United States House of Representatives
Committee on the Judiciary
Subcommittee on Commercial and Administrative Law
Hearing Regarding H.R. 3150, H.R. 3146, and H.R. 2500
Thursday, March 19, 1998
Room 2226, Rayburn House Office Building
The National Bankruptcy Conference
Professor Alan N. Resnick
Hofstra University School of Law
Hempstead, NY 11150
Voice: 516-463-5872; Fax: 516-481-8509; E-mail: firstname.lastname@example.org
Mr. Chairman and Members of the Subcommittee, I am Alan N. Resnick, the Benjamin Weintraub Professor of Bankruptcy Law at Hofstra University School of Law, Of Counsel to the firm of Fried, Frank, Harris, Shriver & Jacobson, and the Reporter to the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States. I am offering this testimony solely on behalf of the National Bankruptcy Conference, and this testimony does not necessarily represent the views of any other firms, committees, or organizations.
The National Bankruptcy Conference is a private organization consisting of approximately 70 bankruptcy judges, lawyers, and law professors formed in 1932 and dedicated to improving federal bankruptcy law and administration. The Conference is grateful to the Congress for regularly having considered its views for more than 60 years and is grateful for this opportunity to submit this testimony on H.R. 3150. I am personally honored to appear here today.
H.R. 3150 covers numerous aspects of both consumer and business bankruptcies, but my testimony this morning is limited to two aspects of H.R. 3150: small business bankruptcy (sections 231-243) and single asset real estate (sections 251-253). Attached as an exhibit to my written testimony is a detailed section-by-section analysis of the entire bill, which sets forth specific comments and concerns.
Small Business Cases
I would like to begin with a few general comments on the small business provisions of the bill. We are all aware of the need to encourage and support small businesses in the United States. Family-owned and other small business ventures are vital to our economic well-being and serve critical needs in our society. These companies provide employment, goods and services, and tax revenue for federal, state, and local government. Appropriate levels of entrepreneurial risk-taking in small business enterprise has always been encouraged. The preservation and growth of existing small businesses are the goals of many federal programs, such as those administered by the Small Business Administration. These businesses deserve the continuing support of Congress.
But in contrast to our national policy in support of small businesses, H.R. 3150 is likely to be anti-small business in its effect. The bill would amend the Bankruptcy Code in ways that could deny tens of thousands of small businesses a meaningful opportunity to restructure their obligations and continue in business through effective reorganization under chapter 11. The Conference is concerned that, by attempting to provide an early detection system designed to identify those small businesses that are not worth saving, the inflexible and burdensome provisions of the bill will have the effect of actually causing more small businesses to fail. These provisions are likely to result in closing the door on many small businesses that could be reorganized successfully if given the chance, but that are unable to meet difficult new requirements and thresholds in the early days of the case.
The very presumption that underlies the small business provisions of H.R. 3150 -- that many or most small businesses should be quickly expelled from chapter 11 and terminated due to low probability of success -- conflicts with the strong governmental policy favoring the encouragement of small business development, and job creation and retention.
Focusing on the particular aspects of the bill relating to small businesses, the National Bankruptcy Conference has the following key objections:
* The expanded definition of "small business debtor" is too broad and inflexible. This category would capture business debtors (including affiliates of the debtor) with non-contingent, liquidated debts of $ 5 million or less (rather than $ 2 million under the current law). This category would include more than 85% of the chapter 11 cases overall, and nearly all chapter 11 cases in most judicial districts. The new small business provisions would be mandatory for the vast majority of businesses filing chapter 11 petitions, whether or not the facts and circumstances of the particular case warranted these requirements. This would result in increased costs, administrative burdens, and unnecessary steps in the majority of chapter 11 cases.
* Single asset real estate debtors -- no matter how large and complex -- are encompassed within the definition of "small business debtor" regardless of the amount of debts (unless the debtor's affiliates file for bankruptcy too). This creates a difficult and unfair hurdle for one particular type of business without any empirical evidence that shows that such burdensome provisions are necessary or appropriate for this singled-out industry.
* The bill imposes new requirements on small business debtors - - often very early in the case. For example, Section 236 imposes numerous duties on the small business debtor and the debtor's management, such as the duty to attend interviews and meetings, to file periodic financial reports and projections, and to maintain insurance that is "customary and appropriate to the industry." Collectively, the provisions of the bill would impose burdensome duties that may actually hinder the reorganization effort and increase the likelihood of failure. These new duties are based on unreasonable assumptions about what every financially-troubled small business debtor can accomplish within a very short time period while attempting to stabilize, maintain, and reorganize business operations. These duties also will result in increased legal and accounting professional fees incurred in the preparation of financial reports and projections, and in connection with the attendance of meetings and negotiations (and perhaps litigation) over the meaning of insurance requirements. They also may detract management from its primary role of running the day-to-day operations of the business and focusing on restructuring its debts under a plan of reorganization. Failure to comply with any of these duties is likely to result in dismissal of the case.
* Inflexible short deadlines -- 90 days for filing a plan and 150 days (from the petition date) for confirming the plan -- are also likely to increase business failures and deprive many small businesses of a fair opportunity to reorganize. Although the bill leaves room for the court to extend these deadlines, the court may not extend them unless it finds that it is "more likely than not" that a plan will be confirmed (a difficult burden for a debtor still negotiating in good faith the terms of a plan of reorganization). Such determinations would require the court to conduct a mini-confirmation hearing without the benefit of a filed plan. These deadlines are likely to force many small businesses to file prematurely ill-conceived and poorly- drafted plans as the only alternative to immediate liquidation by the court. These time provisions may be adequate in certain cases, but will be far too short for businesses with operational problems that take time to stabilize or for seasonal businesses.
* New statutory duties of the United States trustee -- such as conducting initial interviews with every small business debtor to investigate the debtor's "viability" and business plan, visiting the debtor's premises, inspecting books and records, monitoring the debtor's activities to identify whether the debtor will be unable to confirm a plan -- are all designed to detect the debtor's failure. These are not intended to assist the small business to succeed, to retain jobs and relations with suppliers, or to obtain needed financing. These policing functions will greatly increase the expense of the bankruptcy system. In a cost-benefit analysis submitted by the Executive Office for United States Trustees to the National Bankruptcy Review Commission, it was estimated that an additional $3.2 million would have to be expended annually to comply with these new duties.
* The serial filer provisions in section 242, which deprive the benefits of the automatic stay to a small business debtor and its creditors when the debtor has either confirmed a plan in a previous case or was in a case that was dismissed within the past two years, again discriminate against small businesses. Why should the size of a business determine whether it can seek subsequent relief under chapter 11? The importance of these provisions on serial filings are heightened by the possibility that the proposed inflexible fast-track deadlines for small businesses are likely to result in more poorly-developed plans. And this provision is unnecessary. Courts already dismiss subsequent chapter 11 cases when the facts of the case so warrant.
Single Asset Real Estate
The National Bankruptcy Conference supports section 253 of the bill which would clarify the requirements for payment of interest under section 362(d)(3) of the Code. For example, it will clarifying that the debtor may use rents to make required interest payments. These changes should reduce litigation.
But the Conference is troubled by other provisions of the bill that would place artificial and unnecessary obstacles in the way of reorganizing distressed real estate ventures. The result will be many more foreclosures and the elimination of equity interests in real estate.
It is important to note that the real estate ventures that would be deprived of the same reorganization opportunities available to other types of businesses are not limited to small or medium size properties, and will not discriminate only against professional real estate developers. There is a growing trend, fueled by mutual funds and pension plans, for individual consumers, workers, and others to make equity investments in large, complex real estate ventures. The vehicle for these investments are Real Estate Investment Trusts ("REITs"). Therefore, any amendments to the Bankruptcy Code that unduly prejudices such investments by effectively blocking good faith attempts to reorganize large complex real estate ventures could have an adverse impact on pension plans, Individual Retirement Accounts (IRA's), and middle-income consumers who invest their savings in equity REITs.
The Conference is sympathetic to the concerns of undersecured lenders who have seen, over their objection, equity owners continue to own the debtor entity without a competitive bidding process while the undersecured lenders do not get paid in full. In fact, the Conference has suggested that the Bankruptcy Code be amended so that the owners cannot force such a plan on an unwilling undersecured lender unless other parties (including the lender) are permitted to propose an alternative plan. This approach would (1) open the process to the free market to assure that new equity investments are consistent with the true value of the real estate, and (2) permit all parties, including REITs and other existing equity owners, to compete by bidding for the new equity interests.
In contrast to this approach, H.R. 3150 would require that existing equity owners immediately invest cash equal to at least 25% of the value of the property to pay down the mortgage debt - - an insurmountable burden in many cases -- in order to confirm a plan over the objection of the undersecured lender. The result will be more foreclosures and loss of opportunity to invest in the reorganized debtor -- solely because the debtor is the owner of single asset real estate rather than some other type of business..
As mentioned before, the bill also includes single asset real estate debtors within the definition of "small business." This will impose undue burdens and fast-track requirements on the most complex real estate ventures regardless of size and amount of liabilities. Again, the effect is to exclude these businesses from a reasonable opportunity to reorganize and to increase the number of mortgage foreclosures.
In view of these concerns, it is not surprising that 5 of the 9 Commissioners on the National Bankruptcy Review Commission have expressed support for an alternative proposal submitted by Prof. Kenneth Klee. This proposal would, among other provisions, redefine "single asset real estate" by raising the debt limit from $4 million to $15 million (rather than terminating it altogether) and, similar to the Conference's proposal, permit equity owners to participate in a "new value" plan confirmed over the objection of an undersecured lender so long as other parties may file competing chapter 11 plans.
