Train Wreck Reform

Once again couldn't get this to post at Credit Slips, so here it is:

BAPCPA was a deliberate shot, below the waterline, at consumers and small businesses, and it was a highly successful shot, exacerbated by the wildly moving targets that are the courts' and trustees' expectations. Pre-filing analysis for either a 7 or a 13 has become rocket science, except that with rocket science you're at least dealing with, you know, science, as opposed to the whimsy of the gods. No matter what you're dealing with (qualifying a consumer for 7, reformatting and producing the accounting for a business 7, or dealing with a 13 trustee who has no concept of business operations or irregular paychecks), it's a labor-intensive mess.

Then there is personal Chapter 11, a saddle on a sow necessitated by the horse-and-buggy jurisdictional limits in 13 and exacerbated by the brain-dead semi-incorporation of 13 standards into 11 (but what can you expect from The Mind of Grassley). In all honesty, everyone is just making this up as they go, and I shall be long dead before any semblance of order is imposed. Pile onto this that the disparity of treatment between big and little keeps getting worse. Big 11s get away with pre-petition roll-ups and "reorganized liquidations" (*cough* Blockbuster *cough*) that would get an individual or small business bounced for fraud.

Finally, creditors are increasingly using the "reform" to take a dog-in-the-manger approach. This list is long, but these are a few notable locals: Bank of America/Chase (Why is it that every other mortgage has these two worthies in an owner-servicer pas de deux in which they torpedo short sales, proceed with foreclosure at a lower price, and then proceed with a claim for the full deficiency?), RC Willey (I shall never darken its door again. Dear Mr. Buffett, if you made your pile buying into companies with these tactics, you aren't the Sage of Omaha, you're the Don Corleone of Omaha.), America First Credit Union (With its reaffirmation policies, it needs to rename itself "America Last".), Celtic Bank (Sorry, it isn't my clients' fault your troubled assets ratio is back up to 90, six times the national median. It's a you problem.).

We're creating a bankruptcy system people either can't get into or can't stay in, and the system outside bankruptcy is reverting to debtors' prisons. Is it just me, or is there something wrong with this picture?

Triangle Shirtwaist Fire

Today is the Centennial of the Triangle Shirtwaist Fire. Right about now, 100 years ago, a fire broke out in the Triangle Shirtwaist Factory. Due to unsafe conditions typical in sweatshops of the time, in 18 minutes 146 people were dead. For more information, go here.

If anyone wonders why I have been sickened for years by the free trade mantra and its cheerleaders like Thomas Friedman, there it is. Because we had the basic decency to acknowledge that disasters like that should not happen, we implemented building, fire, and health codes and worker safety regulations. The free traders have put our businesses, our industry, our people, and our nation at the mercy of countries that have no such decency. We are competing with imports from countries that are willing to have any number and variety of disasters so long as they can produce cheap goods that undersell and undermine our domestic economy.

There is a technical, legal term for free trade arguments that produce such results: crap.

Boise County Files Chapter 9

As reported by the Idaho Statesman, Boise County, northeast of Boise up Highway 21 through Idaho City and Lowman to the pass over to the Stanley Basin, has filed for Chapter 9, municipal bankruptcy. It seems they screwed up a land use decision, the developer sued them and won a multi-million dollar judgment, and the county come anywhere close to paying.

There are several lessons to be learned from this. First, there are a lot of stupid people on the Interweb Pipes. The Statesman story was apparently linked to a bunch of right-wing websites (Drudge, Free Republic, Town Hall, etc.), and the knee-jerk comments started pouring in from folks who apparently hadn't even bothered to read the article (See comments by Ron Reale, Mark Babb, Christopher K, Teddy Kennedy's SEARCH+RESCUE, Joe Astroturf, Jack White, and golden_elixir for the most egregious examples.), screaming about how liberal Boise deserves this (First, Boise is not liberal, except in Idaho. Second, this is Boise County, not Boise City. Get a map, people.) and how this county was bankrupted by public unions (The Koch Brothers really have their meme rolling, here. You might want to check just how unionized Boise County is. Then check whether any union members caused the loss of the lawsuit.). With "civil" discourse at such a level, it's no wonder nothing is getting accomplished in this country.

Second, municipal bankruptcy is a world of its own. One of the commenters (johnnydoughey) asks a decent question: He thought you couldn't get discharged for liability for an illegal act. Well, there are illegal acts (criminal) and illegal acts (civil penalty). Municipalities can't be convicted of the former and can be excused for more of the latter than private people can. The developer's attorneys have already promised a 921(c) motion for dismissal for a bad faith filing, but I doubt the court will grant this (I wonder if the commenters who are currently complaining about the federal court entering the judgment will also complain about the federal bankruptcy court providing protection from that judgment. They're both exercises of federal authority, after all.). It remains to be seen if the county will come up with a viable plan, though.

