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SOUTHERN ILLINOIS UNIVERSITY
LAW JOURNAL
Volume 31 Spring 2007
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.
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