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The 10 Largest Bankruptcies In History

With Lehman Brothers filing the largest bankruptcy in history, there are a couple interesting points to make.

First, in a democracy, what is a right for the biggest and most powerful corporations among us, should be a right extended to the least consumer among us.  After all, this is also Biblical, is it not?  "Whatever you do for the least of these my brothers, you do it to me".  Matthew 25:40.

Second, it is interesting to view the top 10 biggest brothers (bankruptcies) of all time to give you the size and enormity of that right.  These are:

1.    Lehman Brothers - $639 billion in assets.
2.    Worldcom - 103.4 billion in assets.
3.    Enron - $63.4 billion in assets.
4.    Conseco - $61.4 billion in assets.
5.    Texaco - $35.9 billion in assets.
6.    Financial Corp. of America - $33.9 billion in assets.
7.    Refco - $33 billion in assets.
8.    Global Crossing - $30.2 billion in assets.
9.    Pacific Gas and Electric - $29.8 billion in assets.
10.  United Airlines - $25.2 billion in assets.

IndyMac Files For Bankruptcy Protection

According to The New York Times and others,IndyMac Bancorp, the third-largest banking failure in United States history, said that it had filed for bankruptcy protection, less than three weeks after being seized by federal regulators following a bank run by depositors.

Based in Pasadena, Calif., the holding company for IndyMac Bank filed for Chapter 7 protection on Thursday with the federal bankruptcy court in Los Angeles, indicating it plans to liquidate. IndyMac said it expected the court will appoint a bankruptcy trustee promptly.

IndyMac Bancorp has $50 million to $100 million of assets, $100 million to $500 million of liabilities, and fewer than 50 creditors, according to the bankruptcy filing.

The collapse of IndyMac was the largest U.S. banking failure in two decades. Regulators at the time said IndyMac ended March with about $32 billion of assets, and about $19 billion of deposits, most of which were insured.

IndyMac was the fifth of seven bank failures this year, the F.D.I.C. said.

IndyMac once specialized in "Alt-A" and other below-prime home loans, which often did not require borrowers to fully document income or assets.

It collapsed as borrower defaults began to mount, while tight capital markets forced it to take losses on mortgages it sold and kept on its books.

Former NFL Star Michael Vick Files For Bankruptcy Protection

On July 8, 2008, Michael Vick, the former NFL quarterback who is serving a 23-month prison term for plotting to run an interstate dogfighting ring, filed for Chapter 11 reorganization according to Bloomberg News.  Vick cited debts of $10 million to $50 million in Chapter 11 papers filed yesterday in U.S. Bankruptcy Court in Newport News, Virginia. He listed assets valued at between $10 million and $50 million.

It is reported that Vick's hope is that by filing bankruptcy that he can, after the conclusion of the bankruptcy case, rebuild his life on a personal and spiritual level, resurrect his image as a public figure, and resolve matters with the NFL such that he can resume his career,'' Vick's lawyers said in the bankruptcy filing.

Vick, 28, the No. 1 pick in the National Football League's 2001 college draft and a three-time Pro Bowl choice with the Atlanta Falcons, was indefinitely suspended by the league when he agreed to enter his August 2007 felony plea. He is due to be released from the U.S. penitentiary in Leavenworth, Kansas, in about a year, according to court papers.

A federal judge in December gave Vick less than half the maximum penalty for his role in buying, training and killing dogs while funding gambling on fights held on his property in Surry County, Virginia. He also received three years probation.

Vick pleaded guilty to conspiracy to travel in interstate commerce in aid of unlawful activities and to sponsor a dog in an animal-fighting venture. He publicly apologized for his actions and said he would stand against animal cruelty.

His creditors include The Atlanta Falcons, which are owed $3.75 million for a pro rated signing bonus according to the filing. Other of the largest unsecured creditors listed include Joel Enterprises Inc., owed $4.5 million for breach of contract, and Royal Bank of Canada, owed $2.5 million for a real-estate loan.

Wizard Of OZ

Someone recently compared what we attorneys do as being something similar to the Wizard of Oz, in  that what is behind our organizations might be a little smaller than and less intimidating than as we try to make it appear.

