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News Room


Friday and Saturday, October 18-19, 1996
San Diego Marriott Hotel & Marina
San Diego, California

Approved: December 17, 1996
Prepared by: Susan Jensen-Conklin
Deputy Counsel


San Diego Marriott Hotel & Marina
San Diego, California


Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Jay Alix
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
Judith K. Benderson, Legislative Counsel
Carmelita Pratt, Administrative Officer

Public Attending:

Over the course of the two-day meeting, approximately 300 people attended, including representatives from the American Bankers Association, American Bankruptcy Board of Certification, American Bankruptcy Institute, American Bar Association, American Tax Reduction Movement, Commercial Investment Real Estate Institute, Commercial Law League of America, Community Associations Collectors, International Council of Shopping Centers, National Association of Attorneys General, National Association of Bankruptcy Trustees, National Association of chapter 13 Trustees, National Association of Consumer Bankruptcy Attorneys, National Retail Federation, and the States’ Association of Bankruptcy Attorneys, among others. Federal agencies such as the Administrative Office of the United States Courts, the Executive Office for United States Trustees, Small Business Administration, United States Department of Justice, the Securities and Exchange Commission, and the Internal RevenueService were represented. The federal judiciary, bankruptcy administrators, professors of law, United States Trustee representatives as well as chapter 7, 12 and 13 trustees attended. Representatives from state government, credit unions, banking and credit industry, the Pension Benefit Guaranty Corporation, professional and trade associations, private industry, accounting firms, law firms, paralegals, debtors, and the media, were also present.


At approximately 8:45 a.m., Chair Williamson called the meeting to order and reviewed the meeting agenda. After discussing the Commission’s data base project, he reported on the recently enacted legislation that appropriated an additional $494,000 to the Commission.

In response to his request for an overview on bankruptcy legislation considered by Congress, Legislative Counsel Judith Benderson discussed several pieces of legislation including an amendment to the quarterly fee structure for the United States Trustee Program, the addition of two dischargeability exceptions to 11 U.S.C. § 523, among other legislative matters.

At the conclusion of Ms. Benderson’s remarks, Chair Williamson introduced Samuel Gerdano, Executive Director, American Bankruptcy Institute ("ABI") as an invited witness.


Mr. Gerdano began his remarks by providing an update on the ABI membership survey. He mentioned that a final report on the survey would be available at the ABI Winter Leadership Conference in early December.

After recounting the demographics of the survey respondents, he then reviewed selected survey results. He noted, for example, that 80 percent of the respondents identified their satisfaction level with the bankruptcy system as either good or very good, while only three percent rated it as poorly operated. With regard to the survey question that asked what the primary objectives of the bankruptcy system should be, Mr. Gerdano said that the three most prevalent responses were enhanced distribution to creditors, providing debtors with a fresh start, and maintaining equality of treatment of like-situated creditors. The respondents cited mismanagement as the primary cause of business bankruptcies and identified ease of obtaining credit cards and access to credit as the leading cause of consumer bankruptcies, he reported. He then reviewed the results of several other survey inquiries. In response to Chair Williamson’s query, Mr. Gerdano explained that the survey results will be tabulated by geographic location as well as other indicia.

The "biggest problems" requiring legislative reforms identified by the survey respondents, according to Mr. Gerdano, were the United States Trustee Program, insufficient policing of debtor fraud and abuse, forum shopping, Article III status, the cost and delay of the bankruptcy system, and the pro-debtor proclivity of the bankruptcy bench.

Mr. Gerdano then gave his observations regarding the 104th Congress. He observed that as the Commission was active in a "very public and visible way," this had the effect of discouraging Congressional action. He considered this to be a "probably good" result, reflecting a positive endorsement of the Commission’s work.

At the conclusion of Mr. Gerdano’s comments, Commissioner Alix noted that the work of the ABI in connection with its membership survey was "very helpful" to the Commission and that it may be "one of the most valuable tools" given to the Commission.


Chair Williamson introduced this session by noting that the subject of small business bankruptcy was an area of "particular concern" and acknowledged the contributions of Hon. Thomas Carlson, United States Bankruptcy Judge - N.D. Cal., to the Commission's work in this area.

Mr. Case began his overview of the subject matter by acknowledging the contributions of former Staff Attorney George Singer and current Staff Attorney Jennifer Frasier to the work of the Small Business and Single Asset Real Estate Working Group. He then identified two memoranda that he said described the "current state" of the Working Group's thinking and tentative conclusions. One of these memoranda, dated September 7, 1996, was prepared by Mr. Case while the other, dated October 9, 1996, was drafted by Judge Carlson.

Over the course of the Working Group's deliberations, Mr. Case noted that no one had asserted that chapter 11 as applied to small business cases was working properly. As summarized in Judge Carlson's memorandum, Mr. Case recounted the Working Group's findings: (1) the success rate for small business chapter 11 cases was very low; (2) the principal reason for the low success rate was that an "extraordinary number" of these cases had no realistic prospect of business viability; (3) these cases did not move through the chapter 11 process any faster than their larger, more complex counterparts; (4) unsecured creditors rarely participated in these cases; and (5) the requirement for disclosure statements imposed a high cost for these debtors. Mr. Case also noted that there were concerns about the reliability and fairness of the chapter 11 system and its macro economic inefficiencies that allowed unviable enterprises to operate too long under the protection of chapter 11. Accordingly, the Working Group identified two objectives, he said. One was to develop a way to move viable cases faster and less expensively through the chapter 11 process. The other goal was to identify and eliminate from the system as quickly as possible those small business debtors that had no reasonable prospect for emergence from chapter 11.

To implement these goals, the Working Group determined five concepts, Mr. Case noted. The first consisted of instituting a bright line test for identifying small business debtors. The test for a small business, he explained, would be a debtor with $10 million or less in gross income as defined in Section 61(a) of the Internal Revenue Code. The second concept would shift the burden of proof in certain instances to the small business debtor, he said. The Working Group, for its third concept, determined that it was disinclined to establish a separate chapter under the Bankruptcy Code for small business debtors. The fourth concept would require clearer time lines for emergence from chapter 11, he said. As the fifth concept, Mr. Case noted that there should be more supervision involving an expanded role of judicial supervision.

The time line envisioned by the Working Group, Mr. Case explained, would require an initialstatus conference to be held within 30 days from the date of filing, the purpose of which would be to get the bankruptcy judge informed quickly about the debtor's business and viability. The next event on the time line would require the debtor within 45 days of the petition date to file a plan or move to extend its time for filing such plan. Within 60 days of the petition date, a second mandated status conference would have to be held. If the plan and disclosure statement were filed by the date of this conference, then the bankruptcy judge would schedule the disclosure statement and confirmation hearing dates. If the plan and disclosure statement were not filed by this date, then the judge would have several options: conversion, dismissal, appointment of a trustee, termination of the automatic stay or the setting of a hearing date on whether an extension was justified. Based on a preponderance of the evidence standard, the debtor, Mr. Case observed, would have to establish that a feasible chapter 11 plan can be confirmed within a reasonable time and that the debtor will meet its postpetition tax obligations on a timely basis.

Mr. Case also reported that the Working Group was considering the expansion of judicial flexibility with regard to the disclosure statement requirement. This would permit the judge in his or her discretion to combine the hearing on the disclosure statement with the confirmation hearing or to dispense with the disclosure statement requirement in toto. He added that the confirmation hearing deadline, unless extended, would be 75 days from the petition date. If the case was not confirmed by this date, then the debtor would have to establish cause for an extension of this time period at a hearing.

At the conclusion of Mr. Case's opening remarks, Chair Williamson explained that his presentation provided a "terrific" illustration of the deliberative processes employed by the Commission's Working Groups. He then asked each of the invited participants to introduce themselves. The participants present were Hon. Thomas Carlson, United States Bankruptcy Judge -N.D. Cal.; Deborah Fish, a partner in Allard & Fish and a chapter 7 trustee, Valery Early, Bankruptcy Administrator for the Northern District of Alabama; Joel Pelofsky, United States Trustee - Region 13; Keith Shapiro of Chicago; Marcy Tiffany, United States Trustee - Region 16; and Dwight Williams, Bankruptcy Administrator for the Middle District of Alabama.

