Introduction And Overview

Transcription

1 1 Introduction And Overview 1.01 THE NEED FOR REVISION OF BANKRUPTCY LAWS IN 1978 The present bankruptcy laws are, for the most part, the result of legislation originally passed by Congress in 1978 with important amendments in 1984, 1986, and 1994, with other amendments from time to time, and with major amendments to policy and practice in The 1978 statute, Pub. L. No , 92 Stat sometimes referred to unofficially as the Bankruptcy Reform Act of 1978 became effective, in general, for cases filed on or after October 1, The former Bankruptcy Act (sometimes referred to as the 1898 Act) remained applicable to cases then pending. A consideration of the history of the 1978 legislation probably should begin with the Report of the Commission on the Bankruptcy Laws of the United States. Congress had established the Commission in 1970 to study, analyze, evaluate, and recommend changes in the Bankruptcy Act and the system of bankruptcy administration. Pub. L. No , 84 Stat The Commission consisted of nine members three appointed by the President and two each by and from the Senate, House, and Judiciary and employed a total staff of 27 during its lifetime. At about the same time, the Brookings Institution made a study of bankruptcy and bankruptcy administration. The Brookings Report (D. STANLEY, M. GIRTH, ET AL., BANKRUPTCY: PROBLEM, PROCESS, REFORM) was published in 1971, during the middle of the Commission s study. During its two-year existence the Commission conducted public hearings, gathered evidence, and, as had Brookings, generally studied the operation of the existing bankruptcy system. Its findings were similar to Brookings (although Brookings recommended quite different solutions). Because the 1978 statute was the recognizable descendant of the statute proposed the Commission proposed in July 1973, the Commission s Report merits discussion. 1

2 2 Fundamentals of Bankruptcy Law

3 1.01 Introduction and Overview 3 The Commission s Report to Congress in July 1973 was in two parts. Part I was a narrative of the Commission s findings and recommendations. H.R. Doc. No. 137, 93d Cong., 1st Sess., part I (1973) [hereinafter cited as Report ]. Part II consisted of the proposed text of a new bankruptcy code that would have effected the Commission s recommendations. H.R. Doc. No. 137, 93d Cong., 1st Sess., part II (1973) [hereinafter cited as Commission s Bill ]. The Commission concluded that the bankruptcy statute and system needed reform for a number of reasons. The rising tide of consumer bankruptcies since World War II had placed a severe strain on the existing bankruptcy system. Report at 2. Moreover, a substantial portion of the costs of operating the bankruptcy system was devoted to cases that produced little or no benefit to creditors, and the adversary process used to resolve those matters was inappropriate. Report at 3. In addition, the bankruptcy laws were found not to be uniformly applied. For example, wage-earner plans under Chapter XIII of the former Bankruptcy Act were employed frequently in many parts of the country but were never used in other geographic areas. Report at 4. A different type of problem arose from the Supreme Court s promulgation of the Rules of Bankruptcy Procedure during the 1970s. The result was a comprehensive revision of practice and procedure in the bankruptcy court.at the same time the Rules had a significant impact on the Bankruptcy Act itself. Under the federal statute pursuant to which the Rules were originally promulgated, former 28 U.S.C (1976), a rule superseded any inconsistent provision in the Bankruptcy Act as long as the rule dealt with a matter that was one of practice and procedure. Since a considerable portion of that Act was in the nature of practice and procedure, many of its provisions were, in effect, repealed by the Bankruptcy Rules, although the repealed provisions were not actually removed from the statute. Lawyers and courts were left to determine for themselves which portions of the Act were substantive and therefore still effective. Although the Bankruptcy Rules of the 1970s had recently revised and updated the procedural provisions governing bankruptcy administration, the Chandler Act of 1938 was the last comprehensive revision of the substantive provisions of the 1898 Act before the 1978 legislation. See Countryman, The New Dischargeability Law, 45 AM. BANKR. L.J. 1 (1971). In the Bankruptcy Act Congress had left for determination by state law much of what is substantive in bankruptcy. See Countryman, The Use of State Law in Bankruptcy Cases (Part II), 47 N.Y.U. L. REV. 631 (1972). State law had changed significantly since 1938, particularly in the area of the competing rights of secured and unsecured creditors under the Uniform Commercial Code, which the

4 4 Fundamentals of Bankruptcy Law

5 1.01 Introduction and Overview 5 States had largely adopted in the 1960s. Yet no wholesale reexamination of the bankruptcy law had taken place to determine whether the dual bankruptcy principles of fairness in the treatment of creditors and the grant of a fresh start to the debtor were being served by the use of state substantive provisions. Moreover, the former Bankruptcy Act was a hodgepodge; sections were out of order as well as out of date. The organic bankruptcy court system had simply evolved up to the 1970s without legislative definition, and it was inadequate. As originally contemplated, the referee in bankruptcy was an assistant to the United States district judge. The referee s duty was to conduct the administration of bankruptcy cases under the general supervision of the district judge. In matters of litigation the referee was to report findings of fact and conclusions of law to the district court. But especially during the four decades following the 1938 Chandler Act amendments, the referee s role grew. The referee in bankruptcy became a bankruptcy judge (see former Bankruptcy Rule 901(7)) and exercised virtually all the original jurisdiction of the bankruptcy court. The bankruptcy judge thus had come to exercise the judicial power to decide disputes as a court of original jurisdiction but still was responsible for supervising the administration of bankruptcy cases. The dual role of the referee, or bankruptcy judge, was, in the opinion of many, the most glaring defect in the former bankruptcy system. Informal contacts between the bankruptcy judge and lawyers and others participating in bankruptcy administration were encouraged, if not required, by the very nature of the many administrative duties the Bankruptcy Act imposed on the bankruptcy judge. In supervising the administration of the bankruptcy estate, the bankruptcy judge appointed the receiver or trustee and approved the employment of counsel; often countersigned checks; approved the sale of property and the borrowing of money; and, in reorganization cases, received operating reports for use in determining whether the business operation should continue. The Report of the Bankruptcy Commission observed that [t]he involvement of the referee in the administration of estates entails numerous conferences and communications that are informal and ex parte. Report at 93. Consequently, the Commission concluded on pages of the Report that making an individual [the bankruptcy judge] responsible for conduct of both administrative and judicial aspects of a bankruptcy case is incompatible with the proper performance of the judicial function. Even if a paragon of integrity were sitting on the bench and could keep his mind and feelings insulated from influences which arise from his previous official connections with the case