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105

To amend title 11 of the United States Code, and for other purposes.

Wednesday, June 10, 1998
H.R. 3150: Bankruptcy Reform Act of 1998

To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

Wednesday, May 14, 1997
H.R. 1596: Bankruptcy Judgeship Act of 1997

To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
MEMORANDUM

Section 603 of Chemical Weapons Convention Implementation Act Would Reduce
Reach of Automatic Stay

Editor's Note:

Other Commentary on Section 603 of S. 610:

On May 23, 1997, the Senate by voice vote passed S. 610, the Chemical Weapons
Convention Implementation Act.

Section 603 of the Bill amends Section 362(b) of the Bankruptcy Code by dramatically
reducing the reach of the automatic stay imposed on governmental units. Section 362 of the
Bankruptcy Code is known as the automatic stay. It provides a sweeping halt to enumerated
collection efforts automatically upon the filing of a bankruptcy petition. This provision is a critical
implement in the Bankruptcy Code's tool set for fixing the affairs of a debtor in financial trouble.
It provides the debtor or appointed trustee with a breathing spell after the filing of a petition. By
halting creditor actions against the debtor and its property, the automatic stay permits the
implementation of a statutory scheme which attempts a fair and equal treatment of creditor claims
consistent with the priorities established by the Bankruptcy Code. For these reasons the automatic
stay is said to benefit both the debtor and its creditors.

The exceptions to the automatic stay are set forth in Section 362(b). For either policy or
practical reasons, the listed actions are not subject to immediate halt upon the filing of a
bankruptcy case. Section 362(b)(4) allows for the commencement or continuation of an action or
proceeding by a governmental unit to enforce its police or regulatory power. Section 362(b)(5)
allows for the enforcement of a judgment, other than a money judgment, obtained by a
governmental unit to enforce its police or regulatory power. The legislative history suggested that
these exceptions were to be narrowly construed to permit a governmental unit to protect the
public health and safety, but not to permit the governmental unit to protect a monetary interest in
the debtor's property.

Section 603 of S. 610 attempts to rewrite Sections 362(b)(4) and (5) into a new Section (4).
In the first instance, Section 603 of S. 610 addresses the legitimate concerns of the Chemical
Weapons Convention by adding "any organization exercising authority under the Convention on
the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and
on their Destruction, opened for signature on January 18, 1993," to the governmental unit's
statutory exception. This change appears to be an appropriate amendment necessary to implement
the Convention's mandate. The international body that oversees the Convention is not a
governmental body within the Bankruptcy Code's definition so that body either must be added to
the definition of governmental body or added to the kind of entity that may enforce its police or
regulatory authority without hindrance from the automatic stay.

However, the effect of the language of Section 603 would not be limited to actions in
connection with the Chemical Weapons Convention, but rather would extend to all governmental
units and all types of actions. Thus Section 603 would have substantial and far-reaching
implications for the entire bankruptcy reorganization process. There is a significant split of
opinion about the appropriate application of the stay to governmental units. Indeed, I participated
in a lengthy debate of these very issues before the National Bankruptcy Review Commission in
October, 1996, and the subject is now under careful consideration by the Commission. Such a
major change in the current balance of interests, as proposed by Section 603, should not be
considered without a full public airing of the various points of view. This is particularly true given
that the Commission's recommendations in the area are due to be released to Congress in just four
months.

The following examples illustrate the potential unintended impact of Section 603. Each is
subject to debate about whether the government's police and regulatory power is involved, or
whether the government is acting in some other capacity. The problem is that the authorization
provided for by Section 603 of unilateral action by the governmental unit makes any consideration
of the "capacity" question a post mortem debate.

  • The Federal Communications Commission could revoke or seize a radio or television station
    license for failure to pay a pre-petition obligation, even though the payment of such an obligation
    is prohibited by other sections of the Bankruptcy Code.

  • A local governmental unit charged with the responsibility of controlling liquor licenses
    could revoke or seize such a license unilaterally.

Deletion of Section 603 of the Bill will not limit the government's police and regulatory
powers but rather leave them where they are today, in need of a court order to modify the
automatic stay, except for the existing exceptions. Such a process provides an opportunity for a
hearing on the merits, at which time all parties can be heard and all arguments considered by the
court.

In sum, Section 603, if enacted, would clearly change the prospects for a successful
reorganization for many entities, and significantly shift the balance of power in the bankruptcy
process in favor of certain governmental creditors over all others, including other governmental
creditors, lenders, trade creditors and the debtor. While Congress can legitimately elect to
approve such a shift, it should do so only after having the benefit of a thorough public debate.

For these reasons, the ABI urges the deletion of Section 603 from this Bill, or to modify it in
a way to narrow its effect to chemical weapons matters.

