ABI Bankruptcy Blog Exchange

Credit Slips (10)

Connect the Dots

Posted: September 6th, 2008, 10:43am PDT by Elizabeth Warren

As I was reading last night, I came across three separate little dots of information. The first dot was good news for AmEx, the credit card of choice for higher-income, less financially stressed families, from JD Powers rating company:

American Express ranks highest among all credit card companies and performs well across all of the five customer satisfaction factors. Amex’s customers are generally what the industry calls “transactors” – customers who pay off their bills in full every month and the company focuses on the rewards and benefits of its cardholder experience and it excels in meeting their expectations. Nearly 8 out of ten transactors select their card because of the value they feel they get from its rewards programs, with interest rates of little importance because of their purchasing style.

The second dot was bad news for AmEx:
The second dot was bad news for AmEx:

Credit-card groups were among the key casualties as fears grew of rising defaults. American Express fell 5.3 per cent to $38.75 after Lehman Brothers forecast net charge-offs - a measure of uncollectable debts - on its cards would rise to 8.5 per cent of loans by next year.

The credit card company that probably has the maximum number of customers who pay their bills and has more customers who love their AmEx cards than any other company will likely experience an astonishing 8.5% default rate on its outstanding loans next year. For decades, credit card default rates remained in the 3-4% range. A number like 8.5% puts AmEx credit cards in the same kind of reversal-of-fortune as Countrywide.

The third dot tells what AmEx is up against: Credit card solicitations have dropped back to a mere four billion pre-approved offers in 2008. That's a bit under 40 mail solicitations for every household in America--plus the college and mall marketing, the print ads, the television ads, etc.

I connect the the dots this way: First, the projected defaults for AmEx suggest that trouble is climbing the income ladder. Second, the projected defaults suggest that the economic news is going to get uglier in 2009. And, third, the credit card issuers' plan to avoid complete collapse is to find more people to borrow money, presumably at prices high enough to offset the losses. And all three dots suggest the plan won't work.
8th Circuit Rules Section 526(a)(4) Unconstitutional as Applied to Attorneys

Posted: September 5th, 2008, 5:34pm PDT by Adam Levitin

The United States Court of Appeals for the Eighth Circuit just ruled on a matter of first impression among circuit courts--the constitutionality of the treating attorneys as "debt relief agencies" under provisions of the 2005 Bankruptcy Abuse Prevention and ~~Creditors'~~ Consumers' Protection Act. (Freudian slip...) In so doing, the 8th Circuit struck down a major BAPCPA provision that inartfully restricts attorneys' ability to give clients advice about how to prepare their finances in contemplation of filing for bankruptcy.

For those readers not familiar with the intricacies of BAPCPA, the Act contains a provision, codified at 11 U.S.C. Sec. 526(a)(4), that provides that a "debt relief agency" may not advise a client (whether or not in bankruptcy) to incur more debt more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing
for or representing a debtor in a case under this title." A "debt relief agency" is defined as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of
money or other valuable consideration..." 11 U.S.C. 101(12A). The question before the 8th Circuit was whether an attorney is a "debt relief agency," and if so, whether 526(a)(4) is an unconstitutional abridgment of First Amendment free speech rights of attorneys.

The 526(a)(4) issue is important because levels and types of consumer debt determine a consumer's eligibility for Chapter 7 (liquidation) bankruptcy instead of Chapter 13 (repayment plan) bankruptcy. The centerpiece of BAPCPA was "means testing"--looking at a consumer's income relative to other consumers in the state under a complicated formula, with above-average consumers required to file in Chapter 13. A well-informed consumer might be able to structure his or her finances so as to avoid Chapter 13, which requires living on a court-supervised repayment plan for 3-5 years, but in which creditors' might have larger recoveries.

The Eighth Circuit held that attorneys are "debt relief agencies" within the meaning of the statute, but that restrictions on their ability to advise clients are unconstitutional. The Eighth Circuit, however, upheld the requirement that attorneys, as debt relief agencies, advertise using specific precatory language.

