At its annual meeting, the National Conference of Commissioners on Uniform State Laws (NCCUSL) formally adopted the Uniform Voidable Transactions Act (UVTA). Under its provisions, I believe it says any service member in uniform will be able to avoid a transaction . . . . Hold on, let me give it a read.
To what extent does secured credit law protect creditors from the consequences of mistaken actions made on their behalf? I wrote about this issue in March 2013. As discussed in that post, the bankruptcy court issued both a decision on the merits and a certification for a direct appeal to the U.S. Court of Appeals for the 2nd Circuit.
The 2nd Circuit has now certified the following question to the Delaware Supreme Court:
Under UCC Article 9, as adopted into Delaware law by Del. Code Ann. tit. 6, art. 9, for a UCC-3 termination statement to effectively extinguish the perfected nature of a UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3?
The 2nd Circuit decision is here. (The date of oral argument on the cover page should say March 2014, not March 2013).
File folder photo courtesy of Shutterstock
Until a few days ago, it looked like Detroit's chapter 9 plan confirmation would come and go untouched by appellate process. In February 2014, the U.S. Court of Appeals for the Sixth Circuit granted seven petitions for direct appeal of the bankruptcy court's eligibility decision, which included the finding that public pension claims could be impaired in chapter 9 bankruptcy. But the Sixth Circuit did not act on the request for expedited consideration. Somewhat remarkably, it agreed to do what the bankruptcy court had requested in its certification memo: consult with the bankruptcy court's lead mediator to consider the impact of the appeal's timing on negotiations. According to the bankruptcy court, "the interests of the City, its residents and its creditors are better served by adjusting the pace of the legal process, including the appeals, to meet the needs of the mediation process." (p. 14) Don't know for sure, but it seems plausible that the lead mediator preferred deferral of the appeal until after plan confirmation; doing otherwise might throw a wrench in implementation of plan settlements he oversaw - especially the Grand Bargain, for which he has pressed for many months. Because the eligibility decision included the finding that public pensions could be impaired in bankruptcy, the Sixth Circuit docket has swelled in the meantime to include many amici appearances and briefs, including from CalPERS, the Illinois Public Pension Fund Association, the American Federation of Teachers, and AARP.
A host of appeals from other bankruptcy court orders in Detroit's bankruptcy also are pending in the U.S. District Court for the Eastern District of Michigan. In at least several - and possibly all, as I haven't yet checked each and every one - the district judge sua sponte stayed the matter until the Sixth Circuit decided the eligibility appeal.
This week, the Sixth Circuit shattered the blockade on appeals from Detroit's bankruptcy.
Continue reading "Detroit: My Complication Had A Little Complication" »
6/30 UPDATE: here's the amended complaint.
The fast-moving legislation's title does not include the word bankruptcy. Materials distributed by the Puerto Rico government explain, though, that the bill is meant to provide chapter 9-like relief to Puerto Rico public corporations through one of two paths - one more prepack-like than the other. Calling the effort "dazzling," Cate Long notes, "[s]eldom have financial markets seen such an elegantly choreographed approach to haircutting sovereign debt."
However elegant, investors say the bill violates multiple provisions of the U.S. Constitution. Quiz yourself, or directly check out the action just filed in the U.S. District Court for the District of Puerto Rico seeking a declaratory judgment. H/T Cate Long.
Puerto Rico flag courtesy of Shutterstock
Senator Harkin's discussion draft of the Higher Education Affordability Act (described here) is expected to include a provision restoring bankruptcy relief from private for-profit student loans. A few years ago, I offered justifications for that move here. Prof. Scott Pryor agrees.
But wait, there's more. S.2471, The Medical Bankruptcy Fairness Act of 2014, introduced by Senator Sheldon Whitehouse, co-sponsored by Senator Elizabeth Warren. Section 6 would offer relief from student loans for some bankruptcy filers. Take a look.
Abstract image courtesy of Shutterstock
A little like the ship that Fitzcarraldo (and Werner Herzog) pushed, hoisted, and willed up up up and over a mountain, Detroit's Grand Bargain continues to defy expectations and make forward progress. A significant step today: A big press conference as Governor Snyder signed the necessary bills. Watch here.
The Detroit Retired City Employees Association produced the button in the picture (photo courtesy of Matt Helms of the Detroit Free Press). Shirley Lightsey, President of the association, produced the slogans: You Can't Eat Principles, and Uncertainty Doesn't Pay the Bills. Of the speakers at the press conference today who advocated for the Grand Bargain, Ms Lightsey was the most persuasive.
And practical too. Some retirees are skeptical, but it is hard to imagine retirees will do financially better by voting no or abstaining and hoping for an appellate court victory on the Michigan Constitution questions.
Voting is not, though, the last hurdle for the Grand Bargain - a point lost in the shuffle of the bill-signing press conference.
Continue reading ""You Can't Eat Principles" - Detroit's Grand Bargain Moves Another Step Forward" »
The City of Detroit has proposed a three-hour bus tour of the City to start its chapter 9 plan confirmation hearing. Some creditors object. The City's motion says "[i]f any case ever warranted a Site Visit, this one does." I don't agree, for reasons explored below, but in any event, the eligibility trial would have been a more logical place for it. And even Gilligan and the Skipper too couldn't cover 139 square miles in three hours. So what is going on here?
