SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

OVERSIGHT HEARING ON

THE NATIONAL BANKRUPTCY REVIEW COMMISSION REPORT



Thursday, October 13, 1997

Room 2237 Rayburn Building, 1:00 PM



Williamson Testimony


STATEMENT BY THE CHAIRMAN OF THE NATIONAL
BANKRUPTCY REVIEW COMMISSION
Brady C. Williamson

Subcommittee on Commercial and Administrative Law
Committee on the Judiciary
U.S. House of Representatives
2237 Rayburn House Office Building
November 13, 1997

Thank you, Mr. Chairman, for the opportunity to present the report and recommendations of the National Bankruptcy Review Commission to this Subcommittee and, through it, to the U.S. House of Representatives and the Committee on the Judiciary. This Subcommittee already has focused its attention on bankruptcy law and the work of the Commission through several hearings earlier this year and, now that the Commission has concluded its work, the legislative process becomes preeminent today, into 1998 and beyond.

Twenty years ago, the House Judiciary Committee had just approved the legislation that would become the Bankruptcy Reform Act of 1978. The bill was jointly sponsored by Congressman Don Edwards (D.-Calif.) and Congressman M. Caldwell Butler (R.-Va.), and it was based in part on the work of the first bankruptcy commission, which had submitted its report to the Congress five years earlier. That legislation developed by the House Judiciary Committee was comprehensive, replacing the Bankruptcy Act of 1898 and the Chandler Act of 1938 with the Bankruptcy Code and system this country has today. While the Congress has made significant changes in the law in 1984, 1986 and 1994 the Code's principles and its principal provisions have remained essentially unchanged. Nor does the National Bankruptcy Review Commission, in its 172 recommendations and 1300-page report, suggest that those principles need to be changed dramatically to serve this country well into the next century.

The work of the House Judiciary Committee two decades ago and this Subcommittee's predecessor, the Subcommittee on Civil and Constitutional Rights, warrants a brief note this afternoon for several reasons. First, the legislation was bipartisan. It was the result of a relatively small number of dedicated members of Congress from both political parties, working with a skilled staff, to develop a law that balanced the interests of creditors and the interests of debtors and, not incidentally, the interests of the public. Second, and no doubt not coincidentally, the legislation was adopted by the House Judiciary Committee and by both houses of Congress with overwhelming bipartisan majorities. Indeed, the House of Representatives adopted the legislation by voice vote. The development of the 1978 Bankruptcy Code from commission report to law in about five years was in many ways a model for the American legislative process.

The last two decades have seen significant changes in the bankruptcy system and in the legislative process. The system itself now confronts a record number of consumer bankruptcy filings, and that quite properly has brought unprecedented attention to the bankruptcy system. When the Judiciary Committee last addressed consumer bankruptcy in a comprehensive fashion, in 1977, there were about 212,000 consumer cases. Today, that number has increased six-fold to 1.3 million consumer bankruptcy filings. From 895 cases for each bankruptcy judge in 1977, the number has now grown to 4,200 cases for each judge. The legislative process itself has changed as well with Congress and, particularly, the House Judiciary Committee facing more issues with more controversy than ever before. This Subcommittee's predecessor held 35 days of hearings and spent 22 days in session marking-up the 1978 bankruptcy legislation, for example, and it is difficult to imagine the Congressional calendar today permitting that much attention for any legislation.

The Commission's recommendations and its report, accordingly, should prove particularly valuable to this Subcommittee and the Congress. We had the public hearings that you may not be able to have: 21 regional and national hearings, from New York City to Des Moines to San Diego. We invited and analyzed the substantive submissions that you may not have the time to invite and analyze: more than 2,300 altogether, at least one from every state, on every conceivable subject involving bankruptcy, insolvency or financial distress. And we spent the last 18 months reviewing all of the testimony, the submissions and the ideas great and small to develop 172 recommendations for improving the bankruptcy system without disrupting the inherent balance that has been a hallmark of a century of American bankruptcy law.

