Elizabeth Warren: From Bankruptcy CLE Speaker to the National Limelight as Chair of the Congressional Oversight Panel for Economic Stabilization

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

For years bankruptcy practitioners have known Elizabeth Warren, a professor at Harvard Law School, as a regular speaker at bankruptcy CLE's all over the country. But last month she stepped into an infinitely more visible role by accepting a position on the 5-member Congressional Oversight Panel for Economic Stabilization ("COP"), and then at its first meeting a few days later being elected the Panel's chair. She has in the weeks since then become the very public face of this new assertively public body.

COP's Establishment
COP was mandated by the Emergency Economic Stabilization Act, the $700 billion "bailout," enacted on October 3, 2008. The five members of the panel are each appointed, respectively, by the House speaker, the House Republican leader, the Senate Democratic leader, the Senate Republican leader, and one jointly by the House speaker and the Senate majority leader. This gave Democrats a 3-2 majority in choosing members.

A recent press release lays out COP's mandate and its work thus far:

Section 125 of EESA created the Congressional Oversight Panel to “review the current state of financial markets and the regulatory system” and gave the Panel power to hold hearings, review official data, and write reports that review the TARP program and provide recommendations for regulatory reform. In November, Congressional Leaders began appointing Panel members, and the Panel’s first meeting was held on November 26, 2008. In the two weeks since the first meeting, Panel members met with representatives of the Treasury Department, the Federal Reserve Bank, and the GAO.

The First Report
Although its first members were only appointed in mid-November (John Sununu, the Republican former Senator from New Hampshire, was just appointed on December 17), it has already issued a 38-page report: Questions About the $700 Billion Emergency Economic Stabilization Funds.

As Elizabeth Warren stated in the accompanying press release on December 10:

We are here to get answers to the questions Americans have a right to ask: who got the money, what have they done with it, and how has it helped this country? . . . . This first report not only lays out the questions that will drive the Panel’s work, but demonstrates our determination to bring a broad spectrum of independent input and expertise to ensure that public actions are built on firm foundations that will help stabilize markets and strengthen our economy for America’s families.

The Report includes in its introductory remarks a helpful summary of the use of the "bailout" funds so far:

Treasury has used its authority under the Act to provide 87 banks with $165 billion in exchange for preferred stock and warrants. Treasury further used its authority to provide AIG with $40 billion in exchange for preferred stock and warrants, and to provide Citigroup with an further $20 billion in preferred stock and warrants. As part of a program to guarantee approximately $306 billion in Citigroup's troubled assets, Treasury receives [sic] $4 billion of Citigroup preferred stock and warrants. Together these disbursements constitute approximately $1,900 per American family, or almost 3% of the typical family's pre-tax income.

The ten questions discussed in detail in the report are:
1. What is Treasury’s strategy?
2. Is the Strategy Working to Stabilize Markets?
3. Is the Strategy Helping to Reduce Foreclosures?
4. What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?
5. Is the Public Receiving a Fair Deal?
6. What is Treasury Doing to Help the American Family?
7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?
8. How is Treasury Deciding Which Institutions Receive the Money?
9. What is the Scope of Treasury’s Statutory Authority?
10. Is Treasury Looking Ahead?

The Panel approved the first report with a 3-1 vote on December 9, with the Republican Congressman Jeb Hensarling of Texas dissenting. (John Sununu had not yet been appointed to the Panel.)

Future Oversight Activities
According to its first Report, "COP will hold a series of field hearings to shine light on the causes of the financial crisis, the administration of TARP, and the anxieties and challenges of ordinary Americans." The first of these is to be held on December 16 in Las Vegas, one of the cities hardest hit by residential foreclosures.

In January 2009 "COP will release two public reports," on January 10 one "that examines the administration of the TARP program, including the impact on the economy to date," and on January 20, one "providing recommendations for reforms to the financial regulatory structure." Its establishment statute requires the Panel to issue reports to Congress during every 30 days of its existence, which is currently scheduled to be until

COP just started a public website to provide resources about its efforts, and to give opportunity for citizens to provide input.