Maybe so, but behind everything what we are trying to do is pin a conscience on corporations, banks, finance companies and creditors that pretend to tear their clothes and gnash their teeth over having to pay a little recompense to a financially vulnerable person to whom they have treated badly.  At the same time, most of the multi billion dollar corporations do not think twice of paying their badly performing management hundred million dollar compensation packages or in spending, like Citibank, hundreds of millions to change their logo from one side of their name to another side of their name on all of their signs and print material.

I had a major national bank recently tell me in an email that it would not be "bullied" by my debtor who was in bankruptcy.  Really?  Bullied by a debtor who was just minding his own business and wanted to be left alone from the constant harassment he was receiving despite the fact the lender knew it had been enjoined from this behavior and the fact that the bankruptcy attorney had warned the bank that it was violating the automatic stay.  And, what did the lender find as being bullied.  The Debtor asking them to stop, pay him $500.00 for his time in this matter, and to pay his attorneys' fees of a few thousand dollars that he had not wanted to spend but for the fact that the lender would not stop its activities when politely asked to obey the Court's order.

The last refuge is bankruptcy court, and in this the debtor is suppose to be safe for unilateral action without the knowledge and concern of the bankruptcy court.  And, when big business and big lenders do not obey the law we are increasingly fighting a war of hyperbole.

Not only bankruptcy, but predatory lending, junk fees, the inability to solve any problem or concern of a customer without litigation shows how the essential problem of big lenders and big business and big law firms that they have ceased to serve their customers.  We all feel it.  We are not now trusted customers as we feel more like targets.

Government offers few protections with the exception of the bankruptcy courts.  As a result, the Bankruptcy Code has become the de facto Code of Conduct that should be imposed on all corporations and all lenders.  Should it be so?  Maybe not, but that is what our government has left us, and they have left it to the debtors to enforce this Code of Conduct themselves.

Everybody needs a conscience.  Only it either does not come naturally to big business and those in finance or it is lost in the hierarchy.  It is necessary to ensure that individual actions do not violate a group's moral norms. Conscience consists in the internalization or acceptance of a group's moral norms as correct and overriding one's self-interest when they conflict.  These big lenders and big business do not do override, and these corporations desperately need a conscience to monitor and control their behavior.

William Langewiesche wrote in The Atlantic in November 2001: "The greatest pyramids ... are made not of stone but of people: they are the vast bureaucracies that constitute society's core, and they function not necessarily to get the "job" done but to reward the personal loyalty of those at the bottom to those at the top."  I tend to think he is right.

Adam Smith’s first major work was the Theory of Moral Sentiments. He understood, as an ethicist, that the mechanism of the “invisible hand” would be most efficient if self-interest was restrained by conscience. With remarkable prescience Smith warned that corporations would slip the restraints of human conscience.  These big companies and lenders have taken on a life of their own.  These are entities without a conscience with the potential to wreak havoc on the societies that have created them.

So, what is our job?  It is, I think, to try as best we can in individual cases to demand the respect of these big institutions and try to pin to them a little conscience -- a little concern -- as to what they do.

The "Computer Did It" Is Not A Defense

On March 6, 2008 Bankruptcy Judge Jeffery A. Deller  of the Western District of Pennsylvania in Pittsburgh, had to find again that the "Computer Did It" defense often raised by creditors and collectors is not a defense at all.

In Wingard vs. Altona Regional Health Systems and Credit Control Collections the creditor argued that it did not willfully violate the stay because of a computer error the notices and at least one phone call was made to the debtors.

The Court found first that the automatic stay was willfully violated because in the 2nd Circuit, as in all circuits, the standard for determining a willful violation is only that Defendant had notice of the bankruptcy and intended the act which violated the stay.  There was no real discussion as to whether collection letters and phone calls constituted a violation because that is obvious.

For whatever reason creditors and collectors continue to believe that a mistake on their part seems to constitute a legitimate defense, which is completely opposite of the law.  The continuation of this argument continues to run up damages in the way of legal fees and costs, which make these practices particularily regrettable.

The Court first responding to Credit Control Collections comment that the letters went out because the matter "fell through the cracks" when the computer was not properly coded, and the agencies automatic system of sending letter was the culprit.  A notice having been send to creditor's counsel after one letter was sent, the Court asks, "How many times can a bankruptcy file 'fall through the cracks'"?

As to the "Computer Did It" defense in general, the Court quoting another opinion stated the defense is a "nonstarter ... since intelligent beings still control the computer and are thus responsible for their error ... having a clear obligation to adjust their programming and procedures and their instructions to employees to handle complex matters correctly".

