 You're watching FJTN, the Federal Judicial Television Network, a federal judicial center program, bankruptcy law update. Now from our studios in Washington, D.C. Here is our moderator, federal bankruptcy judge Eugene Weidoff of the Northern District of Illinois. Hello, and welcome to the fourth edition of the Federal Judicial Television Network's bankruptcy law update series. As always, we've picked topics that we think will be interesting and useful to you, and we've invited three of the nation's leading bankruptcy professionals to discuss them. Karen Cordry of the National Association of Attorneys General will discuss the question of state sovereign immunity in bankruptcy. Judge Keith London of the Middle District of Tennessee will talk about the treatment of secured claims in Chapter 13. And Judge Peggy Mahoney, Chief Bankruptcy Judge of the Southern District of Alabama, will look at new value after 203 North LaSalle. Thank you all for being here. Peggy, let's start with you. I'm here to talk about the Bank of America versus 203 North LaSalle case and where that puts us now. You all probably remember that that was a case from the Supreme Court in 1999 that said, if a new value corollary to the absolute priority rule exists under the bankruptcy code, it is not satisfied when an equity or interest holder receives the exclusive opportunity to purchase the debtor's equity in a plan. Since the enactment of the bankruptcy code, bankruptcy courts have held that the owners of the equity in a Chapter 11 debtor could keep or repurchase, depends upon how you look at that, that equity in the reorganized debtor, if the old equity holders contributed cash that was new, substantial, necessary, was real money or money's worth, and reasonably equivalent to the equity that was being purchased. The code section we're talking about is Section 1129B2B2. It says that the holder of an unsecured claim must be paid in full or the holder of any junior claim or interest cannot receive or retain under the plan on account of such junior claim or interest any property. The Supreme Court held that on account of language means because of. This reading recognizes the causal relationship between holding the equity before and getting the new equity, and that's what activates the absolute priority rule. The Supreme Court said if old equity can obtain the new equity, it must do so at a real market price. It used the term top dollar, and that's why we're here today. How do courts determine if old equity is paying top dollar? Well, the Supreme Court, of course, didn't say how we determined that, and they did say what didn't work. And to quote it, it says plans providing junior interest holders with exclusive opportunities free from competition and without benefit of market valuation fail within the prohibition of 1129B2B2. So post-LaSalle, where does that leave us? There have only been a few cases so far on the issue at all, and they're not really on the expected topics as far as I was concerned. A case out of Delaware in the year 2000 in the materials in Ray Zenith Electronics said LaSalle didn't apply to it because the only objector was an equity holder, a minority equity holder, and Judge Walrus said, this is simple, LaSalle only talked about creditors making such an objection, not equity holders. I'm not going to deal with LaSalle. New Midland Plaza Associates, which was a case out of the Southern District of Florida, Judge Hyman, said a fully secured creditor can't raise an absolute priority objection. I think that's pretty clear, but they tried to and said that that should apply to them. They should get to file a competing plan. He said, no, fully secured doesn't apply to you. And the other group of cases has been on whose old equity, in essence. If you're an insider or look like an insider, is that enough to tag you with the old equity name and prevent you under LaSalle from being a bidder? Well, the Zenith case, the same case I talked about, in that case, the majority, the controlling shareholder was also a substantial creditor. And Judge Walrus said that because that shareholder who was under the plan going to get the equity was also a substantial creditor, that LaSalle didn't apply because she said that getting the equity, that that shareholder was getting it as a creditor. And that's the way she viewed it. I think that one's a little hard to take, but the only thing I can glean from that case is the creditor was very substantial, like $337 million in loans made pre-petition to the debtor. It wasn't that like the creditor slash shareholder had gerrymandered itself into this position. But were there other creditors with the same priority who weren't getting paid? Shareholders were wiped out, and that's who was objecting, as well as bondholders who were senior to the shareholders, but junior to this creditor, who was a pre-petition loan creditor. That case contrasts with another decision she made later in 2000, Global Ocean Carriers, where she said that the daughter of the current controlling shareholder was an insider, and that was a close enough relationship that she could not be the person who would end up with the new equity and the entity, and it did violate LaSalle. In that case, there wasn't this very strong participation as a creditor pre-petition, which I think certainly was a difference in the two cases, may have been the factor. And lastly, there's another case in the materials, Waters Edge Limited Partnership from Massachusetts, which said that basically the purchaser of the new equity was the son-in-law of the controlling shareholder, or the partner, controlling partner, and the judge, in this case it was a district judge supporting the bankruptcy judge, Judge Queenen, said that that was okay, that just because you're an insider, it did not make a difference. It says, LaSalle talked about if you were the old equity, the son-in-law was not old equity, enough said. So those cases, I think it's going to be fact generated a lot of times, and really as that first case, the Zenith case shows, I think it may depend a lot on how it looks when you're holding the trial, the confirmation hearing, quite frankly, and what your sense is of the folks. Now Peggy, are all these cases coming up in the context of the situation that existed in 203 North LaSalle? That is to say, where you've got security interests covering all the debtor's assets, the debtor is proposing to pay off those secured claims at the value that the court's established for the collateral, but the debtor or their equity holders want to hold on to ownership. They're going to pay the secured claim out of cash flow, hold on to ownership. That's what's going on in all these cases? Exactly, and there wasn't an opening up of the process. It was an entity that was selected in the plan to take over the equity interest, either old equity or someone they designated, such as a daughter, a son-in-law, et cetera. The concern that the Supreme Court had would really be triggered, wouldn't it, if the old equity can appoint anybody? That's what Judge Walras said in the Global Ocean case. Just having the opportunity to select the new equity holder is a property interest that is sufficient to trigger LaSalle as the way she would put it. Why there's a difference between that case with the daughter purchasing and the majority shareholder, who's also a creditor, it is a