350 posts categorized "Bankruptcy Generally"

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.  

Join us for the "The NCBJ at 90"

posted by Melissa Jacoby

ABLJInfoWill you be in San Francisco for the National Conference of Bankruptcy Judges annual meeting and related events? Please mark your calendars now for Thursday October 27, 3:oo pm Pacific Time: a special educational session honoring the 90th anniversary of the NCBJ.* We (Profs. Gebbia, Simkovic, Pottow, and me, with great guidance and input from Judge Colleen Brown and Judge Mel Hoffman) will be discussing original historical research on bankruptcy courts and bankruptcy law conducted for this occasion. Early abstracts can be found on the NCBJ blog. In the meantime, Prof. Gebbia has been posting quizzes; I suspect some Credit Slips readers would ace these tests, but you won't know until you try!

So please do join us on October 27 to be part of this commemoration and conversation.

* The mission of the NCBJ, according to its website, is:

The National Conference of Bankruptcy Judges is an association of the Bankruptcy Judges of the United States which has several purposes: to provide continuing legal education to judges, lawyers and other involved professionals, to promote cooperation among the Bankruptcy Judges, to secure a greater degree of quality and uniformity in the administration of the Bankruptcy system and to improve the practice of law in the Bankruptcy Courts of the United States.

 

Police Misconduct in Bankrupt Cities

posted by Melissa Jacoby

Bankruptcy filings by major cities have reinvigorated attention to municipal bankruptcy. As chapter 9 and its application have become more like chapter 11, a wide range of creditors are being swept into the process. As written before, city cases now have classes of general unsecured creditors. Those classes also have been including plaintiffs in civil rights lawsuits alleging unconstitutional police conduct. The proposed payouts vary.  San Bernardino's bankruptcy plan, which seeks to release the liability of non-debtor officers as well as the debtor, has been proposing a 1% payout. The confirmation hearing is currently set for October 2016.  Some cities with systemic police practice problems - Ferguson, Chicago - also are known to have pervasive financial difficulties. I am not suggesting or predicting they will end up in bankruptcy, but it is another reminder that civil rights advocates need to be up to speed on the impact of chapter 9, if only to be able to bargain in its shadow as other types of creditors do.

I have just posted a paper on this topic (revised and updated from a version posted earlier this summer). It walks through the issues and gives three brief case studies. Feedback from the Credit Slips readership would be very welcome, and/but please also pass along the link to civil rights lawyers who do § 1983 litigation. Here is the brief abstract:

When a financially distressed city files for bankruptcy, recovery for civil rights violations is at risk. This article examines the impact of bankruptcy on civil rights claims, with an emphasis on allegations of police misconduct resulting in lawsuits under 42 U.S.C. § 1983. We walk through how a bankruptcy filing affects civil rights plaintiffs, starting with the immediate injunction against litigation and debt collection activity, and ending with the legal release of debt and a restructuring plan. Using primary source materials, we offer three brief case studies: Detroit, Vallejo, and San Bernardino. We conclude with suggestions on where to go from here in research and advocacy.

Can a Nonprofit Startup Fix the Pro Se Problem in Bankruptcy?

posted by Dalié Jiménez

For the past four years, Jim Greiner, Lois Lupica, and I have been working on the Financial Distress Research Project (FDRP)*, a large randomized control trial trying to find out what works to help individuals in financial distress. As part of the project, a large number (70+ at last count) of student volunteers have created self-help materials aimed at these individuals, using the latest learnings in adult education, psychology, public health, and more. Part of our work has focused on creating a set of materials to help pro se filers through a no asset Chapter 7 bankruptcy (I blogged about the student loan AP materials here).

Continue reading "Can a Nonprofit Startup Fix the Pro Se Problem in Bankruptcy?" »

Thoughts on the GM Ignition Switch Opinion

posted by Adam Levitin

The Second Circuit handed down its much-anticipated decision on the GM successor liability claims. Bottom line is that most, if not all, of the various claims against New GM are not barred by the Sale Order because of lack of procedural Due Process.  That said, there's a lot more in the ruling.  My thoughts below the break: 

Continue reading "Thoughts on the GM Ignition Switch Opinion" »

The Bad CHOICE Act

posted by Adam Levitin

I'm testifying before House Financial Services tomorrow regarding the "CHOICE Act," the Republican Dodd-Frank alternative.  My testimony is here.  It's lengthy, but it doesn't even cover everything in the CHOICE Act--there are just too many bad provisions, starting with the idea of letting megabanks out of Dodd-Frank's heightened prudential standards in exchange for more capital, then moving on to a total gutting of consumer financial protection, and ending with a very poorly conceived good bank/bad bank resolution system executed through a new bankruptcy subchapter.  The only good thing about the Bad CHOICE Act is that it has little chance of becoming law any time soon. 