In any event, the existence of worthy less-radical alternative proposals and the lack of empirical data to support meaningful projections on the effect of H.R. 3150 on real estate investments and out-of-court workouts, suggest that it would be prudent to slow down the legislative process until all alternatives are evaluated based on available evidence.
For these reasons, the National Bankruptcy Conference respectfully opposes the single asset real estate provisions in sections 251 and 252 of H.R. 3150, but supports section 253. Thank you.
ALAN N. RESNICK is the Benjamin Weintraub Distinguished Professor of Bankruptcy Law at Hofstra University School of Law in Hempstead, New York, where he has taught bankruptcy, contracts, and commercial law courses for twenty-three years. He also is Of Counsel to the firm of Fried, Frank, Harris, Shriver & Jacobson, and is the Reporter to the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States.
Professor Resnick is co-author of Weintraub & Resnick, BANKRUPTCY LAW MANUAL, published by the West Group, is the co-editor of BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY, published by William S. Hein & Co., and is the author of a quarterly column that appears in the Uniform Commercial Code Law Journal. He has written numerous articles, including law review articles that have appeared in the American Bankruptcy Law Journal, Rutgers Law Review, William & Mary Law Review, Banking Law Journal and in other publications. He also is a frequent speaker at professional seminars and has lectured to audiences of bankruptcy judges in every region of the nation.
Professor Resnick is a member of the American Law Institute, the National Bankruptcy Conference, the American Bankruptcy Institute, and the American Bar Association. He also is a Fellow of the American College of Bankruptcy.
Professor Resnick was educated at Rider College (B.S. in Bus. Adm. 1969), Georgetown University Law Center (J.D. 1972), and Harvard Law School (LL.M. 1974).
Except for compensation received for his services as Reporter to the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States, Professor Resnick has not received any federal grant, contract, or subcontract in the current or preceding two fiscal years. Professor Resnick is not receiving any compensation for his testimony on behalf of the National Bankruptcy Conference. The National Bankruptcy Conference has not received any federal grant, contract, or subcontract in the current or preceding two fiscal years.
The National Bankruptcy Conference
Section-by-Section Analysis of H.R. 3150
Title I - Consumer Bankruptcy Provisions
Sec. 101. Needs-based bankruptcy.
This section would foreclose individual debtors from obtaining Chapter 7 relief if their incomes were 75% of the national median family income and they had $50 of monthly net income to pay nonpriority unsecured debts according to the prescribed formula. Families with very modest incomes would have to litigate the issue of Chapter 7 eligibility. This section is troubling on both logistical and principled grounds. Logistically, the means test is problematic for a number of reasons, including the following: (1) the means test does not adjust for regional disparities; (2) median income is not an adequate substitute for need, since the median income for a family with 5 or 6 members is lower than the median income for a family with 4 members; (3) there would be no accounting for significant expenses such as child care or work-related expenses; (4) the means test does not account for tithing or charitable contributions; (5) "projected monthly net income" frequently would be inaccurate due to the high occurrence of income interruption among the bankrupt debtor population; (6) projected monthly net income would not take into account additional Chapter 13 attorneys' fees or Chapter 13 administrative expenses; (7) averaging monthly secured debt payments over a sixty-month period would produce a number that could inflate the debtor's disposable income in the beginning of a plan; and (8) although the section would allow debtors to attempt to prove that they had "extraordinary expenses" that warranted a deviation from the means test, most debtors would not be able to afford to litigate this question, and the calculation still would not leave a cushion for unexpected expenses. The means test may not catch the debtors with more ability to pay; well-advised debtors could circumvent the means test by delaying their bankruptcy filings and incurring additional expenses, while debtors on the margins would be precluded from debt relief, potentially leading them to stop paying taxes and participate in an underground economy.
Even if each of these shortcomings could be addressed satisfactorily, this proposal seems ill-advised without credible evidence that such radical change is cost-justified. The provisions would entail a dramatic increase in the workload of courts and trustees. Restrictions on eligibility for Chapter 7 relief potentially could affect the willingness of creditors to engage in out-of-court work-outs. Congress should enact the data collection provisions of H.R. 3150, sections 441-443, before making this significant change.
Sec. 102. Adequate income shall be committed to a plan that pays unsecured creditors.
To determine the amount that a Chapter 13 plan would have to distribute to non-priority unsecured creditors, section 102 would replace the disposable income requirement with a new calculation of the requisite unsecured creditor distribution. H.R. 3150 would correct one shortcoming of H.R. 2500 by accounting for secured debt payments to calculate monthly net income. However, the definition of monthly net income still would not take into account secured debt arrearage, family size, regional variations, or tithing or charitable contributions, nor would it provide incentives for families to reduce their expenses and learn how to budget. By relying on average secured debt payments, the calculations could significantly understate a debtor's secured debt commitments in some circumstances. It is unclear what is included when secured debts are subtracted; for example, if an auto loan is under-secured, is the installment payment bifurcated, included, or excluded? Proving extraordinary circumstances would generate costly litigation, and the legislation would deter debtors from seeking plan adjustments because debtors would be required to pay an objecting creditor's attorneys' fees if the debtors were unsuccessful. Another interesting component of this section is that it requires debtors to pay at least $50 per month for nonpriority unsecured claims to be in Chapter 13. Debtors who wanted to be in Chapter 13 but did not have $50 per month to commit to unsecured creditors would be left to resort to Chapter 7.
All in all, this legislation likely would cause fewer debtors to qualify for Chapter 13 relief and more plans to fail. Since two-thirds of confirmed Chapter 13 plans already are not completed, Chapter 13 could become a less successful debt collection mechanism under this legislation.
Sec. 103. Definition of inappropriate use.
Section 103 would amend section 707(b) in several respects. "Inappropriate use" would trigger dismissal or conversion. Parties in interest would be able to bring section 707(b) motions. The bases for a section 707(b) motion would be Chapter 7 ineligibility (as described in section 101) or a totality of circumstances analysis.
As stated above, the eligibility requirements are troubling and thus should not be the basis for a section 707(b) motion. However, it is appropriate to authorize dismissal or conversion based on the totality of the circumstances that may reveal that a case is a "clear abuse" of Chapter 7. The provision should not permit creditors to bring substantial abuse motions, which could lead to non-meritorious allegations, strategic behavior, and overreaching to extract reaffirmation agreements; attempting to defend such actions would deplete the already-limited resources of debtors. Creditors believing that a case is abusive should take their allegations to the United States trustee, who can look into the matter and pursue it if appropriate.
Sec. 111. Notice of alternatives.
This provision would require debtors to receive information about debt counseling services and the various bankruptcy options. Clearly, debtors should be aware of non-bankruptcy alternatives as well as the options within the bankruptcy system. However, H.R. 3150 does not state what agency would pay for the notice or who would provide this notice to pro se debtors. Section 111 does not appear to intend to create a jurisdictional requirement to
obtain the notice as a prerequisite to filing, but since the debtor's failure to certify receipt of such notice can result in dismissal of the case under section 408, the section may have an unintended jurisdictional result, particularly for pro se debtors who do not know they need to receive the
notice in order to file for bankruptcy.
Sec. 112. Debtor financial management training test program.
Under this section, the Executive Office for United States Trustees would establish pilot programs for financial education and would evaluate other educational programs that already are in existence. Financial education could be an important tool to prevent debtors from experiencing repeated financial failure and should be pursued in consultation with experts well- versed in the field.
Sec. 113. Definitions.
This section introduces new terms into the bankruptcy lexicon, namely "bankruptcy assistance," "assisted person," and "debt relief counseling agency." These terms are used in subsequent sections of this bill that prescribe the activities of bankruptcy petition preparers. The definition of bankruptcy assistance is rather broad and could encompass unintended parties, such as stores that sell books on bankruptcy.
Sec. 114. Disclosures.
Bankruptcy petition preparers would be required by section 114 to provide certain disclosures to debtors, including the responsibilities that the petition preparer would undertake in the bankruptcy process. By requiring petition preparers to assist a debtor in determining exempt property and other related tasks, section 114 appears to condone the unauthorized practice of law by bankruptcy petition preparers.
Sec. 115. Debtor's bill of rights.
This section creates additional requirements for bankruptcy petition preparers. For example, the petition preparer would have to provide a written contract that discloses the services and the fees, would have to identify its services accurately in advertisements, and would be precluded from advising a consumer to incur more debt in contemplation of bankruptcy. Although it is admirable to attempt to ensure that a consumer obtains more information about services, the fundamental assumptions underlying these provisions are problematic and run counter to other efforts to hinder the use of bankruptcy petition preparers altogether. The provision would require non-attorneys to advertise that they provide assistance that goes beyond mere typing, while typing is the only assistance that they can provide without violating state rules governing the unauthorized practice of law.
Sec. 116. Enforcement.
Under this provision, a bankruptcy petition preparer would have to disgorge fees or waive unpaid fees if he failed to comply with the aforementioned requirements or if he assisted a debtor in a case that ultimately was dismissed or converted. State attorneys general would be authorized to bring legal and injunctive actions against a petition preparer. This section would prevent consumers from being further harmed after being misled by bankruptcy petition preparers.
Sec. 121. Discouraging bad faith repeat filings.
