Are Retirees "Employees" in Determining Priority Claims Under § 507(a)(5)?

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

Consolidated Freightways v. Aetna (In re Consolidated Freightways)
Ninth Circuit Court of Appeals, Case Nos. 07-56720
May 6, 2009


On Wednesday, May 6, the Ninth Court filed its second opinion of the week on a § 507(a) claim priorities issue. On Monday one panel of the Court had addressed whether a debt of an employer for a workers' compensation reimbursement was an "excise tax" and thus a priority claim under § 507(a) a)(8)(E) of the Bankruptcy Code. (Here is my Bulletin on that opinion.) And now two days later the question is whether certain a debtor-employer's debts constitute "claims for contributions to an employee benefit plan" under § 507(a)(5).

Preliminary Note: This is not a well-written opinion. It does not state clearly either the specific issues the panel was addressing or its holdings on those issues. One has to try to read between the lines. Although the judge liked using million dollar words like "pellucid" and "hyaline," referring to how clear he believed the law to be, this opinion was one of the least clear ones that I have read in months. I have done my best to try to get at the intended meaning, but feel free to comment if you think I was led astray and you come away with a different understanding. This opinion makes more sense by reading the underlying bankruptcy court opinion at In re Consol. Freightways, Corp. of Del., 363 B.R. 110 (Bankr. C.D. Cal. 2007), but that should not be necessary.

Issues
The Court addressed:
1) whether the portion of the claim related to benefits paid to retirees falls within "claims for contributions to an employee benefit plan" under § 507(a) a)(5);
2) whether claims related to such retirees who did not render services within the statutory 180-day look-back period are nevertheless entitled to a priority claim;
3) whether such retiree-related claims are to be counted in determining the number of employees for purposes of calculating the priority claim; and
4) whether the priority recovery cap under this subsection is to be treated as an aggregate cap or one limited per individual employee.

Holdings
1) and 2): The portion of the claim based on retirees' benefits count as priority but only so long as the retirees at the time of the filing of the case had rendered some services to the employer-debtor in the statutory 180-day look-back period.
3): The opinion, as far as I could tell, never stated this issue nor discussed it; it merely stated in the first sentence of the "Conclusion": "We disagree with the bankruptcy court’s determination that individuals who did not render services within the 180-day period are to be counted in determining the number of employees . . . under § 507(a)(5)."
4): The $4,650 (at that time) statutory recovery cap for the priority debt is an aggregate amount: the calculation of the total priority claim is not based on an individualized recovery limit of $4,650 per any single employee, but rather that $4,650 is multiplied by the total number of employees in that pool, thus allowing for some individual employees in the pool to be paid substantally more than that, assuming that there were others paid much less and the amount paid being capped at $4,650 times the number of employees.

The Court remanded to the bankruptcy court to apply these holdings.

The Essential Facts
Aetna administered Consolidated Freightways Corporation's (CFC) self-funded medical health plans. It paid medical claims for CFC's employees and retirees, which were reimbursed by CFC. When CFC filed its liquidating Chapter 11 case, it owed Aetna for medical claims as well as for costs of administering the plans. The liquidating trustee objected to priority treatment of claims related to retirees.

The Courts Below
The bankruptcy court determined that Aetna's claim related to the medical claims of retirees qualified as a priority debt The district court affirmed.

The Statutes
Since § 507(a) a)(5) addressing "contributions to an employee benefit plan" interrelates with § 507(a) a)(4) addressing "wages, salaries, or commissions," here are the pertinent portions of both:

(a) The following expenses and claims have priority in the following order: . . .

(4) Fourth, allowed unsecured claims, but only to the extent of $4,650 for each individual or corporation, as the case may be, earned within 90 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for —
(A) wages, salaries, or commissions, including vacation, severance, and sick
leave pay earned by an individual; or
(B) sales commissions . . . .

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
(A) arising from services rendered within 180 days before the date of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
(B) for each such plan, to the extent of —
(i) the number of employees covered by each such plan multiplied by $ 4,650;
less (ii) the aggregate amount paid to such employees under paragraph (4) of this
subsection, plus the aggregate amount paid by the estate on behalf of such
employees to any other employee benefit plan.

