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

Bankruptcy matters have been the focus of several recent posts by A. Benjamin Spencer, a rising star who is currently Assistant Professor of Law at the University of Richmond School of Law and the brains behind two terrific blogs that have recently caught my attention.
His first blog, started last September, is the Federal Practice Bulletin blog, which I highly recommend to all bankruptcy litigators. His latest post is entitled “Fourth Circuit Holds that Class Action Not Superior Method Under Rule 23(b)(3) Compared to Adversarial Bankruptcy Proceeding.” In it, he cites to a recent decision, Gregory v. Finova Capital Corp., 2006 WL 619063 (4th Cir., 3/14/06) (pdf), where the Fourth Circuit issued another fractured opinion, this time reversing as an abuse of discretion a decision of the South Carolina district court certifying a securities fraud class action case commenced by the debtor’s noteholders against the debtor’s principal lender on the basis that the Creditors’ Committee had already commenced an adversary proceeding against the lenders containing similar securities fraud allegations.
Given the split within the 4th Circuit itself, Professor Spencer must have had a tough time deciding whether to include the Gregory case on his Federal Practice Bulletin blog or his second blog, started last October, called “Split Circuits” (though “split circuits” generally relate to splits among the circuits, not splits within a single circuit itself). Bankruptcy practitioners have long known that if you look hard enough, you’ll find a bankruptcy court opinion to support just about any litigation position asserted, so don’t be surprised then to see Professor Spencer blogging about bankruptcy quite frequently in his Split Circuits blog, as he did in these two recent posts:

Petition for Cert. Filed to Settle Circuit Split re application of 28 U.S.C. § 1367 to Bankruptcy Jurisdiction; and

Fourth Circuit Notes Circuit Split re Whether Bankruptcy Law “Property of the Estate” Includes Property the Debtor Fraudulently Transferred.

Best of luck Professor Spencer and thanks for your contributions to the blogosphere!
UPDATE: Special thanks to Craig Goldblatt of WilmerHale’s DC Office for sending along pdf’s of the cert. petition and the corresponding appendix in the Sasson v. Sokoloff case regarding the applicability of 28 USC § 1367 and principles of “pendant,” “ancillary,” and “supplemental” jurisdiction in bankruptcy cases. With bankruptcy-related procedural issues among Justice Ruth Bader Ginsburg’s favorite topics, we sure hope that the Supreme Court grants the cert. petition. It certainly is an issue that daily affects the decisions of bankruptcy judges and litigators.
© Steve Jakubowski 2006

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

The following bankruptcy-related working papers can be downloaded from the Social Science Research Network:
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NYU’s Alberto Bisin & Northwestern’s Adriano A. Rampini: “Exclusive Contracts and the Institution of Bankruptcy.” (Abstract ID: 886733)
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UCLA School of Law’s Daniel J. Bussel: “Creditors’ Committees as Estate Representatives in Bankruptcy Litigation.” (Abstract ID: 878485)
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Univ. of Texas Law School’s Jane M. Cohen: “Of Waterbanks, Piggybanks, and Bankruptcy: Changing Directions in Water Law.” (Abstract ID: 874767)
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Univ. of Chicago Law School’s Kenneth W. Dam: “Credit Markets, Creditors’ Rights and Economic Development.” (Abstract ID: 885198)
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Univ. of Georgia’s Mark Dawkins & Linda Smith Bamber & SMU’s Neil Bhattacharya: “Systematic Share Price Fluctuations after Bankruptcy Filings and the Investors who Drive Them.” (Abstract ID: 881508)
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Nottingham Business School’s Nicola Ficarella & Michael Gavirdis: “Enron & Parmalat two twins parables.” (Abstract ID: 886921)
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UNC-Chapel Hill Law School’s Melissa B. Jacoby: “Fast, Cheap, and Creditor-Controlled: Is Corporate Reorganization Failing?” (Abstract ID: 887523)
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3d Circuit Judicial Law Clerk Adam Levitin: “Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime.” (Abstract ID: 889462)
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Wichita State Univ.’s Stanley D. Longhofer and Kansas St. Univ.’s Stephen R. Peters: “Protection for Whom?” (Abstract ID: 875362)
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UCLA School of Law’s Lynn M. LoPucki: “Where Do You Get Off? A Reply to Courting Failure’s Critics.” (Abstract ID: 888325)
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Columbia Univ. Law School’s Edward R. Morrison and Davis Polk’s Joerg Riegel: “Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges.” (Abstract ID: 878328)
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NYS Bar Assn.: “Formations, Reorganizations, and Liquidations Involving Insolvent Corporations.” (Abstract ID: 885658)
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Northeastern Univ.’s Harlan D. Platt & Marjorie B. Platt: “Understanding Differences Between Financial Distress and Bankruptcy.” (Abstract ID: 876470)
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Univ. of Texas at Austin’s Ramesh K.S. Rao and Univ. of Md.’s Susan V. White: “The Creation of FirstCity Financial Corporation: A Clinical Study of the Bankruptcy Process.” (Abstract ID: 880762)
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Penn. Law School’s David A. Skeel, Jr. & Georg Krause-Vilmar: “Recharacterization and the Nonhindrance of Creditors.” (Abstract ID: 888182)
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SMU Law School’s Joshua C. Tate: “Game Over.” (Abstract ID: 888634)
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Univ. of Miami Law School’s William H. Widen: “Prevalence of Substantive Consolidation in Large Bankruptcies from 2000-2004: Preliminary Results.” (Abstract ID: 878388)
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Abstracts for each of these working papers follow:

Continue Reading 17 Bankruptcy-Related Working 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