Warren's Press Offensive
Warren has in the last week been appearing on national radio shows publicizing this report and COP's work, including National Public Radio's Fresh Air and American Public Media's Marketplace. She concluded her remarks in the December 10 Marketplace interview as follows, clearly presenting her own concerns and the seriousness of the problem:

There has to be an overall notion that we're going to deal with the genuine economic problems in the United States right now. So, for example, we're having a problem -- a real, visible problem -- in the housing market right now. And we've got, potentially, $700 billion commitment of American dollars out there for which, right now, it's not being used. There's not even a hint that it's going to be used to address any part of that problem. That tells me there's not a coherent strategy here. You know, if the American family fails, then there won't be any banks to save. This isn't about saving banks individually. Ultimately, this is about saving our economy, saving our country. But most of all, saving our people.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

The Ninth Circuit BAP Gap in Published Opinions; Its Last Three Unpublished but Citeable Memoranda

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The Ninth Circuit Bankruptcy Appellate Panel has not published an opinion since early August, more than four months ago. (For a summary of that most recent opinion see my Litigation Report entitled The "Law of the Case" Doctrine Applied in the Most Recent 9th Circuit BAP Opinion, Written by Judge Dunn.) This is surprising because in 2008 before August and throughout 2007 the largest gap in published opinions was only about six weeks. In fact, throughout 2005 and 2006 not a single month passed without at least one published opinion. Furthermore, during the calendar years 2005, 2006 & 2007, the BAP published no less than 32 published opinions. So far this year--half-way through December--it has published only 15. A phone call to the BAP Clerk's Office in Pasadena, California asking about this yielded a slightly defensive retort to the effect that "well, we are generating many unpublished memoranda opinions," without any admission of an uncharacteristic gap in published opinions. There seems to be more to this story, and if there is anything newsworthy about it I will report it in a future Bulletin. In the meantime, here are short summaries of the three most recent BAP unpublished but still potentially very valuable memoranda, all from November 2008, two of which had Oregon's Judge Randall Dunn on the three judge panel.

Citeability of the BAP's Unpublished Memoranda

The following cautionary note introduces these memoranda on the Court's website: "All memoranda are unpublished. Memoranda issued before January 1, 2007 may not be cited to or by the courts of this circuit except under the limited circumstances specified in Ninth Circuit BAP Rule 8013-1(c). In accordance with Federal Rule of Appellate Procedure 32.1, memoranda issued on or after January 1, 2007 may be cited without restriction."

Federal Rules of Appellate Procedure Rule 32.1 is titled "Citing Judicial Dispositions" and states in full:

(a) Citation Permitted. A court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been:
(i) designated as “unpublished,” “not for publication,” “non-precedential,” “not precedent,” or the like; and
(ii) issued on or after January 1, 2007.

Each of the BAP's unpublished memoranda included here have the following as their first footnote:
"This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1."

In turn, the most pertinent part of 9th Cir. BAP Rule 8013-1 is subsection (c) stating: "Unpublished memoranda and orders have no precedential value and may not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel." (The rest of the Rule has aspects of interest not directly relevant here, such as the criteria for determining whether a BAP's decision becomes a published opinion or instead an unpublished memorandum, and the procedure to request that a memorandum be turned into an opinion--see the entire Rule 8013-1 at the end of this Bulletin.)

So, under Rule 32.1 of the Federal Rules of Appellate Procedure all unpublished but written dispositions of any federal court since the beginning of 2007 may be cited, but under the 9th Cir. BAP Rule 8013-1(c) citation seems not to be permitted except in the very limited contexts of "the doctrines of law of the case, res judicata, or collateral estoppel."

However the indicated footnote then says that particular case "may be cited for whatever persuasive value it may have," seemingly contradicting the restriction of the BAP Rule. Perhaps the answer is in 9th Cir. Rule 36-3 (a) and (b):

Citation of Unpublished Dispositions or Orders
(a) Not Precedent: Unpublished dispositions and orders of this Court are not precedent, except when relevant under the doctrine of law of the case or rules of claim preclusion or issue preclusion.
(b) Citation of Unpublished Dispositions and Orders Issued on or after January 1, 2007: Unpublished dispositions and orders of this court issued on or after January 1, 2007 may be cited to the courts of this circuit in accordance with Fed. R. App. P. 32.1.

The bottom line: Citation is permitted to unpublished memoranda for persuasive value--9th Cir. Rule 36-3 (b) trumps any seeming contradiction arising out of 9th Cir. BAP Rule 8013-1(c). The best proof: see footnote 6 in the BAP's own unpublished memorandum in Olympic Coast Investment v. Crum (In re Wright) below, in which the BAP itself cites a Ninth Circuit "unpublished non-precedential decision" "for its persuasive value." Even though the BAP's use of that Ninth Circuit decision was technically governed by 9th Cir. Rule 36-3 (b) instead of 9th Cir. BAP Rule 8013-1(c), I believe the BAP would endorse the use of its own unpublished memoranda in the same fashion.

