BankruptcyProf Blog

Happy New Year

I want to wish my readers a happy and prosperous new year and thank everyone for the comments, both on the blog and on the street, in the yard, in court.  Three of my kids graduated from college this year - don't ask me how that happened - they are each about a year apart from the other.  But I'm ready to become a couch potato and spend my time writing, especially on the Supreme Court and Bankruptcy.  I suspect I'm going to have to put that off for a while however since I expect Congress to pass a law early in 2009 which will allow homeowners to write down their mortgages and pay the new loan balance over 30-40 years at a reasonable interest rate.  When that happens, there is going to be a staggering number of new chapter 13 filings.  I would bet it will be double last year.  Persons who never would have considered bankruptcy will file as the benefit will be so huge.  That's what I do for a living when I'm not in the classroom.  That's how I make my own house payment.  I have hired a couple of law clerks to make sure I am ready.  I think its a completely appropriate response to the problems today.  Lenders will not get more than the value of the home anyway when they foreclose and will not get more than current interest rates when they re-lend the money from the foreclosure sale.  So why not let the homeowner do that and keep their home?  I digress - again - Happy New Year.

Jon Hayes 

Circuit Court of Appeals Cases from Last Week

9th Circuit Court of Appeals, December 24, 2008
McGuire v. US, --- F.3d ---, 2008 WL ---- (9th Cir. 2008)(district court lacked jurisdiction to entertain a bankruptcy debtor's Tucker Act claims because of soverign immunity)

Heller Ehrman First Day Declaration

The First Day Declaration of Peter Benvenutti can be accessed here.  The 118 year old "firm" is in dissolution and seems to have far more accounts receivable and other assets than debts but the Bank of America got cold feet and grabbed the $5 million in the bank and a landlord got a writ of attachment for another $5 million so the chapter 11 is off and running.  The declaration explains that the bank's lien may not have been properly perfected and is therefore a preference since it tried to fix the mistake within the preference period.  There are also issues with "retention bonuses," and the like. 

Heller Ehrman Files Chapter 11 in San Francisco

U.S. Bankruptcy Court
Northern District of California (San Francisco)
Bankruptcy Petition #: 08-32514

Assigned to: Judge Dennis Montali   Chapter 11
Date Filed: 12/28/2008 

Debtor
Heller Ehrman LLP, Debtor
333 Bush Street
San Francisco, CA 94104
Tax id: 94-1217308
fka
Heller, Ehrman, White & McAuliffe, LLP

represented by  John D. Fiero
Pachulski, Stang, Ziehl, Young and Jones
150 California St. 15th Fl.
San Francisco, CA 94111-4500
(415) 263-7000
Email: jfiero@pszyjw.com

Responsible Ind
Peter J. Benvenutti
Heller Ehrman White and McAuliffe
333 Bush St.
San Francisco, CA 94104-2878
(415) 772-6000

U.S. Trustee
235 Pine St
Suite 700
San Francisco, CA 94104
(415) 705-3333 

5th Circuit Rules Against Attorneys re Debt Relief Agency Rules

Hersh v. USA,  --- F.3d ----, 2008 WL 5255905 (5th Cir. December, 2008)

Issue:   1.  Do the debt relief agency ("DRA") rules apply to attorneys?  2.  Are the provisions of the DRA rules in 526(a)(4) which restrict speech unconstitutional?   3.  Are the provisions of the DRA rules 527(b) which require certain statements to be provided to the debtor unconstitutional?                     

Holding:    1.  Yes,  2.  Yes,   2.  No. 

Hersh is a consumer bankruptcy attorney who filed this case in district court.  “Hersh argued that sections 526(a)(4) and 527(b) violate the First Amendment right to free speech and her clients' Fifth Amendment right to counsel in a civil case.  In this appeal, Hersh challenges the applicability of the BAPCPA to bankruptcy attorneys by arguing that attorneys do not qualify as ‘debt relief agencies’ as that term is defined in the act.  She also argues that 11 U.S.C. §§ 526(a)(4) and 527(b) are unconstitutional in violation of the First Amendment.”  The district court ruled on summary judgment that attorneys are DRA under the plain language of the statute and “that section 526(a)(4) violates the First Amendment because it ‘imposes limitations on speech beyond what is ‘narrow and necessary.’”  “Hersh argue[d] that section 527(b) violates the First Amendment by compelling her to provide factual information to her clients that is false and misleading, even when it is not pertinent to her client.”
The district court “dismissed Hersh's challenge to section 527(b) because the statute ‘advances a sufficiently compelling government interest and does not unduly burden either the attorney-client relationship or the ability of a client to seek bankruptcy.’”

