Chapter 1: Consumer Bankruptcy - System Administration
1.1.1 National Filing System
A national filing system should be established and maintained that
would identify bankruptcy filings using social security numbers or
other unique identifying numbers.
1.1.2 Heightened Requirements for Accurate Information
The Bankruptcy Code should direct trustees to perform random audits
of debtors' schedules to verify the accuracy of the information listed.
Cases would be selected for audit according to guidelines developed by
the Executive Office for United States Trustees.
1.1.3 False Claims
Courts should be authorized to order creditors who file and fail to
correct materially false claims in bankruptcy to pay costs and the
debtors' attorneys' fees involved in correcting the claim. If a creditor
knowingly filed a false claim, the court could impose appropriate
1.1.4 Rule 9011
The Commission endorses the amended Rule 9011 of the Federal Rules
of Bankruptcy Procedure, to become effective on December 1, 1997,
which will make an attorney's presentation to the court of any petition,
pleading, written motion, or other paper a certification that the
attorney made a reasonable inquiry into the accuracy of that
information, and thus will help ensure that attorneys take
responsibility for the information that they and their clients provide.
1.1.5 Financial Education
All debtors in both Chapter 7 and in Chapter 13 should have the
opportunity to participate in a financial education program.
Chapter 1: Consumer Bankruptcy - Property Exemptions
1.2.1 Elimination of Opt Out
A consumer debtor who has filed a petition for relief under the
Bankruptcy Code should be allowed to exempt property as provided in
section 522 of the Code. Subsection (b)(1) and (2) of section 522 should
1.2.2 Homestead Property
The debtor should be able to exempt the debtor's aggregate interest as
a fee owner, a joint tenant, or a tenant by the entirety, in real property
or personal property that the debtor or a dependent of the debtor uses
as a residence in the amount determined by the laws of the state in
which the debtor resides, but not less than $20,000 and not more than
$100,000. Subsection (m) of section 522 should be revised to reflect
that all exemptions except for the homestead exemption shall apply
separately to each debtor in a joint case.
1.2.3 Nonhomestead Lump Sum Exemption
With respect to property of the estate not otherwise exempt by other
provisions, a debtor should be permitted to retain up to $20,000 in
value in any form. A debtor who claims no homestead exemption
should be permitted to exempt an additional $15,000 of property in any
1.2.4 All professionally-prescribed medical devices and health aids necessary
for the health and maintenance of the debtor or a dependent of the
debtor should be exempt.
1.2.5 Rights to Receive Benefits and Payments
All funds held directly or indirectly in a trust that is exempt from
federal income tax pursuant to sections 408 or 501(a) of the Internal
Revenue Code should be exempt.
1.2.6 Rights to Payments
Rights to receive future payments (e.g., social security benefits, life
insurance) should be exempt, and the debtor's right to receive an
award under a crime victim's reparations law or payment for a
personal bodily injury claim of the debtor or the debtor's dependent
should be exempt.
Chapter 1: Consumer Bankruptcy - Reaffirmation Agreements and the Treatment of Secured Debt
1.3.1 11 U.S.C. § 524(c) should be amended to provide that a reaffirmation
agreement is permitted, with court approval, only if the amount of the
debt that the debtor seeks to reaffirm does not exceed the allowed
secured claim, the lien is not avoidable under the provisions of title 11,
no attorney fees, costs, or expenses have been added to the principal
amount of the debt to be reaffirmed, the motion for approval of the
agreement is accompanied by underlying contractual documents and
all related security agreements or liens, together with evidence of their
perfection, the debtor has provided all information requested in the
motion for approval of the agreement, and the agreement conforms
with all other requirements of subsection (c).
Section 524(d) should be amended to delineate the circumstances under
which a hearing is not required as a prerequisite to a court approving
an agreement of the kind specified in section 524(c): a hearing will not
be required when the debtor was represented by counsel in negotiations
on the agreement and the debtor's attorney has signed the affidavit as
provided in section 524 (c), and a party in interest has not requested a
judicial valuation of the collateral that is the subject of the agreement.
If one or more of the foregoing requirements is not met, or in the
court's discretion, the court shall conduct a hearing to determine
whether an agreement that meets all of the requirements of subsection
(c) should be approved. Court approval of an agreement signifies that
the court has determined that the agreement is in the best interest of
the debtor and the debtor's dependents and does not impose undue
hardship on the debtor and the debtor's dependents in light of the
debtor's income and expenses.
The Commission recommends that the Advisory Committee on
Bankruptcy Rules of the Judicial Conference prescribe a form motion
for approval of reaffirmation agreements that contains information
enabling the court and the parties to determine the propriety of the
agreement. Approval of the motion would not entail a separate order
of the court.
1.3.2 An additional subsection should be added to section 524 to provide that
the court shall grant judgment in favor of an individual who has
received a discharge under section 727, 1141, 1228, or 1328 of this title
for costs and attorneys fees, plus treble damages, from a creditor who
threatens, files suit, or otherwise seeks to collect any debt that was
discharged in bankruptcy and was not the subject of an agreement in
accordance with subsections (c) and (d) of section 524.
1.3.3 No Ride-Through
Section 521(2) should be amended to clarify that a debtor with
consumer debts that are secured, as determined by the provisions of
title 11, by property of the estate must redeem the property or obtain
court approval of an agreement under section 524(c) of title 11 in order
to retain the property postdischarge, except for a security interest in
real or personal property that is the debtor's principal residence.
1.3.4 Security Interests in Household Goods
Household Goods Worth Less Than $500
Section 522(f) should provide that a creditor claiming a purchase
money security interest in exempt property held for personal or
household use of the debtor or a dependent of the debtor in household
furnishings, wearing apparel, appliances, books, animals, crops,
musical instruments, jewelry, implements, professional books, tools of
the trade or professionally prescribed health aids for the debtor or a
member of the debtor's household must petition the bankruptcy court
for continued recognition of the security interest. The court shall hold
a hearing to value each item covered by the creditor's petition. If the
value of the item is less than $500, the petition shall not be granted; if
the value is $500 or greater, the security interest would be recognized
and treated as a secured loan in Chapter 7 or Chapter 13.
1.3.5 Characterization of Rent-to-Own Transactions
Consumer rent-to-own transactions should be characterized in
bankruptcy as installment sales contracts.
Chapter 1: Consumer Bankruptcy - Discharge, Exceptions to
Discharge and Objections to Discharge
1.4.1 Credit Card Debt
Except for credit card debts that are excepted from discharge under
section 523(a)(2)(B) (for materially false written statements respecting
the debtor's financial condition) and section 523(a)(14), (debts incurred
to pay nondischargeable taxes to the United States), debts incurred on
a credit card issued to the debtor that did not exceed the debtor's credit
limit should be dischargeable unless they were incurred within 30 days
before the order for relief under title 11.
1.4.2 Debts Incurred to Pay Nondischargeable Federal Tax Obligations
Section 523(a)(14) should remain unchanged to except from discharge
debts incurred for federal taxes that would be nondischargeable under
1.4.3 Criminal Restitution Orders
Section 523(a)(13) should be expanded to apply to all criminal
1.4.4 Family Support Obligations
Sections 523(a)(5), (a)(15), and (a)(18) should be combined. The
revised 523(a)(5) should provide that all debts actually in the nature of
support, whether they have been denominated in a prior court order as
alimony, maintenance, support, property settlements, or otherwise, are
nondischargeable. In addition, debts owed under state law to a state or
municipality in the nature of support would be nondischargeable in all
1.4.5 Dischargeability of Student Loans
Section 523(a)(8) should be repealed.
1.4.6 Issue Preclusive Effect of True Defaults
For complaints to establish nondischargeability on grounds set forth in
section 523(c), the Bankruptcy Code should clarify that issues that were
not actually litigated and necessary to a prior judgment shall not be
given preclusive effect.
1.4.7 Vicarious Liability
Section 523(c) should be amended such that intentional action by a
wrongdoer who is not the debtor cannot be imputed to the debtor.
1.4.8 Effect of Lack of Notice on Time to Bring Objection to Discharge
Creditors that did not receive notice of a bankruptcy should get an
extension of time to file an objection to or seek revocation of a
1.4.9 Settlement and Dismissal of Objections to Discharge
Section 727 should be amended to provide that (a) any complaint
objecting to discharge may be dismissed on motion of the plaintiff only
after giving notice to the United States trustee, the case trustee and all
creditors entitled to notice, advising them of an opportunity to
substitute as plaintiff in the action; (b) any motion to dismiss a
complaint objecting to discharge must be accompanied by an affidavit
of the moving party disclosing all consideration given or promised to
be given by the debtor in connection with dismissal of the complaint;
and (c) if the debtor has given or promised to give consideration in
connection with dismissal of the complaint, the complaint may not be
dismissed unless the consideration benefits the estate generally.
Chapter 1: Consumer Bankruptcy - Chapter 13 Repayment Plans
1.5.1 Home Mortgages
A Chapter 13 plan could not modify obligations on first mortgages and
refinanced first mortgages, except to the extent currently permitted by
the Bankruptcy Code. Section 1322(b)(2) should be amended to
provide that the rights of a holder of a claim secured only by a junior
security interest in real property that is the debtor's principal residence
may not be modified to reduce the secured claim to less than the
appraised value of the property at the time the security interest was
A creditor's secured claim in personal property should be determined
by the property's wholesale price.