The Three November 2008 Memoranda

Jared v. Keahey (In re Keahey)
BAP No. WW-08-1151-PaJuKa
November 3, 2008

Issue: Did the bankruptcy court err in "finding that a creditor’s attorney committed the tort of outrage and violated his fiduciary duties as a deed of trust trustee in connection with his repeated, abusive attempts to collect a debt secured by the debtor’s home"?
Holding: "The bankruptcy court did not err in finding that [creditor] committed the [Washington state] tort of outrage," in that 1) the conduct at issue was "extreme and outrageous," "the infliction was intentional or reckless," and the recipient "suffered extreme emotional distress" as a result of the conduct.

Olympic Coast Investment v. Crum (In re Wright)
BAP No. MT-08-1164-MoDH
November 3, 2008

Issue: Does a Chapter 7 trustee's distribution to creditors render as moot the appeal by a creditor which did not receive any payment through that distribution? Specifically, if that 7 trustee proposed and received a court order, over an undersecured creditor's objection, to make a final distribution paying nothing to that undersecured creditor because it had filed a proof of claim failing to specify the amount of the unsecured portion, and never filed an amended proof of claim so specifying, would the creditor's appeal of the distribution order be moot if it did not seek to stay the distribution order pending the appeal and the distribution to creditors occurred while the appeal was pending?
Holding: The BAP held that it lacks jurisdiction over appeals that are moot, and this case was "equitably moot" in that the appellant failed "to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court" and so allowed "such a comprehensive change of circumstances to occur as to render it inequitable ... to consider the merits of the appeal." The court also stated that, had it not dismissed the appeal as equitably moot, it would rule on the merits that "a trustee does not have to make distributions to an undersecured creditor who did not amend its claim to assert or estimate the unsecured portion."

Kosmala v. Cook (In re Cook)
BAP No. CC-08-1091-HMoD
November 3, 2008

Issue: Was a debtor's interest in a trust property of his Chapter 7 estate? Particularly, did debtor acquire an interest in trust property under § 541(a)(5)(A) as a "bequest, devise or inheritance" acquired within 180 days of the Chapter 7 filing, since most of the trust assets were transferred to the trust by his mother's will, or instead is debtor's interest in the trust property excluded from property of the Chapter 7 estate because his interest merely vested at the time of the mother's death. § 541(a)(5) includes in the bankruptcy estate “any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date-- (A) by bequest, devise, or inheritance."

Holding: Looking to state law to define debtor's interest in the trust, on the facts here under California law the trust was not a testamentary trust but rather an inter vivos one, and the devise of the assets to the trust through the will did not make the trust testamentary. "[T]the Properties were devised through a pour over provision to the Trust, not to the Debtor. The Debtor was a
contingent beneficiary of the Trust at the date of his bankruptcy filing and had no direct interest in the Properties." The BAP affirmed the decision of the bankruptcy court.

____________________________________________________________________________________________________

Rule 8013-1
DISPOSITION OF APPEAL
(a) OPINION or MEMORANDUM. The Panel may determine that a written disposition of a matter before the Panel will be designated an OPINION if it:
(1) Establishes, alters, modifies or clarifies a rule of law;
(2) Calls attention to a rule of law which appears to have been generally overlooked;
(3) Criticizes existing law; or
(4) Involves a legal or factual issue of unique interest or substantial public importance.
A written disposition of a case not designated for publication will be captioned a MEMORANDUM.
(b) PUBLICATION. Publication of a final disposition means the BAP Clerk will release a copy to recognized channels for dissemination. Only opinions, and orders designated for publication by the Panel, will be published.
(c) CITATION. Unpublished memoranda and orders have no precedential value and may not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
(d) REQUEST FOR PUBLICATION. Any party may request, by letter, that the Panel publish a memorandum. The request must be received no later than 30 days after the filing of the memorandum and must state concisely the reasons for publication.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Judge Kozinski-led Ninth Circuit Panel Denies Petition for En Banc Rehearing: Espinosa, Major Student Loan Opinion Still Stands

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Espinosa v. United Student Aid Funds, Inc.
9th Circuit No. 06-16421
Originally filed October 2, 2008, Amended December 10, 2008
Order Amending Opinion, and Amended Opinion



The Original Opinion
The day after the Ninth Circuit originally released this opinion, I wrote the following entitled Bulletin:

Major New Student Loan Opinion: 9th Circuit Allows Chapter 13 Discharge of Student Loans WITHOUT Adversary Proceeding by Mere Inclusion in Plan

That Bulletin started as follows:

Can a Chapter 13 debtor discharge a student loan by including it in the plan but without filing an adversary proceeding to determine debtor's undue hardship, if the student loan creditor fails to object to the plan? In this opinion filed by the 9th Circuit yesterday, its Chief Judge Kozinski emphatically answered: "yes."

