Transcript of Symposium on "Equity in the Bankruptcy Court".

PositionSymposium on Equity in the Bankruptcy Court

This Symposium was held on October 31, 2019 at the National Conference of Bankruptcy Judges, in Washington, D.C. The format of the presentation was a mock Senate committee hearing at which the following parties appeared:

Chairwoman: Professor Melissa B. Jacoby, Graham Kenan Professor of Law, University of North Carolina at Chapel Hill.

Senators: Kenneth N. Klee, Founding Member of KTBS Law, LLP and Professor Emeritus at the UCLA School of Law, Los Angeles, California; and

Richard Levin, Partner, Jenner & Block LLP, New York, New York.

Witnesses: Professor Jay L. Westbrook, Benno C. Schmidt Chair of Business Law, University of Texas School of Law at Austin

Professor Bruce A. Markell, Professor of Bankruptcy Law and Practice, Northwestern Pritzker School of Law, at Chicago

Professor Diane Lourdes Dick, Seattle University School of Law, at Seattle

Professor Laura Napoli Coordes, Arizona State University Sandra Day O'Connor College of Law, at Phoenix

Chairwoman: This hearing will come to order. We are here because forty years ago, we exercised our constitutional authority under the bankruptcy clause to enact a comprehensive set of rules that all work together in a balanced way, balancing various policies. Now, people often say in my state that if you like the book, you might not like the movie quite as much, and I suppose that might be true here. You might get some surprises. The thing I know is whoever wrote the movie, the screenplay, was not in Congress. Something is different in what's going on in the system than how we wrote it. And so, this hearing is going to look into the sources of that authority and what we might do it about it.

Now, since Congress has been a little bit busy working on some other things, we have gotten some help in preparing for this hearing. And so, I would like to thank the NCBJ, the ABA Bankruptcy section, the American College of Bankruptcy, and the American Bankruptcy Law Journal, which will be publishing the witness testimony in revised form later this year.

So, we have brought four witnesses in from way outside of the Beltway, four distinguished professors. Professor Diane Lourdes Dick comes to us from the state of Washington at Seattle University. She also is a tax expert of interest to our other committees in the Senate. Professor Markell comes to us from Northwestern University in Illinois and a former bankruptcy judge from Nevada. Professor Laura Coordes comes from Arizona State University and has written on a variety of different types of bankruptcy problems. And then, last but not least, is Professor Jay Westbrook, professor at the University of Texas, who has apparently taught us a lot about a lot of what we know about the bankruptcy system as it works.

So, although we are a little short-staffed on the judiciary committee today because of all the other business, at least I was able to get Senator Klee and Senator Levin to come. And there's a little-known Senate rule that when both Senator Klee and Senator Levin are at a hearing, there have to be some special procedures. This is called the two-gavel rule. You have one minute, Senator Klee.

Senator Klee: Thank you, Madam Chairwoman, and thank you for assembling a panel with such unimpeachable credentials. My constituents are very concerned about the bankruptcy system. They are very concerned that the bankruptcy court, instead of being a court of equity, is a court of iniquity that is based on the length of the chancellor's foot. And these panelists, some of them, would broaden the discretion of these judges. We have drafted a statute that is very narrowly drawn, that wants predictability and certainty in result. And my question to the panelists that I want them to address in their presentations is, why should there be broad judicial discretion that will lead to disparate results in identical cases? That's not what my people want. I don't believe that's what my fellow Senators want. Thank you, Madam Chairwoman, I'll yield back the balance of my time.

Chairwoman: Thank you, Senator Klee. Senator Levin?

Senator Levin: Thank you, Madam Chairwoman. And I want to thank the chair, also, for inviting a panel that is not only distinguished, but has a heavy Western representation, which is important in these proceedings ... the West being the epicenter of the importance of bankruptcy.

We all know that the bankruptcy court is a court of equity, but we want to know what that means. Equity powers are important, certainly, but are there any limits on them? What should Congress prescribe as limits as the chair has said? We have to be careful whether the courts are running away with the statute, or implementing it, and how much power do we leave to the court's discretion and equitable determination in interpreting the statutes?