A step back. In the earliest days of my bankruptcy court clerkship, the United States Trustee sought to dismiss or convert the chapter 11 of a small nonprofit on the south side of Chicago. The debtor and the U.S. Trustee parties presented starkly contrasting depictions of this debtor - I remember the dueling photographs - with neither more obviously credible than the other. The case, like most in the bankruptcy court, had a starkly human element: the debtor was a rehabilitation center of sorts. The U.S. Trustee essentially was alleging that the residents lived in deplorable conditions, and the debtor strongly disagreed. To resolve the discrete factual dispute between two parties about the property's condition, Judge Ginsberg decided to schedule a time to leave the modernist skysraping box that was the Dirksen Federal Courthouse and visit the premises, in a van, with law clerk, court reporter, and others in tow. No easy way to verify - the name of the case is lost to me now - but my strong recollection is that the site visit idea prompted no objections. The case cratered for an unrelated reason, mooting the trip. No other case during my clerkship prompted Judge Ginsberg to make a similar proposal.
Over the years, I have learned of other judges' experiences with site visits, revealing similar characteristics: cases with limited parties in interest, specific factual disagreement, the resolution of which could be accomplished efficiently by visiting circumscribed sites.
Continue reading "A Three-Hour Tour and Other Distractions" »
Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court? Mark Berman thinks so. I'm skeptical (fuller version of my argument here). But it depends what we mean when we refer to "equity", which is often used as a rubric for an array of different non-Code practices. More complete coverage at the Harvard Law School Bankruptcy Roundtable.
The good news is that it's a nice (relatively) short opinion with no dissents or concurrences that require a map to understand. The bad news is that it dodges all the interesting issues.
The Supreme Court's opinion in Executive Benefits Insurance Agency v. Arkison.
Yesterday's Is. It. Legal. provoked some comments and questions. Some quick replies above the line, so to speak.
Q: Is it clear that this is going to be a cramdown plan?
Multiple groups of creditors have not settled with the City (e.g., those with financial interests in certificates of participation, water and sewer bonds, LTGO, a few police and fire groups). Non-settling claimants are actively challenging plan confirmation from top to bottom, including whether Detroit's current plan passes muster under the standards applicable to nonconsensual plans. Those who hold or insure COPs are most relevant to yesterday's comments on unfair discrimination. In addition to offering little payment, the City has challenged the COPs' validity altogether. Will all of that get settled? Stranger things have happened in the history of bankruptcy and municipal finance law. But I would guess that result would necessitate some sharing in the Grand Bargain premium.
Q: If it is not a cramdown, then all of the unfair discrimination and absolute priority issues are moot.
I disagree. The strength of the cramdown-related arguments contribute to the leverage of the parties to compromise and settle.
In a week bustling with municipal finance activity (e.g., conclusion of the Stockton confirmation hearing), the Michigan Senate rather easily passed legislation to contribute money to Detroit's restructuring, earmarked for pension claims and permanent insulation of the City-owned art museum against the City's creditors. The bankruptcy is not fully resolved yet, of course. For one thing, creditor voting is not complete, and some pension claimants must be resolicited because of errors in ballots. Assuming that the requisite votes materialize, the City has the burden to prove that its plan of adjustment meets all requirements of the Bankruptcy Code by a preponderance of the evidence. Due to a series of document production delays on the City side, the trial will likely be postponed by at least a few weeks.
Since I last wrote about Detroit, the City filed an omnibus reply to plan objections (doc #5034). Exceeding 250 pages, brief it is not. But the City had much ground to cover, and the end pages are a very useful chart breaking down who made which objections. Several assertions I found troubling relate to whether the plan unfairly discriminates in favor of pension claimants who benefit from the Grand Bargain premium and against dissenting classes of creditors who do not.
...but first, a new (and short!) article: Please download here a just-published piece on the first months of Detroit's bankruptcy, resulting from a fall 2013 Fordham symposium. It reflects efforts to follow public parts of Detroit's chapter 9 through recordings of court hearings and monitoring the docket. And although largely descriptive, the piece sets the stage for unpacking the institutional and functional roles played by the federal court in municipal bankruptcies and beyond. The court's early management and oversight choices (discussed on Credit Slips here & here & here & here) can be tied quite directly to this bankruptcy's development - most notably through the appointment of Chief District Judge Rosen as lead mediator. Without Chief Judge Rosen, would the Grand Bargain exist?
The U.S. Supreme Court has denied a petition for writ of certiorari in Bank of America v. Sinkfield, an 11th Circuit case raising the issue whether a junior lien wholly unsupported by collateral value can be stripped off in chapter 7.
The high court's denial of certiorari yesterday (March 31) is a victory not only for the debtor who prevailed in the case below but also for the National Association of Consumer Bankruptcy Attorneys, represented by the National Consumer Bankruptcy Rights Center, which argued in an amicus brief against Supreme Court review on the ground that the case had not been fully litigated below and thus was a poor one for the Supreme Court to take up.
