The National Bankruptcy Review Commission (NBRC) concluded its public meetings August 12 in Washington, D.C., after voting on dozens of proposals that would affect both business and consumer bankruptcy, as well as the administration of justice. The sharp divisions on the Commission were reflected in a number of close votes on proposals, with Chairman Brady Williamson breaking tie votes on several occasions. A number of issues remain open, subject to voting by mail ballot. The Commission's final report is due to Congress, the President and Chief Justice by October 20.

Tax Issues

On August 11, the NBRC approved a number of technical bankruptcy tax proposals recommended by an ad hoc advisory group of tax professionals. Prof. Jack Williams, chair of the advisory group and co-chair of the ABI's Bankruptcy Tax Committee, walked the Commission through the more than two dozen proposals, covering both personal and business bankruptcy tax issues.

Among the many tax recommendations approved were proposals to: (a) exempt ad valorem taxes from the provisions of §724(b) and marshaling and surcharge under §506(c); and (b) require that chapter 13 debtors file income tax returns for all tax years within six years of the filing, as a prerequisite for confirmation.

The Commission split 4-4 on a proposal to deny a discharge to chapter 13 debtors who filed fraudulent returns or who engaged in willful evasion of taxes, as proven by the government. This issue will be considered again by mail ballot.

Single Asset Cases

The NBRC considered but deferred a recommendation to eliminate the $4 million debt limit from the definition of single asset real estate subject to §362(d)(3), as well as a tighter definition of single asset real estate cases where the debtor is using the real property in an active, substantial business. The working group on small business, partnership and single asset real estate recommended elimination of the cap. Legislation pending in the House (H.R. 764) would raise the cap to $15 million.

Also pending is a proposal that a single asset debtor should be able to confirm a lien-stripping under the new value exception to the absolute priority rule only by infusing new equity, in cash, sufficient to pay down the mortgage to 80 percent of the court-determined FMV of the property. The NBRC will consider this by mail ballot.

Trustee Liability

The Commission approved new rules to limit the scope of personal liability for trustees acting in their official capacity, proposing that trustees should have "derived judicial immunity for all acts taken within the scope of their duties as delineated in the Bankruptcy Code or by order of the court." This codifies the view of the majority of judicial circuits and is designed to alleviate the personal liability cloud over trustee conduct in areas such as environmental clean-up.

Data Collection

The Commission approved a recommendation aimed at enhancing and better coordinating data collection efforts by the AOUSC and the EOUST.

Consumer Cases

On August 12, by a vote of 5-4, the NBRC approved an amendment to the Consumer Framework Proposal, which had been adopted at the Commission's Detroit meeting. The new proposal, offered by Commissioner Caldwell Butler, would make three changes to the Framework, namely to (1) permit reaffirmations, with court approval, but only in cases of secured debt, and only to the extent of the allowed amount (The reaffirmation proposal also added a provision to §524, awarding costs, attorneys' fees and treble damages to any creditor who violated the discharge injunction.); (2) provide that refinanced first mortgages would not be subject to lien-stripping beyond the appraised value of the property at the time the security interest was made, where the property is the debtor's personal residence; and (3) provide that the stay is not automatic in the case of a third bankruptcy filed within six years, where the debtor was in bankruptcy 180 days before the third filing. The Framework had earlier barred all reaffirmations, permitted lien-stripping on all but the primary residence mortgage, and barred a second chapter 7 filing within six years.

The remaining portions of the Framework are unchanged. The Butler proposal was agreed to after the NBRC voted 5-4 against a complete substitute for the Framework, offered by Commissioner Edith Jones.

While supporting the concept of debtor financial education as part of the bankruptcy process, the Commission declined to formally endorse a specific approach, including one offered by Prof. Karen Gross of New York Law School. This approach would propose a uniform, federal system of voluntary debtor education based on the results of a pilot project in selected districts.

The Commission discussed, but did not agree on, a specific proposal to further amend or reduce the dollar amounts contained in the uniform federal exemption proposal, previously adopted. It is expected that a proposal will be circulated by mail ballot.

The Commission deferred consideration and final voting on recommendations (consumer working group #7) dealing with the dischargeability of credit card debt [§523(a)(2)] pending results of a mail ballot.

The Commission rejected, 5-4, a proposal by Commissioner Jones to amend §548(a)(2) to except transfers to charitable or religious organizations, so long as the transfers are reasonable in amount (i.e., not to exceed 10 percent of income) and made to bona fide charitable or religious organizations. The proposal was intended to cover some tithing cases that have found a lack of "reasonably equivalent value" in finding a fraudulent conveyance.

Chapter 11 Cases

Among the business bankruptcy proposals adopted during the last day, the NBRC formally adopted, by a vote of 5-4, a chapter 11 working group recommendation on claims classification. It provides that a plan proponent may classify legally similar claims separately if, upon objection, the proponent can demonstrate that classification is supported by a "rational business justification."

In the area of impairment (working group proposal #13), the NBRC disapproved, by a vote of 5-3, the recommendation that §1129(a)(10) be eliminated. Reducing the number of impaired classes would lead to reduced leverage for creditors. The Commission deferred approval of the rest of the proposal, including the definition of impairment, for consideration by mail ballot.

The NBRC approved, with only one dissenting vote, a proposal to reconcile the standards used to govern solicitation of pre-packaged plans of reorganization to cover both pre- and post-petition situations.

On pre-bankruptcy waivers of Bankruptcy Code provisions (working group proposal #9), the Commission voted 5-4 to provide that a "clause in a contract or lease or a provision in a court order or plan or reorganization executed or issued prior to the commencement of a bankruptcy case does not waive, terminate, restrict, condition or otherwise modify any rights or defenses provided by Title 11." The proposal was sharply attacked by Commissioner Jones as "far reaching" and one that would jeopardize and discourage settlements and out-of-court workouts, including of actions brought by governmental units such as the SEC.

Commissioner Jones generally criticized the chapter 11 working group proposals as ones that unreasonably shifted the balance of negotiating power to debtors and their counsel in large cases. She cited the recommendations on new value, classification, impairment and pre-bankruptcy waivers as examples of proposals that are too beneficial to debtors.

U.S. Trustee System

The NBRC approved recommendations (service and ethics working group #9) to make the Director of the Executive Office of the U.S. Trustee an Assistant Attorney General in the Justice Department, and to revise the existing UST regions to match those of the regional courts of appeal. The Commission deferred consideration of a proposal to establish a "peer review" system for review of adverse actions against panel or standing trustees. The NBRC made no recommendations in the area of the Bankruptcy Administrator program, defeating working group proposals to incorporate the BA system into the U.S. Trustee system by the year 2002 or sooner.