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Items by John Pottow

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Unconstitutional Usury in Arkansas

Posted: August 15th, 2008, 1:37pm PDT by John Pottow

Did everyone see this news story from Arkansas? It looks like usury is alive and well and coming after payday lenders.
Super-Priority for Canadian Workers

Posted: August 13th, 2008, 1:37pm PDT by John Pottow

After years of kerfuffle that at times made BAPCPA's debates seem easy, the Canadians finally passed their revisions to the Bankruptcy and Insolvency Act (and, for junkies, the CCAA) this summer. Here's a link to the Superintendent's site for the curious to get started.

What I thought was one of the more interesting amendments was the elevation of priority for employee wages to super-priority above secured liens (up to cap of $2K per employee, and, interestingly, not on equipment liens). There is also an unlimited super-priority for unpaid or unremitted pension obligations (but not for the traditional "underfunded" pension plan). Finally, to add a good ol' socialist kicker, an administrative beast called the Wage Earner Protection Program will come into being to ensure, among other things, payment of workers' claims and then enjoy subrogation to the bankruptcy claims (thus taking the risk of debtor-employer inability to pay the super-claim).

The interesting lobbying game is the lender lobby: yes, they've been rending some garments, begrudging the "unfairness" of not giving secured lenders their bargained-for rights through the danger of such an unexpected ex post lien (although, ironically, one law-firm communique I saw gave its lender-clients advice on how to prepare, including encouraging oversight of debtors to have competent payroll services that remit pension obligations -- which looks like signs of an adjusting market to me). But they haven't wanted to make too big a stink ("No, we're against workers' priorities!"). The rearguard grumbling they've had is how it would have been better to have such employees covered by the general taxpayers.

Will secured credit dry up in Canada as we know it? Seems to have done pretty well notwithstanding the insolvency horror of a priming lien down here. I reckon it'll chug along just fine north of the border too. We'll see!
Frisky Philly Sheriff

Posted: August 1st, 2008, 2:54pm PDT by John Pottow

Did people see the news reports a month or so ago about John Green, the Sheriff in Philadelphia, who has been exercising "civil" ("official"?) disobedience regarding home foreclosures? I'm torn between whether I think this guy is a shameless opportunist betraying the taxpayers who expect "The Law" to be the final line to enforce such unpopular decisions as a judgment of foreclosure or whether he's a hero who who's bringing a dose of common sense to the housing debacle. Here's the webpage for his office. Thoughts?
More Good News from the Big Three

Posted: July 22nd, 2008, 12:42pm PDT by John Pottow

More good news from the Midwest - GM has announced its plans to "reform" its retiree health benefits to help its financial crisis. (Here's an article from today in the Detroit Free Press.) What's the plan? Make the workers pay higher percentage of the health insurance premium? Well, sort of. How high -- 20%? 50%? Hmm, try 100%. Yup, they're canning health insurance altogether for retirees. (In fact, it's actually worse than 100%, because that would be 100% of a group-priced health insurance policy -- presumably now the retirees will scrounge for medigap insurance in the healthcare state of nature spot market.) As a bone, GM's going to increase the defined-benefit pension payment by up to $300/month. Sounds like yet another shuffle from defined-benefit to defined-contribution, writ large.

I'm not picking on GM. Economic life sucks here (although Google opened a facility in Ann Arbor -- so let's keep those hopes for the new Michigan economy alive). I'm just sharing the news...
New bankruptcies from Michigan!

Posted: July 10th, 2008, 12:09pm PDT by John Pottow

I forgot to alert Credit Slips readers last month about an exciting new chapter 11 here in Michigan. No, not an auto parts supplier, and no, not (not yet) one of the Big Three. It's the Greektown Casino, in good ol' Detroit. If mayoral sex scandals aren't enough to distract you from a floundering economy, apparently neither is the escapist joy associated with emptying your wallet pursuant to a random (but certainly sloped) dissipation curve. (By the way, did "gambling" change to "gaming" the same time "debt" changed to "credit"?) And for the curious, the Greektown casino is not run by Greeks but another ethnicity with an established tradition of running casinos.

