• On Absurdity

    Posted by

    Bob Lawless

    A few days ago, I discussed the sloppy drafting in the 2005 bankruptcy amendments, focusing on one particular piece of drafting that could be construed to eliminate involuntary bankruptcy petitions. Tom Perkins made a good point in the comments. A venerated legal maxim holds that courts are to apply the plain meaning of a statute unless the results would be absurd, but "[c]ourts are now faced with having to define absurdity much more
    frequently in light of many of the curiously drafted or pasted together
    provisions of BAPCPA."

    In January, Judge Bruce Markell published a thoughtful opinion exploring what it means for a result to be absurd such that a court should not follow the literal words of the statute. Judge Markell was dealing with a part of the 2005 amendments related to homestead exemptions. He uses Justice Scalia’s legisprudential writings as a point of departure: "Justice Antonin Scalia is one of the strictest, if not the strictest, textualists active today. . . .  If the methods used by Justice
    Scalia would lead to the reformation of the statute, then the statute probably
    should be reformed, and little time need be spent in discerning the proper or
    ultimate test for all federal statutes." This opinion has been called the WWSD or "What Would Scalia Do" approach. The legal citation is In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006) and is well worth a read by anyone grappling with applying the 2005 bankruptcy amendments.

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  • Floyd Norris Asks a Good Question

    Posted by

    Bob Lawless

    In today’s N.Y. Times ($), columnist Floyd Norris asks a good question. Were parts of the 2005 bankruptcy amendments meaningless? Specifically, Mr. Norris writes about a section of the new law that appears to put limits on retention bonuses for executives of bankrupt firms. Mr. Norris details the dispute between the reorganizing Dana Corporation and its creditors. Dana wants to pay its CEO a $3 million bonus for staying with the company until it emerges from bankruptcy.

    As the law that eventually emerged in 2005 wended its way through Congress in the early part of this decade, reports appeared about bankrupt corporations signing multimillion dollar contracts with corporate executives to ensure the executives stayed with the company through bankruptcy. If generals make the mistake of always fighting the last war, politicians make the mistake of always solving the last corporate crisis. Hence, the congressional solution was a new law banning payments to induce a corporate insider to remain with the bankrupt business. These payments are allowed only if the insider was essential to the business, the insider had a competing offer to go elsewhere, and the payment was no more than 10 times the amount paid to nonmanagement employees to induce them to stay with the company.

    To answer Mr. Norris’s question, this particular section is meaningless. The weakness lies in the way the section was drafted, a point I made yesterday about the 2005 law generally. The predicate for its application is that the payment has to be made for purposes of inducing the insider to stay with the business. It is a simple matter to structure a compensation package so the payment is made for other purposes. For example, a bonus payable upon confirmation of a chapter 11 plan or to meet certain performance goals is an incentive payments to meet those goals, not retention payments. I have yet to encounter an attorney doing chapter 11 work who thinks this new provision will have any substantial effect on compensation practices in chapter 11.

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  • Turn Your Stucco into Sand

    Posted by

    Melissa Jacoby

    I once received a pink flyer from a major bank that said in bold letters “Turn your stucco into sand,” while the inside of the flyer advertised home equity loans for purposes of taking beach vacations. This was supposed to be an enticement, but with this stucco-into-sand imagery, it seemed more like a warning about the consequences of using home equity, leaving people to make their own choices. I’m starting to wonder whether the bankruptcy system needs a similar warning. First, studies by Cheryl Long and Aparna Mathur suggest that there generally are longer-term home-owning consequences to filing for bankruptcy. Second, some homeowners file for bankruptcy primarily to save their homes from foreclosure — presumably because their lenders/servicers will not agree to a workout with a borrower they believe cannot or will not sustain the mortgage, but possibly for other reasons. These filers use chapter 13 bankruptcy, which not only stops a foreclosure but allows them to cure a default over time over the objection of the lender/servicer. The administrative costs alone of chapter 13 to the homeowner probably add up to at least one or two mortgage payments, or, if homeownership is not to be, then a few months of rent in a new home. But I’ve seen no evidence that chapter 13 turns out to save homes in the long term, or that it is any more successful than other anti-foreclosure interventions. We’ll get help figuring this out once real estate finance experts recognize chapter 13 for what it is – a federal mortgagor protection device, albeit of unknown efficacy, that overrides many of the state real estate laws they have spent considerable time analyzing.

