Legislative Update

Journal Issue

Apr 2000

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This month's update contains excerpts from a Department of Justice memorandum outlining
the Department of Justice's views on a variety of provisions in the pending bankruptcy
reform legislation. The full text of the document is available at ABI World
(<a href="/legis/reform/dojcomments.html">http://www.abiworld.org/legis/reform/dojcomments.html</a>). A formal Statement of Administration Policy will be
forthcoming soon from the Clinton administration.

<h3>Department of Justice Comments on Bankruptcy Reform Legislation</h3>

Means Test. Prefer Senate over House insofar as it places primary responsibility in
the United States Trustee (UST) rather than private trustee to screen all chapter
7 cases filed by individuals to see if they meet the criteria for "presumed abuse"
and, if so, to file the appropriate motion. This responsibility is consistent with
the UST's role in policing the system and taking appropriate action to curb abuses.
It would be helpful, however, to clarify two points: first, that the UST will
likely delegate some of initial screening procedures to private chapter 7 trustees who
conduct the §341 meetings as a matter of efficiency; and, second, if the bill
continues to repose the responsibility in one party, e.g., UST, to file a
presumed abuse motion, it should not be read to foreclose other authorized parties,

e.g., case trustee and judge, from filing such a motion as well as circumstances
dictate.

Certification. We oppose the requirement in the §102 of Senate bill of certification by debtor counsel as
to the accuracy of the debtor's expense and income. This will result in debtors having fewer opportunities
for responsible representation and may cause more pro se debtors. For similar reasons we object to §319
of the Senate bill. This suggests modification of the sanctions provision of Rule 9011 to force debtor's
counsel to make reasonable inquiry rather than the current standard of reasonable under the circumstances.
These changes will result in fewer responsible practitioners wanting involvement in representing debtors.

Discouraging abusive reaffirmation practices. The specificity of §203(b) of the Senate bill was
increased significantly from earlier versions. Now besides designating a United States attorney to address
abusive reaffirmation practices and carrying out duties under §3057, there are specified additional duties
of that AUSA to address §§152 and 157 violations relating to materially fraudulent statements in
bankruptcy schedules that are intentionally false or intentionally misleading. It is unclear as to whether
primary responsibility attaches to these additional enforcement provisions. The additional language
indicates a considerable move beyond the earlier concept of a point of contact for such abusive practices.
We must oppose this provision even more vigorously now, as it is a completely unnecessary intrusion
into the internal management of the U.S. Attorney's offices and selects which areas should receive the
most enforcement attention. The Department of Justice has already made bankruptcy fraud prosecutions
a priority, including establishment of a Bankruptcy Fraud Working Group and providing additional
bankruptcy fraud training for the department and agency counsel. The department recognizes the
importance of such prosecutions, such as the Sears case, and such a provision does not assist in their
continued pursuit of such cases.

Debtor Education. In regard to the new requirements for debtor education, §104 of the House bill should
be adopted over the corresponding Senate provision, §105. The House provisions, which call for an
18-month study in six pilot districts, is more realistic than the Senate version, which calls for a one-year
study in three districts in terms of conducting an efficient study, and for that reason we urge their
adoption.

Tax Returns. We strongly prefer §315(b) of the Senate bill over §603 (b) of the House bill in regard to
requirement that debtors file copies of their tax returns, as there is no purpose to imposing that paperwork
burden on debtors or the courts.

Direct Appeals. Section 612 of the House bill allows bankruptcy appeals to be taken directly to the
courts of appeals, thus bypassing the district courts. Because district court involvement is constitutionally
significant, we strongly oppose direct appeals in order not to weaken the arguments for protecting the
current bankruptcy court system from constitutional infirmity.

Trustee Liability. Section 115 (a) of the House bill also establishes a gross negligence standard for
bankruptcy trustees. We oppose this provision. The standard is too high and may leave innocent third
parties and creditors unprotected.

Non-monetary Obligations. Section 215 of the House bill expands a debtor's unique power to assume
executory contacts and leases notwithstanding its default. The amendment would require the debtor to
cure only monetary defaults in the case of real property leases; in all other cases the non debtor may
enforce its full contract rights only where the "equities" permit. This power goes too far because, in
effect, it allows the debtor to rewrite the contract. The non-debtor party should not lose the full benefit
of its bargain merely because its counter-party files in bankruptcy. We strongly oppose this expansion.

Assumption of Contacts. Section 305 of the House bill expands the universe of contracts which a
corporate debtor or a debtor-in-possession (DIP) may assume. Currently, contacts that are not assignable
under non-bankruptcy law may not be assumed or assigned by a debtor. This proposal overrides
non-bankruptcy restrictions on assignment for the benefits of corporations and DIPs. This directly impacts
not only personal service contracts, but also laws restricting the assignment of federal contracts. This goes
too far. Federal non-bankruptcy law prevents government contractors from unilaterally assigning their
contracts, including essential defense procurement contacts. It also restricts the sale of assets to foreign
entities. These laws protect vital national security interests. Vindication of such interests is no less important
should the federal contractor file a bankruptcy. We strongly oppose this expansion.

Single-asset Real Estate. Section 1401 of the Senate bill removes the $4 million limit from the definition
of a single-asset real estate debtor. The House bill has no comparable provision. We strongly favor the
cap's removal. This will expand the universe of such debtors and will enable their mortgages, such as
HUD, to benefit from the limits on the automatic stay given to such creditors.

Creditors' meeting. Section 403 of the Senate bill does not require a creditors' meeting in the
pre-packaged plan. This could be a potential area for fraud.

Preferences. In §411 of the Senate bill, the trustee can't avoid transfers under $5,000. This could lead
to lots of $4,900 transfers, gaming system, and decreasing the estate available to pay other creditors.

Declaratory Judgments of Tax Effects. Section 1004(b) of the Senate bill would amend Bankruptcy
Code §1231(d) to authorize the bankruptcy courts to enter declaratory judgments regarding the future
federal tax effects of chapter 12 plans. Currently, the courts do not have such jurisdiction in any chapter.
We strongly oppose this amendment.

Journal Date

Saturday, April 1, 2000 - 12:00