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News Room


Tuesday and Wednesday, December 17-18, 1996
United States House of Representatives Rayburn Office Building
Washington, D.C.

Approved: February 20, 1997
Prepared by: Susan Jensen-Conklin
Deputy Counsel


United States House of Representatives Rayburn Office Building
Washington, D.C.


Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Jay Alix
M. Caldwell Butler
Babette A. Ceccotti
John A. Gose
Jeffery J. Hartley
Honorable Edith Hollan Jones
James I. Shepard

Commission Advisors and Staff Present:
Professor Elizabeth Warren, Reporter/Senior Advisor
Professor Lawrence P. King, Senior Advisor
Stephen H. Case, Senior Advisor
Susan Jensen-Conklin, Deputy Counsel
Jennifer C. Frasier, Staff Attorney
Elizabeth I. Holland, Staff Attorney
Melissa B. Jacoby, Staff Attorney
George H. Singer, Volunteer Staff Attorney
Judith K. Benderson, Legislative Counsel
Carmelita Pratt, Administrative Officer
Joseph Kuehne, Administrative Assistant

Public Attending:

Over the course of the two-day meeting, approximately 250 people attended, including representatives from the American Bankers Association, American Bankruptcy Institute, American Bar Association, Consumer Bankers Association, HALT, Independent Bankers Association of America, International Council of Shopping Centers, International Credit Association, National Bankruptcy Conference, National Consumer Law Center, National Association of Federal Credit Unions, National Multi Housing Council/National Apartment Association, and the National Federation for Consumer Credit, among others. Federal agencies such as the Administrative Office of the United States Courts, the Congressional Budget Office, Congressional Research Services, Executive Office for United States Trustees, Federal Reserve Board, United States Department of Justice, the Securities and Exchange Commission, and the Internal Revenue Service were represented. Congressional staffers were present as well as members of the federal judiciary, professors of law, chapter 7 and chapter 13 trustees. Representatives from state government, credit unions, banking and credit industry, professional and trade associations, private industry, law firms, debtors and the media were also present.


At approximately 8:40 a.m., Chair Williamson commenced the morning session of the meeting by introducing a series of reports by the Commission staff regarding administrative matters.

Commissioner Gose and Staff Attorney Elizabeth I. Holland provided a brief overview of the Commission's data base project. At the conclusion of their remarks, Chair Williamson noted that the Commission had heard from more than 1,000 people, either in person or by written submission.

Legislative Counsel Judith K. Benderson then gave an update on the Commission's efforts in establishing a web site for posting basic information about the Commission and its future activities. She projected that the web site would be activated after the New Year.

Deputy Counsel Susan Jensen-Conklin reported on the Commission's preliminary efforts with regard to the preparation of its final report. Chair Williamson reminded those gathered at the meeting that the deadline for filing the Commission's final report was October 20, 1997.

The minutes for the September and October 1996 meeting minutes were approved, subject to certain technical corrections.


Upon the conclusion of these administrative matters, Chair Williamson reviewed the meeting agenda. He explained that the consumer creditor panel presentations were "not balanced" as they did not represent the entire perspective of views on consumer bankruptcy. He said that those representing debtors' interests would have an opportunity to make a similar presentation to the Commission in the spring. Chair Williamson noted that consumer bankruptcy was the "single biggest challenge" facing the Commission. He observed that the Administrative Office of the United States Courts had recently reported that approximately 1.1 million consumer bankruptcy cases were filed over the period of September 30, 1995 to September 30, 1996.


The following individuals comprised the first consumer credit panel: Charlie A. Albright, Chief Credit Officer, Household International; Dr. Lawrence Chimerine, Managing Director and Chief Economist at the Economic Strategy Institute; L. Richard Fischer of Morrison & Foerster; William Kosturko, Executive Vice President and General Counsel, People's Bank; Ronald A. Prill, Vice President of Guest Credit, Dayton Hudson Corporation; Professor Ralph Rohner of the Columbus School of Law at the Catholic University of America; and Professor Michael E. Staten, Director of the Credit Resource Center at Purdue University.

Mr. Fischer prefaced his remarks by expressing gratitude on behalf of the National Consumer Bankruptcy Coalition for having the opportunity to make these presentations to the Commission. He then explained that this panel presentation would focus on the "complex and sophisticated process of extending credit to consumers." For example, he noted that pre-approved solicitations for credit cards were made only after a "complicated underwriting process" based on the recipient's credithistory. He also observed that bank credit card debt represented less than ten percent of total consumer debt. He concluded his introductory remarks by stating that credit grantors worked "extremely hard" to ensure that they provided credit only to "credit-worthy consumers" and that they were very successful 97 percent of the time.

Professor Rohner began his presentation by noting that consumer credit grantors did not "operate in a legal vacuum or with unlimited license to do business as they please." He said that consumer credit grantors did business under an extensive framework of regulations and obligations. He then identified six categories.

The first category discussed by Professor Rohner was the obligation to be profitable, which for federally insured depository institutions required an "extensive safety and soundness set of obligations." The second category that he described consisted of the grantor's community responsibilities. He explained that banks and thrifts were subject to "broad sweeping reinvestment requirements." He cited, in particular, the Community Reinvestment Act, which required these entities to serve the credit needs of low and moderate income communities. Professor Rohner described the third category as "respect for customer dignity and integrity," which involved laws against discrimination and restricting the dissemination of customer information. As examples of these laws, he cited the Federal Equal Credit Opportunity Act and Federal Fair Credit Reporting Act. The fourth category, according to Professor Rohner, pertained to the "extensive array" of federal and state laws that require truthfulness in disclosures regarding credit products. The fifth category consisted of those laws that limit collection practices and techniques. The sixth category, according to Professor Rohner, consisted of a body of enforcement structures and sanctions, such as private civil actions.

Chair Williamson asked Professor Rohner whether there were any regulations that impacted on credit card solicitation activities other than truth in advertising rules. Professor Rohner explained that the mailing of a pre-screened solicitation was not subject to "any particular regulation." In response to Commissioner Gose's query, Professor Rohner noted that there was no coordination between consumer credit grantors as a result of the antitrust laws.

The next panelist, Dr. Lawrence Chimerine discussed "broad consumer debt trends" based on a recently completed study. He began his remarks by recalling that within the past two years, various forecasts had predicted that the nation was headed for a recession largely as a result of major consumer retrenchment based on a greatly overextended consumer sector. Nevertheless, he said that these predictions were not actualized for two reasons. First, they were based on inaccurate perceptions about debt and spending in the United States. Second, they were premised on a "misinterpretation" of some of the major statistics used to measure consumer debt levels, particularly debt to income ratios, as they did not take into account major changes that occurred in the nation with regard to the role of debt in the "overall macro economy and the consumer economy." As examples, he mentioned the advent of adjustable rate mortgages, widespread refinancing of mortgages, and the changing role of credit cards.

Dr. Chimerine said that, contrary to popular conception, consumer spending had "grown more slowly in the 1990s than in any other decade since World War II," which he estimated to be only one percent each year on a per capita basis for the first six years of the decade. He stated that the growth in spending essentially matched the growth in income. He explained that spending growth had notexceeded the growth in disposable personal income and that the savings rate had remained basically stable at an average of approximately five percent over the decade. He also stated that the growth in household debt had slowed in the 1990s compared with that of the 1980s. He attributed the rapid growth of the 1980s to mortgage debt, rather than installment loans.

Stating that the debt statistics were "overstated," Dr. Chimerine explained they did not just reflect debt, but account receivables. These statistics included, for example, credit card charges that would be paid within 30 days and that these types of debts accounted for an approximate 20 percent "over-statement" in consumer debt. He also noted that the decline in interest rates had reduced debt servicing costs. He observed that more consumers were using debts to finance asset purchases.

Dr. Chimerine concluded his remarks by noting that the debt to income ratio, even as overstated, had leveled off over the past six months and that "any reading" of the debt statistics suggested that the consumer sector was not over-extended.

Professor Warren asked Dr. Chimerine to explain a statement in his written submission that consumer credit industry delinquency rates had not risen. Dr. Chimerine answered that while delinquency rates for credit card obligations had "clearly" increased, he was not concerned for several reasons. First, he explained that many of these obligations consisted of low balance accounts so that if one measured delinquency rates based on volume of outstandings rather than the percentage of accounts, the numbers were not as high. Second, he said that the increase in credit card delinquency rates partly reflected a substitution factor as consumers were borrowing by using their credit cards rather than resorting to more traditional sources to obtain loans. Third, he said that the lenders were more aggressively extending credit to higher risk groups in recent years.

When asked by Professor Warren if he considered Professor Ausubel's findings that the trend in consumer debt was "very tightly linked" to trends in bankruptcy filing rates, Dr. Chimerine said that the rise in bankruptcies "far, far outstripped" the growth in debt. He also said that most of the studies that he had reviewed concluded that growth in debt was only one of several factors relating to increased bankruptcy filings. As one of these other factors, he cited the impact of corporate downsizing which caused families to be unable to service debt that they could previously service "comfortably."

