With the help of the firm’s summer interns, we’re now able to catch up on our popular "Picks of the Month" feature. This entry cites to bankruptcy-related articles published in March 2006. Links are to We$tlaw:
***
Continue Reading Picks of the Month: Required Bankruptcy Reading for March 2006
.jpg)
Last month, in a post entitled "Deepening Insolvency: The Third Circuit Steps Back from the Breach," I discussed the Third Circuit’s recent decision in CitX Corp., Inc. v. Detweiler, Hershey & Assocs., P.C., 2006 WL 1453117 (3d Cir. 5/26/06) (pdf), in which the Court delivered two bombshells: the first, that negligence alone will not establish liability for deepening insolvency; the second, that deepening insovlency is not a valid theory of damages to support a negligence claim.
Most bombshells raise many questions in their aftermath, and this case is no different. Yesterday, the Andrews Bankruptcy Litigation Reporter published an article entitled "Deepening Insolvency or Deepening Confusion?" (Westlaw only), co-authored by Jenner & Block’s Ron Peterson, Jerry Switzer, and Phil Nelson.
The article reviews the history of deepening insolvency and the decision itself, and finishes by mentioning a few of the "unanswered questions" raised by the decision, including:
"Is a deepening insolvency cause of action the only claim a plaintiff may bring for harm to an already-insolvent company? Surely the 3d Circuit did not intend this result."
- "As [In re] Global [Service Group, LLC, 316 B.R. 451 (Bankr. S.D.N.Y. 2004)] suggests, when, if ever, will a defendant have deepened a company’s insolvency without committing some other intentional tort or breaching an independent fiduciary duty?"
- "If a plaintiff brings claims for fraud and breach of fiduciary duty in addition to a deepening insolvency claim, what is the proper measure of damages for these causes of action if not the deepening of the corporation’s insolvency?"
- "Must a plaintiff show two different (and presumably conflicting) measures of its damages, one for the deepening insolvency cause of action and one for all other claims? Surely that cannot be the case, but CitX suggests otherwise."
In the end, the authors conclude, "it appears that CitX went too far." They write:
If the 3d Circuit was intent on holding that mere negligence is not the proper basis for a deepening insolvency claim, it should have stopped there. By going farther to hold, unnecessarily, that deepening insolvency is not a valid theory of damages for other independent torts, the 3d Circuit has created an unworkable situation that simply deepens the confusion regarding deepening insolvency.
© Steve Jakubowski 2006
This sixth post of the BAPCPA Consumer Bankruptcy Outline for cases decided between 6/1/05 and 5/31/06 addresses homestead exemptions. As reported here, this area absorbed a signficant amount of judicial energy in the early days following BAPCPA’s enactment as courts wrestled with the conflict between the "plain meaning" of BAPCPA’s inartfully drafted "homestead cap" and the apparent legislative intent to extend the $125,000 cap to all states. As Arizona’s Judge Randolph J. Haines (who is no stranger to philosophical debates) noted in BAPCPA’s first reported decision, the language "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law" is clear, and its "plain meaning" is that the $125,000 homestead cap applies to debtors in states that allow the debtors to elect between federal and state exemptions, but not in states like Arizona (or Florida or Nevada) that do not. In reaching this conclusion, Judge Haines had this to say about BAPCPA’s legislative history:
Legislative history is virtually useless as an aid to understanding the language and intent of BAPCPA. The section-by-section analysis in the Report of the House Committee on the Judiciary merely provides a gloss of the statutory language of BAPCPA § 322. It does not provide an example of the kind of problem or abuse it was intended to correct, nor a citation to a case whose result it sought to alter. Consequently it provides no clue to the intended significance of the "as a result of electing" language. Both the majority and the dissents to the 1997 Commission Report are similarly unhelpful as to the significance of this language. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005).
Judge Haines’ remark about the uselessness of legislative history as an aid to understanding BAPCPA surely carries some merit, as the "common wisdom" in this post suggests. It just hasn’t carried the day as regards BAPCPA’s homestead cap provisions, and courts around the nation have uniformly rejected Judge Haines’ literalist approach.
