Incoming NCBJ President Looks Ahead at Issues
Gerdano: During the 17 years you've served as a bankruptcy judge, what have been the most important changes in the bankruptcy system or courts?
Hershner: When I came on the bench in 1980, it was shortly after the new law went into effect. What that law did was to create a commercial court for the nation. It dramatically changed the substantive law and structure of the courts, a change I did not fully appreciate until I went on the bench. Then we had further changes in response to the Marathon ruling. As I reflect on it, Marathon was a trying time to be on the bench, and I hope we never have to face that situation again. But I would have to say the Code itself has led to the biggest change in the system.
Gerdano: It is interesting how the bankruptcy courts have become a kind of federal commercial court.
Hershner: I think that's exactly what has happened. The cases that you see coming out of the bankruptcy courts address some of the most significant issues in business law.
Gerdano: Bankruptcy filings this year will set yet another record, surpassing perhaps 1.3 million new cases. What's your take on the reason for this, especially in what is otherwise a sustained economic expansion?
Hershner: I think nationwide there's any number of reasons. But when I look at the South, the area I'm most familiar with, in the consumer area, I think the financial distress comes from domestic problems in the household: medical expenses, high consumer debt and, in a more general light, the fact that it costs so much just to get by in today's society. In the business area, I continue to see failures resulting from bad management. Business cases are down, of course, but I look for an increase in these cases in 1998, and I expect that the consumer cases will continue to rise as well.
Gerdano: Have you detected any changes in the economy or in lending practices that might lead to a rise in business filings?
Hershner: I have a feeling from what I've read and from talking to people in the lending community that the business cycle will turn, and we'll have more business cases in the near term.
Gerdano: When you look at the filings by state, on a per household basis, Georgia is always right near the top with Tennessee. How do you explain this pattern?
Hershner: In Georgia, the stigma we once had about bankruptcy is gone. Unfortunately, for many people, chapter 13 appears to be part of their life cycle. They file a chapter 13, make some payments, and six months to a year later, they're back into court again.
Gerdano: The Bankruptcy Commission's report will be out soon and consumer bankruptcy is a key area. Do you think there is anything the Commission could recommend to address the kind of situation you described?
Hershner: I'm not sure. I'm aware that the consumer area was among the most contentious of the Commission's topics. I know one of the early goals was to try to find a way to encourage more repayment in chapter 13. But whether the recommendations coming out of the Commission will do that, I simply don't know.
Gerdano: Of the other areas of focus for the Commission, which do you think are the most important for the bankruptcy judges?
Hershner: Without question, the Article III recommendation. Personally, in the 17 years I've been on the bench, I've never felt I needed Article III status to do my job. I know that some of my colleagues believe that we need to be Article III judges, but I don't share that belief.
I can see where the proposed exemptions may lower required payments in chapter 13 plans because they would change the hypothetical chapter 7 liquidation payout to unsecured creditors. One could argue that this would cause more chapter 13 plans to pay out, and actually could possibly reduce the number of repeat filings.
Gerdano: That's probably convenient, since it's not going to pass in Congress. [laughter] In terms of appellate structure, the Commission has recommended a change in the appellate structure to eliminate the intermediate appeal at the district court and to go straight to the court of appeals. What might be the practical effect of this proposal, if adopted?
Hershner: Without question, direct appeals will add some certainty to the law that's not now present. There would be no doubt about the law of the circuit on a given point of law. Now whether the courts of appeal can handle the extra workload, I don't know, and it will up to Congress and the appeals courts to assess it. But I think it makes good sense from a certainty viewpoint.
Gerdano: Another Commission recommendation likely to have an effect on the work of the courts is the new small business proposal, which though styled as applying to small businesses only, the debt limit of $5 million will cover some 85 percent of all business cases. What's your impression of this recommendation?
Hershner: I've heard a suggestion that these new "fast track" procedures might reduce the need for some new bankruptcy judges, because presumably the cases would move faster through the system. But I would doubt that's going to happen. Even in the small business area, we are likely to see complex legal questions and disputes that will still need a judge to resolve. So I see no need for fewer bankruptcy judges if this were to go into effect.
Gerdano: What might be the impact on the cases themselves? Are they likely to move faster toward an up or out resolution on viability?