(Note that these subsections were not substantively changed by BAPCPA except that the dollar amounts were greatly increased and the look-back period in § 507(a) a)(4) was doubled from 90 to 180 days, and the subsections were renumbered because of a new subsection § 507(a) a)(1)).

The Ninth Circuit's Rationale
Retirees are "Employees":
On the issues whether retirees are "employees" under § 507(a)(5) and what is meant by "arising from services rendered," the Court reasoned that "[w]hile at first blush there may be some ambiguity . . . , we think that a consideration of [that subsection] in the context of the statute renders the answer quite clear."

The Court recalled that § 507(a)(5) did not exist at first, when a priority was granted to employees only for wages and such under the predecessor to § 507(a)(4). After the Supreme Court "had determined that unpaid contributions to welfare plans that “provided life insurance, weekly sick benefits, hospital and surgical benefits” or annuities were not accorded priority. . . Congress then remedied that by adopting § 507(a)(5)."

This Ninth Circuit Panel quoted a 2006 Supreme Court opinion asserting that "[t}he current Code’s juxtaposition of the wages and employee benefit plan priorities manifests Congress’ comprehension that fringe benefits generally complement, or 'substitute' for, hourly pay." Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 659 (2006). From this "tight connection" between the two subsections, the Ninth Circuit concluded: "The operative principle is that the priority is for those who rendered services during the 180-day period, whether they were retired or not at the moment of the filing of the bankruptcy petition."

Calculation of the Claim:
On the issue of the total amount of the claim and the meaning of the term "aggragate amount," the Ninth Circuit again quoted the Supreme Court in Howard Delivery:

Congress tightened the linkage of (a)(4) and (a)(5) by imposing a combined cap on the two priorities, currently set at $10,000 per employee [$4,650 in our case here]. Because (a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under (a)(5) for contributions to employee benefit plans can be recovered next up to the remainder of the $10,000 ceiling. No other subsections of § 507 are joined together by a common cap in this way.

The panel concluded:

A plain reading of § 507(a)(5) demonstrates that it provides an aggregate limit on recovery under that provision; not an individualized recovery per employee. . . . . The result is, therefore, that an individual employee’s claim under § 507(a)(5) will not be limited by the amount that the employee may have recovered under § 507(a)(4). No doubt the overall fund will be limited by the (a)(4) recovery, but individual claims to benefits will not be.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.


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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Debtor Corporation's Obligation to State Worker's Compensation Fund is Not "Excise Tax" and So Not a Priority Claim

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


California Self-Insurers' Security Fund v. Lorber Industries (In re Lorber Industries)
Ninth Circuit Court of Appeals, Case Nos. 07-56227 & 07-56309
May 4, 2009

Issue
Does a business debtor's statutory obligation to reimburse a state workers' compensation fund for benefits the fund paid out on the debtor's behalf constitute an "excise tax," and is therefore a priority debt?

Holding
This obligation to reimburse the worker's compensation fund, under the state statute at issue here, is not a priority debt under § 507(a)(8)(E)(ii) of the Bankruptcy Code primarily because "if a private creditor similarly situated to the government can be hypothesized under the relevant statute, the claim cannot be considered an excise tax."

Facts
Debtor corporation self-insured its workers' compensation obligations, as permitted under California state law and, as required under those circumstances, provided the Self-Insurers' Security Fund a security deposit in the form of a letter of credit in case it defaulted on those obligations. After filing a Chapter 11 case, debtor did default, and the Fund took over payments to injured workers, exhausting the letter of credit and then some. The Fund is statutorily entitled to reimbursement for the amount paid beyond the letter of credit. This claim was treated as a general unsecured instead of priority claim in the debtor's reorganization plan, to which the fund objected

The Statute
Section 507 of the Code states as pertinent here:

(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for —
(E) an excise tax on —
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.

The Courts Below
The bankruptcy court held that the claim for reimbursement qualified as an excise tax but was not entitled to priority because the "transaction" being taxed was debtor's application for self-insurance 14 years before the bankruptcy case was filed, well beyond the 3-year priority period. The BAP also held that the claim qualified as an excise tax but decided that the "transaction" at issue was the debtor's post-petition default on its workers' compensation obligations; since that did not occur "during the three years immediately preceding the date of the filing of the petition," the claim was not entitled to priority.

The Ninth Circuit's Rationale
The court disagreed with both lower courts by holding that the debt was not an excise tax, and did so by focusing on one relatively new element in making this determination.

