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I don't have the cite, but I believe Randy Haines, in Phoenix, slammed a company that claimed it was the debtor's fault that a mortgage modification didn't go through, when the proof showed otherwise. And I tell you, I don't see how a private company other than the lender itself can offer any loan modification services at all that are worth the price. They don't have the authority to bind the lender, they don't have the right to represent the borrower in any binding way, and they charge a fee to do what the borrower could do without their "assistance." Often, the fees they charge eat up the cash that the debtor could have used to help get the loan current. And I'm hearing more and more cases of lenders playing the "bait and switch" game too -- they claim not to be able to help you unless you in default, then after encouraging you to default, they use the default as an excuse to take the property anyway! And this is not a new thing either. I know of one person who was told to dismiss her bankruptcy so that they could work something out. She did, and they then posted her property for foreclosure. This happened in 2004. The lender was Citi.
Toggle Commented Nov 16, 2009 on Modification Scams at Credit Slips
I have the greatest respect for Dick Lieb, Ken Klee and Bob Lawless. But I am having a hard time with this one. Let's say a given exemption statute sets the maximum value for a motor vehicle at $25,000. The debtor might have a Toyota Camry, or the debtor might have a Mercedes CLK 430. Assuming both are unencumbered (just for the sake of discussion), doesn't the dollar limitation simply indicate a legislative intention that Camrys should be exempt, but Mercedes convertibles should not be? The trustee will surely sell the Mercedes, and give the debtor a check for $25,000 and the send-off "Here, go buy a Camry." Isn't that the real point of dollar caps? Are we really just concerned about trustees who might want to keep cases open in order to engage in "exemption arbitrage" -- wait to see if one or more exempt assets might appreciate in value during the case above the value claimed as exempt, then sell the asset to recoup that excess value? Wouldn't the solution for that problem be either legislative or a function of rulemaking (setting limits, for example, on how long and under what circumstances a case can remain open)?
Two stories. First is the one where a debtor sought to claim his autocad computer (many years ago) as a tool of the trade, and drew an objection. The objecting party contended made this argument: "If I ask for you to hand me that tool over there on the table, imagine my surprise if you hand me the computer." Second is the one about the debtor who claimed more cows than the exemption statute permitted for cattle, but argued that the cow was actually a family pet. It was never clear whether the cow was permitted inside for dinner, or whether it was housebroken.
Toggle Commented Sep 4, 2009 on Are You a Work Horse? at Credit Slips
And section 560 does not appear to bar the use of section 365 to assume the contract. I agree that the gist of the Bd of Educ argument seems to be that, in the event of a default, the nonbreaching party's remedy ought to be rescission. That is not only dangerous precedent for contract law in general. It is also a dangerous reading of derivative contracts in general. After all, the point is to price risk. If, on breach, the other party gets to rescind, then the pricing model goes out the window. It would be rather like going to Vegas, putting your money on Red 21, then demanding your money back if the ball lands on Black 17 instead.
One commentator said " I have friends who make $45,000 a year but have $30,000 in credit card debt!" He sounded shocked. Well, let's do some math. $45,000 a year is gross pay (assume for two). Take home (assume for now no "bennies") should be somewhere around $35,000 (assume federal tax, FICA, and Medicare, but no state income tax). Per month, rounded, that's about $3,000. Assume a house payment of $1,200 (probably low, but let's play with it). Assume two cars (assume we're in the midwest where everyone has to have a car), at $400 each. We are already at $2,000. Add in utilities, food, car insurance, house insurance, health insurance (is that a luxury?) -- all for $1,000 a month? I doubt it. Oh, I could tweak this a bit here or there -- drop the mortgage to rent ($800?), drop the car payments to $250 (it's a push, but ...). But all I add is $700 a month -- and that ain't much, considering the list of what I need. Oops, I forgot gas, home repair, oil changes, clothes, toiletries, phone (of some sort). And I won't even talk about cable or satellite TV, or church contributions, or a new washer. There's no room for fancy cars, expensive houses, vacations, or any thing else, is there? I'm drawing off of years of experience looking at Schedule J, so I don't think I'm far off. Now just tell this hypothetical person not to "run up a bunch of credit card debt" as it is so often put. Go ahead. Do it, if it will make you feel better. But I challenge most of us to live that way, without resorting to credit card debt.
