Chapter 2 Sources

• Jurisdiction: United States

Chapter 2 Sources

§ 2.1 ~ Three jobs

In this chapter, we do three jobs. First, we outline the sources of bankruptcy law. Next, we offer some techniques for reading that law. Finally, we discuss some ways that you can find out about your case.

§ 2.2 ~ Sources of Law

The bankruptcy lawyer's primary statute is the Bankruptcy Code, Title 11 of the U.S. Code. But for matters of jurisdiction, she is governed by the bankruptcy provisions of the Judicial Code, Title 28. Additionally, bankruptcy crimes are addressed in the Criminal Code, Title 18, chapter 9, and bankruptcy tax matters are addressed in the Tax Code, Title 26. Procedure is governed primarily by the Federal Rules of Bankruptcy Procedure, but also by a wide array of "local rules" and "general orders," not to mention "local local" rules, as we explain more fully below.

But this is only the beginning. Bankruptcy often operates as a framework to implement other law, sometimes (inexactly) referred to as "state law."¹ But this "other law" can be any applicable non-bankruptcy law — state or federal or foreign. At a minimum, the bankruptcy lawyer is likely going to need to know something about security interests under Article 9 of the Uniform Commercial Code and under state mortgage law.² In addition, he will surely need to know something about tax law as it affects bankruptcy cases.³

We deal with all of these matters in turn. But in the first instance, bankruptcy draws its authority from the Constitution, with which we begin.

§ 2.3 ~ The u.s. constitution

U.S. bankruptcy law starts with the Constitution — specifically, Article I, Section 8, Clause 4, which gives Congress the power to make "uniform" bankruptcy laws. Surprisingly little is known about the purpose of the framers in adopting the clause; the clause was added late in the Constitutional Convention with little explanation or fanfare. It is not entirely clear whether the drafters thought they were adopting a debtor protection, a creditor protection, or some combination of the two. What is clear is that the framers understood that, in a nation in which interstate commerce was expected and desired, laws regulating the restructuring of the debtor/creditor relationship and potentially discharging debt had to be uniform nationwide.⁴ The alternative was that states that were dominated by debtor businesses — think agricultural areas like the south — could be moved in times of populist discontent to enact laws benefiting their citizens by discharging debt at the expense of the creditor interests of the more financially oriented states — think northern states like New York and Pennsylvania. So the Constitution provides that if there are to be laws governing bankruptcies, they are to be uniform enactments of the federal government.

Perhaps the most important consequence of the adoption of the bankruptcy clause is negative — the sorts of things that have not happened because it is there. Specifically, because the bankruptcy clause is in the Constitution, it has never been necessary to wrestle with the limits of the commerce clause, as has been the history with so many other kinds of commercial legislation. Similarly, it has not been necessary to enact a uniform code, adopted by individual jurisdictions, as has been the path in commercial law.

One might expect that there would be disputes concerning the scope of congressional authority under the bankruptcy clause. Perhaps surprisingly, there is not much. There has only been a scattering of cases purporting to explore the nature and limits of bankruptcy power.⁵ But ironically, perhaps the most important case imposing a constitutional limit on a bankruptcy statute was decided on the authority not of the bankruptcy clause, but of the Fifth Amendment.⁶

Merely authorizing Congress to adopt bankruptcy laws does not compel it to do so. And indeed, through most of the 19th century, there was no federal bankruptcy law at all. But Congress adopted a comprehensive Bankruptcy Act in 1898, and we have had federal bankruptcy law continuously ever since.

§ 2.4 ~ statutes

The present Bankruptcy Code was adopted as part of a comprehensive reform in 1978, though it has been amended many times since then. It is still appropriate to cite pre-1978 cases on matters of basic principles, and the general rule is that unless Congress has indicated a clear intent to change pre-Code practice, those principles remain in effect.⁷

Important provisions governing jurisdiction are also codified in Title 28. Rules governing the taxation of debtors in bankruptcy, or of bankruptcy estates, are found mostly in the Internal Revenue Code, Title 26. Congress has also proscribed a number of crimes in connection with bankruptcy law, which are codified in Title 18.⁸

§ 2.5 ~ Rules

Rules governing procedure in bankruptcy courts come from the structure set forth in the Rules Enabling Act.⁹ This is the same section that governs all other federal procedural rules systems, including the Federal Rules of Civil Procedure. Rules are proposed by an advisory committee and approved — or not — by the Supreme Court. Congress reserves — but does not often exercise — the right to override the decision of the Court on this matter if it wishes; in the event of a conflict between the Bankruptcy Code and a Rule of Bankruptcy Procedure, the Code controls, being a superior act of Congress.¹⁰

§ 2.6 ~ Ten rules you need to read

Few law students study the Bankruptcy Rules. Even in practice, people tend not to read the rules until they must. But here is a basic list of some of the most important rules to get you started.

