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The National Conference of Bankruptcy Judges Approaches

The National Conference of Bankruptcy Judges (“NCBJ”) will meet in Chicago, Illinois from October 2nd through October 5th. The NCBJ provides excellent and extensive educational programs and wonderful opportunities for networking with bankruptcy professionals, academicians and judges from around the country. The Commercial Law League of America (“CLLA”) has always been, and continues to be, an active participant at the NCBJ.

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CASE ANALYSIS
Preempting Applicable Nonbankruptcy Law in Chapter 11 Reorganization

Catherine E. Vance, Esq.
Columbus, Ohio
(614) 336-3861
Email: vance76@earthlink.net

Summary: In In re Pacific Gas & Elec. Co., 2002 U.S. Dist. LEXIS 16449 (Aug. 30, 2002), the district court held that the plain language of § 1123(a) of the Bankruptcy Code, as well as its legislative history, evidence the intent of Congress to preempt nonbankruptcy laws that would otherwise apply to bar, among other things, transactions that are necessary to implement a Chapter 11 plan of reorganization.

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Withdrawal of Reference. District court erred in withdrawing reference to bankruptcy court sua sponte. Treating appeal as petition for writ of mandamus, and applying five factor test to determine whether mandamus is proper, court held district court failed to demonstrate cause for withdrawal, withdrawal added expense and delay to proceedings, and without mandamus relief, appellants faced damage and prejudice in a way not correctable on appeal. Cantor v. Cantor (In re Cantor), 299 F.3d 1150 (9th Cir. 2002).

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SECTION ANNOUNCES 2002 RECIPIENT OF KING AWARD

The Commercial Law League of America Bankruptcy Section today named Harvard Law Professor Elizabeth Warren as the 2002 recipient of the Lawrence King Excellence in Bankruptcy Award.

The award is made each year to recognize the best in the bankruptcy profession. Recipients are nominated by their peers and are lawyers, judges, teachers or legislators who exemplify the best in scholarship, advocacy, judicial or legislative activities in the field of bankruptcy. The award is named in honor of Professor Lawrence P. King, who set the standards of excellence in the field of bankruptcy during a life-time of devotion to the practice of bankruptcy law.

Elizabeth Warren's work in bankruptcy and commercial law has reached beyond the traditional confines of this business-oriented subject, redefining the field with empirical and theoretical work. The Leo Gottlieb Professor of Law at Harvard Law School, Warren’s latest work focuses on the economic collapse of middle-class families.

Holding a JD from Rutgers University, Professor Warren taught at several universities before coming to Harvard to take the law school’s first chair in bankruptcy and commercial law in 1995. She was the Senior Advisor to the National Bankruptcy Review Commission and she is currently Vice President of the American Law Institute. The National Law Journal named her one of the "Fifty Most Influential Women Lawyers in America." She is an author of many books, articles and papers, including The Fragile Middle Class: Americans in Debt (Yale University Press, 2000) and The Law of Debtors and Creditors (4th ed. Aspen Law & Business, 2001).

The winner of several teaching awards for her work in the classroom, Professor Warren has also been the recipient of a wide variety of professional awards, including the Excellence in Education (National Conference of Bankruptcy Judges, 2001), Champion of Consumer Rights Award (National Association of Consumer Bankruptcy Attorneys, 2000), Outstanding Bankruptcy Academic (Turnarounds and Workouts, 1999, 2000), among countless others. She has received a variety of competitive grants, including the Robert Wood Johnson Foundation Research Grant for Empirical Study entitled "Medical Bankruptcy: A Study of Financially Catastrophic Illness" (2001) and Ford Foundation Grant for Empirical Study entitled "Homeownership and Financial Distress: The Interplay of Tax, Real Estate and Bankruptcy Laws."

MEET YOUR EXECUTIVE COUNCIL

Beginning this month, the newsletter will be spotlighting members of the Executive Council and Bankruptcy Section Staff. Over the next few months we invite you to learn about the individuals who dedicate their time and expertise to the Bankruptcy Section.