Since 1982 the Ninth Circuit had used the following 4-prong test to determine whether a debt was an excise tax:

(a) an involuntary pecuniary burden, regardless of name, laid upon individual or property; (b) imposed by or under the authority of the legislature; (c) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; and (d) under the police or taxing power of the state.

(Interestingly, the court adopted this test in a case decades earlier but apparently involving the same employer-debtor: County Sanitation District Number 2 v. Lorber Industries (In re Lorber Industries of California) 675 F.2d 1062 (9th Cir. 1982)).

But in 2004, because of concerns that the "public purposes" prong was too broad and was thereby overly expanding the definition of "excise taxes" to the detriment of general unsecured creditors, the Ninth Circuit added a fifth prong: the debt is not an excise tax if a non-governmental creditor "can be hypothesized under the relevant statute." George v. Uninsured Employers Fund (In re George), 361 F.3d 1157(9th Cir. 2004). This means that if under the statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity, the] claim did not qualify as an excise tax." The rationale is that granting priority treatment for the government on a claim that was functionally the same as that of other creditors would unfairly favor the government.

Under the California workers' compensation self-insurance statute, beyond the Self-Insurers' Security Fund's reimbursement right:

private creditors . . . may also have similar reimbursement claims against [the debtor corporation.] For example, the entity that extended the letter of credit . . . has a claim against [the debtor] related to its default on its self-insurance obligations. Additionally, [the statute] recognizes that claimants retain a cause of action against the defaulting self-insurer, and provides that the Fund can recover as a subrogee in any action to collect.

So, the Fund’s claim is one that is similar to claims that certain private creditor could raise, and is thus not an excise tax.

Distinguished Its Own Opinions Based on Another State's Statute
The Ninth Circuit panel emphasized that whether a workers' compensation reimbursement is an excise tax and thus a priority debt turns on the details of the statute at issue. It contrasted the California statutory scheme with that of Arizona's, which has "several unique, non-universal characteristics" leading earlier Ninth Circuit opinions to conclude that claims by the Arizona workers' compensation fund are priority excise taxes. Particularly, the Arizona statutes give its fund the exclusive right to pursue uninsured reimbursement claims, and such claims "have the same priority . . . as claims for taxes." See Indus. Comm’n of Ariz. v. Camilli (In re Camilli), 94 F.3d 1330 (9th Cir.1996); DeRoche v. Arizona Industrial Commission (In re DeRoche), 287 F.3d 751 (9th Cir. 2002).

The Bottom Line, and in Oregon . . .
Whether a claim for workers' compensation reimbursement is an excise tax and thus a priority debt under § 507(a)(8)(E)(ii) turns on the state statute upon which the claim is based. Assuming the traditional four prongs of the excise tax test have been met, the matter is determined by whether under the pertinent statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity]."

Oregon's workers' compensation statutes seem to assert that all employer obligations to its fund are "preferred to all general claims in all bankruptcy proceedings," and that all amounts due to the umbrella agency that overseas the workers compensation functions "shall be considered taxes." ORS 656.562

Query: do these assertions serve to turn such obligations by debtors into "excise taxes" and thus priority claims in bankruptcy court, in light of this Ninth Circuit Lorber Industries opinion, which turns so much on the content of the respective state statutes? Or does the question turn on the application of the five prongs discussed in the opinion regardless of the Oregon statute's assertion? Is Oregon's statute more like California's or instead Arizona's, governed by this new Lorber Industries opinion or rather by the Arizona-based opinions distinguished and approved by the Ninth Circuit panel here?

Please feel free to respond to this question by making a comment below. For your convenience, here is ORS 656.562, quoted from above, in full:

(1) All premiums, fees, assessments, interest charges, penalties or amounts due the Industrial Accident Fund from any employer under this chapter and all judgments recovered by the State Accident Insurance Fund Corporation against any employer under this chapter shall be deemed preferred to all general claims in all bankruptcy proceedings, trustee proceedings, proceedings for the administration of estates and receiverships involving the employer liable therefor or the property of such employer.
(2) All assessments, interest charges, penalties or amounts due the Department of Consumer and Business Services shall be considered taxes due the State of Oregon.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO RECEIVE AN EMAIL WITH A LINK TO SUCH FUTURE REPORTS WHEN THEY BECOME AVAILABLE.

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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

May an Assignee of a Debt Base Its "False Financial Statement" Nondischargeability Claim on the Assignor's Reliance on that Statement?

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



Boyajian v. New Falls Corp. (In re Boyajian)
Ninth Circuit Court of Appeals, Case Nos. 07-55713 & 07-55716
May 1, 2009

The Issue
May a § 523(a)(2)(B) nondischargeability proceeding be brought against debtors not just by the creditor which reasonably relied on debtors' alleged false financial statement, but also by this original creditor's successor-in-interest, which had not itself relied on those financial statements? The opinion turns on the meaning and weight to be given to the word "is" in the nondischargeability subsection § 523(a)(2)(B)(iii) and the fact that this verb is in the present tense.

The Courts Below
The bankruptcy court had entered summary judgment for the debtors, holding that the reliance on the false financial statement had to be by the assignee bringing the nondischargeability proceeding, not just the original creditor. The Bankruptcy Appellate Panel, which included Judge Randall Dunn, reversed, saying that an assignee stands in the shoes of the assignor and can base its nondischargeability case on the assignor's reliance on the false financial statements. The Ninth Circuit panel's opinion introduced the BAP opinion as a "careful" one, so one can guess which way its opinion went.

The Statute
Section 523(a)(2)(B) provides that a debt will not be discharged if it was obtained by:

use of a statement in writing—

i) that is materially false;

ii) respecting the debtor’s or an insider’s financial condition;

iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

iv) that the debtor caused to be made or published with intent to deceive . . . .

(Emphasis added.) The plain meaning of the emphasized subsection, particularly the present tense of "is," seems to require that "there be reliance by the creditor who holds the claim at the time of the bankruptcy, even if there had been reliance in the past by the creditor who originally extended credit." The Ninth Circuit disagreed.

The Ninth Circuit's Statutory Interpretation and Holding

Read as a whole, this language does not provide that a debt is non-dischargeable only if the assignee creditor reasonably relied on the materially false statement.
. . . .
The most natural reading of the word “is” in subsection (iii) is simply that the debt is nondischargeable if, at the time the money is obtained by the debtor, he or she used a materially false written statement that was intended to deceive.
. . . .
Therefore, t]he bankruptcy court erred in holding as a matter of law that [the original creditor's assignee] could not pursue an action for non-dischargeability under § 523(a)(2)(B) because it was not the original creditor whom the [debtors] allegedly deceived in the course of incurring their debt.

The Court's Remaining Rationale

1) Congressional intent: Without clear language to the contrary, "Congress intended that the general law of assignment remain applicable," allowing the holder of a general assignment to stand in the shoes of the assignor for purposes of nondischargeability actions.

2) Adverse court opinions: The Ninth Circuit rejected the reasoning and result of the local bankruptcy court case relied upon by the debtors, General Electric Capital Corp. v. Bui (In re Bui), 188 B.R. 274 (Bankr. N.D. Cal. 1995), as well as that of two out-of-circuit bankruptcy courts.

3) Sister Circuit court opinion: The Ninth Circuit embraced the result in a Seventh Circuit opinion which did not directly interpret § 523(a)(2)(B)(iii) but relied on general assignment principles to give the assignee the right to raise a § 523(a)(2)(B) nondischargeability claim: FDIC v. Meyer (In re Meyer),120 F.3d 66 (7th Cir. 1997).

4) Public policy: "[I]f assignment of such a debt were to obviate a future non-dischargeability action in all cases where the assignee did not itself rely on misleading financial statements, the functioning of modern debt markets would be unnecessarily disrupted." Plus it would be perverse to permit "dishonest debtors to receive a discharge through the fortuity that their creditor chose to assign the debt."

The Bottom Line
The assignee of a debt need not have relied on the debtor's false financial statement but may base its nondischargeability claim on the original creditor's reliance on that financial statement.



New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Mortgage Cramdown Prospects After Its Senate Defeat

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

Thursday afternoon's defeat of the bankruptcy mortgage cramdown legislation in the Senate very likely means that it will fall into the background in spite of its passage in the House, at least for a number of months and probably for the rest of this year. The defeat was almost universally expected, especially after the top Senate Democratic leadership stripped it off the broader housing bill with its enticements for the banking industry and made it stand alone in the form of an amendment. But the margin of the loss--45-51, far from the necessary 60 votes, and particularly the fact that a full dozen Democrats voted against it when virtually every Democratic vote was needed, makes it very unlikely that any bankruptcy mortgage cramdown bill could make it into law. This is all the more true in light of the Obama administration's negligible public and legislative support for the provision, indicating that it had decided to pick other battles, and presumably could not be counted on for support in at least the near future.

What's Next
Senator Dick Durbin immediately vowed to try to hang on to a bankruptcy cram down provision in the anticipated conference committee's housing bill, as the House and Senate's bills are reconciled, but the relatively large margin of the loss in the Senate makes this very likely a futile effort. There is a slight possibility of very limited success if the cramdown which came out of the conference was highly restricted, such as applicable only to subprime mortgages--which a number of Senators who voted against it said they would have supported. Sen. Durbin determined early in the negotiation process that such a major narrowing of the cram down benefits would not achieve the desired objectives, but he now has reason to reconsider that, if it is not too late.

In the meantime there will very shortly be, perhaps even by the time this Bulletin is uploaded, a Senate vote on the broader bill, without the bankruptcy provision. It includes two components greatly favored by the financial industry: 1) a huge increase in the FDIC's borrowing authority, which would have the effect of reducing by more than half a proposed special premium that banks would be required to pay the FDIC to help shore it up in the wake of bank failures, saving them $7.7 billion; 2) making permanent the temporary increase in deposits guaranteed by the FDIC., from $100,000 to $250,000. It will have no trouble passing. Then this bill will be reconciled with the already passed House bill which includes the cramdown provision, with the final opportunity mentioned above.

If No Cramdown Comes Out of the Conference Committee
Democrat Tom Carper of Delaware, who voted against the cram down, said "My guess is we're not going to see it again [in the Senate]."

Sen. Durbin was taking the long view after the defeat, clearly trying to be optimistic :

I mean, really, to lose 11 Democrats was disappointing, but, you know, I guess I've gained some ground since the issue last came up. Maybe if the mortgage foreclosures go up dramatically and I call it again next year I can pass it.

Going from 36 votes in favor of bankruptcy cram down a year ago to 45 on Thursday may seem like significant progress, except when considering the large increase in Democrats in the chamber, the change in Administrations, and the phenomenal increase in foreclosures in the meantime. And it is no solace for the hundreds of thousands of homeowners who could have been helped.

Durbin added wryly: "If we fail [at passing cramdown through the conference committee procedure] we’ll wait another year and face a worse crisis and hope that the banks won’t have as much clout.” He concluded: "I'll be back, I'm not going to give up."

The Bottom Line

From a press release from the President of the Center for Responsible Lending, one of the consumer organizations involved in the weeks of negotiations with Sen. Durbin: "The mortgage crisis continues to worsen, and the need for this legislation will only grow. Unfortunately, millions of homeowners and all Americans waiting for economic recovery will pay dearly for this delay."

A new Bulletin on this website will provide an update of this legislation and related foreclosure and mortgage modification issues as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Bankruptcy Mortgage Cramdown Soundly Defeated in Senate Vote

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

The bankruptcy mortgage cramdown amendment was defeated in the Senate on Thursday afternoon by a margin of 45 - 51 (with three Senators not voting), a wide margin considering the 60 votes needed for cloture. Every Republican voted against it, not a surprise, but so did 12 Democrats, including Senator Arlen Specter who switched parties just days ago. Although the defeat was almost universally expected, the margin of the loss and the number of Democrats in the "nay" column must be disheartening for Senator Durbin. He admitted: "I had hoped for a better vote." Although he vowed to try to insert the bankruptcy provision in an anticipated conference with the House, such a provision having passed in the House in early March, the relatively large margin of the loss in the Senate makes his success there quite unlikely.

The Roll Call

The Democrats who had been on the fence and voted for the amendment include Sen. Evan Bayh of Indiana, Mark Warner and Jim Webb of Virginia, Claire McCaskill of Missouri, and Ted Kaufman of Delaware. Votes against were cast by Democrats Tom Carper of Delaware, Robert Byrd of West Virginia, Max Baucus and Jon Tester of Montana, Mary Landrieu of Louisiana, Ben Nelson of Nebraska, Blanche Lincoln and Mark Pryor of Arkansas, Michael Bennett of Colorado, Tim Johnson of South Dakota, and Byron Dorgan of North Dakota, as well as Arlen Specter.

Key Reasons for the Defeat

From watching the legislative developments closely since the House and Senate bills were introduced during the first week of this session of Congress, I believe the bill was defeated for two fundamental reasons: 1) the opponents largely succeeded in framing the debate on their terms; 2) President Obama and his Administration did not risk virtually any political capital on this fight.

Framing the Debate

The financial industry succeeded in convincing enough Senators that preventing hundreds of thousands of foreclosures was not worth risking having mortgage rates go up for everyone. This argument succeeded in spite of the lack of credible evidence of this purported cause and effect, indeed in the face of substantial indications to the contrary. And it succeeded in spite of changes in the original legislation designed to further mitigate any such purported tendency, such as its restriction to mortgages entered into before enactment and adding a sunset clause.

The argument played into and arguably even fanned the popular feelings of righteous indignation of "responsible" homeowners against supposedly "irresponsible" ones. Regardless of how convincing this was, it gave political cover to some Senators. For example, Democratic Sen. Ben Nelson justified his "nay" vote with: "Do I want to have my rate go up so that somebody else might be able to cram down" their mortgage payment?

The financial industry's message resonated in the media with the general fears about the instability of the economy. This resulted in reputable news organization such as the Associated Press mouthing that message with statements such as: "The forced easing, or 'cram-down,' of a mortgage by a bankruptcy judge would have likely introduced additional uncertainty for investors." Such arguments were found credible in spite of the appropriate current popular and Congressional distrust of this industry.

White House Missing from the Debate

For reasons not yet clear, neither President Obama nor virtually any senior members of his Administration provided strong support in the legislative effort in the Senate, indeed even undercutting that effort when it was most needed. Back in mid-February when Obama proposed his "Homeowner Affordability and Stability Plan with barely a mention of bankruptcy cramdown, I speculated that the legislation was "perhaps soft-pedaled because it is controversial." After the House passed its amended bill in early March, in spite of the clear need for help for the tougher Senate battle the Administration issued no statements of support, and seemed to pay no attention as the negotiations kept faltering. And last week, just when an enthusiastic endorsement could well have provided a needed push for the undecided Senators, Treasury Secretary Timothy Geithner instead guardedly said: "We are supportive of carefully designed changes” to bankruptcy law. . . . .“It’s a difficult balance to get right, as you know.” "But the president is supportive of this.” Hardly a ringing endorsement from the Administration's bully pulpit. Even after the vote, there has been no comment from either the Treasury Department or the White House. At some point it seems that a decision was made that in the grand scheme of things, this legislation, at least at this time, was expendable.

Financial Influence from the Financial Sector

And then there is always the issue of campaign money. According to the Center for Responsive Politics, banking and real estate interests have given about $2 million to Sen. Mary Landrieu's campaigns, about $2.6 million to Sen. Ben Nelson's, $1.3 million to Sen. Blanche Lincoln's, $2.5 million to Sen. Johnson's, and $3.5 to Sen. Max Baucus'. Oh, and more than $4.5 million to the new Democrat Sen. Arlen Specter's campaigns. Perhaps the most revealing comment in this respect after the vote was by the Delaware Sen. Ted Kaufman, a state with a very significant financial industry, who is not running for reelection: "I'm liberated from fundraising." He voted for the amendment.

Please return to this website tomorrow morning for a Bulletin on the prospects for this legislation going forward notwithstanding this Senate vote.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Will Senator Arlen Specter's Party Switch Affect the Senate Vote on the Bankruptcy Mortgage Cramdown Legislation?

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


With a Senate floor vote anticipated today on the bankruptcy cramdown amendment, and seemingly everything riding on whether it has the support to garner the filibuster-proof 60 votes, does Sen. Arlen Specter's defection from the Republican party improve its chances? There's a small possibility that it does . . . but probably not, at least not today.

Arlen Specter's Position
Sen. Specter has long been in the middle of the cramdown debate as the potential deal-maker for a long time, as he is now. So there are many clues about his position.

Way back in October 2007, Sen. Specter and Sen. Dick Durbin, the sponsor and steadfast advocate of the current Senate bill, introduced separate bankruptcy cramdown bills and were in direct talks to try to forge a bi-partisan compromise. Specter's bill gave mortgage lenders the right to reject any to changes to the loan terms, giving some indication of how relatively modest his own ideas were on cramdown, at least at that time. Indeed, he expressly argued against allowing bankruptcy judges to modify mortgages without lender approval, asserting that lenders would not be willing to lend if "we meddle with the principal sums." He clearly indicated that he was at the very least very cautious about the cramdown concept.

So how much has Specter's perspective shifted as the foreclosure situation has tremendously worsened in the year and a half since then? As reported in a previous Bulletin here, "Republican [Sen.] Arlen Specter of Pennsylvania has long been a potential supporter, but apparently of only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages." There are no indications that the version to be voted on today will be so limited, and if not this seems to indicate that Specter will not be voting in favor of it.

Specter's Role in the Negotiations
According to a very recent story in BusinessWeek.com:

Early on in Senate negotiations over the bill, Specter was one of a handful of moderate Republicans taking part. Since then, the talks have shrunk to several key Democrats. But a Senate staffer close to the talks says the Republicans—or former Republican, in Specter's case—remain key to actually getting to the 60 votes supporters will need.

This same Senate staffer's comment: ""He's the kind of guy where you never know."

Specter's Change in Party Affecting His Prior Positions
According to the same BusinessWeek.com article: " The measure's supporters hope Specter will have to worry less about the GOP base when considering the topic, but that's not a given. "

According to Specter himself, as he concluded in his statement announcing his party change:

My change in party affiliation does not mean that I will be a party-line voter any more for the Democrats that I have been for the Republicans. . . . I will not be an automatic 60th vote for cloture.
. . . .
Whatever my party affiliation, I will continue to be guided by President Kennedy’s statement that sometimes Party asks too much. When it does, I will continue my independent voting and follow my conscience on what I think is best for Pennsylvania and America.

Although he was speaking here in platitudes, Specter has a well-deserved reputation as an independent thinker. So his change in party affiliation does not seem likely to affect his vote on this bill. Indeed, he may well use this early opportunity to assert his independence from his new party.

Remaining Unknowns
First, even up to the last hours before today's anticipated vote, there is talk of a possible new compromise, one which conceivably could entice Specter's vote. How much that talk is mere posturing is difficult to discern. Indications are that any last-moment breakthrough are a very long shot.

Second, there has been some indication that if today's floor vote is unsuccessful, the measure will still not be dead. With Specter's party switch, there are 57 Democrats in the Senate, and two independents who caucus with them. With the Minnesota election between Al Franken and Norm Coleman still in litigation, the Democrats are now effectively one vote short of the critical 60-vote for cloture. The Minnesota Supreme Court has recently agreed to hear Coleman's election appeal on June 1, meaning that the election there could be decided, according to political observers, as early as mid-June. This extra margin may become critical if the cramdown bill, in whatever amended form, re-emerged after Franken's anticipated arrival.
Finally, and perhaps most importantly, if home foreclosures continue at the present pace, stalling the economic recovery and even further devastating major regions of the country, political pressure will continue to build to address this more assertively.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

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

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Insider's Story on Bankruptcy Cramdown: Senator Durbin's Perspective

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

Negotiations on the Chapter 13 mortgage cramdown bill are reportedly still continuing, so the terms of the compromise bill have not yet been finalized, even as it poised for a Senate floor likely this Thursday. Therefore it is impossible to count votes and attempt to predict the outcome, although virtually all sources are expressing doubt that it will pass. The proponents --primarily Senator Dick Durbin and his aides--continue to say publicly that they still hope to strike a compromise with creditors that will convince a few more key Senators to support the legislation.

Although some negotiation apparently continues, the bill's terms directly related to the mortgage cramdown itself may well by now be firm, since the latest indications are that the focus has now turned to other issues within the broader mortgage legislation. Beyond its terms referred to in my Bulletin of 4/20/09, the bill now requires a homeowner to be two months delinquent. Also, the restriction of the cramdown to loan balances of less than $729,750 (which derives from a FHA conforming loan maximum) continues to be in the bill.

Senator Durbin, the sponsor of the pertinent Senate Bill 61, "The Helping Families Save Their Homes in Bankruptcy Act of 2009," gave a detailed speech yesterday on the Senate floor in support of the cramdown legislation. Although short on details of the bill that will come up for the floor vote, he shed some light on the issue and on the negotiations, from his perspective.

His main themes:

The beneficiaries of the proposed legislation:

When we consider amendments to the bill, the key number to remember is 1.7 million families—1.7 million. That is the number of families we will either give a chance to save their homes or allow them to be thrown out in the street, depending on how the vote turns out.

Refuting the argument that bankruptcy would encourage too many bankruptcies

I don’t want to see more people in bankruptcy. That is not a good outcome. But if the lenders of these mortgages know that at the end of the road, after everything else has gone on, there may be a bankruptcy judge who will sit down and look at that mortgage and say to that flight attendant: You know what. You are offering mortgages at this bank for 4 and 5 percent. You offer this woman 4.5 percent. She can make the payments and keep her home and the court is going to order it.

If they knew that could happen at the end of the day, I think those bankers would be in a position where they would want to sit down before it occurs and try to avoid the foreclosure, avoid the terrible outcome for the family and the neighborhood.

Getting at the heart of the recession:

The Mortgage Bankers Association and their cronies scoffed when we told them we were going to have even more foreclosures, but the number continues to grow. This is the cancer at the heart of this recession. This is what we have to address.

This President has worked overtime with a Recovery and Reinvestment Act, putting money back into the economy, saving jobs, creating jobs. But we have to get to the heart of this housing crisis. We have to stop what has become a steady decline of neighborhoods and real estate values in America. It affects us all.

Durbin's perspective on the financial institutions' perspective:

The banks have said all along we don’t need any change in the law, we will take care of this problem. Look what has happened. As they promised us they would take care of it, they didn’t. More and more homes went into default and face foreclosure because they won’t sit down and make the deal. Why wouldn’t they? If they face $50,000 in losses on these foreclosures, if they have all these new obligations, at the end of the day why wouldn’t they sit down?

I will tell you why. For many of them, they don’t want to concede the fact that they created this crisis. Second, many of them believe that at the end of the day Uncle Sam and the taxpayers of America will ride to the rescue, buying these mortgage securities, taking care of these banks, saving them after the bottom falls out of the real estate market and housing market in America. What an awful outcome, that all these families would have to go through all this suffering, that all these neighborhoods would have all

these problems, so at the end of the day the banks that made the original bad mortgages would be rescued. That must be what they are thinking.

Durbin's anger at the big financial institutions:

The groups that are leading the charge against me on this are familiar names on Capitol Hill: The Mortgage Bankers Association, the people who brought us this wonderful subprime mortgage crisis, they oppose my bill; the Financial Services Roundtable, the biggest names in financial services in this Nation, the ones who have had their hands out for Federal money, oppose this idea of helping people facing foreclosure; and the American Bankers Association. What a disappointment.

. . . .

They say: Don’t worry about it, Senator, we are experts. We are going to handle it. Don’t tell us what we need to do.

. . . .

In effect, they have said we have created these rotten mortgages in the first place. Then we sliced them up into securities and sold them to investors all over the world as though there were no risks involved, although we knew better. They tell us we made billions of profits on the backs of homeowners, and then we took billions more from the taxpayers when the mortgages went bad, but don’t make us solve the crisis.

Supporters of the legislation:

Not everyone has walked away from this responsible solution. The amendment which we will vote on a little later this week has the support of CitiGroup, the Center for Responsible Lending, and many other leading homeowner advocacy groups such as the AARP, the Leadership Council on Civil Rights, the Consumer Federation of America, and dozens of other groups. They have worked with me to craft a responsible, reasonable proposal to give lenders a clear incentive to work hard to keep families in their homes.

Terms of the compromise:

The amendment I am going to offer will make a modest change in the Bankruptcy Code with a lot of conditions. It will not apply across the board. In the past, some of my colleagues have understood the need for action but have been uncomfortable with some of the original language. So let me be clear. This amendment is very different. This amendment limits the assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the two primary foreclosure prevention efforts already underway, the Obama administration’s Homeowner Assistance and Stability Plan, and the congressionally created HOPE for Homeowners Refinancing Program, which this bill will greatly improve.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys