BankruptcyProf Blog

Lehman Bros. Attorneys File Employment Application

The Employment Application of Weil, Gotschal & Manges, LLP can be accessed here.  The rates don't seem too out of whack - $650 to $950 for partners.  What jumped out at me is the disclosure that Lehman paid the firm $51 million in fees in the last year to handle various problems.  They also received a $5 million retainer which seems reasonable.  They also seem to have about 50 conflicts.  Usually that is a big deal but it's probably impossible to find a firm with the wherewithal to do the bankruptcy work who does not also have conflicts.   

Iceland to File Bankruptcy?

Here is an article from the Washington Post. 

Federal Bailout Bill and the Pork

I was wondering how the Federal Bailout Bill grew from 2 1/2 pages to 451 pages.  Here are a few items in the EMERGENCY Senate bill.

SEC. 309. EXTENSION OF ECONOMIC DEVELOPMENT CREDIT FOR AMERICAN SAMOA.
SEC. 310. EXTENSION OF MINE RESCUE TEAM TRAINING CREDIT.
SEC. 311. EXTENSION OF ELECTION TO EXPENSE ADVANCED MINE SAFETY EQUIPMENT.
SEC. 312. DEDUCTION ALLOWABLE WITH RESPECT TO INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES IN PUERTO RICO.
SEC. 313. QUALIFIED ZONE ACADEMY BONDS.

(my favorite - this will clearly help the bailout)
SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.
(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.
—Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly—
‘‘(i) measures 5⁄of an inch or less in diameter, and . . .

SEC. 504. INCOME AVERAGING FOR AMOUNTS RECEIVED IN CONNECTION WITH THE EXXON VALDEZ LITIGATION.

Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008

SEC. 601. SECURE RURAL SCHOOLS AND COMMUNITY SELF DETERMINATION PROGRAM.

TITLE VII—DISASTER RELIEF
Subtitle A—Heartland and Hurricane Ike Disaster Relief

Experian Consents to Order re Credit Reporting after Bankruptcy Discharge

District Court Judge David Carter has approved a settlement in a class action case by a bankruptcy debtor against various credit reporting entities.  You can access the Order here.   The agreement sets forth extensive procedures that the reporting agencies will follow to insure that a debtor's credit report is accurate after the bankruptcy discharge is entered. 

Bailout Bill - Third Time's a Charm? U.S. Senate's Turn to Try

Here is the text of the revised again bailout bill - now 451 pages.  The first version was 2 1/2 pages, the second version was 110 pages.  The Senate is going to vote on this tonight as I understand it.  They are going to wait until the Dodgers-Cubs game is over so they can get a little attention. 

Countrywide - Motions for Relief from Stay

Yesterday, Countrywide was seeking relief from stay to proceed with a foreclosure before Los Angeles bankruptcy Judge Sam Bufford.  I was sitting in the courtroom like a fly on the wall.  The Countrywide attorney had an employee on the stand testifying as is the custom of Judge Bufford.  Bufford wants evidence of who is in possession of the original promissory note i.e., who is the owner of the note.  There was an issue with establishing the knowledge of the person testifying - did he know what he was saying or was he just reading some printout?

What caught my attention was when Judge Bufford asked him how long he spent reviewing each declaration submitted to support a MFR.  He responded "10 to 15 minutes."  His attorney then asked him how many declarations he signed in the past week.  His response (and it was a little flippant), "about 500."  Bufford jumped on that asking him how many hours a day he worked and how he could spend 10 to 15 minutes reading 500 declarations in one week.  He backpedaled off course on the timing - got it down to 5 minutes each which still meant that if he did not take lunch or go to the bathroom, and did nothing but read and sign declarations, he could do 480 in a week. 

What struck me was the 500 per week.  That is 26,000 MFR per year.  I thought they were trying to work things out with homeowners.  I don't know how it ended since Bufford recessed the hearing to get the rest of the matters heard and get us on our way for which I was thankful.         

Federal Bailout Bill - Updated

Here is the text of the most recent version of the bailout bill - the Emergency Economic Stabilization Act of 2008, also known as TARP - Troubled Asset Relief Program.  It requires the Treasury to create an Office of Financial Stability and establishes a Financial Stability Oversight Board. 

I'm not sure what the interest rate is on the federal debt but at 3% lets say, the interest is $27 billion each month, or about a billion dollars a day ($37 million an hour).    

Order Approving Sale of Certain Lehman Bros. Assets for $1.7 Billion

Judge Peck entered this Order on September 19, 2008 selling assets to Barclays Capital four days after the chapter 11 case was filed.  You can access the final agreement betrween the parties here. 

Law School in Kentucky Files Bankruptcy Petition

American Justice Law School filed a chapter 7 petition in the Western District of Kentucky last week.  I'm not sure why.  The schedules, attached here, disclose that the "unencumbered" assets were sold early this year to a new group now operating "the Barkley Law School."  There doesn't seem to be any equity in the assets remaining and corporations do not receive a discharge in chapter ever - ever - ever.  The trustee will look to see if there is anything to sell and if not, simply close the case and the corporation will be back to where it was.  The trustee might sue the Board of Directors for breach of fiduciary duties or other sins but that doesn't often happen unless there is cash around which can be used to pay the trustee's attorneys.

