Law on Rice

My summer school finals are just about over, and finally I can get back to doing something more fun–like studying bankruptcy. To celebrate, I thought I’d liveblog my read of The End of Bankruptcy by Douglas G. Baird and Robert K. Rasmussen. Here goes:

5:17 pm, the introduction to their artice says that “Corporate reorganizations have all but disappeared” and that Chapter 11 has become but a vehicle for selling off the company’s going concern value. More interesting is that statement: “for the vast majority of firms in financial trouble, the traditional corporate reorganization has become increasingly irrelevant” because of the 500,000 firms that fail each year, only 10,000 will file Chapter 11. I know I’m only in the introduction, but does that mean bankruptcy is at an end, or that the bankruptcy code isn’t working very well? There’s a big difference…

5:22 pm, I was going to read further before commenting further, but I stopped dead in my tracks on the next few statements. The authors observe that the most common case is the “electrical subcontractor who uses the bankruptcy forum to cut deal with IRS,” and that “[m]arginally competent owner-managers, bureaucratically inept tax collectors, small-time landlords and suppliers, and and unsophisticated workers and tort victims populate the world” (sic). That strikes me as a rather dim view of the world. I wonder how it will inform the rest of the paper.

5:33 pm, Oops, I kind of forgot that I have to run to the school for something. Stay tuned…

I took summer school this summer–evidence to be precise. I just got home from my test, and what a tough one! It was over 40 pages long and had to be completed in three hours. For those of you who have been to law school, you know what I’m talking about. For the rest of you (what my professor calls “lay people”), count yourselves fortunate to be spared the experience.

I’m sorry for the dearth of posts as I’ve been gearing up. Hopefully to resume starting tomorrow.

This came across my email today from the American Bankers Association: “A record wave of job losses is being cited as a major factor in a record rate of consumer delinquencies in the first quarter of 2009…” For the full press release, click here. The number of delinquent stands at 3.35% of all account.

Looking under the numbers, we see the following:

Looks to me like auto loans had the largest increase in delinquencies.

As I mentioned before, I’m lucky enough to be getting some great hands on experience from a great bankruptcy attorney. One of the issues she asked me to look into was valuation in the context of a Section 522 exemption. I thought I’d play with the issue a bit and work it backward from the forms.

The 1991 Committee Notes seem to foretell a story of ambiguity. Comments from that year to Schedules A-H tell me that the “schedules require a complete listing of assets and liabilities but leave many of the details to investigation by the trustee.” Indeed, it appears that the pre-1991 forms required some kind of documentary evidence, but now they no longer do.

Perhaps more interesting, however, are the 2005 Comments and changes to the forms. For example, the Committee explicitly removed the term “market” from columns where property values were listed. Moreover, the Committee Notes go as far as to say that the “deletion simply indicates that the form takes no position on which Code provision or valuation standard may be applicable in any instance.” The Committee drafters shrug their shoulders by saying something like valuation is a tough issue in bankruptcy cases. Deal with it.

And that’s where the forms stop. Time to turn to Section 522, I guess.

I was reading an opinion by Stan Liebowitz (a professor of economics and director of the “Center for the Analysis of Property Rights and Innovation” at the University of Texas, Dallas) tonight. Prof. Liebowitz crunched some numbers to lay the blame for the foreclosure crisis at the feet of borrowers who put little money down on their houses. 

He concludes with the argument that “stronger underwriting standards are needed—especially a requirement for relatively high down payments.”

Surely he’s right on the economics: it’s just common sense that people are much less likely to walk away from a house where they have equity than a house where they can leave a large and faceless bank holding the bag.

But is he right as a matter of policy? Is it really worth reducing the risk of foreclosure by reducing overall homeownership? Is it worth engaging in an arm wrestling match between the heavy hand of regulatory power and Mr. Smith’s invisible (but equally powerful) hand? Moreover, what kind of argument is this from a free market publication like the Wall Street Journal anyway?

I’m lucky enough to be getting really great experience working for a bankruptcy lawyer these days. Part of what I really enjoy doing is the nuts and bolts work of preparing all the forms that comprise the bankruptcy petition.

But as I fill out the bankruptcy forms, I have two nagging questions in the back of my head: (1) what’s the source of authority that allows the courts to require compliance with the forms and (2) how do I know—legally—whether I’ve responded sufficiently to any particular item required by the form?

Perhaps not surprisingly, I did not see anything in Title 11 specifically referring to the forms. The Federal Rules of Bankruptcy Procedure do, of course, refer to them as the “Official Forms.” Indeed Rule 1007(b)(1) requires that a debtor file a list of schedules “as prescribed by the appropriate Official Forms, if any” when filing the bankruptcy petition. More to the point, however, is Rule 9009 (“Forms”):

Except as otherwise provided in Rule 3016(d), the Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate. Forms may be combined and their contents rearranged to permit economies in their use. The Director of the Administrative Office of the United States Courts may issue additional forms for use under the Code. The forms shall be construed to be consistent with these rules and the Code.

So there’s the authority. In addition, I found some of the answer to my question about compliance in the Advisory Committee Notes to Rule 9009. For example, the ACNs say:

The use of the Official Forms has generally been held subject to a “rule of substantial compliance” and some of these rules, for example Rule 1002, specifically state that the filed document need only “conform substantially” to the Official Form.

Standards like “substantial compliance” make my head swim, but at least it’s something to chew on for a while. Maybe the instructions or committee notes will have more guidance for any given form. Of note, it looks like there is no way to really effectively keep track of the Judicial Conference for changes to the forms—other than to read the reports from the proceedings. As I write this, the last report was over a year ago in March 2008.