Mr. Chairman, in your opening remarks at this Subcommittee's April 16, 1997 hearing on the bankruptcy system and the work of the Commission, you said you hoped the report would be "robust." It is that and more. The Commission's recommendations and its report are controversial. They are meant to be controversial. With its public outreach, the Commission has been, in effect, the eyes and ears of this Subcommittee and the Congress. And that is what you intended us to be. With respect to the controversy over bankruptcy law, however, the Commission's hearings and its deliberative process do not shield the Congress. To the contrary, they provide only a preview of the controversy that Congress already has begun to encounter. Consider just some of the reaction in the three weeks since the Commission filed its report on October 20, 1997.

The National Association of Consumer Bankruptcy Attorneys, an organization that represents debtors' interests, issued a news release contending that some of the Commission's proposals "treat debtors like criminals without any clear evidence of abuse." The proposals to tighten consumer bankruptcy law, the release continued, "would prevent many consumers from saving their homes. Many people will no longer qualify for Chapter 13 ." The comments from the credit industry were no less restrained. The news releases from its lobbyists and advocates characterized the consumer bankruptcy proposals as "disappointing" or "seriously flawed," and those were among the more generous assessments. In short, the Commission's recommendations and report have been criticized by creditor advocates as being too pro-debtor and by debtor advocates as being too pro-creditor.

The November 3, 1997 edition of Business Week reviewed the report and the reaction to it and came to a conclusion that commends itself to this Subcommittee. "Bankruptcy Reform," it said in a headline, "Everybody's mad and that's fine." And the magazine article provided this assessment:
Given the heated emotions swirling around the bankruptcy debate, howls of protest were inevitable. Still, the panel's suggestions would fix a system that is clearly broken . The commission found a reasonable middle ground that cracks down on abuses by the wealthy while protecting financially distressed borrowers from the clutches of lenders who have tried unfairly to portray all delinquents as the new welfare queens.

. . . .

The commission is trying to encourage greater responsibility by borrowers so they can't simply walk away from their debts. But lenders have to be responsible, too . The commission's proposals would help foster accountability on both sides, which is what's necessary to cure the bankruptcy epidemic.

The editorial page of the Los Angeles Times on October 27, 1997 conveyed the same sentiment: "The commission's recommendations though some proposals are highly controversial do provide a foundation for reform efforts, which already have begun in Congress. Neither consumer groups nor lenders and credit card companies are happy with all of them, which suggests a good balance." And The Dallas Morning News: "If [the] commissioners didn't solve the creditor-debtor debate, bankruptcy specialists say, at least they illuminated it."

Over the last 18 months, we found everyone agrees on the need for a bankruptcy system that treats creditors fairly and that provides relief for the "legitimate debtor," but no one agrees on the definition of the "legitimate debtor." Everyone agrees on the need for balance in the bankruptcy system, but no one agrees on the definition of balance. It is for this Subcommittee, in the first instance, and Congress as a whole to maintain and, in some respects, to restore balance in the American bankruptcy system. That is important not just to provide protection for creditors and for debtors but for the public as well. It is the public, of course, that pays for the system and either benefits when it works or suffers when it does not.

How can Congress reach that goal of balance, both elusive and indispensable?

This Congress and its successors will face all of the challenges that faced the 95th Congress 20 years ago, when it adopted the Bankruptcy Code, but the difficulty of drafting and passing technically-precise, balanced legislation has increased. This Subcommittee and the Congress can succeed, as its predecessors succeeded, by moving carefully and by treating with healthy skepticism the proposals offered by either side in the inherently contentious and adversarial relationship between the interests of creditors and the interests of debtors. One thing is certain: if any proposal that advances through the legislative process has the endorsement of any single interest, it is almost certainly the wrong proposal.

The case for radical, architectural change in the bankruptcy system, whether in consumer bankruptcy or in corporate bankruptcy, remains unpersuasive and unproved. The case for incremental change, by contrast, is well supported. In this regard, the controversy that some of the Commission's proposals have attracted should only highlight the far larger number and wide variety of changes that the Commission has recommended with little or no disagreement. Three of those recommendations hold the promise of improving the system, significantly and almost immediately, and they can be addressed by the Congress with care before it adjourns next year.

