[Congressional Record Volume 140, Number 145 (Friday, October 7, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: October 7, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     BANKRUPTCY REFORM ACT OF 1994

  Mr. METZENBAUM. Mr. President, I wish to commend Senators Heflin and 
Grassley, and Congressmen Brooks, Fish, and Synar, for their leadership 
on the enactment of the Bankruptcy Reform Act of 1994, one of the most 
important pieces of legislation to be considered by this Congress. They 
did yeoman's work in preparing this bankruptcy bill, and deserve 
tremendous credit for their efforts.
  The Congress has considered the issue of bankruptcy reform for many 
years and we have debated every nuance, contemplated every scenario, 
and literally cited every statistic many times over. The legislation 
that has been enacted has been painstakingly crafted to address a wide 
variety and array of concerns that have been raised over the years and 
I want to thank the managers and sponsors of this legislation for their 
courtesy and cooperation in accepting my amendments which were offered 
in the spirit of solidifying consumer protections, promoting 
uniformity, and facilitating clearer treatment of many transactions 
under the Bankruptcy Code.
  Mr. President, throughout the process of crafting a viable bankruptcy 
reform proposal, I have reiterated that there is one problem in 
particular that we must fix--professional fees in bankruptcy. I chaired 
a Judiciary Committee hearing on professional fees in bankruptcy that 
revealed a number of examples of how lawyers suck the financial life 
out of companies by charging exorbitant and often unnecessary fees. We 
learned that it is not uncommon for lawyers to engage in such tactics 
as overstaffing, superfluous conferencing, unnecessary research and 
duplication of work. Moreover, we learned that there is widespread 
disparity in the fees paid, in the standards and laws used to set them, 
and in the maneuvering lawyers use to get them. Just as recently as 2 
weeks ago, the New York Times reported that a staff attorney for a U.S. 
trustee challenged what she believed to be excessive fees being rung up 
by the biggest bankruptcy department in this country. This firm's gross 
revenues had risen significantly since 1989, buoyed by at least $136.5 
million in fees from a string of bankruptcies. That is right, almost 
$140 million in legal fees. As an arm of the Justice Department, the 
trustee's office is in a position to monitor fees in bankruptcy cases, 
and it occasionally makes objections in the public interest. 
Nonetheless, the New York Times reported, the attorney challenging the 
fees was removed from the case by her boss and later put back on the 
case on the condition that she not review the fees. The objection to 
the fees was withdrawn.

  In light of these abuses, I am particularly pleased that my proposal 
relating to professional fees is included in the act. The legislation 
sets forth in clear and concise terms those factors that must be 
considered when deciding the appropriateness of a fee request. Some of 
the factors to be considered are: First, whether the services were 
beneficial at the time they were rendered toward the completion of the 
case; second, whether the services are reasonable and necessary; third, 
the customary rates charged for services; and fourth, whether the 
services were performed within a reasonable amount of time commensurate 
with the complexity, importance, and nature of the problem addressed. 
In addition, the U.S. trustees will be required to adopt uniform 
procedural guidelines for the review of fee applications and where 
appropriate, object to a fee request.
  As omnibus bankruptcy fraud statute has been lacking in the code 
despite the dramatic increase over the past decade in the number of 
bankruptcy filings. Annual case filings have climbed from 300,000 in 
1980 to 944,000 in 1991 and in excess of $26 billion is at stake in 
these filings. Commensurate with the rise in filings has been an 
increase in the number of fraudulent schemes that undermine the goals 
of Federal bankruptcy. For example, individuals have feigned bankruptcy 
to avoid debt collection and foreclosure by their creditors. Numerous 
bank officials and their customers have used the bankruptcy process to 
shield themselves from discovery or prosecution from fraud. Drug 
defendants are using bankruptcy filings to frustrate and delay drug 
asset forfeiture proceedings. Hundreds of typing mills are luring 
customers with vague promises of solving their credit problems, 
charging the customer hundreds of dollars while inducing them to sign 
bankruptcy petitions they often do not understand, and then improperly 
filing bankruptcy on their behalf.
  The Bankruptcy Act contains my bankruptcy fraud proposal, which 
strengthens the Government's ability to prosecute bankruptcy fraud. The 
bankruptcy fraud section, which is modeled after the mail and wire 
fraud statutes, sets out criminal penalties for any person who 
knowingly uses the filing of a bankruptcy petition or document to 
defraud others. While this provision is tough on white collar crime, it 
does not overreach in its applications. Proof beyond a reasonable doubt 
of a specific intent to defraud is required, persons committing an 
alleged fraudulent act for a lawful purpose are not covered, and any 
act, to be deemed criminal, must be a part of a scheme to defraud 
involving a bankruptcy proceeding.