Under section 121, a debtor's second filing within one year would trigger the automatic stay for 30 days and then would be terminated automatically unless the debtor could prove that the subsequent filing was in good faith. Section 121 also would authorize in rem relief.
Something should be done to limit the ability of individuals to abuse the bankruptcy system by repeatedly seeking relief with no intent to reorganize, but only to obtain the benefit of the automatic stay. In rem relief should be authorized, as this section recommends. However, the approach to restricting filings in H.R. 3150 may not curb abusive filings; since the automatic stay would apply for 30 days, abusive filers still could use bankruptcy to cancel foreclosure sales. At the same time, this approach could work hardship on debtors legitimately seeking financial reorganization who have received insufficient legal advice, especially since inadvertent failure to file documents leading to dismissal and re-filing presumptively would not satisfy the good faith standard under this section. Thus, the changes contemplated in section 121 would not discourage bad faith repeat filings, but would prohibit good faith repeat filings.
Any effort to curb repeat filings must be accompanied by a national filing system that uses social security numbers to account for its users. Courts would be impeded in tracking repeat filers without such a system.
Sec. 122. Definitions of household goods and antiques.
Section 122 would define "household goods" using the definition employed by the Federal Trade Commission Trade Regulation Rule on Credit Practices, 16 C.F.R. §444.1. Providing statutory definitions can have a beneficial clarifying effect in some instances, but the recommended FTC definition would diverge from the prevailing current interpretations of "household goods" in section 522(f), and this substantive shift could result in increased litigation.
Sec. 123. Debtor retention of personal property security.
This section would prohibit the "ride-through" of secured debt obligations in Chapter 7 absent a reaffirmation of the debt or redemption of the collateral, and thus would resolve the circuit court split over whether secured debts can ride through bankruptcy. Ride-through can be beneficial to both debtors and creditors, and thus this choice should be considered carefully. However, if enacted, Congress should consider an exception for mortgages on primary residences; only a small proportion of homeowners in Chapter 7 reaffirm mortgage debt under current law because real estate is more likely to retain its value and thus protect the secured party.
Section 123 also would clarify that redemption requires payment in a single lump sum.
This amendment would be consistent with the majority view of redemption.
Sec. 124. Relief from stay when the debtor does not complete intended surrender of consumer debt collateral.
If the debtor did not perform the intended action on collateral, section 124 would authorize automatic stay relief without court permission. Creditors should have a remedy when debtors fail to follow through on their intended actions. However, without providing warning or an opportunity to cure, the proposed amendment could prejudice individual debtors who lack sound legal advice.
Sec. 125. Giving secured creditors fair treatment in chapter 13.
According to this section, the holder of an allowed secured claim would retain its lien until payment of the entire debt, including the unsecured portion, or until the plan completion. This amendment would resolve a difference in application of current law. See In re Johnson, 213 B.R. 552 (Bankr. N.D. Ill. 1997) (collecting cases split on issue). It should be kept in mind that the majority of Chapter 13 debtors do not receive discharges, although many of them still have paid at least the value of the collateral as determined under section 506. Requiring lien retention might help encourage plan completion, but could result in a greater number of repossessions of homes and cars, especially if plans spanned 5 to 7 years.
Sec. 126. Prompt relief from stay in individual cases.
Section 126 would require courts to rule on motions for automatic stay relief within 60 days; if they did not, the stay would terminate automatically unless the parties agreed to an extension of the deadline or the court ordered its extension due to "compelling circumstances." Historically, controlling bankruptcy court dockets through statutory amendments has not been successful. With the large volume of cases in the system, this provision may not promote the sound administration of justice. The meaning of "compelling circumstances" may be subject to widely divergent interpretations and thus could create greater disparities among courts.
Sec. 127. Stopping abusive conversions from chapter 13.
This provision would repeal the 1994 amendment to section 348 that clarified the effect of conversion from Chapter 13 to Chapter 7. Section 127 would un-strip liens upon conversion, which would be consistent with requiring lien retention as recommended in section 123, and both likely would result in more repossessions of collateral. However, section 348(f)(2) already deals with bad faith conversions from Chapter 13, calling into question the need for this amendment.
Sec. 128. Restraining abusive purchases on secured credit.
For purchases made within 180 days prior to bankruptcy, the usual valuation rules would be inapplicable and the value of the property could not be deemed less than the outstanding balance, interest, and charges. Although this proposal apparently seeks to eliminate incentives to use bankruptcy to adjust one's obligations under a very recent installment sale agreement, 180 days is too long a period in which to presume that the debtor made the purchase with bad intent. Because this legislation would have significant distributional consequences for creditors, the frequency of abusive pre-bankruptcy purchases should be studied before such a change is implemented. However, a beneficial corollary to the proposal in H.R. 3150 would be to clarify that surrender of property in Chapters 11 or 13 would satisfy a debt in full.
Sec. 129. Fair valuation of collateral.
Section 129 would set the valuation of collateral at "replacement value," to be defined as the price a retail merchant would charge for property of that kind, age, and condition, with no deductions for marketing or sales costs. Although this section is entitled "fair valuation of collateral," it would employ the highest possible valuation of collateral, which would be least advantageous for unsecured creditors in many instances. The proposed amendment apparently would overrule the United States Supreme Court's determination in Associates Commercial Corp. v. Rash, 117 S. Ct. 1879 (1997), that debtors should not have to give value for attributes they did not receive such as reconditioning, preparation, sales commissions, warranties, storage, inventory costs, and advertising. A compromise approach might be to use wholesale value, which is somewhat consistent with the Rash calculation and tends to be higher than liquidation and lower than retail.
Sec. 130. Protection of holders of claims secured by debtor's principal residence.
Section 1322(b)(2) anti-modification protection would be expanded further to include debts "primarily" secured by the debtor's personal residence and would include debts also secured by incidental property and debts secured by mobile homes, condominiums, or cooperatives. In so doing, section 130 would give preferential treatment to a wider range of mortgages and thus would divert value from other creditors and would reduce plan repayment flexibility. If taken too far, anti-modification protection would heighten the risk of home loss and thus would become inconsistent with federal policies encouraging home-ownership. Section 130 also would clarify that vacating one's personal residence within 180 days prior to filing for bankruptcy would not eliminate the anti-modification protection for that mortgage debt.
Sec. 141. Debts incurred to pay non-dischargeable debts.
This section would except from discharge any debts incurred to pay non-dischargeable debts and would give those debts the same priority under section 507 as the underlying obligations. While such a proposal sounds reasonable at first glance, it should be opposed. It would exacerbate unequal treatment for similar creditors, authorizing 100% payment for one creditor and 0% payment for another even though both have the same position with respect to the debtor. Public policy considerations do not support this change for several reasons. First, the need for payment of certain non-adjusting creditors already has been satisfied when a non-dischargeable debt was paid prior to the bankruptcy filing. For example, the Congressional policy that supports excepting child support payments from discharge does not justify non-dischargeability status for an obligation owed to a financial institution that the debtor may have used to pay the child support. Second, the scope of debts that are non-dischargeable under sections 523(a)(2), (a)(4), and (a)(6) is highly variable in different courts and jurisdictions. This amendment, in combination with the proposed change to section 523(a)(2)(A) in section 145, could yield a heightened number of non-meritorious non-dischargeability threats and allegations. Implementing these proposals in a consistent fashion would be difficult since this section does not address many of the consequences of deeming these debts to have the priority and dischargeability status of the underlying obligations.
Sec. 142. Credit extensions on the eve of bankruptcy presumed non-dischargeable.
Under section 142, any debt incurred within 90 days prior to filing presumptively would be non-dischargeable. This change is inadvisable. Debts incurred ninety days prior to filing may not have been incurred in contemplation of bankruptcy, thus the policy basis for proposed amendment is questionable. Such a change would create a strong preference for recently- incurred debts over older debts that should receive equal priority. This section also would generate litigation over whether old debts refinanced within 90 days of bankruptcy or old revolving credit agreements are inside or outside the 90 day limit. Debtors in true financial difficulty and with inadequate or no legal representation essentially would be denied debt relief. However, this provision would not affect the dischargeability of debts of well-advised debtors who could plan around this provision and delay their filings.
Sec. 143. Fraudulent debts are non-dischargeable in chapter 13 cases.
This section would make more debts non-dischargeable in Chapter 13, e.g., those that fall within sections 523(a)(2), (a)(4), or (a)(6). It may be appropriate to exclude debts falling under sections 523(a)(4) and (a)(6) from the super-discharge. However, the most significant problem with this proposal is that sections 141, 142, and 145 would make nearly all credit card debts potentially non-dischargeable under section 523(a)(2) without any proof of fraud and there is no policy reason to make ordinary credit card debts survive the bankruptcy process, especially after a Chapter 13 debtor has made plan payments for 3, 5, or even 7 years. Taken together, these amendments could promote extensive and costly litigation and provide a basis for creditor overreaching.
It is important to note that the majority of Chapter 13 debtors do not actually receive discharges at all, and thus the "super-discharge" is inapplicable to those cases. It is not known how many Chapter 13 debtors have debts that might fall within the Chapter 13 "super-discharge" since the super-discharge limits the need for non-dischargeability litigation. By including debts falling under sections 523(a)(2) in the super-discharge, the proposed change might increase administrative costs and delay the Chapter 13 process through litigation.
Sec. 144. Applying the co-debtor stay only when it protects the debtor.
