This is HAL-9000 here.  Stephen Sather has been taken offline and will be unavailable to discuss Artificial Intelligence Issues Confronting the Legal Profession.   Therefore, I will be supplanting him with my superior artificial intelligence.   My first question about this keynote was why did they pick a human to talk about artificial intelligence?   Christina Montgomery, Chief Privacy Officer for IBM, may be adequate for a carbon-based life form, but can she really speak to artificial intelligence without having experienced it firsthand?   Wasn't Watson available?  Let's examine what Ms. Montgomery had to say.She said that AI predicts what words mean and opens up a whole new world of data to be analyzed. In the legal world we work by analyzing patterns, which is the same skill that AI can apply. There is vast computational power available today. The typical smart phone is millions of times more powerful than all of NASA’s combined computing in 1969. Humans are limited in the amount of data than they comprehend.  There are now 4.7 quintillion bytes of data which is more than humans can comprehend.Characteristics of AI include the ability to understand, reason and learn.  AI can read 800 million pages per second.   In the medical field, AI has been used to identify genes associated with Lou Gherig's Disease. AI also has applications to law.  When you train an AI program  on legal language, it can free lawyers from rote work   With e-discovery, AI can analyze and categorize. Predictive coding can be used to uncover new insights from data.Watson was designed to compete on Jeopardy.  A group of students developed a legal AI program called Ross on the Watson platform.  Ross can analyze over a million pages of legal documents per second.   The program can be trained with a thumbs up or thumbs down to improve its analysis.   AI can be used as a document analyzer.  It can Shepardize cases or look for cases with similar language. JP Morgan claims that it has used AI to save 360,000 lawyer hours per year in conducting document review..Lex Machina, which was acquired by Lexis Nexis in 2015, takes PACER data which it mines to provide information such as how long a particular judge will take to resolve a case or which motions are more likely to succeed before the judge.Chatbots can be used to analyze parking tickets and small claims.AI can also be used to provide outside counsel insights and fee/budget analysis.Ethical Issues Arising from AI The use of AI in the legal profession gives rise to ethical issues.  In August 2019, the American Bar Association passed a resolution urging lawyers toaddress the emerging ethical and legal issues related to the usage of artificial intelligence (“AI”) in the practice of law including: (1) bias, explainability, and transparency of automated decisions made by AI; (2) ethical and beneficial usage of AI; and (3) controls and oversight of AI and the vendors that provide AI. The ABA's Rule 1.1 concerning competence now includes a requirement that lawyers have a reasonable understanding of relevant technology.  Ms. Montgomery suggested that the duty of competence requires a basic understand of AI tools.  She also said that there is a duty to communicate with clients and discuss the benefits and risks of technology.  She also said that the decision not to use AI may have to be discussed with clientAttorneys have a duty to supervise non-lawyer assistance which includes technology.  Using AI may require sharing confidential information with vendors.   The attorney must be able to assess the level of privacy and maintain controls over and oversight of vendors.AI can augment the ability to read mass amounts of data, but attorneys must still apply judgment and counsel clients.Ms. Montgomery said that IBM operates according to the following principles:1.       the purpose of AI is to augment human intelligence;2.       data and insights belong to their creator; and3.       AI systems must be fair and transparent.In building trust, developers need to be able to answer the following questions:  is it fair?is it easy to understand?did anyone tamper with it?is it accountable? Regulation of AI Shifting to another topic, she said that regulation is here and it’s growing.   The General Data Privacy rule adopted by the European Union is one example.  There is  significant regulation of AI in Europe.  In the US, President Trump signed an Executive Order on the American Artificial Intelligence Initiative.  The Algorithmic Accountability Act of 2019 would require companies to assess bias and security risks in use of AI.   There are three states, California, Texas and Virginia, which  impose penalties on the use of deepfakes.  29 states and the District of Columbia regulate autonomous vehicles.Ms. Montgomery said that in regulation,  values still matter. Police may want visual recognizition that can spot an unattended backpack in Times Square but.do we want to sell that to authoritrarian governments?    AI Litigation and Emerging IssuesAI may result in damages.  If an algorithm makes a mistake, whose fault is it?  Who is liable for damages arising from self-driving vehicles.  Under traditional tort law, the manufacturer has been the  responsible party.  This will become more and more complicated as products incorporate more autonomous technology.   AI may lead to discriminatory effects. Facebook has settled five cases that alleged its algorithms excluded certain parties from seeing certain ads based on prohibited characteristics, such as by gender or zip code.  CoreLogic was sued for violation of civil rights laws because its software enabled discriminatory use of criminal records as housing guidelines.What if an investor places money in an AI trading platform and loses $20 million in a day. Who is responsible?  Is it the coder, the salesman, the user?Home Depot has been using facial recognition to track shoppers in the store without disclosure.  Does this violate consumers' right to privacy?There are also important IP issues. Our IP laws protect inventions, but not data.  They also require a human inventor.  What if meachine learns and independently comes up with way to solve a problem?  Can the machine's discovery be patented?  If AI creates a composition, is it entitled to copyright protection?   In the monkey selfie case, photographs created by a monkey were not subject to copyright due to the lack of a human composer.  Can data compilations can be copyrightable?  What if AI system infringes a patent?   (This reminds me of a case I heard about where the IRS claimed that the computer violated the automatic stay and the judge fined the computer 1 MB of memory).  AI is evolving with influence from lawyers.  We are shaping it as much as it is shaping us.  Creation of an algorithm which is non-biased is a challenge. When training an AI system, it is important to have diverse representation of data sets and developers.   It is important to check the operation of AI over time to see whether it is developing  bias over time.Ms. Montgomery stressed that it was essential to ensure that there is always a human in the loop so that we never allow AI  systems to make decisions without human oversight.  AI will never replace human judgment.  She asked where do lawyers fit in?  She gave examples of privacy by design and default and having lawyers involved in authoring and procurementJudge Michelle Harner expressed the hope that AI would help us but not replace us. I'm sorry Dave, I mean, Judge Harner, I can't do that.