After requesting Dr. Chimerine to supply the Commission with footnotes that would support certain of his written conclusions, Commissioner Jones requested him to comment on why he stated that bankruptcy was increasingly becoming a first option rather than a last resort as it was intended to be. Dr. Chimerine cited several national trends: the reduced stigma associated with filing for bankruptcy relief, increased marketing by the legal profession, divorce, and medical expenses.

Chair Williamson asked Dr. Chimerine to explain why bankruptcies were increasing during a time when the economy was doing well. Dr. Chimerine said that the present economic expansion was "moderate" and that it was characterized by a widening income and wealth disparity. He also noted the adverse impact of corporate downsizing. He said that the best study on this issue was done by the WEFA Group.

The next panelist was Ronald Prill, Vice President of Guest Credit for the Dayton HudsonCorporation, the nation's fourth largest retailer. Mr. Prill began his remarks by noting that retail credit cards generate small average transactions and that his firm's average monthly card balances ranged between $190 and $350, which was typical for the industry. He then explained how customers obtained credit cards applications from his firm's stores and how they were evaluated. Noting that the review process was rigorous, he detailed the various aspects of this process, including credit scoring models.

In addition to this process, Mr. Prill said that there were two other important components to a retailer's credit card risk management program. These included the authorization of each credit card sale and periodic review of credit lines. Despite these efforts, he said that his firm's losses from consumer bankruptcies had increased in 1996 from 50 to 63 percent over the last year. Overall, bankruptcy losses increased from less than 20 percent to 26 percent of his firm's total losses. He noted that these increases were not unique to his firm.

Commissioner Jones asked whether his company was granting larger credit lines or changed any of its criteria. Mr. Prill said that his firm had tightened its lending criteria. Among the causes for these increased losses, he cited "a shift" in consumer attitude toward bankruptcy.

In response to Commissioner Ceccotti's query, Mr. Prill described how his company utilized credit report information. He noted that one trend that had been observed was that consumers were increasingly using credit cards as payment devices. He mentioned, for example, that a "large share" of his firm’s customers paid their balances in full each month.

Responding to Commissioner Hartley's inquiry, Mr. Prill acknowledged that his firm monitored the predictiveness of its scoring models and made adjustments where appropriate. Mr. Case asked whether Mr. Prill's firm employed methods to identify customers experiencing changed financial circumstances. Mr. Prill said that while his firm did not reverify income, it reviewed customer payment trends. He also said that his firm did not retain its portfolio of receivables, but sold them off and securitized them.

Charles Albright, Chief Credit Officer for Household International, began his presentation by noting that his firm and its competitors engaged in an "exhaustive process" to ensure that credit was offered to customers with the ability to repay and that these credit offers were not indiscriminately made. He noted that his firm "never" sent a credit card to a consumer who had not affirmatively requested one. After explaining his firm’s pre-screening evaluation data, Mr. Albright said that his firm's strategy was to gain a market share and "replace one of the credit cards in the consumer's wallet." Once a customer qualified and received a credit card, he said that his firm continuously monitored how the account performed. Commissioners Jones and Ceccotti queried Mr. Albright concerning his firm's practices regarding interest rates and state usury regulatory statutes.

Commissioner Jones then asked Mr. Albright to address those reported instances where credit was extended to minors and pets. He explained that his firm usually caught these mistakes in the post-application process. Mr. Fischer added that there were two components to the credit scoring process and that there were mistakes made by credit bureaus and by lenders. Nevertheless, he reminded the Commissioners that more than 97 percent of the time, the "right people" received the offers and obtained the credit.

In response to Professor Warren's request for clarification, Mr. Fischer explained the interest rate regulatory scheme. He said that there were two types of schemes: one that applied to financial institutions and one that applied to "others." Mr. Fischer said the regulatory scheme was controlled by state law based on where the lender was located.

William Kosturko, Executive Vice President and General Counsel of People's Bank in Bridgeport, Connecticut, was the next presenter. He explained that People's Bank, a large community-based savings bank with $7.2 billion in assets, maintained a "two-pronged business" consisting of mortgage loan origination and national credit card components.

Mr. Kosturko's presentation focused on various amendments that he asserted would improve the balance accorded to debtors and creditors under the Bankruptcy Code. The first concerned increasing the incentive for debtors to file for relief under chapter 13 as opposed to chapter 7. He noted, however, that certain aspects of chapter 13 were subject to abuse such as multiple filings. In this regard, he suggested that the Bankruptcy Code be amended to prevent multiple filings by chapter 13 debtors who failed to make plan payments or otherwise failed to perform. He also suggested that the Bankruptcy Code be amended to require the dismissal of chapter 13 cases where the debtors did not make any payments within 90 days from confirmation.

The second area that Mr. Kosturko discussed concerned creditors holding claims in the amount of $5,000 or less. He suggested that they should be able to represent themselves without having to retain counsel.

The third area he mentioned pertained to the Bankruptcy Code's cram down provisions. Notwithstanding the 1994 amendments to the Bankruptcy Code and the Supreme Court's decision in Nobleman, he said that certain bankruptcy and district courts were allowing the cram down of certain residential real estate liens.

Professor Michael Staten, the next panelist, focused his presentation on the profile of the typical consumer bankruptcy debtor based on a study conducted by the Credit Research Center that was funded by a grant from Visa and MasterCard. He explained that the study comprised a sample of 300 bankruptcy cases selected from each of 12 bankruptcy courts. The courts were located in San Diego, Los Angeles, Phoenix, Houston, Dallas, Kansas City, Chicago, Indianapolis, Memphis, Tampa, Atlanta and Hartford. The study sample consisted of approximately 3,500 bankruptcy cases filed over the period of May through July of 1996.

Among the study results that Professor Staten recounted were the following. First, approximately 2,200 consumers who filed for chapter 7 relief on average had total debts in the amount of $91,000, 62 percent of which consisted of non-housing debt. Second, approximately 1,100 debtors filed for relief under chapter 13 and they had an average total debt of $80,000 of which 43 percent was non-housing debt. With regard to their ability to repay, the study disclosed that approximately 45 percent of the 2,200 chapter 7 debtors had monthly incomes that exceeded their monthly living expenses. He said that the debtors comprising this 45 percent on average could have repaid 33.2 percent of their non-housing debt over 36 months. If stretched over 60 months, he said that the average repayment percentage would increase to 55 percent.

As to chapter 13 debtors in the study, Professor Staten said that they had a "dramatically higher capacity to repay" compared to their chapter 7 counterparts in the study. He reported that these chapter 13 debtors could repay 158 percent of their non-housing debt over 36 months. If the repayment term was extended to 60 months, the mean percentage increased to 264 percent.

Summarizing the study's conclusion, Professor Staten noted that chapter 13 debtors had a substantial capacity to repay their obligations. On the other hand, he observed that whether or not the current bankruptcy system provided sufficient incentive to chapter 13 debtors to commit to repayment plans on par with their capacity to repay was "another issue entirely." With regard to chapter 7 debtors, he said that the study data indicated that 22.5 percent of these debtors had the capacity to repay 20 percent or more of their non-housing debts in three years.

At the conclusion of Professor Staten's presentation, Commissioner Hartley asked the panelists to comment on the concept of consumer debtor education. Saying that he would "strongly advocate" consumer counseling on alternatives to bankruptcy, Mr. Prill observed that many debtors were "simply unaware of the alternatives" and penalties associated with bankruptcy. He noted that several consumer credit organizations fund outreach educational programs in high schools and elsewhere. Mr. Albright also said that he was an advocate of consumer credit education and that he had personally participated in high school programs throughout the nation.

Commissioner Jones asked Mr. Kosturko to elaborate on his concerns with regard to the cram down of residential mortgage claims. He said that the provisions should be tightened as applied to residential as well as junior home equity mortgages. He explained that home equity loans were often made on a 20-year basis and that cram down was "very much a function of fluctuating real estate values."

Returning to the concept of mandatory consumer educational programs, Commissioner Shepard said that he was "not terribly impressed with forced education" and analogized it to mandatory Alcoholics Anonymous meetings and driver education courses as part of criminal sentencing. Mr. Prill responded that the consumer education program he advocated would focus on alternatives to bankruptcy and the implications of a bankruptcy filing. He noted that the program discussed by Mr. Albright was not directed at consumers about to file for bankruptcy relief.

Commissioner Jones asked the panelists to comment on the impact of reaffirmation agreements. Mr. Albright reported that his firm did "very poorly" with reaffirmation agreements. In contrast, he said that his firm's largest source of recovery was in the "fraud area," which he defined as "recent usage of the account." He noted that many consumer debtors reestablished their credit after bankruptcy and that his firm provided that option to debtors.

