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Commission Reporter and Staff Present: Professor Elizabeth Warren, Reporter/Consultant Susan Jensen-Conklin, Deputy Counsel Carmelita Pratt, Administrative Officer
Participants: Panel One: Preview of Consumer Issues Consumer Bankruptcy: Going Broke in the Midst of Prosperity: Panelists:
Jan Elston, Ford Motor Credit Company Gary Klein, National Consumer Law Center, Inc. Prof. Jeffrey W. Morris, University of Dayton School of Law David Nordemann, Visa U.S. Risk Management James S.K. Shulman, National Association of Consumer Bankruptcy Attorneys Dr. Theresa Sullivan, University of Texas at Austin Anita Jo Kinlaw Troxler, Standing Chapter 13 Trustee
Panel Two: Preview of Business Issues Retail Business, Wholesale Bankruptcy?
Prof. Edward I. Altman, New York University Leonard N. Stern School of Business Antonio C. Alvarez, II, Alvarez & Marsal, Inc. H. Elizabeth Baird, NationsBank Corporation Neal Batson, Alston & Bird Charles J. Hansen, Carson Pirie Scott & Co. Max Holmes, Salomon Brothers Inc. Leonard M. Rosen, Wachtell, Lipton, Rosen & Katz
Also Present:
Calvin R. Snowden, External Affairs Director, United States General Services Administration - National Capital Region Witnesses:
Karen Cordry, National Association of Attorneys General Judith Starr, Securities and Exchange Commission Richard Bartel on his own behalf Stuart Gelberg, Chapter 13 Trustee Public Attending:
Approximately forty-five people were in attendance including representatives from the Administrative Office of the United States Courts, Federal Judicial Center, Executive Office for United States Trustees, Department of Justice, Internal Revenue Service, Securities and Exchange Commission, Congressional Research Service, various trade associations, private industry, law firms, and the media.
Vice Chair Ginsberg called the meeting to order at 8:42 a.m. and made preliminary comments. The minutes of the February meeting were approved by oral vote of the Commissioners. He stated that a portion of the meeting held February 24 was in closed session at which time personnel matters were discussed. Vice Chair Ginsberg then turned the meeting over to Brady C. Williamson, Commission Chair.
In his opening remarks, Chair Williamson noted that the Commission had faced formidable challenges from its outset. In addition to the delayed appropriation process which caused the Commission not to convene its first meeting for nearly a year after the effective date of the enabling legislation, he cited the death of Mike Synar, the former Chair. Notwithstanding these challenges, however, Chair Williamson observed that the Commissions work was not any less important given the increase in bankruptcy filings generally, and retail filings, in particular, as well as the integral role that bankruptcy plays in the economic life of America and the impact it has on families and businesses throughout the nation. He noted that his work as a practicing attorney in the bankruptcy field and his experience teaching state and federal constitutional law at the University of Wisconsin School of Law together with the experience he obtained while on the staff of the United States House of Representatives and the United States Senate would contribute to the Commissions work.
Chair Williamson stated that he had a procedural and practical agenda. He said that the work of the Commission should be open, with only very rare exception, and that it should be inclusive, without any exceptions. He observed that the Commission as an entity and the Commissioners as individuals should continue not only to hear every point of view, but should also actively solicit points of view not often heard. To this end, he stated that the Commission will take its work outside of Washington, D.C.
While the Commissions report will have academic aspects, Chair Williamson said that it would not be academic. Specifically, he noted that the Commission should inspire law review articles, not write them. The completion of the report, he commented, would mark only the beginning of the Commissions real work. Chair Williamson stated that the goal of the Commission and Congress is to strengthen the Bankruptcy Code, to make it more practical, efficient and effective, and to insure balance and fairness in the sometimes complex legal and economic relationships between lenders and borrowers. To effectuate this process, Chair Williamson noted that he had begun a series of meetings with members of Congress and their staffs and that this process of consultation would continue in the upcoming weeks. He stated that the Commissions assignment was to review the Bankruptcy Code and the attendant issues and to report its findings and recommendations to Congress so that it can enact them into law, which is the Commissions goal.
Chair Williamson noted that the Commissions next meeting would take place at San Antonio in May and that this meeting would continue the discussion of consumer bankruptcy issues. During the interim, he stated that the Commission would accelerate the process of narrowing its focus on the issues that it will address as well as make several personnel decisions.
In concluding his opening remarks, Chair Williamson expressed appreciation to the bankruptcy community for its patience and understanding given the complex and tragic events which affected the Commissions ability to do its work over the past six months. He also noted that the Commissioners, its reporter, and staff, as well as Judge Ginsberg and his staff provided a remarkable service under difficult circumstances.
With regard to todays meeting, Chair Williamson explained that the first portion would be devoted to a discussion of consumer bankruptcy as a prelude to the May meeting. The second portion of the meeting would focus on Chapter 11 and, in particular, on retail Chapter 11 bankruptcies. He noted that the number and visibility of retail bankruptcy cases had important national economic implications. The latter part of the meeting would consist of continuing the process of sifting and winnowing the issues under Commissioner Alixs leadership. Thereafter, a variety of administrative matters would be addressed in this portion of the meeting. He noted that the meeting would conclude with the public participation section which would include a report on a recent United States Supreme Court case having potentially significant impact on the practice of bankruptcy law. He also stated that a moment of silence would be observed at 10:02 a.m. in memory of the anniversary of the Oklahoma City bombing.
PANEL ONE: PREVIEW OF CONSUMER ISSUES CONSUMER BANKRUPTCY: GOING BROKE IN THE MIDST OF PROSPERITY After introducing the panel members, Professor Warren opened the discussion by noting that one in every 104 families in the United States filed for bankruptcy during 1995. She then asked the panelists to describe the typical consumer debtor profile. Dr. Sullivan responded that the statistically average consumer debtor was a baby boomer in his or her late thirties or early forties. While baby boomers were the largest group in the population, Dr. Sullivan noted that they were disproportionately represented among the consumer debtors. She observed that approximately half of these debtors attended college for at least one year, but were somewhat less likely to have a degree than the rest of the population who attended college. Occupationally, Dr. Sullivan stated that the consumer debtor was typically a white collar employee. Of these, she noted that approximately 25 percent were in a higher white collar employment status and that as a whole they were in the middle, not bottom, part of the occupational distribution spectrum. In addition, she observed that one out of five consumer debtors owned or currently owned a business and that another five percent cited failure of the business for which they worked as the cause of their need to resort to bankruptcy. She noted that one half of consumer debtors experienced some form of job disruption. She also observed that approximately one half of consumer debtors were homeowners.
Dr. Sullivan discussed other aspects of the consumer debtor profile. She noted, for example, that consumer debtors had extraordinarily low incomes given their education levels and occupations. For example, one third of these debtors had incomes below the poverty level at the time of filing and only ten percent had incomes above the national median incomes for all families. Consumer debtors carry a lot of debt, Dr. Sullivan observed. Specifically, she noted that a consumer debtor at the median owed two and one-half times his or her annual income with regard to all debt owed. If mortgage obligations are excluded, the consumer debtor owed 1.6 times his or her annual income in debt. Dr. Sullivan also noted that a high proportion of consumer debtors experienced marital interruptions within the two years preceding their bankruptcies. Among married consumer debtors, they were less likely to have two wage earners than married couples in the general population. In sum, Dr. Sullivan observed that the average consumer debtor filed bankruptcy because of a very low income attributable to either business or job difficulties and the complications caused by personal disruptions in the family. Another contributing factor that she cited was the consumer debtors high level of debt.
The panelists generally concurred with Dr. Sullivans profile of the typical consumer debtor. Ms. Troxler, however, noted that many of the cases she administered concerned two-income families. Nevertheless, she agreed that employment or domestic disruption contributed to consumer bankruptcy filings along with insufficient or nonexistent medical insurance coverage. Mr. Shulman likewise ascribed to Dr. Sullivans consumer debtor profile. In addition, he noted that many debtors were poorly educated in financial matters, a factor which would not show up in a statistical analysis. Mr. Nordemann also agreed with the aforesaid consumer debtor profile. He noted that filings through April 5, 1996 were 273,000 as compared to 220,000 for the same period last year.
When asked to identify the typical consumer creditor class, Ms. Elston replied that it consisted of mortgage and vehicle lenders, credit card creditors, the Internal Revenue Service and medical care providers. She noted that many consumer debtors filed to protect their home and car and that consequently the mortgage and vehicle lenders were the prevalent creditors in these cases.
Professor Warren asked whether these debtors could have avoided bankruptcy if they had just cinched in their belts a little tighter. Responding in the negative, Mr. Shulman explained that consumer debtors were typically people who had exhausted all of their options and were depressed about having to resort to bankruptcy. To avoid the prospect of bankruptcy, he said that these debtors often borrowed money from relatives and others and frequently went to budget credit counseling services to attempt workouts. Mr. Shulman noted that consumer debtors have borrowed against the equity in their home and exhausted their savings before resorting to bankruptcy. In sum, he estimated that probably 99 percent of his clients had no option other than bankruptcy.
Although Mr. Nordemann was not sure whether the 99 percent figure cited by Mr. Shulman was accurate, he agreed that a large proportion of consumer debtors needed bankruptcy protection. Nevertheless, he observed that the bankruptcy system had lost some of its balance. He noted, for instance, that a significant proportion of debtors who could have filed under Chapter 13, instead filed under Chapter 7 because it appeared to be an easier alternative. He based this statement on studies of 2,000 cases that his company conducted. Professor Morris asked whether this estimate was based on a finding that these debtors could repay all of their debt or just some significant portion of it. Mr. Nordemann said that it was based on the conclusion that some percentage could be repaid.
Turning to Chapter 13, Professor Warren asked Ms. Troxler whether the typical Chapter 13 debtor was better off than the typical Chapter 7 debtor. While not sure if the Chapter 13 debtor was better off, Ms. Troxler noted that the Chapter 13 debtor stood to lose more in Chapter 7. For example, she observed that exemptions did not help the debtor save property, so that this type of debtor turned to Chapter 13 to save his or her property through future income. Professor Warren asked Ms. Troxler to clarify her statement that exemptions did not help debtors. Ms. Troxler explained that the value of exemptions varied from state to state. In North Carolina, for instance, she noted that the homestead exemption was $10,000 per debtor while a non-homeowner debtor was eligible for a $3,500 wild card exemption.
With regard to Mr. Nordemanns statements concerning the proclivity of debtors to choose Chapter 7 over Chapter 13, Ms. Troxler explained that it was easier to file Chapter 7, eliminate debt and get credit than it was to struggle in a Chapter 13 case for three to five years. She noted that there was no reinforcement in the economy to encourage one to repay as much debt as possible. Ms. Troxler stated that most creditors were not interested because they preferred to charge off the account and move forward. In addition, she observed that Chapter 7 debtors did not have much difficulty in reestablishing their credit. She stated that if a debtor did not have substantial income, then there were no advantages to repaying his or her debts in Chapter 13 as opposed to discharging those same debts in Chapter 7. In sum, she noted that there were not many reinforcements that would encourage a debtor to struggle to repay debts out of future income.
Dr. Sullivan added that there was a statistical difference between Chapter 7 and 13 debtors. She stated that the former carried a lot more debt than the latter. Specifically, she said that Chapter 7 debtors have a debt to an income ratio of 2.8 compared to a 2.1 ratio for Chapter 13 debtors.
Ms. Elston questioned Ms. Troxlers statement that Chapter 7 debtors obtain credit more easily than Chapter 13 debtors. She said that this statement may depend on different time frames such as the date of discharge. While agreeing that timing was an important factor, Professor Morris noted that a Chapter 7 debtor can complete the process in six months and obtain a discharge which effectively gives the debtor 2.5 to 4.5 year head start on a Chapter 13 debtor. In addition, the Chapter 13 debtor must obtain court authorization to incur postpetition debt.
The panelists then recounted instances where vendors specifically importuned debtors to purchase their goods and services following bankruptcy. With regard to the diminished stigma of bankruptcy, Professor Morris opined that its source could be traced to sundry factors such as the general mobility in society and the decision by creditors that bankruptcy has less stigma. Mr. Shulman expressed concern regarding pro se debtors who are preyed upon by petition preparers. He explained that if more debtors were represented by counsel, then there would be fewer instances of debtors filing cases under Chapter 7 instead of Chapter 13. In addition, he noted that many of his clients who filed Chapter 7 were usually worn down or ill.
Mr. Klein observed that the primary reason why there were more consumer bankruptcy filings was that people were more overextended and that there have been significant structural changes in the economy which placed greater pressure on families trying to deal with their debt. For instance, he noted that consumer credit has increased seven times since 1970 while real incomes had not increased comparably. In addition, he observed that there was a significant increase in home secured credit in reaction to the 1986 amendments to the Internal Revenue Code and that the number of foreclosures had nearly tripled since 1980.
Coupled with these factors, Mr. Klein noted, were the structural changes in the nations economy consisting of lower incomes resulting from downsizing. As people become more highly leveraged, he said that even a $10,000 drop in income can make it difficult for a debtor to manage his or her debt. He stated that the need in many areas of the country for a family to have two incomes to support it caused the risk to double. Thus, if either member lost some portion of his or her income, then the family cannot maintain its current debt load, he said. Likewise, Mr. Klein stated that divorce was a catastrophic event for family finances. Another factor was the decrease in savings rates which, in the past, functioned as a resource if someone became unemployed. A further factor Mr. Klein cited was the increasingly aggressive collection activity of creditors which made it more difficult for people to obtain workouts on mortgages, car loans and unsecured obligations. Specifically with regard to auto repossessions, he noted that every state except Wisconsin permitted self-help repossession. He recalled that many clients have increasingly reported that creditors are unwilling to negotiate repayment options.
Mr. Nordemann agreed that perhaps his organization and MasterCard encourage debtors to go into Chapter 7 without giving them a chance to work out their problems. He clarified, however, that neither Visa nor MasterCard issue the credit cards themselves and that these organizations just represent the banks and financial institutions that issue them. He said that his organization would be prepared to help educate its members on this matter.
Ms. Elston, speaking on behalf of Ford Motor Credit, said that the creditor collection process was customer-driven and that it was against Ford Motor Credits interest to immediately repossess a motor vehicle. What Ford really wanted, according to Ms. Elston, was to have the customer pay for the vehicle. Mr. Klein noted that there was a difference in the industry between the policy and the practice. As to the latter, he said there was some very aggressive collection activity that may not be entirely consistent with the articulated policy of a company like Ford Motor Credit.
Commissioner Hartley questioned Mr. Klein as to whether he left out the greater sophistication level of debtors and their ability to massage and abuse the system. While Mr. Klein acknowledged that there was some anecdotal evidence of abuse, he stated that it would be very difficult to determine what percentage of bankruptcy filings constituted an abuse of the system. He noted that there was a broad range of protections available to creditors to root out abuse. He stated that there would be a few people without the best motives who would get through the process, but that this was inherent in any judicial system. From his experience, he said that there was less abuse in the bankruptcy system than existed in the criminal system.
Responding to Commissioner Hartleys query as to whether serial filings constituted an abuse of the system, Mr. Klein stated that debtors who file seven or ten times were abusing the bankruptcy system. On the other hand, he noted that many serial filings involve changed circumstances. For example, it was not uncommon for many Chapter 13 debtors to be unsuccessful in their first case because they suffered further financial setbacks.
Commissioner Hartley wanted to know how to distinguish between legitimate changes in circumstances from attempts to manipulate the system. Mr. Klein cautioned against having a rule that automatically threw out a bankruptcy case simply because it was the debtors second or third attempt. He advised that the circumstances of the filing should first be examined.
In response to Professor Warrens inquiry as to whether there were data on the incidence of serial filings, Ms. Troxler stated that fewer than eight percent of her cases had been filed more than once. Of these serial filings, she noted, many of these debtors had not received a discharge in the prior case and that the second case was typically filed within a year of the first case. The usual scenario was that a debtor would file a Chapter 7 case after the prior Chapter 13 case was dismissed, she observed. Mr. Nordemann responded that his organizations information showed that the amount of debt was typically twice as much in the second filing as was listed in the prior case. He said that this would indicate that debtors were learning the system and may be taking advantage of it. As to serial discharges, Ms. Troxler estimated that these constituted less than one percent of the filings that she administers. In those instances where the prior case was dismissed, however, Ms. Troxler noted that creditors generally did not oppose the second case if the debtor could demonstrate performance and was willing to agree to very stringent controls. And, she observed, a large percentage of these second cases proceeded to discharge.
Commissioner Jones asked Mr. Nordemann whether his figures indicated that the amount of repayment his organization received from Chapter 13 cases was greater than the amount collected from Chapter 7 cases. Although he did not have the data at hand, Mr. Nordemann stated that Chapter 13 was certainly preferable in terms of funds received. Ms. Elston questioned whether unsecured creditors fared better in Chapter 13. She observed that one factor that has not been discussed was the failure rate of Chapter 13 cases.
Professor Warren asked Ms. Elston whether a car lender fared better in a Chapter 7 case with a reaffirmation agreement than in a Chapter 13 case where the secured debt was bifurcated into secured and unsecured claims and the debtor retained possession of the vehicle. Noting that such creditor may fare better, Ms. Elston observed that a secured creditors claim and interest rate in Chapter 13 were crammed down. There were also problems with insurance and depreciation, she noted. Mr. Klein asked Ms. Elston whether the secured creditor was better off in either a Chapter 7 or 13 case as opposed to immediately repossessing the motor vehicle. Ms. Elston acknowledged that the best result for the creditor was for the customer to keep the vehicle and to pay the pay the creditor.
Professor Morris posited whether the response depended upon the district given the fact that some bankruptcy judges imposed minimum payment percentages as prerequisites to confirmation. Ms. Troxler noted that the average payout to unsecured creditors for her cases in the last fiscal year was more than 55 percent and that it exceeded 60 percent the preceding year. She wondered whether unsecured creditors were concerned that secured creditors could have Chapter 7 debtors reaffirm secured obligations which included substantial unsecured claims. She likened this to an unsecured creditor receiving preferential treatment. In contrast, she observed that Chapter 13 tries to level the playing field for creditors.
Ms. Elston noted that while the Chapter 13 debtor retained possession of the motor vehicle, the vehicle depreciated in value and the secured creditor had to wait a substantial period of time to receive its first payment under the plan. Commissioner Jones added that the bifurcation option also allowed Chapter 13 debtors to make payments at lower rates. Professor Morris stated that this problem was caused by judges setting wrong values. Commissioner Jones asked whether the statute should be amended to 70 or 80 percent of the initial value of the loan.
