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Interview with: Arthur Moller
Interview by: David Courtwright
Date: June 13, 1975
Archive Number: OH 126
I: 00:20 June 13, 1975. Interview with Judge Arthur L. Moller. David Courtwright is the interviewer.
DC: Judge Moller, I thought we’d begin by discussing how you came to be a judge in bankruptcy court.
AM: I had been the Chief of the Civil Section of the United States Attorney’s Office for a few years, and the judges apparently had gained some confidence in me, and when there was a vacancy here, well, they asked me if I would take it on, and I agreed to. And so I was appointed on June the 15th, 1962.
DC: What was your background before that?
AM: Principally in the civil area of the law, and that, I think, is the only background that someone needs to get into the bankruptcy work.
DC: Is bankruptcy law highly specialized?
AM: (chuckles) I have found out that that is correct, yes. There are an awful lot of people who seem not to have taken the time to learn very much about it, and that’s one of our primary troubles when it comes to the clogged docket that we presently have in the bankruptcy cases.
DC: How serious is the backlog?
AM: We’re running about— Let’s see. We have about 1,900 cases presently pending on the docket, and that is the highest that we’ve ever had as far as the backlog is concerned.
DC: Is this due to the recent recession?
AM: Yes, in part. In part. And also it’s due to the fact that our cases here are primarily in the business area. We have only a limited number of the consumer type cases. The business cases are the ones where you have all sorts of litigation within the framework of a single case.
DC: Is that by design or by accident? Is there a jurisdictional fiat that says your court will deal only with business cases?
AM: 02:39 No. It’s just the— I really think that the primary reason for the shortage as compared to national statistics of the consumer cases is that Texas has never permitted garnishment of current wages, and that seems to be one of the biggest incentives going for the consumers to file in the bankruptcy court. The jurisdictions—and I have to use as an example, say, northern Alabama, which is the highly industrialized area of Birmingham. Alabama has always permitted a garnishment of a total wage, and of course, there has been a federal law that places a restriction on the total amount that can be garnished out of a current paycheck, reducing it down to about—I mean, leaving the debtor approximately 25% of his paycheck. But even that hasn’t cured the problem as far as these states that do permit the garnishment so that northern Alabama consistently runs about 6,500 cases a year that are strictly consumer cases.
DC: Then what is it in Texas that drives a consumer to file for bankruptcy?
AM: An excess of borrowings that are secured by, say, personal property, usually household goods. Under our state law, those items are exempt, but there is no inhibition against the man’s waiving the exemption and giving a loan company a security interest or a lien on that property, which is a tremendous spur or club, you might say, for the lender.
DC: Do many people seek to escape the harassment of creditors when they come to court?
AM: Yes. That’s their primary reason for it because with the type of exemptions that we do have, the best collection tactic left to the creditor is harassment. There are things like telephone calls in the middle of the night, telephone calls at the office, things of that sort, and it has a way of compelling them to go somewhere for relief.
DC: Are these tactics legal?
AM: There are restrictions on collection tactics under the state law, but I don’t know what they are. State law in that kind of an area is something that I haven’t had occasion to deal with for a long time, so I don’t know what the details are.
DC: Let’s look at the other side of the issue now. Have you seen any cases where the so-called honest debtor isn’t so honest?
AM: 05:53 Sure, you have a number of cases like that. I say a number. I’ve been here—what—two days short of 13 years, and I think I have had possibly half a dozen where because of lack of morals, either commercial morality or other morality, the debtors have lost their discharge. The discharge is the release from the indebtedness, the primary reason for coming here. But that discharge goes to the honest debtor. That’s the way the act is structured, and there are some inhibitions written into Section 14(c) that the violation of any of those will result in his losing his discharge.
DC: About what percentage of cases involving consumers result in a revocation of the discharge?
AM: Oh, if you limit it to the consumer area, there are virtually none. I can just off of the top of my head think of only one in all these years where a consumer lost his discharge.
DC: So these are mostly in the business realm.
AM: They are designed to operate in the business area rather than in the consume area. In the consumer area there are grounds on which a particular debt can be determined non-dischargeable, but that’s quite different from a loss of his discharge completely. A complete denial of a discharge means that the man is released from none of his debts. All of the ones that he owed at the time he filed remain his obligation, and it’s a life sentence. The only way to get out of them is to pay them.
DC: If a discharge is revoked, does this result in an outright liquidation of his estate?
AM: The exemptions that are permitted to a bankrupt, those are the state law. That’s by virtue of Section 6 of the Bankruptcy Act so that whether he does or does not get his discharge, he still retains his exemption.
DC: Is there much conflict between federal and state law in this area?
AM: There can’t be because of the constitutional provision that has been in the Constitution since 1789. That was the rewriting of the United States Constitution, and in the area of bankruptcy, the federal government is supreme so that there can’t be a conflict. There are certain areas like these exemptions that I referred to where you do have the state law applying, but that’s because the Bankruptcy Act provides that they shall apply.
DC: Have you observed any well-defined cycles of business bankruptcies before your court?
AM: 09:05 I think so, and the present one is a good example of that. We are presently, I think, in a real crisis as far as building and land ventures are concerned. I don’t care whether it’s home building or apartment building. This is the worst one we’ve ever had in that respect. But looking back, I suppose in late 1962 and early ’63, we had a bit of a crisis in the multifamily unit apartment buildings. There were a dozen or more that were filed during that period. There was a definite overbuilding for the then demand. That subsided later, and we had a recurrence of that in about 1968 where we had, again, an overbuilding, and it just took a long time to catch up. Well, the present one we’re in started fairly early in ’74, and we haven’t peaked out yet. They’re still coming in at a very lively clip.
DC: What other types of business are especially prone to failure?
AM: When you have a major, major business like building, there are all sorts of allied industries that go with it: your air conditioning and heating contractors, your plumbing contractors, and so forth, so the thing mushrooms because of that.
DC: So you observe every day what an economist would call a linkage.
AM: Right. It’s very pronounced in these situations. If the grocery store on the corner goes under, it doesn’t affect any great number of people very much.
DC: Is it possible to separate out the effects of inflation and those of recession? How does inflation affect bankruptcy?
AM: Primarily, I would say in the fact that the take-home pay of the individual will not keep pace with the inflation so that his gross purchasing power goes down considerably. In the business area, it’s a case of the additional cost of labor. All of his employees have to get increases or they go somewhere else, and the profit margin in his product doesn’t keep pace with it, so then you do have these dropouts from that.
DC: Do businessmen allude to these factors in their briefs or their presentations?
AM: It’s rather well understood. It just goes along with it, so there hasn’t been a great deal of discussion of it.
DC: What are some of the more notable cases that have appeared before your court?
AM: 12:20 That’s a good one. I suppose one of the major cases was the McCullough Tool Company, which we had in 1968, which affected not only the oil well servicing business which they were in but also—and this really is what got them into trouble—they had entered into a land venture by purchasing a large and expensive amount of downtime property. Incidentally, the Hyatt Regency has been built on part of that property, and the Allen Center building, the multistory office building over there. Those are on the north and easterly perimeters of the 23-acre tract that got them into the trouble. It was a difficult case. We have two file cabinets of five drawers each that are full of pleadings that were filed in the case.
DC: There were a sizeable number of creditors?
AM: Yes, about between 3,500 and 4,000.
DC: (chuckles) Oh, my gosh. Texas, of course, is known for wildcat oil wells. Have you seen any of those kinds of cases in your court?
AM: Yes. We’ve had them both as straight bankruptcies and under the rehabilitation chapters. Does that rehabilitation chapter need an explanation for you?
DC: Well, you might go ahead and put it on tape.
AM: We have three primary chapters in the Bankruptcy Act—10, 11, and 12—that are designed with the court’s help to enable a debtor to, let’s say, correct the practices and mistakes that were made that brought the company into financial troubles and get them back on a good, even operating keel and then turn them loose again. Those are the ones that are a lot more work for the court, but the end result is certainly a lot more appealing than a liquidation, which is kind of like the liquidation cases after a while get you to feeling like a mortician.
DC: (chuckles) That reminds me, of course at one time all bankrupts were considered to be criminals, and one of the purposes of the 1938 act was to alleviate that situation. But surely there’s still a subtle stigma to someone who’s declared bankruptcy.
AM: You’re probably right, although I think it’s more local than general. In California, I get the feeling every once in a while that bankruptcy is sort of a status symbol. Everybody seems to have gone through it at some time or another—the actors that you read about and other prominent figures.
DC: I wouldn’t have thought that it was a chic thing to do.
AM: 15:42 (laughs) Well, it just depends on your point of view.
DC: In Houston, what is the psychological impact of the bankruptcy proceedings on a businessman, say one who has failed for the first time?
AM: I’m the wrong one to ask that because I’m not a clinical psychologist. I don’t think I’ve ever seen anyone who undertook to file without a lot of agonizing self-appraisal before he filed. It’s a last desperate effort, really. You have to face the fact that I can see nothing humane about a man’s being in serious financial trouble, and because of some hang-up, failing to file bankruptcy because it deprives him and his family of any chance of a rehabilitation, which really is the primary purpose in a bankruptcy proceeding, to free him from his debts that were undertaken through an error of judgment or something of that sort and let him go ahead and reestablish himself. In that regard, let me make this comment: There is no moral obligation on a man once he gets a discharge of bankruptcy to repay his old debts. But if he is strongly driven to do so, if he has a real feeling about it, he can legally do it. I can think of one man here in Houston who was a rather sizeable merchant, and during the Depression he did go through bankruptcy. After the Depression was over and he got back on a good operating level, he did search out all of his old creditors and pay them off. There were several that he had trouble finding because they were people from other areas, suppliers to his business. He advertised in the Wall Street Journal and anywhere else he could think about that he might reach them, and he finally found all of them except one and paid them off. That man can write his own ticket with any supplier who furnishes wares to a soft goods merchant.
DC: Are there any federal agencies that counsel people concerning bankruptcy, the Small Business Administration, for example?
AM: The Small Business Administration does have their Retired Executives Corps. They have an acronym for it, but I forget offhand what it is.
DC: It’s really crazy. I’ve heard it too.
AM: 18:55 Yeah. Anyhow, those people in that corps are people who have been very successful executives in business, and they are available for consultation with any of your businesspeople who feel that they need it, your smaller businesspeople. I don’t think that full advantage is being taken of their availability.
DC: But this is a fairly recent thing.
AM: It’s been going on for at least ten years.
DC: Oh, really?
AM: See, it comes as a surprise to just about everybody who hears about it.
DC: All right. I guess now I’d like to talk a little bit about the proceedings in the court. I’ve always been a little bit mystified by the difference between a judge and a referee. How is it their duties overlap?
AM: Let me give you a little history. In the beginning—and of course we are still operating under—you referred to 1938. Actually 1938 the so-called Chandler Act was a substantial rewriting or patching up of the Act of 1898, so we really are still operating under the 1898 Bankruptcy Act. In the beginning, the referee was set up as someone to whom the district judge referred certain things occurring within a bankruptcy case. And the referee in the beginning simply heard these things and made recommendations to the district judge for action to be taken in regard to them. Over the years it was realized that that was a pretty cumbersome and inefficient way to do it so that additional powers have been given to the referee, and I suppose the last big jump was—well, the biggest single jump was the 1938 act. There have been additional jurisdictions given in subsequent amendments to the act until now, the referee is called the bankruptcy judge—I mean, who used to be the referee is called the bankruptcy judge, and the district court in a bankruptcy case now sits as an appellate court. It’s the only court of original jurisdiction in our whole federal structure where the court of original jurisdiction serves in an appellate capacity for this specialized branch of their jurisdiction.
DC: What is the role of the trustee?
AM: The trustee is the court officer who does the liquidating and the general administering of the estate. It’s his responsibility to gather in all these assets, reduce them to cash, and then see to the distribution of those among the creditors who file their claims.
DC: Do the creditors have an active role in the proceedings?
AM: 22:25 The whole administration of the state is structured around creditor participation and, really, creditor control. It isn’t very effectively exercised by the creditors in very many cases. Part of it, I think, is because they have confidence in the trustees who usually are pretty well active in the cases. But they are entitled under the act and the bankruptcy rules to elect that trustee. If they fail to elect the trustee, well, then the court has the obligation to appoint it. So that’s what I mean by saying creditor control. In other areas, meaning areas outside of Texas, the creditors very frequently do exercise that franchise. They don’t anywhere in the state that I’m aware of to any material degree.
DC: When we speak of creditors, do we mean more typically an individual or, say, a credit card company? Are we dealing with individuals or corporations?
AM: I’m really talking about the business cases. Those businesses can be a sole proprietorship, they can be a partnership, or any number of entities of that sort. The creditors really, to be very much interested in the cases, are going to have to be involved in the business cases. Your credit card people you see in the consumer cases, and that’s just about it.
DC: Has the increased use of credit cards increased the number of consumer bankruptcies?
AM: To some degree I’d say it did for a while. You may or may not remember that a few years ago— Oh, for instance, when some of the cards like BankAmericard and MasterCharge were first being pushed in this area, I think the people who were trying to get those in circulation went down the telephone book and sent just about everybody a card, unsolicited. It was bad enough that Congress saw fit to pass an act which prohibited the issuance of a card that wasn’t applied for by the particular person.
DC: Was that the act that also limited liability to $50?
AM: No. That came with a subsequent amendment, but that was the act that first drew the attention of Congress to the credit card abuse. Let me add right quickly, the abuse, I think, was not on the part of the people who received the cards but on the part of the people who sent them out. It seemed like Christmas in June when they got an unsolicited credit card and could go anywhere and charge up to $300 on it.
DC: I suppose Congress has been active in the credit realm. Has the Nixon court made any substantial courts in the bankruptcy realm?
AM: 26:06 It’s been a good while since a consumer issue has reached the court. About six or seven years ago there was a holding by the court in regard to the re-filing by a bankrupt within this six-year period. Under the act as we now have it, a discharge can be granted on a case filed six years or more after the first case. In other words, if I had been bankrupt and had gotten a discharge in a case filed in 1969, I would now in 1975 be eligible to file again if I had in the meantime gotten into some additional trouble. The specific situation that the court had before it in that case was that in less than six years, the man had had to come back in, and he had filed a relief case, a Chapter 13, a wage earner case. Those are the ones that I said proliferated in northern Alabama. It was less than six years, so there wasn’t any way that he could get a discharge except in one way as the court spelled it out. If his plan in this Chapter 13 was an extension plan, meaning to pay off 100% to those creditors over an extended period, there was nothing wrong with it. But he could not attempt to whittle them down by way of a composition, reducing the amount that each would be paid because it would violate the six-year limitation on discharges.
DC: Now, composition and extension agreement are the two great alternatives to liquidation.
AM: That’s correct.
DC: Do you see many windfall cases where the person who files for bankruptcy comes into money after he files?
AM: We may have had a limited number of those. I don’t suppose I have any post-bankruptcy statistics on which to base it. You see, under Section 70 of the act, if within six months of the filing of the bankruptcy petition the bankrupt inherits property or acquires a substantial amount by gift even, it’s property that would pass to the trustee. In other words, it would be taken over for the benefit of the creditors. If it’s beyond that six-month period, there is no way for the creditors in this bankruptcy case to reach it so that if you have a large inheritance after the six-month period, well, the man has it for free. I think you’re probably referring to the windfall case like—I believe it was Primo Carnera who had been through bankruptcy about a year before he won the title, and that’s what we in bankruptcy refer to as the windfall type of case.
DC: Speaking of which, do you see many athletes in bankruptcy court?
AM: 29:52 We’ve had several of the Astros over the years. (both chuckle) If they can lose games like they’ve done consistently, I suppose they can lose money too.
DC: I guess to sort of cap all of these questions, I’d like to ask you what sort of reforms that you personally would like to see introduced into the system.
AM: There are presently two new bankruptcy acts pending before Congress. One of them was written by a study commission that was appointed about five, six years ago, assigned the task of studying the Bankruptcy Act and coming up with a system of bankruptcy that would meet the needs of our present society rather than the society as we knew it in 1938 and in 1898. There are many good things about that act, but there are also many things that I find totally unpalatable.
DC: Such as?
AM: I’m not standing alone in that because the bankruptcy judges had written an act of their own, which is a substantial variation of the Commission Act, and it is the competing act, the second act that’s presently pending in Congress. I was one of the six who drafted the Bankruptcy Judges Bill. The Commission Act doesn’t do anything substantial for the consumer. The commission would simply turn the consumer over to an administrative agency and just leave him there. It seemed to us the judges that their attitude was that there simply was not enough money involved to bother the court with. We found that a little bit outrageous because it’s the human equation rather than the monetary one that should control there. And just because he’s a little fish doesn’t mean that he shouldn’t have full access to and full protection from the court, so we totally restructured that. In the business area, the commission had consolidated into a single chapter what we now have as Chapter 10 and Chapter 11. It’s too technical, I think, to get into a discussion of the differences between the two chapters for a purpose like this. But the Chapter 10 is designed for a corporation that needs a pervasive reorganization of the whole corporate structure. I mean, it needs a change in management, it needs a reshuffling of the equity ownership; in other words, the stock ownership, it needs a restructuring of its indebtedness, both secured and unsecured. The process as set up in Chapter 10 is extremely complex. It’s extremely expensive, and not many corporations short of the size of General Motors can survive the treatment. Chapter 11 is a lot freer and looser. It’s designed to restructure or to permit a composition or an extension of the unsecured indebtedness of a debtor. By throwing the two together, the commission had come out with a structure that resembled Chapter 10 much more than it did Chapter 11, and it seemed to us that it in doing so had destroyed the primary utility of the Chapter 11 type case so that we separated the two again.
DC: And kept the dichotomy.
AM: 34:14 Right. It’s a necessary difference because the needs to be served are so different.
DC: Was this act drafted under the auspices of the ABA?
AM: No, neither one.
DC: Does the ABA have a position on it?
AM: Officially, no. The ABA has two different committees. It has a Consumer Bankruptcy Committee and a Commercial Bankruptcy Committee. The Consumer Bankruptcy Committee has soundly denounced the Commission Bill because of their failure of decent treatment of the consumer. They have endorsed the Bankruptcy Judges Bill, and that’s a committee only; that’s not an official position of the ABA. The Commercial Bankruptcy Committee has never really come to any hard resolutions. There are a number of features in the Commission Bill that they have disapproved of, and there are a number of features in the Judges Bill that they have approved of. But understand that before it becomes an official position of the ABA, you have to have the full committee approve it because these are sections of the Corporation and Business Committee, which is the big one. These are simply sections, subcommittees. It has to get approval of the full committee, and then it has to be approved by the Board of Governors, and then it has to go before the full membership meeting before it becomes an official position. So I’m simply telling you what individual subcommittees have done.
DC: Are you actively pushing this draft? Have you spoken on behalf of it?
AM: I appeared before the Senate Judiciary Subcommittee at the end of April, testifying in regard to the Judges Bill.
DC: The other judges, do they come from all parts of the nation?
AM: You mean in the Bankruptcy Judges Conference?
DC: Well, the six men who wrote this bill.
AM: 36:44 A man is from Maine, one is from California, one is from Georgia, one is from Kansas, and me. I think that’s a pretty good spread, don’t you?
DC: What are your chances?
AM: I think they’re very good. Let me elucidate on that by saying that I think that the end result, the bill that ultimately will be passed, will resemble the Judges Bill more than it will the Commission Bill.
DC: Well, do you have any other comments you’d like to make about the bankruptcy court, especially the court in Houston?
AM: The court in Houston right now is suffering from too many cases and too few judges. The situation is going to be bad for some time. It could be a matter of a month or more; I really don’t know. I am terminating. I am resigning effective June the 30th. We have been authorized a third judge here, and I don’t know how soon after the first of July that, one, funds can be made available for him or, two, that the judges will make their choice. To explain that last remark, the bankruptcy judges are appointed by the district judges. They’re not presidential appointments; they’re strictly court appointments. They’re appointed for six-year terms. I have been reappointed in ’74 for an additional six-year term, and for reasons that to me are totally valid, I chose to resign as of the end of December 1974 and come back in on January 1 under a temporary appointment, temporary six-month appointment, which enabled us to get another judge here immediately.
DC: I see.
AM: The permanent third man will not come in until after the first of July. The primary reason that I have taken the action that I did was that the federal judges at all levels, meaning from the bankruptcy judge all the way to the Supreme Court, are still receiving the salaries that were fixed in January of 1969. There have been no increases. It’s pretty well outrageous because I think you’re aware that in the intervening six and a half years there’s been a dilution of the purchasing power of the dollar by somewhere between 40% and 50%.
DC: In other words, you don’t want to end up in your own court.
AM: Well, it’s not a matter of that. I’ve supplemented my income by writing extensively, and for money it’s permissible. But I don’t see any reason why I should when the moment I leave here I’ll double, at least, my present salary.
DC: Is there any legislation pending to correct the problem?
AM: It comes a little late. There is a bill called the Railsback Bill that has been introduced to raise the judiciary, I think, by about 10% or 12%. That isn’t satisfactory to me.
DC: Anything else?
AM: That pretty well does it.
DC: I’d like to thank you for your time. I know your caseload is staggering.
AM: I’ve enjoyed talking to you.
[end of 126] 41:04