THE NATIONAL BANKRUPTCY REVIEW COMMISSION
MINUTES OF MEETING HELD:
Thursday, February 20, 1997
Friday, February 21, 1997
United States Senate Dirksen Office Building
Approved: April 17, 1997
Prepared by: Susan Jensen-Conklin
Commission Members Present:
Brady C. Williamson, Chair
John A. Gose
Honorable Robert E. Ginsberg, Vice Chair
Jeffery J. Hartley (February 21, 1997)
Jay Alix (February 21, 1997)
Honorable Edith Hollan Jones
Honorable M. Caldwell Butler
James I. Shepard
Babette A. Ceccotti
Commission Advisors and Staff Present:
Professor Elizabeth Warren, Reporter/Senior Advisor
Melissa B. Jacoby, Staff Attorney
Professor Lawrence P. King, Senior Advisor
George H. Singer, Volunteer Staff Attorney
Stephen H. Case, Senior Advisor
Judith K. Benderson, Legislative Counsel
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer
Jennifer C. Frasier, Staff Attorney
Joseph Kuehne, Administrative Assistant
Elizabeth I. Holland, Staff Attorney
Over the course of the two-day meeting, approximately 150 people attended, including
representatives from the American Bankers Association, American Bankruptcy Institute,
Law League of America, Government Finance Officers Association, National Association of
General, National Association of Bankruptcy Trustees, National Association of chapter 13
National Association of Consumer Bankruptcy Attorneys, National Association of Federal Credit
Unions, National Consumer Law Center Inc., National Credit Counseling Services, and the
Retail Federation, among others. Federal agencies such as the Administrative Office of the United
States Courts, Executive Office for United States Trustees, Freddie Mac, Pension Benefit
Corporation, United States Department of Housing and Urban Development, United States
Department of Justice, the Securities and Exchange Commission, and the Internal Revenue
were represented. Congressional staff members were present as well as members of the federal
judiciary, professors of law, and chapter 7 and chapter 13 trustees. Representatives from state
government, credit unions, banking and credit industry, professional and trade associations,
industry, law firms, debtors and the media were also present.
Chair Williamson, at approximately 8:40 a.m., commenced the morning session of the
extending thanks to the Senate Judiciary Committee, Senator Grassley and his staff for their
in making the meeting facilities available to the Commission. He then reviewed the meeting
the status of proposed bankruptcy legislation pending before Congress. Upon the conclusion of
opening remarks, Chair Williamson called upon Professor Lawrence P. King, Senior Advisor for
Service to the Estate and Ethics Working Group, to introduce the next session.
OPEN FORUM: ISSUES RELATED TO THE UNITED STATES TRUSTEE
Professor King explained that the United States Trustee Program played an "important part"
administration of bankruptcy cases and that the Commission should accordingly examine the
as well as obtain comments on it from people around the country. He said that this open forum
would be the first attempt to obtain this input, a process that would continue at future meetings.
Mr. Richard Levine of Hill & Barlow began his remarks by noting that he was the first
Director of the United States Trustee Program, where he served for two years, and that he was
currently in private practice. He recalled that at the time the Bankruptcy Reform Act of 1978 was
enacted there was a perception that some bankruptcy judges were too involved in case
and that the United States Trustee should become proactive in the process by which creditors'
committees select counsel. He also noted that there was "significant pressure" placed on himself
Executive Office for United States Trustees to refrain from being unduly involved in the
operations of individual United States Trustee offices.
At its inception, the Program became involved and continues to be involved in the chapter 11
disclosure statement process, which "was a mistake," Mr. Levine said. He asserted that this
should be performed by either the creditors' committee or the bankruptcy judge in those cases
committees. The role of the United States Trustee, he stated, was not to assist bankruptcy judges,
to play an independent role.
When asked by Professor King if the role of the United States Trustee should be expanded in
those cases that lack committees, Mr. Levine said no. One problem about the Program, he noted,
that there were no clear limits on what role the United States Trustee should play and thus, as a
the Program had become involved in substantive areas and lacked focus.
Commissioner Shepard noted that the Small Business Proposal contemplated giving the
States Trustee more responsibilities with regard to identifying "dead on arrival cases." Mr. Levine
indicated that he was not opposed to the United States Trustee being required to identify
cases." Commissioner Shepard then asked whether these additional responsibilities would cause
present work force of the United States Trustees to be spread "too far."
Mr. Levine observed that the Program had historically been "ignored" in the Department of
and likened it to a "stepchild." He suggested that the United States Trustee should have a major
determining whether a case should be converted or dismissed and whether a trustee or examiner
be appointed. He also recommended that the United States Trustee should supervise chapter 13
as there was no reason to have chapter 13 trustees. While acknowledging that the United States
Trustee Program should monitor chapter 7 trustees, Mr. Levine did not support having United
Trustees conducting criminal investigations as this was the province of the Federal Bureau of
Investigation and United States Attorney.
In response to Commissioner Jones' query regarding what the supervision of chapter 7
entailed, Mr. Levine identified various administrative aspects. Commissioner Jones questioned
these supervisory responsibilities had to be performed on a full-time basis if the chapter 7 trustees
capable appointees. Mr. Levine responded that trustees occasionally needed to be "goad[ed]."
In light of certain statements made at the January meeting regarding the lack of investigation
instances of civil fraud, Commissioner Shepard asked whether the United States Trustee should
undertake this responsibility. Mr. Levine said no based on the Program's lack of human resources.
Commissioner Shepard observed that it was problematic that chapter 7 trustees were not
for these efforts. Mr. Levine agreed that this was one of the "many defects in the system" and
that a trustee should "receive extra money" for successfully obtaining the denial of a debtor's
Given the likelihood that funds would not be made available for this purpose, Mr. Levine
that this may mean that some debtors "go free and not have their discharge[s] barred."
When asked by Commissioner Jones to identify the responsibilities that should be performed
United States Trustees, Mr. Levine said reviewing fee applications, serving as the trustee in
cases, and being more vigilant with regard to solicitation practices by creditors' committee
said that the present solicitation practices of attorneys and accountants was no better now than
were in 1978. With regard to the historical budgetary shortfall of the Program, Mr. Levine
that this reflected the "non-support traditionally the Department [of Justice] has given the
Commissioner Jones noted Mr. Levine's reticence regarding the ability of the United States
Trustee to monitor small business cases. She observed that the Small Business Proposal was
on the practices of certain United States Trustees who functioned "pretty effectively." Mr. Levine
explained that his concern pertained to the Program's lack of staff and the lack of support from
bench. He was also concerned that United States Trustees became too involved in cases that, in
interfered with their ability to fulfill their other responsibilities such as monitoring fees. When
Commissioner Shepard to clarify his position regarding the role of the United States Trustee
small business cases, Mr. Levine said that it should play a "superficial role" and that any
should be performed on a "spot check" basis.
Professor King summarized Mr. Levine's comments as that if there was more funding, then
United States Trustee should have greater responsibilities. Agreeing with this summary, Mr.
observed that there was no significant support for the United States Trustee Program, especially
the Department of Justice. He noted, for example, that the Program had "disappeared from the
screen of . . . the Congress."
Joseph Wittman, President of the National Association of Bankruptcy Trustees, discussed
matters. These included due process and grievance procedures for trustees, how trustees are
compensated, providing immunity or quasi-immunity for trustees, the ability of a trustee to retain
her own self as counsel, and micro-management of trustees by United States Trustees.
As to due process, Mr. Wittman noted that trustees who were suspended or removed
"very little notice" or reason for these actions by United States Trustees. Although the Executive
for United States Trustees promulgated proposed grievance procedures, he said that they were
inadequate." His Association favored some form of independent review of these actions. He said
many trustees across the nation were currently operating in an "arena of suppressed fear."
Commissioner Jones asked Mr. Wittman what the closest analogy would be to the type of due
process that his Association wanted for chapter 7 trustees. Although Mr. Wittman responded that
nothing was completely analogous, he asserted that there should be some form of administrative
He explained that his Association supported the amendment of 11 U.S.C. ' 324 to mandate that
review be performed by an independent person. The Association also supported the institution of
internal review process by either the United States Trustees or the Executive Office for United
When asked by Commissioner Ginsberg whether these procedures would require an
law judge to hold a hearing every time a trustee was removed or suspended, Mr. Wittman
"[p]ossibly." He explained, however, that these actions occurred infrequently and that many of
were ultimately resolved. He said that the system had lost many "good trustees" because they
find it is not worth the hassle." Mr. Wittman then complained about the "phenomenal" amount of
paperwork in connection with their case administration responsibilities that trustees must submit
United States Trustees twice a year as well as the "extraordinary amount of time" required to
to various questions posed to them by United States Trustees on matters pertaining to their cases.
Commissioner Jones questioned the purpose of such monitoring. Mr. Wittman said that he
problem with the United States Trustee periodically checking or "prodding the trustees along."
asked by Commissioner Jones whether bankruptcy judges or creditors typically served this
Mr. Wittman said that most judges did not get involved and only a few creditors performed this
response to Commissioner Shepard's query as to the average case load for chapter 7 trustees, Mr.
