SOUTHERN ILLINOIS UNIVERSITY
LAW JOURNAL

ARTICLES

The Law of Unintended Consequences
Margaret Howard .................................................................................................................................................................................................................................................................................451

This article, adapted from the keynote address of the 2007 Southern Illinois University School of Law Bankruptcy Symposium, “Shredding the Safety Net: A Critical Examination of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” The Law of Unintended Consequences, discusses the unintended consequences stemming from Congress’s passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). The law of unintended consequences holds that actions have unforeseen consequences. In the 1930’s, sociologist Robert Merton identified factors that lead to unintended consequences. Several of those factors are particularly relevant with regard to the 2005 Amendments, particularly what Merton called “the imperious immediacy of interest”─instances in which an individual wants to accomplish the intended consequences so much that he or she purposefully chooses to ignore the possibility of unintended effects. This article identifies many of these unintended consequences and examines their effect on debtors, creditors, bankruptcy attorneys and judges, and the consumer credit industry as a whole. The decision by the drafters of BAPCPA to “throw law” at the problems of the bankruptcy code (whether real or imagined), instead of seeking a better understanding of these problems, created unintended consequences because the drafters chose to ignore the possibility of BAPCPA’s unintended effects. Articles Editor, Brice R. Sechrest


Living With the Means Test
Charles J. Tabb and Jillian K. McClelland ....................................................................................................................................................................................................................................463

In 2005, Congress radically changed the nature of the consumer bankruptcy system in the United States with the enactment of BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). The Bankruptcy Code currently in effect reflects an underlying concern that too many debtors who could afford to repay some of their debts were taking advantage of a “forgiving” bankruptcy regime. The heart of the consumer debtor crackdown came in the form of a strict, mechanical means test as a method of proving “abuse.” By adopting the means test, Congress sought to make it harder for consumer debtors to obtain an immediate discharge of their debts in chapter 7. Instead, individual consumer debtors with even modest projected ability to repay creditors out of future income are labeled abusers and must have their cases dismissed or converted.
The abuse provisions in BAPCPA introduced substantive and procedural adjustments to the practice of consumer bankruptcy that have had profound effects on debtors, creditors, attorneys, trustees, and judges alike. This article explores the impact of the means test on the players in the bankruptcy system. First, we discuss abuse testing in the Bankruptcy Code, and note particularly the influence that the consumer credit lending industry exercised in bringing about the 2005 Amendments. Next, we turn to the statute to perform a detailed analysis of the provisions of the means test and its necessary calculations and confusing permutations. Failing or passing the means test is not the end of the story, of course. From there, we consider how a debtor can rebut the presumption of abuse should he fail the means test determination; specifically, through required trustee reports and abuse motions. Finally, we close with an examination of added sanctions and advice restrictions imposed on attorneys. Throughout, we use illustrative emerging case law to highlight several interpretative controversies that have arisen under BAPCPA. Congress sought to implement as mechanical a test as possible; however, the cases show that judicial discretion remains a necessary component to ensure access to bankruptcy relief for those in need, and to weed out those who could otherwise manipulate the system. Articles Editor, Aadam M. Alikhan


Mind Games: Rethinking BAPCPA’s Debtor Education Provisions
Nathalie Martin and Ocean Tama y Sweet ....................................................................................................................................................................................................................................517

U.S. consumer credit levels are at an all-time high, savings levels are at an all-time low, and the vast majority of Americans are financially illiterate. Americans have little to invest and no capacity to retire. Moreover, in 2003 consumer bankruptcies hit a record high. As a result, the authors of this article, Professor Nathalie Martin and Ocean Tama y Sweet, argue that a better financial education is badly needed.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 contains two debtor education provisions. One requires a pre-bankruptcy consumer credit briefing before any consumer bankruptcy case and another that requires a debtor education course before a debtor can obtain a bankruptcy discharge. While these requirements may be well-intentioned, the authors of this article argue that these provisions are poorly designed and do more harm than good. They keep deserving people out of bankruptcy, and also fail to take into account empirical research on learning theory, behavioral economics, the psychology of debt and spending, and the cultural conditions leading to overindebtedness. Moreover, the authors point out that it is inappropriate to require individual debtors to pay consumer credit counseling services for debtor education, when 41 of the largest consumer credit counseling services have recently had their non-profit status revoked because they offered little or no counseling or education, appeared to be primarily motivated by profit, and, in many instances, also served the private interests of related for-profit businesses, officers and directors.
This Article also explores the nexus between the consumer credit industry’s marketing efforts and the psychological, physiological, and cultural factors that encourage indebtedness and discourage saving. Finally, this article describes and advocates an aggressive approach to teaching financial literacy to the middle class. The authors argue that only an aggressive approach can overcome effective consumer credit marketing and the deeply ingrained psychological, physiological, and cultural factors that lead to overindebtedness. Articles Editor, Daniel R. Robinson


Non-Uniform Bankruptcy Laws After BAPCPA
Peter C. Alexander and Kevin A. Hays ..........................................................................................................................................................................................................................................549

As bankruptcy scholars and the courts take a closer look at the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), these individuals will likely identify code provisions within BAPCPA that run afoul of the Uniformity Clause. At present, at least two examples of non-uniformity exist.
First, debtors filing chapter 11 reorganizations may find that the administration of their cases will vary, depending on whether the debtor files in a jurisdiction endorsing the United States Trustee Program (“UST Program”) or the Bankruptcy Administrator Program (“BA Program”). Since the BA Program exists only in the federal districts within two states (Alabama and North Carolina), debtors filing for bankruptcy in other states may have the following concerns: 1) their cases will be subjected to a set of policies and regulations that will increase the overall cost of filing bankruptcy and 2) the UST Program may possess a conflict of interest if the debtor is litigating matters against other federal executive agencies, such as the Internal Revenue Service.
Second, BAPCPA’s provisions relating to exemptions may also violate the Uniformity Clause. Under BAPCPA, a debtor must have been domiciled within a jurisdiction for two years prior to filing bankruptcy before the debtor may take advantage of that jurisdiction’s exemptions. This is constitutionally problematic because a debtor who moves to a new state within this two-year period will be denied the opportunity to take advantage of her new home state’s exemptions. Uniformity, at a minimum, requires that debtors of the same state be treated equally. However, until Congress amends the Bankruptcy Code, it is possible that consumer debtors who are required to use more stringent exemption law of a different state will have sufficient basis to raise a constitutional challenge against BAPCPA. Articles Editor, Daniel R. Robinson


We All Live in a Yellow Submarine: BAPCPA’s Impact on Family Law Matters
Honorable Judith K. Fitzgerald .......................................................................................................................................................................................................................................................563

The Bankruptcy Code was subjected to sweeping amendments that took effect on October 17, 2005, as the result of Congress’s enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). BAPCPA substantially revised the way inter-spousal claims are handled when one divorced spouse files bankruptcy and the other does not. This article summarizes and discusses these changes and notes, in particular, the increased role that the state courts will likely play in the bankruptcy process in such cases. Part I of this article discusses the new definition of domestic support obligation (“DSO”) and its impact on dischargeability. Part II addresses changes in available fora in which to litigate. In Part III of this article, amendments that modified the priority of claims is covered. Part IV discusses changes in the automatic stay provisions and Part V deals with some of the new burdens BAPCPA imposes on debtors. Finally, Part VI is a catch-all section that includes other provisions that do not readily fall within one of the other aforementioned topics.
This article concludes that the amendments to the Bankruptcy Code instituted by the BAPCPA have enhanced the ability of creditors owed a domestic support obligation to collect it, even during the bankruptcy. Moreover, given the additional relief to DSO creditors provided by BAPCPA, it is possible that there will be less litigation of the type handled by both bankruptcy and state courts prior to the amendments and most of the litigation concerning dischargeability of a DSO will likely now take place in state court rather than in bankruptcy court. Nonetheless, some actions, such as obtaining relief from stay, motions to dismiss or convert a case, determinations of priority of claims, objections to claims, objections to exemptions, etc., will remain exclusively within the province of the bankruptcy courts to address. Articles Editor, Christopher J. Frericks

Small Business and the 2005 Bankruptcy Law: Should Mom and Apple Pie Be Worried?
Robert M. Lawless .............................................................................................................................................................................................................................................................................585

This article explores the 2005 bankruptcy law as it affects small business and small business owners. Although small business is often a political darling of congressional rhetoric, the 2005 law singled out small business and small business owners for harsher treatment than their large corporate counterparts. The article describes the problems with the new definition for small business debtor in the Bankruptcy Code and then continues by examining the increased disclosure requirements expected of small businesses, the expanded grounds for dismissal of a small business bankruptcy case, serial filer rules that apply only to small businesses, lengthy standard form disclosure statements and reorganization plans that small businesses will have to use, and the shorter deadlines for confirmation of a small business’s reorganization plan. The article concludes by making some empirically testable predictions about the future of small business bankruptcies and entrepreneurial activity more generally in the wake of the 2005 law. Articles Editor, Matthew J. Hodge

Moving Toward a Federal Law of Corporate Governance in Bankruptcy
Kelli A. Alces .......................................................................................................................................................................................................................................................................................621

Acting on the belief that state law had failed to deter, prevent, and provide accountability for business disasters such as Enron, Congress sought to provide federal legislation to insure that those catastrophes would never occur again. Following the Sarbanes-Oxley Act of 2002, recent amendments to the Bankruptcy Code push the state fiduciary law that governs the behavior of corporate directors and officers closer to irrelevance by making federal securities laws the strongly preferred means of holding rogue managers of bankrupt corporations responsible for their actions. These amendments completely cleared the way for the enforcement of federal securities laws without accommodating already difficult to enforce state fiduciary duty obligations. As a result, state corporate governance standards are likely to be ignored in favor of enforcement litigation based on securities laws once a corporation has entered bankruptcy.
This article begins by considering the most recent changes to the federal law regarding securities regulations, covering Sarbanes-Oxley as well as self-regulatory organizations. The article then examines the three most recent changes to the Bankruptcy Code regarding corporate governance and analyzes how those amendments affect the treatment of a corporate debtor’s officers and directors in the event of severe mismanagement. The article next turns to the national trend toward federal securities law regulation of corporate governance itself and determines how that trend may impact bankruptcy law. The article concludes that Congress has thoroughly provided for federal securities law regulation of officers and directors of a bankrupt corporation but has ignored important state law policies along the way without providing a clear means to close the gap. State common law achievements in the area of corporate governance need not be lost upon the filing of a bankruptcy case, but bankruptcy courts must use the discretion they are afforded in order to approach problems with a debtor’s management mindful of state corporate governance standards. Articles Editor, Tracy Beck Kroger


Toward a More Efficient Bankruptcy Law: Mortgage Financing Under the 2005 Bankruptcy Amendments
Thomas E. Plank ................................................................................................................................................................................................................................................................................641

Despite the many criticisms of the 2005 amendments to the Bankruptcy Code, these amendments provide some benefits for mortgage loan borrowers and originators. Specifically, these amendments expanded the “protected transaction” provisions of the Bankruptcy Code to include transactions that finance the origination of mortgage loans. This article describes how this expansion lowers the costs of making mortgage loans and therefore the costs to consumers who borrow money to purchase single family homes.
The Bankruptcy Code imposes costs on secured lenders that finance consumers and businesses by automatically staying creditor collection actions and imposing other limitations on secured creditors. To reduce these costs–a “bankruptcy tax” on secured creditors–the financing industry over the last 25 years developed the “securitization” of mortgage loans and other receivables, such as automobile loans, student loans, and credit card receivables. Securitization requires a true sale of the receivables from the originator to a separate legal entity that issues securities backed by the receivables or borrows money to be repaid by the receivables. Securitization lowers costs–one study indicated that mortgage loan borrowers saved $2 billion in 1993–but structuring a securitization entails costs not born by other financing techniques. The protected transaction provisions–previously limited to transactions involving securities–also avoid some of the bankruptcy tax on secured creditors. By extending these protected transaction provisions to mortgage loans, lenders that originate mortgage loans are now able to raise capital without incurring either the bankruptcy tax on secured creditors or the costs of a securitization structure. Articles Editor, Elizabeth Wieneke Clymer

COMMENTS

When Two Worlds Collide: Problems Surrounding the Business Judgment Rule as a Privilege in Tortious Interference With Contractual Relations Actions in Illinois
Matthew A. Hood ...............................................................................................................................................................................................................................................................................669

Under the current formulation of the tort of tortious interference with contractual relations in Illinois, an injured plaintiff might not be able to recover at all in a case against the officers and directors of a corporation. First, if a plaintiff brought a claim in state court in Illinois, he may be required to plead, and later prove, that the defendant’s conduct was not justified. Second, and the focus of this comment, the business judgment rule may provide an additional layer of protection for the officers and directors of a corporation, as they likely would be able to claim the rule as a privilege to excuse their otherwise tortious conduct even where the corporation itself was not a party to the contract it tortiously interfered with. Given these two barriers that Illinois courts have erected, it seems the usefulness of the tort has been severely abrogated.
Illinois courts should take an opportunity to reexamine these barriers erected for plaintiffs injured in the state. First, following the California Jury Instructions approach proposed by this comment, Illinois courts should remove the requirement that the plaintiff plead, as part of its prima facie case, that the defendant’s conduct was not justified. Second, the courts should affirmatively state, in direct contrast to an earlier decision, that a defendant corporation (acting through its officers and directors) should not be permitted to use the business judgment rule as a conditional privilege in actions for tortious interference with contractual relations where the corporation is not a party to the contract it tortiously interfered with.

A Fight to the Last Drop: The Changing Approach to Water Allocation in the Western United States
Stephanie Lindsay ............................................................................................................................................................................................................................................................................689

The pioneers who traveled across the country in search of a golden destination were people, who, through insufficient knowledge and poor planning, lacked the essential element of life: water. Much like these pioneers, current American water law has followed an aged path paved with limited knowledge and inefficient planning. Continuing down this path will only lead to expensive and inefficient decisions in the future.
This Comment focuses on the changing approach to water allocation in the western United States, beginning in the infant stages of creation to the current antiquated system. This Comment then proposes a new management approach for water allocation rights, which includes adopting a national watershed management approach in place of the current system and coupling this new approach with the ability for involved parties to negotiate legitimate concerns.


CASENOTES

Secured or Unsecured?─Conflicting Requirements of the
Uniform Commercial Code and The Tax Code Notice Filing Systems Lead Creditors to a False Sense of Security: Analysis of United States v. Crestmark Bank, 412 F.3d 653 (6th Cir. 2005)
Elizabeth A. Wieneke Clymer .........................................................................................................................................................................................................................................................707

The United States v. Crestmark Bank concerns a problem creditors face when discovering whether filing a financing statement will render it secured. The problem exists due to the different indexes of the notice filing systems the Uniform Commercial Code (“UCC”) and the United States Internal Revenue Code (“Tax Code”) have for filing a notice of a lien on property. The Crestmark court faced the issue of whether the IRS’s identification of the debtor/taxpayer provided sufficient notice to a creditor. The court held that the creditor did not perform a reasonably diligent search to uncover the IRS tax lien because they only requested a search using the debtor’s legal name.
Under the Tax Code the IRS is able to file a notice of a tax lien under any variation of the taxpayer’s name. However, under the UCC creditors are required to file financing statements under the debtor’s legal name. The real outcome of the Crestmark court’s decision was that a creditor is now held to a higher standard than the federal government. Creditors are to perform a reasonably diligent search under both the UCC and the Tax Code and are not likely to know of the requirement, since the UCC makes no mention of this extra obligation.
Existing law and legal background on the notice filing systems of the UCC and the Tax Code are discussed. The facts and the decision of Crestmark are explained and critiqued and then possible solutions to correct the inconsistencies in the UCC and Tax Code are suggested. This Casenote will argue that an electronic Universal Filing System for notices of liens on property with a single index is a solution so as to prevent the problem in Crestmark from occurring in the future. Currently, if the IRS filed a notice of a tax lien under a name other than the debtor/taxpayer’s legal name prior to a creditor filing a financing statement, a creditor who has no knowledge that it should look under various names of the debtor/taxpayer has a false sense of security.

Promissory Estoppel─Only a Shield, Not a Sword?: Analysis of DeWitt v. Fleming, 828 N.E.2d 756 (Ill. App. 5th 2005).
Collin F. Richmond .............................................................................................................................................................................................................................................................................735

Illinois law concerning promissory estoppel is unclear. Illinois courts have reached contradictory results regarding how promissory estoppel can be used. In particular, the issue of whether Illinois law allows plaintiffs to use promissory estoppel as a cause of action, or as a “sword,” is unsettled.
In DeWitt v. Fleming, the Fifth Appellate District in Illinois confronted the issue of whether promissory estoppel could be used as an affirmative cause of action when purchasers of land asserted a claim using the doctrine of promissory estoppel. The purchasers attempted to recover the cost of a land survey after the vendor promised to sell the land, but subsequently refused to sell the land. The majority held that promissory estoppel cannot be used as an affirmative cause of action. However, the court failed to analyze promissory estoppel properly because the court did not discuss the different contexts in which the promissory estoppel doctrine is used.
This casenote examines the background and evolution of the promissory estoppel doctrine. It also summarizes the facts, procedure, and majority and dissenting opinions in DeWitt. Finally, the casenote analyzes the reasoning and holding of the majority decision in DeWitt and examines whether Illinois courts should adopt promissory estoppel as a cause of action to allow a plaintiff to recover reliance damages when the plaintiff proves that he relied on the defendant’s statement in a foreseeable and detrimental way, even if those statements do not independently form a contract because there is no mutual assent, no offer and acceptance, or due to the statute of frauds.