Legislative Update

Journal Issue

Nov 2000

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This month's Update provides excerpts of remarks delivered by Brady C. Williamson
(LaFollette Godfrey & Kahn; Madison, Wis.), former chair of the National Bankruptcy
Review Commission, at the Views from the Bench CLE program, held in Washington,
D.C., on Sept. 15, 2000. The full text can be found at ABI World at <a href="/reform/bradytalk.html" target="window2">http://www.abiworld.org/reform/bradytalk.html</a>.

The National Bankruptcy Review Commission completed its work almost three years ago.
On Oct. 20, 1997, the nine members of the Commission walked up those majestic
marble steps to the Supreme Court and literally handed the 1300-page report to
the Chief Justice of the United States who, in his personal remarks, graciously
thanked the Commission for its work. The Commission completed its report—with 172
recommendations for improving the Bankruptcy Code and with a variety of dissenting
opinions—on time and under budget.

The legislative history of the enabling act contained an explicit admonition.
Congress pronounced itself "generally satisfied with the basic framework established in
the current Bankruptcy Code," and it directed the Commission "not [to] disturb the
fundamental tenets of current law."

From my perspective, the Commission's agenda was straightforward: to sponsor a
national dialogue on bankruptcy policy that had as a goal, but not the only goal,
to suggest changes to the Bankruptcy Code that Congress should consider. There was
another, no less worthy, goal: to raise the public's awareness of the causes and
consequences of financial failure for American business and American families.

It is fair today, three years later, to begin to evaluate the work of the
Commission and its legacy—but only to begin because the Commission's ultimate contribution
to the law, like the contribution of the 1975 Commission, will not be determined
for some time.

Let's begin with a statistic that seemed so astounding that I called the Government
Printing Office to verify it. The Commission web site (<a href="http://www.nbrc.gov" target="window2">http://www.nbrc.gov</a>) remains active
with the full text of the report. There have been several thousand hits on the web
site—not in the last three years, not in the last year, not in the last three
months, but in the last two weeks. As a legal resource and research tool, for
judges and for lawyers and academics, the Commission report seems to be useful.

More than 40 federal courts have cited the Commission's work. And it's already
been discussed in more than 250 law review articles. Several of the decisions,
including two by the U.S. Court of Appeals, have turned on the Commission's
recommendations. And there are some interesting patterns emerging.

The reaffirmation provisions of §524—and, particularly, the counsel certification
requirements of subsection (c)(3)—have continued to draw the bankruptcy courts'
attention. The criminal and civil penalties imposed on Sears and other retailers have
heightened the system's scrutiny of reaffirmation agreements, and so has the focus on
reaffirmation in the Commission's report. Based on its recommendations, several
bankruptcy courts have given expansive interpretations to the
"best-interest-of-the-debtor" standard already in §524. Adopting wholesale the
Commission's recommendation for improved disclosure and informed consent, one bankruptcy
judge wrote:

<blockquote>The court finds that an amendment [to the Code] is not necessary to accomplish
this recommendation. It can be adopted by case law...Legislation would assure
the uniform application of the rule in all cases nationwide.</blockquote>

That came in a case where the debtor had $33,000 in aggregate debt on nine
separate credit cards and gross annual income of less than $50,000, and the
reaffirmation agreement reviewed by the court established a new credit limit with one
creditor with virtually no disclosure of its terms.

Bankruptcy courts also have used the Commission's report and its recommendations
to deal with the peculiar problems of single-asset real estate cases, to resolve
automatic stay disputes, to determine the dischargeability of federal income taxes and
to decide whether a "right of first refusal" fell within the executory contract
provisions of §365. One bankruptcy court, emphasizing the Commission's recommendation
for strengthening the discharge injunction, awarded punitive damages against a loan
company "to deter institutional lenders from preying upon unsophisticated debtors." The
bankruptcy judge called the Commission's recommendations a "much-needed statutory
remedy." And several courts have relied on the Commission's analysis of Associates
Commercial Corp. v. Rash to address the difficult problem of the appropriate rate
of interest for secured loans in chapter 13.