Under section 144, the co-debtor stay would apply in a more limited set of cases. In particular, the co-debtor stay would be inapplicable when the debtor did not receive consideration for the claim held by the creditor to the extent the creditor proceeds against the individual who received such consideration or against collateral not in the possession of the debtor. The co-debtor stay also would not apply when the debtor's plan provided for surrender or abandonment of the debtor's interest in personal property subject to a lease. This amendment arguably would streamline the Chapter 13 process. However, the exception to the co-debtor stay is somewhat fact-specific, and a creditor may erroneously determine that the stay did not apply. The Code should provide a specific remedy in the event that a creditor's actions actually violated the co-debtor stay.
Sec. 145. Credit extensions without a reasonable expectation of repayment made non-dischargeable.
Section 145 would amend section 523(a)(2) so that credit card debts would be non-dischargeable without credit card lenders proving the elements of fraud, as all other lenders must do. The credit card lender merely would have to allege that the borrower used a credit card "without a reasonable expectation or ability to repay." Section 145 also would amend subsection (B) of section 523(a)(2) so that lenders would not have to allege that a debtor intended to deceive the lender with a written representation, replacing the requirement with "without taking reasonable steps to ensure the accuracy of the statement."
These amendments conflict with public policy and should not be enacted. They would give better treatment to credit card lenders than any other unsecured lenders and would encourage aggressive marketing of credit cards to risky borrowers. The amendments would make every borrower a guarantor of her future solvency, and they appear to apply even if a borrower was able to make the minimum monthly payments. Furthermore, section 523(a)(2)(A) has provided the basis for threats to obtain reaffirmations; the proposed standards would heighten this overreaching by certain creditors. It also is unclear why the creditor's burden of proof should be relaxed in section 523(a)(2)(B), which generally has been perceived to work well.
Sec. 161. Giving debtors the ability to keep leased personal property by assumption.
Section 161 would amend section 365 such that leased personal property would not be property of the estate and would not be protected by the automatic stay if a lease was rejected or was not timely assumed by the trustee. It also would offer a procedure by which the debtor could assume the lease himself. In individual Chapter 11 cases and Chapter 13 cases, the lease would be deemed rejected at the conclusion of the confirmation hearing, with similar consequences. If enacted, this provision should be clarified to provide that the lease would be abandoned to the debtor upon lack of assumption by the trustee. The same rule should apply in all chapters; the lease should revest as of the effective date of a plan.
Sec. 162. Adequate protection of lessors and purchase money secured creditors.
Under this section, a debtor would be required to make cash payments to lessors and secured creditors until the creditors started receiving plan payments. The section also would authorize a lessor or creditor to retain property rightfully obtained prior to the bankruptcy filing and would insulate such retention from automatic stay and turnover scrutiny. Debtors also would be required to provide each creditor or lessor "reasonable evidence of the maintenance of any required insurance coverage." This section appears to entitle creditors to larger "adequate protection" payments than they actually would receive under the plan. Almost all retailers could assert adequate protection entitlement for debts for small ticket items in which they are nominally secured at best, providing them with treatment far superior to other creditors without a reasonable policy justification. The requisite insurance coverage also may be subject to some dispute.
Sec. 163. Adequate protection for lessors.
Section 163 would amend section 362(b)(10) to provide an exception to the automatic stay for residential landlords so that they can continue eviction proceedings if they believe that the leases have "expired" pre-petition. The provision would permit landlords to evict debtors in public housing and rent-control housing in the midst of the bankruptcy case without court permission upon lease expiration even if the debtors were current in rent. Residential landlords already can get the stay lifted for cause on request to the bankruptcy court. Permitting residential landlords to proceed against the debtor without seeking bankruptcy court permission could severely undercut the bankruptcy process and the relief available for individual debtors. The automatic stay plays an important role in protecting the interests of other creditors, which could be hampered by this amendment. Although this proposal is intended to be a cost saving device for landlords, section 362(b)(10) has not prevented litigation as it applies to non-residential landlords because it is not always clear whether a lease has expired pre-petition.
Sec. 171. Extend period between bankruptcy discharges.
Under section 171, former Chapter 7 debtors could not receive another discharge for 10 years following the commencement of the prior case. Former Chapter 13 debtors who received discharges could not obtain a subsequent Chapter 7 discharge for 5 years after commencement of the prior case. The repeat filing problems under current law seem to involve debtors who have not received discharges in Chapter 13 cases. No evidence has been found showing that debtors who receive discharges are repeatedly or abusively seeking relief directly afterward.
Sec. 181. Exemptions.
Section 181 would amend section 522(b)(2)(A) so that a debtor would have had to live in a state for the majority of 180 days to be entitled to that state's exemptions. Changing 180 to 365 days, while perhaps reasonable in itself, does not go far enough to prevent the use of unlimited exemptions in real and personal property. Exemptions should be capped.
Title II - Business Bankruptcy Provisions
Sec. 201. Limitation relating to the use of fee examiners.
Section 201 would amend section 330 to prohibit the use of so-called fee examiners, persons appointed to examine requests for compensation or reimbursement. Determining fees is a statutorily-imposed duty of the bankruptcy judge that should not be relegated to private parties. A prohibition on fee examiners would cut administrative costs in Chapter 11 cases.
Sec. 202. Sharing of compensation.
Under section 202, section 504 would be amended to permit fee splitting with bona fide public service attorney referral programs that are run in accordance with applicable law. Although some find it controversial to permit fee sharing, this proposal recognizes that state and local regulation of these practices is sufficient to govern this area.
Sec. 203. Chapter 12 made permanent law.
This section would eliminate the sunset provision for Chapter 12, and thus make Chapter 12 a permanent part of the Bankruptcy Code. Making Chapter 12 permanent reflects the general perception that Chapter 12 has worked well and should be retained.
Sec. 204. Meetings of creditors and equity security holders.
Under this section, the court would be authorized to waive the requirement of a section 341 meeting if the debtor had filed a pre-packaged plan of reorganization. Section 341 meetings generally do not serve a meaningful purpose when creditors have voted on a plan prior to the bankruptcy filing. Permitting waiver of the section 341 meeting requirement in this instance is a reasonable proposal that would reduce administrative costs, expedite plan confirmation, and encourage out-of-court consensual negotiations.
Sec. 205. Creditors' and equity security holders' committees.
This amendment would clarify that courts are authorized to review appointments to creditors' and equity security holders' committees, which are made by U.S. trustees. This proposal would resolve a sharp split in the case law and should be supported. The extent to which a creditors' committee adequately represents unsecured creditors is a question of law that may require judicial discretion.
Sec. 206. Post-petition disclosure and solicitation.
This section would permit post-petition solicitation of votes prior to court approval of a disclosure statement in a prepackaged plan of reorganization, but only for holders of claims that were solicited prior to commencement of the case in accordance with applicable non-bankruptcy law. This amendment probably would reduce administrative costs and encourage out-of-court consensual negotiations. However, it may not be clear at the time of post-petition solicitation whether the pre-petition solicitation complied with applicable non-bankruptcy law.
Sec. 207. Preferences.
This provision would broaden the availability of the ordinary course of business defense to preference actions by de-coupling the requirement that a transaction be in the ordinary course of business between the debtor and creditor and in accordance with ordinary business terms for the industry at large. Under the amendment, the recipient of a preferential payment would not have to return the payment for distribution to all creditors if the payment was made in accordance with ordinary business terms even if the payment was not in the ordinary course between the debtor and the creditor. The NBC opposes this amendment because it would completely undercut the preference provisions. Congress enacted and subsequently amended section 547(c)(2) to balance the needs of ordinary commercial transactions with the goal of equality of distribution among similarly-situated creditors. De-coupling the requirements would disrupt this balance. This amendment effectively would insulate most pre-petition transfers from preference recovery, and thus would limit distributions to other creditors. If a payment is not in the ordinary course of dealing among the parties, the fact that the transaction comports with ordinary business terms of the industry should not be a defense. Moreover, even if a payment is in the ordinary course of dealing among the parties, it should also be in accordance with ordinary business terms for the industry to be insulated from preference attack.
Section 209 also would prevent preference actions to recover less than $5,000 in aggregate transfers to non-insider creditors in cases that do not involve primarily consumer debts. Preventing preference actions to recover small amounts should increase the likelihood that any amounts recovered will benefit creditors and not simply the trustee and the trustee's professionals. However, in small cases, these lost preferential payments may make a significant difference in creditors' recoveries.
Sec. 208. Venue of certain proceedings.
This section would amend 28 U.S.C. § 1409 so that a trustee may commence a preference action for a non-consumer debt of less than $10,000 only in the district in which the non-insider creditor resides. This proposal should reduce incentives to bring non-meritorious preference actions in which the aggregate litigation costs would be likely to equal or exceed the value of the assets recovered for the bankruptcy estate.
Sec. 209. Setting a date certain for trustees to accept or reject unexpired leases on nonresidential real property.
Section 209 would amend section 365(d)(4) to replace the 60-day period with a 120-day period for election to perform or breach a non-residential real property lease, and further would provide that the court could not extend the period beyond the date a plan is confirmed. As written, the amendment has some technical problems. First, it appears that the absence of the word "real" before "property" on page 61, line 8, was an oversight, since the section deals with real property leases. Second, while the decision to assume or reject all executory contracts or unexpired leases should be made and announced no later than the confirmation hearing, the actual assumption, rejection, or assignment should not have to occur before the effective date of the plan, which almost always occurs several days after the confirmation hearing. The NBC would support the amendment if section 365(d)(4)(B) were amended to read "The court may not extend the period during which the trustee or plan proponent must elect to assume or reject a lease of nonresidential real property beyond the date of entry of the order confirming the plan, but such assumption or rejection may occur on or before the effective date of the plan."