Wittman stated that it was approximately 300 to 500 cases per year, excluding California where a
trustee handled 1,500 to 2,000 cases annually.
Keith Shapiro of Holleb & Coff said that he was Vice President of the American
Institute and was a founder of the American Bankruptcy Board of Certification, in addition to
served as a chapter 7 panel trustee.
Among Mr. Shapiro's observations were the following. First, he noted that where a creditors'
committee is appointed in a case, the United States Trustee's role should be greatly reduced.
favoring the elimination of the United States Trustee Program in those cases where it served as a
"watch dog," he did not think it was appropriate for the United States Trustee to "second guess[
creditors' committee, unless where there are "unholy alliances."
Second, he said that the United States Trustee Program "absolutely" had a role to play in
chapter 11 cases lacking creditors' committees. There were, for example, some districts that were
effective in monitoring these cases.
Third, Mr. Shapiro observed that although the United States Trustee had a major role in the
application process, the Program lost credibility when it failed to support certain applications. He
that fee objections were increasingly becoming weapons used to disincentivize trustees or their
professionals. Accordingly, he said that the United States Trustee Program could be very helpful
these cases if it did not just focus on abuses by fee applicants. He suggested that this requirement
be effectuated through the enactment of an amendment.
The fourth area that Mr. Shapiro discussed concerned the issue of a trustee retaining himself
herself as counsel. He noted that he chaired a survey on professional fees conducted by the
Bankruptcy Institute in 1991 that found trustees in most districts were not required to propound a
reason why their own firms should be employed. Currently, there was increasingly unequal
of this provision around the nation, he said. The survey also showed that the bankruptcy judges
supported the retention by trustees of their own firms.
Mr. Shapiro then discussed the appointment process for trustees. He observed that with the
politicalization of the United States Trustees' appointment process, it should be assumed that over
these political appointees will, in turn, appoint "cronies" to trustee panels and perhaps remove
"to make room for these cronies." Accordingly, he said that trustees should be protected by
given some meaningful due process rights.
Observing that there was a "lack of control" over consumer bankruptcy cases, Commissioner
Jones explained that this problem began with the failure of debtors' counsel to provide sufficient
counseling advice as well as to scrutinize the debtors' schedules or question their accuracy. This
oversight then continued with the chapter 7 trustees who claimed to not have sufficient funds to
scrutinize the accuracy of these schedules and to determine whether debtors were honestly taking
advantage of the law. Chapter 13 trustees as well, she noted, had the same concerns. She then
whether the United States Trustee or chapter 7 trustee should perform this oversight function.
Mr. Shapiro recalled that when he was first appointed as a panel trustee he was advised by
of his peers to not "overwork" his cases because he would "lose a fortune." While it was a
given there was "tremendous abuse" in the filing of the schedules in these cases, he said that most
trustees could not afford to undertake the type of scrutiny posed by Commissioner Jones. He
that a perception had developed over the past six years that credit card issuers were the most
appropriate parties to attack consumer fraud. Recently, however, he noted that there was a
reflected in the case law "slamming" credit card issuers for overreaching and filing blanket
complaints. In sum, he was not able to identify an "appropriately incentivized party" who would
perform "serious due diligence" on these bankruptcy schedules.
Mr. Wittman agreed that Commissioner Jones had identified the "tip of the iceberg that's out
and that the problem started with debtor's counsel. Commissioner Shepard asked who should
investigate into these abuses. Mr. Wittman responded that although all attorneys had an ethical
obligation to do this, unfortunately it was not done. Commissioner Shepard questioned whether
or an agency within the United States Trustee Program should be responsible for monitoring this
problem. Commissioner Ginsberg observed that there were no studies documenting particular
or determining whether any such problems were nationwide. He suggested that the existence of
problems should first be identified. Professor Warren agreed that the level of analysis was only
anecdotal. Mr. Shapiro noted, however, that the present system did not fund investigations by
and that, accordingly, "most of the rats aren't investigated." Mr. Levine agreed with Mr.
Bill Fry, Executive Director of HALT, a nonprofit reform group, discussed his association's
in promoting the concept of non-attorneys assisting people in the preparation of "simple legal
documents." As a result of the enactment of 11 U.S.C. ' 110, he observed that many petition
were being driven out of business. One of his association's two "major recommendations" was
there should be no fee caps, he stated. The other problem that Mr. Fry discussed was the lack of a
statutory definition of what activities constituted the unauthorized practice of law.
Mr. Fry noted that there was a "great deal of hostility" over the issue of whether
were capable of performing the same professional services that attorneys perform. He said
non-attorneys who worked for attorneys reported that the amount of scrutiny that attorneys gave
cases was "close to nil" He suggested that the law should be amended to permit non-attorneys to
provide basic procedural information, namely, the same type of information available in self-help
Commissioner Shepard asked Mr. Fry whether he was, in effect, seeking to authorize
non-attorneys to practice law without a license. As an example Commissioner Shepard said that
question of whether a claim was secured or unsecured presented a legal issue. Mr. Fry disagreed
suggested that a non-attorney should be able to refer his or her client to a standard definition.
Commissioner Ginsberg observed that most law was not "black letter" and instead had "various
of grey" even with respect to the classification of a claim. Mr. Fry responded that if the
was not clear, then the petition preparer should refer the client to an attorney.
Jean FitzSimon, a member of Johnston, Maynard, Grant and Parker, noted that she primarily
practiced in the area of business reorganizations and that she chaired the American Bar
subcommittee that was responsible for bankruptcy courts, the United States Trustee and
Ms. FitzSimon had four recommendations with regard to the United States Trustee Program.
she recommended that there should be complete separation between administration and
Second, she supported the creation of an Assistant Attorney General for the Program. As her
suggestion, Ms. FitzSimon said that United States Trustees should be appointed on a circuit-wide
Her fourth recommendation was that the Program should be made nationwide and include the two
remaining districts that were still outside of the Program.
With regard to her first recommendation, Ms. FitzSimon explained that if bankruptcy judges
given Article III status, then the delineation between administration and adjudication would
essential. To effect this goal, she suggested that all administrative matters be assigned to the
States Trustee Program, particularly compensation issues. Many of the problems with the
noted, related to uniformity and resource issues. On the other hand, she stated that the Program
made substantial improvements.
Noting that it was critical that the bankruptcy system is predictable and fair, Ms. FitzSimon
that the United States Trustee Program unfortunately suffered because of the intentional and
misguided and probably misunderstood" emphasis of the legislation on local variances. As a result,
several United States Trustees had taken positions and instituted programs that were contrary to
bankruptcy administration. She noted that United States Trustees were "largely unsupervised" and
the local variance was not based on local considerations, but was in many instances based solely
predilections of individual United States Trustees. As an example, she cited how trustees were
in different regions. While trustees in some districts were supported by United States Trustees, in
others, they were treated like "all but convicted criminals." She noted that the current Director of
Executive Office was "powerless" to prevent these practices, because the United States Trustees
"trumped him in the pecking order."
Ms. FitzSimon supported the NAPA Study recommendations that the number of United
Trustee Program regions be reduced to the number of federal circuits, and that the Program has
sufficient funding and authority to contract out such services as reviewing debtors' financial
reviewing bankruptcy schedules. Commissioner Shepard queried Ms. FitzSimon as to whether
process would identify assets missing from debtors' schedules without an audit being conducted.
Ms. FitzSimon acknowledged that not every instance of hidden assets would be uncovered
process, she suggested that it could serve to identify internal inconsistencies and utilize
valuation systems to determine whether or not assets were correctly valued. Commissioner
responded that such computer programs were currently available. Ms. FitzSimon responded that
individual trustees had their own systems and that if the United States Trustee Program had
contract out this service, the Program, in turn, could make it available to all chapter 7 trustees.
Nathan Feinstein of Piper & Marbury began his remarks by noting that he agreed with
virtually all of Ms. FitzSimon's prior statements. He also noted that he had great respect for the
Director of the United States Trustee Program.
Among his specific recommendations were the following. First, he said that the bankruptcy
administration model recommended by the 1973 Commission should be adopted. To effectuate
goal, the authority accorded to the Director of the United States Trustee Program should be
strengthened. Second, he said that much of the administrative responsibilities should be removed
the bankruptcy judges and given to the agency responsible for bankruptcy administration. He
that the current fee application review process worked well.
Kevyn Orr, Deputy Director of the United States Trustee Program, prefaced his remarks by
that one of the Program's goals was to ensure that bankruptcy cases were properly and
administered. Another goal of the Program was to be receptive to suggestions on how to improve
efforts in this regard. He observed that the Program was only ten years old and was the smallest
component in the bankruptcy system with a staff of approximately 1,075 people. Despite
bankruptcy filings, he noted that the size of the Program's staff remained "relatively stable" over
With regard to the Program's supervision of chapter 7 trustees, Mr. Orr explained that these
supervisory efforts included monitoring and ranking the performance of trustees in 14 different
categories. In addition, the Program and the Office of Inspector General performed audits. He
observed that much of the bankruptcy system with respect to fraud was deterrent-based. He also
that fraud and civil enforcement efforts involved resource allocation and cost issues.
