Fifth Circuit Report: June 2015

This month's Fifth Circuit report doesn't have a lot of bankruptcy sizzle:  an interesting case on abstention and remand,  two unpublished cases about how not to reserve a claim under a plan and a case about suing a trustee.   However, there are some fascinating cases about lenders, liens, fraudulent transfers, the Texas Debt Collection Act and the Fair Debt Collection Practices Act.    The big news here is that the Fifth Circuit vacated its Golf Channel decision and instead certified the question to the Texas Supreme Court.   Here are June's decisions.   (Click on the style of the case to go to the actual opinions).

  

MtGox Chapter 15 Case Brings Japanese Insolvency Proceeding and Bitcoin Drama to Dallas Bankruptcy Court

Bankruptcy sometimes provides a window into unfamiliar worlds.   The recent chapter 15 filing by MtGox Co., Ltd. contains an interesting explanation of the bitcoin phenomenon as well as Japanese involvency proceedures.   In re MtGox Co., Ltd., No. 14-31229 (Bankr. N.D. Tx.).   Here are a few nuggets that I picked up from the initial filings.  

By way of introduction, MtGox Co., Ltd. is a Japanese company that operated a bitcoin exchange in Tokyo.  According to Wikipedia, MtGox is an acronym for “Magic:  The Gathering Online Exchange.”  Unforutnately for MtGox, the magic turned sour.   On February 28, 2014, it filed for reorganization in Japan after it found that it was missing bitcoins valued at $473 million which constituted about 7% of all of the bitcoins in circulation.   This raises the question of just what is a bitcoin and how does someone steal half a billion dollars’ worth of them.   

All About Bitcoin

According to the Declaration of Robert Marie Mark Karpeles (Dkt. #3), “Bitcoin is a form of digital currency that was first conceived of in 2008 by a person or group going by the name of Satoshi Nakamoto.”     Attributing the conception of bitcoin to a pseudonymous person or group suggests that this digital medium of exchange is to currency what Anonymous is to the internet, that is, a shadowy, disruptive force.    According to Wikipedia, Satoshi Nakamoto is probably not Japanese and is probably not an individual.   Whether he is an individual or a group, he launched the first Bitcoin software in 2009 and then handed it over to Gavin Andresen (an engineer with a degree from Princeton) in mid-2010.   For his or its troubles, “Nakamoto” ended up with a million bitcoins.   

Continuing on with the Declaration:

The first actual bitcoin was created, or "mined" in 2009. There are several ways in which a person can obtain bitcoin, including the following:

o Bitcoins are "created" through a computer software algorithm which, at any point in time, resides on thousands of computers on the Internet. Persons who accept to certify bitcoin transactions over the bitcoin peer-to-peer network are remunerated by the issuance of a fixed number of bitcoins which evolves over time. The certification is done by the solving of an "algorithm" with the use of ever-more powerful computers. These persons are called "miners" and the process of obtaining bitcoin in this fashion is called "mining."

o A person can also obtain bitcoins that have already been mined by buying them from another. These transactions can consist of "one-to-one" transactions between a buyer and seller. In addition, a person can buy or sell bitcoin through an online exchange, such as the exchange operated by MtGox on the mtgox.com website. In these exchange transactions, the buyer and seller create accounts at the exchange and then fund the account with currency funds, bitcoin or both. The user can then enter a buy or sell order online and the website will match the buy or sell order with one or more sell or buy orders. The buyer receives an increase in bitcoin in his/her account and the seller receives an increase in currency in his/her account. The bitcoin exchange receives a fee or commission for the transaction.

o A person can also obtain and use bitcoin through commercial or merchant transactions; that is, a person can use bitcoin in certain circumstances to pay for goods and services.

Users store bitcoins in a digital "wallet" using either the software provided as part of the bitcoin software or a wallet provided by various providers. MtGox provides a wallet feature. A wallet can be materialized on a piece of paper and bitcoins need not be stored on a computer.

The MtGox exchange allowed persons with MtGox accounts to buy and sell bitcoin among themselves. In this regard, a person was to first open an account at MtGox and was assigned an account number. Once a user wanted to start buying or selling bitcoin on the mtgox website, he or she would need to "fund" the account with currency, bitcoin, or both. In addition, the account holder would be subject to "anti-money laundering" ("AML") procedures.

Once the account was "funded," the account holder would have a "currency balance" in the account, corresponding to the amount of currency he or she had a right to withdraw; and, a "bitcoin balance" in the account, corresponding to the amount of bitcoin he or she had a right to withdraw.

 Declaration, pp. 2-4.

While the part about mining bitcoins by solving an algorithm using ever more powerful computers sounds really technical, I think it can be boiled down to this.  I think that what happened was that someone came up with the idea of bitcoin and persuaded other people to exchange currency or products in return for it.   This is basically the story of currency everywhere.   While we may have once relied upon coins made of precious metals, it still required an agreement that these shiny objects had value.  All money is based on the shared idea that it has value.    Once enough people agree that a thing has value, then it does—at least until people stop thinking it does.

Meanwhile, MtGox was founded in 2007 by Jed McCaleb as a site for trading cards like stocks.   In July 2010, McCaleb read about Bitcoin on Slashdot and decided to create an exchange for trading Bitcoin and regular currencies.   In March 2011, McCaleb sold MtGox to Mark Karpeles while retaining a 12% interest.   Karpeles is a software developer who was born in France in 1985 and moved to Japan in 2009.   

The problem with having something of value is that people who are not nice may try to take it from you.   This happened with MtGox.   Going back to the Declaration:

The mtgox.com website has been subject to numerous attempts by persons to breach its security, create denial of service ("DOS") situations, or to otherwise "hack" the system, and this has been the case since MtGox started operating the website in July 2011. In certain circumstances such attempts have led to the company shutting down the site for periods at a time.

On February 7, 2014, all bitcoin withdrawals were halted by MtGox due to the theft or disappearance of hundreds of thousands of bitcoins owned by MtGox customers as well as MtGox itself. The cause of the theft or disappearance is the subject of intensive investigation by me and others -- as of the present time I believe it was caused or related to a defect or "bug" in the bitcoin software algorithm, which was exploited by one or more persons who had "hacked" the bitcoin network. On February 24, 2014, MtGox suspended all trading after internal investigations discovered a loss of 744,408 bitcoins presumably from this method of theft.

 Declaration, p. 4.    This illustrates another peril of the digital world.   When your asset consists of computer code, there are going to be hackers who will want to breach your network and mess with your stuff, which is apparently what happened to MtGox.    While losing half a billion dollars of your customers’ non-corporeal assets to theft is embarrassing, it is not as bad as JP Morgan losing $5.8 billion from trading credit default swaps or MF Global losing $1.6 billion of customer funds from bad trades.

The Japanese Main Proceeding and the Dallas Chapter 15

While the internet does not exist within fixed borders, companies do.   MtGox was physically located in Tokyo, Japan.   While it is curious that the creator of bitcoin used a Japanese pseudonym, Mark Karpeles was already living in Tokyo when he acquired MtGox in 2011.   So what you have is a Frenchman living in Tokyo who acquires an exchange from an American for trading a digital currency developed by an anonymous person or collective using a Japanese name.    

Returning to the Declaration:

In order to protect the MtGox business as a going concern and retain its value while MtGox investigates the theft of the bitcoins under its control and addresses security defects in the bitcoin exchange, MtGox filed a petition (the "Japan Petition") for the commencement of the Japan Proceeding in the Tokyo Court pursuant to Article 21(1) of the JCRA on February 28, 20 I4, reporting that the company had lost almost 750,000 of its customers' bitcoins, and around 100,000 of its own bitcoins, totaling around 7% of all bitcoins in the world, and worth around $473 million near the time of the filing.

The Japan Proceeding is a civil rehabilitation. The purpose of a civil rehabilitation proceeding is to formulate a rehabilitation plan as consented to by a requisite number of creditors and confirmed by the court, to appropriately coordinate the relationships of rights between creditors and the debtor, with the aim of ensuring rehabilitation of the debtor's business or economic life.

In addition to the petition for commencement, MtGox also filed applications for a temporary restraining order and for a comprehensive prohibition order which were issued by the Tokyo Court on February 28, 2014. At the same time, the Tokyo Court issued orders for the appointment of a supervisor and examiner (collectively, the 'Tokyo Court Orders").

The Tokyo Court appointed Mr. Nobuaki Kobayashi, a Japanese attorney, as MtGox's supervisor and examiner. Under the Tokyo Court Orders, the Debtor cannot execute any agreement with any third party without the consent of the supervisor and examiner. The Debtor however remains free to initiate or pursue any legal proceeding provided that the costs of these proceedings be approved by the supervisor and examiner. On March 10, 2014, Mr. Kobayashi, pursuant to the powers conferred upon him by the Tokyo Court Orders, issued a consent allowing the Debtor to hire Baker & McKenzie to file this Chapter 15 case as counsel of Debtor, allowing the payment of Baker & McKenzie's fees and further acknowledging that this consent was granted at the condition that MtGox's sole Director and Chief Executive Officer, Mr. Karpeles, file this Chapter 15 case as the foreign representative of MtGox.

Under the current status of the Japan Proceeding, the supervisor/examiner does not have the powers to manage the assets of the Debtor. As a consequence, the current management of MtGox remains in place and is allowed to continue to operate its businesses as a debtor-in-possession. I understand that this is permitted under the JCRA and that MtGox has submitted the evidence legally required for the relief to be granted upon formal commencement.

Declaration, pp. 5-6.   In case you were wondering what a Japanese Insolvency order looks like, here is an image of one page:

From what I can discern, the JCRA allows something like our debtor-in-possession procedure with an independent supervisor and examiner who must approve certain actions but does not run the business.  According to a Brief filed by MtGox's American lawyers, Baker & McKenzie, the JCRA was modeled on Chapter X of the U.S. Bankruptcy Act of 1898. 

The Chapter 15 proceeding was filed in response to legal proceedings in the United States.    After Jed McCaleb sold his majority interest in MtGox to Mr. Karpeles, he founded a company named CoinLab, Inc. in the United States.    CoinLab filed suit against MtGox in the Western District of Washington in 2013.   Immediately after MtGox ceased operating, a class action was filed against it in the Northern District of Illinois.    When the Chapter 15 proceeding was filed, MtGox filed a Verified Petition for Recognition and Chapter 15 Relief in which it sought to have Mark Karpeles recognized as the “foreign representative” of MtGox.  It also requested that it be granted provisional relief pending recognition to have the automatic stay apply to MtGox in the United States.   

On March 10, 2014, Judge Harlin Hale entered an order providing that the automatic stay apply “to the Debtor and its assets until further order of this Court or as so ordered at the Recognition Hearing.    The Court scheduled a hearing on recognition of the foreign proceeding before Judge Stacey Jernigan to be commenced on April 1, 2014.    Somehow it seems fitting that the hearing for recognition of the bankruptcy for the exchange that had its digital crypto-currency pilfered will begin on April Fools’ Day.       

Ethics, Empiricists and International Insolvency at NCBJ

Saturday was the final day of the National Conference of Bankruptcy Judges.   The panels focused on ethics issues of the future, the role of empirical research and international insolvency.

Ethics

The first topic up on the ethics panel was reasonable investigation.    The hypothetical involved a lawyer who was unwittingly asked to facilitate money laundering and purchase of estate assets with hidden assets.   Recent cases to be aware of include In re Soare, 493 B.R. 158 (Bankr. D. Nev. 2013)(attorney who failed to investigate whether judgment was nondischargeable and then refused to represent debtor in nondischargeability action required to disgorge fees) and  In re Goodman, No. 12-1643 (9^th Cir. BAP 9/5/13)(sanctions against attorney for negligent representation affirmed)(unpublished opinion can be found here).   

We  learned that ABA opinion 465 says that there is not a per se prohibition on attorneys offering groupons.    (That doesn’t mean it’s a good idea, though).   

The Ethics 20/20 Commission is working on guidelines that would allow foreign lawyers to appear in U.S. proceedings on a pro hac vice basis.   However, a U.S. lawyer must reserve the absolute right to advice on American law.

Hunter v. Virginia State Bar, 744 S.E.2d 611 (Va. 2013) is an interesting case on the intersection between blogging and State Bar advertising requirements.   Hunter published a blog titled “This Week in Richmond Criminal Defense,” which was accessible from his firm’s website.    The overwhelming majority of posts were about cases in which he obtained favorable results for his clients.   The blog did not contain any disclaimers.   The Virginia Supreme Court found that Hunter’s blog constituted commercial speech subject to regulation by the Bar.    The Court found that the Bar could require Hunter to place disclaimers on his posts about his own cases to the effect that the results in the given case did not guarantee the same results for other people.    However, it found that the First Amendment allowed Hunter to discuss public details of his cases without the client’s permission.   A dissent would have found that the First Amendment prevented the Bar from regulating the blog.    

Muniz v. United Parcel Service, 2011 U.S. Dist. LEXIS 11219 (N.D. Cal. 2011) dealt with whether the defendant could subpoena the plaintiff’s lawyer’s postings to a listserv.    The Court quashed the subpoena.   The case illustrates the danger of revealing work product by posting on a listserv.

Empirical Research

The panel on empirical research features three academics:   Dean J. Richard Leonard of Campbell University School of Law, Prof. Theodore Eisenberg of Cornell Law School and Prof. Melissa Jacoby of UNC School of Law.   

Until recently, Dean Leonard was a bankruptcy judge.   He said that when he took the bench, he asked what he should read and was referred to Warren and Westbook’s empirical book, As We Forgive Our Debtors.   He pointed out that empirical studies published by just one law review, the American Bankruptcy Law Review, were cited in 32 opinions ranging from trial courts to the Supreme Court.   

Prof. Eisenberg said that empirical research can be used to disprove the conventional wisdom about bankruptcy.   He referred to the view that the American bankruptcy system is too pro-debtor and noted that the concept of a Debtor-in-Possession is shocking to other countries.   He pointed to empirical studies showing that U.S. reorganization cases paid 20% more to unsecured creditors than those in other countries.   Of twelve studies looking at payouts to unsecured creditors in different countries, the top five payouts were in American bankruptcies.   His conclusion was that the combination of the absolute priority and the Debtor-in-Possession led management to propose a higher dividend to unsecured creditors than plans in other countries.  

He also talked about the importance of studying fees.   He said, “From the day you graduate, (fees) will control your life.”    He said that big fees made news while small ones did not.   In this regard, he said that newspapers were just doing their jobs.   However, he said that the headlines did not reflect reality.  In smaller cases, the fees awarded average 17.6-21.6% of the assets of the debtor.  However, when the assets involved exceeded $100 million, the fees averaged 1-2% of assets.   He contended that fees charged by other professionals, such as investment bankers, charged more in fees.   

In an interesting study, courts denied requested fees at the following rates:

Delaware             0.74%

New York            4.50%

Everyone else      2.29%

While I did not catch his conclusion, mine would be that you can’t assume that judges in Delaware and New York always march in lockstep. 

Prof. Jacoby expressed the concern that empirical studies were too reactive.   She said that there were numerous studies framed in response to concerns that debtors were getting too much relief in bankruptcy.   She said that this approach was a limiting factor on the questions that academics ask and that academics should be more proactive in asking questions that others were not raising. 

Two random points that she made were that academics need more theory in empirical research and that empirical research meant observation and that academics should take the time to observe bankruptcy courts at work.

Prof. Eisenberg got on a soapbox about parties making unsubstantiated claims about the legal system.  He said:

You shouldn’t be able to stand in front of an audience and make nonsensical claims (with statistics).   The Chamber of Commerce does it every day.  

 He went on to say that we study areas that we care about, such as economic statistics.   He said:

You couldn’t say that the inflation rate is 20% (and get away with it).  However, you could say that plaintiffs are recovering multimillion dollar verdicts because of crazy juries. 

The learned professors also made two seemingly contradictory statements.   On the one hand, they stated that there is a lot of shoddy empirical research out there and that empirical studies should not be blindly accepted.   On the other hand, they said that the appeal of empirical research was the “ability of completely untrained people to get into it.”   I think that the point here was that anyone can pick a facet of the legal system to observe, but that it is helpful to partner with statistics geeks to help tell you the significance of what you observed.   (TBLB:  My words, not theirs).

International Insolvency:  The Good, the Bad and the Ugly

The international insolvency panel largely focused on three cases:  In re Lehman Brothers Holdings, Inc., No. 08-13555 (Bankr. S.D. N.Y.) (the good), In re Nortel Networks, Inc., No. 09-10138 (Bankr. D. Del.) (the bad) and Ad Hoc Group of Vitro Noteholders v. Vitro, SAB de CV (In re Vitro, SAB de CV), 701 F.3d 1031 (5^th Cir. 2012) (the ugly).   (The Clint Eastwood reference came from panelist Bruce Leonard).    The panelists were Judge James Peck from the Southern District of New York, Marc Adams of Wilkie Farr, Andrew Leblanc from Milbank Tweed and Bruce Leonard from the Ontario office of Cassels Brock.    In some cases, my notes do not indicate who said what so I will have to attribute comments generically to the panel. 

Before getting into the cases, Judge Peck provided an introduction to chapter 15.   Judge Peck noted that according to section 1501, the purpose of chapter 15 is to “incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of” increasing cooperation between courts of the United States and other countries.    However, as illustrated by the cases that followed, there are factors that get in the way of those purposes.

According to Mr. Abrams, chapter 15 is “the exclusive portal through which foreign representatives can seek assistance of the U.S. bankruptcy courts.”   Chapter 15 allows an American court to recognize and enforce orders and decrees from foreign courts.   It is not a reorganization chapter like chapter 11, but merely allows American courts to assist foreign courts with regard to assets of foreign entities in the United States.

Under Chapter 15, a foreign representative may seek recognition of a proceeding in another country as either a foreign main proceeding (Main Proceeding) or a foreign non-main proceeding (Non-Main Proceeding).    A Main Proceeding is one that is filed in the company’s center of main interest (COMI).    A Non-Main Proceeding is one filed anywhere else that the company has non-transitory economic activity.  A proceeding filed somewhere that is neither a COMI or has non-transitory economic activity is not entitled to recognition.    

Unlike the U.S. venue laws, the COMI determination pays little attention to the company’s domicile or state of incorporation.   Instead, it is more of a nerve center test.   While this may seem clear, Judge Peck commented that “what is written down is not necessarily clear until the circuit court tells you it is clear.”    In the recent case of Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013), the Second Circuit held that COMI is determined as of the date of filing of the chapter 15 petition, so that activities of the foreign representative prior to the filing of the chapter 15 can change what would have otherwise been the COMI.  

   

The importance of being a Main Proceeding vs. a Non-Main Proceeding turns on sections 1520 and 1521.   Under section 1520, a Main Proceeding (which is a proceeding filed in the COMI) is entitled to automatic relief, including enforcement of the automatic stay and sales free and clear of liens for assets in the USA.    Under section 1521, there are various forms of discretionary relief that can be granted to either a Main Proceeding or a Non-Main Proceeding.

The panelists stated that Lehman Brothers and Nortel Networks shared many similarities.   Both were large entities with multi-national operations that took a major hit after the freeze of the credit markets in September 2008.   Nortel filed in September 2008, while Lehman Brothers held on until January 2009.   (TBLB:  The role of the U.S. government in orchestrating the filing of Lehman Brothers is well documented in the movie Too Big to Fail in which a committee of top economic advisors decides that Lehman Brothers should go ahead and file chapter 11 at which point someone asks whether the company should be informed).

In the Nortel case, the business operated in 140 countries through a series of five business lines as opposed to operating through subsidiaries.   It filed proceedings in the United States, Canada and the U.K.    The U.S. claimed priority based on the location of the assets, Canada claimed priority based on the company’s headquarters and the U.K. claimed dibs based on the location of the intellectual property.   The United States and Canadian proceedings recognized each other as contemplated by UNCITRAL.   The U.S. also recognized the U.K. proceeding as a Non-Main Proceeding.   However, the Canadian and U.K. administrators did not seek recognition of each other’s proceedings.  

Based on the view that the company’s assets were melting ice cubes, the three administrators quickly agreed upon a sale of the company’s assets for $7 billion.   However, four years later, the funds continue to sit in escrow because the parties could not agree upon a formula for allocating the sales proceeds.   After three failed mediations, a trial has been scheduled for 2014 with at least four competing formulas for distribution.   

Mr. Abrams commented that the Model Law was not well equipped to deal with the situation where there were three competing COMIs.

Judge Peck stated:

It is hard to design a law that gets to good results.   People have to get to good results.

The panel’s consensus was that because the Nortel assets were sold prior to obtaining an agreement for distribution of the proceeds that the parties lacked sufficient incentives to cooperate once the money was in the lockbox.   

According to Judge Peck, in Lehman Brothers, on the other hand, the assets were “not easily monetized” and “had to be cultivated.”   The only way to unlock the value was through a consensual plan, as opposed to Nortel where the creditors were in gridlock.    In Lehman Brothers, the parties negotiated a protocol for international cooperation and “based on the excuse given by the protocol, people talked to each other and developed a plan.” 

Vitro was a large Mexican glassmaker with U.S. debt.    It obtained approval of a concurso in Mexico and sought recognition in the United States.   In Mexico, all creditors vote together in a single class, including insiders and intercompany claims.   Furthermore, approval of a concurso constitutes a novation which releases all guarantors.   Finally, because a focus of the Mexican law is preserving jobs, a concurso must have the approval of equity.    

When Vitro sought recognition in the U.S., Judge Hale said no based primarily on section 1506, which states that relief need not be granted if it would be “manifestly contrary to the public policy of the United States.”     I have previously written about Judge Hale’s decision here.   The Fifth Circuit affirmed Judge Hale, but on different grounds.   You can find the Fifth Circuit opinion here.   The Fifth Circuit ruled that the granting of non-debtor releases is an issue that has divided the circuit courts.   Because federal courts do not agree upon this issue, allowing non-debtor releases could not be “manifestly contrary.”   Instead, the Fifth Circuit held that:

On the basis of the foregoing analysis, we hold that Vitro has not met its burden of showing that the relief requested under the Plan—a non-consensual discharge of non-debtor guarantors—is substantially in accordance with the circumstances that would warrant such relief in the United States. In so holding, we stress the deferential standard under which we review the bankruptcy court’s determination. It is not our role to determine whether the above-summarized evidence would lead us to the same conclusion. Our only task is to determine whether the bankruptcy court’s decision was reasonable.

Opinion, p. 58.  

The panel was critical of this opinion, asking whether it meant that the United States would be exporting its laws to other countries.    Judge Peck stated:

Recognition was intended to be a presumption to facilitate the reorganization goals of other jurisdictions.   Vitro seems to have changed that model.  

Mr. Abrams argued that:

The panel put blinders on when applying a plain meaning approach.

Abrams also said that he thought Judge Hale had the right approach in examining whether the result was manifestly contrary to the public policy of the United States, even though he did not agree with the Judge’s conclusion.  

 

The panel noted that the Fourth Circuit has opined that Courts should avoid reaching the section 1506 issue to avoid retaliation.   Judge Peck stated that:

I defer to a court that is at least civilized.

He gave the example of a case decided by a local court in India that he had deferred to.   

In the Fairfield Sentry case, the Second Circuit was asked to address the “manifestly contrary” issue in the context of a foreign proceeding in which the records had been sealed.   It held that open records were not a matter of such importance to US policy as to negate recognition.

Mr. Abrams concluded with the remark that

It is not time to trigger an Amber Alert for Chapter 15 and international cooperation yet.

Parting Thoughts:

This is a very good conference.   However, when I attend, I am usually pulling down long days and am mainlining coffee to stay awake.   I can’t help but notice that some very smart people are not very dynamic speakers.    If you are speaking at a conference as prestigious as the National Conference of Bankruptcy Judges, is it not too much to ask that you look up from your notes and speak loudly enough to be heard.    If you sound bored with your own presentation, you are probably putting your audience to sleep.   I would also like to put in a word for more diversity in program formats.     Four people on a one hour panel who don’t interact with each other is nothing more than a series of short monologues.   While brevity is much to be desired, fifteen minutes or less is not enough time to tell me something I don’t already know.   When it comes to putting together a panel, quality of content is to be desired over quantity of talking heads.    If you are going to put multiple people up there, make them interact with each other and preferably disagree on some things.   In the words of Robin Williams, “If you are going to go into the jungle, clash.”  The student loan debate was a good example of how to keep things lively.

NCBJ 2012: Important Cases, Chapter 15, A Constitutional Tour De Force and the CFPB

I made it to three panels each on Friday and Saturday.   I will combine them here for ease of posting.  If you read nothing else, read the Supreme Court discussion, including late-breaking news on Stern v. Marshall.

The Most Significant Business Bankruptcy Decisions and Developments of 2011-2012

This panel discussed four recent cases.  I have discussed Highland Highgate and Gateway RadLAX elsewhere, so I will just focus on the two remaining decisions.

In Development  Specialists Inc. v. Akin Gump Strauss Hauer & Feld, 477 B.R. 318 (S.D.N.Y. 2012), the court considered the obligations of partners of a dissolved law firm to account for earnings from old firm business that they take to a new firm.   Under the Uniform Partnership Act, partners at the time of dissolution have a duty to each other to account for benefits they receive from “use” of partnership property.    The Court ruled that the departing partners owed the firm an accounting for profits earned measured by receipts less expenses.   The Court declined to rule on the following issues on summary judgment:

(1) The Partnership Law requires the departing partner to account for profits he realizes from the use of the dissolved firm's unfinished business. Is that measured by his share of the new firm's profit on the matter, or by the entire profit realized on the matter?

