When a case is heard at the Supreme Court, the docket is filled with briefs of amicus curiae trying to say something that will catch the court's attention. With so many briefs filed, they sometimes cancel each other out in a flutter of pdf files sounding variations on the same themes. However, amicus briefs are much less common at the Court of Appeals level. Recently I was part of an effort where a panel of the Fifth Circuit reversed itself in one instance and reversed a district court in another. The cases are Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017) and Lowe v. DeBerry (In re DeBerry), 2018 U.S. Appl LEXIS 5772 (5th Cir. 3/7/18). In this post, I would like to share how our amicus briefs came together as well as some tips on amicus practice before the Fifth Circuit.
A Split Arises
The issue in Hawk and DeBerry was whether a chapter 7 debtor who disposed of exempt property post-petition could lose that exemption if the proceeds were not reinvested within the period allowed by state law. Outside of bankruptcy it is clear that proceeds that are not reinvested lose their exempt status and become subject to claims of creditors. However, under the Bankruptcy Code, if there is not a timely filed objection to exemption, the exemption is allowed, even if it was frivolous. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). This result was clouded by a Fifth Circuit decision which suggested that an "esssential element of the exemption must continue in effect even during the pendency of the bankruptcy case." Zibman v. Tow (Matter of Zibman), 268 F.3d 298, 301 (5th Cir. 2001). This led the Fifth Circuit to hold that if a Texas homestead was sold during a chapter 13 case and the proceeds were not exempted within six months as provided by Texas law, they would lose their exempt status. Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014).
Following Frost, there was a split between Texas bankruptcy courts as to whether Frost's logic would apply in a chapter 7 case. Two cases made their way to the Fifth Circuit at about the same time. In Lowe v. DeBerry (In re DeBerry), 2017 U.S. Dist LEXIS 113203 (W.D. Tex. 2017), Bankruptcy Judge Craig Gargotta had ruled that proceeds from post-petition sale of a homestead could not be recaptured once the exemption became final. However, he was reversed by U.S. District Judge Royce C. Lamberth. In Hawk v. Engelhart (In re Hawk), 556 B.R. 788 (S. D. Tex. 2016), Bankruptcy Judge Jeff Bohm had ruled that proceeds from an IRA lost their exempt status if they were not reinvested within sixty days notwithstanding failure to object to the original exemption. He was affirmed by U.S. District Judge Melinda Harmon. Thus, there was two cases proceeding to the Fifth Circuit where the District Court had ruled that property could lose its exempt status in a chapter 7 case.
An Amicus Brief Takes Shape
I was approached by Professor Christopher Bradley to see if I would be interested in participating in an amicus brief in the DeBerry case. Chris had more than an academic interest in the issue (pun intended). He had clerked for Bankruptcy Judge Tony Davis. Judge Davis had written an opinion, In re D'Avila, 498 B.R. 150 (Bankr. W. D. Tex. 2013) holding that Frost did not apply in chapter 7. After finishing his clerkship and working in private practice, Chris had obtained an appointment at the University of Kentucky School of Law. I had written at least five blog articles on the disappearing exemption issue, including one which strongly criticized the Frost decision. Michael Baumer, who is a homestead expert within the consumer bar, agreed to join our group. We hastily filed our brief in the DeBerry case and waited.
A few days later, a different panel of the Fifth Circuit handed down an opinion in Hawk v. Engelhart (In re Hawk), 864 F.3d 364 (5th Cir. 2017) finding that un-reinvested proceeds lost their exemption and became property of the estate. This posed a huge problem for us because under the rule of orderliness, one panel of the Fifth Circuit could not overrule another. Thus, we fashioned a second amicus brief arguing that the en banc Fifth Circuit should reconsider the Frost decision, or, in the alternative, limit it to the chapter 13 context. Retired Bankruptcy Judge Leif Clark joined our group of collaborators for this second brief. Judge Clark had presciently written about the issue in In re Bading, 376 B.R. 143 (Bankr. W.D. Tex. 2007) in which he had tolled the period for the debtor to reinvest homestead proceeds out of a concern that Zibman could be applied even in the absence of a timely exemption. (In the interest of telling a compact story, I am not explaining all of the legal arguments in detail. However I did discuss these issues in more depth in my article for the ABI Journal, "Fifth Circuit Walks Back Disappearing Exemption Decision,"American Bankruptcy Institute Journal (Jan. 2018)).
The Hawk panel vacated its prior opinion and substituted an opinion limiting Frost to chapter 13 cases. One of the points that the panel relied upon was part of the ruling by Judge Ronald King in the Frost case that the case would have come out differently in a chapter 7 proceeding. Since we did not cite these comments in our brief, it is possible that our brief did not change the result. A few months later, the Fifth Circuit released its opinion in DeBerry in which it reversed the District Court and affirmed Judge Gargotta. The DeBerry opinion cited our brief which was gratifying.
A Few Notes on Amicus Practice in the Fifth Circuit
Amicus practice before the Fifth Circuit is a specialized area with strict time limits. An amicus brief must be filed within seven days after the brief of the party it supports. Fed.R.App. P. 29(a)(6). This means that the decision to file should be made well before the party being supported has filed its brief. Otherwise, there is not sufficient time to compose a credible brief.
Unless a brief is filed with the consent of both parties, it must be accompanied by a motion for leave to file the brief with a copy of the proposed brief. Fed.R.App. P. 29(a)(2). In my experience, parties rarely consent to filing an amicus brief in support of their opponent, so the proposed amicus should be prepared to file a motion for leave.
The proposed brief must state the interest of the amicus. Generally it is better to have an organization with an interest in the point of law sponsor an amicus brief. In our case, we were not able to find a sponsoring organization. However, having a professor and a retired judge among our collaborators certainly did not hurt.
An amicus brief is limited to half the length of the brief it is supporting. Fed.R.App. P. 29(a)(5). This is particularly tricky on a petition for rehearing or rehearing en banc. Under Fed.R.App. P. 35(b)(2)(A), a petition for en banc hearing or rehearing is limited to 3,900 words. This means that the maximum length of an amicus in support of en banc hearing or rehearing is 1,950 words. This post is 1,401 words long which gives an idea of just how short 1,950 words is. A merits brief may run up to 13,000 words, Fed.R.App. P. 32(a)(7)(B), which allows for an amicus of up to 6,500 words. While the rule states that the length of an amicus brief is based on the maximum amount allowed for a principal brief, we had the clerk limit us to one-half of the actual brief filed which required some last minute cutting.
One final note is that the Fifth Circuit is a forum where strict compliance with format is enforced. I have had to resubmit briefs on multiple occasions to correct technical issues. There are two pieces of advice here. The first is to adhere strictly to the time limit for resubmitting a brief. The second is to be nice to the clerk's office. While it is frustrating to have to revise a brief for format issues, the clerk's office is uniformly willing to walk practitioners through how to make it right. Staying friendly with the clerk's office will avoid a world of unpleasantness.
