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The Ripple Effect

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Most states now require some form of continuing legal education, and most such programs tend to focus (as they should) on case law developments. Yet, the reality of bankruptcy practice is that it is shaped as much by rulings and practices that are never set out in published opinions as it is by the cases printed in West's Bankruptcy Reporter. Those rulings and practices in turn grow out of choices that someone has made that have a ripple effect throughout the system, altering it in ways often more far-reaching than even a Supreme Court decision.

A few examples make the point. Some districts tolerate a certain amount of "serial filings" in their chapter 13 practice, even though the case law tends to condemn it (and even though, in some cases, an argument could be made that the refiling debtors are ineligible under ß109). In some cities, the economy is such that debtors who file chapter 13 are living so close to poverty (or are already below the poverty level) that one small bump in the road that interrupts their monthly income (a car breakdown, a medical emergency, a layoff, a work slowdown) is enough to derail their plan and cause a dismissal. Without chapter 13 relief, such families often face losing the only asset of value that they are ever likely to acquire in their lifetimes—their homes. A little flexibility on tolerating serial filings often allows many people to eventually get back on their feet (at least that is what those judges believe).

The ripple effect from the practice is interesting, and not necessarily what one might expect. Rather than encouraging abusive filings, the practice tends to have the opposite, more salutary effect of discouraging abuse because judges and chapter 13 trustees favoring giving honest debtors a "second chance" become especially vigilant about policing dishonest debtors trying to take advantage of their practice. What is more, the flexibility ends up encouraging debtors to "try again," as it were, rather than simply throwing in the towel and filing chapter 7. Interestingly, new rules on serial filing in the proposed bankruptcy reform legislation will deprive courts of this flexibility, setting off new ripples that may generate (perversely) the exact opposite result of Congress' professed intentions (more on this a little later).

Some courts take a more generous approach to fees than do others, choosing intentionally not to put into a written opinion the standards for fee allowance, lest the result be a straightjacket for the judge and a bete noire for the professionals. Such courts do have standards, it should be emphasized, and the professionals come to know of them by word of mouth (and sometimes by bitter experience). By not putting fee retention and fee award rulings in writing, however, the court can adjust for circumstances. The collateral benefits are obvious (so long as the judge is also relatively consistent).

There is an obvious ripple effect here too. What a court tends to do with fees shapes everything from how professionals keep their time to how they staff a given case, or whether they even file a case in a given district or division. No one will say it, but the primary impetus for the forum shopping that results in many large cases being filed in a relatively limited number of districts has more to do with an approach-avoidance syndrome with respect to fees than it does with the usual proffered explanations (expertise of the court, convenience for the debtor and such). Indeed, a given court can quickly find itself "blackmailed" into modifying its approach to fees by the threat that certain cases will never be filed there unless a certain flexibility toward fee structures is regularly exhibited on the part of the judge or judges. For better or worse, that is the reality—never documented in the case law, of course. The ultimate result? No one knows for sure, but already the system is giving off an unfortunate bad smell that could in turn trigger new legislative curbs (which themselves could drive talented professionals away from the bankruptcy practice).

Another ripple—this one growing out of statute and case law, as it turns out—is the one set off by the oddly conflicting rules for handling jury demands in bankruptcy. Congress passed a law that made it okay for bankruptcy judges to conduct jury trials, thereby harmonizing the Judicial Code (magistrates, who also are not Article III judges, already had statutory authority to conduct such trials). The new law was also supposed to put a stop to what had become common practice: using a jury demand to judge-shop (or, more accurately, to get the case away from the bankruptcy judge). Under pressure from the Judicial Conference, however, the 1994 statute contains a proviso requiring consent by both parties before the bankruptcy judge can conduct the trial. The result? Jury demands are usually made by defendants trying to avoid trial in the bankruptcy court, and they almost uniformly refuse to consent, thereby assuring the transfer (or even dismissal) of the matter. Plaintiffs who want jury trials, in the meantime (including the debtor, debtor-in-possession and trustee), will usually initiate their suit in state court. Defendants will then try to remove the case to bankruptcy court, then demand a jury, hoping to end up in federal district court (where they will then abandon their jury demand). Did Congress (or the Judicial Conference, for that matter) anticipate this ripple effect?

One would hope so. Should Congress pass the proposed bankruptcy reform bill, there will be some interesting new ripples set off. The draconian pre-confirmation adequate protection requirements to be incorporated into chapter 13 will make that chapter much harder for debtors, while the supposed statutory gatekeeper for chapter 7, the means test, is actually little more than a loose mesh that will not keep most people who want to file under chapter 7 from doing so. The result? The new law will have the perverse effect of increasing the percentage of cases filed under chapter 7 and decreasing the number of cases filed under chapter 13.


...the primary impetus for the forum shopping that results in many large cases being filed in a relatively limited number of districts has more to do with an approach-avoidance syndrome with respect to fees than it does with the usual proffered explanations...

Did Congress see this one coming, or was that their real intention? It turns out that car finance companies will prefer chapter 7 filings because of the mandatory reaffirmation provisions in the reform legislation, so the ripple effect of the new legislation comports with Congress's real intentions. However, that was never the intention professed on the floor of the House or the Senate, where numerous legislators extolled the virtues of chapter 13, and announced that the new law would encourage people to repay their debts instead of "walking away from the debts" by filing chapter 7.

Policymakers need to pay attention to the ripples created in the system. So, for that matter, do lawyers and other professionals operating in the system. Those ripples are not always apparent in the case law, but they are readily apparent to practitioners and judges.

What we do will invariably have an impact that extends far beyond the case before us, and none of us can simply stick our heads in the sand and ignore the consequences that our choices will trigger. Some of us will try. Members of Congress will, a few years from now, shake their heads in frustration, protesting that they tried to fix the system while ignoring their own responsibility for setting off the chain of events with their own legislation. Judges will wonder why cases flee from their district, oblivious to the way in which their own rulings and procedures drive away practitioners. Lawyers will, in the service of client's professed needs, instigate practices that end up warping the entire system for years to come. The real lesson to be learned from the ripple effect, more prevalent in the bankruptcy arena than in most other practice areas, is one we all learned as children, that what we do and what we fail to do almost always has consequences. So, before you toss that big rock in the pond...

Journal Date: 
Sunday, July 1, 2001

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