Legislative Update

Legislative Update

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This month's update contains excerpts from a Department of Justice memorandum outlining the Department of Justice's views on a variety of provisions in the pending bankruptcy reform legislation. The full text of the document is available at ABI World (http://www.abiworld.org/legis/reform/dojcomments.html). A formal Statement of Administration Policy will be forthcoming soon from the Clinton administration.

Department of Justice Comments on Bankruptcy Reform Legislation

Means Test. Prefer Senate over House insofar as it places primary responsibility in the United States Trustee (UST) rather than private trustee to screen all chapter 7 cases filed by individuals to see if they meet the criteria for "presumed abuse" and, if so, to file the appropriate motion. This responsibility is consistent with the UST's role in policing the system and taking appropriate action to curb abuses. It would be helpful, however, to clarify two points: first, that the UST will likely delegate some of initial screening procedures to private chapter 7 trustees who conduct the §341 meetings as a matter of efficiency; and, second, if the bill continues to repose the responsibility in one party, e.g., UST, to file a presumed abuse motion, it should not be read to foreclose other authorized parties, e.g., case trustee and judge, from filing such a motion as well as circumstances dictate.

Certification. We oppose the requirement in the §102 of Senate bill of certification by debtor counsel as to the accuracy of the debtor's expense and income. This will result in debtors having fewer opportunities for responsible representation and may cause more pro se debtors. For similar reasons we object to §319 of the Senate bill. This suggests modification of the sanctions provision of Rule 9011 to force debtor's counsel to make reasonable inquiry rather than the current standard of reasonable under the circumstances. These changes will result in fewer responsible practitioners wanting involvement in representing debtors.

Discouraging abusive reaffirmation practices. The specificity of §203(b) of the Senate bill was increased significantly from earlier versions. Now besides designating a United States attorney to address abusive reaffirmation practices and carrying out duties under §3057, there are specified additional duties of that AUSA to address §§152 and 157 violations relating to materially fraudulent statements in bankruptcy schedules that are intentionally false or intentionally misleading. It is unclear as to whether primary responsibility attaches to these additional enforcement provisions. The additional language indicates a considerable move beyond the earlier concept of a point of contact for such abusive practices. We must oppose this provision even more vigorously now, as it is a completely unnecessary intrusion into the internal management of the U.S. Attorney's offices and selects which areas should receive the most enforcement attention. The Department of Justice has already made bankruptcy fraud prosecutions a priority, including establishment of a Bankruptcy Fraud Working Group and providing additional bankruptcy fraud training for the department and agency counsel. The department recognizes the importance of such prosecutions, such as the Sears case, and such a provision does not assist in their continued pursuit of such cases.

Debtor Education. In regard to the new requirements for debtor education, §104 of the House bill should be adopted over the corresponding Senate provision, §105. The House provisions, which call for an 18-month study in six pilot districts, is more realistic than the Senate version, which calls for a one-year study in three districts in terms of conducting an efficient study, and for that reason we urge their adoption.

Tax Returns. We strongly prefer §315(b) of the Senate bill over §603 (b) of the House bill in regard to requirement that debtors file copies of their tax returns, as there is no purpose to imposing that paperwork burden on debtors or the courts.

Direct Appeals. Section 612 of the House bill allows bankruptcy appeals to be taken directly to the courts of appeals, thus bypassing the district courts. Because district court involvement is constitutionally significant, we strongly oppose direct appeals in order not to weaken the arguments for protecting the current bankruptcy court system from constitutional infirmity.

Trustee Liability. Section 115 (a) of the House bill also establishes a gross negligence standard for bankruptcy trustees. We oppose this provision. The standard is too high and may leave innocent third parties and creditors unprotected.

Non-monetary Obligations. Section 215 of the House bill expands a debtor's unique power to assume executory contacts and leases notwithstanding its default. The amendment would require the debtor to cure only monetary defaults in the case of real property leases; in all other cases the non debtor may enforce its full contract rights only where the "equities" permit. This power goes too far because, in effect, it allows the debtor to rewrite the contract. The non-debtor party should not lose the full benefit of its bargain merely because its counter-party files in bankruptcy. We strongly oppose this expansion.

Assumption of Contacts. Section 305 of the House bill expands the universe of contracts which a corporate debtor or a debtor-in-possession (DIP) may assume. Currently, contacts that are not assignable under non-bankruptcy law may not be assumed or assigned by a debtor. This proposal overrides non-bankruptcy restrictions on assignment for the benefits of corporations and DIPs. This directly impacts not only personal service contracts, but also laws restricting the assignment of federal contracts. This goes too far. Federal non-bankruptcy law prevents government contractors from unilaterally assigning their contracts, including essential defense procurement contacts. It also restricts the sale of assets to foreign entities. These laws protect vital national security interests. Vindication of such interests is no less important should the federal contractor file a bankruptcy. We strongly oppose this expansion.

Single-asset Real Estate. Section 1401 of the Senate bill removes the $4 million limit from the definition of a single-asset real estate debtor. The House bill has no comparable provision. We strongly favor the cap's removal. This will expand the universe of such debtors and will enable their mortgages, such as HUD, to benefit from the limits on the automatic stay given to such creditors.

Creditors' meeting. Section 403 of the Senate bill does not require a creditors' meeting in the pre-packaged plan. This could be a potential area for fraud.

Preferences. In §411 of the Senate bill, the trustee can't avoid transfers under $5,000. This could lead to lots of $4,900 transfers, gaming system, and decreasing the estate available to pay other creditors.

Declaratory Judgments of Tax Effects. Section 1004(b) of the Senate bill would amend Bankruptcy Code §1231(d) to authorize the bankruptcy courts to enter declaratory judgments regarding the future federal tax effects of chapter 12 plans. Currently, the courts do not have such jurisdiction in any chapter. We strongly oppose this amendment.

Journal Date: 
Saturday, April 1, 2000