June 24, 2011
Top 5 Bankruptcy Articles of the Past Month
Top 5 most-downloaded bankruptcy-related articles of the past month on SSRN.
1) Directors’ Fiduciary Duties in the Zone of Insolvency and Actual Insolvency: To Whom, What, and When?, Michael R. Patrone. Analyzes the extent of corporate directors' fiduciary duty to creditors, and the incentive structures created by the various possible frameworks for fiduciary duty to creditors.
2) Are Credit Default Swaps Associated with Higher Corporate Defaults?, Stavros Peristiani & Vanessa Savino. Found a statistically significant link between trading in credit default swaps (CDS) and corporate default frequency in the years leading up to 2008.
3) Macroeconomic Effects of Bankruptcy & Foreclosure Policies, Kurt Mitman. Created nationwide models of household debt loads to measure the effects of varying homestead exemption rules and mortgage procedure policies to measure the macroeconomic effects of the policies, and suggested optimal policies to balance increased household welfare while minimizing the cost of mortgages and unsecured debt.
4) Recovery and Returns of Distressed Bonds in Bankruptcy, Wei Wang. Analyzes the rate of return on distressed bonds in Chapter 11 reorganizations, and offers explanations for the generally strong returns on senior bonds and negative returns for junior bonds.
5) Game Theoretic Analysis of Negotiations under Bankruptcy, Amira Annabi, Michele Breton & Pascal Francois. Applied a model of negotiations in court-supervised bankruptcy reorganizations as a non-cooperative game comprised of creditors, shareholders, and a trustee, and found that the length and success of the negotiations, the level of protection for creditors, and the success or failure of the firm, are affected by which of these players is given "first mover advantage" - who files the original plan of reorganization.
May 23, 2011
Steven Schwarcz, law professor at Duke, has an article forthcoming in the May 2012 issue of the UCLA Law Review discussing the issue of state "bankruptcy." He argues that the bankruptcy of a state cannot fit appropriately into the present bankruptcy framework, because state sovereignty both carries implications for the health of the nation's credit system, and obviates the need for conventional protections like the automatic stay. He says adding states to the Chapter 9 framework will likely create more problems than it solves. However, avoiding default without a federal bailout will be difficult without some level of debt restructuring assistance. He suggests a "minimalist framework" to help with binding holdout creditors while avoiding the worst credit problems. It's an interesting read.
-Cassidy Hunter Hayes
February 27, 2011
Law Review Article - Chapter 11 Fees
Stephen J. Lubben
Seton Hall University - School of Law
November 30, 2010
Seton Hall Public Law Research Paper No. 1718047
Among the collective wisdom about large corporate bankruptcy cases, the following points are almost undisputed: Longer chapter 11 cases cost more; Prepackaged chapter 11 cases cost less; Cases filed in New York or Delaware cost more; Fee examiners control the costs of big chapter 11 cases.
But each of these points is wrong, and in most cases entirely backward. And this article provides empirical evidence to show why.
November 16, 2010
Great Article on Attorney's Role in Reaffirmations
Divided Loyalties: The Attorney’s Role in Bankruptcy Reaffirmations
by Gregory M. Duhl
Associate Professor of Law
William Mitchell College of Law
Section 524 of the Bankruptcy Code divides the consumer bankruptcy attorney’s loyalties between the client and the court. On the one hand, the attorney is the gatekeeper for the court in ensuring that whether a debtor enters into a reaffirmation agreement is balanced against one of the primary objectives of the bankruptcy system—to give the debtor a “fresh start.” On the other hand, the attorney has an obligation under the Model Rules of Professional Conduct to pursue the client’s objectives during the bankruptcy representation.
This Article is about the lawyer-client relationship. Ethics scholars have traditionally adopted either a client-autonomy or paternalistic model to analyze the lawyer-client relationship. This Article rejects both and proposes a collaborative model of lawyer-client decision-making. Congress must free bankruptcy lawyers of their ethical conflict, so that lawyers can work in collaboration with their clients to help debtors improve financially post-bankruptcy. Then, the client might be able to be her own gatekeeper, freeing both the courts and attorneys from that responsibility.
