Panic in Detroit

Some thoughts on Detroit in chapter 9, at Dealb%k.

Detroit, Detroit It's a Helluva Town...

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...

The Secrets of Bankruptcy Judge Selection

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.

Update -- The Sixth Circuit Rules IRAs Are Exempt

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.

Will the Supremes Trim Back Bankruptcy Courts' Powers?

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.

Meaningful Disclosure Under Rule 2014

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.

The Bankruptcy Ethics Task Force's Final Report

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.

On Behalf of Bankruptcy Lawyers Everywhere, Mr. Liptak You Have Hurt Our Feelings

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.

Equitable Mootness and Forum Shopping

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 . . . .

Ice Cube Bonds: New Paper on 363 Sales and Chapter 11

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.

Non-exempt Exempt IRAs and Undercompensated Chapter 7 Trustees

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.

Trivia Time: Bankruptcy Lawyers in the Senate

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.

Foreclosing On The Life Story In Your Head

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? 

When a Billion Dollars has Eight Digits; Taking Authorization Seriously

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.   

Ironicality Alert

The FT has an interesting piece on the UK Insolvency Service's ... lack of funds.

Bankrupt Churches

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.

Apologies for Bankruptcy

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.

A Change in Name and More

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.

Stripping Down Bankruptcy Jargon

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. 

Commercial Lawyering for the End of the World

With the apocalypse less than 24 hours away, it is probably too late for any last-minute precautions. This bit of flotsam, which has been drifting around since the early days of the Internet, shows that at least a few commercial lawyers had covered every eventuality for default:

Assassination and Bankruptcy

How's that for a catchy title?

I was inspired by an interesting post over at Lawfare, where the author notes that the term "assassination" has a specialized meaning in legal circles – namely, it involves an unlawful killing – whereas in the popular imagination the term basically refers to any sort of covert killing, particularly those with national security implications.

"Bankruptcy" is another such term. For lawyers, bankruptcy invokes a legal process to solve overindebteness. In the United States, its a court-supervised process under the Bankruptcy Code.

But in the press and other general contexts, bankruptcy is often used as a synonym for insolvency. Der Spiegel is one of the worst offenders, routinely referring to Greece, the United States, and other sovereigns "going bankrupt."  

"Not possible," I say to myself while reading.

But we can expect a lot more of this loose use of the term going forward, especially as we approach the "cliff." After all, we are told that Social Security, Medicare, and Medicaid are bankrupt, when really all that is meant is that they have become quite expensive, and some would no longer like to pay for these programs.

That's a choice between our national debt and our commitment to certain citizens, it really has nothing to do with bankruptcy.

So then why use the term? And why is the term used so loosely? I think we have to concede that the term is still morally powerful, despite all the rhetoric in 2005 about the decline of bankruptcy's stigma.

When we use the term "bankruptcy" we refer to something that is wrong, and needs to be corrected right away. The key question is whether the term is also being use to dodge or obscure other, more important policy questions.

Stern Warnings from the Ninth Circuit

The Ninth Circuit handed down Executive Benefits Insurance v. Arkinson today. [I want to call it "Bellingham Insurance," or "EBIA," but I leave to the Blogosphere to decide.]  It jumped in as a circuit court opining that bankruptcy judges lack the constitutional authority to enter final judgments in fraudulent conveyance actions (yes, federal ones under section 548 of the Code) -- at least as pled against "strangers" to the estate -- and at least if those strangers' claims are not "inextricably intertwined" with the claims resolution process (or whatever test was gleaned from Stern).

But before the Article I Haters Club celebrates too heartily, I should point out that the entire disquisition, illuminating as it is, is obiter dictum.  This is because the court also held the appellant waived its constitutional argument, and because a "Stern" claim is not a subject-matter jurisdiction issue, it is fully waivable (technically, "consentable" through implied consent through conduct).  Thus, the appellant waived the very objection on which the court superfluously opined.

I don't mind dictum here and there, but it's odd that the Ninth Circuit didn't acknowledge its ruminations were such, especially when in the course of the opinion it dropped a FN to the Seventh Circuit's Ortiz opinion (with which it rightly disagreed) and reminded that that court's Stern discussion was dictum.

Still, dictum from a circuit court will surely make others take notice, especially those under its -- yes -- jurisdiction.  But I do feel compelled to play the role of party-pooper and call out the court for having fun by wandering into a constitutinal quagmire and playing around as a pure academic daliance.  (Isn't that what professors are supposed to do?!)

Right of Publicity as an Asset in Bankruptcy?

A quick post to announce that intellectual property scholar Jennifer Rothman has just published an article that engages with the bankruptcy treatment of the "right of publicity." Painting with the broadest brush, the piece questions the alienability of an identity-holder's right of publicity more generally, and concludes creditors should not be entitled to "own (or control)" a debtor's right of publicity (p.236). For the bankruptcy and commercial lawyers reading this post, or courts confronting questions of creditor entitlement to a debtor's right of publicity, the article contains references to recent court decisions of potential relevance (pp. 199-200) in addition to important arguments on these questions. According to Rothman, there still is no published caselaw explicitly holding that creditors are entitled to the value of a bankruptcy filer's right of publicity. (If Credit Slips readers know of examples that did not result in published decisions, I would welcome a comment below, or a note to [email protected]).

Brains for Hire

Posting again on fiction so soon? Not the original intention, but I recently read a story that skirts around the substantive core of Credit Slips, as well as the fabulous work of sociologist Viviana Zelizer, a past Credit Slips guest. Blame or gratitude can be sent c.o.d. to Charles Yu, a lawyer when he is not writing things like Standard Loneliness Package (also in Yu's recently published collection). The thirty-nine year old narrator receives 12/hour to absorb the pain and bad feelings from wealthy customers who pay 100, 200, 2,000/hour to be devoid of such pain and bad feelings. The price varies for watching a loved one die, a funeral, surgeries, root canal, breakups, firings, quittings, nose dives in the stock market (priced higher than some deaths). The company will not quote a price for death of a child.

Elizabeth Warren & LTV Steel

A bankruptcy case from the 1990s called LTV Steel has amazingly enough become an issue in the U.S. Senate race in Massachusetts.  A bankruptcy case!  Just this week, Senator Scott Brown’s campaign released a web ad insinuating that Elizabeth Warren, who worked on the case, somehow fought against LTV Steel’s employees.  The ad demanded to know, “Who is going to defend her?”  Well, given that Warren’s participation in LTV was to defend an arcane but important principle of bankruptcy law—that serves to protect workers—I guess it falls to bankruptcy academics like us to defend her.  So I accept the invitation.  And where better to post than my Blogosphere Alma Mater?

The bankruptcy law question at issue in LTV is complex, and I will discuss it in some detail below.  But in case nobody reads beyond this paragraph, I should quickly dispatch one patent falsehood that gave me a double-take when I viewed the ad.  The video suggests that Warren was somehow trying to make sure LTV’s workers did not receive retirement benefits.  That is objectively false: the workers’ benefits were covered by a trust fund that was fully solvent at the time of the case.  Nobody in good conscience could argue that Warren was somehow trying to deny workers’ benefits that would be paid from an already-funded trust.  LTV and other companies were quarreling over how much each of them needed to contribute to that fund, and Elizabeth Warren only got involved when a federal appellate court issued a decision in the middle of that fight that proposed a novel (and troubling) interpretation of the Bankruptcy Code. 

The full story should dispel the astonishing claim that Warren was somehow a hired gun who hoped to take benefits away from retirees.  Here’s what actually happened.

In Defense of Bankruptcy Courts (or, Is Bankruptcy Really That Exceptional?)

Although not always acknowledged expressly, exceptionalism is pervasive in bankruptcy scholarship. Some work makes no attempt to contexualize bankruptcy within the federal courts, apparently assuming its unique qualities (for example, the disinterest in most bankruptcy venue scholarship about venue laws applicable to other multi-party federal litigation). But other projects are more deliberate in their exceptionalist pursuits.

