"Show Me the Note" is Now the Law

A lot of foreclosure defense has been riding on the "show me the note" argument, namely, "Hey bank, where's the promissory note you claim is evidence of the debt?"  The state courts and the federal district courts have been quite loose on this and generally allowed the banks to proceed with little more than a shoeshine and a smile, but the bankruptcy courts have tended to be stricter.  The reason is inherent in the nature of bankruptcy: Note issues come up normally in two situations, claims and motions for relief from stay, and in both the claimant (the bank) has a stricter burden of proof than in nonbankruptcy proceedings.  Now that fact has been writ large courtesy the Tenth Circuit Court of Appeals in In re Miller.  The Tenth Circuit, reversing the bankruptcy court and the Bankruptcy Appellate Panel, holds essentially that, if you want to come to the table as a note holder, you'd better be holding the note.


This approach is perfectly reasonable and long overdue.  There is an issue that remains open, though.  The Tenth Circuit, as with every other court I've seen address the issue, relies on UCC Article 3 to determine if the claimant is in fact the holder of the note.  There is a growing debate, though, concerning whether standard mortgage notes qualify as negotiable instruments under Article 3.  If they do not, then Article 3 does not apply, and we must look to other law to determine who holds the note.  Stay tuned, we may have this all sorted out in 10 or 12 years.

New Website

Woo-hoo, new website up and running.  Click here, or use the link above my profile to the right.

Big Boys of BK

Lots of Chapter 11 news today.


Kodak finally filed last night.  It had been in trouble for a long time (I think I'm one of the few fossils remaining who uses film.), but it was trying to reshape itself as a printer company.  To do so, it was relying on a revenue stream from its patent portfolio (At one time that portfolio rivaled the likes of Bell Labs and IBM.).  Unfortunately, Kodak didn't account for aggressive (i.e. predatory) behavior by some major license users, including Apple and Research in Motion (I have to say I don't use much of anything from Apple.  I hate black boxes, so I didn't care much for the products, and I didn't care for the culture, either.  Seemed too much like a religious cult.  I see people walking around festooned with 500 i-Crap products, and I wonder why anyone needs to be so simultaneously plugged-in and cocooned from the world.  They remind me of Neo in The Matrix before he's released from his pod.  RIM, though, hurts.  I've rocked the Crackberry for over a half-dozen years now.).  The big users decided to stop paying for the licenses, forcing Kodak to litigate.  They wouldn't buy the patents outright, either, at least not for more than a dime on the dollar.  So Kodak is in Chapter 11, where it might be able to force a few things.



American Airlines, on the other hand, might be getting forced.  It's nearly two months since it filed, and American has barely gotten off square one.  As I blogged the day it filed, American's big motivation was to take down the labor contracts and pensions.  It hasn't, and everyone (including Your Truly) is confused about the delay.  Confused about it, but still willing to take advantage of it.  Delta and US Airways are making noises about rival bids, and others are getting into the game.  If American doesn't have a reorganization plan in front of creditors in two months, it's looking at getting parted out.



And of course we can't let the day go by without some more mess from MF Global, this time with a heapin' helpin' of JPMorgan Chase.  It seems that back in October, right before it filed, MF Global was selling piles of assets to raise cash.  Problem was, it was selling them through JPMorgan, which decided to do a by-the-book slowdown of the transactions.  Consequently, MF Global had neither the assets nor the cash and couldn't meet the inevitable margin calls.  Welcome to bankruptcy.  Now the creditors and trustee are finally getting around to asking JPMorgan where the money went, because it certainly hasn't been turned over.



JPMorgan's involvement in "where did it go" scenarios is getting to be a habit, and it's long past time someone pulled the curtain back and took a look.  Somebody needs to look at where Washington Mutual's assets went, because they were there until JPMorgan stepped in.  And unless something drastic has happened this week, JPMorgan is still sitting on piles of cash involved in investment schemes from five and six years ago (I have to be careful here.  I've had two, executive-VP-level in-house counsel lie to me about the creation and handling of those accounts, so it's hard to say what the "official" records look like any more.  And I've had outside counsel threaten me with bar discipline for daring to represent anyone opposing JPMorgan.  But then that's SOP for Utah.  The Bar doesn't care if an attorney makes a groundless threat like that so long as he is representing a 1% client and he makes it against an attorney with a 99% client.).  Any wonder I refer to the place as "JPMorgoth"?  We'll see if anybody decides to use the big microscope this time or if JPMorgan skates again.