A creditor's secured claim in real property should be determined by the
property's fair market value, minus hypothetical costs of sale.
1.5.3 Payments on secured debts that are subject to modification should be
spread over the life of the plan, according to fixed criteria for interest
1.5.4 Unsecured Debt
Payments on unsecured debt should be determined by guidelines based
on a graduated percentage of the debtor's income, subject to upward
adjustment to meet the section 1325(a)(4) requirement that creditors
receive at least the present value of whatever they would have received
in a Chapter 7. The trustee or an unsecured creditor should be
authorized to file an objection to any plan that deviates from the
guidelines, and a court would determine whether the deviation was
appropriate in light of all the circumstances.
1.5.5 Consequences of Incomplete Payment Plans
The Bankruptcy Code should provide that a case under Chapter 13 that
otherwise meets the standards for dismissal shall be converted to
Chapter 7 after notice and a hearing unless a party in interest objects
on the basis that the debtor had been granted a discharge in a Chapter
7 case commenced within six years of the date on which the conversion
would take place, in which case the Chapter 13 case will be dismissed.
In addition, the debtor may object to conversion without grounds, in
which case the Chapter 13 case will be dismissed. The standards for
modification, dismissal, and discharge in Chapter 13 would not
Section 362 should be amended to provide that the filing of a petition
by an individual does not operate as a stay if the individual has filed
two or more petitions for relief under title 11 within six years of filing
the instant petition for relief and if the individual has been a debtor in
a bankruptcy case within 180 days prior to the instant petition for
relief. On the request of the debtor, after notice and a hearing, the
court may impose a stay for cause shown, subject to such conditions
and modifications as the court may impose.
1.5.6 In Rem Orders
Section 362 should be amended to provide that the filing of a petition
by an individual does not operate as a stay with respect to property of
the estate transferred by that individual to another individual who was
a debtor under title 11 within 180 days of the filing of the instant
petition, unless the court grants a stay with respect to such property
after notice and a hearing on request of the debtor.
After notice and a hearing, a bankruptcy court should be empowered
to issue in rem orders barring the application of a future automatic stay
to identified property of the estate for a period of up to six years when
a party could show that the debtor had transferred such real property
or leasehold interests or fractional shares of property or leasehold
interests to avoid creditor foreclosure or eviction. A subsequent owner
of the property or tenant of the leasehold who files for bankruptcy (or
the same owner or holder in a subsequent filing) should be permitted
to petition the bankruptcy court for the imposition of a stay to protect
property of the estate, which the court would be required to grant to
protect innocent parties who were not a part of a scheme to transfer the
property to hinder foreclosure or eviction.
1.5.7 Retention of the "Superdischarge"
Congress should retain 11 U.S.C. § 1328(a), which permits a debtor who
completes all payments under the plan to discharge all debts provided
for by the plan or disallowed under section 502 of title 11 except for
those listed in section 1328(a)(1) - (3).
1.5.8 Debtors who choose Chapter 13 repayment plans should have their
bankruptcy filings reported differently from those who do not. Debtors
who complete voluntary debtor education programs should have that
fact noted on their credit reports.
1.5.9 Trustees should be encouraged to establish credit rehabilitation
programs to help provide better, cheaper access to credit for those who
participate in repayment plans.
Chapter 2: Treatment of Mass Future Claims in Bankruptcy
2.1.1 Definition of Mass Future Claim
A definition of "mass future claim" should be added as a subset of the
definition of "claim" in 11 U.S.C. § 101(5). "Mass future claim" should
be defined as a claim arising out of a right to payment, or equitable
relief that gives rise to a right to payment that has or has not accrued
under nonbankruptcy law that is created by one or more acts or
omissions of the debtor if:
1) the act(s) or omission(s) occurred before or at the time of the order
2) the act(s) or omission(s) may be sufficient to establish liability when
injuries ultimately are manifested;
3) at the time of the petition, the debtor has been subject to numerous
demands for payment for injuries or damages arising from such acts
or omissions and is likely to be subject to substantial future demands
for payment on similar grounds;
4) the holders of such rights to payments are known or, if unknown, can
be identified or described with reasonable certainty; and
5) the amount of such liability is reasonably capable of estimation.
The definition of "claim" in section 101(5) should be amended to add
a definition of "holder of a mass future claim," which would be an
entity that holds a mass future claim.
2.1.2 Protecting the Interests of Holders of Mass Future Claims
The Bankruptcy Code should provide that a party in interest may
petition the court for the appointment of a mass future claims
representative. When a plan includes a class or classes of mass future
claims, the Bankruptcy Code should authorize a court to order the
appointment of a representative for each class of holders of mass future
claims. A mass future claims representative shall serve until further
order of the bankruptcy court.
The Bankruptcy Code should provide that a mass future claims
representative shall have the exclusive power to file a claim or claims
on behalf of the class of mass future claims (and to determine whether
or not to file a claim), to cast votes on behalf of the holders of mass
future claims and to exercise all of the powers of a committee
appointed pursuant to section 1102. However, a holder of a mass
future claim may elect to represent his, her, or its own interests and
may opt out of being represented by the mass future claims
The Bankruptcy Code should provide that prior to confirmation of a
plan of reorganization, the fees and expenses of a mass future claims
representative and his or her agents shall be administrative expenses
under section 503. Following the confirmation of a plan of
reorganization, and for so long as holders of mass future claims may
exist, any continuing fees and expenses of a mass future claims
representative and his or her agents shall be an expense of the fund
established for the compensation of mass future claims.
The Bankruptcy Code should provide that a mass future claims
representative shall serve until further orders of the bankruptcy court
declare otherwise, shall serve as a fiduciary for the holders of future
claims in such representative's class, and shall be subject to suit only in
the district where the representative was appointed.
2.1.3 Determination of Mass Future Claims
Section 502 should provide that the court may estimate mass future
claims and also may determine the amount of mass future claims prior
to confirmation of a plan for purposes of distribution as well as
allowance and voting. In addition, 28 U.S.C. § 157(b)(2)(B) should
specify that core proceedings include the estimation or determination
of the amount of mass future claims.
2.1.4 Channeling Injunctions
Section 524 should authorize courts to issue channeling injunctions.
2.1.5 Plan Confirmation and Discharge; Successor Liability
Sections 363 and 1123 should provide that the trustee may dispose of
property free and clear of mass future claims when the trustee or plan
proponent has satisfied the requirements for treating mass future
claims. Upon approving the sale, the court could issue, and later
enforce, an injunction to preclude holders from suing a successor/good
Chapter 2: Transnational Insolvency
2.2.1 Adoption of the UNCITRAL Model Law for Cross-Border Insolvencies
2.2.2 Retention of provisions for additional relief
2.2.3 Amendment of title 28 to add jurisdiction over the Model Law
2.2.4 Conforming amendments to the definitions of foreign proceeding and
foreign representative in 11 U.S.C. § 101(23)-(24)
2.2.5 Exclusion from the application of the Model Law of consumers resident
in the United States if their debts are within the limits for Chapter 13
2.2.6 Recognition vel non of foreign tax claims to be left to evolving caselaw
and treaty negotiations
2.2.7 28 U.S.C. § 1410 should be amended to provide that the various bases
for venue may be used in the alternative as a matter of choice, i.e., the
word "only" should be deleted from the section; additionally there
should be a catch-all venue choice related to the interest of justice and
convenience of the parties
Chapter 2: Partnerships
2.3.1 Defining the term "General Partner"
A "general partner" should be defined under 11 U.S.C. § 101 as any
entity that as a result of an existing or former status as an actual or
purported general partner in an existing, former, predecessor, or
affiliated partnership, is liable under applicable nonbankruptcy law
for one or more debts of the partnership.
2.3.2 Consent of Former Partners
The Bankruptcy Code and Rules should be amended to clarify that,
notwithstanding Recommendation 1 (defining "general partner"), a
former general partner of a partnership is not, absent a specific court
order to the contrary, required to consent to a voluntary petition by a
partnership, to be served with a petition or summons in an involuntary
case against a partnership, or to perform the duties of disclosure or
procedural duties imposed on a general partner of a debtor
2.3.3 Bankruptcy Court Jurisdiction
The court in which a partnership case is pending should have
jurisdiction under 28 U.S.C. § 1334(b) to determine who is or may be
liable as a general partner for the debts of the partnership and may
determine the rights among the general partners with respect to the
debts of the partnership. Such matters should constitute core
proceedings under 28 U.S.C. § 157(b).
2.3.4 Liability of General Partner for Deficiency in Partnership Case
If there is a deficiency of property of the partnership estate to pay in
full all allowed claims in a case under title 11, the estate should have a
claim against each general partner to the extent that, under applicable
nonbankruptcy law, such general partner is personally liable for such
deficiency. The amount of the deficiency claim should not be reduced
on account of any right of contribution or indemnity among general
partners. The claim should be estimated if its determination would
unduly delay the administration of the case. Any action or proceeding
to enforce liability under this section should be commenced no later
than four years after the entry of the order for relief in the case
concerning the partnership.
