The MacNeil/Lehrer Report; Bankruptcy

ROBERT MacNEIL: Good evening. This is the first working day of what many expect will be months of chaos and confusion in the nation's bankruptcy courts. The number of people going bankrupt is running at record levels, with two reasons cited -- the depressed state of the economy and the more liberal bankruptcy law. The number of new bankrupticies is now growing by 10,000 a week, and there are some 700,000 cases currently being considered. The court system was coping with that huge workload until last Friday, but now it may not be able to. Friday was the deadline for Congress to rewrite the bankruptcy law. The lame duck session broke up without doing so, so from today the courts will have to "muddle through," as some put it, with a system of rules that many legal experts consider unworkable and, some think, unconstitutional. Tonight, why has the bankruptcy system broken down, and what does it mean for tens of thousands of debtors and their creditors? Jim?

JIM LEHRER: Robin, to understand how it all got to this state of messiness takes some explaining. For years most bankruptcy matters were handled by officials known as referees in bankruptcy who were subservient to federal district judges in both rank and authority. In 1978, Congress expanded their authority and upgraded their titles to federal bankruptcy judges subject to 14-year appointments.Last June the Supreme Court declared the new arrangement unconstitutional, saying the new authority made them real judges and thus entitled to the same lifetime appointments and other protections granted all federal judges. The Court gave Congress until October to correct this by reducing their authority back to the pre-1978 days or giving them full judicial rank. Congress missed the October deadline and it was extended to last Friday, which it also missed because no Solomon-like compromise could be worked out among the following competing interests: Chief Justice Warren Burger's and others' desire that the prestige of the federal judiciary not be diluted by the appointment of 222 new judges; the administration's desire for Mr. Reagan to make those 222 appointments; some Democrats' desire for Mr. Reagan not to; and some Republican senators' desire to amend the bankruptcy law itself to tighten up on personal bankrupticies -- an idea Democratic House leaders opposed on the grounds it was a cave-in to the credit industry. Robin?

MacNEIL: Last week a prominent bankruptcy judge in Dallas, Texas, resigned in protest against the future he saw for the system. He is Dean Gandy, who has been a bankruptcy judge since 1970 and who, until October, headed the National Conference of Bankruptcy Judges. He joins us tonight from public television station KERA in Dallas. Dean Gandy, what does this stalemate mean for the bankruptcy system?

DEAN GANDY: Well, I think it means excessive delays, problems in regards to financing Chapter 11 estates, indecision and confusion hanging over the entire system.

MacNEIL: Chapter 11 is that part of the law which affects the ability of business to go into bankruptcy yet continue in business to a degree?

Judge GANDY: Yes, that is correct.

MacNEIL: Now, what is it about that that caused you to resign? What is it about the personal situation of a judge like you that made it impossible to go on?

Judge GANDY: Well, I do not want to say that I resigned in protest, Mr. MacNeil.I would prefer to say that, having practiced law extensively, bankruptcy law, prior to 1978 when the code came in and corrected the situation, having seen the excessive delays that are involved under any system in which the bankruptcy judge does not have clarity in regards to his jurisdiction, I felt that the practice of law represented a more attractive alternative to me than continuing to be a judge. It's fun to be a judge if you try cases to decide who wins those cases.But unfortunately, under the system that we now have, most of the trials will be related, or a large percentage of the trials will be related to what court do you try the case in? And that is not to me constructive work, and I would prefer to practice law.

MacNEIL: Am I making it too simple if I suggest that your worry would be that you could carry a case to a certain point as a bankruptcy judge, but then you'd have to see it go round to other courts, particularly federal district courts, to be finally resolved, and that's where the delays and things would come in?

Judge GANDY: Yes. Well, let me give you just one little example. Under this rule that has been proposed by the Judicial Conference of the United States, which now will represent the procedure in bankruptcy, let me give you just a little example of what the problem will be. Under this rule, bankruptcy judges sign orders if they are orders to turn over property of the estate.Now, point one: the Northern Pipeline case was a case in which the debtor sued a third party to order turnover of property of the estate. Thus, the very case which held the bankruptcy court jurisdiction unconstitutional -- in that very case the bankruptcy judge is now instructed to sign the order. But, secondly, what is property of the estate? I have never seen a case in which one is sued to turn over property of the estate and he says, "Yes, that is property of the estate." He always says, "It's my property." So you try the case for five minutes or five weeks to determine whose property is it. Under the current system, as I understand this ambiguous rule -- under the current system, if I should determine it was property of he estate, then the whole case would be tried again de novo -- anew -- by the district judge. So I don't see any reason to spend five weeks, one judge trying a case, and then five weeks, another judge trying a case.

