Rufus Reynolds’ Approach to Wage Earner Bankruptcy and its Enduring Impact

Rufus Reynolds’ approach to wage earner bankruptcy[i] had an enduring impact. He was appointed bankruptcy referee[ii] in the Middle District of North Carolina (MDNC) in 1946. He served until 1986 but was recalled to preside over the PTL case until December 31, 1988. His long tenure shaped the MDNC bankruptcy court and left a lasting impression.[iii] He was described as a “pioneer in the development of Chapter XIII and Chapter 13 plans” and the “father of Chapter 13s” in North Carolina.[iv] Although wage earner bankruptcy was enacted in 1938, very few cases were filed in the MDNC until 1965.[v]

Although the U.S. Constitution requires that the Congress is permitted to enact uniform bankruptcy laws, Reynolds believed that each federal judicial district should develop its own method of handling plans for Chapter XIII and Chapter 13.[vi] He believed that his court was an administrative entity as well as an agency of the law.[vii]  There is a long-standing and unapologetic tradition of judicial activism in Chapter XIII and Chapter 13 in North Carolina bankruptcy courts that is reflected in its rules, forms, and practices. By virtue of his primacy and prominence, Reynolds bears some responsibility for that. The judicial activism of Reynolds and those who followed him always increased the power of the judge or the trustee at the expense of the debtor. Reynolds ignored some of the actual law and made up some of his own law.[viii] In a reported chapter 13 decision, Reynolds eschewed a technical interpretation of the Bankruptcy Code in favor of reviewing plans filed in the MDNC, “fairness” and “equities”.[ix] Even an admirer of Reynolds admitted that an important aspect of Reynolds’ judging was “by fiat.”[x] Below are examples.

1. Reynolds forced Chapter XIII debtors to waive the exemptions permitted them by the North Carolina Constitution.[xi] This required waiver was contrary to Section 637 of the Act.
2. Reynolds forced debtors to attend two evening financial management courses run by the trustee as a condition to plan confirmation.[xii]
3. Reynolds invented an “ability to pay” requirement to confirm a plan despite its absence from Section 656 of the Bankruptcy Act or Section 1325 of the Bankruptcy Code prior to 1984. Reynolds made up this requirement. Reynolds implemented his requirement with arbitrary limitations related to vehicles and household goods that he deemed luxuries (e.g. televisions). If the vehicle or household good was deemed by Reynolds to be a “luxury”, then the debtor was required to surrender it.[xiii] The rule invented by Reynolds impacted one out of every ten cases filed.[xiv] A newspaper article described an application of this “rule” by Reynolds at a court hearing: “There’s just something about keeping this color TV that rubs me wrong,” he says, turning to the attorney before him. “I knew that would grate on you, Your Honor.” “Do you have a $1,200 color TV in your home?” Reynolds asks the attorney. “No, sir”.[xv] There was no “rubs me wrong” provision in the Act, and the irrelevance of what kind of a TV an attorney has in his home is obvious. Reynolds created a Guidepost to Solvency[xvi] whereby wage earners would pay back 100% of their debt.[xvii] The guidepost that Reynolds used amounted to paying all debt in full with administrative expenses. According to the trustee, two-thirds of all wage earners in 1972 in the MDNC were paying all of their debts. The other one-third of the cases were dismissed. What seemed to be missing were composition plans where the plan would pay a percentage of what was owed instead of the whole amount. Composition plans were an important part of practice under the Act and the Code, but apparently not much in Reynolds’ court at that time.
4. Reynolds invented a prohibition for wage earner debtors who incur new credit without trustee or court permission.[xviii] This requirement is still in effect in the MDNC as of 2024, and the MDNC is the leading federal district in the US in denying such Motions.
5. Reynolds deviated from the federal bankruptcy forms and created his own forms.[xix] One example is that the wage earner was not required to submit a household budget, but rather they would meet with the trustee to create one.
6. Reynolds invented a requirement whereby his appointed trustee interviewed the debtor without the debtor’s attorney being present.[xx] This was purportedly done to relieve the attorney of the laborious task of compiling the information in the official forms and because the trustee’s office was better qualified to get more pertinent detailed information.[xxi] This grant of power to the trustee (an adverse party to the debtor) and minimization of the role of the attorney was not a common feature of wage earner practice and of dubious propriety.
7. Reynolds reviewed the plan at least once per year to see if payments should be raised or lowered.[xxii] Under section 671 of the Act, a confirmed plan could only be modified based on a finding of fraud.[xxiii]

Many of Reynolds’ innovations occurred when wage earner practice was developing, and his experience and knowledge were limited. Reynolds was not the only bankruptcy judge who took the “running a program” approach and took license with the law. The acquiescence of the MDNC chapter 13 bar under Reynolds is lamentable. Some of Reynolds policy-based judging “by fiat” was somewhat codified in 1984 and 2005. In that sense, Reynolds was ahead of Congress which is not intended as a commendation.

