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News Room

THE NATIONAL BANKRUPTCY REVIEW COMMISSION

MINUTES OF MEETING HELD:
Thursday and Friday July 18-19, 1996
Washington, D.C.

Prepared by: Susan Jensen-Conklin
Deputy Counsel

Dated: September 30, 1996


TABLE OF CONTENTS

JULY 18, 1996 MEETING
ATTENDEES
APPELLATE STRUCTURE PROPOSAL
DISCUSSION OF INITIAL CONCEPTUAL PROPOSALS


OPEN FORUM
WORKING GROUP SUMMARIES
MEETING RECESS

ii

JULY 19, 1996 MEETING
ATTENDEES
DISCUSSION OF SEPTEMBER MEETING AND RELATED MATTERS
WORKING GROUP SUMMARIES


CONCEPTUAL PROPOSALS FOR POSSIBLE CONSIDERATION AT THE SEPTEMBER MEETING
CONCLUDING REMARKS
ADJOURNMENT

iii


MEETING - THURSDAY, JULY 18, 1996
Federal Judicial Center/Education Center
Thurgood Marshall Federal Judiciary Building
Washington, D.C.


ATTENDEES

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

Commission Advisors and Staff Present:
Professor Elizabeth Warren, Reporter/Advisor
Professor Lawrence P. King, Advisor
Stephen H. Case, Advisor
Susan Jensen-Conklin, Deputy Counsel
Elizabeth Holland, Staff Attorney
Melissa Jacoby, Staff Attorney
George Singer, Staff Attorney
Carmelita Pratt, Administrative Officer

Public Attending:

Approximately seventy-five people were in attendance including representatives from the American Bankers Association, American Bankruptcy Board of Certification, American Bankruptcy Institute, American Commercial Bankers, Commercial Law League of America, International Council of Shopping Centers, Mortgage Bankers Association of America, National Association of Attorneys General, National Association of Bankruptcy Trustees, National Association of chapter 13 Trustees, National Association of Credit Management, National Association of Federal Credit Unions, National Association of Consumer Bankruptcy Attorneys, National Realty Committee, among others. Federal agencies such as the Administrative Office of the United States Courts, the Executive Office for United States Trustees, United States Department of Justice, the Securities and Exchange Commission, and the Treasury Department were represented. The federal judiciary, professors of law, United States Trustee representatives as well as chapter 7, 12 and 13 trustees attended. Representatives from the Pension Benefit Guaranty Corporation, banking and credit industry, state government, a labor union, professional and trade associations, private industry, law firms, and the media were also present.


INTRODUCTORY REMARKS

At approximately 9:13 a.m., Chair Williamson called the meeting to order and made preliminary comments. After reviewing the meeting agenda, he explained the working group format. He said that ideas originate in the working group and, where there was preliminary consensus, these ideas would be memorialized in the form of conceptual proposals. These initial conceptual proposals would, in turn, be circulated to the full Commission for consideration. If there is a consensus among the Commissioners for a proposal, then it would be further developed through a comprehensive memorandum which is submitted to the Commission for "final" decision, he observed.

With regard to the minutes for the June 20-21, 1996 meeting, Chair Williamson noted that as they were very detailed, they would be deemed submitted subject to any corrections and be considered for formal approval along with the July meeting minutes at the September meeting.

Among other administrative matters discussed were the current status of the House appropriations bill for the Commission, the need to keep the staff apprised of Commissioner speaking engagements, and potential dates for the Commission’s future meetings.


APPELLATE STRUCTURE PROPOSAL

Professor King observed that the present appellate structure involved a two-layered review process and that this system was very inefficient, costly and had very little stare decisis effect, especially with the initial layer of appeal. He explained that the proposal, as detailed in the underlying memorandum prepared by Staff Attorney Liz Holland, was based on the proposition that there should be just one level of appellate review from a bankruptcy court decision. The proposal, he noted, also reflected the consensus that the appeal should be heard by the circuit court of appeals as it appeared that no constitutional issue was presented by this avenue of appellate review. Professor King explained that the proposal did not necessarily eliminate the need for de novo review by the district court for non-core proceedings. Accordingly, Sections 1291 and 1292 of title 28 of the United States Code would continue to be applicable, although Section 158 would not be applicable, he said.

With regard to interlocutory orders, Professor King noted that there currently was a dichotomy between the jurisdiction of the district court and that of the circuit court of appeals and that this meant that there were different approaches that could be taken under a one-layer appellate structure. For example, he said that the current certification procedure presently in effect pursuant to Section 1292 could be utilized. Alternatively, the district court could handle these appeals under Section 158. A third approach, he cited, be a combination or substitution of these approaches which incorporates the parties’ consent.

Chair Williamson commented that this proposal was "terrific" in that it had immense practical impact on the bankruptcy community and system by eliminating a "stop on the appellate track." Inaddition, he said that while it implicated Article I and III of the Constitution, it did not present serious constitutional problems. He complimented Ms. Holland’s scholarly work on the memorandum.

In response to Chair Williamson’s request for comments from the Commissioners, Commissioner Jones noted that the focus should be on the details of defining interlocutory orders and how these orders should be handled so that there was some coherence for courts and practitioners.

With regard to the proposal’s application to interlocutory orders, Commissioner Ceccotti expressed concern as to whether the proposal would narrow the range of issues that could be immediately appealed either as final orders or through any of the methods described by Professor King. She suggested that the Commission should clarify that the intent would not be to eliminate avenues or narrow the range of issues that can be immediately appealed. In addition, she favored the certification route or Section 158 alternative. Further, she suggested that the Jurisdiction and Procedure Working Group should consider clarifying those matters that are appealable, given the current disarray of the case law on this issue.

Commissioner Jones responded that the case law with regard to appeals emanating from adversary proceeding determinations had developed fairly consistently, but that it was less clear as to appeals concerning administrative issues. A problem that would be eliminated by the proposal, she noted, was that presented by those appeals involving matters of law and bankruptcy issues which, in her circuit, were invariably held to be interlocutory. By isolating administrative-type issues, she opined, a list could be prepared to identify those orders that would be immediately appealable.

Professor King was wary of attempting to list specific orders that could be immediately appealed. He suggested, instead, that it be resolved by utilizing more general language which employed some guidelines or "buzz words."

Agreeing with this concern, Commissioner Ceccotti also raised the issue of workload impact on the circuit courts. Commissioner Jones observed that there was legislation currently pending which could reduce the number of Section 1983 prisoner appeals. She said that these appeals currently comprise 40 percent of the circuit court level appeals and approximately 25 percent of the district court level appeals and, thus, if eliminated, would result in a "considerable decline" in the current case load.

Professor King also recalled that he was concerned about the workload impact on the circuit courts when the proposal was first discussed, but that those concerns were allayed by Judge Arnold’s comments on this matter at the Commission’s February meeting. Nevertheless, Professor King suggested that the Jurisdiction and Procedure Working Group may want to consider establishing a different kind of appellate structure which would not involve the circuit court of appeals, but would feature just one layer of appeal. While Commissioner Shepard noted that the concept of a specialized court of appeals had been rejected, Commissioners Gose and Ceccotti concurred that it should be explored.

Chair Williamson explained that the appellate structure proposal would not be discussed further by the full Commission until it appeared in the draft report. During the interim, however, he said that the Working Group would continue adjusting and refining it. Also, he observed that this did not prevent any Commissioner from bringing the issue back to the full Commission for consideration. He then noted that the proposal would be deemed to be unanimously adopted by the Commission. Commissioner Jones suggested that the idea about creating a separate court was one that the entire Commission may want to examine on an interim basis. Chair Williamson responded that should the Jurisdiction and Procedure Working Group decide that this was necessary, then that aspect of the proposal would come back to the full Commission for consideration.


DISCUSSION OF INITIAL CONCEPTUAL PROPOSALS


MANDATORY WITHDRAWAL

Professor King explained that this proposal concerned deleting the mandatory withdrawal provision of Section 157(d) of Title 28 of the United States Code which currently requires that a proceeding must be withdrawn from the bankruptcy court under the circumstances set forth therein. While mandatory withdrawal had no constitutional effect, the case law interpreting this provision was in disarray which resulted in delay and expense, Professor King observed. The district court, under Section 157(a), had the discretionary authority to refer cases and proceedings to the bankruptcy court while it retained the discretionary authority to take back the reference, he explained. For non-core proceedings, he said that the bankruptcy court may enter a final order on consent of the parties. He reported that there was a consensus in the Jurisdiction and Procedure Working Group that mandatory discretion did not serve any purpose and generated unnecessary litigation. In response to Commissioner Jones’ query as to whether the proposal applied to personal injury cases, Professor King explained that it did not as it was "separate and apart."

Commissioner Ceccotti recalled that she had previously objected to this proposal. She did not necessarily agree that the case law was in "disarray," as the courts had developed a consistent and limiting approach to the application of this provision. With regard to the comments concerning delay, she did not consider this to be a significant factor as a court would have to resolve the underlying dispute in any event. The 2nd Circuit, for example, has clarified many of the issues regarding withdrawal and thus reduced the confusion over the matters that a bankruptcy court as opposed to a district court may hear, she noted. Commissioner Ceccotti also observed that as the proposal could affect the extent of district court oversight, there may be a constitutional impact. When asked by Commissioner Jones whether alternative language which conformed Section 157(d) to practice would address her concerns, Commissioner Ceccotti answered in the affirmative.

Professor King noted that the elimination of Section 157(d)’s mandatory provisions would still leave intact this Section’s discretionary provisions. He noted that the mandatory withdrawal provision was somewhat demeaning to the status of the bankruptcy court. Commissioner Ceccotti noted, however, that there needed to be some form of oversight precisely because of the explosion in the variety of issues coming before the bankruptcy court.

Commissioner Jones agreed with Commissioner Ceccotti that the issue did not concern a matter of demeaning the bankruptcy court’s status, but instead involved a rational division of labor. The point was that it should make the whole bankruptcy process more efficient, she observed.

Commissioner Ginsberg discussed the practical problem presented by mandatory withdrawal in that the bankruptcy case is divided into two tracks that never get together. Whereas in the bankruptcy court the case continues in its ordinary course, the withdrawn matter generally receives a very low priority in the district court, he said. Commissioner Ceccotti observed it was a good objective to strive for a system that provided a relative level of certainty and efficiency, but that it should not necessarily be a goal that must be pursued at any and all costs. As an example illustrating her concern with the proposal, she recounted an instance where a bankruptcy court utilized the automatic stay to enjoin a union election and the district court had to point out that an employer under the Railway Labor Act had absolutely no control over such election.

Commissioner Butler noted that he identified with those who believed that the mandatory withdrawal provision contributed nothing as it did not inhibit the district court in asserting control over cases and proceedings. It merely cluttered up the law and led to litigation, he said. Commissioner Ginsberg stated that if there was cause for withdrawal, current law permitted the district court to exercise control.

Commissioner Ceccotti reiterated her disagreement with the proposal and said noted that the present statutory language was not that clear about the reasons warranting discretionary withdrawal. Commissioner Jones agreed that district courts were reluctant to utilize the discretionary provisions of Section 157(d) because they did not want to interfere with the progress of the case pending before the bankruptcy court. On the other hand, she also noted that there were some areas where the district court could competently handle certain issues faster and probably more accurately than the bankruptcy court. She suggested that the provision be drafted to allow for discretionary withdrawal for cause which incorporated the substance of Section 157(d)’s mandatory provisions. Commissioner Shepard said that he tended to agree with Commissioner Ceccotti and that if withdrawal is discretionary, the district court may defer to the bankruptcy court. To the extent that this served to enlarge the bankruptcy court’s jurisdiction, then this effect should also be considered, he said.

Professor King said that it did not necessarily enlarge the bankruptcy court’s jurisdiction as the jurisdiction already existed. Absent a motion by a party, the issue remains in the bankruptcy court, he observed. Commissioner Butler concurred that the current law with regard to discretionary and mandatory withdrawal was redundant.

The Commissioners thereafter considered whether the Jurisdiction and Procedure Working Group should redraft the proposal in a different form. Commissioner Butler expressed concern over whether the Commission’s resources should be consumed in this regard as opposed to expending them on areas for which there was greater demand. Chair Williamson concluded that the proposal should be re-referred to the Working Group.


DISINTERESTEDNESS

Professor King recounted that the proposal would, in chapter 11 cases, dispense with the disinterestedness requirement for professionals retained by the debtor in possession under Section 327(a). He observed that the requirement resulted from a statutory drafting glitch and that a debtor in possession obviously cannot be disinterested and thus its professionals should not be required to be disinterested. He said that the cases were "legion" regarding the courts’ attempt to apply the disinterestedness standard to professionals sought to be retained by a debtor in possession. He explained that the proposal would only apply to chapter 11 debtors in possession and not, for example, to chapter 11 trustees. Under this proposal, professionals could not have any interest materially adverse to the estate, a standard that the Service, Ethics Working Group would attempt to better refine and define.

In response to Commissioner Ginsberg’s question as to whether the proposal applied differently to elected as opposed to appointed chapter 11 trustees, Professor King explained that it did not as both were required to be disinterested. In answer to Commissioner Jones query as to whether the proposal applied to professionals who simultaneously represent multiple parties, Professor King said no. He clarified that the mere fact that the attorney was a creditor or represented a creditor of the debtor would not disqualify such attorney from representing a debtor in possession, unless there were other factors creating a material adverse interest. Professor King also noted, in response to Commissioner Jones’ concerns, that there may be an effort to coordinate this proposal with the efforts of the American Law Institute to defining material adverse interest.

Hearing no objection, Chair Williamson asked the staff to develop this proposal in greater detail for consideration by the Commission at the September meeting.


NATIONAL ADMISSION

Professor King explained that this proposal would permit an attorney who is licensed to practice law in one district to practice law before a bankruptcy court in any other district without having to pay any court fees to do so.

Commissioner Butler asked what would happen with the requirement that practitioners be familiar with the district’s local rules. Professor King noted that there were several ways to address this. Commissioner Shepard observed that the local bar associations would object to allowing bankruptcy mills from outside their districts to practice in their districts. Recalling the adage "know thy judge," Commissioner Alix observed that wise attorneys would still retain the services of local counsel. From the perspective of a business person, he explained that having one’s choice of counsel without having to contend with various restrictions would be better. Chair Williamson observed that the requirement for local counsel is conceptually different from the national admission proposal.

Commissioner Ginsberg asked whether the Working Group considered the regulatory aspects of the proposal. Professor King responded that he assumed there would be provision for the localbankruptcy court to exercise disciplinary authority over the attorney. He noted that it did not appear that the local state bar would have any disciplinary authority over the attorney as it would not concern the unauthorized practice of law. Commissioner Jones explained that she initially viewed the proposal as trivial because of its limited effect. To the extent, however, that it authorized a firm in one state to advertise and start filing mass bankruptcies in another state without being authorized to practice law in that other state, then the proposal was "very troublesome," she concluded.

Professor King suggested that some districts only required the filing of a certificate of good standing and payment of a fee to permit one to be admitted to practice in these districts. Commissioner Shepard observed that state government counsel would support a nationwide admission policy as they must routinely appear in districts throughout the nation and seek pro hac vice admission. Chair Williamson recalled that he appeared in a district where he was not admitted and the only difficulty was the procedural impediment of completing an affidavit and paying a court fee. The goal, he summarized, would be to eliminate this impediment. At the suggestion of Commissioner Butler, this proposal was re-referred to the Service, Ethics Working Group for further consideration. Commissioner Alix recommended that the Working Group examine the proposal’s impact on large chapter 11 cases as opposed to consumer cases.


ABSOLUTE PRIORITY AND EXCLUSIVITY

Professor Warren, on behalf of the chapter 11 Working Group, explained that the proposal would prevent a debtor from retaining exclusivity while proposing a cram down plan that allows old equity to participate. She clarified that the proposal only applied to "large" chapter 11 cases, a categorization that would be better defined in the future. Where the parties consented, the proposal would not apply. On the other hand, the proposal would cause the immediate termination of the debtor’s exclusivity period absent consent.

The proposal, Professor Warren stated, was intended to clarify the plethora of case law on whether or not there was a new value exception to the absolute priority rule since the Supreme Court’s decision in Ahlers. Another reason for the proposal, she cited, was that it would encourage reorganizations by bringing more capital into some businesses and address the problem of equity getting "too good a deal."

Commissioner Jones prefaced her comments by remarking that the Commission should attempt to clarify the law as to absolute priority. Procedurally, Commissioner Jones was concerned that she did not have sufficient time to analyze the proposal as it had been received by the Commissioners on only 48 hours notice. Among her substantive concerns were that the new value concept was structured somewhat vaguely and that exclusivity should terminate as soon as the debtor proposed a cram down plan. She also wondered whether the proposal would encourage gamesmanship and delay the inevitable result of the case.

Commissioner Alix noted that care should be taken to not confuse equity with management as their interests were not always aligned. He also said that if public shareholders were given thisright, then a fallout effect could result in that they would seek to have committees formed as a structured way to attract capital investment. He agreed with Commissioner Jones’ concerns regarding the need to define new value. Further, he observed that there were different ramifications presented with respect to public and private companies. He also agreed that termination of the exclusivity period should occur at the time when the debtor proposes its plan and not at confirmation. In a broad sense, however, he said that the proposal would bring much more liquidity to the market of reorganizing larger companies because it would encourage capital formation and would also enhance the value for creditors as a result of competing plans. In general, he supported the proposal, but noted that it requires a lot of thought as it involved many complications.

With regard to the issue of new value, Professor Warren said that the Commission could set forth the standards itself or simply adopt the definition articulated by the common law. Commissioner Jones suggested that the chapter 11 Working Group may want to reconsider this proposal in the context of tying it to the concept of shortening the chapter 11 process. She recommended that a more detailed memorandum on the subject be prepared.

Commissioner Ginsberg did not view new value as an exception to the absolute priority rule, but as a corollary. On the other hand, he noted that each of these concerns had a "jiggle effect" which should be considered as opposed to viewing them in insolation. Professor Warren responded that there will be ample opportunity to discuss this in the future. Commissioner Alix observed that the proposal basically created an auction environment.

Noting that the proposal concerned a very significant and visible issue in chapter 11, Chair Williamson requested that the staff prepare a more fully developed memorandum addressing the concerns discussed by the Commissioners prior to the September meeting.


CLAIMS CLASSIFICATION

As with the prior proposal, Professor Warren clarified that the claims classification proposal would apply only to large chapter 11 cases. She explained that this proposal would permit a plan proponent to separately classify legally similar claims if there was a rational business justification to do so. The prohibition under Section 1129 against unfair discrimination among classes with regard to their treatment under the plan would not be affected by the proposal, she noted..

Professor Warren said that the case law on the issue of claims classification was widely divergent and thus has prompted much litigation. In addition to clarifying the law in this area, the proposal was intended to encourage reorganization by according flexibility to the debtor’s bargaining ability while keeping a focus on rational business justification, she explained. As an example, Professor Warren noted that a rational business justification may support separate classification and treatment for a creditor who is the sole supplier of certain goods to the debtor.

Among the competing considerations to the proposal that Professor Warren cited was that the Commission may not want to delegate the responsibility to determine the standard of rationalbusiness justification to the courts.

Commissioner Shepard asked whether the proposal really had a positive or negative impact on the reorganization process. Professor Warren responded that there was a consensus in the Working Group that the proposal kept the focus on the debtor’s business needs. Incorporating her comments with regard to the prior proposal, Commissioner Jones stated that she was not prepared to comment knowledgeably on this proposal without receiving a more detailed memorandum. Chair Williamson noted that the bankruptcy judge under this proposal would be the arbiter of whether or not a valid business judgment exists. Commissioner Shepard observed that he had seen plans, providing for balloon payments or stretching out payments into the distant future, where the only business reason proffered for such treatment was that the debtor just did not presently have the cash. The standard could be so nebulous as to be meaningless, he commented. He noted that while the Commission was seeking to foster more uniformity, this proposal was counterproductive. Professor Warren observed that the proposal would eliminate litigation over the threshold issue.

Commissioner Gose said that he joined in Commissioner Jones’ request that the proposal be more defined. Chair Williamson stated that a more comprehensive memorandum would be prepared and that this proposal would be discussed further at the September meeting.

In concluding this section of the meeting, Chair Williamson reviewed the status of each of the proposals.


OPEN FORUM


JOHN WM. BUTLER, JR.

Mr. Butler, President of the American Bankruptcy Board of Certification ("ABBC"), explained the purpose of certification and the work of his organization. He outlined the history of certification efforts and ABBC’s goal to recognize attorneys who meet discreet, objective certification standards. Among ABBC’s requirements that he discussed were that the applicants must have engaged in the full-time practice of law for at least five years and be a member in good standing in all bars in which the attorney is admitted to practice. For consumer certification, the applicant must have participated in at least 15 qualified consumer bankruptcy matters. The business certification required the applicant to have participated in at least 30 adversary proceedings or contested matters in business bankruptcy cases.

Mr. Butler suggested that the Commission should consider adding bankruptcy specialty certification by an accredited entity as an additional factor in the awarding of professional compensation under Section 330 of the Bankruptcy Code and to provide for national admission of certified bankruptcy attorneys in lieu of the current pro hac vice application practice. He also noted that nationwide admission for certified attorneys need not limit the ability of the local court to regulate the attorneys who appear before it or to impose registration fees. In concluding his comments, Mr. Butler observed that certification was in the public interest because it served toimprove the quality of the bankruptcy bar and identify those individuals to the general public who have the skills and expertise to meet the rigorous standards of an accredited certification program.

In response to Chair Williamson’s question as to whether he had any comments with regard to the Commission’s discussion about national admission, Mr. Butler said that the issue relating to residents practicing in their own state without being licensed in that state would create a "back door" which was not probably intended by the proposal, but would present an issue. Nevertheless, he said that the certification process was important in that it enabled the public to have information identifying those attorneys who have met at least some minimal objective standards.

Commissioner Shepard asked if dealing with the residency issue would improve the competency of the consumer bankruptcy practitioner. Mr. Butler answered that they were separate issues. He also noted that practitioners, to maintain practices that were competitive with other counsel, would open offices in several states.

JOEL REBMANN

Mr. Rebmann, Senior Vice President for Credit at May Department Stores, noted that he was speaking on behalf of his company and the National Retail Federation, the largest retail trade association in the nation. May Department Stores, he explained, is one of the nation’s largest department store operators and that it has 30 million active charge accounts.

Consumer bankruptcies, according to Mr. Rebmann, have had an enormous effect on retail business. In 1996, his company lost approximately $50 million, which represented an increase of 29 percent over the prior year. Inevitably, he observed, losses experienced by retailers diminished their returns or resulted in a higher cost of goods sold. May Department Stores, for example, has tightened its credit standards.

Mr. Rebmann said that he wanted to dispel several myths regarding the retail credit industry. First, he noted that retail credit debt represented less than four percent of total debt, excluding mortgages. He said that although May Department Stores utilized state of the art credit assessment systems, it had become increasingly difficult to differentiate between customers who would pay their obligations from those who were about to file for bankruptcy.

Second, he stated that retailers did not make a lot of money on credit cards. May, for instance, lost in excess of $100 million from its retail credit operations last year, he observed. He explained that retail credit is a service like gift wrap or delivery that May provides as a means of selling its products. Unlike bank cards, retailers do not have income streams such as annual fees and, on average, retailers’ credit lines are significantly lower. Accordingly, it is difficult for retailers to make a profit on their customer credit operations, he said.

Third, Mr. Rebmann noted that bankruptcy was not predictable and that retailers were not causing the problem by continuing to grant credit to those who cannot afford it. May continuallyupdates its customer credit profiles and requires every credit sales transaction to be authorized, he reported. While he did not question the need for bankruptcy, Mr. Rebmann expressed concern about those who abuse the system. He also suggested that there should be better consumer credit education.

Chair Williamson stated that the Commission very much wanted to solicit specific suggestions for improving the bankruptcy system from everyone. Responding to Commissioner Shepard’s request that he clarify his comments regard abuse, Mr. Rebmann explained that the substantial abuse standard should be better defined and that the current 60-day presumption period be extended. Mr. Rebmann, in response to Commissioner Alix’s inquiry, said that May has 30 million outstanding credit cards and that this number is only slightly lower than the number of outstanding credit cards that it had two years ago. From this response, Commissioner Alix concluded that the increased losses were not a product of increased card availability. Agreeing, Mr. Rebmann added that it was also not a result of May becoming more liberal in granting credit.

Commissioner Jones inquired of Mr. Rebmann as to whether the National Retail Federation had any observations regarding the overall efficacy of the consumer bankruptcy system. He answered that the Federation wanted a case to be automatically dismissed if the debtor failed to attend a Section 341 meeting or did not make the payments required under a chapter 13 plan. The Federation also favored extending the payment period for chapter 13 plans. In addition, the Federation supported forcing a chapter 7 debtor into chapter 13 if the debtor had an income stream that could support a repayment plan. Commissioner Shepard asked whether the Federation had any threshold amount to warrant mandatory conversion from chapter 7 to chapter 13. Mr. Rebmann said that the Federation was presently collecting statistics so that it could better respond to this query. In response to Commissioner Jones’s inquiry, Mr. Rebmann said that May recove rs approximately 20 percent of its outstanding claims in chapter 13 cases.


KAREN CORDRY

Ms. Cordry, on behalf of the National Association of Attorneys General, commented that governmental agencies may have concerns regarding the mandatory withdrawal proposal. On the other hand, she supported the national admission proposal as this was a major problem for governmental agencies. She explained that each district has its individual requirements regarding the use of local counsel or admission standards and that governmental agencies did not have the funds to pay pro hac vice admission fees. Unlike May Department Stores, which has counsel throughout the United States, she noted that state governmental agencies did not and, nevertheless, must appear across the country.

With regard to the new value proposal, Ms. Cordry observed that it addressed those cases where equity controlled the case under the protection of the exclusivity period and that she supported terminating exclusivity earlier in the process. Concerning the claims classification proposal, she noted that it presented two divergent concerns: gerrymandering and disparate treatment. In particular, she expressed concern about whether claims placed in a separate class were being treated unfairly ordifferently.


DAVID BARDIN

Mr. Bardin, federal policy counsel for the Cult Awareness Network ("CAN"), explained the circumstances of why CAN, a not-for-profit organization, had to seek bankruptcy relief. He discussed several areas for possible consideration by the Commission. These included whether or not the Bankruptcy Code should expressly deal with not-for-profit organizations, as these entities were fundamentally different from profit organizations particularly with regard to asset structure. For example, his client’s most valuable asset was its advocacy programs which, in turn, were valuable only to other organizations that share the same advocacy goals or to those that are adversaries of CAN. He expressed concern about having adversaries obtaining control of his client’s documents and the prospect that these documents could be destroyed or, even worse, used to disclose confidential or personal information in order to harass, embarrass or reap reprisal.

In response to Chair Williamson’s question, Mr. Bardin explained that CAN advocates for former cult members and their families and maintains a telephone hotline where it answers approximately 20,000 inquiries each year. Chair Williamson suggested that Mr. Bardin provide the Commission with some background on the interplay between bankruptcy and not-for-profit organizations and that he return at a later date to give an update on the status of the litigation affecting his client.

In concluding his remarks, Mr. Bardin asked the Commission to consider extending the automatic stay to officers and directors of not-for-profit organizations that file for relief under chapter 11. Commissioner Alix, however, expressed reservations regarding this suggestion as not all directors and officers of not-for-profit organizations were honest in their motives and dealings.

Following the conclusion of Mr. Bardin’s remarks, the meeting recessed as of 12:08 p.m. After the lunch recess, the chapter 11, Government and Jurisdiction, Procedure Working Groups convened their meetings during the afternoon session.


WORKING GROUP SUMMARIES

At approximately 4:04 p.m., the Commission met in plenary session to hear summaries of the working groups’ deliberations. Chair Williamson explained that the standard format was that the advisors for each working group would report on the points of agreement and disagreement discussed during the working group meeting session. Where there are points of agreement, he noted, they would be summarized in a brief memorandum which would be circulated to the full Commission. Should there be a consensus from the Commission on the proposal, then a more detailed analysis would be prepared, he said.


GOVERNMENT WORKING GROUP SUMMARY

Stephen H. Case, Advisor for the Government Working Group, reported that conceptual memoranda will be prepared addressing four areas. One of these memoranda will address effective methods of improving notice to governmental units to avoid delays and missed opportunities to protect the public interest when a bankruptcy case is commenced, he said. Another will explore the pros and cons of whether the exception to the requirement of filing proofs of claim in chapter 11 cases can be extended to other Chapters under the Bankruptcy Code. The third area will review whether Section 724(b)(2) of the Bankruptcy Code, which gives administrative expense priority over tax liens, makes good public policy. The fourth area concerned whether or not chapter 11 debtors should be permitted to confirm plans that allocate payments to reduce trust fund tax liabilities first as opposed to other tax liabilities. There were other tax related issues that will also be considered later as well, he noted.


CHAPTER 11 WORKING GROUP SUMMARY

Professor Warren reported that the chapter 11 Working Group discussed the question of whether or not industry-specific legislation added to the Bankruptcy Code since 1978 should be repealed to reestablish the historical even-handedness typical of commercial law statutes. The Working Group decided that the statutory provisions which fall into this category should be identified for further consideration, she noted.