Judith Greenstone Miller
Bankruptcy Section Chair
www.raypro.com

Judith Greenstone Miller is a shareholder in the Southfield, MI firm of Raymond & Prokop, P.C. whose practice includes bankruptcy and insolvency, creditors' rights and commercial litigation. Her practice has involved representation of debtors, secured and unsecured creditors, creditors' committees and trustees in bankruptcy proceedings, primarily involving Chapter 11 reorganizations. Ms. Miller received her Bachelor of Arts from the University of Michigan and her Juris Doctor from Wayne State University School of Law. During her tenure as a member of the Executive Council of the Bankruptcy Section, Judy has served as Legislative Committee Co-Chair, Secretary, Treasurer, Chair-Elect and currently serves as Chair. She has devoted many hours to insuring that any bankruptcy reform is both fair and just, and to this end has made many appearances before Congress.

Jay Welford
Bankruptcy Section Immediate Past Chair and Legislative Committee Co-Chair
www.jafferaitt.com

Jay Welford, of Jaffe, Raitt, Heurer & Weiss, P.C. (Detroit, MI) was admitted to practice law in Michigan in 1982. He is Co-Chair of the firm's financial services practice group, and has focused his practice in the areas of bankruptcy, finance, creditors' rights and corporate law. Jay co-chairs the Legislative Committee of the CLLA, and has held numerous offices within that organization, including Chair of the Bankruptcy Section, last year. Jay is at the forefront of the bankruptcy reform process currently ongoing in Washington, having made several appearances before the House and Senate, and having testified on numerous occasions on issues relating to bankruptcy reform.

Robert S. Bernstein
Bankruptcy Section Executive Council Member
www.bernsteinlaw.com

Robert S. Bernstein is Managing Partner of the Pittsburgh based law firm of Bernstein Law Firm, P.C. Bob became aware of the procedures of the legal system at the age of 14 while working for his father as the firm's liaison to the sheriff's department. Concentrating in the many facets of bankruptcy and commercial law, he serves as counsel to bankruptcy trustees, creditors' committees, and creditors in proceedings throughout the country. Bob has served as President and Treasurer of the CLLA and currently serves as the Chair of the CLLA Department of Ethics and Professionalism and a member of the Board of the Fund for Public Education. He is a member of the Board of Directors of the American Board of Certification, the country's only Bankruptcy and Creditors' Rights certifying organization. He also serves as a member of the ABC's Standards Committee. He is vice-chair of the Allegheny County (Pittsburgh) Bar Association's Professional Ethics Committee.

Gary Weiner
Bankruptcy Section Executive Council Member
www.weinerpeskin.com

Gary Weiner, Partner at Weiner and Peskin, P.C. (Springfield, MA), concentrates in bankruptcy law, commercial collections, commercial litigation and loan workouts and serves as one of only four Bankruptcy Panel Trustees in Western Massachusetts appointed by the United States Department of Justice. Gary serves as a member of the Bankruptcy Section Executive Council, Chair of the CLLA Young Members' Section and is a Past Chair of the New England Members Association of the CLLA. In addition, he is contributing editor and Past Chair of the Bankruptcy Section Newsletter Committee. He is a frequent lecturer on bankruptcy and collection topics for various clients and trade organizations.

SUA SPONTE

The National Conference of Bankruptcy Judges Approaches

The National Conference of Bankruptcy Judges (“NCBJ”) will meet in Chicago, Illinois from October 2nd through October 5th. The NCBJ provides excellent and extensive educational programs and wonderful opportunities for networking with bankruptcy professionals, academicians and judges from around the country. The Commercial Law League of America (“CLLA”) has always been, and continues to be, an active participant at the NCBJ.