The arguments about section 526(a)(4) are reasonably straightforward. The government, defending the statute, argued that section 526(a)(4) is designed to prevent consumers from "gaming" the system. The court, however, noted that it interferes with advice that has nothing to do with gaming the system: it might be financially better for all creditors for the debtor to refinance a mortgage into one with lower monthly payments (not least because of 1322(b)(2)'s mortgage anti-modification provision) or to purchase a reliable automobile, as that might not be possible once in Chapter 13. More generally, one can think of other cases, in which a consumer might expect to end up in Chapter 13, but might not want to gamble with the local Chapter 13 trustee's personal sense of what are reasonably necessary expenses (orthodontia? replacing a furnace with a cracked heat exchanger? Probably no monoxide poisoning, but do you want to gamble?)

Here's the thing about 526(a)(4)--it really doesn't prevent gaming of the system. First, a well-informed consumer can game the system without advice from an attorney. Second, at least on its face, section 526(a)(4) doesn't prevent an attorney from suggesting that a consumer cease or reduce working in order to lower monthly income. Third, section 526(a)(4) doesn't prevent an attorney from explaining--very clearly--the state of the law, including how the means test works and how a person with more debt of certain types would be able to qualify for Chapter 7. 526(a)(4) doesn't prevent gaming of the system, it just places a very artificial constraint on attorney advice and thereby reduces attorneys' ability to give clients the best advice that might have nothing to do with gaming the system and thereby undermines the attorney-client relationship. (I know not to romanticize the attorney-client relationship in volume-based consumer bankruptcy practice, but still, we give homage to that sacred theoretical bond).

So what does the 8th Circuit's ruling mean for consumer bankruptcy law? I'm going to be a contrarian and argue that it really doesn't change much. All it does is show that the emperor has no clothes, but everyone who deals with consumer bankruptcy knew that already. The 8th Circuit's decision results in the worst of all worlds jurisprudentially--poorly constructed means testing and the ability to game it with competent counsel. But this sorry state of affairs is no different than what exists outside the 8th Circuit--poorly constructed means testing and the ability to game it by sophisticated debtors or slightly more competent counsel. The 8th Circuit's decision just illustrates what a Through the Looking Glass world BAPCPA has made.

We could, of course, fix this nonsensical situation by leveling up or leveling down--getting rid of means testing or making it a sensible system. The current situation, however, makes little sense. That's not to say it was wrongly decided--the problem was a means testing system that relied on muzzling attorneys to have any shot at being effective, and that's not a system we should have. The BAPCPA's problems are, unfortunately, too big for courts to clean up piecemeal. Courts can try to make sense out of a poorly conceived and drafted statute, but fixing it into a sensible, cohesive system remains a legislative task.

[Hat tip to my student Robert for the ruling!]
Congress is Costing You Thousands of Dollars...?

Posted: September 3rd, 2008, 6:58pm PDT by Angie Littwin

The other day I heard an alarming advertisement on the radio. It began by warning that a new federal law could cost "you" thousands of dollars. It then proceeded to say that, if you want to avoid paying this money, you'd better hurry, hurry, hurry and purchase a home by September 30, when the statute goes into effect. The ad had the tone of a going-out-of-business sale: "Think you have all year to buy a home? Not anymore! Act now while you can still afford to make your dream of home ownership a reality! Offer (or law, in this case) expires on September 30, 2008." (Not an exact quote.) By this point, I was waiting with bated breath to find out how Congress was going to drain potential homeowners of so much money. Didn't it just pass a law designed to help homeowners weather the mortgage meltdown?

Well, it turns out that the thousands of dollars new home buyers will be paying are their own down payments. After some careful listening and some less careful inference based on the September 30 date, I came to the conclusion that the ad was referring to the ban on seller-financed down payments in the Housing and Economic Recovery Act of 2008. The bill was signed into law on June 30 and will go into effect on the October 1 (hence the rush to sell before then). The law's main focus is providing help for current struggling homeowners, but it gets just a little bit proactive about prevention by banning sellers from lending money for down payments. This provision is intended to protect homeowners in the long run. It forces buyers to do a sticker-shock test on whether they can really afford their new homes. And it eliminates some incentives for seller-lenders to overprice houses. When a seller is financing the down payment, there's a temptation to overstate the price because, in the company's role as a lender, it will have the final say over whether the buyer can really afford to spend that much. The only pricing obstacle left to overcome is the buyer, and it's reasonable to think that buyers will be slightly less sensitive to price when they're not paying as much of it right away.
So it's easy to see why real estate developers would be against this provision. But what struck me about the ad is its attempt to pass on this sentiment to buyers, an attempt that borders on misrepresentation. While it's true that the new law "costs" consumers money in the short-term since they'll now have to pay their down payments upfront (or borrow from somebody else, anyway), a borrowed down payment is hardly the same thing as a free one. In the end, buyers who finance their down payments will almost certainly pay more for their houses than those who don't.

