Venue Reform, Cristol Comments and More at NCBJ

I am at the National Conference of Bankruptcy Judges in Atlanta.    The conference includes some of the best bankruptcy continuing education in the country.    There is no way to report on it all, so I will be offering some random observations.   

Moonlight Run

The  healthiest event of NCBJ is Bernstein-Burkley’s Wake Up and Run.    This year’s event drew about 60 runners willing to meet up at 6am for a 5k run.    The race was done professionally with personalized race bibs, chip timing and souvenir tshirts.    It was still full on dark at the race’s start time of 7am, so it ended up being a moonlight run through the park.    Judge Elizabeth Stong of the Eastern District of New York finished second in the women’s division.    Judge Tony Davis was the fastest Texas runner I recognized with a blazing speed of 26:32.    I finished much further back in the pack behind such Texas luminaries as Hugh Ray and Allan Diamond.   I recognized the names of at least five judges who were brave enough to get up at the crack of dawn and go running in the dark. 

Venue

I attended a meeting of the Venue Working Group.   This is a group of about 100 attorneys from 35 states who are working to build support for venue reform in Congress.   The group is supported by the Commercial Law League of America and includes many members from the group.    Peter Califano made a presentation on the group’s work later in the day.   According to Peter, during 2003-2012, there were  559  chapter 11 cases filed in Delaware and 104 in the Southern District of New York which had their headquarters elsewhere.    Those cases involved $2 trillion in collective debt.   

The Working Group supports legislation similar to HR 2533, introduced by Reps. Smith and Conyers, which would have eliminated state of incorporation venue and restricted affiliate venue.

Douglas Rosner of the Working Group will be testifying before the ABI Chapter 11 Reform Commission in November.    The Group will also be participating in the CLLA’s legislative conference in February 2014.

363 Sales

The presentation on 363 sales raised more questions than it answered.    One rhetorical question asked is whether debtor’s management is a mere tool of the secured lenders and whether cases run for the benefit of the secured creditors are proper under the Code.   Another question was whether 363 sales can be structured to accomplish results that could not be obtained under a plan, such as paying some administrative claimants but not others and paying money to unsecured creditors when senior creditors are not being paid in full.    The question was posed of whether the judge could “throw out the Code to do the most good for the most people.”

Student Loans

Judges Anita Shodeen (Bankr. D. Ia) and Michael Williamson (Bankr. S.D. Fl.) had a “debate” on student loans.   I put debate in quotes because they agreed with each other far more than they disagreed.    However, the point-counterpoint format was lively.   

Judge Shodeen noted the difficulty of trying cases with pro se debtors who may suffer from mental illness.   She noted that North Carolina has a program for low cost mental health evaluations for student loan plaintiffs.   

Both judges suggested that practitioners push back on the Bruner test for undue hardship.    Judge Shodeen suggested that the legislative history indicated that section 523(a)(8) was originally intended as a guard against debtor abuse and that it should be brought back to that purpose.

Judge Williamson rejected the appeal to legislative history noting:

Looking to legislative history is like going to a cocktail party and looking for a friendly face.   You’ll probably find one.   

However, he emphasized that the Bruner test is a product of a bygone age when student loans could be discharged in as little as five to seven years and student loan defaults had not ballooned to over 17%.    He said that it is “time for trial courts to get a little aggressive” in pushing back against Bruner and urged attorneys to “push the envelope on these issues.”

Lawrence B. King Award

Judge Jay Cristol received the Lawrence B. King Award from the Commercial Law League.   While I was well acquainted with Judge Cristol’s poetic efforts, I was not aware of his service as a pilot.    During the Korean War, he flew submarine hunting missions off an aircraft carrier.   On a training run, he once shot a missile that ricocheted back and hit his own plane.    More recently, while flying patients for charitable medical treatments, he suffered engine failure and had to put his plane down on the highway.    He has also donated $1 million of his own funds to the University of Miami’s pro bono program.    Finally, he is the author of an acclaimed book on the Liberty Incident in which Israel fired on a U.S. ship during the Six Day War.  

In discussing the history of bankruptcy, which once included debtor’s prisons, he said:

I once proposed lender’s prisons for bank officers who made loans that were not properly underwritten.  It was not well received.

Judge Cristol offered five suggestions for reforming bankruptcy and insolvency laws:

• Eliminate prebankruptcy credit counseling. 