Other parts of the homestead exemption outline offer little of interest to anyone other than those toiling in the trenches of consumer bankruptcy (and perhaps acute insomniacs too). Stay tuned, however, for upcoming summer required reading lists of recent bankruptcy-related articles of interest.
.jpg)
This fifth post of the BAPCPA Consumer Bankruptcy Outline addresses the issue of attorney liability under BAPCPA arising from the new "debt relief agency" provisions of Sections 526, 527, and 528 (see pdf at pp. 88-91). Absent a court order holding otherwise (like the one entered here), it’s generally agreed that these provisions regulate the day-to-day relationships between consumer bankruptcy lawyers and their clients.
I and others have wondered why it is that consumers, treated under BAPCPA as the "moral equivalents of shoplifters" (at least according to Judge Brooks in In re Ott, cited here at Outline Section I.A.5), can’t get the same type of unfettered representation from their attorneys that persons charged as shoplifters (and much worse) get from their criminal attorneys.
In the end, the "debt relief agency" provisions look more like an effort to create a consumer bankruptcy lawyer clone who, much like the ever-multiplying "Agent Smith" from The Matrix-Reloaded, speaks and does precisely as directed with ruthless efficiency. Such micromanagement of the attorney-client relationship and attorney speech has spawned three important court challenges to the DRA provisions. Links to important pleadings filed in these three cases are found below.
Section A of this Part III references bankruptcy court decisions that address (or refuse to address) whether attorneys are "debt relief agents" under BAPCPA. Section B cites to two federal court cases in which local attorneys have brought suit against local US Trustees to directly challenge the constitutionality of BAPCPA’s DRA provisions.
Good luck to all you agents out there!
.jpg)
This fourth post of the BAPCPA Consumer Bankruptcy Outline for cases decided between June 1, 2005 and May 31, 2006 addresses the so-called "hanging paragraph" at the end of Section 1325(a), a good example of how BAPCPA could have used a few good proofreadings before being finalized. Even though the "hanging paragraph" follows subparagraph Section 1325(a)(9), its real consequence relates to Section 1325(a)(5), and is generally understood as preventing a "cram-down" of an auto lender’s secured claim at less than the full amount of the lender’s claim — regardless of the car’s true value (which is almost always less than the claim amount) — if the loan was made within 910 days of the debtor’s filing of the case. The "hanging paragraph" (see pdf at pp.170-71) is perhaps the greatest proof that auto lenders are BAPCPA’s big winners. It provides:
For the purpose of paragraph [1325(a)](5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] preceding the date of the filing of the petition, and the collateral for the debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for the debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
Part II of my BAPCPA consumer outline that follows addresses the "law of intended consequences" (i.e., as the auto lobby intended, no bifurcation of the auto lender’s secured claim into secured and unsecured parts based on the value of the collateral) and the "law of unintended consequences" (i.e., as the auto lobby likely didn’t intend, other features of the loan — such as interest at the contract rate — may stripped from the loan in a "cram down" of the secured auto lender). Another unintended consequence, as provided in Ezell (see section II.B.3 below), is that chapter 13 debtors who surrender their cars may have no obligation to the auto lender at all (even if the value of the car is less than the amount owing on the loan) on the theory that the lender can’t assert an unsecured deficiency claim on surrendered collateral, but rather must accept the car back in full satisfaction of its claim against the debtor.
Interestingly, given the number of 0% or very low interest rate auto loans made in recent years, the "unintended consequence" of a court’s not requiring the contract rate to be applied in a cram-down may actually favor non-subprime auto lenders as to whom, under Till, a "market" rate of interest that is substantially higher than the low interest rate associated with the original loan may be ordered. Subprime auto lenders, however, would be expected to lose out if the Till rate of interest is applied because the interest rates associated with such subprime loans typically exceed the interest rate that would be applied under Till.
In the outline below, "910 cars" refer to cars purchased by the debtor within 910 days of the filing and secured by a purchase money security interest in the car. A "910 creditor" is the lender holding such a "910 claim."
