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UPDATED: BAPCPA as Consumer Protection

posted by Katie Porter

A few weeks ago I posted about the bankruptcy of several subprime lenders and questioned whether or how consumers' potential actions against the lenders would be preserved after bankruptcy. New Century (Delaware Case No. 07-10416) has proposed to sell several of its assets, including pools of "bad" loans that it was forced to repurchase. The motion for an order approving bidding procedures specifically requested that the sale be "free and clear" under section 363(f). Conspicuously absent was any mention of 363(o), a BAPCPA provision that seems to limit "free and clear" sales of assets that are consumer credit transactions subject to the Truth in Lending Act or consumer credit contracts.

The Ohio Attorney General objected, asserting that the bidding procedures and sale order should clarify that the sale would be subject to a state court injunction. (The injunction requires New Century to provide the State AG's office with detailed documentation for certain types of mortgages that New Century wants to foreclose.) This state action apparently prompted the U.S. Trustee to step up. It then "supplemented" its prior objection to the bidding procedures and for the first time asserted that the bidding procedures should clarify that section 363(o) will apply. I can't quite piece together the outcome of these motions from the docket but I think the court entered an order approving the bidding procedures without requiring a change in the language to clarify to bidders that the sale would not be completely 'free and clear' but would be subject to 363(o). If so, perhaps the judge intends to clarify the applicability of 363(o) in the sale order itself and doesn't think it needs to be mentioned in the bidding procedures. This seems to leave open an argument (albeit a weak one) that the bidding procedures clarifying that the sale was 'free and clear' somehow trumps 363(o). If debtors' counsel felt the need to stress the 363(f) free and clear nature of the sale, debtors' counsel should have acknowledged the existence of 363(o). Although much fun has been poked at including the phrase "Consumer Protection" in BAPCPA, Congress may have eerily anticipated the problems being raised by the bankruptcies of subprime lenders by adding 363(o) to the Bankruptcy Code. UPDATE ON 5/8: The court approved an order for sale of some of New Century's assets on Monday.  The sale order explicity says that nothing in the Order approving the Sale or the APA alters any liability of the Purchaser under 363(o), but the court also doesn't make any findings as to whether 363(o) applies. It merely leaves the parties free to litigate whether the assets are consumer credit transactions as required for 363(o) to apply. The order also preserves the requirements of the Ohio state court injunction.


This post needs to be restated in less legalese. Specifically, how is the consumer being harmed or helped?

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