Red Lion Returns

It's not news by any standard, but this story stirred the Red Lion from slumber. For one moment, I am in solidarity with runway models who kicked off ridiculous shoes in exasperation over the absurdity of it all.

Fear of Foreclosure

The prominence of foreclosure in economic news and the skimpy coverage of the breakdown of foreclosure process in the popular press shows the literary force of the word: "foreclosure." It has the visceral impact of a word like "rape," connoting a violent, destructive, faceless goon that comes out of the darkness to destroy the weak and helpless. People are getting "foreclosed on," foreclosure is destroying neighborhoods and cities, and the nation is in a foreclosure crisis. Foreclosure is Voldemort.

Legally, foreclosure is tame and boring. It's a mopping-up operation that has for centuries been relegated to the losers bracket among lawyers, and the museum of antiquities in law. It's no wonder that the reporters don't explain the residential real property foreclosure process, or why law professors roll their eyes when I start to say that joblessness, default, unchecked speculation, arrogance and bad judgment are far scarier than foreclosure. Who wants to think about dirty socks and dust bunnies under the bed when the alternative is to imagine a scary monster?

What do you think? What explains the fear of foreclosure?

Ransom

Last Monday, the Supreme Court heard argument in In re Ransom. A colleague on the law faculty whose forte is not bankruptcy asked me about the case in advance. He was showing an Australian law professor the sights in D.C. on the First Monday in October and Ransom was on the docket. My colleague expressed disappointment that the First Monday docket was clogged with an unexciting bankruptcy case. I told him that Ransom is exciting to me.

The case is about the meaning of a hideously drawn provision that appeared in the Bankruptcy Code as part of the 2005 Reform Act-- the so-called "means test" that governs a debtor's eligibility for discharge of debt under chapter 7 and chapter 13. In simple terms, a consumer debtor is eligible for debt forgiveness if her income is less than the Census Bureau-reported median income for her state. If her income is greater than the median income, then she is eligible for relief in a chapter 7 liquidation case, only if she doesn't have the "means" to pay down her debts over time while paying her current living expenses. If she wants to keep her property and pay down her debts over time, she is eligible for debt forgiveness in a chapter 13 case only if she pays creditors from her income each month the amount she has the "means" to pay. In both settings, "means" means the difference between the debtor's "current monthly income" and her expenses.

The Code provides a staggeringly unreadable list of the expenses that are to be considered for purposes of this comparison. Rather than relegate to the bankruptcy judge the role of determining which expenses that the debtor actually incurs are "reasonable and necessary" as was the judge's role before the 2005 Reform Act, the Code now describes the expenses that the debtor may deduct by reference to IRS published guidelines for agents (the National and Local Standards) who are trying to settle tax delinquencies with taxpayers based on the amount the taxpayer can realistically pay each month and survive.

In Ransom, the dispute was over the amount the debtor could count as an expense of car ownership. Particularly, the question was whether the debtor should be able to count the amount referenced in the Local Standards for a loan or lease payment even if he owns his car free and clear and doesn't actually make any loan or lease payments. In short, does the Code mean that the debtor should be credited with expenses he doesn't actually have for the purpose of determining his "means?" The bankruptcy court held that a debtor has to have some actual car payment expenses before he can claim the IRS plug amount as an expense. The Ninth Circuit affirmed contributing to a split in the circuits on this issue.

I felt it was important to explain to my colleague why this case is so interesting. So I cut to the chase. The "plain meaning" reading in this case is not easy to see because the statute is so badly drawn. The debtor will benefit from a reading that gives her the largest expense total and the largest deduction from income in calculating her "means." The trustee for the benefit of unsecured creditors like MBNA, the unsecured creditor who paid lawyers to take this case all the way to the Supreme Court, will benefit from a reading that limits debtors to the smallest expense total.

So, my colleague, an afficionado of legislative process and statutory interpretation, watched the argument and concluded that the Justices seemed stumped. The interpretation of the statute offered by both sides led to at least two completely absurd scenarios each. The one indisputable fact is that the statute let everyone down and the Court got the dirty job of cleaning up the mess.

My colleague offered the idea of a post legislative, pre-judicial clean up team -- a panel of "special masters" with bankruptcy expertise who would take the legislation that extrudes out of the Congressional sausage maker, consult with the ALI, lenders, borrowers, practitioners and academics, and draft a recommendation for courts who are put to the task of interpreting and applying the legislation.

My reaction to this idea was not good. I am already footing the bill for Congress and I do not want to pay for another layer of government workers who would be subject to the same political pressures that render the officials we elect to make law obviously and completely incapable of doing it. I think that the time for consultation with interest groups, academics, etc. is before the statute is enacted by Congress.

The problem I see is that legislators are hopelessly unmotivated and unable to understand the legislation they enact. The Supreme Court is now the cleanup operation of last resort for all sorts of badly drawn, ill conceived, utterly impractical and inscrutable legislation.

By way of history, as part of the 1994 amendments to the Bankruptcy Code, Congress ordered the creation of the National Bankruptcy Review Commission. This Commission undertook a complete review of the Code and held hearings at which bankruptcy scholars, practitioners and related industry experts had an opportunity to comment. It issued a comprehensive report and reform proposal with a vigorous dissent. Congress entirely ignored all of it. The bankruptcy bar picked to bits the consumer provisions in the legislation that ultimately became the 2005 Reform Act during the years it floated around Congress before it was enacted. Congress ignored it all. And it was easy, because congressmen and senators do not understand anything about the laws they enact. The voices of those who were advocating for technical amendments or otherwise pointing out absurdity in the proposed revisions to the Bankruptcy Code were no more than refrigerator hum. Bankruptcy, tax, administrative law, market regulation, environmental law, you name it -- it's all refrigerator hum.

The problem is easy to see but hard to fix. Bankruptcy policy is fundamental and richly complex. In a simple and broad sense, bankruptcy law describes whose debts may be forgiven. If you stop there, the politics are already hopeless. In debt as in life, sometimes you are the windshield and sometimes you are the bug. Nobody is always for more forgiveness or always for less. So the politics is really in the details. The problem is that as soon as you move past the core function of bankruptcy law into the practical and administrative issues,the core function becomes quickly lost and inaccessible to non-specialists. Instead of considering the basic contours of debt forgiveness directly, the Code provides for exemptions, avoidance powers, claims processes and, as in Ransom, eligibility for relief stated in nearly incomprehensible and arguably absurd terms. Legislators probably don't even think for a second about the macro implications of the law they are enacting: How does this law affect the question of who is forgiven? Rather, legislators tinker around the edges in response to special interest groups whose requests affect the measure of forgiveness in ways that would take at least a 14 week law school course to explain. In short, there are plenty of experts willing to teach members of Congress how changes in the law will or may affect the measure of forgiveness. The problem is the shortage of members of Congress who really want to make the investment necessary to acquire that information.

The second problem is related to the first. Negotiating legislation, like negotiating anything else is expensive. To reduce transaction costs, legislators translate complicated provisions into broad terms. For example, Republicans can sell to their base the idea that the cost of debt forgiveness is borne by people who find a way to live within their means, and thus, it should be harder to discharge debts in bankruptcy. Democrats can sell to their base (what Elizabeth Warren is selling) that the credit card companies are making oodles on consumer debt and they should bear a little pain to make life worth living for working people who hit hard times. The broad principles on which political bargaining occur are so broad that the actual legislation is left to non-legislator staffers and lobbyists who are primarily interested in getting the deal done rather than getting it done in a way that will not appear absurd to a court. The means test language before the Court in Ransom is a small part of a drafting exercise left to drafters who have no stake in the legislation post-enactment.

After the oral argument before the Court in Ransom, who on the Hill is red-faced about the unmissable disrespect for their work? That's right. Nobody. It's a sad indictment of democracy when citizens accept that legislators of all political persuasions are not personally or politically embarrassed by the shoddy quality legislation they impose on the citizens who elect them.

The Appoinment that Isn't

President Obama appointed Harvard bankruptcy law professor Elizabeth Warren to serve as special assistant to the president, presumably to avoid a tough confirmation battle in the Senate if he gave her the job he really wants her to do: Director of the newly created Bureau of Consumer Financial Protection.

Professor Warren is without question a very smart, hard hitting champion for the middle class. The whole thrust of her consumer protection vision is that the working guy can’t be expected to read the small print and that it’s time government started “looking out for the folks.” On the merits of her ideas, I can see why the banks are nervous. And I can see why turf-protecting administrators in DC are nervous. But apart from partisan knee-jerkism (and maybe there is nothing happening in DC apart from that), I don’t see a valid objection to her appointment as bureau director. Although I don’t agree with the way she proposes to protect the folks, I greatly admire that she has staked her career on what I see as a noble and selfless project. If we are going to have a new $500 million federal agency to pile more regulation on the consumer credit industry that will have no effect on consumers’ appetite for crack, she’s as qualified as anyone. At least I have a pretty good feeling that her hand will not be in the till.

I also have the feeling that nobody can afford crack and the crack dealers are packing up their tents anyway.

Light in August (or September)

End of Summer

by Stanley Kurtz

An agitation of the air,
A perturbation of the light
Admonished me the unloved year
Would turn on its hinge that night.

I stood in the disenchanted field
Amid the stubble and the stones
Amaded, while a small worm lisped to me
The song of my marrow-bones.

Blue poured into summer blue,
A hawk broke from his cloudless tower,
The roof of the silo blazed, and I knew
That part of my life was forever over.

Already the iron door of the North
Clangs open: birds,leaves,snows
Order their populations forth,
And a cruel wind blows.

Double or Nothing

This is the year you are going to really study. No more Super Mario Brothers or Zappo.com in class. Goodbye Facebook, Twitter and fantasy football. The weekend shrinks back down to two days, maybe one. It's all going to be different this year, and your grade point average is finally going to show your true potential.

Wanna bet?

Ultrinsic will take that action. This new company, in its beta phase, invites college students to bet that they will beat their statistically predicted grade in a particular course. A student who wants to bet provides information about how he's done in college so far, available data regarding applicable grading curves for various departments, professors, and courses. Ultrinsic runs the data through a formula that predicts how he'll do in a particular course and offers a wager that the student can't beat it. If the student beats the predicted grade, Ultrinsic pays off according to the predicted handicap. If the student doesn't, he pays. The house makes money the old fashioned way, the predictive formula stacks the odds for the house. It wins more than it loses.

During the pilot last year, 600 or so students at NYU and Penn took the bet. This year, Ultrinsic plans to expand to 34 campuses.

How to Get to the Corner Office

Randy Schrum speaks his mind about social media on MyCorporateMedia. He's a CEO who wants to confess, really explain how blogging, twittering and status updating plays out in the corner office, the boardroom and in the market.

The essence of social media activity is social-- and that's the problem. He says:

"The premise and value of the "social media" movement is the power of the collective in the production, distribution, and ownership of goods, and the reasons executives resist this model is that it flies in the face of their existing worldview which, quite frankly, has been pretty successful to date. . . . Most of us have a pretty big chip on our shoulders, attributing our career success to the years of diligence, education, ambition, delayed gratification and sacrifices we've made to reach the leadership levels we've achieved. Therefore, the anti-capitalistic notion that my work and contributions would be homogenized with the uninspired masses, and that ultimately my value would be determined by the randomness of the collective is a jarring and unplatable departure."

Schrum offers an interesting insight into the psyche of executives. The term "executive" isn't so much a title as a mindset that manifests in childhood. People with executive tendencies spent high school taking AP classes, and working a couple of part time jobs. They spend their college years running student organizations, doing internships and taking an overload of classes to finish early. Executives are compulsive high achievers but they tend to shrink from public recognition of their achievements. Schrum notes that "executives are non-narcissistic in a You-Tube world." "In a society that brags, blogs and Tweets about the tiniest personal minutia, [executives] couldn't care less because, frankly we expect success. . . . It's like Vince Lombardi's admonition to his running back after an overly exuberant display. "Next time you make a touchdown, act like you've been there before."

Executives hate social networking because they hate "networking." They dread the roomful of strangers, the awkward chit chat, never enough food. Executives are introverts who value their privacy and consider the ROI (return on investment) for each moment of time.

Schrum's rant puts a name to a reaction I've observed in myself. I'm not so sure that social networking is or can be a business tool, or that the act of sharing half-baked ideas should substitute for the hard and lonely work of baking them.

Bundles of Joy

If you've ever wondered whether practicing law is more interesting and fulfilling than driving kids to the orthodontist, take a look at Moms Who Won't Quit on The Careerist.

My kids asked me once why I wasn't a "real mom." I answered that if I stayed home all day, I'd vacuum holes in the rugs, alphabetize all their books, and stack their toys by color and size. I kept my day job and we all got by.

Too Big to Summarize?

Skadden, Arps takes a whack at the financial reform legislation.

Making the Grades

The New York Times reports that at least ten law schools have raised their grade curves in the last two years. The new rationale for this timeworn response is that students need a competitive edge in a tight job market and higher gpa, however contrived, is just the thing. Ironically, by outing the culprit law schools, the New York Times has probably reversed any advantage their students might have reaped from the sudden lift in gpas.

The premise that a law school can give its graduates the edge in the job market simply by raising their gpas across the board is offensive. Rank in class and rank of law school provide much more useful comparative data than gpa, so the premise that higher gpas, all other things equal, will translate into more job opportunities is dubious. Even assuming that raising the grade curve for all students yields a benefit among a segment of the market (gpa fetishists), the benefit to students at a particular school is at best a wash. Students with otherwise lackluster gpas benefit at the expense of the top of the class who find it increasingly difficult and pointless to distinguish themselves from their peers. If everybody is special as a matter of law school policy, why bother with the time consuming ritual of studying?

Raising the grade curve may make a law faculty feel compassionate in the short run. But all it really accomplishes is to make the faculty less relevant to the market as an evaluator of relative quality. Expert faculty differentiation among students (via competitively awarded grades) is a huge part of what makes a JD valuable. If the market doesn’t perceive any meaningful differentiation among students on the basis of the grades we assign, we’ll be out of business in the blink of an eye. At the very least, we won’t be worth our current salaries.

Two things remain true regardless of the winds of grade inflation. I’d hire someone with a C+ in Corporate Tax over another with an A in (fluff of your choice) any day of the week. And, all students want A’s until the day everybody gets them.

Beyond Understanding

Ironic, isn't it, that proponents of federal overhaul of financial services industry regulation criticize structured finance transactions, derivatives trading and the interconnectedness of national and global financial systems on grounds of complexity. The implication is that mortgage backed securities and other collateralized debt obligation deals were so complicated that even the most sophisticated investors couldn't understand the risks they were incurring.

The bill before the conference committee, Restoring Financial Stability Act of 2010 (H.R. 4173), is over 1600 pages long.

Collateralized Debt Obligations Tutorial

Hardball in the Preparation Market

It's a cage match. Behemoth Barbri and wiry newcomer Themis are mano a mano in the market for Pennsylvania bar review courses. Earlier this week, I saw an e-mail from a Themis rep calling out Barbri's rep for talking trash. I do love competition.

The price for the Themis course is $1395. Would you like New Jersey with that? Themis will throw in New Jersey prep for $100. You may want to add a state essay review for $795 for a total cost of $2280. Compare Barbri's price at $2850. It took some clicking around to even find the price on BarBri's site.

I confess I'm not over my own bar exam prep experience. I resented Barbri's monopoly. Even more, I was horrified by my own perfectly inelastic demand for its product.

Liberal Tendencies: Nature or Nurture?

My friend Buce at Underbelly had this to say about Sorting in the Academy.

Sorting in the Academy

A recently released study of academics asserts that certain characteristics of professors may explain the higher proportion of liberal academics relative to the population at large. The study concludes that 43 percent of the political gap between academics and a random population sample can be attributed to four factors more common among academics: 1)high levels of educational attainment; 2) disparity between levels of educational attainment and income; 3) self-identification as Jewish, non-religious, or a member of a faith that is not theologically conservative Protestant; and 4) high tolerance for controversial ideas.

The authors of the study, Neil Gross and Ethan Fosse, note that their findings confirm the theories of French sociologist, Pierre Bourdieu. Like Bordieu, Gross and Fosse see intellectuals as defined by "possession of high levels of cultural capital and moderate levels of economic capital." Bordieu asserts that this structure shapes intellectuals' political views. ".... Deprived of economic success relative to those in the world of commerce, intellectuals are less likely to be invested in preserving the socioeconomic order, may turn toward redistributionist policies in hopes of reducing perceived status inconsistency, and may embrace unconventional social or political views in order to distinguish themselves culturally from the business classes."

The four factors account for only some of the difference. The authors theorize that young adults are sorted into the professoriate based on their political views. "[T]he professoriate, along with a number of other knowledge work fields, has been 'politically typed' as appropriate and welcoming of people with broadly liberal sensibilities, and as inappropriate for conservatives." The reputation of the academy for 'political type' "leads many more liberal than conservative students to aspire for the advanced educational credentials that make entry into knowledge work fields possible, and to put in the work necessary to translate those aspirations into reality."

Although students may not be aware of its effect on their career choices, political typing likely affects them: "Because these identities involve cognitive schemas and habitual patterns of thinking that filter experience ... most young adults who are committed liberals would never end up entertaining the idea that they might become police or correctional officers, just as it would never cross the minds of most who are committed conservatives that they might become professors, precisely because of the political reputations of these fields."

In Remembrance

L'Amour Est un Oiseau Rebelle

The Metropolitan Opera's live HD telecast of Bizet's Carmen to movie theatres set a record with 240,000 viewers. (Carmen blew away the record set by Puccini's Madama Butterfly last March with 197,000 viewers.) I saw and heard it in the sold out State Theatre right here in State College.

Ah, Habanera

The bird you thought you had caught
beat its wings and flew away ...
love stays away, you wait and wait;
when least expected, there it is!
All around you, swift, swift,
it comes, goes, then it returns ...
you think you hold it fast, it flees
you think you're free, it holds you fast.
Love! Love! Love! Love!
Love is a gypsy child,
it has never, ever, known law;
if you love me not, then I love you;
if I love you, you'd best beware!

I cannot understand how her dress stayed on.

UCC Article 2 Sale of Goods

I am reassured and horrified that the Article 2 scope disorder I've observed among my Contracts students is not just my problem. Thom Lambert at University of Missouri Law encountered a severe strain while grading his Contracts final exams and wrote about it on Truth on the Market.

UCC Article 2 governs contracts for the sale of goods. Apart from some interesting cases involving North Sea oil platforms, electricity, and software which push the envelope of 'goods,' it really couldn't be simpler. Yet, students every year write in the the final exam answer that Article 2 does or does not apply to a particular transaction because one or both of the parties is or is not a merchant.

Yes, some sections of Article 2 regulate the rights of certain professional sellers or buyers who participate in a sale of goods. But the scope of Article 2 is not merchant dependent. UCC Article 2 governs contracts for the sale of goods and it does not matter for purposes of its scope whether the parties are Exxon or rank amateurs picking up a broken leaf blower at a neighborhood garage sale.

Professor Lambert laments that every year his Contracts students screw this up on the exam, and the next year he increases the number of times he tells the class that UCC Article 2 governs all contracts for the sale of goods without regard to whether one of the parties is a merchant. Ad nauseum. I do the same. In every class session in which Article 2 is pertinent I say it: Goods -- not real estate, not services. Goods. Merchant schmerchant, I say. Goods. Do not take your eye off the goods. Where they are, Article 2 (or 2A if the deal is a lease) will be. Merchants come and go. Goods remain.

Let's review. UCC Article 2 applies to all contracts for the sale of goods. Any questions?

Professor Lambert speculates that this mistake may root in students' fixation with UCC 2-207 -- the "battle of the forms" which in part applies only "between merchants." 2-207 is the first foray into statutory interpretation for most students. Perhaps the battle of the forms triggers in some students a form of PTSD. When a simple scope question appears on the exam, students traumatized by 2-207 lose their grip and can see only merchant Viet Cong snaking through the rice. It's only a contract for the sale of goods, but in the heat and the darkness it looks like the enemy. Ah, the smell of merchants in the morning.

My friend and colleague Keith Elkin works with law students preparing for the bar exam. He told me that students make this mistake on practice bar exams even after watching the bar prep video heads say it over and over: UCC Article 2 applies to contracts for the sale of goods.

Next time I teach Contracts, I may give peace a chance and omit coverage of 2-207. If Lambert is right, the price of a really good immersion in a really badly drawn statute is too high.

32% More

American people and their businesses filed 32% more bankruptcy cases in 2009 than in 2008. Last year was the seventh worse on record with about 1.43 million cases filed.

The spike in filings was sharpest in Arizona where the number of cases filed in 2009 rose 77% over last year. Wyoming cases rose 60%, Nevada 59% and California 58%. Pennsylvania is near the bottom of the list with a 14% increase. MSNBC.com sports a cool map of the US showing percentage increases by state.

Law Students Ready for Work

York College of Pennsylvania conducted a national survey of human resources directors and business leaders who make hiring decisions. The study showed that the most important factor that people who hire considered in whether to make a job offer is the candidate's demeanor in five areas: 1) personal interaction including courtesy and respect; 2) communication skills; 3) work ethic; 4)professional appearance; 5) self-confidence. Responders were asked to rank on a scale of 1 (very rare) to 5 (very common) the appearance of these traits in recent college graduates. For all of the five traits the mean rank was below 4.

Recent college graduates appeared to survey responders to be concerned about opportunities for advancement. This trait garnered a mean of 4. Unfortunately for job seekers, those hiring rank this trait as among the least important in the hiring decision.

53% of responders believed that the level of professionalism among recent college grads looking for entry level work was stable over the last five years. 33% percent believed that professionalism had decreased. Those that saw a decline in professionalism identified the causes as a false sense of entitlement to the job, changes in culture and values, and erosion of work ethic. 61% of responders reported that a sense of entitlement to a job had increased among recent grads over the last five years. Responders frequently noted that recent grads had problems accepting personal responsibility for on the job decisions and behavior, difficulty acting independently, and appeared to have no clear sense of direction or purpose in office environments.

I wonder whether law students possess the essential professional traits most valued in the market for legal employment. How can a law school give its students the competitive edge?