Mr. Shulman recalled that the statute was wisely crafted to allow debtors to reestablish stability in their lives, to retain their assets and to repay their creditors in an orderly manner. Commissioner Shepard stated that a debtor controlled the value of the vehicle given its depreciation rate. Mr. Shulman said that in appropriate circumstances creditors could challenge the debtors good faith if the vehicle was purchased on the eve of filing.
Based on cram down alone, Ms. Elston estimated that the three major car lenders lost one billion dollars or more. This figure, she said, did not include administrative costs. Mr. Shulman noted that by challenging the concept of cram down, the fundamental benefit of Chapter 13 was being attacked. Ms. Elston stated that she was not advocating doing away with cram down entirely, but that secured creditors should be able to get the benefit of their bargains.
Returning to the issue of serial filings, Mr. Shulman observed that many of his clients have refiled their Chapter 13 cases. He stated that it would be a mistake to require anything more than that the plan be proposed in good faith. He noted that debtors who needed to file more than one bankruptcy case were not recidivists or criminals, but people who were facing serious financial trouble.
Ms. Troxler noted that there was a distinction between secured creditors such as car lenders and other purchase money lenders. She noted that there were many creditors who claimed to be secured while the collateral was absolutely worthless. Ms. Troxler stated that there was a push in the marketplace to make these loans based on documents that clearly showed that the debtor could not service the debt. She said it was very important to look at both sides of the issue. In particular, she remarked that there was a substantial increase in poor loan documentation for motor vehicles. Commissioner Jones suggested that if debtors knew in advance that they could not readily avoid paying their obligations, they would not be as inclined to borrow. Disagreeing, Ms. Troxler noted that most debtors did not consider bankruptcy while they are shopping.
At 10:02 a.m., there were approximately three minutes of silence in remembrance of the anniversary of the Oklahoma City bombing.
Summarizing certain bankruptcy filing statistics, Professor Warren noted that Chapter 13 comprised 30.9 percent of the bankruptcy cases filed. Dr. Sullivan observed that 62 percent of Chapter 13 cases were dismissed. In response to Professor Warrens question why nearly two-thirds of Chapter 13 cases were dismissed, Professor Morris noted that perhaps these debtors received what they wanted from the system, namely, the opportunity to restructure their home mortgages and cure the arrearages, or that perhaps these debtors overcame the disruption in their financial circumstances. Commissioner Shepard noted that there were a lot of debtors who were overly optimistic and that lawyer mills contributed to the problem. Dr. Sullivan suggested that these debtors had a very unstable income history and that they filed Chapter 13 optimistically thinking that their new jobs would work out, but that they did not. Commissioner Shepard asked whether it should be the responsibility of the debtors attorney to screen these cases out and advise that they should not be filed under Chapter 13. Mr. Shulman noted that he utilizes a budget to analyze these cases. Commissioner Hartley observed that many attorneys did not do this analysis and used Chapter 13 as a vehicle to get fees. Given the apparent delay in some districts with regard to the commencement of plan payments, Mr. Shulman suggested that the Commission should recommend that early confirmation dates be set in Chapter 13.
Commissioner Jones asked Dr. Sullivan how many Chapter 13 cases converted to Chapter 7. Although Dr. Sullivan did not have that information, Mr. Klein noted that it was a mistake to look beyond the obvious answer. With regard to the high failure rate of Chapter 13 cases, he explained that these debtors were likely to face new financial problems. He noted that one-third of all people in the lowest 40 percent of income brackets would have an income disruption in any given year and that one-third of these people would lose at least a months worth of income at some point during the year. Factors like these, he observed, would throw a Chapter 13 case into disarray.
Mr. Klein, in response to Commissioner Hartleys question as to whether composition plans should be eliminated or whether there should be a minimum payment threshold for confirmation, noted that the increased costs of Chapter 13 should be considered. These costs include the filing fee, attorneys fees, trustees fees and the proposed United States Trustee surcharge. In response to Commissioner Shepards suggestion that attorneys fees be eliminated from Chapter 13 plans, Professor Morris answered that there were some districts which encouraged these fees to be paid under a plan in order to maintain the commitment of the debtors attorney to the plans consummation. Commissioner Shepard posited that a Chapter 13 debtors attorney, in many instances, abandoned his or her client as soon as the debtor paid the attorneys fees. Mr. Shulman asked whether Commissioner Shepard had any statistics to substantiate this statement. Commissioner Shepard stated that this was why, in part, Chapter 13 cases were converted or dismissed. Mr. Shulman said that he was unaware of any statistics that establish bankruptcy attorneys abandon their clients. He noted that persons file bankruptcy because they are experiencing financial difficulties and that filing a liquidation or reorganization case did not always cure these difficulties.
Mr. Nordemann observed that his organization was trying to measure how much extra it loses because of bankruptcy. He noted that the average write-off two years ago was approximately $1,900. For those that go into bankruptcy, he stated, the write-off was about $3,200 and that this figure has increased approximately $200 each year. He said that there was no question that those consumers who do pay their obligations also pay for the cost of those that do not.
Mr. Klein commented that while this point has been frequently made for the past 50 years, he has never seen the statistics that show exactly what impact bankruptcy has on interest rates. Ms. Elston remarked that the risk costs for people who do not pay their obligations are exorbitant or disproportional expenses that are passed on to the American public. She also suggested that the Commission should examine those areas in the bankruptcy system which cost creditors so much money and, in turn, are borne by the consumers. Mr. Klein questioned whether these were real losses based on the bargain auto lenders made with their borrowers. Mr. Shulman noted that there were more consumer bankruptcies because the credit industry had inundated the nation with installment debt. He then discussed various statistics evidencing the increase in consumer installment lending. He also observed that the credit card industry had expanded their solicitations to consumers who are less able to service the debt.
As a closing comment, Commissioner Jones requested the panelists to submit letters identifying ten choices for improvements in the Bankruptcy Code.
PANEL TWO: PREVIEW OF BUSINESS ISSUES RETAIL BUSINESS, WHOLESALE BANKRUPTCY? After a brief recess in the meeting, the second panel convened. Prior the commencement of the discussion, Commissioner Alix disclosed that he had been previously represented by Messrs. Holmes, Batson and Rosen, three of the panelists. Professor Warren then introduced the panelists and posed the first question: what is happening in the retail industry?
Mr. Alvarez noted that the retail filings of the late 1980's to early 1990's were primarily done in response to too much debt. In contrast, he observed, the more recent filings were made in response to serious operating problems. The explanation for these more recent filings, he stated, was supply and demand, namely, too many stores and not enough demand from customers. Specifically, Mr. Alvarez cited two problems. One was that the number of stores serving the nation had grown explosively. The second was the change in retailing formats from mall-spaced retailers to warehouse clubs.
In response to Commissioner Shepards query as to whether this competitive growth was financed with debt, Mr. Alvarez said there were different answers. Typically, he noted, where the retailer has both operating problems and is heavily leveraged, it will seek bankruptcy relief sooner than one that has no debt. On the other hand, he observed, there were situations where the operating problem was so bad that the retailer must seek bankruptcy relief regardless of the debtors debt structure.
Mr. Holmes added that the damage was being done by Walmart in the discounter area, by Home Depot in the lumber business, and by Toys R Us. He noted that these companies were primarily equity-financed with high stock prices and that they issued equity to build their growth. Accordingly, he said that these companies have a tremendous advantage over their competitors who are moderately or heavily debt-financed. Professor Altman observed that entities financing these companies expansion would not necessarily do very well in their reorganization. In addition, he noted that it was very easy to obtain postpetition debtor in possession financing if the debtor had hard assets, such as inventories.
Observing that the banking industry is seeing an avalanche of Chapter 11 retail filings, Ms. Baird attributed this development to the fact that there were too many doors, too much space, too much debt and too many expensive leases along with reduced consumer spending. She acknowledged that bankruptcy was utilized as a planning tool to terminate leases. Mr. Hansen noted that occupancy costs, usually in the form of leases, constituted a relatively high percentage of operating expenses for retailers.
Mr. Rosen did not think that it was fair to say that parties enter leases with the intent to file bankruptcy. While noting that both sides recognize that there is a risk factor involved in these transactions, he disagreed that bankruptcy was a planning tool to terminate leases. He explained that bankruptcy was an expensive procedure and that the rejection process did not permit the debtor to escape all liability as there were damage claims.
Mr. Alvarez noted that the unavailability of trade credit other than LBO debt was a strong consideration favoring bankruptcy. Without trade credit, he explained, the retail debtor has difficulty getting goods on normal terms. By becoming a debtor in possession and providing liens, a retailer gives comfort to these trade creditors. The ability to reject leases is also part of the benefit that bankruptcy provides retailers.
Commissioner Jones asked Mr. Alvarez whether Chapter 11 causes a bad impact on those retailers that do not file Chapter 11 cases. He responded that the system will force consolidation and closure. He said that one needed to decide in which forum should this process occur and who should control it. Mr. Batson agreed that Chapter 11 will preside over a contraction in the retail industry.
Mr. Hansen explained that Chapter 11 was a great success for his company. He said that it gave his company a breathing spell from its trade factors and it allowed the debtor to reorganize relatively smoothly over 26 months without cataclysmic effects on its vendors. He observed that Chapter 11 offered a good way to reorganize or liquidate in an orderly fashion.