November 15, 2010
How the Roof Fell in on Countrywide
October 11, 2010
Prof. Jean Braucher Article in Arizona Law Review
Good morning Professor Hayes,
We admire your blog here at the Arizona Law Review and we wanted to notify you about the just-released Financial Products issue. In the midst of the government's efforts to step up regulation of financial institutions through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Arizona Law Review takes stock of some recent financial markets, programs, and products.
In particular, we wanted to draw your attention to three articles:
- Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program. Professor Jean Braucher examines the reasons behind the limited results in the first year of the Home Affordable Modification Program. Braucher’s article reminds us that we are well-served by ex ante regulatory constraints, because it is very difficult to cure a crisis once it has occurred.
- 1,000% Interest - Good While Supplies Last: A Study of Payday Loan Practices and Solutions. Professor Nathalie Martin’s curbside interviews with payday-loan borrowers at the point of sale suggest that the key to the industry’s success is consumers’ misconceptions of the true costs of these loans. Her research also indicates that the business model of payday lenders is to get customers on a debt treadmill, belying industry claims that payday loans are an innocuous way for consumers to deal with emergencies. She concludes by recommending greater regulation through legislation, and particularly recommending a usury cap to reign in these predatory lending practices.
- Neither Borrower nor Lender Be: The Future of Payday Lending in Arizona. Tying Martin's article to developments in Arizona, 3L member Allison Woolston provides a policy note on Arizona's ten-year experiment with authorized payday lending.
Arizona Law Review, Marketing Manager
J.D. Candidate, Class of 2012
The University of Arizona College of Law
June 23, 2010
Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response
From Prof. Mark Scarberry
MARK S. SCARBERRY, Pepperdine University School of Law
Email: [email protected]
Professor Adam Levitin has responded to my recent symposium article critiquing proposed congressional legislation that would allow modification (including strip down) of home mortgages in Chapter 13 bankruptcy. A portion of my Critique criticized his empirical studies concerning the likely effect of the proposed legislation on mortgage interest rates and availability, and also criticized the arguments he has made in support of the proposed legislation. The Critique did note, however, that the insight involved in conceiving of such empirical studies was impressive.
Surprisingly, Professor Levitin’s Response fails to deal with the substantial case authority discussed in my Critique. He treats the Critique’s case authority on a critical question as if it consisted only of one relatively recent Ninth Circuit case and supposed dicta from an “old” Second Circuit case. But the Critique in fact relies on about twenty cases that deal with the question; the only supposedly contrary case authority he discusses in his Response turns out to be one of the cases cited in my Critique and not to be contrary at all. The case authority shows that the main defense put forward in his Response - that the mortgage modifications that would be permitted under the proposed legislation are similar to those permitted before the Supreme Court’s 1993 Nobelman decision and similar to those currently permitted where the collateral is not the debtor’s principal residence - is simply untenable.
It is also surprising that the entire weight of his defense of the empirical studies rests (A) on a very likely mistaken view of the law - that the law permits Chapter 13 debtors to use a novel, flawed approach in modifying secured claims under current law - and (B) on two remarkably bold and implausible assertions regarding how the market data he collected supposedly should have reflected the risk that debtors might use that novel, flawed approach, even though his data was collected before anyone had suggested that debtors might even try to do so. In addition, one of Professor Levitin’s assertions, if accepted, would fatally undermine
the design of a key part of his empirical studies.
The article notes in conclusion that law professors and others who have taken divergent positions on the wisdom of the congressional proposals might yet be able to agree on a common-sense middle ground; there is no need to consider those who disagree with us as having been seduced by the Dark Side.
The citation for my Critique is Mark S. Scarberry, A Critique of Congressional Proposals to Permit Modification of Home Mortgages in Chapter 13 Bankruptcy, 37 Pepp. L. Rev. 635 (2010). The Critique is available at http://ssrn.com/abstract=1520794. The citation for Professor Levitin’s Response to the Critique is Adam J. Levitin, Back to the Future with Chapter 13: A Response to Professor Scarberry, 37 Pepp. L. Rev. 1261 (2010). His Response is available at http://ssrn.com/abstract=1534912. The citation for this Reply is Mark S. Scarberry, Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response, 37 Pepp. L. Rev. 1277 (2010).
