What is bankruptcy law?
The bankruptcy system provides an orderly structure for addressing the inability of an individual or organization to meet its monetary obligations. Whether through liquidation and sale of assets or by restructuring and reorganization to allow an orderly payment of debts, the bankruptcy system governs the obligations and rights of creditors (lenders or others to whom a debt is owed) and debtors (borrowers or recipients of credit, goods, or services).
The framers of the U.S. Constitution (Article 1, Section 8) granted Congress the power to establish a uniform bankruptcy law throughout the United States. Bankruptcy law is set forth in the complex federal statutes of the U.S. Bankruptcy Code (Title 11, United States Code) which governs bankruptcy practice. Bankruptcies are processed through the U.S. Bankruptcy Court (part of the federal court system) and cases are appealed to the U.S. District Courts and U.S. Courts of Appeals.
The purpose of the bankruptcy system is to provide overburdened individuals and organizations with an opportunity to resolve and reorder their financial affairs while providing protection for their creditors. In February 1999 the Associated Press reported that more Americans filed for bankruptcy in 1998 than ever before; more than 1.39 million individuals and 44,000 businesses sought protection from creditors in bankruptcy court. Bankruptcy lawyers who represent debtors guide their clients through the statutory framework that provides relief from the lenders to whom their clients are financially indebted. Bankruptcy lawyers who represent creditors attempt to protect their clients' interests by securing the maximum recovery possible from a debtor, whether that debtor is an individual or a business.
The bankruptcy system is intended to be a last resort for individuals or organizations that cannot meet their monetary obligations. Debtors are given a limited opportunity to resolve their financial obligations without resort to the debtors' prisons that were common in England in the days of Charles Dickens (and vividly described in Dickens' novels). However, in order to avoid abuse and overuse of the opportunity the system provides, bankruptcy may only be declared by individuals once every seven years, and bankruptcy of an organization is closely controlled and monitored by the bankruptcy court and trustee (a person appointed by the court to oversee the business involved in the bankruptcy). In opting for reorganization or liquidation, a business is subjected to strict control by the court and trustee and is subject to the intervention of creditors in some daily business decisions.
Some organizations have used bankruptcy as a way to relieve themselves of the burdens of mass tort litigation. For example, Johns-Mansville used bankruptcy to resolve millions of dollars of claims resulting from the sale of asbestos. Similarly, Dow Corning used bankruptcy to provide relief from millions of dollars of potential liability in breast-implant litigation. Texaco sought relief in the bankruptcy system to continue operations in the face of a multibillion dollar verdict in a commercial dispute with Pennzoil. Steel companies and railroads have proceeded through bankruptcy reorganization as a way to manage the large debt owed to unfunded pension plans.
Negotiations between Debtors and Creditors
Rather than proceed through bankruptcy, lawyers representing the debtor and creditor may try to renegotiate payment terms so that they can be met by the borrower. A renegotiated loan may permit the borrower to repay the debt over an extended period of time (helpful to the borrower in light of his or her ability to pay) but it may require payment at a higher rate of interest (helpful to the lender receiving payment over a longer period of time and at higher risk than anticipated).
Sometimes debtor and creditor negotiations involve a number of creditors who have a financial interest in the transaction. These creditors vary with the transaction—they can include secured creditors (who hold collateral for the loan), unsecured creditors (who do not have an interest in a specific asset of the borrower), and government creditors (including taxing authorities such as the Internal Revenue Service and environmental agencies).
A "workout agreement" avoids the debtor's need to file bankruptcy; such workouts of financially troubled companies are common. Under an "extension agreement," creditors receive full payment of the debt owed, but the debt is paid over time. Under a "composition agreement," creditors agree to receive a percentage of the debt owed. The idea behind a workout is that forgiving the rest of the loan will help the debtor maintain his or her business, yet provide the creditor with a greater return than if the debtor proceeded through bankruptcy.
Reorganization of Debts Under Chapters 11 and 13
The Bankruptcy Code provides several different kinds of protection for debtors. Businesses that are unable to secure a workout agreement may file for Chapter 11 bankruptcy relief in order to reorganize their company. Chapter 11 allows a business in financial trouble to continue to operate and has specific provisions that offer relief for creditors. The business must submit a "reorganization plan" for approval by creditors and then by the U.S. Bankruptcy Court. The bankruptcy trustee, appointed by the court, is represented by counsel. The trustee may oversee the operation of a complicated business reorganization or liquidation. The reorganization plan specifies how the business will restructure its debt. Chapter 11 has offered protection for many large and well-known business entities, as described earlier.
