The Federal Government as DIP Lender

At the American Bankruptcy Institute Legislative Symposium on November 16-17, one of the more interesting ideas came from Harvey Miller. Harvey suggested that the federal government become a leading provider of debtor-in-possession financing.

To get everyone up to speed, most chapter 11 bankruptcy cases feature debtor-in-possession ("DIP") financing wherein a lender provides liquidity to the debtor in possession during the bankruptcy case. Most debtors of course would be unable to obtain credit on the open market and therefore the Bankruptcy Code provides extra incentives to the DIP lender to facilitate the loans to the debtor. The DIP lender gets special priority under section 364 of the Bankruptcy Code to protect the DIP lender's investment.

There are at least a couple significant sources of controversy in the world of DIP financing. First, putting it bluntly, there is quite a bit of money to be made from DIP financing. The rates and fees that the DIP lenders command from the DIP process are quite attractive. Second, other terms of the DIP agreements can be quite onerous as well. For example, the DIP lender often happens to be the debtor's senior secure lender and negotiates to "roll up" the prepetition debt into the DIP facility. Thus negotiating the terms of the order approving the DIP financing is often a very contentious moment in the case.

At the ABI panel discussions, there was a fairly steady drone of complaints about the role that secured lenders in general and the DIP lender in particular plays in a bankruptcy case. At the end of each panel discussion, the moderator typically asked the panel members a question to the effect of, "If you were a one-person Congress, what would you change?" Harvey came up with the most interesting suggestion -- make the federal government a DIP lender.

Obviously, the idea of the federal government doing DIP lending is no longer new or novel. The first I heard talk about the federal government as a DIP lender was a couple years ago when the GM bankruptcy case was only being contemplated. Of course, the federal government ultimately filled the role to both GM and Chrysler in their bankruptcy cases earlier this year. Back when I heard the idea the first time, the concern was that a debtor the size of GM would need such a massive DIP facility that the federal government would be the only lender capable of fulfilling the need. So the government was essentially the DIP lender of last resort.

Harvey's idea presumably would extend the federal government from being the DIP lender of last resort to being the DIP lender for cases of any reasonable size. And the concept definitely has some advantages.

For example, having the government serve as DIP lender would provide competition in an arena where there does not appear to be much at the moment. Generally the only entity interested in being the DIP lender these days is the debtor's senior secured lender. The debtor generally has little leverage in negotiating with its existing lender and ends up agreeing to provisions that are not necessarily what would result if there were an open market for DIP lending. If the government provided an alternative source for DIP lending, the senior secured creditor would be in a weaker position and less likely to be able to extort concessions from the debtor.

Another benefit to the idea is fiscal. You might recall above that there is quite a bit of money to be made in DIP lending. The fees and interests rates that DIP lenders obtain often are pricey. Harvey noted that the government deifnitely could make "a few bucks" if it were in the business of lending. With deficits being what they are, adding a few dollars to the public fisc at the expense of banks and other lenders might be an attractive proposition.

I'm not so naive to say that I expect this proposal to go anywhere. And that isn't because there is anything inherently wrong or inefficient about having the government fill this role. No one at the conference this week challenged Harvey on the idea. And after a couple days thought thus far I haven't come up with the a good argument against it. But there would be serious political opposition to the government regularly becoming a DIP lender.

Existing lenders have a huge incentive to oppose the government's entry into regular DIP lending. Not to weigh into the health-care debates, but in much the same way that health insurance carriers are loathe to have a government health insurance company provide low-cost competition, current players in the secured financing field have an obvious interest in keeping the government out of their business. Harvey is essentially offering up a "public option" for DIP financing.

It probably faces longer odds than the health-care version

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So Maybe G.M. Will Pay The Government Back After All?

There were a lot of questions regarding the U.S. Government's involvement in General Motors earlier this year. And there were many grounds on which to question the government's actions and whether the facilitating the bankruptcy was a good idea. Most of us assumed however, that the government would not get much direct return on its investment.

How much would the calculus change if we knew that the government would get paid back? See the following from the New York Times here:

A government report released last week concluded that taxpayers were unlikely to receive full repayment of the more than $81 billion lent to rescue G.M. and Chrysler. But [G.M. Chairman Edward] Whitacre, speaking at a small college near his home in Texas, insisted that G.M. intended to repay its full debt to the Treasury Department, excluding the nearly $1 billion lent to the old part of G.M. that remains in bankruptcy, The New York Times’s Nick Bunkley reported.

Note the conflicting views. The government is less optimistic that it will get paid back than G.M. is. So perhaps we shouldn't credit the Obama Administration with being too clairvoyant. We might just be getting lucky on this investment if we do in fact get paid back. But if the government recovers the lion's share of value that it invested, that might add some justification for the government's actions.

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An Interesting Read From Chrysler's Bankruptcy Attorney

Corinne Ball, head of Jones Day's bankruptcy group and lead counsel to Chrysler, had a piece in the New York Times Dealbook section recently. It is an interesting read. One section I noticed:

Of course, one can criticize the lender and purchaser choices, particularly when
the lender is the Treasury. Nevertheless, one must consider the factors
potentially motivating the policy choices made at the Treasury. The cost of
loans to New Chrysler and the debtor-in possession (DIP) financing for the
Chrysler bankruptcy were likely weighed against the liquidation alternative,
which would have meant dipping into federal and state coffers to pay for
unemployment benefits, the 85 percent credit for medical benefits (for life in
the case of bankruptcy), the rescue of pensions underfunded by billions of
dollars and other costs.

In other words, the sale had its problems, but the alternatives might have been worse and more expensive.

Corinne also addresses a point I have made here repeatedly. The Chrysler sale might have been flawed on numerous policy grounds, but it almost certainly was legal:

The transaction fully complied with existing bankruptcy precedent, which under
the extreme facts and circumstances confronting Chrysler permitted a sale some
30 days after filing for bankruptcy relief. The linchpin for this conclusion was
that there was no alternative but liquidation, and all the evidence confirmed
that liquidation would yield far less than this sale. Could the taxpayers have
paid more? No doubt, but that is a question of policy, not bankruptcy law.

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I Did Not Get Mugged In London (But Did Get My Email Account Highjacked)

My apologies and condolences to anyone (everyone?) on my contact list who got a phishing scam email from a hacker using my hotmail account. I contacted Microsoft about it and have been changing email accounts the last couple of days.

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Some Rethinking on Health Care Costs and Bankruptcy

I had hypothesized recently that "it is hard to imagine any health care reform that won't reduce bankruptcy rates at least to some degree." It turns out I might have been completely wrong about that.

Check out what Dr. David Himmelstein, one of the authors of the famous study connecting medical costs and bankruptcy, said in a recent New York Times interview:

Q. Would any of the plans under discussion on Capitol Hill reduce the rate of medical bankruptcies?

A. Only the single-payer plan sponsored by Representative John Conyers and Senator Bernie Sanders. The others pretty clearly do little or nothing for medical bankruptcy.

Are we really likely to get health-care reform that won't reduce the rate of illness-induced bankruptcies? Perhaps, yes. Based upon what I read, a single-payer plan is not the most likely form of health care reform. I would be interested to hear why a single-payer system would reduce the rates of illness-induced bankruptcies and the other types of reform will not. I imagine that most insurance plans have sufficient co-pays and deductibles that having a serious illness ends up being a financial "death by a thousand cuts." I remember years ago when I had a serious illness that I was in the doctor's office multiple times each week. If I had to pay even $10 a visit, that would have added up in a hurry. As it was, even with excellent insurance and making a reasonable living, the financial impact of a major health scare was substantial.

Since it appears that health care reform is unlikely to affect the bankruptcy rate, it is probably is disingenuous for us to speak as if it will. Of the major reasons to change the health care delivery system, the efficiency reasons might be completely valid. So, for example, having every person covered by some sort of basic health insurance might encourage them to get routine preventative care and avoid unnecessary emergency room visits. Such routine care might generate benefits both in thew form of cost savings and improving health generally. But if the goal is, paraphrasing a popular Facebook status update, to avoid people going broke when they get sick, we might be kidding ourselves to suggest that the health care reforms currently on the table will do so.

With this additional reflection, one aspect of my original post remains unchanged and another is augmented. First, there are plenty of reasons for health care reform without considering bankruptcy rates. That point remains unchanged. Second, if meaningful health care reform is not going to reduce bankruptcy rates, making bankruptcy less punitive for people who are in financial distress though no fault of their own should be on the table as well.

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Some Thoughts On Health Care Studies And Bankruptcy

Credit Slips recently had an addition to the discussion on medical debt in bankruptcy. Most of our readers are probably well familiar with the issue by now but following is an abbreviated description of it.

