You know that nothing good can come from an opinion which begins like this:This is a case about an affluent debtor who sought to manipulate bankruptcy procedures to accomplish what the Code prohibits--the elimination of all of her credit card debts despite her obvious ability to repay those debts over time. The debtor, Diane Davis, obtained confirmation of a plan in which she proposed to pay her credit card debts in full. The debtor subsequently objected to every claim filed by her creditors based on their alleged failure to attach sufficient documents to their proofs of claim. The debtor withdrew several objections after the creditors responded. The Court has before it the debtor's request for a default order sustaining the remaining objections.In re Diane Davis, No. 09-42865 (Bankr. E. D. Tex.3/31/11). p. 1. You can find the opinion here.The Davis case is one of a debtor who tried to follow the letter but not the spirit of the law. The debtor was an above median income debtor who would not qualify for relief under chapter 7. She filed under chapter 13 but tried to avoid paying any of her unsecured debts. She scheduled all of her unsecured debts as disputed and then objected to every claim filed. If the creditor responded, she withdrew her objection. Since most of the creditors did not respond, she thought that she was home free. However, the court had other ideas.A Few FactsThe Debtor was a single woman with gross monthly wages of $10,428 and disposable income of $3,923.92. The only debts she was delinquent upon were credit cards. She scheduled eight creditors with debts totaling $81,564. Every debt was listed as disputed with the notation "Debtor listed the balance shown on last statement; debtor not presently able to determine if balance is correct and is uncertain if trade name is correct legal creditor." The debtor filed a plan proposing to pay $3,190 to the chapter 13 trustee for 60 months. Twelve creditors filed proofs of claim totaling$147,400.68. Because the plan proposed to pay $190,400 on claims which were less than this amount, no creditors objected to the plan and it was confirmed. Then the debtor objected to every claim. The objections asserted that the creditors had not attached sufficient documentation to the claim and that the debtor would withdraw the objection if presented with adequate documentation. The debtor withdrew her objections to five claims after the creditors filed responses. However, the debtor sought default orders on the remaining seven claims. One of the claims that the debtor sought a default on was from Neiman Marcus. Neiman Marcus amended its claim to add documentation but did not file a response. The debtor's statement of financial affairs revealed that the debtor had been making payments on this claim prior to bankruptcy.The court conducted several hearings on the claims objections. While the debtor was present at one hearing, she did not testify. Debtor's counsel offered a brief on why the claims should be denied but never presented any substantive grounds why the debtor did not owe the debts.Can the Debtor Deny the Claims of the Non-Responding Creditors?The Court's answer was "no." Failure to attach supporting documentation, without more, is not a sufficient ground for denying a claim. Judge Rhoades stated:If an objection to a claim is raised, Section 502(b) provides that the court "shall allow the claim in such amount, except to the extent that" a grounds for disallowance provided by Section 502(b)(1)-(9) applies. (citation omitted). Thus, the Code requires us to overrule a claim objection that does not comply with Section 502(b)--even if the claimant does not appear to raise the issue.Opinion, p. 11. Thus, the mere fact that the creditor failed to attach sufficient documentation to the claim and then failed to respond to the claims objection was not grounds for denying the claim.Not only that, the court found that the claims did "substantially" conform to Bankruptcy Rule 3001 such that they were entitled to prima facie validity. Because the debtor did not produce evidence sufficient to rebut the prima facie validity of the claims, the creditor had no duty to respond.An Interesting TwistWhile Judge Rhoades found that the objections should be denied, she also raised the possibility that the debtor was asking for something she really didn't want. The discharge in a chapter 13 case is different than in a chapter 7 case. (citation omitted). In a chapter 13 case, upon completion of plan payments, a debtor generally is discharged of all debts "provided for by the plan or disallowed under section 502" of the Code. (citation omitted). Section 1328(a) does not, by its terms, discharge a chapter 13 debtor of her obligation to repay claims denied solely under Bankruptcy Rule 3001.Opinion, p. 15. Thus, had the debtor been successful in her non-substantive objections, she would not have discharged the debts.The Ethical Obligations of the Debtor's CounselThe Court was not amused as shown by the subheading "The Ethical Obligations of the Debtor's Counsel." The Court noted that filing the schedules and objecting to the claims, debtor's counsel deliberately chose to (i) ignore the debtor's personal knowledge,and (ii) conduct no independent investigation prior to filing the debtor's bankruptcy schedules and claim objections."Opinion, p. 21. The Court went on to state:It appears to the Court that the debtor and her counsel were motivated by the off-chance that the claimants would not respond to the objections and, consequently, that this Court would sustain the objections without substantive review. 'An off-chance does not satisfy [Bankruptcy] Rule [9011].' (citation omitted). 'This approach of throwing it against the wall and seeing what sticks is precisely the sort of conduct [Bankrutpcy Rule 9011] seeks to counter. (citations omitted). Opinion, pp.21-22. The Debtor's Obligation to Act in Good FaithThe Court was not any more impressed with the debtor's conduct. Regardless of the advice the debtor may have received from her counsel regarding the claims allowance process, she has an obligation to the Court to act in good faith. To confirm a chapter 13 plan, the bankruptcy court must find, among other elements, that 'the plan has been proposed in good faith.' (citation omitted). . . Good faith in this context is not an esoteric legal concept that only lawyers and judges can understand. The question is whether the totality of the circumstances indicates that the plan is unreasonable or that the debtor is attempting to abuse the spirit of the Code. (citation omitted).Opinion, pp. 22-23. The Bottom LineThe Court overruled the claims objections, vacated the order confirming the plan, gave the debtor 30 days to file a new plan and scheduled a hearing to determine whether debtor's counsel violated Rule 9011.What It MeansThe chapter 13 bargain is about paying creditors in return for a discharge. The debtor had enough disposable income to pay all of the filed claims in less than sixty months. This would have been a good deal because the debtor would have been able to repay the debts without interest. However, the debtor tried to take a shortcut and eliminate all of her claims on a defect of form. The Court was right to be concerned about the good faith of this practice.

Yesterday, the U.S. Bankruptcy Court for the Southern District of New York approved the sale of the Manhattan campus of St. Vincent's Catholic Medical Centers to the Rudin real estate family and the North Shore-LIJ Health System.We represented an alternative purchaser group (comprised of former New York City Councilmember Alan J. Gerson, attorney Dudley Gaffin and Dr. Robert Adelman) that objected to the sale. Please read articles about the sale in the Washington Square Journal and Crain's New York Business.

