StayViolation.Com

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.

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.

You Have Gotta Love The Mortgage Lender Implode-O-Meter

It is sad really.  Millions of Americans are losing their homes.  Most of these loses are simply unjust because borrowers were enticed into programs that have harmed them.  The lenders should have known better.  I would contend that they did know better, they thought they could just pawn the loses off on others.  Well, at least one website is gleefully tallying the number of these outrageous lenders that have run into trouble themselves.

As reported byThe New York Times newspaper, The Mortgage Lender Implode-O-Meter has become so recognized that at the recent Mortgage Bankers Association conference, a speaker addressed how to stay off the website.  “No one wants to be number 266,” said Jim Reichbach, a vice chairman and leader of Deloitte’s banking and securities team. “This is a death toll that is equivalent to the casualty ticker of the Vietnam War.”

When you see so many honest people that have been duped in a way that has cost them their homes, and you have seen what mortgage lenders have tried to do to the bankruptcy laws, it is hard not to feel excited watching these blood suckers parish due to their own schemes.

NACBA / Debtors Fail To Win Interpretation Battle In 10th Circuit Over Interest On 910 Vehicles

The National Association of Consumer Bankruptcy Attorneys (NACBA) along with a number of Debtors (and their bankruptcy attorneys) took their argument over whether secured claims, which cannot be crammed down under the 910-day period preceding the filing of a bankruptcy, are "allowed secured claims" under 11 U.S.C. § 1325(a)(B)(ii) entitling the creditor to interest pursuant to the Supreme Court's prior opinion in Till v. SCS Credit Corp, 541 U.S. 465, 469 (2004).

In the consolidated cases before the United States Court of Appeals, 10th Circuit the Debtors has argued before the Bankruptcy Court, the BAP and the 10th Circuit that as a result BAPCPA a creditor who has a claim secured by a 910 vehicle is not entitled to interest at all because a 910 car claim is not an "allowed secured claim" within the meaning of 11 U.S.C. § 1325(a)(5).  Alternatively, they argued that the requirement to pay interest is not mandatory with the Bankruptcy Court in this regard.

The Debtors prevailed in the Bankruptcy Court, but they did not prevail before the 10th Circuit.

The 10th Circuit ruled that although 11 U.S.C. § 506(a) bifurcation of a claim into secured and unsecured portions is no longer available if the property was purchased or financed within 910 of the bankruptcy filing, the full amount owed is an "allowed secured claim" for purposes of 11 U.S.C. § 1325(a)(5), and the Bankruptcy Court must provide the creditors involved the present value of the claim, which includes interest.  The 10th Circuit also ruled that interest is required on the entire claim, and not just that portion that would be secured except for the 910 day limitation.

Although the 10th Circuit referred to some prior collateral decisions on its part, this really was a case of first impression for the Court.  It represented a gallant effort on the part of these Debtors, their bankruptcy attorneys and NACBA, but in the end the argument did not work.  Where the case goes from here is unclear.

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.

You May Now Challenge Ad Valorem Tax Assessments ... The Right Is Just Not As Endless As Some Thought

The problem with BAPCPA sometimes is that it finally clears up some rights of the debtor in dispute, only to limit or take away those rights now understood.

This was illustrated well in Steve Sather's Texas Bankrutpcy Lawyer's Blog.

It was none too clear under the old Bankruptcy Code whether a debtor could get a bankruptcy court to redetermine the appraised values used to compute ad valorem taxes so long as the values had not been previously contested.  Under the old Code debtor's attorneys did this if for not other reason than to try to get some negotiation over tax claims that taxing authorities otherwise want to believe are not negotiable.

In Texas, property tax values must be protested in by a date certain or they become final. Tax rates are then set based on the final valuations. The way some read the old 11 U.S.C. § 505, the debtor was allowed to come in after the appraisal rolls had been finalized and taxes set and complain that the valuations were not correct.  Some argued that a debtor could go back indefinitely as long as the valuations had not previously been contested.  You can read this a leverage.

But, as pointed out by Steve Sather, redetermination of tax values was a controversial. Some courts abstained from redetermining property tax values, In re New Haven Projects Ltd. Liability Co., 225 F.3d 383 (2nd Cir. 2000), while others allowed it, In re Hospitality Ventures/La Vista, 314 B.R. 843 (Bankr. N.D. Ga. 2004); In re Fairchild Aircraft Corp., 124 B.R. 488 (Bankr. W.D. Tex. 1991). The cases declining to exercise jurisdiction relied on language in the legislative history to the code stating that abstention was appropriate "where uniformity of assessment is of significant importance." S. Rep. No. 989, 95th Cong., 2d Sess. 11 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5853.

