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CONGRESSIONAL RECORD -- Senate
Thursday, October 6, 1994
(Legislative day of Monday, September 12, 1994)
103rd Congress 2nd Session
140 Cong Rec S 14461
REFERENCE: Vol. 140 No. 144
TITLE: BANKRUPTCY REFORM ACT OF 1994
SPEAKER: MR. FORD
Mr. FORD. Mr. President, I ask unanimous consent that the Senate proceed to the immediate consideration of H. R. 5116, the bankruptcy reform bill, just received from the House; that the bill be deemed read the third time, passed, the motion to reconsider laid upon the table.
The PRESIDING OFFICER. Without objection, it is so ordered.
So the bill (H.R. 5116) was deemed read the third time, and passed.
Mr. GRASSLEY. Mr. President, I am pleased to support H.R. 5116. This bill represents the collective wisdom of the Senate and the House concerning needed bankruptcy reforms. As an original cosponsor of the Senate-passed bill, S. 540, I would have its enactment. Nonetheless, compromise is the key to enact just about anything, I can support this compromise bill as a good effort to improve our Nation's bankruptcy laws. Indeed, several of the provisions of the House bill were an improvement on the Senate language.
At this time, I would like to address a number of the issues covered by this legislation. First, I am pleased that the House has agreed to create a bankruptcy review commission.
Since the enactment of the present code in 1978, the code has not been able to accommodate the many changes in the economy and other laws. Although the code largely has functioned well, no one in 1978 could have foreseen the changed circumstances that now confront our bankruptcy system. This year, more than 900,000 bankruptcy petitions will be filed, many more than anyone could have imagined in 1978. Since 1978, the world economy has become more international in scope, and the economic boom, in part financed through debt in the 1980's, has led to a multitude of bankruptcies in the 1990's.
Additionally, new laws have been enacted whose relation to bankruptcy has not been carefully evaluated. And despite the 1984 legislation in response to the Northern Pipeline decision, the constitutionality of the current bankruptcy system is not certain. The Blue-Ribbon Bankruptcy Commission established by this bill will evaluate the code's deficiencies, substantively and operationally, and make recommendations to the Congress for legislative change. Thus, while H.R. 5116 will improve the bankruptcy system, its greatest contributions will come from the commission it creates.
One provision in section 104 of the bill concerns the establishment of bankruptcy appellate panels. The Federal courts study committee recommended that Congress require each Federal Court of Appeals establish a bankruptcy appellate panel. It also recommended that parties affirmatively opt out of the procedure or else have their cases heard under it.
Unless specified circumstances apply, the Federal Courts of Appeals will be required to establish bankruptcy appellate panels under this legislation. The Federal Courts Study Committee found that the ninth circuit's BAPS disposed of 902 appeals in 1987 and 664 in 1988, reducing the workload of both district and appellate courts, and have received favorable reviews from both bench and bar. They foster expertise, and increase the morale, of bankruptcy judges, in part by offering them an opportunity for appellate work. I am pleased that H.R. 5116 will promote this procedure.
Section 202 of the bill amends section 550 of the code relating to the recovery of preferences to insiders. Currently, section 547 of the bankruptcy code authorizes trustees to recapture preferential payments be made to creditors within 90 days prior to a bankruptcy filing. Because of the concern that corporate insiders (such as officers and directors) who are creditors of their own corporation have an unfair advantage over outside creditors, section 547 of the Bankruptcy Code further authorizes trustees to recapture any preferential payments to such insiders which were made a full year prior to a bankrputcy filing.
Several recent court decisions, beginning with Levit v. Ingersoll Rand Financial Corp. in re V.N. Deprizio Construction Co., 874 F.2d 1186 (7th Cir. 1989), have allowed trustees to recapture payments made to non-insider creditors a full year prior to the bankruptcy filing, if an insider benefits from the transfer in some way. Although the creditor is not an insider in these cases, the courts have reasoned that because the repayment benefited a corporate insider (namely the officer who signed the guarantee), the non-insider transferee should be liable for returning the transfer to the bankrupt estate as if the transferee were an insider as well.
Our legislation overrules the Deprizio line of decisions and clarifies congressional intent that non-insider transferees should not be subject to the preference provisions of the Bankruptcy Code beyond the 90-day statutory period. Our aim is to encourage commercial lenders and landlords to extend credit to smaller business entities.
Section 219 makes needed changes in the treatment of leases of personal property. Sixty days after the order for relief, the debtor will have to perform all obligations under the equipment lease, unless the court holds a hearing and determines otherwise, with the burden on the debtor. The word ''first'' as used in the section refers to the payments and the performance of all other obligations that initially become due more than 60 days after the order for relief. The purpose of that reference is to make clear the intent that the provision does not affect payments originally due prior to 60 days before the order of relief.
Title III of the bill will assist homeowners. Some homeowners attempt to prevent their homes from being foreclosed upon, even though a bankruptcy court has ordered a foreclosure sale. There may be several months between the court order and the foreclosure sale. Section 301 will preempt conflicting State laws, and permit homeowners to present a plan to pay off their mortgage debt until the foreclosure sale actually occurs. And section 305 will prevent mortgage lenders from imposing interest on interest when mortgage lenders from imposing interest on interest when mortgage arrearages are cured, even when the mortgage instrument is silent on the subject. This section will affect all future mortgages unless the mortgage expressly retains the lender's right to impose such interest on interest.
Title III also expands the criminal code's bankruptcy provision. Section 312 of the bill enacts a new section 157 to 18 U.S. Code on Bankruptcy Crimes. The provisions of section 501 of S. 540, which contained similar provisions, had a subsection (b) which contained certain provisions about requisite intent for criminal liability. The omission of these S. 540 provisions from H.R. 5116 is not intended to signal any congressional purpose to lower the standard on intent necessary to impose criminal liability on entities participating in the bankruptcy process. For example, bona fide settlements are not intended to be criminal under any provision of section 312 of H.R. 5116, nor are indeliberate errors in documents which are not part of any scheme to defraud. By way of further example, entities who act in good faith or who rely in good faith on advice of professional persons are not exposed to criminal liability under section 312.
I wish to commend Senator Heflin for his persistent efforts to see to it that we enact these necessary reforms. I look forward to studying the report of the Bankruptcy Review Commission to determine what further efforts should be made to strengthen the operation of the bankruptcy code.
Mr. HEFLIN. Mr. President, I rise to discuss H.R. 5116, the Bankruptcy Reform Act of 1994 that passed the Senate today.
The passage of this bill brings to a close almost 5 years of work on this legislation. I would like to briefly outline some of the major provisions of this legislation.
The first title of this bill is a collection of provisions intended to increase the efficiency of the bankruptcy court; helping debtors and creditors alike.
The second title relates to consumer bankruptcy issues. Included in this section is an amendment allowing for the curing of a default on a person's principal residence, as well as a provision that will help ensure child support and alimony will continue to be paid after the filing of an individual bankruptcy.
The next title addresses the area of commercial bankruptcy, specifically the role of chapter 11 in today's economy. In this section of the bill there are various provisions intended to update the bankruptcy code in light of the tremendous number of commercial filings each year.
Title four of this bill may be the most important section of the entire bill. This title establishes the national bankruptcy review commission. The commission will have the ability to review and study a wide range of problems presently facing the bankruptcy system, as well as help prepare for the future. I encourage the funding for this commission, at the earliest opportunity, and in the first appropriate vehicle, so that it can begin its' task.
I would like to mention several topics of importance that have come to my attention and which we have addressed during the consideration of this bill. This, of course, is not an exclusive list:
The establishment of provisions within chapter 11 which are designed to help small businesses reorganize quickly and more efficiently;
The problems in cases with single asset real estate;
The establishment of a bankruptcy appellant panel to afford debtors and creditors an efficient mechanism for bankruptcy appeals;
The new section 106(c) recodifies currently existing section 106(b). No substantive change in the law is intended.
The problems faced by issuing card companies when a debtor uses their card to pay Federal taxes and subsequently files for bankruptcy;
The protection of local governments ability to perfect and enforce tax liens;
The confusion over the hotel income/rents issue;
The clarification that section 365 protection for lessors requires the lessee to perform all obligations that become due or payable 60 days after the order for relief;
The highly complex and controversial issues that result from mass torts, health care, and environmental law.
Mr. President, I would like to thank all of the Members of the Senate who have worked with me on this important legislation. I am hopeful that this bill will be signed into law.
TREATMENT OF PRODUCTION PAYMENTS
Mr. SIMPSON. Mr. President, I rise for the purpose of entering into a colloquy with the distinguished Senators from Alabama and Louisiana regarding section 208 of H.R. 5116 which relates to the treatment of production payments in a bankruptcy context.
Mr. HEFLIN. I yield to my friends for the purpose of a colloquy.
Mr. SIMPSON. I have been informed that during House consideration of the bills, certain legislative language, although implied, was inadvertently omitted by the other body. This language is extremely important to the bill. It is critical that the point of this language be clarified so that we fully understand that not only the conveyance of a production payment, but also an oil and gas lease, are each real property interest, excluded from the debtor's estate in bankruptcy.
Mr. JOHNSTON. May good friend from Wyoming is correct, apparently there was some hesitation on the part of the other body to treat oil and gas leases in the bill language because there is currently no definition for an oil and gas lease in the Bankruptcy Code. The absence of a code definition in not relevant since the definition of and oil and gas lease is a matter of State statutory and case law. And further, I agree with him that production payments and oil and gas leases are both real property interests excluded from the debtor's estate in bankruptcy.
Mr. HEFLIN. I thank my good friends for bringing this matter to my attention and I certainly defer to my colleagues' expertise in the oil and gas industry. I concur that both production payments and oil and gas leases are real property interests for purposes of section 541 of the Bankruptcy Code and I will point out that in S. 540 we included language to that effect.
Mr. SIMPSON. I thank my good friend for that clarification, but I need to further point out drafting errors in the House section-by-section description printed in the Congressional Record for October 4, 1994, on page 10767. The language contains inaccuracies which must be corrected. Specifically, and I quote, ''a production payment is an interest in the product of an oil or gas producer * * *'' and ''* * * the interest in the product that is produced.'' I think we all know that a production payment is not an interest in ''product'', rather, it is an interest in certain reserves of an oil or gas producer. I further quote, ''These payments, often transferred by way of oil and gas leases, * * *'' Production payments are not transferred by oil and gas leases; they are created out of oil an gas leases by written conveyance. The sentence should instead read, ''The production payment is created out of an oil and gas lease, each of which is a real property interest.'' Finally, and I quote with reference to oil and gas producers ''generating income from their property'', it would be more appropriate to state that these capital-strapped producers may monetize their property without giving up operating control of their property.
Mr. JOHNSTON. If the Senator will yield, I would like to point out that the terms product and reserves have two very different and distinct meanings in the oil and gas industry, therefore it is important that these points be clarified. And further, I agree with him that it is impossible to transfer a production payment by virtue of an oil and gas lease; rather, a production payment is carved out of an oil and gas lease.
I agree with the Senator that it is very important to clear up any misunderstanding that may have been inadvertently created by the House regarding production payments and oil and gas leases; each of these interests is a real property interest.
Mr. SIMPSON. I might add as a final point, the record fails to clarify the treatment of oil and gas leases in a bankruptcy context. A sentence should have been included in the House text that states: ''It is not the intent of this section to permit a conveyance of a production payment or an oil and gas lease to be characterized in a bankruptcy context as a contractual interest rejectable under section 365 of the Bankruptcy Code.''
Mr. HEFLIN. I concur with the honorable Senator from Wyoming, neither production payments nor oil and gas leases should be characterized in a bankruptcy context as a contractual interest rejectable under section 365 of the Bankruptcy Code. And I thank both Senators for pointing out to me that the Congressional Record contains many inaccuracies evidencing a failure to define and understand the nature of these interests.
Mr. SIMPSON. I thank my distinguished colleagues from Alabama and Louisiana.
Mr. SIMPSON. Mr. President, I rise briefly to express my appreciation to my colleagues, Senators Howell Heflin and Charles Grassley, for their untiring work in the area of bankruptcy reform. Without their leadership, we would not see this important legislation enacted into law.
I am particularly thankful for their assistance in including an amendment I offered to the Senate bill, regarding ''Production Payments'', in this legislation.
It is important to note that the legislation we are now considering in the Senate, even though it is enrolled as a House bill, is in large part, the Senate-passed legislation that our colleagues crafted.
So I am grateful that Members of both Houses of Congress have agreed to include protection under the bankruptcy code for oil and gas production payments, as provided by my original amendment.
Mr. President, this is an issue which is very important to the oil and gas industry in the west. I would, very briefly, explain to my colleagues what my amendment to this legislation is.
The property law governing transactions in oil and gas-as to both real and personal property-has led to some confusion in bankruptcy cases.
Oil and gas exploration and development is already a very high risk undertaking, and uncertainty about how Federal courts will deal with particular issues makes it even riskier for potential investors.
This is one narrow area where we in Congress can help to reduce unreasonable risk to innocent investors.
Typically, the owner of rights to drill obtains part of the funding for a new well by agreeing to pay back the funding ''in kind''-repayment is not in cash, but in product.
That payment is a ''production payment''.
A problem has arisen in that, if the produced declares bankruptcy, then some courts have looked to the production payments as a source of additional revenue for unsecured creditors.
That is a very unfair result, Mr. President, because the owner of that production payment is blameless in the bankruptcy proceeding. Indeed, the owner of a production payment is analogous to what is known in legal terms as a ''bona fide purchaser for value''.
This legislation recognizes that a production payment transferred prior to bankruptcy is a real property interest. it is therefore excluded for the estate of the debtor who transferred that interest to the current owner.
The intent of this provision is that an oil and gas lease, out of which the production payment is created, is also recognized as a real property interest in bankruptcy law-just as that real property interest is recognized under the laws of the various States.
When we crafted this provision, we were careful to make it clear that it was not our intent to permit a conveyance of a production payment to be treated as no more than a contractual interest. Such interests are commonly recharacterized in a bankruptcy proceeding with the result that the innocent owners of production payments are ''left out in the cold''. That is precisely the type of confusion and inequity that this provision is designed to prevent in the future.