The creditor in Sinkfield stipulated to the result that strip off was permitted in the case, based on an Eleventh Circuit opinion so holding in another case, In re McNeal, 735 F.3d 1263 (11th Cir. 2012), one in which en banc rehearing has been sought.
The Supreme Court's decision not to review Sinkfield avoids for now the possibility of disturbing the solid precedent for lien strip off in chapter 13. McNeal is the first circuit court case to allow lien strip off in chapter 7; two other circuits have extended Dewsnup v. Timm, 502 U.S. 410 (1992), to come to the opposite conclusion. See here for background. Lien strip off in chapter 13 has been one of the few ways for debtors in bankruptcy to hold on to homes on which they are underwater while making them more affordable by removing junior liens unsupported by collateral value. Extending that sort of relief to chapter 7 cases would be helpful, but Supreme Court review also poses a serious downside risk of making bankruptcy less promising for consumer debtors.
I’m on my way to the Choice of Law in Cross-Border Bankruptcy Cases symposium at Brooklyn Law School that Susan Block-Lieb mentioned in her post earlier this week, so I have Chapter 15 on the brain.
I posted earlier about a Second Circuit case that held that a debtor’s center of main interests is to be determined as of the time it files a Chapter 15 petition, instead of the time at which it sought bankruptcy relief abroad. That decision effectively opens the door for forum shopping in a way inconsistent with the Model Law.
Another recent Second Circuit decision applied a plain meaning analysis to reach a conclusion that is likewise out of sync with the purpose of Chapter 15, a decision that is likely of great interest to foreign representatives and their counsel.
Am I the only one who didn't know that the National Conference of Commission on Uniform Law recently revised the Uniform Fraudulent Transfer Act in late 2013?
While revisions to the UFTA take a relatively light touch to the uniform act, the Commissioners were keen once more to change the name of these avoidance actions. While the 1988 statute renamed and substantially revised the (much earlier) Uniform Fraudulent Conveyance Act to come up with the Uniform Fraudulent Transfer Act, this time the Commissioners renamed the Uniform Fraudulent Transfer Act as the Uniform Voidable Transfer Act. I guess we were hurting folks' feelings by implying that their transactions were fraudulent, even though lawyers know that constructive fraudulent transfers are only "fraudulent" in their economic effect.
Long live the UVTA!
Get it?
Anyway, Law v. Siegel is now out, with a 9-0 opinion that shouldn't surprise anyone. It finally gave Justice Scalia a chance to write a strongly textualist bankruptcy opinion for the Court, getting him out of the gulag of concurrences and dissents. It helped, of course, that he cited myriad other ways to punish debtors than surcharing exemptions. He wouldn't want to be accused of going soft.
As part of my study of religious organizations' Chapter 11 cases, I interviewed attorneys who represented a variety of churches and other faith-based institutions in their reorganization cases. Some of my findings are presented in this new paper. In short, the interviews confirm my previous conclusion based on an analysis of documents filed in religious organizations' Chapter 11 cases: reorganization oftentimes can be beneficial for these debtors.
Of the 52 Chapter 11 cases discussed by attorneys, 23% ended in a confirmed reorganization plan, and another 40% resulted in an agreement between the debtor and its creditors. When I interviewed the attorneys, 71% of their clients were still operating, though a couple churches were in the midst of foreclosure. When asked what "special considerations" other attorneys should be aware of in future representations, attorneys focused on six issues:
Continue reading "Attorneys' Advice on Representing Religious Organizations in Chapter 11" »
Harvard Law School's Bankruptcy Roundtable, a dialogue between academics and practitioners, is now in the blogosphere! The Roundtable has launched with a number of very substantive posts by Douglas Baird and Anthony Casey; Judge Sontchi; Thomas Jackson and David Skeel; Nelly Alemeida; and Marshal Huebner and Hilary Dengel. I know that we academics benefit a lot from discussions with practitioners. (I hope, but am not entirely sure, that the benefits are mutual...)
Highly recommended.
On behalf of the Credit Slips bloggers, I want to extend our sympathy to the family and friends of Professor Ted Eisenberg who passed away suddenly on Sunday. Ted worked in the areas of civil rights, the death penalty, and bankruptcy. He also was a pioneer in the field of empiricial legal studies. The scholars who participate on Credit Slips owe Ted a huge intellectual debt. His work was greatly influential on my own scholarship. Ted, you will be greatly missed.
Chapter 15’s modified universalism structure requires cooperation between courts in different countries as well as tolerance for outcome differences under different bankruptcy laws. While in general it’s fair to say U.S. courts have been cooperative and tolerant, for some reason the issue of intellectual property licenses in bankruptcy brings out the worst in us.
In the appeal of Jaffe v. Samsung (the appeal of a case called In re Qimonda in the courts below), the Fourth Circuit recently held that a U.S. bankruptcy court can require a German court overseeing the liquidation of a German company to apply U.S. law when dealing with licenses of U.S. patents.