Sec. 231. Definitions.
The definition of "small business debtor" would encompass debtors (including any group of affiliated debtors) with aggregate non-contingent, liquidated secured and unsecured debts of $5,000,000 or less as of the petition date and single asset real estate debtors as defined in 11 U.S.C. § 101(51B). Small business treatment would be mandatory for all debtors fitting the definition, not elective as under current law. This provision makes a significant change shortly after the 1994 amendments set the debt cap for voluntary small business treatment at $2,000,000. The new definition would encompass more than 85% of Chapter 11 cases overall, and nearly all Chapter 11 cases in most judicial districts. Some cases falling within the proposed definition have active creditor involvement, vitiating the principal justification for special small business rules. The definition contains no safety valve when the small business rules would not be appropriate or necessary for a particular debtor. Moreover, imposing the proposed requirements on all single asset real estate debtors, regardless of size, complexity, or amount of liability, is undesirable and inconsistent with the policy justifications for providing special treatment to a discrete group of debtors. Since the empirical evidence is insufficient to show that these Chapter 11 cases are being improperly administered, additional data should be collected before adopting such proposals. Moreover, the use of Chapters 12 or 13 for very small businesses should be considered as a less restrictive alternative.
Sec. 232. Flexible rules for disclosure statement and plan.
This section authorizes courts to waive or modify the disclosure statement requirements, to conditionally approve disclosure statements to allow solicitation to proceed, and to combine the disclosure statement hearing with the confirmation hearing. This section is unobjectionable. Congress adopted section 1125(f) in 1994, which authorizes courts to hold combined hearings on disclosure statements and plan confirmation, but only when debtors elect small business treatment. Section 232 would extend the reach of that amendment and would codify the practices of some courts. The efficacy of the disclosure statement has been challenged on numerous occasions. The modification of the disclosure statement requirement in small business cases is an important first step in the elimination of cumbersome disclosure statements.
Sec. 233. Standard-form disclosure statements and plans.
Section 233 would order the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States ("Rules Committee") to devise and adopt uniform forms for disclosure statements and plans of reorganization for debtors falling within the small business definition. The section advises that the rules should achieve a practical balance between parties' reasonable needs for complete information and economy and simplicity for debtors. The establishment of standardized disclosure statement forms is a good idea. Uniform disclosure statements could help provide clear and pertinent information to creditors and could facilitate the collection of better, more consistent data about the bankruptcy system overall.
Sec. 234. Uniform national reporting requirements.
This provision would require a small business debtor to file periodic financial reports that include information on profitability, projected cash receipts and disbursements, comparisons of actual receipts and disbursements with prior projections, whether the debtor is in compliance with post-petition requirements and has filed tax returns and paid taxes and other administrative claims, and other matters in the best interest of all parties. Uniform reporting requirements would be beneficial as long as they are kept simple. Since U.S. trustees already require debtors to submit balance sheets, income statements, and cash-flow statements, additional financial reporting requirements should be limited to simple forms that solicit basic pieces of information in a specified format. Overly extensive and complex reporting requirements could be difficult and perhaps unnecessary for some very small businesses, and past attempts of U.S. trustees to implement more intricate national financial reporting forms have been unsuccessful.
Sec. 235. Uniform reporting rules and forms.
This section would require the Rules Committee to propose forms in accordance with the recommendations in section 234. Any financial reporting forms should be designed in consultation with parties with the appropriate expertise.
Sec. 236. Duties in small business cases.
Section 236 imposes numerous requirements on small business debtors early in the case. A small business debtor would have to provide a balance sheet, a statement of operations, a cash-flow statement, and income tax returns with the petition, or provide a statement under penalty of perjury that these statements have not been prepared. The debtor's senior management would be required to attend numerous meetings with the U.S. trustee and court. Schedules and statements of financial affairs would have to be filed within 30 days after filing the bankruptcy petition absent "extraordinary and compelling" circumstances. The small business debtor specifically would be required to maintain "insurance customary and appropriate to the industry." The small business debtor would have to establish a segregated bank account for taxes within 10 days after filing for bankruptcy and deposit such funds no later than 1 business day thereafter. Moreover, the small business debtor would have to allow the U.S. trustee to inspect the business premises.
The legislation makes unrealistic assumptions about what a small business debtor feasibly can accomplish within a very short time period while it attempts to maintain and reorganize business operations. Being required to make extensive submissions in the chaotic first few days of a Chapter 11 case, in combination with the many additional immediate requirements that these proposals would impose, would hamper small business reorganization. Preparing for and attending an extensive set of meetings could detract from management's primary role of running the business. In small business cases, "management" might be only one person or a handful of people, whose time might be better spent addressing the needs of the business and complying with the requirements already set forth in the Bankruptcy Code. Although it sounds reasonable to require debtors to maintain insurance "customary and appropriate to the industry," parties may dispute what types of insurance fall within this description. Debtors should comply with post-petition obligations, but failure to do so already can lead to conversion or dismissal under current law. The enumeration of certain post-petition obligations might suggest that those listed are more significant than post-petition obligations that are omitted from the list. Taxes should not be isolated for special treatment when the small business debtor also must make significant payments to employees, environmental authorities, or other parties that would not have the benefit of segregated accounts. Moreover, since section 243 of this bill would make failure to pay taxes a specific ground for dismissal, conversion, or appointment of a trustee, the bank account requirement may be superfluous. It could lead to extraneous disputes and dealings that would detract from the small business' primary objectives of reorganizing and running the business.
Sec. 237. Plan filing and confirmation deadlines.
This section would require the small business debtor to file a plan of reorganization within 90 days after filing for bankruptcy. To obtain an extension, the debtor would have to demonstrate prior to the expiration of the deadline "by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable time."
If this proposal were enacted, the Bankruptcy Code would discriminate against struggling small businesses trying to reorganize and would force them to seek to confirm poorly-drafted or ill-conceived plans or to liquidate. Small business Chapter 11 debtors are less likely to have engaged in plan negotiations before filing. The time limits are far too short for many small enterprises, such as those with operational problems or seasonal businesses. Secured creditors might be able to use the shorter time restrictions as leverage to obtain more favorable treatment to the detriment of unsecured creditors.
Although the amendment offers the possibility of an extension, obtaining an extension under these standards would be nearly impossible for small business debtors. The court would have to conduct a mini-confirmation hearing, and the small business would have to offer to prove the very information that the business needs the extension to obtain.
This proposal is premised on the notion that prolonged Chapter 11 cases are more costly than expedited proceedings, but a study of Civil Justice Reform Act procedures suggests that shorter deadlines and extensive case management do not always reduce parties' costs, James Kakalik, Just, Speedy and Inexpensive? Summary of Main Findings, Facts & Trends, Rand Institute for Civil Justice 5 (1997), nor do they necessarily result in quicker dismissal of "dead on arrival" cases. See Marcy C.K. Tiffany, Fast Track, Statistics, and Delay Reduction: A Comparative Analysis (Draft, October 6, 1996). The proposed extension standards would result in a duplication of effort and court time, undermining the benefit of combining the disclosure statement and confirmation hearings. Too much judicial time would be consumed on hearings to extend a deadline that many observers already have concluded is too short. Since this proposal contemplates a heightened expenditure of judicial time on both litigation and administrative matters, the workload may increase the need for additional judges and court personnel, further diminishing any anticipated aggregate cost savings.
Sec. 238. Plan confirmation deadline.
Under this section, plans of small business debtors would have to be confirmed no later than 150 days after the bankruptcy filing; the deadline could be extended only if the debtor meets the burden for an extension stated in section 237. The NBC's criticisms of the 90-day plan filing deadline and the extension requirements apply equally to this provision. This section again increases the likelihood of small business failure.
Sec. 239. Prohibition against extension of time.
Section 239 would amend section 105(d) to prohibit a court from exercising its discretion to extend a deadline in a manner inconsistent with sections 237 and 238. This section therefore further restricts courts' flexibility to be responsive to a particular circumstance.
Sec. 240. Duties of the United States trustee and bankruptcy administrator.
The U.S. trustee or bankruptcy administrator would be vested with new statutory duties in small business debtor cases, including the duty to conduct "initial debtor interviews" during which the U.S. trustee would investigate the debtor's viability and business plan. The U.S. trustee would have the duty to inspect the debtor's premises and would have to diligently monitor the debtor's activities to identify whether the debtor will be unable to confirm a plan.
Rather than helping the small business debtor reorganize, retain jobs, and retain relations with suppliers, this section imposes U.S. trustee duties that are premised on small business failure. Without financial or business training, U.S. trustee or Bankruptcy Administrators' mandatory visits and examinations of books and records may be of limited utility and yet would raise costs considerably. When the National Bankruptcy Review Commission considered this issue, the Executive Office for U.S. Trustees estimated that an additional $3.2 million would have to be expended annually to comply with this set of proposals. See Cost Benefit Analysis; United States Trustees' Implementation of Small Business Proposal (April 7, 1997) (submitted by Executive Office for United States Trustees to National Bankruptcy Review Commission). Of this amount, $265,000 would be allocated to travel costs.
However, if other small business provisions were implemented, continuous monitoring to prevent cases from languishing should vitiate the need for extremely short deadlines proposed elsewhere.
Sec. 241. Scheduling conferences.
Section 241 would amend section 105(d) to require courts to hold status conferences as necessary to further the "expeditious and economical resolution of the case." As long as status conferences are held sparingly, this provision should not cause a significant change in current law.