There a couple of reasons why the corporation might have filed the chapter 7.  One is that the new entity might want to buy some of the remaining assets and have the sale approved by the Bankruptcy Court.  Secondly, the new school may want to disclose the previous transfer of the assets to it and if no one objects, they will have a great argument later that no games were played in the transfer.  Next, the schedules were signed by a Lisa Owen, entitled "Sole Director."  Apparently everyone quit and told her to turn out the lights.  She may need someone to give the keys to.  There are payroll taxes so maybe she thinks there are assets which can be sold and the IRS would be first in line if there is anything left after the trustee pays herself and her attorneys.  Lastly, the bankruptcy may have been filed hoping that creditors do not know that the bankruptcy doesn't affect their rights (it only delays enforcement of their rights), and when they see the bankruptcy notice, they write off the debt and go away.       

Bankruptcy 2005 Applied to Wall Street

From my friend Peter Lively.  This is pretty good.  Thinking outside the box as they say.

Bankruptcy 2005 applied to Wall Street

by mundog50

In 2005 our congress passed a bankruptcy bill, crafted by the banking industry, to correct supposed problems with the then current law. Despite testimony from a wide range of experts ranging from bankruptcy judges and trustees to Harvard professors that the new bill imposed onerous conditions on people in dire circumstances and lead to many more families suffering financial ruin, our representative chose to believe their banker buddies and passed this turkey. After all, only a scumbag scofflaw would attempt to get out of their financial obligations, right?

The current crisis got me to thinking, what would happen if we imposed the same conditions on the bankers as they imposed on us in 2005? Would it look something like this?

1. Banks would be required to show their tax returns for the past five years and all their financial statements. These would be gone over with a fine tooth comb and any irregularities promptly reported to the IRS. Income would be averaged for this five year period and arguments that they had no income to pay would be ignored. They made a lot of money over a five year period, so who cares if they say that they have no income or no assets?

2. Lawyers hired to represent them in the hearings would have to sign a statement testifying that all the paperwork was accurate and true and that they agreed to be legally and financially responsible if it was not or if any errors were discovered. Ever.

3. All officers and employees of the corporation would have their income and assets surveyed. If their house was deemed "too expensive" they would be required to sell it and move into a very modest apartment. They would be required to sell all their cars but one, and if it was anything above a Ford Taurus or equivalent, or if the payment was too high, they would be expected to get a clunker and drive that. There would be no allowance for maintenance or repair of their auto, as that would be taking money away from their creditors.

4. All income of the corporation, its officers and employees would be the property of the trustee, with only an allowance for meager living expenses allowed. All other income would be sent to the creditors on a quarterly basis. Income tax returns would be given to trustee every year to make sure no one took a second job or received an inheritance. If the return showed extra income, this would be seized by the trustee. If the money was already spent, the judge would throw them out of bankruptcy protection.

5. All officers and employees of the corporation would be subject to daily calls from the collection agencies that purchased debts from their creditors for pennies on the dollar. Too bad the law was changed to allow this, because the old law banning this sort of activity was" too restrictive" on the freedom of commerce. Hope they have fun talking with all those fun folks in India threatening their families with jail.

6. And of course, lawyers get paid first.

I'm not trying to criticize the current effort going on in Congress. I just thought it would be funny if the bankers had  a taste of their own medicine.

You can access this posting here. 

Response to Mortgage Banker's Association's Position re Modifying Mortgages in Bankruptcy

This has got Georgetown Prof. Adam Levitin's feathers a little ruffled.  The Mortgage Bankers Assn claims that if home mortgages can be modified in a bankruptcy case, over the objection of the lender, interest rates will rise and there will be fewer loans.  Here is his "very short explanation of why the MBA's claim is patently false and in fact disprovable."  Thanks to his Credit Slips posting.

What's this flap all about Alfie?  A secured lender's claim can be modified in a chapter 13 or chapter 11.  This means the loan can be reduced to the value of the property and the interest rate can be reduced to "a reasonable rate."  Right now - today - chapter 11 and chapter 13 debtors can re-write the secured loan UNLESS the loan is secured by the debtor's home (or most newly acquired vehicles).  If the debtor could propose a plan which would re-write the loan on his home, the lender would suddenly find reason to talk to the debtor and work this out.  When the lender will not talk, the debtor simply walks away and the lender gets the home back in a foreclosure sale - at its then current value obviously - and re-sells it (for which it then re-lends the funds at the then current interest rate).  What am I missing here? 

Constitutionality of the California Wildcard - Last Add

I received an email from counsel for the debtors in the Regevig case in Arizona telling me that they have settled with the trustee and will be withdrawing their appeal.  We will have to wait to see if any trustees in California decide to take the baton and run.