By HANNAH SELIGSONSMALL-BUSINESS owners know it is cash flow or die. While the recession officially ended in June 2009, many companies are still reeling. Credit can be hard to come by, and profits have not completely bounced back. On top of that, many customers are taking longer than ever to pay their bills.Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun & Bradstreet, that will assess the financial strength of a company.)SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia & Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”There are, he said, no hard and fast rules. “It’s all about the dynamics,” he said. “For example, if we have a customer who is in dire straits, and they appear to be making an effort to pay, we might continue working with them.”Still, the economics may ultimately dictate the decision. As Mr. Phelps pointed out, if your company has a 10 percent profit margin and you lose $10,000 on an account, that is an additional $100,000 in revenue that your company has to find.DON’T RELY ON THE POST OFFICE To avoid having someone in the accounting department tell you that “the check is in the mail,” push for direct deposit or electronic transfer. That way, you can get paid exactly on the 45th or 60th day. There are also services available from banks that will allow checks to be faxed and scanned, with the money deposited into your account the same day.Consider accepting credit cards or PayPal. Yes, there is a fee, depending on which card or service you use, but the cash comes almost instantly.“Some credit card companies pay their merchants on the following day,” said George A. Cloutier, founder of American Management Services, a financial turnaround firm. “And in a climate where cash is so tight, that’s often worth the fee.”LET THEM KNOW IT’S IMPORTANT Rachel Lawrence oversees invoicing and bill collection at Bright Power, an energy efficiency company based in Manhattan. She was trying to collect from a property management firm that was 30 days late on a $25,000 invoice.“They kept giving me this excuse that they had changed accounting systems, which I think can be a delay tactic,” she said. “It got to the point where I really had to make it clear that I wanted payment, so I offered to physically pick up the check.”Ms. Lawrence gave the property management company dates and times she would be available to make the 30-minute trip to its office in Midtown Manhattan. The firm agreed to have the check ready. “When you say this is important enough to me that I will go out of my way,” she said, “I think people respond.”OFFER A DISCOUNT Mr. Phelps said he does not like to reward clients for not paying, but that in certain cases extending a discount on the condition that the debt be paid immediately in cash or a cashier’s check can make the money appear.“We’d rather have something than nothing and save ourselves the time and effort of going to court,” he said, “but we probably wouldn’t enter into a credit relationship with that company in the future.”And do not be afraid to give a 10 percent discount, said Mr. Cloutier: “For 1 or 2 percent, it’s probably not worth it to the person who owes the money, particularly if they are short on cash.”Copyright 2011 The New York Times Company. All rights reserved.

Offers of Judgment can be a handy device for shifting the risk of paying court costs in litigation. However, as a pair of recent opinions from Judge Leif Clark demonstrate, they can be tricky to pull off successfully. Eastman v. Baker Recovery Services, Adv. No. 08-5055-C (Bankr. W.D. Tex. 12/28/10 and 1/31/11). You can find the opinions here and here. The Offer of Judgment Rule Federal Rule of Bankruptcy Procedure 7068 incorporates Federal Rule of Civil Procedure 68, which states: Rule 68. Offer of Judgment (a) Making an Offer; Judgment on an Accepted Offer. More than 14 days before the trial begins, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment. (b) Unaccepted Offer. An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs. (c) Offer After Liability Is Determined. When one party's liability to another has been determined but the extent of liability remains to be determined by further proceedings, the party held liable may make an offer of judgment. It must be served within a reasonable time — but at least 14 days — before a hearing to determine the extent of liability. (d) Paying Costs After an Unaccepted Offer. If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made. The rule is designed to encourage parties to make serious settlement offers early in the proceedings to avoid running up costs. If a defendant makes a reasonable offer and it is accepted, the case is over. On the other hand, if the defendant makes an offer which is not accepted and the ultimate judgment is “not more favorable than the unaccepted offer” the plaintiff must pay the defendant’s costs incurred after the offer was made. The Eastman Case Eastman was a particularly ugly discharge violation case. I have written about the underlying case before here. The defendants made an offer of judgment for $5,000.00 on February 27, 2009. After trial, the Court awarded $1,000.00 in statutory damages under the FDCPA plus attorney’s fees. The defendants objected to the plaintiff’s request for attorney’s fees based on the offer of judgment. The Court rejected the defendant’s argument, finding that the offer of judgment was not “not more favorable than the unaccepted offer.” The rule thus provides that the plaintiff must pay a defendantʼs fees if the judgment rendered fails to exceed the amount of the offer in compromise. In this case, the judgment consists of (a) the actual damages suffered, consisting of attorneysʼ fees incurred by the Plaintiff in order to enforce the discharge injunction and (b) the reasonable expenses incurred by the Plaintiff in recovering those actual damages, consisting of attorneysʼ fees incurred in prosecuting the litigation in order to obtain that recovery. (citation omitted). Thus, “costs” in the context of the rule includes the reasonable attorneysʼ fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law. “[T]he judgment finally obtained must include not only the verdict of the jury but also the costs actually awarded by the court for the period that preceded the offer.” (citation omitted). The offer in this case was made well after the Plaintiff had incurred reasonable fees for the preparation of the complaint, preparing a response to a motion to dismiss, and preparing a response to a motion for summary judgment. In addition, discovery had already taken place. The offer made was for $5,000, and was filed of record on February 27, 2009. By that point, the Plaintiff had already incurred $3,900 in fees by Alex Katzman (litigation counsel), and $4,150 in fees by Rob Eichelbaum (bankruptcy counsel) by February 27, 2009. Over $9,000 in fees were incurred by Mr. Eichelbaum from late 2007 through the end of 2008. $3,000 in fees was incurred just to convince the Defendants to withdraw the offending judgment -- and that only after the Defendants tried to use that judgment to extract a payment from the Plaintiff. Thus, the judgment, including the costs incurred to that point in time exceeded the offer in compromise. The Defendants are not entitled to recover their costs from Plaintiff under Rule 68(d). Opinion on 12/28/10, pp. 8-9. Thus, in order to have been successful, the Offer of Judgment should have offered $5,000 plus costs incurred to date. Because the offer was for a flat $5,000.00 and the attorney’s fees incurred exceeded that amount, the offer did not meet the requirements of the rule. Undeterred, the defendants moved for reconsideration on the basis that they had previously made an offer to settle in March 2008. The Court noted that this offer was made prior to the commencement of the litigation. The Court cited the Wright & Miller treatise for the proposition that an offer of judgment can only be made by a party defending against a claim. If litigation has not been brought, then the offer to settle is not an offer of judgment. A Successful Offer of Judgment Case While Eastman shows how not to make an offer of judgment, Judge Letitia Paul’s opinion in Smith v. Radoff, 2006 Bankr. LEXIS 2412 (Bankr. S.D. Tex. 2006), is an illustration of a successful use of Rule 7068. In that case, a judgment creditor obtained appointment of a receiver for the debtor’s assets some sixteen years after entry of the discharge. The receiver withdrew $44,475.79 from the debtor’s bank account. Upon being sued, the quick-thinking defendants made separate offers of judgment to return the funds and to pay interest, costs and attorney’s fees. The plaintiff refused the offer and proceeded to trial. At trial, the Court found that the defendants testified credibly that they were not aware of the bankruptcy discharge and had difficulty verifying it due to the age of the case (it was filed in 1987) and the debtor’s common surname. The Court awarded interest on the seized funds at the federal judgment rate. Although the plaintiff requested attorney’s fees of $71,357.50, the court only awarded fees of $12,000.00, finding that the plaintiff had failed to mitigate damages. The Court denied all other relief to the plaintiff. The Court then found that because the judgment was not more favorable than the offer of judgment, that the defendants were entitled to recover their costs. In subsequent proceedings, the Court awarded attorney’s fees to each of the defendants in an amount exceeding the plaintiff’s recovery. As a result, when the final judgment was entered, the plaintiff owed a small amount to the defendants. The case settled after an appeal was filed. More on Attorney’s Fees While both the Eastman and Smith cases found that attorney’s fees were included within the definition of costs, this is not always the case. In Marek v. Chesny, 473 U.S. 1 (1985), the Supreme Court held that attorney’s fees constitute costs whenever the underlying substantive ground for relief defines them as costs. The Advisory Committee notes to Federal Rule 54(d) listed 35 statutes which allow recovery of costs, of which at least eleven included attorney’s fees within the definition of costs. The Civil Rights Attorney’s Fees Awards Act of 1976, which was the governing statute in the Marek case, allowed attorney’s fees “as part of the costs.” As a result, the Supreme Court found that attorney’s fees could be awarded under Rule 68. The Supreme Court’s ruling means that awards of attorney’s fees as costs under Rule 68 may be dependent upon small variations in language. For example, 28 U.S.C. §1927 allows a court to award “excess costs, expenses, and attorney’s fees.” Since costs and attorney’s fees are listed as separate items in the statute, attorney’s fees would likely not constitute costs in that context. In Eastman, Judge Clark found that “’costs’ in the context of the rules, includes the reasonable attorney’s fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law.” Opinion 12/28/10, p. 9. Unfortunately, Judge Clark did not cite to the settled case law. However, in Chambers v. NASCO, Inc., 501 U.S. 32 (1991), the Supreme Court stated that “a court's discretion to determine ‘the degree of punishment for contempt’ permits the court to impose as part of the fine attorney's fees representing the entire cost of the litigation.” While the Supreme Court was not using the term “cost” in the narrow sense of costs of court under Rule 68, this may provide some support for the proposition. A Final Quirk As if the law on Offers of Judgment were not difficult enough, there is a line of cases which hold that an Offer of Judgment will not result in cost shifting in a case where the defendant is the prevailing party. In re LMP Shoal Creek, LLC, 2007 Bankr. LEXIS 4659 (Bankr. W.D. Tex. 2007); In re Security Funding, Inc., 234 B.R. 398 (Bankr. E.D. Tenn. 1999). Rule 68(d) refers to “the judgment that the offeree finally obtains.” These cases hold that if the plaintiff does not recover a judgment, that Rule 68 would not apply. This appears to be a strange result, since a damage award of $1 would allow cost shifting, but a take nothing judgment would not.