If You Don't Promote, Your Business Won't Float

No apologies at all to Johnnie Cochran.

Yesterday, while waiting for a kid to finish a rehearsal, I swung by Trolley Square just to see what was going on there these days.  It was about 0915, and I was surprised to find the parking lots and new garage already pretty full.  I walked inside and discovered that Trolley had leased a space to the Sundance Film Festival for ticket sales and that there were several hundred people in line waiting for the ticket office to open at 1000.  I thought, "This is a great idea by Trolley.  Sundance audience, relatively hip, some discretionary income.  Exactly the target market for Trolley-style shops.  And a captive audience to boot, with nothing to do but stand around until the ticket office opens."


And then I noticed that I wasn't seeing any shops open.  I walked through the whole place.  Not a single shop was open.  No one was working the lines, handing out fliers or coupons or samples, offering to hold a place in line while someone shopped, taking food orders and bringing them back.  Nothing.  All those customers, and no one approaching them.


First, to Trolley Square management: Kudos, you did your job.  You brought in a mass of potential customers the likes of which has rarely been seen around that tomb.  And you'll be bringing those crowds in all week.  It isn't your fault if your tenants aren't taking advantage.  When they come whining to you for concessions because they aren't getting enough traffic, you should rub their noses in the photos and videos you're taking of this event.  Why should you give concessions to businesses that act like they're hobbies?


Second, to Trolley Square tenants: You blew it, and you'll probably blow it all week.  Yes, you opened at 1000, but so what?  Those customers had already been there for an hour with nothing to do but wait.  They didn't even have a moving line to keep up with.  They were just standing there.  And you were nowhere.  You weren't visiting with potential customers, you weren't telling them about your inventory and specials, you weren't learning about their shopping habits and needs, you weren't getting their contacts for your email list, you weren't having them like your Facebook page.  You were a no-show.  I know you'll whine about lack of traffic all Summer, but it's really your own fault.


Third, to everybody: I've seen grundles of small businesses that acted either like they were hobbies or they had a divine right to customers.  Both attitudes are fast tracks for the Fail Train.  Hobbies are not designed to make money; they need to stay in your garage.  And the last folks who claimed a divine right to something got their heads lopped off.  The only people who don't have to work for money are the ones who were born with it.  Your business is there to make money, and that requires work, your work.  If you don't bring it, don't expect success.

Merry Red Ink Christmas

Throughout the holidays, I saw people buying like mad.  I kept thinking, "Wait a minute.  The job picture stinks, about every asset and investment class is dropping, and everyone below the top 10% is getting absolutely rocked.  How is everyone buying?"


The old-fashioned way, apparently: debt.  The Fed's figures for November are out (December won't be out for another month, but I can't imagine it won't look worse.).  Consumer debt rose at an annual rate of 9.9%.  Revolving debt (credit cards, lines of credit, etc.) rose at an annual rate of 8.5%, and nonrevolving debt (mostly secured purchase money loans and student loans) rose at 10.7%.
This is a mess in the making.  We have learned nothing from four years ago.  People are once again buying by spending money they don't have by taking out loans they can't afford from people who don't care if they (or, more accurately, their clients/customers) get repaid or get stuck with collateral they can't unload so long as they get their origination fees.  And when this new house of cards collapses, where does the bail-out come from this time?

I see bankruptcies trending back up soon, but that isn't the real concern.  With the President, the House, and one-third of the Senate up for election this Fall, D.C. will pull any smoke-and-mirrors to kick the economic can past November.  But what kind of hangover will we get in 2013?  If what we've seen is any kind of prologue, you may want to find yourself a place to hide in the high grass.

Money Tree Not Down

For any of you who may be wondering, the recent announcement of a Chapter 11 filing by Money Tree has nothing to do with the local company.  Completely separate entities.  The bankrupt one operates solely in the Southeast (Aside: How do you go broke as a payday lender?  Katrina was six years ago, and did it really blow that many paychecks out to see?  Were you lending to the entire Ninth Ward?).  So if you need a loan shark out here in the wild, wild West, the local Tree is still standing.