Reading the comment by FJP made me realize the irony of it all. We have expanded the availability of consumer purchasing (a major driver for our economy) on one of only two sources (1) the top 10% of the population with enough discretionary income to buy stuff without too much stress (maybe its 15% or maybe its 5% -- anyone got better numbers?) and (2) the bottom 90%, using the extraordinary amount of credit we extend to that population. That second group has to use credit, because real wages for them have been essentially flat for years, but the real cost of living has not. Now, in an economy where jobs are scarce, employers can make them even more scarce by screening out the people who are having a hard time with credit -- roughly a million bankruptcy filings a year (the number of people is of course larger, because most filings are joint filings, husband and wife). Granted, not all of those people are actively looking for a job at any one time, but that is the number per year who now have bankruptcy added like a scarlet letter to their credit report. Over the years, that gets to be a pretty big number. The irony, then, is that more and more people have to settle for even poorer paying jobs because of their credit history, making their credit situation only that much more dire. That, in turn, places extra pressure on their ability to continue to engage in consumer spending -- unless credit extenders engage in even riskier credit extending than they have done in the past. We now know where that can take us. Maybe we can balance consumer spending on the backs of the top 10%, and pretty much ignore the rest of the populace. Certainly, a number of economies around the planet do that. And certainly even stricter hiring standards will depress both hiring and wages even more, leading to higher productivity for businesses. Perhaps that's a good thing, at least for the shareholders. But at what cost? Will we in the top 10% just satisfy ourselves of our moral and social superiority, and simply ignore the rest of the poor mullets out there who lack our good judgment and superior skills? And if we do, will the vaunted American middle class simply melt away, and return us to the America of the 1890's?
Reading the comment by FJP made me realize the irony of it all. We have expanded the availability of consumer purchasing (a major driver for our economy) on one of only two sources (1) the top 10% of the population with enough discretionary income to buy stuff without too much stress (maybe its 15% or maybe its 5% -- anyone got better numbers?) and (2) the bottom 90%, using the extraordinary amount of credit we extend to that population. That second group has to use credit, because real wages for them have been essentially flat for years, but the real cost of living has not. Now, in an economy where jobs are scarce, employers can make them even more scarce by screening out the people who are having a hard time with credit -- roughly a million bankruptcy filings a year (the number of people is of course larger, because most filings are joint filings, husband and wife). Granted, not all of those people are actively looking for a job at any one time, but that is the number per year who now have bankruptcy added like a scarlet letter to their credit report. Over the years, that gets to be a pretty big number. The irony, then, is that more and more people have to settle for even poorer paying jobs because of their credit history, making their credit situation only that much more dire. That, in turn, places extra pressure on their ability to continue to engage in consumer spending -- unless credit extenders engage in even riskier credit extending than they have done in the past. We now know where that can take us. Maybe we can balance consumer spending on the backs of the top 10%, and pretty much ignore the rest of the populace. Certainly, a number of economies around the planet do that. And certainly even stricter hiring standards will depress both hiring and wages even more, leading to higher productivity for businesses. Perhaps that's a good thing, at least for the shareholders. But at what cost? Will we in the top 10% just satisfy ourselves of our moral and social superiority, and simply ignore the rest of the poor mullets out there who lack our good judgment and superior skills? And if we do, will the vaunted American middle class simply melt away, and return us to the America of the 1890's?
ummmmm, I think I made this point last week sometime, in response to one of the comments on one of Steve's previous blog posts. Except I hadn't had the benefit of reviewing the senior secured debt instrument.
Toggle Commented Aug 6, 2009 on A Note on Senior Debt at Credit Slips
In response to the posts regarding servicers/lenders delaying foreclosure, there's a recent article in the NYT suggesting a profit motive that I hadn't thought of before. In a nutshell, the article says that some lenders are adding additional fees to the loan by keeping it in distress for a long period of time (Ronald Mann, are you listening?), and recouping the additional fees out of the foreclosure proceeds. According to the article, its an additional reason why lenders are dragging their feet on loan modifications (or coming up with mods that are suboptimal, so that they are doomed to fail, but only after additional fees for doing the modification have been added to the loans). In this brave new world, apparently some lenders don't make money lending. They make money making up fees and charges. Here's the link to the article: http://www.nytimes.com/2009/07/30/business/30services.html?_r=1&ref=business
Toggle Commented Jul 30, 2009 on Mortgage Servicing Update at Credit Slips