Hershner: That's the goal, but I have some question about that. In my years here in the Middle District of Georgia, while we have some of those expedited procedures available, I've never seen anybody opt for fast track procedures.
Gerdano: In the consumer area, one of the proposals that might impact the decision whether to file at all is a change in the exemption rules. The Commission has proposed both a greater degree of uniformity and a substantial increase in the amount of property that a debtor can shield from creditors. Coming from a state with a high number of filings already, what do you see as the likely impact of this change?
Hershner: It would have an impact here in Georgia because we have very low exemptions available. We see many debtors emerging from bankruptcy with little exemptible property to help them with their fresh start. Larger exemptions may help some of them avoid having to refile a bankruptcy.
Gerdano: Congress just doubled the federal exemptions in 1994. It's hard to see, in that context, how this new proposal favors the goal of encouraging more use of chapter 13. It may discourage the chapter 13 choice and create more no-asset chapter 7s instead.
Hershner: One could argue that. The proposed exemptions would be a substantial increase over what's available in Georgia now. I can see where the proposed exemptions may lower required payments in chapter 13 plans because they would change the hypothetical chapter 7 liquidation payout to unsecured creditors. One could argue that this would cause more chapter 13 plans to pay out, and actually could possibly reduce the number of repeat filings. This points out the difficult issues that the Commission dealt with in the consumer area, and there is obviously no easy answer.
Gerdano: Has there been a problem of creditor abuse of reaffirmations in your district?
Hershner: We see a number of reaffirmations, and I've examined a number of them in light of the Sears situation. We haven't had any of the problems that we've read about in other parts of the country. In our cases, this was something the debtor felt he needed to do because of the property involved, and was something he could handle. It usually allowed him to keep a car to get to work, so I haven't perceived a problem on the order of these other areas of the country.
Gerdano: The other issue nationally that's come up in the consumer area is the aggressive pursuit of non-dischargeability claims, particularly in the credit card area by AT&T Universal and others. The allegation is that the assertions of non-dischargeable fraud are made in a blanket way and not because there is evidence of fraud in a particular case. Rather, the goal is to get leverage on the debtor to win a reaffirmation. Have you seen these practices by national creditors?
Hershner: Within the last six months, I have seen some of that in the credit card area. Some creditors have made a commitment to pursue these cases and even bring them to trial. I suspect that leverage is a part of it, which we detect when the cases are pre-tried.
Gerdano: Is this something that should be addressed by legislation?
Hershner: I'm not sure that Congress needs to change the substantive law. It strikes me that §523 already provides enough guidance on how to handle it. The increase in cases may be just a phase and thus not something that we need legislation on.
Gerdano: Among the bills pending while we're waiting on the Commission's report is legislation that would create 18 new bankruptcy judgeships around the country. What do you think are the prospects for passage in this Congress?
Hershner: I'm optimistic that these badly-needed judgeships will be approved, and soon. The NCBJ legislative committee has worked very hard with the Administrative Office to demonstrate the need for these new positions and I would hope the Senate will be receptive, as the House already has been.
Gerdano: Next year is likely to be a big year for bankruptcy legislation, what with the Commission report and Congress moving on the judgeship bill and other legislation. What do you hope to achieve during your tenure as president of the NCBJ?
Hershner: I look forward to working with the nation's bankruptcy community, its many outstanding judges and professional organizations like the American Bankruptcy Institute. We are going to need to respond to the Commission's recommendations and help Congress assess what's necessary to keep the system strong and efficient. We will have some challenges, but I look forward to working with all our friends in the community to meet those challenges.
Gerdano: If you had to identify one problem area of the law where you would like to find a solution, what would it be?
Hershner: Serial filings are a problem. The challenge is how to strike a balance between what's fair to both creditor and debtor, and that takes into account changed circumstances, where perhaps the debtor has lost a job and needs to refile. I don't know what the magic solution would be.
Gerdano: Bright line time limits have a kind of seductive appeal here—so many filings per six years, for example. But line drawing may cause an injustice if there is not enough discretion in the court to depart from the rule.
Hershner: The bankruptcy judge needs the discretion to do what's right, what's fair and equitable.