The fourth quarter of 2017 was another slow period for Fifth Circuit opinions dealing with bankruptcy. There was only one published opinion and there were several opinions that I found on the Fifth Circuit's page but were not in LEXIS. Nevertheless, here they are for your consideration.The cases cover mootness, standing, and verbal statements about financial condition.
Dick v. Colo Hous. Enters., LLC, 872 F.3d 709 (5th Cir. 10/4/17)
Debtor sought to prevent a foreclosure sale including filing several bankruptcies. Two years after the last bankruptcy was dismissed, the substitute trustee posted the property for foreclosure. The Debtor obtained a TRO in state court. The Defendants removed the case to federal court. The U.S. District Judge denied the request for a preliminary injunction. The Debtor appealed and requested a stay pending appeal in the Fifth Circuit. The stay was requested the day before the foreclosure sale and was approved the next day. However, by this time, the substitute trustee had already conducted the foreclosure sale and sold the property to the lender.
The lender moved to the dismiss the appeal as moot. The Debtor argued that the Court could still grant relief since it could order the lender to rescind the foreclosure. The Debtor relied on an unpublished opinion. However, there was a published opinion stating that "[i]f the debtor fails to obtain a stay, and if the property is sold in the interim, the district court will ordinarily be unable to grant any relief." Matter of Sullivan Central Plaza I, Ltd., 914 F.2d 731, 732 (5th Cir. 1991). Based on the rule of orderliness, the Fifth Circuit declined to extend its prior unpublished opinion. The Court dismissed the appeal as moot, stating, "this court simply cannot enjoin that which has already taken place."
Khan v. Xenon Health, LLC (In re Xenon Anesthesia of Texas, PLLC), 698 Fed. Appx. 793 (5th Cir. 10/16/17)(unpublished)
Xenon Anesthesia of Texas, PLLC ("Xenon Texas") filed chapter 7 bankruptcy. Khan and Xenon Health, LLC ("Xenon Health") each filed claims. Khan objected to Xenon Health's proof of claim. Khan was previously a member of Xenon Texas. However, he was compelled to transfer his interest to another party in state court proceedings. After he was compelled to transfer his membership interest, he withdrew his proof of claim.
The Bankruptcy Court found that because Khan was not an owner of the Debtor and had withdrawn his proof of claim, he was not a party in interest who was entitled to object to a claim. The Fifth Circuit affirmed.
Tow v. Bulmahn (Matter of ATP Oil & Gas Corp.), Case No. 17-30077 (5th Cir. 10/27/17)(unpublished)
Trustee brought claims against Debtor's officers and directors for approving preferred stock dividends on the eve of bankruptcy and approving certain bonuses. The District Court dismissed. The Fifth Circuit affirmed. It was not enough to say that directors collectively approved dividends. It was necessary to show which ones voted in favor. Additionally, it was not sufficient to allege that dividends harmed the company's long term viability without additional explanation. Bonus claims were also dismissed due to failure to adequately allege why bonuses were excessive.
The Fifth Circuit also affirmed the ruling dismissing claims against the officers and directors who received the bonuses. It quoted a New Hampshire Bankruptcy Court decision which stated that "Bad business decisions without more cannot form the basis for a fraudulent conveyance action seeking recovery of compensation paid to an officer or a director."
The Fifth Circuit also affirmed the dismissal of related conspiracy claims and denial of leave to amend after the Second and Third Amended Complaints.
Garner v. Pillar Life Settlement Fund I, LP (Matter of Life Partners, Inc.), Case No. 16-11436 (5th Cir. 11/29/17)(unpublished)
Life Partners, Inc. sold undivided interests in life insurance policies that were found to be securities. The company filed chapter 11 and a trustee was appointed. Two different groups of investors filed adversary proceedings seeking class action status. The class actions were consolidated and the reference was withdrawn to the District Court. The Trustee and the named Plaintiffs sought to certify a class for settlement purposes. The District Court referred the matter to the Bankruptcy Court which conducted a hearing and recommended approval of the settlement. The District Court approved the settlement. A group of investors appealed approval of the class action settlement. Meanwhile, Life Partners confirmed a plan which incorporated the settlement. The objecting investors did not appeal plan confirmation and the plan was substantially consummated. The Fifth Circuit found that it could not grant any effectual relief based on appeal of only the Settlement Agreement. As a result, it dismissed the appeal as moot.
Haler v. Boyington Capital Group, LLC (In re Haler), 2017 U.S. App. LEXIS 27034 (5th Cir. 12/29/17)(unpublished)
The Debtor, Randall Lee Haler, was Executive Vice-President of McKinney Aerospace, L.P., a company that repaired and refurbished business jets. Haler told Boyington, a customer of McKinney Aerospace, that McKinney was in "very fine legally financial shape" and had plenty of cash. Apparently the company was not in very fine financial shape because when Boyington cancelled the contract, the company was unable to refund the unused portion of the funds obtained. Boyington sued in state court and obtained a fraud judgment against Haler for $258,000.
When Haler filed for chapter 7 bankruptcy, Boyington sued to obtain a non-dischargeable judgment under 11 U.S.C. Sec. 523(a)(2)(A). The Bankruptcy Court granted summary judgment based on the state court judgment and the District Court affirmed. The Fifth Circuit reversed. A non-dischargeable judgment under 11 U.S.C. Sec. 523(a)(2)(A) cannot be based on a statement respecting the debtor or an insider's "financial condition." Under 11 U.S.C. Sec. 523(a)(2)(B), a non-dischargeable debt can be based on a written statement of financial condition. The intersection of these two subsections means that oral statements of financial condition can never result in a non-dischargeable debt.
The Fifth Circuit found that Haler's statements were made concerning McKinney's financial condition and therefore could not result in a non-dischargeable judgment. The Fifth Circuit reversed the lower courts.
The third quarter of 2017 had one blockbuster opinion reaffirming the finality of exemptions in Chapter 7 and several less remarkable decisions. It was a slow quarter for bankruptcy.
Rosbottom v. Schiff (Matter of Rosbottom), 701 Fex. Appx. 330(5th Cir. 7/17/17)(unpublished)
The Debtor and his spouse conveyed their interests in a Louisiana residence to trusts. They then sold the residence for $1,850,000 and each deposited half the money in their own account. In 2005, Rosbottom divorced his spouse. He purchased a condominium in Dallas using his share of the proceeds from the Louisiana residence. He then conveyed the condo to his trust. Rosbottom filed for bankruptcy in 2009. He was convicted of bankruptcy fraud and a Chapter 11 trustee was appointed. After the Trustee confirmed a plan, the Trustee and the ex-spouse brought a declaratory judgment action seeking to determine that the Dallas condo was property of the estate.
The Bankruptcy Court found that the trust created by Rosbottom was invalid under Louisiana law because it violated Louisiana law prohibiting the conveyance of an undivided interest in community property. The Fifth Circuit affirmed. Because the creation of the trust was a nullity under Louisiana law, it never gained title to the Louisiana property. When that property was sold and a new residence was purchased, that property belonged to the Debtor and was property of the estate.