June 11, 2010
Article on Tax Rules Applicable to Bankrupt Partnerships
The first sentence caught my eye: "Tax lawyers have known for a quarter-century that a bankruptcy restructuring of a partnership can result in a crushing tax burden for the partnership’s owners." You can access the article here. File it under "Reasons to make your client hire a tax professional."
May 10, 2010
New Article by Prof. Mark Scarberry on Mortgage Modifications in Chapter 13
An email from Prof. Mark Scarberry:
I’ve just posted this new article to SSRN. You can read the abstract (or even improve my download stats by downloading the full text!) at http://ssrn.com/abstract=1604144. It’s a continuation of the discussion/debate that Prof. Adam Levitin and I have been having over mortgage modification in chapter 13 and in particular over his empirical studies. (Thus he is the “Empiricist” in the title.) The article, and one by Professor Levitin to which it is a reply, will be coming out soon in the Pepperdine Law Review. (A link to his article can be found in the abstract of mine on SSRN.)
April 03, 2010
Quoted in BusinessWeekI am quoted by Karen Klein in her Smart Answers column for BusinessWeek. The article can be accessed here.
March 01, 2010
Summary of Commercial Law Cases 2009 - Prof. Stephen SepinuckThis is a nice review of commercial cases for last year. Prof. Sepinuck teaches at my alma mater (undergrad) Gonzaga University Law School in Spokane. You can access his summary here. (btw, go ZAGS)
February 23, 2010
Top Five Bankruptcy Article Downloads
1 Assessing the Probability of Bankruptcy
Stephen A. Hillegeist , Elizabeth K. Keating , Donald P. Cram and Kyle G. Lundstedt
INSEAD , Harvard University - John F. Kennedy School of Government , Independent Author and VaRisk, Inc.
Date Posted: May 3, 2002
Last Revised: November 17, 2003
Working Paper Series
2 Misbehavior and Mistake in Bankruptcy Mortgage Claims
U of Iowa Legal Studies Research Paper No. 07-29, Texas Law Review, Vol. 87, 2008
Katherine M. Porter
University of Iowa - College of Law
Date Posted: November 7, 2007
Last Revised: August 14, 2009
Accepted Paper Series
3 Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios to Predict Bankruptcy
William H. Beaver , Maureen F. McNichols and Jung-Wu Rhie
Stanford University , Stanford University and Stanford University - Graduate School of Business
Date Posted: February 2, 2005
Last Revised: May 22, 2008
Working Paper Series
4 Bankruptcy Prediction With Industry Effects
Sudheer Chava and Robert A. Jarrow
Texas A&M University and Cornell University - Samuel Curtis Johnson Graduate School of Management
Date Posted: October 20, 2001
Last Revised: July 21, 2009
Working Paper Series
5 Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK
EFA 2005 Moscow Meetings Paper, ECGI - Finance Working Paper No. 89/2005, WFA 2005 Portland Meetings Paper, AFA 2005 Philadelphia Meetings Paper
Sergei A. Davydenko and Julian R. Franks
University of Toronto - Finance Area and London Business School
Date Posted: January 5, 2005
Last Revised: September 28, 2006
Working Paper Series
February 03, 2010
ABA Preview of the Supreme Court Magazine
This is a great publication I just discovered. I am going to write the preview of the Lanning case, oral arguments coming in March.
The current highlights: www.supremecourtpreview.org (on the right hand column)
The archives: http://www.abanet.org/publiced/preview/highlights.shtml
(Click on the link for “Complete PREVIEW Article” to get the url for the Preview for a specific case.)
Great New Article from Ronald Mann and Katie Porter
Saving Up for Bankruptcy, Georgetown Law Journal, Jan. 10, 2010
This is a great article, especially since it agrees with what I have been saying forever. Most consumers who file chapter 7 are driven to it by credit card collectors. Chapter 13s of course are driven by foreclosure sales.
This Article looks beneath the raw bankruptcy numbers and examines the mystery of why so few of the consumers for whom bankruptcy would be economically valuable actually choose to file. What prompts the few who seek bankruptcy relief at any given moment to separate themselves from the mass who do not?
From the abstract:
This paper probes the puzzle of why only a few of those for whom bankruptcy would be economically valuable ever choose to file. We use empirical evidence about the patterns of bankruptcy filings to understand what drives the point in time at which the filings occur, and to generate policy recommendations about how the bankruptcy and debt-collection system sorts those that need relief from those that do not.
The paper combines three kinds of data. First, quantitative data collected from judicial filing records that show the weekly, monthly, and annual patterns of bankruptcy filings. Second, 40 interviews with industry professionals (consumer and creditor attorneys, trustees, and judges) from five states (Georgia, Iowa, Massachusetts, Nevada, and Texas). The interviews probe why people file when they do and what distinguishes those that choose to file from those that hold off. Third, survey data from the 2007 Consumer Bankruptcy Project, the first nationally representative sample of bankrupt households. The survey data explores the struggles families endure before they choose to file.
The data support two empirical findings. The first is about the role of aggressive collection in motivating bankruptcy filings. Generally, apart from foreclosure-related filings, the emergency bankruptcy filing is largely a myth. Creditor collection activity does not force people into an immediate bankruptcy. On the contrary, it wears them down slowly but ineluctably, like water dripping on a stone. Second, the primary factor that affects the date on which people actually file is their ability to save up the money to pay their attorneys and filing fees. Thus, among other things, we see an annual peak shortly after families receive their tax refunds, and a semi-monthly peak related to the receipt of paychecks.
Finally, we build two important policy recommendations on those findings. First, we argue that the existing collection process is flawed by a prisoner’s dilemma that leads to excessive and wasteful “dunning” by creditors. Because each creditor has an incentive to be first in line to collect, and because the creditors can dun their debtors at little or no cost to themselves, creditors as a group naturally engage in dunning activities that debtors find intolerable – a level of activities from which a rational single creditor would refrain. We recommend a variety of solutions to strengthen the FDCPA. Some are at the level of detail (extending it to in-house collection, increasing the statutory damages, and the like). But the most important is a “do-not-call” rule modeled on the do-not-call list for telemarketers. Specifically, we recommend a low-transaction-cost mechanism (activated by telephone call or Internet site) that would automatically and immediately stop all creditor collection activity.
Second, corollary to our argument that excessive collection causes inappropriate filings, we also believe that the excessive filing costs deter socially valuable filings. To respond to that problem, building on earlier work, we argue that low-income low-asset filers should have access to a simplified administrative process that provides prompt relief without the costs and delay of judicial process.
December 20, 2009
Reflections on Twenty Years of Law Teaching: A Great Article by UCLA Prof. Stephen Bainbridge
I have learned a few things over the past couple of years following Prof. Bainbridge's blog. His article on the UCLA Law Review website can be accessed here. I would not say we agree on a lot, especially politically, but he gets me thinking.
I certainly employ the "soft Socratic" method of teaching. Call on a volunteer to review an assigned case or answer a question and then help when they get stuck in the response - give them a straight answer at the end of the discussion, write it on the board.
But I part ways with Steve on whether law schools are supposed to teach students "to think like lawyers." That is my goal in teaching and I think that is by far the accomplishment of a law student by the end of the law curriculum. I did not realize that until I taught first year contracts after about ten years of teaching the Uniform Commercial Code to third year students. I kept writing on exam answers from first year students, "This is not political science class." "This is not sociology." State the issue, state the rule, and apply the rule to the facts. Students do not have difficulty learning the rules (the few rules which are actually important to learn). They have a terrible time applying the rules to Mr. Jones sitting in your office with a problem that needs resolution. Often the student will set forth the correct issue and rule, and then abandon the rule entirely because "in this case it's unfair to make Mr. Jones pay for the goods." They have a terrible time telling Mr. Jones he blew it. He better pay.
But the article has motivated me to give power point a shot. I have used it a little but never handed out a power point presentation to students. It has motivated me to think about how to use all those electronic gadgets students are staring at during class - in a positive way - rather than just continuing to whine about it.
September 09, 2009
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 [email protected] or by phone at 954-258-9261.
Joseph Van de Bogart
FIU Law Review
Executive Symposium Editor
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.
April 10, 2009
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."
December 21, 2008
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."
November 27, 2008
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.