Postpetition Wages Held by Chapter 13 Trustee Belong to Debtor Upon Conversion

posted by Pamela Foohey

In case you haven't seen it, the SCOTUS issued its unanimous opinion in Harris today, holding that postpetition wages held by the Chapter 13 trustee at the time a case is converted to Chapter 7 must be returned to the debtor. When the Fifth Circuit issued its decision that created the split with the Third Circuit, I blogged some thoughts, primarily focusing on statutory analysis. Now that the SCOTUS has weighed in, the practical question is: how can creditors protect themselves from the risk that the trustee will accumulate a large sum of postpetition wages? Today's opinion ends with that question and notes that the amount of postpetition wages a particular Chapter 13 trustee will be holding at the time of conversion will depend upon the practices of that trustee. In addition, as in the case before the Third Circuit, sometimes Chapter 13 trustees accumulate funds because creditors refuse to receive plan payments for whatever reason.

Today's opinion suggests that creditors can include a disbursement schedule in the Chapter 13 plan. The Third Circuit's opinion sets out a few other ideas (see fn 9), including requesting plan modification if a creditor is refusing to accept payments. Perhaps the most effective protection suggested by the Third Circuit is for the plan to provide that payments vest in creditors immediately upon receipt by the Chapter 13 trustee, and to include similar language in the order confirming the plan. The Third Circuit, however, explicitly noted that it was not ruling on whether such language would remove accumulated undistributed payments from revesting with the debtor upon conversion. Today's opinion notes that a plan that provides that payments are property of the estate (as the plan provided in Harris) does not change the outcome that undistributed postpetition wages revest with the debtor upon conversion. But that still seems to leave creditor vesting language as a potential way for creditors to protect themselves.

Shareholders in Chapter 11 Cases

posted by Stephen Lubben

Now up on Dealb%k.

No Evading Illinois Pension Woes

posted by Jason Kilborn

The Illinois Supreme Court issued its unanimous opinion this past Friday putting a stake through the heart of the legislature's latest attempt to evade its responsibility for woefully underfunding four of the state's five public pensions. Adam (among others) has discussed the pension issue in the Detroit bankruptcy case and the Michigan constitutional provision protecting pension benefits from impairment. The Illinois Constitution of 1970 has an identical provision (art. XIII, s. 5), which will have much more bite in the case of the state of Illinois--an entity that, unlike Detroit, is not eligible for bankruptcy protection. Long story short: the Supreme Court all but scoffed at the state's arguments that contracts can sometimes be impaired (and the state has a really, really good reason here) and that prohibiting the legislature from reducing vested pension benefits is an impermissible abdication of sovereign authority. The Court pointed out that it wasn't the legislature, but the people of Illinois, who imposed the pension protection restriction ... and it seems now the people will likely have to revisit the idea of vastly increased state income taxes and the like, as "[a]dherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it."

I had long wondered why we still see defined-benefit pensions, in either the public or the private sector. It seemed obvious to me that defined-benefit plans are not sustainable and that every retirement protection system needed to switch to defined-contribution plans (like 403(b) and 401(k) retirement savings plans). It turns out that even this "obvious" switch won't necessarily fix the problem prospectively, as this paper reports.

Where's bankruptcy (or some other kind of restructuring) protection when you need it!?

Bankruptcy and Student Loan Debt

posted by Adam Levitin

My thoughts on whether the Bankruptcy Code should be amended to allow easier discharge of student loan debt are upon The Examiners at the Wall St. Journal. Short of it is yes for private student loans, no for public student loans. I'm sure to catch hell for this from some of the more aggressive student loan forgiveness advocates, given that most of the market is public student loans, but there are other restructuring and foregiveness options available for public loans and serious fairness problems with allowing discharge of existing student loans.  New borrowers shouldn't have to subsidize older ones' dischargeability, and taxpayers shouldn't be picking up the tab for social insurance to the extent that bad educational/career choices are within individuals' control.      

Fine Corinthian Colleges

posted by Stephen Lubben

And the business model that will likely leave them unable to pay students, even if the students win in their ongoing litigation, over at Dealb%k.