Cowin v. Countrywide Home Loans, Inc. (In re Cowin), 864 F.3d 344 (5th Cir. 7/18/17)
This was a dischargeability case under 11 U.S.C. Sec. 523(a)(4) and (a)(6). The Debtor entered into a scheme to purchase properties being foreclosed for unpaid condominium assessments. The properties were subject to mortgage liens which were not extinguished by the sales. The Debtor then arranged for a related party to purchase the ad valorem tax liens against the property and conduct a second sale. The tax lien sale extinguished the mortgage liens. However, the excess proceeds should have been paid to the mortgage lenders. Instead, they were diverted to a company controlled by the Debtor. This happened four separate times.
Several lenders, including Bank of America and Countrywide, filed suit. The Debtor filed two chapter 11 proceedings which were dismissed. After the second bankruptcy was dismissed, the bankruptcy court retained jurisdiction over the adversary proceedings. The Debtor entered into an agreed judgment with Bank of America. After the Countrywide case was tried but before the Bankruptcy Court entered findings and conclusions, the Debtor filed a chapter 7 proceeding. However, the Debtor did not file a suggestion of bankruptcy until after the Bankruptcy Court ruled that the debt was nondischargeable. The Bankruptcy Court entered judgment in favor of Countrywide after it learned of the second bankruptcy filing. Bank of America sued for a nondischargeable judgment in the second case.
On appeal, the Debtor argued that the agreed judgment with Bank of America was a new debt which could be discharged and that the Bankruptcy Court violated the automatic stay by entering judgment in the Countrywide adversary.
The Debtor argued that the Bankruptcy Court erred in imputing his co-conspirator's actions to him. The Fifth Circuit found that he participated sufficiently in the conspiracy to have personal liability and that actions of a co-conspirator could be imputed to him. Thus, the Court found that Cowin's actions constituted larceny and were nondischargeable under 11 U.S.C. Sec. 523(a)(4).
The Fifth Circuit found that it did have a clear precedent on whether the automatic stay prevented the Bankruptcy Court in one case from entering a judgment after a second case was filed. The closest precedent the court had was that filing a proof of claim in a bankruptcy case did not violate the stay. However, the Court found that any error was harmless because the Bankruptcy Court could have simply lifted the automatic stay to enter the judgment.
The Court did not directly address the claim that the Bank of America judgment extinguished any possible claim for nondischargeability. However, the Supreme Court decision in Archer v. Warner, 123 S.Ct. 1462 (2003) seems to foreclose this argument.
Hawk v. Engelhart (In re Hawk), 864 F.3d 364 (5th Cir. 7/19/17), vacated, 871 F.3d 287 (5th Cir. 9/5/17)
A debtor filed a petition under chapter 7 and claimed an IRA account as exempt. No party objected to the exemption. Later it turned out that the Debtor had withdrawn the IRA funds and had not re-invested them within 60 days as required by the exemption statute. The Trustee sued for turnover and prevailed in the Bankruptcy Court. Initially, the Fifth Circuit ruled in the Trustee's favor, finding that exempt property must retain its exempt status throughout the case. On petition for rehearing, the Fifth Circuit withdrew its opinion and distinguished its prior Frost opinion. It held that in a Chapter 13 proceeding, property that was exempt could come into the estate once it lost its exempt status because of 11 U.S.C. Sec. 1306(a)(1). I was one of the amici who sought to overturn the original decision.
Bynane v. The Bank of New York Mellon. 866 F.3d 351 (5th Cir. 8/3/17)
Plaintiff bought a home. Mortgage was assigned to a securitization trust. Bank of New York Mellon was the trustee for the trust. Property was sold at foreclosure to Guzman. Plaintiff filed suit in state court which was removed to federal court. Plaintiff sought to remand based on incomplete diversity. District Court denied the motion and dismissed plaintiff's claims.
Court found that citizenship of trust was based on citizenship of trustee. Because Bank of New York was domiciled in New York it did not defeat diversity. Court declined to hold that trust was a citizen of each of the domiciles of its shareholders. Plaintiff also sought to establish that Guzman transferred property to a Texas resident who should be considered the real party in interest. Court said that it would determine diversity based on the actual parties not a non-party with a potential interest in the case.
Court also rejected argument that Bank of New York did not hold good title because assignment to it was forged or was not authorized. Court ruled that obligor could not defend itself on a ground that rendered the assignment voidable but not void. The without authority ground would only make the assignment voidable. While a forged assignment would be void, the Plaintiff did not meet the pleading requirements of Fed.R.Civ.P. 9 to establish fraud.
Court also rejected promissory estoppel claim based on alleged promise from Bank of America to sign a modification agreement. However, Plaintiff did not plead what the terms of the alleged modification were so that claim failed.
Dorsey v. U.S. Department of Education (Matter of Dorsey), 870 F.3d 359 (5th Cir. 9/1/17)
Debtor sought a hardship discharge under 11 U.S.C. Sec. 523(a)(8). After his creditors successfully moved to re-open the bankruptcy case to file proofs of claim, the Debtor filed a notice of appeal in the main case. Thereafter, the Court conducted a trial on the adversary proceeding at which the Debtor failed to appear. The Debtor then sought to amend his statement of issues and record in the District Court to include matters relating to the adversary proceeding. The District Court found that because there was not a notice of appeal in the adversary proceeding, it lacked jurisdiction over the attempt to appeal from the adversary proceeding. The Fifth Circuit affirmed.
In 2005, Congress amended 11 U.S.C. Sec. 507(8) to add the following category of non-dischargeable debts:
any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual
A "qualified education loan" is one where the interest is tax deductible. The amendment had the effect of making private student loans non-dischargeable if the interest could be deductible.
If Congress repeals the definition of "qualified education loan" as part of the process of eliminating the deduction for student loan interest, there would be no corresponding provision in the tax code for Sec. 507(a)(8)(B) to refer to. In that case, Courts could find that the language added in 2005 does not refer to anything and is a null set. Of course, Court could try to apply Congressional intent and apply the non-existent provision of the tax code as though it were still there. If this passes, it will raise some interesting issues.
Jevic--The Inside Story and the Impact on Future Chapter 11s featured participants from the case offering their perspective on the case and what it meant. Dan Dooley of MorrisAnderson was the Chief Restructuring Officer for Jevic. Domenic Pacitti of Klehr Harrison was Debtor's counsel. Rene Roupinan of Outten & Golden represented the WARN Act claimants. The panel was moderated by Judge Gregg W. Zive (Bankr. D. Nev.).
Jevic Holding Company was a trucking company based in New Jersey. It had been acquired by Sun Capital and was financed by CIT Group. CIT requested that the debtor liquidate itself in Chapter 11. The Debtor apparently gave WARN Act notices. However, New Jersey had its own state statute which was stricter than the national statute.