Essential Resources on Burdens of Proof in Bankruptcy Litigation: Property Exemptions and Beyond

posted by Melissa Jacoby

Shutterstock_380908687Deliberations of the Advisory Committee on Bankruptcy Rules have generated great materials relevant to burdens of proof in bankruptcy litigation that judges and lawyers should read and keep on their shelves, whether physical or virtual. Judge Christopher Klein's Suggestion 15-BK-E, submitted in July of 2015, posited that Rule 4003(c) (which gives the objecting party the burden of proof in property exemption disputes) exceeds the authority of the Rules Enabling Act "with respect to claims of exemption that are made under state law that does not allocate the burden of proof to the objector." The document includes a detailed court decision, In re Tallerico, setting forth the reasoning. In a memorandum starting on page 67 of the agenda book downloadable here,  Assistant Reporter/Professor/prior Credit Slips guest Michelle Harner takes a deep dive into the intersection of burdens of proof and the Rules Enabling Act. The Harner memo considers two key Supreme Court decisions that present different standards. The first is Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000), which played a central role in Judge Klein's submission and court decision. The second is Hanna v. Plumer, 380 U.S. 460 (1965). Harner concludes that Hanna is more on point in the event of a conflict between a federal bankruptcy rule and state law. And, as Harner explains, the Supreme Court in Hanna "rejected the argument that a rule is either substantive or procedural for all purposes" (p78), walks through the questions to be considered, and seeks to apply them to the exemption issue at hand. It looks like the Bankruptcy Rules Committee will not be proposing changes to Rule 4003(c) at this time, but this memo should live on, alongside the case law, as an essential resource for judges and lawyers who encounter disputes over the propriety of burdens of proof in federal rules. 

Bookshelf image courtesy of Shutterstock.com

 

Puerto Rico Restructuring Options That Don't Rely on Congress

posted by Mark Weidemaier

The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring. 

We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.

Puerto Rico: Debt Restructuring and Takings Law

posted by Melissa Jacoby

ConstitutionPer the last words of my PROMESA post, click here for an interview with Professor Charles Tabb, who discusses the (limited) impact of the Takings Clause on debt restructuring and moratorium legislation. 

Constitution image courtesy of Shutterstock.com

Puerto Rico Symposium: Of Wills and Ways

posted by Melissa Jacoby

JigsawDebt relief without Congress? No one promised it would be pretty.  

Our brainstorm (remember the ground rules) has included Levitin's MacGyver-inspired local currency, eminent domain, and liberally-interpreted exchange stabilization, Weidemaier's use of COFINA doubts to wedge open the door for a Executive Branch/Puerto Rico partnership, and, thanks to economist Arturo Estrella, a long menu of options with examples, summarized succinctly as "where there is a will, there is a way" (p. 1) (english report at bottom of this page). Could the federal government underwrite new bonds in an exchange offer, asks Pottow? Be the mediator with a big stick, asks Lubben?  Might a holdout creditor be liable to shareholders if it rebuffed a reasonable deal, asks Jiménez? (scroll to the comments). Marc Joffe notes the potential analogy of the City of Hercules tender offer (as well as the fact that Levitin's local currency suggestion has a history from the Depression). 

Lawless reminds us of the risks associated with discriminatory treatment of Puerto Rico's debt and access to legal tools. Of course, there is a long history here. Maria de los Angeles Trigo points to UT professor Bartholomew Sparrow's study of the Insular cases. And while most expect debt relief will be conditioned on some sort of fiscal oversight, it needs to be designed in a way to avoid the foibles of the past.

Returning to Lubben's mediation theme, let's push the brainstorming a step farther: could Treasury appoint a federal judge, such as Chief District Judge Gerald Rosen (E.D. Mich.), to oversee the mediation, and demand that all creditors participate in good faith until released? Even in the absence of legal authority for this move, would creditors formally object or fail to show up? 

Thanks to participants and readers for active involvement so far, and please keep your thoughts and reactions coming this way.  

Puzzle photo courtesy of Shutterstock.com

Puerto Rico And (Very) Soft Executive Power

posted by Mark Weidemaier

Melissa's post asked what the executive branch could do to facilitate restructuring of Puerto Rico's debt. I'll get to that, but I first want to talk about Puerto Rico itself. At first glance, the Commonwealth seems to be in a uniquely terrible position. It has the disadvantages of a sovereign (e.g., no bankruptcy) but lacks the advantages (e.g., legal and/or practical immunity from legal enforcement). In fact, it lacks only most of the advantages. One advantage of sovereignty it does enjoy--and that many "true" sovereign borrowers are obliged to forego when they borrow--is that much of its debt is governed by its own law. That law can be changed (subject to constraints in the U.S. constitution) or interpreted in ways that give the Commonwealth needed restructuring flexibility. 

Continue reading "Puerto Rico And (Very) Soft Executive Power" »

Credit Slips Presents: A Virtual Symposium on Puerto Rico

posted by Melissa Jacoby

TablePuerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.

Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action? 

On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.

Continue reading "Credit Slips Presents: A Virtual Symposium on Puerto Rico" »

Initial Attorney Reactions to the New Bankruptcy Forms

posted by Pamela Foohey

Help ImageYesterday I spoke at the Oklahoma Bar Association's annual advanced bankruptcy seminar. My talk focused on my research into chapter 11 cases filed by churches, a few of which are from Oklahoma. But the seminar's timing aligned perfectly with the roll out of the new bankruptcy forms. And unsurprisingly the first hour of the seminar was devoted to introducing and discussing the forms. A debtor attorney who handles chapter 7, 11, 12, and 13 cases -- Brian Huckabee -- parsed through some of the forms and added some initial comments. My take-away is that debtor attorneys' chief concern is that the readability and understandability of the forms will make it easier for debtors to file pro se, taking work away from attorneys ("this is self-service!"), a concern which was raised during the public-comment period. A related concern was voiced by a chapter 7 trustee: that chapter 7 (and 13) trustees will end up spending more time working through each case.

Three items during the discussion stood out to me. The first two relate to the "self-service" nature of the forms, particularly the new forms' instructions and white space. The last item goes to an attachment to the proof of claim form, Form 410A -- Mortgage Proof of Claim Attachment. 

Continue reading "Initial Attorney Reactions to the New Bankruptcy Forms" »

Longest Running Catholic Archdiocese Chapter 11 Case Finally Ends

posted by Pamela Foohey

The Archdiocese of Milwaukee filed its chapter 11 petition on January 4, 2011. Yesterday, four years and ten months later, Bankruptcy Judge Susan Kelley confirmed the dioceses' reorganization plan. During those four plus years, the most contentious issue regarded a $55 million trust fund established rather suspiciously prior to filing to care for a cemetery. The parties were sent to mediation repeatedly, but the cemetery issue seemed to remain the hold up -- until the 7th Circuit ruled that the cemetery trust fund was not shielded from the Code's avoidance provisions by the Religious Freedom Restoration Act. After the 7th Circuit's ruling, the archdiocese revised its plan to distribute $21 million in total to sex abuse claimants. $16 million is coming from that cemetery trust fund. 

In comparison, the archdiocese's initial plan proposed to distribute $4 million in total to these claimants. The $21 million primarily will be split among 355 people. Though it is difficult to compare settlement amounts across diocese chapter 11 cases because of unknowns about abuse severity, state laws that apply to the underlying claims, and available insurance monies and other assets, the $21 million still makes Milwaukee's settlement one of the smallest based on the number of people to receive compensation.

Continue reading "Longest Running Catholic Archdiocese Chapter 11 Case Finally Ends" »

Who "Presides" over Chapter 13 Plan Confirmation Hearings?

posted by Melissa Jacoby

Shutterstock_329900393Temple Law Review will soon publish a volume honoring Bill Whitford, based on a conference from last fall. That event was particularly special for an additional reason: it turned out to be the last opportunity, for many of us, to spend time with another inspiring leader in our field, Jean Braucher

My own short contribution, on judicial oversight in chapter 13 bankruptcies, has just been posted here. We will share the word when the entire volume is available - including, I believe, a piece from Jean.

Gavel image courtesy of Shutterstock

Unhappy Birthday, BAPCPA

posted by Adam Levitin

BAPCPA's been in effect for 10 years now. I still remember the day before it went into effect, seeing round the block lines at the Wilmington courthouse as consumers rushed to file. 

There's lots to say about BAPCPA, for both consumers and businesses, but it boils down to this: it's not a fine wine and hasn't improved with age. The vinegar only gets more sour. 

How Do You C It?

posted by Bob Lawless

One of the great challenges to the bankruptcy system if not to the American way of life is those who insist on capitalizing the  letter when discussing chapters of the Bankruptcy Code. If it is "section 1129," as the Bluebook dictates, then it is "chapter 11." Both are merely designations for a portion of a statute.  The defense that is given to me is that the capitalized just looks better. Are we supposed to capitalize words now merely because the mood strikes us? Are there no rules left? The horror. The horror.

When confronted with the RaNdOm CaPiTaLiZeR CrOwd, weak-willed persons such as myself cave in a spirit of compromise and also because I am a heckuva guy. Someone stronger must oppose this tyranny.

Donald Trump Speaks the Truth

posted by Adam Levitin

I never thought I'd write this, but Donald Trump speaks the truth, at least as far as bankruptcy is concerned. 

There's plenty to criticize regarding Donald Trump, but I really wish the media would back off the bankruptcy angle of his career, or at least be smarter about it.  

Continue reading "Donald Trump Speaks the Truth" »

Picking a Judge to Preside over a Municipal Bankruptcy

posted by Melissa Jacoby

GavelLast week I introduced to Credit Slips readers my draft article on federal court oversight of Detroit's bankruptcy. An easily overlooked element of what I called The Detroit Blueprint is non-random judge selection, required by Congress for municipal bankruptcy cases.

Departing from the random assignment norm in the federal judiciary, section 921(b) of the Bankruptcy Code requires the chief judge of the applicable circuit court of appeals to select the judge who will preside over a municipal bankruptcy. In 1997, the National Bankruptcy Review Commission unanimously recommended eliminating section 921(b).  That Commission's Final Report observed that the fear prompting the provision - random draw of a judge unable to handle the case - was no longer salient. Congress did not take up this recommendation. What difference did section 921(b) make in Detroit?

Continue reading "Picking a Judge to Preside over a Municipal Bankruptcy" »

Chapter 9 and Federal Courts: The Detroit Blueprint

posted by Melissa Jacoby

BlueprintAmong its other effects, the Puerto Rico debt crisis has dramatically increased the number of public figures and politicians whose verbal repertoire includes the term "chapter 9." Bondholders' resistance to chapter 9 access for Puerto Rico municipalities is fueled in part by an earlier public debt crisis: Detroit. As suggested in my Credit Slips posts, Detroit made some new law but its major lasting legacy is procedural. I just posted a draft article, based on original empirical research, documenting that procedural blueprint, Federalism Form and Function in the Detroit Bankruptcy. It shows the paths by which the federal court became a major institutional actor throughout Detroit's restructuring.

After reading scholarship and case law on chapter 9, one might envision that, because of the Tenth Amendment to the U.S. Constitution and federalism principles, presiding judges are essentially locked in a closet for much of the duration, released only when the parties affirmatively seek an adjudicator. That's never entirely accurate, but to say it is inaccurate regarding Detroit is the understatement of the year.

Although The Detroit Blueprint will have broader ripple effects, I am dubious that its most significant elements could or would be implemented in, say, a PREPA bankruptcy. Detroit should not be an impediment to changing the Bankruptcy Code to cure the wrongful omission of Puerto Rico municipalities. More on that, and additional perspectives from the article, in future posts.  
 

Image courtesy of Shutterstock

Dodd-Frank's Constitutionality

posted by Adam Levitin

I'm testifying tomorrow before Senate Judiciary Committee's Subcommittee on The Constitution (yes, that's the official capitalization), about the constitutionality of the Dodd-Frank Act.  

Short version: nothing to see here folks.

Slightly longer version: really nothing to see here.

Even longer version:  the plaintiffs in State National Bank of Big Spring v. Lew have a totally non-Originalist interpretation of the Bankruptcy Clause, namely that "uniform laws" apparently requires equal treatment of all similar creditors, so title II Orderly Liquidation Authority is unconstitutional.  Yes, that's the sound of me shaking my head.

My written testimony is available  here.  

Attorney Market for Discharging Student Loans

posted by Dalié Jiménez

BeatSLs

On Friday, Tara Siegel Bernard reported in the New York Times that some bankruptcy judges think that the onerous Brunner standard for discharging student loans should change. Commenting on the article, reader "alma" writes:

As someone who recently filed for bankruptcy and has more than $100,000 in student loan debt, I can tell you why I did not try to get relief from student loans: I did not know it was an option. My lawyer simply told me that it was not possible to have student loans discharged. This article is the first I have even heard there was any method to do so ....

From the rest of the comments, this poster is not alone. Some of this may be explained by clients misunderstanding what's said (where the attorney means they don't think that this particular client will succeed in obtaining a discharge). But especially pre-2005 when the law was murkier, I do wonder about the level of advice given to filers.

Attempting to discharge student loans costs extra money, something bankruptcy clients are unlikely to have. Given the low numbers of attempts, it's unlikely any given bankruptcy attorney has any experience filing such a case. Doing it is no simple matter either; it's literally a federal case. I've only found one book out there detailing how to file an adversary proceeding to discharge student loans in bankruptcy. 

My own limited experience is that this is (unsurprisingly) quite hard. As part of a larger study, Jim GreinerLois Lupica, a couple of dozen students, and I have been working to create a DIY guide to a no-asset Chapter 7 bankruptcy guide, complete with a module on representing yourself through an adversary proceeding to discharge student loans. We just posted a paper on the philosophy behind our materials (and why we include cartoons like the one above). If we succeed, we hope that the materials we create will be useful to attorneys as well as pro se individuals. But there has to be a market before attorneys will use them.

What say you, Credit Slips readers, are bankruptcy attorneys offering student loan discharge services? Do clients want them? Can they afford them?

The cartoon credit goes to Hallie Pope. Hallie is the creator of "Blob" and other cartoons featured in the self-help materials in the Financial Distress Research Study.

Puerto Rico Preemption Redux: Back to You, Congress

posted by Melissa Jacoby

1stCircuitCoverOn February 6, 2015, a district court held Puerto Rico's Recovery Act to be expressly preempted by section 903 of the Bankruptcy Code.

On July 6, 2015, the U.S. Court of Appeals upheld the finding: The Recovery Act is preempted, on both express preemption and conflict preemption grounds. 

Judge Torruella wrote a separate concurrence starting on page 50 of the decision. One of his points bearing special mention here is that he finds unconstitutional the 1984 Bankruptcy Code amendment that stripped Puerto Rico's right to authorize chapter 9 for its municipalities, due to the lack of a rational basis. Had he secured another vote for that view...

Credit Slips contributors surely will weigh in more, in this space or elsewhere, on the decision and  next steps. For now, Congress needs to move on H.R. 870, which now has support in the Senate. H.R. 870 simply reinstates Puerto Rico's ability to authorize its municipalities to use chapter 9, akin to states. Others advocate for bankruptcy relief for the Commonwealth of Puerto Rico itself; that proposal is separate from, and considerably more controversial than, H.R. 870.

 

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" »

Archdiocese's Potential Fraudulent Transfer Not Protected by RFRA, First Amendment

posted by Pamela Foohey

The Archdiocese of Milwaukee’s Chapter 11 case remains the longest running Chapter 11 case filed by an Archdiocese or other Catholic entity. It filed in January 2011, and because of religious-based objections to the application of the Code's fraudulent and preferential transfer provisions, Bankruptcy Judge Susan Kelley has declined to rule on any reorganization plan until the objections are settled.

The main hang-up is an April 2007 pre-petition transfer of $55 million from the Archdiocese’s general accounts to a trust earmarked for maintaining cemeteries--generally known as the "Cemetery Trust Fund." Post-filing, the Archbishop, acting in his role as the trustee of the Cemetery Trust Fund, sought a declaratory judgment from the bankruptcy court that the $55 million would never be part of the Archdiocese's bankruptcy because the First Amendment and/or the Religious Freedom Restoration Act (RFRA) barred the application of the Code's avoidance provisions. The action was defended by the Unsecured Creditors' Committee -- because the DIP was just a tad conflicted given that it acts through its sole corporate member, the Archbishop.

The question made its way up to the 7th Circuit, which issued a long awaited opinion today. The rulings are: (1) RFRA is not applicable because it only applies to suits in which the government is a party, and the Creditors' Committee is not the government; and (2) the Archbishop's free exercise rights are not violated by application of the Code's generally neutral principles that are narrowly tailored to support a compelling government interest in protecting creditors. In short, the Archdiocese decided to file under Chapter 11 and now it cannot seek a religious exemption for purported fraud.

Continue reading "Archdiocese's Potential Fraudulent Transfer Not Protected by RFRA, First Amendment" »

All Late-Filed Taxes Now Nondischargeable?!

posted by Jason Kilborn

Tax formSometimes a tax return is not a tax return. As a result, bankruptcy is becoming a less effective response to back tax woes in the US. Yesterday, the 1st Circuit joined the 5th and 10th in holding that old income tax debts are nondischargeable if the taxpayer-debtor filed the related tax returns late. This is the latest negative impact of BAPCPA and an oddly worded statute with an even odder citation.

Section 523(a)(1)(A) of the Bankruptcy Code has long made nondischargeable recent income tax debts, for taxes for which the return was due within three years before the bankruptcy filing. But older tax debts might also survive the discharge thanks to section 523(A)(1)(B)(i). That section renders taxes nondischargeable if the taxpayer-debtor failed to file a return. Not surprising. What is surprising is a recent revision and its expansive interpretation, which have created a vast new category of nondischargeable tax debts.

Continue reading "All Late-Filed Taxes Now Nondischargeable?!" »

Puerto Rico Preemption

posted by Melissa Jacoby

PRholdingLast summer, PREPA bondholders filed actions challenging the constitutionality of Puerto Rico's recently enacted, but as yet unused, Public Corporation Debt Enforcement and Recovery Act. Last night, the district court filed a seventy-five page opinion. It did not dispose of the actions in full (e.g., the contract clause challenges remain alive but not decided), but did hold the Recovery Act is preempted. Given that the judge's order permanently enjoins Puerto Rico from enforcing the Recovery Act, I believe it is immediately appealable under 28 USC 1292(a)(1).

Continue reading "Puerto Rico Preemption" »

Random Thoughts on Reform

posted by Michelle Harner

I just finished discussing the “random walk” theory in my Corporate Finance class, so I thought I would close out my stint on Credit Slips with some “random thoughts” on reform.

First, two expressions of sincere gratitude: I want to thank Bob Lawless and everyone at Credit Slips for the opportunity to blog about reform these past two weeks. It has been great fun. I also would like to thank the many practitioners, judges, financial advisors, academics, and industry groups who participated in the ABI Commission reform study process. Everyone made a meaningful contribution to the project. 

Continue reading "Random Thoughts on Reform" »

Bankruptcy Valuations: A Pair of Modest Proposals

posted by Adam Levitin

I want to take up Michelle Harner's call for "innovation and new approaches to valuation". Valuation may well be the most important issue in bankruptcy, and it is also the issue that is least subject to meaningful judicial review. Imagine a Court of Appeals trying to parse through discounted cash flow models or what are proper comparables. The lack of meaningful appellate review makes it all the more important that we get valuation right. 

Continue reading "Bankruptcy Valuations: A Pair of Modest Proposals" »

The Art of Valuation

posted by Michelle Harner

Shutterstock_247765387Anyone who has ever litigated a valuation issue knows that valuation is more art than science. Experts often arrive at widely divergent valuations. Yet, these valuations are of the same company, for the same time period, based on the same data, and often invoke the same model. How then can the valuations be so different and, more importantly, which expert is right? Valuations of course can vary for a number of reasons, including different assumptions and inputs, and sometimes because of the methodology itself. But as one of my very astute students in Corporate Finance recently pointed out, valuations also likely differ because of the legal position (he actually used the term "self-interest") of the party employing the expert and offering the particular valuation into evidence.

Continue reading "The Art of Valuation" »

Deflate Gate and Bankruptcy Reform

posted by Michelle Harner

Shutterstock_246224011People (and institutions) like rules that give them a competitive edge. You need only to look at the recent headlines and the media coverage of “Deflate Gate” to understand this basic concept. Reportedly, Tom Brady, Peyton Manning, and other quarterbacks lobbied the NFL to allow each team to supply its own set of footballs for use by that team’s quarterback during games. Note—I am not suggesting ill motive on the part of either Brady or Manning (or the others).  Although I never played quarterback, I can understand a quarterback’s desire to select personally his own game-day equipment. 

How does any of this relate to chapter 11 reform? To answer that question, ask yourself a different one: Do you like how chapter 11 currently resolves your client’s key issues in most instances? If you answered “yes,” you likely see no reason for reform. If you answered “no,” you likely would favor reform, but perhaps only those aspects of reform beneficial to your client. Therein lies the ever-present dilemma for policymakers:  implementing the best policy for the overall federal bankruptcy system in the midst of so much noise.

Continue reading "Deflate Gate and Bankruptcy Reform" »

The Melting Ice Cube Fallacy

posted by Michelle Harner

Shutterstock_216629227Can a company really melt? Putting aside a business with a perishable product or inventory, does management really wake up one morning and say, “Wow, if we do not sell this company in 30 days or less, we will lose significant value for our stakeholders.” I highly doubt it. Rather, I think a company “melts” because management leaves the freezer door open too long, or perhaps a particular stakeholder has its foot in the door. (For a thoughtful article on the melting ice cube issue, see here.) 

If the Code simply did not permit expedited sales, what would happen? Could it be that the possibility of an expedited sale with all of the bells and whistles of a confirmed plan enables management and senior creditors either to delay the chapter 11 filing or to manufacture urgency? From my perspective, this question is the central difficulty with section 363 going concern sales. A company should be able to reorganize through a value-maximizing sale in chapter 11. But those sales should not include quick fire sales that offer little opportunity for a robust auction or the need to use chapter 11 tools to enhance value in that auction. Chapter 7 is already well suited for such fire sales.

Continue reading "The Melting Ice Cube Fallacy" »

Rethinking “Small” Business Bankruptcies

posted by Michelle Harner

Shutterstock_228943780It may surprise some, but approximately 90% of all chapter 11 debtors have less than $10 million in assets or liabilities, less than $10 million in annual revenues, and 50 or fewer employees (see data on small and medium-sized enterprises (SMEs) in the ABI Commission Report, here). These companies are the heart of chapter 11. Nevertheless, most of the media and caselaw coverage discusses only the megacases—e.g., Caesars, American Airlines, Tribune Company, etc.—representing approximately 2-3% of chapter 11 debtors. It is time to change the focus of the conversation.

When a small business closes its doors, an entire community feels the impact. Consider the following description of the ripple effects of the closing of a small mine in Lincoln County, Montana:

In addition to the workers and families directly impacted by the loss of jobs, the ripple effects of the loss of that income will impact local businesses at every level. Restaurants, stores and other shops depend upon local consumers to keep themselves afloat, the dollars that are paid to those employees find their way into the hands of a number of additional places, keeping a small local economy alive.  (Full story here.)

Similar stories occur most everyday in towns across America (see, e.g., here).

Continue reading "Rethinking “Small” Business Bankruptcies" »

Businesses Need Certainty; Distressed Businesses Need It Even More

posted by Michelle Harner

Shutterstock_179420726The general counsel of a financially distressed company calls you.  She of course clearly states that her company does not need to file a chapter 11 case, but she is curious to understand how a chapter 11 case might work for her company.  Specifically, she wants to know: Can the company continue to use intellectual property it licenses and has integrated into its business operations?  Will some or all of the company’s existing shareholders be able to retain their ownership if they contribute to the company’s reorganization?  If the company decides to pursue a sale, can the company sell its assets free and clear of all claims?  Will she and the company’s other executives be released from any alleged liability if the company confirms a plan of reorganization?  What if the company reorganizes through a going concern sale instead?

All very astute questions, to which you will likely have to answer, “it depends.”  It depends primarily on where the company files its chapter 11 case.  These and other key issues in chapter 11 are subject to splits in the case law that create uncertainty and increase costs.  The splits require companies (and their creditors) to perform extensive jurisdictional analyses of issues likely to be important in any chapter 11 case.  Not surprisingly, one jurisdiction may be favorable on one issue, with another jurisdiction more favorable (or silent) on a different, equally critical issue. 

Continue reading "Businesses Need Certainty; Distressed Businesses Need It Even More" »

Let’s Not Just Create Jobs, Let’s Save Them, Too

posted by Michelle Harner

Shutterstock_120243664In his State of the Union speech on Tuesday, President Obama talked a lot about job creation. I am all for growing the economy and creating more U.S. jobs, but I also am for saving jobs and keeping people employed at U.S. companies, even if those companies fall upon hard financial times. Strikingly, approximately 18,500 people lost their jobs when Hostess closed its doors; 34,000 people lost their jobs when Circuit City suffered the same fate; and over 9,900 people were let go as a result of four casinos in Atlantic City closing in the past twelve months.

It is undeniable that chapter 11 changes people’s lives. It can save an employee’s job, continue a customer relationship for a vendor, and preserve a tenant for a landlord. It also can, however, devastate all of these relationships in what feels like a nanosecond—relationships that many people rely on to support their families or their own business operations. As I suggested in an earlier post, I believe that the human face of chapter 11 often gets lost in all of the noise concerning the rate of return to creditors, disputes among institutional creditors, and whether a company should be sold quickly, or at all, through the chapter 11 process.

Continue reading "Let’s Not Just Create Jobs, Let’s Save Them, Too" »

Little Big Mistakes: The Second Circuit Rules on GM/JP Morgan

posted by Melissa Jacoby

PencilCulminating a two-year appeals process, the United States Court of Appeals for the Second Circuit just ruled that the statement filed to terminate a financing statement perfecting a security interest was effective. Yes, the parties intended to terminate a different financing statement, but that doesn't change the outcome under the facts of this dispute (these facts have been the subject of several prior Credit Slips posts; see here and here and here).

Today's per curiam decision cites the Restatement (Third) of Agency for the proposition that "Actual authority . . .  is created by a principal's manifestation to an agent that the agent take action on the principal's behalf."  And, says the panel, that's what happened. Again, full (and fairly brief) opinion is here.

Pencil image courtesy of Shutterstock

Have Retail Reorgs Gone the Way of the Dodo?

posted by Michelle Harner

Shutterstock_157426502-3In the past two months, four retailers have filed bankruptcy cases. RadioShack is rumored to be preparing a chapter 11 filing, and other retailers certainly appear to be struggling (see Stephen Lubben’s post here). But if you were counseling any of these retailers, would you recommend a chapter 11 filing? Okay, put aside the professional fees you might earn—would filing really be in the best interests of your retail client? (For a discussion of fees and costs in chapter 11, see Part IV.A.8 of the ABI Commission Report.)

Consider this: from 2006-2013, the number of retailers liquidating in chapter 11 increased significantly. Although no data are perfect, the various data we have on chapter 11 filings are quite telling. For example, according to the UCLA-LoPucki Bankruptcy Research database, during 2006-2013, 41.2% of large public retailers (excluding eating and drinking places) emerged from chapter 11 and 58.8% liquidated while, during 1980-2005, 60.5% of large public retailers emerged from chapter 11 and only 39.5% liquidated. Likewise, a quick look at the New Generations Public and Major Private Companies database suggests a similar trend for 2006-2013: approximately 62% of retail cases in the database ended in a liquidation (36 of 58). A chapter 11 filing has, quite literally, become a “bet the company” decision for retailers.

Continue reading "Have Retail Reorgs Gone the Way of the Dodo?" »

Who’s Looking Out for the Students?

posted by Matthew Bruckner

Shutterstock_230939425Last week at the Brookings Institution, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray described his greatest challenge as CFPB director as coordinating his agency’s response with those of other agencies whose responsibilities overlap with the CFPB. Although he didn’t mention the U.S. Department of Education (the “ED”) by name, perhaps he was thinking of them when he spoke, given the two agencies’ widely divergent responses to the ongoing Corinthian Colleges debacle. For those who aren’t aware, both agencies recently accused Corinthian Colleges of misleading students about their job prospects at graduation. But the agencies appeared to part ways on the appropriate response. 

Continue reading "Who’s Looking Out for the Students?" »

What’s Fairness Got To Do with It? When the “It” Is Chapter 11, a Lot….

posted by Michelle Harner

For those of you who are not familiar with my scholarship, I am fairly conservative in my approach, and I strive to remain objective in my analysis and balanced in my proposals. I believe that most companies try to get it right, I respect markets, and I do not think that financial institutions and private funds are evil. In fact, some of my scholarship suggests that private funds may actually add value to matters (see example here). I mention these things only to help you understand the lens through which I analyze corporate governance and restructuring issues, including the chapter 11 reform topics that will be the focus of my posts over the next several days.

Based on my research and my ten-plus years in private practice, chapter 11 is not just a value maximization and distribution scheme. It is much more. I was in Judge Bodoh’s courtroom during the LTV Steel cases when hundreds of steelworks packed the courthouse during hearings. I was in Judge Wedoff’s courtroom during the United Airlines cases when pilots and flight attendants would often be on hand. And I worked on several asbestos cases (see, e.g., here and here), which affected not only the livelihoods of thousands of people, but also the health and well-being of several thousand more. In each of these cases, and many others I worked on, the people—not the continuation of some fictitious legal entity or a particular creditor group’s return on its investment—were at the heart of the process.  (For another example of this principle, see here.)

Continue reading "What’s Fairness Got To Do with It? When the “It” Is Chapter 11, a Lot…." »

The "Overwhelming Incentives" to Avoid Bankruptcy

posted by Matthew Bruckner

Shutterstock_118095742In an earlier post, I claimed that Thomas Jefferson School of Law’s recent debt restructuring was the rational response to its recent financial difficulties. I closed that post by suggesting that bankruptcy was not a viable option for Thomas Jefferson’s creditors because of U.S. Department of Education (“E.D.”) regulations. Those regulations provide that a voluntarily bankruptcy filing terminates an institution’s eligibility to participate in Title IV loan programs (e.g., Stafford, Perkins and Plus loans). As a result, law schools and their creditors ordinarily share “overwhelming incentives . . . in avoiding bankruptcy”. See Marblegate Asset Mgmt. v. Education Mgmt. Corp., 2014 WL 7399041,*11. (S.D.N.Y. Dec. 30, 2014).

A brief discussion of those regulations and their implications follows after the jump.

Continue reading "The "Overwhelming Incentives" to Avoid Bankruptcy" »

Waiting for Wellness

posted by Melissa Jacoby

Shutterstock_208016377To get ready for the January 14, 2015 Supreme Court oral argument on Wellness International Ltd. v. Sharif, read this National Bankruptcy Conference report.

Why Troubled Law Schools May Remain Open

posted by Matthew Bruckner

Shutterstock_69583900For years, pundits have declared that many law schools were on the verge of closing. In particular, low-ranked, stand-alone law schools operating in competitive marketplaces were repeatedly highlighted as being at the highest risk of closing. And with enrollment plummeting at law schools around the country, many were wondering which law school would be the first to keel over. Thomas Jefferson School of Law was often highlighted as a particularly likely candidate. But instead of closing, Thomas Jefferson recently restructured $127 million in bond debt, writing down $87 million and having the interest rate on its remaining $40 million reduced to 2%. In exchange, the school handed over the only significant asset it had on its balance sheet—its new law school building. But the building was promptly leased back to the school and Thomas Jefferson remains open for business. This ignited my curiousity and I decided to investigate.  

A look at Thomas Jefferson’s audited financial statements helps make sense of the school’s restructuring and what it implies for other law schools.

Continue reading "Why Troubled Law Schools May Remain Open" »

Bankruptcy Attorney Advertising in the Digital Age

posted by Pamela Foohey

Yellow Pages--maybe not so much anymore. Websites, AdWords, and social media--yes, yes, and occasionally.

Little has been written about bankruptcy attorney advertising. The last Credit Slips post focused on bankruptcy attorneys' ads in the 2013 Yellow Pages and surveyed the wording that attorneys used to describe their roles as debt relief agencies. One of the comments on the post suggested that the Yellow Pages remained a fruitful advertising venue for consumer bankruptcy attorneys. But my current research seems to point in a different direction.

As part of my research regarding nonprofits' use of reorganization to deal with financial distress, over the last year, I've spoken with 76 attorneys who represented religious organization debtors in their Chapter 11 cases. Many of these attorneys' practices are predominately consumer debtor oriented. Half of the attorneys maintain practices that are at least 70% consumer debtor work. The attorneys also are located across the country--from Massachusetts to Colorado to California.

As part of the interviews, I asked the attorneys if and how they advertise their practices. The results are anecdotal, but the attorneys' experiences may signal a switch from print and television advertising to complete reliance on websites, Internet leads, and social networking sites.

Continue reading "Bankruptcy Attorney Advertising in the Digital Age" »

What the ...?

posted by Stephen Lubben

Just received this month's ABI Journal. I surely can't be the only one who finds the ad for the BMC Group – inside the front cover – obnoxious, even offensive (I'm not going to dignify it by reproducing it). I get that sex sells ... but in a bankruptcy journal, advertising a claims agent?

Some Bibles Are More Exemptable Than Others

posted by Jason Kilborn

Holy BibleI wonder how many Bankruptcy professors have posed a hypothetical about the exemption of a rare Bible worth lots of money? Well, a federal District Court in Illinois had to answer the question for real.

The Illinois personal property exemption statute includes the debtor's Bible. A debtor in Southern Illinois asserted this exemption in a rare, first-edition Mormon Bible that she had acquired (for free) from her local library. Apparently, the library director had not been paying attention, as the 1830 Bible was appraised at at least $10,000.

Amusingly, the debtor's lawyer described this item of property on Schedule B as "old Mormon bible," further observing that "debtor has been told that there is a 100% exemption for bibles but valuable bibles may or may not be covered under such exemption" (!). The trustee accepted this open invitation and objected that the statute was never intended to apply to a Bible of such value, and the bankruptcy court agreed. The District Court reversed.  Responding to the standard law professor questions, the court noted that the word "necessary" in the statute modified only the first word, "wearing apparel," not the other words ("one does not need a bible, school books, or family pictures to survive"), and unlike other property in the statute, bibles are not subject to an explicit value restriction. QED.

Sometimes life does imitate fiction.

Holy Bible image courtesy of Shutterstock

Detroit's Bankruptcy: The Conversation

posted by Melissa Jacoby

Readers who have not otherwise received notice in the twittersphere may be interested in this commentary at The Conversation.

Are Some Banks Using Credit Reports to Help Collect Discharged Debts?

posted by Dalié Jiménez

Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.

There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and ... failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.

More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.

The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:

One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.

I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.

Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.

Detroit's Bankruptcy: End(s) and Means

posted by Melissa Jacoby

TobecontinuedOn Friday November 7, 2014, Judge Rhodes confirmed the City of Detroit's plan of adjustment. As previously noted, this judicial act permits the release of debt and clears the way for the City to forge ahead, but the future of Detroit is in the hands of many others. Although a fuller written decision is expected, the court's oral ruling already hints strongly at new bankruptcy doctrine. Two examples: unfair discrimination and professional fees.

Continue reading "Detroit's Bankruptcy: End(s) and Means" »

Now Might Be the Time for the Longest Pending Catholic Diocese Chapter 11 Case to Settle

posted by Pamela Foohey

The Archdiocese of Milwaukee is one of 11 dioceses (plus 2 other Catholic-affiliated religious orders) to file under Chapter 11 -- and it likely will not be the last. All of the cases were filed in hopes of achieving global settlements of sexual abuse claims. The Milwaukee Archdiocese filed over 3.5 years ago, in January 2011, making it the longest running Diocese case. 6 of the 7 other dioceses that filed before it confirmed reorganization plans in an average of about 2 years after filing. The shortest time to confirmation was 10 months, while the longest was 2.75 years. The other diocese, San Diego, negotiated a settlement, via mediation, in approximately 9 months.

The Milwaukee Archdiocese and its creditors (predominately abuse claimants) have spent the last 3.5 years, despite a trip to mediation in 2012, primarily fighting over a $55 million trust fund established to pay for upkeep of the diocese's cemetery. Without the $55 million, abuse claimants are likely to receive no more than $4 million. The $4 million figure would be smallest settlement paid to abuse claimants in any of the Catholic Church bankruptcies so far. The cemetery trust issue is pending before the 7th Circuit. Meanwhile, attorneys' and other professionals' fees are rising, leading Judge Kelley to order the parties back to mediation, starting tomorrow.

Continue reading "Now Might Be the Time for the Longest Pending Catholic Diocese Chapter 11 Case to Settle" »

Regulars

Occasionals

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad