Regular updating of my web site is a difficult task.
Consequently, I have not been able to maintain my customary newsletter
schedule. The problem is not ideas, content and material. The law and
current events are full of that stuff. The problem is rather logistics and
translating the material into the hypertext markup format, then uploading
with all the proper graphics to the proper location on the AT&T
server. That is then followed by the task of "tweaking" all the
hyper link references. Hopefully, I will have caught up by the end of the
year.
Western State University College of Law (Fullerton, California) has received American Bar Association provisional accreditation. The accreditation is good for seven years. This represents the culmination of an effort by the Trustees of the profit making institution which began in excess of twenty years ago. ABA accreditation is significant in one major respect. Graduates of the law school can now expect their degrees to be "honored" in all of the other states of the country.
The Los Angeles based Concord University School of Law,
opened by the same company that helps people prepare for the law school
admissions test, will offer all its courses online, apparently a first in
the legal education field. But the school lacks ABA accreditation, so a
graduate will not be able to take the bar exam outside of California.
| Legal Trends in
the Courts
Recent Cases of Interest |
| Sexual harassment: Alida Star Gebser, an eighth-grade student who had been sexually harassed by a teacher, tried to hold the school district liable for damages under Title IX of the Education Amendments of 1972. Gebser, joined by the United States as amicus curiae, invoked the standards used by the Courts of Appeals in Title VII cases involving workplace sexual harassment by a supervisor. The Supreme Court rejected that standard, ruling that damages may not be recovered unless an official of the school district who had authority to institute corrective measures had actual notice of, and was deliberately indifferent to, the teacher's misconduct. Gebser v. Lago Vista Ind. School Dist. |
| Age Discrimination--There is conflict in the Courts: Recently, a Division Five Appellate panel upheld an award of $800,000 in punitive damages against Bechtel Corp. for age discrimination and, in the process, sent a subtle message that the court does not look favorably upon last year's controversial 4th District decision in Marks v. Loral Corp.--an opinion mentioned in this newsletter. That decision had decimated age-related claims. In Keiffer v. Bechtel Corp., Justice Barbara Jones took issue with Marks in an unpublished section of her 26-page opinion. The Recorder |
| Crazy Cases-Continued: The Mistaken Beef Burrito- A devout Hindu is suing a Taco Bell for serving him a beef burrito rather than the bean one he ordered. The one bite of beef he chewed violated his most fundamental religious principle, causing him emotional distress as well as medical expenses and loss of wages, Mukesh Rai's claimed in his suit filed last week. Rai claims to have suffered tremendously in the wake of the burrito bite, and said he has had to travel abroad to perform a religious purification ceremony with Hindu masters. According to the suit, Rai repeated the order twice to be ensured of not receiving a meat burrito. He said Taco Bell initially showed interest in addressing his concerns but failed to take action. (The Los Angeles Times ) |
| Torts/Insurance Law--Amy Zuniga Revisisted: State Farm Pays $100 Million in Secret Settlement. Previously in this newsletter, I had highlighted ongoing litigation emanating out of the Northridge earthquake. In the course of that litigation, the revelations of former State Farm employee had generated a technical and controversial battle over disclosure. Recently, in a secret settlement filed under "deepest confidentiality," State Farm Insurance Co. paid 117 policyholders $100 million in response to a suit alleging that the insurance company unfairly altered its earthquake coverage policy before the 1994 Northridge quake. The settlement is the largest known earthquake payout by an insurer. Attorneys for the homeowners who sued said State Farm could face additional payouts to thousands of other policyholders whose quake coverage was trimmed. State Farm admitted no wrongdoing in making the deal. The Los Angeles Times |
| Employment Law: Cotran decision revisited.
I have previously mentioned the landmark Cotran decision, where the
California Supreme Court ruled earlier in the year that an employer may
fire an employee for good cause after conducting a reasonable
investigation, even if the allegations which trigger the termination are
later found to be untrue. I thought it might be appropriate to examine
the significance of that decision in greater detail.