Chair Williamson asked the participants to discuss the respective roles of the United States Trustee and Bankruptcy Administrator. Mr. Williams explained that one of the "obvious distinctions" was that the Bankruptcy Administrator system was under the auspices of the federal judicial branch while the United States Trustee Program was within the executive branch. On the other hand, he noted that the respect roles of each were very similar: to superintend the administration of bankruptcy estates. He said that upon the filing of a chapter 11 case in his district, an operating order was entered that required the debtor to file a plan and disclosure statement by a date certain, usually 120 days from the petition date. Then the bankruptcy administrator met with the debtor within a week of the filing to review its fiduciary responsibilities and financial reporting requirements such as filing operating reports. Thereafter, Mr. Williams said that the bankruptcy administrator reviewed each monthly operating report to ensure that there was no diminution of the debtor's estate.

Mr. Early added that there were differences among the bankruptcy administrator districts with regard to the extent of reporting requirements and mentioned that in his district there were more in effect than in Mr. Williams' district. He observed that staff accountants went to the debtor's place of business to review the debtor's books and records to ensure that they were properly maintained and reconciled with the debtor's first monthly operating report. In addition, a preference audit was performed by the staff accountant during this on-site visit, he stated. Further, the accountants assessed whether or not the debtor had an ongoing business.

Commenting on the extent of operations of the United States Trustee varied among different districts based on case volume, Mr. Pelofsky said, for example, that his office conducted an initial debtor interview usually within one week of the filing date to make sure that the debtor had insurance and to inquire into the status of the debtor's taxes and for the payment of postpetition obligations. He added that his office required the debtor to establish a "brand new banking relationship" to cut off the prepetition financial activity.

After observing that her region had a much larger case volume than others, Ms. Tiffany said that this impacted on the nature and character of the procedures in effect in her region. She also noted that the case mix in her region was different. She observed that approximately 34 to 35 percent of the chapter 11 cases concerned operating debtors and that 47 percent of the region's chapter 11 cases were real estate cases, half of which were single asset real estate cases. As to separating out "DOA" debtors from viable ones, Ms. Tiffany said that there were three categories: those that had some realistic possibility of reorganizing, those that had some chance of reorganizing, and those that had neither the ability nor the intent to reorganize.

When asked by Commissioner Hartley how soon her office made its determination that a case was DOA, Ms. Tiffany said that the "first clue" was total noncompliance. She then cited several examples of noncompliance such as the failure to submit a real property questionnaire, proof of insurance coverage and licenses, recent financial statements, projected cash flow statements, copies of tax returns for the prior three years, and a list of insiders, among other items of information. Although she said that her office did not have time to meet with all of these debtors initially, Ms. Tiffany stated that the debtors were required to contact her office telephonically to make sure that they understood the reporting requirements.

Commissioner Shepard asked if many of the real estate DOA cases were "tax-motivated chapter 18s" or whether they were filed to use chapter 11 to liquidate assets and "trap the tax" before converting to chapter 7. As these debtors provided very little information, Ms. Tiffany explained that it was "difficult to get too refined about them." In response to Commissioner Hartley's question as to whether her office utilized the same type of order used by the Bankruptcy Administrator System, she said that her office relied on the Bankruptcy Code and the United States Trustee Guidelines. Responding to Commissioner Shepard's query with regard to the disposition of those cases that "just need a little more time," Ms. Tiffany noted that most of them were dismissed for noncompliance. Commissioner Hartley asked how soon did her office move to get these cases out of the system. She answered that one of the problems concerned distinguishing these cases fromthose that may be in compliance. She explained that her office issued a notice of deficiency that notified debtors of their noncompliance and enabled her office to identify those cases for which motions should be prepared. She said that her office "probably" could have a motion prepared within approximately 30 days and that it would take another 30 days to have the motion calendared based on the time required by the clerk's office to notice these hearings. In sum, she said that the "vast number" of the noncompliance cases were on the court's calendar within 60 to 75 days.

When asked by Commissioner Shepard whether this time frame would be reduced if her office was required to meet with every debtor within two or three days from the petition date, Ms. Tiffany responded "[a]bsolutely not" as the debtors would simply not show up at these meetings and that this would not constitute grounds for dismissal. To make such failures constitute grounds for dismissal, Mr. Early suggested that they should be court-ordered events. Ms. Tiffany acknowledged that this approach would "certainly be a way to do it," but mentioned that there was a policy issue. She explained that the current system had an open door policy without any entry requirements and that there were no exit penalties as well. For those debtors that negotiated with their creditors while having the benefit of the automatic stay without reorganizing, she said that the issue was whether these cases constituted an improper use of chapter 11. If this constituted a failure of the system, then she suggested that these cases should be flushed out of it. On the other hand, if this constituted a success of chapter 11, then one may want to "think twice" about doing this, she advised.

In response to Commissioner Gose’s question as to how the Bankruptcy Administrator system handled these debtors, Mr. Early said that it was done differently as these initial meetings were court-ordered. He then reviewed his office's chapter 11 filing and case closing statistics. Ms. Tiffany added that it was "definitely possible" to develop procedures for flushing nonperforming real estate cases out of the system more quickly.

Commissioner Shepard asked Ms. Fish whether the 75-day period was worrisome. From the position of a chapter 7 trustee, she responded that generally the assets of non-single asset real estate debtors dwindled while they remained in chapter 11. Other typical factors that she noted were that the principals of these debtors were paid regularly during the pendency of these cases whereas prepetition they were paid only intermittently. She favored the appointment of a monitoring agent who would visit the debtor's premises. Ms. Tiffany said that her office conducted site visits for those debtors identified as "real cases." She noted, however, that there was a lot of sorting that had to be done before the identification process was done.

Ms. Fish asked Mr. Williams how fast were these non-performing debtors identified. He said that this review could be done based on the first month's operating report. Commissioner Shepard asked whether the current system protected against a situation where a debtor ceases operations postpetition while continuing to pay compensation to its counsel and principals. Mr. Williams said that 30 days was "as quickly as his office could move" against this type of debtor without an on-site visit. Referring to Ms. Fish's comments, Commissioner Shepard noted that within 30 days "[l]ots of things are gone." Ms. Tiffany observed that her office had a "pretty good idea" about a debtor's reorganization potential based on the compliance reports and when it determined that a debtor lackedthis potential, her office made a compliance motion.

When Commissioner Shepard asked for confirmation that it took 75 days to get this type of debtor out of the system, Ms. Tiffany explained that this time period referred to the date on which the motion would first be heard by the court. Removing a case from the system, she noted, depended on how many continuances the court granted the debtor. Mr. Williams agreed that his office had similar experiences.

Ms. Fish noted that during this period, the inventory usually turned into accounts receivable, which had been collected and paid, enormous adequate protection payments were made to the secured creditor and the preference actions were given to the secured creditor pursuant to the first day cash collateral order. She said that for many of these small business cases, there was no creditor involvement and protection. She suggested that the system should protect these creditors.

Ms. Tiffany noted that while there may not be creditor involvement, there "always" was a United States Trustee representative reviewing these debtors' compliance. She said that there were motions "on every case" where there was "not complete and full compliance." While distinguishing the Central District of California, Mr. Pelofsky said that the United States Trustee did review first day applications to highlight potential abuses to the court and that it was often successful in striking a balance to allow some opportunity for a debtor to treat its creditors equitably as the case progressed. He explained that the issue concerned access. He did not think a legal system could be created that denied access to people based on argumentative perceptions such as viability. He said that there was "no way" that this could be evaluated in the early days of a case. He also noted that there were "a lot of tools" available preconfirmation "to sweep" these cases out of the system.

Although Commissioner Hartley, in summarizing the participants' comments, noted that the United States Trustee in California sometimes had a "hard time" in "staying on top" of its cases, Ms. Tiffany retorted that it did not have a "hard time" and that it monitored cases "very effectively." Commissioner Hartley responded that the time frames were longer and observed that a motion to dismiss a chapter 11 case in Mobile, Alabama, for example, could be heard on an emergency basis within "about a week or two." He then asked Mr. Shapiro for his input on what the panelists discussed and on the concept of a monitoring agent.

Mr. Shapiro said that he had "mixed emotions" about many of the proposals being considered by the Working Group. He explained that as his firm represented large and small debtors, trustees and creditors, he was "sensitive to the plight of all these different parties." He observed that debtors resorted to bankruptcy because they generally were losing money and that this problem continued postpetition. Accordingly, he said that large as well as small debtors deserved some time during the "breathing spell" afforded by chapter 11 to fix this problem. He then mentioned several examples of the items that could be fixed during this period although he noted that many small cases missed one of those elements that were critical to a successful reorganization. These companies, he said, took a little more work and time in chapter 11 to get these problems resolved. In sum, Mr. Shapiro said that he rejected the concept that postpetition losses were a "terrible thing" and that a monitor couldmake a better assessment of a debtor's viability than the debtor's creditors, particularly secured lenders. He suggested that these monitors would not result in a "tangible difference" or shorten the time it required to flush these cases out of the system.