little hard to see. But as I said, I think the facts dictated the difference. Yeah, Carol, if we talk about property, the state has any interest that the debtor owns. If you were starting at the beginning of the case and asking, was that a property interest? I'm sure the courts would generally say it was. I was just saying to you all before we started here that the cases where I see this coming up though are not ones that the states are involved in, are not ones where there's a security interest. I've been in an asbestos case where the old owner, the parent company, wanted to keep ownership of the company and the various asbestos creditors didn't want to turn the company over. I've been in a number of consumer protection cases where those claims are the major claims in the case and the owner wants to keep doing its business, hopefully lawfully, afterwards. We're not at all sure they can operate their businesses lawfully and make a profit. So we've seen this coming up in the totally unsecured context. I'm not sure that it really makes any difference in terms of the concern about how do you determine when the old owner should be able to keep control of the company when it can't pay the debts in full. Well, I mean, that's the whole issue. There is a crammed down process and that is allowed in certain contexts. As to the unsecured creditors, I'm assuming you're objecting in those cases and saying, this is bad faith. The debtor shouldn't be in operation because of X, Y, or Z. There are a lot of ways to prevent confirmation even if you meet the confirmation standards. But one of the, like going back to the asbestos case, which was a big hard fought one, there was one where we had distinct disputes about the value of the company. Now, the court can either resolve that, but the other way is the creditors keep the company. And if we say we think it's worth a lot more. In the unsecured context, Karen, that you're talking about, I think the problem really goes away because you can have an auction. The difficulty with the new value cases is that you've already established a value for all the debtor's assets. And that's going to be paid to the secured creditors. And now we're talking about what's left. Well, theoretically, there isn't anything left because the entire set of assets has already been taken care of by paying the secured creditor. And so we're having an auction, not for the value of the assets, but for the value of owning the business separate from the assets. It's a ransom, all of you. That's right. Exactly. And it almost requires a non-economic element for the old equity to want to put in anything. In 203 North Licell, they had recaptured tax liability that they wanted to avoid. So they were willing to pay extra, more than the assets were worth. You can imagine a situation where it's a family business, and the old equity really wants to keep that business and the family so they're willing to pay more than what the assets are worth. But if you don't have secured creditors, you just put the assets up for auction. And if the old equity is willing to pay more than what the assets are worth, that'll come out in the auction process. Right. But one of the problems becomes is that the creditors are not really in a position to get, I think you refer to this as roundhouse. I didn't know that term before, but they've got all this debt. What we're really saying to them is you can't join this auction unless you can go out and incur as much debt as you already have owed to you, bid that, or bid some portion of that, and then turn around and pay it back to yourself, which seems to be a kind of convoluted process, and one which is very difficult for anyone to do. I mean, how would anybody go out and convince a bank loan me a bunch of money so I can buy a bankrupt company and then just turn around and give it all back to myself? As a practical matter, it becomes, I think, almost an impossible task to say, oh, just join the auction. I agree with you, and it's a problem for a debtor who's the one that might want to arguably benefit from doing that by having a claim, like is the case in many of these, where they have a pre-petition, legitimate loan or other unsecured claims secured or unsecured, that in a bidding situation, a secured creditor or the unsecured creditors, if the others wanted to bid, would have to satisfy. How would an unsecured creditor body put together a credit bid in a new value, LaSalle situation? How would they do it? It's an arithmetical problem. What you could do would be to figure out what, well, yeah, that's a creditors committee, but what you'd have to do is you'd have the group of creditors that wanted to bid, and you would look at a total number that they bid in, but then reduce the cash that they had to put to satisfy that bid by the money that they would get back through the case. Now, there are problems with that. They got to pay all the lawyers. Well, there's that. There's another problem. You don't know necessarily what the total amount of the claims are going to be. There might be a lot of claim objections that haven't been resolved, and so how can you tell what portion they're really going to get big? It's very, very difficult. It works in theory more to cause negotiations, quite frankly, than anything. I agree with that, because our perspective is in this particular case, this Asbestos case, for instance, we saw this plan going forward with evaluation on the company that we thought was just outrageous. We tried to get exclusivity terminated. We couldn't. That's one of the pieces of going with a new value plan. That's a help, but even there, even with exclusivity terminated, even in the case we'd been involved in for four or five years, we found ourselves at a terrible disadvantage trying to put a quick plan and auction together. But even there, the right to compete was a major piece of it. I don't think the questions really do the creditors get to keep it unless the debtor comes up with a hundred cents. The real question is, do they push the debtor to a point where they're willing to say the bird in the hand of what the debtor is giving them is easily worth those ten birds in the bush that they're never going to collect on? One thing that really strikes me as strange in this new value context is that the Supreme Court has told us we need market valuations, we need auctions to test value, but the whole predicate for a new value case is the court's determination of what the assets are worth so that those, that value can be paid through a plan. And then you have the auction to determine this ephemeral equity value that's left separate from the value of the assets. You can't have 203 without a predicate judicial determination of asset value. That's right. And the case impugned somewhat that whole valuation process by courts and felt and really pushed the law in economics sort of theories about market being where things should be tested. But you're right, the first piece of that is the court making a determination. We've only got a couple minutes left but I wanted to ask you Peggy, what do you see as the outcome between lifting exclusivity and having auctions? How do they interrelate? Will either work? If the court gets two plans, one of which proposes an auction and one of which doesn't, does the court have to take the one that proposes the auction? How does that be able to get resolved? We don't know really. Some courts I think and I think you can make a good argument that simply terminating exclusivity is enough and if you get competing plans then there is a case that I found Great Bay Hotel and Casino out of New Jersey which really has a lengthy discussion of two competing plans that came about when exclusivity was terminated and actually the debtor ultimately kind of dropped out of the process and there were two competing plans where the court went through an analysis of how you analyze and come to a conclusion as to which is the better plan and that is again a process where bankruptcy judges own value determinations are really going to be important and determinations about what's important to the business, what's important to the creditors. In that case it was a Casino, Casino licensing was it was a big issue, one entity was already licensed, one wasn't. There are a host of problems with that. Terminating exclusivity may be enough. Can you force a creditor to bid in the debtor's plan you know context or can can they come up with another plan? That isn't known. They're just all we have really are questions. As I said the cases that have come down have been on kind of side issues not the big issues we have to deal with. Has anybody else had this experience? I personally don't like exclusivity much so that's my bias but going back through all the real estate cases that we had through the 80s and into the into the 90s every time I let exclusivity expire in a case that had a new value issue buried in it because the existing owners wanted to keep it I got a consensual plan. Well I think it seems real pressure toward getting the residents agreements in potential new value battles. I really don't extend exclusivity anymore at all. I think you're right that that it usually results in in a lot of talking. If they haven't been. Is this good? Is it good Karen? I mean I think so. What do you get when I when when when Peg drops exclusivity you're the dog that caught the car if you step in with a plan what are you going to do? Well as a state we generally the only times where we're sort of really in a position where we're trying to looking at the whole substances thing is where it's it's a consumer protection case and often in these ones where by far the biggest creditor in the case we basically said their entire operation isn't going to work. They've got to talk to us anyway about how they're going to operate in the future or they're not going to go back in business so in those ones you know we've kind of held on and said well sovereign immunity or no we we have to be in this case because we have to deal with this debtor and this problem and resolve how these people are going to operate in the future. You know what I think is coming is kind of a consensus among us that lifting exclusivity is an excellent way of dealing with the 203 North LaSalle problem. What happens is that there is negotiation if there weren't negotiation you'd wind up with competing plans and the court would have to pick one. Now my guess is that if neither plan called for an auction you'd have to make a valuation as Peggy was saying which one gives more to the unsecured creditors. If one called for an auction and the other didn't you'd probably go with the one that called for the auction. If they both called for an auction probably go with the one that had the most open auction proceedings but you're likely never to get to that point because once it's an open game the parties will talk to one another and they will reach a consensus. I don't I don't say two things. One I think in the bankruptcy review commission there was a discussion and the idea there was to put the lifting of it after a vote and I think that's just totally the wrong timing. It's far too easy to get the vote in your favor if you don't know that there's going to be a competing plan coming. And second I'm not sure that you really have to have the court pick. I mean I've seen ones where there's been two things on the ballot. Are you in favor of plan A or are you in favor of plan B? Those always settle. But yeah that's well as soon as you threaten to let both plans go out for a vote you. Although this Great Bay case it didn't and the vote was inconclusive. Both plans creditors basically from different classes approved different plans it was hard to say which was the better the better one but some I've had cases where both plans were approved by the the creditor body. Does that mean they get paid twice? We're going to have to move on now and actually we have solved all the problems regarding new values so I want to thank Peggy and Karen you're next. So what do you have to tell us about state sever immunity today? Well what I have to tell you is I'd like to start with one of my favorite movies which is all that jazz and if you recall in that a lot of it had to do with this comedy routine where he was talking about someone when they're confronted with a terminal illness diagnosis and their reaction it goes through denial and depression and anger and bargaining and acceptance and I tend to think that's sort of been the way most people have reacted to the the possibility of seminal and its impact on on bankruptcy. A lot of the first four I'm not sure how many people have gotten to the fifth one I'm not sure most people ever want to get to the fifth one. Which say which one. That's acceptance. That's acceptance yes yes. Well as a as a knee jerk 1960s era liberal you know I found it a little odd myself sometimes to be where I'm at here but you know I actually did go back about two three years ago and sit down and read the federalist paper through cover to cover and you know what I learned is that they really a fundamental part of what they're talking about is putting states in the position of being a strong counterweight to the federal government just as they have the checks and balances between the branches of government they wanted checks and balances between the levels of government and sovereign immunity was seen as part of that process that just as judges need judicial immunity to be strong independent. It just took 200 years for us to discover this in the in the federalist. No actually I think it's always been there and I think in fact there's a long history of of of supreme court cases that say that and I'm going to say at the end but I'll say it right now I think one of the reasons why this is coming up now as opposed to 200 years ago is because this wasn't a fight the court the the congress I should say ever used to try to pick with the states. You go back and you look at the social legislation in the 30s which is really the first time congress really started getting into doing anything social kind of legislation really broad legislation not only did it not try to cover the states it generally explicitly excluded the states Social Security Act didn't use to cover state employees National Labor Relations Act still doesn't it wasn't until the 50s and 60s that they started writing sort of unclear you know laws that didn't clearly say we were covering them or we were clearly excluding them it just would say something like it covers all employers and then you had the series of cases about clear statement so this really is only a fight that started getting picked in the 70s and 80s where you started trying to decide well we just ought to cover everybody so whether it's a good idea or a bad idea the fact is I think the constitution assumed that sovereign immunity was necessary to keep these two governments and that you were going to have the ability of the people to go to one government or the other government and essentially play them off against each other as a way of preserving the rights of the people that's the fundamental concept that's out there and where they're in particular cases it has some impact a lot of immunities and privileges have impacts but it is part of a overall constitutional structure that's there I just point you to the dispute right now over do you settle with Microsoft the federal says yes some of the states say no you know you may think it's better to have the settlement in which case the federal's right you may think it's too weak in which case you think the states are right by having that real force play out in front of the court hopefully you're going to get the best possible resolution of that case I mean I think that's completely consistent with what the sort of thought processes were there but it is playing out in one court not not in state court and in and in federal court separately which is some of my issue with how sovereign immunity works and you've also got to answer the argument that bankruptcy was an exception to everything you've said from the very beginning well in the first place you have to start with the fact that they didn't ever have a federal bankruptcy system except for a couple of years for the first hundred years of our existence but they wanted one from the very beginning if you get all of those folks out of prisons well actually what you find is that they wanted a uniform bankruptcy law so that simply there was not a difference between did Pennsylvania let this guy out for his Pennsylvania debts but New Jersey still wanted him in jail for his New Jersey debts it wasn't particularly they necessarily wanted him out of business they just wanted to be sure they had a uniform standard that in fact is the the only discussion about bankruptcy apparently in the constitution the debates was in the context of the full faith and credit clause and if you go to the federalist papers it merits exactly one sentence which says it'll be so helpful for creditors being able to collect money and avoiding frauds who could be against a bankruptcy clause so to the extent that people are saying this is such a special provision and it was so important I have a little trouble finding that importance in the history up at this point so for better or for worse whatever the legal history whatever the theories are we are working from Seminole at the moment and its analysis and actually I think the Alden versus Maine case which came out in 1999 probably has the best single putting everything together in one place all the rationale all the history you accept it you don't accept it for the moment it is the law and working from there how does this mean that Seminole plays out in bankruptcy I think the clear vast majority consensus is a basic principle Seminole does apply the 11th amendment does apply in bankruptcy there are these lingering 14th amendment arguments there's the Blymeister line of analysis I've discussed it in the paper I don't think it has merit I think it is an argument that put a different way it may have merit when addressed to the Supreme Court I don't think though the issue is open in the way that the Blymeister Court thinks this is still an open issue what is the Blymeister argument that the Blymeister argument basically goes back to the Federalist Papers and says that Hamilton was talking about sovereignty he was talking about ways you could lose sovereignty and then it goes back to another Federalist Paper article that talks about various places in which states yield their sovereignty and it talks about naturalization and it says well naturalization was uniform and bankruptcy is uniform and therefore this must mean that it's the same as naturalization and that means you've waived sovereignty there's more to it but that's kind of the shorthand version of it I think that the shortest answer to the problem there is what he is talking about is sovereignty in the sense of sovereign power to legislate on subjects if you look at that the earlier article that he refers back that Hamilton refers back to it's an article about preemption in the Supremacy Clause it's where can both states and the federal government legislate where can only one legislate to the exclusion of the other and naturalization is put as one where there's only going to be one federal rule I don't think you can have a state rule law as to how the federal government naturalizes citizens it doesn't seem to me to be talking at all about sovereign immunity you certainly aren't going to have states being sued over the application of the federal law of naturalization so I think it's really distinguishing or failing to distinguish two concepts sovereign immunity from sovereignty over legislative powers and in that sense then we're right back to the fight we've had for the last 40 years that's what I say it's a perfectly valid fight to have I just don't think it's an open one at the moment for lower courts which is does the scope of legislative power does the fact that the federal government may have plenary power over a particular topic under article one does that say anything about judicial power and sovereign immunity I think Seminole said the answer to that is as strongly and as emphatically as it could again I'm not going to fight here at the moment as to whether you want to fight the merits of that but I think that question has been answered at the moment for the lower courts so assuming it applies and certainly it thought it did it refers to both the majority and the dissent refers to bankruptcy the majority saying it's going to apply and we don't have a problem with that the dissent saying it's going to apply and we do have a problem with that but they didn't have any doubt in their mind that their opinion was going to apply to bankruptcy I think it really works down to two sort of fundamental issues here that they take in a myriad of problems but most of the issues fall into these two fundamental questions one are the basic provisions of the code things like the automatic stay and the discharge provisions binding on the state and if so how can you enforce them and two what about sections 106B and 106C I think Seminole wipes out 106A I think we're pretty clear on that 106B and C what is the scope of a waiver or however you want to say what happens in response to the fact that the state filed a claim so in fact these two questions intersect because a lot of courts start with the concept of 106B and C which spells out what is the consequence of filing a claim but indicate that in their view there's a much broader waiver that comes from filing a claim that the language in 106B and C doesn't define the limit of what is the effect of filing a claim personally I think that's a wrong way of interpreting but I'll start with that and we'll work back and I'll give you an idea of why first off if you read section 106B and C they're actually fairly limited provisions all they say is that if the government files a proof of claim and now it does have to have filed it we've gotten rid of the question about whether not just having a proof of claim somehow was a waiver of immunity if it files a proof of claim that certain claims can be filed against it well and I assume that means claims in the bankruptcy sense which means rights to payment they have to be property they have to be property of the estate and in 106B they have to arise out of the same transaction or occurrence so those are an expansion on the common law of immunity I put a lot of cases in the materials that don't seem to get cited in bankruptcy but that are clearly cases out there there's a couple of three supreme court cases and numerous lower court cases dealing with this question in the context of outside of bankruptcy and actually one of the three supreme court cases was a bankruptcy case and the second one was dealing with a decedent estate so you still had much the same kind of a context of competing claims to the same pool of assets and you put them all together and they basically say that the standard is only claims arising out of the same transaction or occurrence but also only in the nature of recruitment i.e. the defensive recruitment and why because when you file a claim you have to let the person defend themselves and a recruitment is a defense I mean it makes a pretty logical scenario there that to the extent that a claim is a defense and recruitment falls in that category then you can bring it but once you finish defending i.e. defeating the state's claim you're done anything beyond there is your own individual claim so that's I think there's maybe a little wriggle room in the cases but very little I think the most logical clear fairly clear consensus of the reading of those cases is that absent any statutory attempt to change it it's the mandatory counterclaims in the nature of recruitment no affirmative recovery and clearly 106b and c expand on that okay but the the question is apart from affirmative recovery right denying the state's claim and then requiring the state to pay more money into the estate the question is if the state wants to get a share of the bankruptcy estate why isn't it appropriate for any claim to be asserted against the state by way of set off to reduce the amount that the state can get so if the state owes the bankrupt anything for any reason and it's not going to pay that why shouldn't the amount that it's not paying be deducted from the amount that it gets on its proof of claim you can make some policy arguments about it probably the legal argument is because the supreme court has already said it doesn't work that way because in a bankruptcy case US Fidelity and Guarantee was a bankruptcy case and yes that's what they said when you file a claim it really goes back when they say that Article 3 only covers suits that the state consents to bring that's what they mean true consent not deemed consent not waived not forced not constructive not if you do this you auto agree to do that and I think that's what the college savings case says as well now the first circuit just came out with a case called arcebo it's actually a re-hearing of a previous decision and they concluded that essentially what you're saying that well it it once you do this in fact they went they went a much broader position they started with the notion that we think we understand that the rule is that when you file a claim you wave immunity with respect to anything sort of related to that I think that's a and they base that basically on extrapolating from Gardner which said that when you file a claim you wave immunity with respect to the adjudication of that claim now in context though if you read that first off there were no counterclaims whatsoever in Gardner it was a pure matter of defenses and it was a question of could they raise defenses that had already been litigated and the answer was no but not as a jurisdictional issue it was a full faith a full faith in credit comedy race to decod any one of those sort of things but Gardner talks about allowance proof distribution rights from the estate none of those have to do with discharge for instance and there weren't any counterclaims in Gardner so just simply had no occasion to discuss this rule but those other cases fidelity and guarantee and us versus Shaw which were 1940 cases the Potawatomi Indian tribe case which is the 1991 case and reiterates the same rule and just case upon case in other circuits outside of bankruptcy say the rule is extremely clear and they're not just cases where you're going you know straight against the other ones or ones with competing claims to a fund as I say I mean as I say there's might be a small amount of room you could try to make an argument that Supreme Court has not absolutely determine the question of how related the claim has to be and cut it off at the affirmative but I think the question of affirmative recovery I think there's absolutely no question under the existing case law that that's going to be barred let's let's push that issue a little bit further let's suppose that there is a request to affirmatively recover from the state maybe even in the context of a litigated proof of claim and the state engages in pretrial procedures regarding that request for affirmative recovery maybe even begins the trial and then sees that things are going badly it's likely to lose and assert sovereign unity at that point do you see any possibility for a waiver being determined then well if the question is badly well the answer is you can't you can't put that kind of judgment in the fidelity and guarantee case said it was avoid judgment not only avoid but it was subject to collateral attack but sort of just a somewhat more broader I start my case I decide I don't like it I defend a claim brought against me forget the counter whatever the real question of asking is when can you raise this waiver issue and is there a point where you have gone too far into the case the answer is partially given by the supreme court in a case called Ford Motor Company I think it's a 1943 case but it's never been challenged what it basically says is you can raise it at any time that's usually the way it's just read as saying even and in Ford sovereign immunity was not raised until the supreme court level so clearly that the notion that you don't raise it before trial and you're out of luck the procedural sort of timing question Ford clearly says there's never going to be a time when you can't raise it the other part of Ford which is less clearly recognized but the ninth circuit did start to pick up on this this question although I think it's application was a little lacking but it said what the other part of Ford is all right I've let you raise the question of waiver now you still have to prove that you didn't waive that the person who was doing whatever you did didn't have the authority to waive immunity Ford says something like if the person had the authority to do it then they certainly have waived in any normal sort of context so the bankruptcy judge is watching this program should raise it themselves and every adversary proceeding or every bankruptcy case involving the state where the state is a litigant in any way it may be that that you want is that the it may be that you want clarification from the state now you know claims I don't want to spend three days trying the state and then have the supreme court tell me I didn't have I certainly understand that where the state files a proof of claim I think you know it's it's a single determination you should be able to get a clear confirmation that is our position in our state that the attorney general's office has the the authority to file this proof of claims where it's much more Don't you have to ask for that too I mean I have to find out whether the litigant in front of me has authority from the person or thing within the government that has the authority to tell me that the state is in here and there is a waiver to some extent actually I mean there's somewhat of a distinction actually between ones where the state is coming in affirmatively and negatively and actually this is it helps if you in this analysis of counter claims and the same thing if you think about the fact that when I am filing something there's no I haven't triggered the 11th amendment at all because nothing is happening to me I'm nobody's doing anything against me there's no real question in terms of my filing a complaint of waiver of the 11th amendment the question becomes when something is filed against me or when an adversary action is started against me I didn't ask the question well I want to be sure that my after trial that my determination of non-dischargeability or dischargeability is going to stick I want to be sure and I've got an agency in here I've got maybe even not an agency I've got someone collecting the student loan on behalf of an agency on behalf of the state by contract how do I know whether what they tell me about sovereign immunity can be made to stick and Karen you've got 30 seconds to answer it may well be that you need to have the answer say I need it from the attorney general I may only need the answer once but the fact is there's lots of case law out there that low level people can't wave immunity if they don't actually have the authority to wave immunity it's a great situation it's a warning to all of us if there's a doubt get clear authorization yeah and I don't think you're gonna need it every single case because once the attorney general has said these people have the authority or they don't have the authority or this is what we wave to but you got it you got to tell us you got to take the net a minute to tell us all right if you're right about all of this then then how do we administer the bankruptcy system and involve the state all right first off I'll say this real quick automatic stay I view that as a statutory command it doesn't take any judicial involvement to trigger it it can be enforced through ex party young suits against state officials I think the discharge injunction gets a lot trickier because it clearly is not something that can come into play even in a chapter seven case without the court being having it stamped and without at least the opportunity to litigate so I'm not sure the fact that nobody does makes it any less of judicial action than a default judgment but you'll admit that it's an open question this is certainly an open question so far no one comes this way but I think there's a very serious question there and I think this is gonna be continue to be litigated I think courts could probably reduce the pressure greatly if they would take a middle course that I've sort of advocated in some articles which is don't let a debtor put anything in the plan or at least agree that anything in the plan that exceeds what the code actually says and allows a debtor to have can't bind the states simplest example those student loan cases where they wrote a discharge into the plan or they wrote into the plan that I don't know interest on this non-dischargeable debt clearly that violates the code but the court just said well judicial power means it binds okay well with that advice to bankruptcy judges for someone who's in a position to do good advice we're gonna turn to Keith thank you very much Karen and the issues involving secured claims in chapter 13 that you want to talk about you know this is like going out coming out of a theater in Manhattan after a great play out in the street this is not fair this is not fair we gotta get our heads redirected well it's one of the mill bankruptcy stuff huh the run of the mill stuff yeah this is the this is the everyday thing and it affects chapter 13 case yeah so many those of you who know Jean Weedoff who are watching this know that he thinks too much he does he thinks too much and what he wanted us to do in seven minutes was to discuss the the collision between a confirmed chapter 13 plan and a secured claim that's been filed essentially and you see that collision every day in your in your courts it may be with respect to value it may be with respect to the amount of the claim the treatment of the claim whether it gets interest whether it doesn't get interest what interest rate you see it in lots of different different ways and he also wants us to cover what you can do by way of modification after confirmation with respect to a secured claim that's dealt with in the plan and those two issues together they gather up about half of the reported cases in chapter 13 and and so we're we've gotta take just the skim off of the top you can handle it I'm gonna give you the simple answer I wanna be practical about it too though I think I think the simple answer to the first question and there really is a simple simple answer to it about the collision between the proof of claim process and the confirmation process in a chapter 13 case the simple answer is that we ought to avoid this problem we ought to just avoid it and by we it's the judiciary and the way the courts will run and it's the bar I mean it always is but we can and should avoid the question because the code itself gives us a mismanagement of the problem the code itself really does set up two processes it sets up a confirmation process and a claims allowance and litigation process and the two things run parallel but there's three pieces and because the three pieces are so culture bound by what happens around the country by what you do in your court or what you do in yours Karen's in a terrible position when she goes to play in this game representing a secure you ever have secured creditors well we got tax tax liens and the case yeah I guess tax liens are like secured creditors only worse and priority claims which are we get priority claims too but but but you get a judgment lead it's because there's three things involved the plan and what the plan says and then there's there's you have the plan sitting there and then and then you have the proof of claim itself and what it says and then you have the procedure in the district and those three things are so various around the country and they conspire to make an anarchy in the reported cases so I would throw all the reported cases out I really would that's simple that's my biggest problem with with what everybody tries to do by fitting their case into what some other reported case says because chances are without saying it the process that jeans court goes through is totally different than mine but I'm trying to distinguish or fit myself into his case when it when it really doesn't fit and I'm eager to get case simple answer to the problem but the before he does the idea of throwing out all the reported cases may not work if one of them is a circuit court decision in your circuits if you I thought that was his answer just throw it if you want if you need proof of the anarchy argument and that we ought to avoid the anarchy argument jeans right the materials he's talking about I think are on the website and in those materials you've got great stuff on sovereign immunity and on on on on on LaSAL and then you have some other stuff on 13 the anarchy part of it and you can read just one case if you want to and that's the a day or case that came out of your your circuit was it your case I know I don't think so I don't think so unlike the cell and and it'll just show you that there's so many combinations and permutations of what the plan says when the proof of claim was filed or not filed whether the claims bar date is passed whether you've had a hearing what the notice said there's no way to have uniformity with respect to who wins in the collision between a plan and a proof of claim unless we all decided to do it the same way and we're not going to do that that would be novel I don't think it's going to happen because we have code and rule but there's a simple solution here's how I think you get to the simple solution simple answer is a statutory answer and it is the plan always wins it always wins because that's what 1327 says it says the plan binds everybody whether they've whether they've filed a proof of claim or not whether they've objected or not it just doesn't matter the plan wins now having said that the problem is if the plan doesn't say anything that's useful to Karen Cordry when she gets the plan or the the summary of the plan then what binding effect that's 1327 give to a plan that says I'm going to pay allowed secured claims in full or just allowed unsecured claims or allowed claims in full or unsecured claims 20 percent or whatever it happens if we could raise the level of precision in the practice of what the plan says we solve the problem because I think nobody would disagree here that if the plan said GMAC is a secured creditor to the extent of $6,755 and I'm going to pay them $219 a month for 42 months if that's what the plan said and you got the plan and you had an opportunity to object and the notice was clear that your values being set and this is what you get all sorts of preclusion principles are going to set in when that order becomes final and and by preclusion I don't want to mislead you I don't want to even go to the judge made kinds of preclusion because we get in trouble as soon as we start talking collateral stop will here because then we bring in the the would of could of should of arguments you know I could argue this I should of argued this and that let's stay with statutory preclusion and it's 1327a says you're bound by what my plan says and if my plan is clear plan wins I just have to say Keith I couldn't agree with you more that's exactly what I think the work solution really worry I was going to say something defrecatory before I made that comment to myself but the the fact of the matter is we've adopted a model chapter 13 plan in the northern district of Illinois that attempts to do precisely what Keith has just recommended was that post a dare post a dare yes a response to a dare what it proposes to do is tell every secured creditor your claim is being valued as set forth in this claim in this plan excuse me regardless of any contrary proofs of claim we can agree to reduce the value of this secured claim but you're not going to get any more than what's put in this plan so if you don't want to get this as your secured claim you've got to object to confirmation and then we get the matter resolved at the time of confirmation doesn't it raise a problem though with now a secured creditor who's got a consensual lien you know your car deal or that's that's simple but I go back to my people my tax liens in this sort of thing I I may not know what the amount is I mean one of the things you do is you still back on it on a collision course with the fact that Congress said states have six months and other people at least have you know 90 to 120 days or however the numbers work out with the the plan you're giving people three to four to six months to file a claim and to figure out some of these things I mean I didn't know when the debtor was going to file I don't have my my papers all sitting here just ready to go I may not know on the date when he files this plan or when the objections come due what my claim is so you're really setting up this collision between the time periods that you've told me I have to get to figure these things out and the dates when he wants to do is I mean 15 days after the the cases filed he's got it in there what you're really saying is I essentially have 15 days not six months to figure out what my claim is or else I'm just required to routinely object to anything he writes in there the gotcha argument where because plan confirmation in many districts I think most comes up before those deadlines certainly before the government deadline and that is a problem for the government no question about it the process has got to be fair or the courts of appeals are going to continue to write cases like a dare they are and the fourth circuit has gone even further than a dare has in making the in getting angry is what I think is a way to describe it they're angry at the procedure in our courts with dealing with claims in chapter 13 cases because we are doing gotchas we're running we're running past and giving notices that aren't clear and not giving enough time I was going to say so Keith if you think the confirmation order ought to bind what do we need to do make sure that confirmations are four months out do we wait six months for the government how do you put that part of it together you have to let the claimant know that this is going to be the effect and if there's a problem they have they need to come in and they can come in and ask for a continuance of the confirmation hearing I expect Keith you'd grant that request wouldn't you I don't even see those they get stamped with my name somewhere I think you'd have to assume the governments will routinely then be doing it because which is okay so you're going to be a thing at least government claim is there you're probably going to be six months out anyway I mean one of the concerns we have about the notion of the plan always controlling comes back to my sovereign immunity piece there's this line of cases that say somehow if you do it in a plan even when the judge stamps the plan and makes all the determinations that somehow isn't triggering sovereign immunity but if you do it in the adversary proceeding or the claims objection proceeding or anything where it's clearly you and me then the 11th amendment does control so I'm now in a position where if you say the plan controls you're wiping out the 11th amendment with respect to any issue that the state has you just it's wonderful you've taken us back into the theater from the street right back so you wanted to be back in the theater and I love it because there's an enormous sovereign immunity problem buried in chapter 13 practice there is and I'm pleased to say that only there are only a half a dozen reported 13 cases where it's come up and they're almost all on the discharge end of the case is where the sovereign immunity has started to come up in 13 but it's there we can't take it out of 13 anymore than we can take it out of any other kind of bankruptcy it's just there we are affecting we 13 confirmation does affect the rights of the sovereign right if we if we start with that proposition then I don't have so much of a problem once we assume that the 11th amendment applies to all of it that's fine then we get to back to my problem and I won't I won't discuss my problem here well Keith has given us a simple answer to the first question how you get a secured plane valued for purposes of confirmation in chapter 13 now what's the next problem after you got the plan confirmed what happens to that secured claim yeah yeah I'm gonna restate it a little bit and take away some of the problems in your question oh not fair you let me define the issue and I can I'll win what's true in private practice too you know what I'm saying the real issue here is I think to state it is what are the limits on what are the limits on post confirmation modification of the treatment of a secured claim holder what are the limits on it and where do you look for those limits and and it's it's a Vern countryman kind of answer because you know what Vern's first sentence was every time you ever said anything about bankruptcy to him was go read the statute yeah you know it was one concept it was it was just what he always did and I think the answer really is in 1329 itself for the most part that's where the answer is the 1329 controls the post confirmation modification but to sort of set it up just a little you know this is the situation where the debtor comes in after confirmation and says you know the engine blew on the car and we valued it at 8000 in the confirmation a year ago I've been paying along on it now but I can't drive it I need a new car I want to give it back to you Jean here's the car it's yours yeah here's the car have a good life and because I gave it back to you now under 506 you don't have a secured claim anymore or put a better way your secured claim is now equal to what's left of the value of the car and once you sell the car it's zero right you got that value subtract that from the total claim and the balance is unsecured has to be unsecured because the code tells us it has to be unsecured 506 exactly right and so that's not where the cases are coming out that's one kind of fact pattern and she's right that's not where the cases are coming out that's what you decided because I went why are you doing that because I looked at this issue and I've had to rule on it I came out with the decision that it that it is still secured and because and you're going to tell us why that that reasoning is wrong I'm going to tell you as I mess this up and I'm not alone I'm not alone in messing it up and by messing it up this this issue if you go back it's been around since 1982 is when we got the first case on it and sometimes it's a surrender of the car because of the blown engine sometimes it's a sale sometimes it's relief from the stay and the secure claim holder goes in gets their collateral because something's happened in the case debtor hadn't done a thing I want my car I want to drive the car but I don't get to anymore you get my car and I still have to pay you as a secured claim holder okay maybe I'll buy no I can set up some patterns that you will even be on my side on I mean that that one I might be on your side on but but what then what happens is we started talking about this 20 years ago as the claim being reclassified and I'm not going to claim that I came up with that that concept but the effect has been that it's really distracted the courts from what's really happening and in the post confirmation modification I'm not reclassifying from something to something else your secured claim I'm not doing that you still have the secured claim that you filed it's just that when I give you the collateral back a year or two into the case the code says that the amount of the secured portion of that claim under 506a changes now is this is this slide of hand from the creditor's standpoint it is slide of hand but from the code standpoint it's not because the bankruptcy code has a structure that makes that work but you're essentially saying I can surrender anytime I want to that the surrender isn't a one-time sort of option if the car value goes down I can surrender it if it goes my house more likely my house stores in price I don't have to surrender it why else would 1329 the post confirmation modification section incorporate the 1322 parts that let me surrender it wouldn't make any sense if I can't surrender after confirmation why would the code say I can surrender after confirmation does 1329 allow changes in the treatment of secured claims I think the burden's on you there and I say it this way it says for example it says that I can increase or decrease payments on account of claims of any class class all right well it doesn't say unsecured claims it says payments on claims and you and I know being the strict constructionist that you are Jean the absence of the word unsecured in front of claims says it's all claims but do we put secured claims in a class aren't they each separate this is fascinating there are a couple of the reported post confirmation modification cases that say that secured claims are either all in one class there's a couple of cases that say that those are wrong it's the other way around if you go back to the chapter 11 cases you find every secured claim holder is in a separate class unless the plan says otherwise because collateral is different the rights on default are different the property you're foreclosing on in the event of a default is different interest rates are different everything is different you couldn't possibly confirm a chapter 13 plan with more than one secured claim holder if they were in the same class and yet because the code in the 13 would require you to treat them the same well how can I treat the car lender and the water bed lender the same but you're saying they're in separate classes they have to be okay so so I can increase or decrease payments on account of the car after confirmation that's what it says on account of the claim but you're not doing just that you're you're changing you're you're the claim is becoming unsecured once again you got 30 seconds to rip this all the answer is when I give the car back I've made a payment on account of that claim in a form that is not covered by the plan and that's one of the other things that 1329 says I can do it says that I can alter a distribution that's the word it uses in 1329 I can alter a distribution to the car over here to account for a payment that's other than under the plan and I surrendered the car but it still doesn't say you can change the type of claim still secured just 506 says it's secured to the extent of the value of the collateral and the collateral is gone well I think that'll have to be the last word I want to thank you and the other panelists for participating in our program today taking the time to explore and explain these interesting issues for us I also want to remind all of you watchers today that there are written materials for this program available on the FJC website as well as a one page evaluation form please fill out that form and fax it back to us at the number on the bottom of the form it's the only way for us to know if you find today's program interesting and useful and the only way for us to find ways to improve these programs in the future for the federal judicial television network I'm Judge Ching Weiroth thank you for watching