As every Cub fan is painfully aware, hope springs eternal around this time every year in Chicago. This year, of course, is notable because — for the first time in recent memory — hope is springing (even if not eternally) among White Sox fans (though some label it irrational exuberance).
Baseball, however, isn’t all that’s providing hope for Chicago’s bankruptcy pros this April. Check out the following upcoming three bankruptcy conferences, which offer real hope for those trying to make sense of BAPCPA’s senseless provisions. These are:

  • April 7, 2006: The University of Illinois Law School is sponsoring this one-day conference entitled “Consumer Bankruptcy and Credit in the Wake of the 2005 Act,” featuring an all-star panel of judges and professors from the US and Canada;
  • April 17, 2006: The DuPage County Bankruptcy Committee is sponsoring this meeting (the 7th in a continuing series) on some important consumer bankruptcy issues spawned by BAPCPA, including requirements imposed by the US Trustee’s office on the debtor and its attorney;

    • and

  • April 27, 2006: The Commercial Law League of America, as part of its 76th Annual Meeting, is sponsoring this symposium at DePaul University College of Law (see p.4 of brochure) entitled “BAPCPA Six Months Later,” featuring prominent judges, lawyers, professors, and consultants from around the country.

© Steve Jakubowski 2006

Congratulations are in order for fellow blogger and friend, Francis X. Pileggi of the Delaware Litigation Blog, who’s made some new law in Delaware. As he reports here, the Delaware Supreme Court issued an opinion on March 14 (which favored Francis!) that is “must reading for anyone who drafts or needs to interpret an arbitration clause in an agreement governed by Delaware law.” Francis writes that in the opinion —

Delaware’s highest court affirmed the trial court and with pithy reasoning addressed the issues of: (i) who decides arbitrability if the agreement incorporates the rules of the American Arbitration Association (AAA); and (ii) based on the terms of the specific agreement at issue, whether the claims raised were governed by the arbitration clause. The Court determined that based on the terms of the particular agreement involved, the parties intended that the trial court determine the threshold issue of arbitrability, and that likewise injunctive relief should be decided by the trial court. CAVEAT: If the parties to an agreement simply incorporate the rules of the AAA without more, one should be aware that the AAA will likely be empowered to not only decide the issue of arbitrability, but the AAA will also be the forum to dispense equitable relief.

Coincidentally, just before reading Francis’s post on the ruling, I was reading this opinion from the Third Circuit on whether an arbitration proceeding violated the automatic stay, and — if so — whether both the panel’s deliberations and the resulting award were void. Acands, Inc. v. Travelers Casualty and Surety Co., 435 F.3d 252 (3d Cir., 1/19/2006).
What most caught my eye about this case, however, was the composition of the panel, which included former Third Circuit Judge — now Supreme Court Justice — Samuel A. Alito and Judge Milton I. Shadur, district court judge for the Northern District of Illinois (and himself a Chicago institution). A bankruptcy case resolved by these two judges seemed worth reading for this reason alone.
While not a “must read,” it’s a good read to be sure, for it reaffirms Judge Cristol’s reminder (mentioned here) that “a little neglect may breed mischief.” Here, it appears the only thing Travelers needed to have done to preserve the hard-fought benefits of painstaking arbitration proceedings (initiated by the debtor!) was to have filed a lift stay motion in the bankruptcy court in advance of filing a counterclaim against the debtor in those proceedings. Given that the debtor had initiated the arbitration proceedings, it is likely the bankruptcy court would have entered an order lifting the stay. Because Travelers failed to do so, the Third Circuit ruled, the proceeding was rendered a nullity, and the debtor — having lost at arbitration — was given a second bite at the apple.
In reaching this seemingly draconian result, the Third Circuit noted that the result was compelled because “no equitable power to grant relief from the automatic stay rests with the District Court. To the extent that an equitable exception to the automatic stay exists, it rests solely in the Bankruptcy Courts.”
Judge Alito wrote this about the nature of the case, and of the results compelled by the automatic stay:

Continue Reading Arbitration Clauses in Delaware and the Third Circuit Recently Examined

The Wall Street Journal’s James Haggerty wrote thi$ 3/11/06 article entitled “Millions Are Facing Monthly Squeeze On House Payments.” In it, he provides some disturbing data regarding the subprime lending industry, including a graph showing subprime lending originations increasing from $150 billion in 2000 to $650 billion in 2005. Haggerty writes:

In the hot housing market of recent years, many households took advantage of “affordability” mortgage loans — heavily promoted by lenders — that hold down payments for an initial period. Now the initial periods are coming to an end on many of these loans, leaving borrowers to face resets of their interest rates that can cause monthly payments to shoot up between 10% and 50%.
More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s Economy.com, a research firm in West Chester, Pa….
A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans….
For a study released in February, Dr. Cagan examined adjustable-rate first mortgage loans made in 2004 and 2005, including refinancings. He figures about 7.7 million of these loans are outstanding, representing $1.888 trillion of debt.
About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to strain their finances.
Assuming that home prices stay around current levels and interest rates don’t rise sharply, Dr. Cagan figures about one million households eventually will default and lose their homes to foreclosure. That would cause about $110 billion of losses for lenders, he says.
Lenders and the economy as a whole could easily cope with such losses, Dr. Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. “It won’t happen all at once,” Dr. Cagan says. “It will be spread out over several years.”

History has shown that “hockey stick” growth patterns in the subprime industry are 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 the current exponential growth since 2000 in subprime lending, then waves of defaults will be “tsunami-like” in proportion. That’s what happened to the subprime auto lenders of the 1993 – 1997 era (e.g., Mercury Finance, First Merchants Acceptance Corp., National Auto Financial, Reliance Acceptance). Let’s hope it’s not the case here, but don’t hold your breath that its not. Either way, the squeeze continues.
3/22/2007 Update:: See my latest update on the subprime squeeze here.
© Steve Jakubowski 2006

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