Credit Slips

Bankruptcy Filings Decline 6% in June

The most recent bankruptcy filing data from Automated Access to Court Electronic Records (AACER) show a 6.1% decline in the U.S. daily bankruptcy filing rate. The were about 124,800 bankruptcy filings in June which, spread over the 22 business days in the month, is a daily bankruptcy filing rate of 5,672. In May, the daily bankruptcy filing rate was 6,038.

I do not take the dip in bankruptcy filings as strong evidence that the end of the recession is just around the corner. First, there is the usual caution against reading too much into the ups and downs of a monthly indicator. Over the past eight months, the bankruptcy filing rate went up four time and down four times, although cumulatively the increases have been more than the decreases. (The daily filing rate is 11.7% higher than eight months ago.) Second, although the month-over-month figure is a decline, bankruptcy filings are up sharply on an annual basis. The June 2009 figure is a 32.5% increase over 2008. Over the entire year, projections show that 2009 bankruptcy filings will be 28.2% - 36.4% greater than 2008. As I discussed last month, the long-term trend is toward the same filing rate as before the 2005 bankruptcy law was adopted. Third, bankruptcy filings lag macroeconomic bad news. Yesterday's news about the jump in unemployment shows the U.S. recession is far from over, and those unemployed may show up in the bankruptcy courts much later. People do not run into bankruptcy court the day they are laid off. in our most recent empirical work from the Consumer Bankruptcy Project, more than 50% of bankruptcy filers told us they struggled for more than two years before filing bankruptcy.

Projecting forward, total 2009 U.S. bankruptcy filings will be:

• 1,404,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,593 per day) as they have averaged for the first six months of 2009
• 1,414,000 filings if bankruptcy filings continue at the same daily rate (5,672 per day) as they have averaged for June
  
• 1,494,000 filings if bankruptcy filings for the remaining six months of 2009 constitute the same proportion of total filings as the last six months of 2008 constituted for total filings that year (about 53.2%)

Bankruptcy as a Disqualifying Factor for Child Custody?

Several sources, including our friends over at Bankruptcy Beat, are reporting that Michael Jackson's mother, who has been awarded temporary custody of her three grandchildren, might have trouble gaining final custody because of a 1999 bankruptcy filing. Washington attorney Beth Kaufman is quoted as saying, "I think it would be a negative factor but not necessarily a disqualifier. It could indicate that she is not capable of sound financial management.”

It is often said that bankruptcy experts and family law experts don't know know as much about the other field as we should. That is certainly true for me, but I was surprised to read that a bankruptcy filing could be a negative factor for a family law court deciding a child custody matter. The Bankruptcy Code prohibits discrimination against former bankrupts, but that prohibition applies only in specific situations such as certain state licensing decisions or in employment matters. It would not prohibit a state court from considering a bankruptcy filing in a child custody matter. Still, on the question of fitness to be a parent, an old bankruptcy filing would seem to have little relevance.

The Case for a Consumer Financial Protection Agency

Yesterday, the White House released proposed statutory languagefor the creation of a Consumer Financial Protection Agency (CFPA).  The bill is long, but the CFPA, the brainchild of our co-blogger Elizabeth Warren, is by far the boldest part of the Obama financial restructuring plan.  I’d also venture to say that it is the most important. 

 

In this post I want to underscore why we need a CFPA.  In future blog posts, I hope to come back to what a CFPA will and won’t do.

In the Home Stretch

Note: The following was just sent from Credit Slips blogger Stephen Lubben: "At the GM hearing, although closing arguments may run over to tomorrow. I don't think there has been anything thus far that would prevent the sale from going forward."

Health Insurance to Go Broke With

An article in today;s New York Times chronicles how medical debt can financially ruin U.S. citizens even with health insurance. Policies with limits, often hidden from the consumer, quickly run out and leave the insured with mounds of debt. This story comes on the heels of an academic study by Credit Slips bloggers Debb Thorne and Elizabeth Warren and their co-authors, David Himmelstein and Steffie Woolhandler, showing an increase between 2001 and 2007 in the number percentage of medically related bankruptcies. I sometimes wonder how persons reading from outside the U.S. react to these sorts of stories.

Who Loses in Cuomo v. Clearing House?

Adam Levitin already posted on this week's decision in Cuomo v. Clearing House Association where the U.S. Supreme Court struck down a regulation from the Office of the Comptroller of the Currency's (OCC). The regulation preempted state enforcement of consumer protection laws against national banks and grew out of subpoenas issued by the New York attorney general. At first blush, the opinion seems to be a big victory for consumers, and it certainly is a victory. As alluded in the comments to Levitin's post, the opinion might not be as big of a victory as it seems.

The Supreme Court and What Attorneys Can Say

Some other obligations have kept me away from blogging for the past few weeks. One great thing about a group blog is having great colleagues who pick up the slack. I had wanted to say a few words about the Supreme Court's June 8 decision to hear United States v. Milavetz. At this point, the Court's announcement is old news. This post is about what is at stake in the Milavetz decision and why Credit Slips readers might want to watch this case when it gets argued in the fall.

There have been several Credit Slips posts (here and here) about the lower court decisions in Milavetz. Some issues that were raised in the lower court decisions have dropped away, and before the Supreme Court, the case will involve section 526(a)(4) of the Bankruptcy Code, a provision added by the 2005 amendments. It provides that "a debt relief agency shall not advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for charge for services performed as part of preparing for or representing a debtor in a case under this title." Yes, that is language that perhaps only a lawyer could love but probably not even then. The upshot is that section 526(a)(4) aims to prohibit bankruptcy lawyers from advising clients to incur debt right before they file bankruptcy. It was not intended to prohibit bankruptcy lawyers from charging for their services, although that might be a natural reading of the language. Rather, the section also tries to prohibit lawyers from advising clients to borrow money to pay attorneys' fees for a bankruptcy filing.

Cuomo v. The Clearing House Association: OCC Loses Even with Chevron Deference

The Supreme Court delivered its decision in Cuomo v. the Clearing House Association today.  The issue in the case was whether the a regulation passed by the Office of the Comptroller of the Currency (OCC) preempted state enforcement of state fair lending laws against national banks.  Coming on the heels of the OCC's victory in Wachovia v. Watters, in which the Supreme Court held that a state could not exercise visitorial powers over an operating subsidiary of a national bank, many thought that the Supreme Court would extend the OCC's power to near complete preemption of any state authority over national banks. To the surprise of many observers, however, the Court ruled 5-4 (Thomas, with Roberts, Kennedy, and Alito dissenting) in favor of the State of New York (Cuomo).  

GM and §363(f)

As I noted in a recent post, "new GM" has agreed to "assume all products liability claims arising from accidents or other discrete incidents arising from the operation of GM vehicles occurring subsequent to the Closing of the 363 Transaction." (Debtors' response to objections, paragraph 62). The purchasing entity has also agreed to be responsible for "lemon law" claims.

This suggests that current tort claims will continue to be subject to Chrysler-like treatment, meaning that the gains in speed at the GM sale hearing may be somewhat less than I suggested in my prior post.  On the other hand, from a strategic perspective, this move would be consistent with the settlement GM made with its bondholders on the eve of filing. That settlement had the effect of fracturing the dissenting bondholders and removing the most effective sale objectors, and I have previously argued that the extension of §363(f) to future claims is the weakest part of the automakers' successor liability argument, because doing so would seem to violate due process.

GM Sale Objections

I have not covered the GM objections with the same intensity as I did in Chrysler, in part because the vast bulk of the objections raise the very same issues. For example, I'm sure most Credit Slips readers know how I feel about the old sub rosa plan argument. But for those of you looking for information on how the sale hearing will proceed, a good place to start is the Debtors' response to the objections. Even if you don't agree with the debtors' arguments, they provide a helpful service by organizing the objections and providing docket numbers for each one.

GM decides speed is better

GM has decided not to fight the §363(f) issue and will not attempt to "cleanse" its assets of tort claims when transfered to "New GM." I have previously argued that §363(f) should be read to apply to tort claims, subject to the overriding limits of due process that would temper 363(f) as applied to future claims. (Unless somebody wants to argue that Katz overcomes other Amendments too -- as explained by the majority, the Bankruptcy Clause does appear more powerful than previously understood).

Nevertheless, the issue is not a simple one and would have likely bogged down the sale hearing for a few days -- especially given that the litigants are better prepared than they were in Chrysler, and GM's case, which does not involve even the semblance of an outside bidder (vs. Fiat in Chrysler), is somewhat weaker. Accordingly, GM made the understandable choice to keep its case moving.

Transnational Bankruptcy

At the final day of the INSOL conference in Vancouver, I attended a fascinating panel on the issues that arise when a multinational corporate group seeks to reorganize. The panel was staffed by judges from Canada, the UK, Korea, and Germany -- and  deftly chaired by a U.S. judge who managed to resist drawing the discussion back to the U.S. For those of us from the U.S., I think the discourse was particularly enlightening. While the panel began with lots of optimism about the new tools for cross-border coordination, by the end it became plain that only Canada would consider a joint reorganization case. In the other jurisdictions, it was clear that the vision of a cross-border case was actually a series of parallel cases within the several jurisdictions, aimed at reaching a common point.

The distinction is important, and a point that is often lost in the good-feeling surrounding the adoption of chapter-15-like procedures. In a joint reorganization case, creditors are apt to be treated equally, based on the value of the unified enterprise. In the case of parallel proceedings, creditors in those jurisdictions that happen to have readily "realizable" assets are going to have significant holdup power, especially if the assets remain "local" as part of a separate bankruptcy proceeding. For local secured creditors, that may be a fair result, but for unsecured creditors who likely relied on the value of the overall enterprise, this sort of jurisdictional fragmentation is likely to produce very arbitrary (and likely inefficient) results.

Open-Source Law Review Publication Contracts

I know this isn't standard Credit Slips fare and will probably be of little interest to most readers, but it's of reasonable concern to academic readers:  the lack of standardization among law review publication contracts. 

The Current Paradox

I'm spending the week at the INSOL conference in Vancouver. I think it is important for academics to interact with the "real world" on occasion, to make sure that one's scholarship does not become too ivory tower. And the INSOL events are especially good since they provide a chance to interact with the global insolvency community.

But I have noticed that many of the panels could benefit from an "outside voice." In particular, during one panel I attended today two points were made:  (1) government intervention in the restructuring process increases uncertainty and makes life difficult for senior lenders in particular (lots of agreeing nods) and (2) because of "deleveraging," banks are essentially not making loans to distressed companies (more nods here).  Well, given point 2, either you are going to have government intervention or you are going to have corporate failure on a massive scale. Given the social dislocation associated with the latter option, politicians have strong incentives to embrace intervention (especially those in the majority, who will face the blame for said dislocation).

Too Big to Fail? Is Obama Proposing an Implicit Government Guarantee of Goldman Sachs' Liabilities?

Secretary Geithner was quoted by the Times as saying that from now on, “no one should assume that the government will step in to bail them out if their firm fails.”

Sorry, but that's just not credible.  The Obama financial reorganization blueprint basically says that there are Tier 1 FHCs financial institutions that get special regulation) that are too-big-to-fail (TBTF).  For these (today 19?) companies that the administration has decided are guaranteed a bailout.  The blueprint refers to a guarantee of liabilities only passingly in its section on special resolution powers for Tier 1 FHCs, but given how we've handled the GSEs, AIG, Bear Stearns, etc., its hard to believe that we wouldn't guarantee the debts of a failed Tier 1 FHC--the whole nature of being a Tier 1 FHC is that there is systemic risk from its failure to honor debt obligations. 

This means that for Tier 1 FHCs, their debt is as good as guaranteed by the U.S. government.  The implications of this are far-ranging and serious; I haven't worked through all of them, but here's what jumps out at me:

Making the GM sale hearing a bit more contentious?

I'm still thinking about the Supreme Court's opinion today, which held that the terms of the 1986 Manville plan are binding even if they exceeded the bankruptcy court's jurisdiction, but my initial take is that this makes the fight over selling the GM assets "free and clear" more important, because the tort creditors can't count on being able to challenge the order after the fact.  Of course, I've already argued that current tort claims probably are subject to §363(f), but plainly the tort claimants (and perhaps others) don't agree.

ABA Consumer Protection Conference: Credit Slips out in Force

Angie Littwin and I will be speaking on a very timely panel about the need for a consumer financial product safety commission Consumer Financial Protection Agency (CoFiPro=Coffee Pro?) at the ABA's Section on Antitrust 's Consumer Protection Conference at Georgetown.

The conference features appearances by numerous current and former FTC and state officials--including a greeting by the incoming head of the Consumer Protection bureau, my GULC colleague David Vladeck--as well as prominent private practitioners. Sessions cover issues including internet issues (with special attention to the perhaps surprising scope of Section 230 of the CDA), privacy, the use of empirical evidence, and the different standards applied by different regulators, including the FTC, NAD, and courts applying the Lanham Act.

Just to play with acronyms for proposed Consumer Financial Protection Agency: CoFiPro=Coffee Pro? or CoFinPro=Coffin Pro?

Skin in the Game

The proposed skin-in-the-game requirement for securitization strikes me as misguided, no matter how its structured. Different industries use securitization for different purposes, and while skin in the game might not have much of an impact in some, it runs contrary to the (legitimate) purposes of securitization in others.

Some industries securitize primarily to gain off-balance sheet and immediate revenue-booking accounting benefits and because it is a cheaper funding source than other methods. Industries like these often have significant skin in the game (e.g., the credit card industry, where a 7% vertical slice is the typical minimum requirement and it's usually much higher). Other industries, like non-GSE mortgages securitize primarily to shift credit risk. The whole point of securitization is not to have skin in the game.

The skin in the game requirement is being driven by the experience in mortgage securitization, not other types of securitization, and imposing a skin in the game requirement probably won't do much to non-mortgage securitization, where there might already be more than 5% retained interest. But for housing finance, skin in the game is really counter productive.

A Further Thought on Securitization Regulation

As I noted in my earlier treatise post, the Administration has proposed requiring all originators to keep a stake in each asset securitization, to ensure that they have "skin in the game."  In particular, the Administration proposes requiring retention of a 5% stake, and would further mandate that the stake remain unhedged.

The last bit troubles Felix Salmon, who seems to think that makes CFOs life difficult.  Perhaps, but should we care?  In particular, there clearly is some tension between this proposal and traditional risk management.  But at present, originators can use CDS to give themselves a zero or even negative stake in the outcome of the securitization.  In such a world -- and that's the world we'll return to if we simply restart the securitization market without change -- the downward spiral of asset quality I described in my prior post in essentially unstoppable.

Sure investors will be "smart" now, and they won't buy low quality assets with the same mania, but individual investor moderation does only little to address the systemic issues that come from excessive securitization.  Only an unhedged originator stake can correctly align incentives.  I doubt 5% is a sufficiently large stake; but it's a start, indeed any number greater than zero is a move in the right direction.

When Is a Market Too Big?

The emerging details of the Administration's securitization regulations have got me to thinking about an issue I first began to consider with regard to CDS. Namely, at what point do apparently useful tools allow a market to become "too big," in the sense that the market begins to generate systemic risks. And what can be done about it?

In the case of CDS (credit default swaps, see here and here), the existence of CDS allows for a magnification of the underlying debt market in ways that may create systemic risks. For example, although I have generally argued that GM would have been better off filing for chapter 11 a few years ago, doing so would have have had the potential to result in several collateral failures of financial institutions, because of the massive amount of then-outstanding CDS in which GM was the "reference entity." Indeed, a simple downgrade of GM's rating during this period almost completely unhinged the CDS market. In this respect, GM's slow glide into bankruptcy court was actually helpful, in that it allowed the market to "burn off" a lot of outstanding CDS, which simply expired before the bankruptcy.

California and Default

As I noted previously, a default by California would have serious repercussions for the larger national and even global economy. Extreme budget cuts in California to avoid such a default could also have serious effects on the larger economy, given California is such a big part of the U.S. economy.

Given this conundrum, the one obvious way out of the problem would be for the federal government to loan California the money it needs to balance it budget without radical program cuts. But I have previously noted that the Administration has political reasons to avoid getting further entangled in "bailouts," particularly when doing so will aid a Republican governor who is likely to have little ability to "call off" the members of his party in Congress.

Thus, it is perhaps unsurprising that the Washington Post reports that the Administration has denied California's request for federal aid. But this bears watching, as I suspect -- baring a truly marvelous economic recovery -- the Administration will be forced to revisit this issue again.

California is, after all, facing a $24 billion budget shortfall. It is going to be very hard for the State to close this gap without some serious effects on the broader economy. For example, the Governor has proposed ending the State's welfare program, all financial aid for college students, and its program that provides medical insurance to children of low-income parents. I'm sure my personal-bankruptcy savvy co-bloggers can anticipate what effects that might have on consumer spending, and bankruptcy rates, in California.

Yet another reason not to pack up the stimulus program just yet.

So Maybe Chrysler Was Only Worth $2 Billion After All

The WSJ has the details on what the lenders who supported the deal were looking at.  In short, the "analysis suggests that the $2 billion that the Treasury Department agreed to pay to Chrysler’s largest lenders, including J.P. Morgan Chase, Citigroup and Morgan Stanley, to settle a total of $6.9 billion first-lien debt may have been the best deal those lenders could have gotten."

I told you this wasn't a big deal, despite what all those editorial writers kept say -- I'm going off to be smug now.

The Effect of Legislation of Credit Card Interest Rates...

Is a drop? 

According to Bankrate.com, credit card interest rates stayed steady for low-rate cards and dropped for some high-rate cards.  So what this means that the Credit CARD Act has resulted in lower interest rates, right? 

Of course not.  That's a pretty obvious ex-post ergo propter hoc argument that doesn't proove anything.  But you can bet we'd see exactly the same sort of argument being made if rates had gone up (and we assuredly will the next time rates do go up).  No conclusive evidence need apply.  Never mind that the legislation hasn't even gone into effect yet.  Flipping through the cable stations, I saw no less a luminary than Mike Huckabee on Fox saying that one of his interviewees was having trouble getting credit because of the legislation.  I believe in anticipatory effects, but really, what issuer would shift away from a juicy business model a minute sooner than required? 

The Growing, Unseen Chapter 11 Wave

Over the weekend, Six Flags -- the owner of Magic Mountain in Los Angeles and other amusement parks -- filed a chapter 11 petition in Delaware. This morning, the Extended Stay hotel chain filed a chapter 11 petition in New York.  All of this is part of an increasing wave of large corporate chapter 11 cases that has been obscured by GM, Chrysler, and Lehman Brothers. Magic Mountain lost its appeal once I left my teens (never did get there) and I'm not sure I've ever stayed at an Extended Stay hotel, but both of these debtors have billions of dollars in assets and thousands of employees. That is, these companies have serious implications for the future of chapter 11 and the larger economy.

Indeed, according to bankrutpcydata.com, already there have been thirty-five chapter 11 cases filed by debtors with assets of more than $1 billion this year. In 2008 there were not that many large cases in the entire year. Chapter 11 cases of this size can be expected to continue to develop throughout the year and into next year, as we continue to work through a "bulge" in senior debt that newly moderate lenders will refuse to refinance and a series of problems in private equity. And the "tail" of this chapter 11 boom can be expect to persist for at least a couple of years past the petition date -- that is, into 2012.

Congress will probably never hold hearings on whether these companies should be allowed to use §365, but I think we can expect that the collective, collateral effect of these cases on trade creditors, landlords, and employees will equal, if not exceed, the effects of the better-known cases. This will in turn create a ripple of small business bankruptcy cases that will be completely unseen by the financial press and most academics, including myself.

Illustration from "Editor," all rights reserved.

GM Retention Applications

The key retention applications were filed on Friday, and by the morning we can expect the inevitable gasping story about how Harvey Miller bills at $950 an hour.  The press keeps doing this, and the big firms have no reason to stop them, given that most of the cost of a case comes from the middle of the billing structure.

Reviewing the Weil application, I was struck by how dreadfully dull retention applications really are. I mean, the Weil GM application is essentially the same basic application that Weil/Skadden/etc. have been filing for at least 15 years now -- I have the binders in my office to prove it.

Why hasn't this been reduced to one page ("We want to retain Weil Arps & Ellis to do the typical things that debtors' counsel does in big chapter 11 cases. They charge a lot, but we think they're worth it. As shown by the attached, they meet the requirements of §327(a).") with an attached declaration that has the case-specific (i.e., interesting) information?

Claim or Interest -- part 2

In my prior post on this topic, I examined and rejected the argument that reference to §1141 helps us understand §363(f), inasmuch as the term "interest" is used in different ways in the two sections.

But what about the core argument that the tort claimants have made, namely, that "interests" means "liens" in §363(f), and thus it is impermissible for the bankruptcy courts to allow the sale of automaker assets free of successor liability claims, which are clearly not liens. Recall the objection filed by the "tort claimants and consumer organizations," where it was argued that §1141:

is much broader than that of Section 363(f) by including “claims”, not just “interests in property,” i.e. liens.

earlier in the same objection, the argument is even more plain:

the language of Section 363(f), read in conjunction with other provisions of the Bankruptcy Code, is clear.  It establishes that “interests in property” which can be foreclosed under Section 363(f) are liens, mortgages, money judgments, writs of garnishment and attachment, and the like, and cannot encompass unliquidated successor liability claims.

The strongest argument against equating "interests" with liens in §363(f) comes from subpart (f)(3), which applies if "such interest is a lien." If we adopt the tort claimants' argument, this provision nonsensically states if "such lien is a lien." I submit that a more plausible reading of §363(f)(3) would suggest that "interest" as used in §363(f) includes liens, but it is not limited to liens. This reading is also buttressed by §362(d)(4), which speaks of recording "interests or liens" in real property.

But the second quote from the tort claimants does recognize a somewhat broader reading of "interests" in §363(f), while rejecting the inclusion of "unliquidated successor liability claims."  Of course, the right to assert a successor liability claim is not an "unliquidated successor liability claim" from the debtor's perspective. Unliquidated or not, it is not even a claim against the estate -- rather, it is only properly termed a claim against the buyer of the debtor's assets. From the perspective of the debtor's bankruptcy estate, a successor liability cause of action is a right that certain creditors hold, but it is not a right or claim against the debtor.  Correctly conceptualizing the right to bring a successor liability claim not only further undermines the analogy to §1141, but also properly focuses us on the issue of whether this right could be an "interest in property."

Claim or Interest -- part 1

One of the key disputes in both the GM and Chrysler cases has been the use of §363(f) to sell the assets "free and clear" of successor liability claims.  The normal rule is that a corporation that buys another corporation's assets does not buy its liabilities, unless it expressly contracts to do so.  In this context, successor liability typically refers to the "product line" exceptions developed by the California and Michigan Supreme Courts, that allow the assertion of product liability claims against the buyer, notwithstanding the normal rule.

The primary argument against the debtor's ability to sell its assets free of the plaintiff's ability to assert a successor liability claim against the buyer is that §363(f) refers to sales free of an "interest in such property," while §1141, the chapter 11 discharge, relieves the debtor of "claims and interests."  For example, in the objection to the Chrysler sale filed by the "tort claimants and consumer organizations," it was argued:

Moreover, the language of Section 1141 of the Bankruptcy Code confirms the propriety of a narrow reading of Section 363(f).  Section 1141, which governs the disposition of estate property in a plan of reorganization, broadly states that property dealt with in a plan is free and clear of all “claims and interests of creditors.” 11 U.S.C. § 1141(c). This language is much broader than that of Section 363(f) by including “claims”, not just “interests in property,” i.e. liens.

I do not find the comparison of these two provisions particularly helpful, because it seems clear that the word "interest" is used very differently in the two sections.  Indeed, the Bankruptcy Code uses the word "interest" or variations thereof (e.g., disinterested) more than 300 times, often in very different contexts. The most obvious example being interest paid on a debt, e.g., §362(d)(3)(B), a use which would seem to be of little relevance to this discussion.

Bank Regulatory Arbitrage and Deregulation: the Number of Bank Regulators Matters

One of the key points of debate over financial institution regulation reform is how many different bank regulators there should be and the extent of their respective bailiwicks.  Some argue that the number of regulators is a secondary issue.  It's not.  It's a first tier concern.  A critical flaw of our banking regulation system is the ability of financial institutions to engage in regulatory arbitrage, which has a corrosive effect on the quality of bank regulation.  As long as there are multiple federal banking regulators supervising essentially equivalent financial institutions there will be regulatory arbitrage, which will inevitably undermine whatever statutory framework Congress sets forth for financial institution regulation.

A Final Thought on the Chrysler Sale

A recent exchange with a commenter on the blog lead me to this conclusion: doesn't the argument that the consideration going to the Unions should have instead gone into the estate, for the benefit of the secured lenders, amount to little more than an argument that the buyer of the Chrysler assets (backed by the government) should have overpaid for the assets?

Next Up, Ford

So now that Chrysler's closed and GM's speeding along, where does that leave Ford? Well, with still about $30B in debt for starters. But this raises a theme in corporate bankruptcy of dominated industries like automotive and airlines. Will Ford be "forced" to file out of an economic peer pressure?

My initial hunch -- and it's just a hunch -- is no, at least not yet. Among other reasons, I'm just recalling the airline rhetoric earlier this decade about how all the airlines would have to follow United in. But they didn't all go in, did they?  I think American stayed out -- and has its restructuring been impeded, or is it still holding its own (since it was able to use the filers' labor negotiations to its piggyback benefit presumably)? Won't this be the same with Ford? 

Interchange Legislation Overview

It's summer, so it must be interchange season here in DC.  A trio of interchange-related bills have been introduced (or really reintroduced) in Congress.  First, there is the House version of the Credit Card Fair Fee Act of 2009, H.R. 2695, sponsored by Representative Conyers.  Second, there is the Senate version of the Credit Card Fair Fee Act of 2009, S. 1212, sponsored by Senator Durbin.  And third, there is the Credit Card Interchange Fees Act of 2009, H.R. 2382, sponsored by Representative Welch.  I think it is useful to summarize what these bills would do and their approaches to interchange regulation. 

Another Chrysler Appeal

This time a dealership, appealing from the bankruptcy court's order authorizing the rejection of the dealership agreement. I don't get the fight these dealers are putting up -- once the sale closed, staying with "old Chrysler" does not strike me as an attractive alternative.

But perhaps the appeal is to clarify the effect of the rejection on the dealers state-law remedies. Nonetheless, might be time for some cost-benefit analysis -- and keep in mind every appeal means more professional expenses for the debtor and less chance of any recovery for the unsecured creditors. 

UPDATE:  Another appeal from a different group of dealers.

Those wacky members of Congress

I assume the Automobile Dealer Economic Rights Restoration Act of 2009 (H.R. 2743) is going nowwhere fast, but I do appreciate that a few members of the House were kind enough to provide this bankruptcy professor with some interesting reading on a rainy Thursday afternoon in Newark.

Section 3(a) of the bill provides that "[i]n order to protect assets of the Federal Government and better assure the viability of automobile manufacturers in which the Federal Government has an ownership interest" said manufacturers "may not deprive an automobile dealer of its economic rights and shall honor those rights as they existed" on the eve of a manufacturer's bankruptcy case.

Now the bill does not actually reference § 365, and one could easily question the premise of the opening clause, but I assume that this is intended to "unreject" Chrysler's unwanted dealership agreements, and thwart GM's expected move reject some of its own dealership agreements.

The thing that makes this amusing is that section 3(c) of the bill expressly states that if enacted it will have no effect on the sale orders in either chapter 11 case. In short, the dealers who are "saved" by this bill will have the dubious privilege of being dealers for liquidating corporations that no longer manufacture cars. That is, the bill does not to alter the reality that the dealers' contracts are with "old" GM and Chrysler and they are being left behind. As the dealers will say when they realize this -- "swell," or words to that effect.

Finally, there is a part of me that hesitates to point out this flaw, because, as I have argued, chapter 11 already suffers from excessive Congressional tinkering that has made it increasingly difficult to actually reorganize companies under the Code. I would also think that any attempt to do what Congress seems to want to do here might run afoul of due process and separation of powers, particularly as applied to Chrysler -- although I'm getting myself pretty far out on the constitutional law limb here and will retreat to the wonderfulness of the Bankruptcy Code at once.

UPDATE:  One way around the statutory problem I identify is to read this as an attempt to create some sort of successor liability in the reorganized companies for these contracts, essentially assigning them without using §365.  The constitutional law issues, whatever their merit, would still remain.  And I think Fiat (and maybe the Canadians) might have some problems with this -- it amounts to changing the deal after it's been closed.

Oakland = GM?

Where have I heard this before:

Oakland City Council members may have privately bandied about the possibility of the city filing for bankruptcy, an unusually rare event in U.S. history. But none says it's likely, and Mayor Ron Dellums virtually ruled it out Tuesday.

"Bankruptcy is not a strategy that has been seriously considered, nor is it being pursued at this point," he said in a statement.

Full story here.  At least the mayor qualifies his answer, unlike GM's prior management.

What Did the Indiana Funds Want?

Felix Salmon wonders about this editorial and why anyone would pay White & Case lots of money to contest either the Chrysler or GM deals.  The editorial is easily dispatched as the usual jumble from people who can't be bothered to understand the actual deal structure. 

The question of what the Indiana funds were up to and why anyone might want to hire White & Case to do the same thing in GM, where the dissenting creditors have an even weaker position, is less obvious. 

The Indiana funds apparently paid $17 million for a stake in Chrysler's secured loan that had a face value of $43 million. That is, from inception they were investors in distressed debt and presumably understood the risk associated with that. Today they received $15 million as their share of the sale proceeds. That's exactly what they would have received on the first day of the case, but along the way the Indiana funds thought it might be nice to run up a bill with White & Case that must easily top $1 million, pursuing some arguments of dubious merit. Why do it?

GM's Bondholders

The "Unofficial Committee of Family & Dissident GM Bondholders" -- a group comprised of 3 individuals who hold 0.0085% of the outstanding GM bonds -- has moved to become an official committee.  I have never seen a case where a single security has been subdivided into multiple committees (the bonds are already represented on the general committee).

Among the issues the F&D folks raise is the possibility that some of the bondholders who agreed to support the revised deal with GM might have CDS protection (sometimes referred to as a "basis trade"). This is an issue I discussed in my article on CDS and chapter 11 -- the possibility that hedged creditors might support different plans than "normal" creditors, given their downside protection -- and it will be interesting to see if at the sale hearing the bankruptcy court wants to know more about the bondholders who are supporting the sale.

California and the Argentine Option

As a person who still considers Los Angeles home, I often find myself reading the Los Angeles Times webpage.  Yesterday I saw that Los Angeles County's recent note offering got a lower than expected credit-rating, in part because of the State's financial problems.  A county official quoted in the article explained that S&P had based the rating on a "worst case scenario."  My initial response was, are they doing that now?

Several people have asked me whether California might not follow GM into bankruptcy court.  The easy answer to that is "no," since states, unlike cities and counties, can't file under the federal Bankruptcy Code.

But the financial press has also picked up on the issue and noted that California might be forced to default at some point this year if it becomes impossible to continually refinance its outstanding debt. In a recent Bloomberg column, Kevin Hassett breathlessly proclaims that "California leads nation to bond default abyss." He goes on to trace the problem to California's high corporate and personal income taxes, and then makes the entirely predictable argument that this shows that federal taxes should not be raised either.

Of course this ignores the fact that California has high corporate and personal taxes because its property taxes are extremely low. Proposition 13 instituted a kind of rent control scheme for property taxes in the late 1970s that caps increases in property taxes save for when the property is sold.  In a state like California where property values increased much more rapidly than inflation over the past few decades, and the state population has been rapidly increasing, this provided a windfall to generally older, long-time homeowners, that the legislature made up by increases in other taxes.

But what about the basic question of a California default. Could it happen? Certainly. It has happened before.

42 Days and Out

The Chrysler sale has closed.

Now the rejected dealers, underpaid secured lenders, and other unsecured creditors can file their proofs of claim and wait to see if there is anything left in "old Chrysler" to make any sort of a distribution.  If there is not some hope of value in the near term, we may be looking at a conversion to chapter 7.

My own research shows that liquidation in chapter 11 is highly preferable for the unsecured creditors, as the mean and median distribution in chapter 7 is 0%.  Of course, that option is only available if there are funds to pay for it -- Jones Day is not going to work for free.

Lubben Is Around to Stay

On behalf of all the regular Credit Slips bloggers, it is a pleasure to announce that Professor Stephen Lubben is joining us as a regular blogger. In associating himself with us, we are pretty sure that Lubben has thereby flunked the Groucho Marx Test. One of the other regulars wanted to convince Lubben there was some sort of equity buy-in on a small blog that features no advertising. It is best that person remain anonymous given our many posts about various forms of financial scams. Stephen, you and I instead will need to talk about the $20 blog posting fee that needs to be sent to me after each post.

As regular readers know, Lubben has been guest blogging for the past several weeks and has been focusing on the Chrysler and GM bankruptcies. Lubben's focus on corporate bankruptcy substantially adds to our existing expertise in that area. If you're not familiar with Lubben's academic work, take a gander at his SSRN page. Among his many interesting articles are a number of pieces on credit default swaps, a topic on which Lubben was writing before they got into the news.

Welcome aboard, Stephen.

In Other Chrysler news

The bankruptcy court entered an order today that allows the debtor to reject more than 700 dealership agreements, effective today. The order includes the following slightly odd finding:

To the extent that any Dealer Laws conflict with the terms of this Order or the impact of the rejection of the Rejected Agreements under the Bankruptcy Code and applicable case law, such laws are preempted by the Bankruptcy Code, pursuant to the Supremacy Clause of the United States Constitution.

Essentially this is a restatement of the law of preemption.  A broad restatement. Not really a finding. More relevant to the dealers, the bankruptcy court retains jurisdiction over "all matters relating to the implementation, enforcement and interpretation of this Order." That is, don't even try to go to state court on this.

The order indicates that the court will issue an opinion on this in the near future. Just in case some other debtor wants to cite it.

Chrysler Appeal -- Let the Closing Commence

The Supreme Court has lifted the stay.

The Absolute Priority Rule?

Part of the debate about the GM and Chrysler cases has turned on the putative violation of the Absolute Priority Rule. I've previously argued that the actual deal structure in both cases contains no such violation, because the value going to the unions is not the debtors' and the senior lenders have no claim on it.

But there is also a good deal of unreality in the notion that the Absolute Priority Rule is a hard and fast rule, never to be violated. Professor Epstein snidely notes that President Obama is "no bankruptcy lawyer." Well neither is Professor Epstein, and one of the key problems with much of the debate about these cases is that the most vocal commentators have failed to acknowledge that the Absolute Priority Rule is routinely violated in modern chapter 11 practice.

Prognostications on Appellate Procedure

Justice Ginsburg's stay should not be over-read.  She is exercising her single justice authority to accord more time for the full court to pass on the petition.  The Supremes have a well oiled procedural machinery to deal with quick-response stays and appeals (capital cases), so this sidebar on June 15's significance is just for them to figure out how long they have to make a decision without it being moot.  My tea-leaf read is that if they decide to hear the appeal -- which is warranted only weakly in my opinion vis. traditional grounds for cert. -- then they will enter a full stay pending appeal (and that appeal may well be accelerated).  But if they decide that there's not enough meat to warrant the granting of the cert petition, they'll just lift their stay as a "pocket affirmance."

And My Brother Lubben is surely right that the only thing legally important here is the tort claimants, and they're off on the sidelines right now.

Nevermind that stuff our CEO said

Fiat notes that the Chrysler deal, by its terms, automatically expires on June 15th if not closed.  Lyle at SCOTUSblog has more on the responses to the Indiana Funds' filing this morning.

GM, Chrysler, and Future Tort Claims

Steve Jakubowski continues his interesting ruminations over the Chyrlser sale, noting that he doubts that Justice Ginsburg is "losing sleep over whether the sale is a sub rosa plan or whether the absolute priority rule was violated."  I agree, although clearly lots of other chapter 11 professors do not.

Steve goes on to state that the big issue in the appeal is the treatment of tort creditors -- noting that even Credit Slips wild man Professor Lubben agrees with regard to future tort claimants (gasp!).

Well, I do agree that future tort claimants have the strongest argument of all the appellants (and strangely, they are receiving the least press attention), which is why I was very interested to see that there has been a motion to appoint a future asbestos claims representative in GM.

It might well be in GM's interest to agree to this motion, since the presence of such a representative might increase its ability to address these claims in the sale order. On the other hand, there is an argument to be made that the tort plaintiffs might have been better off not filing this motion, since it will make it harder for them to assert successor liability claims against "new GM," an entity that might actually be able to pay such claims.

That Wasn't So Smart

Fiat's CEO flushes his company's leverage, saying Fiat won't walk away from the deal even if it goes past June 15, potentially complicating things for Chrysler's attorneys, who have argued that any delay will "kill the sale."  The Obama Administration can't be too pleased either, since they may be forced to play the heavy, again.

Chrysler Appeal -- Stay Edition

Justice Ginsburg has entered a temporary stay that essentially extends the 4pm deadline, without telling us more.

UPDATE:  My friends at SOTUSblog (whom I've never met) have more on the order. They describe the order as having "no legal significance."

Why It Will Be Good To Be a Bankruptcy Lawyer . . . .

. . . . or at least a chapter 11 lawyer, even after the Chrysler and GM sales close.  Assuming, of course, the Supreme Court does not outlaw 363 sales.

Chrysler Sale Order Appeal -- U.S. Weighs In

The Solicitor General's memorandum urging Justice Ginsburg to deny the request for a stay is here.  The pleading highlights the difficulties the appellants will have overcoming the bankruptcy court's findings of fact.

The pleading also rejects my suggested interpretation of Iridium, arguing instead that the 2d Circuit embraced Braniff in that opinion. The Solicitor General then goes on to argue that the bankruptcy court court found that this was not a sub rosa plan, and that finding is correct. This is a reasonable interpretation of Iridium, and avoids the creation of a circuit split, which might lead to Supreme Court review.

The Politics of GM and Chrysler

There is no doubt that both GM and Chrysler are highly political bankruptcy cases, and the Politico blog has a new story that examines the Republican party's efforts to use GM to attack the President.  In part this ability to use these cases for political ends reflects GM's long history of saying the right things while doing the same old things, a point I have made before.  It also reflects the degree to which GM, unlike most other debtors, has managed to alienate a few generations of consumers with the products it put out in the late 1970s and throughout much of the 1980s.  For people who don't rely on GM or Chrysler for their jobs, these companies should have long ago been brushed aside by the invisible hand.  Saving them is therefore bound to be controversial, since support for the automakers has been concentrated into a narrow region of the country.  The automakers can blame themselves for creating this situation.

But most importantly, the political nature of these chapter 11 cases also flows from the reality that no politician would have allowed companies of this economic magnitude to fail during a severe economic crisis.  And I do believe that these cases, in this economic context, were inevitably bound to have significant political involvement, and if the Republicans had won the White House last year, it would be the Democratic party who would now be complaining about "corporate welfare" while President McCain bailed out GM (perhaps favoring dealers instead of the unions).

Yet another reason why it would have been preferable for the automakers to have addressed their problems a few years ago.  Of course, there was no stakeholder interested in compelling such a result at that time.  In short, there was a kind of market failure, perhaps caused by the shear size of these debtors.

 . . . there goes my invite to next year's ALEA conference.

What's Going On?

Throughout the Chrysler case, the Indiana Pension Funds have asserted that they hold $42 million of the senior debt.  But in their application last night (at page 6), asking the Supreme Court for a stay, they assert they hold $100 million of the senior debt.

Have they been buying debt? To what end?

Chrysler's Sale Order & Filene's Basement

At pages 20-21 of their application for a stay of the bankruptcy court and 2d Circuit's rulings, the appellants state that the Supreme Court will want to consider their appeal because:

This matter also raises an important issue of first impression: whether, and to what extent, section 363 of the Bankruptcy Code may be construed to permit a debtor, even under exigent circumstances, to deal with substantially all of its assets and liabilities without complying with the Congressionally-mandated procedural and substantive protections specified in sections 1122-1129 of the Bankruptcy Code for such transactions.

As I noted yesterday, the appellants have become increasingly open about the broad implications of their challenge to the Chrysler sale. And for this I'm glad, as I have also indicated my impatience with those who pretend that the use of a 363 to shorten a chapter 11 case is some sort of novelty.

But consider the implications of this appeal for a truly ordinary chapter 11 case, like that of Filene's Basement. Last week Filene's Basement sold most of its assets to a bidder backed by Men's Warehouse, after entering chapter 11 in May.

The timeline is essentially the same as in Chrysler, and the winning bidder intends to keep most of the stores operating -- which leads to the very same issues of preferring some creditors (those needed for ongoing operations) while others are "left behind" in old Filene's Basement.

If the Supreme Court were to adopt strict rules against 363 sales, many, many large chapter 11 cases would become chapter 7 cases. The entire chapter 11 bar has a big stake in the outcome of this appeal.

Chrysler Sale Order Appeal -- Supreme Court Edition

The appellants have asked Justice Ginsburg to stay the closing of the 363 sale so that the Supreme Court can consider the issues in the appeal.  The SOCTUSBlog has good coverage of the various pleadings. I have previously indicated that the appellants bankruptcy-law arguments are not particularly compelling, save for perhaps the issue of barring future tort claims.

Interestingly, the appellants rely on several op-ed pieces to support their application for a stay.  I have questioned the analysis in some of these op-eds here.

In a large part the bankruptcy part of the appeal to the Supreme Court is based on the old sub rosa plan argument. I believe it was Judge Sack who noted, in Friday's arguments before the 2d Circuit, that using the term "sub rosa" really does not add much to the analysis. Essentially, the key question is whether a 363 sale becomes so much like a plan that the there should have been voting and a disclosure statement.

The TARP issues strike me as the issues more likely to interest the Supreme Court.  On the other hand, these issues may be the most fragile ones in the appeal because it is not clear that the appellants have standing. Moreover, as the 2d Cir. seemed to recognize on Friday, there is a sense in which the TARP issues are kind of "tacked on" to the appellants arguments. The Canadian funding of this case is plainly not subject to this challenge, and even if the challenge were successful, it's not clear what role this would have in the bankruptcy case. Indeed, a "win" on this issue would arguably harm the appellants more than losing this appeal could. A withdrawal of Treasury funding would bring a quick end to Chrysler's chapter 11 case -- and leave a chapter 7 trustee with a daunting task.

Link to Full Medical Bankruptcy Article

On June 5, CBS ran a story, "Medical Debt Huge Bankruptcy Culprit." CBS News story. Not only is it an interesting write up, but there is a link to our (Himmelstein, Thorne, Warren and Woolhandler) full article, "Medical Bankruptcy in the United States, 2007: Results of a National Study." Full text of research article. So if you are interested, you can read the article in its entirety.

Credit Card Line Reductions and Eliminations

In the coming months and years we are likely to hear the banking industry and its supporters blame the Credit CARD Act for reductions in consumer credit availability.  That might end up being the case, but we should be skeptical of the claim (and of the magnitude asserted) until we see some data that supports such a finding.  The fact of the matter is that there is already a tremendous credit contraction going on in the credit card space.  The chart using data from Carddata.com shows the annualized rate at which card issuers are closing down accounts at their own initiative.  As of April, it was 19.01% (I understand that to mean that in April about 1.6% (=.19/12) of all accounts were closed).  Remember, this is account closings, not credit line reductions, which are occuring on top of the account closings. 

In other words, a fair conclusion is that even without the legislation, we'd be seeing credit lines cut and eliminated right and left.  That means it just won't do to rest on priors and fall back on the syllogism of more regulation means more costs means less credit available.  To be fair, there could be an anticipatory effect showing up in the account attrition data.  But the legislation doesn't start to go into effect until late August, and a lot of it doesn't go into effect until 2010.  So a profit maximizing issuer would probably want to close the accounts that are profitable under current law, but not under the new law on the day before the legislation goes into effect, rather than a few months ahead.

 

The latest Consumer Bankruptcy Project publication: Medical Bankruptcies

Along with my co-authors (Himmelstein, Warren and Woolhandler), I would like to share with the readers of Credit Slips some of the highlights of our most recent publication from the Consumer Bankruptcy Project 2007: "Medical Bankruptcy in the United States, 2007: Results of a National Study." (Published June 4, 2009, by The American Journal of Medicine.)

The 2d Circuit

As you have no doubt have heard by now, and as I had long expected, the 2d Circuit affirmed the bankruptcy court's decision in Chrysler, essentially incorporating the Bankruptcy Judge's opinion by reference.  The courtroom was packed -- at least 300 people in attendance -- and there was notable surprise when the panel announced at the end of argument that they would take a ten minute recess and return.

Clearly this not only helps Chrysler -- assuming the appeal to the Supreme Court is unsuccessful, as I expect it will be -- but also GM, which is following the same basic template.

One of the most interesting parts of the hearing, from my perspective, occurred when the attorney for the Indiana Funds seemed to argue for Lionel to be overturned and for the appellate court to reduce the bankruptcy court's discretion in the area of 363 sales. Although the court clearly did not accept his invitation, that moment was the closest the appellants got to acknowledging just how significantly they needed to change chapter 11 practice if they were to win.

Shocked, Shocked

Steve Jakubowski has a great new post up summarizing the bankruptcy court's decision in Chrysler, and in it he makes plain an argument that I've only referred to obliquely. In particular, in both GM and Chrysler many of the banks, hedge funds, and other institutional creditors are getting a taste of their own medicine, and they hate it.

In the past decade lenders have learned how to play the chapter 11 game.  They lock up all of the debtors assets with security interests and make strong demands, like quick 363 sales and "roll overs" of pre-petition debt into post-petition credit lines, as the price for allowing a reorganization case to even happen. In this way, the Treasury is simply playing the institutional lenders' game -- exerting a lot of control over the chapter 11 process as the result of the DIP financing it is providing.

Thus, when I see these same institutional investors acting like Captain Renault, I'm skeptical.  And when I see the financial press suddenly expressing shock at these practices, I say "where have you been?"

Federalist 44

As others have noted, the Indiana Pension Funds invoke the founding fathers in support of their claim that the government is rolling over their rights as creditors.  This part of the brief particularly stands out:

As James Madison wrote long ago in language that is still markedly salient today: “laws impairing the obligation of contract are contrary to the first principles of the social compact, and to every principle of sound legislation.”  The FEDERALIST No. 44 (James Madison).

I'm not a constitutional law expert, but this quote seems out of context to me.  Federalist 44 deals with the Contract Clause, the prohibition on the States passing laws impairing contractual obligations. Congress' power under the Bankruptcy Clause is not subject to this limitation. The Supreme Court, under Chief Justice Marshall, explained the relationship between the two clauses in 1819 in Sturges v. Crowninshield:

Without entering further into the delicate inquiry respecting the precise limitations which the several grants of power to congress, contained in the constitution, may impose on the state legislatures, than is necessary for the decision of the question before the court, it is sufficient to say, that, until the power to pass uniform laws on the subject of bankruptcies be exercised by congress, the States are not forbidden to pass a bankrupt law, provided it contain no principle which violates the 10th section of the first article of the constitution of the United States [the Contract Clause].

Indeed, it is arguable that a Bankruptcy Code would be unworkable, or at least of limited value, it if could not impair the obligations of preexisting contracts.  And similarly, seen from the perspective of those founding fathers who saw debtor-creditor law as an important part of the national economy, it makes perfect sense that the States' ability to atomize debt collection law would be restricted.

As Seen on NPR's Fresh Air . . . .

I'm fond of saying that I have a face made for radio, granted not the most original line in the world but maybe that it's me and not radio. Check out Credit Slips blogger Adam Levitin grinning from ear to ear on a story page for his appearance on NPR's Fresh Air. Adam was there to discuss the recently enacted Credit Card Accountability, Responsibility, and Disclosure Act. I'm sorry that I did not know about this show in advance as I always learn something when Adam talks or writes about credit card regulation (not that I would admit it to him, so let's keep that secret). You can get the stream from the story page.

Chrysler Briefs (copies)

By popular demand, below are some of the key briefs in the Chrysler appeal.  There are about a dozen total briefs in this appeal, but reading these will give you the core arguments.

Download Debtor Brief

Download US Brief

Download Ind Brief

GM's New Chapter

It's not surprising that GM is advertising heavily during the NBA Finals, despite, or perhaps because of, its recent bankruptcy.  But what did catch me off guard is the new slogan I just heard at the end of a commercial:  "Because the only chapter we're focused on is Chapter 1."  I had to look it up online to make sure I'd heard correctly. Was that really a bankruptcy-chapter pun I just heard on prime time TV?

But now I have a different question. Will anybody outside of the bankruptcy world know what GM is talking about? I know bankruptcy is all over the news these days, but still.  What do readers think?

The Chrysler Briefs

Tomorrow at 2pm a panel of the 2d Circuit (09-2311) will hear arguments in the expedited appeal of the Chrysler sale order.  I hope to attend the hearing.

In preparation, I've been slogging through as many of the briefs as possible, and my initial take-away is that there is not much new here. There are essentially two core issues on appeal:

First:  Did the bankruptcy court err in approving the sale?  Subsumed within this issue are the claims that the Chrysler sale was a sub rosa, that the plan violated the absolute priority rule, and that the debtors' assets can't be sold "free and clear" of tort claims under §363(f).

If you've been reading my posts, you know that I believe the sub rosa plan and absolute priority rule issues to be based on either a misunderstanding of the deal structure, and or intentional attempt to confuse the issue. The sale order does not dictate how the the post-sale debtor should proceed with its case, and unless these appellants are attempting to upend typical 363 practice in the SDNY and Delaware, this deal is unremarkable.

For the last ten years chapter 11 cases, particularly in New York and Delaware, have increasingly turned on quick 363 sales, at the demand of senior lenders, with the remainder of the case devoted to handing out the proceeds.  Congress could decide that this is bad bankruptcy policy, but it would be quite a shock to the bankruptcy bar if the 2d Circuit chose this case to suddenly change all that, especially given the predictably dire results of doing so.

The absolute priority rule is also not violated because the value going to the unions is not coming from the debtor.  A purchaser of assets can do whatever it wants post sale, and just because the senior lenders are jealous does not make it a violation of the Bankruptcy Code.  

On the "free and clear" issue, I tend to think that the 2d Circuit will follow the 3d Circuit's reasoning in TWA.

Credit Card Defaults--Piggybacked Underwriting

If you want to get a window on why credit card defaults are soaring, look at credit card underwriting.  There is virtually no income verification in the card industry--all loans are stated income loans (a/k/a liar loans), and we know how well that worked for mortgages (and there's more temptation to lie about a card as a default won't cost you the house). 

The card industry does do some ersatz income verification, however, using credit reports,but this might only exacerbate underwriting problems.  Credit reports only list debts, not income, but card issuers are able to piggyback off the underwriting of lenders that do income verification.  Thus card lenders will look at mortgage debt on credit reports to gauge income levels.  If you have/had a large mortgage, that implies a large income. 

The problem with this style of underwriting is that it relied on mortgages being thoroughly underwritten both in terms of income verification and in terms of mortgage-debt-to-income ratios.  As mortgage lending standards went out the door, so too did card lending standards.  Card issuers ceased to get the benefit of mortgage lenders' income verification and got squeezed as mortgage debt gobbled up an increasing share of borrowers' income. 

To be sure, there are other factors now pushing up credit card defaults to historic levels, unemployment being chief among them and the inability to refinance credit card debt by using home equity, but what amazes me is that even now that we know that mortgages size is a completely unreliable indicator of repayment ability, leading card issuers are still piggybacking off of mortgage underwriting.

May Bankruptcy Filings Climb to Over 6,000 Per Day

According to data from Automated Access to Court Electronic Records ("AACER"), there were over 120,000 U.S. bankruptcy filings in May 2009 or 6,020 for each of the 20 business days in May. That is the first time daily bankruptcy filings have topped the 6,000 mark since the 2005 bankruptcy law was adopted.

The May filing rate represented a 2.8% increase from the previous month and a year-over-year increase of 40.9%. The April daily filing rate had declined by 2.4%, meaning the increase in May just made up for the April decline plus a little more. The pattern for 2009 is consistent with recent years with monthly up and downs through the summer but no consistent increases until later in the year. It is important not to make too much out of the month-to-month changes in the bankruptcy filing rate. It is the long-term trend that matters, and the graph to the right shows how the long-term trend is heading us back toward the daily filing rate before the 2005 law was enacted.

GM & Opel

On the day GM filed, the Times ran a story noting that GM's European division – Opel/Vauxhall – had been “spared” going into bankruptcy by the deal with Magna and some Russian investors.

Are we so certain they were spared?  Sure in the short term European employees and others who rely on GM will avoid some pain, but what about the long term?  The domestic part of GM is talking about dropping over 2,000 dealers, rewriting its labor contracts, massively reducing its debt load and shuttering several plants, all in about a month.  Will Opel’s new owners be able to achieve a similar degree of restructuring in anything close to that timeframe?  It may be my American chauvinism, but my impression is that it will be even harder to obtain a comprehensive restructuring of Opel outside of a bankruptcy process, as the European jurisdictions have much stricter laws regarding the termination of employees, shuttering plants, etc.

As GM and its stakeholders are now learning, sometimes avoiding bankruptcy simply makes the pain worse when it comes.  GM's chapter 11 case would have been much simpler (relatively) two years ago, when the credit markets were open and people where still buying cars.

(I invite the European readers to comment or correct me in the comments or via email.)

Let the Canadians Run It

The Financial Times mentions that Senator Alexander has proposed distributing the U.S. Treasury's stake in reorganized GM to taxpayers. After we all receive our 0.0000003% stake in GM (talk about separation of ownership and control), the Canadians and the UAW will be the controlling shareholders.

I'm not sure the Senator has thought this all the way through.

(and, yes, I know that not every American is a "taxpayer," but you get the point).