More Further Thoughts on the California Wildcard Exemption

More further thoughts about the Regevig case in Arizona.  I will admit that at first I thought Judge Haines had a supportable argument for his proposition.  He ruled that California cannot tell the trustee to leave things alone which applies only when a federal bankruptcy proceeding is in process.  But I really believe after considering it further that he is 100% wrong (or maybe 90%).

1. Suppose the California legislature passed a law which said that there are no state exemptions at all. Suppose also Cal did not "opt out" as the Bankruptcy Code allows it to do.  The debtor would be able to claim all sorts of stuff exempt under the Bankruptcy Code.  The trustee would be told to leave things alone even though other creditors could seize the same stuff outside of BK.

2. Suppose Cal passed a law which had the state exemptions (CCP 704 et seq) and no Section 703 exemptions (where the wildcard is) and did not opt out – same thing.  The trustee would be prevented from taking things that other creditors could take in Cal.  And he is prevented because the Bankruptcy Code stops him.  Congress thought this up, not Cal.

3. Suppose Cal kept the 704 exemptions and opted out but 703.140(b) was verbatim Section 522(d). Surely that is constitutional because it parrots the Bankruptcy Code passed by the federal government. And again, Cal law provides that the trustee must stay away from stuff other creditors can take but it the same stuff Congress prohibits the trustee from getting.

4. Suppose Cal had no exemptions at all and still opted out.  There would be an uproar that Cal cannot tell debtors that they cannot use any exemptions when the federal government has provided for exemptions.  The uproar would be that the trustee should be forced to leave alone at least what 522(d) says to leave alone even though everyone else outside of bankruptcy can grab at will.

So the issue cannot be the "scheme" or the fact that the trustee is prevented from doing something that other creditors are not.  The issue is whether the amount of the wildcard - being double the federal exemptions in Section 522(d) - "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," per Perez v. Campbell, 402 U.S. 637 (1971) and lots of older Supreme Court cases.

There is a question as to whether Cal can modify 522(d) at all and it seems that the answer is yes unless the modification stands as an obstacle etc.  If the answer is yes, Cal can modify 522(d), the rule is that Cal gets the benefit of the doubt as to the amount of the changes.  I smell another 5-4 decision in our future.

Lehman Hearing Transcript

So it was really one of your typical "First Day" hearings on September 16.  One of the motions was to give a "comfort order" to JP Morgan Chase, the bank that clears the checks and various securities going from here to there on a daily basis.  Technically, when the chapter 11 is filed, whatever cash is in the bank at that moment and whatever securities are owned by the debtor are transferred to the bankruptcy estate.  The bank should not be sending those funds to someone else without court permission or someday some sharp chapter 7 trustee will sue the bank to get the money back.  Counsel for the bank was explaining the problem to Judge James Peck and stated "And then this morning, Your Honor, there was a smaller advance had to be made for fifty-one billion dollars."  Anyway, the transcript of the hearing can be accessed here. 

More on the Constitutionality of the California Wildcard Exemption

As I reported earlier, August 9, 2008, an Arizona Bankruptcy Judge has ruled that the California Wildcard exemption (CCP 703.140(b)) is unconstitutional.  In re Regevig, 389 B.R. 736 (Bkrtcy, Ariz, Haines J, June, 2008)  As I understand it, certain trustees in California intend to attack the exemption as well.  The Supreme Court in Perez v. Campbell, 402 U.S. 637 (1971) struck down an Arizona statute which it deemed violated the Supremacy clause. 

In the 5-4 decision, Justice White wrote:

"Deciding whether a state statute is in conflict with a federal statute, and hence invalid under the Supremacy Clause, is essentially a two-step process of first ascertaining the construction of the two statutes and then determining the constitutional question whether they are in conflict. In the present case, both statutes have been authoritatively construed.  In Schecter v. Killingsworth, 93 Ariz. 273, 380 P.2d 136 (1963), the Supreme Court of Arizona held that

"[t]he Financial Responsibility Act has for its principal purpose the protection of the public using the highways from financial hardship which may result from the use of automobiles by financially irresponsible persons."

"With the construction of both statutes clearly established, we proceed immediately to the constitutional question whether a state statute that protects judgment creditors from "financially irresponsible persons" is in conflict with a federal statute that gives discharged debtors a new start "unhampered by the pressure and discouragement of preexisting debt."  As early as Gibbons v. Ogden, 9 Wheat. 1 (1824), Chief Justice Marshall stated the governing principle -- that

"acts of the State Legislatures . . . [which] interfere with, or are contrary to the laws of Congress, made in pursuance of the constitution,"

are invalid under the Supremacy Clause. Id. at 22 U. S. 211 (emphasis added).  [In the final analysis] our function is to determine whether a challenged state statute "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U. S. 52, 312 U. S. 67 (1941).  Since Hines, the Court has frequently adhered to this articulation of the meaning of the Supremacy Clause. See, e.g., Nash v. Florida Industrial Comm'n, 389 U. S. 235, 389 U. S. 240 (1967); Sears, Roebuck & Co. v. Stiffel Co., 376 U. S. 225, 376 U. S. 229 (1964); Colorado Anti-Discrimination Comm'n v. Continental Air Lines, Inc., 372 U. S. 714, 372 U. S. 722 (1963) (dictum); Free v. Bland, 369 U. S. 663, 369 U. S. 666 (1962); Hill v. Florida, 325 U. S. 538, 325 U. S. 542-543 (1945); Sola Electric Co. v. Jefferson Electric Co., 317 U. S. 173, 317 U. S. 176 (1942)."

I'm going to prepare an amicus brief for the Central District Consumer Bankruptcy Attorneys Assn supporting the debtor and the constitutionally of the wildcard exemption.  I will update this as I get further along in the research. 

More Info on Lehman Bros.

The second item on the Bankruptcy Court docket is the Declaration of the Chief Financial Officer of Lehman Bros., Ian T. Lowitt.  This pleading gives a brief background on Lehman Bros and why it filed the chapter 11 case.  You can access it here.  Usually the reason for the filing is some unexpected event like some creditor trying to seize something or call a loan that is about to come due.  Lehman Bros. filed due to a lack of liquidity according to Lowitt.  You know this is a big case when you read this paragraph:

"The Company’s liquidity crisis prompted an emergency meeting on September 12, 2008, between the Debtor’s management, officials from the New York branch of the Federal Reserve Bank, the heads of major financial institutions, Treasury Secretary Henry Paulson, and SEC Chairman Christopher Cox. Government officials later indicated that emergency federal funding would not be forthcoming to stabilize Lehman Brothers and provide the liquidity needed for its operations."

The pleading did not disclose the amount of Lowitt's bonus for last year. 

Lehman Bros. Bankruptcy - Can You Say $639 Billion in Assets and $613 Billion in Debts?

This chapter 11 case was filed in the Southern District of New York.  You can access the emergency schedules here.  It's case No. 08-13555-jmp.  Judge James M. Peck.  (The picture is Emanuel and Mayer Lehman, circa 1880s) 

Debtor's counsel is:

Harvey R. Miller
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, NY 10153
(212) 310-8000
Fax : (212) 310-8007
Email: harvey.miller@weil.com

Revisions to Federal Rule of Evidence 502 - Attorney Client Privilege

The House of Representatives has passed Senate Bill S 2450, which creates a new Federal Rule of Evidence 502 (limiting waivers of the attorney-client privilege and work-product rule). The full text of the rule and explanatory material can be accessed here.  The President is expected to sign the bill within the next few weeks.

Median Income Amounts Change Effective October 1, 2008

The UST has announced the new median income figures for each state effective October 1, 2008.  Those can be accessed here. 

Prof. Christian Weller's Comments on the Mortgage Mess

From Prof. Bob Lawless and Credit Slips. 

Fannie Mae and Freddie Mac Seized by U.S.

From Prof. Dale Oesterle BusinessProf Blog:

"Over the weekend the United State Government, read Treasury Secretary Henry Paulson, seized two federally charted mortgage companies, Fannie Mae and Freddie Mac.  This comes on the heels of a federally sponsored buyout of one our largest investment banks, Bear Stearns.  Now there is news that the three largest automobile companies, GM, Ford and Chrysler, want federal loans to sustain their companies.  For any who criticize the United States for engaging in "naked capitalism,"  this is proof that they are way off the mark.  We do not have anything close to a "free" market economy -- it is heavily managed.

The seizure of Fannie Mae and Freddie Mac makes two major mistakes and two minor ones as well.  The two major mistakes -- it is a windfall bailout of the subordinated debt holders of both companies -- the government preferred stock dividends and option to buy common take behind the current obligation to pay subordinated debt holders.  The subordinated debt holders, like the stock holders of both institutions should be wiped out -- they took a risk for return gamble and it failed.  Second, the remaining companies will still play the public interest game of lending money at below market rates to stimulate the mortgage market.  The companies are not, with government ownership, any more profit driven than they were before the seizure.  This should be no surprise -- government run companies are always quasi-political animals. In other words, the government will use these companies to "stimulate" the economy - a backdoor grant system. Great.

  The minor mistakes -- first, the company should sue the previous CEOs for breach of fiduciary duty and get back some of the outrageous salary and severance benefits they claimed while running the company into the ground.  Second, we should know the names of the politicians that carried the water for these companies for years, blocking reform efforts, so as to get campaign contributions.  Who are the Fannie Mae and Freddie Mac eight (or whatever)?"

Mrs. Fields' Meeting of Creditors September 3, 2008

DATE	TIME	CASE NUMBER	CASE NAME	LOCATION
September 3, 2008	1:30 p.m.	08-11953 (PJW)	Mrs. Field's Original Cookies, Inc.	J. Caleb Boggs Federal Building 844 North King Street, Room 5209 Wilmington, DE 19801

10 days after the case was filed and 12 days before objections are due to the Plan of Reoragnization already filed.  That is what I call moving it along. 

Mrs. Fields' Files Chapter 11

This is a "pre-packaged case."  Mrs. Fields' sent out a Disclosure Statement and Plan a while ago which they then filed the same day as the Bankruptcy Petition.  The last day to file an objection to the Plan is September 15, 2008. 

U.S. Bankruptcy Court
District of Delaware (Delaware)
Bankruptcy Petition #: 08-11953-PJW

Assigned to: Peter J. Walsh Chapter 11

Date Filed: 08/24/2008

Debtor Mrs. Fields' Original Cookies, Inc. 2855 East Cottonwood Parkway Suite 400 Salt Lake City, UT 84121 Tax id: 87-0552899	represented by	David R. Hurst Montgomery McCracken Walker & Rhoads LLP 1105 N. Market Street 15th Flooor Wilmington, DE 19801 302-504-7828 Fax : 302-504-7820 Email: dhurst@mmwr.com
U.S. Trustee United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035 302-573-6491

Call for Book Reviews: Women and the Law

Proposals Due September 25, 2008

The editors of Pace Law Review invite proposals from scholars, researchers, practitioners and professionals for contributions to a special book review issue to be published in Winter 2008.  We seek proposals for reviews of any book published in 2008, 2007 or 2006 that contributes to the understanding of women’s experiences with the law.

Pace Law School has a longstanding commitment to both the study of women and the law and the development of women as lawyers and leaders.  The Pace Women’s Justice Center was founded in 1991 as the first academic legal center in the country devoted to training attorneys and others in the community about domestic violence issues.  Pace is a vibrant and intellectual community that contains several nationally-recognized scholars of women’s, children’s and LGBT rights.

A law review volume devoted to books concerning women and the law promotes an ongoing discourse on women and the law, justice and feminist jurisprudence.

Please submit book review proposals of no more than 500 words by attachment to plr@law.pace.edu by September 25, 2008.  Proposals should include (a) the intended reviewer’s name, title, institutional affiliation and contact information; (b) the title and publication date of the book proposed for review; (c) a description of the importance of the book to the general topic; and (d) any other information relevant to the book or proposed review (e.g., the proposed reviewer’s expertise or any relationship with the author).  Authors are welcome, but not required, to submit a CV as well.  We expect to make publication offers by October 1, 2008.

Complete manuscripts from authors of accepted proposals will be due November 1, 2008.  Completed book reviews should not exceed 8,500 words.

Bridget Crawford
Professor of Law and Associate Dean for Research
    and Faculty Development
Pace Law School
78 North Broadway
White Plains, New York  10603
Tel. (914) 422-4416

Chapter 7 Trustee Final Report Forms Have Been Revised

You can find the forms here. 

UST Requests Chapter 11 Trustee in Michael Vick Case

Yesterday the US Trustee filed a motion seeking appointment of a chapter 11 trustee.  It seems that the gentleman Vick wanted to be his financial adviser has just been sued by the SEC for securities violations.  The prior financial adviser has been accused of taking significant assets without telling anyone.  Without a "financial adviser," Vick will have to be the fiduciary of the estate himself.  He does not get out of Leavenworth until next summer.  The UST has requested a hearing on shortened notice.   

Rights of Consignment Sellers, In re Whitehall Jewelers

I have a client who owns two large retail jewelry stores.  When a chapter 11 looked imminent, my client wanted to know what happens to the consignment goods and the consignment creditors.  In the business they call it goods "on memo."   The memo, a small piece of paper, says that the goods are on consignment and at all times are owned by the seller until, of course, they become owned by the buyer/store.  Clearly no one paid any attention to that language.  So is it consignment or not?  Bankruptcy Judge Kevin Gross responds to the same question saying, "I don't know either, but until there is an adversary proceeding and a judgment re ownership, the goods cannot be sold in a 363 sale."  See, In re Whitehall Jewelers Holdings, Inc., 2008 WL 2951974 (Bankr. D. Del. 7/28/08).   

IndyMac Bank Files Chapter 7 in Los Angeles

U.S. Bankruptcy Court
Central District Of California (Los Angeles)
Bankruptcy Petition #: 2:08-bk-21752-BB

Assigned to: Sheri Bluebond Chapter 7 Voluntary Asset

Date Filed: 07/31/2008

Debtor IndyMac Bancorp, Inc. c/o Edwin Woodsome Orrick, Harrington & Sutcliffe, LLP 777 South Figueroa Street Suite 3200 Los Angeles, CA 90017 Tax id: 95-3983415	represented by	Dean G Rallis Jr 333 S Hope St 16th Fl Los Angeles, CA 90071 213-576-1000 Fax : 213-576-1100 Email: drallis@wbcounsel.com John C Weitnauer 1201 W Peachtree St Atlanta, GA 30309-3424 404-881-7000
Trustee Alfred H Siegel Siegel, Gottlieb, Mangel & Levine 15233 Ventura Blvd., 9th Floor Sherman Oaks, CA 91403-2201 (818) 325-8441
U.S. Trustee United States Trustee (LA) 725 S Figueroa St., 26th Floor Los Angeles, CA 90017

Court Allows Attorney Fees in Full to Counsel for Creditor's Committee in Aloha Case

In my July 21 post, I noted that the firm of Sonnenschein Nath & Rosenthal which represented the Creditor's Committee for the month before the Aloha chapter 11 case was converted to chapter 7 had filed a fee application seeking $235,000 in fees.  GMAC objected and a hearing was held on July 29.  The result you ask?  Fees allowed "in full as requested."      