2.3.5 Power of the Court to Assure Payment of the Deficiency
Renumbered section 723(b) of the Bankruptcy Code should be
amended to provide that the court in a partnership case may, after
notice and a hearing, order any general partner that is not a debtor in
a case under this title (1) to provide the estate, in such amount as the
court shall determine to be appropriate under the circumstances, with
indemnity for, or assurance of payment of, any deficiency recoverable
from such general partner, or (2) not to incur obligations or transfer
property except under specified circumstances.
2.3.6 Trustee's Recovery against the Estate of a Debtor General Partner
Renumbered section 723(c) of the Bankruptcy Code should be
amended to provide that notwithstanding section 728(c), the trustee of
a partnership has a claim against the estate of each general partner in
such partnership that is a debtor in a case under title 11 for (1) the full
amount of all claims allowed in the case concerning the partnership for
which such general partner would otherwise be personally liable as a
general partner under applicable nonbankruptcy law; and (2)
administrative claims which have been assessed against such general
partner. Notwithstanding section 502 of this title, there shall not be
allowed in such partner's case a claim against the partner on which
both the general partner and the partnership are liable, except to the
extent that such claim is allowable and secured only by property of
such general partner and not by property of such partnership.
2.3.7 Repeal of the "Jingle Rule" in All General Partner Bankruptcy Cases
Chapter 5 of the Bankruptcy Code should be amended in order to
provide that the claim of a trustee of a partnership debtor, or the claim
of a creditor of a nondebtor partnership, is entitled to share in the
distribution in a general partner's bankruptcy case in the same manner
and to the same extent as any other claim of the same class of a creditor
of such general partner.
2.3.8 Allocation of Expenses of Administration of a Partnership Case
Chapter 5 of the Bankruptcy Code should be amended to provide that
the expenses of administration of a partnership case under section 503
of the Bankruptcy Code may be assessed against general partners or
paid from the property constituting recoveries from general partners
under this section and from other property of the estate in such
proportions as the court shall determine are fair and reasonable after
notice and hearing.
2.3.9 Distribution of Recoveries from General Partners
Renumbered section 723 of the Bankruptcy Code should be amended
to provide that notwithstanding section 726 of the Bankruptcy Code
(except as provided in Recommendation 2.3.8 above), the trustee should
apply any recovery obtained from a general partner or the estate of a
general partner only to the payment of deficiencies on claims for which
such general partner is personally liable as a general partner under
applicable nonbankruptcy law. Any property constituting recoveries
from general partners or the estates of general partners under this
Recommendation not applied to the proper deficiencies as herein
provided or to administration expenses (as provided in
Recommendation 2.3.8 above), should be equitably distributed by the
trustee to such general partner or to such general partners' estates as
may be ordered by the court after notice and hearing.
2.3.10 Distribution of Property of the Partnership Estate
Renumbered section 723 of the Bankruptcy Code should be amended
to provide that notwithstanding section 726 of the Code, and except as
set forth in Recommendation 2.3.8 above (treatment of expenses of
administration), the trustee should distribute property of the
partnership estate which is not recovered from general partners or the
estates of debtor general partners to allowed claims against the
partnership in accordance with otherwise applicable provisions of this
title without considering distributions of property from general
partners or general partners' estates.
2.3.11 Trustee's Power to File Involuntary Cases
Section 303(b)(3) of the Bankruptcy Code should be amended to permit
the trustee of a partnership in a case commenced under title 11 to file
an involuntary petition against a general partner without regard to the
number of creditors, nature of the claims or dollar amount of the
claims otherwise required under section 303(b)(1) and (2).
2.3.12 Appointment of Committee of General Partners
Chapter 11 of the Bankruptcy Code should be amended to provide
that, on request of a party in interest, the court may authorize the
United States trustee to appoint a committee of general partners that
is fairly representative of the interests of all general partners.
2.3.13 General Partner Liability on Nonrecourse Partnership Debt under 11
U.S.C. § 1111(b)
Section 1111(b) of the Bankruptcy Code should be amended to clarify
that, except as otherwise provided in a confirmed plan of a partnership
debtor or the order confirming the plan, a general partner is not liable
on a nonrecourse claim against the partnership except to the extent
that the general partner is personally liable on such claim under
applicable nonbankruptcy law.
2.3.14 'Temporary' Injunction of Proceedings or Acts against Nondebtor
The Bankruptcy Code should be amended to permit the court for
cause, upon motion of a party in interest and after notice and hearing,
to temporarily enjoin actions of creditors or general partners of a
debtor partnership against nondebtor general partners or their
property on account of partnership obligations. No injunction should
be granted under this Recommendation unless the nondebtor general
partner (1) consents to the jurisdiction of the bankruptcy court; (2)
makes or undertakes to make the disclosures required by
Recommendation 2.3.18 below; and (3) the order granting the
injunction precludes the protected general partner from incurring
obligations or transfers of property except under specified
2.3.15 Relief from the Temporary Injunction
The Bankruptcy Code should be amended to provide that the court,
upon request of a party in interest and after notice and hearing, may,
for cause, grant relief from the temporary injunction provided
pursuant to Recommendation 2.3.14 . The relief available would
include the termination, annulment, modification or conditioning a
continuation of the injunction.
2.3.16 'Postconfirmation' Injunction of Proceedings or Acts against Nondebtor
General Partners Who Contribute to Plans
The Bankruptcy Code should be amended to permit the court, in
connection with the confirmation of a plan of reorganization in a
partnership case, to enjoin partnership creditors and general partners
from actions or proceedings against a general partner or its property
to collect on partnership-related claims where the general partner has
contributed or made an enforceable commitment to contribute an
amount to the payment of debts in accordance with the plan or the
order confirming the plan. The court, after notice and hearing, must
determine that the plan complies with otherwise applicable
requirements for confirmation in light of the personal assets of the
nondebtor contributing partners and that the injunction will not
discriminate unfairly or inequitably with respect to creditors of the
partnership or the claims of the general partners for contribution or
2.3.17 Revocation of Injunction
The Bankruptcy Code should be amended to provide that the
injunction issued with respect to any nondebtor general partner under
Recommendation 2.3.16 above should be terminated or revoked on the
request of a party in interest if, after notice and hearing, the court
determines (1) that the protected nondebtor general partner has failed
to perform a material commitment under the plan; (2) that the order
confirming the plan in which the injunction was issued is revoked
under sections 1144 or 1230 of the Code; or (3) that the nondebtor
general partner has procured the injunction by fraud. The Bankruptcy
Code should be further amended to provide that a request for
revocation for fraud under provision (3) should be made at any time
within two years after the date of the entry of the confirmation order.
2.3.18 Duty of Disclosure by Nondebtor General Partners
The Bankruptcy Code should be amended to provide that, unless
otherwise ordered by the court for cause, each nondebtor general
partner shall, within 30 days after the entry of the order for relief in a
partnership case or within such time as the court shall fix, produce
information concerning such partner's financial condition and affairs
similar to that provided by a debtor, together with such additional
information and periodic reports as may be required by the court from
time to time.
2.3.19 Access to Disclosed Information
The Bankruptcy Code should be amended to provide that the trustee,
debtor in possession or other entity designated by the court in a
partnership bankruptcy case should maintain and promptly provide to
parties in interest in the case, on reasonable request, certain important
information regarding the nondebtor general partners of the debtor
2.3.20 Treatment of LLC Member or LLC Manager Under the Bankruptcy Code
Debtor LLC members in member-managed LLCs should be treated
like general partners under the Bankruptcy Code. Similarly, debtor
managers of manager-managed LLC's should be treated like general
partners under the Bankruptcy Code. This treatment should be limited
to three aspects of the LLC member or LLC manager relationship: (1)
continuity of LLC after LLC member's or manager's bankruptcy
filing; (2) transferability of LLC ownership interest; and (3)
management rights in the LLC.
2.3.21 Exclusion of a Partnership or LLC Relationship from Treatment under
11 U.S.C. § 365
The Bankruptcy Code should be amended to exclude partnership and
LLC governing documents and relationships from treatment under 11
U.S.C. § 365. A new section concerning partnership and LLC
governing documents and relationships should be added to the
2.3.22 Ipso Facto Provisions in Partnership or LLC Governing Documents
Ipso facto provisions relating to partnerships, LLCs, and the rights or
interests of partners or LLC members or managers should not be
enforceable under the Bankruptcy Code. Ipso facto provisions include
any provision in a partnership agreement, LLC operating agreement,
or applicable nonbankruptcy law that operates to terminate or modify
the rights of a partner or LLC member based on insolvency, financial
condition, commencement of a voluntary or involuntary case under
title 11, or appointment of a trustee or custodian. Non-ipso facto
provisions that limit a partner's or LLC member's rights, relationship,
interest, or permit expulsion on the basis of something other than
insolvency, financial condition, commencement of a voluntary or
involuntary case under title 11, or the appointment of a receiver would
2.3.23 Property of the Estate, Transferability, and Valuation of a Partnership or
"Property of the estate" for a partner or LLC member should include
all rights attendant with the partnership or LLC interest, including
management rights, voting rights, and economic rights (including
goodwill, the right to share in profits and losses, and any other right to
payment). Except as provided below, the Recommendation does not
alter the effect of section 541(a)(6), to the extent it is applicable. In the
case of an individual partner or LLC member who (1) continues
employment (in whatever capacity) with the partnership or LLC after
the order for relief, and (2) whose estate receives or is more likely than
not going to receive the "buyout price" as defined below, all
partnership or LLC interest amounts arising, accruing, or payable
after the order for relief are deemed to be on account of personal
services rendered by the partner or LLC member and do not become
property of the estate. There should be a presumption, in a case of an
individual debtor, that the estate is more likely than not going to
receive the "buyout price," upon which presumption the parties should
be entitled to rely and function until the court orders to the contrary,
after notice and hearing, on motion of the trustee or any party in
The court should have the power to authorize a sale under section 363
of the partnership or LLC interest and order the admission of the
buyer to the partnership or LLC with all rights and duties the debtor
had, except that if the governing documents preclude transfer under a
non-ipso facto provision, the anti-transfer clauses will be given effect,
but only if the partnership or LLC pays the "buyout price" to the
estate. The court should retain the power to (1) fashion reasonable
payment terms which balance the needs of the estate for receipt of cash
as rapidly as possible with the needs of the entity for liquidity and
working capital to conduct its operations in a prudent manner; and (2)
ensure receipt of the buyout price by the estate.