Congress is considering amending Chapter 15 to mandate a similar result through the proposed Innovation Act, which would add the following language to Section 1522:
Continue reading "Cooperation and Tolerance in Chapter 15" »
Thank you to the Credit Slips team and, in particular, Bob, for inviting me to guest blog.
The recent news about the Tennessee Volkswagen workers’ voting against UAW representation fits into some of my current research looking at worker representation in bankruptcy. Interestingly, VW itself favored the unionization effort and, despite the rejection, VW has stated its intention to continue to find ways to create something akin to a German works council, which provides a way to incorporate employee voice into corporate governance.
Would something like a works council also improve governance in bankruptcy?
I'm thrilled to join Credit Slips as an occasional contributor. As Bob mentioned, my research focuses on religious organizations that file under chapter 11. Based on the approximately 500 religious institutions that filed between 2006 and 2011 (about 90 cases per year), I previously concluded that primarily small nondenominational and congregationalist Christian churches seek to reorganize in hopes of retaining their buildings after they have fallen behind on mortgage payments. I recently updated my database of religious organization chapter 11 cases through the end of 2013 to see if faith-based institutions filed in similar numbers over the past couple years. (My previous paper details how I identify these filings.)
This graph shows the number of religious organization chapter 11 cases filed per year (values on left axis) versus the total business chapter 11 filings per year (values on right axis) based on data from Epiq Systems. Religious organizations are still filing in what some might view as substantial numbers: 107 cases were filed in 2012 and 89 cases were filed in 2013. Similar to total chapter 11 filings, their filing numbers are declining. On average, religious organization cases still account for about 1% of chapter 11 filings every year.
As I wrestle with the EBIA v. Arkison case and the great paper pointed out by Melissa last week, I can't get past a nagging feeling that the argument about party consent to bankruptcy courts' issuing final orders on "core but unconstitutional" matters is more theoretical than practical. Why would any well-represented defendant in a fraudulent conveyance case consent to making the case against them smoother and more efficient for the trustee?! It seems to me (and this was the case in my practice days long ago) that defendants who know what they're doing will throw up any possible roadblock in the way of such a case in the hopes of wearing down the trustee and making settlement more likely and/or cheaper. For example, as EBIA did, fraudulent conveyance defendants for years now, since Granfinanciera, have been demanding jury trials and insisting that such trials proceed before the district court. What makes anyone think defendants will consent to bankruptcy courts' entering final (e.g., summary judgment) orders, even if this is allowed?
In other words, why all the fuss? What am I missing? Even if the Supreme Court holds that individual defendants can waive the Article III concerns at issue in Arkison, will this really change anything meaningfully? It seems to me that the much more important issue in Arkison is the second, about allowing bankruptcy courts to make proposed rulings in such "core but unconstitutional" cases despite the supposed "gap" in 28 USC § 157(b)(1)--a "no" answer on that question would bring the system to a screeching halt. But isn't consent for suckers--and how many suckers do we expect are out there in such cases?
The paper was just posted here. Its authors are Elizabeth Gibson and Jonathan Landers, and it was written for the National Bankruptcy Conference. A key sentence from the abstract: "The paper contends that the Court’s analysis in [Commodity Futures Trading Commission v.] Schor supports the constitutionality of bankruptcy court adjudication of private rights with the parties’ consent, notwithstanding the decision of three federal circuits to the contrary." The paper also discusses consequences for the bankruptcy system, magistrate system, and the workload of district courts in the event that the Supreme Court rejects the consent route. All in an efficient seventeen-page package.
Paper image courtesy of Shutterstock.
Federal bankruptcy law defers to the states on a critical issue: what is the basic minimum income and property that debtors need not surrender to creditors. Four states protect 100% of workers' wages, while 21 states allow creditors to garnish debtors' wages down to 50% of the poverty level for a family of 4, according to a new report from the National Consumer Law Center. Similarly only 9 states protect a used car of average value from seizure, and state home exemptions are still all over the map. Even the exemptions that exist are often evaded by the $100 billion debt buyer industry, whose collection suits are dominating civil court dockets around the country.
This comprehensive and timely survey will be an essential tool not only for bankruptcy research, but also for anyone who cares about economic inequality and the plight of the working poor.
A city in bankruptcy operates with considerably more freedom from judicial oversight than its private chapter 11 counterparts. People often say judges have just two principal points of involvement in a chapter 9: presiding over trials on eligibility and confirmation of the plan of adjustment. My earlier posts about Detroit have told a story that puts judges in a more active ongoing role, emblematic of the evolution of the federal judiciary over the second half of the Twentieth Century. Serious managerial judging (plus a team) empowers them to shape the speed and direction of municipal restructuring notwithstanding doctrinal and constitutional limits on their formal legal authority. Yesterday's evidentiary hearing in Detroit's bankruptcy is illustrative.
Short bursts on Detroit's Chapter 9 bankruptcy will be offered at @bankrprof. While I'm here, though, a report that the retiree committee has filed a motion to withdraw the reference from the bankruptcy court of its objections to Detroit's chapter 9 eligibility.