Mixed Messages Regarding OLA

posted by Stephen Lubben

Over at Dealb%k I talk about the confusing state of affairs regarding Dodd-Frank Orderly Liquidation Authority and the FDIC's new "single point of entry" (SPOE) approach to OLA. 2015-04-28 09.23.39 HDR

In short, since OLA expressly excludes depository banks, it is not clear that a SIFI can be placed into OLA based on the failure of its insured bank. One way around that problem might be to use the "source of strength" doctrine to trigger a default at the parent-company level.

Trick is that the the regulators have done nothing to develop the source of strength power Dodd-Frank gives them, and doing so is also in tension with their general disapproval of parent company guarantees and cross-default provisions. They argue that guarantees and cross-default provisions will undermine SPOE.

That New Song About Bills

posted by Pamela Foohey

You may have heard it. It was on the radio the last three mornings as I drove to work. It goes, "I got bills I gotta pay, so I'm gonn' work work work every day." It made me think about bankruptcy (naturally). And it is really catchy. The song's simply titled, "Bills," and is LunchMoney Lewis's debut single. The lyrics reference empty fridges, cars not starting, shoes without "soul," praying that cards won't be declined, and, of course, piles of bills. The music video features an adorable girl and her lemonade stand, complete with a credit card reader made out of cardboard.

When asked about the song, Lewis said: "I feel like people relate to 'Bills' no matter where you’re from. Whether you’re very middle class or you’re lower class or you’re in the projects or you’re upper middle class. We all get bills. . . . That’s why I wanted to turn it into something positive, like when you hear 'Bills' it kind of makes you feel happy, you know?" (full interview). The song made me smile, and apparently is rapidly climbing the pop charts.    

Check out the official video for some Friday fun.

Stale Debts in Bankruptcy

posted by Dalié Jiménez

Should liability under the Fair Debt Collection Practices Act (FDCPA) lie against a creditor who submits a proof of claim past the statute of limitations in a consumer bankruptcy case?

That is the question the Supreme Court declined to review recently in LVNV Funding, LLC v. Crawford. In Crawford, the Eleventh Circuit applied the "least sophisticated consumer" standard to find liability for the debt buyer when it submitted a proof of claim in 2008 for a debt that was out of statute as of 2004. Other courts have held differently. In fact, just last month, district courts in Indiana and Pennsylvania dismissed FDCPA suits against debt buyers under essentially the same facts as Crawford. Other courts, including the Second Circuit, have seemingly held that FDCPA liability can never lie in a bankruptcy case.

Putting the merits of applying the FDCPA in a bankruptcy case aside, it seems to me that in this specific instance potential liability under the Act could serve very useful functions: namely efficiency and cost savings.

Continue reading "Stale Debts in Bankruptcy" »

A World Without Harvey

posted by John Pottow

Here's an early obit.  It's hard for me to imagine a chapter 11 world without Harvey Miller.  Although the adjective is over-used, I think it would be difficult to argue the man was not transformative to bankruptcy law.  He was an incredible mentor, and I am honored to have considered him a friend.  I can't count  how many younger lawyers in the field he encouraged and taught, in so many ways.  It's just hard to imagine a world without his seemingly indefatigable spirit.  Harvey makes -- made, I'm still adjusting to the past tense -- you feel both energized and exhausted at the same time after an engagement.  It's a sad day, but happy too, I suppose, knowing what a great run he had.  Trite, I apologize, but he was a rare breed, indeed.

"Quicken" the Development of the Law

posted by Katie Porter

Over the last few years, the US Department of Justice has reached settlements with nearly every major lender with regard to the lending procedures for FHA (Federal Housing Administration) loans. The legal basis for the settlements were alleged violations of the False Claims Act. The total recovery is about $3 billion dollars.Sue me

In the wake of lengthy and expensive investigations and negotiations, lenders have basically . . . whined.  Jamie Dimon said the company was "thoroughly confused" by the FHA's investigations and said he was going to "figure out what to do." That task might be a whole lot easier due to Chase's competitor, Quicken Loans. On Friday, Quicken sued the Department of Justice and the Department of Housing and Urban Development, asking the court for a declaratory judgment and injunction that would halt the government's efforts to bring Quicken to settle its alleged FHA liability. I love this lawsuit!!! 

