Statement Of The American Bankruptcy Institute Before A Joint Hearing Of The House Subcommittee On Commercial And Administrative Law And The Senate Subcommittee On Administrative Oversight And The Courts On Bankruptcy Judgeship Needs Prepared for the American Bankruptcy Institute
 

Chairman Grassley, Chairman Gekas and members of the joint subcommittees, I am Ford Elsaesser, the President of the American Bankruptcy Institute (ABI). I am a senior partner with the Sandpoint, Idaho firm of Elsaesser, Jarzabek, Anderson, Marks & Elliott where my practice is primarily in the areas of commercial and bankruptcy litigation, corporations, partnerships and rural electric cooperatives. I am also the bankruptcy panel trustee for chapters 7, 11 and 12 in the District of Idaho and the Eastern District of Washington, handling 1,100 cases per year. As a speaker at numerous regional and national educational programs around the country, my perspective on bankruptcy is national in scope.

As you know, the ABI is the nation's largest multi-disciplinary organization devoted to research and education on issues related to bankruptcy and insolvency. Founded in 1982, ABI is non-profit and non-partisan. Our more than 6,800 members span the entire spectrum of bankruptcy professionals: attorneys for both creditors and debtors in individual and commercial cases, judges, accountants, lenders, trustees, credit managers, turnaround professionals, academics and others.

Importantly, the ABI is not a lobbying organization and we do not advocate positions before Congress, although we regularly appear before these subcommittees and other committees of Congress. We have historically supported legislation that affects the administration of justice in the bankruptcy system, such as regarding the salaries of bankruptcy judges, or to provide for judicial retirement benefits, and to increase the number of judges where needed and appropriate. We appeared most recently in support of more judgeships in June, 1997 and December, 1995.

We are pleased to appear again today to provide our views on the Judicial Conference's request for 24 additional bankruptcy judgeships, including 18 now contained in the bankruptcy reform bills (H.R. 833 and S. 625) and six additional positions (District of Puerto Rico, District of Delaware, District of Maryland, Eastern District North Carolina, Southern District of Florida, and Middle District of Georgia, to be shared with the Southern District of Georgia) recommended by the Conference in March 1999.

The ABI applauds the work of the Judicial Conference of the United States for its continued careful assessment of the workload burdens of the bankruptcy courts, and for its prudent recommendations for additional judgeships. Congress last authorized new bankruptcy judgeships in 1992. The Judicial Conference sent recommendations for additional judgeships to Congress in 1993, 1995, 1997 and earlier this year. Each time, the Conference has reassessed its prior recommendations to ensure that the need continues to be demonstrated.

The formal process of the Bankruptcy Committee of the Conference is elaborate, taking into account not only a weighted caseload formula developed by the Federal Judicial Center (generally requiring more than 1,500 weighted filing per judge) but also on-site surveys and other factors not captured by a mere numerical formula. While the focus has been on the formula as an objective measurement, the results from the use of the formula are never dispositive. Some districts that exceed the 1,500 weighted case filings are not recommended for more judges because those courts believe they can handle the additional workload.

Filing Trends in Perspective

As these subcommittees are too well aware, the pending judgeship request comes in the wake of an explosion in bankruptcy filings during much of the 1990's, with total new cases peaking in 1998 at over 1.4 million. Your subcommittees have heard much testimony over the last few years about the apparent paradox of record bankruptcies during "the best economy in a generation," in the words of President Clinton. During the '90s, consumers have dominated the national economy, accounting for two-thirds of our gross domestic product. High rates of employment, household wealth and consumer confidence have coexisted with record levels of household debt as a share of after-tax income. For the first time, the rate of personal savings is negative. Bankruptcy filings have grown in virtual lock-step with an increase in family debt burden, from both home mortgages and installment debt.

Most recently, as consumers' non-mortgage debt burden has stabilized (in the wake of sustained low interest rates and intense competition in the consumer credit markets), we have seen a leveling off and even a decline in personal bankruptcies. The U.S. per capita personal bankruptcy rate dropped by 17.5 percent from the fourth quarter of 1998 to the second quarter of 1999. Certain economic factors suggest that this decline will continue in the near term.

Using a year-end of June 30, filings for the 12-month period ending in 1999 were 1,391,964. In comparison, 1,429,451 new cases were filed for the 12-month period ending in 1998. Although filings have declined this year, the number of new petitions filed represent a 62.2 percent increase over the same period ending in 1995.

Workload Impact

As these subcommittees know, the focus cannot be entirely on total case filings as not all cases result in the same workload for a judge. The vast majority of cases are consumer filings. Since 1993, consumer (non-business) cases have accounted for an increasing percentage of total bankruptcies, peaking at 97 percent this year. These cases typically require less time of a bankruptcy judge. Unless there is an adversary proceeding brought by a creditor, or a motion to convert the case brought by the trustee, most of these cases now involve very little work by the judge.

However, the pending requests should be considered in light of the significant changes to the consumer bankruptcy laws proposed by H.R. 833 and S. 625. Consumer bankruptcy cases which now involve relatively little or no judge time will likely account for a greater workload if either of these bills become law. Attached to my statement is an excerpt from a comprehensive, new analysis completed last week by Hon. Eugene R. Wedoff, a bankruptcy judge in Chicago and the Co-chair of the ABI Consumer Bankruptcy Committee. Judge Wedoff's analysis identifies several discrete areas of ambiguity in the application of the means test found in H.R. 833, where parties and the trustee will be forced to litigate new issues. Beyond the means test, there exist an array of other changes to current law that will require satellite litigation before the bankruptcy judge. These areas include reaffirmations, broadened exceptions to discharge, credit counseling requirements, and more.

As a Chapter 7 trustee, I can state that under the proposed changes, there would be a substantial increase in consumer bankruptcy litigation, even if there is a corresponding decline in filings due to the "disincentives" to file found in both H.R. 833 and S. 625. Ironically then, consumer bankruptcy cases that heretofore rarely reached a bankruptcy judge, will now occupy more judicial time.
Neither will the reform legislation's proposals in the business bankruptcy area lessen the workload faced by bankruptcy judges. It is clear that business cases often involve numerous parties, creditors and collateral litigation over complex issues. These cases have a workload impact far beyond their numbers. The pending bills make few changes designed to lessen this workload. In part due to the healthy national economy, business cases have declined. In the year ending June 30, 1998, there were 39,934 new business cases, down from 50,202 a year earlier. Chapter 11 filings in particular have dropped sharply in recent years, from 13,221 in 1995, to 12,859 in 1996, to 11,159 in 1996, to 9,613 in 1998 and 8,684 last year.

There is concern, however, that a rise in Chapter 11 filings could occur just around the corner. Federal bank regulators have issued repeated warnings in recent months about credit quality and concern over underwriting standards for commercial loans. Bond defaults are rising. Sectors including health care (nursing homes and hospitals) and retail are seeing growth in the number of financially-troubled entities. Health care bankruptcies, in particular, are very judicial time intensive.

Requests for Resources Should be Scrutinized

While it is important to meet the legitimate resource needs of the courts, we agree with Chairman Grassley that the judiciary bears the burden of demonstrating the need for new judgeships. We applaud Chairman Grassley's healthy skepticism toward an ever-growing federal bench, especially a the appellate level. It is also important to realize that the Third Branch of government, including the bankruptcy courts, is not immune from oversight into its use of current resources. No request for more resources should be approved by Congress without an assessment that the current judges are being used in the most efficient manner. We note, however, that the Bankruptcy Committee has consistently recommended fewer permanent and more temporary judgeships than requested by the Circuit Councils.

Limiting judgeship requests to the number necessary is important because each bankruptcy judgeship costs about $721,000 to establish and about $575,000 per year to maintain, according to the General Accounting Office. At the same time, it is important that there are sufficient judgeships to enable the bankruptcy system to operate fairly and efficiently. We believe the Judicial Conference, through its Bankruptcy Committee, has struck the appropriate balance in the pending requests.

Cost Saving Mechanisms Should be Pursued

One cost-conscious innovation we support is the use of temporary judgeships. Eleven of the 24 new positions would be designated as temporary. This provides Congress with a periodic opportunity to assess the continued need for these positions. Converting temporary judgeships to permanent positions should occur only when the long-term need is clear.

There are a number of other cost-saving innovations that should be further promoted, including more and better case management techniques, greater use of automation in the bankruptcy courts, expansion of the use of visiting judges both intra-circuit and inter-circuit, more use of recalled and retired judges, temporary law clerks and other ways to match the existing resources with current need. These devices are especially important in managing complex business cases. We encourage the Judicial Conference and the Administrative Office of the Courts to continue to work to find ways to better equalize the workload of judges.

We thank the Subcommittees for inviting ABI to participate in today's hearing and we look forward to assisting you and your staff in any way you find helpful. I would be pleased to answer any questions you might have.