Yesterday’s Supreme Court head-scratcher is Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 2006 WL 1639224 (pdf), a delightful opinion in which Justice Ruth Bader Ginsburg (for a majority that surprisingly included Justices Scalia and Thomas) took on every issue we hoped here the Court would tackle, and then some. In the end, we’re left with another pathbreaking bankruptcy decision that will surely set the contours of the "plain meaning" doctrine in bankruptcy cases for years to come. With the bankruptcy bench and bar struggling mightily to determine when "plain meaning" should be followed under BAPCPA’s ill-conceived and poorly drafted provisions, Justice Ginsburg’s opinion helps show the way.
The issues presented, and the winning petitioner’s arguments, are discussed at length here, and so won’t be repeated. The basic question addressed by the Court was whether payments or premiums owing on account of workers’ compensation "plans" are entitled to a priority in bankruptcy as "claims for contributions to an employee benefit plan arising from services rendered within 90 days before the [petition] date." Given Judge Markell’s recent opinion that when it comes to interpreting BAPCPA’s convoluted provisions, one should consider what a strict textualist like Justice Scalia might say, one would have expected Justice Scalia to join Justice Kennedy’s dissent, for Justice Kennedy (joined by Justices Souter and Alito) wrote in no uncertain terms that the statute’s "plain meaning" should govern (and hence there is no obvious reason to exclude workers’ compensation "plans" from other "plans" that benefit employees). Instead, however, Justice Scalia (and, surprisingly, Justice Thomas too given his opinion in Ron Pair that "as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute") sided with Justice Ginsburg in declaring that when it comes to bankruptcy law, "plain meaning" must be viewed through bankruptcy lenses (or bifocals, depending on your eyesight). Justice Ginsburg wrote (pp.2-3, 14, 15-16):
In holding that claims for workers’ compensation insurance premiums do not qualify for § 507(a)(5) priority, we are mindful that the Bankruptcy Code aims, in the main, to secure equal distribution among creditors. We take into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress….
[W]e are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that provisions allowing preferences must be tightly construed…. Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code’s equal distribution aim. We therefore reject the expanded [i.e., "plain meaning"] interpretation Zurich invites. (Citations omitted.)
Given the 6-3 vote, the surprise joinder by Justices Scalia and Thomas in the majority opinion clearly changed the outcome in the case. Who really could have expected that Justices Scalia and Thomas would reject the stricter textualist-based reasoning offered by Justice Kennedy’s dissent in favor of Justice Ginsburg’s bankruptcy-based prism through which "any doubt concerning the appropriate characterization" should be filtered? Here’s how Justice Kennedy framed the issue (dissent at pp. 1-2):
Before commencing a more detailed discussion of the central issue, certain preliminary matters must be addressed. To begin with, the Court states a background rule of construction that, when we interpret the Bankruptcy Code, “provisions allowing preferences must be tightly construed.” The Court links this rule with a general objective in the Code for equal distribution. That objective, it is true, is acknowledged by our precedents, and we have said that a Code provision must indicate a clear purpose to prefer one claim over another before a priority will be found. This is different, though, from establishing an interpretive principle of strict construction when the Code addresses priorities, for strict construction can be in tension with the objective of “equality of distribution for similar creditors.” The bankruptcy priorities, then, should not be read simply to give priorities to as few creditors as possible. They should be interpreted in accord with the principle of equal treatment of like claims. In any event the priority provisions should not be read so narrowly as to conflict with their plain meaning. (Citations omitted.)
I suppose, in retrospect, Justice Scalia’s apparent acceptance of the principle that the "plain meaning" doctrine has its own bankruptcy ocular was apparent from the start given the following opening exchange between Zurich American’s attorney and Justice Scalia at oral argument (at p.25):
Mr. Verrilli (for the respondent): Thank you, Mr. Chief Justice, and may it please the Court: I think it’s important to focus on exactly what a workers’ compensation plan provides. A workers’ compensation plan provides health insurance that pays for the medical costs of a workplace accident, disability insurance —
Justice Scalia: You’re begging the question by calling it a plan. I mean, … that’s one of the issues here. Why don’t you tell us what workmen’s compensation laws require?