Note: The above was forwarded to Rep. Henry J. Hyde,
Chairman of the House Committee on the Judiciary; Rep. Newt Gingrich, Speaker of the House;
Rep. Richard Gephardt, Minority Leader; and Rep. John Conyers, Jr., Ranking Member of the
House.
  • S.Res.
    75     To advise and consent to the ratification of the Chemical Weapons Convention, subject to
    certain conditions.

  • The Chemical Weapons Convention Home Page

  • Complete text
    of The Chemical Weapons Convention
Thursday, April 17, 1997

To amend title 11 of the United States Code.

Thursday, September 18, 1997
H.R. 2500: Responsible Borrower Act of 1997

To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.

Thursday, April 17, 1997
S. 610: Chemical Weapons Convention Implementation Act of 1997

To combat waste, fraud, and abuse in payments for home health services provided under the medicare program, and to improve the quality of those home health services.

Tuesday, May 5, 1998
S. 2031: Home Health Integrity Preservation Act of 1998

To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
Brewing a Tempest in a Teapot:

A Response to Professor Markell


Written by:

Karen Cordry

NAAG Bankruptcy Counsel

National Association of Attorneys General

kcordry@naag.org

Web posted and Copyright ©
July 1, 1997, American Bankruptcy
Institute.

Editor's Note:

Other Commentary on Section 603 of S. 610:

rof. Markell has written an analysis of the language in S.610 that
revises §362 of the Bankruptcy Code. As NAAG has been publicly accorded responsibility
for the inclusion of the language in the bill, I would like to present a counterpoint to some of the
more alarmist portions of the Professor's discussion. I have also included a letter that was sent to the
House and Senate subcommittee by the Chair of NAAG's Bankruptcy and Taxation Working
Group, Attorney General Heidi Heitkamp of North Dakota, which further discusses these issues.

Just a note on process first. I do take responsibility for suggesting that the Justice
Department's
December 1996 memorandum to the National Bankruptcy Review Commission include the language that is
now part of S. 610, but that is as far as I go. The Senate acted independently, and without
consultation with NAAG, when it decided to include that language in the Chemical Weapons bill.
It is my understanding that they were initially concerned with whether the non-governmental
inspection teams that enforce the Chemical Weapons Treaty would qualify for inclusion under the
police and regulatory exemptions from the stay. Although that concern could be easily addressed,
the subcommittee was then forced to consider whether a party could file bankruptcy and assert
the automatic stay as a bar to the regulatory actions of such teams. In deciding to add language
to address those concerns, the Senate subcommittee concluded that the revisions were equally
appropriate with respect to governmental police and regulatory actions generally. (Some have
suggested that they should have only made the change with respect to the chemical weapons
teams, but this could have resulted in unwarranted negative implications about the scope of the
police and regulatory exception in other areas.) S. 610 then passed the Senate
unanimously—a result with which NAAG is well pleased, although not directly responsible.

On the merits, then, the bill simplifies the existing structure by combining present
§§362(b)(4) and (5) into a single section which also exempts police and regulatory
actions from §§362(a)(3) and (6). This change is not necessarily an expansion of the
Code's present provisions; a substantial number of courts already consider that either or both of
§§362(a)(3) and (6) cannot reasonably be deemed to apply to actions which are
explicitly exempted by §§362(b)(4) and (5). See, e.g. Javens v. City of Hazel
Park, 107 F.3d 359 (§362(a)(3)) and In re Mateer, 205 B.R. 915, 921-922
(C.D. Ill. 1997) (§362(a)(6)). But, to the extent that the case law is split, and the proposal
does propose a change, I submit it is reasonable, necessary, and, indeed, inevitable.

In so stating, I refer, of course, only to the changes that the proposal actually makes, not to
the imaginative list of horribles that have been conjured up about it. To clarify the situation:

  • The proposal only exempts police and regulatory actions. Collection of taxes,
    student loans, SBA loans, and the like have never been viewed as police and regulatory
    actions and would not be affected by this change.
  • A monetary judgment may be entered in a police and regulatory action but, as is the case
    now, cannot be enforced through collection from the estate's or the debtor's assets. (Thus, Prof.
    Markell's assertion that the exemption from §362(a)(6) will allow the government to
    "collect a debt" is simply incorrect. The exemption from §362(a)(6) is included, not to
    allow for collection of money judgments, but rather to clarify that the extremely broad language in
    that section should not be used to bar legitimate governmental actions which are explicitly
    exempted from the more specific sections of the Code.)
  • The provisions of §§362(a)(4) and (5), which bar actions to create, perfect, or
    enforce a lien remain effective against governmental entities.
  • Exempting an action from the automatic stay does not exempt the government or the debtor
    from other restrictions in the Code; thus, the government would still not be able to discriminate
    against a debtor for failure to pay a dischargeable debt, nor would the debtor be free to make
    post-petition payments on governmental claims except in accordance with the Code's provisions.
  • Section 105 remains available to restrict actions by the government which could be enjoined
    under nonbankruptcy law, such as where the government is acting in bad faith or could be subject
    to equitable estoppel.

To the extent, though, that true police and regulatory actions do require the exercise
of control over property of the estate, the bill clarifies that generally applicable law continues to
control, even with respect to entities that file for bankruptcy. I make no apology for that
proposition—a civilized society cannot function if its laws can be set aside whenever they
impinge on business' profit-making opportunities. The choices as to whether the benefits of a law
outweigh its impact on marginal enterprises is one that must be faced by the legislature when it
enacts the statute; once that choice is made, there is nothing in the Code that authorizes a
bankruptcy judge to override the legislative judgment, based on his own ad hoc weighing
of the equities of the situation. This does not mean that the government can "exercise its
regulatory powers for private gain." It does mean that the government can continue to protect
the public interest in health, safety, consumer protection, environmental protection, labor laws,
and the like even when a debtor is involved.

At times, those protective actions inevitably will impact on property of the estate. Under
current law, the government is plainly allowed to complete all necessary proceedings to determine
that the particular actions should be taken, but arguably must come to the bankruptcy
court for a "Mother, may I?" type of hearing before it is allowed to actually take the
actions. But requiring a motion to lift the stay makes sense only if the bankruptcy court has any
meaningful discretion to grant or deny the request. But, on what basis may it do so? There really
are only two options: it can refuse to grant full faith and credit to a judgment of another court and
redetermine the merits of that judgment, or it can admit the validity of the order but conclude that
it may allow the debtor to violate the law in order to assist the reorganization effort or to provide
more money to creditors. I invite Prof. Markell or anyone else to find the language in the Code
that authorizes either of those results. (Contrast, for instance, the language in §505 that
allows tax liabilities to be redetermined, with the language in 28 U.S.C. 959(b) which explicitly
requires the debtor to obey applicable state police and regulatory statutes.)

This is not to say that a state court judgment, for instance, is always right, but full faith and
credit does not depend on the merits of the other court's actions. Rather, our federal system
requires each branch of government to respect the actions of other branches and nothing
in the Code overrules that fundamental principle of federalism. (See In the Matter of Pope
(Pope v. Wagner), 1997 WL 341702, fn. 9 (Bankr. N.D. Ga. 6/16/97), which discusses the
Rooker-Feldman abstention doctrine, which provides that even if a state court decision is wrong,
only the Supreme Court has appellate jurisdiction to modify that decision). In short, the
bankruptcy courts do not exercise appellate authority over every other state and federal court in
the land. And, if the bankruptcy court must accept the validity of those judgments, then
requiring a pro forma motion will be, at best, a waste of time and money for all
concerned and, at worst, will allow serious harm while time is wasting. Professor Markell's
suggestion that the government should simply either routinely make ex parte motions to
lift the stay or seek retroactive annulment of the stay is, I submit, no way to run a railroad.
Government should not have to function by emergency motion or court contempt sanctions with
the hope that its good intentions will save it from being punished.

Prof. Markell then goes on to cite some examples of government actions that would be
allowed under this section, but which he believes should not be allowed to take place. I suggest,
however, that there is no alternative to allowing those actions to proceed. For instance, he states
that the amendment would allow the government to seize and destroy T-shirts that violate
copyright law. That is probably true, but does he seriously suggest that creditors have a right to
demand that the government must sell the shirts for their benefit, thus becoming an
accomplice to the debtor's illegal actions? If so, how does one balance the benefit to those
creditors with the harm to the debtor's competitors who must stand by and watch the federal
government take sales away from them by marketing goods when the debtor is not allowed to
sell? By the same token, if current forfeiture laws allow for the seizure and sale of a car that is
used as an instrumentality in the sale of drugs, does he mean to say that a bankruptcy judge may
refuse to lift the stay if the judge believes that the law is unfair and should not be applied in that
fashion? That conclusion is a prescription for judicial anarchism. I suggest, instead, that if one
disagrees with the current forfeiture laws (and there may be much to disagree with), the proper
solution is to go to Congress and have them changed, not to allow debtors to use bankruptcy
courts as an end run around the law to gain additional rights that do not now exist.