The "buyout price" means the highest price (including a calculation or
appraisal method), if any, provided in the governing documents in the
case of a buyout of an interest not on account of the bankruptcy of,
insolvency of, financial condition of, commencement of a voluntary or
involuntary case under title 11 for, or appointment of a trustee or
custodian for, a partner or LLC member or manager. If no such price
is provided, the court should determine a fair buyout value.
2.3.24 Treatment of Partnership and LLC Management Rights
During any period when an estate administered in a bankruptcy case
includes a partnership or LLC interest, the management and voting
rights of the partner or LLC member are to be exercised as follows:
- A debtor in possession under Chapter 11 or a debtor
under either Chapter 12 or Chapter 13 should exercise all
management and voting rights, subject to the applicable
non-ipso facto provisions of the partnership or LLC
governing documents and applicable nonbankruptcy law,
and the other applicable provisions of the Bankruptcy
- Where (a) there is more than one general partner or LLC
managing entity and at least one of such partners or
entities is not a debtor in a case under the Bankruptcy
Code, and (b) a Chapter 7 or Chapter 11 trustee has been
appointed, then the trustee should not exercise any
management rights except to the extent necessary to
constitute a quorum or to meet a minimum majority
required by the governing documents or applicable
- In all other cases where a Chapter 7 or Chapter 11 trustee
has been appointed, the trustee shall exercise all
management and voting rights.
Regardless of the foregoing, in all cases where (1) an individual debtor
continues to function as a partner or member after the order for relief,
and (2) the estate receives or is more likely than not going to receive,
the "buyout price," then the individual should have the sole power to
exercise management and voting rights attributable to periods after the
order for relief.
2.3.25 11 U.S.C. § 523 and Imputed Conduct or Liability
11 U.S.C. § 523 should be amended to provide that nothing in this
section shall preclude the discharge of a general partner from a debt
(otherwise nondischargeable in a copartner's or agent's bankruptcy
case) arising solely as a result of imputing to the general partner the
conduct or liability of a copartner or agent.
2.3.26 Subordination of Claims Arising from the Purchase or Sale of a
11 U.S.C. § 510(b) should be amended to subordinate the claims
"arising from the rescission of a purchase or sale" of their partnership
interests or "for damages arising from the purchase or sale" of their
partnership interests to all claims and interests that are senior or equal
to the claim or interest represented by such security or other interest
in the bankruptcy case of a general partner.
Chapter 2: General Issues in Chapter 11
2.4.1 Clarifying the Meaning of "Rejection"
The concept of "rejection" in section 365 should be replaced with
"election to breach."
Section 365 should provide that a trustee's ability to elect to breach a
contract of the debtor is not an avoiding power.
Section 502(g) should be amended to provide that a claim arising from
the election to breach shall be allowed or disallowed the same as if such
claim had arisen before the date of the filing of the petition.
2.4.2 Clarifying the Option of "Assumption"
"Assumption" should be replaced with "election to perform" in section
2.4.3 Interim Protection and Obligations of Nondebtor Parties
A court should be authorized to grant an order governing temporary
performance and/or providing protection of the interests of the
nondebtor party until the court approves a decision to perform or
breach a contract.
Section 503(b) should include as an administrative expense losses
reasonably and unavoidably sustained by a nondebtor party to a
contract, a standard based on nonbankruptcy contract principles,
pending court approval of an election to perform or breach a contract
if such nondebtor party was acting in accordance with a court order
governing temporary performance.
2.4.4 Contracts Subject to Section 365; Eliminating the "Executory"
Title 11 should be amended to delete all references to "executory" in
section 365 and related provisions, and "executoriness" should be
eliminated as a prerequisite to the trustee's election to assume or
breach a contract.
2.4.5 Prebankruptcy Waivers of Bankruptcy Code Provisions
Section 558 of the Bankruptcy Code should provide that except as
otherwise provided in title 11, a clause in a contract or lease or a
provision in a court order or plan of reorganization executed or issued
prior to the commencement of a bankruptcy case does not waive,
terminate, restrict, condition, or otherwise modify any rights or
defenses provided by title 11. Any issue actually litigated or any issue
resolved by consensual agreement between the debtor and a
governmental unit in its police or regulatory capacity, whether
embodied in a judgment, administrative order or settlement agreement,
would be given preclusive effect.
2.4.6 Prepackaged Plans of Reorganization; Section 341 Meeting of Creditors
Section 341 should provide that upon the motion of any party in
interest in a Chapter 11 case that entails a prepackaged plan of
reorganization, the court may waive the requirement that the U.S.
trustee convene a meeting of creditors.
2.4.7 Authorization for Local Mediation Programs
Congress should authorize judicial districts to enact local rules
establishing mediation programs in which the court may order non-binding, confidential mediation upon its own motion or upon the
motion of any party in interest. The court should be able to order mediation in an
adversary proceeding, contested matter, or otherwise in a bankruptcy
case, except that the court may not order mediation of a dispute arising
in connection with the retention or payment of professionals or in
connection with a motion for contempt, sanctions, or other judicial
disciplinary matters. The court should have explicit statutory
authority to approve the payment of persons performing mediation
functions pursuant to the local rules of that district's mediation
program who satisfy the training requirements or standards set by the
local rules of that district. The statute should provide further that the
details of such mediation programs that are not provided herein may
be determined by local rule.
2.4.8 Court Review of Appointments to Creditors' Committees
Subsection (a)(2) of 11 U.S.C. § 1102, "Creditors' and equity security
holders' committees," should be amended to read as follows:
(2) On request of a party in interest and after notice and
a hearing, the court may order a change in membership of
a committee appointed under subsection (a) of this section
if necessary to ensure adequate representation of creditors
or of equity security holders. On request of a party in
interest, the court may order the appointment of
additional committees of creditors or of equity security
holders if necessary to assure adequate representation of
creditors or of equity security holders. The United States
Trustee shall appoint any such committee.
2.4.9 Employee Participation in Bankruptcy Cases
Changes to the Official Forms, the U.S. Trustee program
guidelines and the Federal Rules of Bankruptcy
Procedure, are recommended to the Administrative Office
of the U.S. Courts, the Executive Office of the U.S.
Trustee, and the Advisory Committee on Bankruptcy Rules of the Judicial Conference, as appropriate, in order
to improve identification of employment-related
obligations and facilitate the participation by employee
representatives in bankruptcy cases. The Official Forms
for the bankruptcy petition, list of largest creditors,
and/or schedules of liabilities should solicit more specific
information regarding employee obligations. The U.S.
Trustee program guidelines for the formation of
creditors' committees should be amended to provide
better guidance regarding employee and benefit fund
claims. The appointment of employee creditors' committees
should be encouraged in appropriate circumstances as a
mechanism to resolve claims and other matters affecting
the employees in a Chapter 11 case.
2.4.10 Enhancing the Efficacy of Examiners and Limiting the Grounds for
Appointment of Examiners in Chapter 11 Cases
Congress should amend section 327 to provide for the retention of
professionals by examiners for cause under the same standards that
govern the retention of other professionals.
The Advisory Committee on Bankruptcy Rules of the Judicial
Conference should consider a recommendation that Federal Rule of
Bankruptcy Procedure 2004(a) be amended to provide that "On motion
of any party in interest or of an examiner appointed under section 1104
of title 11, the court may order the examination of any entity."
Congress should eliminate section 1104(c)(2), which requires the court
to order appointment of an examiner upon the request of a party in
interest if the debtor's fixed, liquidated, unsecured debts, other than
debts for goods, services, or taxes or owing to an insider, exceed
A creditor's secured claim in personal property should be determined
by the property's wholesale price.
A creditor's secured claim in real property should be determined by the
property's fair market value, minus hypothetical costs of sale.
2.4.12 Clarifying The Conditions for Sales Free & Clear Under 11 U.S.C. §
Congress should make clear that bankruptcy courts can authorize sales
of property of the estate free of creditors' interests regardless of the
relationship between the face amount of any liens and the value of the
2.4.13 Release of Claims Against Nondebtor Parties
Congress should amend sections 1123 and 524(e) to clarify that it is
within the discretion of the court to allow a plan proponent to solicit
releases of nondebtor liabilities. Creditors that agree in a separate
document to release nondebtor parties will be bound by such releases,
whereas creditors that decline to release their claims against nondebtor
parties will not be bound to release their claims.