Mervyn's Chapter 11 First Day Motions

Attached is the Declaration of Charles Kurth, CFO of Mervyn's which is designed to support the first day motions filed by the debtor.  This declaration is not as useful as is usually the case.  There is not really a lot of information about the company, its assets, liabilites and what led to the filing of the petition.  I will check tomorrow to see the results of the hearing on the motions.      

Earthquake in Los Angeles

I was on the freeway heading to Riverside (through Chino Hills - the epi-center) when the earthquake hit.  I felt nothing.  I got off the freeway to get some water and the store I stopped at had a sign which said, "Closed for an hour due to earthquake."  "Hm," I thought.  I turned on the news and found out what happened.  (I had been listening to a book on tape - The Steel Wave by Jeff Shaara)  My wife had been calling me but my cell never rang.  We survivied the 1994 Northridge earthquake.  For 30 seconds or so that morning I thought the moon had crashed into the earth or something.  It was definitely the "big one" and it started out as the "big one."  Hell had arrived.  The violence was unimaginable.  I know bigger "big ones" are coming but cannot imagine it.    

Foreclosure in San Fernando Valley

In the San Fernando Valley, north of Los Angeles, where I live the foreclosures are sizzling.  According to the Daily News, there were 803 foreclosure sales in June, 08 compared to 263 in July, 07.  There were 2,084 foreclosure sales in the valley in the second quarter of 08, up from 632 for the same quarter last year.  The previous most foreclosure sales in one quarter in the valley was 1,818 in 1996. 

I don't know what portion of the sales are because the lenders are adjusting the rates up to an amount the homeowner can't pay versus what portion is because the homeowner's just can't make the payments for other reasons.   Its probably the first reason mostly which is incomprehendable to me. 

Credit Card Arbitration Agreements - Creates Private Law According to Professor Elizabeth Bartholet

Harvard Professor Elizabeth Bartholt's testimony before the US Senate on July 23, 2008 gives a fascinating look at the reality of arbitration clauses in employment contracts and credit card agreements.  She testifies that she herself was an arbitrator for a time in credit card cases.  She ruled 18 times in a row for the credit card issuer and the 19th time for the consumer.  After ruling for the consumer, she was systematically removed from doing any further arbitrations until she resigned the position.  Arbitrations counted for 1% of her income.  Prof. Bartholet's comments can be found here.   The arbitration clauses as well as a significant portion of the procedure is standard language in credit card agreements of course.  Congress?  are you listening?

Aloha Committee Counsel Seeks $235,000 in Fees for One Month

The firm of Sonnenschein Nath & Rosenthal which represented the Creditor's Committee for the month before the chapter 11 case was converted to chapter 7 has filed a fee application seeking $235,000 in fees.  GMAC has objected to the application calling it excessive (duh).  For some telephone calls, Sonnenschein billed $2,000 per hour.  That would be two partners in the $750 range and one in the $600 range.  The objection of GMAC can be found here and here.  The hearing is July 29.  I will check back then.  These matters are tough for the judge because the objection complains away but doesn't really tell the judge what number he should approve.  Judges tend to simply lop off 10% or some other nominal amount since that is the safe path.   

National Law Journal Comments on Kagenveama

As long as they spell your name right is what I always say.  The NLJ Article on Kagenveama can be accessed here.  There is a great quote from the Chapter 13 guru, Judge Keith Lundin:

"[Kagenveama] is a huge message to Congress that they've got a mess on their hands and they can't leave it to the courts to fix it," said Judge Keith Lundin, a bankruptcy judge for Tennessee's Middle District and author of Chapter 13 Bankruptcy (3d ed).  "Bankruptcy trustees around the country warned Congress in 2005 this would be a problem, but they ignored it," Lundin said.

Countrywide to Pay Chapter 13 Trustee $325,000 Settlement

According to the Los Angeles Daily News, Countrywide has agreed to pay Western Pennsylvania chapter 13 trustee Rhonda Winnecour $325,000 as a settlement for an action she filed against Countrywide seeking sanctions.  Countrywide was charging borrowers improper fees and was failing to provide documents to the trustee when requested according to the report.  The action requested loan histories in 293 cases which Countrywide apparently could not provide.  The settlement still must be approved.   