This is an amazing opinion. It is one of the most colorful opinions I've read in months (see some of that "color" quoted below). In overturning the District Court appellate decision and following its own 9th Circuit precedents, it strongly rejected constitutional arguments to the contrary by the 4th, 6th & 7th Circuits as well as statutory arguments to the contrary by the 2nd and [en banc]10th Circuits.

The Amended Opinion
Now just released yesterday is this Order Amending Opinion, and Amended Opinion which is unusual in two respects.

1) The Amendments
First, there are an unusual number of amendments to the original opinion. Characteristically, there are one or two corrections or insertions when an opinion is amended. Here, there are seven, covering two full pages. I am speculating, but given that the author is the idiosyncratic Chief Judge Kozinski, and the opinion goes against the grain of other Circuit opinions, including an en banc one, the good judge decided to try to tweak his arguments to try to present the best case for when the argument eventually lands in the Supreme Court.

2) Denial of Petition for Rehearing En Banc
Second, the Order Amending Opinion concludes as follows:

The petition for rehearing en banc is denied. See Fed R. App. P. 35. No further petitions may be filed and all pending motions are denied.

Fed R. App. P. 35 states in pertinent part as follows:

Rule 35. En Banc Determination

(a) When Hearing or Rehearing En Banc May Be Ordered.

A majority of the circuit judges who are in regular active service and who are not disqualified may order that an appeal or other proceeding be heard or reheard by the court of appeals en banc. An en banc hearing or rehearing is not favored and ordinarily will not be ordered unless:

(1) en banc consideration is necessary to secure or maintain uniformity of the court’s decisions; or

(2) the proceeding involves a question of exceptional importance.

(b) Petition for Hearing or Rehearing En Banc.

A party may petition for a hearing or rehearing en banc.

(1) The petition must begin with a statement that either:

(A) the panel decision conflicts with a decision of the United States Supreme Court or of the court to which the petition is addressed (with citation to the conflicting case or cases) and consideration by the full court is therefore necessary to secure and maintain uniformity of the court’s decisions; or

(B) the proceeding involves one or more questions of exceptional importance, each of which must be concisely stated; for example, a petition may assert that a proceeding presents a question of exceptional importance if it involves an issue on which the panel decision conflicts with the authoritative decisions of other United States Courts of Appeals that have addressed the issue.

Note that the Rule in the last sentence above in effect defines "questions of exceptional importance" in such a way that it seems highly applicable to this panel opinion. As stated in my quote from my Bulletin on the original opinion, this Espinosa "panel decision" clearly "conflicts with authoritative decisions of other United States Courts of Appeals that have addressed the issue." Yet Judge Kozinski denies the petition for rehearing en banc summarily, without any explanation whatsoever why this is not "a question of exceptional importance," how it does not conflict with other Courts of Appeals "authoritative decisions" when it so plainly does so.

I finished the earlier Bulletin on the original opinion with a section entitled "Not Need En Banc Review," which stated:

The coup de grace of Judge Kozinski's opinion was his repeated assertions that his three-judge panel did NOT need to call for an en banc rehearing in spite of conflicts with so many other Circuits, as well as with a number of decisions in the 9th Circuit BAP and 9th Circuit bankruptcy courts. Why?: He simply did not find those other cases persuasive.

ConcIusion
I finished my earlier Bulletin with:

[Judge Kozinski] is pushing a rationale based in large part on a 10th Circuit case that was repudiated last year by an en banc decision of the 10th Circuit. Principled and gutsy, or stubborn and erroneous, in any event it's an entertaining opinion.

Now in Judge Kozinski's (and his fellow 3-judge panel mates') summary denial of the petition for rehearing en banc and his sprucing up of the opinion with his amendments, he is showing that the Chief Judge is boss and is presenting his best case for knowing better than the other Circuits.


by Andrew Toth-Fejel

Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Caution: A Bankruptcy Crimes "Sweep" May Be Coming to a Neighborhood Near You

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

As bankruptcy filings increase and individual debtors' attorney offices get more stressed, it may be tempting to let office procedures get lax and to allow corners to be cut in the name of efficient service. As the seriousness of the difficult economy takes hold and some people feel victimized by circumstances beyond their control, there appears to be at least anecdotal indications that more debtors are resorting to cheating the system that they feel has cheated them. So let the following be a cautionary tale.

