On Promoting Uniform Laws Respecting Bankruptcy
The U.S. Constitution authorizes Congress to make "uniform laws respecting bankruptcy." Yet our bankruptcy laws, at least in practical application, are far from uniform. In one sense, it is probably a good thing that bankruptcy law has a different flavor in different parts of the country. The statute relies heavily on state property law, state commercial law and state exemption law, so that bankruptcy in Texas plays out somewhat differently from bankruptcy in Massachusetts, for example. Some states allow non-judicial foreclosures, inviting the use of bankruptcy as an opportunistic injunction employed at the eleventh hour. Some states' parsimonious exemption schemes make bankruptcy attractive because of their more generous exemptions.
In some areas of law, state model laws have tended to blunt this lack of uniformity. The Uniform Commercial Code, for example, though officially enacted as a separate state statute in each of the 50 states, is effectively the national law governing a broad range of commercial transactions. The same is true for various other uniform enactments. These laws thus tend to have the same impact in bankruptcy cases, regardless of what state law applies.
Uniformity seems most difficult to achieve in the way the law is actually applied in the various districts around the country. Part of this lack of uniformity is but a reflection of the fact that bankruptcy in the United States is entrusted to judicial officers who, in the honest discharge of their oath of office, will inevitably reach different conclusions about what the law means when it is applied. That "problem" (if it can even be called one) is not unique to bankruptcy. Any statute will accrete judicial glosses as litigants test the limits and meaning of its provisions in the course of trials. We try to smooth out these differences via our system of appellate review and principles of stare decisis. The more efficient we make appellate review, the more quickly and easily we arrive at more uniform interpretations that are binding on lower courts, rendering the statutes increasingly uniform. Indeed, one of the complaints that has often been voiced about the bankruptcy system of appellate review is that it is too inefficient to perform this necessary function. The extra layer of district court appellate review discourages further appeal to the circuit, yet only a circuit decision will have the effect of binding precedent that is needed to settle conflicting interpretations of the statute. Direct appeals from the bankruptcy court to the circuit courts would go a long way toward achieving greater uniformity in the application of the bankruptcy laws.
Even a more efficient system of appellate review is unlikely to completely address the need for uniformity of the bankruptcy laws, however. Some issues, by their nature, will simply never go up on appeal because the marginal cost of review cannot be justified. These are the practice issues that arise in consumer bankruptcy cases. They are national in character because they usually involve national lenders—credit card companies, home mortgage lenders, automobile finance companies and home equity lenders. With 94 judicial districts nationwide, and with many of those districts further fractured into divisions, these creditors are forced to learn and comply not only with the Bankruptcy Code as written, but also the Bankruptcy Code as applied in hundreds of different locations. The transactional costs this imposes on lenders is, of course, both frustrating and expensive.
Let me offer up an example that arose just recently in my neck of the woods. Home lenders in a chapter 13 bankruptcy case would like to be able to notify their borrowers when they fall behind one month, but are disinclined to do so for fear of being sanctioned for a stay violation. Instead, they often wait until the default is at least 60 days old, then file a motion for relief from stay. Even though the motion is heard within 30 days, by that time, the default may well now be 90 days old, and more difficult for a cash-strapped debtor to bring current. The fear of sanctions comes not from what has happened in my court, but from what lenders have experienced in other courts in other parts of the state or the country. A similar fear prevents lenders from sending notices of changes in tax and insurance escrows—even though, in Texas, state law requires the lender to give written notice to the borrower as a prerequisite to adjusting the escrow payment.
The lawyers for both the debtor and the creditor who brought this issue up on the docket were pleased that I was more than willing to approve an arrangement that would permit home mortgage lenders to send default notices to debtors without fear of reprisal. After all, the lender was certainly not expecting to be relieved from having to file a motion to lift stay as a prelude to exercising their state law enforcement remedies. All they wanted was the right to notify the debtor of a post-petition default, giving the debtor the chance to cure the problem quickly without expensive stay litigation. However, they pointed out that my willingness to arrive at a practical resolution gave little real solace to the lender. Unless other courts around the country adopted the same solution, the real savings in transactional costs would be so small as not even to justify adopting a different rule of practice for our district, no matter how practical and realistic that solution might otherwise be.
I have no illusions that the resolution I suggested is the best solution to this particular problem. Other courts have alternatives that may be just as practical. In one district, for example, post-petition home mortgage payments are made by the chapter 13 trustee under the plan (though without incurring a trustee's commission). Perhaps that is the best solution. The real point is not what the solution ought to be, but how to arrive at a uniform solution nationwide. Clearly, these are not the kinds of issues that are easily amenable to resolution via the appellate review process; the cost is too great, and it takes too long to arrive at what one would recognize as a nationwide answer. Legislative fixes, as we have seen from watching the fate of proposed bankruptcy reform over the last four or five years, can all-too-easily bog down. Often, by the time the legislative fix is in, the economic landscape has changed, and the fix has become meaningless. Even the rulemaking process is sufficiently cumbersome that it suffers from the same defect.
Bench/Bar Cooperation on Local Rules
Perhaps what is needed to deal with these kinds of uniformity problems is a national model of a process currently in use in many districts and divisions at the local level. In many cities, the consumer bar, both debtor and creditor lawyers, regularly meet to discuss these kinds of issues, and to arrive at practical solutions at the local level. Sometimes, the solution to a given problem will be adopted by tacit understanding, sometimes it will take the form of a standing order or local rule. In all events, the process tends to be relatively quick and relatively efficient. Imagine a national "commission," similarly constituted, that evaluated problems of this type and suggested a "model rule" or "model standing order," much as the commissions that draft uniform laws for enactment by state legislatures now do. The model solution could then be considered by and (hopefully) adopted by judicial districts nationwide as a local rule or standing order or practice. Granted, even this procedure could become cumbersome, but at least at the outset it offers a better hope for harmonization of procedures than do any of the current alternatives.1
The ABI Journal has a broad nationwide readership, and ABI itself may well afford the best mechanism for instituting such a "commission." At the outset, I invite the comments and reactions of my colleagues on the bench. But the Constitution's promise of uniformity is empty unless we find practical nationwide solutions to these very real nationwide problems.
1 Indeed, it is worth noting that a certain amount of "harmonization" has already begun to take hold with various districts promulgating procedures for handling first day orders in complex chapter 11 cases, often copying the work of other vanguard districts. Return to article