LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 18, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 6533 words

HEADLINE: PREPARED STATEMENT OF
WILLIAM H. SCHORLING
CHAIR OF THE BUSINESS BANKRUPTCY COMMITTEE
OF THE BUSINESS LAW SECTION OF THE ABA
ON BEHALF OF
THE AMERICAN BAR ASSOCIATION
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - H.R. 833, THE BANKRUPTCY REFORM ACT OF 1999

BODY:

SUMMARY OF STATEMENT SUBMITTED BY WILLIAM H. SCHORLING ON BEHALF OF THE AMERICAN BAR ASSOCIATION.
My name is William H. Schorling, and I have been designated to present the American Bar Association's views on bankruptcy reform in general and H.R. 833 in particular. I am a practicing attorney in Philadelphia, Pennsylvania, and I am also the Chair of the Business Bankruptcy Committee of the American Bar Association Business Law Section.
The ABA's Views on H.R. 833-- Bankruptcy Reform Act of 1999.
While the ABA has not yet taken a position on many of the consumer bankruptcy reform provisions of H.R. 833--including the concept of "means testing"--we believe that any comprehensive bankruptcy reform legislation should include a number of other specific reforms not currently contained in H.R. 833.
The ABA's position on direct appeals. The ABA recommends that a provision be added to H.R. 833, similar to the language contained in Section 411 of last year's bill, H.R. 3150, that would allow direct appeals to the regional circuit courts of appeals. The benefits of direct appeals to the regional circuit courts of appeals include fewer appeals in the court system as a whole and creation of a body of binding precedent which will reduce the number of appeals over time. Allowing direct appeals would significantly reduce the cost and expense of bankruptcy proceedings. Further, the important economic and commercial decisions which often arise in the context of bankruptcy cases are worthy of the valuable resources of the circuit courts.
The ABA's position on partnerships in bankruptcy. The ABA believes that a partnership bankruptcy structure should be added to the existing Code. The ABA endorses an automatic stay inhibiting post- bankruptcy suits against general partners for partnership liabilities, to remain in effect for sixty days after a bankruptcy filing. Also the ABA favors automatic stays of transfers outside the ordinary course of non-bankruptcy property by general partners of the filing partnership.
The ABA's position on sharing fees. The ABA recommends that a provision be added to H.R. 833, similar to the language contained in Section 202 of last year's bill, H.R. 3150, regarding sharing of fees. Such a provision should allow attorneys to remit a percentage of a fee awarded or received under the Code to a bona fide public service lawyer referral program, operating in accordance with state or territorial laws regulating lawyer referral services or the rules of professional responsibility governing the acceptance of referrals.
The ABA's position on disinterestedness. The ABA recommends amending H.R. 833 by adding a provision clarifying that an attorney who represents a debtor in possession need not be a disinterested person. A finding that counsel is "interested" in the debtor because the counsel was owed a pre-petition fee ignores the invariably more significant "interest" an attorney acquires whenever the attorney engaged to represent a post-petition debtor.
The ABA's position on claims priorities or retroactive legislation. The ABA opposes the enactment, in the absence of the most compelling circumstances, of special interest legislation designed to increase the types of claims entitled to priority under the Bankruptcy Code. For this reason, the ABA has concerns regarding a number of provisions in H.R. 833 that would create new priorities. The ABA also generally opposes amendment of the Bankruptcy Code by legislative process which avoids fair opportunity for open hearings, on well-publicized notice, before the judiciary committees of Congress. It is imperative that the Judiciary Committee carefully consider the full effects of bankruptcy reform legislation before reporting a bill. Mr. Chairman and Members of the Subcommittee:.
My name is William H. Schorling and I have been designated to present the American Bar Association's views on business issues concerning H.R. 833, the Bankruptcy Reform Act of 1999.