Commissioner Shepard questioned Mr. Orr as to whether he was aware of any formal
that examined into the extent of fraud. Responding in the affirmative, Mr. Orr stated that the
had launched a new fraud initiative. In addition, he said that trustees made criminal referrals and
Program reviewed schedules to determine whether there was any fraud. This process was
referrals received from confidential sources. He noted, however, that there was no database that
provide a quantifiable number of the cases presenting some element of fraud.
Commissioner Jones asked Mr. Orr to explain the deterrents that were present in the
system. Mr. Orr responded that the deterrent was "getting caught." Commissioner Jones then
how many discharges were denied each year. While Mr. Orr could not cite an exact number, he
that there was a "record number" of criminal referrals this year, namely, 740.
Commissioner Jones recalled that at last month's meeting, at which Mr. Orr was present, all
United States Trustee representatives agreed that the United States Attorney Offices did not
prosecute bankruptcy fraud. Mr. Orr said that it was not so much that the United States Attorney
not prosecute bankruptcy crimes, but that there was a resource allocation issue. Given this fact
fact that bankruptcy judges did not routinely deny discharges, Commissioner Jones observed that
were no deterrents in the current bankruptcy system. Mr. Orr responded that the United States
Trustees also pursued civil remedies, such as dismissal of cases, where there was evidence of
"improper behavior in the system." Based on discussions with trustees nationwide, Commissioner
Shepard observed that trustees did not move to bar discharges or undertake actions beyond the
simple motions because they lacked the resources and that they were not rewarded for these
Although Mr. Orr said that the Program tracked enforcement reports, he acknowledged that
was a "wide disparity" between what could be done and what was presently done in this area. He
wanted to dispel the impression that the Program was doing nothing with regard to fraud. Mr. Orr
concurred with Commissioner Shepard that a "great deal more should be done." In addition, he
that the current Attorney General was supportive of the Program's efforts with regard to
fraud and cited Operation Total Disclosure as an example. In addition, the Program's current
sought 20 additional positions specifically targeted toward prosecuting fraud.
Commissioner Jones asked Mr. Orr to comment on the suggestions from the other panelists
certain auditing functions be outsourced. Mr. Orr noted that he and Jerry Patchan, Director of the
Executive Office for United States Trustees, were discussing this possibility, its cost and potential
Mr. Orr then discussed two other issues. One was the due process concerns expressed by
trustees. He mentioned that Program representatives met with representatives from the National
Association of Bankruptcy Trustees and asked them to submit a proposal that addressed these
concerns. The second was the perception that United States Trustees were viewed as political
appointees who made trustee appointments based on favoritism. He explained that the United
Trustee position was actually a "confidential policy advocation, policy making" position. There
attempt by the Department of Justice or the Program, he noted, to politicize this position.
Commissioner Shepard asked Mr. Orr whether the Program had sufficient resources to
monitor small chapter 11 business cases. Mr. Orr said that the Program agreed that its role should
"somewhat limited" in those cases where there was adequate representation by a creditors'
And, in response to those criticisms alleging that the Program lacks uniform policies, he noted
Program had issued manuals on all substantive areas of the Program's duties. Chair Williamson
inquired about a proposal to reorganize the Program's regions. Mr. Orr explained that this
would restructure the Program's regions on either a circuit-based or some other rationalized
said that while it was included in the Program's proposed budget for 1997, it required further
Upon the conclusion of Mr. Orr's comments, the plenary session recessed at approximately
a.m. to allow the Commissioners to attend the following working group sessions: Small Business
Working Group, Consumer Bankruptcy Working Group and Service to the Estate and Ethics
PRESENTATION: COMMERCIAL LAW LEAGUE OF AMERICA
The Commission reconvened into plenary session at approximately 1:25 p.m. which began
presentation from the Commercial Law League of America ("CLLA").
Jay L. Welford of Jaffe, Raitt, Heuer & Weiss introduced the panel appearing on behalf
CLLA and explained the purpose of the presentation. He said that the panelists would highlight
CLLA's positions as set out in its prior written submissions to the Commission.
Elliott Levin, the first panelist, began his comments by noting that the CLLA was not
there needed to be a special provision for small business bankruptcy cases. He noted that small
had the same problems as larger debtors and that their cases may be as equally complex as their
counterparts. In particular, he observed that top management in small business bankruptcy cases
typically was less sophisticated and therefore needed more time than the ninety-day period
forth in the Small Business Proposal. He said that the CLLA was opposed to "micro-managing"
chapter 11 cases and putting too many burdens on the debtor. In addition, he said that these
would generally need two to four months to stabilize their financial condition and that it took time
deal with secured creditors.
Regarding other proposals under consideration by the Commission, Mr. Levin said that the
"wholeheartedly" supported the proposals dealing with voting, the absolute priority rule and the
of creditors' committee appointments. On the other hand, he said that many other proposals under
consideration by the Commission already existed either through practice or by case law. He noted,
instance, a chapter 11 debtor in the Southern District of Indiana must demonstrate that it is able to
confirm a plan in defense of a motion to terminate the automatic stay or in support of a motion to
the exclusive period.
With regard to the Small Business Proposal's definitional provisions, Mr. Levin observed that
would include almost 90 percent of small business debtors in the Southern District of Indiana.
Accordingly, the CLLA recommended that the definition be changed to apply to debtors with $2
million of liquidated, non-contingent, non-disputed debt as this would include the debtors that
needed fast track treatment.
In summarizing his remarks, Mr. Levin said that the CLLA was not convinced that there was
need for either a small business chapter or a small business definition. Nevertheless, to the extent
there is a recommendation providing for separate treatment for small business debtors, he said
CLLA supported extending the 90-day time period for filing a plan and that the present version of
definition should be reviewed further.
Alan Gordon, the next speaker, discussed three recommendations by the CLLA. The first
concerned a proposed amendment to the ordinary course exception provisions under 11 U.S.C. '
547(c)(2) as the present provisions were too uncertain. In particular, he noted that this provision
spawned litigation and wasted a tremendous amount of judicial resources. He said that the CLLA
recommended that this Section incorporate an objective test with a reach back period of either 90
120 days based on the date the goods were delivered or the services were rendered.
The second proposal discussed by Mr. Gordon concerned the release of third parties under a
reorganization plan. The CLLA wanted it to be clear that parties voting on a plan would retain
guarantees and other rights against third parties. The release, he said, should not be incorporated
plan provision, but should be accomplished by a separate explicit written document such as a
form. Creditors who voted on a plan, he noted, should not be forced to give up their rights against
parties unless they explicitly agreed to this treatment. To effectuate this recommendation, Mr.
observed that Section 1141 should also be amended in addition to Sections 524(e) and 1123.
The third CLLA suggestion that Mr. Gordon described consisted of a proposed technical
amendment to the 60-day period under 11 U.S.C. ' 365(d)(4). The recommendation would toll
period upon the filing of a motion seeking authority to assume a lease or to extend the time within
the lease must be assumed, assigned or rejected.
Judith Greenstone Miller, the third panelist, discussed seven tentative proposals emanating
Commission's Government Working Group. She began her remarks by noting that the
creditor had "enhanced rights" and that to the extent these enhancements were procedural in
CLLA would support these. On the other hand, to the extent that the enhancements were
and thereby provided additional rights and benefits to government creditors that extended beyond
available to non-government creditors, then the CLLA would object to such enhancements. She
that as government creditors were "large enough and sophisticated enough" and had sufficient
to protect their interests, then they did not need such substantive enhancements.
Specifically addressing the Government Working Group's proposal to repeal Section
Ms. Miller said that the CLLA favored the implementation of "less drastic means" to protect a
government creditor's lien by limiting the provision's subordination provisions to administrative
claimants. With regard to the Government Working Group's proposal to extend the "deemed
to chapter 7 cases for government creditors, she said that the CLLA would endorse extending this
proposal to all creditors in chapter 7 cases. Concerning the proposal on trust fund taxes, Ms.
reported that the CLLA believed that Energy Resources was "good law" and that it has
consistently applied. As a result, it has maximized assets for the benefit of all creditors, she
Ms. Miller then discussed the proposal that would alter the burden of persuasion under 11
505. She said that the CLLA opposed this recommendation because the government should be on
"equal footing" with other creditors based on the fact that it can access information as easily as
Regarding the proposal that would make the filing of tax returns and payment of
taxes mandatory, Ms. Miller said that the CLLA viewed this suggestion as "onerous and
as well as costly with regard to its implementation. In addition, she noted that it could have a
effect" on the reorganization process.
With regard to the proposal that would permit the setoff of tax obligations against tax refunds
without requiring the taxing authority to obtain relief from the automatic stay, Ms. Miller said that
assumed the claims were accurate. She also noted that it would deprive other creditors from
notice of the setoff and their right to object.
The final proposal that Ms. Miller discussed pertained to the requirement that the debtor
good faith settlement negotiations as a condition to the imposition of contempt sanctions
violations. She said that this would foster violations of the automatic stay.
Ms. Miller concluded her remarks by noting that the CLLA would likely submit comments
regard to the 100 one-page tax proposals under consideration by the Commission.
At the conclusion of Ms. Miller's presentation, Commissioner Shepard questioned her
the legislative history of Section 724(b) and why there was no explanation on how ad
taxes became included in this provision. He expressed concern that the current provision
money that would have paid for health, police and fire protection, and education, to subsidize
"the lawyers of a failed chapter 11."
Ms. Miller responded that the amount of revenue derived by the government from a
estate was "insignificant as against the whole" and that there were better ways of policing the
bankruptcy system to ensure that "dead on arrival" cases were "booted out before you have a
administrative hit." As an example, she mentioned improved case administration by courts,
and the United States Trustee Program. Disagreeing, Commissioner Shepard said that the
should not support any policy that "in effect would take taxpayer money and subsidize lawyers."
Commissioner Shepard then addressed Ms. Miller's comments concerning Energy
Resources and observed that chapter 11 debtors were using this decision to discharge
non-dischargeable taxes. Ms. Miller responded that in the majority of cases, at least two-thirds of
plan period was used to extinguish trust fund tax obligations. If the government was concerned
the risk, then it had other alternatives, she said. Ms. Miller also noted that the bankruptcy courts
be confirming plans that were not feasible.
With regard to Mr. Levin's comments concerning chapter 11 debtors who experience losses
three to four months, Commissioner Shepard asked who should sustain these losses. Mr. Levin
creditors would. Commissioner Shepard noted that Ms. Miller would allow the taxpayers to
attorneys who "drag" out cases as long as there is money to fund their fees. Mr. Levin concluded
remarks by noting that there were cases where he was not paid for his services.
PLENARY SESSION: EXECUTORY CONTRACTS
Following the CLLA presentation, the meeting continued with a plenary session on executory
contracts. Chair Williamson prefaced this session by noting that the subject of executory contracts
been described as "one of the most difficult challenges" presented by the Bankruptcy Code.
Warren noted that this discussion was a continuation of one that began at the Commission's
Invited participants at this session included the following: Hon. Prudence Carter Beatty,
States Bankruptcy Judge - S.D.N.Y.; Richard Broude, Mayer, Brown & Platt; George Hahn,
formerly of Hahn & Hessen; Professor Alan Resnick, Hofstra University School of Law;
Sigal, Simpson, Thatcher & Bartlett; Professor Charles Tabb, University of Illinois College
Law; and Professor Jay Westbrook, University of Texas School of Law.
Professor Westbrook explained that the "difficulty" with Section 365 of the Bankruptcy Code
that it was very complex and that the law was in a "state of turmoil." He suggested that it may be
to try to prioritize issues presented by this Section given its complexity.
The first issue introduced by Professor Westbrook was the notion of executoriness. He
that this doctrine evolved in response to apparent mistakes committed by trustees and debtors in
possession in the assumption and rejection process. Out of this doctrine, however, many serious
problems had arisen, he noted. As an example, he cited the treatment of option contracts as
The second issue identified by Professor Westbrook concerned the use of rejection as an
power. He explained that the power to reject an executory contract was simply a power to breach
contract and pay damages, not a power to rescind or avoid a previously transferred property right
as a patent license.
The third area under Section 365 that Professor Westbrook suggested should be reviewed
issue of interim performance, that is, the period of time during which the debtor in possession or
trustee decided whether to assume or reject. He noted that during this period, the other party to
agreement must remain ready to perform, but may not be fully compensated for the losses it
over the course of this period.
Professor Westbrook observed that if the executoriness aspect of contracts treated under
365 was abolished and if rejection was eliminated as an avoiding power, then this would, in turn,
eliminate many of the special exceptions under this Section. As the subject of contracts in
was "so enormously important economically and in such serious disarray in the statute and the
he recommended that there be "some serious level of reform" to this provision.
At the conclusion of his opening remarks, Professor Westbrook then reviewed specific
his recommendations. For example, the terms "assumption" and "rejection," he said, should be
replaced with "election to perform" and "election to breach." In addition, he suggested that the
"pre-bankruptcy contract" replace "executory contract." Further, there would be an express
in the statute to eliminate the concept of executoriness as a threshold requirement.
Judge Beatty observed that under Section 70 of the former Bankruptcy Act of 1898, the
of property of the estate included "assumption" and "rejection." She noted that the problem
by this provision occurred principally in business cases and that very different issues were
consumer cases. For instance, she said that a trustee never assumed a residential lease, unless it
value for an estate such as a cooperative or condominium lease. She said that the decision to
should be based on whether the contract had value and not on whether it is executory.
Noting that he agreed with her last comment, Professor Westbrook explained that part of the
problem was that a contract was both an asset and a liability. Judge Beatty said that judges had
differing views about contracts. She also noted that the definition of property of the estate under
Section 70 of the former Bankruptcy Act included contract actions.
Messrs. Broude and Hahn agreed with Professor Westbrook's suggestion regarding the
of executoriness. Mr. Hahn asked whether matters that were essentially payables and receivables
should be included under Section 365. Professor Westbrook responded that there was no reason
"lop those things off."
Saying that he "cautiously" agreed with Professor Westbrook, Professor Resnick said that it
extremely difficult to foresee how it would work and the scope of its impact. For example, he
the elimination of executoriness from Section 365 would increase its scope "tremendously" and
include for the first time accounts payable, accounts receivable, and warranty claims that arise
prepetition sale of goods. He also expressed concern about whether this would change the
and bargaining power factors or alter the policy of equality of treatment for creditors through the
assumption process. Concerning warranties, Professor Resnick posed the hypothetical where the
debtor-manufacturer in the plan assumed certain contracts and two years thereafter the product
explodes. He asked whether the debtor would have to pay that claim in full. The answer, he
might be for the debtor to reject all possible breach of warranty claims and all prepetition
also asked whether the debtor would actually have to make a motion before the court to assume
Professor Tabb had similar substantive concerns regarding the ability to assume a contract
the non-debtor party has already fully performed and the administrative burden of having to either
assume or reject all contracts. He agreed, however, that the executoriness requirement had caused
"much more grief than it has caused good." He suggested that there should be some type of
presumptive default rule that would permit certain types of pre-bankruptcy contracts to be
automatically rejected such as where the non-debtor party has fully performed.
Mr. Broude, noting that he did not share Professor Resnick's concerns, said that the good that
would derive from eliminating the executoriness requirement would outweigh the administrative
He said that there were many different ways that problems and exceptions can arise.
Acknowledging Professor Tabb's suggestion that a default rule may be a good idea, Professor
Westbrook observed that the choice was not between "no difficulties and new
but between enormous difficulties and fewer difficulties.
Citing the district court's decision in Lubrizol, Judge Beatty suggested that the
under Section 365 could be resolved by amending the definition of property of the estate under
541. She explained that bankruptcy judges "get sort of off the mark" because they did
merge the contract and property concepts back together again.
Then Professor Westbrook addressed Professor Resnick's concerns regarding prepetition
warranties. Ordinarily, he observed, these are "dead weight obligations" that the
possession did not want to assume. Under current law, this type of obligation would not be
executory contract and thus it cannot be assumed. Judge Beatty stated that a debtor should be
assume any contract whether or not it was executory. Mr. Broude observed that some courts hold
a warranty claim constituted an executory contract based on the condition that the claimant must
somehow notify the manufacturer of the warranty breach. Professor Westbrook agreed and noted
these courts "make up something in order to make it work."
Professor Resnick asked why warranty claims could not be treated as a separate class in a
reorganization instead of under the assumption and rejection provisions of Section 365. Mr.
responded by noting that assumption is a method of disenfranchisement and that it would be very
difficult to identify the members of any such class of warranty claimants. Professor Resnick said
where such claims were unimpaired the plan would so provide.
Mr. Sigal said that Professor Westbrook's analysis was "very good and very
given the likelihood that bankruptcies over the next 20 years would be "heavily laden"
contracts as their main assets. He also characterized the recommended change of terminology as
"good." Mr. Sigal then described a situation where there was a debtor-guarantor that
the holding company of a non-debtor operating company to illustrate the need for flexibility.
Professor Westbrook's concept, the debtor would have the option, but would not be required to
In response to Commissioner Jones' question as to whether his proposal would alter the rights
the parties would have under state law, Professor Westbrook said that the thrust of the proposal
be to return the parties back to where they were under state law, subject to the fact that the
would be paid in "little tiny bankruptcy dollars" and that ordinarily specific
was not available against the trustee. Mr. Sigal added that there were three parts to this system:
election to perform, an election to breach, and an election to modify with court approval.
Westbrook clarified that his proposal with regard to the first two parts was very much oriented to
applying state law.
Observing that rejection was fundamentally a bankruptcy right that may not exist under state
Judge Beatty questioned whether it would be better to adopt a more sensible result as a matter of
federal law, rather than state law. Otherwise, she said that there will be bankruptcy judges from
different states who would have to see "what the handwriting on the wall is in their
Professor Westbrook responded that these matters had to operate on the basis of state law with
those modifications that were appropriate for a financially distressed or liquidating debtor. Judge
said that a federal system would prevent the states from defeating the effect of bankruptcy law.
While not agreeing that rejection was a bankruptcy-specific remedy, Mr. Broude asked
Westbrook whether the property rights referred to in his proposal were state-defined or based on
overriding federal definition of property rights. Professor Westbrook observed that under the
Bankruptcy Code there was always the problem of whether or not property was defined
under state law or pursuant to some federal concept. This issue was, he said, under the second
his proposal, namely, that Section 365 cannot be used to avoid a property interest that existed
non-bankruptcy laws. He thought that non-bankruptcy laws to a "large extent" should
define property rights.
Speaking on behalf of the National Bankruptcy Conference, Mr. Hahn said that the
agreed with this aspect of Professor Westbrook's proposal, that is, rejection should not be viewed
an avoiding power. Nevertheless, he noted there were several concerns about this result.
Jones asked why state law consequences should not be preserved in bankruptcy. With regard to
specific performance, Professor Warren explained that this would permit one party to obtain all
value and leave nothing or nominal value for the other parties. Professor Resnick added that
performance had expanded as a remedy that went beyond just having a property interest in
property. Mr. Hahn explained that the Conference resolved this issue by not deeming specific
performance to be a property interest. Professor Warren recharacterized this statement to mean
whether or not a party is entitled to specific performance would be a bankruptcy question, not a
Mr. Broude said that he would like to consider "more deeply" the choice between
federal and state law and the best interest of the estate together with constitutional principles
by executory contracts. Professor Westbrook noted that the issue was whether or not specific
performance under certain circumstances should be recognized under the bankruptcy laws.
Mr. Hahn questioned whether the adoption of the first two prongs of Professor Westbrook's
proposal would eliminate the special interest provisions under Section 365. Some of these
he observed, dealt with specific problems that general concepts do not address such as the ability
offset damages for rejection breaches. Judge Beatty agreed with Mr. Hahn that some of these
exceptions were necessary.
To set up the issues presented by the third prong of Professor Westbrook's proposal, Mr.
described a hypothetical where a bank financed a manufacturer's acquisition of goods in exchange
an assignment of the contract. Thereafter, the manufacturer filed for bankruptcy relief. He then
questioned whether this aspect of the proposal was really an election to perform and an election
breach system with two options or whether it was an election to modify a system that would
change state law.
With regard to present law, Professor Westbrook observed that the bankruptcy courts have
frequently found ways to give landlords and others in executory contract situations only use and
results. Instead, he proposed that these parties should receive the contract rate or reasonable
compensation as it may be difficult to determine the contract rate.
Judge Beatty disagreed with Professor Westbrook's statement regarding the bankruptcy
decisions on this matter. She said that generally there was not much of a problem with non-real
Referring to Commissioner Jones' concerns regarding policy implications, Mr. Sigal asked
the Commission wanted to recommend a system mandating that state law controlled and
modification of a contract absent commercial and reasonableness standards under the Uniform
Commercial Code. On the other hand, he asked whether the Commission wanted to recognize an
overriding federal policy that would permit some bending of contract rights to promote
Mr. Broude commented that the purpose of postponing the election to perform was not to
the debtor to play the market, but to determine if the case would be successful. He then discussed
hypothetical where the non-debtor had an obligation to manufacture a special purpose piece of
equipment for the debtor that would have taken four years to build, but the debtor filed for
relief two years after the agreement was made. He suggested that the non-debtor party was
some adequate protection.
Professor Westbrook noted that as it appeared that everyone agreed that there was no
with regard to the protection of the non-debtor party during this interim period, an empirical
was presented. He said that if he could be persuaded that the current law was ideal, then there
be no reason to change it and, thus, he would withdraw the third component of his proposal. On
other hand, he noted that he had heard an "enormous amount of complaint" that the
were not compensating the non-debtor party during this period. He said that the third prong of his
proposal was concerned about fairness to the non-debtor party.
Commissioner Jones observed that there had been letters written to the Commission
concern about non-debtor parties being held in abeyance without knowing whether or not they
administrative claim and whether the debtor will have the money to pay the administrative claim.
Broude said that the debtor's ability to pay at the end of a case presented a different issue.
Professor Warren asked the panelists to address certain other aspects of this proposal,
provisions for establishing a standard by which the non-debtor would be paid and providing tools
enforce this right. She then asked them to respond as to whether this presented a problem that had
be solved. Judge Beatty said that the answer depended on what bankruptcy judges did. While
"put blinders on" and characterized it as an issue under Section 365, others
as an issue under Section 362, she commented.
Professor Resnick observed that two problems were presented by this Section. The first was
problem of delay. The vehicle available to the non-debtor party seeking to address this problem
ask the court under Federal Rule of Bankruptcy Procedure 6006 to set a deadline for assuming or
rejecting. The other problem was how the non-debtor party who fully performed should be
compensated, that is, by immediate full compensation or as an administrative expense.
Professor Tabb asked whether or not there should be a prerequisite to having administrative
expense treatment, such as the requirement to demonstrate that there was a benefit to the estate.
Alternatively, he asked whether there should be a presumptive rule as in Section 365(d)(3).
Responding to Professor Warren's comment regarding the protections currently available to
non-debtor parties, Professor Westbrook said that these remedies were very limited. He
that they should be more flexible and provide for reasonable compensation during the interim. Mr.
observed that Professor Westbrook's concept was "very good" for two reasons. First,
was more flexible. Second, it was more promotive of a reorganization. The real issue, he said, was
quantum of fair protection.
While saying that he "kind of love[d]" the first two prongs of Professor
proposal, Mr. Broude did not favor the last prong at all and agreed with Professor Resnick that
present law adequately protected the non-debtor party. Commissioner Jones suggested that a
presumption could be created that if the debtor had an option to assume or reject, then the other
to the contract should be entitled to be paid at the contract rate.
Upon the conclusion of this colloquy, the session on Section 365 ended.
STATUS REPORT ON TRANSNATIONAL INSOLVENCY
Professor Westbrook, United States Reporter for the American Law Institute Project, said
Project was ongoing, but that the more immediate concern was the UNCITRAL Project. After
providing an update on UNCITRAL, he projected that a draft model law would be available in a
"couple of weeks" and that final approval of the text was expected by May.
STATUS REPORT ON FUTURE CLAIMS
Professor Warren reviewed the Commission's progress with regard to future claims and
that the concept under consideration would treat future claims as a subset of claims. It would
future claim as one based on prepetition acts and that these acts would be sufficient to establish
She noted that the Working Group had focused on such factors as the amount and kind of
that should apply so that it did not become a "monster" within the system that
"gobbles up unknown and unexpected events." Factors under consideration in this
included the ability to identify claims with reasonable certainty and to estimate them. Other
include issues pertaining to materiality, opt out provisions, and a future claims representative.
With regard to the concept of a future claims representative, Professor Warren said that the
Working Group was examining the appropriate standard that should apply to this professional.
Working Group also was considering the concept of a channeling injunction as a means to deal
Commissioner Shepard said that he would "absolutely insist" that the concerns
expressed by Francis Allegra of the Department of Justice be addressed with regard to discharging
liability of manufacturers. Professor Warren responded that the concept under consideration
permit a debtor in possession to continue to pollute postpetition.
After reviewing the meeting agenda for the following day, Chair Williamson recessed the
MEETING - FRIDAY, FEBRUARY 21, 1997
United States Senate Dirksen Office Building
Chair Williamson reviewed the day's meeting agenda and made several administrative
announcements. These included the announcement that the Commission would be holding a
meeting in Des Moines on April 1 that would focus on chapter 12, consumer bankruptcy and
business bankruptcy issues. Upon the conclusion of his introductory remarks, the next session
CONSUMER DEBTOR REPRESENTATIVES PANEL
Norma Hammes, President of the National Association of Consumer Bankruptcy Attorneys
("NACBA"), began her comments by noting that NACBA had closely followed the
Commission's work and that it had submitted a "modest" list of proposals that would
improve the bankruptcy system.
Ms. Hammes then observed that the Commission appeared to be more concerned with
creditor-driven proposals such as limiting repeat filings, state exemptions, the dischargeability of
and other procedural matters. On the other hand, she complimented the Commission for
obtain "some excellent" statistical information regarding the cause of the current
of consumer bankruptcy filings. She cited, for example, the unrebutted data supplied by the
Congressional Budget Office and Professor Lawrence Ausubel that clearly proved that the high
rate was directly related to improvident, but highly lucrative lending practices by the consumer
industry. She was also encouraged by the Consumer Bankruptcy Working Group's discussion of
prior day on how some creditors abuse the bankruptcy system by improperly obtaining and
invalid reaffirmation agreements, and by filing baseless nondischargeability actions to obtain a
judgment or coerce nuisance settlements.
While acknowledging that there were some instances where debtors abused the system, Ms.
Hammes said that the "vast majority" of consumer debtors were "conscientious, hard working,
Americans." She noted that NACBA would help formulate "precise corrections" to address these
abuses, without imposing additional burdens on honest debtors. In addition, NACBA believed
bankruptcy system would be greatly improved if the benefits available to chapter 13 debtors were
enhanced, she reported. Under the present law, there were significant disincentives to debtors to
relief under chapter 13. Ms. Hammes cited, for example, the federal law that permits credit
report both chapter 7 and chapter 13 cases for ten years. In addition, she cited the erosion of the
chapter 13 super discharge, particularly with regard to student loans. Under current law, chapter
debtors emerged from bankruptcy "still saddled with unmanageable student loans" and they had
greater ability to repay because significant debts were not discharged.
Creditors also benefitted from chapter 13, Ms. Hammes stated. She noted that creditors
that the dividends paid under chapter 13 "can be substantial." In addition, she said that the
also benefitted from chapter 13 as these debtors paid their most recent three years of taxes in full
returned to the "tax paying system." As a result, "[h]undreds of millions of dollars are paid to the
and state taxing agencies."
Ms. Hammes said that NACBA, in prior correspondence to the Commission, had suggested
other ways of improving chapter 13. These recommendations included giving chapter 13 debtors
right to separately classify and pay in full nondischargeable debts, the elimination of any
that debtors make a minimum payment to unsecured creditors to satisfy the good faith
permit the discharge of otherwise nondischargeable debts if paid over a period of time in excess of
three years, to treat rent-to-own contracts as installment purchase agreements, and to provide for
default discharge where the debtor met the best interest of creditors test, unless a creditor sought
dismissal or conversion of the case to one under chapter 7.
Gary Klein, the next presenter, appeared on behalf of the National Consumer Law Center, a
nonprofit advocate for low and moderate income consumers. He began his remarks by noting
was heartened by the recognition of creditors, as noted during sessions before the Commission
American Bankruptcy Institute, that the majority of debtors were "people who simply can't make
meet and need a fresh start."
The "central challenge" for the Commission, he said, would be to preserve and perhaps
the core of the bankruptcy system for honest debtors. To achieve this goal, Mr. Klein
that the Commission measure any reform by two tests. First, will the reform undermine the
of the system for debtors experiencing "real financial problems?" Second, will the reform increase
cost of the bankruptcy system for people who cannot afford it? Three types of costs that he cited
user fees, such as case filing fees; administrative costs, that would be passed on to all debtors in
bankruptcy system; and legal fees, resulting from the increased need for debtors to litigate. In
he cited 11 U.S.C. ' 523(a)(2)(A), which was being used for leverage by creditors as low and
moderate income debtors could not afford to pay for legal representation.
Two other areas required reform, according to Mr. Klein. First, he recommended that further
erosion of the debtor's fresh start be stemmed. Second, he asked that the success rate of chapter
cases be enhanced. With regard to the first area, he said that exceptions to discharge should be
and that the current exceptions should be reviewed to make sure that they were necessary. He
suggested that the Commission search for ways to control reaffirmation abuses. The best way to
effectuate this reform, he noted, would be to eliminate reaffirmations entirely. If they were to be
allowed, however, he suggested that they be limited to a narrow class of instances where debtors
received some benefit for reaffirming these debts.
Other areas of reform discussed by Mr. Klein included the following. He recommended that
to enhance the discharge injunction and to prevent discrimination against debtors who file for
bankruptcy be explored such as through the establishment of statutory damages and/or the award
attorney fees for lawyers who handle discharge injunction violations. To protect the debtor's fresh
Mr. Klein asked that the Commission examine methods to bring "baseless credit card
actions under control."
With regard to chapter 13, Mr. Klein said that the Commission should address how the
rate of chapter 13 cases could be improved. Among the possible solutions that he suggested was
ensuring that a trustee's compensation was no greater than the amount necessary to administer the
trustee's office. He recommended that strip down of all non-purchase money security interests be
permitted. In addition, there should be a provision in the Bankruptcy Code that would encourage
consensual loan modifications. He concluded his opening remarks by recommending that
policy ought to bring high rate lending under control because it would generate more defaults and,
therefore, more failures and a greater need for bankruptcy.
Chair Williamson asked the panelists whether they agreed or disagreed that there should be
to encourage debtors to file for relief under chapter 13 as opposed to chapter 7 as a matter of
policy. Ms. Hammes responded "[a]bsolutely" and explained that this was one of NACBA's major
goals. She noted that debtors would choose chapter 13 if there was "some reason for them to take
option." Mr. Klein said that the key word was "encourage" as problems would arise if debtors
forced to file under chapter 13. A forced system would create a "new federal collection agency
people to pay debts."
Turning to the Commission's tentative proposal on uniform federal exemptions, Chair
asked the panelists for their comments. Ms. Hammes observed that "politically it's a touchy issue,"
noted that it was important to have a reasonable minimum amount of personal property and
exemption provisions. She agreed that a floor with regard to state exemptions would be "very
advantageous to the system." Mr. Klein stated that he was in favor of the "floors and ceilings
Commissioner Jones observed that there was a lack of correlation between the level of
and the number of bankruptcy filings. Ms. Hammes responded that there was a correlation
type of exemptions available and the type of bankruptcy relief that the debtor needed. Noting her
disagreement with this statement, Commissioner Jones cited Texas as a state with an unlimited
homestead exemption, which should encourage debtors to file for chapter 7 relief, but that it, in
not. Professor Warren agreed that statistically one could not demonstrate a correlation either
the filing rate and available exemptions or between the choice of chapter and exemptions. Mr.
observed that while the correlation may not be apparent in the filing rates, it may be present in the
outcomes of these bankruptcy cases. Professor Warren responded that if debtors lost property,
"certainly" would relate to the effectiveness of their fresh start.
Citing Ms. Hammes' comments regarding student loans, Commissioner Hartley asked her to
address the issue of whether debtors should be held responsible for voluntarily entering into
agreements. Objecting to the implication that her clients were not responsible, Ms. Hammes said
on the contrary, they were "very responsible" and often struggled with their debts for a
period of time before seeking relief. Mr. Klein noted that part of the response to Commissioner
Hartley's question involved consideration of the financial condition of the debtors in the
system. It was "almost always clear," he said, that these debtors had very significant financial
and lacked the ability to repay their debts outside of bankruptcy.
Commissioner Hartley then asked the panelists to define serial filings. Mr. Klein said that
yet to be a demonstration that serial filings represented a significant portion of all bankruptcy
Asking Mr. Klein to "[f]orget the word significant," Commissioner Hartley said that there was a
problem. Ms. Hammes disagreed. Commissioner Shepard cited studies in Oregon demonstrating
there was a "significant problem" with serial filings. Mr. Klein responded that solutions to the
of abusive filings already existed under the Bankruptcy Code. Commissioner Shepard said that
solutions had not worked. Disagreeing, Mr. Klein said that debtors were constantly "being tossed
of the system" based on lack of good faith, substantial abuse, relief from the automatic stay,
dismissal, denial of discharge, and the imposition of Rule 11 and criminal sanctions. Noting his
agreement with Mr. Klein, Commissioner Ginsberg said that serial filings were a problem, but not
serious problem in most of the country.
Mr. Klein suggested that the Commission find some narrowly tailored solutions. He noted,
example, chapter 13 for some debtors did not work initially, but that subsequently these debtors
experienced changed circumstances and needed to refile for chapter 13 relief. Commissioner Jones
queried why this could not be addressed by modifying the chapter 13 plan. Mr. Klein answered
this solution would not be sufficient if the debtor had a significant financial problem.
Jones asked whether this reflected "a lot of real bad planning" in the drafting of the chapter 13
Mr. Klein responded that "for the most part these are unexpected life events." Ms. Hammes
and noted that these events included illnesses or periods of unemployment. In addition, she noted
many of these debtors were marginal in many respects. Commissioner Jones commented that
"[b]asically society ought to pay for people who are too dumb to manage their affairs over and
and over again." Ms. Hammes said it was not a "matter of dumbness" and that most creditors
agree that the serial filing problem was "fairly small." Commissioner Jones noted that some
have said that up to 20 percent of their chapter 13 caseloads consisted of refiled cases. Ms.
disagreed with that number. Mr. Klein said he had numerous clients whose cases were successful
the "second try."
Chair Williamson brought the discussion to a close by asking the panelists to identify the one
of the current bankruptcy system they would change. Ms. Hammes recommended that the
for chapter 13 should be increased. Mr. Klein said that the effectiveness of the fresh start should
preserved and enhanced. Thereupon the meeting recessed to allow the chapter 11, Government
Jurisdiction and Procedure Working Groups to meet.
PLENARY SESSION: DECISIONS ON PENDING PROPOSALS AND
CONSUMER BANKRUPTCY WORKING GROUP PROPOSAL NUMBER 1-
UNIFORM FEDERAL EXEMPTIONS
Noting that this proposal was "still a work in progress," Professor Warren explained that the
Commission had recommended that there be uniform federal exemptions, but this
not adopted at the last minute as part of the Bankruptcy Reform Act of 1978. She noted that
exemptions presented the "single biggest source of non-uniformity" in consumer bankruptcy
country. She then acknowledged that the Working Group's deliberations benefitted from the
Professor Lawrence Ponoroff of Tulane University and Judge William Brown.
Professor Warren then explained that the proposal would set a floor of $40,000 and a cap of
$100,000 for a homestead exemption. It would be left to the states to determine, however, what
constituted a homestead. In addition, she observed that the proposed exemption scheme would be
available on a household basis and did not "double up" for married debtors.
As for medical devices and health aids, an unlimited exemption would be available under the
proposal. For retirement plans, the current exception for ERISA-qualified plans from the
property of the estate would be retained and certain plans that did not qualify would be exempt
this proposal. Rather than placing a dollar cap on this exemption, the intent, she explained, would
examine contributions within a period preceding the bankruptcy filing to prevent a debtor from
a great deal of money in something denominated a retirement plan." Professor Warren noted that
debtor under this proposal would be able to retain up to $25,000 in value in any form. In addition,
would be inflation adjustments, but no opt out provisions. After explaining the general contours
proposal, she noted that it may require some adjustment for involuntary petitions.
Upon the conclusion of Professor Warren's overview of Consumer Bankruptcy Working
No. 1 - Uniform Federal Exemptions, Commissioner Jones expressed interest in hearing from the
bankruptcy community. Chair Williamson noted that the proposal was very specific and that it
an important policy matter.
Commissioner Hartley observed that the dollar amount of the homestead exemption would be
"lightning rod." Chair Williamson noted that the current homestead exemption
ranged from a low of zero to a high of limitless.
Commissioner Shepard said that there were several aspects of the proposal that concerned
"great deal." First, he was concerned about a dollar cap, particularly as applied to
farmers. Second, he said that the proposal as it applied to medical devices was
"meaningless" as he was not aware of any practices by creditors to levy on
"pacemakers and heart lung machines." Third, he cited the proposal's treatment of
retirement plans and that it would enable debtors to protect "substantial amounts of
from their creditors. Fourth, he was concerned about eve of bankruptcy asset planning.
With regard to Commissioner Shepard's fourth point, Commissioner Jones explained that the
proposal was intended to prevent these practices. Professor Warren agreed. Nevertheless,
Commissioner Shepard explained that the $25,000 limit was "meaningless" for
otherwise failed to take account of geographic differences.
Regarding Commissioner Shepard's concerns as to the proposal's retirement plan provisions,
Commissioner Ceccotti responded that the proposal would protect those retirement plans that
code or ERISA limitations. On the other hand, she suggested that the Working Group review the
proposal with regard to his concerns pertaining to farmers. Professor Warren concurred that
people plan for retirement in different ways.
Commissioner Alix asked Professor Warren to explicate the ramifications of involuntary
bankruptcy under the proposal. In particular, he expressed concern whether it would
state level bankruptcy system." Professor Warren explained that the "key"
a bankruptcy system is the discharge of debt and refinancing of secured obligations.
Then Commissioner Gose asked whether the proposal had any provision for tools of the
Professor Warren said that there was no separate category for this type of exemption, although
current law the exemption was $1,500. Commissioner Shepard was concerned how this would
to farm debtors. Commissioner Alix observed that an exemption for tools of the trade presented a
"slippery slope" as applied to farmers.
Commissioner Butler recalled that while federal exemptions were considered in connection
1978 legislation, the opt out provisions prevailed. He said that local representatives, particularly
members of the House of Representatives, were not satisfied with the uniformity aspect of federal
exemptions. He noted that the homestead exemption amount as set forth in the proposal may be
high, especially when combined with the $25,000 "wild card" exemption. He was not sure how
proposal would apply to tenancies by the entireties. In southern California, Commissioner
that $125,000 would not purchase a "shack."
In closing the discussion on this proposal, Chair Williamson said that the "single most
important factor" in this proposal was the integrity of the federal bankruptcy system and the
appearance of fairness.
JURISDICTION & PROCEDURE WORKING GROUP PROPOSAL NUMBER
ARTICLE III TRANSITION
Professor King prefaced his comments on this proposal by noting the contributions of Judge
Conrad Cyr of the 1st Circuit Court of Appeals, U.S.
Bankruptcy Judge Robert Martin, U.S. Bankruptcy Judge Mary Davies Scott, and former U.S.
Bankruptcy Judge Ralph Mabey.
The proposal, Professor King noted, addressed two issues: personnel and the jurisdictional
procedural requirements of title 28 of the United States Code. Beginning with the issue of
the proposal would permit sitting Article I bankruptcy judges to finish the remainder of their
terms. On the basis of attrition, Article III judges would be appointed. The appointments would
made by the President with the advice and consent of the Senate. The proposal would not affect
present retirement provisions for those bankruptcy judges who complete a 14-year term.
With regard to the jurisdictional and procedural aspects of the proposal, Professor King
that the constitutional problems that presently existed would not be affected by it and that, for
the dichotomy between core and non-core proceedings would remain in effect. As Article III
bankruptcy judges were appointed in the districts, they would, in effect, displace the need for
Upon the conclusion of Professor King's explication of the proposal, the Commissioners
their observations. While noting that she had not changed her view on the issue of whether
judges should be accorded Article III status, Commissioner Jones said that the proposal was
"reasonable." Commissioner Butler said that he was "comfortable" with
proposal. Commissioner Hartley, agreeing with Commissioner Jones, said that the proposal was
reasonable. Commissioner Alix observed that the proposal was very "pragmatic."
JURISDICTION & PROCEDURE WORKING GROUP PROPOSAL NUMBER
- AFFILIATE VENUE
Professor King explained that this proposal pertained to the affiliate venue provisions of 28
' 1408(2). Citing the Eastern Airlines case as an example, he noted that Working Group
deemed the practice to be "unseemly," but also recognized that there should be some
The proposal, according to Professor King, would permit affiliated companies to follow a
company into a particular venue. On the other hand, the proposal would not permit an affiliate to
the district of another affiliate, if there was no independent basis for the subsidiary to file in that
The bankruptcy court would retain the authority to transfer venue for those situations where it
serve the interest of justice and the parties' convenience.
The Commissioners then voiced their comments. Commissioner Jones said that the proposal
"good idea." Expressing support for the proposal, Commissioner Hartley noted that
brought closure to an important issue.
SMALL BUSINESS, PARTNERSHIPS AND SINGLE ASSET REAL ESTATE
WORKING GROUP PROPOSAL NUMBER 1 - SMALL BUSINESS
Stephen Case introduced the next proposal, which he explained was embodied in a
dated February 14 and a supplemental one dated February 20. He then reviewed the "four
pillars" supporting this proposal.
First, he cited the high degree of "creditor apathy" in smaller chapter 11 cases.
Second, chapter 11 was generally not "terribly successful" based on the confirmation
of these cases although there were certain districts such as the Eastern District of North Carolina
the confirmation rate was 62.9 percent. He also cited a study by Deputy Counsel Susan
Jensen-Conklin that found that chapter 11 debtors had only a 6.5 percent chance of consummating
reorganizing. Third, he said that there was data indicating that nearly two-thirds of chapter 11
confirmations did not occur until two years following the date of filing. Fourth, there was
measure of abuse" by unsupervised small chapter 11 debtors, he said.
The proposal, Mr. Case explained, would define small business debtors and put them on a
track. In addition, the proposal would require uniform financial reporting rules and enlarge the
for conversion and dismissal under 11 U.S.C. ' 1112. Further, the proposal would expand the
responsibilities of the United States Trustee and Bankruptcy Administrators with regard to the
monitoring of these cases. Other technical aspects of the proposal would require shorter time
the filing of schedules and impose the requirement that the debtor in possession maintain
bank accounts for withholding deposits and sales taxes collected.
Time frames under the proposal would require the filing of a reorganization plan within 90
the filing, followed by confirmation to be effected within 120 days from the petition date. The
"safety valve" under the proposal would be in the form of an extension hearing
the debtor who, in turn, would have the burden of proof to show by a preponderance of the
that it would likely confirm a plan within a reasonable time.
Under the proposal, Mr. Case added, the automatic stay would not be automatically
subsequently refiled chapter 11 cases. Rather, these debtors would have to seek court
With regard to the proposal's definition of "small business," Mr. Case explained that
various choices were considered and the current version of the proposal relied on a gross revenue
Upon the conclusion of Mr. Case's explication of the proposal, Commissioner Hartley
that it provided a "reasonable approach" to a recognized problem. Commissioner
agreed. Commissioner Shepard acknowledged that the primary focus of the proposal was to rid
bankruptcy system of "dead on arrival" cases.
Chair Williamson noted that the Commission had the invaluable assistance of a very wide
section of practitioners, judges, United States Trustees, private trustees and others involved in the
chapter 11 process. In particular, he cited the contribution of United States Bankruptcy Judge
Carlson. He then suggested that the Commissioners first address their comments to discussing the
positive aspects of the proposal.
Commissioner Jones said that she enthusiastically supported 90 percent of this proposal.
Commissioner Ceccotti noted that she endorsed the proposal's premise that the rules and
facilitating large business reorganizations may not work as well for small business cases. She also
supported that aspect of the proposal that would reduce unnecessary delays and the attendant
Further, she favored those provisions of the proposal that left the details of oversight to the
administrative and judicial structures rather than assigning them to third parties. In addition,
Commissioner Ceccotti supported the simplification of the disclosure statement process and
encouraged the Working Group to identify additional efficiencies that would streamline the
reduce its cost. Commissioners Butler and Ginsberg concurred with Commissioner Ceccotti's
comments. Commissioner Alix agreed that many have cited the prevalence of languishing small
cases and the need to address this problem.
As to the negative aspects of the proposal, Commissioner Ceccotti said that the $10 million
definitional limit was "too big." She suggested that the test should be one that was
susceptible of application. In addition, she cited the comments of United States Bankruptcy Judge
Hill Fenning that questioned the apparent rigidity of the proposal's deadlines as well as the
of other bankruptcy judges. Commissioner Ceccotti said that much of the proposal's provisions
already codified in the Bankruptcy Code. On the other hand, she supported those provisions that
institute additional guidelines under 11 U.S.C. ' 1112.
Among the other concerns that Commissioner Ceccotti discussed was whether a
standard" was being created for business cases with regard to the proposal's financial
requirements. She suggested that the Working Group review Federal Rule of Bankruptcy
2015. She expressed concern that these requirements would overly burden a small business
She concluded her comments by questioning some of the proposal's phraseology and how a
bankruptcy judge would apply its standards.
Commissioner Alix said that he favored the gross revenue concept but suggested that it be
under GAAP, rather than under the Internal Revenue Code. As to the $10 million cap, he
that the Working Group utilize the services of the United States Trustee Offices or the
Office of the United States Courts to obtain some data to support a Pareto analysis. Once this
determined, he advised that it should be indexed to an inflation rate.
Thereafter, Commissioner Alix questioned the proposal's provisions regarding debtors who
more than 30 days delinquent on filing any federal annual income tax return. He described this
as "overreaching, overbearing, and unacceptable."
As to that aspect of the proposal requiring the promulgation of uniform national reporting
for small business debtors, Commissioner Alix observed that as troubled companies had bad
and records, this requirement was unreasonable. Turning to the proposal's provisions with regard
failure to pay administrative claims, he had a "real problem" with this as often these
consisted of professional fees. Under current law, he observed, the failure to pay administrative
expenses already constituted cause for relief. He also expressed concern about rigid filing dates.
Agreeing that there may be some questions about the wording of this aspect of the proposal,
Commissioner Jones noted, however, that in practice the United States Trustee would not seek
immediately because a debtor missed a deadline as there would be some prosecutorial discretion.
Nevertheless, the proposal addressed those cases where the principal reaped the benefits of the
business to the detriment of the creditors, she said. Noting that he agreed in principal with
Commissioner Jones, Commissioner Alix said that his concern was about balance, that is, dealing
the four factors identified by Mr. Case against the individual rights of debtors especially given the
environment from which they emanated.
In addition, Commissioner Alix questioned who should appear on behalf of the debtor at the
various mandatory hearings and interviews fixed by the proposal. Commissioner Ginsberg, in
to this comment, cited Federal Rule of Bankruptcy Procedure 9015, which permits the court to
designate a person who must act on behalf of the debtor. Commissioner Alix noted that one could
assume that this person would be the owner, as owners did not always run businesses.
Ginsberg said that the debtor could be required to identify this party in the petition. Commissioner
concurred with this suggestion.
As to that aspect of the proposal requiring initial interviews with the debtor's
owners and top operating managers," Commissioner Alix expressed similar concerns. He
that the proposal, in this respect, went "a little too far." He also questioned whether
anyone could ascertain the accuracy of a debtor's books and records. For example, if the debtor
supplied copies of its tax returns, how would one determine whether they complied with the law,
an audit, he asked. And, if the debtor was not in compliance under the proposal, he queried what
would be the next step.
Mr. Case responded that after the United States Trustee or Bankruptcy Administrator moved
relief, the debtor would then be able to establish whether there was a good reason excusing its
noncompliance. Commissioner Alix said this was why the debtor should have the initial burden of
establishing compliance. Nevertheless, he observed that there was a theme throughout the
placing burdens on debtors that no one can monitor.
After the lunch recess, Commissioner Alix continued his critique of the Small Business
He suggested that rather than having the United States Trustee make the assessment, the
party for the debtor should be required to sign a statement that verifies that the debtor's books and
records are being properly maintained and in compliance with United States Trustee Guidelines.
Observing that this alternative was considered by the Working Group, Commissioner Hartley
that he was concerned about whether it would accomplish anything. The current form of the
was drafted in response to an idea originally premised on the concept of an independent examiner
monitoring agent. Commissioner Alix said that the goal can be met if a debtor complies with the
States Trustee Guidelines without having someone come in to make a separate assessment. As no
can tell if a debtor is in compliance with the tax laws, then it became a "losing job," he
While noting that some of the proposal's language may require some "tweaking"
regard, Commissioner Shepard explained that the goal of the proposal was to establish
orders" for small business debtors and to provide the tools for the United States Trustee to
accomplish their work.
Again, Commissioner Alix recommended that the burden should be placed on the debtor's
responsible party to supply copies of filed tax returns to the United States Trustee. Saying that
a "very legitimate point," Commissioner Hartley suggested that this aspect of the
be reviewed further.
Addressing the proposal's provisions regarding the use of "reasonable discretion"
the United States Trustee or Bankruptcy Administrator, Commissioner Alix expressed concern
should instead be the responsibility of the bankruptcy judge. Mr. Case said that the February 20
memorandum recognized this concern. Commissioner Hartley also explained that the court would
the end decide the issue. Commissioner Alix suggested that the language be refined so that it did
appear that the bankruptcy judge was being instructed to follow whatever the United States
Bankruptcy Administrator recommended.
The next provision of the proposal that Commissioner Alix addressed concerned the
to deposit taxes withheld or collected by the debtor. Commissioner Shepard said that there had
"considerable testimony" that debtors use these funds to survive even though these
were not property of the estate. Expressing disagreement with this concept, Commissioner Alix
that companies outside of bankruptcy typically have access to these funds until they were required
deposited. The proposal, as presently drafted, placed a heavier burden on the debtor, he observed.
In response to Commissioner Gose's request for clarification, Commissioner Alix explained
was not opposed to the concept of requiring these funds to be placed in an escrow account when
are due, but he objected to accelerating this process. Commissioner Shepard asked how could one
assure that these funds would not be consumed by corporate officer salaries, professional fees and
other expenditures. Commissioner Alix said one could not and that the proposal was just
carve-out for one creditor, even though there were other creditors, such as employees and
professionals, extending administrative funds who risked nonpayment.
Turning to that component of the proposal requiring the debtor to file missing tax returns,
Commissioner Alix said that this was an unreasonable demand for small business debtors as they
generally lacked the ability to comply. On the other hand, he favored that aspect of the proposal
would allow greater flexibility for disclosure statements and create standard forms for disclosure
statements and plans. As approximately 90 percent of a small business debtor's creditors had
less than $500, it did not "make a lot of sense to have the full disclosure statement"
these cases. He recommended that an expedited hearing and shortened notice apply to those
who use a streamlined form of the disclosure statement and plan to provide an incentive.
Commissioner Alix then discussed the 90-day period for filing plans. He observed that many
businesses "have real seasonality" to them, especially retailers. Accordingly, the time
may leave a debtor in a "hopeless situation." He suggested that there should be
"some balancing language" included in the proposal. Mr. Case responded that the
provides for those instances by requiring the debtor to come forward with evidence to prove that
more likely than not that the debtor, if granted an extension, will confirm a plan within a
period of time. Nevertheless, Commissioner Alix noted that as most small businesses got into
after a period of many years, it was unlikely they could get out of trouble in just 90 days. He
that ten to 20 percent of the cases would require an extension of this time period.
Mr. Case explained that the theory behind the proposal was to prevent a debtor from reaping
benefit of the automatic stay forever. Rather, the debtor should be required to come forward and
establish that it can confirm a plan in exchange for the continued protection. Commissioner Alix,
however, questioned the proposal's language, "evidence that is more likely than not to
plan of reorganization within a reasonable time." He suggested that "in light of the
circumstances" be added. The proposal should not make it hard for debtors to reorganize,
Commissioner Alix then discussed other components of the proposal. Concerning that aspect
the proposal that would require scheduling conferences, Commissioner Alix generally was not
to this requirement. As to its provisions regarding serial filings, Commissioner Alix noted that the
bankruptcy judge who was assigned the original case would be in the best position to assess the
subsequently filed case.
At the conclusion of Commissioner Alix's comments, Commissioner Ginsberg noted that he
virtually agreed with all of his observations. In addition, he had several other concerns. First, he
that the proposal had a "strident note" that debtors are "tax cheats." He
suggested that a different tone be used. Second, he stated that the proposal "reads like a tax
collector's wish list." Most of the protections afforded by the proposal favor only the
Revenue Service. Third, he questioned the definition's amount and dependence on Section 61 of
Internal Revenue Code. In particular, he was concerned about potential disputes developing over
definition's application given the fact that Secti