The Bankruptcy Reform Act of 1978
| Publication year | 1979 |
| Pages | 1396 |
| Citation | Vol. 8 No. 8 Pg. 1396 |
1979, August, Pg. 1396. The Bankruptcy Reform Act of 1978
The Bankruptcy Reform Act of 1978(fn1) is a Congressional effort to simplify and modernize a patchwork of statutes, cases, and rules that trace their roots to legislation first enacted in 1898. The magnitude and merit of that undertaking will be appreciated by all who are familiar with current bankruptcy law. The substantive provisions of the Bankruptcy Reform Act are commonly referred to as the "Bankruptcy Code" (more conveniently, the "Code") to distinguish them from current bankruptcy law, called the "Bankruptcy Act."
In the space available here, it is not possible to deal thoroughly with a piece of legislation as ambitious as the Code. The aim of this article is merely to summarize those portions of the Code that may be of particular interest to Colorado practitioners and thus provide a foundation from which a study of the Code itself may proceed.(fn2)
The major substantive provisions of the Bankruptcy Code apply to proceedings commenced on or after October 1, 1979.(fn3) Proceedings pending on that date will continue to be governed by existing law. Those portions of the Code that establish new "United States Bankruptcy Courts" as adjuncts of the District Courts and provide for the appointment and term of bankruptcy judges will not become effective until April 1, 1984,(fn4) to allow time to study the operation of the new law and determine how many bankruptcy judges will be needed.(fn5) In the meantime (called the "transition period"), existing bankruptcy judges will continue in office (unless their terms are not renewed after a merit screening process established by the Code)(fn6) and the current Bankruptcy Courts will exercise all of the powers and jurisdiction provided for the new courts.(fn7)
The Bankruptcy Code is organized in eight chapters that bear only odd arabic numbers. Chapters 1 (General Provisions), 3 (Case Administration), and 5 (Creditors, the Debtor, and the Estate) apply in all proceedings under the Code. Chapters 7 (Liquidation), 9 (Adjustment of Debts of a Municipality), 11 (Reorganization), and 13 (Adjustment of Debts of an Individual with Regular Income) establish particular types of proceedings.
A Chapter 7 liquidation proceeding is analogous to a straight bankruptcy under current law. Chapter 7 includes special provisions for stockbroker and commodity broker liquidations.(fn8) Chapter 9 governs proceedings relating to a municipality and because of its limited interest to
most practitioners, it will not be dealt with in this article. Chapter 11 governs all rehabilitative proceedings not covered by the more specialized Chapters 9 and 13, including cases that would be brought under Chapter X, XI, or XII of the Bankruptcy Act. As under current law, special provisions apply to railroad reorganizations.(fn9)
Chapter 13 is roughly analogous to a wage earners' plan under Chapter XIII of the Bankruptcy Act but has been expanded to include all "individuals with regular income" and may be used by sole proprietorships that do not have debt in excess of certain limits.
Chapter 15 (United States Trustees) establishes in certain districts (including Colorado) a pilot program of United States Trustees to exercise certain supervisory and appointing powers of the bankruptcy judges and to supervise and monitor the performance of private trustees. The section numbers in Chapter 15 are keyed to the sections in the balance of the Code that are displaced or modified by Chapter 15 in pilot districts. For example, § 15303 provides for the appointment of an interim trustee by the United States Trustee in a pilot district and displaces § 303(g), which provides for that appointment to be made by the Court. Because Colorado is part of the pilot program, Chapter 15 will be cited in this article where appropriate.
In addition to codifying the substantive law of bankruptcy, the Bankruptcy Reform Act of 1978 amends other sections of federal law to conform with the Code and establishes the new system of Bankruptcy Courts.(fn10)
Because the Code was finalized in haste, it is replete with technical errors. A bill has already been introduced to correct these mistakes.(fn11)
In operating under the Code, practitioners will have the advantage of an extensive body of legislative history growing from the different bills that were proposed by the Commission on the Bankruptcy Laws of the United States(fn12) and the National Conference of Bankruptcy Judges(fn13) and the various legislative reports.(fn14) Of special value are the commentaries inserted in the Congressional Record by the House and Senate in lieu of publishing a conference report.(fn15) However, changes were made after these commentaries were prepared and care should be exercised to determine
that the comments relied upon relate to the final version of the Code.
Another important structural consideration is the relationship of the Code to the Bankruptcy Rules, which have played so important a part in bankruptcy proceedings under current law. It will be recalled that these rules, which were adopted by the United States Supreme Court in 1973, superseded conflicting statutory provisions but could not "a-bridge, enlarge, or modify any substantive right. "(fn16)The Bankruptcy Code calls for the development of new rules, but provides that the current Bankruptcy Rules will continue in effect, to the extent not inconsistent with the provisions of the Code, until the new rules are adopted.(fn17) The new rules are not allowed to conflict with, and therefore cannot supersede, the Code in any respect, whether procedural or substantive. The courts ultimately must determine which of the current Bankruptcy Rules are inconsistent with the Code.
An excellent basic reference work for the Code is the three-volume 1979 Collier Pamphlet Edition (Matthew Bender & Co., Inc.), which contains the current Bankruptcy Act, the Bankruptcy Rules, and the new Bankruptcy Code. The volume dealing with the Bankruptcy Code includes appropriate legislative history materials following each section of the Code and may save many hours of searching through the Congressional Record. It also contains helpful comments highlighting the changes effected by particular sections, including lengthy excerpts from the related provisions of the Bankruptcy Act, and crossreferences where there is a perceived inconsistency between a section of the Code and the Bankruptcy Rules.
One of the most fundamental changes made by the Code is to grant to the Bankruptcy Courts "pervasive" jurisdiction to decide cases relating to bankruptcy proceedings.(fn18) This jurisdiction is original and exclusive for all cases under the Code(fn19) (i.e., liquidation or reorganization proceedings) and original but not exclusive for all civil proceedings arising under the Code or relating to bankruptcy estates.(fn20) Gone is the distinction between "summary" and "plenary" jurisdiction which has been so important under the Bankruptcy Act. The Bankruptcy Court is, however, given the right to abstain from hearing a particular proceeding over which it has nonexclusive jurisdiction and an abstention, or a decision not to abstain, is not appealable.(fn21) Presumably, a decision to abstain would put the parties in the same position they have been in when a...
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