In one federal district, the Southern District of West Virginia, based in Charleston, the U.S. Trustee's office and the U.S. Attorney combined forces to investigate and charge four different individual debtors with diverse bankruptcy crimes. The details of the charges should both remind debtors' counsel of the kinds of details to pay special attention to and be a short lesson in the most common bankruptcy crime statutes.

Bankruptcy Crime Statutes 18 U.S.C. §§ 152 and 157
§ 152 is entitled "Concealment of assets; false oaths and claims; bribery." It lists nine types of sanctioned behavior, but these four cases involve only the first three types, the concealment of assets, making false oath and a false declaration:

A person who

(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;

(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

. . .

shall be fined under this title, imprisoned not more than 5 years, or both.

The remaining six kinds of sanctioned behavior are noteworthy because many involve potential crimes by parties other than debtors. A summary of these include:

(4) a creditor or alleged creditor filing a false proof of claim;

(5) a transferee wrongfully receiving property from a debtor after the filing of a bankruptcy case;

6) receiving a bribe--"any money or property, remuneration, compensation, reward, advantage, or promise thereof"--or order to take or avoid any action in a bankruptcy case;

(7) pre-petition transfers or concealment of debtor assets by the debtor or by others, including the debtor's agents and officers;

(8) pre-petition and post-petition concealment, falsification, or destruction of records about a debtor's property or financial affairs by the debtor or by others; and

(9) post-petition withholding of records about a debtor's property or financial affairs by the debtor or by others.

§ 157 is entitled "Bankruptcy fraud," and states in its entirety:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so -

(1) files a petition under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title;

(2) files a document in a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title; or

(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.

The Four Accused Debtors
Victoria Caudill, 51, was accused of transferring $60,000, that she had received in a workers' compensation settlement from the Florida Department of Labor and Employment Security, into another person's bank account and then failing to disclose this asset in her bankruptcy case. She was indicted by the federal grand jury for concealing assets (18 U.S.C. 152(1)), making a false declaration (18 U.S.C. 152(3)) and devising a bankruptcy fraud scheme (157(3)).

Clinton Smith, 62, was accused of falsely declaring in his 2004 bankruptcy case that his wife still owed a 50-acre parcel of land the couple had bought back in 1977 but had in fact been sold the previous year for about $207,000, his half-share of which was being paid to him in payments of $2,000 per month. He failed to disclose this income. He was indicted by the federal grand jury for concealing assets (18 U.S.C. 152(1)), making a false declaration (18 U.S.C. 152(3)) and devising a bankruptcy fraud scheme (157(3)).

Jennifer Longwell, 38, was accused of falsely disclosing that she had sold a parcel of real property for $20,000 when in fact she had sold it for $69,000; she falsely disclosed that she continued own another parcel when in fact she had sold it the day before. She also gave false testimony at the meeting of creditors about those transactions. She was indicted by the federal grand jury with two counts of making a false oath (18 U.S.C. 152(2)) and one count of concealing assets (18 U.S.C. 152(1)).

Tracy Helms, 42, was accused of concealing guns and jewelry in her bankruptcy case. She was not indicted by grand jury but rather the U.S. Attorney's office filed an "information" against her for concealing these assets (18 U.S.C. 152(1)).

Potential Criminal Penalties
As indicated in the quoted statutes above, both 18 U.S.C. § 152 and § 157 provide for a fine and/or up to 5 years of imprisonment. However local newspaper accounts state that that the three indicted individuals face up to 15 years in prison, and one story last month in the Charleston, West Virgina News & Sentinel said that Ms. Longwell faced 15 years in prison, three years probation and up to $750,000 in fines.

The U.S. Attorney's Warning
The local U.S. Attorney Charles T. Miller said that these cases should "serve as a warning to those who would abuse the [bankruptcy] system." The U.S. Trustee's Office refers suspicious circumstances to his office, the FBI then investigates, and then his office decides whether to prosecute. His parting words: "It's pretty straightforward in bankruptcy: You list what you have, you list what you owe, and you get a clean slate. It's when you hold [assets] back that [you] get into trouble."