By the way, I was in the car when I heard the ad, so I couldn’t write down the details. I remember the advertiser being a company called Portrait Homes, but when l looked it up, all I found was a web site for Pasquinelli & Portrait Homes. Yes, it is a Texas real estate company, but, if it's the same company, its position on the Housing and Economic Recovery Act has certainly changed: the web site features an ad based on the $7,500 tax credit the new law offers certain first-time home buyers. So it sounds like Portrait Homes is treating the changing-of-the-law like a sale after all. Throughout September you'd better buy a home right away before old law expires, but if you happen to stop by on October 1, they may just have a new legislative provision that will still save you money. If any Credit Slips readers out there hear this advertisement, I would greatly appreciate a confirmation about whether or not the company behind this gem is, in fact, Portrait Homes.
Revisiting the 2005 Amendments When Times Get Hard

Posted: September 3rd, 2008, 6:08am PDT by Elizabeth Warren

As a follow up to my earlier post about the forces that have made bankruptcy less workable for reorganizations, I note a new Businessweek article. Retailers are feeling the pain of reduced consumer spending and tough credit terms, and now they are discovering that the 2005 bankruptcy amendments will make it harder--or impossible--for some of them to reorganize.

In an article entitled, When Chapter 11 is the End of the Story, reporters have started interviewing failing retailers who are facing new hurdles because of the changes in the law. The conclusion? Companies that might have reorganized before 2005 may now be pushed into liquidation.
Bobby's comment on the earlier piece is right on point: bankruptcy laws will determine who bears the losses. But that's the problem with many of the amendments. Special interest lobbying means that one group gets favored over another, with no real policy justification. Worse yet, in some cases, companies that could reorganize if all the creditors shared the hit will be forced to liquidate.

Creditors want their money, of course. But giving creditors so much power that businesses that could have been reorganized will end up liquidating makes no business sense for anyone.

Congress was enthusiastic about dismantling some key Chapter 11 protections in boom times. When those amendments are tested in hard times, they seem much less attractive.
Bankruptcy Filings Reach New High in August

Posted: September 2nd, 2008, 6:56pm PDT by Bob Lawless
The U.S. bankruptcy filing rate climbed again in August, reaching a new post-2005 high of 4,476 filings per day. The year 2005 is significant because it was the year that the bankruptcy law changed making it more expensive and more time-consuming to file bankruptcy as well as making bankruptcy less effective once debtors got to bankruptcy court. Despite these changes, the bankruptcy rate has become staggeringly high, and we appear to have returned to an era where we will have well more than 1 million annual bankruptcy filings.

By almost any estimate, bankruptcy filings will be over 1 million for this year. For the 2008 calendar year, bankruptcy filings will be:
- 1,049,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,160 per day) as they have averaged for the first eight months of 2008
- 1,075,000 filings if bankruptcy filings continue for the same daily rate (4,476 per day) as they have averaged for August 2008
- 1,080,000 filings if bankruptcy filings for the remaining four months of 2008 constitute the same proportion of total filings as the last five months of 2007 constituted for total filings that year (about 34.9%)
The August filing rate of 4,476 filings per day is 2.2% higher than July 2008 when the filing rate was 4,381 filings per day. Although the total number of filings in August (93,987) is actually less than it was in July (96,385), it is the daily filing rate that is most important. The total number of bankruptcy filings in a month is sensitive to the number of business days in the month, and July had an extra business day as compared to August.
Although August's 2.2% increase may seem small, the figure is deceivingly low because it actually translates into a 29.2% annual growth rate. In other words, if bankruptcy filings increased 2.2% each month of a year, the total bankruptcy filings for that year would be 29.2% greater than it was the previous year. (Because of compounding, the calculation is not as simple as taking 2.2% times twelve months.) This is a tremendously high growth rate in bankruptcy filings. At this growth rate, bankruptcy filings in 2009 would be over 1,300,000.

People often ask me why I think bankruptcy filings are rising. My answer is that it is both simple and complex. The simple answer is that hard economic times obviously contribute to rising filing rates. Tightening consumer credit markets also lead to short-term increases in bankruptcy filings as consumers find it difficult to borrow more to stave off the day of reckoning. That is the simple part. The more complex part of the answer is that we know people do not file bankruptcy immediately upon the onset of financial distress. Typically, consumers struggle for a long time--often two or more years--before filing bankruptcy. The job loss today or the harassing calls from creditors may precipitate a bankruptcy filing, but the seeds of that bankruptcy filing were sown long before it shows up as a statistic in the bankruptcy filings.
Systemic Risk, Business Risk and Bankruptcy

Posted: August 31st, 2008, 4:57pm PDT by Elizabeth Warren

Yale economist Robert Shiller argues that we need to add a new structure to the bankruptcy code, one designed to deal with systemic risk. He notes that the failure of a giant hedge fund or of multiple businesses could bring down the whole economy, and that we need to put in place the tools to deal with such a crisis now--before the next crisis is upon us.

I think Dr. Shiller is right about 1) the need for a mechanism to deal with systemic failure, and 2) that bankruptcy is the right place to develop such a scheme. I also fear that most policymakers won't see the need until it is too late.

But things are worse that Professor Shiller suggests.
Over time, bankruptcy law is becoming less able to deal even with ordinary business risks, thus diminishing the effectiveness of a structure that would provide some stabilization in a shaky economy. The problem is that different interest groups have picked away at the general rules of bankruptcy, making a comprehensive reorganization of a business (or a family) less and less likely.

Start with the 1978 Code, a slim volume that laid out a basic structure of how businesses could deal with failure and, if there was a going-concern value to be preserved, get back on their feet. The pain of non-payment would be distributed among their creditors, with the theme of equity-is-equality as the centerpiece and exceptions to that rule carefully cabined. (The exception, of course, has been the treatment of secured debt.) But work through the 1984 amendments, the 1994 amendments, and the 2005 amendments. The code is twice as long, and most of the changes are about special deals for special groups.

Shall we start a list? Airplane engine financiers? Repo swaps? Shopping center landlords? Inventory suppliers? Sure, every group can explain why it needs a special exception, and sometimes those reasons may be compelling. But total up all the changes, and the impact is to make bankruptcy work less and less effectively to hold all the creditors together to share the pain of discharge and to give the debtor a meaningful chance to reorganize a going-concern business.

Other amendments that aren't tied to a specific creditor group are also aimed at reducing the likelihood of reorganization. So, for example, Unrealistic time limits to confirm a plan of reorganization or expansion of the ordinary course of business exception to voidable preferences push more businesses toward liquidation.
The changes to Article 9 of the UCC have compounded the problem. Secured creditors have been given the tools to vacuum up every crumb of value. Now in Chapter 11, as Jay Westbrook keenly observes, secured creditors are often in control.

Trying to save a failing business is tough. Many efforts will fail. Success can be important not only for the business managers, owners and creditors, but also for the employees, retirees, taxing authorities, suppliers, and communities that depend on that business. When the economy is strong, there is a lot of value derived from a well-functioning bankruptcy law, but in a lousy economy, there is more value. In other words, everyone in this economy has a stake in a well-functioning bankruptcy law.

Defenders of a neutral, well-functioning bankruptcy system are in constant opposition to single-interest groups. Over the past three decades, the single-interest groups have dominated the legal process. Perhaps, as Dr. Shiller suggests, it is time to look at the big picture again.
The Path to Economic Growth: Bankruptcy

Posted: August 21st, 2008, 4:10pm PDT by Elizabeth Warren

For years, lenders and the IMF have told developing countries that if they really want economic growth they need to adopt strong creditor-protection laws. Without that, no one will lend--or so they said. A new empirical paper takes another cut at that advice. According to a country-by-country analysis of merger and acquisition behavior, Creditors' Rights and Corporate Risk-Taking, strong bankruptcy laws may do more to promote beneficial risk-taking and economic growth.

The insight of the paper is interesting: strong creditor rights make corporations risk averse. As a result, these laws "induce costly risk avoidance," causing the companies to engage in practices that fail to maximize the value of the firm and it's potential. The study finds the effects are particularly strong in countries where management is ousted whenever the business fails.
The paper doesn't track failing companies. Instead, it focuses on corporate M&A decisions at the national level. It documents notes how asset-wasting, risk-averse decisions correlate with the strength of creditors' rights on a country-by-county basis. In other words, the failure to have strong bankruptcy laws to balance against the rights of individual creditors echoes through the whole economy, not just the behavior of distressed businesses.

The paper reminded me of a conversation that I used to have with my bankruptcy classes about why American bankruptcy law was so generous. In part, bankruptcy fit the the risk-taking attitudes of a young and growing nation populated by people who wanted to take a risk--and wanted to know that there would be a chance to take a second risk if the first one failed. As the US Congress limits the usefulness of bankruptcy as a reorganization tool--both in business cases and consumer cases--that conversation has become more historical.

Efforts by Congress, by the IMF, and by big secured creditors who press for laws to give a handful of creditors the whip hand seem short-sighted to me. Whether a policymaker is sympathetic to debtors or creditors, a bankruptcy system that encourages beneficial risk-taking, that keeps corporations searching out new business opportunities, that encourages entrepreneurs to form small businesses, and that gives consumers a reason to go to work every morning is better for everyone--debtors, creditors and all the rest of us.
Why the OCC Can't Be Relied on for Consumer Protection

Posted: August 21st, 2008, 8:44am PDT by Adam Levitin

The OCC is up to its old tricks. It doesn't matter how bad things are out there for consumers--one can always count on the OCC to stand up against any attempt to regulate the consumer lending practices of national banks.

The OCC's latest shande is its opposition to the Federal Reserve's proposed expansion of Regulation AA, which defines and bans certain unfair and deceptive acts and practices (UDAP). The OCC's response, is perhaps the best illustration of its complete regulatory capture--the OCC is objecting to the proposed Regs because it is concerned that they will hurt bank safety-and-soundness, and constrict lending (which it claims is bad for consumers).

Somehow the OCC's parallel agencies--the OTS and NCUA, which regulate federal thrifts and credit unions, haven't been overwhelmed by the same concerns, as they have proposed parallel UDAP regulations to the Fed's. It seems that the OCC doesn't understand that UDAP regulations are about consumer protection, not safety-and-soundness. But, then it is hard to think of a federal agency that is more in the thrall of the entities it "regulates."
To be sure, the Fed has hardly been a bastion of consumer protection historically, and it only acted now under the threat of Congressional action and jurisdiction stripping, and the proposed Reg AA amendments do not go far enough. (The comments that Katie Porter and I submitted to the Fed on the proposed reg that detail this are unfortunately not up on the Fed's website, but then the Fed was deluged with 65,000 comments or so...) Nonetheless, the Fed, OTS, and NCUA have gotten the message from Congress that it is time to clean up consumer lending. It seems like OCC never got that memo.

Of course, the Comptroller argues that the regulations are bad for consumers because they will reduce credit availability. We can't be sure that they will have that effect (because the banks have never shown any evidence), and even if they do, that might not be such a bad thing--it was a glut of easy credit that led to the mortgage bubble. But the Comptroller's real concern is that the proposed regulations will hurt banks--that is they will reduce bank profits and hence safety-and-soundness. Not only does this underscore the essential conflict between consumer protection and safety-and-soundness--abusive practices are often very profitable. It also points to the chutzpah of the OCC's argument: had the OCC done a better job at restraining out-of-control mortgage lending practices, banks would be in a much stronger financial shape now, so there shouldn't be any worries about the impact of credit card lending regulations. And ultimately, if the only way a bank can make a profit is to engage in abusive consumer lending practices, that bank should be out of business. Somehow, though, I suspect that credit card lenders will still manage to turn a healthy profit regardless of the regulations.

All of this points to the need to reorganize consumer protection in financial services. Chartering and safety-and-soundness regulation need to be separated from consumer protection. This could be done either by restoring states' consumer protection powers in the financial services context by putting consumer protection in financial services into a single federal agency that does not have conflicting missions--either the FTC or a new consumer financial products safety commission.
Not Quite Free and Clear

Posted: August 19th, 2008, 1:02pm PDT by Stephen Lubben

Beginning with Baird and Rasmussen's End of Bankruptcy, and including papers by Westbrook, LoPucki, and yours truly, much recent corporate bankruptcy scholarship has focused on the frequent exercise of pervasive control by secured lenders in chapter 11 cases.

A key aspect of this new reality is the prevalence of sales of "substantially all" (corporate speak for "all") of the debtor's assets under section 363, before formulation of a plan. Lenders are willing to fund short cases leading to sales of the debtor as a going concern -- not "old fashion" reorganization plans. Sale of the debtor's assets under section 363 importantly invokes § 363(f) of the Bankruptcy Cod e, which appears to allow the new buyer to acquire "clean" title to the debtor's assets.

But along comes Judge Markell, writing for the 9th Circuit Bankruptcy Appellate Panel in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), to throw cold water on this reliance on section 363(f). Judge Markell summarizes his opinion as follows:

outside a plan of reorganization, does § 363(f) of the Bankruptcy Code permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, nonconsenting junior liens? We hold that it does not.

I discuss this conclusion -- which many chapter 11 practitioners and scholars will find shocking -- after the jump.
The BAP's conclusion seems to be somewhat like the 7th Circuit's notorious K-Mart opinion: an appellate court reigns in an accepted chapter 11 practice that has gotten too far in front of the actual language of the Bankruptcy Code. And it is undoubtedly true that many 363 motions are drafted based on what we wish 363(f) said, rather than what the statute actually provides. At best, these motions often make conclusory statements that the requirements of 363(f) have been met -- statements that don't count for much when viewed as part of an appellate record.

But I want to probe a bit deeper into Judge Markell's analysis of sections 363(f)(3) and (f)(5). The case facts are simple: The debtor owned a large parcel of land in Burbank, California. The land was subject to a $40 million first lien held by a hedge fund, and second lien for $2.5 million held by another creditor. Bankruptcy court affirms the sale of the property to the senior lender (who credit bid its claim as the "stalking horse"), free and clear of the second lien -- grumpy junior creditor appeals.

After holding that the appeal was not moot, the BAP held that neither section 363(f)(3) nor (f)(5) supported the bankruptcy court's decision to strip off the second lien.

First, Judge Markell rejected those cases that import a 506(a) type analysis into 363(f). First, he noted that the language of 363(f)(3) was distinct from that used in 506(a), and if Congress had intended the same result why the distinct language? Thus, he goes on to hold that 363(f)(3) is only implicated in cases where the sale price is more than the face amount of all liens on the asset.

He also notes that 363(f)(3) by it terms applies only when the sale price is "greater than" the value of all liens. If a 506(a) analysis is used in the context of a credit bid, the sale price will always equal the value of the secured claim and never be greater than, as required by the statutory language. Putting aside the assumed Congressional knowledge of algebra that this analysis implies, this point still seems rather persnickety. Future creditors are advised to bid their claim plus $0.01 to ensure that 363(f)(3) applies.

Judge Markell's reading of the statutory language is somewhat more persuasive, but note that everyone (both the court and the parties) is assuming that the value of the real estate is $40 million. But in a liquidating chapter 11 case that appears likely to offer no recovery to unsecured creditors, the lender likely had no reason not to bid the full amount of its claim at the auction (there is no mention of third-party guarantees).

If cash bidders uniformly valued the property at < $40 million, they wouldn't even show up at the auction -- as apparently happened in this case, where the stalking horse bid won the auction. In short, would Judge Markell's analysis hold up if the lender had said "yeah, we bid our full claim amount but we're going to put on expert testimony to show that the property is really worth $30 million." Assuming the expert was credible, the sale "price at which such property is to be sold is greater than the aggregate value of all liens," albeit still lower than the face amount of the liens.

Sticking with Judge Markell's analysis under these facts forces us to confront the fact that this interpretation of the statue uses the term "value" in a way that means something other than economic value of the lien, and something more like "claim." Of course, the term "claim" is also defined in the Code and if Congress had meant that, why didn't they use that term? . . . and the interpretive wheel goes round again.

If you're still with me after all that, I'll say a few words about the court's analysis of 363(f)(5).

The court first rejected the idea that a cramdown under 1129(b) could be the relevant "legal or equitable" proceeding that could compel a junior creditor to accept a money satisfaction. That seems reasonable, since the cramdown likely will never happen if the 363 sale occurs, and the entire analysis begins to resemble a particularly confusing time travel episode of Stargate.

Judge Markell than goes on to explain that

The question is thus whether there is an available type or form of legal or equitable proceeding in which a court could compel [the junior creditor] to release its lien for payment of an amount that was less than full value of [the junior creditor]'s claim. Neither the Trustee nor [the senior creditor] has directed us to any such proceeding under nonbankruptcy law, and the bankruptcy court made no such finding. 2008 WL 2840659 at *15 (citations omitted).

Here the opinion again resembles Kmart, inasmuch as I view Kmart has having been driven by the tendency in chapter 11 practice to file motions that have little evidentiary support -- no, repeating the text of the motion in a declaration does not count, especially on an issue like this where the signer of the declaration probably does not have basis for knowing this information (if it is even a factual issue). No doubt because of the increasingly transactional nature of chapter 11, it is all too easy to forget that what "works" in the bankruptcy court might not constitute an adequate record on appeal.

Future drafters of 363 motions would be well advised to point the bankruptcy court to the relevant state law citations that might support a finding that 363(f)(5) applies -- state foreclosure law would seem to be an obvious source. As I'm sure my consumer colleagues on this blog can confirm, second liens get wiped out in foreclosure sales all the time, right?
Clear Channeling Lubben

Posted: August 19th, 2008, 11:45am PDT by Bob Lawless

Seton Hall law professor and Credit Slips guest blogger Stephen Lubben wrote and asked me if we were going to say anything about the opinion of the Ninth Circuit Bankruptcy Appellate Panel in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), No. 07-1176 (Bankr. 9th Cir. July 18, 2008) and available here. The answer to any such inquiry is "I don't know -- depends on our time and what strikes our interest." (By the way, if you have noticed the light posting over the past week and a half, the regular bloggers here have been pretty busy.)

To discourage any future inquiries along these lines, I asked Professor Lubben if he wanted to write up something for Credit Slips on this case. Furthering our good fortune, he readily agreed. In all seriousness, we are lucky to have such a careful observer of the corporate reorganization scene to comment on this important decision, dealing with the ability to submit a credit bid in a sale of assets in a bankruptcy case (For the nonlawyers, a "credit bid" is when a creditor bids the amount of its debt instead of cash.) Because asset sales play a central role in the chapter 11 process, the Clear Channel opinion will be widely discussed. Look for Professor Lubben's post in the next few days.

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Credit Slips (10)

Posted: September 6th, 2008, 10:43am PDT by Elizabeth Warren

Posted: September 5th, 2008, 5:34pm PDT by Adam Levitin

Posted: September 3rd, 2008, 6:58pm PDT by Angie Littwin

Posted: September 3rd, 2008, 6:08am PDT by Elizabeth Warren

Posted: September 2nd, 2008, 6:56pm PDT by Bob Lawless

Posted: August 31st, 2008, 4:57pm PDT by Elizabeth Warren

Posted: August 21st, 2008, 4:10pm PDT by Elizabeth Warren

Posted: August 21st, 2008, 8:44am PDT by Adam Levitin

Posted: August 19th, 2008, 1:02pm PDT by Stephen Lubben

Posted: August 19th, 2008, 11:45am PDT by Bob Lawless