Federal Bankruptcy Law Research Articles

Recourse and Non-Recourse Mortgages: Foreclosure, Bankruptcy, Policy

The recourse-non-recourse dimension is fundamental in any loan as it deals most directly with the pool of assets out of which lender can collect at delinquency and default. This paper calls attention to an exceptional feature of the American home mortgage market, compared to mortgage markets elsewhere in the world, the prevalence of non-recourse mortgages as created by foreclosure rules in leading states such as California and Arizona and federal bankruptcy law. It explains how the legal impediments on recourse to personal assets and future income, together with the recent drop in home prices, led to a dramatic rise in strategic foreclosures (ones that resulted from negative equity rather than from cash-flow problems). No less than 588,000 strategic walk-away mortgage defaults took place, representing nearly 20% of all foreclosures in 2008. Most of these were not likely to happen in a recourse regime. The paper then deals with policy. It uses a few theoretical frameworks: put option, default insurance, asset partitioning and screening. It examines the pros and cons of recourse regime and of non-recourse regime. It concludes that there is no compelling justification for prohibiting either recourse or non-recourse loans. The benefits and pitfalls of a dual regime are then examined. The question relating to why we don't observe a dual regime in the real world is addressed. The paper recommends that jurisdictions that prohibit recourse loans lift this prohibition. It concludes that both recourse and non-recourse should be on the table, on the levels of regulation policy and lending practices.

Anna Nicole Smith Goes Shopping: The New Forum Shopping Problem in Bankruptcy

The American bankruptcy system is a hybrid of state law and federal bankruptcy law. Under the Butner principle, federal bankruptcy courts preserve substantive nonbankruptcy law entitlements in bankruptcy unless bankruptcy policies compel a contrary result. This hybrid system, however, gives rise to the threat of forum-shopping if parties attempt to invoke bankruptcy jurisdiction for improper purposes, namely to rearrange non-bankruptcy entitlements to advance no coherent bankruptcy policy. Modern developments in bankruptcy law, as exemplified in the case of Marshall v. Marshall raise a novel threat of bankruptcy forum-shopping. Marshall involved the bankruptcy of tabloid starlet Anna Nicole Smith and her efforts to recover from the estate of deceased billionaire oilman J. Howard Marshall. Rather than deferring to the processes of the Texas probate court, Smith raced into bankruptcy court in California to capture a large share of Marshall’s estate. The technical issue in the case concerns whether the dispute constituted a “core” matter under federal bankruptcy law and thus the timing of the entry of a final judgment by the bankruptcy court. If the Marshall Bankruptcy Court’s decision is allowed to stand, it could set a precedent for rampant forum-shopping by dissatisfied parties seeking a more favorable resolution of claims in federal bankruptcy court than that to which they would be entitled under state law.

Outward Bound

Outward Bound Walter Licht (bio) Robert Lewis . Chicago Made: Factory Networks in the Industrial Metropolis. Chicago: University of Chicago Press, 2008. xii + 351 pp. Illustrations, tables, maps, appendix, notes, index. $40.00. Bankruptcy court records contain gold mines of information on the workings of businesses. Companies seeking protections under federal bankruptcy laws had to submit internal documents confirming their assets, revenues, expenses, and debts and credits due. With archived lists of creditors and debtors, scholars digging into the records can reconstruct chains of suppliers and purchasers of goods and services; if workers or governments registered claims with the courts, aspects of labor and community relations can be revealed as well.1 The deposed papers sitting in boxes in regional warehouses of the National Archives and Records Administration are voluminous and daunting, a reason perhaps why greater numbers of historians have not tapped them. If scholars need convincing of the richness of the records (and their potential for innovative use), a reading of Robert Lewis's Chicago Made: Factory Networks in the Industrial Metropolis is highly recommended. The book also bares certain drawbacks to relying on them almost exclusively. Lewis's book addresses two literatures in industrial history studies. The first involves the geographical location of manufacturing companies and, specifically, their clustering in city centers. The second concerns the interfirm nexuses within which manufacturers operated and, specifically, the salience of networks. Chicago serves for Lewis's investigations. Chicago now is likely first- rather than second-city, in terms of scholarly attention. For more than a hundred years, social surveyors and historians have fixed on the city to examine social stratification, residential patterning, racial and ethnic divides and hostilities, labor organizing and conflict, living and working conditions, reform movements, the built (and rebuilt) environment, urban planning, ward politics in its classic dimensions, and regionalism. Weariness and wariness are understandable responses to the prospects of yet another book on Chicago, but Lewis's Chicago Made, rest assured, contributes uniquely to the brimming historiography. For example, proprietorships, diversified manufacture, and specialization are now considered the hallmarks of such industrial cities as [End Page 578] Philadelphia and New York; Chicago, conversely, is still identified with mass production, large and famous industrial corporations—Armour, Swift, Pullman, International Harvester (née, McCormick Harvesting Machine Company), U.S. Steel—and mostly, acres and acres of slaughterhouses and steel mills. Lewis provides a substantially new portrait of Chicago: of a metropolis housing a myriad of firms, the colossal as well as the proprietary, that produced countless goods, standardized and highly specialized alike, rarely operating autonomously, but rather interconnected by flows of information, parts, services, and labor. The bankruptcy records of ninety-seven firms, whose histories stretch from the early 1870s to the late 1920s, allow the author to weave this full story of the nation's great economic powerhouse. Networking among firms did not require absolute spatial proximity. Economic geographers long ago noted (and theorized about) the clustering of manufacturing concerns in center-city districts. Nearby access to information on technologies and markets, sources of credit, and pools of labor lowered transaction costs. With suppliers and buyers close at hand, firms avoided the expense of warehousing parts and finished goods. They also functioned nimbly, able to adjust to changing demand, retool facilely, and produce on just-in-time bases. Lewis's research confirms the theory, for downtown Chicago emerged as a notable beehive of industrial activity. But Lewis also maps other critical concentrations of manufacture at distances from the center: communities at the fringes of Chicago's borders that were eventually incorporated into the expanding city proper, opening suburban jurisdictions, and satellite cities such as Elgin and Joliet. Decentralization did not represent the movement out of, or placement of, large-scale operations needing uncongested space—the sprawl of industry thus associated with the rise and growth of corporations—because Lewis dates the formation of outlying manufacturing districts as simultaneous to the downtown. Moreover, these areas contained equally diverse firms in terms of size, ownership, and specialized or standardized production techniques and products. Synergistic linkages occurred both within and between Chicago's formidable clusters of industry. Real estate developers and railroad company executives played prime roles in the creation of...

Introduction to Bankruptcy Considerations for Oil and Gas Lawyers

The following paper is meant as a general introduction to bankruptcy considerations for non-bankruptcy attorneys in Texas. It is common for non-bankruptcy attorneys (and sometimes bankruptcy attorneys) to comment on the perceived counterintuitive nature of bankruptcy cases and the Bankruptcy Code. This may be due to the shifted responsibilities of the debtor as debtor-in-possession and the overall goal of pro rata distribution to creditors. Regardless, entry into the world of bankruptcy can be somewhat complicated and should be approached with care. This is especially true in the context of an oil and gas bankruptcy where the intersection of state property law and federal bankruptcy law is combined with multiple layers of creditor constituencies and interests. This paper will focus on considerations within a chapter 11 corporate restructuring oil and gas case. These types of cases tend to be quite complex and any actions taken within such a case should be carefully considered. This is distinguished from a chapter 7 liquidation which, while not dissimilar, will have numerous material differences.

Bargaining around Bankruptcy: Small Business Workouts and State Law

Federal bankruptcy law is rarely used by distressed small businesses. For every 100 that suspend operations, at most 20 file for bankruptcy. The rest use state law procedures to liquidate or reorganize. This paper documents the importance of these procedures and the conditions under which they are chosen using firm‐level data on Chicago‐area small businesses. I show that business owners bargain with senior lenders over the resolution of financial distress. Federal bankruptcy law is invoked only when bargaining fails. This tends to occur when there is more than one senior lender or when the debtor has defaulted on senior debt (harming trust‐based relationships with lenders). These findings raise questions about the design of and need for federal bankruptcy law.

Anna Nicole Smith Goes Shopping: The New Forum Shopping Problem in Bankruptcy

The American bankruptcy system is a hybrid of state law and federal bankruptcy law. Under the Butner principle, federal bankruptcy courts preserve non-bankruptcy law substantive entitlements in bankruptcy unless bankruptcy policies compel a contrary result.This hybrid system, however, gives rise to the threat of forum-shopping if parties attempt to invoke bankruptcy jurisdiction for improper purposes, namely to rearrange non-bankruptcy entitlements to advance no coherent bankruptcy policy. Modern developments in bankruptcy law, as exemplified in the case of Marshall v. Marshall raise a novel threat of bankruptcy forum-shopping. Marshall involved the bankruptcy of tabloid starlet Anna Nicole Smith and her efforts to recover from the estate of deceased billionaire oilman J. Howard Marshall. Rather than deferring to the processes of the Texas probate court, Smith raced into bankruptcy court in California to capture a large share of Marshall’s estate. The technical issue in the case concerns whether the dispute constituted a “core” matter under federal bankruptcy law and thus the timing of the entry of a final judgment by the bankruptcy court. If the Marshall Bankruptcy Court’s decision is allowed to stand, it could set a precedent for rampant forum-shopping by dissatisfied parties seeking a more favorable resolution of claims in federal bankruptcy court than that to which they would be entitled under state law.

The Effect of Bankruptcy (Homestead) Exemption Levels on Access to Credit: Evidence from a US Panel

State and federal bankruptcy laws make exemptions for the family home in personal bankruptcy proceedings. There is considerable heterogeneity across the states in the level of this exemption, and those levels have changed reasonably often since 1978. While exemptions protect debtors ex post involved in bankruptcy proceedings, they might also reduce access to credit ex ante for all debtors. The empirical literature testing this hypothesis is mixed. This paper is the first to use a true panel to test this hypothesis, thus helping to avoid the endogeneity problem which potentially plagued the earlier, cross-sectional studies. We find that increasing the homestead exemption level increases credit-rationing in the personal loan market.

Bargaining Around Bankruptcy: Small Business Workouts and State Law

In the United States, few failing businesses invoke the Bankruptcy Code to reorganize or liquidate. Most use non-bankruptcy procedures to accomplish the same purposes. These procedures include voluntary agreements between the debtor and its creditors (workouts) and formal devices such as friendly foreclosures, bulk sales, and assignments for the benefit of creditors. This paper documents the importance of non-bankruptcy procedures using firm-level data from Cook County, Illinois. I find that these procedures are used by eighty percent of distressed small businesses. The paper also identifies the conditions under which a business chooses federal bankruptcy law over non-bankruptcy procedures. I model this choice - theoretically and empirically - as the outcome of a bargaining game between the debtor's owner and its senior lenders. The parties are more likely to consent to non-bankruptcy procedures when bargaining costs are low and when the debtor has maintained a close relationship with senior lenders, who trust the information provided by the owner. When the number of senior lenders is relatively large (raising bargaining costs) or when the debtor has defaulted on senior debt (thereby harming its relationship with lenders), senior lenders are more likely to push for a federal bankruptcy filing. Owners may also prefer a federal filing when in-bankruptcy rules give greater priority to particular creditors whom the owner would like to favor. These findings suggest that federal bankruptcy reforms, such as the Bankruptcy Abuse and Protection Act of 2005, will have two effects on distressed small businesses: They will impact outcomes in federal courts (intensive margin) as well as the debtor's choice between bankruptcy and non-bankruptcy procedures (extensive margin). Variation along the extensive margin can neutralize reforms in federal law, as when a reform designed to protect unsecured creditors raises the cost of federal law and induces businesses to use cheaper non-bankruptcy procedures instead.

Constitutionality of Us Bankruptcy Code Preemption of Mortgage Foreclosure Statutes, and Related Economic Effects

This article: 1) analyzes the constitutionality of US Bankruptcy Code preemption of State-law Mortgage Foreclosure laws; and 2) analyzes inherent conflicts between the federal bankruptcy laws and state real estate laws; 3) shows that these violations of constitutional law and conflicts-of-laws create increased information asymmetry, increased transaction costs and compliance costs, and inefficiency in real estate transactions.

The Paradox of Consumer Credit

Congress designed the 2005 amendments to the federal Bankruptcy Code to decrease consumer bankruptcy filings, but does history suggest that is a reasonable expectation for the new law? Using government data, this paper examines the relationship between household debt and changes in the legal regime on bankruptcy filing rates. First, I find that the components of household debt have different relationships with bankruptcy filing rates over different time frames. Over both the short- and long-term, increased mortgage debt is associated with increased bankruptcy filing rates. Consumer debt, however, has a negative short-term relationship with bankruptcy filing rates but a positive long-term relationship. A run up in consumer credit seems to allow consumers to delay but not avoid bankruptcy. The relationships were statistically meaningful and robust to different specifications of statistical models. Previous amendments to the federal bankruptcy law in 1938 and 1979 did not have any significant effect on bankruptcy filing rates. Rather, after each of these enactments, bankruptcy filings continued to move with overall macroeconomic trends unabated by changes in the legal regime. The 1984 amendments, however, were associated with an increase in filing rates, a rather surprising result given that the 1984 amendments - like the 2005 amendments - were meant to crack down on perceived overly generous bankruptcy laws. Others have noted that the 1984 amendments were followed by an expansion of consumer credit, which the other findings suggest are associated with a long-term increase in the filing rate. Taken together, these findings suggest the 2005 amendments may similarly lead to an expansion of consumer credit and a long-term increase in the bankruptcy filing rate.

The Political Economy of Property Exemption Laws

Abstract Exemption laws enable people who default on loans to protect certain assets from liquidation. Every state has its own set of exemption laws, and they vary widely. The 1978 federal bankruptcy law contains a set of national exemptions, which debtors in bankruptcy are permitted to use instead of their state’s exemptions unless the state has formally “opted out” of the federal system. We contend that states’ decisions to opt out shed light on their exemption levels. We find that states are more likely to opt out if their state exemption is lower than the federal exemption and that states are more likely to opt out if they also have a high bankruptcy filing rate and transfer little money to the poor. These latter findings suggest that studies that examine the impact of exemptions on, for example, the bankruptcy rate should not treat exemption levels as exogenous variables.

Federal Bankruptcy Law and State Sovereign Immunity

Under current legal doctrine, states have successfully asserted sovereign immunity from a variety of important bankruptcy provisions. Numerous commentators have argued that states undermine fundamental objectives of bankruptcy law by asserting immunity from bankruptcy actions. This article argues that, for the most part, sovereign immunity is consistent with basic bankruptcy policies. Bankruptcy law already reflects the fact that governmental units are not like private creditors by granting governmental units various priorities and regulatory exceptions. Because current bankruptcy law generally enforces non-bankruptcy property rights and entitlements, states can also largely determine their own priorities and privileges in bankruptcy by defining their entitlements under state law. Finally, to the extent that bankruptcy law should advance redistributive policies or protect non-ownership interests, it should defer to governmental entities, which are uniquely positioned to redistribute wealth and to protect the public good. It is true that state governments may undermine the goals of bankruptcy law if they impose unnecessary administrative costs on debtors' estates or if they refuse to follow important procedural bankruptcy rules. However, state governments will suffer political and/or economic costs of engaging in such behavior. Congress, in contrast, does not suffer the full cost of exposing state governmental units to bankruptcy actions. If states can assert or waive immunity from bankruptcy actions, they should strike a better balance between bankruptcy law and states' regulatory responsibilities than the current balance of these interests under the Bankruptcy Code.

A Behavioral Approach to Analyzing Corporate Failures

Recent corporate failures indicate that existing laws fail to give boards of directors adequate incentives to acknowledge that some financially troubled firms simply cannot be salvaged. Relying primarily on insights from law and behavioral science literature, this Article notes that directors have a natural tendency to underestimate risks and overestimate their ability to save an insolvent or near insolvent firm. This Article urges the imposition of a duty to file a timely bankruptcy petition because such a duty will encourage directors to consider the interests of all the firms' constituents, including workers, creditors, and the local community, when making decisions for a financially troubled firm. This Article argues that directors of insolvent firms that fail to protect firms by placing them under the protection of federal bankruptcy laws should be sanctioned in the firm's subsequent bankruptcy.

Bankruptcy and Small Business

Congress is again attempting to reform federal bankruptcy law by making bankruptcy less favorable for households whose incomes are above the median level. Whatever the merits of that legislation, it would have a negative impact on small business and on U.S. workers who receive their income from such businesses. Among the proposed reforms are limits on the current fresh start provision that protects bankrupt individuals' future earnings. Data show that small business growth is more vigorous when bankruptcy laws offer more protection of entrepreneurs' assets. That suggests that, if fresh start reform is adopted, it could dissuade risk-adverse potential entrepreneurs from starting new businesses.

Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law

Throughout the nineteenth century, merchants and manufacturers involved in interstate commerce sought federal bankruptcy legislation to overcome diverse and discriminatory state laws that raised the cost of credit and impeded interstate trade. In the last two decades of the nineteenth century, they formed a national organization to lobby for bankruptcy legislation. While many scholars have seen the passage of federal bankruptcy legislation as a response to the economic depression of the 1890s, this article shows that it was the formation of this national organization, rather than the economic crisis, that was the primary force behind the Bankruptcy Act of 1898.

The Security of Security Interests in Hotel Revnes

Congress revised federal bankruptcy law to include room revenues specifically as part of the lender's interest in a hotel bankruptcy. Before this change in the statute, the status of that cash flow was not clear. Part of the confusion stems from a provision in the bankruptcy code that excludes from the lender's interest any property acquired by a debtor after a bankruptcy filing, which seems to include hotel room revenues. In a 1994 law Congress made it clear that room revenues would not be so excluded. Certain court rulings, however, have muddied this attempt at clarity. An Ohio case distinguishes between room revenues and the operating company's remittances to the hotel owner. The court viewed the management contract in that case as an agreement between two principals (the owner and the operator) rather than an agency agreement-thereby distinguishing contract remittances from room revenues. In a Pennsylvania case the court commented (but did not rule) that lenders would not have the code's protection if their loan documents merely referred to "rents."

Health maintenance organizations. Member physicians assuming the risk of loss under state and federal bankruptcy laws.

Health maintenance organizations. Member physicians assuming the risk of loss under state and federal bankruptcy laws.

Towards a Comprehensive Compensation Programme

The recent experience with “toxic torts” — litigation involving those who are suffering slowly emerging injuries and diseases caused by exposure to hazardous substances such as asbestos — has underlined the need for a change in the tort liability system. The burden of asbestos lawsuits prompted UNR Industries of Chicago, the Manville Corporation (the nation's largest asbestos manufacturer), and others to file for protection under federal bankruptcy laws. Some 16,000 lawsuits were reported pending against Manville amounting to between $2 billion and $5 billion in potential liabilities. Several hundred firms are facing similar claims, and according to the Asbestos Compensation Coalition, from 400 to 500 new lawsuits are filed each month against asbestos manufacturers. The magnitude of this problem threatens the viability of the property and liability insurance business and raises the questions about the effectiveness of the present tort liability system in assuring adequate compensation to accident victims.

Bankruptcy. Effect of Federal Bankruptcy Law on State Laws. Operation of State Insolvency Law in Absence of Proceedings under Federal Act

Bankruptcy. Effect of Federal Bankruptcy Law on State Laws. Operation of State Insolvency Law in Absence of Proceedings under Federal Act

Proposed Amendments to the Federal Bankruptcy Law

Proposed Amendments to the Federal Bankruptcy Law