2013 Year in Review: Chapter 9, the "Grand Column" and Other Musings

Article originally appeared in American Bankruptcy Institute on 12/01/13

As 2013 winds down, we reminisce about a year that finally paid off for all of those lawyers who dedicated their practice to chapter 9 of the Bankruptcy Code. Four in all.1 Fortunately, due to demand, many more have acquiesced to join their ranks.2

Perhaps the biggest news is the filing of the City of Debtroit3 bankruptcy case. We had a column ready to go on this significant filing a few months ago, but we figured the Detroit Rupt City4 case would have been transferred to Delaware and had a plan confirmed and case closed by the time our article was published. Fortunately that did not happen, and it has even turned into an interesting “chapter 9 is unconstitutional” case.5 One news outlet described the argument thus: “A union attorney argued on Tuesday [Oct. 15, 2013, that] the bankruptcy process erodes states’ accountability under their constitutions by ceding their responsibility for financial management within their borders to the federal bankruptcy court.”6 Since transcripts are hard to come by these days, particularly for 90 days (the magical amount of days it takes to protect privacy concerns), everyone that wasn’t in the courtroom has to take the reporters’ word for it. As for me, I looked up a pleading and indeed the word “constitution” (translation: “unconstitutional”) was used a sufficient amount of times to convince me that someone is in fact making this argument.

Speaking of “union attorneys,” there are a lot of unions involved in the Detroit case,7 as is common with most chapter 9 cases.8 Since none of them thought my experience with unionized “plumbers and pipefitters” at my house was sufficient experience with unions to be employed in this case, I admit that I am a little bitter. This much can be surmised: They all seem to think chapter 9 is a bad idea.9 It’s too bad creditors in chapter 11 don’t think to launch a similar attack on chapter 11. Here’s the lead argument: “[T]he bankruptcy process erodes [a corporation’s] accountability under their [loan/credit/ corporate documents] by ceding their responsibility for financial management within their [company] to the federal bankruptcy court.” Regardless, I’m sure we can expect a similar attack in every pending chapter 9 now, a la Stern v. Marshall.

Let’s just hope the constitutionality of chapter 8 is never questioned.10

And now for the rest of the news. TOUSA finally settled, mostly. TOUSA is that pesky bankruptcy case in the Southern District of Florida that struck fear in the hearts of the lending industry when the bankruptcy judge avoided liens and ordered disgorgement of $403 million of loan proceeds, plus a few other things that amounted to about another $80 million in damages. Later, it struck fear in the hearts of law firms and other professionals that take on such cases for debtors and committees when the district court, on appeal, reversed the bankruptcy court, leaving the previously triumphant lawyers penniless — and the bankruptcy estate less viable. Still later, it struck fear in the hearts of lenders again when the Eleventh Circuit reversed the district court. The Eleventh Circuit obviously included the following sentence in its opinion, hoping to get a plug in the Chapter 8 Humor column: “The record supports a determination that the bankruptcy of TOUSA was far more like a slow-moving category 5 hurricane than an unforeseen tsunami.”11

Shortly thereafter, under what is being called the “Grand Bargain,”12 the case settled. Most unsecured creditors are expected to receive something in the neighborhood of 5 percent or less on their claims, the litigation against the lenders not been successful. At least the unsecured creditors could take comfort in the fact that they were not being sued for preferences while bigger fish were being fried. Oh wait, they were sued. Yes, it’s nice to know that some things never change in bankruptcy.

Speaking of preferences, 2013 is also the year of “no preference is too small.” Jane Austen once wrote: “It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.”13 Likewise, in bankruptcy: “It is a truth universally acknowledged, that a chapter 7 trustee in possession of a no-asset estate, must be in want of a preference action.”14 To be sure, Congress did put a dollar limit on preference actions for individuals who have “primarily consumer debts” ($600),15 but I’m pretty sure Congress didn’t believe that anyone would actually file a preference lawsuit for less than $1,000. It’s sad, but when times are slow, times are slow, and we can’t all represent the unions in the Detroit case.

