Concurring Opinions » Rafael Pardo

The Unconstitutionality of State-Created Bankruptcy-Specific Exemptions

Rafael Pardo — Thu, 31 Aug 2006 23:17:57 +0000

Judge Jeffrey R. Hughes, writing for the U.S. Bankruptcy Court for the Western District of Michigan, has held a Michigan exemption law that applies only in federal bankruptcy proceedings to be unconstitutional. In re Wallace, 2006 WL 2347807 (Bankr. W.D. Mich. Aug. 9, 2006) (to be published). The Bankruptcy Code authorizes states to opt out of the Code’s exemption scheme. As a general matter, then, debtors from opt-out states may only exempt property from their bankruptcy estates pursuant to state-provided exemptions and nonbankruptcy federal exemptions. 11 U.S.C. § 522(b)(2), (3)(A). In this regard, the Bankruptcy Code recognizes and defers to nonbankruptcy entitlements. A state exemption law that applies only in federal bankruptcy proceedings (a “bankruptcy-specific exemption”) raises the issue of whether the recognition of and deference to nonbankruptcy entitlements translates into a congressionally-delegated authority for states to create bankruptcy entitlements. Within the exemption context, the Wallace court has answered “no.” States do not have such authority, thus rendering a state-created bankruptcy-specific exemption unconstitutional.

The court in Wallace referenced a 2000 decision issued by the U.S. Bankruptcy Court for the Northern District of Indiana, In re Cross, 255 B.R. 25 (Bankr. N.D. Ind. 2000), which found that an Indiana bankruptcy-specific exemption regarding entireties property was unconstitutional. Aside from these two decisions, I know of no others that address this issue. This is curious as Delaware, Georgia, Iowa, Kentucky, New York, Ohio, and West Virginia have all enacted bankruptcy-specific exemptions in one form or another—some allowing debtors in bankruptcy to claim more exempt property than they otherwise could outside of bankruptcy and others providing the opposite. I wonder whether courts and/or legislatures in these jurisdictions will take notice of the Wallace decision. Perhaps there are more constitutional challenges or even statutory amendments on the horizon. Stay tuned.

Educated Yet Broke

Rafael Pardo — Tue, 29 Aug 2006 21:29:18 +0000

Can you be too poor to file for bankruptcy, yet have the ability to repay your student loans?

When Congress amended the Bankruptcy Code in 2005, it also amended the Judicial Code to provide for the waiver of the mandatory filing fee for bankruptcy. That’s right. Prior to this statutory amendment, if you were so financially strapped that you couldn’t pay the filing fee (then, $150 for Chapters 7 and 13; now, $220 for Chapter 7 and $150 for Chapter 13), you were out of luck: Per the Supreme Court’s 1973 decision in United States v. Kras, 409 U.S. 434, in forma pauperis relief was unavailable in bankruptcy. Lest we prematurely praise Congress for changing this state of affairs, debtors today will get a waiver of the filing fee only under very narrow circumstances. A debtor must have (1) household income less than 150% of the poverty line and (2) and an inability to pay the filing fee in installments (see 28 U.S.C. § 1930(f)(1)).

Now that we have a sense of what Congress deems to be a financially dire situation, at least for purposes of filing for bankruptcy, it strikes me that we might use this measure to gauge a debtor’s inability to repay other types of debts—say, for example, student loans. In an empirical study of the discharge of student loans in bankruptcy, Michelle Lacey (mathematics, Tulane) and I documented that the financial characteristics of the great majority of debtors in our sample evidenced an inability to repay their student loans. One measure we used was the amount of the debtor’s household income in relation to the poverty line established by the U.S. Department of Health and Human Services. We had sufficient information to calculate this figure for 262 discharge determinations. For this group of debtors, half of them had household income less than 200% of the poverty line. It didn’t occur to us to run the numbers using the 150% figure applicable to the fee waiver. In light of the new statutory provision, I’ve set out to look at our data from this perspective. The numbers are sobering, to say the least.