Mr. Shapiro observed that the biggest problem with these cases was case management. In this regard, he thought that the mandatory status conference was a good idea. He suggested that there should be more scrutiny of these cases by either the United States Trustee or the court, or a combination thereof. He also noted that cutting back on disclosure statement requirements was a good idea.

Although Commissioner Gose asked Mr. Shapiro for his opinion regarding the Bankruptcy Administrator system, Mr. Shapiro said that he had limited knowledge of the system. He noted, however, that some of their procedures were consistent with his support for enhanced case management. He also observed that many of the unsuccessful cases were filed by attorneys who should not have filed such cases based on their lack of experience. He supported certification for professionals so that a baseline was created.

In response to Commissioner Shepard's query, Mr. Shapiro said that he was "[a]bsolutely not" opposed to requiring debtors to remain current with regard to the payment of postpetition taxes and maintenance of postpetition insurance. Agreeing, Ms. Tiffany said that this was "a really wonderful idea."

Mr. Early disagreed that a bank’s judgment was "better or more reliable" than the judgment of an independent party regarding the determination of a debtor's feasibility, although he agreed that the addition of a small business monitoring agent was "probably over-kill." He also noted that out of all the chapter 7 filings in his district for the past six months, only three cases exceeded the $10 million bright line discussed by Mr. Case. In addition, he observed that a small business monitoring agent would not serve to "out crook a crook." Ms. Tiffany concurred. Mr. Shapiro said that even in Chicago the $10 million limit would include a "very high percentage" of the chapter 11 filings.

Mr. Shepard asked the panelists to discuss the possibility of a Bankruptcy Administrator or United States Trustee representative visiting the debtor's premises to verify taxes and insurance coverage, among other items. Ms. Tiffany said that the United States Trustee Program was doing this already. Mr. Shapiro said that he was unaware that this was the practice of the United States Trustee in his district. He noted that his creditor clients were willing to rely on the perjury laws as applied to the debtor's financial reports. Ms. Tiffany then clarified that she did not mean to say that her office went to the debtor's premises to verify this information. Rather, her office had the debtor supply the underlying proof and verification for her office's review.

Judge Carlson said that the question was how sophisticated should the monitoring system be, the amount of resources that should be devoted to it, and whether it should be implemented by government or private entities. Although the panelists said that the current system is working effectively, he noted that there were still a "great number of cases" that did not reorganize,notwithstanding this scrutiny. He acknowledged that courts were reluctant to grant a motion early in a case under the current burden of proof. He suggested that the effectiveness of the current system could be improved by using the lack of compliance with the administrative requirements or the presence of a significant amount of delay as "danger signals" that should require the debtor to prove that a reorganization is likely.

Commenting on Mr. Shapiro's remarks, Ms. Fish noted that the problem was not present in those cases where there were sophisticated creditors' committees or where the debtor or committee hired a turnaround expert. She thought that the $10 million standard may have to be reduced. Her concern, however, was who would independently monitor the case absent a creditors' committee. Although she said that it would appear that the United States Trustee and Bankruptcy Administrator systems were doing "excellent jobs," she was not convinced that all of the regions act with the same degree of guidance or expend the same amount of energy.

In response, Ms. Tiffany referred to two papers that she prepared and recently distributed to the Commission. She also noted that the funding arrangement for small business monitors was "unworkable" and that the data collection provision was likewise "unworkable" due to the cost and time resources it would require. Further, she said that while the United States Trustee was reviewing the debtors' operating reports and assessing the debtor's feasibility, the real problem was requiring the United States Trustee to prove that the debtor cannot reorganize. As the discussion on this issue came to a close, Mr. Shapiro observed that the concept's deadlines were "too draconian" and that there should be greater flexibility.

In concluding this portion of the plenary session, Chair Williamson asked Mr. Case to summarize the discussion by outlining the eight points comprising the small business concept. These were identified as the $10 million bright line definition for small business debtors, mandatory status conferences, mandatory time frames, reallocation of the burden of proof regarding the debtor’s entitlement to continued protection under chapter 11, postpetition monitoring, postconfirmation monitoring, disclosure statement flexibility, and no separate chapter for small business cases. Chair Williamson then explained that the purpose of this portion of the session was to provide a "real sense" of where individual Commissioners were on each of these issues.

With regard to the $10 million definition, Commissioner Alix recalled that this figure was not based on any empirical evidence and asked whether the Working Group had any information that would show what portion of business filings exceeded this limit. Mr. Case said that the Working Group was proceeding based on the "more or less anecdotal perception" that this amount may apply to 90 percent or 100 percent of all chapter 11 filings in some districts. Commissioner Alix recommended that the Working Group ask the Administrative Office of the United States Courts or Federal Judicial Center to compile a statistical estimate regarding this definition.

Commissioner Jones recalled that either Judge Fenning or Judge Bufford recommended this figure as a cutoff for several reasons. It covered, for example, a large proportion of single asset real estate cases, she noted. Commissioner Hartley observed that the intent was to include a highpercentage of chapter 11 cases based on the high failure rate for these cases. Commissioner Alix added that a statutorially imposed bright line should have some adjustment feature to allow either for inflation or the consumer price index because $10 million now will not mean the same thing ten years from now. Commissioner Ginsberg recalled that 11 U.S.C. § 104 had a built-in provision for automatic inflation adjustments. Commissioner Alix suggested that it was important to leave the bankruptcy judges with some discretion to consider exempting certain debtors under special circumstances. He said that absolute rules can tend to create "absolute problems." Commissioner Hartley responded that the Working Group considered this concern, but decided to have a defined bright line that was absolute. Commissioner Alix observed that the bankruptcy judges may nevertheless have discretion under 11 U.S.C. § 105.

With regard to the prospect of having to hold a hearing on this issue, Commissioner Ginsberg said that the "worst time" to have this hearing was at the outset of a case because of the chaotic conditions affecting the debtor at that time. The measure of where the cutoff should be, according to Commissioner Alix, was even more important if there was to be no hearing on the issue. He noted that these cutoffs could vary widely across the nation. Professor King observed that giving a bankruptcy judge discretion on this issue would generate more litigation. On the other hand, he said that under all of the mandatory provisions of the small business concept, the bankruptcy judge was given a "great deal of discretion." As to those cases falling outside of the $10 million bright line, Professor King noted that the bankruptcy judge retained "an awful lot of discretion" to increase or reduce deadlines.

As to the second component of the small business concept, that is, mandatory status conferences, Commissioner Ginsberg said that he had "a lot of difficulty" with it as it was similar to the system in effect before the enactment of the 1978 Bankruptcy Code. He said that the status conference would be presented from an ex parte point of view to the decision maker who, thereafter, would be called upon to be impartial. He asked the Working Group to explain this component of the small business concept in greater detail.

Commissioner Shepard asked Commissioner Ginsberg if he would be more comfortable if an independent monitoring agent reported to the court at the status conference the results of its review of the debtor's books and records. Commissioner Alix asked Mr. Case to explain what was the Working Group's goal with regard to this recommendation. Mr. Case responded that the Working Group felt that this would cause the bankruptcy judge to become directly informed about the debtor and to obtain a sense of whether the case belonged in the system or not. Commissioner Gose added that it would cause the debtor to realize that it was in a system where there were precise deadlines.

Commissioner Jones observed that this dovetailed very well with how the United States Trustee and Bankruptcy Administrator were currently monitoring their cases. When asked by Commissioner Alix as to whether or not the United States Trustee currently had status conferences, Commissioner Gose said that it varied. Commissioner Ceccotti said that the panelists indicated that the practice did vary, but that there was some effort either directly or through the mail to establish some contact.

Commissioner Ginsberg said that if motions were pending, then all parties affected by it would have to be heard by the bankruptcy judge. While observing that a judge may get to know the case through this process, Commissioner Ginsberg noted that he or she would hear only one side and this information would not be tested by cross examination. He questioned what a judge would actually learn through this process.

Commissioner Jones observed that the premise underscoring this recommendation was that there was little creditor oversight in these cases. Commissioner Ginsberg said that he believed that the judge should be an adjudicator and that the United States Trustee and Bankruptcy Administrator were established to maintain this role for the judge by removing him or her from the administration of these cases. He was also concerned that this would cause the judge to become too involved in the case and, correlatively, to cause the judge to favor the debtor's reorganization.

