American Bankruptcy
Institute
REPORT ON THE STATE
OF THE
AMERICAN BANKRUPTCY SYSTEM
Sections of the Report
Introduction
This report is the capstone of the ABI's three-year Bankruptcy Reform
Study Project. The Project was designed to inform the process of
bankruptcy reform, which is currently the subject of proceedings before
the National
Bankruptcy Review Commission. The ABI Bankruptcy Reform Study
Project produced dozens of academic papers and sponsored ten symposia on
a wide range of hotly debated bankruptcy issues.
The Project's efforts culminated this August with a 65-question
survey covering a broad spectrum of possible areas of reform. The survey
was designed to balance the theoretical approach of the scholarly papers
and symposia with the practical insights of a broad range of
professionals who are most familiar with the strengths and weaknesses of
our nation's bankruptcy system.
No group is better suited to make this evaluation than the ABI
membership. As the nation's largest organization of insolvency
professionals, the ABI's 5,200 members represent both a substantial
segment of the nation's bankruptcy professionals and a broad
cross-section of practice specialties. All members received the survey,
and the high response rate (1465 respondents) demonstrates the
seriousness with which these professionals approach the subject of
bankruptcy reform.[1]
The ABI's diversity is reflected in the survey results. The
respondents include attorneys, accountants, academics, judges, trustees,
lenders, credit managers, turnaround consultants, and several other
types of bankruptcy professionals. They practice in all fifty states,
the District of Columbia, Puerto Rico, and the Virgin Islands. In their
professional capacities they represent the interests of creditors,
debtors, investors, and governmental entities. Almost all respondents
have at least five years of bankruptcy experience and half have 15 years
or more of bankruptcy experience. Their practice experience ranges from
the simplest of consumer bankruptcies in rural America, to the most
complex business bankruptcies in our major urban centers. This report
reflects the collective judgment of this rich and varied pool of
bankruptcy talent and experience.
Summary of Conclusions
In the view of these professionals, the Bankruptcy Code of 1978 is
working well. While there are several areas where reform is indicated,
the current law receives high marks, and there is little support for
major revision. This view is shared by the range of ABI members, with
both debtor and creditor representatives endorsing the general thrust of
the current law. However, problems of delay, excessive costs,
unfairness, and abuse need to be addressed in the current round of
reforms.
Abuse appears to be a small but significant problem in both consumer
and business bankruptcy cases. Both debtor and creditor representatives
expressed general support for strict deadlines and for either dismissal
or the appointment of trustees to help combat abuse.
Similarly, both debtor and creditor representatives strongly
supported the reorganization policy embodied in Chapter 11 of the
current law. The debtor-in-possession concept, the automatic stay, the
policy of granting an exclusive plan period to the debtor, and the cram
down power were all favored. However, endorsement of the reorganization
policy is tempered by strong support for reforms aimed at making the
process quicker, cheaper, and more effective. Strict time limits are
supported as a response to excessive delays that are a major problem in
Chapter 11 cases. Further, while the technical requirements of Chapter
11 do not appear to be interfering with the reorganization of
economically viable entities, those requirements need to be modified to
filter out non-viable debtors and to deal with debtor management
problems more effectively. The business reorganization process also
needs to be reformed to address the problem of excessive professional
fees. However, on these issues there was only modest support for
specific reforms such as appointing an independent financial advisor or
sharing professionals.
Although there is general support for relaxing the eligibility
requirements for consumer reorganizations under Chapter 13, the current
law is favored in most other respects. Time limits are strongly
endorsed, as is the concept of a limited discharge. The current
discharge provisions of Chapter 13 are generally supported, although
there is backing for requiring a minimum distribution to unsecured
creditors. There is also modest support for a uniform national exemption
list.
There is strong support for the imposition of high standards of
integrity for all professionals. The current law's "disinterestedness"
standard for attorneys is generally endorsed, as is its extension to
most other professionals. Court review of professional appointments and
U.S. Trustee review of both professional appointments and fee requests
are also supported.
The general support for a balance between the rights of creditors and
debtors carries over to fairness among creditors. The principle of
equality of distribution in bankruptcy is strongly embraced and there is
strong opposition to the creation of priority classes of claimants.
The consensus is that, after almost 20 years, the Bankruptcy Code
still works well and needs only minor reform.
Overall Rating
Perhaps the most surprising result of the survey is the very high
overall rating of the current bankruptcy system. Half of the respondents
rated it either "excellent" or "very good." Another 37 percent rated it
"good," with only 3 percent rating it "poor" and 11 percent rating it
"fair." Although the rating remained positive regardless of the type of
bankruptcy experience, there were some significant differences. Creditor
representatives rated the system less highly than debtor
representatives, but still 40 percent rated it either excellent or very
good, and 41 percent rated good.[2] Similarly, respondents
practicing in the ten largest U.S. cities rated the system less highly
than those from mixed or rural districts, with 44 percent rating it
either excellent or very good and 39 percent rating it good.[3] Geography also
played a role, with relatively less satisfaction in the Second Circuit
and relatively greater satisfaction in the Third, Fourth, and Tenth
Circuits.
