The National Conference of Bankruptcy Judges concluded with an interview of Supreme Court Justice Elena Kagan by Third Circuit Judge Marjorie Rendell and Bankruptcy Judge Randall Dunn. Justice Kagan was very humble and self-effacing, but was not overly forthcoming. In an ironic twist, Justice Kagan took the Supreme Court bench with no expertise in bankruptcy, but her maiden opinion was in that area. She said she enjoyed her work on Ransom v. FIA Card Services. She said, “Everything is new. You learn a lot. I would be glad to do more (bankruptcy cases).”She said that her service as Solicitor General was good preparation for the court because “the whole job is focused on the court.” However, she did admit that she felt funny being referred to as “General Kagan” during her prior job. She said, “It’s an embarrassing thing because you’re not a General.”Justice Kagan acknowledged that despite having four law clerks and hearing only about 80 cases a year, the job was challenging. “All of the cases we get are hard. It’s such a different kind of judging.” She also said, “The whole thing’s difficult. It should be difficult. If you thought it was easy, you shouldn’t be doing it.”She said that she had not yet developed a judicial philosophy. “I’m not a grand theoretical thinker, especially at this stage in my judicial career. I’m ready to take it a case at a time.”Justice Kagan distinguished Constitutional interpretation from statutory interpretation. She said, “Statutory interpretation is frequently different from Constitutional interpretation because the Constitution is written so much more broadly and is so open-ended so it’s hard to approach it like you would the Bankruptcy Code.” In statutory interpretation, she said, “Start with the text, the particular provision in context, its purpose. Sometimes when the text is uncertain you move to more general purposive principles and legislative history. Congress wrote what it wrote and you have to follow that.”When asked about the fact that there are three women on the court, she stated that “there are women’s faces and women’s voices coming from all over. We’re not shrinking violets.” However, she said that the female presence on the court “makes a world of difference in the perception of the court,” but “doesn’t make much difference in deliberations.” She said that she was surprised that technology had passed the internal workings of the court by. She said that the justices do not email each other. She said that “coming back to the court after twenty-five years after being a clerk, they communicate in exactly the same way.” She spoke about memos written on heavy paper transmitted by messengers. However, she saw advantages in not using email. “How many times have you written an email, pressed send and then thought better of it. . . . The way we communicate, even though it’s less modern, there’s a certain deliberateness and thoughtfulness to it.” Justice Kagan compared writing an opinion to teaching a class. She said, “”I’ve become aware that when I sit down to write an opinion it is the same as when I tried to prepare for a class. You explain something complicated to someone who doesn’t know much about it. You try to convey complex ideas so they understand it and it sticks with them.”When it comes to questions in oral argument, she said, “We are an incredibly hot bench now. We have a lot to say. Odds that you will get no more than two or three sentences out are not great.” She said that she tries to “ask questions that they can actually answer.” She said that in asking questions, she looks at “what are the hang-ups in the person’s case for me. I want to give someone a chance to convince me.” Other times she asks questions to “convey views to the other people on the bench.”Justice Kagan said that briefs are more important than oral argument, although oral argument “can crystallize things for you.” Despite the ideological divide on the court, she said, “We all really like each other very much. We have lunch together every day we have argument or conference.” She pointed out that the closest friends on the court were Justices Ruth Bader Ginsburg and Antonin Scalia. She said, “Disagreements about how to do law shouldn’t carry over into the next case or into general relationships.” She said “I have eight great friends that I didn’t have before.”On a completely random note, putting spellchecker in text messaging is not helpful. When my dad called me during this presentation, I texted him back to let him know that I couldn’t talk because I was listening to Supreme Court Justice Kagan. After I hit send, I realized to my horror that I had referred to Justice Pagan. I don’t think that Android has a right wing bias. I just think its artificial intelligence doesn’t know when to shut up

The National Conference of Bankruptcy Judges concluded with an interview of Supreme Court Justice Elena Kagan by Third Circuit Judge Marjorie Rendell and Bankruptcy Judge Randall Dunn. Justice Kagan was very humble and self-effacing, but was not overly forthcoming. In an ironic twist, Justice Kagan took the Supreme Court bench with no expertise in bankruptcy, but her maiden opinion was in that area. She said she enjoyed her work on Ransom v. FIA Card Services. She said, “Everything is new. You learn a lot. I would be glad to do more (bankruptcy cases).”She said that her service as Solicitor General was good preparation for the court because “the whole job is focused on the court.” However, she did admit that she felt funny being referred to as “General Kagan” during her prior job. She said, “It’s an embarrassing thing because you’re not a General.”Justice Kagan acknowledged that despite having four law clerks and hearing only about 80 cases a year, the job was challenging. “All of the cases we get are hard. It’s such a different kind of judging.” She also said, “The whole thing’s difficult. It should be difficult. If you thought it was easy, you shouldn’t be doing it.”She said that she had not yet developed a judicial philosophy. “I’m not a grand theoretical thinker, especially at this stage in my judicial career. I’m ready to take it a case at a time.”Justice Kagan distinguished Constitutional interpretation from statutory interpretation. She said, “Statutory interpretation is frequently different from Constitutional interpretation because the Constitution is written so much more broadly and is so open-ended so it’s hard to approach it like you would the Bankruptcy Code.” In statutory interpretation, she said, “Start with the text, the particular provision in context, its purpose. Sometimes when the text is uncertain you move to more general purposive principles and legislative history. Congress wrote what it wrote and you have to follow that.”When asked about the fact that there are three women on the court, she stated that “there are women’s faces and women’s voices coming from all over. We’re not shrinking violets.” However, she said that the female presence on the court “makes a world of difference in the perception of the court,” but “doesn’t make much difference in deliberations.” She said that she was surprised that technology had passed the internal workings of the court by. She said that the justices do not email each other. She said that “coming back to the court after twenty-five years after being a clerk, they communicate in exactly the same way.” She spoke about memos written on heavy paper transmitted by messengers. However, she saw advantages in not using email. “How many times have you written an email, pressed send and then thought better of it. . . . The way we communicate, even though it’s less modern, there’s a certain deliberateness and thoughtfulness to it.” Justice Kagan compared writing an opinion to teaching a class. She said, “”I’ve become aware that when I sit down to write an opinion it is the same as when I tried to prepare for a class. You explain something complicated to someone who doesn’t know much about it. You try to convey complex ideas so they understand it and it sticks with them.”When it comes to questions in oral argument, she said, “We are an incredibly hot bench now. We have a lot to say. Odds that you will get no more than two or three sentences out are not great.” She said that she tries to “ask questions that they can actually answer.” She said that in asking questions, she looks at “what are the hang-ups in the person’s case for me. I want to give someone a chance to convince me.” Other times she asks questions to “convey views to the other people on the bench.”Justice Kagan said that briefs are more important than oral argument, although oral argument “can crystallize things for you.” Despite the ideological divide on the court, she said, “We all really like each other very much. We have lunch together every day we have argument or conference.” She pointed out that the closest friends on the court were Justices Ruth Bader Ginsburg and Antonin Scalia. She said, “Disagreements about how to do law shouldn’t carry over into the next case or into general relationships.” She said “I have eight great friends that I didn’t have before.”On a completely random note, putting spellchecker in text messaging is not helpful. When my dad called me during this presentation, I texted him back to let him know that I couldn’t talk because I was listening to Supreme Court Justice Kagan. After I hit send, I realized to my horror that I had referred to Justice Pagan. I don’t think that Android has a right wing bias. I just think its artificial intelligence doesn’t know when to shut up

Prof. Jay Westbrook and Prof. Katie Porter presented a delightful tour de force of empirical research titled Mythbusters. They compared ten statements of conventional wisdom to the results of empirical research. As Jay said, “There are all kinds of things that everyone thinks are true but we don’t know whether they are really true.” (For this post, I will refer to the speakers as Jay and Katie since these two professors go out of their way to be accessible so that it just seems appropriate). 1.1. BAPCPA permanently crippled consumer bankruptcy.The answer is not necessarily. Filings today are very similar to what was seen before BAPCPA. Today’s filing levels of 1.5 million cases per year are about equal to filings during 2001-2004. The income profiles today are similar with chapter 7 debtors averaging $24,000 per year and chapter 13 debtors averaging $34-35,000. The only thing that can’t be measured is what filings would have been like if BAPCPA had not been passed. Given the weak economy, filings might have been much higher without the legislation. 2. For big business, reorganization in Chapter 11 really just means a 363 sale. While 363 sales are more common in large cases, they are not the norm. Cases with above $50 million in assets resulted in 363 sales in less than 33% of the cases while in chapter 11 cases of all sizes only 10-15% resulted in 363 sales. 3. Young people are more likely to file bankruptcy because of a decline in stigma. Research shows two things: survey respondents report mortifyingly high rates of stigma and bankruptcy is increasing among the elderly and declining among the young. A study in 2001 showed that 84.3% of persons filing bankruptcy said they would be embarrassed or very embarrassed if their families or friends found out. Another survey showed that bankruptcy was more traumatic than the death of a friend or separation from a spouse. Another study showed that people are waiting longer before they file bankruptcy. In 1981, people filed bankruptcy when their debt to income ratio was 1.41 while in 2001 that number had more than doubled to 3,04. Of persons surveyed, most had been struggling with debt for more than two years before filing. Bankruptcy filings for those aged 75-84 increased by 433.3% from 1999-2007 and rates for those aged 65-74 increased 125%. Meanwhile the overall rate of filing decreased 29.2% and the filing rate for those aged 18-24 fell by 64.1%. The unfortunate fact is that bankruptcy is becoming a reality for the Greatest Generation. 4. There is nothing important in business bankruptcy between Mom & Pop and WorldCom. Among some academics, there are two categories of chapter 11 cases, important (more than $100mm) and not important (everyone else). In the real world, 60% of chapter 11 cases fall into the range of $100,000 - $5 million in assets, while only 6% had $100 million in assets or more. Additionally, 20% of all chapter 11 cases were filed by individuals. The professors opined that this shows the difficulty of trying to construct a one size fits all chapter 11 model. 5. Small businesses linger endlessly in chapter 11. A study done prior to BAPCPA showed that 50% of small business cases that ultimately failed were dismissed or converted within six months while 50% of successful cases took 15 months to confirm. The professors noted that small business cases take just as long to confirm as big business cases, although small business cases were dismissed or converted much faster than their larger counterparts (107 days faster in 2002). According to Jay, if the 2005 time limits had been in effect in 2002, 80% of the successful small business cases might have failed. He added that the effect of the 2005 small business amendments may have been to “maim cases that could have succeeded.” 6. The bankruptcy experience is race neutral. While the Bankruptcy Code is race neutral on its face, the “Ideal Debtor” for chapter 7 is one who holds retirement accounts, has high but reasonable expenses, financially supports only legal dependents and has little or no child support of student loan obligations. This is more likely to describe a white debtor than a minority debtor. The most accurate predictor of whether someone will file chapter 13 is whether they are African American. African Americans file for chapter 13 at twice the rate of other debtors. In 2007, Hispanics were likely to pay 25% more in attorney’s fees than white or African American debtors. The professors were quick to say that they can’t say why this is happening, only that this is what the numbers show. 7. Forum shopping is all about getting to Delaware or New York. It turns out that forum shopping happens in other parts of the country as well. Of 409 large cases filed outside of Delaware and New York since 1980, 27% were forum shopped According to Katie, large cases should file in Jay and Kate’s districts because they would have easy access to academics and cheap beer. Jay noted that Austin had live music as well. 8. Bankruptcy works for pro se filers. Chapter 7 works reasonably well for pro se filers, while chapter 13 is a complete disaster. Among pro se chapter 7 debtors, 17.6% of debtors had their cases dismissed for technical reasons compared to 1.9% of those with counsel. Among pro se chapter 13 debtors filing since 2006, only 4% had their cases pending or discharged at the four year mark compared to 45% of those represented by counsel. 90% of pro se chapter 13 cases are dismissed prior to confirmation compared to just 15% of those represented by counsel. According to Katie, pro se debtors are playing Las Vegas odds in chapter 13 and might do better taking their filing fee to Las Vegas. She said we have “constructed a complex machine that most of the time may require a lawyer.” 9. Many of the chapter 13 cases that do not complete plans are actually successes. When Warren, Westbrook and Sullivan released their study that only 33% of chapter 13 cases result in discharge, they were treated as heretics. Now this success rate is conventional wisdom, but a new narrative has arisen that failed chapter 13 cases may actually be successes. The data says no. While the debtor remained in bankruptcy, chapter 13 avoided foreclosure for 81% of debtors while 70% faced loss of their home within 2-3 months after dismissal. Once their cases were dismissed, 57.5% of debtors reported that their situation was the same or worse than when they filed. 60% of debtors very much disagreed with the statement that they exited bankruptcy because they had accomplished their goals or found another solution compared to 20% who agreed or agreed very much with the statement. In a chilling statistic, 33% of debtors whose chapter 13 cases were dismissed reported that they struggle to pay for food. 10. Lenders maximize recoveries in each case. Sarah Pei Woo conducted a study of chapter 11 bankruptcies of residential real estate developers during the recession. Tragically, she passed away after a brief illness after her study was completed. She found that banks acted not to maximize recovery but to increase short-term liquidity and accede to regulatory pressure. The question was not how much they would recover but when. Among residential real estate developers, 81.7% were liquidated, 11.1% were sold in 363 sales and just 4.6% reorganized. Secured lenders filed a motion for relief from stay in 72.5% of the cases. Banks who were in financial distress were 24.9% to 28.6% more likely to seek relief from the automatic stay.

Dr. Thomas Hoenig was the Friday luncheon speaker. He served for twenty-five years as President and CEO of the Federal Reserve Bank of Kansas City. He said that he “wanted to get you on board that Too Big to Fail is bad policy.” He warned that the crisis brought about by Too Big to Fail in 2008 was likely to recur. He said that “unless you acknowledge the problems that brought about the crisis, it would happen again. He identified some of the factors as distorted incentives, not allowing the market to function and subsidizing favored groups. Dr. Hoenig identified three pieces of legislation as creating the climate for Too Big to Fail. The Glass-Steagall Act extended protections to commercial banks in the form of deposit insurance in return for separating out their risk-based activities. He described Glass-Steagall as “a covenant between government and the private sector” to “extend protection around you because of your role in society.” He said that “in return for special protection, we will limit (the activities of commercial banks) to payment systems and financial intermediation systems because these are the purposes we want to protect.” He said that if commercial banks wanted to engage in risk-based activities, they would have to do so with their own capital in a separately chartered entity. He said that Glass-Steagall was the system in place until the 1980s and “worked reasonably well.” According to Hoenig, “with stability comes its own sources of weaknesses.” The demand to take down the wall between commercial banking and other activities led to the Gramm-Leach-Bliley Act of 1979. The effect of GLB was to allow banks to invest in risk with a federal backstop. The risk of this was predicted by Adam Smith who noted that merchants would seek to widen the market and narrow their competition. While widening the market is desirable, narrowing competition is not. GLB narrowed competition by allowing some players an artificial subsidy. By eliminating Glass-Steagall, the market share of the largest banks was increased from 14% in 1979 to 60% in 2007. “Thus was born too big to fail.” The Dodd-Frank legislation was supposed to fix Too Big to Fail. He said, “I am concerned that it won’t” because “the incentives haven’t changed.” The largest institutions are now 20-30% bigger and the cost of capital is being kept artificially low. Under Dodd-Frank, if a TBTF institution finds itself on the ropes, the regulators must make a decision about whether the institution is solvent but illiquid or insolvent. This decision must be made on a Friday afternoon and must be approved by the Secretary of the Treasury and the Chairman of the Federal Reserve with possible involvement by the courts. He asked, “Who can take an institution of $2.2 trillion into receivership over the weekend?” As a result, he predicted that regulators would be inclined to find that the entity was solvent but illiquid and inject federal dollars to keep it afloat. As a result, he said, “the market doesn’t function” and “there is no cleansing of the market.” Dr. Hoenig said that anything this large cannot be allowed to fail. As a result, the incentives must be changed. He noted that in the current system, profits are privatized and losses are socialized. He recommended that investment banking, trading and other risk-based activities be moved into separate entities with private capital. He also called for making the competitive market more fair. He said that regional banks cannot compete with the twenty largest entities because they are not subsidized. Dr. Hoenig said that he disagreed with those who said that current capital requirements for commercial banks are too stiff. He disagreed, noting that before there was a federal safety net, financial institutions maintained capital of 15-20% compared to the current 7%. He said that (15-20% capital) is “what the market called for.” He also disagreed with those who said that such measures would place U.S. financial institutions at a competitive disadvantage compared to institutions in other parts of the world. Dr. Hoenig said that foreign banks were not a good model to follow. He said “look at their banks.” He said, we are “not in a competitive process to excellence, but a competitive process to the bottom.” He also warned that the country was too leveraged. He said that consumer debt as a percentage of GDP had grown from 80-90% to a high of 125% before dropping to the current level of 114%. At the same time the savings rate fell from 8% to 0% although it has risen back to 5%. Dr. Hoenig described the federal government as being in crisis. He said that government debt had increased from 40% of GDP in 1990 to 100%. Currently interest rates average 2.5%. He asked what if market interest rates began to apply? He said that monetary policy has been captured by Too Big to Fail. (I apologize in advance if I incorrectly transcribed any of Dr. Hoenig’s statistics or their units of measurement. I was taking notes as quickly as I could but possibly not quickly enough. Any statements that do not make sense are the result of my reporting rather than the content of the speaker).

Rajeev Date had the unenviable job of filling a speaking slot originally assigned to Elizabeth Warren to discuss the creation of the Consumer Financial Protection Bureau. He is currently the Special Advisor to the Secretary of the Treasury on the Consumer Protection Bureau. Prior to that, he worked for over a decade in the financial services industry, including stints at Capital One Financial and Deutsche Bank. Mr. Date described the similarities between his job and that of bankruptcy lawyers pointing out that both deal with people getting wiped out because of something financial and both seek to help consumers. The Consumer Financial Protection Bureau was a signature part of the Dodd-Frank legislation. He stated that its goal was making consumer financial markets work. Before Dodd-Frank, consumer protection functions were assigned to seven agencies which had other responsibilities as well. He sketched out some recent history to show the need for the Bureau. He said that consumer debt exploded during the years before the financial crisis. He said that it “covered everything, big ticket, small ticket, secured unsecured. Everything grew and everything grew fast.” From 1999-2007, household debt nearly tripled. He cited college kids with credit cards, home mortgages with teaser rates and people exhausting their savings on high cost debt as emblematic of the period. Mr. Date said that consumers were signing up for “things they didn’t understand.” Mr. Date noted that the mortgage industry was at the epicenter of the financial crisis. While lenders usually have incentives to ensure borrowers can pay them back, the mortgage industry was different. Because the brokers and banks that originated loans were compensated up front, risk and reward were delinked. He also said that there was a breakdown in the market. Because originators could shop for the most favorable legal regime, they did so. Additionally, there were problems with transparency. He defined transparency as both parties understanding the terms of the deal and talking about the same deal. Mr. Date said that transparency was absent during the years leading up to the financial crisis. The fastest growing products were things that were hard to understand. In order to gauge the risk involved in some financial products, it was necessary to have extensive knowledge of how the rate caps worked and interest rate history. He said that “problems of transparency continue today. Borrowers deserve to know what they are signing up for.” Mr. Date was enthusiastic about the prospect of starting a new agency from the ground up. He quoted Steve Jobs for the proposition that “the only way to great work is to love what you do.” He described his challenge as creating new perspectives, creating a new structure and recruiting new talent. Although the CFPB is only a few months old and lacks an Executive Director, it has grown to 690 employees, has begun taking consumer complaints, started education programs and has released examination guidelines. Notwithstanding the lack of an Executive Director, the authority to carry out the Bureau’s powers has transferred to the Secretary of the Treasury. He pointed out that from 2001-2007, the volume of unusual mortgages exploded dramatically. He described one of the worst products offered as a mortgage with a one month teaser rate. He said that while the Bureau is working to clean up new originations, there are already $10 trillion in mortgages out there. Mr. Date answered several questions related to mortgage servicing. He said that when he was in the financial services business, he would walk the floors of collection operations for automobile lenders and credit card lenders to evaluate whether to purchase the business. He said that they understood that there were some people who wouldn’t pay and planned for it. On the other hand, income in the mortgage servicing industry is largely fixed regardless of whether the loan performs or does not. When a loan is performing, the cost to service the loan is less than the fees paid. However, when a loan is not performing, the servicer’s costs exceed their revenue. As a result, “the incentives don’t line up” for mortgage servicers to work with borrowers in default. He also pointed out a disparity in that mortgage servicers can “fire” their borrowers by selling the portfolio to a new servicer, while borrower cannot fire their servicer. The CFPB has released its manual for mortgage servicer examinations. Mr. Date said that in the past, examinations of mortgage servicers were neglected because these operations did not affect the “safety and soundness” of the financial institution. He said that the servicing manual does two things: it sets standards for consistency and lets servicers know what to expect. Three different judges asked questions relating to home mortgage modifications. One judge spoke about debtors who submitted everything they were asked to and didn’t hear back for months only to be told their information had been lost. Another judge asked, “What do I do? What do I tell them?” Mr. Date pointed out that mortgage brokers were good at holding consumers’ hands during the application process. However, no one is holding their hand in the modification process. He pointed out that the CFPB will put consumers in touch with HUD-approved housing counselors. This information is available at consumerfinance.gov. He also said that enforcement was a tool available to the Bureau. He said that the Bureau would choose the right areas for investigation and bring cases when we need to. He said, “There are bad guys. If you don’t know who they are, you may be one yourself.”

Prof. Ralph Brubaker and Prof. Ken Klee spoke on “Not Again! Will Bankruptcy Courts Survive the Supreme Court’s Second Look At Stern v. Marshall?” However, their panel could have been titled, “Does the Bankruptcy World Need Yet Another Talk on Stern v. Marshall?” Fortunately the answer was yes. The History of Summary/Plenary Prof. Brubaker discussed the history of bankruptcy adjudication going back “before the beginning” to English bankruptcy practice. He said that the summary/plenary distinction began with English bankruptcy commissioners. Commissioners operating under the supervision of the Lord Chancellor could administer bankruptcy estates and make certain determinations of law and fact, such as adjudicating claims. Their power was by the concept of in rem so that they could decide any question regarding property in the possession of the assignee, who was the equivalent of a trustee. If the assignee had to sue someone to recover property, that proceeding had to be brought in the appropriate superior court. In the Bankruptcy Act of 1800, Congress expressly allowed non-Article III bankruptcy commissioners to adjudicate all summary proceedings in a manner similar to English practice. This principle became even more firmly in place in the Bankruptcy Act of 1898. The jurisdictional statute expressly stated that there was no plenary jurisdiction except for some matters such as preferences and fraudulent conveyances. The 1898 Act introduced non-Article III officers similar to commissioners designated as Bankruptcy Referees. The full extent of the referee’s authority was not defined with perfect clarity resulting in multiple Supreme Court decisions. The Supreme Court invoked the summary/plenary distinction finding that plenary matters had to be brought before an Article III judge, while bankruptcy referees could determine summary matters and their decisions would be given the same effect as one from an Article III judge. When Congress reformed the bankruptcy laws in 1978, it expanded the scope of bankruptcy jurisdiction. Jurisdiction was now extended to any proceeding related to the Bankruptcy case. All of that very broad jurisdiction was to be exercised by non-Article III bankruptcy judges subject to appellate review. The Marathon decision struck down the 1978 jurisdictional scheme as unconstitutional. However, the Court in Marathon never said where the constitutional line was. Indeed, there was not even a majority opinion in the case. Nevertheless, he said that “the most obvious explanation for why the court found the Code unconstitutional was that the Marathon case would have been a plenary suit which should have been tried in an Article III court. Congress reacted to Marathon by enacting the core/non-core distinction which Prof. Brubaker equated to a codification of the summary/plenary distinction. He noted that in Granfinanciera, Justice Brennan, who authored the Marathon plurality, equated the Seventh Amendment right to trial by jury with plenary suits under the Bankruptcy Act of 1898 that could only be tried in an Article III court. He said that Congress could not take away the right to jury trial by classifying a matter as a core proceeding. Prof. Brubaker described this as constitutionalizing the summary/plenary distinction. He noted that in Stern v. Marshall, Chief Justice Roberts relied heavily on Seventh Amendment decisions to establish the right to decision by an Article III judge. Prof. Klee said that Stern v. Marshall was not a politically decided case. Rather, it was about fundamental power, whether non-Article III courts should be limited or whether their authority should be based on pragmatism. Prof. Klee had two good lines that don’t otherwise fit with this post. He said “Vicki was well endowed in her own right but not financially.” He also said that as a result of Pierce Marshall’s attorneys decision to file a proof of claim “history was made.” Power vs. Jurisdiction Prof. Klee was quick to point out that Stern v. Marshall was not about jurisdiction. Jurisdiction was vested in the district court. The Bankruptcy Judge can decide matters if they are delegated by the District Court and that delegation is constitutional. As a result, the case was not about jurisdiction, but who could exercise that jurisdiction. He said this distinction was important to the question of whether parties could consent to decision by a Bankruptcy Judge. “If it’s just lack of power, you can consent. If it is lack of subject matter jurisdiction, you can’t consent.” Public Rights Chief Justice Roberts placed a lot of emphasis on the early case of Murray’s Lessee which held that if an action could have been decided by the English courts of law, equity or admiralty, they could not be assigned to non-Article III tribunals in the absence of a public rights exception. According to Prof. Klee, the public rights exception in bankruptcy is probably limited to cases in which the United States is a party. (Although not pointed out by the speakers, the Chrysler and GM cases would be good examples of the public rights exception). However, he made the interesting comment that Justice Scalia’s concurrence showed that in his heart, he does not want to overturn the bankruptcy system because it is a long-established system. This was similar to his ruling in the BFP case in which he relied on the long-established practice of state foreclosure laws. Thus, for Justice Scalia, historical practice is a way to get to authority. Prof. Klee recommended perusing Blackstone’s Commentaries to look for historical practice. Claims and Consent Under Stern, Bankruptcy Courts can still decide proofs of claim. Filing a claim establishes a claim to the bankruptcy res and constitutes consent to adjudication of the claim itself. However, filing of a proof of claim does not constitute consent to anything beyond that. In Stern, Pierce Marshall’s filing of a proof of claim was not consent to determination of Vicki’s counterclaim. As the Supreme Court pointed out, Pierce really had no choice about filing a proof of claim, so he did not consent to anything beyond determination of the claim. Prof. Brubaker said that filing a claim is only consent to determining the claim because that is a natural consequence of filing a claim. Prof. Klee argued that “The current court is re-writing history. Under the Act, we had jurisdiction by ambush.” In Gardener v. New Jersey, the court held that the state’s filing of a proof of claim waived sovereign immunity. The Court also held that filing a proof of claim waived the Seventh Amendment right to jury trial. Prof Brubaker rejected the notion of jurisdiction by ambush as consent. “Jurisdiction by ambush means they are not consenting to anything.” Supplemental Jurisdiction Prof. Brubaker would analyze Stern v. Marshall as a case on supplemental jurisdiction. “The Stern majority never acknowledged supplemental jurisdiction, but signed on to it.” However, he said that the nexus for supplemental jurisdiction is “tightly circumscribed.” He said it is only available to the extent necessary to dispose of independent matters already before the court. Things That Can Be Done or Not Prof. Klee said that there are still many things Bankruptcy Judges can do. They can employ counsel, approve compensation (which drew applause from the audience) and administer the estate. However, he noted that according to Blackstone, English commissioners could not enter the discharge. They could certify the discharge to the Chancellor but could not enter it. He added, “If bankruptcy judges cannot enter discharges, we are in a new world.” The professors had a vigorous discussion on whether bankruptcy judges could enter money judgments in nondischargeability cases. Prof. Klee thought it was permissible so long as the debtor was the defendant. On the other hand, Prof. Brubaker said that “historically courts have considered nondischargeability as a separate claim.” Prof. Klee responded that the debtor was res to which Prof. Bubaker said “nah.” They also discussed whether Bankruptcy Courts could follow the report and recommendation procedure in core proceedings where the Bankruptcy Court lacked constitutional power to enter a final judgment. Prof. Klee pointed out that there were now three categories of cases: core proceedings where the Bankruptcy Court can constitutionally enter a final judgment, noncore proceedings in which the Bankruptcy Court may submit proposed findings of fact and conclusions of law and core proceedings in which the Bankruptcy Court lacks power to enter a final judgment. Prof. Brubaker said that if Congress had authorized courts to enter a final judgment, it implicitly had authorized them to take the lesser action of submitting proposed findings and conclusions. Prof. Klee, while initially taking the position that submitting proposed findings and conclusions was not authorized noted that the best retort to his own position was Stern v. Marshall in which the Supreme Court “didn’t bat an eye” when the District Court treated the Bankruptcy Court’s ruling as proposed findings and conclusions. So What Are We Left With? My question after listening to this discussion is whether the Bankruptcy Court has any broader power now than it did under the Bankruptcy Act of 1898 or than was possessed by English bankruptcy commissioners. I am more sanguine than the professors. I think that will be too difficult to turn back the clock on thirty years of expansive power exercised by Bankruptcy Judges. To the extent that historical practice or specialized expertise are grounds for vesting power in a non-Article III tribunal, there is a case for vesting more power in the Bankruptcy Courts than they enjoyed prior to 1979. Bankruptcy Courts have developed specialized expertise in dealing with the consequences of financial failure. They have developed into our national courts of commerce. While most historians would scoff at thirty years as a mere blip in time, it is significant enough that it will be difficult to roll back the clock.

The Long and Short of It: Financial Engineering Meets Chapter 11 was one of the more esoteric presentations at the conference with an unusual lineup of panelists. The group included New York Bankruptcy Judge James Peck, investment banker David Barse, Professor Edward Janger, Dr. Riz Mokal from the World Bank and Edward Murray, an English solicitor. They discussed the effect of safe harbors granted to certain financial contracts under sections to 555 to 562 of the Code. These sections were extensively re-written by BAPCPA. Certain financial contracts, such as swaps and repos are granted safe harbors under the Bankruptcy Code. These contracts can be liquidated, terminated or accelerated notwithstanding the Bankruptcy Code. They are also exempt from recovery under preference and fraudulent transfer theories. According to the panelists, this was done to protect the interest of sophisticated parties and avoid the risk of financial contagion. The rationale was that if one party went down, that the transaction could not be unwound and pull down the counter-party. Additionally, the ability to do close-out netting under a contract allows parties to reduce their risk. One problem with these provisions is that, even with the extensive re-writing of definitions in 2005, the definitions are still imperfectly drawn. Section 555 applies to securities contracts and was intended to protected intermediaries. However, as written, it could apply to a transaction with Bernie Madoff’s Ponzi scheme. Prof. Janger suggested that these provisions may have “done exactly the opposite of what they were supposed to do” in the 2008 financial crisis. He said that when a Bear Stearns or a Lehmann Brothers files bankruptcy, their hands are tied and they can’t reorganize. The drafters did not anticipate that large entities would be filing bankruptcy. The panel debated whether the immunities granted to financial contracts increase the risk of transactions. Dr. Mokal noted that the provisions were put in the Code in 2005 and the financial crisis followed three years later. Ed Murray described the immunities as a “safety net” and said that they did not eliminate incentives to monitor credit risk. He said that parties want to make good transactions and noted that “credit officers are a pain” regardless of the immunities. David Barse was much more direct. He said, “If we don’t get comfort, we don’t participate. If secondary parties don’t participate, then primary can’t participate.” He described the protections as providing a “comfort zone” and said that “providing great clarity is very important.” He added that “the practical answer is that two parties to a contract should be allowed to play it out and shouldn’t be regulated.” Dr. Mokal stated that the safe harbors are an important part of a sophisticated insolvency system. He said that in other countries, there are not sophisticated bankruptcy regimes and that there is “no certainty about the court’s ability to understand or apply sophisticated rules or statutes.” He said that this was “unlike in this country where courts understand exactly what Congress intended,” a comment which drew chuckles from the audience. The panel also discussed how financial contracts could be used to commit mischief in the bankruptcy system. Prof. Janger discussed the problems of empty voting and the empty creditor where there is a separation of the economic interest from the ownership interest and separation of the economic interest from governance rightst in bankruptcy and workout situations. He said that creditors can go short and bet against a company’s reorganization and then cause trouble. He analogized the problem to a secured creditor voting its deficiency claim to sink the reorganization and acquire the asset. He said that the tools available to bankruptcy judges to combat this problem included disclosure under Rule 2019, designating ballots and subordination. Mr. Barse said that this was a big problem. He said that creditors using ever more sophisticated tools can drive decisions on corporate governance. He said that while his firm doesn’t use these tools to drive corporate governance that they could be used by corporate raiders. He also added that “Derivatives are tools of destruction. We don’t really know what they do.”

Thursday’s lunchtime speaker was Gregory L. Miller, Chief Economist for SunTrust Banks, Inc. His presentation was not too gloomy but a bit disturbing. He began Saturday Night Live style saying, “I’m the economist and you’re not.” Miller predicted that “there is not going to be a double dip recession.” He said that his “subjective prospect that the economy will fall into recession is not significant.” He estimated the prospect of recession at 25% which he said was not great because at any given time, there is a 15% prospect of recession. On the other hand, Mr. Miller said that the rest of the world has a 60% chance of recession, noting that at least three countries in the Euro Zone were already in recession and that others were at risk.” Nevertheless, he said that, “whether or not the rest of the world goes into recession, we will not.” Mr. Miller suggested that a global recession could even help the United States, since it would make foreign goods less expensive. He said this would be good for lovers of French wine. He noted that despite the weak economy elsewhere in the world U.S. exports were still increasing. Miller noted that the private sector in the United States was “fine under the circumstances” but that the “public sector is not pulling its weight at a time when it should be doing it.” He added that “Pulling the economy deeper when it’s already in the soup is not a government function but that’s what it’s doing.” Miller said that the private sector was growing at a rate of 3.6% while the overall economy was growing at a rate of 2.8% indicating that the public sector was a net drain of 0.8% on the economy. Mr. Miller said that in the U.S. economy, the housing, government and credit sectors were weak. He said that the housing sector was at the bottom but that condos were “a virtual black hole.” He said that housing and credit are usually leading sectors, but that the rules are different now and the standards are higher. He said that two trillion dollars has been dumped into bank balance sheets where it is stuck in capital accounts of regulated banks who aren’t sure what their capital requirements are. He said that banks were reluctant to put loans on the books when they don’t know whether they will pass audit. With regard to the labor market, he pointed out that the Obama administration’s current jobs bill consists largely of former Republican proposals. However, “the opposition is obliged to hate the dominant party’s policy even if it is the right thing.” Mr. Miller noted that the current $450 billion proposal would have more effect than the previous $800 billion stimulus bill because it funneled money to the private sector where the multiplier is higher rather than the prior stimulus which went through state and local governments. However, he said, “It’s not the jobs. Nine percent unemployment is not what’s wrong with the economy.” He said that the natural unemployment rate is 6% and that when we had 4% unemployment, there was too much employment in the economy. He said that 30% of the newly unemployed came from the construction and mortgage finance sectors. He said there is a mismatch between those who want jobs and those who are looking to employ. He said that two-thirds of the unemployed would likely remain unemployed and “we don’t want them employed.” Miller said that interest rates will remain painfully low until at least the middle of 2012. Nevertheless, banks are finding it more profitable to park their cash at the Fed where they can earn 0.25% interest. He pointed out that reserves have increased from $500 billion to $3 trillion. He said that to get banks lending, the Fed would need to lower the rate it pays to zero or even charge banks to keep their cash parked at the Fed. He said that the Euro sovereign debt crisis was a crisis of banking and culture, not an economic crisis. He said that U.S. banks held only 0.10% of their assets in European sovereign debt and that this was concentrated in banks that could afford to absorb the loss. In summary, the U.S. economy is not going into recession, the prospect for the rest of the world looks bleak, unemployment is not going back to where it once was, banks are not lending and the U.S. government is dysfunctional. That’s about as rosy of a view as you can get from an economist.

I am at the 2011 National Conference of Bankruptcy Judges in Tampa, Florida. For this first day, I heard a good mix of consumer and chapter 11 programs along with a provocative economist. Here are a few highlights.Chapter 11 IssuesOn the chapter 11 side, the topic du jour was In re DBSD North America, Inc., 634 F.3d 79 (2nd Cir. 2011) which was discussed by no less than three speakers. Prof. Troy McKenzie and Judge Mary Diehl each discussed the gifting aspects of the case, while Ronald Peterson talked about designation of votes in chapter 11.GiftingThe latest word on “gifting” (that is, a senior creditor ceding value to a junior class of creditors over the objection of an intervening class) is that is violates the absolute priority rule. DBSD North America presented an extreme version in that secured creditors gave up value to equity who would receive value on account of, among other things, their equity interest. The Second Circuit held that this was a clear violation of the absolute priority rule. However, other scenarios were not as clear. For example, in In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993), a secured creditor and a junior class reached a gifting agreement. However, no plan was confirmed and the case was converted to chapter 7. After the secured creditor obtained relief from the stay, it announced that it would honor its prior agreement. The court of appeals held that the secured creditor could do whatever it wanted with its money. It seems that “gifting” only raises an absolute priority rule problem when it occurs under a plan and is “on account of” an equity interest. If it is done in the context of a 9019 compromise and settlement or a 363 sale, it is more likely to work. It was also suggested that because the absolute priority rule was enacted with equity interests in mind, a gifting arrangement between two classes of creditors might pass muster.Designation of BallotsRon Peterson discussed the history of designation of ballots. Prior to the Chandler Act in 1937, the Bankruptcy Act did not contain a provision for disallowing a ballot. However, a case involving a hotel in Waco, Texas prompted William O. Douglass to press for a disallowance of ballot provision. In that case, Hilton Hotels invested substantial monies in a hotel in Waco, Texas under a lease. The debtor cancelled the lease and filed for reorganization. Hilton Hotels bought up a blocking position in the debtor’s unsecured debt and insisted that the lease be reinstated. In that case, there was no provision to prevent the attempt to hijack the reorganization.Since that time, designation of ballots has been allowed where a creditor votes to put a competitor out of business, acts based on sheer malice, acts on inside information or seeks to gain an unfair advantage over other similar creditors. In DBSD North America, the court of appeals affirmed a decision to designate ballots of a competitor who purchased a blocking position with the intent to gain control of the debtor’s telecommunications spectrum rights. On the other hand, where a creditor strikes a hard bargaining position but acts out of economic self-interest, its vote will be allowed. In the words of Gordon Gecko, “greed is good.” I was disappointed that Ron did not discuss my case on designating ballots, In re The Landing Associates, Ltd., 157 B.R. 791 (Bankr. W.D.Tex. 1993). However, since he mostly stuck to circuit cases, this was not surprising.Rights OfferingsClifton Jessup gave an interesting talk on rights offerings. Fortunately, Judge Diehl made him explain what a rights offering was. A rights offering is an offer by the debtor to sell securities (usually equity securities) to its existing creditors at a discount in order to obtain financing to emerge from bankruptcy. Rights offerings also involve a backstop party who agrees to purchase any securities not purchased by others in return for a fee. Structured DismissalsNan Coleman from the Executive Office of the U.S. Trustee and Prof. Troy McKenzie discussed structured dismissals. A structured dismissal is a procedure where the debtor’s assets are sold and then a case is dismissed with conditions. Those conditions may include affirming protections to the purchaser in the 363 sale, releases to parties and a modified claims procedure. Ms. Coleman advocated that U.S. Trustee position that structured dismissals are contrary to the Bankruptcy Code and should not be allowed. She said, “Let’s be clear. It’s not a gift. It’s a quid pro quo. Someone is getting something and someone is giving up something. Prof. McKenzie offered a tepid defense stating that some features in structured dismissals raise eyebrows but that “perhaps they should be given a little room to develop before they are squelched.”Employment of Counsel/Committee SolicitationEmployment of counsel and committee solicitation were both discussed in the ethics portion of the program. In an unusual opinion, Judge Michael Lynn has ruled that debtor’s counsel need not be disinterested. In re Talsma, 436 B.R. 908 (Bankr. N.D. Tex. 2010). If debtor’s counsel is owed fees, it may sell its claim prior to bankruptcy to avoid being disqualified for being a creditor. In re 7677 E. Berry Ave. Assoc., LP, 419 B.R. 833 (Bankr. D. Col. 2009). However, this did not work when payment for the claim was contingent on what the purchasing creditor received in the bankruptcy. In re Fish & Fischer, Inc., 2010 WL 5256992 (Bankr. S.D.Miss. 2010).In re Universal Building Products, 2010 WL 4642046 (Bankr. D. Del. 2010) illustrates that state disciplinary rules apply when soliciting a committee. In that case, prospective committee counsel asked a Chinese speaking party they had a prior relationship with if he would contact Chinese speaking creditors. He was offered the position of translator for the committee. Model Rule 7.3 restricts direct solicitation of prospective clients and Delaware had adopted a version of this rule. Based on the violation of Rule 7.3, counsel was disqualified from representing the committee. Consumer IssuesUntangling the Mortgage Morass: Rules, Rogues and RepairsThis panel handled the sexy topic of the new Bankruptcy Rules applicable to mortgage claims which takes effect in December 2011. The panel did a good job of laying out the history of the rules and issues likely to arise. The rules had their genesis with Jones v. Wells Fargo Bank, 366 B.R. 584 (Bankr. E.D. La. 2007) and Padilla v. GMAC Mortgage, 389 B.R. 409 (Bankr. E.D. Pa. 2007). These cases raised the specter of a debtor successfully completing a chapter 13 plan and then immediately being posted for foreclosure based on undisclosed charges that accrued during the bankruptcy proceeding.Under the new rules, there are three changes which will take effect in December. First, mortgage claims must include an attachment listing delinquent amounts as of the petition date, including any charges and the date they were incurred. Among other things, this will require disclosure of the amount of escrow shortage as of the petition date. Fed.R.Bankr .P. 3001(c)(2), Official Form 10, Attachment A. Next, mortgage creditors must give notice of a change in payment amount 21 days before it takes effect. Fed.R.Bankr. 3002.1(b), Official Form 10, Supplement 1. Additionally, mortgage creditors must give notice of post-petition fees and costs incurred every 180 days. Fed.R.Bankr.P. 3002.1(c),(d). Finally, at the conclusion of a chapter 13 case, the trustee or debtor must give a Notice of Final Cure Payment. Fed.R.Bankr.P. 3002.1(f).The panel identified several interesting issues under these rules. One issue is that the form does not take a position on how to calculate the escrow shortage. The Third and Fifth Circuits have taken the position that any amount charged to the debtor for escrow pre-petition is escrow shortage, In re Rodriguez, 629 F.3d 136 (3rd Cir. 2010) and In re Campbell, 545 F.3d 348 (5th Cir. 2008), while one major mortgage servicer has taken the position that only amounts advanced out of pocket prior to the petition date constitute escrow shortage. As pointed out by Judge Eugene Wedoff (Bankr. N.D. Ill.), this makes a big difference. Because the escrow shortage is part of the pre-petition claim, it can be paid out over the life of the plan. However, if amounts accrued but unpaid are not considered pre-petition claims, then they are included in the post-petition escrow amount and must be paid within one year. John Rao stressed that it was important to avoid doublecounting by including the escrow shortage in the proof of claim and then seeking to recoup it post-petition as part of the ongoing mortgage payment. A petition for cert has been filed in the Rodriguez case and the Supreme Court has requested that the Solicitor General comment, which is a sign that the court may be considering granting the petition. The new attachment to proof of claim must be signed. Faiq Mihlar suggested that before attorneys sign the attachment that they read the Third Circuit’s opinion in In re Taylor, 2011 U.S. App. LEXIS 17651 (3rd Cir. 2011) in which an attorney was sanctioned for signing claims without reading them or knowing whether they were accurate. He said that the best practice was to have the attorney prepare the attachment and have the client review and sign it. He said that while he enjoyed appearing in court, he preferred not to do so as a witness.John Rao pointed out that the 21 day period for providing the notice of change in payment is the same period provided under RESPA. He said that the new form is merely a cover sheet and that the mortgage servicer may simply attach its regular notice of payment terms.When giving notice of charges incurred during the case, it is only necessary to give notice of charges that will be sought to be charged to the borrower. It is important that charges only be listed once. For example, if a lender incurs attorney’s fees in one six month period and they are not paid, it should only report new attorney’s fees incurred subsequently and should not report the prior fees again.If the creditor does not give timely notice of the fees incurred, it is barred from collecting them later. The failure to request fees could be the basis for judicial estoppel in a subsequent state court proceeding.Mark Redmiles from the U.S. Trustee’s office explained the procedure for giving notice of completed cure payment. Within 30 days after completion of payments, the trustee or debtor must give notice that payments have been completed. The mortgage creditor has 21 days to respond. If the creditor does not respond, then the loan is deemed to be current.Faiq Mihlar argued that the 21 day period was too short and that lenders would not have time to receive the document and act on it. This raised the possibility that conniving debtors could simply fail to make their last several payments before completion of the plan knowing that the lender would probably fail to respond to the Notice of Final Cure Payment. Judge Wedoff suggested that the creditor could request an extension of time under Rule 9006 if it could not respond within the deadline. He also suggested raising the time limit with the rules committee.So You Think Consumer Bankruptcy Is Easy? Challenges of a Complex Code This panel discussed several difficult consumer issues. However, the best comment did not relate to the specific topics. Judge Shelley Chapman (Bankr. S.D. N.Y.) acknowledged that prior to taking the bench eighteen months ago, she had only practiced chapter 11 law. She described the chapter 13 docket as “the hardest thing I have done so far.” She said that it was “a daunting task” facing a room full of consumer bankruptcy lawyers. Judge Chapman’s humility and candor were refreshing.This illustrates how the selection of bankruptcy judges has changed. In the 1980s, the circuits often appointed judges with no prior bankruptcy experience. Today, the circuits tend to favor chapter 11 practitioners. While this is a marked improvement, it still leaves a gap in the judge’s experience. The panel had a lively discussion on whether a wholly unsecured junior lien could be stripped in a chapter 20 case (a chapter 7 followed by a chapter 13). In a chapter 20 case, the debtor is not entitled to a discharge in the chapter 13 case. Can he strip off the junior lien based on its lack of security?Judge Chapman opined that, perhaps it was her chapter 11 bias, but that “allowed secured claim” meant that a claim was secured within the meaning of Section 506(a),that secured claim equates to economic interest. She stated that she requires the second lienholder to grant a release and give it to the chapter 13 trustee to hold in escrow until completion of payments.John Clement, the debtor’s lawyer on the panel, argued against lienstripping. He argued that secured claim referred to the state law security interest. He cited the Supreme Court decisions in Dewsnup v. Timm, 112 S.Ct. 773 (1992) and Nobelman v. American Savings Bank, 113 S.Ct. 2106 (1993) as evidence that the Supreme Court does not look favorably upon the economic definition of secured claim. John Gustafson, a chapter 13 trustee, warned that practitioners should be careful how far they push the issue. While most circuits currently allow lienstripping in chapter 20 cases, the Supreme Court might not be so favorable.John Gustafson discussed the problem of social security income in chapter 13 cases. Under the means test, social security income is not counted. However, what about the debtor who has a high income and is also receiving social security? Should this debtor be allowed to pay less? In chapter 7, the problem is addressed by the distinction between Section 707(b)(2) and 707(b)(3). While Section 707(b)(2) applies the means test, Section 707(b)(3) examines the totality of the circumstances in cases in which the means test is satisfied. Perhaps the good faith requirement of Section 1325(a)(4) should fulfill a similar purpose.Frederick Clement noted that BAPCPA was intended to take discretion away from bankruptcy judges while the totality of the circumstances approach to good faith would grant discretion. Mr. Gustafson countered that “sure it’s subjective but so is Section 707(b)(3).” He likened it to putting a bandaid over our glasses and not looking at the social security income. He also suggested that if judges couldn’t consider extra social security income alone, perhaps they could consider it along with other factors, such as the debtor wanting to keep a Harley (apparently that’s a bad thing).Frederick Clement talked about the tension between the binding nature of a plan under Section 1327(a) and the ability to modify a plan under Section 1329(a). If the debtor confirms a plan and later decides that he doesn’t want to pay as much, “is there some threshold other than I want to” when proposing a modification? If not, how is the plan binding? He gave the example of In re Noble, in which the debtor proposed to retain a vehicle and later sought to surrender it. The Court held that the Debtor was bound. John Gustafson asked whether creative lawyers could draft around such future contingencies. He suggested that a debtor could offer to make extra payments up front in return for the option to surrender the vehicle later in the plan.Frederick Clement pointed out that in Ransom v. FIA Card Services, 131 S.Ct. 716 (2011)and Hamilton v. Lanning, 130 S.Ct. 2464 (2010), the Supreme Court appeared to assume that debtors could modify their plans at will. He said “If that is the case, how are you bound at all?” He suggested that a plan could only be modified for substantial and unanticipated circumstances and only to address the specific changes authorized in Section 1329, such changing the payment amount or length of the plan. He noted that while you could change the term of the plan, you could not change the “applicable commitment period” so that an above median debtor could not shorten a plan to less than 60 months.

The PACER and CM/ECF programs have revolutionized the practice of bankruptcy law. Thanks to PACER, I can download a document filed in almost any district in the country for the low price of $.08 per page (soon to go up to $.10 but still cheap). Thanks to CM/ECF, I can meet a deadline to file a pleading from home at 11:59 p.m. The purpose of PACER and CM/ECF is to offer greater public access to government records. According to the Administrative Office of the U.S. Courts:The Case Management/Electronic Case Filing (CM/ECF) system is the Federal Judiciary's comprehensive case management system for all bankruptcy, district and appellate courts. CM/ECF allows courts to accept filings and provide access to filed documents over the Internet. CM/ECF keeps out-of-pocket expenses low, gives concurrent access to case files by multiple parties, and offers expanded search and reporting capabilities. The system also offers the ability to: immediately update dockets and make them available to users, file pleadings electronically with the court, and download documents and print them directly from the court system.The Dark SideWhile these electronic access programs make the system more transparent, democratic and user-friendly there is also a dark side. Mandatory e-filing can be burdensome on the casual filer, such as a state court practitioner who rarely ventures into bankruptcy court. Many courts have adopted procedures to assist pro se parties and occasional filers. Some examples include allowing paper filing with court permission, allowing documents to be submitted on disk or be scanned at the clerk's office and allowing proofs of claim to be filed without a CM/ECF password and login. A Scary OrderHowever, in an extreme case, a court in Pennsylvania has charged an attorney a $150 "processing fee and sanction" for filing a paper document. You can see an image of the order below (I apologize for the poor copy). In pertinent part, the order states:(T)he Court has determined that a processing fee and sanction of $150.00 shall be assessed in the event of any failure to comply with the rules concerning electronic filing. The processing fee and sanction shall be paid each time an attorney files a document by means other than the Court's CM/ECF system. The attorney named below has filed a document on paper, disk or via scanning at the Clerk's office in violation of the Court's long standing procedures in this regard, therefore,It is hereby ORDERED, ADJUDGED and DECREED that on or before October 7, 2011, Attorney (name redacted) shall pay a $150 processing fee and sanction for failure to electronically file a document with this Court by use of its CM/ECF system. This fee must be paid from the funds of the attorney or his law firm. counsel shall not charge to or collect the $150.00 from the client as a fee, cost, expense. or other charge in this case.Why It's BadThis order concerns me for (at least) three reasons. The first is a matter of due process. I have read the local rules of the Bankruptcy Court for the Western District of Pennsylvania. There is no provision for a processing fee or sanction for attempting to file a document other than electronically. Indeed, the Court's procedure manual explicitly states that submitting a document on disk or scanning it at the clerk's office is allowed. Because the order does not distinguish between filing on paper, disk or by scanning at the clerk's office, the order punishes behavior that is expressly allowed by the court's procedures.Second, I have trouble finding a justification for the order. It is my understanding that individual judges do not have the authority to set fees. While the judicial conference of a circuit may authorize certain miscellaneous fees, I don't think individual judges have this power. I also don't believe that this qualifies as sanctionable conduct. It doesn't fall within Rule 9011 and it is my understanding that the court's inherent authority to sanction is limited to cases of bad faith. Finally, I have a philosophical objection to the order. One of the stated purposes for the Bankruptcy Code was to break up the incestuous "bankruptcy rings" where local attorneys, trustees and judges had an overly cozy relationship to the exclusion of outsiders. The E-Government Act of 2002 was intended to make government records more accessible. This order violates both of these purposes. It brings the judicial power of the United States down on an attorney who made a procedural mistake. While the amount of the sanction is minimal, it is still a court-imposed sanction which must be reported in some cases. A careful review of the Court's rules and procedures would not have disclosed the peril (although the attorney would have seen that something called e-filing was mandatory). Besides the shock of receiving a judicial reprimand by return mail, the order also sends the message that outsiders practice here at their peril. Admittedly, bankruptcy is a technical and difficult area of the law. Through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress made it much more challenging for the average practitioner to wander into bankruptcy court representing a consumer debtor. Nonetheless, the courts, as public servants, should use their power to make the courts more accessible rather than less. This order is offensive.