Law on Rice

I just got back from my trip to the Arizona State Bar’s annual convention where I attended the bankruptcy session on Friday. Because I was traveling (and working on an exam in a summer school class), I didn’t have time to give you the the latest chapter 7 news. Here’s my attempt to catch up:

• The Fort Collins Coloradan has an in depth article on the rise in bankruptcy filings in one corner of Colorado. It starts with the story of Jay Schimpf who was forced into chapter 7 when his medical bills amounted to $280,000—a full $270,000 more than his insurance would pay. Read the full story here.
• The Los Angeles Times reports that personal bankruptcies in the Southland nearly doubled from 2007 to 2008. Read the full story here.
• A writer at the New York Times took a dive into small business bankruptcies here.
• There’s an interesting blog post at the Wall Street Journal about the Blixseth bankruptcy and a fight over a 2005 Land Rover. Read the rest here.

I’m at the State Bar of Arizona’s Annual convention’s all day bankruptcy session. It’s fascinating. I’m on the consumer track. Hot topics so far are lien stripping, short sales as opposed to bankrupty, and the real party in interest issues raised by the the mess in banking consolidation.

UPDATE: sorry for the terse post. I wrote it while I sitting in the Arizona Biltmore with my Wordpress on my iPhone.

The American Bankruptcy Institute gave me a link to an interesting article about the foreclosure mess that people (and banks) find themselves in these days, and it got me thinking: what exactly are all the legal issues raised by this situation?

Maybe I should step back. The Washington Post ran a story today about the fact that many homeowners are declaring bankruptcy (or just walking away from their homes), but the mortgage companies are simply not foreclosing. Indeed, “In better times, lenders tended to begin the foreclosure process after three months, said Guy Cecala, publisher of Inside Mortgage Finance. Now it is not unusual for it to take nine months for the process to begin, he said.”

So during this period, what legal issues arise? There are, of course, the contractual duties of the homeowners to maintain the properties, and the good will requirements of the lenders. Then there are the myriad of issues raised by bankruptcy. In addition, there might be tax issues for the long (involuntary) forbearances (think “income” under sec. 61(12) of the tax code). There there are all kinds of legal and equitable issues remedies like waiver and estoppel that might come into play. There are accounting and securities disclosure issues on the parts of the banks (especially after Spring’s FASB/mark to market changes) under the Securities Act and the Exchange Act. Also, what does this all mean for state foreclosure laws? In summary, I think there will be many law review articles springing from the 2008-2010 era!

I’ll leave you with this parting (and human) point from the article: For the Jensens, the delay has extended a painful period. “There was a sense of responsibility that until someone says we no longer own that property, we wanted to make sure it’s handed off correctly,” Jensen said. “We could have walked away like everyone else and said, ‘We don’t care.’ But we loved our neighbors and our neighborhood. We hold ourselves responsible.”

Yeah, yeah… so I took yesterday off from the Chapter 7 bankruptcy news. So file an adversary proceeding against me! Here’s what I’ve got for you today:

• Even though personal chapter 7 bankruptcies account for 85-95% of all filings, business bankruptcies often dominate the news. An interesting article on point is one from BusinessWeek published yesterday. It observes that the business bankruptcy rate continues to be extremely high—even with signs that the recession is receding. Indeed, over 100,000 businesses have been in bankruptcy court in the last 18 months. One group is predicting that the elevated rate will continue through 2010. Read more here.
• Speaking of business filings, there’s an unfortunate story about a airplane company that is disputing it owes millions in back wages through a chapter 7 filing. Read more here.
• Moving on to personal cases and litigation, there’s a somewhat interesting—if obscure—story about a chapter 7 filing staying litigation as a plaintiff in a tax dispute with a county assessor somewhere on the Arkansas-Oklahoma line. Read more here.

Since there wasn’t much in the “mainstream” press, I took a gander at the chapter 7 stories in the blogosphere:

• Daniel Gershburg, a New York/New Jersey bankruptcy lawyer, posted about some of the implications of filing chapter 7 when you own a business. Read more here.
• Atlanta bankruptcy attorney Jonathan Ginsberg has some interesting advice about tax withholdings while under a chapter 13 plan. Read more here.

Some really interesting news on the wire today about Chapter 7 bankruptcy filings. Here’s what I’ve got:

• Some BYU professors considered why bankruptcy filings in one state differ from another. Here’s a brief summary of what they found: “BYU professors Lars Lefgren and Frank McIntyre wrote in the study, published in the University of Chicago’s Journal of Law and Economics, that about 70 percent of bankruptcy differences between the states can be explained by wage garnishment laws, the percentage of bankruptcies filed under Chapter 13 and demographics.” The researchers were well positioned since Utah has the second highest rate of bankruptcies in the nation. Read more here.
• There was a pretty big involuntary Chapter 7 case filed today against a vaccine maker. Read more here.
• The recession is probably hitting RV manufacturers in a big way. One manufacturer, Monaco, just asked the bankruptcy court to convert its Chapter 11 filing to a Chapter 7. Read more here.
• A company that wanted to provide healthcare to the poor in urban neighborhoods just filed for Chapter 7 liquidation in Arizona. It claims assets of less than $100,000 and liabilities exceeding $15m. Read more here.
• There’s a “motherhood and apple pie” article about rebuilding credit after chapter 7 bankruptcy here.
• There’s an interesting article about the interplay of a particular food manufacturer’s bankruptcy and food companies’ insurance policies here.

