My November 9, 2024, letter to Jerry Nadler

 Josiah M. Daniel, III 

Retired Partner in Residence     Visiting Scholar 

                              Vinson & Elkins LLP                 Department of History, UT Austin  

U.S. Mail: 2904 Rosedale Ave., Dallas, TX 75205 

B: blog-josiahmdaniel3.blogspot.com/ 

E: josiahmdaniel3@gmail.com 

         

Rep. Jerrold N. Nadler                                                                                             November 9, 2024

Ranking Member, Judiciary Committee                                  via email and U.S. Mail

House of Representatives 

2132 Rayburn HOB 

Washington, DC 20515

Re: Your H.R. 9223 (the “Nondebtor Release Prohibition Act of 2024”) would,     unintentionally, impair Chapter 9 municipal bankruptcy, but the solution is simple. 

Dear Congressman Nadler:  

I respectfully submit my identification of an unintended flaw in your bill that would have an adverse effect upon municipal bankruptcy , along with my recommendation for an easy fix. By copy hereof, I also notify your co-sponsors, Congresspersons Cohen, Norton, Porter, Desaulnier, and Johnson, as well as Senator Warren.

Your bill creates a new § 113 in Chapter 1 of the Bankruptcy Code (the Code) that will be applicable to cases in all chapters that provide relief to debtors; that includes Chapter 9 (municipal bankruptcy) by virtue of Code § 103(f). 

The debtor in Chapter 9 must, of course, be a “municipality,” defined as a “political subdivision or public agency or instrumentality of a State,” i.e., a city, town, public hospital district, irrigation district, or other political subdivision of a State that has the power to tax, spend, and incur debt. Chapter 9 affords such a public debtor an opportunity to conduct and effectuate a restructuring through negotiations with creditors through a plan of adjustment, maintaining vital public services while discharging unpayable amounts of debt. While Chapter 9 case filings are rare, the availability of Chapter 9’s relief is vitally important for the financial health and operational wellbeing of American cities, towns, and special purpose districts

What your H.R. 9223 does not take into account is that a key element of municipal bankruptcy is a broad, automatic (but temporary) stay of debt-collection activities that shields the debtor and also protects certain, worthy, nondebtor third parties. But unlike the “extended automatic stay” that the Purdue Pharma bankruptcy judge ordered to protect the Sacklers, the municipal bankruptcy stay that protects certain third parties is entirely statutory and automatic, not discretionary with a bankruptcy judge—and exists in the Code for a very good purpose for ninety years now.  

The municipal bankruptcy stay is found in Code § 922(a)(1):  

§ 922. Automatic stay of enforcement of claims against the debtor 

(a) A petition filed under this chapter operates as a stay, in addition to the stay provided by section 362 of this title, applicable to all entities, of— 

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against an officer or inhabitant of the debtor that seeks to enforce a claim against the debtor . . . . 

As set forth in the first line of § 922(a), the Chapter 9 stay is “in addition to the stay provided by section 362 of” the Code, providing an additional stay for certain, very special and deserving third parties—namely, “an officer or inhabitant of the [municipal] debtor”—against legal process or judicial action “that seeks to enforce a claim against the debtor” by way of process or action.   

On fast glance, you might think this Code-based stay of Chapter 9 this stay resembles an extension of the automatic stay of Code § 362(a) or the issuance of a preliminary injunction by the bankruptcy judge in a mass tort Chapter 11 case in that it does protect some nondebtor third parties; but the Chapter 9 stay is fundamentally different—and therefore the Chapter 9 stay ought to be specifically excluded from the ambit of your H.R. 9223. 

First, the third parties that are protected—automatically by virtue of the municipality’s commencement of a Chapter 9 case—are not at all analogous to nondebtor third parties such as the Sacklers who caused massive damage and numerous deaths. Contrary to the appalling situation of the Sacklers, the third parties protected by municipal bankruptcy’s automatic stay are, first, the “officers” of the municipality, including elected and appointed officials who are governing, leading, administering, and performing the public-service functions of their city, town, hospital district, other political subdivision, or instrumentality of a State, and, second, all the “inhabitants” of that political entity. 