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Ninth Circuit Limits Section 502(b)(6) Cap on Claims by Landlord to Lost Rental Income, Does Not Extend This Cap to Collateral Claims by Landlord

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


El Toro Materials Co. v. Saddleback Valley Community Church (In re El Toro Materials Co.)
Ninth Circuit Court of Appeals Case No. 05-56164
Filed October 1, 2007
Opinion by Judge Alex Kozinski
(subsequently appointed Chief Judge of the Ninth Circuit)

These Bulletins often present appellate opinions the day after they are released, but this Ninth Circuit opinion from last year is worth a look because 1) the holding and its rationale is quite straightforward, so it's easy to learn from; 2) the opinion involves, directly and indirectly two of the more interesting people living in the Ninth Circuit; and 3) because the subject in controversy is one million tons of mud. Even hard-
working bankruptcy attorneys every once in a while get to come out of the trenches and play in the mud.

The Two Personalities
The opinion's author, Alex Kozinski, who shortly after this opinion became the Chief Judge of the Ninth Circuit Court of Appeals. He became a U.S. Court of Appeals judge at 35, the youngest in the country. His opinions are common-sensical and humorous, reflecting fearless libertarian instincts. Emigrated from Romania at 12, his parents both Holocaust survivors, he still speaks, as he says, "with an accent close to [California Governor] Schwarzenegger's." (Please see my prior Bulletin featuring another opinion he authored: "Major New Student Loan Opinion: 9th Circuit Allows Chapter 13 Discharge of Student Loans WITHOUT Adversary Proceeding by Mere Inclusion in Plan."

The pastor of the successful appellant here, Saddleback Church, is Rick Warren, author of one of the best-selling books in history, "The Purpose-Driven Life," and "unquestionably the U.S.'s most influential and highest-profile churchman" in the opinion of a recent Time article on him His church was the venue for the "civil forum" last August featuring the two Presidential candidates, which he moderated. The event was affirmation of his stature. He is not named in the opinion.

The Simple Facts and the Interpreted Statute
This church is the landlord with the million tons of mud left by the debtor, El Toro Materials, upon its rejection of a lease under § 365(a) of the Code. It brought an adversary proceeding "claiming $23 million in damages for the alleged cost of removing the mess, under theories of waste, nuisance, trespass and breach of contract." § 502(b)(6) states that if an objection is made to a claim by a creditor the bankruptcy court

shall determine the amount of such claim . . . and shall allow such claim in such amount, except to the extent that--
(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds--(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . . .

That last subsection is a cap on the amount of the claim at either one year of rent on the remaining term of the lease, or, if it is greater, the rent for 15 percent of the remaining term of the lease, but at most three years of rent. The issue is whether that cap on a claim by "lessor for damages resulting from the termination" of a real estate lease caps not just future rent pegged to the periods stated in subsection (A), but also caps other damages owed by the lessee-debtor to the landlord. Such as the cost of removing two billion pounds of mud.

Judge Kozinski Explains
The holding was one of simple statutory construction supported by case law, but the judge presented it quite differently than most jurists. Instead of going right to the statute and case law, he starts by looking at the purpose of the cap for landlord-creditor claim amounts, its economic and historical context, with the help of a touch of legislative history: "The damages cap was 'designed to compensate the landlord for his loss while not permitting a claim so large (based on a long-term lease) as to prevent other general unsecured creditors from recovering a dividend from the estate.”

Then Judge Kozinski begins the core of his analysis with common sense:

The structure of the cap—measured as a fraction of the remaining term—suggests that damages other than those based on a loss of future rental income are not subject to the cap. It makes sense to cap damages for lost rental income based on the amount of expected rent: Landlords may have the ability to mitigate their damages by re-leasing or selling the premises, but will suffer injury in proportion to the value of their lost rent in the meantime. In contrast, collateral damages are likely to bear only a weak correlation to the amount of rent.

Then he moves to public policy:

One major purpose of bankruptcy law is to allow creditors to receive an aliquot share of the estate to settle their debts. Metering these collateral damages by the amount of the rent would be inconsistent with the goal of providing compensation to each creditor in proportion with what it is owed.

Only then does he seem to even look at the details of the statute at issue:

The statutory language supports this interpretation. The cap applies to damages “resulting from” the rejection of the lease. 11 U.S.C. § 502(b)(6). Saddleback’s claims for waste, nuisance and trespass do not result from the rejection of the lease—they result from the pile of dirt allegedly left on the property. . . . . The million-ton heap of dirt was not put there by the rejection of the lease—it was put there by the actions and inactions of El Toro in preparing to turn over the site.

