- Dec 14, 2000
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Kenneth Klee spent his early career as a congressional staffer, drafting the 1978 law that set the framework for the bankruptcy system.
So the UCLA School of Law professor -- a lifelong Republican and, from 1992 to 2000, legislative chairman of the National Bankruptcy Conference -- figured lawmakers would want his input on the bankruptcy overhaul they worked on for eight years before finally passing it in 2005.
He was wrong.
"The Republican staff, at least during my years as chief of legislation from 1992 to 2000, largely spurned the efforts of the conference to work out linguistic issues," Klee said, "even when we showed them pages and pages of grammatical and typographical errors." Instead, the legislators relied on the expertise of creditor lobbyists to write much of the bill.
The result, said Klee and Richard Levin, a partner at Skadden, Arps, Slate, Meagher & Flom who was Klee's Democratic counterpart in drafting the 1978 bill, is a mess -- and an avalanche of disputes that will soon roll into the federal appellate courts.
The Bankruptcy Abuse Prevention and Consumer Protection Act -- which went into effect last October -- makes problematic changes to the system, Klee and Levin say, using problematic language to do so.
Among Klee's examples:
A cross-referencing error changes the apparent meaning of a provision about loan default penalties.
A section aimed at curbing malpractice suits against bankruptcy practitioners doesn't mention the statute under which most such suits are filed.
Ambiguous language in a provision on trustee commissions leaves unclear whether compensation for a trustee is capped.
In short, the country's top bankruptcy lawyers say the legislation is intellectually and linguistically insolvent.
"The problem is the new law is so poorly crafted and so internally inconsistent that within a year or a year and a half, you're going to see a lot of appeals," Klee said.
That's a concern for federal judges, who are trying to figure out how to deal with the flood of appeals bound to be unleashed by the substantive, often ambiguous changes.
The changes to the law are likely to set more competition, and litigation, among creditors. And that litigation will be compounded by the cross-referencing and grammatical shortcomings that the appeals courts will have to resolve.
"The bill was drafted without consultation with bankruptcy judges and courts," said 9th Circuit Chief Judge Mary Schroeder. "Since they didn't consult with judges, they didn't use terms of art."
The reason for that, say opponents and supporters of the bill, is that bankruptcy's increasingly important role in the economy has raised the stakes for large creditors.
These days, it's the creditors' lobbyists who hold sway with Congress, rather than the more independent lawyers and judges of the National Bankruptcy Conference.
"Now they have to compete with a lot of other groups to influence the process, and frankly, bankruptcy has become such a big part of the economy," said Philip Corwin, a Washington lawyer who lobbied in support of the new law for the American Bankers Association. "Bankruptcy became too important to be left just to a group of self-appointed experts."
But without the expertise -- self-appointed or otherwise -- of the conference's judges and lawyers, there is widespread judicial concern over how the law will shake out.
Schroeder said the chief bankruptcy judges from around the country are scheduled to meet in April to discuss provisions in the law that allow interlocutory appeals.
Like other jurists, Chief Judge Barry Russell of the Central District of California Bankruptcy Court -- the country's largest -- is concerned, though he remains circumspect in opining on the bill.
"I have no opinion one way or the other on it, but there was not a lot of legislative history," he said. "Other than the banks and creditors, from the newspapers, I don't think anyone thought it was a good bill."
TAKING CARE OF BUSINESS
Proponents and critics agree that the one unifying principle behind the law is that creditors with good lobbyists got what they wanted.
That's because during the eight years it sat around Congress, the legislation turned into a virtual sump for provisions suggested by business interests.
Many of those provisions will work to the detriment not just of debtors, but of other, smaller creditors. This is true both of the little-publicized changes to business bankruptcies and the well-reported draconian changes to consumer insolvency.
Stephen Case -- a former partner at Davis, Polk & Wardwell in New York, and an adviser to the National Bankruptcy Review Commission, which proposed much of the legislation in a 1997 report -- said the drafting process was largely a lobbyist free-for-all.
"Suppose you let a bunch of school kids loose on an old car with a paintbrush," he said, in describing the process.
Case nevertheless says the approach, messy as it was, resulted in changes that will curb debtor abuse. He says critics should blame debtors who push the envelope -- and judges who were unwilling to put debtors out of business.
The 1978 bankruptcy law, he argues, was "the high-water mark in world history of a favorable-to-the-debtor statute." He says the question now is whether the changes will strike a balance that protects the interests of debtors, creditors and the employees of insolvent companies.
Case acknowledges drawbacks to the new law. He agrees that increased power for such creditors as utilities and landlords and the strict deadlines for debtor plans will probably create more competition among creditors -- and more litigious bankruptcies.
BIPARTISAN EFFORT
Whatever criticisms may be leveled at the law, supporters contend it was not a left vs. right battle.