And yes, there's currently a casino expansion project underfoot (about $500 million at last count).
Quadruple Filers

Posted: July 7th, 2008, 6:56pm PDT by John Pottow

I thought in light of the recent long weekend (by which I mean Canada Day), readers with an interest in international matters might enjoy this article from some friends at a respected Canadian law firm on Mr. Thomas Bouvin, who found himself recently filing for his fourth bankruptcy. Perhaps my homeland needs BAPCPA to settle out these abusive debtors? After all, with a colorful anecdote like this, what further data would one need to justify legislative intervention?
Debtors Anonymous?

Posted: July 3rd, 2008, 9:28am PDT by John Pottow

I wanted to pass along an interesting story I saw a few weeks ago in the WSJ about support groups for debtors. They had such names as the "Sunday Morning Club" and "Girls Just Wanna Have Funds." These groups, to me, serve as an indicator that debt has become a socio-cultural phenomenon akin to addiction, such that people now feel the need to have support groups to confront and combat their problems. I also note a lot seem church-based. I suspect these are more organic and less slick than. e.g, current commercialized debt gurus. Here's my lingering question: what do the credit card lenders have to say about them? I suspect they'll proffer support, the way brewers encourage "responsible drinking," but I can't help but wonder whether secretly they can't stand them...
Final Aloha, Aloha

Posted: March 31st, 2008, 8:10am PDT by John Pottow

Update on Aloha: giving up the ghost and ending passenger service after 60+ years. May sell its cargo business, but lots of sad and confused travelers are going to find canceled flight they'll have to rebook! Story here.
Aloha, Aloha

Posted: March 24th, 2008, 1:06pm PDT by John Pottow

Some readers might have seen that Aloha airlines went into chapter 11. Again. They earlier flew there in 2004, scrubbed their books a bit, and then emerged.

Why back in? Couple reasons, they say. First, fuel is really expensive. (Who knew?) Second, Mesa (allegedly) ripped off their business plan in violation of a confidentiality agreement signed during the 2004 proceedings when they were soliciting capital. Bankruptcy whining? Not necessarily: Mesa lost a trial against fellow plaintiff Hawaiian airlines just recently (and is appealing).

This raises a question in my mind. Is Aloha's refiling a "failure" of chapter 11? Is it a chapter 22? On the one hand, if it's just gas-is-expensive, then maybe they should have foreseen that. Or, more precisely, maybe if their viability is so marginal that even a freshly restructured Aloha can't survive with these gas prices, then they should liquidate.

On the other hand, if they got screwed unexpectedly by a commercial party, then maybe it's just bad timing. As such, is refiling "per se" proof of a chapter 11 system failure?
Home Equity Shoe Dropping

Posted: March 13th, 2008, 11:50am PDT by John Pottow

Something that I had been wondering about re: the mortgage meltdown has been home equity loans. We've all been focusing on home mortgages (starting with sub-prime, but slipping up to Alt-A and conventionals), but what I was curious about was home equity lines: are those going into default too? The answer, it seems, is yes. In just today's Wall Street Journal, Robin Sidel reports that charge-offs on home equity lines are doubling. J.P. Morgan Chase predicts first-quarter write-offs of $450 million (up from $248 million prior period) on its $95 billion portfolio. Delinquency rates are also up too, to over 4%.

The rub with these loans will be on under-water mortgage homes. The home equity lines, I suspect, are second liens to the PMSI mortgagee, so for the many homes where the superior-lien mortgage gobbles up most of the value of the home, will this result in foreclosures, or just losses? Either way, more bad news I guess.
Solutia Solution

Posted: March 12th, 2008, 11:36am PDT by John Pottow

I didn't want Credit Slips readers to miss the settlement of the Solutia lawsuit that occurred at the end of February.

Solutia sued its consortium of DIP lenders for trying to back out of a $2.05 billion exit financing loan. The justification for the weaseling, said the banks, was that the credit markets had gotten tough(!) and that it would be hard to syndicate and/or sell the DIP loan(!!), and so this was the sort of "material adverse change" that would allow rescission of the commitment under the contract(!!!).

I'd like to say this is consensual resolution of a contested matter, but I noticed that the "settlement" apparently involved the banks ponying up $50 million more in funds -- which sounds like someone got scared when Solutia said it'd be happy to have a bankruptcy judge weigh in and set a precedent. There are some rosy press releases from Citigroup, and Solutia has happily emerged from 11, but there's more to this than meets the eye. This would have been a watershed precedent -- either way -- in a turbulent credit market. Smells like the banks didn't like their prospects here. But the audacity of their (attempted) repudiation of the exit financing commitment on the "tough market" defense suggests (in addition to chutzpah) that the credit crunch really is proving tough all 'round.
Forget Credit Cards: Blame Hookers, Strippers, and Porn

Posted: February 15th, 2008, 2:27pm PST by John Pottow

The UK Insolvency Helpline recently reported that a quarter of its users admitted to having paid money for sex/porn in getting into financial distress. Here's a British article on the report here. I'm just going to let that sink in on its own. It does, however, make me wonder about the applicability of the adjective "sub-prime" in this context.
Creditor Calls Debtor Excrement

Posted: February 8th, 2008, 10:25am PST by John Pottow

Under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692d(2), creditors are prohibited from using "obscene or profane" language in collecting debts.

Would this count?

Or is truth an absolute defense?

(Thanks to students in my bankruptcy class for bringing this article to my attention.)
Thanks to Jean Braucher

Posted: February 7th, 2008, 8:34am PST by John Pottow

Although the caption of this post is self-explanatory, we just wanted to emphasize how much we enjoyed having Jean Braucher post for us this past week and hope you did so too. Jean's intellectual travels from Canada to Australia show she's willing to leave no stone unturned in her attempt to see how we can do things better in the American consumer bankruptcy world.
A Bankruptcy Passing

Posted: February 6th, 2008, 12:38pm PST by John Pottow

My colleague here at Michigan, Emeritus Professor Frank R. Kennedy, passed away. My other colleauge (and recent guest blogger) James J. White had nice things to say about him back in 1982: here. Readers old enough to remember his role in crafting the 1978 Code will likely fine his loss a sad one.
Welcome to Jim White

Posted: January 20th, 2008, 10:58pm PST by John Pottow

Does your employer (like mine) not give you MLK Day off? Well, then Credit Slips has just the solution to your woes: reading the musings of our newest guest blogger, Prof. James J. White. Good law nerds will be well acquainted with his celebrated co-authored treatise, but for those who need an introduction, Jim has been one of the nation's leading commercial law academics since, well,I don't know -- maybe the McKinley Administration? In any event, how long he's been writing is not important. What's important is that he's an insightful and provocative scholar. I'm sure he'll provide a soothing tonic for those who fear the tone of this blog sometimes drifts toward the liberal end of the political spectrum...
Fargo (No, not North Dakota -- Argentina)

Posted: November 27th, 2007, 2:40pm PST by John Pottow

Just a heads up for another interesting international decision out of the Southern District of New York. Here, Chief Judge (Stuart, not Stan) Bernstein booted an involuntary petition opened against Fargo by some creditors who were unhappy with how things were unfolding in the Argentine "concurso" of Fargo, which is Argentina's largest commercial producer of bread and bread products. It's a fun story, involving an Argentine appellate court that may have been out in left field ("Indeed, Fargo has conceded certain procedural irregularities, and its own expert has acknowledged that the appellate ruling suffers from 'flaws.'") Basically, the aggrieved parties who want to move things Stateside are bondholders who were surprised to find that the Argentine appellate court, in ostensibly resolving the question whether the face value or market value of their notes should determine their claims and voting purposes, decided to value their claims based on neither and instead, adopting a position advocated by neither party, set their voting rights based on only the unpaid interest of the notes(!).

