StayViolation.Com

John McCain: The Fundamental Deregulator

Oh, Burn!!

Burn is an exclamatory response, generally by a third party, after someone has just received an insult.  It is slang for disrespecting someone or to make fun of someone.  It is so humiliating or insulting to the point where you cannot return with a comeback.

I have thought, "Oh, BURN!", or its equivalent, a couple of times over the last decade.

The first was during bankruptcy deform, in which these large financial institutions pushed through Congress and the White House reforms that were not needed, and for which there was no motivation for no better reason than to make bankruptcy harder for consumers to file.  Phil Gramm, who is now John McCain's economic adviser, was a United States Senator during part of the debate over bankruptcy reform, and I recall him getting on national TV, and sending out mailers, referring to those who file bankruptcy as "deadbeats".  This practice was repeated by his successor, John Cornyn, who liked to refer to those who file bankruptcy as "deadbeats".  I always thought, no matter what the arguments or what the position taken, that these two otherwise disrespectful men went out of their way to not only advance their contributor's goal, but to intentionally disparage, belittle, dishonor, derogate, defame and slur those who felt they needed this protection.

Certainly the Republicans were not the only ones to blame for this fiasco.  Many Democrats were complicit.  And, were John Cornyn could almost be forgiven because, I doubt from his demeanor in office, that he is very bright.  However, is not Phil Gramm's excuse.

The second "Oh, Burn" moment came when I read about the $700 Billion bailout of the large financial institutions so as to prevent them from filing bankruptcy.  None, or little, of that money is going to help ordinary folks that might have been affected by the conduct of these banks.

You can say what you want about the pros and cons of the bailout, but the philosophy of it show an hypocrisy that is huge and shows a blatant type of contempt for common people.

What this monetary philosophy entails is the privatization of profits, but the socialization of risk or losses.  When there is money to be made or bilked, the government should get out of the way and never interfere, but the government should be made solely responsible for the risks and losses associated with the escapades of the financial institutions.

This was the same argument people like Gramm, Cornyn, Bush, McCain and many on both sides of the divide in Congress argued in regard to the so-called bankruptcy reform measures in Congress.  They argued that in essence that by allowing middle class people to just file bankruptcy when times got tough for them, without regard for the better times they might have had in the past, that the government was allowing these people to privatize profits and to socialize their loses, and that was wrong in their minds at the time.

Now, after middle class people are forced into 5 year repayment schedules not based on their actual budgets or earnings, we are creating what is now a trillion dollars of relief for Wall Street, while ignoring Main Street, and while denying ordinary people the right to achieve the same result when they find a financial meltdown unavoidable.

Bail Bond Guarantees Are Dischargeable

This practice includes the prosecution of contempt as to those that violate the discharge injunction.  However, when considering whether you can or should proceed with a discharge injunction violation you have to look carefully at the exceptions to discharge as stated in 11 U.S.C. § 523.  If there is an exception is it one that requires an actual adversary by the opposing party while the bankruptcy is pending, or is the debt simply immune from any discharge entered due to the type of debt it represents.  It is always a question.

In this regard, the 10th Circuit Court of Appeals has now stated that 11 U.S.C. § 523(a)(7) does     not render nondischargeable a debt incurred by a debtor who has     guaranteed a bail bondsman to make the bondsman whole in the event a     criminal defendant jumps bail.

In a case of first impression for the Court, it ruled in  Affordable Bail Bonds, Inc. v. Sandoval (In re Sandoval) that a judgment obtained before the filing of a case for the guarantee of payment to a bail bond company on an appearance bond was dischargeable because § 523(a)(7) did not apply.

In this case the Debtor, Sandoval, entered into a "plain talk" contract with the Bondsman, Affordable, as an indemnitor in the even the person being bailed did not appear as required.  The Debtor paid the Bondsman $1,600.00 for the bond and agreed to reimburse the Bondsman for actual expenses in case of forfeiture, including the "full amount of the bail forfeited".

The 10th Circuit stated a few caveats:  "It is important at the outset to understand what this case is not. It is not a case where the debtor was the defendant in the underlying criminal action who had previously jumped bail and is now attempting to get his debt to a governmental unit discharged in bankruptcy. Nor is it a case involving a bail-bondsman debtor or other type of surety debtor who is attempting to discharge a debt owing directly to a governmental unit incurred as a result of the
nonappearance of a defendant. We are not concerned here with the nature, scope, or operation of the bond agreement between the Bondsman and the State of Oklahoma".