The decision by Judge Deller is troubling in that he did not award damages for the attorneys' fees in this case.  The matter is silent, and so it is unknown if the debtor's properly requested or proved such damages.

Should You Sue The Creditor's Lawyer Who Had Notice Of The Bankruptcy And Participated In The Violation Of The Automatic Stay

Man o' man, I can tell you right now that I do not like it.  I do not want to do it.  I will do most anything to keep from doing it.  However, lately I have to admit that the arrogance of some of these lawyers, and the tactics which they elect to employ, make it very difficult to avoid.

I use to take the position that the creditor or collector violating the stay will deal with its own attorney should it feel it got bad advice or representation.  Besides, what I had learned was that if you sue the attorney this Sicilian thing kind of erupts where the attorney's client no longer matters and the attorney  feels that he or she must win the argument at all costs.  The case consumes too much time and too much money, and then much explanation has to be developed at trial as to why this happened to support the damages known as legal fees.  You typically see an attorney that might be a little bit of an ass anyway turn into some kind of kamikaze jerk.  You have to think, who needs that?

The problem is, however, that I am finding that these attorneys (and they are pretty limited in number) whether or not you include them the litigation as a party they become annihilative in any event, they refuse to remove themselves from the litigation in violation of the lawyer-witness rule, and they become venomous and wrackful.  So, maybe you should consider carefully who these attorney might be, and then do what you can to remove them from the litigation.  It might be fine to simply file a motion to disqualify them because they and their firm represent a witnesses in the case.  But, if you are dealing with these Rambo lawyers that would advise their clients and participate in the willful violation of the automatic stay or discharge injunction -- if you know them to be pernicious and malevolent individuals anyway -- to just include them in the litigation as a party.

My Dad use to say about physicians that bedside manners matter.  I can tell you now that the same is true for attorneys.  And, whether by accident or intent, if these attorneys lack ethical and moral temperament, they leave you little choice but to include them when the facts suggest they had notice and were involved in the violation.

All of this presupposes that the lawyer and law firm actually had notice of the bankruptcy, and with this notice took or allowed prohibitive action against your client.  This point does not need to be stretched or exaggerated.  You should not sue the lawyer unless you are spot on in this regard.

Then, of course, you need to consider what Jonathan Alper of Florida Bankruptcy Law Blog wrote a few years ago:

"Overheard an interesting case in bankruptcy court concerning a debtor’s petition to sanction a creditor for pursuing a state court case against the debtor after he filed bankruptcy. The debtor’s attorney explained to the judge that he had repeatedly told the creditor’s collection agent and their attorney about the debtor’s bankruptcy and suggested they drop their action against the debtor. Nevertheless, the creditor’s attorney pursued discovery from the debtor and went as far as filing in state court a motion to show cause why the debtor should not be held in contempt of court. The debtor had to appear in state court with his attorney to personally explain to the judge that his bankruptcy stayed further discovery or any other activity in the state proceeding. The debtor appeared in bankruptcy court in a wheelchair breathing through an oxygen mask and unable to speak directly to the judge. His attorney showed that the debtor’s disability made it unusually difficult for him to go to state court because the creditor would not abide by the bankruptcy stay.

The debtor’s attorney stated that the debtor sought sanctions against the creditor company but not against the creditor’s attorneys. The judge denied sanctions. The judge reasoned that while the creditor’s attorney clearly knew that collection and discovery was going on after the bankruptcy there was no evidence that officers of the company knew their attorney was violating the stay. Since the debtor’s attorney had dropped demand against the creditor attorney the judge had insufficient evidence of intentional wrongdoing on behalf of the creditor company even though, as the debtor argued, the creditor’s attorney was acting as an agent of the client.

In this case a debtor’s attorney extended some professional courtesy to a fellow attorney to relieve them of personal liability and by doing so lost a recovery for the debtor at this hearing. It seemed clear that the bankruptcy judge would have entered a sanction against the creditor’s attorney in favor of the debtor. Before an attorney lets a fellow attorney off the hook he should make sure the client consents after the client understands what may be the loss of a potential source of monetary recovery."

Why?