Anyway, there was a two-year back and forth with the Argentine Supreme Court and it appears that the noteholders basically got fed up and filed an involuntary 11 in SDNY. In exercising rights to dismiss the petition under § 305(a)(1), Chief Judge Bernstein noted that other than the bondholders, all the players were in Argentina, that all the property save a trademark or two was held in Argentina, and that a hypothetically confirmed chapter 11 plan would have little effect, other than reddening the face of an Argentine judge when asked for recognition, and that the creditors were all participants (albeit unhappy ones) in the Argentine proceeding. As for the suggestions that the Argentine commercial judiciary is corrupt and that the peculiarities of Argentine insolvency law were public-policy-offensively different, he (rightly) brushed them aside. (I'm not even getting into the greenmailing sub-plot.)

Seeing the writing on the wall, the creditors asked that rather than dismiss the petition, the court should only suspend it, which would leave in place the U.S. stay and allow, in effect, Judge Bernstein to "take another look at the the progress in Argentina in the future. In other words, they want me to oversee the Argentine bankruptcy. []I decline the invitation. The automatic stay is not an end unto itself, but a protection a debtor gets to allow it to reorganize." (He also noted the irony that the stay-favoring creditors had violated the Argentine stay by filing the involuntary 11!)

I see this as another good opinion taking a pragmatic and principled approach to cross-border insolvency. Perhaps a more technically literate reader will post a link to the opinion...

UPDATE (11/28): A copy of the opinion is now available here.
On Mortgage Brokering

Posted: October 13th, 2007, 6:03pm PDT by John Pottow

I'm still trying to understand fully how this market works, and I've got some outstanding questions about which I'd be interested in getting some more information.

1) Many commentators contend banks charge more for their retail rates than mortgage brokers are able to procure for buyers (and still make a comfortable profit margin for the broker to boot). This was certainly my experience when I tried using a broker and phoning some banks directly. But I don't understand how that business model is economically tenable. If this is pervasive, why wouldn't banks drop their rates and squeeze out the middleman? Something doesn't add up here, but maybe it's just a market failure.

2) If part of the added value the broker brings to the table is fostering competition among originating banks, does the rise of the internet and the easier dissemination of information mean the days of brokers are numbered? I am reminded of how the garden-variety travel agency business basically vanished when airlines started going online and price shopping became easy for consumers.

3) What is the profit incentive of the mortgage broker? If she is an agent of the buyer (which the buyer would surely be reasonable in believing if the broker refers to the buyer as her "customer" or even her "client"), then I would expect, for an alignment of principal-agent interests, that the broker's profit would be incentivized to reduce the buyer's loan cost (i.e., interest rate). That is, if the broker gets a 5% mortgage for the buyer, she gets paid X, but if she gets 4.9% mortgage, she gets paid something > X (which hopefully is less than 0.1%!). Yet as I understand it, the broker gets more if she convinces the buyer to take a higher priced mortgage (i.e., earns something > X if she gets buyer to take mortgage at 5.1%). Have I got that right? (Note that I am, for purposes of this question, agnostic as to the structuring of that compensation, be it a flat fee paid at closing or a deferred fee achieved through a YSP.) Similarly, does the broker have an incentive to get the buyer to take out more debt rather than less debt (that is, does the greater face amount of the mortgage increase the broker's profit)? If so, I again worry about a potential disalignment of incentives.