Perhaps the most tangible jurisprudential effect of the Commission's work to date
has come in cases involving the liability of trustees. The Bankruptcy Code, as you
know, does not provide a personal liability standard, and a long line of court
decisions has led to varying conclusions—requiring a standard of care ranging from simple
negligence to virtual immunity. The Commission recommended a "gross negligence" standard
that balanced too little protection (and the resulting disincentive to serve) with too
much protection (and the resulting disincentive to care). Just five months ago, the
U.S. Court of Appeals for the Fifth Circuit expressly adopted the Commission's
recommendations, citing with approval its comprehensive analysis of the competing court
decisions and the competing policy considerations.

The national dialogue the Commission undertook continues today—in the Congress, at
the White House, and in the popular news media. And the Commission's report
provides a frame of reference for that dialogue because it provides a primary frame
of reference for a balanced approach to bankruptcy legislation.

Compare the legislative process that led to the enactment, with little controversy,
of the Bankruptcy Code in 1978 with the legislative process that has brought the
Senate and the House, this year, each to adopt bankruptcy legislation in differing
forms. There should be little doubt that the two legislative initiatives—one today and
one more than 20 years ago—are comparable in that they each would make fundamental,
far-reaching changes in this country's bankruptcy system. Yet the comparison ends
there, and in that, there may be a lesson.

By all accounts, the 1978 legislation was both bipartisan and relatively
balanced, fashioned by a professional staff and led through the legislative process by
a few members of Congress who had a developed particular interest and skill in this
area of the law. The 1978 legislation was, by all accounts, neither very
publicized nor very politicized—in any sense of those terms. And it was not
politicized in part because it had balance.

The legislation pending today has bipartisan support as well, but few would
characterize it as balanced. Bankruptcy has become, in the absence of substantive
balance, both politicized and publicized. The two go hand in hand. And if the
pending legislation fails to become law, it may be precisely for that very reason.

The bankruptcy legislation in 1978 was not a golden opportunity for fundraising.
It is today.

One need not accept a perfect correlation between Congressional fundraising and the
proposal or adoption of legislation to conclude that there may well be an imperfect
correlation. There is no escaping the fact that financial institutions and their
executives and political action committees have made significant contributions to
well-placed members of Congress of both parties.

The bankruptcy legislation in 1978 was not a focal point for lobbyists. It is
today.

Indeed, by some accounts, lobbyists for the credit card industry and other
financial institutions literally helped draft sections of the pending legislation. And
in that legislation, all 300 pages of it and more, you will find special
provisions for corporate interests and institutions placed there at the request of their
lobbyists. No one should be naïve. The 1978 legislation was not an immaculate
conception. There were lobbyists. Financial institutions were heard. But they did
not dominate the process.

The bankruptcy legislation in 1978 was not the product of a secret or shadow
conference committee shaped by a few. It is today.

Indeed, there has been no conference committee. The reconciliation of the two bills
remains, to a significant extent, unknown—the result of a procedural determination by
the leadership, apparently, to attach the proposal (with virtually no involvement by
the minority) to an unrelated bill to overcome the procedural obstacles to final
passage.

The politicization of bankruptcy has had at least one direct and immediate effect,
beneficial to the public if not to the proponents of the legislation. It has raised
the visibility of the bankruptcy system, and those who must use it, in the eyes of
the public.

The bankruptcy debate today is a political debate and, accordingly, a far more
visible debate than it ever has been. And that helps explain two very distinct
developments: both the shape of the pending bankruptcy bills, one passed by the
Senate and one passed by the House, and the inability of its proponents to break
the procedural bonds that, so far at least, have held them hostage.

This Congress could have passed a bankruptcy bill long before now, and perhaps it
fairly could have been called "reform." But the pending legislation is not bankruptcy
legislation—not the balanced, apolitical legislation that Congress has adopted in the
past to give both American families and American businesses a fresh start. And
ironically, if the legislation fails, it will be because of the politicization fostered
by its proponents.

Whether or not the pending legislation becomes law, the outcome will be blamed on
politics. Yet it will be more appropriate to praise or blame the enactment or its
failure on the politicization of a process that, until recently, had been characterized
by procedural and substantive balance. Whether or not the pending legislation becomes
law, moreover, neither we nor the Congress should forget that the bankruptcy
legislation—any bankruptcy legislation—affects American families and American business in
profound ways. And, from the standpoint of both process and substance, they deserve
nothing less than the benefits of an open deliberative process and a law that, as
amended, retains the balance it long has had.

Journal Date

Wednesday, November 1, 2000 - 12:00