Note paper image courtesy of Shutterstock
My Detroit posts so far (here and here) focus on the role of the judge and court. The first considered managerial judging, and there's significant news on that front this week. Having read one hundred and nine timely objections to eligibility, Judge Rhodes interpreted many objections to raise only legal issues and expedited the hearing on those issues to September 18, from October 23 (see p.3 of order). On September 19, the court will hear from individuals who filed eligibility objections, three minutes each. October 23 remains the date for objections that require the resolution of material fact. But the court is deferring objections based on treatment of pension rights in a plan because they are not eligibility issues (see section VI of the order, p. 6). This is the technically "slower" instance, per this post's title. Parties troubled by this new order have until September 6 to file objections or comments (see section XI. p.7).
Continue reading "Detroit: More People, Moving Faster (and, in an instance, Slower) " »
With the Second Circuit's ruling in the Argentina/NML case and the now-urgent need to get secured transactions and bankruptcy into the 1L curriculum, Credit Slips has yet to give attention to Wellness International Network, Limited, issued on Aug 21 by the Seventh Circuit. Luckily, on this issue, I don't mind getting the ball rolling, and then stepping out of the way.
Continue reading "Doesn't Anyone Want to Talk About Jurisdiction This Week? " »
First, the most recent news: the fee examiner job in Detroit's chapter 9 has just been awarded. And the Detroit Free Press has just awarded itself a not-so-subtly snarky news headline.
Similar to the bankruptcy court's order appointing a mediator, the fee examiner order authorizes the examiner to call in reinforcements - other lawyers at his law firm, as well as an accountant and the accountant's firm. Judicial Team Chapter 9 Detroit grows.
A cadre of federal judges once fought hard - repeatedly and successfully - to exclude bankruptcy judges from the Article III judiciary. In so doing, they conceptualized bankruptcy judges as the helpers, not the ones building teams. When a district judge was asked at a Congressional hearing in the 1970s whether bankruptcy judges would need law clerks, the district judge's NO could be heard from miles around. That issue has long been resolved - of course, they need law clerks. The Federal Rules of Bankruptcy Procedure prohibit special masters in bankruptcy cases. But bankruptcy courts commonly appoint fee examiners or fee committees in bigger cases, which seem little different from a special master. And the judges fighting against Article III status never imagined a bankruptcy judge appointing his own chief district judge as the omnibus mediator, with the potential for a raft of additional judicial and non-judicial mediators in tow. But now it has happened. And that delegation of responsibility from bankruptcy judge to district judge is already underway, per the first mediation order dated August 16.
And yet, the building of this team should feel familiar to those Article III judges from the 1970s and 1980s. When they needed to bring order to complex cases involving unconstitutional conditions in prisons and schools, and bargaining over the remedial scheme, district judges brought in more people. Masters. Special masters. Hearing officers. Monitors. Various kinds of committees. Ombudsmen. Barring the appointment of lions, tigers, or bears, the City of Detroit case yet again illustrates commonalities between the non-adversarial aspects of bankruptcy cases and non-bankruptcy litigotiation.
Human spokes image courtesy of Shutterstock
When the Chief Judge of the Sixth Circuit selected Judge Rhodes to
preside over the City of Detroit's chapter 9 case, she attached a letter
from the Chief Judge of the Eastern District of Michigan. Among other
things, it lauded Judge Rhodes' case management
skills, and asserted the need for those skills in a case of this nature. To many, the phrase “case management” may evoke procedural judicial tasks of
little normative content. But the sandwich of the two
words should invite deeper questions about the role of courts, judges,
judicial adjuncts, and trials, and the impact of the presence or absence of disputes playing out in public view.
Continue reading "Detroit's Chapter 9 and the Vanishing Umpires" »
Detroit's bankruptcy filing today is obvious grabbing some headlines. It's not clear, however, how much bankruptcy can do to fix Detroit. Bankruptcy is really good at dealing with problems created by overleverage. If there's too much debt, a debtor, municipal, corporate or consumer, can use bankruptcy to slough it off. Similarly, if the problem is some bad contracts outstanding, bankruptcy's got that covered too.
But bankruptcy can't fix everything. If a business doesn't have a viable operating model, well, bankruptcy doesn't solve that. At best, it buys a business some breathing room to fix its operating model. But not every business can be fixed. Slide rules, whale oil, and ice delivery just aren't winning business models these days. Same goes for a consumer. Bankruptcy can take care of the debt, but it can't get the consumer a job.
This principle also applies to municipalities. It isn't clear at this point whether Detroit would be able to operate in the black going foward even if it were delevered and lowered its labor costs. Put another way, it isn't clear at this point that there is an effective reorganization possible. The city is straddled with a much larger footprint than its tax base can easily support, and to the extent it increases the costs of the services it provides or decreases service provision, it risks losing the more affluent and therefore more mobile part of its tax base. Basically, Detroit needs to have its population consolidated in about a quarter of the city's square mileage. I don't know how that can be accomplished. It's one thing to consolidate operating divisions of a company to effectuate cost savings from reduced overhead. But that move just doesn't work with municipalities.