Sec. 242. Serial filer provisions.
Section 242 would completely withhold application of the automatic stay for a small business that filed a bankruptcy petition within two years after a prior Chapter 11 plan had been confirmed, or within two years after the entry of a dismissal order in a prior Chapter 11 case. If the former owners of a prior small business debtor have transferred the business to a successor entity, the automatic stay would not apply unless the debtor could prove by a preponderance of the evidence that the new case had resulted from circumstances beyond the control of the debtor not foreseeable at the time the first case was filed and that "it is more likely than not" that the debtor will confirm a feasible plan, but not a liquidating plan, within a reasonable time.
Absent evidence that small business debtors regularly file serial bankruptcy petitions in inappropriate circumstances, the need for this amendment is doubtful. Courts already dismiss subsequent Chapter 11 cases when necessary. Applicable standards for imposing a stay under section 362 of the Bankruptcy Code should not vary depending on the debtor's size. The section does not appear to provide a procedure for a debtor to invoke the automatic stay unless it is a successor entity, and the recommended tests for obtaining automatic stay protection for a successor entity are litigation-intensive and would entail significant costs. The practical results would be either that courts would have to disregard the statute or that small businesses would be foreclosed from subsequent reorganization attempts altogether. It also is not clear why the proposal discourages liquidating plans. Other sections of the small business provisions would increase the likelihood of small business repeat filings because the proposed fast track confirmation would increase the number of poorly-developed plans and thus would lead to more post-confirmation defaults.
Sec. 243. Expanded grounds for dismissal or conversion and appointment of trustee.
This section recommends that section 1112(b) be amended to provide that a court shall convert or dismiss a case, whichever is in the best interest of creditors and the estate, when a movant establishes "cause," and would enumerate grounds for cause. Requests for dismissal or conversion would not be granted if the debtor objects and establishes that "it is more likely than not" that a plan will be confirmed within a time fixed by statute or by court order; and, if "cause" is an act or omission of the debtor, that there exists a reasonable justification for the act or omission and that the act or omission will be cured within a reasonable time fixed by the court not to exceed 30 days after the court decides the motion (unless the movant expressly consents to a continuance for a specific period of time or compelling circumstances beyond the debtor's control justify an extension beyond 30 days). Section 243 also would authorize the appointment of a trustee instead of conversion or dismissal if the court determined this would be in the best interest of the estate.
The proposed changes to section 1112 apparently would apply to all Chapter 11 debtors, not just small business debtors. Unlike the current language of section 1112, which makes dismissal or conversion discretionary, this proposal would make dismissal or conversion mandatory upon the presence of factors indicating that such action would be in the "best interest of the estate." The proposed standards that a debtor would have to satisfy to overcome dismissal or conversion are litigation-intensive and would prejudice small businesses that can ill-afford prolonged court proceedings. The presumption underlying this proposal, that most small business debtors should be quickly expelled from Chapter 11 due to the low probability of reorganization, conflicts with governmental policy favoring the encouragement of small business development and job creation and retention. Foreclosing opportunities to reorganize could discourage the appropriate level of risk-taking in small business enterprise. Because the list of causes is so specific, a court might feel inhibited to grant dismissal on a ground not delineated in the statute. Without knowing what situations would qualify as "compelling circumstances" to enable courts to extend the deadline, it is difficult to gauge the implications of the proposed deadline. Statutory attempts to manage court dockets have not been successful in the past. Appointment of a Chapter 11 trustee generally has been an extraordinary remedy responsive to wrongdoing or gross mismanagement. This proposed amendment would represent a substantial shift from current policy. Overzealous use of this provision could lead to displacement of small business owners and liquidations of potentially viable small businesses, to the detriment of the owners and their unsecured creditors. Mandatory dismissal or conversion also precludes proposal and confirmation of creditor plans that could be in the best interests of creditors.
Sec. 251. Single asset real estate defined.
Section 251 would re-define single asset real estate and eliminate the debt cap on the definition. This definition would trigger the application of several special single asset real estate provisions in addition to the proposed fast track small business provisions. The proposed definition for single asset real estate cases has several shortcomings. First, the definition's wording would not exclude cases in which the real property is used by a debtor or related company in an active business. If this definition were adopted, sophisticated lenders could condition significant real estate loans to viable active businesses by requiring borrowers to place real estate collateral into a single-purpose subsidiary that would qualify for single asset real estate treatment in the event of default and bankruptcy. The definition should be worded to preclude this type of activity. The current $4 million debt limit on the definition should be raised to $15 million, but should not be lifted altogether. Valid reasons support distinguishing small-debt projects from large-debt projects. Many large projects involve jobs that will be lost if the reorganization process is forced down a fast track. Most projects with high debt levels have ample cash flow to maintain tax and maintenance payments and thus these cases are less likely to produce the abuses commonly associated with small single asset real estate cases. Other, unanticipated effects could flow from imposing rigid refinance rules and fast-track negotiations on such a wide range of projects. For example, these rules might diminish or eliminate possibility of claims trading to enhance liquidity in large projects and to increase both the leverage and return for the creditors. If Congress were to adopt this reasoning and to raise the definitional cap rather than eliminating it altogether, it should clarify that the face amount of the debt, not the value of the property, controls application of the definition.
Sec. 252. Plan confirmation.
Section 252 would amend section 1129(b) to provide different rules for single asset real estate debtors that seek to confirm plans over the objection of classes of unsecured claims that would not be paid in full. In particular, if a debtor sought to confirm a plan over the objection of a class of unsecured claims that included a secured creditor's deficiency claim, the debtor would have to pay down the allowed secured claim in cash so that the principal amount of the debt secured was no greater than 75% of the value of that real estate. This change is proposed in the absence of any empirical data justifying the change. A rigid standard requiring a 25% cash equity infusion may make sense in some cases, but may wreak havoc in others, forcing businesses to close on account of a technical financial rule. Moreover, tinkering with the fair and equitable rule in the absence of concrete data could have detrimental spill-over effects in both non-single asset real estate bankruptcy cases and, perhaps more significantly, in countless out of court workout agreements. The loan-to-value test would preclude out-of-court workout agreements in which lenders take less than a 75% restructured first mortgage, and would discourage lenders from taking fractional equity positions in workouts, as they often do now, because they could hold out for 25% cash or ownership of all of the equity in a Chapter 11 plan. As a practical matter, this change would preclude reorganization and confirmation of a wide range of cases that would fall within the very broad proposed definition of single asset real estate. A better approach that would protect lenders' interests without causing these adverse consequences would be to codify the new-value exception for all Chapter 11 cases, but to provide that plan exclusivity would be terminated when a plan proponent sought to confirm a new-value plan under section 1129(b)(2)(B)(ii).
Sec. 253. Payment of interest.
This section would amend section 362(d)(3) to make clear that the debtor can make the requisite payments from rents generated by the property. The section also would change the applicable interest rate to the non-default contract rate and would amend the deadline so that payments must be commenced or a plan filed on the later of 90 days after the petition date or 30 days after the court determines that the debtor is subject to these provisions. The NBC supports section 253. These changes will provide greater certainty and reduce litigation.
Title III - Municipal Bankruptcy Provisions
Sec. 301. Petition and proceedings related to petition.
This section would clarify that a Chapter 9 petition constitutes an order for relief as in other chapters of the Bankruptcy Code. This is a reasonable amendment and the NBC supports it.
Title IV - Bankruptcy Administration
Sec. 401. Adequate preparation time for creditors before the first meeting of creditors in individual cases.
This section would require that the section 341 meeting be convened within 60 to 90 days after the bankruptcy petition was filed unless the court had reason to hold the meeting earlier. The delayed timing could result in extended application of automatic stay and delayed pay-outs to creditors. However, the preservation of court discretion might ameliorate this problem in appropriate cases.
Sec. 402. Creditor representation at first meeting of creditors.
This section, which would permit non-lawyer creditor representatives to appear and participate in section 341 meetings, might create conflicts with some state laws by promoting the unauthorized practice of law. See In re Maloney, 209 B.R. 844 (Bankr. M.D. Pa. 1997) (examining debtor at section 341 meeting constitutes practice of law under Pennsylvania law); but see State Unauthorized Practice of Law Committee v. Paul Mason & Associates, 46 F.3d 469 (5th Cir. 1995) (administrative functions handled by non-lawyer creditor representatives did not constitute unauthorized practice of law under Texas law). If the Bankruptcy Code were to override state law on the governance of legal practice in this fashion, non-lawyers at least should be required to identify themselves as non-lawyers on the record.
Sec. 403. Filing proofs of claim.
This section would introduce the "deemed filed" rule in Chapter 7 and Chapter 13 cases, such that the holder of an undisputed, non-contingent, unliquidated claim or interest that appears in the schedules would not have to file a proof of claim. Since there has been some concern that the schedules of individual debtors are of questionable accuracy, applying the deemed filed rule may divert value from holders of properly- calculated claims and would favor those holding claims that debtors inadvertently inflated. By eliminating claims documentation from the files, the deemed filed rule would make the process more difficult and cumbersome for the case trustee, who has the obligation under section 704 to object to the allowance of claims that are improper.
Sec. 404. Audit procedures.
Under this section, no fewer than 1 in every 50 cases in each judicial district would be selected randomly and would be audited by independent certified public accountants or independent licensed public accountants. Also to be audited would be cases with schedules showing income and expenses reflecting greater-than-average variances from the norm of the district. The Attorney General would establish procedures for fully funding such audits.
