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The Second Part of Shredding the Safety Net

posted by Bob Lawless

OK, the "live blogging" thing did not work very well at the "Shredding the Safety Net" conference at the Southern Illinois University School of Law. It was too difficult to pay attention to what was being said and try to compose blog posts at the same time. I eventually settled on taking notes for a later post. "Later" became Saturday afternoon, which became Sunday, and now here it is Monday afternoon.

All of the conference papers will be published in the SIU Law Journal later this spring, which reminds me that I had better get to the point here because I owe the law journal revisions on my paper. Without further ado . . . .

Dean Peter Alexander presented on uniformity issues after the 2005 bankruptcy law. The Constitution gives Congress power to enact uniform laws on the subject of bankruptcy." The requirement of uniformity has traditionally been viewed as a limitation on the congressional power. Geographic and regional differences in the application of the bankruptcy laws have never been viewed as a violation of this uniformity requirement. Thus, Congress can enact a bankruptcy law that incorporates state laws on exemptions even though the result that debtors in different states will have different outcomes for their bankruptcy cases.

Dean Alexander identified two parts of the bankruptcy system that are potentially nonuniform. First, two states are not part of the U.S. Trustee program. Rather, they function under a system run by bankruptcy administrators. The U.S. Trustee collects quarterly fees in a chapter 11 case but, until a recent statutory amendment, bankruptcy adminstrators did not. Prior to the statutory amendment, the U.S. Court of Appeals for the Ninth Circuit ruled this difference violated the uniformity requirement. Dean Alexander used this case as a point of departure to consider whether the role of the U.S. Trustee create a uniformity problem. The U.S. Trustee program is part of the federal Department of Justice ("DOJ"), and DOJ will appear in many bankruptcy cases to collect taxes owed to the federal government. This may be a conflict of interest, but it is a conflict of interest authorized by Congress. The constitutional requirement is one of uniformity, and for Dean Alexander to persuade me, I want to understand better how a conflict of interest is linked to uniformity

The other possible uniformity problem relates to exemptions, which allow a debtor to remove property from the bankruptcy estate and keep it. These exemptions are determined by state law. Thus, an Illinois debtor gets to keep the property that Illinois law allows, and an Iowa debtor gets to keep the property that Iowa law allows. The 2005 law put restrictions on the ability of a debtor to change residences and move to better exemptions. In some cases, for example, an Iowa debtor might have to pick the Illinois exemptions if they had recently moved to Iowa from Illinois. Dean Alexander wonders whether the bankruptcy law might not now be "uniform" because two debtors in the same state receive different outcomes. Frankly, I'm skeptical. The uniformity requirement does not require absolute equality for debtors. For example, family farmers in bankruptcy receive favorable treatment because of chapter 12, but I do not believe anyone thinks that situation presents a serious uniformity issues.

I spoke next, exploring the 2005 bankruptcy law as it relates to small business. At nearly every turn, Congress made the bankruptcy law harsher on small business. It is the only congressional enactment that of which I know where Congress was affirmatively hostile to small business. I will spare further details. The paper will be available on SSRN when I get finished with the final revisions.

Our lunchtime speaker was Professor Margaret Howard from Washington & Lee gave the luncheon talk. Her theme was the 2005 bankruptcy law as a law of unintended consequences. It was a delightful talk, delivered well with poise and grace. Professor Howard identified several provisions fo the 2005 bankruptcy law that had unintended consequences. If debtors fail to jump through the technical hurdles needed to get credit counseling before filing bankruptcy their case can be dismissed, but if they correct the technical hurdle and refile, they become subject to new repeat filer rules. In the so-called hanging paragraph, Congress tried to give automobile lenders new powers but the plain language of the provision could be read to eliminate the security interest in many automobile loans (a provision we have talked about before on Credit Slips). Another provision that Professor Howard identified as having unintended consequences were the key employee retention plan (or KERP) provision (another subject we have discussed here and here). One of the requirements to get bankruptcy court approval of a KERP is that the employee must have a bona fide job offer, which Professor Howard suggests just encourages employees of firms in bankruptcy to get offers that might lead to their departure. There was more, but I need to move to the next paper.

