BankruptcyProf Blog

FIU Law Review Invite

Dear Mr. Hayes,
    My name is Joseph Van de Bogart, and I am the Executive Symposium Editor for the Florida International University Law Review. I am currently in the process of preparing our Fall/Winter 2009 book on emerging issues in bankruptcy law.  Considering your organization and the extensive expertise and experience of your members, on behalf of our law review, we would like to inquire as to whether you know of any interested authors.
    The members of the FIU Law Review Editorial Board decided to pursue this topic area because of the ever-increasing importance of bankruptcy proceedings in the global economy and in consideration of the current financial crises.  I am honored to be putting together the Fall 2009 book and to have the opportunity to work with tremendously talented individuals.
    We hope you will agree to send out this invite to your members.  While they would be  free to write on any topic of their choosing, example topics include how bankruptcy is changing due to the financial crisis, how bankruptcy law is applied in your jurisdiction, cross-border insolvency issues, or any other issue in bankruptcy law that you find of interest.    We look forward to hearing from you.  Please feel free to contact me via email at josephvandebogart@gmail.com or by phone at 954-258-9261.
    Sincerely,
    Joseph Van de Bogart
    FIU Law Review
    Executive Symposium Editor
    josephvandebogart@gmail.com

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.         

Prepackaged Chapter 13s?

"The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach" by Eric Posner and Luigi Zingales can be accessed here.  They propose

"what we call a prepackaged Chapter 13 bankruptcy, in which the mortgage is automatically readjusted in line with the decline of housing prices in the homeowner’s ZIP code. The homeowner ends up with positive equity in his house, so that he will either maintain the house or sell it outside foreclosure, and the creditor ends up with a claim of greater value than the foreclosure price of the house. Because both parties are made better off, the cost of credit should not increase in the long run; and taxpayers do not have to subsidize the scheme." 

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."

Bainbridge on Twenty Years of Law Teaching

Professor Steven Bainbridge's article, Reflections on Twenty Years of Law Teaching can be accessed here.  I have always been a "soft socratic" teacher, as Prof. Bainbridge describes it, and will remain so.  Bainbridge discusses whether law school teaches students how to think like lawyers.  I have no doubt about it.  Even the most inattentive students who spend the minimum amount of time studying (usually at the end of the semester as panic sets in) learn the basic rules on the subject and can spew them back on the test.  But ask the student in class whether or not the federal court will have jurisdiction if I sue my former client who lives in Florida, their eyes glaze over, they panic trying to find those rules on their laptop while I am waiting for some analysis.  The rules on personal jurisdiction, subject matter jurisdiction and venue, which I have spent hours discussing, become a jumbled mess when finally put into a very simple fact hypothetical.  A big part of that is a lack of effort, but a big part is that students have difficulty thinking like a lawyer.  It is something that is learned.  I tell my students to stop thinking like a law student and start thinking like a lawyer.  A law student searches for "issues," usually as many as possible, or at least as many as there are rules that they remember.  A lawyer trys to solve Joe's problem, the guy sitting in his office spewing out facts in random order, which must be assimilated into the rules, and a conclusion reached and advice given to help Joe solve his problem.  Ah! IRAC.  It works.

Having said all of that, I am mindful that professors these days are using power point more and posting recordings on blogs or school websites and assigning cases to students in advance and various other "new" teaching strategies.  I'm working to learn and use these; the goal really is to prepare interested and motivated persons to become lawyers.  It is a goal I enjoy.   

Chapter 11 Analysis from Profs Warren and Westbrook

This article, "Chapter 11: Conventional Wisdom and Reality," with more mind-boggling data, is about a year old but has some really useful information on the uses and successes of "a cross-section" of chapter 11 cases.  The total assets in the cases studied range from $13 (dollars) to $19 billion.  The article can be accessed here. 

