Rajeev Date had the unenviable job of filling a speaking slot originally assigned to Elizabeth Warren to discuss the creation of the Consumer Financial Protection Bureau. He is currently the Special Advisor to the Secretary of the Treasury on the Consumer Protection Bureau. Prior to that, he worked for over a decade in the financial services industry, including stints at Capital One Financial and Deutsche Bank. Mr. Date described the similarities between his job and that of bankruptcy lawyers pointing out that both deal with people getting wiped out because of something financial and both seek to help consumers. The Consumer Financial Protection Bureau was a signature part of the Dodd-Frank legislation. He stated that its goal was making consumer financial markets work. Before Dodd-Frank, consumer protection functions were assigned to seven agencies which had other responsibilities as well. He sketched out some recent history to show the need for the Bureau. He said that consumer debt exploded during the years before the financial crisis. He said that it “covered everything, big ticket, small ticket, secured unsecured. Everything grew and everything grew fast.” From 1999-2007, household debt nearly tripled. He cited college kids with credit cards, home mortgages with teaser rates and people exhausting their savings on high cost debt as emblematic of the period. Mr. Date said that consumers were signing up for “things they didn’t understand.” Mr. Date noted that the mortgage industry was at the epicenter of the financial crisis. While lenders usually have incentives to ensure borrowers can pay them back, the mortgage industry was different. Because the brokers and banks that originated loans were compensated up front, risk and reward were delinked. He also said that there was a breakdown in the market. Because originators could shop for the most favorable legal regime, they did so. Additionally, there were problems with transparency. He defined transparency as both parties understanding the terms of the deal and talking about the same deal. Mr. Date said that transparency was absent during the years leading up to the financial crisis. The fastest growing products were things that were hard to understand. In order to gauge the risk involved in some financial products, it was necessary to have extensive knowledge of how the rate caps worked and interest rate history. He said that “problems of transparency continue today. Borrowers deserve to know what they are signing up for.” Mr. Date was enthusiastic about the prospect of starting a new agency from the ground up. He quoted Steve Jobs for the proposition that “the only way to great work is to love what you do.” He described his challenge as creating new perspectives, creating a new structure and recruiting new talent. Although the CFPB is only a few months old and lacks an Executive Director, it has grown to 690 employees, has begun taking consumer complaints, started education programs and has released examination guidelines. Notwithstanding the lack of an Executive Director, the authority to carry out the Bureau’s powers has transferred to the Secretary of the Treasury. He pointed out that from 2001-2007, the volume of unusual mortgages exploded dramatically. He described one of the worst products offered as a mortgage with a one month teaser rate. He said that while the Bureau is working to clean up new originations, there are already $10 trillion in mortgages out there. Mr. Date answered several questions related to mortgage servicing. He said that when he was in the financial services business, he would walk the floors of collection operations for automobile lenders and credit card lenders to evaluate whether to purchase the business. He said that they understood that there were some people who wouldn’t pay and planned for it. On the other hand, income in the mortgage servicing industry is largely fixed regardless of whether the loan performs or does not. When a loan is performing, the cost to service the loan is less than the fees paid. However, when a loan is not performing, the servicer’s costs exceed their revenue. As a result, “the incentives don’t line up” for mortgage servicers to work with borrowers in default. He also pointed out a disparity in that mortgage servicers can “fire” their borrowers by selling the portfolio to a new servicer, while borrower cannot fire their servicer. The CFPB has released its manual for mortgage servicer examinations. Mr. Date said that in the past, examinations of mortgage servicers were neglected because these operations did not affect the “safety and soundness” of the financial institution. He said that the servicing manual does two things: it sets standards for consistency and lets servicers know what to expect. Three different judges asked questions relating to home mortgage modifications. One judge spoke about debtors who submitted everything they were asked to and didn’t hear back for months only to be told their information had been lost. Another judge asked, “What do I do? What do I tell them?” Mr. Date pointed out that mortgage brokers were good at holding consumers’ hands during the application process. However, no one is holding their hand in the modification process. He pointed out that the CFPB will put consumers in touch with HUD-approved housing counselors. This information is available at consumerfinance.gov. He also said that enforcement was a tool available to the Bureau. He said that the Bureau would choose the right areas for investigation and bring cases when we need to. He said, “There are bad guys. If you don’t know who they are, you may be one yourself.”

