Friday, June 19, 2009

Supreme Court Grants Cert in Attorney Speech Case

The Supreme Court has granted certiorari in Milavetz, Gallop & Milavetz, P.A. v. United United States, 541 F.3d 785 (8th Cir. 2008), cert granted, 2009 U.S. LEXIS 4277 (6/8/09). The Milavetz case held that the provision in BAPCPA preventing attorneys from advising debtors to incur debt in contemplation of bankruptcy was an unconstitutional restriction on the right to free speech under the First Amendment. Although it is not in direct conflict, the Fifth Circuit took a somewhat different tack on this issue, finding that the statute was not facially overbroad and reserving the issue of whether it could be overbroad as applied in a specific case. Hersh v. United States, 553 F.2d 743 (5th Cir. 2008). Thus, the Eighth Circuit said that the statute was unconstitutional on its face, while the Fifth Circuit held that a constitutional challenge would have to wait until there was an actual case where an attorney was punished for providing advice contrary to the statute.

Milavetz also had two other rulings, finding that attorneys were Debt Relief Agencies and finding that the mandatory disclosures (i.e., "We a Debt Relief Agency") was constitutional. Most courts have agreed with these conclusions.

Milavetz had one interesting sidenote. The Commercial Law League of America, a professional group, which represents the interests of creditors, filed an amicus brief in support of the plaintiffs' position. Thus, this is a case where a creditor's trade group spoke up for the speech rights of debtor's lawyers.

The order granting certiorari did not limit itself, so that it appear that the Supreme Court will take up all three issues.

Thursday, June 18, 2009

Supreme Court Decides One Case and Hints At Result in Another

While many continuing legal education conferences consist of regurgitations of things you already know, every once in a while, you gain an insight which makes it all worthwhile. Today at the State Bar of Texas Bankruptcy Section Bench-Bar Conference, I was fortunate enough to hear Nashville Bankruptcy Judge Keith Lundin tie together today's decision in Travelers Indemnity Co. v. Bailey, 557 U.S. ___ (6/18/09) with the decision to grant cert in Espinosa v. United Student Aid Funds,Inc., 545 F.3d 1113, as amended at 553 F.3d 1193 (9th Cir. 2008), cert granted, 2009 U.S. LEXIS 4361 (U.S. 6/15/09). The common link between the two cases is whether bankruptcy court orders which could have been objected to are subject to collateral attack when they are not. In Travelers, the Supreme Court held that a bankruptcy court injunction contained in a confirmation order was not subject to collateral attack. Judge Lundin suggested that the Supreme Court might be signalling a similar result in Espinosa, a case involving a chapter 13 confirmation order.

20 Year Old Order Trumps in Travelers

The Travelers case arose out of the Johns-Manville bankruptcy case. In return for contributing $770 million to a trust created by the plan of reorganization, Mansville's insurers received the benefit of an injunction preventing suits against them. Over a decade later, plaintiffs started suing Travelers for withholding information about the dangers of asbestos or conspiring with Manville to conceal the dangers of asbestos. Many of these suits accused Travelers of acting wrongfully in its own capacity rather than as Mansville's insurer.

Travelers agreed to settle with some of the plaintiffs in return for an order from the Bankruptcy Court clarifying that the suits were barred by the original 1986 order. The Bankruptcy Court granted the clarifying order, finding that the direct suits against Travelers were encompassed by its original order.

On appeal, the Second Circuit reversed. It held that it was not enough to look to the terms of the prior order. Instead, it was necessary to deteermine whether the order was within the subject matter jurisdiction of the Bankruptcy Court. Concluding that the Bankruptcy Court did not have subject matter jurisdiction to enjoin suits against a non-debtor insurance company based on the insuror's own misconduct, the Second Circuit reversed.

On writ of certiorari, the Supreme Court reversed the Second Circuit and reinstated the Bankruptcy Court's order. The Supreme Court stated:

If this were a direct review of the 1986 Orders, the Court of Appeals would indeed have been duty bound to consider whether the Bankruptcy Court had acted beyond its subject-matter jurisdiction. (citation omitted). But the 1986 Orders became final on direct review over two decades ago, and Travelers' response to the Circuit's jurisdictional ruling is correct: whether the Bankruptcy Court had jurisdiction and authority to enter the injunction in 1986 was not properly before the Court of Appeals in 2008 and is not properly before us.
Opinion of the Court, p. 10.

Travelers Ruling Hints At Espinosa Result

While this ruling is significant, it also suggests that direction that the Supreme Court might take in a case in which it granted certiorari earlier this week. In Espinosa v. United Student Aid Funds, Inc., a chapter 13 debtor included several provisions in its plan related to student loans:

1. It provided that the student loan claim would be paid in the amount of $13,250;

2. It provided that "The amounts claimed by the United Student Loan Aid Funds, Inc., et. al. for capitalized interest, penalties, and fees shall not be paid for the reasons that the same are penalties and not provided for in the loan agreement between the Debtor and the lender."

3. It provided that amounts not paid under the plan would be discharged.

The creditor also received a notice stating that if it did not agree with the treatment provided for its claim under the plan, that it was under an obligation to object.

United Student Aid Funds, Inc. filed a claim for a higher amount, but did not object to the plan. After the debtor completed its plan and received a discharge, United began intercepting the Debtor's tax refunds. Espinosa sought to hold United in contempt, while United sought a determination that the plan could not discharge its student loan debt. The Bankruptcy Court ruled that the plan controlled and that the student loan debt was discharged.

On appeal, United claimed that the plan could not discharge the debt because the Debtor did not file an adversary proceeding seeking a hardship discharge. The Ninth Circuit disagreed, stating:

(W)hen the creditor is served with notice of the proposed plan, it has a full and fair opportunity to insist on the special procedures available to student loan creditors by objecting to the plan on the ground that there has been no undue hardship finding. Rights may, of course, be waived or forfeited, if not raised in a timely fashion. This doesn't mean that these rights are ignored, or that a judgment that is entered after a party fails to assert them conflicts with the statutory scheme or is somehow invalid.
Espinosa, at 1118.

The Ninth Circuit rejected an argument that United did not receive due process.

It makes a mockery of the English language and common sense to say that Funds wasn't given notice, or was somehow ambushed or taken advantage of. The only thing the creditor was not told is that it could insist on an adversary proceeding and a judicial determination of undue hardship. But that's less a matter of notice and more of a tutorial as to what rights the creditor has under the Bankruptcy Code--a long-form Miranda warning for bankers. If that were the standard for adequate notice, every notification under the Bankruptcy Code would have to be accompanied by Collier's Treatise, lest the creditor overlook some rights it might have under the Code.
Esinosa, at 1121.

On motion for rehearing en banc, the Ninth Circuit found it necessary to add some additional authority to its opinion. One of its insertions referred to a treatise written by Judge Keith Lundin, stating:

Rather, we agree with Judge Lundin that "Pardee and Andersen stand soundly for the better-reasoned principle that notice of how the Chapter 13 plan affects creditors' rights is all that the Constitution, the Bankruptcy Code and the Bankruptcy Rules require to bind creditors to the provisions of a confirmed plan under § 1327(a)." Keith M. Lundin, Chapter 13 Bankruptcy § 229.1 (3d ed. 2000 & Supp. 2004)."
553 F.3d at 1196.

Judge Lundin makes an interesting point. If the confirmation injunction in Travelers was valid regardless of whether the Bankruptcy Court arguably exceeded its subject matter jurisidction, wouldn't it follow that an order confirming a chapter 13 plan would be entitled to similar respect even if the debtor failed to comply with the procedural niceties for commencing an adversary proceeding.

Will Espinosa Extend the Reach of Shoaf?

The outcome in Espinosa will have significant repercussions in the Fifth Circuit. The Fifth Circuit has three opinions holding that a provision in a plan cannot determine the allowance of a claim or the secured status of the claim. In re Taylor, 132 F.3d 256 (5th Cir. 1998)(chapter 11 plan could not establish amount of responsible person liability at $0); In re Howard, 972 F.2d 639 (5th Cir. 1992)(chapter 13 plan could not reduce amount of secured claim to $500); In re Simmons, 765 F.2d 547 (5th Cir. 1985)(no res judicata effect for chapter 13 plan which erroneously listed claim as unsecured). The Fifth Circuit has held that this trio of cases is an exception to the general rule contained in Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987) that unobjected to provisions in a plan are enforceable based on res judicata. Since the rationale in the Simmons trio was that additional procedural requirements were required to affect a claim, an opinion upholding Espinosa could undermine these precedents.

Monday, June 15, 2009

Chapter 11 in Texas: Introduction to the 2008 Cases

Enron filed in the Southern District of New York. However, there are still chapter 11 cases being filed in Texas. During 2008, there were a total of 701 chapter 11 cases filed in Texas. This will be the first of a series of posts examining the Class of 2008. In future posts, I hope to look at who filed, who represented them and how many were successful.

Where Do Texas Chapter 11s File?

In this post, I will look at something more basic: where did the cases file. The answer is that more chapter 11 cases are filed in big cities than in small towns. While there is nothing surprising about the fact that more chapter 11s were filed in Dallas or Houston than in Lubbock, it is interesting that some large metropolitan areas attract a disproportionate number of cases.

The cases were distributed among the four districts of Texas as follows:

Southern District of Texas--271
Northern District of Texas--249
Western District of Texas---102
Eastern District of Texas----79

Of the cases filed in Texas, 663 originated within Texas and 38 were filed by out of state debtors. During 2007 (which is the most recent year available), the population of Texas was 23,904,380. That means that on average, there was one chapter 11 filed for every 36,055 residents. However, that does not mean that every county with at least 36,055 residents could claim a chapter 11 of their very own. Indeed, some 29 counties with at least this much population, including Midland and Taylor did not have any cases. Instead, the cases were skewed toward the larger counties.

The 20 largest counties gave rise to 589 filings for an 89.7% share of the total cases originating from Texas. These counties only contain 71% of the state's population. Thus, it appears that the large counties get a disproportionately large share of the filings compared to the state at large. This is not true across the board. The county with the lowest ratio of residents to filings was humble Camp county. This county had seven filings (all related to Pilgrim's Pride) and a population of 12,557 for a rate of one chapter 11 case for every 1,794 residents.

When the filings per population are compared between the 20 largest counties, there is a definite bias in favor of the Dallas/Fort Worth and Houston megaplexes.

The term Ch.11PP refers to Chapter 11 cases filed per population. A low number means that more cases were filed than would be predicted by the population, while a high number indicates the reverse.

While there is not a complete correlation, counties in the D/FW and Houston area, including Collin, Dallas, Denton, Harris and Tarrant, a a lower Ch.11PP rate (meaning had more cases than would be predicted strictly by population) than the rest of the state. However, some of the outlying counties in the Houston megaplex, including Fort Bend, Montgomery, Brazoria and Galveston counties, had fewer cases than would be expected. The border counties did not show a clear trend. Webb and Cameron counties had higher filing rates, while El Paso, Bexar and Hidalgo counties were in the bottom group. Rounding out the less than expected group were Travis, Nueces, Jefferson and Bell Counties (although Travis was just about average, one of the rare occasions that designation will be applied to the capital of Keeping It Weird).


Why do cases flock toward some localities and avoid others? Access to judges may be part of the answer. Harris County has four resident judges, while Dallas county has three. On the other hand, Lubbock County, Jefferson County and El Paso County all share judges with other divisions. However, this does not explain Bexar County, which has two resident judges but a low filing rate. Access to the chapter 11 bar may be a factor. Many of the counties which had lower rates of filings were outliers from major metropolitan areas. Montgomery, Fort Bend, Brazoria and Galveston Counties are all part of the Houston megaplex with lower than expected filing rates. If most of the chapter 11 lawyers are located in Houston, individuals and small businesses in outlying areas might be deterred from hiring a lawyer in the big city. Another possibility may be that the types of business prevalent in an area might influence the filing rate. For example, areas with high amounts of agriculture (Lubbock, Nueces) seem to be lower in filings. Suburban areas have very inconsistent results, with Denton, Collin and Williamson Counties ranking high and Ft. Bend, Montgomery and Brazoria counties ranking low.

If you would like a copy of the chart which is easier to read, please send an email to

Coming Attraction

The next installment of the Class of 2008 will look at the flameouts, the cases that were dismissed or converted in the first 90 days. Although I have not done the research yet, I suspect that paying the filing fee in installments may be an indicator that a case is on rocky ground. I am amazed at just how many cases there are in this category.

Friday, June 12, 2009

Another View on Chrysler

The Chrysler deal has now closed, proving that it is possible to do a multi-billion dollar asset sale on an expedited timetable when the U.S. government is your DIP lender and is directing the pace. I am still scratching my head at the ease with which this deal went through. In the realm where I practice, an attempt to sell the debtor's assets to a purchaser selected by management for a small fraction of the secured debt would not only be denied, but would likely be followed by a motion for sanctions. However, when you are dealing with a debtor whose failure could send nuclear shock waves across the economy, it may be that the strict legalities give way to more pragmatic considerations.

Here is a pragmatic analysis from guest-blogger Steve Roberts.

How about this.

If the government did not step in, Chrysler would shut down and go into liquidation and the senior lenders with $6.9 billion in debt would be paid less than the $2 billion or 29 cents on the dollar the government is offering them.

So the government is using your and my money to bail out the lenders along with everyone else. But holdouts among the lenders are screaming that their constitutional and statutory rights are being violated because inferior claims are getting more.

Lets look at that. Who do we, the taxpayers, need if there is any chance for us to get our money back? The the supply chain and the workers. Without them there is no bailout and the senior lenders would get less. So New Chrysler cuts the unions into the deal and assumes the supply contracts with the suppliers to maintain the supply chain.

The Indiana pension funds, who are the last holdouts among the senior lenders, say that the government is hurting the teachers and state employees of Indiana with this bailout, so let's examine that. The fund managers for these funds bought Chrysler debt in or after 2007 and paid 43 cents on the dollar for it, betting that Chrysler would survive. They were wrong. They did not lose money because the government stepped in. They lost money because they lost on the risk they took.

These fund managers have said publicly in this case that they will settle for 50 cents on the dollar, a neat 7 cent profit. And since the government will not use your and my money to bail these fund managers out for their miscalculation, they are appealing the approval of the sale to the 2nd Circuit on an emergency basis.

They must be betting that the government will pay them more if they win and are willing to take the risk that the government will not let the bailout fail.

Since Steve wrote this analysis, both the Second Circuit and the Supreme Court refused to block the sale and it has now closed.

However, I think it highlights what an unusual case this is. Chrysler was not a meaningful player in its own bankruptcy. Instead, the case tested how much the treasury was willing to pay to avoid the collateral damage from a Chrysler failure. The senior lenders (or at least the holdouts) were not banks which had lent money directly to the debtor, but rather speculators who had bought the debt in the hopes of making of a profit. As Steve correctly points out, the objecting creditors, having seen that the government was in the bailout business, wanted a bailout of their own investment decision. The government stood firm and was backed up by the courts.

What I really want to know is how can I use this precedent in my next single asset real estate case?