A (Not New) Response to A New Deal for Debtors.

AuthorGordon, Jonathan C.

Professor Pamela Foohey's recent article, A New Deal for Debtors: Providing Procedural Justice in Consumer Bankruptcy, 60 B.C. L. REV. 2297 (2019), argues that consumer bankruptcy is "procedurally bankrupt"--that it lacks procedural justice because debtors do not have the opportunity to share their story with the bankruptcy judge. For solutions, Foohey proposes two "new deals." New Deal #1 (the "modest" one) proposes that bankruptcy's trustee-conducted "341 meeting" be replaced with a judge-conducted meeting held in court. New Deal #2 (the "drastic" one) proposes that the current bankruptcy system be turned into an administrative system run by an administrative agency, rather than the federal courts.

This Article first challenges the assertion that consumer bankruptcy is "procedurally bankrupt," particularly due to the lack of contested matters in consumer bankruptcy. Then, this Article submits that the two New Deals are problematic and would actually worsen any procedural injustice. New Deal #1 would return to the structure of "341 meetings" that existed nearly fifty years ago--one that is expressly prohibited in the current Bankruptcy Code after commentators called it an "unfair forum." And New Deal #2 could leave debtors feeling as if their cases are not important enough for the current judicial system.

This Article concludes by suggesting a lighter, more flexible proposal: a framework for consumer debtors to submit their stories to the court, much like large, corporate debtors generally do at the beginning of their bankruptcy cases. This framework would test the hypothesis that consumer debtors want to tell the court their stories and provide an opportunity to those that do.

Introduction

At the core of A Deal for Debtors is the pursuit of "procedural justice"--the "feeling that one has a voice, is respected, and is before a neutral and even-handed adjudicator." (1) Procedural justice "brings legitimacy to the legal system" some have even "argue[d] that legal procedures are more important than substantive law." (2) "At the very least, research shows that procedural justice is crucial to the rule of law and fundamental to the legal system's operation and effectiveness." (3) A New Deal for Debtors submits that procedural justice is particularly relevant within the consumer bankruptcy system because "[a]bout one million people file consumer bankruptcy every year" making "the consumer bankruptcy system ... the part of the federal court system with which people most often come into contact." (4)

After providing a general primer on consumer bankruptcy, A Nfitu Deal for Debtors asks: "Is Consumer Bankruptcy Procedurally Bankrupt?" (5) In examining that question, Foohey cites social science literature to explain that procedural justice depends primarily on four factors: whether people "(1) believe that they had a voice and chance to be heard, (2) perceive that they were treated with dignity and respect, (3) feel that the decisionmaker sincerely considered their case, and (4) observe the forum as neutral and evenhanded." (6) "The opportunity to be heard--that is, participation--is the most important factor." (7)

A Deal for Debtors then analyzes the consumer bankruptcy system--what procedures do people expect to find in consumer bankruptcies? The article assumes:

* "[M]ost people think that after a household files bankruptcy, the debtors will sit before a judge and explain why they are asking to be excused from paying their debts." (8)

* "[P]eople probably expect that debtors will be required to declare that they cannot pay back what they owe, that they are unable to live up to their financial and social obligations, and that their predicament, simply put, is hopeless." (9)

* "[M]ost people ... also probably think that creditors will be present during these hearings and will have the right to cross-examine debtors, similar to what people see on television shows involving the criminal justice system." (10)

* "[O]verindebted individuals may look to the bankruptcy process to help them deal with [anger, guilt, shame, and disgust] and assert their social standing" (11)

For further support for her assumptions, Foohey looks to her prior research on the bankruptcies of religious nonprofits. (12) In that research, Foohey interviewed forty-five leaders who filed chapter 11 bankruptcy on behalf of their churches and religious schools. (13) "During these interviews, in part to assess what they expected from the bankruptcy process, [Foohey] asked the leaders if anything about their bankruptcy cases surprised or stood out to them." (14) According to the interviews, the leaders who had a negative experience overall felt excluded from the bankruptcy process, while "those leaders who had more positive experiences appeared before judges or at least attended hearings." (15)

Based on those assumptions about what consumer debtors expect (assumptions that I challenge below), A Flew Deal for Debtors argues that procedural justice in consumer bankruptcy cases requires that debtors be able to share their story with a bankruptcy judge. (16) But as her article explains, that opportunity is rarely provided. "Most debtors never appear in court before the bankruptcy judge and generally have little to no voice during their bankruptcy proceedings. Besides their attorneys, the only judicial 'officials' who debtors physically see are bankruptcy trustees." (17) With that, A Flew Deal for Debtors concludes that "consumer bankruptcy, in effect, is procedurally bankrupt." (18)

  1. IS CONSUMER BANKRUPTCY REALLY PROCEDURALLY BANKRUPT?

    To form its hypothesis of what procedural justice should look like in consumer bankruptcy, A Flew Deal for Debtors essentially relies on two sources: (1) assumptions of what people expect (based primarily on "what people generally know about the legal system" (19) and "television shows involving the criminal justice system" (20)) and (2) anecdotes from leaders of religious nonprofits that filed for chapter 11 bankruptcy. (21) Both sources are suspect and ignore that consumer bankruptcies are significantly different from chapter 11 cases, criminal cases, civil cases, and the (real and fake) cases portrayed in television shows and other media. Unlike those examples, most consumer bankruptcies do not involve disputes. (22) Surely, the opportunity to be heard is critical in contested matters, but is that opportunity necessary in a case without a contest? If a debtor files for bankruptcy and gets a discharge without any dispute, but the debtor never sees or talks to the judge, would the debtor care? Maybe; maybe not.

    Moreover, though I appreciate the religious leaders' feelings, their concerns are not particularly sympathetic. For example, one leader was frustrated that the judge ordered mediation; the leader felt like the court would rather delegate to a mediator than hear the leader's story. (23) Mediation, however, resulted in a successful resolution. Another leader wanted to be present in the courtroom but was advised that his presence was not needed. (24) Nothing prohibited him from attending every court hearing; the leader was simply advised that it was not necessary--as is sometimes true in all types of litigation.

    None of this is to say that debtors do not want a voice in their bankruptcy cases--maybe they do. But the current support underlying A New Deal for Debtors and leading to that assumption is inadequate. To her credit, Foohey seems to acknowledge as much, saying that "to fully assess the hypotheses that underlie [her] theory, researchers must undertake more targeted empirical studies of the system." (25)

    Nonetheless, despite my reservations about those hypotheses, I acknowledge that there may be something unusual about debtors not interacting with the bankruptcy court during such a significant, life-changing event. I submit, however, that the solutions offered in A New Deal for Debtors would actually worsen any feelings of procedural injustice.

  2. NEW DEAL #1: A RETURN TO THE "UNFAIR FORUM" OF 50 YEARS AGO

    The first proposal calls for a change to bankruptcy's "341 meeting," referred to as such because it is required under [section] 341 of the Bankruptcy Code. (26) The "341 meeting" is held outside the courtroom, usually in a designated meeting room, where the debtor appears in front of the bankruptcy trustee and any creditors who wish to attend. (27) At the "341 meeting," the trustee examines the debtor about his or her schedules (which list things like the debtor's assets, liabilities, incomes, and expenses) and questions the debtor to determine any inaccuracies or omissions. (28) Creditors also have the opportunity to question the debtor. (29)

    In turn, the debtor has the chance to explain his or her schedules and circumstances. (30) Thus, the "341 meeting" is the "foremost means by which debtors tell the story of how they ended up in bankruptcy." (31) Critically, however, and as Foohey notes, the...

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