ABI - National Bankruptcy Review Commission
National Bankruptcy Review Commission
THE NATIONAL BANKRUPTCY REVIEW COMMISSION
MINUTES OF MEETING HELD:
Friday, April 19, 1996, Washington, D.C.
Approved: May 16, 1996
Prepared by: Susan Jensen-Conklin
MEETING - FRIDAY, APRIL 19, 1996
Federal Judicial Center, Education Center
Thurgood Marshall Federal Judiciary Center
Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
M. Caldwell Butler
Babette A. Ceccotti
John A. Gose
Jeffery J. Hartley
Honorable Edith Hollan Jones
James I. Shepard
Commission Reporter and Staff Present:
Professor Elizabeth Warren, Reporter/Consultant
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer
Panel One: Preview of Consumer Issues
Consumer Bankruptcy: Going Broke in the Midst of Prosperity:
Jan Elston, Ford Motor Credit Company
Gary Klein, National Consumer Law Center, Inc.
Prof. Jeffrey W. Morris, University of Dayton School of Law
David Nordemann, Visa U.S. Risk Management
James S.K. Shulman, National Association of Consumer Bankruptcy
Dr. Theresa Sullivan, University of Texas at Austin
Anita Jo Kinlaw Troxler, Standing Chapter 13 Trustee
Panel Two: Preview of Business Issues
Retail Business, Wholesale Bankruptcy?
Prof. Edward I. Altman, New York University
Leonard N. Stern School of Business
Antonio C. Alvarez, II, Alvarez & Marsal, Inc.
H. Elizabeth Baird, NationsBank Corporation
Neal Batson, Alston & Bird
Charles J. Hansen, Carson Pirie Scott & Co.
Max Holmes, Salomon Brothers Inc.
Leonard M. Rosen, Wachtell, Lipton, Rosen & Katz
Calvin R. Snowden, External Affairs Director, United States General
Administration - National Capital Region
Karen Cordry, National Association of Attorneys General
Judith Starr, Securities and Exchange Commission
Richard Bartel on his own behalf
Stuart Gelberg, Chapter 13 Trustee
Approximately forty-five people were in attendance including
from the Administrative Office of the United States Courts, Federal
Center, Executive Office for United States Trustees, Department of
Internal Revenue Service, Securities and Exchange Commission,
Research Service, various trade associations, private industry, law
Vice Chair Ginsberg called the meeting to order at 8:42 a.m. and made
preliminary comments. The minutes of the February meeting were approved
oral vote of the Commissioners. He stated that a portion of the meeting
February 24 was in closed session at which time personnel matters were
discussed. Vice Chair Ginsberg then turned the meeting over to Brady C.
Williamson, Commission Chair.
In his opening remarks, Chair Williamson noted that the Commission had
formidable challenges from its outset. In addition to the delayed
appropriation process which caused the Commission not to convene its
meeting for nearly a year after the effective date of the enabling
he cited the death of Mike Synar, the former Chair. Notwithstanding
challenges, however, Chair Williamson observed that the
was not any less important given the increase in bankruptcy filings
and retail filings, in particular, as well as the integral role that
plays in the economic life of America and the impact it has on families
businesses throughout the nation. He noted that his work as a
attorney in the bankruptcy field and his experience teaching state and
constitutional law at the University of Wisconsin School of Law together
the experience he obtained while on the staff of the United States House
Representatives and the United States Senate would contribute to the
Chair Williamson stated that he had a procedural and practical agenda.
said that the work of the Commission should be open, with only very rare
exception, and that it should be inclusive, without any exceptions. He
observed that the Commission as an entity and the Commissioners as
should continue not only to hear every point of view, but should also
solicit points of view not often heard. To this end, he stated that the
Commission will take its work outside of Washington, D.C.
While the Commissions report will have academic aspects, Chair
Williamson said that it would not be academic. Specifically, he noted
Commission should inspire law review articles, not write them. The
of the report, he commented, would mark only the beginning of the
Commissions real work. Chair Williamson stated that the goal of
Commission and Congress is to strengthen the Bankruptcy Code, to make it
practical, efficient and effective, and to insure balance and fairness
sometimes complex legal and economic relationships between lenders and
borrowers. To effectuate this process, Chair Williamson noted that he
begun a series of meetings with members of Congress and their staffs and
this process of consultation would continue in the upcoming weeks. He
that the Commissions assignment was to review the Bankruptcy Code
attendant issues and to report its findings and recommendations to
that it can enact them into law, which is the Commissions
Chair Williamson noted that the Commissions next meeting would
place at San Antonio in May and that this meeting would continue the
of consumer bankruptcy issues. During the interim, he stated that the
Commission would accelerate the process of narrowing its focus on the
that it will address as well as make several personnel decisions.
In concluding his opening remarks, Chair Williamson expressed
the bankruptcy community for its patience and understanding given the
and tragic events which affected the Commissions ability to do its
over the past six months. He also noted that the Commissioners, its
and staff, as well as Judge Ginsberg and his staff provided a remarkable
service under difficult circumstances.
With regard to todays meeting, Chair Williamson explained that
portion would be devoted to a discussion of consumer bankruptcy as a
the May meeting. The second portion of the meeting would focus on
and, in particular, on retail Chapter 11 bankruptcies. He noted that
number and visibility of retail bankruptcy cases had important national
economic implications. The latter part of the meeting would consist of
continuing the process of sifting and winnowing the issues under
Alixs leadership. Thereafter, a variety of administrative matters
be addressed in this portion of the meeting. He noted that the meeting
conclude with the public participation section which would include a
a recent United States Supreme Court case having potentially significant
on the practice of bankruptcy law. He also stated that a moment of
would be observed at 10:02 a.m. in memory of the anniversary of the
PANEL ONE: PREVIEW OF CONSUMER ISSUES
CONSUMER BANKRUPTCY: GOING BROKE IN THE MIDST OF
After introducing the panel members, Professor Warren opened the
noting that one in every 104 families in the United States filed for
during 1995. She then asked the panelists to describe the typical
debtor profile. Dr. Sullivan responded that the statistically average
debtor was a baby boomer in his or her late thirties or early forties.
baby boomers were the largest group in the population, Dr. Sullivan
they were disproportionately represented among the consumer debtors.
observed that approximately half of these debtors attended college for
one year, but were somewhat less likely to have a degree than the rest
population who attended college. Occupationally, Dr. Sullivan stated
consumer debtor was typically a white collar employee. Of these, she
that approximately 25 percent were in a higher white collar employment
and that as a whole they were in the middle, not bottom, part of the
occupational distribution spectrum. In addition, she observed that one
five consumer debtors owned or currently owned a business and that
percent cited failure of the business for which they worked as the cause
their need to resort to bankruptcy. She noted that one half of consumer
debtors experienced some form of job disruption. She also observed that
approximately one half of consumer debtors were homeowners.
Dr. Sullivan discussed other aspects of the consumer debtor profile.
noted, for example, that consumer debtors had extraordinarily low
their education levels and occupations. For example, one third of these
debtors had incomes below the poverty level at the time of filing and
percent had incomes above the national median incomes for all families.
Consumer debtors carry a lot of debt, Dr. Sullivan observed.
noted that a consumer debtor at the median owed two and one-half times
her annual income with regard to all debt owed. If mortgage obligations
excluded, the consumer debtor owed 1.6 times his or her annual income in
Dr. Sullivan also noted that a high proportion of consumer debtors
marital interruptions within the two years preceding their bankruptcies.
married consumer debtors, they were less likely to have two wage earners
married couples in the general population. In sum, Dr. Sullivan
the average consumer debtor filed bankruptcy because of a very low
attributable to either business or job difficulties and the
caused by personal disruptions in the family. Another contributing
she cited was the consumer debtors high level of debt.