Commissioner Shepard noted that there was a survey of the 9th Circuit bankruptcy judges that showed a majority favored more judicial involvement earlier in these cases. In addition, he noted, Commissioner Ginsberg's concern regarding judicial favoritism would be balanced by shifting the burden of proof as suggested by the small business concept.

Noting that he may be alluding to matters bearing more on interpersonal relations than legislative change, Commissioner Alix observed that there had been a lot of tension between some bankruptcy judges and some United States Trustees and that on occasion actions were brought by the United States Trustee that were disregarded by the bankruptcy judges. On the other hand, he said that there were other districts where a good working relationship existed and there was mutual respect. Commissioner Ginsberg observed that he came from a district where the United States Trustee system worked "marvelously." He said that it was not the concept of the United States Trustee system that has caused the problem, but the appointment of certain United States Trustees was "most unfortunate."

Commissioner Alix suggested that the United States Trustees should be encouraged to standardize their case monitoring activities and that the bankruptcy judges should likewise be encouraged to better support the work of the United States Trustees. He suggested that the problem could be addressed by the entry of an administrative order directing the debtor to remain current with administrative expenses, maintain insurance, and otherwise comply. If the debtor failed adhere to with these provisions, the order would not permit the debtor to remain in the system.

In response, Commissioner Shepard observed that the Working Group decided that the bankruptcy judge should play a more active role in the administration of small business chapter 11 cases. Commissioner Ginsberg, however, said that he needed to know what was meant by "an active role." Chair Williamson said that the Working Group would focus on this issue.

Mr. Case then addressed that aspect of the concept that would allocate to the debtor the burden of establishing by a preponderance of the evidence that it had a probability of confirming a feasible plan within a reasonable period of time in order to enjoy the continued benefits of Chapter11. This hearing, he explained, would be held if the debtor either failed to file a plan within 45 days or failed to confirm a plan within 75 days from the date on which the case commenced. While one requisite party to this hearing would be the debtor, he said that the Working Group was considering whether the other parties would be the United States Trustee, an independent feasibility monitoring agent, or a Bankruptcy Administrator.

Commissioner Alix observed that the time frames for filing and confirming a plan were inextricably linked to the standard of proof, that is, shorter time frames should result in a lower standard of proof. Mr. Case recounted that the Working Group determined that a "tough set of requirements" would affect prepetition planning by debtor's counsel and serve as a disincentive to the filing of "DOA" chapter 11 cases. It would also cause the debtor to undertake the necessary preparation prepetition in order to meet these stringent standards.

While agreeing with the first point discussed by Mr. Case, Commissioner Alix "totally" disagreed with the second point as most small business cases were filed on a "knee-jerk reaction basis" without much time for prepetition planning. In addition, he observed that a small business debtor typically had poor recordkeeping and limited staff. While not opposed to the concept of a deadline, Commissioner Alix said that the question involved determining how stringent it should be given the risk that it may cause the system to lose some debtors that could have reorganized. He suggested that the legislative history of chapter 11 would show that it was intended to help companies reorganize and that the deadline should err on keeping debtors in the system a little longer, rather than a little shorter. He also suggested that this issue was related to the definition of a small business being considered by the Working Group. A higher threshold amount would affect these time frames, he said.

Returning to Mr. Case's comments about the disincentive effect of the concept, Professor Warren asked the Working Group members to consider the distribution consequences involved. If a small business did not file for relief, she asked, will the secured creditor get all of the assets and the unsecured receive nothing? Commissioner Shepard said that this would be reviewed. Commissioner

Alix commented that this may increase chapter 7 filings.

Observing that this concept involved an in loco parentis premise, that is, creditors were not actively protecting their own interests, Commissioner Ginsberg recommended that the Working Group consider ways to motivate creditors to become more active. Commissioner Jones said that 18 years of experience had proven that this was not possible. Commissioner Ginsberg responded that this experience had proven that it had not happened, but not that it was not possible.

Commissioner Shepard mentioned the problem of the public's perception of the integrity of a bankruptcy system that allowed "this looting of cases to go on" and the high administrative expenses that were paid before tax claimants received anything. Commissioner Ginsberg questioned why creditors were not actively involved in monitoring a debtor with $10 million in cash flow, which he described as a "pretty sizeable outfit." Commissioner Shepard observed that creditors did not want "to throw good money after bad."

Given the comments by the panelists concerning their case monitoring efforts and the very wide geographical diversity that existed, Commissioner Ceccotti asked whether the Working Group members wanted to rethink whether "one size fits all" with regard to the time limits was appropriate. Commissioner Gose said that the Working Group would look at this concern as it tied into Commissioner Alix's concerns as well. Commissioner Ceccotti maintained that it may be better to allow a little more flexibility in the front end of a case. Referring to Judge Carlson's comments, she also suggested that the Working Group should consider the burden of proof issue in a broader way than simply at one point in the process. Agreeing, Commissioner Alix said that it related to an overall issue of systemic compliance.

Continuing on to the next aspect of the concept, Mr. Case explained that the Working Group favored retaining those provisions that allowed creditors to waive the absolute priority rule as opposed to adopting those provisions incorporated in the separate small business chapter legislation that mimicked the disposal income test of chapter 13. Commissioner Hartley added that the Working Group determined that a separate chapter was not necessary to effectuate meaningful changes to small business cases.

Commissioner Ginsberg commented that he was originally "amazed" at how often debtors sought extensions at the confirmation hearing because creditors had not voted. Accordingly, he thought that it would be "economically more efficient" to eliminate the requirements for disclosure statements and to rely on the confirmation process. Professor King noted that there was a "big difference" between this concept and chapter 13 as the latter had a disposable income test and that unsecured creditors would receive nothing absent having the power to vote on the plan.

Concerning the issue of whether there should be separate and different treatment for single asset real estate cases, Mr. Case said that this would be discussed at the Commission's next meeting. He then asked the Commissioners to comment on what type of monitoring should be performed postpetition for small business cases.

Commissioner Ginsberg said that it was the role of the United States Trustee to set up a system for debtors to file monthly financial reports and that the system appeared "to work fine." Mr. Case asked whether there should be an analysis of the debtor's viability. Commissioner Ginsberg responded that the reporting process was a starting point and that the failure to comply with this process would "certainly be cause for serious consideration" after notice and hearing.

Given the statistics provided by the United States Trustee's Office that approximately 85 percent of these cases either convert or dismiss in 18 months, Commissioner Shepard asserted that he did not consider this to be a system that was "working." Noting that he disagreed, Commissioner Ginsberg explained that the ability to monitor these cases was presently built into the present United States Trustee system, although it was not exercised in all districts. As he previously observed, the United States Trustee Program was "unfortunately" a product of the personnel within each district and that this was a matter that needed "to be cleared up."

Commissioner Jones asked why the United States Trustee should not be required to perform certain responsibilities and to dismiss those cases where the debtors failed to perform. Commissioner Ginsberg believed this could be done, although he thought the United States Trustee Program had "done it fairly well" although there has "historically" been a "lack of supervision from Washington."

Commissioner Alix suggested that the Working Group may want to review how the United States Trustee Program was functioning on a global basis and not just in a few districts and whether its statutory mandate gave it the power and resources to monitor these cases with the support of the judiciary. He suspected that probably all the tools and procedures were currently in place, but that there needed to be a greater focus on execution.

Before the session concluded, Commissioner Alix wanted the record to reflect that he thought that the elimination of the disclosure statement requirement for small businesses was merited. He suggested that the disclosure statement or a short version of it be made available to creditors upon request. With regard to feasibility analysis, he did not think that either the United States Trustee or the bankruptcy judge was qualified to perform this task and that, therefore, the concept of an independent feasibility evaluator may be a "good option to have." He recommended that a cost benefit analysis and a review of the "burn rate" be performed.

At the conclusion of Commissioner Alix's remarks, Chair Williamson summarized the agenda for the remaining portion of the meeting and closed the session.


At approximately 3:03 p.m., Chair Williamson convened the plenary session on consumer bankruptcy. He began this session by remarking that of all the subject matters considered by the Commission, consumer bankruptcy had engendered the most interest and controversy and that it was probably the most important area for review. He observed that there were now one million families who filed for bankruptcy relief during the past year.

Noting that the Commission had focused on consumer bankruptcy at each of its prior meetings, Chair Williamson acknowledged that this focus occurred in different ways: sometimes on Chapters 7 and 13 as they exist and sometimes on whether or not a unitary basic bankruptcy system was a viable alternative to the present system. The focus of this session, he explained, would be on what was good and bad about the current system.

