Bankruptcy Case Law: Navigating Complex Proceedings

Navigating the complexities of bankruptcy law can be challenging. Bankruptcy proceedings often involve nuanced interpretations of statutory provisions, equitable considerations, and procedural rules. Staying informed about recent case law is crucial for practitioners seeking to represent their clients effectively in this intricate area of law. 

The Framework of Bankruptcy Law

Bankruptcy law in the United States is governed primarily by Title 11 of the United States Code, commonly referred to as the Bankruptcy Code. The Code outlines various types of bankruptcy, including Chapter 7 (liquidation), Chapter 11 (reorganization), and Chapter 13 (individual debt adjustment). Federal bankruptcy courts, as units of the district courts, have exclusive jurisdiction over these proceedings.

The overarching goal of bankruptcy law is twofold: to provide debtors with a fresh financial start and to ensure equitable treatment of creditors. Achieving this balance often requires courts to interpret ambiguously worded provisions and weigh competing interests, leading to the development of significant case law.

Recent Case Law Trends

The Dischargeability of Student Loans

One of the most discussed topics in recent bankruptcy jurisprudence is the dischargeability of student loans. Under 11 U.S.C. § 523(a)(8), student loans are not dischargeable unless repaying them would impose an “undue hardship” on the debtor. Courts have historically applied the Brunner test (from Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987)) to determine undue hardship. This test requires the debtor to prove:

1. They cannot maintain a minimal standard of living if forced to repay the loans;
2. Their financial situation is likely to persist for a significant portion of the repayment period; and
3. They have made good faith efforts to repay the loans.

In recent years, some courts have reexamined the rigidity of the Brunner test, particularly as student loan debt has skyrocketed. The test has discouraged many debtors from even attempting to discharge their loans, despite evidence that a significant minority of those who try are successful in obtaining at least partial relief​. As a result, some courts have explored alternative approaches to undue hardship. The Eighth Circuit’s “totality of circumstances” test, for example, considers:

1. The debtor’s financial resources,
2. Necessary living expenses, and
3. Other relevant facts and circumstances.

This broader approach aims to provide more equitable outcomes by allowing courts greater discretion.

Third-Party Releases in Chapter 11 Plans

Another contentious issue involves third-party releases in Chapter 11 reorganization plans. These releases shield non-debtor parties, such as corporate officers or affiliates, from future liability related to the debtor’s financial troubles. While some courts allow such releases if they meet stringent fairness and necessity requirements, others reject them outright as exceeding the scope of bankruptcy jurisdiction.

The Supreme Court’s landmark decision in Harrington v. Purdue Pharma L.P. illustrates the controversy. The dispute originated in Purdue Pharma’s opioid-related bankruptcy, where lower courts offered differing views. The bankruptcy court approved releases shielding the Sackler family from liability in exchange for a multi-billion-dollar settlement, citing public health benefits. However, the district court vacated the plan, stating the Bankruptcy Code lacked explicit authority for such releases. The Second Circuit reinstated the releases, emphasizing exceptional circumstances and creditor support. The Supreme Court, in a 5-4 decision, reversed this ruling, declaring that bankruptcy courts cannot grant third-party releases without statutory authorization. This decision significantly restricts the use of such provisions, complicating mass tort resolutions and prompting calls for legislative reform to address the gap in statutory authority.

Best Practices for Navigating Complex Proceedings

To navigate the evolving landscape of bankruptcy law, practitioners must adopt proactive strategies.

Understand Procedural Nuances

Bankruptcy proceedings are governed by both the Federal Rules of Bankruptcy Procedure and local court rules. Procedural missteps can delay cases or harm a client’s position. Attorneys should familiarize themselves with jurisdiction-specific requirements and maintain meticulous attention to detail when filing motions or pleadings.

Embrace Mediation and Alternative Dispute Resolution

Bankruptcy courts increasingly encourage mediation to resolve disputes efficiently. Attorneys should consider mediation as a tool to avoid protracted litigation, particularly in contentious matters like preference claims or plan confirmation disputes.

Leverage Technology

Advances in legal technology, such as AI-powered research tools and case management software, can streamline workflows and enhance analytical capabilities. Attorneys should embrace these tools to improve efficiency and provide cost-effective services.

Ethical Considerations in Bankruptcy Practice

Bankruptcy practice presents unique ethical challenges, particularly when representing multiple parties with conflicting interests. Attorneys must be vigilant in avoiding conflicts of interest and ensuring compliance with disclosure obligations under Rule 2014 of the Federal Rules of Bankruptcy Procedure. They should also counsel clients about their duties under the Bankruptcy Code, including the obligation to disclose all assets and liabilities fully and accurately.

The duty of candor to the court is paramount in bankruptcy proceedings. Misrepresentations or omissions can lead to sanctions, dismissal of the case, or denial of discharge. Practitioners must prioritize integrity and transparency in every aspect of their practice.

Stay up to date on bankruptcy case law with Continuing Education of the Bar (CEB)

CEB provides a range of online services designed to enhance legal practice, including Practitioner, CEB’s all-in-one legal research solution with authoritative practice guides. Practitioner is meticulously crafted by California lawyers for California lawyers, providing comprehensive insights and resources tailored to your specific needs. All practice guides seamlessly integrate with CEB’s primary law research tool, empowering you to delve into California, Ninth Circuit Court of Appeals, and U.S. Supreme Court case law, alongside California statutes and the California Constitution. As part of the Practitioner subscription, you gain access to DailyNews, ensuring you stay updated on any critical new cases or developments in your field. And don’t forget, Practitioner also includes TrueCite®, CEB’s powerful case law citator, enhancing your research efficiency and accuracy.

Our tools offer unparalleled support in case law research, legal analysis, and staying updated with the latest judicial decisions. By choosing CEB, you gain access to a wealth of knowledge, enabling you to navigate complex legal landscapes with confidence and precision.