Senior Care Centers Cases Illustrate Fine Line Between Complex and Small Business Cases

 “One pill makes you larger
And one pill makes you small….”
— “White Rabbit” by Jefferson Airplane

Senior Care Centers Inc., a chain of skilled nursing facilities, accomplished the feat of filing once as a complex chapter 11 case in 2018 (“First Case”) and then re-filing as a small business debtor in 2021 (“Second Case”). This success can be attributed to its ability to shed debt in its First Case, as well as in its decision to exclude its operating subsidiaries (and their debt) from its Second Case.

In 2018, the company sought bankruptcy protection in the Northern District of Texas in Case No. 18-33967 and requested complex case status based on having more than $10 million in debt and more than 50 parties in interest. It emerged a year later with a confirmed plan that was substantially consummated in March 2020. Under the plan, it pared back its operations from more than 100 facilities to approximately 22 of its best-performing locations.

In 2021, it filed a new case, along with parent company Abri Health Services, LLC, in Case No. 21-30700, and it elected to be treated as a small business debtor filing under subchapter V of chapter 11.

Some Background on Large and Small Cases

The “complex” case designation is not found in the Bankruptcy Code. It references a series of procedures adopted by local rules in various bankruptcy courts to allow the court to more efficiently deal with larger cases.[1] The complexity of the original Senior Care Centers case is shown by the fact that the case has over 3,000 docket entries.

Subchapter V was added to the Bankruptcy Code and went into effect on Feb. 20, 2020. Initially, subchapter V was only applicable to cases with aggregate debt of $2,725,625.[2] However, just one month later, on March 27, 2020, this debt limit was temporarily increased to $7,500,000 by the CARES Act. The debt limit will revert to the original level on March 27, 2022, unless extended by Congress. Subchapter V includes several provisions designed to make smaller cases more affordable. There is no creditors’ committee,[3] disclosure statements are not required,[4] and the absolute priority rule is replaced by a disposable-income requirement.[5]

How Did the Cases Change?

In the First Case, Senior Care Centers and its affiliates entered bankruptcy with $45.56 million in secured asset-based-lending debt.[6] The debtor had $4.33 million in additional secured debt and owed $35 million to landlords. Finally, the debtor owed $36.7 million in unsecured trade debt. Thus, when Senior Care Centers entered the First Case, it had over $120 million in debt and truly qualified as a “complex case.”

When Senior Care Centers filed the Second Case, it reported just $3,065,730 in debt, nearly all of which was unsecured. The schedules stated that $500,000 of unsecured debt consisted of claims classified as “Holders of Allowed Convenience Class Claims” under the plan in the First Case, and that $2,494,717.62 consisted of rent owed to a landlord with which the debtor had ongoing difficulties. The parent company, Abri, listed $2,676,709.02 in debt consisting primarily of the same rental obligations.

Going from $120 million to $3 million in debt is a major feat. Part of this reduction was accomplished by the deleveraging of the company’s balance sheet, which occurred in the First Case. The substantial amounts of secured debt were refinanced and then paid after the First Case, leaving the parent companies relatively debt-free. However, the second reduction in debt came from the decision of which debtors filed bankruptcy. In the First Case, Senior Care Centers filed along with its operating subsidiaries, which had the unsecured trade debt.

In the Second Case, only the two parent companies filed. TXMS Real Estate Investments Inc., the landlord with the large claim in the Second Case, objected to the debtors’ designation as a small business debtor, claiming that they were seeking “to have their cake and eat it, too.” Apparently Senior Care Centers Inc. and the operating entities were all parties to a master lease with TXMS. When Senior Care Centers filed bankruptcy, it contended that the automatic stay prohibited TXMS from terminating the master lease, thus protecting the nondebtor operating entities. However, because the operating entities did not file, Senior Care Centers sought to have their trade debt excluded from the subchapter V eligibility calculation.

The court has not heard the objection, so it is not known whether Senior Care Centers’ strategy to take advantage of subchapter V will succeed. However, its strategy appears to make financial sense. A complex case has complex costs for the debtor. In the First Case, Senior Care Centers was dealing with a panoply of debt. In the Second Case, it was dealing primarily with a single creditor. By limiting the entities that filed, Senior Care Centers could attempt to achieve a more cost-effective remedy for dealing with what it described as a recalcitrant lessor.

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[1] See, e.g., U.S. Bankruptcy Court for the Northern District of Texas, Local Rules, Appx. E, Procedures for Complex Chapter 11 Cases.

[2] 11 U.S.C. § 101(51D).