The facts that struck me are:

• 70% of the cases, where the debtor proposes a plan, result in a confirmed plan.
• 47% of all cases not "booted out" within six months result in a confirmed plan.
• 82% of small business cases which confirmed a plan did not do so within six months, i.e., the new times limits of BAPCPA create serious risk of failure where a little more time may have resulted in success.
• Chapter 11 liquidation plans are about 30% of the total plans confirmed. 
• in 62% of confirmed plans, the original owners retained an equity stake. 
• individual chapter 11s were about 11% of the total cases filed (in 2002 decreasing from 25% in 1994).
• about one-third of all chapter 11 cases result in confirmed plans, not the 15-17% touted as the conventional wisdom.
• About half of all cases that do not file a plan within six months are "booted out."  The courts do a very good job, according to the authors, of weeding out the DOA cases early.   

Prof. Nancy Rapoport Article on Ethics in Bankrupty Court

"(Almost) Everything We Learned about Pleasing Bankruptcy Judges, We Learned in Kindergarten," July, 2008 can be accessed here.  This is an amusing way of looking at very old rules, "Be Prepared," "Don't Lie," etc.

Over-Spending is Cause for Personal Bankruptcy According to New Study

Well, I'm glad we cleared that up!  Professor Ning Zhu, Professor at University of California, Davis, has some great statistics which show what I have been saying for years: over-spending by consumers is the biggest cause for consumer bankruptcies, not medical problems, divorce and unemployment.  The article is here.  According to Zhu, the overspending makes the consumer "more susceptible to adverse events" but the spender knows that he can file bankruptcy and only partially bear the cost of the overspending. 

Having agreed with him on the cause for filing, I still have no problem with the consumer bankruptcy rules and ease of bankruptcy.  The credit card companies extend credit every day to people with marginal ability to repay and now want rules preventing bankruptcy so that the telephone collectors won't be impeded from bludgeoning these people into paying the credit card before anything else.    

Professor Zhu writes, "In terms of policy implication, our findings indicate that by imposing greater costs, the more stringent requirements for filing in the new law may deter some households from over-consumption."  I disagree with that comment completely.  With credit card issuers bombarding consumers with easy credit and ridiculously high interest rates, the only thing "greater costs" accomplishes is more and more people "going underground" after running their credit cards to unacceptable limits.  Without the bankruptcy fresh start, these consumers will work "under the table," cash their paychecks so there is no bank account to seize or simply work less or not at all so there is no paycheck to seize.   The primary accomplishment of bankruptcy is it stops that phone from ringing - the collector gorillas - and the consumer can rejoin society.   

Zhu points out that credit card debt equals almost a full year of income for "the bankrupt households" he studied.  That means something like a third of their pre-tax income goes to pay the interest alone.  How can credit card issuers extend that kind of debt to those kinds of consumers?  And now they want Congress to simply prevent the bankruptcy filing!  My vote is to rescind the 2005 Amendments. 

Article on Professional Fees in Chapter 11 Cases

Professor Stephen Lubben has a recent article in the American Bankruptcy Journal on Professional Fees in Chapter 11 cases.   Lubben, Stephen J.,Corporate Reorganization & Professional Fees. American Bankruptcy Law Journal, Vol. 82, p. 77, 2008  Available at SSRN: http://ssrn.com/abstract=1094032

From his abstract:

"Among the key findings of this study are:

- Most of the regulation of professional fees provided by the Bankruptcy Code is valuable primarily for its deterrence effects.  Retention applications are rarely denied and requested fees are rarely reduced. This, of course, does not mean that the regulatory system is broken, but rather that much of the system is not easily viewed by outsiders.

- Unlike prior studies, I find that time spent in chapter 11 seems to have very little independent effect on the costs of the case.  Factors like the size of the debtor corporation, the number of professionals retained, and whether a committee is appointed play much bigger roles.

- Professional fees in chapter 11 are subject to economies of scale.  In particular, with every 1 percent increase in the size of a debtor, professional fees only grow by less than half a percent - holding other key factors constant.

- Lost in the sound and fury about large professional expenses in large cases is the fact that almost 35 percent of the chapter 11 cases result in no payment whatsoever to the professionals. These are typically smaller cases that are often converted to chapter 7 or dismissed outright."

Must Read Empirical Study on Credit Card Profits

This is a great article by a young Harvard fellow, Michael Simkovic, which establishes with empirical data that bankruptcy filings are down because of the amendments, credit card profits are up hugely since the amendments, and credit card companies have not passed the savings from fewer bankruptcy case writeoffs onto the consumer.  Interest rates, late charges and other fees have risen in the past two years.  Why?  Apparently because of the lack of competition among credit card issuers, the lack of ability of the consumer to compare the rates of different issuers, and the lack of ability to change cards once the consumer is up to his ears in debt.  The article can be accessed here.   

New Study on Justice Scalia Statutory Interpretation

I found a great new article on Justice Scalia, thanks to Professor David Hricik's Statutory Construction Blog.  Written by Professor Miranda McGowen at the University of San Diego, it is entitled, "Do as I Do, not as I say: An Empirical Investigation of Justice Scalia's Ordinary Meaning Method of Statutory Interpretation."  Studying Scalia's dissents for the past twenty years she concludes,

"This study shows that Justice Scalia consults an eclectic set of extrinsic materials when he is construing statutes.  He in fact uses essentially the same broad set of materials that other justices use—except for legislative history.

"This also study found that Justice Scalia’s methodology is eclectic, too.  In a quarter of the issues in this sample, Justice Scalia abandoned textualism in favor of overtly common law methods.  When interpreting regular statutes, his presumption in favor of ordinary meaning did little work for him; in a majority of cases Justice Scalia construes words in statutes in light of their specialized, legal meanings or the meaning they have accrued in case law or in common law, not their ordinary meaning.

"Whatever Justice Scalia says about his interpretive theory, he is as purposivist of a judge as they come.  The data show that he interprets statutes in light of purpose as frequently as the rest of the Court.  Purpose rather than text sometimes drives his interpretation; if statutory purpose requires it, he will sometimes adopt second-best textual interpretations.

"The purposes he attributes to statutes do not come from his theory of interpretation, for he claims that purpose analysis is generally improper, unless the text indicates the statute’s purpose.  Nor do they come from the legislative materials, for he considers them too unreliable and too easily manipulated to provide judges with the proper amount of constraint.

"Sometimes Justice Scalia does infer statutory purpose from the text, and sometimes from agency regulations.  But frequently, his sense of a statute’s purpose comes from earlier Court decisions and lower court decisions.  Indeed, this is so often the case that his statutory interpretation practice bears an uncanny resemblance to the kind of common law interpretation of statutes he has decried in his theoretical writings."

Article on "Borrowed Regulations": The IRS's Ability to Decide Who Qualifys for Chapter 7

I highly recommend a new article published in the Norton Bankruptcy Law Advisor by Professor Matthew Stevenson and Kristin Hickman: The Administrative Law of Borrowed Regulations: Legal Questions Regarding the Bankruptcy Law's Incorporation of IRS Standards.  The article can be accessed here.   

From the abstract:  "To what extent, if at all, should bankruptcy courts defer to IRS statements, contained in documents other than the Standards themselves, about how the Standards should be applied?  May the IRS alter the Standards for its own purposes but not for bankruptcy purposes, or vice versa?  What procedures must the IRS use when it modifies the Standards, especially in light of the fact that the Standards now have an apparently binding effect in bankruptcy cases?"

Article From Judge Bruce Markell on Individual Chapter 11 Cases

Thanks to Bob Hiller for his post:

Subject: Individual Debtors in Chapter 11 after BAPCPA
"The Sub Rosa Subchapter: Individual Debtors in Chapter 11 after BAPCPA"

University of Illinois Law Review, Vol. 2007, p. 67
UNLV William S. Boyd School of Law Legal Studies Research Paper No. 08-03

BRUCE MARKELL, William S. Boyd School of Law, UNLV

In reforming the bankruptcy laws in 2005, Congress added several provisions to the Bankruptcy Code regarding the use of chapter 11 by individuals. These changes radically alter the basic chapter 11 rules with respect to individuals; among the most significant change is that postfiling service income, previously allocated to the individual debtor alone (and not available to pay prefiling creditor claims), was made property of the estate available to pay prefiling creditor claims. This article surveys the changes made and their possible impact, and suggests that they are sufficiently radical to have warranted a separate subchapter of chapter 11.

