Government Working Group A
Working Group Proposal #4: Improving Notice to Government
Creditors
Background
Numerous government agencies regularly find themselves creditors in bankruptcy cases.
Representatives of the government argue that neither the Bankruptcy Code nor the Federal Rules
of Bankruptcy Procedure provide adequate requirements to ensure that a debtor indicates, and
therefore a clerk of court notifies, the specific government agencies that are creditors. When the
government is not made aware of the nature of its potential claim, government agencies,
especially federal agencies, are not sufficiently interrelated to determine what agency might need
to participate in the bankruptcy case. The failure to notify the relevant agencies has an impact on
whether the relevant parties receive notice in a timely and meaningful manner, which raises
potential constitutional implications. Moreover, without notice of the bankruptcy case,
government agencies inadvertently may act in contravention of the automatic stay by pursuing
particular causes of action, such as environmental clean-up actions.
The Proposal
The Commissioners in Government Working Group A agreed to the following action by the
Commission:
The Commission should submit to the Advisory Committee on Bankruptcy Rules of the
Judicial Conference ("Rules Committee") a recommendation
that the Federal Rules of Bankruptcy Procedure further delineate procedures for notice to
governmental agencies; specifically, the Commission should suggest that the rules require
a debtor who has filed for bankruptcy under any chapter to list on its schedules the
particular agency/agencies that are creditors in the bankruptcy case.
Reasons for the Change
Under 11 U.S.C. § 342, "there shall be given such notice as is
appropriate" of an order for relief, e.g., the filing of a voluntary petition commencing a
bankruptcy case. Section 102(1)(a) indicates that the appropriateness of notice is determined by
the particular circumstances. Bankruptcy Rule 2002, and most specifically subsection (j),
delineates what constitutes proper notice to the United States. [ FN: Fed. R. Bankr. P. 2002(j), "Notices To The
United States, " provides the following: Copies of notices required to be mailed to all creditors
under this rule shall be mailed (1) in a chapter 11 reorganization case, to the Securities and
Exchange Commission at any place the Commission designates, if the Commission has filed either
a notice of appearance in the case or a written request to receive notices; (2) in a commodity
broker case, to the Commodity Futures Trading Commission at Washington, D.C.; (3) in a
chapter 11 case to the District Director of Internal Revenue for the district in which the case is
pending; (4) if the papers in the case disclose a debt to the United States other than for taxes, to
the United States attorney for the district in which the case is pending and to the department,
agency, or instrumentality of the United States through which the debtor became indebted; or if
the filed papers disclose a stock interest of the United States, to the Secretary of the Treasury at
Washington, D.C.] However, government representatives have indicated
that the rule is underinclusive and,therefore, the relevant government agencies routinely do not
receive timely notices of bankruptcy cases. Some of the subdivisions of Rule 2002 apply only in
chapter 11 cases, leaving open the procedure for cases filed under other chapters. Moreover,
subdivision (j)(4) states that the clerk must notify the appropriate regional United States
attorney’s office and the specific agency to which the debtor is indebted "if the
papers in the case disclose a debt to the United States other than for taxes." If a debtor
provides only sparse information in the schedules that fails to identify the nature of the claim, the
bankruptcy court clerk only can send notice to "U.S. Attorney General, Justice Department,
Washington, D.C." with no indication of the agency that should be notified or the nature of
the underlying claim.
In addition, the Federal Rules of Bankruptcy Procedure give debtors little guidance on what
constitutes adequate notice to state and local governmental entities. While the 1983 Advisory
Committee Notes indicate that the Committee did not intend Rule 2002 to preclude the
establishment of local rules that require notification to state or local taxing authorities, [ FN: 8 Collier on Bankruptcy ¶ 2002.01
(15th ed. 1996).] government representatives have reported that local rules
have not provided or enforced adequate notice provisions with sufficient consistency.
Government Working Group A agreed that improved notice to government creditors would
enhance the fairness and efficiency of the process, which are essential in bankruptcy cases and
proceedings. Better notice procedures also would prevent inadvertent automatic stay violations
that impose additional costs on the bankruptcy estate.
The Working Group also reached consensus that the most meaningful and appropriate way
to effectuate this suggestion would be to submit it to the Rules Committee and indicate the need
for improving notice procedures in a concrete fashion. Rule 2002 might be expanded to require
debtors to identify the names of the affected federal agencies in their address matrices in addition
to listing the United States Attorney and/or Attorney General. [ FN: In addition, the Department of Justice has
suggested that the United States Attorneys be permitted to prepare lists of local government
agencies that frequently are creditors and make those lists available in bankruptcy clerks ’
offices.] In addition, the rule also might address the appropriate
mechanisms for adequately notifying non-federal government agencies.
The Working Group considered recommending statutory changes, but it concluded that the
process governing the implementation of meaningful notice could best be spelled out in the rules,
which are debated and adopted by those who specialize in court procedures. The Commissioners
also concluded that rule-making was inherently more flexible and better able to adapt to changing
technologies which might have an important impact on appropriate notice procedures. It was
noted during the discussion that electronic transmission of notices already is in effect; both
through the rule-making process and cooperative effort between government agencies and the
clerk’s office in bankruptcy courts, current notice problems can be alleviated.
Competing Considerations
Some commentators have suggested that notice involves issues of due process and therefore
notice requirements should be codified in the statute itself. The Commissioners agreed that due
process was essential, but felt that the Federal Rules of Bankruptcy Procedure provided the
appropriate forum for these types of requirements.
Others might take a contrasting view and argue that government entities should not receive
special protection since all parties, and more specifically large corporations, experience notice
problems. There are, however, certain circumstances that seemingly are unique to the
government. The government is composed of non-integrated agencies that use conflicting tracking
and identification methods of its potential debtors. One would surmise that a private corporation,
especially one that voluntarily has engaged in business with the debtor, could develop internal
mechanisms such that its authorized agent can identify the nature of the claim more readily and
could to forward notice to the appropriate party within the corporation.
Some commentators have taken the position that the Commission should recommend even
stronger requirements to ensure that the government agencies not only receive notice but that
they also receive enhanced information about their own claims to distinguish between real claims
and mere precautionary claims. While the Commissioners did not include this concept in their
proposal, the issue was left open for debate in the deliberations of the Rules Committee.
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