A discharged employee can no longer challenge a termination decision resulting from alleged misconduct so long as a reasonable good faith investigation occurred. The Supreme Court decision in Cotran v. Rollins Hudig Hall International also invalidates the 1989 State Court of Appeal ruling in Wilkerson v. Wells Fargo Bank, 212 Cal. App. 3d., holding that in order for an employee to be terminated under a good cause standard, a jury had to determine that the alleged misconduct actually occurred. According to the Cotran decision, the jury's role will now be limited to an assessment of the objective reasonableness of the employer's factual determination of misconduct. The Court,did not spell out the essentials of an adequate employer investigation. The Court, however, did indicate that an adequate investigation includes notice of the claimed misconduct and a chance for the employee to respond. Richard Cotran sued his former employer Rollins Hudig Hall International Inc., an insurance company, after the company fired him from his Senior Vice President position. The termination occurred following an investigation of allegations that Cotran had sexually harassed two female employees. The company's investigation included interviews with 21 people who worked with Cotran. A jury in the underlying Superior Court trial decided that Cotran had not sexually harassed the two female employees and therefore the Company should not have terminated Cotran. The jury awarded Cotran $1.78 million in lost compensation. An appellate court overturned that verdict, ruling that the company had conducted an adequate investigation of the allegations and had a reasonable belief Cotran engaged in the alleged harassment. The Supreme Court in a 6-1 ruling, agreed with the appellate court. As a result, the only question for the jury is whether the factual basis on which an employer bases its decision to terminate is reached honestly, after an appropriate investigation and/or based its decision on reasons that are not arbitrary or pretextual. I suspect that we can expect to see "misconduct" investigation as a defense in many of these cases in the future. |
| Torts-Automobile Insurance-Proposition 213 Under the Microscope: Wrongful Death Action May be Maintained by survivors of deceased uninsured motorist. Horwich v. Superior Court. A California state appeal court has held that Proposition 213, which limits the compensation available in suits by uninsured drivers, does not bar family members from collecting noneconomic damages for the wrongful death of an uninsured motorist. The Court held that the parents of an uninsured driver killed in an automobile accident could recover for non-economic loss, such as pain and suffering. The opinion indicated that the new law is clear that damages can only be limited against the owner or operator of the uninsured vehicle. |
Is it a "bank bailout"?
Will it turn the courts into the credit industry's "repo man"?
Has the "fix" been in for a long time already, with numerous financial players laying out big bucks on a "sure thing?
You decide.
By way of background, the House of Representatives has passed HR3150 which addresses bankruptcy reform. The Senate has passed Senate Bill 1301. The two bills are set for additional action and the likelihood is that we will see some sort of Bankruptcy reform which incorporates the basic themes and approaches expressed in these proposals. Those themes seem to be focusing upon a "needs based" criteria, and basic restrictions upon full discharge of one's burdensome or overwhelming debt. Many scholars, and I agree, believe this represents a monumental change in the American cultural and historical approach to "debt forgiveness"---a concept which contributed to the founding of the country. And, against the current backdrop of Presidential scandal, I feel it appropriate to place the spotlight on the Legislative branch in light of the fact that next to NAFTA and healthcare insurance reform, this has become one of the most heavily "lobbied" issues of modern politics.
Here are some snippets from some articulate, and informed sources. Admittedly, the bias of the viewpoint is intended:
"Big Banks Don't Need a Bailout"
by James P. Caher
Congress is poised to enact bankruptcy "reforms" which would directly affect more middle class Americans than just about any other piece of legislation considered this term. If successful, the so-called reform movement would revolutionize the way we have viewed debt relief in this country since the days of our Founding Fathers — several of whom were impoverished debtors themselves (Thomas Jefferson went bankrupt 5 times)— and would severely undermine the "fresh start" to financial life which we have traditionally afforded honest debtors. An unprecedented lobbying and public relations campaign funded, surprise!, by credit card companies is seeking new bankruptcy laws designed to protect lenders from the consequences of their own reckless lending practices.
The cornerstone of these proposals is the notion of "needs-based bankruptcy" — the concept that bankruptcy should only be available to those deemed worthy, by the credit industry, of relief. Although the recent record increases in bankruptcy filings is the stated reason for the "reform," the fact of the matter is that consumer lenders have been promoting this idea in Congress for at least 30 years. Now, however, they have a peg on which to hang their innocent-sounding "Responsible Borrower Protection Bankruptcy Act," which I view as a less than clever euphemism for what should more accurately be termed the "Irresponsible Lender Protection Bankruptcy Act."
