Mr. SESSIONS. Madam President, we are talking about financial reform. There is a lot of attention and a lot of the Members of the Senate are trying to keep up with it and trying to make sure we create a reform package that effectively deals with corporations that have so mismanaged their business that they need to be dissolved or broken up or liquidated, as is normally the case when a company in America cannot pay its bills.
This happens every day for smaller companies. It becomes a bit more complicated, sometimes a great deal more complicated, when the corporations get bigger and bigger and bigger. The way our corporations are normally dissolved, if they are financially insolvent and cannot operate, has always been bankruptcy court.
There are bankruptcy judges all over America. It is a Federal court system. Bankruptcy is referred to in the U.S. Constitution. It has worked very well. I guess what I am concerned about is, some of the provisions that are in the proposed legislation that is floating about would alter that traditional idea in ways that may be unwise.
Senator Leahy, the chairman of the Judiciary Committee, I am the ranking Republican on that committee, and I have talked about this a little bit. It is getting to a point where we need to figure out what is happening here. The matter is highlighted by a letter from the Judicial Conference of the United States--Mr. James Duff, the Presiding Secretary, of the Judicial Conference of the United States. Chairman Leahy asked them their opinions on some of the proposals for dissolution of companies, the orderly liquidation of companies.
The Judicial Conference responded in a letter that was received by Senator Leahy, and I do believe it raises important questions. I truly do. I am a person who spent a lot of time practicing law, both as U.S. attorney and in private practice in Federal court, and have some appreciation for how bankruptcy courts operate. I would say, we ought to pay attention to what the Judicial Conference says to us. It is a kind of correspondence they take seriously. They do not lightly send off letters to the Senate. This was in response to a question. So this is what Mr. Duff replies on behalf of the Judicial Conference, in reply to Senator Leahy: As you noted, Title II would create an ``Orderly Liquidation Authority Panel'' within the Bankruptcy Court for the District of Delaware for the limited purpose of ruling on petitions from the Secretary of the Treasury for authorization to appoint the Federal Deposit Insurance Corporation (FDIC) as the receiver for a failed financial firm.
Then it goes on to say: This is a substantial change to the bankruptcy law because it would create a new structure within the bankruptcy courts and remove a class of cases from the jurisdiction of the Bankruptcy Code. The legislation, by assigning to the FDIC the responsibility for resolving the affairs of an insolvent firm, appears to provide a substitute for a bankruptcy proceeding.
You see, when people loan money to a corporation, people buy stock in a [Page: S2575] corporation, they buy bonds of a corporation or otherwise loan them money, they have an expectation that if that company fails to prosper and pay what they owe, that company at least will be hauled into bankruptcy court and they will have an opportunity to present their claims and to receive whatever fair proportion of the money that is still left in the company as their payment.
It may be 10 cents on a dollar, it may be 90 cents on a dollar or whatever you get. They understand that bankruptcy judges have the authority to try to allow the company to continue to operate, to stay or stop people from filing lawsuits against the company and collecting debts, to allow the company a while to see if they cannot pay off more debtors by continuing to operate than shutting them down.
But if they see the company is so badly in financial crisis that it is going to collapse anyway, they come in and shut it down before they can rip off more people. So that is what bankruptcy courts do every day. So this letter indicates that by assigning the FDIC responsibility for resolving these affairs, it provides a substitute for bankruptcy, which is denying the lawful expectations of people who loan money to or bought stock in these corporations.
They go on to say: We note, however, that the legislation will result in the transition of at least some bankruptcy cases to FDIC receivership in situations where a firm is already in bankruptcy, either voluntarily or involuntarily.
In other words, it appears that legislation would allow a case to be taken out of bankruptcy that was already in the bankruptcy court.
It goes on to say: The legislation does not envision objection, participation, or input from the bankruptcy creditors (whose rights will be affected) in the course of appointing the FDIC as receiver. Indeed, the legislation deals in a sealed manner; [secret manner, apparently] only the Secretary and the affected financial firm would be noticed and given the opportunity of a hearing.
That will have major impacts on a stockholder or bondholder or a creditor of a corporation. The FDIC is going to meet with this big company, this big bank, and work out a deal and not even tell the people who loaned the corporation money in good faith and have certain legal rights, at least they always had previously. These rights, somehow, will be extinguished or cut off.
It goes on to say: The financial position of affected creditors may have been changed within the context of the firm's bankruptcy case in such a way that the creditors' rights might have changed dramatically. Any resulting due process challenges would impose significant burdens on the courts to resolve novel issues for which the bill provides no guidance.
They go on to say: In addition, we note that petitions under this title involving financial firms would be filed in a single judicial district. The Judicial Conference favors distribution of cases to ensure that court facilities are readily accessible to litigants and other participants in the judicial process.
Under the current proposal all of these cases are going to be tried in Delaware. I do not know if we have enough judges in Delaware.
They go on to say this: With respect to the limited review [that means appellate] to be conducted by the panel created in section 202, [of the proposed legislation] we note that the authority may exceed what is constitutionally permitted to a non-Article III entity.
What does that mean? That means some of these powers are judicial powers given only to Federal district courts presided over by senatorially confirmed, presidentially-appointed, lifetime Federal judges. We can't just give them off to somebody else to decide. It is just not constitutional. We don't have the powers in the Congress, or the President doesn't have the powers to take over judicial roles.
They continue: A previous statute was held unconstitutional because it conferred on the bankruptcy courts the authority to decide matters reserved for Article III courts.
It goes on to talk about that.
Let me tell my colleagues what CEOs don't like. Do we want to be tough on CEOs? I will give some suggestions.
If they can't run their companies and they can't pay their bondholders, can't pay their debtors, their stock has become worthless. People invested in their companies believing they were legitimate, believing the representations of their financial condition, and it turned out to be false. They do not want to be in a court where they raise their hands and have to give testimony under oath. They don't want to be in that position.
The way the law has been thought of and is worked out to handle these cases is to have a Federal bankruptcy judge preside over this process. There are bankruptcy rules about what the judge can and cannot do. Each entity that has an interest in the matter can have lawyers. The stockholders can have lawyers. The bondholders can have lawyers. The creditors can have lawyers. The workers can have lawyers. The employees can have lawyers. The guys have to come in under oath. They have to bring their financial statements. If they lie, they go to jail for perjury. This is a powerful thing. A lot of these big wheels don't want to subject themselves to it. I would say, if we want to be tough on these companies, don't create some FDIC buddy group that has been supervising them and sees their role as trying to work with them. Have a real judge.
We can create a system where we select experienced judges, create some special procedures for larger bankruptcy cases. We should consider that.
My one comment before I wrap up is, we should listen to the Judicial Conference and recognize there is a danger to the rule of law to legitimate expectations of creditors and stockholders by this new change, this unexpected change in the law. We should allow classical procedures to work. If we need to improve them and make some special provisions for dissolution of corporations to help bankruptcy judges do the job better, I would certainly favor that. That would allow us to function in a lawful way, a principled way, and not allow people to meet in private and secret, as we have seen happened recently, and dissolve their cases in a matter that is not open and free to the entire public, as would happen in bankruptcy court.
I ask unanimous consent to have printed in the Record the letter from the Judicial Conference.
There being no objection, the material was ordered to be printed in the RECORD, as follows: JUDICIAL CONFERENCE OF THE UNITED STATES, Washington, DC, April 12, 2010.
Hon. PATRICK J. LEAHY, Chairman, Committee on the Judiciary, U.S. Senate, Washington, DC.
DEAR MR. CHAIRMAN: I am writing in response to your letter of March 25, 2010, seeking the views of the Judiciary with regard to provisions relating to bankruptcy that are contained in the financial regulation bill recently approved by the Senate Committee on Banking, Housing, and Urban Affairs. We appreciate your soliciting the views of the courts on this matter. You identified several of the issues that are of concern to the courts, and I will address each of those.
As you noted, Title II would create an ``Orderly Liquidation Authority Panel'' within the Bankruptcy Court for the District of Delaware for the limited purpose of ruling on petitions from the Secretary of the Treasury for authorization to appoint the Federal Deposit Insurance Corporation (FDIC) as the receiver for a failing financial firm. This is a substantial change to bankruptcy law because it would create a new structure within the bankruptcy courts and remove a class of cases from the jurisdiction of the Bankruptcy Code. The legislation, by assigning to the FDIC the responsibility for resolving the affairs of an insolvent firm, appears to provide a substitute for a bankruptcy proceeding. The Judicial Conference has not adopted a position with regard to the removal from bankruptcy court jurisdiction of the class of financial firms identified in this legislation.
We note, however, that the legislation will result in the transition of at least some bankruptcy cases to FDIC receivership in situations where a firm is already in bankruptcy, either voluntarily or involuntarily. Section 203(c)(4)(A) provides that a pending bankruptcy case would be evidence of a firm's financial status for purposes of triggering the Treasury Secretary's authority to seek to appoint the FDIC as receiver. The bill does not specify how the transition from a bankruptcy proceeding to an administrative proceeding would be effected. Further, the bill does not specify the effect of the transfer on prior rulings of the court. For example, would any stays or other rulings continue in effect or be dissolved upon the transfer to the FDIC? This could be especially problematic if creditors have changed position based upon rulings in the course of the bankruptcy proceeding. The legislation does not envision objection, participation, or input from the bankruptcy creditors (whose rights will be affected) in the course of appointing the FDIC as receiver. Indeed, the legislation proposes to deal with this petition in a sealed manner; only the Secretary [Page: S2576] and the affected financial firm would be noticed and given the opportunity of a hearing. The financial position of affected creditors may have been changed within the context of the firm's bankruptcy case in such a way that the creditors' rights might have changed dramatically. Any resulting due process challenges would impose a significant burden on the courts to resolve novel issues, for which the bill provides no guidance.
In addition, we note that petitions under this title involving financial firms would be filed in a single judicial district. The Judicial Conference favors distribution of cases to ensure that court facilities are reasonably accessible to litigants and other participants in the judicial process. Although we are aware that a large number of companies are incorporated in Delaware, it is not clear that Delaware would necessarily be a convenient location for many of the affected companies, nor indeed the proper venue for that petition, absent changes to title 28, United States Code.
We also note that the legislation requires the designation of more bankruptcy judges for the panel than are permanently authorized for Delaware under existing law. The District of Delaware is authorized one permanent bankruptcy judge and five temporary judgeships. If Congress were to choose not to extend these judgeships or convert them to permanent status, it would be impossible to implement section 202's requirement to appoint three judges to the Orderly Liquidation Authority Panel from the District of Delaware.
With respect to the limited review to be conducted by the panel created in section 202, we note that the authority may exceed what is constitutionally permitted to a non-Article III entity. A previous statute was held unconstitutional because it conferred on the bankruptcy courts the authority to decide matters that are reserved for Article III courts. Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). The review of the Secretary's decision in this instance appears to resemble more closely appeals of agency decisions under the Administrative Procedure Act than a bankruptcy petition and, therefore, appears more appropriate for an Article III court. Moreover, the affirmation of the Secretary's petition to designate the Federal Deposit Insurance Corporation as a receiver effectively removes a case from the application of bankruptcy law. Accordingly, it seems anomalous to subject this petition to review by a bankruptcy court.
Your letter particularly questioned whether the time limit of 24 hours for a decision by the panel would be sufficient or realistic. The Judicial Conference has consistently opposed the imposition of time limits for judicial decisions beyond those already set forth in the Speedy Trial Act or section 1657 of title 28. We appreciate that a matter affecting the operation of the national economy warrants a prompt resolution. We note that the courts, recognizing this concern, have already demonstrated an ability to move swiftly in resolving bankruptcy petitions involving large corporations with broad impact on the national economy. In each of these instances, the initial determinations were made by a single judge. The resulting appeals in some cases were also adjudicated on an expedited basis without a statutory requirement to do so.
Requiring a panel of three judges to assemble, conduct a hearing, and craft a written opinion within 24 hours presents practical difficulties that may be insurmountable. Although §202(b)(1)(A)(iii) could be read to limit the court's review to the question of whether the covered financial company is in default or danger of default, the Secretary is required to submit to the panel ``all relevant findings and the recommendation made pursuant to section 203(a),'' which specifies consideration of multiple factors (repeated in subsection (b) of that section as the basis for the Secretary's petition). Even with the full cooperation of the financial firm affected by the proceeding, which is not a predicate for the consideration of a petition, it would appear difficult to hear and consider the evidence and prepare a well-reasoned opinion addressing each reason supporting the decision of the panel within 24 hours. Even assuming that factors other than the solvency of the firm would be excluded from this special panel's review, it may well be that the subject financial firm or one of its creditors would seek judicial review of one of the prior administrative evaluations of the statutory factors, either in the course of the hearing conducted by the Orderly Liquidation Authority Panel or in another court. Such challenges would also make it difficult to meet the proposed timeline. It is possible that the facts of a particular case may be so clear that a decision could be rendered within 24 hours, but the statutory requirement of such speed seems inconsistent with the thoughtful deliberation that would be appropriate for a decision of such great significance.
Although it is to be hoped that only a small number of large financial firms would ever become subject to this legislation, each of the petitions would involve large volumes of evidence regarding complex financial arrangements. Thus, the legislation could result in a large proportion of the judicial resources of a single bankruptcy court being devoted exclusively to review of the Secretary's petitions. Further, the bill provides that the Secretary may re-file a petition to correct deficiencies in response to an initial decision, thus extending the time in which the court's resources would be diverted from other judicial business. The District of Delaware is one of the busiest bankruptcy courts in the nation; to draw the court's limited judicial resources away from the fair and timely adjudication of those bankruptcy cases to process petitions under this bill would be inequitable and unjust to the debtors and creditors in those pending cases. If, as seems possible given recent economic developments, the failure of one firm weakens other firms in the financial services sector, the demand could exceed the court's resources. This consideration alone counsels against the assignment of all such cases to a single court.
Finally, we note that both the Administrative Office of the United States Courts (AO) and the Government Accountability Office (GAO) are directed to conduct studies which will evaluate: (i) the effectiveness of Chapter 7 or Chapter 11 of the Bankruptcy Code in facilitating the orderly liquidation or reorganization of financial companies; (ii) ways to maximize the efficiency and effectiveness of the Panel; and (iii) ways to make the orderly liquidation process under the Bankruptcy Code for financial companies more effective.
With respect to those firms that are to be treated under Chapters 7 and 11 of the Bankruptcy Code, the vagueness of, and/or lack of criteria for determining ``effectiveness'' will hamper the ability of the AO and GAO to produce meaningful reports. Some would regard rapid payment of even small portions of claims as an effective resolution, while others would prefer a delayed payment of a greater share of a claim. There would also be significant disagreements between creditors holding different types of secured or unsecured claims as to the most effective resolution of an insolvent firm. Some would argue that effectiveness should be measured by the impact of the resolution on the larger economy, regardless of the impact on the creditors of the particular firm. Without clearer guidance for the studies, both agencies will be required repeatedly to expend resources on the development of reports that may not provide the information Congress is seeking.
Thank you for seeking the views of the Judiciary regarding this legislation and for your consideration of them. If we may be of assistance to you in this or any other matter, please do not hesitate to contact our Office of Legislative Affairs at (202) 502-1700.
Sincerely, James C. Duff, Secretary.