Prof. Ralph Brubaker and Prof. Ken Klee spoke on “Not Again! Will Bankruptcy Courts Survive the Supreme Court’s Second Look At Stern v. Marshall?” However, their panel could have been titled, “Does the Bankruptcy World Need Yet Another Talk on Stern v. Marshall?” Fortunately the answer was yes. The History of Summary/Plenary Prof. Brubaker discussed the history of bankruptcy adjudication going back “before the beginning” to English bankruptcy practice. He said that the summary/plenary distinction began with English bankruptcy commissioners. Commissioners operating under the supervision of the Lord Chancellor could administer bankruptcy estates and make certain determinations of law and fact, such as adjudicating claims. Their power was by the concept of in rem so that they could decide any question regarding property in the possession of the assignee, who was the equivalent of a trustee. If the assignee had to sue someone to recover property, that proceeding had to be brought in the appropriate superior court. In the Bankruptcy Act of 1800, Congress expressly allowed non-Article III bankruptcy commissioners to adjudicate all summary proceedings in a manner similar to English practice. This principle became even more firmly in place in the Bankruptcy Act of 1898. The jurisdictional statute expressly stated that there was no plenary jurisdiction except for some matters such as preferences and fraudulent conveyances. The 1898 Act introduced non-Article III officers similar to commissioners designated as Bankruptcy Referees. The full extent of the referee’s authority was not defined with perfect clarity resulting in multiple Supreme Court decisions. The Supreme Court invoked the summary/plenary distinction finding that plenary matters had to be brought before an Article III judge, while bankruptcy referees could determine summary matters and their decisions would be given the same effect as one from an Article III judge. When Congress reformed the bankruptcy laws in 1978, it expanded the scope of bankruptcy jurisdiction. Jurisdiction was now extended to any proceeding related to the Bankruptcy case. All of that very broad jurisdiction was to be exercised by non-Article III bankruptcy judges subject to appellate review. The Marathon decision struck down the 1978 jurisdictional scheme as unconstitutional. However, the Court in Marathon never said where the constitutional line was. Indeed, there was not even a majority opinion in the case. Nevertheless, he said that “the most obvious explanation for why the court found the Code unconstitutional was that the Marathon case would have been a plenary suit which should have been tried in an Article III court. Congress reacted to Marathon by enacting the core/non-core distinction which Prof. Brubaker equated to a codification of the summary/plenary distinction. He noted that in Granfinanciera, Justice Brennan, who authored the Marathon plurality, equated the Seventh Amendment right to trial by jury with plenary suits under the Bankruptcy Act of 1898 that could only be tried in an Article III court. He said that Congress could not take away the right to jury trial by classifying a matter as a core proceeding. Prof. Brubaker described this as constitutionalizing the summary/plenary distinction. He noted that in Stern v. Marshall, Chief Justice Roberts relied heavily on Seventh Amendment decisions to establish the right to decision by an Article III judge. Prof. Klee said that Stern v. Marshall was not a politically decided case. Rather, it was about fundamental power, whether non-Article III courts should be limited or whether their authority should be based on pragmatism. Prof. Klee had two good lines that don’t otherwise fit with this post. He said “Vicki was well endowed in her own right but not financially.” He also said that as a result of Pierce Marshall’s attorneys decision to file a proof of claim “history was made.” Power vs. Jurisdiction Prof. Klee was quick to point out that Stern v. Marshall was not about jurisdiction. Jurisdiction was vested in the district court. The Bankruptcy Judge can decide matters if they are delegated by the District Court and that delegation is constitutional. As a result, the case was not about jurisdiction, but who could exercise that jurisdiction. He said this distinction was important to the question of whether parties could consent to decision by a Bankruptcy Judge. “If it’s just lack of power, you can consent. If it is lack of subject matter jurisdiction, you can’t consent.” Public Rights Chief Justice Roberts placed a lot of emphasis on the early case of Murray’s Lessee which held that if an action could have been decided by the English courts of law, equity or admiralty, they could not be assigned to non-Article III tribunals in the absence of a public rights exception. According to Prof. Klee, the public rights exception in bankruptcy is probably limited to cases in which the United States is a party. (Although not pointed out by the speakers, the Chrysler and GM cases would be good examples of the public rights exception). However, he made the interesting comment that Justice Scalia’s concurrence showed that in his heart, he does not want to overturn the bankruptcy system because it is a long-established system. This was similar to his ruling in the BFP case in which he relied on the long-established practice of state foreclosure laws. Thus, for Justice Scalia, historical practice is a way to get to authority. Prof. Klee recommended perusing Blackstone’s Commentaries to look for historical practice. Claims and Consent Under Stern, Bankruptcy Courts can still decide proofs of claim. Filing a claim establishes a claim to the bankruptcy res and constitutes consent to adjudication of the claim itself. However, filing of a proof of claim does not constitute consent to anything beyond that. In Stern, Pierce Marshall’s filing of a proof of claim was not consent to determination of Vicki’s counterclaim. As the Supreme Court pointed out, Pierce really had no choice about filing a proof of claim, so he did not consent to anything beyond determination of the claim. Prof. Brubaker said that filing a claim is only consent to determining the claim because that is a natural consequence of filing a claim. Prof. Klee argued that “The current court is re-writing history. Under the Act, we had jurisdiction by ambush.” In Gardener v. New Jersey, the court held that the state’s filing of a proof of claim waived sovereign immunity. The Court also held that filing a proof of claim waived the Seventh Amendment right to jury trial. Prof Brubaker rejected the notion of jurisdiction by ambush as consent. “Jurisdiction by ambush means they are not consenting to anything.” Supplemental Jurisdiction Prof. Brubaker would analyze Stern v. Marshall as a case on supplemental jurisdiction. “The Stern majority never acknowledged supplemental jurisdiction, but signed on to it.” However, he said that the nexus for supplemental jurisdiction is “tightly circumscribed.” He said it is only available to the extent necessary to dispose of independent matters already before the court. Things That Can Be Done or Not Prof. Klee said that there are still many things Bankruptcy Judges can do. They can employ counsel, approve compensation (which drew applause from the audience) and administer the estate. However, he noted that according to Blackstone, English commissioners could not enter the discharge. They could certify the discharge to the Chancellor but could not enter it. He added, “If bankruptcy judges cannot enter discharges, we are in a new world.” The professors had a vigorous discussion on whether bankruptcy judges could enter money judgments in nondischargeability cases. Prof. Klee thought it was permissible so long as the debtor was the defendant. On the other hand, Prof. Brubaker said that “historically courts have considered nondischargeability as a separate claim.” Prof. Klee responded that the debtor was res to which Prof. Bubaker said “nah.” They also discussed whether Bankruptcy Courts could follow the report and recommendation procedure in core proceedings where the Bankruptcy Court lacked constitutional power to enter a final judgment. Prof. Klee pointed out that there were now three categories of cases: core proceedings where the Bankruptcy Court can constitutionally enter a final judgment, noncore proceedings in which the Bankruptcy Court may submit proposed findings of fact and conclusions of law and core proceedings in which the Bankruptcy Court lacks power to enter a final judgment. Prof. Brubaker said that if Congress had authorized courts to enter a final judgment, it implicitly had authorized them to take the lesser action of submitting proposed findings and conclusions. Prof. Klee, while initially taking the position that submitting proposed findings and conclusions was not authorized noted that the best retort to his own position was Stern v. Marshall in which the Supreme Court “didn’t bat an eye” when the District Court treated the Bankruptcy Court’s ruling as proposed findings and conclusions. So What Are We Left With? My question after listening to this discussion is whether the Bankruptcy Court has any broader power now than it did under the Bankruptcy Act of 1898 or than was possessed by English bankruptcy commissioners. I am more sanguine than the professors. I think that will be too difficult to turn back the clock on thirty years of expansive power exercised by Bankruptcy Judges. To the extent that historical practice or specialized expertise are grounds for vesting power in a non-Article III tribunal, there is a case for vesting more power in the Bankruptcy Courts than they enjoyed prior to 1979. Bankruptcy Courts have developed specialized expertise in dealing with the consequences of financial failure. They have developed into our national courts of commerce. While most historians would scoff at thirty years as a mere blip in time, it is significant enough that it will be difficult to roll back the clock.

The Long and Short of It: Financial Engineering Meets Chapter 11 was one of the more esoteric presentations at the conference with an unusual lineup of panelists. The group included New York Bankruptcy Judge James Peck, investment banker David Barse, Professor Edward Janger, Dr. Riz Mokal from the World Bank and Edward Murray, an English solicitor. They discussed the effect of safe harbors granted to certain financial contracts under sections to 555 to 562 of the Code. These sections were extensively re-written by BAPCPA. Certain financial contracts, such as swaps and repos are granted safe harbors under the Bankruptcy Code. These contracts can be liquidated, terminated or accelerated notwithstanding the Bankruptcy Code. They are also exempt from recovery under preference and fraudulent transfer theories. According to the panelists, this was done to protect the interest of sophisticated parties and avoid the risk of financial contagion. The rationale was that if one party went down, that the transaction could not be unwound and pull down the counter-party. Additionally, the ability to do close-out netting under a contract allows parties to reduce their risk. One problem with these provisions is that, even with the extensive re-writing of definitions in 2005, the definitions are still imperfectly drawn. Section 555 applies to securities contracts and was intended to protected intermediaries. However, as written, it could apply to a transaction with Bernie Madoff’s Ponzi scheme. Prof. Janger suggested that these provisions may have “done exactly the opposite of what they were supposed to do” in the 2008 financial crisis. He said that when a Bear Stearns or a Lehmann Brothers files bankruptcy, their hands are tied and they can’t reorganize. The drafters did not anticipate that large entities would be filing bankruptcy. The panel debated whether the immunities granted to financial contracts increase the risk of transactions. Dr. Mokal noted that the provisions were put in the Code in 2005 and the financial crisis followed three years later. Ed Murray described the immunities as a “safety net” and said that they did not eliminate incentives to monitor credit risk. He said that parties want to make good transactions and noted that “credit officers are a pain” regardless of the immunities. David Barse was much more direct. He said, “If we don’t get comfort, we don’t participate. If secondary parties don’t participate, then primary can’t participate.” He described the protections as providing a “comfort zone” and said that “providing great clarity is very important.” He added that “the practical answer is that two parties to a contract should be allowed to play it out and shouldn’t be regulated.” Dr. Mokal stated that the safe harbors are an important part of a sophisticated insolvency system. He said that in other countries, there are not sophisticated bankruptcy regimes and that there is “no certainty about the court’s ability to understand or apply sophisticated rules or statutes.” He said that this was “unlike in this country where courts understand exactly what Congress intended,” a comment which drew chuckles from the audience. The panel also discussed how financial contracts could be used to commit mischief in the bankruptcy system. Prof. Janger discussed the problems of empty voting and the empty creditor where there is a separation of the economic interest from the ownership interest and separation of the economic interest from governance rightst in bankruptcy and workout situations. He said that creditors can go short and bet against a company’s reorganization and then cause trouble. He analogized the problem to a secured creditor voting its deficiency claim to sink the reorganization and acquire the asset. He said that the tools available to bankruptcy judges to combat this problem included disclosure under Rule 2019, designating ballots and subordination. Mr. Barse said that this was a big problem. He said that creditors using ever more sophisticated tools can drive decisions on corporate governance. He said that while his firm doesn’t use these tools to drive corporate governance that they could be used by corporate raiders. He also added that “Derivatives are tools of destruction. We don’t really know what they do.”

Thursday’s lunchtime speaker was Gregory L. Miller, Chief Economist for SunTrust Banks, Inc. His presentation was not too gloomy but a bit disturbing. He began Saturday Night Live style saying, “I’m the economist and you’re not.” Miller predicted that “there is not going to be a double dip recession.” He said that his “subjective prospect that the economy will fall into recession is not significant.” He estimated the prospect of recession at 25% which he said was not great because at any given time, there is a 15% prospect of recession. On the other hand, Mr. Miller said that the rest of the world has a 60% chance of recession, noting that at least three countries in the Euro Zone were already in recession and that others were at risk.” Nevertheless, he said that, “whether or not the rest of the world goes into recession, we will not.” Mr. Miller suggested that a global recession could even help the United States, since it would make foreign goods less expensive. He said this would be good for lovers of French wine. He noted that despite the weak economy elsewhere in the world U.S. exports were still increasing. Miller noted that the private sector in the United States was “fine under the circumstances” but that the “public sector is not pulling its weight at a time when it should be doing it.” He added that “Pulling the economy deeper when it’s already in the soup is not a government function but that’s what it’s doing.” Miller said that the private sector was growing at a rate of 3.6% while the overall economy was growing at a rate of 2.8% indicating that the public sector was a net drain of 0.8% on the economy. Mr. Miller said that in the U.S. economy, the housing, government and credit sectors were weak. He said that the housing sector was at the bottom but that condos were “a virtual black hole.” He said that housing and credit are usually leading sectors, but that the rules are different now and the standards are higher. He said that two trillion dollars has been dumped into bank balance sheets where it is stuck in capital accounts of regulated banks who aren’t sure what their capital requirements are. He said that banks were reluctant to put loans on the books when they don’t know whether they will pass audit. With regard to the labor market, he pointed out that the Obama administration’s current jobs bill consists largely of former Republican proposals. However, “the opposition is obliged to hate the dominant party’s policy even if it is the right thing.” Mr. Miller noted that the current $450 billion proposal would have more effect than the previous $800 billion stimulus bill because it funneled money to the private sector where the multiplier is higher rather than the prior stimulus which went through state and local governments. However, he said, “It’s not the jobs. Nine percent unemployment is not what’s wrong with the economy.” He said that the natural unemployment rate is 6% and that when we had 4% unemployment, there was too much employment in the economy. He said that 30% of the newly unemployed came from the construction and mortgage finance sectors. He said there is a mismatch between those who want jobs and those who are looking to employ. He said that two-thirds of the unemployed would likely remain unemployed and “we don’t want them employed.” Miller said that interest rates will remain painfully low until at least the middle of 2012. Nevertheless, banks are finding it more profitable to park their cash at the Fed where they can earn 0.25% interest. He pointed out that reserves have increased from $500 billion to $3 trillion. He said that to get banks lending, the Fed would need to lower the rate it pays to zero or even charge banks to keep their cash parked at the Fed. He said that the Euro sovereign debt crisis was a crisis of banking and culture, not an economic crisis. He said that U.S. banks held only 0.10% of their assets in European sovereign debt and that this was concentrated in banks that could afford to absorb the loss. In summary, the U.S. economy is not going into recession, the prospect for the rest of the world looks bleak, unemployment is not going back to where it once was, banks are not lending and the U.S. government is dysfunctional. That’s about as rosy of a view as you can get from an economist.