Responding to Commissioner Jones question, Mr. Rosen noted that there may not be a definitive answer. With regard to the airline industry, he observed that there probably was an extraordinary competitive advantage when Continental adopted a strategy of reduced fares and were able to operate at a lower cost. On the other hand, he noted that this was not a general problem. He cited, for example, that when Federated filed Chapter 11, Bloomingdales did not start charging less for its goods. In addition, he observed that Chapter 11 generally costs extra money and that it causes a lot of grief and aggravation. There are many problems that must be addressed including keeping customers, suppliers and employees. Mr. Batson remarked that sometimes the competitive disadvantage runs the other way. Mr. Holmes stated that the abuse in Chapter 11 is presented by those companies that linger beyond two or three years because they derive some business advantage over its competitors.
Professor Warren asked the panel to focus on industry-wide pressures and why whole industries appear to be in trouble at the same time. Professor Altman attributed these trends to the economics of the time, not the bankruptcy system. Mr. Alvarez recalled that it had been his experience that trends have been industry-driven except for the late 1980's when they were driven by LBOs. In the early 1980's, the price of oil affected the oil service companies, he observed. Likewise, deregulation helped spur competition among the airlines. As these contractions would have occurred whether or not Chapter 11 existed, he said that Chapter 11 just served to define to whom you give control. In the United States, the debtors are given a chance, while in Europe creditors have control. Commissioner Hartley asked if the level of abuse was affected by the size of the debtor. Mr. Rosen noted that there was a distinct problem with smaller debtors where there were no active creditors committees. The concern presented, he stated, was who was watching the store. He observed that there was a perception that the United States Trustee Program, as well-intentioned as it might be, was not sufficiently funded and geared up to monitor these cases. Although the recent amendments to the Bankruptcy Code provide the means for bankruptcy judges to become more involved in case administration, Mr. Rosen asked whether case administration should be the judges or the United States Trustees responsibility. Mr. Alvarez explained that companies that linger in Chapter 11 do so because they have complicated capital structures and have to devise a method of dividing assets to obtain the necessary votes for confirmation.
Commissioner Shepard asked who receives the benefit and who pays the cost of Chapter 11. Mr. Hansen answered that professionals are the only ones who really do not share any of the pain of the bankruptcy process and do not have an equity stake in a speedy outcome the way other participants in the process have. Mr. Alvarez noted that cases drag on because delay favors the bottom rung of the capital structure and the lawyers it employs. He cautioned that speed should not be overemphasized as it would permit the senior creditors to retain all the debtors value.
Commissioner Jones questioned why bankruptcy should divide values differently from what the parties agreed to under law pursuant to an enforceable contract. Messrs. Alvarez and Rosen observed that the issue concerned the ambiguity of value. Mr. Rosen noted that Chapter X was abandoned as the valuation process was so protracted and contentious. The Bankruptcy Code was designed to end the debate by forcing parties to compromise and to encourage compromise by giving these parties the right to debate.
Commissioner Shepard asked if this was not economic extortion. Mr. Rosen responded that under the former system, the judge had to decide the issue of value after a full trial, a process that under Chapter X did not work because it took too long. Mr. Holmes noted that one persons extortion is anothers unfairness. As an example he cited the National Gypsum case where the debtor, in league with its secured creditors, stated that its new stock would trade at $5.00 a share and while the junior creditors believed it would trade at $10.00 a share. A year and a half later, he recalled, the stock was trading at $30.00 a share. While it initially appeared that these creditors were holdout extortionists, it eventually turned out that they were right.
Mr. Holmes stated that there has to be a process where valuation can be aired, but it has to be a short enough process that did not consume ten years. He recommended that there be a two-year time limit on extensions of exclusivity. Citing LTV as an example, he said that case lasted eight years and the professionals were paid $50 million. He observed that management liked the process because during these eight years, the debtor had an extraordinary competitive advantage as it did not have to pay interest while creditors had to wait for their money. Noting that the case lasted six years, rather than eight, Mr. Rosen stated that he represented creditors who wound up getting only common stock. He noted that much of the time was consumed by litigation with the PBGC and that until the pension liabilities were determined, there could be no division of the assets.
Commissioner Jones asked Mr. Rosen whether he could determine the reorganizational prospects of a debtor. He responded that for some companies it is perfectly clear that they can reorganize if the debt is simply adjusted. He cited Federated and Macys as examples of these types of debtors. There were other companies where a simple fix will work, he noted. With other companies, however, one did not know whether they would be able to reorganize until some time elapsed.
Agreeing with Mr. Rosen, Ms. Baird said that the reorganization process begins long before the Chapter 11 case is filed. In a large case, she observed, a lot of information has been developed by lenders and other creditors and a workout can proceed for years before bankruptcy ensues. Mr. Batson noted that no one knows exactly how it will turn out. He mentioned that in the Dalkon Shield case, he was initially informed that his equity clients would not receive any value. Four years later, however, he said that a $2.4 billion trust had been established to fund Dalkon Shield claims, secured creditors were paid $100 million, and equity received $750 million. He stated that there was some empirical evidence showing that there were a lot of underwater equity cases with equity committees which basically extorted part of the value of the Chapter 11 process. The question presented, according to Mr. Batson, was whether the courts should have some threshold solvency or reasonable likelihood of solvency determination before permitting the appointment of an equity committee. He expressed concern with this approach because it was not easy to make this determination at the early stage of a Chapter 11 case.
Professor Altman cautioned that one must adhere to the fundamental purpose of bankruptcy reorganization, that is, it is a privilege, not a right, and that this privilege should be exercised by firms worth more alive than dead. If the debtor is worth more dead than alive, the Chapter 11 process should be truncated very quickly, he noted. He did not believe that the system enables a judgment to be made in the early stages of a Chapter 11 case as to whether the firms going concern value was worth more than its liquidation value. Nevertheless, he suggested that this determination should be done early, although not automatically. He posited that a much shorter exclusivity period be considered and that this determination be mandated at its expiration.
Commissioner Alix noted that the size of the debtor may affect its likelihood of reorganization. For example, he cited statistics that showed companies with more than $75 or $100 million in revenues had a 90 percent chance of successfully emerging from Chapter 11 as a going concern and that this percent was much smaller for cases in the $25 to $75 million range. For those cases with revenues less than $10 million, he noted that they had a 10 percent chance of successfully emerging from Chapter 11. Professor Altman acknowledged that there were studies indicating that approximately 15 to 20 percent of Chapter 11 cases confirm. Referring to a study published during 1995 in the Journal of Finance, he said that of the 806 publicly held companies that filed Chapter 11, 24 percent emerged successfully as public companies, 18 percent emerged as private companies, seven percent were merged, 15 percent were liquidated and 36 percent were unresolved at the time of the study. Of these cases comprising the 36 percent, he stated that about 75 to 80 percent of these cases ultimately emerged from Chapter 11. He noted that the companies comprising the study had an average of $122 million in assets and $260 million in revenues. Commissioner Shepard asked whether the breaking point for success depended on the debtors size or on the fact that it was publicly owned. Professor Altman answered that he was almost sure that the vast majority of Chapter 11 cases that did not confirm were privately owned.
Professor Warren asked the panelists what the effect would be of requiring companies to liquidate faster and whether that would be beneficial for the economy. Ms. Baird stated that she had been working with 20 or 25 banks for the past three to four years and that their number one priority was to eliminate lingering Chapter 11 cases by reigning in exclusivity and otherwise removing cases from Chapter 11 that should not be there. Specifically, she noted that there should be a short exclusivity period at the expiration of which the Chapter 11 debtor should be required to establish its value or viability to the creditors or the court.
Responding to Professor Warrens queries, Mr. Holmes noted that the focus should not be on liquidating companies quicker, but on resolving the process quicker. Ms. Baird continued that the valuation should be performed by the debtor itself rather than by independent liquidators. She stated that the bankruptcy court, in determining value, should have to find that there was value in the equity. Commissioners Hartley and Shepard expressed concerns as to the inexactitude and litigiousness that attend this determination. Mr. Holmes suggested that an absolute deadline for exclusivity termination be fixed in lieu of making this determination. Mr. Rosen described this suggestion as a safety valve for creditors because it would open up the plan proposal process to others. As an aside, he mentioned that the Southern District of New York was considering establishing a rule requiring status conferences to be held within three to four weeks after the commencement of every Chapter 11 case.
Commissioner Jones posited whether the problem could be addressed by allowing only publicly owned companies to reorganize under Chapter 11. Mr. Rosen responded that there were many large private enterprises that deserved to be reorganized. Mr. Holmes noted that if one of the goals of reorganization is to preserve jobs, then every company, regardless of size, should have the opportunity to avail itself of Chapter 11. Commissioner Shepard questioned whether this was a valid goal given the purposes of downsizing. He stated that bankruptcy was being used to salvage jobs in industries that were dying and over leveraged. He said that he did not understand why the government should be part of this salvaging process.
Commissioner Gose asked Mr. Rosen whether private companies should be required to establish their eligibility for Chapter 11. Answering in the negative, Mr. Rosen explained that to require a hearing for a company that is desperate and cannot meet a payroll on the following day or cannot get merchandise for the Christmas season would not be fruitful. He stated that the 1978 Bankruptcy Code wanted companies to be able to enter Chapter 11 easily because of the experience under prior law. He noted that being in Chapter 11 is not fun and that accordingly Commissioner Goses suggestion was not a solution. He stated that it was impossible to draw hard lines in many instances and that is why judges must have discretion, providing there is guidance with regard to the exercise of that discretion.
Mr. Alvarez questioned whether the speed of the reorganization process should be controlled and dominated by secured creditors. He also asked how the distinction would be made between companies of the same size that were privately and publicly held. He stated that the real abuse happened at the bottom rung of the capital structure which was where the case drags and uses the bankruptcy court as an offensive weapon. He said that the equity interests have a lot of motivation to let the case languish in the hope that the values get better. He noted that the professionals generally functioned as tools in this process and were not the cause of the problem. Professor Altman said it there were advantages to members of management to keep the firm in Chapter 11 as long as possible so they could preserve their jobs and obtain tremendous compensation in the form of incentives and options. On the other hand, he noted that statistics showed that 55 percent of the old CEOs are eliminated by the time a plan is filed and that 70 percent are removed by the time the plan is confirmed. Thus, he stated that the group under discussion was relatively small, but perhaps important in terms of the size of the companies where old management remained in control. Accordingly, he said that he would argue against the concept that management is the only cause. Nevertheless, he stated that to the extent that there was an incentive for management to keep the firm in Chapter 11 for as long as possible, it was very important to have a fixed period of time by which there must be a determination of whether or not the firm should be liquidated. He concluded that the driving force in these extensions was probably a combination of the lower rung of the credit structure, management and professionals. Mr. Rosen stated that he agreed with Mr. Alvarezs statement that professionals did not drive the decision-making process. Rather, this process involved parties and interests, such as management or equity holders. Mr. Alvarez said that the concept of a definite date is a protection that currently did not exist. Vice Chair Ginsberg observed that the problem with a definite date is that it does not remain definite. Mr. Alvarez explained that he was referring to a date certain by which the Chapter 11 debtors exclusive right to file a plan terminates. He said that courts give extensions for two or three years and that frustrates people. He stated that there should be some outside form of protection in the form of a date certain by which exclusivity terminates.
Mr. Batson replied that the problem was that one shoe doesnt fit all sizes. He said that Chapter 11 covers a broad range of debtors including small debtors to others with mass tort claims. He also expressed concerns about drawing artificial lines as to eligibility. He also was concerned about the provision which permits Chapter 11 debtors to elect to be treated as small businesses. Regarding the small business election option, he stated that this allowed a small business debtor to prevent the appointment of creditors committee and thereby create a situation where no one is monitoring the case, unless the court exercises its case management powers.
Mr. Hansen explained that he wanted the Commission to have input from the perspective of a debtor that successfully emerged from Chapter 11. He said that his firm, a billion dollar, privately held company, emerged from Chapter 11 in 26 months. Now publicly held, he noted that the company has increased its earnings by 23 percent following confirmation and its financial condition has constantly improved over the ensuing four years. Since confirmation, 47 percent of the debtors stores have been renovated which has increased store square footage by 25 percent, he observed. In addition, the debtor was able to preserve jobs and currently has 14,000 employees. He said that an advantage of the exclusivity period was that it permitted the debtor to put together a five-year business plan with projections for the first time. He likened Chapter 11 to flying in a hurricane. The first 12-week period was horrible. This was followed by calm where the debtor ran its business in a very protective cocoon. Then at the end of the Chapter 11 case when the negotiations occurred, the exit process was just as rough as the first part of this process.
Professor Altman asked Mr. Hansen at what point was the debtor able to determine that its going concern value was greater than its liquidation value. Mr. Hansen responded that it was approximately one year into the Chapter 11 case after the debtor went through its Christmas season. He said that the case was filed in August 1991 and by January 1993, the debtor was in a position to determine whether it was a reorganization or liquidation candidate. He also noted that exclusivity should have terminated at that point. Commissioner Alix observed that the bankruptcy process is devoid of any focus on the time-value of money. He asked the panelists whether a structure should be devised which provided incentives for professionals and management to focus on this factor. He then described a matrix divided into quadrants designed to identify those cases where the process was not time-consuming and produced high value. At the lowest end of this spectrum would be cases where the process was time-consuming and produced low value. For these, management and professionals should be penalized. For those cases in the middle of the spectrum, average time and average value, management and professionals should receive their regular fees. Services rendered in cases that were time-consuming and produced high value, or time-efficient and generated low value, may not be as valuable. For those cases where high value was produced and the time factor was low, the management and professionals should receive a reward. In response to Professor Altmans question which asked how value would be defined, Commissioner Alix replied that the court would make this determination based on a liquidation analysis obtained from the debtor. Although Mr. Batson was not sure if Commissioner Alixs model would work in practice, he agreed that the bankruptcy courts should return to the result-based approach in the compensation process. Ms. Baird noted that management already receives a bonus when the case confirms. With regard to professionals, however, she noted that this incentive-driven model would require lawyers to make business decisions. Mr. Batson noted that there were many alternative billing arrangements outside of bankruptcy and that there was room in the bankruptcy process for incorporating these arrangements. Messrs. Batson and Holmes viewed the problem as one that can be addressed by the courts rather than through legislation. Mr. Batson observed that there is a presumption implicit in this discussion that professionals are overpaid. He said there were data, however, indicating that cost for professionals was from two to three percent of value. He therefore questioned whether the presumption that professionals were overpaid was correct and suggested that there should be some data reviewed before the compensation structure is revised. Professor Altman agreed with the two to three percent cost range mentioned by Mr. Batson.
ADMINISTRATIVE MATTERS ORGANIZATIONAL MATTERS AND PRIORITIZATION OF ISSUES After the lunch recess, the Commission reconvened for the afternoon session of its meeting. Concerning the panels, Chair Williamson commented that the panelists demonstrated a remarkable ability to challenge each other and the Commissioners and that this is what the process was all about. He noted that this was similar to the adversarial system which provides a way where one can perhaps find good public policy, if not truth. Commissioner Butler remarked that he was impressed with the quality of the panelists presentations. He noted that the Commission was examining very sensitive areas such as exclusivity and that it should continue to identify those areas that concern the real world as this would be progress. Commissioner Ceccotti thought that the panels reflected a good cross section of views. She also observed that some of the issues discussed, such as status conferences under Section 105(d), had previously been discussed in prior meetings and that they were now surfacing in different contexts. While the panels served as great precursors to the Commissions future work, Commissioner Gose suggested that the Commission will have to revisit some of these issues in more depth. Vice Chair Ginsberg stated that he was impressed by the diversity and that the dialog was an effective method of teaching. He said that he learned a great deal from listening to the questions and responses. Commissioner Jones was pleased with the panels as a preliminary way of providing an overview of the issues confronting the Commission. Concurring with these comments, Commissioner Shepard also noted that he was surprised at the amount of agreement among the participants on some of the important issues. Commissioner Alix likewise agreed with the Commissioners comments. Chair Williamson then described the next portion of the meeting as the sifting and winnowing process with regard to the issues that the Commission must confront and resolve. In this regard, he stated that one of the Commissions first priorities was to reduce the issues to a manageable number. While he acknowledged that there was no magic number that is manageable, he noted that in the whole wide world of problems with the Bankruptcy Code, some of these problems were theoretical and others were practical. Some of these problems, he continued, were constitutional. He noted that some problems can be resolved by statute and others, while involving the system, lay outside the Commissions purview. He said that this process would not be completed this afternoon as it was one that would continue.
Referring to Commissioner Jones earlier comments, Chair Williamson agreed that the Commission could not afford to wait to start soliciting specific proposals. He encouraged interested parties to submit proposals right away. In response to Commissioner Butlers query as to whether Chair Williamson was still considering utilizing task forces, Chair Williamson said absolutely. For example, he noted that he was thinking about geographical hearings at which two or three Commissioners would officiate.
COMMISSIONS VISION STATEMENT Commissioner Alix prefaced his remarks by asking the Commissioners to recall the matters he discussed at the February 24 meeting. He stated that he was still pursuing the basic goal of establishing parameters and principles that would then allow the Commission to consider the issues in a framework. He noted that whether the process, issues or principles are modified, the idea is to have some form of structure that allows the Commission to keep matters in context and to continue moving forward.
Reviewing his March 7 memorandum, he noted that he had suggested that the Commission articulate its vision in a statement which, in turn, would contain the Commissions philosophy, its image of the system and the Bankruptcy Code at its future best. The vision statement would then lead to the Commissions mission, he noted. The mission or the Commissions charge should be reflected in the Commissions goals, objectives and tasks. To this end, he stated that he had disseminated to the Commission draft vision and mission statements together with a concept for defining what some of the issues should be. The comments that he received in response thereto would be discussed today. Commissioner Alix distributed copies of a matrix in which he and Linda Hamel, his associate, classified the issues and topics identified to date. Professor Warrens November 2 memorandum, which identified six major substantive areas, was utilized as a guidepost in the preparation of the matrix, he stated. He observed that the matrix characterized the issues and topics as strategic, managerial, operational or task level.
The next part of this process, according to Commissioner Alix, was to develop a time line setting out how the Commission will attack these issues so that it will have a final report within the mandated deadline. He observed that the amount of work that must be accomplished necessitated more staff and resources than currently available at the Commission. He suggested that it would also require subgroups and volunteers.
Concerning the Commissions vision statement, Commissioner Alix stated that it should reflect a shared view of what the Commission wants in the bankruptcy system. The draft vision statement that he proposed stated that the Commission envisioned a national bankruptcy system that provides relative certainty to its users, a system that is user friendly, low cost, and speedy. The system takes advantage of the available technology, eliminates the major problems and frustrations in the current system through solutions that use the current infrastructure where possible and the system is structured to meet the needs and demands of the users over the next 20 years, he continued. Commissioner Alix then explained why he chose certain terms in fashioning this vision statement. For example, he used the phrase national bankruptcy system because it presented a broader view than just a reference to the Bankruptcy Code. He explained the importance of the word certainty and the adverse consequences of a system that lacks it. Likewise, he described the significance of user friendly and low cost and speedy, among other terms in the draft vision statement. With regard to the statements reference to the future, Commissioner Alix explained that the Bankruptcy Code was largely based on an industrial society within the continental United States without much consideration of its international impact.
Thereafter, Commissioner Alix reviewed the comments that he had received from the Commissioners on the draft vision statement. One of these suggested eliminating the reference to user friendly as it may create the impression of encouraging the nation to walk away from its debts. Another comment suggested that the phrase low cost be changed to cost efficient or be eliminated in its entirety. A third comment was an alternative, shorter version of the draft vision statement.
Commissioner Shepard asked whether the word speedy should be used. He wondered whether the Commission, by employing this term in its vision statement, sought to emphasize speed or whether it wanted to emphasize reducing or eliminating undue delay. In lieu of user friendly, he suggested that certain, consistent and uniform be utilized. Commissioner Ceccotti agreed with Commissioner Shepards comments regarding the term speedy. With regard to the phrase user friendly, Commissioner Alix noted that it involved both operational and moral issues. Commissioner Butler, acknowledging the constraints imposed by the Constitution, suggested that there should be a reference to a uniform system of bankruptcy. He explained that the bankruptcy system means fresh start and equitable asset distribution. He also noted that there should be a reference in the vision statement to the constraints imposed by the Commissions time and resources.
Chair Williamson observed that the concept of maintaining and improving what currently exists in the bankruptcy system should be reflected implicitly if not directly in the vision statement so that there is no misapprehension of what the Commission is doing. He also noted that Congress has given the Commission a partial mission statement in that it has defined the Commissions parameters in the language of the enabling statute. Commissioner Shepard noted that the legislative history pertaining to the creation of the Commission as reflected in the Committee Report would appear to limit the Commission to fine tuning the Bankruptcy Code. He reminded the Commissioners, however, that they previously agreed that there was additional language in the legislative history that was not as binding and that he certainly did not want the vision statement to state that areas that are not correct or proper will be maintained. Chair Williamson stated that it was important to remember what it is that Congress has asked the Commission to do. With regard to Commissioner Alixs use of the work national, Chair Williamson said that it was a very important word to keep in the vision statement in light of recent Supreme Court cases.
COMMISSIONS MISSION STATEMENT Turning to the Commissions mission statement, Commissioner Alix explained that it serves to define the Commissions program. He reviewed the draft mission statement that was circulated to the Commissioners. This statement said that the Commissions mission over the next 18 months was to study the bankruptcy system, its issues, problems and opportunities and produce a report. The report should be understandable, usable, practical and credible. In addition, the report should lead to legislation as well as other practical and operational changes in the system so that it promotes or advances the Commissions vision in all areas such as the United States bankruptcy system, capital recovery process, and the business problem and debt resolution process for individuals and businesses with regard to relative certainty of speed, cost, timing, execution and range of possible outcomes. He then reviewed the significance of the terms comprising this statement.
Commissioner Alix reviewed the comments that he received from the Commissioners regarding the proposed mission statement. He agreed with the comment that suggested uniformity and fairness should be included in the last sentence of the statement. A second comment suggested that the length of the statement should be reduced. A third comment suggested that the statement should include a focus to eliminate inconsistent and unintended interpretations of the Bankruptcy Codes provisions.
Commissioner Hartley recommended shortening the last sentence and including the phrase uniformity and fairness. He also noted that the mission statement should be as brief as possible to lessen the chance that it will be misinterpreted. Commissioner Shepard agreed that the statement should be shortened. He noted that the Commission had yet to adopt any philosophy regarding its emphasis. He suggested that the portion of the proposed mission statement that follows the word vision should be eliminated because it essentially embodied the vision statement. Commissioner Jones concurred with Commissioner Shepards suggestion. Vice Chair Ginsberg suggested that the mission statement should closely follow Section 603 of the enabling statute. In general, the Commissioners agreed with this suggestion. Commissioner Ceccotti also concurred with the suggestion of eliminating the verbiage following the word vision in the mission statement. Commissioner Butler discussed usage of the words study and evaluate and suggested that the mission statement employ the same words as the enabling statute.
Commissioner Butler noted that the credibility of the Commission was very important. He observed that every one of the changes that have been made to the Bankruptcy Code since 1978 has a patron. He said that suggesting what had been previously done was not perfect would not accomplish much. He noted that the Commission was not asked to do Congress job of going back and doing all this minutia legislating. The Commissions responsibility, he observed, was to look at the structure of the system, rather than the nitty gritty of the Bankruptcy Code. Commissioner Alix stated, however, that there may be members on the Commission who disagree with this view. Commissioner Jones recalled that it was her suggestion that the Commission focus on the Bankruptcy Code. Commissioner Butler interjected that it was because she did not like the way the Code was written. Commissioner Jones noted for example that the Commission concurred at the February meeting that the venue provision was wrong and needed to be fixed. Agreeing, Commissioner Butler explained that this was a structural change. Commissioner Ceccotti observed that these two views were actually consistent. She explained that after the Commission addresses the structural concept, there will be a need to address the Codes language as part of the Commissions recommendation. Commissioner Alix noted that this process may involve a direct evaluation of the Bankruptcy Code.
Chair Williamson asked Commissioner Alix to synthesize the comments discussed at the meeting and circulate a revised draft to be reviewed at the May meeting. He cautioned the members, however, that the vision and mission statements, even if adopted at the May meeting, could thereafter be changed as this was a continuing process.
The next topic discussed concerned the draft matrix of issues. Commissioner Alix said that the matrix of issues should be considered in light of the Commissions vision and mission statements. As to how the Commission should allocate its time, he emphasized that it was very important that the Commission conduct this process from a point of view of whether these issues were fundamental, strategic or constitutional which would be where the most change could be accomplished, given the Commissions limited time resources.
Commissioner Alix then described the background behind the preparation of the issue matrix. He noted that it does not reflect every issue discussed to date by the Commission. Rather, he said that it follows an outline that Professor Warren previously prepared. The six general topic areas were identified as the following: a) bankruptcy administration; b) consumer bankruptcy; c) issues affecting environmental law, tax, banking, insurance, regulated industries, future claims, mass torts and Chapter 9; d) issues affecting employees, labor law, pensions; e) business bankruptcies, including partnerships and transnational matters; f) the role of bankruptcy and bankruptcy as commercial law. Commissioner Alix reminded the Commissioners that this was a working outline or master list to which issues could be added in a spreadsheet format. It would also serve as an indexing system, he noted.
Commissioner Ceccotti recalled that the topic outline upon which the issue matrix was based was geared to organizing hearing days. Agreeing with Commissioner Ceccotti, Professor Warren stated that the topic outline as contained in her November 2 memorandum was really an organizational principle for six meetings and that it was not an intellectually structrured principle for how one would organize these topics. Commissioner Alix invited Professor Warren to rethink the topic organization in a more intellectual way for the matrix.
Commissioner Alix then read into the record a memorandum dated April 19, 1996 from himself which was addressed to the Commissioners. The memorandum concerned the Commissions mission, goals, work plan and time line. In this memorandum, Commissioner Alix noted that all issues included in the matrix should be consistent with the Commissions vision and mission statements. He also urged the Commission to form subcommittees that were organized around the six major topic areas on which the matrix is based. The subcommittees would be presumably staffed by the Commissioners who, in turn, would probably sit on two or three subcommittees, he noted. He suggested that the subcommittees should recruit volunteer experts who would assist the subcommittees with researching and writing position papers. In addition, he envisioned these subcommittees holding hearings on their topics at various association conferences. Further, the subcommittees would select speakers to address the full Commission and submit their subcommittee reports to the Commission. Commissioner Alix stated that the subcommittees would be responsible for pursing the goals, objectives and tasks of the Commission.
Commissioner Alix then discussed the proposed time line. By May 1996, he said the subcommittees should be formed. During May and June 1996, volunteers should be chosen and assigned projects. Thereafter, the volunteers should conduct research over the period of July through September 1996. By September 30, 1996, these experts would be required to submit a draft position paper to the pertinent subcommittee. A final draft position paper would be due by November 30, 1996. By December 31, 1996, the position papers would be ready for submission to the full Commission. Beginning in January 1997, the subcommittees would prepare their reports. The Commission would then review the submissions in public hearing formats over the period of January through June 1997. Those that helped write the papers for the subcommittee would be invited to speak before the Commission to clarify any matters and to assist the Commissioners in their understanding of the submissions. By June 1997, the Commission would probably cease its public hearings. During July 1997, Professor Warren would finalize the first draft of the report for the Commissions review. During August 1997, she would prepare the second draft. The third draft would be completed during September 1997 and the final draft would be completed by October 1997.
Commissioner Hartley commented that the idea of a time line was excellent and that the subcommittee approach was probably the way to go provided there was better definition of what the subcommittees were supposed to do and what their focus would be. Commissioner Shepard also agreed that it was a marvelous system that should be adopted as soon as possible. He also suggested that subtopic d be restructured to include employees, labor, pension, tax, environmental, securities and perhaps regulated industries. Professor Warren said that this proposed grouping was too extensive. Commissioner Jones indicated that she was very sympathetic to the effort because she believed that the Commission needed some framework like this to accomplish its work. She also stated that she very much endorsed the task force concept and time line. She suggested that there should be six subcommittees. With regard to subtopic c, she would restructure this group. She questioned whether regulated industries should be categorized under bankruptcy law at all. She suggested that tax be given its own subtopic heading. Commissioner Alix agreed with Commissioner Jones suggestion that there be six subcommittees.
Commissioner Butler was very supportive of the approach, although he noted that the Chair should consider it and then determine whether he agrees with it as the decision was his to make. Commissioner Ceccotti endorsed the approach and stated that the idea of establishing subcommittees was terrific. She said that she had received many offers of assistance from other practitioners to work on any topic assigned to them. She agreed with Commissioner Jones comments with regard to the subtopic organization. She also concurred with Commissioner Butlers statement that this was a suggestion to the Chair. Agreeing with Commissioners Butler and Ceccotti, Commissioner Gose stated that Professor Warren should restructure the topics so that she is comfortable with them intellectually. Commissioner Ginsberg stated that this approach would give the Commission direction which it had lost for a period of time and would provide a framework through which the renewed enthusiasm of the Commissioners could be channeled.
Professor Warren stated that she very strongly endorsed the idea of a framework. Nevertheless, she noted that this approach had powerful content implications and expressed concern that the time line reflected a notion that the subcommittees would function without direction from the Commission and without outside hearings, and that the reports would not be submitted to the full Commission until mid-1997. Commissioner Alix clarified that the approach was not intended to exclude other processes and that he assumed the Commission would continue to hold its public meetings.
Professor Warren indicated that she was very concerned about the winnowing process. She questioned whether or not there may be a consensus in different areas where the Commission could offer meaningful changes to Congress. She mentioned that two ad hoc committees had been formed to follow up on the Commissions direction from the February meeting. These committees were formed to begin developing a report concerning bankruptcy administration, she explained. Commissioner Jones observed that the subcommittee concept would lessen the work load of the Commissioners and permit them to focus on two or three areas.
In response to Commissioner Goses request for additional information regarding the two ad hoc committees that she previously mentioned, Professor Warren said that they were formed to advise her in the two areas where the Commission had achieved a working consensus. So following the direction of the Commission, she put together two committees to develop a report on these areas. She noted that the subcommittee approach had powerful content implications in that it short-circuits the process by which people can make their views heard before the Commission. Commissioner Gose observed, however, that the Commission as a whole would continue the public meeting process while the subcommittees did their work. Commissioner Alix also stated that the Commissioners as a group would like to be involved in the formation of study groups and in the selection of panel participants. In sum, Professor Warren stated that she was concerned whether the formation of these subcommittees should occur before the Commission has heard anything more about these topics and that it may turn out to be counterproductive. Commissioner Alix stated that it was important to have the subcommittees formed as soon as possible given the many issues that must be examined.
Commissioner Jones observed that there were a lot of groups that have yet to contact the Commission with their views. If they knew there were subcommittees devoted to certain topics, these groups may be more willing to come forward, she noted. Agreeing, Commissioner Alix stated that the subcommittees would be better able to service their concerns.
Chair Williamson observed that the Commission was committed to a two-track process. One is internal, consisting of the Commissions work of evaluating the Bankruptcy Code and practice and recommending changes. The other is external, a process that involves hearing from those who are in the bankruptcy community. With regard to the question of study groups or choosing speakers, he said that these efforts inherently involve delegation and that the Commissioners should trust each other while keeping in mind that the Commission as a whole makes the ultimate recommendations. He noted that it was important for the Commission not to study issues where there appeared to be a consensus. He asked Commissioner Alix and Linda Hamel to generate within the next ten days their synthesis of todays discussions regarding the vision and mission statements, a time line and issue matrix. In turn, the Office will circulate the revised draft to the Commissioners who would have ten days to comment, either orally or in writing to the Office, Professor Warren or himself. He then will prepare a memorandum that defines an approach for the next 18 months that reflects everyones interests and concerns.
After a short recess, the meeting was reconvened. Before proceeding to next item on the meeting agenda, Chair Williamson reminded those gathered that they were welcomed to speak at the public participation portion of the meeting.
Ms. Jensen-Conklin, Deputy Counsel, reported that the Commission has $1.5 million authorized and that $1 million has been appropriated. Of the appropriated amount, approximately $158,000 had been expended to date. Given projections for the 1996 fiscal year, she noted that the Commission was about $84,000 under budget. She also explained the expenses incurred for meetings held on-site at the Federal Judicial Center and off-site.
Chair Williamson explained that the appropriation of the Commissions remaining funding was an important objective. To this end, he noted that he and Ms. Jensen-Conklin had met with several administration officials to discuss the appropriation process. He also stated he along with the Office staff would be working with individual members of Congress to assure that the remaining $500,000 is appropriated. Mr. Snowden, General Services Administration External Services Director, confirmed that the appropriated funds were currently available to the Commission.
Chair Williamson asked the Commissioners to read the Commissions Charter and By-laws within the next 20 to 30 days. He said that there were some changes that may be beneficial and that he may submit those changes to the Commission at the May meeting. He encouraged anyone who had any suggestions to forward them to him. If he had any changes to propose, he stated that they would be sent to the Commissioners.
Chair Williamson said that Commissioners ought to speak whenever and wherever they want as long as they are expressing their own personal views. He stated that it was essential that all Commissioners individually or in groups speak to the public as well as listen. To that end, he said that it was also essential that the Office staff serve as the central repository for invitations and acceptances. The purpose of this procedure is to ensure that an inadvertent trend does not develop and that there is breadth and diversity in terms of geography and subject matter. He asked the Commissioners to let the Office staff know and they will maintain a log or report of acceptances which will be available at each meeting.
Chair Williamson stated that the burden of speaking should not fall either on the Chair or any one Commissioner. He noted that of the many invitations that he had recently received, he had accepted two, the California Bankruptcy Forum Conference and a group of Chapter 11 bankruptcy attorneys in New York.
Ms. Pratt, Administrative Officer, reported on the travel and accommodation arrangements for the May meeting. The Commission also discussed the format of the meeting. Professor Warren stated that she would prepare a memorandum identifying the issues for the May meeting.
Chair Williamson reviewed future meeting dates with the Commissioners. These were identified as June 20 to 21 and July 18 to 19, 1996. No meetings were planned for August 1996.
Commissioner Shepard then discussed the need to have a meeting which is focused on government issues. He explained that the government creditor was unlike other creditors in bankruptcy cases. For instance, he said that government personnel have fiscal limitations regarding travel. He suggested that the Commission convene a meeting in September to coincide with a conference of state and local government representatives to be held at Santa Fe, New Mexico. The focus of this meeting, Commissioner Shepard noted, should be on government issues in bankruptcy, including environmental, tax, securities, labor and related matters. Chair Williamson stated that he would consult with the Commissioners regarding his suggestion and that he would discuss it in greater detail with Commissioner Shepard thereafter.
Chair Williamson noted that the executive directors position was vacant. He said that he personally did not have a candidate in mind. He asked representatives of the bankruptcy community that were present at the meeting to make it clear to their members and constituents that this vacancy existed and that applications should be submitted as quickly as possible to the Office staff. He said that the salary range is outlined in the statute and that additional information about the position was available from the Office staff. PUBLIC PARTICIPATION KAREN CORDRY
Ms. Cordry identified herself as the bankruptcy counsel for the National Association of Attorneys General, an organization that represents 50 state attorney generals as well as the five territories and the District of Columbia. She noted that her statements today were made on her own behalf.
She began by agreeing with Commissioner Shepards statements regarding the importance of holding a meeting on governmental issues. She noted that the states were becoming much more active in bankruptcy matters and that the recent decision by the United States Supreme Court, Seminole Tribe of Florida v. Florida, would impact further on this process. In particular, she observed that bankruptcy has had a major impact on the way states have been able to enforce their laws, collect their taxes, administer their child care support and student loans. Accordingly, she supported having the Commission hold a meeting in Santa Fe. She also mentioned that her organization would be very interested in working with the Commissions subcommittees dealing with governmental issues.
Ms. Cordry prefaced her remarks regarding Seminole by reviewing the history of Section 106 of the Bankruptcy Code. She noted, for example, that it had no predecessor under the former Bankruptcy Act and that there were many disputes regarding the bankruptcy courts jurisdiction regarding federal and state governmental entities. As originally enacted, Section 106 permitted affirmative recoveries and mandatory counterclaims as well as non-mandatory counterclaims in the recoupment sense, she observed. The provision also eliminated the immunity defense. She then reviewed the Supreme Courts holdings in Hoffman and Nordic Village which essentially held that the bankruptcy court was not the forum to recover monetary payments from local, state or federal government. Ms. Cordry stated that the Supreme Court in 1989 rendered its decision in Pennsylvania v. Union Gas that Congress under its plenary Article I powers could abrogate a states Eleventh Amendment immunity.
Pursuant to the Bankruptcy Reform Act of 1994, Section 106 was substantially revised, according to Ms. Cordry. The provision was restructured to provide that it clearly abrogated sovereign immunity. She recalled that her organization wrote to Congress with regard to the dubious constitutionality of this amended provision in light of the Eleventh Amendment. During the interim, the Merchants Grain case was wending its way through the appellate courts, she noted. In this case, she observed, the State of Ohio sought to liquidate a failing grain operator in order to pay farmers owed money by the operator. Within 90 days, the company filed for bankruptcy in Illinois and moved against Ohio to set aside the payments as preferential transfers. The State of Ohio, moving to dismiss the action based on sovereign immunity, prevailed in the bankruptcy and district courts, she said. Between the time the case was argued in the Seventh Circuit and the decision was rendered, the 1994 Amendments to Section 106 were enacted and given retroactive effect. After receiving an adverse ruling from the Seventh Circuit, the State of Ohio asked the Supreme Court to grant certiorari and the remaining 49 states filed amicus briefs in support thereof.
In the meantime, however, the Supreme Court decided Seminole which held that if Article III did not empower Congress to enact a statute permitting states to be sued without their consent, then it did not have the power under Article 1 either, she stated. Given its decision in Seminole, the Supreme Court then granted certiorari in Merchants Grain, vacated the Seventh Circuits decision and remanded the case for reconsideration, she reported. In light of these recent decisions, Ms. Cordry predicted that Section 106s provisions as applied to state, local and municipal governmental entities will be found to be unconstitutional. She also speculated that the decision may impact on the bankruptcy courts authority to determine tax obligations owed to state, local and municipal governmental entities under Section 505 of the Bankruptcy Code if these entities have not filed claims for theses obligations. Correlatively, she noted that Ex parte Young clearly did not permit determination of purely state law issues as it only applied to issues of federal law.
Chair Williamson commented that the consequences of Seminole and Merchants Grain will have practical and theoretical implications in bankruptcy law and practice. Ms. Cordry noted that these cases may impact on the ability to sue a state entity for violations of the automatic stay or discharge injunction where the state has not waived its immunity.
Ms. Starr stated that her presentation represented the views of the staff of the Security and Exchange Commission ( SEC ), and not that of the Commission itself.
After explaining the work of the SEC, Ms. Starr observed that there were many points of contact between her agency and the bankruptcy system. These included law enforcement, regulatory compliance of public corporations and their disclosures regarding the issuance of securities, overseeing the propriety of security registration exemptions, and generally protecting investors. She noted that the Bankruptcy Code recognizes that the SEC is more than just a creditor. In Section 1109, for example, she explained that the SEC has party in interest status in Chapter 11 cases.
The focus of her presentation, she noted, was law enforcement concerns that the SEC has in bankruptcy cases. In the consumer context, the SEC was interested in preventing abuses of the automatic stay, discharge provisions and efforts to undermine its enforcement activities and remedies, she observed. In sum, she stated that the SEC was interested in making sure that bankruptcy was not a haven for wrongdoing. With regard to corporate cases, she noted that the SECs interests were more complex as they involved issues concerning securities law issues and discharge abuse.
Ms. Starr said that one of the general concerns of her agency was that there be uniformity and an effort to close some of the open-ended provisions and gaps in the Bankruptcy Code. These were the most troublesome aspects to the SEC and other law enforcement agencies, she explained, because of the lack of certainty. Referring to her submission to the Commission, Ms. Starr highlighted those issues that she hoped would be considered. These included the scope of the automatic stay and its exception for law enforcement activities, the open-endedness of Section 105, determinations involving whether or not a fund established by a law enforcement agency constitutes property of the estate or is a constructive trust, the dischargeability exceptions, Chapter 13's discharge provisions for fines and penalties as well as forfeitures for intentional wrongdoing, notice and reporting issues, and non-debtor discharges in Chapter 11.
Upon conclusion of her remarks, Commissioner Shepard asked if there was sufficient similarity between the issues she discussed and those of the state government entities. Noting that several issues were the same, Ms. Starr stated that a combined meeting on state and federal governmental issues would be useful. RICHARD BARTEL
Mr. Bartel, speaking his own behalf, identified himself as a private investigator in Washington, D.C. He said that his firm specialized in bankruptcy fraud issues and that it generally did work for creditors.
He noted that he had previously brought to the attention of the Commission various methods by which organized crime was using the bankruptcy system as an instrumentality for the perpetration of fraud. He recalled that he had cited the Eastern Airlines case, a matter that his firm had been investigating for four years. He noted that the trustee had taken the assets from this case and was attempting to start his own airline under the name of Pan Am.
Mr. Bartel stated that he had several recommendations that would minimize some of the fraud opportunities in bankruptcy cases. These recommendations included allowing liquidation in Chapter 11 only where a trustee has been appointed and confirmation has occurred; rei


text:
OBITS - Incomplete obituaries are marked with a *
G. Ralph Hobbs
Jan 15, 2013
Jan. 15, 2013
G. Ralph Hobbs, 71, of Athens, died on Tuesday morning, Jan. 15, 2013, at his residence.
A native of Sullivan County and longtime resident of Athens, he was a son of the late Gladstone W. and Eliza Gardner Hobbs, and was also preceded in death by a brother, Coy Lynn Hobbs. He was a member of Zion Hill Baptist Church, and had been the supervisor of the Headstart-Family Resources Agency until his retirement.
Survivors include his wife, Judy Beam Hobbs of Athens; two daughters and one son-in-law, Tara Elizabeth and Neil Hensley of Unicoi, Colo., and Rachel Leigh Hobbs of Winston-Salem, N.C.; 12 grandchildren; two great-grandchildren; two stepdaughters and one stepson-in-law; several nieces and nephews; and one sister and brother-in-law, Judy and Bobby Greenlee of Greeneville.
A celebration of life service will be held at a later date.
In lieu of flowers, the family requests memorial contributions be made to Zion Hill Baptist Church, 269 County Road 516, Etowah, TN 37331.
You may sign the guest register at www.smithfuneral&cremationservicesofathens.com
Smith Funeral & Cremation Services of Athens is serving the family of G. Ralph Hobbs.

subset: commoncrawl


text:
The kingdom of Marshovia is so small that one of its richest citizens, Madame Sonia, is responsible for paying more than half of its taxes. Understandably, when she runs away to Paris and takes her money with her, it means disaster for the tiny country. In order to prevent a government collapse, King Achmet dispatches dashing Count Danilo to win back Sonia's allegiance and restore the nation to prosperity.
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Collegiate Millennials Shaping Culinary Trends of Tomorrow
"On-the-go fare" among food needs driven by 18- to 22-year-olds
ROCKVILLE, Md.—College millennials' current needs for powerful nutrition, flavorful food, comfort and indulgence and speed and convenience are driving their food choices, which in turn shape the culinary trends of tomorrow.
As incoming college freshmen pack their bags for school this fall, many will be saying goodbye not only to family, but also to existing eating habits. Thanks to innovative campus foodservice, adventurous restaurants and the influence of new acquaintances, impressionable students are exposed to new foods that quickly turn into favorites. They develop new eating habits and expectations that will stick with them long after graduation, impacting the food industry for decades, according to the recently released Collegiate Gen Y Eating: Culinary Trend Mapping Report by market research publisher Packaged Facts and strategic food and beverage innovation agency CCD Innovation.
"The college environment, with its campus food courts, self-serve bars and convenience stores along with plenty of nearby cheap global eats, offers students an exceptional opportunity to experience new foods, flavor profiles and eating styles," said Kimberly Egan, CEO of CCD Innovation, San Francisco. "Just as minds expand in the classroom, palates expand in college and are forever altered. The food industry will need to respond to these adventurous consumers as they leave campus and start earning their own paychecks."
To get an inside look at the dynamics of food attitudes and behaviors of the nearly 20 million 18- to 22-year-olds who are currently attending college, CCD Innovation conducted several online quantitative research studies in late 2011 and spring 2012 at several college campuses nationwide. From this research comes the basis of the report, which outlines seven culinary behaviors or preferences this cohort is developing that are distinct from previous generations.
Profile 1: Dining Along the Meatless Spectrum: More students align themselves along the less-meat to meatless spectrum, from flexitarian to vegetarian to vegan and even raw diets.
Profile 2: The Mighty Chickpea: Inexpensive, versatile and packed with protein, the worldly chickpea fills students' bellies in myriad ways.
Profile 3: Nut Butters: A Protein Pal: Although Gen Y students grew up in a climate of peanut distrust due to the increase in children's allergies, college students today have embraced peanut butter's valuable protein power along with that of other nut butters, especially almond.
Profile 4: Fruit & Vegetable Discovery: New college students are discovering a whole new world of fruits and vegetables. On campus they encounter expansive salad bars, unfamiliar vegetable side dishes and unusual vegan and vegetarian fare. Friends, restaurants and student retail haunts like Trader Joe's introduce them to new dried fruit snacks, to-go salads and produce-centric beverages.
Profile 5: Asian Love Affair: We hear so much about how younger Millennials have grown up eating global cuisine, and the study found many young consumers continue the discovery in college. Thanks to dining halls and nearby ethnic restaurants, students have many opportunities to try new foods. While flavor is the primary driver, other qualities attract students such as the vegetarian possibilities and robust amount of vegetables. Customization is another draw.
Profile 6: Italian & Mexican: Familiar Comfort: While college is a time to explore new foods and diets, it's also really stressful. Sometimes a kid needs a little comfort, something familiar, warm and filling. That's where Italian and Mexican cuisines come in.
Profile 7: On-the-Go Fare: "Easy to make." "Portable." "Eat quickly." "Eat as I walk to class." These are the refrains coming from our student survey respondents about their "go-to" foods.
--CSP Daily News