With little fanfare, Yra Harris, a veteran trader of Chicago’s pits, started blogging his Notes From the Underground last December. I learned about it last month from a good friend of his, and strongly recommend it to you. Yra is a frequent guest commentator on CNBC, and one of the smarter guys in the room.
In June 2007, I wrote here about Judge Small’s opinion that BAPCPA’s expanded "safe-harbor" definition of "swap agreement" did not apply to ordinary supply agreements in which a seller and an end-user entered into a contract "for delivery of a product that happen[ed] to be a recognized commodity." As such, Judge Small held, these contracts were not exempt from avoidance as fraudulent transfers (on the theory that the supply contracts were made for less than market value when the debtor was insolvent).
Well, to the delight of the ISDA, which filed an amicus brief in support of the appellant-purchasers of natural gas under various supply contracts with the debtor, the 4th Circuit yesterday reversed Judge Small and remanded with instructions that the Bankruptcy Court "allow the customers to attempt to demonstrate facutally and legally that their natural gas supply contracts were swap agreements based on the classification included in § 101(53B)." Hutson v. E.I. du Pont de Nemours and Co. (In re Nat’l Gas Distribs., LLC), 2009 WL 325436 (4th Cir. 2/11/09) (pdf)
In reaching this decision, the 4th Circuit undertook to determine the meaning of "commodity forward agreements," and ultimately concluded that "the bankruptcy court in this case construed ‘commodity forward agreements’ too narrowly–i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity." In so doing, the 4th Circuit found:
- First, that "the Bankruptcy Code does not require that a ‘forward contract’ [which necessarily is narrower in scope than "forward agreements"] be traded on an exchange or in a market";
- Second, that the contracts at issue were not "simple supply contracts" because "they also were part of a series of contracts in which the customers hedged their risk of future fluctuations in the price of natural gas … that were only a part of a larger risk management program in which the customers ‘regularly use[d] forwards and other derivatives."
- Third, that while BAPCPA’s legislative history, which Judge Small quoted, "does provide support for the notion that traditional supply agreements are not ‘swap agreements’ … the conclusion that the contracts in this case are traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements … [and thus] Congress did not preclude physical delivery in connection with a ‘commodity forward agreement,’ as defined in § 101(53B)(A)."
Notably, however, the Court "[did] not direct the bankruptcy court to find that the contracts in this case are ‘commodity forward agreements’ or ‘swap agreements.’" Recognizing that § 101(53B) "contains its own counterintuitive definitions, as well as inconsistencies," the 4th Circuit would not attempt to provide its own definition. Instead, it "point[ed] to certain nonexclusive elements that the statutory language appears to require," those being:…
In advance of her coming to Chicago on May 1 to speak at this upcoming all day symposium sponsored by the CLLA and DePaul’s Business & Commercial Law Journal, America’s BAPCPA guru, Cathy Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc., has graciously agreed to again guest blog.
Last year, in her first guest post, Cathy reflected on BAPCPA’s unruly landscape at the close of its "terrible two’s." This year, as BAPCPA closes a less rambunctious third year, Cathy looks at a post-BAPCPA bankruptcy rule change enacted on December 1, 2007 to address, in Rule 6003, the potential for overreaching in the blizzard of "first-day" papers filed at the outset of a case. The new rule requires a showing of "immediate and irreparable harm" if an order retaining professionals, using or selling assets outside of the ordinary course, or assuming or assigning executory contracts or unexpired leases is to be entered on less than 20 days’ notice after the filing of the case. Cathy surveys the litigation and literary landscape on what constitutes "immediate and irreparable harm" and, because she’s a guru, "speculate[s] about the [new rule’s] effects until live controversies emerge that are decided by the courts."
Thanks again for blogging Cathy! Your post last year broke this blog’s single and three-day records for page views, and hasn’t been matched since. May the next year be a good one for you!
Finally, thanks to Bankruptcy Court Decisions, home of the ever-resourceful Kate Colangelo, for permission to reprint the article of former Chief Judge Spector, cited by Cathy below.
