Barrister's Club Crystal Ball (March 26, 2011)

Your are cordially invited to the Barrister’s Club Crystal Ball, which is a charity fundraiser benefitting the San Francisco Bar Association’s youth, diversity and school-to-college programs. This semi-formal event will take place at the San Francisco War Memorial’s Green Room (401 Van Ness Avenue at McAllister Street) on Saturday, March 26, 2011, at 7:00 pm. All are welcome to mingle and dance with our local attorneys, bid at the silent auction, and enjoy drinks and gourmet snacks. The price per ticket is $75, and you can register here. We would love to see you there! - Reno Fernandez

Borders Files Chapter 11

Mega book retailer Borders Group, Inc. commenced a chapter 11 bankruptcy case today in the United States Bankruptcy Court for the Southern District of New York (Case No. 11-10614).  The company disclosed $1.29 billion in debt and $1.27 billion in assets.  Borders owes $41.1 million to Penguin Group , $36.9 million to Hachette Book Group and $33.8 million to Simon & Schuster, all of which are book publishers.  Prior to filing, Borders secured $505 million in financing from GE Capital and other sources to assist in the reorganization.



Borders cited reduced customer spending and lack of liquidity among the reasons for filing chapter 11.  Borders President Mike Edwards said the company "does not have the capital resources it needs to be a viable competitor and which are essential for it to move forward with its business strategy to reposition itself successfully for the long term."  Borders plans to close approximately 200 of its 642 stores, 35 of which are in California, and lay off about 6,000 of its 19,000 employees.  Copies of the bankruptcy petition and first day motions can be found here. - Reno Fernandez

Lockyer Rejects State Bankruptcy for California

We previously posted a short article on a Republican proposal to allow states to file bankruptcy.  Bill Lockyer, California's state treasurer, has rejected the idea, arguing that bankruptcy is for individuals, companies and municipalities that cannot raise their revenue, whereas states are entitled to raise taxes.  Sacramento Bee columnist Dan Walters has commented that California's $20 billion deficit is only 1% of its economic output. - Reno Fernandez

Republicans Propose Allowing States to File Bankruptcy

Newt Gingrich and Texas Senator John Cornyn are advocating allowing states, such as California and New York, to file bankruptcy.  At present, only cities and other municipal entities can file bankruptcy under chapter 9 of the Bankruptcy Code.  Allowing a state to utilize some form of bankruptcy protection would likely shift losses from taxpayers to public sector union employees and pension plans.  In fact, Newt Gingrich's proposal would prohibit any tax increases as part of a reorganization.  In addition to public employees, bondholders are likely to take a loss in a state bankruptcy, and adding a chapter of the Bankruptcy Code for states will certainly upset the government bond market.  Nevertheless, University of Pennsylvanie law professor David. A. Skeel argues that state bankruptcy will make it easier for states to negotiate with unions and that the alternative of a federal bailout is unattractive.  Skeel also notes that, although the bond market will be unhappy, California bondholders are already accounting for a potential default. - Reno Fernandez

Justice Kagan's First Opinion Tightens Automobile Ownership Cost Determination Under the Means Test

In her first opinion on the United States Supreme Court, Justice Elena Kagan reports the Justices' 8-1 ruling that a consumer debtor cannot deduct the IRS standard automobile ownership costs from his or her disposable monthly income under the means test if the automobile is free and clear.  In Ransom v . FIA Card Services, N.A., 11 C.D.O.S. 459 (U.S. Supr. Ct. No. 09–907 January 11, 2011), Justice Kagan explained that the means test, which is used for determining eligibility for chapter 7 and is related to the calculation of plan payments under chapter 13, includes deductions from disposable monthly income for vehicle “Ownership Costs” and vehicle “Operating Costs” pursuant to certain IRS standards.  The Ownership Costs include only loan or lease payments, and they are deemed to be $471 per month based on national automobile financing data.  Operating Costs, on the other hand, can include the expenses of driving and maintaining a vehicle.

In Ransom, the chapter 13 debtor claimed the full Ownership Cost as well as Opweating Costs of $388 per month for a car that the debtor owned free and clear.  A creditor, namely FIA Card Services, objected to the claim of Ownership Costs and argued that the payments to creditors proposed in the plan should be increased in light of the resulting higher disposable monthly income.  The bankruptcy court agreed and denied confirmation of the plan.  The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit Court of Appeals affirmed.

The Supreme Court focused on the language of 11 U.S.C. § 707(b)(2)(A)(ii)(I), which provides that:  “The debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides.”  Specifically, the Justices ruled that the term "applicable" means that the debtor must have actually incurred the expense.  In other words, the Ownership Costs do not apply if there are in fact no loan or lease payments.  The opinion further notes that the Ownership Costs do not include the expenses of driving or maintaining an automobile, which are covered by the separate Operating Costs deduction.

The Justices did not discuss the debtor's policy argument or alternative interpretation of the term "applicable."  These may be similar to the arguments advanced in a recent Credit Slips article.  The article argues that:  "[W]e also can think of the 'ownership expense' as the cost of saving up to replace an existing car. In addition, if we deny an ownership expense to a debtor who owns a car free and clear, we create an incentive to buy a new car on credit just before filing bankruptcy so that there is an actual out-of-pocket 'ownership expense' the debtor can deduct." 

Justice Scalia filed a dissenting opinion, arguing that the term "applicable" does not do as much work as the majority thinks.  "A House of Lords opinion holds, for example, that in the phrase ‘in addition to and not in derogation of ’ the last part adds nothing but emphasis.  Davies v. Powell Duffryn Associated Collieries , Ltd. , [1942] A. C. 601, 607."  Specifically, Justice Scalia argues that the phrase simply makes the IRS tables applicable to the means test.  The tables have entries for "one car" and "two cars," but not "no car."  In other words, the first two entries are applicable of the debtor has a car, and the last is applicable if the debtor has no car, regardless of whether there are any loan or lease payments.

In an interesting twist, the Credit Slips article criticized the Office of the US Trustee for having published guidelines on the means test that stated, without qualification, that the Ownership Costs could not be deducted if the automobile is free and clear; in other words, the US Trustee decided the Ransom case before the Supreme Court did.

By Reno F.R. Fernandez III

Anchor Blue Files Chapter 11

Today, Anchor Blue Holding Corp. and Anchor Blue, Inc. commenced a chapter 11 bankruptcy case in Delaware.  Anchor Blue is a clothing retailer known for its denim wear.  The company is based in Corona, California, and operates 117 stores and employs approximately 1446 employees in Arizona, California, Colorado, New Mexico, Oregon, Texas, Utah and Washington. - Reno Fernandez

Event Update: Alternative Strategies in Assisting Distressed Companies

On Thursday, January 13, 2010, John Seeley of Acrius Capital will be giving a talk entitled "Alternative Strategies in Assisting Distressed Companies" to the Barrister's Club Business, Commercial and Bankruptcy Section.  We look forward to getting the inside scoop on turnaround financing and other issues.  The program is from 12:00 to 1:00 pm, and all are welcome.  For more information and to sign up, click here.  - Reno Fernandez