Wednesday, October 31, 2018

NCBJ San Antonio: Highlights of Day 2

On Day 2 of NCBJ San Antonio, I went for a run, laughed at a musical about ethics, listened to a debate over equitable mootness, went to a fraudulent conveyance program and listened to an economist predict the next recession.

An Early Morning Run and an Opportunity to Give Back

Day 2 of this year's NCBJ dawned early for about 5% of the conference attendees who shrugged off the prior night's eating and drinking for an early morning Wake Up and Run.   The event, which is sponsored by Bernstein-Burkley, was particularly poignant because of the recent terrorist attack in Pittsburgh.   Here is what the firm had to say:
These horrific events have hit us close to home at Bernstein-Burkley, having occurred only a few miles from the firm's headquarters in Pittsburgh. Our employees lost friends and family members, and together as a united city, we grieve the loss of 11 neighbors.
The firm will donate $100 for every person entered in the race and will match contributions from NCBJ registrants up to $7,500.00.   To donate, please visit https://app.mobilecause.com/vf/JFPGH. Send a receipt of your donation to mluznar@bernsteinlaw.com and Bernstein-Burkley will match your donation. 

Getting back to the run itself, it was really dark out and was a reminder that there are a lot of lawyers and judges who are in better shape than I am.  However, I did finish the race and I got to see half of the judges in the Western District of Texas.   Congratulations to everyone who participated.   Robert Miller was the fastest runner, finishing in a blistering 17:32.   Judge Elizabeth Stong from the Eastern District of New York was the fastest judge.    

Ethics Follies

What could be a better way to learn about ethics than singing and dancing lawyers?   Ethics Follies 2018 presented a parody of Sister Act called Shyster Act.  I have posted a few clips below.



Since the point of an ethics presentation (beyond getting ethics hours) is to learn about ethics, here are a few takeaways.   Some of them were pretty obvious.  In the story an attorney who manages a singer co-mingles her trust funds with his client funds and then uses the money to hire internet trolls to try to influence a senate election.   When his associate refuses to participate in the scheme and quits the firm, lawyer Shyster shoots him.   The singer Lola sees this and goes into witness protection at a convent.   The obvious points here are don't co-mingle client trust funds, don't embezzle client trust funds and don't commit murder.   The less obvious point (only because the others were so glaringly apparent) is that an attorney may not commit an act he knows to be illegal or unethical and in the face of a demand to do so, must resign.   The ethical rules do not address how to avoid being murdered when you find out you are working for a criminal law firm.



There were a number of other ethical issues interspersed with the singing and dancing.  In one scene, an associate of the firm takes a selfie with Lola and is about to post it on Instagram when he has to be reminded about client confidentiality.   (In this case, Lola's location was confidential since she was hiding from Shyster). 

One song dealt with lawyers who went to mediation in bad faith so that they could run up their hours.  The bad male lawyers also made a plan to object to all the other side's discovery responses and set hearings when they knew the other side was going to be out of town.   This segment dealt with the duty not to overbill your client, the requirement to convey settlement offers to your client, the duty of fairness to the other side and counsel, and the duty of candor to the tribunal.

In another scene, an associate is passed over for promotion and is drinking heavily.   The partners discuss the resources available from the State Bar to help lawyers with substance abuse problems as well as the risks of allowing an impaired lawyer to advise clients.   However, the most moving part was the young associate's self-revelation when he sings "Before I can save someone else, I have to save myself."

There is also a random scene of bankruptcy judges singing about the Judicial Code of Conduct which all of us should find reassuring.



In the finale, Shyster forces his way into the convent and tries to shoot Lola.  The nuns offer to lay down their lives for their new friend who has taught them how to sing.  However, the heroic FBI agent disarms Shyster and receives a chaste kiss on the cheek from Lola.

The study guide to the musical covered at least twenty different rules from the ABA Model Rules of Professional Conduct.

Hooked on the Horns of a Legal Dilemma:  Can "Moo"tness Be Equitable? 

This was a moot court demonstration on the issue of ethical mootness.   The demonstration was more informative about the substantive issue than on how to argue an appellate case because both of the advocates were too good.   What I mean is that the advocates, Danielle Spinelli and Susan Freeman, did such a good job arguing their positions that there weren't any mistakes to learn from.


The case being argued was based on the facts of Sunnyslope, the affordable housing project that was worth more in foreclosure than as an ongoing business.   You can read more about the case at the CLLA Bankruptcy Blog here.    The oral argument highlighted the odd situation that equitable mootness runs counter to the principle that courts must hear cases within their jurisdiction but is accepted by all circuits.  

Ms. Spinelli lead off by arguing that equitable mootness was neither equitable nor about mootness.  She pointed out that prudential mootness exists where a court cannot craft a remedy of any sort so that any opinion would be advisory.  Equitable mootness on the other hand prevents review of a substantially consummated plan even when a remedy could still be fashioned.  She pointed out that the Bankruptcy Code expressly provides for two situations in which an order which has not been stayed is shielded from review:  DIP financing and sales free and clear of liens.  Since Congress expressly provide for non-review in those areas, it should be presumed not to have intended it in other cases.  She distinguished equitable mootness from abstention doctrines.  If a federal court abstains from hearing a case, it can still be heard by another court.  With equitable mootness, the appeal dies and the case is  not heard at all. She said that the role of equitable mootness should be limited to crafting a remedy which does not disturb the interests of third parties who have relied upon the confirmation order.

Ms. Freeman highlighted the impact on parties who have relied on the confirmation order, such as the investor who put funds into the project, the city that wanted to promote affordable housing and the tenants of the affordable housing project.   She argued that if plans could be reversed after substantial consummation that sophisticated investors would refrain from committing to a plan if there was a possibility of appeal of a confirmation order.  She said that reversal of the confirmation order would eviscerate the plan because the only effective remedy would be to allow foreclosure.  She distinguished the case from one involving third party releases where a discrete issue could be carved out without undermining the entire plan.   She also faulted the bank for not seeking a stay pending appeal noting that the bank had the resources to post a supersedeas bond but made the tactical decision not to do so.   

It was an interesting debate.  I have used equitable mootness and have argued against it.   I don't like it because it cuts off appellate review of plan confirmations and believe that it should be used sparingly.

ABI Roundtable on Fraudulent Conveyance Law

This presentation was mislabeled since everyone sat at a rectangular table.   The panelists discussed several hot issues in fraudulent conveyance law and invited discussion from the audience.

The first issue discussed was whether a deposit into a bank account was a "transfer."   This seemed like a silly issue to me but the courts have come up with different rationales for arriving at the same result.   In re Whitley, 848 F.3d 205 (4th Cir.), cert. denied, 138 S. Ct. 314 (2017) said that deposit of funds into a bank account was not a transfer.   Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017) said that it was a transfer but that the bank was not the immediate transferee so that the transfer could not be avoided.   In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017) involved a deposit of funds into an account that was used to pay a bank debt.   The bank argued that once the funds were deposited in the account, it had a right of setoff.  However, the Ninth Circuit said that in a hypothetical liquidation, the deposit of the funds giving rise to the setoff would have been an avoidable transfer itself.   The premise  behind these cases is that the funds are long gone.   It does not seem right to allow the trustee to recover the funds when the bank only held them in a technical sense.

The next issue had to do with clawback of parents paying tuition for their children.  The cases break down between the formalistic view stating that the parent did not receive a benefit from paying for their child's education and the broad view that moral or societal value constitutes reasonably equivalent value.  Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re Knight), No. 15-21646, 2017 WL 4410455, (Bankr. D. Conn. Sept. 29, 2017) applied the strict view.  DeGiacomo v. Sacred Heart Univ. (In re Palladino), 556 B.R. 10 (Bankr. D. Mass. 2016) held that the parents' view that having a financially self-sufficient child constituted reasonably equivalent value.   Sikirica v. Cohen (In re Cohen), Adv. No. 07-02517, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31, 2012), rev'd on other grounds, 487 B.R. 615 (W.D. Pa. 2013) found that  a debtor received “reasonably equivalent value” for funds used to satisfy reasonable and necessary expenses for the maintenance of the debtor’s family, and that payments for post-secondary undergraduate educational expenses are reasonable and necessary for the maintenance of the Debtor's family.  

Ron Peterson brought up  In re Adamo, 582 B.R. 267 (Bankr. E.D.N.Y. March. 29, 2018) which involved a payment made by parents to a student's tuition account.   The court found that the initial transfer was to the student and not to the college.  As a result, the college as mediate transferee could defeat the claim.   Mr. Peterson also raised the anomaly of a debtor who was obligated to pay for college tuition for an adult child under a divorce decree and the parent who remained married and paid for college tuition.  In the first case, the parent had a legal obligation to pay.  In the second, the obligation was only moral or societal.

The next topic was payment of fines.  I'm not sure what the issue is here.  If there is a legally enforceable debt, it is clearly reasonably equivalent value.   If a person pays a fine to avoid prison time, that would be reasonably equivalent value because a person can 't earn any money while they are in jail.  If it is a corporation paying a fine to prevent its executives from going to jail, that is not reasonably equivalent value.   First, the corporation does not benefit from protecting its execs.  Second, the incompetence of the executives was probably what put the corporation in bankruptcy in the first place.  Therefore, removing the executives would be a net benefit to the corporation.

Finally, there were issues relating to taxes.   In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) involved a sub-s corporation that paid its shareholders' tax liability.   The IRS argued that it would have been entitled to sovereign immunity under state law.   The Court of Appeals held that section 106 waived that sovereign immunity.   The transfer at issue occurred more than two years pre-petition.  As a result, the transfer could only be avoided under section 544.   Outside of bankruptcy, sovereign immunity would prevent recovery of the transfer.  However, the court found that section 106 overroad the result that would otherwise occur.   The Seventh Circuit went the other way.   In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014) found that sovereign immunity would prevent recovery of the transfer outside of bankruptcy and that because section 544 is based on remedies available under state law that sovereign immunity had to be included.  It found that the reference to section 544 in section 106 had to be understood as referring to section 544(a) only.

ABI Luncheon:  Honoring Keith Lundin and a Not So Gloomy Recession

Retired Judge Keith Lundin accepted the Norton Judicial Excellence Award.   Presenter William Norton discussed Judge Lundin's Zelig-like presence at all of the important bankruptcy developments of the past thirty years and his super-authoritative treatise on Chapter 13.   Rather than talk about himself, Judge Lundin essentially gave a roast for the twelve prior recipients of the award, demonstrating that he is a genius and has a sense of humor to boot.

Dan White, a Senior Economist with Moody's Analytics, presented the economic forecast.  He told a story about the time J.P. Morgan was asked what would happen with the stock market.  Morgan replied "There will be volatility," a perfectly accurate answer with little practical import.  Mr. White said that the one thing he could be 100% certain of was that there will be a recession.  However, he could not say with certainty when it would happen or how severe it would be.   On these topics, all he could do was offered educated guesses.   To avoid keeping you in suspense, his education guesses were that there would probably be a recession in mid-2020 and that it would likely be mild unless one or more accelerators kicked in.  (My term not his).      

He said that several factors pointed to a recession in mid-2020.   First, it has been nine years since the last recession.   This is the second longest period of expansion in recent history.  He added that ten years is a long time to avoid screwing up the economy.   Their forecast assumes a strong 2019 which would then peter out shortly.   The Trump administration has jacked up the economy with tax cuts and increased spending.   

He gave the example of his six year old son trick or treating and coming home shaking from the amount of sugar he had consumed.  After the sugar rush wore off, he immediately fell asleep, not even making it through the opening credits of "It's the Great Pumpkin, Charlie Brown."  In this case, the Trump administration has given the economy a sugar rush with tax cuts and increased spending.  When this wears off in 2020, the economy will likely fall.

Mr. White also said that when we blow past full employment, we usually have a recession within three years.   The economy passed 4.5% unemployment in 2017.  If full employment is at the 4.0% unemployment rate, we may have a little more time.

He also talked about the yield curve in a slide I copied below.   In order for bankers to lend, there needs to be a spread between the 3 month interest rate and the ten year interest rate.   When the yield curve inverts, we are usually a year away from a recession.  He also said that whenever the yield curve falls to 1%, it is likely to invert.   We are currently at 1%.  He said that many economists will go on TV and explain why the yield curve doesn't matter.   "Friends don't let friends doubt the yield curve" he explained.

All of these factors point to a recession in 2020, but the big question is how bad will it be?  He gave three examples.   The recession of 2001 was mild, the recession of 1991 was more severe and the great recession of 2009 was, well, it was the great recession.   In  the 2001 recession, GDP dropped 0.6 percent from its peak.  In 1991, the drop was 1.5%.   The 2001 recession was over within a quarter while the 1991 recession lasted a year.   (I took these numbers from an article that I found, not from Mr. White's presentation).    Mr. White explained that there could even be a growth recession, that is, where the economy declines but continues to expand.

He explained that "having a recession is not the end of the world."  A recession "brings some of the excess crap out of the economy.  Small recessions help avoid big recessions."

Mr. White said that the likelihood was for a soft landing but there were a broad range of possibilities.  He explained several wild cards that could make a recession worse.   If President Trump and President Xi follow through on all of their threats regarding tariffs, it could raise the tariff rate from 1% to 5%, something that has not been seen in many years.  This would hurt agriculture and any industry that relies on steel.   He described the two world leaders as engaging in a game of chicken and predicted that they would ultimately back away.

Debt was another factor that could influence a recession.   Household debt is actually at a good level.  Federal government debt is on an unsustainable course but will not dramatically affect the economy for 10-15 years if entitlements are not reined in.   Local government spending is a problem because the percentage of mandatory spending by local governments has been steadily rising along with defaults and bankruptcies by local government.   Because local governments cannot engage in deficit spending, they will have to curtail other spending as mandatory expenditures rise.  This could hurt the economy.   Finally, non-financial corporate debt is not scary on an aggregate level but the distribution of that debt is.   He described corporate debt as a barbell.   There are a lot of well-collateralized, very secure corporate debts.  At the other extreme, there are "leveraged" debts which is a euphemism used to avoid describing them as junk debt.  Leveraged firms are leveraging up.  Because every business with good credit has already received all the loans they need, banks need to make riskier loans to continue making money.   However, because of the transparency required by Dodd-Frank, they will not keep these loans on their own balance sheets.   Instead, they are creating "Collateralized Loan Obligations" and selling them to pension funds and other investors.  However, the size of these debts is not large enough to tank the economy.

His opinion was that these risk factors would likely mean the difference between a 2001 recession and a 1991 recession.  Either way, it is not an apocalyptic scenario unless someone does something really stupid that we can't see at this point.   You can always bet on stupid.  (My comment, not his). 


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