The panelists generally concurred with Dr. Sullivans profile of
typical consumer debtor. Ms. Troxler, however, noted that many of the
she administered concerned two-income families. Nevertheless, she
employment or domestic disruption contributed to consumer bankruptcy
along with insufficient or nonexistent medical insurance coverage. Mr.
likewise ascribed to Dr. Sullivans consumer debtor profile. In
he noted that many debtors were poorly educated in financial matters, a
which would not show up in a statistical analysis. Mr. Nordemann also
with the aforesaid consumer debtor profile. He noted that filings
April 5, 1996 were 273,000 as compared to 220,000 for the same period
When asked to identify the typical consumer creditor class, Ms. Elston
replied that it consisted of mortgage and vehicle lenders, credit card
creditors, the Internal Revenue Service and medical care providers. She
that many consumer debtors filed to protect their home and car and that
consequently the mortgage and vehicle lenders were the prevalent
Professor Warren asked whether these debtors could have avoided
they had just cinched in their belts a little tighter. Responding in
negative, Mr. Shulman explained that consumer debtors were typically
had exhausted all of their options and were depressed about having to
bankruptcy. To avoid the prospect of bankruptcy, he said that these
often borrowed money from relatives and others and frequently went to
credit counseling services to attempt workouts. Mr. Shulman noted that
consumer debtors have borrowed against the equity in their home and
their savings before resorting to bankruptcy. In sum, he estimated that
probably 99 percent of his clients had no option other than
Although Mr. Nordemann was not sure whether the 99 percent figure cited
Shulman was accurate, he agreed that a large proportion of consumer
needed bankruptcy protection. Nevertheless, he observed that the
system had lost some of its balance. He noted, for instance, that a
significant proportion of debtors who could have filed under Chapter 13,
instead filed under Chapter 7 because it appeared to be an easier
He based this statement on studies of 2,000 cases that his company
Professor Morris asked whether this estimate was based on a finding that
debtors could repay all of their debt or just some significant portion
Mr. Nordemann said that it was based on the conclusion that some
could be repaid.
Turning to Chapter 13, Professor Warren asked Ms. Troxler whether the
Chapter 13 debtor was better off than the typical Chapter 7 debtor.
not sure if the Chapter 13 debtor was better off, Ms. Troxler noted that
Chapter 13 debtor stood to lose more in Chapter 7. For example, she
that exemptions did not help the debtor save property, so that this type
debtor turned to Chapter 13 to save his or her property through future
Professor Warren asked Ms. Troxler to clarify her statement that
not help debtors. Ms. Troxler explained that the value of exemptions
from state to state. In North Carolina, for instance, she noted that
homestead exemption was $10,000 per debtor while a non-homeowner debtor
eligible for a $3,500 wild card exemption.
With regard to Mr. Nordemanns statements concerning the
debtors to choose Chapter 7 over Chapter 13, Ms. Troxler explained that
easier to file Chapter 7, eliminate debt and get credit than it was to
in a Chapter 13 case for three to five years. She noted that there was
reinforcement in the economy to encourage one to repay as much debt as
possible. Ms. Troxler stated that most creditors were not interested
they preferred to charge off the account and move forward. In addition,
observed that Chapter 7 debtors did not have much difficulty in
their credit. She stated that if a debtor did not have substantial
then there were no advantages to repaying his or her debts in Chapter 13
opposed to discharging those same debts in Chapter 7. In sum, she noted
there were not many reinforcements that would encourage a debtor to
repay debts out of future income.
Dr. Sullivan added that there was a statistical difference between
and 13 debtors. She stated that the former carried a lot more debt than
latter. Specifically, she said that Chapter 7 debtors have a debt to an
ratio of 2.8 compared to a 2.1 ratio for Chapter 13 debtors.
Ms. Elston questioned Ms. Troxlers statement that Chapter 7
obtain credit more easily than Chapter 13 debtors. She said that this
statement may depend on different time frames such as the date of
While agreeing that timing was an important factor, Professor Morris
a Chapter 7 debtor can complete the process in six months and obtain a
discharge which effectively gives the debtor 2.5 to 4.5 year head start
Chapter 13 debtor. In addition, the Chapter 13 debtor must obtain court
authorization to incur postpetition debt.
The panelists then recounted instances where vendors specifically
debtors to purchase their goods and services following bankruptcy. With
to the diminished stigma of bankruptcy, Professor Morris opined that its
could be traced to sundry factors such as the general mobility in
the decision by creditors that bankruptcy has less stigma.
Mr. Shulman expressed concern regarding pro se debtors who are
upon by petition preparers. He explained that if more debtors were
by counsel, then there would be fewer instances of debtors filing cases
Chapter 7 instead of Chapter 13. In addition, he noted that many of his
clients who filed Chapter 7 were usually worn down or ill.
Mr. Klein observed that the primary reason why there were more consumer
bankruptcy filings was that people were more overextended and that there
been significant structural changes in the economy which placed greater
pressure on families trying to deal with their debt. For instance, he
that consumer credit has increased seven times since 1970 while real
had not increased comparably. In addition, he observed that there was a
significant increase in home secured credit in reaction to the 1986
to the Internal Revenue Code and that the number of foreclosures had
tripled since 1980.
Coupled with these factors, Mr. Klein noted, were the structural
the nations economy consisting of lower incomes resulting from
downsizing. As people become more highly leveraged, he said that even a
$10,000 drop in income can make it difficult for a debtor to manage his
debt. He stated that the need in many areas of the country for a family
have two incomes to support it caused the risk to double. Thus, if
member lost some portion of his or her income, then the family cannot
its current debt load, he said. Likewise, Mr. Klein stated that divorce
catastrophic event for family finances. Another factor was the decrease
savings rates which, in the past, functioned as a resource if someone
unemployed. A further factor Mr. Klein cited was the increasingly
collection activity of creditors which made it more difficult for people
obtain workouts on mortgages, car loans and unsecured obligations.
Specifically with regard to auto repossessions, he noted that every
except Wisconsin permitted self-help repossession. He recalled that
clients have increasingly reported that creditors are unwilling to
Mr. Nordemann agreed that perhaps his organization and MasterCard
debtors to go into Chapter 7 without giving them a chance to work out
problems. He clarified, however, that neither Visa nor MasterCard issue
credit cards themselves and that these organizations just represent the
and financial institutions that issue them. He said that his
would be prepared to help educate its members on this matter.
Ms. Elston, speaking on behalf of Ford Motor Credit, said that the
collection process was customer-driven and that it was against Ford
Credits interest to immediately repossess a motor vehicle. What
really wanted, according to Ms. Elston, was to have the customer pay for
vehicle. Mr. Klein noted that there was a difference in the industry
the policy and the practice. As to the latter, he said there was some
aggressive collection activity that may not be entirely consistent with
articulated policy of a company like Ford Motor Credit.
Commissioner Hartley questioned Mr. Klein as to whether he left out the
greater sophistication level of debtors and their ability to massage and
the system. While Mr. Klein acknowledged that there was some anecdotal
evidence of abuse, he stated that it would be very difficult to
percentage of bankruptcy filings constituted an abuse of the system. He
that there was a broad range of protections available to creditors to
abuse. He stated that there would be a few people without the best
would get through the process, but that this was inherent in any
system. From his experience, he said that there was less abuse in the
bankruptcy system than existed in the criminal system.
Responding to Commissioner Hartleys query as to whether serial
constituted an abuse of the system, Mr. Klein stated that debtors who
seven or ten times were abusing the bankruptcy system. On the other
noted that many serial filings involve changed circumstances. For
was not uncommon for many Chapter 13 debtors to be unsuccessful in their
case because they suffered further financial setbacks.
Commissioner Hartley wanted to know how to distinguish between
changes in circumstances from attempts to manipulate the system. Mr.
cautioned against having a rule that automatically threw out a
simply because it was the debtors second or third attempt. He
that the circumstances of the filing should first be examined.
In response to Professor Warrens inquiry as to whether there were
on the incidence of serial filings, Ms. Troxler stated that fewer than
percent of her cases had been filed more than once. Of these serial
she noted, many of these debtors had not received a discharge in the
and that the second case was typically filed within a year of the first
The usual scenario was that a debtor would file a Chapter 7 case after
prior Chapter 13 case was dismissed, she observed. Mr. Nordemann
that his organizations information showed that the amount of debt
typically twice as much in the second filing as was listed in the prior
He said that this would indicate that debtors were learning the system
be taking advantage of it. As to serial discharges, Ms. Troxler
these constituted less than one percent of the filings that she
In those instances where the prior case was dismissed, however, Ms.
noted that creditors generally did not oppose the second case if the
could demonstrate performance and was willing to agree to very stringent
controls. And, she observed, a large percentage of these second cases
proceeded to discharge.
Commissioner Jones asked Mr. Nordemann whether his figures indicated
amount of repayment his organization received from Chapter 13 cases was
than the amount collected from Chapter 7 cases. Although he did not
data at hand, Mr. Nordemann stated that Chapter 13 was certainly
terms of funds received. Ms. Elston questioned whether unsecured
fared better in Chapter 13. She observed that one factor that has not
discussed was the failure rate of Chapter 13 cases.