When the case was filed, the CRO Dan Dooley, negotiated a wind-down budget which included $3.0 million for paying accrued wages and related payroll obligations. After the company was liquidated, the Debtor was holding $1.7 million which was subject to Sun's lien (it was also a secured creditor). There were two other important pieces of litigation. The WARN Act claimants sued the Debtor and Sun Capital. They alleged that the Debtor and Sun were a unitary employer. The Official Committee of Unsecured Creditors sued Sun and CIT to unwind the leveraged buyout as a fraudulent transfer.
Eventually a settlement was reached where Sun allowed the $1.7 million to be used to pay creditors and CIT paid another $2.0 million to cover priority and administrative claims. However, in the settlement Sun did not want any money to go to the WARN Act claimants because they were also suing Sun. As a result, a structured dismissal was set up which provided that the settlement funds would be paid to creditors but not to the WARN Act claimants. This involved skipping over the WARN Act claimants' priority claims.
The Bankruptcy Court approved the structured dismissal and the Third Circuit affirmed under the "rare circumstances" doctrine. The Supreme Court reversed finding that a debtor could not violate the priority scheme under the Bankruptcy Code in a non-consensual an end of case distribution. The Court left open the possibility that paying creditors out of sequence would be allowed in cases such as paying employee wage claims and critical vendor claims where doing so would advance Code-related goals.
Mr. Pacetti (the Debtor's lawyer) explained that they used a structured dismissal because there are only three ways to end a chapter 11 case--a plan, conversion or dismissal. 11 U.S.C. Sec. 349(b) says that the parties shall revert to the status quo ante unless the court "orders otherwise." The structured dismissal was an attempt to have the court "order otherwise."
Judge Zive focused on the Court's reference to allowing priorities to be skipped based on a Code-related objective. He raised the case of Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2nd Cir. 2007). In Iridium, the debtor had claims against its parent, Motorola, and Motorola had administrative claims against the estate. In settlement of other litigation, a fund of money was created to fund a litigation trust to sue Motorola. Any money remaining in the litigation trust would go to the unsecured creditors. Motorola objected to diverting funds which could have paid its administrative claim to the trust. The Second Circuit generally found that the settlement was permissible because having a well-funded creditors' trust would increase the value of the claims against Motorola. However, it remanded for an explanation of why the residual funds in the trust would go to the unsecured creditors instead of being distributed in priority order.
Mr. Dooley stated that the Code-related objective here was maximizing the pie.
Judge Zive said that other areas where priority-skipping would be allowed would be wage orders, critical vendor motions and roll-ups as part of DIP financing. He said these are all orders that allow the case to proceed.
Ms. Roupinan was asked how Jevic would change WARN Act litigation. She said that requiring parties to follow the absolute priority rule would provide clarity and predictability and improved ability to negotiate.
Mr. Pacetti said that in skipping priorities, it was important to consider what the stage of the case is. First day motions will get greater latitude than end of case distributions. He also stressed the importance of making an evidentiary record.
Judge Zive seconded this notion stating that any time you want the court to do something you should provide sufficient facts. He gave the example of routine motions for cash management and continuing bank accounts which could result in de facto sustantive consolidation.
Ms. Roupinian asked whether priority-skipping would be ok if all parties consented. She asked what would happen if the U.S. Trustee was the only party objecting.
Judge Zive replied that the policy of the U.S. Trustee is not the Bankruptcy Code. He said that "if everyone is consenting, I don't have a problem with that." However, he focused on what constituted consent? He said that if a party is given notice and fails to object, they have waived their objection.
Mr. Dooley said that the take-away from the case was that it was really about the absolute priority rule, not structured dismissals.
Judge Zive said that one of the problems with Jevic was that there was no going concern value to protect and no jobs. As a result, the Code-related objective was much weaker. A few moments later, he emphasized that priority skipping can be allowed to protect going concern value, jobs, etc. but that "there has to be a significant reason."
The panel also discussed gifting, that is, where one creditor gives up value so that it can go to a creditor with lesser priority. Judge Zive pointed out In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015) where lenders acquired the debtor's asset via a credit bid but deposited funds in escrow for professional fees and paid some funds directly to unsecured creditors. Where the funds were paid directly by the secured lender, they were never property of the estate and thus the court had no jurisdiction over them.
Mr. Pacetti that lawyers should cut deals earlier in the case and read Jevic for what it says. However, Ms. Roupinian said that parties should either follow the absolute priority rule or get consent.
Judge Zive said that courts would be skeptical about non-consensual priority-skipping and that lawyers should get the evidence that shows why the settlement is proper.
Mr. Dooley said that doing priority skipping "requires real proof." He also said that structured dismissals must be squeaky clean and that first day orders may be more carefully examined. He said that the ruling will embolden the U.S. Trustee.
The take-aways from the panel were build your evidentiary record, identify a Code-related objective and do your deal at a time when it will still advance the reorganization.
Asset Protection Trusts--How to Make Them and How to Break Them examined a phenomenon emerging in the laws of several states, including Nevada. This panel was moderated by Ron Peterson of Jenner & Block with Neal Levin of Freeborn & Peters, Judith Greenstone Miller of Jaffe Raitt Heuer Heuer & Weiss, P.C., Rebecca Hume of Kobre & Kim, and Judge Brian F. Kenney of the U.S. Bankruptcy Court for the Eastern District of Virginia.
According to Judith Greenstone Miller, there are now seventeen states that allow Debtor Asset Protection trusts ("DAPs"). Some states have a statute of limitations as short as eighteen months to challenge a DAP while others may allow up to four years or more for an existing creditor that did not have knowledge of the transfer. Some states require an affidavit of solvency.
Michigan was the seventeenth state to allow DAPs in March 2017 and amended the Uniform Fraudulent Transfer Act (UFTA) to exempt a "qualified disposition." There are also variations in state law between those following the Uniform Fraudulent Transactions Act (UVTA) and the Uniform Voidable Transfers Act. While UFTA does not have a specific choice of law provision, UVTA does.
Ms. Miller explained that DAPs require giving up control and that high net worth indiiduals don't like to give up control. DAPs are attractive to individuals with plenty of assets now who fear future liabilities such as doctors.
In Michigan, DAPs must be irrevocable. The Trustee must reside in Michigan. The settlor must execute an affidavit that the transfer of assets into the trust will not render them insolvent and that they are not subject to pending litigation other than as described. They may retain the power to direct investments and request distributions of income and principal although they cannot demand a distribution. The sole means to challenge a DAP is to bring an action under the UVTA by clear and convincing evidence. The statute of limitations in Michigan is shortened from six years to two years, although it starts at the time of the qualified disposition. If a claim arises after the disposition, the statute of limitations is two years from when the claim arises. Beyond the state statute of limitations, the only resort is to Sec. 548 of the Bankruptcy Code for actual intent to hinder, delay or defraud. If a transfer is set aside, the property reverts to the settlor and only to the extent necessary to satisfy the claim.
Neal Levin described Nevada's DAP law, which he described as an "absolute shield" for assets. It has been around since 1999 and has a two year statute of limitations with a six month discovery rule. There is no requirement for an affidvait of solvency. The burden of proof is clear and convincing evidence. Additionally, the settlor retains incredible control over the trust assets. He said that the only exception to the Act's protections is an action under the UVTA.
Judge Brian F. Kenney described the Virginia law as being one of the least protective. He said that his state statute says that a transfer is not voidable solely because is was made to a self-settled trust without consideration. As with the law of several other states, Virginia's statute contains a provision shielding professionals who structure a transfer from liability. However, at the same time, Virginia adopted a statute providing for sanctions against any party within its jurisdiction who transfers assets with knowledge of a judgment. Thus, there is some conflict in the law.
Rebecca Hume came all the way from the Cayman Islands to discuss foreign asset protection trusts which she described as a war between the world and the debtor's assets with a gate that only the debtor has a key to. She described the Cook Islands as the worst jurisdiction for creditors with the Island of Nevis close behind. The law of the Cayman Islands provides that issues relating to Cayman Islands trusts must be governed by the law of the Cayman Islands and that any order of a foreign court attempting to assert control over a Cayman Islands trust would be unenforceable. In the Cook Islands, a claim must be brought within two years of when the transfer was made. The creditor must prove a fraud beyond a reasonable doubt. Further, the creditor must hire a lawyer in the Cook Islands and may not enter into a contingent fee arrangements. She said she knew of only one case where a Cook Islands Trust was set aside.
Judge Kenney said that Sec. 548(e) was added to the Code to address the problem of DAPs. He said that it allows a ten year lookback for a self settled trust and requires an intent to hinder, delay or defraud. This standard relies on the traditional badges of fraud analysis. The Trustee has two years to commence an action but that the statute could be equitably tolled.
Ron Peterson asked Judge Kenney what he could do to a debtor who was ordered to repatriate assets from a Cook Islands Trust but refused to do so. He said that under Sec. 105(a), he has the power to enforce his orders. He said that as a practical matter, incarceration for civil contempt will often be referred to the U.S. District Court because the District Court has more tools available to deal with incarceration. In one case, a debtor named Sala raised the defense of impossibility but the Court ruled that where is the impossibility is self-created, the defense would be rejected. He described it as a game of chicken between the debtor who is willing to sit in jail without giving up his funds and the Court that keeps him there.
In U.S. v. Grant, Neal Levin said that the settlor's widow raised the impossibility defense saying "I asked for the money back but they said no." The Court found that this was not sufficient to purge the contempt.
Mr. Levin pointed out that one-third of the world's wealth is kept in off-shore jurisdictions. He said that it was important to work with professionals in the affected jurisdiction.
Ms. Hume said that many offshore jurisdictions allow the settlor to retain great control over the trust and would only impose an independent trustee when "things get dicey." She said that settlors frequently retain the policy to change the trustee. She pointed to a court of appeals decision which required a settlor to disclose where trusts were located and what was within them. She described a Privy Council decision where a settlor had a power to revoke the trust but refused to exercise that power. The Council held that it could appoint a receiver over the power of revocation which allowed the trust to be revoked and the money collected.
Mr. Levin talked about how most wire transfers pass through New York banks. Because these banks are in the United States, the U.S. Courts have jurisdiction over them and they can be brought into the case.
Ron Peterson pointed out that the U.S. has treaties with countries such as Switzerland and that the U.S. Attorney can be brought to enforce the treaty in limited instances.
Mr. Levin pointed out that on the other side are "the forces of evil" such as foreign judges who view their responsibility as limited solely to enforce their laws and foreign professionals who want to protect their fees. He also said that the United States is now considered to be the largest recipient of offshore funds as foreign citizens are transferring funds to DAPs in the United States. He described the problem of professionals helping people conceal their assets as a "pervasive problem."
Ms. Hume pointed out that the Cayman Islands are now parties to various statutes requiring disclosures of cash transfers so that there is greater transparency and less advantage to hiding assets in the Cayman Islands.
The main take-away from the panel was that when dealing with DAPs or offshore trusts, the key is to engage qualified professionals who understand the local law in order to avoid committing malpractice whether trying to set up one of these vehicles or challenging one.
The Commercial Law League of America presented a keynote address from Dean. Erwin Chemerinsky, of UC Berkeley Law School at its annual luncheon. Dean. Chemerinsky discussed his main area of expertise in a talk entitled The Supreme Court: Appointments to and Statutory and Constitutional Interpretation by the Court in Bankruptcy Cases. He spoke for over an hour without notes.
He started by talking about the place of bankruptcy cases in the Supreme Court's jurisprudence. Although bankruptcy cases outnumber every other case in the federal system, the Supreme Court only takes two or three bankruptcy cases in a given term. He noted that of the current justices on the court only one had served as a trial court judge and several justices had never argued a case in any court before being appointed to the Supreme Court. As a result, the Court is taking fewer and fewer cases. For much of the 20th Century, the Court heard as many as 200 cases a term. Last term the Court heard only 59 cases (not counting cases decided without argument).
The bulk of his talk discussed the battle between the formalists and the realists on the Court. He offered three theses: 1) we have and are likely to continue to have a conservative Supreme Court; 2) the conservatives and some of the liberals tend to be quite formalistic; and 3) this trend is undesirable.
A Conservative Court
Since 1971, the Supreme Court has had five to eight justices appointed by Republican presidents. With the death of Antonin Scalia, the Court was split 4-4 for a brief period of time. This led to a remarkable fight in Congress. In recent years (I missed the exact number), there have been twenty-four justices nominated during the final two years of a president's term. Of those, 21 were confirmed and three were voted down. However, until the nomination of Merrick Garland, there had never been a nominee who was simply ignored. Until the nomination of Neil Gorsuch, no nominee had ever been filibustered. The Senate had to change its rules to end the filibuster by a majority vote.
Dean Erwin Chemerinsky
Justice Gorsuch appears to be very conservative. Since taking the bench, he has voted with Clarence Thomas 100% of the time. In contrast, Antonin Scalia only voted with Thomas 81% of the time. The Court's current makeup consists of three consistently conservative justice (Alito, Gorsuch and Thomas), one most conservative justice (Roberts), four consistently liberal justices (Breyer, Ginsberg, Kagan and Sotomayor) and Anthony Kennedy as the swing vote. Justice Kennedy votes with the majority 97% of the time. Eliminating unanimous decisions, he still sides with the majority 94% of the time. The Dean tells his students to shamelessly pander to Justice Kennedy in their Supreme Court briefs.
The age of the current justices indicates that conservative domination is likely to continue for decades. Since 1960, the average age where justices retired from the court was 78. Three of the liberal/swing justices are currently over 78 (Ginsberg, Breyer and Kennedy). In contrast, three Republican appointees are likely to serve for an additional fifteen years (Alito, Thomas and Roberts) while Justice Gorsuch could possibly serve as many as forty years. Thus, the Court is likely to remain very conservative for decades to come.