BAPCPA clears up this right with the addition of 11 U.S.C. § 505(a)(2)(C), which states that the court may not redetermine "the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermining that amount under any law (other than bankruptcy law) has expired."

Congress by limiting the practice, obviously understood that the practice pre-BAPCPA of redetermining those property taxes constituted a legitimate reading of the law at that time.  Now, unfortunately, you cannot retroactively challenge valuations going back prior to the filing of the bankruptcy, but you can still contest valuations which could have been challenged on the petition date and 11 U.S.C. § 108(a) would appear to give the debtor two years in which to file the motion.  The trustee may commence the action within the longer of the original period or two year.

This amendment also seems to quiet the controversy over redetermination is proper. By limiting redetermination to situations where the protest period has not expired on the petition date, Congress appears to have implicitly endorsed it in that one case.

In my way of thinking, this provision is still useful for the reason that house prices are stagnant or falling in most places.  Yet, taxing authorities are continuing to raise values for tax collection reasons.  When I have attended property tax challenges in the past, I can tell you that the process seems so very arbitrary.  To say that it is based on any exact science would be wrong.  It would also seem to be able to apply leverage in the sense this process will take the taxing authority out of the state court and administrative process they now enjoy, and place then in an environment in which they are not familiar.

(Stephen Sather pictured).

Confirmation Might Not Always Superceed A Stipulation Entered

In Taumoepeau v. Manufactures & Traders Trust Company, et. al. the 10th Circuit Court of appeals had to decide if a drop dead order or stipulation entered before confirmation concerning strictly post-petition house payments (which did not in fact concern the abt pre-ptition payments) on a residential mortgage was superseded in a way as to make the drop dead order or stipulation non-enforcible after confirmation.

The 10th Circuit, like the Bankruptcy Court and the BAP before it, found that both the drop dead stipulation and the confirmed plan could be read harmoniously and the automatic stay was not in effect to stop the lender's actions in selling the house at foreclosure even though the stipulation was not referred to or included in the confirmed plan.

Most of the decision issued by the 10th Circuit deals with a complicated issue of whether the Court had the jurisdiction to hear the appeal given its late filing.  If found it did, but that in no way impacted on its decision concerning the drop dead stipulation entered in this case.

The relevant facts are that in February 2003 (before BAPCPA) the Debtors filed Chapter 13 bankruptcy and a plan addressing their pre-petition mortgage arrearage.  Their amended plan in July 2003 continued this treatment s to the pre-petition arrearage only.  After filing, but before confirmation, however, the Debtors fell approximately $10,000.00 behind in mortgage payments post-petition.  It has to be assumed that they were required to make these payments on their home directly.  To resolve this post-petition arrearage only, the Debtors and the Creditor entered into a stipulation, which allowed for the automatic stay to lift and the lender to foreclose on the Debtors' home if the Debtors failed in making future payments and other considerations.   Four days after entering into this stipulation the Bankruptcy Court confirmed the Debtors' plan, which provided for the pre-petition arrearage, but made no reference to the stipulation or the post-petition payments.  The Debtors eventually defaulted on the stipulation, the stay was lifted, and the lender proceeded with foreclosure, and in fact did foreclose.  The Debtors then brought an action to stop their eviction from the house claiming that the confirmation superseded the stipulation.

The Bankruptcy Court disagreed with the Debtors.  It was appealed to the BAP and it disagreed with the Debtors as well.  The 10th Circuit found that indeed the post-petition payments missed were nowhere addressed in the order of confirmation.  However, the Court found that the stipulation in no way dealt with the issue of the lenders pre-petition claim for missed payments, and as such the documents were somehow mutually exclusive.  To state it as the Court did, "Like the bankruptcy court in interpreting its own orders, and like the BAP in affirming that interpretation, we conclude that the stipulation and amended plan can be read harmoniously, each addressing a separate debt owed."

In short, the final decision of the 10th Circuit fell on the interpretation of the orders of the Bankruptcy Court.  It is important to note that there exist decisions that disagree with the conclusion reached by the 10 Circuit, and it is concerning that the 10th Circuit would reach this decision without citing to one case or Bankruptcy Code provision, or text, that supports its findings.  It is rare to find such a decision devoid of all such references, and I am not sure what credence that can be given to this decision for this very reason.

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.