Professor Warren prefaced her comments by noting that the Commission maintained a data base as well as a mailing list on consumer bankruptcy issues. She explained how the consumer bankruptcy issue list was prepared.

Hon. Leif Clark, United States Bankruptcy Judge - W.D. Tex., addressed the scope of adebtor’s discharge. He noted that if there was a system that encouraged chapter 13 and made reaffirmations essentially unavailable in chapter 7, then the discharge should be broadened and exceptions to it minimized. If, however, the current chapter 7 system is maintained, that is, with reaffirmations, then the present discharge exceptions should be retained as they represent policy considerations.

Henry Sommer of Philadelphia said that all of the discharge issues being discussed were not new and were debated by the prior Commission. With regard to the fraud exception, he observed that there has been a theme of creditor overreaching as illustrated by the implied fraud credit card cases. He stated that there were two dangers presented by this trend. First, many more of these actions were being brought as a means of coercing reaffirmations and that, accordingly, the award of attorneys’ fees incurred by a debtor in defending against these actions ought to be mandatory. Although these actions may not be justified, debtors and their counsel do not want to deal with the risk of litigation and so they settle these actions, he asserted. Second, he said that the standard was not clear with regard to credit card fraud.

Professor Warren asked whether or not there ought to be a clarification about when credit card debt is nondischargeable. She said that the proposed standard, as proffered by Mr. Sommer, was that such debt be dischargeable if the only evidence of fraud was that the debtor used the credit card when he or she was in financial trouble.

William Binzel of MasterCard responded that there were different levels of intent and that there had to be an examination of whether or not the debtor who incurred the debt had a reasonable expectation of repaying that debt. He supported clarification of the standard by examining the reasonableness of the debtor’s expectation of his or her ability to repay the debt. Commissioner Hartley observed that the Commission at its meeting in San Antonio heard that it was too easy to file for bankruptcy relief and that it was too easy to obtain credit. He wondered whether everyone on each end of this process should be punished.

Remarking that this was a "fair and legitimate" concern that the Commission should explore, Mr. Binzel recalled that historically credit cards were available only to the affluent. For various reasons, he noted, the availability of credit cards had become "democratized" and that this was not a "bad result." He noted that credit decisions were based on a person's past credit history and that the number of solicitations indicated that there was a lot of competition in the industry, which consists of 6,000 institutions. As a result of this competition, there has been a democraticization of credit and that this had produced a "very positive" result for individuals and the economy.

Hon. Jay Cristol, United States Bankruptcy Judge - S.D. - Fla., agreed with Mr. Sommer in that he was receiving a "flood of cases" concerning credit card fraud. He asserted that the credit card companies who were "so generous in democratizing credit" were "making huge profits" and hiring counsel to pursue debtors who already had their "back to the wall." He mentioned that there was a policy in the Southern District of Florida against any settlement of this type of lawsuit without court review and under advice of counsel. He observed that "massive numbers of cases were just slippingthrough as approved," although the majority of debtors were "honest, decent people that have had bad times." He said that these debtors were "not in a position to fend for themselves" and thus needed protection from this type of litigation.

Hon. Kathleen P. March, United States Bankruptcy Judge - C.D. Cal., noted that one could argue that everyone was "guilty," that is, those credit card companies that "shove credit down people's throats," and debtors who use credit irresponsibly. Judge March then discussed 11 U.S.C. § 523(a)(6) that, by definition, applied to debtors who were not innocent. If Chapters 7 and 13 were combined, Judge March said that there was a "very strong policy argument" that these types of debts should not be dischargeable under a unitary system. When asked by Professor Warren whether Section 523(a)(6) should apply to current chapter 13, Judge March observed that there was a difference between what chapter 13 was intended to be and how it was applied in Los Angeles. Although chapter 13 was intended to have debtors repay a significant part of their unsecured debt, there was "an awful lot" of zero and low percent plans that were confirmed in the Central District of California.

Professor Lawrence Ausubel of the University of Maryland advised that caution should be exercised before introducing rules that affect the dischargeability of credit card debt as his research showed that people "generally and systematically" underestimate the extent of their credit card debt and their inability to repay it. If the dischargeability standards for credit card debts were made harsher, people would not adjust their behavior, he opined.

Hon. Thomas Waldron, United States Bankruptcy Judge - S.D. Ohio, recommended that chapter 13 discharge provisions should be "left alone" or expanded and that chapter 7 be modified "if there has to be change." He explained that the discharge provisions of chapter 13 provided an opportunity for individuals to reorganize their debts and to do other things that were not necessarily debt-related.

Ike Shulman, President of the National Association of Consumer Bankruptcy Attorneys, observed that non-tortfeasing debtors were being imputed to have committed torts and thereby having their debts held to be nondischargeable. He said that the establishment of an intent to defraud should be a prerequisite for a nondischargeability determination. Responding to Judge March's comments regarding zero percent chapter 13 plans involving claims for wilful and malicious injuries, Mr. Shulman said that these plans still had to satisfy the good faith standard and that a case involving egregious acts would probably not be confirmed under current law.

Hon. Alan Ahart, United States Bankruptcy Judge - C.D. Cal., observed that the greatest source of litigation in his district concerned credit card debt actions. Accordingly, he recommended to the Commission that this had to be "fix[ed]" and that a "bright line test" was needed. In this regard, he cited the 9th Circuit's decision, In re Anastas, which held that intent to deceive must be established to support a nondischargeability determination for a credit card debt. He would not take a position on whether obligations based on wilful and malicious injury should be nondischargeable in a chapter 13 case. If this exception was made applicable to chapter 13, he recommended that amore stringent definition be used.

Stephen Csontos of the United States Department of Justice commented on the chapter 13 "super discharge" provisions. He said that the Internal Revenue Service was the "biggest victim" of this provision especially with regard to fraudulent and nonfiled tax returns. He suggested that this conveyed a "terrible signal to the taxpaying public" and it was bad from a policy standpoint. In sum, he recommended that a "good tax policy" should be considered by the Commission. He said that a system should be created where debtors can accomplish what they need to have done in one chapter, rather than having to file for relief a second time.

Commissioner Hartley observed that there was a "prevailing attitude" that the Bankruptcy Code should be used to "save us from ourselves." Mr. Binzel responded that MasterCard did not advocate the elimination of bankruptcy protection for those that needed it. He said the focus should be on why 1.2 million people will have to file bankruptcy this year. He asked whether this resulted from economic factors or from the lack of insurance such as health, car or employment. He was not aware of anyone who claimed to have the answer. While acknowledging that most individuals used credit responsibly, Mr. Binzel said that these responsible people were in essence the "victims" of bankruptcy as they bore the cost of the discharged debts.

Responding to Commissioner Hartley's comment, Hon. Louise Adler, Chief United States Bankruptcy Judge - S.D. Cal., agreed that bankruptcy should save people from themselves. She felt so strongly about this that she was teaching budgeting skills to junior high and high school students. Observing that people spent money without realizing what they were doing, she recommended that budgeting skills should be taught to chapter 13 and, perhaps, chapter 7 debtors.

Commissioner Shepard, with regard to Commissioner Hartley's comment, noted that this was the equivalent of saying that "we are a nation of victims" and that this was "a little difficult to swallow." He agreed with Mr. Binzel's statement about the absorption of discharged bankruptcy debts by others. He also noted that in many small towns, the creditor did not have the opportunity to pass this loss to others.

Charles Docter, a debtor's attorney for approximately 37 years from Washington, D.C., asserted that the problem was not caused by debtors, but by the credit card industry. He said that the industry should "face[ FN:.] up to its responsibility."

Michael O'Connor, a chapter 7 trustee from New York, stated that he recently had a debtor, with $19,000 in annual income, who received six credit cards from the same bank. The debtor, in turn, "maxed out" these cards in the amount of $5,000 each. He asserted that the debtor should "certainly" not have to shoulder this responsibility.

Norma Hammes, Vice President of the National Association of Consumer Bankruptcy Attorneys, observed that the Internal Revenue Service and the state taxing authorities benefitted from chapter 13 as it was a good collection mechanism for these agencies. She mentioned, for example,that construction workers who may have worked for many companies over the years often did not have their W-2 forms for their jobs and that it was "simply impossible" for them to locate their records. She said that it was important to get these people back into the system by allowing them to discharge these debts in exchange for having them pay their more recent taxes and to continue paying them on a regular basis.

In response to Professor Warren's request for comments on the dischargeabilty of student loans, Judge Waldron noted that the "literature" on this issue varied. Whereas historically, he observed, it was "just impossible" to discharge these loans, there now were "cracks appearing in that wall." In addition, courts were not allowing interest in spite of the fact that there was no clear basis to do this, he noted. In sum, he suggested that this was an area that was "worthy of clarification, rather than evolution." Agreeing with Judge Waldron, Judge Leif Clark observed that as chapter 13 debtors could not separately classify student loans, they often faced a "huge interest bill" at the end of their plans.

Kenneth Crone, on behalf of Visa USA, stated that it was important to note that 60 percent of credit card charges were not revolving, but paid in full. In addition, he said that only seven percent of the total consumer debt consisted of bank card debt. Further, he reported that more than 80 percent of consumers who filed for bankruptcy relief had four cards or less, which meant that 20 percent had no card debt when they filed. He asserted that there was a flaw in a system that allowed a consumer to obtain more relief than they actually needed. In response to Professor Warren's request for clarification regarding his first point, Mr. Crone said that Visa had done several studies that showed bankruptcy did not correlate to credit card debt. He noted that a survey indicated that only 28 percent of the consumers stated that debt was a cause. Professor Ausubel said that credit card delinquencies were "almost perfectly correlated" with bankruptcy filings for the period of 1990 through 1996.

Ron Pretekin of Dayton, Ohio commented on 11 U.S.C. § 1328(a)(3) concerning the dischargeability of diversion claims where there was no court order of restitution. He suggested that the Commission should consider this policy issue.

Professor Warren asked the group to focus on installment redemption and whether or not a debtor should be able to retain property and pay only its strip down value over time in a chapter 7 case.

Mr. Sommer noted that many debtors were required to reaffirm a secured debt and, as a result, end up paying "a lot of unsecured debt" as it was the law in their particular circuit. He also discussed the impact of Rake v. Wade, which required debtors to pay interest on interest to cure mortgage arrears. He noted that the money paid to secured creditors was "coming right out of the unsecured creditors' pockets." He did not understand why the unsecured creditors were not "up in arms about it." While secured claims were being stripped in chapter 13, he said that debtors were simply reaffirming the debt and paying a "real premium."

Acknowledging that there was a preference for chapter 13, Judge Clark noted that this was based on the notion that repayment of debt was preferable to "simply laundering debt." He said that reaffirmation was a very important part of this process. Depending on local legal culture, reaffirmation in chapter 7 provided an alternative to chapter 13. He said that if you "strip off reaffirmation," this would push people into chapter 13, which was a "pretty good remedy in most parts of the country." Concerning the enforceability of contracts, Judge Clark said that bankruptcy "across the board" impaired contractual obligations.

Commissioner Jones observed that a debtor absolved of his or her obligations through a discharge had the same right as any other citizen to repay those debts and the form of repayment could be by reaffirmation. Jean Ryan, a bankruptcy practitioner from the Southern District of Florida, said that she had seen a surge in reaffirmation agreements. She described instances where creditors attempted to coerce reaffirmations from her clients through the use of threatening letters. In addition, she mentioned that these creditors lacked the documentation to support their assertion of a security interest. She asserted that the time frames under the statement of intent did not allow debtors' counsel sufficient time to determine whether the secured creditors had properly perfected security interests.

Hon. Geraldine Mund, United States Bankruptcy Judge - C.D. Cal., observed that while she should be "swamped" with reaffirmation agreements, she only received approximately four per month. She was aware that debtors were being convinced by creditors to sign these agreements without having them filed with the court. In addition to the confusing procedure for the approval of reaffirmation agreements under the Code, she said that the process largely depended on the quality of the debtor's attorney. Stating that there was "a lot of abuse," she recommended that the Commission should "gather information" about this process.

The next area addressed was whether or not there should be uniform exemptions. Hon. William Brown, United States Bankruptcy Judge - W. D. Tenn., advocated a uniform system of federal exemptions. Observing that it was a "big problem" in the public's perception, Judge Brown said that the present opt-out system encouraged venue shopping and engendered ethical problems such as asset conversion. Commissioner Hartley, agreeing with his comments, asked Judge Brown how these uniform exemptions would be defined. Judge Brown said that was "obviously the problem."

Professor Warren asked whether the use of "floors and ceilings" was a way to move toward uniformity. Judge Brown agreed that this was better than allowing "just an unlimited thing." Commissioner Shepard questioned how this system would respond to regional differences and wondered whether it should be left to the states to determine because of these regional differences.

Judge Clark agreed with Commissioner Shepard that the area of exemptions was a matter of state law. The abuses as popularized in the media, however, did not stem from bankruptcy law, but as a result of disparate state law exemption schemes. Judge Cristol said that the abuses in the system "were not that many." Nevertheless, he believed that a "fairness element" should be instilled into thelaw nationwide.

Mr. Crone stated that, under the current system, debtors were getting more relief than they were entitled to or actually requested. He also noted that five years earlier, 50 percent of consumer bank card charges were paid in full. Currently, this percent was more than 60 percent, he said.

Kenneth Klee, a bankruptcy practitioner from Los Angeles, acknowledged that this was a "very difficult issue" because creditors should not be encouraged to force debtors into bankruptcy if the federal exemptions were less than what these debtors would receive under state law. Correlatively, he said that debtors should not be encouraged to file for bankruptcy relief if the federal exemptions were more liberal than they were under state law. Nevertheless, the Constitution mandated that there should be a uniform law on the subject of bankruptcy, he noted. He recommended that setting a federal floor and allowing states to exceed this floor was the "right answer" as it would deal with those states that have not updated their exemptions since 1855. He also discussed whether Section 6334 of the Internal Revenue Code should be addressed.

Professor Lawrence Ponoroff of New Orleans said that while floors and ceilings would be "an incremental step in the right direction," it did not solve the problem. He recommended a single, lump sum cash value exemption to account for regional differences and eliminate some of the litigation.

Section 707(b) was the last topic discussed. Professor Warren noted that there was much diversity in the implementation of this provision and that some had suggested that it be eliminated. Others had recommended that creditors be able to invoke this provision. A third viewpoint favored clarifying this provision.

Mr. Sommer said that creditor use of this provision would facilitate threats and coercion in obtaining reaffirmations. The theory of Section 707(b) from the creditors' perspective is to bar debtors from filing chapter 7 so that they file for relief under chapter 13, he explained. He noted that debtors who filed under chapter 7 did so because they lacked the ability to file under chapter 13. If these people were pushed into chapter 13, the failure rate would be even higher, he asserted. He observed that the consumer credit industry was trying to recycle these debtors back into the credit market as it recognized that this was in their interest to do so. He said that consumer spending and credit were important parts of the economy.

Mr. Binzel said that there used to be a "high social stigma" associated with filing for bankruptcy in exchange for debt discharge. This stigma served as a disincentive to filing for bankruptcy, he noted. As this stigma has diminished, "a lot more people" were resorting to bankruptcy, he said. With regard to a debtor’s ability to repay, he observed that it was a question of balance. If a debtor had no ability to repay, then that individual should have the benefit of a discharge, but that it should be an "extraordinary remedy."

While not directing her comments to any particular individual, Commissioner Jones observed that it would be much more useful for the Commission if the speakers provided concrete suggestionsrather than made "speeches."

Hon. Marilyn Shea-Stonum, United States Bankruptcy Judge - N.D. Ohio, said that the problem with Section 707(b) was that the court had "no business" in "wandering through the files." She asked the Commission to consider what role the bankruptcy judge should play as this provision appeared to conflict with the judge's role as an arbiter of issues. She also noted that several trustees compromised Section 707(b) actions on notice to all parties, including the United States Trustee. She also noted that there was "very uneven enforcement" of this provision by the United States Trustee.

Marcy Tiffany, United States Trustee for Region 16, said that Section 707(b) should be clarified to address this provision's divergent application. She explained that some courts were receptive to these motions while others were not. She noted that there were "real inequities" as a result.

Upon the conclusion of Ms. Tiffany's remarks, Chair Williamson reviewed the meeting agenda for the next day and adjourned the session at approximately 4:40 p.m.

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At approximately 8:26 a.m., Chair Williamson commenced this meeting session. After reviewing the meeting agenda, he explained the Commission's decision making process.



Professor Warren explained that this proposal provided that a court, upon request of a party after notice and hearing, may order a change in the membership of a committee appointed under 11 U.S.C. § 1102(a) to ensure adequate representation of creditors or equity security holders. In effect, it would permit court review of United States Trustee appointments, she noted. Chair Williamson added that within the past 24 hours, a paper addressing this proposal was received by the Commissioners from the United States Trustee.

Commissioner Ceccotti said that the present statutory provision was confusing and that its legislative history offered "absolutely no guidance" on the deletion of Section 1102(c) in 1986. Needless litigation with regard to the interpretation of this provision had resulted, she noted. Much of the case law favored court review, she added. Ms. Ceccotti concluded her initial remarks by noting that the submission of the United States Trustee failed to address the lack of efficiency and increased expense associated with the present provision.

Registering a "mild objection," Commissioner Jones observed that this provision was designed to take the court "out of the business" of case administration. She noted that a committee had a fiduciary responsibility to the creditors it represented. Those who argued over committee membership were really doing this to run up costs and delay the case. Her concern was whether this would streamline the process or create new opportunities for litigation and tactical maneuvering.

Commissioner Ceccotti responded that the proposal encourages creditor participation in chapter 11 cases. Under the current system, she said, the United States Trustee was not required to explain its decision making process regarding committee appointments. Given the confused state of the law, the bankruptcy judges were not sure if they could remedy it other than by creating another committee, which was an expensive solution, she noted. This proposal, she explained, had a streamlining effect by clarifying the remedies available.

Indicating that he supported the proposal, Commissioner Ginsberg said that rather thaninvolving the court in case administration, it simply provided for judicial review of an administrative agency's action. He said that parties who have not been appointed to a committee as well as the committee had a right to be heard on this issue.

Commissioner Alix considered the impact of the increased incidence of claims trading on this proposal. As a result of claims trading, he observed that there was turnover in a committee's membership. He recalled that he had been involved in cases where court oversight over the committee's composition would have been beneficial. When asked by Commissioner Hartley if the change effected by the proposal would "slow" the case down, Commissioner Alix said that it would not as the committee would continue to function pending the court's decision. Commissioner Ceccotti agreed with this statement based on her recent experience in a case where this occurred.

While stating that there would not be a formal vote in keeping with the Commission's practice, Chair Williamson noted Commissioner Jones' dissent and asked Professor King to discuss the next proposal.


Professor King explained that the revised version of this proposal incorporated 28 U.S.C. § 157(d) as an example of cause for permissive withdrawal. The purpose of the proposal was twofold, he observed. First, the proposal recognized that mandatory withdrawal was not an "essential element" to the constitutional reformatting of the Bankruptcy Code that occurred in 1984. Second, the proposal encouraged efficiency of administration.

While recognizing the Working Group's efforts to address her previously noted concerns, Commissioner Ceccotti still objected to the proposal and outlined her reasons. She noted that as the Working Group was currently reviewing the Article I/III issue, it would be better procedurally to consider this proposal together with all of the jurisdictional proposals "in one package" to determine how they worked together. Substantively, her objection also concerned a division of labor issue. She said that Congress determined that certain types of matters involving the interplay of the Bankruptcy Code and other federal laws should be dealt with by a district judge. While not implying that a bankruptcy judge could not deal with these issues, she said that this provision reflected a decision by Congress regarding a division of labor. She also wondered whether the revised proposal would create more confusion as it may be unclear if there was still discretion regarding its application.

Supporting Commissioner Ceccotti's objection on the basis of sound jurisprudence, Commissioner Shepard said that the bankruptcy court did not have to be the forum for resolving all issues that might arise from a bankruptcy case. In addition, he said that by simply granting courts discretion on this issue would permit them to continue or refuse to act. Further, he viewed the proposal as more than a technical correction.

Commissioner Jones observed that the proposal did not effect a serious change in the law andexpressed support for it.

While saying that he "strongly" supported the proposal, Commissioner Ginsberg did not object to Commissioner Ceccotti's suggestion that the Commission "table" it until there was a "comprehensive package of jurisdictional matters." Substantively, he agreed with Commissioner Jones that the proposal did not involve "much of a change." He noted that the current system was subject to delay and caused duplication of litigation. To have matters "dumped in the lap" of a district judge was not a "sound idea," he surmised.

Commissioner Ceccotti responded that the delay was much less of a concern for various reasons. One, the district judges were not adept at dealing with these motions, she noted. Second, the bankruptcy rules made it very clear that there should not be any automatic delay or stay of the proceeding while the district judge considered the motion.

Commissioner Hartley recalled that the Working Group decided at its session during the prior day that it would refer the Article I/III issue to the entire Commission for consideration at its next meeting without any recommendations. During the interim, an extensive memorandum discussing the issue would be prepared and disseminated.

Based on this timetable for consideration of the Article I/III issue, Commissioners Ceccotti, Ginsberg and Jones supported deferral of the proposal until the Commission reviewed the entire system. While his position on the proposal had not changed, Commissioner Hartley had "no problem" with deferring its consideration.


Professor King explained that this proposal concerned 28 U.S.C. § 157(b)(2) and (b)(4) which provide that the bankruptcy court does not have jurisdiction over personal injury and wrongful death claims. The proposal recommended that this restriction be deleted by giving the bankruptcy court the authority to determine the allowance and disallowance of these claims, he said. Given their position with regard to the prior proposal, Professor King asked the Commissioners whether they wanted to defer consideration of this proposal as well.

Commissioner Ceccotti suggested that its consideration be deferred for a different reason, namely, that the Jurisdiction & Procedure Working Group should "join forces" with the Mass Torts/Future Claims Working Group regarding this proposal, as it affected both.

Commissioner Shepard expressed concern how this proposal would impact on an individual plaintiff in a personal injury case who would have to litigate in an inconvenient forum that was not in the habit of conducting jury trials or enforcing rigid rules of evidence. It created a very practical problem of government intervention into people’s lives, he observed.

After expressing that he had the "highest opinion" of his colleagues' qualifications to hear these matters, Commissioner Ginsberg suggested that the Commissioners needed to consider what was the most efficient system and then adjust this section as needed.

Commissioner Jones confirmed with Professor King that the proposal would have no effect on the current widespread practice of modifying the automatic stay to allow state court litigation with regard to insurance coverage to go forward.

Although Commissioner Shepard reiterated his concern about the burdensome impact that the proposal would have on litigants, Professor King said that the result was no different from a contract action.

Chair Williamson observed that the mandatory withdrawal and personal injury proposals were in their initial threshold form and that, by definition, they should be deferred until the Commission considered the Article I/III issue. In addition, Professor King mentioned that the proposal concerning a bankruptcy judge's contempt powers should likewise be deferred. Chair Williamson stated that these three proposals would be reviewed at the Commission's meeting in January or February.


Professor King explained that this proposal would essentially incorporate the current appellate provisions in Title 28 of the United States Code concerning civil actions appealed to the circuit court. In addition, the proposal would incorporate the certification process as well. Thus, if a bankruptcy court certified an issue as important or one necessary to the administration of the estate and if the circuit court of appeals agreed, then the circuit court would have jurisdiction of the appeal. The proposal also applied to those instances where parties to an appeal from an interlocutory order consented and the circuit court agreed to hear the appeal.

Commissioner Ceccotti suggested that the explanatory notes that accompany this recommendation in the final report should indicate that it was not intended to narrow the flexible standards that currently exist regarding interlocutory appeals emanating from bankruptcy cases.

Not hearing any opposition to the proposal, Chair Williamson said that there was no reason to bring it back for further consideration.


This proposal, Professor King explained, would amend 28 U.S.C. § 1410 to give the court some discretion to affect actions pending in other districts either against the debtor or its property.

As no opposition was noted, Chair Williamson proceeded to the next set of proposals for consideration.


Chair Williamson explained that this proposal along with three others that would be also considered at this session resulted from the general government issues and regulation/taxation roundtable discussions conducted at the Commission's meeting in Santa Fe.

Professor Warren opined that the proposal would be in the form of a recommendation to the Advisory Committee on Bankruptcy Rules of the Judicial Conference to consider improving notice to government agencies. The proposal would recommend that a debtor be required to specify the particular government agency creditors on its schedules. This approach was taken, as opposed to recommending a statutory amendment, because it allowed more flexibility to adjust to the needs of the different agencies and to the technological innovations that may dramatically change noticing procedures.

Commissioner Shepard did not like "passing the buck off" to some other group. Given the unclear case law regarding the jurisdictional impact of the bankruptcy rules, he said that the question of the effect of noncompliance with these rules would remain. He also expressed concern about referring a matter to a different body that may not promptly act upon it. Further, he thought that the Commission should at least provide some direction as to what should be changed. Accordingly, he suggested that the proposal be referred to the Working Group for further consideration. Commissioner Gose also favored having the proposal referred to the Working Group.

