The National Conference of Bankruptcy Judges consistently
delivers some of the best continuing legal education in the country for
bankruptcy lawyers. Here are some highlights from this year's conference.
I started my day Thursday with the Bernstein-Burkley firm's
Wake Up and Run. For the past three year's the firm has sponsored a daybreak 5k
run at the conference. This year's run drew about 80 participants who ran,
jogged or meandered around the waterfront in San Diego. At 33:58, I was near
the back of the pack, so I can't tell who the fastest judge was or how the
Fifth Circuit fared against the Ninth Circuit. The fact that so many people
would get together at 6:30 a.m. to go for a communal run shows that you don't
have to be crazy to practice bankruptcy law, but it helps.
The Reaction to Stern v. Marshall
So much has been written about Stern v. Marshall
that it is hard to say anything new. The panel did a good job on focusing on
the judicial reaction to the decision rather than rehashing the story of the
former Playboy playmate who didn't get her multi-million judgment because
Congress created an unconstitutional allocation of work between the bankruptcy
courts and the district courts. The panel gamely tried to wade through the
reams of decisions mentioning Stern v. Marshall. As of October 25, there were
712 of them. The trend appears to be that while there are still about 50
decisions a month mentioning the Supreme Court ruling, the sky is not falling. Out
of a sample of cases, the panel found that a majority of Stern-based motions to
withdraw reference, motions to dismiss and motion to abstain had been denied. Two
early decisions which suggested that bankruptcy courts lacked the power to even
consider matters which were core proceedings but could not be constitutionally
decided by the bankruptcy court were walked back by subsequent decisions.
The most important response to Stern v. Marshall is
that a few courts have developed local rules to deal with the decision and the
national rules committee has proposed a set of rules changes as well. The
Southern District of New York's rules have provided the template for several
other courts that have addressed the issue. Their rules can be found here.
The Southern District rules attempt to require parties to
state whether they will consent to entry of a final judgment by the Bankruptcy
Court or whether they object. The new rules require a statement of consent in
the first pleading filed in an adversary proceeding, in the first pleading
filed by a defendant, and upon removal o f a case. These rules reflect a
belief, which is probably warranted, that the parties can consent to decision
by a non-article III judge. New Rule 9033-1 provide that if a matter is core
but the court cannot constitutionally enter a final judgment, the Court shall
enter proposed findings and conclusions "as if it is a non-core proceeding."
The proposed national rules amendments can be found here.
The proposed rules eliminate the core/non-core terminology from rules 7008,
7012, 9027 and 9033. Instead, parties will simply state whether they consent to
entry of a final order by the bankruptcy court. New Rule 7016(b) states that
the court shall, either sua sponte or on timely motion of one of the parties
decide whether to enter a final judgment, enter proposed findings and
conclusions or "take some other action." Parties may submit
comments on the proposed rules amendments until February 15, 2013.
What the Puck: Sports Teams in
This presentation discussed the bankruptcies of the
Phoenix Coyotes, the Texas Rangers and the Los Angeles Dodgers. According to
the panelists, a sports league is nothing more than a cooperative of the teams.
When an owner acquires a team, he agrees to give the league veto power over who
will own the team and where it will be located. This gives the league enormous
power over the teams and theoretically gives it the power to veto most
decisions that would be made in a bankruptcy proceeding. In bankruptcy terms,
the debtor is a party to an executory contract which either is not subject to
being assumed or at or cannot be assumed in a manner compatible with the
proposed reorganization. Nevertheless, bankruptcy has been successful to
varying degrees because of the incentive of the fellow owners to allow the
bankrupt team to, in the words of Tom Salerno, "bend the league rules."
The three cases each had their own unique stories. The
Phoenix Coyotes were losing money because Arizona was not a particularly good
market for a hockey club. Their owner wanted to sell out to a Canadian
technology entrepreneur who would move the team. However, the league had vetoed
the proposed sale. The Texas Rangers, on the other hand, were a profitable
team, whose parent company was mired in debt. The team owners and the league
were both happy to allow the team to be sold to a group led by Nolan Ryan. However,
to get the benefit of bankruptcy, they had to allow a competitive sales process.