Professor Warren asked Ms. Elston whether a car lender fared better in
Chapter 7 case with a reaffirmation agreement than in a Chapter 13 case
the secured debt was bifurcated into secured and unsecured claims and
debtor retained possession of the vehicle. Noting that such creditor
better, Ms. Elston observed that a secured creditors claim and
rate in Chapter 13 were crammed down. There were also problems with
and depreciation, she noted. Mr. Klein asked Ms. Elston whether the
creditor was better off in either a Chapter 7 or 13 case as opposed to
immediately repossessing the motor vehicle. Ms. Elston acknowledged
best result for the creditor was for the customer to keep the vehicle
pay the pay the creditor.
Professor Morris posited whether the response depended upon the
the fact that some bankruptcy judges imposed minimum payment percentages
prerequisites to confirmation. Ms. Troxler noted that the average
unsecured creditors for her cases in the last fiscal year was more than
percent and that it exceeded 60 percent the preceding year. She
whether unsecured creditors were concerned that secured creditors could
Chapter 7 debtors reaffirm secured obligations which included
unsecured claims. She likened this to an unsecured creditor receiving
preferential treatment. In contrast, she observed that Chapter 13 tries
level the playing field for creditors.
Ms. Elston noted that while the Chapter 13 debtor retained possession
motor vehicle, the vehicle depreciated in value and the secured creditor
wait a substantial period of time to receive its first payment under the
Commissioner Jones added that the bifurcation option also allowed
debtors to make payments at lower rates. Professor Morris stated that
problem was caused by judges setting wrong values. Commissioner Jones
whether the statute should be amended to 70 or 80 percent of the initial
of the loan.
Mr. Shulman recalled that the statute was wisely crafted to allow
reestablish stability in their lives, to retain their assets and to
creditors in an orderly manner. Commissioner Shepard stated that a
controlled the value of the vehicle given its depreciation rate. Mr.
said that in appropriate circumstances creditors could challenge the
debtors good faith if the vehicle was purchased on the eve of
Based on cram down alone, Ms. Elston estimated that the three major car
lenders lost one billion dollars or more. This figure, she said, did
include administrative costs. Mr. Shulman noted that by challenging the
concept of cram down, the fundamental benefit of Chapter 13 was being
Ms. Elston stated that she was not advocating doing away with cram down
entirely, but that secured creditors should be able to get the benefit
Returning to the issue of serial filings, Mr. Shulman observed that
his clients have refiled their Chapter 13 cases. He stated that it
would be a
mistake to require anything more than that the plan be proposed in good
He noted that debtors who needed to file more than one bankruptcy case
recidivists or criminals, but people who were facing serious financial
Ms. Troxler noted that there was a distinction between secured
as car lenders and other purchase money lenders. She noted that there
many creditors who claimed to be secured while the collateral was
worthless. Ms. Troxler stated that there was a push in the marketplace
these loans based on documents that clearly showed that the debtor could
service the debt. She said it was very important to look at both sides
issue. In particular, she remarked that there was a substantial
poor loan documentation for motor vehicles. Commissioner Jones suggested
if debtors knew in advance that they could not readily avoid paying
obligations, they would not be as inclined to borrow. Disagreeing, Ms.
noted that most debtors did not consider bankruptcy while they are
At 10:02 a.m., there were approximately three minutes of silence in
remembrance of the anniversary of the Oklahoma City bombing.
Summarizing certain bankruptcy filing statistics, Professor Warren
Chapter 13 comprised 30.9 percent of the bankruptcy cases filed. Dr.
observed that 62 percent of Chapter 13 cases were dismissed. In
Professor Warrens question why nearly two-thirds of Chapter 13
dismissed, Professor Morris noted that perhaps these debtors received
wanted from the system, namely, the opportunity to restructure their
mortgages and cure the arrearages, or that perhaps these debtors
disruption in their financial circumstances.
Commissioner Shepard noted that there were a lot of debtors who were
optimistic and that lawyer mills contributed to the problem. Dr.
suggested that these debtors had a very unstable income history and that
filed Chapter 13 optimistically thinking that their new jobs would work
but that they did not. Commissioner Shepard asked whether it should be
responsibility of the debtors attorney to screen these cases out
advise that they should not be filed under Chapter 13. Mr. Shulman
he utilizes a budget to analyze these cases. Commissioner Hartley
that many attorneys did not do this analysis and used Chapter 13 as a
to get fees. Given the apparent delay in some districts with regard to
commencement of plan payments, Mr. Shulman suggested that the Commission
recommend that early confirmation dates be set in Chapter 13.
Commissioner Jones asked Dr. Sullivan how many Chapter 13 cases
Chapter 7. Although Dr. Sullivan did not have that information, Mr.
noted that it was a mistake to look beyond the obvious answer. With
the high failure rate of Chapter 13 cases, he explained that these
likely to face new financial problems. He noted that one-third of all
in the lowest 40 percent of income brackets would have an income
any given year and that one-third of these people would lose at least a
months worth of income at some point during the year. Factors
these, he observed, would throw a Chapter 13 case into disarray.
Mr. Klein, in response to Commissioner Hartleys question as to
composition plans should be eliminated or whether there should be a
payment threshold for confirmation, noted that the increased costs of
13 should be considered. These costs include the filing fee,
fees, trustees fees and the proposed United States Trustee
response to Commissioner Shepards suggestion that attorneys
eliminated from Chapter 13 plans, Professor Morris answered that there
some districts which encouraged these fees to be paid under a plan in
maintain the commitment of the debtors attorney to the plans
Commissioner Shepard posited that a Chapter 13 debtors attorney,
instances, abandoned his or her client as soon as the debtor paid the
attorneys fees. Mr. Shulman asked whether Commissioner Shepard
statistics to substantiate this statement. Commissioner Shepard stated
this was why, in part, Chapter 13 cases were converted or dismissed.
Shulman said that he was unaware of any statistics that establish
attorneys abandon their clients. He noted that persons file bankruptcy
they are experiencing financial difficulties and that filing a
reorganization case did not always cure these difficulties.
Mr. Nordemann observed that his organization was trying to measure how
extra it loses because of bankruptcy. He noted that the average
years ago was approximately $1,900. For those that go into bankruptcy,
stated, the write-off was about $3,200 and that this figure has
approximately $200 each year. He said that there was no question that
consumers who do pay their obligations also pay for the cost of those
Mr. Klein commented that while this point has been frequently made for
past 50 years, he has never seen the statistics that show exactly what
bankruptcy has on interest rates. Ms. Elston remarked that the risk
people who do not pay their obligations are exorbitant or
expenses that are passed on to the American public. She also suggested
the Commission should examine those areas in the bankruptcy system which
creditors so much money and, in turn, are borne by the consumers. Mr.
questioned whether these were real losses based on the bargain auto
made with their borrowers. Mr. Shulman noted that there were more
bankruptcies because the credit industry had inundated the nation with
installment debt. He then discussed various statistics evidencing the
in consumer installment lending. He also observed that the credit card
industry had expanded their solicitations to consumers who are less able
service the debt.
As a closing comment, Commissioner Jones requested the panelists to
letters identifying ten choices for improvements in the Bankruptcy
PANEL TWO: PREVIEW OF BUSINESS ISSUES
RETAIL BUSINESS, WHOLESALE BANKRUPTCY?
After a brief recess in the meeting, the second panel convened. Prior
the discussion, Commissioner Alix disclosed that he had been previously
represented by Messrs. Holmes, Batson and Rosen, three of the panelists.
Professor Warren then introduced the panelists and posed the first
what is happening in the retail industry?
Mr. Alvarez noted that the retail filings of the late 1980's to early
were primarily done in response to too much debt. In contrast, he
the more recent filings were made in response to serious operating
The explanation for these more recent filings, he stated, was supply
demand, namely, too many stores and not enough demand from customers.
Specifically, Mr. Alvarez cited two problems. One was that the number
stores serving the nation had grown explosively. The second was the
retailing formats from mall-spaced retailers to warehouse clubs.
In response to Commissioner Shepards query as to whether this
competitive growth was financed with debt, Mr. Alvarez said there were
different answers. Typically, he noted, where the retailer has both
problems and is heavily leveraged, it will seek bankruptcy relief sooner
one that has no debt. On the other hand, he observed, there were
where the operating problem was so bad that the retailer must seek
relief regardless of the debtors debt structure.
Mr. Holmes added that the damage was being done by Walmart in the
area, by Home Depot in the lumber business, and by Toys R Us. He noted
these companies were primarily equity-financed with high stock prices
they issued equity to build their growth. Accordingly, he said that
companies have a tremendous advantage over their competitors who are
or heavily debt-financed.
Professor Altman observed that entities financing these companies
expansion would not necessarily do very well in their reorganization.
addition, he noted that it was very easy to obtain postpetition debtor
possession financing if the debtor had hard assets, such as inventories.
Observing that the banking industry is seeing an avalanche of Chapter
retail filings, Ms. Baird attributed this development to the fact that
were too many doors, too much space, too much debt and too many
leases along with reduced consumer spending. She acknowledged that
was utilized as a planning tool to terminate leases. Mr. Hansen noted
occupancy costs, usually in the form of leases, constituted a relatively
percentage of operating expenses for retailers.
Mr. Rosen did not think that it was fair to say that parties enter
the intent to file bankruptcy. While noting that both sides recognize
there is a risk factor involved in these transactions, he disagreed that
bankruptcy was a planning tool to terminate leases. He explained that
bankruptcy was an expensive procedure and that the rejection process did
permit the debtor to escape all liability as there were damage claims.
Mr. Alvarez noted that the unavailability of trade credit other than
was a strong consideration favoring bankruptcy. Without trade credit,
explained, the retail debtor has difficulty getting goods on normal
becoming a debtor in possession and providing liens, a retailer gives
to these trade creditors. The ability to reject leases is also part of
benefit that bankruptcy provides retailers.
Commissioner Jones asked Mr. Alvarez whether Chapter 11 causes a bad
those retailers that do not file Chapter 11 cases. He responded that
system will force consolidation and closure. He said that one needed to
in which forum should this process occur and who should control it. Mr.
agreed that Chapter 11 will preside over a contraction in the retail
Mr. Hansen explained that Chapter 11 was a great success for his
said that it gave his company a breathing spell from its trade factors
allowed the debtor to reorganize relatively smoothly over 26 months
cataclysmic effects on its vendors. He observed that Chapter 11 offered
way to reorganize or liquidate in an orderly fashion.
Responding to Commissioner Jones question, Mr. Rosen noted that
may not be a definitive answer. With regard to the airline industry, he
observed that there probably was an extraordinary competitive advantage
Continental adopted a strategy of reduced fares and were able to operate
lower cost. On the other hand, he noted that this was not a general
He cited, for example, that when Federated filed Chapter 11,
not start charging less for its goods. In addition, he observed that
11 generally costs extra money and that it causes a lot of grief and
aggravation. There are many problems that must be addressed including
customers, suppliers and employees. Mr. Batson remarked that sometimes
competitive disadvantage runs the other way. Mr. Holmes stated that
in Chapter 11 is presented by those companies that linger beyond two or
years because they derive some business advantage over its
Professor Warren asked the panel to focus on industry-wide pressures
whole industries appear to be in trouble at the same time. Professor
attributed these trends to the economics of the time, not the bankruptcy
system. Mr. Alvarez recalled that it had been his experience that
been industry-driven except for the late 1980's when they were driven by
In the early 1980's, the price of oil affected the oil service
observed. Likewise, deregulation helped spur competition among the
As these contractions would have occurred whether or not Chapter 11
said that Chapter 11 just served to define to whom you give control. In
United States, the debtors are given a chance, while in Europe creditors
Commissioner Hartley asked if the level of abuse was affected by the
the debtor. Mr. Rosen noted that there was a distinct problem with
debtors where there were no active creditors committees. The
presented, he stated, was who was watching the store. He observed
was a perception that the United States Trustee Program, as
it might be, was not sufficiently funded and geared up to monitor these
Although the recent amendments to the Bankruptcy Code provide the means
bankruptcy judges to become more involved in case administration, Mr.
asked whether case administration should be the judges or the
States Trustees responsibility. Mr. Alvarez explained that
that linger in Chapter 11 do so because they have complicated capital
structures and have to devise a method of dividing assets to obtain the
necessary votes for confirmation.
Commissioner Shepard asked who receives the benefit and who pays the
Chapter 11. Mr. Hansen answered that professionals are the only ones
really do not share any of the pain of the bankruptcy process and do not
an equity stake in a speedy outcome the way other participants in the
have. Mr. Alvarez noted that cases drag on because delay favors the
rung of the capital structure and the lawyers it employs. He cautioned
speed should not be overemphasized as it would permit the senior
retain all the debtors value.
Commissioner Jones questioned why bankruptcy should divide values
from what the parties agreed to under law pursuant to an enforceable
Messrs. Alvarez and Rosen observed that the issue concerned the
value. Mr. Rosen noted that Chapter X was abandoned as the valuation
was so protracted and contentious. The Bankruptcy Code was designed to
debate by forcing parties to compromise and to encourage compromise by
these parties the right to debate.
Commissioner Shepard asked if this was not economic extortion. Mr.
responded that under the former system, the judge had to decide the
value after a full trial, a process that under Chapter X did not work
it took too long. Mr. Holmes noted that one persons extortion is
anothers unfairness. As an example he cited the National Gypsum
where the debtor, in league with its secured creditors, stated that its
stock would trade at $5.00 a share and while the junior creditors
would trade at $10.00 a share. A year and a half later, he recalled,
was trading at $30.00 a share. While it initially appeared that these
creditors were holdout extortionists, it eventually turned out that they
Mr. Holmes stated that there has to be a process where valuation can be
but it has to be a short enough process that did not consume ten years.
recommended that there be a two-year time limit on extensions of
Citing LTV as an example, he said that case lasted eight years and the
professionals were paid $50 million. He observed that management liked
process because during these eight years, the debtor had an
competitive advantage as it did not have to pay interest while creditors
wait for their money. Noting that the case lasted six years, rather
eight, Mr. Rosen stated that he represented creditors who wound up
common stock. He noted that much of the time was consumed by litigation
the PBGC and that until the pension liabilities were determined, there
no division of the assets.
Commissioner Jones asked Mr. Rosen whether he could determine the
reorganizational prospects of a debtor. He responded that for some
it is perfectly clear that they can reorganize if the debt is simply
He cited Federated and Macys as examples of these types of debtors.
other companies where a simple fix will work, he noted. With other
however, one did not know whether they would be able to reorganize until
Agreeing with Mr. Rosen, Ms. Baird said that the reorganization process
long before the Chapter 11 case is filed. In a large case, she
observed, a lot
of information has been developed by lenders and other creditors and a
can proceed for years before bankruptcy ensues. Mr. Batson noted that
knows exactly how it will turn out. He mentioned that in the Dalkon
case, he was initially informed that his equity clients would not
value. Four years later, however, he said that a $2.4 billion trust had
established to fund Dalkon Shield claims, secured creditors were paid
million, and equity received $750 million. He stated that there was
empirical evidence showing that there were a lot of underwater equity
with equity committees which basically extorted part of the value of the
Chapter 11 process. The question presented, according to Mr. Batson,
whether the courts should have some threshold solvency or reasonable
of solvency determination before permitting the appointment of an equity
committee. He expressed concern with this approach because it was not
make this determination at the early stage of a Chapter 11 case.
Professor Altman cautioned that one must adhere to the fundamental
bankruptcy reorganization, that is, it is a privilege, not a right, and
this privilege should be exercised by firms worth more alive than dead.
debtor is worth more dead than alive, the Chapter 11 process should be
truncated very quickly, he noted. He did not believe that the system
judgment to be made in the early stages of a Chapter 11 case as to
firms going concern value was worth more than its liquidation
Nevertheless, he suggested that this determination should be done early,
although not automatically. He posited that a much shorter exclusivity
be considered and that this determination be mandated at its expiration.
Commissioner Alix noted that the size of the debtor may affect its
of reorganization. For example, he cited statistics that showed
more than $75 or $100 million in revenues had a 90 percent chance of
successfully emerging from Chapter 11 as a going concern and that this
was much smaller for cases in the $25 to $75 million range. For those
with revenues less than $10 million, he noted that they had a 10 percent
of successfully emerging from Chapter 11. Professor Altman acknowledged
there were studies indicating that approximately 15 to 20 percent of
cases confirm. Referring to a study published during 1995 in the
Finance, he said that of the 806 publicly held companies that filed
11, 24 percent emerged successfully as public companies, 18 percent
private companies, seven percent were merged, 15 percent were liquidated
percent were unresolved at the time of the study. Of these cases
the 36 percent, he stated that about 75 to 80 percent of these cases
emerged from Chapter 11. He noted that the companies comprising the
an average of $122 million in assets and $260 million in revenues.
Commissioner Shepard asked whether the breaking point for success
the debtors size or on the fact that it was publicly owned.
Altman answered that he was almost sure that the vast majority of
cases that did not confirm were privately owned.
Professor Warren asked the panelists what the effect would be of
companies to liquidate faster and whether that would be beneficial for
economy. Ms. Baird stated that she had been working with 20 or 25 banks
the past three to four years and that their number one priority was to
eliminate lingering Chapter 11 cases by reigning in exclusivity and
removing cases from Chapter 11 that should not be there. Specifically,
noted that there should be a short exclusivity period at the expiration
which the Chapter 11 debtor should be required to establish its value or
viability to the creditors or the court.
Responding to Professor Warrens queries, Mr. Holmes noted that
should not be on liquidating companies quicker, but on resolving the
quicker. Ms. Baird continued that the valuation should be performed by
debtor itself rather than by independent liquidators. She stated that
bankruptcy court, in determining value, should have to find that there
value in the equity. Commissioners Hartley and Shepard expressed
to the inexactitude and litigiousness that attend this determination.
Holmes suggested that an absolute deadline for exclusivity termination
in lieu of making this determination. Mr. Rosen described this
suggestion as a
safety valve for creditors because it would open up the plan proposal
to others. As an aside, he mentioned that the Southern District of New
was considering establishing a rule requiring status conferences to be
within three to four weeks after the commencement of every Chapter 11
Commissioner Jones posited whether the problem could be addressed by
only publicly owned companies to reorganize under Chapter 11. Mr. Rosen
responded that there were many large private enterprises that deserved
reorganized. Mr. Holmes noted that if one of the goals of
reorganization is to
preserve jobs, then every company, regardless of size, should have the
opportunity to avail itself of Chapter 11. Commissioner Shepard
whether this was a valid goal given the purposes of downsizing. He
bankruptcy was being used to salvage jobs in industries that were dying
over leveraged. He said that he did not understand why the government
be part of this salvaging process.
Commissioner Gose asked Mr. Rosen whether private companies should be
to establish their eligibility for Chapter 11. Answering in the
Rosen explained that to require a hearing for a company that is
cannot meet a payroll on the following day or cannot get merchandise for
Christmas season would not be fruitful. He stated that the 1978
Code wanted companies to be able to enter Chapter 11 easily because of
experience under prior law. He noted that being in Chapter 11 is not
that accordingly Commissioner Goses suggestion was not a solution.
stated that it was impossible to draw hard lines in many instances and
why judges must have discretion, providing there is guidance with regard
exercise of that discretion.
Mr. Alvarez questioned whether the speed of the reorganization process
be controlled and dominated by secured creditors. He also asked how the
distinction would be made between companies of the same size that were
privately and publicly held. He stated that the real abuse happened at
bottom rung of the capital structure which was where the case drags and
the bankruptcy court as an offensive weapon. He said that the equity
have a lot of motivation to let the case languish in the hope that the
get better. He noted that the professionals generally functioned as
this process and were not the cause of the problem.
Professor Altman said it there were advantages to members of management
keep the firm in Chapter 11 as long as possible so they could preserve
jobs and obtain tremendous compensation in the form of incentives and
On the other hand, he noted that statistics showed that 55 percent of
CEOs are eliminated by the time a plan is filed and that 70 percent are
by the time the plan is confirmed. Thus, he stated that the group under
discussion was relatively small, but perhaps important in terms of the
the companies where old management remained in control. Accordingly, he
that he would argue against the concept that management is the only
Nevertheless, he stated that to the extent that there was an incentive
management to keep the firm in Chapter 11 for as long as possible, it
important to have a fixed period of time by which there must be a
of whether or not the firm should be liquidated. He concluded that the
force in these extensions was probably a combination of the lower rung
credit structure, management and professionals.
Mr. Rosen stated that he agreed with Mr. Alvarezs statement that
professionals did not drive the decision-making process. Rather, this
involved parties and interests, such as management or equity holders.
Alvarez said that the concept of a definite date is a protection that
did not exist. Vice Chair Ginsberg observed that the problem with a
date is that it does not remain definite. Mr. Alvarez explained that he
referring to a date certain by which the Chapter 11 debtors
right to file a plan terminates. He said that courts give extensions for
three years and that frustrates people. He stated that there should be
outside form of protection in the form of a date certain by which
Mr. Batson replied that the problem was that one shoe doesnt fit
sizes. He said that Chapter 11 covers a broad range of debtors
small debtors to others with mass tort claims. He also expressed
about drawing artificial lines as to eligibility. He also was concerned
the provision which permits Chapter 11 debtors to elect to be treated as
businesses. Regarding the small business election option, he stated
allowed a small business debtor to prevent the appointment of
committee and thereby create a situation where no one is monitoring the
unless the court exercises its case management powers.
Mr. Hansen explained that he wanted the Commission to have input from
perspective of a debtor that successfully emerged from Chapter 11. He
that his firm, a billion dollar, privately held company, emerged from
11 in 26 months. Now publicly held, he noted that the company has
its earnings by 23 percent following confirmation and its financial
has constantly improved over the ensuing four years. Since
percent of the debtors stores have been renovated which has
store square footage by 25 percent, he observed. In addition, the
able to preserve jobs and currently has 14,000 employees. He said that
advantage of the exclusivity period was that it permitted the debtor to
together a five-year business plan with projections for the first time.
likened Chapter 11 to flying in a hurricane. The first 12-week period
horrible. This was followed by calm where the debtor ran its business
very protective cocoon. Then at the end of the Chapter 11 case when the
negotiations occurred, the exit process was just as rough as the first
Professor Altman asked Mr. Hansen at what point was the debtor able to
determine that its going concern value was greater than its liquidation
Mr. Hansen responded that it was approximately one year into the Chapter
case after the debtor went through its Christmas season. He said that
was filed in August 1991 and by January 1993, the debtor was in a
determine whether it was a reorganization or liquidation candidate. He
noted that exclusivity should have terminated at that point.
Commissioner Alix observed that the bankruptcy process is devoid of any
on the time-value of money. He asked the panelists whether a structure
be devised which provided incentives for professionals and management to
on this factor. He then described a matrix divided into quadrants
identify those cases where the process was not time-consuming and
value. At the lowest end of this spectrum would be cases where the
time-consuming and produced low value. For these, management and
should be penalized. For those cases in the middle of the spectrum,
time and average value, management and professionals should receive
regular fees. Services rendered in cases that were time-consuming and
high value, or time-efficient and generated low value, may not be as
For those cases where high value was produced and the time factor was
management and professionals should receive a reward.
In response to Professor Altmans question which asked how value
defined, Commissioner Alix replied that the court would make this
based on a liquidation analysis obtained from the debtor. Although Mr.
was not sure if Commissioner Alixs model would work in practice,
agreed that the bankruptcy courts should return to the result-based
the compensation process. Ms. Baird noted that management already
bonus when the case confirms. With regard to professionals, however,
that this incentive-driven model would require lawyers to make business
decisions. Mr. Batson noted that there were many alternative billing
arrangements outside of bankruptcy and that there was room in the
process for incorporating these arrangements. Messrs. Batson and Holmes
the problem as one that can be addressed by the courts rather than
legislation. Mr. Batson observed that there is a presumption implicit
discussion that professionals are overpaid. He said there were data,
indicating that cost for professionals was from two to three percent of
He therefore questioned whether the presumption that professionals were
overpaid was correct and suggested that there should be some data
before the compensation structure is revised. Professor Altman agreed
two to three percent cost range mentioned by Mr. Batson.
ORGANIZATIONAL MATTERS AND PRIORITIZATION OF ISSUES
After the lunch recess, the Commission reconvened for the afternoon
its meeting. Concerning the panels, Chair Williamson commented that the
panelists demonstrated a remarkable ability to challenge each other and
Commissioners and that this is what the process was all about. He noted
this was similar to the adversarial system which provides a way where
perhaps find good public policy, if not truth. Commissioner Butler
that he was impressed with the quality of the panelists
He noted that the Commission was examining very sensitive areas such as
exclusivity and that it should continue to identify those areas that
the real world as this would be progress. Commissioner Ceccotti thought
the panels reflected a good cross section of views. She also observed
some of the issues discussed, such as status conferences under Section
had previously been discussed in prior meetings and that they were now
surfacing in different contexts. While the panels served as great
to the Commissions future work, Commissioner Gose suggested that
Commission will have to revisit some of these issues in more depth.
