The Toolbox: Importance of Consumer Practitioners

This month I want to get on a soap box to promote the significance of consumer bankruptcy lawyers to the general practice of bankruptcy law. While some firms handle both types of cases, the practice has become split between consumer and business bankruptcy lawyers with the latter seen as more prestigious and certainly better paid. My purpose in this column is to give conscientious consumer lawyers the respect they deserve.

Business bankruptcy lawyers are often unfamiliar with Chapter 13 (and Chapter 12) as well as provisions elsewhere in the Bankruptcy Code ¹11 U.S.C. §§101 et seq. that primarily impact consumers – e.g., Section 523 delineating non-dischargeable debts. Because of the congressional concern with consumers, this leads to overlooking important aspects of the Code. Business lawyers would do well to study more consumer law.

First of all, not only are many provisions of the Code—largely Chapters 1, 3 and 5—applicable to both consumer and business cases but many provisions of Chapter 13 (and Chapter 12) parallel provisions of Chapter 11. For example, the prohibition of “unfair discrimination” is found in Section 1322(b)(1) (and Section 1222(b)(1)) as well as Section 1129(b)(1). The treatment of secured claims under Section 1325(a)(5) parallels Section 1129(b)(2)(A)(i). Likewise, the effects of confirmation described in Section 1327 (and Section 1227) are substantially similar to those detailed in Section 1141(a)-(c). Indeed, individual Chapter 11 cases now closely follow Chapter 13—see, e.g., Sections 1115, 1127(e), 1129(a)(15), and 1141(d)(5). Thus, the lawyer representing a Donald Trump in bankruptcy needs to understand how Chapters 12 and 13 work. Because of the volume of consumer cases (and, in the case of individual Chapter 11 cases, because of the long history of similar law in Chapter 13), the law is often more fully developed there than in the large Chapter 11 cases.

This brings me to my second point: consumer bankruptcy drives the law. From the perspective of congressional action, without the impetus of reform of consumer law, it is unlikely that Congress would have made the changes to Chapter 11—Section 1121—and the Code generally—Section 365(d)—in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that today give business practitioners headaches.

But even more important is the effect on the case law of the preponderance of consumer cases. The number of consumer cases means that the first impression of a provision common to both consumer and business cases is typically construed by the courts in a consumer case. ²See, e.g., Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440 (2004) considering waiver of sovereign immunity under Section 106. Similarly, where the provisions of Chapter 13 and Chapter 11 are in sync, the first authoritative word is in a consumer case. ³See, e.g., Liberty Nat’l Enters. v. Ambanc La Mesa Ltd. P’ship, (
In re
Ambanc La Mesa Ltd. P’ship.), 115 F.3d 650 (9th Cir. 1997), looking to Chapter 13 law to construe “unfair discrimination.”

In fact, many important decisions of general application with significant ramifications for Chapter 11 cases are handed down by appellate courts in consumer cases. In Associates Commercial Corporation v. Rash, 520 U.S. 953 (1997). the Supreme Court held that replacement value must be used in valuing property for cramdown purposes. In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the Court adopted a formula approach for calculating cramdown interest rates. ⁴Although note 14 of the Court’s opinion suggested different treatment in Chapter 11, the formula approach has been used there as well. See Wells Fargo Bank Nat’l Assoc. v. Texas Grand Prairie Hotel Realty, LLC (In re Texas Grand Prairie Hotel Realty, LLC), 710 F.3d 324 (5th Cir. 2013). In United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010), the High Court found a creditor bound by a term of a confirmed plan even though the provision at issue was improper. In Brown v. Chesnut (In re Chesnut), 422 F.3d 298 (5th Cir. 2005), the Court of Appeals held that an arguable interest in property implicated the automatic stay of Section 362(a) of the Code. These are just examples of consumer cases that affect Chapter 11 practice.

When you look at these cases give a moment’s thought to the consumer lawyers who handled them. While it may be that a high-powered professor or practitioner will handle them in the Supreme Court, up to that time matters will be in the hands of the consumer specialist who maintains a volume practice. That lawyer will make the record and fix in stone the issues that the Court will eventually decide. All the person arguing to the High Court can do is fashion arguments within the parameters set by the parties below.

Those parameters will be set by lawyers who in preparing a case or writing an appellate brief will often be using their own time rather than billable time. The fact is consumers cannot pay big fees for experts and to build voluminous records or for counsel to author extremely detailed briefs. Sometimes the issue is joined in bankruptcy court with little or no preparation—and when counsel faces paying the expenses of an appeal out of his or her own pocket and writing briefs and pleadings without much prospect of payment by the client—it is almost too much to expect first quality work. When a good job is done—as I find to be the norm—it is almost charity on the part of the attorney, who cannot see such individual—specific effort as a profit center. In short, the professionalism of the consumer lawyer is what the rest of us must rely on to be sure that the law and issues will be property identified and explicated during the appellate process.

My third point is that that same professionalism is what will satisfy consumer debtors that the legal system works as it should. Over a million consumer cases are filed each year. The debtors in those cases represent the largest share of litigants on the civil side in the federal courts. How these debtors view the system is an important factor in establishing the reputation of our profession and we must all be grateful for those attorneys that work as competent and effective advocates in representing these people.

The volume of cases also illustrates the importance in the economy of consumer cases. Each year Chapter 7 and Chapter 13 trustees disburse billions of dollars from consumer cases. Tens of billions of dollars in debt are discharged. Millions of Americans have been relieved of burdensome obligations through the Code, and the Code will continue in the future to give honest consumers a fresh start.

I wanted to use this column to point out the importance of the consumer bankruptcy lawyer. Attorneys involved in mega-Chapter 11 cases too often feel superior to the Chapter 13 specialist. But the Code applies in consumer cases and lawyers in those cases use most of the same tools as business reorganization counsel. That they use those tools for the most part well in dealing with the number of clients they have and in addressing issues as complex as those faced in large corporate cases is important to all of us who care about the system.