I am at the 2011 National Conference of Bankruptcy Judges in Tampa, Florida. For this first day, I heard a good mix of consumer and chapter 11 programs along with a provocative economist. Here are a few highlights.Chapter 11 IssuesOn the chapter 11 side, the topic du jour was In re DBSD North America, Inc., 634 F.3d 79 (2nd Cir. 2011) which was discussed by no less than three speakers. Prof. Troy McKenzie and Judge Mary Diehl each discussed the gifting aspects of the case, while Ronald Peterson talked about designation of votes in chapter 11.GiftingThe latest word on “gifting” (that is, a senior creditor ceding value to a junior class of creditors over the objection of an intervening class) is that is violates the absolute priority rule. DBSD North America presented an extreme version in that secured creditors gave up value to equity who would receive value on account of, among other things, their equity interest. The Second Circuit held that this was a clear violation of the absolute priority rule. However, other scenarios were not as clear. For example, in In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993), a secured creditor and a junior class reached a gifting agreement. However, no plan was confirmed and the case was converted to chapter 7. After the secured creditor obtained relief from the stay, it announced that it would honor its prior agreement. The court of appeals held that the secured creditor could do whatever it wanted with its money. It seems that “gifting” only raises an absolute priority rule problem when it occurs under a plan and is “on account of” an equity interest. If it is done in the context of a 9019 compromise and settlement or a 363 sale, it is more likely to work. It was also suggested that because the absolute priority rule was enacted with equity interests in mind, a gifting arrangement between two classes of creditors might pass muster.Designation of BallotsRon Peterson discussed the history of designation of ballots. Prior to the Chandler Act in 1937, the Bankruptcy Act did not contain a provision for disallowing a ballot. However, a case involving a hotel in Waco, Texas prompted William O. Douglass to press for a disallowance of ballot provision. In that case, Hilton Hotels invested substantial monies in a hotel in Waco, Texas under a lease. The debtor cancelled the lease and filed for reorganization. Hilton Hotels bought up a blocking position in the debtor’s unsecured debt and insisted that the lease be reinstated. In that case, there was no provision to prevent the attempt to hijack the reorganization.Since that time, designation of ballots has been allowed where a creditor votes to put a competitor out of business, acts based on sheer malice, acts on inside information or seeks to gain an unfair advantage over other similar creditors. In DBSD North America, the court of appeals affirmed a decision to designate ballots of a competitor who purchased a blocking position with the intent to gain control of the debtor’s telecommunications spectrum rights. On the other hand, where a creditor strikes a hard bargaining position but acts out of economic self-interest, its vote will be allowed. In the words of Gordon Gecko, “greed is good.” I was disappointed that Ron did not discuss my case on designating ballots, In re The Landing Associates, Ltd., 157 B.R. 791 (Bankr. W.D.Tex. 1993). However, since he mostly stuck to circuit cases, this was not surprising.Rights OfferingsClifton Jessup gave an interesting talk on rights offerings. Fortunately, Judge Diehl made him explain what a rights offering was. A rights offering is an offer by the debtor to sell securities (usually equity securities) to its existing creditors at a discount in order to obtain financing to emerge from bankruptcy. Rights offerings also involve a backstop party who agrees to purchase any securities not purchased by others in return for a fee. Structured DismissalsNan Coleman from the Executive Office of the U.S. Trustee and Prof. Troy McKenzie discussed structured dismissals. A structured dismissal is a procedure where the debtor’s assets are sold and then a case is dismissed with conditions. Those conditions may include affirming protections to the purchaser in the 363 sale, releases to parties and a modified claims procedure. Ms. Coleman advocated that U.S. Trustee position that structured dismissals are contrary to the Bankruptcy Code and should not be allowed. She said, “Let’s be clear. It’s not a gift. It’s a quid pro quo. Someone is getting something and someone is giving up something. Prof. McKenzie offered a tepid defense stating that some features in structured dismissals raise eyebrows but that “perhaps they should be given a little room to develop before they are squelched.”Employment of Counsel/Committee SolicitationEmployment of counsel and committee solicitation were both discussed in the ethics portion of the program. In an unusual opinion, Judge Michael Lynn has ruled that debtor’s counsel need not be disinterested. In re Talsma, 436 B.R. 908 (Bankr. N.D. Tex. 2010). If debtor’s counsel is owed fees, it may sell its claim prior to bankruptcy to avoid being disqualified for being a creditor. In re 7677 E. Berry Ave. Assoc., LP, 419 B.R. 833 (Bankr. D. Col. 2009). However, this did not work when payment for the claim was contingent on what the purchasing creditor received in the bankruptcy. In re Fish & Fischer, Inc., 2010 WL 5256992 (Bankr. S.D.Miss. 2010).In re Universal Building Products, 2010 WL 4642046 (Bankr. D. Del. 2010) illustrates that state disciplinary rules apply when soliciting a committee. In that case, prospective committee counsel asked a Chinese speaking party they had a prior relationship with if he would contact Chinese speaking creditors. He was offered the position of translator for the committee. Model Rule 7.3 restricts direct solicitation of prospective clients and Delaware had adopted a version of this rule. Based on the violation of Rule 7.3, counsel was disqualified from representing the committee. Consumer IssuesUntangling the Mortgage Morass: Rules, Rogues and RepairsThis panel handled the sexy topic of the new Bankruptcy Rules applicable to mortgage claims which takes effect in December 2011. The panel did a good job of laying out the history of the rules and issues likely to arise. The rules had their genesis with Jones v. Wells Fargo Bank, 366 B.R. 584 (Bankr. E.D. La. 2007) and Padilla v. GMAC Mortgage, 389 B.R. 409 (Bankr. E.D. Pa. 2007). These cases raised the specter of a debtor successfully completing a chapter 13 plan and then immediately being posted for foreclosure based on undisclosed charges that accrued during the bankruptcy proceeding.Under the new rules, there are three changes which will take effect in December. First, mortgage claims must include an attachment listing delinquent amounts as of the petition date, including any charges and the date they were incurred. Among other things, this will require disclosure of the amount of escrow shortage as of the petition date. Fed.R.Bankr .P. 3001(c)(2), Official Form 10, Attachment A. Next, mortgage creditors must give notice of a change in payment amount 21 days before it takes effect. Fed.R.Bankr. 3002.1(b), Official Form 10, Supplement 1. Additionally, mortgage creditors must give notice of post-petition fees and costs incurred every 180 days. Fed.R.Bankr.P. 3002.1(c),(d). Finally, at the conclusion of a chapter 13 case, the trustee or debtor must give a Notice of Final Cure Payment. Fed.R.Bankr.P. 3002.1(f).The panel identified several interesting issues under these rules. One issue is that the form does not take a position on how to calculate the escrow shortage. The Third and Fifth Circuits have taken the position that any amount charged to the debtor for escrow pre-petition is escrow shortage, In re Rodriguez, 629 F.3d 136 (3rd Cir. 2010) and In re Campbell, 545 F.3d 348 (5th Cir. 2008), while one major mortgage servicer has taken the position that only amounts advanced out of pocket prior to the petition date constitute escrow shortage. As pointed out by Judge Eugene Wedoff (Bankr. N.D. Ill.), this makes a big difference. Because the escrow shortage is part of the pre-petition claim, it can be paid out over the life of the plan. However, if amounts accrued but unpaid are not considered pre-petition claims, then they are included in the post-petition escrow amount and must be paid within one year. John Rao stressed that it was important to avoid doublecounting by including the escrow shortage in the proof of claim and then seeking to recoup it post-petition as part of the ongoing mortgage payment. A petition for cert has been filed in the Rodriguez case and the Supreme Court has requested that the Solicitor General comment, which is a sign that the court may be considering granting the petition. The new attachment to proof of claim must be signed. Faiq Mihlar suggested that before attorneys sign the attachment that they read the Third Circuit’s opinion in In re Taylor, 2011 U.S. App. LEXIS 17651 (3rd Cir. 2011) in which an attorney was sanctioned for signing claims without reading them or knowing whether they were accurate. He said that the best practice was to have the attorney prepare the attachment and have the client review and sign it. He said that while he enjoyed appearing in court, he preferred not to do so as a witness.John Rao pointed out that the 21 day period for providing the notice of change in payment is the same period provided under RESPA. He said that the new form is merely a cover sheet and that the mortgage servicer may simply attach its regular notice of payment terms.When giving notice of charges incurred during the case, it is only necessary to give notice of charges that will be sought to be charged to the borrower. It is important that charges only be listed once. For example, if a lender incurs attorney’s fees in one six month period and they are not paid, it should only report new attorney’s fees incurred subsequently and should not report the prior fees again.If the creditor does not give timely notice of the fees incurred, it is barred from collecting them later. The failure to request fees could be the basis for judicial estoppel in a subsequent state court proceeding.Mark Redmiles from the U.S. Trustee’s office explained the procedure for giving notice of completed cure payment. Within 30 days after completion of payments, the trustee or debtor must give notice that payments have been completed. The mortgage creditor has 21 days to respond. If the creditor does not respond, then the loan is deemed to be current.Faiq Mihlar argued that the 21 day period was too short and that lenders would not have time to receive the document and act on it. This raised the possibility that conniving debtors could simply fail to make their last several payments before completion of the plan knowing that the lender would probably fail to respond to the Notice of Final Cure Payment. Judge Wedoff suggested that the creditor could request an extension of time under Rule 9006 if it could not respond within the deadline. He also suggested raising the time limit with the rules committee.So You Think Consumer Bankruptcy Is Easy? Challenges of a Complex Code This panel discussed several difficult consumer issues. However, the best comment did not relate to the specific topics. Judge Shelley Chapman (Bankr. S.D. N.Y.) acknowledged that prior to taking the bench eighteen months ago, she had only practiced chapter 11 law. She described the chapter 13 docket as “the hardest thing I have done so far.” She said that it was “a daunting task” facing a room full of consumer bankruptcy lawyers. Judge Chapman’s humility and candor were refreshing.This illustrates how the selection of bankruptcy judges has changed. In the 1980s, the circuits often appointed judges with no prior bankruptcy experience. Today, the circuits tend to favor chapter 11 practitioners. While this is a marked improvement, it still leaves a gap in the judge’s experience. The panel had a lively discussion on whether a wholly unsecured junior lien could be stripped in a chapter 20 case (a chapter 7 followed by a chapter 13). In a chapter 20 case, the debtor is not entitled to a discharge in the chapter 13 case. Can he strip off the junior lien based on its lack of security?Judge Chapman opined that, perhaps it was her chapter 11 bias, but that “allowed secured claim” meant that a claim was secured within the meaning of Section 506(a),that secured claim equates to economic interest. She stated that she requires the second lienholder to grant a release and give it to the chapter 13 trustee to hold in escrow until completion of payments.John Clement, the debtor’s lawyer on the panel, argued against lienstripping. He argued that secured claim referred to the state law security interest. He cited the Supreme Court decisions in Dewsnup v. Timm, 112 S.Ct. 773 (1992) and Nobelman v. American Savings Bank, 113 S.Ct. 2106 (1993) as evidence that the Supreme Court does not look favorably upon the economic definition of secured claim. John Gustafson, a chapter 13 trustee, warned that practitioners should be careful how far they push the issue. While most circuits currently allow lienstripping in chapter 20 cases, the Supreme Court might not be so favorable.John Gustafson discussed the problem of social security income in chapter 13 cases. Under the means test, social security income is not counted. However, what about the debtor who has a high income and is also receiving social security? Should this debtor be allowed to pay less? In chapter 7, the problem is addressed by the distinction between Section 707(b)(2) and 707(b)(3). While Section 707(b)(2) applies the means test, Section 707(b)(3) examines the totality of the circumstances in cases in which the means test is satisfied. Perhaps the good faith requirement of Section 1325(a)(4) should fulfill a similar purpose.Frederick Clement noted that BAPCPA was intended to take discretion away from bankruptcy judges while the totality of the circumstances approach to good faith would grant discretion. Mr. Gustafson countered that “sure it’s subjective but so