Commission on Structural Alternatives for the Federal Courts of Appeals
Thurgood Marshall Federal Judiciary Building
One Columbus Circle, N.E.
Washington, DC 20544

Madam and Gentlemen:

Thank you for the opportunity to respond to the Commission’s Tentative Draft Report (October 1998) ("Draft Report"). This letter will limit itself to those portions of the Commission’s Report that pertain to bankruptcy appellate structure.

It is disappointing that the Draft Report, admittedly without "full study of the bankruptcy appellate system," has tentatively determined upon a bankruptcy appeals recommendation opposite from that reached by the National Bankruptcy Review Commission ("NBRC"). The Draft Report points to three "serious drawbacks" which impel its recommendation notwithstanding "the obvious advantages to routing bankruptcy appeals to the courts of appeals:" (1) the "increased workload it would bring to the courts of appeals," (2) the possible delay and cost in having appeals heard in a district other than the district in which the bankruptcy case is pending; and (3) the "sacrifice [of] bankruptcy judge expertise that has proven valuable in circuits with BAPs."

Bankruptcy professionals and academic commentators are virtually unanimous that the present system is seriously deficient, and that it should be replaced by a system of appeals directly from the bankruptcy trial court level to the court of appeals level. It is respectfully suggested that the "increased workload" is seriously overstated; that it is questionable whether significant delay or expense differences between appellate routes can be demonstrated, although it is certain that one appeal is faster and less expensive than two; and the suggestion that appellate review should be to BAPs whose "decisions would bind bankruptcy judges but not district judges" is almost certain to exacerbate the lack of binding precedent problem. One would hope that this and similar letters might prompt reconsideration of the Commission’s tentative position.

The current bankruptcy appellate process works poorly. It does not produce a coherent body of guiding precedent. Two rounds of appeals are expensive and time consuming. Appeals often fail to reach closure in time to be determinative in "deal-sensitive" reorganizations or before a debtor's assets have been exhausted. Where BAPs exist, an undesirable game of forum-shopping at the appellate level is mandated. The current bankruptcy appeals system fails to perform the primary functions of the appellate process: "error correction" and "law declaration."

The NBRC Recommendation 3.1.3, that bankruptcy appeals should go directly to the courts of appeals, is a universally supported position among bankruptcy practitioners and those academics who have studied the bankruptcy system. A Joint Task Force of the American Bar Association (the "Joint Task Force") had, after several years of sharing insights and data among the several major bankruptcy organizations, informally coordinated development of a consensus direct appeal position. The position was introduced to the NBRC from a variety of sources in addition to the Joint Task Force, and it became the subject of early and serious consideration by the NBRC study groups. The direct appeal recommendation was the first to receive approval by the NBRC. In the year between its well-publicized initial adoption by the NBRC in June 1996 and promulgation of the NBRC’s Final Report in October 1997, there was little or no dissent from the recommendation, nor did opposition emerge from the bankruptcy community during the year a like text formed part of HR 3150. This is not to suggest that simply because bankruptcy practitioners and academic commentators unanimously agree that their opinions should thereby prevail. But neither should the views of those who daily live with the system be lightly dismissed.

Stare decisis is a shambles in the bankruptcy field. Congress and the business community insist that the cost and duration of bankruptcy proceedings are excessive. One reason for much bankruptcy litigation is that the traditional common law role of precedent hardly functions in the bankruptcy system today. There is little binding precedential guidance, and there is some reported precedent for almost any position.

Bankruptcy appeals have generally gone to district judges. There are 94 districts and 647 district judges. No district judge is bound by the decision of any other district judge. No bankruptcy judge is bound by the precedent or opinion of a district judge (except, of course, a specific matter under direct review). The problem is compounded by the existence (and now since enactment of the 1994 Amendment to 28 U.S.C. Sec. 158, the likelihood) of a second appellate route via the BAPs and yet additional sources of non-binding opinions. District judges in the Ninth Circuit have already made clear that they will not be bound by decisions of the non-Article III BAP; and many of the bankruptcy judges in the Ninth Circuit have made clear, in deed if not in word, that they incline more toward following the lead where it exists of the non-Article III BAP. The chaotic state is exacerbated in four circuits today by the right of litigants to choose between the BAP appeal route and the district court route, and the ability to seek a "withdrawal of the reference" when, in the absence of a binding precedent, a split between the local district judge and the BAP is discerned.

The hundreds of bankruptcy decisions (some fourteen new volumes in most years) published each year become not the source of guidance, but the basis for virtually any position. Professor Daniel J. Bussel listed myriad examples of unreconciled decisions in his 1994 article in 41 UCLA Law Review 1063. The writer of this letter, in his 1995 article in the Norton Annual, noted some three dozen decisions on relatively common matters such as the allowance of claims filed after a bar date, two dozen on the classification of deficiency claims, eighteen on the new value exception, a dozen on the separate classification of student loan claims. The Commission, at Footnote 102, has cited the Baisler/Epstein article to like effect. Any lawyer can think of himself or herself as duty-bound to litigate a client's desires because there is no binding precedent to limit his or her imagination. That is not a small consideration in an era when lawyers are sued for failing to assert a claim for which precedent exists.

Among the traditional characteristics of review in the federal court system, (as described in the Long Range Plan for the Federal Courts (December 1995) issued by The Judicial Conference of the United States), are "access to at least one meaningful review . . . by a panel of three Article III judges . . . [guided by a] consistent application of federal law" and issuance of "careful opinions produced in cases of precedential import after collegial deliberation." The two-level bankruptcy appeal process is not normative. Most of the federal system allows only a single appeal as of right from the trial level to an appellate panel, with certiorari to the United States Supreme Court a rare possibility.

No one has demonstrated why bankruptcy appeals should be burdened by the cost and delay of an "extra" level of appeal at the district court level. District judges have no special competence in bankruptcy matters beyond those possessed by the bankruptcy judges; nor do they have better "generalist" qualifications than, or the benefits of collegial deliberation possessed by, court of appeals panels. Appeals from trial level bankruptcy decisions should go directly to a three judge panel of an Article III appellate court.

The "most significant" criticism of the direct appeal proposal is that it would add to the workload of the courts of appeals. The non-bankruptcy portion of the Commission’s Draft Report makes clear that, with or without bankruptcy appeals, the courts of appeals need more judges (and perhaps more courts of appeals or divisions thereof). Why the courts of appeals should have too few judges in this nation, grounded on the rule of law and the availability of justice, is a conundrum for all to ponder. That partisan politics, perceived public hostility to lawyers and courts, and a relatively small cost (far less than a regiment or a warship) should impede fair access to the courts is a disgrace that the Bar and the citizenry must remedy. That is a societal issue, not a bankruptcy argument. Any added burden of bankruptcy appeals is a proverbial drop in the bucket.

Elimination of a second level of appeals would reduce the aggregate number of bankruptcy appeals by at least 1200 cases. Statistics provided by the Federal Judicial Center or gleaned from the Annual Reports of the Administrative Office of the United States Courts (hereafter collectively the "AO Statistics") report the number of "second appeals", that is, bankruptcy appeals from the district courts or BAPs to the courts of appeals, in recent years as 1250 in 1998, 1187 in 1997, 1436 in 1996, 1658 in 1995 and 1389 in 1994. In a direct appeals system, "second appeals" would no longer exist. That saving in the judicial workload -- mostly in the Article III judge workload -- has gone largely without comment in the Draft Report. That elimination alone -- almost one-fifth of all bankruptcy appeals -- represents a major reduction in the amount of judicial time Article III Judges would be required to devote to bankruptcy appeals in future years.

The Draft Report emphasizes "more than 3,200 new appeals per year" to describe the "increased workload" upon the courts of appeals. It fails to report, however, that the district judges would be relieved immediately of an even greater number of appeals than would be added to the courts of appeals. The AO Statistics make clear that if a direct appeal system had been in effect, the district court judges would have been relieved of scheduling, hearing, and deciding 3330 bankruptcy appeals filed in 1998, 3452 of those filed in 1997, 3847 in 1996, 4292 in 1995 and 4513 in 1994. The district judges relieved from those appeals would have been, and will be henceforth, available to help share the increase in the court of appeals bankruptcy appeal workload described at pages 58-59 of the Draft Report. Since court of appeals panels regularly include a district judge, a substantial pool of Article III judicial talent would be available to relieve the perceived "increased workload."

Elimination of over 1200 "second appeals" from those which would otherwise come before judges of the courts of appeals, plus the availability of those district judges who would have been required to hear and decide between 3330 and 4513 intermediate level bankruptcy appeals annually, should certainly more than offset (or at least substantially reduce) any strain on the courts of appeals caused by elimination of the district courts and the BAPs as fora for bankruptcy appeals.

The Draft Report asserts the premise that "direct review might increase appellate caseloads more than 6% (i.e., more than 3,200 new appeals per year)," and links that premise to the conclusion that it would add between "50 appeals per panel each year" in six circuits and up to "100 new appeals per panel" in three circuits, Draft Report at pages 58-59. The statistical data under-girding the premise appears to be seriously askew..

The "3,200" number is reached by taking all bankruptcy appeals filed at the district court and BAP level between June 30, 1997 and June 30, 1998 (4478 total, of which 3330 were filed in the district courts and 1148 in the BAPs), subtracting the number of bankruptcy appeals filed in the courts of appeals (1250), and thus arriving at a net 3228 "Appeals Added" for that statistical period ended June 30,1998. What is left out from the computation is the statistical experience for cases terminated prior to submission of an "appeal" to a "panel."

Of the 3330 bankruptcy appeals to the district courts filed in the 1997-1998 statistical year, decision or judgement was entered during the year in only 13.9% of the cases. A reported 39.9% were dismissals (including voluntary) and other terminations (reported as transfer, remand to U.S. agency, and statistical closing) prior to decision. Some 49% of the cases were still pending as of June 30, 1998. Accordingly, of the cases that reached disposition, over 76% were terminations prior to a merits decision. Parallel percentages for FY1997, FY1996 and FY1995 were 67.9%, 70.4% and 67.8%. Shown graphically:

It is apparent that the Draft Report projection should reflect that 67% to 76% of bankruptcy appeals will be terminated before submission for decision on the merits.

Any increase in asserted burden upon the courts of appeals would, it is respectfully submitted, be more than balanced by the benefits flowing from the change. A cognizable body of binding bankruptcy precedent would be created in a short time. Whatever the initial number of appeals, it is clear that bankruptcy litigation and bankruptcy appeals would be reduced as binding precedent is established by each circuit. Lawyers who litigate settled issues would almost certainly find fee allowances refused and malpractice liability or similar penalties established for vexatious or needless litigation. The courts of appeals would undoubtedly shape the interlocutory provision and reshape the concept of "finality" to arrive at review standards that work in the various bankruptcy case settings. Review would be quick and direct. If judicial personnel were required to handle an initial surge of appeals, or if other temporary circumstances required, it may well be that panels could sit with two Article III judges and a bankruptcy judge without threatening a rerun of Northern Pipeline v. Marathon. The absurdity of dual appeal routes would be eliminated. A system of appeals directly to courts fitted for the task of appellate judging must work better than the current district judge bankruptcy appeals patchwork, so often administered by judges who feel overburdened by their "normal" trial schedules, and who may be untrained for the role of appellate reviewer.

The Commission’s Draft Report notes that a "speedy resolution is often essential in bankruptcy appeals," suggesting that district judge appellate review is necessarily speedier than a direct appeal to the courts of appeals. No statistics or anecdotal material is cited.

Statistical data prepared by members of the Federal Judicial Center staff was transmitted to participants at the 1997 National Bankruptcy Judges Conference and was published in its proceedings. Although the data was not prepared on a precisely comparable basis, the conclusion is apparent that bankruptcy appeal times in the district courts and in the courts of appeals are roughly the same. As to district court appeals, the mean time from filing to disposition for 1994 (the earliest year reported, and a year in which most of the cases had been terminated) was 219 days and the median time was 154 days. As to the court of appeals bankruptcy appeals for the 1994 year, procedural terminations were reported with a mean of 146 days and a median of 106 days; merits terminations with a mean of 323 days and a median of 301 days. The split between procedural and merits terminations for the district courts was not reported

The experience with bankruptcy appeals to the district judges reported anecdotally is as varied and haphazard as one might anticipate when proceedings are taken to 647 potential fora, manned by judges whose daily experience is the trial of civil and criminal cases, and who often consider bankruptcy appeals an unwelcome intrusion. I recall taking an appeal shortly after enactment of the Bankruptcy Code. The district judge commented after a few minutes: "I don’t understand this bankruptcy stuff. What I understand, I don’t like. And I’ve already heard more than I want to hear." There are anecdotal reports of appeals which have lingered for several years with a district judge "hoping that it will go away," balanced by experiences where district judges heard appeals and made decisions within days, especially in matters of local notoriety.

It seems clear, however, that distance from the bankruptcy court location is not a significant factor (except perhaps in the relatively rare bankruptcy appeals filed by unrepresented debtors). In many instances, particularly in less populated areas, the bankruptcy court may not be in the same location as the district court. In other instances, it is often more convenient to travel (especially by train or air) to the urban areas where courts of appeals tend to sit than it is to drive to more remote areas. More to the point, today most appeals require an in person appearance only on the day of argument, and then generally by counsel only. Most other events are as readily accomplished by mail or electronic transmission. Also, it is often the case that only the debtor or certain of the principals of the debtor reside in the locale of the bankruptcy court. The various creditors or other parties often reside elsewhere.

It has not been demonstrated that three bankruptcy judge experts are wiser than one bankruptcy judge expert, or that specialist judge review is superior to "generalist" judge review. It does seem persuasive, however, that at least one level in the bankruptcy process needs pass before one or more Article III judges. That brings one back to the first position. There is no justification for the delay, the cost or the confusion resulting from the insertion of an intermediate and non-binding BAP on the road to reaching a binding Court of Appeals precedent.

One may view the recent past as a mirror to the future. The bankruptcy courts will be the venue for health care insolvencies like Allegheny Hospital (involving hundreds of care providers and thousands of current or potential patients), municipal reorganizations such as Orange County, California, the salvaging of high tech and communications companies (whose primary assets are restrictive covenants binding key employees and licensing agreements from suppliers and with customers), mass tort casualties such as A. H. Robins and Johns Manville (miracle drugs or products gone wrong), and the near-miss restructuring of Long Term Capital LLP (billions of dollars of marketable derivatives). The cases illustrate the frequently unrecognized truth about bankruptcy proceedings: the seriously litigated bankruptcy matters concern contracts, secured transactions, torts, trust indentures, commercial law –the stuff of a general law practice. As to substantive law issues, the appellate function of "error correction" is probably best accomplished in a "generalist" Article III appellate court. As to procedural matters, the need is for the "law declaration" function of the appellate process: development of a cognizable body of binding bankruptcy precedent. Both of these appellate roles may be most expeditiously accomplished by a system of bankruptcy appeals directly to the courts of appeals.

Respectfully yours,

Nathan B. Feinstein

/nbf