In light of these caveats, the Bankruptcy Court had gone into some discussion that the Debtor was not a party to the bonds that were forfeited, and the debt was therefore not a fine or a penalty.  The 10th Circuit cut through this by stating it does not matter because this type of "debt is not payable to and for the benefit of a governmental unit, and thus the statute does not bar discharge".  All that mattered was that the "Bondsman is a nongovernmental corporate entity ... and the fact that [the Bondsman] ultimately paid money to the State of Oklahoma after [the one bonded out] failed to appear does not change [the Bondsman's] status from that of a private corporate entity".  The Bondsman had attempted to bootstrap the government entity prong of The Bondsman attempts to satisfy the government-entity prong of § 523(a)(7) by arguing that [the Bondsman] should be subrogated to the rights of the State of Oklahoma.  The 10th Circuit, as the Bankruptcy Court before it, was unpersuaded, stating:  "the State had no rights on the bail bond or otherwise against the [the Debtor]. Thus, 'stepping into the shoes' of the State as a subrogee avails the Bondsman nothing in regard to the dischargeability of the debt and fails to afford the Bondsman status as a governmental unit.

The Bondsman relied on a public policy argument, which would seem to contravene the Bankruptcy Code.  The 10th Circuit concluded that “'[E]xceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.”' (Internal cite omitted).

Lead Them Not Into Temptation

The problem for many big corporations, insurance companies, financial institutions and even consumers to a lesser degree is that it is easy for a lawyer to lead them into temptation.  To the lawyer it is the means of getting paid more per case.  To the entity it is the feeling of feeling vindicated, even if the final result does not necessarily turn out that way (kind of like the last act of defiance).

We all know lawyers that do this.  Not only do we know who they are, they know who they are.  They probably live a little better than the rest of us, they are never in their offices because they are always in depositions somewhere, and they probably have the best hourly and collection rates around.  In East Texas we say that they are "Board Certified in Billing".

From my perspective typically representing the Plaintiffs, it comes at me this way.  "My client does not think it did anything wrong".  Or, their client wants to argue that a 1949 decision out of Puerto Rico represents a line of cases that represents good law, even if it goes against every decision in the circuit in which the suit resides.  Or, the one I love the best, is that the attorney is concerned not for his client, but what message this sends if he allows his client to settle this claim.  There is of course the so-called "Wal-Mart Defense" in which not only will there be no settlement, they will try to bury you regardless of the costs, for the principal of the thing.  It has to be the delight of those attorneys who think to highly of themselves to convince their clients that this is a viable option.

The problem for many big corporations, insurance companies, financial institutions and even consumers to a lesser degree is that it is easy for a lawyer to lead them into temptation.  To the lawyer it is the means of getting paid more per case.  To the entity it is the feeling of feeling vindicated, even if the final result does not necessarily turn out that way (kind of like the last act of defiance).

We all know lawyers that do this.  Not only do we know who they are, they know who they are.  They probably live a little better than the rest of us, they are never in their offices because they are always in depositions somewhere, and they probably have the best hourly and collection rates around.  In East Texas we say that they are "Board Certified in Billing".

From my perspective typically representing the Plaintiffs, it comes at me this way.  "My client does not think it did anything wrong".  Or, their client wants to argue that a 1949 decision out of Puerto Rico represents a line of cases that represents good law, even if it goes against every decision in the circuit in which the suit resides.  Or, the one I love the best, is that the attorney is concerned not for his client, but what message this sends if he allows his client to settle this claim.  There is of course the so-called "Wal-Mart Defense" in which not only will there be no settlement, they will try to bury you regardless of the costs, for the principal of the thing.  It has to be the delight of those attorneys who think to highly of themselves to convince their clients that this is a viable option.

I Guess Bankrutpcy Attorneys Are Debt Relief Agencies Again -- But How Much Does It Matter?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 started requiring certain people and entities to disclose to consumers in looking to file bankruptcy that they are a "Debt Relief Agency", and to instruct potential bankruptcy filers not do to do things such as not to incur more debt before filing.  See, 11 U.S.C. §§ 526(a)(4) and 528(a)(4) and (b)(2).  Since this time bankruptcy attorneys across the nation have been contesting the fact that they classified as a "debt relief agency" under the these code provisions, because these provisions do not necessarily include the direct application of "lawyer" or "attorney".  They have also, been disputing that the law can constitutionally restrict them from advising their clients to incure new debt, because in some situaitons involving the mortgage crises, this might be benefical.

The matter is important to consumer bankruptcy attorneys on an emotional, practical, and legal level.  On an emotional level, most attorneys do not believe they competed to get into law school, lived through that grind, and pass an impossible bar exam just to have bare the mark that compares it to other fly by night organizations.

On a practical matter, debt relief agencies have a duty to provide certain disclosures to debtors within a short period after meeting with them.  This does not sound onerous on its face, but most consumer bankruptcy attorneys are kind enough to offer most people free evaluations when the new law places terrible restrictions on them already concerning these services.  It literally takes hours of their time, already discouraging attorneys to practice in the area.  Also, many attorneys are nice enough to talk to consumers over the telephone.  This puts the attorney at risk of not being able to provide these disclosures.

On a legal level, bankruptcy attorneys do not believe that Congress should be allowed to prohibit them from advising their clients in ways that might be financially beneficial to the client, as the new Code provisions do.

Then, of course, there is the whole issue of the question itself.  If an attorney does not know if the provision applies to him or her, how does he or she know to try and comply with it.  So, attorneys have been racing around the country trying to get this issue before bankruptcy courts and district courts to get some degree of clarification.  Needless, to say these decisions have been mixed, at best, leaving some attorneys practicing in a particular court, not having to comply, and those in another court having to comply.

This whole discussion is predicate to a decision of first impression being handed down by one of the United States Courts of Appeal, which states that attorneys are debt relief agencies and must comply with those disclosure provisions, but striking down that part of the law as unconstitutional to prohibits attorneys from advising their client as to incurring debt.  In effect, the 8th Circuit splits the baby.

In Milavetz v. United States of America, the 8th Circuit Court of Appeals found that the new term, "debt relief agency" as defined in 11 U.S.C. § 101(12A), is not ambiguous.  Holding with a majority of the courts that have ruled on this matter, including the Texas case, Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006), "constitutional avoidance" does not apply in this as to the "debt relief agency".  The Court of Appeals defined constitutional avoidance as "where an otherwise acceptable construction of a statute would raises serious constitutional problems, the Cour will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress".  Thus, if interpreting "debt relief agency" to include attorneys would raise constitutional problems, the Court would look for another interpretation.

Ultimately, the Court found that "debt relief agency" includes attorneys because they were not expressly excluded from this group under 11 U.S.C. § 526(d)(2), and because the limited congressional history specifically discussed this provision in terms of "professional standards for attorneys".  The Court also found that providing this disclaimer is does not violate the constitution guarnatees of free speech.

This being the case, the 8th Circuit had to determine if the prohibition restricting attorneys from discussing with clients the possibility of incurring new debt was overly broad and thus unconstitutional.  The 8th Circuit found it was.

The Court ruled that § 526(a)(4)'s plain language an attorney is prohibited from providing this beneficial advice—even if the advice could help the assisted person avoid filing for bankruptcy altogether. For instance, it may be in the assisted person's best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy all together.  The Court found that Incurring these types of additional secured debt, which would often survive or could be reaffirmed by the debtor, may be in the debtor's best interest without harming the creditors.

The end result is that, at least in the 8th Circuit, and probably around the country, bankruptcy attorneys are going to have to use the "debt relief agency" moniker and provide certain minimal disclosures, but § 526(a)(4) is no more, and the government cannot tell you not to provide beneficial information to your clients.

(Pictured is the Hon. Lavenski R. Smith who wrote the opinion).

10th Circuits Adopts Objective-Coercion Principle In Discharge Injunction Violations

The United States Court of Appeals, Tenth Circuit opened the door to the Objective-Coercion Principle in discharge injunction violations.  In doing so, however, it distinguished the facts of the case at hand and ruled against the debtors because neither the Bankruptcy Court findings, nor the Debtor's testimony met the guidelines set out by the 10th Circuit.

In the case In re Paul, Circuit Judge Stephen H. Anderson issued the opinion that states that the Objective-Coercion Principle "operates as an overarching exception" to the rule that actions that do not directly violate the 11 U.S.C. §524 discharge injunction may still be a violation of §524(a)(2) if it can be shown that a "creditor acted in such a way as to 'coerce' or "harass' the debtor improperly so as to theoretically force them to pay a discharged debt.

The 10th Circuit, therefore, adopts the theory first established by the 1st Circuit Court of Appeals in its decision In re Pratt in 2006, except that the 10th Circuit did not find that the facts before it in In re Paul met the standard set.

Federal Regulators Seize IndyMac Bank

The real estate market is obviously not going to wait for Congress to act.  It is making decisions on its own as to what banks and companies will survive the real estate meltdown.

According to CNNMoney, in what in what is likely to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators.  The operations of the Pasadena, Calif.-based bank were shut down by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

The clean up of this bank is expected to costs the Deposit Insurance Fund between $4 billion and $8 billion, and worse still it is expected that 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits.

IndyMac, with assets of $32.01 billion and deposits of $19.06 billion, is the fifth bank to fail this year. Between 2005 and 2007, only three banks failed.  IndyMac marks the largest bank collapse since 1984, when Continental Illinois.

Most media is reporting extensively on what will happen to depositors in the bank.  The bigger question it seems is what does this do to already pressed mortgage borrowers (debtors).  As these troubled mortgage loans are sold off the collections activities against the borrowers are likely to become more aggressive.  This will undoubtedly have a big impact on bankruptcy filings and bankruptcy based litigation.