I am the current chair of the Business Bankruptcy Committee of the Business Law Section of the American Bar Association, a committee consisting of 1,500 bankruptcy lawyers, professors and judges representing all aspects of the legal profession concentrating on business bankruptcy law. In that capacity, I have been authorized to express the position of the American Bar Association, and its more than 400,000 members, on the important issues raised in the bill.
The ABA appreciates the opportunity to present testimony to this distinguished Subcommittee stating the views of our membership. We welcome the opportunity to work with you and your staff to improve the law and serve the interests of the public.
H.R. 833 - - The Bankruptcy Reform Act of 1999.
The bill under consideration by the subcommittee, H.R. 833, contains many technical and substantive provisions. While the American Bar Association has not yet taken a position on many of the consumer bankruptcy reform provisions of H.R. 833--including the concept of "means testing" for debtors--we believe that any comprehensive bankruptcy reform legislation should include a number of other specific reforms not currently contained in H.R. 833.
My testimony today will focus on several areas of concern that were excluded from H.R. 833, particularly provisions dealing with (1) direct appeals, (2) partnerships in bankruptcy, (3) allowing attorneys to share referral fees, (4) disinterestedness, and (5) claims priorities.
A. DIRECT APPEALS.
The American Bar Association believes that any comprehensive bankruptcy reform legislation should provide for some system of direct appeals of final bankruptcy orders to the circuit courts.
Pursuant to 28 U.S.C. ' 158(a) and (b), final and interlocutory orders of a bankruptcy court currently are appealable in the first instance to a U.S. district court or, with the parties' consent, to a bankruptcy appellate panel provided (i) that a bankruptcy appellate service has been established for the circuit in which the particular bankruptcy court is located, and (ii) that the district court for the particular district has not opted out of participation. Pursuant to Section 158(d), the final orders of either a district court or a bankruptcy appellate panel may be appealed to the appropriate court of appeals. In turn, review of a decision by the court of appeals may be sought in the U.S. Supreme Court. The four-tiered appellate structure, complete with two divergent paths at the second layer of review, is problematic and should be replaced with a more streamlined system.

As one of its first acts, the National Bankruptcy Review Commission adopted its Recommendation 3.1.3 proposing that the first stage of the appellate process, appeals to the district courts, be eliminated. The NBRC recommendation followed Conference Plan Recommendation 22 of the Proposed Long Range Plan for the Federal Courts (the "Conference Plan") proposed by the Judicial Conference's Committee on Long Range Planning in 1995. Recommendation 22 had recommended that the existing mechanism for review of dispositive orders of bankruptcy judges should be studied to determine what appellate structure will ensure prompt, inexpensive resolution of bankruptcy cases and foster coherent, consistent development of bankruptcy precedents. Recommendation 21 in the Conference Plan provided the general rule that actions of decisions of Article I courts should be reviewable directly in regional courts of appeal.
The American Bar Association's response to each recommendation in the Conference Plan was comprised of a statement of ABA Policy and a more expansive Comment thereon. The ABA Comment regarding Recommendation 22 states:.
"The bankruptcy appellate process does not produce a coherent body of guiding precedent. One reason for the amount of bankruptcy litigation -- and the attendant cost and duration of insolvency proceedings -- is the failure of stare decisis to function in the bankruptcy system.
"Bankruptcy appeals may be argued either before the almost 550 district judges or may proceed to bankruptcy appellate panels where they exist. Virtually none of the decisions of those courts are viewed as binding upon bankruptcy judges or on district judges hearing appeals in bankruptcy cases. Notwithstanding the hundreds of bankruptcy opinions, little binding precedent has emerged. One result is that issues which commonly arise are litigated again and again throughout the country. Note should also be taken of the shortcomings of "finality" as a standard for appealability in bankruptcy matters.
"Substantial portions of the bankruptcy bench and bar believe that the bankruptcy appellate process is time-consuming, expensive, and fails to produce useful bankruptcy precedent. There is a growing consensus that the time has come for a study which might lead to solutions in the form of legislation or reorganization of the bankruptcy appellate structure.". Thus, the recommendations of the NBRC and the Committee on Long Range Planning and the Comment by the ABA all recognize the problems created by the lack of binding bankruptcy law precedent and suggest direct appeals to the regional circuit courts of appeal as a possible solution.