"This legislation is a product of bipartisan support," Terry Shawn, a spokesman for Republican Rep. F. James Sensenbrenner Jr., a bill sponsor, wrote in an e-mail last week. "It passed the House by a vote of 302-126. It passed the Senate by a vote of 74 to 25."
The bill's critics are bipartisan as well: Democrats and Republicans throughout the National Bankruptcy Conference. And Case, a proponent of the business changes, is a Democrat.
It's not hard to see why -- especially in a Republican Congress -- that creditors can take control of a bankruptcy bill. They're the only ones who show up to talk about it.
"One of our problems is there's no future debtors of America association," said Sally Neely, senior counsel at Sidley Austin Brown & Wood in Los Angeles, and the bankruptcy conference's current legislative chief.
Without the adversarial process behind the drafting of most economic legislation, the conference in past years has made an effort to advocate for a balance between debtors' and creditors' needs, Klee and Levin said.
But as the 2005 law was developed, the conference -- for the first time -- found itself marginalized. This created a situation in which the only adversaries were among creditors vying for favorable provisions.
For example, Corwin, the Bankers Association lobbyist, said he wanted to keep judges from indefinitely extending the timeframe in which a debtor has the exclusive right to file a reorganization plan.
"My client supported putting some limit on exclusivity because we've seen a lot of cases where the judge isn't tough enough," he said. The new provision gives creditors "a chance to take control."
But Corwin isn't so sure about other changes, including the lease and reclamation provisions affecting retailers. "I question whether what's been done in the bill is the best policy. I think it's going to make it more difficult for retailers to reorganize."
But with everyone -- including his client -- acting in their own self-interest, he wasn't about to challenge the issue of lease deadlines or other matters pushed by different creditor groups.
"The banks felt like we couldn't criticize someone pushing for a firm deadline where [debtors] could abuse it," he said.
While the piecemeal process of having lobbyists for different groups write legislation is anathema to lawyers like Levin and Klee, Corwin said that's how things work now, and critics at the bankruptcy conference should get used to it.
"I can understand their point -- they don't like that bankruptcy law has become politicized," he said. But that was inevitable, he argues, adding that the conference has become too attached to the laws it influenced.
"They think the 1978 law was handed down to them from the mountain on stone tablets," he said.
Levin and Klee concede that they're not happy about many of the changes being made. But if the changes were inevitable, they say, legislators could have at least paid more attention to their packaging.
"We lost, and we're upset that we lost," Levin agreed. "But at least write it in English."
NEW RULES
The Bankruptcy Abuse Prevention and Consumer Protection Act takes discretion away from bankruptcy judges in favor of sharp rules that favor larger creditors.
"The bill attempts to solve problems by giving people absolute rights," said Patrick Murphy, a partner at Winston & Strawn who specializes in commercial bankruptcies.
Those absolute rights, say Murphy and UCLA School of Law professor Kenneth Klee, a drafter of the 1978 law that set the current bankruptcy framework, change the balance between creditors, giving some -- those with good lobbyists -- distinct advantages over competitors.
For example:
Under the new law, utilities will have "a tremendous amount of power" -- in the words of a report prepared by Klee -- to shut off a commercial debtor's service without court approval.
Commercial landlords, led by the powerful shopping-center lobby, secured a provision in the new legislation that forces debtors to decide whether to keep leases within 210 days of declaring bankruptcy, rather than allowing judges to extend that deadline.
Without the option of going through a full year's business cycle -- most importantly, the Christmas gift season -- critics of the law say insolvent retailers will be forced to give up leases right away.
Companies that ship goods to a retailer up to 45 days before a declaration of bankruptcy will be able to reclaim those goods. Muddled wording in that provision, Klee argues, implies that a supplier could both reclaim goods and file a claim for expenses on such goods. And Murphy agrees. "The stuff on reclamation," he said, "is just indecipherable."
Under the new law, judges lose the ability to extend a debtor's exclusive right to propose reorganization plans. With that period now capped at 18 months, Murphy said, creditors may refuse to negotiate with debtors, waiting to file their own plans. Judges and lawyers expect this to lead to increased litigation among creditors.
The definition of "preference payments," or bills paid to creditors in the few months before a debtor declares bankruptcy, now lets more creditors keep such payments, rather than return them to the estate for distribution.
Debtors' ability to pay "retention bonuses" -- controversial payments to keep personnel key to a reorganization -- is extremely curtailed. This addresses the outcry of labor groups that say workers suffer in a bankruptcy while executives get raises. But corporate insolvency lawyers say it poses an obstacle to effective reorganizations.
Cliffs: Congress passes law where creditor lobbist write bill. Congress does not ask judges, lawyers etc from bankruptcy court. Law is filled with errors etc.