The Housing Market Could Totally Collapse

According to Fortune nearly half of all of the country's outstanding home loan debt is owned by or guaranteed by either Fannie Mae or Freddie Mac.  $5 trillion dollars worth of mortgages, and these two government-sponsored enterprises are in serious financial shape and could fail.

The problems with the two agencies are already causing a loss of confidence with investors, and it is making housing loans harder to come by.

The two companies are hybrids or sort.  Fannie Mae was created by Congress in 1938 and Freddie Mac was created by Congress in 1970.  The mandate for both is to maintain a market for mortgages by buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid. This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.  However, the companies are also publicly traded, with the usual mandate of trying to maximize profits for shareholders.  Their efforts involves risk, and as quasi-government programs there is an implicit guarantee that the feds wouldn't let them fail.  As a result, the market and rating agencies have always treated these two as bulletproof.

Each company has borrowed billions directly from the United States Treasury.  Because of the government involvement they have had  a AAA credit rating and could borrow at low rates, which is a benefit they need in order to loan money.  As a result, they have piled on risks without a capital cushion to cover it.  It has not help that like Enron and other companies Fannie Mae has been found to have overstated its earnings and Freddie Mac has been found to have overstated its profits.  Their stock value has recently fallen by 47%.

The question is if these two giants start to founder, how much will it cost the government to bail them out, and whether they are bailed out or not, how much of the surrounding economy will the two take with them if they fail.

It is interesting to talk about and speculate about these issues, but the truth of the matter is that these events would impact real people.  It will undoubtedly lead to more ordinary people needing to file bankruptcy to save their homes.  If the companies sell off debt or obligations, it will lead to harsher collection activity.  This will undoubtedly lead to automatic stay and discharge injunction violations.  So, it is a very real problem.

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.

Democratic Presidential Candidate Barack Obama Calls For New Bankruptcy Reform

Democratic presidential candidate, Barack Obama, vows to put back some of those protections that were taken away from consumers when Congress passed, and the President signed into law, BAPCPA in 2005.

According to the Associated Press and Fox News, Obama has proposed changing bankruptcy laws to fast-track the process for military families, help seniors keep their homes, and protect people recovering from natural disasters. In doing so, Obama also accused Republican rival John McCain of repeatedly siding with the banking industry, saying, “When it comes to strengthening the safety net for hardworking families, he’s been part of the problem, not part of the solution.”

Obama stated, “Like the president he hopes to succeed, Sen. McCain does not believe the government has a real role to play in protecting Americans from unscrupulous lending practices. He would continue to allow the banks and credit card companies to tilt the playing field in their favor, at the expense of hardworking Americans.”

McCain spokesman Tucker Bounds responded in a statement: “Eighteen Democrats and John McCain worked together on the bipartisan Senate bankruptcy bill, and Barack Obama’s rigid partisanship and self-promoting political attacks show that he’s a typical politician — which is the problem in Washington, not the solution.”

Obama’s new proposals supplement his broader — and previously announced — bankruptcy reform agenda that includes changes intended to help people in financial distress because of medical bills and allow homeowners going through the bankruptcy process to renegotiates terms of their mortgages.

The Democrat said he also would help service members and military families struggling financially after multiple moves, lengthy deployments and, in some cases, predatory lenders, saying, “If you’re protecting America, America should be protecting you from unfair bankruptcy laws.”

He pledged to expedite the bankruptcy process for them by exempting them from a “harsh means test,” cutting “unnecessary paperwork” and “token counseling,” and enacting a minimum homestead exemption to help them keep a greater share of their home’s value.

Obama also wants to allow a speedier bankruptcy process for all service members regardless of what state they live, a departure from current law that says people can use federal bankruptcy exemption laws if their state of residence allows. Some 35 states bar families from federal exemptions, according to a campaign-issued fact sheet.

As for seniors, Obama said, “I’ll help make sure that if you’re over 62 and facing bankruptcy, you’ll have a better chance of keeping your home.”

He said people in that age bracket would get a minimum federal homestead exemption equal to the median cost of a home in their state, “giving them a better chance to keep their homes and helping them maintain both their independence and their financial security.”

In addition, Obama said he would help families recovering from a natural disaster by streamlining the bankruptcy process for those in certified natural disaster areas by eliminating “unnecessary paperwork” and waiving “unneeded credit counseling requirements.”

He also promised to enact a 120-day moratorium “on adverse credit actions from collectors, such as foreclosure” to free families from concerns about collectors as they are trying to recover. And, his campaign said he would amend the Equal Credit Opportunity Act, which bars discrimination in lending, to include protection for disaster victims, so that lenders do not unfairly restrict credit to such families.