Generally speaking, the ABA believes that both shortcomings of the existing system would be dramatically improved through some system of direct appeals to the circuit courts.
We believe the multiple benefits of permitting direct appeals to the regional circuit courts of appeal outweigh other considerations. First, eliminating one level of appeal will, as a necessary corollary, result in fewer appeals in the court system as a whole. Second, direct appeals will result in a body of binding precedent which will reduce the number of appeals over time. Third, a significant number of bankruptcy appeals filed with the district courts are not prosecuted so that the burden of the circuit courts will be less than would be indicated by the gross number of bankruptcy appeals filed. Fourth, the important economic and commercial decisions which often arise in the context of bankruptcy cases are worthy of the valuable resources of the circuit courts. The relative burden of such cases does not justify dismissing the benefits and efficiencies of direct appeals out-of- hand.
Moreover, from a comparative perspective, it is difficult to understand why the bankruptcy appellate structure should afford bankruptcy litigants more opportunities for appellate review than almost every other type of litigant in the federal system. Most types of federal cases are subject to the standard three-tired system of review (e.g., review in a district court, court of appeals, and the U.S. Supreme Court), and there is nothing inherent in bankruptcy jurisprudence that demands an additional layer of appellate scrutiny. On the contrary, given that bankruptcy cases tend to be especially cost-sensitive, the expense associated with the current system's four- tiered structure is an unfortunate extravagance.
Although direct appeals has it benefits, it has been criticized as increasing the workload of the courts of appeals in that the courts of appeals would need more judges. To the contrary, elimination of a second level of appeals would reduce the aggregate number of bankruptcy appeals by at least 1200 cases. Statistics provided by the Federal Judicial Center or gleaned from the Annual Reports of the Administrative Office of the United States Courts report the number of 'second appeals", that is bankruptcy appeals from the district courts, in recent years as 1250 in 1998, 1187 in 1997, 1436 in 1996, 1658 in 1995 and 1389 in 1994. In a direct appeals system, "second appeals" would no longer exist. That elimination alone - - almost one-fifth of all bankruptcy appeals - - would represent a major reduction in the amount of judicial time Article III judges would be required to devote to bankruptcy appeals in future years.
In sum, the American Bar Association strongly endorses the concept of streamlining the bankruptcy appellate structure. The ABA recognizes the problems created by the lack of binding bankruptcy law precedent. As such, the ABA believes that the existing system would be dramatically improved through some system of direct appeals to the circuit courts.
B. PARTNERSHIPS IN BANKRUPTCY.
The American Bar Association also favors legislation that would add a partnership bankruptcy structure to the existing Bankruptcy Code.
Partnerships are a popular vehicle for doing business. Partnerships include the two person small business, the single asset real estate venture, and the large professional service firm. By its nature, the general partnership does not afford limited liability to its members. Rather, the liability of general partners for partnership debt is determined by state law and the partnership agreement. Consequently, the determination and enforcement of liability for the debts of an insolvent partnership involves a multitude of difficult and seemingly unanswerable questions.
The complexities of the intersection between partnership and insolvency laws have defied resolution. The result is that currently only one provision of the Bankruptcy Code - - 11 U.S.C. ' 723 - - addresses a partnership bankruptcy. This section authorizes the trustee of a partnership in a Chapter 7 liquidation to claim and collect a deficiency of the partnership estate from a general partner and does not apply to Chapter 11 reorganizations.
In 1996, an Ad Hoc Committee of the ABA, comprised of representatives from the tax, partnership, and business bankruptcy communities proposed amendments to the Bankruptcy Code which form the basis for administration and resolution of partnership cases under the Bankruptcy Code. There was broad based participation in the work of the Ad Hoc Committee and the proposed amendments represent a strong consensus. The proposed amendments to the Bankruptcy Code, and the ABA resolution endorsing these amendments, are attached as Appendix A.