The Court of Appeals affirmed that attorneys are DRA but reversed the ruling that 526(a)(4) is unconstitutional.  It affirmed the dismissal of the 527(b) claim.  The opinion largely restates the opinion of the 8th Circuit in Milavetz and adopts the dissent there as to the speech issue.  It adds that “the legislative history of the BAPCPA indicates that Congress intended the act to apply to attorneys as the House Report for the BAPCPA refers to attorneys multiple times.”

As to the issue of free speech in 526(a)(4), the court agreed with the dissent in Milavetz.  “We hold the doctrine of constitutional avoidance should be applied to section 526(a)(4) to avoid any of the potential constitutional problems with this statute that have been raised by Hersh.”  “If interpreted literally and broadly, section 526(a)(4) would raise serious constitutional problems because, as Hersh suggests, it would restrict some speech that is protected by the First Amendment.”  “Hersh does not dispute that section 526(a)(4), even when read literally, does prohibit some speech that Congress can regulate without violating the First Amendment.”  “To avoid potential constitutional questions regarding section 526(a)(4)'s restrictions on speech, this court construes the statute to prevent only a debt relief agency's advice to a debtor to incur debt in contemplation of bankruptcy when doing so would be an abuse of the bankruptcy system.”  “Under this court's construction of section 526(a)(4), it is clear that the potential for the statute to prohibit protected speech is not by any means substantial in relation to the statute's legitimate reach.”

As to the requirement in 527(b) that the DRA give the statement set forth in that section to a debtor, the court said “The statute merely sets forth a list of information about bankruptcy proceedings that a debt relief agency-acting in return for the payment of money or other valuable consideration-must provide to its clients who are ‘assisted persons.’ It does not limit the amount of information that the debt relief agency can provide, so the debt relief agency is free to expand upon, clarify, or even express disagreement with any of the provisions in the required statement.  Furthermore, because section 527(b) provides that the statement should be given to the client ‘to the extent applicable,’ if the debt relief agency feels that some of the provisions of the statement are not relevant to its client, it can omit the irrelevant information. This language also provides great leeway for debt relief agencies deciding whether it is necessary to provide a client with the statement at all. If, for example, Hersh represents a creditor who qualifies as an ‘assisted person,’ section 527(b) only requires her to present the creditor with the statement if it is ‘applicable’ to that client.”  “Furthermore, contrary to Hersh's arguments, section 527(b) does not require Hersh or other debt relief agencies to make false and misleading statements. Most of the statements that Hersh cites as examples of false and misleading material are simply generalizations that she is free to expand upon and clarify for her clients. For example, Hersh complains that the assertion in the statute that her client ‘will have to pay a filing fee to the bankruptcy court’ is misleading because the fee can be deferred under Federal Rule of Bankruptcy Procedure 1006(b). Hersh is completely free to explain to her client the deferral options.”   

Chase Home Finance - Getting Any Bailout Funds?

An email today from consumer bankruptcy attorney Kenneth J. Schwartz:

Reality check needed here, please. In today's mail, I received 11 letters from Chase Home Finance LLC. advising me that on various clients' Chapter 7 cases, Chase will not send statements (despite my written request that it do so) or report the status of the loans for credit purposes unless my clients reaffirm the debts. As far as I am concerned, reaffirmation is not an option, so how are you other folks responding to this?

Law Ofc Kenneth Jay Schwartz
21031 Ventura Blvd 12th FL
Woodland Hills, CA, 91364

On Company Jets

AIG is not giving up any of its seven private jets even though it has acepted $150 billion from us folks.  It sold two of its jets and has cancelled orders on four more in an effort to tighten its belts.  So says the Associated Press in its article "Wall Street Still Not Downgrading to First Class."   J. Robert Brown has some great comments on this issue and the "toothlessness" of the executive compensation restrictions in the bailout.  See Brown's comments on his December 22 and 23rd posts.  For example, the CEO of Circuit City used the company jets for personal use to the tune of $100,000 in 2007 as disclosed in its 2008 Proxy Statement.   

Circuit Court of Appeals Cases from Last Week

2nd Circuit Court of Appeals, December 16, 2008
In re Ades & Berg Group Investors, ---- F.3d ---, 2008 WL ------- (2nd Cir. 2008)(courts should "act very cautiously" in applying constructive trust law in the context of bankruptcy. Recognizing different equities in bankruptcy versus nonbankruptcy contexts is a permissible transformation of the substantive law)

10th Circuit Court of Appeals, December 15, 2008
In re Hunt, ---- F.3d ---, 2008 WL ------- (10th Cir. 2008)(debtors' conversion from Chapter 13 to Chapter 7 mooted the appeal - issue was negative-equity in section 1325(a))

Thanks to Findlaw.com

Prof. Jean Braucher, University of Arizona, Article on BAPCPA

This new article, entitled "A Guide to Interpretation of the 2005 Bankruptcy Law," is a great summary of the various shortcomings of BAPCPA.  The article can be accessed here.  The comment I enjoyed reading most is

"[T]he 2005 law has at least temporarily reduced access to bankruptcy because of increased costs due to new uncertainty, paperwork and hoop-jumping."

"The effect of the new law is primarily to raise the price of access to bankruptcy, thus deterring and delaying filing, perhaps particularly among the poorest debtors, not a purpose of the legislation.  The unfortunate result is that more of the overindebted remain in the "sweat box of consumer credit" for longer, even when they lack the means to work their way out of debt without bankruptcy, leaving creditors able to collect in part in the meantime."

Auto Bailout Term Sheets

This is some pretty interesting stuff.  The Term Sheet - 14 pages and an appendix - for the $13 billion loan to GM and the $4 billion to Chrysler can be accessed here.  They have to give up the private airplanes, reduce and limit salaries to the top 25 executives, and a lot of other stuff, i.e. like not sell anything for more than $100 million without prior notice to the government.  What I like especially is that they have to provide weekly "status reports" to the "lender," i.e., the US Treasury, and bi-weekly "liquidity status reports," and two monthly "certifications."  I assume that the additional cost to do those reports will eat up the saving on the airplanes and salaries.  Also we will need a whole new bureaucracy to read all these reports and write memos to each other about what they say.  I may be getting a little crusty with age - I know.   

Polaroid Files Chapter 11 in Minnesota

US Bankruptcy Court District of Minnesota (Minneapolis)
Bankruptcy Petition #: 08-46617

Assigned to: Judge Gregory F Kishel
Chapter 11   
Date Filed: 12/18/2008 

Debtor
Polaroid Corporation
4400 Baker Road
Minnetonka, MN 55343

represented by  James A. Lodoen
Lindquist & Vennum P.L.L.P
4200 IDS Center
80 South Eight Street
Minneapolis, MN 55402
612-371-3234
Email: jlodoen@lindquist.com

Polaroid's Motion for Use of Cash Collateral can be accessed here.  It seems Polaroid is owned by one Petters Group Worldwide, owned in turn by one Thomas J. Petters, newly arrested and indicted on "numerous fraud and other charges."  The Motion alleges that Petters caused Polaroid to "very recently" pledge its assets "to secure substantial debts and investments for which Polaroid received no or inadequate consideration."  It is having difficulty getting financing - duh.   According to the motion, Polaroid intends to sell "the Polaroid business and related assets." 

Consumer Bankruptcy Attorneys Program on New Local Rules

GENERAL MEMBERSHIP ASSEMBLY & ELECTION OF OFFICERS FOR 2009

January 24, 2009 at 10:00 a.m.

New location:

Southwestern Law School
3050 Wilshire Boulevard
Los Angeles, CA 90010

MCLE Program, Co-Sponsored by Southwestern Law School, will follow at 11:00 a.m.

“NEW LOCAL BANKRUPTCY RULES FOR THE CENTRAL DISTRICT”

Speakers:
Hon. Judge Thomas Donovan
David Tilem, Esq.

*CDCBAA certifies that an application is pending for approval for this activity for MCLE credit by the State Bar of California and Legal Specialization Credit in Bankruptcy Law by Board of Legal Specialization of the State Bar of California.

Other Upcoming Events:

February 21, 2009               
MCLE: “Annual Case Review” to be presented by the Hon. Judge Meredith Jury and Professor M. onathan Hayes

Organizational Meetings Coming Up in Delaware

December 19, 2008	12:00 p.m.	08-13256 (CSS)	EZ Lube LLC	J. Caleb Boggs Federal Building 844 King Street, Room 2112 Wilmington, DE 19801
December 18, 2008	10:00 a.m.	08-13141 (KJC)	Tribune Company, et al.	The Hotel DuPont 11th & Market Streets King/Sullivan Room Wilmington, DE 19801

Supreme Court Accepts New Bankruptcy case

It's actually a pair of cases:  Travelers Indemnity Co. v. Bailey and Common Law Settlement Counsel v. Bailey.  The cases arise out of the Johns-Manville asbestos cases.  The issue is whether new lawsuits being filed by claimants directly against insurers are barred by the Plan of Reorganization and a subsequent settlement between the insurers and claimants.  Some claimants did not agree to the settlement but the bankruptcy court and a federal District Court made clear that the lawsuit ban in the 1986 reorganization plan did apply to such lawsuits — present and future — against Travelers.  Those rulings were reversed by the circuit court of appeals saying that the bankruptcy court did not have jurisdiction in 1986 to stop the lawsuits directly against the insurers.

A complete summary can be found on Scotusblog.com 

US Trustee Position Available in Riverside, California

You can access the announcement here. 

SALARY RANGE: $112,341 to $145,500 USD per year

OPENING DATE: December 12, 2008  CLOSING DATE: December 29, 2008 

DUTY LOCATION:  U.S. Trustee Program, Riverside, California, 92501

DUTIES: The incumbent is responsible for the administrative and legal management of the
Region 16's Riverside Field Office of the United States Trustee's Office, including the supervision of personnel assigned to the office; the implementation of civil enforcement strategies to combat fraud and abuse in the bankruptcy system; the enforcement of the  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005;  the administration of cases filed under chapters 7, 11, 12, and 13 of the Bankruptcy Code; representing the United States Trustee in court; maintaining and supervising a panel of private trustees; and ensuring that violations of law are referred to the United States Attorneys for possible prosecution.

CONTACT INFORMATION:

POINT OF CONTACT:         Annette Soule, Administrative Officer
CONTACT PHONE:             213.894.0425
CONTACT E-MAIL:            Annette.Soule@usdoj.gov

Circuit Court of Appeals Cases for Last Week

5th Circuit Court of Appeals, December 09, 2008
Beitel v. OCA Inc., --- F.3d ---, 2008 WL ----- (5th Cir. 2008)(motion to set aside or to vacate the default judgment requires preponderance-of-the-evidence standard when assessing willfulness)

Thanks to Findlaw.com

New House Bill on Modifying Home Mortgages

110th CONGRESS  2d Session  H. R. 7328
December 10, 2008
Mr. CONYERS (for himself, Mr. DELAHUNT, and Mr. NADLER) introduced the following bill; which was referred to the Committee on the Judiciary

SEC. 2. WAIVER OF COUNSELING REQUIREMENT WHEN HOUSES ARE IN FORECLOSURE.
Section 109(h) of title 11, United States Code, is amended by adding at the end the following:
`(5) The requirements of paragraph (1) shall not apply in a case under chapter 13 with respect to a debtor who submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor's principal residence may commence a foreclosure on the debtor's principal residence.'.
SEC. 3. AUTHORITY TO MODIFY CERTAIN MORTGAGES.
Section 1322(b) of title 11, United States Code, is amended--
(1) by redesignating paragraph (11) as paragraph (12),
(2) in paragraph (10) by striking `and' at the end, and
(3) by inserting after paragraph (10) the following:
`(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a debt for a loan secured by a security interest in the debtor's principal residence that is the subject of a notice that a foreclosure may be commenced, modify the rights of the holder of such claim--
`(A) by reducing such claim to equal the value of the interest of the debtor in such residence securing such claim;
`(B) by waiving any otherwise applicable early repayment or prepayment penalties;
`(C) if any applicable rate of interest is adjustable under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan; and
`(D) by modifying the terms and conditions of such loan--
`(i) to extend the repayment period for a period that is the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter; and
`(ii) to provide for the payment of interest accruing after the date of the order for relief under this chapter at an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and'.
SEC. 4. COMBATING EXCESSIVE FEES.
Section 1322(c) of title 11, the United States Code, is amended--
(1) in paragraph (1) by striking `and' at the end,
(2) in paragraph (2) by striking the period at the end and inserting a semicolon, and
(3) by adding at the end the following:
`(3) the debtor, the debtor's property, and property of the estate are not liable for a fee, cost, or charge that is incurred while the case is pending and arises from a debt that is secured by the debtor's principal residence except to the extent that--
`(A) the holder of the claim for such debt files with the court notice of such fee, cost, or charge before the earlier of--
`(i) 1 year after such fee, cost, or charge is incurred; or
`(ii) 60 days before the closing of the case; and
`(B) such fee, cost, or charge--
`(i) is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable
security agreement; and
`(ii) is secured by property the value of which is greater than the amount of such claim, including such fee, cost, or charge;
`(4) the failure of a party to give notice described in paragraph (3) shall be deemed a waiver of any claim for fees, costs, or charges described in paragraph (3) for all purposes, and any attempt to collect such fees, costs, or charges shall constitute a violation of section 524(a)(2) or, if the violation occurs before the date of discharge, of section 362(a); and
`(5) a plan may provide for the waiver of any prepayment penalty on a claim secured by the debtor's principal residence.'.
SEC. 5. CONFIRMATION OF PLAN.
Section 1325(a) of title 11, the United States Code, is amended--
(1) in paragraph (8) by striking `and' at the end,
(2) in paragraph (9) by striking the period at the end and inserting a semicolon, and
(3) by inserting after paragraph (9) the following:
`(10) notwithstanding subclause (I) of paragraph (5)(B)(i), the plan provides that the holder of a claim whose rights are modified pursuant to section 1322(b)(11) retain the lien until the later of--
`(A) the payment of such claim as reduced and modified; or
`(B) discharge under section 1328; and
`(11) the plan modifies a claim in accordance with section 1322(b)(11), and the court finds that such
modification is in good faith.'.
SEC. 6. DISCHARGE.
Section 1328 of title 11, the United States Code, is amended--
(1) in subsection (a)--
(A) by inserting `(other than payments to holders of claims whose rights are modified under section
1322(b)(11)' after `paid' the 1st place it appears, and
(B) in paragraph (1) by inserting `or, to the extent of the unpaid portion of the claim as reduced, provided for in section 1322(b)(11)' after `1322(b)(5)', and
(2) in subsection (c)(1) by inserting `or, to the extent of the unpaid portion of the claim as reduced,
provided for in section 1322(b)(11)' after `1322(b)(5)'.
SEC. 7. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.
(a) Effective Date- Except as provided in subsection (b), this Act and the amendments made by this Act shall take effect on the date of the enactment of this Act.
(b) Application of Amendments- The amendments made by this Act shall apply only with respect to cases commenced under title 11 of the United States Code on or after the date of the enactment of this Act.

KB Toys First Day Declaration

This is one of the less useful first day declarations.  I wish the author would have told us about him and how he got the job and who he is.  This is fun!  I get to be the judge.  The declaration can be accessed here. 

The timing of this filing is particularly peculiar.  Retailers, especially toy sales I assume, make about 250% of their annual profit in December. I am completely guessing on the amount but the chain I worked for in law school had a huge loss the other 11 months.  We always barely hung on until December.    

KB Toys, Inc. Chapter 11 Filing

U.S. Bankruptcy Court
District of Delaware (Delaware)
Bankruptcy Petition #: 08-13269-KJC

Assigned to: Kevin J. Carey Chapter 11

Date filed:   12/11/2008

Debtor KB Toys, Inc., a Delaware corporation, et al. 100 West Street Pittsfield, MA 01201 Tax ID / EIN: 94-3380658	represented by	Joel A. Waite Young, Conaway, Stargatt & Taylor The Brandywine Bldg. 1000 West Street, 17th Floor PO Box 391 Wilmington, DE 19899-0391 302 571-6600 bankfilings@ycst.com Matthew Barry Lunn Young, Conaway, Stargatt & Taylor
U.S. Trustee United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035 302-573-6491

Bankruptcy Filing Statistics for the Central District of California

It looks like we will have about 65,000 filings (about 3,200 for each of the 20 judges here) in the calendar year 2008 compared to 34,000 last year.  You can access the statistics here.  What surprises me is that the 2008 filings are higher than 2004.  As I have posted earlier, total filings in the country are still about one-third less than total filings in 2004. 

There were 724 chapter 11 filings in the whole district through early December, 2008.  It seems that Delaware gets that many every week and for seven judges. 

There was a funny comment on the Credit Slips blog.  Someone asked how many filings were expected for 2009 and someone answered "about 1.2 million unless Congress permits adjustment of home mortgages, then about 2.5 million."