Commissioner Ceccotti said that the roundtable did not develop this recommendation in order to pass the buck. Rather it was thought that this approach would best assist government agencies in their dealings with the Rules Committee. Nevertheless, she did not oppose having the Working Group consider this proposal further.

Noting that she was a former member of the Rules Committee, Commissioner Jones concurred that the proposal concerned a subject that was appropriate for its consideration. Commissioner Ginsberg stated that he agreed with Commissioner Jones. Commissioner Gose responded that perhaps the Rules Committee could be given some guidance in the context of the proposal.

In response to Commissioner Shepard's concerns regarding the time and processes of the Rules Committee, Professor King explained that the Rules Committee was created, in part, to promulgate rules in a much quicker fashion than through the enactment of legislation. He noted that Congress purposely left procedural matters out of the Bankruptcy Code so that they would be dealt with by the rule making process. The rules, he observed, cannot supersede or conflict with anything in the statute. In addition, he noted that it had been his experience that the Rules Committee "alwaysreached out" to governmental agencies to determine their noticing needs. One of the problems, however, was that these agencies were "always over-reaching," he said. If sensible and reasonable solutions were proposed, Professor King said that they would be adopted by the Rules Committee. To supplement this proposal, the roundtable discussants suggested that Chair Williamson contact the Chair of the Rules Committee to discuss procedural proposals being considered by the Commission.

Chair Williamson said that should the Working Group want to amend this proposal, this would be easily accommodated. As mentioned by Commissioner Jones and Professor King, he noted that the rules process can work more quickly than the legislative process. He also observed that anything that the Commission recommended to the Rules Committee needed to await the final report.


This proposal, Professor Warren explained, was designed to clarify that 11 U.S.C. § 105 was not intended to expand the bankruptcy court’s injunction powers beyond what the statute specifically authorized. It would provide that the courts could not use this provision to stay police and governmental regulatory actions that would be allowable outside of bankruptcy. She reported that the roundtable discussants concluded that the Commission should recommend in its report how Section 105 should be used, but that they did not favor a statutory amendment to this provision as it could have unanticipated consequences.

Commissioner Shepard said that this provision was a substantial problem as it generated a lot of litigation. Concerned that advisory language would be ineffectual, he favored a statutory amendment as it would not "hurt the good cases" and would "clean up the cases that need attention." Accordingly, he opposed the proposal.

Agreeing with Commissioner Shepard, Commissioner Jones noted that government representatives sought to have this provision’s injunction authority conform with every other standard for obtaining an injunction outside of bankruptcy. To the extent that there was a lack of conformity, she said that this was an "untenable" problem.

Commissioner Alix noted that he had "real concerns" about limiting Section 105 as debtors needed the extraordinary relief provided by this provision. Commissioner Shepard responded that the suggested change would not result in a limitation, but would serve to clarify it.

Chair Williamson invited governmental representatives and others who had problems with Section 105 to supply specific case examples so that the Commission could evaluate the extent to which the difficulty with this provision was systemic or simply an isolated aberration.


As before, Professor Warren said that this proposal did not encompass a statutory amendment. Rather, it recommended that the final report contain advisory language reflecting the predominant case law view that a postpetition obligation to comply with environmental laws or to ameliorate a continuing hazard was not a "claim" dischargeable in bankruptcy. She added that this issue was resolving itself correctly through the appellate process.

Commissioner Shepard was concerned about addressing the problem through advisory language. Commissioner Jones noted that the proposal was "very narrowly couched." Professor Warren acknowledged that the proposal represented a "very narrow answer to a very narrow question." She added that it was not a complete endorsement of the Torwico case as there were issues in that case that would be addressed by the Mass Torts/Future Claims Working Group.

Responding Commissioner Shepard's comments, Chair Williamson said that there was "some significance" associated with the proposals considered by the Commission as well as with those it did not decide.


Professor Warren explained that this proposal would amend 11 U.S.C. § 362(b)(4) to apply to actions by governmental units to exercise control over property of the estate as part of its enforcement of police and regulatory powers. She noted that the proposal was not intended to change the scope of what constituted police and regulatory power.

An example cited by Commissioner Jones was condemnation. Another example mentioned by Professor Warren was the termination of a license by a governmental unit as part of its police and regulatory powers. She reiterated that the proposal was not designed to allow a governmental unit to exercise other leverage that it would have beyond its police and regulatory powers. Commissioner Alix asked whether the proposal would allow a governmental unit to pull a license for nonpayment of a licensing fee. Professor Warren answered no as it was not an exercise of police and regulatory power.

At the conclusion of the discussion on this proposal, Chair Williamson reviewed the meeting schedule for the remainder of the day. This session closed at approximately 9:54 a.m.


Commissioners and staff in attendance at this session were Commissioners Jay Alix, John A. Gose, Jeffery J. Hartley, James I. Shepard, and Jay Alix; Stephen H. Case, Senior Advisor; and Jennifer Frasier, Staff Attorney. The roundtable discussants included Donald Harris of the NewMexico Taxation and Revenue Department; Joyce Bauchner, Assistant Chief Counsel for General Litigation at the Internal Revenue Service; John Akin, Supervising Attorney with the California Franchise Tax Board; Ronald Del Vento, an Assistant Attorney General with the Texas Attorney General's Office and Chief of the Collections Division; A. Lavar Taylor, an attorney in private practice who specialized in bankruptcy tax issues; Michael St. James, an attorney whose practice specialized in business debtor bankruptcy work; Robin Phelan, Haynes & Boone; Mark Segal, a bankruptcy tax practitioner from Las Vegas; Stephen Csontos, Senior Legislative Counsel with the United States Department of Justice Tax Division; and Kenneth Weil, a bankruptcy tax practitioner from Seattle.

Mr. Case, noting that the discussion was focused on his September 7, 1996 memorandum entitled, "Questions for Discussion at Roundtable," posed the first philosophical question, namely, should governmental claimants be treated just like any other creditor in a bankruptcy case.

Mr. Harris said that governmental creditors were different because they did not choose their debtors, they could not vary their interest rates depending on the quality of the collateral or risk of default, and they could not cut off services to entities that do not pay.

Mr. St. James reminded the discussants that bankruptcy was a collective proceeding and that while the government should probably receive some benefits such as immunity from a preference challenge, it was important to let the collective environment work. He asked why the government should not be treated just like any other creditor and whether a taxpayer who filed for bankruptcy relief should get "some extra benefit." He expressed concern that the Commission focused on the fraudulent debtor who was trying to evade taxes rather than focusing on more normal circumstances.

Mr. Harris concurred that the government should participate in the collective process, but noted that debtors sometimes provide ambiguous notice to their government creditors and engaged in tactical maneuvering. He mentioned the problem of unfiled tax returns and other instances where the government had no knowledge that its liabilities were being discharged. Mr. St. James said that these problems could be readily fixed and that the number of fraudulent taxpayers was "very, very small."

Mr. Del Vento said that it was the taxpayer who was not participating in the collective process as this process imposed a responsibility to file returns. He expressed concern about a value system that allowed a taxpayer who did not file returns to get a discharge.

Recalling that this was discussed at the prior roundtable discussion in Santa Fe, Mr. St. James said that this was determined to be the least controversial issue and that there was unanimity that people should be required to file their returns. Where, however, a taxpayer failed to file a return from eight years ago and then be "gnawed" by the Internal Revenue Service for five years, policy concerns were presented.

Suggesting that the discussion should move from the abstract level to specific areas, Mr. Case asked the panelists to focus on the issue of whether the requirement that tax returns be broughtcurrent should be a condition precedent for confirmation of a chapter 13 plan.

While generally agreeing with this proposition, Mr. Phelan said there may be some point in time where it would become "ridiculous" such as where someone failed to file tax returns for 15 years. He suggested that some cutoff point should be fixed. He also noted that the problem concerned several types of debtors: those who pay their taxes, those who were "Machiavellian tax cheats" and others in the middle. He said that the point was to bring these debtors back into the system.

Ms. Bauchner stated that she and Mr. Csontos informally discussed possible reach back periods and indicated that six years may be a possible time frame. When asked by Mr. Phelan whether the court should exercise some discretion with this time frame, Ms. Bauchner said no as it was unlikely that someone would be unable to reconstruct their records for this period of time. Mr. St. James did not view the six-year reach back period as that "


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