Quite obviously, those nondebtor third persons are not liable on creditors’ claims against the municipal debtor. But prior to Congress’s passage of municipal bankruptcy in 1934, such nondebtor officers and inhabitants of insolvent municipalities had historically been subjected to lawsuits by aggressive creditors, principally holders of defaulted municipal bonds—primarily but not exclusively in mandamus cases seeking to twist as many arms as possible to force a debtor municipality to increase tax rates and to collect defaulted taxes more aggressively in an effort—almost always nugatory—to cause more and faster payments on defaulted municipal bonds.   

It was Congressman Hatton W. Sumners (1875-1962),  serving as Chair of the House Judiciary Committee (1931 to 1947), who devised the predecessor provision of today’s Code § 922(a)(1) and drafted it into the municipal bankruptcy bill, H.R. 5885, he filed on June 2, 1933. His successor bill, H.R. 5950, carried that stay provision forward into his First Municipal Bankruptcy Act, also known as Chapter IX, that was enacted on May 24, the next year, 1934. That Act was legislatively (i) extended on April 10, 1936, (ii) reenacted as the Second Municipal Bankruptcy Act on August 16, 1937, and (iii) incorporated into the Chandler Act on June 22, 1938. The Chapter IX stay required entry of an order of the court, but when Congress in 1976 revised municipality bankruptcy, it made the municipal-bankruptcy stay automatic in that year’s revisions to Chapter IX, which of course was then adopted as the Arabically numbered Chapter 9 as part of the Bankruptcy Reform Act of 1978.

(For brevity, I have not footnoted my historical presentation above. I am about to submit for publication my archivally researched article on the history of the genesis of municipal bankruptcy. Upon your request, I would be happy to submit my full manuscript, and to point out the relevant archival citations, for the points I summarized above.)  

The specific way your H.R. 9223 will operate adversely upon today’s Chapter 9 stay is by forbidding the bankruptcy court to enter an order that would include injunctive relief in favor of nondebtor third parties:

[New] § 113 . . . (a) Except as provided in subsection (b) of this section, subsection (a)(3), (g), (h), or (i) of section 524,the court may not—. . . with respect to the liability of an entity other than the debtor or the estate [i.e., of a nondebtor third party] on, or the liability of property of an entity other than the debtor or the estate  for, a claim or cause of action of an entity other than the debtor or the estate . . . (2) . . .  enjoin—(A) the commencement or continuation . . . of a judicial, administrative, or other action or proceeding to assert, assess, collect, recover, offset, recoup, or otherwise enforce such claim or cause of action [i.e., against a nondebtor third party]; or (B) any act to assert, assess, collect, recover, offset, recoup, or otherwise enforce such claim or cause of action.

Here specifically is how your bill will thwart Chapter 9’s stay provision: 

Under Code §§ 921(b), (c), and (d), after the Chief Judge of the Court of Appeals designates the bankruptcy judge to handle the case, and after the bankruptcy judge finds the debtor filed the petition in good faith and that the petition meets “the requirements of this title to conduct the case,” then “the [bankruptcy] court shall order relief under this chapter [9].” So after the filing of the petition, the Chapter 9 case does not commence until after those preliminaries and until a bankruptcy judge “order[s] relief under this chapter.” 

At that point your H.R. 9223 would kick in and forbid and prevent (“the court may not”) the bankruptcy court to order Chapter 9 relief because, as Code § 922(a) provides, that order would activate the municipal bankruptcy stay: the Chapter 9 “petition . . . operates as a stay” or injunction during the case’s pendency that, as discussed above, automatically protects those certain statutorily designated nondebtor third parties, i.e., the municipal debtor’s “officers” and “inhabitants,” against litigation and assertion of claims by and from persons who also have claims against the debtor. 

Summarizing: under normal Chapter 9 process, the bankruptcy judge must enter an order approving the petition and ordering “relief under this chapter [9]” and that order activates the § 922(a)(1) statutory stay in favor of not only the debtor but also the nondebtor officers and inhabitants of a municipality. Your § 113 would prohibit a court order activating or providing such stay or injunctive relief protecting nondebtor third parties even for the finite pendency of the case.

In conclusion, your H.R. 9223 would turn the clock back 90 years for Chapter 9 municipal bankruptcy. It would eliminate or render impossible § 922(a)(1)’s protection of a municipal-debtor’s nondebtor officers and nondebtor inhabitants against the inevitable litigation brought by municipal bondholders and creditors who will—just like before 1934—seek to recover their claims against the municipalities by suing the officers and inhabitants for mandamus and other causes of action. 

