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Roundtable Discussion

By: dmc-admin//August 10, 2005//

Roundtable Discussion

By: dmc-admin//August 10, 2005//

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On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention Act of 2005.

Although some elements of the act already have taken effect, the majority of changes will take place in October. Some of the biggest changes will take place in the area of consumer bankruptcy. However, the act also includes changes for corporate bankruptcy, as well.

On June 30, the Wisconsin Law Journal, Milwaukee Bar Association and Eastern District of Wisconsin Bar Association brought together a group of bankruptcy judges and practitioners to discuss those changes. What follows is a collection of articles based on that roundtable.

Bankruptcy Reform

Part I

The Bankruptcy Reform Act will have a significant effect on consumer debtors and their lawyers. Means testing was designed to reduce the number of consumers filing Chapter 7. The act also calls for bankruptcy lawyers who represent consumer debtors to be more accountable for the accuracy of the schedules their client file.

A group of bankruptcy judges, attorneys and trustees acknowledged that changes related to Chapters 7 and 13 are a major part of the Bankruptcy Reform Act.

However, they noted that the act also will affect the realm of commercial bankruptcy.

The panel, which spoke to a group of bankruptcy lawyers and judges in Milwaukee, also said that although the reform was intended to help creditors, it might have some unintended negative side effects for them.

Consumer Filings

Bruce G. Arnold

ImageBruce G. Arnold is a shareholder and managing director of the Milwaukee office of Whyte Hirschboeck Dudek. He joined Whyte Hirschboeck Dudek in 1981 where he concentrates in his bankruptcy practice on representation of debtors and creditors’ committees in Chapter 11 bankruptcy proceedings. He currently represents debtors in the Keystone case.

Hon. Susan V. Kelley

ImageJudge Susan V. Kelley has served on the U.S. Bankruptcy Court for the Eastern District of Wisconsin for two years. Prior to that, she practiced bankruptcy law for 24 years primarily in commercial and creditor areas. She also served as a trustee. In 1979, she clerked for Judge Glenn Goldburn in the U.S. Bankruptcy Court for the District Court of Maryland.

Hon. Margaret Dee McGarity

ImageChief Judge Margaret Dee McGarity, U.S. Bankruptcy Court for the Eastern District of Wisconsin. McGarity has been on the bankruptcy bench since her appointment in 1987. She has spent the last two years as chief judge. As an attorney, she began handling bankruptcy cases in the late 1970s and was appointed bankruptcy trustee in 1978.

Todd Esser

ImageTodd Esser, of Todd Esser & Associates in Milwaukee, has been handling debtor and creditor law for 23 years. Esser was on the Chapter 7 panel of trustees for eight years. He is a member of a number of associations focusing on creditor, debtor, and insolvency work. His practice focuses on consumer debtors in bankruptcy.

Paul G. Swanson

ImagePaul G. Swanson is a partner at Steinhilber, Swanson, Mares, Marone & McDermott in Oshkosh. Swanson is a 1979 University of Wisconsin Law School graduate. He has been a Chapter 7 trustee since 1982 and handles all debtor work in Chapter 7s, 11s, 12s, and 13s. He is president of the National Association of Bankruptcy Trustees.

Timothy F. Nixon

ImageTimothy F. Nixon, of Godfrey & Kahn in Green Bay, is lead attorney for the firm’s business, finance, and restructuring practice group. Nixon is a graduate of University of Wisconsin Law School. He received his undergraduate degree and is an adjunct faculty member of the UW-Green Bay where he teaches classes in law and public management. He also lecturers on commercial litigation, the Uniform Commercial Code, and Bankruptcy Law.

Chief Bankruptcy Judge Margaret Dee McGarity, from the Eastern District of Wisconsin, said, "I think probably the most famous and maybe the most important change is the means test when it comes to qualifying for Chapter 7 and for disputed Chapter 13s under some circumstances. Congress has given debtors a rigid and unrealistic set of expenses that they’re going to have to deal with in evaluating whether they can confirm a plan or file a Chapter 7."

That could potentially increase the litigation in special circumstances, McGarity said. As Congress sought to set limitations on judicial discretion and create a "one-size-fits-all&quot
; approach to expenses, she said, legislators left room for manipulation and game playing within the system.

"There are plenty of ways that debtors can, nevertheless, get around the system and feather their own nests, as it were, to the detriment of creditors, which I think is the opposite of what Congress was trying to do," McGarity said.

Consumer bankruptcy attorney Todd Esser, of Todd Esser & Associates in Milwaukee, agreed that the means test will be the most significant change coming from the bankruptcy changes, which will take effect in October. Looking at his own practice, Esser estimated that about 33 percent of his clients would be affected by the means test. He noted that his clients are typically at a higher income level and that the effect might be less for the average person filing Chapter 7.

Fewer Will Qualify

Judge Susan V. Kelley, from the Eastern District of Wisconsin, agreed that the enhanced requirements to determine whether someone qualifies for Chapter 7 would have a significant effect on the system.

"Estimates I’ve heard are that maybe 20 percent who would qualify now for Chapter 7 won’t be qualifying for Chapter 7 under the new act," Kelley said.

“The eligibility requirements will impact a counsel’s decision on what he can do for a client,” Esser observed.

Kelley also noted that under existing bankruptcy laws, people had to file a statement of intention about whether to reaffirm or redeem something. However, the requirement had no teeth.

"Under the new act, they have to perform that intention within 30 days after the meeting of creditors, or as of 45 days after the meeting of creditors, the stay is lifted as to that vehicle and it’s deemed abandoned from the bankruptcy estate," Kelley said. "So there’s definite enforcement for the statement of intention."

Effect on Trustees

Paul G. Swanson is a partner at Steinhilber, Swanson, Mares, Marone & McDermott in Oshkosh. Swanson has been a Chapter 7 trustee since 1982, and he handles debtor work in Chapter 7s, 11s, 12s, and 13s.

"I think that from a trustee’s standpoint, there aren’t a lot of new duties imposed on a Chapter 7 panel trustee," Swanson observed. "There’s a duty to notify child support claimants and family support claimants, but beyond that, I think it’s probably going to make our lives a little bit easier."

The same will not be true for the U.S. Trustee, who will have additional responsibilities under the new act, Swanson said. He estimated that the cost to fund the new mandates related to the U.S. Trustee could be "in the hundreds of millions of dollars."

Swanson anticipated that in a certain percentage of all cases, debtor audits will be a significant factor. He also touched on the issue of lawyers certifying client filings.

"One of the other things that is troublesome to me, somewhat, is the certifications that debtors’ counsel will have to make under the law that they’ve made … a reasonable inquiry," Swanson said, noting that lawyers who fail to do that are subject to sanctions under Rule 9011.

Increasing Costs

He explained that lawyers will be expected to document what contributed to the client’s current financial situation — "the loss of a job, a large lawsuit, overspending.

Why are they there?" They also will have to certify that the schedules and statements are accurate.

"That’s probably going to mean that we’re going to have to send somebody out, or go out ourselves and take a look at the debtor’s assets, the debtor’s home and maybe get an appraisal," Swanson said.

Those extra steps will increase the cost of handling consumer bankruptcy cases. "We see maybe $700-$900 per Chapter 7 in a routine case now," Swanson observed.

"I think you’re going to expect that to probably double.

Bruce G. Arnold, a shareholder and managing director of the Milwaukee office of Whyte Hirschboeck Dudek, agreed that the Bankruptcy Reform Act would have the greatest effect on consumer debtors. However, the bankruptcy changes will also affect businesses.

Commercial Bankruptcy Changes

Arnold, who represents debtors and creditors’ committees in Chapter 11 proceedings, said, "There are some pretty significant changes that affect those of us who are Chapter 11 business reorganization attorneys, principally from the standpoint of substantial additional protections for creditors. Principally, the time to assume or reject leases is substantially limited; the period of time in which something is deemed to be a preference is modified; creditors now have the ability to get an administrative expense claim for any goods that they sell in the ordinary course of the 20 days preceding the filing of a petition; and a host of other changes that we’re going to get into in greater detail."

Although, the Bankruptcy Reform Act has been viewed as a benefit to creditors, they may find that is not the case overall.

"I think it remains to be seen whether in the long run these changes, which benefit narrowly certain of the constituencies, will ultimately result in creditors as a whole doing better because of the changes," Arnold said. "The jury’s still out, but here’s my prediction. I think the changes of the 2005 Act will ultimately lead to lower recoveries in Chapter 11 bankruptcies."

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Roundtable – Part II

Timothy F. Nixon, the lead attorney for Godfrey & Kahn’s business, finance, and restructuring practice group, agreed with Arnold’s observation that creditors might not do as well as expected. Nixon noted that the earlier observations about the increased cost of handling bankruptcy cases will mean a greater drain on already-limited financial resources.

"If there’s not enough money to pay in the first place and now we have added additional legal and other costs, that’s going to reduce the amount of money available for creditors," Nixon said. "The one thing I’ve found after all the years I’ve been doing this, the turnip has blood or the turnip doesn’t have blood. And regardless of how many rules you have, if the turnip has no blood, it has no blood.

"So I think we’re going to see a restriction of access and probably a reduction of the amount to creditors. But in my gratitude to Congress, I believe lawyers are going to make more money."

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