2.4.14 Exclusion of Payroll Deductions from Property of the Estate
Congress should amend 11 U.S.C. § 541(b) to clarify that funds
deducted from paid wages within 180 days prior to the date of the
commencement of a case under title 11, held by a debtor/employer, and
owed by employees to third parties, other than a federal, state or local
taxing authority, do not fall within the definition of "property of the
2.4.15 Absolute Priority and Exclusivity
11 U.S.C. § 1129(b)(2)(B)(ii) should be amended to provide that the
court may find a plan to be fair and equitable that provides for
members of a junior class of claims or interests to purchase new
interests in the reorganized debtor.
11 U.S.C. § 1121 should be amended to provide that on the request of
a party in interest, the court will terminate exclusivity if a debtor
moves to confirm a non-consensual plan that provides for the
participation of a holder of a junior claim or interest under
1129(b)(2)(B) but does not satisfy the condition set forth in section
2.4.16 Classification of Claims
Section 1122 should be amended to provide that a plan proponent may
classify legally similar claims separately if, upon objection, the
proponent can demonstrate that the classification is supported by a
"rational business justification."
2.4.17 Prepetition Solicitation for a Prepackaged Plan of Reorganization
The standards and requirements provided in the Bankruptcy Code for
postpetition solicitation should be applicable to solicitation for a plan
of reorganization within 120 days prior to filing a Chapter 11 petition
by an entity that is subject to and in compliance with the public
periodic reporting requirements of the Securities Exchange Act of
1934. Notice of such prepetition solicitation should be served on the
Securities and Exchange Commission. If an entity solicits for a plan
of reorganization but does not file for bankruptcy, the bankruptcy
requirements and standards should be applicable if the entity does
not complete an exchange offer or any other transaction on the basis of
2.4.18 Postpetition Solicitation for a Prepackaged Plan of Reorganization
Section 1125(b) should be amended to provide that the acceptance or
rejection of a plan may be solicited after the commencement of a case
under title 11 but before the court approves a written disclosure
statement from those classes that were solicited for the plan prior to the
filing of the bankruptcy petition.
2.4.19 Elimination of Prohibition on Nonvoting Equity Securities
Congress should amend section 1123(a)(6) to eliminate the requirement
that the charter of the reorganized corporate debtor prohibit the
issuance of nonvoting equity securities. Section 1123(a)(6) should
otherwise remain unchanged.
2.4.20 Postconfirmation Plan Modification
11 U.S.C. § 1127(b) should be amended to permit modification after
confirmation of a plan until the later of 1) substantial consummation
or 2) two years after the date on which the order of confirmation is
entered. All other restrictions on postconfirmation plan modification
in section 1127(b) should remain unaltered.
Chapter 2: Small Business Proposals
2.5.1 Defining the term "Small Business"
A "small business debtor" is any debtor in a case under Chapter 11
(including any group of affiliated debtors) which has aggregate
noncontingent, liquidated secured and unsecured debts as of the
petition date or order for relief of five million dollars ($5,000,000) or
less and any single asset real estate debtor as defined in 11 U.S.C.§
101(51B), regardless of the amount of such debtor's liabilities.
2.5.2 Flexible Rules for Disclosure Statement and Plan
Give the bankruptcy courts authority, after notice and hearing, to
waive the requirements for, or simplify the content of, disclosure
statements in small business cases where the benefits to creditors of
fulfillment of full compliance with Bankruptcy Code § 1125 are
outweighed by cost and lack of meaningful benefit to creditors which
would exist if the full requirements of § 1125 were imposed;
The Advisory Committee on Bankruptcy Rules of the Judicial
Conference ("Rules Committee") shall be called upon to adopt, within
a reasonable time after enactment, uniform safe-harbor standard
forms of disclosure statements and plans of reorganization for small
business debtors, after such experimentation on a local level as they
deem appropriate. These forms would not preclude parties from using
documents drafted by themselves or other forms, but would be
propounded as one choice that plan proponents could make, which, if
used and completed accurately in all material respects, would be
presumptively deemed upon filing to comply with all applicable
requirements of Bankruptcy Code §§ 1123 and 1125. The forms shall
be designed to fulfill the most practical balance between (i) on the one
hand, the reasonable needs of the courts, the U.S. Trustee, creditors
and other parties in interest for reasonably complete information to
arrive at an informed decision and (ii) on the other hand, appropriate
affordability, lack of undue burden, economy and simplicity for
Repeal those provisions of 11 U.S.C. § 105(d) which are inconsistent
with the proposals made herein, e.g., those setting deadlines for filing
Amend the Bankruptcy Code to expressly provide for combining
approval of the disclosure statement with the hearing on confirmation
of the plan.
2.5.3 Reporting Requirements
To create uniform national reporting requirements to permit U.S.
Trustees, as well as creditors and the courts, better to monitor the
activities of Chapter 11 debtors, the Rules Committee shall be called
upon to adopt, with a reasonable time after enactment, amended rules
requiring small business debtors to comply with the obligations
imposed thereunder. The new rules will require debtors to file periodic
financial and other reports, such as monthly operating reports,
designed to embody, upon the basis of accounting and other reporting
conventions to be determined by the Rules Committee, the best
practical balance between (i) on the one hand, the reasonable needs of
the court, the U.S. Trustee, and creditors for reasonably complete
information and (ii) on the other hand, appropriate affordability, lack
of undue burden, economy and simplicity for debtors. Specifically, the
Rules Committee, shall be called upon to prescribe uniform reporting
a. the debtor's profitability, i.e., approximately how much
money the debtor has been earning or losing during current and
relevant recent fiscal periods;
b. what the reasonably approximate ranges of projected cash
receipts and cash disbursements (including those required by law
or contract and those that are discretionary but excluding
prepetition debt not lawfully payable after the entry of order for
relief) for the debtor appear likely to be over a reasonable period
in the future;
c. how approximate actual cash receipts and disbursements
compare with results from prior reports;
d. whether the debtor is or is not (i) in compliance in all
material respects with postpetition requirements imposed by the
Bankruptcy Code and the Bankruptcy Rules and (ii) filing tax
returns and paying taxes and other administrative claims as
required by applicable nonbankruptcy law as will be required by
the amended statute and rules and, if not, what the failures are,
how and when the debtor intends to remedy such failures and
what the estimated costs thereof are; and
e. such other matters applicable to small business debtors as
may be called for in the best interests of debtors and creditors
and the public interest in fair and efficient procedures under
2.5.4 Duties of the Debtor in Possession
The debtor is required to:
a. append to the voluntary petition or, in an involuntary
case, to file within three days after the order for relief, either
(A)(i) its most recent balance sheet, statement of operations and
cash-flow statement and (ii) its most recent federal income tax
return or (B) a statement made under penalty of perjury that no
such financial statements have been prepared or that no federal
income tax return has been filed or (C) both;
b. attend meetings, at which the debtor is represented by its
senior management personnel and counsel, scheduled by the
court, the U.S. Trustee, or the Bankruptcy Administrator
including, but not limited to initial debtor interviews, court-ordered scheduling conferences, and meetings of creditors
convened under 11 U.S.C. § 341;
c. file all schedules and statements of financial affairs for
small business debtors within the limits set by the Bankruptcy
Rules, unless the court, upon notice to the U.S. Trustee and a
hearing, grants an extension, which extension or extensions shall
not, in any event, exceed thirty (30) days after the order for relief
absent extraordinary and compelling circumstances;
d. comply with postpetition obligations, including but not
limited to the duties to: file tax returns, maintain appropriate and
reasonable current insurance as is customary and appropriate to
the industry, and timely pay all administrative expense tax
claims, except those being contested by appropriate proceedings
being diligently prosecuted;
e. create within ten (10) business days of the entry of order
for relief (or as soon thereafter as possible in case all banks
contacted during the first ten (10) business days decline the
business) separate deposit accounts with a bank or banks in
which the debtor shall be required to timely deposit, until a plan
is confirmed or the case is dismissed or converted or a trustee is
appointed, after receipt, all taxes collected or withheld by it for
governmental units. In compelling circumstances, the court may
dispense with these requirements after notice and a hearing;
f. allow the U.S. Trustee or its designated representative to
inspect the debtor's business premises, books and records at
reasonable times on reasonable prior written notice to the debtor.
2.5.5 Deadlines for Plan Filing and Confirmation
In small business cases only, require that the disclosure statement, if
any, and plan must be filed within 90 days after the entry of order for
relief, unless extended as permitted below. During this 90-day period,
only the debtor may file a plan unless on request of a party in interest
made during this period and after notice and a hearing, the court, for
cause, orders otherwise. In small business cases only, require the plan
to be confirmed within 150 days after the entry of order for relief,
unless extended as permitted below.
