On Promoting Uniform Laws Respecting Bankruptcy

<p>The U.S. Constitution authorizes Congress to make "uniform laws respecting
bankruptcy." Yet our bankruptcy laws, at least in practical application, are far from
uniform. In one sense, it is probably a good thing that bankruptcy law has a
different flavor in different parts of the country. The statute relies heavily on state
property law, state commercial law and state exemption law, so that bankruptcy in
Texas plays out somewhat differently from bankruptcy in Massachusetts, for example. Some
states allow non-judicial foreclosures, inviting the use of bankruptcy as an
opportunistic injunction employed at the eleventh hour. Some states' parsimonious exemption
schemes make bankruptcy attractive because of their more generous exemptions.

</p><p>In some areas of law, state model laws have tended to blunt this lack of
uniformity. The Uniform Commercial Code, for example, though officially enacted
as a separate state statute in each of the 50 states, is effectively the national
law governing a broad range of commercial transactions. The same is true for various
other uniform enactments. These laws thus tend to have the same impact in bankruptcy
cases, regardless of what state law applies.

</p><p>Uniformity seems most difficult to achieve in the way the law is actually applied
in the various districts around the country. Part of this lack of uniformity is but
a reflection of the fact that bankruptcy in the United States is entrusted to judicial
officers who, in the honest discharge of their oath of office, will inevitably reach
different conclusions about what the law means when it is applied. That "problem" (if
it can even be called one) is not unique to bankruptcy. Any statute will accrete
judicial glosses as litigants test the limits and meaning of its provisions in the
course of trials. We try to smooth out these differences via our system of appellate
review and principles of <i>stare decisis.</i> The more efficient we make appellate review,
the more quickly and easily we arrive at more uniform interpretations that are binding
on lower courts, rendering the statutes increasingly uniform. Indeed, one of the
complaints that has often been voiced about the bankruptcy system of appellate review
is that it is too inefficient to perform this necessary function. The extra layer of
district court appellate review discourages further appeal to the circuit, yet only a
circuit decision will have the effect of binding precedent that is needed to settle
conflicting interpretations of the statute. Direct appeals from the bankruptcy court to
the circuit courts would go a long way toward achieving greater uniformity in the
application of the bankruptcy laws.

</p><p>Even a more efficient system of appellate review is unlikely to completely address
the need for uniformity of the bankruptcy laws, however. Some issues, by their
nature, will simply never go up on appeal because the marginal cost of review cannot
be justified. These are the practice issues that arise in consumer bankruptcy cases.
They are national in character because they usually involve national lenders—credit card
companies, home mortgage lenders, automobile finance companies and home equity lenders.
With 94 judicial districts nationwide, and with many of those districts further
fractured into divisions, these creditors are forced to learn and comply not only with
the Bankruptcy Code as written, but also the Bankruptcy Code as applied in hundreds
of different locations. The transactional costs this imposes on lenders is, of course,
both frustrating and expensive.

</p><p>Let me offer up an example that arose just recently in my neck of the woods.
Home lenders in a chapter 13 bankruptcy case would like to be able to notify their
borrowers when they fall behind one month, but are disinclined to do so for fear of
being sanctioned for a stay violation. Instead, they often wait until the default
is at least 60 days old, then file a motion for relief from stay. Even though
the motion is heard within 30 days, by that time, the default may well now be
90 days old, and more difficult for a cash-strapped debtor to bring current. The
fear of sanctions comes not from what has happened in my court, but from what lenders
have experienced in other courts in other parts of the state or the country. A
similar fear prevents lenders from sending notices of changes in tax and insurance
escrows—even though, in Texas, state law requires the lender to give written notice
to the borrower as a prerequisite to adjusting the escrow payment.

</p><p>The lawyers for both the debtor and the creditor who brought this issue up on the
docket were pleased that I was more than willing to approve an arrangement that would
permit home mortgage lenders to send default notices to debtors without fear of
reprisal. After all, the lender was certainly not expecting to be relieved from
having to file a motion to lift stay as a prelude to exercising their state law
enforcement remedies. All they wanted was the right to notify the debtor of a
post-petition default, giving the debtor the chance to cure the problem quickly without
expensive stay litigation. However, they pointed out that my willingness to arrive
at a practical resolution gave little real solace to the lender. Unless other courts
around the country adopted the same solution, the real savings in transactional costs
would be so small as not even to justify adopting a different rule of practice for
our district, no matter how practical and realistic that solution might otherwise be.

</p><p>I have no illusions that the resolution I suggested is the best solution to this
particular problem. Other courts have alternatives that may be just as practical. In
one district, for example, post-petition home mortgage payments are made by the
chapter 13 trustee under the plan (though without incurring a trustee's commission).
Perhaps that is the best solution. The real point is not <i>what</i> the solution ought to
be, but <i>how</i> to arrive at a uniform solution nationwide. Clearly, these are not the
kinds of issues that are easily amenable to resolution via the appellate review
process; the cost is too great, and it takes too long to arrive at what one would
recognize as a nationwide answer. Legislative fixes, as we have seen from watching
the fate of proposed bankruptcy reform over the last four or five years, can
all-too-easily bog down. Often, by the time the legislative fix is in, the economic
landscape has changed, and the fix has become meaningless. Even the rulemaking process
is sufficiently cumbersome that it suffers from the same defect.

</p><h3>Bench/Bar Cooperation on Local Rules</h3>

<p>Perhaps what is needed to deal with these kinds of uniformity problems is a
national model of a process currently in use in many districts and divisions at
the local level. In many cities, the consumer bar, both debtor and creditor
lawyers, regularly meet to discuss these kinds of issues, and to arrive at
practical solutions at the local level. Sometimes, the solution to a given problem
will be adopted by tacit understanding, sometimes it will take the form of a
standing order or local rule. In all events, the process tends to be relatively
quick and relatively efficient. Imagine a national "commission," similarly
constituted, that evaluated problems of this type and suggested a "model rule" or
"model standing order," much as the commissions that draft uniform laws for
enactment by state legislatures now do. The model solution could then be considered
by and (hopefully) adopted by judicial districts nationwide as a local rule or
standing order or practice. Granted, even this procedure could become cumbersome,
but at least at the outset it offers a better hope for harmonization of procedures
than do any of the current alternatives.<small>^{<a href="#1" name="1a">1</a>}</small>

</p><p>The <i>ABI Journal</i> has a broad nationwide readership, and ABI itself may well
afford the best mechanism for instituting such a "commission." At the outset, I
invite the comments and reactions of my colleagues on the bench. But the
Constitution's promise of uniformity is empty unless we find practical nationwide
solutions to these very real nationwide problems.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Indeed, it is worth noting that a certain amount of "harmonization" has already begun to take hold with various districts promulgating
procedures for handling first day orders in complex chapter 11 cases, often copying the work of other vanguard districts. <a href="#1a">Return to article</a>

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