  In addition, the law provides for injunctive relief, damages, and 
criminal penalties against bankruptcy petition preparers who are 
negligent or commit fraud in preparing petitions. It also sets forth 
criteria for supervising their fees. This provision, which I introduced 
as an amendment to S. 540 in April of this year, is critically needed 
and empowers the Government to confront the large scale fraudulent 
conduct of those who prey on the poor and unsophisticated. While not 
all so-called typing mills or petition mills are abusive, data show 
that they are most prominent in major metropolitan areas with poor and 
minority communities. For example, in the central district of 
California, approximately 70,000 petitions were filed in 1991 and the 
Department of Justice estimates that almost 20,000 petitions were filed 
as a result of entities who entice a debtor into believing that his/her 
credit problems will be cured and most significantly, that (s)he will 
be able to avoid eviction by filing a bankruptcy petition.
  The Bankruptcy Act closes another gap that permitted white collar 
crooks and others to hide behind bankruptcy protections to avoid 
payment of criminal fines. As individuals have misused the bankruptcy 
process to avoid debt collection and foreclosure, so have persons 
convicted of crimes sought to shield themselves from the payment of 
court-imposed fines triggered by criminal activity. My proposal, which 
is included as section 302 of the law, removes this shield and creates 
continued liability for the payment of criminal fines even if 
bankruptcy is pursued.
  Mr. President, many will recall that I introduced an amendment in 
April of this year which would have resolved the debate over how rent-
to-own contracts would be treated in bankruptcy cases. The rent-to-own 
companies attempt to avoid credit sales and usury laws by writing their 
agreements as leases. Courts that have adopted the lease interpretation 
have ruled that to keep their property, consumers must pay the entire 
remaining balance of the rent-to-own contract, amounts which the 
Pennsylvania Attorney General has found to be the equivalent of 100 to 
200 percent in interest. Consumers argue that these agreements should 
be treated as credit sales in bankruptcy, and courts adopting this view 
have allowed the consumer to keep possession of the goods by paying 
the creditor no more than the amount the creditor would realize if the 
goods were repossessed.

  My proposal would have clarified the law in a way that debtors with 
rent-to-own contracts would be treated in the same way the Bankruptcy 
Code treats those with installment sales contracts, but this proposal 
is not contained in H.R. 5116. This exclusion should not be interpreted 
as a congressional determination with regard to the treatment of rent-
to-own contracts in bankruptcy cases one way or another. The exclusion 
will leave this determination in the hands of the court in a particular 
case, depending upon the facts and circumstances of that case.
  I would like to again thank all of those who have played a role in 
developing and honing the Bankruptcy Reform Act of 1994. And I did in 
April of this year, when S. 540 was on the Senate floor, I must pay 
special tribute to Pam Banks who, although no longer with my staff, 
continued to work tirelessly on this proposal during these last 2 
weeks, as she has done for the past 4 years. Pam's dedication has been 
constant and skillful and the consensus that has been reached with 
regard to my concerns is largely attributable to her involvement and 
assistance.

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