Early Bankruptcy Procedure
Sporadically during the nineteenth century and consistently since 1898, the federal courts have exercised jurisdiction over bankruptcy proceedings and related cases. Beginning in 1973, the Supreme Court promulgated, and Congress approved, uniform rules of bankruptcy procedure. Prior to that, bankruptcy rulemaking varied depending on the bankruptcy statute in effect at the time. Neither of the first two bankruptcy acts—the unpopular and short-lived statutes of 1800 (repealed in 1803) and 1841 (repealed in 1843)—contained any provision for uniform rules. The former said nothing on the subject, while the latter permitted the U.S. district courts to make their own local bankruptcy rules, subject to review by the corresponding U.S. circuit court.
Congress enacted a third bankruptcy statute in March 1867, created, like the earlier laws, in response to widespread financial instability. The act of 1867 allowed for the first time the promulgation of uniform rules of procedure. Section 10 of the act gave the justices of the Supreme Court the power to issue general orders to regulate the practice and procedure of the bankruptcy courts; the duties of the officers of the courts; the fees and costs associated with bankruptcy proceedings; the procedure for appeals to the U.S. circuit courts; the filing and inspection of records; and any other matters necessary to carry the act’s provisions into effect. The act required the justices to report their general orders to Congress “from time to time,” but did not provide Congress with the authority to alter or veto them.
In response to the 1867 act, the Supreme Court formed a bankruptcy commission consisting of Chief Justice Salmon P. Chase and Associate Justices Samuel Nelson, Samuel Miller, and Noah Swayne. The commission worked quickly, and on May 16, 1867, the Court promulgated the General Orders in Bankruptcy, the first uniform set of bankruptcy procedural rules in the nation’s history. The General Orders contained thirty-three separate provisions covering matters such as the duties of clerks, the method of commencing proceedings, the filing of papers, the taking of testimony, the duties of assignees (those responsible for taking possession of the bankrupt’s property), the settlement of claims, and the disposal of property in order to satisfy the claims of creditors. The rules were strictly procedural and did not touch directly on the substantive rights and obligations of debtors and creditors, which were governed entirely by the statute. The Court made a few revisions and additions to the General Orders over the next several years, eventually expanding them to contain thirty-seven provisions, but the 1867 act to which they applied was repealed in 1878.
Procedure Under the Bankruptcy Act of 1898
The nation was again left without a federal bankruptcy law until the passage of the Bankruptcy Act of 1898, also known as the Nelson Act. The Nelson Act became the nation’s first long-lasting bankruptcy law, remaining in effect without major modification for the next eighty years. The act once again designated the U.S. district courts as courts of bankruptcy and also empowered the district judges to appoint referees in bankruptcy to carry out many of the act’s functions. Section 30 of the act once again provided for the promulgation of uniform procedural rules and permitted the Supreme Court to make “[a]ll necessary rules, forms, and orders as to procedure and for carrying this act into force and effect[.]” The Supreme Court promulgated a new set of General Orders in Bankruptcy on November 28, 1898, to be effective on January 2, 1899. The new orders were very similar in scope and content to the 1867 orders, and were again limited to procedural matters. The Court issued further orders adding to, amending, or repealing portions of the General Orders in Bankruptcy on seventeen occasions between 1905 and 1961.
The General Orders served a limited function, existing only to carry out the terms of the substantive bankruptcy law. As the Supreme Court recognized in Meek v. Centre County Banking Co. (1925), the Court’s power under section 30 of the 1898 statute was “plainly limited to provisions for the execution of the Act itself, and does not authorize additions to its substantive provisions.” In Meek, the Court held that the 1898 act did not allow some members of a partnership to file for bankruptcy without the consent of the others. General Order VIII appeared to contemplate such a filing, by outlining the procedure by which a nonfiling partner could resist a bankruptcy petition filed by other partners. The Court noted that the order in question had been copied from the General Orders made under the 1867 bankruptcy act, which had allowed for bankruptcy filings by fewer than all members of a partnership. Because the 1898 act contained no comparable provision, General Order VIII could not be applied to the act and was therefore “without statutory warrant and of no effect.”