Commissioner Ginsberg wondered whether the reaffirmation could be linked to consumer education. Dr. Chimerine said that they should be linked.

Mr. Case asked Mr. Albright to explain how his firm utilized quarterly credit reports. Mr. Albright said that they were used for various purposes including market share as well as to monitor and adjust credit lines as part of his firm’s proactive program.

Professor King asked Professor Staten if he compared the results of his study with a prior "Purdue Study" conducted during the early 1980s. Professor Staten said no as his study was still in its early stage. Commissioner Shepard asked whether the study made any adjustment for inaccurate statements by debtors. Mr. Staten said no.

Professor Warren observed that the Bankruptcy Code presently required chapter 13 debtors to commit all of their disposable income for three to five years to their plans and that only one in three of these debtors completed their plan payments. In addition, she noted that many of these plans paid "zero percent" to unsecured creditors. Professor Staten said that there was not necessarily a link between the study's data on the capacity to repay and the actual plans that were filed. He indicated that he intended to collect this data.

Referring to Dr. Chimerine's written statement regarding the percentage of debtors who have "'never been delinquent on any loans appears to now be 50 percent or higher,'" Chair Williamson asked the panelists to comment on whether or not they agreed with this conclusion. Mr. Albright concurred with this statement, but estimated that for his firm this percent was approximately 10 to 12 percent and that this was a "newer phenomenon." He particularly agreed with Dr. Chimerine's conclusion that bankruptcy was no longer an alternative of "last resort." He attributed this to the corporate downsizing that occurred during the 1990s and the higher risk associated with persons who were self-employed and used credit cards to fund their business operations.

Chair Williamson was "still baffled" by the recent increase in bankruptcy filings over the past 12 to 18 months. In addition to the factors cited by Mr. Albright, Dr. Chimerine explained that there were several other factors involved, including the declining portion of the population with health care insurance as well as an increased awareness of bankruptcy as an option, and corporate downsizing.

Observing that he detected a "kind of derogatory use" of the phrase "bankruptcy awareness," Professor King asked whether anyone was suggesting that the availability of bankruptcy should be "kept secret." Dr. Chimerine said no.

In response to Commissioner Gose's follow-up query regarding abuse, Mr. Albright cited the extensive advertising by a prominent bankruptcy practitioner that appeared in the Yellow Pages of his local telephone book.

Commissioner Jones asked the panelists to comment on various reports by the media that suggest a connection between the increase in credit card debt and the number of bankruptcy filings exists. Mr. Albright acknowledged that there was some connection and that there were instances where consumers, having multiple credit cards, would use one to pay the other. He said that his firm monitored these practices.

Dr. Chimerine noted that there were costs as a result of bankruptcy such as higher interest rates, fees and taxes. As the upward trend was "so dramatic" and was "outstripping what's happening in the broad economy," a question was raised as to whether or not there was abuse. He also asked whether the bankruptcy system was functioning the way it was originally intended.

In closing this portion of the panel presentations, Chair Williamson noted that the Commissionwas "data-starved" and that it was "nice" to have the benefit of Professor Staten's study.


The individuals comprising this panel were the following: Philip S. Corwin, a partner in Federal Legislative Associates; Mike McEneney, an attorney with Morrison & Foerster; Robert F. Mitsch, Chief Executive Officer, American Bankruptcy Service; and George J. Wallace, an attorney with Eckert Seamans Chevin & Mellot.

The first presenter, George Wallace, noted that this panel would address overall policy issues for bankruptcy reform. He suggested that there were "compelling reasons" why the current bankruptcy law should be reassessed where a debtor had the ability to repay. He said that the "fresh start policy" did not justify "complete and unlimited discharge" of debtors having the ability to pay some portion of their debt. He anticipated that this trend would increase as the stigma associated with bankruptcy diminished. To the extent that bankruptcy relief is available without adjustment for ability to pay, the cost of consumer credit was unnecessarily higher for consumers who paid their obligations, he said.

Based on these concerns, Mr. Wallace concluded that the present bankruptcy system was "fundamentally flawed" in how it dealt with debtors who had the ability to repay their debts. He said that reliance on the stigma associated with filing for bankruptcy relief and debtor self-restraint were no longer "sound policy."

Mr. Wallace suggested that debtors having the ability to repay their debts should be required to set aside postpetition disposable income for at least three years. In addition, reaffirmation agreements should be recognized in both chapter 7 and chapter 13, he recommended. Further, chapter 13 should be "significantly refined" as it presented "significant difficulties." In sum, he favored the establishment of a "needs-based" system as opposed to the current "bankruptcy on demand" system.

Robert Mitsch, the next speaker, discussed three issues: the "great disparity" between the amount of relief needed by debtors versus the amount of relief they received; the problem of the bankruptcy system's "legitimacy and integrity," and the "fundamental conflicts" that "riddle" the bankruptcy system.

Addressing the first concern, Mr. Mitsch said that more relief was given than was needed or "even requested." He observed that a "common phenomenon" of reaffirmations was that a debtor would tailor his or her bankruptcy relief to only those dischargeable debts that were necessary to implement his or her fresh start. He also noted that there were insufficient incentives for debtors to file for relief under chapter 13.

With regard to the second concern, Mr. Mitsch stated in most jurisdictions there was "absolutely no verification" of the accuracy of the information contained in a debtor's schedules and statement of financial affairs. He said that there was a widespread belief that debtors use bankruptcy laws "to abuse" the system. He recommended that verification of income and random audits would "go a long way in rebuilding the faith of the American public" in the bankruptcy process.

As to the third tranche, Mr. Mitsch said that there was no justification for the lack of uniformity in the substantive bankruptcy law. Fundamental issues of bankruptcy law should not vary among districts, he asserted.

The third panelist, Michael McEneney, discussed the proposition that the Bankruptcy Code was fundamentally flawed as it allowed debtors to obtain more relief than they actually needed. He said that the consumer bankruptcy system provided debtors with "billions of dollars of relief . . . without ever asking the question whether those debtors need that relief.

To deal with this "flaw," Mr. McEneney recommended that debtors having the ability should be required to repay some portion of their debts from their disposable income. If a debtor cannot undertake this obligation, then his or her case should be "handled under chapter 7." To implement this system, he suggested that the debtor provide the necessary financial information and should the debtor fail to do this, the case would be dismissed. In addition, he suggested that there should be an efficient mechanism for determining whether the income and expense information supplied by a debtor was accurate. This could be accomplished by requiring the debtor to file recent pay stubs and tax returns with the bankruptcy petition. To augment this verification process, Mr. McEneney said that statistics maintained by the Department of Labor could be used to develop expense models for basic living expenses such as food, clothing, shelter, transportation and other expenditures. Further, he suggested that the bankruptcy system must help debtors avoid future financial difficulty by providing training through a self-funding system

The final presenter on this panel was Philip Corwin. His remarks were directed to the "Basic Bankruptcy Concept," which would replace the current system with a single consumer bankruptcy chapter. He said that the Commission should not expend "undue time and effort debating" the form of bankruptcy alternatives, but rather should focus on the "paramount goal of achieving meaningful and workable reform." Among the reasons that he cited in support of this position, Mr. Corwin noted that the consumer credit industry opposed "radically restructuring" the current chapters of the Bankruptcy Code. He explained that the Coalition's "paramount objective" was to obtain legislative reform with regard to presently existing problems.

Another ground that he cited in opposition to the Basic Bankruptcy Concept was its emphasis on predictability of outcome. As this could only be accomplished by substantially curtailing the flexibility of the current system, which would serve neither creditors nor debtors, he said that this would reopen settled legal issues and "raise unanticipated new disputes." Mr. Corwin said that the Coalition supported an expedited appeals process, providing definition to frequently litigated legal concepts, establishing mandatory financial education programs, and halting abusive serial filings.

Among specific aspects of the Basic Bankruptcy Concept that the Coalition opposed were "delinking options within a repayment chapter," the elimination of legally binding reaffirmation agreements, and governmental interference with creditor underwriting standards. Mr. Corwin also stated that he opposed any weakening of the "established public policy against cram downs of home mortgages."

In response to Commissioner Gose's request to explain his reference to creditor underwriting standards, Mr. Corwin said this pertained to penalizing creditors for employing subjective valuejudgments.

Commissioner Jones expressed concern about a system that required "every single debtor to have to jump through hoops" to verify the information he or she provided and having to compare that information with the local cost of living index. Professor Rohner said that the debtor's counsel was the first step in a system that provided good information. A second source for this information would be the Department of Labor, which could develop expense models. Commissioner Jones wondered whether these models would be sufficiently flexible.