So without further ado, heeeeeeerrrrrreeee’s Cathy! …….. …
As noted in the section of my BAPCPA outline of one year ago entitled "The Hanging Paragraph: Section 1325(a)(*) — The "Car Loan Protection" Provision: The Law of Intended and Unintended Consequences, a pesky little decision by Judge (and former Army captain) Richard Stair, Jr. in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006), caught the attention of auto lenders because it held, for the first time, that an auto lender in a chapter 13 case must accept a surrendered car in full satisfaction of its claim (thus denying the lender its state law right to a deficiency for any shortfall).
Somehow, between then and now, the holding in Ezell became the "majority" rule in the land, much to the sure chagrin of the auto lobby. After all, as brilliantly documented in a paper by Univ. of Wisconsin’s William Whitford entitled A History of the Automobile Lender Provisions of BAPCPA, the auto lobby drafted the "hanging paragraph" and had Michigan Senator Spencer Abraham introduce it in a 1998 amendment to the proposed legislation. (See Whitford, at pp. 34-36). Remarkably, the paragraph hung there through BAPCPA’s enactment without change. Now one may wonder why an obvious grammatical faux-pas like a "hanging paragraph" went uncorrected for seven years, but it’s hard to attribute the error to sloppy last-minute drafting.
The minority view among bankruptcy courts regarding the auto lender’s claim against a surrendering debtor in a chapter 13 case was best articulated in my view by Nevada’s Judge Bruce A. Markell (a philosophical wizard who is one of the bankruptcy bench’s most capable Code constructionists) in In re Trejos, 352 B.R. 249 (Bankr. D. Nev. 2006), a case that I’ve wanted to discuss for almost a year now. In it, Judge Markell ultimately concluded that Ezell was wrongly decided. Still, as he said, "the basics of how to interpret statutory text such as the hanging paragraph are not unduly complicated, but (as always) the devil is in the details." [NB: (Judge Easterbrook, concurring.)]
In analyzing the "hanging paragraph," Judge Markell starts with "plain meaning" (as required by Ron Pair), considers the context (as the textualist approach of Justice Scalia and Harvard’s Professor John Manning mandates), seeks additional clues in bankruptcy’s slang (or "gibberish"), but above all "[will] not condone … the imputation of a congressional purpose based on materials that cannot or do not reflect a unitary congressional purpose, followed by the use of that purpose to definitively construe straightforward text." Id. at 258. Judge Markell concludes:…
BAPCPA’s least appreciated (and understood) changes, despite their enormous impact on financial markets generally, are the changes designed to strengthen and clarify the enforceability of various types of financial derivatives contracts. To provide enhanced protection to the financial services industry, Congress added or expanded the Code’s definitions for such industry staples as "forward contracts" (§101(25)), "repurchase agreements" (§101(47)), and "swap agreements" (§101(53B)). Various other Code provisions were amended or added to reflect Congress’s desire to enable a nondebtor party–without hesitation–to terminate, liquidate or accelerate its securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements with the debtor. (See generally, these few pages of professor, lawyer, Code co-architect, and energy healer Ken Klee’s excellent summary of BAPCPA’s amendments to the Code’s business-related provisions).
Columbia Law professor Edward Morrison, with Columbia GSB economics legend Franklin Edwards, argue in a Winter 2005 article entitled Derivatives and the Bankruptcy Code: Why the Special Treatment? that BAPCPA’s extension of the Code’s protections for the financial services industry "to include a broader array of financial contracts, all in the name of reducing systemic risk … is a mistake." Rather, they argue, "[a] better, efficiency-based reason for treating derivatives contracts differently arises naturally from the economic theory underlying the automatic stay [i.e., derivative contracts are rarely needed to preserve a firm’s going-concern surplus]." Still, they warn (at p.1):
There are, however, downsides to treating derivatives contracts differently (creditors, for example, would like to disguise loans as derivatives contracts). These downsides are probably not signficant, but they highlight the fragility of the Code’s treatment of derivatives contracts, which should worry members of Congress as they consider arguments to expand the Code’s exemptions for derivatives contracts.
After BAPCPA became law, Professor Morrison teamed with Columbia LLM candidate (and now Davis Polk associate) Joerg Riegel to author another article entitled Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges. They wrote that BAPCPA did not just "eliminate longstanding uncertainty surrounding the protections available to financial contract counterparties, especially counterparties to repurchase transactions and other derivatives contracts" Rather, they observed, "the ambit of the reforms is much broader," especially because of the newly expanded definition of "swap agreement," which they termed "so broad that nearly every derivative contract is subject to the Code’s protection." (p.1). Notably, however, this conclusion was later called into question (though not expressly) by Thompson & Knight’s Rhett Campbell in a 2005 article entitled Financial Markets Contracts and BAPCPA. He wrote that "even though the definitions themselves are often nothing more than a listing of labels with little attempt at a functional definition, the legislative history shows an intent to prevent parties from obtaining the benefits of financial contracts safe harbors merely by the judicious use of labels." 79 Am. Bankr. L. J. 697, 705 (2005).
In commenting on the impact of these reforms on the bankruptcy judiciary, Morrison and Riegel concluded (pp. 4-5):
Equally important, the amendments limit judicial discretion to assess the economic substance of financial transactions, even those that resemble ordinary loans or that retire a debtor’s outstanding debt or equity. The reforms of 2005 direct judges to apply a formalistic inquiry based on industry custom: a financial transaction is a "swap," "repurchase transaction," or other protected transaction if it is treated as such in the relevant financial market….
Indeed, if anything is clear from the new Code, it is that judges are strongly discouraged from engaging in functional analysis of financial contracts. The Code’s protections encompass contracts or combinations of contracts that differ little in substance from unprotected transactions, such as secured loans. They are protected because they are recognized in financial markets as financial contracts. Any judicial effort to distinguish protected and unprotected contracts based on their "substance" is doomed to failure and can only generate significant uncertainty in the very markets the Code seeks to protect. By relying on broad market definitions, the Act gets judges out of the (largely futile) business of second-guessing financial contracts. Absent evidence of intent to defraud a debtor’s creditors, which remains ground for denying protection to payments under a financial contract, the new role of judges is to apply industry custom to financial contracts in much the same way that they would apply custom to interpret a contract under the Uniform Commercial Code.
Maybe it’s just Professor Morrison’s year of clerking for Justice Scalia that has jaded him, but most bankruptcy judges I know don’t "apply a formalistic inquiry," especially when it comes to interpreting BAPCPA! (See also, the opinions of Judge Bruce A. Markell (here and here) and the 60 pages of handouts on principles of statutory construction that the Southern District of Ohio’s Chief Bankruptcy Judge, Thomas F. Waldron, penned for last year’s NCBJ confab). In this regard, it’s worth considering the words of the Eastern District of North Carolina’s Chief Bankruptcy Judge A. Thomas Small in In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006) (pdf), where he had this to say about interpreting BAPCPA:
Unfortunately, the BAPCPA amendments … are confusing, overlapping, and sometimes self-contradictory. They introduce new and undefined terms that resemble, but are different from, established terms that are well understood. Furthermore, the new provisions address some situations that are unlikely to arise. Deciphering this puzzle is like trying to solve a Rubik’s Cube that arrived with a manufacturer’s defect. [Ed. Note: This one is sure to work.] Fortunately, after many twists and turns, a few patches of solid color emerge. Id. at 529.
Judge Small’s opinion last week in Hutson v. Smithfield Packing Co. (In re Nat’l Gas Distributors, LLC), 2007 WL 1531616 (Bankr. E.D.N.C. 5/24/07) (pdf) partially resolved BAPCPA’s puzzle regarding the scope of the "swap agreement" amendments to the Code surprisingly easily, but not because he "appl[ied] a formalistic inquiry." Rather, in deciding whether BAPCPA’s expanded definition of "swap agreement" to include "forward agreements" would preempt an avoidance action against a nondebtor customer who received natural gas from the debtor under a below-market commodity contract, Judge Small concluded:…
To me, the greatest benefit of blogging is that it has enabled me to meet and befriend so many in the profession (lawyers, judges, and professionals alike) whom I otherwise likely would never have even met.