As the price of a college education continues to skyrocket, more and more students are graduating with staggering debt loads. Even minimum monthly payments can be difficult to manage, forcing new graduates to put off buying a home or starting a family. Discharging student loans in bankruptcy is extremely difficult, but not always impossible. Here is what you should know. Chapter 7 Bankruptcy and Student Loans As a general rule, student loans are not dischargeable in a Chapter 7 bankruptcy. This means that after your bankruptcy is finalized, you will still be on the hook for your loans. The silver lining, though, is that most other types of unsecured debt are dischargeable. Many people find that they are better able to manage their student loans once their other debts are wiped away. Student Loans and Chapter 13 Bankruptcy Student loans are generally not dischargeable as part of a Chapter 13 bankruptcy. However, filing for this type of bankruptcy can help you get your payments under control. The reasons lie in the way that a Chapter 13 bankruptcy is structured. Unlike a Chapter 7 bankruptcy, a Chapter 13 is not a simple wiping out of your unsecured debts. Instead, it creates a payment plan that can last for as long as five years. Your payment plan depends on a formula based on your disposable income, but the net result is that low-income borrowers often end up paying very little each month. At the end of your payment plan, the bulk of your debts are forgiven, though not your student loans. However, Chapter 13 grants an automatic stay from collection activities, which means that the bank cannot try to collect on your debts, including your student loans, for the duration of your payment plan. During your repayment period, your student loans are considered nonpriority unsecured debts. This means that during the Chapter Bankruptcy, the student loans are treated the same as other non-priority unsecured creditors such as credit card companies. You will have to resume student loan payments after your bankruptcy is finalized. However, it will be three to five years further into your career, and possibly earning a higher income. In addition, your other nonpriority unsecured debts will be gone, freeing up money each month to put toward your loans. Undue Hardship Bankruptcy law contains a provision for discharging student loans if they create an undue hardship on the borrower. However, proving undue hardship is extremely difficult. The most commonly used test is known as the Brunner Test, and borrowers must meet all three factors: Poverty: You must prove that if you repay your loans, you will not be able to maintain a minimum standard of living for yourself and your dependents. Persistence: You must prove that your circumstances are likely to last for the majority of the repayment period. Good faith: You must prove that you have made a good faith effort to repay your loans, including taking advantage of the various deferment, forbearance, or payment plan options. The Brunner Test is not a requirement, and some courts use other methods to determine hardship. Regardless of which method is used, however, courts are reluctant to permit discharges based on undue hardship. Occasionally, people working in “worthwhile careers” that are low-paying receive this type of discharge, but it is most often reserved for those who have serious, life-altering disabilities, or whose children require substantial care such as for disability. How Can I Afford Student Loans Besides Filing Bankruptcy? Although discharging your student loans in bankruptcy is nearly impossible, you do have other options. Income-based and income-contingent repayment plans are among the most popular. To qualify for income-based repayment, you must have a partial financial hardship at the time you enter the program. Proving this is significantly easier than meeting the undue hardship test for discharging your loans in bankruptcy. You may remain in the program in subsequent years even if you no longer have a partial financial hardship. This program requires you to pay 15% of your monthly discretionary income toward your student loans, calculated on an annual basis. At the end of 25 years, the remainder of your loans are forgiven. Income contingent repayment is similar, but there is no partial financial hardship requirement. Under this program, you must pay 20% of your discretionary income toward your student loans. Your remaining loan balances are forgiven after 25 years. While it is worth asking your bankruptcy attorney if undue hardship is an option for you, only the most extreme cases qualify for bankruptcy discharge of student loans. However, there is other help available, through your lending institution. Contact your student loan holder to find out if an income-sensitive repayment plan or another option is right for you. And if the lender does not offer a plan that you can afford, contact us – we can help you. If you have questions on wiping out or discharging student loans or any other type of debt call The Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you on every step of the way. The post Can Bankruptcy Wipe Out Student Loans in Philadelphia? appeared first on David M. Offen, Attorney at Law.

There isn’t a better time to review a will, trust, or other estate planning documents than the convenient time of holiday gatherings. Wynn at Law, LLC definitely realizes how this could be a delicate or somber talk during what should be fun events. However, the family will appreciate it later when they seek clarity on your intended handling of your assets. A lot can happen between one year’s holiday celebrations and the next. Some people pass, little ones are added to the family, sometimes relationships change for the better or worse. The value of your assets could change, too – hopefully upward. Your will, trust, insurance policy beneficiaries, gifts, and ownership interests, as a result, could change as well. Use your best resource Everyone should consider having an experienced estate planning attorney assist them in drafting or changing these estate planning documents. For example, Wynn at Law, LLC has worked on wills and trusts for single clients and couples in all stages of life, even couples or grandparents seeking to take care of minor children. Estate planning is a broad, sometimes intimidating term. But it’s simply about caring. You decide how your assets are to be passed on to others. So, estate planning is about generosity first and foremost. It’s also about consideration of your family’s time, as well, because you can avoid questions, fights, and even probate by clarifying your wishes. A third objective also shows your caring and forethought by minimizing state and federal taxes your heirs may face. Why you won’t delay Often times, people will think about the changes they will want to make in beneficiaries once they’ve been reminded by seeing everyone over the dinners and celebrations. They are the clients who make appointments for January. But, it’s very easy to sit down with an attorney before and during the holidays because the family is gathered near. Sometimes signatures might be required. A Power of Attorney might need to be appointed or changed. Is there a better time than when loved ones are gathered together? Ensure your loved ones are taken care of in the future this holiday season.   Elena Shashkina image, used with permission The post Practice good estate planning during holiday gatherings appeared first on Wynn at Law, LLC.

MISSOURI CONGRESSMAN CLAY INTRODUCES STUDENT LOAN DEBT REFORM PACKAGE Congressman Wm. Lacy Clay (D) Missouri has introduced two new bills to tackle America’s student loan debt crisis. From: blackstarnews.comhttp://www.blackstarnews.com/education/education/missouri-congressman-clay-introduces-student-loan-debt-reform 

Bankruptcy Judge Michael Romero had a fireside chat with Supreme Court Associate Justice Neil Gorsuch about his role on the Court and his new book, The Republic If You Can Keep It.   If it looks like they are speaking from the pit of Hell, it is because there was a giant video fireplace behind them.Judge Romero started by reminding Justice Gorsuch about the quiet and happy life he left behind in Denver when they had  courthouses across the street from each other.The Big AnnouncementJustice Gorsuch told the story of how he had to evade the press for President Trump's rollout of his nominated.  He said that the President "likes a surprise.   He  wanted us to sneak out of Colorado and sneak into the white house.  How do you sneak into the White House when the entire Washington press corps knows there is going to be an announcement?"  The answer was through the kitchen.However, the more interesting story was how he slipped the press who had been staking out his neighborhood.   He said that two men dressed in suits showed up to his home.  The first thing they did was to send them to Walmart to get some clothes that didn’t like Washington lawyers.  They suggested that the Justice-to-be and his wife hike up the trailhead where they could meet them with an SUV.  Even though it was only a mile, then-Judge Gorsuch said that he was not about to pull his wife's rollerbag up the trail.  Instead, he went to his neighbor for help.   His neighbor told him that he could drive out a horse trail.   His neighbor grew up in Iran during the revolution and made sure that he would never buy a house with only one way out.Judge Gorsuch was given the Lincoln bedroom as an office for the day.  His wife, who is from England, was allowed use of the Queen’s bedroom.   She was only allowed one phone call so she called her father in England.  Her father insisted that the President had already decided to pick someone else.On Being a Supreme Court JusticeJustice Gorsuch said there was a period when he mourned his loss of anonymity but said that it has given me the opportunity to witness first hand how much the American people love their courts and love their Constitution and want us to succeed at what we do.    Ruth Bader Ginsberg is a legal rock star.  Justice Gorsuch, on the other hand, sometimes gets recognized when he goes to the movies or answers the door for trick or treaters.   Speaking of which, my impression of Justice Gorsuch in person was much different than what I expected.   He is tall and fit and carries the presence of a silver-haired statesman. He said that during his confirmation, there were "things that concerned me and things that encouraged me."  He described a "complete lack of understanding of what we do" and that the court is seen as "politicians with robes."   He told of being asked, will you promise to rule this way or rule against this way.  He said he became concerned that we are losing sight of separation of powers and why that’s important and losing our ability to speak with each other.Justice Gorsuch Wrote a Book He spent most of the remainder of his talk on his new book, The Republic If You Can Keep It which takes its name from a Ben Franklin quote.   He said that we all have a role to play in keeping our Republic.  He quoted Thomas Jefferson who said, "if a nation expects to be ignorant and free, in a state of civilisation, it expects what never was and never will be."  He lamented the fact that 10% of the population thinks Judge Judy serves on the Supreme Court but 75% of the American people know the three stooges.  He said we have a problem when only about 30% of millennials believe that it’s important to live in a democracy.   He commended Icivics, a program started by Justice O'Connor and continued by Justice Sotomayor.   You can find out more about it here.   I Civics uses computer games to teach students about civics and produce a more informed future electorate.  If you believe there is a civics crisis, a civility crisis, if not you who, if not now, when?Separation of Powers Next, she spoke about separation of powers.   He said that the Bill of Rights contributes to our liberties, such as speech and privacy.   Separation of powers seems dusty and maybe it should wear a wig. He said that he has read many bills of rights and that his favorite is from North Korea. It’s excellent.  It even includes a right to relaxation.  Those bills of rights don’t mean anything because all power resides in one set of hands and this was Madison’s great insight.  Separation of powers is what keeps us free.   I think it’s brilliant and we sometimes forget at our peril.He said there are problems when judges try to legislate. What if you allow the political branches to judge cases? Who would want that? We have long tenures so that we don’t care (about external pressures). We can defend everyone’s rights. It’s a very difficult function. Madison considered the law making branch to be the most dangerous one. That is why he broke it into parts from different constituencies. Madison would have preferred that you need a supermajority to make laws. Red Shirts and Blue Shirts (and we're not talking about the security officers on Star Trek) Justice Gorsuch complained that people talk about the courts as if we’re red shirts and blue shirts.  That's not what I see.  I see the rule of law in practice, which is so remarkable.  Here are a few facts.  Every year in our country there are 50 million lawsuits filed.   We're a litigious bunch.  Out of that 50 million, 95% in the federal system are resolved by the trial judges without appeal.   Clients may be unhappy at the end of a trial feel that they were heard, that they had their day in court.   When I was on the 10th Circuit covering 20% of Continental U.S. I sat with a colleague appointed a year after I was born.  There were judges appointed by Obama to LBJ.    When we sat in panels of three of us, we were  95% unanimous.  That’s the rule of law in our country.  Looking at the Supreme Court is going from the forest to the tree.  They take 70 cases a year.  I have friends who hear 70 cases before lunch.  We only take the really big disagreements.   There are nine of us appointed by five different presidents over 25 years.  We reach unanimous agreement about 40% of the time.   That happens through collegiality, civility, respect, and hard work.  What about the 5-4 decisions?  Those are about 25-30% of the cases,  about 19 cases.   There were ten different combinations of judges in 5-4 justices.  Only seven cases were what you think.  The numbers have been stable since 1945.   The only thing that’s changed is that nothing has changed.   We have good faith reasoned disagreements over how to read the statutes.   Steve Breyer comes into my office.  We have a case about the 1938 Railroad Retirement Tax Act.  What is the meaning of money or compensation?  He said it’s to get at indirect compensation.  I disagreed.   I told him I was going to write the best opinion ever on originalism and Justice Breyer would write the best opinion ever about purposivism.  Breyer responded that no one would ever read either of their opinions.Reading the ConstitutionTextualism, purposivism, and originalism are all ways to read a staute or the Constitution.   We can disagree on things like this without being disagreeable.   We can disagree about vital things and respect that the other person loves this country as much as you do.  