He then returns back to common-sense public policy:

Interpreting the section 502(b)(6) cap to include damage collateral to the lease would also create a perverse incentive for tenants to reject their lease in bankruptcy instead of running it out: Rejecting the lease would allow the tenant to cap its liability for any collateral damage to the premises and thus reduce its overall liability, even if staying on the property would otherwise be desirable and preserve the operating value of the business

. . . .

This would both reduce the operating value of the business and deny recovery to a creditor—a lose-lose situation counter to bankruptcy policy

. . .

Further, extending the cap to cover any collateral damage to the premises wuold allow a post-petition but pre-rejection tenant to cause any amount of damage to the premises- either negligently or intentionally--without fear of liability beyond the cap.

Almost as an afterthought, in his second-to-last paragraph, the judge refers to only one other court opinion, the only one in the entire body of his opinion that he deigns worthy of mention outside the ancient cases he refers to earlier for historical context, and mentions it only for the purpose of overruling it--a Ninth Circuit BAP opinion that the underlying BAP in this case relied on. He provides no explanation why this prior case was wrongly decided, other than to mention in a footnote that two concurring judges in the current case's BAP "expressed reservations" about it. Other than this, and a short footnote distinguishing a potentially contrary Ninth Circuit opinion from the issue in this case, Judge Kozinski's holding is supported in his opinion by no case law whatsoever, reflecting his usual audacity.

The Judge's Advice to the Entire Ninth Circuit BAP
Perhaps anticipating his ascension to the Chief Judge role, but more likely just reflecting his assertive personality, Judge Kozinski gave the following procedural recommendation to the Ninth Circuit's Bankruptcy Appellate Panel:

When the [BAP] believes that one of its precedents is wrongly decided or otherwise deserves reconsideration [as two of the three judges in the panel did in this case], the goal of judicial efficiency may be best served by allowing the BAP itself to overrule its own precedent. The BAP, promulgating its rules under supervision of the Ninth Circuit Judicial Council, has not yet implemented a rule creating an en banc procedure.[Citation excluded.] As this case suggests, the time may be ripe for the BAP to consider instituting such a procedure.

In other words, he's telling the BAP: don't waste the Ninth Circuit's time on cases relying on bad BAP precedent; instead come up with a procedure for dumping such bad BAP law on your own.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Hedge Funds Scoff at Congress' Chapter 13 Mortgage Modification Threat: Funds Sue Countrywide and Jeopardize Its Huge Modification Settlement

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

A few weeks ago Congress directly warned two specific huge hedge funds, and the industry in general, not to undercut federal efforts at encouraging voluntary home mortgage modifications. These two hedge funds, Greenwich Financial Services and Braddock Financial Corporation, were apparently "instructing the servicers of their mortgages to defy this national program and to insist on further socially and economically damaging foreclosures."

This strong warning came specifically in the form of a very explicit statement by the chairman of the House Financial Services Committee and five of his pertinent subcommittee chairs (and in letters addressed personally to the presidents of Greenwich Financial and of Braddock Financial Corporation, and to the Managed Funds Association ("The Global Voice of the Alternative Investment Industry").) These influential members of Congress, albeit all Democrats, clearly threatened to "invoke the protection of the bankruptcy laws on single family residences" if these two particular hedge funds and the industry in general does not "reverse this policy."

But then this Monday (12/1/08), Greenwich Financial, whose president, William Frey, has been an outspoken critic of mortgage modifications, threw down its own gauntlet, in the form of a lawsuit filed in New York State Supreme Court in Manhattan, against Countrywide Financial Corp., now owned by Bank of America. This proposed class-action lawsuit seeks to require that Countrywide pays to the 374 securitization trusts involved the FULL VALUE of all the mortgage loans that Countrywide had sold to them, reflecting a total debt of about $80 billion. In October Countrywide had settled predatory lending charges by fifteen state attorneys general by agreeing to reduce mortgages by $8.4 billion through mandatory mortgage modifications. (See my 10/7/08 Bulletin on this settlement, called What You and Your Clients Need to Know About Yesterday's $8 Billion Countrywide/Bank of America Settlement).

The persistent Gordian Knot preventing solution of the mortgage meltdown has been the ownership of a large portion of mortgages not by single creditors but by multiple parties through the infamous mortgage backed securities.

