Lunchtime Conversation Prompts Judicial Inquiry

Over the past year, the Houston bankruptcy court judges have written quite a number of opinions calling attention to unprofessional practices. These opinions have reacted to proceedings coming before their courts, many of which have been quite disturbing. However, now Judge Marvin Isgur has gone one step further. He has initiated a proceeding to investigate a credit counseling agency based upon a lunchtime presentation he attended. In re Credit Counseling in the Southern District of Texas, No. MC-07-301 (Bankr. S.D. Tex. 2/15/07).

Judge Isgur Gets Indigestion and Issues An Order

According to Judge Isgur:

"On January 26, 2007, the undersigned judge attended the monthly meeting of the Houston Association of Debtors Attorneys. At that meeting, the speaker was the chief executive officer of Money Management International. In responding to a question from the audience, the speaker told the assembled group that Money Management International had an employment policy that barred the employment of any credit counselor who had previously been in bankruptcy."

This concerned Judge Isgur because 11 U.S.C. Sec. 525 provides that "no private employer may ... discriminate with respect to employment against an individual who is or has been a debtor under this title ... solely because such debtor or bankrupt" has been a debtor. Thus, an entity which functions as a gatekeeper for the bankruptcy process appeared to be violating the Bankruptcy Code.

Judge Isgur noted that the U.S. Trustee is given responsibility for regulating credit counseling agencies, but surmised that "the United States Trustee would not necessarily have inquired into Money Management International's employment practices as regulated by Sec. 525 of the Bankruptcy Code." In response to this concern, the court issued an order which "requires that the United States trustee determine whether Money Management International should remain on its approved list of counseling agencies." The court scheduled a hearing for March 1, 2007 for the U.S. Trustee to advise the court as to the current status of Money Management International.

By What Authority?

Judge Isgur's concern for the integrity of the bankruptcy system is commendable. It seems apparent that he wants to encourage Money Management International to amend its ways and comply with Title 11. However, the procedure followed is somewhat novel.

Congress gave the power to regulate credit counseling agencies to the United States Trustee, a division of the Department of Justice. Under 11 U.S.C. Sec. 111(b), the United States Trustee is given authority to approve a credit counseling agency for a probationary period of six months and then for successive one year periods. Any person who disagrees with a final decision to approve or deny a subsequent one year appointment may seek review from the appropriate district court of the United States within 30 days.

If this were the entirety of the statutory scheme, then Judge Isgur would appear to be on shaky ground. However, there is another curious provision. Sec. 111(e) states that:

"The district court may, at any time, investigate the qualifications of a nonprofit budget and credit counseling agency referred to in subsection (a) above, and request production of documents to ensure the integrity and effectiveness of such agency. The district court may, at any time, remove from the approved list under subsection (a) a nonprofit budget and credit counseling agency upon finding such agency does not meet the qualifications of subsection (b)."

Thus, the "district court" is given almost blanket authority to review the status of credit counseling agencies "at any time." 28 U.S.C. Sec. 157(a)allows the District Court to refer proceedings arising under Title 11 to the Bankruptcy Court. Thus, unless the term "district court" is intended to refer to the actual U.S. District Court rather than the Bankruptcy Court acting under referral from the District Court, Judge Isgur acted exactly as Congress intended.

Who Is the District Court?

The choice of the words "district court" in Sec. 111 is unusual. In most instances, Title 11 refers to "the court" or "the bankruptcy court." The term "district court" is found in only a few sections. In a few cases, it is used to refer to the U.S. District Court appointed under Article III. For example, under the pre-BAPCPA version of 11 U.S.C. Sec. 110, the bankruptcy court was permitted to certify certain violations by bankruptcy petition preparers to the district court. (Under BAPCPA, this provision was changed to refer to "the court" and eliminate the need to certify the fact to a higher court). In Sec. 524(g)(3)(A), the issuance of certain channeling injunctions are valid if the confirmation order is issued or affirmed by the district court. Both of these sections clearly referred to the Article III court.

Two other provisions are more ambiguous. Sec. 526(c)(4) grants concurrent jurisdiction to the district courts of the state in situations where a state official could bring an action against a debt relief agency. However, other subsections within Sec. 526 refer to "the court" or "a Federal court" such that the context is not clear. In Sec. 1116(4), the debtor must file other documents required by a local rule of the district court. Bankruptcy court local rules are adopted under the authority of the district court. As a result, the reference to district court rules clearly refers to bankruptcy court rules.

While the use of the term "district court" in section 111(e) is ambiguous, it probably refers to the bankruptcy court acting under reference from the district court. The subsection contemplates the court initiating an investigation and making findings with regard to the suitability of a credit counseling agency. It is unlikely that a U.S. District Court, which has no direct dealings with credit counseling agencies, would have the time or inclination to launch such an investigation.

Conclusion

When I began this article, I expected to conclude that Judge Isgur had initiated a well-intentioned but unauthorized Star Chamber proceeding. I believed that the U.S. Trustee had the sole authority to regulate credit counseling agencies and that this case raised a separation of powers issue. Therefore, I was surprised to find that Congress had authorized this type of independent inquiry. This is a remarkable section of the Code and one which has received little attention.

Thus, what is really remarkable about Judge Isgur initating a Miscellaneous Case to investigate comments made at a bankruptcy luncheon is that it seems to be exactly what Congress intended. Sec. 111(e) appears to authorize the bankruptcy judge to launch independent investigations based on whatever facts come to his attention, whether in court, at a luncheon or in cocktail party chatter. This marks a dramatic shift in the role of the court. One of the hallmarks of the Bankruptcy Code of 1979 is that it removed the court from the role of administrator. Now, under BAPCPA, the same Congress which took away much of the Court's discretion with regard to means testing, has given the bankruptcy court an independent administrative role.