May 2, 2009
Chrysler Bankruptcy Case Website
Treasury's Summary of Chrysler Restructuring and Chrysler-Fiat Alliance
Here is a nice summary of the Chrysler restructuring plan from the U.S. Treasury. Chicago attorney Steve Jakubowski analysis also is well worth the time. His blog can be accessed here.
May 1, 2009
Chrysler First Day Declarations
These are really interesting. I smell a book in this if I don't go broke paying PACER. The declarations can be accessed here: Frank Ewasyshyn; Robert Manzo; Scott Garberding; Peter Grady; Thomas LaSorda (I didn't make that name up): James Arrigo, and John Schenden. These tell the real story about what's been going on and what led up to the filing. There is also a little turf protection in there.
April 30, 2009
Cal Bar Insolvency Law Committee Writing Competition 2009 Winner Announced
Ali Matin, from my alma mater, Loyola Law School, is the winner of the 2009 Writing Competition hosted by the Business Law Section of the California Bar Assn. The article entitled "Phantom Home Mortgage Deductions on Chapter 7 Means Tests: Why Bankruptcy Courts’ Treatment of Secured Debt Payments is Contrary to Legislative Intent and Against Public Policy" can be accessed here. The argument is that persons who are not paying their mortgages should not be entitled to deduct the payments on the means test. I smell a big firm creditor lawyer in the making. My view is that Congress makes the law and 707(b)(2) says a debtor may deduct "The debtor's average monthly payments on account of secured debts shall be calculated as the sum of - (I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition." If Congress didn't mean that, they should correct it and the 100 other mistakes they made. Since almost everyone passes the means test anyway, all the logic in the world about the equities and fairness are beside the point.
Anyway, 707(b)(3) says that if a debtor passes the means test, the court still can dismiss the case based on the totality of the circumstances. Several judges have ruled that secured payments you are not going to make is a factor in determining if the filing was an abuse and I have been told that the US Trustee will file motions to dismiss in these cases.
But huzzah to Mr. Matin for a good article and a nice explanation of the means test.
Chrysler Chapter 11 in New York
U.S. Bankruptcy Court Southern District of New York (Manhattan)
Bankruptcy Petition #: 09-50002-ajg
Assigned to: Judge Arthur J. Gonzalez
Date filed: 04/30/2009
1000 Chrysler Drive
Auburn Hills, MI 48326
Tax ID / EIN: 38-267362
represented by Corinne Ball
222 East 41st Street
New York, NY 10017
Fax : (212)755-7306
United States Trustee
33 Whitehall Street
New York, NY 10004
Meet Corinne Ball, Chrysler's Bankruptcy Attorney
Chrysler to File Bankruptcy Today - Washington Post Article (and all over the Radio all morning)
Its 9:00 a.m. Los Angeles time and this is old news already. The Washington Post article is here. The problem with informal workouts is that one creditor hold out will prevent the deal from getting done. I assume the hedge funds who are objecting believe they will get a better deal in bankruptcy. Chrysler (and its mother - the U.S.) believes that the bankruptcy court will approve the agreement over the hedge fund's objection because its better for the creditors than a liquidation. That is always the test and it comes down to property values and trials in bankruptcy over confirmation of plans are often gigantic valuation battles. I just wish the news pundits would stop saying that "the public may stop buying Chryslers because of the bankruptcy." The more the public hears that, the more nervous it will get - not because of the bankruptcy but because the news has scared them off. Just my 10 cents worth.
The Reuters article is here. Thanks to my son Desmond.
April 29, 2009
4th Circuit Rules that Auto Lender has Purchase Money Security Interest Even in Negative Equity Portion of Loan
Brief by Roksana Moradi, third year student at University of West Los Angeles School of Law.
Wells Fargo Fin. Acceptance v. Price, --- F.3d ---, 2009 WL 975796 (4th Cir. 2009)
ISSUE: Does a creditor have a “purchase money security interest” for the portion of its claim relating to negative equity?
Circuit Judge Wilkinson,
Debtors Telephius and Shawana Price bought a 2001 Lincoln from Capital Mazda in North Carolina. Debtors purchased the Lincoln on secured credit financed by Capital Mazda who subsequently assigned the contract to Wells Fargo. They put down $1,400 and traded in their 1997 Nissan Maxima. Debtors had purchased the Nissan on credit, and still owed $5,500.00 to their previous lender. The contract for the Lincoln therefore included financing for "negative equity.”
Almost one year later the Prices filed a Chapter 13. Their Chapter 13 plan proposed to bifurcate Wells Fargo’s claim under Section 506(a): a secured claim for the present value of the Lincoln and an unsecured claim for the remainder. Wells Fargo objected arguing that the "hanging paragraph" protected its claim from bifurcation because that claim was secured by a "purchase money security interest."
The bankruptcy court ruled that the meaning of "purchase money security interest" in the hanging paragraph depended on state law and therefore, under North Carolina law, the negative equity and gap insurance components of the contract did not give rise to a purchase money security interest.
On appeal, the district court agreed but applied the "dual status rule" and held that Wells Fargo did have a purchase money security interest for the part of its claim that did not relate to negative equity and gap insurance.
The Fourth Circuit reversed both the bankruptcy court and the district court. In Chapter 13, the debtor has the option of retaining his property over the objection of a secured creditor. In return, the secured creditor retains its lien on the collateral, and the debtor must pay the present value of the creditor’s "allowed secured claim" over time. Section 506(a)(1) provides that the value of the allowed secured claim is equal to the value of the collateral. Thus, if the secured creditor’s claim is for more than the collateral’s value, Section 506(a)(1) requires the bifurcation of the claim into two components: a secured claim for the value of the collateral, and an unsecured claim for the balance. Bifurcation of the secured creditor’s claim is sometimes characterized as "stripping down" the secured claim to the collateral’s value.
In 2005, Congress amended Chapter 13 by adding the "hanging paragraph" (so called because the paragraph is unnumbered) to Section 1325(a). The effect of the hanging paragraph is to prevent the bifurcation of certain secured claims when confirming a debtor’s plan under Section 1325(a)(5). The text of the hanging paragraph provides: For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
The hanging paragraph does not define the term "purchase money security interest." The Court of Appeals looked to state law to define those terms. In North Carolina, a "purchase-money security interest" in goods is defined as a security interest in goods that are "purchase-money collateral," which is in turn defined as goods that secure a "purchase-money obligation." So the important question for the court’s purposes was the definition of a "purchase-money obligation." To constitute a purchase-money obligation, the debt must be "incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used."
Wells Fargo claimed that the Prices incurred the portion of the debt relating to negative equity "for value given to enable the [Prices] to acquire rights in or the use of the [new car]," and that the value was "in fact so used." The Court of Appeals agreed in that the value from Capital Mazda used to pay off the Prices’ negative equity "enabled" the Prices to acquire the new vehicle and held that the entire debt was secured by a purchase money security interest that Wells Fargo’s claim was therefore protected from bifurcation by the hanging paragraph. The negative equity financing was integral to the whole transaction in which the new vehicle was purchased. All of the Prices’ debt to Wells Fargo was incurred at the same time, in the same contract, and for the same purpose: acquiring the new car. Therefore, Wells Fargo’s claim was entirely a “purchase money obligation.”
April 27, 2009
Supreme Court Grants Cert on Exemptions Case, Schwab v. Reilly
Today, per ScotusBlog.com, the Supreme Court granted cert in Schwab v. Reilly, Docket: 08-538, to be argued next term.
Issue (grant limited to questions one and two):
1. When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, is the exemption limited to the specific amount claimed, or do the numbers being equal operate to “fully exempt” the asset, regardless of its true value?
2. When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, must a trustee who wishes to sell the asset object to the exemptions within the thirty day period of Rule 4003, even though the amount claimed as exempt and the type of property are within the exemption statute?
The Third Circuit Court of Appeals ruled for the debtor saying:
We decide whether a Chapter 7 trustee who does not lodge a timely objection to a debtor’s exemption of personal property may nevertheless move to sell the property if he later learns that the property value exceeds the amount of the claimed exemption. Where, as here, the debtor indicates the intent to exempt her entire interest in a given property by claiming an exemption of its full value and the trustee does not object in a timely manner, we hold that the debtor is entitled to the property in its entirety.
Given the Supremes propensity for reversing circuits, this might not be good. You can access the 3rd Circuits opinion here.
April 26, 2009
Chapter 13 Audited Annual Report for FY 2008
You can access the report here, more statistics than the feeble mind like mine can comprehend - by district and even by trustee!. The report is dated April 24, 2009.
188 trustees across the country collected $5.2 billion. Distributions were (very roughly) $2.7 billion to secured creditors; $260 million to priorty creditors; $1.2 billion to unsecureds; and $472 million to debtor's counsel. The trustees' actual expenses of operations were $253 million plus $32 million compensation for the trustees. There were 756,874 cases open at the end of the fical year.