Now, a comment (or at least semi-rhetorical question):

I understand some defenders of the YSP pricing structure to be making the argument that if we assume the mortgage broker has to be paid (which seems a reasonable assumption), then compensating him through a YSP is just spreading out what would otherwise be a flat fee up front. If so, it has the potential advantage of providing further financing for buyers who would otherwise be unable to afford mortgage brokers. That seems to make sense. My concern, however, is that if I make a further assumption -- that the mortgage broker's fee is a small outlay in relation to the overall mortgage debt -- then we are talking about putative buyers who are so close to the margin that they cannot afford to secure the financing if forced to pay a small portion of it (the brokerage cost) as an upfront fee. Pursuing that assumption, I have misgivings whether it is socially beneficial to put these people into home mortgages. Perhaps they'd be better off renting a bit longer until becoming more financially secure, as surely they are the marginal consumers who will take the first hits when the market sours. I worry there's something regressive lurking here.
A High Grade for High-Grade

Posted: September 14th, 2007, 3:06pm PDT by John Pottow

Apologies in advance for this post. When my co-bloggers and I brainstormed this site, we talked about trying to merge scholarly issues with accessibility. This post woefully shortchanges the latter. But I can't help myself -- I'm just too excited about the recent High-Grade opinion out of Judge Lifland's chambers.

One of the quiet successes of BAPCPA was finally getting Chapter 15 passed into law, which pertains to cross-border insolvency proceedings, an area that I write about a bit. Yet there have been fits and starts in some early opinions by courts who, how shall I put this in a politic manner -- seem to be struggling.

One of the big deals from the theoretical side is Chapter 15's embrace of an idea that goes by the label "universalism," which basically means we would be better off with a coordinated system of choice of law in cross-border proceedings following some jurisdiction-selecting rule, as opposed to reverting to the choice of law "state of nature" of territorial sovereignty. (Our European cousins are off and running with the centre of main interests test ("COMI") under their Regulation.) One of the necessary foundations of a universalist approach to regulating transnational bankruptcies is what I dub "jurisdictional hierarchy," recognizing that some jurisdictions are going to have to bite the bullet and bow to the laws of other jurisdictions in any given case.

Chapter 15 imposes such a jurisdictional hierarchy by requiring U.S. courts to distinguish between a "main" and "non-main" foreign bankruptcy proceeding when a U.S. Chapter 15 proceeding is opened. (A Chapter 15 is opened by a foreign representative, like a trustee, in a bankruptcy proceeding taking place abroad.) And yes, the COMI test is used: if the foreign proceeding is being conducted in the country that houses the debtor's COMI, then it is a foreign "main" proceeding. One reason it is important to get this distinction (i.e., is it a request from a main or a non-main (or possibly neither!) proceeding?) is because it signals the jurisdictional hierarchy. If the proceeding is recognized as a foreign main proceeding, that means the U.S. court will be mindful of its necessarily inferior legitimacy to legislative (and maybe adjudicative) jurisdiction over the dispute. If the proceeding is recognized as a non-main proceeding, the assistance offered to the foreign representative is curtailed, on the theory that he's not really the person who should be travelling abroad asking for help.

An ominous early case, SPhinX, tried to pooh-pooh the relevance of main vs. non-main, cavalierly implying it doesn't really matter because U.S. bankruptcy judges have such wide discretion they can shape and fashion almost any sort of remedy (and so get a non-main proceeding representative the sort of relief generally intended for a main proceeding representative). In addition to stumbling a bit doctrinally, the SPhinX case was worrisome for trying to scuttle the very foundation of jurisdictional hierarchy so central to universalism -- and so importantly advanced, albeit gingerly, in Chapter 15.

Enter High-Grade. In that case, the actual holding denied the (Cayman) foreign representative's request for assistance because it was found not only was the Cayman proceeding not a main proceeding (COMI of Bear Stearn's investment fund was, unsurprisingly, in New York), it wasn't even a non-main proceeding, because the connection to the Cayman Islands was purely a legal formalism devoid of economic substance (incorporating offshore for tax advantage). Yet what is so important about the case is that (arguably in obiter dicta) it goes through a thoughtful and careful analysis of the centrality of the distinction between foreign main and non-main proceedings and hence of the importance of jurisdictional hierarchy in a Chapter 15 world.

SPhinX's retirement will be welcome; I predict it is High-Grade that will get the cites. I just couldn't help but give it a "shout out" as it rolled hot off the presses.

Apologies again for readers who are now utterly bored. You were warned.
Firm, Taut Prepack?

Posted: August 23rd, 2007, 9:13am PDT by John Pottow

I've been following a little bit the Bally's Total Fitness chapter 11 in SDNY. A couple things of note. First, it sounded like it would be nice and smooth, with something like 99% of senior debt pledging support. Then some unhappy creditors came in grumbling about the DIP proposal (which had priming provisions, so three guesses why they were irked). Next thing I saw is an amended plan with some equity fund injecting cash, but a much different (and lower) level of support than the initial bold predictions of 99%.

So what's going on (I wonder semi-rhetorically to the Credit Slips audience)? Is this case imploding, or is this par for the course? Can a prepack "unwrap" itself and morph into a full-blown 11 (in which case, who tied the knots)? Also, I'm wondering more generally why this business is bust. Shouldn't be tied to mortgage market, and I'm not aware of corporate malfeasance.
Pottow & Zywicki: Together at Last!

Posted: August 21st, 2007, 12:47pm PDT by John Pottow

Prof. Todd Zywicki, with whom some Credit Slips readers might be familiar, had an interesting editorial in last week’s Wall Street Journal called “The Two-Income Tax Trap.” I wanted to alert readers to it in part because it is intriguing and in part because it is something on which Todd and I find some agreement.

It’s not a complicated argument. Taking a page from Prof. Elizabeth Warren and Ms. Amelia Tyagi’s playbook, Todd takes stock of what expenses have gone up over the past few decades as a second spouse has entered the work force. Todd’s point is that one of the biggies is taxes, in part because of our progressive tax structure. Thus when gross income increased 75%, tax expense increased 140%. I will call this his “positive” point. He makes an important contribution by underscoring the effect of a second earner’s income being treated by a higher marginal rate.

Before moving onto the normative point, a quick substantive comment: Todd uses the marginal tax rate as a shorthand – to maximize precision, one should probably use the effective tax rate, which will dampen the distinction somewhat. But I’m OK with shorthand. I'm just flagging for number crunchers.

And also a quick stylistic point: Todd’s editorial could be read as implying Elizabeth/Amelia were derelict in not reporting these tax numbers. I don’t think so. I think they were just netting out taxes (as they say) to do apples-to-apples comparison of “disposable” income, so we could basically see whether consumers were getting greedier. (I also think the numbers are there in an endnote, but it's been quite some time since I read the book.) Thus I don’t think Todd’s commentary should be seen as a criticism of their book, but rather an extension of it.

Now, onto the normative. Todd concludes that this large increase in the tax burden engendered by a second earner should serve as a call for flatter taxes. Here, I’m more agnostic. I haven’t thought through the issue that much. I suppose if income redistribution (an end which I support) could be guaranteed through other means, then surely it’d save some costs to flatten out the income tax code. So I might be with Todd all the way. But I’d probably have to think more on this normative issue before I gave him my full support. But for now, I’ll settle for agreeing with him on raising an interesting positive point.
Musings on Sub-prime Meltdown

Posted: August 14th, 2007, 2:51pm PDT by John Pottow

I have been wrestling with posting about the remarkable global economic occurrences triggered by the sub-prime mortgage meltdown in the United States, but I'm still not entirely sure I fully appreciate what is going on, let alone have anything helpful to share with Credit Slips readers. I am astounded not just at the scope of the crunch (as in its penetration around the world) but also the depth of the turmoil (commercial paper is being hit because of sub-prime mortgage jitters?!). As I struggle to comprehend just what is going on, I'm left with a couple thoughts/questions.

1) Is what we're seeing here like a macro-economic manifestation of the Two-Income Trap? That is, we thought we were making families better off with the entry of the wife into the workforce. It turns out, rather than diversifying risk we were inadvertently multiplying it. Is this just what happened with bundling and packaging out sub-prime mortgages? Instead of healthily diversifying risk, all we did was spread around the scope of possible entities (German banks!) to be hurt in the event of a collapse.

2) Can risk every be priced "accurately"? It seems to me that as investment funds chased higher and higher returns (which we can blame on, pick your scapegoat -- how about cheap Chinese currency forcing a huge trade deficit and concomitant buy-up of U.S. debt?), that there was increasingly willful blindness regarding risk portfolios. Was it really that hard to foresee CDOs eating up through the tranches to even the "safest" tier? Even the quantiest of quants seemed to bet wrong, which strikes me as a sober reminder that humans, after all, oversee these programs and continue to suffer cognitive frailties.

3) Is it possible to isolate the effects of something like the mortgage market to mortgage investors? Tough love regulators of course don't want to respond to "mere losses" in the investment markets by cutting interest rates, which should be the province of monetary policy, although that won't stop them from cheating (ie., achieving the same effect, admittedly with more control, by injecting the sorts of funds that the Fed and ECB have just done). But as we're seeing, we can't just sit by and let a supposedly discrete group of investors take their lumps -- when credit gets squeezed in commercial paper, we realize it's just not that easy when credit gets crunched. Call these what you want ("externalities" or whatever), but it strikes me that we're coming to the painful conclusion that the economic dislocation of Jack losing his sub-prime financed (declining valued) home involves a lot more pain than just that felt by Jack. (And let's also not forget that Jack's hurting too).

I wish I had more learned or scholarly insight for readers, but I find myself intellectually overwhelmed....
The Unconstitutionality of 11 U.S.C. 522(p)

Posted: June 30th, 2007, 1:50pm PDT by John Pottow

I’ve been mulling this provision of BACPA over for sometime now, including conferral with a colleague of mine on the faculty here who specializes in constitutional law, and I’m becoming increasingly convinced that s. 522(p) is unconstitutional.

For those who want to see the Code, I’ll copy it in at the bottom of this post. For those who want a reminder, this is the “hard cap” of $125K homestead exemption that applies for debtors who have recently moved.

Why is it unconstitutional (in my view)? It has nothing to do with the generic exemption challenges that have failed in the past (e.g., the dis-uniformity of different states having different exemptions, or the dis-uniformity of some states opting out of the federal exemptions). No, this is a somewhat arcane matter of constitutional law that rarely gets litigated (just because it’s so unusual to be implicated). The problem is that it inhibits the unenumerated but generally accepted right to interstate travel under the Fifth Amendment’s Due Process Clause.

Here’s the problem. The Feds could exercise their Supremacy Clause power and pass hard caps in Bankruptcy for everyone. (Cf. Recommendations of NBRC.) But what they’ve done here, with 522(p)(2)(B), is made a cap but then made an exception to the cap for intra-state movers. What this means, therefore, is that the cap only applies to inter-state moving debtors. As such, it is a direct discrimination on those who move states. Moreover, this is not like a “vesting requirement,” which has survived constitutional scrutiny in previous cases, because the rule is not that the debtor keeps his old exemptions until he vests into the new ones. Rather, the rule is if he moves from Texas to Florida, he forfeits his unlimited exemption under each state’s laws just because he was an inter-state mover – a “penalty” visited by neither state’s laws!

If the level of scrutiny applied to this provision were strict, then I don’t see how it could possibly pass constitutional muster (I’m not even sure how it’d do on a lower standard). I could be off-base, so I’m open to changing my mind. Herewith the Code:

11 U.S.C. s. 522
….
(p)(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 [$125,000 (added by BAPCPA 10-17-05) effective 4-1-04. Adjusted every 3 years by section 104.] in value in--

         (A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
         (B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
         (C) a burial plot for the debtor or a dependent of the debtor; or
         (D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

(2)….
(B) For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor's current principal residence, if the debtor's previous and current residences are located in the same State.
BAPCPA's Success in Driving Lawyers from Bankruptcy Practice

Posted: June 18th, 2007, 2:47pm PDT by John Pottow

Susan Thurston, Clerk of the Bankruptcy Court of the District of Rhode Island, had an insightful piece in last month's ABI Journal, "Behind the Numbers: The New Workload of the U.S. Bankruptcy Courts." It is not a random national sample or anything so methodologically sophistated, but it is one clerk's reflections on the patterns in her courthouse. She finds, which should surprise no-one, that while case numbers have gone down, the clerk's work per caseload (and, indeed, the number of motions per case) has gone up. Here's what's even more interesting (and distressing): "So too, we have experienced an increase in the percentage of pro se filed cases from pre-BAPCPA days. . . . [A] substantial time investment is required by clerk's office staff both at the intake counter as well as on the telephone to impart filing and procedural instructions to individuals who are overwhelmed by the complexity of the process . . . ."

So we find that as BAPCPA succeeds in driving lawyers out of practice, more people have to file pro se. I'll leave aside the cynical suspicion that by driving debtors' lawyers out of practice, creditors were hoping to improve their distress negotations lot. I'll also leave aside the serious issues of proceeding unrepresented in bankruptcy -- an already unenviable time. What I want to underscore is that there's no such thing as a free lunch. The BAPCPA proponents who celebrate scaring off part of the debtor's bar have just shifted costs onto overworked goverment clerks who continue to provide yeomen's service. Yet another reason why my taxes are too high....
Welcome to Professor Lipson

Posted: June 9th, 2007, 9:46pm PDT by John Pottow

Credit Slips readers are in for a treat this week. Our guest blogger will be Prof. Jonathan C. Lipson, yet another bankruptcy law expert. Unlike many academics who purport to have expertise in the field of bankruptcy, Prof. Lipson (on faculty at Temple but currently visiting at Penn) actually practiced law before he entered the academy. It would be difficult to sum up his current research focus; he has such catholic interests as "constitutional exceptionalism" of bankruptcy law, ecclesiastical bankruptcies, executive compensation, and (one of my favorites) the role of the examiner in Chapter 11. He also writes good stuff on Article 9 and other commercial law to boot. Enjoy!

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Posted: August 1st, 2008, 2:54pm PDT by John Pottow

Posted: July 22nd, 2008, 12:42pm PDT by John Pottow

Posted: July 10th, 2008, 12:09pm PDT by John Pottow

Posted: July 7th, 2008, 6:56pm PDT by John Pottow

Posted: July 3rd, 2008, 9:28am PDT by John Pottow

Posted: March 31st, 2008, 8:10am PDT by John Pottow

Posted: March 24th, 2008, 1:06pm PDT by John Pottow

Posted: March 13th, 2008, 11:50am PDT by John Pottow

Posted: March 12th, 2008, 11:36am PDT by John Pottow

Posted: February 15th, 2008, 2:27pm PST by John Pottow

Posted: February 8th, 2008, 10:25am PST by John Pottow

Posted: February 7th, 2008, 8:34am PST by John Pottow

Posted: February 6th, 2008, 12:38pm PST by John Pottow

Posted: January 20th, 2008, 10:58pm PST by John Pottow

Posted: November 27th, 2007, 2:40pm PST by John Pottow

Posted: October 13th, 2007, 6:03pm PDT by John Pottow

Posted: September 14th, 2007, 3:06pm PDT by John Pottow

Posted: August 23rd, 2007, 9:13am PDT by John Pottow

Posted: August 21st, 2007, 12:47pm PDT by John Pottow

Posted: August 14th, 2007, 2:51pm PDT by John Pottow

Posted: June 30th, 2007, 1:50pm PDT by John Pottow

Posted: June 18th, 2007, 2:47pm PDT by John Pottow

Posted: June 9th, 2007, 9:46pm PDT by John Pottow