So, in the end, here’s how Justice Ginsburg and the majority addressed the five questions regarding statutory interpretation teed up for its consideration:
This third post of the BAPCPA Consumer Bankruptcy Outline addresses attempts at uniformity by the bench in rendering decisions on BAPCPA’s confusing laws. These attempts have been manifested in various forms, including:
The goal of this outline, which will surely become tiresome for most by the final post with the outline’s 180th subsection, is to contribute to these valiant attempts at uniformity. When I first learned bankruptcy in the early 1980’s following passage of the Bankruptcy Code of 1978, it was often said that "you can find a bankruptcy opinion to support just about any proposition you need."
Readers of this outline will see that BAPCPA’s onerous, conflicting, poorly drafted, incomplete, and hanging provisions have — in the short time since the Act’s passage — given rise to a myriad of conflicting opinions that simply cannot be reconciled and as to which the conflicts of bankruptcy’s early days pale in comparison. At least back then you didn’t have to ignore the statute’s "plain meaning" quite as often. Still, litigants are likely to find a BAPCPA opinion to support just about any proposition they need.
Hopefully this outline will help those debtors, litigants, judges, and clerks wanting to "see the forest (or wood) for the trees" be better equipped to choose among conflicting options.
Good luck to all!
Continue Reading BAPCPA Outline: Part I, Section C – Judicial Commentary: Attempts at Uniformity
At my alma mater’s faculty blog, my friend and former classmate, Professor Bob Rasmussen, writes about a business’s "Prime Directive"; that is, "first hire the right person as CEO, [then] ensure that the CEO is shown the door at the appropriate time." Bob concludes his post by noting that "law can influence the discussion. Doctrines such as lender liability, equitable subordination, and the tort of deepening insolvency, if pushed too far, can make lenders hestitate, thus prolonging the tenure of managers that need to go."
Speaking of "pushing too far," consider the highly controversial case of Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) (pdf), in which the Third Circuit — "predicting Pennsylvania law" — declared that deepening insolvency is a separate and independent tort in Pennsylvania and that the resultant "injury" from this tort is "to [a debtor’s] corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life."
In Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX, Inc.), 2006 WL 1453117 (3d Cir. 5/26/06) (pdf), the Third Circuit pushed back in a follow up to its much-maligned opinion in Lafferty. In CitX, the Third Circuit commented on the controversy spawned by Lafferty, stating (at footnote 11):
Continue Reading Deepening Insolvency: The Third Circuit Steps Back from the Breach
.gif)
This second post, corresponding to Part I, Section B of the BAPCPA / Consumer Bankruptcy Law Outline is titled: BAPCPA’s "Plain Meaning" Not Followed.
This section points to 5 cases over the past year where bankruptcy judges were so confounded by BAPCPA that they felt compelled to deviate from its "plain meaning" in order to avoid virtually nullifying certain of its key provisions.
.jpg)
The "Great American Consumer Bankruptcy Outline" — a 102 page treatise on consumer bankruptcy case law developments in the past year — is now (thankfully) complete. Special thanks to my wife and two children, without whose unwavering support, this project never would have been completed.
This first post, corresponding to Part I, Section A of the Outline is titled: "Judicial Commentary on BAPCPA: Venting." This section points to 7 cases over the past year where bankruptcy judges, with varying levels of frustration, told us what they really thought about BAPCPA. [NB: Thanks to Professor Jean Braucher who coined the term "venting" in describing some judicial reactions to BAPCPA.]
Links are to Westlaw. Those who do not have access to Westlaw may contact me directly if they would like to view a particular case, though all federal courts maintain their own websites where judicial opinions may be accessed by the public free of charge (e.g., Bankr. N.D. Ill. – Judge Wedoff opinions). Because all the outline’s case references identify the deciding judge, you should be able to find the opinions online with minimal effort.
Thanks for reading. I’ve updated the table of contents here.
Continue Reading BAPCPA Outline: Part I, Section A – Judicial Commentary on BAPCPA: Venting