In response to anonymous, assuming you are right that compromise of principal and interest required 100% consent, I don't know that that would much matter, for two reasons. The first is technical -- the "consent" was not to a compromise of principal and interest as such, but rather to the sale of the collateral free and clear of liens (that is, with the understanding that the lien on the secured debt would attach to the proceeds). That is rather like agreeing to a deed in lieu of foreclosure. Is that the same as a compromise of principal and interest? This gets into word parsing, I know, but I think that the "no compromise" language would refer to a rewriting of the obligation, rather than to an agreement regarding the remedy. The "consent" given to the sale certainly did not operate to waive the debtor's obligation to pay the debt (not legally anyway). Nor did the consent prevent the lender from credit bidding, in order to assure that a higher amount was paid for the value of the assets. So I don't agree that "consent" to the 363(f) was legally the same as "compromise of principal and interest. It would take a much closer look at the indenture (if that's what its properly called) to see to what circumstances less than 100% vote applied. The second reason is a practical one. Suppose that a holdout meant that there was no consent to the sale. And suppose the court then ruled that no sale could be accomplished free of lien under 363(f), due to lack of consent. Now what? The case would have turned into a very expensive game of chicken. I think the real point of the posting by anonymous is that the U.S. Government, by electing to function as both buyer and DIP financer, placed itself in the same ultra powerful position that secured lenders traditionally enjoy in most bankruptcy cases -- a position in which they can, as holders of the money, effectively dictate the outcome. The buyer can favor whomever it wants, buy what it wants, leave behind what it wants. That's what the US did here. Some are simply offended that, in making its decision about what to keep and what to leave behind, it decided to keep the workers, and leave behind the speculators that bought distressed bond debt. They don't like unions, so they don't like the US taking the side of unions. All of that is fine public policy debate. But its not a bankruptcy issue. In bankruptcy, them that has the gold generally get to make the rules. In this case, it was the US that had the gold.
Well somebody needs to make the obvious point about the use of filings in 2006 and 2007. These are the years immediately following the enactment of BAPCPA. Bankruptcy filings nationwide dipped dramatically in 2006 in part because so many people filed in October 2005, right before the new law was passed. They also dipped because the new law itself added new hurdles to the filing process. Finally, they also dipped because (at least for the first year following the enactment of BAPCPA) a significant portion of the potential filing population believed that, when BAPCPA was enacted, Congress had "abolished bankruptcy." How convenient, then, for the Fraser Institute to use those two years, conveniently omitting the impact of BAPCPA on bankruptcy filings nationwide. In a democracy that values freedom of speech, it's easy to short-circuit honest dialogue about important public policy issues. You need only be totally amoral about your responsibility to tell the truth.
Two thoughts. First, you must have been reading my mind. I've been saying the same thing for some time now -- that we've substituted credit for wage increases. It's what makes me very skeptical that we will easily escape the problems we're now in -- I don't see real wage growth happening any time in the future, and I don't see the public able to absorb much more debt. And how sad it will be if we re-start our economy by extending even more risky credit to the American public, sowing the seeds for the next economic disaster. Second, how odd it is that the first response to your blog was an advertisement for debt consolidation -- as though that's all we need to do to "fix the problem."
Steven, I agree with David Yen's comment. I don't think the WSJ article says much about the liquidation value of the "good" assets. And it doesn't say much about the value of the whole enterprise before the cherry picking. I'm not getting the comments (seen elsewhere) about the "unprecedented speed" of the sale. How about Lehman Bros. sale of its best parts to Barclays on the second day of the case? And how about all the sales I see that never make the news that run on just as fast a track? And wasn't this sale in the works for months before the actual filing? Sorry, I just don't get it.
Okay, let me be the contrarian. There is an argument to be made that, if the buyer paid that group of creditors as part of the overall "price" it was willing to put up in order to acquire the asset, then that consideration ought to be factored into the "value" that the asset must have been "worth" to the buyer. The argument completes, then, with the proposition that that value should have been paid into the estate, for appropriate distribution in accordance with the scheme of distribution in the Code. This is the argument made not so long ago in the Sharper Image case, where the buyer agreed to pay the unsecured creditors a sum of money in exchange for their dropping their objections to confirmation. The UST argued that that money was actually part of the "value" the buyer was giving to acquire the asset. The court concluded otherwise, saying that the buyer could spend its own money as it pleased, and could not be compelled to throw the money into the pot for redistribution in a way not beneficial to the buyer. And this is the nub of it. If the consideration is paid in a way that is not beneficial to the buyer, then perhaps the consideration would never be paid at all. The buyer in Chrysler had economic reasons for satisfying the union claims differently -- doing so made the acquired assets more valuable in the hands of the buyer. If it had been required to instead simply put that money into the pot (and so not garner the support of workers on the other side of the sale), it arguably would never have committed that money to the sale in the first place. These conceptual considerations support the abstract notion that a plan would be a better alternative than a sale. True enough, in the abstract. But both time and the lack of operational financing made that option essentially meaningless. As I recall from college days, it was Leibnitz who posited that we live in the best of all possible worlds, and Voltaire who jolted him back to reality.