The Advisory Committee on Rules of Bankruptcy Procedure
In 1958, Congress authorized the Judicial Conference of the United States (JCUS)—the national policy-making body for the federal courts—to “carry on a continuous study” of the rules of practice and procedure throughout the federal judiciary. As a result, the JCUS established a Standing Committee on Rules of Practice and Procedure. The Standing Committee was supported by five advisory committees, including the Advisory Committee on Rules of Bankruptcy Procedure, chaired by Judge Philip Forman of the U.S. Court of Appeals for the Third Circuit. Law professor and bankruptcy expert Frank Kennedy of the University of Iowa (and soon afterward of the University of Michigan) was appointed reporter for the committee.
The Advisory Committee’s first task was to propose an initial set of revisions to the existing General Orders in Bankruptcy to improve upon them and bring them into harmony with changes Congress had made to the bankruptcy laws. The Advisory Committee held a preliminary meeting in April 1960 and submitted its proposed revisions to the Standing Committee at the end of August. After circulating the draft to the bench and bar for comment, the Standing Committee sent it to the Supreme Court, which adopted the revisions in May 1961 to take effect in July.
As it worked on further revisions to the General Orders between 1961 and 1964, the Advisory Committee also contemplated the limited scope of the Supreme Court’s rulemaking power under section 30. At its January 1961 meeting, the members of the Advisory Committee discussed the fact that unlike the Federal Rules of Civil Procedure (FRCP), the General Orders in Bankruptcy did not require congressional approval. The civil rules, bearing the imprimatur of Congress, superseded all conflicting laws, including federal statutes. The bankruptcy rules, by contrast, had to remain consistent with existing law. The Advisory Committee recommended that Congress pass a statute authorizing the Supreme Court to promulgate bankruptcy procedural rules by the same method used for the civil rules. The statutory language the Advisory Committee proposed mirrored the Rules Enabling Act of 1934, concluding with the provision: “All laws in conflict with such rules shall be of no further force or effect after such rules have taken effect.” Likewise, the proposed law contained the Rules Enabling Act’s command that the rules “neither abridge, enlarge, nor modify the substantive rights of any litigant.”
Warren Olney III, the director of the Administrative Office of the U.S. Courts, wrote to Speaker of the House Sam Rayburn on behalf of the JCUS in May 1961 to formally recommend the legislation to Congress. A bill was introduced a week later and reported favorably by the House Judiciary Committee, which pointed out that because the General Orders in Bankruptcy had to remain consistent with the Bankruptcy Act, Congress had to pass a statute every time it wanted to make a procedural change. Giving the Supreme Court more rulemaking authority would relieve Congress of this burden. A more comprehensive set of bankruptcy rules would create more uniformity in procedure as well. The limited scope of the existing General Orders left bankruptcy referees to fill in the gaps with their own practices, which could vary greatly. The General Orders’ 1939 mandate to follow the FRCP “as near as may be” helped somewhat, but referees frequently disagreed about the applicability to bankruptcy proceedings of certain civil rules. The bill recommended by the JCUS quickly passed the House, but it died in the Senate after Senator Sam Ervin introduced a bill that would have required all rules amendments to lie with Congress for a year (as opposed to the 90-day period the Rules Enabling Act had specified since 1950) before taking effect. Ervin’s bill did not pass, however.
Another bill with the same language was introduced in 1963 after the JCUS reiterated its request for the legislation. Once again, the House quickly passed the bill, and the following year, the Senate followed suit. President Lyndon B. Johnson signed the bill into law on October 3, 1964. Section 30 of the Bankruptcy Act was repealed, but all General Orders promulgated under it remained in force. In response to the new legislation, the Advisory Committee began general discussions at its November 1964 meeting about the formation of new bankruptcy procedural rules. The members agreed that the Bankruptcy Act, the existing General Orders in Bankruptcy, and the FRCP would serve as starting points for the new rules. Another topic of discussion was whether the Advisory Committee should avoid covering certain areas for fear of overstepping its bounds and encroaching on congressional prerogatives.