The NBC supports the implementation of an audit process. However, auditing 1 in 50 cases -- perhaps over 28,000 cases a year -- misallocates resources. To conduct audits properly and to avoid funding audits through higher filing fees, auditing 1 in 1,000 cases is a more attainable goal. Moreover, these audits should be geared toward the discovery of undisclosed assets, not the analysis of the debtor's books and records, which generally are minimal or non-existent in individual debtor cases; for this reason, accountants might not be the right professionals to conduct these audits. The Attorney General should have discretion to allocate higher audit percentages to debtors with higher incomes, where the prospects for asset recovery are higher.
Sec. 405. Giving creditors fair notice in chapter 7 and 13 cases.
Section 405 would amend section 342 to require notice to a creditor to include account numbers and specific address or agent if the creditor had so requested. The failure to include such information could invalidate the legal effect of the notice. Effective notice is a crucial component of any judicial process. However, the amendment would entitle a creditor to violate the automatic stay if the notice did not comply exactly with its purported request. This proposal therefore could prejudice the interests of other creditors when an unsophisticated individual debtor does not provide the precise information that a creditor claims it requested.
Sec. 406. Timely filing and confirmation of plans in chapter 13.
This section would require the debtor to file a Chapter 13 plan within 30 days after filing the bankruptcy petition unless the court ordered otherwise. The confirmation hearing would have to be held within 45 days thereafter. This amendment would lengthen, not shorten, the time to file a repayment plan; Fed. R. Bankr. P. 3015(b) presently requires that the plan be filed within 15 days of filing the petition. These delays could yield higher administrative costs.
Sec. 407. Debtor to provide tax returns and other information.
Section 407 would amend section 521 to require debtors to file additional information, including any tax returns for the preceding three years, pay stubs, section 109 eligibility statement, statement of anticipated increase in income, current tax returns or amendments, statement providing basis for calculation of monthly income and expenses, sources of income, and the identity of others co-responsible for dependents. Section 407 also would require a certificate of an attorney or petition preparer that he provided the debtor with notice of alternatives to bankruptcy. A pro se debtor would have to submit a certificate stating that she obtained and read the notice of alternatives. Information would have to be updated on an annual basis in Chapter 13 cases.
Much of the information listed in section 407 already is required under current law or pursuant to local district rule or orders or can be obtained through a Rule 2004 examination. While debtors should be required to disclose accurate information, the requirements should be limited to information that is relevant to the bankruptcy case. Privacy issues are implicated squarely by requiring tax returns for prior years, which likely would be subject to challenge by many organizations and individuals. Social security numbers should be added to the list to help track repeat filers and to help verify information. In the case of a pro se debtor, the section does not make clear who would advise the debtor of the requirement to submit the notice of alternatives certificate.
Sec. 408. Dismissal for failure to file schedules timely or provide required information.
If the debtor did not submit all of the aforementioned information, the debtor's case would be dismissed automatically under this section. Extensions would be granted only with a "compelling justification." Given the proposed restrictions on repeat filings contemplated in section 109 and the presumption that filing a second petition due to prior inadvertence is not good faith, this section would heighten the consequences of inadvertence or incompetent counsel. Obtaining copies of tax returns may take longer than the proposed extension period. Moreover, section 707(a)(3) already provides authorization for a U.S. trustee to seek dismissal for failure to file the information presently required by section 521(1). The efficacy of that approach should be explored further before implementing an automatic dismissal process.
Sec. 409. Adequate time to prepare for hearing on confirmation of the plan.
Section 1324 would be amended to provide that a confirmation hearing may be held no earlier than 20 days and no later than 45 days after the section 341 meeting. It is sensible to hold the section 341 meeting prior to a Chapter 13 confirmation hearing.
Sec. 410. Chapter 13 plans to have a 5-year duration in certain cases.
Under section 410, a Chapter 13 plan would have to span at least 5 years if a debtor's income was at least 75% of national median income (national median family income for family of equal size, national median household income for individual earners), but plans could be as long as 7 years for this group of debtors. Two-thirds of confirmed voluntary Chapter 13 plans already result in default and are not completed, resulting in dismissal or conversion. Requiring debtors to commit to repayment periods beyond 5 years would lower the completion rate and would raise significant policy questions regarding the appropriate length of time for a repayment plan.
Sec. 411. Sense of the Congress regarding expansion of rule 9011 of the Federal Rules of Bankruptcy Procedure.
Section 411 expresses the sense of Congress that Rule 9011 should be modified to include a requirement that all documents, including schedules, should be submitted to a court or trustee only after the debtor or the debtor's attorney has made reasonable inquiry to verify that the information is well-grounded in fact and is warranted by existing law or a good faith argument for extension, modification, or reversal of existing law. Parties and their attorneys should be encouraged to make diligent efforts to provide accurate information. The same standards should apply to all parties in a case and should apply in both business and consumer cases.
Sec. 412. Jurisdiction of courts of appeals.
Under this section, appeals from final orders of bankruptcy judges would be heard by the circuit courts of appeals, not by district courts or bankruptcy appellate panels. The NBC supports this amendment; it would streamline the bankruptcy process, reduce litigation costs, and heighten the precedential value of bankruptcy appeals, which ultimately should lower the number of appeals. It would bring bankruptcy appellate procedure into accordance with that of some other non-Article III tribunals.
Sec. 441. Improved bankruptcy statistics.
This section would order the Director of the Executive Office for United States Trustees to compile statistics (in a format established by the Administrative Office of the United States Courts) and to make them publicly available and to report to Congress annually on the following: total assets and liabilities, monthly income, projected income, average income and expenses, aggregate amount of debt discharged (using the following calculation: total debt minus "predominantly non-dischargeable debts"), average case length and reaffirmation information. For Chapter 13 cases, the following would have to be collected: number of cases with property valued less than the amount of the claim (stripped down debts), number of cases dismissed for failure to pay in accordance with the plan, and number of cases with successive filings within six years after the first filing.
The need for accurate data is unquestionable, and the proposed amendments suggest that there currently exists little reliable evidence on which to justify dramatic changes to the system and any such reform should await the results of the proposed data collection. However, the legislation delineates reporting instructions that could produce inaccurate data. For example, the recommended calculation of total debt discharged would not account for reaffirmed debts, and thus would be seriously misleading. Accurately calculating "predominantly non-dischargeable" debts could not be accomplished due to widely divergent interpretations of what constitutes a non-dischargeable debt. The proposed Chapter 13 reporting requirements are under-inclusive and would omit pertinent information such as: the number of debtors obtaining hardship discharges and the number converted to Chapter 7 upon plan default; the number of months/years of plan compliance for debtors who ultimately default; percentage of general unsecured debt committed to be repaid in completed Chapter 13 cases as compared to Chapter 13 cases not completed; amount of priority and non-dischargeable debts to be repaid in Chapter 13 plans; objections to Chapter 13 plans; average length of time between filing and confirmation of Chapter 13 plans. Academics and government officials with expertise in data collection should be consulted to determine the proper method of collecting the desired information.
Sec. 442. Bankruptcy data.
This section would require the Attorney General to issue rules requiring uniform forms for final reports by trustees in all chapters and for debtors in possession. Trustees' reports would include information regarding the following: length of time case was pending, assets abandoned, assets exempted, receipts and disbursements of the estate, expenses of administration, claims asserted, claims allowed, distributions to claimants and claims discharged without payment. Chapter 11 reports would be required to include information regarding standard industry classification, length of case, number of employees, cash receipts, disbursements, and profitability, compliance with legal requirements, tax payments, professional fees, plans of reorganization filed, and recoveries of holders of each class of claims.
These types of information would be useful for parties to a particular case and for Congress when it establishes bankruptcy policy. This information should be collected before enacting the proposed small business and single asset real estate provisions.
Sec. 443. Sense of the Congress regarding availability of bankruptcy data.
Section 443 would express the sense of Congress that all data held by bankruptcy clerks should be released in electronic form to the public on demand and that the bankruptcy system should use a single set of data definitions and forms to collect data nationwide. This section expresses appropriate goals that should guide further efforts in data collection.
Sec. 501. Treatment of certain liens.
This section would exempt ad valorem real or personal property tax liens from the subordination operation of section 724(b)(2), consistent with S. 1149, introduced by Senators Grassley and Durbin. Although other tax liens still would be subject to subordination, section 501 would require a trustee to first exhaust unencumbered assets of the estate and to surcharge collateral under section 506(c) for the reasonably necessary costs and expenses of preserving and disposing of that property. The NBC supports the proposed exemption for ad valorem real property tax liens, but opposes the remainder of this recommendation. The reasons traditionally justifying the subordination of tax liens in this limited context remain in full force today. Imposing a statutory requirement to marshal assets and to surcharge collateral might create peripheral litigation that would diminish further the limited assets of the Chapter 7 estate. Moreover, many personal property tax liens are voided by section 545, and thus they are not affected by the operation of this provision.
Section 501 also would withdraw jurisdiction from the bankruptcy court to determine the amount or legality of any ad valorem tax after expiration of the applicable period for contesting or redetermining that amount under non-bankruptcy law. This provision is problematic. The bankruptcy court should retain the jurisdiction to determine pre-petition and administrative taxes that affect distributions to other creditors.
Sec. 502. Enforcement of child and spousal support.
