A month ago, 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.  Yesterday, Dallas’ District Court Judge David C. Godbey declared in Hersh v. United States, No. 05-2330-N (N.D. Tex. 7/26/05) (pdf), that BAPCPA did indeed transform consumer bankruptcy lawyers into "debt relief agents."  More significantly, however, Judge Godbey also held that BAPCPA unconstitutionally restricts an agent’s free speech rights in certain respects, but not in others.

In finding that BAPCPA does unconstitutionally restrict a debt relief agent’s free speech rights, Judge Godbey focused on Code section 526(a)(4), which prohibits a debt relief agent from "advis[ing] an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title."  In finding this provision "not sufficiently narrow," and thus an unconstitutional restriction of an agent’s free speech rights, Judge Godbey concluded:

Section 526(a)(4), therefore, is overinclusive in at least two respects:  (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions.  Gentile, 501 U.S. at 1075; see a/so In re R. M. J., 455 U.S. 191, 203 (1982) (Even under intermediate scrutiny, "[s]tates may not place an absolute prohibition on certain types of potentially misleading information … if the information also may be presented in a way that is not deceptive."); Conant v. Walters, 309 F.3d 629, 638-39 (9th Cir. 2002) (pdf) (finding that government could not justify policy that threatened to punish a physician for recommending to a patient the medical use of marijuana on ground that such a recommendation might encourage illegal conduct by the patient). Thus, section 526(a)(4) of the BAPCPA imposes limitations on speech beyond what is "narrow and necessary."  Accordingly, the Court finds 11 U.S.C. § 526(a)(4) facially unconstitutional and denies the Government’s motion to dismiss Hersh’s claim.

Judge Godbey then invited the plaintiff-agent (the humble Princteon undergrad and UT JD-MBA grad, Susan B. Hersh) to "move for summary judgment on that claim once she amends her complaint to assert it explicitly."

Judge Godbey, however, refused to strike down as unconstitutional Code section 527, which requires debt relief agents to provide "assisted persons" with certain mandatory disclosures (also listed at p.9, fn.11) that were designed, on the one hand, to protect consumers from overreaching debt relief agents, while on the other hand, to scare the bejesus out of them when contemplating a bankruptcy filing.  In holding that these mandatory disclosures do not "unconstitutionally compel speech," Judge Godbey concluded:Continue Reading Texas District Court Rules that BAPCPA’s Section 526(a)(4) Unconstitutionally Restricts a “Debt Relief Agent’s” Free Speech Rights, But Section 527 Doesn’t

Catherine E. Vance, DSI’s research and policy guru, is as steeped in the legislative history of BAPCPA as you’ll find. 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. Clearly then, given BAPCPA’s well-known flaws, when Cathy decides to look into the history of BAPCPA’s incongruous new Code section 1102(b)(3) (which requires a creditors’ committee to “(A) provide access to information for creditors who hold [like] claims” and “(B) solicit and receive comments from [such] creditors”), it’s worth reflecting on her comments.
Cathy’s latest work, entitled The Origin of Information Sharing Under New § 1102(b)(3) (pdf), however, is not about “the legal problems with these § 1102(b)(3) orders and the motions that underlie them – most notably the absence of a case or controversy and insufficient notice.” Rather, she starkly notes, the purpose is “to dispel a myth that permeates them all: that we know nothing about the origin or purpose of § 1102(b)(3).”
So what should we know about the origins of Section 1102(b)(3)? Well, for starters, it’s origins were quite inauspicious, resting on a short statement from Representative Nydia Velasquez, then the ranking democratic member of the House Small Business Committee, who “[o]n May 5 … offered House Amendment 57, making her intention clear: Vel�zquez had small business creditors on her mind, especially those whose claims are large from the creditor’s perspective, but small from the debtor’s.”
Cathy quotes directly from Representative Velasquez’s passionate statement in support of the amendment (reported in the Congressional record), where Representative Velasquez said:

Mr. Chairman, while H.R. 833 provides a plan for overhauling our Nation’s bankruptcy law, there is one issue that, while seemingly small, will have a great impact on this Nation’s small businesses. That is the way that the bankruptcy process leaves small businesses who are creditors on the outside looking in.
To solve this problem, I am offering an amendment that will quickly and fairly address the issue by ensuring more small business involvement and greater communication in the bankruptcy process. My amendment will make two simple changes.
First, it would allow a small business involved as a creditor in a Chapter 11 bankruptcy case to be added to the creditor committee by the court. The court could make such an appointment by comparing the amount of the claim as a proportion of the business’ gross annual revenue, thus showing that a business is disproportionately affected.
Second, my amendment will ensure that those small businesses not included on the creditor committee will have access to critical information regarding the credit [sic] committee’s actions. This could be achieved by simply making the committee open to comments from and required to provide additional information to those small businesses not included on the committee but who will nonetheless be affected by the outcome.

Cathy notes that no further changes were proposed, and the provision sailed through without much further ado, “save for some unhelpful information included in the various House reports.”
To Cathy, however, there is no need to engage in protracted mental anguish in every chapter 11 case over how to handle the most basic of chapter 11 duties (i.e., the sharing of information between the debtor and the committee). In effect, Cathy seems to argue, do what others have done with BAPCPA’s more enigmatic provisions — first, try to limit them; and if that doesn’t work, ignore them. She writes:Continue Reading Everything Starts Somewhere: DSI’s Catherine Vance Unlocks the Mystery Behind the Origin of BAPCPA’s Section 1102(b)(3), Which Requires a Creditors’ Committee to Provide Creditors with Access to Information and a Ready Ear – Part I

Houston’s Bankruptcy Judge Marvin Isgur again takes the forefront in interpreting BAPCPA’s thorny provisions (as he did here, here, and here), this time issuing a controversial opinion on whether the automatic stay applies to ineligible debtors whose cases have been dismissed under BAPCPA for lack of credit counseling. In re Salazar, 2006 WL 827842 (Bankr. S.D. Tex., 3/29/06) (pdf).
Having previously dismissed the debtor’s petition because the debtor failed to obtain credit counseling in advance of the filing of the petition, Judge Isgur was then asked to decide whether the automatic stay applied during the period between the time of the filing of the petition and the time the Court declares the debtor ineligible under BAPCPA’s Code section 109(h).
What was at stake? A lot, for the debtor’s friendly neighborhood subprime lender (Ameriquest Mortgage) had done what most lenders won’t do without a court order; that is, proceed wilfully postpetition with a pending foreclosure sale without first obtaining relief from the automatic stay. Because actions in violation of the automatic stay are generally deemed void (not merely voidable), application of the automatic stay to the period between the ineligible debtor’s filing and the close of the debtor’s case would render the foreclosure a nullity. In dictum, Judge Jeffery A. Deller concluded just that in In re Tomco, 2006 WL 459347 (Bankr. W.D. Pa., 2/27/06) (pdf) (while disagreeing with Judge Cecelia G. Morris’s dictum in In re Rios, 336 B.R. 177, 180 n.2 (Bankr. S.D.N.Y. 2005) (pdf) about BAPCPA’s “less automatic” stay).
Judge Isgur, however, reached a contrary result. His ruling appears to be the first actual decision on the merits nationwide, and his conclusions couldn’t have been clearer. He wrote:

[I]t is implausible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy’s most powerful protection: the automatic stay. Both logic and the statute dictate that no automatic stay arises on the filing of a petition by an ineligible person�. [T]he relevant statutory language leaves no room for discretion. (Emphasis in original.)

This opinion won’t win Judge Isgur much praise from those looking to judges to “subvert” (to use Professor Jean Braucher’s framework discussed here) BAPCPA’s less palatable provisions. But the result, he ruled, was dictated by applying simple logic to the answers reached on the following three questions:

(1) When does the stay takes effect under Code section 362?
(2) When is a petition filed under Code sections 301 and 302?
(3) Who may be a debtor under Code section 109?

Applying straight-forward, syllogistic logic, Judge Isgur essentially concluded that Congress had so tied his hands that there was nothing he could do to unwind the postpetition foreclosure sale of the hapless debtor’s home. He wrote:

[W]hen read together, §§ 109(h), 302, and 362(a) establish that no stay can exist for debtors who fail to obtain the required credit counseling or qualify under an exception. The syllogism is as follows:

  • Individuals who have not received credit counseling and who do not qualify for a waiver are not eligible to be debtors under § 109.
  • Only eligible individuals may file a petition under § 302.
  • Without the filing of a petition under § 302, the automatic stay provisions set forth in § 362 are not invoked.

Judge Isgur could have finished there and moved on to another of the 11,000 cases on his docket, as the hard-nosed lobbyists who drafted BAPCPA and crammed it down everyone’s throats intended, but Judge Isgur wasn’t so easily shaken from his judicial roots and felt compelled to delve into the problematic practical implications of his ruling. He wrote:Continue Reading Judge Isgur Holds that the Automatic Stay Doesn’t Apply to Ineligible Debtors Under BAPCPA Who Failed to Get Credit Counseling

The following BAPCPA related working papers can be downloaded from the Social Science Research Network:
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Univ. of Wisconsin’s Jodi L. Bellovary & Marquette Univ.’s Don E. Giacomino & Michael D. Akers: “A Review of Bankruptcy Prediction Studies: 1930 to Present.” (Abstract ID: 892160)
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NYU Law School’s Karen Gross & Fordham Law School’s Susan Block-Lieb: “Empty Mandate or Opportunity for Innovation? Pre-Petition Credit Conseling and Post-Petition Financial Management Education.” (Abstract ID: 884487)
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Tel Aviv Univ’s Buchmann Law School Ron Harris and Einat Albin: “Bankruptcy Policy in Light of Manipulation in Credit Advertising.” (Abstract ID: 877053)
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William & Mary Law School’s Richard M. Hynes and Univ. of Chicago Law School’s Eric A. Posner: “The Law and Economics of Consumer Finance.” (Abstract ID: 874199)
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National Consumer Law Center’s Deanne Loonin & Elizabeth Renuart: “Life and Debt: A Survey of Data Addressing the Debt Loads of Older Persons and Policy Recommendations.” (Abstract ID: 885398)
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UNLV Law School’s Judge Bruce Markell: “The Sub Rosa Subchapter: Individual Debtors in Chapter 11 after BAPCPA.” (Abstract ID: 893582)
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Widener Univ. School of Law’s Juliet Moringiello: “Has Congress Slimmed Down the Hogs?: A Look at the BAPCPA Approach to Pre-Bankruptcy Planning.” (Abstract ID: 892034)
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Abstracts for each of these working papers follow:Continue Reading 7 BAPCPA Related Papers Available for Downloading from SSRN

Add Bankruptcy Judge Sidney Brooks, Chief Judge for the Bankruptcy Court for the District of Colorado, to the growing list of prominent judges (such as those mentioned here (Judge Monroe), here (Judge Markell), here (Judge Isgur), here (Judge Mark), and here (Judge Small)), who have become so exasperated with BAPCPA’s reckless disregard of the English language that they wrote an opinion not only deciding an issue of first impression under BAPCPA, but also in the process taking the opportunity to bash Congress for having passed such poorly drafted legislation and having failed to first consult with the frontline judges and bankruptcy professionals who now have to try and make sense out of it.
In In re TCR of Denver, LLC, 2006 WL 626156 (Bankr. D. Colo., 2/17/06) (pdf), Judge Brooks had this to say about Congress’s shoddy drafting:

This is a case where the language of BAPCPA passed by Congress tends to defy logic and clash with common sense. This is an example of a specific revision to the Bankruptcy Code, if followed by the Court and applied as Congress seems to intend — i.e., by way of strict construction — would result in an absurd decision and totally unworkable legal precedent. These drafting problems have the potential of bringing the bankruptcy system to a halt while debtors, creditors, and the courts try to figure out just exactly what Congress intended. This Court would add that it appears that the largely overlooked changes to the bankruptcy provisions related to non-consumer cases, such as the case presently before the Court, may sometimes equal the poor crafting of the consumer provisions. Moreover, serious and consequential constitutional questions may be looming on the horizon because of inartful drafting.

What problem was Judge Brooks lamenting? Well, most people don’t need a course in logic from Judge Markell to know there’s a world of difference between items in a list connected by the word “or” and items in a list connected by the word “and.” Apparently, however, BAPCPA’s scriveners learned no such lesson, and so it was left to Judge Brooks to explain, in principled fashion, why it was that Congress really meant to use the word “or” when it instead wrote “and” in modifying Bankruptcy Code section 1112(b) (which determines when a Court “shall” dismiss a chapter 11 proceeding or convert it to a chapter 7 liquidation).
Before BAPCPA’s enactment, Bankruptcy Code section 1112(b) provided that the Court may dismiss or convert a case (but was not required to do so) for “cause.” The old law identified 10 possible grounds for dismissal or conversion that may constitute “cause.” Notably, these 10 possible grounds for dismissal or conversion were listed in the alternative or “disjunctive,” connected only by the word “or,” so that any one factor alone could have provided sufficient “cause” for dismissal or conversion.
With BAPCPA, however, Congress made a change to Code section 1112(b) that — if the “plain meaning” were followed — would have produced absurd results for it would have required the Bankruptcy Court to dismiss or convert the case “for cause” only upon the confluence of 16 separate factors, all connected by the word “and.” As Judge Brooks noted, however, all these factors could never simultaneously exist within a corporate debtor. Indeed, he observed, if all factors were ever applicable to a single individual debtor, criminal prosecution of the individual — rather than mere dismissal of its bankruptcy case — would be the most appropriate remedy!
To fix the problem, Judge Brooks pushed plain meaning aside and ruled that “a party in interest does not need to establish [under BAPCPA’s new Code section 1112(b)(4)] all of the items constituting ’cause’ before a case can be dismissed by the Court.” Before doing so, however, he made sure to extend a very well-deserved compliment to the attorneys for both the creditor movant and the debtor. These briefs, he wrote, “might well win prizes for their rhyme.” You’ll find these simultaneous submissions (which I highly recommend) here (creditor’s attorney, Cynthia Kennedy of Lafayette, CO) and here (debtor’s attorney, Barry Arrington of Arvada, CO). The US Trustee’s brief, which Judge Brooks described as “well-reasoned” (but not poetic), is here.
Here’s some more of what Judge Brooks had to say about BAPCPA’s butchering job:Continue Reading Denver’s Judge Sidney Brooks Joins the BAPCPA Bashing Bandwagon as the Litigants Submit Poetic Dirges Lamenting BAPCPA’s Incomprehensibility

A recent comment here asked whether one can get away with getting credit counseling just one day in advance of the bankruptcy filing. The cases answer this question with a resounding NO!
As with most statutory schemes, however, it doesn’t take long (as noted here) for a case to come along that gives a judge an opportunity to find an exception to the general rule.
Another judge finding such an exception is Judge A. Jay Cristol, Chief Judge Emeritus of the Bankruptcy Court for the Southern District of Florida (and author of this classic ode (in which he denied his own sua sponte motion) and this highly acclaimed book on the so-called “Liberty Incident”).
In In re Petit Louis, 2006 WL 538635, (Bankr. S.D. Fla. 3/1/06) (pdf), the debtor — who couldn’t understand English — requested a waiver of the credit counseling requirement on the basis that none of the approved counseling agencies could speak to him in his native Creole. In the alternative, he asked the Assistant US Trustee to provide a Creole translator, or decertify the approved counseling agencies for failure to provide Creole speaking counselors. The Assistant US Trustee, for her part, stuck close to the party line and maintained several different reasons as to why she lacked authority to waive the pre-bankruptcy counseling requirement, decertify any counseling agencies approved for the district, or provide a free translator (these rapid-fire, hard-nosed arguments alone make the case worth reading).
In meting out a small — but significant — measure of justice, Judge Cristol actually bucked the trend and waived the pre-filing credit counseling requirement for this indigent, Creole-speaking debtor. He wrote:

Now, this is a matter that probably could go either way. You could take the position that since it is the custom of the Court in proceedings not to provide interpreters, that this policy will be carried over to the issue of credit counseling.
On the other hand, since the credit counseling is a new provision and it is provided for a particular purpose, the position could be taken that it should be strictly construed and that, if the credit counseling agency cannot provide the counseling in the debtor’s language and the debtor cannot afford to hire a translator, there is no possibility the debtor can get the credit counseling.
Therefore, this Court grants the waiver of the credit counseling requirement in this case because of the inability of any of the certified credit counseling agencies to provide pre-bankruptcy counseling in Creole.

Expect to soon see a request for waiver of the credit counseling requirement that combines Judge Cristol’s reasoning with the “BAPCPA is incomprehensible” reasoning (reported here, here, and here) and argues that since BAPCPA is the legislative equivalent of Creole, the credit counseling requirement should be waived for that hapless debtor too.
For those interested, here are a few other classic quips from Judge Cristol’s bankruptcy opinions and proceedings that will surely make you laugh (and please don’t hesitate to contribute your own references or personal memories in the comments below):Continue Reading Say What? … Florida’s Judge Jay Cristol Waives Credit Counseling Requirement for Creole-Speaking Debtor Who Couldn’t Understand English

Bankruptcy Judge Bruce Markell, whose courtroom is in Las Vegas, has written extensively on bankruptcy law topics. His first article, written in 1988 following his becoming a partner in Sidley & Austin’s LA office, was entitled Toward True and Plain Dealing: A Theory of Fraudulent Transfers Involving Unreasonably Small Capital, 21 Ind. L. Rev. 469 (1988). This extensively researched article was a major contribution to bankruptcy scholarship as it was the only one out there that hit every case you’d ever want to read on the topic back through the enactment in 1571 of the “Statute of Elizabeth” (a penal statute that prohibited conveyances made with “intent to delay, hinder or defraud creditors and others of their just and lawful actions”). I vividly recall this article because I was then a third year associate responsible for writing — from scratch — a comprehensive memo on the meaning of “unreasonably small capital” in fraudulent transfer law. The results of my research obviously were no match for Judge Markell’s essay, so I could only marvel at the timely publication of this providential article that saved me and others hundreds of hours of painstaking research into cases well over 100 years old.
Since that very auspicious start, Judge Markell (who tutored logic in his four years of college, graduated 1st in his class at UC-Davis Law School, and clerked for then 9th Circuit Judge — now Supreme Court Justice — Anthony M. Kennedy) has written, taught, and lectured extensively on bankruptcy law and practice. He was appointed Bankruptcy Judge for the District of Nevada in July 2004 to fill a vacancy on the Court, and was again appointed for a full 14 year term in October 2004.
Judge Markell’s latest scholarly contribution, however, is not about bankruptcy, but about that famed enigmatic philosopher, Ludwig Wittgenstein (don’t go to sleep yet!), about whose works Judge Markell wrote a thesis in college entitled Grice’s Recursive Definition of Truth and Wittgenstein’s View on Meaning in Tractatus Logico Philosophicus and in the Philosophical Investigations. In his latest article, entitled Bewitched by Language: Wittgenstein and the Practice of Law, 32 Pepp. L. Rev. 801 (2005), Judge Markell asks a question few would dare to posit (and many more would not care to posit). He asks:

Have courts considered Wittgenstein’s philosophy when deciding cases?

Judge Markell answers yes, but clearly he’s not impressed by the overall level of judicial scholarship in the forty opinions of record that cite to Wittgenstein. Notably, even Judge Easterbrook’s references to Wittgenstein fall short in Judge Markell’s eyes. He writes:Continue Reading Judge Markell Invokes Justice Antonin Scalia’s Canons of Statutory Construction Over the Philosophical Theories of Ludwig Wittgenstein in Resolving the Judicial Debate Over How to Close BAPCPA’s New “Mansion Loophole”