The overall satisfaction rating was also reflected in the results of
specific survey questions. For most of the potential areas of reform
investigated by the survey, the respondents preferred the current law
over various alternative reform proposals. The only generalizable
exceptions were that there was strong support for simplifying bankruptcy
law and for speeding up the bankruptcy process.
Abuse in the Bankruptcy System
Historically, many bankruptcy reforms have been driven by concern
over perceived abuses. The survey results confirm that abuse is a
problem in our current bankruptcy system, but that it is not rampant. In
both business and individual cases, more than half of the respondents
indicated that abuse occurs only rarely or occasionally. Roughly a third
reported that abuse occurs sometimes. And, abuse was reported as
occurring frequently or usually by only 13 percent for business cases,
and a somewhat higher 17 percent for individual cases.
However, the view changed dramatically depending on the nature of
practice. While more than two-thirds of debtor representatives stated
that abuse occurs only rarely or occasionally, only about one-third of
creditor representatives agreed. However, even among creditor
representatives only 17 percent thought abuse occurred frequently or
usually in business cases and 29 percent thought it occurred frequently
or usually in consumer cases. Since the survey did not attempt to define
"abuse," some of the difference may represent differing views about what
constitutes abuse, rather than differing views about its frequency. The
differences in the views of the trustee representatives and judges were
not statistically significant.
Geography played a small role, with abuse in business cases reported
as relatively more frequent in the Second, Third, and Eleventh Circuits,
and as relatively less frequent in the Seventh Circuit. There was no
statistically significant difference among circuits with respect to
consumer bankruptcy. However, in both consumer and business cases, abuse
was reported as relatively more frequent in the ten largest cities.
Consumer abuse was relatively rarer in rural districts, and business
abuse was relatively less frequent in mixed districts.
Several specific areas of perceived abuse were investigated by the
survey. While a majority felt that serial filings by individual debtors
were not a significant problem, 40 percent disagreed. Although debtor
representatives overwhelmingly dismissed it as a problem, almost
two-thirds of creditor representatives, and slightly more than half of
the judges, viewed it as a significant problem. Geographically, the
problem was relatively greater in the Second, Ninth and Eleventh
Circuits, and significantly smaller in the First and Seventh Circuits.
Thus, serial filings are a significant problem that needs to be
addressed.
In terms of abuses in business cases, more than a third reported
excessive professional fees and expenses as a problem that arose always
or often, with half reporting that it sometimes arose. Abusive filings
were not a problem, or were rarely a problem according to a majority (55
percent), with only 8 percent stating they were always or often a
problem. Further, only 29 percent listed abuse of the system by debtors
as one of the top five reasons why plans are not confirmed, with 12
percent listing abuse of the system by creditors. Finally, fraud was not
ranked as a major reason why confirmed plans fail.
Thus, it appears that abuse is a problem that needs to be addressed
and that some aspects of the problem need to be addressed by local
initiatives, rather than by federal legislation. However, abuse does not
appear to be the type of systemic problem justifying the wholesale
revision of bankruptcy law.
Goals of Bankruptcy Law
Although modern legal scholarship focuses on many non-traditional
goals of bankruptcy law, only the traditional objectives received
widespread support. Approximately three-quarters of the respondents said
the traditional goals of providing a fresh start to debtors and of
enhancing distribution to creditors should be primary objectives of a
bankruptcy system. Maintaining equality of treatment for similarly
situated creditors ranked a close third. Only one-half endorsed
efficient claims resolution and preservation of going concern values as
primary objectives, with only one-third endorsing job preservation and
resolution of fraud.
Causes of Bankruptcy
The proper design of a bankruptcy system depends, in part, on the
causes of financial distress. Mismanagement ranked first as a primary
cause of business bankruptcy, with 89 percent listing it. Market forces
ranked second at 68 percent. No other cause was endorsed by a majority,
although litigation/legal action and operational problems were a distant
third and fourth, at 48 and 33 percent, respectively. Overall, the
causes did not vary greatly from urban to rural districts. However,
market forces, litigation/legal action, and operational problems were
relatively more likely to be cited as a primary cause in the ten largest
cities. Undercapitalization and mismanagement were relatively more
likely to be cited in mixed districts. And, mismanagement,
litigation/legal action, and government regulation or policy were
relatively less likely to be cited in rural districts.
For consumer bankruptcy, three primary causes were each cited by
two-thirds of the respondents. They were the ease of obtaining personal
credit and credit cards, loss of a job, and financial mismanagement. Two
additional reasons -- medical problems and marital/family problems --
were each endorsed by 57 percent of the respondents. However, the
reported causes of consumer bankruptcy did vary by type of district. In
rural districts, job loss, litigation/legal action, and
disaster/catastrophic event were relatively less likely to be cited. In
mixed districts, medical problems and marital/family problems were
relatively more likely to be cited. In contrast, medical problems and
marital/family problems were relatively less likely to be cited in the
ten largest cities, but job loss, litigation/legal action,
business/employer failure, and disaster/catastrophic event were
relatively more likely to be cited. Interestingly, there was no
statistically significant difference among these types of districts with
respect to either financial mismanagement or the ease of obtaining
personal credit and credit cards.