It Wasn't Illegal?

On 11 December, President Obama was interviewed on 60 Minutes.  The transcript is here.  The interview is pretty much what you'd expect.  Then, about three-fourths of the way through, comes this:

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn't illegal.

Excuse me?


First, it must be nice to deal with US news media, which consist almost entirely of ignorant tyros who do what they're told.  Steve Kroft swallowed that comment and just kept pitching softballs.  A BBC interviewer would have gone straight at that comment and pointedly asked the President just what in Hell he was talking about.


Second, loan fraud is illegal, and we've had well over 31 flavors of it in this mess, with new ones cooked up by B of A, Chase, and RBS every day.  Securities fraud is illegal, including stuffing investment instruments with cherry-picked, bogus "assets" and then betting against them (I'm looking at you, GoldSacks.).


Mr. President, as a former prosecutor I can tell you that, just because your boys aren't pressing charges, all this garbage has suddenly been washed clean.  And yes, Mr. President, the DOJ folks are your boys, however much you may want to hide behind prosecutorial independence.  You picked Holder, you picked the US Attorneys.  Their decisions are your decisions.  Own them.

Just Because You Bought It...

...doesn't mean it's yours.  There's a big brouhaha in the MF Global bankruptcy.  It seems the trustee's definition of the bankruptcy estate (and hence the assets available for him to liquidate) includes gold and silver bullion that traders and investors parked, or at least thought they were parking, with the firm and received warehouse receipts for.  And they are WAY unamused they can't get their bling.


A little background.  First, warehouse receipts.  I'm Joe Farmer, and I just brought in my corn harvest.  I decide to store it at the grain elevator for a couple of weeks.  I take it to the elevator, physically deposit it there, and get a receipt for X amount of corn.  When I want it back, I turn in the receipt, pay the handling charges, and get my corn back.  Substitute any storable thing you care to name, it's the same, basic process.


Second, other people's property in a bankruptcy estate.  If you lend your friend $100, and he declares bankruptcy, chances are you'll never see old Ben Franklin again.  If you let your friend use your car, though, and he declares bankruptcy, the trustee can't just take your car.  The bankruptcy estate doesn't include things the debtor possesses but someone else owns.


And that's what the warehouse receipt people are saying.  They have receipts for specific bars of precious metals that they bought and that were supposed to be stored in the MF Global facility.


Problem the First: Unlike Joe Farmer, extremely few of these people actually lugged any gold bricks to MF Global for storage.  Some put money directly into an MF Global account for purchase and storage, and took a "warehouse receipt" in return.  Others were brokers themselves and were making purchases for customers.  Either way, they weren't really following warehousing procedures (How often do you ask the warehouse to buy the stored item for you?), so off the bat we have a question of whether these "warehouse receipts" are warehouse receipts.


Problem the Second (and here's where it gets painfully apparent that a brokerage is not a warehouse): Back in 2005 the CFTC adopted Rule 1.25, which allows certain commodities investors to invest clients' deposit accounts (as opposed to investment accounts) so long as an asset of "equal value" is substituted in (As an aside, if I as an attorney were to do this with a client account, I'd be doing the perp walk in nothing flat.  In Investment World, though, it's perfectly OK.  For the investment house, that is.).  This fact was undoubtedly disclosed somewhere in the "storage agreement," and unless I miss my bet, that condition wasn't entirely one-sided.  If MF Global could invest the deposits, it could defray some of its costs instead of passing them on to the depositors (Remember those handling charges I mentioned?  Running a grain elevator isn't free.).  I certainly wouldn't be surprised if that was how MF Global pitched it.


So instead of the gold and silver sitting in the warehouse, MF Global pulled it and replaced it with "assets," namely paper instruments with all the value of papier de la toilette, or some such.  Needless to say, a bunch of the gold and silver is nowhere to be found.  Which means a bunch of those "warehouse receipts" don't stand for anything.  Which is perfectly OK since, by the receipts' own terms, the bullion could be swapped out.  Which leaves the "warehouse receipts" looking less like warehouse receipts and more like mislabeled investment contracts.  Which is exactly how the bankruptcy trustee is treating them.  If the depositors want it any different, they'll have to take the trustee to court and force it.  Good luck with that.