A Valuable Resource: NCBRC.org

Sometimes we forget that, with all its flaws, consumer bankruptcy is still a remarkable institution, providing meaningful relief to more than two million Americans a year (counting co-debtors and dependents). The system’s singular feature is that most individuals can find a private attorney to represent them at a relatively low flat fee, typically worth it in light of the benefits of a bankruptcy discharge to most debtors.  In other areas of consumer law, it is much harder for individuals to find a private attorney.  Despite changes in bankruptcy law in 2005 that increased the cost of access to the system, the consumer debtor bar has figured out how to deliver services for reasonable fees.

If the need to appeal arises, however, the affordability equation often breaks down, a problem made worse by the wretched drafting of the 2005 law, creating hundreds of difficult new legal issues.  A debtor in bankruptcy may have a good legal case on appeal but no way to pay a private attorney for the expense of researching and writing a brief and preparing for oral argument.  An appeal adds thousands of dollars of additional cost.  The National Consumer Bankruptcy Rights Center was formed to address this problem, helping to protect debtors’ rights as well as the integrity of the consumer bankruptcy system by making sure that cogent arguments are made at the appellate level.  NCBRC (pronounced Nic-Bric) provides assistance by either working directly with debtors’ attorneys or by filing amicus (friend of the court) briefs in courts throughout the country.

Anyone interested in consumer bankruptcy law should find NCBRC’s web site, www.ncbrc.org, useful as a resource, both for its bank of briefs and its blog about important consumer cases.

Financial Failure Fiction (and Poetry)

If I am not mistaken, it has been a while since Credit Slips has featured discussions of "bankruptcy literature." So I thought I would report that I just finished The Financial Lives of the Poets by Jess Walter, whom Janet Maslin called a "deft humorist and catastrophist" back in 2009. The book is a powerful reminder that literary writers and others in the art and culture worlds have amazing tools to capture the spiral downward and the third-party effects. And behold a writer who dares to use not only the term bankruptcy, but to distinguish between its constituent chapters. Disclosure: this book would not be rated PG (at least in my naive world) and it is deliberately outlandish. Taking it literally could produce extreme lack of sympathy for the indebted financial reporter-poet protagonist. You might like this book if you are a fan of, say, The Information by Martin Amis, The Ask by Sam Lipsyte, or Straight Man by Richard Russo. Readers out there, feel free to share your take on Walter's book (and name any other recent works of fiction that you think do it as well or better). Apparently, the book is being turned into a movie with Jack Black, directed by Michael Winterbottom. 

Regardless of the outcome in the book, let's not give up on the idea of online financial reporting and advice in the form of poetry (making a living on it is a different story). Perhaps one of the Credit Slips gang will be inspired to give it a try on this site? Stay tuned.  

Tribal Bankruptcy

The Wall Street Journal reported last week about a challenge to a bankruptcy filing by the Santa Ysabel Resort and Casino. The casino, located on a reservation outside San Diego, filed a chapter 11 case, listing debts of about $40 million. The bankruptcy filing is being contested by the debtor's lender on the grounds that Native American tribes are sovereign nations and they are cannot use chapter 11. The twist in this case is that the lender raising that argument and trying to get the Resort and Casino tossed out of bankruptcy is itself a federally-recognized Native American tribe, the Yavapai-Apache Nation. It bought the Resort and Casinos' debt from JPMorgan Chase.

When I was in practice I worked on some related issues. For example, whether a tribe who was a creditor of a debtor waived its sovereign immunity by filing a proof claim. The Santa Ysabel case seems to raise much more fundamental issues about the availability of bankruptcy protection. If Santa Ysabel cannot file chapter 11, could it somehow file chapter 15? Would it need its own tribal bankruptcy system to do so? Does it matter whether the resort had incorporated under state law (it apparently is unincorporated)? Does it matter if the resort were not located on tribal land, even if it were wholly owned by a tribe?