Scope and Design of Bankruptcy Law
While there was general support both for the current law's
limitations on eligible debtors and for the Code's "one-size-fits-all"
approach, there was also significant support for changes in the
eligibility provisions and for special provisions for certain types of
debtors. The survey asked whether 19 different types of entities should
be permitted to be debtors under the bankruptcy laws. Although a
significant number of respondents chose the "no opinion" response for
several of the entities, the respondents generally opposed permitting
banks and pension plans to be debtors. However, the respondents slightly
favored the inclusion of governmental entities, insurance providers,
labor unions, and foreign entities; and a majority favored the inclusion
of bank holding companies, securities industry entities, trusts, and
health maintenance organizations. Approximately two-thirds supported the
inclusion of utilities and charitable/not-for-profit organizations; and,
there was even stronger support for including airlines, railroads,
single asset real estate entities, partnerships, family farmers, small
businesses, and mass tort/product liability defendants.
Although two-thirds of the respondents supported a special chapter or
provisions for governmental entities, there was not majority support for
separate chapters for any of the other 18 types of entities listed in
the survey. The respondents were about evenly split on whether special
provisions should be available for insurance providers and family
farmers. However, a majority of those with an opinion on the issue
favored continuing the current Chapter 12 beyond its 1998 expiration
date. In addition, there was significant minority support for special
provisions for banks, utilities, securities industry entities, railroads
and small businesses.
The lack of consensus regarding the inclusion of special chapters or
provisions for various types of entities carried through to other
questions about specific areas where special provisions might be
appropriate. Thus, half of the respondents felt that the length of the
debtor's exclusive period to file a plan should differ depending on the
type of business. Of those favoring such a special provision, the
substantial majority favored shorter exclusivity periods for single
asset real estate entities, but favored longer exclusivity periods for
publicly-held companies, regulated industries (e.g., airlines) and
governmental entities. On a related question about time limits for
confirming plans, only half felt that the length of the time limit
should differ depending on the type of business.
In general, there was support for expanding the scope of Chapter 13.
Fifty-seven percent supported permitting family businesses to use
Chapter 13, regardless of corporate form or structure. In addition,
there was significant minority support for permitting partnerships,
privately-held corporations, professional corporations, and limited
liability companies to obtain the type of relief currently available for
individuals under Chapter 13. There was also strong minority support for
increasing the Chapter 13 debt limits. While half supported the current
limits of $250,000 in unsecured debts and $750,000 in secured debts, 38
percent supported increased debt limits. Further, only half supported
the current distinction between secured and unsecured debts in the
Chapter 13 ceiling. Those supporting the secured/unsecured distinction
were asked to indicate the appropriate debt limits. While the median
figures were at the current $250,000/$750,000 level, the average (mean)
figures were $365,450/$765,690, and the figures at the 75th percentile
were $500,000/$999,000.
Administrative and Professional Appointment
Issues
Although the automatic stay has been the subject of continual
amendments and reform proposals, there was strong support for preserving
the current law. First, 98 percent thought that bankruptcy law should
provide an automatic stay. Further, two-thirds supported keeping the
scope of the stay the same as it is under current law, with the rest
split evenly between narrowing and broadening its scope. Finally, almost
two-thirds rejected the proposition that the stay should be for a finite
period of time. However, even those supporting a finite stay strongly
supported (by 90 percent) making discretionary extensions available.
The problems of professional appointment and compensation, and
perceptions of abuses and excessive fees, have long plagued bankruptcy
law and have provided the impetus for many reform proposals. The results
confirm that this area continues to be problematic. Several professional
issues were listed in response to the open-ended question about the
three most significant problems in the current bankruptcy system. These
ranged from complaints about professionals, such as excessive
compensation and lack of competency (especially in Chapter 11 cases), to
complaints by professionals about delays in payment and
compensation procedures that are too cumbersome.
The excessive fee concern was mirrored in the question about the
frequency of various problems in reorganization cases. Excessive
professional fees and expenses ranked as the second most frequent
problem in business reorganization cases, behind excessive delays and
immediately ahead of existing management. Thirty-nine percent of
respondents indicated that excessive professional fees were a problem
"often" or "always", and 50 percent indicated they were "sometimes" a
problem. Only 11 percent indicated that this problem did not arise or
arose rarely. Further, creditor representatives viewed this problem as
relatively more frequent, with 48 percent stating it occurred often or
always.
However, two partial solutions to the excessive fee issue were
rejected by the respondents. Sixty-two percent rejected the suggestion
that, in cases with multiple committees, the committees be required to
use the same professionals (e.g., accountants, appraisers, investment
bankers). Opposition to the proposal spanned practice specialties, with
a majority of both business Chapter 11 debtor and creditor
representatives opposing it.[4] Committee representatives
strongly opposed it (74 percent), and it was slightly opposed by judges.
In addition, professionals specializing in the largest Chapter 11 cases
[5] were also
strongly opposed (81 percent).
A majority also opposed the suggestion that the bankruptcy court
appoint an independent financial advisor in reorganization cases to
analyze and provide information to the court and creditors concerning
the debtor's financial condition and viability. Here, however,
significant differences were observed, with judges being slightly in
favor of the proposal, business Chapter 11 creditor representatives
being slightly opposed, business Chapter 11 debtor representatives being
relatively more opposed, and committee representatives being the most
opposed. While attorneys were opposed to the proposal, both accountants
and investment bankers strongly supported it, and a majority of
turnaround consultants supported it.
