New Jersey State Bar Association - The voluntary Bar Association of New Jersey, serving members since 1899.

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NJSBA Acts on Bankruptcy, ELEC and Budget Issues

NEW BRUNSWICK, NJ—The NJSBA has been busy over recent weeks working to advance association positions on bankruptcy reform, proposed amendments and rules of the Election Law Enforcement Commission and the 2005-2006 state budget.

Bankruptcy Reform

The NJSBA has taken positions on two separate pieces of legislation that would reform the bankruptcy process for the first time in nearly 30 years.

The NJSBA board of trustees voted to support S. 314, the Fairness in Bankruptcy Litigation Act of 2005, at its Feb. 18 meeting, to protect consumers, creditors, workers, pensioners, shareholders and businesses by reforming the rules governing venue in bankruptcy cases to combat forum shopping by corporate debtors.

“The venue amendment enables the court of that jurisdiction to make determinations that affect employees, creditors and other parties of interest rather than an unrelated unconnected jurisdiction making those decisions,” said Barry Frost, chair of the NJSBA Bankruptcy Law Section.

Cited as impetus for the legislation are corporations that have filed for bankruptcy in jurisdictions far from their home turf, such as Enron.

In his statement to the Senate Committee on the Judiciary, bill sponsor Sen. John Cornyn (R-TX), said the new legislation, “would prevent corporate debtors from moving their bankruptcy cases thousands of miles away from the communities and their workers who have the most at stake. And, it will prevent bankrupt corporations from effectively selecting the judge in their own cases.”

The Enron bankruptcy litigation was adjudicated in New York where Enron reportedly employed fewer than 60 people, rather than in Texas, the jurisdiction where the majority of their employees were located.

“These cases should be filed in the main business jurisdiction rather than an unrelated jurisdiction,” said Frost.

“The jurisdiction should have a feel for what happens to the local economy,” he added.

In a letter supporting passage of the venue legislation to members of the Senate Judiciary Committee, NJSBA President Edwin J. McCreedy wrote, “the abuse of the existing venue provisions is corrupting the entire bankruptcy process. It has even been suggested…that some Bankruptcy Courts have been especially accommodating to debtors and their professionals in an attempt to attract large and prominent businesses to file for Chapter 11 in those venues.”

McCreedy further indicated that forum shopping skews the bankruptcy process and the venue legislation would “foster greater local control over important business and community decisions. It will allow New Jersey business and employee groups to play a greater role in the bankruptcy cases of New Jersey companies.”

Prominent New Jersey companies who have recently forum shopped their bankruptcy cases to other states include Formica, Bradlees, Jamesway, Loehmans, Rickels, Exide, Amazing Savings and MIIX Insurance. This “forum shopping” wrote McCreedy, forces New Jersey based businesses, employee groups and creditors to “retain high-priced Manhattan or Delaware attorneys, rather than New Jersey counsel and are further forced to travel significant distances to protect their rights.”

S. 314 was introduced on Feb. 8, 2005. It has been referred to, and is awaiting further consideration by the Senate Committee on the Judiciary.

The second piece of bankruptcy reform legislation is S256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. On Feb. 18, the NJSBA board of trustees opposed this bill that would amend federal bankruptcy laws and make it more difficult for middle-income individuals to file for bankruptcy under Chapter 7 and get a fresh start. The legislation would also create a host of new requirements that could hit debtors even harder by increasing bankruptcy filing and related costs.

“The new legislation will have a dramatic impact on the middle-income debtor because the new statute will require them to make payment back to unsecured creditors which is not now required in order to save a house,” said Frost.

“With an income above the state median, the debtor would be required to make payment back to unsecured creditors. That may or may not be doable based on income. You’re really hitting the people who make between $60,000 and $100,000 a year, with a family of four who are struggling with medical and other bills. Instead of curing mortgage arrears to save their house, they have to make payments to save the house,” he said.

Under the proposed means test, if the amount of debtor income remaining after certain expenses are deducted from the debtor’s current monthly income exceeds a specified threshold, the debtor would be ineligible for Chapter 7 relief (complete relief in bankruptcy), and would be required to file under Chapter 13 (adjustment of debts of an individual with regular income).

The new legislation would have what Frost called, “artificial criteria” for allowed expenses.

“The new legislation seems to impact an IRS regulation on allowable expenses which may or, may not have relevancy in today’s economy,” he said.

Other provisions in the legislation would make it more expensive for those debtors as well. The bill requires that the Executive Office for the U.S. Trustees establish a debtor education program.

“It becomes more expensive to file a bankruptcy because the debtor would need to seek debt counseling before they are eligible to file,” said Frost. “Not only does the debtor have to pay expenses to file for the bankruptcy, but now also must come up with expenses for debt counseling, which may or may not be helpful.”

Another problem is the requirement that an attorney execute a certification stating that the facts told by the debtor are true and that the attorney has made reasonable inquiry to those facts.

“Diligent inquiry is the issue here,” said Frost. “If a client lies, you are potentially liable. Eventually, the courts will have to make a determination, but in the meantime, this would be the attorney’s responsibility. If the client is lying, then what do you do? This affects attorney-client privilege and takes the frivolous litigation statute and adds a whole other level.”

Proponents of the legislation argue that it will lower the costs of good and services for all consumers by enabling companies and issuers of credit to collect unpaid debts more easily rather than passing on those costs.

Critics claim the measure favors banks and credit card companies who are largely responsible for the high rate of bankruptcies because of heavy promotion of credit cards and loans that often come with large and largely unseen fees for late payments.

On March 15, S. 256 was referred to the House Committee on the Judiciary and the Committee on Financial Services. The Senate approved the measure on March 10 by a 74-25 vote in favor of the bill.

ELEC Lobbying Regulations

The Election Law Enforcement Commission held a hearing on March 15 on the proposed amendments and new rules implementing the “Legislative and Governmental Process Activities Disclosure Act,” N.J.S.A. 52:13C-20. The proposal is the result of seven bills signed into law as part of the 2004 legislative ethics reform initiative and an eighth bill that became effective April 2004. Together, the new laws changed the scope of lobbying activity and reporting in New Jersey and the new rule proposal implements those changes.

A summary of the proposal can be found on the March 14, 2005 Capitol Report, at From the left index select Government Relations and then Capitol Report.

Paul Josephson of Hill Wallack testified on behalf of the NJSBA at the hearing and presented the association’s concern that the proposed amendments and new rules encroach on the New Jersey Supreme Court’s authority to regulate the practice of law.

The proposal further seeks to regulate government contract processes for which regulat