Bankruptcy Code in ePub and Kindle Formats

For readers putting together course syllabi in the bankruptcy area, this post is just a reminder that my able research assistant, Scott Cromar, and I put together ePub and Kindle versions of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure. These versions are based on the public domain files available from the U.S. House of Representatives last December, and I intend to do a new version this December. The files are available for free -- no one is making any money off this -- from this old blog post or from the Center for Computer-Assisted Legal Instruction (CALI).

Bankruptcy on the Bar

One of our recent grads tells me that the recent Texas bar exam had a question on bankruptcy law. That got me wondering how many states test bankruptcy law on their bar exam. Two minutes of searching around on Google did not reveal any others, but by then my limited attention span was exhausted.

Except as Provided in the Syllabus, Students Shall Read the Statutory Section (i) Before Coming to Class or (ii) In Class Unless Provided Otherwise

The legal side of what we do requires comprehending dense statutory texts. Law students, however, arrive in our courses after a first year of law school heavily devoted to case law. When I was teaching corporate law, a student once came up after class with a question about  preparing for the final exam. She earnestly explained that she understood "the law" -- it was just the statute she could not understand. Could I recommend a book that explained the statute? The law apparently was what was in the cases in the textbook, with the statute being some sort of aid to understanding the law. No wonder they put those statutes in books called statutory supplements!

In reaction to what I see as an overemphasis on court decisions in many other law school courses, my courses unashamedly emphasize the statutes we cover. For example, is a spouse is an "insider" under the Bankruptcy Code? Here is a hint for my students this upcoming semester -- the answer does not depend on your gut instinct: "relative" is a defined term. Thus, I was initially appalled on Friday when I got an advertisement from Aspen, a law textbook publisher (including of my own textbook on empirical methods in law), asking if I felt guilty about the amount of statutory material I assigned. If so, the new LoPucki and Warren statutory supplement for Bankruptcy Law and Article 9 (of the Uniform Commercial Code) was now available as a VisiLaw marked version that would make "inaccessible statutes accessible." No, I did not feel guilty about assigning too much statutory material -- if anything I wanted to assign more. This new development just seemed like another sign of the pending zombie apocalypse.

My initial reaction, however, was more "ready, fire, aim" than considered judgment. As I learned more about the product, I've decided it is worth a try. At the least, I wanted to write something here to get reactions from practitioners.

What's On at a Courthouse Near You

In addition to a post last week broadly raising visitors' physicial interaction with courts, an earlier post discussed variation in the website availability of daily calendars for U.S. bankruptcy courtrooms. Today's post follows up on this narrower thread for two reasons. First, some who responded privately were interested in hearing what else was discovered. Second, the end of Judith Resnik's recently published Addison C. Harris lecture stresses that public access to court proceedings is more than of merely conceptual importance. While she observes that, "obtaining  a robust audience for courts also requires structural attention," it turns out that "many judges report their courtrooms to be lonely spaces" and "[i]n contrast to the popularity of media shows about courts, real judges often find themselves without an audience."(p. 339) These were not references to bankruptcy court (the lecture recognizes in other places that the nature of bankruptcy work occupies more courtroom time notwithstanding the phenomena of managerial judging and vanishing trials), but tee up the issue raised earlier: why don't all public courts post calendars on their websites? 

Representation and Realities of (Bankruptcy) Court Work

The Yale Journal of Law and the Humanities held a symposium on "Courts: Representing and Contesting Ideologies of the Public Sphere" in 2011, and recently published papers from this event. Some of the contributions to this symposium, especially the piece by Judith Resnik and Dennis Curtis, and the commentary by William Simon, emphasize the potential disconnect between representations of law and justice that might adorn courthouses and the nature of the actual work that goes on inside. Although these scholars did not discuss the bankruptcy court in depth (Simon does mention that scholars have long seen bankruptcy as deviating from traditional models of adjudication), each side of the disconnect may be quite interesting for our purposes.

