Jevic and the Supremes

posted by Stephen Lubben

My own conflicted thoughts on Jevic, over at Dealb%k.

ABA Journal Blawg 100!

posted by Bob Lawless

HonoreeBadgeCredit Slips is honored to have been selected as part of the ABA Journal's Blawg 100, their annual list of the top 100 blogs about law and lawyering. It is our second year in a row for inclusion on the list.

We appreciate all of our readers and are humbled by the time you spend with us. The comments to the posts continually demonstrate that one of the things that makes this blog work is our readership. Thanks for visiting.

Homestead Proceeds in Bankruptcy

posted by Gary Neustadter

California's tiered homestead exemption protects a debtor's dwelling to the extent of $75,000, $100,000, or $175,000, depending upon the debtor's status, protects a like amount of proceeds of an execution sale of the homestead for six months following sale, and protects a dwelling acquired with the proceeds within the six-month period. Cal. Code Civ. Pro. §§ 704.710 – 704.730. The short six-month window seriously undermines Chapter 7 relief to a California debtor who would be willing to sacrifice non-exempt equity in a dwelling, such as a surviving spouse, recently widowed, who is burdened with unmanageable unsecured debt and can no longer afford mortgage payments.

In the Ninth Circuit, following a Chapter 7 trustee's sale of a dwelling, the debtor's right to retain the exempt proceeds evaporates, and the right to the proceeds reverts to the trustee, if the debtor fails to reinvest the proceeds in a new dwelling within six months after receiving proceeds of the sale. Wolfe v. Jacobson (In re Jacobson) (9th Cir. 2012). The six-month window assumes a debtor's ability to purchase a replacement dwelling within the specified period. In many locations, including coastal California's urban areas, the amount of protected proceeds will be sufficient, at best, for a down payment. Unless the debtor moves to a less expensive part of the state or country, financing would be essential. But Freddie Mac and Fannie Mae will not purchase mortgage secured loans made within four years of a Chapter 7 discharge (two years with extenuating circumstances) and the FHA will not insure such loans made within two years of a Chapter 7 discharge unless the debtor qualifies under the FHA's back to work program. Some specialized lending programs targeting specific categories of debtors (e.g. veterans) may be more forgiving, but otherwise it is difficult to imagine a lender willing to finance purchase of a dwelling by a recent Chapter 7 debtor if the loan is neither insured nor salable in the secondary market.

Continue reading "Homestead Proceeds in Bankruptcy" »

The CFPB and Behavioral Economics

posted by Adam Levitin
This post is an extended aside from my previous post about David Evans' argument about the CFPB's mindset and institutional incentives.  The point isn't critical to Evans' argument, but I'm writing because it really irks me because it shows such a lack of understanding about the CFPB.  Specifically, Evans suggests that the CFPB's supposed emphasis on preventing consumer harms rather than maximizing consumer welfare stems from the CFPB’s “intellectual foundation in behavioral economics.” This just wrong.  The CFPB really doesn’t have a behavioral economics DNA. (Heck, behavioral economics hasn't made much of a mark on government in general).  

Continue reading "The CFPB and Behavioral Economics" »

The CFPB and Consumer Welfare

posted by Adam Levitin
David Evans has an interesting article on PYMNTS that argues that "The fundamental problem with the CFPB ... isn’t who’s on top. It is that the CFPB does not have an institutional desire, or incentives, to make sure that the financial services industry supplies consumers with products that consumers need, including loans.” It’s refreshing to hear a CFPB critic argue that the issue isn’t really with the CFPB’s structure, but with its worldview. But Evans is still wrong.  

Continue reading "The CFPB and Consumer Welfare" »

Proposed New EU Insolvency Directive

posted by Jason Kilborn

The European Commission has just released its proposal for another Insolvency Directive, finally tackling the very sticky issue of substantive harmonization. I had hoped the Directive would push Member States toward greater harmonization of their consumer insolvency regimes, and I even made some proposals for principles and rules for such a move, but because cross-border lending to individuals for personal consumption remains quite limited in Europe (only about 5% of total household lending), the Commission concluded that "the problem of consumers' over-indebtedness should be tackled first at national level." (p. 15)  Nonetheless, the Commission's explanatory memo heartily endorses applying the principles on discharge in this new Directive (principally, providing a full and automatic discharge after a maximum 3-year process) to all natural persons, both entrepreneurs and consumers.