Approximately 35% of the 262 debtors had (1) household income less than 150% of the poverty line and (2) less than $201.93 (in 2003 dollars) in monthly disposable household income—that is, the equivalent of the $220 Chapter 7 filing fee in 2006. Based on these figures, slightly more than a third of the student loan debtors would have been on their way to qualifying for a waiver of the bankruptcy filing fee had they filed for Chapter 7 today. Within this subgroup, however, approximately 42% of the debtors were denied a discharge of their student loans—which, on average, would have taken 2 years and 9 months to repay if the debtor lived expense-free and devoted all household income to this endeavor. It seems horribly unrealistic to expect that such a debtor would have the ability to repay his or her student loan. While the Bankruptcy Code fails to define “undue hardship,” the standard for discharging student loans in bankruptcy, perhaps courts should begin to look at the new fee-waiver provision to inform their application of the standard and to avoid troubling results such as these.

Now Playing in a Bankruptcy Court Near You

Rafael Pardo — Fri, 18 Aug 2006 06:26:03 +0000

Imagine that, for the past several years, you’ve worked diligently and dutifully as a bankruptcy judge. Unlike your Article III colleagues on the federal bench, you don’t have lifetime tenure or salary protection. But that doesn’t really bother you all that much because you care about what you do and you feel you make a difference. What’s more, you love the substance of your work—applying the Bankruptcy Code day in and day out. Sure, it has its share of inconsistencies and ambiguities that present some interpretive difficulties, as any statute would, but, at the end of the day, it’s elegant and workable. And then, BAM! Your life as a judge as you know it comes to a screeching halt.

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) into law, thus becoming Congress’s willing accomplice in committing statutory massacre. And when I say statutory massacre, I’m not even thinking about how BAPCPA substantively changes the Bankruptcy Code. Rather, I’m focusing on BAPCPA’s inartful drafting. As recently blogged by Bob Lawless over at Credit Slips: “Regardless of one’s views about the substance of the amendments, most everyone seems to agree that the legislative drafting left something to be desired.” And that’s putting it quite mildly. A quick glimpse at some of the statements from members of the bankruptcy bench during the past year gives the impression that some of the judges are not too happy with Congress.

Take, for example, Judge Lundin’s commentary on the eve of BAPCPA’s effective date, which appeared in the September 2005 issue of the American Bankruptcy Institute Journal:

Whether by design or default, bankruptcy practitioners and judges will spend decades unraveling cross-references that lead nowhere and interpreting new terms of art that fail to communicate. If the drafters intended to make bankruptcy more complicated and expensive by making the bankruptcy law less coherent and more difficult of application, they succeeded. There will be generations of “technical amendments.” Am. Bankr. Inst. J., Sept. 2005, at 1, 70.

Speaking of technical amendments to BAPCPA, consider Judge Haines’s opinion in In re McNabb:

It has been reported that a “technical amendments” bill is in the works to fix various glitches in BAPCPA, notwithstanding Congressional testimony that it was so perfect that not a word need be changed. Perhaps this is one of those glitches. If so, Congress can easily fix it. Frankly, this Court believes it should . . . . 326 B.R. 785, 791 (Bankr. D. Ariz. 2005).

Okay, okay, so maybe these two comments aren’t so bad. Perhaps a mix of tongue-in-check with a slight dose of admonition—the sort of checks-and-balances stuff the Founding Fathers had in mind with three equal branches of government, right? Well, from Judge Brook’s perspective, it seems there’s no need to sugarcoat or to be subtle. Better to come out and say what’s on your mind:

This is a case where the language of BAPCPA passed by Congress tends to defy logic and clash with common sense. This is an example of a specific revision to the Bankruptcy Code, if followed by the Court and applied as Congress seems to intend—i.e., by way of strict construction—would result in an absurd decision and totally unworkable legal precedent. These drafting problems have the potential of bringing the bankruptcy system to a halt while debtors, creditors, and the courts try to figure out just exactly what Congress intended. In re TCR of Denver, LLC, 338 B.R. 494, 495-96 (Bankr. D. Colo. 2006).

Or, better yet, why not repay the favor? If Congress wants to enact legislation that is utter nonsense from a drafting perspective, then why not issue completely nonsensical opinions commenting on that legislation? Judge Cristol did so by issuing a sua sponte order penned in the vein of Dr. Seuss’s Green Eggs and Ham:

I do not like dismissal automatic,

It seems to me to be traumatic.

I do not like it in this case,

I do not like it any place.

As a judge I am most keen

to understand, What does it mean?

How can any person know

What the docket does not show.

…

Before this problem gets too old

it would be good if we were told:

What does automatic dismissal mean?

And by what means can it be seen?

Are we only left to guess?

Oh please Congress, fix this mess!

Until it’s fixed what should I do?

How can I explain this mess to you?

In re Riddle, 334 B.R. 702, 703 (Bankr. S.D. Fla. 2006)

At this point, you might be thinking that this is just the sort of anecdotal evidence that leads to unjustified inferential leaps. The situation can’t be all that bad, can it? The judges surely are overreacting, feeling (1) slighted by Congress’s efforts to strip them of their discretion through provisions like means-testing through mathematical formulas and automatic dismissals and (2) insulted by lobbyists from the credit industry, including one who said that bankruptcy judges are “not real judges” and are “part of the . . . problem” with the bankruptcy system (see L.A. Times story here). Actually, the situation may be more dire than perceived.

A search of Westlaw’s FBKR-CS database, which consists of reported and unreported bankruptcy decisions and orders that are issued by all levels of federal courts, reveals that, to date, there are 538 documents that mention “BAPCPA” or “Bankruptcy Abuse Prevention and Consumer Protection Act.” Notwithstanding that this is a new law that has presented issues of first impression for courts, this strikes me as an excessive amount of opinion-writing, more than one would normally expect to see with a legislative enactment that has been in effect for less than a year. Worse yet, of those 538 documents, 40 mention the phrase “absurd result.” Even if only some of those opinions involve a BAPCPA issue where a plain language interpretation could lead to an absurd result—conceivably, a court might mention the phrase as it rejects a weak absurd-result argument—it can’t be a good sign that approximately 7.4% of the issued opinions within the year of BAPCPA’s enactment make an “absurd result” reference.

When bankruptcy judges issue commentary or opinions like the examples set forth above, Congress should pay close attention and look to clean up the terrible mess it has made. After all, these folks are among the nation’s top experts in bankruptcy. But, as persuasively argued by Melissa Jacoby, past experience has shown that it’s not likely that Congress will listen and that change will have to come from the actors within the bankruptcy system.

Bankruptcy in the Wake of Katrina

Rafael Pardo — Tue, 08 Aug 2006 09:42:41 +0000

I’ve recently been thinking about the difficulty researchers will face in studying Hurricane Katrina’s effects on bankruptcy filing rates in New Orleans. A couple of weeks ago, over at Credit Slips, Bob Lawless (University of Illinois) discussed the importance of extending credit relief to natural-disaster victims. Lawless’s empirical work on bankruptcy filing rates after a major hurricane has found “that for every two new bankruptcies that occur in areas unaffected by the hurricane, there are three new bankruptcies in the judicial district where the hurricane made landfall.” The study focused on hurricanes from 1980 – 2004, so I’m curious to see whether in the case of Katrina this finding will hold to be true for the Eastern District of Louisiana (E.D. La.), within which New Orleans is located. My hunch is that it won’t. Since the New Orleans diaspora involved hundreds of thousands of individuals, many of whom would be likely candidates for bankruptcy but have not returned (and may never return) to the city, the increased volume of bankruptcy filings will not materialize in E.D. La. A preliminary look at recent bankruptcy-filing data from the district suggests as much.

As an initial matter, there has recently been a national downward trend in bankruptcy filings. According to statistics from the Administrative Office of the U.S. Courts, bankruptcy filings for the second quarter of Fiscal Year 2006 (1/1/06-3/31/06) were down approximately 71% nationwide compared to the second quarter of FY 2005. This dramatic downturn has been attributed to the deluge of bankruptcy filings prior to October 17, 2005—the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which was intended to make it more difficult for certain consumer debtors to obtain bankruptcy relief. However, bankruptcy filings for E.D. La. had dropped approximately 86% for the same period of time—15% more than the nationwide figure. In terms of absolute numbers, there were only 340 total bankruptcy filings (60 business and 280 consumer) within the district.

It strikes me that these figures, in addition to being a product of strategic behavior by debtors in anticipation of BAPCA, also reflect the fact that the majority of individuals who have returned to New Orleans probably have had the financial means to stave off a bankruptcy filing. On the other hand, many of the New Orleans evacuees who remain away from the city have probably lost much (if not all) and either (1) have less of an incentive to return or (2) do not have the financial means to return. It’s these individuals whom researchers will have to track down—in places like Houston, Birmingham, Atlanta and Nashville—in order to understand fully the effects of Hurricane Katrina on financial distress. Moreover, any comprehensive study will have to analyze the impact of the diaspora on the communities where New Orleans residents relocated. The economies of these communities will simultaneously have experienced financial gain (e.g., influx of consumer dollars, workforce expansion) and financial strain (e.g., increased demands on public services such as health care and education). Considering the latter, it could very well be the case that financial distress leading to bankruptcy will be experienced by individuals in communities that were not directly in the path of Hurricane Katrina. If the numbers are large enough, the Katrina experience could force us to reconsider our prior understandings of a natural disaster’s impact on bankruptcy filing rates.

Class Absences and Grades

Rafael Pardo — Wed, 02 Aug 2006 09:04:42 +0000

With my move to Seattle University, the opportunity has arisen to re-examine my attendance and preparation policy for class. During the past two years, I required students in all of my courses to show up on time to class and to be prepared to discuss the assigned material. If they were tardy, absent or unprepared, I deemed them absent for that class session. My rule was to withdraw a student from the course who ended up being deemed absent for more than 25% of the scheduled class sessions. Having amassed attendance and grade data for 5 courses (2 first-year courses and 3 upper-class electives) and 223 students, I couldn’t resist the temptation to figure out whether class absences affected my students’ final grades. I’ve been crunching the numbers the past few days with Stata and have been surprised by what I found.

By way of background, approximately 80% of the students enrolled in my courses were deemed absent for three class sessions or less (and this figure includes the 17% who had perfect attendance). The remaining 20% were deemed absent for anywhere from three to seven class sessions. It’s worth noting that I did not begin taking attendance at the first scheduled class session and generally waited for a couple of class sessions before I began doing so, especially for upper-class electives given the shopping period provided to 2Ls and 3Ls. Keeping this in mind, and the fact that tardiness and unpreparedness counted as absences for my courses (although, based on my recollection, the majority of absences were “true” absences), students in my courses were deemed absent, on average, for approximately 9% of the class sessions for which attendance was kept. (Excluding those with perfect attendance, this figure jumps to 11%.) Given that no penalty was triggered until a student was deemed to be absent from 25% of the class sessions for which attendance was kept, I’m generally pleased by these figures.

But what effect, if any, did class absences have on final grades in my courses? With my first cut at the data, I’ve run a linear regression of final grade (which, for all courses, was based solely on an anonymous, in-class exam) on class absences. It seems as if class absence did influence a student’s final grade in my courses (i.e., it had statistical significance). That said, the variable has limited explanatory power: It accounts for only 5% of the variation in grades among students. Reference to the regression coefficient for class absences further suggests that the variable had only a slight influence on final grade: According to the model, a student’s final grade decreased by approximately .08 quality points (on the 4.0 grading scale) with each absence. Put another way, a student’s final grade dropped by nearly a third of a step (e.g., from B+ to B) with every four absences.

So what do I make of the data at this point? By requiring students to have attended at least 75% of class sessions, perhaps I reduced the adverse effect class absences could theoretically have on final grade. It strikes me that students with an excessive number of absences (e.g., 50% and upward of scheduled class sessions) would be most affected in their exam performance. But students who took my exams didn’t fit that profile, and maybe that’s why class absence accounts so little for the variation in grades in my past courses. On the other hand, maybe it’s the case that the material I presented in class didn’t add much to what the students were getting from studying on their own. I really hope that’s not true! Ideally, I’d like all students to have had the same amount of classroom instruction going into the final exam. If my policies encourage students to attend all or the overwhelming majority of my classes, and if, in turn, that minimizes the effect of attendance as a determinant of final grade, then perhaps that’s one good reason to continue my policy.