Commentary Taxpayer Cost Could Have Been Minimized in Automaker Bankruptcies

ABI Bankruptcy Brief | June 14, 2012

June 14, 2012

NEWS AND ANALYSIS

COMMENTARY: TAXPAYER COST COULD HAVE BEEN MINIMIZED IN AUTOMAKER BANKRUPTCIES

President Obama reasons that the estimated $23 billion the taxpayers lost in the bankruptcies of General Motors and Chrysler was worth paying to avoid massive job losses, but a commentary by James Sherk of the Heritage Foundation and Prof. Todd Zywicki of George Mason University Law School in today's Wall Street Journal claims that the president could have kept the automakers running and avoided losing money. The preferential treatment given to the United Auto Workers accounts for the entire amount American taxpayers' lost from the bailout, according to the commentary. GM and Chrysler owed billions of dollars to the union's Voluntary Employee Beneficiary Association (VEBA) when they went bankrupt. The union and the automakers created VEBA in 2007 to assume responsibility for the UAW's retiree health benefits. GM owed $20.6 billion and Chrysler owed $8 billion to VEBA as unsecured claims. In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders. At the time of bankruptcy, GM owed these unsecured creditors $29.9 billion, for which they received 10 percent of the stock of "new" GM, which went public in November 2010, and warrants to purchase 15 percent more at preferred prices. Yet the VEBA got 17.5 percent of new GM and $9 billion in preferred stock and debt obligations, according to the commentary. Based on GM's current stock price, VEBA collected assets worth $17.8 billion—$12.2 billion more than if the administration had treated it like the other unsecured creditors. Read the full commentary. (Subscription required.)

REALTYTRAC: U.S. FORECLOSURE FILINGS FALL 4 PERCENT IN MAY FROM LAST YEAR

Market researcher RealtyTrac reported today that the number of U.S. properties with foreclosure filings slipped 4 percent in May from a year earlier, continuing a streak of year-over-year declines, the Wall Street Journal reported today. There were 205,990 U.S. properties with default notices, scheduled auctions and bank repossessions in May, a 9 percent increase from the prior month. One in every 639 U.S. housing units had a foreclosure filing last month, RealtyTrac reported. U.S. foreclosure activity has now decreased on a year-over-year basis for 20 consecutive months, according to the report. However, RealtyTrac reported that foreclosure starts in May rose 16 percent on the year, after 27 consecutive months of year-over-year declines. Read more. (Subscription required.)

REPORT: AMERICANS SEE BIGGEST HOME EQUITY JUMP IN 60 YEARS

Home equity in the first quarter rose to $6.7 trillion, the highest level since 2008 with homeowners taking advantage of record-low borrowing costs to refinance their loans and continue to pay down principal, Bloomberg News reported today. The gain in percentage terms was the biggest jump in more than 60 years, according to an analysis by Bloomberg of Federal Reserve data. Measured as a share, rather than in dollars, homeowner equity was 41 percent of U.S. residential property value in the first quarter, including homeowners who do not have mortgages, according to the Fed study released last week. The last time the share was that high was in the third quarter of 2008 when it was 43 percent. Residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years, according to Fed data. Since then, it has fallen 7 percent as the value of all residential property has dropped 23 percent. Many homeowners are also choosing to shorten the terms of their loans, which increases monthly payments. The average mortgage term fell to 27 years in March and April from 29 years in February. Read more.

ANALYSIS: BIG-BOX SPACE REMAINS HARD TO FILL

Many shopping centers that lost Borders stores after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults, the Wall Street Journal reported today. Values have been falling in particular for the suburban shopping centers that rely heavily on big-box stores and have been bearing the brunt of the impact from online retail competition. A new survey of 205 closed Borders stores shows that one-third are still vacant, according to brokerage Colliers International. Those stores that filled the former Borders space are leasing at rates roughly 30 percent lower on average than what Borders paid, Colliers said. Overall, national vacancy statistics on big-box centers don't appear too grim, partly because new construction is scant. With some retailers expanding, like DSW and Ross Stores Inc., the vacancy rate has declined to 6.6 percent after hitting a multiyear high of 7.9 percent in 2009, according to CoStar. Even so, rents are near their lowest levels since 2006, and the vacancy rate is rising again and will likely hit 6.8 percent by the end of the year because of more closings, CoStar reports. Read more. (Subscription required.)

CALENDAR ANOMALY PUSHES UP FITCH CARD CHARGE-OFFS

Credit ratings agency Fitch in April saw an increase in credit card debt that was uncollectible, the first time in 2012, the Associated Press reported yesterday. The increase was due to a calendar anomaly rather than a change in the paying habits of consumers. Fitch director Herman Poon said that credit card issuer Citibank had an additional three days in its fiscal monthly calendar to charge off receivables compared with the same period last year. Fitch's charge-off index for April increased by 0.27 percentage point to 5.44 percent. Without the Citi calendar anomaly, credit card charge-offs would have remained flat. Delinquencies reached 17-year lows as accounts that were late by 60 days or more decreased by 0.11 percentage point to 2.03 percent. Read more.

ABI IN-DEPTH

WEBINAR ON JUNE 26 TO EXAMINE SUPREME COURT'S RULING IN RADLAX CASE

Having already examined the oral argument in a previous ABI media teleconference, panelists will reconvene for an ABI and West LegalEd Center webinar on June 26 to discuss the Supreme Court's ruling in RadLAX Gateway Hotel LLC v. Amalgamated Bank. CLE credit will be available for the webinar, which will be held from 2:00-3:30 p.m. ET.

Experts on the program include:

• Adam A. Lewis of Morrison Foerster, lead counsel for Amalgamated Bank before the Court.
• David Neff of Perkins Coie LLP (Chicago), the counsel of record for petitioner RadLAX Gateway Hotel LLC and participant in the argument.
• Jason S. Brookner of Andrews Kurth LLP (New York), whose article was cited in the brief for the respondent.
• Prof. Charles Tabb, the Alice Curtis Campbell Professor of Law at the University of Illinois College of Law, who recently published a paper titled "Credit Bidding, Security, and the Obsolescence of Chapter 11."

ABI Resident Scholar David Epstein will be the moderator for the webinar.

The webinar costs $115 and purchase provides online access for 180 days. If you are purchasing a live webcast, you will receive complimentary access to the on-demand version for 180 days once it becomes available. Click here for more information.

LATEST CASE SUMMARY ON VOLO: KAPETANAKIS V. FIRST NATIONAL INSURANCE CO. OF AMERICA (IN RE KAPETANAKIS; 5TH CIR.)

Summarized by Aaron Kaufman of Cox Smith Matthews Inc.

The Fifth Circuit affirmed the district court's order, which affirmed the bankruptcy court's order, and reiterated that "a settlement agreement of a non-dischargeable obligation does not convert the debt to one that is dischargeable." The Court of Appeals rejected the debtor's argument that First National released its fraud claim when it accepted a consent judgment to settle pre-petition fraud claims, citing the Supreme Court's decision in Archer v. Warner, 538 U.S. 314 (2003). Finding sufficient evidence in the record to support findings that First National reasonably relied on the putative indemnitors' signatures in issuing surety bonds and that the debtor intentionally forged those signatures, the Court of Appeals found no reversible error in the lower courts' judgments. Accordingly, the determination of non-dischargeability was affirmed.

More than 500 appellate opinions are summarized on Volo typically within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: BANKS NEED BETTER RISK MANAGEMENT, NOT MORE REGULATION

The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. In light of JPMorgan CEO Jamie Dimon's testimony yesterday before the Senate Banking Committee yesterday, a recent post made the case that better risk management is needed by banks, not more regulation.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll
First-day orders authorizing full and immediate payment of the claims of ‘critical vendors’ should be prohibited; all pre-petition unsecured creditors should be subjected to the same rules. Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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