[3] 11 U.S.C. § 1181(a).

[4] 11 U.S.C. § 1181(b).

[5] 11 U.S.C. § 1191(b).

[6] Disclosure Statement for Third Amended Plan, p. 5.

The Unsavory Origins of the Term "Chinese Wall"

The National Conference of Bankruptcy Judges has put out a statement on Inclusive Language which recommends using the term  "firewall," "screen" or "ethics wall" instead of "Chinese wall" to describe "an information barrier within an organization intended to prevent exchange of information or communication that could lead to conflicts of interest." It stated that the term "Chinese wall" was considered offensive without further elaboration. According to Bryan Garner's A Dictionary of Modern Legal Usage, the term refers to The Great Wall of China, while others have said that it refers to the screen walls used in internal Chinese architecture. 

NCBJ 2021: Speeding Out of the Pandemic: Courts, Practitioners and the Road Ahead

This panel looked at how Covid has affected the legal professional and how it will affect the practice going forward. The panel consisted of Judge Elaine Hammond (Bankr. N.D. Cal.), Judge Christopher Sontchi (Bankr. D. Del.), Judge Laura Taylor (Bankr. S.D. Cal.), Matthew Feldman of Wilkie Farr and Stuart Gold from Gold Lange Majoros Smalarz PC. This was the last session of the conference that I attended and one of the most interesting. Some of the topics discussed included a nurse in scrubs doing her reaffirmation hearing from the breakroom, a judge conducting court from his dining room table and a law firm with story time and honey on the roof. And then there was the vitriol seeping from online hearings.

NCBJ 2021: Awards Edition

 One of the celebratory aspects of the National Conference of Bankruptcy Judges is the recognition of judges, attorneys and others receiving awards from various groups. I went to as many programs I could. Congratulations to the following honorees!

The Bankruptcy Inn Alliance of the American Inns of Court recognized two judges, making up for the lost year of Covid. There are currently fourteen Bankruptcy Alliance Inns, including a new one in North Carolina. I am a member of the Larry E. Kelly Inn of Court in Austin-San Antonio, Texas.

Judge Judy Fitzgerald (retired) from Pittsburgh was the 2020 award recipient. She has her own Inn of Court named for her. I got to know Judge Fitzgerald from the Commercial Law League of America where she was very active.

Judge Harlan "Cooter" Hale from Dallas was the 2021 award recipient. Judge Hale will be retiring next year among what he described to me as a generational shift in the bankruptcy judiciary. Judge Hale is a member of the John C. Ford Inn of Court in Dallas. He said that when he took the bench, one of his duty stations was in Wichita Falls, Texas. When he traveled there, Judge Ford's robes were still hanging there and he wore them in honor of his predecessor.

Judge Laura Taylor Swain (S.D. N.Y.) received the Lawrence P. King Award for Excellence in Bankruptcy. Judge Swain is one of a select group of bankruptcy judges to be appointed to an Article III bench. She was appointed as a Bankruptcy Judge in the Southern District of New York in 1996 despite not having practiced bankruptcy. In 2000, President Clinton appointed her to the District Court bench. In 2017, she was appointed by Chief Justice Roberts to preside over the PROMESA debt restructuring cases in Puerto Rico. She will become chief judge of the Southern District of New York later this year. 

Judge Randolph Haines (retired) received the William Norton Judicial Excellence Award. While serving on the bankruptcy bench in Arizona, he wrote the opinion in Bliemeister v. Industrial Commission (In re Bliemeister), 251 B.R. 383 (Bankr. D. Ariz. 2000) which held that sovereign immunity did not preclude the Bankruptcy Court from determining that a debt owing to a state agency had been discharged. The Supreme Court relied upon his analysis in Tennessee Student Assistance Corp. v. Hood, 124 S.Ct. 1905 (2004).

The American Bankruptcy Institute presented its Annual Service Award to the ABI staff in recognition for their heroic service during the year of Covid.

The ABI also recognized John Penn of Perkins Coie and Bob Keach of Bernstein Shur. Both men are former Presidents of the ABI. Mr. Penn was praised for his Zelig-like presence at many important times during the life of the ABI while Mr. Keach was recognized as the co-chair of the ABI’s Commission to Study the Reform of Chapter 11 and his work on legislative reform.

 

NCBJ 2021: Legislative Wish Lists and Realities

This is a combination of two programs. One of the NCBJ plenary sessions offered a Shark Tank like program where three lawyers pitched their proposals to reform the Bankruptcy Code. Meanwhile, at the ABI luncheon, Bill Brandt and Robert Keach offered their prognostications as to what might actually change in the Code. Since both programs involved legislation, I have chosen to combine them here. As you read through this article, you should note that the first part contains the idealism of would-be reformers while the second part contains the realpolitik. 

Shark Tank

Student Loans

In the first program, John Rao of the National Consumer Law Center offered his proposal to amend 11 U.S.C. Sec. 523(a)(8) to rollback dischargeability of student loans to the law as it existed in in 1998 when student loans could be discharged after seven years or on a showing of undue hardship.  He said that the seven-year period deals with the concern that people can come straight out of school and file bankruptcy. He said it's not a complete solution. He said we still need to deal with cost of higher education. 

To make the case for change, he gave the illustration of Karen in Arkansas. She borrowed $10,000 thirty years ago. She never used her degree. Over thirty years, she paid $20,000 but still owed $106,000. Mr. Rao said that there is something fundamentally broken with a system if that is how we treat our debtors. Now the federal student loan creditors can garnish her Social Security and tax refunds and even the Earned Income Tax Credit. There is no statute of limitations on federal student loans so her debts will only disappear when she dies. 

Why did Congress change the law?  (Congress changed the law in 2005 to add some private student loans to the list of non-dischargeable debts and eliminate the ability to discharge student loans after seven years). He pointed out that there was not a single Congressional hearing or GAO report on abuse. He characterized the change in law as a Congressional gimmick to balance the budget. 

Mr. Rao was asked if his proposal would protect the public fisc. There are $1.7 trillion in federal student loans. Why not require payment of disposable income over period?

Mr. Rao responded that most debts are performing. Only about 10% in default. There is no evidence that denying discharge increases revenues to government. Instead, the federal government can capitalize the interest and seek returns that would make a predatory lender blush. The problem with requiring debtors to complete a chapter 13 is that about 50% of Chapter 13 debtors never get a discharge.

Mr. Rao was asked about his proposal to leave undue hardship in in his proposal. He was asked whether it be better to have objective criteria for undue hardship. Mr. Rao said that objective criteria would help but we already have a workable standard for undue hardship in connection with reaffirmation agreements and it would make sense to use that standard. However, he pointed out that the debtors who need relief the most can't afford to litigate. 

He was asked whether his proposal would roil the markets. Wouldn't lenders increase the price to address the risk? He pointed out that the pricing only affects private lenders. When private loans were made non-dischargeable in 2005 there was either no decrease in rates or an actual increase based on different studies.

President Biden has proposed cancelling some student loan debt. Doing this would be a stimulus to economy according to Moody's as more people would be able to buy homes and have children. However, requiring bankruptcy to get that cancellation would avoid the moral hazard of general cancellation. 

KERPs

 

Metta Kurth pitched a proposal to close loopholes to BACPA's limitations on "pay to stay." She called her proposal "stop the heist." In 2005, BAPCPA limited Key Employee Retention Programs ("KERPs") by requiring that a company demonstrate three things: that the person receiving the KERP has received a better offer, that their services are essential and that the amount of the KERP is either not more than 10 times the mean amount paid to non-management employees for similar purposes or, if no similar amounts were paid out in the prior year, it did not exceed 25% of any similar payment made to an insider during the prior year. 11 U.S.C. Sec. 503(c).     

Some companies shifted away from KERPs and went to "keeps," incentive payments to be earned for meeting certain benchmarks. Ms. Kurth said that "keeps" had a greater sense of integrity. However, other companies made an end run around the KERP rules by simply making these payments pre-petition. She gave the example of JC Penney which paid out $7.5 million to four executive five days before the petition. 

Ms. Kurth proposed to amend 11 U.S.C. Sec. 548 in three ways:

(a) Existing Sec. 548(a)(1)(B)(ii)(IV) states that insider compensation given for less than reasonably equivalent value and outside of the ordinary course of business can be recovered as a fraudulent transfer. She would extend this to apply to all insider compensation given during the 90 days before bankruptcy.

(b)  She would also add a provision that insider compensation would be presumed to be for less than reasonably equivalent value if it was greater than the normal pre-bankruptcy compensation and did not meet the requirement for a KERP; and

(c)  Make non-dissenting directors who approve compensation in violation of this provision liable similar to state laws applicable to illegal dividends. 

She was asked if companies would just give out insider bonuses 91 days before bankruptcy if her proposal was adopted. She answered that the petition date is often fluid and that 90 days will catch most abuse. 

She said that her proposal would motivate companies to use a "keep" or stay within guardrails for KERPs during the runup to the petition.