And the next paper was presented by Professor Tom Plank at the University of Tennessee. He offered a discussion of securitization, which is the process by which companies can carve out part of their earnings and sell it to investors. Particularly, Professor Plank discussed how lenders carve out their loan portfolio and resell it other investors. Of course, this activity has been occurring for years, and Professor Plank discussed his belief that this activity redounds to the benefit of consumers by lowering interest rates.

Professor Kelli Alces who is currently at the University of Richmond as a visiting professor but will be a full-time professor at Florida State next year next spoke about the provisions she sees in the 2005 bankruptcy law that will further cause a federalization of corporate law. For example, Professor Alces talked about the new exception to bankruptcy's automatic stay for self-regulatory organizations or "SROs." The term "SRO" is the fancy legal term for stock exchanges like the New York Stock Exchange or Nasdaq that have powers to regulate the trading that occurs there. Professor Alces concluded with a plea to keep state law corporate governance standards an important part of federal bankruptcy law.

Finally, we heard from Professor Charles Tabb, my colleague here at the University of Illinois, and a major part of the conference was Professor Tabb and I having fun at each other's expense. Professor Tabb took on that most dreaded portion of the new bankruptcy law: the means test. Regardless of one's feelings about the merits of the 2005 law, the means test has to be especially dreaded because it combines incredibly technical provisions with poor drafting.

Although his paper (co-authored with his research assistant, Jill McClelland) included other issues, Professor Tabb focused his presentation on three issues with with the means test. First, he decided that the means test was not coextensive with the issue of abuse on ability to pay. To understand this issue, suppose someone files bankruptcy immediately after landing a lucrative $100,000/year job. The debtor likely would pass the means test because the debtor's income averaged over the past six months, as the Bankruptcy Code calculates it, would be low. Nevertheless, in such a case Professor Tabb would allow a bankruptcy court to use the Bankruptcy Code provision stating that a bankruptcy case can be dismissed for "abuse." On this issue, Professor Tabb is clearly wrong, and if he feels otherwise, he should get his own blog (or respond in the comments below). The means test is an elaborate statutory calculation dicated by Congress, and the bankruptcy courts should not substitute their own judgments for when a debtor can and cannot pay. The bankruptcy courts should use the "abuse" provision to address cases where the debtor has committed fraud or concealed assets and not use it as a basis to overrule Congress on when debtors can and cannot pay.

Professor Tabb next talked about the so-called double counting issue, where debtors under the means test can take a standard deduction for the expenses of owning a car and also take a deduction for the actual payments made to a secured lender. Because he sees this as egregious double-counting, Professor Tabb would not allow it. He is right that it is double-counting, and the official form for the means test adopts Professor Tabb's position. Nevertheless, the statute seems to compel a different result. In section 707(b)(2)(A)(ii)(I) states, "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts under the National Standards and Local Standards" (i.e., the standard deduction which includes the expense of owning a car). Section 707(b)(2)(A)(iii) further gives the debtor a deduction for actual payments made to a secured lender, which would include automobile loans). It may be double counting, but the statue seems to require it. My guess is that most bankruptcy courts will side with Professor Tabb on this one even if the statute directs a different result.

One topic on which Professor Tabb and I agree is the issue of whether one has to own a car to get the standard deduction for the expenses of owing a car. We both agree that Congress allowed the deduction regardless of whether one actually owned a car. (See my previous post on this topic for a lengthier explanation.) My deeper disagreement with Professor Tabb on all of these issues, however, is that he seems to mix plain language and intent/purpose and so-called best answer reasons. On the two issues where we disagree, he eschews a plain language approach, giving primacy to likely congressional intent and best answer arguments (i.e., my outcome is a preferred interpretive outcome because it reaches an outcome best in line with common sense/justice/<insert your value here>). It would help me to have a better understanding of why Professor Tabb prefers a plain language interpretation the issue where we agree but not on the issues where we don't.


Professor Lawless (hereafter "Bob") will do anything to get me to read his blog, including picking on me. I think his feelings are hurt that I don't read it more regularly. It's not him, I tell him, I just haven't picked up the "blog habit." But this is what I get. Mostly, though, I am disappointed that I did not do a better job of teaching him when he was my student back before the Bush-1 administration.

before I start picking on Bob, I first want to say that it was a great, great conference, and hats off go to Peter Alexander for putting it together. I really enjoyed all the talks (even Bob's).

now getting to the me-versus-Bob debate -- as a prefatory note, I would remind readers that I was one of the most vehement opponents of the means test. My "Death of Consumer Bankruptcy" article in 2001 is illustrative of my views. In the present work-- "Living With the Means Test," though, my co-author Jill McClelland and I are trying to divine what the law that Congress passed actually means, not what we would prefer it to mean.

If anyone actually wants to read the draft of paper that Jill and I actually wrote, instead of Bob's slanted recap, just send me an emaill to ctabb@law.uiuc.edu and I'll send it to you.

I should note that I am sending this rejoinder to Bob on my own hook, so don't get mad at Jill.

okay, first debate -- is the means test the exclusive test of ability to pay? Of course not. Here we side with Judge Wedoff. This is the most natural reading of the statutory text, given its structure. Bob somehow never mentions that 707(b)(2) merely creates a "presumption" of abuse, or that 707(b)(2) and (3) each are ways of trying to ascertain the single issue, which is "abuse" under 707(b)(1). Why a debtor who can repay virtually all of his debts and is making $100 grand a year is immune from "abuse" dismissal simply because he just took the job is not clear to me. Certainly nothing in the statute so indicates. Presumptions rarely, if ever, are construed to be exclusive. To give but one example, 523(a)(2)(C) is not construed to be the exclusive eve-of-bankruptcy load-up fraud rule. If you want more, read Jill's and my paper.

I would note, in the for-what-it's-worth category, if one ascribes any role at all to presumed legislative intent, do you really think that the 109th Congress intended for $100K debtor I just described to get off scot free?

on the second point, that of double counting, Bob surprisingly forgets to mention one little sentence in the Code section that gives the allowance for the Local Standards, which states:
“Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments of debt.” § 707(b)(2)(A)(ii)(I). One searches in vain for how Bob explains that one away. So yes, we do think you can't double count.

I'm glad Bob agrees with us on the "free and clear" point.

and to think I gave him a ride to the conference ...

Charles Tabb

OK, so Charles (hereinafter "Respondent") has seen through me. My comments on his paper, which is very good despite my disagreement with its conclusions, were a ploy so he would read the blog. Respondent certainly is no friend of the means test, and he advances plausible readings of the statute. But they are more natural readings of the language. For example, the provision to which respondent points--section 707(b)(2)(A)(ii)(I)--more likely establishes the term "monthly expenses as a term of art and carves out secured debt payments for their own treatment (in section 707(b)(2)(A)(ii)(III)).

Lying underneath our disagreement is a question of how to interpret the 2005 bankruptcy law. There are many places in the 2005 law where the law's ordinary meaning would lead to results it is unlikely Congress would want. It is unlikely, for example, that Congress wanted debtors to double count the standard automobile ownership expense and actual secured debt repayments. To what extent should the interpretive enterprise relieve mistakes we think Congress likely made in drafting this statute? That is an timeless interpretive question for legal scholars and courts, but the 2005 bankruptcy law presents a particularly context for its resolution. Here we have a statute that, by most accounts, was replete with special interest provisions. Should the courts consider the likely legislative bargain when the statute was enacted?

On the uniformity question, I think that someone should look at the interaction of the use of state wide data in one section, while using county or metropolitan data in another. A debtor whose "Current monthly income" is below the applicable state median income is not subject to the means test. But the data used to determine allowable expenses if CMI is over the state median income is county data. Unlike variations in exemptions, this can't be justified by differences in state law.

Great tips…thanks. I cannot stress how great shredders are. You can get them for really cheap, even Wal-Mart has them. Everything should be shreaded, as the crooks out there are getting very creative!

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  • 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.