Chair Williamson asked Mr. Wallace to identify when the bankruptcy system became "flawed." Mr. Wallace said that the flaw dated back to the Chandler Act and that the use of bankruptcy had changed based on the lessened stigma associated with it. Mr. McEneney added that the way lending is done had changed. While in the past lending was generally based on the borrower's assets, it was currently based on ability to repay premised on the borrower's credit history, he noted. Mr. Wallace explained that the flaw had always been in the system, but that it had now become apparent.

Mr. Corwin said that there had been a "major change" in the credit industry over the past 20 years in that it was now subject to federal policies that say lenders had an affirmative duty to make credit available in a "fairly aggressive way," including low and moderate income people. He observed that the system was "approaching a breaking point" based on the fact that bankruptcy filings were "at an all time high in a non-recessionary period." He predicted that there would either be legal reform or substantial retrenchment by creditors on the "pricing of availability of credit."

When asked by Mr. Case as to whether the problem was caused by the bankruptcy law or that the industry had discovered that its product needed to be better rationed, Mr. Corwin said that there were "fundamental policy problems" with a system that allowed debtors with "substantial capacity to repay" to obtain relief without having to supply any evidence concerning income or expenses. Mr. McEneney added that no matter how tight underwriting standards were made, they still would not prevent bankruptcy filings.



The individuals comprising panel three, which focused on unsecured creditors, were as follows: Robert V. Burns, Manager, Multnomah County Employees Credit Union; Kenneth R. Crone, Senior Vice President, VISA U.S.A. Inc.; and George Fitzgerald, Credit Field Representative, Manager Recovery Center, Sears Merchandise Group. The individuals who appeared on the fourth panel, which focused on secured creditors, were the following: Leonora Baughman, Chrysler Financial; and Gary Seligson, General Counsel, Citicorp Mortgage Inc.

The first presenter on the unsecured creditor panel was Robert Burns. He explained that he spoke on behalf of smaller lenders such as community banks, small loan companies and retailers. Among the problems that he addressed was the lack of uniformity and the "quandary" it presented to small creditors. He also cited advertising tactics of bankruptcy attorneys. He said that consumers should be informed about alternatives to bankruptcy so that they chose the alternative that isappropriate for them. The reaffirmation process was another problem area that he discussed. Even though in a debtor's interest, often counsel or the bankruptcy court advised the debtor against entering into a reaffirmation agreement.

George Fitzgerald, the next speaker from the unsecured creditor panel, focused his presentation on reaffirmation agreements and the need to require debtors to supply account numbers for noticing purposes. He said that reaffirmed accounts performed better than Sears’ overall credit portfolio. In addition, his firm's representatives "regularly hear positive comments" from debtors regarding reaffirmations. He said that this meant customers were clearly saying that they wanted to have the right to voluntarily reaffirm selected obligations.

With regard to requiring identifying account numbers, Mr. Fitzgerald explained that this problem affected both debtors and customers. This lack of information delayed compliance with the automatic stay and caused errors in customer identification.

The next presenter from the unsecured creditor panel was Kenneth Crone. He proposed five amendments to the Bankruptcy Code that he described as "critical" from the perspective of unsecured lenders.

His first recommendation was that the Code should be amended to include a presumption that all consumer debt incurred within 90 days preceding a bankruptcy filing was nondischargeable as the current provision was too narrowly drawn. As his second recommendation, Mr. Crone suggested that the Code should be amended to provide that debts incurred without a reasonable expectation of an ability to repay should be nondischargeable. The third suggestion that Mr. Crone discussed was that the Code should mandate that fraudulently incurred debts were nondischargeable under chapter 13. As his fourth suggestion, Mr. Crone said that the Bankruptcy Code should be amended to require that all income committed by a debtor to a chapter 13 plan be distributed only to creditors who chose to participate in the plan.

Mr. Crone’s final recommendation was that the Bankruptcy Code should be amended to define more clearly the circumstances under which a chapter 7 case may be dismissed for abuse. He said that the current substantial abuse provision was "largely ineffective." Specifically, he noted that creditors having a direct financial interest in these cases could not move under this provision even if they had information supporting dismissal of such cases under this provision.

Leonora Baughman, one of the two panelists who spoke on behalf of secured creditors, said that secured creditors did not believe "wide-ranging alteration" of the Bankruptcy Code was necessary in order to address the lack of uniformity in the present system.

Ms. Baughman noted that chapter 7 debtors, owing secured obligations on their motor vehicles, were currently required to reaffirm the outstanding balance, redeem the secured portion of the obligation in cash, or surrender the vehicle. She explained that upon the entry of the discharge order, a problem arose as to whether other contractual obligations continued to be in effect post-discharge. She noted, for instance, that it was unclear whether a creditor could seek enforcement of a requirement to maintain insurance coverage or contact the debtor if he or she became delinquent.

Under chapter 13, she noted that there was even "greater variance" particularly with regard to the timing of 341 meetings and confirmation hearings and the requirement that debtors make adequate protection payments pending confirmation. Regarding the latter, she said that some courts required the debtor to pay the contract amount, while others held that it was the depreciation amount. There was also much variance post-confirmation. In particular, she stated that there can be a delay of up to a year before a secured creditor received a payment post-confirmation. Further, there were variances with regard to the accrual of interest, she stated. Whereas some courts held that interest accrued upon filing, others held that it commenced upon confirmation.

Gary Seligson was the second secured creditor panelist who addressed the Commission. His presentation concerned the treatment of residential mortgage lenders under the current bankruptcy law. In particular, he cited the use of serial filings to delay foreclosure actions. He observed that residential mortgage lenders were concerned that the Basic Bankruptcy Concept would "reopen issues that have been discussed and settled in past legislative reform efforts" and that a "radical" change to the present system could have "unintended and very negative effects" on the mortgage market.

He described cram down as one of the issues presenting the "greatest immediate concern" to the residential mortgage industry and that this problem was particularly acute in the context of chapter 13. Subsequent to the 1994 amendments to the Bankruptcy Code and the Supreme Court's decision in Nobleman, he said that the courts had narrowed the scope of this decision so that it did not apply to standard Fannie Mae loan agreements. The practical effect of these holdings, he said, was that they nullified the anti-modification provisions of the Bankruptcy Code. This problem could be addressed, he opined, by revising the Code to make it clear that mortgage loans, including standard Fannie Mae loans, could not be modified.

Mr. Seligson also cited abuses caused by serial filings. He suggested that there should be mandatory sanctions such as requiring the debtor to pay the lender's counsel fees, court costs and lost opportunity costs associated with the dismissal of a bankruptcy case with prejudice. Before being authorized to file a subsequent bankruptcy case, the debtor should be required to show that the filing was justified based on a significant change in circumstances.

After the conclusion of Mr. Seligson's remarks, Chair Williamson stated that the Commission maintained a consumer bankruptcy mailing list. He than asked the Commissioners to pose questions to the panelists.

Commissioner Ginsberg asked Ms. Baughman whether she opposed all forms of strip downs. Answering in the affirmative, she explained that debtors were intentionally purchasing vehicles and filing for bankruptcy relief in order to strip down the lien. Responding to Commissioner Ginsberg's inquiry regarding parity of treatment, Ms. Baughman said that secured vehicle lenders wanted to have "some concurrent payment" with that received by mortgage lenders.

Mr. Seligson responded to Commissioner Jones' inquiry regarding home equity loans. He said that as these loans were really another form of refinancing, they should be covered by the anti-modification provisions of the Bankruptcy Code. As to whether or not vehicle loans should also come within the Code's anti-modification provisions, he said that Congress recognized the "uniquenature" of homes and accordingly had "carve[d] out special protection for home mortgage lenders."

Chair Williamson asked Mr. Crone to address the statements of some panelists about "so-called surprise bankruptcies." Mr. Crone said that there were three distinct types of consumer bankruptcy filings: consumers who were basically undisciplined and "credit runaways;" consumers who held back until they realized that they have no alternative other than to file for bankruptcy relief and then "cut loose and load up on their accounts" prepetition; and consumers who refuse to accept the fact that they must file for bankruptcy relief. He said that the focus should be on the second group and that his recommendation about extending the presumption period for nondischargeabilty to 90 days was directed to this group.

Chair Williamson then asked the panelists to make specific suggestions for incentives that would make chapter 13 more attractive. As an example, he noted that there had been a suggestion that the filing of a chapter 13 case be treated more favorably in credit reports for those debtors who complete their plans. Mr. Crone said that this concept was not necessary as credit grantors currently supported consumers who had "a meaningful chapter 13 plan." As an example, he cited a credit rehabilitation program operating in Texas.

Professor Warren directed her question to Mr. Burns. Recalling that he said that his firm closely examined income and ability to repay as well as maintained this information over a long period of time, she asked whether creditors who did not undertake these efforts should be treated differently from those who collected this information. Mr. Burns was not sure how this distinction could be made as his firm was "obviously" very small and thus could manage its portfolio very differently from creditors with much larger portfolios.