She acknowledged that her proposal would not fix the imbalance in executive compensation. 20 years ago, executives earned 70 times the wage of their typical worker while today that ratio is now 200 times.

She said that she was not trying to fix entire system, just the perception of abuse.

(Ed.: While I admire Ms. Kurth's enthusiasm, her proposal would continue the trend of making the Bankruptcy Code resemble the Tax Code in its complexity. The problem with ever more specific prohibitions is that ever more clever lawyers will find ways around them. To be very clear, she had identified a very real and very serious problem. My quibble is with the specifics of her proposal rather than the need for it)

The Means Test

Eric Brunstad proposing the means test as the gateway for determining substantial abuse. He proposed going back to the standard existing before BAPCPA when Bankruptcy Judges had discretion to find substantial abuse based on the circumstances of the case rather than a statutory presumption. 

He said that the means test was a solution in search of a problem that never existed and a bad solution at that.

He said that judges know abuse when they see it and have ample tools to address it when it actually arises.

He asked the rhetorical question of where did the means test come from? He said it came from the history of credit card underwriting. At one time, credit card underwriting was done on an individual basis. Then it went to a portfolio underwriting system. The model predicted 4% default rate. As time went on, credit cards became less profitable. He said that the credit card companies wanted to squeeze a couple more bucks out of the system by making bankruptcy more difficult and expensive to pursue. (Ed. Prof. Ronald Mann described this as the "sweatbox" in an influential paper). 

He said that the means test was a very inefficient solution. If you are $1 above the test, you are deemed to be a substantial abuse. 

Prof. Brunstad said that the empirical data said abuse was not out there. He also said that a one size fits all test was not useful. He quoted Tolstoy who said, "All happy families are alike; each unhappy family is unhappy in its own way.” He said that by analogy, every abusive debtor is abusive in its own way. 

He stressed that there was not a problem with too many people filing bankruptcy. According to Sen. Elizabeth Warren, 43 million people were in financial distress after the Great Recession, but only 1.5 million filed bankruptcy.  He said that people do not file for bankruptcy willy-nilly

He repeated the proverb that you can't get blood out of stone and then described the means test as a very expensive blood test for the stone.

He said that this kind of discretionary thing (i.e., ferreting out abuse) is what bankruptcy judges are paid to do.

He also said that there is a huge externality problem. He asked who gets the benefit and who bears the cost? The credit card companies reap the benefit from debtors who continue to pay because they cannot afford to file bankruptcy. The cost is borne by higher fees paid by debtors. He said that if a debtor is required to file chapter 13, it is like a 25% tax. 

In the end, the audience voted to invest in all three proposals. Unfortunately, legislative reform depends on a dysfunctional Congress, not what bankruptcy judges and professionals would like to see. That offer a nice segue into the second legislative program I watched.

ABI's Program on Legislative Likelihoods

The three proposals contained in the Shark Tank program were each thought provoking. However, when the American Bankruptcy Institute put on a program on likely changes to legislation, it focused on different proposals altogether. Bill Brandt and Robert Keach are both ABI members who have been active in proposing legislation. Although ABI does not take positions on legislative as a group, its individual members have been active in lobbying Congress. I want to stress that the very opinionated and outspoken Mr. Brandt and Mr. Keach were speaking for themselves rather than for the ABI as an institution. 

SubChapter V

Mr. Brandt started the conversation off with discussion of SubChapter V. He said that when it was passed, the debt limit of $2.7 million was too low. Shortly after it was passed, they were able to increase the limit to $7.5 million but only on a temporary basis. Now he said that the goal would be to increase the limit to $20 million. However, at higher limits, SubChapter V would take on more of a hybrid nature. He said that U.S. Trustee fees would need to kick in at somewhere between $7.5 million to $10.0 million to keep the program funded. He also said that legislation would likely give courts the option to have a creditors' committee beginning at $12-$15 million.

He said that if the debt limit was increase to $20 million, it would cover 95% of Chapter 11 cases. He said that this would take the wind out of the venue issue, which he described as "our abortion issue."

This raises two very interesting questions. Was he assuming that mega SubChapter V cases would not be forum shopped? If the law allows forum shopping and litigants see an advantage to doing so, why would they stop? Also, it wouldn't address the problem of the large public companies seeking out favorable venues to the detriment of smaller creditors, employees, retirees and other constituencies. Also, as a Texan, I am very familiar with the emotions triggered by abortion. On the one hand are those with moral certainty about the importance of lives as yet unborn while on the other there is the moral certainty of those who want to control their own bodies. Abortion stirs the outrage of moral certainty in its combatants. Is bankruptcy venue really that divisive or was Mr. Brandt merely engaging in hyperbole?

 Mr. Keach acknowledged that he had lost the debate over having a facilitating trustee in SubChapter V and that it was good that he lost. He described the trustee as one of the reasons why the Small Business Reorganization Act has worked so well.

Mr. Brandt said that raising the SubV debt limit could make its way into a reconciliation bill because it would raise fees. He also explained that because the support of Sen. Grassley was critical that SubChapter V was intentionally made similar to Chapter 12.

Venue

Mr. Brandt had a very cynical view on venue reform. He said that with this President and Rep. Nadler chairing the House Judiciary Committee, venue would be a non-starter. He said that venue was a good way for Sen. Cornyn and Sen. Warren to raise a lot of money but that it would not be a factor for the balance of this decade.

Mr. Keach said that the option to allow affiliate filings was designed to placate New York bankruptcy lawyers but "no one in New York believes that."

(Ed.: Dissenting Opinion here. For the last three years, Sens. Cornyn and Warren have worked together on a venue bill. This year bills have been introduced into the Senate and House at an earlier stage with more co-sponsors than before. As cases like Purdue Pharma draw national outrage, bankruptcy venue will continue to build momentum. However, I must acknowledge that our scrappy, grass-roots crusade has very determined and well-organized opposition). 

Mr. Brandt said that there was a study that concluded that the bankruptcy industry had the same effect for the Delaware economy as having a minor league baseball team would have. He also said that having increased debt limits for SubChapter V would be a pretty good second choice for the venue reformers. 

Mr. Brandt noted that the fire for venue reform has weakened as the New York-Delaware duopoly has expanded to include Houston and Virginia. (Ed.: Dallas, TX, Corpus Christi, TX and Charlotte, N.C. have also been the recipients of recent attempts at forum shopping. Will forum shopping become so widespread as to draw a collective "meh" from the bar? As the blogger, I get to ask the questions, but I honestly don't have an answer).

He said that 10-15% of the Senate will always oppose venue reform making it an uphill battle. 

He also said that another needed reform would be to allow a single asset real estate debtor to be a SubV debtor if it was a landlord to a small business debtor.

Third Party Releases

Mr. Keach mentioned that when Jon Oliver did a program on third party releases, he had a researcher spend an hour with Mr. Keach. He said that Mr. Oliver gave the issue a very serious presentation. He then said that the issue was not going anywhere. He characterized it as a solution in search of a problem. He said that it was not the bankruptcy system that was broken but the tort system. He said that bankruptcy delivers money to victims faster and more efficiently than the tort system. He said that it is easy to forget that what we are about is compensating people. He said that if you want to punish people, prosecute them. "If you can't prosecute them, then shut up."

Mr. Brandt said that legislation barring third party releases even with an opt out were going nowhere. He said it was a chance for Democrats to say that they voted against Darth Vader. 

Student Loans

Mr. Brandt said that the Fresh Start Bill proposed by Sen. Dick Durbin is the closest bill that might actually achieve passage. It would reinstate dischargeability after ten years and is close to the ABI Commission's proposal. However, he said it was "probably not a this year thing." He added that bankruptcy reform always starts out with consumer provisions. He indicated that it would not be this Congress. Probably the next Congress or the one after that and it would be part of a bill with lots of ornaments on it.

He said that one problem with achieving bankruptcy reform is that there is not an association of past and future debtors but that student loan borrowers vote. Unfortunately, they cannot afford campaign contributions. 

Mr. Keach said that the purveyors of private student loans hired really good lobbyists in the past but that maybe the problem is becoming too significant to ignore.

Final Thought: I really appreciated the fact that Mr. Brandt and Mr. Keach didn't pull any punches. I may not have agreed with them, but they certainly gave their unvarnished opinions without resorting to polite euphemisms. 

NCBJ 2021: Minority Banks and Lending

This panel, including Judge Christopher Lopez from the Southern District of Texas and Josiah Lindsay from Fortress Investment Group, contained a wealth of information. The panel generally covered the economic health of the African American community, the disparate impact of Covid on the African American community and how Minority Deposit Institutions (MDIs) and Community Financial Development Institutions (CFDI) can help to alleviate those conditions. 

NCBJ 2021: CLLA Luncheon: Ethics Goes to the Movies

Larry Cohen, a lawyer from Vermont and adjunct faculty member at multiple law schools used movie clips to teach legal and judicial ethics. Trying to describe movie clips without being able to play them may be a fool's errand but I will do my best.  I am sure that I didn't capture everything possible but at least this is some ethical food for thought.

In Anatomy of a Murder (1959), Jimmy Stewart is defending a serviceman accused of murder. The prosecutor effectively cross-examines Stewart's expert witness doctor, getting him to concede that the defendant may have known right from wrong. The prosecution then calls for a conference in chambers and asks Jimmy Stewart if he wants to change his client's plea from not guilty to guilty. The prosecutor is really obnoxious. However, Jimmy Stewart pulls out a law book and hands it to the judge. The opinion he wants is marked by an object which the judge recognizes as a frog gig. The judge and Jimmy Stewart talk about the joys of hunting frogs and Stewart offers to let the judge keep the frog gig. The chastened prosecutor realizes that he has been outfoxed by Stewart and says "We're hooked."

 MPRC 3.5(a): A lawyer shall not:

(a) seek to influence a judge, juror, prospective juror or other official by means prohibited by law;

While we normally think of Jimmy Stewart as the good guy, here he is improperly trying to influence the judge. 

In And Justice for All (1979), there is a funny scene where there is a recess in a case. The defendant, who is on trial for selling fake lottery tickets, walks over to the prosecution table and begins eating the tickets. Someone points this out to the prosecutor and pandemonium ensues. The judge walks in and fires a gun to restore order.

MPRC 3.4 A lawyer shall not: (a) unlawfully obstruct another party' s access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value. A lawyer shall not counsel or assist another person to do any such act;

The way the scene plays out, the defense lawyer does not notice his client eating the lottery tickets. However, if he observed this and didn't say anything, he would violate Rule 3.4(a).

MPRC 8.3(b) A lawyer who knows that a judge has committed a violation of applicable rules of judicial conduct that raises a substantial question as to the judge's fitness for office shall inform the appropriate authority.

Arguably the lawyers would have an obligation to report the gun-toting judge. 

I can't find a specific rule that says that a judge should not fire a gun in open court to maintain order. However, I have to think there must be one.

In The Verdict (1982), a lawyer is examining a witness. The judge takes over and begins cross-examining the witness. The judge gets the expert to admit a point unfavorable to the plaintiff and cuts off the examination. The exasperated lawyer says something to the effect of if you're going to try my case for me, I wish you wouldn't lose it for me.

Fed.R.Evid. 611- Mode and Order of Examining Witnesses and Presenting Evidence (a) Control by the Court; Purposes. The court should exercise reasonable control over the mode and order of examining witnesses and presenting evidence so as to: (1) make those procedures effective for determining the truth; (2) avoid wasting time; and (3) protect witnesses from harassment or undue embarrassment.

Model Code of Judicial Conduct Canon 1

A judge shall uphold and promote the independence, integrity, and impartiality of the judiciary, and shall avoid impropriety and the appearance of impropriety.

The court is allowed to exercise "reasonable" control over examining witnesses. Taking over the examination does not seem to be reasonable. Certainly cutting off the examination and undercutting the lawyer's case violates the duty to maintain the integrity and impartiality of the judiciary.

MRPC 3.5 is titled Impartiality and Decorum of the Tribunal. However, there is nothing in the rule which prohibits counsel from impugning the court other than Rule 3.5(d) which prohibits a lawyer from engaging in conduct designed to disrupt a tribunal. I think this one probably falls within the court's inherent ability to preserve the dignity of the proceedings.  

Snow Falling on Cedars (1999) involves a murder trial. The context is an island in the Pacific Northwest where Japanese Americans were interned during World War II. The prosecutor is aggressively cross-examining the Japanese American defendant and his examination goes over the line. The defense attorney makes a mild objection which the judge sustains. The Judge then lectures the prosecutor and tells him to ask a proper question. When the prosecutor hesitates, the Judge says "Shame on you" and tells him to sit down.

This would also invoke Judicial Canon 1 since the Court is making a personal attack on the prosecutor. 

There are so many teachable moments in My Cousin Vinny (1992). In the scene we watched, the judge calls Vincent Gambini back into chambers and tells him that the New York Bar has no record of a Vincent Gambini ever having tried a case. Vinny says that Vincent Gambino is just his stage name and that his real name is the name of a prominent lawyer. When he recounts this to Mona Lisa Vito, she asks him if he is stupid, because the lawyer's name he gave died the week before.

MRPC 3.3(a) A lawyer shall not knowingly: (1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;

MPRC 3.5(b): A lawyer shall not:

(b) communicate ex parte with (a judge) during the proceeding unless authorized to do so by law or court order;

MPRC 5.5(a) A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so.

The interesting point here is that although Vinny Gambino has an ex parte communication with the court, he was invited to do so by the judge. Thus, he was arguably authorized to do so. Obviously, making a false representation to the judge and practicing without permission in a jurisdiction are bad. 

There is a scene from an episode of Law and Order where a defense lawyer attempts to do an impromptu demonstration that an Asian American witness cannot distinguish between European Americans. The judge calls the lawyers into chambers. The judge tells him he cannot do the demonstration and asks if he has an expert. The lawyer says that he does. The prosecution objects that the witness has not been disclosed. The defense lawyer says he just thought of it. The judge then tells him that he thinks he is lying and that if he can ever prove it, there will be consequences.

The impromptu demonstrate may violate Rule 3.5(d) about not engaging in conduct intended to disrupt a tribunal.

Under Rule 8.3 (a),  

A lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer's honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority." However, here it is the judge who believes the lawyer has engaged in conduct raising a substantial question about his honesty. Perhaps the prosecutor, having heard the judge's admonition might be under a duty to report his counterpart. 

In Inherit the Wind (1960), the jury is just about to come back in. Someone comes up to the judge and says "Let this thing simmer down. Don't forget November's not too far off." Also, there is a radio reporter broadcasting live from in front of the bench.

MRPC 3.5:  A lawyer shall not:

(a) seek to influence a judge, juror, prospective juror or other official by means prohibited by law;

(b) communicate ex parte with such a person during the proceeding unless authorized to do so by law or court order;

Assuming that the person who approaches the judge is a lawyer, he has violated Rule 3.5(a). If he is a lawyer in the proceeding, he has violated Rule 3.5(b) as well. 

Model Code of Judicial Conduct Canon 3:  

A judge shall conduct the judge’s personal and extrajudicial activities to minimize the risk of conflict with the obligations of judicial office.

In this case, the Judge has complied with Canon 3 by not letting the appeal to his re-election affect his ruling. 

I think there must be something wrong with letting the radio broadcaster do so from right in front of the bench but I can't find the rule. 

If anyone has additional suggestions for ethical violations in these scenarios, please send them to me and I will be happy to give you credit. 

NCBJ 2021: Even the Circuits Can't Agree

 ABI Editor at Large Bill Rochelle hosted a group of three panels discussing three different legal issues. The issues included one legitimate circuit split, a dispute between lower courts and a divided state court panel.

Recharacterization

Issue one was whether recharacterization of debt is an issue of state or federal law. Recharacterization is where an obligation nominally characterized as a debt is recharacterized to be an equity contribution.  Recharacterization was first recognized in the Supreme Court case of  Pepper v. Litton, 308 U.S. 295 (1938). The Third, Fourth, Sixth, Tenth and Eleventh Circuits all state that the issue is one of federal law while the Fifth and Ninth Circuits hold that it is a matter of state law.  

Rembrandt van Rijn - The Bankruptcy of 1656 - The Art, Loves and Insolvency of a Great Artist

Judge Scott Clarkson (Bankr. C.D. Cal.) gave a fascinating talk on the art, loves and insolvency of Rembrandt van Rijn. While this talk may not have a lot of practical import, Judge Clarkson tells a great story.

Introduction

Rembrandt van Rijn was born in Leyden in the Dutch Republic in 1603. The Dutch Republic dates back to the late 1500s and is the oldest continuous republican government in Europe. The town of Leyden, where he was born, was besieged by the Spanish and held them off. In return, William of Orange offered them ten years free from taxes but they asked for a university instead. 

The young Rembrandt attended Latin school where, among other things, he learned Bible stories that would form some of his later work. He was apprenticed to an artist and also attended university. To be a painter and a printmaker, he had to understand chemistry to work with oil paints and the properties of metal to work with copper plates.

As an artist, he was known as a hyper realist because he painted what he saw. It was said of him "he seeks the ugly." He learned to create depth in his art by using light and shadow in a technique called chiaobscuro. In his paintings, the light is generally shown on the left hand side of the canvas because he was right handed and didn't want to smudge the art. About 10-20% of his paintings were self portraits so that he wouldn't have to pay a model.

Rembrandt was originally quite an astute businessman. He would sell an oil painting for 400 guilders plus materials, which was a years' wage for a workman. He also did commercial art. Different guilds would pay him to do a painting including their members to be hung in their guild hall. If someone didn't pay his share, he would be painted out of the picture. One of these corporate paintings might sell for 1,000 guilders.  His painting The Night Watch, done for a local militia, was controversial because it showed the figures in action instead of rigorously posed. While this made for a more exciting painting, it did not showcase his patrons who were paying for the work.

He also developed printmaking as a business. Unlike other artists, he would etch directly onto the copper. A print was more affordable to the general public, going for 20-30 guilders each but he could make many copies. His etching of Christ Healing the Sick was so popular that prints went for 100 guilders a piece.  

Bankruptcy of Rembrandt

Rembrandt filed bankruptcy in 1656. One cause was his complicated tragic personal life. His first wife died from disease shortly after their son was born. Under Dutch law, he was required to pay half of his assets to his son. His lawyer convinced the wife's family to delay this payment. He brought in a wet nurse named Gertie to feed the child and she became his lover. Later, he took up with his much younger housekeeper and sent Gertie away. She took him to court and was awarded an allowance of 200 guilders per year. However, with the connivance of Gertie's family, she was sent to an asylum and he only had to pay the cost of her confinement. 

His house was also a cause of his downfall. While many scholars thought that buying the house caused his losses, Judge Clarkson concluded otherwise. He bought the house with a Consol or perpetual bond. He only paid one-fourth of the cost of the home down and then had to pay 5% interest on the bond without the principal ever coming due except in the event of default. This was essentially an annuity and was a common financial vehicle. Thus, although the purchase of the house did not lead to his bankruptcy, the fact that the house was sinking and tilting did. All of the neighbors agreed to jointly pay to stabilize the row of houses. However, Rembrandt did not pay his share.

He also lost money as his art went out of fashion. He was sued by purchasers of his art who felt that they did not get what was promised or did not receive anything in the case of a painting lost during a time of war.  He also was a profligate spender. He would go to sales and buy up whatever he thought he could use in his paintings, such as a suit of armor.

Realizing that he was in dire financial straits, he went to Orphans Court and got an order to transfer the house to his son. However, to do that, he had to clear the mortgage from the property. To do this, he borrowed 7,000 guilders from the Mayor, which he did not pay back. 

Facing pressure from lawsuits, his neighbors and the Mayor, he filed a cessio bonorum, which means a cessation of goods. He could not receive a discharge but he would avoid jail. Under the cessio bonorum, he surrendered his goods and agreed to pay all of his future earnings to his creditors above the amount of bare necessities. This combined the most burdensome elements of today's Chapter 7 and Chapter 13. 

His trustee sued his son to get the house back under Amsterdam's recently passed fraudulent transfer law. The trustee won but the judgment was reversed before the funds could be disbursed because the fraudulent transfer law was not retroactive. Although he lost the house, the money that he and his son received back was more than the total of what he had paid on the house. Thus, he achieved what many debtors today seek--a free house--although he did not get to keep it.

To avoid the requirement that he pay his future earnings to his creditors, his mistress and son formed a corporation and Rembrandt worked for it, receiving only enough pay to cover his necessities. After his bankruptcy, he had new financial success. In 1658, he painted Phoenix Rising. It was said that the Phoenix represented Rembradt. He died in 1669 at the age of 63.

It is clear that Judge Clarkson is passionate about art and history and he told a good yarn. It also had enough bankruptcy content to (I hope) qualify for CLE credit.

 

Random Thoughts from the National Conference of Bankruptcy Judges

I have attended and blogged about this conference for a number of years. I remember being captivated by Paul Begala talking about Barack Obama's belief in American Exceptionalism and Gene Wedoff being honored for his service as a judge. This made me realize that NCBJ is a conference where really interesting people talk about important stuff. 

NCBJ 2021: Jeopardy, the Broken Bench Edition

 The National Conference of Bankruptcy Judges is back this year in Indianapolis with a hybrid format for in person and virtual attendees. About 750 in person attendees helped to prop up the local hospitality industry. Every year the conference kicks off with the Broken Bench presentation, an overview of hot issues in the bankruptcy world. This year's program was done in a Jeopardy format with host Chief Judge Pamela Pepper (E.D. Wis.). This was a fun presentation of bankruptcy trivia. While this post may not help your day to day practice, I hope you enjoy it.

In the section introducing the contestants, we learned that Demetra Liggins once struck up a conversation with Tyne Daly on a New City bus. Nancy Rapoport is a competitive ballroom dancer. She experienced a wardrobe malfunction when her helper failed to secure the clasp on her gown and it started slipping down while she danced. Judge Catherine Furay (Bankr. W.D. Wisc.) both collects and designs bobbleheads.