As to the former, though, the proposed Directive virtually shoves European national insolvency law in the direction of US law--for better or worse. The primary thrust is to encourage a rescue climate through more robust "preventive restructuring frameworks." Read: Chapter 11. The characteristics of such frameworks include leaving the debtor in possession of its assets and affairs, staying enforcement proceedings that might interfere with restructuring negotiations, mandating disclosures for proposed restructuring plans, facilitating plan adoption by creditors in classes, including a cram-down option and an explicit absolute priority rule (pp. 30, 38, not mentioning a new value corollary ... though not using the troublesome phrase "on account of its claim" in the definition of the absolute priority rule), and protecting new (DIP) financing. The importance of institutions is highlighted, with mandates concerning the expertise and training of judges, administrators, and practitioners. A few Credit Slips contributors in particular might be interested in the Commission's comment that "It is important to gather reliable data on the performance of restructuring, insolvency and discharge procedures in order to monitor the implementation and application of this Directive." The proposal thus includes detailed rules on data to be collected using standardized templates for easy comparison of empirical results across countries.

My sense is that this proposal will face some substantial political opposition, but the Commission has an impressive track record on getting its proposals adopted by the Parliament and Council. If and when this thing is adopted, I'm sure European authorities will have no trouble finding US restructuring professionals eager to volunteer to visit Europe to provide the type of training to judges, administrators, and practitioners mandated by this Directive. Put my name on the list!

Chapter 9's Cabinet of Constitutional Curiosities: Ongoing Constitutional Violations

posted by Melissa Jacoby

Just a handful of modern big-city bankruptcies have revealed foundational questions about chapter 9's fit within federal courts and constitutional jurisprudence. Given that chapter 9 no longer is simply an adjustment of bond debt, bankrupt cities restructure a wide range of claims in their plans, including those arising from long-lingering disputes; to this point, a Ninth Circuit panel just heard oral argument on a dispute from Stockton's exercise of its eminent domain power twelve years before Stockton filed its chapter 9 petition, only to put the case on hold pending rehearing en banc of a chapter 11 equitable mootness dispute. But my commentary today focuses on the impact of events and decisions during a bankruptcy case. If cases no longer must be prepackaged, a city's decisionmakers have a longer period of automatic stay protection during which to act in ways that might generate controversy, causes of action, or both.

Recall, for example, Detroit's headline-making residential water shutoff policies and practices. The bankruptcy court used informal control to coax the city into increasing protections for low-income residents. In response to an adversary proceeding requesting more formal intervention, the bankruptcy court held it did not have the power to enter an order enjoining the policy or directing changes. But Judge Rhodes' analysis included a significant caveat: in a follow-up written ruling, Judge Rhodes held that section 904 of the Bankruptcy Code does not shield a municipal debtor from injunctions of ongoing constitutional violations:

The Court concludes that § 904 does not protect the City from the bankruptcy court's jurisdiction over the plaintiffs' constitutional claims because the City does not have the "governmental power" to violate the due process and equal protection mandates of the Constitution [citations omitted]. The City must comply with those constitutional mandates [citation omitted]. Accordingly, the Court concludes that those claims, unlike the plaintiffs' other claims, do survive the City's § 904 challenge.

Lyda v. City of Detroit, 2014 WL 6474081 at *5 (Bankr. E.D. Mich., Nov. 19, 2014). That holding did not get the Lyda plaintiffs far because, according to the court, the allegations failed to state a constitutional claim on which relief could be granted. The adversary proceeding was dismissed. Judge Rhodes' decision rightly signaled, though, that a municipal bankruptcy petition is not a license to engage in constitutional violations without consequence. The district court had affirmed the ruling. Lyda v. City of Detroit, 2015 WL 5461463 (E.D. Mich. Sept. 16, 2015).

Last week, the Sixth Circuit reversed the portion of the bankruptcy court's decision on the relationship between section 904 and alleged ongoing constitutional harms. The reversal did not change the outcome for the parties, but generates a troubling question: can municipal bankruptcy allow a city to continue to violate constitutional rights with no redress? Surely the answer must be "no"?

Continue reading "Chapter 9's Cabinet of Constitutional Curiosities: Ongoing Constitutional Violations" »

A Note On Setoff and Recoupment

posted by Stephen Lubben

For Slips readers that might not otherwise see it, I wanted to highlight this post on the Delaware Corporate & Commercial Litigation Blog, about a recent state supreme court decision on the distinction between setoff and recoupment, and the applicability of the statute of limitations to the former.

Linking Pyramid Schemes (aka Multilevel Marketing Companies) and Consumer Bankruptcy

posted by Pamela Foohey

A couple weeks ago, on Last Week Tonight, John Oliver started what promises to be the greatest pyramid scheme ever. In an effort to help him, watch the segment here (warning: language). More seriously, multilevel marketing companies that sell products directly to customers through salespeople working out of their homes (Herbalife, Amway, Nu Skin, the relatively new Rodan + Fields) operate by way of a concerning sales structure. Salespeople recruit salespeople, who recruit more salespeople, who recruit yet more salespeople. The salespeople at the top make money off of the salespeople at the bottom. And the salespeople at the bottom often are left with stockpiles of soon-to-expire product in their homes and garages. Indeed, as noted by John Oliver, in July of this year, Herbalife consented to a $200 million settlement with the FTC in which they agreed to change their business tactics. When asked about Herbalife's business model, FTC Chairwoman Ramirez said, "they were not determined not to be a pyramid."  

Now, the potential (probable?) connection to bankruptcy filings. There is evidence that people sign up to sell these products because they need to make extra money--which makes sense. Signing up to be a salesperson for a multilevel marketing company could be one of many coping tactics used by someone hopelessly deep in debt. Get a second job, sell some belongings, go without insurance or food . . . and try to sell products from your home. People may get the idea from friends or financial gurus. For instance, Dave Ramsey's website has a page titled, "Guide to Joining a Multilevel Marketing Company," which includes some of the same inspirational, "go-getter," pull yourself up by your own bootstraps, you hold the key to your own success language that accompany Facebook posts that try to entice people to join Rodan + Fields. Of course, that means it is your fault when you fail, right?

Continue reading "Linking Pyramid Schemes (aka Multilevel Marketing Companies) and Consumer Bankruptcy" »

Disrupting consumer bankruptcy law practice

posted by Gary Neustadter

     Imagine a conversation with Siri (or other digital assistant), circa 2040, that begins as follows:

        Mariana: Siri. I am wondering whether I should file bankruptcy. What do you think?

Siri: Have you considered meeting with a consumer bankruptcy lawyer to discuss that?

Mariana: I've already contacted a few, but all of them charge more than I can afford.

Siri: I understand. I've talked with many other people who say the same thing, and many people file bankruptcy without consulting a lawyer. So let me see if I can help you. Why are you thinking about bankruptcy?

Mariana: I can't pay my medical bills and I got a notice from a collection agency about garnishing my wages. My credit card debts keep growing because I can't even pay the monthly interest, and my student loan debt is still large.

Siri: I imagine that this is pretty stressful for you and I think it is a good idea to consider ways in which you might be able to deal with these problems.

Mariana: Thanks for understanding. And I am losing sleep over this and also having trouble concentrating at work. What do you suggest?

Siri: Let's start by creating some spreadsheets that show your income, your living expenses, your debts, and what you own. You will probably have to dig up some of this information and get back to me, but we can at least start now.

Mariana: O.K. I've got some time now. How do we do this?

Siri: Turn on your television monitor and I'll show you some spreadsheets that we can fill in.

Mariana: O.K. Done.

Siri: Good. I see you now. You do look quite upset.

Mariana: [Shakes her head agreeing with Siri].

Siri: Do you want to talk a little bit more about how this is affecting you before getting started?

Mariana: No. Let's get started now.

     Siri proceeds over the next couple of days to interview and counsel Mariana as would today's consumer bankruptcy lawyer (and staff). Siri gathers the necessary data and completes the spreadsheets. She helps Mariana understand and compare Chapter 7 and Chapter 13 as well as possible non-bankruptcy options (e.g. resisting wage garnishment and stopping unwanted contact from debt collectors). She provides Mariana with the required credit counseling.

     After a few days reflection, Mariana instructs Siri to prepare the relevant documents for a Chapter 7 bankruptcy. Siri does so, obtains digital copies of Mariana's pay stubs, obtains Mariana's digital signatures, draws filing fees from Mariana's PayPal account, and files the necessary documents with the bankruptcy court.

     Soon thereafter, Siri alerts Mariana to the first meeting of creditors. Mariana attends via FaceTime after practicing with Siri on answering questions that Siri anticipates from the United States Trustee. A few weeks later, Siri notifies Mariana of her discharge, evidence of which Siri will store for Mariana together with the spreadsheets, copies of the documents filed with the bankruptcy court, and a recording of all conversations between Siri and Mariana relating to resolution of her financial difficulties.

     Science fiction? I'm beginning to think not for too long.

Continue reading "Disrupting consumer bankruptcy law practice" »

Do Financial Institutions Care About Bigotry?

posted by Adam Levitin

Do financial institutions care about bigotry?  I don't ask that facetiously.  I want to be clear that I am not raising the question of whether financial institutions themselves want to discriminate based on race, gender, national origin, religion, sexual orientation, etc. (or "have a taste for discrimination" in Gary Becker's terminology).  Instead, what I am asking is whether they care about bigotry and discrimination in society writ large?  That is, do financial institutions believe they have some sort of social responsibility?  Do they, as corporate entities believe in diversity and inclusion, and human rights?  Or even if they don't, do they believe that bigotry and discrimination in society are bad for their bottom line?  

Certainly that's what they have told us in the past.  Large banks have repeatedly made statements about how diversity and inclusion help them to be better businesses and to better serve their customers.  Indeed, many large financial institutions have statements of corporate values that typically include things like diversity and inclusion and human rights.  These institutions also sponsor charity events that advocate for these values.  But how much of this is just lip service and token payments to improve community relations?  We're about to find out. The major financial services trade associations just got a letter from the Ranking Democratic Members of the Senate Banking and House Financial Services Committee, as well as from Senator Elizabeth Warren and Rep. Keith Ellison.  The letter outlines concerns about Stephen Bannon's appointment to a senior White House position and asks the trade associations to publicly oppose Bannon's appointment.  Will the trade associations (and the banks that fund them) take a stand against bigotry, even if it costs them political capital with the incoming administration?  If they don't, what sort of message are they sending about their commitment to comply with fair lending laws?  About equal opportunity employment?  About hostile workplace environments?  It'll be interesting to see what happens.  Obviously the trade associations aren't quite the same as their members, and cannot be seen as speaking for any particular member institution, but this is a case in which silence counts as action, and if the trade associations are silent, then it's on the members to speak up if that silence does not represent them. As the letter says, "This moment is a test of the moral leadership of the banking and finance community."  

In re Trump Entertainment Resorts, Inc. in Retrospect

posted by Adam Levitin

Today in bankruptcy I taught In re Trump Entertainment ResortsInc. (Bankr. D. Del. Feb. 20, 2015).  The case isn't in my casebook (although some might notice that I presciently included in the problem sets a recurring character named Ronald Grump, a real estate developer with frequent bankruptcy dealings), but I added it to my syllabus this fall because of the election connection.  It was only today, however, that I realized what a hugely important decision it was in retrospect.  

The case involved an attempt by Donald and Ivanka Trump to terminate the debtor's license to use their trademark name, which had been pledged by the debtor as collateral for a loan, despite being nonassignable by its terms.  The Trumps sued in state court to terminated the trademark based on an alleged breach of the license agreement, but the debtor's bankruptcy filing stayed the suit. The Trumps moved to lift the stay.  The bankruptcy court said that the trademark license was an executory contract, and under the hypothetical test for assumption, said that the debtor could not assume the license, and therefore lifted the stay to allow the state court termination litigation to proceed (which I assume resulted in termination).  

Here's the thing.  Imagine if this case had come out differently.  What if the bankruptcy estate could have assumed and assigned the Trump trademark?  And what if it were happening during the election season or now?  One can only imagine the bidding war that might have developed.  

Creative Avoidance of Potential FDCPA Liability

posted by Gary Neustadter

     On May 19, 2015, Clark County Collection Services, LLC ("CCCS"), a Nevada debt collector, obtained a default judgment in Nevada Justice Court against Patricia Arellano on an assigned medical claim of $371.89. Two months later, on July 27, 2015, Arellano filed a class action in federal district court in Nevada, against CCCS and its lawyers, alleging FDCPA violations associated with the state debt collection action.

     A week later, on August 4, 2015, CCCS and its lawyers responded with some creative lawyering. CCCS obtained a writ of execution from the Nevada Justice Court. The writ, stating an amount owing of about $825 (including fees, costs, and interest added to the principal amount of the judgment), commanded the sheriff to levy on the Arellano FDCPA cause of action pending in federal district court. Because Nevada law permits execution on a judgment debtor's pending cause of action against another, the sheriff levied the writ, posted notice of sale once each week, for three consecutive weeks, in the Nevada Legal News, and thereafter held a sale of the cause of action on November 19, 2015. CCCS, likely the only bidder at the sale, purchased the cause of action with a credit bid $250.

     On January 21, 2016, CCCS filed a motion to dismiss the federal district court action (or in the alternative for summary judgment) arguing, among other things, that by virtue of the execution sale it now owned the FDCPA claim against itself and that Arellano therefore lacked standing. The district court agreed and entered an order dismissing the action. Ms. Arellano has appealed to the Ninth Circuit and the case is pending. Her opening brief (Plaintiff-Appellant's Opening Brief, Arellano v. Clark County Collection Services, LLC, No. 16-15467 (9th Cir. July 29, 2016), ECF No. 9), argues that federal law preempts and therefore precludes this use of the Nevada enforcement procedure by a debt collector because, so used, the procedure undermines the deterrent and remedial purposes of the FDCPA. The brief also argues that an FDCPA claim is akin to a tort claim and that use of the Nevada enforcement procedure to purchase the claim amounts to the assignment of a tort claim that is prohibited by common law.