Remember back in October 2005, in the week before BAPCPA became effective, when about 500,000 Americans from every race, color, and creed decided they’d be better off filing bankruptcy than risking the possibility they’d have to enter BAPCPA’s inferno at some later time? Back then I wrote here that “BARF” (Bankruptcy Abuse Reform Fiasco) was rapidly becoming the preferred acronym for the new bankruptcy legislation among many bankruptcy professionals.
Since then, as reported here, here, and here, exasperated bankruptcy judges have wrestled mightily with a few of BAPCPA’s plainly irreconcilable provisions. Indeed, as noted here, one judge went so far as to quote Lincoln’s Gettysburg Address to prove that one can’t just ignore 278 words in BAPCPA (which coincidentally was the length of the Gettysburg Address) even though a “first blush” look (i.e., the plain meaning) demanded it.
Tom Kirkendall of Houston’s Clear Thinkers blog yesterday wrote this post, pointing us to a recent decision by Austin Bankruptcy Judge Frank Monroe, who became so fed up with BAPCPA’s senseless, disorienting, and often menacingly complex (i.e.,kafkaesque“) world that he finally lashed out at Congress, calling the legislation’s adoption in its title of the words “consumer protection” the “grossest of misnomers.” In re Sosa, 2005 WL 3627817 (Bankr. W.D. Tex. 12/22/05).
To put this opinion in its context, you need to know something about Judge Monroe, former member of the great Houston-based bankruptcy firm of Sheinfeld, Maley & Kay, which dissolved in 2001 (ironically, according to one partner, “because of the resurgence of bankruptcy as a very hot practice area”). Judge Monroe practiced at SM&K continuously starting fresh out of the University of Texas law school in 1969, even serving as its managing partner for several years. His investiture as bankruptcy judge occurred in 1989, and he was reappointed in 2002 (hat tip to Mike Baumer for the clarification).
Clearly, then, Judge Monroe is no ranting anti-BAPCPA loon, so when he ascends the bully pulpit, it’s worth listening. In fact, I think it’s fair to say that Judge Monroe spoke for most of us bankruptcy professionals when he wrote, after playing “Judge Scrooge” and having to dismiss on Christmas eve the bankruptcy petition of another hapless consumer who failed to seek pointless credit counseling in advance of an emergency filing on the eve of foreclosure (an emergency apparently occasioned in part by the bank’s own assurances of cooperation):

Those responsible for the passing of [BAPCPA] did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act. This is because the parties pushing the passage of the Act had their own agenda. It was apparently an agenda to make more money off the backs of the consumers in this country….
It should be obvious to the reader at this point how truly concerned Congress is for the individual consumers of this country. Apparently, it is not the individual consumers of this country that make the donations to the members of Congress that allow them to be elected [House vote] and re-elected [Senate vote] and re-elected and re-elected.

Looks like Judge Monroe would concur that BAPCPA looks more like BARF to those, like him, in the thick of it.
You’ll find here, in a post dated 1/16/06, another take on Judge Monroe’s decision at the American Bankruptcy Institute’s BAPCPA Blog.
2/6/06 Update: Another hat tip thanks to Mike Baumer for pointing us to an earlier case where Judge Monroe similarly blasted Congress, this time in connection with the insanely harsh and unfair treatment of student loans in bankruptcy. Judge Monroe labeled this standard for discharging such loans the “let’s make it as tough as humanly possible to discharge a student loan” standard. In re Speer, 272 B.R. 186 (Bankr. W.D. Tex. 2001) (pdf). He called Congress’s squeezing of such debtors with the nearly impossible burden of proving “undue hardship” under Bankruptcy Code section 523(a)(8) in order to get the student loan discharged “a complete and total abdication of any scintilla of responsibility.”
In another well-crafted exhortation against Congress’s treating defaulting student loan debtors like “bums” and “putting the fox [i.e., the schools who liberally dispense loans to beef up their bottom lines] in charge of the hen house [i.e., the gullible students who believe the school’s advertising about the supposed value of an education there] and not only blaming the students if they get eaten, but also charging them for the cost of the meal!”
Most notably, perhaps, Judge Monroe wrote this the year before he was reappointed to the bench, showing he’s not afraid of the “big bad wolf” [i.e., Congress]. He wrote:Continue Reading Judge Monroe Tells It Like It Is: BAPCPA Is a Fiasco Because Congress Sold Out Individual Consumers to Special Interest Groups