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."

Continue Reading BAPCPA Outline: Part II, Sections A & B — The Hanging Paragraph: Section 1325(a)(*) — The “Car Loan Protection” Provision: The Law of Intended and Unintended Consequences

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:

Continue Reading “Plain Meaning” Through Bankruptcy Bifocals: A Surprising Coalition Joins Justice Ginsburg in Narrowing the Bankruptcy Code’s “Plain Meaning” in Howard Delivery v. Zurich

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: 

  • En banc review established by rules of the local court;
  • Expedited appeals (reported here) (Virissimo case);
  • Jointly drafted opinions; and
  • Combination of multiple cases under a single caption to address a common issue of law (such as reported here). 

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

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.

Continue Reading BAPCPA Outline: Part I, Section B – Judicial Commentary: BAPCPA’s “Plain Meaning” Not Followed

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

Early this spring, when BAPCPA bashing had become “so very smashing!” (culminating in this post about the latest BAPCPA bashing opinion), I returned to my desk one sunny afternoon and retrieved from my voice mail a message from someone identifying himself as Marvin Isgur, who wanted to know if I’d like to come down to Galveston, Texas in late June to speak before about 300 consumer bankruptcy lawyers at this conference on recent consumer bankruptcy case law developments.

My initial reactions to Judge Isgur’s voice message were much akin to those of Noah, as portrayed by Bill Cosby in this classic skit.  First, when I heard the message say “Steve, this is Marvin Isgur…,” I thought — like Noah — “what do you want, I’ve been good?”  Then when the message continued, and Judge Isgur said he’d like me to deliver the opening presentation on recent consumer bankruptcy law decisions, I thought — like Noah — “what’s an ark?” (i.e., what’s consumer bankruptcy law)?

Yet, having placed the “don’t mess with

Texas” label on Judge Isgur here (following his issuance of the first opinion clearly demonstrating BAPCPA’s harsh new world for consumers), I pretty much viewed his proposal as an “offer you can’t refuse.”

A few days after accepting, the organizers at University of Texas Law School’s Center for Continuing Legal Education made sure to let me know “the most popular event every year at the conference has been the opening presentation by Professor Elizabeth Warren from Harvard and by Professor Jay Westbrook of the

University of

Texas.”  In fact, they added, “the presentation is so popular each year that we thought that we would find an expert to try to fashion a comparable program on recent developments in Consumer Bankruptcy Law.”  As for preparing an outline on the topics you’ll be speaking about, attached you’ll find the 113 and 119 page outlines that Professors Warren and Westbrook, respectively, distributed at previous conferences.  Oh, and good luck!

It was then that I truly understood the perils of accepting the “offer you can’t refuse.”  As noted here, such career choices may well spell one’s doom.  Judge Isgur, however, encouraged me to have no fear, and that everything would turn out fine.

Well, many panic-driven, sleep-deprived days and nights later, I’ve now completed that “Great American Consumer Bankruptcy Outline,” a 90 page magnum opus encapsulating pretty much every consumer bankruptcy opinion worth reading (or not so worth reading) in the past 12 months.

So, for those of you who’ve wondered what happened to me these past couple of months, and why I have cut down on my blogging–well, now you know.

In the coming days and weeks, I’ll publish here periodic installments from each of the outline’s 17 sections.  Alternatively, you can get the glossy version by signing up for the conference (be sure to bring your Hawaiian garb, though).

Here’s the Table of Contents to the Outline:

Continue Reading The “Mother of All BAPCPA Consumer Bankruptcy Law Outlines,” Soon Available for Your Reading Pleasure

It’s hard as a bankruptcy lawyer not to focus on negative economic news, especially when it deals with the ability of common Americans to pay that last bastion of assumable debt — the mortgage.  Today’s front page article in Chicago’s Sunday Tribune, titled "Mortgage defaults on rise," informs of the following rather depressing facts:

  • Foreclosures on home mortgages are on the way up.
  • In Illinois during the first three months of 2006 nearly 13,700 properties entered foreclosure, up 32 percent from the fourth quarter of 2005.
  • The numbers are grimmer elsewhere in the Midwest, with Michigan and Ohio together recording 45,000 mortgages entering some stage of foreclosure in the first quarter of 2006, representing increases of 91 percent and 39 percent, respectively, compared with last year’s fourth quarter.
  • Nationally, foreclosures are up 38 percent, higher than in any quarter of last year.
  • Things could get far worse when $2.7 trillion in ARM’s reset over the next 18 months.

