Bankruptcy Litigation Blog

With little fanfare, Yra Harris, a veteran trader of Chicago's pits, started blogging his Notes From the Underground last December.  I learned about it last month from a good friend of his, and strongly recommend it to you.  Yra is a frequent guest commentator on CNBC, and one of the smarter guys in the room.

Yesterday on CNBC's Squawk Box, Yra commented on how BAPCPA's changes ended up screwing the banks "good and hard."  He explains that BAPCPA's anti-consumer protection features have had the unintended consequence (see others here, here, and here) of flipping around distressed middle class America's incentives in a way that has multiplied the banks' net consumer losses manyfold.  Pre-BAPCPA, people would file bankruptcy to keep their house and escape their credit card debt.   Now, however, people are instead paying down their credit cards at the expense of their mortgage in order to keep their credit lines available for the inevitable rainy day(s).  Meanwhile, they live mortgage-free for 12-18 months and build up their cash reserves until they're finally forced from their home in foreclosure. 

And so, Yra concludes, the law that has "done more harm to middle class America" than any other single piece of consumer legislation (others concurring here) has "flown back in the faces of the banks and slapped 'em hard," again proving true the old saying, "be careful what you wish for" because, as Yra puts it, "it'll come back at you good and hard!"

 ***

Finally, in case you're wondering where I've been of late, I can pretty much lay my absence at the feet of my three adorable children, pictured above, Zachey, Rockey (Rachel), and Davey.  (Davey and Zachey are now three.  Here's them three and two years ago.)  Every day I'm at work, they call and ask "when's 'D' coming home?"  And when I'm home, they run downstairs with big smiles saying they want to "go in 'D's' car" to the park, the mall, the zoo, the ice cream store, the slurpee store, etc. etc.  Obviously, an excellent reason not to blog!

Thanks for reading.

| Posted By Steve Jakubowski In BAPCPA | 0 Comments |
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Here are my Twitter posts for the past week.  RSS Feeds are also available.

• On remand from SCOTUS, 2d Cir says making Chubb's claims against Travelers subject to 1986 confirmation order violates due process. http://ow.ly/1sbpL

• Debtor's failure to fund self-insured retention (SIR) doesn't excuse insurer's obligation to fund defense costs above SIR. http://ow.ly/1s9Yj

• 7th Cir. reverses Grede v BoNY: Caplin's limits on BK trustee's standing don't apply to post-confirm. liquidating trust. http://ow.ly/1rJxC

• Can a man's ch.7 case be transferred to his first-filed ch.7 affiliate's foreign ct per Rule 1014(b)? This brief says no! http://ow.ly/1rs7e

• Philly News sues lenders to extend DIP maturity:says they are retaliating for investigation of "illegal" taping of pre-BK mtg. http://ow.ly/1r133

• Most notable point in oral arg on my appeal of GM sale: Harvey Miller saying filed proofs of claim total $129B & are mostly products claims.

May your Passover and Easter holidays be meaningful!

Thanks for reading!

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And so, it appears, 19 years of hell for the remaining surviving heirs of J. Howard Marshall II come near an end.  Here's the chronology:

• First, in October 1991, the so-called "courtship" between J. Howard and Anna begins.
• In April 1995, Anna sues J. Howard's son and guardian, Pierce, in Texas Probate Court (amended several times after J. Howard's death) for, among other things, tortious interference with her expectation of support during the marriage and after his death and for fraud and undue influence in connection with J. Howard's estate planning.
• In August 1995, J. Howard dies, leaving her nothing.
• In January 1996, Anna files bankruptcy. 
• In May 1996, Pierce brings a non-dischargeability adversary for defamation.
• In June 1996, Pierce files a corresponding proof of claim in Anna's bankruptcy case. 
• In June 1996, Anna counterclaims in bankruptcy, asserting the same claims she made in probate court.
• In October 2000, the bankruptcy court rules against Pierce on the defamation claims and, in December 2000, it enters a $475 million judgment in favor of Anna on the counterclaims.  Marshall v. Marshall, 253 B.R. 550 (Bankr. C.D. Cal. 2001).
• In January 2001, Pierce appeals. 
• In January 2001, Anna nonsuits her claims against J. Howard's estate and Pierce individually in probate court.
• In February 2001, Pierce files an amended counterclaim against Anna in probate court for declaratory relief to determine her rights to the estate and property of J. Howard and a complaint for a declaratory judgment against Anna and J. Howard's estate that J. Howard's Living Trust reflected his intentions and were valid.
• In March 2001, after a five month jury trial in the Texas Probate Court, the jury unanimously finds that the Living Trust and will were valid and had not been forged or altered, that J. Howard wasn't the victim of fraud or undue influence, that J. Howard had the requisite mental capacity at all relevant times, and that J. Howard had no agreement with Anna to give her 1/2 of all his property.
• In December 2001, the probate court enters final judgment in favor of Pierce on all claims, holding that Pierce was entitled to his inheritance, free from all claims by Anna or Pierce's older brother.
• After the jury verdict in probate court, Pierce moved to dismiss Anna's claims against him in district court on the appeal of the bankruptcy court ruling on grounds of claim and issue preclusion, but the district court denied this motion in December 2001.  Marshall v. Marshall, 271 B.R. 858 (C.D. Cal. 2001).
• In March 2002, the district court entered judgment in favor of Anna, finding that "J. Howard always intended to give [Anna] ... half of his 'new community'" (i.e., the appreciation of his estate during their marriage) and that Pierce "backdated documents, altered documents, destroyed documents, suborned falsified notary statements, presented documents to [J. Howard] under false pretenses, and committed perjury,” in order to deny any distributions to Anna from J. Howard's estate.  In re Marshall, 275 B.R. 5 (C.D. Cal. 2002).
  
• In 2004, the 9th Circuit vacated the judgment against Pierce on the basis that the so-called probate exception to federal subject matter jurisdiction precluded consideration of the case.  Marshall v. Marshall (In re Marshall), 392 F.3d 1118 (9th Cir. 2004).
  
• In 2005, the US Supreme Court granted Anna's petition for certiorari, as I discussed here, here, here, and here.
• On May 1, 2006, as discussed here, here, here, and here, the US Supreme Court reversed the 9th Circuit's decision, concluding that the probate exception did not apply to Anna's in personam counterclaims against Pierce.  The 9th Circuit only considered the issue of federal subject-matter jurisdiction.  The Supreme Court remanded for consideration of whether Anna's claims were "core" and whether Anna's claims were barred under principles of claim and issue preclusion based on the earlier judgment entered in the Texas Probate Court.  Marshall v. Marshall, 547 U.S. 293 (2006).
• Finally, and that's the purpose of this post, the 9th Circuit concludes on March 19, 2010, that Anna's counterclaim is not a core proceeding but, at most, "related to" her bankruptcy case.  As a result, the earlier judgment entered in her favor by the bankruptcy court was not final at the time that the Texas Probate Court entered its judgment in favor of Pierce, and so the Texas Probate Court judgment was the earliest final judgment that precludes all of Anna's claims.  Marshall v. Stern (In re Marshall), No. 02-56002, 2010 WL 986781 (9th Cir. Mar 19, 2010) (NO. 02-56002) (pdf).
  

The 9th Circuit's opinion is certainly worth reading for many reasons.  First, it provides an excellent review of "the evolution of the current bankruptcy regime in order to appreciate the important distinctions between 'arising under,' 'arising in,' and 'related to' proceedings and how the notion of 'core' proceedings came to exist."  (Id. at p. 4508).  The case also is interesting in its analysis of how "counterclaims by the estate against persons filing claims against the estate"―that by statute (28 U.S.C. § 157(b)(2)(C)) are defined as "core"―can still be narrowly construed as non-core "in order to avoid potential constitutional problems arising from having Article I judges issue final orders in cases requiring an Article III judge."  (Id. at p. 4521).  Even compulsory counterclaims may not be "core" proceedings, the Court held, writing:

| Posted By Steve Jakubowski In US Supreme Court Cases | 0 Comments |
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Back in the good old days when bashing BAPCPA was in vogue, I posited here that BAPCPA's "debt relief agency" provisions "look more like an effort to create a consumer bankruptcy lawyer clone who, much like the ever-multiplying Agent Smith from The Matrix-Reloaded, speaks and does precisely as directed with ruthless efficiency."  Today's unanimous opinion from Justice Sonia Sotomayor (with concurrences from Justices Scalia and Thomas) tells us not to worry because while attorneys in fact are "debt relief agents" under the Code, §526(a)(4) "prohibits a debt relief agency only from advising a debtor to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy."  Milavetz, Gallop & Milavetz, P.A., v. United States, No. 08-1119 (Op. at 13). 

As with most bankruptcy decisions from the Supreme Court, the path taken to the holding is more interesting than the actual holding itself.  This post examines two aspects of that road:

• First, the Court's discussion of the application of the "plain meaning" rule and the relevance of legislative history; and

• Second, the Court's recognition of the ethical boundaries of the attorney-client relationship and, in particular, the line where advice crosses into conspiracy. 

1.     Attorneys as "Debt Relief Agents" and Footnote 3's "Bridge Too Far"

This first conclusion comes as no surprise as the attorneys' arguments "failed to persuade [the Court] to disregard the statute's plain language."  (Op. at 7).  But rather than stop at plain meaning, the Court dropped a footnote finding support for the plain meaning in BAPCPA's legislative history (Op. at 6, n. 3).  This single footnote prompted Justice Scalia to write a separate concurring opinion just so that he could attack the premise of Footnote 3.

In Part II, Section B of my BAPCPA outline, entitled BAPCPA's "Plain Meaning" Not Followed, I reviewed five cases in the first year following BAPCPA's enactment where bankruptcy judges were so confounded by BAPCPA that they felt compelled to deviate from its "plain meaning" in order to avoid virtually nullifying certain of its key provisions.  Justice Scalia's concurrence highlights the problem facing bankruptcy lawyers who attempt to rely upon the legislative history of BAPCPA for interpreting an ambiguous statutory provision.  He wrote:

I join the opinion of the Court, except for footnote 3, which notes that the legislative history supports what the statute unambiguously says.  The Court first notes that statements in the Report of the House Committee on the Judiciary “indicate concern with abusive practices undertaken by attorneys.”  Ante, at 6, n. 3.  Perhaps, but only the concern of the author of the Report.  Such statements tell us nothing about what the statute means, since (1) we do not know that the members of the Committee read the Report, (2) it is almost certain that they did not vote on the Report (that is not the practice), and (3) even if they did read and vote on it, they were not, after all, those who made this law.  The statute before us is a law because its text was approved by a majority vote of the House and the Senate, and was signed by the President.  Even indulging the extravagant assumption that Members of the House other than members of its Committee on the Judiciary read the Report (and the further extravagant assumption that they agreed with it), the Members of the Senate could not possibly have read it, since it did not exist when the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  And the President surely had more important things to do.

The Court acknowledges that nothing can be gained by this superfluous citation (it admits the footnote is “unnecessary in light of the statute's unambiguous language,” ante, at 6, n. 3).  But much can be lost.  Our cases have said that legislative history is irrelevant when the statutory text is clear. See, e.g., United States v. Gonzales, 520 U.S. 1, 6 (1997); Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992).  The footnote advises conscientious attorneys that this is not true, and that they must spend time and their clients' treasure combing the annals of legislative history in all cases:  To buttress their case where the statutory text is unambiguously in their favor; and to attack an unambiguous text that is against them.  If legislative history is relevant to confirm that a clear text means what it says, it is presumably relevant to show that an apparently clear text does not mean what it seems to say.  Even for those who believe in the legal fiction that committee reports reflect congressional intent, footnote 3 is a bridge too far.

2.     § 526(a)(4)'s Narrow Scope Does Not Impair the Attorney-Client Relationship

| Posted By Steve Jakubowski In US Supreme Court Cases | 1 Comments |
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Thanks to Emory University Law School, host of the 7th Annual Symposium of the Bankruptcy Developments Journal, for generously sponsoring my trip to Atlanta yesterday to participate in a panel discussion, moderated by my friend Mark Duedall, entitled Ethics 2.0--The Ethical Challenges and Pitfalls of Web 2.0.  The panel included Kevin O'Keefe, founder of LexBlog (and purveyor of this blog and that of an amazing 3,000 other authors--I think I was in the first 30), and Scott Riddle, founder of the Georgia Bankruptcy Blog.  Kevin even twittered a picture of me during my part of the presentation.

Drawing upon this fantastic 1996 essay by Chief Judge Easterbrook entitled Cyberspace and the Law of the Horse, my main point was that analyzing the ethical challenges of web 2.0 is like analyzing the "Law of the Horse."  What is the "Law of the Horse," you ask?  Here's how Chief Judge Easterbrook described it:

When he was dean of this law school, Gerhard Casper was proud that the University of Chicago did not offer a course in "The Law of the Horse."  He did not mean by this that Illinois specializes in grain rather than livestock.  His point, rather, was that "Law and . . . " courses should be limited to subjects that could illuminate the entire law....  We are at risk of multidisciplinary dilettantism, or, as one of my mentors called it, the cross-sterilization of ideas.  Put together two fields about which you know little and get the worst of both worlds.

Dean Casper's remark had a second meaning--that the best way to learn the law applicable to specialized endeavors is to study general rules.  Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows.  Any effort to collect these strands into a course on "The Law of the Horse" is doomed to be shallow and to miss unifying principles. Teaching 100 percent of the cases on people kicked by horses will not convey the law of torts very well.  Far better for most students--better, even, for those who plan to go into the horse trade--to take courses in property, torts, commercial transactions, and the like, adding to the diet of horse cases a smattering of transactions in cucumbers, cats, coal, and cribs.  Only by putting the law of the horse in the context of broader rules about commercial endeavors could one really understand the law about horses. 

Now you can see the meaning of my title. When asked to talk about "Property in Cyberspace," my immediate reaction was, "Isn't this just the law of the horse?"  I don't know much about cyberspace; what I do know will be outdated in five years (if not five months!); and my predictions about the direction of change are worthless, making any effort to tailor the law to the subject futile. And if I did know something about computer networks, all I could do in discussing "Property in Cyberspace" would be to isolate the subject from the rest of the law of intellectual property, making the assessment weaker.

For a contrary view, be sure to read Professor Lessig's 1999 commentary published in the Harvard Law Review entitled, The Law of the Horse: What Cyberlaw Might Teach.

Late last year, the ABA announced the formation of ABA Commission on Ethics 20/20, whose purpose is "to perform a thorough review of the ABA Model Rules of Professional Conduct and the U.S. system of lawyer regulation in the context of advances in technology and global legal practice developments, to study these issues and, with 20/20 vision, [to] propose policy recommendations that will allow lawyers to better serve their clients, the courts and the public now and well into the future." 

The panel is filled with brilliant thinkers, including the inspirational future (I pray) Supreme Court nominee Judge Diane Wood and the leading ethics maven, Professor Stephen Gillers. 

The Commission’s preliminary outline (at pp. 7-9) suggests it won’t generate a “Law of the Horse,” but instead a thoughtful analysis of how existing rules should be modified to address the unique issues raised by burgeoning technology and its many applications.  I highly recommend reviewing the outline for insight into the complexity of the issues being examined.

Meanwhile, to avoid suffering a "Woodsian" fall from grace, from which you’ll never fully recover, be sure to review existing ethics rules before you plunge into Web 2.0, for when it comes to legal ethics, the old saying "look before you leap" most assuredly trumps its counterpart, "he who hesitates is lost."

Kevin's take on yesterday's symposium is in his post entitled Focus on the Possibilities of Blogging and Social Media, Not the Challenges.  Kevin's focus is certainly rightly placed, though every blogger I know will tell you that--ethics aside--blogging on a consistent basis is an unquestionable challenge.

| Posted By Steve Jakubowski In Stupid Lawyer Tricks | 0 Comments |
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