A debtor who was denied a job based on a bankruptcy filing found out the hard way that subtle differences in wording can make a big difference. Burnett v. Stewart Title, No. 10-20250 (5th Cir. 3/4/11). You can find the opinion here.In September 2006, Shani Burnett filed for chapter 13 bankruptcy relief. The following year, she interviewed with Stewart Title. She was offered a job subject to a background check. When Stewart Title found out about the bankruptcy, they rescinded the offer. Burnett filed suit against Stewart Title under 11 U.S.C. Sec.525, which is titled "Protection Against Discriminatory Treatment." The Bankruptcy Court dismissed the Complaint for failure to state a cause of action and the District Court affirmed.The Fifth Circuit as well. What would have been a good claim against a public employer failed to state a cause of action against a private employer. Section 525(a) says that a public employer may not "deny employment to, terminate the employment of, or discriminate with respect to employment against" a debtor. Sec. 525(b) states that a private employer may not "terminate the employment of, or discriminate with respect to employment against" a person who has filed bankruptcy.The Debtor argued that refusing employment based on bankruptcy constituted "discrimination with respect to employment," one of the two clauses applicable to a private employer. The Fifth Circuit conceded that the argument might be reasonable in isolation, but failed when the two subsections were read together.Burnett and amicus curiae contend that the act of denying employment to a person is to “discriminate with respect to employment against” that person, such that it is barred by the plain language of § 525(b). If § 525(b) were considered in isolation, Burnett’s position may have merit. However, when interpreting the meaning of a phrase in a statute, the statute must be read as a whole because “ ‘Act[s] of Congress . . . should not be read as a series of unrelated and isolated provisions.’ ” (citation omitted).* * *Applying . . . canons of statutory construction to § 525(b), we conclude that Congress did not prohibit private employers from denying employment to persons based on their bankruptcy status.Opinion, pp. 2-3, 5.The Fifth Circuit's opinion is spot on. Where one subsection expressly applies to denial of prospective employment and the second one does not, the omission must be given effect. The bottom line is that public employers may not discriminate against either existing or prospective employees based on their bankruptcy status, but private employers must only protect existing employees. The Bankruptcy Court opinion by Judge Jeff Bohm makes an important point:If Stewart Title had actually offered Burnett a position and if she had accepted the offer, then an employment relationship would have arisen, and any discrimination thereafter based on Burnett's bankruptcy status would have been unlawful under Sec. 525(b). (citation omitted). However, because Burnett was never formally hired and never had an employment relationship with Stewart Title, Stewart Title did not violate Sec. 525(b) by refusing to hire Burnett based on her bankruptcy status.Memorandum Opinion, Burnett v. Stewart Title, Adv. No. 08-3239 (Bankr. S.D. Tex. 10/14/08), pp. 6-7.While it is unfortunate that the prospective employee did not receive "protection against discriminatory treatment," the statutory wording dictated the result. Private employers may reject potential employees based on bankruptcy status.

By STEPHANIE CLIFFORD American shoppers did not shed their reliance on credit cards over the year-end holidays.While the average debt on credit cards in December decreased by 4 percent compared with the same month a year before, Americans still carried an average of $4,284 on credit card statements in December 2010, according to data released this week by the credit monitoring company Experian.The data offers conflicting versions of the economy’s already mixed picture. While some consumers spent more during the holidays because the economy was rebounding, others were still unable to cover expenses without leaning on their credit cards. And while holiday spending also appeared to have been more robust than in the last several years, even more recent data has shown a bit of a slowdown in consumption this year.“You’ve got people who already had good credit and were pretty much managing their credit, and because of the risk, paid down their debt even more,” said Maxine Sweet, vice president for public education at Experian. Then there were “very dramatic increases in debt by people who, mainly, lost jobs, but also had medical emergencies, and turned to credit cards to carry them through the hard times.”The most recent consumer credit report from the Federal Reserve showed that revolving credit, which is mostly credit card debt, increased by 3.5 percent in December at an annual rate, the first such increase in 27 months. (That data included “charge-offs,” or debt that the credit card companies considered essentially uncollectible, while the Experian data, since it was pulled from active credit files, did not.) Card spending (including credit, debit and electronic benefit-transfer cars) was up 6.5 percent in December compared with spending at the same stores a year earlier, according to First Data, which processes merchant transactions.Retailers tend to benefit from credit card spending, as it often means people are spending beyond their budgets.Holiday spending rose 5.5 percent in the 50 days before Christmas in 2010 compared with 2009, according to MasterCard Advisors SpendingPulse. Much of that was driven by increases in apparel, jewelry and luxury goods.While many shoppers had vowed to spend only with cash this holiday season, that was a budgeting trick that not everyone could use.The cash shoppers, Ms. Sweet suggested, “were the ones that were pretty much in control — they can say, ‘I’m going to be more conservative.’ ” People under more difficult circumstances had to put certain debts on their credit cards, she said. In February, the retail analyst David Strasser issued a note to clients saying that the increase in credit spending was good news.Spending at Visa and MasterCard in the United States was up a combined 8.3 percent for the fourth quarter, Mr. Strasser noted, “a hopeful sign that big-ticket spending is in recovery mode for 2011.”“Weak credit trends have clearly bottomed out,” he wrote, and the increases in credit card spending “will disproportionately help big-ticket retailers that were hit hard during the downturn, as credit was curtailed and consumers lacked liquidity to purchase big-ticket products.”The Experian data, which is broken down by metropolitan area, also gives a sense of how different cities may be recovering from the recession.The city with the highest card debt in December was San Antonio, with $5,177 due on average, 21 percent above the national average. (The figures include debts on regular credit cards and retail Visas and MasterCards, but not a retailer’s own card — so a Gap-brand credit card would not be included, but a Gap Visa card would.)San Antonio was followed by Jacksonville, Fla., at $5,115, a city with one of the lowest average credit scores, suggesting that pure debt may have been piling up there. Dallas, which came in at fifth with $4,936, also has one of the lowest average credit scores in the country.Atlanta was third, with $4,960, and Honolulu, with $4,939, was fourth.In 2009, the list of cities with the most credit card debt was similar: Dallas, Atlanta, San Antonio, Jacksonville and the Waco, Tex., metropolitan area.Jeanie Wyatt, chief executive of the San-Antonio based advisory firm South Texas Money Management, said the economy in the city had been quite steady.“Our unemployment rate is lower than the national average,” she said, “the health care field has been fast-growing, and of course we still have a big military component, and tourism, and a growing energy component. People are feeling, I think, pretty good about their job security.”She said San Antonians were largely living on working-class paychecks, which could explain some of the credit card debt.