I get this question a lot from bankruptcy attorneys and from clients.  Why, for example, does a creditor who repossesses a vehicle in violation of the automatic stay fail to return it immediately upon demand?  Or, why does a collection agency or creditor continue to send and make demands after being told of the bankruptcy?  Are they intentionally violating the automatic stay?

Well, the answer is often no.  They are not intending to violate the stay.  It is usually based upon institutional arrogance.  No one person is handling the entire matter, the person who is confronted with the issue does not have the complete authority, training, experience, or will to stop what is happening.  The person taking the demand to stop hears so many complaints and explanations it just goes in one ear and out the other.  One cog is given instructions on how to perform and it dare not do anything else.  Sometimes it is based upon a misunderstanding of the law or the remedies available to the creditor or collector, the creditor or collector dares to rely on its own instincts and not consult a bankruptcy attorney as to whether it is right in its assumptions.  A creditor or collector too often finds it is fine to rely on its own opinion that requires you or your attorney to prove them wrong.

What does not help is that many of the misconceptions harbored by creditors and collectors are not as a result of bad legal advice.  It is a result of bankruptcy attorneys continually letting them off the hook for past indiscretions.  I cannot tell you how many times, especially from carry-the-note car lots, I have heard the refrain that I have always done this in the past and I never got sued.

The good news is that an aggrieved debtor does not have to prove (or for that matter disprove) the intend to the creditor or collector who violated the automatic stay.  This is the willfulness standard, and it is followed by nearly every jurisdiction in the country.  Under 11 U.S.C. § 362(h) of the pre-BABCPA Code, or 11 U.S.C. § 362(k) of the post-BABCPA Code, damages are mandatory, including attorneys' fees and costs upon the finding that (1) one or more of the automatic stay provisions of 11 U.S.C. § 362(a) were violated, (2) there is not an exception for the action pursuant to 11 U.S.C. § 362(b), (3) the creditor or collector had notice of the bankruptcy filing, and (4) the creditor intended the action it undertook to violated the automatic stay.

There are two important distinctions in regard to these elements.  The first, is that if a creditor or collector repossessed a car, for example, you only have to show it intended to repossess the car.  You do not have to prove it knew or believed they were or were not violating the automatic stay.  This just does not matter.

The second issue is that there are NO GOOD FAITH DEFENSES allowed to explain the conduct.  Le me repeat that.  There are NO GOOD FAITH DEFENSES allowed to explain the conduct.  So, for example, it does not matter if the creditor or collector thought it was not violating the stay, or thought it had a right to violate the stay, or was advised by legal counsel that it was okay to do what it did, or had gotten away with the conduct before.

Many courts simply do not like to admit it, but 11 U.S.C. § 362(h) or (k) are strict liability statutes.  You only have to prove  up the objective facts related to the elements stated above.  You do not have to prove up or disprove why it happened.  The Courts should not be concerning themselves with why something happened for the determination of actual damages, including attorneys' fees and costs.

Judge Stacy Jernigan's Fight Against The New Bottom Feeders

In In re White Stacy Jernigan, the United States Bankruptcy Judge for the Northern District of Texas in Dallas took steps to expose and reel in those that she called "A New Cottage Industry of Bottom Feeders" who try to make a buck off down and out debtors who are about to lose their home after they seek bankruptcy relief.

Earlier in the Debtor's bankruptcy, Judge Jernigan believed she had to lift the automatic stay protecting the Debtor's home.  Given that a bankruptcy already existed it was unlikely that the Debtors could stop the foreclosure from taking place.  The Debtor's bankruptcy attorney insisted that there was little they could do to stop the foreclosure given that the automatic stay had been lifted.

But, with foreclosure comes lots of mail solicitations promising help.  Of the approximately 40 mailings that the Debtors received based on the posting of their home for foreclosure, the Debtors chose a company that represented itself as North American Foreclosure.  It what that company and its representatives called "a completely legal procedure" they convinced the Debtors to transfer a 1% ownership of their home to an individual who would file bankruptcy to stop the foreclosure.  The the Debtors would pay North American $650 per month until the 1% was paid back (whenever that would happen).

The paperwork selling the 1% of the house to an individual in California was apparently backdated.  Then the mortgage company, which was in the process of foreclosing the home, receive notification from the representatives of American Foreclosure that the property was included in the bankruptcy of a Debtor who had then filed bankruptcy in California.  The problem, as it turns out, is that the property was not listed on the California Debtor's bankruptcy case, and the Debtor claims she knew nothing of the transaction.  She was apparently duped as well.