Appendix

Some excerpts from U.S. House of Representatives Judiciary Committee hearing held on March 23, 1982.

Creditor trade organization representative Robert Evans:

In those jurisdictions where they do have an ability-to-pay standard—and I will cite one which is well known, the middle district of North Carolina, which has long had an ability-to-pay standard. And what is that? Simply a comparison of income against expense for that individual, a determination of how much disposable income is available to the repayment of debt.   

….

Congressman M. Caldwell Butler (R. VA):

You mentioned a North Carolina ability-to-pay test. Where does that come from? Chapter 13 doesn’t have a provision of that sort?

Evans:

That’s right. Well, under the good faith standard—

Congressman Butler:

You mean this is a good faith standard which is in one of these courts?

Evans:

 Judge Rufus Reynolds, the senior judge in the bankruptcy court, has for many, many years used the ability-to-pay test in his district. We have cited portions of a letter outlining just how that works. Seventy-seven percent of the cases in Judge Reynolds’ district are chapter 13. I urge you to compare that with the State of Maryland which has 5 percent of all cases in chapter 13.

Now either the people in North Carolina that take bankruptcy have an overwhelming ability to repay, whereas those in Maryland do not, or there is something going on here involving the ability of the judges to control how bankruptcies are handled in their courts.

…

Evans:

If you will ask Judge Rufus Reynolds in North Carolina how many he decides, you will get the same result. The parties work it out among themselves.

Congressman Butler:

The judges create their own law.

Some excerpts from U.S. Senate Judiciary Committee hearings in January 24, 1983.

Evans:

If you go to the middle district of North Carolina, you see that 77 percent of the cases were chapter 13. In North Carolina the entire State has 67 percent—67 percent in North Carolina, and 5 percent in Maryland.

What accounts for that? Are they poorer in Maryland than in North Carolina? Of course not. Anyone could look at these statistics and estimate that something is wrong here. You do not need any fancy studies—$300,000 worth or 280 cases, or whatever-to tell you that the way this is effectuated is based on what the judges perceive they want to happen in their courts.

Tom Small practices in North Carolina in the eastern district. They have had an ability to pay standard down there for years and virtually no litigation. The debtors in that district use chapter 13 almost exclusively and none of them—contrary to Professor Countryman’s concerns—manages to quit work to get out of paying their debts. It just does not work that way. It is a very, very successful organization.

In summing up, I would like to say what we are trying to do is this: Judge Rufus Reynolds, Judge Eaton in Mississippi, and Judge Kelly in Chattanooga, Beryl Maguire in New York run very fine consumer bankruptcy operations which are consistent with the principals we are trying to get established here. If we can find some way to get that into legislation, we know from experience no one is going to be hurt.

(Addressing Senator Dole):

Mr. Chairman, maybe you would like to correspond with Judge Rufus Reynolds and some of the other judges who seem to do this by fiat if not by law.

Thomas Small:

Mr. Chairman, I practice in North Carolina, and I will be happy to provide the subcommittee with information about the North Carolina experience.

Prepared remarks of Chase Manhattan Bank Vice President:

For example, in a recent six-month period in the Middle District of North Carolina, Greensboro Division, 415 Chapter 13 plans were confirmed. In 59.7% of the 36-month plans and 55.7% of the 60-month plans, unsecured creditors were to receive 100% payment of their claims. Moreover, 92% of the 36-month plans and 89.1% of the 60-month plans, unsecured creditors were to receive 100% of their claims. Moreover, 92% of the 36-month plans and 89.1% of the 60-month plans were to pay unsecured creditors at least 50%. Only .3 of 1% of all plans paid less than 10%.

Contrast this with the experience of the credit card operation of a major bank in the Midwest over a recent three-month period. Of the 263 Chapter 13 cases in which the proposed percentage of payout was known, the bank was to receive 100% in 37.7% of the cases, 50% or more in only 44% of the cases, and 10% or less in a startling 38.8% of the cases.

Why can debtors in North Carolina make significantly larger payments to creditors? This vast contrast cannot be explained on the basis of geography or demographics. The Midwest bank’s figures are taken from a national card base not a local group. The difference can only be explained by the application of different standards by different judges.

______________________________

[i] From 1938-1979 under the Bankruptcy Act of 1898, wage earner bankruptcy was Chapter XIII and from 1979 to present, under the Bankruptcy Code, wage earner bankruptcy is Chapter 13.

[ii] Bankruptcy referees were redesignated as judges in 1973 but their function remained the same until the Bankruptcy Code was implemented in 1979 and the function was altered.

[iii] Andrea Ball, Prominent local judge dies after surgery. Greensboro News and Record. Quoting MDNC Bankruptcy Judge William Stocks. November 1, 1998. Page 2 continued to page 18.