Formalists Formulate More Opinions
Dean Chemerinsky said that the conservatives and some liberals tend to be very formalistic. Formalism is the view that judges take undisputed legal premises and apply them to the facts. Formalism is often dominated by "plain meaning" analysis. Formalism was the dominant approach to constitutional law through the 19th Century when the legal realists tried to blow it up. The legal realists argued that there are political decisions which form the basis for so-called undisputed legal premises so that courts should look at the values being served rather than pretending to apply neutral principles. However, formalism is alive and well in the Supreme Court, especially when it comes to bankruptcy decisions.
Formalism in Statutory Interpretation
Dean Chemerinsky argued that Henson v. Santander Consumer USA, Inc., 137 S.Ct. 1718 (2017) was an example of formalism. The question was whether the FDCPA should apply to anyone who has purchased debts. The Court ruled that it did not apply to creditors who purchased debts prior to default. He described this as very formalistic. He said that formalism rejects consideration of the legislative purpose, let alone the legal history. The definition of "debt collector" under the FDCPA includes a person who regularly collects or attempts to collect debts owed to another. He claimed that it was just as reasonable to construe this provision to anyone who collects debts. He said that the purpose of the statute would be furthered by applying it to all persons who collect debts. (I'm not sure I buy that analysis, but he is a really smart guy).
In Midland Funding, LLC v. Johnson, 137 S.Ct. 1407 (2017), the Court was asked whether a proof of claim filed on a debt that was barred by the statute of limitations violates the FDCPA. There is nothing in the Bankruptcy Code which bars the filing of a time-barred debt. According to Dean Chemerinsky, Justice Breyer wanted to take a plain meaning approach to what is false, deceptive, misleading, unfair, or unconscionable. However, Justice Sotomayor, in dissent, was concerned by the fact that the courts were being "deluged" with bad debts. The professor asked why it wouldn't be unfair to file a debt that the creditor knew was time-barred?
Going back a few years to Law v. Siegel, 134 S.Ct. 1188 (2014) a debtor sought to fraudulently invent liens which would keep the value of his property within the California exemption limit. The Bankruptcy Court would have denied the exemption based on the fraud. However, a unanimous Supreme Court reversed based on the plain language of Sec. 522. He said that the formalists don't want to focus on the consequences of the decision and instead look just at the plain meaning.
On the other hand, Marrama v. Citizens Bank, 549 U.S. 365 (2007) was a functional decision. The Bankruptcy Code said that a debtor had an absolute right to convert to chapter 13. The liberal justices said that it would be a waste of time to allow a debtor to convert to chapter 13 if the case would just be converted back to chapter 7. The four conservatives said just follow the statute.
Dean Chemerinsky said that it is impossible to reconcile Law v. Siegel with Marrama.
Formalism in Constitutional Analysis
Prof. Chemerinsky described Northern Pipeline Construction Co. v. Marathon Pipeline Co., 102 S.Ct. 2858 (1982) as one of the worst cases decided by the Supreme Court. The issue was whether a Bankruptcy Court could enter a final judgment on a state law claim between two non-bankrupt parties. The Court voted 6-3 to strike down the jurisdictional scheme of the original Bankruptcy Code. However, no opinion commanded a majority. He said that Justice Brennan's plurality opinion was the epitomy of formalism. It gave no reasons why judges appointed under Article I could not rule on state law matters. After all, he asked, who normally rules on state law matters? State courts. State judges do not have life tenure.
However, the subtext of the opinion had nothing to do with bankruptcy. It was the Reagan era. Congress was seeking to restrict the authority of courts to consider hot button issues, such as abortion and school busing. In Northern Pipeline, the Supreme Court sent a message to Congress that if it attempted to restrict its jurisdiction, it would be unconstitutional. After Northern Pipeline, the Court took a functional approach in cases such as Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986) where they considered where a grant of power to a non-Article III court would undermine the Article III judiciary.
The Court veered back into formalism with Stern v. Marshall, 131 S.Ct. 2594 (2011). Chief Justice Roberts' majority opinion could not have been more formalistic. While the majority acted as though practical consequences didn't matter, Justice Breyer's dissent was focused on the confusion that would result from the opinion.
Four terms later the Court backed away from formalism when it decided Wellness International Network, Ltd. v. Shariff, 135 S.Ct. 1932 (2015). The issue was whether an Article I Bankruptcy Judge could render a final judgment with consent. By a vote of 6-3, the Court said yes. Justice Sotomayor's majority opinion followed the Schor case's doctrine that delegation to a non-Article III tribunal was only unconstitutional when it undermined the Article III courts. The difference between Stern v. Marshall and Wellness was that Justices Alito and Kennedy changed their minds. Why did they do this? It had nothing to do with bankruptcy. Rather, both Justices were concerned about Magistrate Judges. If Stern was followed to its formalistic conclusion, it could render Magistrate Judges unconstitutional as well and both justices had previously written opinions upholding Magistrate Judges.
Dean Chemerinsky cautioned that Wellness will not put formalism to rest. The Court vacillates between formalism and functionalism from case to case.
The Critique of Formalism
The legal realists offered a critique of formalism a century ago. Formalism provided a false certainty. Do fixed legal principles really provide answers with certainty? Formalism makes it look like the justices are not deciding how a case should turn out; it hides what's really happening. Dean Chemerinsky suggested that we should be asking what was Congress's purpose? In his view, the Court got Congress's purpose wrong in both Henson and Midland Funding. He said that there was no good reason to object to bankruptcy courts deciding state law issues.
In conclusion, he asked, what should we do? He said that academics need to explode the myth of formalism. The Dean said that he hoped that the academic criticism of Stern v. Marshall caused Justices Alito and Kennedy to back away in Wellness.
In the meantime, lawyers and judges should be aware that the Supreme Court is going to be receptive to formalistic arguments for a long time to come. The take-away he said is the what if? What if Hillary Clinton had defeated Donald Trump? What if there had not been hanging chads in Florida in 2000? What if John Kerry had been elected? The Supreme Court would have looked much different today. The bottom line is that elections matter. And then he sat down.
Note: I did not use direct quotes in this article because I was not confident in my note-taking. In some passages, I added or rearranged words to better reflect the sense of what Dean Chemerinsky was saying when my notes came off as wooden and jerky. Dean Chemerinsky was anything but wooden and jerky so I did not want to portray him in that way. However, I am pretty sure that the last sentence of his address is pretty close to verbatim.
One thing that conferences like NCBJ celebrate are the best in the profession. This year I went to three awards presentation. Prof. Nancy Rapoport of the University of New Las Vegas Law School received the Lawrence P. King Award for Excellence in Bankruptcy from the Commercial Law League of America. Judge Mary Walrath (Bankr. D. Del.) received the Norton Judicial Excellence Award from the American Bankruptcy Institute and Thompson Reuters. Finally Judge Homer Drake (Bankr. N.D.Ga.) received the Distinguished Service Award from the Bankruptcy Alliance of the American Inns of Court.