MacNEIL: And is it your position that all this could be solved if judges like you were elevated to the rank and position of full federal judges, and then you could just try the whole thing yourself? Would that be the solution in your view?

Judge GANDY: The solution is to make bankruptcy judges Article III judges, but that does not mean equal status with district judges, and I personally would not favor that. Artricle III only means two things: one, appointment for life; two, no power to reduce salary during term in office. Period.It does not mean two-storied courtrooms; it does not mean the same salary; it doesn't mean anything else other than those two things.

MacNEIL: And you think if they did that, that would solve this problem?

Judge GANDY: Yes, it would. And to show the sincerity of the bankruptcy judges, it would probably result in none of them being appointed because that would be essentially a political appointment, and bankruptcy judges, as essentially non-political specialists, do not have the political fences that would indicate their appointments. So they're actually crusading for something that would put them out of business.

MacNEIL: Thank you. Jim?

LEHRER: Not everyone sees either the problem or the solution the same way Judge Gandy does. A dissenter is Alan Morrison, director of the Public Citizen Litigation Group, which represents consumer interests in the courts. It is funded by the Ralph Nader organization, and was founded by Mr. Nader and Mr. Morrison, a former assistant U.S. Attorney in New York. Do you see chaos ahead for the bankruptcy courts, Mr. Morrison?

ALAN MORRISON: I don't because I think, as a wiser man than I once said, things are never as good or as bad as they seem. I think there are going to be problems, but I think we'll manage to muddle through.

LEHRER: You heard what Judge Gandy says; there are going to be delays. There's going to be indecision and confusion. All the time's going to be spent deciding which court should try it rather than what the issues are.

Mr. MORRISON: Well, he is obviously in a much better position than I on the day-to-day aspects. But it seems to me that sensible creditors, sensible debtors and sensible trustees -- the people who run the bankruptcies for the debtors -- will get together and realize that you can't object to everything, and they'll find ways to work this out in most but not all the cases. According to statistics from the adminisrative office of the U.S. courts, some 85% of the bankruptcy matters are uncontested. Now, I would expect those to go forward pretty much as they've gone forward before. And in other cases people will say, "Well, we can litigate to the Supreme Court of the United States, but is it really worth it? Does it make a difference to us to have a bankruptcy judge as opposed to having an Article III judge?" And while the situation is not going to be perfect, I think we'll get through all right.

LEHRER: Do you favor making bankruptcy judges Article III judges, to use the Judge's term?

Mr. MORRISON: No, I don't. I don't think it's necessary.I don't have any real objection in principle. The Judge indicated that those appointments would be political, and that would bother me a little bit. I have two --

LEHRER: Why? Why?

Mr. MORRISON: Well, my real concerns are that people who become Article III bankruptcy judges one day can be turned around the next and become regular Article III judges just by changing the bankruptcy law or the federal law giving them jurisdiction. And what this would mean is that people who were chosen to be bankruptcy judges -- and they may be very good at that -- could someday be sitting on civil rights cases, constitutional law cases, or even criminal cases if Congress gets the inevitable plea, "We need more judges."

LEHRER: Well, in fact, Judge Gandy and the bankruptcy judges don't favor this, but that was the position of the Reagan administration. They did want these judges to have that jurisdiction to sit on other cases as well, just for the record.

Mr. MORRISON: Right. Chairman [Peter] Rodino of the House Judiciary Committee recognized the problem and has tried to write the law in a way that would prevent that from occurring. But, as I said before, the statutes can be changed, and when the inevitable cry for more judges comes out, I get very worried that the statutes will be changed.

LEHRER: Well, then, what do you see as a solution to the Supreme Court directive? The Supreme Court essentially said, as I said in very much of an oversimplification, but said -- either/or: you either go back to the pre-'78 rules or you do something about the status of the judges. Where would you draw the line?

Mr. MORRISON: I think what we could do is to add about 25 or 30 Article III bankruptcy judges who could handle the cases in which these special kinds of issues that the Supreme Court pointed out to in the Marathon case, require Article III judges. Those cases in their entirety could be handled by these special judges. There would be at least one in all of the major districts and some in -- more than one in some. And these judges could handle these kind of cases in a way that would preserve the efficiency of having a single judge handle the matter without the overlap problem.

LEHRER: And then the other 200 -- that would leave the other 200 who would just continue to handle bankruptcy issues that don't require this expanded authority?

Mr. MORRISON: Right. One of the concerns I have is that when you suddenly add 225 Article III judges, you put an enormous burden on the President and on the Senate to nominate and confirm truly qualified people. And I get very worried that we won't get the kind of scrutiny we need when we have this massive infusion of new judges in the federal system.

LEHRER: Would you feel differently. Mr. Morrison, if somebody other than Ronald Reagan was president appointing these 200-and-some judges?

Mr. MORRISON: I surely would feel differently about who's appointing them. I don't think I'd feel differently about the principle. But there have been proposals made to spread out the appointment of these 225-or-so judges over a period of years, which would get to one of my problems, which is that of the number coming all at the same time regardless of who the person is that's appointing them. But in any event there are likely to be very serious political pressures to appoint politicians instead of people who are qualified bankruptcy judges.

LEHRER: Mr. Morrison, thank you. Now, there is more to the congressional stalemate over the bankruptcy courts than the question of status for the judges. Two Republican senators, Robert Dole and Strom Thurmond, want some changes in the law itself. They have been encouraged and supported in that effort by the consumer finance industry represented here tonight by Robert Evans, general counsel and senior vice president of the National Consumer Finance Association which represents some 600 finance organizations. Mr. Evans, some see your interest as the villain in this -- that you wanted Congress to enact certain changes in the bankruptcy law, and that kept Congress from meeting the deadline the Supreme Court had given it. Do you plead guilty or not guilty to that charge"

ROBERT EVANS: Well, certainly, Jim, it's true that we have been trying for two years to get the attention of both House and the Senate on a very serious consumer bankruptcy issue which relates to the ability of an individual to take bankruptcy even though he can pay his debts. Now, this is shocking to the man on the street when he hears it, but it is true that about one in four people taking bankruptcy today actually has the capacity to pay his debts, but is still enabled under the law to take straight bankruptcy and walk away from them.

LEHRER: And how would you change that?

Mr. EVANS: Well, simply put in a threshold test which would allow the judge, upon the motion of any interested party, generally a creditor, to examine the debtor's condition and determine whether indeed he does have sufficient income to pay his living expenses and then to have a disposable income left over to pay his debts as he incurred them.

LEHRER: As you know, it's been suggested that what you all really wanted was to reduce people who had filed bankruptcy to the poverty level -- leave them enough where they would be at the poverty level and then take the rest of their income to pay off your clients' debts, or the consumer organization's debts. Is that correct?

Mr. EVANS: Well, of course not, and if I were opposing what we were doing I would say that also. But it's simply a smokescreen for those who are opposed philosophically to this sort of thing. But it should be very apparent that if a person can pay his debts he should pay them. And the same test that is now used in Chapter 13 to determine an individual's capacity to pay would be used by a judge in determining whether he's eligible for a straight discharge. And that is whether he has enough income, number one, to support himself and his family, and whether he has anything left over to pay debts.

LEHRER: Well, how is the law written now that makes it possible for people who are not bankrupt to take bankruptcy. That is in fact what you are saying, right?

Mr. EVANS: Because the code is still grounded in an anachronism, and that is that all lending is based on assets, whereas, today, consumer credit is really based on a peron's ability to pay out of future income. Very little consumer credit today is actually secured by property. When the retailers -- Sears or the banks and the credit cards -- and the finance companies make cash loans, generally that is without any security to back it up. What they're looking at is that particular individual's capacity and character and earning capacity to pay those debts out of future income.

LEHRER: It's been suggested, Mr. Evens, as I know you're also aware, that what you folks are really looking for is a federal government bailout; that, after all, you gave -- you loaned money to people who you should not have loaned money to. Now you want the government to come along and collect the money for you.

Mr. EVANS: Bear in mind, Jim, who are -- the people that are interested in this. This is the entire spectrum of consumer creditors across the country. That would involve the major retailers, the major banks -- all the banks. The credit unions are very strongly a part of this effort, as well as the finance industry itself. This is the group that extends $330 billion of consumer credit annually and is now faced with a $6-billion annual bankruptcy loss to try to overcome that. We have determined in a study that about one out of four taking straight bankruptcy actually have the capacity to pay those debts. So, to answer your question directly about whether or not we've made bad loans, the consumer today is in the best condition he has been in 20 years. His liquid assets are greater in relation to his debts than he's experienced in the last 20 years. The amount of his disposable income that he's allocating to the repayment of debt is the lowest that it's been in 20 years. It is not true that the consumer is overly burdened; it is not true that the creditors have, as you put it, just put this debt out there willy-nilly without regard to their ability to pay it.

LEHRER: Thank you. Robin?

MacNEIL: Now the views of an expert in bankruptcy law who opposes the amendments the consumer credit industry wants. He is Larry King, a law professor at New York University and a consultant to the New York law firm of Wachtell Lipton Rosen & Katz. Professor King, why is Mr. Evans' position wrong, in your view?Why do you oppose those amendment?

LARRY KING: Well, I guess essentially because they're not going to do any good in the first place; and the amendments themselves are very poor, in the second place, just in concept and in policy. Basically the threshold test that the group is advocating has been advocated now for more than 15 years. It started back in about 1964 through 1967. At that time a similar proposal did not even get out of subcommittee in the Congress. Now they're back in 1981-1982, I think basically because of a feeling that the political climate, especially in the Senate,is ripe for it. I don't think -- I would be very surprosed to hear a consumer who has filed a bankruptcy petition say to you that he is in the best position he has been in in the last 20 years.

MacNEIL: But what about the facts or statistics that Mr. Evans quotes, that one out of every four straight bankrupts has the means through future earnings or assets to pay his debts, but under the present law he doesn't have to?

Prof. KING: Well, I, first of all, will not accept the statistic. I don't think it's a valid statistic. I know the study that he referred to. I don't think that one can tell in such a study that a certain number of people who have filed bankruptcy petitions, if you take their income over the next five years or whatever period of time, would have sufficient income to pay all of their debts or 75% of their debts or 50% of their debts. I think that study, for example, predicted an unemployment rate of, say, 8.8% or something of that nature. Today that unemployment rate, as we know, is over 10% and climbing. The study would not take that into consideration. I think it's also interesting -- one thing that I learned since the study came out is that the director of this -- not the director, but the National Science Foundation, back in about 1976 was given the Golden Fleece Award by Senator Proxmire for awarding a study on consumer legislation to the same group because this group has been known to have a bias toward the credit industry. Frankly, I just would not accept that kind of a statistic. I don't think it's true.

MacNEIL: Do you agree that, however many may be availing themselves of it, the present law does permit people who theoretically could pay their debts to escape without paying them?

Prof. KING: We have had that same law for 80 years. This law of 1978 did not change anything at all in that respect that was in the Bankruptcy Act of 1898. So we are simply carrying forward with a tradition that we have had in this country for many, many years. This is nothing new.

MacNEIL: Do you think it's a good tradition?

Prof. KING: I think it is a very good tradition. We have a philosophy and a tradition in this country to give persons who are overburdened with debt an attempt at a fresh start, a new financial life. The hope is, of course, to make these people again productive members of the community. And it would be very improper, I think, to adopt a policy that would say, "No, you cannot get a discharge from your debts; you have to use your income to pay off your debts over the next five years." This is almost like in slave labor, if you will.

MacNEIL: What do you see as the solution to this impasse?

Prof. KING: I think that, with respect to the consumer debtor problem, the Bankruptcy Code of 1978 has cured some areas of abuse that existed in the past. I think the major impasse that we're fighting today is the court problem. I think that it is a shame that the National Consumer Finance Association, for example, has held this court bill hostage to the amendments that they want to see occur in the bill. I remember, I think it was in the June 29th edition of one of the New York City newspapers, where Mr. Evans was quoted as saying in referring to the Supreme Court decision, "It's manna from heaven." And I think the reason for that is obvious. I think the solution to the court problem is very simple, and there is only one solution. The Supreme Court has told us there is only one solution, which is that the bankruptcy court has to be made an Article III court. It's as pure and simple as that.

MacNEIL: Thank you. Jim?

LEHRER: Mr. Evans, was the Supreme Court decision manna from heaven for you all?

Mr. EVANS: Well, the reason for that remark is quite obvious. It meant that the House Judiciary would have to report out some legislation, and of course since the House Judiciary Committee is known, Jim, as you probably realize, as the Boot Hill of the legislature here in Washington -- it's more noted for not passing legislation than it is for passing legislation. We were hopeful when that bill came out that we would have an opportunity to take our bill, with its 280 co-sponsors in the House, and let the democratic process work its will and amend it on the House floor. Indeed, it's notable that the bill was never brought up on the House floor by Chairman Rodino. He attempted in the waning moments of the session to bring it up under suspension, but the leadership for some reason would not let him bring it up. And he was very incensed by that and I don't blame him. But he could easily have brought the bill up at any time by going to the Rules Committee and getting a rule.

LEHRER: Wasn't the same thing applying, though, in the Senate in reverse, that the sponsors of your bill wouldn't let the judge part come up unless the Senate agreed to hear the other part, too? So that's what caused the problem, in a nutshell.

Mr. EVANS: The Senate put together --

LEHRER: You wouldn't give and they wouldn't give.

Mr. EVANS: Well, there was a gridlock at the end; let's put it that way. Everybody had the chance to stop everyone else. But let me say this: even if we hadn't been there, and the issue of the judges came up by itself on the floor of either house, there would have been blood all over the floor, as the expression goes. A lot of senators who do not want Article III status and a lot of congressmen who're hiding behind the consumer credit amendments were quite glad to see us take the heat.

LEHRER: Judge Gandy, back to the judge issue. What about Mr. Morrison's suggestion that, say, 23 of the 220-some bankruptcy judges be declared Article III judges and let them handle the tough ones?

Judge GANDY: Well, in the first place, as I recall, there are some 94 judicial districts. If you add 23 Article III judges, you might have to have Houston judges flying up to Dallas to try the cases. The number would far too low. In the second place, his whole premise is based on the idea that there are only a small number of Article III problems in bankruptcy. That is totally false.In May and in June I surveyed all of the cases that were set in my court that had constitutional problems. Justice Brennan, in Northern Pipeline --

LEHRER: Excuse me.

Judge GANDY: -- said that the question was one of determining private rights, disputes --

LEHRER: Yeah, well, look, Judge, let me just --

Judge GANDY: -- well, I determined there were 86% of private rights disputes in my -- in my cases.

LEHRER: All right. Mr. Morrison?

Mr. MORRISON: This probably isn't the place to get into the unconstitutional ramifications --

LEHRER: Particularly with a minute left, it isn't.

Mr. MORRISON: I do want to say one last thing about the creditor aspect, and that is that, in addition to what Larry King said, there's an enormous problem of trying to administer a law which sets for five years your repayment schedule based on what your current income is now and what your expenses are. If your children have to go to the hospital or if, in my case, your muffler on your car breads down, that's not part of your schedule. And if you want to talk about overloading the bankruptcy courts and have bankruptcy judges running your payment schedules every week, Mr. Evans' bill would do precisely that.

LEHRER: Mr. King, let me ask you finally, do you see chaos in the next several weeks and months in the bankruptcy courts of this country?

Prof. KING: Yes, sir, I do.

LEHRER: Who is going to get hurt, if anyone?

Prof. KING: Well, I think creditors, debtors, employees, shareholders, government agencies -- have I left anybody out?

LEHRER: No, sir, you haven't.

Prof. KING: Okay.

LEHRER: All right, thank you. Robin?

MacNEIL: Yes, Judge Gandy, thank you for joining us in Dallas; Mr. Evans, Mr. Morrison, in Washington; Professor King, in New York. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.