[iv] E.D.N.C. Bankruptcy Judge Thomas M. Moore. “Chapter 13 –Making it Work”. 1990 or 1991. East Carolina University Joyner Library Archives.

[v] In 1965, North Carolina ranked 37 out of 51 in rank of ratio of Chapter XIII petitions to state populations and 51 of 51 by ratio of Employment Bankruptcy to population. Harry H. Haden, Chapter XIII Wage Earner Plans—Forgotten Man Bankruptcy, 55 Kentucky L.J. 3, 1967. Nationwide, wage earner bankruptcy became much more prominent in January 1961 because of a Reader’s Digest article entitled We Went Bankrupt—On the Installment Plan. See also Reginald W. McDuffee, The Wage Earner’s Plan in Practice, 15 Vanderbilt Law Review, 1, 1961. Myron C. Banks, The Forgotten Remedy: Wage Earners’ Plans under the Bankruptcy Act, 33 North Carolina Law Review 3, 1955.

Cases pending (From Greensboro News & Record, September 26, 1971).

April 1, 1965: 2

April 1, 1966: 22

April 1, 1967: 91

June 30, 1968: 227

June 30, 1969: 347

Dec. 31, 1969: 426

June 30, 1970: 690

Dec. 31, 1970: 895

June 30, 1971: 1341

Aug. 31, 1971: 1412

Money paid into the MDNC plans

1968: $123,177.24

1969: $182,535.24

1970: $285,307.98

1971: $549,603.81

[vi] In re Sands, 15 B.R. 563 (Bankr. M.D.N.C., 1981); Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 115.

[vii] Greensboro Bar Association. Memorial Resolution for Rufus Reynolds. January 21, 1999.

[viii] Congressman M. Caldwell Butler (R.Va). Oversight Hearings before the Subcommittee on Monopolies and Commercial Law of the Committee on the Judiciary House of Representatives. Ninety-Seventh Congress. First and Second Sessions on Personal Bankruptcy. Serial No. 116. March 23, 1982. Pages 347-348.

[ix] In re Sands, 15 B.R. 563 (Bankr. MDNC, 1981). Of Sands, a law review article declared that Reynolds had “[s]imply missed the whole idea” of the Code provision. McLaughlin James B, Jr, “Lien Avoidance by Debtors in Chapter 13 of the Bankruptcy Reform Act of 1978,” 58 Am.Bankr.L.J. 45 at 66 (Winter 1984).

[x] U.S. Senate Judiciary Committee hearings in January 24, 1983.

[xi] Reyolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 230.

[xii] Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 120, 256; Mills, Mike, Bankruptcy Offers Means of Escaping From Debts. Burlington Daily Times. December 27, 1972. Page 22; C.A. Paul, Up to Neck in Bills? There is a Way Out. December 3, 1972. Greensboro News & Record. Page 99.

[xiii] Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 119, 255; Ed Martin, Wage Earner Plan Offers Debtors Hope: When Dream Turns to Nightmare. Durham Herald-Sun. December 9, 1973. Page 77. In re Sands, 15 BR 563 (Bankr. MDNC, 1981).

[xiv] Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 119.

[xv] Ed Martin, Wage Earner Plan Offers Debtors Hope: When Dream Turns to Nightmare. Durham Herald-Sun. December 9, 1973. Page 77.

[xvi]

[xvii] C.A. Paul, Guidepost to Solvency. December 3, 1972. Greensboro News and Record. Page 99.

[xviii] Harry H. Haden, Chapter XIII Wage Earner Plans—Forgotten Man Bankruptcy, 55 Kentucky L.J. 3, 1967; Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Pages 251, 254; Mills, Mike, Bankruptcy Offers Means of Escaping From Debts. Burlington Daily Times. December 27, 1972. Page 22. Ed Martin, Wage Earner Plan Offers Debtors Hope: When Dream Turns to Nightmare. Durham Herald-Sun. December 9, 1973. Page 77. C.A. Paul. How to Get in Debt-And Out. Greensboro News & Record. December 3, 1972. Page 99.

[xix] Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Page 113.

[xx] Reynolds, Rufus. Bankruptcy Guide. North Carolina Bar Association. 1975. Pages 113, 228, 256- 259. In re Sands, 15 B.R. 563 (Bankr. MDNC, 1981).

[xxi] Reynolds, Rufus, Bankruptcy Guide, North Carolina Bar Association. 1975. Page 228.

[xxii] Reynolds, Rufus, Bankruptcy Guide. North Carolina Bar Association. 1975. Page 254.

[xxiii] Section 646(5) required that the plan payments could be accelerated or decelerated based on circumstances, but Reynolds seemed to be changing the distributions on claims which would not have been allowed for.

______________________________

Click here for a PDF version of this article.