The CLLA Breakfast will be held on Thursday, October 3, 2002 at 7:30 a.m. The featured speaker at our breakfast will be William A. Brandt, the President of Development Specialists, Inc. (“DSI”), Chicago, Ill., one of the premier workout and consulting firms in the country. Mr. Brandt will speak on “Political Ramifications Behind the Bankruptcy Legislative Process and Why It Did or Did Not Become Law.” Mr. Brandt has advised Congress on matters of insolvency and bankruptcy, and in that capacity, was the principal author of an amendment to the Bankruptcy Code permitting the election of trustees in Chapter 11 cases. In addition to being a member of President Clinton’s National Finance Board, Mr. Brandt was also active in the last two Democratic National Conventions as a Delegate from Florida in 1996 and as a member of the Democratic National Committee’s Platform Committee in 2000. Mr. Brandt will speak about the legislative process and background attendant to the bankruptcy legislation that has now been pending before Congress for almost three (3) terms. Despite overwhelming bi-partisan support from both the Senate and the House of Representatives, and having received veto proof votes supporting enactment, the bill still has not become law. Much of what has transpired behind the scenes in closed door meetings, as well as political sensitivity to issues unrelated to bankruptcy per se, will not only enlighten the audience but also provide added insight into the legislative process and the important role that we, as bankruptcy professionals, have played in that process.

Each year, the CLLA and its Bankruptcy Section makes its presentation of the Lawrence P. King Award for Excellence in Bankruptcy at the CLLA’s Breakfast at the NCBJ. The Lawrence P. King Award for Excellence in Bankruptcy is awarded to recognize the best in the bankruptcy profession. Recipients are nominated by their peers from an array of lawyers, judges, professors and legislators, who ultimately are believed to exemplify the best in scholarship, advocacy, judicial or legislative activities in the field of bankruptcy. The award is named in honor and memory of Professor Lawrence P. King, who was the first recipient of the award and was known and recognized for a life-time of devotion and excellence to the practice and practitioners in the field of bankruptcy. Professor King was also a Reporter and Advisor for the National Bankruptcy Review Commission.

This year’s recipient of the Lawrence P. King Award is Elizabeth Warren, the Leo Gottlieb Professor of Law at Harvard Law School. Prior to joining the faculty at Harvard as a tenured professor in 1995, Professor Warren was the William A. Schnader Professor of Commercial Law at the University of Pennsylvania, and the Jay H. Brown Centennial Fellow in Law and the Conoco Faculty Fellow in Law at the University of Texas School of Law. Professor Warren is a graduate of the University of Houston with a Bachelor of Science, and Rutgers University School of Law (Newark). She is the winner of numerous teaching and other professional awards. Professor Warren’s work in bankruptcy and commercial law has reached beyond the traditional confines of the business-oriented subject, empirically redefining the field. Professor Warren has focused on the economic collapse of middle-class families. We look forward to you joining us at the CLLA Breakfast to acknowledge and share in Professor Warren’s receipt of the Lawrence P. King Award for a life-time of devotion and commitment to excellence in bankruptcy. For additional information regarding Professor Warren, see official press release in this newsletter.

Each year at the NCBJ the CLLA, its Bankruptcy Section and the Fund for Public Education sponsor an educational program on Current Developments in Hot and Emerging Areas in bankruptcy. This year’s 17th Annual Educational Program will be held on Thursday, October 3, 2002 from 2:30 to 5:30 p.m. The speakers and topics at this year’s NCBJ program will be:

• Judge Randolph Baxter (Bankr. N.D. Ohio); Selected Legal Doctrines in Bankruptcy Practice;
• Chief Judge Gregg W. Zive (Bankr. D. Nev.);The House Doesn’t Always Win -Bankruptcy and Gambling;
• William H. Schorling (Klett, Rooney, Lieber & Schorling, Philadelphia, Pa.); Financial Expert Testimony in Bankruptcy Court After Daubert; Materials by Professor Jack F. Williams (Georgia State University College of Law, Atlanta Ga. and Consultant, BDO Seidman, LLP, New York, NY);
• Honorable Marjorie O. Rendell (3rd Circuit Court of Appeals); What Do Courts of Appeals Like to See (Or Hear) in Bankruptcy Appeals; and
• Professor Ray G. Warner (William P. Borland Distinguished Scholar and Professor of Law at University of Missouri., Kansas City School of Law and Of Counsel, Greenberg Traurig, P.C., Chicago, Ill.); Attachment, Filing and Foreclosures Under Revised Article 9.

The program will be moderated by Judge Frank W. Koger (Bankr. W.D. Mo.) and Harry W. Greenfield, Buckley, King & Bluso, Cleveland, Ohio. Special thanks are extended to our sponsors, BBK, Ltd, Ernst & Young Corporate Finance LLC and McDonald Investments, for their generous support of this educational program. With the outstanding talent and substance to be featured at this year’s NCBJ, the CLLA Educational Program is certain to enlighten and enrich your knowledge and expertise.

While the fate of the bankruptcy legislation remains uncertain at this juncture, nevertheless, in the event that the bankruptcy bill passes prior to 3:00 p.m. on October 4, 2002, the CLLA will co-sponsor an educational program on the legislation with the NCBJ from 3:00 to 5:00 p.m. Featured speakers include Professor Kenneth N. Klee, U.C.L.A. School of Law and Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles, California; Judge Leslie J. Tchaikovsky (Bankr. N.D. Cal.); Chief Judge Eugene Wedoff (N.D. Ill.) and Judith Greenstone Miller, Raymond & Prokop, P.C., Southfield, Michigan. The program will be moderated by Judge Frank W. Koger (Bankr. W.D. Mo.). The program will highlight and familiarize you with the significant changes to the Bankruptcy Code.

This year’s NCBJ will provide numerous educational and networking opportunities for you. We hope that you will consider joining us at one of the CLLA scheduled functions and use the NCBJ as a stepping stone or springboard for becoming active with the CLLA and its Bankruptcy Section. Looking forward to seeing you there!

Judith Greenstone Miller
Raymond & Prokop, P.C.
26300 Northwestern Highway
4th Floor - P.O. Box 5058
Southfield, MI 48086-5058
Phone: 248-357-3010
Fax: 248-357-2720
jmiller@raypro.com
www.raypro.com

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CASE ANALYSIS

Summary: In In re Pacific Gas & Elec. Co., 2002 U.S. Dist. LEXIS 16449 (Aug. 30, 2002), the district court held that the plain language of § 1123(a) of the Bankruptcy Code, as well as its legislative history, evidence the intent of Congress to preempt nonbankruptcy laws that would otherwise apply to bar, among other things, transactions that are necessary to implement a Chapter 11 plan of reorganization.

Facts: Pacific Gas & Electric (“PG&E”) and its parent company filed a disclosure statement and plan of reorganization that called for the disaggregation of PG&E. Under the plan, three new limited liability companies would be created and PG&E’s operations would be separated into four lines of business, retail gas and electric distribution, electric transmission, interstate gas transmission, and electric generation. The result would be the emergence from bankruptcy of four companies, all subsidiaries of PG&E’s parent company. Furthermore, the entities involved in electric transmission, interstate gas transmission, and electric generation would no longer be subject to the regulatory authority of the California Public Utilities Commission (“CPUC”), but would come under the ratemaking jurisdiction of the Federal Energy Regulatory Commission. Execution of a number of transactions essential to carrying out the plan would violate various provisions of California law and, on this basis, the CPUC objected to the disclosure statement and plan.
The bankruptcy court declined to approve the disclosure statement, In re Pacific Gas & Elec. Co., 280 B.R. 506 (Bankr. N.D. Cal. 2002), expressing concern that the plan proposed to “disaggregate [PG&E] with unfettered preemption of any contrary bankruptcy law.” The bankruptcy court further stated, however, its belief that the plan would be confirmable so long as its proponents could establish with particularity the requisite elements of implied preemption, the laws sought to be preempted, and the reasons those laws should be preempted.

Issue: The central issue before the district court concerned the scope and application of § 1123(a) of the Bankruptcy Code. That section provides, in relevant part, that “[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall provide adequate means for the plan’s implementation, such as transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan. 11 U.S.C. § 1123(a)(5). PG&E argued that this language serves to preempt any nonbankruptcy law that is an obstacle to the transactions and steps necessary to effect a reorganization plan. CPUC, on the other hand, asserted, and the bankruptcy court agreed, that § 1123(a) merely directs what a plan must contain, preempting only those nonbankruptcy laws that purport to dictate plan provisions.

Holding: Reversing the bankruptcy court, the district court held that both the text and legislative history of § 1123(a) demonstrate Congressional intent to preempt nonbankruptcy laws that would otherwise apply to bar, among other things, transactions necessary to implement a chapter 11 reorganization plan.

Analysis: The district court first clarified that whether § 1123(a) impliedly preempts nonbankruptcy law is not relevant. According to the district court, the phrase

Catherine E. Vance, Esq.
Columbus, Ohio
(614) 336-3861
Email: vance76@earthlink.net

CASE LAW UPDATE

Withdrawal of Reference. District court erred in withdrawing reference to bankruptcy court sua sponte. Treating appeal as petition for writ of mandamus, and applying five factor test to determine whether mandamus is proper, court held district court failed to demonstrate cause for withdrawal, withdrawal added expense and delay to proceedings, and without mandamus relief, appellants faced damage and prejudice in a way not correctable on appeal. Cantor v. Cantor (In re Cantor), 299 F.3d 1150 (9th Cir. 2002).

Self-Settled Spendthrift Trusts. Settlor/debtor created trust for her own benefit and inserted spendthrift clause. Held, the entire spendthrift clause is void as to settlor’s creditors. Because debtor’s interest was limited to an income stream for her life, with an irrevocable charitable gift of the trust corpus, only income stream is available to the estate and creditors. Menotte v. Brown (In re Brown), 2002 U.S. App. LEXIS 18237 (11th Cir. Aug. 28, 2002).

Jurisdiction. Bankruptcy court was without jurisdiction to enter supplemental order on confirmation of plan after creditor appealed confirmation order. Issue determined in supplemental order did not fit within Rule 8002 exceptions to general rule that appeal divests trial court of jurisdiction, which is conferred upon appellate court. Texas Comptroller of Public Accounts v. Transtexas Gas Corp. (Matter of Transtexas Gas Corp.), 2002 U.S. App. LEXIS 17413 (5th Cir. Aug. 22, 2002).

Administrative Claim Under 11 U.S.C. § 365(d)(3). Lessor levied chapter 11 debtor’s property to enforce bankruptcy court order requiring surrender of premises and payment of post-petition rent. After service of notice, but before levy was complete, debtor’s case converted to chapter 7. Held, lessor’s writ of execution violated the automatic stay; language of order did not explicitly grant relief of same. Court also joined majority in holding lessor’s claim subordinate to chapter 7 administrative expenses. Kir Temecula v. LPM Corp. (In re LPM Corp.), 2002 U.S. App. LEXIS 17375 (9th Cir. Aug. 22, 2002).

Interest Rate Under Chapter 13 Cramdown. Court adopts “coerced loan” approach; plan should utilize contract rate unless creditor demonstrates current rate in excess of contract or, conversely, debtor demonstrates current rate is less than contract rate. In re Till, 2002 U.S. App. LEXIS 17274 (7th Cir. Aug. 21, 2002).

Denial of Discharge. In ruling in favor of the debtor, bankruptcy court erred by relying exclusively on the lack of concealment of transfer of assets and fact that debtor relied on advice of counsel. Bankruptcy court should have also considered other indicia of fraud, including whether debtor transferred by possession goodwill of former dentistry practice to practice formed post-petition. Groman v. Watman (In re Watman), 2002 U.S. App. LEXIS 16700 (1st Cir. Aug. 20, 2002).

Transaction as “Economic Sham.” Corporate-owned life that had no net economic effect on debtor and existed solely for purpose of avoiding taxes were economic; accuracy-related penalties for debtor’s understatement of income were proper. IRS v. CM Holdings, Inc. (In re CM Holdings, Inc.), 2002 U.S. App. LEXIS 17171 (3d Cir. Aug. 16, 2002) aff’g (IRS v. CM Holdings, Inc. (In re CM Holdings, Inc.), 254 B.R. 578 (D. Del. 2000).

Confirmation of Plan. Debtor and creditors entered, and court approved, stipulation providing relief from the automatic stay on specified dates in order that foreclosure proceedings could be undertaken. Debtor’s plan did not include stipulation. Bankruptcy court did not err in confirming plan; stipulation and order did not expressly provide that provisions would bind parties and court in future plan of reorganization. Atalanta Corp. v. Allen (In re Allen), 2002 U.S. App. LEXIS 16532 (9th Cir. Aug. 16, 2002).

Catherine E. Vance, Esq.
Columbus, Ohio
614-336-3861
Email: vance76@earthlink.net

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Washington Hot News

September 26
Senators Continue to Push Bankruptcy Reform

At a press conference yesterday, a bipartisan group of senators, including Senate Majority Leader Daschle (D-SD), Senate Majority Whip Reid (D-Nev.), Senator Carper (D-DE), Senator Hatch (R-Utah), and Senator Grassley (R-Iowa), urged the House to take up the Bankruptcy Reform Bill conference report (H.R. 333).
Daschle stated the bill has broad support in the Senate and it would pass if brought to the floor. However, he reasserted that he would not take up the legislation until the House has considered it.

Despite this prompting, there appears to be no progress in breaking the impasse over the Schumer abortion language which has been opposed by a select group of House Republicans and some labor organizations traditionally with close ties to democrats.

In other news, on September 24th, Sen. Kohl (D-WI) introduced S. 2996, a bill to amend the bankruptcy code to limit the value of certain real and personal property that a debtor may elect to exempt under state or local law. (Text of the bill is not yet available.)

September 20, 2002
Will time run out on the bankruptcy bill?

To give everyone an idea of the future of Congress, the scheduled" adjournment is October 4th. However, it is likely that the partisan behavior of the parties will increase by the day as elections draw closer.

Further, numerous "must go" legislative proposals are still outstanding (most of the government funding bills, the homeland Security bill). It is highly unlikely they will hit the 4th. Maybe the 11th, not much past the 14th (with everyone rushing back to campaign). It now also appears likely that they will come back for a short "lame duck" session in November (a week or 10 days) to try and finish up business Either way, look for a CR until early 2003 on the spending bills they can't complete. Regarding the Bankruptcy Bill, by all accounts, we have not seen the last of it. It is most likely to surface again on or after October 8th or during the lame duck session.
Regardless of when, it appears to face a rocky road with prior supporters starting to pull back. Some of the Republican right is opposed as a result of the Schumer amendment compromise and some Democrats who are supporters of labor organizations now in opposition of the Schumer language. (You also have to wonder whether the economy is starting to make anyone nervous).

September 19, 2002
Rent-to-Own Industry Bill Passes in House.

On September 18th, HR 1701, that imposes federal regulations on the rental-purchase industry for the first time, passed the House, 215-201.
The rental-purchase industry has sought this type of legislation for years in order to avoid battling numerous lawsuits under different federal statutes. The bill defines a rent-to-own agreement as a lease agreement as opposed to a credit agreement. In exchange, the industry agreed to a number of disclosures and consumer protections, such as: a listing of fees, charges, and penalties; a statement that a consumer will not own the property until the total dollar amount is paid; a statement of the initial payment, the first payment, and any fees; and the price of the property. Further, the bill requires the disclosure of the amount and timing of the payments, the total cost of the payments, and a statement of the consumer's right to terminate the agreement without paying a fee or charge. On the 17th, Sen. Landrieu (D-La.) introduced S. 2947, the companion bill. The bill faces an uphill battle in the Senate, where consumer groups are opposed to the legislation because some say it will preempt stronger consumer protection laws in at least four states: New Jersey, Minnesota, Vermont, and Wisconsin.

David Goch
Washington Legislative Counsel, CLLA
Webster, Chamberlain & Bean
150 North Michigan Avenue, Suite 600
Chicago, IL 60601
dgoch@wc-b.com

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©2002, Commercial Law League of America