But when the debtor sought approval of bidding procedures that denied the lenders a right to credit bid under §363(k) or exercise their right to an "1111(b) election," under the theory that the debtor's proposed plan was providing the lenders with the "indubitable equivalent" of their claims under §1129(b)(2)(A)(iii) the bankruptcy court said "not so fast." Among other things, that court said that the "indubitable equivalent" bit of 1129(b)(2)(A) could not be used to rather obviously avoid the more specific provisions of 1129(b)(2)(A).

But the debtor appealed to the district court, whose 57 page opinion was issued a week ago.  After a discussion about whether the court had jurisdiction to hear the appeal, the opinion moves on to an extensive discussion of the "plain meaning" approach to statutory interpretation.  Those of you who have heard of the "plain meaning" rule can skip right to page 23 of the opinion, where the action starts.

In short, the district court rules that the only relevant statutory provision is §1129(b)(2)(A)(iii), and because each subpart of 1129(b)(2)(A) is separated by an "or," the plain reading of the statute must give each subpart independent significance.  That is, subpart (iii) is not limited by anything in subparts (i) and (ii), and a sale under subpart (iii) is not subject to the limitations in those other subparts.  That is, no credit bidding or 1111(b) elections need be provided in a sale under the "indubitable equivalent" prong.

I've been waiting for the same crowd that got all hot and bothered about GM and Chrysler to rear up, but it hasn't happened yet.  So I'll have to be outraged all by myself.

It seems clearly problematic to create an exception to what I have previously described as fundamental secured creditor protections in the Code:  the right to credit bid and the right to make an 1111(b) election are the primary protections that secured lenders have against "lowball" sales in a world where chapter 11 has become increasingly sale driven. It remains unclear to me how a sale that lacked these features could ever provide creditors with the "indubitable equivalent" of their claims.

Citing the 5th Circuit's recent Pacific Lumber opinion, the district court essentially says, don't worry, this will all work out fine so long as the debtor is valued properly. But isn't that the whole point? The district court's approach shifts the risk of an erroneous valuation onto the lenders.

And in doing so, the court seems to have created an obvious "best interests of the creditors" problem.  After all, a debtor can't cram down a dissenting creditor under §1129(b) unless it has complied with all parts of §1129(a), save for (a)(8). I don't see how the debtor can strip the lenders of their right to credit bid in the hypothetical chapter 7 case contemplated by section 1129(a)(7).

The district court responds that it is only considering bidding procedures at this point, and that confirmation issues will be addressed by the bankruptcy court at a future stage. But it seems distinctly odd that the bankruptcy court is being told to approve bidding procedures for an auction that may well be pointless. How can Congress have ever possibility intended to allow the debtor waste estate funds in this manner? With all due respect to the district court, it seems as though the court got a bit too focused on §1129(b)(2)(A), at the expense of that provision's place in the larger Bankruptcy Code.

The lenders have appealed to the 3d Circuit, although they only obtained a 7 day stay from the district court.  We can hope that this will be sorted by the Circuit before any lasting harm is done.

UPDATE:  The 3d Circuit is getting involved.

This, of course, ignores the degree to which the financial community created the Lehman mess, by both undermining chapter 11 through the reckless expansion of the derivative safe harbors in 2005 and by the general refusal to work with the existing chapter 11 system both before (Bear Sterns) and after (AIG) Lehman. In the case of AIG, this also connects to today's story about the Fed's decision to pay top dollar to AIG's counterparties, whereas a credible threat to put AIG into chapter 11 might well have saved  billions of dollars. Of course, Treasury and the Fed were unable to make such a credible threat, given their generally dismissive relationship with chapter 11 and an extreme case of cold feet following Lehman.

To be sure, Lehman's old management should get a good deal of the blame for calling bankruptcy counsel on the day they wanted to file. It strikes me as a breach of fiduciary duty to conduct no advance planning  for the largest chapter 11 case, ever. The trick, of course, is whether the estate can make the breach into a duty of loyalty claim, as duty of care claims are essentially useless as a result of Delaware's §102(b)(7).

Thinking of starting up such a business yourself but, of course, being honest and legitimate? Think again. The receiver concluded that if the business were run lawfully, profitability would be “severely challenged.” In fact, I recently asked a panel of experts on foreclosure rescue scams if they thought ANYONE, even one of them, could legitimately advertise that they provided loan modification assistance. Given the long odds in getting a loan modification, even with HAMP finally somewhat operational, perhaps the best one can offer is to take on the frustrating work of trying to get a modification. But without some chance of success, perhaps most modification assistance is a mirage.

The explanation for why homeowners can’t get reliable answers on loan modifications is that the default servicing technicians are “cab drivers,” when successful HAMP and other loss mitigation programs would require “cup drivers” in NASCAR parlance. The servicing industry doesn’t care much for “CRAMP,” their term for Hope Now and HAMP, which the former employee described as a vehicle designed for an 8-lane Interstate running on a two-lane country road. And those qualified written requests that consumers can use to get information on their mortgage loans? Those QWRS are “Quite a lot of Written Regurgitated S**t” because most consumers won’t know what to do with the information that the system spits out in response to the request. Depressing that the best legal tool consumers have may be aptly described with such acronym. If there is a bright spot here, it’s that folks like Max who are holding the industry’s feet to the fire are making a difference. In fact, Max got his own term. A “BCA” is a boot camp attorney, whose request means a lot of work and trouble for the unlucky servicing tech who gets such correspondence.

There's a lot that I thought was objectionable or questionable in Evans and Wrights study, but most of it was well within the bounds of reasonable argument.  I have no problem intellectually with arguments that any particular regulation could impose costs that outweigh its benefits.  Instead, I was was moved to write because Evans and Wright were making precise numerical claims about the cost impact of the CFPA, and that these claims were based on either (1) a highly questionable comparison to dissimilar regulation or (2) pure conjecture.  

In their reply, Evans and Wright spend a good deal of time arguing about things that are really beside the point to my critique.  For example, Evans and Wright emphasize that I have not proved the affirmative case for the CFPA's positive impact (a passing point I made to show that the economic impact of regulation is susceptible to multiple predictions) and that I have "disputed virtually none of [their] findings that the CFPA Act would impose high costs on lenders and ultimately result in denying borrowers choice."  Let's be clear.  My critique was about three spurious numbers.  I didn't set out to prove a positive case in the critique and don't need to do so to make my central point.  And to imply a concession from silence about other issues is ridiculous in this context.  This sort of logical move is, however, consistent with the problems with Evans and Wright's statistical claims.  

But let's get to the heart of the matter.  My issue with Evans and Wright is about the numbers, not about their priors regarding regulation.  There are three numerical claims in Evans and Wright's piece with which I took issue. First, Evans and Wright claim that a CFPA would result in a 160 basis point increase in the cost of credit and a derivative 2.1% decrease in credit demand.  These assertions were based on a comparison with a study of non-analogous regulations that have been found to have an 80 basis point impact.  Evans and Wright argue that even though the regulations are different, they are less invasive, so therefore at least twice the impact would be the lower bound. Why twice?  Just because.  Evans and Wright still have no justifiable basis for doubling, as opposed to tripling the number, etc.  It is not as if 160 basis points is within some statistical confidence interval or the like.  While a 160 basis point number appears to have the imprimatur of social science, it is just conjecture, or, to be charitable, a very rough guesstimate.  

In a cost-benefit analysis, however, precision matters.  A CFPA might be worthwhile at 120 basis points, but not at 160 basis points, for example.  The problem with Evans and Wright's methodology is that they can no better defend a 160 basis point number than a 120 basis point number or a 700 basis point number.  Evans and Wright emphasize that there were merely setting a lower bound, but that hardly makes their number more defensible.  Evans and Wright simply do not and cannot know the impact, including what the lower bound would be.  Of course, precision is beside the point if the goal is to produce a scare statistic, rather than a rigorous cost-benefit analysis.  

The third spurious statistic in Evans and Wright is a claim that a CFPA would result in 4.3% slower job creation.  They achieved this number by taking a statistic about the role of small startups in job creation and then "supposing" that a CFPA would inhibit five percent of this.  I noted there were problems with their job creation statistic (namely that it failed to account for the spectacular failure rate of small startups after their first year, when they result in net job loss, not creation).  But that was a side point.  The critical problem was that they "supposed" a impact number without any basis whatsoever for their supposition. 

Evans and Wright take issue with my statement that "The key point here, however, is the impact of the legislation is speculative and certainly not susceptible to precise statistical predictions.”   They state, "That is a nihilistic approach."  Actually, it is an intellectually honest approach.  A debate that is poisoned by spurious statistical claims, rather than their debunking, are what will engender nihilism.  It'd be great to have an empirically informed policy debate.  But that's not license to make up numbers.  Policy debates have to function within our epistemological limitations.  There's a constructive debate to be had about the CFPA.  But constructive doesn't mean making things up.  

First is the "glass is all the way empty" approach, that the rise in the bankruptcy rate reflects the poor health of the economy, results from rising unemployment, and is a sign that the U.S. consumer is not as healthy as recent figures showing GDP growth might suggest. Although I continue to think that the primary short-term driver of ups and downs in the filing rate is the availability of consumer credit, there is no way to look at record bankruptcy filing rates and not see problems for the U.S. consumer.

It also right to look at these data as saying the "glass is only half empty." This is not the same as saying the most recent data should be interpreted optimistically, that is the glass is half full. Rather, it is a subtle and complex story trying to draw a distinction between "dire" and "not good."

The graph to the right shows the month-to-month change for the past three years. (I have omitted 2006 because, and especially for the early months that year, its bankruptcy filing trends were greatly affected by the 2005 changes to the bankruptcy law.). The graph shows seasonality in the bankruptcy filing data -- sharp rises early in the year and a decline toward the end of the year. Part of the seasonality has been an increase in the fall of each year, and the October 2009 figures fit that pattern.

Another data point is to consider the 25.3% year-over-year increase that the October 2009 data represents the second smallest year-over-year increase in the monthly filing data over the past three years. (The smallest is 21.3% in January 2008.) Yes, bankruptcy filings went up as compared to the same time last year, but they have been on a steady trend back toward their pre-2005 levels ever since the changes to the bankruptcy law. In fact, the rate of increase in that trend appears to be slowing.

Again, I feel compelled to reiterate that I am not saying everything is peachy-keen. It's just that if you are looking for "sky is falling" economic indicators, then you are looking in the wrong place if you are using the bankruptcy filing numbers. What would be really meaningful are bankruptcy filing statistics that do not follow the season patterns of the past few years. Watch to see whether bankruptcy filings drop in November and December and then rise sharply in January and February. That will tell us whether the bankruptcy filing rates are extraordinary or part of the usual patterns.

With only two months left in the calendar year, the projected 2009 total bankruptcy filings is starting to look like it will come in right around 1.45 million. Back in December 2008, I predicted total 2009 bankruptcy filings would be a little under 1.4 million with an upper bound of around 1.6 million. That was not too bad as far as predictions go. For 2010, I think 1.6 million bankruptcy filings might be a good lower boundary of an estimate for projected total bankruptcy filings--more on that later. In the meantime and for the record, here is where the 2009 projections stand:

• 1,448,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,769 per day) as they have averaged for the first ten months of 2009
• 1,455,000 filings if bankruptcy filings continue at the same daily rate (6,200 per day) as they have averaged for October
  
• 1,461,000 filings if bankruptcy filings for the remaining two months of 2009 constitute the same proportion of total filings as the last two months of 2008 constituted for total filings that year (about 17.1%)

The forward-looking test allows for a more flexible consideration of the debtor's circumstances in the future. The mechanical test, as the name implies, requires only the application of the amounts fixed in the statute. As the Tenth Circuit said, reasonable people could read the Bankruptcy Code to reach either result. The forward-looking test can account for changed circumstances of the debtor, such as a decline in income that often precedes a bankruptcy filing.

Of the four bankruptcy cases the Supreme Court has on its docket right now, Hamilton may have the greatest practical effect on real people. It will not only determine the rules for those who file chapter 13 but, as a result, also play a big role in whether chapter 13 will be a good solution for many persons with financial problems, especially homeowners facing foreclosure.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?