(2) What constitutes a deductible "expense" or "overhead" at the new firm? What portion of the new Firm's realized fee is profit and what is expense (which will entail dissection of billing rates to tease out the profit factor from the cost factor)?

(3) How does one value the Former Coudert Partner's contribution of "effort, skill and diligence" to the matter?

 

477 B.R. at 350.   The Court subsequently authorized an interlocutory appeal.    

The case raises serious questions about whether partners who remain with a firm at dissolution will constitute a burden on their new firms, since they may be forced to account for any profits on work brought from the old firm.   Since part of the attraction of a lateral hire partner is his book of business, this would severely diminish the attorney’s value in the marketplace.   Since the rule only applies to persons who are partners at dissolution, it also creates an incentive for lawyers to jump ship and thus hasten the decline of the firm.    

These are issues that law firms should address in their partnership agreements before they go bust.   Also, the rule might apply differently in jurisdictions which follow the Revised Uniform Partnership Act.

In In re TOUSA USA, Inc., 680 F.3d 1298 (11^th Cir. 2012), the parent company paid off existing debt by borrowing new funds secured by the assets of its subsidiaries.   The Bankruptcy Court avoided the transfer as to both the lenders who were paid off and the lenders who got new liens.  The District Court reversed as to the original lenders.   The 11^th Circuit affirmed the original bankruptcy court ruling.  Even though the original lenders did nothing more than receive payment on their debts, the fact that the funds came from encumbering the assets of the subsidiaries meant that they were transferees for whom the fraudulent transfer was made.   I will be writing more about this decision soon.

Round Two:   Scoring a Knockout on Appeal

This panel included Guy Cole, a former bankruptcy judge who now sits on the Sixth Circuit, Jim Haines of the First Circuit BAP, and Supreme Court advocates Eric Brunstad and Susan Freeman.

Judge Cole offered a bad joke based on an anecdote from Eric Brunstad at the prior day’s luncheon.  In a Supreme Court argument, Brunstad had tried to explain the need for prompt action by bankruptcy courts, giving the examples of rotting bananas and melting ice cream.  This prompted a straight-faced question from Chief Justice Rehnquist about “melting bananas,” demonstrating that even Supreme Court justices can mix a metaphor.  

Judge Cole asked:

Q:        What happens to a melting banana?

A:        It loses its appeal.

Sorry, I couldn’t resist repeating that.  (It might have actually been Judge Haines who told the joke, but I will give the credit to Judge Cole since he sits on a higher court).

I picked up a few practical points from this panel.

Focus on your audience.   While a bankruptcy judge or a BAP may be familiar with bankruptcy terms, an appellate judge will be unlikely to.   As noted by Judge Cole, about 70% of his docket consists of criminal appeals and pro se prisoner cases.    Someone pointed out that “indubitable equivalent” is half of a haiku.  I think the point was that our jargon may be confusing to higher courts.

Put it in context.   Since your case will be reviewed by judges unfamiliar with bankruptcy law and law clerks just out of law school, be sure to explain why it makes a difference.    If the difference between two different interest rates means that the debtor wins reorganization or faces liquidation, this would be a good thing to point out.

For oral argument, practice giving sound bite answers.  Susan Freeman pointed out that doing a moot court, especially for Supreme Court arguments, will work out weak areas in your argument.  Because oral argument is short, being able to give concise, responsive answers is a must.

Focus on the level of the court you are arguing to.   The Supreme Court does not care what a bankruptcy court somewhere has to say about an issue.   They care about what they have said before and what the circuits have to say.

Coming to America Broke:  Chapter 15 Plain and Fancy

In this discussion of chapter 15, Judge Alan Gropper had the best bankruptcy pun of the conference when he noted that, “We used to look for commies.   Now we look for COMIs.”    While both similarly sounding terms have international implications, COMIs or Centers of Main Interests, actually have a positive connotation under chapter 15.

While chapter 15 may sound exotic, it is simply the means by which an American court can provide assistance to a court conducting an insolvency proceeding in another country.   Chapter 15 is based on the UNCITRAL Model law adopted in 1997.  It is based on the concept that a foreign representative appointed in a foreign proceeding may request recognition and enforcement in the United States.

To begin with, there must be a “foreign proceeding” including the following elements:   

(i) a proceeding; (ii) that is either judicial or administrative; (iii) that is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to insolvency or the adjustment of debts; (vi) in which the debtor's assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation.      

 In re Betcorp, 400 B.R. 266 (Bankr. D. Nev. 2009).

If there is a foreign proceeding, a foreign representative may request recognition.   In order to receive recognition, a proceeding must be either a “foreign main proceeding” filed in the business’s Center of Main Interest (or COMI) or a “foreign nonmain proceeding” filed in a country in which the company has a business “establishment.”    In re Bear Stearns High-Grade Credit Strategies Master Fund, Ltd., 389 B.R. 325 (S.D. N.Y. 2008) established that a proceeding commenced in a so-called letterbox jurisdiction might be neither a main proceeding nor a nonmain proceeding.   In that case, a fund was established in the Cayman Islands, but all of its business activities were in the United States.   The Court refused to recognize the Cayman Islands proceeding.

Prof. Jay Westbrook said that international insolvency could be approached from a strictly territorial approach or a broad universal approach.   Because there is no international court system, chapter 15 acts on the basis of a modified universalist approach.   A court somewhere gets to be the lead court and other courts may assist.   

Recognition under chapter 15 is meant to be an easy process, and according to a study by Prof. Westbrook, is granted 95% of the time.   Once a proceeding has been “recognized,” a U.S. court may grant “additional relief” if parties are “sufficiently protected.”   The Vitro SAB case (which I wrote about here) is a case where the Court found that a Mexican proceeding did not sufficiently protect American creditors and denied additional relief.   The case is currently pending before the Fifth Circuit.  

According to Prof. Westbrook, there have been 585 chapter 15 cases commenced since 2005.   Initially these cases predominantly came from tax havens.  However, since the Bear Stearns case, some 65% come from Canada and the United Kingdom.   

The papers from this presentation are available to the public here.      

Bankruptcy Bingo:  The Battle for Bragging Rights

This panel discussed ten recent bankruptcy decisions of interest in a game show format.   Judge Sheri Bluebond, the game’s hostess, deserves high praise for taking a panel of ten judges and four contestants through ten cases in 60 minutes.    The cases discussed were:

In re Maharaj, 681 F.3d 558 (4^th Cir. 2012).   The absolute priority rule applies to property owned by the debtor pre-petition.   The exception to the absolute priority rule only applies to post-petition property.

Ackerman v. Eber, 687 F.3d 1123 (9^th Cir. 2012).   Court would not compel arbitration of dischargeability issues over debtor’s objection. 

In re Nortel Networks, Inc., 669 F.3d 669 F.3d 128 (3^rd Cir. 2011).   No police power exception to automatic stay where foreign government was seeking to protect its own interest in funding pensions.

Behrman v. National Heritage Foundation, Inc., 663 F.3d 704 (4^th Cir. 2011).   Court remanded case involving third party releases where bankruptcy court findings were couched in terms of generalities rather than specific findings.   

In re XMH Corp., 647 F.3d 690 (7^th Cir. 2011).   In an appeal involving assumption and assignment of a trademark license, the fact that the license had expired allowed the court to assign the non-executory portions of the contract.

In re TOUSA USA, Inc., 680 F.3d 1298 (11^th Cir. 2012).   Old lenders were entities for whose benefit avoidable transfers were made.

Peterson v. McGladrey & Pullen, 676 F.3d 594 (7^th Cir. 2012).   Suit brought against auditors of debtor who operated a ponzi scheme was barred by in pari delicto.   Because suit was brought under state law, state law defenses applied.

Perkins v. Haines, 661 F.3d 623 (11^th Cir. 2011).   Ponzi scheme investors established defense for return of principal.   They gave value and acted in good faith, thus entitling them to defense.

In re Friedman, 466 B.R. 471 (9^th Cir. BAP 2012).   Debtor may retain both Sec. 541 property and Sec. 1115 property without violating absolute priority rule.  This case conflicts with In re Maharaj above.

In re Mirant Corporation, 675 F.3d 530 (5^th Cir. 2012).   Although debtor was headquartered in Georgia, Georgia had no significant interest in enforcing repealed Georgia law in fraudulent transfer action.   Court applied New York law instead.   For reasons that are unclear to me without reading the opinion, the Fair Debt Collection Practices Act somehow affected a fraudulent conveyance case involving commercial transactions.

 The specific questions and answers can be found on the NCBJ website here.  

What 33 Years of Supreme Court Interpretations of the Bankruptcy Code CanTeach Us

Continuing the Supreme Court theme, Professors Erwin Chemerinsky and Ken Klee and Judge Judy Fitzgerald spoke about Supreme Court interpretations of the Bankruptcy Code.    These speakers deserve extra credit because they put their panel together on short notice after Justice John Paul Stevens was unable to make the conference.   They sounded several interesting themes, including the ongoing battle between textualists and purposefulists and how the circumstances of the court can affect major decisions.

The Supremes on Statutory Interpretation:

According to Prof. Klee, there are deep divides on the court as to how to interpret the Constitution and statutes.    The textualists, led by Justice Scalia, will follow the text even when their philosophical leanings would lead them elsewhere.    The purposefulists, led by Justice Breyer, will look more deeply into the purpose of the statue.     Nevertheless, the Supreme Court does not care deeply about bankruptcy.   According to Prof. Klee, they do the best that they can and leave it to Congress to fix it if they get it wrong.

Prof. Klee used three cases as illustrations.

Hall v. United States, 132 S.Ct. 1882  (2012).   This chapter 12 case dealt with the question of what happens to taxable gain when farmer has low basis and the farm is foreclosed upon during the bankruptcy.   The farmer can be left with a terrible problem because the tax is not part of estate and not subject to discharge.  Sen. Grassley authored legislation to avoid this problem.  Unfortunately, the intent not reflected in language of statute.   Justice Sotomayor wrote majority opinion for a 5-4 court.  The Court applied a strict textualist approach to find that the language should be interpreted as written, rather than as intended.   Prof. Klee speculated that this opinion might mean that Justice Sotomayor might actually have some textualist leanings.  This problem  would not occur in an individual  chapter 11 case because there is a separate taxable estate in a chapter 11 case.

Marrama v. Citizens Bank, 127 S.Ct. 1105 (2006).  In this 5-4 statutory interpretation case, a debtor who filed chapter 7 and was caught in wrongdoing sought to convert to chapter 13.  Although the statute said there was an absolute right to convert, Justice Stevens, applying a purposefulist approach, upheld the bankruptcy court decision denying conversion.   Justice Stevens said that it was nonsensical to allow conversion if the debtor could not stay in chapter 13 absent good faith.   The textualist minority said there because there was an absolute right to convert, the only proper approach was to allow conversion and then re-convert the case.   The majority said that bankruptcy was for the benefit of the honest but unfortunate debtor and that scoundrels should not have the right to convert (whether the Code says so or not).

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012).   In this 8-0 decision, the court, rather than examining the extensive history of the term “indubitable equivalent” relied on a statutory canon to determine that the specific provision of Sec. 1129(b)(2)(A)(ii) controlled over the more general Sec. 1129(b)(2)(A)(iii).   

Prof. Erwin Chemerinsky noted that the fact that there have only been three statutory interpretation cases relating to the Bankruptcy Code in recent years reflects the reduced number of cases being heard by the Supreme Court.   Throughout much of the 20^th Century, the Court heard over 200 cases per year.  In 1978, the Court decided 162 cases.   While Chief Justice Roberts lamented the Court’s declining docket in his confirmation hearing, the court decided just 65 cases in the last term.   As a result, many important legal issues will go for longer periods of time without decisions.

Prof. Chemerinsky said that the court has a deeply divided bench with regard to both statutory and constitutional interpretation.  Justice  Scalia’s largest impact on the court has been changing how judges approach  legislative history.   He was the first justice to suggest that legislative history is irrelevant and he often gets a majority to join him. While Justice Breyer advocates looking at the underlying purpose of the statute and is willing to look at legislative history, he considers history to be just an indication of the purpose of the statute.   

Prof. Chemerinsky decried an over reliance on the plain meaning approach, noting that rarely will cases come to the Supreme Court with texts that have plain a meaning.   Where there are two plausible interpretations, either one can be supported under the plain meaning approach.    In that instance, the words of the statute don’t answer the question.   

Stern v. Marshall Dissected and Placed in Historical Context:

Prof. Chemerinsky argued that the two most important constitutional decisions relating to bankruptcy were driven by very different concerns.   In Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982), a plurality led by Justice Brennan held that the jurisdictional scheme of the Bankruptcy Reform Act of 1979 was unconstitutional because it allowed non Article III bankruptcy courts to determine state law issues between non-debtor parties.   Prof. Chemerinsky asked, why did the liberal wing of the court care about giving too much power to non-Article III judges?   His answer is that they didn’t.   At the time, Congress was threatening to remove the power of  the federal courts to hear controversial issues such as abortion and affirmative action.   According to Prof. Chemerinsky, “I think that what the Supreme Court did in Marathon was to send a message to Congress about the ability of Congress to limit the power of the (Article III) courts.”   He noted that the only possible constitutional fix to this problem was to make bankruptcy judges Article III judges.   However, Chief Justice Burger and the Article III judiciary opposed this move.    Congress created the core/non-core distinction which did not really solve the problem.     

    

Over time, the Supreme Court changed its approach toward non-Article III Courts.   In Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985) and Commodity Futures Trading Commission v. Schor (1986),  the court adopted a functional approach.   The core/non-core distinction made sense from a functional point of view.

All of this changed  with Stern v. Marshall, 131 S.Ct. 2594 (2011), which Chemerinsky described as the second most important case with  regard to the Bankruptcy Reform Act of 1978.  In this case, it was the conservative wing of the court that sought to limit the power of the bankruptcy court.    Chief Justice Roberts and the conservative wing of the court took a formalistic approach which looked to what the term judicial power of the United States meant when the Constitution was adopted.   The liberals, led by Justice Breyer, took a functional approach, noting that the core/non-core distinction worked as a practical matter.   Prof. Chemerinsky said that one of the puzzles of the two cases is why the Supreme Court found it important to require Article III courts to determine matters of state law.   After all, most state law issues are decided by state courts which do not have the protections guaranteed by Article III.  The answer, which I think was left unstated, is that the bankruptcy courts are a football being kicked back and forth between the liberal and conservative wings of the court to advance other agendas.

Prof. Chemerinsky said that a big question is whether consent will solve the problem.  He said that if consent works, there will not be much practical impact from Stern.    He then dramatically added that “Until yesterday, consent was enough to solve the problem.”   On October 26, 2012, while the NCBJ was proceeding, the Sixth Circuit decided Stone v. Waldman,  No. 10-6497 (6^th Cir. 2012), which can be found here.     

 This is the first circuit court decision to hold that the Stern problem cannot be solved through consent.    He said that if this decision is followed, the impact will be enormous.   If the Supreme Court takes up Stone v. Waldman and rules that consent is not adequate, then bankruptcy courts will be required to do reports and recommendations in all matters in which they cannot issue a final order.    This would lead to ping-ponging back and forth between bankruptcy and district courts, delay, additional expense and the elevation of form over substance as overworked district courts rubberstamp bankruptcy court rulings.   He added, “In the end, I am of the conclusion that the only solution is to make Bankruptcy Judges Article III judges, but question whether there is the political will to do this.”   

Prof. Klee noted that in Stern v. Marshall, the plaintiff was found to have consented to determination of his state law defamation claims in the dischargeability context.   He said, “If the bankruptcy courts can’t decide claims,  we should close up shop and go home.”

Bankruptcy Judge Judy Fitzgerald asked, how far can I go in determining a claim?

In Stone v. Waldman, a chapter 11 debtor-in-possession argued that he had been defrauded by a creditor.    The bankruptcy court denied the creditor’s claim and also awarded $3 million in damages to the DIP.    On appeal, the defendant argued that the Bankruptcy Court lacked authority to enter judgment against him under Stern v. Marshall.   The Sixth Circuit found that the federal courts had jurisdiction over the debtor’s affirmative fraud claim but that the bankruptcy court lacked authority to enter a final judgment.  

As I read the decision, the Sixth Circuit ruled on waiver rather than consent.   The defendant did not object to the Bankruptcy Court’s ability to enter a final judgment against him.   The Sixth Circuit found that a party could not waive the right to have a claim determined by a constitutionally valid court.  It stated:

Waldman’s objection thus implicates not only his personal rights, but also the structural principle advanced by Article III. And that principle is not Waldman’s to waive.

Opinion, p. 8.  

Prof. Chemerinsky argued that this was a consent case because Waldman affirmatively pled that the claims against him were core proceedings.   I do not read the case that expansively.   While Waldman agreed that the claim was core, that does not end the issue, since Stern v. Marshall created the new category of core but unconstitutional.   Additionally, the Court used the term waiver in its analysis.  Is there a difference between waiver and consent?   I think so.    Time will tell.

Prof. Klee suggested that perhaps the solution was to have the U.S. Trustee designated as the representative of the estate so that all matters brought on behalf of the estate would implicate rights of the federal government and thus be public matters.

Prof. Chemerinsky described that as “an incredibly clever approach” but questioned whether the United States would be a real party in interest notwithstanding the designation.    In Qui Tam cases, a private party may sue in the name of the United States, but that is a situation where the U.S. is the party that has suffered the loss.   

Judge Fitzgerald then asked if changing case captions from “In re” to “Ex rel” would solve the problem.

 Prof. Chemerinsky predicted that there will be a split among the circuits. At this year’s Seventh Circuit Judicial Conference, Judge Easterbrook was dismissive of the notion that consent would not work.

One of the professors (sorry my notes are unclear) stated that if the court is going to take Stern seriously, what does that mean for magistrate judges and arbitrators?   While magistrate judges function more like true adjuncts to the district courts, they have the ability to conduct jury trials with consent.   The question was asked how that could survive if Waldman is the law.

 Prof. Chemerinsky said that it was difficult to try to predict what will happen in the future.  If the court takes a functional approach, it will “back away and take consent as solution.”  However, he said that he was skeptical that Supreme Court judges have any concept of what bankruptcy judges do and may decide the issue without thinking about what it means for the bankruptcy courts.

A Little Speech:

From there, the professors pivoted to discuss Milavetz, Gallop & Milavetz v. United States, 130 S.Ct. 1324 (2010).    Prof. Chemerinsky noted that BAPCPA regulates speech in many ways.   One area where he believed Congress had acted unconstitutionally was the provision prohibiting a Debt Relief Agency from advising an assisted person to incur debt in contemplation of bankruptcy.   Nevertheless, a unanimous Court, in an opinion by Justice Sotomayor, found the provision constitutional.   Justice Sotomayor read the provision as prohibiting an attorney from advising a debtor to take out debt for an improper purpose.   The professor opined that “just because the Supreme Court says something doesn’t make it right” and that it was a “nice way of writing the statute, but it’s not how Conress wrote it.”   He noted that even the textualist judges signed on the opinion, illustrating that consistency only goes so far (the last clause was mine, not Prof. Chemerinsky’s).

Prof. Klee argued that the court read a good faith requirement into statute.   “Here they took a statute about incurring more debt in contemplation of filing a case and limited it to incurring debt that is not good debt.”  He added that reading something into a statue that is not there to avoid a constitutional problem is not the same as the doctrine of constitutional avoidance.  He concurred that it was a “fascinating statutory interpretation case because the court rewrote the statute and the textualists went along with it.”  

Prof. Klee noted that statutory interpretation had changed since the Code was drafted in 1978.   At that time, the Supreme Court was clear that legislative history matter and the Code was drafted with that in mind. 

Immunity for the Sovereign (Don't Tell the Tea Party):  

Finally, the professors turned to sovereign immunity.   

Prof. Klee described 106(a) which waives sovereign immunity as an abomination.  He said that when the Court rejected a general waiver of sovereign immunity, a deal was cut in 1994, the parties sat in a room and went through every provision and negotiated whether immunity would be waived or not.  He said that this micro approach increased the probability that something would be missed.

Prof. Chemerinsky discussed the conflict in the Supreme Court’s sovereign immunity decisions.  In Pennsylvania v. Union Gas Co., 491 U.S. 1 (1989), the Court said that states could be sued if Congress said so. In Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), the Court said no. As a result, the carefully drafted language of section 106(a) became irrelevant after Seminole. 

 

In Tennessee Student Assistance Corp. v. Hood, 124 S.Ct. 1905 (2004), the pendulum swung back the other way.   The Supreme Court essentially ducked the constitutional issue and held that it did not apply because the discharge operated “in rem.”  Justices Scalia and Thomas dissented, arguing that whether jurisdiction is in rem or in personam, there is still an effect on an unwilling state.   Finally, in Central Virginia Community College v. Katz, 126 S.Ct. 990 (2006), the court held in a 5-4 decision that sovereign immunity did not apply to recovery of a preference in bankruptcy.  The decision came down in  Jan. 2006, just days before Sandra Day O’Connor left the court.  Prof. Chemerinsky stated that he always believed that the result would have been different if the opinion had come down two weeks later.    He believes that there are now five justices willing to overrule Katz who don’t accept that sovereign immunity doesn’t apply in bankruptcy.   

My heard hurt after this panel—not because it was bad, but because I think I got an entire Constitutional law course in one hour.   For my money, this fill-in panel was the highlight of the conference. 

Consumer Financial Protection Bureau’s Big Assignment

The final panel of the conference examined the Consumer Financial Protection Bureau.   Last year’s conference also included a CFPB presentation, but the bureau had been functioning for less than 90 days at that time.   The panelists included Prof. Pat McCoy, who had been with the bureau at its founding, Holly Petraus, Assistant Director for the Office of Servicemember Affairs and Gretchen Morgenson of the New York Times.

Prof. McCoy explained the new for the bureau pointing out that during the home mortgage boom, federal regulators did “precious little to deter reckless mortgage lending.”   Although the Federal Reserve was the one federal regulator that could have issued a regulation requiring that loans only be made to borrowers who could pay, Alan Greenspan had a philosophical opposition to banking regulation and said no.   The CFPB will be promulgating such a regulation by January 21, 2013.   The fragmented set of federal regulators prompted a “race to the bottom” to see which regulatory agency could get the most charters by offering the least regulation.    Additionally, banks faced competition from unregulated non-bank lenders.   This put pressure on banks to compete.   Finally, consumer protection was divided among four federal regulators whose core missions were bank safety and monetary policy rather than consumer protection.   Prof. McCoy stated that in the mortgage area, lack of controls over “nearly brought down the financial system.”    She added that ignoring consumer financial protection can lead to system-wide financial problems of “catastrophic proportions.”   

The Dodd-Frank legislation created the CFPB as the one federal regulator whose sole mission was consumer financial protection.    The Bureau opened its doors on July 31, 2011.   The Bureau reduced fragmentation by providing one agency responsible for consumer protection.   It took measures to avoid the regulatory race to the bottom by ensuring that lenders could not avoid regulations by switching to a new regulator.   It also subjected non-bank lenders to CFPB examination.   The bureau was also designed to avoid regulatory inaction on philosophical grounds because it was affirmatively required to enact rules.

Ms. Petraeus said that her goal was to “ensure that no one can build a financial model around deceptive business practices.”  She stressed the importance of requiring disclosure so that people can see the costs. 

She said that her job involved ensuring that servicemen received financial education, to monitor complaints and to protect military families.  She said that she has been to 40 military bases in connection with her job and that pay day lenders and scams were a major emphasis.

Ms. Petraeus also pointed out the difficulties involved for service members and home mortgages.   She said that she had moved 24 times during her husband’s 37 years of military service.   When a service member receives PCS orders, they may not be able to sell their property or rent it for enough to pay the mortgage.  

However, many service members do not qualify for mortgage modification programs because they are either are not in default at the time they receive orders or are no longer occupying their property.    While some lenders allowed mortgage modifications for service members transferred into a combat zone, they did not address the much more common scenario of regular transfers.    She said that the recent Attorney Generals’ settlement provided more options for service members and that they were working to ensure that a home would be deemed to be owner occupied if the service member planned to return to it.   

She said that defaulting on a mortgage in order to qualify for a modification program posed special problems for service members.   She said that financial problems constituted the number one cause of losing a security clearance in the military.   When this happens, the service member cannot work in his trained field and the military must find someone else to fill the vacancy.  

 

Ms. Petraeus spoke about the importance of financial education for service members.  She said that currently it is offered as part of basic training.   She said that when you take a new recruit and push him to his physical limits and then place him in a dark room where someone is giving a powerpoint talk, the natural result is nap time.    She spoke about how the military is now sending financial education packages to recruits during the period between enlistment and when they arrive to begin their service.  This deferred entry period can sometimes be substantial and allows an opportunity for education. 

Parting Thoughts

This makes the Fifth NCBJ I have attended.   This year’s conference attracted about 1,900 registrants and over 150 bankruptcy judges.    I made it to twelve panels in two and a half days, which is a lot of information to take in.   In between blogging, I had the opportunity to meet some new people, catch up with previous acquaintances, eat some convention lunches and drink a lot of coffee.   However, the most illuminating moment came during the closing night dinner on Friday when the dance floor was swarmed by judges, quite a few of whom displayed silver hair, dancing to the beat of Creedence Clearwater Revisited (composed of the band’s original rhythm section).  While there may have been a few practitioners up there, I saw a lot of blue badges (indicating judges) moving in that direction.  It was a good metaphor for the fact that we may be getting older and we have to overcome challenges such as the awkwardly drafted language of BAPCPA, but the bankruptcy community still has a lot of vigor and a bit of fun left in it.  However, I really wish I had taken some pictures.  See you next year in Atlanta.