2.5.6 Burden of Proof for Extensions of Deadlines
Permit extensions of the deadlines for filing and approving disclosure
statements, if any, and filing and confirming plans of reorganization
only if the debtor, having duly noticed and appeared at the necessary
extension hearing conducted and ruled upon prior to the expiration of
the deadline, if any, and having carried the burdens of coming forward
and persuasion, demonstrates by a preponderance of the evidence that
it is more likely than not to confirm a plan of reorganization within a
reasonable time. No such deadline may be extended unless a new
deadline is imposed at the time the extension is granted. The
Bankruptcy and Judicial Codes will require the U.S. Trustee, as the
case may be, to be a recipient of notice of extension hearings and to
participate actively therein, in order to assure, to the maximum extent
feasible, that the interests of the public are protected when
determinations are made as to whether small business debtors receive
extensions and have proven by a preponderance of the evidence that it
is more likely than not that they will confirm a plan within a
2.5.7 Scheduling Conferences
Require the bankruptcy court to promptly conduct at least one on-the-record scheduling hearing, on notice to the U.S. Trustee and the
debtor's 20 largest unsecured creditors to be sure that the deadlines
discussed above are met except that no such hearing is required if an
agreed order is filed by the debtor and U.S. Trustee and approved by
the court after notice and hearing. The court shall also conduct such
other scheduling hearings and status conferences as it deems fit and
proper. Whenever possible, these hearings shall be scheduled in
conjunction with other mandatory events so as to minimize to the most
reasonable practicable extent, the time of debtor personnel spent in
court and at official meetings.
2.5.8 Serial Filer Provisions
Provide in the Bankruptcy Code that, with respect to any debtor (or
any entity which has succeeded to substantially all the debtor's assets
or business) which files a second case while another case is pending in
which such debtor is the (or one of the) debtor(s) or in the event that it
again becomes a debtor in a Chapter 11 case within two years after an
order of dismissal of a Chapter 11 case in which it was the debtor has
become a final order or a Chapter 11 plan has been confirmed, shall
not be entitled to the section 362(a) stay unless, after it has become a
debtor, it bears the burdens of coming forward and of persuasion, by
a preponderance of the evidence, that (1) the new case has resulted
from circumstances beyond the control of the debtor not foreseeable at
the time the first case was filed and (2) it is more likely than not that it
will confirm a feasible plan, but not a liquidating plan, within a
reasonable time. In cases involving such debtors when the owners have
transferred the business to a new legal entity, owned and arranged by
them, the section 362(a) stay would apply on filing but would be lifted
on a verified, ex parte motion of the U.S. Trustee, with the right to have
it reimposed upon a showing of (1) and (2) above. The Federal Rule of
Civil Procedure governing injunctions applies to the court's award of
a stay to the debtor.
2.5.9 Expanded Grounds for Dismissal or Conversion and Appointment of
a. Modify section 1112 to read as follows:
(b)(1) Except as provided in subsection (c) of this section or in
section 1104(a)(3) of this title, on request of a party
in interest or the U.S. Trustee, and after notice and
a hearing, the court shall convert a case under this
chapter to a case under Chapter 7 of this title or
shall dismiss a case under this chapter, whichever
is in the best interest of creditors and the estate,
where movant establishes cause, except that such
relief shall not be granted if the debtor or another
party in interest objects and establishes both:
(A) that it is more likely than not that a plan will be confirmed
within a time as fixed by this title or by order of the court;
(B) if the cause is an act or omission of the debtor:
(i) that there exists a reasonable justification for the
act or omission; and
(ii) that the act or omission will be cured within a
reasonable time fixed by the court not to exceed 30
days after the court decides the motion unless the
movant expressly consents to a continuance for a
specific period of time or there are compelling
circumstances beyond the control of the debtor
which justify an extension.
(2) For purposes of this subsection, cause includes:
(A) substantial or continuing loss to or diminution of the
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance;
(D) unauthorized use of cash collateral harmful to one or
(E) failure to comply with an order of the court;
(F) failure timely to satisfy any filing or reporting
requirement established by this title or by applicable rule;
(G) failure to attend the section 341(a) meeting of creditors or
an examination ordered under Bankruptcy Rule 2004;
(H) failure timely to provide information or attend meetings
reasonably requested by the U.S. Trustee or;
(I) failure timely to pay taxes due after the order for relief or
to file tax returns due after the order for relief;
(J) failure to file or confirm a plan within the time fixed by
this title or by order of the court; and
(K) failure to pay any fees or charges required under Chapter
123 of title 28.
(3) The court shall commence the hearing on any motion under this
subsection within 30 days after filing of the motion, and shall
decide the motion within 15 days after commencement of the
hearing, unless the movant expressly consents to a continuance
for a specific period of time or compelling circumstances prevent
the court from meeting the time limits established by this
b. Additional Grounds for Appointment of Trustee
Add the following new section to 11 U.S.C. § 1104:
(a)(3) where grounds exist to convert or dismiss the case
under section 1112 of this title, but the court
determines that the appointment of a Chapter 11
trustee is in the best interests of creditors and the
2.5.10 Enhanced Powers of the United States Trustee and Bankruptcy
Add a new subclause (e) to 11 U.S.C. § 341, and amend 28 U.S.C. § 586
(the general statute governing the powers and duties of the U.S.
Trustee) and the Manual for Bankruptcy Administrators, (governing
the duties of Bankruptcy Administrators) to require U.S. Trustees in
every small business debtor case (except where they, in their reasonable
discretion determine that the conduct enumerated below is not
advisable in the circumstances):
(1)(a) to conduct an initial debtor interview ("IDI") with the
debtor as soon as practicable after the entry of order for relief but
prior to the first meeting scheduled under Bankruptcy Code §
341(a). At the IDI, the U.S. Trustee shall, at a minimum, begin to
investigate the debtor's viability, inquire about the debtor's
business plan, explain the debtor's obligations to file monthly
operating reports and other required reports, attempt to develop
an agreed scheduling order, and inform the debtor of other
Chapter 11 obligations;
(b) when determined by the U.S. Trustee to be
appropriate and advisable, to visit the appropriate
business premises of the debtor and ascertain the general
state of the debtor's books and records and verify that the
debtor has filed its tax returns. This visit should take
place in connection with or reasonably promptly after the
IDI (wherever possible, these events shall be combined
with other events so as to minimize to the most reasonable
practicable extent the amount of time of debtor personnel
spent in court and at official meetings); and
(c) to review and monitor diligently on a continuous
basis each debtor's activities, with a view to identifying as
promptly as possible those debtors which do not pass the
test of being more likely than not to be able to confirm a
Chapter 11 plan within a reasonable time; and
(2) in cases where, upon the basis of continuing review,
monitoring or otherwise, the U.S. Trustee finds material grounds
for any relief under Bankruptcy Code § 1112, to move the court
promptly for relief.
Chapter 2: Single Asset Proposals
2.6.1 Change the Present Statutory Definition of "Single Asset Real Estate" in
First, the $4 million debt limit should be eliminated from the
definition of "single asset real estate" debtor subject to section
Second, the definition of "single asset real estate" should be more
carefully worded to exclude cases in which the real property is
used by a debtor in an active business.
The definition, as proposed, incorporating both concepts, would read
undeveloped real property or other real property constituting a
single property or project other than residential real property
with fewer than 4 residential units on which is located a single
development or project which property or project generates
substantially all of the gross income of a debtor and on which no
substantial business is being conducted by a debtor, or by a
commonly controlled group of entities substantially all of which
are concurrently Chapter 11 debtors, other than the business of
operating the real property and activities incidental thereto.
2.6.2 Amend Code Section 362(d)(3) in Three Particulars
a. Make clear that payments required by section 362(d)(3) may
be made from rents generated from the property.
b. Provide that the interest rate with respect to which payments
are calculated shall be the nondefault contract rate.
c. Amend the statute to provide that the payments must be
commenced or a plan filed on the later of 90 days after the
petition date or 30 days after the court determines the debtor to
be subject to section 362(d)(3).
2.6.3 Require Substantial Equity in order to Confirm a Lien-Stripping Plan
Using the New Value Exception
In cases where the secured creditor has not made the election
under section 1111(b)(1)(a)(i), a plan must satisfy the following
requirements to be confirmed under the new-value exception
following rejection by a class that includes the unsecured portion
of a claim secured by real property: (1) The new value
contribution must pay down the secured portion of the claim on
the effective date of the plan so that, giving effect to the
confirmation of the plan, sufficient cash payments on the secured
portion of the claim shall have been made so that the principal
amount of debt secured by the property is no more than 80
percent of the court-determined fair market value of the property
as of the confirmation date; (2) the payment terms for the secured
portion of the claim must both (i) satisfy all applicable
requirements of section 1129 of the Code, and (ii) satisfy then-prevailing market terms in the same locality regarding maturity date, amortization, interest rate, fixed-charge coverage and loan
documentation; and (3) the new value contribution must be
treated as an equity interest that is not convertible to or
exchangeable for debt.
Chapter 3: Jurisdiction
3.1.1 Establishing the Bankruptcy Court under Article III of the Constitution
The bankruptcy court should be established under Article III of the
3.1.2 Transition to an Article III Bankruptcy Court
As of the enactment of legislation to establish an Article III bankruptcy
court, sitting bankruptcy judges should be permitted to finish their
current fourteen year terms. As vacancies are created through attrition
(including expiration of current statutory term, appointment as an
Article III judge, resignation, retirement prior to end of term for any
reason, or death), Article III bankruptcy judges should be appointed
by the President upon the advice and consent of the Senate to fill those
positions. Sitting bankruptcy judges should be permitted to apply for
any Article III judgeship positions while remaining on the bench.
Nothing in the Recommendation will affect the length of the current
term, salary, retirement benefits, or other attributes of sitting
During the transition period, bankruptcy jurisdiction should be treated
in the following manner: as Article III bankruptcy judges are
appointed, the jurisdiction provisions under 28 U.S.C. §§ 1334 and 157
should be transferred on a district-by-district basis to the Article III
bankruptcy judge sitting in that district. Consequently, bankruptcy
jurisdiction would reside in the Article III bankruptcy judge, including
the power to refer and withdraw cases and proceedings. While a
district is without an Article III bankruptcy judge, the Judicial Council
for that circuit should be authorized to: (1) determine the need for an
Article III bankruptcy judge in that district, and (2) if necessary,
designate an Article III bankruptcy judge from another district (within
the circuit) to sit in that district. In the event the judicial council
determines a need for an Article III bankruptcy judge and one has not
yet been appointed to sit within that circuit, the Chief Justice, upon
receiving a certificate of necessity from the chief judge of the circuit,
should be authorized to designate an Article III bankruptcy judge from
another circuit to fulfill the request.
3.1.3 Bankruptcy Appellate Process
The current system which provides two appeals, the first either to a
district court or a bankruptcy appellate panel and the second to the
U.S. Court of Appeals, as of right from final orders in bankruptcy cases
should be changed to eliminate the first layer of review.
3.1.4 Interlocutory Appeals of Bankruptcy Orders
28 U.S.C. § 1293 should be added to provide, in addition to the appeal
of final bankruptcy orders, for the appeal to the courts of appeals of
interlocutory bankruptcy court orders under the following
circumstances: (1) an order to increase or reduce the time to file a plan
under section 1121(d); (2) an order granting, modifying, or refusing to
grant an injunction or an order modifying or refusing to modify the
automatic stay; (3) an order appointing or refusing to appoint a
trustee, or authorizing the sale or other disposition of property of the
estate; (4) where an order is certified by the bankruptcy judge that (x)
it involves a controlling issue of law to which there is a substantial
difference of opinion, and (y) immediate appeal of the order may
materially advance resolution of the litigation, and leave to appeal is
granted by the court of appeals; and (5) with leave from the court of
3.1.5 Venue Provisions under 28 U.S.C. § 1408
28 U.S.C. § 1408(1) should be amended to prohibit corporate debtors
from filing for relief in a district based solely on the debtor's
incorporation in the state where that district is located.
The affiliate rule contained in 28 U.S.C. § 1408(2) should be amended
to prohibit a corporate filing in an improper venue unless such debtor's
corporate parent is a debtor in a case under the Bankruptcy Code in
that forum. Section 1408(2) should be amended as follows:
(2) in which there is pending a case under title 11
concerning such person's affiliate, as defined in
section 101(2)(A) of title 11, general partner,
partnership, or a partnership controlled by the
same general partner.
The court's discretionary power to transfer venue in the interest of
justice and for the convenience of the parties should not be restricted.
Chapter 3: Procedure
3.2.1 Minimum Amount to Commence a Preference Action under 11 U.S.C. §
11 U.S.C. § 547 should provide that $5,000 is the minimum aggregate
transfer to a noninsider creditor that must be sought in a nonconsumer
debt preference avoidance action.
3.2.2 Venue of Preference Actions under 28 U.S.C. § 1409
28 U.S.C. § 1409 should be amended to require that a preference
recovery action against a noninsider seeking less than $10,000 must be
brought in the bankruptcy court in the district where the creditor has
its principal place of business. The Recommendation applies to
nonconsumer debts only.
3.2.3 Ordinary Course of Business Exception Under 11 U.S.C. § 547(c)(2)(B)
11 U.S.C. § 547(c)(2)(B) should be amended to provide a disjunctive
test for whether a payment is made in the ordinary course of the
debtor's business if it is made according to ordinary business terms.
The ordinary course of business defense to a preference recovery action
under section 547(c)(2) should provide as follows:
(2) to the extent that such transfer was in payment of a
debt incurred by the debtor in the ordinary course of
business or financial affairs of the debtor and the
transferee and such transfer was -
(A) made in the ordinary course of business or financial
affairs of the debtor and the transferee; or
(B) made according to ordinary business terms[.]
3.2.4 Ad Valorem Tax Priority under 11 U.S.C. § 724(b)
11 U.S.C. § 724(b) should be amended to exempt from subordination
properly perfected, nonavoidable liens on real or personal property of
the estate arising in connection with an ad valorem tax. Section 724(b)
should also require the trustee to marshal unencumbered assets of the
bankruptcy estate and surcharge secured claims, if warranted by the
circumstances, under section 506(c) prior to subordinating any tax
liens under the statute.
3.2.5 Burden of Proof for Tax Proceedings
The Bankruptcy Code should be amended to clarify that the burden of
proof/persuasion rules and concomitant presumptions in tax
controversies which would be applicable under nonbankruptcy law are
equally applicable in bankruptcy court proceedings to determine tax
liabilities under 11 U.S.C. §§ 502 and 505.
3.2.6 Exception of Tax Refunds Setoffs under 11 U.S.C. § 362(b)
11 U.S.C. § 362(b) of the Bankruptcy Code should be amended to allow
a governmental unit to setoff an income tax refund that arose prior to
the commencement of a Chapter 7 or Chapter 13 case against an
'undisputed' income tax liability of an individual debtor that arose
prior to the commencement of the case.
Chapter 3: Administration
3.3.1 United States Trustee Program
The Director of the Executive Office for United States Trustees should
hold the position of Assistant Attorney General.
The United States Trustee regions should match the number, size and
configuration of the federal judicial circuits.
3.3.2 Personal Liability of Trustees
Trustees appointed in cases under Chapter 7, 11, 12 or 13 of the
Bankruptcy Code should not be subject to suit in their individual
capacity for acts taken within the scope of their duties as delineated in
the Bankruptcy Code or by order of the court, as long as the applicable
order was issued on notice to interested parties and there was full
disclosure to the court.
Chapter 7, 12 and 13 trustees only should be subject to suit in the
trustee's representative capacity and subject to suit in the trustee's
personal capacity only to the extent that the trustee acted with gross
negligence in the performance of the trustee's fiduciary duties. Gross
negligence should be defined as reckless indifference or deliberate
disregard of the trustee's fiduciary duty.
A Chapter 11 trustee of a corporate debtor only should be subject to
suit in the trustee's representative capacity and subject to suit in the
trustee's personal capacity only to the extent that the trustee has
violated the standard of care applicable to officers and directors of a
corporation in the state in which the Chapter 11 case is pending.
Debtors in possession should remain subject to suit to the same extent
as currently exists under state or federal law.
3.3.3 Qualification of Professionals under 11 U.S.C. § 1107(b)
Section 1107(b) should be amended to provide that a person should not
be disqualified for employment under § 327 solely because such person
holds an insubstantial unsecured claim against or equity interest in the
debtor. Section 327 and § 101(14) should remain unchanged.
3.3.4 National Admission to Practice
Admission to practice in one bankruptcy court, usually by virtue of
being admitted to practice in the relevant United States District Court,
should entitle an attorney, on presentation of a certificate of admission
and good standing in another district court, to appear in the other
bankruptcy court without the need for any other admission procedure.
The Recommendation will not affect requirements (if any) to associate
with local counsel. Similarly, the Recommendation will not change the
requirements under state law governing the practice of law and the
maintenance of an office for the practice of law. The Recommendation
will only amend the local bankruptcy rule or practice requirements
governing special admission of attorneys to the bankruptcy court who
are otherwise not admitted to the bar of the district court in the district
where the bankruptcy court is located to appear in a particular
3.3.5 Fee Examiners
The Bankruptcy Code should explicitly preclude the appointment of fee
examiners as an improper delegation of the court's duty to review and
award compensation under 11 U.S.C. § 330. The Recommendation
does not affect the court's authority under 11 U.S.C. § 1104(c) to
appoint an examiner to investigate and report on certain aspects of a
Chapter 11 case, for example, a potential fraudulent transfer or a
particularly complicated claims estimation.
3.3.6 Attorney Referral Services
11 U.S.C. § 504 should be amended to permit an attorney compensated
out of a bankruptcy estate to remit a percentage of such compensation
to a bona fide, nonprofit, public service referral program. Such
attorney referral program must be operating in accordance with state
laws and ethical rules and guidelines governing referrals. The
Recommendation does not affect the requirement that all compensation
arrangements be disclosed in the application for retention under Fed.
R. Bankr. P. 2014 and in the application for compensation under Fed.
R. Bankr. P. 2016(a).
Chapter 4: Data Compilation and Dissemination
4.1.1 Establish as policy that all data held by bankruptcy clerks in electronic
form, to the extent it reflects only public records as defined in
Bankruptcy Code § 107, should be released in electronic form to the
public, on demand.
4.1.2 Establish and fund a pilot project to aggregate the data from their various sources,
particularly bankruptcy clerks, and make that data available to the
public in electronic form, on demand.
4.1.3 Secure limited-duration appointment of a coordinator, who, with the
head of the AO's office and the head of EOUST, would be charged with
the duty of:
(1) making recommendations to increase the accuracy of the
debtor's petitions, schedules and statements;
(2) setting the data-collection goals;
(3) coordinating the bankruptcy data-collection efforts of the
central reporting agencies; and
(4) reporting on an annual basis to the Congress, the Chief
Justice, and the President.
4.1.4 Establish a bankruptcy data system in which (1) a single set of data
definitions and forms are used to collect data nationwide and (2) all
data for any particular case are aggregated in the same electronic
4.1.5 Maximize the number of documents filed electronically and maximize
open-to-the-public remote electronic access to all data for free, or at the
lowest possible cost.
Chapter 4: Taxation and the Bankruptcy Code
4.2.1 Clarify provisions of the Bankruptcy Code on providing reasonable
notice to governmental units.
4.2.2 Amend the Bankruptcy Code to prescribe that to the extent that a tax
claim presently is entitled to interest, such interest shall accrue at a
stated statutory rate.
4.2.3 The Commission should submit to the Advisory Committee on
Bankruptcy Rules of the Judicial Conference ("Rules Committee") a
recommendation that the Federal Rules of Bankruptcy Procedure
require that notices demanding the benefits of rapid examination under
11 U.S.C. § 505(b) be sent to the office specifically designated by the
applicable taxing authority for such purpose, in any reasonable
manner prescribed by such taxing authority.
4.2.4 Conform § 346 of the Bankruptcy Code to IRC 1398(d)(2) election; also
conform local and state tax attributes that are transferred to the estate
to those tax attributes that are transferred to the bankruptcy estate
under IRC § 1398.
4.2.5 Amend 11 U.S.C. § 507(a)(8) and 523(a)(1) to provide for the tolling of
relevant periods in the case of successive filings. Thus, in the event of
successive bankruptcy filings, the time periods specified in § 507(a)(8)
shall be suspended during the period in which a governmental unit was
prohibited from pursuing a claim by reason of the prior case.
4.2.6 Amend 11 U.S.C. § 507(a)(8)(ii) to toll the 240-day assessment period
for both pre- and post assessment offers in compromise.
4.2.7 Amend the Bankruptcy Code to require "small business debtors" to
create and maintain separate bank accounts for trust fund taxes and
nontax deductions from employee paychecks. Also, any proposal
should provide for sanctions for failure to comply with this Bankruptcy
4.2.8 Amend 11 U.S.C. § 1141(d)(3) to except from discharge taxes unpaid by
businesses entities, which nonpayment arose from fraud.
4.2.9 Amend 11 U.S.C. § 362(a)(8) to confine its application to proceedings
before the Tax Court for tax periods ending on or prior to the filing of
the petition in the bankruptcy case and to permit appeals from Tax
4.2.10 Application of the periodic payment provisions of § 1129(a)(9)(C) to
secured tax that would be entitled to priority absent their secured
4.2.11 Amend 11 U.S.C. § 545(2) to overrule cases that have penalized the
government due to certain benefits for purchasers provided for in the
lien provisions of the Internal Revenue Code.
4.2.12 Amend 11 U.S.C. § 503 and 28 U.S.C. § 960 to eliminate the need for a
governmental unit to make a "request" to the debtor to pay tax
liabilities that are entitled to payment as administrative expenses.
4.2.13 Amend 11 U.S.C. §§ 502(a)(1) and 503(b)(1)(B) to provide that
postpetition ad valorem real estate taxes should be characterized as an
administrative expense whether secured or unsecured and such taxes
should be payable as an ordinary course expense.
4.2.14 Amend the Bankruptcy Code to overrule Investors of The Triangle v.
Carolina Triangle Ltd. Partnership (In re Carolina Triangle Ltd.
Partnership), 166 B.R. 411 (9th Cir. B.A.P. 1994), and to ensure that
postpetition ad valorem real-estate taxes are a reasonable and
necessary cost of preservation of the estate.
4.2.15 Amend the Bankruptcy Code to establish that ad valorem taxes are
incurred by the estate and, therefore, are entitled to administrative
expense priority status.
4.2.16 & 4.2.17 Amend the Bankruptcy Code to conform the treatment of state and local tax claims to that treatment provided for federal tax claims by, among others, amending 11 U.S.C. § 346 to conform state and local tax attributes to the federal list in IRC § 1398.
4.2.18 Clarify IRC § 1398 to provide that the bankruptcy estate's income is
subject to alternative minimum tax and capital gains tax treatment if
4.2.19 Amend the Bankruptcy Code to provide that the term "assessed or
assessment" as used in 11 U.S.C. §§ 362(b)(9) and 507(a)(8) shall mean
"that time at which a taxing authority may commence an action to
collect the tax."
4.2.20 Amend 11 U.S.C. § 1125(b) to establish standards for tax disclosures in
a Chapter 11 disclosure statement.
4.2.21 Clarify 11 U.S.C. § 726(a)(1) to provide that a taxing authority must file
a claim for a priority tax before the final order approving the trustee's
report is entered by the court.
4.2.22 Conformity of Chapter 13 plans with provisions of the Bankruptcy
Code: Requirement to file returns.
4.2.23 Whether an income tax return prepared by the taxing authority should
be considered a filed income tax return for purposes of the Bankruptcy
4.2.24 Dismissal and injunction against filing subsequent case where court
determines that a Chapter 13 debtor is abusing the bankruptcy process.
4.2.25 Create a method by which a trustee may obtain a safe harbor and
certainty regarding the nature, amount, and consequences of debt
4.2.26 Amend IRC § 1398(e)(3) to provide that a debtor should be treated as
an employee of the bankruptcy estate as to payments by the estate of
estate assets to the debtor for services performed.
4.2.27 & 4.2.28 Tax treatment of the sale by the estate of a debtor's homestead:
Availability of capital gain exclusion on sale of residence to the trustee
of an individual debtor.
4.2.29 Whether changes are needed in IRC §§ 108 and 382 with respect to the
issuance of stock for debt.
4.2.30 Whether IRC § 1001 should be modified to provide for parallel tax
treatment of recourse and nonrecourse debt.
4.2.31 Tax treatment of abandonment of property by an estate to the debtor.
4.2.32 Application of § 505(b) discharge to estate as well as to the debtor,
successor to the debtor, and trustee where taxing authority does not
4.2.33 Bifurcation for claim filing purposes of a corporate tax year that
straddles the petition date.
4.2.34 Requirement of periodic payment for deferred payments of tax under
§ 1129(a)(9) and designation of interest rate used while making those
4.2.35 Authority of bankruptcy courts to grant declaratory judgments on
prospective tax issues in Chapter 11 plans of reorganization.
4.2.36 Whether payment of prepetition nonpecuniary loss tax penalties in
Chapter 11, 12, and 13 cases should be subordinated to payment of
general unsecured claims.
4.2.37 Whether a substitute for return shall constitute a filed return for purposes of dischargeability issues.
Chapter 4: Chapter 9 - Municipal Bankruptcy Relief
4.3.1 Incorporation of the Securities Contract Liquidation Provisions - 11
U.S.C. §§ 555, 556, 559 & 560
The securities contract liquidation provisions in 11 U.S.C. §§ 555, 556,
559 & 560 should be applicable in Chapter 9 cases and should be added
to the list contained in section 901(a).
4.3.2 Chapter 9 Petition as Order for Relief
Section 921(d) should be deleted. Section 921(c) authorizes the court to
dismiss a Chapter 9 petition for (1) lack of good faith; or (2) failure to
meet the requirements of title 11. Deletion of section 921(d) will
eliminate the statutory conflict between section 301 providing that a
voluntary petition constitutes an order for relief and section 921(d)
authorizing the court to order relief only if the petition is not dismissed
under section 921(c). Deletion of section 921(d) will also conform
Chapter 9 to all other chapters of the Bankruptcy Code where a
voluntary petition is the order for relief.
4.3.3 Eligibility of Municipalities to Serve on Creditors' Committees
11 U.S.C. § 101(41) should be amended to permit municipalities to serve
on creditors' committees in Chapter 9 cases under the provisions of 11
U.S.C. § 1102.
4.3.4 Elimination of 11 U.S.C. § 921(b)
Section 921(b) should be deleted. Bankruptcy judges should be
appointed to preside over Chapter 9 cases in the same manner as they
are appointed to supervise all other cases under the Bankruptcy Code.
4.3.5 Inclusion of "Employees" in 11 U.S.C. § 922(a)
11 U.S.C. § 922(a)(1) should be amended to provide stay protection to
nonresident "employees" of municipalities that have filed for Chapter
9 relief. Section 922(a)(1) should read:
(1) the commencement or continuation, including the
issuance or employment of process, of a judicial,
administrative, or other action or proceeding against an
officer, employee, or inhabitant of the debtor that seeks
to enforce a claim against the debtor[.]
4.3.6 Treatment of Municipal Obligations in Chapter 9
Chapter 9 should be amended to provide comparable protection to all
types of tax-exempt obligations sold in the municipal marketplace. The
Recommendation will not affect the right of a municipality to use
special revenues for the provision of necessary municipal services.
Chapter 4: Chapter 12 - Bankruptcy Relief for Family Farmers
4.4.1 Sunset Provision and Chapter 12 Eligibility
The sunset provision should be eliminated. Chapter 12 should be made
a permanent addition to the Bankruptcy Code. Section 101(18) should
be amended to increase the aggregate debt limits to $2,500,000. The
other eligibility requirements in section 101(18) should remain
4.4.2 Direct Payment Plans
28 U.S.C. § 586(e) should be amended to clarify that the calculation of
the standing trustee's percentage fee should be based upon the
aggregate of those payments "made under the plan" on account of
claims impaired or modified by operation of bankruptcy law regardless
of who makes the payment.