Similarly, Detroit does not seem to have been well managed, even in spite of its problems. The emergency manager represents a turnaround team at the very top of the city, but the management problems appear to go much, much deeper. I don't know how bankruptcy can fix this problem either.
So what does this mean for Detroit? My guess is that we see both bondholders and labor making (or being forced to make) concessions during the bankruptcy. But don't expect to see a revitalized city coming out of Chapter 9. Instead, Detroit will continue to be a deeply troubled city, irrespective of what happens in bankruptcy. I hope I'm proven wrong, but I just don't see how bankruptcy will fix Detroit. In the meanwhile, we can all sing along: Detroit, Detroit, it's a helluva town...the attorneys are up, but the bondholders down...
Everything you wanted to know about bankruptcy judge selection can be found in a report from the Institute for the Advancement of the American Legal System (IAALS) at the University of Denver. As many Credit Slips readers will know, bankruptcy court judges are appointed to 14-year terms by the courts of appeals in the various federal circuits. The exact appointment process varies from circuit to circuit. The report provides a detailed look from everything of who gets appointed to the circuit's merit selection panels that do most of the heavy lifting in making recommendations to how these panels conduct the interviews that are part of the selection process. Although the report is pitched more toward a policy-minded audience, it also should be required reading for anyone who might want to be a bankruptcy judge.
As the report documents, most observers think the bankruptcy judicial appointment process works pretty well, producing a high-quality bench through merit selection. As we debate the formalistic legal distinctions in the two pending Supreme Court cases (here and here) that could cut back the amount of bankruptcy judges' discretion, we should not forget the pragmatic reality that this discretion is being exercised by what is perhaps the most overall expert bench in the federal judiciary.
Judge and lawyer image courtesy of Shutterstock.
A few weeks ago, I posted about an apparent movement to challenge the bankruptcy-exempt status of IRAs based on boilerplate language commonly found in the account agreements of many of the nation's largest brokerages. The legal argument rested on hyper-technical interpretations of the Bankruptcy Code and the account agreements, but nonetheless several lower courts had ruled that debtors could lose their IRAs to the bankruptcy trustee.
The Sixth Circuit heard oral arguments on the case last Thursday and issued an opinion yesterday. The court rejected the bankruptcy trustee's arguments and ruled the IRAs remained exempt despite language that hypothetically could have led to the brokerage having a lien on the account. And, yes, for you keeping score at home that is four days total, including a weekend, from oral argument to published opinion.
In addition to the fair housing case that Alan noted, the Supreme Court also granted cert in a bankruptcy case, Law v. Siegel. Having listened to many bad jokes about my last name over the years, my initial reaction was to set up an over/under pool on how many bankruptcy newsletters and blogs will run articles under a title that has a bad pun on "Law v. Siegel" such as "Supreme Court Lays Down the 'Law' on Bankruptcy Exemptions." Because U.S. governmental authorities are protecting us from the tyranny that was InTrade, my over/under challenge will have to remain hypothetical.
My second reaction was to wonder what trivial bankruptcy issue the Court now had deemed cert-worthy while it seems to pass on more important cases. This time, however, the Court has picked up an important issue on which the lower courts had split. More significantly, the case presents an opportunity for the Court to address the universal solvent of the Bankruptcy Code--the provision that bankruptcy judges and lawyers seize upon when all else is against them--namely section 105 of the Bankruptcy Code.
Continue reading "Will the Supremes Trim Back Bankruptcy Courts' Powers?" »
One of the frustrations experienced by all business bankruptcy attorneys seeking engagement in chapter 11 cases can be traced to the vague language of Rule 2014. The rule requires the disclosure of information necessary to determine whether the professional’s employment is in the best interest of the estate.
But what specific information should be disclosed and in what detail? Currently, Rule 2014 does not limit the extent of disclosure of a professional’s connections with: (i) the debtor; (ii) any creditors of the debtor; (iii) other parties in interest; (iv) attorneys of the debtor, creditors, and parties in interest; (v) accountants for the debtor, creditors, and parties in interest; and (vi) the United States Trustee and persons employed by the U.S. Trustee’s office. The broad but undefined term “connection” has further led to confusion over the appropriate level of inclusiveness in disclosures. The uncertainty surrounding the meaning of “connection” has also led to attempts by professionals to argue that some important “connections are immaterial.” In other cases, professionals present a “phone book” sized disclosure documents, in which the meaningful connections are all but lost in the static. In deciding which connections are relevant, getting the judgment call wrong can be catastrophic for a lawyer; the failure to appropriately disclose connections is an independent basis for the disallowance of fees or even disqualification.
This context set the stage for the Ethics Task Force’s drafting of Proposed Rule 2014 (included in the Final Report). The Proposed Rule is an effort to provide clarity to professionals concerning what relevant connections must be disclosed, as well as to provide improved information for courts and other parties to use in determining a professional’s eligibility for employment.