To prevent that, all you have to do is revise H.R. 9223 by adding the following capitalized reference to Code § 922(a)(1):   

‘‘§ 113. Prohibition of nondebtor releases 

(a) Except as provided in subsection (b) of this section, subsection (a)(3), (g), (h), or (i) of section 524, SECTION 922(a)(1), section 1201, and section 1301, the court may not—. . . .”

Respectfully submitted,

Josiah M. Daniel, III

cc: Rep. Steve Cohen

Rep. Eleanor Holmes Norton

Katie Porter

Mark Desaulnier

Rep. Hank Johnson 

Sen. Elizabeth Warren

Words of wisdom re blaming or accusing others

Heard from the pulpit of All Saints Episcopal Church, Austin, Texas, this past Sunday, and cited to her "German grandmother" by Rev. Genevieve Razim, preaching:

"Remember that when you point your finger, there are three more fingers pointing back at you."

figurative language in academic/historical writing . . .

"[L]inguists, philosophers, and literary theorists who have investigated processes of textualization in scholarly discourse have all reached the same conclusion: writing an academic study without at some point resorting to figurative language is extremely difficult, even impossible."

Philippe Carrard, History As a Kind of Writing : Textual Strategies in Contemporary French Historiography, University of Chicago Press, 2017. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/utxa/detail.action?docID=4785185.

A good definition of "American demagogue"

Here is a book I discovered in history grad school. Published in 1954, it is relevant today: Reinhard H. Luthin, *American Demagogues--Twentieth Century* (1954 & 1959), with an introduction by the great historian Allan Nevins.

The author presents a very functional definition of "American demagogue":

"masters of the masses who, in their aspirations for political place and power pandered to the passions and prejudices, rather than the reason of the populace, and performed all manner of crowd-captivating tricks. . . . He is a politician skilled in oratory, flattery, and invective; evasive in discussing vital issues; promising everything to everybody; appealing to the passions rather than the reason of the public; and arousing racial, religious, and class prejudices--a man whose lust for power without recourse to principle leads him to seek to become a master of the masses."

He added, perspicaciously:

"In a future fraught with complex social, economic, and diplomatic dilemmas, future demagogues will probably find more untapped areas of ignorance, prejudice, bigotry, and emotionalism to exploit. With television and other means means of mass communication, their voices and their faces may invade any home in the United States--and many abroad. Such professional 'men of the people' accordingly present a persistent problem which this and future generations of Americans and peoples of other lands will be forced to face."

In the Intro, Professor Nevins notes: "We have had plenty of demagogues in state and city affairs. . . . But we have never had a President who by the wildest stretch of the English language could be justly called a demagogue."

That was in 1954 . . . . . . .

I attach the title page and the TOC.

Further to my critique of today's SCOTUS: "judicial hubris"

 From the intro to a new law article (footnotes omitted):

In its 2024 decision overruling the decades-old Chevron doctrine directing judges to accept an

agency’s reasonable interpretation of ambiguous statutory language, the Supreme Court declares:

“agencies have no special competence in resolving statutory ambiguities. Courts do.” This Article

makes clear how profoundly blinkered an assertion of judicial hubris this statement is. We present

findings from a qualitative empirical study of how agencies work with the statutes that give them

authority to act, showing that interpreting statutes to ensure that they have effect in the world is at

the heart of agency competence. Loper-Bright, much like the Court’s recent supercharging of the

“major questions doctrine,” rests on two flawed assumptions . . . .

Anya Bernstein & Cristina Rodríguez, Working with Statutes, forthcoming Tex. L. Rev. 2025)(emphasis added). 

I agree, and I recommend this article to all who have serious interest in the Court and are concerned about it trajectory.

I agree with Alan Nevins here:

"Instead of dissecting impersonal forces … the historian should narrate the past in terms of living men and women seen as individuals, groups, or communities; and he should give due emphasis to personal motivation and initiative."

Allan Nevins (1890-1971)

Historian, Columbia University Faculty, 1928-58

From my new post on SSRN titled "Early Ruminations on the Supreme Court's Purdue Pharma Decision," available free at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4915343, on pages 11-12 is my insight that I believe represents a unique contribution to the national discussion about this case (footnotes omitted):

3. The Court’s attempt to characterize the nature of the bankruptcy discharge by assertions of legal history fails. 

The attempt of the majority to provide the legal history of the discharge in bankruptcy cases stumbles badly. The current Court considers itself expert in legal history, as its decision-making has made a purported “turn to history” in many subject matter areas in recent years. The Purdue majority purports to furnish relevant history to buttress its conclusion about the nature of the discharge in bankruptcy, but its contention here is insupportable. 

Specifically Justice Gorsuch’s opinion avows:

history offers a third [strike against the dissent’s construction of §1123(b)(6)]. When Congress enacted the present bankruptcy code in 1978, it did “not write ‘on a clean slate.’” . . . Recognizing as much, this Court has said that pre-code practice may sometimes inform our interpretation of the code’s more “ambiguous” provisions. . . . While we discern no ambiguity in §1123(b)(6) for the reasons explored above, historical practice confirms the lesson we take from it. Every bankruptcy law the parties and their amici have pointed us to, from 1800 until 1978, generally reserved the benefits of discharge to the debtor who offered a “fair and full surrender of [its] property.” 

From the context, it is clear that the Court is speaking of the statutory law of bankruptcy, not its case law or common law. While the parties and the amici curiae may well have failed to point it out, the majority’s proclamation about “[e]very bankruptcy law” is incorrect because one entire chapter of the bankruptcy law that was adopted and was effective for the half century before 1978—a restructuring chapter, no less—unequivocally provided for a debtor to receive a bankruptcy discharge of claims without surrendering its assets. And that chapter remains in effect today. 

Chapter IX of the Code’s predecessor, the Bankruptcy Act of 1898, known as municipal bankruptcy, afforded the judicial relief of adjustment of debts for municipal debtors, and this bankruptcy law provided explicitly for a discharge of debts with no surrender of properties into a bankruptcy estate or otherwise into the custody of the bankruptcy court. In municipal bankruptcy, there is no estate, and the debtor not only continues in possession of its assets but also is free to manage and dispose—even sell—those assets without bankruptcy court approval. 

The deep legislative history of bankruptcy discloses that one of the innovations of the robust elaboration, development, and reformulation of bankruptcy and reorganization law that occurred during the New Deal was that Congress came to understand that a prior concept of a “fair and full surrender of [its] property” was not a sine qua non of all forms of bankruptcy relief. In a nutshell, here is the interesting story of the evolution of bankruptcy’s constitutional and legal theory that accompanied the formulation and enactment of Chapter IX municipal bankruptcy. 

In the flurry of legislative activities during the lame duck phase of Herbert Hoover’s presidency and then the first year and a half of Franklin D. Roosevelt’s first term, members of Congress offered bills to innovate municipal bankruptcy for the relief of many thousands of cities, towns, and other political subdivisions of states that had become insolvent—unable to pay their outstanding bonds. Opponents of the adoption of Chapter IX argued vehemently that surrender of assets for administration by and under the bankruptcy court was the absolutely essential element of bankruptcy, and because a Chapter IX debtor would retain its properties, municipal bankruptcy would be unconstitutional under precedents such as Sturges v. Crowninshield and Hanover Nat. Bank v. Moyses. 

But an important legal thinker, the Chair of the Judiciary Committee of the House of Representatives, Congressman Hatton W. Sumners of Dallas, analyzed the Constitution’s article I, § 8, clause 4 (the “Bankruptcy Clause”) and that article’s § 10 (the Contracts Clause) and determined that Congress’s power to legislate statutory bankruptcy law is not so limited. It was Sumners who on January 21, 1933, filed the first bill to afford bankruptcy relief for insolvent political subdivisions of states, and he soon crafted the specific legislation that was enacted as the First Municipal Bankruptcy Act in 1934 and, after the Supreme Court invalidated it in Ashton v. Cameron County Water Improvement District No. 1, re-enacted the law as the Second Municipal Bankruptcy Act in 1937. 

Sumners’s rationale survives and continues justify municipal bankruptcy today. Then and still, municipal bankruptcy contains no concept of property of the estate and requires no turnover of assets to the bankruptcy court. A municipal debtor receives the same reorganizational relief that a Chapter 11 debtor does and that includes a discharge of debts upon confirmation of a plan—but with no surrender of assets. So the majority is incorrect in its historical allegation about surrender of property.

-Josiah Daniel