The Debtors paid a gentleman by the name of David Curtis, North American Foreclosure's local representative, $650.00 for the first payment to begin the process.  The Debtors eventually made one payment to the company before their bankruptcy counsel contacted the Debtor's about Judge Jernigan's show cause order.

The Bankruptcy Court, upon learning of the fraud, took immediate action, finding that those associated with North American Foreclosure likely violated various bankruptcy laws, she found that the Debtors were likely innocent parties which were duped, and she order North American Foreclosure, and its representatives, David Curtis and his company, Jireh Capital Services, to appear and show cause why they did not violate the automatic stay provisions of 11 U.S.C. § 362 and are not liable pursuant to § 362(k).  The Court confirmed in its Order pursuant to 11 U.S.C. § 362(j) that the automatic stay was terminated in the Debtors' bankruptcy and, in case it was not, she annulled the stay retroactively pursuant to 11 U.S.C. § 362(d).  The Court voided the transfer of the 1% to the California bankruptcy filer.  The Court reported the actions as possible bankruptcy crimes pursuant to 18 U.S.C. §§ 3057, 152 and 157.  The Court provided a courtesy copy of her decision to the Chief Bankruptcy Judge in California and the Texas Attorney General, and the Judge issued a plea to the consumer debtors bankruptcy bar to be mindful of these actions and to warn their client's accordingly.

To date nobody has appeared before Judge Jernigan to show cause as ordered.

Undisclosed Fees Charged By A Mortgage Company Both Before And After Confirmation Can Constitute Compensable Violations

The scenario is that debtors file bankruptcy, typically a Chapter 13 bankruptcy.  They might pay an arrearage on the home through the plan.  They pay their mortgage payment direct through the plan, meaning the ongoing mortgage payment is included in the plan, but either by the debtors or through the trustee in some jurisdictions the current house payment is being made directly.  The mortgage company continues to add charges while the bankruptcy is pending for drive by inspections, attorneys' fees, certain late penalties, and the like.  However, the company does little to disclose these to the court.  The result is the mortgage company is laying in wait -- hiding -- while these fees build (sometimes called "escrow arrearages") until the bankruptcy is discharged.  Then the mortgage servicing company (which is often not the same one as when the bankruptcy was originally filed) makes a demand for these fees, and the accrued interest from the fees.  Sometimes the mortgage company makes a demand for back house payments when the past mortgage payments were first applied to paying these fees, costs and expenses.  In any event, if not paid after discharge the mortgage company threatens foreclosure.

For years bankruptcy attorneys have been trying to figure out how to effectively deal with this matter, because the situation exists to some extent in nearly every Chapter 13 bankruptcy in which a mortgage is involved.  What complicates the matter for both the attorney and the client is deciphering the long -- often erratic -- payment history since the filing of the bankruptcy.  It takes an untold number of attorney time to get this accomplished, and there is a question of how to get paid, and how to get the matter resolved.  In this, there might now be hope.

Two Houston bankruptcy courts have tackled this issue with different opinions of which laws are violated, but essentially reaching the same conclusion -- these fees must be disclosed by the filing of a 2016(a) fee application with the court or they are likely (1) per se unreasonable, and (2) constitute violations of the Bankruptcy Code, the orders of the Court, and possibly the injunctions of the Court.

Aside From Non-Collection Letters Required By Law You Cannot Lift The Stay To Foreclose On A Home And Continue To Call The Debtor

Mortgage lenders continue to push the envelope in bankruptcy case.  They believe they can imagine exceptions for their conduct, even though not supported by law, and make them so.  There seems to be a disconnect in the thought of mortgage lenders in what they can and cannot do in a bankruptcy process, and that if they cannot adapt their technologies that they should not be held responsible for their conduct.  No doubt this is aggravated by the sub-prime and mortgage default situation, which, unlike before BABCPA, they are wanting to avoid the specter of foreclosure (in this case, even though the stay was lifted).

In what is a simple decision from Bankruptcy Judge Thomas L. Saladino of District of Nebraska, the Court distinguishes from letters sent to borrowers facing foreclosures as required by non-bankruptcy law and the attempt to continue harassing the Debtors as to their house debt by the use of telephone calls in which the stay is lifted to foreclose.