Landsource DIP Financing of $1 Billion is Denied

According to troubledcompanyreporter.com, the Bankruptcy Court in Delaware, Judge Kevin Carey, denied a motion to approve DIP Financing for Landsource based in part on the objection of the unsecured creditors committee, represented by Laura Jones of the Pachulski, Stang firm.  In the course of an eight hour hearing, Jones argued that the proposal was "simply an attempted asset/leverage grab" by the lenders.  "The Debtors' contention that rolling $1 billion in prepetition debt into an administrative claim is necessary as 'adequate protection' for the First Lien Lenders under these
circumstances is absurd on its face."  The Troubled Company news report can be found here. 

UST Director Clifford J. White III Report to the National Association of Chapter 13 Trustees

Mr. White's remarks can be found here.   One surprising comment is that the UST audits, while they were conducting them full blast in fiscal year 2007, found "at least one material misstatement" in 30% of the cases.  I assume that the bulk of those are in pro per filings.  That tends to prove, to me, that the goal of Congress (i.e., the Senator from MBNA) was to make bankruptcy filings too complicated to do without an attorney and much more expensive to do with an attorney.  That has played a large part in the reduced filings the past few years since October 17, 2005.  I'm not sure I could fill out the means test form myself, the famous B22, without the computer program I paid $1,300 for. 

Changes to California Foreclosure Law - from the Insolvency Committee

Dear Insolvency Law Committee Constituency List Members:

Governor Schwarzenegger signed legislation on July 8, 2008, effective immediately, regarding all California residential mortgage foreclosures.

Civil Code sections 2923.5, 2923.6, 2924.8 and 2929.3 and Code of Civil Procedure section 1161b are added to the California Codes to address the influx of mortgage foreclosures in California.

Requirements to Contact Borrower re Workout Options Prior to Foreclosure and to Provide Declaration re Same with Notice of Default and/or Notice of Sale

Civil Code section 2923.5 applies to loans initiated from January 1, 2003 to December 31, 2007 secured by residential real property for owner-occupied residences.  Owner-occupied means it is the borrower’s principal residence.

The section provides that a mortgagee, beneficiary or authorized agent, which can be the prospective foreclosure trustee (collectively hereafter “beneficiary”), may not file a Notice of Default under section 2924 until 30 days after contacting the borrower as prescribed below or a diligent effort as described below is made to contact the borrower.

The beneficiary shall contact the borrower in person or by telephone to assess “the borrower’s financial situation and explore options for the borrower to avoid foreclosure.”  During the initial contact, the beneficiary must:

1.                   Advise the borrower that he or she has the right to request a subsequent meeting to be scheduled by the beneficiary within 14 days; and

2.                   Provide the borrower with the toll free number made available by the US Dept of Housing and Urban Development to find a HUD certified housing counseling agency [(800) 569-4287].

The Notice of Default must now include a declaration from the beneficiary that it has contacted the borrower or conducted due diligence to do so unless the borrower has surrendered the property to the beneficiary.  If the Notice of Default was recorded before July 8, 2008, a declaration must accompany the Notice of Sale when it is recorded, stating that the borrower was contacted to assess the financial situation and explore options to avoid the foreclosure or list the efforts made to contact the borrower if no contact was made.

Diligent efforts to contact the borrower shall “require and mean:”

1.                   Sending a first class letter that includes the toll free HUD number; and

2.                   Attempting to contact the borrower, after the letter has been sent, at least three times by telephone call to the primary number on file at different times on different days—an automated system is ok so long as a live representative connects if the borrower answers, and the telephone requirements are met if after trying the contact, the number is disconnected; and

3.                   Two weeks after the telephone contact attempts are satisfied, if the borrower does not respond, the beneficiary must send a certified letter that includes a toll free number to contact a live representative; and

4.                   The beneficiary has posted a “prominent” link on the homepage of its internet website, if any, with the following information:

a.                   Options may be available to borrowers who cannot afford their mortgage and the instructions on how to explore the options;

b.                   A list of financial documents borrowers should collect to discuss options with the beneficiary;

c.                   A toll free number to discuss the options; and

d.                   The HUD toll free counseling number;

Contacting the borrower or diligent efforts to do so are not required if:

1.                   The borrower surrenders the property by turning over the keys or by sending a letter to the beneficiary; or

2.                   The borrower has contracted with a person or organization whose primary business is advising how to extend the foreclosure process and how to avoid contractual obligations; or

3.                   The borrower has filed bankruptcy.

Duty of Servicing Agents to Enter into Workouts or Modifications

Section 2923.6 provides that servicing agents for loan pools owe a duty to all parties in the pool so that a workout or modification is in the best interests of the parties if the loan is in default or default is reasonably foreseeable, and the recovery on the workout exceeds the anticipated recovery through a foreclosure based on the current value of the property.

Notice to Tenants Living in Foreclosed Property of Extended Eviction Period

Section 2924.8 applies to residential real property when the billing address is different than the property address, i.e. there are potentially tenants living in the property.  It provides for an additional notice to be mailed and posted with the Notice of Sale, addressed to “Resident of property subject to foreclosure sale.”  The notice shall say in English and other languages as required by Civil Code section 1632, if the agreement was negotiated in another language:

Foreclosure process has begun on this property, which may affect your right to continue to live in this property.  Twenty days or more after the date of this notice, this property may be sold at foreclosure.  If you are renting this property, the new property owner may either give you a new lease or rental agreement or provide you with a 60-day eviction notice.  However, other laws may prohibit an eviction in this circumstance or provide you with a longer notice before eviction.  You may wish to contact a lawyer or your local legal aid or housing counseling agency to discuss any rights you may have.