Thanks to Bob and Credit Slips for the warm welcome. In April, after two long years, we completed the American Bankruptcy Institute Ethics Task Force's Final Report. This week we will be guest blogging about “bankruptcy ethics” and discussing many of the issues we confronted as Reporters. We will also do our best to summarize the white papers, “best practices” narratives, and proposed rules presented in the Final Report.
Here is some background about the Task Force and its work product. In 2011, then-ABI President Geoffrey L. Berman asked us if we would serve as Reporters for the newly formed ABI National Ethics Task Force. The Task Force was constituted to address a problem familiar to all bankruptcy professionals and judges: state ethics rules do not always “fit” with the realities of bankruptcy practice. State ethics rules may also not be a perfect fit in the context of other types of practice, either—for example, states may not yet know how best to handle the increasingly interconnected digital and virtual world—but it is clear that the Model Rules do not fit neatly in a practice that involves numerous parties with changing allegiances, often departing from the classic two-party adversarial proceeding.
Continue reading "The Bankruptcy Ethics Task Force's Final Report" »
Bankruptcy lawyers and judges often toil away in the lower reaches of the federal judicial over not-so-momentous issues such as the value of a refrigerator. When bankruptcy issues get to the Supreme Court, we tend to get excited. Boy, did that balloon get popped in Adam Liptak's New York Times column this morning about a recent tendency toward unanimity in the Supreme Court:
For now, consensus reigns. That is partly because some of the recent decisions were decidedly minor. . . . Another, about the meaning of the word “defalcation” in the Bankruptcy Code, must have made Justice Stephen G. Breyer, its author, wonder what he had done to deserve the assignment.
Ouch. Minor? We have given this decision extensive coverage on Credit Slips here and . . . OK, well we haven't. When the case was granted cert, I did post a photo noting that it involved a bank I drive past every morning. It was a nice photo.
Liptak vastly overstates his point. Out of the million bankruptcy filings each year, this decision could literally affect several. And, the meaning of "defalcation" is an intellectually interesting exercise. It almost sounds like something you should not be able to say on television. "Defalcation" is also not to be confused with "defalconation," which describes what happens in the NFL every year around playoff time with a certain Atlanta-area team.
A few weeks ago, the Supreme Court denied cert in a case called Law Debenture Trust Co. v. Charter Communications, Inc. (No. 12-847). The issue was whether the Second Circuit had correctly applied the doctrine of equitable mootness to an appeal in the Charter Communications bankruptcy. Paul Allen -- yes, that Paul Allen -- held an ownership stake in Charter that should have been worth approximately zero because that is usually the value of an ownership stake in a bankrupt company.
Charter, however, needed to retain Allen's voting interest in the company to avoid a default in its senior credit facility with J.P. Morgan and also to preserve net operating losses. By the time negotiations were over, Allen had $375 million, Charter's purchase of his preferred stock in a Charter subsidiary, a liability release, and other consideration. The junior creditors complained the deal violated the absolute priority rule, the requirement in chapter 11 that creditors be paid in full before shareholders receive anything. Allen responded that it was a perfectly cromulent deal because he was being paid to help out Charter and not because he was a shareholder. The legal dispute revolved around the meaning of "on account of" in § 1129(b)( bb76uyhj09-=09g hewa*a[0g zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz . . . .
FAC UT ARDEAT, begins The Flamethrowers by Rachel Kushner. It means "made to burn," the narrator learns (from that "gasbag . . . Chesil Jones"). Whether your preferred hurry-up 363 sale metaphor involves flames, ice, or a wagon full of rotting salmon, Ted Janger and I have just posted a draft of an article reframing the problems with pre-plan going-concern sales, and reallocating the risk associated with such sales. The abstract:
Financially-distressed companies can melt like ice cubes. In Chrysler’s Chapter 11 bankruptcy, the finding that the debtor was losing $100,000,000 per day justified the hurry-up sale of the company to Fiat. This assertion -- that the firm is a rapidly wasting asset -- is frequently offered, and accepted, in support of quick sales under section 363(b) of the Bankruptcy Code. This raises a policy question: is this speed and streamlined process a “bug” or “feature?” Do these hurry-up going-concern sales create a speed premium and maximize value for the bankruptcy estate, or do they facilitate collusive deals between incumbent managers, senior creditors and potential purchasers? The answer is, “a little bit of both.” It is, therefore, crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock-in a favored deal. To accomplish this sorting and reduce transactional leverage, we seek to allocate the increased risks of foregone process to the beneficiaries of the sale. We propose that a reserve – the Ice Cube Bond – be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited section 363 sales as a useful way to quiet title in complex assets and preserve value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code.
Perhaps Ice Cube Bonds is the long weekend reading material you were hoping would come your way? We'd value your feedback.
Match image courtesy of Shutterstock.
Some chapter 7 trustees have found a problem that could affect thousands of IRAs, leading to the first post in a two-post series on unintended consequences. A better reading of the law is that these IRAs should remain exempt from the bankruptcy process. Cases are wending their way through the court system, and until the courts resolve the issues, many IRAs may remain under threat. And, there is no guarantee the courts will agree with me on how the cases should be resolved.
The situation begins with the 2005 changes to the bankruptcy law. One of the few ways these changes were favorable to consumer debtors was to clarify and expand the exemptions available to retirement assets, including IRAs. Most retirement assets are exempt from the bankruptcy process, meaning debtors can retain these assets even after the bankruptcy case.
Continue reading "Non-exempt Exempt IRAs and Undercompensated Chapter 7 Trustees" »
I always figured that Elizabeth Warren was the first bankruptcy lawyer to serve in the Senate. Turns out that there's at least one other. (I'm not counting Senators who have served as Chapter 7 trustees.) Anyone know who? Answer under the break.
Continue reading "Trivia Time: Bankruptcy Lawyers in the Senate" »
In the fictional worlds of Charles Yu, George Saunders, or Etgar Keret, a person's accumulated life stories and thoughts when she files for bankruptcy might be withdrawn, like blood, then filtered for marketability. In such a world, a debtor might be required to spin her tale for the sole benefit of creditors, or forever silenced. Planning to give a five-minute anecdote about your childhood at The Moth? Don't even think about it.
Casey Anthony's bankruptcy was filed in January 2013 as a no-asset Chapter 7, with nearly $800,000 in debt - not counting scores of claims with amounts identified as "unknown." Ms. Anthony's income and expense schedules list, literally and rather remarkably, zeroes all the way down. At the 341 meeting of creditors in March, Ms. Anthony asserted that friends and strangers take care of her needs. Presumably, this arrangement is not sustainable. Will she seek to support herself in the future by talking about her past?
The bankruptcy trustee wants to auction off something that probably has never been expressly sold in a bankruptcy case (it certainly wasn't listed as an asset in the schedules): exclusive rights in perpetuity to the commercialization of Ms. Anthony's life story, including "her version of the facts, her thoughts and impressions of whatever nature, in so far as these pertain to her childhood, the disappearance and death of her daughter . . . her subsequent arrest . . . and withdrawal from society. . . ." (see the lengthy paragraph 3 in here). How much debt would be satisfied by such a sale?
Continue reading "Foreclosing On The Life Story In Your Head" »
Move over, two ships Peerless. Even in legal regimes that prioritize substance over form, errors in the execution of formalities can produce significant consequences and the risk of transactional failure. And even chapter 11 cases featuring quick asset sales can generate litigation over such formalities for years to come. A recent example illustrates both points.
On March 1, 2013, the United States Bankruptcy Court for the Southern District of New York issued and certified a judgment for direct appeal to the United States Court of Appeals for the Second Circuit. The decision grants summary judgment in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. et al, adversary proceeding 09-00504, in the GM bankruptcy. The decision already has received in-depth summaries, at least in some law firm bulletins. If the Second Circuit accepts a direct appeal, I aspire to watch the oral arguments, but hope it will be easier to find a seat in the courtroom than in NML v. Argentina.
Continue reading "When a Billion Dollars has Eight Digits; Taking Authorization Seriously" »
My colleague, Professor Pamela Foohey, has just posted a paper on SSRN about religious organizations that have filed chapter 11. While the Roman Catholic dioceses bankruptcies have grabbed a lot of attention, Foohey identifies 509 other cases filed by faith-based organizations from 2006 - 2011. The amount of work in this study is impressive. Foohey individually reviewed each of the 60,000+ chapter 11 cases filed during that time frame to find the faith-based bankruptcies. The result is a census of faith-based organizations in chapter 11, including churches, schools, and community-assistance organizations.
My colleague, Jennifer Robbennolt, and I have posted a paper to SSRN exploring apologies in the bankruptcy context. Jennifer has done some of the leading studies on apologies in different legal contexts. Contrary to the instincts of many lawyers, apologies tend to produce better outcomes for defendants. For example, victims who hear an apology are less likely to feel they need to invoke legal process and are generally more amenable to settlements. Researchers have demonstrated these effects in a variety of legal settings such as personal injury, professional malpractice, and criminal law. We wondered whether we would see similar effects in bankruptcy.
Some recent moves in the Senate Judiciary Committee should be of interest to bankruptcy specialists. The committee has approved a new subcommittee to be called "Bankruptcy and the Courts" with Senator Chris Coons of Delaware as the subcommittee chair. The new subcommittee is essentially a name change from the old "Administrative Oversight and the Courts" subcommittee, which also had jurisdiction over bankruptcy matters.
A Credit Slips commenter recently asked that blog posts explain (or at least spell out) acronyms and specialist terminology. This inspired me to report back on a corporate bankruptcy terminology set that University of North Carolina Law students collaboratively produced last year (technically, a wiki) in business bankruptcy, an advanced transition-to-the-profession seminar. In both comments and emails, Credit Slips readers helped me expand the list of terms (and also offered great ideas for practical writing projects). So thanks again for your contributions, and thanks also to the Spring 2012 seminar alumni - some of whom are practicing bankruptcy law or clerking for bankruptcy courts right now, or headed there soon - who tackled the collaborative vocabulary project, and the entire seminar and its experimental elements, with such great spirit and a 100% perfect attendance record! So, some observations.
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