It’s my theory all the “cheap money sloshing around the world” (a quote from Hal Holbrook’s character in Wall Street) was one of the causes of the current skyrocketing bankruptcy rates. High unemployment rates combined with over-leveraged consumers surely bears some of the blame (with the caveat that there’s lots of blame to go around).

My big question is whether (and should) the new Consumer Financial Protection Agency do anything to prevent consumers from getting overleveraged in the future?

Part of the answer to that question might be found in the Financial Product Safety Commission Act of 2009 (S.566/H.R.1705). My understanding is that the new agency would be very similar to the structure proposed therein. So, in looking at the bill’s text, I see that the new agency shall, inter alia, do the following:

(1) promulgate consumer financial product safety rules that–(A) ban abusive, fraudulent, unfair, deceptive, predatory, anticompetitive, or otherwise anticonsumer practices, products, or product features; (B) place reasonable restrictions on consumer financial products, practices, or product features to reduce the likelihood that they may be provided in a manner that is inconsistent with the objectives specified in subsection (a); and (C) establish requirements for such clear and adequate warnings or other information, and the form and manner of delivery of such warnings or other information, as may be appropriate to advance the objectives specified in subsection (a);

Parsing through that, it appears that the operative terms are “abusive, fraudulent, unfair, deceptive, predatory, anticompetitive, or otherwise anticonsumer” under (1)(A). Read broadly, it seems like the new agency could, say, regulate the debt-to-income ratio of consumers under almost any of those terms, especially with the explicit power to “place reasonable restrictions” on such products under (1)(B). My big question, however, is should it?

I submit to you that the big bankruptcy law news the other day was more about consumer protection than bankruptcy law per se. Still, because many consumer bankruptcies are fueled, at least in part, by the practices of consumer finance companies, the new agency proposed by President Obama seems highly relevant here.

As you probably know by now, President Obama is proposing the creation of a new consumer financial protection agency, not unlike other consumer product safety agencies. Obama would likely installed Harvard Law Professor Elizabeth Warren as its head (she also blogs at Credit Slips). Indeed, it appears that Ms. Warren has proposed a similar agency in the past. Read more on the NY Times’ Economix here. I have complex emotions on it.

Here are a few of the interesting articles I found around the web relating to Chapter 7 bankruptcy filings:

• A Janesville, Wisconsin city councilman filed for Chapter 7. That a small town city councilman filed for bankruptcy isn’t as interesting as the commentary. Read more here.
• In a David v. Goliath story, two small bondholders (one of whom filed Chapter 7 a number of years ago), are suing General Motors over its own Chapter 11 filing. Read more here.
• In an apparently dramatic last minute courtroom drama, SCO (who I mentioned yesterday), was saved from liquidation through a forced conversion from Chapter 11 to Chapter 7 when a white knight investor appeared in court. Read more here.
• In more Midwest news, it appears that a regional automobile dealer is in a bit of hot water over some sales booked but not delivered as well as some unpaid sales tax bills. These usually get a special Schedule on a bankruptcy filing! Read more here.
• Speaking of hot water, a Utah attorney filed for Chapter 7 protection a little while ago. His unpaid creditors, however, look to be the least of his problems. Read more here.

The Ninth Circuit just released it’s opinion in Warren v. Wirum (In re Warren), a bankruptcy decision. The following is just a brief abstract of the facts.

Prior to filing his bankruptcy petition, California moved against Mr. Warren’s bank account because of unpaid child support payments. A few weeks later, Mr. Warren filed a Chapter 7 petition to avoid the seizure. In his petition, he include a list of creditors, but he did not include other financial information required by section 521(a)(1) of the Code.

The day after he filed, the bankruptcy court notified him that he need to file the additional 521(a)(1) information within fifteen days, which he failed to do. The bankruptcy court scheduled a hearing to show cause as to why sanctions should not be imposed, but a few days before the hearing the trustee asked for time to investigate.

About five months after he filed the petition, Mr. Warren moved for dismissal, citing his lack of compliance. The district court refused to dismiss. I’ll let you read the full case on Bankruptcy Law Reports to find out why at Warren v. Wirum (In re Warren).

Ever since I learned what an important role long-term job loss plays in bankruptcy filings, I’ve been watching the rate closely. New data should be available by the time you get read this today. The new information would be available here.

While I don’t have the numbers as I write this, I have some collateral damage to report:

• Nevada is reporting that its unemployment rate hit 11.3%. I suppose the state is suffering from a double whammy of declining tourism dollars and low construction rates. You can decide for yourself here.
• Michigan hit 14.1%. Chrysler Bankruptcy + GM Bankruptcy=14.1% unemployment. Ouch. Read more here.
• Missouri seems like it has a little less misery at 9.0%. Here.
• Obama is predicting a nationwide unemployment rate north of 10%, but that’s not really new news. Here.
• One economic group gives the grim forecast of 9.5-10% unemployment throughout 2010. It’s not for nothing that they call it the dismal science. Here.
• We’re not alone. The U.K. is already over 10%, but it seems like things are easing a little more over there. Here.

Not very good news so far, so let’s see what today brings. And keep your fingers crossed.

UPDATE: looks like new claims were up just a little this week, still topping 600,000. Read the release here. However, the good news is that continuing claims fell by 148,000 or so—the first drop since January (read it on Bloomberg). Maybe things are looking up.