- Rule 2002 is a catch-all notice rule that sets time limits for a variety of matters. There are plenty of other time rules.¹¹
- Rule 9014 provides the general framework for contested matters — i.e., conflicts that are not governed by the adversary rules in the 7000 series.
- Rule 4001 sets far more detailed standards for some specific contested matters including relief from stay, using cash collateral, and borrowing money, as well as settlements and compromises involving these matters.
- Rule 7001 tells what matters require an adversary proceeding.¹²
- Rule 2004 is a broad, special bankruptcy discovery rule. Compare Rules 7026 through 7037 — incorporating Federal Rules of Civil Procedure 26 through 37 in bankruptcy adversary proceedings; they are also incorporated into contested matters under Rule 9014.
- Rule 9011 is the "good faith pleading" rule.¹³
- Rule 6004 focuses on use, sale, or lease of property. Compare Rule 4001 above.
- Rule 4007 governs dischargeability of a debt. Compare Rule 4004 on discharge.
- Rule 3002 tells how to file a proof of claim. See the surrounding Rules — 3001 through 3008 — for other claims issues.
- Rule 9027 governs the removal of non-bankruptcy cases to the bankruptcy court.

§ 2.7 ~ Local rules

Bankruptcy courts also generate local rules to flesh out the framework. These local rules have been a persistent source of complaint in the bar. The complaints are of three sorts: (1) the local rules are too diverse and particular; (2) they may sometimes tramp upon substantive law; and (3) they sometimes exist in "oral tradition," so an outsider cannot even find out about them.

The first complaint is understandable: The harried lawyer practicing in multiple districts does not enjoy having to juggle half a dozen different systems in his head. On the other hand, there will always be some matters that are not amenable to general resolution — surely the world would not be a better place if all stay-relief motions were heard on Thursdays. Moreover, it is surely better to have a set of local rules, printed — or perhaps better, posted on a website — and accessible, than to be blindsided by local procedures that are not set forth in rules at all.

This point gains force when you reflect on the reputation of bankruptcy court as an "insider's court" where regulars enjoy a home court advantage. Set aside the question of whether or not its reputation is deserved. The point is that whatever their vices, rules clearly stated, if consistently enforced, have the virtue of making the same process available to all.

The second complaint — rules as substance — is more difficult to evaluate. The line between substance and procedure is at best shadowy. But some things cross it. For example, consider a rule purporting to grant a discharge to corporations in chapter 7. Such a rule could not be considered mere procedure by any measure.¹⁴ Of course, there are closer cases than this.

Driven by persistent complaints of this sort, the drafters of the bankruptcy rules have promulgated — and repeatedly amended — a federal rule to govern local rules.¹⁵ The federal rule provides that local rules must be "consistent with — but not duplicative of—Acts of Congress and these rules." Also, they must "not prohibit or limit the use of the Official Forms." A most intriguing provision provides: "A local rule imposing a requirement of form shall not be enforced in a manner that causes a party to lose rights because of a nonwillful failure to comply with the requirement."¹⁶

Another provides: "No sanction or other disadvantage may be imposed for noncompliance with any requirement not in federal law, federal rules, Official Forms or the local rules of the district unless the alleged violator has been furnished in the particular case with actual notice ofthe requirement."¹⁷ The drafters seem to be trying to respond to the criticisms set forth above.

Beyond local rules, there are often "standing orders," or "general orders," governing various matters. In addition, "local local" rules emanate from individual judges. These are least likely to be written and thereby most likely to blindside the unwary. They may be the best argument of all for retaining local counsel on unfamiliar turf in any matter of consequence.

§ 2.8 ~ Official Forms

Just about everything that needs to be done to begin a bankruptcy case — and many things that need to be...