We also would like to know what's actually going on in the courts. How are judges interpreting their equitable powers? How much discretion are they using? And how is that working? And with that, thank you, Madam Chairwoman.

Chairwoman: Thank you, Senator Levin. Professor Dick.

Dick: Thank you, Chairwoman, and members of the committee for this invitation to testify on the equitable powers of the bankruptcy court forty years after enactment of the Bankruptcy Code.

I've come before you today to report the results of a recent study I conducted of U.S. bankruptcy judges concerning their beliefs regarding the equitable and discretionary powers of the bankruptcy court. The survey asked a combination of multiple choice and open-ended questions about the subjective personal experiences of judges. Specific questions were designed to help understand, among other things, what respondents perceived to be the sources of the court's equitable powers; how they interpret and apply Section 105(a); what they believe it means for a court to act in the name of equity; their approaches to exercising discretion; and whether they have perceived a change in the level of discretion that judges possess.

The survey was emailed to the members of NCBJ, and fifty-one judges completed the survey. Now I should caution that, because of the methods used, the results of this survey cannot be generalized to the entire population of U.S. bankruptcy judges. However, the study nonetheless provides important insights on the judicial decision-making process.

Survey results clearly show that there is no universal understanding among bankruptcy judges of the meaning, source, scope, and proper exercise of the court's equitable powers and general discretion. Perhaps most importantly, the results show there is no common understanding of the distinction, if any, between exercises of discretion and exercises of the court's equitable powers. As a result, judges' views on these topics are multi-dimensional and interconnected.

For instance, a particular judge's views on judicial discretion depend in large part on whether she perceives a difference between judicial discretion and equitable powers. Moreover, the same judge's approaches to exercising equitable powers depend on her understanding of the source of such powers. It should come as no surprise, then, that the respondents' perspectives on judicial discretion and equitable powers were not binary and did not fall along a spectrum. Rather, they tended to cluster into multiple, related sets of opinions and approaches. In fact, four distinct clusters emerged from the responses I received.

Judges in cluster one believe that the bankruptcy court has inherent equitable powers, but that they have largely been supplanted by the Bankruptcy Code. Judicial discretion is exercised as directed by the Code, and then strictly in accordance with precedent.

Judges in cluster two similarly believe that the bankruptcy court has inherent equitable powers, and that they have largely been supplanted by the Code. However, these judges exercise discretion with an eye toward leveling the playing field and ensuring matters are decided on the merits.

Judges in cluster three believe that the modern bankruptcy court's equitable powers derive from, and are constrained by, the Code, and that substantive discretion and equitable powers are, in fact, one and the same.

Judges in cluster four believe that the bankruptcy court has broad inherent equitable powers, and that the Code yields to such powers whenever it authorizes judicial discretion. Equitable powers may also be used to fill gaps in the law according to these judges.

After carefully reading through over sixty single-spaced pages of survey responses, I have concluded that no one cluster is correct or incorrect, or better or worse. Rather, each reflects a different perspective on these central questions of legal philosophy and bankruptcy law, and it's entirely possible that judges move through multiple clusters over time, as their views on judicial discretion and equitable powers are developed, shaped, and re-shaped by their experience, education, and personal reflection.

So how should policy makers construe these results? First, I think it goes without saying that any efforts to delineate the court's equitable powers should clearly distinguish between equity and discretion. But more importantly, the survey results caution against legislative efforts to curb bankruptcy courts' equitable and discretionary powers. As one respondent observed, "We really can't be judges without some equitable range." And while there is considerable disagreement regarding the precise source and scope of equitable powers, survey results point to a common belief that all federal judges possess inherent powers that serve to protect the integrity of the courts.

Senator Klee: Boy, was that well-timed!

Chairwoman: You may finish your statement if you....

Dick: I would just like to thank you for the invitation to testify today, and I look forward to your questions. Thank you.

Chairwoman: Thank you, Professor Dick.

Senator Levin: Thank you very much.

Chairwoman: Professor Markell?

Markell: Thank you...

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