Payday Lenders and Bankruptcy

There are more payday lender storefronts today than McDonalds, so says Professor Paige Skiba.  Does 30 million lenders at 450% have any correlation with bankrptcy filings?  Definitely she concludes.  You can find the article here or at www.creditslips.org.   

Informative Insight on Appellate Briefs

This is a very informative post I received in an email today from the LA County Bar Assoc.  It is by Professor Scott Wood at Loyola Law School who questions a research attorney with 20 years experience with the California Court of Appeals.  You can access the article here. 

One great comment is that the appellant should concentrate on his best few arguments, (i.e., he says "how many errors can the trial judge make?), the respondent should make every argument possible since the court must affirm if any argument supports the result. 

Trying to Protect a Crook? File for the non-Crook Spouse

Here is the CDCBAA Newsletter for February, 2008.  It has an article about this topic by Dennis McGoldrick, former chapter 7 trustee in Los Angeles.  The subject is the little known and less understood "community property discharge" in Section 524.   

Chapter 15

There has been a lively discussion of chapter 15 on one of the list serves.  I thought the law review article cites might be helpful.  See Brooklyn Journal of International Law . . . a symposium volume entitled "Bankruptcy in the Global Village:  The Second Decade."  The volume can be found online here.

From Professor Jay Westbrook:  Avoidance Of Pre-Bankruptcy Transactions In Multinational Bankruptcy Cases, 42 Tex. Int'l L.J. 899 (2007); Universalism and Choice of Law, 23 Penn State Int. L.J. 625 (2005); Choice of Avoidance Law in Global Insolvencies, 17 Brook. J. Int. L. 499 (1991).

Also, as many of you know, Judge Samuel Bufford is writing a book on chapter 15.   I will post when it becomes available. 

JH

Great Kozinski Article on Writing Briefs and Oral Advocacy

Kozinski, Alex, The Wrong Stuff, 1992 B.Y.U. L. Rev. 325.  This article is 15 years old but is or should be mandatory reading in every law school writing or advocacy class.  It is actually a speech Judge Kozinski gave at BYU.  He subtitled it - How to Lose an Appeal.  As sarcastic as ever, Kozinski sets forth a great compendium of "don'ts" when writing and presenting your appeal. 

• "First, you want to tell the judges right up front that you have a rotten case. The best way to do this is to write a fat brief.  So if the rules give you 50 pages, ask for 75, 90, 125--the more the better.  Even if you don't get the extra pages, you will let the judges know you don't have an
  argument capable of being presented in a simple, direct, persuasive fashion.  Keep in mind that simple arguments are winning arguments; convoluted arguments are sleeping pills on paper.
• Bind your brief so that it falls apart when the judge gets about half way through it.  Also--this is a biggie-- make sure your photocopier is low on toner or scratch the glass so it will put annoying lines on every page. The judge won't even be able to decipher what you wrote, much less what you meant.
• [W]inning arguments should not only be buried, they should also be written so as to be totally unintelligible.  Use convoluted sentences; leave out the verb, the subject, or both.  Avoid periods like the plague. Be generous with legal jargon and use plenty of Latin. And don't forget the acronyms in bureaucratese.
• [P]ick a fight with opposing counsel.  Go ahead, call him a slime.  Accuse him of lying through his teeth. [In one particular case], I found myself cheering for the lawyers and forgot all about the legal issues.
• You can always create a diversion by attacking the district judge.  You might start out by suggesting that he must be on the take because he ruled against you.  Or that he is senile or drunk with power, or just plain drunk.
• Block quotes, by the way, are a must; they take up a lot of space but nobody reads them. Whenever I see a block quote I figure the lawyer had to go to the bathroom and forgot to turn off the merge/store function on his computer.
• A good way to improve your chances of losing is to overclaim the strength of your case.  When it's your turn to speak, start off by explaining how miffed you are that this farce--this travesty of justice--has gone this far when it should have been clear to any dolt that your client's case is ironclad.  Now the reason this is a good tactic is that it challenges the judges to get you to admit that there is just some little teensy-weensy weakness in your case.
• When you feel you've got them good and lathered, move into the next phase: stonewalling. What you want to avoid at all costs is giving a short, direct answer to the question.  Instead, tease the judge, equivocate, make him rephrase the question. The point is to get the judge really committed to the question so that the lack of a good answer will take on monstrous significance. A good way to start is by ridiculing the question: "I was afraid the court would get sidetracked down a blind alley by this red herring."
• An alternative to stonewalling--and one of my personal favorites--is cutting off a judge's question.  Doing this gives you several important advantages.  First, it's rude, and if you're out to lose your case, there is really no substitute for offending the guy who's about to decide your case.  Beyond that, cutting off the judge mid-question sends an important message: Look here your honor, you think you're so clever, but I know exactly what is going on inside that pointed little head of yours. Then again, cutting the judge off gives you an opportunity to answer the wrong question.