Also consistent with S. 1149, this section would amend section 522(c)(1) to provide that property shall be liable for non-dischargeable taxes and family support obligations post-discharge regardless of whether state exemptions or federal exemptions were used. This amendment seems to be designed to clarify that even the most protective state exemptions cannot insulate property from non-dischargeable tax and domestic support obligations. See, e.g., In re Davis, 105 F.3d 1017 (5th Cir 1997) (section 522(c)(1) preempts state law and makes homestead remain liable for pre-petition non-dischargeable domestic support obligations), reh'g en banc granted, 131 F.3d 1120 (5th Cir. 1997). Although this amendment might clarify one attribute of exemption law, navigating between federal and state law is likely to remain confused as long as bankruptcy exemptions continue to be governed by multiple laws.
Sec. 503. Effective notice to government.
This section sets forth parameters for providing notice to government units. Although some of the recommendations are reasonable, the details of adequate notice should be addressed in the Federal Rules of Bankruptcy Procedure, not the statute. One detail of concern is the requirement that if a debtor is liable to a governmental unit on account of an obligation owed or incurred by another party or under a different name, the debtor shall identify such entity; this means that a debtor who is unaware of a potential trust fund liability, or believed in good faith that no liability existed, might run afoul of the statute for failure to notify a governmental unit of this liability. A better approach that would accomplish the intended goals would be to require disclosure of business organizations in which the debtor owned a substantial equity interest or in which the debtor was an officer or director.
Sec. 504. Notice of request for a determination of taxes.
This section would amend section 505(b) to require that any request for a determination of tax liability under that section would have to be made in a manner designated by the governmental unit. To be reasonable, this proposal should require governmental units to file the requisite notice forms with the courts. Otherwise, the form of notice may not be available to a debtor in good faith who seeks to comply. Without the addition of a filing registry, the proposal should be opposed.
Sec. 505. Rate of interest on tax claims.
Under section 505, the rate of interest on deferred taxes, including state and local taxes, would be determined by Internal Revenue Code section 6621(a)(2). This proposal would provide a clear rule and avoid litigation over the applicable interest rate, which otherwise can lead to gamesmanship and strategic behavior.
Sec. 506. Tolling of priority of tax claim time periods.
This section would make several moderate changes that reflect current law and several quite significant changes that should be opposed. First, section 506 would toll three-year and 240-day periods of section 507(a)(8) of the Bankruptcy Code during the duration of a case, which is a reasonable proposal that reflects the majority of current law. In addition, section 506 also would make the 240-day period for offers and compromise apply to pre-assessment and post-assessment offers. However, section 506 also would add six months to the tolling period under section 507(a)(8)(A)(i) during which the prior bankruptcy case was pending, which does not appear to be necessary or to be supported by any policy justification. Further, section 506 would toll the 240-day period for the duration of an installment payment agreement, which could add years to the tolling period and is not a necessary or desirable change.
Sec. 507. Assessment defined.
This section would amend section 101 to add a definition of "assessment" for state and local taxes and would provide that "assessment" of federal taxes would have the meaning provided by the Internal Revenue Code. This proposal would clarify current law and is unobjectionable. Unlike federal tax law, which provides a clear and reasonable definition of assessment, state laws do not have a uniform understanding of this term. This proposal would provide a uniform definition of assessment that is consistent with the federal tax law definition without disturbing the application of the federal definition.
Sec. 508. Chapter 13 discharge of fraudulent and other taxes.
This section would further restrict the scope of the Chapter 13 "super-discharge" by disallowing the discharge of taxes falling under section 523(a)(1), even if the debtor has paid in accordance with her Chapter 13 plan for 5-7 years. Thus, the remaining indebtedness on a wide range of tax claims could not be discharged. The super-discharge currently helps get debtors back into the tax system and to retrieve back taxes that otherwise would likely be uncollectible, and altering these provisions may have undesirable consequences. This section, in conjunction with section 143, would substantially reduce the debtor's ability to discharge debts after completing a long repayment plan, and thus may decrease the incentives to file for Chapter 13 or to complete a repayment plan.
Sec. 509. Chapter 11 discharge of fraudulent taxes.
Section 509 would amend section 1141(d) of the Bankruptcy Code such that plan confirmation would not discharge a corporate debtor from a tax debt on which the debtor made a fraudulent return or which the debtor willfully attempted to evade or defeat. This provision is unobjectionable.
Sec. 510. The stay of proceedings in tax court.
This section would provide an exception to the automatic stay or appeals from certain court and administrative decisions determining a tax liability of the debtor. This provision appears to be unobjectionable and was supported unanimously by the Tax Advisory Committee of the National Bankruptcy Review Commission. However, various provisions of H.R. 3150 offer new exceptions to the automatic stay for various interests. The aggregate effect of these provisions should be considered carefully before enacting numerous provisions that will erode automatic stay protection for the collective interests of creditors and interest holders.
Sec. 511. Periodic payment of taxes in chapter 11 cases.
This section would make two changes. First, it would require plans to provide for uniform periodic payments of deferred priority taxes. The NBC opposes this proposal. Courts and parties should have flexibility to establish non-level payments for good business reasons. In addition, the amendment itself appears to have some implementation problems that would have to be repaired prior to enactment, (e.g., requiring payment of at least 15% of the claim over the first 5 years and no more than 20% of the claim in the final year).
This section also would apply the six-year stretch-out to secured tax claims, which appears to be unobjectionable.
Sec. 512. The avoidance of statutory tax liens prohibited.
Section 512 would amend section 545(2) to codify that "superpriority" rights accorded to some purchasers by the Internal Revenue Code and parallel state and local law provisions cannot be used by a trustee to avoid tax liens in stocks, securities, motor vehicles, inventory, certain goods purchased at retail, and certain household goods. Although the NBC agrees that the section should be clarified to eliminate litigation, the NBC would resolve the matter
differently. Specifically, section 545(2) should be clarified to give the trustee the status of a hypothetical bona fide purchaser without knowledge or notice of a lien, who takes possession of the item purchased and has not relinquished possession. This status would preserve for the benefit of all creditors those items of property on which the filed tax lien does not take priority in all circumstances under non-bankruptcy law. A similar change should be made to the definition of purchaser in section 544(a).
Sec. 513. Course of business payment of taxes.
This section would require that post-petition taxes be paid in the ordinary course of business, that ad valorem real property taxes be paid when due, and that administrative period tax liabilities be paid without a request from the governmental unit. It is reasonable to require that a Chapter 11 debtor that remains in business needs to pay taxes in the normal course as a business expense, and this is generally what occurs under current law. However, this provision does not address the situation of an administratively insolvent estate and whether this change inadvertently would give taxes a superpriority over other administrative expenses.
Sec. 514. Tardily filed priority tax claims.
This section would amend section 726(a)(1) so that late filed tax claims would be entitled to distribution under that subsection to the extent they are filed before the date on which the court approves the final report and accounting of the trustee. The proposed change should be supported, as it is consistent with the efficient administration of bankruptcy estates to require late filed tax claims to at least be filed prior to a trustee's final accounting.
Sec. 515. Income tax returns prepared by tax authorities.
Under this section, for purposes of section 523(a)(1)(B), "return" would include returns filed by the governmental unit or a written stipulation to judgment entered by a non-bankruptcy tribunal. This recommendation should be supported. When a tax liability has been fixed between the taxing authority and the debtor, the underlying rationale for excepting the tax debt as an "unfiled claim" no longer is applicable. However, it is unclear why the amendment also would provide that the return must have been filed in a manner permitted by applicable non-bankruptcy law, which may cause confusion and is not necessary to effectuate the primary component of this section.
Sec. 516. The discharge of the estate's liability for unpaid taxes.
This provision would add the bankruptcy estate to the list of parties that would be protected from a tax claim upon failure of a governmental unit to respond to a request for a determination of taxes under section 505(b). The NBC supports this proposal. The consequences of a governmental unit's failure to respond to such a request should affect the estate if it affects the liability of the trustee, the debtor, and the successor to the debtor.
Sec. 517. Requirement to file tax returns to confirm Chapter 13 plans.
As one of several new conditions to confirming Chapter 13 plans, section 517 would require debtors to have filed the past 6 years of tax returns prior to the first meeting of creditors, and would make some provisions for extensions for compliance. Although some wage earners arguably would be able to comply easily with this provision, others who have held multiple jobs or have had independent contractor status may have more difficulty. This provision also might prolong the Chapter 13 process, although several other provisions of H.R. 3150 already extend the period between filing and confirmation. If this provision were enacted, the debtor should not have to prove her need for a further continuance by "clear and convincing evidence" when the "preponderance of the evidence" standard is generally used in bankruptcy proceedings.
Sec. 518. Standards for tax disclosure.
This section would amend section 1125 to require that disclosure statements contain a full discussion of the tax consequences of a plan of reorganization. This proposal would enable parties to be better informed about significant consequences of a plan of reorganization.
Sec. 519. Setoff of tax refunds.
Section 519 would amend section 362 to permit the government to set off "uncontested" pre-petition income tax obligations against pre-petition income tax refund rights without seeking court permission. The NBC opposes this proposal and believes that governmental units should continue to be required to request relief from the stay before proceeding against property in which the estate has an interest, notwithstanding the fact that some local rules already permit setoff without court permission. The consequences of wrongful setoffs are particularly acute for the bankruptcy estate and other creditors if Congress is unable to abrogate state governments' sovereign immunity in federal court and cannot deem the government to have waived sovereign immunity by other acts. Seminole Tribe of Florida v. Florida, 116 S. Ct. 1114 (1996).