At the 33rd Annual Spring Meeting in Washington, D.C., ABI presented Professor Michelle M. Harner of the University of Maryland Francis King Carey School of Law with its highest membership award, the ABI Annual Service Award. As the official Reporter for the ABI Commission to Study the Reform of Chapter 11, Prof. Harner supported the Commission in all aspects of its vast effort to study current practice under chapter 11 and make recommendations for legislative reform. Prof. Harner kindly agreed to speak with me about her work with the Commission for this edition of the ABI Legislation Committee Newsletter. Below are some excerpts from our conversation.
Q. What was your role with the ABI Commission to Study the Reform of Chapter 11?
A. I served as the Reporter for the Commission, which entailed a number of responsibilities. I attended all of the Commission-level meetings. I attended many, although certainly not all, of the Advisory Committee meetings. And then I also attended the public field hearings. We had 17 field hearings in 11 different cities during the course of about 2 ½ years. And for all of those three components — the Commission hearings, the Advisory Committee meetings, and the field hearings — I was tasked with helping the Commission research, prepare, and think about the road ahead. We had a massive research database that included articles, empirical studies and case law on chapter 11; we also had Commission-level white papers, Advisory Committee research memoranda and over 800 pages of witness testimony. It was a massive amount of information, but all of it was extremely valuable to the Commission and the project. So I worked to review and synthesize the materials for the Commission, and help the Commission use it as thoughtfully as we could in the deliberations. I basically did whatever I could as Reporter to help facilitate a thoughtful, informed, and very robust dialogue among the Commissioners about the chapter 11 process. And then when it came down to memorializing the decisions, I worked very closely with the Commissioners to draft the Report. I also should note that I had wonderful support from my student research assistants and three very talented young lawyers, Leah Barteld Clague, Jennifer Ivey-Crickenberger and Sabina Jacobs.
Q. Did the Commission start with set areas of focus, or were those areas determined through the field hearings and the initial work that was done?
A. The Commission started with a basic question: Is chapter 11 working as effectively as it could? But it really did not start from the premise that there are particular issues, or troublesome aspects of chapter 11 that we needed to target or do something about immediately. It really started with that broad question: What’s working and what’s not? And to help provide a framework to that open-ended type of question, the Commission identified 13 broad areas of chapter 11 practice. It then worked within each of those broad subject matter areas — and all 13 of them are listed in the Commission’s Report and on the Commission’s website; it then worked within each one to think about questions that could be researched and answered, based on the Commissioners’ experience in the practice, what colleagues had told them, what the research showed and what we were starting to hear in the initial field hearings. And again, it was not a mandate or a directive. It was, “Ok, we’re thinking about finance — let’s study debtor-in-possession financing facilities, let’s see how the terms have evolved, let’s see how that’s impacting the chapter 11 process, and let’s see if something needs to be changed, or if it’s working just fine as it is.”
Q. What was one of the trickiest issues that the Commission tackled?
A. I’ll pick one where — I think it’s evident from the Report if you read it — there was a lot of tension and inability to reach consensus by the Commission, and that’s in pari delicto and whether or not in pari delicto should be permitted as a barrier to an action by the estate. I don’t think that anyone expected going in that there would be a great deal of dispute about whether or not the in pari delicto defense should be available or used to block an action by the estate. But as the Commission started to go through the case law and to discuss the rights of the various parties outside of bankruptcy vs. in a chapter 11 case, the dialogue became much more intense and divided. Ultimately, as reflected in the Report, the Commission was able to agree that the bankruptcy trustee — the chapter 11 trustee — should not be impacted by in pari delicto defense. But the Commission could not agree on whether or not that same treatment should be accorded to a creditors’ committee or a post-confirmation litigation trust, or some other estate representative, including the debtor in possession. So that certainly was an area that the Commission did not reach complete agreement on, even under the voting rules that it established for the principles. So that was a surprise, and people felt very passionately about all sides of that debate, and I tried to capture that in the narrative in the Report.
Q. If you could wave a magic wand and change one thing in the Code today — without speaking for the Commission — what would it be, and why would you focus on that particular area?
A. It would be the small and middle-market case provisions, and I would focus on that area because I think that’s where we have a great need, and where we’re seeing the greatest impact. In the larger cases, those companies have the resources, even though they’re distressed, to hire the professionals to help them figure out how to work within the Code, even if the Code is not working perfectly. Smaller and middle-market companies don’t have that luxury, and so what’s happening is that they’re having to turn to state or equity receiverships, which may or may not be beneficial to them, or they’re simply closing their doors. So to the extent we could make the process simpler, cheaper, and more effective for the small to middle-market companies, we would help improve approximately 90 to 95 percent of the cases filed in this country. This in turn would help the owners, suppliers, and many employees touched by small and middle-market companies. So I think there’s a huge potential benefit if we could figure out how to do it better for those companies and help them rehabilitate or reorganize their assets in a way that is preserving jobs, preserving value and keeping companies in that space vibrant.
Q. What are the next steps for the Commission and its Report, and what do you see as some of the impediments to chapter 11 reform?
A. I think the Commission’s main objective for the near term is that the Report generate a meaningful dialogue and discussion about chapter 11, and whether or not chapter 11 reform is necessary, and if so how it should be implemented. I think there has been a discussion started, and we’re hopeful that the discussion continues, and continues to be very productive, which I think it has been to date. As far as turning the principles into legislative reform, the principles are meant to be a catalyst for thinking about how we might do it. Many of the principles — for example, if you take the redemption option value proposal — the Commission forthrightly said we think this is a work in process. We think there’s something here, we think there’s a way to better allocate value in a chapter 11 case, let’s all talk about it and see if we can refine it into something that would make legislative sense. So I think there is the discussion and refinement of the principles, and then I think other groups have to join the conversation and help push it forward as a policy matter. I also think for it to be a meaningful reform package, parties need to try to take off their advocacy hats and think about the system as a whole, and what changes would better the integrity and the entirety of the system, even if those changes may not benefit their clients directly, or may cause their clients to have to do things a little differently. But I think that’s really what needs to be done if we’re going to turn the Report into legislative change, and change that actually will make a difference.