Ginsberg stated that he was impressed by the diversity and that the
an effective method of teaching. He said that he learned a great deal
listening to the questions and responses. Commissioner Jones was
the panels as a preliminary way of providing an overview of the issues
confronting the Commission. Concurring with these comments,
Shepard also noted that he was surprised at the amount of agreement
participants on some of the important issues. Commissioner Alix
agreed with the Commissioners comments.
Chair Williamson then described the next portion of the meeting as the
and winnowing process with regard to the issues that the Commission must
confront and resolve. In this regard, he stated that one of the
Commissions first priorities was to reduce the issues to a
number. While he acknowledged that there was no magic number that is
manageable, he noted that in the whole wide world of problems with the
Bankruptcy Code, some of these problems were theoretical and others
practical. Some of these problems, he continued, were constitutional.
noted that some problems can be resolved by statute and others, while
the system, lay outside the Commissions purview. He said that
process would not be completed this afternoon as it was one that would
Referring to Commissioner Jones earlier comments, Chair
agreed that the Commission could not afford to wait to start soliciting
specific proposals. He encouraged interested parties to submit
away. In response to Commissioner Butlers query as to whether
Williamson was still considering utilizing task forces, Chair Williamson
absolutely. For example, he noted that he was thinking about
hearings at which two or three Commissioners would officiate.
COMMISSIONS VISION STATEMENT
Commissioner Alix prefaced his remarks by asking the Commissioners to
the matters he discussed at the February 24 meeting. He stated that he
still pursuing the basic goal of establishing parameters and principles
would then allow the Commission to consider the issues in a framework.
noted that whether the process, issues or principles are modified, the
to have some form of structure that allows the Commission to keep
context and to continue moving forward.
Reviewing his March 7 memorandum, he noted that he had suggested that
Commission articulate its vision in a statement which, in turn, would
the Commissions philosophy, its image of the system and the
Code at its future best. The vision statement would then lead to the
Commissions mission, he noted. The mission or the
charge should be reflected in the Commissions goals, objectives
tasks. To this end, he stated that he had disseminated to the
vision and mission statements together with a concept for defining what
the issues should be. The comments that he received in response thereto
be discussed today.
Commissioner Alix distributed copies of a matrix in which he and Linda
his associate, classified the issues and topics identified to date.
Warrens November 2 memorandum, which identified six major
areas, was utilized as a guidepost in the preparation of the matrix, he
He observed that the matrix characterized the issues and topics as
managerial, operational or task level.
The next part of this process, according to Commissioner Alix, was to
a time line setting out how the Commission will attack these issues so
will have a final report within the mandated deadline. He observed that
amount of work that must be accomplished necessitated more staff and
than currently available at the Commission. He suggested that it would
require subgroups and volunteers.
Concerning the Commissions vision statement, Commissioner Alix
that it should reflect a shared view of what the Commission wants in the
bankruptcy system. The draft vision statement that he proposed stated
Commission envisioned a national bankruptcy system that provides
certainty to its users, a system that is user friendly, low cost, and
The system takes advantage of the available technology, eliminates the
problems and frustrations in the current system through solutions that
current infrastructure where possible and the system is structured to
needs and demands of the users over the next 20 years, he continued.
Commissioner Alix then explained why he chose certain terms in
vision statement. For example, he used the phrase national bankruptcy
because it presented a broader view than just a reference to the
Code. He explained the importance of the word certainty and the
consequences of a system that lacks it. Likewise, he described the
significance of user friendly and low cost and speedy, among other
the draft vision statement. With regard to the statements
the future, Commissioner Alix explained that the Bankruptcy Code was
based on an industrial society within the continental United States
much consideration of its international impact.
Thereafter, Commissioner Alix reviewed the comments that he had
the Commissioners on the draft vision statement. One of these suggested
eliminating the reference to user friendly as it may create the
encouraging the nation to walk away from its debts. Another comment
that the phrase low cost be changed to cost efficient or be
its entirety. A third comment was an alternative, shorter version of
Commissioner Shepard asked whether the word speedy should be used.
wondered whether the Commission, by employing this term in its vision
statement, sought to emphasize speed or whether it wanted to emphasize
or eliminating undue delay. In lieu of user friendly, he suggested
certain, consistent and uniform be utilized. Commissioner Ceccotti
with Commissioner Shepards comments regarding the term speedy.
regard to the phrase user friendly, Commissioner Alix noted that it
both operational and moral issues. Commissioner Butler, acknowledging
constraints imposed by the Constitution, suggested that there should be
reference to a uniform system of bankruptcy. He explained that the
system means fresh start and equitable asset distribution. He also
there should be a reference in the vision statement to the constraints
by the Commissions time and resources.
Chair Williamson observed that the concept of maintaining and improving
currently exists in the bankruptcy system should be reflected implicitly
directly in the vision statement so that there is no misapprehension of
the Commission is doing. He also noted that Congress has given the
a partial mission statement in that it has defined the Commissions
parameters in the language of the enabling statute. Commissioner
that the legislative history pertaining to the creation of the
reflected in the Committee Report would appear to limit the Commission
tuning the Bankruptcy Code. He reminded the Commissioners, however,
previously agreed that there was additional language in the legislative
that was not as binding and that he certainly did not want the vision
to state that areas that are not correct or proper will be maintained.
Williamson stated that it was important to remember what it is that
has asked the Commission to do. With regard to Commissioner Alixs
the work national, Chair Williamson said that it was a very important
keep in the vision statement in light of recent Supreme Court cases.
COMMISSIONS MISSION STATEMENT
Turning to the Commissions mission statement, Commissioner Alix
explained that it serves to define the Commissions program. He
the draft mission statement that was circulated to the Commissioners.
statement said that the Commissions mission over the next 18
to study the bankruptcy system, its issues, problems and opportunities
produce a report. The report should be understandable, usable,
credible. In addition, the report should lead to legislation as well as
practical and operational changes in the system so that it promotes or
the Commissions vision in all areas such as the United States
system, capital recovery process, and the business problem and debt
process for individuals and businesses with regard to relative certainty
speed, cost, timing, execution and range of possible outcomes. He then
reviewed the significance of the terms comprising this statement.
Commissioner Alix reviewed the comments that he received from the
Commissioners regarding the proposed mission statement. He agreed with
comment that suggested uniformity and fairness should be included in
sentence of the statement. A second comment suggested that the length
statement should be reduced. A third comment suggested that the
should include a focus to eliminate inconsistent and unintended
of the Bankruptcy Codes provisions.
Commissioner Hartley recommended shortening the last sentence and
the phrase uniformity and fairness. He also noted that the mission
should be as brief as possible to lessen the chance that it will be
misinterpreted. Commissioner Shepard agreed that the statement should
shortened. He noted that the Commission had yet to adopt any philosophy
regarding its emphasis. He suggested that the portion of the proposed
statement that follows the word vision should be eliminated because it
essentially embodied the vision statement. Commissioner Jones concurred
Commissioner Shepards suggestion. Vice Chair Ginsberg suggested
mission statement should closely follow Section 603 of the enabling
In general, the Commissioners agreed with this suggestion. Commissioner
Ceccotti also concurred with the suggestion of eliminating the verbiage
following the word vision in the mission statement. Commissioner
discussed usage of the words study and evaluate and suggested that
mission statement employ the same words as the enabling statute.
Commissioner Butler noted that the credibility of the Commission was
important. He observed that every one of the changes that have been
the Bankruptcy Code since 1978 has a patron. He said that suggesting
been previously done was not perfect would not accomplish much. He
the Commission was not asked to do Congress job of going back and
all this minutia legislating. The Commissions responsibility, he
observed, was to look at the structure of the system, rather than the
gritty of the Bankruptcy Code. Commissioner Alix stated, however, that
may be members on the Commission who disagree with this view.
Jones recalled that it was her suggestion that the Commission focus on
Bankruptcy Code. Commissioner Butler interjected that it was because
not like the way the Code was written. Commissioner Jones noted for
that the Commission concurred at the February meeting that the venue
was wrong and needed to be fixed. Agreeing, Commissioner Butler
this was a structural change. Commissioner Ceccotti observed that these
views were actually consistent. She explained that after the Commission
addresses the structural concept, there will be a need to address the
Codes language as part of the Commissions recommendation.
Commissioner Alix noted that this process may involve a direct
the Bankruptcy Code.
Chair Williamson asked Commissioner Alix to synthesize the comments
at the meeting and circulate a revised draft to be reviewed at the May
He cautioned the members, however, that the vision and mission
if adopted at the May meeting, could thereafter be changed as this was a
PRIORITIZATION OF ISSUES
The next topic discussed concerned the draft matrix of issues.
Alix said that the matrix of issues should be considered in light of the
Commissions vision and mission statements. As to how the
should allocate its time, he emphasized that it was very important that
Commission conduct this process from a point of view of whether these
were fundamental, strategic or constitutional which would be where the
change could be accomplished, given the Commissions limited time
Commissioner Alix then described the background behind the preparation
issue matrix. He noted that it does not reflect every issue discussed
by the Commission. Rather, he said that it follows an outline that
Warren previously prepared. The six general topic areas were identified
following: a) bankruptcy administration; b) consumer bankruptcy; c)
affecting environmental law, tax, banking, insurance, regulated
future claims, mass torts and Chapter 9; d) issues affecting employees,
law, pensions; e) business bankruptcies, including partnerships and
transnational matters; f) the role of bankruptcy and bankruptcy as
law. Commissioner Alix reminded the Commissioners that this was a
outline or master list to which issues could be added in a spreadsheet
It would also serve as an indexing system, he noted.
Commissioner Ceccotti recalled that the topic outline upon which the
matrix was based was geared to organizing hearing days. Agreeing with
Commissioner Ceccotti, Professor Warren stated that the topic outline as
contained in her November 2 memorandum was really an organizational
for six meetings and that it was not an intellectually structrured
for how one would organize these topics. Commissioner Alix invited
Warren to rethink the topic organization in a more intellectual way for
Commissioner Alix then read into the record a memorandum dated April
from himself which was addressed to the Commissioners. The memorandum
concerned the Commissions mission, goals, work plan and time line.
this memorandum, Commissioner Alix noted that all issues included in the
should be consistent with the Commissions vision and mission
He also urged the Commission to form subcommittees that were organized
the six major topic areas on which the matrix is based. The
would be presumably staffed by the Commissioners who, in turn, would
sit on two or three subcommittees, he noted. He suggested that the
subcommittees should recruit volunteer experts who would assist the
subcommittees with researching and writing position papers. In
envisioned these subcommittees holding hearings on their topics at
association conferences. Further, the subcommittees would select
address the full Commission and submit their subcommittee reports to the
Commission. Commissioner Alix stated that the subcommittees would be
responsible for pursing the goals, objectives and tasks of the
Commissioner Alix then discussed the proposed time line. By May 1996,
the subcommittees should be formed. During May and June 1996,
should be chosen and assigned projects. Thereafter, the volunteers
conduct research over the period of July through September 1996. By
30, 1996, these experts would be required to submit a draft position
the pertinent subcommittee. A final draft position paper would be due
November 30, 1996. By December 31, 1996, the position papers would be
for submission to the full Commission. Beginning in January 1997, the
subcommittees would prepare their reports. The Commission would then
the submissions in public hearing formats over the period of January
June 1997. Those that helped write the papers for the subcommittee
invited to speak before the Commission to clarify any matters and to
Commissioners in their understanding of the submissions. By June 1997,
Commission would probably cease its public hearings. During July 1997,
Professor Warren would finalize the first draft of the report for the
Commissions review. During August 1997, she would prepare the
draft. The third draft would be completed during September 1997 and the
draft would be completed by October 1997.
Commissioner Hartley commented that the idea of a time line was
that the subcommittee approach was probably the way to go provided there
better definition of what the subcommittees were supposed to do and what
focus would be. Commissioner Shepard also agreed that it was a
system that should be adopted as soon as possible. He also suggested
subtopic d be restructured to include employees, labor, pension, tax,
environmental, securities and perhaps regulated industries. Professor
said that this proposed grouping was too extensive. Commissioner Jones
indicated that she was very sympathetic to the effort because she
the Commission needed some framework like this to accomplish its work.
also stated that she very much endorsed the task force concept and time
She suggested that there should be six subcommittees. With regard to
c, she would restructure this group. She questioned whether regulated
industries should be categorized under bankruptcy law at all. She
that tax be given its own subtopic heading. Commissioner Alix agreed
Commissioner Jones suggestion that there be six subcommittees.
Commissioner Butler was very supportive of the approach, although he
that the Chair should consider it and then determine whether he agrees
as the decision was his to make. Commissioner Ceccotti endorsed the
and stated that the idea of establishing subcommittees was terrific.
that she had received many offers of assistance from other practitioners
work on any topic assigned to them. She agreed with Commissioner
comments with regard to the subtopic organization. She also concurred
Commissioner Butlers statement that this was a suggestion to the
Agreeing with Commissioners Butler and Ceccotti, Commissioner Gose
Professor Warren should restructure the topics so that she is
them intellectually. Commissioner Ginsberg stated that this approach
give the Commission direction which it had lost for a period of time and
provide a framework through which the renewed enthusiasm of the
could be channeled.
Professor Warren stated that she very strongly endorsed the idea of a
framework. Nevertheless, she noted that this approach had powerful
implications and expressed concern that the time line reflected a notion
the subcommittees would function without direction from the Commission
without outside hearings, and that the reports would not be submitted to
full Commission until mid-1997. Commissioner Alix clarified that the
was not intended to exclude other processes and that he assumed the
would continue to hold its public meetings.
Professor Warren indicated that she was very concerned about the
process. She questioned whether or not there may be a consensus in
areas where the Commission could offer meaningful changes to Congress.
mentioned that two ad hoc committees had been formed to follow up on the
Commissions direction from the February meeting. These committees
formed to begin developing a report concerning bankruptcy
explained. Commissioner Jones observed that the subcommittee concept
lessen the work load of the Commissioners and permit them to focus on
In response to Commissioner Goses request for additional
regarding the two ad hoc committees that she previously mentioned,
Warren said that they were formed to advise her in the two areas where
Commission had achieved a working consensus. So following the direction
Commission, she put together two committees to develop a report on these
She noted that the subcommittee approach had powerful content
that it short-circuits the process by which people can make their views
before the Commission. Commissioner Gose observed, however, that the
Commission as a whole would continue the public meeting process while
subcommittees did their work. Commissioner Alix also stated that the
Commissioners as a group would like to be involved in the formation of
groups and in the selection of panel participants. In sum, Professor
stated that she was concerned whether the formation of these
should occur before the Commission has heard anything more about these
and that it may turn out to be counterproductive. Commissioner Alix
that it was important to have the subcommittees formed as soon as
given the many issues that must be examined.
Commissioner Jones observed that there were a lot of groups that have
contact the Commission with their views. If they knew there were
devoted to certain topics, these groups may be more willing to come
she noted. Agreeing, Commissioner Alix stated that the subcommittees
better able to service their concerns.
Chair Williamson observed that the Commission was committed to a
process. One is internal, consisting of the Commissions work of
evaluating the Bankruptcy Code and practice and recommending changes.
other is external, a process that involves hearing from those who are in
bankruptcy community. With regard to the question of study groups or
speakers, he said that these efforts inherently involve delegation and
Commissioners should trust each other while keeping in mind that the
as a whole makes the ultimate recommendations. He noted that it was
for the Commission not to study issues where there appeared to be a
He asked Commissioner Alix and Linda Hamel to generate within the next
their synthesis of todays discussions regarding the vision and
statements, a time line and issue matrix. In turn, the Office will
the revised draft to the Commissioners who would have ten days to
either orally or in writing to the Office, Professor Warren or himself.
then will prepare a memorandum that defines an approach for the next 18
that reflects everyones interests and concerns.
After a short recess, the meeting was reconvened. Before proceeding to
item on the meeting agenda, Chair Williamson reminded those gathered
were welcomed to speak at the public participation portion of the
Ms. Jensen-Conklin, Deputy Counsel, reported that the Commission has
million authorized and that $1 million has been appropriated. Of the
appropriated amount, approximately $158,000 had been expended to date.
projections for the 1996 fiscal year, she noted that the Commission was
$84,000 under budget. She also explained the expenses incurred for
held on-site at the Federal Judicial Center and off-site.
Chair Williamson explained that the appropriation of the
remaining funding was an important objective. To this end, he noted
and Ms. Jensen-Conklin had met with several administration officials to
the appropriation process. He also stated he along with the Office
be working with individual members of Congress to assure that the
$500,000 is appropriated. Mr. Snowden, General Services Administration
External Services Director, confirmed that the appropriated funds were
currently available to the Commission.
REVIEW OF BY-LAWS
Chair Williamson asked the Commissioners to read the Commissions
and By-laws within the next 20 to 30 days. He said that there were some
changes that may be beneficial and that he may submit those changes to
Commission at the May meeting. He encouraged anyone who had any
forward them to him. If he had any changes to propose, he stated that
would be sent to the Commissioners.
Chair Williamson said that Commissioners ought to speak whenever and
they want as long as they are expressing their own personal views. He
that it was essential that all Commissioners individually or in groups
the public as well as listen. To that end, he said that it was also
that the Office staff serve as the central repository for invitations
acceptances. The purpose of this procedure is to ensure that an
trend does not develop and that there is breadth and diversity in terms
geography and subject matter. He asked the Commissioners to let the
staff know and they will maintain a log or report of acceptances which
available at each meeting.
Chair Williamson stated that the burden of speaking should not fall
the Chair or any one Commissioner. He noted that of the many
he had recently received, he had accepted two, the California Bankruptcy
Conference and a group of Chapter 11 bankruptcy attorneys in New York.
MAY MEETING ARRANGEMENTS AND FUTURE MEETING DATES
Ms. Pratt, Administrative Officer, reported on the travel and
arrangements for the May meeting. The Commission also discussed the
the meeting. Professor Warren stated that she would prepare a
identifying the issues for the May meeting.
Chair Williamson reviewed future meeting dates with the Commissioners.
were identified as June 20 to 21 and July 18 to 19, 1996. No meetings
planned for August 1996.
Commissioner Shepard then discussed the need to have a meeting which is
focused on government issues. He explained that the government creditor
unlike other creditors in bankruptcy cases. For instance, he said that
government personnel have fiscal limitations regarding travel. He
that the Commission convene a meeting in September to coincide with a
conference of state and local government representatives to be held at
Fe, New Mexico. The focus of this meeting, Commissioner Shepard noted,
be on government issues in bankruptcy, including environmental, tax,
securities, labor and related matters. Chair Williamson stated that he
consult with the Commissioners regarding his suggestion and that he
discuss it in greater detail with Commissioner Shepard thereafter.
Chair Williamson noted that the executive directors position was
He said that he personally did not have a candidate in mind. He asked
representatives of the bankruptcy community that were present at the
make it clear to their members and constituents that this vacancy
that applications should be submitted as quickly as possible to the
staff. He said that the salary range is outlined in the statute and
additional information about the position was available from the Office
Ms. Cordry identified herself as the bankruptcy counsel for the
Association of Attorneys General, an organization that represents 50
attorney generals as well as the five territories and the District of
She noted that her statements today were made on her own behalf.
She began by agreeing with Commissioner Shepards statements
the importance of holding a meeting on governmental issues. She noted
states were becoming much more active in bankruptcy matters and that the
decision by the United States Supreme Court, Seminole Tribe of
Florida, would impact further on this process. In particular, she
that bankruptcy has had a major impact on the way states have been able
enforce their laws, collect their taxes, administer their child care
and student loans. Accordingly, she supported having the Commission
meeting in Santa Fe. She also mentioned that her organization would be
interested in working with the Commissions subcommittees dealing
Ms. Cordry prefaced her remarks regarding Seminole by reviewing
history of Section 106 of the Bankruptcy Code. She noted, for example,
had no predecessor under the former Bankruptcy Act and that there were
disputes regarding the bankruptcy courts jurisdiction regarding
and state governmental entities. As originally enacted, Section 106
affirmative recoveries and mandatory counterclaims as well as
counterclaims in the recoupment sense, she observed. The provision also
eliminated the immunity defense. She then reviewed the Supreme
holdings in Hoffman and Nordic Village which essentially
that the bankruptcy court was not the forum to recover monetary payments
local, state or federal government. Ms. Cordry stated that the Supreme
in 1989 rendered its decision in Pennsylvania v. Union Gas that
under its plenary Article I powers could abrogate a states
Pursuant to the Bankruptcy Reform Act of 1994, Section 106 was
revised, according to Ms. Cordry. The provision was restructured to
that it clearly abrogated sovereign immunity. She recalled that her
organization wrote to Congress with regard to the dubious
this amended provision in light of the Eleventh Amendment. During the
the Merchants Grain case was wending its way through the
courts, she noted. In this case, she observed, the State of Ohio sought
liquidate a failing grain operator in order to pay farmers owed money by
operator. Within 90 days, the company filed for bankruptcy in Illinois
moved against Ohio to set aside the payments as preferential transfers.
State of Ohio, moving to dismiss the action based on sovereign immunity,
prevailed in the bankruptcy and district courts, she said. Between the
the case was argued in the Seventh Circuit and the decision was
1994 Amendments to Section 106 were enacted and given retroactive
After receiving an adverse ruling from the Seventh Circuit, the State of
asked the Supreme Court to grant certiorari and the remaining 49 states
amicus briefs in support thereof.
In the meantime, however, the Supreme Court decided Seminole
that if Article III did not empower Congress to enact a statute
states to be sued without their consent, then it did not have the power
Article 1 either, she stated. Given its decision in Seminole,
Supreme Court then granted certiorari in Merchants Grain, vacated
Seventh Circuits decision and remanded the case for
reported. In light of these recent decisions, Ms. Cordry predicted that
Section 106s provisions as applied to state, local and municipal
governmental entities will be found to be unconstitutional. She also
speculated that the decision may impact on the bankruptcy courts
authority to determine tax obligations owed to state, local and
governmental entities under Section 505 of the Bankruptcy Code if these
entities have not filed claims for theses obligations. Correlatively,
noted that Ex parte Young clearly did not permit determination of
state law issues as it only applied to issues of federal law.
Chair Williamson commented that the consequences of Seminole
Merchants Grain will have practical and theoretical implications
bankruptcy law and practice. Ms. Cordry noted that these cases may
the ability to sue a state entity for violations of the automatic stay
discharge injunction where the state has not waived its immunity.
Ms. Starr stated that her presentation represented the views of the
the Security and Exchange Commission ( SEC ), and not that of the
After explaining the work of the SEC, Ms. Starr observed that there
points of contact between her agency and the bankruptcy system. These
law enforcement, regulatory compliance of public corporations and their
disclosures regarding the issuance of securities, overseeing the
security registration exemptions, and generally protecting investors.
noted that the Bankruptcy Code recognizes that the SEC is more than just
creditor. In Section 1109, for example, she explained that the SEC has
in interest status in Chapter 11 cases.
The focus of her presentation, she noted, was law enforcement concerns
the SEC has in bankruptcy cases. In the consumer context, the SEC was
interested in preventing abuses of the automatic stay, discharge
efforts to undermine its enforcement activities and remedies, she
sum, she stated that the SEC was interested in making sure that
not a haven for wrongdoing. With regard to corporate cases, she noted
SECs interests were more complex as they involved issues
securities law issues and discharge abuse.
Ms. Starr said that one of the general concerns of her agency was that
be uniformity and an effort to close some of the open-ended provisions
in the Bankruptcy Code. These were the most troublesome aspects to the
other law enforcement agencies, she explained, because of the lack of
certainty. Referring to her submission to the Commission, Ms. Starr
highlighted those issues that she hoped would be considered. These
the scope of the automatic stay and its exception for law enforcement
activities, the open-endedness of Section 105, determinations involving
or not a fund established by a law enforcement agency constitutes
the estate or is a constructive trust, the dischargeability exceptions,
13's discharge provisions for fines and penalties as well as forfeitures
intentional wrongdoing, notice and reporting issues, and non-debtor
in Chapter 11.
Upon conclusion of her remarks, Commissioner Shepard asked if there was
sufficient similarity between the issues she discussed and those of the
government entities. Noting that several issues were the same, Ms.
stated that a combined meeting on state and federal governmental issues
Mr. Bartel, speaking his own behalf, identified himself as a private
investigator in Washington, D.C. He said that his firm specialized in
bankruptcy fraud issues and that it generally did work for
He noted that he had previously brought to the attention of the
various methods by which organized crime was using the bankruptcy system
instrumentality for the perpetration of fraud. He recalled that he had
the Eastern Airlines case, a matter that his firm had been
for four years. He noted that the trustee had taken the assets from
and was attempting to start his own airline under the name of Pan
Mr. Bartel stated that he had several recommendations that would
of the fraud opportunities in bankruptcy cases. These recommendations
allowing liquidation in Chapter 11 only where a trustee has been
confirmation has occurred; rei