Tuesday, October 10, 2017

NCBJ Report: Broken Bench TV

This year's National Conference of Bankruptcy Judges takes place in Las Vegas at the Paris Hotel and Casino.   The conference kicked off just one week after the horrific shootings here.  Mass shootings represent a break down of the social contract.  The law is intended to resolve disputes between people without the need for violence.   Bankruptcy law deals with break downs of financial relations.   It can involve such weighty matters as whether a company goes out of business or a family loses their home.  It is an imperfect system.   However, the terrible tragedy that occurred here is a reminder of the alternative to the rule of law.  #VegasStrong.

The conference opened with Broken Bench TV, NCBJ's current events program anchored by Judge Bruce Harwell (Bankr. D. N.H.), Prof. (and candidate for Congress) Katherine Porter from the University of California Irvine School of Law and Prof. John Pottow from the University of Michigan School of Law.     Last year, NCBJ opened with Broken Bench Radio.   This year brought the conference into the 21st Century with a combination of highly produced video reports and live in-studio conversations. 

21st Century Repo Man

Judge Mildred Caban from the Bankruptcy Court of Puerto Rico talked how technology is enabling auto lenders to more efficiently repossess autos.   She said that there is $1.2 trillion in auto debt in this country with one-fifth being advanced to people with bad credit.  She described secret weapons that subprime auto collectors ploy, including GPS trackers, starter interrupters and plate recognition technology.    A starter interrupter is a device which prevents the vehicle from starting.   A buy here pay here lender may give a debtor a code good for just that month or may disable the vehicle if payments are not made. Interestingly, Article 9 of the UCC specifically allows lenders to employ a device which renders the collateral inoperative.    License plate recognition allows repo men to identify vehicles that have been slated for pickup as they drive around.   The judge described a scene of repo men trolling a neighborhood where their presence was more pervasive than the police.

Adventures in Valuation

Bill Rochelle from ABI and Susan M. Freeman with Lewis Roca Rothgerber Christie LLP presented a segment on Current Developments in the Saga of Sunnyside Housing.   This case dealt with a major valuation opinion from the en banc Ninth Circuit.

Bill Rochelle introduced the discussion by noting that the Courts of Appeals had recently had two Emily Litella moments.   Emily Litella was the Saturday Night Live character who go off on a rant about something she had misheard and then when she was corrected would say "never mind."  (Remember the segment on Soviet Jewelry?). Mr. Rochelle said that the Fifth Circuit had an Emily Litella moment in Matter of Hawk.   The Court initially ruled that a chapter 7 trustee could seek turnover of property that was finally exempted when it changed form.  After a petition for rehearing, an outcry from the bankruptcy bar, an amicus brief and coverage from Bill Rochelle, the panel reversed itself.   (Bill did not mention his role in bringing attention to the issue).

The other Emily Litella moment occurred in In re Sunnyslope Housing Limited Partnership, 818 F.3d 937 (9th Cir. 2016).   This was an affordable housing project.   As long as the debtor owned the property, it could only be used for affordable housing.   However, if the lender took it back, it could realize a greater value.    Thus, it was the rare case where liquidation value was greater than going concern value.  The panel opinion declined to apply the Rash case which required application of fair market value.    It focused on the language in Sec. 506(a) to value collateral based on the creditor's interest in the property.   However, on en banc review, the full Ninth Circuit reversed.   In re Sunnyslope Housing Limited Partnership, ___ F.3d ___ (9th Cir. 5/26/17).  The en banc court stated that it would take the Supreme Court at its word in the Rash decision.   It also noted that Sec. 506(a) actually refers to the creditor's interest in the debtor's interest in the property.   Thus, value under Sec. 506(a) could never exceed the value of the property in the debtor's hands.

There has been a petition for cert. filed in the case.   Rochelle stated that if cert was granted, "I'm going to wet my pants" because it would mean that the Supreme Court was willing to re-examine the rights of secured creditors.

Judge Laura Grandy (Bankr. S.D. Ill.) gave a commercial for the 2018 NCBJ in San Antonio which will be the city's tricentennial.   In discussing retail bankruptcies, she noted that it was a shame that Payless and not Prada was not well heeled.

Getting Paid

Prof. Porter and Ed Baltz discussed issues of getting paid in consumer bankruptcy including unbundling and fee only chapter 13 cases.    Mr. Boltz said that if someone files a chapter 7 petition without receiving a retainer on the premise that they did not perform any work pre-petition, he has either committed malpractice or is lying.    However, he said the alternative was to wait until the debtor could cobble together the fee during which he would still be subject to collection actions.  An alternative is to file a no money down chapter 13, which he described as two-thirds of the chapter 13 cases being filed.  He said that the key to doing a fee only chapter 13 case was getting informed consent from the client.     Finally, Mr. Baltz discussed how suing creditors can be a way for debtor's lawyers to get paid.  He dismissed the Johnson v. Midland Funding case as merely eliminating "low hanging fruit."

Supreme Court Weather Report

Elizabeth Wydra of the Constitutional Accountability Center presented the Supreme Court weather report.    She said all eyes are going to be on swing vote Anthony Kennedy this term.   She noted the strange weather patterns presented by the gerrymandering case and noted that "representatives should not choose their voters; voters should choose their representatives."    Other highlights of the court's term include the Masterpiece Cake case about whether a Christian baker could refuse to bake a cake for a gay wedding and the whether public employee unions could charge non-members a representation fee, an issue on which the court had deadlocked 4-4 in the prior term.   She described the Carpenter case dealing with whether accessing cell phone tower records without a warrant as "sunshine through the partisan fog" (meaning that the case is likely to draw broad agreement among the justices)

Two New York bankruptcy judges, Judge Bob Drain and Judge Alan Gropper had a segment on binding arbitration of bankruptcy matters.    They noted that when parties seek to employ arbitration in bankruptcy, the answer is usually emphatically no.    However, the Supreme Court is dramatically in favor of arbitration.    Judge Drain raised the question of whether there could be arbitration of a motion to approve a DIP loan.   Judge Gropper stated that there are conflicting cases on whether a debtor could be forced to arbitrate a discharge violation.   I found two cases denying arbitration of discharge violations but could not find one allowing it.   Harrier v. Verizon Wireless Personal Communications, LP, 903 F.Supp.2d 1281 (M.D. Fl. 2012); In re Jorge, 568 B.R. 25 (Bankr. N.D. Ohio 2017).   They said that bankruptcy should not be allowed on a "core" bankruptcy matter but then changed that to a "primary" bankruptcy issue to avoid confusion with the formal core/non-core dichotomy.

Up in Smoke

Retired Judge Keith Lundin appeared to offer an op-ed on cannibis bankruptcies.   He appeared with a cardboard figure named CK (which I think stands for Cannibis Keith).  He appeared to be dazed and confused when he said that he was stoked about cannibis bankruptcies but that a letter from the U.S. Trustee meant that those cases could go up in smoke.  

The U.S. Trustee program has issued a letter to trustees directing them not to administer marijuana assets in bankruptcy because marijuana remains illegal under federal law.   However,he raised the issue of what is a marijuana related asset.   Is it the warehouse where the cannibis was stored?   What about the truck that delivered the pot?   What if an employee of a marijuana dispensary files chapter 13.   Are his wages marijuana-related assets?     The Bankruptcy Court for the District of Colorado has dismissed a marijuana related case on the basis that the trustee would violate the law by administering the assets.  In re Arenas, 514 B.R. 887 (Bankr. D. Col. 2014).

Judge Lundin argued that there is not an exception in the Bankruptcy Code for toxic assets.  However, he said that the U.S. Trustee has the power to say, "I appoint you and I forbid you."

At that point, Irving Picard, trustee for Bernie Madoff, called in.   Mr. Picard said that he had collected $12 billion on behalf of creditors.   Judge Lundin asked him if any of the money he recovered constituted proceeds from illegal activities, to which Mr. Picard said, that's what a Ponzi scheme is.

Judge Lundin concluded by stating that with the U.S. Trustee forbidding trustees to administer cannabis-related assets that state court receiverships may be sprouting up in the states where it is legal.

Structured Dismissals

 Craig Goldblatt and Chris Landau, who battled each other in the Jevic case, appeared to discuss the case.   Mr. Goldblatt said that the takeaway from Jevic was that you can't have an end of case distribution which violates the the priority scheme and that any priority skipping distributions must have a code-related objective.  Mr. Landau said that although he technically lost the case, it was a win in the bigger picture of defining when payments to critical vendors, employee wage claims and other similar items would be permissible.

A Series of Unfortunate Events

 Professors Porter and Pottow discussed Sundquist v. Bank of America (In re Sundquist), 566 B.R. 563 (Bankr. E.D. Cal. 2017) in which Bank of America found itself on the receiving end of over $40 million in damages for violating the automatic stay again and again and again. 

The case began with a promised loan modification that Bank of America apparently never intended to process.   That does not violate the law.  However, it did result in the Sundquists filing Chapter 13.  Nevertheless, Bank of America proceeded to foreclose on the Sundquists and evict them from their home.   The Court founds that the stay violation would have been apparent to anyone who cared to look but that nobody at Bank of America cared to look.   Bank of America's agents then disconnected the utilities so that the yard died.   Attempting to remedy the situation, Bank of America transferred the property back to the Sundquists but failed to tell them.   Meanwhile, the overgrown loan, the homeowners association made an assessment against the Sundquists for failure to maintain their property.  

The case was so serious that one of the debtors was hospitalized and the other attempted suicide.   The Court awarded $1 million in compensatory damages to the debtors and $45 million in punitive damages.   The Debtors were ordered to pay the punitive damages award to the National Consumer Law Center, the National Consumer Bankruptcy Rights Center to five law schools in the University of California system (including UC Irvine School of Law where Prof. Porter teaches).  In awarding punitive damages, the Court described the case as a problem of corporate culture.

The professors noted that the parties are now engaged in settlement negotiations.  One term being discussed is vacating the opinion.   As a result, they said, go to 566 B.R. 563 and read the case while you still can.
A Commercial for Pro Bono Appeals

Retired Judge Gene Wedoff appeared to give a commercial for his new project to represent pro se individuals in bankruptcy appeals on a pro bono basis.   He said that in 28 years as a judge, he saw many people who had good issues but could not afford to appeal.   He said "I want people to know that I am giving away appellate services."   

He gave an example of one of his projects, an appeal of a student loan dischargeability case.   A teacher went to school to gain a graduate degree so she could work as an administrator.   However. she couldn't get an administrative position.   She persuaded the bankruptcy court that she was subject to an undue hardship while representing herself on a pro se basis.  However, the District Court reversed.   It rejected the Bankruptcy Court's fact finding without explaining why.  It also found that the debt should not be discharged because she did not make a wise decision in pursuing the additional education.   The Eleventh Circuit reversed requiring the District Court to explain its fact finding and to reject its new requirement.  

Buying Retail

Rick Wynne with Jones Day offered a prognosis on the future of retail bankruptcies.   He said the tsunami of retail bankruptcies is just started.   Low interest rates have allowed lenders to keep extending the debt and delaying the inevitable.   He said that one huge problem is not no one has found a way to respond to Amazon..   He said that retail companies are further weakened by high amounts of leverage.   For example, ToysRUs has a ratio of debt to EBIDTA of 14:1 compared to Amazon whose ratio was 1.3:1.   He said that another problem was that retail cases must go fast due to utility deposits, 503(b)(9) claims and restricted deadlines to assume or reject leases.

Many of the issues covered briefly in this program were the subject of later panels.

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