Toggle Commented Jun 13, 2009 on A Final Thought on the Chrysler Sale at Credit Slips
Mr. Loeb -- I think Steve got it right with his quote from Paul Cravath. Lauria attempted to extract value for his clients by being obstructionist -- and by heating up the rhetoric in the media. That's fine. That's his job. He made the pitch that the government was behaving like outlaws. The conservative media then jumped on that with charges that the administration was trying to turn the U.S. into a socialist (or even communist) workers' paradise. The Obama administration struck back by calling the holdouts greedy (I don't think he called them traitors, but I could be wrong) and accused them of selfishly putting their own interests ahead of everyone else's interests. Sounds to me like just some good old fashioned bare-knuckled brawling, trying to use public (and some political) pressure to advance positions. I personally am not surprised. Hard nosed negotiations often take place in the bankruptcy context. We just don't normally see those negotiations on public display -- much less find the media being used as a tool in those negotiations. But I think you are wrong to pitch it as "the Administration's successful campaign to wipe out dissent." That suggests something far more pernicious than I think the facts warrant. As Prof. Lubben has already pointed out, the real pressure points for the lenders were (1) Chrysler in liquidation was a nightmare scenario for the lenders and (2) credit bidding was their only real legal option -- and they did not want to own Chrysler. The lenders responded to that pressure, just as parties always respond to pressure in negotiations. Recasting that as "wiping out dissent" is both disingenuous and unfair.
Toggle Commented Jun 12, 2009 on What Did the Indiana Funds Want? at Credit Slips
I'm amused by these ruminations about intrinsic value. In my experience with 363(f) sales in the past (usually driven by the secured creditor -- how's that for irony?), the court and creditors are given no more options than were given in Chrysler. This is what the court and creditors are told: (1) if you think it's worth more than what's being offered, then bring a competing buyer to the table; (2) if another secured creditor thinks the price is inadequate, it should credit bid; (3) the buyer has no obligation to buy anything more than what it chooses to buy, and no obligation to pay any claims other than those it deems to be important to it as a buyer; (4) the secured lender driving the sale has no obligation to continue to fund operations of the debtor in order to reorganize by way of a plan, and (5) the lender chooses not to extend financing for operations for any purpose other than to achieve this sale. Every bankruptcy lawyer and judge knows this. This is not news. Unsecured creditors who complain that a secured creditor-driven sale is a sub rosa plan typically lose. Unsecured creditors who claim that some creditors are being preferred while others are being left behind, typically lose. They lose as a matter of law, and they lose as a matter of economic reality. All that is changed here is that the party complaining is a secured creditor, rather than a group of unsecured creditors. And their status as "secured creditors" is actually misleading because they are actually participants in a loan in which the majority of the participants (a super majority as a matter of fact) consented to the sale! If you read section 363(f), consent is enough to authorize such a sale. These objecting secured creditors' claims are derivative, not direct. They would not have the right to directly enforce their security interests against Chrysler. They would not have the right to insist on a payment that was higher than the payment made to the other participants in the loan. So most of the arguments advanced by these objecting secured creditors about how "their rights" were being trammeled either by the government or by the court were bogus from the beginning. Seems to me that their remedies were (1) bring a better buyer to the table, (2) credit bid (assuming they had that right under the loan participation -- and I'll bet they didn't), (3) sue the indenture trustee and/or the collateral agent or the other members of the loan participation for breaching their duty to them. But the remedy is NOT to insist that the buyer pay more money, or that the buyer pay specific creditors, or that the buyer not pay specific creditors. For all those who scream that this 363(f) sale process subverts important rights of creditors, I remind them that this device is one that secured creditors themselves have pushed on the system. Sauce for the goose, as the saying goes, is also sauce for the gander.
Toggle Commented Jun 10, 2009 on The Absolute Priority Rule? at Credit Slips
Consider these ramifications: 1. Ginsburg submitted the matter to the entire Court. Given her strong dissent in Bush v. Gore, I wonder if she might have been thinking about the unilateral stay that Justice Scalia issued in that case, and her desire not to do the same thing here. I also wonder if she might have been thinking about the institutional value of assuring that the entire Court participate in the decision, given all the heated rhetoric that was accompanying the Chrysler appeal in the media. 2. Did the Court telegraph a justiciability concern when it suggested that the Court should tread more lightly in areas of national policy normally shaped by the Executive Branch? That would be consistent with justiciability standards the Court has espoused in the past. 3. Did the Court intimate that it was unimpressed with the rhetoric of the objecting creditors when it ruled that an insufficient showing had been made by them to warrant a stay? 4. Did the Court also signal that there were nonetheless some disturbing aspects of the case that, if properly raised by the right parties at the right time and in the right forum, the Court might want to take a look at? If so, what does that bode for GM?