Direct appeals. Every party in every bankruptcy case filed today faces a burden not imposed in any other federal judicial proceeding: two levels of appeal. A litigant in any bankruptcy proceeding first must appeal an adverse decision to the federal district court or bankruptcy appellate panel and only then, if time and resources permit, in turn, to the U.S. Court of Appeals. That requires an additional round of appellate briefs and argument, additional time measured in months if not years and additional cost to the parties and the judicial system. Of no less significance, the "intermediate" decision by the district court has no precedential value beyond the case itself. Instead of resolving issues of bankruptcy law and practice on appeal, thereby reducing subsequent litigation, this requirement encourages additional litigation because fewer appellate issues are resolved with binding decisions by the U.S. Courts of Appeals.

The Commission has recommended, unanimously, that a bankruptcy judge's decision be directly appealable to the U.S. Court of Appeals. This single change in the law will save time and literally millions of dollars for the taxpayer and the parties involved in bankruptcy litigation without raising any constitutional issues involving due process or court structure. It is not a new idea. The bankruptcy legislation adopted by the House of Representatives in 1978 provided for this direct appeal. The legislation sent to the President did not.

Transnational insolvency. It cannot be said too often that the American economy can continue to grow only as part of a growing global economy. Today, transnational and multinational corporations are becoming commonplace. The incidence of transnational insolvency has increased as well, and American businesses today can find themselves discriminated against, if not literally cheated, by the insolvency laws in other countries that favor domestic corporations. Even 20 years ago, Congress recognized the potential impact of transnational insolvency by adopting section 304 of the Bankruptcy Code, which permits ancillary proceedings for foreign insolvencies. There is a need now, however, to take the next step.

The Commission has recommended, again without dissent, that the Congress adopt the model law recently approved by the United Nations Commission on International Trade Law. The delegates from this country played a critical role in the development of the model law, and the adoption of its substantive provisions in the Bankruptcy Code would protect American businesses and advance international trade. A decision by Congress next year to approve the essential elements of this model law would maintain this country's leadership on the issue and encourage other countries to adopt, with the model law, some of the critical procedural and substantive protections for creditors that characterize American bankruptcy law today.

Exemptions. The constitution gives the Congress the authority to adopt "uniform" laws on bankruptcy. In at least one respect, however, the bankruptcy law of this country is anything but uniform. The "system" of state exemptions, intended to recognize differences from state to state as well as the states' interests in personal financial matters, has become a patchwork of provisions that invite debtor abuse. When some states have no homestead exemption and others have an unlimited homestead exemption, when well-counseled debtors can avoid repaying any of their obligations to creditors through state exemption statutes, the system has lost its way. Indeed, the inconsistency in state exemptions is the single greatest threat to the integrity of the bankruptcy system because it threatens public confidence in the fairness and balance of the bankruptcy laws.

The Commission has recommended that Congress stop these abuses by adopting uniform personal property exemptions that apply to every debtor in every state. Where there is room for state-by-state differences, in homestead exemptions, Congress should adopt a range with a floor and a ceiling that gives the states some flexibility, but not unlimited flexibility, to establish the amount of equity that a debtor can protect. Reasonable exemptions should be part of the "fresh start," recognizing as well the inherent value of home ownership, but they should not be an open invitation to abuse. The Commission's exemption proposal was controversial, with Commissioners differing on the appropriate exemption levels, but there was virtually no dissent on the need for uniformity. Like the transnational and direct appeal recommendations, this proposal warrants attention by the 105th Congress.

The House of Representatives has just approved a technical amendments bill that makes important changes in the Bankruptcy Code. The U.S. Senate has just approved legislation to eliminate the sunset provision that now threatens Chapter 12 and to make subtle but significant changes in the priority payment provisions of the bankruptcy law. The question then is not whether Congress will address the Bankruptcy Code in 1998 but how it will address the Code.

The Commission's report and recommendations offer a systematic analysis of the issues, some technical and some comprehensive, that confront this critical aspect of the American economy. No one expects this Subcommittee, let alone the Congress, to take up every recommendation. Through its work, and the work of thousands of volunteers across the country who selflessly contributed their time and their ideas, however, the Commission has tried to reaffirm the principle of balance in the bankruptcy law. We can offer no clearer recommendation and no better legacy to the Congress than that.

Thank you.



Brady C. Williamson
LaFollette & Sinykin
One East Main Street - Suite 500
Madison, Wisconsin 53703
(608) 257-3911



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