Commissioner Ginsberg asked Mr. Seligson to explain what was "sacred" about home mortgage loans. Mr. Seligson answered that this query should be directed to Congress as it had decided to provide special protections for these liens. He surmised that these special protections were extended based on the "long-standing belief" that homes were different from motor vehicles and other personal property holdings and that people should be encouraged to keep their homes. Commissioner Ginsberg asked whether these special protections should apply to junior loans. Mr. Seligson responded that if one viewed junior liens as just another form of refinancing, then they should be treated the same way.

Referring to Professor Warren's prior inquiry about judgmental lending, Mr. Crone said that while there was evidence that it was effective, credit scoring was "actually more objective" and performed better. Citing the relatively low charge-off rate for all bad debts, including bankruptcy, that was reported by Mr. Burns' firm, Professor Warren said that it was much less than the industry rate of 3 percent. Mr. Crone explained that one could always cite anecdotal situations or analyze a microcosm. Based on the total performance of more than 6,000 credit card issuers and the way they tactically offer credit, that is, ability to pay and past performance in combination with the scoring process generated a higher degree of accuracy, he said Mr. Burns added that his firm had "nothing against the scoring."

Noting that Mr. Burns had described the current consumer bankruptcy system was "labyrinthine," Chair Williamson asked the panelists to identify what about the system that hadchanged since the 1978 Bankruptcy Reform Act. Speaking from a secured creditor's standpoint, Ms. Baughman was not sure if anything had changed, but that the variances had become more apparent in recent years as more creditors were now crossing geographic boundaries and more debtors were filing for bankruptcy relief. Mr. Crone noted in addition that there had also been a change in the democratization of credit. Mr. Seligson warned that if more home mortgages were not subject to the Bankruptcy Code's anti-modification provisions, then lenders would insist on higher down payments.

At the conclusion of this session, the meeting recessed at approximately 12:28 p.m.


After the conclusion of the lunch recess and the Small Business, Consumer Bankruptcy and Service, Ethics Working Group sessions, Chair Williamson reconvened the meeting for a plenary session on future claims. Before commencing the plenary session, he reviewed the meeting agenda for the following day. He also explained the format of the Commission's Working Groups and the purpose of this plenary session on future claims.

The members of the future claims panel included the following: Donald Bernstein, Robert Greenfield, Barbara Houser, Michael Reed, and Jeffrey Warren.

Professor Warren began the discussion by recounting that this session represented the third occasion that the Mass Torts/Future Claims Working Group had met. She then identified the issues that were to be considered at this plenary session as whether or not the Commission should focus on this area, and if so, what should be the approach.

Particular concepts that Professor Warren summarized for discussion were adding a definition of future claims to the Bankruptcy Code, creating provisions for the representation of future claimants, and limiting future claimants’ prospective recoveries to the amount estimated for the allowance of claims and likely to be distributed through a trust over time. In addition, she mentioned that this basic structure would specifically authorize "[c]hanneling injunctions." Further, a parallel structure would be available for good faith purchasers under 11 U.S.C. §§ 363 and 1123 so that they could acquire estate assets free and clear of future claims. She explained that claims would be "left to ride through" the bankruptcy, presumably for 100 percent collection "on the other side if the entity survives."

Commissioner Shepard asked the panelists to comment on what would be the effect if the Commission did not address future claims. Ms. Houser responded by recommending that the Commission should address this issue as many courts had struggled with it. She explained that currently there was a lack of uniformity on such issues as what was a "future claim" and how did it fit in the chapter 11 process.

Commissioner Jones questioned where the uniformity would "come from" given the flexible definition of future claims proposed in the materials submitted to the Commission on this issue. Both Mr. Reed and Mr. Warren concurred with Ms. Houser with regard to the need for the Commission to address this issue. Concerning Commissioner Jones’ query, Mr. Warren observed that the concept would precisely define a future claim to eliminate the question of whether or not a bankruptcy courthad the jurisdiction to consider the claim. He said the Commission could adopt a definition that would create certainty and ensure procedural due process. Mr. Reed acknowledged that while the presently proposed definition was not "perfect," judicial resources should not be consumed in determining case outcomes based on what the definition of a claim is. Mr. Case said that the proposed definition was "rather narrow and confining."

To provide perspective, Professor Warren reviewed the elements of the definition under discussion. She said that a future claim had the following three characteristics: (1) it was a claim based on the debtor’s prepetition actions that would give rise to liability but for the fact that the parties injured had not yet discovered their injuries and acted to remedy their damages such as by commencing lawsuits; (2) these future claim holders must be identified with reasonable certainty; and (3) the claims must be reasonably susceptible to estimation. She added that this definition was not presently intended to apply to environmental claims.

In response to Commissioner Shepard’s queries on whether this definition would apply to possible claims for future injuries resulting from breast implants and Ford Pintos, Ms. Houser answered in the affirmative. Mr. Greenfield reminded the panelists that these claims, under the proposed definition, would also have to be susceptible to estimation with reasonable certainty. Mr. Bernstein expressed concern regarding whether adequate representation for due process purposes would result where contact had not yet been established with the product.

Commissioner Jones asked why the current definition of claim did not apply to recipients of Dow Corning breast implants. Ms. Houser explained that under state law many of these individuals would not technically fit under this definition. In response, Commissioner Jones noted that this caused a further problem with regard to establishing liability under state law. As an example of this problem, she cited the fear of contracting breast implantosis as opposed to actually having the disease. Mr. Case said that some plaintiffs’ lawyers contend that their clients do not have a claim under some state laws until the injury manifests. He observed that the proposed definition would tie the claim to prepetition acts and thus avoid the disparate results under different state laws. Commissioner Jones wondered whether bankruptcy judges should create standards of liability for these injuries. Mr. Case responded that the proposed definition required the following analysis: if there were prepetition acts that create injury resulting in a cognizable claim in the bankruptcy setting, then the damages resulting from injury would have to be measured.

Mr. Bernstein raised two policy questions: was the intent to maximize the value available for all creditors and whether future claimants can be dealt with in a way that is fair and provides adequate representation of their interests. Without resolving the latter concern, he noted that the former issue would not be resolved. He explained that the goal was to create "this notion of maximizing the pot" so that everyone is provided for equally. Although she agreed with this goal, Commissioner Jones nevertheless questioned whether the proposed definition would accomplish this result.

Mr. Greenfield observed that the proposed definition was intended to reach this goal, but that it may be a "question of language." He recalled that the National Bankruptcy Conference took ten years to develop this language. He then discussed how this definition would have been applied in the Piper reorganization case. Mr. Case explained that if there was no prepetition relationship with Piper, then the party was not a future claimant. He added that the proposed definition would have probablyproduced the same result as one could neither identify who would be injured in a future plane crash nor estimate their injuries. Commissioner Jones disagreed.

Responding to Commissioner Jones’ concerns regarding the dilemma of obtaining certainty in the definition of future claims, Ms. Houser said this goal was "almost impossible to achieve" and it was why there were circuit courts of appeals to ensure that the definition was interpreted as consistently as possible. Commissioner Jones was still concerned that if one could not write a rule, then one could not make a law. Mr. Case responded that the proposed definition did not determine liability or damages, but rather defined a category of elements that identify circumstances when future claims can be filed and bankruptcy relief granted.

Commissioner Shepard observed that the concept of proximate cause had not yet been addressed by the discussants. Mr. Case said that the definition identified who could file a claim. Ms. Houser added that proximate cause pertained to the issue of liability, which would be addressed in the context of the allowance or disallowance of the claim or in the estimation process.

Commissioner Shepard asked whether this definition would permit the American Tobacco Company to file for relief under chapter 11 in order to "shed" its liability for all future claims for lung cancer. Mr. Warren answered that a company would not subject itself to the scrutiny and process of chapter 11 just to get rid of a problem. Given the fact that a "major, major liability" was involved in this hypothetical, Commissioner Ceccotti was not sure that she agreed with Mr. Warren. Mr. Warren responded by recounting certain facts pertaining to the Cellotex case. While prior to filing for chapter 11 the company was spending $6 million a month to resolve asbestos claims, bankruptcy enabled the debtor to stop spending this money and to develop a plan that channeled these claims to a trust. Noting that Commissioner Jones may be correct in that the existing definition of claim may be broad enough, Mr. Warren observed that the uncertainty of its application needed to be resolved.

Mr. Case described the dilemma faced by companies with mass tort claimants. Given the pending claims, the company cannot sell its business because of successor liability. In addition, the company cannot refinance as lenders recognize that the lawsuits will "eat up" its assets. If the company files for chapter 11 relief, then there was the equality of distribution problem, he said. The Manville case from the standpoint of equality of distribution was a "disaster," he observed. If there was a clearer definition of these claims as well as a clearer message from Congress to treat everyone equally, he did not think that the same extent of disparity would have resulted in that case.