“While San Antonio has a lower unemployment rate and a more stable economy, our wage earners are at that mid- to lower end,” she said. “I would presume that lower-income individuals tend to have a higher percentage of credit card debt.”The cities that racked up the lowest credit card debt for December were Sioux Falls, S.D. ($3,446); the area in Tennessee and Virginia around Kingsport, Johnson City and Bristol ($3,449); Fort Wayne, Ind. ($3,476); Paducah, Ky.($3,515); and Davenport, Iowa ($3,515).In December 2009, the cities with the lowest credit card debt were Altoona, Pa.; Lafayette, La.; Evansville, Ind.; Davenport, Iowa; and Cedar Rapids, Iowa.VantageScore, a credit rating produced by the three major reporting bureaus, Experian, Equifax and TransUnion, gives a picture of whether the credit card spending came from economic confidence, or from desperation.Midwest and West Coast cities dominated the list of cities with the 25 highest VantageScores. Wisconsin had three cities on that list (Green Bay, at No. 1; Madison, at No. 2; and Milwaukee, at No. 21). Several states had two: California (San Francisco and Santa Barbara), Minnesota (Minneapolis and the Valley City-Fargo area, which crosses into North Dakota), Oregon (Eugene and Portland) and Iowa (Cedar Rapids and Des Moines). There were no Southern or Southwestern states on the list of the top credit scores.“Cities like Minneapolis, that always have great credit scores, actually have higher debt than other cities,” Ms. Sweet said. “But it’s offset by the fact that they never miss payments, and they always have high credit limits.”The list of the 25 cities with the lowest VantageScores in December was heavily Southern. Texas had seven cities on the list (Harlingen, El Paso, Tyler, Waco, San Antonio, Dallas and Houston, going from lowest to highest credit scores). Other than two California cities (Bakersfield and Fresno) and Las Vegas, every other city on the list was from the South.“Part of that is a lot just a lot of younger people moving in, and a larger migrant population — so by younger, meaning not just in age, but also less depth in their credit history, and we think that’s one factor,” Ms. Sweet said of the lower credit scores in Texas in particular.“When you have these consumers who are in crisis with foreclosures and unemployment, that has to be driving up their credit card debt,” Ms. Sweet said.Shoppers interviewed last December sounded quite cautious about their spending.Julianne Cantarella, 43, was at the Garden State Plaza Mall in Paramus, N.J. (the New York metropolitan area is No. 42 on the Experian list of high credit card debt). Her house had finally sold over the summer after being on the market for a year and a half, she said, so she thought the economy was improving.“But I did cut down on the money I’m spending and the amount of gifts I’m buying,” she said.In Columbus, Ohio (No. 12 on the Experian list), Dorothy Huggins, 54, was shopping with her granddaughter.“Everybody in our family is fine — nobody’s lost their jobs, but I have lots of friends and neighbors who have been hit,” Ms. Huggins said. “That made us more conservative this year because we’re wondering, are we next?”“There are so many people hurting, through no fault of their own. And we’re fortunate enough to be doing well,” she said. “So we bought a lot less stuff this year.”Christopher Maag contributed reporting from Columbus, Ohio, and Nate Schweber from Paramus, N.J.Copyright 2011 The New York Times Company. All rights reserved.

This past Saturday, I was able to combine two of my interests, books and bankruptcy, in a trip to the Borders Going Out of Business Sale. Actually, my eldest daughter demanded that I take her there. However, I was happy to indulge her and I thought it would be interesting to see what a going out of business sale looked like.We went during the initial, orderly stage of the sale. There was still a wide selection of books available. The shelves all contained labels saying "Fixtures not for sale." The sale looked like a very successful marketing strategy. The books we bought were marked down 20-30% with an extra 10% off with a Borders card. Those prices were good, but not much less than a typical sale. Nonetheless, the store was packed with customers, so it appears that the GOB hype was successful in bringing in the purchasers even before the discounts got deep.When we went, employee morale appeared to be pretty good. The clerks were doing a good job of moving customers through the line and were friendly. However, I did overhear a clerk telling a customer that he didn't know when the store would be closing and that the employees were the last to know what was happening. However, his tone was matter of fact rather than frustrated or angry. I imagine that after he answers the same question a hundred more times, there may be more of an edge to the response.I plan to return to the late stages of the sale to see what whether the orderliness and calm continues to prevail as the store enters its death spiral.Credit Slips has a good take on Borders abuse of the venue provisions of the Code. You can find it here.

In a 113 page opinion, U.S. District Judge Alan S. Gold has reversed a controversial fraudulent conveyance judgment in the TOUSA bankruptcy case. In re TOUSA, Inc., Case No. 10-60017 (S.D. Fl. 2/11/11). You can find the opinion here.A Series of Highly Unfortunate EventsTOUSA involved a network of related companies in the homebuilding business. They obtained liquidity for their operations through a revolving line of credit granted by Citicorp North America as administrative agent ("the Revolver"). Ultimately, the Revolver was guaranteed by the TOUSA subsidiaries and their assets were pledged as collateral.Meanwhile, TOUSA entered into a Joint Venture with Falcone/Ritchie, LLC to acquire some of the homebuilding assets of Transeastern Properties, Inc. ("the TransEastern JV"). To fund the TransEastern JV, they took out new debt independently of the Revolver (the "TransEastern Debt"). The lenders on this debt were known as the TransEastern Lenders. TOUSA and some, but not all, of its subsidiaries, guaranteed the TransEastern Debt.The joint venture did not go well and the TransEastern Lenders declared a default.At this point, Citicorp became uncomfortable and demanded that the TOUSA subs pledge collateral for the Revolver. Because they wanted to continue benefitting from the funds available under the Revolver, they agreed.Meanwhile, the TransEastern Lenders brought suit against TOUSA and the other parties liable on the TransEastern Debt. TOUSA saw that it had three choices: 1) litigate; 2) file bankruptcy or 3) settle. They didn't believe that they could survive an extensive lawsuit. They also were afraid that if the parent filed bankruptcy, funding for the operating subsidiaries would dry up.With settlement being the only viable option, they settled. The TOUSA group took out new loans from, appropriately enough, the New Lenders. The debt to the New Lenders was guaranteed by the subsidiaries and the subsidiaries pledged their assets. Citicorp agreed to allow the New Lenders to have an equal lien on the assets that were already pledged to them.The effect of this transaction was that a larger group of TOUSA companies (the "Conveying Subsidiaries") pledged their assets and guaranteed the new debt where previously, only the parent company and a few subsidiaries had been liable for the TransEastern Debt.The settlement occurred on July 31, 2007. The TransEastern Lenders received payment of over $426 million on debt exceeding $600 million.Unfortunately, the settlement with the TransEastern Lenders did not spell the end of the TOUSA troubles. August 2007 was described as a “once in a century credit tsunami,” a “Black Swan” event, and an “economic Pearl Harbor.” TOUSA and many of its subsidiaries filed chapter 11 on January 29, 2008. The Creditors' Committee filed suit against the TransEastern Lenders and the New Lenders asserting that the TransEastern settlement constituted a fraudulent conveyance.The Bankruptcy Court found that the Conveying Subsidiaries did not receive reasonably equivalent value. The Court found that they did not receive any direct benefit from having their assets encumbered and that, on top of that, they failed