During BAPCPA’s most formative and tumultuous years, starting in 1998, Cathy viewed BAPCPA’s development from the unique vantage point of legal writer, analyst, and national education coordinator for the Commercial Law League of America.
She has penned numerous articles on BAPCPA, and even published (with Corrine Cooper) a "best-selling" book (hey, #542,995 ranking on Amazon is actually high for a bankruptcy treatise!), which I reviewed briefly in this post of one year ago.
In the book’s preface, Cathy and her co-author open with the following thought:
We spent much of our time during the period from 2000 to March 2005 fighting the passage of the Bankruptcy Reform Act. We wish it had not passed. It is terrible legislation for a whole variety of reasons.
The remaining 350+ pages of the book prove their point!
Cathy is here in Chicago attending the 77th annual spring meeting of the Commercial Law League of America, fresh from her television debut last week on C-Span, which broadcast live on 4/13 the "Bankruptcy Roundtable discussion" at the ABI Spring Meeting (which featured an all-star panel that included Cathy, DSI’s head honcho Bill Brandt, Illinois Senator Dick Durbin, Jefferies & Co.’s Bill Derrough, Cliff White, Acting Director of the Executive Office for US Trustees, and Travis Plunkett of the Consumer Federation of America).
Cathy, a BAPCPA guru if ever there was one, has graciously agreed (in what I hope will be an annual undertaking!) to post a few "happy" birthday thoughts and reflections on this, the 2d anniversary of BAPCPA’s enactment, regarding some of the surprising results culled from a recently completed survey sponsored by the CLLA.
So without further ado, heeeeeeerrrrrreeee’s Cathy! ……..…
A year ago, I voiced my concerns in a post entitled "The Subprime Squeeze" that the dramatic "hockey stick" growth in housing’s subprime lending market was "more likely caused by looser adherence to underwriting standards than by increased demand for subprime products among qualified borrowers." "If, in fact, looser credit standards have driven…
On December 6, the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee held a hearing styled as an "Oversight of the Implementation of the Bankruptcy Abuse Prevent and Consumer Protection Act." Witnesses included Clifford J. White III (acting director, Executive Office of U.S. Trustees), the Honorable Randall Newsome (U.S. Bankruptcy Court for the Northern District of California), Professor Todd Zywicki (George Mason Law School), Steve Bartlett (Financial Services Roundtable), David Jones (Ass’n of Independent Consumer Credit Counseling Agencies), Professor Bob Lawless (U of I College of Law), and Henry Hillebrand, III (chapter 13 standing trustee in Nashville, Tennessee). [Witness links are to their prepared written statements.]
When it comes to BAPCPA, it’s fair to say that "beauty is in the eye of the beholder," as this very old saying goes. Still, I suppose we should be thankful our legislative rules of order don’t comport with those of the Taiwanese, or who knows what the hearing would have degenerated into.
Professor Lawless, no friend of BAPCPA, summarizes the day’s events here (U of I Faculty Blog) and here (Credit Slips Blog). Professor Lawless took Senator Grassley to task for these opening remarks, as well as for openly questioning whether it’s unethical for a judge to criticize BAPCPA. In this regard, it is worth looking at Canon 4 of the Code of Conduct for US Judges, which generally is read to allow judicial commentary on inept laws. As Professor Steven Lubet (author of Lawyers’ Poker: 52 Lessons That Lawyers Can Learn From Card Players and the classic textbook Modern Trial Advocacy) wrote 22 years ago in a monograph published by the American Judicature Society entitled Beyond Reproach: Ethical Restrictions on the Extrajudicial Activities of State and Federal Judges (p.40):**
In the same manner that judges’ charitable and civic activities must not detract from their impartiality, so must their personal lives be free from the suggestion that their judging will be tainted by bias. This is not to say that judges need refrain from forming and expressing opinions. There is no reason to insulate judges from normal human discourse, and there surely is no way to prevent intelligent human beings from developing what Justice Rehnquist calls "an inclination of temperament or outlook." Furthermore, in most cases where a judge’s life actually has evidenced a "tendency or inclination to treat a particular litigant more or less generously than a different litigant raising the identical legal issue" [again quoting Justice Rehnquist], the appropriate remedy is recusal, not prohibition of the conduct which gives rise to the favoritism. It is natural to expect a judge to be "biased" in favor of his or her children; this bias is resolved by disqualifying the judge from sitting in cases involving the children, not by forbidding procreation.
The most disparaging remarks concerning the oversight hearing came from the National Association of Consumer Bankruptcy Attorneys (NACBA), which pulled no punches in this press release, calling the hearing the Republicans’ "last gasp at one more unbalanced hearing … before Democrats assume control." [NB: Though, as Judge Monroe reminds us here, the vast majority of Democrats weren’t exactly hostile to the new law either.] NACBA President Henry Sommer summed up NACBA’s views of the matter by labeling the "Republican witness line-up" as "the financial world equivalent of the Flat Earth Society" who "have been charged with slapping some lipstick on the pig." Now them’s fightin’ words!
Overall, however, by far the greatest contribution to the day’s proceedings was, naturally, the least publicized: that being, the American Bankruptcy Institute’s submission of the entire 247 page transcript of its October 16 star-studded event at Georgetown University Law Center entitled "A Year After BAPCPA." Thanks to Sam Gerdano and the ABI for making this transcript available to us all! It is outstanding reading! At the end of the day, however, the conclusions reached by event’s moderator, Judge Dennis R. Dow, Bankruptcy Judge for the Western District of Missouri, surely challenge Senator Grassley’s declaration that "[e]arly reports indicate that the law is working well." As Judge Dow said in closing the meeting, "the one thing we can all agree on is that we want this process to work." Yet, as his final remarks reveal, the manifest conclusion thus far is that the law is not working quite as well as Senator Grassley would have us believe. Judge Dow said:…
Last summer, as part of my continuing BAPCPA Consumer Outline series, I posted an outline section entitled Attorneys as ‘Debt Relief Agencies’ — Court Decisions and Constitutional Challenges, in which I reviewed various cases winding their way through the federal courts challenging the constitutionality of BAPCPA’s "debt relief agency" provisions. Since then, I added…
Last summer I posted a nine-part outline reviewing BAPCPA’s early decisions in the consumer arena. Recently, Linquist & Vennum’s George Singer, former staff attorney for the National Bankruptcy Review Commission, completed his own 108 page tome on significant business and consumer cases decided in BAPCPA’s first year. The article, replete with 586 footnotes, leads the current issue of the North Dakota Law Review. The complete citation is The Year in Review: Case Developments under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 82 N.D. L. Rev. 297 (2006).
Given the Democrats’ recent electoral sweep, I asked George for some thoughts on whether a Democratic-led Congress might scale back on some of BAPCPA’s more onerous provisions. Here’s what he said in response:
I do not see the new Congress tinkering with the revised Bankruptcy Code any time soon. The subject of bankruptcy reform has been on Congress’ plate for over 10 years and, in my view, Congress has moved on–at least for now. The BAPCPA had strong bi-partisan support so the shift of power in the houses of Congress will not really be a driver for change. The short history we have had with the new legislation has, however, resulted in unintended consequences. Creditors are not getting all that they bargained for and splits of authority have emerged over a number of important issues. I can imagine the credit industry pushing a "technical amendments" bill in the next couple of years, particularly if we start seeing some circuit-level authority construing the changes to the law in a manner that is less than favorable to the industry.
Thanks to George and the North Dakota Law Review, in whom all rights to the article are reserved, for the privilege of being able to share it with my blog’s readers. In his introduction, George describes his goals for the Article as follows:…