Third, if you're going to be in local government, please learn how to make land use decisions. At issue here was a teen treatment facility that the county put so many conditions on, it was economically unfeasible. The conditions themselves, frankly, weren't the problem. Most of the conditions had to do with assuring adequate infrastructure back there in the hills. The problem was that the county had already approved other, larger developments back in those hills that required most of the same infrastructure but had applied no such conditions. In other words, the county was trying to charge all the infrastructure costs of several developments to one development, a constitutional no-no, and that was also discrimination against a special needs facility, a Fair Housing Act no-no. On top of that, county staff and elected officials were apparently advising the opponents on how to build a record to block the development, also a constitutional and FHA no-no. The developer filed suit for damages and nailed the county good.

Folks, if the city slickers are coming to your corner of Hay Seed World to make a quick flip on your cheap land, lawyer up and do what your lawyers say. I guarantee the developer has and is mapping out every move you can make. The Boise County commissioners didn't listen when the Boise County attorney said they were screwing up. The Boise County commissioners didn't listen when the attorneys for the Idaho Counties Risk Management Program (the counties' insurance pool) said they were screwing up and (SURPRISE!) the Program has denied coverage. Locally, Draper didn't lawyer up when it was reviewing SunCrest, and it will be dealing with it forever. Bluffdale didn't lawyer up on the one-acre zoning lawsuit and ended up losing an FHA case (It should consider itself lucky the developer wanted the development and not damages, or else we would have had a Chapter 9 here in South Valley.). Whether you're in private business or public office, it's never a good idea to be your own legal counsel.

I Really Don't Care What Paul Jackson Says

A new article over at Credit Slips comments on Paul Jackson's chest-thumpings over an Alabama trial court decision on a chain of title issue. I'll let you read about it over there. I'm posting here because I couldn't get my links to work over there. Here it is, with links:

Jackson is a long way from an objective observer. In law practice, he represented banks and servicing shops. He thinks that second mortgages are the chief problem with short sales, not the endless feedback loops within the first position lender and its servicers. He's a leading proponent of the theory that strategic defaulters are going off on shopping sprees (No comment on whether such opinions are why he remains ABD in the consumer behavior doctoral program at USC.). If you have Yves Smith and everybody else, including Janet Tavakoli on one side and Paul Jackson on the other, I'm backing Yves.

On the substantive side, I think you're exactly right. I practice in two non-judicial foreclosure states, and once that sale closes, you don't get it unwound. The debtor came to the game too late. In the cases where the debtor gets to court before the sale, the banks are losing.

Bankruptcy Exemptions

OK, enough ranting and back to some nuts and bolts.

Last June the SCOTUS a decision in Schwab vs. Reilly concerning when a party could challenge a claimed exemption. Debtor had claimed an exemption in some personal property and set the value for it at exactly the exemption amount. It turned out the property was worth more than that, and the trustee wanted to liquidate the property and distribute the difference. Problem was that the trustee didn't object by Rule 4003's 30-day deadline. The majority ruled, "Sorry, Debtor, notice matters, you gave no notice there was anything to be objected to, so you only protected the property up to the value you listed, and the trustee can pursue the overage." The dissent wrote, "30 days means 30 days. Period. The property should be fully exempt."

This case arose because Debtor was in a state that had not opted out of the Federal exemptions and so had a "floating exemption" that she could split among different pieces of property. That's why she low-balled the value of the property at issue; she would have more of the exemption left over for other property. Some states have that floating exemption too. For those of us in opt-out states that don't provide a float, the opinion was not very exciting. Here in Utah, you get a $2,500 exemption for your car. You list its value as $2,000 but it turns out to be $3,000, you get the same exemption.

But what about exemptions that don't have set limits? Suppose you valued the exempt property at X, but it turns out to be worth twice that. Can the trustee come in at any point and say, "You only exempted the claim amount, and I'm taking the rest"? I don't know. I do know that in Section III of its opinion, the SCOTUS reaffirmed Taylor, which held that listing an exemption value as "unknown" gives notice of a valuation issue and sets the 30-day clock running (Yes, Taylor concerned an exemption with a fixed limit, but to me, the issue is notice, and "unknown" is a red flag.). I've always used "unknown" in the schedules when we didn't know a value. Some people get bent out of shape by that, but until they amend the Code or the Rules, I'm going to keep on using it, and now I have an extra reason. Setting a value where I don't have one is nothing but a trap for the debtor.

On a side note, the alignment of justices in Schwab was perhaps more interesting than the opinion. The majority was written by Thomas (?) and joined by Scalia, Alito, Kennedy, Sotomayor (!), and Stevens (!!). The dissent was written by Ginsburg and joined by Breyer (!) and Roberts (!!!!!!!!!!!!!). Go figure.