An overview of the proposed amendments is found in an article by Morris W. Macey and Frank R. Kennedy entitled "Partnership Bankruptcy and Reorganization: Proposals for Reform," which appears in Volume 50, Number 3 of The Business Lawyer, a quarterly journal published by the ABA Business Law Section. Professor Kennedy, the original Reporter for the Bankruptcy Code, has served as the Reporter for the Ad Hoc Committee.
The estate of many partnerships, especially professional or service partnerships, can be preserved only by the Chapter 11 process. This fact has been exemplified by five recent bankruptcies involving insolvent professional partnerships: (1) Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey (Bankr. S.D.N.Y.); (2) Myerson & Kuhn (Bankr. S.D.N.Y.); (3) Laventhol & Horwath (Bankr. S.D.N.Y.); (4) Heron, Burchette, Ruckert & Rothwell (Bankr. D.D.C.); and (5) Gaston & Snow (Bankr. S.D.N.Y.).
These five cases involve remarkably similar facts. Each involved either a large law or accounting firm which sought Chapter 11 bankruptcy relief to wind up its affairs. In each case, the bankruptcy court was forced to formulate a remedy that would encourage voluntary contribution by general partners to maximize the distribution of property of the state and simultaneously avoid unnecessary bankruptcy filings by partners and unnecessary litigation.

In each of the cases it was clear that the issuance of an injunction or its equivalent to bar future actions against contributing partners was the sine qua non of the confirmed plan.
The American Bar Association has carefully evaluated the problems and solutions set forth in the foregoing cases in formulating the proposed amendments to the Bankruptcy Code. The extended stay, which is analogous to a permanent injunction, is a key factor of the amendments. Although the foregoing cases involve large professional partnerships, the problems encountered and the resolutions embraced are equally applicable to all partnership bankruptcy cases.
As such, the American Bar Association believes that the Bankruptcy Code should be amended so that a partnership bankruptcy will trigger an automatic stay of a limited duration of sixty days. Although general partners may be liable for some or all of the debts of the partnership under nonbankruptcy law, the courts have generally given heed to the literal language of the Bankruptcy Code and its legislative history negating the argument that the property of a partnership includes the property of its member general partners. Thus, the automatic stay has been generally held not to bar actions, proceedings, or acts directed against a general partner or its property.
Experience in the administration of partnership cases has demonstrated the crucial importance in Chapter 11 partnership cases of the issuance of an injunction against the enforcement of partnership creditors' rights against general partners and their property. The automatic stay will prohibit partnership creditors from exercising their collection efforts against partners or partners' property. The purpose of the automatic stay is to preserve the partners' property for distribution in the partnership case. By obviating the necessity for the partnership trustee or the partnership as a debtor-in-possession to seek and obtain an injunction against actions, proceedings and acts by partnership creditors directed against general partners, the extended stay accomplishes the same purpose and result for the benefit of the partnership creditors, insofar as the general partner's assets liable for the partnership debts are concerned, as the automatic stay of Section 362 does with respect to the partnership assets.
Further, the American Bar Association proposes an amendment which would allow the stay to be extended to nondebtor partners as a part of the confirmation of a plan. Courts should be permitted to issue an extended stay of actions, proceedings and acts against a general partner in a partnership case when the general partner has made a contribution to the payment of the partnership's debts, or assumed a commitment to make such a contribution in accordance with the provisions of a confirmed plan or order confirming a plan. Experience has demonstrated that recoveries by partnership creditors may be significantly enhanced if general partners can be persuaded to contribute to a recovery pool, post-petition future earnings, exempt property, and other assets not otherwise available to partnership creditors, in exchange for protection against collection suits by partnership creditors and suits for contribution and indemnification by copartners and the trustee of the partnership or the partnership as a debtor-in-possession.