Nancy Rapoport is the Special Counsel to the President of the University of Nevada, Las Vegas, the Garmin Turner Boyd Professor of Law at the William S. Boyd School of Law and an Affiliate Professor of Business Law and Ethics at the Lee Business School. She has served as Dean or interim Dean of three separate law schools.
She received the Distinguished Alumna Award from Rice University.
Prof. Rapoport is a recognized expert in ethics. She is the author of Enron and Other Corporate Fiascos: The Corporate Scandal Reader and appeared in the Academy Award nominated move Enron: The Smartest Guys in the Room. She is currently serving on the Fee Review Committee in the Caesars Entertainment Operating Co., Inc. bankruptcy.
She is also a Board Member of the National Museum of Organized Crime and Law Enforcement (the MOB Museum). In her spare time, she competes, pro-am, in American Rhythm and American Smooth ballroom dancing.
In her introduction of Prof. Rapoport, Wanda Borges of the CLLA quoted her as saying, "My parents taught me everything. They taught me how to live a moral life." Wanda quoted the President of UNLV as saying, "If she was a superhero, her power would be enthusiasm."
In receiving the award, she said she was "flabbergasted but not speechless." She went on to offer two true confessions: that she took bankruptcy pass/fail and never took professional responsibility. She said she had no interest in bankruptcy and intended to be a securities lawyer--until she began to work as a securities lawyer.
Prof. Rapoport Accepts the King Award
Prof. Rapoport said "I have built a career out of the intersection of bankruptcy law and professional responsibility. I love bankruptcy law. I love that bankruptcy lawyers find ways to make the pie bigger. I love the people." She also said that "good lawyers have the ability to change the world for the better."
Finally she said "We are at a pivotal point for the practice of law. Our margins are tighter. Think about where the practice of law should go." She said that she teaches law students that it is more important to listen to the other side than to push your own position.
On a personal note, I have enjoyed attending many continuing legal education programs where Nancy spoke. She spoke on legal ethics at the very first Commercial Law League meeting that I attended. Although she is kind of a big deal, she came and presented a showing of The Smartest Guys in the Room to the Austin Bankruptcy Bar. Her ability to include clips from lawyer movies in her ethics presentations has given me many laughs while making good points. Finally, I am amazed by the pictures she posts on Facebook of her ballroom dancing exploits.
Judge Walrath Receives the Norton Award for Excellencew
Judge Mary Walrath (Bankr. D. Del.) is the current President of the National Conference of Bankruptcy Judges. She has served on the Delaware Bankruptcy bench since 1998. When she took the bench, Delaware had two bankruptcy judges but based on the workload could have qualified for eighteen. She is a co-founder and co-president of the Delaware Bankruptcy Inn of Court. She is also a fellow of the American College of Bankruptcy.
In her remarks she mentioned that she also sits as Bankruptcy Judge for the District of Virgin Islands. She expressed admiration for the Court Clerks who have experienced so much difficulty after Hurricanes Irma and Maria.
Judge Homer Drake Accepts the Distinguished Service Award
Judge Homer Drake has been a bankruptcy judge since 1964, which is before they were known as bankruptcy judges. He was president of the National Association of Referees in Bankruptcy in 1973 when the rules committee changed the name of the judicial officials from Referees in Bankruptcy to Bankruptcy Judges. That was also when the National Conference of Bankruptcy Judges took its present name. Judge Drake also has an Inn of Court named after him. That was a significant honor since few Inns of Court are named after living persons.
This panel discussed some of the unusual issues raised by limited liability companies. The panel consisted of Bankruptcy Judge Ashely Chan from the Eastern District of Pennsylvania, Prof. Carter Bishop from Suffolk University Law School, Craig Goldblatt form Wilmer Hale, Paul L. Lion, III from Morrison & Foerster, LLP and Emily Pagorski from Stoll Keenon Ogden PLLC Emily Pagorski and Craig Goldblatt played the role of litigators in two moot court arguments.
What Is It?
According to Paul "Chip" Lion, a limited liability company is neither a corporation nor a partnership. LLCs have members rather than shareholders. They have managers who may be members who run the business. LLC's are formed by filing a certificate of formation. They are governed by their operating agreement. The state where the certificate of formation governs the legal affairs of the LLC.
The members of an LLC own interests, which consist of economic interests, information rights and management rights. Managers of an LLC owe fiduciary duties to the LLC These are duties of loyalty and care and can be modified under the law of some states.
Bankruptcy Remote Entities
Prof. Bishop introduced the problem of an LLC being used as a bankruptcy remote entity. Under the hypothetical, unanimous consent was required to file bankruptcy and allowed members to act in its own interest and waived all duties except for the implied duty of good faith and fair dealing. The operating agreement was then modified to add a non-economic member to presumably represent the interest of the secured creditor. When it is time to file bankruptcy, the members disagree. However, the LLC files anyway. The secured creditor then sought to dismiss the case as a bad faith filing.
Two cases involving LLCs have found that bankruptcy policy invalidated the state law blocking provision because the non-economic member did not have a duty to act in the entity's best interest. In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. ND Ill. 2016); In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016) However, a case involving a limited partnership reached the opposite conclusion. In re Squire Partners, Limited, 2017 W.L. 2901334 (E.D. Ark. 2017), appeal filed to Eighth Circuit. The Squire case relied on the fact that the partner with the blocking interest had a financial interest.
The hypothetical posed a conflict between the ability of parties to contract as allowed by state law as opposed to whether the contractual provision was a waiver of the right to file bankruptcy similar to a pre-petition waiver of discharge. After a mock trial, the court found that the non-economic member did not act in good faith and that therefore his blocking vote was invalid. In partcular, under the hypothetical, the debtor had equity which would be lost in the event of a foreclosure.
Is an Operating Agreement an Executory Contract?
In the second hypothetical, a member holds the right to manage the LLC. There are other members. Under the Operating Agreement, the right to manage cannot be assigned. Additionally, the Operating Agreement provides that upon filing bankruptcy, the member ceases to be a member. When the managing member files bankruptcy, the Chapter 7 trustee attempts to assume the operating agreement and dissolve the LLC over the objection of the other members. The hypothetical was based on a California LLC.
Prof. Bishop argued that under Sec. 541 would bring the economic interest and management right into the estate. Most Operating Agreements would not meet the Countryman test for an executory contract. Additionally, Sec. 365 precludes the assumption of a personal services contract. Further, the contract would be subject to the ipso facto clause of Sec. 365.
The hypothetical posed a conflict between the property of the estate provisions of Sec. 541 and the executory contract provisions of Sec. 365. The judge asked whether it would be appropriate to apply a broader definition of an executory contract than the Countryman test. The hypothetical also raised the issue of how the Chapter 7 trustee could meet the debtor's fiduciary duties to the other members. The Court ruled that both the economic and non-economic interests entered the estate but that the Trustee would order the Trustee to wait six months before dissolving the LLC to maximize the value for the other members.
