief from the perceived
abuses arising out of these cases.
Mr. Chairman and Members of the Subcommittee:
I am Roger M. Whelan, a practicing bankruptcy and insolvency attorney
with the Washington law firm of Shaw Pittman Potts & Trowbridge.
Prior to my involvement in the private practice of law, I served as
United States Bankruptcy Judge for the District of Columbia from 1972
through 1983. I was on the bench when new bankruptcy rules were enacted
in 1973 and continued to serve when the new Bankruptcy code was enacted
in 1978, and first became effective in October 1979. I also served on
the United States Bankruptcy Court for the District of Maryland from
August 1981 through December 1982. I have written and lectured
extensively on numerous consumer and business bankruptcy matters and
have been a Distinguished Lecturer at the Columbus School of Law
(Catholic University of America) where I have taught bankruptcy and
insolvency classes continuously since 1975.
I am appearing here today on behalf of the American Bankruptcy
Institute (ABI) a 5,500 person professional association of academicians,
judges, practitioners and public policy makers who have a professional
interest in the field of bankruptcy law and practice, and particularly
in the organization and efficiency of the nation's bankruptcy courts.
The ABI is a bipartisan, non-profit educational institute. I am a
Director of the Institute and am presently serving as Chairman of its
Legislative Committee. Because the ABI is not an advocacy organization,
some of the views expressed here are solely those of the author and not
necessarily those of the ABI or its other Directors.
I shall discuss certain provisions of the Bankruptcy Law Technical
Corrections Act of 1997, [ FN: For
ease of reference, I shall refer to both HR 120
(introduced on January 7, 1997 by Rep. Conyers) and HR 764
(introduced on February 13, 1997 by Rep. Hyde) as the Technical
Corrections Act because each bill is not identical with respect to each
document. A comparison of both bills with respect to Sections set forth
in one bill but not the other is attached for reference.]
which generally seeks to correct errors that arose when Congress passed
the Bankruptcy Reform Act of 1994, [
FN: Pub. L. No. 103-394, 108 Stat. 4106 ] which
became effective October 22, 1994. Thus, the Technical Corrections Act
would insert proper punctuation that was inadvertently omitted, correct
inaccurate references to other Bankruptcy Code sections and correct the
numbering/ lettering of Bankruptcy Code subsections. The American
Bankruptcy Institute supports these changes, which will alleviate
confusion that resulted from what appear to be typographical errors.
The American Bankruptcy Institute also supports certain minor changes
that will clarify Congress' intent. For example, the Technical
Corrections Act modifies Bankruptcy Code Section 101(51B) to clarify
that the definition of single asset real estate cases (i.e.,
cases where the debtor's main asset is a single development, such as an
apartment building or office complex) does not include family farms. The
Technical Corrections Act also clarifies that in 1994, when Congress
overruled the Deprezio line of cases, it intended the new law to
apply to transfers of liens in property. [
FN: The Technical Corrections Act proposes to modify the
definition of "transfer" in Section 101(54) to include the "creation of
a lien," and further amends Sections 550(c) and 547(b).]
Moreover, the Technical Corrections Act also expands the ability of a
trustee to assist the estate by modifying Section 327(d) to allow a
trustee to act as an attorney, accountant, appraiser, auctioneer or
other professional person rather than as just the "attorney or
accountant for the estate." In particular, the American Bankruptcy
Institute supports the proposed revision that would allow bankruptcy
professionals to receive fixed and contingent fees, rather than
requiring that suchprofessionals charge hourly rates, [ FN: Revised Section 328(a) would provide
that a professional may be employed on "any reasonable terms and
conditions of employment, including on a retainer, on an hourly basis,
on a fixed or percentage fee basis , or a contingent fee
basis."] as well as the provision that clarifies that
debtor corporations may recover punitive damages for willful violations
of the automatic stay. [ FN: Section
362(h) replaces "individual" with "entity," thereby clarifying that a
debtor that is an individual, corporation, partnership or other entities
may recover punitive damages and shall recover actual damages for
willful violations of the automatic stay. Thus, the Act eliminates the
construction of Section 362(h) that prevents non-individual debtors from
recovering for willful stay violations.] The American
Bankruptcy Institute also supports Congress' efforts to clarify that the
1994 amendments to Bankruptcy Code Section 525(c) apply only to bar
discrimination concerning student loans and grants because of prior
bankruptcies, and not all loans.
However, I believe that certain "technical" amendments are erroneous
or misleading and, before addressing the more substantive issues, I
would like to draw your attention to these errors. First, the Technical
Corrections Act proposes to replace language in Bankruptcy Code Section
108(c)(2) with identical language--"922, 1201 or" would be replaced with
"922, 1201 or...."
Second, the Technical Corrections Act proposes to change Bankruptcy
Code section 327(c) by replacing "In a case under chapter 7, 11 or 12 of
this title" to "In a case under chapter 7, 12, or 12 of this title."