to prevent the bankruptcy of the parent company. The Bankruptcy Court dismissed the prospect that the Conveying Subsidiaries would have been harmed by a default under the Revolver caused by the TransEastern litigation.The Court also found that "the New Lenders and the Transeastern Lenders did not act in good faith and were grossly negligent when they engaged in the July 31 Transaction on the basis that there was 'overwhelming evidence that TOUSA was financially distressed.'” District Court Opinion, p. 38.The Bankruptcy Court avoided the liens of the New Lenders and ordered the TransEastern Lenders to disgorge the payments it had received and to pay prejudgment interest.The District Court OpinionThe District Court teed up the issues as:(1) whether the Transeastern Lenders can be compelled to disgorge to the Conveying Subsidiaries funds paid by TOUSA to satisfy a legitimate, uncontested debt, where the Conveying Subsidiaries did not control the transferred funds, and(2) whether the Transeastern Lenders are liable for disgorgement as the entities “for whose benefit” the Conveying Subsidiaries transferred the Liens to the New Lenders, where the Transeastern Lenders received no direct and immediate benefit from the Lien Transfer.District Court Opinion, p. 42.Parroted Findings Not Entitled to Clearly Erroneous ReviewNormally "reasonably equivalent value" would be a fact question reviewed under the clearly erroneous standard. However, the District Court had harsh words for the Bankruptcy Court 's findings. The Bankruptcy Court adopted 446 out of 448 proposed findings from the Committee in whole or in part while adopting none of the 1,600 findings proposed by the Defendants. In its Brief, the Defendants contended that out of 500 pages of post-trial submissions, not "a single case, exhibit or other piece of evidence cited by them appears in the Opinion unless and to the extent it was also cited by the Committee."The District Court stated:The “clearly erroneous” standard of review for factual findings is relaxed in circumstances where a lower court adopted one party’s proposed order verbatim. (citation omitted). This practice has been heavily criticized and discouraged by the U.S. Supreme Court and by the Eleventh Circuit. (citation omitted). (“Many courts simply decide the case in favor of the plaintiff or the defendant, have him prepare the findings of fact and conclusions of law and sign them. This has been denounced by every court of appeals save one. This is an abandonment of the duty and the trust that has been placed in the judge by these rules. It is a noncompliance with Rule 52 specifically and it betrays the primary purpose of Rule 52—the primary purpose being that the preparation of these findings by the judge shall assist in the adjudication of the lawsuit. I suggest to you strongly that you avoid as far as you possibly can simply signing what some lawyer puts under your nose. These lawyers, and properly so, in their zeal and advocacy and their enthusiasm are going to state the case for their side in these findings as strongly as they possibly can. When these findings get to the courts of appeals they won't be worth the paper they are written on as far as assisting the court of appeals in determining why the judge decided the case.”) (citing J. SKELLY WRIGHT, SEMINARS FOR NEWLY APPOINTED UNITED STATES DISTRICT JUDGES 166 (1963).District Court Opinion, pp. 44-45.I have no way to know whether the Bankruptcy Court's wholesale adoption of the Committee's findings was the result of judicial laziness or simply because the Committee's lawyers were extremely persuasive. However, when the Court simply parrots back the findings proposed by one party, the court has ceased being a neutral arbiter and has become a mouthpiece for the winning party. As the District Court correctly noted, "When these findings get to the courts of appeals they won't be worth the paper they are written on as far as assisting the court of appeals in determining why the judge decided the case.”Before You Can Figure Out If It Was a Fraudulent Conveyance, You Have to Figure Out What HappenedThe District Court began its analysis by examining the substance of the transactions.Those transactions involved three distinct asset transfers:1. TOUSA caused certain of the Conveying Subsidiaries to convey the liens on their real property assets and become obligated to a collection of financial entities referred here as the New Lenders.2. In exchange for the liens and the obligations, the New Lenders loaned funds and provided credit facilities, the New Loans, to TOUSA; and3. TOUSA used the funds from the New Lenders in part to satisfy its $421 million debt to the Transeastern Lenders.District Court Opinion, p. 47. The District Court then contrasted this analysis with the Bankruptcy Court's findings.The Bankruptcy Court found the Transeastern Lenders liable under Section 548 on two different bases of liability, for two distinct fraudulent transfers:(1) as direct transferees of the New Loan proceeds paid in satisfaction of a valid antecedent debt; and (2) as entities “for whose benefit” the Conveying Subsidiaries transferred the liens to the New Lenders. In essence, the Bankruptcy Court found that the Conveying Subsidiaries had a property interest in the New Loan proceeds that TOUSA transferred to the Transeastern Lenders, received only minimal value in exchange for relinquishing that property, and were insolvent. Accordingly, the Bankruptcy Court voided the entire transfer and ordered the Transeastern Lenders to disgorge the funds received in satisfaction of the undisputed debt they were owed. [Op., p. 180–81]. The Bankruptcy Court’s Opinion adopted both of the Committee’s theories of liability in the same language used in the Committee’s post-trial papers with only the barest of word changes, and without attempting to harmonize these two mutually exclusive theories.District Court Opinion, pp. 47-48.This passage highlights an important aspect of applying fraudulent transfer law to complex financial transactions. Because these transactions involve multiple transactions and multiple parties, the way that you slice and dice the transactions may determine the outcome. The Bankruptcy Court collapsed the transactions into a single transfer where the assets of the Conveying Subsidiaries were used to pay the debt of the parent TOUSA. On the other hand, the District Court examined each transaction independently.The District Court Rejects the Direct Transferee TheoryThe District Court had no trouble rejecting the theory that the TransEastern Lenders were the recipient of a direct transfer of property of the Conveying Subsidiaries. The loan proceeds from the New Lenders were deposited into an account of a subsidiary which was not one of the Conveying Subsidiaries. The Conveying Subsidiaries never had any control over these funds. As a result, the Conveying Subsidiaries did not have a property interest in the funds paid to the TransEastern Lenders. The control test is important under the Eleventh Circuit decision in In re Chase & Sanborn Corp., 848 F.2d 1196 (11th Cir. 1988).The District Court was dismissive of both the Bankruptcy Court's reasoning and the arguments advanced by the Committee on appeal.Without any factual dispute in the record, both the First and Second Lien Term Loan Agreements directed that the proceeds of the New Loans be used to satisfy the Transeastern Settlement. Specifically, Section 4.12 of the agreements required the proceeds of the loans to be used to fund the “Acquisition,” defined as “the contribution by the ‘Administrative Borrower’ [TOUSA] to the Transeastern JV Entities of an amount necessary to discharge all amounts of outstanding indebtedness of the Transeasatern JV Entities.” [Trial. Exh. 360 §§ 1.1, 4.12]. Under the totality of the circumstances, the Bankruptcy Court’s findings and legal conclusions were neither “logical” nor “consistent with the equitable concepts underlying bankruptcy law.”* * *The Bankruptcy Court erred by failing to apply the Eleventh Circuit’s control test to the totality of the circumstances as established by the actual documents governing the transactions. Rather, it dismissed the test, expressly rejecting as “clearly wrong” the proposition that ‘control’ is an essential element of any property interest under Section 548. [Op., p. 157]. The Bankruptcy Court expressed the view that a control test “would negate the paradigmatic example of a fraudulent transfer, in which the owner of an insolvent corporation transfers corporate funds to a personal account for his personal use” because the owner’s de facto control over the funds cannot vitiate the corporation’s control over, and property interest in, the funds. [Id. at 158].District Court Opinion, p. 49, 50-51. Similarly, the Court noted that, "In its Appeal Brief, the Committee offered no substantive response to the Transeastern Lenders’ position that the Conveying Subsidiaries never had any property interest in the New Loan proceeds, and thus transferred nothing to the Transeastern Lenders." District Court Opinion, p. 54.District Court Finds Clear Error in Finding Lack of Reasonably Equivalent ValueIn a mind-numbing discussion, the District Court found that the Bankruptcy Court committed clear error in finding lack of reasonably equivalent value. On the one hand, the Bankruptcy Court found that the Conveying Subsidiaries had only a minimal interest in the loan proceeds because they had been "forced" to agree to the use of these funds to pay the TransEastern Lenders. The District Court held that if the Conveying Subsidiaries had only a minimal interest in the loan proceeds, that they needed only to receive a minimal value to receive reasonably equivalent value. The approaches taken by the Bankruptcy Court and the District Court illustrate the difference between a forest or the trees approach. The Bankruptcy Court looked at the forest. It concluded that the Conveying Subsidiaries' assets were encumbered to pay a debt of the parent. The District Court looked at the trees. The Conveying Subsidiaries encumbered their assets in return for loan proceeds. If those loan proceeds were used improvidently, that did not change the fact that they received reasonably equivalent value from the loan itself. They all had boards and the boards voted to approve the transaction.At this point, the District Court opinion has an almost Alice in Wonderland quality. If you encumber your assets in return for loan proceeds in which you have a minimal interest, you need only receive minimal value in return. Of course, if the assets were encumbered by full value liens and the Conveying Subsidiaries received only a minimal interest in the net proceeds, it stands to reason that there is a disconnect here. Indirect Value Is Still ValueThe District Court returned to surer footing when it analyzed the question of indirect value. The Bankruptcy Court held that if the Conveying Subsidiaries did not receive direct value, that the TransEastern Lenders had the burden to prove receipt of indirect value. However, the District Court noted that the Plaintiff had the burden to prove lack of reasonably equivalent value, whether it was direct or indirect. Thus, the Bankruptcy Court placed the burden of proof on the wrong party. The District Court concluded that "the record establishes beyond dispute that the ConveyingSubsidiaries themselves, as compared to only the TOUSA Parent, received indirect economic benefits, constituting reasonably equivalent “value,” in exchange for their lien transfers." District Court Opinion, pp. 63-64. The District Court found that the Bankruptcy Court committed an error of law when it held that avoiding default under the Revolver could not constitute value to the Conveying Subsidiaries.Nonetheless, I conclude that the Bankruptcy Court committed legal error in holding that the “avoidance of default and bankruptcy by the Conveying Subsidiaries” is as a matter of law “not property and therefore is not cognizable as ‘value’” under Section 548 of the Bankruptcy Code.District Court Opinion, p. 64. I think this is an important conclusion. Using the forest and the trees analogy again, at the forest level, it was reasonable for the Conveying Subsidiaries to conclude that avoiding the financial decapitation of their parent was in their collective interest. As Ben Franklin once said, "We must all hang together or we shall all hang separately." However, in this case, the Bankruptcy Court was looking at the trees when it concluded that the Conveying Subsidiaries encumbered their assets for the gratuitous benefit of their parent. If the economy had not descended into an economic black hole, the decision of the Conveying Subsidiaries to attempt to save themselves by saving their parent would have been quite sound. Reasonably equivalent value must be determined based on July 31, 2007 rather than August 2007.The District Court opinion goes on for another fifty pages. However, the most important part is on page 64. The District Court opinion is Act II of a drama which will continue to at least Act III and possibly Act IV. What it does is set forth two very different approaches to the same problem. The Eleventh Circuit panel which receives this appeal will have some deep thinking in store for them.

The Fifth Circuit's recent decision in Camp v. Ingalls allowed an itinerant debtor to claim federal exemptions that would not have been available to him had he remained in Florida. That was a small victory for the debtor. However, a decision released just a few days later reveals the darker side of the 730 day rule for claiming exemptions. In the case of In re Fernandez, No. 09-32896 (Bankr. W.D. Tex. 1/26/11), which can be found here, a debtor was deprived of the generous homestead exemption allowed by both Texas and Nevada law where he had gone back and forth between these states.What HappenedAlfred Fernandez owned a home in El Paso, Texas. When he was laid off from his job in El Paso, he relocated to Nevada for seven years. All the while, he continued to make the payments on his home in El Paso and planned to return. About a year prior to bankruptcy, he did return. When he filed for bankruptcy, he claimed his home as exempt under Texas law and the trustee objected. Then he amended his exemptions to claim the home as exempt under Nevada law and the trustee objected. Because he had not lived in Texas for 730 days before bankruptcy, the Texas exemptions were not available to him. However, the trustee contended that Nevada law could not be used to exempt property located in Texas. The Bankruptcy Court agreed.The Court's RulingJudge Leif Clark engaged in an exhaustive analysis of the legal issues involved. However, at its core, the ruling followed this logic:1. Sec. 522(b)(3)(A) instructs the court to look to the law of the state where the debtor resided for the greater portion of the 180 days prior to 730 days if the debtor has not resided in one state for 730 days.2. This provision requires application of Nevada law.3. Although the Nevada exemption statutes do not expressly limit their application to property located within Nevada, it is reasonably clear that Nevada would not apply its internal exemption statutes to property located within other states. Judge Clark based this conclusion, in part, in a response given by the Nevada Supreme Court to a certified question, which noted in passing that the purpose of the exemption statute was to protect "the family, its individual members, and the community and state in which the family resides." He also noted that exemption laws exist to give guidance to Sheriffs as to what property they can levy upon. Obviously, a Nevada sheriff would not be levying upon property located in Texas, so there is no reason for Nevada to design an exemption statute to apply elsewhere.4. Because the statute says to look to property that "is" exempt under the applicable state law, the Bankruptcy Court must apply state law in the same manner as the state would have.5. As a result, the Debtor is not entitled to a homestead exemption under Texas or Nevada law. The Debtor could claim a homestead exemption under federal exemptions, but this exemption would only cover a portion of the debtor's equity in his residence.The Court refused to adopt a construction in which the Bankruptcy Code effectively federalized state exemption laws. Instead, the Court applied state law in the manner in which the states would have applied it.The Court acknowledged that its decision was not very palatable, stating:The express language of section 522(b)(3)(A) certainly generates a result that many (including this court) would perceive to be unfair. But a perceived unfair result is not necessarily an absurd result. And absent such a finding, a court is obligated to apply the plain language of the statute as written. The language of the domiciliary requirement is, to this court, unambiguous and straightforward. Though the look-back period has changed, the structure of the provision is essentially unaltered from the original version enacted in 1978, and it is plainly and easily applied (albeit with unfortunate consequences in the case of traveling debtors). If the language of a statute is plain, then it is the duty of the court to enforce them according to their terms.Opinion, p. 30.While this is a harsh result, it appears to be one that Congress intended. Section 522(b)(3)(A) was intended to prevent debtors from moving to enhance their exemptions. Judge Clark's ruling is consistent with what would have happened if the debtor had remained in Nevada, namely, that he could not have claimed his Texas property as a homestead.Federalized ExemptionsJudge Clark rejected the argument that the Bankruptcy Code transformed state laws into federal rules which could be applied independently of their state law moorings. While the context was different, I made a similar argument about the Bankruptcy Code federalizing state exemption laws in the case of In re Dyke, 943 F.2d 1435 (5th Cir. 1991). (If you read the published version, it incorrectly states that my firm represented an amicus party. In fact, there were two consolidated appeals and we represented one of the debtors). In Dyke, the issue was whether ERISA preempted the Texas Property Code exemption for retirement benefits in a bankruptcy case. The correct result, as later determined by the Supreme Court, was that the anti-alienation provisions in ERISA constituted an exemption under other federal law. However, a panel of the Fifth Circuit had previously rejected this argument. This led to the seemingly absurd result that while ERISA expressly prohibited alienation of retirement plan assets, state laws which effectively said the same thing were preempted by ERISA. We argued that ERISA could not preempt state exemption laws in a bankruptcy case because the state law had become federalized when it was incorporated by the Bankruptcy Code. The Fifth Circuit adopted our reasoning but got there by a slightly different route. The Court stated:Like Title VII, the Bankruptcy Code relies on state law to assist in the implementation and enforcement of its goals. The principal goal of the Bankruptcy Code is to ensure that a debtor comes out of bankruptcy with adequate possessions to have a "fresh start." (citation omitted). The Code adopts a federal exemption scheme which satisfies this goal; but recognizing that circumstances are different in the various states, the Code also "permits the states to set exemption levels appropriate to the locale." (citation omitted). If this Court were to interpret ERISA to preempt provisions of the state exemption schemes, the states would be unable to set enforceable exemption levels on retirement benefits. This would relegate many debtors to a federal exemption scheme which might be inappropriate to the locale. As a consequence, the enforcement scheme contemplated in the Bankruptcy Code would be modified and impaired.Under the specific language of ERISA section 514(d), this Court cannot construe ERISA to modify or impair the policies of other federal laws. The Bankruptcy Code, in particular, is a federal law that ERISA cannot disturb. (citation omitted). The Texas legislature has created a state exemption scheme that advances the principal goal of the Bankruptcy Code. One such exemption in this state scheme, section 42.0021(a) of the Texas Property Code, permits bankrupt debtors to exempt the funds in their retirement plans. Tex. Prop.Code Ann. § 42.0021(a)(Vernon Supp.1991). If the ERISA preemption clause is enforced against section 42.0021(a), the preemption clause would impair the ability of the Bankruptcy Code to ensure -- through the Texas state exemption scheme -- that Texas debtors can get a "fresh start" after bankruptcy. Accordingly, this Court concludes that ERISA section 514(d) saves the Texas state exemption scheme from preemption. ERISA does not preempt section 42.0021(a) of the Texas Property Code.In re Dyke, at 1449-50. The Fifth Circuit held that the Texas Property Code advanced the policies of the Bankruptcy Code, but did not state that the Bankruptcy Code federalized state exemption laws. The nuance is important. If the state law had become federal law, it could have been interpreted as federal law. However, where it merely advanced the policies of the Bankruptcy Code, the case was weaker. Unintended ConsequencesWhen Congress added the 730-day residency requirement into BAPCPA, it was no doubt trying to discourage debtors from making an exemption-enhancing move, such as the one made by Bowie Kuhn. However, under Judge Clark's logic, the actual consequence of the statute is to provide that the prior state's law will never apply, since states do not design their exemption statutes to have extra-territorial application. This will mean that migrant debtors will be limited to or receive the benefit of the federal exemptions. Since most states have opted out of the federal exemption scheme, this means that a choice that would have been unavailable to most debtors becomes the only choice. Judge Clark, in a Scalia moment, was quick to point out that just because Congress didn't think through the consequences of its wording did not give the Court license to adopt a different construction.It seems clear that the plain language of the statute yields an unfortunate result. Here, it deprives this debtor of his home, even though outside of bankruptcy, Texas law would preserve his home against the claims of his creditors. Yet an unfortunate result is not sufficient grounds to ignore the plain language of a statute. It is certainly never grounds to simply ignore Congressional intent, nor does it ever justify simply rewriting a statute a particular judge or judicial panel does not like. And that principle of judicial restraint must cut across all ideological lines, as it is central to the nature of the judiciaryʼs role in a constitutional form of government. (citation omitted). This statute plainly directs a court to deprive the unlucky debtor who has moved to the state of filing within the two year period prior to filing of the state exemptions not only of the state in which she resides but also of the state in which she used to reside, and gives her, in return, the right to claim federal exemptions (whether on the basis this court espoused in Battle or on the basis of the failsafe provision at the end of section 522(b)(3)). The result, in this case, is that the debtor will lose his house. The court takes no pleasure in being the enforcing officer of a wrongheaded and plainly unfair statute. But it is up to Congress, not the courts, to fix this problem.Opinion, pp. 41-42 (emphasis added).(Note: When I wrote about Justice Scalia's dissent in Hamilton v. Lanning, I stated, "Justice Scalia is willing to be a minority of one for the proposition that when Congress passes laws that are foolish or just plain wrong, that the courts have an obligation to throw their words back at them and yield a foolish judgment." Thus, a Scalia moment is one where the Court consciously renders an absurd judgment because the statutory text demands it. It is worth noting that the Supreme Court's jurisprudence interpreting BAPCPA has taken the opposite approach and has tried to make sense of the law regardless of what a strict reading of the text would dictate.).The Fernandez decision is a big deal. While it is heartbreaking for Mr. Fernandez personally, the larger significance is that Judge Clark has indicted Congress for legislative malpractice for constructing a statute in which one portion (applying the law of the former state) will never apply. It will be interesting to see what the higher courts do with this difficult issue.

Another chapter in the Austin development wars has played out as the Fifth Circuit affirmed the Bankruptcy Court ruling denying confirmation of the plan of reorganization proposed by the Save Our Springs (SOS) Alliance, Inc. Matter of Save Our Springs (SOS) Alliance, Inc., No. 09-50990 (1/26/11). However, intervening developments have helped to keep the feisty environmental activist group alive. You can read the opinion here.What HappenedThe Fifth Circuit described the facts this way:S.O.S. is a nonprofit charitable organization that sues municipalities and developers to ensure what it believes is responsible use of the Edwards Aquifer in the Texas Hill Country. Two of its lawsuits resulted in sizable awards of attorney’s fees to the defendants in those suits. One of the defendants, the Lazy Nine Municipal Utility District, assigned its award to Sweetwater Austin Properties, L.L.C. (“Sweetwater”). Unable to pay the awards, S.O.S. filed for bankruptcy in April 2007.Opinion, p. 2.The Court's description is accurate, although couched in measured, legal language. SOS was born out of a citizen revolt at an all night city council meeting about a proposed development. Since that time, SOS has waged legal holy war against developers in sensitive areas of the Edwards aquifer. Several of those lawsuits blew up in their face, resulting in large judgments for attorneys fees. In its plan, SOS divided unsecured creditors into three classes and proposed to pay them $60,000 on a pro rata basis. The Bankruptcy Court rejected the SOS plan on the grounds that it had not demonstrated that it would be able to raise the $60,000 and that it had impermissibly gerrmandered the unsecured creditor classes. Because SOS was a "small business debtor," it was required to confirm a plan within 300 days. By the time the case was tried and the opinion was delivered, SOS was outside the 300 day window. SOS tried to change its designation as a small business debtor, but the Court did not allow this. As a result, the Bankruptcy Court dismissed the case.The Fifth Circuit considered three issues on appeal:1. Did the Debtor prove that the plan was feasible, that is, that it could raise the money?2. Was the Debtor's separation of creditors into different classes permissible?3. Should the Court have allowed the Debtor to change its small business designation?The Court ruled against the Debtor on all grounds.Feasibility, Fair and Equitable and the Non-Profit Debtor's DilemmaThe case of a non-profit debtor involves an interesting application of the absolute priority rule. Under the absolute priority rule, the requirement that a plan be "fair and equitable" includes the requirement that junior interests not receive or retain any interest unless unsecured creditors are paid in full or consent to the plan. However, a non-profit does not any equity holders. As a result, this requirement does not apply. It also means that the amount that a non-profit must pay to unsecured creditors in a cram-down situation is somewhat arbitrary.The amount that a non-profit must pay is governed by the following rules:1. The debtor must pay more than creditors would receive in a chapter 7 liquidation. This is often an easy test to meet because many non-profits have few if any tangible assets.2. The plan must be filed in good faith. That means that the debtor must be legitimately trying to reorganize instead of simply avoiding payment of its debts.3. The plan must satisfy the uncodified requirements of the "fair and equitable" test. Although "fair and equitable" includes the requirement that equity not retain any interest unless unsecured creditors consent or are paid in full, it also can include the Bankruptcy Court's estimation of whether the plan is "fair and equitable" in a general sense, sort of a judicial smell test.4. Finally, the plan must be feasible. The debtor must be able to pay what it promises to pay.The good faith, fair and equitable and feasible standards can impose conflicting demands. If a plan proposes to pay less than the debtor is capable of paying, then the plan may not be proposed in good faith or be fair and equitable. If the debtor proposes to pay more than it is capable of, then the plan is not feasible. In this case, it appears that the debtor was so concerned with proving that it could not afford to pay more than the $60,000 proposed that it failed to prove that it could pay this amount.The Court of Appeals summarized the evidence on feasibility in this manner:At the five-day confirmation hearing, S.O.S. presented evidence of its strong fundraising history, indicated that it had pledges for $20,000 of the fund after soliciting its top donors, and expressed confidence that it could raise the rest within the sixty-day period. S.O.S.’s executive director testified, however, that it would be difficult to raise the rest of the funds, because many of S.O.S.’s donors wanted to prevent their money from going to judgment creditors in bankruptcy. Moreover, the executive director noted that it would be “extremely difficult” to take money from S.O.S.’s general operating fund, because “[w]e struggle to meet our monthly overhead every month,” and S.O.S. had told its general-fund donors that their money would not go to pay judgment creditors.Opinion, p. 3. Based on this evidence, the Bankruptcy Court concluded that SOS "offered no evidence at the hearing to show that it could [raise the $60,000]--no commitments, no evidence of relevant past performance, nothing." The Fifth Circuit found that evidence of past fundraising was insufficient given that "raising funds during bankruptcy is more difficult than at other times" and that its donors were reluctant to contribute to pay judgment creditors. The Fifth Circuit also dismissed the $20,000 in pledges because they were not firm commitments, only accounted for one-third of the amount required and that its major donors had been tapped. At the Fifth Circuit, the standard of review is whether the Bankruptcy Court committed clear error. In my view, the Bankruptcy Court was overly dismissive of the evidence of past fundraising and the partial commitments. Unfortunately, the Debtor provided the Court with ammunition for this finding when it poor mouthed its ability to pay more. The Debtor could have won the feasibility battle by doing its fundraising in advance (with monies held in trust pending the court's ruling) or by having its major donors guaranty that they would make up any shortfall, but that would have opened it up to a charge that it was intentionally underpaying. By focusing on the wrong side of the equation, the debtor lost the feasibility battle.GerrymanderingAn additional requirement for confirmation is that a plan be approved by at least one class of impaired creditors. If one creditor holds more than 33% of the unsecured claims, the debtor will not be able to obtain an impaired, accepting class unless the debtor has a secured class of creditors to accept the plan or can divide its creditors into multiple classes. In this case, the debtor apparently did not have any secured creditors, so it divided its unsecured creditors into three classes. Separate classification of unsecured creditors became more difficult following the Fifth Circuit's ruling in Matter of Greystone III Joint Venture, 995 F.2d 1274, 1278 (5th Cir. 1991) that "ordinarily 'substantially similar claims,' those which share common priority and rights against the debtor's estate, should be placed in the same class." The Fifth Circuit backed away from this statement somewhat in In re Briscoe Enterprises II, Ltd., 994 F.2d 1160 (5th Cir. 1993)(finding that debtor had good business reasons for separate classification of unsecured claims). However, one part of the Greystone ruling which remains sacrosanct is that to justify separate classification, a debtor must treat the separate classes differently and have good business reasons for doing so. In this case, the Debtor sought to have each of the three classes of unsecured claims share in the same pot of $60,000 on a pro rata basis. Thus, the Court of Appeals concluded, "SOS's plan treats all its unsecured creditors identically, so they should all have been in the same class absent a legitimate reason to classify them separately." Opinion, p. 7. The Debtor argued that it had separately classified Sweetwater because Sweetwater had non-creditor interests. The Fifth Circuit acknowledged that this reason, if proven, would have been sufficient.S.O.S. contends that the bankruptcy court erred, because Sweetwater has two “non-creditor interests” justifying separate classification. A non-creditor interest can justify separate classification if it gives Sweetwater “a different stake in the future viability” of S.O.S. that may cause it to vote for reasons other than its economic interest in the claim. (citation omitted). If such non-creditor interests in fact exist, they would justify S.O.S.’s classification schemeOpinion, p. 8. It is certainly plausible that Sweetwater was motivated to punish SOS for its environmental zealotry. However, Sweetwater's principal testified that he just wanted to get his claim paid. Ironically, the Fifth Circuit found that Sweetwater's vote was not motivated by a desire to avoid future litigation with the Debtor because the litigation did in fact continue notwithstanding denial of the plan and dismissal of the case. Given these facts, it would have been almost impossible to have the Bankruptcy Court's finding set aside as clearly erroneous. However, the opinion is significant because it explicitly recognizes that non-creditor interests are a proper reason for separate classification. Thus, the argument could work in a case with better evidence, such as a creditor which readily admitted its motives or one where the creditor would gain a non-economic benefit from the debtor's demise. The Small Business Designation and Judicial Estoppel As noted above, the long battle over confirmation caused the Debtor to run out the 300 day clock for confirming a plan. The Debtor argued that the Court erred in not allowing it to revoke its small business designation. The Fifth Circuit noted that while debtors can typically amend filings "as a matter of course at any time before the case is closed," that judicial estoppel was properly invoked to prevent the Debtor from doing so in this case. Having received the benefits of the small business designation, the Debtor could not renounce it once it became burdensome. This finding is unremarkable. Meanwhile Back at the Sweetwater RanchWhile the appeal of the Bankruptcy Court order was ongoing, developments continued to occur on other fronts. SOS challenged the Sweetwater judgment on the basis that the judgment was rendered by a judge who had been defeated in his primary election and was therefore ineligible to preside over the trial. A Travis County District Court agreed and vacated the judgment, prompting one of SOS's attorneys (not Weldon Ponder) to proclaim "We won" on a bankruptcy listserve. However, that victory was taken away by the Third Court of Appeals. Sweetwater Austin Properties, LLC vs. SOS Alliance, Inc., 299 S.W.3d 879 (Tex. App.--Austin, 2009, pet. den.). In October 2010, Sweetwater lost its property in one of the largest foreclosures in Travis County. The Bank resold the development within a month. Thus, despite the setbacks, SOS outlasted its adversary. It is not clear whether Sweetwater, the Bank or the new owner controls the judgment now. Disclosure: My firm did some work for SOS prior to the bankruptcy. We voted our unsecured claim in favor of the Debtor's plan.