Mr. Bernstein added that Mr. Case’s concern may ultimately involve a priority issue among various claimants. Ms. Houser said that, in addition, there was also the question of the business’ viability. Without the ability to deal with a company’s problems at one time, she stated that the viability of even an extremely profitable company could be undermined.

In response, Commissioner Gose asked whether this concern pertained to the tort system and whether this was an attempt to use the Bankruptcy Code to reform it. Replying in the negative, Ms. Houser said that the plaintiffs’ attorneys who participated in the prior working group sessions agreed that this problem had to be addressed by the Commission because companies facing mass tort liability would continue to file for chapter 11 relief.

Noting that class action cases and mass tort bankruptcies were not very successful, Commissioner Jones observed that the transaction costs in these bankruptcy cases were "gigantic" and that the estimation process was "at best scientific guesstimate." Mr. Reed responded that the reason for these high transaction costs was that there was so much litigation over issues that would not have to be litigated if the uncertainty in the Bankruptcy Code was eliminated.

Mr. Case disputed the proposition that these bankruptcy cases were failures. Instead, these cases produced "stunning successes" by protecting jobs and going concern value, he asserted. As an example, he cited the A.H. Robbins case. The failures of these cases, he conceded, concerned fair distribution to creditors and the transaction costs, which are exacerbated because the bankruptcy law is unclear.

Commissioner Jones said that as long as the issue was addressed through the American litigation process, this problem would continue to exist either in the trial court or in the bankruptcy court. The concept under consideration at this session, she noted, was "really reshuffling chairs on the deck of the Titanic." While not "absolutely opposed" to the concept, she was skeptical whether it would resolve the problem.

Chair Williamson suggested that if the Commission did not make a recommendation in this area, then it was highly unlikely that Congress would address the problem. A recommendation from the Commission would at least serve as an invitation or challenge to Congress to address these issues either in the bankruptcy context or elsewhere, he advised. While sharing Commissioner Jones’ concerns that the ultimate problem was with the litigation system, Commissioner Ceccotti thought that there may be some added benefit in "prodding Congress."

Noting that all of the choices faced by society in this area were "unpleasant, unperfect, [and] at least at one level unacceptable," Chair Williamson observed that another process argument in favor of the Commission making a recommendation was that it may avoid having Congress address the problem through industry-specific legislation. Commissioner Hartley, stating that he disagreed, noted that Congress would address this area as there was "just too much money on the table." The panelists than discussed the ramifications of the Piper case.

Noting that it was "extremely important" for the Commission to make a recommendation dealing with this problem, Professor King said that concerns with regard to the specific language of the definition of a claim could be worked out to everyone’s satisfaction. Should the Commission fail to act, he predicted that the lack of uniformity would continue and that there was a risk that a court may conclude that the entire process was unconstitutional. If there was no guidance, some cases may just liquidate and pay existing creditors without provision for future claimants. Professor King also recalled that after the Manville case was filed, he testified before a House subcommittee on labor that the problem should be addressed by revising the tort system. Nevertheless, nothing resulted from this hearing and others that were heard. He characterized the importance of addressing this issue as a first or second priority.

Commissioner Jones expressed "very serious skepticism about this whole enterprise," but did not view it as a "do or die situation" for the Commission. She explained that even if the Commission was able to resolve the definitional problem, there were other "very, very serious issues" on how todefine classes of future claimants, how "to weed out transaction costs," how to estimate claims and the scope of the discharge.

Commissioner Gose did not think the Commission could avoid dealing with this issue. Otherwise, it would appear that the Commission was saying that it was "too hard, we can’t do it," he said. He did not think this was the message that the Commission wanted to send to Congress.

Concurring with Commissioner Gose, Commissioner Hartley said that this was one of the matters that Congress specifically wanted the Commission to consider. As support for this conclusion, he said that the legislative history mentioned future claims and mass torts "over and over and over again."

Other comments from the Commissioners included the following. Chair Williamson characterized the issue as simply involving a "red light/green light decision" in terms of going forward on specific recommendations. Commissioner Shepard said the basic question was whether future claims and mass torts should be dealt within the bankruptcy context. Commissioner Butler, agreeing that the Commission should address the issue, explained that Congress needed guidance on it. By making a recommendation, the Commission would advance the dialogue on this issue. Rather than asking the Commissioners to decide at this session, Chair Williamson said that he would ask them to decide during the plenary session set for the following day.

At the conclusion of Chair Williamson’s comments, the meeting adjourned until the following day.

United States House of Representatives Rayburn Office Building
Washington, D.C.


At approximately 8:42 a.m., the second day of the meeting began. Chair Williamson announced that the dates for the Commission’s January meeting had been changed to January 22-23, 1997. He then expressed the Commission’s gratitude to the House Judiciary Committee for making the meeting space in the Rayburn Office Building available.

Thereafter, Chair Williamson provided a brief overview of the Commission’s regional meeting held December 4, 1996 in Akron, Ohio. He noted that, in addition to himself, Commissioner Ginsberg and Professor King attended this meeting, which was organized by the Cleveland and Akron Bar Associations, among others. He stated that a series of regional meetings would be held over the coming months in such locations as Alabama, New York and possibly Iowa, where the focus would be on chapter 12 issues.

Chair Williamson then introduced the first open forum speaker.



Thomas Ambro, appearing on behalf of the Delaware State Bar Association, directed his comments to the Jurisdiction and Procedure Working Group Proposal Number 2 - Venue. He principally focused on that aspect of the Proposal that pertained to the elimination of place of incorporation as a basis of venue.

Mr. Ambro prefaced his comments by noting that 80 percent of Delaware corporations filed their bankruptcy cases in districts other than the district of Delaware. He also observed that approximately 68 percent of motions to transfer the venue of cases filed in the district of Delaware since 1988 were granted. Thus, he asserted that there was no evidence substantiating the allegation that the Delaware bankruptcy judges were possessive of cases filed in their district.

With regard to the allegation that small creditors in bankruptcy cases filed in Delaware were inconvenienced as a result, Mr. Ambro said that there had been no discussion of less restrictive alternatives such as teleconferencing or that venue decisions should be based on creditor location. He then recited several statistics regarding the location of creditors in large bankruptcy cases filed in Delaware.

Mr. Ambro recalled that William Schorling, head of the Business Bankruptcy Committee of the American Bar Association, recommended that the Commission wait until certain studies on this issue were completed. He said that these studies were likely to be completed in the near future. Mr. Schorling, according to Mr. Ambro, wrote that as answers to a "significant number of questions"concerning whether the proposal was justified were unanswered. Accordingly, Mr. Ambro asked "why the rush to judgment?" The only report on the issue submitted to the Commission was prepared by the Delaware State Bar Association, he stated.

Observing that many individuals had corresponded with the Commission on this issue, Mr. Ambro noted that others who opposed the proposal did not do so publicly because they feared adverse consequences and that it was a "political issue." He then quoted from a letter authored by D.J. Baker of Weil, Gotshal & Manges that stated it was "‘perverse’" to restrict access to the Delaware bankruptcy courts where "‘Chapter 11 clearly works at its highest efficiency.’" Mr. Ambro said that there had been no search for a less restrictive alternative and that the Proposal was "begot for political reasons." Mr. Ambro concluded his initial remarks by noting that it was "premature" for the Commission to act on this Proposal.

With respect to Mr. Ambro’s comments regarding the possibility that venue should be a creditor decision, Mr. Case asked what would happen if creditors were allowed to make this determination. Mr. Ambro responded that in practice creditors already made these decisions, especially with respect to prepackaged bankruptcy cases. While in voluntary cases, the debtor determined the issue of venue, Mr. Ambro noted that creditors decided it in involuntary cases and that a number of these cases had been filed in Delaware over the past few years. He acknowledged, however, that it would be "largely unworkable" to allow creditors to decide venue for voluntary cases. A creditors’ committee had the option of filing a motion to transfer venue, he said. In addition, creditors voice their opinion on this issue by electing not to file this motion.

Chair Williamson recalled that there was a "great deal of emotional testimony" at the Akron regional meeting about this issue. He asked Mr. Ambro to respond to those at this regional meeting who were convinced that permitting a debtor to choose venue based solely on place of incorporation was "just not fair." Mr. Ambro said that there was a mechanism in place to address these concerns, namely, to file a motion to transfer venue. With regard to creditors with small claims, he suggested that less restrictive alternatives be considered such as requiring the debtor to litigate in the districts where these creditors were situated or to resolve issues via telephone conferences.

Turning to preference actions, Chair Williamson asked Mr. Ambro if he supported a requirement that they be brought in the target’s district. Mr. Ambro noted that most preference issues were resolved by negotiation following the issuance of a demand letter and that most preference proceedings were resolved before trial.

Professor King observed that a "major complaint" with the former system was the delay and expense that were incurred by trustees who had to litigate outside of their districts. As a result, this requirement was eliminated in 1973 by major changes to the federal bankruptcy rules.