Kenneth Klee spent his early career as a congressional staffer, drafting the 1978 law that set the framework for the bankruptcy system.
So the UCLA School of Law professor -- a lifelong Republican and, from 1992 to 2000, legislative chairman of the National Bankruptcy Conference -- figured lawmakers would want his input on the bankruptcy overhaul they worked on for eight years before finally passing it in 2005.
He was wrong.
"The Republican staff, at least during my years as chief of legislation from 1992 to 2000, largely spurned the efforts of the conference to work out linguistic issues," Klee said, "even when we showed them pages and pages of grammatical and typographical errors." Instead, the legislators relied on the expertise of creditor lobbyists to write much of the bill.
The result, said Klee and Richard Levin, a partner at Skadden, Arps, Slate, Meagher & Flom who was Klee's Democratic counterpart in drafting the 1978 bill, is a mess -- and an avalanche of disputes that will soon roll into the federal appellate courts.
The Bankruptcy Abuse Prevention and Consumer Protection Act -- which went into effect last October -- makes problematic changes to the system, Klee and Levin say, using problematic language to do so.
Among Klee's examples:
A cross-referencing error changes the apparent meaning of a provision about loan default penalties.
A section aimed at curbing malpractice suits against bankruptcy practitioners doesn't mention the statute under which most such suits are filed.
Ambiguous language in a provision on trustee commissions leaves unclear whether compensation for a trustee is capped.
In short, the country's top bankruptcy lawyers say the legislation is intellectually and linguistically insolvent.
"The problem is the new law is so poorly crafted and so internally inconsistent that within a year or a year and a half, you're going to see a lot of appeals," Klee said.
That's a concern for federal judges, who are trying to figure out how to deal with the flood of appeals bound to be unleashed by the substantive, often ambiguous changes.
The changes to the law are likely to set more competition, and litigation, among creditors. And that litigation will be compounded by the cross-referencing and grammatical shortcomings that the appeals courts will have to resolve.
"The bill was drafted without consultation with bankruptcy judges and courts," said 9th Circuit Chief Judge Mary Schroeder. "Since they didn't consult with judges, they didn't use terms of art."
The reason for that, say opponents and supporters of the bill, is that bankruptcy's increasingly important role in the economy has raised the stakes for large creditors.
These days, it's the creditors' lobbyists who hold sway with Congress, rather than the more independent lawyers and judges of the National Bankruptcy Conference.
"Now they have to compete with a lot of other groups to influence the process, and frankly, bankruptcy has become such a big part of the economy," said Philip Corwin, a Washington lawyer who lobbied in support of the new law for the American Bankers Association. "Bankruptcy became too important to be left just to a group of self-appointed experts."
But without the expertise -- self-appointed or otherwise -- of the conference's judges and lawyers, there is widespread judicial concern over how the law will shake out.
Schroeder said the chief bankruptcy judges from around the country are scheduled to meet in April to discuss provisions in the law that allow interlocutory appeals.
Like other jurists, Chief Judge Barry Russell of the Central District of California Bankruptcy Court -- the country's largest -- is concerned, though he remains circumspect in opining on the bill.
"I have no opinion one way or the other on it, but there was not a lot of legislative history," he said. "Other than the banks and creditors, from the newspapers, I don't think anyone thought it was a good bill."
TAKING CARE OF BUSINESS
Proponents and critics agree that the one unifying principle behind the law is that creditors with good lobbyists got what they wanted.
That's because during the eight years it sat around Congress, the legislation turned into a virtual sump for provisions suggested by business interests.
Many of those provisions will work to the detriment not just of debtors, but of other, smaller creditors. This is true both of the little-publicized changes to business bankruptcies and the well-reported draconian changes to consumer insolvency.
Stephen Case -- a former partner at Davis, Polk & Wardwell in New York, and an adviser to the National Bankruptcy Review Commission, which proposed much of the legislation in a 1997 report -- said the drafting process was largely a lobbyist free-for-all.
"Suppose you let a bunch of school kids loose on an old car with a paintbrush," he said, in describing the process.
Case nevertheless says the approach, messy as it was, resulted in changes that will curb debtor abuse. He says critics should blame debtors who push the envelope -- and judges who were unwilling to put debtors out of business.
The 1978 bankruptcy law, he argues, was "the high-water mark in world history of a favorable-to-the-debtor statute." He says the question now is whether the changes will strike a balance that protects the interests of debtors, creditors and the employees of insolvent companies.
Case acknowledges drawbacks to the new law. He agrees that increased power for such creditors as utilities and landlords and the strict deadlines for debtor plans will probably create more competition among creditors -- and more litigious bankruptcies.
BIPARTISAN EFFORT
Whatever criticisms may be leveled at the law, supporters contend it was not a left vs. right battle.