At the outset, the mortgages backed by these securities include a disproportionate share of the troubled loans. As stated last month by James Lockhart, the head of the Federal Housing Finance Agency, in his own plea to the holders of these securities:

The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s [which "only represent 20% of serious delinquencies".] Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs [Fannie Mae and Freddie Mac] that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS [mortgage backed securities] servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.

And for a variety of reasons, in part because of the multiple owners involved, convincing the holders of these private lable MBS's--often hedge funds and brokerage firms--to agree to mortgage modifications has been very difficult. This has greatly stymied the various much-ballyhooed federal mortgage modification initiatives of the last few months. With the major exception of the aggressive modification efforts by the FDIC at institutions that it has taken over--including IndyMac in July and Downey Federal Savings last month--the various governmental programs have all been voluntary on the part of the mortgage holders. Appeals to the common good, such as in the ones quoted above by the FHFA's Lockhart, or even Congressional threats have thus far not proved very effective.

The one major MANDATORY mortgage modification program has been the one agreed upon by Countrywide/Bank of America in the largest ever predatory lending settlement in history. It was scheduled to go into effect December 1, 2008. So Greenwich Financial's decision to target this program, or at least to try to draw a bright line in favor of investors' rights here, is fascinating. In some respects this week's lawsuit by Greenwich Financial against Countrywide could be seen as merely a strong ($8 billion!) message that it wasn't part of the settlement with the state attorneys general and so it refuses to share in the losses agreed to by Countrywide and its owner, Bank of America. As Greenwich's Frey said in written testimony in response to the Congressional ire referred to at the beginning of this Bulletin (oddly, he was not compelled to testify in person in spite of being invited to in the above letter from the Congresspersons): “These [residential MBE] investors are not only investment banks, college endowment funds, and sovereign wealth funds, but ordinary Americans in significant numbers.” And as he said in reference to Greenwich's lawsuit, "[Countrywide's] intention is to modify them, and they don't have the right to do that." Greenwich is merely seeking a declaratory judgment that it, and the other involved investors for whom it is seeking class action status, will not have to take any losses related to this massive settlement.

But Countrywide's response is that "[l]oan modifications have been occurring for decades without objections or challenges, so we are especially troubled at the timing of this complaint. . . . . We are confident any attempt to stop this program will be legally unsupportable.” In other words, we are being (forced to be) flexible--shouldn't the investors be as well?

The bottom line is that as policy makers seek ways to pressure and entice lenders to modify mortgages, the investors in the creative instruments backing up these mortgages are understandably asserting their contract rights, and now resorting to litigation. Given the phenomenal sums involved, this is not at all surprising. But if the investors and their agents refuse to be flexible about accepting reductions in value, while others in the financial chain are sharing in the pain, this reveals the continued intractability of the problem, and the severe limitations of voluntary solutions. And litigation delay is systemically dangerous because every passing month without efficient and workable solutions to the home mortgage meltdown causes ever broader economic fallout. Thus as the Congressional warning stated, these actions by the hedge funds are greatly undercutting the arguments of those "in the financial community" that mortgage modification through bankruptcy "would be damaging" and "would not be necessary to achieve the economically desirable result of reduced foreclosures." Given the bellicose behavior of Greenwich Financial and the general turf-protecting behavior of its industry, we shall see during this delicate transition to and beginning of a new Congress and new Administration whether the threatened "much tougher legislation," in the form of bankruptcy mortgage modifications or otherwise, will be forthcoming.


POSTSCRIPT: One of the most sadly entertaining items I have read in months came across my screen in researching for this story, testimony in 2003 by an attorney for Orrick, Herrington, and Sutcliffe, LLP, a "global law firm" with 21 offices on three continents, at a House subcommittee hearing on "Preventing Abusive Lending While Preserving Access to Credit," in which he argued against "[w]ell intended, but overly restrictive, regulation" in the securitization arena. In light of the events of the past few months, the following portions of his testimony will make you both laugh and cry:

Securitization reflects innovation in the financial markets at its best.

Virtually all ... MBS [mortgage backed securities] are rated by independent rating agencies whose analyses is watched closely by investors as a guide to the credit quality of the securities. In almost all cases, rating agencies monitor the performance of the securities on an ongoing basis.

Securitization reallocates risk at many levels. By shifting the credit risk of the securitized assets (for a price) to ... MBS [mortgage backed securities] investors, financial institutions can reduce their own risk. As the risk level of an individual institution declines, so does systemic risk, or the risk faced by the financial system overall.

Good to see that "systemic risk" and "the risk faced by the financial system" has been reallocated so seamlessly.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys