A Brief History of Bankruptcy Law

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Having studied and researched, and written and spoken on, bankruptcy issues ad nauseam for more than three decades, I have traced the etymology, scope, and evolution of modern U.S. bankruptcy laws and practice as follows:

1) The term "bankruptcy" originates from the Italian banca rotta, derived from Latin and translated as "broken bench." This derivation is traced to medieval days when a sign of a merchant's or money changer's insolvency was his broken stand in the marketplace. In Italy, money dealers worked from tables, or benches. When a money dealer ran out of money, his table (or bench) would be broken, and he could no longer deal money; hence the development of the use of banca rotta. The description had its French equivalent, banqueroute, and then made its way into the English language in the mid-1500s. The term was used both as a figure of speech, as well as a literal definition to describe what happened to some unfortunate folks.

2) Early English bankruptcy laws were designed to assist creditors in collecting a debtor's assets, not to protect the debtor or discharge (forgive) the bankrupt's debts. The Bankruptcy Clause of the U.S. Constitution reflects this pro-creditor purpose. (In fact, debtor's prisons existed in many states well into the eighteenth century.) Like other provisions of the Constitution, the bankruptcy power granted in the U.S. Constitution was designed to encourage the development of uniform laws governing commerce in the United States and to alleviate the excesses of perceived pro-debtor state legislation that existed under the earlier Articles of Confederation.  Bankruptcy law stems from U.S. Const. art. 1, § 8, cl. 4. which empowers Congress to establish “uniform [l]aws on the subject of Bankruptcies throughout the United States.”

4) Congress overhauled the system in 1978 by adopting a new federal bankruptcy statute (Bankruptcy Code) in response to perceived abuses in the 1960s and early 1970s. The Bankruptcy Code was further amended by the Bankruptcy Reform Act of 1994 (Reform Act). The Reform Act made several significant changes to the Bankruptcy Code, affecting both consumer and business bankruptcies, and benefitting both debtors and creditors.

5) The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was explicitly designed by Congress to make it more difficult for debtors to file a Chapter 7 Bankruptcy—under which most debts are forgiven (or discharged)--and instead required them to file a Chapter 13 Bankruptcy--under which the debts they incurred are discharged only after the debtor has repaid some portion of those debts. The BAPCA constituted the most extensive revision of the Bankruptcy Code since 1978. The goal of the Act was to streamline the Bankruptcy Code, speed up proceedings, limit abuses, and “level the playing field.” Approximately half of the Act’s provisions dealt with business, not consumers, and at least 21 provisions related in some manner to real estate.

 6) The BAPCA, which contained more than 500 pages of legislation, did not contain any radical changes to the Bankruptcy Code with respect to its effect on commercial real estate transactions. But it did clarify several issues that were the subject of different interpretations and conflicting federal court decisions. The BAPCA also addressed some of the perceived abuses that were brought to light as the result of the filings of the largest business bankruptcies in history (including Enron and WorldCom). Some of the changes also limited the flexibility and discretion of bankruptcy courts to extend the time periods granted to debtors to approve or reject leases and formulate a plan.

7) For information on the U.S. bankruptcy system in general, see the following excerpt from the author’s article entitled The Lender’s Guide to Single-Asset Real Estate Bankruptcies, 31 Real Prop. Prob. & Tr. J. 393, 401, 403 (Fall 1996), as updated in 1 The Law of Distressed Real Estate, Foreclosure, Workouts, Procedures, Ch. 24 (2008):

 8) The federal bankruptcy system consists of four levels of courts. The first level contains the federal bankruptcy courts. Each state has one or more federal judicial districts. For example, New York has a Southern District and a Northern District, Illinois has a Southern District and a Northern District, Pennsylvania has an Eastern District and a Western District, Massachusetts has only one district, and California has four or more districts. Local bankruptcy judges are nominated by judicial conference, which is a panel of their peers and are appointed by the United States Courts of Appeals for fourteen year terms. Bankruptcy court decisions may be appealed to the United States district courts, or to a bankruptcy appellate panel (BAP) in circuits with BAPs, and thereafter to the United States Courts of Appeals. Finally, the cases may be appealed to the United States Supreme Court.

 9) Most bankruptcy judges state that they are bound only by decisions that have been handed down by the United States Supreme Court and their respective circuit court of appeals. Cases from other circuit courts, from other district courts, and even from other bankruptcy courts within the same district, may be persuasive, but are not binding on bankruptcy judges. In most courts, bankruptcy judges are assigned cases randomly, with one case rotating to each judge as the cases are filed.

 10) The second level of the federal bankruptcy system consists of the United States district courts. There is one district court for each federal judicial district. District court judges hear civil and criminal cases that are filed in their courts, and only a small percentage of their time is spent on bankruptcy appeals. Where the circuit has instituted a BAP consisting of three bankruptcy judges from the circuit, the district courts are replaced as the first level of bankruptcy appeals. To date, only the Ninth Circuit has established a BAP. The Reform Act requires that all circuits establish a BAP unless there are insufficient resources to do so. The Act further provides that a bankruptcy judge serving on a BAP may not hear an appeal that originated in the district for which such judge is appointed or designated. All parties must consent to a BAP appeal. Thus, a party may elect to appeal to the district court and bypass the BAP.

 Finally, the federal bankruptcy system consists of twelve United States courts of appeals, including the D.C. Court. A party can apply to any court of appeals in its circuit as a matter of right, but further appeals to the United States Supreme Court are, of course, discretionary.

 

 

 

Jack Murray
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