One issue that was not raised by the discussion was the application of 11 U.S.C. Sec. 541(b)(1) which states that property of the estate does not include a power that the debtor may only exercise for the benefit of an entity other than the debtor. In my opinion, the right to manage an LLC is a power which the member exercises for the benefit of the LLC and the other members. Thus, I would expect that it would not be property of the estate.
I liked the format of this program because it used two of the panel members to provide background and introduce the hypotheticals while the two litigator members of the panel argued the case to an actual Bankruptcy Judge.
The Wolf (of Wall Street?) at the Door: Lending to the Financial Underclass examined a variety of issues affecting those with limited means. Bankruptcy Judge D. Sims Crawford from the Northern District of Alabama moderated a discussion with Thad Bartholow with Kellett & Bartholow and Prof. Creola Johnson from the Ohio State University Moritz College of Law.
Prof. Johnson and Mr. Bartholow focused on several areas that they believed were subject to abuse, including car title lending, payday lending, loans made that were never requested and claims on non-existent debt.
Prof. Johnson spoke about subprime auto loans which carry double digit interest rates with collateral that is easy to repossess. She said that while the volume of subprime loans was going down, a majority of them would likely end up in default and in bankruptcy. A trend in subprime auto loans is to include a kill switch in the vehicle which turns off the car if payments are not made which she described as "synthetic foreclosure." She said that subprime lenders often threatened to repossess cars if regular payments were not made post-petition and gave the example of In re Velichoko, 473 B.R. 64 (Bankr. S.D.N.Y. 2012) where the lender said that bankruptcy did not apply to it and repossessed the car during the bankruptcy. In order for the debtor to get the car back, the creditor extracted a payment of $800 and execution of a reaffirmation agreement.
Mr. Bartholow suggested that a best practice for chapter 13 cases involving kill switches was to include a plan provision invalidating that clause in the loan agreement.
Another abuse he identified was student loan servicers who may fail to cancel a garnishment after bankruptcy is filed due to defects in their software.
Prof. Johnson spoke about problems raised by payday lending. She said that technology has changed so that where a payday lender would have previously obtained a post-dated check, now they obtain authority to debt a customer's bank account. One practice she identified was when payday lenders would have authority to debit the customer's account for the full amount of the loan but would just debit for the amount of a rollover fee. In that case, the customer would end up paying much more than the original debt. Another problem she discussed was payday lenders threatening borrowers with criminal prosecution if they did not pay. Although dishonoring a postdated check will not give rise to theft by check, she said that payday lenders take advantage of poorly educated consumers to make these threats.
She gave In re Hodge, 367 B.R. 843, 846 (Bankr. M.D. Ala., 2012) and In re Snowden, 422 B.R. 737, 740–41 (Bankr. W.D. Wash. 2009) as examples of bad behavior by payday lenders. In the Hodge case, the creditor told the debtor that bankruptcy did not apply to checks, threatened the debtor with arrest and continued to make EFT withdrawals from her account post-petition. In Snowden, the creditor called the debtor sixteen times including at her job as a nurse.
According to Bartholow, the debt buying industry is buying debts without much due diligence and that this places the burden on debtor's counsel to remedy. He claimed that many debt buyers "don't know or don't care" whether the debt they buy is legitimate and that it imposes a massive cost to the bankruptcy system. He said that because debtors who take out payday loans often take out many of them, they may not remember which ones are real. He described time-barred claims as a "cancer on the system" and also pointed out the danger of fake claims and miscalculated claims.
Bartholow said that he has had problems with debtors who are already in chapter 13 taking out post-petition payday loans. He noted a split of authority as to whether a court order is required to take out these loans but expressed his opinion that it should be required. He expressed frustration that debtors would keep relying on payday loans which he described as "financial crack."
Mr. Bartholow described attempts to collect on debts not owed as the CFPB's #1 reported consumer complaint. He put part of the blame on skip tracing services such as Accurint which may erroneously report that a debt is owed by someone with a similar name. In one case, he had a client named Marco R who lived in South Texas but was being dunned by a creditor seeking to collect a debt from a debtor named Marcos R who lived near Dallas.
A related problem he discussed was consumers who may apply for a payday loan but don't agree to accept it. In some instances, the payday lender will advance the funds anyway and it becomes a swearing match as to whether the customer accepted the loan.
Prof. Johnson talked about trends in the fintech industry but focused on lead aggregators. Many of the internet ads for payday loans are not from actual payday lenders but companies which use them to generate leads which are then compiled by lead aggregators. A consumer may think she is applying for a low interest loan only to be paired with a high interest payday lender.
Mr. Bartholow also talked about abuses with loan modifications. He said that in many cases, borrowers filed bankruptcy in order to buy time to obtain a loan modification. However, in other cases, lenders may place a borrower on a trial modification that was not requested by the borrower. The lender then files a notice of payment change with the court which results in the trustee reducing the payment to the lender. When it is time to approve the final loan modification, it may extend the loan out forty years and greatly increase the amount the borrower would pay. However, at that point, the debtor has a choice to either accept the bad deal or face a default created by the creditor's interim loan modification.
Returning to the theme of debt buyers, Mr. Bartholow said that debt buyers usually are engaged in the purchase and sale of spreadsheets and do very little to verify the debts. He estimated that debt buyers only have loan documents in 5% or less of transactions they do. When the transaction involves, a payday loan, which is a closed end loan, Rule 3001 requires that "the writing" upon which the debt is based be attached to the claim. If debt buyers don't have the documents, they are in violation of the rule.
Bartholow also spent some time discussing the Supreme Court decision in Johnson v. Midland Funding. He stated that in his opinion, the dissent got it right. However, he said that it will be important to limit Midland Funding to its facts. The opinion stated that filing a time barred claim that contains the information necessary to readily determine whether it is a time-barred claim is one thing. However, he opined that the ruling should not apply to a non-existent debt or one that is miscalculated.
Finally, Prof. Johnson concluded with the story of the Tucker brothers,Scott and Joel Tucker. Scott Tucker had a payday loan empire that made actual payday loans although the way he processed payments was fraudulent. He used the money that he made to become a race car driver. In addition to having fines levied against him, he is now being prosecuted for criminal violations.
Bartholow chimed in with the story of his brother, Joel, who took data obtained from lead aggregators and entered it into spreadsheets which he represented to be legitimate payday loans. He ultimately sold a portfolio of 15,000 fake payday loans in the amount of $390 which were then placed into the court system by unwary debt buyers. Judge Marvin Isgur initiated a Show Cause Proceeding in the Southern District of Texas in which he compelled Joel Tucker to appear and testify with regard to the claims under penalty of being incarcerated. Judge Isgur found Mr. Tucker's testimony to be non-credible.
Disclaimer: I am currently involved in litigation with Mr. Bartholow's firm. While I have tried to accurately convey the highlights of what was discussed, nothing in this post should be construed to be a comment on our case.
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