Chapter 13 of the Bankruptcy Code allows individual debtors to reorganize their debts. Debtors repay creditors in installments, in hill or in part, over a period of years, without losing their personal assets through liquidation.
Liquidation Under Chapter 7
When restructuring the debt is not an option, Chapter 7 allows individuals and businesses to obtain a "discharge" or release from their debts. Individuals filing under Chapter 7 can keep a limited number of their possessions and assets but must liquidate most of their assets and give the proceeds to creditors. Businesses that file under Chapter 7 must liquidate their assets and cease business operations.
While bankruptcy is governed by federal statute, some states provide limits on what can be seized by the creditor. For example, the state of Florida provides a substantial homeowner's exemption, which permits a once-wealthy homeowner to retain a high-priced mansion even when he or she is forced to liquidate assets. Other states protect personal possessions, such as a car or even a family Bible, from seizure by the creditor.
Some debts cannot be discharged in bankruptcy. For example, student loans are specifically exempted from discharge (a fact recent law school graduates should remember as they write their monthly checks for student loan payments!). Also, fraudulent conveyances, or transfers of money and assets to avoid the reach of the court, can be voided or annulled by the court.
Life as a Bankruptcy Lawyer
Where do bankruptcy lawyers work?
Many bankruptcy lawyers work in private law firms. They represent individual and corporate debtors, individual and corporate creditors, creditors' committees, and bankruptcy trustees. Large and mid-size firms may have departments that specialize in bankruptcy and creditors' rights, and some small firms are bankruptcy "boutiques," in which all members of the firm specialize in bankruptcy.
Other attorneys work at banks, title companies, utilities and corporations, where they may be part of a corporate legal department; they may deal with matters such as bankruptcy issues or creditor/debtor rights issues. The government also employs bankruptcy lawyers. They work for agencies such as the Internal Revenue Service, the Securities and Exchange Commission, the Pension Benefit Guaranty Corporation, and state and municipal tax authorities.
Who are their clients and what types of cases do they work on?
Richard Donovan and Dave Dixon are bankruptcy attorneys at Carlton Fields in Tampa, Florida. Carlton Fields is a large firm, with a commercial bankruptcy/creditors rights department of about 10 attorneys. Robert has nearly 20 years of experience; Dave has 12 years of experience. Robert explains, "I generally represent lending institutions, mostly large banks. I sometimes represent corporate debtors, and, on rare occasions, individual debtors. In recent years I have represented certain mutual fund companies who purchased bad loans from the FDIC [Federal Deposit Insurance Corporation], the RTC [Resolution Trust Corporation], or banks. The amounts involved in the matters I work on can range from a million dollars to $325 million. Conflicts often arise between the debtors and my clients or between other creditor constituencies (usually unsecured creditors) and my secured creditor clients. When I represent the debtor, it feels like me against the world." John, too, generally represents creditors. "Most of my clients are generally secured creditors, such as banks and insurance companies. These clients are located primarily in large money center cities, and they need to retain local counsel in the jurisdiction of the pending bankruptcy case," he says. Secured creditors, such as banks or financial institutions, generally have an interest in a particular asset of the debtor that was used as collateral for the loan. In contrast, unsecured creditors cannot point to a particular asset of the debtor, and are thus left to receive proceeds from any remaining assets after the payment of the secured creditors.
Sherry Stern, a partner at Oppenhcimer Wolff & Donnelly LLP, a large firm in Minneapolis, Minnesota, describes herself as "a litigator who works very often with cases in the bankruptcy court or arising out of bankruptcy." Sherry always represents creditors. She often represents indenture trustees—trustees who look out for the interest of small investors who hold notes, bonds, or debentures issued by corporations or municipalities. "For example, I worked on a casino default case. The source of money for building the casino was a public offering, but the casino defaulted on its loan. The indenture trustee sued to work out the best deal for the bondholders." She adds, "All bankruptcy work is in federal court. This has given me wonderful opportunities. I recently argued a case in the D.C. Circuit Court in Washington, D.C. Another case I'm working on involves the standing [jurisdictional right] of the indenture trustee to bring certain claims. That case is in the Fifth Circuit Court of Appeals."
