SUPREME COURT, ADVOCATES STRUGGLE WITH DEWSNUP AT ORAL ARGUMENT ON LIEN STRIPPING
by Prof. Anne Lawton
ABI Resident Scholar
On Tuesday, March 24, 2015, the Supreme Court heard oral argument in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona. The Supreme Court granted certiorari in Caulkett and Toledo-Cardona to decide whether a chapter 7 debtor may "strip off" a junior mortgage lien, pursuant to Sect. 506(d), when the debt owed to the senior lienholder exceeds the current value of the collateral. In its 1992 decision in Dewsnup v. Timm, the Supreme Court held that Sect. 506(d) did not permit the chapter 7 debtors to "strip down" a lien to the current value of the collateral. Finding the Code's text ambiguous, the Dewsnup Court explained that Congress did not intend to depart from the pre-Code rule that liens pass through bankruptcy unaffected. Because the creditors' claim in Dewsnup was allowed and secured by a lien, even though the claim amount exceeded the collateral's value, the Court concluded that the chapter 7 debtors could not "void" the lien, pursuant to Sect. 506(d). The issue in Caulkett and Toledo-Cardona is whether Dewsnup's holding in the context of a partially underwater mortgage applies to cases with totally underwater second mortgages. Click here to read the full analysis.
PODCAST: BANKRUPTCY JUDGE AND SCHOLAR DEBATE PROFESSIONAL FEE ISSUE CURRENTLY BEFORE SUPREME COURT
ABI Resident Scholar Prof. Anne Lawton talks with Bankruptcy Judge Judith Fitzgerald (W.D. Pa.; Pittsburgh) (ret.) and Prof. Lawrence Ponoroff of the University of Arizona College of Law (Tucson, Ariz.) about their views of the issue before the Supreme Court in Baker Botts LLP v. ASARCO LLC, No. 14-103. Judge Fitzgerald and Prof. Ponoroff provide their differing perspectives on whether Sect. 330(a) of the Bankruptcy Code grants bankruptcy judges discretion to award compensation for the defense of a fee application. Listen to the discussion here.
ORAL ARGUMENT PREVIEW: SUPREME COURT TO USE CONSUMER BANKRUPTCY CASE TO RESOLVE QUESTION OF REORGANIZATION PROCESS
The Supreme Court will consider two consumer bankruptcy cases tomorrow during oral argument, including one case that could help resolve circuit splits on the reorganization process, according to a SCOTUS Blog preview yesterday. The case of Bullard v. Hyde Park Savings Bank involves a basic fact pattern doubtless repeated in tens (if not hundreds) of thousands of bankruptcy filings this decade: a bankrupt homeowner, whose home indisputably is worth far less than the mortgage that burdens it, with few other significant debts. Indeed, the Justices face that fact pattern three times this month (last week in Caulkett and another case, Harris v. Viegelahn, also being heard tomorrow). As with Harris and Caulkett, the monetary stakes of this case are slight, but the similarities end there as Bullard presents a procedural problem that has plagued the courts of appeals for years: whether a debtor can appeal a bankruptcy court order that denies confirmation of a plan. The ramifications of that question go far beyond individual homeowner filings; the problem is crucial in large reorganizations where plan confirmation often is quite contentious. In those cases, at least in circuits that do not permit appeal from plan denial, the refusal of a bankruptcy court to approve the debtor’s plan leaves the debtor with no practical recourse unless it can persuade the same judge that just denied confirmation to approve an immediate appeal. Because the Second Circuit is in that group of circuits, that rule applies to the many large business reorganizations filed in New York. Read the full preview.
SENATE TAKES SWING AT BIG BANKS WITH "LIVING WILL" AMENDMENT
The Senate last Thursday unanimously passed by voice vote an amendment to the budget directing Congress to take punitive measures against big banks that fail to craft credible plans for how they could collapse in bankruptcy without damaging the broader economy, the Wall Street Journal reported on Saturday. The amendment was sponsored by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), a bipartisan duo that has long targeted the largest Wall Street firms for remaining "too big to fail," or so large and interconnected that the government would have no choice but to save them in another crisis. While not binding policy, the unanimous vote underscores the political attention that the so-called living wills have in Congress, increasing the pressure on regulators to dish out harsh medicine to those banks that can't produce convincing road maps to their own demise. Living wills are blueprints that big banks, as part of the 2010 Dodd Frank law, must provide to regulators showing how they could be dismantled without taxpayer support. Regulators rebuked 11 of the largest U.S. banks last year for shortcomings in their plans and demanded significant progress in the next year. The Federal Reserve stopped short, however, of declaring the plans "not credible," a finding that would lead to an escalating series of sanctions. The Federal Deposit Insurance Corp. did declare the plans not credible, but both regulators must agree in order for the consequences to kick in. Read more. (Subscription required.)
FED'S FISCHER SAYS REGULATORS MUST KEEP WATCH ON SHADOW BANKING
The Federal Reserve's second-highest official said yesterday that regulators must better monitor and consider new rules for the growing proportion of lending being done by non-bank financial firms, Bloomberg News reported. "Non-bank firms and activities can pose the same key vulnerabilities as banks, including high leverage, excessive maturity transformation, and complexity, all of which can lead to financial instability," Fed Vice Chairman Stanley Fischer said. Fischer is leading the Fed's efforts to bring more attention to risks posed by the so-called shadow banking sector, and is giving his second speech on the topic since Friday. The Fed and other central banks have hardened regulation of banks since the 2008 financial crisis, helping to spur the growth of less tightly regulated forms of lending. "Before the crisis, the authorities had few policy levers to provide liquidity or to resolve failures of nonbanks in a way that would avoid serious spillovers," according to Fischer, head of the Fed's financial stability committee. He floated a handful of possible changes, including placing direct restrictions on how broker-dealers raise funds that would limit the duration of their liabilities or their use of wholesale funding. Read more.
COMMENTARY: THE GLORY DAYS OF PRIVATE EQUITY ARE OVER
There are many signs that private equity has peaked as an asset class, according to a Wall Street Journal commentary yesterday. Private equity is pervasive, which is one of its problems, according to the commentary. Dow Jones LP Source reported that 765 funds raised $266 billion in 2014, up 11.7 percent over 2013. Here are the main reasons, according to the commentary, as to why private equity has peaked:
1) Interest rates are going up. Rising interest rates mean that private equity will see higher costs of capital.
2) Banks are slowing lending for leveraged deals. Since 2013, regulators have been discouraging leverage above six times earnings before interest, taxes, depreciation and amortization.
3) Tax reform is in the air, and interest-rate deductions are on the chopping block. The Lee-Rubio tax reform plan introduced in March "eliminates the deductibility of new debt."
4) Private equity has been holding back the economy. When you buy out a drugstore chain or car-rental company and load it with debt, you aren't investing in the productivity of the economy.
5) It is fresh out of targets. The reality is that the best companies with high-enough cash flow to pay down interest can't be bought.
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ABI'S NEWEST TITLE, CHAPTER 15 FOR FOREIGN DEBTORS, IS AVAILABLE FOR PRE-ORDER!
Every month brings several new cases filed under chapter 15, making this a rare growth spot in corporate bankruptcy. ABI's newest title, Chapter 15 for Foreign Debtors, covers all aspects of the UNCITRAL Model Law on Cross-Border Insolvency, as well as chapter 15 of the Bankruptcy Code. The book also provides details about foreign representatives, avoidance actions, creditor protections, concurrent proceedings, comity and much more. An extensive appendix filled with sample case documents and forms related to chapter 15 proceedings is included. To pre-order your copy at the ABI member price (log-in required) of $75, please click here. (Printed copies will be delivered in April 2015.)
NEW CASE SUMMARY ON VOLO: WELLNESS WIRELESS INC. V. INFOPIA AMERICA LLC (5TH CIR.)
Summarized by Craig Geno
A civil action originally filed in district court was dismissed by the district court due to lack of subject-matter jurisdiction because "the bankruptcy court's jurisdiction is implicated pursuant to 28 U.S.C. Sec. 1334."
There are nearly 1,700 appellate opinions summarized on Volo, and summaries typically appear 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: DON'T BLAME DODD-FRANK FOR DWINDLING NUMBER OF COMMUNITY BANKS
There are many things to dislike about the Dodd-Frank Act, according to a recent blog post, but the law is not causing the demise of community banks.
To read more on this blog and all others on the ABI Blog Exchange, please click here.
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