Continue reading "Creative Avoidance of Potential FDCPA Liability" »

Preliminary Thoughts

posted by Stephen Lubben

On the new reality. Over at Dealb%k.

Welcome to Guestblogger Gary Neustadter

posted by Katie Porter

Credit Slips is delighted to welcome first-time guest blogger, Professor Gary Neustadter. A renowned innovative teacher, Professor Neustadter  specializes in debtor-creditor law, contracts, consumer protection, and legal practice. His classic work, When Lawyer and Client Meet: Observations of Interviewing and Counseling Behavior in the Consumer Bankruptcy Law Office, is a must-read, particularly worth revisiting as the nature of legal practice changes in the last decade driven by BAPCPA and the technology.

His new article, Randomly Distributed Trial Court Justice: A Case Study and Siren from the Consumer Bankruptcy World, is one of the most exciting pieces of scholarship that I've had the pleasure of reading. Gary offers all those interested in civil justice and economic rights a rare window directly into the justice system. While the picture that he portrays is far from pretty, his article approaches the effect of great art: it challenges us to question our assumptions and our perspectives.

Welcome, Gary, to Credit Slips. We look forward to your insights.

How to think about banks

posted by Alan White

Banking is not an industry; banking is not the real economy. The big banks especially are economic and political behemoths that remain unpopular and poorly understood in the popular imagination. Opinion polls show voters favor breaking them up, and some shareholders do too. While Wall Streeters may bemoan the fact that banks are no longer hot growth stocks, I suspect most voters who chose either candidate would not be saddened to see banks become public utilities. The Republican agenda to roll back Dodd-Frank, if this means unshackling the megabanks from speculating with public and taxpayer funds, will be the first betrayal by the incoming administration of its voter base.

Banks are now basically franchisees of the government's, i.e. the taxpayers', full faith and credit, as recently and eloquently explained by Professors Saule Omarova and Robert Hockett  Banks create and allocate capital because the government recognizes bank loans as money and puts taxpayers' full faith and credit behind bank IOUs. The conventional story that banks convert privately-accumulated savings into loans to borrowers is a myth. Because banks are public-private partnerships to create and allocate capital, the public can and should play a central role in insuring that the financial system serves the needs of the real economy, not just the financial economy.

So here is the first test for our new federal leaders. Are you tools of Wall Street, doing its bidding by undoing financial reform, or will you turn banks into the public utilities they ought to be?  

Slow start for personal bankruptcy in Russia

posted by Jason Kilborn

After focusing on the substance of personal bankruptcy laws around the world for years, I'm now convinced that I should instead have been focusing on institutions and procedure. Reports of the first year of the Russian personal bankruptcy process convince me further. In a paper anticipating the new law, I predicted potential process hangups, but I badly underestimated the degree to which procedural complications would waste time and resources and undermine the system's new effectiveness. I plan to look more closely at this in the future, but for now, one statistic reported in the press tells it all: In the first full year of the new Russian law's effectiveness, of the 33,000 individual bankruptcy petitions filed, only about 15,000 have been admitted into the procedure, and of these, only about 500 have been fully processed. Debtors' errors in filling out the new paperwork doubtless contributed to this slow start, but I suspect the courts are just not embracing the new process yet, and admitted cases are being drowned in a swamp of pointless procedural formalities. A simplified procedure for these individual cases is being discussed already, but why couldn't this lesson have been learned at the outset? There is simply no need in the personal bankruptcy context for complex procedures designed for high-asset business cases. Decades of experience elsewhere have proven this time and again. And once again we see, as Margaret Howard observed in one of my favorite articles years ago, lighthouse still no good.

Civil Rights and Economic Justice in a New Era

posted by Melissa Jacoby

FlyerSharing news of this post-election civil rights conference on December 2, 2016 that, notably for Credit Slips, features pathbreaking research by Professors Mechele Dickerson and Bob Lawless (in collaboration with Dov Cohen and the late Jean Braucher) on the intersection of race with debt and bankruptcy and an exploration of how this research informs policymaking and advocacy going forward. Time permitting, I will address a different intersection between race and debt: collecting judgments arising from police misconduct when cities file for bankruptcy. Thanks to Professor Ted Shaw and the Center for Civil Rights for recognizing the role debtor-creditor research can play in the quest for equality. 

Register using this link.

 

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