Whoops. Errata on my part. I see now what Steve was talking about, with Fiat's CEO promising "never" to walk away from the deal. But my take on that is that he was telling the dissenting bondholders not to hold their breath for any "reward" for their being obstreperous. He'll wait them out rather than pay them another dime. I stand by my earlier comment though that the dissenting bondholders are sure in a pickle here. I think they're betting that the Administration will do anything to keep the company from failing -- including paying greenmail. If they're wrong, and they win at the S.Ct., then the sale fails. Depending on the Court's rationale, the GM deal might be in trouble too. We live in interesting times.
Toggle Commented Jun 9, 2009 on That Wasn't So Smart at Credit Slips
Re Mr. Loeb's comment above -- "They (the lenders) quite reasonably see that the worst case -- liquidation, would result in a better result than the current plan." I respectfully disagree. There is no assured financing for the operation of Chrysler. Without operations, the liquidation of Chrysler would be very ugly indeed, because the market is extremely thin for auto plants that aren't going concerns, or for unsold Chrysler inventory, or parts inventory. These particular lenders are playing a dangerous game -- if they win at the S.Ct., they lose (and big). The sale will fall through, liquidation ensues, and the bondholders will be lucky to get 10 cents on the dollar. If the objecting bondholders cut a deal, it will have to be a deal for all the debenture issue, unless the rest of the debenture holders agree to let the squeaky wheel get a better return than the rest of the bondholders. I'm not surprised that Fiat has said, "we'll walk." Why not? That happens in 363 sales all the time -- buyer says "my way or the highway." Who else is there? And they are right that Chrysler is actually a melting ice cube. It's losing market share and credibility by the week. Funny how nobody ever took notice of the way 363 sales have re-shaped the way restructuring in bankruptcy is done before. Is that because, in the past, it was the secured creditors themselves who were pushing the 363 option? How ironic that it is a secured creditor who is complaining that 363 sales undermine the reorganization process.
Toggle Commented Jun 9, 2009 on That Wasn't So Smart at Credit Slips
weren't many of the CDS's out there already "collateralized"? And weren't the repos essentially collateralized (since they are functionally the same as security interests)? Am I missing something here?
Toggle Commented May 19, 2009 on Collateral, Collateral Everywhere at Credit Slips
Bill, what is SNAC protocol? I haven't reviewed the ISDA forms within the last 6 months. Bob, the point of my earlier post was to raise the question whether the law under 1126 might evolve to take into account the new reality of short positions potentially created by CDS contracts. Where an immediate sale is not as readily available to solve the problem (as it was for Chrysler), reorganization issues become more important, perhaps.
I think the interesting question about CDS and chapter 11 is this: the assumption in ch 11 is that creditors act in terms of their "long" position. We premise voting behavior on that assumption. When a creditor holds a CDS with a solvent counterparty, then the creditor is "short," and that affects that creditor's voting decision. Query: does this raise new analytical questions about designation of votes under 1126(e)?
Toggle Commented May 12, 2009 on Setting up the Bondholders at Credit Slips
In response to dWj, I get it. Chapter 11 is expensive. And it can be unpredictable. Just look at Delphi.
Toggle Commented May 12, 2009 on Looking Ahead: GM at Credit Slips
I know a bankruptcy lawyer whose wife has a small horse. The horse got a credit card. They used the credit card to buy the horse's feed and other stuff. True story. Of course, the horse didn't pay the bill (what did it have to offer?).
I rejoin this conversation only to make this small point. Were the drafters of the PEB Official Comments to file an amicus brief in a given case, a court would readily recognize the special expertise of the brief writers, and may even be inclined to give their brief a special deference as a result. Consider, for example, the briefing offered to the district court in the chapter 15 case, Bear Stearns. The authors were intimately involved in the drafting of chapter 15, and the court knew it. Their arguments were thus given special weight. But it was also an amicus brief, and their identities were clearly disclosed. Had the court chosen to give their brief no weight, it would have been on safe ground. Were a court to fail to give "official comments" special deference, however, that might make for a point of error on appeal. The PEB Commentaries function like the amicus brief in Bear Stearns -- no doubt authored by knowledgeable folks whose input is appreciated by the courts. But by bearing the imprimatur "official," they take on an added precedential value that I find inappropriate. Their authorship is undisclosed, their motivations might be mixed, but all that is disguised under the guise of being "official." I think that is bad for the system. That's why I agree with David's point.