is Section 707(b)(3).” He likened it to putting a bandaid over our glasses and not looking at the social security income. He also suggested that if judges couldn’t consider extra social security income alone, perhaps they could consider it along with other factors, such as the debtor wanting to keep a Harley (apparently that’s a bad thing).Frederick Clement talked about the tension between the binding nature of a plan under Section 1327(a) and the ability to modify a plan under Section 1329(a). If the debtor confirms a plan and later decides that he doesn’t want to pay as much, “is there some threshold other than I want to” when proposing a modification? If not, how is the plan binding? He gave the example of In re Noble, in which the debtor proposed to retain a vehicle and later sought to surrender it. The Court held that the Debtor was bound. John Gustafson asked whether creative lawyers could draft around such future contingencies. He suggested that a debtor could offer to make extra payments up front in return for the option to surrender the vehicle later in the plan.Frederick Clement pointed out that in Ransom v. FIA Card Services, 131 S.Ct. 716 (2011)and Hamilton v. Lanning, 130 S.Ct. 2464 (2010), the Supreme Court appeared to assume that debtors could modify their plans at will. He said “If that is the case, how are you bound at all?” He suggested that a plan could only be modified for substantial and unanticipated circumstances and only to address the specific changes authorized in Section 1329, such changing the payment amount or length of the plan. He noted that while you could change the term of the plan, you could not change the “applicable commitment period” so that an above median debtor could not shorten a plan to less than 60 months.

The PACER and CM/ECF programs have revolutionized the practice of bankruptcy law. Thanks to PACER, I can download a document filed in almost any district in the country for the low price of $.08 per page (soon to go up to $.10 but still cheap). Thanks to CM/ECF, I can meet a deadline to file a pleading from home at 11:59 p.m. The purpose of PACER and CM/ECF is to offer greater public access to government records. According to the Administrative Office of the U.S. Courts:The Case Management/Electronic Case Filing (CM/ECF) system is the Federal Judiciary's comprehensive case management system for all bankruptcy, district and appellate courts. CM/ECF allows courts to accept filings and provide access to filed documents over the Internet. CM/ECF keeps out-of-pocket expenses low, gives concurrent access to case files by multiple parties, and offers expanded search and reporting capabilities. The system also offers the ability to: immediately update dockets and make them available to users, file pleadings electronically with the court, and download documents and print them directly from the court system.The Dark SideWhile these electronic access programs make the system more transparent, democratic and user-friendly there is also a dark side. Mandatory e-filing can be burdensome on the casual filer, such as a state court practitioner who rarely ventures into bankruptcy court. Many courts have adopted procedures to assist pro se parties and occasional filers. Some examples include allowing paper filing with court permission, allowing documents to be submitted on disk or be scanned at the clerk's office and allowing proofs of claim to be filed without a CM/ECF password and login. A Scary OrderHowever, in an extreme case, a court in Pennsylvania has charged an attorney a $150 "processing fee and sanction" for filing a paper document. You can see an image of the order below (I apologize for the poor copy). In pertinent part, the order states:(T)he Court has determined that a processing fee and sanction of $150.00 shall be assessed in the event of any failure to comply with the rules concerning electronic filing. The processing fee and sanction shall be paid each time an attorney files a document by means other than the Court's CM/ECF system. The attorney named below has filed a document on paper, disk or via scanning at the Clerk's office in violation of the Court's long standing procedures in this regard, therefore,It is hereby ORDERED, ADJUDGED and DECREED that on or before October 7, 2011, Attorney (name redacted) shall pay a $150 processing fee and sanction for failure to electronically file a document with this Court by use of its CM/ECF system. This fee must be paid from the funds of the attorney or his law firm. counsel shall not charge to or collect the $150.00 from the client as a fee, cost, expense. or other charge in this case.Why It's BadThis order concerns me for (at least) three reasons. The first is a matter of due process. I have read the local rules of the Bankruptcy Court for the Western District of Pennsylvania. There is no provision for a processing fee or sanction for attempting to file a document other than electronically. Indeed, the Court's procedure manual explicitly states that submitting a document on disk or scanning it at the clerk's office is allowed. Because the order does not distinguish between filing on paper, disk or by scanning at the clerk's office, the order punishes behavior that is expressly allowed by the court's procedures.Second, I have trouble finding a justification for the order. It is my understanding that individual judges do not have the authority to set fees. While the judicial conference of a circuit may authorize certain miscellaneous fees, I don't think individual judges have this power. I also don't believe that this qualifies as sanctionable conduct. It doesn't fall within Rule 9011 and it is my understanding that the court's inherent authority to sanction is limited to cases of bad faith. Finally, I have a philosophical objection to the order. One of the stated purposes for the Bankruptcy Code was to break up the incestuous "bankruptcy rings" where local attorneys, trustees and judges had an overly cozy relationship to the exclusion of outsiders. The E-Government Act of 2002 was intended to make government records more accessible. This order violates both of these purposes. It brings the judicial power of the United States down on an attorney who made a procedural mistake. While the amount of the sanction is minimal, it is still a court-imposed sanction which must be reported in some cases. A careful review of the Court's rules and procedures would not have disclosed the peril (although the attorney would have seen that something called e-filing was mandatory). Besides the shock of receiving a judicial reprimand by return mail, the order also sends the message that outsiders practice here at their peril. Admittedly, bankruptcy is a technical and difficult area of the law. Through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress made it much more challenging for the average practitioner to wander into bankruptcy court representing a consumer debtor. Nonetheless, the courts, as public servants, should use their power to make the courts more accessible rather than less. This order is offensive.

Tech visionary Steve Jobs died yesterday. One of many items being circulated about him is a commencement address he gave at Stanford in 2005. I have copied it in its entirety below. However, I wanted to focus on one passage which speaks to what we do as bankruptcy lawyers. Here, Jobs talks about being fired from Apple, the company he had founded, at age 30: I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life. During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together. I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle. Steve Jobs was able to take a monumental setback and come back brilliantly. As bankruptcy lawyers, we give both individuals and companies the opportunity to recover from devastating financial losses. Who knows--the next individual debtor who you help to get a fresh start or the next company you reorganize may use that opportunity to develop something revolutionary just as Steve Jobs did. Steve Jobs: "Find What You Love"I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.The first story is about connecting the dots.I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it's likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.My second story is about love and loss.I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.My third story is about death.When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.This was the closest I've been to facing death, and I hope it's the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.Stay Hungry. Stay Foolish.Thank you all very much.

Today is the first Tuesday in October which marks the start of the Supreme Court's October Term 2011. So far the Court has granted cert in forty-eight cases, only one of which involves bankruptcy. There are a few interesting petitions pending but no bombshells like last term's Stern v. Marshall.Cert Granted:No. 10-875, Hall v. United States. This case concerns whether post-petition capital gains in a chapter 12 case constitute a claim against the estate. The case arises because chapter 7 and chapter 11 cases give rise to a separate taxable estate while chapter 12 and chapter 13 cases do not. The Ninth Circuit found that because a chapter 12 estate is not a taxable entity, it could not "incur" a tax. Because the estate did not incur the tax, the tax could not be treated under the debtor's plan. The Ninth Circuit position conflicts with opinions from the Eighth Circuit and the Tenth Circuit Bankruptcy Appellate Panel.You can read the docket here.Petitions Pending:No. 11-166, RadLAX Gateway Hotel, LLC v. Amalgamated Bank. This case raises the Philadelphia Newspapers issue of whether a plan can propose a sale of property without allowing the lender to credit bid. The Seventh Circuit ruled that it could not. The Third Circuit has allowed a sale without credit bidding as the "indubitable equivalent" of the creditor's claim.You can read the docket here.No. 10-1285, Countrywide Mortgages v. Rodriquez. This case has to do with the troublesome issue of how to calculate escrow payments on a mortgage claim in chapter 13. The Third Circuit held that, notwithstanding RESPA, the lender could not factor pre-petition escrow shortgages into the debtor's post-petition payment. The Fifth Circuit has ruled consistently with the Third Circuit.You can read the docket here.Cert Denied:No. 10-1443, AmeriCredit Financial Services v. Penrod. This case involved whether a creditor who financed negative equity still had a purchase money security interest under the hanging paragraph of Section 1325(a). The Ninth Circuit said that it did not, while the other eight circuits to consider the issue ruled in favor of the purchase money status. The Supreme Court denied cert today. This means that the circuit split is not resolved.

It sounds like a cliché, but here at Shenwick & Associates, every bankruptcy case really is different. Every debtor has their own unique story of how they got into debt, what type and amount of debt they have, their living conditions and many other factors, which we need to apply the law to so we can provide them with the relief they seek. In one recent case, we had a young single man (let's call him "Doug") who lived in Brooklyn and earned a substantial income. He had filed for Chapter 7 bankruptcy a few years ago, but the case was dismissed because he was earning too much to qualify for Chapter 7 bankruptcy. In 2005, Congress radically amended the bankruptcy laws through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which introduced a new form, Form 22, the "Statement of Current Monthly Income." There are actually three different forms, depending upon whether the debtor is filing for relief under Chapter 7 ( Form B22A) (the "Means Test"), Chapter 11 ( Form B22B) or Chapter 13 ( Form B22C) of the Bankruptcy Code. For Chapter 7 debtors, Form B22A includes a means-test calculation, which is a complex six page calculation of expenses and disposable income that a debtor must complete if he or she is above the median income for their state and family size. If their disposable income is above $11,725 over a 60 month period, the presumption of abuse arises, which means that it would be presumptively abusive to allow them to liquidate their debts under Chapter 7 of the Bankruptcy Code. In this case, they must file for relief under Chapter 11 or Chapter 13 of the Bankruptcy Code. Form B22C includes calculations to determine the length of a Plan (36 or 60 months) and the amount of disposable income the debtor must pay into the Plan each month. Doug came to us to determine what his disposable income would be in a Chapter 13 Plan. Although he had a condo, it was "underwater" (the liens on the condo exceeded the fair market value of the apartment), so he was going to have to surrender the unit to his secured creditors and rent an apartment. However, the rents he was being quoted by brokers far exceeded the IRS mortgage/rent standard for one person living in Brooklyn ($1,297). The question was-could we also deduct the differenhttp://www.blogger.com/img/blank.gifce between the actual rent he was going to have to pay and the mortgage/rent standard? There is very scant case law on this question, and no appellate courts appear to have considered the issue yet, but according to the Bankruptcy Court in the Eastern District of Kentucky, the answer is no, not without special circumstances. In , 382 B.R. 85 (2008), the debtors filed a joint Chapter 7 bankruptcy petition that reported annualized current monthly income of $83,022.36 on their Means Test. The applicable median family income for 2 persons in Kentucky was $41,560. The allowable mortgage/rent standard for 1 or 2 persons living in Boone County, KY was $842/month, but the Shinkles' actual rent was $1,500/month. So, the Shinkles claimed an adjustment of $658 on Line 21 of their Means Test, which allows debtors to claim an additional expense if they contend that the process set out in Line 20 of the Means Test does not accurately compute the amount they are due under IRS Standards. Without this adjustment, their Chapter 7 case would have been presumptively abusive. The legal issue before the Court was if the Shinkles should be entitled to claim their actual rental expenses on the Means Test, in excess of the IRS standards. In its discussion, the Court looked to the plain language of § 7070(b)(2)(B) of the Bankruptcy Code, which provides: "In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide - documentation for such expense or adjustment to income; and a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable." The United States Trustee contended that the Shinkles had not demonstrated such special circumstances. The Shinkles argued that allowed amounts for rent or mortgage expenses are guidelines and not "set in stone," that a condition of Mrs. Shinkle's employment was that she reside in Boone County, and that any slight reduction in rent they could derive from moving would be offset by the costs of moving and forfeiting their opportunity to own the house they were renting. The Court cited two cases where special circumstances were found–In re Scarafiotti, 365 B.R. 618,631 (Bankr. D.Colo. 2007) (debtors' son needed to be in a specific school to address mental and emotional difficulties, which justified a modest increase in the debtors' housing allowance) and In re Graham, 363 B.R. 844,847 (Bankr. S.D. Ohio 2007 (the debtor husband had to move 800 miles from his wife and her two children from a previous marriage in order to find gainful employment, but the debtor wife could not join her husband because of the constraints of her shared custody agreement. These debtors were allowed to claim a second set of housing expenses for the husband). The Court found no such special circumstances in the Shinkles' case. For more information about the Means Test in Chapter 7, disposable income to fund a Plan in chapter 13 and getting relief through the bankruptcy process, please contact Jim Shenwick.

By JOSEPH PLAMBECK First-time buyers in New York City confront a series of choices: co-op or condo, high-rise or walk-up, a second bathroom or just steps from the subway? But there seems to be consensus on at least one decision — whether to hire a real estate lawyer.In New York, unlike most places in the United States, it is customary for buyers to seek the representation of a lawyer throughout the purchasing process. Although this is not a legal requirement, some longtime real estate agents say they have never witnessed a deal completed without the buyer’s having a lawyer on hand.“I would never, never have a situation where a buyer did not have an attorney,” said Deanna Kory, a senior vice president of the Corcoran Group. “Without question, there is too much to understand. You can’t understand it on the fly.”Buyers in New York City rely upon lawyers because real estate transactions can be extraordinarily complicated. In addition to the usual concerns about contracts, liens and titles, New York’s numerous co-ops have financial statements and meeting minutes that require scrutiny. Buying a condo, and even a single-family home, can be equally knotty. Not to mention that the sellers on the other side of the table usually come armed with their own lawyer.And then, of course, there is the simple fact that real estate in New York is expensive. Making a bad deal can jeopardize huge amounts of money.“You’re signing the largest check you’ve ever signed,” said Gary L. Malin, the president of the brokerage Citi Habitats, “and you want to make sure that you’re not missing something. To not engage an attorney — you’d feel naked in the process.”Lawyers also provide a necessary buffer in what can be an emotional process. Peter Graubard, a real estate lawyer since 1994, said lawyers were able to provide an objective assessment even while advocating for buyers.“I’m really the only involved party whose fee doesn’t depend on the deal closing,” Mr. Graubard said. “I get paid for my lack of a conflict of interest.”Mr. Malin, who worked for a short time as a real estate lawyer before joining Citi Habitats, says it is especially important for first-time buyers to have a lawyer on their side. A real estate agent can help with some aspects of the process, but a lawyer is the one who performs crucial due diligence and helps finish the deal.At the start of the buying process, the lawyer helps negotiate the contract. Michael P. Kozek, a lawyer at Jeffrey S. Ween & Associates, says that most of the drafting is done by the seller’s lawyer, but that there should be a chance to review the terms and try to adjust them.The buyer’s lawyer will also dig into the information available about a property, looking at a co-op’s finances and the minutes of its board meetings. Some buyers with a background in finance believe they can handle this part by themselves. But, Ms. Kory said, they may not know the customary tax breaks and accounting methods used by co-ops, which can lead to serious misunderstandings.Michael W. Goldstein, a lawyer who has handled residential real estate deals for more than 20 years, says an experienced lawyer is also easily able to spot in the board’s minutes any issues that may percolate into problems. Perhaps there is talk about a loud resident who is to be the buyer’s neighbor, or discussion of a balky boiler that may need expensive repairs not accounted for in the building’s capital improvement plan.Because experienced real estate lawyers see a lot of contracts and know the customs, they can also help cut through roadblocks. For that reason, Ms. Kory said, it is usually a mistake to hire a lawyer who does not have extensive familiarity with residential deals.Lawyers and real estate agents both say that the best way to find a lawyer is through word of mouth, in the best case from a friend or a family member. But if that option is not available, real estate agents are often happy to refer someone with whom they have worked.Ms. Kory says she often advises clients to talk to two or three lawyers, and then choose one, before making any offer on a home. That might seem premature, she said, but having good representation lined up can help ensure that you get the home you really want.“Having a lawyer makes you look more capable of following through on the deal,” Ms. Kory said. “Even if you are the only one bidding, you will come across stronger if you have all your ducks in a row.”Buyers should have a few simple questions ready for prospective lawyers. First, ask about residential real estate experience — generally, more is better. Find out about experience with closings for homes similar to yours, or even in the building you are considering. Then find out how much of the work would be done by the lawyer personally, and how much (and which parts) would be handled by a paralegal.And ask if the charge will be a flat fee or based on an hourly rate. In general, residential real estate lawyers in New York charge a fee, often between $1,500 and $2,500. More complicated or expensive deals, like buying a multifamily brownstone, for example, can take the tab closer to $5,000.In most cases, that fee will cover a few hours of face time with the lawyer, his or her presence at the closing and a few conversations over the phone. The lawyer will spend several additional hours examining the paperwork and performing due diligence. The buyer also receives something else: more peace of mind.“The reality is that most people are not well versed in real estate law,” said Mr. Malin of Citi Habitats. “There are a lot of things that could potentially go wrong in the process. And you could very likely regret not spending the money.”Copyright 2011 The New York Times Company. All rights reserved.