The 1973 Bankruptcy Rules
The process of making an entirely new set of bankruptcy procedural rules was a long and arduous one. The first portions of the new rules did not come into effect until October 1973—thirteen years after the Advisory Committee was formed and nearly a decade after Congress expanded the Supreme Court’s rulemaking authority. The Bankruptcy Act contemplated several different types of bankruptcy, which complicated the Advisory Committee’s efforts, because the members felt that there should be some rules particular to each. The Advisory Committee decided to begin by formulating procedural rules for Chapters I through VII of the Act, which covered liquidation, also known as “straight bankruptcy.” Liquidation entailed the debtor turning over its nonexempt property to the bankruptcy court, the sale of that property by a trustee, and the use of the proceeds to pay the claims of creditors in the order provided by law.
The Advisory Committee labored over the rules for the next seven years, meeting for three or four days in Washington, D.C., twice per year to review proposed drafts. Lawrence P. King, who was appointed associate reporter in 1968, remembered that the Advisory Committee “studied each draft rule carefully and minutely, going over each word and mark of punctuation to make sure that the rule said what it was meant to say and, to the extent human minds can work to avoid such things, carried no ambiguous interpretation with it.” In March 1971, the Advisory Committee published a preliminary draft of the Chapter I–VII rules, asking the bench and bar to submit comments by April 1972. After receiving and reviewing comments (which did not result in major changes), the Advisory Committee forwarded its draft to the Standing Committee, which in turn sent it to the full JCUS. The JCUS approved the rules at its fall 1972 meeting and sent them to the Supreme Court. The Court voted on April 24, 1973, to approve the rules, forwarding them to Congress on the same day. Congress did not exercise its veto power over any aspect of the rules, and under the Supreme Court’s order, the Bankruptcy Rules and Official Bankruptcy Forms took effect on October 1, 1973.
The Chapter I–VII rules contained 183 separate provisions grouped into nine parts. Part I covered the petition for bankruptcy; Part II the administration of the bankrupt estate; Part III creditors’ claims and distributions to creditors; Part IV the duties and benefits of the bankrupt; Part V the courts of bankruptcy; Part VI the collection and liquidation of the estate; Part VII adversary proceedings; Part VIII appeals to the district court; and Part IX general provisions. Many of the rules in Part VII explicitly incorporated the FRCP and were numbered correspondingly to the civil rules rather than consecutively. For example, Rules 704 and 705, on service of process and service of pleadings, respectively, incorporated FRCP 4 and 5, which covered the same topics. In addition to promoting uniformity and simplicity, the incorporation of the civil rules was designed to facilitate participation in bankruptcy litigation by a wide range of attorneys as opposed to a small and insular group of bankruptcy specialists. The rules were accompanied by thirty official bankruptcy forms for the use of counsel.
The new rules divided bankruptcy litigation into two categories—adversary proceedings and contested matters—each with its own set of procedures. Adversary proceedings consisted of actions to recover money or property, to determine lien rights, to object to a discharge of debt, or to obtain an injunction. These proceedings were conducted with more formality, beginning with a summons and a complaint, with an eye toward making them more similar to other types of civil litigation. Contested matters, such as an objection to a trustee’s report on the exemption of certain of the debtor’s property or an objection to a creditor’s proof of claim, were handled less formally and were typically initiated by motion.
Another significant innovation was to expand the judicial aspects of the office of referee in bankruptcy to enhance the status of the position and ensure a high-quality applicant pool. Reflective of referees’ higher status was the rules’ reference to them, for the first time, as “bankruptcy judges.” Moreover, Rule 102(a) provided for bankruptcy cases to be referred automatically to the bankruptcy judge, overriding a provision of the Act that permitted a district judge to direct otherwise. Whereas the JCUS had issued a resolution in 1960 stating that referees should not conduct jury trials, Rule 115(b) allowed bankruptcy judges to do so unless a party demanded a trial before a district judge. Rule 810 also provided for district judges to give more deference to orders issued by referees when reviewing them on appeal. The rule omitted a provision allowing district judges to hear additional evidence and made it more explicit that referees’ findings of fact were to be accepted on appeal unless they were “clearly erroneous.”
Perhaps the most controversial expansion of the referees’ authority was found in Rule 920(a), which empowered the referees to issue fines of up to $250 for civil or criminal contempt of court. Any penalty more severe would require approval by a district judge. The grant to referees of the contempt power formed the basis for Justice William O. Douglas’s dissent from the Supreme Court’s order approving the new rules. The only justice to dissent, Douglas found the change to be an “alarming” extension of a power that he felt should be closely confined. Douglas also objected to the rulemaking process generally, pointing out that the Court was “merely the conduit for the Rules,” and lacked sufficient expertise to judge their desirability. In his view, the law should have allowed the JCUS to submit the rules directly to Congress without involving the Court.
In 1968, while it was in the midst of drafting the rules for Chapters I–VII of the Bankruptcy Act, the Advisory Committee appointed two associate reporters, Professor Lawrence King of New York University Law School and Professor Vern Countryman of Harvard Law School, to begin work on rules for other chapters providing for different types of bankruptcies (often called “debtor relief” provisions, because they did not involve liquidation). Countryman was assigned Chapter XIII, which provided for wage-earner plans (later called rehabilitation). This chapter allowed some debtors who received income to establish a plan to pay off at least some of their debts without having to liquidate their estates. King was to begin drafting rules for Chapter X on corporate reorganizations, Chapter XI on corporate arrangements, and Chapter XII on real property arrangements by parties other than corporations. Among the possible forms reorganization could take were the sale or transfer of some of the corporation’s property to another corporation; a merger with another corporation; changes in the terms of existing securities; and the issuance of new securities for cash, property, or the settlement of claims. Arrangements, by contrast, were equivalent to the wage-earner provisions of Chapter XIII, involving plans for the settlement of debts without liquidation or structural changes to the bankrupt entity. In contemplating procedural rules for these chapters of the Bankruptcy Act, the Advisory Committee decided at the outset that the rules for Chapters I–VII would be incorporated by reference where applicable to avoid repetition.
Work on the Chapter XIII rules went relatively quickly, and they were approved by the JCUS and then the Supreme Court at the same time as the rules for Chapters I–VII, also becoming effective on October 1, 1973. The Chapter XIII rules were divided into nine parts that paralleled the organization of the Chapter I–VII rules. Parts VII, VIII, and IX (on adversary proceedings, appeals, and general provisions, respectively) were brief, as they incorporated by reference the same-numbered parts of the Chapter I–VII rules. Among the new features of the rules were a provision for a joint bankruptcy petition by a husband and wife, if both were otherwise eligible to file under Chapter XIII, and a requirement that secured creditors file their claims on or before the first meeting of the creditors. The latter provision carried significant implications for creditors, because if they failed to file on time, their claims would not be treated as secured for the purposes of voting on a wage-earner plan (secured creditors had veto power) or for receiving distributions under the plan.
The rules for Chapter XI on corporate arrangements followed close on the heels of the others. They were promulgated by the Supreme Court and forwarded to Congress in March 1974, taking effect on July 1 of that year. A particularly important improvement was Rule 11-15, which governed the conversion of a Chapter XI case into a corporate reorganization under Chapter X. In the past, the Securities and Exchange Commission (SEC) frequently moved for such a conversion late in the process, resulting in a waste of time and resources in creating a Chapter XI plan that would not be confirmed. The new rule allowed a debtor to move for a conversion at any time, but required the SEC or any other party in interest to do so within 120 days of the first creditors’ meeting. Further expediting the process, the referee in bankruptcy could rule on a motion for conversion, whereas the district judge had been required to do so under the Bankruptcy Act.
Some controversy ensued when it came time for the Standing Committee to approve draft rules for Chapter X. The SEC, under then-chair William O. Douglas, had played a significant role in drafting the chapter on corporate reorganizations, which was enacted as part of the Chandler Act of 1938. When the Chapter X procedural rules were circulated for public comment in December 1972, the SEC submitted a report to the Advisory Committee that was highly critical of the proposed rules. While the report made objections to specific rules that were designed to enhance the supervisory authority of the bankruptcy referee relative to the district judge, the SEC’s “basic premise,” in King’s words, “was that Chapter X Rules should not be promulgated at all.” The Advisory Committee did adopt some changes based on the SEC’s comments, and the Standing Committee directed the Advisory Committee to make further revisions. Despite these efforts, when the Supreme Court received the draft rules in 1975, the SEC lobbied the Court not to promulgate them. The Court nevertheless did so in April 1975, over the usual objection by Justice Douglas that the Court was not qualified to prescribe specialized procedural rules. At the same time, the Court promulgated a short and uncontroversial set of Rules for Chapter XII, regarding arrangements of debts secured by real property owned by noncorporate debtors.
The final two sets of rules the Advisory Committee drafted to complete the package were those for Chapter VIII (often referred to as § 77), on railroad reorganizations, and Chapter IX, on municipal bankruptcies. Walter Taggart, a professor at Villanova Law School who had served as a law clerk to U.S. District Judge John Fullam of the Eastern District of Pennsylvania (who oversaw the reorganization of the Penn Central Railroad) was appointed associate reporter to draft the Chapter VIII rules. King was assigned Chapter IX. The Chapter IX rules encountered a complication when they had to be amended at the very last minute. New York City was undergoing a severe financial crisis in the mid-1970s, and many feared the city would go bankrupt. The existing Chapter IX of the Bankruptcy Act, however, was not designed for a city as large as New York, because any bankruptcy plan required the approval of a majority of the city’s shareholders, a clear impossibility in such a metropolis. Congress made statutory modifications to the chapter to make the filing requirements more liberal for larger cities, and those changes became law in April 1976. The JCUS had already approved the draft Chapter IX procedural rules and submitted them to the Supreme Court for its approval. In the interest of time, the Advisory Committee considered appropriate rule changes by mail rather than by holding meetings, and a revised set of rules that were in harmony with the new statute was quickly forwarded to the Court to replace the prior set. The Court promulgated those rules, as well as those for Chapter VIII, on April 26, 1976, to be effective on August 1 of that year. With this, the Advisory Committee had completed its mission.
Perhaps owing to the fact that the bankruptcy bench and bar had been granted ample opportunity to comment on the proposed procedural rules, they did not engender a great deal of controversy once they had been promulgated. Many judges, scholars, and attorneys published articles explaining the new rules and highlighting some of the more significant ways in which they changed bankruptcy procedure in order to guide their colleagues. Some were optimistic that the rules would improve the speed and efficiency of the bankruptcy courts. Bankruptcy Judge William Leffler of the Western District of Tennessee, for example, wrote that “[i]t is almost unanimously agreed upon by those who administer the [Bankruptcy] Act that the procedural changes have been long overdue.” The articles were nearly devoid of normative analysis of the rules, however. One exception was an article by Louis Levit, an experienced bankruptcy lawyer from Chicago who chaired several different bankruptcy practitioners’ committees. Levit pointed out that while the rules were supposed to address only procedural matters, “[t]he line of demarcation between substance and procedure is, of course, not easily drawn, and there are instances where many will conclude that substantive rights are in fact being affected.” Levit gave as examples a provision permitting the court, rather than creditors, to appoint a successor to a deceased trustee, and provisions assigning the burden of proof for objections to a trustee’s exemption report or to the discharge of a debt. While Levit found these rules questionable, he stopped short of deeming them inappropriate.
The Rules Since the Bankruptcy Reform Act of 1978
While the Advisory Committee was busy drafting new sets of bankruptcy procedural rules during the early to mid-1970s, Congress was hard at work as well, drafting an entirely new bankruptcy act. In 1970, Congress established the Commission on the Bankruptcy Laws of the United States to examine the bankruptcy system and recommend improvements. The Commission’s report, issued in 1973, was based in large part on a 1971 study by the Brookings Institution, a Washington, D.C., think tank. After several years of legislative debate, Congress passed the Bankruptcy Reform Act of 1978, commonly known as the Bankruptcy Code.
The Act’s biggest innovation was to expand the power of bankruptcy judges significantly, giving them exclusive jurisdiction over all cases arising under the bankruptcy laws as well as original, but not exclusive, jurisdiction over “all civil proceedings arising under” the bankruptcy laws or “arising in or related to” a bankruptcy case. The bankruptcy judges were to constitute the bankruptcy court for their district, which was to serve as an “adjunct” to the district court, and were to be appointed to fourteen-year terms by the President with the advice and consent of the Senate. While the Act did not create an administrative agency within the executive branch, as the Commission’s report had recommended, it did establish the U.S. Trustee Program within the Department of Justice to oversee some administrative aspects of bankruptcy. The new bankruptcy courts were to begin operations on March 31, 1984, with the existing bankruptcy judges exercising the Act’s expanded jurisdiction during a transition period.
It was clear that new procedural rules would be needed to conform to the new legislation. Congress, however, having written an entirely new bankruptcy code, did not want its work to be altered through the rulemaking process. Accordingly, the 1978 Act revised the statute governing the Supreme Court’s rulemaking power, removing the language stating that procedural rules promulgated by the Court would supersede any inconsistent statutory provisions. To allow a wide scope for rulemaking, however, the new bankruptcy act omitted procedural matters for the most part. Because the original Advisory Committee was no longer in operation, Chief Justice Warren Burger established a new one on January 1, 1979, chaired by Judge Ruggero Aldisert of the U.S. Court of Appeals for the Third Circuit. Although the Act left the existing bankruptcy rules in place until new ones could be promulgated, the new Advisory Committee quickly drafted a set of interim rules to fill gaps left by the existing rules. To speed the process, the JCUS sent the interim rules directly to the U.S. district courts, recommending their adoption as local rules, rather than utilizing the lengthy Supreme Court rulemaking procedure.
The Advisory Committee then turned its attention to writing a new set of procedural rules, all of which had to be consistent with the 1978 Bankruptcy Code. When a draft was completed in April 1982, the Advisory Committee held public hearings in San Francisco, New York City, and Chicago, in addition to receiving comments by mail. After being approved by the Standing Committee, the JCUS, and the Supreme Court, the new bankruptcy rules became effective on August 1, 1983. The new rules did not vary dramatically from their 1970s predecessors, but they were organized differently. They were divided into ten parts corresponding to various aspects of bankruptcy procedure (mirroring the nine-part organization of the old Chapter I–VII rules, with a Part X added to cover a temporary U.S. trustee pilot program), but unlike the former rules, they were not divided into chapters. Their official title remained the Bankruptcy Rules until 1991, when they were retitled the Federal Rules of Bankruptcy Procedure. Reception of the new rules by the bankruptcy bench and bar mirrored that of the earlier rules. While the transformation of bankruptcy brought about by the 1978 code generated a great deal of discussion and debate, most examinations of the accompanying rules were limited to technical analyses of their expected effect on day-to-day practice in the bankruptcy courts.
While the rulemaking process was underway, the 1978 Act was already running into trouble. When Congress was crafting the new code, one of the main points of contention was whether or not to create bankruptcy judgeships that were accorded Article III status, meaning tenure during good behavior and protection against a reduction in compensation. The opponents of such a move, which included Chief Justice Berger, won the day, and bankruptcy judges remained Article I judicial officers serving for limited terms. (When reconstituting the Advisory Committee, Burger excluded several members of the predecessor body, allegedly because of their advocacy of Article III bankruptcy judgeships.) In 1982, the Supreme Court held in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. that the Act’s grant to non-Article III judges of “the essential attributes of the judicial power” was unconstitutional. The Advisory Committee felt that no immediate changes to the draft procedural rules then under consideration were needed, because those rules did not directly address the jurisdiction or authority of the bankruptcy courts.
Despite a renewed call for Article III bankruptcy judges, the Bankruptcy Amendments and Federal Judgeship Act of 1984, enacted to respond to the Northern Pipeline decision, made no such provision. Instead, the statute defined certain matters as “core” bankruptcy proceedings over which the bankruptcy judges would have full jurisdiction, and others as “non-core,” in which bankruptcy judges were limited to the submission of proposed findings of fact and conclusions of law to the district court. The statutory changes enacted in 1984 required amendments to, but not an overhaul of, the rules of bankruptcy procedure. The bankruptcy rules were amended frequently thereafter, however, with particularly extensive revisions occurring in 1987, 1991 (which included the elimination of Part X), 2008, and 2009. Most of the amendments were adopted by the Supreme Court under the usual rulemaking procedure, but Congress amended the rules by statute several times as well.