A frequent complaint of bankruptcy professionals is that procedures
relating to the retention of professionals are cumbersome and that the
current law's "disinterestedness" standard is too strict. That view was
only partly supported by the survey data. In general, the respondents
supported the existing "disinterestedness" standard. Approximately 90
percent of respondents indicated that attorneys should not be
disqualified for having previously represented the debtor in cases where
all unpaid pre-petition fees or expenses were waived, or where the
attorney is not owed pre-petition fees or expenses. Also, 84 percent
indicated that previous representation of a creditor in an unrelated
matter should not disqualify the attorney. Further, two-thirds indicated
that an attorney should not be disqualified in cases where the attorney
previously represented the debtor, but is owed pre-petition fees or
expenses.
In contrast, approximately two-thirds felt that an attorney should be
disqualified in cases where the attorney has previously represented the
debtor and has received a potentially avoidable pre-petition transfer.
Also, a majority felt that disqualification was appropriate where: (1)
the attorney represents an affiliate or a principal of the debtor; (2)
the attorney, or another lawyer in the attorney's firm, previously
served on the debtor's board of directors; or (3) the attorney currently
represents a creditor in an unrelated matter. Both professionals
specializing in the largest Chapter 11 cases and business Chapter 11
debtor representatives were slightly in favor of disqualifying attorneys
who represent an affiliate or a principal of the debtor, and those who
previously served on the debtor's board of directors. However, both
groups supported the appointment of an attorney who currently represents
a creditor in an unrelated matter.
Interestingly, the respondents supported the extension of the current
attorney "disinterestedness" standard to other types of professionals.
While a majority supported application of the "disinterestedness"
standard to auctioneers and brokers, almost two thirds supported
applying the standard to appraisers and liquidators, and almost
three-fourths supported applying the standard to accountants, investment
bankers, and turnaround specialists. Perhaps more importantly, the
professionals in each profession also supported application of the
"disinterestedness" standard to their own professions. With the
exception of brokers, where there were no data, there was no
statistically significant difference between the views of the
professionals in the subject profession and the pool of respondents on
the question of whether the "disinterestedness" standard should be
applied to that profession.
Similarly, the respondents supported requiring court approval of the
debtor's retention of each of these seven types of professionals. A
requirement for court approval was supported by 56 percent overall for
appraisers, 60 percent for brokers, 61 percent for auctioneers, 76
percent for liquidators, 78 percent for accountants, and 83 percent for
both investment bankers and turnaround specialists. Further, with the
exception of auctioneers, brokers, and liquidators, a majority of the
professionals in each profession supported a court appointment
requirement. Auctioneers and liquidators did oppose a court approval
requirement, but the number of respondents was too small for the
difference to be statistically significant. There were no data on
brokers' views.
Finally, 69 percent of the respondents felt that trustees should be
able to retain their own firms as professionals in the cases where they
are serving as trustee. Approval was even stronger among trustees, with
88 percent supporting this proposition.
Consumer Issues
The survey investigated a range of consumer bankruptcy issues. As
noted above, there was significant support for increasing the Chapter 13
debt limits and for expanding the types of entities eligible for Chapter
13-style relief. Although many consumer debtors currently are permitted
to pay their filing fees in installments, and the possibility of filing
bankruptcy in forma pauperis is currently being tested in some
districts, the respondents slightly opposed permitting individuals to
file voluntary bankruptcy cases without first paying the full filing
fee. The views of debtor representatives were not different in a
statistically significant way.
Almost half of the respondents felt that the exemptions provided to
individual debtors under federal bankruptcy law should be uniform for
all states. Thirty-six percent supported continuation of the current
"opt-out" mechanism, and only 12 percent felt that bankruptcy exemptions
should be governed exclusively by state law. Dramatic differences
emerged when respondents from selected states with liberal exemption
policies (Florida and Texas) were compared with those from states with
modest exemption policies (New York and Pennsylvania). The modest
exemption respondents strongly supported uniform exemptions (67
percent), with only seven percent supporting state law and 27 percent
supporting the "opt-out." In contrast, the liberal exemption respondents
supported the current "opt-out" rule by a bare majority (52 percent),
with 20 percent supporting state law and 29 percent supporting a uniform
rule. Similar results were found in a comparison of two contiguous
states, one with a modest exemption policy (Missouri) and one with a
liberal exemption policy (Kansas).
In general, the respondents supported a limited discharge of debts.
Respondents were asked whether various types of debts should be
dischargeable "always," "sometimes," or "never." Of the 13 listed types
of debts, the only type of debt that a significant number of respondents
thought should "always" be dischargeable were future condominium fees or
dues (39 percent). For family obligations, a strong majority felt that
child support arrearages (74 percent) and alimony/spousal and child
support obligations (67 percent) should never be dischargeable, but 70
percent thought that marital property settlements should sometimes be
dischargeable. Sixty-nine percent thought that fraud should never be
dischargeable. However, for false financial statements, only 48 percent
thought that such debts should never be dischargeable, with 49 percent
stating that they should sometimes be dischargeable. Other types of
debts that a majority thought should never be dischargeable were drunk
driving/boating liability (59 percent), intentional torts (52 percent),
and restitution/criminal fines (52 percent). Approximately
three-quarters thought that taxes, educational loans, and environmental
liability should sometimes be dischargeable, and two-thirds thought that
bank officer/director liability should sometimes be dischargeable.
There was no consensus about the "super discharge" available in
Chapter 13 cases. While 44 percent thought the Chapter 13 discharge
should remain the same, 29 percent thought it should be narrowed and 21
percent thought it should be broadened. These results broke down along
debtor vs. creditor lines, with 51 percent of creditor representatives
favoring a narrower discharge and 37 percent of debtor representatives
favoring a broader discharge. A slight majority also felt that there
should be a required minimum distribution to unsecured creditors in
exchange for a Chapter 13 discharge. Again, the results broke down along
debtor vs. creditor lines, with 79 percent of creditor representatives
favoring a minimum distribution requirement and 67 percent of debtor
representatives opposing it.
Both consumer debtor representatives and consumer creditor
representatives supported a time limit for confirming plans, with 86
percent of creditor representatives and 56 percent of debtor
representatives in favor of time limits. Forty-three percent of those
supporting time limits favored a limit of 120 days or less, with an
additional 34 percent favoring a 180-day limit, and 20 percent favoring
a one-year limit. Of those favoring time limits, half thought that a
trustee should be appointed if no plan was confirmed within the time
limit; the remedies of liquidation and dismissal were each supported by
about a quarter. On the question of what circumstances would justify
dismissal of a liquidation case, there was general agreement between
debtor and creditor representatives. Strong majorities supported
dismissal for (1) nonpayment of required fees and charges, (2) failure
to file required schedules of assets and liabilities and/or statements
of financial affairs, (3) "bad faith" filings, and (4) unreasonable
delay by the debtor that is prejudicial to creditors. A strong majority
of creditor representatives, and a 56 percent majority of debtor
representatives supported dismissal based on serial filings. And, while
a majority of creditor representatives supported dismissal where the
debtor had current ability to repay debt, only 38 percent of debtor
representatives supported dismissal on that ground.
Business Reorganization Issues
Although the debtor-in-possession concept has come under significant
criticism, the survey respondents strongly supported allowing debtors in
business reorganizations to remain in possession of their property,
retain all of their rights and powers, and operate their businesses.
Almost three-quarters of creditor representatives and 93 percent of
debtor representatives supported the debtor-in-possession concept.
However, despite wide support for the basic concept, it appears that
there are substantial problems in practice. Mismanagement ranked first
among the causes of business bankruptcy. Further, existing management
was ranked as the third most common problem in business reorganization
cases, with 37 percent stating that existing management was "often" or
"always" a problem, and 53 percent stating that it was "sometimes" a
problem. Only 10 percent indicated that existing management was not a
problem or rarely a problem. In addition, mismanagement was ranked
second among the reasons why confirmed plans in business reorganizations
fail. These results suggest that reform efforts need to be directed
towards the early identification and resolution of management problems
in business reorganization cases.
The respondents expressed mixed views on granting special rights or
remedies to post-petition lenders. The only rights with majority support
were the granting of origination and other "up front" fees (60 percent),
validation of pre-petition liens/interests (57 percent), and binding
effect on a subsequently appointed trustee (67 percent). The respondents
slightly favored granting liens on avoidance action recoveries. However,
a majority opposed granting veto power over payments to professionals
(82 percent), bootstrapping of liens and claims from pre-petition to
post-petition (61 percent), the waiver of avoidance actions against the
lender (53 percent), and the waiver of other claims against the lender
(such as lender liability claims) (53 percent). Except for relatively
stronger opposition to bootstrapping, there was no statistically
significant difference in the views of the professionals specializing in
the largest Chapter 11 cases. However, opposition to bootstrapping,
waiver of avoidance actions, and waiver of other claims was relatively
stronger in the districts with the largest reorganization cases.[6]
Only a minuscule three percent supported elimination of the debtor's
exclusivity period for filing a plan of reorganization. Forty-five
percent supported the current law's 120-day exclusive period, with 24
percent supporting a longer 180-day period and 17 percent supporting a
slightly shorter 90-day period. Only half thought that the exclusivity
period should differ depending upon the type of the debtor's business.
Of those, a majority thought that publicly-held companies, regulated
industries (such as airlines, etc.), and governmental entities should
have more than 120 days. Only single asset real estate cases garnered
majority support for an exclusivity period of less than 120 days.
A majority (62 percent) of all respondents supported a time limit for
confirming a plan in reorganization cases. The time limit was supported
by 75 percent of business Chapter 11 creditor representatives, but by
only 39 percent of business Chapter 11 debtor representatives. Of those
supporting a time limit for confirmation, half supported time limits of
180 days or less, with 38 percent supporting a one-year limit and 11
percent supporting a two-year limit. A slight majority thought that the
time limit for confirming a plan should differ depending upon the type
of the debtor's business.
The respondents were split on the consequence of missing the time
limit. A plurality (41 percent) thought that a trustee should be
appointed, with 19 percent supporting dismissal of the case and another
19 percent supporting liquidation. Finally, 15 percent thought there
should be no consequence. Among those who favored time limits on
confirmation, half thought that the consequence should be appointment of
a trustee, with about one-quarter each supporting liquidation and
dismissal. Among those opposing time limits, about one-third each
supported appointing a trustee and doing nothing.
The combined results of the debtor-in-possession, exclusivity, and
time limit questions indicate strong support for a limited right to
reorganize. The results suggest a reorganization provision that, in the
typical case, grants a short exclusivity period to the debtor, followed
by the appointment of a trustee within six months to a year if no plan
is confirmed. Longer periods, or discretionary extensions could be
available in more complex cases, such as those involving publicly-held
companies, regulated industries, and governmental entities.
Consistent with the general support for time limits on exclusivity
and plan confirmation, time-related issues ranked first and fourth among
the most common problems in business reorganization cases. Excessive
delays ranked first, with 46 percent indicating that they were "often"
or "always" a problem, and an additional 46 percent indicating that they
were "sometimes" a problem. Excessive professional fees and expenses
ranked second, with 39 percent indicating that they were often or always
a problem, and an additional 50 percent indicating that they were
sometimes a problem. Existing management ranked third, with 37 percent
indicating that it was often or always a problem, and an additional 53
percent indicating that it was sometimes a problem. Excessive time in
bankruptcy before conversion or dismissal ranked fourth, with 36 percent
indicating that it was often or always a problem, and an additional 47
percent indicating that it was sometimes a problem. Excessive secured
creditor influence ranked fifth, with 31 percent indicating that it was
often or always a problem, and an additional 49 percent indicating that
it was sometimes a problem. There were no other issues for which the
combined percentage of "often" and "always" responses significantly
exceeded the percentage of "rarely" and "not at all" responses. However,
the remaining issues garnering the greatest percentage of often and
always responses were (6) ADR underutilization, (7) insufficient access
to information; (8) exclusivity extensions; (9) insufficient committee
involvement; and (10) insufficient uniformity (e.g., local rules).
The respondents strongly supported both the "cram down" power and a
"new value" exception to the absolute priority rule. Eighty percent
thought that a plan should be confirmable without acceptance by all
impaired classes of claims. Although an overwhelming 95 percent of
business Chapter 11 debtor representatives supported the cram down
power, it also was supported by 73 percent of business Chapter 11
creditor representatives. A new value exception to the absolute priority
rule was supported by three-quarters of respondents. It was supported by
91 percent of business Chapter 11 debtor representatives, and also was
supported by 70 percent of business Chapter 11 creditor
representatives.
When asked to identify reasons why plans are not confirmed, only
three reasons were endorsed by a majority of respondents. Eighty-five
percent listed lack of economic viability, 77 percent indicated that the
plan was not feasible, and 71 percent listed insufficient financing.
Four other reasons were endorsed by approximately one-quarter of the
respondents. They were (1) abuse of the system by the debtor, (2)
inability to obtain requisite votes, (3) desired results obtained
without need for confirmed plan, and (4) loss of collateral through
foreclosure. Only 12 percent indicated that plans are not confirmed
because confirmation standards are too technical. Confirmation is only
one of the steps towards a successful reorganization and, unfortunately,
a very large percentage of confirmed plans in business reorganization
cases fail. The primary reason that confirmed plans fail, according to
the survey respondents, is unrealistic financial projections.
Mismanagement ranked a distant second, with unforeseen external events
or circumstances coming in a very distant third. These responses suggest
that the confirmation process is working in the sense that economic
problems, rather than technical or procedural problems, are the primary
impediment to plan confirmation. However, the confirmation process is
not filtering out enough of the plans with significant economic problems
and is not dealing effectively enough with management problems.
Court Issues
Granting Article III status to bankruptcy judges was supported by 62
percent of respondents. However, there was a significant difference in
opinion by professions, with 78 percent of judges supporting Article III
status and 64 percent of attorneys supporting it, but only 48 percent of
other professionals supporting it. While granting Article III status to
bankruptcy judges would permit simplification of the bankruptcy
jurisdictional provisions, jurisdictional battles were rated as the
least frequent of 19 surveyed problems in business reorganization cases.
Further, while those supporting Article III status reported a slightly
higher frequency of jurisdictional battles as problems in business
reorganization cases, even among those respondents jurisdictional
battles were rated as a problem "rarely" or "not at all" by 70 percent,
and as a problem "often" or "always" by only seven percent.
There was strong support for Bankruptcy Appellate Panels as the
initial venue for appeals from the bankruptcy court. Overall, 56 percent
felt that bankruptcy appeals initially should be taken to the Bankruptcy
Appellate Panel, with only 20 percent favoring the United States
District Courts, and only 21 percent favoring direct appeals to the
Circuit Court of Appeals. An even stronger endorsement of Bankruptcy
Appellate Panels comes from Ninth Circuit professionals, who have long
had a Bankruptcy Appellate Panel. Among Ninth Circuit professionals, 70
percent favor the Bankruptcy Appellate Panels, with only 14 percent
favoring the United States District Courts, and only 16 percent favoring
direct appeals to the Circuit Court of Appeals. The high level of
satisfaction in the Ninth Circuit suggests that the Bankruptcy Appellate
Panel reform should be carried forward.