Moreover, the Technical Corrections Act proposes to delete the word
"section" in Section 327(b), such that Section 327(b) would read, "If
the trustee is authorized to operate the business under 721, 1202 or
1108 of this title...." These changes will only create confusion.
Third, the Technical Corrections Act proposes to amend Section 423(a)
with several corrections and modifications. However, the Act is somewhat
confusing in proposing to move subsection (a)(15) to follow subsection
(a)(14), which it already does.
Fourth, the Technical Corrections Act proposes to replace language in
Bankruptcy Code Section 524(a)(3) with identical language-- "523,
1228(a)(1), or 1328(a)(1) of this title, or that..." would be replaced
with "523, 1228(a)(1), or 1328(a)(1) of this title, or that...."
Now, I would like to briefly address my main substantive comment
regarding an important proposed amendment. The Bankruptcy Code allows
the trustee to assume or reject the debtor's contracts with third
parties. However, there are certain exceptions to protect the third
parties. Thus, in order to assume a contract, the trustee must first
"cure," which requires the trustee to bring all outstanding arrearages
current and otherwise be in compliance with the debtor's contractual
obligations under the contract. However, to prevent third parties from
creating artificial contractual obligations to prevent a debtor from
assuming a contract, Congress relieved the trustee of curing certain
obligations, including those conditioned on the debtor's remaining
solvent. Furthermore, the Bankruptcy Reform Act of 1994 amended
Bankruptcy Code Section 365(b) to provide that a trustee need not cure
"a penalty rate or provision relating to a default arising from any
failure by the debtor to perform nonmonetary obligations under the
executory contract or unexpired lease." The amendment was intended to
allow a trustee to assume a contract without curing penalty rates or
penalty provisions.
Certain case law interpreted the word "penalty" in the 1994
amendments to modify only "rate" and not "provision." Thus, at least one
court allowed a trustee to assume contracts without curing certain
nonmonetary defaults that it would previously have been required to
cure, notwithstanding that the provisions were not penalty provisions.
See In re Claremont Acquisition Corp., 186 B.R. 977,
989-90 (C.D. Cal. 1995), appeal granted. This inaccurate
interpretation could wreak havoc for creditors that enter into contract
provisions that require that the debtor do morethan pay a fee
(e.g., maintain insurance).
The Technical Corrections Act seeks to clarify that in passing the
Bankruptcy Reform Act of 1994, Congress intended "penalty" to modify
both "rates" and "provisions." However, the proposed modifications in
the Technical Corrections Act do not accomplish Congress' goal. In fact,
the proposed change may have the opposite result of the one Congress
intends. Currently, the Technical Corrections Act would replace Section
365(b)(2)(D) with the following two provisions:
(D) the satisfaction of any penalty rate in any contract or unexpired
lease; or
(E) the satisfaction of any provision relating to a default arising
from any failure by the debtor to perform nonmonetary obligations under
any executory contract or unexpired lease other that an unexpired lease
of personal property."
Subsection (E) does not artfully accomplish the House's expressed
intent of allowing a trustee to assume a contract without curing penalty
provisions.
I would propose that correcting the interpretation of Bankruptcy Code
Section 365(b)(2)(D) is more readily accomplished by simply modifying
Bankruptcy Code Section 365(b)(2)(D) to read:
the satisfaction of any penalty rate or penalty provision
relating to a default arising from any failure by the debtor to perform
nonmonetary obligations under the executory contract or unexpired lease.
(emphasis added).
Because Congress has already chosen to address the problem area of
Single Asset Real Estate cases in the Bankruptcy Reform Act of 1994, and
because there is also an amendment that would remove the statutory $4
million cap in Bankruptcy Code Section 101(51B), I would refer the
Committee to my chapter in the American Bankruptcy Institute's recently
published work "Single Asset Real Estate Bankruptcies - Current
Developments and Legislative Issues," published by the American Bar
Association in 1997 (Chapter 12 is referenced and attached to this
testimony). Because single asset cases lack economic substance in that
the only significant creditor is the securedlender, legislation is
sorely needed to address this significant issue.
Finally, I commend Congress for its efforts to pass the Boating and
Aviation Operation Act of 1997 (the "Safety Act"), introduced on January
7, 1997 by Rep. Ehlers. The Safety Act would bar discharge in bankruptcy
of a debt for death or personal injury caused by the debtor's operation
of watercraft or aircraft while intoxicated. This amendment is urgently
needed to overrule cases like In re Greenway (Boyce v.
Greenway), 71 F.3d 1177 (5th Cir.), cert. denied , where the
court determined that provisions of the Bankruptcy Code that prohibit
discharge for debts incurred while intoxicated from the operation of a
motor vehicle do not apply to debts from operating a boat. Thus, in
Greenway, the court allowed discharge of claims against the
debtor who, while intoxicated, crashed his boat into the claimants'
vessel, killing one person and injuring several more.
I thank you for the opportunity of appearing before this subcommittee
and hope that these remarks will be of some assistance to you in this
important work. If I can be of further assistance to you or the
subcommittee, please do not hesitate to call upon me or the American
Bankruptcy Institute.
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