60-Day Eviction Notice for Tenants in Foreclosed Properties

Finally, Code of Civil Procedure section 1161b provides that tenants in foreclosed properties must be given a 60-day eviction notice.  The section does not apply if any party to the foreclosed note remains a tenant, subtenant or occupant in the property.

These materials were written by Donna T. Parkinson, Chair of the Insolvency Law Committee.

Alex Kozinski on the Dating Game

This is a pretty fun 40 second clip from the dating game a long time ago. 

Thomas Mesereau-Ephriam-Villaraigosa Free Legal Clinic

Hello Fellow Alums

I am a 2003 UWLA graduate and the legal coordinator for the Thomas Mesereau-Ephriam-Villaraigosa Free Legal Clinic.

I am extending to all students and alum the opportunity to come out and share your legal expertise, brush up on client intake or for students to obtain the opportunity to interview clients in all areas of law.  As most may know, Thomas Mesereau was Michael Jackson and Robert Blake's attorney, Ms Ephriam was Divorce court judge and Villaraigosa is the mayor of LA. Tom spends most of his time at this clinic and is always eager to share his knowledge with students and attorneys willing to assist in the clinic.

Our clinic offers seminars and discussions on various legal and relevant topics. For instance, August 30th we will have UWLA Professor Tiggs conducting a BK workshop, August 2nd will be a discussion on Juvenile issues, August 16th will be BASTA Inc discussing Tenants Advocacy and Rights.  In September we will have Immigration Law & Drug Court Judge Ellen DeShazer.

We also have started a new program: Criminal Record Cleaning: Expungement, where we assist those needing to clear their criminal record in order to get jobs and become a productive citizen.  We will have a FREE special training on July 19th at a sister location so you will have to contact me directly through the website if you are interested in participating, just say that you are a UWLA student or Alum.

Later in the year we will begin a full-fledge mediation program that we have partnered with the City Attorney's office, again if you are interested in this program you will need to be a participant of the clinic to obtain the FREE training.

So why don't you check out our website at www.mevfreelegalclinic.com which will have our various clinic dates and feel free to email me through the clinic.

If you are available come on out this Saturday July 12th otherwise we will be open again on the 26th.

Again, I invite each of you to take advantage of this great opportunity.

Best to All

Sophia Harris, J.D.
Class of 2003

Michael Vick Bankruptcy

The man was my idol; the absolute best make-the-play-no-matter-what quarterback.  Maybe I will learn something from his chapter 11 case.  Vick filed chapter 11 in the Eastern District of Virgina yesterday, case no. 08-50775-FJS.  His address is listed as Michael Vick, USP Levenworth, P.O. Box 100, Leavenworth, KS 66048 in case you want to write to him.  I say that with no sarcasm; I suspect he would like mail.   His schedules aren't due for a while so there's not too much I can report for now.  There is an application to appoint someone named David Talbot as Designated Responsible Person.

"Consider Chapter 13" Website

This looks like a really useful website for chapter 13 practitioners, www.considerchapter13.org .  Retired Bankruptcy Judge Tom Waldron is the spearhead of the organization with the title "Academy Adviser."   

Tennessee Bans Credit Card Solicitation on Campus

Thanks to Prof. Katie Porter post on Credit Slips for this information.  Tennessee has passed a law banning credit card solicitation on college campuses or using school facilities or student organization to solicit for credit cards or from offering gifts or other promotional incentives on campus at least.  Prof. Porter expects the credit industry to fight this in court, probably arguing that the federal government regulates banks, not Tenn.  The new statute can be found here. 

City of Vallejo Seeks to Cancel Union Contracts under the Bankruptcy Code

The City of Vallejo has filed a motion seeking to reject or terminate its four union contracts.  The motion can be found here.  The hearing is set for July 22, 2008.  The city has 407 employees, the bulk of whom belong to one of the unions.  It has an annual budget of $87 million of which 76% is labor costs.  The reason for the chapter 9 filing according to the motion, "general fund revenues cannot keep up with expenditures."  According to the city, it has cut expenditures everywhere else that is legal.  It now projects that the bulk of future increases in spending will be in labor and related costs which it maintains are already at top of the market levels, at least for police and fire, and are already beyond the ability of the city to pay. 

The motion argues that Section 1113 relating to rejection of union contracts does not apply to chapter 9 cases.  That would make sense, especially under the recent Florida v. Piccadilly case, since Section 1113 is located in the chapter 11 part of the code and not in chapter 9.    

California Bankruptcy Journal Seeking Articles on Individual Chapter 11 Cases

From Tax guru Elmer Dean Martin:

The California Bankruptcy Journal is plann