So, Mr. President, I wish to extend my appreciation to our colleagues, Senators Howell Heflin and Charles Grassley for their assistance. I would also recognize the valuable assistance provided by Oklahoma Representative Mike Synar, and House Judiciary Committee Chairman Jack Brooks, in accepting this provision as part of the final legislation which we will be voting on today. I thank them, and I thank the chair.
CREATION OF BANKRUPTCY APPELLATE PANEL SERVICES
Mr. HEFLIN. Mr. President, the intent of Section 104(c) is to require the judicial council of each circuit to establish a bankruptcy appellate panel service. However, we also recognize that there will be some circumstances in individual circuits where the establishment of a bankruptcy appellate panel service would not be a benefit to the parties or to the system. Therefore, we have included language that permits a judicial council to determine that there are insufficient judicial resources available in the circuit to create a bankruptcy appellate panel service or that creation of such a service will result in undue delay or increased cost to the parties. For example, in some circuits the majority of appeals are generated from a single large district with numerous bankruptcy judges. However, in the remaining districts within the circuit there are only one or a small number of bankruptcy judges and very few appeals. Because the legislation prohibits a bankruptcy judge from hearing an appeal that originated in the district to which they are appointed, the burden of hearing such appeals will be placed on the judges for the smaller districts, while those judges from the District with the majority of the appeals in the circuit will be eligible to hear very few appeals.
Because of this disparate distribution of appeals there may be insufficient judicial resources for the effective operation of a bankruptcy appellate panel service.
Although the number of bankruptcy cases filed each year almost reached one million, the number of bankruptcy appeals is small in comparison. The average number of appeals per circuit for the last available 12-month period was 408. As with all averages, this number is lower in some circuits and higher in others. There may be situations where the number of bankruptcy appeals filed do not warrant the creation of this new system. In some districts, the medium disposition time for disposing of bankruptcy appeals is efficient under the current system.
It should be recognized that the creation of a bankruptcy appellate panel service can help to establish a dependable body of bankruptcy case law.
I ask that a letter be printed in the Record .
There being no objection, the letter was ordered to be printed in the Record , as follows:
U.S. Department of Justice,
Office of Legislative Affairs,
Washington, DC, October 6, 1994.
Hon. Howell Heflin ,
Chairman, Subcommittee on Courts and Administrative Practice, Committee on the Judiciary, U.S. Senate, Washington, DC.
Dear Mr. Chairman: I am writing with regard to proposed bankruptcy legislation that would create a new bankruptcy fraud statute, section 312 of H.R. 5116. To put this measure in perspective, in calendar year 1993, there were over 875, 000 bankruptcy cases filed; however there were a mere 183 bankruptcy fraud prosecutions during the analogous period of FY 1993.
As recently stated by the Department of Justice in a letter to House Judiciary Committee Chairman Jack Brooks, dated September 15, 1994:
''Section 157 (of Title 18 of the United States Code), patterned after the wire and mail fraud statutes, would require proof of devising or intending to devise a 'scheme or artifice to defraud.' Like the mail fraud statute, an essential element of the proposed statute requires proof beyond a reasonable doubt of a specific intent to defraud. This is one of the highest mens rea standards in the criminal law. Because of the high burden of proof, most courses of action under the Bankruptcy Code and allowed by the bankruptcy courts are unlikely to be prosecutable under this new law or any other statute. * * * If however, there were no 'intent to defraud' present, as noted above, no prosecution could result.''
I hope that this background information allays your concerns regarding proposed section 157.
Sheila F. Anthony,
Assistant Attorney General.
Mr. BROWN. Mr. President, I wonder if the distinguished manager of the bill, the senior Senator from Alabama, is available to answer one of two questions that I have regarding this bill? Specifically, Mr. President, when S. 540, the Bankruptcy Reform Amendments, was considered by the Senate earlier this year, the Senate adopted an amendment sponsored by myself; the senior Senator from Alabama, Mr. Heflin ; and the Senator from Florida, Mr. Graham. That amendment, which ultimately became Section 221 of the Senate-passed bill, sought to codify the authority of the courts to issue permanent injunctions under certain circumstances. Can the distinguished bill manager advise me regarding the disposition of that provision? Is it included in the bill that passed the other body and is before us for approval today?
MR. HEFLIN. Mr. President, if the Senator will yield, I can advice the Senator that the provision be refers to was approved by the House and is a part of the measure we have before us today. What was Section 221 of the Senate bill is how substantively reflected in Section 111 of the House bill. Certain minor changes to the language of the provision were recommended by the House, and I understand that the provision as adopted by the House is acceptable to the various parties that have been involved in this matter.
MR. BROWN. Mr. President, I thank the distinguished bill manager for his response, and I wonder if I might make an additional inquiry? Specifically, Mr. President, I wonder if the Senator from Alabama can enlighten the Senate regarding the impact of this ''Supplemental Permanent Injunctions'' provision on those existing Injunctions that have been issued in asbestos-related Chapter 11 reorganizations, as well as its impact on any subsequent Injunction that may be issued in an asbestos-related reorganization proceeding.
Mr. HEFLIN. Mr. President, if the Senator will yield, I would be happy to respond. Mr. President, Section 111 will codify a court's authority to issue a permanent injunction to supplement the existing injunctive effect of Section 524 of the Code in asbestos-related Chapter 11 reorganizations. This section provides that, if certain defined conditions are satisfied, a court may issue a supplemental permanent injunction barring asbestos-related claims or demands against the reorganized company and channeling those claims to an independent trust. To qualify under the statute, such a trust is to be funded in whole or in part by the securities of the reorganized company, which at some time could be borrowed against, or more likely sold outright, to raise cash to pay claims; and the reorganized obligation to make future payments, including dividends, to the asbestos victims' trust.
Moreover this section is carefully limited to bankruptcy orders where certain specified conditions are satisfied, including requirements that a supermajority of the affected class of asbestos claimants vote to approve the plan creating the trust and authorizing ;the injunction, and that the terms of the injunction be set out in the plan or related documents and fully detailed in any plan description issued for the purposes of soliciting creditor approval. If and when these and other conditions are satisfied, the section provides that the affected injunction is permanent and irrevocable except on initial appeal of the plan, if any.
Mr. President, this statutory affirmation of the court's existing injunctive authority is designed to help asbestos victims receive maximum value. It does so by assuring investors, lenders, and employees that the reorganized debtor has indeed emerged from Chapter 11 free and clear of all asbestos-related liabilities other than those defined in the confirmed plan of reorganization, and that all asbestos-related claims and demands must be made against the court-approved trust. This added certainty will ensure that the full value of such a trust's assets-the securities upon which it relies in order to generate resources to pay asbestos claims-can be realized.
Finally, Mr. President, with respect to the Senator's specific question, this Section applies to injunctions in effect on or after the date of enactment. What that means is, for any injunction that may have been issued under a court's authority under the Code prior to enactment, such an injunction is afforded statutory permanence from the date of enactment forward, assuming that it otherwise meets the qualifying criteria described earlier. A good example of this would be the injunctions issued in the Manville and the UNR Industries reorganizations, both of which are intended to be covered by this section and both of which will be confirmed as permanent under this statute, so that the securities of these reorganized companies should no longer be discounted because of any fear of unknown asbestos liabilities. Regarding any prospective asbestos-related trusts and their related injunctions, they, too, would qualify under the statute so long as the criteria outlined in the proposed legislation are satisfied.
Mr. BROWN. Mr. President, I thank the distinguished bill manager for his explanation, and I am pleased that this provision has been approved by the other body and can be approved by the Senate again here today. As the Senator from Alabama has ably stated, adoption of this provision will assure that the financial markets are free to value the securities of reorganized companies such as Denver-based Manville Corporation, unencumbered by any suggestion that asbestos-related claims arising from Manville's pre-bankruptcy activities, whether existing now or manifesting in the future, may reach to the reorganized company in any fashion other than that provided in the confirmed plan of reorganization. In essence, we are affirming what Chapter 11 reorganization is supposed to be about: allowing an otherwise viable business to quantify, consolidate, and manage its debt so that it can satisfy its creditors to the maximum extent feasible, but without threatening its continued existence and the thousands of jobs that it provides. I am pleased to have been an original sponsor of this important provision, and I urge my colleagues to support it and the entire Bankruptcy Reform Amendments package that is before us today.
Mr. HATCH. Mr. President, the Bankruptcy Act of 1994 is one of the most important pieces of economic legislation to be considered and passed by the 103d Congress. It is important because it clarifies many of the existing ambiguities in our bankruptcy law that have, in essence, discouraged the extension of new credit to our businesses in Utah and throughout the Nation.
The bill responds to these concerns by offering clear guidance to both creditors and debtors as to the risks they are undertaking. It strikes a fair and delicate balance between the rights and responsibilities of creditors and the rights and obligations of debtors. More importantly, it encourages the credit community to extend much needed new capital to the well deserving businesses in our communities seeking to grow and expand. In sum, this bill is good for business, good for creditors and good for consumers.
This bill also creates a new Bankruptcy Commission to study and investigate bankruptcy issues and problems. One issue that merits careful study is the relationship of local governments to bankruptcy law. This issue is of great concern to many local governments in Utah, including Salt Lake City. We need to review how the priority provisions of the code impact our local governments as they are increasingly drawn into the bankruptcy process.
In coming to an agreement on the provisions contained in H.R. 5116, the House and the Senate have agreed to eliminate section 205 of S. 540, the Senate-passed bill. Section 205 provided that, unless a landlord obtain a stay pending appeal, the reversal or modification of an assignment of a lease will have no effect on a good faith assignee. While there is some disagreement as to the proper interpretation and implementation of the bankruptcy code in this area, I believe that the decision in in re Slocum was correct in its analysis of the law.
The House has added a new provision, section 216, to the Bankruptcy Reform Act and I would like to clarify my belief as to the purpose and intent of including this section. It is my understanding that the current statute of limitations contained in section 546(a) of title 11 requires that an avoidance action be brought within 2 years of the filing of a chapter 11 petition, even if a trustee or other estate representative is subsequently appointed or the case is later converted. Thus, under current law, if a trustee or other estate representative is appointed after the current 2 year statute of limitations expires, any actions which the trustee may discover are time-barred. This amendment has arisen from a perceived need to provide a period of time for a later appointed bankruptcy estate representative to investigate and institute actions.
This is yet another area of bankruptcy law that has ;been the subject of extensive litigation recently, and I commend the Congress for its attention to this problem. This amendment should prevent prejudice against potential defendents that would result from having to defend stale actions and should encourage estate representative to investigate and resolve actions earlier in a bankruptcy case, thus minimizing estate expenses and maximizing the value of the estate to all creditors.
On January 1, 1995, the longstanding ''Stock for Debt'' rule, which has been a fixture of U.S. tax law for fifty years, will be repealed pursuant the terms of the Revenue Reconciliation Act of 1993. The rule has been an essential tool for reorganizing and restructuring financially troubled companies in Chapter 11. I regret the repeal of the ''Stock for Debt'' rule, but the passage of this major bankruptcy reform legislation creates the perfect opportunity to reexamine the need for tax incentives to rehabilitate troubled companies.
Currently, the ''Stock for Debt'' rule allows creditors to exchange millions of dollars of debt in troubled companies for equity interests in those companies, resulting in many new financially viable business ventures. If creditors agree to the exchange, they invest in the reorganized company's future, reduce the company's debt and preserve the jobs of the company's employees.
The repeal of the ''Stock for Debt'' now means that Chapter 11 companies that exchange their stock for their debt will, in effect, be taxed on the differences between the value of the debt forgiven and the value of the stock received by the creditors. This tax liability will be satisfied by reducing the reorganized company's tax attributes-such as reducing the company's net operating losses or its tax basis in assets. By reducing these tax attributes, the creditors will be investing in a reorganized company that is worth much less. Thus, creditors will be less likely to exchange debt for stock or will demand more for the exchange. The reorganized company will be weakened-or its reorganization will fail-all to the severe detriment of its employees.
The reinstatement of the ''Stock for Debt'' exception is crucial to the hundreds of thousands of Americans whose jobs may be on the line in the months and years ahead as companies attempt to restructure. The ''Stock for Debt'' exception may make the difference between a company's survival or its failure. More important, for employees of the affected company, it could mean the difference between continued employment and unemployment.
The repeal of the ''Stock for Debt'' rule raises serious questions for those of us concerned with bankruptcy policy. As a matter of public policy, both our Bankruptcy Code and tax laws have traditionally favored the rehabilitation of troubled companies over their liquidation. Unfortunately, the Congress has deviated from our longstanding policy with the elimination of the ''Stock for Debt'' rule.
Mr. President, I urge my colleagues on both the Judiciary and Finance Committees to join me in efforts in the 104th Congress to review the need for tax incentives to rehabilitate troubled companies as well as other aspects of bankruptcy taxation.
Finally, let me again express my appreciation to Senators Heflin and Grassley for their fine leadership in crafting a bankruptcy bill acceptable to the Senate, to consumers, and to the entire bankruptcy community. I commend them for their untiring efforts and I look forward to working with them on bankruptcy tax issues in the next Congress.
CONGRESSIONAL RECORD -- House
Tuesday, October 4, 1994
103rd Congress 2nd Session
140 Cong Rec H 10752
REFERENCE: Vol. 140 No. 142-Part II
NOTICE: This is a preliminary document and is subject to revision, including addition or revisions to reflect final pagination.
TITLE: BANKRUPTCY REFORM ACT OF 1994
SPEAKER: MR. BROOKS
TEXT: Text that appears in UPPER CASE identifies statements or insertions which are not spoken By a MEMBER of the Senate on the floor.
Mr. BROOKS. Mr. Speaker, I move to suspend the rules and pass the bill (H. R. 5116) to amend title II of the United States Code, as amended.
The Clerk read as follows:
H.R. 5116 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) Short Title .-This Act may be cited as the ''Bankruptcy Reform Act of 1994''.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from Texas (Mr. Brooks ) will be recognized for 20 minutes, and the gentleman from New York (Mr. Fish ) will be recognized for 20 minutes.
The Chair recognizes the gentleman from Texas (Mr. Brooks ).
(Mr. BROOKS asked and was given permission to revise and extend his remarks.)
Mr. BROOKS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, the Bankruptcy Reform Act of 1994 will improve the administration of bankruptcy cases, as well as provide greater fairness and certainty for individuals, corporations, and governmental entities. It will help address problem areas, which have contributed to slow and inefficient case administration in the courts. The recent surge in the number of bankruptcy filings has only highlighted the need for a targeted legislative response.
This bill is clearly a consensus product. It includes most issues addressed in H.R. 6020-the bill Congressman Fish and I introduced in the 103d Congress-as well as a select number of issues addressed by Congressman Synar -a leader in the field-Congresswoman Schroeder and many others in their bankruptcy proposals.
I don't believe it is an overstatement to say that this legislation may be one of the most significant pieces of economic legislation to be considered by the House in this Congress. Without bankruptcy reform, companies, creditors, and debtors alike will continue to be placed on endless hold until their rights and obligations are adjudicated under the present system-and that slows down new ventures, new extensions of credit, and new investments.
We have been very careful in striking a balance between creditors and debtors in the legislation. The excellent work of so many of the committee members on both sides of the aisle has produced a bill that deserves the wholehearted support of this body.
But time is short. For that reason, we have been in close contact with our counterparts in the other body concerning the contours and general direction of the House bill. It is my hope that we can pass this bill today; that it can be sent to the other body and then forwarded post-haste to the President's desk to be signed into law.
Mr. Speaker, I insert in the Record a section-by-section analysis of the provisions of the Bankruptcy Reform Act of 1994.
I urge a favorable vote on this important legislation.
Bankruptcy Reform Act of 1994- Section-by-Section Description
TITLE I. IMPROVED BANKRUPTCY ADMINISTRATION
Section 101. Expedited hearing on automatic stay
Section 362(e) of the Bankruptcy Code provides that a preliminary hearing on a motion to lift the automatic stay must conclude within 30 days, with the final hearing to commence within 30 days thereafter.
Under many court interpretations, there is no specific limitation on when the final hearing on the motion to lift the stay must conclude. See, e.g., In re ML Barge Pool, 98 B.R. 957 (Bankr. E.D. Mo. 1989); In re Bogosian, 112 B.R. 2 (Bankr. D.R.I. 1990).
This section provides that the final hearing must conclude within 30 days of the preliminary hearing, unless extended by consent of the parties or for a specific time which the court finds is required by compelling circumstances. Under this standard, for example, an extension should not be available where the debtor was merely seeking to delay the bankruptcy process or had neglected to consummate a pending contract. Compelling circumstances that might justify an extension might include, for example, the bona fide illness of any party or the judge or the occurrence of an event beyond the parties' control. Such a finding must be balanced with the legitimate property rights at stake in each particular case. The Committee believes speedy conclusion of hearings on the automatic stay will reduce the time and cost of bankruptcy proceedings by preventing unjustified or unwarranted postponements of final action.
Section 102. Expedited filing of plans under chapter 11
Section 1121 of the Code, currently in effect, grants a debtor the exclusive right to file a plan during the initial 120 days after an order for relief under chapter 11. This exclusive period expires either at the end of the 120 day period if the debtor has not filed a plan, or, if the debtor has filed a plan and the plan has not bee accepted by creditors, within 180 days after the order for relief. Thereafter, any party-in-interest may file a plan. The bankruptcy court may extend or shorten the exclusive period at the request of the debtor or any other party-in-interest upon a showing of ''cause.'' Exclusivity is intended to promote an environment in which the debtor's business may be rehabilitated and a consensual plan may be negotiated. However, undue extension can result in excessively, prolonged and costly delay, to the detriment of the creditors. See. e.g., ''When Firms Go Bust.'' The Economist, August 1, 1992.
Under current law, an order extending the debtor's exclusive period to file a plan is an interlocutory order. 28 U.S.C. 1A158(a) provides that appeals from interlocutory orders of a bankruptcy judge may be made to the district court only upon leave of the district court, and not as a matter of right. Section 102 of the bill would amend 28 U.S.C. 1A158 so as to provide for an immediate appeal as of right to the district court from a bankruptcy court's order extending or reducing that debtor's exclusive period in which to file a plan. This will prevent those parties who feel they were harmed by an extension, or a failure to extend, to obtain possible recourse in the district court. The Committee intends that the district court carefully consider the circumstances of each case so appealed with a view to encouraging a fair and equitable resolution of the bankruptcy.
Section 103. Expedited procedure for reaffirmation of debts
Some uncertainty exists under current law regarding whether a separate hearing is required for a debtor to reaffirm a debt, even when the debtor is represented by an attorney who files an affidavit stating that the reaffirmation was voluntary and that is would not impose an undue hardship on the debtor. See In re Richardson, 102 B.R. 254 (Bankr. M.D. Fla. 1989); In re Churchill , B.R. 878 (Bankr. D. Colo. 1988); In re James , B.R. 582 (Bankr. W.D. Okla. 1990) (cases holding reaffirmation hearing is required); In re Carey , 51 B.R. 294 (Bankr. D.D.C. 1985); In re Reidenbach , 59 B.R. 248 (Bankr. N.D. Ohio 1986); In re Pendlebury , 94 B.R. 120 (Bankr. E.D. Tenn. 1988) (cases holding reaffirmation hearing is not required).
This section clarifies that a separate hearing is not mandatory in order to reaffirm a debt where the debtor is adequately represented by counsel. In addition, the section supplements existing safeguards by requiring that the reaffirmation agreement advise the debtor that reaffirmation is not required, and by mandating that the attorney's affidavit indicate that the debtor has been fully advised of the ramifications of the reaffirmation agreement and any default thereunder. The Committee intends that such understandings be appropriately highlighted in the agreement to ensure adequate notice to the debtor. In each of the above circumstances, the Committee intends that before the debtor agrees to a reaffirmation, that the debtor be made fully aware of his or her rights under the Bankruptcy Code to discharge the debt and of the effect of a reaffirmation to continue the debt obligation as though a bankruptcy petition had not been filed.
Section 104. Powers of bankruptcy courts
This section makes a number of changes to clarify the powers of bankruptcy courts in managing bankruptcy cases. Several of these changes are based on the recommendations of the Federal Courts Study Commission. Subsection (a) authorizes bankruptcy court judges to hold status conferences in bankruptcy cases and thereby manage their dockets in a more efficient and expenditious manner. Notwithstanding the adoption of Bankruptcy Rule 7016 (relating to pretrial conferences), some judges have appeared reluctant to do so without clear and explicit statutory authorization. This provision clarifies that such authority exists in the Bankruptcy Code in adversary and nonadversary proceedings. Subsection (b) allows the full appeal of certain bankruptcy court refusals to abstain in State law legal proceedings. As with most other portions of this Act, subsection (b) operates prospectively and applies only to cases filed after the effective date of the Act. Accordingly, it does not make any existing orders appealable. Any future decisions not to abstain, if made in cases filed before the effective date of the Act, would also be governed by present law and thus would not be appealable to the Circuit Court of Appeals. Subsection (c) provides for the establishment in each judicial circuit of a bankruptcy appellate panels, composed of sitting bankruptcy judges, to serve in place of the district court in reviewing bankruptcy court decisions. Under this subsection, the judicial council of each circuit would be required to establish a bankruptcy appellate panel service for this purpose, unless the council finds there are insufficient judicial resources available in the circuit or that establishment would result in undue delay or increased cost to the parties. Subsection (d) provides that all appeals from bankruptcy courts shall be heard by a bankruptcy appellate panel, if established and in operation as provided in 28 U.S.C. 158(b), unless a party makes a timely election to have an appeal heard by a district court. Subsections (e) and (f) conform the rulemaking procedure for bankruptcy courts to the existing procedure for other Federal courts.
Section 105. Participation by bankruptcy administrator at meetings of creditors and equity security holders.
This section clarifies that for the States in which the bankruptcy system is administered by a Bankruptcy Administrator instead of U.S. Trustee, the Bankruptcy Administrator would have the same power as a U.S. Trustee to preside at creditor's meetings and conduct examinations of the debtor.
Section 106. Definition relating to eligibility to serve on chapter 11 committees
This section amends the Bankruptcy Code to include pension benefit grantors and certain pension plans within the definition of a ''person'' for purposes of section 1102 of the Code. This section is intended to clarify that the Pension Benefit Guaranty Corporation and State employee pension funds are authorized to serve on chapter 11 committees.
Section 107. Increased incentive compensation for trustees
Private trustees are responsible for supervising chapter 7 cases, and, in some instances, chapter 11 cases, as well as for distributing funds to creditors. This section provides for an increase in the court-approved compensation payable to private trustees. Under current law, the private bankruptcy trustees may receive 15 percent of the first $ 1,000 disbursed in the case; 6 percent of the next $ 2,000 disbursed; and 3 percent of any additional monies disbursed. The section increases the maximum compensation to 25 percent of the first $ 5,000 in disbursements to creditors; 10 percent of additional amounts up to $ 50,000; 5 percent of additional amounts up to $ 1 million; and 3 percent of any amounts in excess of $ 1 million. This increased compensation is not borne by the Federal Treasury, but it to be paid by those involved in the bankruptcy system. The American Bankruptcy Institute has issued a report recommending increased trustee compensation. See Am. Bankr. Inst., American Bankruptcy Institute National Report on Professional Compensation in Bankruptcy Cases (G.R. Warner rept. 1991).
Section 108. Dollar adjustment
Subsection (a) revises the current debt limits applicable to a chapter 13 filing from a maximum of $ 100,000 of unsecured debt and $ 350,000 of secured debt to $ 250,000 of unsecured debt and $ 750,000 of secured debt. These changes should help encourage individual debtors to elect chapter 13 repayment over chapter 7 liquidation. Creditors generally benefit when a debtor elects chapter 13. Notwithstanding the fee increases in chapter 13 cases, the Committee does not intend for debtors to be able to utilize chapter 13 as an office solely to obtain discharge from certain liabilities. For example, it is not contemplated that an individual who committed to heinous crime would be able in good faith to use chapter 13 solely as a means of discharging a civil obligation owing to a harmed party. Among other things, the remaining subsections increase the current dollar limitations applicable to involuntary filings, bankruptcy priorities, and bankruptcy exemptions based on recommendations received from the Judicial Conference. This provision also provides for automatic increases in response to future inflation every 3 years.
Section 109. Premerger notification
This section conforms section 363(b)(2) of the Bankruptcy Code more closely to the requirements for antitrust review of transactions under section 7A of the Clayton Act (15 U.S.C. 18(a)). Section 7A requires parties to a merger or acquisition to notify the Department of Justice and the Federal Trade Commission and wait a specified period of time before completing the transaction, to allow for review of its competitive implications. Generally, the waiting period terminates 30 days after the filing requirement is met, but the period can be extended by a request from the Department or the FTC for additional information.
Under section 363(b)(2) of the Code, however, the section 7A waiting period for mergers and acquisitions involving assets in bankruptcy is shortened by 10 days, and could be shortened even further by order of the bankruptcy court. See, e.g., CNBC/FNN matter, FTC File No. 911-0067.
Section 109 of the bill extends the initial waiting period for transactions in bankruptcy to 15 days after the Department of Justice and the FTC receive the notification required under section 7A(a). The provision also clarifies that this waiting period can never be shortened, but only extended. Finally, the provision specifies three ways in which the 15-day waiting period can be extended: pursuant to section 7(e)(2), if the Justice Department or the FTC makes a ''second request''; pursuant to section 7A(g)(2), if the parties fail to comply; and by the court, for bankruptcy related or other reasons. The provision also makes a number of other minor clarifying changes to section 363(b)(2) of the Code.
Section 110. Allowance of creditor committee expenses
The current Bankruptcy Code is silent regarding whether members of official committees appointed in chapter 11 cases are entitled to reimbursement of their out-of-pocket expenses (such as travel and lodging), and the courts have split on the question of allowing reimbursement. See e.g., In re Lyons Machinery Co., Inc. 28 B.R. 600 (Bankr. E.D. Ark. 1983); In re Mason's Nursing Center, Inc., 73 B.R. 360 (Bankr. S.D. Fla. 1987) (cases prohibiting reimbursement); In re J.E. Jennings, Inc., 96 B.R. 500 (Bankr. E.D. Pa. 1989); In re Aviation Technical Support, Inc., 72 B.R. 32 (Bankr. W.D. Tex. 1987) (cases permitting reimbursement).
This section of the bill amends section 503(b) of the Bankruptcy Code to specifically permit members of chapter 11 committees to receive court-approved reimbursement of their actual and necessary out-of-pocket expenses. The new provision would not allow the payment of compensation for services rendered by or to the committee members.
Section 111. Bankruptcy code injunctions
This section adds a new subsection (g) to section 524 of the Code, establishing a procedure for dealing in a chapter 11 reorganization proceeding with future personal injury claims against the debtor based on exposure to asbestos-containing products. The procedure involves the establishment of a trust to pay the future claims, coupled with an injunction to prevent future claimants from suing the debtor.
The procedure is modeled on the trust/injunction in the Johns-Manville case, which pioneered the approach a decade ago in response to the flood of asbestos lawsuits, it was facing. Asbestos-related disease has a long latency period-up to 30 years or more-and many of the exposures from the 1940's, when asbestos was in widespread use as an insulating material, had become the personal injury lawsuits of the 1970's and 1980's. In 1982, when Johns-Manville filed for bankruptcy, it had been named in 12,500 lawsuits, and epidemiologists estimated that 50,000 to 100,000 more could be expected, with a potential liability totalling $ 2 billion. Kane v. Johns-Manville Corp., 843 F.2d 636, 639 (2d Cir. 1988).
From the beginning, a central element of the case was how to deal with future claimants-those who were not yet before the court, because their disease had not yet manifested itself. The parties in the Manville case devised a creative solution to help protect the future asbestos claimants, in the form of a trust into which would be placed stock of the emerging debtor company and a portion of future profits, along with contributions from Johns-Manville's insurers. Present, as well as future, asbestos personal injury claimants would bring their actions against the trust. In connection with the trust, an injunction would be issued barring new asbestos claims against the emerging debtor company. Asbestos claimants would have a stake in Johns-Manville's successful reorganization, because the company's success would increase both the value of the stock held by the trust and the company profits set aside for it.
The bankruptcy court appointed a special representative for the future claimants; this special representative was centrally involved in formulating the plan and negotiating support for it among the other creditors. The Johns-Manville plan was confirmed and upheld on appeal. Kane v. Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986), aff'd in part, rev'd in part, 78 B.R. 407 (S.D.N.Y. 1987), aff'd, 843 F.2d 636 (2d Cir. 1988). Nevertheless, lingering uncertainty in the financial community as to whether the injunction can withstand all challenges has apparently made it more difficult for the company to meet its needs for capital and has depressed the value of its stock. This has undermined the ''fresh start'' objectives of bankruptcy and the goals of the trust arrangement.
Meanwhile, following Johns-Manville's lead, another asbestos manufacturer, UNR, has resolved its chapter 11 reorganization with a similar trust/injunction arrangement. And other asbestos manufacturers are reportedly considering the same approach.
The Committee remains concerned that full consideration be accorded to the interests of future claimants, who, by definition, do not have their own voice. Nevertheless, the Committee also recognizes that the interests of future claimants are ill-served if Johns-Manville and other asbestos companies are forced into liquidation and lose their ability to generate stock value and profits that can be used to satisfy claims. Thus, the tension present in the trust/injunction mechanism is not unlike the tension present in bankruptcy generally.
The Committee has approved section 111 of the bill in order to strengthen the Manville and UNR trust/injunction mechanisms and to offer similar certitude to other asbestos trust/injunction mechanisms that meet the same kind of high standards with respect to regard for the rights of claimants, present and future, as displayed in the two pioneering cases. The Committee believes Johns-Manville and UNR were aided in meeting these high standards, in part at least, by the perceived legal uncertainty surrounding this mechanism, which created strong incentives to take exceptional precautions at every stage of the proceeding. The Committee has concluded, therefore, that creating greater certitude regarding the validity of the trust/injunction mechanism must be accompanied by explicit requirements simulating those met in the Manville case.
Section 111 requires, in order for present claimants to be bound by a trust/injunction, that the trust have the capability of owning a majority of the shares of the debtor or its parent or of a subsidiary; that the debtor prove that it is likely to be subject to substantial future asbestos claims, the number of which cannot be easily predicted, and that the trust is needed in order to deal equitably with present and future claims; and that a separate creditor class be established for those with present claims, which must vote by a 75 percent margin to approve the plan.
In order for future claimants to be bound by a trust/injunction, section 111 requires that the trust operate in a structure and manner necessary to give reasonable assurance that the trust will value, and be able to pay, similar present and future claims in substantially the same manner.
The asbestos trust/injunction mechanism established in the bill is available for use by any asbestos company facing a similarly overwhelming liability. It is written, however, so that Johns-Manville and UNR, both of which have met and surpassed the standards imposed in this section, will be able to take advantage of the certainty it provides without having to reopen their cases.
Section 111 contains a rule of construction to make clear that the special rule being devised for the asbestos claim trust/injunction mechanism is not intended to alter any authority bankruptcy courts may already have to issue injunctions in connection with a plan or reorganization. Indeed, Johns-Manville and UNR firmly believe that the court in their cases had full authority to approve the trust/injunction mechanism. And other debtors in other industries are reportedly beginning to experiment with similar mechanisms. The Committee expresses no opinion as to how much authority a bankruptcy court may generally have under its traditional equitable powers to issue an enforceable injunction of this kind. The Committee has decided to provide explicit authority in the asbestos area because of the singular cumulative magnitude of the claims involved. How the new statutory mechanism works in the asbestos area may help the Committee judge whether the concept should be extended into other areas.
Section 112. Authority of bankruptcy judges to conduct jury trials in civil proceedings
This section would amend title 28 of the United States Code to clarify that bankruptcy judges may conduct jury trials and enter appropriate orders consistent with those trials if designated by the district court and with the express consent of all parties to the bankruptcy proceeding.
This amendment world clarify a recent Supreme Court decision and resolve conflicting opinions among the different circuits regarding this issue. The Supreme Court in conflicting opinions among the different circuits regarding this issue. The Supreme Court in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), held that in bankruptcy core proceedings, there is a constitutional right to a trial by jury.
The Granfinanciera court had no finding on whether bankruptcy judges could conduct civil trials, and the circuits have reached contrary opinions regarding this issue. Five circuits have held that, in the absence of enabling legislation, bankruptcy judges could not hold jury trials. See Official Committee of Unsecured Creditors v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122 (4th Cir. 1993); In re Grabill Corp., 987 F.2d 1153, reh'g en hand denied, 976 F.2d 1126 (7th Cir. 1992); Raforth v. National Union Fire Insurance Co. (In re Baker & Getty Financial Services Inc., 954 F.2d 1169 (6th Cir. 1992); Kaiser Steel Corp v. Frates (In re Kaiser Steel Corp., 911 F.2d 380 (10th Cir. 1990); In re United Missouri Bank of Kansas City, N.A., 901 F.2d 1449 (8th Cir. 1990). The Second Circuit has been the lone circuit to hold that bankruptcy judges have implicit authority to conduct jury trials. See In re Ben Cooper, Inc., 896 F.2d 1394 (2d Cir. 1990).
Section 113. Sovereign immunity
This section would effectively overrule two Supreme Court cases that have held that the States and Federal Government are not deemed to have waived their sovereign immunity by virtue of enacting section 106(c) of the Bankruptcy Code. In enacting section 106(c), Congress intended to make provisions of title 11 that encompassed the words ''creditor,'' ''entity, '' or ''governmental unit'' applicable to the States. Congress also intended to make the States subject to a money judgment. But the Supreme Court in Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989), held that even if the State did not file a claim, the trustee in bankruptcy may not recover a money judgment from the State notwithstanding section 106(c). This holding had the effect of providing that preferences could not be recovered from the States. In using such a narrow construction, the Court held that use of the ''trigger words'' would only bind the States, and not make them subject to a money judgment. The Court did not find in the text of the statute an ''unmistakenly clear'' intent of Congress to waive sovereign immunity in accordance with the language promulgated in Atascadero State Hospital v. Scanlon, 473 U.S. 234, 242 (1985).
The Court applied this reasoning in United States v. Nordic Village, Inc., 112 S. Ct. 1011 (1992), in not allowing a trustee to recover a postpetition payment by a chapter 11 debtor to the Internal Revenue Service. The Court found that there was no such waiver expressly provided within the text of the statute.
This amendment expressly provides for a waiver of sovereign immunity by governmental units with respect to monetary recoveries as well as declaratory and injunctive relief. It is the Committee's intent to make section 106 conform to the Congressional intent of the Bankruptcy Reform Act of 1978 waiving the sovereign immunity of the States and the Federal Government in this regard. Of course the entire Bankruptcy Code is applicable to governmental units where sovereign immunity is not or cannot be asserted. As suggested by the Supreme Court, section 106(a)(1) specifically lists those sections of title 11 with respect to which sovereign immunity is abrogated. This allows the assertion of bankruptcy causes of action, but specifically excludes causes of action belonging to the debtor that become property of the estate under section 541. The bankruptcy and appellate courts will have jurisdiction to apply the specified sections to any kind of governmental unit as provided in section 106(a)(2). The bankruptcy court may issue any kind of legal or equitable order, process, or judgment against a governmental unit authorized by these sections or the rules, but may not enter an award for punitive damages.
Furthermore, in awarding fees or costs under the Bankruptcy Code or under the Bankruptcy Rules, the award is subject to the hourly rate limitations contained in section 2412(d)(2)(a), title 28, United States Code, and these limitations are applicable to all governmental units, not just the Federal Government. Section 106(a)(4) permits an order, process, or judgment to be enforced against a governmental unit in accordance with appropriate nonbankruptcy law. Thus, an order against a governmental unit will not be enforceable by attachment or seizure of government assets, but will be subject to collection in the same manner and subject to the same nonbankruptcy law procedures as other judgments that are enforceable against governmental units. Of course, the court retains ample authority to enforce nonmonetary orders and judgments. Nothing in this section is intended to create substantive claims for relief or causes of action not otherwise existing under title 11, the Bankruptcy Rules, or nonbankruptcy law.
Section 106(b) is clarified by allowing a compulsory counterclaim to be asserted against a governmental unit only where such unit has actually filed a proof of claim in the bankruptcy case. This has the effect of overruling contrary case law, such as Sullivan v. Town & Country Nursing Home Services, Inc., 963 F.2d 1146 (9th Cir. 1992); In re Gribben, 158 B.R. 920 (S.D.N.Y. 1993); and In re the Craftsman, Inc., 163 B.R. 88 (Bankr. W.D. Tex. 1994), that interpreted section 106(a) of current law.
Section 114. Service of process in bankruptcy proceedings on an insured depository institution
This section operates to amend bankruptcy rule 7004 to require that service of process to an insured depository institution be accomplished by certified mail in a contested matter or adversary proceeding. The rule that is presently in operation only requires that service be achieved by first class mail.
Section 115. Meetings of creditors and equity security holders
This section, applicable only in chapter 7 cases, requires the trustee to orally examine the debtor to ensure that he or she is informed about the effects of bankruptcy, both positive and negative. Its purpose is solely informational; it is not intended to be an interrogation to which the debtor must give any specific answers or which could be used against the debtor in some later proceeding. No separate record need be kept of the examination since it will be preserved along with the remainder of the record of the meeting, which normally is recorded on tape.
The trustee conducting the meeting of creditors is directed to orally inquire whether the debtor is aware of the consequences of bankruptcy, including protections such as those provided by the discharge and the automatic stay, as well as the fact that the bankruptcy filing will appear on the debtor's credit history. Since different creditors treat bankruptcy debtors differently, the trustee is not expected to predict whether the bankruptcy filing will make it more or less difficult for the debtor to obtain credit; some creditors may treat the debtor more favorably after bankruptcy has removed all other debts, and many creditors consider a bankruptcy filing a barrier to new credit only if it occurred in the 2 or 3 years prior to the credit application. For the same reasons, it is not expected that the trustee would predict whether a dismissal or conversion of the bankruptcy which has already been filed would improve the debtor's chances of obtaining credit.
The trustee must also verify that the debtor has knowingly signed the section of the bankruptcy petition stating the debtor's awareness of the right to file under other chapters of the Code.
Finally, the trustee must make sure the debtor is aware of the effect of reaffirming a debt. Since section 103 of the bill eliminates for most debtors the warnings and explanations concerning reaffirmation previously given by the court at the discharge hearing, it is important that trustees explain not only the procedures for reaffirmation, but also the potential risks of reaffirmation and the fact that the debtor may voluntarily choose to repay any debt to a creditor without reaffirming the debt, as provided in Bankruptcy Code section 524(f).
In view of the amount of information involved and the limits on the time available for meetings of creditors, trustees or courts may provide written information on these topics at or in advance of the meeting and the trustee may then ask questions to ensure that the debtor is aware of the information.
Section 116. Tax assessment
This section expands the tax exception to the automatic stay that is contained in 11 U.S.C. 1A362(b)(9). This section will lift the automatic stay as it applies to a tax audit, a demand for tax returns, assessment of an uncontested tax liability, or the making of certain assessments of tax and issuance of a notice and demand for payment for such assessment. The language of this provision is only intended to apply to sales or transfers to the debtor. It has no application to sales or transfers to third parties, such as in sales free and clear of tax liens under section 363(f).
Section 117. Additional trustee compensation
This section provides an additional $ 15 compensation for the services of a trustee in a chapter 7 case in addition to the $ 45 already provided for in Bankruptcy code section 330(n). To obtain the funds to pay the additional fees, the Judicial Conference of the United States is required to prescribe additional fees payable by parties as provided in section 1914(b) of title 29; the Judicial Conference of the United States is also authorized to prescribe fees for notices of appearances filed by parties-in-interest after a bankruptcy case is filed and fees to be charged against distributions to creditors. The latter fees would be deducted, by trustees or other entities making distributions, from the monies payable to creditors, constituting user fees charged to those who participate in bankruptcy cases by receiving distributions. Since the fees are payable by the creditors from funds to be distributed to them, such deductions would not affect the application of the best interests of creditors test or other tests for confirmation in chapters 11, 12 or 13. No higher payment from the debtor would be necessary to meet these tests due to the deduction. It is the Committee's intention that the funds for this increase not be borne by the Federal Treasury or by debtors in chapter 7 or 13 cases.
TITLE II. COMMERCIAL BANKRUPTCY ISSUES
Section 201. Aircraft equipment and vessels; rolling stock equipment
Section 201 would effectuate a number of changes. It would amend both sections 1110 and 1168 to delete the phrase ''purchase-money equipment'' in order to clarify that these sections protect all lease financing agreements and all debt financings that involve a security interest, not only security interests obtained at the time the equipment is acquired. This change would be phased in so that only new equipment first placed in service after enactment of the amendment would be affected. Once this rule is fully phased in, the distinction between leases and loans would no longer be relevant for the purposes of these sections.
During the time before this rule is phased in, a safe harbor definition of the term ''lease'' for equipment first placed in service prior to the date of enactment would apply. Under the safe harbor, a lease would receive section 1110 or section 1168 protection if the lessor and the debtor, as lessee, have expressed in the lease agreement, or a substantially contemporaneous writing, that such agreement is to be treated as a lease for Federal income tax purposes. This section also clarifies that the rights of a section 1110 or section 1168 creditor would not be affected by section 1129 ''cram-down.''
Section 202. Limitation on liability of non-insider transferee for avoided transfer
Section 547 of the Bankruptcy Code authorizes trustees to recapture preferential payments made to creditors within 90 days prior to a bankruptcy filing. Because of the concern that corporate insiders (such as officers and directors) who are creditors of their own corporation have an unfair advantage over outside creditors, secton 547 of the Bankruptcy
Code further authorizes trustees to recapture preferential payments made to such insiders in their capacity as creditors a full year prior to a bankruptcy filing. Several recent court decisions have allowed trustees to recapture payments made to non-insider creditors a full year prior to the bankruptcy filing, if an insider benefits from the transfer in some way. See Levit v. Ingersoll Rand Financial Corp. ( In re V.N. DePrizio Construction Co. ), 874 F.2d 1186 (7th Cir. 1989); Ray v. City Bank & Trust Co. ( In re C&L Cartage Co. ), 899 F.2d 1490 (6th Cir. 1990); Manufacturers Hanover Leasing Corp. v. Lowrey ( In re Robinson Brothers Drilling ), 892 F.2d 850 (10th Cir. 1989). Although the creditor is not an insider in these cases, the courts have reasoned that because the repayment benefitted a corporate insider (namely the officer who signed the guarantee) the non-insider transferee should be liable for returning the transfer to the bankrupt estate as if it were an insider as well. This section overrules the DePrizio line of cases and clarifies that non-insider transferees should not be subject to the preference provisions of the Bankruptcy Code beyond the 90-day statutory period.
Section 203. Perfection of purchase-money security interest
Section 547(c)(3) of the Bankruptcy Code provides that a trustee may not avoid the perfection of purchase-money security interest as a preference if it occurs within 10 days of the debtor receiving possession of the property. This section conforms bankruptcy law practices to most States' practice by granting purchase-money security lenders a 20-day period in which to perfect their security interest.
Section 204. Continued perfection
This section sets forth an amendment to sections 362 and 546 of the Bankruptcy Code to confirm that certain actions taken during bankruptcy proceedings pursuant to the Uniform Commercial Code to maintain a secured creditor's position as it was at the commencement of the case do not violate the automatic stay. Such actions could include the filing of a continuation statement and the filing of a financing statement. The steps taken by a secured creditor to ensure continued perfection merely maintain the status quo and do not improve the position of the secured creditor.
Section 205. Impact of lease rejection on leases
This section clarifies section 365 of the Bankruptcy Code to mandate that lessees cannot have their rights stripped away if a debtor rejects its obligations as a lessor in bankruptcy. This section expressly provides guidance in the interpretation of the term ''possession'' in the context of the statute. The term has been interpreted by some courts in recent cases to be only a right of possession. See In re Carlton Restaurant, Inc. , 151 B.R. 353 (Bankr. E.D. Pa. 1993) (preventing a tenant from assigning the lease); Home Express, Inc. v. Arden Associates, Ltd. ( In re Arden and Howe Associates, Ltd. ), 152 B.R. 971 (Bankr. E.D. Cal. 1993) (preventing a tenant from enforcing restrictive covenants in the least); In re Harborview Development 1986 Limited Partnership , 152 B.R. 897 (D.S.C. 1993) (holding that ''possession'' contemplated by the Code was physical possession of the premises denying a holder of a ground lease protection under the Code). This section will enable the lessee to retain its rights that are appurtenant to its leasehold. These rights include the amount and timing of payment of rent or other amounts payable by the lessee, the right to use, possess, quiet enjoyment, sublet, or assign.
Section 206. Contents of plan
This amendment conforms the treatment of residential mortgages in chapter 11 to that in chapter 13, preventing the modification of the rights of a holder of a claim secured only by a security interest in the debtor's principal residence. Since it is intended to apply only to home mortgages, it applies only when the debtor is an individual. It does not apply to a commercial property, or to any transaction in which the creditor acquired a lien on property other than real property used as the debtor's residence. See In re Hammond , 276 F.3d 52 (3d Cir. 1994); In re Rameriz , 62 B.R. 668 (Bankr.S.D.Cal. 1986).
Section 207. Priority for independent sales representatives
This section clarifies that independent sales representatives of a bankrupt debtor are entitled to the same priority as the employees of the debtor codifying In re Wang Laboratories, Inc. , 164 B.R. 404 (Bankr. Mass. 1994). This section modifies section 507 of title 11 to include such representatives in the section's third priority as employees for the purposes of claims of a bankrupt debtor. The section specifies that in order to be treated as an employee for the purposes of priority, at least 75 percent of the income of the independent sales representative must have been earned as an independent contracting entity from the bankrupt debtor.
Section 208. Production payments
A production payment is an interest in the product of an oil or gas producer that lasts for a limited period of time and that is not affected by production costs. The owner has no other interest in the property or business of the producer other than the interest in the product that is produced. These payments, often transferred by way of oil and gas leases, represent a means by which capital-strapped oil producers may generate income from their property without giving up operating control of their business. Although a number of states use the ownership theory by treating production payments as conveying interests in real property ( See In re Simasko Production Co. , 74 B.R. 947 (D. Colo. 1987) (production payment treated as separate properly interest)), it is not clear that this treatment will necessarily apply in all States in case of bankruptcy. As a result, this section modifies section 541 of the Bankruptcy Code to exclude production payments sold by the debtor prior to a bankruptcy filing from the debtor's estate in bankruptcy.
Section 209. Seller's rights to reclaim goods
Section 209 addresses the concerns of trade creditors who claim they often have insufficient notice to exercise their reclamation rights. Section 209 amends section 546(c)(1) of the Bankruptcy Code to give trade creditors up to 10 extra days to utilize reclamation rights after the commencement of a bankruptcy case.
Section 210. Investment of money of the estate
Section 345 of the Code governs investments of the funds of bankrupt estates. The purpose is to make sure that the funds of a bankrupt that are obligated to creditors are invested prudently and safely with the eventual goal of being able to satisfy all claims against the bankrupt estate. Under current law, all investments are required to be FDIC insured, collateralized or bonded. While this requirement is wise in the case of a smaller debtor with limited funds that cannot afford a risky investment to be lost, it can work to needlessly handcuff larger, more sophisticated debtors. This section would amend the Code to allow the courts to approve investments other than those permitted by section 345(b) for just cause, thereby overruling In re Columbia Gas Systems, Inc., 1994 WL 463514 (3rd Cir. (Del).
Section 211. Selection of private trustees in chapter 11 cases
This section will conform selection of private trustees in chapter 11 cases to the selection process in chapter 7 cases, thereby allowing creditors in a chapter 11 case to elect their own trustee under section 1104 of chapter 11.
Section 212. Limited liability partnerships
Section 723 of the Bankruptcy Code addresses the personal liability of general partners for the debts of the partnership. Section 723 grants the trustee a claim against ''any general partner'' for the full partnership deficiency owing to creditors to the extent the partner would be personally liable for claims against the partnership. It is unclear how this provision would be construed to apply with regard to registered limited liability partnerships which have been authorized by a number of States since the advent of the 1978 Bankruptcy Code. This section clarifies that a partner of a registered limited liability partnership would only be liable in bankruptcy to the extent a partner would be personally liable for a deficiency according to the registered limited liability statute under which the partnership was formed.
Section 213. Impairment of Claims and Interests
The principal change in this section is set forth in subsection (d) and relates to the award of postpetition interest. In a recent Bankruptcy Court decision in In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), unsecured creditors were denied the right to receive postpetition interest on their allowed claims even though the debtor was liquidation and reorganization solvent. The New Valley decision applied section 1124(3) of the Bankruptcy Code literally by asserting, in a decision granting a declaratory judgment, that a class that is paid the allowed amount of its claims in cash on the effective date of a plan is unimpaired under section 1124(3), therefore is not entitled to vote, and is not entitled to receive postpetition interest. The Court left open whether the good faith plan proposal requirement of section 1129(a)(3) would require the payment of or provision for postpetition interest. In order to preclude this unfair result in the future, the Committee finds it appropriate to delete section 1124(3) from the Bankruptcy Code.
As a result of this change, if a plan proposed to pay a class of claims in cash in the full allowed amount of the claims, the class would be impaired entitling creditors to vote for or against the plan of reorganization. If creditors vote for the plan of reorganization, it can
be confirmed over the vote of a dissenting class of creditors only if it complies with the ''fair and equitable'' test under section 1129(b)(2) of the Bankruptcy code and it can be confirmed over the vote of dissenting individual creditors only if it complies with the ''best interests of creditors'' test under section 1129(a)(7) of the Bankruptcy Code.
The words ''fair and equitable'' are terms of art that have a well established meaning under the case law of the Bankruptcy Act as well as under the Bankruptcy Code. Specifically, courts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors' claims must be paid in full, including postpetition interest, before equity holders may participate in any recovery. See, e.g., Consolidated Rock Products Co. v. Dubois, 312 U.S. 510, 527, 61 S.Ct. 675, 685 (1941); Dentureholders Protective Committee of Continental Inv. Corp., 679 F.2d 264 (1st Cir.), cert. denied, 459 U.S. 894 (1982) and cases cited therein.
With respect to section 1124(1) and (2), subsection (d) would not change the beneficial 1984 amendment to section 1129(a)(7) of the Bankruptcy code, which excluded from application of the best interests of creditors test classes that are unimpaired under section 1124.
The other subsections deal with the issue of late-filed claims. The amendment to section 502(b) is designed to overrule In re Hausladen, 146 B.R. 557 (Bankr. D. Minn. 1992), and its progeny by disallowing claims that are not timely filed. The amendment also specifies rules relating to the filing of certain governmental claims. These changes are not intended to detract from the ability of the court to extend the bar date for claims when authorized to do so under the Federal Rules of Bankruptcy Procedure. The amendments to section 726(a) of the Code, governing the distribution of property of the estate in a chapter 7 liquidation, conform to the amendments to section 1129(b) and 502(b). The amendments to paragraphs (2) and (3) of section 726(a) assure that the disallowance of late-filed claims under new section 502(b)(4) does not affect their treatment under section 726(a).
Section 214. Protection of security interest in postpetition rents
Under current section 552 of the Bankruptcy Code, real estate lenders are deemed to have a security interest in postpetition rents only to the extent their security interest has been ''perfected'' under applicable State law procedures, Butner v. United States, 440 U.S. 48 (1979). Inclusion under section 552, in turn, allows such proceeds to be treated as ''cash collateral'' under section 363(a) of the Bankruptcy Code, which prohibits a trustee or debtor-in-possession from using such proceeds without the consent of the lender or authorization by the court. In a number of States, however, it is not feasible for real estate lenders to perfect their security interest prior to a bankruptcy filing; and, as a result, courts have denied lenders having interests in postpetition rents the protection offered under sections 552 and 363 of the Bankruptcy Code. See, e.g., In re Multi-Group III Ltd. Partnership, 99 B.R. 5 (Bankr. D. Ariz. 1989); In re Association Center Ltd. Partnership, 87 B.R. 142 (Bankr. W.D. Wash. 1988); In re TM Carlton House Partners, Ltd., 91 B.R. 349 (Bankr. E.D. Pa. 1988); In re Metro Square, 93 B.R. 990 (Bankr. D. Minn. 1988). Section 214 provides that lenders may have valid security interests in postpetition rents for bankruptcy purposes notwithstanding their failure to have fully perfected their security interest under applicable State law. This is accomplished by adding a new provision to section 552 of the Bankruptcy Code, applicable to lenders having a valid security interest which extends to the underlying property and the postpetition rents.
Section 214 also clarifies the bankruptcy treatment of hotel revenues which have been used to secure loans to hotels and other lodging accommodations. These revenue streams, while critical to a hotel's continued operations, are also the most liquid and most valuable collateral the hotel can provide to its financiers. When the hotel experiences financial distress, the interests of the hotel operations, including employment for clerks, maids, and other workers can collide with the interests of persons to whom the revenues are pledged. Section 214 recognizes the importance of this revenue stream for the two competing interests and attempts to strike a fair balance between them. Thus, subsection (a) expressly includes hotel revenues in the category of collateral in which postpetition revenues are subject to prepetition security interests, and subsection (b) includes such revenues in ''cash collateral'' as defined in section 363.
These clarifications of the rights of hotel financiers are, however, circumscribed. A critical limit is the ''equities of the case'' provision in subsection (a) which is designed, among other things, to prevent windfalls for secured creditors and to give the courts broad discretion to balance the protection of secured creditors, on the one hand, against the strong public policies favoring continuation of jobs, preservation of going concern values and rehabilitation of distressed debtors, generally. Further circumscription is supplied by the list of exceptions at the beginning of subsection (a). Thus, among other things, the reference to section 363 permits use of pledged revenues if adequate protection is provided; the reference to section 506(c) permits broad categories of operating expenses-such as the cost of cleaning and repair services, utilities, employee payroll and the like-to be charged against pledged revenues; the reference to section 522 protects individual debtors' rights; and the reference to sections 544, 545, 547 and 548 protect the debtor's right to use all its avoiding powers against the lienholder. These rights, preserved by the list of sections, would not be waivable by the debtor, either pre- or postpetition.
Section 215. Netting of swap agreements
Parties active in the foreign exchange market generally document spot and forward foreign exchange transactions under a netting agreement. The Bankruptcy Code's definition of ''swap agreement'' refers only to foreign exchange contracts, but is silent as to whether spot transactions fall within the definition. This section confirms the market understanding that spot foreign exchange contracts are included in the term ''swap agreement.'' It is expected that contracts that mature in a period of time equalling 2 days or less will fall under the umbrella of ''swap agreements.''
Section 216. Limitation of avoiding powers
This section clarifies section 546(a)(1) of the Bankruptcy Code which imposes a 2-year statute of limitations within which an appointed trustee must bring an avoidance action. The purpose of a statute of limitations is to define the period of time that a party is at risk of suit. This section defines the applicable statute of limitations as 2 years from the entry of an order of relief or 1 year after the appointment of the first trustee if such appointment occurs before the expiration of the original 2-year period. The section is not intended to affect the validity of any tolling agreement or to have any bearing on the equitable tolling doctrine where there has been fraud determined to have occurred. The time limits are not intended to be jurisdictional and can be extended by stipulation between the necessary parties to the action or proceeding.
Section 217. Small business
This section amends title 11 to expedite the process by which small businesses may reorganize under chapter 11. For the purposes of this section, a small business is defined as one whose aggregate noncontingent liquidated secured and unsecured debts are less than $ 2,000,000 as of the date of the bankruptcy filing. A qualified small business debtor who elects coverage under this provision would be permitted to dispense with creditor committees; would have an exclusivity period for filing a plan of 100 days; and would be subject to more liberal provisions for disclosure and solicitation of acceptances for a proposed reorganization plan under Code section 1125. This section permits an extension with respect to the debtor's original filing time if the debtor shows there were circumstances beyond its control.
Section 218. Single asset real estate
This section will add a new definition to the Code for ''single asset real estate,'' meaning real property that constitutes a single property or project (other than residential property with fewer than four units) which generates substantially all of the gross income of the debtor and has aggregate noncontingent, liquidated secured debts in an amount up to $ 4 million. It amends the automatic stay provision of section 362 to provide special circumstances under which creditors of a single asset real estate debtor may have the stay lifted if the debtor has not filed a ''feasible'' reorganization plan within 90 days of filing, or has not commenced monthly payments to secured creditors.
Section 219. Leases of personal property
Under current law, when a debtor files for bankruptcy, it has an unspecified period of time to determine whether to assume or reject a lease of personal property. Pending a decision to assume or reject, lessors are permitted to petition the court to require the lessee to make lease payments to the extent use of the property actually benefits the estate. Section 219 responds to concerns that this procedure may be unduly burdensome on lessors of personal property, while safeguarding the debtors ability to make orderly decisions regarding assumption or rejection. The section amends section 365(d) to specify that 60 days after the order for relief the debtor must perform all obligations under an equipment lease, unless the court, after notice and a hearing and based on the equities of the case, orders otherwise. This will shift to the debtor the burden of bringing a motion while allowing the debtor sufficient breathing room after the bankruptcy petition to make an informed decision. Section 363(e) is also amended to clarify that the lessor's interest is subject to ''adequate protection.'' Such remedy is to the exclusion of the lessor's being able to seek to lift the automatic stay under section 363. Finally, section 365(b) is clarified to provide that when sought by a debtor, a lease can be cured at a nondefault rate (i.e., it would not need to pay penalty rates).
Section 220. Exemption for small business investment companies
This section specifies that small business investment companies are ineligible to file for bankruptcy protection. This will prevent such filings from being utilized to subordinate the interests of the Small Business Administration to other creditors.
Section 221. Payment of taxes with borrowed funds
This section makes loans that are used to pay Federal taxes nondischargeable under section 523. This will facilitate individuals' ability to use their credit cards to pay their Federal taxes.
Section 222. Return of goods
This section clarifies section 546 of the Bankruptcy Code by adding a subsection (b) permitting a bankruptcy court to hold a hearing and allow a buyer to return to the seller goods shipped before the commencement of the case if it is in the best interests of the estate. This will allow debtors to return unsold goods in order to offset their debts. The notion may only be made by the trustee and must be made within 120 days after the order for relief.
Section 223. Proceeds of money order agreements
This section excludes from the debtor's estate proceeds from money orders sold within 14 days of the filing of the bankruptcy pursuant to an agreement prohibiting the commingling of such sale proceeds with property of the debtor. To benefit from this section, the money order issuer must have acted, prior to the petition, to require compliance with the commingling prohibition.
Section 224. Trustee duties; professional fees
Subsection (a) requires the United States Trustee to invoke procedural guidelines regarding fees in bankruptcy cases and file comments with fee applications. The section also clarifies the standards for court award of professional fees in bankruptcy cases. These changes should help foster greater uniformity in the application for and processing and approval of fee applications.
Section 225. Notice of creditors
This section amends section 342 of the Bankruptcy Code to require that notices to creditors set forth the debtor's name, address, and taxpayer identification (or social security) number. The failure of a notice to contain such information will not invalidate its legal effect, for example, such failure could not result in a debtor failing to obtain a discharge with respect to a particular creditor.
The Committee anticipates that the Official Bankruptcy Forms will be amended to provide that the information required by this section will become a part of the caption on every notice given in a bankruptcy case. As with other similar requirements, the court retains the authority to waive this requirement in compelling circumstances, such as those of a domestic violence victim who must conceal her residence for her own safety.
TITLE III. CONSUMER BANKRUPTCY ISSUES
Section 301. Period for curing default relating to principal residence
Section 1322(b)(3) and (5) of the Bankruptcy Code permit a debtor to cure defaults in connection with a chapter 13 plan, including defaults on a home mortgage loan. Until the Third Circuit's decision in Matter of Roach, 824 F.2d 1370 (3d Cir. 1987), all of the Federal Circuit Courts of Appeal had held that such right continues at least up until the time of the foreclosure sale. See In re Glenn, 760 F.2d 1428 (6th Cir. 1985), cert, denied, 474 U.S. 849 (1985); Matter of Clark, 738 F.2d 869 (7th Cir. 1984), cert, denied, 474 U.S. 849 (1985). The Roach case, however, held that the debtor's right to cure was extinguished at the time of the foreclosure judgment, which occurs in advance of the foreclosure sale. This decision is in conflict with the fundamental bankruptcy principle allowing the debtor a fresh start through bankruptcy.
This section of the bill safeguards a debtor's rights in a chapter 13 case by allowing the debtor to cure home mortgage defaults at least through completion of a foreclosure sale under applicable nonbankruptcy law. However, if the State provides the debtor more extensive ''cure'' rights (through, for example, some later redemption period), the debtor would continue to enjoy such rights in bankruptcy. The changes made by this section, in conjunction with those made in section 305 of this bill, would also overrule the result in First National Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir. 1991) with respect to mortgages on which the last payment on the original payment schedule is due before the date on which the final payment under the plan is due. In that case, the Third Circuit held that subsequent to foreclosure judgment, a chapter 13 debtor cannot provide for a mortgage debt by paying the full amount of the allowed secured claim in accordance with Bankruptcy Code section 1325(a)(5), because doing so would constitute an impermissible modification of the mortgage holder's right to immediate payment under section 1322(b)(2) of the Bankruptcy Code.
Section 302. Nondischargeability of fine under chapter 13
This section adds criminal fines to the list of obligations which may not be discharged pursuant to a chapter 13 case.
Section 303. Impairment of exemptions
Because the Bankruptcy Code does not currently define the meaning of the words ''impair an exemption'' in section 522(f), several court decisions have, in recent years, reached results that were not intended by Congress when it drafted the Code. This amendment would provide a simple arithmetic test to determine whether a lien impairs an exemption, based upon a decision, In re Brantz , 106 B.R. 62 (Bankr.E.D.Pa. 1989), that was favorably cited by the Supreme Court in Owen v. Owen , 111 S.Ct. 1833, 1838, n.5.
The decisions that would be overruled involve several scenarios. The first is where the debtor has no equity in a property over and above a lien'> -->lien senior to the judicial lien the debtor is attempting to avoid, as in the case, for example, of a debtor with a home worth $ 40,000 and a $ 40, 000 mortgage. Most courts and commentators had understood that in that situation the debtor is entitled to exempt his or her residual interests, such as a possessory interest in the property, and avoid a judicial lien'/def/l036.htm'> -->lien or other lien of a typlienbject to avoidance, in any amount, that attaches to that interest. lienrwise, the creditor would retain the lien after bankruptcy and could threaten to deprive the debtor of the exemption Congress meant to protect, by executing on the lien. Unfortunately, a minority of court decisions, such as In re Gonzales , 149 B.R. 9 (Bankr.D.Mass. 1993), have interpreted section 522(f) as not permitting avoidance of liens in this situation. The formula in the section would make clear that the liens are avoidable.
The second situation is where the judicial lien the debtor seeks to avoid is partially secured. Again, in an example where the debtor has a $ 10, 000 homestead exemption, a $ 50,000 house and a $ 40,000 first mortgage, moslienmmentators and courts would have said that a jlienial lien of $ 20, 000 could be avoided in its entirety. Otherwise, the creditor would retain all or part of the lien and be able to threaten postbankruptcy execution against the debtor's interest which, at the time of the bankruptcy is totally exempt. However, a few courts, including the Ninth Cirlien in In re Chabotlien92 F.2d 891 (9th Cir. 1992), held that the debtor could only avoid $ 10,000 of the judicial lien in this situation, leaving the creditor after bankruptcy with a $ 10,000 lien attached to the debtor's exempt interest in property. This in turn will result, at a minimum, in any equity created by mortgage payments from the debtor's postpetition income-income which the fresh start is supposed to protect-going to the benefit of the lienholder. It may also prevent the debtor from selling his or her home after bankruptcy without paying the lienholder, even if that payment must come from the debtor's $ 10,000 exempt interest. The formula in the section would not permit this result.
The third situation is in the Sixth Circuit, where the Court of Appeals, in In re Dixon , 885 F.2d 327 (6th Cir. 1989), has ruled that the Ohio homestead exemption only applies in execution sale situations. Thus, the court ruled that the debtor's exemption was never impaired in a bankruptcy and could never be avoided, totally eliminating the right to avoid liens. This leaves the debtor in the situation where, if he or she wishes to sell the house after bankruptcy, that can be done only by paying the lienholder out of equity that should have been protected as exempt property. By focusing on the dollar amount of the exemption and defining ''impaired,'' the amendment should correct this problem. By defining ''impairment,'' the amendment also clarifies that a judicial lien on a property can impair an exemption even if the lien cannot be enforced through an execution sale, tlien -->lien y supporting the result in In re Henderson , 18 F.3d 1305 (5th Cir. 1994), which permitted a debtor to avoid a lien that impaired the homestead exemption even though the lien could not be enforced through a judicial sale.
The amendment also overrules In re Simonson , 758 F.2d 103 (3d Cir. 1985), in which the Third Circuit Court of Appeals held that a judicial lien could not be avoided in a case in which it was senior to a nonavoidable mortgage and the mortgages on the property exceeded the value of the property. The position of the dissent in that case is adopted.
Section 304. Protection of child support and alimony
This section is intended to provide greater protection for alimony, maintenance, and support obligations owing to a spouse, former spouse or child of a debtor in bankruptcy. The Committee believes that a debtor should not use the protection of a bankruptcy filing in order to avoid legitimate marital and child support obligations.
The section modifies several provisions of the Bankruptcy Code. Subsection (b) specifies that the automatic stay does not apply to a proceeding that seeks only the establishment of paternity or the establishment or modification of an order for alimony, maintenance, and support. Subsection (c) provides a new bankruptcy priority relating to debts for alimony, maintenance or support obligations. Subsection (d) provides that section 522(f)(1) of the Bankruptcy Code may not be used to avoid judicial liens securing alimony, maintenance, or support obligations. (This subsection is intended to supplement the reach of Farrey v. Sanderfoot , 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991), which held that a former husband could not avoid a judicial lien on a house previously owned with his wife.)
Subsection (e) adds a new exception to discharge for some debts arising out of a divorce decree or separation agreement that are not in the nature of alimony, maintenance or support. In some instances, divorcing spouses have agreed to make payments of marital debts, holding the other spouse harmless from those debts, in exchange for a reduction in alimony payments. In other cases, spouses have agreed to lower alimony based on a larger property settlement. If such ''hold harmless'' and property settlement obligations are not found to be in the nature of alimony, maintenance, or support, they are dischargeable under current law. The nondebtor spouse may be saddled with substantial debt and little or no alimony or support. This subsection will make such obligations nondischargeable in cases where the debtor has the ability to pay them and the detriment to the nondebtor spouse from their nonpayment outweighs the benefit to the debtor of discharging such debts. In other words, the debt will remain dischargeable if paying the debt would reduce the debtor's income below that necessary for the support of the debtor and the debtor's dependents. The Committee believes that payment of support needs must take precedence over property settlement debts. The debt will also be discharged if the benefit to the debtor of discharging it outweighs the harm to the obligee. For example, if a nondebtor spouse would suffer little detriment from the debtor's nonpayment of an obligation required to be paid under a hold harmless agreement (perhaps because it could not be collected from the nondebtor spouse or because the nondebtor spouse could easily pay it) the obligation would be discharged. The benefits of the debtor's discharge should be sacrificed only if there would be substantial detriment to the nondebtor spouse that outweighs the debtor's need for a fresh start.
The new exception to discharge, like the exceptions under Bankruptcy Code section 523(a) (2), (4), and (6) must be raised in an adversary proceeding during the bankruptcy case within the time permitted by the Federal Rules of Bankruptcy Procedure. Otherwise the debt in question is discharged. The exception applies only to debts incurred in a divorce or separation that are owed to a spouse or former spouse, and can be asserted only by the other party to the divorce or separation. If the debtor agrees to pay marital debts that were owed to third parties, those third parties do not have standing to assert this exception, since the obligations to them were incurred prior to the divorce or separation agreement. It is only the obligation owed to the spouse or former spouse-an obligation to hold the spouse or former spouse harmless-which is within the scope of this section. See In re MacDonald, 69 B.R. 259, 278 (Bankr.D.N.J. 1986).
Subsection (f) specifies that bona fide alimony, maintenance or support payments are not subject to avoidance under section 547 of the Bankruptcy Code. Subsection (g) provides that child support creditors or their representatives are permitted to appear at bankruptcy court proceedings.
Section 305. Interest on interest
This section will have the effect of overruling the decision of the Supreme Court in Rake v. Wade, 113 S.Ct. 2187 (1993). In that case, the Court held that the Bankruptcy Code required that interest be paid on mortgage arrearages paid by debtors curing defaults on their mortgages. Notwithstanding State law, this case has had the effect of providing a windfall to secured creditors at the expense of unsecured creditors by forcing debtors to pay the bulk of their income to satisfy the secured creditors' claims. This had the effect of giving secured creditors interest on interest payments, and interest on the late charges and other fees, even where applicable law prohibits such interest and even when it was something that was not contemplated by either party in the original transaction. This provision will be applicable prospectively only, i.e., it will be applicable to all future contracts, including transactions that refinance existing contracts. It will limit the secured creditor to the benefit of the initial bargain with no court contrived windfall. It is the Committee's intention that a cure pursuant to a plan should operate to put the debtor in the same position as if the default had never occurred.
Section 306. Exception to discharge
This section extends from 40 to 60 days the period in which a consumer debt to acquire ''luxury goods or services'' may be presumed nondischargeable in a proceeding under section 523(a)(2) of the Bankruptcy Code. The section also increases from 20 to 60 days the period in which cash advances under an open end credit plan may be presumed nondischargeable in such a proceeding. In addition, the dollar amount necessary to trigger such a presumption in the case of luxury goods is increased from $ 500 to $ 1,000.
Section 307. Payments under chapter 13
Currently, the practice of making payouts under a chapter 13 plan varies from one court to another. This section clarifies Congressional intent that the trustee should commence making the payments ''as soon as practicable'' after the confirmation of the chapter 13 plan. Such payments should be made even prior to the bar date for filing claims, but only if the trustee can provide adequate protection against any prejudice to later filing claimants caused by distributions prior to the bar date.
Section 308. Bankruptcy petition preparers
This section adds a new section to chapter 1 of title 11 United States Code to create standards and penalties pertaining to bankruptcy petition preparers. Bankruptcy petition preparers not employed or supervised by any attorney have proliferated across the country. While it is permissible for a petition preparer to provide services solely limited to typing, far too many of them also attempt to provide legal advice and legal services to debtors. These preparers often lack the necessary legal training and ethics regulation to provide such services in an adequate and appropriate manner. These services may take unfair advantage of persons who are ignorant of their rights both inside and outside the bankruptcy system.
This section requires all bankruptcy preparation services to provide their relevant personal identifying information on the bankruptcy filing. It requires copies of all bankruptcy documents to be given to the debtor and signed by the debtor. The section also provides that if the petition is dismissed as the result of fraud or incompetence on the preparer's account, or if the preparer commits an inappropriate or deceptive act, the debtor is entitled to receive actual damages, plus statutory damages of $ 2,000 or twice the amount paid to the preparer, whichever is greater, plus reasonable attorney's fees and costs of seeking such relief. The bankruptcy preparer is also subject to injunctive action preventing the preparer from further work in the bankruptcy preparation business.
Section 309. Fairness to condominium and cooperative owners
This section amends section 523(a) of the Bankruptcy Code to except from discharge those fees that become due to condominiums, cooperatives, or similar membership associations after the filing of a petition, but only to the extent that the fee is payable for time during which the debtor either lived in or received rent for the condominium or cooperative unit. Except to the extent that the debt is nondischargeable under this section, obligations to pay such fees would be dischargeable. See Matter of Rosteck, 899 F.2d 694 (7th Cir. 1990).
Section 310. Nonavoidability of security interests on tools and implements of trade, animals, and crops
This section adds a limited exception to the debtor's ability to avoid nonpossessory nonpurchase-money security interests in implements, professional books, or tools of trade of the debtor or a dependent of the debtor, or farm animals or crops of the debtor or a dependent of the debtor. It applies only in cases in which the debtor has voluntarily chosen the State exemptions rather than the Federal bankruptcy exemptions or has been required to utilize State exemptions because a State has opted out of the Federal exemptions. In such case, if the State allows unlimited exemption of property or prohibits avoidance of a consensual lien on property that could otherwise be claimed as exempt, the debtor may not avoid a security interest on the types of property specified above under Bankruptcy Code section 522(f)(2) to the extent the value of such property is in excess of $ 5,000. This section has no applicability if the debtor chooses the Federal bankruptcy exemptions, which cannot be waived. Like other exemption provisions, the new provision applies separately to each debtor in a joint case.
Section 311. Conversion of case under chapter 13
This amendment would clarify the Code to resolve a split in the case of law about what property is in the bankruptcy estate when a debtor converts from chapter 13 to chapter 7. The problem arises because in chapter 13 (and chapter 12), any property acquired after the petition becomes property of the estate, at least until confirmation of a plan. Some courts have held that if the case is converted, all of this after-acquired property becomes part of the estate in the converted chapter 7 case, even though the statutory provisions making it property of the estate does not apply to chapter 7. Other courts have held that the property of the estate in a converted case is the property the debtor had when the original chapter 13 petition was filed.
These latter courts have noted that to hold otherwise would create a serious disincentive to chapter 13 filings. For example, a debtor who had $ 10,000 equity in a home at the beginning of the case, in a State with a $ 10,000 homestead exemption, would have to be counseled concerning the risk that after he or she paid off a $ 10,000 second mortgage in the chapter 13 case, creating $ 10,000 in equity, there would be a risk that the home could be lost if the case were converted to chapter 7 (which can occur involuntarily). If all of the debtor's property at the time of conversion is property of the chapter 7 estate, the trustee would sell the home, to realize the $ 10,000 in equity for the unsecured creditors and the debtor would lose the home.
This amendment overrules the holding in cases such as Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) and adopts the reasoning of In re Bobroff, 766 F.2d 797 (3d Cir. 1985). However, it also gives the court discretion, in a case in which the debtor has abused the right to convert and converted in bad faith, to order that all property held at the time of conversion shall constitute property of the estate in the converted case.
Section 312. Bankruptcy fraud
This section sets out criminal penalties for any person who knowingly, fraudulently, and with specific intent to defraud uses the filing of a bankruptcy petition or document, or makes a false representation, for the purpose of carrying out a fraudulent scheme. An essential element of the new fraud action, as with other fraud actions, is requirement of proof beyond a reasonable doubt of a specific intent to defraud. Under no circumstance is this section to be operative if the defendant is adjudicated as having committed the act alleged to constitute fraud for a lawful purpose.
The section would not apply to a person who makes a misrepresentation on a financial statement, and then subsequently files a bankruptcy case, so long as the debtor had not at the time of the misrepresentation planned the bankruptcy filing as part of a scheme in connection with this misrepresentation. This would be the case, for example, where the misrepresentation occurred a considerable period of time before the bankruptcy filing, and the primary motivation for the bankruptcy filing was not related to the misrepresentation or fraud. It would also not be a crime under this section for a person to make a false statement or promise concerning a proceeding under title 11, as long as the false statement or promise was not made as part of a scheme to defraud involving the bankruptcy proceeding. Similarly, a person who conveys incorrect information about the pendency of a bankruptcy or the planned filing of a bankruptcy case would not be within the scope of this section unless that information was conveyed fraudulently and to further a fraudulent scheme.
The provision could, however, apply to creditors as well as debtors. For example, if a creditor, as part of a scheme to defraud a debtor or debtors, knowingly made false statements to a debtor concerning the debtor's rights in connection with a bankruptcy case, that creditor could be subject to this section.
Section 313. Protection against discriminatory treatment of applications for student loans
This section clarifies the antidiscrimination provisions of the Bankruptcy Code to ensure that applicants for student loans or grants are not denied those benefits due to a prior bankruptcy. The section overrules In re Goldrich, 771 F.2d 28 (2d Cir. 1985), which gave an unduly narrow interpretation to Code section 525. Like section 525 itself, this section is not meant to limit in any way other situations in which discrimination should be prohibited. Under this section, as under section 525 generally, a debtor should not be treated differently based solely on the fact that the debtor once owed a student loan which was not paid because it was discharged; the debtor should be treated the same as if the prior student loan had never existed.
TITLE IV. GOVERNMENT BANKRUPTCY ISSUES
Section 401. Exception from automatic stay for postpetition property taxes
Local governments rely on real property taxes to constitute one of their principal sources of revenue. These taxes are, in turn, typically secured by statutory liens. Both the property owner and any mortgage holder recognize that their interest in real property is subject to the local government's right to collect such property taxes. However, several circuit courts have held that the automatic stay prevents local governments from attaching a statutory lien to property taxes accruing subsequent to a bankruptcy filing. See, e.g., In re Paar Meadows, 880 F.2d 1540 (2d Cir. 1989), cert. denied , 110 S.Ct. 869 (1990); Makaroff v. City of Lockport, 916 F.2d 890 (3d Cir. 1990). These decisions create a windfall for secured lenders, who would otherwise be subordinated to such tax liens, and significantly impair the revenue collecting capability of local governments. This section overrules these cases and allow local governments to utilize their statutory property tax liens in order to secure the payment of property taxes.
Section 402. Municipal bankruptcy
Under section 901 of the Bankruptcy Code, a municipality may file for bankruptcy if, among other things, it is ''generally authorized'' to do so under State law. The courts have split regarding whether this provision requires express statutory authorization by State law in order for a municipality to file for bankruptcy. See In re Pleasant View Utility District, 24 B.R. 632 (Bankr. M.D. Tenn. 1982); In re City of Wellston, 43 B.R. 348 (Bankr. E.D. Mo. 1984); In re Greene County Hospital, 59 B.R. 388 (Bankr. S.D. Miss. 1986); In re City of Bridgeport, 128 B.R. 688 (Bankr. D. Conn. 1991) (cases not requiring express authorization); but see In re Carroll Township Authority, 119 B.R. 61 (Bankr. W.D. Pa. 1990); In re North and South Shenango Joint Municipal Authority, 80 B.R. 57 (Bankr. W.D. Pa 1982) (cases requiring express authorization). This section clarifies the eligibility requirements applicable to municipal bankruptcy filings by requiring that municipalities be specifically authorized by the State in order to be eligible to file for bankruptcy.
TITLE V. TECHNICAL CORRECTIONS
This title makes a number of technical corrections to the Bankruptcy Code.
TITLE VI. BANKRUPTCY REVIEW COMMISSION
This title establishes a National Bankruptcy Review Commission. The Commission is empowered to review the Bankruptcy Code and to prepare a report based upon its findings and opinions. Although no exclusive list is set forth, the Commission should be aware that Congress is generally satisfied with the basic framework established in the current Bankruptcy Code. Therefore, the work of the Commission should be based upon reviewing, improving, and updating the Code in ways which do not disturb the fundamental tenets and balance of current law.
The title mandates a nine-member Commission, Congress appointing four members, the President appointing three members, and the Chief Justice of the U.S. Supreme Court appointing two members. The members of the Commission should be knowledgeable in bankruptcy law, with diversity of background and opinion considered in their selection. The first meeting of the Commission shall be held 210 days after the date of enactment. No Member of Congress or officer or employee of the executive branch may be appointed to serve on the Commission.
TITLE VII. SEVERABILITY; EFFECTIVE DATE
Section 701 provides that if any provision of the Act is held to be unconstitutional, the remaining provisions shall not be affected thereby. Section 702 provides that the amendments made by the Act shall only apply prospectively, except as otherwise and specifically noted therein.
Mr. Speaker, I yield 1 minute to the gentleman from Oklahoma, (Mr. Synar ).
(Mr. SYNAR asked and was given permission to revise and extend his remarks.)
Mr. SYNAR. Mr. Speaker, I thank the chairman of the committee for yielding this time to me.
Mr. Speaker, our bankruptcy laws have developed since the early 1800's to embody two key principles which are respected in H.R. 5116, today's bankruptcy reform bill.
First, our bankruptcy laws must continue to encourage economic expansion by offering creditors the privately enforced protection they need to feel secure in lending the capital that fuels economic growth. The reforms we offer today will continue the bankruptcy code's tradition of keeping private losses private. My colleagues should remember that there is no taxpayer backup in bankruptcy; no FDIC to make up losses if a company or an individual becomes insolvent. Instead, the code provides a system which allows debtors and creditors to resolve the differences in their ledgers with Government intrusion or involvement.
And second, we must ensure that our bankruptcy laws protect debtors as well as creditors. We must truly give debtors a fresh start because our Nation is a nation of failures and has been since its earliest days. Capitalism demands that for every winner there are losers and the economic liberty that has brought generations of immigrants to our Nation has always embodied the freedom to fail as well as the chance to succeed.
H.R. 5116 embodies both of these principles and deserves our support today. The bill helps individual debtors by raising the Chapter 13 debt limits to a new total of $ 1 million, by establishing new civil penalties bankruptcy petition preparers who negligently or fraudulently prepare bankruptcy petitions and by allowing Chapter 13 debtors to cure foreclosure judgments at least through the time of foreclosure on the property.
Crecitors also benefit from today's bill. Specifically, provisions designed to curtail bankruptcy fraud and abuse and reduce the unnecessary costs and delays of the bankruptcy process will benefit all those who rely on the bankruptcy code for settling accounts. Commercial creditors should also find comfort in a number of reforms contained in the legislation with regard to bankruptcy trustees and new rights for creditors in certain bankruptcy situations.
Finally, I would like to extend my warm and heartfelt thanks to Chairman Brooks for his consideration of this legislation and to the entire Economic and Commercial Law Subcommittee staff for their long hours of work on this legislation. Their dedication to commonsense reform of the code follows a fine tradition on the committee and they are to be commended for their efforts.
Mr. FISH. Mr. Speaker, I yield myself such time as I may consume.
(Mr. FISH asked and was given permission to revise and extend his remarks.)
Mr. FISH. Mr. Speaker, I am pleased to speak in support of H.R. 5116, the Bankruptcy Reform Act of 1994, legislation I have joined with the gentleman from Texas (Mr. Brooks )-the chairman of the Committee on the Judiciary-and the gentleman from Oklahoma (Mr. Synar ) in sponsoring. The bill comes to the floor in a form that reflects the outcome of informal discussions between the two bodies. A number of features of S. 540, an omnibus bankruptcy bill that passed the Senate by unanimous vote in April of this year, are incorporated in the legislation we consider today.
In the 102d Congress, the House and Senate Committees on the Judiciary compiled hearing records that documented the need for legislation to address a range of problems confronting participants in the bankruptcy process. The last comprehensive rewrite of U.S. bankruptcy law had been completed in 1978. By the early 1990's, substantial updating was needed in response to burgeoning bankruptcy filings including megacases, greater complexity characterizing financial transactions, and unanticipated economic consequences of Bankruptcy Code provisions.
The priorities we recognized were to expedite bankruptcy procedures, stimulate greater recoveries, and mitigate adverse impacts of financial distress. Although each body passed a major bankruptcy bill, the 102d Congress adjourned before the process of reconciling House and Senate bills could be completed. For that reason, we have returned-although later in the 103d Congress than I would have hoped-to this important unfinished business.
Bankruptcy case filings declined last year after eight consecutive years of significant increases, but the 1993 total nevertheless exceeded 875, 000-more than double the 1985 figure. In view of these statistics-and the reality that some business bankruptcies in recent years have involved literally billions of dollars and many thousands of jobs-the profound economic consequences of bankruptcy cannot be overlooked. We must meet the challenge of reducing bankruptcy delays, discouraging abuses of the bankruptcy process, and resolving bankruptcy law problems that needlessly burden American businesses.
This legislation includes many important provisions. The following are some of the highlights:
We obviate the necessity of bankruptcy judges holding superfluous hearings when debtors, with the benefit of representation by counsel, seek to reaffirm obligations.
We seek to facilitate more expeditious resolutions of requests for relief from the automatic stay-and we seek to discourage long postponements for filing proposed reorganization plans.
We encourage greater reliance on Chapter 13 of the Bankruptcy Code-an alternative to liquidation-by making a broader range of debtors eligible to file under that chapter and contribute income under a repayment plan.
We provide explicit statutory authorization for bankruptcy judges to conduct jury trials with the consent of the parties when so designated by the district court-thus saving judicial resources in certain situations where the right to trial by jury is guaranteed.
We give expression to the inappropriateness of penalizing lenders for obtaining loan guarantees-penalties that eventually can constrict credit and increase interest rates-and for that reason effectively overrule the DePrizio case.
We clarify that important Bankruptcy Code protections for entities that finance or lease aircraft, vessels, and railroad equipment cover a broad range of transactions.
We modify the automatic stay in response to abuses involving some single asset real estate entities that file under Chapter 11 solely for purposes of delay without any expectation of reorganizing successfully.
We provide additional safeguards for equipment lessors in recognition of problems they often face during the bankruptcy process.
We clarify judicial authority to issue injunctions in certain circumstances where trusts are created to pay asbestos related claims-because we recognize that by removing uncertainty over the validity of such injunctions, the value of trust assets available to fund recoveries by victims can increase.
We safeguard a seller's important right to reclaim goods by extending the reclamation period in limited circumstances. We remove the unjustifiable bar to the Pension Benefit Guaranty Corporation and ;State pensions funds serving on creditors' committees.
H.R. 5116 encourages greater utilization of backruptcy appellate panels to hear appeals-with the consent of the parties-in bankruptcy cases. We recognize, however, that bankruptcy appellate panels may not improve the administration of justice in some circuits and therefore provide judicial councils with flexibility in broadly specified circumstances.
The provisions of this bill necessarily are diverse because the bankruptcy process affects a wide range of activity in our complex economy. When Bankruptcy Code uncertainties make economic transactions cumbersome, the resulting higher costs affect everyone. Bankruptcy law reform is very important to the American public because we are all consumers.
The bill before us makes important improvements in existing law. I urge my colleagues to support it.
Mr. Speaker, I have no further requests for time, and I yield back the balance of my time.
Mr. BROOKS. Mr. Speaker, I yield 2 minutes to the distinguished gentleman from California, (Mr. Howard Berman ) an outstanding member of the committee who has worked long and hard on this issue.
(Mr. BERMAN asked and was given permission to revise and extend his remarks, and include extraneous matter.)
Mr. BERMAN. Mr. Speaker, I rise in strong support of H.R. 5116, the Bankruptcy Reform Act. I want to congratulate our chairman, the gentleman from Texas, for the careful balance he has struck in this legislation, and for the expert assistance provided by this excellent staff.
I would like to speak in particular to three sections of the bill.
First, I am very pleased by the inclusion of Section 113 in the bill, effectively overruling the decisions of the Supreme Court in U.S. versus Nordic Village and Hoffman versus Connecticut Department of Income Maintenance, and clarifying the original intent of Congress in enacting Section 106 of the Bankruptcy Code with regard to sovereign immunity.
I would particularly note the import of Section 113 with regard to the rights of taxpayers. Section 113 establishes that the Federal and State governments cannot seize the property of taxpayers who have filed for bankruptcy. This provision establishes that the government cannot assert sovereign immunity as a shield to defend its actions in violating the automatic stay and discharge provisions of the Code, but instead must abide by the regular processes of the bankruptcy court applicable to all claimants.
I would also like to comment on two provisions in the bill which will help respond to bankruptcy typing mills which have proliferated in the central district of California. The Justice Department reports that typing mills were responsible for 30 percent of all bankruptcy filings in the central district, many by individuals who were unfairly preyed upon because they do not speak English or understand the bankruptcy system. Section 308 of the bill creates a new set of civil standards and penalties pertaining to these typing services. Under this section, if a bankruptcy petition is dismissed as a result of fraud or incompetence by the preparer, the debtor will be entitled to actual as well as statutory damages.
Section 312 of the bill, setting forth new criminal penalties for bankruptcy fraud, should also help limit abuses by typing mills. While many legitimate bankruptcy professionals have expressed concern regarding the scope of section 312, it is my understanding that because of existing case law precedent relative to mail fraud, section 312 would only apply in cases where there existed proof beyond a reasonable doubt of a specific intent to defraud. In this regard, I attach an excerpt from a memorandum prepared by the Department of Justice acknowledging the very heavy burden they would face in bringing a fraud action under section 312.
Intent to Defraud Must be Proved Beyond a Reasonable Doubt
Proposed 1A157(a), patterned after the mail and wire fraud statutes (18 U.S.C. 1A1341, 1343), would require proof of devising or intending to devise a ''scheme or artifice to defraud.'' Like the mail fraud statute, an essential element of the proposed statute requires proof beyond a reasonable doubt of a specific intent to defraud. This is one of the highest mens rea standards in the criminal law. Because of this high burden of proof, courses of action permitted under the Bankruptcy Code and allowed by the bankruptcy courts are unlikely to be prosecutable under this new law or any fraud statute. Where a statute or case supports the action taken and the person can show that he or she relied on such law, it would not be possible to show the intent to defraud required by the statute proposed.
Knowledge and intent are elements in any fraud prosecution. See, e.g., U.S. v. White, 879 F.2d 1509, cert. den., 494 U.S. 1027 (1990) (wife who had no knowledge of concealed business property could not be prosecuted for signing false statements that omitted such property); U.S. v. Tashjian, 660 F.2d 829, cert. den., 454 U.S. 1102 (1982); U.S. v. Martin, 408 F.2d 949, cert. den., 396 U.S. 824 (1970); U.S. v. Goodstein, 883 F.2d 1362 (7th Cir.), cert. den., 494 U.S. 1007 (1990). Similarly, the requirement that any fraud be ''material'' (while not in any statutory language, ''materiality'' is an element of bankruptcy fraud as well) would contemplate and include a concept that the fraud would target and interfere with the bankruptcy process.
Because of this high burden of proof, most courses of action allowed by the bankruptcy courts are unlikely to be prosecutable under this new law or any fraud statute. Where a statute or case supports the action taken and the person can show that he or she relied on such law, it would be extremely difficult to show an intent to defraud. Good faith has long been recognized as a complete defense to any fraud prosecution. See e.g., United States v. Williams, 728 F.2d 1402 (11th Cir. 1984) (good faith is a complete defense to the element of intent to defraud). Advice of counsel is also a defense that will counter a fraud prosecution where a debtor took certain action based on an attorney's good faith interpretation of the bankruptcy laws.
The proposed statute is no broader than the mail fraud statute, and in many respects is narrower because of the body of bankruptcy law potential defendants could point to in justifying their actions. The courts have the ability to ensure that this proposed law is not abused, just as they have monitored the application of the criminal laws in other areas. For example, in prosecutions under the income tax laws, the courts have allowed good faith but mistaken and misguided reliance on civil laws to be raised as a defense to a criminal prosecution. See e.g., United States v. Cheek, -- U.S. --, 111 S. Ct. 604 (1991).
MS. SLAUGHTER. MR. SPEAKER, I RISE IN STRONG SUPPORT OF H.R. 5116, THE BANKRUPTCY REFORM ACT OF 1994.
H.R. 5116 CONTAINS A NUMBER OF IMPROVEMENTS TO THE BANKRUPTCY CODE, INCLUDING EXPEDITED COURT PROCEDURE, INCREASED PROTECTION AGAINST BANKRUPTCY FRAUD, AND THE ESTABLISHMENT OF A NATIONAL BANKRUPTCY COMMISSION TO PAY CLOSE ATTENTION TO KEY ISSUES IN BANKRUPTCY PROCEDURE.
ONE SECTION OF H.R. 5116 WHICH I FEEL IS VITALLY IMPORTANT IS SIMILAR TO THE TEXT OF MY OWN BILL, H.R. 4711, THE SPOUSAL EQUITY IN BANKRUPTCY AMENDMENTS. HERE, H.R. 5116 GIVES ADDED PROTECTION TO CHILD SUPPORT AND ALIMONY PAYMENTS IN THE EVENT OF A BANKRUPTCY FILING. UNDER THE CURRENT BANKRUPTCY CODE, CHILD SUPPORT AND ALIMONY ARE GIVEN NO PRIORITY WHEN A DEBTOR'S ASSETS ARE DISTRIBUTED. IT IS INCOMPREHENSIBLE THAT WHILE MANY CREDITORS CAN COLLECT THEIR FEES, DEPENDENT SPOUSES AND CHILDREN HAVE TO WAIT, AND MAY NEVER BE INCLUDED. H.R. 5116 ELEVATES CHILD SUPPORT FROM ITS CURRENT STATUS AS A GENERAL, UNSECURED DEBT TO A FORMALLY PRIORITIZED DEBT. THIS IMPORT CHANGE WILL HELP ENSURE THAT A CUSTODIAL PARENT WILL NOT HAVE TO WAIT YEARS TO RECEIVE PAYMENT DUE.
H.R. 5116 ALSO CLOSES A LOOPHOLE WHICH CAN BE DEVASTATING FOR SINGLE-PARENT FAMILIES. DURING A DIVORCE AGREEMENT, IT IS NOT UNCOMMON FOR THE CUSTODIAL PARENT TO ACCEPT A LOWER LEVEL OF CHILD SUPPORT IN EXCHANGE FOR THE OTHER PARENT ASSUMING THE COUPLE'S MARITAL DEBTS. IF THE NON-CUSTODIAL PARENT DECLARES BANKRUPTCY, HOWEVER, THE MARITAL DEBTS THAN FALL TO THE SINGLE PARENT. THINK OF WHAT THE CUSTODIAL PARENT THEN FACES: LITTLE OR NO CHILD SUPPORT PAYMENTS, THE HEAVY RESPONSIBILITIES OF ALL THE MARITAL DEBTS, AND THE EXPENSES THAT COME WITH REARING CHILDREN ALONE.
THE BANKRUPTCY REFORM ACT WOULD OBLIGATE THE NON-CUSTODIAL SPOUSE, WHO AGREED TO PAY THE COUPLE'S MARITAL DEBTS, TO CONTINUE RESPONSIBILITY FOR THESE DEBTS. I THINK IT IS OUTRAGEOUS THAT WIVES AND DEPENDENT CHILDREN MUST ANSWER TO CREDITORS FOR DEBTS THE HUSBAND FIRST AGREED TO PAY. THIS RELATIVELY SMALL-BUT VITAL-CHANGE IN THE BANKRUPTCY CODE WOULD PREVENT THIS SITUATION, AND ENSURE A MORE EQUITABLE TREATMENT OF ALL PARTIES IN THE EVENT OF BANKRUPTCY.
MR. SPEAKER, I HAVE HEARD HEARTBREAKING STORIES FROM SINGLE PARENTS WHO WANT NOTHING BUT THE BEST FOR THEIR CHILDREN, BUT FIND THEMSELVES FORCED TO FIGHT FOR THEIR RIGHTFUL LEVEL OF CHILD SUPPORT. WITH NO OTHER RECOURSE, THESE FAMILIES OFTEN TURN TO WELFARE TO PROVIDE THE CHILD SUPPORT THE ABSENT PARENT OUGHT TO BE RESPONSIBLE FOR. H.R. 5116 TAKES AN IMPORTANT FIRST STEP IN BREAKING THIS TRAGIC CYCLE BY STRENGTHENING CURRENT BANKRUPTCY LAW AND ENFORCING TOUGHER MEASURES FOR CHILD SUPPORT AND ALIMONY COLLECTION.
FINALLY, MR. SPEAKER, I WOULD LIKE TO COMMEND THE DISTINGUISHED CHAIRMAN OF THE JUDICIARY COMMITTEE, JACK BROOKS, AND RANKING MEMBER HAMILTON FISH, FOR THEIR DILIGENT EFFORTS AND HARD WORK IN MOVING OMNIBUS BANKRUPTCY REFORM BEFORE CONGRESSIONAL ADJOURNMENT. I ENCOURAGE MY COLLEAGUES TO JOIN ME IN SUPPORTING THE BANKRUPTCY REFORM ACT. THANK YOU, MR. SPEAKER, AND I YIELD BACK THE BALANCE OF MY TIME. ;
Mr. BROOKS. Mr. Speaker, I have no further requests for time, and I yield back the balance of my time.
The SPEAKER pro tempore (Mr. Poshard ). The question is on the motion offered by the gentleman from Texas (Mr. Brooks ) that the House suspend the rules and pass the bill, H.R. 5116, as amended.
The question was taken.
Mr. GEKAS. Mr. Speaker, I object to the vote on the grounds that a quorum is not present and make the point of order that a quorum is not present.
The SPEAKER pro tempore. Pursuant to clause 5, rule I, and the Chair's prior announcement, further proceedings on this motion will be postponed.
The point of no quorum is considered withdrawn.
TITLE: BANKRUPTCY REFORM ACT OF 1994
SPEAKER: HON. CHARLES E. SCHUMEROF NEW YORK IN THE HOUSE OF REPRESENTATIVES
TEXT: Text that appears in UPPER CASE identifies statements or insertions which are not spoken By a MEMBER of the Senate on the floor.
Mr. SCHUMER. Mr. Speaker, had there been a recorded vote on H.R. 5116, the Bankruptcy Reform Act, I would have voted no on this measure. While I support the goals of this legislation, I have grave concerns about section 218 of the bill.
SECTION 218, WHICH COVERS SINGLE ASSET REAL ESTATE, IS MEANT TO ADDRESS BANKRUPTCIES FOR ENTERPRISES LIKE SHOPPING CENTERS, MALLS, AND OFFICE BUILDINGS. THIS LANGUAGE, WHETHER ADVERTENTLY OR INADVERTENTLY, POSES A GRAVE HAZARD TO FINANCIALLY TROUBLED COOPERATIVE HOUSING.
MR. SPEAKER, I DO NOT BELIEVE THAT THIS BILL WAS INTENDED TO PUT CO-OP UNIT OWNERS IN FINANCIALLY TROUBLED CO-OPS OUT ON THE STREET. I WILL BE SEEKING CLARIFYING REPORT LANGUAGE FROM THE JUDICIARY COMMITTEE TO THAT EFFECT. IN ADDITION, IF CO-OPS WERE INADVERTENTLY BURDENED BY THIS LEGISLATION, A TECHNICAL CORRECTIONS BILL TO AMEND THIS LEGISLATION IS WARRANTED.
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