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  • Update: Security Freezes

    Posted by

    Bob Lawless

    In a previous post, I criticized a House bill that would remove the choice some consumers have under state law to freeze their credit reports. News reports indicate that the preemption provisions have been stripped from the bill. Consumer groups continue to oppose the overall bill for weakening other consumer protections against identity theft. The U.S. Public Interest Research Group has a good summary of their reasons for opposing the bill.

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  • Whatever Else It Is, It Is Poorly Written

    Posted by

    Bob Lawless

    Here is my entry for biggest understatement on the Credit Slips blog: the 2005 bankruptcy amendments have drawn some criticism. Regardless of one’s views about the substance of the amendments, most everyone seems to agree that the legislative drafting left something to be desired. An example is with involuntary petitions. Because section 109(h) requires credit counseling for all consumer debtors in the 180 days preceding or (in some circumstances) the 30 days after the bankruptcy petition, a consumer debtor could defeat an involuntary petition by simply not getting credit counseling. Does that mean that the 2005 amendments eliminated involuntary bankruptcy petitions against consumer debtors?

    A bankruptcy court in New Jersey has reached the sensible conclusion, "of course not." (In re Fagan, No. 06-14863 NLW (Bankr. D.N.J. Aug. 14, 2006). In amending the Bankruptcy Code, Congress left in place the section that authorizes involuntary petitions (section 303). If Congress had wanted to except consumer debtors from involuntary petitions, it simply could have amended the list of debtors ineligible for involuntary relief. Moreover, an "individual" must get consumer credit counseling before a bankruptcy petition "by such individual" (section 109(h)). Because an involuntary petition is filed by creditors and not "by such individual," the credit counseling requirements do not apply.

    All of this hair-splitting could have been avoided if the credit counseling requirements had simply started with  "Except in the case of an involuntary petition," but is there a larger point here other than the hair splitting? I think so. The 2005 bankruptcy amendments were the most sweeping changes to the federal bankruptcy law since 1978 when congressional staffers worked closely with professional experts to draft the Bankruptcy Code. Since 1978, we have seen a steady erosion of congressional willingness to involve bankruptcy experts in legislative drafting. The result was that special interests and their paid lobbyists had a major role in drafting the 2005 amendments.

    That’s not surprising. Most legislation is drafted, at least initially, by lobbyists. In 1978, there were around 200,000 total bankruptcy filings, and in 2005, there were over 2,000,000. I don’t expect to see a return to the days when Congress looked to
    bankruptcy experts for advice in how to draft the bankruptcy law. The stakes are higher than they were in 1978.

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  • College Students’ Responses to their Parents’ Bankruptcies

    Posted by

    Debb Thorne

    Regardless of the class I’m teaching, I always find some way to incorporate the subjects of credit, debt and bankruptcy into my lectures. In Introduction to Sociology, I tie the subjects to discussions of social institutions; in Research Methods, I talk about the methods we use to collect data on the Consumer Bankruptcy Project (and share many of our findings); and in Social Inequality, well, the connection is pretty obvious.

    One consequence of these lectures on credit/debt/bankruptcy is that students feel free to come talk with me in the privacy of my office about their parents’ bankruptcies. Some cry because they are frightened that their parents will no longer be able to afford to pay for college, which translates into either more student loans or postponing their education. Some are afraid that their friends will find out the truth about why the family sold the house and moved out of the neighborhood. Others are angry at their parents’ (assumed) financial stupidity. And still others are relieved to know that their parents are not to blame–their mom’s medical bills or the loss of their dad’s job better explains what happened to the family.

    Granted, these observations are nothing more than anecdotal evidence, but they do suggest that when parents file for bankruptcy, the experience extends to their children. The kids are frightened, embarrassed and angry–all of the emotions that their folks probably felt. Unfortunately, these kids don’t feel that they can talk with their parents about the bankruptcy (we all know that people will talk about their sex lives long before they will chat about their finances). Instead, they turn to their professor for reassurance.

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  • Chapter 11 as Federal Tax Collection?

    Posted by

    Melissa Jacoby

    Debtor-creditor types tend to focus on private creditors in the business of extending credit or loaning money. Of course, debtor-creditor relationships vary considerably and accordingly have rather different dynamics. The findings in several empirical studies of chapter 11 should keep us mindful about the significant role of the Internal Revenue Service as a creditor in bankruptcy and how tax obligations affect the bankruptcy initiation decision for small businesses. In the recent working paper Dynamics of Large and Small Chapter 11 Cases: An Empirical Study, Douglas Baird, Arturo Bris, and Ning Zhu analyze chapter 11 cases in the Southern District of New York and the District of Arizona between 1995 and 2001. Baird and co-authors find vastly different patterns of general unsecured creditor payout between the big cases and the small cases (short version: general unsecured creditors get paid very little in the small cases). Although perhaps not their main result, they also report that “The need to resolve tax obligations is the engine that drives the typical small chapter 11 case.” (pp. 19-20). In in-depth research on chapter 11 cases in the Northern District of Illinois, Baird and Ed Morrison similarly have found the IRS in a prominent role. In their 2005 Columbia Law Review article Serial Entrepreneurship and Small Business Bankruptcy, Baird and Morrison suggest that the IRS essentially encourages entrepreneurs to put their struggling businesses into chapter 11, where it will renegotiate the entrepreneur’s personal liability.  So notwithstanding the special collection entitlements the government gives itself, it seems that the IRS prefers to encourage the initiation of a costly bankruptcy process, with other parties footing the bill. 

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  • One Voice or Two?

    Posted by

    Elizabeth Warren

    Newsweek ran a story this week about the scandals rocketing through the medical research field: a huge dispute over how much corporate sponsorship of research influences outcomes. The debate centers on the conflicts of interest that result from who paid for the research and whether that influences outcomes.  But there is an interesting side note that some scientists say is potentially more important: With sponsored research, the sponsor can simply fail to report the bad results. When the drug works—publish! When the drug doesn’t seem to have much effect—don’t publish! In effect, only the good outcomes (from the sponsor’s point of view) ever see daylight.


    This relates directly to Katie Porter’s post about the need for empirical research that produces original data in a field such as credit research. There are tons of data collected about customers, defaults, debt-income ratios, the role of job loss, etc. But those data are proprietary, which means the owners (the creditors) don’t have to tell anything. If they have something to say that advances their interests, e.g., during the debates over the bankruptcy law, then they can produce those data. But everything else is secret.


    Original data are very expensive to develop. Without them, however, Katie has it right: our understanding of credit will be completely one-sided. We will hear only one voice—and that will be the voice of those who make money from promoting a particular point of view.

    Doctors and patients are starting to worry about the effects of bias in medical research. I hope the number of people who worry about biases in what we know about credit will expand as well.

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  • Tort Liability in Consumer Credit Article

    Posted by

    John Pottow

    Those in attendance at Charles Tabb’s excellent symposium on BAPCPA this past spring in Chicago will recall a discussion we had on this topic prompted by my article, which is also being published in the Illinois Law Review, on this very theme —  "Reckless Lending: Time for a New Lender Liability?"

    Here is a link to the symposium web page, although I do not know whether they have the articles available for downloading yet:  Illinois Law Review.  My article explores the various policy arugments in favor of — and some non-trivial ones against — creditor liability in this area.  It’s an idea which traces a pedigree back to the inimitable Vern Countryman.  Those who can’t wait to read the article may be interested to know at the outset that because the idea has so many complicated ramifications, I also propose a "gentler" version than outright tort liability.  That is of an affirmative defense to a collection proceeding, but no independent cause of action for consequential damages.

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  • Legal Empirical Research

    Posted by

    Katie Porter

    Professor Richard Lempert at the University of Michigan Law School has just completed a week as a guest blogger at Empirical Legal Studies. He’s written passionately about how he thinks legal scholars should use data, and the posts are definitely provocative.

    I’m highlighting Lempert’s postings here because each of my fellow CreditSlips bloggers do empirical research about credit and bankruptcy issues. We care about the quality of available data and about how data are used. Debates about data were a high profile and controversial part of the recent bankruptcy reform process, and I suspect this trend will continue. Lempert’s last post raises a particularly important point about the difficulty and importance of collecting data, as opposed to using precoded publicly available data sets (Dept of Justice crime statistics, for example). He argues that collecting and preparing data is an important scholarly activity that deserves the respect and recognition of the legal academy. This point is particularly salient in the world of private law (including payment law, secured transactions, debtor-creditor law) in which the transactions are hidden from public view and much of the data are claimed as proprietary. Without painstaking original data collection, whether quantitative or qualitative, the realities of these important legal systems will not be understood.

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