While not recommending that the system be changed back, Mr. Ambro suggested that other options be considered, such as teleconferencing.


William Schorling, Chair of the Business Bankruptcy Committee of the American Bar Association’s Business Law Section, noted that he was appearing in his personal capacity, unless otherwise noted. He addressed venue, Article III status for bankruptcy judges, and national admission.

With regard to venue, Mr. Schorling said that he was speaking on behalf of the Business Bankruptcy Committee. While the Committee Working Group agreed that changes to the venue provisions were "probably" needed, it was "troubled" because of the lack of objective data, he reported. He observed that venue decisions were made by large corporations that did business with creditors located in many areas. He said that it was unlikely that the forum chosen by these debtors would be convenient to a majority of the creditors. Expressing surprise with a chart prepared by Commission staff that showed more creditors were located in districts where the debtors’ principal assets were located, he noted that the Federal Judicial Center was preparing a study of this data.

A "more problematical aspect of venue choice," Mr. Schorling noted, concerned "result-oriented decision making" or "career-making" cases. It had been his experience that bankruptcy courts engage in "some result-oriented decision making" in order to attract and keep large cases. This problem, he suggested, could be addressed by limiting the extent of venue choice. He said that state of incorporation was "not troubling one way or the other" as it was "pretty easy" to incorporate a subsidiary in Delaware, for example, and then to file the non-Delaware parent in that district.

If Delaware was eliminated as a forum choice, however, he warned that this would adversely impact on the "measurable economic benefit" present in prepackaged, pre-negotiated chapter 11 cases as these plans involved state corporation laws. He then summarized the position of the Business Bankruptcy Committee as noting that there were not enough data to make a decision on how venue should be reformed.

When asked by Chair Williamson if other sections of the American Bar Association had taken positions on venue, Mr. Schorling said that the Litigation and General Practice Sections favored the elimination of the state of incorporation as a proper forum.

Addressing that aspect of the Venue Proposal concerning the affiliate rule, Mr. Schorling noted that it raised "serious concerns" and that further deliberation was required. Among the practical problems that he cited was the fact that many prepetition lenders were cross-collateralized by the assets of the debtor-parent’s subsidiaries and that cash management banks can halt a debtor’s access to cash without "first day orders" being entered early in the case.

Referring to a survey conducted by Professors Lynn LoPucki and William Whitford, Mr. Schorling said that it found that principal place of business for a "substantial number of cases" had changed prior to the time when these cases were filed. He suggested that this problem could be addressed by extending the time period by which venue in a district is established.

Mr. Schorling then commented on other proposals under consideration by the Commission. With regard to national admission without the requirement for local counsel, Mr. Schorling expressedsupport for this proposal. He also supported extending Article III status to bankruptcy judges as the present system was constitutionally infirm.


Robert Greenfield, appearing on behalf of the National Bankruptcy Conference ("NBC"), discussed several matters. First, he recommended that the Commission address future claims as it was a "very, very important issue." The present Bankruptcy Code "inadequate[ly]" dealt with future claims and, in particular, issues pertaining to discharge, participation, sales and whether or not one had a claim needed to be addressed.

With regard to according Article III status for bankruptcy judges as contemplated by Jurisdiction and Procedure Working Group Proposal Number 8, Mr. Greenfield reported that the NBC support of this concept has been longstanding. He noted that it would "significantly increase the stature" of bankruptcy judges and that this was important for the bankruptcy system. In addition, he said that the core versus non-core system did not work well.

As to those proposals that contemplate continued Article I status for bankruptcy judges, Mr. Greenfield said that he supported the Jurisdiction and Procedure Working Group Proposals Number 3 - Mandatory Withdrawal, 5 - Personal Injury Claims, and 7 - Mandatory Abstention. Nevertheless, he said that these proposals did not resolve the core versus non-core issue or the jury trial issue.

As to Jurisdiction and Procedure Working Group Proposal Numbers 6 - Contempt and 9 -Referrals to Magistrate Judges, Mr. Greenfield stated that the NBC supported these proposals as well. With regard to the former, however, he suggested that the proposal "could go a bit farther" regarding the bankruptcy judge’s power to incarcerate contempt offenders.

Concerning Jurisdiction and Procedure Working Group Proposal Number 2 - Venue, Mr. Greenfield noted that the NBC favored the elimination of place of incorporation as a basis of venue. He said that there was "no question" that "forum shopping at its height" was involved when debtors and major creditors choose the Delaware district to file prepackaged chapter 11 cases. He thought that it was "really unseemly" for parties to get together and decide where to file a case. Rather, he said that there should be a nexus between the district and the debtor’s principal assets or business operations. In practice, he observed that most creditors were very reluctant to move for a venue transfer as there was a "tremendous" burden of proof issue, among other concerns. Currently, the system permitted forum and judge shopping, which he said was "inappropriate."

With respect to that aspect of Proposal Number 2 that pertained to affiliate venue, the NBC had a "practical problem," according to Mr. Greenfield. Citing the statements proffered by the prior speaker, Mr. Greenfield said that NBC was concerned that the Proposal would make it "extremely difficult" for cases involving an affiliated group of entities to be filed in one court. Particularly where the affiliated group has a cash management system that is consolidated, he explained that it was very important that these cases be heard by one bankruptcy judge on the same day of the filing.

To resolve the practical problem with this aspect of the Venue Proposal, the NBC had two suggestions, Mr. Greenfield said. He suggested that the filing of an affiliate in the same district as the filing of an affiliate at the same level, such as brother/sister entities, should be permitted. And, if the parent files first, the subsidiary could file in the same district. With regard to an affiliate group, he suggested that a "center of gravity" concept should apply. It would be premised on the affiliated group’s principal place of business based, perhaps, on the location of the group’s principal assets, he noted.

Mr. Greenfield then addressed Government Working Group Proposal Number 7 - Section 362(b)(4). He stated that the NBC "very strongly" opposed this Proposal for several reasons. First, the definition of "exercise control over property of the estate" was very broad. He said that the governmental agency should be required to establish that there was no pecuniary interest or claim collection incentive involved with the underlying action.

Commissioner Shepard asked Mr. Greenfield whether he was suggesting that government police and regulatory powers should be subjugated to the bankruptcy laws and cause these governmental interests to be treated "just like any other creditor." Mr. Greenfield said that where the governmental action concerned a pecuniary interest, then the government was no different from other creditors. As the issue concerned the protection of the public from potential harm and hazard, Commissioner Jones asked whether the burden should be on the debtor to demonstrate that there was, in fact, no hazard. Mr. Greenfield responded that it would be too late if the license has already been revoked or if the estate property had already been lost. In addition, he said that the issue was "doubly complicated" by the Supreme Court’s holding in Seminole.

When asked by Commissioner Shepard as to whose rights were paramount on this issue, Mr. Greenfield said that most bankruptcy judges would very quickly terminate the automatic stay if it was shown that there was no pecuniary motive to the intended governmental police or regulatory action. He noted that Commissioner Shepard was assuming that the government acted appropriately in every case. Commissioner Shepard responded that the presumption should be that the people should be protected and that, accordingly, the debtor should have the burden. Mr. Greenfield recalled that the 1973 Commission carefully reviewed this issue and Congress also considered it in connection with the 1978 Bankruptcy Reform Act.

Commissioner Jones observed that the Commission had been informed of instances where, for example, an airline whose license was revoked by the Federal Aviation Administration, was permitted to continue operations postpetition by virtue of filing for bankruptcy relief. Mr. Greenfield noted that most bankruptcy judges would not allow this to happen and that the law should not be changed because of one bankruptcy judge’s decision. Nevertheless, he noted that the law could be clarified as to these types of governmental actions and provide for an expedited procedure for hearing these matters.

In response to Commissioner Butler’s request, Mr. Greenfield said he would submit proposed language with regard to the affiliate venue proposal.


Professor Susan Block-Lieb spoke in favor of extending Article III status to bankruptcy judges.

One reason that Professor Block-Lieb cited in support of her position was that it would reduce the doctrinal and constitutional uncertainty in the bankruptcy system. Since the Supreme Court’s ruling in Northern Pipeline, holding that the jurisdictional provision of the Bankruptcy Reform Act of 1978 to be unconstitutional, the Court had issued several decisions in this area differing substantially from its plurality decision in Northern Pipeline. She also noted that "substantial" changes in the Court’s membership created a "great deal" of constitutional uncertainty.

Professor Block-Lieb observed that very often litigants as well as bankruptcy judges hesitate to raise constitutional issues. As an example, she mentioned that there was often no underlying judgment with regard to the liability at issue in dischargeability proceedings. Although bankruptcy judges "quite regularly" enter judgments with regard to liability issues, many of these judges have told her that they were not sure if they had the authority to do this. Rather than allowing this issue to continue to lie in a state of substantial and doctrinal uncertainty, the Commission should proactively address it, she recommended.