Continue reading ""Quicken" the Development of the Law" »

Thanks for the chance to post.

posted by David Lander

Thanks to the folks who run Credit Slips for the opportunity to post.  I hope to be back in a few months with musings about the following: 

  1. Since the CFPB has very limited authority over auto finance, and since securitization of consumer auto loans is back with a vengeance and since low and moderate income folks desperately need used cars, we need to watch carefully this first post-crash subprime challenge. 
  2. Do preference recoveries redirect dollars in accordance with the goal of preference avoidance? With help from Ronald Mann I hope to do a small empirical study that others might replicate in their localities.Such information is crucial in figuring out the right size and shape for the preference recovery net. 
  3. Has the combination of the fall-off of law student numbers and the pressure toward more practice-oriented courses impacted the use of adjuncts in law schools?
  4. What are the factors behind the significant fall-off in insolvency work and is this a normal cycle or does it constitute institutional change for the business bankruptcy bar? I hope to combine my thinking with what I can learn from interviews with lawyers, lenders of every type, turnaround folks and academics who study this type of thing.   Till next time. 

Secured Credit, Churches, and Reorganization

posted by Pamela Foohey

Chapter 11's ability to empower true reorganization has received much criticism of late in light of an increasingly held assumption that most Chapter 11 cases end in a 363 sale of the debtor's assets. Around this time last year, the American Bankruptcy Institute and the University of Illinois College of Law co-hosted a symposium dedicated to discussing secured creditors’ rights and role in modern Chapter 11. Papers from the symposium (including by Slips contributors) very recently became available here.

I was lucky enough to moderate a couple of the symposium panels. As I was listening to the discussion, I noticed that what I was hearing about secured creditors and 363 sales did not match  what I had observed in my study of how religious organizations (mainly smaller churches) currently use Chapter 11. To accompany the release of the symposium papers, I wrote a short piece describing how secured creditors influenced religious organizations' Chapter 11 cases in ways that did not lead to widespread sales, but rather, plans and settlements.

Continue reading "Secured Credit, Churches, and Reorganization" »

A Gunmaker Gets Aggressive

posted by Stephen Lubben

TrackdownOver at Dealb%k, I have a new column up about Colt's rather aggressive dual-track exchange offer and prepack.

In short, it involves very little creditor input. Perhaps part of a larger trend of aggressive use of chapter 11 by private equity backed debtors?

And no, I have no idea if Robert Culp is holding a Colt firearm that that picture ... but he looks kind of cool, doesn't he?

An Arbitration Between Russia and Ukraine?

posted by Mark Weidemaier

Shutterstock_267853262Russia has threatened to take Ukraine to arbitration unless the country pays its $3 billion bond in full. As Anna notes, the bond gives the holder the option to sue in English court or to arbitrate under the rules of the London Court of International Arbitration (LCIA). The LCIA is a preeminent international arbitration institution, but the choice of arbitration over litigation is an unusual one in this context. Non-consumer lenders typically prefer litigation to arbitration. As I've shown elsewhere, sovereign lenders share this preference. Arbitration clauses rarely appear in sovereign bonds unless (i) the issuer's internal law forbids it to submit to foreign court jurisdiction (e.g., Brazil, El Salvador) or (in English-law bonds) (ii) the issuer has not agreed to enforce English court judgments but has signed on to the New York Convention, which requires it to enforce foreign arbitration awards. Ukraine falls into the latter camp, and its bonds have traditionally given bondholders the option to arbitrate. (Technically, it's the trustee's option; bondholders cannot demand arbitration. But Russia owns 100% of this issue, and I presume the trustee will do what Russia wants.)

I have not seen the trust deed for the Russian bond so I can't say with 100% certainty how the arbitration clause operates. From the prospectus, however, it seems that the clause is identical to the one in Ukraine's other debt (see par. 25.4-25.7). There is a panel of three arbitrators; each party nominates one, and the parties jointly nominate the third. Most lenders prefer judges in New York or London to this kind of arrangement, which arguably ensures at least one arbitrator receptive to the borrower's arguments. From the lender's perspective, there's nothing to argue about. I lent money; you didn't repay it. (Party-appointed arbitrators are formally independent of the appointing party - see LCIA Rules 7.1 and 5.3-5.5 - but some suspect bias nonetheless.) So why does Russia prefer to arbitrate?

Continue reading "An Arbitration Between Russia and Ukraine?" »

Lessons For Consumer Protection From The World Of Inclusive Capitalism

posted by David Lander

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

Continue reading "Lessons For Consumer Protection From The World Of Inclusive Capitalism " »

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