Credit counseling is as valuable as telling a person with a heart attack to listen to a lecture on healthy eating habits before he can have open heart surgery.

•  While Judge Cristol did not oppose the personal financial management course, he said it came too late. He recommended that all high school students be required to complete a financial management course.

• He recommended bringing back “real” usury laws.

• He said that education should be free in the United States or that student loans should be dischargeable. He said that 

I see little difference between a person who borrows $100,000 to open a pizza business and the person who borrows $100,000 for an education. Why shouldn’t they both be dischargeable?

He also asked: 

“Why undue hardship? Why isn’t hardship enough?”

• He also said that chapter 13 would be more useful if courts could modify home mortgage loans. He said this “would be the law if the major banks were not so greedy and stupid.”

It is somewhat ironic that the person being honored by a creditors’ rights organization used his acceptance speech to criticize certain creditors. However, after 28 years on the bench and 38 years of service in the Naval Reserve, he has earned the right to speak his mind. His presentation was lively and drew a warm response from the crowd. 

Thursday’s Keynote Speech

Bloomberg News Editor Bill Rochelle gave the keynote address for the CLLA lunch.    Prior to joining Bloomberg in 2007, he was a bankruptcy lawyer for 35 years.

He thanked the CLLA for inviting him to an event where he wouldn’t have to pay for any of his food or drink for four days.

The more the bankruptcy business declines, the more the turnaround managers parties to hold onto market share

he remarked.

He predicted that Executive Benefits Insurance Agency v. Arkinson will not make much difference, but that “the next case will be a whopper.”   He said that when he attended oral arguments in Stern v. Marshall, he observed that all of the justices (even the ones who eventually dissented) were “very concerned about preserving the perogatives of Article III judges.”    He said that if the Supreme Court rules against the viability of waiver and consent, it will only affect cases currently pending.   However, the next case to reach the Supreme Court could hold that decisions in cases decided long ago are invalid.   He noted that Judge Jed Rakoff (S.D. N.Y.) has held that decisions by Bankruptcy Courts within the ambit of Stern v. Marshall are not entitled to res judicata or collateral estoppel effect and are only binding between the parties.   He said that the next case decided by the Supreme Court under Stern v.Marshall could spell the end of the U.S. Magistrate system.

However, he said that Law v. Siegel is likely to be the big case of the term.    Law v. Siegel is a Ninth Circuit case that I have previouslywritten about in which the Circuit affirmed the Bankruptcy Court’s decision to take away a debtor’s exempt property under section 105 based on misconduct.    He said that the case could be “a blockbuster case on whether federal courts can use their equity powers to override the plain meaning of statutes.”    He said that the case could be the turning point on equity.  

He proceeded to discuss numerous areas where there are splits between the circuits, including equitable mootness, artificial impairment, inherited IRAs, recharacterization of debt into equity, dismissal for bad faith based on pre-petition conduct, whether the Fair Debt Collection Practices Act is preempted by the Bankruptcy Code and whether wage garnishments within 90 days of bankruptcy are preferences.   

Rochelle proposed creating a Federal Circuit Court for Bankruptcy.    He noted that disagreements between the circuits are growing while the Supreme Court hears only a few bankruptcy cases.   Sending all bankruptcy cases to one federal circuit composed of judges from each of the other circuits would allow for uniformity in bankruptcy law that is not present today and reduce the opportunities for forum shopping.

CLLA Afternoon Panels

The main thing that I took away from the discussion on complex litigation in Ponzi Scheme cases is that there is a presumption of fraud in Ponzi Scheme cases but no one agrees on its boundaries.   I also learned that Kathy Bazolan Phelps and Judge Steven Rhodes have written The Ponzi Book:   A Legal Resource for Unraveling Ponzi Schemes.  

The main take aways from the Current Developments program were that deepening insolvency is still viable in Europe where it is known as “wrongful trading” and can lead to jail time and that the cases over who owns the unfinished business of bankrupt law firms are still very much in play after being a major topic of discussion at last year’s NCBJ.

In the ethics panel, I learned that there is a new proposed Rule 2014 which will only require disclosure of material connections, but will require the firm to disclose how it defined materiality in doing the conflicts check.   It will also require firms to disclose what process they followed to score creditors’ committee gigs.

Another theme was that when caught in an ethical violation, remorse is good.   It is better for the firm and its partners to accept responsibility than to deny that anything happened or throw the young associate under the bus.