The second reason that Professor Block-Lieb said supported extending Article III status to bankruptcy judges was that it was "good policy" as it would improve the efficiency of the bankruptcy court system. Whenever state court, bankruptcy and district judges have simultaneous jurisdiction over litigation in a bankruptcy case, bankruptcy jurisdiction was fractionalized, which, in turn, slowed down the bankruptcy case’s resolution, she observed. She recommended that the creation of an Article III bankruptcy court system would permit bankruptcy courts to exercise the broad grant of bankruptcy jurisdiction without question and this would facilitate the goal of expeditiousness.


After a ten-minute recess, Chair Williamson commenced the plenary session of the meeting concerning decisions on pending proposals.


Professor King recounted that at the Commission’s prior meeting in October, the Commission decided that the staff should prepare a memorandum reviewing the various alternatives regarding Article I/III status. In response, a memorandum, dated November 14, 1996, was prepared. It addressed three alternatives. The first would accord Article III status to the bankruptcy court system. The second would continue the present Article I system, but address those provisions of Title 28 that could be revised so that the system and case administration were more expeditious. The third would contemplate leaving the present Article I system in tact with some modifications of Title 28, but less than those proposed by the second alternative. His personal recommendation, as reflected in a separate memorandum distributed to the Commissioners, was to accord Article III status to the bankruptcy court system.

To provide some perspective with regard to this proposal, Professor King provided a historical overview. He said that the 1973 Commission recognized that there was one "very, very important" and "over-arching" change that had to be made to the system, namely, bankruptcy courts had to be able to adjudicate any matter that arose in the context of a bankruptcy case and that costly and "completely inefficient" dichotomy between summary and plenary jurisdiction had to be eliminated. Although the 1973 Commission recommended this change, it did not recommend converting the bankruptcy court to an Article III court because there appeared to be no constitutional impediment to giving such jurisdiction to the bankruptcy court. The basis for this conclusion was that Congress, under the Constitution, had the express power to enact uniform laws regarding bankruptcy and the Commission concluded that this included the power to create a judicial system that would administer any bankruptcy statute.

As the proposed legislation for the Bankruptcy Reform Act of 1978 wended its way through Congress, the constitutional issue arose, Professor King noted. "[S]ome fear developed" about giving such jurisdiction to a non-Article III court would be unconstitutional, he said. Although the Bankruptcy Reform Act of 1978 broadened the bankruptcy court’s jurisdiction, it did not restructure the bankruptcy court as an Article III court. He recalled that everyone who studied this issue was "very nervous" about the constitutional ramifications of the law. Then the Supreme Court in 1982 ultimately held that it was unconstitutional. This, in turn, led to the enactment of the 1984 amendments, which, in turn, has led to the various comments heard at this meeting about the constitutional uncertainty that exists to this day about the jurisdictional provisions of the present bankruptcy laws. Professor King suggested that this Commission could address the issue in order to make the system more viable and to eliminate the uncertainty.

Commissioner Ginsberg, speaking in his personal capacity, strongly supported according Article III status to bankruptcy judges. He noted, however, that a majority of his colleagues would probably recommend leaving the system as is based on "job security" concerns. In support of his position, he cited Professor Block-Lieb’s prior statements with regard to constitutional uncertainty and the present system’s inefficiencies. Absent the problem being addressed by the Commission, he predicted that there would be a second Northern Pipeline decision where the Supreme Court will have to determine the system’s constitutionality.

Agreeing with Commissioner Ginsberg’s analysis, Commissioner Butler supported according Article III status to bankruptcy judges as the present system was under a "constitutional cloud." He said that he had "lived with this issue for 20 years," dating to when he was a Congressman. At that time, he recalled that the House concluded that Article III status had to apply if the bankruptcy courts were to be given pervasive jurisdiction. He did not think that the current Congress would be unreceptive to this proposal as it was dedicated to improving the efficiency of government and reducing its cost. Characterizing it as the "most important" issue that the Commission will consider, Commissioner Butler urged his fellow Commissioners to support this proposal. He recommended that if the proposal was adopted, then the Working Group should be instructed to develop transition details with regard to its implementation.

Commissioner Ceccotti suggested that more thought should be given to the proposal. The problem involved more than just simply giving bankruptcy judges Article III status, she advised. Before this is done, she said that everyone should be comfortable with the way the Bankruptcy Codeaddressed significant non-bankruptcy issues. She noted, however, that she was not "entirely comfortable" how the Code functioned in this regard, particularly as to issues not involving commercial debtor/creditor matters. As examples, she mentioned the discussions of the prior day on future claims and the articulated public health and safety concerns of governmental interests. She said that the goal of having one court decide everything expeditiously was not necessarily involved in a system intended to promote reorganization and ensure a fresh start. Specifically with regard to the issue of jury trials, Commissioner Ceccotti recommended that the Commission could provide assistance as the delay related to notions of procedure and to who should hear a dispute. She concluded her comments by reminding the Commissioners that they had approved streamlining the appellate process and that the opportunity to review the kinds of issues that she mentioned would be limited under the present proposal.

Speaking in opposition to the Article III proposal, Commissioner Jones said that her principal objection was that there was no institutional advantage to being an Article III judge. She noted that the Judicial Conference of the United States Courts was on record as opposing Article III status for bankruptcy judges as well as to creating more Article III judges unless "patently necessary to the operation of our constitutional system." She noted that no one who has addressed the Commission on this issue has suggested that the entire jurisdictional system as executed by bankruptcy judges was unconstitutional. While questions have evolved about the appropriate scope of magistrate judges’ jurisdiction, these have been resolved without threatening the overall soundness of the magistrate judge system, she said. Although there may be "friction" generated by the "related to" jurisdictional provisions because it involved a "federalist conflict between federal bankruptcy courts and state courts," this friction will always be present, she asserted. Article III courts are confronted with the friction on a daily basis as reflected in questions pertaining to removal, preemption, and the conflict between state and federal law, she said.

Other concerns that Commissioner Jones cited in support of her opposition to the proposal were that it would expand the number of Article III trial courts by 30 percent and that there would be a great reluctance to giving life tenure to even more federal judges. She also noted that there had never been a specialist Article III court before and that this would create an "inevitable conflict in jurisdiction." She predicted that there would be arguments that bankruptcy judges "take on their fair share" of criminal cases while federal district court judges would be asked to hear mass tort cases because of the less constitutional doubt of their authority to handle them under Federal Rule of Civil Procedure 23.

Commissioner Jones concluded her observations by noting that she did not perceive the margins of bankruptcy court jurisdiction to be "constitutionally compelling" Article III status for bankruptcy courts. She also questioned why the Commission had "to speak with one voice on this issue."

Sharing Commissioner Ceccotti’s concerns regarding the present bankruptcy system’s capacity to deal with non-bankruptcy issues, Commissioner Shepard noted that he was not satisfied how provisions of the Bankruptcy Code were being used to override state and local laws. He also expressed concern about how it would impact on treatment of personal injury and wrongful death claims.

Commissioner Alix sought clarification as to whether the proposal would result in according life tenure to bankruptcy judges and salary parity with district judges. Although Commissioner Jones noted that the compensation of bankruptcy judges would be increased to that of district judges as a result of this proposal, Professor King was not sure if that was a constitutional requirement. Life tenure, on the other, was constitutionally required, Professor King explained.

Commenting on the present compensation and pension provisions for bankruptcy judges, Commissioner Butler noted that it was "very good" and that may be one of the reasons why the bankruptcy judges were reluctant to support Article III status. Commissioner Butler then noted that there were Article III courts with specialized jurisdiction and that it was possible for Congress to carve out this jurisdiction. Again citing the "constitutional cloud" that was hanging over the present system, he strongly supported the Proposal.

In response to Commissioner Alix’s query, Commissioner Butler said that it would also address the lack of stare decisis and thereby bring more certainty to the system. Professor King agreed and noted that there would be a "great deal more expedition" in reorganization cases. Addressing Commissioner Ceccotti’s concerns regarding non-bankruptcy issues, Professor King observed that the jurisdiction authority accorded an Article III bankruptcy court would make it much easier for such court to deal with these issues. He said her concerns actually supported the Proposal.

Commissioner Ceccotti explained that she favored the current system because it enabled generalists to deal with the "novel issues" that she previously described.

Although Commissioner Jones agreed with Commissioner Butler in that there were Article III courts with limited jurisdiction, she maintained that there would be no practical way to confine the jurisdiction of an Article III bankruptcy court. Addressing Commissioner Alix’s concerns, Commissioner Jones noted that "Marathon II" would not hold all bankruptcy courts to be unconstitutional. She said that the cure that was being proposed would be "much, much bigger than the remedy" as it involved the fundamental legal stru


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