Without the extended stay, individual creditors would sue individual general partners, and general partners would then cross-claim against each other for contribution and sue the debtor for indemnification. The probable result would be a costly and time-consuming web of litigation replete with attendant attachments, garnishments and executions. Personal bankruptcy would be a likely consequence for many. By preventing a haphazard scramble for the assets of general partners, and by facilitating an orderly distribution scheme, the permanent injunction under the extended stay ensures that general partners will be protected and that creditors' recoveries will be maximized. The extended stay should not bar actions, proceedings, or acts against general partners who do not assume a commitment or fail to fulfill a commitment to pay partnership debts. The extended stay does not constitute nor may it be deemed to be a release of joint tortfeasors. Because the extended stay is tied to confirmation of a plan, compliance with the best interests of creditors test, which is inherent in the confirmation process, is ensured.
In sum, the American Bar Association believes that any comprehensive bankruptcy reform bill should establish a partnership bankruptcy structure, and the ABA recommends amending the Code, generally in the form of the attached Appendix A. As part of this new partnership bankruptcy structure, the ABA endorses an automatic stay inhibiting post-bankruptcy suits against general partners for partnership liabilities, to remain in effect for sixty days after a bankruptcy filing. The ABA also believes that such an amendment should include automatic stays of transfers outside the ordinary course of non- bankruptcy property by general partners of the filing partnership.
C. SHARING FEES WITH A BONA FIDE LAWYER REFERRAL PROGRAM.
The American Bar Association recommends that a provision be added to H.R. 833, similar to the language contained in Section 202 of last year's bankruptcy reform bill, H.R. 3150, that would allow an attorney to share his fee with a bona fide public service lawyer referral program.
In August 1993, the ABA House of Delegates adopted a Resolution endorsing the "Model Supreme Court Rules Governing Lawyer Referral and Information Services" and a "Model Lawyer Referral and Information Service Quality Assurance Act." These Rules established specific public service criteria for lawyer referral programs, and urged adoption of these standards by each state.
Model Rule IX provides that "a qualified service, may, in additional to any referral fee, charge a fee calculated as a percentage of legal fees earned by any lawyer panelist to whom the service has referred a matter." This method of funding is often the only way a public service lawyer referral program can operate in a financially self-sufficient manner. The Bankruptcy Code provision 11 U.S.C. Section 503(b) describes the allowance of expenses and fees, and is qualified by restrictions and prohibitions described under Section 504(a) and (b). These restrictions prohibit an attorney from agreeing to the sharing of compensation or reimbursement with another person. These provisions effectively prohibit a lawyer referral service from collecting a fee for bankruptcy case referrals.
The ABA believes that the prohibition contained in the Bankruptcy Code was not intended to apply to a public service-oriented lawyer referral program. Therefore, in February 1997, the ABA adopted a formal resolution urging that 11 U.S.C. Section 504 be amended to permit the remittance of a fee to bona fide lawyer referral programs. A copy of the ABA's resolution, and Recommendation 3.3.6 of the National Bankruptcy Review Commission, which was based on the ABA's resolution, is attached as Appendix B.
Lawyer referral services provide a valuable and highly visible service to the community. Lawyer referral serves two critical functions - - to provide information to consumers about their legal concerns and, if appropriate, make a referral to an attorney capable of providing appropriate legal services to the consumer. Without lawyer referral, thousands of people are without an agency to turn to for legal assistance. Fortunately, however, lawyer referral services have been enormously successful and according to recent estimates, over 3 million calls around the country are handled by public service lawyer referral programs each year.
The majority of lawyer referral programs in the U.S. support their operations by charging a percentage fee to each attorney receiving a case from the service. The question of the permissibility of percentage fee funding, or "fee splitting" has long been settled. When this funding method was originally conceived more than forty years ago, it immediately raised questions about fee splitting among ethics experts across the country. In 1956, the ABA adopted an ethics opinion allowing an attorney to remit a percentage of the fee to "help finance the service by a flat charge or a percentage of fees collected." (Formal Opinion No. 291, dated August 1, 1956, reaffirmed in Informal Opinion 1076, dated October 1968). In Emmons v. State Bar of California, (1970) 6 Cal. App.3d 565, 86 Cal. Reporter 367, the court was asked if it was improper to charge a percentage fee to panel members. The court said in part,. "Serious and progressive elements, within and outside the legal profession have for several decades sought means of making legal services more readily available to the public. . . . the lawyer reference program has been evolved to establish communication between qualified attorneys and clients needing their services.".
The court recognized, as we do, that it is the role and responsibility of lawyers to provide legal services to the public, and that any fair and legitimate method of providing funding for information and access programs must be considered.

In the past, lawyer referral services have been funded through a combination of panel membership fees and substantial subsidies from their sponsoring bar associations. The economic pressures faced by the legal profession in the late 1980's and 1990's resulted in a corresponding decrease in dues dollars available to bar associations for public service programs. Lawyer referral programs must find a method of becoming financially self-sufficient if they are to survive and serve their communities. The recent reductions in federal dollars for legal services to the poor, and funding reductions to the Legal Services Corporation, have further restricted the resources available for moderate-income programs.
The system of generating revenues through a percentage fee funding system allows the bar to accept a small percentage of the fee when the panel attorney is retained for any cases referred by the lawyer referral and information service. Thirty-four states have percentage fee programs. Ethics opinions have consistently held that a percentage fee program is a legitimate way for a lawyer referral and information service to generate income if two conditions are met. First, the funds collected through percentage fee funding must be used solely for the purpose of defraying the costs of operating the service, or for other public service programs such as pro bono services, and second, the attorney must not increase the costs of his/her legal services to offset the fees remitted to the lawyer referral program. In every state where the issue of payment of a percentage fee to a legitimate lawyer referral service has arisen, there has been a ruling which has found that the payment of a percentage of the fee earned back to a legitimate referral service is legal and ethical.
Unfortunately, collecting a percentage of an attorney's fee as a means of funding the lawyer referral service does not comport with certain provisions of the Bankruptcy Code. Section 504 of the Code prohibits fee-splitting arrangements except where (1) a person is a partner or otherwise associated with an individual compensated from an estate, or (2) an estate-compensated attorney for a creditor who filed an involuntary case under Section 303 is assisted by another attorney. But this prohibition is similar to the fee splitting prohibition contained in the Model Rules of Professional Conduct, for which an exception has been made specifically for public service lawyer referral programs. In sum, because of the tremendous benefits that could be realized from allowing bankruptcy attorneys to share fees with bona fide public service lawyer referral programs, the ABA supports an amendment to the Bankruptcy Code utilizing language similar to that contained in Section 202 of last year's bankruptcy reform bill, H.R. 3150.
D. DISINTERESTEDNESS.
The American Bar Association also believes that comprehensive bankruptcy reform legislation should clarify that an attorney who represents a debtor in possession need not be a disinterested person.
An attorney with historic ties to a debtor should not be automatically disqualified as bankruptcy counsel for that debtor. Certain bankruptcy judges have suggested that the attorney for a debtor in possession should have considerable independence from the management of that debtor, and some decisions have denied compensation because the attorney was not a person "disinterested" in the client. Those results are inconsistent with provisions of the Model Rules of Professional Conduct, however, which require a lawyer to abide by the client's decisions and which, in the corporate context, holds that the lawyer represents the entity under instructions issued by its officers and board of directors, unless they seek to violate legal obligations. The attorney is not to be "disinterested" in the client; he must be guided by the client's objectives.
While "disinterestedness" is an appropriate standard when dealing with the "trustee" - - a person who himself must be "disinterested" - - its use in respect of counsel for the debtor has resulted in the wrongful disqualification of debtor's counsel in a number of cases. Most bankruptcy judges effectively ignore the "disinterestedness" provision when dealing with prebankruptcy counsel for the debtor. Generally speaking, a disclosure to the Court at the time of engagement that a pre-bankruptcy fee remained unpaid - - thus rendering the law firm a creditor of the debtor - - or that the law firm represented shareholders or corporations affiliated with the debtor, was not automatically disqualifying. Obviously, if a party in interest presented reasons for disqualification, such considerations came before the bankruptcy judge for evaluation and decision.
During recent years, however, several courts have determined that "a violation of the disinterestedness rule" required disqualification of the debtor's counsel. In some cases, the court did not make that disqualification determination until long after the law firm had been appointed by the same court and had put thousands of dollars of time and costs into the case.
The difficulty with the disinterestedness standard being applied to counsel for the debtor in possession is that it causes substantial problems. It does not fill the vacuum left by the abandonment of an independent trustee and the idea that it might is misleading.
The disinterestedness standard is problematic in that it often disqualifies that counsel who is most knowledgeable and best equipped to handle the reorganization. It does this by focusing on the counsel's historical identity with the debtor, which should not be disqualifying in and of itself. The relevant test should be whether any of the historical connections with the debtor creates a materially adverse interest. The fact that the lawyer or a partner of the lawyer may be a creditor, stockholder, director or officer should not be the end of the inquiry; the issue is whether it creates a problem. Whether the debtor is represented by the historical lawyer or a new lawyer, the lawyer must still take direction from those in control, and is therefore not disinterested.
The American Bar Association supports the enactment of legislation to amend the Bankruptcy Code to make clear that an attorney who represents a debtor-in-possession need not be a "disinterested person," as that term is defined in the Bankruptcy Code, but that such counsel should comply with non-bankruptcy standards of professional responsibility generally applicable in the district where the case is pending and should not hold or represent an interest materially adverse to the estate.
The American Bar Association also recommends the adoption of additions to the Bankruptcy Rules and to the Official Bankruptcy Forms which provide for more detailed disclosure than is presently required of potentially conflicting interests and similar information, and which provide that if such data has been filed in good faith, a subsequent termination of the attorney's employment will not disqualify that attorney from receiving compensation under applicable standards. These provisions should be added to H.R. 833, or to any other comprehensive bankruptcy reform legislation considered by Congress.
E. CLAIMS PRIORITIES.
Finally, the American Bar Association opposes the enactment, in the absence of the most compelling circumstances, of special interest legislation designed to increase the types of claims entitled to priority under the Bankruptcy Code. As a result, the ABA has concerns regarding a number of specific provisions in H.R. 833 that would create new priorities.
Although H.R. 833 contains many new priorities, several stand out. In particular, the ABA has concerns that the following provisions of H.R. 833 create priorities where the circumstances are less than compelling: Section 131 (adding a priority for claims for injuries resulting from the operation of a motor vehicle or vessel while the debtor was intoxicated), Section 137 (mandating payments to lessors and purchase money secured creditors in Chapter 13 cases), Section 205 (requiring the surrender of non-residential real property subject to a lease if the lease is not assumed within 180 days after the order for relief), Section 207 (declaring warehouseman's liens unavoidable notwithstanding Code Section 545(2) and (3)), Section 208 (extending the limitation in Code Section 546(c)(1)(B) for reclaiming sellers from 20 to 45 days) and Section 1127 (restricting transfers of certain property by debtors that are not moneyed business or commercial corporations or trusts).
The primary function of the bankruptcy process is to gather together an insolvent debtor's assets and to distribute those assets fairly among the debtor's creditors. This "equality of distribution" policy is modified by the establishment of priorities - - payments "off the top" - - to accomplish certain limited goals. The Bankruptcy Code allows, for example, a first priority for costs of administration (i.e., costs incurred during the administration of the bankruptcy estate after the bankruptcy petition was filed).

The Code recognizes that in order to get suppliers to provide goods and services needed to preserve or enhance the bankruptcy estate, or to get lawyers or security guards to perform required services, they will have to be paid in cash or at least promised "good payment".
A major reason that the bankruptcy laws, and particularly the Chapter 11 reorganization process, have worked well in the United States is that priority payments - - those payments which come ahead of the distributions to unsecured creditors - - are relatively limited. Over the years, however, a constant stream of bills have been introduced in Congress that would provide that one or another special interest group receive priority payments in bankruptcy ahead of all other creditors. A multitude of special interest groups have emerged to demand priorities, and federal agencies have used their positions as "government insiders" to bring about priority legislation without any public hearing.
Moreover, in recent years, government agencies with powerful Congressional constituencies have proposed Bankruptcy Code amendments in Congress to provide priority to one favored governmental entity or another. Had these priorities been adopted, it would have virtually destroyed any opportunity for Chapter 11 reorganization or for meaningful distribution of assets to unsecured creditors.
Fair and equitable treatment of creditors' claims is and should remain a primary goal of the bankruptcy process. The Chapter 11 provisions of the United States Bankruptcy Code work well largely because the "delicate balance" of claims and priorities is further subjected to a negotiating process which impels each claimant or category of claimant to assess carefully the relative worth of their claims against the value of having the debtor emerge as a viable enterprise, thus preserving the going concern value of its assets, the jobs of employees, and the contribution of its products and services to its community. For these reasons, the ABA opposes legislation that would create a new unjustified priority of claims for certain creditors. The ABA also opposes the enactment, in the absence of the most compelling circumstances, of special interest legislation which upsets the delicate balance of rights existing under current law by establishing new priorities for particular types of creditors, including those new priorities contained in H.R. 833.
The ABA also generally opposes amendment of the Bankruptcy Code by legislative process which avoids fair opportunity for open hearings, on well-publicized notice, before the judiciary committees of Congress. Open deliberations preceding the enactment of legislation which affects thousands of cases should be a prerequisite for any legislation. The statement seems so obvious, and would seem so central an idea in our Congressional system, that it is surprising that it has to be repeated.
Open hearings on reasonable notice is a clear requirement in an open society. We are not now speaking about declarations of war or other emergency measures, nor are we speaking of simple legislation which is straightforward and has clearly predictable effects. The Bankruptcy Code is a tightly constructed piece of technical legislation which has indirect effects on many other laws and on the American economy. Bankruptcy is a field in which procedure is substance. As such, Bankruptcy Code provisions have far-reaching effects, not only in bankruptcy proceedings themselves, but often throughout the economy as a whole. Indeed, in some instances, a Code provisions can influence whether a business transaction will be entered into in the first place. For these reasons, it is imperative that the Judiciary Committee carefully consider the full effects of bankruptcy reform legislation before reporting a bill.
CONCLUSION.
The ABA strongly believes that the Bankruptcy Code can be improved and made both more efficient and more equitable by adopting several common-sense reforms, including new provisions (1) allowing direct appeals of final bankruptcyrt orders to the regional courts of appeal, (2) establishing a partnership bankruptcy structure, (3) allowing greater sharing of attorneys' fees with bona fide public service lawyer referral programs, and (4) clarifying that an attorney representing a debtor in possession need not be a disinterested person. On the other hand, in order to ensure that most unsecured creditors are treated fairly and equally, Congress should resist the temptation to create any new priorities for particular types of creditors, absent compelling circumstances. In this way, Congress can ensure that the Bankruptcy Code continues to fulfill its function of gathering an insolvent debtor's assets and then distributing them fairly among the debtor's creditors, without imposing any unintended consequences on the American economy.
The ABA has been a consistent advocate of legislation designed to improve and streamline the bankruptcy system, while at the same time preserving the due process protections of all participants . We appreciate the opportunity to testify before the Subcommittee today, and we look forward to working with your Subcommittee--and with other advocates of positive bankruptcy reform in Congress and in the Administration--in an effort to achieve these goals.
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