The credit industry is hardly a worthy candidate for corporate welfare, and that is precisely what this bill is. Credit card companies have made a business determination that more is gained through the reckless extension of credit to virtually anyone than is lost through the occasional default. And they are right. Even with the increase in personal bankruptcy filings, banks and credit card companies suffer defaults in only about 5 percent of their accounts. What investor wouldn't take odds like that? Lend money at triple the prime rate; charge a percentage of everything purchased with that money; collect fully 95 percent of the time. No wonder that credit cards remain the single most profitable segment of banking.
But the real tragedy of "needs-based bankruptcy" is not that it would lock in exorbitant profits -- although it would -- but that it would, penalize the more responsible debtors and subsidize the more irresponsible. Example: Assume that Mary is $20,000 in debt while Jane racked up $75,000 in bills. Both have excess monthly income (the amount available for repayment of debts after reasonable living expenses) of $75, or the ability to repay $4,500 to creditors over a five-year period. Under one of the bills pending in Congress, Mary, who exercised more restraint, would not be eligible for Chapter 7 bankruptcy, because she could pay at least 20 percent. But Jane would qualify, precisely because she was less responsible and, consequently, could never pay back the money. Congress would penalize Mary and reward Jane.
The current legislative activity is rooted in the Bankruptcy Reform Act of 1994, which amended many provisions of the Bankruptcy Code and established the National Bankruptcy Review Commission. The Commission's mandate was to investigate and analyze bankruptcy-related problems not foreseen, or left unresolved, by the 1994 legislation. It's jurisdiction included the entire spectrum of bankruptcy law — from mega business reorganizations to municipal bankruptcies, to tenure for bankruptcy judges and, yes, to consumer issues as well. During the two years of hearings conducted by the Commission, representatives of the credit card industry relentlessly lobbied for special protections, all while their clients pocketed record profits. Studies, financed by the industry, were cited repeatedly in an aggressive, and ultimately futile, effort to persuade the Commission to recommend protective legislation. The Commission rejected the idea of "needs-based bankruptcy" by a seven-to-two vote. Disheartened but not discouraged, the credit industry turned its lobbying/ public relations efforts toward Congress [he means payoffs], launching a preemptive strike even before the Commission's report was formally released. Anticipating the Commission's report, creditors got one bill endorsing their agenda introduced in the House several weeks before the report was issued, and another in the Senate on the day after the Commission's report was received. Thus the holy grail, "needs-based bankruptcy," remains on the legislative agenda, and seems to be gaining support for all the wrong reasons.
Restricting the ability of financially strapped consumers to gain a fresh start will not significantly increase revenues to creditors. More significantly, it obscures the real problems — corporate greed, too-easy credit, overspending by cash-strapped consumers and a diminishing sense of personal (and corporate) responsibility. Bankruptcy is not the cause of these ills, merely the predictable result. Protecting lenders from the consequences of their irresponsible lending practices simply encourages more of the same, with long-term implications for both the economy and the moral fiber of the nation.
Our bankruptcy system is not "broken" or "fundamentally flawed," as opponents claim In fact, if one views capitalism as a two-sided coin — with one side stamped "reward" and the other side marked "risk" — it is working precisely as it should in a free market economy. The increase in bankruptcies (which I view as a self-correction in the lender/ borrower relationship) will, in time, force lenders to act more responsibly, or suffer the consequences. Meanwhile, courts deciding cases on a daily basis, are striking a just balance between debtors and credit card issuers. By publishing their opinions, these courts continue to craft a body of law which responds to societal changes, including reckless lending and the concomitant explosion in consumer debt. Rather than proving that the bankruptcy system is broken, this body of law actually reflects a process that has worked quite well. It would be a shame if representatives from groups interested only in their own self-interest convinced Congress to reject this extensive and incredibly rich jurisprudence in hopes of finding a legislative "fix."
(James P. Caher has been a practicing bankruptcy attorney for over 20 years and is co-author of the popular book, "Debt Free! Your Guide to Personal Bankruptcy Without Shame" (Henry Holt & Co. 1996), and author of two books for bankruptcy professionals: "Discharging Marital Obligations in Bankruptcy," (LRP Publications 1997) and "Discharging Credit Card Debts".)(LRP Publications 1998)
Published Thursday, June 18, 1998, in the San Jose Mercury News EDITORIAL
BANKS and credit card companies are doing a masterful job persuading Congress that unscrupulous individuals, not loose lenders, are responsible for the nation's towering piles of bad debt. With an intense and expensive election-year lobbying effort, they are pushing for blunt, harsh and self-serving changes to the bankruptcy laws. So far they've met little resistance.
Last week, the House, with token Democratic opposition, rubber-stamped the credit industry's bill. It will have to be reconciled with a less punitive but still fundamentally flawed version that's moving through the Senate. The industry has characterized its purpose as a campaign to re-infuse personal responsibility into the bankruptcy code. It points to an indisputable trend as proof that bankruptcy is losing its stigma. Last year, in the midst of a booming economy, with low unemployment, a record 1.4 million Americans filed for bankruptcy. That was 20 percent higher than in 1996, which, in turn, was 29 percent above 1995 and eight times the volume of 20 years ago.
The rise in bankruptcies also has tracked the growth in credit card borrowing, with consumer debt now reaching more than $1.3 trillion. One reason for that is a rising plastic tide last year, which disgorged 2.5 billion credit-card applications -- 10 for every person -- at America's mailboxes. But the industry claims no culpability for pushing credit cards and high credit limits on people who can't handle them. Instead, it points to studies, some of whose methodology is disputed, that conclude that as many as 30 percent of those in bankruptcy could repay a third of their debts but don't. Rather, they file under Chapter 7 bankruptcy, which lets them write off all debts. The industry's solution, in the House bill, is a nationwide means test for filers. Those earning above the median family income -- $51,000 for a family of four -- would be forced to repay at least 20 percent of their unsecured creditors over several years under Chapter 13, which requires repayment of debt based on a court-approved plan. Unsecured creditors have no liens or collateral to collect against a debt.
That sounds reasonable, except that the income level would not be regionally adjusted. It would disproportionately ensnare financially strapped middle-class families in urban and high-income areas like Santa Clara County. In a bow to the banks, the House bill elevates a significant portion of credit card debt to equal status with unpaid taxes, student loans and child support -- debt that cannot be canceled. Kids and MasterCard would end up fighting for the same slice of the pie, attaching the same wages. Last year, the independent, congressionally appointed National Bankruptcy Review Commission overwhelmingly rejected such a radical shuffling of priorities.
Most people file for bankruptcy not because they're deadbeats, but because of divorce or a loss of a job or medical insurance. Because the House bill does not take into account high housing costs, the repayment scheme could devastate some families in this area. They would be deprived of the ability to file Chapter 7, denied a high enough portion for housing expenses and badgered by credit card companies. Many will simply join the two-thirds who already fail to meet their Chapter 13 repayment plans. Others will lose their house and go underground. If the House were serious about curbing abuses, it would have passed a narrower bill aimed at nabbing repeat filers. It would have eliminated five states' unlimited home exemption that lets the rich in Florida and Texas hide their assets in multimillion-dollar homes. (California's $75,000 home exemption, on the other hand, is too low.)
Instead, UCLA Law School Professor Ken Klee, chairman of the National Bankruptcy Conference, speculates that the credit industry's motive behind the bill is to make the federal bankruptcy court their repo man, so banks can go on collecting a 17-plus percent interest on a principal that a besieged debtor will never be able to erase. Every day, families -- kids, pets, everyone -- are enticed with deceivingly low introductory credit-card rates and $100,000 credit limits. An even-handed bankruptcy reform would require banks to do a credit check before issuing cards -- or risk losing their priority status if the holder files for bankruptcy protection. It would require simpler and fuller disclosure, spelling out the safe limits of debt, based on a family's income, pointing out that it would take 34 years to repay a $2,500 debt at the monthly minimum rate. Bankruptcies have reached an alarming level for prosperous times. But to reach the right corrective, which addresses a source of the problem, Congress must do more than the credit industry's bidding.
By Brigid McMenamin
Forbes Magazine June 15, 1998
LAST YEAR 400,000 Americans filed for Chapter 13 personal bankruptcy, nearly three times the number a decade ago. Bad news? Not for Bear Stearns Cos. While banks and credit card firms grumble about deadbeats, those clever folks at the $3.5 billion (fiscal 1997 net revenues) New York City-based investment bank and securities trading firm have found a way to cash in on them. Bear Stearns is snapping up Chapter 13 debts of individuals, through an obscure New York-based subsidiary called Max Recovery. Max pays creditors like Chase or Household Finance 8 cents to 15 cents on the dollar for claims against individuals going through a Chapter 13 bankruptcy. Bear Stearns notifies the bankruptcy trustee that it now owns the claim. When the debtor starts sending monthly checks to the trustee under his payback plan, Bear Stearns gets the creditor's share, typically 20 cents to 70 cents on the dollar, sometimes more.
Many debtors, however, never complete their payment plan. Example: Last year Max Recovery likely paid no more than $180 for the $1,188 debt that retired New York City subway token clerk Thomas Lea owed to Household Finance. If Lea fulfills his five-year bankruptcy payment plan, Bear Stearns will see at least $594.95 before overhead. The key to this business is volume. The market is big: The combined unsecured debts of Chapter 13 filings come to some $6 billion a year. While nobody knows how much of that is sold, Max Recovery is the biggest buyer, says Judy Hammond, founder of the Debt Marketplace, a Santa Fe Springs, Calif.-based claims broker.
Bear Stearns officials decline to discuss the Max Recovery unit for the record, with good reason: They've got a good thing going by using the Justice Department's bankruptcy trustees to do their collections for them. Why tip off competitors? It's just the latest example of the growing multibillion-dollar trade in personal debt, from car loans and credit card balances to tort judgments and timeshares. The mechanics are simple. In a Chapter 7 bankruptcy, a consumer can wipe out all his unsecured debts, but may risk losing his house and car. Folks who want to keep their assets often prefer Chapter 13, in which they agree to pay off at least part of the debts over three to five years. A Department of Justice-appointed trustee handles collections and distributes funds to creditors. Creditors don't like to wait for their money. In the late 1980s some lawyers began buying up Chapter 13 claims, hoping to turn a profit eventually. But they couldn't afford to finance huge blocks. And with dusty paper records and delays, profits were slim. Technology has changed all that. Today bankruptcy courts and trustees manage cases electronically. Many use software sold by Electronic Processing in Kansas City, Kansas.; a Memphis-based firm called DCS; or Compu-Management located in Bristol, Va.
Compu-Management also sells clever software that analyzes a debtor's plan to predict how much a creditor can expect to recover. All this technology makes it easier to evaluate and transfer claims. A buyer needn't even punch the claims data into a computer: Court officials do that for him. Recognizing the potential profit, Bear Stearns founded Max Recovery in 1993 and began buying up Chapter 13 debts in batches, using its own software to gauge recoveries. The unit was the brainchild of Charles Rusbasan, a banker who came to Bear Stearns in 1992. Sellers of the debt include Chase, MBNA America and Morgan Stanley Dean Witter's Salt Lake City-based credit card venture, Prime Option Services. Creditors who opt to sell their claims simply don't think they'll net as much as Max Recovery can pay. The $30 billion (assets)Union Bank of California, for one, sold $3 million of Chapter 13 accounts last year to Max Recovery. Bank officials figured they'd never beat 10 cents on the dollar on their own. What are the sellers thinking? "I don't think they [creditors] fully understand the value of what they're selling," says Jack Dennison, founder of Compu-Management. In each of the past two years, Fingerhut, a direct marketing firm that extends credit to folks without credit cards, unloaded $15 million of claims on Bear Stearns. Fingerhut Treasurer James Wehmann insists he got a good price. But he admits he had to estimate the future net returns based only on how much Fingerhut had collected in the past. He did not have the benefit of the sophisticated software Bear Stearns uses. In other words, it appears that Fingerhut may not have realized just how much its claims were worth.
The business promises to grow, as legislation pending in Congress would force more consumers to choose Chapter 13 and pay off a bigger percentage of their debt. The politicians see some kind of moral imperative here. Bankers just see a good business.
Just to ensure that our Executive as well as
Legislative branches share equally in my wrath, I am closing this
newsletter with a quote from one of our ex-Presidents who to this day
seems to enjoy a reputation for standing tall..
My further updates will follow.
Sincerely,
Gerald
Spala
August 31, 1998
