The Changing Face of Bankruptcy Litigation
Bankruptcy litigation has changed substantially since enactment of the Bankruptcy Reform Act of 2005 (the "Act"). Since the Act became effective commercial bankruptcy litigation has focused on recovery of claims due to the debtor, avoidance of transfers made by the debtor, objections to claims against the debtor, and valuation of assets/adequate protection or secured claims. Even this litigation is somewhat limited because recovery and transfer avoidance proceedings for small amounts also must be brought in the defendant's federal judicial district. Claim objections, large avoidance proceedings, proceedings to recover a debtor's claims against others not started before the petition, and valuation/adequate protection proceedings are brought in the bankruptcy court presiding. These proceedings are central to the bankruptcy purposes of protecting one creditor (or group) from another creditor (or group) and all creditors from the debtor.
Although the number of fact-finding trials in commercial cases is decreasing, the legal and factual complexity of the cases tried or decided is increasing. The likely outcomes on the less complex factual and legal issues are more likely to be recognized and settled without any litigation or much less extensive litigation than in the past. The more complex cases tend to be more intensively and carefully litigated than was typical in the past.
One amendment in the Act has created an entirely new type of litigation, disputes involving sales of tangible property to a commercial debtor within 20 days of filing of the debtor's petition which may be entitled to administrative priority under §503(b)(9) of the Bankruptcy Code. (Administrative priority is the highest priority for unsecured claims.) This amendment has created much difficulty in administering Chapter 11 plans and obtaining plan confirmation. Administrative claims must be "cashed out" on confirmation. Many courts are wary about approving any action or steps outside a debtor's usual course of business before confirmation if the debtor is viewed as having more administrative claims than unencumbered assets (or, even more restrictively, than cash). The perception of administrative insolvency may cause a case to fail that previously could achieve confirmation.
Valuation and adequate protection is moving away from experts who are permitted to testify, in essence, "It is worth $__________. Trust me. I am an expert," to a more process-driven analysis of what costs must be incurred to achieve what return, over what time in all the surrounding facts and circumstances. This more careful analysis requires a much higher level of sophistication on the part of all parties and participants in the process in accounting, economics, process analysis, and realities of the business cycle of a business and the life cycle of property of the type valued.
Bankruptcy Consumer Litigation
Consumer-related bankruptcy litigation has also changed under the Act. The Act focused on preventing abuses brought to Congress's attention. Litigation, therefore, became much more focused on: a) the debtor complying with the intricacies of the bankruptcy process at all points in the case (regardless of whether the non-compliance impairs anything of value to creditors); b) identifying debtors who can or possibly can make meaningful payments to creditors as a group; c) identifying debtors who have failed to disclose all assets; d) identifying claims of exemptions that exceed the permissible exemptions; e) identifying debtors who have engaged in conduct that is prejudicial to creditors and should not be relieved of a debt or all debts; f) identifying debtors (and property) who have transferred property that can or should be recovered; g) insuring that debtors in payment plans are paying all that can and should be paid; and h) identifying improper or abusive claims that prejudice other creditors.
A second area of consumer-related bankruptcy litigation is obtaining (or resisting) motions to allow a creditor to continue litigation against a debtor or a debtor's property, for example, to complete a mortgage foreclosure. This often comes down to whether "cause" for obtaining authority has been obtained.
A third area of consumer-related bankruptcy litigation is the trustee's efforts to recover property for the estate and disputes concerning settlement of claims by the trustee, especially litigated claims against third parties.
As with commercial claims, the complexity of the legal issues and surrounding facts is increasing. The Act created a host of new rules, often drafted imprecisely. Some of the disputes have been litigated vigorously and resolved by appellate courts, for example, the so-called "910 claims" or "hanging paragraph" of §1325(a) concerning financing for vehicles purchased by a Chapter 13 debtor within 910 days of the debtor's petition. Other issues remain undecided with decisions from every point of view possible.
Bankruptcy litigation, as a whole, requires knowledge of the Code and Act, much formal education, much experience, and great flexibility.