The Los Angeles Dodgers were losing money and had been drained of $240 million
by owner Frank McCord. McCord wanted to sell the media rights for a small
fortune and hang onto the team. The league did not want to allow this to
All three cases resulted in auctions. In the case of the
Phoenix Coyotes, the league bought the team, even though it did not have the
highest bid. Three years later the team is still losing money and the league
has not found a new owner. In the case of the Texas Rangers, a sales process
designed to favor the Nolan Ryan group was upset when Judge Michael Lynn
convinced the parties to allow genuine competitive bidding. Dallas Mavericks
bad boy Mark Cuban almost got the team until he was outbid by the Ryan group. In
the Dodgers case, the team sold for $2 billion, which will likely allow Frank
McCord to walk away with anywhere from hundreds of millions to a billion
dollars. In each case, the bankruptcy case transitioned the team to a new owner
acceptable to the league (although in the Coyotes case, that owner was the
A Grimm Fairy Tale: Perspectives in the Next
Chapter of the U.S. Mortgage Market Story
My notes from this panel would fill a ten page article. However,
a few highlights will have to suffice.
New York Times journalist and author Gretchen Morgenson
is the author of Reckless Endangerment: How Outsized Ambition, Greed and
Corruption Led to Economic Armageddon. She argued that the government's role in
subsidizing home ownership through Fannie Mae and Freddie Mac corrupted the
mortgage market. When the executives, shareholders and lobbyists for Fannie and
Freddie were able to get part of the subsidies for themselves, they promoted
more demand for subsidized mortgages. The private mortgage market which is
based on securitization was rampant with conflicts of interest and lack of
disclosure. Due to the collapse of the private mortgage market, Fannie and
Freddie now comprise 95% of the mortgage market.
She said that if the government is going to subsidize housing finance, it
should do so directly on the government's own balance sheet. She also said that
the private sector must be "deeply engaged in building a market that is
trustworthy, clean and not corrupt.
Another speaker pointed out the extent of the mortgage foreclosure crisis. 3.5
million foreclosures have been completed, 2 million more are in the pipeline
and 7 million more are at risk. Foreclosure has been shown to reduce the value
of foreclosed homes by 27% and to reduce the value of homes in the neighborhood
Franklin Codel, head of Mortgage Production for Wells Fargo Home Mortgage
stated that Wells Fargo works very hard with borrowers experiencing financial
distress but servicers and investors were not ready for the elevated level of
foreclosure activity. Nevertheless, he said that Wells Fargo completes two
mortgage modifications for every foreclosure.
Clifford White, Executive Director of the Executive Office for U.S. Trustees
highlighted the role of the bankruptcy system in dealing with the mortgage
crisis. He said that "our experienced in the bankruptcy system has been that
large banks were not performing well" and that the bankruptcy system has been
at the forefront of identifying problems in the mortgage industry. He added
that 300,000 distressed homeowners go into chapter 13 each year.
Mr. White argued that the bankruptcy courts saw the mortgage crisis sooner than
other segments of the economy, but that the U.S. Trustee's program "faced an
onslaught of resistance" to efforts to try to address the problem.
Mr. White also stated that the bankruptcy system should think of itself as a
regulatory mechanism. He highlighted the disclosures required by the amended
bankruptcy rules. He said that these rules "affect bank processors in a way
that no other federal rules do."
Both Mr.Codell and Steven Swartout, who is the Executive Vice-President for a
community bank, stated that their institutions have a high level of modifying
mortgages that they own but that they have difficulty getting responses from
the investors on mortgages they service.
Ms. Morgenson was critical of the HAMP program, describing it as
"ill-conceived" and with very few sticks attached. The program was voluntary
and did not address second liens which were often retained by the originating
bank. She questioned whether the government was trying to strike a balance
between protecting the financial sector and protecting bad actors.
Mr. Swartout explained that there were different markets for long-term and
short-term mortgages. He said that there were only a limited number of entities
that could take on the risk of a 30 year fixed rate mortgage. As a community
bank, their market is in making two, three or five year callable mortgages. He
said that the expectation is that these mortgages would be repriced at maturity.
However, he said that they would not meet the requirements of a "Qualified
Mortgage" under proposed federal regulations.
In closing Gretchen Morgenson complimented the work of the bankruptcy courts,
stating, "without you questioning what came into your courtrooms we wouldn't be
even this close to a turnaround in the housing market."
Justice Stevens and Advocacy Before the Supreme Court
The Commercial Law League luncheon featured the presentation of the Lawrence
King Award to retired Supreme Court justice John Paul Stevens and a keynote
address by Supreme Court advocate Eric Brunstad. (Unfortunately, Justice
Stevens was not able to accept the award in person). The two blended nicely
into a program on bankruptcy and the Supreme Court.