Some Advice from the IMF: Cramdown Mortgages in Bankruptcy

The International Monetary Fund has focused its critical gaze on us. Just in time for the holiday marking the end of our colonial period, the IMF has completed its "Mission to the United States of America."  See here.  The IMF has held up its neocolonial mirror and found us problematic: "The U.S. recovery remains tepid."  Anyone disagree? Annoying to have outsiders tell us the truth.

There are many recommendations about how we could reinvigorate our economy. Notably, at number 10, there is this:  "Consideration should also be given to allowing mortgages on principal residences to be modified in personal bankruptcy without secured creditors’ consent (cram-downs)."

Happy Independence Day!

Bankruptcy Court Calls

In connection with some ongoing research, I have noticed that U.S. bankruptcy courts have different approaches to informing the public about matters being taken up in open court. Many provide PDFs of court calls on their websites up to several weeks in advance (recognizing that matters settle, are postponed, or can change for other reasons). But on other bankruptcy court websites, it is difficult to find out what's happening on any given day. Might the informed readership of this blog offer reasons that courts refrain from making that information available on their websites? If you'd rather not comment directly on this post, feel free to write me privately at [email protected]. 

Sit Back and RadLAX

I'm having trouble getting excited over RadLAX going before SCOTUS.  Ronald Mann has written that RadLAX "well might be the most important business bankruptcy case since its 1999 decision in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership." I think that statement is literaly true, but that's not saying much; the Supreme Court doesn't hear very many business bankruptcy cases, period.

As it stands, I don't think the outcome in RadLAX is going to have much of an impact on bankruptcy practice on the ground.  If the creditors prevail, the world will look like status quo, say 2009:  credit bidding is allowed in sales under plans (and there will be little reason to teach RadLAX in a bankruptcy course).

If the debtor prevails, then de jure there will be no right to credit bid, but there will be one de facto in most cases (making the case well worth teaching).  If there's a DIP financing agreement, that agreement will almost certainly provide for the DIP lender to have a right to credit bid.  That means a ruling for the debtors will affect a narrow class of creditors and cases.  It will affect secured lenders not in the DIP consortium, and it will affect secured lenders in cases where there is no DIP financing. That's cases financing themselves on cash collateral or unrestricted cash or trade credit or unsecured insider DIP loans.  In other words, no impact whatsoever on the mega-cases.  Maybe a greater impact on middle market. We'll also see syndication agreements including provisions to deal with cash bidding situations.  In other words, a ruling for the debtors in RadLAX is unlikely to result in a major realignment of power in bankruptcy cases.  

Sadly, SCOTUS taking RadLAX (which is reasonable to deal with a circuit split) is a reminder that SCOTUS hasn't addressed the two key issues in Chapter 11:  the use of DIP financing agreements and asset sales as sub rosa plans.  Obviously SCOTUS has to have a proper case to deal with these problems, and SCOTUS generally has discretion on hearing appeals.  The Court could have dealt with this in Chrysler, but because of the macroeconomic impact of Chrysler (via GM), it was not the ideal case for addressing the interaction between the DIP loan, the sale, and the plan. So while it's nice to see a business bankruptcy case before the Court, I don't think too much rides on this one.  

Littwin on Bankruptcy Without a Lawyer

A few weeks ago, Katie Porter noted the release of the new book, Broke: How Debt Bankrupts the Middle Class. We are trying to feature posts from the authors of Broke about their contributions. Today's post comes from Professor Angela Littwin of the University of Texas School of Law and a founding member of Credit Slips:

After a long absence, I am temporarily back on Credit Slips, blogging about my contribution to Broke, the new book edited by Credit Slips’ own Katie Porter. My chapter is about consumers who file for bankruptcy without a lawyer (known as filing “pro se”). The chapter is entitled The Do-it-Yourself Mirage: Complexity in the Bankruptcy System. which should give you a pretty good idea of my take on the matter. Using data from the 2007 Consumer Bankruptcy Project, I found that pro se filers were significantly more likely to have their cases dismissed than their represented counterparts. My most interesting result deals with education. My analysis suggests that consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom. I argue that bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.

This bad news, however, is not the entire story.

The Backdrop for BROKE: Consumer Debt Then and Now

In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle Class,  I present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.

In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?

Consumer Friendly Forms for Bankruptcy

In many respects, bankruptcy is a one-size-fits-all legal process. Yes, there are ample differences in the law (and a world of difference in practice) between the bankruptcy of a large corporation and a typical consumer. But the Bankruptcy Code itself contains plenty of provisions of general applicability. A major example of the one-size-fits-all approach to bankruptcy is the official forms for filing a case. The basic petition and schedules are the same forms for Big Airline Co. and Mr. Joe Blow. The information on the forms is wildly different, with Big Airline Co. listing hundreds or even thousands of creditors, with many more digits in their debts, than Joe Blow. But the form for those debts--Schedule F--is the same form. That may all be changing soon.

The Bankruptcy Rules Committee began a Forms Modernization Project a few years ago, and one of its top agenda items has been creating new forms just for use in consumer bankruptcy cases. Although few people seem to be aware of the effort, a draft version of those new forms is available to the public and to my mind, well worth a look. To see the forms, go here, then click on September 2011, download the file, and look  at pp. 189-315 of the PDF (or tab 7.1 if you use the PDF index.) One thing that is obvious from the page numbers in the prior sentence is that the new forms are really long--way longer than the current forms as completed in the typical consumer case. The added length results in part from the development of extensive instructions for each form. Below is an example of a new form with some commentary on its notable new features.

Race and Chapter 13

As Adam noted in his kind post, the New York Times today featured our study, "Race, Attorney Influence, and Bankruptcy Chapter Choice." My co-authors are Credit Slips blogger Jean Braucher, a law professor at the University of Arizona, and Dov Cohen, a professor at the University of Illinois who holds a cross appointment in psychology and law. And, we all express many thanks to the NYT reporter, Tara Siegel Bernard, who spent a lot of time slogging through the statistics and legal intricacies in our study.

In a nutshell, the study reports real-world data from the Consumer Bankruptcy Project showing that, among bankrupcy filers, blacks file chapter 13 at higher rates than all other races. The effect is large -- for example, blacks even had a higher chapter 13 rate (54.6%) than homeowners (47.1%). The second part of the study showed that, in a random sample, bankruptcy attorneys were more likely to recommend chapter 13 for a hypothetical couple named "Reggie & Latisha" who went to the African Methodist Episcopal Church as compared to "Todd & Allison" who went to the United Methodist Church. Also, attorneys were more likely to see "Reggie & Latisha" as having good values and being more competent when they expressed a preference for chapter 13.

Kindle and ePub Versions of Bankruptcy Code (Updated)

One of my crack research assistants, Scott Cromar, put together electronic versions of the U.S. Bankruptcy Code and Federal Rules of Bankruptcy Procedure (FRBP) that can be read using Amazon Kindle or an ePub reader. Because these books were assembled using public-domain materials from the U.S. government, we are making them available free of charge. Keep reading after the page break for links and more information.

Your Favorite Business Bankruptcy/Restructuring Lingo: A Word of Thanks

Just a word of gratitude to readers for providing great responses to the prior call for corporate bankruptcy lingo. Thanks to your help, UNC Law's advanced business bankruptcy students are collaboratively examining such terms through a wiki and this will help them make an even smoother transition into the professional world. If any new lingo comes to mind, don't hesitate to pass it along! 

Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy

At the end of a lively session yesterday at Duke Law School featuring Professor Stephen Ware of University of Kansas Law School, there was a brief discussion of whether shorter foreclosure timelines and clearer rules would promote more workouts of delinquent mortgages. The aforementioned paper about bankrupt homeowners suggests that the opposite might actually be the case: among homeowners in bankruptcy, longer foreclosure timelines in their home states were associated with a lower probability of foreclosure initiation while shorter timelines were associated with a higher probability of foreclosure initiation.

What is the Relationship Between Credit Cards and Mortgage Delinquency?

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

BROKE: A New Book on Consumer Debt and Bankruptcy

Just in time for New Year's resolutions on 1) reading more, 2) paring back your own debt, and 3) learning more about consumer bankruptcy to help you do your job (if you are a lawyer, judge, or academic, media, etc), the book, Broke: How Debt Bankrupts the Middle Class was released from Stanford University Press.

The book makes extensive use of the 2007 Consumer Bankruptcy Project data, providing statistics, analysis, and commentary on consumer bankruptcy and debt topics. I edited the volume, and chapter contributors are many Credit Slips regulars or guest bloggers--Jacob Hacker, Bob Lawless, Kevin Leicht, Angela Littwin, Deborah Thorne, and Elizabeth Warren--along with other top scholars.

In the next few weeks, the chapter authors will blog here at Credit Slips about the research featured in the book, but to whet your appetite, I've included a table of contents for the book after the break. The book is accessible to lay readers but its scholarly focus provides plenty of data to educate and surprise even bankruptcy experts. Working on the book, I certainly learned a great deal about timely and important topics such as how pro se debtors (those without attorneys) fare in bankruptcy, where families go after they lose their homes to foreclosure, how bankruptcy affects couple's marriages, and the ways that bankrupt households differ in their financial straits from other households of concern such as those with low assets or late payments on debt. Of course I'm biased but I think the book provides the most comprehensive overview of the consumer bankruptcy system since the enactment of the 2005 bankruptcy amendments.

Law of the Chicken

A headline from last Friday's BNA's Bankruptcy Law Reporter, which reports recent cases and other legal developments, caught my eye:

Poultry Farmers Can't Rely on Promissory Estoppel Theory;
Proofs of Claim Denied

That seems like a pretty harsh rule for poultry farmers. I wonder whether it is some sort of corollary to the "widows and orphans rule" -- poultry farmers always lose. Ever since Schechter Poultry was effectively overruled, poultry farmers can't seem to catch a break in the federal courts.

Understanding Anna Nicole Smith (or, at least, Stern v. Marshall): A Must-Read Analysis

Led by my colleague Elizabeth Gibson, four members of the National Bankruptcy Conference have produced a fantastic analysis of the Stern v. Marshall U.S. Supreme Court decision (that most recently has been mentioned on Credit Slips here and here). I strongly recommend it for judges, lawyers, academics and others interested in the bankruptcy system and/or federal court jurisdictional questions.    

In or Out of Mortgage Trouble? A Study of Bankrupt Homeowners

This is a newly published paper  in the American Bankruptcy Law Journal that I was lucky to work on with Daniel McCue and Eric Belsky at the Joint Center for Housing Studies at Harvard University. Using previously unexamined data in the 2007 Consumer Bankruptcy Project, we study what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. Although much can be said about the econometric analysis, for now I wanted to mention quickly that the paper includes descriptive details about bankrupt homeowners (debtor-reported) such as numbers of missed mortgage payments, use of adjustable rate mortgages, mortgage broker use, mobile homes, and refinancing or home equity lines of credit. So please check it out!   

Anna's Revenge, Episode I

We may be beginning to see the fallout from Stern v. Marshall, the Supreme Court case on bankruptcy jurisdiction courtesy of Anna Nicole Smith's bankruptcy. Last week, the U.S. Court of Appeals for the Seventh Circuit issued a broad decision that would call into question the power of the bankruptcy court to hear many state-law defenses to creditor's claims in bankruptcy. To the best of my knowledge, this is the first court of appeals decision applying Stern.

The Seventh Circuit, in a case called In re Ortiz, held the bankruptcy court could not hear claims that a health care company had violated Wisconsin state law by making bankruptcy court filings containing private medical information of bankruptcy debtors. The irony is that the bankruptcy court had found the debtors had failed to establish a claim under state law, thus making the Seventh Circuit's decision a victory for the debtors involved in that particular appeal. For other bankruptcy debtors, however, the Seventh Circuit's decision could hinder their ability to assert state-law defenses such as violations of state UDAP laws (unfair deceptive acts and practices laws).