Chicago attorney Barry Gay specializes in bankruptcy law at the law firm of Schwartz, Cooper, Greenberger & Krauss. "I represent all types of debtor businesses—including entrepreneurs, national retailers, finance companies, manufacturers, wholesalers, distributors, service organizations, trucking companies, labor unions, and owners of hotels, shopping centers, office buildings, and apartment complexes. I also represent creditors—both secured and unsecured creditors of troubled entities. I help creditors recover pledged collateral, prosecute claims against debtors, and realize their liens or security interests. I assist the creditors in working out payment plans for Chapter 11 debtors. I also represent creditors' committees. In a Chapter 11 bankruptcy involving a business entity, the United States Trustee appoints a committee of seven to nine creditors—often out of thousands of creditors— to look out for the creditors' interests."
What daily activities are involved in bankruptcy law practice?
The bankruptcy attorneys we talked to described a wide range of daily activities. "There's no typical day, thank goodness!" says Barry Gay. "Every day unfolds differently. I'm on the phone a lot, and I attend a lot of meetings. The tasks vary with whether I'm representing a debtor or a creditor corporation." Barry notes that a good bankruptcy lawyer has to be familiar with numerous areas of the law. "You really have to be a general practitioner to be an effective bankruptcy lawyer," Barry says. "I feel like bankruptcy law is an umbrella for the practice of every area of law—my practice involves leases, contracts, and loan documents as well as employment issues, tax issues, and financial transactions." Barry also notes that his practice is a blend of transactional work and litigation. "If you draft a plan of reorganization under Chapter 11 for your debtor client, it's a contract with your creditors. If the creditors contest the reorganization, then you find that you're handling a trial." Barry says that he's constantly on the phone, negotiating with the debtor or creditors on the other side of the case. "What you're really doing is arguing about the future rather than fighting about the past. You're trying to create a plan for moving forward, for resolving the issues that arise in the bankruptcy. As a debtor, you're figuring out how to satisfy the obligations to the creditors. You may try to give them stock in the company, or get them to agree to a payment of 10 cents on the dollar, or ask them to accept a percentage of future profits. Whatever the solution, you're trying to move the business forward. And that's a lot of fun," Barry adds.
Dave Dixon told us that his activities also vary day to day. "Often I go through periods where I have a lot of court hearings, and at other times a majority of my time is spent in business meetings or general office work. I generally spend a significant portion of my time at my desk in negotiation on behalf of my clients, responding to inquiries, or drafting and revising pleadings to be filed at court." Dave adds, "Now that I've practiced 12 years, the amount of research I do in the library has decreased significantly." The bankruptcy-related research at the firm is left to attorneys with less seniority.
Communicating with clients is an important part of a bankruptcy attorney's work, explains Richard Donovan. "There are always telephone conversations discussing case strategies and advising clients on a variety of matters," he reports. Most of Robert's clients are out of state, so he meets with them only occasionally. "We communicate by telephone or through correspondence. Periodically, however, I attend meetings here in Florida or out of state. These meetings tend to be large because they include different constituencies of a bankruptcy case. For example, I often represent bank groups; their meeting will include members of the bank group, perhaps some other advisers to the group (accountants, environmental experts, industry experts, etc.), representatives of the debtor company and its advisers, and sometimes members of a creditors' committee and their advisers." Robert usually attends several court hearings each month. "These hearings can involve long, evidentiary trials; arguing motions on primarily legal grounds when the facts are not in dispute; or merely observing what is occurring in a case." Robert adds that though he's practiced for 20 years, he continues to be a student of the law and works hard to keep abreast of the latest legal developments. "I still spend some time in the library doing research in connection with litigation, with articles and speeches, and as a contributing editor of two treatises. I also keep up with advance sheets and newsletters."
As a bankruptcy litigation attorney, Sherry Stern is involved in the myriad tasks that challenge corporate litigators. "Right now, I have a number of cases in the discovery phase," she says. "I compose interrogatories, issue and respond to document requests, and take depositions. I spend time reviewing discovery responses and analyzing how they affect the case. I assess whether the information will motivate my client to move toward settlement. I spend time talking to clients, drafting letters and locating witnesses to the case." As a litigator, Sherry is also in court to argue motions, attend hearings, and conduct trials.
What do bankruptcy lawyers find rewarding about their practice?
The bankruptcy attorneys we talked to enjoyed helping their clients solve their business problems. "What's most rewarding," says Barry Gay, "is representing a debtor, someone who has been in business 30 years, has run into huge financial problems, and thinks that their life is coming to an end. You help them reorganize their business, and they get a fresh start." Barry adds that he also enjoys the creative aspects of representing debtors. "You have to come up with creative reorganization plans. Representing debtors helps you more effectively represent creditors, because you're better familiar with the debtor's options."