In a nutshell, medical debt is a factor in a substantial chunk of individual bankruptcy cases. Whether that portion is a quarter, a half, or three quarters apparently is debatable. With health care being the current hot topic on the political table, that health care costs cause such a large portion of individual bankruptcy cases becomes a justification for suggesting that we change our health care delivery system. And some folks who might have a strong pecuniary interest in that debate sometimes offer their sense of the data when compared to a country with what they believe is a particularly undesirable system.

In some ways, the role that bankruptcy statistics plays in this debate is misplaced. Reasonable minds can differ about how to reform the health care system in the United States. Few would suggest that even modest changes, such as reducing the percentage of people who lack health insurance altogether, would not be beneficial. We can debate endlessly which style of health care reform would do the greatest service and cause the least harm to particular interests. But it seems that even modest reform should increase coverage rates and reduce the negative effects of having so many people uninsured. Presumably as well, regardless of what percentage of bankruptcies medical debt causes, any effort to spread the costs of health care away from those most affected by it will reduce the number of bankruptcies that health care costs cause. Reducing bankruptcy rates is a worthy goal of course, but all the reasons for reforming heath care exist regardless of the incidence on the bankruptcy rates. And it is hard to imagine any health care reform that won't reduce bankruptcy rates at least to some degree.

There are at least three different policy reactions that can come from the association between health care costs and bankruptcy. The first, as shown above, is to debate the best delivery mechanism for health care. The second, which I almost never hear, is to suggest that the general social safety net in the United States is inadequate when people who are insured still face illness-imposed bankruptcy through loss of work. The third, which also seems to have fallen out of fashion, is to note that few benefits accrue from imposing additional burdens on people who file a bankruptcy case arising out of their illness.

The first I learned of the connection between health care in bankruptcy was during the debates over the 2005 BAPCPA Amendments. I discussed that some here. Perhaps now that we have lived with BAPCPA for a few years and health care seems to be a more pressing concern, the time for discussion on reforming bankruptcy laws is not quite upon us. Certainly reforming health care will remain in the political forefront for a while. Nevertheless at some point some adjustments to the Bankruptcy Code might be appropriate.

When considering this issue, it occurred to me that the Bankruptcy Code generally differentiates between debt based upon its security or priority, but does little to differentiate between the kinds of circumstances that can lead to individual bankruptcy. As an easy example, the means test in section 707 does not differentiate between "consumer debts" arising from a long and disabling illness or, alternatively, from excessive consumerism, gambling addiction, or any of the other less sympathetic causes of financial distress. Without suggesting that there is any apparent benefit to making obtaining relief under the bankruptcy laws any more difficult, at least with respect to people in financial difficulties arising largely from poor health, perhaps the Bankruptcy Code should make obtaining relief easier to obtain. Whatever reasons existed in 2005 to make bankruptcy relief less available probably applied less to people facing significant health concerns than to people seeking to abuse the financial system. The 2005 amendments, however, made no real attempt to differentiate between the various types of circumstances that can lead to financial distress.

And of course, none of this is to suggest that making bankruptcy relief more palatable for people in medically induced financial distress should be a substitute for appropriate health-care reform. The reasons for reforming the health care delivery system exist independent of the wisdom of reforming the Bankruptcy Code and vice versa. But perhaps when we have accomplished whatever version of health-care reform is in store for us, we can consider whether the people for whom such reforms are inadequate might deserve no less than exclusion from some of the most burdensome provisions of the Bankruptcy Code.

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Thoughts On Bar Exams From A Bankruptcy Attorney

I ended up taking the New Jersey Bar Exam last week. It is sort of a long story but this was my third bar exam. I took California back in 1996, New York in 2006 when I moved back east, and now New Jersey in 2009. Three bar exams in thirteen years definitely gives one a little perspective on the process. Other than losing some work and blogging time while trying to undertake minimal preparations and recovery, this last version was relatively painless for me. That said, I certainly would not mind if I never take another bar exam.

Ironically, of course, bankruptcy practice is almost exclusively federal and few of us ever go to state court. I went to state court a handful of times in California, have been to New York state court only to get admitted there, and have been to a state court in New Jersey only for jury duty. By contrast, I have lost count of the different bankruptcy courts in which I have appeared or filed pleadings.

I got to chatting a little with people waiting in line and with those sitting near me during breaks in the action. I was the only admitted attorney of the people I met so naturally I got to offer the odd opinion about bar exams and bar preparation. I thought about this article from Carolyn Elefant a few days ago. Carolyn notes that the bar exams in some way mirrors the practice of law because, for example, there is a lot of preparation involved and a lot of the rules you have to learn do not really make a whole lot of sense. I agree with much of Carolyn's piece and in particular made the point to people with whom I spoke that preparing for the bar is very much like practicing law. The time-management skills and concentration necessary to cover the bar prep materials is similar to what law practice requires.

The bar exam itself, however, doesn't remind me at all of law practice. We rarely are asked to anything "closed book," answer questions in anything resembling a multiple-choice format, or work from 9:00-12:00 and then 1:30-4:30. In fact, much of law practice is recognizing what we don't know and finding the answer in a book or calling a colleague to ask. When providing advice to clients, we don't have four options laid out in front of us from which to choose. Law practice regularly requires non-linear, creative thinking. The bar exam tests the opposite.

I also was struck on Wednesday during the multistate portion of the exam by how little of the material had arisen in any form in my dozen years of practice. That section of the exam, known generally as the MBE, consists of 200 multiple-choice questions from six standard subject areas: contracts, torts, criminal law, evidence, constitutional law, and real property. As a bankruptcy specialist, I have dealt with five of the six subjects in some form on a fairly regular basis over the years. Yet a relatively small fraction of the MBE questions tested anything that I would see in practice. I look at contracts quite often, but the MBE mostly tests matters such as offer and acceptance rather than drafting contract provisions. There are few chapter 11 cases without tort claims, but I never had to learn what sort of duty of care a land owner has to a trespasser. Adverse possession I have seen exactly once outside an exam.

In that sense, though, the MBE is a very fair test. If someone who has been practicing for more than a decade has no particular advantage over a person who just graduated law school, no one should complain that the test has any particular bias in it. In fact, because I spent all of June and July 1996 studying, I was significantly better prepared for that version of the test than I was either in 2006 or 2009. The last two times I had to juggle bar preparation with work.

But of course the public is not better served by having the competency test for lawyers be skewed in favor of recent graduates. Say what you want about the nice people I met this week at the bar exam. These mostly twenty-somethings were younger, trimmer and better-looking than I am but we would hope that a decade of law practice would make me at least a slightly more qualified attorney than someone right out of law school. Nevertheless, if anything, the current format of bar exams favors the recent graduate or anyone else who has time to devote to learning reams of material that will not necessarily benefit him or her in practice.

Of course, there is the usual argument when anyone complains about the bar exam that this process is just some combination of: (a) a barrier to entry imposed by the existing community of admitted attorneys to keep the supply of lawyers down; and (b) a rite of passage for newer attorneys. Frankly, imposing some sort of competency floor for professionals does not bother me at all. And many of my favorite stories from law practice come out of bar exam experiences. That we subject newer attorneys to having their intellectual and emotional eggs scrambled a bit is fair warning for what is likely to occur during the rest of their legal career.

I am less convinced, however, that we do this in the manner that best serves the public. Having taken three different versions of this exam, so much more law student ability is being tested than attorney ability that I can't help but wonder whether there is not a better a format somewhere.

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Half a Loaf to No One; The Supreme Court's Decision in Travelers

The U.S. Supreme Court's latest addition to bankruptcy jurisprudence might be the least useful opinion in recent memory. It requires a certain gift to take a clear circuit split and provide essentially no guidance at all to which circuits might be correct. But the Travelers opinion does just that.

For those who have not been following along, the case of Travelers v. Bailey has a long and tortuous (tortious?) history that goes back decades. Once upon a time, Johns Manville Corporation was a leading producer of asbestos products. As one might imagine, that line of business eventually led to bankruptcy court. Manville's primary insurer was Travelers and Travelers ultimately assisted in funding Manville's plan of reorganization. The bankruptcy court in New York confirmed that plan in 1986. Largely from the funds received from Travelers and other insurers, the plan created a trust to pay all asbestos claims against Manville. The plan included a release for Travelers, the scope of which became the focus of the case at the Supreme Court. In theory, all claims against Travelers related to the Manville insurance policies would be channeled to the trust created to pay such claim. After all, why would the insurance companies agree to settle the claims if potential plaintiffs then could sue Travelers directly for their injuries?

Of course, the plaintiffs sued anyway. Roughly a decade after confirmation, the plaintiffs started suing the insurance companies directly. The insurance companies of course invoked the 1986 confirmation order. They asked the bankruptcy court to stay the pending actions. The bankruptcy court did so, fostered a further settlement, and then held an evidentiary hearing on the basis for the direct actions. In 2004, the bankruptcy court issued an order clarifying its 1986 order and concluding that the direct actions were covered by the confirmation order. Thus the bankruptcy court ultimately stayed an action by one non-debtor against another non-debtor. On appeal, the district court affirmed the bankruptcy court but the Second Circuit reversed.

No one doubts that the bankruptcy court had the authority to interpret its own order. The $64,000 question is whether the bankruptcy court had the jurisdiction to enjoin the action of a non-debtor against another non-debtor. On this question, there is a clear circuit split that I discussed a few months back. Guidance from the Supreme here would have been most helpful. This split can affect venue decisions in all sorts of cases and having a uniform rule might have had a beneficial effect on venue issues. Having a uniform rule also might allow parties to make decisions with some degree of certainty about their effects. So what did the Supreme Court do?

They punted.

Thursday's opinion resolved the case without resolving the issue. The Supreme Court held that: (a) the 1986 confirmation order was completely clear and became final years ago; and (b) the bankruptcy court had subject matter jurisdiction to enter the 2004 order. Therefore, according to the Supreme Court, the Second Circuit should not have reversed the bankruptcy court. Regardless of whether the Supreme Court was correct on these matters, the opinion fails to provide any useful guidance to speak of. The ultimate question here was whether a bankruptcy court had the jurisdiction to prevent lawsuits by potential third-party plaintiffs against potential third-party defendants. If the bankruptcy court had the jurisdiction to do so, why not just say it? If the bankruptcy court did not have jurisdiction, affirm the Second Circuit and let Congress figure out what to do about future claims.

Why does this matter? Because no one really knows for certain right now whether bankruptcy courts have the jurisdiction to release claims of one third-party against another. And the issue arises in just about every case in which the debtor is engaged in an industry that might lead to harms to people who cannot be identified yet. Just as a simple example, if an auto manufacturer is reorganized (or sold, either way) and the cars that it manufactured prepetition are defective in a way that results in accidents years from now, whom should the plaintiffs who were harmed be able to sue? The reorganized or reconstituted auto manufacturer? The insurance company who provided insurance coverage to the manufacturer? There might be a bankruptcy court order releasing those parties. According to the Supreme Court's decision in Travelers, if the plaintiffs wanted to be able to sue anyone who was released, the plaintiffs should have appealed the order back when it was entered by the bankruptcy court -- even though the order was entered years before anyone knew about the defect.

How would you like that answer if you were the accident victim? Years before you were hit and injured by a defective car that you did not own, you should have appealed the bankruptcy court order that provided a release for the manufacturer and its insurance company.

I cannot say as a matter of policy what the right result is here. Whether bankruptcy courts should have the jurisdiction to provide release to third-parties for future claims is a policy question that is beyond the scope of my expertise. It certainly would be helpful to know what the answer is though. Because "You should have appealed the order that you didn't know about that deprived you of all sorts of rights you didn't know you would have" is not a particularly satisfactory response.

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Supreme Court Upholds Travelers Order

This morning the U.S. Supreme Court upheld the bankruptcy court's order enjoining lawsuits against Travelers. Opinion is available here. More discussion to follow in upcoming days, I imagine.

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The Chrysler Sale and Spin Wars; How An Early 363 Sale Can Give The Impression Of A Successful Bankruptcy

As usual when I discuss anything of a political nature, I will preface my comments by noting that this not a political site and that politically I am a non-partisan moderate. And given the nature of transaction, I don't have the financial background to comment intelligently on whether the Chrysler sale was economically wise.

By getting the general public to the focus on the duration of Chrysler's bankruptcy case rather than its effect, the Obama administration seems to have won the spin war. Media sources, bloggers and tweets are routinely reporting that, because the Chrysler sale closed, Chrysler has exited bankruptcy. To bankruptcy practitioners, a case is not over because of an asset sale. The case will proceed to address claims and the myriad of other issues that remain. But to most people paying attention, the major assets leaving the ambit of "bankruptcy protection" signals the effective end of "Chrysler in bankruptcy." That the recovery to unsecured creditors is not necessarily high seems to have been lost in the excitement over the sale.

Ironically, the speed with which assets leave a bankruptcy case tends to have an inverse relation to the ultimate recovery in the case. A quick sale of all of the assets from a bankruptcy estate is not a sign of a -- for a lack of a better word -- "healthy" debtor. Quick sales of assets are very common when assets are declining in value; the proverbial truck full of soon-to-be-rotting vegetables is an easy example. The expected return to unsecured creditors from a sale of all assets is usually inconsequential or at least very low. The expected return to unsecured creditors for a reorganization is usually at least a little higher than what we expect from an asset sale. And there certainly is a better chance of tort and future claimants receiving a meaningful recovery in a reorganization than from the remnants of an assets sale. Nevertheless, Chrysler's quick "exit" from bankruptcy gets hailed largely as a success because it only took six weeks.

It is a very fair criticism that long, complex reorganization cases tend to benefit two unpopular groups: bankruptcy professionals and existing management. The longer and more complex a bankruptcy case is, the more work bankruptcy professional must perform and the more fees they are likely to incur. Similarly, the self-preservation tendencies of the debtor's management rarely counsel towards a quick sale. But is the Schadenfreunde value of depriving a relatively small number of unloved people their compensation seems little reason to counsel in favor of a quick sale unless absolutely necessary.

In short, without commenting on the relative merits of the Chrysler sale, celebrating a quick sale as if it had been a successful prepackaged bankruptcy does a disservice to the public's sense of what should and should not be important in a bankruptcy case. It would be better to explain that a quick bankruptcy sale in this instance is necessary to preserve the value that might remain in Chrysler and provide any recovery to creditors rather than suggesting that somehow the Chrysler bankruptcy case was a success because the only assets of substantial value departed the case within a couple months.

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Why The Chrysler Sale Did Not Violate The Absolute Priority Rule

With the Chrysler sale appeal currently pending at the Supreme Court, there have been occasional questions and concerns about whether the sale violates the absolute priority rule. Now is a good time to lay to rest any confusion about the role of the absolute priority rule here.

First a quick primer on the absolute priority rule: It has its origins in the Bankruptcy Act of 1898 and the requirement that reorganization plans be "fair and equitable." The basic principle of the absolute priority rule is that no junior class should receive any distribution until senior classes are paid in full. The Supreme Court in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) confirmed that the principle has extended into the "fair and equitable" requirement in section 1129 of the Bankruptcy Code.

There is confusion about the breadth of the absolute priority rule, though. Some believe that the "absolute" means that the rule applies to all aspects of a bankruptcy case. The appellants to the Chrysler sale made this argument to the Supreme Court while seeking to stay the Chrysler sale. The appellants argued that the terms of the sale were in contravention to the absolute priority rule as expressed in In re Armstrong World Industries, 432 F.3d 507 (3d Cir. 2005). The Armstrong decision, however, came in the context of a plan of reorganization, not an asset sale.

There does not appear to be any reported decision applying the absolute priority rule to an asset sale. As such, the absolute priority rule probably only applies directly to plans being confirmed over the objection of creditors. Recall above that the absolute priority rule became incorporated in the Bankruptcy Code through the requirement contained in section 1129(b)(1) that plans confirmed over objections be "fair and equitable." Section 363 contains no such requirement. Therefore, there is no clear prohibition to a sale that does not conform to the absolute priority rule.

Realistically then, under what circumstances are sales that would not conform to the absolutely priority rule likely to occur? The Chrysler sale is a good illustration. When the purchaser has the mixed motivations of wanting to acquire assets and also address claims for which it might be obligated, the purchaser might seek to satisfy such claims through participation in the sale. For example, Chrysler's retirees who do not have their healthcare provided by Chrysler might be a burden on Medicare and/or Medicaid. Therefore the U.S. government has a strong interest in making sure that those retirees have their healthcare funded. Ultimately these situations are likely to arise when there are such motivations or perhaps when an insider is purchasing the assets.

None of this is to offer an opinion about whether the absolute priority rule should apply to asset sales, whether the Chrysler sale was the best use of the government's resources, or even whether the Chrysler sale's effects on the capital markets were sufficiently negative to counsel against the sale. Unless something truly unexpected happens, however, such as the Supreme Court deciding suddenly that the absolute priority rule applies to asset sales, the Chrysler sale did not violate the absolute priority rule.

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Breaking: Supreme Court Issues Stay Pending Appeal in Chrysler Sale

From the New York Times:

The United States Supreme Court agreed Monday afternoon to delay the sale of most of Chrysler’s assets to Fiat pending further consideration of an appeal by three Indiana state funds, in a move that injects a new element of uncertainty over the carmaker’s bankruptcy case.

Justice Ruth Bader Ginsburg, who handles emergency matters arising from the United States Appeals Court for the Second Circuit, issued a stay of the sale, preventing Chrysler and Fiat from completing the transaction immediately.

Unbelievable.

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Medical Bills Causing Bankruptcies; Just Like 2005

By now many readers of this blog will have heard or read about the Harvard study that came out this week showing that medical bills play a significant role in over sixty percent of personal bankruptcy cases. Here is a story from CNN reporting the study.

Most versions of the story that I read did not explain that the 2009 study is a sequel. The results are not very different from a similar study back in 2005. Here is a story about that study.

Just to compare the results, in the 2005 study forty-six percent of bankruptcies involved medical costs and that grew to sixty-two percent in 2009. The study reprised some of its descriptions too. From the 2009 article:

"That was actually the predominant problem in patients in our study -- 78 percent of them had health insurance, but many of them were bankrupted anyway because there were gaps in their coverage like co-payments and deductibles and uncovered services," says Woolhandler. "Other people had private insurance but got so sick that they lost their job and lost their insurance."

From the 2005 article:

Surprisingly, most of those bankrupted by illness had health insurance. More than three-quarters were insured at the start of the bankrupting illness. However, 38 percent had lost coverage at least temporarily by the time they filed for bankruptcy.

And apparently Warren Buffet is enough of a household name now to be in the same sentence as Bill Gates. From the 2005 article:

Dr. David Himmelstein, the lead author of the study and an Associate Professor of Medicine at Harvard commented: "Unless you're Bill Gates you're just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick."

From the 2009 article:

"Unless you're a Warren Buffett or Bill Gates, you're one illness away from financial ruin in this country," says lead author Steffie Woolhandler, M.D., of the Harvard Medical School, in Cambridge, Mass. "If an illness is long enough and expensive enough, private insurance offers very little protection against medical bankruptcy, and that's the major finding in our study."

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In Defense Of Bankruptcy Attorneys Fees

There is a post on the Legal Blog Watch entitled Bankruptcy Lawyers: Parasitic or Productive? which suggests that perhaps bankruptcy attorneys should reduce their fees when bankruptcy cases get complex and provide less of a return to creditors. With high-profile bankruptcy cases in the news in recent days, this was one of the numerous articles about bankruptcy attorneys and their fees. Without wanting to single out any author or any particular article, this one happened to catch my attention. Obviously, there is no need to attempt to defend the decisions of any professional who does not act in the best interests of the client or patient. It is easy in these times, though, to pick on the most visible beneficiaries of hard times. It might be more useful, however, to walk a mile in the shoes of the object of criticism before likening him or her to a parasite.

It is important to understand at the outset the challenges facing bankruptcy attorneys. The practice requires an immense skill set. Not only must they know bankruptcy law inside out and backwards, they often must have both litigation and transactional skills. The practice involves the underlying rights of parties governed by state law but altered by the overlay of federal bankruptcy law. It is a highly technical practice that certainly attracts a cerebral crowd.

The bankruptcy attorneys who end up spending their careers working the larger, more complex cases are not necessarily motivated completely by money. Of course, lawyers are no more inclined to become non-profit institutions than other professionals are. But I would liken the motivation of a high-end bankruptcy lawyer to that of an oncologist. Both sorts of professionals absolutely intend to make a good living from their work. But there are plenty of other specialties in law and medicine in which to do that. At least part of the attraction to a challenging practice is knowing that the tasks ahead might be vary hard and the stakes quite high. Some of the attraction also might be the pressure of working in a difficult and challenging field full of other exceptionally capable professionals.

To continue with the analogy, we do not begrudge the oncologist who is better compensated than a general practitioner. We also do not wonder whether a cancer patient might be just as well off having a less expensive treatment than the one prescribed by the leading oncologist. We do not suggest that the oncologist take a fee cut simply because the first line of treatment was successful. And of course there are not many articles questioning whether oncologists are "parasitic" even though they make their livelihood as a result of other people's substantial misfortune.

None of this is to suggest that there are no decisions based either entirely or excessively on fees. Just as a patient with a serious medical condition will face a battery of tests, not all of which will be strictly justifiable on a medical basis, attorneys will undertake tasks that might not have been the best use of the client's resources. Most attorneys I know can recite at least one cringe-worthy story about a decision that was motivated much more by fees than the best interests of the client. Of course many patients with serious illnesses also were the subject of tests that had little or no chance of furthering his or her treatment.

The nature of professional practice at any level involves filling a need. Sometimes that need involves repairing a tooth. Sometimes that need involves treating a serious illness. Sometimes that need involves negotiating a contract or litigating a significant dispute between sophisticated parties. And sometimes that need involves the complex representation of an entity involved in a chapter 11 bankruptcy proceeding. In each instance someone will call on the expertise of a professional with a lot of training and experience in the hope that the skills and wisdom acquired along the way will lead to a favorable result. The professional also might charge more than necessary or appropriate for his or her services. Doubtless some of the decisions that the professional makes will be subject to second-guessing and some of that second-guessing will be well deserved. But nothing about professional services is unique to bankruptcy practitioners and singling out one kind of professional from the rest of the lot carrying mixed motivations simply makes the kettle stand apart from the pot.

Ultimately the market in one form or another provides a check on professional fees. A dentist who is pushing braces on teenage patients might find the patient heading elsewhere for cleaning. The doctor who prescribes unecessarily might have an insurance company question such practices. The litigator who undertakes fruitless and costly discovery motions might have an angry client questioning the fees. And a bankruptcy practitioner being paid by a bankruptcy estate always will have some combination of a client, a judge, the U.S. Trustee, and the other parties in the case reviewing every fee application. Whether these checks are sufficient in all instances is debatable, but no one should think a large bankruptcy representation is a license to print money.

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Chrysler: Selling Free and Clear of Tort Claimants

This post comes in response to an excellent comment on yesterday's post on the legality of the Chrysler sale. The commenter asked asked about the portion of the Chrysler sale opinion (p. 42-44) dealing with "personal injury, property damage, and wrongful death claims of current and future litigants injured by Chrysler cars bought before the sale to Fiat" and whether there will be any recovery for those claimants. The commenter also asked about whether the same result might occur in GM's bankruptcy case.

We are now into some of the higher metaphysics of bankruptcy law. I apologize in advance to our readers for whom this discussion seems confusing and also for the ways in which I will cut analytical corners to try to explain how future claims work. There is nothing simple about any of this.

The Bankruptcy Code defines a "claim" just about as broadly as possible. The definition includes rights that arise from actions that have not yet occurred and harms about which the injured party is unaware. The definition is designed to elicit and address as many entities that might have any rights against the debtor as possible. So, for example, someone who buys a car that has a latent defect which causes an accident well after the manufacturer's bankruptcy case still arguably had a claim in that bankruptcy case. More famously, a worker in a factory who was exposed to asbestos on the job, but who will not have symptoms of any illness until years after the owner of the factory filed a bankruptcy case, also probably had a claim in that bankruptcy case.

The question then becomes, when a debtor is selling substantially all of its assets to a new purchaser for a price that is nowhere close to enough even to pay the senior lenders, is such a sale free and clear of the tort claims. Section 363(f) of the Bankruptcy Code addresses sales free and clear and states that such sales may be "free and clear of any interest in such property" under any one of five circumstances, one of which is almost always present. There is a split of authority as to whether a future claim constitutes an interest in property for the purposes of section 363(f). But, as Judge Gonzalez noted in his opinion, one of the current leading cases on the subject, In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003) held that such claims are interests in property and can be extinguished through a sale.

Obviously, this is a potentially unfair result. When an enterprise causes harm, it is not at all apparent why the previous owner can sell that enterprise without compensating the party harmed. Or, if the owner can sell the enterprise, why is the purchaser of the enterprise not required to compensate the party harmed? I doubt that even the most strident of apologists for the Bankruptcy Code would conclude that its results are always fair.

Fortunately for some tort claimants, purchasers do in some circumstances agree to compensate such claimants. I noted in the news this morning that the Obama administration said that the U.S. Government would back the warranties of GM vehicles. It is often in the interests of the purchaser of manufacturing assets to undertake such efforts to maintain goodwill with customers. Therefore, the owners of defective vehicles might not be left out in the cold.

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