Policing the System
Although current law relies on both the Office of the U.S. Trustee
and, in business reorganization cases, official committees to help
ensure that the bankruptcy system operates fairly and efficiently, both
received mixed reviews from survey respondents. In response to an
open-ended question, the U.S. Trustee system was cited by many
respondents as one of the three most significant problems in the current
bankruptcy system. However, there was strong support for an active U.S.
Trustee role in cases without committees, and moderate support for such
a role in cases with committees. Further, the U.S. Trustee appears to be
actively performing its role, since few respondents listed lack of U.S.
Trustee involvement as a problem in reorganization cases.
With respect to the scope of that role, more than two-thirds of
respondents indicated that the U.S. Trustee should be responsible for
protecting non-debtor interests in cases without committees. There was
very strong support for an active U.S. Trustee role in virtually all
aspects of such cases, with only post-confirmation matters (at 54
percent) falling below the two-thirds support level. While the level of
support for an active U.S. Trustee role diminished for cases with
committees, approximately half or more supported an active role in
virtually all aspects of such cases, except post-confirmation matters
(29 percent), compensation of debtor's management (43 percent), and the
plan confirmation process (44 percent). Although professional
compensation and retention issues are often a source of conflict between
bankruptcy professionals and the U.S. Trustee, there was very strong
support in cases without committees for U.S. Trustee involvement in the
retention of professionals (74 percent) and compensation of
professionals (72 percent). There was far less support for those roles
in cases with committees. Only 49 percent supported a role in the
retention of professionals, while 53 percent supported a role in the
compensation of professionals. On the range of issues, business Chapter
11 debtor representatives tended to be the least supportive of the U.S.
Trustee's role in cases with committees, while judges tended to be the
most supportive.
The official committees were generally viewed as providing a
necessary balance (59 percent) and serving a necessary function (64
percent). Only 2 percent said they were never necessary. However,
professionals specializing in the largest Chapter 11 cases viewed the
committees much more favorably, with 80 percent stating that committees
provide a necessary balance and 75 percent stating that they perform a
necessary function. Also, committee representatives were much more
likely to indicate that committees provided a necessary balance (79
percent) and performed a necessary function (85 percent). Respondents
from the ten largest cities were relatively more likely to indicate that
committees were necessary, while those from rural districts were
relatively less likely to do so.
The majority indicated that the level of committee utilization was
about right, although a substantial minority indicated that committees
were appointed in fewer cases than necessary (35 percent) and a small
minority indicated that they were appointed more often than necessary
(16 percent). Interestingly, the views of committee representatives
varied from the overall pool of respondents only slightly, with
committee representatives less likely to indicate that committees were
appointed more often than necessary.
The extent of committee involvement appears to be a problem in many
cases, with 27 percent listing insufficient committee involvement as a
problem that always or often occurs in business reorganization cases. An
additional 35 percent listed it as a problem that sometimes occurs.
These results suggest that the committee concept needs rethinking. While
the committee vehicle may work satisfactorily in larger districts, or
bigger cases, it may not be the best method for protecting non-debtor
interests in other cases.
Preferential Transfers
There was general agreement that intent to prefer a creditor should
not be added as a necessary element for avoiding a preferential
transfer. Overall, only 26 percent of respondents supported such a
change in the law. Even among business Chapter 11 creditor
representatives only 30 percent favored an intent requirement.
Valuation
The majority (52 percent) did support a change to provide a specific
valuation standard in bankruptcy cases, with fair market value being the
preferred standard for most purposes. While creditor representatives
were more supportive of adopting a specific valuation standard (58
percent) and trustee representatives were less supportive (43 percent),
there was no statistically significant difference in the views of debtor
representatives or judges.
The respondents were deeply divided on the question of what valuation
standard should be adopted. However, a plurality favored a fair market
valuation for all purposes except confirmation. For solvency
determinations, more than 40 percent favored a fair market valuation,
with about a third favoring a liquidation valuation and about a quarter
favoring a going concern valuation.
On exemption issues, the pool was more divided, with 47 percent
favoring a fair market value and 42 percent favoring a liquidation
value. Here the views divided along debtor vs. creditor lines, with 62
percent of debtor representatives favoring a liquidation value and 57
percent of creditor representatives favoring a fair market value.
For confirmation issues, a plurality of 45 percent favored a going
concern valuation, with 36 percent favoring a fair market valuation. A
going concern valuation for confirmation issues was the most favored
choice of both debtor representatives and creditor representatives;
however, debtor representatives were almost evenly divided among the
three standards, while creditor representatives were almost evenly split
between a going concern valuation and a fair market valuation.
With respect to secured creditor issues, fair market valuation was
the most favored choice for cash collateral and adequate protection
purposes, and was the majority choice (53 percent) for valuing
collateral. On all three issues, creditor representatives favored a fair
market valuation, whereas debtor representatives were split with
approximately two-fifths favoring a liquidation standard and two-fifths
favoring a fair market standard.
Claims
There was general opposition to granting specific categories of
claimants priority over unsecured creditors. Respondents were asked to
indicate whether 19 types of claims should always, sometimes, or never
be given priority over general unsecured claims. The majority supported
always prioritizing only two classes of claims: (1) the expenses of
administration (77 percent), and (2) alimony/spousal and child support
claims (50 percent). Seven additional classes garnered majority support
for at least sometimes receiving priority. In descending order of their
combined "sometimes" and "always" percentages, they were: (1) wages (92
percent); (2) employee benefits (82 percent); (3) taxes (77 percent);
(4) pension/retirement claims (74 percent); (5) reclamation claims (62
percent); and (6 & 7) a tie between restitution/criminal fines and
marital property settlement claims (each at 54 percent).
Consumer debtors often attempt to prioritize non-dischargeable claims
and health care claims in their Chapter 13 plans. However, with the
exception of the family obligations and restitution/criminal fines noted
above, a majority rejected priority treatment of such other
non-dischargeable claims as drunk driving/boating liability and
educational loans, and rejected priority treatment of health care
claims.
In business cases, priority is granted to fishermen. Certain other
claims often receive a de facto priority because of restrictions
on contract rejection for collective bargaining agreements, restrictions
on abandonment for environmental liabilities, and statutory "trust"
provisions such as the Perishable Agricultural Commodities Act (PACA). A
majority rejected priority treatment for each of these types of claims.
Finally, there have been reform proposals advocating a priority for
non-tax governmental claims and a priority for involuntary creditors
such as tort claimants. However, three-quarters of the respondents
rejected priority treatment of non-tax governmental claims and of mass
tort/products liability claims.
Difficult policy choices and practical problems are presented by tort
claims, environmental liability, and certain other claims that are not
yet liquidated at the time of plan confirmation. The majority (52
percent) favored estimating such claims for both voting purposes and
distribution purposes. Approximately one-quarter favored estimating the
claims for voting purposes only. Only eight percent felt that the claims
should be unaffected by confirmation, with less than five percent
supporting either disallowance of such claims or delaying confirmation
until the claims could be liquidated. There was no statistically
significant difference in the views of those professionals specializing
in the largest Chapter 11 cases.
With respect to claims trading, 56 percent of respondents felt that
the transfer or sale of claims (other than publicly-traded claims)
should not be subject to court approval. Opposition was even stronger in
the districts with the largest reorganization cases, with 63 percent
opposing a court approval requirement. Of those favoring a court
approval requirement, there was no consensus as to the nature of the
court's review. Respondents favoring court review were asked about four
possible standards for that review and were asked to identify all that
should be considered by the court. However, none was endorsed by even a
third of those respondents. Only 30 percent thought the court should
review the adequacy of disclosure, and only 29 percent thought the court
should review the impact that the transfer would have upon the
reorganization process. Only 15 percent thought that the court should
review the price paid and only 12 percent thought that the court should
review the impact that the transfer would have upon competition.
Further, although claims are often purchased at a price well below
face value, 68 percent believed that the rights of the purchaser (the
transferee) of a claim should be based upon the face amount of the
claim, rather than the price paid for the claim. There was no
statistically significant difference in the views of those prof
essionals specializing in the largest Chapter 11 cases.
Finally, in both claims trading and in certain other situations, the
same claimant may hold multiple different claims that are included in a
single class under the plan of reorganization. A small majority (52
percent) felt that in such cases the owner should not be treated as a
single claimant, but rather as one claimant with respect to each claim
owned. However, the opposite view prevailed among those professionals
specializing in the largest Chapter 11 cases, with 57 percent favoring
treating the holder of multiple claims as a single claimant.
FOOTNOTES
[1]The survey was designed and conducted in
accordance with generally accepted survey techniques and statistical
principles by Dr. Louis H. Primavera, Ph.D., and Dr. Bernard S. Gorman,
Ph.D., of the St. John's University Graduate School of Arts and
Sciences. A detailed explanation of the survey methodology is contained
in the report of Dr. Primavera and Dr. Gorman, titled "Methodology for
the Membership Survey for the American Bankruptcy Institute." For the
purposes of this Report, and following accepted statistical procedure,
the probability level of less than or equal to .05 was selected as the
test of significant association.
[2]Respondents devoting at least 50 percent
of their practice to debtor representation, creditor representation, or
trustee representation were defined as debtor representatives, creditor
representatives, or trustee representatives, respectively. Respondents
devoting at least 25 percent of their practice to the representation of
official committees were defined as committee representatives.
[3]The ten largest cities were defined as
the districts that included the ten largest U.S. cities by population
based on the 1990 Census. Mixed districts were those including cities
ranked 11th through 50th, unless the district was already included in
the "ten largest" cohort. The remaining districts were defined as
rural.
[4]Business Chapter 11 professionals were
defined as those devoting at least 50 percent of their practice to
business Chapter 11 cases. Those who also devoted at least 50 percent of
their practice to the representation of debtors or creditors were
defined as business Chapter 11 debtor representatives or business
Chapter 11 creditor representatives, respectively.
[5]As a proxy for this group, this cohort
was defined to include respondents who both devoted at least 75 percent
of their practice to business Chapter 11 cases and who listed their
primary districts as either the Central District of California, the
District of Delaware, the Northern District of Illinois, or the Southern
District of New York.
[6]Those districts were the Southern District of
California, the District of Delaware, the Northern District of Illinois,
and the Southern District of New York.
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