The Working Group also discussed recommending that better data collection be required so that Congress will have information upon which to base its future policy decisions, Professor Warren recounted. She noted that the Working Group may ultimately decide to recommend the establishment of a task force that would inter-react with the other working groups. The task force could possibly be staffed with people involved in data collection at the Administrative Office of the United States as well as other governmental agencies.

The third area considered by the Working Group concerned employee and labor issues, specifically whether Section 1113 has functioned effectively to establish an appropriate balance between protecting collective bargaining agreements and providing a company with a reasonable opportunity to reorganize, Professor Warren observed. She said that a specific proposal was discussed, namely, whether or not a union can automatically reject a debtor’s collective bargaining proposal where the proposal would result in a violation of other labor laws. rejection of the collective bargaining agreement. The Working Group concluded that it would have to collect more information on the labor laws that would be implicated by this concept as well as more information on the general operation of labor laws in the bankruptcy context. There was, however, no consensus to move forward on this proposal at this time, she stated.

The fourth area reviewed by the Working Group concerned creditors’ committees. According to Professor Warren, there was consensus that Congress should restore the bankruptcy court’s power to change the composition of these committees and to review the United StatesTrustee’s decisions regarding committee appointments. She noted that there was a strong consensus that the bankruptcy court’s power should be restored and that the standard of review should be de novo. She specified that there should not be a presumption that the United States Trustee’s decision is correct. Professor Warren anticipated that a specific proposal in this regard will be available for discussion at the September meeting. In addition, she noted that specific inquiries of the United States Trustee’s Office current practices with respect to committee formation procedures.

The final proposal considered by the Working Group was the claims classification concept and the concerns discussed at the plenary session earlier during the meeting. The focus was to reduce litigation and not to build in more standards that would lead to increased litigation. Consequently, the proposal was revised with regard to the provisions pertaining to unfair discrimination and rational business justification. With regard to the "unfair discrimination" component of the proposal, this requirement would be moved back into the cram down provisions of the Bankruptcy Code. While the rational business justification test for separating legally similar creditors into different classes would be retained, the Working Group decided to limit the kinds of parties who could raise this issue to creditors who were members of a dissenting class. The purpose of this limitation, she explained, was to control litigation and to prevent the "holdout" problem.

The Working Group did not have sufficient time within which to substantively discuss the absolute priority proposal. The underlying memorandum on this concept, however, would be reworked and developed in greater detail for the next meeting, Professor Warren stated.

Commissioner Jones questioned whether debtors, who are already impecunious, should be required to furnish extensive data. She also questioned whether this requirement should be statutorially codified or handled administratively through the Administrative Office of the United States Courts. In addition, she observed that as there were several other issues that cut across bankruptcy law, such as the scope of the automatic stay, priorities under Section 507 and executory contracts, it was unclear whether these issues should be considered by the chapter 11 Working Group or some other working group.

With regard to data collection, Commissioner Gose cautioned that it was imperative that the Commissioners define the ends that they wanted from this data. Professor Warren acknowledged that Commissioners Jones’ and Gose’s comments would be addressed in the proposal. She noted that the concept also concerned capturing the information that was currently reported, but whose collection was not enforced and its accuracy was not checked.

Commissioner Ceccotti, responding to Commissioner Jones’ remarks regarding the crossover issues, noted that the Commission was not constrained by its current working group format from discussing these issues.

Commissioner Jones suggested that the data base being prepared by the staff highlight those sections of the Code which have generated the most problems based on the submissions to the Commission from the public.


JURISDICTION AND PROCEDURE WORKING GROUP SUMMARY

Professor King reported that the Working Group had identified several tentative areas where there was a consensus which would be memorialized in short-form proposals for review by the Commission at its next meeting.

Beginning with the appellate process structure, Professor King noted that there was a consensus that the review of interlocutory orders be done in accordance with Sections 1291 and 1292 of Title 28 of the United States Code. The proposal would permit the appellate court to hear an interlocutory appeal based on its own determination and hear appeals as of right under Section 1292 with respect to orders affecting the automatic and as well as through the certification process.

With regard to mandatory withdrawal, Professor King noted that the Working Group agreed that Section 157(d) should be amended so that all withdrawal is discretionary. Specifically, Section 157(d), under the proposal, would retain the substantive provisions dealing with mandatory withdrawal, but withdrawal would be on a discretionary basis.

Concerning the mandatory abstention provisions of Section 1334(c)(2) of Title 28 of the United States Code, the Working Group reached a consensus that they should be deleted and that the discretionary provisions be retained, Professor King stated. The Working Group also agreed that the special provisions contained in Section 157(b)(2)(B) and related provisions in Section 1411 should also be deleted as they only served to complicate the bankruptcy process.

In addition, Professor King said that preparatory memoranda regarding contempt and the use of magistrate judges would be prepared. With regard to contempt, the memorandum will examine provisions of former Section 1481 that were not carried forward by the 1984 Amendments to the Bankruptcy Code as well as other writings on this topic. The other memorandum would review referrals of non-core proceedings by district court judges to magistrate judges and examine a provision of the Bankruptcy Reform Act of 1978, not carried forward by the 1984 Amendments, which specifically denied the authority of the district court to make such referrals.

Commissioner Shepard observed that the Government Working Group considered mandatory withdrawal to be very necessary and useful to some government agencies. He said that he would like to know who was going to suffer the loss and who was going to gain from it. Professor King responded that this would be reviewed.

Professor King stated that Robert Greenfield, on behalf of the National Bankruptcy Conference, was gathering data on the incidence of jurisdictional disputes under Sections 157 and 1334 since 1984 to determine the impact of this issue on the bankruptcy system. This study, which would provide a breakdown of the reported cases, would be prepared prior to the September meeting.

Chair Williamson invited Chris Kohn of the Department of Justice to communicate his concerns regarding Section 157 to Liz Holland, Staff Attorney. Professor King added that some aspects of the venue proposal may be discussed at the September meeting, if sufficient time is available.


MEETING RECESS

Before recessing the meeting, Chair Williamson reviewed the agenda for the Friday portion of the meeting. The meeting recessed at 4:36 p.m.


MEETING - FRIDAY, JULY 19, 1996
Federal Judicial Center/Education Center
Thurgood Marshall Federal Judiciary Building
Washington, D.C.


ATTENDEES

Commission Members Present:

Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
M. Caldwell Butler
Babette A. Ceccotti
John A. Gose
Hon. Edith Hollan Jones
James I. Shepard

Commission Reporter and Staff Present:
Professor Elizabeth Warren, Reporter/Advisor
Professor Lawrence P. King, Advisor
Stephen H. Case, Advisor
Susan Jensen-Conklin, Deputy Counsel
Elizabeth Holland, Staff Attorney
Melissa Jacoby, Staff Attorney
George Singer, Staff Attorney
Carmelita Pratt, Administrative Officer

Public Attending:

Approximately one hundred people were in attendance including representatives from the American Bankers Association, American Bankruptcy Board of Certification, American Bankruptcy Institute, Association of chapter 12 Trustees, Commercial Law League of America, Consumer Bankers Association, Credit Union National Association, Independent Bankers Association, Mortgage Bankers Association, National Association of Attorneys General, National Association of Bankruptcy Trustees, National Association of chapter 13 Trustees, National Association of Federal Credit Unions, National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center, National Multi Housing Council, National Retail Federation, Navy Federal Credit Union, among others. Federal agencies such as the Administrative Office of the United States Courts, the Executive Office for United States Trustees, United States Department of Justice, and the Treasury Department were represented. The federal judiciary, professors of law, United States Trustees as well as chapter 7, 12 and 13 trustees attended. Representatives from the banking and credit industry, professional and trade associations, private industry, law firms, and the media were also present.


DISCUSSION OF SEPTEMBER MEETING AND RELATED MATTERS

At 8:30 a.m., Chair Williamson reconvened the plenary meeting of the Commission and reviewed the day’s agenda. He then outlined the format and focus of the September meeting. Similar to that utilized at the May meeting in San Antonio, the September meeting will utilize the roundtable format and continue the working group as well as decision making processes, he said. The focus will be on the intersection between local, state and federal government with bankruptcy, he added.

Upon the conclusion of the plenary session, the Consumer Bankruptcy; Service, Ethics; Small Business, Partnerships and Single Asset Real Estate; Mass Torts, Future Claims; and Transnational Bankruptcy Working Groups met.


WORKING GROUP SUMMARIES

At approximately 1:30 p.m., the Commission reconvened to hear the working group summaries.


SMALL BUSINESS, PARTNERSHIPS AND SINGLE ASSET REALTY WORKING GROUP SUMMARY

After acknowledging the contribution of the participants to the Working Group’s deliberations, Mr. Case noted that there was a consensus with regard to three areas. First, there should be more bright line rules concerning small business chapter 11 cases. Second, small cases need to move faster through the bankruptcy system and at lower cost. Third, small business incapable of achieving confirmation should be dismissed or converted promptly after the case is filed.

During the Working Group session, Mr. Case observed, the discussants were asked to consider four working hypotheses: small business should be defined to mean any business with gross revenues of less than ten million dollars in the twelve months preceding the filing; every small business debtor must attend a hearing commenced within 90 days from the filing of the case at which they must demonstrate to the bankruptcy court’s satisfaction that a reasonable probability exists that the debtor will confirm a plan within a reasonable time; the bankruptcy court should have broad case management authority to deal with those cases that fail to make this demonstration; and the disclosure statement and voting process with regard to small business debtors should be simplified and expedited.

Mr. Case stated the Working Group expressed interest in the possibility of having an independent business consultant play some role with regard to establishing whether a debtor’s business was viable and whether the debtor deserved to be in chapter 11. Accordingly, the staff will prepare a detailed paper about the mandatory hearing requirement and the independent viability expert. In addition, there was support among the participants to expand the case management powers of the bankruptcy courts and to streamline the disclosure statement and confirmation processes. He noted that while one of the participants suggested that the voting requirements for small businesscases be relaxed so that only two thirds in amount of claims would be needed, the Working Group did not give any instructions about whether to study this suggestion further.

With regard to single asset real estate cases, Mr. Case noted that there was a consensus that the law as it applied to these cases needed major reform and that a sensitive and practical definition of what constituted a single asset real estate case needed to be devised. The Working Group asked the participants to consider the following approaches: whether or not a trustee should be automatically appointed for these types of cases; and whether or not every single asset real estate case should be dismissed automatically unless the debtor remained current on postpetition taxes, maintained insurance coverage, and paid reasonable maintenance and postpetition interest on the entire mortgage debt. The participants suggested that the Working Group focus on whether the the new value exception, separate classification of unsecured deficiency claims, and lien stripping under Section 1111(b) should be available in single asset real estate cases. In concluding his remarks, Mr. Case projected that at least one or two of these concepts would be developed in time for the September meeting.

Chair Williamson asked for the source of the $10 million definitional threshold for small business chapter 11 cases. Commissioner Gose responded that he and Commissioner Alix had discussed it in an informal manner.


SERVICE, ETHICS WORKING GROUP SUMMARY

Professor King observed that the Working Group’s entire focus was on different aspects of the United States Trustee Program. Proposed legislation that would amend the method for computing standing trustee expenses and give the bankruptcy court exclusive authority to remove standing trustees from future cases was used as an initial starting point for the Working Group’s discussion. The general conclusion reached as a result of these discussions was that these matters were better left to the external and internal processes of the United States Trustee Program. The determination would be made and reviewed through the United States Trustee Program’s internal process and then be subject to judicial review under an abuse of discretion standard similar to or encompassing the protocol used under the Administrative Procedures Act.

The Working Group’s discussion then turned to the role of the United States Trustee in large and small chapter 11 cases. The larger cases were protected by well-represented creditors’ committees while in the smaller cases the same protective devices were not in place. As the discussion proceeded, there appeared to be some recognition that even in the largest cases, the United States Trustee has a role to play such as with respect to the retention of professionals and the review of fee applications as opposed to other matters which principally involved the exercise of business judgment.

A specific matter that was considered, Professor King noted, was the propriety of permitting direct payments to be made outside of a plan in chapter 12 cases and whether or not the trustee should be compensated for these direct payments. The Working Group noted that there was a splitamong the circuits on this issue. It discussed the substantial financial hardships that standing chapter 12 trustees have suffered in those jurisdictions that permit direct payments outside of a plan without compensation to these trustees. Professor King anticipated that a memorandum discussing this compensation issue would be prepared.


CONSUMER BANKRUPTCY WORKING GROUP SUMMARY

Professor Warren observed that more than 60 people attended the Consumer Bankruptcy Working Group session and that more than 20 participants offered their comments and observations during the course of this session. The general focus of the Working Group was on the conceptual spectrum consisting of whether the consumer bankruptcy system should be left virtually intact with only small changes being effected, or whether there should be a wholesale reform of the system.

She recalled that the Working Group at the June meeting discussed a thought experiment with regard to sharpening the differences between chapter 7 and chapter 13 as well as making the system more streamlined, principled and uniform throughout the nation. At this session, the Working Group focused on the other end of the spectrum, namely, a unified consumer bankruptcy system with provisions to deal with specific consumer financial problems such as home mortgages and arrearages, car loans in default, and tax obligations. Professor Warren reported that the Working Group had a lively debate and fairly detailed exploration of the unitary system concept. She concluded her summary by noted that the Working Group would caucus to decide on what the next appropriate step should be.


TRANSNATIONAL BANKRUPTCY WORKING GROUP SUMMARY

Professor King and Mr. Case summarized the Working Group’s discussions. Professor King noted that the Working Group reviewed current efforts of the International Bar Association Committee’s Concordat which is an advisory to courts on how to work out certain matters and provides protocols for dealing with bankruptcy proceedings pending in different countries against the same debtor. The Working Group also reviewed the United Nations’ work with respect to UNCITRAL which concerns the development of a model law on transnational bankruptcies. It was anticipated that UNCITRAL’s efforts would not be finalized until the April of next year.

The Working Group also focused on some very specific recommendations for amendment. One of these concerned whether the element of comity should be retained, according to Professor King. Specifically, the Working Group considered whether Section 1410 of Title 28 of the United States Code should be amended to require that only one proceeding need be brought rather than the current requirement of bringing proceedings in each jurisdiction where the debtor’s property is located.

Other general areas that the Working Group considered, Mr. Case noted, concerned the dimensions of how foreign insolvency practitioners view the bankruptcy system and process in the United States. He said that the Working Group expressed interest in hearing from some of thesepractitioners perhaps during a portion of the October meeting which will coincide with the National Conference of Bankruptcy Judges annual meeting or to meet with them at the March INSOL meeting at New Orleans.

The Working Group concluded its session by asking the participants to identify the two most troublesome aspects of American bankruptcy law and practice. The responses were the extraterritorial effect of the United States bankruptcy law and the extremely liberal debtor in possession concept. Mr. Case noted, however, that one participant acknowledged that foreign countries are beginning to recognize that saving jobs is a good idea and that the debtor in possession concept works better as a job saving device. Accordingly, the level of opposition to this concept among foreign practitioners may be beginning to become divided.

Commissioner Shepard added that the Working Group stressed that the Commission should forego taking any formal action with regard to formulating a global plan until UNCITRAL and the other groups adopt their guidelines.


MASS TORTS AND FUTURE CLAIMS WORKING GROUP SUMMARY

Professor Warren reported that the Working Group spent approximately two-thirds of its session discussing whether this topic should be considered by the Commission or be left to developing case law. The conclusion was that the Commission should consider the topic.

The Working Group then discussed how the Bankruptcy Code should deal with the incidental future claimant and whether only those claims that truly threaten the company’s health should be affected by a plan. The Working Group also considered the notion of effective representation to protect the interests of future claimants through a structure that would protect the assets of the company in order to enlarge the asset pool available to compensate future claimants. She noted, for example, that the concept could involve such items as channeling injunctions and developing procedures that would cut the transaction costs associated with trying to resolve these claims. The concept of using administrative resolution of tort cases to encourage settlement and tying attorney compensation to some degree to the compensation paid to future claimants, for instance, were also considered.


CONCEPTUAL PROPOSALS FOR POSSIBLE CONSIDERATION AT THE SEPTEMBER MEETING

Chair Williamson, in concluding the Working Group Summaries, asked each advisor to identify those specific proposals that may be discussed at the September meeting.

The Small Business, Partnership and Single Asset Real Estate Working Group, according to Mr. Case, will likely develop proposals that would define a small business, devise a weeding-out method to identify debtors who abuse the system, and set up time frames and simplified procedures to speed the bankruptcy process for deserving debtors.

Professor Warren, on behalf of the Consumer Bankruptcy and Mass Torts and Future Claims Working Groups, did not foresee any proposals being formalized at this time. Commissioner Jones noted, however, that the Commission would solicit views on the unified consumer bankruptcy model discussed at today’s session. Agreeing, Professor Warren added that anyone who is interested in keeping apprised of the Consumer Bankruptcy Working Group’s proposals should have his or her name added to the Commission mailing list.

Professor King said that a proposal in the form of an amendment to the venue of cases ancillary to foreign proceedings provisions of Section 1410 of Title 28 of the United States Code may be prepared and perhaps a paper which reviews the issues presented by direct plan payment arrangements in chapter 12 cases.


CONCLUDING REMARKS

Professor Warren acknowledged the contributions of the participants and others at this meeting to the Commission’s work. Concurring with Professor Warren’s comments, Chair Williamson also acknowledged that the working group model developed for considering substantive issues which has been utilized at the June and this meeting has generally proven to be satisfactory. In particular, he noted, it has served to focus the Commission’s attention on very specific issues.


ADJOURNMENT

Chair Williamson concluded the meeting at approximately 2:15 p.m. Back to Table of Contents


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