Next to finally, while the markets are flush with cash again and lending institutions are laying off their workout managers, bankruptcy courts and staff have been cutting costs to address the budget crisis. Dark days are ahead, indeed. Next year’s “Year in Review” column may be canceled if things get any worse.

Finally, just when everyone thought Stern would be removed from the “keynote” speech materials of every seminar, it is headed back to the Supreme Court in the embodiment of Bellingham.16 Although Bellingham will add some food for thought to the Stern discussion — i.e., can parties consent to a final judgment entered by an Article I judge in an unconstitutional core proceeding ... and [is anyone still awake?] what’s the effect of the so-called “gap” — I predict that the decision will receive far less praise or criticism, or any discussion for that matter, mostly because Anna Nicole Smith is not a party.

Click here to view a PDF of the original article

1 The number “four” is used for dramatization purposes only. We toyed with saying “three” but thought that might detract (we are being serious here) from a remarkable story published in The Wall Street Journal, “Detroit Bankruptcy Lawyers Break a Glass Ceiling — Female Attorneys on Both Sides of Case Stand Out in Male-Dominated Field.” See http://online.wsj.com/news/articles/SB10001424127887323420604578648102789952638. Heather Lennox (represents the City of Detroit), Sharon Levine (represents the Michigan Council 25 of the American Federation of State, County & Municipal Employees, AFL-CIO and Sub-Chapter 98, City of Detroit Retirees) and Babette Ceccotti (represents the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America) are the lead lawyers for the main parties.

2 It turns out that our ridicule of the “coming wave of chapter 9 cases” in 2010 was a bit immature. See “2010: The Year of Stagnation, Plus Sideshow,” ABI Journal, December/ January 2011.

3 This term was first coined by Mr. Eric Van Horn in an e-mail sent to Mr. Scott Brown in July 2009. If there’s an earlier reference, we haven’t seen it. Scott Brown nearly deleted the e-mail, but he’s glad now that he didn’t.

4 Also coined by Mr. Eric Van Horn a la “Detroit Rock City.” This one was lost on Scott Brown until he Googled it. If you enjoy heavy make-up on men and lots of guitars and fireworks, and lyrics that seem more patched up than a Chapter 8 Humor column, you’ll love this song.

5 Is it not enough that core proceedings are under heavy artillery fire? Why must bankruptcy lawyers think of new ways to make themselves irrelevant?

6 See www.reuters.com/article/2013/10/16/usa-detroit-doj-idUSL1N0I614H20131016.

7 Okay, I take that one back. The following is a sampling of the unions involved in the case: International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (a.k.a. “International Union, UAW”); Amalgamated Transit Union Local 26; Local 324, International Union of Operating Engineers; Local 517M, Service Employees International Union; Detroit Public Safety Unions; Michigan Council 25 of the American Federation of State, County & Municipal Employees, AFL-CIO and Sub-Chapter 98, City of Detroit Retirees; Detroit Fire Fighters Association, I.A.F.F. Local 344, Creditor Detroit Police Officers Association, Creditor Detroit Police Lieutenants and Sergeants Association and Creditor Detroit Police Command Officers Association. See Case No. 13-53846. Even the name of the court is long: U.S. Bankruptcy Court for the Eastern District of Michigan, Southern Division – Detroit.

8 I’m just assuming this is true since I haven’t done any real checking on this. And I’m hoping the word “most” is accurate, too.

9 Id., Minute Entry dated 10/15/2013 and 10/16/2013.

10 Not once has chapter 8 faced a budget crisis, although some may argue it faces a humor crisis every now and again.

11 See www.ca11.uscourts.gov/opinions/ops/201111071.pdf at 32.

12 Humility is contagious; we are thinking of renaming this column the “Grand Column.”

13 Pride and Prejudice, at 1. 

14 Scott and Prejudice, at 1.

15 11 U.S.C. § 547(c)(8). A similar-but-higher amount was set for consumers “whose debts are not primarily consumer debts.” Id. at (c)(9).

16 I’m not even going to bother citing this case. If you can’t find it in two seconds on Google, give me a call.