"This legislation is a product of bipartisan support," Terry Shawn, a spokesman for Republican Rep. F. James Sensenbrenner Jr., a bill sponsor, wrote in an e-mail last week. "It passed the House by a vote of 302-126. It passed the Senate by a vote of 74 to 25."
The bill's critics are bipartisan as well: Democrats and Republicans throughout the National Bankruptcy Conference. And Case, a proponent of the business changes, is a Democrat.
It's not hard to see why -- especially in a Republican Congress -- that creditors can take control of a bankruptcy bill. They're the only ones who show up to talk about it.
"One of our problems is there's no future debtors of America association," said Sally Neely, senior counsel at Sidley Austin Brown & Wood in Los Angeles, and the bankruptcy conference's current legislative chief.
Without the adversarial process behind the drafting of most economic legislation, the conference in past years has made an effort to advocate for a balance between debtors' and creditors' needs, Klee and Levin said.
But as the 2005 law was developed, the conference -- for the first time -- found itself marginalized. This created a situation in which the only adversaries were among creditors vying for favorable provisions.
For example, Corwin, the Bankers Association lobbyist, said he wanted to keep judges from indefinitely extending the timeframe in which a debtor has the exclusive right to file a reorganization plan.
"My client supported putting some limit on exclusivity because we've seen a lot of cases where the judge isn't tough enough," he said. The new provision gives creditors "a chance to take control."
But Corwin isn't so sure about other changes, including the lease and reclamation provisions affecting retailers. "I question whether what's been done in the bill is the best policy. I think it's going to make it more difficult for retailers to reorganize."
But with everyone -- including his client -- acting in their own self-interest, he wasn't about to challenge the issue of lease deadlines or other matters pushed by different creditor groups.
"The banks felt like we couldn't criticize someone pushing for a firm deadline where [debtors] could abuse it," he said.
While the piecemeal process of having lobbyists for different groups write legislation is anathema to lawyers like Levin and Klee, Corwin said that's how things work now, and critics at the bankruptcy conference should get used to it.
"I can understand their point -- they don't like that bankruptcy law has become politicized," he said. But that was inevitable, he argues, adding that the conference has become too attached to the laws it influenced.
"They think the 1978 law was handed down to them from the mountain on stone tablets," he said.
Levin and Klee concede that they're not happy about many of the changes being made. But if the changes were inevitable, they say, legislators could have at least paid more attention to their packaging.
"We lost, and we're upset that we lost," Levin agreed. "But at least write it in English."
NEW RULES
The Bankruptcy Abuse Prevention and Consumer Protection Act takes discretion away from bankruptcy judges in favor of sharp rules that favor larger creditors.
"The bill attempts to solve problems by giving people absolute rights," said Patrick Murphy, a partner at Winston & Strawn who specializes in commercial bankruptcies.
Those absolute rights, say Murphy and UCLA School of Law professor Kenneth Klee, a drafter of the 1978 law that set the current bankruptcy framework, change the balance between creditors, giving some -- those with good lobbyists -- distinct advantages over competitors.
For example:
Under the new law, utilities will have "a tremendous amount of power" -- in the words of a report prepared by Klee -- to shut off a commercial debtor's service without court approval.
Commercial landlords, led by the powerful shopping-center lobby, secured a provision in the new legislation that forces debtors to decide whether to keep leases within 210 days of declaring bankruptcy, rather than allowing judges to extend that deadline.
Without the option of going through a full year's business cycle -- most importantly, the Christmas gift season -- critics of the law say insolvent retailers will be forced to give up leases right away.
Companies that ship goods to a retailer up to 45 days before a declaration of bankruptcy will be able to reclaim those goods. Muddled wording in that provision, Klee argues, implies that a supplier could both reclaim goods and file a claim for expenses on such goods. And Murphy agrees. "The stuff on reclamation," he said, "is just indecipherable."
Under the new law, judges lose the ability to extend a debtor's exclusive right to propose reorganization plans. With that period now capped at 18 months, Murphy said, creditors may refuse to negotiate with debtors, waiting to file their own plans. Judges and lawyers expect this to lead to increased litigation among creditors.
The definition of "preference payments," or bills paid to creditors in the few months before a debtor declares bankruptcy, now lets more creditors keep such payments, rather than return them to the estate for distribution.
Debtors' ability to pay "retention bonuses" -- controversial payments to keep personnel key to a reorganization -- is extremely curtailed. This addresses the outcry of labor groups that say workers suffer in a bankruptcy while executives get raises. But corporate insolvency lawyers say it poses an obstacle to effective reorganizations.
Cliffs: Congress passes law where creditor lobbist write bill. Congress does not ask judges, lawyers etc from bankruptcy court. Law is filled with errors etc.
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