Recently, I came across this well-focused blog, The Foreclosure Report, which offers the following recent posts to show that the dramatically increasing trend in foreclosures is not limited to the midwest, but is affecting every region:

The prime culprit for all this pain:  loose lending, particularly at the subprime level (a problem discussed here).  The Tribune article cites to the Community Bank of Elmhurst’s own Bill Gooch, its CEO, who said he thought that lending policies are playing a role in the foreclosure trend as "some financial institutions, competing fiercely for business, are making mortgages available to marginal borrowers."  "People think they have to loosen their restrictions, their guidelines, their policies," he said.  Similar sentiments have been widely reported elsewhere.
 
Meanwhile, we learned on Friday that the University of Michigan’s Survey of Consumers reported that its index of consumer confidence fell to 79.1 in May from 87.4 in April, the biggest drop since Hurricanes Katrina and Rita hit last year.  As the site’s charts and tables show, that’s about as low as it gets.  The squeeze continues.
 
Good luck all, and have a safe holiday.
 
 
© Steve Jakubowski 2006

A bankruptcy examiner is appointed by the court in a bankruptcy case pursuant to Code section 1104(c) to "conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor." 

This simple grant of authority has led to the issuance of  reports that, when stacked together, surely validate former Fed chairman Alan Greenspan’s conclusion in 2002 — in pre-Sarbannes-Oxley testimony before the Senate — that:

  • The stock boom of the 1990’s created "an outsized increase in opportunites for avarice," in which "[a]n infectious greed seemed to grip much of our business community.  Our historical guardians of financial information were overwhelmed."
  • "It is not that humans became any more greedy than in generations past.  It is that the avenues to express greed had grown so enormously."

Historians of future generations need only look at examiner’s reports in some of the more spectacular bankruptcies of the recent past to confirm Mr. Greenspan’s conclusory observations.  (See, e.g., Enron, WorldCom-1&2 , Spiegel, Fibermark, and Gitto Global-1, 2, 3, 4).  Perhaps, though, they’ll just conclude, like King Solomon, that "there’s nothing new under the sun."

Another damning examiner’s report, this one issued by Dan Harrow, the Court-appointed examiner in the Fruehauf Trailer Corp. case, has recently been the subject of considerable controversy, as these articles from the LA Times relate.  According to today’s story:

What otherwise promised to be a low-key race for Orange County treasurer/tax collector has been anything but, with one candidate stung by allegations that he mismanaged the assets of a bankrupt trailer company, resulting in a district attorney’s investigation….

After bankruptcy was granted in 1998, Street took over a successor company formed to liquidate Fruehauf’s remaining assets as well as its pension plan. He resigned in August 2005, replaced by a new trustee, Daniel Harrow.

On March 15, five days after Street filed his candidacy papers to run for Moorlach’s seat, Harrow filed a 63-page statement with the Bankruptcy Court in Delaware accusing Street of "mismanagement, conflicts of interest and greed" while in charge of the trust.

Street said the statement was rife with falsehoods. He defended his actions, saying that creditors had recouped their money and that he had shored up the company’s ailing pension fund.

When the federal Pension Benefit Guaranty Corp. announced its takeover of the fund in 2004, its news release said that a $7-million deficit would be covered by insurance.

In April, Street filed a defamation and conspiracy lawsuit against Harrow and a union official who criticized Street before Orange County supervisors.

Street’s "shoot the messenger" defamation suit likely won’t go far given that private trustees like Harrow have, according to the 9th Circuit, quasi-judicial immunity for "actions that are functionally comparable to those of judges, (i.e., those functions that involve discretionary judgment)."  Curry v. Castillo (In re Castillo), 297 F.3d 940, 947 (9th Cir. 2002) (pdf). 

Street’s failure to obtain a protective order under Code section 107(b)(2) to "protect [him] with respect to scandalous or defamatory matter contained in a paper filed [with the Court]" may also bar him on claim preclusion grounds from attempting to raise this issue again in another related proceeding.  Cf., Gitto v. Worcester Telegram & Gazette Corp. (In re Gitto), 422 F.3d 1 (1st Cir. 2005) (pdf) (contents of examiner’s report only "defamatory" for purposes of Code section 107(b)(2) if material would cause a reasonable person to alter its opinion of the person in question and either (i) the material is untrue or (ii) the material is potentially untrue and irrelevant or included within a bankruptcy filing for an improper end).

 

© Steve Jakubowski 2006

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