Dave Dixon also enjoys the creative problem-solving involved in bankruptcy practice. "The most satisfying aspect of this job is having a client come in with a problem, and then sitting down with that client to determine how to resolve that problem." He adds, "I enjoy formulating a strategy to accomplish the goal the client and I have set and then executing that strategy successfully for the client."
"It's very satisfying to come into a situation where legal and economic relations between the parties are strained and chaotic and attempt to bring order and resolution to the situation," explains Richard Donovan. In recent years Robert has represented a not-for-profit hospital chain as debtors-in-possession in Chapter 11 bankruptcy cases. "The hospitals were in dire financial straits and at war with not only their creditors but also the local government for the county in which they were located. The hospitals ultimately decided to attempt to impose an involuntary repayment plan on the creditors. The creditors told us we would eventually have to accept their terms (i.e., surrender), but bankruptcy is a great equalizer. The hospitals are now running well, have good relations with the community, and have accumulated approximately $27 million in cash. Their chances for reorganization are excellent. The cases are not yet resolved, but it will be satisfying to have been involved in a situation where the hospitals will be able to continue operating and creditors will be repaid to the greatest extent possible."
Sherry Stern says that her bankruptcy-related work has brought her in touch with remarkable people. She explains, "I work with wonderful and bright associates at the firm. They help me along with my cases. I work with high caliber opponents. It's fun to work with—and against—smart, reputable, and conscientious people. This makes the practice of law a lot more fun." Because bankruptcy cases are in federal court, Sherry travels frequently. "Meeting new friends and colleagues is one of the great rewards of travel," she says. "I have met all sorts of interesting people and some really wonderful women attorneys during my travels. One of those women is on the Board of Governors of the American Bar Association. I met her in 1991, when I was doing a bankruptcy in New Orleans, and we've stayed in touch all these years."
Sherry also mentions how much she enjoys the excitement of being in the courtroom. "I love the fast pace of litigation, the thrill of being in court. I love appellate arguments and the requisite back and forth debate with the judges." Sherry also enjoys the intellectual challenge of her practice. "So much preparation is involved in appellate arguments. You look at every case cited by either side and try to find all the pitfalls. You try to anticipate the opponent's arguments, determine which are likely to be strongest, and carefully craft your responses."
The Training and Skills Important to Bankruptcy Law
How do people enter the field of bankruptcy law?
Some attorneys develop an interest in bankruptcy law while law students and decide to pursue the field upon graduation. For these students, the best preparation is clerking for a bankruptcy judge upon graduation from law school. Sherry Stern explains that her large Minneapolis firm looks for associates with judicial clerkship experience. "All of our associates in this area of practice clerked for a bankruptcy judge before they came to work for us. This is a crucial stepping stone that we look for when we hire bankruptcy associates."
Students interested in starting out as bankruptcy attorneys can also gain valuable experience by working as a summer associate in a law firm that specializes in the field or a large firm that has a bankruptcy department. "I originally envisioned myself as a corporate lawyer," says Dave Dixon. "After clerking for a summer at a prominent Texas bankruptcy boutique firm, I decided to make a legal career in the field of bankruptcy. I found this area of the law to be business oriented and a practice where parties make decisions based upon sound business rationale."
Other lawyers enter bankruptcy practice once they develop experience in litigation or another field. "I came into this area almost by accident," explains Richard Donovan. "I had clerked for a federal district court judge in New York after graduating from law school and was very impressed by one attorney who was arguing a bankruptcy appeal before my judge. After my clerkship I became a litigator at a firm, but I was approached about an opportunity to go to another firm that had just begun a bankruptcy practice headed up by the lawyer with whom I had been so impressed." Robert further confides, "At the time, I actually viewed bankruptcy as a not very prestigious or interesting area of the law. I was so impressed with the attorney, however, that I decided to work with him. To my delight I found that bankruptcy was a fascinating area, and I was fortunate to learn it from a national expert."
Sherry Stern began her legal career as a tax attorney. The firm she worked for assigned her a bankruptcy case. The case culminated in a lawsuit against a Chapter 7 trustee, and Sherry argued the case up through the Eighth Circuit Court of Appeals. Sherry also became involved in the bankruptcy section of the Minnesota State Bar Association. "It's a very small bar, very collegial, and it gave me great exposure. I monitored legislation. I did some pro bono work for debtors." Sherry handled her firm's bankruptcy work while also litigating business and employment cases. By the time she joined Oppenheimer Wolff & Donnelly after five years of practice, she had developed strong litigation skills and acquired a sophisticated knowledge of bankruptcy issues.
