Fresh Start at the Bankruptcy Court, 0518 COBJ, Vol. 47, No. 5 Pg. 12
| Author | THOMAS B. MCNAMARA, J. |
| Position | Vol. 47, 5 [Page 12] |
JUDGES’ CORNER
THOMAS B. MCNAMARA, J.
The cornerstone of American bankruptcy law is the chance for a “fresh start.” The Bankruptcy Code[1] provides “a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’”2 Animated by these laudable goals, bankruptcy protects the “honest but unfortunate debtor,”3 while at the same time serving as a safety valve to ensure the future vitality of the U.S. economy.
Almost one million American consumers and businesses file for bankruptcy each year.4 Insolvency proceedings constitute about 67% of the total caseload within the federal judiciary.5 While the full-time, specialized bankruptcy bar is fairly small, most Colorado lawyers likely will have at least some passing involvement with bankruptcy matters during their careers. This article provides an introduction to the bankruptcy system, identifies the foundations of bankruptcy law, describes the work of the U.S. Bankruptcy Court for the District of Colorado, and offers practice guidance for lawyers working on bankruptcy matters—especially those who may not be familiar with insolvency.
The Bankruptcy System: Bankruptcy Code, Jurisdiction, Venue, and Appeals
Article I, Section 8 of the U.S. Constitution federalizes insolvency by providing that “Congress shall have the power . . . [t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”6 But Congress enacted bankruptcy statutes only on a temporary and sporadic basis through much of the first century of the Republic.7 Thereafter, the Bankruptcy Act of 18988 governed insolvency proceedings for about 80 years. In 1978, Congress passed the Bankruptcy Reform Act of 1978 (1978 Act),9 which modernized insolvency law and created the Bankruptcy Code. Although Congress enacted a number of important amendments10 in later years, the substantive framework of the 1978 Act still governs bankruptcy today.
The 1978 Act sought to enlarge bankruptcy court jurisdiction so that Article I bankruptcy judges were empowered to hear and finally decide most matters arising in or related to bankruptcy cases under the Bankruptcy Code. However, the jurisdictional grant has proved tenuous. Te U.S. Supreme Court determined that the broad grant of jurisdiction to bankruptcy judges violated Article III of the U.S. Constitution by vesting non-Article III bankruptcy judges with too much of the “judicial power” of the United States.11 After some resulting turmoil, Congress created a bifurcated jurisdictional fix under which bankruptcy judges “constitute a unit of the district court to be known as the bankruptcy court” and “[e]ach bankruptcy judge [is] a judicial officer of the district court.”12 Congress authorized district courts to refer “any or all cases under title 11 [the Bankruptcy Code] and any or all proceedings arising under title 11 or arising in or related to a case under title 11” to bankruptcy judges subject to a dichotomy between “core proceedings” and “non-core proceedings.”13 Subsequently, the U.S. District Court for the District of Colorado enacted a local rule of “automatic referral” of bankruptcy matters to the Colorado Bankruptcy Court.14 But the unusual jurisdictional scheme and split responsibilities of district judges and bankruptcy judges continue to generate some uncertainty. Te U.S. Supreme Court issued a trilogy of important decisions addressing the bankruptcy jurisdictional conundrum in the last several years.15
Like the jurisdictional framework, bankruptcy venue also is somewhat unusual. A bankruptcy case may be fled in any judicial district “in which the domicile, residence, principal place of business . . . or principal assets” of the debtor are located in the 180 days prior to fling a bankruptcy petition or in which “there is a pending case . . . concerning [the debtor’s] affiliate . . . .”16 In consumer bankruptcy cases, proper venue generally is straightforward. However, the liberal bankruptcy venue statute permits forum shopping in commercial cases. Especially during the last two decades, large business enterprises, which generally are incorporated in Delaware and have some affiliate connections in New York, have taken advantage of the venue statute to file insolvency proceedings far from their headquarters’ locations and local communities. For example, General Motors, an iconic Michigan company, used a minor affiliate to file bankruptcy in New York. Similarly, in recent years most Colorado based companies—such as Sports Authority Holdings, Avaya, Inc., Molycorp, Inc., Veneco, Inc., Emerald Oil, Inc., and many others—have fled their reorganization cases in Delaware or New York. Recently, bankruptcy venue reform legislation has been proposed in Congress to resolve this problem.17
Final judgments of the bankruptcy court are subject to initial appeal to the district court as of right.[18] However, Congress also authorized the formation of a “bankruptcy appellate panel service composed of bankruptcy judges”19 to hear initial bankruptcy appeals. The U.S. Bankruptcy Appellate Panel for the Tenth Circuit (BAP) opened for business in 1995,20 but initially was not available for Colorado appeals. Te U.S. District Court for the District of Colorado authorized appeals originating in Colorado to be fled with the BAP in 2005.[21] Finally, a direct initial appeal to the circuit court of appeals also is possible in limited circumstances.22 After the initial appeal, Colorado bankruptcy disputes may be further appealed to the U.S. Court of Appeals for the Tenth Circuit (if a direct initial circuit court appeal was not used) and then, potentially, to the U.S. Supreme Court.
The Foundations of Bankruptcy
While insolvency cases may involve a surprisingly wide array of collateral state and federal law issues, the Bankruptcy Code is the framework for all bankruptcy cases. In a broad sense, the statutory scheme recognizes two main types of bankruptcy: liquidation and reorganization. And there are two main types of debtors: individuals (consumers) and entities (businesses). Bankruptcy cases may be pursued under any of six separate chapters. Chapter 7 governs liquidation for individuals and entities through the auspices of an independent Chapter 7 trustee. Chapter 9 uniquely addresses reorganization of municipalities. Chapter 11 is normally thought of as the mechanism for reorganization of businesses, but it may also be used by individuals to reorganize. Chapter 12 is designed to protect family farmers and fisherman, including both individuals and businesses engaged in farming and fishing. Chapter 13 serves as the platform of reorganization for most individuals who have regular income. And Chapter 15 deals with international or cross-border insolvency cases.
While the substantive provisions of bankruptcy as embodied in the various chapters are quite detailed and complex, certain fundamental policies cut across all types of cases. Te principal foundations of bankruptcy are (1) full disclosure, (2) breathing space, (3) notice, (4) maximization of value, (5) equality of distributions, and (6) a fresh start.
Full Disclosure
Full disclosure is one of the quid pro quos for bankruptcy protection. It starts with the petition. Early in every bankruptcy case, the debtor—whether an individual or an entity— must disclose all assets and liabilities through a statement of financial affairs and schedules.23 Te debtor’s income and expenses also must be itemized. And, in Chapter 11, the debtor must provide monthly operating reports, including detailed income and expense information, throughout the bankruptcy case. Te failure to timely and...
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