One comment which kind of surprised me is that the judges know the law.  Its likely one of the three wrote the opinion on one of the important cases relating to the issue at hand.  Consentrate on the facts and be sure to know the record inside and out.      

Great Insight on Credit Card Lending to "Bankrupts"

Professor Katie Porter has a great article on the practices of the credit card industry in lending to persons after they have filed bankruptcy.  Bankrupt Profits: The Credit Industry’s Business Model For Postbankruptcy Lending, Katherine Porter, College of Law, University of Iowa.  Using significant empirical data, she establishes that the credit card industry tells Congress that debtors are low-lifes who run up their credit card on frivolities intending to file bankruptcy to avoid repayment.  In reality, the industry views debtors as "new meat," a new source of profit. 

She says,

"This Article’s key finding is that creditors repeatedly solicit debtors to borrow after bankruptcy. Families receive dozens of offers for new credit in each month immediately after their bankruptcy discharge.  Some offers specifically target these families based on their recent financial problems, using bankruptcy as an advertising lure."

Her findings are based on a "core sample" of "1,250 consumer bankruptcy cases, consisting of 780 Chapter 7 bankruptcies and 470 Chapter 13 bankruptcies."  She analyzed the cases at the outset and did telephone interviews one and three years later. 

"Credit solicitation of recent bankruptcy debtors is rampant.  Nearly all debtors stated that they had received offers for credit in the first months following their bankruptcy.  One year postbankruptcy, these families reported that creditors sent them an average of more than fourteen credit offers per month."

Her findings are that 25% of the debtors had obtained new credit within one year of the filing.

"Two paradoxes emerge.  Debtors report more difficulty in obtaining secured loans than unsecured loans.  Also, debtors who chose Chapter 13 (repayment) bankruptcy instead of Chapter 7 (liquidation) bankruptcy have fewer opportunities to borrow.  Rather than identifying them to creditors as a 'responsible' borrower, repaying a portion of their past debts actually hinders a family’s access to future credit.  On the whole, the credit industry treats former Chapter 7 bankruptcy debtors as valuable customers, seeking to profit by loading these families with new debt immediately after bankruptcy."

"Chapter 13 families are significantly less likely to receive credit offers than Chapter 7 families.  The reported rate for Chapter 13 families is significantly lower than the fraction of Chapter 7 debtors (96.1 percent) who receive credit offers after filing bankruptcy.  At least in the short-term, Chapter 13 seems to be a modest deterrent to the credit industry’s efforts to turn bankrupt families into customers."

She concludes, "lenders’ intense solicitation of postbankruptcy families is consistent with an understanding of the consumer bankruptcy system as a refuge for decent, honest families reacting to adverse events such as job loss or illness."