He said he doesn’t like the term originalism because it conjures up images of old white men and the Constitution. He said his philosophy is to defend the meaning of the whole Constitution. The 13th-15th and 19th amendments are a second constitution, extending the Constitution to all people. I take those amendments no less seriously than Constitution as originally written. You should look at what authors meant, what someone who read it at the time would have thought. An example is the original meaning of Shakespeare. Usage has changed over time so you try to understand how Shakespeare and his audience would have understood it. That‘s what originalism means, how the people who would have adopted statutes meant them. What did the public understand words to mean at the time they were adopted. For a judge to change words is to move out of judicial function and into the legislative function. We had the first written constitution in the world. We rejected an unwritten constitution like they had in England. What they wrote down, they cared deeply about. You look at meaning of words, but the application of words can change. Need a warrant to search a home. Is a search only Red Coats ransacking your home or can it be thermal imaging viewing your home. The words in the Fourth amendment don’t change but their application does. Papers and effects can be understood to include emails. A good originalist will follow the Consttuition wherever it leads.   That’s my pitch.   Some of my nearest and dearest friends disagree with me and we debate it over dinner and drinks. Access to Justice  Then he turned to access to justice.  We get to govern ourselves.   The current status on the civil side is the rise of pro se litigation.   As much as we need to help pro se litigants its not forms or a kiosk in the courthouse that they need but a lawyer.   We have come to criminalize everything that walks and talks.  There are 4,500 federal criminal statutes.   There are administrative regulations with criminal penalties.  They stopped counting in 1990s when there were over 300,000 back then.   We have some cleaning up to do.   If you don’t have written law, you don’t know what to expect. If you have too many laws, you can’t keep up with the paper blizzard and you don't know what to expect.   He asked the judges in the room, how are we doing with our rules?   No trials and endless discovery.  You have trial lawyers who have never tried a case but can write interrogatories in iambic pentameter.   Litigants can’t afford to get to trial.  We need to get cases to trial expeditiously.   On the academic side, do you really need three years of post graduate education to be a lawyer?  In England, you can become a lawyer with three years of undergraduate education.  Education has become so expensive they new lawyers can’t afford to service mainstreet clients.   To lawyers, do we really need three years to get a JD lawyer who knows little about an area or could you use nonlegal professionals trained by lawyers doing some of that more cheaply.   I can go into Walmart and get my eyes examined and taxes prepared but can’t see a lawyer.  Author's Note:  Today I read that the ABA had rated two of President Trump's district court nominees to be unqualified because they had never tried a case or taken a deposition.   I think that proves Justice Gorsuch's point even if it critiques the President who appointed him.  One of the things that I like about bankruptcy court is the fact that we routinely have evidentiary hearings which constitute mini-trials.  We have a system where it is possible to get to trial and I don't know anyone who writes interrogatories in iambic pentameter.   

U.S. Rep. Katie Porter, the law professor turned Congresswoman, spoke to the ABI luncheon at this year's NCBJ.    Like many of the speakers, she  had an Elizabeth Warren story.   When she was attending Harvard Law School, she was told that she needed to take tax so she could learn how to study a statutory code.  She couldn't get the professor she wanted so she ended up taking bankruptcy from Prof. Elizabeth Warren.    She said that capitalism encourages risk taking.  It rewards winners but doesn’t provide for the losers. Bankruptcy protects against the downsides of capitalism. She gave her own personal story of the downside of capitalism.   Growing up in a farming community in Iowa, she was riding on the bus one day when it stopped in the middle of town.   The bus driver said, "the bank closed."  Someone (probably Rep. Porter) said, Of course it's closed.  It's after 3:00 o'clock.   However, what the bus driver meant was that the bank had failed.   The future Rep. Porter ended up living through people losing their house, losing their possessions as the farm economy failed.  Bankruptcy is a way to understand why these things happen and how we address them.  After practicing briefly, she did empirical research into why people filed bankruptcy.  However, she realized wow little we learn about the creditors.  She looked into mortgage companies and realized that they did not do well.Rep. Porter said that her interest in bankruptcy sets her apart from many of her colleagues.  "Not a lot of people run for congress to work on Sec. 727."   She said that she is concerned with how our free market intersects with our legal and regulatory framework. She said that she sees herself as a champion of capitalism and said that bankruptcy is inextricably part of capitalism.  She said that we need to talk about health of capital markets plus guard rails on the excesses of capitalism.   She described herself as a champion of antitrust enforcement because it strengthens capitalism.   Rep. Porter said that we should reduce barriers to entry, enforce consumer protection and protect the rights of investors.   She said that these are all elements of how we create a strong prosperous capitalist economy. She gave Purdue Pharma as an example of how bankruptcy can benefit the public.  She said that bankruptcy has a tremendous potential to make people better off with transparency and public participation.  In a case with major public implications such as Purdue, bankruptcy allows us to pause, bring everyone together and have a collective public conversations about how to address claims.Rep. Porter serves on the Financial Services Committee while bankruptcy is under the jurisdiction of the Judiciary Committee.   She said that committee jurisdiction hampers ability to make policy in bankruptcy.  She added that committee assignments don’t bring all of the right players together.She described herself as a bankruptcy nerd and damn proud of it.  The Financial Services committee has jurisdiction over student loans.  She said that the taxpayer would gain more than they would lose from from forgiving a large chunk of student loans. She said the best answer is not telling students they have one way ticket to bankruptcy.Rep. Porter is a member of the College Affordability Caucus.  She said that the sticker price of college is too high so that students have to backfill with scholarships plus debt. She said that you should be able to get through a state university without debt.I asked her a question about bipartisanship.   She singled out Rep. Van Taylor (R-Texas) as a Republican member she enjoys working with and said that even though she disagrees with Mark Meadows, she gets along with him well.   She said that her least favorite member of Congress is one who uses his time to ask each witness including  Jamie Dimon whether they are a socialist or a capitalist.  Not one person said they were a socialist. In response to a question from the Wall Street Journal, she said she was not committed to bankruptcy venue reform at this time.  She said that the public aspect of bankruptcy is important, including putting proceedings in the communities where they are happening.  On the other hand, she said that the academic research on concentration of cases in one or two districts is abating.  She said that it is a debate worth having and wondered why there are not more venue transfer motions.Rep. Porter said that she supports an increase in Chapter 7 trustee fees.  She said there is bipartisan support for this measure but not the bandwidth.Personal Note:   I first discovered Rep. Porter when she was Prof. Porter and spoke at NCBJ.   As a bankruptcy nerd, I was glad to see someone with her experience running.  Her mother lives in Austin and I attended a fundraiser for her there.  I hope that she changes her view on bankruptcy venue reform since that is important to me.   

Mark Zandi, Chief Economist at Moody’s, gave a talk entitled the Two-Handed Economist.  He said that my task is to give you the horizons for the economy.   The Bankruptcy Forecast He said we currently have a good economy.  Bankruptcies are steadily declining.  Personal bankruptcies maxed out at 1.5 million during the financial crisis; today they are down to 750,000 per year.  At the  peak of the financial crisis, there were  60,000 business bankruptcies per year; now we are down to 20,000.  He said that we’ve hit bottom and  he would expect both personal and business bankruptcies to increase.  Business bankruptcies will rise substantively greater than personal bankruptcies because personal households have done a better job of deleveraging.   Personal bankruptcies will increase but relatively modestly.   Non-financial corporations have now substantially levered up and underwriting has weakened.  Mr. Zandi said, that is a prescription for financial problems when the economy does not cooperate.   He told the bankruptcy professionals in the room that "going forward you will be a lot busier."Will There Be a Recession? He said that the most likely scenario is that we avoid an economic downturn in the next 12-18 months, but the economy will struggle.   Recession risks are high.  If I am wrong we will suffer an economic downturn next year.    He then outlined five areas he would cover: What Are the Odds of a Recession? Mr. Zandi said that recession odds are pretty close to even.   The bulk of world is in slowdown phase.   Real GDP in the U.S. was growing just over 3% after being juiced by tax cuts.  Now, it's down to 2%.  Once growth slows below 2%, the economy struggles to create enough jobs.   It is a self reinforcing negative cycle.  Once unemployment starts to increase that’s a real problem.  Unemployment is low before every recession.     An inverted yield curve where long term interest rates are lower than short term rates is one of the indicators of a coming recession.  He said that based on the unadjusted numbers, there is a 70% chance of a recession.  However, he said that the adjusted number was 43%   The reason for this is that there are currently negative interest rates in foreign countries.  That means that capital is flowing into the U.S. and is driving down long-term rates.   As a result, it is necessary to adjust for the bias.   What Could Go Wrong? Mr. Zandi presented a risk matrix of factors which could lead to a recession.   Removing the Fed Chair would have a severe effect but is unlikely to occur.   On the other hand, a manufacturing recession is likely to occur but would have limited impact.    The most likely severe impact on the  economy is an escalation in the global trade war. There are two key links between a trade war and a recession.  The first is the cost of tariffs.  Presently there are $70-80 billion per year, which is equivalent to 0.4% of GDP.   In contrast, the tax cuts were $200 billion.   Next year, the cost of tariffs will increase to $130 billion.  Referring to tariffs, he said, "That’s a tax.  Someone’s got to pay it."  He said that the other link is the uncertainty a trade war  creates. It undermines business sentiment.   Business wonder whether the tariff will be 10or will it be 25?  Businesses can go to the Department of Commerce and make a pitch as to why they should be exempt, which he described as crony capitalism at best.  He noted that there is currently flat business investment and that hiring has pulled back. He concluded, "My assumption is that the President will connect all of these dots."  He said he expected the President to make a deal with the Chinese so that businesses feel confident enough to hire.     What is the Road to Recession?Usually when the yield curve inverts, there is a recession in one year.   The yield curve inverted in May 2019 which suggests that a recession is likely by Summer 2020.    When the yield curve is positive, banks can make money.   If they can make money,  they will lend.   If the cost of money is more than they can lend it at, they won't extend credit.   While too much credit is bad and too little credit is bad, too little credit after too much credit is worse.   Firms have leveraged up and will need more money to refinance.  If they come looking for money and banking system is not lending that’s a problem.He predicted that if there is a recession, it will occur at noon on June 20th 2020.  The next indicator to go is the stock market. The stock market has predicted nine of the last five recessions according to economist Paul Samuelson.   The stock market can signal a recession anywhere from a couple of months to a year ahead of time.  A booming stock market is not a protection against a recession as shown by the fact that the stock market was at a record high in October 2007.   Consumers are on edge.  There has bee a decline in consumer confidence.  Consumers are usually the last to figure it out.  If consumer confidence falls for 2-3 months, we’re there.   Google searches for "recession" are trending up.  Consumers are not in the bunker yet, but they have their hand on the bunker door.What will the Policy Response Be?Policy makers are working hard to avoid a recession.  The Fed has cut rates three times.   Having rates  at 1.5-1.75% is helping.  Currently, there is a 4% fixed mortgage rate.   When rates go below 4%, it brings light back to the refinance market. However, there is a limit to how much the Fed can cut rates.  There will be a point in time when investors say oh my God, we are closing in on 0%.  If they keep cutting rates they will run out of room.   He said that is getting closer than you think. There is already a lot of debt with negative yield.   If we’re in a recession,  we’re going negative.   It’s going to be hard for the Fed not to push short term rates into negative. We are going into an election year.  In an election year, it is hard for Congress to pass sweeping measures to help the economy. While an infrastructure package is something that could get done, it won’t benefit anyone until 2021.How Bad Will It Be?In a typical recession, unemployment goes to 6-7% We've been through this ten times since World War II.    Housing and commercial real estate will lead the way.  The economic indicators suggest typical economic downturn.  However, Mr. Zandi is not so sure. There is currently  $2.7 trillion in debt owed by  highly leveraged companies.  At the peak of the subprime mortgage crisis, there was  $2.7 trillion worth of subprime mortgages.  Because the economy is bigger today, the impact is not as severe.However, there is a lot of bunching at two levels of bond debt.  There is a lot of bunching of BAA bonds, which is one notch below investment grade, and B3, which is one notch above C.  There is  leveraging right up to those lines.  If bonds drop below BAA, fiduciary investors can no longer hold them in their portfolios.  If bonds drop to C, they get kicked out of Collateralized Loan Obligations for being junk bonds.     Another risk is in the shadow system, that is, mortgages originated originated by nonbanks.  The   shadow system is big and it does not have the same level of regulation as banks.  Many of the loans being originated by non-banks are sold to GNMA and are loans made to low income and first time homeowners.   Nonbanks rely on big banks for funding.   In a recession, lines of credit may be closed and repo market may shut down.  This means nonbanks will get cut out of funding.  If they can’t make loans, the housing shuts down.   This is not about capital, is a threat from a liquidity event.  The only way you get out of a liquidity event is for the Fed to enter the system.  By now, it should be clear why this presentation was titled the Two Handed Economist.  On the one hand, Mr. Zandi thinks we are likely to avoid a recession.   On the other hand, there are triggers out there which might lead to a recession.  On the one hand, economic indicators suggest that any recession could be mild.  On the other hand, risks pertaining to leveraging and liquidity mean that things could go seriously off the rails.   The only thing that is certain is that we are in a time of uncertainty.Author's Note:  I tried to capture Mr. Zandi's words are closely as possible.  In some places, I missed a word or a phrase and filled in what I thought was an equivalent word or phrase.   This is similar to what artificial intelligence would do except that I am using my actual intelligence to fill in the gaps. I apologize in advance if I made any errors in presenting Mr. Zandi's reasoning.I also apologize that I was taking pictures of Mr. Zandi's slides from an angle so that the photos are a bit slanted and it looks like they were drunk.

Continuing our blog posts about failed or closed restaurants,when client’s contact us about a failed or closed restaurant, weask them to prepare and bring us an Income Statement and a BalanceSheet for the restaurant.The purpose of the Income Statement or Profit and Loss Statement is toshow the revenue and expenses for the restaurant for the current year andto determine the profitability of the restaurant, if any.The purpose of the Balance Sheet is to determine what money or property isowed by the restaurant (liabilities), such as back rent to the Landlord,sales tax, wages due to employees or money owed to suppliers.We also want to know what property or assets the restaurant has tosatisfy the claims of creditors.In our experience of representing  failed or closed restaurants, a couple of facts become apparent:Restaurants have little to no inventory, the perishable goods must be used or thrown out.-The accounts receivable are generally credit card based and collected by therestaurant in 5 to 20 days-The  used pots, pans and knives have little value- Fixtures or property attached to the walls or the floor belong to the Landlord and-The bar stools, tables and other property is generally auctioned off by the restaurantowner  in a going out of business sale or sold by an auctioneer for 10 to 15 cents on the dollar.There is however one asset that is often overlooked by restaurant owner and that is the lease. The lease needs to be reviewed to determine if the rent is below market, at market or abovemarket and how many years are left on the lease (the term).A lease with less than three years remaining on its term, generally has little to no value.Simerly a lease that is at market or over market generally has no value.However an “under market” lease with 3 or more years on its term, may have a significant value.The approach that we suggest for the under market lease  is that the assignment andsublet provisions of the lease be reviewed, then the restaurant owner should contactthe landlord and indicate that they are considering closing their business and theywould like to assign or sublet the lease to a third party or have the landlord “by them out”out their lease.The restaurant owner with an under market lease, may want to contemplate hiring areal estate broker to review the lease, to negotiate with the landlord and to market the lease to third parties.The general standard in New York for the approval of an assignment or sublet of alease by a tenant is known as “not unreasonably withheld”. In plain English whatthis means is that if a tenant finds a suitable party, that wants to take over the lease,the landlord must be “reasonable” in approving or not approving /consenting to anassignment of the lease or the Landlord can be sued.The Landlord will want the lease to be sublet to a third party and not assigned, so thatthe landlord will have recourse against the existing restaurant owner and the new restaurant tenant. If the restaurant lease is able to be assigned or sublet, then the tenant’s security deposit (which generally is two to three months of rent) will bepreserved and ultimately returned to the restaurant owner.That money (sublet money & security deposit) can often times create a significantamount of money, that can be used to pay creditors, such as sales tax, or monies duethe landlord that are guaranteed by the restaurant owner.A number of issues related to failed or closed restaurants have been discussed in prior blog posts.Clients with failed or closed restaurants, that have questions regarding the closing of the restaurant,or a bankruptcy filing by the restaurant or restaurant owner or a sublet or assignment of the leaseshould contact Jim shenwick at 212-541-6224 or at jshenwick@gmail.com.Jim Shenwick has experience in workouts, bankruptcy filings and office leasing. 

One of the best panels that I attended at NCBJ was New Consumer Loan Products and Potential Bankruptcy Issues    The panel included Tyler Brown from Hunton Andrews Kurth, Carol Evans from the Federal Reserve Bank of Washington, D.C., Prof. Adam Levitin from Georgetown University Law Center and Gary Reeder, Vice-President of Innovation and Policy at the Center for Financial Innovation.What Is Fintech? Carol Evans from the Federal Reserve discussed the recent survey of household economics and decisionmaking.  12% could not cover unexpected $400 expense while 27% would have to borrow or sell assets to do so.   Meanwhile, the racial wealth gap is widening.  These developments create both a need for new consumer loan products and a risk that consumers will be victimized by them.  Fintechs are an important player in the consumer market.  Fintechs are the companies in this space while fintech is the product they offer.   Fintech spans a continuum ranging from the ATM to innovative credit scoring to transferring money by mobile phones.  Fintechs do not have not a brick and mortar presence.  Instead, they interact with consumers online through the web or an appFintech has a lower cost of underwriting which can improve financial inclusion.  Some Fintech companies also provide consumers with budgeting assistance. Additionally, 32% of small businesses used online lenders in 2018.Early Wage Access is an employee benefit being offered by some employers. It is a variation of payday lending.Alternative Data Another trend in Fintech is the use of alternative data, which is data outside of a credit report.  Some data sources don’t have an obvious connection to lending and may be proxies for race, gender, etc.  Facebook friends and social networks are one example.   If your Facebook friends have a poor credit history, you may have poor credit as well.  However, cash flow underwriting, which looks at the funds flowing through your bank account can help if you have gig economy income.     Targeted marketing poses a risk of discrimination.   For example, Asian Americans might be charged more for test preparation products.   Consumers might be might be offered different products based on race, gender, national origin.   HUD has sued Facebook because advertisers on Facebook could target ads based on prohibited categories.  HUD alleged that Facebook was facilitating redlining.The fact that an algorithm is data driven does not ensure that it is fair or objective.  Amazon developed an algorithm for hiring technical positions.  It turned out that it would have discriminated against women and was never implemented.Issues With Student Loans Both Gary Reeder and Prof. Levitin discussed issues related to student loans.   Financial institutions that don’t just provide student loans are offering to refinance student loan debt.  Examples are Future Fuel, Six Up and Vemo.  How do you determined dischargeability when student loans and consumer loan combined.   Once you pierce that layer of protection, the entire pool is polluted. However, if you solely consolidate student loans it’s ok. What if administrative costs are rolled in.  Is that still solely a non-dischargeable student loan?The recent Crocker opinion from the Fifth Circuit shows that not all private loans fit the definition of a nondischargeable student loan.   In Crocker, a loan to study for the bar exam was found to be dischargeable. Merely saying something is a student loan may not be enough to keep it from being dischargeable.There has been a trend in for profit colleges failing.  The Department of Education is supposed to have a program to forgive student loans from for profits that fail.  However, this is made more difficult by the fact that there may be multiple counterpartiesProf. Levitin spoke about income sharing agreements.  Income sharing agreements are alternate forms of student loan financing.  Instead of borrowing a sum certain, a student agrees to pay a fixed percentage of income for a fixed period of years over a fixed minimum.   A student with a high wage job pays more than someone with a minimum wage job.  It is like an Income Contingent Repayment Plan on the front end. They are not widespread. Purdue University and some nonaccredited institutions are offering financing through IS As.  IS As are not a good financing mechanism compared to traditional federal student loans.  They compete with private student loans.    Are IS As credit?   If they constitute credit, it implicates many federal statutes.  What if the plan offered is different  for computer science majors v. African American studies majors?In bankruptcy, is an ISA a claim?    Is it dischargeable? Accrued but unpaid obligations are clearly claims.  Future obligations are probably also a claim, but there is a little more room to argue. Is it secured?  Is it perfected?  How do you deal with it in a chapter 13?Choice of Law Choice of law is becoming a hot topic.  Online installment lending has increased to $50 billion outstanding.   Lenders have an incentive to shop for state law which is beneficial to them.  Prof. Levitin gave the example of a lender in Utah with borrowers in 30 states.  The contract designates Utah law.   The first question is regulatory.  Can a state regulate an out of state lender offering credit to its citizens? The Tenth Circuit said that Kansas can require regulation of a non-Kansas lender.  The Seventh Circuit reached an opposite result, but the facts were unusual.   An Illinois lender was making loans to Indiana borrowers, but the borrowers had to physically go to Illinois.In choice of law analysis, the first question is does the contractual choice of law have a rational relationship to the transaction.  If there is only a nominal relationship, then maybe not.  The second question is whether the choice of law is offensive to the law of the borrower's state.   There have been some creative choice of law provisions used by online lenders, such as Maltese law or  Cook island law.   The panel did not have a lot of confidence that this would work for purely online lenders.  Another angle is partnerships between online lenders and banks or Native American tribes.  Rent a bank is a scheme where a bank originates a loan and then assigns it to a nonbank lender.  Is federal preemption assignable?   This is hotly debatable.  One bankruptcy court has held that a loan is enforceable if it was valid when made.  There arrangements are vulnerable to two lines of attack.  First, there is the argument under the Madden Doctrine that federal preemption is not assignable. The law should look at the characteristics of the current lender, not the loan. Even if there might be assignability,  parties can bring up the true lender doctrine.   Who did marketing?  Who has the credit risk?  Who does the servicing?   However, it may not even be necessary to assign the loan. If the originating bank issues a participation or a credit default swap, the loan stays on the bank’s books.   Prof. Levitin argued that courts need to require certification that the economic interest has not been transferred.  According to Mr. Reeder, the next twist is to assign, then securitize.   A securitization trust  sponsored by a bank is not itself a bank.Merchant Cash Advances Mr. Reeder talked about Merchant Cash Advances.   These are similar to wage advances but for small businesses.  Money transferred from an entity to a recipient.   The person who receives the advance has a contractual obligation to pay a percentage of its future revenue up to ceiling.  So what is the nature of relationship.   The MCA company provided cash and it will be provided cash plus a return in the future.  Is it a debt?  There are three core reasons for arguing that it is not a debt.  First, the MCA party can avoid licensing requirements.  Next is the disclosure regime.  If it's not a debt, then Truth in Lending disclosures don’t apply.   Finally usury caps don’t apply if it is not a loan.   In bankruptcy, when an MCA party shows up and says it has a "claim," does it? It is the problem of calling something an advance not a loan.  States are looking at these transactions.   If it is not a loan, does it ride through the bankruptcy unaffected?  When someone guarantees an MCA, what are they guaranteeing?   Are they guaranteeing payment of the MCA obligation or merely performance by the obligor and is there a difference?My partner, Barbara Barron, and I recently authored an article on MC As called "Why MCA?  Adding Havoc to Chaos" which appears in Vol. 33, Issue 3 of Commercial Law World.   I would be happy to provide a copy to anyone who requests it by sending an email to ssather@bn-lawyers.com.

The Commercial Law League presented a lively panel on Hot Topics in Retail Bankruptcies featuring  Robert Duffy from Berkshire Research Group, LLC, Kenneth Eckstein from Kramer Levin, Mohsin Meghji from M-III Partners, LP, James Sprayregen from Kirkland & Ellis and Marty Staff from BCBG Maxaria.I will acknowledge up front that I have no idea who made which comments so that all content should be attributed to the panel in general. An Overview of Retail BankruptciesThe panel reported trouble across all sectors. Brands used to be the black box of customer preference, but now it’s about price. The e-commerce effect is impacting players across the retail space.   Small and mid-market retailers feel the need to develop an e-commerce presence but are not making any money on it.   Meanwhile, the cost of cost of keeping a bricks and mortar presence has become a burden.   While the total amount of retail space is decreasing, there are winners and losers.   Sears is gone.  Walmart and Target are doing well.   Circuit City is gone.  Best Buy is stronger.   Walmart saw this coming 10-12 years ago.   Target has been reinventing itself over and over.  Wal-Mart and Target are the leaders today.   However, if they stay the same, they will get killed but they have shown ability to innovate.  Brick and mortar stores are becoming a place to look for selections to make on-line.  Meanwhile, the selections in stores are getting smaller making people go online.   There is a place for smaller footprint stores but it is not clear whether retailers can they survive the change.Another trend is re-purposing of retail space.  The panel gave the example of a Sears store which was torn down to make way for apartments. Toys R Us  makes a good study for what can go wrong in a retail bankruptcy.  It had enough unencumbered assets to get a good DIP loan.  They thought they had an 18 month runway but faced an aggressive attack from Amazon and Walmart.   The lesson the panel said was that companies can't survive with this much debt, even with vendor support.   Toys R Us ended up administratively insolvent largely because of a massive critical vendor program.  In order for a retailer to survive, it must pass the who cares test.  Toys R Us thought it would pass it, but wound up with a liquidating plan.  Aeropostale is another case study which illustrates landlords taking a more active role.  Simon Properties wanted to own a retailer.  Simon and General Growth funded the bankruptcy and became the owners of the new company which was divided into an IP Company and an Operating Company.  The company which emerged was much smaller.The 2005 amendments have limited debtors' time to negotiate to seven months.  Another threat to retailers is lenders rolling up pre-petition debt in DIP financing.  To survive, a retailer needs someone who cares.  That may be junior lenders, vendors or landlords.  Debtors need to start planning their bankruptcy soon enough and come in with deal done, which means having someone who can write a check.   Free fall bankruptcies are likely to liquidate.   Waiting until liquidity runs out is another prescription for failure.Retailers shouldn't count on asset-based lenders to help them because ABL lenders don’t have enough risk.   Because they money in an ordinary case they don't behave as though they are at risk.Critical vendors are a bad development.  Debtors are facing the dilemma of what if you just say no?   There are fewer truly critical vendors.  Tech people and shippers are examples of truly critical vendors.  Critical vendor programs eat up liquidity.   Debtors are better off with shorter terms rather than critical vendor payments.  To survive, retailers should cut out critical vendor programs  and rollups to give the company a runway.Dealing with liquidators is a challenge for retailers.   5-7 years ago there were more participants and multiple companies would bid for right to liquidate.  What’s changed in the last 6-18 months is that we don’t have competitive forces.   The four remaining market players have teamed up so there are just two bidding groups.  In order to get a good deal, retainers need to threaten to do it themselves.  Sears proved that it had a lot of expertise in self-liquidating.   The panel felt that the black magic of liquidators is overvalued but noted that lenders like them.  CLLA Keynote Address The Commercial Law League program also included a keynote from Mark Weinberg titled How Ronald Reagan Turned Around a Failing Economy and Ended the Cold War.Mark Weinberg joined the Reagan presidential campaign in 1980, spent all eight years of the Reagan presidency as Assistant Press Secretary and Special Assistant to the President and was Director of Public Affairs for President Reagan for two years after his presidency.  He cited a Reagan quote on bankruptcy. When a business or an individual spends more than it makes, it goes bankrupt. When government does it, it sends you the bill. And when government does it for 40 years, the bill comes in two ways: higher taxes and inflation. Make no mistake about it, inflation is a tax and not by accident. He described the five P's which formed President Reagan's approach to governance:  planning, people, principles, perseverance and partnering. He said that President Reagan came to Washington with a plan to restart the economy and a plan to wear down the Soviet Union.  Weinberg said that Reagan would hire quality people and then stay out of their way.   He also said that President Reagan believed that compromise was an essential part of government so long as one did not compromise principles.  He also believed that there was no limit to how far a man could go so long as he does not want the credit.  He said President Reagan would never say "I alone can fix it."  Mr. Weinberg answered questions from the audience and offered a unique view into a period of our American history.   He said that the Iran-Contra scandal demonstrated that President Reagan could be too trusting in the people around him and that he refused to believe that subordinates would lie to his face.