What skills are most important to bankruptcy lawyers?
- "Negotiation skills are critical to bankruptcy practice," says Dave Dixon. "I believe that you acquire these skills by actually litigating and trying cases and taking on the responsibility of a case," he adds. Richard Donovan explains why negotiation skills are so important: "In a bankruptcy there is only so much money to go around, and part of the job of the bankruptcy lawyer is to make rational assessments as to who is entitled to what portion of that 'pot' and to convince the parties to accept that portion. In most cases compromise is in the best interests of the parties. Obtaining a compromise sometimes requires convincing not just your adversaries, but also your client, to give in on certain issues. This requires understanding of human nature, the peculiar dynamics of bankruptcy, and the law."
- Creative problem-solving skills are key to success as a bankruptcy attorney. "Bankruptcy practice involves tremendous creativity," says Barry Gay. "You have to figure out economical and easy ways to move the parties from point A to point B. You have to think of creative solutions to people's problems without fighting. Bankruptcy cases should settle. Creative solutions move the parties toward settlement." Richard Donovan agrees on the important role creativity plays in this area of practice. "The skills most important to a bankruptcy lawyer are pragmatism, flexibility, and creativity. I think you learn these skills by experience and by remaining a student of the law, economics, and, especially, human nature," he says.
- Bankruptcy attorneys need excellent writing skills. "As a bankruptcy lawyer, you do lots of brief and motion writing. You must be clear and persuasive in your writing—whether you're drafting a document or writing to a client," says Sherry Stern.
- A bankruptcy lawyer needs strong oral advocacy skills. "Advocacy skills are important in any area of law, but especially important in bankruptcy law," explains Barry Gay. "Bankruptcy is a form of litigation," says Sherry Stern. "Bankruptcy attorneys are in court all the time. You need to be comfortable in a courtroom. You have to be comfortable being in front of people."
What classes and law school experiences do bankruptcy lawyers recommend?
- Take a bankruptcy law course. A basic bankruptcy course will help you determine whether you're truly interested in the field. Your law school may also offer additional courses or seminars in bankruptcy law. Business law classes are also helpful, including courses dealing with the Uniform Commercial Code. The lawyers we talked to recommended courses such as tax, accounting, employee benefits, real estate, business organizations, and securities regulations. "Probably the most helpful class for me in preparing for bankruptcy practice was secured transactions," says Richard Donovan. "Many of the commercial issues discussed in that course arise in bankruptcy. In fact, most of the current case law in secured transactions is being developed in the bankruptcy courts."
- Moot court gives students an opportunity to develop strong oral advocacy skills. In moot court competition, students make appellate arguments in front of a team of judges (usually faculty members, experienced practitioners, or local judges). Students must respond extemporaneously to the judges' challenging legal questions. Trial advocacy classes, in which students actually conduct a trial, complete with a mock jury, also provide students with an opportunity to sharpen their oral advocacy skills.
- Gain practical experience by working as a summer associate or a law clerk in a firm that has a bankruptcy practice. Most large firms hire entry-level attorneys through summer associate programs. Smaller firms sometimes hire law clerks that work during the summer or throughout the academic year. Working in a firm can help you determine whether or not you really enjoy bankruptcy practice. "Find an area of practice you like," says Barry Gay. "You're going to spend as much time at the office as you are with your family. I'm lucky—I've found an area of law that's very exciting and that lets me use my creativity."
- Work as a judicial clerk for a bankruptcy judge. While a second year law student, you can apply for judicial clerkships that begin upon graduation from law school. Bankruptcy judges generally hire judicial law clerks, and as Sherry Stern mentioned above, this is one of the very best ways to begin a career in bankruptcy law. Large firms often seek entry-level attorneys who have worked for judges.
- If your school has a bankruptcy law clinic, consider participating. In a clinical setting, you have the opportunity to work with real clients facing the kinds of issues you will encounter in practice. There's no better way to develop client contact skills.
- Become active in bar association activities. "Get involved in the numerous business law sections of the American Bar Association, the state bar associations, and the American Bankruptcy Institute," advises Dave Dixon. Another benefit of involvement in bar association activities? Developing good relationships with the bankruptcy lawyers you meet means that you have people to turn to for advice (and for leads!) in the job search.
- Follow local, national, and international economic developments. Read newspapers, magazines, and financial journals. "Read the Wall Street Journal," advises Richard Donovan. "It will keep you apprised of business developments which drive the bankruptcy practice."