Finally, Prof. Markell argues at length that the problem is heightened with respect to state
actions because of the Supreme Court's decision in the Seminole Tribe case. To be sure,
that decision did give the states a measure of immunity from federal court jurisdiction
over challenges to their actions. That is a far cry from "the specter of a state making a unilateral
determination that a seizure is permitted by its interpretation of its police and regulatory powers,
and then never having that issue reviewed in any court, federal or state."
Seminole did not repeal either the Due Process or the Supremacy Clauses of the
Constitution. Thus, I would be more impressed by this "specter" if the article provided examples
of where a governmental agency could seize property without satisfying due process
requirements, including appropriate notice, a hearing, and rights to object. It is one thing to say
that review of a civil seizure or forfeiture decision may not be available in the bankruptcy court; it
is quite another to imply that this means there is no independent review of the action or
remedies for an improper action. I assume, Prof. Markell did not intend to suggest that state
courts are incapable or unwilling to apply state and federal law competently and evenhandedly. If
bankruptcy courts believe themselves competent to administer state law, they should be equally
willing to extend the same collegial respect to state court judges.

Moreover, it is not at all clear that the bankruptcy courts are totally barred from adjudicating
challenges to state property seizures. The Supreme Court's recent decision in Idaho v. Couer D'Alene Tribe, No. 94-1474 (June 23, 1997)
discusses the scope of the Ex Parte Young exception, as it pertains to declaratory
judgments against state officials with respect to control of property. While the unusual facts of
that case resulted in a determination that the exception did not apply, I think there is room for
debtors to argue that they may normally sue state officials in bankruptcy court to determine rights
of possession, if not final ownership, in goods seized from them during the case. If so, then there
is a federal avenue to regain these assets for the estate's use during the case even if a
final decision on ownership may need to be made in state court. I do not concede this point, I
merely note that the issue is by no means settled or hopeless for debtors. Nor, of course, in any
event, do I believe that going to state court is a fate worse than death, as some commentators
seem to assume. Most state courts are well aware of their obligations to obey federal law, are
reasonably competent at reading and applying a statute, and may even be capable of deciding a
case correctly without assistance from the federal judiciary. Seminole probably does
mean that other parties will need to visit state courts more often—and we welcome their
arrival.

Thursday, April 17, 1997

To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

Thursday, October 2, 1997
H.R. 2604: Religious Liberty and Charitable Donation Protection Act of 1997

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.

U.S. Department of Justice

Executive Office for United States Trustees


Office of Research and Planning

901 E Street, NW, Suite 740 Ph: (202) 616-9193

Washington, D.C. 20530 Fax: (202)
616-4576

Samuel J. Gerdano

Executive Director American Bankruptcy Institute

44 Canal Center Plaza

Alexandria, VA 22314

Dear Mr. Gerdano:

The American Bankruptcy Institute recently posted on its web site
"An Analysis of S. 1914 Business
Reorganization Provisions" by Christian Onsager. Mr. Onsager estimates that
implementation of Section 410 of S. 1914 would require over 5,000 additional United States
Trustee employees. This analysis of the demands on the United States Trustee Programs is
flawed by at least two major errors.

First, his estimate is based on 27,000 chapter 11
filings per year. Annual chapter 11 filings have never reached 27,000 in any year, and the
current annual volume is about 10,000 filings. As of April 1998, the open
chapter 11 caseload for all United States Trustees was 9,930 cases.

Second, Mr. Onsager appears to make a fundamental arithmetic error.
Mr. Onsager estimates that 80 percent of chapter 11 cases will be small business cases
under S. 1914's provisions. Based on his estimate of 27,000 case filings, there would then
be 21,600 cases requiring -- again according to Mr. Onsager -- an additional 10 hours per
case. The additional workload under this analysis would total 210,600 employee hours. A
work year is general estimated to consist of 2,080 hours. Using Mr. Onsager's numbers, S.
1914 would require -- at most -- 103 additional United States Trustee employees.
Mr. Onsager's estimate of 5,000 additional employees is therefore in error by a multiple
of 50, even using his excessive chapter 11 case estimates.

The United States Trustee Program has expressed its support of S.
1914. Because the bill requires practices already put in place by United States Trustees
in many chapter 11 cases, and the chapter 11 caseload is likely to be less than half of
that predicted by Mr. Onsager, the need for additional personnel would be far more modest
than he states. Currently, there are approximately 1,000 employees of the United States
Trustee Program. There may be a need for some increase in United States Trustee personnel
to meet the needs of S. 1914 and the other provisions in the pending bankruptcy
legislation. However, much of the work required by S. 1914 is already being performed by
existing personnel. While there will undoubtedly continue to be debate about S. 1914,
opposition should not be based on exaggerated estimates of additional employees needed to
do the work required by the bill's provisions.

Very truly yours,

Joseph A. Guzinski

Thursday, April 2, 1998

To amend the Truth in Lending Act to require a credit card issuer to disclose, in any preapproved application, solicitation, or offer to open a credit card account under an open end consumer credit plan, each rate of interest that will actually apply to any credit extended under such plan, and for other purposes.

Tuesday, January 7, 1997
H.R. 274: Truth in Credit Card Offers Act
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