A few stories about Justice Stevens:
Shortly after he was appointed to the Seventh Circuit, the court considered the
case of protesters who had occupied the state capital grounds. The legislature
voted the protesters in contempt of the legislature and had them arrested. This
was during the height of the Nixon law and order days. While the other members
of the panel had no problem with the arrest, it troubled Justice Stevens and he
dissented. He also assumed that he had lost his chance to be considered for the
Supreme Court. However, when President Nixon resigned and President Ford was
looking for a nominee who was not closely tied to Nixon, Stevens got the nod.
Justice Stevens said that brilliance was not how much you knew but whether you
used it in a wise and humane manner.
Justice Stevens, unlike many appellate judges, was most comfortable around
Bankruptcy Judge James Gregg accepted the award on behalf of Justice Stevens. He
described him as intelligent, inquisitive and cordial, the opposite of pompous
and egotistical. He said that Justice Stevens said that his most interesting
bankruptcy case was Central Virginia Community College v. Katz, 126
S.Ct. 990 (2006) in which he found that sovereign immunity did not protect a
state from recovery of a preference, a decision which dialed back the Supreme
Court's sovereign immunity jurisprudence which Justice Stevens felt had been
exalted beyond anything the framers intended.
Eric Brunstad the keynote speaker, has argued ten cases
before the Supreme Court including this year's RadLAX decision. He noted
that Justice Stevens had authored three bankruptcy opinions: Marrama,
Katz and Till. He praised Justice Stevens for being willing to
consider cases on a case by case basis rather than being bound by a fixed
He said that Justice Stevens' approach to the law was exemplified by his
decision in Marrama, which denied a debtor's ability to convert from chapter 7
to chapter 13 despite statutory language referring to an absolute right. He
said that Justice Stevens viewed the inherent power of the court as an
extension of its powers in equity to deny relief to a party with unclean hands.
He believed that even though you may not be able to waive a right, you could
Justice Stevens was also a big fan of liberty, viewing it as an interest which
transcended the written words of the Constitution.
Mr. Brunstad told several anecdotes about the Supreme Court. On one day, it had
snowed particularly hard. A lawyer received a call from the court clerk asking
if he needed a right to court. Much to his surprise, an SUV showed up with
Chief Justice Rehnquist and Justice Kennedy. The Chief fretted that they would
be late and told the driver, "I order you to drive through all red lights" to
which Justice Kennedy replied, "do you have that power?"
On another occasion, Chief Justice Rehnquist was quizzing an attorney about how
to limit the discretion of bankruptcy judges. Before the advocate could get a
word out, Justice Breyer quipped, "Isn't that what they're paid to
On another occasion, one of the Justices had asked about a long and involved
hypothetical which left the lawyer puzzled. Justice Scalia told him, "Just say
yes," which the lawyer did. The follow up question was "Why?" When the
puzzled lawyer turned to Justice Scalia, he said, "You're on your own."
Brunstad said that he takes his approach for arguing cases from Aristotle,
focusing on Logos-which refers to logic, Athos-which refers to credibility of
the speaker and Pathos-which refers to an emotional connection with the
Pre-Bankruptcy Ethics: How to Avoid the Minefields Before Combat Begins
Prof. Nancy Rapoport had some good perspective on the role played by counsel
for the Debtor-in-Possession. She pointed out that, on the one hand, counsel
represents the Debtor-in-Possession, which is a fiduciary to the creditors. While
counsel is not a fiduciary to the creditors, counsel is an officer of the court.
This may impose higher duties on counsel for the DIP than counsel for a private
party. She noted that counsel is generally protected when advising the DIP
between several acceptable courses of action. On the other hand, she said of
Richard Carmody of Adams & Reese discussed the importance of representing
the interests of the DIP and not its principals. He pointed out that in the
Diocese of Spokane case, the attorneys who represented the Diocese in its
chapter 11 have now been sued alleging that they represented the interest of
the former Bishop rather than the Diocese.
Chapter 11 Update: Hot and Emerging Issues
This presentation discussed several important new cases in the chapter 11 arena.
Here are a few cases to be aware of.
In Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil Co.), 599 F.3d
1255 (11th Cir. 2010), the debtor used cash collateral without
permission. A supplier who was paid for goods actually delivered was required
to repay the funds as an unauthorized post-petition transfer. On the other
hand, in Abbot v. Arch Wood Protection, Inc. (In re Wood Treaters, LLC),
2012 Bankr. LEXIS 3454 (Bankr. M.D. Fla. 2012), a vendor who received payment
from a debtor who obtained permission to use cash collateral but was not in
compliance with the order escaped liability. The cases raise the issue of how
much due diligence a party dealing with a DIP must perform in order to qualify
for a good faith defense to an action under Sec. 549.
In re Heritage Highgate, 679 F.3d 132 (3rd Cir.
2012) raised an interesting valuation question. An appraisal at the beginning
of the case showed that the debtor's property exceeded the value of both the
first and second liens. By confirmation, the starting value of the property
less lots sold during the bankruptcy was less than the amount of the first lien.
However, the debtor's cash flows showed that future sales of lots would bring
in enough money to pay both liens. Critically, the second lienholder did not
offer any independent appraisal testimony. The court held that the debtor's
cash flows, which assumed future appreciation in the value of the debtor's
property, was not a valuation as of confirmation. As a result, the second lien
was completely underwater.
In re Loop 76, LLC, 465 B.R. 541 (9th Cir. BAP 2012)
went against the majority of cases in allowing separate classification of a
deficiency claim. The court allowed separate classification because the
deficiency claim had the benefit of personal guaranties.
Several recent cases have applied the Till decision to chapter 11 cases.
In In re Cottonwood Corners Phase V, LLC, 2012 Bankr. LEXIS 2004 (Bankr.
D. N.M. 2012), the debtor sought to reinstate the debt at the contract rate of
5.8% Using a formula approach based on the 10 year treasury bill
rate plus risk factor points, the court found that 7.0% was appropriate. In In
re North Valley Mall, LLC, 2010 Bankr. LEXIS 1927 (Bankr. C.D. Cal. 2012),
the Court used a blended "tranche" approach to come up with an interest rate of
8.5%. Finally, in In re Walkabout Creek Limited Dividend Housing
Association, LP, 460 B.R. 567 (Bankr. D. D.C. 2012), the court said that
the interest rate should be at least 1% above the equivalent treasury bill rate.
Because this exceeded the rate proposed by the debtor, the court denied
confirmation. The court said that the prime + 1-3% formula in Till did
not even rise to the level of dicta. These cases strike me as wrongly
decided. The chapter 13 statuory language interpreted in Till is
identical to the language in chapter 11. Most chapter 11 cases are too small to
support dueling experts. As a result, the Till formula presents an
appropriate starting point for most cases.
Two recent cases have rejected use of the "indubitable equivalent" prong of
section 1129(b)(2)(A). In In re River East Plaza, LLC, 669 F.3d 826 (7th
Cir. 2012), the court rejected replacing the debtor's real property collateral
with treasury bills. If this is not the indubitable equivalent, I don't know
what would be. In Cottonwood Corners Phase V, the debtor proposed to
repay arrearages on the debt over time without interest on the basis that the
arrearages already included default interest. This did not work.
Gentry v. Siegel, 668 F.3d 83 (4th Cir. 2012) is
an interesting case on class proofs of claims. If a party files a class proof
of claim and the class is certified, the class is approved retroactively. If
the class is not certified, the court must allow class members additional time
to file a claim. Procedurally, a class claim is deemed allowed in the absence
of an objection. If there is an objection, the class rep must seek to invoke
the adversary rules to obtain class certification. In the specific case, the
court did not certify the class because a class of several hundred employees
was not necessary in a case with thousands of creditors.
subscribers can access enhanced versions of the opinions cited in this article:
Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011)
Virginia Community College v. Katz, 126 S.Ct. 990 (2006)
Petroleum Co., LLC v. Cohen (In re Delco Oil Co.),
599 F.3d 1255 (11th Cir. 2010)
v. Arch Wood Protection, Inc. (In re Wood Treaters, LLC), 2012
Bankr. LEXIS 3454 (Bankr. M.D. Fla. 2012)
re Heritage Highgate, 679 F.3d 132, 2012 U.S. App. LEXIS
9698 (3rd Cir. 2012)
re Loop 76, LLC, 465 B.R. 541 (9th Cir. BAP 2012)
re Cottonwood Corners Phase V, LLC, (Bankr. D. N.M. 2012)
re North Valley Mall, LLC, 2010 Bankr. LEXIS 1927
(Bankr. C.D. Cal. 2012)
re Walkabout Creek Limited Dividend Housing Association, LP,
460 B.R. 567 (Bankr. D. D.C. 2012)
re River East Plaza, LLC, 669 F.3d 826 (7th
v. Siegel, 668 F.3d 83 (4th Cir. 2012)
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