Ethical Implications of Recent Supreme Court Consumer Bankruptcy Opinions

In the last year, the U.S. Supreme Court issued four opinions which addressed what appear to be fairly discrete questions of some practical import to consumer bankruptcy practitioners. Three of those cases have ethical implications which the Supremes either did not comprehend or did not attach much significance to.

 The first case, United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010), involved a Chapter 13 in which the debtor filed a plan which proposed to pay his student loan debt in full through the plan, but without payment of interest. No one objected and the plan was confirmed. Approximately three years later, the creditor intercepted the debtor’s tax refund, the debtor moved to enforce the confirmation order, the creditor moved to set aside the order as void under FRCP 60(b), and eventually the case ended up before the Supremes. The court held that the order was not void because the court has jurisdiction to to hear student loan hardship discharge cases. The court further held that the creditor was not denied due process although it was not served with a summons and complaint (the creditor was served with a copy of the plan and filed a proof of claim in the case) because Rule 7011 requiring an adversary be filed is procedural, not jurisdictional. Result: debtor wins. Interest on the student loan debt is discharged.

 This case places a debtor’s attorney in the unfortunate position that he/she has conflicting duties to the court and to the client. Although the Supremes make it clear that the confirmation order never should have been entered (they refer to the “bankruptcy court’s error”), they nonetheless held that the provision was effective. As a debtor’s attorney I have an obligation to represent my clients zealously within the bounds of the law. Isn’t it my duty to try to get a plan confirmed that provides my client with the most relief possible? The obvious answer is that the relief granted to the debtor in Espinosa never should have been granted. (The relief granted was not within the bounds of the law.) I concede that point, but it was granted so – Which duty is higher – the duty to the court or the duty to the client? The Supremes at least recognized this issue in Espinosa. In the final paragraph of the opinion, the court states: “We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis. As we stated in Taylor v. Freeland & Kronz (citation omitted), “debtors and their attorneys face penalties under various provisions for engaging in improper conduct in bankruptcy proceedings. The specter of such penalties should deter bad faith attempts to discharge student loan debt without the undue hardship finding Congress required. And to extent existing sanctions prove inadequate to the task, Congress may enact additional provisions to address the difficulties United predicts will follow our decision.”


The second case was Hamilton v. Lanning, 130 S.Ct. 2464 (2010), which involved a debtor who took a one time buyout from her previous employer. That income caused her income to be above the median for her state. She proposed a 36 month plan based upon her new job and the trustee objected contending that the Code requires mechanical application of the means test. The court rejected that position and held: “When a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.” This ruling should come as no surprise as the majority of the courts which have addressed this issue have reached the same result – holding that “projected” has to add something to “disposable income.” This is the one opinion of the four that does not raise any serious ethical implications. (You can’t advise your debtor to quit their job so they qualify. Right? Seems pretty straightforward to me.)

 The third case was Schwab v. Reilly. 130 S.Ct. 2652 (2010). In that case, the debtor had operated a restaurant before filing a Chapter 7. She claimed restaurant equipment as an asset and assigned a dollar value to the asset of $10,718 which fit within her allowable federal exemptions. The trustee obtained an appraisal of the equipment at $17,200 and moved to sell the equipment subject to the debtor’s claimed exemption. The debtor objected contending that because the trustee did not object to her exemptions, she was entitled to keep 100% of the value. The court disagreed holding that because the dollar value assigned to the asset by the debtor fit within the dollar range of the allowable exemption, the trustee was not required to object to the exemption to preserve the estate’s interest in any value in excess of the exempt interest. This is the case which has resulted in many debtor’s attorneys now including a provision in their Schedule C which states some version of “amount claimed is 100% of market value.”

 The problem with this is that it places the trustee in the position of having to at least consider filing an objection to exemptions where the debtor’s schedules include such a provision. This may not be an issue in the “typical consumer case” where the assets consist of basic household goods and a house and two cars. (Of course, how many of us have had clients who listed only minimal jewelry but show up in our office wearing something which was clearly not valued accurately?) It seems that the more common problem scenario for the trustee is the scenario that played out here. The debtor owns something other than basic household goods – inventory, equipment, etc – and assigns a value that fits within the allowable exemption amount (i.e., under the wildcard.) Is it just fortuitous that the value fits within the allowable amount, or did the debtor “lowball” the value to make it fit? The trustee in these cases may feel compelled to object just to preserve the estate’s interest and to get some opinion of value. (Which he is going to pay for out of the $60 he gets out of the filing fee.) I would suggest that if a judge catches a debtor’s attorney doing this on more than a few occasions, there should be serious consequences. (Both for the debtor and the attorney.)

 Finally, in Ransom v. FIA Card Services, N.A., 131 S.Ct. 716 (2011), the court was faced with the issue of whether a debtor gets a vehicle ownership expense on the means test for a vehicle which is not encumbered by any debt. The court concluded that the debtor does NOT get such an expense. For those of us in Texas, this reversed the holding of In re Tate, 571 F.3d 423 (5th Cir.2009). But if the debtor went out and got a title loan for, say, enough to pay the bankruptcy attorney’s retainer, then there would be a debt secured by the car and the debtor would get the full vehicle ownership expense for that vehicle even if the debt would be paid in only a few months. Of course, 526(a)(4) provides that a debt relief agency may not advise an assisted person to incur more debt in contemplation of filing bankruptcy or to pay an attorney for filing a bankruptcy, but the reality is that an attorney is not prohibited from telling his client “You do not qualify for Chapter 7 by a few hundred dollars and if you only had a title loan, you would qualify. I am not advising you to do that, I am just advising you of the fact that you do not currently qualify, but you would if…….” (Wink, wink.)

 The unfortunate effect of three of these four opinions is that it places the debtor’s attorney in the precarious position of balancing his duty of fully advising his client of all of their rights and responsibilities while maintaining his duty to the integrity of the system.

 Just thinking out loud. (Or is it shouting into the hurricane?)

 Michael Baumer


Law Office of Michael Baumer


The Fifth Circuit recently held that private employers may discriminate in hiring based on a bankruptcy filing. In re Burnett, 635 F.3d 169 (5th Cir.2011). The court distinguished between public employers which may not discriminate in hiring and private employers which may. Neither public nor private employers may discriminate with respect to persons who are already employed based solely on a bankruptcy filing. (The employer in Brunett was Stewart Title Inc. – another reason to not be fond of title companies.) The Fifth Circuit is in line with Rea v. Federated Investors, 627 F.3d 937 (3d Cir.2010).


The bankruptcy code contains provisions dealing with employment discrimination by public and private employers in Section 525 as follows:

(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 . . . a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

Subsection (a) dealing with discrimination by governmental units was contained in the 1978 Bankruptcy Code. Subsection (b) dealing with discrimination by private employers was added in 1984. Both prohibit termination of employment or discrimination of employment based solely on a bankruptcy filing, but there is a small but apparently significant variation in the language of these two provisions. (a) prohibits denying employment based on a bankruptcy filing, but (b) does not. The courts have relied on this difference in holding that a private employer may deny employment based on a bankruptcy filing while a governmental unit may not.

An issue common to both sections is that they prohibit discrimination based “solely” on a bankruptcy filing. Employers will rarely identify a bankruptcy filing as the reason for terminating employment when a general assertion of insubordination or not being a team player will suffice (and is much more difficult to disprove.) Even if an employer does identify a bankruptcy filing as an issue in employment discrimination, as long as it is not the only issue, 525 is presumably not violated.

Law Office of Michael Baumer

Lessons in Islamic Law – Contract Law

The other day, I was reading something in the Tao Teh Ching which reminded me of something I read once in the Quran and I was looking for that and came across the following passage. In case anyone cares, I am not a Muslim, but I never trust what anyone else tells me the Quran says (or the Bible, either), so I read the actual book to see what it really says. Anyway, this is what the Quran says about contracts. (More particularly, promissory notes.)


O believers, when you negotiate a debt for a fixed term,

draw up an agreement in writing,

though better it would be to have a scribe write it faithfully down;

and no scribe should refuse to write as God has taught him,

and write what the borrower dictates,

and have fear of God, his Lord, and not leave out a thing.

If the borrower is deficient of mind or infirm,                                         

or unable to explain, let the guardian explain judiciously;

and have two of your men to act as witnesses; but if two men

are not available, then a man and two women you approve,

so that in case one of them is confused the other may remind her.

When the witnesses are summoned they should not refuse.

But do not neglect to draw up a contract, big or small,

with the time fixed for paying back the debt.

This is more equitable in the eyes of God,

and better as evidence and best for avoiding doubt.

But if it is a deal about some merchandise

requiring transaction face to face,

there is no harm if no contract is drawn up in writing.

Have witnesses to the deal, and make sure

that the scribe or the witness is not harmed.

If he is, it would surely be sinful on your part.

And have fear of God,

for God gives you knowledge,

and God is aware of every thing.

If you are on a journey and cannot find a scribe,

pledge your goods against the loan;

and if one trusts the other,

then let him who is trusted

deliver the thing entrusted, and have fear of God, his Lord.

Do not suppress any evidence,

for he who conceals evidence is sinful of heart;

and God is aware of all you do.



So what are the important principles here?

  1. Contracts should be in writing.
  2. They should be written by “scribes.” (Modern translation: lawyers.)
  3. Don’t leave anything out. (Make sure all important terms are addressed.)
  4. Have it witnessed. (Modern translation: notarized?)
  5. Don’t harm the scribe or witnesses. (Modern translation: don’t shoot the lawyers.)
  6. A written contract is “better as evidence and best for avoiding doubt.” (Modern translation: the parole evidence rule.)
  7. “Do not suppress any evidence.” (Modern translation: tell the truth, the whole truth, and nothing but the truth.)
  8. I have no intention of going here, but two women equal one man, at least for witness purposes, so “if one of them is confused, the other may remind her.”  (Modern translation: if you are discussing this with a woman you might want to still talk to you in the future, you should preface the discussion with “Can you believe this?”)

Law Office of Michael Baumer

Totality of the Circumstances under 707(b)(3)


Around Thanksgiving, The UST and I tried two 707(b) cases in front of Judge Mott. He took them under advisement and announced his rulings on December 22. He made lengthy recitations of findings of fact and conclusions of law on the record, but apparently will not be publishing these as opinions. If you are going to try one of these cases, you might want to get a transcript as it will provide valuable insight into how he approaches these issues.


The first case was:


Hufstedler 10-11769


In this case the debtors are in their mid-50s with one dependent child. They both work for the state and have for several years so income is fairly secure. Their combined gross income is $109,000 per annum. Just prior to filing, Mr. Hufstedler purchased a term life policy with a death benefit of $100,000 with a monthly premium of $151. Mr. Hufstedler already had term life coverage of approximately $300,000. (Mrs. Hufstedler has approximately $500,000 in term coverage, but it has been in place for several years and the UST did not object to that expense.) He and his wife also purchased long term care insurance with a monthly premium of $431. Although both of the debtors have some medical issues (they both take blood pressure medicine and he takes cholesterol medicine and is a diabetic), their conditions have not materially changed recently and are manageable with medication. The stated reason for these purchases was looking forward and trying to provide for the family in the event one of their medical conditions grew worse.


Judge Mott initially held that long term care insurance is not “health insurance” as contemplated by 707(b)(2)(A)(ii)(I) so it would not be an allowable expense on line 34 of the means test.


He went on to conclude that the long term care insurance was not a “reasonably necessary expense at this time”, because there was no apparent immediate need and the insurance could be purchased 5 years later (at the end of a hypothetical Chapter 13) for only an additional $91 per month.


Finally, he concluded that the long term care was not a “special circumstance” under 707(b)(2)(B)(i). He recited several cases which opine that special circumstances require something “unforeseeable or beyond the control of the debtor” or “out of the ordinary or exceptional in some way” or for which “there is no reasonable alternative” or disallowing the expense would “result in demonstrable economic unfairness prejudicial to the debtors.”


On the debtors’ side, he did hold that homeowners insurance required under a deed of trust was allowable as a reasonable and necessary expense on line 42 of the means test. (Payments on secured claims.) Although the insurance expense is not really a payment on a secured claim, if the debtor fails to provide the insurance, the lender can purchase single interest coverage insurance and charge the expense to the debtors. (HOA dues were not an issue in this case, but the same analysis should apply.)


He also concluded that the debtors’ cell phone expense was “not particularly excessive.” The UST objected to this expense largely (it seems) because just prior to filing the debtors upgraded their phones when they renewed their service contracts. (Most of us have nicer phones than the debtors.)


The UST also objected (somewhat vaguely) to the debtors’ out of pocket medical expenses which are much higher than normal. I’m not faulting the UST – this is always an issue because medical expenses fluctuate significantly and are not fixed like a house or car payment. Deciding on a specific monthly dollar amount is an imprecise exercise, at best. Although Judge Mott expressed some concern that the expenses might be overstated by some amount, he concluded that the UST had not met its burden in proving the actual amount so the amount listed in Schedule J was allowed.


The second case was:


Babb 10-11551


Mr. Babb is a commercial property manager/developer with Lincoln Properties. Between 2006 and 2010, his income decreased from over $400,000 to approximately $115,000. He is $47,000 over median. He qualifies for Chapter 7 under 707(b)(2). The issue in this case was whether allowing him to obtain a discharge was an abuse under the “totality of the circumstances” under 707(b)(3).


The problem in this case was the house payment. PITI totaled $7600 per month which was roughly equal to his current monthly net income and, although he was optimistic that some deals which had been on hold were moving forward, he could not say with any certainty that his income would increase in the near term. The house payment was 5.5 times the IRS standard. A modification on the first lien is in process, but neither the first or second liens was current. The liens total $1,020,000 and the house is valued at $950,000 (which might be optimistic given current market realities.)


Although Judge Mott accepted the fact the housing expense was not an issue when the home was purchased in 2006, he concluded the expense is “unreasonable and excessive in light of their current circumstances.”


FYI, in both cases he gave the debtors 30 says to convert to another chapter or the cases will be dismissed.


Michael Baumer

Law Office of Michael Baumer

Fifth Circuit affirms Camp v. Ingalls

On January 21 the Fifth Circuit affirmed the District Court opinion in Camp v. Ingalls.


In that case, the debtor moved from Florida to Texas in 2007 and filed a Chapter 7 in 2008, less than 730 days later. The question presented was what exemptions was the debtor allowed or required to claim.


Section 522(a)(3)(A) which was added by BAPCPA provides that a debtor may claim the exemptions of the state where he was domiciled for the 730 day period prior to filing. If he has not been domiciled in one place for the 730 day period, he claims the exemptions of the state where he resided for the 180 day period prior to the 730 day period. In this case, Mr. Camp would be required to claim Florida exemptions because he was not domiciled in Texas for 730 days prior to filing.


The problem is that Florida’s exemption statutes say that specified property may be claimed as exempt by “residents of this state.” Since Mr. Camp is no longer a resident of the state of Florida, he is not entitled to claim Florida exemptions. The Fifth Circuit held that although Florida has opted out, the Florida exemptions only apply to residents and since Mr. Camp was a non-resident, the Florida opt out statute did not bar him from claiming federal exemptions. (I personally think this is the wrong way to get to the right answer, but they got the right answer, so I’m not going to complain too much.)


In a footnote, the court declined to address the issues of whether 522(b)(3) preempts state law restrictions of extraterritorial application of exemptions and whether the savings clause at the end of 522(b) permits a debtor to claim the federal exemptions when state law opts out and at the same time restricts extraterritorial application of state exemptions.


I have previously written on this issue and opined that I think Judge Gargotta reached the result that Congress actually intended (If you have lived somewhere for less than two years, you have to use the exemptions where you came from), but the statute was not well thought through (i.e., the drafters at MBNA never thought about the issue or looked at individual state laws) and as result, poorly drafted. Because I have way too much time on my hands, I have actually looked at each state’s exemption statutes to see if they have a domicile or residency requirement. Please note that some states have a residency requirement for real property, but not personal property, and vice versa. I made a chart, which I offer for your consideration. Major disclaimer – the chart is about two years old. State laws may have changed since then. I know, for example, that New York is considering amendments to its exemption laws to address this issue.   


For what it’s worth………


Michael Baumer

Assigned Ad Valorem Tax Claims in Chapter 13

The following is a recent article published in the State bar of Texas Bankruptcy Law Section Newsletter. It is primarily of interest to consumer bankruptcy law attorneys practicing in Texas.

Chapter 13 debtors whose taxes are not escrowed will occasionally resort to one of the property tax payment services which pay the taxes and take an assignment of the taxing entity’s claim. The upside for the taxing authority: they get their money faster without incurring collection costs. The upside for the debtor: they get to pay the taxes over a longer period of time without incurring collection costs. The downside for the debtor: taxing authorities can only charge 12% interest while tax assignees can charge 18%. If the debtor pays the claim over a longer period of time at 18% interest, they end up paying far more interest. (Actually, the best case for the debtor is for the mortgage company to pay the taxes. That way, the debtor can pay back the mortgage company at no interest.)

 BAPCPA added new Section 511 which provides: “If any provision of this title requires the payment of interest on a tax claim… the rate of interest shall be the rate determined under applicable nonbankruptcy law.” It is significant that Section 511 does not define “tax claim.”

 There have been a recent spate of opinions on this issue starting with Judge Lynn in In re Davis, 352 B.R. 651 (Bankr.N.D.Tex.2006). Judge Lynn held that the claim of a creditor which paid the ad valorem tax claim prior to filing of the Chapter 13 and held a transfer of the tax lien was a “tax claim” under Section 511 and so was entitled to receive its contractual rate of interest in a Chapter 13. The important point here is the anti-modification provision of Section 1322(b)(2) which provides that a debtor may modify the rights of holders of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”

 In In re Sheffield, 390 B.R. 302 (Bankr.S.D.Tex.2008), Judge Isgur went into a more detailed analysis and concluded that although the private company assignee of a taxing authority held a “tax lien”, it did not hold a “tax claim”, disagreeing with Judge Lynn.

 Section 101(51) defines a security interest as a “lien created by an agreement.” Ad valorem tax liens are created by state law, not by any agreement. In most of these cases, the tax assignee takes a transfer of the taxing authority’s lien, but they also have the debtor execute a note and deed of trust. As Judge Isgur explains, the lien is not created by the agreement, but arises by operation of state law. In order to obtain an assignment of the tax lien, the taxes must be paid by the assignee. When the taxes are paid, there is no longer any “tax claim.” A new claim arose under the promissory note executed by the debtor. That claim may have resulted from payment of taxes, but it was not a “tax claim.” Judge Isgur makes the further point that the tax assignee did not purchase the taxing authority’s claim – it paid the claim. Judge Isgur concludes: “A state taxing authority may assign its tax claims if state law so provides. Hypothetically, a state could authorize the sale of its tax receivables to a third party. That third-party assignee would presumably be protected by Sec. 511, But, that is not the structure that this State has chosen for the private collection of its property taxes.”

 Approximately one month later, Judge Bohm followed Sheffield in In re Prevo, 393 B.R. 464 (Bankr.S.D.Tex.2008). Judge Bohm provides some discussion of the Kentucky and Pennsylvania tax statutes to contrast them with the language of the Texas statute and clarify the issue.

 Judge Isgur revisited the issue in January 2009 in In re Kizzee-Jordan, 399 B.R. 817 (Bankr.S.D.Tex.2009). In Kizzee-Jordan, the tax assignee took another approach arguing that Sheffield was inconsistent with the Supreme Court’s opinion in Johnson v. Home State Bank, 501 U.S. 78 (1991) and the Sixth Circuit’s opinion in Glance v. Carroll, 487 F.3r 317 (6th Cir.2007). Neither of those opinions have any relevance to the disposition of this issue and Judge Isgur so concluded. (In short order.) [Judge Isgur confirmed this conclusion again a month later in In re Sotto, 2009 WL 260957 (Bankr.S.D.Tex.2009).]

 I have not found any opinions in the Eastern or Western Districts or by any other judges in the Northern or Southern Districts.

 Assuming that 511 does not apply to “tax liens” as opposed to “tax claims”, the appropriate rate of interest for tax assignees in Chapter 13 would be the Till “prime plus” approach. FYI, the interest rates confirmed in Sheffiled, Prevo, Kizzee-Jordan and Sotto were 12%, 8.25%, 8.5%, and 7%, respectively. (As a debtor’s attorney, I like the downward trend in rates.)

 I would guess that we will see the tax assignee lobby try to get the legislature to “fix” this “defect” in the tax statutes, but until then, your Chapter 13 plans should pay Till interest, not the contract rate of 15% or 18%.


Michael Baumer

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New Legislation Protecting Tenants of Foreclosed Properties

On May 20, 2009, President Obama signed into law The Protecting Tenants in Foreclosure Act. Public Law No.111-22. The law took effect immediately.

The principal protection of the law is that the successor in interest to the foreclosing lender must give a bona fide tenant (not the mortgagee or a family member who is paying market rate rent negotiated as part of an arms length transaction) at least 90 days notice to vacate the property. If the tenant has a lease, they are entitled to occupy the property until the end of the lease. The new owner may terminate the lease on 90 days notice if the purchaser intends to occupy the property. In both cases, the tenant must pay the contract rent to the new owner or they may terminate the tenant’s occupancy in compliance with state law. [There are additional provisions relating to tenants (and owners) of section 8 properties.]

None of these provisions preempts state or local laws providing greater protection to tenants.

The provisions of this law expire December 31, 2012.

My clients are not typically tenants and so are less likely to be hugely effected by this legislation. I do, however, represent many clients who own rental properties which they intend to surrender because they are upside down and the properties do not cash flow. This legislation will effect the tenants of those debtors.

Michael Baumer

Law Office of Michael Baumer

The Future of Chrsyler

On Father’s day morning I watched the McLaughlin Group as I do most Sunday mornings. (Although I frequently turn off the sound while they shout over each other.) At the end of the show, John invites his guests to make a prediction and he makes one, too. John predicted that Chrysler will produce a car that gets 50 miles per gallon and costs less than $5,000 by the end of 2011.

 Let’s look at that in pieces. (Although I am going to nitpick with him over some of the details, I am not criticizing John McLaughlin. Keep reading.)

 First, it really isn’t Chrysler anymore. It is Fiat/Chrysler. This is more significant than most Americans realize. (Fiat didn’t put up any money to “buy” Chrysler. If the “new” Chrysler crashes and burns, Fiat walks away with minimal consequences. Sweet. Where do I sign up for this for my business?)

 Second, a car that gets 50 mpg is really no big deal. This is the easy part, believe it or not.

 Third, I think that a “less than $5,000” price tag is seriously optimistic, but I do think we could get into that neighborhood. (This is going to be a very bare bones car. Let me suggest that your teenager doesn’t need to drive a Lexus/Hummer/Suburban.)

 Fourth, I am not convinced that Chrysler can produce this (very) theoretical car in the US by the end of 2011. I will concede that Fiat/Chrysler might produce that car somewhere else by then, but that is a very different issue. (I understood that part of the reason we bailed out Chrysler and GM was to help save American jobs. If all of these production jobs move overseas, why are American taxpayers footing the bill to preserve and/or create jobs in Italy?) Historically, the time line from design to market for the US auto industry has been more than 5 years. To shorten that reality, the only option is to tool up to produce an existing Fiat model in the US. One small problem: the Fiats produced in Europe do not comply with US environmental laws. Either Fiat/Chrysler has to get a waiver of existing environmental laws or they have to re-tool their “small engine technology” to comply with those laws. Any bets on which is more favorably received by US taxpayers? And how long will this take?

 Another small detail: it takes more than a month or two to re-tool a car plant. Remember all of those car ads on TV that show the robots making the spot welds or spraying paint on cars on the assembly line? All of those robots have to be re-programmed to produce another car. The end of 2011 may be achievable (although improbable), but can Fiat/Chrysler survive that long? Their sales are already down by half from historical levels. (They aren’t the only one, but their numbers seem particularly bad.)

 More problematic are two questions that have no happy answer. First, what is the “hot” Chrysler product that people “have to have?” (To keep Fiat/Chrysler in business in the US for the interim period. However long that is.) The short answer is that there is no such product. The Dodge Ram truck is the leading contender, but the Ford F-150 and the Chevrolet C1500 are far more popular. (A very large problem.)

 Second, what is the Fiat product that Americans “have to have?” This is the “save Chrysler” notion. In theory, Chrysler is supposed to benefit from Fiat’s small engine technology. Let’s assume for the purpose of argument that Fiat has some super duper technology that will save Chrysler. If that was the case, Americans would be clamoring for that already existing Fiat model. Fiat would be selling thousands/millions/gazillions of those cars, because America is, after all, the home of “sell what sells.”

 John McLaughlin’s prediction that Chrysler would produce a 50 mpg $5,000 car by the end of 2011 illustrates the real problem. Most of the Pundits talk about Chrysler being “out of bankruptcy” like that’s the end of the story. The harsh reality is that Chrysler is still in serious trouble. The Fiat deal is life support. (At best.) Chrysler is not viable, Fiat or no Fiat. Chrysler as we know it will cease to exist. The question is the date of the demise, not whether it will happen.

 Michael Baumer



Law Office of Michael Baumer


The news since May 1, 2009.

GM is closing 11 plants, “idling” 3 more, and closing 3 parts distribution facilities.

Fiat/Chrysler is probably closing plants, but there is no official word yet.

GM will layoff 21,000 (more) employees.

Fiat/Chrysler will layoff more employees, but we don’t know how many yet.

GM will reportedly terminate somewhere between 2000 and 2600 dealerships. (They sent out notices to 1100 dealerships prior to filing Chapter 11 that they would not be renewed. The question is how many more.)

Chrysler (pre-Fiat) has already terminated 789 dealerships.

The terminated dealerships are reported to be the “weakest” dealerships with an average of 50 employees per dealership. (The reality seems to be that these are the low volume dealers. They may be profitable for the dealer, but they are less profitable for GM and Chrysler. The trend is toward the big, chain, mega-dealers out on the interstate. The small downtown dealers who have been in business for three generations are no longer required or desired.)

Estimated job losses for Chrysler dealerships: 40,000. Estimated job losses for GM dealerships: 100,000+/-. (My best guess is that these numbers are at least somewhat inflated. Some of these dealers sell other brands and will continue to sell those brands. Some do not sell other brands, but they will survive as used car lots and/or doing repair work. The “good” news is that instead of losing 140,000 jobs at dealerships, we will “only” lose somewhere between 70,000 and 100,000.)

The reported numbers are that since 2002, 300,000 jobs have been lost at companies that supply parts to the auto industry and that the number of suppliers has declined from 1900 to 1100. (Some of these ceased to exist due to mergers. Some just ceased to exist.) There are estimated to be approximately 300,000 jobs remaining in the direct chain to the auto manufacturers. Best guess? There will be additional mergers/consolidations in the supplier industry. There will be additional bankruptcies by the weakest links.

Economists talk about the “multiplier effect”. In good times, each new job in the auto industry creates (up to) ten more jobs because of jobs for suppliers, jobs for delivery companies, jobs at restaurants, jobs at lube companies, the grocery store, etc…….) Unfortunately, (and economists are less happy to talk about this), the multiplier effect works on the downward spiral, too. For each job lost at GM or Chrysler, how many more jobs are lost? (Ten? Does the multiplier work in the same proportions on the downslope as on the upslope?)

Spring Hill, Tennessee is the home of the original Saturn plant which opened in 1990. Prior to the Saturn plant, the population of Spring Hill was approximately 1500. The current population is approximately 25,000. By far the largest employer in the area was the Saturn plant. (The plant was closed in 2007 to re-tool. It reopened in 2008 producing the Buick Lucerne.) GM has announced that this is one of the plants they are “idling.” (Idling is the industry term for a plant they are shutting down “temporarily” as opposed to a plant which they are shutting down permanently. Like forever.)

The Spring Hills plant employs 3000 people. They are all probably going to lose their jobs. (They will all be laid off this Fall assuming no white knight comes in and saves the day) That is more than 10% of the town’s population. Unemployed people wash their cars less often. They get their hair cut less often. They eat out less often. They don’t buy new cars. They don’t buy big screen TVs. They buy cheap domestic beer rather than the fancy imported stuff. They don’t take vacations. They don’t ……………..

If somebody doesn’t buy the plant, what happens? How do you sell your house? Who is going to buy it? The answer is: nobody. Prices will drop. Anybody who has a home will walk away and/or move away. Nobody will move in to replace them. I don’t know the specifics in this case, but in many of these cases the big employer in town will pay a yearly payment “in lieu” of property taxes. I would guess that GM pays one or two or three million dollars in lieu of property taxes for the Spring Hill plant. That money won’t get paid anymore. What is the effect of this loss of tax revenue? (Not counting the drop in property tax revenues due to the decline in values for houses that nobody can sell.) City and county employees get laid off – police officers, teachers, park employees, the ladies at the counter where you pay your vehicle registration, the guys (no offense ladies) who pick up your trash, ……..

Unless some miracle happens, Spring Hill, Tennessee will lose most of its population in the next five years, and the people who are left will make significantly less money. Spring Hill may not become a ghost town, but there will be parts of town that will make you wonder.

This is their new reality.

Michael Baumer

Law Office of Michael Baumer

Chrysler Chapter 11 email to Texas Bankruptcy Bar

The following is an email I sent to the Bankruptcy Section of the Texas Bar on May 14, 2009.

Dear Readers:

All of us who know a little about how bankruptcy really works have been amused and/or bemused by the whole notion that Chrysler would go through a “surgical bankruptcy” that would be completed within 60 to 90 days. The asset sale to Fiat may be completed within 60 days, but mopping up the blood may take a little longer.

One issue which has not received a great deal of press is Chrysler’s ability to reject franchise/dealer agreements as executory contracts under Chapter 11. Franchise agreements for car dealers are generally controlled by state law and many states have laws which are VERY protective of their auto dealers. (Some car dealers make or made a LOT of money and they know and contribute to their elected state officials. Some of you may have heard of Red McCombs.) Some states, for instance, have laws which force the car companies to renew franchises at the end of the contract term, whether the car manufacturers want to or not. The result has been that there are a lot of car dealers (many in small towns or in towns close to each other [think Northeast]) which may be profitable for the dealer, but not for the manufacturer.

Today Chrysler released its list of franchises which will be rejected effective June 1. That list includes 789 dealers. Having a law firm to run, I don’t actually have time to do a state by state analysis, but by my count, there are 50 in Texas. For comparison, Florida has 34 and New Jersey appears to be one of the hardest hit with 30. (I realize that 50 in Texas is more than 30 in New Jersey, but there are some counties in Texas bigger that the whole state of New Jersey.) The Midwest seems to be particularly hard hit with large numbers in several Rust Belt states. (Ohio, Michigan, Illinois, and Iowa.)

I practice in Austin, which did not lose a single dealer. (Good for Austin, but as a bankruptcy lawyer, I fell a bit left out.

Although Austin didn’t lose any, the Central Texas region did not do so well. We lost FIVE in Waco proper, and one each in Clifton, Hillsboro, and Gatesville. Closer to Austin, we lost one each in Fredericksburg, Lockhart, Giddings, Seguin and San Marcos.

San Antonio only lost one.

The Archer family lost four in Houston. (Ouch.) Baytown and Alvin each lost one.

In the Dallas/Fort Worth area there are ten with one each in Dallas and Fort Worth, two each in Denton and Waxahachie, and one each in Arlington, Richardson, McKinney and Mineral Wells.

The Valley lost two in Harlingen and one each in McAllen and Brownsville.

Doing some basic internet research, a new car dealership typically employs between 100 and 200 people depending on its size. 789 dealerships times 150 employees equals 118,350 people that won’t have a place to work June 1. I realize it is really not that simple. Some of these franchises are two that operate together (i.e., a Chrysler franchise and a Dodge franchise on the same lot.) There will be some consolidation in the industry, so some of these people will find jobs at other that dealers that survive and will theoretically sell more cars now that there is less competition. (Of course, new car sales for Chrysler are down 48% from a year ago.) The fallout extends far beyond the dealers. Some of the auto dealer employees used to make pretty good money. (And in some cases, very good money.) I’m talking about the sales guys/girls and the finance guys. The car washers maybe not so much. BUT all of these people spent money in their local communities at restaurants and stores and the local Starbucks. How is losing its Chrysler dealer going to effect Aransas Pass, or George West, or Hughes Springs, or Crockett, or Denver City?

These are the numbers for Chrysler. When GM files at the end of May, their list of franchises to be rejected is rumored to be almost 3,000 dealers.

In case anyone was interested.

Michael Baumer

Law Office of Michael Baumer

FYI, the next day Chrysler announced that the expected layoffs from the dealerships would “only” be about 40,000 people. GM has since announced that they will “only” be terminating about 2200 dealerships. These are smaller dealerships and only employ 50 people or less, so the actual number of people who will lose their jobs at the GM dealerships should be under 100,000. And that’s the “good” news.

by Michael Baumer