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2008) INVESTIGATING APPELLATE STRUCTURE 1807
CONCLUSION

In this Article, we have shown that, in different ways, federal
courts have expressed a general preference for the quality of appellate
review afforded by BAPs as opposed to district courts. On the hardly
implausible assumption that courts in fact strive to resolve cases and
issues correctly, this finding tends to validate theoreticians’ claims
about the ideal attributes of appellate review, because BAPs, more so
than district courts, tend to feature those attributes. Upon the same
assumption, this finding also should prompt policymakers to introduce
more appellate tribunals with these attributes—specifically,
multimember panels whose members enjoy an expertise in the types
of matters likely to fill up the docket of the tribunals.

We believe that future research in the area will offer even more
insights. We intend to continue our exploration by refining our
consideration of issues that come before courts. Perhaps, for example,
some issues lend themselves more to solution by expert panels than do
others. We also hope to consider the effect of competition between
appellate tribunals, such as the one that exists between BAPs and
district courts in the bankruptcy appeals context.

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2008) Misbehavior and Mistake in Mortgage Servicing 167

billion more than debtors believed was owed. If even a small fraction of this
aggregate sum represents creditors overreaching in their claims, the damage
to the bankruptcy process is tremendous. Debtors are surprised after filing
bankruptcy by the burden of paying their mortgage debts, and distributions to
other creditors could be unfairly skewed.

The substantial number of cases with large discrepancies shows that
debtors and creditors operate in bankruptcy with very different
understandings of the amounts of mortgage debt. The most likely expla-
nation for this phenomenon may be that debtors and creditors simply have
different records or lack reliable records. The finding that debtors over-
estimate their obligations in just over one-quarter of loans is consistent with
this hypothesis. Debtors get no benefit from inflating their mortgage debt on
their bankruptcy schedules. In most cases, neither debtors nor their attomeys
appear to confirm the amount of the mortgage debt with the creditors at the
time of the bankruptcy filing,””* The data strongly suggest that many debtors
file bankruptcy without knowing how much their mortgage creditors think is
owed. The problem could reflect a different phenomenon. Creditors’ claims
may themselves be bloated and overstate the accurate amounts of debt. Such
problems could result from servicers’ practices of loading claims with default
fees that are not disclosed to debtors, or from mistaken calculations of the
amounts due in preparing the proofs of claim. Case law has documented
both effects.”””

Regardless of which party’s calculation is correct, and even assuming
all parties’ behavior is unintentional, serious policy consequences occur from
the system’s failure to resolve these discrepancies. If the mortgagee was
actually owed a smaller amount than the debtor thought was due, the
counseling process regarding the advisability of bankruptcy was based on
misinformation. If the arrearages were significantly less than the debtor
believed, viable alternatives to Chapter 13 bankruptcy could have existed.
Perhaps the debtor could have borrowed the amount necessary to cure the
default in one payment. Or perhaps the debtor would have tried asking the
servicer for a repayment plan outside of bankruptcy.

The creditor’s-favor gaps raise equal, or more serious, harms.
Additional amounts of mortgage debt have meaningful effects on families in
bankruptcy. If creditors are overreaching by even half of the amount
suggested by either the absolute-dollar analysis or the percentage analysis,
they are imposing a hefty burden on debtors’ disposable incomes and
diverting money from unsecured creditors. Claims that are bloated by

226. Servicer practices may deter debtors from getting such information. As explained ebove
in subpart 1(A), servicers have no reputational concem about poor customer-service response, and
so many servicers make it time consuming and difficull for a debtor to reach them. Additionally,
the industry practice of imposing “payoff” or “statement” fees discourages debtors from making
account inquiries.

227. See supra text accompanying notes 86-91.

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2008) INVESTIGATING APPELLATE STRUCTURE 1773

extent that citation of one court by another reflects the citing court’s
view that the other court was “correct” in some way, the notion of
correctness is, in different ways, both narrower and broader than
correctness in the context of affirmation on direct appeal. It is
narrower in that the citing court well may be citing a case not based
upon a broad holding, but rather based upon some narrow holding or
even dicta. It is broader in that, unlike a court that affirms a lower
court’s disposition even though it disagrees with its reasoning, a court
that cites to another court’s decision positively at some level agrees
with some aspect of the court’s reasoning.!° Of course, there may be
situations where a court cites another court’s opinion simply because
it perceives the other court's opinion to be binding precedent.! For
this reason, we consider the results of extracircuit citations and
citations by courts of appeals to BAPs and district courts—settings
where there is no issue of binding precedent and citation is purely a
matter of choice—to be especially informative.17

Within this context, one can point to two broad notions as to
why courts cite other courts’ opinions; both accord with our broad
understanding of “correctness.” First, a court may cite to another
court’s decision because it is truly influenced by the other court’s
reasoning.'°8 If this is true, then the citing court in some sense finds
the other court’s reasoning to be “correct.” Alternatively (or perhaps in
‘ addition), a court may cite to another court's decision not so much to
explain the basis for its decision as to justify that decision, thus

CaL. L. REV, 381 (1977) {hereinafter Merryman, Toward @ Theory of Citations); ef. William M.
Landes, Lawrence Lessig & Michael E. Solimine, Judicial Influence: A Citation Analysis of
Federal Courts of Appeals Judges, 27 J. LEGAL STUD, 271, 271-76 (1998) (noting that “(cjitations
are at best a crude and rough proxy for measuring influence,” and identifying potential
drawbacks and limitations to empirical analyses of judicial citation:
105. See Landes & Posner, supra note 104, at 261 & n.3 (excluding from citation study
ting rejection of the cited case as a precedent”), Our study also includes only
hee.

ignore an unimportant decision than to spell out reasons for not following it”).

106. See Landes & Posner, supra note 104, at 251 (excluding from citation study
nonprecedential citations).

107. David J. Walsh, On the Meaning and Pattern of Legal Citations: Evidence from State
Wrongful Discharge Precedent Cases, 31 LAW & SOC'Y REV. 837, 340-41 (1997) (stating that cases
cited for their influential nature will depend more on the quality of the decisions than the

atature of the cited cqurt).

108. See id. at 339 (suggesting that citations may “indicate intercourt communication and
influence on judicial decisionmaking”); cf. McKenna & Wiggins, supra note 65, at 651 (‘The
availability of published opinions is generally thought to be an important aspect of the appellate
process because written opinions provide guidance to judges and litigants by explaining the
reasons for the appellate decision.”),

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85% of renting debtors did not disclose a lease, (104 of
122 cases) These are divided as follows:
88% of debtors paying rent for a residence did not
disclose a lease. (94 of 107 cases)
67% of debtors paying mobile home lot rent did not
disclose a lot lease. (10 of 15 cases)

8. If the debtor is in business, did the debtor attach a de-
tailed statement of income and expenses to schedules I and J?

The line on schedule I that requires the debtor to disclose “Regular in-
come from operation of business or profession or farm” and instructs the
debtor to “attach detailed statement.”6? Schedule J imposes a similar require-
ment for business expenses. Thus, a debtor with business income or ex-
penses is required to attach detailed statements of income and expenses. This
was determined by examining the specific disclosure on the business income
line on schedule I and the business expense line on schedule J, as well as other
similar disclosures, for example, on the “other monthly income” line on sched-
ule L°° Twelve debtors had such business income or expenses.

83% of debtors with business income or expenses failed
to attach the required detailed statements of income and
expenses.67 (10 of 12 cases)

9. In a chapter 7 case, does schedule J address payments for
all debts that the debtor intends to reaffirm?

Section 521(2)(A) requires the debtor to file a statement of intent regard-
ing secured consumer debts,*8 When a debtor states an intention to reaffirm
a secured debt, schedule J requires the debtor to disclose the resulting
monthly payment. A notation was made in each case in which monthly

“Official Bankruptcy Form 6, schedule 1.

“41d, schedule J.

Sid, schedule I

“Only two of the twelve debtors with business income of expenses had debts that appeared to be
primarily business debts. See infra question 17 at 674 and note 89. The other ten debtors with business
income or expenses appeared to have primarily consumer debt. However, it can sometimes be difficult to
determine from the schedules whether credit card debt or other bank debt is consumer debt or business
debt. See, eg, In re Goodson, 130 BR. 897, 900 (Bankr. ND. Okla. 1991); In ve Berndt, 127 BR. 222, 224
(Bankr. DN.D. 1991); In ve Hammer, 124 BR. 287, 290 (Bankr. C_D. Ill. 1991), vacated on other grounds,
sub nom, Meeker v. Pilgrim (In ve Pilgrim), 135 BR. 314 (CD. ll. 1992); In re Bell, 65 BR. 575 (ED.
Mich. 1986); In ze Almendinger, 56 BR. 97 Bankr. N.D. Obio 1985).

STOF the wo debtors who did attach statements of income and expenses, one attached a form that
appeared to be a preprinted, commercially available form and the other attached schedule C from a Form
1040 federal tax return.

11 USC. § 521(2)(A) (1994). Official Bankruptcy Form 8.

Schedule J has a line for the disclosure of “Installment payments.” Official Bankruptcy Form 6.

See In ve Hovestadt, 193 BR. 382, 385 (Bankr. D. Mass. 1996) (“This Court has observed that in the

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1999) CONSUMER BANKRUPTCY PAPERS 663
Schedule B: Schedules I & J:

Cash on hand Debtor in business?

Security deposit disclosed? Detailed statement attached?

Life insurance disclosed? Verification: 4

won dis 2 signe

Ss meet isclosed: Statement of Financial Affairs:

Secured creditors? Question 3a answered other than

iq “none”?

Schedules D, E & F: Answer to question 9 regarding fees

HWIJC disclosed? pal
Schedule G: Statement of Intent:

Lease disclosed? All secured creditors disclosed?
Schedule I: Any debt to be reaffirmed?

Marital status 2016(b) Statement:

Union dues? Toral fee

Pension income? ve Pa a

Pension plan contribution? Other fee disclosure problems
Schedule J:

Rent or mortgage payment

Life insurance expense?
Auto expense but no auto disclosed
in Schedule B or G?

Includes all debt to be reaffirmed per
Statement of Intent?

C. EXaMINING THE SampLe Cases

The next task was to determine whether the sample of 200 cases is rea-
sonably representative of the universe of consumer cases filed in the Eastern
District of Michigan, Southern Division at Detroit during the study period,
based on available data. The bankruptcy clerk provided demographic data
Pertaining to this universe of cases from the court’s official BANCAP com-
puter data base. The available demographic data consisted of (1) the propor-
tion of consumer cases filed under chapter 7 and chapter 13, and (2) the
proportion of cases filed as individual cases and as joint cases.

Table 2 demonstrates that the demographics of the sample cases in
Groups 1 and 2, and the combined sample, are similar to the demographics of
the universe of cases.

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Ill. _ EMPIRICAL ANALYSIS OF THE PERCEIVED QUALITY OF
APPELLATE REVIEW: EVIDENCE FROM APPELLATE

BANKRUPTCY OPINIONS...

A. Sample Selection and Variables of Interes
1, Sample Selection ..
2. Variables of Interest.

B. Bivariate Descriptive Statistics .
C. Regression Analyses.
1. Circuit Court Affirmance ..
2. Positive Citing References by Other
Federal Courts
D. _ Interpretation of Result:
CONCLUSION.
APPENDIX ..

INTRODUCTION

What is the ideal structure for appellate review? Without
providing a definitive answer to the question, commentators have
suggested several factors that may improve the process, and thus
perhaps the accuracy, of appellate review. First, it is said that panels
of judges are preferable to review by a single judge. Second, expertise
in the relevant area of law is a benefit. Third, other indicia of
lawfinding ability—such as the ability of lawyers and judges to focus
‘on legal issues without the distraction of factual conflicts and the
amenability of judges’ schedules to careful contemplation and
reflection—contribute to the quality of appellate review. Fourth, a
court’s adherence to traditional notions of appellate hierarchy, as
exemplified by following its earlier precedents, has been deemed to
produce better results, Finally, it is said that the independence of
appellate judges—that is, the extent to which job features such as life
tenure and a guaranteed salary tend to insulate judges from pressures
to decide cases or issues one way or another—is of value.

In this Article, we endeavor to evaluate empirically the relative
quality of appellate review. To do this, we rely upon data obtained
from the appellate review of bankruptcy matters. The current federal
bankruptcy appellate structure provides an excellent setting in which
to study appellate review because it offers litigants two paths for
obtaining appellate review. First, after the bankruptcy judge issues a
ruling, litigants may have the district court—in the person of a single
district judge—review that ruling. Alternatively, the parties may
agree (in circuits that have them) to have the bankruptcy judge’s

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2008] Misbehavior and Mistake in Mortgage Servicing 163

existence of discrepancies is not itself alarming. The findings in Figure 3
could merely reflect minor differences in record keeping. Alternatively, the
claims could consistently be larger because of the addition of modest and
explainable postbankruptcy charges such as accrued interest.” J explore
these explanations with additional analyses, ultimately concluding that the
data do not suggest that either reason can fully explain the discrepancies in
creditors’ and debtors’ calculations.

The first indication that the disagreements may be genuine and serious
comes from evidence on the dollar size of the gaps. Among all loans, the
median claim exceeded its corresponding scheduled debt by $1,366. The
average difference between a claim and its scheduled debt was $3,533," In
the typical bankruptcy, a mortgage creditor asserted that it was owed a
significantly larger amount than the debtor believed was the home debt.
These errors are too large to reflect small, record-keeping situations, such as
a single late charge imposed since the debtor’s most recent mortgage
statement or a postbankruptcy property inspection.

The second indication that postbankruptcy charges cannot explain most
of the differences in debtors’ and creditors’ calculations is the existence of
claims in which the debtor overestimated the amount of the debt.
Postbankruptcy charges can only explain discrepancies in favor of creditors.
Debtors do not know whether such charges will be imposed and cannot
include them in their schedules. The debtor’s-favor gaps suggest that the
disagreement occurs for a different reason, at least in many instances.

Further analysis reinforces the conclusion that the gaps between claims
and scheduled debts reflect a serious misunderstanding. Figure 4 shows the
distribution of the size of the gap amounts between claims and the
corresponding scheduled debt. At every interval, the number of times in
which the creditor’s claim exceeded the scheduled amount was greater than
the number of times in which the debtor estimated a higher debt. While the
disagreements go in both directions (with debtors and creditors each
reporting a higher amount of debt in some instances), creditors more
frequently charge more than debtors think is owed.

21, The debtors’ schedules should only reflect the amount due at the time of the bankruptcy.
The proof-of-claim forms should be identical, as the instructions specify that the amount should be
the “Amount of Claim as of Date Case Filed.” Official Bankruptcy Form 10 (2007), supra note 41
However, some creditors ignored this instruction and listed charges that arose after the bankruptcy
was filed and before the claim was filed (a period of usually less than sixty days).

222. The sample size was 1,675. The analysis inchided those loans in which the claim amount
and the scheduled amount were identical (no gap). The standard deviation for the entire sample was
$11,480.

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1816 VANDERBILT LAW REVIEW [Vol. 61:6:1745

Table 6: Binary Logistic Regression Model of Circuit Court Affirmance

Variable Affirmance Full Affirmance

Court 3.947** (1.407, 11.069) _2.535* (1.119, 5.742)
Published 0.295¢* (0.129, 0.673) 0.287#** (0.138, 0.598)
Appellant 2.003 (0.815, 4.924) 4,293*** (1.886, 9.776)
Appellee 0.993 (0.434, 2.272) 2.372* (1.072, 5.249)
Chapter 7 1,594 (0.770, 3.299) 1.683 (0.852, 3.323)
Debtor Type 1.279 (0.581, 2.812) 0.936 (0.438, 2.000)
Dispute Type 0.940 (0.431, 2.048) 1.142 (0.544, 2.394)
Subject 0.596 (0.260, 1.365) 0.452* (0.206, 0.990)
FY 1998 1.103 (0.485, 2.511) 0.527 (0.247, 1.122)
FY 1999 0.721 (0.323, 1.611) 0.729 (0.336, 1.582)

N 237 237
Log likelihood -110.133 -122,660
McFadden’s R? 0.117 0.157

Source: Affirmance Database
Note: *** p < 0.001, ** p< 0.01, * p< 0.05. Odds ratios presented with 95% confidence
intervals in parentheses.

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666 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

81% of debtors paying rent on a residence disclosed
no security deposit. (87 of 107 cases)

80% of debtors paying rent on a mobile home lot
disclosed no security deposit. (12 of 15 cases)

4. If schedule J discloses expenses for life insurance, is life
insurance disclosed in schedule B?

Line 9 of schedule B requires the debtor to disclose, “Interests in insur-
ance policies. Name insurance company of each policy and itemize surrender
or refund value of each."54 A debtor who discloses an expense for life insur-
ance on schedule J should disclose an interest in that insurance on schedule
B55 In 37 cases, the debtor disclosed an expense for life insurance.

73% of debtors who disclosed an expense for life insur-
ance disclosed no life insurance. (27 of 37 cases)

5, If schedule I shows income from a pension, or if schedule J
shows contributions to a pension, or if schedule I or J shows
an expense for union dues, does schedule B show an interest
in a pension?

Line 11 of schedule B requires the debtor to disclose and itemize, “Inter-
ests in IRA, ERISA, Keogh, or other pension or profit sharing plans."5* This
question tests whether the debtor disclosed a pension interest when it ap-
peared that the debtor would have such an interest. Certainly a debtor must
disclose a pension interest if the debtor discloses pension income in schedule I
or pension contribution expenses on schedule I or J. In addition, this question
assumes that a debtor who is a union member has an interest in a pension

“Official Bankruptcy Form 6, schedule B, line 9. Although nothing in this instruction limits the
disclosure requirement to life insurance, no debtors disclosed any other kind of insurance. See Payne v.
Wood, 775 F.2d 202, 207 n.6 (7th Cir. 1985) (“The cash surrender value of the [property damage] policy
‘was an asset of the estate. In order to keep the policy, the [debtors} should have charged the surrender
value against their maximum exclusion.”).

Te is possible that a debtor might pay for life insurance without having any interest in it. For
‘example, a debtor might pay the premiums for a life insurance policy for @ parent, spouse or child, without
having any interest in the policy or its proceeds. However, this scenario seems rare and the inquiry was
deemed appropriate for study purposes. In such a case, the debtor should, depending on the circumstances,
disclose the payments on che statement of financial affairs as either payments to a creditor (question 3),
gifts (question 7), or transfers (question 10). No such responses were made in the study sample.

S6Official Bankruptcy Form 6, schedule B, line 11. Several courts have stated that a debtor must
disclose a pension interest even if that interest would be either exempt under § 522(d) or excluded from
the estate under § 541(c2) and Patterson v. Shumate, 504 US. '753, 112 S. Ct. 2242, 119 L. Ed. 2d 519
(1992). See, eg, In re Turpen, 218 BR. 908, 914 (Bankr. ND. Iowa 1998); In re Comp, 134 BR. 544, 553
(Bankr. M.D. P2. 1991); In re Maide, 103 BR. 696, 698 Bankr. W.D. Pa. 1989).

But see Vaughn v. Aboukbater (In re Aboukhater), 165 BR. 904, 910 (BAP. 9th Cir. 1994) (Non-
estate property need not be disclosed in the debtor's schedules." Duval v. Portner (In re Portner), 109
BR 977, 986 (Bankr. D. Colo. 1989) (holding that the debtor's discharge cannot be denied for failing to
disclose property that is not property of the estate.)

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2008) Misbehavior and Mistake in Mortgage Servicing 123

Families in serious financial trouble are under great stress. The
telephone rings with repeated calls from debt collectors, each paycheck is at
risk of garnishment, and the next knock on the door could be a process server
or a repo agent. Yet, for many families, the greatest fear is losing their
homes to foreclosure. A home is not only most families’ largest asset, but
also a tangible marker of their financial aspirations and middle-class status.
A threatened or pending foreclosure can signal the end of a family’s ability to
struggle against financial collapse and begin an unrecoverable tumble down
the socioeconomic ladder.

Bankruptcy offers these families one last chance to save their homes.'
A bankruptcy filing halts a pending foreclosure and gives families the right
under federal law to cure any defaults on mortgage loans over a period of
years.’ The bankruptcy system offers refuge from the vagaries of state
foreclosure law, substituting the protections of the federal court system and
uniform legal rules to ensure that these families get one final opportunity to
preserve their homes,

But this protection comes at a cost. Mortgage companies file proofs of
claim with bankruptcy courts for the amount of mortgage debts. In turn,
bankrupt debtors must pay these claims or lose their homes. The balance
between the family and the mortgage lender is clearly spelled out in the
bankruptcy laws, which specify the manner in which the amount owed is to
be established and obligate both the homeowner and the mortgage company
to disclose information accurately.’

This claims process is well established and, until now, has been
uncontroversial. Homeowners—backed up by lawyers, policy makers, and
news reporters—assume that bankruptcy functions according to the official
rules and that it provides a realistic opportunity for families to save their
homes if they follow those rules. The data revealed in this Article suggest,
however, that home-mortgage lenders often disobey the law and that the
legal system does not function to substantiate the amounts that lenders assert
that consumers owe. These problems can cripple a family’s efforts to save
its home and undermine policies that promote sustainable home ownership.

This Article examines the actual behavior of mortgage companies in the
consumer bankruptcy system. Using original data from 1,700 recent Chapter
13 bankruptcy cases, I conclude that mortgages’ behavior significantly
threatens bankruptcy’s purpose of helping families save their homes. Despite

1. See Raisa Bahchieva et al., Mortgage Debt, Bankruptcy, and the Sustainability of
Homeownership, in CREDIT MARKETS FOR THE POOR 73, 104 (Patrick Bolton & Howard Rosenthal
eds., 2005) (explaining that Chapter 13 bankruptcy is frequently used by families facing
foreclosure).

2, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, THE LAW OF DEBTORS AND
CREDITORS 306 (Sth ed. 2006).

3. Id. at 143; see FED. R. BANKR. P. 9011 (requiring that all petitions, pleadings, motions, and
‘other papers filed with the court in a bankruptcy action have factual support).

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2008] INVESTIGATING APPELLATE STRUCTURE 1763

See, e.g., 140 CONG. REC. $14,463 (daily ed. Oct. 6, 1994) (statement of Sen, Heflin) (Tt should be
recognized that the creation of a bankruptcy appellate panel service can help to establish a
dependable body of bankruptey case law.”). But see Daly, 255 B.R. at 273:

Any suggestion that Congress’ authorization of the creation of BAP Services

was motivated substantially by its desire to create a uniform body of

bankruptcy law within the circuits is not supported by the BAP Service’s

history, which instead suggests that BAPs were conceived primarily as a tool

for relieving district court judges of an ofttimes undesirable and burdensome

aspect of their workload.
At the same time, one can point to the certification procedure in section 158(d)(2) of the Judicial
Code—under which courts of appeals may decide interlocutory appeals when, among other
circumstances, the question raised is one “as to which there is no controlling decision of the court
of appeals for the circuit or of the Supreme Court of the United States,” 28 U.S.C.
§ 158(4)(2)(A)() (Supp. V 2005)—as evidence that Congress chose other, explicit means of
increasing bankruptcy law uniformity. See H.R. REP. No. 109-31, at 148 (2005), reprinted in 2005
U.S.C.C.AN. 88, 208.

Commentators are divided over whether BAP decisions bind bankruptcy courts. Compare,
Bussel, supra note 13, at 1098 (arguing that bankruptcy courts should consider both BAP
and district court decisions as binding precedent), Chemerinsky, supra note 4, at 128 (“From [a]
functional perspective, I think that BAP decisions clearly should be binding on bankruptcy
courts.”), and Camp, supra note 52, at 1676-84 (arguing that BAPs should bind both bankruptcy
and district courts within a circuit), with Trujillo, supra note 60, at 492 (“[O}nly opinions of the
U.S. courts of appeals and the U.S. Supreme Court bind bankruptcy courts by reason of formal
hierarchy.”), and Caminker, supra note 13, at 870-72 (arguing that theoretical considerations
argue in favor of bankruptcy courts being bound by district court decisions). Moreover, strict
application of vertical stare decisis is difficult, insofar as it is not certain until after the
bankruptcy court has issued judgment into which appellate path the case will proceed. C/. Camp,
supra note 52, at 1682:

Since bankruptcy judges do not know at the time they make a decision

whether it will be a BAP or a district court that will hear any appeal, and

since no district court has so far considered itself bound by a BAP, it is no

surprise that many bankruptcy judges feel free to disregard BAP decisions.
Compare this to the United States Tax Court, which considers itself bound by its own precedent,
except insofar as it has also held that it is bound “to follow a Court of Appeals decision which is
squarely in point where appeal from [the] decision lies to that Court of Appeals.” Golsen v.
Comms, 54 T.C. 742, 756-57 (1970), affd, 445 F.2d 985 (10th Cir. 1971). Because the court of
appeals to which a taxpayer will appeal is determined by his state of residence, 26 U.S.C.
§ 7482(b)(1) (2000), it is always clear at the time of decision which circuit's precedent is binding.

As to the normative question, there are those who argue that an increase in application of
stare decisis would be normatively desirable. See, e.g., Boroff, supra note 52, at 215, 221 (arguing
that the current dual track appellate system makes it difficult to generate binding precedent,
and that the system be changed to allow for development of binding precedent); Bussel, supra
note 13, at 1095 n.114 (“[Llogically . .. district courts . .. as well as bankruptcy courts might be
bound by prior BAP decisions.”). There also are strong arguments, however, that a structure
other than the standard appellate hierarchy might be desirable. First, one of the bases on which
the pyramidal appellate hierarchy functions is the notion that issues “percolate” up from the
lower courts to the higher courts. It is the desire for percolation that, commentators argue,
restricts (and properly so) application of horizontal stare decisis to the same court and not to
sibling courts of equal hierarchical stature. See Samuel Estreicher & Richard L. Revesz, The
Uneasy Case Against Intracircuit Nonacquiescence: A Reply, 99 YALE L.J. 831, 834 (1990) (‘The
rejection of intercircuit stare decisis is premised upon—and given the obvious casts in deferring
uniformity, is explainable only in terms of—the benefits of dialogue among the circuits.”}; see
also Maxwell Stearns, Standing Back from the Forest: Justiciability and Social Choice, 83 CAL.

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RAFAEL L PARDO 4

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
2008 Washington Bankruptcy Judges Conference, Blaine, Washington
(September 19, 2008)

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
Third Annual Conference on Empirical Legal Studies, Comell Law School
(Scptember 12, 2008) (poster session)

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Annual Fall Symposium of the Ninth Circuit Bankruptcy
Appellate Panel, Ashland, Oregon (August 26, 2008) (co-presented with
Jonathan R. Nash)

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
Houston Higher Education Finance Roundtable, University of Houston Law
Center (May 19, 2008)

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Annual Meeting of the American Law and Economics
Association, Columbia Law School (May 16, 2008)

The Utility of Opacity in Judicial Selection, NYU Annual Survey of American
Law Symposium, Tradeoffs of Candor: Does Judicial Transparency Erode
Legitimacy?, NYU School of Law (March 11, 2008)

2007

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
Annual Meeting of the Midwestem Law & Economics Association, University
of Minnesota School of Law (October 13, 2007)

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
Federal Judicial Center Workshop for Bankruptey Judges II, Austin, Texas
(September 17 & 18, 2007)

ness and Inability to Repay: The Role of Debtor Health in the Discharge of
Educational Debt, Federal Judicial Center Workshop for Bankruptcy Judges Il,
Austin, Texas (September 17 & 18, 2007)

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, Federal Judicial Center Workshop for
Bankruptcy Judges Il, Austin, Texas (September 17 & 18, 2007)

Eliminating the Judicial Function in Consumer Bankruptcy, National Bankruptcy
Administrators Conference, Asheville, North Carolina (July 31, 2007) (keynote
address)

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Joint Annual Meetings of the Law and Society Association
and Research Committee on Sociology of Law, Humboldt University (July 28,
2007) (co-presented with Jonathan R. Nash)

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Stanford/Yale Junior Faculty Forum, Stanford Law School
(May 18, 2007) (co-presented with Jonathan R. Nash)

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verify the legitimacy or accuracy of claims, each of which cuts into the
limited dollars available for distribution. Poor compliance with the claims
tules effectively deflects creditors’ obligations onto cash-strapped, bankrupt
families, who must choose between the costs of filing an objection or the
risks of overpayment. Deficiencies in the claims process can permit unmeri-
torious or excessive claims to dilute the participation of legitimate creditors
and to prevent the just administration of bankruptcy estates.” Further, from
a systems standpoint, it is hard to discern the benefit of allowing parties to
opt-out of rules at will. Reforms to the claims process will protect the
integrity of the bankruptcy system.

Mortgagees’ frequent failure to comply with Rule 3001 results from
weaknesses in the current rules, which do not deter creditors from dis-
regarding the documentation requirements. While the rules themselves use
mandatory language, phrased in terms of “shall,”*“* the reality is that some
creditors treat them as aspirations—or ignore them entirely. In most
instances, there is no negative consequence when a mortgagee fails to attach
the required documentation. Under the current system, the main tool to fight
improper claims is Federal Rule of Bankruptcy Procedure 9011, which
requires all factual contentions in pleadings to have evidentiary support.’
While courts have sanctioned creditors for filing unsubstantiated claims,“
Rule 9011 was not designed to correct the systematic failure of other rules.
Rule 3001(f) provides a “carrot” to encourage compliance by granting prima
facie validity to claims that are executed and filed in compliance with Rule
3001." Yet, as a practical matter, all claims receive this treatment if neither
the debtor nor another party in interest objects to the claim. Creditors can
rely on the lack of scrutiny to validate their claims and sidestep the burdens
of Rule 3001.

The consequences of disregarding Rule 3001 need to be sharpened.
Even when an objection is filed, there is typically no sanction for missing

243. See Gardner v. New Jersey, 329 U.S. 565, 573 (1947) (acknowledging the deleterious
effects of unmeritorious or excessive claims on participation by legitimate bankruptcy claimants),
244. FeD. R. BANKR. P. 3001(c)}-{4). The proof-of-claim form also contains the following
instructions:
‘You must attach to this proof of claim form copies of documents that show the debtor
owes the debt claimed or, if the documents are too lengthy, a summary of those
documents. [f the documents are not available, you must attach an explanation of why
they are not available”; and “[y}ou must ... attach copies of the documentation of your
lien, and state the amount past due on the claim as of the date the bankruptcy casc was
filed.

Official Bankruptcy Form 10 (2007), supra note 41.

245. FED. R. BANKR. P. 9011(b)(3).

246, See, eg., In re Cassell, 254 BR. 687, 691 (B.A.P. 6th Cir. 2000) (“Proofs of claim must
meet the standards of [Rule 9011.J"); In re Berghoff, No. 06-10375, 2006 WL 1716299, at *2
(Bankr. N.D. Ohio June 30, 2006) (Finding that a mortgage lender violated Rule 9011 by ineluding
ina claim certain fees that were not warranted by existing law).

247, FED. R.BANKR. P. 3001(f).

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178 Texas Law Review [Vol. 87:121

debtors attorneys request information from mortgage servicers and do not
receive responses or receive inadequate responses, the servicers may have
violated RESPA.” If successful, these claims entitle plaintiffs to actual
damages and the costs of reasonable attorneys fees.’” An objection may also
generate evidence of a practice that can be challenged under a state’s unfair
or deceptive practices act, which typically also permits the recovery of
attorneys fees if the plaintiff is successful.” In some instances, review of
mortgage claims can reveal causes of action that allege violations in how the
loan was originated. For example, a review of a loan’s statutorily required
Truth in Lending disclosure can give rise to a claim for actual or statutory
damages, or even rescission of the loan under some circumstances.” The
Truth in Lending Act”” also is fee-shifting so that mortgage companies may
be ordered to pay the attorneys fees and costs of successful actions” These
examples show how bankruptcy can be the locus for identifying a variety of
illegal lending activity. Reviewing mortgage claims should be merely the
first step in helping a family stop a foreclosure or untangle itself from the
harm of an inappropriate or predatory home loan.

The data provide systematic evidence that mortgage servicers do not
adequately document their claims and may be engaged in overreaching in
assessing fees and calculating outstanding obligations. The current state of
mortgage claims puts debtors at risk. Each time a family loses its home
based on an inaccurate claim, the bankruptcy system fails. Inflated mortgage
claims undercut a core bankruptcy policy—helping families in financial
trouble save their homes and right themselves financially.

C. Sustainable Homeownership Policy

The findings on the unreliability of mortgagees’ claims have
implications beyond bankruptcy. All families who are trying to pay off a
home loan are put at risk if subject to poor or predatory mortgage servicing.
Most families rely on their mortgage servicers to credit payments, calculate
payoff balances, and apply fees only when justified. Most families do not
and cannot separately verify the servicers’ accounting. Bankruptcy data
provide a lens for examining whether Americans should trust servicers to
carry out these tasks and whether the servicing industry is adequately
regulated.

It seems likely that default by a borrower may exacerbate servicing
problems because default triggers the imposition of fees and sometimes a

269. See 12 U.S.C. § 2605(c) (2006) (detailing the proper response to a borrower's request).
270. Id. § 2605(0)3).
271, DOUGLAS J. WHALEY, PROBLEMS AND MATERIALS ON CONSUMER LAW 481 (3d ed.
2002).
272. 15 U.S.C. §§ 1635, 1640 (2006).
273. Id. §§ 1601~1667F.
274, Id. § 1640(0)(3).

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1999) CONSUMER BANKRUPTCY PAPERS 703

2. National Remedies for the Official Forms

Substantial consideration ought to be given to a complete overhaul of the
Official Forms, for several purposes. First, plain English ought to be the pri-
mary goal.!! Second, a multidisciplinary approach is necessary to assure that
the language on the forms maximizes the chances that unsophisticated debt-
ors will understand what is required? Third, the diversity of the
experiences and cultures of consumer debtors ought to be given special con-
sideration, along with the potential impact of that diversity upon debtors’
ability to meet the bankruptcy disclosure requirements.!9> Fourth, functional
and organizational efficiencies within the forms should be incorporated.19*
Finally, the instructions accompanying the official forms should be expanded

11Several definitions have been offered for “plain English” in legal writing See, eg, Cat. Gov't
Cove § 11342(e) (West 1995) (“Plain English’ means language that can be interpreted by a person who
hhas no more than an eighth grade leve! of proficiency in English”). Another commentator lists the ten
typical elements of plain English: (1) a clear, organized, easy-to-follow outline or table of contents, (2)
appropriate captions or headings, (3) reasonably short sentences, (4) active voice, (5) positive form, (6)
subject-verb-object sequence, (7) parallel construction, (8) concise words, (9) simple words and (10) precise
words, George H. Hathaway, An Overview of the Plain English Movement for Lawyers, 62 Mica. BJ. 945,
945 (1983). See also, Michael 8, Friman, Plain English Statutes: Long Overdue or Underdonel, 7 Loy.
Consumer L. Re. 103 (1995) (reviewing the various statutory approaches to plain English and critiqu-
{ng the various federal and state attempts to legislate it); George D. Gopen, The State of Legal Writing:
Res Ipsa Loquitur, 86 Mich. L. Rev. 333 (1987).

The Advisory Committee on Bankruptcy Rules has begun to address plain English considerations.
The 1997 committee notes refer to plain English in connection with amended Form 9 (Notice of Bank-
ruptcy Case, Meeting of Creditors, and Deadlines), amended Form 18 (Discharge of Debtor in a Chapter 7
Case), and new Form 20A (Notice of Motion or Objection). The suggestion here is to expand those
considerations to the other forms.

19° This approach could involve the sciences of linguistics, communication, sociology, psychology and
survey research. ‘This effort could also involve the Federal Judicial Center, the statutory purpose of which
fs “wo farther the development and adoption of improved judicial administration in the courts of the
United States” 28 USC. § 620(a) (1993).

193Sce Kathryn M. Stanchi, Resistance Is Futile How Legal Writing Pedagogy Contributes to The
Law's Marginalization of Outsider Voices,103 Dice. L. Rev. (1998); Clark D. Cunningham, The Lawyer as
Translator, Representation as Text: Towards an Ethnography of Legal Discourse, 77 Conneut L. REV.
(1992).

>*Presently, the organization of the official forms must create a struggle both for thase who complete
them and for those who review them after filing, For example, locating the pertinent information r
ing a debtor's vebicle in a chapter 7 case now requires reference to five different papers: (1) schedule B for
‘ownership and value, (2) schedule C for exemption, (3) schedule D for the secured debt on the vehicle, (4)
the statement of intent regarding the debtor's intent ro surrender the vehicle or reaffirm the debt, and (5)
schedule J for payment on the debt if it is to be reaffirmed. The first four pieces of data could and should
be disclosed in a combined format on.a single schedule. Such organizational efficiencies would enbance the
likelihood of complete and accurate disclosures, and would make it easier for trustees and creditors to
review the information after it is filed.

In the same vein, consideration might be given to creating a national electronic filing form for the
required bankruptcy disclosures. This electronic form could be used either for printing paper copies of the
official forms or for electronic filing. Functionally, the electronic form could include barriers to the kinds of
omissions and inconsistencies found in this study.

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692 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

denying or limiting the debtor's exemptions, but only if accompanied by bad
faith, concealment, fraud, abuse of process or intention to deceive.!°9 In the
absence of such circumstances, the court will permit the debtor to amend the
schedules to exempt any omitted property.'#9 Moreover, the focus of the
exemption issue is strictly upon asset disclosure, while the problems observed
in the study involved many other disclosure obligations. Also, exemption
issues are much less significant in chapter 13 cases.'44 Accordingly, like the

Payne v. Wood, 775 B.2d 202, 205 (7th Cir, 1985); In re Montanez, 233 BR. 791, 796 (Bankr. ED.
Mich. 1999); In re Barber, 223 BR. 830, 833 Bankr. N.D. Ga.1998}; In re Stinson, 221 BR. 726, 728
(Bankr. ED. Mich. 1998); In re Lundy, 216 BR. 609, 610 (Bankr. ED. Mich. 1998), In re Schachter, 214
BR. 767, 778 (Bankr. ED. Pa. 1997); In re St. Angelo, 189 BR. 24, 26 (Bankr. DRI. 1995); In te
Markmueller, 165 BR. 897, 900 (Bankr. ED. Mo. 1994), order corrected, 167 BR. 899 (Bankr. B.D. Mo.
1994), aff'd, 51 F.3d 775 (8th Cir. 1995); In re Mobring, 142 B.R. 389 (Bankr. E.D. Cal. 1992), aff'd, 153
BR. 601 (BAP. Sth Cir, 1993), aff'd without op, 24 F.3d 247 (9th Cir. 1994) (unpublished table decision),
BK. Medical Sys, Inc. Pension Plan v. Roberts (fn e Roberts), 81 BR. 354, 360 (Bankr. W.D. Pa. 1987)
In re Wenande, 107 BR. 770 (Bankr. D. Wyo. 1989).

Exemptions may be limited in value due to inadequate disclosure. In re Doyle, 209 BR. 897, 902
Banke. N.D, Ill 1997) (“The Schedules filed in this case are illustrative of the problems resulting from
hasty and incomplete draftsmanship ~ inadequately detailed information which effectively precludes the
Trustee, the creditors, and the Court fram learning what the Debtors’ assets really are, especially what is
being properly claimed exempe.”). Ambiguities in the claim of exemption may be construed against the
debtor. Addison v. Reavis, 158 BR. 53, 59 (ED. Va. 1993), aff'd sub nom, In re Grablowsky, 32 F.3d 562
(4th Cie. 1994); Anislie v. Grablowsky (In re Grablowsky), 149 BR. 402, 406 (Bankr. ED, Va. 1993); In re
Mohring, 142 BR. 389 (Bankr. E.D. Cal. 1992)

See also 11 US.C. § 522(g\(1) (1994), which permits the debtor to exempt property recovered by the
trustee, but only if ehe transfer of the property was neither voluntary nor concealed by the debtor. Glass
v. Hite (In re Glass), 60 F.3d 565, 568 (9th Cir. 1995); Sherk v. Texas Bankers Life & Loan Ins. Co. (In re
Sherk), 918 F.2d 1170, 1176 (Sth Cir. 1990); Simonson v. First Bank of Greater Pittston (In re Simonson),
758 F.2d 103, 106 (3rd Cir. 1985); Redmond v. Tuttle, 698 F.2d 414 (10th Cir. 1983}; Trujillo v. Grim-
mett (In re Trujillo), 215 BR. 200, 204-05 (BAP. 9th Cir. 1997), affd, 166 F.3d 1228 (9th Cir. 1998).

The party objecting to the exemption bas the burden of proof. Fep. R. BANKR. P. 4003(c).

Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982); In re Martin, 205 BR. 145, 146
(Bankr. ED. Ark. 1997), aff, 213 BR. 574 (ED. Ark. 1997), rev'd om other grounds, 140 F.3d 806 (8th
Cir, 1998); In ve Williams, 197 BR. 398, 403-04 (Bankr. M.D. Ga. 1996); In re Brown, 178 BR. 722, 728
@anke. ED. Tenn. 1995); In re Corbi, 149 BR. 325, 330 Bankr. EDN.Y. 1993); In re Gander, 109 BR.
548, 549 (Bankr. D.RL 1989); Jones v. Burgess (In re Burgess), 1 BR. 421, 426 (Bankr. M.D. Tenn. 1979).

"Exemptions, which are set forth in § 522(d) and state law, apply in botb chapter 7 and chapter 13.
11 USC. § 103(a) (1994); In re Schnabel, 153 BR. 809, 817 (Bankr. N.D. Ill 1993). However, in chapter
13 cases, their significance is “greatly diminished” 11 U.S.C. § 103(a) (1994). In chapter 13, the debeor is
permitted to keep all assets, exempt or not. In re Comelius, 195 BR 831, 835 (Bankr. NDN.Y. 1995); In
te Mitchell, 80 B.R. 372, 380 (Bankr. W_D. Tex. 1987) (On confirmation of the plan, all the property of
the debtor, whether claimed exempt or not, will belong to the debtor, and upon completion of the plan, the
debtor and all of his or her unencumbered property will be discharged from creditors’ claims. See 11
USC. §§ 1327(b), 1328(2). The raison dletre for objecting to a debtor's exemption claims thus evaporates
in a chapter 13 case”). Exemptions under chapter 13 ate only informational. In re Mortis, 48 BR. 313,
314 (WD. Va. 1985). Exemprions are listed in chapter 13 only to permit the court to determine in
‘confirming the plan that the creditors receive more under the plan than they would in a chapter 7 Liquida-
tion, pursuant to § 1325(a)(4) (1994). Armstrong v. Lindberg (In ze Lindberg), 735 F.2d 1087, 1089 (8th
Cir.) cere. denied, 469 US. 1073, 105 8. Cr. $66, 83 L. Ed. 2d 507 (1984). See also In re Edwards, 105 BR.
10, 11 (Bankr. W.D. Va. 1989).

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1822 VANDERBILT LAW REVIEW (Vol. 61:6:1745

Table 11: Binary Logistic Regression Model of Direct Quotation of Positively Cited
First-Tier Appellate Opinion by Positive Citing Federal Courts

Variable Direct Quotation

Court 2.727%* (1.393, 5.339)
First-Tier Full Affirmance 0.563 (0.297, 1.067)
Published 1.142 (0.455, 2.868)
Appellant 1,079 (0.473, 2.461)
Appellee 1.173 (0.514, 2.681)
Chapter 7 1.083 (0.555, 2.112)
Debtor Type 1.300 (0.572, 2.954)
Dispute Type 0.861 (0.381, 1.946)
Subject 1.050 (0.474, 2.328)
‘Subsequent Appeal 0.702 (0.360, 1.370)
FY 1998 1.079 (0.501, 2.323)
FY 1999 2.007 (0,964, 4.178)
N 200
Log likelihood -126.033
McFadden’s R* 0.091

: First-Tier Database
: *** p <0.001, ** p $0.01, * p< 0.05. Odds ratios presented with 95% confidence
intervals in parentheses.

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The distributions of opinions by circuit in each database roughly
approximate one another.!5

As stated before, we do not seek in our study to make claims
about the unobserved population of bankruptcy appeals but rather
confine our commentary to the observed sample of data we have
amassed. That said, we recognize that the story we seek to tell may
not be as compelling if selection bias accounts for the results that we
present. Accordingly, we seek to alleviate concerns regarding two
major types of potential selection bias stemming from litigant choices
that could produce a distorted picture: (1) case-selection bias and (2)
forum-selection bias.

It has been theorized that cases adjudicated at the trial level
represent a nonrandom group by virtue of litigant choices.!° For a
host of reasons, litigants may choose only a select group of cases for
which to pursue a final adjudication by a trial court. If tried cases
substantively differ from settled cases, a study that focuses solely on
tried cases will misrepresent the larger world of litigation because
most cases settle.!27 An appeal further exacerbates the selection bias
because (1) not all adjudicated cases are appealed and (2) not all
appealed cases are disposed of by court decision. The bankruptcy
appellate structure doubly compounds the problem given the two
levels of intermediate appellate review.

If these assumptions are correct, should they be of overriding
concern in a study such as ours? We think not for the following
reasons. First, case-selection bias should not impact our citation data
insofar as a court is generally constrained to written opinions when it
chooses those opinions to which it cites. Second, cases settled either at
the trial or at the appellate level are not a relevant population for
purposes of our study. Our study asks whether the circuit court will
perceive the BAP to have performed the appellate function better than
the district court. Because circuit courts are not autonomous
decisionmaking bodies and can only resolve those appeals brought
before them by the litigants, the only cases that can and should be
measured for this purpose are those cases actually appealed to and

125. See infra Appendix tbl.1.

126. See, eg., George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13
J. LEGAL STUD. 1 (1984).

127. According to a recent empirical study, approximately 2% of federal civil lawsuits in 2002
ended in trial. Mare Galanter, The Vanishing Trial: An Examination of Trials and Related
Matters in Federal and State Courts, 1 J. EMPIRICAL LEGAL STUD. 459, 463 tbl.1 (2004). The
bankruptcy analogue of a federal civil lawsuit is an adversary proceeding. See supra note 45. In
2002, approximately 5% of adversary proceedings terminated during or after trial. Elizabeth
Warren, Vanishing Trials: The New Age of American Law, 79 AM. BANKR. L.J. 915, 930 (2005).

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2008) Misbehavior and Mistake in Mortgage Servicing 147

supported by an itemization, the debtor and other parties are unable to
discern the specific bases for the creditor’s asserted right to be paid the total
amount of the claim. Further, the usefulness of these itemizations varied
greatly.'®?

The most fundamental piece of evidence to support a claim is a copy of
the promissory note or instrument establishing the existence and terms of the
debt. A note is necessary to establish the existence of a debt, its key terms,
and the creditor’s standing to collect the debt. Despite its importance, a note
was not attached to 41.1% of claims.

The finding that four out of ten claims were not supported by a note is
troubling for several reasons. First, the note is not easily available from
another source. Unlike mortgages, notes are not recorded in public records.
If the debtor does not have a copy of the note, and the servicer does not
provide one, the servicer has an informational advantage, which Rule 3001
was presumably designed to eliminate. Next, the promissory note or other
debt instrument is absolutely necessary to enable the debtor, trustee, and
other creditors to verify that the amount asserted as owed on the proof of
claim is correct. The note contains the initial account balance, the applicable
interest rate, and the terms that govern the mortgagee’s ability to charge fees
upon default.’ In subprime loans, such terms are nonstandard and may vary
widely, increasing the importance of having a copy of the note. Third, a
copy of the note is necessary to trace the ownership of the obligation and to
ensure that a creditor has standing to bring an action to collect from a debtor.
As an avalanche of securitized home loans have entered default in the last
year, courts have become frustrated at the difficulty in determining the chain
of title of the note.'** Finally, Rule 3001(c)'s requirement that a copy of a
writing be attached applies widely. Nearly all debts are evidenced by writing
in today’s commercial economy, Yet, even when the claim is for a large debt
such as a mortgage, creditors do not comply with the proof-of-claim rules.

153. See infra subpast ILI(B).

154. In most instances, the note contains broad language on charges and costs. For example,
the Fannie Mae unsform instrument gives the noteholder a “right to be paid back by [the borrower]
for all ofits costs and expenses in enforcing this Note to the extent not prohibited by applicable law.
‘Those expenses include, for example, reasonable attorneys’ fees.” Fannie Mac, Multistate Fixed-
Rate Note—Single Family 1 (instrument revised Jan. 2001), avatlable af bttps:/iwww.efan
niemae.com/sf/formsdocs/documents/notes/pdf/3200.pdf. Even under this broad language, debtors
may have challenges to the mortgages’ claims. For example, they could contest the
“reasonableness” of asserted attomeys fees or argue that the language on “costs and expenses” is
modified by “enforcing this Note” so that costs such as fax fees cannot be justified by this
provision.

155. See Nosek v. Ameriquest Mortgage Co. (In re Nosek), 386 B.R. 374, 383-85 (Banka. D.
Mass. 2008) (imposing monetary sanctions on Ameriquest, Wells Fargo, and several attomeys for
misrepresenting the identity of the holder of the note in bankruptcy proceedings); see also In re
Foreclosure Cases, 521 F. Supp. 24 650, 654 (S.D. Ohio 2007) (dismissing foreclosure cases for
lack of standing when ownership of the note was not established).

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2008] INVESTIGATING APPELLATE STRUCTURE 1787

least somewhat random, distribution of issues and factual settings, we
would expect citation rates to favor district court opinions slightly.
Our data, however, generally show that citation rates favor BAP
opinions. Specifically, we find strong differences between the BAP and
district court samples that are statistically significant at both the
mean and the median. For example, a BAP opinion that was positively
cited had, on average, approximately 7 citations by other federal
courts, whereas a district court opinion averaged approximately 3
citations. Furthermore, by disaggregating our citation data according
to the type of federal court that cited the first-tier appellate opinion,
we find that the BAP opinions in our study had a statistically
significantly greater number of citing references by courts of appeals,
BAPs, and bankruptcy courts than did district court opinions. On the
other hand, district court opinions had a statistically significantly
greater number of citing references by other district courts than did
BAP opinions. Finally, the data indicate that extracircuit federal
courts cited more to BAP opinions than to district court opinions and
that the difference is statistically significant. Some of these results are
illustrated below in Figure 2."

positively by other federal courts are included in our bivariate analyses of the citing reference
data.

143. Cf, Merryman, Toward a Theory of Citations, supra note 104, at 403 (arguing that the
larger number of citations by the California Supreme Court to opinions issued by the courts of
New York State may be due to the large case literature arising out of New York).

144. For a full accounting of these results, see infra Appendix tbl.5.

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678 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

sures were required.9° Three of the five specific inquiries into inconsistent
disclosures revealed problems in more than 10% of the cases.!°° Two of the
three specific inquiries designed to expose disclosures that raise substantial
questions revealed problems in more than 10% of the cases.!°1 Table 3 com-
piles these results.

TABLE 3. SUMMARY OF RESULTS BY TEST QUESTION

Percent
Question with
Number Test Criteria Problems

1 Not state asset or no asset 40%
2 Married debtor not state H, W, J or C for property 54.0%
3 Renting debtor not disclose security deposit 81.0%
4 — Debtor with life insurance expense not disclose life insurance 73.0%
5 Debtor with likely pension interest not disclose pension interest 54.0%
6 — Joint debtors not disclose H, W, J or C for debts 16.0%
7 Renting debtor not disclose lease 85.0%
8 Debtor in business not attach detailed statement 83.0%
9 Chapter 7 debtor not list expenses for all debts to be reaffirmed 21.0%
10 Not date papers 105%
11 Chapter 7 statement of intent not address all secured creditors 14.0%
12 Not disclose automobile 5.0%
13 Chapter 7 debtor with expenses not within 10% of income 43.0%
14 Attorney fee disclosures inconsistent 12.5%
15 Other fee disclosure problems 10.0%
16 Asset/no asset estimation incorrect 25.5%
17 Consumer debt statement incorrect 2.0%
18 Papers dated more than 15 days before filing 19.0%
19 — Schedules dated before petition but filed after 5.5%
20 Not disclose prepetition debt payments 85.0%
21 Other errors 26.5%

A total of 687 errors and problems were found. These errors and
problems were observed in 99% of the study cases. (198 of 200 cases) The
median number is 3.0 per case. The mean (average) is 3.4 per case, with a
standard deviation of 1.6.

Chart 1 shows the number of cases with each number of errors. This
chart demonstrates that 26% of the cases had five or more errors and
problems. (52 of 200 cases) Nearly 10% of the cases had six or more errors
and problems. (19 of 200 cases)

See, in addition to the results summarized in note 98, supra, the results on questions 6 (16%), 9
(21%), 10 (10.5%), and 11 (1496), supra. Only one inquiry in this category, question 1 (496), supra, at 664,
revealed problems in less than 10% of cases.

2°See the results on questions 13 (43%), 14 (12.5%) and 16 (25.5%), supra, at 670.

21See che results on questions 18 (19%) and 20 (85%), supra, at 675-76.

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1812 VANDERBILT LAW REVIEW {Vol. 61:6:1745
Table 5: Citing Reference Data

Panel A: Federal Court Positive Citing Reference by Type of First-Tier Appellate
Opinion

Positive Citing Reference by Federal Court

First-Tier Appellate Opinion No Yes Total

Type

BAP 10 96 106

(9.43) (90.57) (100.00)

District Court 56 106 162
(34.57) (65.43) (100.00)

Total 66 202 268
(24.63) (75.37) (100.00)

Source: First-Tier Database

Note: Row percentages are reported in parentheses. The p-value from a chi-square test
with one degree of freedom is less than 0.0001.

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5776

Dunans GaLiai, GUUUES RUHL, CUMIIaL Lan fain, mutes = Canagy,
Prineipal Ronald Barton products); Outboard Marine Corp.
‘Speaks at 2010 central developers in several significant single-asset real estate cases.
‘State: Gankruntey Before ascending to the bench, he represented the trustee in the
‘Morkshop chapter 7 case of the owner and operator of an oil refinery,
eincipals Ronald Bartant, «Energy Cooperative Inc., which at the time was the largest
Feri (en andi chapter 7 case in the history of the Northern District of Iilino
ee
pene (r. Bari it ni
oe Mr. Barliant 1s a Fellow in the American College of Bankruptcy.

inter cen He has taught debtor-creditor relations at John Marshall Law
School and has frequently lectured and participated in panel
discussions on bankruptcy-related topics at the invitation of

Principal Ronald Bariant te

‘Speak at CBA Bankruptcy §
EBLGABERO'S any organizations, Including the Federal Ju

National Conference of Bankruptcy Judges (WCBD), the American
‘ancieal Ronsld-Baclent Bankruptcy Institute (ABI), the American Bar Association (ABA),
SAGROALEIDABA the Commercial Finance’ Associaton,

Management Assocation, the Chicago Bar Assocation (CBA) and
Principals Ronald Bariiant LexisNexis Mealey's. Mr. Barliant was a panelist for "Claims
and Jon Cooper Speak at Trading: Implications for the Chapter 11 Process, Pitfalls for the
Miachiago eas!” Ciame Trader," The National Conference of Bankruptey Judges,

2008; "Do You Remember Lender Lsbity?," The. Distressed
Principal Ronald Relient Debt Conference, 2008; and “Valuation in the Context of
‘Susake al the jae Bullet, Bankruptcy,” 57th Annual Meeting of the Seventh Circuit Bar
Habel see Association and hudilal Conference of the Seventh Circlt, 2008.
Principal Randall Kein and His published writings include articles on chapter 11
Fitch amd EaaN,—cecutory contracts, preferences, and the anti-trust Itigation in

fhe United Arsines case (in which he represented an indenture
fgaldseriantspaksat __trustee/defendant). He also co-authored an article featured in
‘TMA 2005 Annual the American Bankruptcy Institute Law Review, "From Free-Fall
‘Seovention to Free-For-All: The Rise of Pre-Packaged Asbestos Bankruptcies
1 Uncen at of Civinter 2004). He was a member of the board of governors of

c the NCB) from 1998 to 2000 and of the NCBI's Endowment for

See Education from 1997 to 1998, In addition, he served on national
atta and judicial commitees and’ on’ working "groups
eee sesdenin tectmology ses and the treatment of mass torts in Bankruptcy
eestor cases. Nr Barant is Iisted in The Best Lawyers In America and
Aecunng Minis Super Lawyers, as well as Chambers USA: America's
‘aaatantoantst Leading Lawyers for Business. He is currenty a member of the
Sere aarton ABI (Business Reorganization Commitee), ABA (Business Law
‘of Delaware and Other Section), and NCBJ (Former Judges Section). He is also Chair of
Sunstone the Bankruptey and Reorganization Committe ofthe CBA.

Mr. Barliant is admitted to practice in Illinois. He received his law
degree in 1969 from Stanford University School of Law, where
he was a member of the editorial board of the Stanford Law
Review. He received his B.A. in 1966 from Roosevelt University.

[1] Chambers USA: America’s Leading Lawyers for Business

2006, p. 773.

PROFESSIONAL ACTIVITIES

Reorganization Committee
‘American Bar Associ

Former Judges Section
© Chicago Bar Association,
Reorganization Committee

bttp://www.goldbergkohn.com/printversion html

(boat engines); and the

‘American Bankruptcy Institute,

ion, Member, Business Law Section
National Conference of Bankruptcy Judges,

nage eo

8/30/2010
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662 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

select the dates or the set of consecutive cases on each date. Table 1 shows
the number of cases chosen on each date for the Group I cases.

TABLE 1. THE GROUP 1 CASES

Filing Date ‘Number of Cases
April 14, 1998 . 15
April 16, 1998 68
April 17, 1998 17
Total 100

The cases in Group 2 were chosen using a formula based upon a computer
random number generator to return a random series of actual case filing num-
bers during the six-month study period.

B. RECORDING THE DATA FROM THE STupy Cases

For each of the 200 study cases, a copy of the petition, the schedules, the
statement of financial affairs, the statement of intention and the attorney's fee
statement under Rule 2016(b) was obtained. Thirty-nine items of data from
each case were then reviewed and manually entered into a computer database
program.‘4 These data and their sources are listed below. A question mark
indicates that information was recorded yes or no; otherwise, the actual data
were recorded.

In addition, it was noted whether the debtor's residence appeared to be a
home that the debtor owned, a mobile home or a rental.#5 Also, other inci-
dental findings regarding problems with the papers were recorded.

Petition: Summary of Schedules:
Case number Total assets
Joint filing? Total liabilities
Chapter Income
Stated consumer case but actually Expenses

business? Date schedules filed

Stated asset/no asset Schedules A & B:
Attorney HWJC disclosed?

Date petition filed

“The database program is Microsoft Access 97. The author is willing to share the database for any
legitimate research purposes, or to verify the results of this study.

“The residence was recorded as “bome” if the debtor disclosed 2 home on schedule A and the address
of that home matched the debtor’s residence address on the petition. The residence was recorded as
“mobile home” ifthe debcor disclosed a mobile home in schedule A or B and nothing suggested any other
residence. The residence was recorded “rental” in all other cases.

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2008] INVESTIGATING APPELLATE STRUCTURE 1783

2. Variables of Interest

Recall that we sought to test our broad inquiry into the
perceived quality of appellate review by focusing on (1) how two
distinct appellate courts in the bankruptcy judicial system—the BAPs
and district courts—perform their error-finding function and (2) how
other judicial actors perceive the quality of that performance. As our
hypotheses indicate, we concerned ourselves with an array of
dependent variables that fall within one of two categories:
(1) affirmance by the court of appeals and (2) citations by other federal
courts to the appellate opinions issued by BAPs and district courts.
We will discuss each category and the variables associated with each
in turn.

First, we tracked the disposition rendered by the BAP or
district court on appeal according to three ordered outcomes:
(1) “negative” for those dispositions where the reviewing court
reversed, remanded, or vacated the disposition rendered below;
(2) “hybrid” for those dispositions where the reviewing court partly
affirmed the disposition rendered below; and (3) “positive” for those
dispositions where the reviewing court fully affirmed the disposition
rendered below.'%3 We define circuit court affirmance in two ways:
broadly and narrowly. Broadly defined, affirmance occurred when the
circuit court either partly or fully affirmed the disposition rendered by
the first-tier appellate court (ie., those observations with hybrid or
positive outcomes).!** Narrowly defined, affirmance occurred only
when the circuit court fully affirmed the disposition rendered by the
first-tier appellate court (i.e., those observations with positive
outcomes).'%5 Second, in order to document citation data to the
opinions in our databases, we relied upon KeyCite, West’s citation
research service.'36 We documented for each first-tier level opinion all

133. For the frequency of the dispositions rendered on appeal in first-tier and second-tier
level opinions, see infra Appendix tbl.2.

134, As set forth below, we denominate this variable “Affirmance.” See infra text
accompanying notes 150-151.

136. As set forth below, we donominate this variable “Full Affirmance.” See id.

136. KeyCite organizes citing references for a case by segregating nogative citing references
from positive citing references. KeyCite further organizes negative and positive citing references
according to the depth of treatment given by the citing reference to the cited opinion. Four
categories exist for the depth of treatment provided by the citing reference: (1) “examined,”
indicating that the citing reference contains an extended discussion of the cited opinion, usually
more than a printed page of text; (2) “discussed,” indicating that the citing reference contains a
substantial discussion of the cited opinion, usually more than @ paragraph but less than a
printed page; (3) “cited,” indicating that the citing reference contains some discussion of the cited
opinion, usually less than a paragraph; and (4) “mentioned,” indicating that the citing reference

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2008] INVESTIGATING APPELLATE STRUCTURE 1815

Panel D: Federal Court Positive Quoting References by Type of First-Tier Appellate
Opinion

Positive Quoting Reference by Federal Court

First-Tier Appellate Opinion Type No Yes Total
BAP 33 61 94
(35.11) (64.89) (100.00)
District Court 65 4l 106
(61.32) (38.68) (100.00)
Total 98 102 200
(49.00) (51.00) (100.00)

Source: First-Tier Database
Note: Row percentages are reported in parentheses. The p-value from a chi-square test
with one degree of freedom is less than 0.0001.

Panel E: Citing Reference Data for Positively Quoted First-Tier Bankruptcy
Appellate Opinions

Citing References
First-Tier Appellate Opinion Type Median Mean N
BAP Opinions 1,00 1.43 94
District Court Opinions 0.00 0.58 106

ttest of difference in means:
Wilcoxon rank-sum test: z

Source: First-Tier Database
Note: *** p< 0.001, ** p $0.01, *p<0.05.

= -4,4839 (p < 0.0001)***
4.473 (p < 0.0001)***

Panel F: Immediacy Data for Positively Quoted First-Tier Bankruptcy Appellate
Opinions

Number of Days
First-Tier Appellate Opinion Type Median Mean | N
BAP Opinions 177 306 94
District Court Opinions 387 533 106

test of difference in means: 1 = 4.0459 (p = 0.0001)***
Wilcoxon rank-sum test: z= 4.166 (p < 0.0001)*#*

Source: First-Tier Database
Note: *** p< 0.001, ** p< 0.01, *p< 0.05.

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704 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

and clarified as necessary.19>
3. Local Responses to the Problems with the Official Forms

On the local level, representatives of all participants in the process,
including bankruptcy judges, debtor attorneys, creditor attorneys, trustees
and representatives of the United States Trustee’s office, can come together
to create a set of published guidelines for completing the Official Forms.196
These guidelines would express local needs and expectations regarding the
content and detail of the required disclosures on the bankruptcy papers, line
by line as necessary. They would also supplement and clarify the presently
inadequate instructions on the official forms.

As part of the process of creating local guidelines, the bar and the court
might also consider creating a local client interview form that attorneys could

1951p, Payne, 775 F.2d at 206, the court suggested that clarifying and simplifying the official forms is a
national issue, not a local issue:

[A] court may not announce a specific rule such as: “List separately each item that
a trustee might think could be sold for $25 or more” When writing the bank-
ruptcy code Congress had to choose between a specific set of rules, such as a $25
line of demareation, and a more general standard. The code selects a standard
rather than a rule, and a court may not reverse this choice just because the rule
seems more easily administrable. The degree of specificity must be left in the
charge of those who draft the bankruptcy schedules, and so far they have allowed
many items to be lumped together for a single valuation.

1861, appears that a few bankruptcy courts have adopted local rules establishing limited expectations
for completing the official forms. See O'Connell v. Mann (In re Davila), 210 BR. 727, 729 n2 (Bankr. SD.
Tex. 1996) (“The Court notes that at least since 1989 the local rules of the Bankruptcy Courts for the
Souther District of Texas have required a debtor's schedules to contain a detailed inventory of the
debtor's assets with a separate valuation for each item; In re Reid, 97 BR. 472, 479 (Bankr. ND. Ind.
1988) (‘For guidance on specificity the parties should refer to the local rules of this court, which provide:
“When property of the debtor is claimed as exempt under applicable law, such property shall be adequately
described and itemized in the schedules in the place provided therefore. General terms of description (ie.
“automobiles? ‘common stock, etc.) are not sufficiently descriptive.” Rules of the United States Bank-
ruptcy Court for the Northern District of Indiana, Rule B-206[").

See also C.D. Cat. LBR. 1002-1(¢) (“If the petition fails to specify the chapter under which relief is
being sought, the case will be deemed to have been filed under chapter 7. If the petition fails to specify
‘whether it is @ consumer or business case, it will be presumed to be a consumer case. Ifthe petition fails to
indicate the number of creditors or equity holders, or the amount of assets or debts, it will be presumed
that che case falls in the smallest category of each.”); D. Maine LBR 4003-1 (A debtor's claim of exemp-
ions shall be specific and shall, as to each item or category of items claimed as exempt, designate by title,
section and subsection, the statutory basis for the claim. Exempt assets need not be inventoried and
valued item by item in every case. However, the schedules must disclose the debtor’s exemption claims
‘with meaningful particularity and the debtor must be prepared to provide detailed information regarding
assets claimed as exempt at the meeting of creditors. In joint cases, exemptions claimed by each debtor
shall be listed separately."); D.RJ. LBR 4003-1, (same); DNJ. LBR 1007-1, (‘In addition to the require-
ments of DNJ. LBR 1002-1(a) in a joint petition, the assets and liabilities of each debtor shall be sepa-
rately listed and tabulated on the schedules and statements under appropriately identified columns or
entries, Joint assets and liabilities of the debtors shall be listed and tabulated as such, under appropriately
identified columns or entries”)

The suggestion in the text is for substantially more extensive guidance.

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5769
RAFAEL I. PARDO 3

Comment, Bankruptey Court Jurisdiction and Agency Action: Resolving the
NextWave of Conflict, 76 N.Y .U. L. REV. 945 (2001)

Note, Beyond the Limits of Equity Jurisprudence: No-Fault Equitable
Subordination, 75 N.Y.U. L. REV. 1489 (2000)

AMICUS BRIEF .
Brief for Amicus Curiae Professor Rafael I. Pardo in Support of Neither Party,
United Student Aid Funds, Inc. v. Espinosa, 130 8. Ct. 1367 (2010) (No. 08-
1134), 2009 WL 2875368

CONGRESSIONAL TESTIMONY

An Undue Hardship? Discharging Educational Debt in Bankruptcy: Hearing
Before the Subcommittee on Commercial and Administrative Law of the
House Committee on the Judiciary, 111th Congress (September 23, 2009)

SELECT PRESENTATIONS
2009
Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, Faculty
Workshop, University of California, Irvine School of Law (December 3, 2009)
Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, Faculty
Colloquium, University of Washington School of Law (November 23, 2009)

The Real Student-l.oan Scandal: Undue Hardship Discharge Litigation, Scattle
Economics Council, Seattle, Washington (October 14, 2009) (inaugural
speaker for 2009-2010 season)

Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, Faculty
Colloquium, Emory University School of Law (September 9, 2009)

An Empirical Examination of Access to Chapter 7 Relief by Pro Se Debtors,
Harvard-Texas Joint Conference on Commercial Law Realities, University of
Texas School of Law (March 28, 2009) (in absentia)

2008

An Empirical Examination of Access to Chapter 7 Relief by Pro Se Debtors,
Research Conference on Access to Civil Justice: Empirical Perspectives,
New York University School of Law (November 13, 2008)

The Real Student Loan-Scandal: Undue Hardship Discharge Litigation,
Faculty Workshop, Arizona State University, Sandra Day O°Connor College
of Law (October 22, 2008)

An Empirical Examination of Access to Chapter 7 Relief by Pro Se Debtors,
‘Annual Meeting of the Midwestern Law & Economics Association,
Northwestern University School of Law (October 4, 2008)

8/25/2010

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148 Texas Law Review {Vol. 87:121

The mortgage data hint that compliance with Rule 3001(c) may be even
worse for smaller claims evidenced by a writing, such as credit-card debts.'**

Creditors were more diligent about attaching documentation to prove a
valid security interest in the debtor’s home. A perfected security interest
such as a copy of a recorded mortgage or deed of trust accompanied 80.4%
of mortgagees’ proofs of claim. As shown in Figure 1, 19.6% of claims were
not supported by a security interest to document the creditor’s lien in the
debtor’s home. In light of the dismal compliance on attachment of notes, it
may be tempting to view this finding on security interests as a relative
success that may not merit policy attention. However, several risks are
created when creditors do not prove a valid security interest.

The first potential harm is to the integrity of the bankruptcy system.
The data show that nearly one in five mortgagees ignores a clear disclosure
rule when they participate in a bankruptcy case. With much less evidence of
misbehavior by debtors,'*” Congress imposed at ‘on debtors’ schedules to
ensure full disclosure of assets'** and permitted dismissal of debtors’ cases as
a penalty for failing to provide documentation.'” These laws evidence
Congress’s belief that bankruptcy is a serious and important process and that
full disclosure is necessary to preserve the system's integrity. Creditors who
make affirmative filings to a court, such as a proof of claim, also affect
public confidence in the integrity of the bankruptcy system.' The failure of
approximately 20% of creditors to attach security interests to their claims
damages the structural integrity of the process to ensure that claims are
accurate and that all assets are distributed according to bankruptcy law and
procedure.

The second reason that the finding on attachment of mortgages is
troubling results from the serious distributional consequences to all parties in

156, See John Rao, Debt Buyers Rewriting of Rule 3001: Taking the “Proof” Out of the Claims
Process, AM. BANKR. INST. J., July-Aug. 2004, at 16, 16 (stating that Rule 3001 supporting
documents are not provided to purchasers of credit-card debt)

157. See Steven W. Rhodes, A Preview of “Demonstrating a Serious Problem with Undisclosed
Assets in Chapter 7 Cases,” NORTON BANKR. L, ADVISER, May 2002, at 1, 1~2 (finding in a one-
district sample that 70% of asset cases—a small fraction of all Chapter 7 cases generally—
contained undisclosed or undervalued assets in the debtors’ lists of assets and valuations); see also
Edith H. Jones & James I. Shepard, Recommendations for Reform of Consumer Bankruptcy Law by
Four Dissenting Commissioners, in REPORT OF THE NATIONAL BANKRUFTCY REVIEW
COMMISSION 1029, 1057-58 (1997), available at http://govinfo.library.unt.edwabre/report/ 24com
mvi pdf ("The Commission repeatedly heard testimony that the information reported in the debtors’
schedules is often unreliable.”).

158, Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L.
No. 109-8, § 603, 119 Stat. 23, 122 (codified at 11 U.S.C. §§ $21, 727 and 28 U.S.C. § $86 (2006))
(authorizing random audits of debtors).

159, 1d. § 316, 119 Stat. at 92 (codified at 11 U.S.C. § 521(i)) (automatically dismissing 3
bankruptey case if the debtor does not provide required information, such as payment advices).

160. Because debtors almost always affirmatively seek bankruptcy relief, it may be fair to
impose increased burdens for disclosure on them as the “moving party.” Nonetheless, creditors who
participate in cases also submut themselves to federal process and should be required to comport
‘with the rules that govern their actions in bankruptcy cases.

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1999) CONSUMER BANKRUPTCY PAPERS 681

CHART 2. CHAPTER 7 FEE

Errors
a

$100 $300 $500 $700 $900 $1,100
Fee ($100 to $1,100 only)

2. The Prepetition Fee Paid

Whereas Chart 2 addresses the total attorney fee, Chart 3 addresses the
actual fees paid before the petition was filed, for both chapter ’7 and chapter
13 cases. Again, this is to test whether a higher “up front” fee permits the
attorney the time necessary to file more complete and accurate papers.

However, Chart 3 appears to demonstrate somewhat the opposite. It
shows that the number of errors actually increases slightly with the amount
of the fee paid before the petition is filed. At the lower end, where the
prepetition payment is up to $200, the errors approximate 3. At the other
end, where the prepetition payment is over $800, the errors approximate 4.
The explanation for this was not examined further.

In six chapter 7 cases, the fee was $0, for the probable reasons indicated in note 107, supra. These
cases were excluded from Chart 2 because the economic incentives under scrutiny here do not seem to
apply when considerations other than those arising from market forces dictate the attorney fee.

Further, for presentation purposes only, Chart 2 also excludes two chapter 7 cases in which the fees
‘were $1375 and $1600. These fees substantially exceeded the upper end of the primary range of fees
(approximately $200 - $1000). There were four errors in each of these two cases, which is approximately
‘what the trendline on Chart. 2 would have predicted.

‘The median fee in the chapter 7 cases (excluding the six no fee cases) was $500 (range $199 - $1600).
‘The average was $520 with a standard deviation of $209.

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170 Texas Law Review [Vol. 87:121

The number of formal objections could understate the scrutiny that
claims receive. Parties could be informally working out disagreements about
claims. This hypothesis, however, is incongruent with the rare incidence of
amended claims. Amended claims were located to correspond with only
9.7% of all mortgagees’ initial claims. If creditors were being called to task
through informal processes like phone calls from debtors’ counsel or
negotiations at plan-confirmation hearings, the result in most of such
situations should be an amended claim.”” Further, my interviews with
dozens of consumer attorneys before beginning this study revealed that only
a few practitioners regularly review all mortgage claims.” The high-volume
nature of consumer practice undoubtedly explains this situation, but it does
not excuse it. The missing documentation and the lack of standardized and
detailed itemizations only heighten the financial and time costs to review
claims.

The data offer a cautionary tale about relying on the formal law to
actually function as intended to protect parties. Very few mortgage claims
meet the ideal of the bankruptcy process; a majority of claims lack
documentation and reflect a sizeable discrepancy in record keeping between
debtors and creditors. Unambiguous law exists to address such problems.
For decades, the system has relied on these procedures to safeguard the
integrity of bankruptcy distributions. Yet, the paucity of objections shows a
collective failure of the system to identify even patently defective claims.

Verifying that debtors only pay the amounts to which creditors are
legally entitled should be a routine part of bankruptcy representation. This is
a reasonable burden to impose on attomeys given the large size of mortgage
claims and the requirement that debtors must pay all mortgage arrearage debt
in full to save their homes. Similarly, trustees have a statutory obligation to
object to improper claims,”” yet rarely do so. The current system fails to

237. Another possibilty is that the plan-confirmation process serves as a check on the accuracy
of claims. In their proposed Chapter 13 repayment plans, debtors may be relying on their own
calculations of the amounts due, rather than using the amounts of the mortgagees’ claims as the
basis for the required repayment. If the creditor does not object to the plan, the order confirming the
plan would trump the claim for purposes of the required payment in bankruptcy. Conversely,
creditors may be objecting to the amounts of mortgage debt in the plans, and if the objections are
‘sustained, the plans would be conformed to the creditors’ claims. The extent to which confirmed
Chapter 13 plans reflect the creditors’ claims or the debtors’ scheduled amounts, or some
compromise between these discrepant numbers, is an empirical question. The difficulty in testing
this hypothesis is that, in most districts, the plan contains only the amount of pre-petition arrearage
Yet, some claims did not specify the arrearage at all, while other claims reflect only the combination
of pre-petition and post-petition amounts. Thus, despite my efforts to do so, it is impossible to
compare either the total claims or the total arrearages contained in confirmed plans to those
contained in the proofs of claim in any significant fraction of cases.

238. See also Vicki Mabrey & Ely Brown, Playing the Odds, ABCNEWS.COM, Dec. 14, 2007,
bhup://abenews.go.com/Business/RealtyCheck/Story?id=4002397&page=1 {interviewing Max
Gardner about the “bankruptcy boot camp” that he developed to train attomeys on mortgage issues
in bankruptcy cases).

239. 11 U.S.C. § 704(a)(5) (2006).

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2008) INVESTIGATING APPELLATE STRUCTURE 1793

5.74] times higher.’5* Put another way, holding all other variables
constant, a first-tier appellate disposition rendered by a BAP
increased the odds of Affirmance by 295% [41, 1007] and Full
Affirmance by 154% [12, 474].

It is helpful to elucidate these findings in terms of predicted
probabilities. Using the actual values of all of the independent
variables included in the model, we can calculate the predicted
probability of circuit court affirmance for the 237 first-tier appellate
dispositions upon which the model is based. In Figures 4 and 5 below,
we present the predicted probabilities for Affirmance and Full
Affirmance, respectively, of the actual observations in our regression
model through use of a histogram that displays the distribution of
those probabilities for district court dispositions and BAP dispositions
separately. The width of each bar represents a specific interval of
predicted probability of affirmance, and the height of each bar
represents the percentage of dispositions that fall within that interval.
For any observation with a predicted probability of over 50% (ie.,
greater than 0.5), the model assigned the positive outcome of circuit
court affirmance.

156. When performing inference, we implement the recommended practice of conveying
levels of uncertainty by using the notation (#, #] to indicate the lower and upper bounds of the
95% confidence interval around our estimates. See Lee Epstein, Andrew D. Martin & Matthew
M. Schneider, On the Effective Communication of the Results of Empirical Studies, Part I, 59
VaND. L. REV. 1811, 1835-37 (2006).

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2008) Misbehavior and Mistake in Mortgage Servicing 131

A claims process is incorporated into every bankruptcy case to
determine how much each creditor is owed and to adjudicate any disputes
about the debt. These proofs of claim are bankruptcy’s altemative
mechanism to separate lawsuits by each creditor to collect a debt. In the
mortgage context, a proof of claim functions similarly to a complaint to
foreclose and collect a deficiency judgment. That is, the claim should
establish a creditor’s interest in the debtor’s home as a mortgagee and the
amount owed on the mortgage note. The debtor has the opportunity to
“answer” by objecting to the claim. The bankruptcy court then has authority
to fix the claim. Because proofs of claim are the most common interaction
between debtors and creditors in the bankruptcy system,"’ they offer an
excellent mechanism for examining the behavior of mortgage servicers in
bankruptcy cases.

C. The Harms of Abusive Servicing

Mortgage-servicing abuse can take several forms. The Federal Trade
Commission (FTC) believes that poor servicing can be a serious problem for
homeowners and has identified several abusive practices, including the
imposition of unwarranted late fees, unnecessary force-placed insurance, and
illegal fees.“* Two cases illustrate the problems that incorrect or inaccurate
mortgage servicing imposes on borrowers. In Rawlings v. Dovenmuehle
Mortgage, Inc.,"° the servicer repeatedly asserted that the homeowners had
failed to make payments even though the servicer itself had erred by
applying the payments to the wrong account.” After the servicer sent notices
of default and imposed late fees, the homeowners spent over seven months
attempting to resolve the servicer’s error.’ In another instance, Islam v.
Option One Mortgage Corp.,* the borrowers refinanced, but the prior ser-
vicer continued to threaten to foreclose on the borrowers’ home and to report
adverse information to credit bureaus.” This year, the Boston Globe
reported that mortgage companies typically include projected foreclosure
costs in payoff amounts given to borrowers in default. These fees are es-
timates for anticipated services, which may never be rendered. While a

47. While claims are the most common creditor activity in bankruptcy cases, claims are not
filed by every creditor. See | KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY § 67.1 (3d ed. 2000 &
Supp. 2004) (stating that numerous creditors fail to file proofs of claim).

48. DIV. oF CONSUMER & BUS. EDUC., FED. TRADE COMM'N, MORTGAGE SERVICING:
MAKING SURE YOUR PAYMENTS COUNT 3 (2008), available af hup:/iwww.ftc.gov/bcp/
edu/pubs/consumerfhomes/real0 pdf.

49. 64 F. Supp. 2d 1156 (MD. Ala. 1999).

50. Id. at 1159-60.

51. Id.

52. 432 F. Supp. 2d 181 (D. Mass. 2006).

‘53. Id. at 183-84.

54. Sacha Pfeiffer, Hidden Legal Fees Push Some into Foreclosure, BOSTON GLOBE, Jan. 18,
2007, at DI

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1756 VANDERBILT LAW REVIEW [Vol. 61:6:1745

statutorily established the bankruptcy judges, who are appointed by
the courts of appeals,’ as “unit(s]” of the district courts.4? Thus,
parties technically should file bankruptcy cases in federal district
court. However, the Act authorizes each district court to “refer” “any
or all cases” or “proceedings” to the bankruptcy judges.*? District
courts in turn have implemented “standing orders” to refer
bankruptcy cases in the first instance to the bankruptcy courts.‘4

In determining the scope of the bankruptcy judge’s authority to
resolve a dispute within a bankruptcy case,’ it is necessary to
categorize the proceeding as core or non-core. Absent the consent of all
parties, bankruptcy judges may only issue recommendations for the
resolution of non-core proceedings, with de novo district court review
upon objection by either party.* Appellate review thereafter lies to the
appropriate federal court of appeals,‘7 and thence to the Supreme
Court,** in line with the typical federal appellate hierarchy.

Core proceedings, on the other hand, are those that lie at the
heart of a bankruptcy case.*? Bankruptcy judges are empowered to

41. 28 U.S.C. § 152(a)(1) (Supp. V 2005).

42, Id. § 151 (2000); see also id. § 162(a)(1) (Supp. V 2008) (“Bankruptcy judges shall serve
as judicial officers of the United States district court established under Article III of the
Constitution.”).

43, Id, § 157(a) (2000).

44, 9AM. JUR. 2 Bankruptey § 731 (2008); Bussel, supra note 13, at 1066 & n.12.

45. Disputes in bankruptcy cases generally assume one of two forms: (1) an adversary
proceeding, or (2) a contested matter. Adversary proceedings include, for example, a proceeding
to recover money or property; a proceeding to determine the validity, priority, or extent of a lien;
a proceeding to object to or revoke a discharge; and a proceeding to determine the
dischargeability of a debt. FED. R. BANKR. P, 7001. Such proceedings are initiated and advance
much as any other federal lawsuit, insofar as Part VII of the Federal Rules of Bankruptcy
Procedure, which governs such proceedings, virtually incorporates the Federal Rules of Civil
Procedure (occasionally with modification). See, e.g., id. 7003 (FED. R. Civ. P. 3); id. 7004(8)
(Portions of Fev. R. Crv. P. 4); id. 7005 (FED. R. Crv. P. 6); id. 7012() (FED. R. CIV. P. 12(6)-{h));
id. 7013 (FED. R. Crv. P. 13); id. 7014 (FED. R. CIV. P. 14); id. 7056 (FED. R. Crv. P. 56). Disputes
between parties that are not adversary proceedings are called “contested matters,” and they
proceed according to less complex procedures than adversary proceedings—including request for
relief by motion rather than the filing of a complaint. Fp. R. BANKR. P. 9014; see also
Khachikyan v. Hahn (In re Khachikyan), 335 BR. 121, 125 (BAP. 9th Cir. 2005) (‘In a
contested matter, there is no summons and complaint, pleading rules are relaxed, counterclaims
and third-party practice do not apply, and much pre-trial procedure is either foreshortened or
dispensed with in the interest of time..."

46. The Judicial Code describes a non-core proceeding as “a proceeding that is not a core
proceeding but is otherwise related to a case under title 11.” 28 U.S.C. § 187(c)(1) (2000 & Supp.
V 2008).

47. 28U.S.C. §§ 1291, 1292 (2000).

48. Id. § 1254(1).

49. Section 157(b)(1) of the Judicial Code speaks of “core proceedings arising under title 11,
or arising in a case under title 11.” Id. § 157(b)(1). In turn, section 157(b)(2) lists examples of core
proceedings, which include matters concerning (1) administration of the estate, (2) the allowance

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2008) INVESTIGATING APPELLATE STRUCTURE 1749

creating an appellate body with the expertise to deal effectively with
the complex area of patent law.5

Third, courts and commentators identify general “lawfinding
ability’—as distinct from expertise in particular areas of law—as a
virtue for appellate review. While the Supreme Court has
characterized the presence of multijudge panels as “[plerhaps most
important” in assessing lawfinding ability,’ it has also indicated other
factors that tend to enhance lawfinding ability in the appellate
setting. Specifically, lawfinding ability is greater when (i) the judges
have schedules that allow time for reflection,® (ii) the judges resolve
legal issues once the factual record is fully developed,® and (iii) the
attorneys may focus on the relevant legal issues without the
distraction of trial advocacy.!°

A fourth factor that tends to be associated with the quality of
appellate review is the extent to which an appellate court conforms to
traditional appellate hierarchy.!! Courts in the United States are
organized according to a standard hierarchy: trial courts decide cases
in the first instance, with a first appeal as of right to an intermediate
appellate court and a second appeal to a high court at the discretion of

5. See, eg., Rochelle Cooper Dreyfuss, The Federal Circuit: A Case Study in Specialized
Courts, 64 N.¥.U.L. REV. 1, 7 (1989) (citing predictability and efficiency as reasons for creating a
specialized patent court to relieve the burden of technical patent cases on generalist judges); R.
‘Polk Wagner & Lee Petherbridge, Is the Federal Circuit Succeeding? An Empirical Assessment of
Judicial Performance, 152 U. PA. L. REV. 1105, 1114-17 (2004) (giving an account of the
establishment of the Federal Circuit's exclusive appellate jurisdiction over patent law).

6, See Nash, supra note 1, at 1022.

7. Salve Regina Coll. v, Russell, 499 U.S. 226, 232 (1991).

Id, at 231 (noting, with a negative connotation from the perspective of lawfinding
ability, that district judges “preside alone over fast-paced trials”).

9. Id, at 232.

10. Id, at 231-32.

11, See, eg., Robert B. Ahdich, Between Dialogue and Decree: International Review of
National Courts, 79 N.Y.U. L. REV. 2029, 2047 (2004) (suggesting that appellate review and
appellate hierarchy are integrally related by noting that “the various characteristics and
fanctions of appellate review ... suggest that some gradation of judicial authority is central to
the nature of appellate review,” and that “[aJn appellate system of review. .. is one defined by
hierarchy’); Jobn A. Ferejohn & Larry D. Kramer, Independent Judges, Dependent Judiciary:
Institutionalizing Judicial Restraint, 17 N.Y.U. L. REV. 962, 998 (2002) (“{T}he deveiopment of an
appellate hierarchy with collegial courts at the higher levels and stringent rules of vertical stare
decisis operates structurally to ensure that no individual judge can, by his or her actions alone,
inflict too much damage on the judiciary by making aberrant or overly ambitious decisions.");
Mortimer N. 8. Sellers, The Doctrine of Precedent in the United States of America, 54 AM. J.
Comp. L. 67, 68 (2006) ("The essence of the American system of precedent as experienced in
practice resides in the great authority and hierarchical arrangement of the courts.”). But cf.
Pauline T. Kim, Lower Court Discretion, 82 N.Y.U. L. REV. 383, 287-88 (2007) (arguing that the

ipal-agent model for analyzing lower court efforts to fulfill appellate court
‘mandates ignores the allocation of discretion to lower courts).

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664 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73
TABLE 2. THE DEMOGRAPHICS OF THE STUDY SAMPLE

CASES COMPARED TO THE UNIVERSE OF CONSUMER CASES
DURING THE STUDY PERIOD

Study Sample
Universe
Group 1 Group 2 Total of Cases
Chapter 7 80% 72% 76% 74%
Chapter 13 20% 28% 24% 26%
Individual 78% 16% 771% 71%
Joint 22% 24% 23% 23%

IV. TESTING THE DISCLOSURES

To accomplish the goal of objectively measuring the care with which the
initial papers in consumer bankruptcy cases are prepared, a series of tests
were performed on the data recorded from papers in each case. These tests
examine for specific instances of (a) incomplete disclosures, (b) inconsistent
disclosures, and (c) disclosures that, although not themselves demonstrably
inaccurate or incomplete, raise a substantial question about the care with
which the other disclosures were made.

A. INCompLETE Disclosures

Eleven areas were examined for incomplete disclosures. Each of these
questions tests whether the debtor made a disclosure that was required
either (1) by the Official Forms in every case, or (2) in the debtor’s case based
on other information that the debtor did disclose.

1. Does the petition state the required estimate of whether
funds will be available for distribution to unsecured
creditors?

The petition requires the debtor to estimate whether the case is an
“asset” case or a “no-assetTM case by checking the appropriate box to indicate
either that “funds will be available for distribution to unsecured creditors,” or
that “after any exempt property is excluded and administrative expenses paid,
there will be no funds available for distribution to unsecured creditors."46 In
each study case, the debtor's response or failure to respond was recorded.4?

4% of debtors failed to indicate on the petition whether
the case was asset or no asset. (8 of 200 cases)

2. If the debtor is married, do schedules A & B disclose

“Official Bankruptey Form 1.
The accuracy of this response is tested in question 16, infra, at 673.

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1790 VANDERBILT LAW REVIEW {Vol. 61:6:1745

appellate opinion and positive direct quotation thereto by other federal
courts, we would have expected to see slightly more than half (51%) of
the first-tier appellate opinions to have been quoted directly. Our
analysis confirms that there is less than a 0.0001 probability that
random chance alone would have yielded a difference as large as this,
thus indicating a statistically significant association between the type
of first-tier appellate opinion and a federal court's decision to quote
the opinion directly when positively citing to it. Furthermore, we
observe that, on average, approximately 1.5 of the positive citing
references to BAP opinions directly quote such opinions as opposed to
only 0.58 of the positive citing references to district court opinions.
Also, whereas 65% of the positively cited BAP opinions have at least
one directly quoting citing reference, only 39% of the positively cited
district court opinions did so. These differences are highly statistically
significant and further support our contention that positive federal
citing references will have directly quoted BAP opinions more
frequently than district court opinions.'*?

Finally, the immediacy with which a federal court cites to such
an opinion serves as yet another indicator of its perceived quality.
Accordingly, we consider the period of time for which it took a first-tier
appellate opinion to be positively cited by a federal court for the first
time.'® Our data show that, for the group of positively cited first-tier
appellate opinions, a BAP opinion would receive its first positive citing
reference by another federal court, on average, within approximately
10 months (306 days), while it took nearly twice as long—
approximately 17 months (533 days)—for a district court opinion.
Moreover, slightly more than half (51%) of the BAP opinions from this
group received their first positive citation within approximately a 6-
month period. This starkly contrasts with district court opinions, only
about a quarter (24%) of which received their first positive citation
within the same period of time. These highly statistically significant
differences indicate that the type of first-tier appellate opinion has

147. For purposes of these analyses, we excluded extreme outliers according to the criteria
discussed in supra note 142. For a full accounting of these results, see infra Appendix tbl.5.

148. We might assume that an opinion that comprehensively and effectively addresses an
unresolved or debated issue of law that has been repeatedly litigated not only will be ly
cited, but also will be cited more quickly. Thus, for purposes of this analysis, we exclude the
extreme outliers we identified with respect to total number of positive citing references. See
supra note 142, We further sought to identify whether there were any extreme outliers in terms
of the number of days it took for the first-tier appellate opinions to be cited. In this instance, we
define an extreme outlier to be any observation with a total number of days that falls above the
third quartile of the immediacy data (638 days) by more than 3 times the interquartile range for
such data (620.5 days). On the basis of these parameters, there were no additional extreme
outliers.

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1999) CONSUMER BANKRUPTCY PAPERS 675

C. Discrosures THAT RatsE QUESTIONS

Three areas were examined, not because the responses are demonstrably
inaccurate, but rather because they raise substantial questions about the care
with which the papers were prepared:

18. Are the schedules dated more than fifteen days before
the petition was filed?

Neither the Bankruptcy Rules nor the Official Forms establish any re-
quirement or provide any instruction on when the debtor should date the
schedules. The study tested whether the schedules and the statement of fi-
nancial affairs were dated more than fifteen days before the case was filed.
Although somewhat arbitrary, this criterion was selected because under
Bankruptcy Rule 1007(c), the debtor has fifteen days after filing the petition
to file the schedules and statement of financial affairs

Although the Official Bankruptcy Forms provide no instruction on this
point, dating the disclosures on or near the filing date is important in adminis-
tering the bankruptcy case because the financial information required in the
forms naturally changes over time. Stale information is less likely to be accu-
rate. Also, several of the required disclosures are explicitly time sensitive.»
In any event, questions regarding the current accuracy of the disclosures arise
when the papers are dated substantially before they are filed.

19% of debtors dated the papers more than fifteen days
before the petition was filed.5* (38 of 200 cases) Half of
those debtors dated the papers more than thirty days
before the petition was filed. (17 of 200 cases) The two
longest time periods were 154 and 145 days.

%Fep, R. Banke. P. 1007(¢).

"The disclosures that are explicitly time sensitive include the responses to the questions in the state-
ment of financial affairs about: income from employment or operation of business for the previous two
calendar years and calendar year to dare (question 1); other income during the previous two years (ques-
tion 2}; payments to creditors within ninety days, and within one year for payments to insiders (question
23); suits and administrative proceedings, executions, gamnishments and attachments within one year (ques-
tion 4); repossessions, foreclosures and returns within one year (question 5}; assignments within 120 days
and receiverships within one year (question 6); gifts within one year (question 7}; losses within one year
(question 8); payments elated to debt counseling or bankruptcy within one year (question 9); other trans-
fers within one year (question 10); closed financial accounts within one year (question 11); safe deposit
boxes within one year (question 12}, setoffs within ninety days (question 13); and, prior address of debtor
within cwo years (question 15).

One explanation for this is that in these cases, the debtor's attorney completed the forms and beld
them for some reason, perhaps relating to the debtor's payment of the attorney fees and casts. Some
evidence of this is reported in Jean Braucher, Lauoyers and Consumer Bankruptcy: One Code, Mary Cul-
tures, 67 AM. Bawen. LJ. 501, $49 (1993) (finding that interviews with chapter 7 lawyers disclosed chat
fifteen of thirty-three lawyers did not grant credit on their fees; however, some of these took fees in pre-
filing installments of two to six months, but the petition would not be filed prior to full payment). This
study did not test these hypotheses.

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2008] INVESTIGATING APPELLATE STRUCTURE 1821

Table 10: Zero-Truncated Negative Binomial Regression Model of Number of Days
for First Positive Federal Court Citing Reference to Positively Cited First-Tier
Appellate Bankruptcy Opinions

Variable Number of Days

Court 0.565*** (0.423, 0.753)
First-Tier Full Affirmance 0.913 (0.698, 1.194)
Published 0.922 (0.631, 1.345)
Appellant 1.116 (0.781, 1.595)
Appellee 1.097 (0.761, 1.582)
Chapter 7 0.767 (0.579, 1.016)
Debtor Type 0.889 (0.619, 1.275)
Dispute Type 0,836 (0.596, 1.174)
Subject 0.670* (0.480, 0.937)
Subsequent Appeal 0.681* (0.507, 0.914)
FY 1998 0.860 (0.607, 1.220)
FY 1999 0.927 (0.676, 1.272)
N 200
Log likelihood -1392.339
McFadden’s R? 0.013

irst-Tier Database
: *#* 5 < 0.001, ** p< 0.01, * p $0.05, Incidence rate ratios presented with 95%
confidence intervals in parentheses.

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126 Texas Law Review (Vol. 87:121

suffer dire harms from poor mortgage servicing. Errors or overcharges
increase the cost of home ownership and expose families to the risk of
wrongful foreclosure. This Part explains the serious consequences of
mortgage servicing and collects the scattered reports of servicing abuse. This
review highlights the need for a systematic examination of the reliability of
mortgage servicing.

A. The Structure and Function of Mortgage Servicing

Mortgage servicing is the collection of payments from borrowers and
the disbursement of those payments to the appropriate parties, such as
lenders, investors, taxing authorities, and insurers.'' The rise of servicing as
a distinct industry resulted from the widespread use of securitization in the
mortgage market.'? Put simply, securitization is the process of creating debt
instruments (usually bonds) by pooling mortgage loans, transferring those
obligations to a trust, and then selling to investors fractional interests in the
trust's pool of mortgages.'? These investors receive periodic payments on
their investments.'* Servicers act as intermediaries between the borrower
and the other parties to the securitization.'® A pooling-and-servicing agree-
ment sets out the servicer’s responsibilities for collecting and remitting the
mortgage payments.’© The participation of servicers complicates the
borrower-lender relationship and limits flexibility in loss mitigation and de-
fault situations.”

Mortgage servicers do not have a customer relationship with
homeowners; they work for the investors who own the mortgage-backed
securities.'* Borrowers cannot shop for a loan based on the quality of the

at the loan origination phase, was the largest direct- restitution settlement ever in a state or federal
case).

11, Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 HOUSING POL'Y
DEBATE 753, 735 (2004).

12. See Possible Responses to Rising Morigage Foreclosures: Hearing Before the H. Comm. on
Fin, Serss., 110th Cong. app. at 97 (2007) (statement of Sheila C. Bair, Chairman, Federal Deposit
Insurance Corporation) (“Prior to the widespread use of securitization, home finance typically
involved a bank or savings institution granting a loan to a borrower. The lending institution would
‘make the decision to grant credit, fund the loan, and collect payments.”).

13. See STEVEN L. SCHWARCZ ET AL., SECURITIZATION, STRUCTURED FINANCE, AND CAPITAL
MARKETS 2 (2004) (providing an introduction to securitization and examining the legal issues
relevant to securitized transactions).

14. Ud.

15. Id at 15.

16. See Hearing, supra note 12, app. at 101-02 (statement of Sheila C. Bair, Chairman, Federal
Deposit Insurance Corporation) (explaining that a servicer must comply with the relevant
secuntization documents).

17. See id. app. at 102-06 (describing the conflicts of interest faced by servicers when
‘managing mortgages).

18. Id. app. at 103. However, lenders do have a customer relationship with borrowers and may
‘want to retain them as repeat customers. SCHWARCZ ET AL., supra note 13, at 15. Some lenders
retain the servicing obligations when they sell loans on the secondary market, but the active market
for servicing contracts means that very few customers will find that their loans are serviced by the

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5570

An Empirical Investigation into
Appellate Structure and the
Perceived Quality of Appellate
Review

Jonathan Remy Nash*

Rafael I. Pardo”

INTRODUCTION ..

L EVALUATING THE QUALITY OF APPELLATE REVIEW

Il, _ INVESTIGATING APPELLATE STRUCTURE AND THE
PERCEIVED QUALITY OF APPELLATE REVIEW.
A. The Bankruptcy Appellate Process.......
B. Hypotheses

* Professor of Law, Emory University. Prior to joining the faculty at Emory University
School of Law, Professor Nash was the Robert C. Cudd Professor of Environmental Law at
Tulane Law School. He was also Visiting Professor at the University of Chicago Law School for
the 2007-2008 academic y

“Associate Professor of Law, Seattle University.

For helpful suggestions, we are grateful to Adeno Addis, Douglas Baird, Thomas Bak, the
Honorable Prudence Carter Beatty, Michael Collins, Jason Czarnezki, Onnig Dombalagian, the
Honorable Frank Easterbrook, David Epstein, Myriam Gilles, Michael Herz, the Honorable
Christopher Klein, Daniel Klerman, Michelle Lacey, Clarisa Long, Glynn Lunney, Anup Mal
‘Thomas Miles, Lawrence Ponoroff, Eric Posner, Frederick Schauer, Margo Schlanger, Catherine
Sharkey, Nancy Staudt, Frederick Tung, and Kathryn Zeiler. This Article also benefited greatly
10 commentary of participants at the 2008 Annual Fall Symposium of the Ninth Cireuit
Bankruptcy Appellate Panel; the 2008 Annual Meeting of the American Law and Economics
Association; the poster session of the Second Annual Conference on Empirical Legal Studies; the
2007 Annual Meeting of the Law and Society Association; the 11th Annual Conference of the
International Society for New Institutionsl Economics (especially that of John Drobak, who
served as a commentator on the paper); the 2007 Stanford/Yale Junior Faculty Forum (especially
that of Pamela Karlan and Judith Resnik, who served as commentators on the paper); the 2007
Reenvisioning Law Colloquium at the University of Houston Law Center; the 2006 Annual
Meeting of the Midwestern Law and Economics Association; a faculty workshop at Seattle
University School of Law; and from the commentary of students in the seminar on "Courts,
‘Judges, and Voting” at the University of Chicago Law School. Demelza Baer-Bositis and Jacob
Eisenstein provided excellent research assistanct

1745

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GPO,

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152 Texas Law Review [Vol. 87:121

trustees. Undocumented or insufficiently documented claims create
obstacles to ensuring that mortgage creditors are paid in accordance with the
law. At worst, creditors’ failure to provide documentation can manipulate
the bankruptcy system to overpay on these obligations, harming the debtor
and all other creditors.'” The requirements for claims documentation should
be consistently respected and enforced to prevent these harms.

B. Default Fees in Mortgage Claims

Itemizations were the most common form of documentation attached to
claims. The prevalence of itemizations, however, is a misleading cue as to
their usefulness in ensuring the accuracy of mortgage claims. Two major
problems undermined the itemizations’ use as a tool to evaluate the propriety
of a creditor’s claim. First, there is no standard form for itemizations. Even
with a single servicer or attorney, the itemization format and amount of detail
varied.'”” Without a standard format, itemizations cannot be reviewed using
a semiautomated or routine process. In high-volume systems such as the
consumer bankruptcy system, the result is to dramatically limit the scrutiny
of claims. To make affordable services available to debtors, the consumer
attormey has to employ standardized procedures that can be applied in
hundreds of cases a year. Trustees are similarly bound by cost and efficiency
concems.'” The wide variation in the form of itemizations means that
debtors and trustees will be severely hampered in reviewing and objecting to
claims. The result is a system that does not ensure that even obvious
mistakes or overcharges in claims will be reviewed and objections will be
filed, if appropriate.

The second, and related, problem is the tremendous variation in the
quantity of detail provided on itemizations. Some “itemizations” contain so
little detail as to be a perversion of the proof-of-claim form’s use of that term
to describe the attachment. In a few instances, the itemization simply
consisted of a breakout of the amount of arrears that was part of the

170. See In re Wingerter, No. 06-50120 (Bankr. N.D. Ohio Oct. 1, 2007) (opinion resolving a
show-cause order) (“A policy of filing a proof of claim without having possession of the supporting
documents, but withdrawing the claim if the debtor subsequently files an objection to the claim's
validity smacks of gamesmanship and creates an unacceptable risk that distributions to other
creditors will be unfairly reduced.”

171. In some districts, the variation was obviously due to the differing practices of the attomeys
hired to represent the servicer. In other instances, however, the same attomey filed proofs of claim
in several different formats, probably reflecting the fact that the servicer itself is preparing the proof
of claim and merely transmitting it to the attorney for review and filing with the court.

172, See 11 US.C. § 7041) (2006) (prescribing that the trustee shall “close such estate as
expeditiously as is compatible with the best interests of parties in interest”). A trustee is potentially
subject to liability to the creditors for failing to close an estate in a cost-efficient manner. See In re
C. Keffas & Son Florist, Inc., 240 B.R. 466, 474 (Bankr. E.D.N.Y. 1999) (“If the trustee fails to
make this necessary cost-benefit analysis, then the trustee will necessarily breach the statutory
mandate under 11 U.S.C. § 704(1), and incur a liability for the damages unjustifiably imposed upon
the creditors. ...”).

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696 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

hundred fifty-five cases and suspended from practice for failing to support the
fees, for inaccurate and incomplete disclosures, and for incompetent and inad-
equate representation.'58 In In ve Brantley, the court found that the sched-
ules prepared by the debtor's attorney were inaccurate and warned the
attorney that if the conduct continued in future cases, the court would rec-
ommend a hearing on suspension from practice.'59 Nevertheless, disciplinary
actions against bankruptcy attorneys are rare.'6°

G. LecaL Mavpractice Clams

A debtor who suffers injury from an attorney's improper or inadequate
advice in preparing the bankruptcy papers may assert a claim for legal mal-
practice.'6! However, several legal and practical obstacles explain why this
remedy does not address systemic problems with bankruptcy papers. First, a
substantial majority of courts have concluded that because the debtor must
have known of any problems with the papers before they were filed, the
malpractice claim accrued prepetition and is therefore property of the bank-
ruptcy estate under 11 U.S.C. § 541(a)(1).16* In these circumstances, the
trustee is the only proper party to pursue the claim,!6* but may not have the

ND. Tex. 1987) (suspending debtor's attomey from practice for sixty days for forging the debtor's signa-
tuures on the initial bankruptcy papers).

+8210 BR. 727 (Bankr. SD. Tex. 1996).

+9584 BR. 508 (Bankr. $.D. Ohio 1988).

'6See Maggs, supra note 127, at 28:

Disciplinary actions against bankruptcy attorneys, however, seKlom occur for two
reasons. First, state bars and federal law enforcement agencies have very limited
resources. They learn about bankruptcy fraud mostly through referrals and they
usually have more serious matters to address. Second, charges against attorneys
may be difficult to prove. Merely showing that an attorney gave bad advice does
not suffice; the prosecutor also must demonstrate, at a minimum, that the lawyer
knew that advice was wrong. It is often difficult to obtain such evidence. (foot-
notes omitted.)

381$cc, eg, Wheeler v. Magdovits (In re Wheeler), 1377 F.3d 299 (Sth Cir. 1998) (the debtor's claim for
malpractice allegedly resulting in his bankruptcy fraud conviction accrued prepetition because the debtor
should have known that his schedules concealed assets); In re Tomaiolo, 205 BR. 10 (Banke. D. Mass.
1997) (relying on Segal v. Rochelle, 382 US. 375, 86 S. Ce, S11, 15 L Ed. 2d 428 (1966)}; In re JE.
Marion, Inc,, 199 BR. 635 (Bankr. SD. Tex. 1996); Haaland v. Corporate Management, Inc, 172 BR. 74
(SD. Cal. 1989); Ellewanger v. Budsberg (In re Ellwanger), 140 BR. 891 (Bankr. W.D. Wash. 1992); Jones
v. Hyatt Legal Servs. (In re Dow), 132 BR. 853 (Bankr. $.D. Ohio 1991). See generally Barry K. Tagawa,
Collection and Bankruptcy Practice: The Third Highest Area of Malpractice Exposure, 3 No. 2 LEcat
‘Mavpractice Rep. at 15 (1992) (‘The most common category of errors alleged against collection and
bankruptcy attorneys is Yailure to know or properly apply the law").

But see, Alvarez v. Johnson, Blakely, Pope, Bokor, Ruppel and Burns, P-A. (In re Alvarez), 228 BR. 762
(Bankr. M.D. Fla. 1998); Swift v. Seidler (In re Swift), 198 B.R. 927 (Bankr. W.D. Tex. 1996), aff'd sub
nom, State Farm Life Ins. Co. v. Swift, 129 F.3d 792 (5th Cir. 1997}; Collins v. Federal Land Bank of
‘Omaha, 421 N.W.2d 136, 139-40 (Iowa 1988).

*62See supra note 161 and cases cited therein.

1914,

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legal assistants and junior attorneys to review claims. Standardization would
also facilitate the development of computer programs to analyze creditors’
calculations for items such as escrow accounts and arrearage payment
streams. Indeed, creditors themselves have identified variations in local
practice as an obstacle to accurate servicing.” A model itemization
attachment was promulgated by a committee of mortgage-industry
representatives, Chapter 13 trustees, and mortgage servicers." The model
attachment would require servicers to provide details such as the type of the
loan, its interest rate, and any payment-adjustment dates.”*' It also sets out a
standardized format for servicers to break out the amount of any pre-petition
arrearages, categorize each charge, and report how many times each type of
charge had been imposed. The Advisory Committee on Bankruptcy Rules
should review the model itemization and consider incorporating it into the
Official Form 10 and Rule 3001(a), at least for mortgage claims. Voluntary
adoption seems unlikely as the form has not yet been adopted, despite its
existence for many months. Notably, the participation of industry represen-
tatives in creating the model itemization does reflect some willingness by
servicers to admit that their bankruptcy procedures need improvement.

The solutions outlined here would systematically improve mortgage
claims. Given the empirical evidence of widespread problems with
mortgage claims, these approaches may be the most efficient solution. The
realities of consumer bankruptcy practice may dictate structural solutions that
do not rely on the voluntary participation of individual actors. While such
teforms would modestly increase the administrative burdens, the benefits of
increased reliability in mortgage claims justify these policy changes.

B. Bankruptcy as a Home-Saving Device

Mortgage claims are a key determinant of the outcomes of consumer
bankruptcy cases. A core function of Chapter 13 bankruptcy is helping
families save their homes”? which the Bankruptcy Code effectuates by

259. Hearing, supra note 58, at 5 (statement of Steve Bailey, Chief Executive for Loan
Administration, Countrywide Financial Organization), available at brtp://judiciary.senate govipaf!
08-05-06Steve_%20Batley_Testimony.pdf (testifying that, as a result of variations across
jurisdictions in the rules governing bankruptcy, bankruptcy-loan secvicing is a borrower-by-
‘borrower process that requires manual input of data unique to each borrower, and that this type of
processing can occasionally result in mistakes).

260. MODEL PROOF OF CLAIM ATTACHMENT, supra note 175, at 2-3.

261. ‘The model attachment would also require the creditor to provide the Mortgage Electronic
Registration System (MERS) number for the loan, the real property tax number and parce! number,
and a contact person for the servicer (not just the servicer's attorney).

262. Cf. In re Coates, 292 B.R, 894, 899-900 (Bankr. C.D. Ill. 2003) (noting that the frequent
appearance of attomeys fees and expenses in mortgage claims justifies a systematic approach to this
aspect of Chapter 13 cases).

263. See 1 LUNDIN, supra note 47, § 129.1 ("[l]t is not unusual for rehabilitation of a home
mortgage to be the principal reason for filing a Chapter 13 case.”).

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1999) CONSUMER BANKRUPTCY PAPERS 673

16. Is the estimation of whether assets will be available for
distribution to creditors consistent with the disclosures in
the schedules or in the chapter 13 plan?

In chapter 7 cases, the statement regarding the estimated availability of
funds for distribution to unsecured creditors was compared with the sched-
ules? If the debtor exempted all unencumbered property on schedule C, and
if the debtor disclosed no preferences or fraudulent conveyances, the debtor
should have estimated that no funds would be available for distribution. In
chapter 13 cases, the debtor's estimate was evaluated according to whether
the debtor's plan proposed a distribution to unsecured creditors.§+

25.5% of debtors incorrectly estimated whether funds
would be available for distribution to creditors. (51 of
200 cases) By chapter, the results are:
11% of chapter 7 debtors estimated that funds
would be available for distribution to creditors

‘a prepetiton debt, this debt was not listed in schedule F in any of the cases. “The practice of not schedul-
ing debts for prepetition fees may mislead debtors as to the dischargeability of these debts.” Marianne B.
Culhane & Michaela M. White, Reaffirmation and Discharge Problems, 1114 PLL/Corp 703, ‘721-22
(April-May, 1999) (reporting empirical study results showing 38% of consumer debtors” attomeys ex-
tended fee credit and that none listed the debt in schedules D or F, although a few disclosed the represen-
tation agreement on schedule ).

Granting fee credit raises the issue of whether the postpetition collection of these fees by the debtor's
attomey violates the automatic stay of § 362(a) or the discharge injunction of § 524(a). On this issue one
court of appeals recently stated:

This small-dollars but large-issue litigation poses a problem that pervades each of

the many thousands of no-asset or low-asset personal bankruptcies in the federal

court system: the legal posture of the attorneys’ fees paid or payable by Chapter 7

debtors. Whether the debtor is required by his or her attorney to pay all of the fees

up front—even before the filing in bankruptcy—or, as here, enters into a prefiling

arrangement for payment of the fees (or a material portion of the fees) after filing,

che legal status of the fees attributable to postpetition services does not fit comfort-

ably within the provisions of the Bankruptcy Code.
Gordon v. Hines (In re Hines), 147 F.3d 1185, 1186 (9th Cir. 1998). This issue has not been addressed in
the Eastern District of Michigan.

8p tbe discussion of question 1, supra at 664, the language on the petition form establishing this
requirement is quoted.

Although in chapter 7 cases the proper criteria is fairly obvious, in chapter 13 cases, attomeys
appeared to use two different criteria. In estimating whether there will be a distribution to unsecured
creditors, many chapter 13 attomeys applied a hypothetical chapter 7 liquidation analysis, while others
relied on the chapter 13 plan.

‘The Administrative Office of the United States Courts, which collects this data for statistical pur-
poses, states that the proper test is whether the chapter 13 plan proposes a distribution to unsecured
creditors, Telephone Interviews with Frank Szczebak, Director of the Bankruptcy Division, and Patricia
‘Channon, Administrative Office Unived States Courts (August 13, 1999). Accordingly, that was the test
utilized in this study.

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1748 VANDERBILT LAW REVIEW [Vol. 61:6:1745
J, EVALUATING THE QUALITY OF APPELLATE REVIEW

Assembling an exhaustive list of the ideal elements of appellate
review would present no small task. However, the academic literature
does suggest several attributes that will tend to contribute to better
appellate review.

First, commentators laud the use of panels of judges, rather
than single judges, to hear appeals. There are two justifications for
this, First, to the extent that there is an objectively “correct” answer to
a question of law posed on appeal, and to the extent that there is a
greater than 50% chance that each appellate judge will reach that
“correct” answer, the Condorcet Jury Theorem instructs that a panel
of judges will more likely reach the “correct” answer than will a single
appellate judge.’ Second, even to the extent that one might question
the validity of the assumptions underlying the applicability of the
Condorcet Jury Theorem in the context of appellate review,? there is
an argument that the collegial nature of multimember appellate
panels contributes to reflective decisionmaking and thus to the quality
of appellate review.

'A second factor that strengthens the quality of appellate review
is expertise of the appellate decisionmaking body in the subject matter
of the appeals it hears.‘ Thus, for example, Congress created the
United States Court of Appeals for the Federal Circuit with an eye to

1. See Jonathan Remy
Interpretations of State Law, 77
‘Jury Theorem).

2, See Jonathan Remy Nash, A Contest-Sensitive Voting Protocol Paradigm for
Multimember Courts, 66 StaN. L. REV. 75, 112-13 & 112 nn.130-31 (2003) (questioning the
applicability of the Condorcet Jury Theorem in the context of appellate judicial decisionmaking).

3. See, eg, Hurry T. Edwards, The Effects of Collegiality on Judicial Decisionmaking, 151
U. Pa. L. REV. 1699, 1649 (2003) (arguing that collegiality contributes to sound decisionmaking
thet focuses on the legal issues at hand); Lewis A. Kornhauser & Lawrence G. Sager, Unpacking
the Court, 96 YALE LJ. 82, 100-02 (1986). But see Richard L. Revesz, Environmental Regulatio
Ideology, and the D.C. Circuit, 83 VA. L. RBV. 1717, 1719 (1997) (Gnding empirical evidence that
judges on an appellate panel of the same political party are more likely to vote ideologically);
Cass R. Sunstein, David Schkade & Lisa Michelle Ellman, Ideological Vating on Federal Courts
of Appeals: A Preliminary Investigation, 90 VA. L. REV. 301, 316-25 (2004) (finding some
‘evidence of ideological voting on federal courts of appeal:).

4, _ See Erwin Chemerinsky, Decision-Makers: In Defense of Courts, 71 AM. BANKR. LJ. 109,
116 (1997) (‘Specialization offers two major advantages: expertise and uniformity."). For an
argument that it might benefit the legal system to have some judges with expertise in areas
other than law, see Adrian Vermeule, Should We Have Lay Justices?, 59 STAN. L. REV. 1569,
1587-98 (2007).

sh, Resuscitating Deference to Lower Federal Court Judges’
aL. L. REV. 975, 1022-23 (2004) (describing the Condorcet

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1999) CONSUMER BANKRUPTCY PAPERS 705

use with their clients on an optional basis. Such a local interview form would
be designed to carry out the local guidelines and to facilitate accuracy in the
completion of the Official Forms.

B. Remepres FOR THE Lack oF Care BY DEBTORS AND THEIR
ATTORNEYS

1. The Lack of Care in Completing the Bankruptcy Papers
The results of a majority of the test questions in this study cannot be
attributed to ambiguities in the forms, but rather reflect insufficient care in
completing the forms. This is certainly true regarding the results of several of
the questions that tested for incomplete and inconsistent disclosures, such as:

Did the debtor estimate whether assets will be available for
distribution to creditors?!97

If married, did the debtor state who owns the property?#9®
If renting, did the debtor disclose a security deposit?!99

If a joint petition, did the debtors state who owes the
debts?200

If intending to reaffirm debt, did the debtor include the ex-
pense for the monthly payments?201

Did the debtor date the papers???

Did the debtor address all secured creditors in the § 521
statement of intent?20

Did the fee disclosures of the debtor and the attorney
agree?204

Jn addition, the study noted other errors that reflect inadequate care.
2. National Responses to the Lack of Care

Consideration should be given to creating inexpensive and prompt judi-
cial processes that would be available in these circumstances and that would

'97Official Bankruptcy Form 1, voluntary petition. See supra note 46 and accompanying question and
text,
Official Bankruptcy Form 6, schedules A and B. See supra test question 2.
‘Official Bankruptcy Form 6, schedule B, line 3. See supra note 49 and accompanying question and
text.

70°Official Bankruptcy Form 6, schedules D, B and F. See supra note 58 and accompanying question
and text.

2°'Official Bankruptcy Form 6, schedule J. See supra note 68 and accompanying question and text,

"Official Bankruptcy Forms 6 and 7, schedules and statement of financial affairs. See supra note 70
and accompanying question and text.

2°Qffcial Bankruptcy Form 8, statement of intent. See supra question and text accompanying note
7.

?Official Bankruptcy Form 7, statement of financial affairs, question 9; statement required by Fep. R.
Bann. P, 2016(b). See supra question and text accompanying note 78.

2'See vest questions 15 at p.672 (other fee disclosure errors) and 21 at p.677 (other errors).

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2008] Misbehavior and Mistake in Mortgage Servicing 153

creditor’s total claim. Since the proof-of-claim form itself already requires
that information," the itemization added nothing to the one-page claim form
itself. Other creditors merely listed three categories: the total amounts of
principal, interest, and “other/miscellaneous.”

To analyze the variation in detail, the Mortgage Study coded all the
itemization detail into several categories based on the types of charges that
debtors allegedly owe.'* Despite using the servicing industry's own
categories,'” 43% of itemizations either made reference to fees that did not
fit one of the dozen specific categories or proffered an aggregate sum of
many types of varying charges that could not be separated. One common
technique was the use of a temporal category that did not provide any legal
basis for the permissibility of the charges. For example, several itemizations
labeled charges only as “pre-petition,” without identification of whether
these amounts resulted from missed payments, default charges, or accrued
interest.'"® Among claims with debt identified only as pre-petition, the
average of this type of debt was $1,651, a fairly substantial sum without any
specific basis. Another common label was “prior/previous servicer,” which
again does not pinpoint the basis for the charges or permit any examination
of whether the amount claimed is correct. Perhaps most egregiously, some
amounts were labeled merely “other” or included in a column of summed
figures with absolutely no description at all." These vague or temporal
descriptions do not meet the requirement of Form 10 to itemize any
additional charges and do not permit meaningful review of the accuracy or
legality of servicers’ calculations of debt.

The itemizations were plagued by another troubling feature: the use of
laundry-list descriptions. The most common such label in the sample was
“Inspection, Appraisal, NSF, and other charges.” Over thirty proofs of
claim used that recitation with the words in that order and no additional
breakdown of fees in that line item. For this description to be literally

173. Official Bankruptcy Form 10 (2007), supra note 41

174, Each charge was categorized as one of the following: principal, interest, escrow, late
charges, foreclosure fees or costs, nonsufficient funds charges, property inspection fees, broker
price opinions or appraisals, corporate advances, post-petition fees, suspense funds, or other. The
last category was residual and used when the charge did not fit another category or the fees were not
broken out into one of the above categories.

175. The categories set out above, supra note 174, are consistent with those on the Model Proof
of Claim itemization developed by a joint committee of Chapter 13 trustees and mortgage servicers.
See NAT'L ASS'N OF CHAPTER 13 TRUSTEES MORTGAGE COMM. MODEL PROOF OF CLAIM
ATTACHMENT 2-3 (2007) (hereinafter MODEL PROOF OF CLAIM ATTACHMENT]. This model proof
of claim attachment was included in a 2007 report issued by the National Association of Chapter 13
Trustees Mortgage Committee. NAT'L ASS'N OF CHAPTER 13 TRUSTEES, REPORT OF MORTGAGE
COMMITTEE (2007) {hereinafter REPORT] (on file with the Texas Law Review).

176. Charges or amounts labeled merely as pre-petition were identified in sixty-three claims,
fewer than 5% ofall claims. This count excludes any fees labeled as “‘pre-petition attorneys’ fees.”

177. For example, one claim's “itemization” listed $5,391 described only as “other.” Another
claim requested $3,023 for “delinquency expenses.”

178. “NSE” stands for nonsufficient funds.

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1778 VANDERBILT LAW REVIEW

“second-tier database”), we ran two separate search queries. The first
query consisted of the single term “11 U.S.C.,” the standard citation to
title 11 of the United States Code (commonly referred to as the
“Bankruptcy Code”), coupled with (1) a date restriction that limited
query retrieval to decisions and orders issued during the three-year
period beginning on October 1, 1997 and ending on September 30,
2000;"7 and (2) a field restriction that limited query retrieval to
decisions and orders whose preliminary field contained either the term
“district court” or “bankruptcy appellate panel,” but not “court of
appeals.""8 The second query mirrored the first query with the
exception that the field restriction limited query retrieval to decisions
and orders whose preliminary field only contained the term “court of
appeals.”1!9 The first query produced 1,487 documents, while the
second query produced 871 documents. These large numbers clearly
presented a challenge by virtue of the time it would take to review
each document. We sought to reduce the time demand by randomly
selecting for review approximately one-quarter of the documents
produced by each search query—specifically, 372 documents from the
first search query and 218 documents from the second search query.}!29
In order to identify those that would be selected for inclusion and
analysis in the two databases, we reviewed these documents according
to the procedures described below.

We sought to include in the databases appeals that involved
the resolution of dispositions rendered by bankruptcy courts in core
proceedings.'*! We included only those documents that disposed of the
appeal on the merits. (Because most of these documents were opinions
rather than orders, for ease of reference we will collectively refer to
the documents as opinions for the remainder of the Article.) Opinions
that solely involved procedural dispositions (e.g., dismissal for lack of

117. Coverage for the FBKR-CS database begins with the year 1789.

118. The preliminary field for case law documents (i.e, decisions or orders issued by a court)
in Westlaw is found at the top of such documents and generally contains the name of the court
that issued the document, In its entirety, the first search query waa as follows: “11 u.s.c.” & pr
(‘district court” “bankruptcy appellate panel” % “court of appeals”) & da (aft 9/30/1997 & bef
10/01/2000).

119. In its entirety, the second search query was as follows: “11 us.c.” & pr (“court of
appeals”) & da (aft 9/30/1997 & bef 10/01/2000).

120. Each search query produced a numbered result list in which the opinions were listed in
reverse chronological order. For the first-tier database, the results were organized by court in
reverse chronological order (i.e., district court opinions were listed first in reverse chronological
order followed by BAP opinions listed in reverse chronological order). We used a random number
generator to select the opinions from each result list that we would analyze. For each result list,
we randomly generated a set of unique numbers falling within the range of the total documents
retrieved by the search query.

121. See supra notes 49-50 and accompanying text.

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2008] Misbehavior and Mistake in Mortgage Servicing 133

abusive servicing can heighten them. Without servicers’ reaching out to
consumers and spending the necessary time and money, sensible loan
modification opportunities will be missed. Families who could have saved
their homes with a repayment plan or modification will lose their homes, and
investors will suffer unmitigated losses.”

The harms of servicing abuse may be even higher for families in
bankruptcy, which often file Chapter 13 in a final effort to save their homes.
If bankruptcy claims contain illegal fees, debtors will face increased burdens
in confirming repayment plans and be forced to find extra income to make
bloated payments. Even if the servicing harm is limited to informational
problems, debtors suffer harms. As one bankruptcy court recognized,
mistakes by creditors, who are in control of the accounts, impose additional
costs on debtors—the parties who can least afford such expense—to sort out
such problems.” Servicing problems also jeopardize the ability of courts and
trustees to administer bankruptcy cases correctly and fairly. Other creditors
are harmed if mortgage companies wrongly divert money that should be
available to pay unsecured creditors and increase the administrative costs of
bankruptcy. If servicing abuse is routine, this also weakens our collective
confidence in the integrity of the bankruptcy system and the power of law to
balance the rights of consumers and businesses.

D. Litigation on Mortgage-Servicing Practices
Mortgage-servicing abuse is a nascent legal issue. Depending on the
type of misbehavior, consumers may have both federal and state claims and
both common law and statutory remedies. While the case law is growing,
there are still relatively few adjudicated decisions on mortgage-servicing

61. See Michael A. Stegman et al., Preventive Servicing Is Good for Business and Affordable
Homeownership Policy, 18 HOUSING POL’Y DEBATE 243, 246 (2007) (presenting dara that show
that effective preventive-servicing strategies increase dollars collected, reduce overall operating
costs, and slow the rate at which mortgages progress into delinquency).

62. See Eggert, supra note 23, at 282 (recounting a 2007 statement from a federal regulatory
authority encouraging mortgage servicers to use loan modification and other loss-mitigation
techniques to keep borrowers in their homes).

63, See id. at 284 (“Effective loan modifications, which can result from preventive servicing,
can both reduce borrowers’ payments, helping to keep them in their homes, and save investors from
credit losses that result from foreclosure.”).

64. See Williams v. Fairbanks Capital Corp. (In re Williams), Case No. 00-00770-W, Adv. No.
01-80105-W, 2001 WL 1804312, at *1-2 (Banks. D.S.C. Nov. 19, 2001) (awarding punitive
damages to the debtor after the debtor incurred substantial attomeys fees, other costs, and lost
wages responding to inaccurate court documents filed by the creditor due to errors in its records)

65 NAT'L CONSUMER LAW CTR, supra note 22, at 147 nl (citing recently published
authorities describing the growing problem of mortgage-servicing abuse).

66. See id. at 179 (explaining that, in addition to federal claims brought under the Real Estate
Settlement Procedures Act, 15 U.S.C. §§ 2601-2617 (2006), consumers often may bring claims
under state unfair-and-deceptive-trade-practices acts and common law breach-of-contract, breach-
of-fiduciary duty, and tort claims).

HemOnline -- 87 Tex. L. Rev. 133 2008-2009 DEF01604


5772

RAFAEL I. PARDO 6

Christine Dugas, Student Loans Are Crushing New Grads; Without Jobs, Paying
Off $100,000 in Debt Is Tough, USA TODAY, May 13, 2009, at 6A.

Bill Virgin, Beware the Latest ‘C Level’ Executive, SEATTLE POST-
INTELLIGENCER, Oct. 28, 2008, at D1.

Vesna Jaksic, Your Attendance Is Required, NAT'L L.J., Sept. 24, 2007, at 4.

Courses TAUGHT

Bankruptcy, Contracts, Payment Systems, Sales, Secured Transactions, Trusts
and Estates, Legal Scholarship Colloquium

Law SCHOOL SERVICE

Faculty Liaison, Fair Debt Collection Observation Project, Seattle University
‘School of Law, September 2009 — January 2010

Member, Planning Committee for State Judicial independence—A National
Concern, Seattle University School of Law, April 2009 - September 2009

Member, Faculty Appointments Committee, Seattle University School of Law,
July 2008 ~ May 2009

Chair, Special Faculty Appointments Committee, Seattle University School of
Law, January 2008 ~ May 2008

Chair, Commercial Law Focus Area, Seattle University School of Law, July
2006 — May 2010

Member, Curriculum Committee, Seattle University School of Law, July 2006 ~
July 2007

Member, Legal Research and Writing Committee, Tulane Law School, July 2005
~ July 2006

Member, Readmissions Committee, Tulane Law School, July 2005 - July 2006
Faculty Liaison, Honor Board, Tulane Law School, March 2005 — July 2006

Member, Special Clinical Appointments Committee for the Tulane
Environmental Law Clinic, Tulane Law School, July 2004 ~ July 2005

Member, Faculty Appointments Committee, Tulane Law School, July 2004 -
July 2005

Advisor, La Alianza del Derecho, Tulane Law School, September 2003 - July
2006

Member, Judicial Clerkship Committee, Tulane Law School, July 2003 ~ July
2004

8/25/2010

DEF01897


5657

128 Texas Law Review [Vol. 87:121

most basic things about their mortgage payment[s]."”” Mortgage servicers

can exploit consumers’ difficulty in recognizing errors or overcharges by
failing to provide comprehensible or complete information. In fact, poor
service to consumers can actually maximize servicers’ profits." Indeed, it
appears that servicers fail to satisfy customers. A study of consumer
satisfaction with business services found that only 10% of borrowers are
happy with their mortgage servicers.”?

Spiking foreclosure rates and pressure from Wall Street may exacerbate
problems with mortgage servicing.” Falling real-estate prices have changed
the profit calculus of foreclosure, encouraging lenders to reach out to
delinquent borrowers! Facing political and financial pressure, lenders and
servicers are struggling to develop cost- and time-effective strategies for loss
mitigation.” However, cash-strapped lenders have fewer resources than ever
to devote to loan servicing.” Just as more borrowers risk losing their homes,
servicers may have to lay off employees, skimp on procedural safeguards, or
reduce investment in technology. These changes do not portend well for
borrowers in high-cost loans or those seeking loan modifications.
Mortgage servicing is a crucial part of the home-ownership process that must
be part of any response to the rising foreclosure rate and downturn in the
mortgage market.

21. Lenders Look for Way to Avoid Bankruptcy Maze, NAT'L MORTGAGE NEWS, Aug. 30,
2004, at 23 [hereinafter Lenders Look], available at http://www.nationalmortgagenews.com/
premiunvarchive/?id=147519.

28. See Guttentag, supra note 19 (arguing that the normal financial incentives to provide quality
service do not exist within the current structure of the loan-servicing industry)

29, Press Release, J.D. Power & Assocs., Customer Service and Attention to Detail Drive
Home Mortgage Satisfaction 1 (Nov. 26, 2002) (on file with the Texas Law Review).

30. See Posting of Tara Twomey to Credit Slips, http://www creditslips.org/creditslips/2007/
03/subprime_servic.html (Mar. 19, 2007, 23:32 PDT) (“Financial troubles, staff layoffs and
potentially higher servicing costs on defaulting loans have led to concems that servicing quality
may decline.”).

31. See, e.g., Carrick Mollenkamp, Faulty Assumptions: In Home-Lending Push, Banks
Misjudged Risk, WALL ST. J., Feb. 8, 2007, at Al (discussing mega-bank HSBC's recent efforts to
‘work with troubled borrowers, including hiring more employees to work out payment plans and
implementing a top-down overhaul of its entire mortgage-services branch).

32. See id. (descnbing HSBC's expanded loss-mitigation efforts); Ruth Simon, Digging Out of
Delinquency, WALL ST. 3., Apr. 11, 2007, at D1 (“The sharp rise in delinquencies in recent months
is straining mortgage companies® ability to respond quickly to borrowers, with such solutions as
new repayment plans or modifications to loan agreements.”).

33. See Simon, supra note 32, at D1 (describing the heightened strains on servicers as the
volume of default increases).

34, See Eggert, supra note 23, at 284-92 (documenting barriers that servicers face in loan
modifications).

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judges) presumably experts in bankruptcy law. Thus, they are well
suited to resolve legal issues that might arise in core bankruptcy
proceedings.“ District judges, by contrast, are more often
characterized as generalists in the law, without special training or
experience in bankruptcy law.

The third factor—“other” lawfinding ability*—appears to favor
neither district judges nor bankruptcy appellate panels. Attorneys
filing appellate briefs may focus on the legal issues without the
distractions of trial advocacy, whether the briefs are filed with the
district court or appellate panel. Similarly, both district judges and
bankruptcy appellate panels hear legal issues once a factual record
has been established. Last, while district judges and bankruptcy
judges both preside over trials, neither the district judge hearing a
bankruptcy appeal, nor bankruptcy judges sitting on a bankruptcy
appellate panel, are presiding over a trial as part of the appellate
process.®7

63. See, eg., id. at 107 (“Most of the bankruptcy judges were bankruptcy practitioners in
their prior careers.”); see also id. at 123 (noting that, of a random survey of bankruptcy judges in
2005, “[albout 83%... were bankruptcy practitioners before taking the bankruptcy bench,” and
that, “olf the 17%... who were not bankruptcy practitioners, almost all came from a business
Jaw background, as commercial litigators or corporate transactional lawyers,” and further noting
that the surveyed bankruptcy judges felt that their prior experience was very helpful on the
bench); cf. id. at 113-16 (discussing the trend among bankruptcy judges to hire more permanent,
fas opposed to term, law clerks, and noting that those bankruptcy judges who preferred
permanent clerks often hired clerks with legal experience, and in particular practice experience
in bankruptey law).

64. See Chemerinsky, supra note 4, at 128 (‘[T]he BAP is desirable because it allows
specialist bankruptcy judges to replace nonspecialist federal district court judges.”); see also
Jeffrey J. Rachlinski, Chris Guthrie & Andrew J. Wistrich, Inside the Bankruptcy Judge’s Mind,
86 B.U. L. REV. 1227, 1290-31 (2006) (reporting empirical finding that bankruptcy judges as
specialized actors perform “at least as well” as generalist judges in terms of not exhibiting typical
biases often reflected in judgments).

65. One might argue that even district judges with no experience in bankruptey before
ascending to the bench gain some experience by virtue of hearing a steady stream of bankruptcy
cases. A study by the Federal Judicial Center of the bankruptcy appellate structure, however,
reached the opposite conclusion, observing that “[t]he number of first-level reviewers greatly
exceeds the number of bankruptey judges producing the judgments reviewed, and appellate
caseloads are spread thinly among district judges, giving few judges much opportunity to develop
bankruptcy expertise.” Judith A. McKenna & Elizabeth C. Wiggins, Alternative Structures for
Bankruptcy Appeals, 76 AM. BANKR. L.J. 625, 627 (2002).

66. We employ the modifier “other” because, as noted above, the Court suggested that the
use of multi-judge panels is “[plerhaps most important” in assessing lawfinding ability. Supra
note 7 and accompanying text.

67. Ibis this factor that, presumably, vests district judges with lawfinding ability when they
sit by designation on court of appeals panels. See Nash, supra note 1, at 1031 (explaining that
the better term is lawfinding “ability” and not lawfinding “expertise”). One might argue that
lawfinding ability is enhanced to the extent that the judge (whether district or bankruptcy)
enjoys relief from her other responsibilities while hearing appeals, This seems not to be the case,
however, at least for bankruptcy judges:

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quoted in contrast to 40% [29, 50] for a district court opinion.'® Thus,
when holding other variables at their mean, the likelihood of direct
quotation of a first-tier appellate opinion by a citing federal court is
predicted to increase by 25 [9, 40] percentage points when the court
cites to a BAP opinion. We present the distribution of predicted
probabilities for direct quotation (based on the actual values of all of
the independent variables included in the model) in Figure 9 below.

FIGURE 9

PREDICTED PROBABILITIES FOR DIRECT QUOTATION OF
FIRST-TIER APPELLATE OPINIONS BY CITING FEDERAL COURTS

District Court BAP

20
20

° 2
2° 2

g

€£ i

a

Be u e

Hy i

8 | .

g :

a. © 1;

}—_fo

°
) 2 04 6 8 1 0 2 4 6 8 1
Predicted Probability for Direct Positive Quotation

Moreover, if we look to the extent of direct quotation of first-
tier appellate opinions, a negative binomial regression model indicates
that a statistically significant relationship exists between the type of
first-tier appellate court to have issued the opinion and the extent to

166. None of the other independent variables was a statistically significant predictor of
direct quotation of the first-tier appellate opinion by its citing reference. For detailed results
from this regression model, see infra Appendix tbi.11.

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1999) CONSUMER BANKRUPTCY PAPERS 685

VI. THE INADEQUACY OF PRESENTLY AVAILABLE REMEDIES

The data reviewed in this article suggest that the bankruptcy papers filed
by consumer debtors and their attorneys are not accurate and complete, and
are not prepared with the necessary care and understanding. The fundamen-
tal question raised by this study is how to motivate consumer debtors to file
more accurate and complete disclosures.

The bankruptcy process offers a wide array of remedies for a debtor's
intentionally wrongful conduct in a bankruptcy case.1!° This Part demon-
strated that these remedies were not designed to address the issues raised in
this study. For several reasons, attempts to invoke them for this purpose
have not been and cannot be effective. First, these remedies are largely based
upon a degree of wrongful intent that is well beyond the carelessness and
inadvertence that this study found. Second, the parties with standing to pur-
sue these remedies often lack the economic motivation to do so in these cases,
because the processes that must be undertaken to invoke these remedies are
time consuming, cumbersome and expensive. In this Part, each remedy was
reviewed and its inadequacy explained.

The next Part will discuss other possible solutions that may be more
effective.

A. Dismissat OF THE CHAPTER 7 OR 13 BANKRUPTCY CasE

The Bankruptcy Code firmly establishes the bankruptcy court’s authority
to dismiss chapter 7 and chapter 13 cases for “cause."42 The debtor's “bad
faith” can constitute cause for dismissal in either chapter 7 or chapter 13.122

"See Wayne D. Holly, Criminal and Civil Consequences of False Oaths in Bankruptcy Help Ensure
Reliable Information, 71-MAR N.Y. St. BJ. 38 (1999) (discussing bankruptcy crimes under 18 US.C.
§ 152 and objections to discharge under 11 US.C. § 727(a)).

TM411 USC. §§ 707(2) and 1307(c) (1994).

‘In chapter 7: Industrial Ins. Serv. v. Zick (In re Zick), 931 F.2d 1124, 1129 (6th Cir. 1991) (noting
that dismissal under § 707(a) for bad faith “should be confined carefully and is generally utilized only in
those egregious cases that entail concealed or misrepresented assets and/or sources of income, and exces-
sive and contioued expenditures, lavish lifestyle, and intention to avoid a large single debt based on con-
uct akin to fraud, misconduct, or gross negligence"). See also In re Kamen, 231 BR. 275, 278 (Bankr. ND.
‘Ohio 1999); In re Houck, 199 BR. 163, 164-65 (SD. Ohio 1996); In re Moses, 227 BR. 98, 101 (ED.
Mich. 1996) (holding that dismissal under § 707(a) was proper for the debtor's failure to provide sufficient
‘information to permit the trustee to administer the estate); In re Cappuccetti, 172 BR. 37, 39 Bankr. ED.
Ark. 1994); Cassady-Pierce Co, Inc. v. Bums (In re Burns), 169 BR. 563, 568 (Bankr. WD. Pa. 1994); In
re Hammonds, 139 BR. 535, 542 (Bankr. D, Colo, 1992} In re Clark, 86 BR. 593, 594 (Bankr. ED. Ark.
1988). See also Hon. Tamara O. Mitchell, Dismissal of Cases Via 11 U.S.C. § 707: Bad Faith and Sub-
stantial Abuse, 102 Com. LJ. 355 (1997). Bue see Katie Thein Kimlinger and William P, Wassweiler, The
Good Faith Fable of 11 USC. §707(@): How Bankruptcy Courts Have Invented a Good Faith Filing
Requirement for Chapter 7 Debtors, 13 Bankr. Dev. J. 61 (1996).

In chapter 13: Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999); In re Williams, 144
F.3d 544, 550 (7th Cir. 1998); In re Lilley, 91 F.3d 491, 496 (3rd Cir. 1996}; Molitor v. Edison (In re
Molitor), 76 F.3d 218, 220 (8th Cir. 1996); Gier v. Farmers State Bank of Lucas, Kansas (In re Giex), 986

HeinOnline -- 73 Am. Bankr. LJ. 685 1999

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140 Texas Law Review [Vol. 87:121

However, the U.S. Trustee may have limited powers to pursue such
remedies. A court has dismissed one of the actions that the U.S. Trustee filed
against a mortgage servicer, ruling that the agency does not have the
authority to bring legal action to request monetary sanctions against creditors
that have engaged in abusive practices.'"’ The court also refused to grant the
injunction that the U.S. Trustee requested.’'® This decision may undermine
the potential of the U.S. Trustee to protect bankruptcy debtors, although
other courts have affirmed the right of the U.S. Trustee to participate in
litigation that could result in sanctions against creditors for abusive
practices." Clearly, the U.S. Trustee does not have regulatory authority to
investigate or challenge mortgage-servicing abuse outside the bankruptcy
system.

The anecdotal reports of mortgage-servicing abuse are growing, and the
cited decisions are quite recent. However, regulatory enforcement remains
weak, and cases outside of bankruptcy are exceedingly rare. Given the mil-
lions of consumers who may face foreclosure in the next few years,’”° and
the hundreds of thousands of homeowners who file for Chapter 13 bank-
tuptcy to save their homes each year,'”’ there is a definite need to probe the
reliability of mortgage servicing. The harms from poor servicing carry
severe consequences, and empirical data can help draw attention to the need
to consider how servicing contributes to failed home ownership.

Il. Methodology

The Mortgage Study is a large, multistate study of the home loans of
families in financial distress. Its principal objective is to create an original
database to facilitate new research on the intersection of mortgage lending
and bankruptcy. Tara Twomey’ and J are the principal investigators in the

Mar. 30, 2008, at 1E (describing the U.S. Trustee’s involvement in a Georgia bankruptcy case after
the debtor lost her home to foreclosure despite filing for bankruptcy).

117. See, eg., Walton v. Countrywide (in re Sanchez), Case No. 01-042230, Adv. No. 08-1176,
slip op. at 5 (Bankr. S.D. Fla. Oct. 2, 2008 (memorandum opinion and order granting
Countrywide’s motion to dismiss) (holding that the U.S. Trustee does not have authority to “pursue
punitive sanctions on behalf of the public by way of an adversary proceeding”).

U8. id.

119. See, eg., In re Parsley, 384 B.R. 138, 145-47 (Bankr. .D. Tex. 2008) (finding that the
USS. Trustee acted within its authority in participating in show-cause proceedings against a
mortgage servicer and its attomeys); see 11 U.S.C. § 307 (2006) (granting wide authority to the
US. Trustee in bankruptcy cases).

120. Press Release, Pew Charitable Trusts, 1 in 33 Homeowners Projected to Be in Foreclosure
Within the Next Two Years (Apr. 16, 2008), available at hitp:/iwww.pewtrusts.org/news_room
detail aspx7id=37950.

121, Ben Rooney, Bankruptcy Filings Surge to I Million—Up 29%, CNNMONEY.COM, Aug.
27, 2008, http://money cnn.com/2008/08/27/news/economyfoankruptey/.

122. When the study began, Tara Twomey was a clinical instructor at Harvard Law School.
She is currently a Lecturer in Law at Stanford Law School and a consultant for the National
Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center. Neither
‘organization had any involvement in this research.

HemOnline 87 Tex. Rev. 140 2008-2009 DEFO1611


5758
1999) CONSUMER BANKRUPTCY PAPERS 699

Trustee has similar authority.172_ Again however, the threat of criminal pros-
ecution is too remote to be effective in addressing the problems disclosed in
this study.175

These kinds of negative reinforcements were not designed to address the
problems of inaccurate and incomplete schedules in consumer cases, nor are
they effective for that purpose. Indeed, the results of this paper demonstrate
as much, Three reasons appear for this. First, these procedures are designed
primarily to address intentional misconduct, rather than carelessness or inad-
vertence in completing the bankruptcy forms. Second, imposing these conse-
quences on a debtor may be seen as too severe in such circumstances. Third,
because the case is most likely a no asset case, the trustee probably does not
have the resources in the case to hire counsel to initiate and pursue these
remedies in court. Therefore, motivating more careful disclosures will require
more creative responses.

VII. SUGGESTING SOME REMEDIES

This part will review some national and local responses that might be
considered in addressing the problems revealed in this study, including:
(a) revising the official forms and expanding their instructions; (b) creating

(®) The United States attorney thereupon shall inquire into ehe facts and report
thereon to the judge, and if it appears probable that any such offense has been
committed, shall without delay, present the matter to the grand jury, ualess
‘upon inquiry and examination he decides that the ends of public justice do not
require investigation or prosecution, in which case he shall report the facts to
the Attomey General for his direction.

Several cases have concluded “that § 3057 was intended primarily as an administrative measure - a
congressional directive to the district offices of the United States Attorneys to become more active in the
prosecution of bankruptcy fraud cases.” United States v. Filiberti, 353 F. Supp. 252, 253 (D. Conn. 1973)
(Citing congressional record). See also United States v. Laurenti, 581 2d 37 (2d Cir, 1978), cert. denied,
440 US. 958, 99 S. Ct. 1499, 59 L. Ed. 2d 71 (1979); In re Valentine, 196 BR. 386 (Bankr. ED. Mich.
1996).

Sez also Maureen A. Tighe, A Guide to Making a Criminal Bankruptcy Fraud Referral, 6 Am. BANKR,
Inst. L. Rev. 409 (1999).

428 USC. § 586(a)(3)(F) (1993). See Heston, note 135 supra. See also, United States Department
of Justice, Lecat MANUAL For Unrrep Srares TRUSTEES, volume 1, pages 91-93 (August 1988).

"3Indeed, it is not clear that threat of prosecution even deters debtors intent on committing fraud. “In
1996, the Attomey General announced ‘Operation Total Disclosure,’ which resulted in the prosecution of
127 defendants for their involvement in 111 bankruptcy crimes between December 1995 and February
1996. After the initial fanfare associated with Operation Total Disclosure, the prosecution of bankruptcy
crimes has slowed.” Ogier 8 Williams, supra note 170, at 325-26 (footoote omitted). “[T]he vast major-
ity of prosecutions occur in cases involving substantial sums of money, particularly egregious behavior,
concealments, transfers or misrepresentations by the debtor and/or his attorney.” Id. at 348. “The lack of
prosecution means that there is litele motivation for a dishonest debtor to sober up and not attempt to
defraud his creditors.” Id. at 349. “[PJcosecutions under § 152 itself are comparatively infrequent.” Me-
Cullough, supra note 135, at 2, “[lt is] incredible that out of nearly 883,457 bankruptcies filed in 1995,
only one hundred fifty eight criminal complaints were filed” Id. at 41.

HeinOnline -- 73 Am. Bankr, L.J. 699 1999

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684 AMERICAN BANKRUPTCY LAW JOURNAL

CHART 6. ASSETS

(Vol. 73

Errors

$0 $50,000 $100,000 $150,000
Assets (excluding 2 cases > $200,000)

CHART 7. LIABILITIES

$200,000

0 T

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000

Liabilities (excluding 2 cases > $300,000)

HeinOnline -- 73 Am. Bankr. LJ. 684 1999

DEF01713


5648

“The Threes”: Re-Imagining Supreme
Court Decisionmaking

* Tracey E. George
Chris Guthrie 61 Vand. L. Rev. 1825 (2008)
Article IIf authorizes “one Supreme Court,” but it says
virtually nothing about the Court's institutional design. Consistent
with this Constitutional silence, the Court’s size, docket, and
courtroom practices have changed dramatically. For example, the
Court has had as many as ten and as few as six members, and for
nearly four decades, the Court delegated decisionmaking in the
summer to one Justice! In this Essay, the first in a series of essays
designed to re-imagine the Supreme Court, we argue that the Court
should alter its decisionmaking processes in what might seem to be a
radical way but, in fact, is not. We argue that the Court, like the
United States Courts of Appeals and several foreign high courts,
should adopt panel decisionmaking. Based on a theoretical and
empirical analysis of the costs and benefits of a panel system, we
contend that if the Court were to embrace panel decisionmaking, it
would be better able to fulfill its Constitutional role as the leader of
an ostensibly “coequal” branch of government.

HemOnline ~ 61 Vand L. Rev. 1823 2008

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1784 VANDERBILT LAW REVIEW [Vol. 61:6:1745

positive citations made to it by any federal court—aside from those
citations made in connection with the direct appellate history of the
opinion—during the five-year period following the date that the
opinion was issued. Pursuant to these criteria, approximately 75% of
the first-tier appellate opinions had citing references. We further
documented (1) citations by type of court, (2) citations by depth of
treatment, (3) citations directly quoting the cited opinion, and (4) the
immediacy with which first-tier appellate opinions were cited.'3?

The major explanatory variables (i.e., independent variables) in
the databases include (1) whether the BAP or district court heard the
initial appeal, (2) whether the appellant was solely the debtor in
whose case the appeal arose, (3) whether the appellee was solely the
debtor in whose case the appeal arose, (4) whether the appeal arose in
the context of a case filed under Chapter 7 of the Bankruptcy Code,
(5) whether the bankruptcy case in which the appeal arose was filed
by an individual, (6) whether the type of dispute proceeding within
which the appeal arose was an adversary proceeding or contested
matter, and (7) the subject matter of the appeal.

B. Bivariate Descriptive Statistics

Our primary interest lies in the statistical relationship
between the identity of the first-tier appellate court and various
dependent variables: (1) affirmance by the court of appeals, (2) the
number of positive federal court citations to the opinion issued by the
first-tier appellate court, (3) the depth of treatment given to first-tier
appellate opinions when positively cited by other federal. courts, (4)
direct quotation of the first-tier appellate opinion by positive citing
references, and (5) the immediacy with which the first-tier appellate
opinion is positively cited. By searching for a statistically significant
relationship between the identity of the first-tier appellate court and
each of these dependent variables, we can look for those relationships
warranting further inquiry through regression analysis that will
confirm the existence of the relationship when controlling for other
factors.

Hypothesis 1 posits that courts of appeals more likely will
uphold the dispositions rendered on appeal by BAPs than those
rendered by district courts. Our data support this hypothesis. In the

rrief reference to the cited opinion, usually in a string citation. Finally, KeyCite
identifies citing references that directly quote the cited opinion.

137. For citation data for those first-tier appellate opinions with positive citing references,
see infra Appendix tbl.3.

HeinOnline 61 Vand, L. Rev. 1784 2008

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1999) CONSUMER BANKRUPTCY PAPERS 695

ney substantial new responsibilities for the debtor's schedules and statement
of financial affairs.15?

The third change is that generally, a motion for sanctions under the rule
must be served twenty-one days before filing, to give a “safe harbor” opportu-
nity to correct the alleged deficiency.153

‘The fourth change is that even if a violation of the rule is found, the
imposition of sanctions is now discretionary, not mandatory.154

Even though the debtor's attorney now bears responsibility for the sched-
ules and statement of financial affairs, it is unlikely that Rule 9011, as
amended, will have any substantial impact on the problems of incomplete and
careless schedules. Even when the rule mandated sanctions for a violation,
bankruptcy courts were reluctant to do so unless the circumstances were
outrageous.'55 Further, as noted, the imposition of sanctions is now explic-
itly discretionary.156

F. ADMINISTRATIVE SANCTIONS AGAINST THE DesTor’s ATTORNEY

In extraordinary circumstances, the court may respond more severely.
For example, in In re Ludwick, the bankruptcy court suspended debtor's at-
torney from practice for two years for forging the debtor's signature on the

petition and lying about it to the court.!7 In O’Connell v. Mann (In te
Davila), an attorney representing chapter 13 debtors was denied fees in one

152The new Rule 9011, which requires attorneys to make reasonable inquiry into the accuracy of the
information being provided to the courts, will remind lawyers that they serve as gatekeepers for the
truth.” The Commission's Consumer Bankruptcy Recommendations, Consumer Bankruptcy News, No-
vember 20, 1997, at 3. The Bankruptcy Review Commission actually recommended making Rule 9011
explicit that “an attorney's responsibility to make a reasonable inquiry into the accuracy of information
extends to the bankruptcy schedules, statement of affairs, lists and amendments.” Commission REPORT,
supra note 2, at 113.

ep, R. BANKR. P. 9011(c)(1)(A). See In re Russ, 218 BR. 461, 468 (Bankr. D. Minn. 1998), aff'd,
221 BR 237 (BAP. &th Cit. 1998) (denying a motion vader Bankruptcy Rule 9011 due to the moving
party's failure to comply with the new safe harbor provisions); In re Smith, 230 BR. 437, 440-41 (Bankr.
ND. Fla, 1999).

See also In re Melendez, 235 BR. 173, 201 n.24 (Bankr. D. Mass. 1999) (the “safe harbor” provision
does not apply when the court initiates the sanctions issues HJ. Rowe, Ine. v. Spiegel (In re Talon
Holdings, Inc) 1999 WL 150337 at *3 Bankr. N.D. Ill. 1999) (the “safe harbor” provision does not apply
‘to the petition itself under Rule 9011(¢)(1)(A)

451¢ |. . the court determines that subdi (b) has been violated, the court may . . . impose an
appropriate sanction . ..” Feo. R. BANKR P. 9011(c).

'S3Nathalie D. Marvin, Fee Shifting in Bankruptcy: Deterring Frivolous, Praud-Based Objections to
Discharge, 76 N.C. L. Rev. 97, 147 (1997) (‘Bankruptcy courts still are reluctant to impose sanctions
under Rule 9011 unless the behavior in question is truly outrageous and not just ignorant.”).

86See supra note 154.

457385 BR 238 (Bankr. WD. Mich. 1995). See also D.H. Overmyer Co, Ine. v. Robson, 750 B.2d 31,
33 (6th Cir. 1984) (“The bankruptcy court has both statutory and inherent authority to deny [an attar-
ney] the privilege of practicing before i"); Peugeot v. Unites States Trustee (In re Crayton), 192 BR. 970
(BAP. 9th Cir. 1996); In re Moix-McNutr, 220 BR. 631 (Bankr, W.D. Ark. 1998) (suspending debtor's
attomeys for four years in part for filing false and misleading schedules} In re Nesom, 76 BR. 101 (Bankr.

HeinOnline -- 73 Am. Bankr. L.J. 695 1999

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1796 VANDERBILT LAW REVIEW

coded 0 and positive responses coded 1) (First-Tier Full Affirmance);
(3) Published; (4) Appellant; (5) Appellee; (6) Chapter 7; (7) Debtor
Type; (8) Dispute Type; (9) Subject; (10) whether the first-tier court’s
disposition was subsequently appealed to the court of appeals
(negative responses coded 0 and positive responses coded 1)
(Subsequent Appeal); and (11) Fiscal Year.

The model identifies the type of first-tier appellate court to
have initially determined the appeal as a statistically significant
predictor of whether the court’s opinion will have been positively cited
by another federal court.!5° Figure 6 below illustrates the predicted
probability of positive citation to the first-tier appellate opinion based
on the actual values of all of the independent variables included in the
model.

FIGURE 6
PREDICTED PROBABILITIES FOR POSITIVE CITATION OF
FIRST-TIER APPELLATE OPINIONS BY FEDERAL COURTS

District Court BAP

8 g
af g
2 ae
2
é3 8
3
$
Ze g
8
5
é |

2 2

° 2 4 6 8B 1 oO 2 A & 8B 1

Predicted Probability for Positive Citation
‘Source: First-Tier Database

156. For detailed results from this regression model, see infra Appendix tbl.7.

HeinOnline ~ 61 Vand. L. Rev. 1796 2008

DEF01563


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2008] Misbchavior and Mistake in Mortgage Servicing 161

default or foreclosure costs. Inside or outside of bankruptcy, the law does
not appear to be functioning as intended to ensure that creditors must satisfy
the evidentiary burden to show that charges are permissible under applicable
law.

C. Discrepancies Between Debtors’ Schedules and Mortgagees’ Claims

The proof-of-claim process is the mechanism for fixing the amount of
the debtor’s obligation. When they file Chapter 13 bankruptcy, most
homeowners are in default on their mortgages.”"* Thus, most claims seek to
establish both the amounts of the arrearages and the amounts of the
outstanding principal remaining on the loans. These amounts are treated
differently in Chapter 13 cases. To retain their homes, debtors must “curfe]
any default within a reasonable time,””"* normally by making payments over
the period of the Chapter 13 plan (three to five years) or a shorter period as
fixed by the bankruptcy courts.”"© Any regular mortgage payments also
continue to be due as set forth in the note. Debtors must pay both the
arrearages and their ongoing mortgage payments to retain their homes and
receive discharges of remaining unsecured debt.” Thus, part of the pre-
bankruptcy calculus that debtors and their attorneys should consider in deter-
mining whether debtors can save their homes in bankruptcy is whether they
will have sufficient income to make both payments.?"* To weigh the viability
of Chapter 13 bankruptcy and consider alternatives such as Chapter 7
bankruptcy or surrendering the home, debtors and their attorneys need a
fairly accurate estimate of the amount of the outstanding arrearage and the
amount of the total mortgage debt.

This subpart analyzes data to measure whether debtors and creditors
agree on the amount of mortgage debt. The goal was to determine if either
party had a substantial misunderstanding of the amount of the debt. For this
analysis, I matched each home loan listed on a particular debtor’s schedule to
its corresponding proof of claim.”” I then measured the direction and extent
of the gap between the debtor's and mortgagee’s calculations of the mortgage
debt.” If the amount on the claim exceeded the mortgage debt on the

214, See supra note 38 and accompanying text.

215. 11 U.S. § 1322(6\(5) (2006).

216. See 2 LUNDIN, supra note 47, § 133.1 (noting that several bankruptcy courts have
formulated factor tests for the reasonableness determination and citing decisions thet permitted the
curing of defaults for a wide variety of time periods).

217. See 11 US.C. § 1328(a) (requiring the debtor to complete all payments under the plan
before the court may discharge debts provided thereunder).

218. See Jacoby, supra note 128, at 337 (arguing that the failure of debtors’ lawyers to screen
their clients for their ability to complete a Chapter 13 repayment plan results in more unsuitable
debtors in Chapter 13 bankruptcy).

219. It was not possible to perform this matching for every home loan. Among the 2,164 home
Jans in the sample, only 1,768 proofs of claim were filed.

220. For the gap analysis, some loans and their corresponding claims had to be eliminated.
First, loans were eliminated if the Schedule D or the proof of claim bad a zero or a blank entry for

HeinOnline - 87 Tex. L. Rev. 161 2008-2009 DEF01632


5626

2008) INVESTIGATING APPELLATE STRUCTURE 1801

Using the same negative binomial regression model we used to
predict the extent to which federal courts would cite to the first-tier
appellate opinions, we find limited results for whether the type of
first-tier appellate opinion will be a statistically significant predictor
of the depth of treatment provided to the opinion by the citing federal
court when controlling for other factors.'6? Again, when holding all
other variables at their mean, we find that BAP opinions are predicted
to have a statistically significant higher number of citing references by
other federal courts that (1) provided discussion of less than a
paragraph but more than a brief reference to the cited opinion—
approximately 2.96 [1.99, 3.92] more citing references of this type—
and (2) provided discussion of more than a paragraph but less than a
printed page of the opinion—approximately 0.39 [0.09, 0.68] more
citing references of this type.’ On the other hand, we find no
statistically significant relationship between the type of first-tier
appellate court that issued the opinion and the number of citing
references that either mentioned the opinion (i.e., contained a brief
reference to the cited opinion, usually in a string citation) or examined
the opinion (i.e., contained an extended discussion of the cited opinion
usually more than a printed page of text).16

Including the same observations and independent variables
from the regression models we used to predict the extent of citation
and depth of treatment by citing references, we predict through binary
logistic regression the tendency of first-tier appellate opinions to be
directly quoted by federal courts that positively cite to those opinions.
We find that, when holding other variables at their mean, a BAP
opinion is predicted to have a 64% [53, 75] chance of being directly

163. In one instance, we do not use a negative binomial regression model. In order to predict
the number of citing references that examined the first-tier appellate opinion (i.e., an opinion
that contains an extended discussion of the cited opinion usually more than a printed page of
text), we used a Poisson regression model since the values for this dependent variable were not
overdispersed. When using a negative binomial model, the likelihood ratio test for alpha—the
overdispersion parameter—was not significant (chi-squared = 0.0019, df = 1, p = 0.483), thus
indicating that the Poisson model is preferred.

164, To predict the total number of positive citations that provided discussion of more than a
paragraph but less than a printed page of the opinion, we initially fitted a negative binomial
tegression model that included all of the independent variables included in the negative binomial
regression model used for the other types of citations (the full model). Although the Court
variable was a statistically significant predictor in the full model, the model as a whole was not
statistically significant (chi-squared = 16.41, df = 12, p = 0.2200). Accordingly, using a backward-
selection stepwise regression, we fitted a partial model that only included the Court and Subject
variables. This partial model was statistically significant (chi-squared = 9.67, df = 2, p = 0.0080),
and the Court variable continued to be a statistically significant predictor (p = 0.008).

165. For detailed results from this regression model, see infra Appendix tbl.9.

HeinOnline ~ 61 Vand. L; Rev. 1801 2008

DEF01568


5777

Ye Barna. Gumus un, Con

pends Lane cenit, AHL > CaNLaZY, HEED hages us

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# Stanford University, J.D., 1969
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‘© Principal Ronald Barliant quoted in The Deal
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DEF01902


5711

182 Texas Law Review [Vol. 87:121

share of debtors’ assets. From external indicia, the claims process in
consumer bankruptcy cases seems like an exemplar of a well-designed legal
system that balances the interests of consumers and industry. The claims
rules are unambiguous; all parties typically are represented; the process is
uniform; the federal judicial system brings gravitas to the procedures; and
specialized actors such as bankruptcy judges and trustees are present to
police the system.

Yet, despite these reassuring features, the empirical data show that
many mortgagees fail to comply with applicable law. The data establish a
widespread, current practice of filing incomplete claims with vaguely
identified fees. This hinders any meaningful or effective scrutiny of whether
mortgage companics are only charging the correct amounts to struggling
homeowners. The structural incentives are insufficient to uphold
bankruptcy’s potential as a home-saving device and to ensure the integrity of
the bankruptcy system. The problems with mortgages’ calculations are
likely to be even worse outside of bankruptcy, where the rules are less clear
and the procedural safeguards are fewer. Systematic reform of the mortgage-
servicing industry is needed to protect all homeowners—inside and outside
of bankruptcy—from overreaching or illegal behavior. The findings on the
unreliability of mortgage servicing are a high-stakes reminder of the
challenges of designing a legal system that actually functions to protect
consumers.

HemOnline ~ 87 Tex. L Rev. 182 2008-2009 DEF01653


5622

2008] INVESTIGATING APPELLATE STRUCTURE 1797

We find that, when holding other variables at their mean, a
BAP opinion is predicted to have a 90% [84, 97] chance of being
positively cited by another federal court in contrast to 73% [65, 81] for
district court opinions. Accordingly, when holding other variables at
their mean, the likelihood of positive citation to a first-tier appellate
opinion by another federal court is predicted to increase by 17 [7, 27]
percentage points for BAP opinions. These data support our
hypothesis that, if a BAP issued the first-tier appellate opinion, it will
increase the chances of the opinion being positively cited by other
federal courts.157

The question arises whether this association persists when
analyzing the extent to which other federal courts cite to first-tier
appellate opinions, whether analyzing citations in the aggregate (i.e.,
total number of positive citations) or disaggregated according to the
type of citing federal court. To answer the question, we implement a
variety of count regression models that analyze the 200 observations
in the first-tier database where a federal court positively cited to the
opinion issued by the BAP or district court.* First, in order to predict
the aggregate number of positive citations, we conduct a zero-
truncated negative binomial regression analysis.15® We then proceed to
analyze the number of positive citations by citing court type pursuant
to a negative binomial regression model (with one exception).'© For
both of these models, we incorporate the same independent variables
from the binary logistic regression model used to predict whether the
first-tier appellate opinion would be cited. Figures 7 and 8 compare (1)
the observed probabilities for each value of the number of positive
citations to the first-tier appellate opinions from the first-tier database
with (2) the average predicted probabilities of observing those specific

167. The model also identifies the Published, Dispute, and Subject variables as significant
predictors of whether the first-tier appellate opinion will have been cited by other federal courts.

188, There were actually 202 such observations. For purposes of our regression analyses,
however, we eliminated 2 extreme outliers, which left 200 observations to be analyzed. See supra
note 142,

159. A zero-truncated negative binomial regression model is appropriate here since (1) the
aggregate number of positive citations is a count variable that is overdispersed, and (2) there are
no zero values for this subset of observations (.e., all opinions have at least one positive citing
reference).

160, We ran the regression model four times to account for four different types of citing
federal courts (ie., bankruptcy court, district court, BAP, and extracircuit federal courts). In
order to predict the number of citing references by courts of appeals, however, we used a Poisson
regression model. When fitting a negative binomial regression model, the likelihood ratio test for
alpha—the overdispersion parameter—was not significant (chi-squared = 2.62, df = 1, p = 0.056),
thus indicating that the Poisson model is preferred. We do not use a zero-truncated model for
any of these dependent variables since some of the observations do have zero values.

HeinOnline ~ 61 Vand. L. Rev. 1797 2008

DEF01564


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122 Texas Law Review [Vol. 87:121

Misbehavior or mistake by mortgage servicers can have grave
consequences. Undocumented or bloated claims jeopardize a family’s ability to
save its home. Beyond bankruptcy, poor or abusive mortgage servicing
undermines the United States’ home-ownership policies by exposing families to
the risks of overpaying or suffering unjustified foreclosure. This Article’s
findings offer an empirical measure of the validity of concerns about whether
consumers can trust mortgage companies to adhere to applicable laws.

I, Statement of the Problem...
A. The Structure and Function of Mortgage Servicing.
B. Homeowners in Bankruptcy
C. The Harms of Abusive Servicing.
D. Litigation on Mortgage-Servicing Practices

Il. Methodology.

III. Findings
A. Required Documentation for Mortgage Claims
B. Default Fees in Mortgage Claims...
C. Discrepancies Between Debtors’ Schedules and Mortgagees’ Claims

. 161

D. Claims Objections.
IV. Implications
A. Proof-of-Claim Process:
B. Bankruptcy as a Home-Saving Device
C. Sustainable Homeownership Policy.
V. Conclusion...

ATL
171
175
178
181

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132 Texas Law Review [Vol. 87:121

consumer advocate described the practice as a “license to steal from
homeowners,” an industry representative conceded that it was “pretty much
industry standard.”**

The likelihood that such practices translate into concrete harms is
sharpened because consumers report serious difficulty in communicating
with mortgage servicers when they perceive that an error or overcharge has
occurred.*® Consumers allege that they have to speak with dozens of
representatives to address servicing mistakes or to receive basic information
such as a payment history.*’ These problems are exacerbated when a
borrower defaults on a loan, in part because the loan is often transferred to
the loss-mitigation department or sold to a different servicer that specializes
in troubled loans.**

Abusive servicing can push a homeowner into default or can make it
hard or impossible for a homeowner to climb out of trouble. Research has
shown that the quality of loan servicing can affect the incidence of loan
default.” Servicers may alter their practices and delay foreclosure to drive
up their profits because they do not have incentives to care about Preventing
foreclosure.” While preventive servicing can reduce loss severities,”

55. Id.

56. See, eg, S.P. Dinnen, Mortgage Complaints Can Take Extra Effort, DES MOINES REG.,
May 2, 2004, at 1D (detailing scenarios in which consumers had to repeatedly argue with their
‘mortgage servicers over the servicers’ accounting mistakes); Adolfo Pesquera, Paper Trail of
Problems: Some Fairbanks Clients Report Nightmare Errors, SAN ANTONIO EXPRESS-NEWS, Aug.
9, 2002, at LE (reporting repeated complaints that Fairbanks Capital Corporation does not properly
record payments and then holds its customers responsible for the errors).

57. See Posting of Ben Popken to The Consumerist, http://consumerist.com/S047947/12-
confessions-of-a-home-mortgage-collector (Sept. 10, 2008, 12:36 EDT) (reporting that mortgage-
servicing employees frequently hang up or transfer homeowners back into queve in order to avoid
work); Posting of Katie Porter to Credit Slips, hitp://www.creditslips.org/creditslips/2008/07/the-
really-sad.html (July 13, 2008, 10:01 PDT) (providing a transcript of a debtor's call to his mortgage
servicer in which he was transferred and put on hold and was unable to learn the reason for a
charge).

58. See Popken, supra note 57 (“The Loss Mitigation department has NO CLUE what they are
doing.”); see also Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy
Fueling the Foreclosure Crisis? Hearing Before the Subcomm. on Admin. Oversight and the Courts
of the S. Comm. on the Judiciary, 110th Cong, (2008) (statement of Robin Atchley), available at
hitp://judiciary senate. govhhearings/testimony.cfim?id=3327 &wit_id=7158 (testifying that while her
account was in bankruptcy, no person with Countrywide could ever give her clear information on
‘what they claimed was owed or why that amount was owed).

$9. See Anthony Pennington-Cross & Giang Ho, Loan Servicer Heterogeneity and the
Termination of Subprime Morigages 19, 19-20 (Fed Reserve Bank of St. Louis, Working Paper
No. 2006-024A, 2006), available at http:/Iresearch stlouisfed.org/wp/2006/2006-024.pdf (finding
“strong evidence” that the identity of the individual mortgage servicer substantially affected the
chance of default among a large sample of subprime mortgages).

60. See Yingjin Hila Gan & Christopher Mayer, Agency Conflicts, Asset Substitution, and
Securitization 19-20 (Nat'l Bureau of Econ. Research, Working Paper No. 12,359, 2006), available
at http://www nber.org/papersiw12359 (finding that mortgage servicers often delay foreclosure
proceedings so that they can avoid the costs associated with foreclosure and collect additional fees
while the loan spends time in special servicing).

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2008) INVESTIGATING APPELLATE STRUCTURE 1791

some association with the time within which the opinion will garner
its first positive citation by another federal court.!49

In summary, based on the affirmance rates of courts of appeals
on subsequent review of BAP and district court opinions, we find that
courts of appeals perceive BAPs to provide a better quality of appellate
review than district courts. Moreover, based on citations to the
opinions issued by BAPs and district courts, we find strong evidence
that most nonreviewing federal courts perceive the quality of BAP
opinions to be better. We now look to confirm whether these
associations will persist when controlling for other potential
explanatory variables and, if so, we attempt to measure the strength
of such associations.

C. Regression Analyses

Here, we seek to provide a more comprehensive analysis of the
perceived quality of appellate review by constructing a series of
regression models that will test whether the statistically significant
relationships we identified in Part IIIB persist when controlling for
the independent variables discussed in Part IILA.

1. Circuit Court Affirmance

For the 237 observations in the affirmance database,'TM we used
a logistic regression mode] to predict the binary dependent variable of
circuit court affirmance (no affirmance coded 0 and affirmance coded
1), both broadly and narrowly defined (respectively, Affirmance and
Full Affirmance),}5! based on the following independent variables:

whether the first-tier appellate court was a district court (coded
0) or a BAP (coded 1) (Court);

whether the appeal arose within the context of an adversary
proceeding (coded 0) or a contested matter (coded 1) (Dispute

Type);

the fiscal year in which the first-tier appellate court issued its
opinion (for which we created three indicator variables with the
response categories 0 for those opinions issued outside of the

149. For a full accounting of these results, see infra Appendix tbl.5.
150. See supra Part II1.A.2.
151. See supra text accompanying notes 134-135.

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2008) Misbehavior and Mistake in Mortgage Servicing 173

documentation.“* Some courts have concluded that failure to comply with
Rule 3001 is not a permissible basis for disallowing a claim” because this
behavior is not listed in § 502(b) of the Bankruptcy Code, which govems the
allowance of claims.” A few jurisdictions have taken a different approach
and ruled that incomplete claims documentation can be a basis for
disallowing a claim.”*' The majority rule seems to be that a claim that does
not comply with Rule 3001 loses its prima facie evidentiary effect, which
shifts the burden to creditors to prove their claims. However, courts
usually require the debtor to advance some evidence that disputes the claim
rather than merely pointing to noncompliance with the rule.” If the servicer
is uncooperative and, for example, refuses to promptly provide a complete
and comprehensible payment history, the debtor may have a difficult time
actually forcing the creditor—the party in control of the records—to meet the
burden that the rules impose upon it. An affidavit from the debtor may
suffice in such cases, and the courts seem to be increasingly sympathetic to
debtors’ frustrations with obtaining information from mortgage servicers.’
The simplest route to boosting the reliability of mortgage claims is to
revise § 502(b) to include the failure to provide the attached documentation

248. But see In re Prevo, No, 08-30815, 2008 WL 4425799, at *3-4 (Bank. $.D. Tex. Aug. 7,
2008) (issuing a show-cause order to determine whether the creditor should be required to pay the
debtor's attomeys fees for objecting to a mortgage claim that was disallowed for failure of the
creditor to meet its evidentiary burden).

249. See, eg, In re Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993); In re Heath, 331 B.R. 424,
431-32 (BAP. 9th Cir. 2005); In re Gurley, 311 B.R. 910, 915-16 (Bankr. M.D. Fla. 2001) (all
holding that the failure to comply with Rule 3001 cither can be fixed by amending the claim or is
not a valid objection), see also Becket, supra note 242, at 53 (concluding that disallowance on Rule
3001 grounds is not within a court's statutory authority becouse, under 28 U.S.C. § 2075, the
bankruptcy rules are not supposed to “abridge, enlarge, or modify substantive rights”).

250. 11 U.S.C. § $02(b) (2006).

251. See, eg., In re Shafiner, 320 B.R. 870, 879 (Bankr. W.D. Mich. 2005) (permitting a
trustee to refuse to administer the proof of claim as filed); see also NANCY H. DREHER & JOAN N.
FEENEY, BANKRUPTCY LAW MANUAL § 6:4 (Sth ed. 2008) (“There is a split of authority on
whether the failure to comply with Rule 3001(c) requires disallowance of the claim.”); of In re
McLaughlin, No. 05463927, 2007 WL 2571943, at *4 (Bankr. N.D. Ohio Aug. 31, 2007)
(disallowing claims filed by a trustee pursuant fo Rule 3004 because the trustee did not reasonably
investigate the claims or provide documentation to support them).

252. In re Gilbreath, No. 08-32404-H4-13, 2008 WL 4569965, at *76 (Bankr. S.D. Tex. Oct.
14, 2008) (ruling that proofs of claim that failed to comply with Rule 3001 are not prima facte valid,
and disallowing such claims when the creditor did not micets its burden of proof to prove the
claims).

253. See, eg., In re Campbell, 336 B.R. 430, 434 (B.A.P. 9th Cir. 2005) (holding that a proof of
claim lacking documentation required by Rule 3001(c) is not disallowed unless the debtor's
objection to the claim contests the amount of the debt and not merely the violation of the Rule); Jn
re Stewart, No. 07-11113, 2008 WL 2676961, at *9 n.15 (Bankr. E.D. La. Apr. 10, 2008) (shifting
the burden of proof onto the creditor because the debtor had objected and presented sufficient
evidence to overcome the presumption of the claim’s validity).

254, See, eg., In re Heath, 331 BR. 424, 437 (B.AP. Sth Cir. 2005) (stating that a creditor's
failure to provide information or to support its claim “in itself may raise an evidentiary basis to
object to the unsupported aspects of the claim, or even a basis for evidentiary sanctions, thereby
coming within Section 502(b)’s grounds to disallow the claim” (internal citations omitted).

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2008] Misbehavior and Mistake in Mortgage Servicing 157

payment history may show that the servicer imposed late charges on the
homeowner, despite the fact that the homeowner’s check cleared the bank
before the payment was due,'® or that the servicer held funds in suspense
accounts without application to the amount due.'

Some servicing practices may constitute consumer abuse. For example,
the FTC alleged that Fairbanks Capital Corporation had engaged in an unfair
or deceptive practice by repeatedly and unnecessarily assessing property-
preservation fees, which usually means an agent drove by the property to
determine its condition.'' The settlement enjoined the assessment of such
fees more frequently than every thirty days and permitted such charges only
if Fairbanks was unable to contact the borrower or had determined that the
property was vacant.'®? Nonetheless, servicers continue to be faulted for
conducting an unreasonable number of inspections.'*? One bankruptcy court
has stated that it is “done allowing lenders reimbursement for property
inspections,” unless the lenders can show “that those property inspections
actually happened and that they’re worthwhile.”"* If the fees cannot meet
these criteria, they may not legally be charged. Imposing such fees could
give rise to a counterclaim against the servicer for engaging in an unfair or
deceptive practice. The amount of the property-preservation fees in the
sampled itemizations varied greatly, suggesting either that many of these fees
resulted from multiple inspections or that a few servicers may be charging an
unreasonable amount for a single inspection service.'"> The “broker price
opinion” charge in Table 1 would grossly exceed the standard cost for this
type of property inspection, which is essentially an abbreviated appraisal. If
the $1,489 sum represents several inspections, the servicer should have
separated these charges in its detail of fees.

189. See, e.g., in re Ocwen Fed, Bank FSB Mortgage Servicing Litig., Case No. 04-CV-2714,
MDL-1604, 2006 WL 794739, at #1 (N.D. Ill. Mar. 22, 2006) (denying a motion to dismiss a
multidistrict litigation suit that alleged, incer alia, that the servicer misapplied payments and
improperly imposed late fees).

190, Most Ioan instruments specify how payments are to be applied, and violations of this
language are potential breaches of contract.

191. See United States v. Fairbanks Capital Corp., No. 03-12219, 2004 WL 3322609, at *1 (D.
Mass. May 12, 2004) (approving the settlement agreement of the FTC's deceptive-trade claims
against Fairbanks Capital Corporation).

192. United States v. Fairbanks Capital Corp., No. 03-1219 (D. Mass. Nov. 21, 2003) (order
preliminarily approving stipulated final judgment), available at www.fic.gov/os/2003/1 1/0323014
order.pdf.

193. See in re Stewart, 391 B.R, 327, 343-45 (Bankr. E.D. La. 2008) (criticizing a servicer for
inspecting the debtor's property on average every fifty-four days after default, notwithstanding that
every inspection reported the property to be in good condition).

194, Transcript of Hearing at 3, Jn re Waring, No. 06-40614 (Bankr. D. Mass. July 27, 2007).

195. In addition to the example given in Table 1, two different proofs of claim from the
Northern District of Texas requested payment of property-preservation fees of $105; another
property-preservation fee from the Southern District of Georgia was $240. Inspection and appraisal
were frequently combined in a laundry list of fees, making it impossible to determine whether the
inspection or appraisal parts of these charges were reasonable. See supra notes 176-78 and
accompanying text.

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166 Texas Law Review {Vol. 87:121

gaps between claims and scheduled amounts represent default costs, they
offer a powerful reminder of how quickly mortgage debt can mushroom and
how difficult it can be for debtors to find the income to cure arrearages.

A final rebuttal to the assertion that the gap data indicate the existence
of only minor misunderstandings comes from a system-wide analysis. On an
aggregate basis, the disagreements between debtors and mortgagees are a
multibillion-dollar problem. Based solely on the Mortgage Study sample of
approximately 1,700 loans, millions of dollars are at risk of misallocation.
Figure 6 shows the total of all debtor’s-favor claims (scheduled amount
exceeded claim) and all creditor’s-favor claims (claim exceeded scheduled
amount). When viewed from a systems standpoint, the cumulative effect
of the discrepancies is enormous. Mortgage creditors in the sample
requested nearly $6 million more on proofs of claim than the debtors
reflected on their schedules. The mismatch between debtors’ and creditors”
calculations tilts sharply in favor of creditors.

Figure 6: Aggregate Gap Between Claims
and Scheduled Amounts

10,000,000

8,000,000 +

6,000,000

4,000,000

2,000,000

(2,000,000)

(4,000,000)

Debtor's Favor ‘Net Gap
MToul $ Gap (2,096,284) 8,035,281 5,938,997

Extrapolating this finding beyond the Mortgage Study sample shows the
scope of the problem for the entire bankruptcy system. About 400,000
homeowners per year have filed Chapter 13 bankruptcy in recent years.”
Multiplying the $6 million gap from the sample of 1,700 cases to the total
homeowners in Chapter 13 indicates that each year mortgagees claim over $1

224, See Lynn M. LoPucki, The Systems Approach to Law, 82 CORNELL L. REV. 479, 481
(1997) (describing systems analysis as 2 methodology developed to manage complexity).

225, Am. Banks, Inst., Quarterly Non-business Filings by Chapter (1994-2008), hitpil/www.abi
world.org/AM/AMTemplate.cfim?Section=Home&CONTENTID=49785&TEMPLATE=/CM/Cont
entDisplay.cfmn.

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2008) Misbehavior and Mistake in Mortgage Servicing 171

offer sufficient incentives to encourage attorneys and trustees to obtain the
additional information necessary to ensure that the amounts paid to
mortgagees are correct. Similarly, the current system suggests that creditors
can operate with the knowledge that their claims will not be reviewed or
challenged. Combined with the financial incentives of servicers to overreach
and the anecdotal evidence of servicing abuse,” there is a serious risk that
mortgage servicers’ overreaching and errors are imposing unfair burdens on
families trying to save their homes. It is also possible that creditors’ claims
for nonmortgage debt are plagued with problems similar to those that exist in
mortgage claims.' Indeed, because such debts are usually for smaller
amounts, they may be subject to even less scrutiny for their accuracy. The
evidence from the bankruptcy courts calls into question the ability of
consumers to trust creditors to accurately and fairly account for their
payments and assess charges.

IV. Implications

The systemic failure of the claims process to ensure that mortgage
creditors are collecting only what they are legally owed harms debtors, other
nonmortgage creditors, and the integrity of the bankruptcy system. Yet the
most distressing implication may be the data’s suggestion that mortgage-
servicing abuse may be even more prevalent beyond bankruptcy.

A. Proof-of-Claim Process

The problems with mortgage claims are structural. Creditors should
comply with federal law if they expect to receive distributions in bankruptcy.
Debtors and their attorneys also must bear responsibility for ensuring
accurate payments. Objections to claims do not appear with sufficient fre-
quency to police claims, even with regard to large debts such as mortgages.
The current claims process is malfunctioning.

Mortgagees’ failure to satisfy Rule 3001 should not be dismissed as a
mere technicality. The rules governing claims were implemented to provide
adequate procedures to help parties identify claims for which a valid
objection may exist, thus ensuring the accurate payment of claims.”
Without documentation of the debt, the debtor and other creditors cannot

240. See supra subparts I(A), I(0).

241. The U.S. Trustee recently settled # complaint against Capital One that alleged that the
credit-card issuer had filed claims and accepted payments in bankruptcy cases for debts that had
been discharged in debtors’ prior bankruptcies. Complaint of the U.S. Trustee Phoebe Morse for a
Permanent Injunction & Other Equitable Relief at 3, Morse v. Capital One Bank (In re Galley), No.
06-12142-JNF (Bankr. D. Mass. Oct. 2, 2008); see also Amic Efrati, Capital One in Settlement Over
Card Debt, WALL ST. J., Oct. 3, 2008, at B3 (announcing the settlement between Capital One and
the U.S. Trustee).

242. See Alane A. Becket, Proofs of Claims: A Look at the Forest, AM. BANKR. INST. J., Dee.—
Jan. 2005, at 10, 53 (describing how the rules governing claims are designed to give parties
information and evidence to use in determining whether to object to the claim).

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1999) CONSUMER BANKRUPTCY PAPERS 665

whether the property is owned by the husband, wife or
both? .

The instructions at the top of schedules A and B state, “If the debtor is
married, state whether husband, wife, or both own property by placing an
‘H, ‘W’, J or ‘C’ in the column labeled ‘Husband, Wife, Joint, or Commu-
nity."48 This question tests whether married debtors made these required
disclosures regarding property ownership. The debtor's marital status was
recorded from schedule I. In 90 cases, the debtor was married.

54% of married debtors did not state whether the prop-
erty listed in schedules A and B was owned by the hus-
band, the wife, jointly, or as community property. (49 of
90 cases)

3. If the debtor pays rent for a residence or a mobile home
lot, does schedule B disclose a security deposit?

Line 3 of schedule B requires the debtor to disclose, “Security deposits
with public utilities, telephone companies, landlords, and others.”49 It was
inferred that a debtor was in a residential rental arrangement if (1) the debtor
did not disclose owning either real property on schedule A or a mobile home
on schedules A or B, and (2) the debtor disclosed an amount on the first line
of schedule J for “Rent or home mortgage payment (include lot rented for
mobile home)."5° By these criteria, one hundred seven debtors paid rent for a
residence.5! Similarly, it was inferred that a debtor was in a mobile home lot
rental arrangement if (1) schedule A or B disclosed a mobile home, (2) sched-
ule A did not disclose real property, and (3) the first line on schedule J dis-
closed rent. By these criteria, fifteen debtors paid rent for a mobile home
lot? This test assumes that a security deposit is a part of any arrangement
under which the debtor pays rent for a residence or a mobile home lot.>3

81% of debtors paying rent disclosed no security deposit.
(99 of 122 cases) This is divided as follows:

“Official Bankruptcy Form 6, schedules A and B.

Id, schedule B.

Similar criteria were utilized in Marianne B. Culhane & Michaela M. White, Taking the New Con-
sumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors, '7.AM. Banrn. Inst. L.
Rev. 27, 50 (1998).

Official Bankruptcy Form 6, schedule J. One hundred twenty debtors in the study sample disclosed
10 real property or a mobile home. Of these, thirteen disclosed no rent and were probably living rent-free
with relatives or associates. Thus, 107 debtors paid rent for a residence.

#?Sixteen debtors disclosed mobile homes and no real property. One of these disclosed no rent. Thus,
Afteen debtors owned mobile homes and paid lot rent.

"This assumption is untested in this study. It is recognized that in some cases, a debtor's landlord
might not require a security deposit. Nevertheless, itis appropriate and illuminating to examine how often
debtors who were paying rent for a residence ot a mobile home lot did not disclose a security deposit.

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1999) CONSUMER BANKRUPTCY PAPERS 669

payments on debts to be reaffirmed are not included in schedule J. In
seventy-seven chapter 7 cases, the debtor's statement of intention stated an
intent to reaffirm debt.

21% of chapter 7 debtors who stated an intent to reaf-

firm secured consumer debt did not include in schedule J

the monthly payments for all of the debts to be reaf-

firmed. (16 of 77 cases)

10. Are the declarations concerning the debtor's schedules
and statement of financial affairs dated?

Official Bankruptcy Form 6 includes a signed declaration concerning
debtor's schedules, and to the left of the debtor's signature line, there is a
blank for a date.7° Similarly, Official Bankruptcy Form 7 includes a signed
declaration concerning the statement of financial affairs, with a blank line for
a date to the left of the debtor's signature line.7* This question tests whether
the debtor filled in a date on the declaration for either the schedules and the
statement of financial affairs.’*

10.5% of debtors failed to date the schedules and the
Statement of financial affairs. (21 of 200 cases)

11. In a chapter 7 case, does the statement of intention
under § 521(2)(A) address all secured creditors?

A debtor must list all secured creditors in schedule D. Further,
§ 521(2)(A) requires a chapter 7 debtor to disclose whether the debtor in-
tends to reaffirm each secured consumer debt or to redeem the collateral.
Official Bankruptcy Form 8 requires the debtor to state an intention either to
surrender the collateral or to avoid the lien under § 522(f). This question
tests whether the debtor's statement of intent addresses all secured creditors
holding consumer debt. Ninety-one chapter 7 debtors disclosed secured con-
sumer debt in schedule D.

14% of chapter 7 debtors with secured consumer debt did

majority of cases in which reaffirmation agreements are filed pursuant to section 524(c) the debtors’ Sched-
vules I and J reveal that debtors do not have sufficient income to afford even the de minimis payments set
forth in the reaffirmation agreements filed with the Court.” (footnote omitted)); In re Beurzese, 214 BR.
444, 450 (Bankr. E.D.N.Y. 1997) ([A] sampling of the debtors’ schedules I and J in the 30 cases raised a
prima facie concern whether the debcors could meet their repayment obligations under these agree-
ments”). See also In re Melendez, 224 BR. 252, 259 (Bankr. D. Mass. 1998); In ze Kamps, 217 BR. 836,
846 (Bankr. C.D. Cal 1998); In re Latanowich, 207 BR. 326, 335 Bankr. D. Mass. 1997) (‘[T]he
Debtor's schedule of income and expenses showed no excess income with which to pay the debt he was

7See also supra note 8, and infra questions 18 and 19, at 675-76.

na

‘7 If either the schedules or the statement of financial affairs were dated, this was considered sufficient
for purposes of this study, although perbaps not as a matter of fully completing the papers.

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2008) INVESTIGATING APPELLATE STRUCTURE 1747

ruling reviewed by a panel of bankruptcy judges—a so-called
“bankruptcy appellate panel” or “BAP.” Further appeal in both cases—
whether from the district court or the bankruptcy appellate panel—
lies with the proper federal circuit court of appeals.

We have collected data on affirmance rates in and citation
rates to appellate bankruptcy opinions, Analyses of the data
generally—and analyses of the citation data in particular—support
the notion that BAP decisions in our study are perceived to be of
greater quality than are district court decisions. First, we find support
for the proposition that courts of appeals are more likely to uphold
upon review the conclusions of BAPs than district courts. Second, BAP
decisions are, with statistical significance, cited more frequently by
bankruptcy courts, BAPs, federal courts of appeals, and courts in
other circuits than are district court decisions. Only district courts are
not more likely .to cite BAP decisions than decisions rendered by
district courts.

Our findings will be of interest both to theoreticians and
policymakers. If courts try to reach “correct” decisions, then our
findings generally buttress the various theories about how to structure
appellate tribunals so as to maximize the quality of appellate review.
This, in turn, should guide policymakers in designing appellate
tribunals and appellate structures in general. In particular,
multimember tribunals that adhere to traditional notions of appellate
hierarchy and that have subject-matter expertise in the area of the
appeal appear to be desirable. And, even if judges do not strive to
resolve issues and cases “correctly,” our findings still seem to support
the notion that judges perceive that appellate tribunals that have
certain attributes will reach correct conclusions. In this sense, our
findings show the persuasive strength of the theoreticians’ story, or at
least judges’ perceptions of the strength of that story.

The Article proceeds in the following manner. Part I provides
an overview of the theoretical literature discussing the quality of
appellate review. Part IT discusses the means by which we undertook
to evaluate the quality of appellate review: Part ILA presents the legal
setting of appeals of core bankruptcy proceedings, and Part IIB sets
out the hypotheses we sought to test. Part IIf explains how we tested
the hypotheses. Part IIIA details the data we compiled and the
essential features of those data. The next two subparts present the
findings of our statistical analyses, with Part III.B explicating the
bivariate descriptive statistics and Part IILC presenting the results of
regression tests we conducted. Part IIID interprets these results and
considers the implications of our findings.

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1999) CONSUMER BANKRUPTCY PAPERS 659

debtor's responses in the petition and Schedules to assure
they are internally and externally consistent; (4) demand of
the debtor full, complete, accurate, and honest disclosure of
all information required before the attorney signs and files
the petition; and (5) seek relief from the court in the event
that the attorney learns that he or she may have been misled
by a debtor.29

The connection between the debtor's obligation to file complete and ac-
curate schedules and the fair administration of the bankruptcy case is clear.2°
This administration includes “determining whether crimes have been commit-
ted, whether objections to exemptions should be filed, and whether property
should be claimed for the estate or abandoned.”*! To a substantial extent the
trustee's ability to perform the duties set forth in 11 U.S.C. § 704 depends
on the accuracy and completeness of debtor's disclosures??_ Under 11 U.S.C.
§ 554(c), only scheduled property (not otherwise administered) is deemed

2° Armwood, 175 BR. at 789 (citations omitted). See also Aetna Fin. Co. v. Martines (In re Martinez),
22 BR 419, 421 (DNM. 1982) (‘We would also remind the debtors’ attorney that it is his duty as an
officer of this court to take all possible steps to assure himself that the information listed in his clients*
petition is correct”)

See supra notes 16-17 and cases cited therein. See also North River Ins. Co. v. Baskowitz (In re
Baskowitz), 194 BR. 839, 843 (Bankr. ED. Mo. 1996) (“The dual purposes of a Chapter 7 bankruptcy
‘case are to grant the honest debtor a discharge af his or her prepetition debts, and to provide a mechanism
for the fair and orderly distribution of the debtor's assets that are subject to administration by the
‘Trustee. These purposes are [only] realized when a debtor complies with the requirement to submit
accurate and complete information concerning identification of creditors and assets”).

In re Gaines, 106 BR. 1008, 1013 (Bankr. W_D. Mo. 1989), sev'd on other grounds, 121 BR. 1015
(WD. Mo. 1990). See also Payne v. Wood, 775 B.2d 202, 206 (7th Cir. 1985) (“The requirement that the
debtor list the property serves at least two functions. One is to settle claims of title, so that on the day of
discharge everyone knows who owns what, The other is to allow the trustee to decide which claims to
challenge"); Andermahr v. Barras (In re Andermahr), 30 BR. 532, 533 (BAP. 9th Cir. 1983); First Nat'l
Bank of Mason City, Iowa v. Cook (In 1¢ Cook), 40 BR. 903, 906 (Bank. ND. Iowa 1984) (“The purpose
of the question [on the statement of financial affairs asking whether the debtor has made any transfers of
property in the year preceding the filing of the bankruptcy petition] is to allow the trustee and the
creditors of the debtor to determine if there should be other assets in the bankruptcy estate”).

Section 704 provides:

‘The trustee shall—

(2) collect and reduce to money the property of the estate for which such trustee
serves, and close such estate as expeditiously as is compatible with the best
interests of parties in interest;

(3) ensure that the debtor shall perform his intention as specified in section
521(2)(B) of this title;

(4) investigate the financial affairs of the debtor;

(5) if a purpose would be served, examine proofs of claims and object to the allow-
ance of any claim that is improper;

(© if advisable, oppose the discharge of the debtor]

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150 Texas Law Review [Vol. 87:121

“reasonable period of time.” Based on this language, a debtor could

challenge a servicer’s practice of holding payments for extended periods,
usually by placing the funds in “suspense accounts” and by not applying the
payment to the debtor’s obligation.

Mortgagees’ compliance with the documentation requirements for
claims varied among judicial districts. Figure 2 shows the variation among
districts for the three types of claims documentation.'® The boxes in Figure
2 demarcate the middle two quartiles of documentation compliance. The
bottom of each box shows the percentage of attached documentation in the
district that was at the first quartile {i.e., 25% of districts had worse
compliance). The top of each box shows the percentage of attached
documentation in the district that was at the top quartile (i.e., 75% of districts
had worse compliance). The diamond in the middle of each box shows the
tate of attached documentation in the median district.

The relatively small heights of the boxes in Figure 2 indicate that most
jurisdictions do not approach full compliance with documentation
requirements. The overall pattem of findings is not driven by outlying
districts with very poor compliance. Even in the districts that boast compli-
ance that is better than the other three quartiles of districts, the fraction of
claims without documentation is significant. The problem is particularly
acute with respect to mortgagees’ failure to attach notes. Among the districts
with the worst compliance (those in the bottom quartile), the percentage of
claims with a note attached was 50% or lower, ranging all the way to zero
complying claims. In these jurisdictions, a majority of claims will not be
supported by copies of the notes.

165. To access the Fannie Mae/Freddie Mac uniform instruments for cach state, see Fannie
Mae, Legal Documents—Security Instruments, _https./www.efanniemae.com/st/formsdocs/
documents/secinstruments/#standard [hereinafter Fannie Mae Standard Instruments]. To access the
standard instrument for a particular state, follow the hyperlink in the Standard.doc columa in the
Standard Instruments table. Note that the standard instrument for Maine does not include
“reasonable period of time” language, and the standard instrument for New Jersey requires the
lender to immediately apply any payments it accepts. /d.

166, The top and bottom of the vertical lines in Figure 2 show that there was at least one district
in which no claims (0%) had a required type of documentation and at least one district in which all
claims (100%) had a required type of documentation, These findings largely result from the
presence in the sample of some districts with very few cases. Because the addition of a single case
‘could dramatically change the compliance rate in those districts, the absolute range of compliance is
Dot very useful. Thus, the data on interdistrct variation are best used to observe a general pattern,
as shown by the quartile findings.

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Panel C: Citing Reference Data by Depth of Treatment for Positively Cited First-

Tier Bankruptcy Appellate Opinions

Citing References
Depth of Treatment: Mentioned Median | Mean N
BAP Opinions 1.00 1.10 94
District Court Opinions 0.00 0.73 106
t-test of difference in means: f= -1.8837 (p= 0.0611)
Wilcoxon rank-sum test: z= -2.288 (p = 0.0221)*
Depth of Treatment: Cited Median | Mean N
BAP Opinions 4.30 5.22 94
District Court Opinions 1.00 1.94 106

t-test of difference in means: f = -7.3435 (p < 0.0001)**
Wilcoxon rank-sum test: z = -6.941 (p < 0.0001)***

Depth of Treatment: Discussed

Median Mean N

BAP Opinions 0.00 0.89 94
District Court Opinions 0.00 0.48 106
t-test of difference in means: = -2.8311 (p= 0.0051)**
Wilcoxon rank-sum test: z = -2.349 (p = 0.0188)*
Depth of Treatment: Examined Median | Mean N
BAP Opinions 0.00 0.05 94
District Court Opinions 0.00 0.09 106

t-test of difference in means: f= 1.0285 (p = 0.3050)
Wilcoxon rank-sum test: z = 0.889 (p = 0.3741)

Source: First-Tier Database
Note: *** p < 0.001, ** p < 0.01, * p< 0.05.

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1800 VANDERBILT LAW REVIEW [Vol. 61:6:1745
FiGure 8
COMPARISON OF OBSERVED AND PREDICTED COUNTS OF POSITIVE
CITATION TO FiRST-TIER APPELLATE OPINIONS BY TYPE OF CITING FEDERAL COURT

Pocono Spore
Prrtag of Ohtone

7? . es oe ew Di Pe.s eres ona
rte Om Cnet Cte
[—— Creare rept
—— [—o— negate Boma Preson

pa4 58

Pecan of Ooo
Puce Opin

Cr ° 7 z ey 7 3
arta of AP ctor ‘Numero otc Appa Catone
= Ciera Poin [= Caeeve Prati
[—+— Nagatve Smal Prion |——— Powson Preeson

These results support Hypotheses 2B, 3, 4, 5, and 7. We also
find that, holding all other variables at their mean, district court
opinions are predicted to receive approximately 0.34 [0.03, 0.65] more
district court citations than BAP opinions, thus confirming the
distinction we drew in Hypothesis 6.1*! Overall, the bulk of our
evidence suggests that other actors within the bankruptcy judicial
system perceived BAPs to provide a better quality of appellate review
than district courts.162

161, To predict the total number of positive district court citations to first-
opinions, we initially fitted a negative binomial
independent variables in the negative binomial regression model used for the other types of
citations (the full model). Although the Court variable was a statistically significant predictor in
the full model, the model as a whole was not statistically significant (chi-squared = 19.21, df =
12, p = 0.0886). Accordingly, using a backward-selection stepwise regression, we fitted a partial
model that only included the Court, Debtor, Subject, and Fiscal Year variables. This partial
model was statistically significant (chi-squared = 16.70, df = 5, p = 0.0051), and the Court
variable continued to be a statistically significant predictor (p = 0.032).
162. For detailed results from these regression models, see infra Appendix tbl.8.

appellate
gression model that included all of the

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1999) CONSUMER BANKRUPTCY PAPERS 687

chapter 13 plan; in this view, the accuracy and completeness of the debtor's
papers are not explicitly considered.” Other courts apply the “totality of
circumstances” test,!18 and some of the courts adopting this approach explic-
itly consider, as one factor, whether the debtor's schedules and statement of
current income and expenses reasonably and accurately reflect the debtor's
true financial condition.1!9 Despite the differences in the approaches to this
issue, there is general agreement that in adopting § '707(b), Congress was
concerned about chapter 7 filings by “non-needy debtors.”12° Nevertheless, it
is reasonably clear that a chapter 7 case will not be dismissed for “substantial
abuse” merely because of inadvertent omissions in the debtor's papers.124

"7See Carl Felsenfeld, Denial of Discharge for Substantial Abuse: Refining - Not Changing - Bank-
nuptcy Law, 67 ForDHam L. Rev. 1369 (1999); Richard E. Coulson, Substantial Abuse of Bankruptcy
Code Section 707(b): An Evolving Philosophy of Debtor Need, 52 Consumer Fin. LQ. Rep. 261, 279
(1998); Carlos J. Cuevas, The Consumer Credit Industry, The Consumer Bankruptcy System, Bankruptcy
‘Code Section 707(b), and Justice: A Critical Analysis of the Consumer Bankruptcy System, 103 Com. LJ.
359, 407 (1998).

MaSee, og, Stuart v. Koch (In 1e Koch), 109 F.3d 1285, 1288 (8th Cir. 1997); Huckfeldt v. Huckfeldt
(In re Huckfeldt), 39 F.3d 829, 831 (8th Cir. 1994); Fonder v. United States, 974 P.2d 996, 999 (8th Cir,
1992); Zolg v. Kelly (In ze Kelly), 841 F.2d 908, 914 (9th Cir. 1988).

In any event, § 707(b) provides “There shall be a presumption in favor of granting the relief requested
by the debtor.”

'5In ve Krohn, 886 F-2d 123, 126 (6th Cir. 1989) (Te is not possible of course, to list all che factors
shat may be relevant to ascertaining a debtor's honesty. Counted among them, however, would surely be
the debtor's good faith and candor in filing schedules and other documents[ J"). Sce also Stewart v, United
States Trustee (In re Stewart), 215 BR. 456, 464 (BAP. 10th Cir. 1997), affd, 175 F.3d 796 (10th Cir,
1999); In re Rodriguez, 228 BR. 601, 603 (Bankr. W_D. Va. 1999); In re Wisher, 222 BR. 634, 637
(Bankr. D. Colo. 1998); In re Heasley, 217 BR. 82, 87 (Bankr. N.D. Tex. 1998); In re Adams, 206 BR. 456,
460 (Bankr. M.D. Tenn. 1997), vacated on other grounds, 209 BR. 874 (Bankr. M.D. Tenn. 1997); United
States Trustee v. Duncan (In re Duncan), 201 BR. 889, 894 (Bankr. W.D. Pa. 1996).

Several courts of appeals have adopted the “totality of circumstances” test without explicitly sug-
gesting that the accuracy of the echedules should be considered. Stewart, 175 F.3d 796; Kornfield v.
Schwartz (In re Kornfield), 164 F.3d 778, 781 (2nd Cir. 1999}; First USA v. Lamanna (In e Lamaana),
153 F.3d 1, 5 (Ist Cir. 1998); Kestell v. Kestell (In re Kestell, 99 F.3d 146, 149 (4th Cir. 1996); Green v.
‘Staples (In re Green), 934 F.2d 568, 572 (4th Cir. 1991).

‘20Scewart v. United States Trustee, 175 F.3d 796, 806 (10th Cir. 1999); In re Lamanna, 153 F.3d at
3-4; Stuart v. Koch (In re Koch), 109 F.3d 1285, 1290 (8th Cir. 1997); United States Trustee v. Harris,
960 F.2d 74, 76 (8th Cir. 1992), Green v. Staples (In re Green), 934 F.2d 568, 570 (4th Cir. 1991); In re
Krohn, 886 F.2d 123, 125-26 (6th Cir. 1989); In te Walton, 866 F.2d 981, 983 (8th Cir. 1989).

In a comprehensive study of published decisions under § 707(b), one commentator found, “Despite
shetoric to the contrary, the preponderance of cases shows that the courts routinely apply only an excess
income test.” Pelsenfeld, supra note 117, at 1369. This commentator conclyded, “Courts frequently give
lip service to the totality of the circumstances test(s) but fail to apply it in any meaningful sense” Id. at
1394,

See also Coulson, supra note 117, at 279 (explaining that ability to pay is the primary factor in totality
of circumstances test}; Cuevas, supra note 117, at 407 (the real focus of [the totality of the circum-
stances] test is whether the debtor has the ability to pay”).

'20%n re Hudson, 56 BR. 415, 420 (Bankr. N.D. Ohio 1985), order modified, 64 BR. 73 (Bankr. ND.
Ohio 1986) (explaining that under § 707(b}, the court may examine whether debtor has exhibited good
faith and bas made fall and accurate disclosure, but primary focus should be ability to pay); In ve Penna, 86
BR 171, 173 (Banke. ED. Mo.1988) (denying a motion to dismiss because there no evidence that the

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2008] Misbehavior and Mistake in Mortgage Servicing 145

greater than debtors do; these differences typically represent thousands of
dollars. Yet, creditors are rarely called to task for these behaviors. The vast
majority of all claims (96%) pass undisturbed through the bankruptcy system
without objection. Attomeys do not aggressively enforce their clients’ rights
against mortgage companies because the costs are too high and the incentives
are too low in the current system. The combination of the widespread
deficiencies in claims and the lack of objections weakens the integrity of the
bankruptcy process and can harm both debtors and other creditors by
skewing distributions in favor of mortgage creditors.

A. Required Documentation for Mortgage Claims

Mortgage creditors who want to receive distributions from the
bankruptcy estate for mortgage arrearages must file a proof of claim."? In
the Chapter 13 cases in the sample, mortgage creditors filed proofs of claim
to correspond with 81.7% of the home loans that debtors listed on their
bankruptcy schedules.'*

Creditors who file claims are required to use Official Form 10 or a
similar document that substantially conforms to the form.'** Form 10 directs
creditors to attach an itemized statement if their claim “includes interest or
other charges” in addition to the principal amount.’ This requirement
would apply to nearly all typical mortgage claims, as these obligations bear
interest. Federal Rule of Bankruptcy Procedure 3001 imposes two additional
evidentiary requirements on proofs of claim:'*” (1) a copy of the writing if
one evidences the claim,'* and (2) evidence of perfection if the creditor
asserts a security interest in the property of the debtor.'”

143. See Official Bankruptcy Form 10 (2007), supra note 41 (requiring a creditor who fills out
1a proof of claim for a secured claim to state the value of property that is collateral for the debt,
attach copies of documentation of the lien, and state the amount past due on the claim (the
arrearage) as of the date the bankruptcy case was filed). Note that the proof-of-claim form has been
amended slightly and that the new version will go into effect in December 2008. See Official
Bankruptcy Form 10 (2008), available at hutp://www.uscourts.gov/rules/BK_Forms_Pending_
2008/B10_Form10_1208.pdf.

144, As noted in Part II (Methodology), we checked for proofs of claim at two points—six
months after each case's filing date and over one year after each case's filing date—to ensure the
completeness of the proof-of-claim data. For a discussion of mortgagecs” incentives to file claims,
‘see supra text accompanying notes 41-46.

145. FED. R. BANKR. P. 3001(a).

146, Official Bankruptcy Form 10 (2007), supra note 41

147. It is possible that a single, integrated document could perform the function of both the note
and the mortgage in creating the partis’ rights and obligations in the transaction. We did not
idennfy such instances in the sample. Because consumer home loans are typically intended for sale
on the secondary market, separation of the note and the mortgage helps ensure that the note is a
negotiable instrument that will be subject to the holder-in-due-course defense upon transfer.

148. FED. R. BANKR. P. 3001(c) (“Wheo a claim, or an interest in property of the debtor
securing the claim, is based on a writing, the original or a duplicate shall be filed with the proof of
claum.”).

149, 1d. 3001(4) ("If a security interest in property of the debtor is claimed, the proof of claim
shall be accompanied by evidence that the security interest has been perfected.”).

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making the “primary function” of citations one of “legitimation.”!©
Even if a court simply cites to another court to legitimate its own
conclusions, we would say that the citing court perceives of the other
court’s reasoning as “correct” in some sense. Indeed, the citing court is
using the citation to bolster the perception that its own reasoning and
conclusions are “correct.”

In light of the foregoing, and as detailed below, we proceed to
test the perceived correctness of an appellate opinion by considering
(1) the propensity of other federal courts within the bankruptcy
judicial structure to cite the opinions issued by first-tier appellate
courts, (2) the depth of treatment given to such opinions by federal
citing courts (including direct quotation), and (3) the immediacy
with which such opinions garner a citing reference. Accordingly, we
offer the following additional hypotheses.

Hypothesis 2A: Federal courts more likely will positively cite to BAP
opinions than to district court opinions.

Hypothesis 2B: Federal courts will positively cite to BAP opinions more
frequently than to district court opinions.

Hypothesis 3: Courts of appeals will cite more frequently to BAP
opinions than to district court opinions.

Hypothesis 4: Bankruptcy courts will cite more frequently to BAP
opinions than to district court opinions.

Hypothesis 5: BAPs will cite more frequently to BAP opinions than to
district court opinions.

Hypothesis 6: District courts will cite more frequently to district court
opinions than to BAP opinions.

Hypothesis 7: Federal courts outside of the circuit of the first-tier
appellate court that issued the opinion (extracircuit federal courts) will
cite more frequently to BAP opinions than to district court opinions.

Hypothesis 8: Positive federal citing references will afford a greater
depth of treatment to BAP opinions than to district court opinions.

109. Walsh, supra note 107, at 339.
110. Cf. id. at 342 (distinguishing between “strong” and “weak” citations).

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bankruptcy appellate review than their district court counterparts—
assuming, of course, that the question of judicial independence does
not outweigh other factors. Many challenges stand in the way of
investigating this general claim, chief among them the difficulty in
empirically testing the “correctness” of the dispositions rendered by
the appellate court. Knowledge of this would be crucial for purposes of
ascertaining whether the appellate court had appropriately performed
its appellate function—that is, identifying error in those instances
when it occurred. Making such a determination would necessarily
involve content analysis of appellate opinions according to a particular
metric of correctness. It is difficult to develop such a metric without
infusing a degree of inherent subjectivity into its design. What we may
deem to be a “correct” decision may be “incorrect” according to others.
Accordingly, at the initial stage of empirical inquiry, we are not
persuaded that detailed content analysis of appellate opinions is
warranted.

Absent detailed content analysis of appellate opinions, how
might we empirically proceed with our inquiry into the quality of
appellate review? Although we cannot empirically test the
“correctness” of decisions, we can empirically test the perception held
by other actors within the bankruptcy judicial system of the
correctness of those decisions. For those bankruptcy appeals that
proceed to the second tier of review, we can consider whether the court
of appeals deemed proper the disposition rendered by the first-tier
appellate court.

There are several ways in which the rate at which a higher
court upholds a lower court’s disposition may shed light upon judicial
perceptions of correctness of lower court decisions.® First, there is a
tautological sense in which what an appellate court says is, by

95. Professor Frank Cross has expressed a similar view in his empirical study of decisions
rendered by U.S. Courts of Appeal
[here are typically nonfrivolous legal arguments for each side in circuit
court cases, so it is impossible to code certain cases as being legally correct (or
incorrect) without the researcher second-guessing and effectively overriding
the judge. Such an approach offers an unreliable too! for evaluating judicial
decisions because it probably reflects more about the researcher than about
the judges being evaluated. Research requires a more objective tool for

evaluating the law.

FRANK B. CROSS, DECISION MAKING IN THE U.S. COURTS OF APPEALS 46-47 (2007).

96. But see Wagner & Petherbridge, supra note 5, at 1127-28 (noting the limits of “result-
ical studies”); Stephen J. Choi & G. Mitu Gulati, Bias in Judicial Citations: A
New Window into the Behavior of Judges? 5 (N.Y.U. Law & Econ. Research Paper Series, Paper
No. 06-29, 2006), available at http:/sern.com/abstract=913663 (using empirical data to argue
that judges of one political party are more likely to cite opinions authored by judges of the same
party, especially in particular “high stakes” settings),

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2008] Misbehavior and Mistake in Mortgage Servicing 149

a bankruptcy if a mortgagee cannot prove it holds a valid security interest.
Under bankruptcy law, a mortgage that is not properly perfected can be
avoided.'*' Avoidance typically relegates the obligation to unsecured status
in bankruptcy and significantly reduces the debtor's obligation to pay the full
amount of the debt." Even a credible threat of avoidance could cause an
allegedly secured party to lower its claim to prevent the risk of litigating its
secured status. Thus, the ability to challenge whether a mortgage is properly
perfected redounds to the benefit of both the debtor and to all unsecured
creditors, whose distributions from the bankruptcy estate will be higher if the
mortgage is not entitled to treatment as a secured claim. In light of these
very powerful benefits, the rate of noncompliance is alarming. The failure to
attach a security interest should serve as a red flag that prompts scrutiny of
the claim. While some trustees or debtors may themselves be checking the
public records to determine if the creditor holds a valid mortgage, this state
of affairs effectively reflects creditors’ ability to shift the burdens of their
disclosure duties onto other parties in the system. The law requires creditors
to prove that they are entitled to preferential treatment as secured creditors;'*
their failure to do so creates a risk that some creditors who may not in fact
have valid mortgages will receive higher payments than they are entitled to
under the law."

Finally, the security interest is necessary for the same reason as the
note: it contains the terms that bear on the calculation of the amount owed.
Further, the mortgage usually contains provisions on how a loan should be
serviced. For example, in most states the model Fannie Mae instrument
requires the lender to either apply or refund partial payments within a

161. 11 U.S.C. § 544 (2006). This provision is commonly called the “strong arm” power
because it permits the trustee to “knock off” security interests that are not properly perfected under
state law to defeat certain other types of creditors,

162. See WARREN & WESTBROOK, supra note 2, at 478 (explaining that a creditor in an
avoidance action “may face the loss of its security interest or an order requiring it to pay back
amounts it received fom the debtor shortly before bankruptcy”); id, at 285 ("Just as secured
creditors in Chapter 7 enjoy enhanced status and are entitled to greater repayment than unsecured
creditors, the secured creditor in Chapter 13 enjoys substantially better protection than the
unsecured creditor."). Without a security interest, the mortgage is an unsecured obligation. Thus,
the house is immediately available to the debtor as an asset to use as collateral. After committing
all disposable income for the applicable commitment period in the Chapter 13 case, a debtor then
may discharge any remaining obligation on the mortgage claim because it is an unsecured debt.
The combination of avoiding a security interest and completing a Chapter 13 plan results in the
debtor owning the house free and clear.

163. Fep. R. BANKR. P. 3001(4).

164. In addition to the failure to properly perfect the mortgage by complying with state
recording statutes, some trustees who routinely demand and scrutinize mortgage documents have
identified other errors that invalidate a mortgage (such as the failure of a notary to witness the
mortgage). See, e.g., In re Fisher, 320 B.R. 52, 65 (E.D. Pa, 2005) (holding that a bankruptcy
ustee may avoid a mortgage under 11 U.S.C. § 544 on the basis that it was improperly proved and
recorded), fn re Marsh, 12 S.W.3d 449, 454 (Tenn, 2000) (ruling that, under Tennessee law, a deed
of trust that lacks a notary seal acknowledging execution is invalid as alien).

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676 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

19. Were the schedules filed after the petition but dated
before?

Another circumstance raising questions about the preparation of the
schedules occurs when the schedules are dated before the petition is filed, but
are then held for filing until after the petition is filed. The explanation for
this odd circumstance was not investigated further.

5.5% of debtors signed their papers before filing the peti-
tion but filed them after filing the petition. (11 of 200
cases)

20. Is there any substantive response to question 3a on the
statement of financial affairs regarding payments aggregating
more than $600 to any creditor within ninety days before
the petition?

Question 3a on the statement of financial affairs requires disclosure of
payments aggregating more than $600 to any creditor within 90 days before
the filing.* In testing the responses to this question, the initial effort was to
identify the subset of debtors who were most likely to have made a payment
required to be disclosed. The criteria were (1) a monthly rent or mortgage
payment on schedule J over $600, and (2) monthly income on schedule I over
$2,000. Thus, a debtor in this subset who makes even one rent or mortgage
payment within the ninety days before filing bankruptcy would be required
to respond affirmatively to question 3a.9* Twenty debtors had monthly in-
comes over $2000 and monthly rent or mortgage payments over $600. The
lack of response to question 3a, especially by the higher income debtors in the
study sample, raises questions about the care and understanding of debtors in
completing these papers.

85% of the debtors with over $600 in monthly rent or
‘mortgage payments and with over $2000 in monthly in-

*Pechaps the debtor's attorneys in these cases held the signed papers wat the fee balance was paid.
im
Official Bankruptcy Form 7, question 3a, The debtors disclosure of such transfers facilitates prompt
action by the trustee, the importance of which was explained by one court:
Recovery of property pursuant to § 548 is intended to insure fairness to the credi-
tor in the distribution of the assets of the bankrupts estate. As a fiduciary of the
estate, the trustee has a duty to avoid such transfers if to do so would benefit the
estate and it is usvally advisable for the trustee ta act quickly. By waiting, the
trustee is merely risking the loss of his ability to crace the property and the
ransfecees,
Lovell v. Mixon, 79 P-2d 1373, 1378 (Bth Cir. 1983). See also supra note 31 and cases cited therein.
"It appears that many attomeys perceive that question 3a on the statement of financial affairs is
limited to payments to unsecured creditors. However, nothing in the language of the question justifies this
conclusion. Thus, a debtor must also disclose payments to secured creditors and lessees,

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CHART 1. THE NUMBER OF CASES WITH EACH NUMBER OF
ERRORS

60

50

B. Comparisons BaseD ON DesTor CHARACTERISTICS

Subgroups of debtors were analyzed by certain identifiable characteris-
tics. This was done in an attempt to determine whether remedial efforts
should be more focused on any of the subgroups. However, none of the sub-
groups did significantly better or worse compared to the others.

When an adjustment is made to compare the results on the eighteen ques-
tions applicable in both chapter 7 and chapter 13, the average number of
problems for the one hundred fifty-two chapter 7 cases is 2.93, and for the
forty-eight chapter 13 cases, 3.04.10? The average for the ninety-four single
debtors was 3.17, for the fourteen separated debtors, 3.07, and for the ninety
married debtors, 3.74.1°3 For the one hundred fifty-four individual petitions,
the average was 3.42, and for the forty-six joint petitions, 3.48.1

For both chapter 7 and chapter 13, the cases filed by the higher volume
firms had slightly better averages. The thirty-six chapter 7 cases filed by the

227 hree test questions (9, 11 and 13) applied only to chapter 7 cases, For this comparison, the results
of these questions were removed. Accordingly, these averages compare the results on the same eighteen
test questions,

465Fo¢ this comparison, no adjustment was made for the results of the test question directed only to
married debtors (question 2). These three subgroups total 198 debtors because 2 debrors did not state
their marital starus on schedule L

20'For this comparison, no adjustment was made for the results of the test question directed only to
joint debtors (question 6).

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CHART 4. INCOME

Errors
S

$0 $1,000 $2,000 $3,000 $4,000 $5,000
Income

CHART 5. EXPENSES

$6,000

Errors

$0 $1,000 $2,000 $3,000 $4,000 $5,000
Expenses

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may lurk at more refined levels of case-type delineation, we are at
least confident that the size of any forum-selection bias is confined,
not pernicious, and thus probably has not had a meaningful effect
upon our data and analysis.132

first-tier database, for all observations, and for those observations from BAP circuits, the four
most frequently occurring subjects were matters relating to discharge, procedure/jurisdiction,
avoiding powers, and multiple subjects. For the second-tier database, for all observations and for
those observations from BAP circuits, the four most frequently occurring subjects were matters
relating to discharge, claims, avoiding powers, and multiple subjects. For the first-tier database,
approximately 56% of the appeals heard by district courts in BAP circuits as well as all district
courts combined involve one of the four most frequently occurring subjects. For the second-tier
database, approximately 64% of the appeals heard by district courts in BAP circuits and 59% of
the appeals heard by all district courts combined involve one of the four most frequently
occurring subjects. After applying a chi-square test with one degree of freedom, we found no
statistically significant relationship in BAP circuits between the subject matter of the appeal and
the first-tier appellate court to hear the appeal (a p-value of 0.288 for the first-tier database and
a p-value of 0.876 for the second-tier database).

Second, for all observations in the first-tier database, we examine whether a statistically
significant relationship exists between the subject matter of the appeal and whether there is a
subsequent appeal to the circuit court. Again, we classify observations according to whether the
subject of the appeal fell into one of the four most frequently occurring subject matter
categories. For those observations involving subsequent appeal to the circuit court,
approximately 62% involved a top subject matter category. For those observations without circuit
court review, approximately 56% involved a top subject matter category. Applying a chi-square
test with one degree of freedom, we found no statistically significant relationship (p = 0.476)
between the subject matter of the appeal and subsequent appeal to the circuit court.

Finally, we found that courts of appeals affirm district courts in BAP circuits at a rat
similar to that of their counterparts in non-BAP circuits. In the first-tier database, there were 77
observations for which there was a subsequent appeal to the court of appeals. The subsequent
history for 10 of those observations, however, already existed in the second-tier database (i.e., the
circuit court opinion fromi the second-tier database reviewed an opinion from the first-tier
database). When combining the 67 unique observations from the first-tier database involving a
subsequent appeal to the court of appeals with the 170 observations in the second-tier database,
courts of appeals partly or fully affirmed district courts in BAP circuits approximately 77% of the
time and partly or fully affirmed district courts in non-BAP circuits approximately 71% of the
time. Bivariate analysis confirms that no statistically significant difference exists between the
rate at which courts of appeals partly or fully affirmed district courts from BAP circuits and
district courts from non-BAP circuits (chi-squared = 0.9094, df = 1, p = 0.340). Furthermore, if
one considers only those observations where the court of appeals fully affirmed district courts,
the affirmance rates in BAP and non-BAP circuits are similar. The circuit court affirmance rate
of district court dispositions in BAP circuits was approximately 67% in comparison to 65% in
non-BAP circuits. Bivariate analysis confirms that this difference is not statistically significant
(chi-squared = 0.1419, df= 1, p = 0.706).

132. With respect to citations, if there is a forum-selection bias, then the BAPs are not
deciding some categories of cases—and, perhaps, certain issues—that the district courts are.
‘This logically should translate into an increase in citations to district court opinions as compared
to BAP opinions, since other courts facing such issues and wishing to include citations will have
no opportunity to cite to any BAP opinions. Yet, as we discuss below, our data analyses generally
show that BAP citations are favored. In short, if there is a selection bias, then our statistical
analyses, if anything, understate the extent to which BAP citations are favored.

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misstatement in a schedule or a statement of financial affairs,!2* if it was
knowing and fraudulent, and related to a material matter.!?5 In addition, the
discharge may be denied for intentionally concealing property by failing to
disclose it in the schedules.26 However, denying the discharge is not war-
ranted for misstatements or omissions resulting from confusion, misunder-
standing, haste, inadvertence or attorney error.127 Further, this remedy does
not apply to a chapter 13 debtor.125

"Under 11 U.S.C. § 727(aX4)(A), quoted in note 15, supra, such an omission or misstatement may
constitute a “false oath.” In re Chavin 150 F.3d 726 (7th Cir. 1998); Beaubouef v. Beaubouef (In re
Beaubouef); 966 F.2d 174 (5th Cir. 1992); Williamson v. Fireman's Fund Ins. Co, 828 F.2d 249 (4th Cir.
1987); Chalik, 748 F.2d at 617-18; Smith v. Grondin (In ze Grondin), 232 BR. 274, 277 (BAP. st Cir.
1999). See also Craig H. Averch, Denial of Discharge Litigation, 16 Rev. Lrric. 65, 106-07 (1997); Wayne
D. Holly, Criminal and Civil Consequences of False Oaths in Bankruptcy Help Ensure Reliable Information,
‘-MAR NY. Sr. BJ. 38, 38-39 (1999).

*5Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (Ist Cir. 1994); Bennett v. Hollingsworth,
(In re Hollingsworth), 224 B.R. 822, 830 (Bankr, M.D, Fla, 1998).

"611 USC. § 727(a)(2), quoted in note 15, supra, Chavin, 150 F.3d 726; Gullickson v. Brown (In re
Brown), 108 F.3d 1290, 1295 (10th Cir. 1997).

*27Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1295 (10th Cir. 1997); Citizens First Nat'l Bank
vv. Hunter (In re Hunter), 229 BR. 851, 858 (Bankr. MD. Fla. 1999); Kilburn v. Filby (fn re Filby), 225
BR. 532 @Banks. D.NH. 1998); Cohen v. Pond (In re Pond), 221 BR. 29, 34 (Bankr, MD. Fla. 1998);
Williamson Constr., Inc. v, Ross (In re Ross), 217 BR. 319 (Bankr, M.D. Fla. 1998); Hunter v. Shoup (In
re Shoup), 214 BR. 166, 177 (Bankr. N.D. Ohio 1997); Kirchner v. Kirchner (In re Kirchner), 206 BR. 965
(Bankr. W.D. Mo. 1997}; Stone v. Stone (In re Stone), 199 BR. 753 Bankr. N.D. Ala. 1996); Roeder v.
‘Ziegler (In re Ziegler), 156 BR. 151 (Bankr, WD. Pa. 1993); Perniciaro v. Natale (In re Natale), 136 BR.
344, 349 (Bankr. EDINY. 1992); Ashton v. Burke (In re Burke), 83 BR. 716, 720-21 (Bankr. DND.
1988). But see Boroff v. Tully (In re Tully), 818 F.2d 106, 111 (1st Cir. 1987) (Nor can an attorney's
willingness to bear the burden of reproach provide blanket immunity to a debtor; itis well settled that
reliance upon advice of counsel is, in this context, no defense where it should have been evident to the
debtor that the assets ought to be listed in the schedules). See also Gregory E. Maggs, Consumer Bank-
muptcy Fraud and the “Reliance on Advice of Counsel” Argument, 69 Ant. Bann LJ. 1 (1995).

‘Similarly, many courts do not deny the discharge if the debtor reports the omission or misstatement at
the creditors meeting. Brown, 108 F.3d at 129; Baker v. Mereshian (In se Mereshian), 200 BR. 342, 346
(BAP. 9th Cir 1996); Williamson Constr., Inc. v. Ross (In re Ross), 217 BR. 319 (Bankr. M.D. Fla.
1998). But see Barnett Bank of Tampa, N.A. v. Muscatell (In re Muscatell), 113 BR. 72,75 (Bankr. M.D.
Fla. 1990); Job v. Calder (In te Calder), 93 BR. 734, 738 (Bankr. D. Utah 1988), aff'd, 907 F.2d 953 (10th
Gir. 1990).

It is no defense that the debtor believed that the omitted property was worthless. Chalik v.
‘Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir, 1984); Krudy v. Scott (In re Scott), 227 BR. 834,
842 (Bankr. SD. Ind. 1998); Law Office of Larry A. Henning v. Mellor (In re Mellor), 226 BR. 451, 458
(D. Colo, 1998); Stanley v. Hoblitzell (In re Hoblitzell), 223 BR. 211, 215 (Bankr. ED. Cal. 1998); Con-
gress Talcott Corp. v. Sicari (In re Sicari), 187 BR. 861, 882 (Bankr. SDNY, 1994); Lister v. Gonzalez (In
re Gonzalez), 92 BR. 960, 962 (Bankr. SD. Fla. 1988).

"25Generally, the provisions of chapter 7 apply only in chapter 7 cases. 11 US.C. § 103(b) (1994).
‘Nothing in chapter 13 allows an objection to the discharge of a chapter 13 debtor for false oath or
concealment. Deans v. O'Donnell (Jn re Deans), 692 F.2d 968, 971 n.5 (4th Cir. 1982); Gayton v, Haney
Un re Gayton), 61 BR. 612, 613 (9th Cit. BAP. 1986); In re Girdaukas, 92 BR. 373, 376 (Bankr. ED.
Wis, 1988); United States v. Vlavianos (In 7¢ Viavianos), 71 BR. 789, 795 n.3 (Bankr, W.D. Va. 1986)
(The provisions of 11 U.S.C. § 727(a), which set out ten grounds for denying a debtor a discharge, do not
apply to discharges granted in Chapter 13 cases.”); Cornett v. Galt (In re Galt), 70 BR. 57, 59 (Bankr. SD.
‘Ohio 1987).

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attorneys to know how to handle these charges in preparing bankruptcy
claims.

The amounts of attorneys fees disclosed in the claims varied
considerably. The data revealed several clusters of bankruptcy fees; the most
common amounts were $125, $150, $250, $275, and $500. On a dollar basis,
the difference in these amounts is small. On a percentage basis, however,
many mortgages charge two or three times as much as other mortgagees.””?
Because the fees varied within judicial districts, the discrepancy does not
seem to be attributable merely to regional cost differences.” The consis-
tency of such fees also suggests that many servicers use a flat fee rather than
a lodestar method based on hourly rate, which is required in some juris-
dictions.* Given the nonexistent or minimal scrutiny of most mortgage
claims, the system appears to permit mortgagees to effectively make their
own determinations of what constitutes reasonable attorneys fees for a
routine Chapter 13 bankruptcy.

A related problem is that one cannot discern from a flat bankruptcy fee
whether such charges actually represent an actual expense for attorneys.
Some creditors use such bankruptcy fees to collect “monitoring” fees due to
the purported additional burden of having to service a loan in bankruptcy.”
In other instances, servicers may seek to impose bankruptcy fees for the
purported administrative costs of preparing proofs of claim. If such work

203. A review of the claims in the Mortgage Study shows that the bankruptcy fee of Bank of
America was $250. Yet, Chase Home Finance, LLC posed a bankruptcy fee of half that amount,
or $125. Because these lenders are large, national institutions, presumably their actual costs for
preparing a proof of claim would be quite similar. Nevertheless, the data show a disparity. It
appears that debtors whose mongages arc held by Bank of America must pay $125 more than
debtors whose mortgages are held by Chase Home Finance, LLC in order to complete their plans.

204, For example, in the Eastern District of Arkansas, bankruptcy fees ranged from $125 to
$800.

205. See. e.g., In re Boddy, 950 F.2d 334, 337 (Bankr. W.D. Ky. 1991) (holding that a lower
court abused its discretion by employing a “normal and customary” standard, rather than a lodestar
analysis, to calculate the fee award).

206. See infra subpart I1I(D).

207. The lodestar-versus-flat-fee issue was apparently a point of contention in the work of the
National Association of Chapter 13 Trustees’ committee on proofs of claim. The servicers wrote
separately on this issue to argue that a flat fee should be permissible, analogizing to the flat “no-
look” fee that some courts permit for Chapter 13 representation to avoid debtors’ counsel having to
file a fee application pursuant to Rule 2016 in each case. NAT'L ASS’N OF CHAPTER 13 TRUSTEES
MORTGAGE COMM., NOTES BY MORTGAGE SERVICERS ON MORTGAGE SERVICING DURING A
CHAPTER 13 BANKRUPTCY 3-4 (2007) (included in REPORT, supra note 175)

208. This may be particularly true when the charge was described as “POC prep fte” or “plan
review” fee. Arguably, neither of the prior-quoted activities is strictly necessary to “defend thle]
mortgage,” nor are they costs from “prosecut[ing) all necessary claims and actions to prevent or
recover for any damage to ot destruction of the property,” although such language commonly
appears in the standard mortgage documents upon which lenders rely to collect bankruptcy fees.
See RAO ET AL, supra note 187, at 176 (reproducing a provision contained in standard mortgages
that a large loan-servicing company relies on to impose bankruptcy-monitoring fees). Further, the
preparation or filing of a proof of claim and the review of a proposed Chapter 13 plan may not

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5767

RAFAEL I. PARDO . — pardo@uw edu

Professor of Law (206) 543-1580
University of Washington School of Law

‘Wiliam H. Gates Hall, Room 340

Box 353020

Seattle, WA 98195-3020

EMPLOYMENT

University of Washington School of Law, Seattle, Washington
Professor of Law, June 2010 — present

Seattle University School of Law, Seattle, Washington
Associate Professor of Law (with tenure), July 2009 ~ May 2010
Associate Professor of Law, July 2006 — Tune 2009

Tulane Law School, New Orleans, Louisiana
Associate Professor of Law, July 2003 - June 2006

Willkie Farr & Gallagher LLP, New York, New York
Business Reorganization and Restructuring Associate, August 2002 —
February 2003

The Honorable Prudence Carter Beatty, U.S. Bankruptcy Court for the
Southern District of New York, New York, New York
Law Clerk, August 2001 — July 2002

EDUCATION

New York University School of Law, New York, New York
J.D. 2001
Executive Editor, New York University Law Review
Judge John J. Galgay Fellowship in Bankruptcy and Reorganization Law
Merit Scholarship Recipient

Yale University, New Haven, Connecticut
B.A. in History, 1998
Senior Thesis: Diverging Religious Approaches to the Role of Faith in
Revolution: The Conflict Between the Church Hierarchy and the
Progressive Clergy in Nicaragua, 1981-1983
Lewis P. Curtis Fellowship for Travel
Edgar J. Boell Prize

8/25/2010

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180 Texas Law Review [Vol. 87:121

Poor mortgage servicing is an assault on America’s policy of promoting
sustainable home ownership. If families are hit with unreasonable fees and
cannot understand what is owed on their mortgage loans, they are at risk of
foreclosure. Servicing abuse can begin before bankruptcy, but may
ultimately drive some families into bankruptcy as a last resort for trying to
address this issue. The current policy debate on home ownership is focused
on loan-origination issues, such as whether mortgage brokers or lenders
placed families in appropriate loans.”” Servicing problems may be less
visible, but no less harmful. Research shows that the Quality of preventive
servicing affects the incidence and outcome of default.“° The rising
foreclosure rate will only escalate the number of families who must struggle
to understand the amounts of their arrearages and who are at risk of having to
pay unreasonable default costs to save their homes.”*' Policies that aim to
protect families from foreclosure should address the weaknesses in mortgage
servicing and not just alter the process for loan origination. For families who
are already trapped in unaffordable loans, other relief will come too late.
Improving mortgage servicing would provide immediate protection to
families facing foreclosure.

Paying a mortgage is most families’ most important financial obligation.
Unreliable servicing can cause ordinary families to overpay, even for those
who avoid default and bankruptcy. For example, inaccurate payoff balances
can penalize families when they refinance a home loan. Even families who
try to get ahead on their mortgages may lose such benefits if servicers fail to
credit additional payments to principal, instead holding them in suspense or
treating them as prepayments despite instructions to the contrary from the
borrowers. These practices create a needless barrier to home ownership.

Under the current regime, consumers have no choice in servicers. Any
market exists solely based on the needs of lenders and bond issuers, whose
concems are distinct—if not opposed—to borrowers. Jack Guttentag,
emeritus professor at the Wharton Schoo! of Business, has suggested that
consumers be allowed to “fire” their servicers, essentially receiving a one-

279. See Prepared Statement of the Federal Trade Commssion on Home Mortgage Disclosure
Act Data and FTC Lending Enforcement: Hearing Before the H. Comm. on Fin. Servs., |30th Cong.
5-9 (2007) (statement of Lydia B. Pames, Director of the Bureau of Consumer Protection, Federal
Trade Commission), available at http:/hwww.tc.govios/testimony/P064806hdma pdf (descnbing
the FTC's collection of data on the pricing of subprime moctgages marketed to consumers)

280. See Penningion-Cross & Ho, supra note 59, at 19 (Finding that the probability of loan
default varied widely by loan servicer, even after controlling for loan-, housing-, and labor-market
conditions).

281, Sce generally Press Release, RealtyTrac, Foreclosure Activity Up Over 55% in First Half
of 2007 (July 30, 2007), available at http://www cealtytrac,com/ContentManagemenvpress
release.aspx?ChannellD=9<em{D=2932&accnt=64847 (summarizing the results of a mid-year
foreclosure-market report showing dramatic increases in foreclosure filings nationwide); Danielle
Reed, Rising Foreclosure Rates Point to a Normalizing Home Market, WALL ST. J. ONLINE, Apr.
17, 2006, hitp/www.realestatejournal.com/buysell/markettrends/20060417-reed.hrml (discussing
rising foreclosure rates and mortgage delinquencies in the United States in the first haf of 2006).

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trustee has assets, allocating them to opposing the debtor's discharge may
well reduce the dividend to creditors.3¢ The United States Trustee rarely
objects to the discharge, probably as a matter of resource allocation and pri-
oritization within that program.!97 As a result, this remedy is of little value
in motivating more accurate schedules in consumer chapter 7 cases.138

C. DeNrAL oR LIMITATION OF THE Desror’s EXEMPTIONS IN
CHAPTER 7

The inadequate disclosure of a debtor's assets in chapter 7 may result in

Bankruptcy Crime Prosecutions, 6 Am. BANKER. Inst. L. Rev. 359, 361 (1998) (“Bankruptcy trustees are
often unable to thoroughly investigate estates where there are no readily accessible assets available to fund
the costs of administration” (footnote omitted)}; Ralph C. McCullough II, Bankruptcy Fraud: Crime
Without Punishment II, 102 Cons, LJ. 1, 12 (1997) ("In these ‘no asset’ cases, the trustee, who represents
the unsecured creditors, does not see the ability to recover money for them, and he sends the bankruptcy
case through with little questioning; not necessarily because the trustee doesn't wish to bother with the
case, with the tremendous demands on his time, rather it is simply impossible for him to do so.”) Hon. Jim
D. Pappas, We've Got to Stop Meeting Like This, 14-SEP Am. BANKR. Inst. J. 35, 35 (September, 1995)
("As a practical matter, these ‘meetings’ are a joke. Depending upon the local practice, 10 or more meet-
ings are scheduled per hour, guaranteeing that no meaningful examination of the debtor occurs.” (footnote
omitted)).

“If the trustee bas information that would support an objection to discharge but deems such an action
inadvisable, the trustee should promptly bring such facts to the attention of the United States Trustee.”
United States Department of Justice, Executive Office for United States Trustees, HANDBOOK FOR
Cuapren 7 Trustees, pp. 64 (effective October 1, 1998).

36See, eg, In te Amold, 162 B.R.775 (Bankr. ED. Mich. 1993) (awarding trustee's counsel fees of
$4053.75 from the estate for prosecuting an unsuccessful objection to discharge); In re Kearns, 162 BR. 10
(Bankr. D. Kan. 1993) (awarding trustee's attorney fees of $6561.75 to pursue objection to discharge;
estate had funds of $1347.65).

‘The trustee's economic disincentive to pursue an objection to discharge is further exacerbated by the
public policy against settling an objection to discharge claim upon the debtor's payment of money. See
Vickers, 176 BR. at 290 (‘Discharges are not property of the estate and are not for sale. It is against
public policy to sell discharges. Selling discharges would be a disease that would attack che heart of the
bankruptcy process, its integrity.” (citation omitted); In re Moore, 50 BR. 661, 664 (Bankr. ED. Tenn.
1985) (‘Under no circumstances, not even where the intent is innocent, may a debtor purchase a repose
from objections to discharge. A discharge in bankruptcy depends on the debtor's conduct; it is not an
object of bargain”). See also In re Wilson, 196 BR. 777, 778-79 (Bankr. ND. Ohio 1996); Jacobson, 159
BR 314.

But see In re Bates, 211 BR. 338, 348 (Bankr. D. Minn. 1997) (*[T]he proposed settlement represents
an attempt by the Trustee to act in the best interests of the estate by limiting the estate's exposure to the
risks and expenses of trial in the face of an uncerrain outcome”); In re Mavrode, 205 BR. 716 (Bankr.
DNJ. 1997).

‘Whatever the merits of these considerations, it must also be recognized that a trustee’s incentive to file
aan objection to discharge might well be impaired if the trustee will not be permitted to settle it and must
either take it to trial or seek to dismiss it. :

}7Nothing in the United States Department of Justice, Unrrep States TRUSTEE MANUAL, volume
1 (August 1988) or volume 2 (October 1996), addresses the circumstances under which the United States
‘Trustee will object to a debtor's discharge.

"8[n 1998 in the Eastern District of Michigan, in 20,905 consumer chapter '7 cases, 108 objections to
discharge were filed (0.5%). These objections to discharge were not further analyzed to determine the
number that alleged false oath under § 727(a)(4) or concealment of property under § 727(a)(2).

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in the bankruptcy appeals process perceive BAPs to provide a better
quality of appellate review than district courts. These conclusions
provide strong validation to commentators who have theorized about
the ideal attributes of appellate review. To the extent that courts in
fact strive to resolve cases correctly, the findings suggest that BAPs in
fact offer higher quality appellate review than do district courts. That
conclusion, in turn, has important ramifications for policymakers. It
would seem desirable for policymakers to introduce more
multimember appellate tribunals staffed by judges with particular
expertise in the subject matter of the appeals.178

It is important to emphasize again that those conclusions
clearly result only if courts in fact strive to reach correct resolution of
cases and issues. That is a question on which our data do not and
cannot shed light. It may be the case that, partly as a result of
theoreticians’ writings, courts favor BAPs over district courts not
because they truly conclude that BAPs are correct more often, but
rather because they simply believe (without truly examining) that
BAPs are correct, which in turn inclines them simply to affirm the
conclusions of BAPs. If so, the lesson for policymakers is murkier.

178. See, ¢g., id. at 634:
[UJsers of the complex bankruptcy system probably want precedent not just
settled, but settled right . ... If early (and in the Ninth Circuit, not so early)
impressions about the quality of work by the bankruptcy appellate panels
hold up, the dual needs for binding authority and substantive correctness .. .
argue for some sort of a dual or hybrid system involving bankruptcy appellate
panels in eome form.

‘The benefits of establishing such tribunals may impose various costs, although they may be
minimized depending on the manner in which such tribunals are integrated within existing
judicial operations. See, e.g., id. at 629; Bankruptcy Appeals, Lawyers Wary of New System Begun
This Month, N.Y.LJ., July 11, 1996, at 6 ("Steven Flanders, the Second Circuit Executive,
though, while noting that the BAPs represent a ‘major institutional change’ for the circuit,
believes the costs will be manageable. Mr. Flanders indicated that the calendaring of appeals
will be integrated into the circuit clerk’s office .. ..”), From the perspective of litigants, a cost of
particular concern would be that of disposition time. In the bankruptcy appeals context, however,
preliminary evidence tentatively suggests that BAPs appear to have reduced such costs. A study
by the Federal Judicial Center reported that, “[i]n most circuits, the overall mean and median
disposition times for BAPs are lower than the national figure for bankruptcy appeals to the
district courts, but in most circuits they are based on a rather small number of cases, which
limits the conclusions to be drawn from the figures.” McKenna & Wiggins, supra note 65, at 661.

We emphasize that our findings do not speak to whether it is more desirable to have many
such tribunale—as is the case with BAPs—or just ono national tribunal—as is the case, for
example, with the United States Court of Appeals for the Federal Circuit for patent appeals.
That issue would seem to turn largely on the importance of having an intermediate appellate
tribunal announce legal rules with national uniformity. See, e.g., id. at 649.

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unlimited. For example, at least one court has held that payoff fees are
impermissible because they constitute a nonreimbursable expense under the
terms of the note.'*? Another court ruled that a servicer could not charge a
homeowner for property inspections because it had failed to give the debtor
notice of the inspections as required by the note." The typical amount of a
fax fee ($50) could also be challenged as unreasonable. Such requests are
apparently handled automatically by fax-back technology at minimal cost to
the servicer.'®> Thus, some of the fees shown in Table 1 may be neither
reasonable nor permitted by contract. Paying such claims would distort the
claims-distribution process and impose unfair burdens on debtors in making
bankruptcy payments.

State or federal statutes also limit the fees that debtors must pay.
Certain charges that appear on proofs of claim simply are not legal. Some
states prohibit the “pyramiding” of late fees'®* or have promulgated specific
rules about the use of suspense accounts to hold partial payments in
abeyance.'*"” Because mortgage servicers operate on a national basis, they
may be unaware of these state laws. Alternatively, servicers may apply the
same fees to all loans covered by one securitization agreement, despite the
fact that varying state law actually applies to the loans. The propriety of fees
may be impossible to verify without a payment history for the loan, which
almost never was attached to the proof of claim."* For example, the

attomeys’ fees to protect its interest in the Property and/or rights under this Security
Instrument, including its secured position in a bankruptcy proceeding.

Jd, The standard instruments of Georgia, New York, and Wisconsin include substantially similar

language. Id. Maine’s standard instrument provides that the lender may “do and pay for whatever

is necessary to protect the value of the Property and Lender's rights in the Property.” Id.

183, See, e.g., Dougherty v. N. Fork Bank, 753 N.Y.S.2d 130, 131 (N.Y. App. Div. 2003)
(holding that the payoff-quote fee of $25 was not permissible under state law); see also Ga. CODE
ANN. § 7-6A-3(4) (2004) (generally prohibiting a payoff fee but allowing a limited fee of $10 if the
borrower requests a faxed copy of the payoff amount or has made other recent payoff requests).

184, In re Stewart, 391 B.R. 327, 344-45 (Bankr. E.D. La. 2008).

185, See Michael LaCour-Little, The Evolving Role of Technology in Mortgage Finance, 11 3.
HOUSING RES. 173, 192 (2000) (“Payoff requests can be handled by incorporating the related fax-
back technology, in which printed payoff statements (as would be required for a refinance loan) can
be automatically faxed back to a telephone number entered during the same automated telephone
transaction.”).

186, The standard Fannie Mae note seems to prohibit the pyramiding of late fees, stating that
the borrower will pay a fate charge “only once on each late payment.” See Fannie Mae Standard
Instruments, supra note 165. Some transactions use different notes (and thus, it is important that a
copy of the note accompanies the proof of claim), and some servicers may not honor the terms of
the notes, either intentionally or inadvertently.

187, See JOHN RAO ET AL, NAT'L CONSUMER LAW CTR., FORECLOSURES: DEFENSES,
WORKOUTS, AND MORTGAGE SERVICING 154-55 (2d ed. 2007) (discussing the use of suspense
accounts).

188. The instruction on the proof-of-claim form says that the claimant “must attach to this proof
of claim form copies of documents that show the debtor owes the debt claimed.” Official
Bankruptcy Form 10 (2007), supra note 41. This arguably requires not just the note to show the
existence of the original debt, but also a current payment history that supports that the debtor
actually owes the amount of the claim.

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judges not enjoy this status.‘ Further, district judges lie on the same
level as BAPs on the bankruptcy appellate hierarchy." In short, it
seems that district judges will think of BAPs as coequals in terms of
hierarchy at best, and as subordinates at worst. Accordingly, we think
it comparatively less likely that district judges, as opposed to other
federal judges, would look to opinions authored by BAPs as opposed to
district judges. It is on these bases that we preliminarily offer
Hypothesis 6.

Given our hypotheses that other courts within the bankruptcy
judicial structure are more likely to cite to BAP opinions (with the
exception of Hypothesis 6), we further hypothesize that the underlying
motivations prompting such citation practices will also lead these
courts to discuss BAP opinions in greater detail and to cite to BAP
opinions with more immediacy. We thus propose Hypotheses 9 and 10.

We now turn to evidence from the findings of our study and use
that evidence to evaluate our hypotheses empirically.

TIL. EMPIRICAL ANALYSIS OF THE PERCEIVED QUALITY OF APPELLATE
REVIEW: EVIDENCE FROM APPELLATE BANKRUPTCY OPINIONS

This Part presents the results of our empirical study of
appellate bankruptcy opinions issued both at the first-tier and second-
tier levels of appellate review in the bankruptcy judicial system. We
test the hypotheses discussed above in Part II.B through the use of
quantitative methodology and look for patterns that point to a
relationship between the type of appellate court and the manner in
which others perceive the quality of review provided by the court. In
doing so, we seek to evaluate the theoretical assumptions that have
evolved regarding those attributes considered to improve the quality
of appellate review. We emphasize, however, that we do not purport to
provide either a definitive or exhaustive account. We readily admit
that we have chosen to study a narrow set of data from a snapshot in
time that is not necessarily representative of the general universe of
bankruptcy appeals. Aware of these limitations, we nonetheless have
strong convictions that a great deal of valuable information can be
gleaned from the data and that this information will help guide future
discussions. Ultimately, our goal is to begin a shift away from
generalization and abstraction and to generate a more concrete

114. See supra note 37 and accompanying text.
116. See supra fig.1.

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138 Texas Law Review (Vol. 87:121

bankruptcy court confirming a
develop appropriate technology.

Some courts also have targeted the creditors’ law firms for
misbehavior." A New Jersey law firm was fined for filing 250 court
pleadings in which the signature page had been pre-signed before review by
the servicer.'* The court’s opinion sternly reminds servicers and attomeys
that technological “advances” do not absolve the responsible humans of their
duties to the court.'© Another court has observed “instances in which
attorneys representing alleged mortgagees or their servicing agents did not
know whether the client was a mortgagee or a serving agent, or how their
client came to acquire its role.”"”” In addition, several class action lawsuits
have been filed based on allegedly inappropriate efforts to collect attorneys
fees in bankruptcy.'®*

When problems are systemic, private lawsuits may be an ineffective
solution. The Federal Trade Commission (FTC) joined the National
Consumer Law Center in bringing a class action lawsuit against a large ser-
vicer, Fairbanks Capital Corporation, for alleged violations of consumer-
protection laws.’ The lawsuit settled in 2003 after Fairbanks agreed to pay

lan cannot be excused by the failure to

103. See, eg, Payne v. Mortgage Elec. Registration Sys. (In re Payne), 387 B.R. 614, 625
(Bankr. D. Kan, 2008) (focusing on the fact that the creditor did not change its accounting when a
homeowner filed bankruptcy, and describing how the creditor misapplied the debtor's Chapter 13
plan payments); Nosek v. Ameriquest Mortgage Co. (In re Nosek), 363 B.R. 643, 650 (Bankr. D.
Mass. 2007) (rejecting computer-software shortcomings as an excuse for failing to correctly apply
the debtors" payments).

104. See, eg, In re Allen, No, 06-60121, stip op. at 7-8 (Bankr. S.D, Tex. Jan. 9, 2007)
(finding that a large creditor's law firm had filed an erroneous and unsubstantiated objection to a
plan's confirmation).

105. In re Rivera, 342 B.R. 435, 463-64 (Bankr. D.N.J. 2006).

106, id, at 467; see also Allen, No. 06-60121, slip op. at 7 (describing the close relationship
between servicers and their “outside” counsel, who receive some pleadings ‘‘set up” with data from
the servicer's computer system).

107. Jn re Schwartz, 366 B.R. 265, 266 (Bankr. D. Mass. 2007). In Schwartz, the “creditor”
claimed to have foreclosed before the bankruptcy filing but was ultimately unable to show that it
hhad the nght to undertake any foreclosure activity. 1d, at 269.

108. See Harris v. First Union Mortgage Corp. (In re Harris), Case Nos. 96-14029-MAM & 00-
11321-MAM.-13, Adv. No. 99-1144, 2002 Bankr. LEXIS 771, at *10, *13, 30 (Bankr. S.D. Ala.
May 10, 2002); Slick v. Norwest Mortgage Inc. (In re Slick), Case No. 98-14378-MAM, Adv. No.
99-1136, 2002 Bankr. LEXIS 772, at *11-12, *25 (Bankr S.D. Ala. May 10, 2002) (both refusing
to award attomeys fees to a mortgagee for proof-of-claim-preparation fees that were not fully
disclosed to the mortgagor). In Nevada, a proposed class action suit was filed to challenge Ocwen
Federal Bank's practice of including a “proof of claim fee” in claums filed in Chapter 13 cases; the
case was transferred to the Panel on Multidistrict Litigation and remains pending. See /n re Dunlap,
Case No, 03-14317, Adv. No, 03-1429, slip op. at 1-4 (Bankr. D. Nev. Jan. 26, 2005) (describing
the facts of the case).

109. The National Consumer Law Center's Web site lists the Fairbanks Capital Corp. case as
‘one of its recent successes and provides the pertinent case documents. Nat’l Consumer Law Ctr.
Examples of NCLC’s Litigation, —http://www.consumerlaw.org/action_agenda/cocounseling/
ccamples_litigation.shtml#fairbanks; see also Complaint for Permanent Injunction and Other
Equitable Relief and Monetary Civil Penalties at 1~2, United States v. Fairbanks Capital Corp., No.
03-1219 (D. Mass. Nov. 12, 2003), available at http:/www.consumerlaw.orgyinitiatives!

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2008) INVESTIGATING APPELLATE STRUCTURE 1757

resolve these cases definitively, in the first instance, with appellate
review to follow.TM Here, however, there may be more than one possible
appellate path.

The statute authorizes the judicial council of each circuit to
establish a “bankruptcy appellate panel’—commonly known as a
“BAP”—comprised of bankruptcy judges from that circuit.5' BAPs are
now constituted—and have been constituted since 1996—in the First,
Sixth, Eighth, Ninth, and Tenth Circuits.5? For a BAP to be
empowered to hear appeals from bankruptcy courts in a given district,
a majority of district judges in the district must vote to authorize it.5
In circuits that have created BAPs and in districts that have
authorized the BAP to hear appeals, the default rule is that, unless a
party elects otherwise, appeals of bankruptcy judges’ rulings in core
proceedings will lie to the BAP.54 Appeals from BAP rulings lie to the

of claims, (8) objections to discharge, and (4) plan confirmation. Id. § 157(b)(2) (2000 & Supp. V
2005).

50. Id. § 167(b)(1) (2000). Unless, that is, the district court withdraws the reference to the
bankruptey court. Jd. § 157(d). In that case, the district court hears the matter in the first
instance, with appeals in the ordinary course lying to the court of appeals and then the Supreme
Court. See supra notes 47-48

61. 28 U.S.C. § 158(b)(1). The statute also authorizes the creation of intercircuit BAPe, id.
§ 158(0)(4), but none has yet been created. Much as the bankruptcy court is a unit of the district,
court, the bankruptcy appellate panel may be seen as “a unit of the federal courts of appeals.”
Admin. Office of the U.S. Courts, The Federal Judiciary—United States Courts of Appeals,
Bankruptcy Appellate Panels, http:/iwww.uscourts.govicourtsofappeals/bap.htm! (last visited Oct.
11, 2008); see also 28 U.S.C. § 158(b)(1) (requiring BAPs to be established and BAP judges to be
appointed by the circuit judicial council); BAP. 8TH Cir. R. 8016A(a)(1) ("The Clerk of the
United States Court of Appeels for the Eighth Circuit shall serve as the Clerk of the United
States Bankruptcy Appellate Panel for the Eighth Circuit.”). Compare Coyne v. Westinghouse
Credit Corp. (in re Globe Ilumination Co.), 149 B.R. 614, 620-21 (Bankr. C.D. Cal. 1993)
(describing BAP as unit of the circuit court), with Kathleen P. March & Rigoberto V. Obregon,
Are BAP Decisions Binding on Any Court?, 18 CAL. BANKER. J. 189, 197 (1990) (describing BAP as
unit of the district court),

52. The 1994 amendments to the Bankruptey Code were designed to encourage circuit
to create BAPs by directing that each circuit “shall establish” a BAP unless the circuit
judicial council finds that existing judicial resources are insufficient to establish one or that its
establishment would result in undue delay or increased cost to parties in cases under the
Bankruptcy Code. 28 U.S.C. § 158(b)(1). The six regional circuits that voted against establishing
BAPs “concluded that the appellate process was functioning well as already constituted and that
BAPs would create undue delay or increase the cost of appeals.” Henry J. Boroff, The
Precedential Effect of Bankruptcy Appellate Panel Decisions, 103 COM. L.J. 212, 214 n.10 (1998)
(citing Elizabeth Abbott, Bankruptey Review Panel Makes Debut, NATL L.J., Mar. 3, 1997, at
B1). For a historical discussion of BAPs, see Bryan T. Camp, Bound by the BAP: The Stare
Decisis Effects of BAP Decisions, 34 SAN DIEGO L. REV. 1643, 1648-60 (1997); infra note 75.

53. 28 U.S.C. § 158(b)(6). In the mid-19908, when a Second Circuit BAP was in existence,
“only three districts participate[d]—and these together typically receive{d} less than a third of all
bankruptcy petitions filed in the Second Circuit.” Camp, supra note 52, at 1660. These facts,
presumably, played a large role in the ultimate decision to disband the Second Circuit BAP.

54, 28 U.S.C. § 158(c){1) (2000 & Supp. V 2005).

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Misbehavior and Mistake in Bankruptcy Mortgage
Claims

Katherine Porter”

The greatest fear of many families in serious financial trouble is that they
will lose their homes. Bankruptcy offers a last chance for families to save their
homes by halting a foreclosure and by repaying any default on their mortgage
loans over a period of years. Mortgage companies participate in bankruptcy by
filing proofs of claim with the court for the amount of the mortgage debt. To
retain their homes, bankruptcy debtors must pay these claims. This process is
well established and, until now, has been uncontroversial. The assumption is
that the protective elements of federal bankruptcy shield vulnerable homeowners
from harm.

This Article examines the actual behavior of mortgage companies in
consumer bankruptcy cases. Using original data from 1,700 recent Chapter 13
bankruptcy cases, I conclude that mortgage companies frequently do not comply
with bankruptcy law. A majority of mortgage claims are missing one or more of
the required pieces of documentation for a bankruptcy claim. Furthermore, fees
and charges on claims often are poorly identified, making it impossible to verify
if such fees are legally permissible or accurate. In nearly all cases, debtors and
mortgage companies disagree on the amount of outstanding mortgage debt.

Despite these irregularities, mortgage claims in bankruptcy are contested
infrequently. Imposing unambiguous legal rules does not ensure that a system
will actually function to safeguard the rights of parties. The findings of this
Article are a chilling reminder of the limits of formal law to protect consumers.
The observation that laws can underperform has crucial implications for
designing legal systems that function as intended and for evaluating the
appropriate scope of consumer protections.

+ Associate Professor of Law, The University of lowa College of Law. David Baldus, Patrick
Bauer, Robert Lawless, Lynn LoPucki, Ronald Mann, and Elizabeth Warren provided helpful
comments om this Article. I thank Tara Twomey for her participation as co-investigator in
developing the Mortgage Study database, and Ann Casey for invaluable assistance in data collection
and analysis. John Eggum, Sarah Hartig, Kati Jumper, Chris Jerry, Gina Lavarda, Brian Locke, and
‘Nece McDaniel provided research assistance.

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2008) Misbehavior and Mistake in Mortgage Servicing 127

servicing, and they have virtually no ability to change servicers if they are
dissatisfied with the servicers’ conduct.'? The only exit strategy for a
dissatisfied borrower is refinancing the mortgage, and even then, the
homeowner may find the new loan assigned to the prior servicer.” Because
their customers are the trustees who hire them to collect on behalf of
investors, servicers have few reputational or financial constraints pushing
them to work to satisfy homeowners with their performance.”"

In fact, servicers have a financial incentive to impose additional fees on
consumers. Mortgage servicers earn revenue in three major ways. First, they
receive a fixed fee for each loan. Typical arrangements pay servicers
between 0.25% and 0.50% of the note principal for each loan.’? Second,
servicers earn “float” income from interest accrued between when consumers
pay and when those funds are remitted to investors.” Third, servicers often
are permitted to retain all, or part, of any default fees, such as late charges,
that consumers pay.”* In this way, a borrower’s default can boost a servicer’s
profits. A significant fraction of servicers’ total revenue comes from
retained-fee income.” Because of this structure, servicers’ incentives upon
default may not align with investors’ incentives.® Servicers have incentives
to make it difficult for consumers to cure defaults.

A consumer is only obligated to pay charges if the charges are permitted
by the terms of the mortgage and by state and federal law. To validate such
charges, consumers must know how the servicer calculated the amount due
and whether such fees are consistent with their loan contracts. A lending
industry representative has admitted that “[mJost people don’t understand the

originating lender. See Jack M. Guttentag, A Mortgage Servicing System for Borrowers?, http://
wwew.migprofessor.comvA%20-%20Servicing/a_servicing_system_for_borrowershtm (“The great
majority of loans today are serviced by firms that don't own them.”).

19. Jack M. Guttentag, Why Is Mortgage Servicing So Bad?, http://www.mtgprofessor.
com/A%20-420Servicing/why_is_servicing_so_bad.htm (last modified Dec. 13, 2004) (explaining
that borrowers cannot easily choose a servicer based on the quality of servicing, nor ean they fire a
servicer for poor servicing).

20. See id. (describing borrowers’ inability to select their mortgage servicers).

21. id.

22, NAT'L CONSUMER LAW CTR., FORECLOSURES 148 (2d ed. 2007).

23. Kurt Eggert, Comment on Michael A. Stegman et al.’s “Preventive Servicing Is Good for
Business and Affordable Homeownership Policy”: What Prevents Loan Modifications?, 18
HOUSING PoL’y DEBATE 279, 286 (2007).

24, Eggert, supra note Li, at 758.

25. Some information can be gleaned from the securities filings of public companics that
service mortgages. Late charges accounted for approximately 11% of revenues for Ocwen’s
residemtial-mortgage-servicing division in 2006. See Ocwen Fin. Corp., Annual Report (Form 10-
K), at 30 (Mar. 16, 2007); ef RONALD J. MANN, CHARGING AHEAD 23 (2006) (reporting that
credit-card issuers ear 9% of their revenue from penalty fees).

26. See Hearing, supra note 12, at 9 (describing the conflicting interests of the participants in a
securitization).

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2008) INVESTIGATING APPELLATE STRUCTURE 1753

The two-tiered system of bankruptcy appeals is an excellent
field for an empirical investigation of how alternative appellate
structures may affect the quality of appellate review. The current
appellate structure provides for appeals of bankruptcy court decisions
in “core” bankruptcy proceedings to be heard by one of two appellate
tribunals: federal district courts or federal bankruptcy appellate
panels (commonly referred to as “BAPs”). Based on the criteria we
identified above in Part I, we conclude that the BAP is the stronger of
the two appellate courts—that is, better equipped to carry out the
principal function of identifying alleged error. We investigate this
hypothesis through the study of appeals in core bankruptcy
proceedings. We seek to unearth evidence that will inform scholarly
inquiry into the hallmarks of quality appellate review and that will
illuminate areas warranting further exploration.

This Part sets the backdrop for our empirical study. First, we
describe the bankruptcy judicial structure, with primary emphasis on
the manner in which appeals progress through it. We then discuss our
approach for empirically investigating the theoretical proposition that
BAPs are the stronger of the two appellate courts in performing
appellate function at the first tier of review. We finally develop a
series of hypotheses to test the theory.

A. The Bankruptcy Appellate Process

Unlike any other part of the federal judicial system, the
bankruptcy appeals process routinely involves two levels of
intermediate review. This anomalous state of affairs can be traced to
congressional reform efforts during the 1970s that sought to improve
the quality of the bankruptcy court while simultaneously maintaining
it in a subordinate relationship to the district court.

Under the predecessor to the current Bankruptcy Code, the
Bankruptcy Act of 1898,% district courts delegated much of their
responsibility over bankruptcy cases to “bankruptcy referees,”
individuals appointed by a panel of district judges for a six-year
term. The limited role and status of the referees at the inception of
the Bankruptcy Act expanded over time, which in turn increased the
cadre of full-time judicial officers involved in the administration of

28. See Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96
MICH. L. REV. 47, 128 (1997) (noting that the “double appeal system was a concession to the
federal judges, a symbol of the subordination of the bankruptcy court to the district court”).

24, See Act of July 1, 1898, ch. 641, 30 Stat. 544 (repealed 1978).

25. Posner, supra note 23, at 61-62.

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2008) Misbehavior and Mistake in Mortgage Servicing 155

Table 1: Actual Fees from Mortgagees’ Claims

Description District Fee Amount
Attomeys fees Wester District of Virginiae $31,273
Bankruptcy fees & costs | Northem District of Georgia $2,275
Broker price-opinion fee | Eastern District of Arkansas $1,489
Demand fee District of Massachusetts $145
Overnight delivery Eastern District of Michigan $137
Payoff-statement fee Southern District of California $60
Fax fee Eastern District of Virginia $50

The law constrains the charges that debtors must pay in several ways.
Based just on their descriptions and amounts, the fees in Table 1 appear
vulnerable to legal challenge. Yet, none of these claims were objected to by
any party in the bankruptcy proceedings. The law’s various limits on fees
were never invoked to test the validity of these charges.

The first legal constraint on fees and charges is private contract law.
The note and mortgage themselves are agreements that limit the parties’
obligations.'® Most mortgage notes only obligate the borrower to pay the
lender for “reasonable” costs incurred to collect on the debt or enforce the
security interest.'! The standard mortgage permits the lender, upon default
(including a bankruptcy filing) to “do and pay for whatever is reasonable or
appropriate” to protect the lender’s interest in the property and rights under
the security agreement.' While this language is quite broad, it is not

180, This point reinforces the problems created when claims are not supported by this
documentation, particularly for subprime loans that do not conform to Fannie Mae's or Freddie
Mac’s standards.

181. For example, one of the notes from a Tennessee case included in the Mortgage Study
sample contains the following language: “COSTS OF COLLECTION AND ATTORNEYS’
FEES—I agree to pay you all reasonable costs you incur to collect this debt or realize on any
security. This includes, unless prohibited by law, reasonable attomeys' fees.”

182, See Fannie Mec Standard Instruments, supra note 165. In almost all states, the Fannie
Mae standard instrument provides:

If {Borrower defaults (including by filing bankruptcy)], then Lender may do and pay
for whatever is reasonable or appropriate to protect Lender’s interest in the Property
and rights under this Security Instrument, including protecting and/or assessing the
value of the Property, and securing and/or repairing the Property. Lender’s actions can
include, but are not limited to: (a) paying any sums secured by a lien which bas priority
over this Security instrument; (b) appearing in court; and (c) paying reasonable

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2008) Misbehavior and Mistake in Mortgage Servicing 125

industry.’ The written law contains clear instructions, and parties are given
the opportunity to object to inappropriate conduct. Indeed, the claims
system has functioned for decades without generating calls for reform. Yet
these data show that reality is far from the ideal suggested by these external
markers of system reliability. These data show that there are significant
defects in the bankruptcy system, a chilling reminder that imposing
unambiguous legal rules does not ensure that a system will actually function
to protect the rights of parties. In the context of consumer transactions—
where individuals are not repeat players or institutional actors—the
observation that laws underperform has crucial implications that echo far
beyond bankruptcy policy. An effective legal system requires more than
merely putting words into law and then relying on silence as an indication of
acceptable and just behavior. These data show that effective enforcement
mechanisms or structural incentives for industry compliance can be as
important as the rigor of substantive rules.

Part I of this Article examines the incentives for mortgage servicers to
comply with applicable laws and describes reported incidences of abusive
servicing. Part II describes the Study’s methodology. Part TI presents
original data on the legality and accuracy of mortgage claims. These data
show a high incidence of unreliable servicing behavior, even in the context of
the heightened procedural protections in bankruptcy. Part [V develops the
policy implications of the findings and proposes structural solutions to
reduce the risks that poor mortgage servicing imposes on homeowners and
the legal system. Without improved procedures and enforcement activity,
homeowners in financial trouble—both inside and outside of bankruptcy—
remain vulnerable to mortgages’ misbehavior and mistakes.

I. Statement of the Problem

Americans pursue home ownership to build wealth and to improve their
financial positions. The explosion of subprime lending and the rapid
maturation of the securitization market for mortgages have fueled occasional
criticisms of mortgage servicers, who are the intermediaries between
consumers and mortgage holders.’ Consumers have complained of over-
charges and difficulty in obtaining accurate loan information. Increasingly,
these problems erupt into litigation, most frequently in bankruptcy courts.
Although policy makers have focused on loan origination,”® consumers can

7. See MARGARET HOWARD, BANKRUPTCY: CASES AND MATERIALS 44 (4th ed. 2005) (noting
that bankrupicy law attempts to protect the interests of both debtors and creditors).

8 See infra notes 228-29 and accompanying text.

9. 1p this Article, I refer only to servicers, but lenders who service their own loans may behave
similarly to third-party servicers.

10. See, e.g., Press Release, lowa Attorney Gen., States Settle with Houschold Finance: Up to
$484 Million for Consumers (Oct. 11, 2002), available at hitp://wwwstate.ia.us/governmentl
ag/latest_news/releases/oct_2002/Household_Chicago.html (reporting that the multistate settlement
with morgage lender Household Finance Corp., for its misrepresentation and disclosure violations

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In addition to the issues specifically reviewed in this study, many other
questions may arise in completing the official forms:

How should the debtor disclose those matters that change
often, or even daily, such as cash on hand and deposits in
financial institutions?!

How much detail is required in disclosing household
goods??85

How much detail is required in disclosing wearing
apparel?386

How much detail is required in disclosing information relat-
ing to unsecured creditors regarding the date the claim was
incurred and the consideration for the claim, especially when
the debt is on a credit card?!87

How should a debtor estimate current monthly income, es-
pecially when the debtor's hours and overtime are
uncertain?88

Should the debtor's disclosure of property held for another
person include property of the minor children in the
household?189

These are only examples of the issues that debtors and their attorneys
face in attempting to respond to the legal requirements of filing bankruptcy.
There may well be similar questions of interpretation for every disclosure
requirement. Even regarding a matter as simple as prior names used by the
debtor,"5° a question can arise about disclosing a prior corporate name that
the debtor used. Or, concerning the disclosure of the debtor's social security
number, a debtor may face an issue of whether to disclose an incorrect
number attributed to the debtor by a creditor.

These and other difficulties with the official forms reviewed below can be
addressed both nationally and locally.

‘Official Bankruptcy Form 6, schedule B, lines 1 and 2.

"851d, schedule B, line 4. See, eg, Payne v. Wood, 775 F.2d 202 (7th Cis. 1985}; Mohring, supra, 142
BR. at 395-96 (“The one thing that is certain about chis debtor's lists and schedules is that the generic
listing of ‘houschold goods' worth $1,000 is incomplete and ambiguous. There is no description of the
household goods; they are merely said to be ‘at debtor's residence’ and worth $1,000. This does not
substantially comply with the requirements of Official Porm 6. And it is not adequate to permit the
trustee and creditors to determine whether the property is validly exempt”).

"Official Bankruptcy Form 1, schedule B, line 6.

187id,, schedule F.

88[d, schedule L

850fficial Bankruptcy Form 7, statement of financial affairs, question 14.

°8Official Bankruptcy Form 1, voluntary petition.

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Figure 2: Variation Among Judicial Districts in Attached Documentation

Bottom and Top Quartiles
120%

* 100% . .
i eo% | Ceo i

60% fe] ‘@ Median
40% | .
20% | : ! | a Minimum
0% - 2
Percent of Claims Percent of Claims Percent of Claims
with Itemization with Security with Note
Interest

The variation among districts reinforces concerns about uniformity, a
feature of bankruptcy law that is explicit in the U.S. Constitution’s
Bankruptcy Clause.'®” While uniformity challenges to bankruptcy law have
had little success,'® the variations in claims documentation reveal systematic
differences based on where a debtor files for bankruptcy. While the law is
identical, the realities of compliance vary among judicial districts. Proofs of
claim are another example of a “local legal culture” effect in bankruptcy.’
To the extent that uniformity is crucial to ensure the integrity of the bank-
tuptcy system, creditors’ inconsistent compliance with claims procedures is
troubling. Depending on the place of residence, debtors and their counsel
receive varying amounts of information about mortgage obligations.

The data on proofs of claim show that in at least one important respect
creditor behavior is not uniform, and that the reality of practice does not
match the clear requirements of the law. Despite long-standing and
unambiguous documentation rules that apply in all bankruptcy cases, most
mortgage proofs of claim lack one or more pieces of documentation. This
pattern of noncompliance undermines the purpose of the proof-of-claim rules
and effectively shifts the burden to verify the accuracy of claims to debtors or

167. See US. CONST. art. I, §8, cl. 4 (stating that Congress has the power “to
establish... uniform laws on the subject of bankruptcies throughout the United States”). See
generally Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, 79 AM. BANKR. LJ. 571, 592-94 (2005) (discussing the effect of
the uniformity requirement in the Bankruptcy Clause and the judicial interpretations of what
constitutes uniformity).

168. See Chemerinsky, supra note 167, at 592-94 (cataloging unsuccessful challenges under
the uniformity requirement).

169. See supra note 46 (describing other local-tegal-culture effects in bankruptcy).

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remedy.®” Another court reduced a mortgagee’s claim under the equitable
theory of recoupment after finding that the servicer violated the Real Estate
Settlement Procedures Act®® (RESPA) by failing to respond to the debtor’s
requests for an account balance.” The opinion’s first sentence reveals the
court’s frustration: “Is it too much to ask a consumer mortgage lender to
provide the debtor with a clear and unambiguous explanation of the debtor’s
default prior to foreclosing on the debtor’s house?" In some instances,
creditors have paid the price for their attorneys’ poor record keeping. In Jn
re Hight?’ the court disallowed the portion of a mortgagee’s claim that
pertained to attorneys fees because neither the creditor nor its law firm could
provide evidence of the legal work, such as the hourly rate or the time
spent.” In one egregious case, a mortgage company filed a proof of claim
for more than $1 million when the principal balance on the note was
$60,300.03." The inaccuracy likely stemmed from the claimant’s mistake in
reporting the cost of the insurance policy that the servicer forced on the
debtor after the debtor’s insurance lapsed. These types of problems led a
prominent Chapter 13 trustee to conclude that mortgage servicing in
bankruptcy is in a “sad state.”TM*

Mortgage-servicing problems have surfaced in other procedural
contexts besides proofs of claim. The nature of this misconduct is rarely due
to the posture of the case, however, and similar problems may infect
mortgage claims or nonbankruptcy servicing. For example, bankruptcy
motions for relief from the automatic stay put debtors at direct risk of losing
their homes in a state-law foreclosure action. This context may spur debtors
and their attorneys to respond by confronting servicing inaccuracies that
went unidentified in proofs of claim. Several courts have complained about
unsubstantiated or patently false allegations in mortgagees’ motions for relief
from the stay.°> Courts have lamented mortgage servicers’ practice of filing
motions to vacate the automatic stay based on nonexistent records or
inaccurate information stemming from poor accounting practices, and have

87. Id. at 707-08.

88. 12 USC. § 2617(e\(1) (2006).

89. See In re Thompson, 350 B.R. 842, 852 (Bankr. E.D. Wis. 2006) (explaining that the
debtors could reduce the amount of the claim via recoupment even though RESPA does not
explicitly authorize it)

90. Id. at 844-45,

91. No. 07-36683, 2008 WL 3539802 (Bankr. S.D. Tex. Aug. 13, 2008).

92. Id. at *13.

93. Proof of Claim, In re Farmer, No. 04-35273 (Bankr. D. Mass. June 1, 2004) (on file with
the Texas Law Review).

94. See Hildebrand, supra note 45, at 10.

95. See, eg., In re Schuessler, 386 BR. 458, 492-93 (Bankr. S.D.N-Y. 2008) (imposing,
sanctions requiring the creditor to pay the debtors’ attomeys fees and costs caused by the filing of
an unsubstantiated motion for relief from the stay); In re Parsley, 384 B.R. 138, 180 (Bankr. S.D.
Tex. 2008) (finding that an attorney’s misrepresentation of the stay-relief motion was conducted in
bad fauth, but declining to impose sanctions).

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Nevertheless, on occasion, courts did impose sanctions against attorneys.146
In several cases, joint liability was imposed.'47 However, in several cases
involving inaccurate schedules, courts refused to impose sanctions under this
rule.48

The amended rule effects four substantial changes.'4° First, although the
debtor's attorney is still excused from the signing requirement, the new rule
provides that the act implicating the legal responsibility for a paper is
presenting the paper to the court, whether by signing, filing, submitting or
later advocating it.'5° Second, the new certification that is triggered upon
presentation of the paper is that to the best of that person’s knowledge, infor-
mation and belief, “the allegations and other factual contentions have eviden-
tiary support."51 This may well be interpreted to require a greater standard
of prefiling inquiry than the “well grounded in fact” standard of the old rule.
Thus, taken together, these two changes appear to place on a debtor's attor-

(Bankr. ED, Va. 1995); In re Eatman, 182 BR. 386, 396 (Bankr. S.D.N-Y. 1995); In re Remington Dev.
Group, Inc, 168 BR. 11, 15 Bankr. DRI. 1994); Barnett Bank of Tampa, N.A. v. Muscatell (In xe
Moscatell), 116 BR. 295, 298 (Bankr. MD. Fla. 1990); In re Alderson, 114 BR. 672, 677 (Bankr. DS.D.
1990). See also In re Saturley, 131 BR. 509, 518-19 (Bankr. D. Me. 1991) (“The Chapter 7 debtor's
attorney, although not without obligations regarding the truthfulness and accuracy of documents filed by
‘or on behalf of his client, is specifically relieved of the requirement that he or she sign, and thereby certify,
the debtor's schedules”),

In Eatman, 182 BR. at 396, the court concluded that although sanctions against the attorney were not
appropriate under Rule 9011, the attorney should be sanctioned under 11 USL. § 105 and 28 USC.
§ 1927. See also White v. Mitchell (In te Hardee), 165 F.3d 18 (4th Cir. 1998) (unpublished table deci-
sion available at 1998 WL 766699).

TMIn re Moix McNutt, 220 BR. 631, 636 (Bankr. ED. Atk. 1998); In re Cossey, 172 BR. 597, 601
Banke. ED. Ark. 1994); In re Ridner, 102 BR. 247, 249-50 Bankr. W-D. Okla. 1989); In re Smith, 143
BR. 912, 914 (Bankr. D. Neb. 1992) (“The fact that [debtor's] counsel does not sign bankruptcy schedules
does not provide a justification for counsel to assume the position of ostrich, head buried in the sand, while
client claims exemptions unsupported by law. .. . If claimed exemptions are not supported by law, counsel
is subject to sanctions”} Iannacone v. Hill (in re Hill, 39 BR 599, 601 (Banke. D. Minn. 1984) (che
debtor's attomey was sanctioned $1000 for claiming improper exemptions on schedule C; the court also
relied on 28 USC. § 1927).

‘Estate of Peslbinder v. Dubrowsky (In re Dubrowsky), 206 BR. 30, 36 (Bankr. EDN.Y. 1997); In
te Armwood, 175 BR. 779, 788 (Bankr. N.D. Ga. 1994); In re Pasko, 97 BR. 913, 918 (Bankr. ND. IIL
1988); Snow v. Jones (In re Jones), 41 BR. 263, 268 (Bankr. CD. Cal, 1984). See also National Indem. Co.
v. Proia (In re Proia), 35 BR. 385, 388-89 (Bankr. DRI. 1983).

Min In re Bove, 29 BR. 904 (Bankr. DRL 1983), the petition and schedules contained significant
‘omissions and misstatements, but the court declined to hold the debtors in contempt or to impose mone-
tary sanctions against the debtors, because the capacity and general awareness of one debtor was dimin-
ished and she bore none of the responsibility, and the misrepresentations made by the other debtor were
induced partly by the principal of a consumer credit organization, probably on behalf of an attorney, and
no action was sought against the principal of the credit counseling firm or the attomey.

TMFep, R. BANKR. P. 9011. See Arnold M. Quittner, Current Developments in Bankruptcy and Reor-
ganization: Employment and Compensation of Appointed Professionals, ‘788 Prac. L. Inst/Com. L. &
Prac. Course HANDBOOK Series 561, 971 (1999).

\s0Fyp, R. Banke. P. 9013(b).

‘'Bzp, R. Bankr. P. 9011(b)(3).

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resources or motivation to do so.

Second, if, as the majority of courts hold, the debtor who claims malprac-
tice either knew or should have known of any problems with the papers, it
would seem that an attempt to fault the attorney for the subsequent conse-
quences may not succeed.16* This might be especially so when the conse-
quences were imposed based on a judicial finding of the debtor's fraudulent
intent, such as would be necessary for a criminal conviction for bankruptcy
fraud*5 or denial of the discharge.16*

Third, the estate’s recovery on the debtor's legal malpractice claim may
result in a windfall, because the estate may have actually benefitted from the
malpractice? The prospect of a windfall might impair the viability of the
claim.

Addressing the malpractice remedy for consumer debtors, one bankruptcy
judge recently lamented:

To operate “profitably” in this area, a consumer debtors" law-
yer has to do a high volume business. So if a court suspects
that a chapter 7 lawyer ineffectively represents a client in
one case, that level of poor performance is likely to affect
many other clients. The most frustrating aspect of this judi-
cial position is opening case files on a daily basis and discov-
ering clients who are not effectively represented by their
lawyers. A bankruptcy court should not adopt an existential
posture by wryly or sadly observing: if a chapter 7 debtor
suffers from malpractice, then tort remedies are available to
that victim. Many chapter 7 debtors, in fact, never discover
that their attorneys have committed malpractice.168

‘Sef it is truly the debtor who is attempting to take advantage of the bankruptcy system, then the
debtor's chances of recovering against his professionals are slim.” Swift v. Seidler (fn re Swift), 198 BR.
927, 938 (Bankr. W.D. Tex. 1996).

'85See, eg, Wheeler v. Magdovitz (In re Wheeler), 137 F.3d 299 (Sth Cir 1998); In re Tomaiolo, 205
BR. 10 (Bankr. D. Mass. 1997).

16eSwift, 198 BR. at 937.

‘57s the court stated in Swift, 198 BR. at 937:

Assuming for the sake of argument that the Debtor's contentions are meritorious,
ie, that but for the negligence and breaches of the Defendants the debtor would
have been able to successfully claim his IRA as exempt and would not have been
denied his discharge, then the estate has actually benefitted from the alleged mis-
conduct of the Defendants, Because of the alleged conduct of the Defendants, the
TRA, which would otherwise have been the Debtor's exempt property, became
property of the estate and subject to the claims of the Debtor's creditors. The
Debtor's creditors also benefitted, allegedly because of the Defendants’ actions, in
that the Debtor remains personally liable to them for the full amount of their claims
since his discharge was denied.

+n ve Bruzese, 214 BR. 444, 450 (Bankr. EDN.Y. 1997).

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Table 1: Sample of Appellate Bankruptcy Opinions

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APPENDIX

[Vol. 61:6:1745

Panel A: District Court and Bankruptcy Appellate Panel (BAP) Opinions by Fiscal

Year
Fiscal District Court Column BAP Column
Year Opinions Percentage Opinions Percentage
1998 56 34.57 34 32.08
1999 53 32.72 44 41.51
2000 53 32.72 28 26.42
Total 162 100.00 106 100.00
Source: First-Tier Database
Note: Column percentages may not iotal 100% due to rounding.
Panel B: District Court and Bankruptcy Appellate Opinions by Circuit
Circuit District Column BAP | Column Total | Column
Court Percentage Percentage Percentage
First 7 4.32 10 9.43 17 6.34
Second 32 19.75 5 4.72 37 13.81
Third 26 16.05 0 0.00 26 9.70
Fourth 9 5.56 0 0.00 9 3.36
Fifth 14 8.64 0O 0.00 14 5.22
Sixth 16 9.88 a 10.38 27 10.07
Seventh 23 14.20 0 0.00 23 8.58
Eighth 2 1.23 22 20.75 24 8.96
Ninth 14 8.64 31 29.25 45 16.79
Tenth 7 432 | 27 25.47 34 12.69
Eleventh 12 741 0 0.00 12 4.48
District of 0 0.00 0 0.00 0 0.00
Columbia
Total 162 100.0 } 106 100.00 | 268 100.00
Source: First-Tier Database
Note: Column percentages may not total 100% due to rounding.
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First, consider our findings that, even when holding other
variables at their mean, the likelihood of some affirmance (whether in
part or in full) by the court of appeals is predicted to increase from
77% for district courts to 93% for BAPs, and that the likelihood of full
affirmance by the court of appeals is predicted to increase from 69%
for district courts to 85% for BAPs.'” Given that affirmance deference
has been documented to be a major determinant of circuit court
outcomes,'”! the statistically significant difference in affirmance rates
takes on added significance. While legal procedural requirements
generally require a court of appeals to accord deference to a lower
court’s findings of fact, the legal standard most often applicable to a
lower court’s conclusions of law—de novo review—calls for no such
deference. If courts of appeals affirm BAPs at a statistically significant
greater rate than district courts, notwithstanding the affirmance bias
created by legal review standards, our results suggest that the circuit
courts perceive the BAP to perform its error-finding function better
than the district court.172

Second, consider our statistically significant findings that BAP
opinions received higher numbers of positive citations by other federal

170. See supra Part III.C.1.

171. See CROSS, supra note 95, at 39-68.

172. A study conducted by the Federal Judicial Center found that courts of appeals fully
affirmed the judgments of district courts in bankruptcy appeals approximately 73% of the time,
and the study further estimated that the affirmance rates for BAP judgments would be simi
See McKenna & Wiggins, supra note 65, at 630. We conclude that our statistically significant
evidence contravenes the prior understanding of outcomes in the bankruptcy appeals system,

In response to the account we have provided regarding circuit court affirmance, one might
argue that courts of appeals simply prefer to reduce their workload and that they accordingly
tend to defer to BAPs (even if the legal standard calle for more exacting review). Assuming,
however, that the predilection toward leisure does not outweigh the desire of courts of appeals to
resolve appeals correctly, then one must assume that, to the extent that courte of appeals
affirm—and, on this story, defer to—BAPs more than district courts, they do so because they
believe that BAPs are structurally more likely to resolve the issues correctly than are district
courts. It is true that, to the extent that the courts of appeals simply defer to BAPs to a greater
extent on principle (i.e., with less review of how the BAPs actually resolve particular cages), we
cannot say whether the affirmance rate measures actual quality of appellate review. Even on
this story, however, the affirmance rate does measure the perceived quality of appellate review.

One also might argue that courts of appeals in BAP circuits are heavily invested in the
success of the BAPs given that the judicial councils in those circuits have decided to establish
BAPs in the first instance, see 28 U.S.C. § 158(6)(1) (2000) (setting forth procedures for
establishing a BAP), and given that the judicial councils have also selected the bankruptcy
judges who will serve on the BAPs, see id. § 158(b)(3) (setting forth procedures for selecting BAP
judges). The desire to legitimate the BAP as an institution, in other words, may motivate the
greater tendency of courts of appeals to affirm BAPs, Insofar as review by a court of appeals is
transparent, however, it is unlikely that the court would simply affirm BAP judgments and
reasoning that were obviously wrong. Put another way, it seems unlikely that the desire of a
court of appeals to legitimate a BAP would entirely outweigh the desire to resolve appeals
correctly.

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tenure, their terms last fourteen years.> Moreover, their
appointments may be renewed,’ and indeed in most cases are
renewed.7” While judicial independence may be fostered by life tenure,
the renewable, fourteen-year term of bankruptcy judges effectively
allows them to serve as long as many of their Article III
counterparts.” Even if the absence of life tenure gives Congress
leeway to reduce the term of bankruptcy judges””—an option that it
has never exercised since it created the bankruptcy courts—the
fourteen-year, renewable term still grants a fair amount of judicial
independence to bankruptcy judges.

Second, the Judicial Code prescribes that a bankruptcy judge
may be removed “only for incompetence, misconduct, neglect of duty,
or physical or mental disability,”®! whereas the Constitution mandates
that an Article III judge will hold his or her office only “during good
Behaviour.”®? The broad language of the good-behavior standard for

75, 28U.S.C. § 162(a)(1) (2000 & Supp. V 2005).

76, See Federal Courts Improvement Act of 1996, Pub. L. No. 104-317, § 303, 110 Stat.
9847, 3852 (providing that, “{w]hen filling vacancies, the court of appeals may consider
reappointing incumbent bankruptcy judges under procedures prescribed by regulations issued by
the Judicial Conference of the United States’).

71. See Mabey, supra note 62, at 107 (noting that, of the 116 bankruptcy judges who left the
bench in the decade prior to 2005, only 10 did eo as a result of not being reappointed); see also
U.S. Court of Appeals for the Ninth Circuit, Bankruptey Judge Reappointment Regulations § 1(e)
(2001), available at http://207.41.19.16/Web/OCELibra.nsf (follow “Bankruptcy” hyperlink; then
follow “Bankruptcy Judge Reappointment Regulations” hyperlink) (last visited Oct. 25, 2008)
(providing that “[t]he court of appeals shall decide whether or not to reappoint the incumbent
[bankruptcy] judge before considering other potentially qualified candidates” (emphasis added)).
To the contrary, one might argue that the fact that bankruptcy judges must seek, and generally
receive, reappointment, demonstrates the absence of judicial independence.

78. See In re Grabill Corp., 976 F.2d 1126, 1129 (7th Cir. 1992) (Easterbrook, J., dissenting)
(Rhetoric about life tenure notwithstanding, there is no substantial difference between the 14-
year term to which bankruptcy judges aro appointed and service ‘during good Behavior’ for
Article III judges.”). Article III judges (other than Supreme Court Justices) whose service on the
federel bench terminated between 1983 and 2008 served, on average, twenty-four years. Judith
Resnik, Judicial Selection and Democratic Theory: Demand, Supply, ond Life Tenure, 26
Carnoz0 L. REV. 579, 618 chart 4 (2005).

79, While Congress may reduce the duration of the fixed-term appointment for bankruptcy
judges at any point via statute, the constitutionally guaranteed life tenure granted to Article II]
judges could only be stripped away via constitutional amendment (an exponentially more
difficult proposition)

80. See COMM'N ON THE BANKR, LAWS OF THE U.S., REPORT OF THE COMMISSION ON THE
BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. NO. 93-137, pt. 1, at 95 (1973) (proposing
various reforms “to enhance the real and apparent judicial independence of bankruptcy judges,”
including “[e}xtension of the term of the bankruptcy judges from the present six years to the
proposed fifteen years”); cf. Nash, supra note 20, at 2196 (observing that “one can question the
degree to which life tenure in fact secures for judges a larger measure of judicial independence”).

81, 28U.S.C. § 152(e) (2000).

82, U.S. CONST. art. IIT, § 1.

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FIGURE 5
PREDICTED PROBABILITIES FOR FULL AFFIRMANCE

District Court BAP

8 3
2¢ $
5
2
g a 8
a
3
EH g g
ée 2

° °

o123 45678 91 o123 4567891

Predicted Probability for Full Affirmance:

‘Source: Affirmance Database

2. Positive Citing References by Other Federal Courts

To further explore (1) the decision of federal courts to cite
positively to the opinions issued by first-tier appellate courts, (2) the
extent to which they do so, (3) the manner in which they do so, and (4)
the immediacy with which they do so, we construct a series of binary
logistic regression models as well as various count regression models
(e.g., negative binomial and Poisson). First, we examine whether the
association between the identity of the first-tier appellate court and
positive citation to its opinion persists when controlling for other
factors. For all 286 observations in the first-tier database, we use a
binary logistic regression model to predict whether a federal court will
have cited positively to the first-tier appellate opinion (coding opinions
with no positive citations as 0 and coding opinions with at least one
positive citation as 1) based on the following independent variables:
(1) Court; (2) whether the first-tier appellate court fully affirmed the
disposition rendered by the bankruptcy court (negative responses

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FiGure 7
COMPARISON OF OBSERVED AND PREDICTED COUNTS OF
Positive CITATION TO FiRST-TIER APPELLATE OPINIONS
BY ALL FEDERAL COURTS AND EXTRACIRCUIT FEDERAL COURTS

i
é°
3
&
3 “
ia
°
0 2 4 6 8 0 12 %4 16 18 20 22
Number of Federal Court Citations
—e— Observed Proportion
—2— Zero-Truncated Negative Binomial Prediction
‘Source: rt Tir Databave
=
2
go
&
6
Sa
ine

o 12 3 4 5 6 7 8B 9 10 14 12 13
Number of Extracircuit Citations

—*— Observed Proportion
—*— Negative Binomial Prediction
Source: Frst-Ter Database

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124 Texas Law Review [Vol. 87:121

unambiguous federal rules designed to protect homeowners and ensure the
integrity of the bankruptcy process,’ mortgage companies frequently fail to
comply with the laws that govern bankruptcy claims. A majority of
mortgage companies’ proofs of claim lack the documentation necessary to
establish a valid debt. Fees and charges on bankruptcy claims often are
identified poorly and sometimes do not appear to be legally permissible. On
an aggregate level, mortgage creditors assert that bankrupt families owe them
at least $1 billion more than the families who file bankruptcy believe they
owe.? Although infractions are frequent and irregularities are sometimes
egregious, the bankruptcy system routinely processes mortgage claims that
do not comply with legal procedures. Far from serving as a significant check
against mistake or misbehavior, the bankruptcy system routinely processes
mortgage claims that cannot be validated and are not, in fact, lawful.

The data revealed here are important because they offer a rare glimpse
into the high-stakes world of mortgage servicing. Whether a bankrupt family
can save its home turns on the family’s being able to find the money to cure
its mortgage arrearage. The data on missing documentation, unsubstantiated
fees, and discrepancies in record keeping, combined with the growing body
of case law penalizing mortgage servicers for their conduct in bankruptcy
cases, raise the specter that many bankrupt families may be overcharged or
may unfairly lose their homes. Such realities undermine bankruptcy’s core
purpose of helping financially distressed families save their homes.°

The misbehavior and mistakes of mortgage servicers that this Article
identifies in the bankruptcy data are not specific to the bankruptcy process.
Indeed, the reliability of mortgage servicing may be worse for ordinary,
nonbankrupt Americans. When these families face foreclosure, they lack the
safeguards of the bankruptcy system—such as specific and uniform federal
laws, bankruptcy trustees, specialized federal courts, and the representation
of counsel—that are intended to ensure that mortgage servicers are com-
plying with consumer-protection laws. This Article's findings suggest that a
flawed system of mortgage servicing is a key contributor to the current crisis
in the American home-mortgage market. Crafting an effective policy re-
sponse to help homeowners requires that regulators and policy makers
recognize how poor mortgage servicing can threaten families’ efforts to save
their homes.

The evidence that unreliable mortgage servicing is pervasive provides a
powerful lesson on the limits of formal law. The procedures for bankruptcy
claims were thoughtfully designed to balance the concems of consumers and

4. See,e.g., In re Matus, 303 B.R. 660, 675 (Bankr. N.D. Ga. 2004) ("The [bankruptcy] statutes
are designed to msure complete, truthful and reliable information is put forward at the outset of the
proceedings, so that decisions can be made by the parties in interest based on fact rather than
fiction.” (quoting /n re Braicher, 289 B.R. 205, 218 (Bankr. M.D. Fla. 2003))).

5. See infra text accompanying note 224.

6. See WARREN & WESTBROOK, supra note 2, at 306 (explaining that nearly every state had
ranted some level of protection from creditors by the end of the nineteenth century).

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656 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

as may be appropriate."?

In addition, the Code and the Rules create a special obligation on the
debtor in disclosing assets. Section 521(3) obligates the debtor to “cooperate
with the trustee as necessary to enable the trustee to perform the trustee's
duties."° Under Rule 2015(a)(1), the trustee's duties include filing a com-
plete inventory of the debtor’s property, if that has not already been done.!*
Further, Rule 4002(4) specifically requires the debtor to “cooperate with the
trustee in the preparation of an inventory.”!?

Very little official comment is available relating to the purposes of the
required disclosures. The purposes of the disclosures are not discussed in the
advisory committee notes to Bankruptcy Rules 1007 or 9009. The advisory
committee note to Official Bankruptcy Form 1 (the voluntary petition) states
the purposes of only a few of its disclosure requirements.?? The advisory
committee note to Official Bankruptcy Form 6 (the schedules) obliquely sug-
gests that the requirements of the schedules relate to the trustee’s functions,
stating, “The schedules require a complete listing of assets and liabilities but
leave many of the details to investigation by the trustee."!4 Finally, nothing
in the notes to Official Bankruptcy Form 7 (the statement of financial affairs)
suggests the purposes of any of its required disclosures.

B. THe ReQuiREMENTs ACCORDING To Casz Law

Tn describing the nature and extent of the disclosure obligations of debt-
ors in chapter 7, the judicial pronouncements in the cases are firm:5

°Fep. R. BANKR. P. 9009.

"11 USC. § 521(3) (1994).

“Pep. R. Bankr. P. 2015(aX1)-

"Pep. R. Banke. P. 4002(4). See also In re Moses, 792 F. Supp. 529, 531 (ED. Mich. 1992); Kaler v.
Olmstead (In re Olmstead), 220 BR. 986, 998 (Bankr. DN-D. 1998); In re Mobring, 142 BR. 389, 394
Bankr. ED. Cal. 1992), aff, 153 BR. 601 (BAP. 9th Cit. 1993), affd without op., 24 F.3d 247 (9th Cir.
1994) (unpublished table decision).

For example, this advisory committee note states that the requirement to disclose a prior bankruptcy
in the petition is “to alert the trustee to cases in which an objection to discharge pursuant to § 727(aX8)
‘or (9) or a motion to dismiss under § 109(g) may be appropriate.” Official Bankruptcy Form 1 advisory
committee note. The same note states that the purpose of the requirement to disclose information about
pending related cases is so that the clerk can “assign the case to the judge to whom any related case has
been assigned.” Id. The statistical information on the petition is required “to assist the clerk in providing
statistical information required by the Director of the Administrative Office of the United States Courts
pursuant to the Congressional reporting requirements of 28 USC. § 6047 Id

“Official Bankruptcy Form 6 advisory committee note.

19Most of the case law interpreting the disclosure requirements arises in context of objections to the
debtor's discharge under 11 US.C. §§ 727(a), which provides that the debtor shall be granted a discharge,
unless:

(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of
the estate charged with custody of property under this title, has transferred,
removed, destroyed, mutilated, or concealed, or has permitted ta be, transferred,
removed, destroyed, mutilated, or concealed—

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2008) Misbehavior and Mistake in Mortgage Servicing 179

transfer to a loss-mitigation department or even to a new servicer.
Nonetheless, the reality is that most defaults and pending foreclosures occur
outside the bankruptcy system.”* Thus, most families in default on their
mortgages lack the protections—albeit, the existing weak protections—of the
bankruptcy claims process to shield them from impermissible or
unreasonable default fees. Indeed, servicers’ accounting should be better
inside the bankruptcy system than outside of it because, at least in theory, a
bankruptcy is a check on mortgage overreaching. If a Chapter 13 case is
filed, the servicer usually hires an attorney who is supposed to review the
claim for accuracy and illegality, and the servicer knows that homeowners
usually have retained an attorney to represent them. Not only are
mortgagees’ misbehavior and mistakes probably not confined to bankruptcy
debtors, the frightening prospect is that servicing problems among non-
bankrupt families who are behind on their mortgages may be even worse
than the bankruptcy data reveal.

Very recent case law lends legitimacy to this fear. In late 2007, two
federal courts in Ohio dismissed dozens of foreclosure lawsuits on standing
grounds because the plaintiffs could not prove they were the record owners
of the mortgage and note. Two class action lawsuits are pending that
allege that consumers paid bloated, illegal fees for default charges.”
Mortgage servicers are increasingly being fingered as the primary parties
who are frustrating homeowners’ efforts to obtain modifications of
unaffordable loans.””

275. Foreclosure filings appear to outnumber bankruptcy cases filed by homeowners by a four-
to-one ratio. In 2006, there were 597,965 nonbusiness bankruptcy filings. Press Release, Admin.
Office of the U.S. Courts, Bankruptcy Filings Plunge in Calendar Year 2006 (Apr. 26, 2007),
available at hitp:/iwww.uscourts gov/Press_Releases/bankruptcyfilings041607.html. ‘The best
available data, which is from the 2001 Consumer Bankruptcy Project, indicate that about 52.5% of
all families in bankruptcy are homeowners. Bahcheva et al, supra note 1, at 92. In 2006, there
were 1,259,118 foreclosure filings. Press Release, RealtyTrac, More Than 1.2 Million Foreclosure
Fihngs Reported in 2006 (Jan. 25, 2007), available at bttp://www.realtytrac.com/Content
‘Management/pressrelease.aspx?ChannellD=98tItemlD=185S&accnt=64847; see also Dennis R.
Copozza & Thomas A, Thomson, Subprime Transitions: Lingering or Malingering in Default?, 33
J. REAL ESTATE FIN. & ECON. 241, 241~58 (2006) (reporting that in a study of borrowers who were
idemtfied as ninety-days delinquent on their loans, only 11% had filed for bankruptcy eight months
later).

276, See, e.g., In re Foreclosure Cases, 521 F. Supp. 2d 650, 654 (8.D. Ohio 2007) (giving
plaintiffs thiry days to submit evidence proving that they had standing to file the complaint); In re
Foreclosure Cases, No. 07CV2282, 2007 WL. 3232430, at *3 (N.D. Ohio Oct. 31, 2007) (finding
that plaintiffs could not show proof of ownership of the note or mortgage).

271. See In re Harris, No. 03-44826, 2008 WL. 924939, at *1 (Bankr. S.D. Tex. Jan. 16, 2008)
(alleging that default servicers had impermissible and undisclosed arrangements with attorneys to
retain a portion of the fees); Complaint at 2, Trevino v. Merscorp, Inc., No. 07-568 (D. Del. Nov. 6,
2007) (alleging that Merscorp overcharged and extracted improper fees from mortgage borrowers).

278. See Eggert, supra note 23, at 286-87 (describing servicers’ self-interest as a barrier to loan
modification); Larry Cordell et al., The Incentives of Mortgage Servicers: Myths and Realities 3
(Fed, Reserve Bd,, Fin. and Econ. Discussion Series, Paper No. 2008-46, 2008) (reporting that
available evidence suggests that the inadequate loss-mitigation capacity of mortgage servicers and
certain servicing practices are factors contributing lo avoidable disclosures).

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2008} INVESTIGATING APPELLATE STRUCTURE 1761

Fourth, bankruptcy appellate panels conform to traditional
notions of appellate review: their rulings are generally seen to be
binding on future bankruptcy appellate panels drawn from the same
circuit. Further, at least one BAP has held that its decisions are
binding on all bankruptcy courts within that circuit,®? even if the
bankruptcy courts themselves do not share this view.” In contrast,

‘When asked how BAP service affects their service as a bankruptcy judge,
several of the [surveyed bankruptcy judges] indicated that it required
adjustments to their bankruptcy court trial and hearing schedule and that it
substantially added to their workload. Some of the Survey Participants
suggested that those bankruptcy judges who serve full-time on the BAP
should have the option of employing an additional law clerk. One Survey
Participant indicated that service on the BAP was “like having a second job.”
Mabey, supra note 62, at 122 (footnote omitted); see also Stephen A. Stripp, An Analysis of the
Role of the Bankruptcy Judge and the Use of Judicial Time, 23 SETON HALL L. REV. 1329, 1330
(1993) (“The fundamental truth which is the basis for this article is that the bankruptcy caseload
in many districts in this country is so overwhelming that the bankruptcy judges are sorely
pressed in the struggle to cope with it.”).

68. BAPs in three circuits—the Eighth, Ninth, and Tenth—have reached this conclusion.
Eg., Concannon v. Imperial Cap. Bank (In re Concannon), 338 B.R. 90, 95 (B.A.P. 9th Cir. 2006)
(reaffirming that the BAP will not overrule its prior rulings unless an intervening circuit court or
Supreme Court decision, or subsequent legislation, undermines those rulings); Salomon N. Am.
v. Knupfer (Jn re Wind N’ Wave), 328 B.R. 176, 181 (B.A.P. 9th Cir. 2005) (same); Blagg v. Miller
(Un re Blagg), 223 B.R. 795, 804 (B.AP. 10th Cir. 1998) (“Our decision is dictated by the principle
that we are bound by prior panel decisions. A panel cannot overrule the judgment of another
panel of the court.”), appeal dismissed, 198 F.3d 257 (10th Cir. 1999); Smolen v. Hatley (In re
Hatley), 227 B.R. 77, 761 (B.A.P. 10th Cir. 1998) (same), affd, 194 F.3d 1320 (10th Cir. 1999);
Luedtke v. Nationsbane Mortgage Co. (In re Luedtke), 215 B.R. 390, 391 (B.A.P. 8th Cir. 1997)
(relying on circuit court precedent that circuit court panel decisions bind subsequent circuit court
panels to announce rule that BAP decisions bind subsequent BAP panels); Ball v. Payco-Gen.
‘Am, Credits, Inc. (In re Ball), 185 BR, 595, 597 (B.A.P. 9th Cir. 1995) (“We will not overrule our
prior rulings unless a Ninth Circuit Court of Appeals decision, Supreme Court decision or
subsequent legislation has undermined those rulings.”).

69. Philadelphia Life Ins. Co. v. Proudfoot (In re Proudfoot), 144 B.R. 876, 879 (B.A.P. 9th
Cir. 1992) (“[BJAP decisions originating in any district in the Ninth Circuit are binding precedent
on all bankruptcy courts within the Ninth Circuit in the absence of contrary authority from the
district court for the district in which the bankruptcy court sits.”); In re Windmill Farms, Inc., 70
BAR. 618, 622 (B.AP. 9th Cir, 1987), rev'd on other grounds, 841 F.2d 1467 (9th Cir. 1988).

10. Compare, e.g., Ore. Higher Educ. Assistance Found. v. Selden (In re Selden), 121 B.R.
59, 62 (D. Ore, 1990) (stating that BAP decisions bind only those bankruptcy courts sitting in the
district out of which the appeal arose), with Daly v. Deptula (In re Carrozzella & Richardson),
255 B.R. 267, 273 (Bankr. D. Conn. 2000) (rejecting argument that substantial motivation of
Congress in creating BAPs was to generate a uniform body of bankruptcy law within the circuits,
concluding that there is no principled reason why decisions of a BAP should have more
precedential authority than those of district courts, and finding it odd and unseemly, if not
unconstitutional, for a BAP—comprised of three non-Article III judges—to be generating for
bankruptcy judges, and perhaps also for district judges, the law of the circuit until the circuit
court had spoken), Jn re Virden, 279 B.R. 401, 409 n.12 (Bankr. D. Mass. 2002) (quoting In re
Carrozzella, 265 B.R. at 272-73), and Life Ins. Co. of Va. v. Barakat (In re Barakat), 173 BR.
672, 676-80 (Bankr. C.D. Cal. 1994) (concluding that BAPs bind bankruptcy courts on matters
arising in core proceedings even though district courts do not), a/fd on ather grounds, 99 F.3d
1520 (9th Cir. 1996). For further discussion regarding the precedential effect of BAP decisions,

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time option to choose a different servicer.”? He postulates that servicers

would compete for this additional business, driving up quality, and balancing
servicers’ incentives between lenders and borrowers.”*? Another policy
response to concerns about mortgage servicing is to step up enforcement
action. However, single actions against egregious servicers may not produce
systematic reform, as the Mortgage Study data suggest that servicing issues
are industry-wide. A bigger problem may simply be focusing HUD on its
duties to enforce RESPA and to police mortgage servicers. HUD’s Web site
for complaints does not even mention mortgage servicing,“ and the FTC,
rather than HUD, has taken the lead in recent actions against servicers,”*°

The Mortgage Study data suggest that policy makers who focus on
promoting home ownership need to concem themselves with mortgage
servicing, which is a crucial aspect to enabling families to achieve home
ownership. Mortgage-servicing abuse weakens families’ efforts to manage
their mortgages successfully and can result in families being wrongfully
deprived of their homes through foreclosure or unsuccessful outcomes in
bankruptcy. Mortgagees’ failure to honor the terms of their Joans and
applicable law weakens America’s home-ownership policies and threatens
families’ financial well-being.

The findings are a tangible reminder that merely enacting a law does not
ensure its success. Without the correct structural incentives and without
robust safeguards, a law can fail to deliver its promised protections. In the
consumer context, this observation has particular power. Consumers face
disadvantages to industry in a legal system: consumers are not repeat players;
they have fewer resources; and they do not have institutional incentives to
shape the system. The claims process in bankruptcy exemplifies the
difficulty in developing and monitoring an effective legal system. The
findings should caution policy makers and advocates from blindly trusting in
the written law as a decontextualized instrument to shape behavior.

V. Conclusion

Hundreds of thousands of Americans file Chapter 13 bankruptcy each
year hoping to save their homes from foreclosure. Reliable claims are crucial
to the success of the bankruptcy system because the claims mechanism
implements the two core goals of bankruptcy policy: to help debtors obtain a
fresh start by paying their debts and to ensure that creditors receive a fair

282. Jack Guttentag, Borrowers Should Be Able to Fire Moryage Servicers, hnp://www.
igprofessor.convA%20%20Servicing/oorrowers_should_be_able_to_fire_servicers.htm.

283. Id.

284. See U.S. Dep't of Housing and Urban Dev., Complaints, supra note 115 (handling
complaints for housing discrimination; landlord-tenant disputes; manufactured-housing issues; land
sales; deceptive contractors; and fraud, waste, and abuse).

285. See Div. OF CONSUMER & BUS, EOUC., supra note 48 (describing what consumers should
expect of morigage servicers and the process for filing complaints against servicers).

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which other federal courts directly quoted the opinion.'*" Specifically,
we find that, holding all other variables at their mean, a BAP opinion
is predicted to have approximately 0.75 [0.35, 1.16] more citing
references that directly quote it than a district court opinion.'® These
findings support Hypotheses 9A and 9B.

Finally, we find support for Hypothesis 10, even when
controlling for other factors. A zero-truncated negative binomial
regression model indicates that the type of first-tier appellate court to
have issued the opinion influenced the immediacy with which it was
cited. A BAP opinion is predicted to decrease the expected number of
days before a federal court first cites positively to a first-tier appellate
opinion by approximately 44% [25, 58], holding all other variables
constant. It would seem, therefore, that BAP opinions command the
attention of other federal courts more quickly than district court
opinions.169

D. Interpretation of Results

Our inquiry into the perceived quality of appellate review has
focused on two types of perception: (1) the manner in which courts of
appeals, upon direct review, have perceived BAPs and district courts
to perform their error-finding function; and (2) the manner in which
other federal courts have signaled, through citation practices, their
perception of the quality of appellate review provided by BAPs and
district courts. We conducted our inquiry by testing a series of
hypotheses predicting that BAPs, by virtue of their structural
features, would be perceived to provide a quality of appellate review
superior to that of their district court counterparts. In the end, our
statistical analyses generate considerable evidence in support of our
hypotheses. We repeatedly find a statistically significant, positive
association between BAPs and various measures for the perception of
the quality of appellate review. However, as statistical significance
does not necessarily translate into substantive significance, we seek to
give a richer account of the different ways in which our results
buttress our claims.

167. The model incorporates the same independent variables and observations from the
binary logistic regression model used to predict the tendency for direct quotation of first-tier
appellate opinions.

168. No statistically significant relationship existed between any of the other independent
variables and the number of citations that directly quoted the first-tier appellate opinion. For
detailed results from this regression model, see infra Appendix tbL.9.

169. For detailed results from this regression model, see infra Appendix thl.10.

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that high court.!? Within that hierarchy are rules of precedent that,
while not absolute, create barriers against courts overruling earlier
cases, As a general matter, under so-called horizontal stare decisis,
high courts and intermediate appellate courts will follow their own
earlier precedents.!? Further, vertical stare decisis binds inferior
courts generally to the precedents issued by superior courts within the
hierarchy.

It is true that court systems need not have the features of
appellate hierarchy and stare decisis to function, nor indeed to
function well.8 Commentators debate whether Congress can
statutorily alter or abrogate the traditional rules of stare decisis, as

12, See, eg, Lewis A. Kornhauser, Adjudication by a Resource-Conatrained Team:
Hierarchy and Precedent in a Judicial System, 68 S. CAL. L. REV. 1605, 1607-08 (1995)
(Clucidating the traditional appellate hierarchy).

13, Absent en banc review, courts of appeals are bound by prior decisions insued by the
court (independent of panel composition). E.g., United States v. Myers, 200 F.3d 716, 720 (10th
Cir. 2000).

In general, horizontal stare decisis does not extend beyond the court that issued an opinion to
sibling courts of the same hierarchical level. While intermediate appellate courts will follow
decisions issued by eerlier panels of the same court—notwithstanding that the composition of the
judges on the panels may vary—intermediate appellate courts generally are under no
precedential obligation to follow decisions issued by sibling intermediate appellate courts of

imilar hiorarchieal rank. Thus, for example, a Ninth Circuit panel may find First Circuit
precedent to be persuasive and choose to follow it, but stare decisis does not demand that the
Ninth Circuit oo act; rather, stare decisis leaves the Ninth Circuit free to disagree with and to
disregard the First Circuit precedent. See, e,t., Evan H. Caminker, Why Must Inferior Courts
Obey Superior Court Precedents?, 46 STAN. L. REV. 817, 824-25 (1994). Also, the rule of
horizontal precedent does not extend to trial courts, as discussed below. See Amy Coney Barrett,
‘Stare Decisis and Due Process, 74 U. COLO. L. REV. 1011, 1015 (2003); Caminker, supra, at 825
(C{A] district court judge may ignore the decisions of foreign’ courts of appeals as well as other
district court judges, even within the same district.” (footnote omitted)); Kornhauser, supra note
12, at 1608. But ace Daniel J. Bussel, Power, Authority, and Precedent in Interpreting the
Bankruptey Code, 41 UCLA L. REV. 1063, 1095 (1994) (noting a “long tradition” of district judges
deviating from prior precedent in the same district only in extraordinary circumstances}; infra
note 71 and accompanying text.

14. See, eg., Chemerinsky, supra note 4, at 111 ({Clourts generally issue written decisions
that, when published, have precedential effect on future rulings involving different parties";
Susan B. Haire, Stefanie Lindquiat & Donald R. Songer, Appellate Court Supervision in the
Federal Judiciary: A Hierarchical Perspective, 37 Law & SOCY REV. 143, 148 (2003) (‘Appellate
oversight in the lower tiers of the federal judicial hierarchy ... provides a process through which
circuit judges are expected to promote legal rules that will guide decision making in subsequent
cases."j; Kornhauser, supra note 12, at 1608.

16, For example, civil Jaw systems do not rely upon as stringent a hierarchy, or upon rules
of precedent as stringent. See, eg., Caminker, supra note 13, at 826; Kornhauser, supra note 12,
‘at 1608; Thomas Lundmark, Interpreting Precedents: A Comparative Study, 46 Am. J. COMP. L.
211, 214 (1908) (eoviewing INTERPRETIVE PRECEDENTS: A COMPARATIVE STUDY @. Neil
‘MacCormick & Robert 8. Summers eds., 1997)) ‘One of the classic differences between civiLlaw
and common-law jurisdictions is that the former . . . do not recognize judicial precedent as an
independent source of law.” (footnote omitted). For an exposition, and critique, of the necessity
and desirability of stare decisis, ee Caminker, supre note 13, at 885-67.

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Moreover, § 707(b) implicitly prohibits the trustee from bringing a mo-
tion to dismiss for substantial abuse.!2? Prohibiting the one who may be in
the best position to discover and assert problems with the debtor's papers
further suggests that this remedy was not designed to address those
problems.

In denying a motion to dismiss under § '70'7(b), one court summarized the
difficulty of using this remedy to address the problems with many debtors’
papers:

Mistakes and omissions are too frequent for this Court to
assume that deceit is evident simply because mistakes are
present. Insufficient information or poor advice is more
likely one of the causes. A large percentage of income and
expense statements are probably erroneous in some fashion
or other, either because of simple negligence or oversight, or
because of a lack of understanding of the forms or the signifi-
cance of the questions asked, or because of miscommunica-
tion between debtors and their attorneys or, in joint cases,
because of miscommunication between spouses.!23

B. Dentat oF DiscHARGE IN CHapTeR 7 Cases
A chapter 7 debtor's discharge may be denied for an omission from or

debtor's original understatement of income and expenses was intentional). See also In re Laury-Norvell,
157 BR. 14, 16 (Bankr. N.D. Ohio 1993) (denying motion to dismiss because the inaccuracies in the
debtor's schedules were property attributable to the debtor's counse! rather than the debtor).

"Section § 707(b) provides that “the court, on its own motion or on motion by the United States
Trustee, but not at the request or suggestion of any pasty in interest, may dismiss ...” See In re Christian,
804 F.2d 46, 48 (3rd Cir. 1986) (bolding that a creditor lacks standing to file a motion to dismiss under
§ 707(b)); Jn re Wisher, 222 BR. 634, 636 (Bankr. D. Colo. 1998); Perniciaro v. Natale (In re Natale), 136
BR 344, 352 (Bankr. ED.N.Y. 1992). This limitation was designed to insure “that such motions are not
routinely made in every Chapter 7 case,” Kornfield v. Schwartz (In re Kornfield), 164 F.3d 778, 784 (2nd
Cir. 1999), and vo protect the debtor from harassment by the creditors, Zolg v. Kelly (In re Kelly), 841
F.2d 908, 917 (9th Cir. 1988); United States Trustee v. Joseph (In re Joseph), 208 BR. 55, 60 (BAP. Sch
Cit. 1997); In re Bitagerald, 155 BR. 711, 715 (Bankr. W.D. Texas 1993).

Nevertheless, the United States Trustee can rely on information from the trustee and creditors, and
‘once the United Seates Trustee brings a motion to dismiss, chese parties may participate. 11 USC.
§ 707(b) (1994); United States Trustee v. Clark (In re Clark ), 927 F.2d 793, 797 (4th Cir.1991). Contra,
In ve Restea, 76 BR. 728, 732-34 (Bankr. D.S.D. 1987) (denying the United States Trustee's motion to
dismiss because creditors suggested to the United States Trustee's office that it should investigate the case
for abuse).

If panel trustees are given standing under § 707(b), one court speculated, probably accurately: unfor-
tunately, most panel trustees would never bring such motions anyway, as there is no economic incentive to
do 30, especially in no-asset cases where the trustee will only be paid $45 for handling the case. The cost
of bringing the action is, in the usual case, not compensable unless the estate has assets. In re Fitzgerald,
155 BR. 711, 713 nt (Bankr. W.D. Tex.1993).

"In ve Attanasio, 218 BR. 180, 229 (Bankr, ND. Ala. 1988).

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RAFAEL I. PARDO 5

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Reenvisioning Law Colloquium, University of Houston Law
Center (January 26, 2007)

2006

An Empirical Investigation into Appellate Structure and the Perceived Quality of
Appellate Review, Annual Meeting of the Midwestern Law & Economics
Association, University of Kansas School of Law (October 20, 2006) (co-
presented with Jonathan R. Nash)

2005

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, Faculty Workshop, St. John’s University
School of Law (October 26, 2005)

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, Faculty Workshop, Seattle University School
of Law (October 10, 2005)

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, Young Scholars Workshop, Annual Meeting
of the Southeastern Association of Law Schools, Hilton Head Island, South
Carolina (July 17, 2005)

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, Tulane-Loyola Junior Faculty Workshop,
Tulane Law School (March 18, 2005)

MEDIA COMMENTARY

Diane Davis & Eilcen J. Williams, Supreme Court Says Ch. 7 Trustee Is Not
Required to Object to Ambiguous Exemption, 22 Bankr. L. Rep. (BNA) 855,
856 (June 24, 2010),

Diane Davis & Bemard J. Pazanowski, Supreme Court Approves Forward-
Looking Test to Calculate “Projected Disposable Income," 22 Bankr. L. Rep.
(BNA) 781, 781 (June 10, 2010)

Ross Reynolds, The Conversation: Trade School in Tough Times: Is It Worth It?,
KUOW Puget Sound Public Radio, Mar. 25, 2010.

Diane Davis, Bankruptcy Attorneys Consider Impact of Espinosa Decision on
Practitioners, 22 Bankr. L. Rep. (BNA) 395, 401 (Mar. 25, 2010).

Peter S. Goodman, In Hard Times, Lured into Trade School and Debt, NY.
Times, Mar. 14, 2010, at Al.

Thomas G. Dolan, Does the Repaying of Private Student Loans Represent Undue
Hardship?, HisP. OUTLOOK HIGHER EDUC., Feb. 8, 2010, at 20.

Eric Kelderman, Supreme Court Considers Case About Excusing Student Debt
Through Bankruptcy, CHRON. HIGHER EDUC., Nov. 29, 2009.

8/25/2010

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1999) CONSUMER BANKRUPTCY PAPERS 677

come disclosed nothing in response to question 3a on the
statement of financial affairs. (17 of 20 cases)

21. Other errors

Other errors were incidentally found and recorded.

26.5% of the cases had other errors. These included:
Schedule A listed a mobile home.
Schedule B listed cash on hand in a “Brokerage
Account.”
Schedule C did not exempt a mobile home.
Schedules D and F did not disclose a debt on a
loan from a pension plan, the payments on which
were disclosed in schedules I or J.
Schedule E included debts that are not priority
debts.97
Schedule I did not disclose spouse employment in-
formation, or did not identify the spouse, or did not
list payroll deductions for taxes, or stated that the
marital status is “single” but disclosed spouse
information.
Schedule J disclosed payments for property that the
statement of intent indicated would be surrendered,
or for property that was not disclosed as collateral
in schedule D.
The statement of intent included creditors not
listed in schedule D, or for creditors listed as un-
secured creditors.

V. COMPILING THE RESULTS

A. For THe Stupy Cases as A WHOLE

The results are disturbing by any measure. Six of the eleven specific in-
quiries into missing disclosures turned up problems in more than 50% of the
cases in which the missing disclosures were required.°° Ten of these eleven
inquiries revealed problems in more than 10% of the cases in which disclo-

Technically, this may not be a disclosure error, as a debtor could rationally choose not to exempt all
exemptible property. In this case, however, it was an error, later corrected.

*Priority debts are set forth in 11 U.S.C. § 507(2). The debts erroneously scheduled as priority debts
included debts for student loans and for unemployment overpayments. Apparently, these debtors were
advised that any debt to a governmental unit is a priority debt. Also included here was 2 debt to “Best
Buy,” which was erroneously scheduled as a “consumer deposit” under § 507(a)(6)-

Sec the results on questions 2 (54%), 3 (81%), 4 (73%), 5 (54%), 7 (859) and 8 (83%), supra, at__.

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Table 9: Regression Analyses of Number of Positive Federal Court Citing
References to Positively Cited First-Tier Appellate Bankruptcy Opinions (by Depth
of Treatment)

Variable Cited* Discussed? Quoted"
Court 25258¢* 1.798%* 2.338%"

(1.922, 3.317) (1.164, 2.779) (1.527, 3.580)
First-Tier Full Affirmance 1023 0.828

(0.789, 1.325) (0.561, 1.222)
Published 1.521 1.535

(0.997, 2321) (0.771, 3.056)
Appellant 1127 1,288

(0.809, 1.569) (0.761, 2.179)
Appellee 1.021 1373

(0.735, 1.420) (0.817, 2.307)
Chapter 7 1.352° 1.302

(1.027, 1.779) (0.853, 1.988)
Debtor Type 0.766 0.663

(0.541, 1.085) (0.388, 1.135)
Dispute Type 0.853 0913

(0.608, 1.197) (0.549, 1.517)
Subject 1.174 1397 1.059

(0.839, 1.643) (0.882, 2.213) (0.645, 1.741)
Subsequent Appeal ots 0.676

(0.699, 1.197) (0.438, 1.043)
FY 1998 1.101 1.450

(0.804, 1.506) (0.885, 2.374)
FY 1999 0.969 1.366

(0.725, 1.296) (0.862, 2.163)
N 200 200 200
Log likelihood 436214 221.011 -257.881
McFadden’s R* 0.076 0.021 0.060

Source: First-Tier Database

Note: *** p< 0.001, ** p< 0.01, * p < 0.05. Incidence rate ratios presented with 95%
confidence intervals in parentheses. We have only presented the results from those
regression analyses in which the Court variable was a statistically significant predictor.
* Negative binomial regression model.

> We have fitted a negative binomial regression model that does not include all of the
independent variables in the table for the reasons set forth in supra note 164.

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Hypothesis 9A: Positive federal citing references are more likely to
quote directly BAP opinions than district court opinions.

Hypothesis 9B: Positive federal citing references will directly quote
BAP opinions more frequently than district court opinions.

Hypothesis 10: The time within which a federal citing reference will be
made to opinions issued on appeal by BAPs will be faster than to those
issued by district courts.

Notably, in Hypotheses 2B, 3, 4, 5, and 7, we hypothesize that
BAP opinions will be cited more often than district court opinions. We
suggest this on the ground that several factors weigh in favor of the
conclusion that BAPs will resolve issues of bankruptcy law “correctly,”
while only one factor—judicial independence—weighs in favor of
district courts.

It seems to us highly probable, a priori, that bankruptcy judges
and BAP judges are unlikely to be concerned with the fact that the
bankruptcy judges who serve on BAPs do not enjoy Article IIT
status.1 Accordingly, we have developed Hypotheses 4 and 5.
Hypothesis 3 is to similar effect. It seems to us that courts of appeals
would be more focused on the structural factors favoring BAPs than
the lack of Article III status—particularly with respect to subject-
matter expertise.!!? Note first that, to the extent that the absence of
Article III status may suggest a lack of independence vis-a-vis the
issues in the case or the parties, that problem is greatly ameliorated
by the fact that the parties must have consented in order to have the
BAP issue a decision in the first place. Second, court of appeals judges
presumably do not need the buffer of Article III status to remind them
that they sit several notches above bankruptcy judges and BAPs on
the judicial food chain.!!5

The same cannot be said for district judges. That district judges
lobbied against giving bankruptcy judges Article III status
demonstrates how important it is to district judges that bankruptcy

111. See McKenna & Wiggins, supra note 65, at 628 (‘Bankruptcy appellate panel (BAP)
judges provide specialized bankruptcy expertise that their bankruptcy colleagues... value
highly as a source of authority.”).

112, See id. at 678 (“Circuit judges, on average, have less specialized knowledge than
bankruptcy judges, particularly those selected to serve on BAPs.”).

113, It is also conceivable that courts of appeals in circuits that have BAPs are somewhat
favorably inclined to cite to those BAPs, to the extent that they consider the BAPs to be adjuncts
of the courts of appeals. See supra note 51.

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[Vol. 61:6:1745

Table 8: Regression Analyses of Number of Positive Federal Court Citing
References to Positively Cited First-Tier Appellate Bankruptcy Opinions (by Type

of Federal Court)

Variable All Bankruptcy District. BAP Court of —Extracircuit
Federal Court Court Citations” Appeals —_—_Citations”
Court Citations? Citations‘ Citations*
Citations"

Court 2.538%" 2.072" 0628" = 9.7029" 2.3368" 1.447"
(1.836, (1.509,2.845) 0.410, (5.462, (1.297, (1.030, 2.031)
3.509) 0.962) 17.231) 4,206)

First-Tier | 0.995 0.985 1.088 0.873 1,000

Full (0.732, (0.726, 1.337) (0.738, 0517, (0.716, 1.397)

‘Affirmance | 1-352) 1.605) 1.473)

Published | 1.838" 1.563 4276 3.524 4giaees
(1.128, (0.968, 2.526) (0.985, (0.820, (2.443, 9.488)
2.994) 18.561) 15.141)

Appellant | 1.020 1.023 0.925 1.381 1.055
(0.685, (0.686, 1.527) (0.573, (0.614, (0.681, 1.633)
1.519) 1493) 3.104)

Appellee 1.005 1.096 0.470%* 2.306 1.194
(0.681, (0.740, 1 623) (0.275, 101, (0.780, 1.828)
1.485) 0.802) 4.830)

Chapter? | 1.395% 1386* 1.330 1629 1112
(1.011, (1.010, 1.904) 0373, (0.901, (0.783, 1.581)
1.924) 2.026) 2.948)

Debtor Type | 0.741 0.782 0.673 1.475 0.400* 0.800
(0.490, (0.517,1.183) (0.432, (0.803, (0.188, (0.512, 1.249)
1.120) 1.050) 2.709) 0.852)

Dispute 0.817 0.796 1452 0.678 0.930

Type (0.551, (0.538, 1.178) (0.871, (0.326, (0.614, 1.408)
1.212) 2.418) 1.413)

Subject 1.435 1160 1.492 1.870 1341 1.202
(0.971, (0.783, 1.720) (0.976, (1.125, (0.634, (0.797, 1.814)
2.121) 2.280) 3.107) 2.838)

Subsequent | 1.092 1.063 1.169 0949 1.127

Appeal (0.795, (0.777, 1.455) (0.789, (0.536, (0.805, 1.579)
1.501) 1.731) 1.682)

FY 1998 1134 0845 1.687* 1.657* 0.700 0914
(0.778, (0.584, 1.223) (0.999, (1.018, (0.376, (0.606, 1.378)
1.652) 2.847) 2.697) 1302)

FY 1999 1.004 0.926 1.324 1.237 0.447* 0.867
711, (0.659, 1.301) (0.789, (0.799, (0.240, (0.595, 1.263)
L418) 2.223) 1915) 0.832)

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660 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

abandoned to the debtor when the case is closed.?? In addition, the debtor's
financial rehabilitation can be advanced by preparing and filing complete and
accurate papers.*+

In chapter 13 cases, the schedules play a uniquely significant role. For
example, the schedules are considered in determining whether the debtor
meets the eligibility requirements for the debt limits in chapter 1335 The
schedules also assist in determining whether the debtor's plan was filed in
good faith,?* and whether to dismiss or convert the case for cause? They
are also considered in determining whether the plan proposes to pay creditors
at least what they would receive in a hypothetical chapter 7 liquidation.
Finally, the schedules are used to evaluate whether the plan meets the confir-

“Jeffrey v. Desmond, '70 F.3d 183, 186 (1st Cir. 1995). See also Vreugdenhill v. Navistar Int'l Transp.
Corp, 950 F.2d 524, 525-26 (8th Cir. 1991). Section 554(c) provides:
[Alny property scheduled under section 521(1) of this title not otherwise adminis-
‘tered at the time of the closing of a case is abandoned to the debtor and adminis-
tered for purposes of section 350 of this title.

[T]he debtors themselves are better served in their financial rehabilitation efforts if they can de-
velop clear and complete pictures of their financial condition” Commission Report, supra note 2, at
108.

Section 109(e) establishes the secured and unsecured debt limits for chapter 13 debtors. See Com-
prehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 757 (6th Cir. 1985) (‘Chapter 13
eligibility should normally be determined by the debtor's schedules checking only to see if the schedules
‘were made in good faith.”), See also Henrichsen v. Scovis (In re Scovis), 231 BR. 336, 340 (BAP. 9th Cit.
1999); Barcal v. Laughlin (In ze Barcal), 213 BR. 1008, 1015 (BAP. 8th Cir, 1997}; In re Tabor, 232 BR.
85, 89 (Bankr. N.D. Ohio 1999); In re Berenato, 226 B.R. $19 (Bankr. E.D. Pa. 1998); In Re Griggs, 181
BR 111, 114 (Bankr. ND. Ala. 1994) (noting the court should consider the debtor's chapter 13 schedules
in determining eligibility for conversion from chapter 7 to chapter 13); People’s Bank v. Winder (In re
Winder), 171 BR. 728, 730-31 (Bankr. D.Conn. 1994); In re White, 148 BR. 283, 285 (Bankr. ND. Ohio
1992); In re Koebler, 62 BR. 70, 72 (Bankr. D. Neb. 1986).

36Section 1325(a)(3) establishes that one of the requirements for confirmation of the plan is that “the
plan has been proposed in good faith.” See In re Lindsey, 183 BR. 624, 628 (Bankr. D. Idaho 1995) (noting
that the accuracy of the debtor's schedules is one factor to consider in judging the debtor's good faith in
proposing the plan). See also New Jersey Lawyers’ Fund For Client Protection v. Goddard (In re God-
dard), 212 BR. 233 (DNJ. 1997); In re Allard, 196 B.R. 402 (Bankr. N.D. Ill. 1996), aff'd, 202 BR. 938
(ND. Ill 1996); fn re Cockings, 172 BR. 257 (Bankr. ED. Ark. 1994); In re Hagel, 171 BR. 686, 688 n.3
(Bankr. D. Mont. 1994), aff'd, 184 BR. 793 (BAP. 9th Cir. 1995); In re Sitarz, 150 B.R. 710 (Bankr. D.
Minn. 1993); In 7¢ Lawson, 93 B.R. 979 (Bankr. N.D. UL 1988).

3711 USC. § 1307(¢) (1994). Molitor v. Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996); In
xe Buchanan, 225 BR. 672, 673-74 (Bankr. D. Minn. 1998); In re Famisaran, 224 BR. 886, 893 (Bankr.
ND. Ill 1998); In re Nassar, 216 BR. 606, 608 (Bankr. 8D. Tex. 1998); in re Blankstyn, 210 BR. 164, 167
(Bankr. D. Ariz. 1997); In re Rosencranz, 193 BR. 629, 636-37 (Bankr. D. Mass. 1996); In re Green, 141
BR. 440, 442-43 (Bankr. MD. Fla. 1992), In re Powers, 48 BR. 120, 121 (Bankr. M.D. La. 1985).

3811 USC. § 1325(a)(4) (1994). Heritage Ped. Credit Union v. Cox (In re Cox) 175 BR. 266, 275
(Bankr. C.D. Dl. 1994). See also In re Short, 176 BR. 886, 888 (Bankr. S.D. Ind. 1995); In xe Santa Maria,
128 BR. 32, 36 (Bankr. NDN.Y. 1991); GEC Corp. of Missouri v. Bixby (In re Bixby), 10 BR. 456, 458-
59 (Bankr. D. Kan. 1981); In re Fredrickson, 5 BR. 199, 200-201 (Bankr. MD. Fla. 1980).

Section 1325(a)(4) provides for confirmation of the plan if

[The value, 2s ofthe effective date of the plan, of property to be distributed under
the plan on account of each allowed unsecured claim is not less chan the amount

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2008) INVESTIGATING APPELLATE STRUCTURE 1811
Panel B: Distribution of Positive Citations to First-Tier Appellate Opinions
N 25% Median 75% Mean
202 1 2 5 4

Source: First-Tier Database

Table 4: Circuit Court Affirmance of First-Tier Appellate Dispositions

Panel A: Partial or Full Affirmance

Circuit Court Affirmance

First-Tier Appellate Court No Yes Total
BAP 5 52 57
(8.77) (91.23) (100.00)
District Court 47 133 180
(26.11) (73.89) (100.00)
Total 52 185 237
(21.94) (78.06) (100.00)

Source: Affirmance Database
Note: Row percentages are reported in parentheses. The p-value from a chi-square test
with one degree of freedom is 0.006,

Panel B: Full Affirmance

Circuit Court Affirmance
First-Tier Appellate Court No Yes Total
BAP MW 46 37
(19.30) (80.70) (100.00)
District Court 61 9 180
(33.89) (66.11) (100.00)
Total 22 165 237
30.38) (69.62) (100.00)

Source: A ffirmance Database
Note: Row percentages are reported in parentheses. The p-value from a chi-square test
with one degree of freedom is 0.037.

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1768 VANDERBILT LAW REVIEW (Vol. 61:6:1745

Article III judges has become increasingly politicized, evidenced most
recently by the tendency for close examination of the ideology of
nominees,’ the appointment process for bankruptcy judges has
seemingly remained nonpolitical. The Judicial Code charges the
appointment task to the court of appeals for the circuit in which there
exists a vacancy for a bankruptcy judgeship.” Thus, the appointment
process involves judges selecting judges—a presumably nonpolitical
process.®! This nonpolitical process has produced a bankruptcy bench

89, See Nash, supra note 20, at 2182-92.

90, 28 U.S.C § 152(a)(1) (Supp. V 2008); id. § 152(a)(3) (2000).

91. The possibility exists, however, that the judicial appointment of judges may substitute
judicial patronage for political patronage and thus compromise judicial independence. See Judith
Resnik, “Uncle Sam Modernizes His Justice”: Inventing the Federal District Courts of the
Twentieth Century for the District of Columbia and the Nation, 90 GEO. LJ. 607, 673 (2002). But
see Posner, supra note 23, at 81-82 (“Appointments by the judicial branch are not as
controversial, because judges belong to different parties.”). Furthermore, one may argue that,
insofar as the circuit judges are a product of a politicized appointment process, they themselves
may be politicized and thus infuse politics into the appointment process for bankruptcy judges.
‘The merit-selection process for appointing bankruptcy judges, however, seems to have provided
little opportunity for euch politicization to take root. A quick look at the manner in which the
Ninth Circuit conducts this process (one that seems representative of the process conducted in
other circuits) suggests why this has been the case.

Interested candidates must submit applications for the position. See Judicial Council of the
Ninth Circuit, Regulations Governing the Appointment of U.S. Bankruptcy Judges § 2.02 (2001),
available at http://207.41.19.16/Web/OCELibra.naf (follow “Bankruptcy” hyperlink; then follow
“Regulations Governing the Appointment of U.S. Bankruptcy Judges” hyperlink) (last visited
Oct. 25, 2008). The Circuit advertises nationally and encourages the federal judicial districts
within the circuit to advertise intensely and locally. Id. § 2.01. A local merit screening committee,
which generally consists of (1) the chief judge of the district in which the bankruptey judge is to
he appointed, (2) the president of the state bar association, (8) the president of one or more local
bar associations within the district, (4) the dean of a law schoo! located within the district, (5) the
administrative circuit judge of the circuit geographical unit in which the bankruptey judge is to
¢ appointed, and (6) the chief bankruptcy judge of the district in which the bankruptey judge is
to be appointed. id. § 3.02(a). The committee recommends five applicants to the Court-Council
Committee on Bankruptcy Appointments, whose membership includes three circuit judges who
serve as voting members. See id. §§ 3.03(c)(1), 9.04(). The Court-Council Committee circulates a
report to the Ninth Circuit Judicial Council recommending a candidate for appointment, and
that report will be deemed to be the Judicial Council's recommendation to the Court of Appeals
(unless the Council determines that the Court-Council Committee should reconsider its
recommendation). Id. §§ 3.04(c)(6), 3.06(a). The recommended candidate is appointed upon a
majority vote of the members of the Court of Appeals. 28 U.S.C § 152(a)(3) (2000).

For the argument that the nonpolitical nature of the bankruptcy bench may be attributable
to the opacity of the process for selecting bankruptcy judges, see Rafael I. Pardo, The Utility of
Opacity in Judicial Selection, 64 N.Y.U. ANN. SURV. AM. L, (forthcoming 2008), available at
httpy/ssrn.com/abetract=1205002.

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first-tier database, there were 77 observations for which there was a
subsequent appeal to the court of appeals.!*8 The subsequent history
for 10 of those observations, however, already existed in the second-
tier database (i.e., the circuit court opinion from the second-tier
database reviewed an opinion from the first-tier database). Combining
the 67 unique observations in the first-tier database involving a
subsequent appeal to the court of appeals with the 170 observations in
the second-tier database, we generated a database of 237 observations
for purposes of analyzing circuit court affirmance rates of first-tier
appellate dispositions (the “affirmance database”). When defining
affirmance broadly to include those dispositions where the circuit
court either partly or fully affirmed the first-tier appellate court, the
court of appeals affirmed BAPs approximately 91% of the time as
opposed to 74% for district courts.!8° If no association had existed
between the type of first-tier appellate court to have initially decided
the appeal and the disposition rendered on subsequent appeal by the
court of appeals, we would have expected to see first-tier appellate
dispositions partly or fully affirmed by the court of appeals
approximately 78% of the time. Our analysis confirms that there is
Jess than a 0.01 probability that random chance alone would have
yielded a difference as large as the one witnessed. Similarly, when
defining affirmance narrowly to include only those dispositions where
the circuit court fully affirmed the first-tier appellate court, the court
of appeals affirmed BAPs approximately 81% of the time as opposed to
66% for district courts.“ If no association had existed between the

138. Of the 77 observations in the first-tier database for which there was a subsequent
appeal to the court of appeals, 50 were district court dispositions and 27 were BAP dispositions.
As there were a total of 162 district court and 106 BAP dispositions in the first-tier database,
infra Appendix tbl.1, approximately 31% of the district court dispositions and 25% of the BAP
dispositions involved subsequent appeal. As our firet-tier database only includes opinions that
disposed of the appeal on the merits, these figures seem to be consistent with empirical evidence
that has estimated that up to a third of first-tier appellate dispositions rendered on the merits
have been further appealed to the court of appeals. See McKenna & Wiggins, supra note 65, at
630; see also U.S. BANKRUPTCY APPELLATE PANEL FOR THE EIGHTH CIRCUIT, STATISTICAL
REPORT: JANUARY 1, 2005 ~ DECEMBER 31, 2005 (2005), available at http:/www.ca8.uscourts.gov!
newbap/state/q4-b.pdf (documenting that approximately 30% of bankruptcy appeals in the
Eighth Circuit in 2005 were taken to the U.S. Court of Appeals).

189. The 91% circuit court affirmance rate of BAP dispositions approximates the rate at
which the U.S. Court of Appeals for the Tenth Circuit partly or fully affirmed merit-based BAP
dispositions—that is, 90%—during the eleven-year period beginning on July 1, 1996 and ending
on June 30, 2007. See U.S, BANKRUPTCY APPELLATE PANEL FOR THE TENTH CIRCUIT, ANNUAL
REPORT OF BANKRUPTCY APPEALS IN PARTICIPATING BAP DISTRICTS FOR THE STATISTICAL YEAR
JULY 1, 2006 - JUNE 30, 2007 (INCLUDING DISPOSITION STATISTICS FOR APPEALS DisPOSED OF
SINCE JULY 1, 1996) 8 (2007), available at http://www.bap10.uscourts.govistata/2007.pdf.

140, The 81% full affirmance rate of BAP dispositions by circuit courts approximates the rate
at which the U.S. Court of Appeale for the Tenth Circuit fully affirmed merit-based BAP

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On the other hand, if a chapter 7 debtor's income substantially exceeds
the debtor's expenses, so that there is net disposable income under 11 U.S.C.
§ 1325(b), there may be a question of whether the case is a “substantial
abuse” under 11 U.S.C. § 70'7(b).75

Accordingly, this question tests whether a chapter 7 debtor's disclosures
regarding income and expenses are consistent. Somewhat arbitrarily, a 10%
leeway was structured into the test. This leeway was chosen because sched-
ules I and J require the disclosure of any anticipated changes in income and
expenses of more than 10% within one year.

43% of chapter 7 debtors disclosed expenses not within
10% of income.?” (66 of 152 cases) These debtors are
further described as follows:
6% of chapter 7 debtors showed no income. (9
cases)
35% of chapter 7 debtors showed expenses more
than 10% above income. (53 cases)
3% of chapter 7 debtors showed expenses more
than 10% below income. (4 cases)

14. Is the debtor's disclosure of the attorney fee paid in re-
sponse to question 9 of the statement of financial affairs con-
sistent with the attorney's disclosure of attorney fee paid in
the Rule 2016(b) statement?

Question 9 of the statement of financial affairs requires the debtor to dis-
close all attorney fees paid within one year before filing for “consultation
concerning debt consolidation, relief under the bankruptcy law or preparation
of a petition in bankruptcy ..."78 Rule 2016(b) requires the debtor’s attorney
to disclose the information required by 11 U.S.C. § 329(a), which includes
the compensation paid within one year of the filing for “services rendered or
to be rendered in contemplation of or in connection with the case ..."79 This

‘The Human Side of Bankruptcy, 18-FEB Am. Banxa. Inst. J. 28, 28 (1999). “The budgeting process is as
important in a chapter 7 case as itis in a chapter 13. ‘The chapter 7 should be a solution to the debtor's
problems, not just temporary relief. Chapter 7 debtors must make some hard choices about what items
they can really afford and must examine their lifestyle carefully. Theit attorney must guide them toward a
realistic budget so they can move forward in their lives without financial pressures” Id at 29 3.

7Sce infra notes 116-20. See also Jean Braucher, Counseling Consumer Debtors to Make Their Oun
Informed Choices - A Question of Professional Responsibility, § Am. Bankr. Inst. L, Rev. 165, 181 (1997)
(CA debtor who chooses chapter 7 should not file schedules that show disposable income that would not
be there if expenses had been listed accurately. Listing expenses realistically minimizes the risk of a sub-
stantial abuse challenge in a chapter ‘7 case”)

T’None of these debtors provided an explanation regarding anticipated changes in income or expenses.

“Oficial Bankruptcy Form 7, question 9.

Feo. R. Bawgn. P. 2016(b); 11 USC. § 329(a) (1994).

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courts, BAP opinions were cited in greater depth, and BAP opinions
were cited with greater immediacy. We noted above that citations
rates are most relevant and most informative in the absence of a stare
decisis obligation.!7? Accordingly, we find that our results regarding
the citation practices of courts of appeals and extracircuit federal
courts merit particular attention.

At first blush, one might not consider substantively significant
our statistically significant finding that, when holding other variables
at their mean, BAP opinions are predicted to receive approximately
0.2 more citations by courts of appeals. Placed in its proper context,
however, this finding takes on new light. As an initia] matter, courts
of appeals were incredibly parsimonious in their citing of first-tier
appellate opinions. Specifically, 82% of the first-tier appellate opinions
did not receive any circuit court citations, thus making any amount of
citation by the courts of appeals impressive. Furthermore, we estimate
pursuant to our regression analysis that the rate of citation over a
five-year period to BAP opinions by courts of appeals is 2.33 [1.30,
4.21) times greater than for district court opinions.}"4 These findings
confirm anecdotal evidence reported by the Federal Judicial Center
that circuit judges perceive BAP opinions to be of a higher quality
than district court opinions.!* Thus, although the size of the
statistically significant effect we witness with respect to circuit court
citations appears small, we interpret it to have substantive
significance. Finally, we uncovered statistically significant evidence to
support our hypothesis that extracircuit federal courts would
positively cite with greater frequency to BAP opinions—specifically, a
rate predicted to be 1.45 [1.03, 2.03) times greater than that for
district court opinions.’”6 In light of “the dearth of binding precedent
fon questions of substantive bankruptcy law) from the courts of
appeals or the Supreme Court,”}7’ one might interpret the extracircuit
favoritism of BAP opinions over district court opinions as the next-
best source of authority.

When we consider these findings in concert with the rest of our
findings on citation practices, we conclude that there exists strong
support for the notion that, in a variety of ways, other judicial actors

173. See supra notes 106-107 and accompanying text.
174, See infra Appendix tb1.8.

See McKenna & Wiggins, supra note 65, at 678 ("There is anecdotal evidence that
judges find the BAP decisions they review better reasoned and the cases better prepared
for review than decisions from the district courts, and that this impression is independent of the
likelihood of affirmance or reversal.” (emphasis added)).

176. See infra Appendix tbl.8.
177, See McKenna & Wiggins, supra note 65, at 628.

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2008] INVESTIGATING APPELLATE STRUCTURE 1771

definition, correct (unless, that is, the appellate court decision is itself
reversed). Thus, if an appellate court affirms the disposition of a lower
court, then the lower court’s disposition was correct. Second, one can
presume that the appellate court wishes to resolve the legal issues
“correctly” for the parties and for future courts.*” The law generally
calls upon appellate courts to examine legal issues de novo without
deference to the reasoning or conclusion of the court below.® Still, if
the appellate court ultimately reaches the same conclusion as the
court below, then it is accurate to say that the appellate court
perceived the lower court’s conclusion to be correct.

However, courts of appeals may not always affirm a decision
because they believe the earlier decision was “correct.” Judges need
not be so selfless. Indeed, there is a school of thought that views
judges, like all people, as self-interested actors. Judges may be
interested in keeping their jobs—for bankruptcy judges, this
translates to reappointment. Insofar as district judges enjoy Article IIT
status, they have life tenure and are guaranteed not to suffer any
salary reductions. Still, even Article III judges may have dreams of

97. See supra note 17.

98. See, e.g., Concannon v. Imperial Capital Bank (Jn re Concannon), 338 B.R. 90, 93
(BAP. Sth Cir, 2006) (“{Wle review the bankruptcy court's conclusions of law and interpretation
of the Bankruptcy Code de novo.”); Official Unsecured Creditors Comm. of Valley-Vulean Mold
Co, v. Ampco-Pittsburgh Corp. (In re Valley-Vulean Mold Co.), 237 B.R. 322, $26 (B.A.P. 6th Cir.
1999) (stating that conclusions of law by bankruptcy court are reviewed by BAP de novo); 9
CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2588, at 470
(2006).

99. It is possible that, notwithstanding the legal standard to the contrary, appellate courts
do not always reexamine legal issues de novo in practice. Perhaps, for example, courts of appeals
are inclined to rely upon the expertise of BAPs (sub rosa, of course, since the law dictates
otherwise) and thus are inclined to affirm BAP opinions. Or, perhaps equally, the appellate
courts might more often than not affirm district court opinions on the ground that district judges
enjoy Article III status and thus are independent. In either case, it would be accurate to view an
‘appellate court affirmance as embracing the lower court opinion as correct.

100. See O'Hara, supra note 17, at 737-38 (suggesting that judges make decisions “to impose
their normative views, beliefs, and mores on [society!"); Richard A. Posner, What Do Judges and
Justices Maximize? (The Same Thing Everyone Else Does), 3 SUP. CT. ECON. REV. 1, 39 (1993)
(‘Judges are rational, and they pursue instrumental and consumption goals of the same general
kind and in the same general way that private persons do.”).

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658 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

“The burden is on the debtors to complete their schedules
accurately."21

“The burden is on the debtors to use reasonable diligence in
completing their schedules and lists."2

“Candor, accuracy and integrity are required of a debtor in
bankruptcy."23

“Even if the debtor thinks the assets are worthless he must
nonetheless make full disclosure.">+

“[S]chedules are to be complete, thorough and accurate in
order that creditors may judge for themselves the nature of
the debtor’s estate.”25

“The bankruptcy laws impose a strict obligation on debtors
to file complete and accurate schedules."25

“If there is any doubt or uncertainty whatsoever as to a pos-
sible interest in any property, the asset should be scheduled
with an appropriate explanation.”27

The obligations of the debtor's attorney in this context have also been
addressed in the cases:?8

The duty of reasonable inquiry imposed upon an attorney by
Rule 11 and by virtue of the attorney’s status as an officer of
the court owing a duty to the integrity of the system re-
quires that the attorney (1) explain the requirement of full,
complete, accurate, and honest disclosure of all information
required of a debtor; (2) ask probing and pertinent questions
designed to elicit full, complete, accurate, and honest disclo-
sure of all information required of a debtor; (3) check the

financial affairs. They are not intended to be made a comprehensive record or journal of the debtor's
business dealings.”).

*Rion v. Spivey (In te Springer), 127 B.R. 702, 707 (Bankr. M.D. Fla. 1991). See also Faden v.
Insurance Co. of N. Am. (In re Faden), 96 B.3d 792, 795 (Sth Cir. 1996). .

7Lubeck v, Littlefield’s Restaurant Corp. (In 1 Fauchier), 71 BR 212, 215 (BAP. 9th Cir. 1987).
See also In re Matthews, 154 BR. 673, 678 (Bankr. W.D. Tex. 1993) (citing In re Braymer, 126 BR. at
502),

Holder v. Bennett (In re Bennett), 126 BR. 869, 875 (Bankr. ND. Tex.1991). See also Wiethuchter,
147 BR. at 199 ({A]]l debtors have a duty to update the schedules they file with the Bankruptcy
Court().

*Armstrong v. Lunday (In re Lunday), 100 BR. 502, 508 (Bankr. DN.D. 1989). See also United
States v. Haught (Ii re Haught), 207 BR. 269, 271 (Bankr. M.D. Fla. 1997).

Garcia v. Coombs (In re Coombs), 193 B.R. 557, 563-64 (Bankr. S.D. Cal. 1996) (quoting Lunday,
100 B.R. at 508). See also Sullivan, 204 BR. at 942.

75In re Dubberke, 119 B.R. 677, 680 (Bankr. S.D. Iowa 1990).

#7 American State Bank v. Montgomery (In re Montgomery), 86 BR. 948, 959 (Bankr. N.D. Ind. 1988).

See, eg, Robinson, 198 BR. at 1024; In re Armwood, 175 BR. 779, 789 (Bankr. N.D. Ga. 1994);
Matthews, 154 BR. at 680; Jn re Huerta, 137 BR. 356, 379 n8 (Bankr. C.D. Cal. 1992).

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134 Texas Law Review [Vol. 87:121

problems.” Several explanations exist. Consumers may not be aware of
their rights or be able to afford attorneys. The relative youth of mortgage
servicing as an industry means that few attorneys or judges understand the
legal and factual issues involved.” Regulatory authority for mortgage
servicing is fractured.”” The paucity of decisions suggests that many con-
sumers may respond to mortgage claims by “lumping it” rather than seeking
any formal redress.’ Consumers who litigate these disputes face all the
challenges of typical consumer-protection litigation, including limited access
to attomeys, expensive and complicated evidentiary issues, and insufficient
remedies to justify such suits.”

Most litigation against mortgage servicers has occurred in the context of
bankruptcy cases.” Bankruptcy changes the dynamic between borrowers
and servicers. The vast majority of consumers hire attorneys to represent
them in their bankruptcies.” Without counsel, consumers may be unable to
raise such claims. They may also have trouble identifying attorneys who are
familiar with such issues or willing to take such suits on a stand-alone basis.
As part of the bankruptcy case, the attorney may find it difficult to obtain the
cooperation of the mortgage servicer,”* and litigation may be necessary to
fulfill the attorney’s duty of representation.”® While bankruptcy is the
context for most servicing disputes, the problems identified in bankruptcy

67. See generally Gretchen Morgenson, Dubious Fees Hit Borrowers in Foreclosure, N.Y.
TIMES, Nov. 6, 2007, at Al (chronicling several ongoing lawsuits alleging serious misconduct by
mortgage-servicing providers).

68. See Eggert, supra note 11, at 768 (arguing that most borrowers are unable to enforce their
legal rights because they rarely read their mortgage-loan contracts and usually cannot afford to
retain an attomey to pursue litigation under consumer-protection statutes),

69. See, e.., NAT'L CONSUMER LAW CTR, supra note 22, at 201-03 (documenting conflicting
decisions in the federal cours regarding mortgage servicers’ claims that the requirements of the Fair
Debt Collection Practices Act (FDCPA) and Real Estate Settlement Procedures Act (RESPA) are
preempted by the Bankruptcy Code).

70. See Eggert, supra note 11, at 774-75 (expressing concer that legislation passed by several
states to curb servicer abuses may be subject to federal preemption)

71. See Mare Galanter, Reading the Landscape of Disputes: What We Know and Don't Know
(and Think We Know) About Our Allegedly Contentious and Litigious Society, 31 UCLA L. REV. 4,
14 (1983) (“Even where injuries are perceived, a common response is resignation, that is, ‘lumping
in”).

72. See JOHN A. SPANOGLE ET AL., CONSUMER LAW: CASES AND MATERIALS 772 (3d ed.
2007) (discussing the barriers to consumer litigation).

73. See Lenders Look, supra note 27 (quoting an employee of a servicer remarking that
“[bjankrupicy is becoming fertile ground for a lot of loopholes and a lot of lawsuits and a lot of
costs to servicers”).

74. See TERESA SULLIVAN ET AL., AS WE FORGIVE OUR DEBTORS: BANKRUPTCY AND
CONSUMER CREDIT IN AMERICA 22-23 (1989) (finding that only 4% of debtors in a sample of
1,529 bankruptcy cases filed pro se petitions).

75. See Hildebrand, supra note 45, at 10 (describing morgage servicers? inability ot lack of
effort to make their records match debtors’ plans or to comply with the requirements of the
Bankruptcy Code, such as disclosing fees and costs).

76. See MODEL RULES OF PROF. CONDUCT pmbl. para. 2 (2007) (“As advocate, a lawyer
zealously asserts the client's position under the rules of the adversary system.”).

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686 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

In weighing whether there is bad faith constituting cause for dismissal, the
bankruptcy court may consider the intentional concealment of assets or the
lack of candor and completeness in the debtor's bankruptcy papers.!> The
focus of the court's inquiry is upon the debtor’s honesty of intention.1¥4
Thus, inadvertent omissions or omissions due to the attorney's failure to
Properly review the papers do not establish cause for dismissal for bad
faith.5

The court can also dismiss a consumer bankruptcy chapter 7 case if grant-
ing relief would be a “substantial abuse” of the provisions of chapter 7.46 In
defining “substantial abuse,” many cases hold that the primary or exclusive
focus is upon the debtor's ability to pay creditors through a hypothetical

F.2d 1326, 1329 (10th Cir. 1993); Society Nat'l Bank v, Barrett (In re Barrett), 964 F.2d 588, 591 (6th
Cir, 1992); Neufeld v. Preeman, 794 F-2d 149, 152 (4th Cir.1986); Shell Oil Co. v. Waldron (In re Wal-
dron), 785 F.2d 936 (11th Cir) cert dismissed, 478 US. 1028, 106 8. Ct. 3343, 92 L. Ed. 2d 763 (1986);
Johnson v. Vanguard Holding Corp. (In re Jobnson), 708 F.2d 865, 867-68 (2nd Cir. 1983); United States
v. Estus (In re Estus), 695 F.2d 311, 316 (8th Cir.1982).

In Chapter 7: Industrial Ins. Serv. v. Zick (In re Zick), 931 F.2d 1124, 1128 (6th Cie. 1991); In re
Moses, 227 BR. 98, 101 (ED. Mich. 1996).

In Chapter 13: Molitor v, Edison (In re Molitor), 767 F.3d 218, 220 (8th Cir. 1996) (“The bad faith
determination focuses on the totality of the circumstances, specifically: (1) whether the debtor bas stated
his debts and expenses accurately; (2) whether he has made any fraudulent representation to mislead the
bankruptcy court[]"). See also Leavitt v, Soto, 1717 F.3d 1219, 1224 (9th Cir. 1998); Eisen v. Curry (In.
te Bisen), 14 F.3d 469, 470 (9th Cir. 1994); In re Love, 957 F.2d 1350, 1356 (7th Cir. 1992); Hardin v.
Caldwell (In re Caldwell), 851 F.2d 852, 859 (6th Cir. 1988); Estus, 695 F.2d at 317 (Among the factors
to be considered are “the accuracy of the plan's statements of the debts, expenses and percentage repay-
tment of unsecured debe and whether any inaccuracies are an attempt to mislead che court. In re Graffy,
216 BR. 888, 891 (Bankr. M.D. Fla. 1998); In re Fernandez, 212 BR. 361, 368 (Bankr. CD. Cal. 1997),
affd, 227 BR. 174 (BAP. 9th Cir, 1998); New Jersey Lawyers’ Fund for Client Protection v. Goddard,
212 BR. 233, 238 (DNJ. 1997}; In re Cockings, 172 BR. 257, 261 (Bankr. E.D. Ark. 1994) (Bad faith due
in part to “incomplete schedules, most noteworthy, inadequate breakdown of expenses"), In re Bandini, 165
BR. 317, 319 (Bankr. SD. Fla, 1994); In re Meisner, 155 BR. 519, 520 (Banks. D. Neb. 1993); In re
Standfield, 152 BR. 528, 535 (Bankr. N.D. Ill. 1993), appeal dismissed, 1993 WL 192957 (NLD. Ill. 1993),
In ve Powers, 48 BR. 120, 121 (Bankr. M.D. La. 1985).

'4In Chapter 7: In re Marks, 174 BR. 37, 40 (ED. Pa. 1994); Cassidy-Pierce Co, Inc. v. Burns (In re
Burns), 169 BR. 563, 567 (W.D. Pa. 1994); In re Hammonds, 139 BR. $35, 541 (Bankr. D. Colo. 1992); In
re Campbell, 124 BR. 462, 464 (Bankr. W.D. Pa. 1991).

Tn Chapter 13: Johnson v. Vanguard Holding Corp. (In re Johnson), 708 F.2d 865, 868 (2nd Cir.
1983); Barnes v. Whalen, 689 F.2d 193, 200 (D.C. Cir. 1982); In re Powers, 135 BR. 980, 992 (Bankr.
CD. Cal. 1991).

"5In Chapter 7: In re Khan, 172 BR. 613, 625 (Bankr. D. Minn. 1994); Fahey Banking Co. v. Parsell
(in ve Parsell), 172 BR. 226, 231 (Bankr. N.D. Ohio 1994); In re Josey, 169 BR. 138, 140-41 (Banke. SD.
Ohio 1994). See also In re Price, 211 BR. 170, 172 (Bankr. M.D. Pa, 1997); In re Marks, 174 BR. 37, 40
(ED. Pa. 1994); Buck v. Buck (In re Buck), 166 BR. 106, 109 (Bankr. M.D. Tena. 1993).

Chapter 13: In re Stoutamire, 201 BR. 592 (Bankr. SD. Ga. 1996) (dismissing the case for failing to
disclose an injury claim, but refusing to dismiss with prejudice because the attorney's interview form was
inadequate to elicit the correct information); Im re Fulton, 148 BR. 838, 842-43 (Bankr. SD. Tex. 1992)
(holding that the debtor's failure to disclose his non-filing wife's interest in community property was not
bad faith because debtor intended to disclose community nature of the interest).

4611 USC. § 707(b) (1994). See Mitchell, supra note 112, at 359-72.

HeinOnline -- 73 Am, Bankr. LJ. 686 1999

DEFO01715


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1792 VANDERBILT LAW REVIEW (Vol. 61:6:1745

fiscal year in question and 1 for those opinions issued during the
fiscal year in question) (Fiscal Year);!°2

whether the first-tier appellate court had published its
disposition (negative responses coded 0 and positive responses
coded 1) (Published);

whether the only party to appeal to the first-tier level court was
the debtor (negative responses coded 0 and positive responses
coded 1) (Appellant);

whether the debtor was the only party appearing as an appellee
at the first-tier level of review (negative responses coded 0 and
positive responses coded 1) (Appellee);

whether the appeal arose in the context of a Chapter 7 case
(negative responses coded 0 and positive responses coded 1)
(Chapter 7);

whether the bankruptcy case in which the appeal arose was
that of an individual debtor (negative responses coded 0 and
positive responses coded 1) (Debtor Type); and

whether the subject of the appeal could be classified as falling
into one of the four most frequently occurring subjects of appeal
heard by first-tier appellate courts for which there was
subsequent appeal! to the court of appeals (negative responses
coded 0 and positive responses coded 1) (Subject).15°

According to the model, even when controlling for other
potential explanatory variables, the type of first-tier appellate court to
have initially determined the appeal remains a statistically significant
predictor of Affirmance and Full Affirmance by the court of appeals.'®
The model indicates that the shift from the district court to the BAP
as the first-tier appellate court made the odds of Affirmance 3.95
[1.41, 11.07] times higher and the odds of Full Affirmance 2.54 [1.12,

152, The opinions in the database were issued during one of three government fiscal years—
1998, 1999, or 2000. See supra note 122 and accompanying text. The reference category was first-
tier opinions issued during the 2000 fiscal year and was accordingly excluded from the model.

153, The four most frequently occurring subjects were matters relating to discharge (24%),
multiple subjects (17%), avoiding powers (10%), and procedure/jurisdiction (9%).

154, Both the Court and Published variables are significant predictors of Affirmance and
Full Affirmance, The Appellant, Appellee, and Subject variables are significant predictors of Full
Affirmance (but not Affirmance). For detailed results from this regression model, see infra
Appendix tbl.6.

HeinOnline ~ 61 Vand. L. Rev. 1792 2008

DEF01559


5658

2008] Misbehavior and Mistake in Mortgage Servicing 129

B. Homeowners in Bankruptcy

Most consumers who file Chapter 13 bankruptcy cases are
homeowners.*> The requirements of the Bankruptcy Code impose new
burdens on mortgage servicers. In tum, these complexities create new
opportunities for mortgage-servicing abuse. The harms of poor mortgage
servicing are heightened in bankruptcy, a supposed refuge for families trying
to save their homes.

When a borrower files for bankruptcy, the creditor is barred by the
automatic stay from pursuing other legal action to collect the debt. Pending
foreclosures may not proceed against the debtor’s home, unless the court
grants the creditor permission to do so.” Many homeowners are in default
on their mortgage loans when they seek bankruptcy relief.* Because
families typically struggle for months before filing bankruptcy,” their
mortgage accounts at the time of bankruptcy may be loaded with default
charges, penalty fees, and foreclosure costs. To retain their homes in
bankruptcy, Chapter 13 requires debtors to pay these arrearage amounts in
full (including any regular monthly payments that were not made before the
bankruptcy).

To establish the arrearage amount that must be cured, creditors usually
file proofs of claim.*' Even if their loans are not in default, many mortgagees

35. See TERESA SULLIVAN ET AL., THE FRAGILE MIDDLE CLASS: AMERICANS IN DEBT 202
(2000) (stating that half of all bankruptcy debtors are homeowners); Bahchieva et al., supra note 1,
at 104-05 (explaining that although most debtors prefer Chapter 7, homeowners disproportionately
choose Chapter 13 because Chapter 7 does not protect home equity).

36. 11 USC. § 362(a) (2006).

37. See id. § 362(b) (setting out the exceptions to the automatic stay).

38. See Bahchieva et al., supra note 1, at 73, 104 (finding that bankrupt homeowners are about
50% more likely to file Chapter 13 than Chapter 7, and attributing this preference to Chapter 13's
special protections for homeowners in default).

39. The median family that files for bankruptcy reports seriously struggling with debts for
more than one year before filing bankruptcy. This query wes posed to Chapter 7 and Chapter 13
debtors in telephone interviews one year after the respondent filed for bankruptcy. See Robert M.
Lawless et al, Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 AM.
BANKR. L.J. 349, 381-82, 382 fig.12 (2008) (reporting data from telephone surveys of families in
bankruptcy).

40. See 11 USC. § 1322(b)(2) (2000) (providing that the Chapter 13 bankruptcy plan may
“modify the rights of holders of secured claims, other than a claim secured by a security interest in
real property that is the debtor's principal residence”) (emphasis added); § 1322(6)(5) (providing
that “notwithstanding paragraph (2) of this subsection,” the bankruptcy plan may “provide for the
curing of any default within a reasonable time”); see also Mark S. Scarberry & Scott M. Reddie,
Home Mortgage Strip Down in Chapter 13 Bankruptcy: A Contextual Approach to Sections
1322()(2) and (b)(5), 20 PEPP. L. REV. 425, 431 (1993) (“Most homeowners in Chapter 13 must,
as a practical and ultimately a legal matter, use § 1322(b)(5) to cure their defaulted home mortgages
if they wish to keep their homes.”).

41, See Official Bankruptcy Form 10 (2007), available at hitp:/iwww.uscourts.govirules!
BK_Forms_1207/B_010_1207f pdf (instructing secured creditors to list the amount of any arrearage
as of the time that the case 1s filed). See generally David Gray Carlson, Proofs of Claim in
Bankruptcy: Their Relevance to Secured Creditors, 4 J. BANKR. L. & PRAC. 555 (1995) (deseribing
the reasons why secured creditors file proofs of claim).

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5749
690 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

An adversary proceeding is required to deny a debtor's discharge.!?9
This process involves a complaint, an answer, discovery, motions, a trial, and,
possibly, multiple appeals.!° The party objecting to the discharge bears the
burden of proof by a preponderance of the evidence.!+

An objection to the discharge can be filed by a creditor, the trustee or the
United States Trustee.'*? However, it is rare for a creditor to be motivated
to object to the debtor's discharge, probably because in most cases the
debtor’s conduct does not meet the strict requirements for denying the dis-
charge and the creditor's debt does not justify the expense. Similarly,
although the trustee is under a duty to oppose the discharge “if advisable,"
the trustee rarely has sufficient assets to fund such litigation.1>* Even if the

"Rep, R_ Bakr. P. 7001(4}; In re Little, 220 BR. 13, 16 (Bankr. DINJ. 1998); In re Goodwin, 163
BR. 825, 834 (Bankr. D. Idabo 1993).

See Fep. R. BaNkR. P. 7001 - 8620. These rules incorporate by reference most of the Federal Rules
of Civil Procedure.

"Red. R. Bankr. P. 4005; Peterson v. Scott (In re Scott), 172 F.3d 959, 966-67, (7th Cir. 1999);
Barclays/American Bus. Credit, Inc. v. Adams (In re Adams), 31 F.3d 389, 394 (6th Cir. 1994), cert
denied, 513 US. 1111, 115 8. Ct. 903, 130 L, Ed. 2d 786 (1995); Farouki v. Emirates Bank Int Led. (In 1e
Farouki), 14 F.3d 244, 249 n.17 (4eh Cir. 1994); Beauboeuf v. Beauboeuf (In re Beauboeuf), 966 F.2d 174
(Sth Cir. 1992); First Nat'l Bank of Gordon v. Serafini (In re Serafini), 938 F.2d 1156, 1157 (10th Cir.
199%).

211 USC. § 72701) (1994).

93In re Sebosky, 182 BR. 912 (Bankr. M.D. Fla. 1995). Some courts allow attorney fees as an admin-
istrative expense under § 503(b) to a creditor that prosecutes an objection to discharge. In re Zedda, 169
BR. 605 Bankr. ED. La. 1994); Jacobson v. Reese Speece Properties, Inc. (In re Speece), 159 BR. 314
(Bankr, ED. Cal. 1993); In re Rumpza, 54 BR. 107 (Bankr. DD. 1985); Johnson Mem'l Hosp. v. Hess, 44
BR 598, 600 (W.D. Va. 1984); In re George, 23 BR. 686, 687 (Bankr. SD. Fla. 1982) (trustee was
awarded fees of $330, the trustee's attorney, $2,000, and the creditor's attorney, $1873 plus $486 in costs;
the funds in the estate were $4970).

There is a split in the cases on whether prior court approval is required for an award of fees. Some
cases hold that such approval is not required. Eg, Zedda, 169 BR. 605. However, other courts deny fees
in the absence of such approval. Jn re Lagasse, 228 BR. 223 (Bankr. E.D. Ark. 1998); In re Monahan, 73
BR. 543 (Bankr. S.D. Fla. 1987); In re Romana, 52 BR. 590 (Bankr. M.D. Fla. 1985); In re Spencer, 35
BR. 280 (Bankr. N.D. Ga. 1983); Lazar v. Casale (In re Casale), 27 BR. 69 (Bankr. ED.N.Y. 1983); In re
Jobnson, 72 BR 115, 118 (Banke, ED.N.C. 1987) (‘The reason for a rule prohibiting compensation for
‘unauthorized services is to enable the court to maintain control of costs and to insure that estave assets are
not wasted. Duplication of services between a creditor and the trustee of a creditors’ committee is to be
By asking for prior approval to bring a complaint, a creditor provides the trustee with an oppor
tunity to indicate whether he is willing and able to pursue the action in question.” (citations omitted).
‘One court requiring prior approval granted that approval nunc pro tunc and allowed fees to the creditor's
attorney for objecting to the debcor’s discharge. In re Antar, 122 BR. 788 (Bankr. $.D. Fla. 1990).

1411 USC. § 704(6) (1994).

335s observed in note 85, supra, all of the chapter 7 cases in this study were no asset cases,

“tt may be true that the cost of opposing a discharge may be too great to make opposing a discharge
‘advisable, particularly where all creditors are given notice of the trustee's dilemma but not a single one
shows interest in helping the trustee deal with the problem of costs” Moister v. Vickers (In re Vickers)
176 BR. 287, 289 (Bankr. N.D. Ga 1994)

See also Jacobson v. Robert Speece Properties, Inc. (In re Speece), 159 BR. 314, 322 n.12 (Bankr. E.D.
Cal, 1993) (The realities are chat trustees commonly take a back seat when a creditor objects to discharge
in order to conserve resources[ J"); Mary Jo Heston, The United States Trustee: The Missing Link of

HeinOnline - 73 Am. Bankr. L.J. 690 1999

DEF01719


Avan warstais, UUIuuerR HUM, CoH

GOLDBERG KOHN

Practice Areas.

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creditors’ Rights
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Since joining Goldberg Kohn in |
September 2002 as a principal in the
Bankruptcy & Creditors’ Rights Group,
Ronald Barliant has represented
debtors and creditors in complex
bankruptcy cases. As head of the firm's "burgeoning practice in
debtor work,"[1] his debtor representations include a machine
tool manufacturing company in a Delaware chapter 11 case
involving significant environmental and mass tort liabilities (plan

confirmed with future claimants trust 11 months after filing), @
wireless telecommunications carrier in a chapter 11 case
requiring the restructuring of debts owed the FCC for
PCS licenses (plan confirmed 5 months after filing), and a home
products manufacturing company in a pre-negotiated chapter
11 case involving a debt-for-equity swap and the issuance of
new debt securities (plan confirmed 75 days after filing).

His creditor representations include the indenture trustee for
most of the aircraft operated by United Airlines; the prepetition
secured lenders and debtor in possession lenders in the chapter
11 cases of a large manufacturing company; a foundry and a
food distributor, the secured creditor resisting substantive
consolidation in the Delaware case of a sub-prime lender; and
Claimants in asbestos-related chapter 11 cases.

Mr. Barliant has also argued several appeals and counseled
major financial firms in connection with distressed investments,
and both debtors and creditors in connection with workouts. In
addition, he has mediated disputes in over a dozen cases,
including Delphi Corporation, U.S. Energy Biogas, HALO,
Altheimer & Gray and Fleming Foods. He has also been engaged
as a consultant by other law firms representing clients in
bankruptcy cases, and as an expert witness. In addition, he is
an estate representative in the Global Crossing case and'was a
irector of a Delaware debtor in the automotive industry.

Before joining Goldberg Kohn, Mr. Barliant served as a United
States bankruptcy judge for the Northern District of Ilinois from
1988 to 2002. During his tenure on the bench, one of the
largest cases over which he presided was Comdisco Inc. (in the
technology services industry), involving more than $4 billion in
debt. Other prominent cases he heard include Florsheim Group
Inc. (men’s shoes); Birmingham Steel Corp. (specialty steel);
Archibald Candy Corp. (confectionaries under Fanny May and
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(telecommunications); Ben Franklin Retail Stores (retail); Keck,
Mahin & Cate (law firm); Forty-Eight Insulations Inc. (asbestos

http://www.goldbergkohn.com/printversion.html

bape rue

8/30/2010
DEF01900

PORT Exhibit 1098


5635

1810 VANDERBILT LAW REVIEW

Table 2: Frequency of Dispositions Rendered on Appeal

Panel A: First-Tier Dispositions

Disposition Frequency Percentage
Negative 8 29.10
Hybrid 2 8.21
Positive 168 62.69
Total 268 100.00

Source: First-Tier Database

Panel B: Second-Tier Dispositions

Disposition Frequency Percentage
Negative 33 19.41
Hybrid 17 10.00
Positive 120 70.59
Total 170 100.00

Source: Second-Tier Database

Table 3: Data for First-Tier Appellate Bankruptcy Opinions with Positive Citing
References

Panel A: Frequency of Positive Citation to First-Tier Appellate Opinions

‘Number of Frequency Percentage
Citations
1 45 22.28
2 35 17.33
3 24 11.88
4 17 8.42
5 18 8.91
26 63 31.18
Total 202 100.00

Source: First-Tier Database

HeinOnline ~61 Vand. L. Rev. 1810 2008 DEF01577


5659

130 Texas Law Review [Vol. 87:121

will file claims to establish the amount of outstanding principal. While liens
on a debtor’s property pass unaffected through bankruptcy”? barring a
specific challenge based on special bankruptcy avoidance powers,” creditors
who wish to receive distributions from the trustee must file claims.“*
Trustees normally pay arrearage amounts to servicers from debtors’ Chapter
13 payments.’ In some jurisdictions, trustees also collect and transmit the
regular ongoing mortgage payments to servicers.“°

42, See 11 U.S.C. § 524(a) (stating that discharge “voids any judgment at any time obtained, to
the extent that such judgment is a determination of the personal liability of the debtor”) (emphasis
added); Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (noting that discharge extinguishes
only the personal liability of the debtor and that a creditor still has the right to foreclose on a
mortgage); Marianne B. Culhane & Michaela M. White, Debr After Discharge: An Empirical Study
of Reoffirmation, 73 AM. BANKR. L.J. 709, 714 (1999) (“Valid liens on collateral survive the
discharge.”).

43, See 11 U.S.C. §§ 544, 547 (2006) (establishing the powers of the trustee and allowing
avoidance of a transfer when several conditions are satisfied).

44, See FED. R. BANKR. P. 3002 (providing that, with certain exceptions, an “unsecured creditor
or an equity security holder must file a proof of claim or interest for the claim or interest to be
allowed"); FED. R. BANKR. P. 3021 (providing that distribution under the plan will be made to
creditors whose claims have been allowed and to certain others); see also WARREN & WESTAROOK,
supra note 2, at 219 (“To receive any distribution, each Chapter 7 or Chapter 13 creditor must
submit a proof of claim.

45, See 11 US.C. § 1326(c) (“Except as otherwise provided in the plan or in the order
confirming the plan, the trustee shall make payments to creditors under the plan.”); see also Henry
E. Hildebrand Ill, The Sad State of Mortgage Service Providers, AM. BANKR. INST. J., Sept. 2003,
at 10, 10 (explaining that trustees are required by the terms of confirmed Chapter 13 plans to make
arrearage payments to mortgage companies),

46. See Scott F. Norberg & Nadja Schreiber Compo, Report on an Empirical Study of District
Variation, and the Roles of Judges, Trustees and Debtors’ Attorneys in Chapter 13 Bankruptcy
Cases, 81 AM. BANKR. LJ. 431, 446 (2007) (reporting that in three of the seven bankruptcy districts
surveyed in the article, the practice was for Chapter 13 debtors to make mortgage payments through
the trustee). Practices for paying mortgage creditors in Chapter 13 cases vary. In some
jurisdictions, ongoing mortgages are paid “outside the plan,” meaning that the debtor continues to
make the ongoing principal and interest payments directly to the mortgage servicer without trustee
involvement. See id. (finding three other bankruptcy districts where the practice was for Chapter (3
debtors to make mortgage payments directly to the creditor); see also Timothy D. Moratzka,
Commission-Free= Chapter 13 Debior as Dispersing Agent, AM. BANKR. INST. J., Oct. 2007, at 14,
14 (presenting cases from jurisdictions where the debtors were allowed to make mortgage payments
“outside the plan”). Even in these jurisdictions, the trustee usually collects the debtor's payment of
any arrearages on the mortgage loan; in other districts, the trustee collects both the arrearage
amounts and the ongoing morigage payments. See Hildebrand, supra note 45, at 40 (“More and
more chapter 13 trustees are being required by the terms of confirmed plans to make not only the
arrearage payments 10 mortgages, but also the payments to maintain the regular monthly
payments.”),

These practices are yet another example of the well-documented phenomena of “local legal
culture” in bankruptcy cases. See generally Jean Braucher, Lawyers and Consumer Bankruptcy:
One Code, Many Cultures, 67 AM. BANKR. L.J. $01 (1993) (contrasting the cultures of bankruptcy
practices in different locations); Lynn M. LoPucki, Legal Culture, Legal Strategy, and the Law in
Lawyers’ Heads, 90 NW. U. L. REV. 1498 (1996) (using examples of local bankruptcy practices to
explain the nature and evolution of law); Teresa A. Sullivan et al., The Persistence of Local Legal
Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 HARV. JL. & PUB,
Pony 801 (1994) (using examples of the differing bankruptcy practices in various locales to stress
the importance of “local legal culture”).

HemOnhne ~ 87 Tex. L. Rev. 130 2008-2009 DEF01601


5694

2008) Misbehavior and Mistake in Mortgage Servicing 165

debtor’s schedule listed an outstanding mortgage obligation of $100,000 and
the corresponding proof of claim was for $110,000, the gap is $10,000. As a
percentage of the amount of scheduled debt, the gap is 10%. I grouped these
percentage-size data into categories as shown in Figure 5 for creditor’s-favor
claims (70.6% of all loans). About four in ten (40.4%) of all loans in the
Mortgage Study sample had a mortgage claim that exceeded the
corresponding debtor’s scheduled amount by less than 5%. The more
alarming findings concem the portion of claims in which the creditor’s claim
was much higher than the debtor's amount. The gap was between 5% and
15% of the debtor’s calculation of the mortgage debt for 21.4% of all loans in
the sample. Another 8.8% of loans had mortgage claims that were more than
15% higher than the amount of debt as calculated by the debtors on their
schedules. Given their size, it seems implausible that these discrepancies
resulted from valid postbankruptcy charges or an underestimation by debtors
relying on the prior month’s mortgage statements to complete the bankruptcy
schedules. Instead, the magnitude of these differences suggests a real
misunderstanding between debtors and creditors about the amounts of
mortgage debt.

Figure 5: Frequency of Creditor’s-Favor Gaps,
Calculated as Percentage of Claimed Amount

Small Gap (<5%) Medium Gap (5-15%) Large Gap (15%)

‘981,179 loans

Unfortunately, the data do not permit an analysis of what portion of the
disagreement about the debts relate to arrearage and what fraction, if any, is
due to differing calculations of outstanding principal. Creditors and debtors
were not consistent enough in separating these amounts to make any
systematic comparison. Given that the outstanding principal appears on each
mortgage statement that a debtor receives, it seems likely that at least some
fraction of the disagreement is attributable to default charges and fees. These
costs cannot be easily calculated by debtors, who may only take into account
missed payments in determining the arrearage amounts. To the extent the

HeinOnline -- 87 Tex. L, Rev. 165 2008-2009 DEF01636


5768

RAFAEL I. PARDO 2

PUBLICATIONS

Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, 68 WASH.
& LEE L. REV. (forthcoming 2011)

Opinion, Resolution Oversight, NAT'L L.J., May 31, 2010, at 34 (with Jonathan
R. Nash)

An Empirical Examination of Access to Chapter 7 Relief by Pro Se Debtors, 26
Emory BANKR. DEV. J. 5 (2009)

Setting the Record Straight: A Sur-Reply to Professors Lawless et al., 33
SEATTLE U. L. REV. 93 (2009)

Failing to Answer Whether Bankruptcy Reform Failed: A Critique of the First
Report from the 2007 Consumer Bankruptcy Project, 83 AM, BANKR. LJ. 27
(2009) (peer-reviewed)

The Real Student-Loan Scandal: Undue Hardship Discharge Litigation, 83 AM.
BANKR. L.J. 179 (2009) (peer-reviewed) (with Michelle R. Lacey)

* cited in Jn re Miller, 409 BR. 299 (Bankr. E.D. Pa. 2009)
The Utility of Opacity in Judicial Selection, 64'N.Y.U, ANN. SURV. AM. L. 633
(2009) (symposium issue)
An Enpirical Investigation into Appellate Structure and the Perceived Quality of
Appeliate Review, 61 VAND. L. REV. 1745 (2008) (with Jonathan R, Nash)

Examining the Perceived Quality of Appellate Review in the Bankruptcy System,
NORTON BANKR. L. ADVISER, Aug. 2008, at 1 (with Jonathan R. Nash)

Hines and Inability to Repay: The Role of Debtor Health in the Discharge of
Educational Debt, 35 FLA, ST. U. L. REV. 505 (2008)

Eliminating the Judicial Function in Consumer Bankruptcy, 81 AM. BANKR. L.J.
471 (2007) (peer-reviewed)

© cited in Jn re Cox, 393 BR. 681 (Bankr. W.D. Mo. 2008); In re Quigley,
391 B.R. 294 (Bankr. ). W. Va. 2008); Jn re Tumer, 384 B.R. 537
(Bankr. $.D. Ind. 2008); Jn re Waters, 384 B.R. 432 (Bankr. N.D. W. Va.
2008)

Analyzing Chapter 7 Abuse Dismissal Motions Post-BAPCPA: A Reply on
Cortez, AM. BANKR. INST. J., December/January 2007, at 16
© cited in Jn re Henebury, 361 B.R. 595 (Bankr. $.D. Fla. 2007)

Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the
Discharge of Educational Debt, 74 U. CIN. L. REV. 405 (2005) (with Michelle
R Lacey)

cited in Jn re Cumberworth, 347 B.R. 652 (B.A.P. 8th Cir. 2006); In re
Woody, 345 B.R. 246 (B.A. 10th Cir. 2006); In re Greenwood, 349
BR. 795 (Bankr. D. Ariz. 2006)

On Proof of Preferential Effect, 55 ALA. L. REV. 281 (2004), reprinted in 13 J.
BANKR. L. & PRAC. 95 (2004)

* cited in Jn re Bankvest Capital Corp., 375 F.3d 51 (1st Cir. 2004)

8/25/2010

DEF01893


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168 Texas Law Review [Vol. 87:121

default fees or enlarged due to a servicer’s miscalculations diminish
bankruptcy’s potential as a home-saving device.

To prevent the harms from either type of gap, two changes are needed.
Debtors attorneys should obtain up-to-date statements of their clients’
mortgage obligations from creditors before counseling debtors to file Chapter
13. Then, after a bankruptcy is filed, attorneys and debtors should verify the
accuracy and reasonableness of the mortgagees’ claims, examining the
source of any discrepancies between the claims and the scheduled amounts.
To enable this latter practice, creditors must be held to the evidentiary
standard for proofs of claim and must produce complete and clear
documentation of their calculations. Without these changes, the functioning
of the bankruptcy process is impaired.

D. Claims Objections

The findings in the prior three Parts of this Article offer a trio of indicia
that undermine confidence in the claims system. Mortgagees often presented
claims without required documentation;”* many claims contained requests
for suspicious fees;”? and mortgagees’ claims and debtors’ records were
rarely identical.” The proof-of-claim process has an existing, internal
mechanism to address such problems. Under § 502(a) of the Bankruptcy
Code, any party in interest may object to a claim.” If such an objection is
made, “the court, after notice and a hearing, shall determine the amount of
such claim."

Despite these procedures, mortgage creditors are rarely called to task for
the widespread deficiencies in their claims. Objections were identified to
cotrespond with only 67 of the 1,768 proofs of claim in the sample. In other
words, objections were filed in response to only 4% of all claims. Debtors,
trustees, and other creditors simply did not object to mortgagees’ claims—
even when such claims did not meet the standard for prima facie validity
because the claims did not comply with the unambiguous requirements of
Rule 3001;?°* even when such claims contained vague or suspicious fees; and
even when such claims exceeded the debtors’ calculations of their debts by
thousands of dollars. A debtors attorney who has developed a training
program to educate attorneys about mortgage-servicing issuesTM has

228. See supra text accompanying notes 149-54,

229. See supra text accompanying notes 173-74, 209-11

230. See supra subpart IIK(C).

231. 11 USC. § 502(a) (2006).

232. Id. § 502(b).

233. FED. R. BANKR. P. 3001(f) (“A proof of claim executed and filed in accordance with these
rules shall constitute prima facie evidence of the validity and amount of the claim.").

234. See infra note 238.

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jurisdiction) were excluded. In most instances, each opinion generated
one observation. However, some opinions generated multiple
observations. For example, some opinions resolved multiple appeals in
separate and unrelated bankruptcy cases. In other instances, an
opinion would resolve an appeal of separate orders that were entered
by the bankruptcy court in distinct proceedings within the same case.
Finally, by virtue of the identical date restriction included in both
search queries, each opinion was issued during one of three
government fiscal years: 1998, 1999, or 2000.12?

Pursuant to these selection procedures, our first-tier database
consists of 268 observations drawn from 264 opinions," 4 of which
produced a second observation. Our second-tier database consists of
170 observations drawn from 165 opinions,' 5 of which produced a
second observation. Not surprisingly, for both databases, the majority
of appeals wended their way through the district courts rather than
the BAPs—although more so for appeals in the second-tier database
(approximately 81%) than the first-tier database (approximately 60%).

122, We tailored our search in this manner for two reasons. First, we wanted to facilitate
comparisons of our data with official government data regarding bankruptcy appeals. Generally,
such data track the government's fiscal year, which begins on October Ist and ends on
September 30th, rather than tho calendar year.

Second, we chose the specific time period for this study in order to capture the BAP
experience at its apex in terms of participating circuits. BAPs did not become a fixture of the
bankruptcy judicial system until 1996, The enactment of the Bankruptcy Code in 1978 amended
the Judicial Code to permit, but not require, the establishment of BAPs on a circuit-by-circuit
basis, Only the First and Ninth Circuits chose to do so, establishing their BAPs in 1979 and
1980, respectively. In the wake of the Marathon decision, however, the First Circuit concluded
that continued operation of a BAP would be inappropriate until Congress remedied the defects in
the constitutionally infirm, bankruptcy jurisdictional scheme. Massachusetts v, Dartmouth
House Nursing Home, Inc., 726 F.2d 26 (1st Cir. 1984).

‘The Ninth Circuit reached the opposite conclusion in Briney v. Burley (In re Burley), 738 F.2d
981 (9th Cir. 1984), holding that circuit court supervision of the BAP satisfied Marathon's
requirement of Article III judicial review. Despite the measures taken by Congress in 1984
through the Bankruptcy Amendments and Federal Judgeship Act to address the Marathon
decision, the First Circuit Judicial Council chose not to reauthorize its BAP, thus leaving the
Ninth Circuit as the only circuit with an operating BAP. This state of affairs changed with the
Bankruptcy Reform Act of 1994, which amended the Judicial Code to require the judicial council
of each circuit to create a BAP absent a finding by the council that (1) insufficient judicial
resources in the circuit would preclude its establishment, or (2) that establishment of a BAP
would produce undue delay or increased cost to parties in bankruptcy cases. Pub. L. No. 103-394,
§ 104(c)(3), 108 Stat. 4106, 4109 (codified at 28 U.S.C. § 158(b)(1)). Prompted into action by this,
amendment, in 1996 the First Circuit reauthorized and the Second, Sixth, Eighth, and Tenth
Circuits established BAPs. The Second Circuit BAP, however, ceased operations on July 1, 2000.

123, Thus, our selection criteria reduced the random sample of documents relating to the
first-tier database by approximately 18%.

124, Similar to the first-tier database, see supra note 123, our selection criteria reduced the
random sample of documents relating to the second-tier database by approximately 17%.

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670 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

not address all of their secured debt in their statements of
intention.?> (13 of 91 cases)

B. INconsisTenT DiscLosuREs
Six areas were examined for inconsistent disclosures:

12. Does schedule J show an expense for an automobile pay-
ment but schedules B and G disclose no automobile?

Generally, a debtor disclosing an expense for automobile payments in
schedule J will have an interest in the automobile that must be disclosed. If
the debtor owns the automobile, the disclosure would be on schedule B. If
the debtor leases the automobile, the disclosure would be on schedule G.
This question tests whether the debtor inconsistently disclosed an expense
for automobile payments but no interest in any automobile.

5% of debtors inconsistently disclosed expenses for auto-
‘mobile payments but no automobile. (10 of 200 cases)

13. Ina chapter 7 case, are the expenses in schedule J within
10% of the income in schedule I?

In many cases, the debtor has established a pattern of increasing borrow-
ing to carry on a lifestyle beyond the debtor’s means, which has caused the
debtor's bankruptcy. It is entirely reasonable to expect that as part of the
bankruptcy process, the debtor will come to understand and appreciate the
basic economic fact that one’s income provides a natural limit on one’s ex-
penses. Without assets or credit, one’s expenses simply cannot exceed one’s
income. This fact applies with special urgency to a debtor in bankruptcy
because as the bankruptcy approaches, during the bankruptcy, and for a time
after the bankruptcy, the debtor's assets and credit are likely to be limited. If
the debtor’s expenses still substantially exceed the debtor's income, the
debtor has a problem, or soon will. Indeed it might be questioned whether
such a debtor yet understands and appreciates the basic economic principles
of budgeting income and expenses. This question tests the debtor's under-
standing and appreciation of this fact of life as of the moment of filing
bankruptcy.7>

This includes one chapter 7 case in the svudy sample in which the requiced statement of intent was
not filed.

There is an infrequent scenario in which a debtor makes payments on a vehicle that is formally titled
or leased in another's name, such a child. In that event, a response might not be required on either
schedule B or G, depending on the circumstances. However, in such a case, the debtor should, again
depending on the circumstances, disclose the payments on the statement of financial affairs. See supra note
55. No such responses were made ia the study sample.

"One of the most difficult problems faced by every bankruptcy attorney is helping the debtors to
prepare a realistic, post-bankruptcy budget, but this is probably the most important thing [the attorney]
will do to help them. Their financial and emotional rehabilitation starts with this” Hon, John C. Akard,

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remedies previously reviewed, this remedy does not address the problems
observed in the study.

D. Dentat or REDUCTION OF Fees For Depror's ATTORNEY

11 U.S.C. § 329(b) allows the bankruptcy court to order the return of
any payment to the debtor’s attorney, or cancel any fee agreement, if the
compensation exceeds the reasonable value of the attorney's services. In a
few reported cases, courts have reduced or denied fees for consumer debtor
attorneys due to inaccurate or incomplete disclosures in the bankruptcy pa-
pers.'4? However, nothing suggests that this remedy has been used on a reg-
ular basis to address problems in debtors’ papers.

E. Monetary Sanctions UNDER BANKRUPTCY RULE 9011

On December 1, 1997, major changes took effect in Bankruptcy Rule
9011. Previously, the rule provided that the bankruptcy court could sanction
a party for signing and filing any paper that was not well grounded in fact “to
the best of the party’s knowledge, information and belief, formed after a rea-
sonable inquiry.”"!4* If the debtor's initial bankruptcy papers violated this
tule, the debtor could be sanctioned.14# However, the debtor's attorney was
excused from the requirement to sign the schedules or the statement of finan-
cial affairs, and was not ordinarily subject to sanctions under this rule.!45

Matter of Geraci, 138 F.3d 314, 318 (7th Cir.), cert. denied, _U.S.__, 119 8. Ct. 63, 142 L. Ed. 2d
50 (1998) (TThe attorney's performance was “not up to a level that [the bankruptcy court] sees from the
majority of practitioners who regularly appear before it.”) (quoting from In re Chellino, 209 BR. 106, 120-
21 (Bankr. C_D. Ill. 1996)); Slaton v. Raleigh, 1998 WL 684210 (NLD. IIL 1998); Bill Parker & Assocs. v.
Flarau (In re Rainwater), 124 BR. 133, 139 (MD. Ga,1991), affd, 943 F.2d 1318 (11th Cir. 1991)
(conflicting information in schedules); In re Woodward, 229 BR. 468, 476 Bankr. N.D. Okla. 1999) (fail
ure to disclose fee paid and undervaluing asset); In re Barber, 223 BR. 830, 834 (Bankr. N.D. Ga. 1998)
(failure to disclose debtor's personal injury claim); In re Ludwick, 185 BR. 238, 244 (Bankr. W.D. Mich.
1995) (attorney's forgery of the debtor's signature); In re Corbett, 145 B.R. 332 (Bankr. M.D, Fla. 1992)
(having clients sign forms in blank); In re Bennett, 133 BR. 374, 378-79 (Bankr, N.D. Tex. 1991) (undis-
closed retainer); In re Dalton, 95 BR. 857, 860 (Bankr. MD. Ga. 1989), affd, 101 BR. 820 (MD. Ga.
1989) (false statement of compensation).

“Rep. R. Bane. P. 9011 (prior to December 1, 1997 amendment).

TM4Caldwel v. Unified Capital Corp. (In re Rainbow Magazine, inc), 77 F-3d 278, 282 (9th Cir. 1996)
(Gebtor’s principal sanctioned $45,000 for filing a false statement of financial affairs); Stuebben v. Gicioso
in re Gioioso), 979 F.2d 956 (3rd Cir. 1992) (explaining that sanctions must be awarded for bad faith
opposition to motion for summary judgment on claim of intentional omission of assets); In re Famisaran,
224 BR. 886, 893 (Bankr. ND. Ill. 1998; In re Graffy, 233 BR. 894 (Bankr. M.D. Fla. 1999) (awarding
sanctions against the debtor under Rule 9011 and the inherent power of the court under § 105(a)}; In te
Eatman, 182 B.R. 386, 396 (Bankr. $.D.N.Y. 1995); Railroad Center v. Thompson (In re Thompson), 165
BR. 30, 32-33 (Bankr. M.D. Tenn. 1994). But see In ve Smith, 143 BR. 912, 914 (Bankr. D. Neb. 1992)
(refusing to impose sanctions against debtors for claiming property as exempt in bankruptcy schedules
‘without any legal basis, because “mistake in bankruptcy schedules was due to admitted error of counsel”).

MSMicGarben v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1170 (4th Cir, 1997),
cert, denied, _ US. _, 118 §. Ct. 369, 139 L. Ed. 2d 287 (1997); Cobn v. United States Trustee (In re
‘Ostas), 158 BR. 312, 319 (N.D.N.Y. 1993); In re Palumbo Family Ltd. Partnership, 182 BR. 447, 475-76

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referees.TM It is this dynamic that underlies the current bankruptcy
judicial structure and the anomaly of double appeals. Only one level of
intermediate appellate review would have been needed had Congress
made today’s bankruptcy judges coequals with district court judges,
but that was not to be the case.

With enactment of the Bankruptcy Code in 1978,35 Congress
effectuated a complete overhaul of the federal bankruptcy system that
had been in place for eighty years. While there were proposals to vest
bankruptcy judges with Article III status,9 Congress ultimately
rejected that notion, a decision supported by most current and former
Article III judges.37 Congress instead decided to establish the
bankruptcy courts as “adjuncts” of the federal district courts.
Bankruptcy jurisdiction was vested statutorily in the district courts,
yet the statute also directed that all of that jurisdiction was to be
exercised by the bankruptcy courts, which were to be staffed by non-
Article III judges.*®

The Supreme Court rejected the 1978 Act’s jurisdictional
structure in Northern Pipeline Construction Co. v. Marathon Pipe Line
Co.8 The Court in Marathon held that the 1978 Act violated
Article III by vesting federal judicial power in non-Article III
bankruptcy judges. The decision forced Congress to repair the
constitutional infirmity. Lobbying by Article III judges led Congress
yet again to reject a solution of affording bankruptcy judges Article III
status.4? Instead, Congress simply modified the 1978 structure. The
Bankruptcy Amendments and Federal Judgeship Act of 1984

34. See Posner, supra note 23, at 75.

38. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (codified as amended
primarily at 11 U.S.C. §§ 101-1532 and in scattered sections of 28 U.S.C).

36. See Countryman, supra note 28, at 7-8.

37. See id. at 8-9; Posner, supra note 23, at 77 (“The federal judges opposed the creation of
more independent bankruptcy courts, because (1) they would lose their appointment power over
bankruptcy judges, and thus one of their main patronage opportunities, and (2) their status
would be diluted through the vast increase in the number of federal judicial positions.”).

Interestingly, as Congress considered various proposals for reorganizing the court structure
of the bankruptcy system in its reform efforts from the 1970s that Jed to enactment of the
Bankruptcy Code, bankruptcy judges did not seek Article III status. Instead, they lobbied
Congress for appointment by the judicial council, rather than the president, for two reasons:
First, they believed their merit would be properly recognized in a nonpolitical judicial
appointment process; and, second, they feared that sitting judges would lack the political
connections necessary for presidential appointment. See Mund, supra note 26, at 20-21, 24-25,
29. For a political economic analysis of the 1978 Act's treatment of bankruptcy judges, see
Posner, supra note 23, at 74-94.

88. See 28 U.S.C. § 1471(b), (c) (Supp. II 1978), invalidated by N. Pipeline Constr. Co. v.
‘Marathon Pipe Line Co., 458 U.S. 50 (1982).

39. 458 U.S. at 87.

40. Countryman, supra note 28, at 31.

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An Empirical Study of Consumer
Bankruptcy Papers

by
The Honorable Steven W. Rhodes*

I, INTRODUCTION

An empirical study was performed on the schedules, the statements of
financial affairs and other initial papers in 200 randomly chosen consumer
bankruptcy cases filed in the first half of 1998 in the United States Bank-
ruptcy Court for the Eastern District of Michigan, Southern Division at De-
troit. The objective of the study was to measure the care and understanding
with which consumer debtors and their attorneys prepare these initial bank-
ruptcy papers.! The methodology was to test the completeness and internal
consistency of nineteen specific disclosures, Other errors were noted and
catalogued as found.

Three conclusions are drawn from this study. First, the lack of care and
understanding of the debtors and their attorneys in fulfilling the disclosure
requirements is palpable and disturbing. Second, the Official Bankruptcy
Forms do not adequately communicate the disclosure requirements. Third, in
some ways, the disclosure requirements are unrealistic and unnecessary, and
serve only to make knaves of otherwise honest debtors and their attorneys?

“United States Bankruptcy Judge, Eastern District of Michigan; Adjunct Professor, University of
‘Michigan Law School.

T want to thank the many individuals who assisted and encouraged this project. When preliminary
results were presented to the Detroit Consumer Bankruptcy Association, the Bankruptcy Section of the
Eastern District Federal Bar Association and the Eastern District Trustee's Association, several listeners
gave me very helpful comments and suggestions. Both Dean Nancy Rapoport of the University of Ne-
braska College of Law and Professor Elizabeth Warren of the Harvard Law School spent some time with
me discussing the project, giving me guidance and encouragement. Tim Reagan of the Federal Judicial
Center reviewed some of the statistical aspects of the study with me, Bankruptcy Judges Arthur J.
Spector of Bay City and Keith M. Lundin of Nashville assisted with edits on the nearly-final draft.
Finally, Kelli Dexter, Caroline Edwards and Lisa Harris performed their wonderful law clerk magic.
‘Thanks to all. Of course, the mistakes are all mine.

“The study examined only the initial papers. Amended papers were not examined.

*This characterization is borrowed from Memphis Bank &? Trust Co. u. Whitman, 692 F.2d 427, 432
(6¢h Cir. 1982) (Courts ehould not allow a debtor to obtain money through dishonesty and keep the gain
by filing a chapter 13 case within a few days. This “rons the risk of turning otherwise honest consumers
and shopkeepers into knaves). As stated by the National Bankruptey Review Commission, “While there
‘will never be a substitute for good legal advice, no one benefits when a system for financially distvessed
‘consumers becomes a trap for the unwary.” 1 NaTionaL BaNerurrcy Review ComMIssion, BANK.

653

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1999) CONSUMER BANKRUPTCY PAPERS 661

mation requirement to propose the debtor's best effort.39

The disclosure obligations of consumer debtors are at the very core of the
bankruptcy process*? and meeting these obligations is part of the price debt-
ors pay for receiving the bankruptcy discharge.*! This study seeks to mea-
sure the responses of consumer debtors to their disclosure obligations and
thus the extent to which debtors keep their end of the “bankruptcy
bargain."4?

Tl. THE METHODOLOGY OF THE STUDY

A. Setectinc Ranpom Stupy Cases

The first task was to select consumer bankruptcy cases at random from
the cases filed during the first half of 1998 in the Eastern District of Michi-
gan, Southern Division at Detroit. The criterion to identify consumer cases
was the debtor's statement on the petition that the debts are primarily con-
sumer in nature, although the study establishes that this statement is not
always accurate.43

Initially, it was thought that a study sample of 100 cases would be suffi-
cient, and the first group of that number, Group 1, was selected. After a
preliminary analysis of Group 1, it was concluded that a second group of 100
cases, Group 2, should also be selected, to provide a larger sample and to
attempt to assure some greater reliability of the final results,

The two groups of cases were chosen in different ways. The cases in
Group 1 were chosen from cases filed on three dates. For each date, the cases
that were chosen were consecutive filings. No particular method was used to

that would be paid on such claim if the estate of the debtor were liquidated under
chapter 7 of this title on such date.

2911 USC. § 1325(b)(1)(B) (1994). In re Pickering, 195 BR. 759, 763-64 (Bankr. D. Mont. 1996); In
se McCray, 172 BR. 154, 156-57 (Bankr. SID. Ga. 1994). See also In re Fields, 190 BR. 16, 18 n.1 Bankr.
DN. 1995); In re Hutcherson, 186 BR. 546, 551 (Bankr. ND. Ga. 1995).

Section 1325(b)(1XB) provides for confirmation if “the plan provides that all of the debtor's projected
disposable income to be received in the three-year period beginning on the date that the first payment is
due under the plan will be applied to make payments under the plan” Section 1325(b)(2) states, “For
purposes of this subsection, “disposable income’ means income which is received by the debtor and which is
‘not reasonably necessary to be expended . .. for the maintenance or support of the debtor or a dependent
of the debtor.”

See supra notes 16-18 and accompanying text.

"In chapter 7 cases, § 727(b) discharges the debtor from all prepetition debts except those set forth in
§ 523(a). In chapter 13 cases, § 13282) discharges the debtor from all prepetition debts except those set
forth in that subsection. Section 524 imposes an injunction upon the collection of any discharged debt.

“Fidelity Nat'l Title Ins, Co. v. Franklin Uh re Franklin), 179 BR. 913, 927 (Banke. ED. Cal. 1995)
(holding that the debtor “elected not to perform his end of the ‘bankruptcy bargain’ by fully, candidly, and
completely disclosing all his financial affairs and debts").

“See infra notes 87-89 and accompanying text.

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plan that must also be disclosed.>7 The debtor's union membership was de-
termined through the disclosure of union dues as a payroll deduction on
schedule I or as an expense on schedule J. In 50 cases, the debtor disclosed
pension income, pension expense or union dues.

54% of debtors who disclosed pension income, pension

expense or union dues disclosed no pension interest. (27

of 50 cases)

6. If the petition is a joint petition, do schedules D, E and F
disclose whether the debts are owed by the husband, wife,
jointly or as community debts?

The instructions at the top of schedules D, E and F each state, “If a joint
petition is filed, state whether husband, wife, both of them, or the marital
community may be liable on each claim by placing an ‘H, ‘W," J? or °C’ in the
column labeled ‘Husband, Wife, Joint, or Community.’"5* This question tests
whether joint debtors made the required disclosures regarding liability on
debts. In 49 cases, a joint petition was filed.

16% of debtors who filed joint petitions did not state
whether the debts were owed by the husband, the wife,
joint, or community. (8 of 49 cases)

7. If the debtor rents either a residence or a mobile home lot,
is the lease disclosed in schedule G?

‘The instructions for schedule G require the debtor to disclose “all execu-
tory contracts of any nature and all unexpired leases of real or personal prop-
erty."59 This question tests whether the debtor disclosed an expense for rent
for a residence or a mobile home lot in schedule J and did not disclose the
lease in schedule G.° One hundred seven debtors rented a residence and
paid rents! Fifteen debtors owned a mobile home and paid lot rent.S?

Ip the Detroit area, most union members belong to national unions associated with the auto industry
or to other major national unions. In the author's experience, members of such unions do have pension
interests, However, if a debtor is employed only part-time or if the debtor's union is a small unaffiliated
local union, the debtor may not have a pension interest. In any event, although the assumption is untested,
it is worthwhile to examine the issue for purposes of this etudy.

Official Bankruptcy Form 6, schedules D, E, and B.

Id, schedule G. This question assumes that schedule G requires the disclosure of both written and
coral leases. However, it might be concluded that schedule G is ambiguous on this point. See infra note
180 and accompanying text. Nevertheless, in light of the functional purposes of schedule G, the assump-
tion és warranted in this study.

The criteria for determining whether the debtor rented a residence are set forth in the discussion on
question 3, supra, at 665. See also supra note 45.

1See supra note 51.

The criteria for determining whether the debtor rented a mobile home lot are set forth in the discus-
sion on question 3, supra, at 665. See also supra note 52.

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Figure 4
PREDICTED PROBABILITIES FOR AFFIRMANCE

District Court BAP
8 &
ge g
3
&
2 8 3
6
3
rs
Ba &
:
@ e 2
° ° i -
01234567891 01234567891

Predicted Probability for Affirmance

‘Source: Affimance Database

First, we find that, when holding other variables at their mean,
a BAP disposition is predicted to have a 93% (86, 99] chance of being
either partly or fully affirmed by the court of appeals in contrast to
77% [70, 84] for district court dispositions. Thus, when holding other
variables at their mean, the likelihood of partial or full affirmance by
the court of appeals is predicted to increase by 16 [7, 25] percentage
points when it reviews BAP dispositions. Second, we find that, when
holding other variables at their mean, a BAP disposition is predicted
to have an 85% [76, 95] chance of being fully affirmed by the court of
appeals in contrast to 69% [62, 77] for district court dispositions. Thus,
when holding other variables at their mean, the likelihood of full
affirmance by the court of appeals is similarly predicted to increase by
16 (4, 28] percentage points when it reviews BAP dispositions. These
findings support our hypothesis that courts of appeals will more likely
uphold the dispositions rendered by BAPs than those rendered by
district courts.

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bankruptcy cases.%* Eventually, the Supreme Court promulgated rules
of bankruptcy procedure in 1973 that redesignated referees as
“bankruptcy judges.”” This change, however, did not remove the
distinction between bankruptcy judges and Article III judges,
including, for example, “prohibitions against bankruptcy judges using
the elevators, parking lots, and dining rooms reserved for Article III
judges.”® Moreover, some Article III judges continued to refer to
bankruptcy judges as “referees” in spite of the titular change.
Sentiments such as these infused their way into the policymaking
debates over bankruptcy reform in the 1970s.

In 1970, Congress established the Commission on the
Bankruptcy Laws of the United States to analyze the Bankruptcy Act
and to suggest recommendations for its reform.” While the original
resolution creating the Commission proposed that the Chief Justice
would appoint two bankruptcy referees as commissioners, strident
opposition—led by, among others, District Judge Edward Weinfeld,
chair of the Judicial Conference’s Committee on the Administration of
the Bankruptcy System—resulted in passage of the resolution without
constraints on whom the Chief Justice could appoint. The Chief
Justice did not appoint any bankruptcy referees to the Commission,
instead appointing Judge Weinfeld and District Judge Hubert Will.
Judge Weinfeld’s efforts resulted in the exclusion of bankruptcy
referees from policymaking discussions on bankruptcy reform within
the organizational framework of both the Commission and the Judicial
Conference. That the federal judiciary went to great lengths to
oppose the inclusion of bankruptcy referees in the reform process
highly suggests that Article III judges feared loss of power and
prestige in the event Congress increased the power of bankruptcy

26, See Geraldine Mund, Appointed or Anointed: Judges, Congress and the Passage of the
Bankruptey Act of 1978: Part One: Qutside Looking In, 81 AM. BANKR. LJ. 1, 3-6 (2007).

27. BANKR. R. 901(7) (1973) (repealed 1978).

28. Vern Countryman, Scrambling to Define Bankruptcy Jurisdiction: The Chief Justice, the
Judicial Conference, and the Legislative Process, 22 HARV. J. ON LEGIS. 1, 2 (1985). Hearsay
evidence suggests that at least one Article III judge viewed bankruptcy judges as occupying the
professional status equivalent to a janitor. See Mund, supra note 26, at 12 n.34

29. Posner, supra note 23, at G1 & n.25; of. Mund, supra note 26, at 12 n.34 (“As late a
1978, even though Judge James Browning, then chief judge of the Ninth Circuit, specifically
invited five bankruptcy judges to attend the circuit conference, Senior District Judge Lloyd
George (formerly a bankruptcy judge) reports that ‘they wouldn't call me “judge.” They called me
mister.’* (quoting Interview with Lloyd George (Dec. 20, 2004))).

30. Pub. L. No. 91-354, 84 Stat. 468 (1970).

31. Mund, supra note 26, at 7.

32. Id. at 8.

33. Id.

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Fiure 2
AVERAGE NUMBER OF POSITIVE CITING REFERENCES TO
FIRST-TIER APPELLATE OPINION BY CITING REFERENCE TYPE

District Court Opinion

All Federal Courts

Bankruptey Court

Type of Distict Court
Citing Reference BAP
Court of Appeals

Extracircuit Federal Courts

0 2 4 6 8
Average Number of Citations

BAP Opinion

All Federal Courts

Bankruptcy Court

Type of District Court
Citing Reference BAP
Court of Appeals

Extracircuit Federal Courts

Average Number of Citations

Additional evidence of the perceived correctness of the first-tier
appellate opinions can be gleaned from examining the depth of
treatment provided to those opinions by the federal courts that cited to
them. Hypothesis 8 predicts that the citing references to BAP opinions
will have afforded a greater depth of treatment than district court
opinions. Our data generally support this hypothesis. We find that, at
both the median and the mean, BAP opinions had a statistically
significant higher number of citing references by other federal courts
that cited (i.e., provided discussion of less than a paragraph) and
discussed (i.e., provided discussion of more than a paragraph but less
than a printed page) the opinion.'*5 We also find that, at the median,
BAP opinions had a statistically significant higher number of citing
references by other federal courts that mentioned the opinion (ie.,
contained a brief reference to the cited opinion, usually in a string

145. For purposes of this analysis, we once agein exclude extreme outliers according to the
criteria discussed in supra note 142.

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Figure 4: Gap Between Proofs of Claim and Schedule D Amounts

oN
sel \ -

Lot
i ; . om cictors ner
‘0 \ “

wf SN 2

0-200 2001-4901 6001 3001-10p01- 12001 14,001 16,901
‘4900 6900900 10,000 12900 14,000 16,090 1000 20.000 mare

‘Amount of Gap

1.601 loans

Creditor’s-favor gaps were consistently larger than debtor’s-favor gaps.
The median gap for loans in which the claim exceeded the scheduled amount
(creditor’s favor) was $3,311. The average creditor’s-favor gap was $6,309.
The size of the typical gap in the debtor’s favor was much less. The median
was $1,090, less than one-third of the gap for creditor’s-favor loans.”? The
bottom line in Figure 4 shows that debtor’s-favor gaps were of modest
amounts, with the vast majority of such differences calculated at less than
$2,000. The top line in Figure 4, however, shows that very large gaps were
much more common when the creditor’s calculation exceeded the debtor’s
calculation. Many creditors requested payment on the proof of claim of
several thousand more dollars than debtors thought they owed.

Of course, mortgage debts are relatively large in absolute size. It is
difficult to articulate an exact standard for a “minor” versus “major”
disagreement and to know at what point the gaps are sufficiently large that
the bankruptcy process is undermined if these discrepancies are not being
identified and resolved. An alternative to measuring the gaps in absolute
dollars is to consider the size of the gaps in relation to the amount of the
claims. For this analysis, I calculated the percentage size of each gap in
relation to the amount of the debtor’s scheduled debt. For example, if a

223. The average gap among the debtor’s-favor claims was $5,376. As with the creditor’s-
favor claims, the size of the average reflects a substantial number of claims with very lange gaps.
The standard deviation of the debtor’s-favor claims was $13,704. The standard deviation for the
creditor’s-favor claims was $9,143.

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2008) INVESTIGATING APPELLATE STRUCTURE 1767

removal arguably encompasses the grounds set forth by the Judicial
Code for removal of bankruptcy judges. Moreover, while Article III
judges may be removed only by impeachment,® and bankruptcy
judges may be removed by a majority of all of the judges of the judicial
council of the bankruptcy judge’s circuit,® the practical reality is that
very few bankruptcy judges have been removed from office.* If the
specter of removal does not appear to be greater for bankruptcy judges
than Article III judges, it follows that bankruptcy judges need not
limit their behavior in ways that would prevent them from acting as
independently as Article III judges.

Third, although the Supreme Court has identified the “fixed
and irreducible” compensation provided to Article II] judges by the
Compensation Clause as a hallmark of an independent judiciary,® the
lack of a similar guarantee in the salaries of bankruptcy judges should
not be overemphasized in assessing their judicial independence. Since
Congress enacted the Bankruptcy Code in 1978 and created the
current scheme for federal bankruptcy judgeships, the salary of
bankruptcy judges has only increased.’ Moreover, since 1987,
bankruptcy judges have received a salary at an annual rate that
equals 92% of the salary of district court judges (as determined by
section 135 of the Judicial Code). Thus, for the past two decades,
bankruptcy judges have had fixed compensation that nearly equals
that of district court judges.

Finally, if one takes into account the substantive differences in
the appointment processes of bankruptcy judges and district judges
and the consequences that flow therefrom, it becomes clear that
bankruptcy judges may be better situated than district judges to resist
the political influence that would threaten to compromise an
independent judiciary. While the judicial appointment process for

83. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 59 (1982) (Brennan, J.,
plurality opinion) (“The ‘good Behaviour’ Clause guarantees that Art. IIT judges shall enjoy life
tenure, subject only to removal by impeachment.”). But see Saikrishna Prakash & Steven D.
Smith, How to Remove a Federal Judge, 116 YALE. L.J. 72 (2006) (arguing that federal judges
may be removed from office by means other than impeachment).

84. 28 U.S.C. § 152(e).

85. See Mabey, supra note 62, at 107 (listing reasons for departure from the bench for the
115 bankruptcy judges who did so in the decade prior to 2005, but not mentioning removal as one
of those reasons). On the other hand, one might argue that the low rate of removal of bankruptcy
judges reflects the absence of judicial independence: bankruptcy judges have behaved in a way so
as to avoid removal.

86. N. Pipeline, 458 U.S. 50 at 59 Brennan, J., plurality opinion).

87. See Mabey, supra note 62, app. A.

88. 28 U.S.C. § 163(a). Congress amended the Judicial Code in 1987 to provide for the
current salary structure for bankruptcy judges. Pub. L. No. 100-202, § 408(a), 101 Stat. 1329,
1329-26 (1987).

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one district judge is generally not bound to follow the ruling of another
district judge—even one in the same district—on matters of
bankruptcy or otherwise.” And bankruptcy courts have held that they
are not bound by the holding of a single district judge on a multijudge
district court.” Therefore, BAPs comport more with the standard
model of appellate hierarchy than do district courts hearing
bankruptcy appeals.”3

see Salomon N. Am., 328 BR. at 181 n.2 (noting the Ninth Circuit BAP's prior holding that ite
decisions bind bankruptcy courts within the circuit, but also recognizing that some bankruptcy
courts have rejected that holding); Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220,
1225 n.3 (@th Cir, 2002) (describing “binding nature of Bankruptcy Appellate Panel decisions” as
“an open question,” and ‘join{ing] Judge O’Scannlain’s call for the (Ninth Circuit] Judicial
Council to consider an order clarifying whether the bankruptcy courts must follow the BAP");
Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir. 1989) (“BAP decisions cannot
bind the district courts themselves. As article III courts, the district courts must always be free
to decline to follow BAP decisions and to formulate their own rules within their jurisdiction.”); id.
at 472 (O'Scannlain, J., concurring) (writing “separately to propose that the Judicial Council of
this Circuit consider adoption of an order requiring that Bankruptcy Appellate Panel...
decisions shall bind all of the bankruptcy courts of the circuit, subject to the restrictions imposed
by article III so well discussed in the [court’s} opinion’); Paul M. Baisier & David G. Epstein,
Resolving Still Unresolved Issues of Bankruptcy Law: A Fence or an Ambulance, 69 AM. BANKR.
L.J. 525, 531 (1995) (“Even stronger arguments can be made against any stare decisis effect at all
for the opinion of a bankruptcy appellate panel.”); Chemerinsky, supra note 4, at 129-30 (‘I
would argue that district courts should be bound by BAP decisions. The view that an Article I
court can never bind an Article III court is an overstatement.”); Trujillo, supra note 60, at 494
1.23 (arguing that BAPs function as district courts, and accordingly cannot issue binding
opinions).

71. See Baisier & Epstein, supra note 70, at 529 (noting that “[nJone of the district judges is
bound by a bankruptcy appeals decision of a district judge from one of the other 93 district
courts,” and that “district judges in multi-judge districts are not even bound by the bankruptcy
appeals decisions of other judges from that same district”). But see Bussel, supra note 13, at
1095-96; id. at 1096 n.116 (‘I am aware of only a handful of cases where district judges in the
same district adopt differing views of the same question of bankruptcy law and in those cases one
or both of the decisions is unpublished.

72. See, eg., In re Romano, 350 B.R. 276, 281 (Bankr. E.D. La. 2005) (“{A] single decision of
a district court in this multi-judge district is not binding upon this court.”); id. at 277-81
(summarizing authority for both sides); Paul Steven Singerman & Paul A. Avron, Of Precedents
and Bankruptcy Court Independence, 22 AM. BANKR. INST. J, 1, 56-57 (2003) (noting conflict,
gathering authorities, and finding that a majority of bankruptcy courts have held thet they are
not bound by the decision of a single district court judge in a multi-judge district); Trujillo, supra
note 60, at 494 (arguing that a bankruptcy decision by one bankruptcy judge cannot bind other
bankruptcy judges in the same district, and that a bankruptcy decision by one district judge
cannot bind other district judges or bankruptcy judges in the same district). But see
Chemerinsky, supra note 4, at 129 (“While a district court exercising original jurisdiction cannot
bind other district courts, its decisions should be binding on bankruptcy courts when the district
court is serving as an appeals court.”).

73. Our point here is simply that BAPs seem to fit more cleanly into the standard
hierarchical appellate model than do district courts sitting on appeal, not that that is necessari
mandated under the current statutory scheme or normatively desirable. The latter two points
are debatable.

With respect to the current statutory scheme, there are statements in the legislative history
indicating that Congress created the BAPs to help foster greater uniformity in bankruptcy law.

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2008) INVESTIGATING APPELLATE STRUCTURE 1751

well as the normative question of whether it should.'® Nonetheless,
whether it is constitutionally mandated or normatively desirable, the
assumption underlying the dominant U.S. judicial structure is that
horizontal and vertical stare decisis provide precedential power to
decisions by appellate courts. Assuming that judges seek to arrive at
correct outcomes,'” these standard rules of precedent presumably
increase the quality of appellate review. It stands to reason that a
court that knows that its opinions will bind itself, and possibly bind
lower courts, will consider more carefully its reasoning before issuing
judgments and opinions that announce new rules of law.!® Relatedly, a
focus on cases that raise novel legal questions should allow appellate
courts to conserve judicial resources, apply those resources in cases in
which they are truly needed, and thus to reach correct answers more
frequently.!9

16. Compare, eg, Caminker, supra note 18, at 826-34 (arguing that the constitutional case
for the binding nature of Supreme Court precedent on lower federal courts is “quite powerful”),
and Richard H. Fallon, Jr, Stare Decisis and the Constitution: An Essay on Constitutional
‘Methodology, 76 N.Y.U. L. REV. 570, 577-85 (2001) (arguing in favor of the constitutional status
of stare decisis), with John Harrison, The Power of Congress over the Rules of Precedent, 50 DUKE
J. 603, 513 (2000) (arguing to the contrary), Thomas Healy, Stare Decisis as a Constitutional
Requirement, 104 W. Va. L. REV. 43, 92 (2001) (same), Gary Lawson, Controlling Precedent:
Congressional Regulation of Judicial Decision-Making, 18 CONST. COMMENT. 191, 204-07 (2001)
(Game), and Michael Stokes Paulsen, Abrogating Stare Decisis by Statute: May Congress Remove
the Precedential Effect of Roe and Casey?, 109 YALE L.J. 1635, 1546-47 (2000) (same).

17. See Kornauser, supra note 12, at 1606 (taking as a baseline assumption in develo
economic theory of stare decisis that “the judicial team’ seeks to answer the expected number of
‘correct’ answers subject to its resource constraint’); cf. Owen M. Fiss, Objectivity and
Interpretation, 34 STAN. L. REV. 738, 746-47 (1982) (discussing how judges belong to an
“interpretive coromunity” that subscribes tothe rule of law).
at the correct outcome motivate judges, see, eg, Erin

implicit Collusion? Toward a Game Theoretic Analysis of Stare

‘Decisis, 24 SETON HALL L.. REV. 736, 738-42 (1993) (arguing that judges’ self-interest including
judges” interest in expanding their influence—explains the development of horizontal stare
ech infra nots 10-102 and accompanying txt, the fst remain tet, to the extent thet the
| form and rules, the extent

to which a court comports with that norm will increase the perception that it is reaching correct

18 See Kornhauser, supra note 12, at 1623 ("In a completely decentralize
judge would have to attend to the caseload of every other judge in order to identify appropriate
cases for review; in a bierarchical system, only the appellate judges need have a systemic
perspective on caseload”); ef. id. at 1620 (noting that, abeent horizontal precedent, “each judge is
‘more likely to give each case intensive consideration” (emphasis added)); id. at 1624 (arguing in
favor of “strict vertical precedent because the hierarchical structure creates a division of labor
between levels of the hierarchy”); id. at 1625-27 (arguing in favor of horizontal precedent at the
appellate, but not the trial, level),

‘supra note 12, at 1622-24; Caminker, supra note 13, at 839-43. Of
coat in such a system is that the first court may resolve the legal question incorrectly,
and then bind future courts to that rule. See O'Hara, supra note 17, at 736 n.3 (identifying the
“primary social cost of stare decisis” as “the entrenchment of bad decisions"); see also Lewis A.

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permitting debtors to cure arrearages on mortgages over time.” Because
mortgage creditors are most Americans’ largest creditor, their actions in
bankruptcies heavily influence debtors’ success in saving their homes from
foreclosure. A family’s ability to confirm a Chapter 13 plan or cure a
default may turn on the amount fixed as being owed to the mortgage
creditor.” Debtors cannot easily generate additional disposable income if
alleged obligations to mortgagees magically increase or if fees multiply
without justification. The debtor’s ability to pay mortgage arrearages, as a
practical matter, determines the success of a case. Plan confirmation tums on
this issue. What is more, if the debtor misses any plan payments, the
mortgage creditor frequently will seek relief from the stay to proceed with a
foreclosure, and the debtor's bankruptcy may be dismissed. Thus, the
amounts of mortgage proofs of claim have direct effects on bankruptcy’s
usefulness as a home-saving device.

Miscalculations about mortgage debt have grave consequences for
families at nearly every point in the bankruptcy system. From the outset,
debtors may be harmed if they make their bankruptcy-filing decisions
without accurate knowledge of their mortgage debts. If debtors under-
estimate the amount of their outstanding obligations to mortgagees, which
the data show occurs in the majority of cases, their attomeys may misadvise
them about the feasibility of confirming a Chapter 13 plan and the likelihood
that they can cure their mortgage defaults. Conversely, if debtors
overestimate their arrearages, they could file bankruptcy without pursuing
other types of relief, such as borrowing from families or friends, seeking
forbearance from the mortgagee, or selling an asset. Debtors’ inability to
report their mortgage debts with reasonable accuracy indicates a serious
shortcoming in the prebankruptcy counseling process. The data suggest that
attorneys who do not verify the mortgage debt may give suboptimal advice to
their clients about the advisability of Chapter 13 bankruptcy. This situation
could be one factor that contributes to the low success rate of debtors
completing Chapter 13 repayment plans.”

After families file for bankruptcy, discrepancies in debtors’ and
creditors’ records of the amount of mortgage debt and incomplete mortgagee
proofs of claim lead to either of two undesirable consequences. In most
instances, the data show that debtors do not verify the amounts requested on

264. See 11 U.S.C. § 1322(b)(5) (2006) (providing debtors with the ght to cure mortgage
arrearages within a reasonable time).

265. See Bahchieva et al., supra note 1, at 74 (“Our results also suggest that rising mortgage
debt has important consequences for federal bankruptcy policy.").

266. See In re Coates, 292 B.R. at 899 (“A debtor's obligation to cure the prepetition mortgage
arrearage 1s enforceable as a condition of confirmation. A plan that fails to provide for a complete
cure is not confirmabte over the objection of the mortgagee.”).

267. See, e.g., Scot F. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Snudy of
Discharge and Debt Collection in Chapter 13, 7 AM. BANKR. INST. L. REV. 415, 439 (1999)
(Ginding that approximately one-third of Chapter 13 debtors complete their plans).

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154 Texas Law Review [Vol. 87:121

accurate, the servicer should have actually conducted an inspection and an
appraisal, one or more of the debtor’s payments should have been returned
for nonsufficient funds, and the debtor should have engaged in some other
behavior that resulted in a permissible charge. While plausible, the laundry-
list description with its inclusion of “other charges” suggests that servicers
are taking shortcuts in describing the actual fees that debtors owe.

The poor quality of itemizations causes real harms. First, confidence in
the bankruptcy system is undermined when the quality of information
provided does not satisfy the rules designed to ensure fair claims distribution.
Vague or laundry-list descriptions do not satisfy the instructions on the
proof-of-claim form, which were written to balance the rights and needs of
debtors and creditors. Second, without a true itemization that identifies the
nature of each fee, parties cannot verify that a mortgage claim is correctly
calculated. The servicer could have made a mistake when aggregating fees
and charges. Alternatively, the servicer could be overreaching and charging
fees that are not permitted by law or by the terms of the contract. The case
law described in Part I shows that when courts scrutinize the nature of
mortgage claims, they frequently find evidence of servicer misbehavior.’”
Yet, the itemizations do not provide sufficient information to permit a review
of the charges’ legality. Individual debtors would need to engage in
extensive discovery to verify the permissibility of the servicer’s calculations.
This reality makes it equally impossible to use the Mortgage Study data to
apply systematic analyses to determine if servicers are actually charging
illegal fees. The available bankruptcy court records simply do not provide
the necessary information. Indeed, the courts that have adjudicated disputes
over mortgage claims have needed dozens of hours of evidentiary testimony
to decipher the basis for the total amount claimed by mortgage servicers.
This, in fact, is the key point. By obscuring the information needed to
determine the alleged basis for the charges, servicers thwart effective review
of mortgage claims. The system can only function as intended if complete
and appropriate disclosures are made.

Notwithstanding the limitations of the servicers’ itemizations, I
attempted to conduct an individual review of claims that were merely
categorized as “other.” Given that the categories used to code the claims
data (e.g., “foreclosure costs”) were deliberately broad enough to encompass
all likely charges, these charges seemed per se suspicious. I identified
dozens and dozens of claimed fees that appeared to be impermissible or, at
minimum, should have been challenged to ensure that the creditor had a basis
for such unusual charges. Table | gives a few examples of causes for
concern.

179. See supra Part J.

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2008]

INVESTIGATING APPELLATE STRUCTURE

1817

Table 7: Binary Logistic Regression Model of Positive Citation by a Federal

Court to First-Tier Appellate Opinion

Variable Positive Federal Court Citation
Court 3.445** (1.515, 7.836)
First-Tier Full Affirmance 1.459 (0.724, 2.942)
Published 6.810°** (3.391, 13.673)
Appellant 0.868 (0.361, 2.086)
Appellee 1,278 (0.524, 3.118)
Chapter 7 1.335 (0.644, 2.765)
Debtor Type 0.783 (0.321, 1.908)
Dispute Type 2.881* (1.148, 7.231)
Subject 3.392** (1.379, 8.346)
Subsequent Appeal 0.937 (0.450, 1.951)

FY 1998 0.745 (0.336, 1.653)

FY 1999 1,072 (0.469, 2.452)

N 268

Log likelihood 116.625
McFadden’s R? 0.220

Source: First-Tier Database

Note: *** p < 0.001, ** p < 0.01, * p < 0.05. Odds ratios presented with 95%

confidence intervals in parentheses,

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higher office.!°! Article III judges—and, for that matter, BAP judges—
may also wish to avoid the “ignominy” of reversal by a higher court. 10?

Even if BAP judges and district judges have an aversion to
reversal, that ought not to change appellate judges’ behavior in terms
of upholding the conclusion of lower court decisions, assuming at least
that the reappointment or elevation process does not demand political
decisionmaking.'8 Put another way, a judge—whether a bankruptcy
judge serving on a BAP or a district judge—who wants to be
reappointed or elevated has essentially the same incentive to decide
cases correctly as do judges who simply want to decide the disputes
before them correctly. As such, a court reviewing a first-level
intermediate bankruptcy appellate decision—whether a panel of a
court of appeals or the Supreme Court—should adopt the conclusion of
the lower court if it deems that conclusion to be “correct.” Similarly,
appellate court judges should seek to affirm correct decisions—and
reverse incorrect ones—even if their motives are not strictly to reach
correct outcomes.

Based upon the foregoing, we offer the following hypothesis.

Hypothesis 1: Courts of appeals more likely will uphold the
dispositions rendered by BAPs than those rendered by district courts.

Citation rates provide yet another basis on which to test
empirically the perceived correctness of an appellate opinion.'TM To the

101. See Nash, supra note 20, at 2196. Indeed, Professor Resnik has identified such
careerism by bankruptcy judges. See Resnik, supra note 91, at 673 (observing that “{ajn
increasingly well-trodden path is for a person to shift from magistrate or bankruptcy judge to
district court judge"). A recent study of the bankruptcy bench, however, indicated that only eight
of the 115 bankruptcy judges who left the bench from 1996 to 2005 did so as a result of
n Article III judgeship. Mabey, supra note 62, at 107.

.. Caminker, supra note 13, at 827 & n.40 and the authorities cited therein; see
also Nash, supra note 20, at 2197-98 (discussing the desire of Article III judges to avoid
impeachment, public chastisoment, and overruling by the legislature).

103. Note, however, that other motivations may explain bankruptcy judges’ behavior. See,
eg., LYNN M. LOPUCKI, COURTING FAILURE: HOW COMPETITION FOR BIG CASES IS CORRUPTING
‘THE BANKRUPTCY COURTS (2006) (arguing that bankruptcy judges in different districts compete
for large corporate bankruptcy casos); Marcus Cole, ‘Delaware Is Not a State’: Are We Witnessing
Jurisdictional Competition in Bankruptcy?, 65 VAND. L. REV. 1845, 1890-93 (2002) (arguing that,
in order to conform to dominant state culture favorable to corporations, Delaware bankruptcy
judges compete for corporate bankruptcy filings).

William M. Landes & Richard A. Posner, Legal Precedent: A Theoretical and
, 18 JL. & ECON. 249 (1976) (arguing that citation practices are not

sentially a matter of taste but rather are aystematic and susceptible to empirical study); John
Henry Merryman, The Authority of Authority: What the California Supreme Court Cited in 1950,
6 STAN, L. REV. 613 (1954); John Henry Merryman, Toward a Theory of Citations: An Empirical
Study of the Citation Practice of the California Supreme Court in 1950, 1960, and 1970, 60 8.

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1999) CONSUMER BANKRUPTCY PAPERS 657

“A debtor's complete disclosure is essential to the proper ad-
ministration of the bankruptcy estate."16

“The veracity of the [debtor's] statements is essential to the
successful administration of the Bankruptcy Code.”!7

“The obligation of full disclosure is crucial to the integrity of
the bankruptcy process."'8

“The debtors have a duty to truthfully answer questions
presented in the various schedules and filings carefully, com-
pletely and accurately.TM9

“The debtor is imposed with a paramount duty to carefully
consider all questions included in the Schedules and State-
ment and see that each is answered accurately and
completely."20

(A) property of the debtor, within one year before the date of the filing of the
petition; or
(B) property of the estate, after the date of the filing of the petition;

(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account{]

See infra notes 124-27 and accompanying text.

Cohen v. McElroy (In re McElroy), 229 BR. 483, 488 (Bankr. MD. Fla. 1998). See also In re Sochia,
231 BR. 158, 160 (Bankr, WD.NY. 1999).

"Van Roy v. Watkins (In re Watkins), 84 BR. 246, 250 (Bankr. S.D. Fla. 1988) (citing Chalik v.
Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)).

4In re Hyde, 222 BR. 214, 218 (Bankr. SD.N-Y. 1998), rev'd on other grounds, 235 B.R. $39 (SD.N.Y.
1999) (citing In re Wincek, 202 BR. 161, 166 (Bankr. MD. Fla. 1996), aff'd, 208 BR. 238 (MD. Fla.
1996) (*[Full disclosure ofall relevant information has always been an important policy of the bankruptcy
laws." (internal quotations and citations omitted) (alteration in original).

19tn re Famisaran, 224 BR. 886, 891 (Bankr. N.D. Ill 1998). See also Cole Taylor Bank v. Yonkers (In
re Yonkers), 219 BR. 227, 232 (Bankr. ND. IIL 1997); National Am. Ins. Co. v. Guajardo (In re Guajardo),
215 BR. 739, 741 (Bankr, WD. Ark. 1997); United States v. Trembath (In re Trembath), 205 B.R. 909,
914 (Bankr. ND. Il 1997); Netherton v. Baker (fn re Baker), 205 BR. 125, 131 (Banke. N.D. Ill. 1997),
‘motion to amend judgment denied, 206 BR. $10 (Bankr. ND. Ill. 1997); In re Robinson, 198 BR. 1017,
1022 n6 (Bankr. ND. Ga. 1996); Torgenrud v. Benson (In re Wolcott), 194 BR. 477, 486 (Bankr. D.
‘Mont. 1996); Hollar v. United States (In ze Hollar), 184 BR. 25, 29 (Bankr. MD.N.. 1995), affd, 188
BR. 539 (MDNC. 1995), affd, 92 F.3d 1179 (4th Cir. 1996) (unpublished table decision available at
1996 WL 442883); Cundiff v. Wiethuchter (In re Wiethuchter), 147 BR. 193, 199 (Bankr. ED. Mo.
1992); Jones v. United States (In re Jones), 134 BR. 274, 279 (ND. Il 1991); Banc One, Texas, NA. v.
Braymer (In re Braymer), 126 BR. 499, 502 (Banke. N.D. Tex. 1991).

Casey v. Kasal (In re Kasal), 217 BR. 727, 734 (Bankr. B.D. Pa. 1998), aff'd, 223 BR. 879 (ED. Pa.
1998). See also FDIC v. Sullivan (In re Sullivan), 204 BR. 919, 942 (Bankr. ND. Tex. 19977 Morton v.
Dreyer (In re Dreyer), 127 BR. 587, 593-94 (Bankr. N.D. Tex. 1991); MacLeod v. Arcuri (In re Arcuri),
116 BR. 873, 879-80 (Bankr. SD.N.Y. 1990) (“A debtor has an ‘affirmative duty’ to identify all assets,
abilities, and to answer all questions fully and wich tbe utmost candor. Creditors and those charged with
administration of the bankruptcy estate are enticled to a ‘truthful’ statement of the debtor's financial
condition.” (citations omitted)); Friedman v. Sofro (In re Soffo), 110 BR. 989, 991 (Bankr. S.D. Fla. 1990).

But see Hoc, Inc. v. McAllister (in re McAllister), 215 BR. 217, 233 2.8 (Bankr. N.D. Ala. 1996)
(The purpose of the official forms is to provide basic information regarding a debtor's assets, liabilities and

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circuit courts of appeals.®* Parties may seek discretionary review by
the Supreme Court of rulings by the courts of appeals.**

If either the appellant or the appellee so elects—or if the circuit
has not created a BAP or, even if it has, if the district court in
question has not voted to authorize BAP appeals—then the district
court (in the person of a single district judge) initially hears appeals of
bankruptcy court rulings in core proceedings.*” The judgment of the
district court may then be appealed to the appropriate circuit court of
appeals,®* with discretionary Supreme Court review as the remaining
appellate step.®? In short, then, certain parties in some circuits have
an option between two possible appellate paths. We illustrate this in
Figure 1.6!

56. Id. § 158(4)(1) (Supp. V 2005).

56. Id. § 1254(1) (2000).

57. Id. § 168(c)(1) (2000 & Supp. V 2005).

58. Id. § 158(d)(1) (Supp. V 2005).

59. Id. § 1254(1) (2000).

60. See generally Bernard Trujillo, Self-Organizing Legal Systems: Precedent and Variation
in Bankruptcy, 2004 UTAH L. REV. 483, 490-500 (elucidating the differences between the
standard federal judicial hierarchy and the bankruptcy appellate system).

61. We should note that a third possible appellate path not yet discussed—that of direct
appeal from the bankruptcy court to the court of appeals—exists for a limited set of
circumstances. By virtue of amendment to the Judicial Code by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, appeal may
proceed directly to the court of appeals pursuant to a certification procedure if one of the
following circumstances exists: (1) the appeal involves a question of law unresolved by the court
of appeals for the circuit or by the Supreme Court; (2) the appeal involves a matter of public
importance; (3) the appeal involves a question of law requiring resolution of conflicting decisions;
‘or (4) the appeal may materially advance the progress of the case or proceeding in which the
appeal is taken. 28 U.S.C. § 158(d)(2)(A) (Supp. V 2005).

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suspicion beyond the one court location and the limited time period from
which the study cases were drawn. Third, because only a portion of the
disclosures was tested, the study was not designed to expose all of the omis-
sions and inconsistencies in the papers. The study cases may have additional
problems not quantified in this study. Nevertheless, the study does establish
substantial cause for concern, and for further study and consideration.

IL THE DISCLOSURE REQUIREMENTS IN CONSUMER
BANKRUPTCY CASES

A. THe Statutory Basis

Section 521(1) of the Bankruptcy Code requires the debtor to file “a
schedule of assets and liabilities, a schedule of current income and current
expenditures, and a statement of the debtor's financial affairs[.]"* With re-
spect to consumer debts secured by property of the estate, § 521(2)(A) re-
quires the debtor to file “a statement of his intention with respect to the
retention or surrender of such property and, if applicable, specifying that such
property is claimed as exempt, that the debtor intends to redeem such prop-
erty, or that the debtor intends to reaffirm debts secured by such
property[.]">

Rule 1007(b)(1) of the Federal Rules of Bankruptcy Procedure supple-
ments the requirements of the Bankruptcy Code by requiring that the debtor
also file “a schedule of executory contracts and unexpired leases[.]"° This
rule requires that all of these disclosures be “prepared as prescribed by the
appropriate Official Forms."? Rule 1008 then provides that all such papers
“shall be verified or contain an unsworn declaration as provided in 28 U.S.C.
§ 1746.78 Rule 9009 provides, “The Official Forms prescribed by the Judicial
Conference of the United States shall be observed and used with alterations

financial affairs regarding lawsuits was “often wrong.” and that some debtors who suggested that judg-
ments or gumishments had been issued against them gave no specifics).

411 USC. § 521(1) (1994).

511 USL. § 521(2)(A) (1994).

“Pep. R. BaNER. P. 1007(b)(1).

71d.

"Fp. R. BANKER. P. 1008. Section § 1746 of the United States Code (1994) provides for this form of
declaration, “I declare (or certify, verify, or state) under penalty of perjury under the laws of the United
States of America that the foregoing is true and correct” The verification in the official form for the
schedules is, “I declare under penalty of perjury that I have read tbe foregoing summary and schedules,
consisting of __ sheets, and tbat they are true and correct to the best of my knowledge, information, and
belief” Official Bankruptcy Form 6, ‘The verification in the offical form for statement of financial affairs
‘omits the language, “to the best of my knowledge information and belief” and is thus closer to the statu-
tory format. It provides, “I declare under penalty of perjary that I have read the answers contained in the
foregoing statement of financial affairs and any attachments thereto and that they are true and correct.”
Official Bankruptcy Form 7. There is no official explanation for the difference.

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H. Criinar REFERRAL AND PROSECUTION

Under 18 U.S.C. § 152,'6° knowingly and fraudulently omitting assets
from bankruptcy papers is a crime.!70 When there is reasonable cause to
believe that a bankruptcy crime has been committed, 18 U.S.C. § 3057(a)
authorizes the bankruptcy judge or the trustee to refer the case to the United
States Attorney for investigation and prosecution.17" The United States

16918 U.S.C. § 152 provides in pertinent part:
A person who-

(2) knowingly and fraudulently makes a false oath or account in or in relation to
any case under title 115

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or
statement under penalty of perjury as permitted under section 1746 of title 28,
in or in relation to any case under title 11;

shall be fined under this title, imprisoned not more than 5 years, or both,

19Unived States v. Mohamed, 161 F3d 1132, 1136 (8th Cir. 1998), cere. denied, _ US. _, 119 S. Cx.
1345, 143 L. Bd. 2d 508, (1999) (the act of concealing assets when filing a bankruptcy petition suffices to
warrant a twolevel sentencing enhancement for violation of judicial process, due to increased culpability
‘when the defendant conceals assets from bankruptcy court officers and thus hinders the bankruptcy pro-
cess); United States v. Hernandez, 160 F.3d 661 (11th Cir. 1998); United States v. Holland, 160 F.3d 377
(7th Cir. 1998); United States v. Guthrie, 144 F.3d 1006, 1010 (6th Cir. 1998), United States v.
Sheinbaum, 136 F.3d 443 (5th Cir. 1998), cert. denied, _ US. _, 119 S, Ce. 1808, 143 L. Bd. 2d 1011
(1999}; United States v. Shadduck, 112 F.3d 523 (ist Cir. 1997).

See also United States v. Willey, 57 F.3d 1374 (Sth Cir), cert. denied, $16 US. 1029, 116 S, Ct. 675,
133 L. Ed. 2d 524 (1995); United States v. West, 22 F.3d 586, 589 n.$ (5th Cir), cer. denied, 513 US.
1020, 115 8, Ct. 584, 130 L. Ed. 2d 498 (1994); United States v. Hubbard, 16 F.3d 694 (6th Ci. 1994),
rev'd on other grounds, 514 US. 695, 115 S, Ct. 1754, 131 L. Ed. 2d 779 (1995) (the court of appeals
upheld convictions under 18 U.S.C. § 152; the Supreme Court reversed other convictions under 18 USC.
§ 1001); Tamara Ogier & Jack F. Williams, Bankruptcy Crimes and Bankruptcy Practice, 6 AM. BANKER.
Inst. L. Rev, 317 (1999); Craig Peyton Gaumer, Bankruptcy Fraud: Crime And Punishment, 43 SD. L.
Rev. 527 (1998).

Debtors’ attorneys are also subject to prosecution. See, eg, United States v, Webster, 125 F.3d 1024
(7th Cir. 1997), cer. denied, _ US. _, 118 S. Ct. 698, 139 L. Ed. 2d 642 (1998); United States v. Dolan,
120 F.3d 856 (8th Cit. 1997}, United States v. Smithson, 49 F.3d 138 (Sth Cir. 1995); United States v.
Edgar, 971 F.2d 89 (8th Cir. 1992); United States v. Brown, 943 F.2d 1246 (10th Cir. 1991}; United
States v. Zimmerman, 943 F.2d 1204 (10th Cir. 1991).

171See Seidel v. Durkin (in re Goodwin), 194 BR. 214, 223 (BAP. 9th Cir, 1996); In re Famisaran,
224 BR. 886 (Bankr. ND. Ill. 1998); State Bank of India v. Kaliana (In re Kaliana), 207 BR. 597 (Bankr,
ND. Ill. 1997}; In re Holder, 207 BR. 574 (Bankr. M.D. Tenn. 1997); In re Lewis, 51 BR. 353 (Bankr.
EDN. 1985); Flushing Sav. Bank v. Parr (In re Part), 13 BR. 1010 (EDN-Y. 1981).

18 USC. § 3057 (1985) provides:

@) Any judge, receiver, or trustee having reasonable grounds for believing chat any
violation under chapter 9 of this ticle or other laws of the United States relat-
ing to insolvent debtors, receiverships or reorganization plans has been commit-
ted, or that an investigation should be had in connection therewith, shall report
+o the appropriate United States attorney all the facts and circumstances of the
case, the names of the witnesses and the offense or offenses believed to have
been committed. Where one of such officers has made such report, the others
need not do so.

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understanding of how differences in appellate structure affect the
quality of appellate review.

This Part proceeds as follows. Part III.A sets forth the selection
criteria used to constitute the sample for our study, discusses the
major variables that we studied and incorporated into our statistical
models, and details the general characteristics of the sample. Part
IIIB presents descriptive statistics comparing perceptions of the
quality of appellate review provided by BAPs with perceptions of the
quality of appellate review provided by district courts. Part III.C
presents the central findings from our regression models, and Part
IMD interprets our results.

If those attributes identified as improving the quality of
appellate review truly do so, we would expect to see a positive
relationship between BAP opinions and their perceived quality.
Furthermore, we would expect this relationship to be stronger than
the relationship, if any, between district court opinions and their
perceived quality. In summary, we find that the rates at which courts
of appeals affirm appeals from BAPs and district courts provide
support for the claim that BAPs are perceived to provide a better
quality of review than the district courts. Furthermore, data on
subsequent citation by federal courts to the opinions rendered on
appeal by BAPs and district courts lend considerable support to the
claim. Given the possible impact of selection effects on the affirmance
data as opposed to the citation data, we consider the strongly robust
results we observe in the citation context to be more informative.

A. Sample Selection and Variables of Interest

1. Sample Selection

To constitute the sample of appellate bankruptcy opinions for
this study, we formulated a search query in Westlaw’s FBKR-CS
database, which contains reported and unreported case law documents
{ie., decisions and orders) relating to bankruptcy that were issued by
various courts—including the Supreme Court, circuit courts of
appeals, BAPs, district courts, and bankruptcy courts.16 Because we
sought to create two separate databases, one for first-tier appellate
dispositions by BAPs and district courts (the “first-tier database”) and
one for second-tier appellate dispositions by courts of appeals (the

116, Reported case law documents are those released for publication in West Federal
Reporters.

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nine firms that filed the most chapter 7 cases during the study period had an
average of 3.31; the average of the other one hundred sixteen chapter '7 cases
‘was 3.64.15 The twenty-three chapter 13 cases filed by the nine firms that
filed the most chapter 13 cases during the study period had an average of
2.74; the average of the other twenty-five chapter 13 cases was 3.32. Thus,
this effect was somewhat greater in chapter 13, where the filings are more
concentrated in the higher volume firms.!°5

These results suggest that the observed differences have no functional
significance.

C. CorRELATIONS WITH THE Fee AND FinaNciat DaTa IN EACH

Case

1. The Chapter 7 Fee

The data permit an examination of the premise that the chapter 7 fee
fixed in the marketplace is too low to permit debtors’ attorneys sufficient
time to prepare fully accurate and complete schedules and statements of
financial affairs.1°7 This premise was examined in Chart 2, a scatterplot in
which each point represents a chapter 7 case with its associated fees and
number of errors.!°8 The nearly flat trendline on Chart 2 demonstrates that
there is no significant relationship between the chapter 7 fee and the number
of errors found in this study.199

10>These chapter 7 averages are not adjusted as set forth supra note 102.

10648% of the chapter 13 cases were filed by the higher volume firms. Just 24% of the chapter 7 cases
were filed by the higher volume firms.

1°7No purpose is served in examining this issue in the chapter 13 cases in this study, because in the
Eastem District of Michigan, Southern Division at Detroit, the fee in most such cases is $1200. In 81% of
the chapter 13 cases in the study, the agreed fee was $1200 according to the attorney's Rule 2016(b)
statement. (39 of 48 cases) In three chapter 13 cases, the fez was $0, probably because the attorney so
agreed or because representation was provided by legal aid or a prepaid legal services program. In two
chapter 13 cases, the fee was under $1200 ($950 and $1000), and in four cases it exceeded $1200 (one case
at $1250 and three cases at $1500).

‘The fees reflected on Chart 1 are taken from the attorneys’ Role 2016(b) statements, not from the
debtors’ responses to question 9 on the statement of financial affairs. As noted in the discussion on
question 14, supra at 671-72, the study found differences in the disclosures in these papers in 12.5% of the
cases. The disclosure made in the Rule 2016(b) statement was chosen because it presumably better re-
flects what the attorney thinks the fee is, and this data point is more relevant to the attorney's economic
incentives.

However, Chart 1 does reflect one set of adjustments to the fee data from the Rule 2016(b) state-
‘ments, in an attempt to better approximate reality. As noted in the discussion on question 15 (relating to
other fee disclosure errors), supra at 672, five statements filed by one attorney indicated that the agreed
fee was $0, even though the debtor bad paid either $495 or $650. For purposes of correlating the agreed
fee and the number of errors, the paid fee data in these five cases was used rather than the agreed fee data.
‘This adjustment assumes that the fee paid by the debtor was the actual agreed fee. See supra note 81 and
accompanying text.

¥PAll of the scatterplots and their associated trendlines were created using the Microsoft Excel
spreadsheet program.

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local guidelines for completing the official forms; (c) creating inexpensive and
expedited procedures in the bankruptcy court to resolve these issues concern-
ing the completeness of the papers; and (d) creating continuing legal educa
tion opportunities for attorneys and paralegals for improving client interview
skills and for understanding the legal requirements of the forms.174

The suggestions made in this part reflect the judgment that the problems
of inadequate disclosure revealed in this study have two primary causes.
First, the official forms are in legal language and are ambiguous. Second, debt-
ors and their attorneys are insufficiently motivated to exercise the care neces-
sary to complete the forms. These distinct causes will be discussed with
potential remedies for them.

A. THe OrriciaL Forms

1, Issues Debtors Face in Completing the Forms

The results of some of the test questions in this study can be explained, at
least in part, by the interpretive issues that debtors and their attorneys face
in completing the Official Forms:'75

"74In an effort to address asset disclosure problems in bankruptcy, the Bankruptcy Review Commis-
sion recommended, “The Bankruptcy Code should direct trustees to perform random audits of debtors’
schedules to verify the accuracy of the information listed” Conemassion REPorr, supra note 2, § 1.12, at
107. In expanding on the concept of audits, the Commission stated, “Information could be verified by the
submission of recent to pay stubs, tax returns if available, and other similar documentation. Trustees
‘would report material irregularities to the bankruptcy courts . .. Whether irregularities warrant revoca-
tion of discharge or criminal prosecution would be subject to the discretion of the parties and Department
of Justice, as under current law.” Id. at 109.

However, such audits would not address the problems identified in this study. Although auditing may
be a useful tool in identifying concealed assets and transfers, and in discouraging fraud, the Commission
proposes resolving such problems through the traditional processes and remedies. It offers no new reme-
dies specific to the problems of careless and inadvertent omissions and inconsistencies identified in this
study. See Gary Klein, Consumer Bankruptcy in the Balance: The National Bankruptcy Review Commis-
sion’s Recommendations Tilt Toward Creditors, 5 AM. BaNxR. Inst. L. Rev. 293, 300-301 (1997) CAu-
dics would supplement Rule 9011, objections to discharge, complaines to determine dischargeability, good
faith requirements, Rule 2004 examinations, creditor's meetings, dismissals for substantial abuse, and crimi-
nal sanctions as tools to root out fraud.” (footnotes omitted)).

"75Recognizing that the forms require interpretation, one court of appeals attempted to give debtors
and their attorneys some guidance:

It would be silly to require a debtor to itemixe every dish and fork, even to list the
electric knife separately from the crock pot. The necessary degree of specificity
varies with the value of separate listings. The lower the value of the items, che less
feason to identify each. But it does not follow that a generic listing always encom-
passes the low-value items within a category.

‘The debtor must furnish enough information to put the trustee on notice of the
wisdom of further inquicy. The trustee, who protects the interests af the creditors,

then may make a calculation of the benefits of more detailed listing in each case, and
he may ask the bankruptcy court to require the debtor to do more.

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from Chapter 13 cases, the rules and procedures to ensure accurate
bankruptcy claims are identical for Chapter 7 cases.'"” However, mortgage
claims are much less frequently filed in Chapter 7 cases because there are
fewer homeowners who file Chapter 7, and also because Chapter 7 does not
offer the remedies to homeowners in default that Chapter 13 does.'*!

Second, the sample was drawn only from districts where the applicable
state law permits nonjudicial foreclosures of debtors’ principal residences.'”
We limited the sample in this way because the more favorable remedies
available to mortgagees in nonjudicial-foreclosure states may reduce
servicers’ incentives to negotiate with consumers after default. That is,
because nonjudicial foreclosure is faster and less expensive for creditors than
judicial foreclosure,'* debtors may have a greater need to file bankruptcy in
nonjudicial-foreclosure states to contest a foreclosure. Restricting sampling
to states that permit nonjudicial foreclosure probably boosted the proportion
of homeowners in default on mortgage loans in the sample. Nevertheless,
because bankruptcy law is uniform nationally on the requirements for proofs
of claim and the rights of homeowners with mortgages in default, a random
national sample, including judicial-foreclosure states, may not produce
different data.'*

130. See, eg, FED. R. BANKR. P. 3001 (describing the procedures for claims, without
differentiation for various chapters of bankruptcy relief).

131, See Jacoby, supra note 128, at 327-28 (reviewing the additional legal tools available to
defaulting mortgage borrowers filing under Chapter 13 as compared to Chapter 7).

132. Our sample represents 49% of the judicial districts in the United States, The sample
includes twenty-three states in addition to the District of Columbia: Alabama, Arkansas, California,
Colorado, Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, New Hampshire, North Carolina, Rhode Island, South Dakota, Tennessee, Texas, Utah,
Virginia, West Virginia, and Wyoming.

133, See BARLOW BURKE, REAL ESTATE TRANSACTIONS 336 (4th ed. 2006) (discussing
nonjudicial power-of-sale foreclosure and stating that it 1s both cheaper and faster than judicial
foreclosure); GRANT NELSON & DALE WHITMAN, REAL ESTATE FINANCE LAW 636 (Sth ed. 2007)
(characterizing the rationale of power-of-sale foreclosure as removing the ‘substantial additional
burdens” of judicial foreclosure). Judicial foreclosure procedures vary depending on state law.
Typically these steps include the filing of a lawsuit and a judgment, followed by a court order
authorizing a judicial sale conducted pursuant to statutory procedures. BURKE, supra, at 334.
Nonjudicial foreclosure typically proceeds under a deed of trust that permits a third-party trustee,
upon default, to sell the property in a private sale. See id. at 336 (identifying the deed of trust as
“the more commonly used form of secunty instrument” in a power-of-sale foreclosure, and noting
that the individual conducting the sale under this system will usually be a trustee). Although some
public notice is required by all states, a nonjudicial foreclosure, as its name suggests, docs not
require court supervision or the filing of a lawsuit. See id. at 337 (describing how a power-of-sale
foreclosure relieves mortgagees of the burden of initiating litigation to enforce a lien),

134, For those cases in which a foreclosure was filed before bankruptcy, it is possible that in
judicial-foreclosure states the lenders were more likely to have retained attorneys before the
bankruptcy than in nonjudicial-foreclosure states. It is unclear if such attomey involvement would
result in more complete or accurate bankruptcy pleadings.

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Any effort to motivate more complete, accurate and careful disclosures must
address all of these issues.

The study also compared subgroups of the sample to determine whether
the disclosure problems predominated in any of these subgroups. Individual
debtors were compared to joint debtors. Married, separated and single debt-
ors were compared. Debtors whose attorneys filed in higher volumes were
compared to debtors with other attorneys. None of these comparisons re-
vealed any significant distinctions in the results.

The study also examined for any correlations with the economic charac-
teristics of the cases, including fees charged and paid, assets, liabilities, ex-
penses and income, and again found no significant correlations.

Part II reviews the disclosure obligations established in the Bankruptcy
Code and the Bankruptcy Rules, and the standards established in the case
law. Part III discusses the methodology of the study. Part IV reviews the
specific test questions and their results. Part V compiles the results of the
study and reviews the subgroup and the correlation analyses. Part VI re-
views the current remedies for incomplete or inaccurate schedules and con-
cludes that because these remedies are cumbersome, time consuming and
expensive, they have not been effective in addressing the issues raised here.
Finally, Part VII suggests some remedies, both local and national, to address
the problem.

The scope of this study is limited in significant respects. First, no investi-
gation was made beyond the filed papers to determine the truth of any disclo-
sures. The study was not designed to detect or measure fraud or intentional
concealment. Second, although the motivation for this study was the au-
thor’s nagging suspicion that consumer debtors’ bankruptcy papers are a per-
sistent and widespread problem,° this study was not designed to prove that

‘Ruptcy: THe Nexr Twenty Years, NATIONAL Banxruetcy Review Commission Fivat Rerort,
235 (October 20, 1997) (hereinafter, “Commatssion REPORT").

This article is based on the premise that it is “a mistake to suppose that every act of bankruptcy is a
fraudulent act, and every bankrupt, perforce, a knave” Summers v. Abbot, 122 F. 36, 38 (8th Cir. 1903).
It is also presumed that most debtors qualify as “honest but unfortunate.” Grogan v. Garner, 498 U.S. 279,
287, 111 S. Ct. 654, 659, 112 L. Ed. 2d 755 (1991); Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S. Ct.
695, 699, 78 L. Ed. 1230 (1934). On the other hand, it is recognized that [debtors are not perfectly
trustworthy,” Payne v. Wood, 775 F.2d 202, 206 (7th Cir. 1985), cert. denied, 475 U.S. 1085, 106 S. Ct.
1466, 89 L. Ed. 2d 722 (1986), and therefore the trustee is empowered to “investigate the financial affairs
of the debtor.” 11 US.C. §§ 704(4) and 1302(b)(1).

See In re Attanasio, 218 BR. 180, 229 (Bankr. N.D. Ala. 1988), infra note 123 and accompanying
text; In re Bruzzese, 214 B.R. 444, 450 (Bankr. E.D.N.Y. 1997), infra note 168 and accompanying text.

Ocher investigators have observed these kinds of problems. See, ¢g, Teresa A. Sullivan, Elizabeth
Warren & Jay Lawrence Westbrook, The Use of Empirical Data in Formulating Bankruptcy Policy, 50-
SPG Law & ConTEMP. Pross. 195, 229 (1987) (‘We have found a large number of errors in the com-
pleted bankruptcy forms.”); Susan D. Kovac, Judgment-Proof Debtors in Bankruptcy, 65 AM. Banke. LJ.
675, 767 0.56 (1991) (reporting that the specific information provided by debtors on the statement of

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cases often originate months or years earlier and are equally likely to occur
when a borrower is in default but does not file for bankruptcy.””

Bankruptcy courts have repeatedly expressed frustration with
mortgagees’ failure to provide complete and accurate information.”” Courts
and litigants have struggled to obtain comprehensible records from servicers.
In Maxwell v. Fairbanks Capital Corp.,” the court described the creditor's
pleadings: “Thus, Fairbanks, in February 2000, represented that the Debtor
owed it $48,691.36 /ess than what it demanded of the Debtor in April of
1998 and $192,963.64 more than it demanded of her on July 13, 1999."6°
The court found that “Fairbanks, in a shocking display of corporate
irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation
to it out of thin air.”*' The court held that this behavior violated both federal
and state law.” After the court’s ruling on liability, the debtor settled the
case for a full discharge of her mortgage and $125,000 in damages and
attomeys fees."

Other courts have identified a similar pattern of confusing or incomplete
record keeping as evidenced by servicers’ proofs of claim. Unable to
decipher a servicer’s records, even after ordering further document
production, one court finally resorted to creating its own amortization table.“
The judge stated, “The poor quality of the papers filed by Fleet to support its
claim is a sad commentary on the record keeping of a large financial
institution. Unfortunately, it is typical of the products generated by lenders
and loan servicers in court proceedings.”** In some instances, mortgagees
apparently are unable to offer any accounting to support their claims. In
Litton Loan Servicing v. Garvida,*® when the servicer failed to respond to a
court order to provide information, the bankruptcy appellate panel affirmed
that a downward adjustment of the mortgagee’s claim was an appropriate

77. Email from Keith M. Lundin, Bankr. Judge, U.S. Banks. Court for the Middle Dist. of
Tenn., to Henry J. Sommer (July 12, 2004) (on file with the Texas Law Review) (recounting the
discussion at a session on mortgage-servicing problems in Chapter 13 cases, which occurred at a
2004 National Association of Chapter 13 Trustees meeting). The grevances aired were: (1)
servicers are unable to prepare correct pre-petition claims in Chapter 13 cases; (2) proofs of claim
are filed without balances or are bloated with illegal and fraudulent fees sometimes totaling several
thousand dollars; (3) irreconcilable and unexplained balances appear on amended proofs of claim;
(4) servicers provide no contact information; and (5) servicers refuse to provide loan payment
histones. id

78. See Hildebrand, supra note 45, at 40 (describing judges’ critical responses to mortgages
“deplorable records”).

79. Maxwell v. Fairbanks Capital Corp. (/n re Maxwell), 281 B.R. 101 (Bankr. D. Mass. 2002).

80. Id. at 114,

81, Id at 17.

82. Id. at 120, 132.

83. Agreement for Judgment at 2, /n re Maxwell, 281 B.R. 101 (No. 00-142383) (on file with
the Texas Law Review)

84. Inre Wines, 239 BR. 703, 706 (Bankr. D.N.J. 1999).

85. Id. at 709.

86. In re Garvida, 347 B.R. 697 (B.A.P. 9th Cir. 2006).

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1999) CONSUMER BANKRUPTCY PAPERS 707

favor of the moving party if the court determines that the debtor's papers are
deficient, and in favor of the debtor if the court determines otherwise. Such a
process would have advantages similar to the first suggested process.

A final suggestion on the national level is for the United States Trustee
program to focus on this issue, to make it a priority and to bring its resources
to bear upon it.°9 Such a priority could give the trustee substantial support
in dealing with this problem.

3. Local Responses to the Lack of Care

The focus of a local response to this problem should be specific educa-
tional opportunities for the debtor bar. The agenda for such education might
include both a review of the legal requirements for disclosure in the initial
papers, as supplemented by the local guidelines, and workshop opportunities
to improve client interview skills?#° These workshops might be modeled
after the trial advocacy skills workshops offered to trial lawyers, which in-
clude demonstration and mock trial opportunities for the participants?!
Thus, under supervision and with review by experienced attorneys or others,
each participant would interview a mock debtor for the purpose of eliciting
the disclosures necessary and required to complete the forms. The partici-
pants would then complete the bankruptcy forms for the “debtor,” and this
work product would be reviewed for accuracy and completeness.

This study demonstrates a disturbing disconnect between the declared
law of consumer bankruptcy disclosure and the actual execution of that law
in consumer cases. Most fundamentally, this disconnect can affect the admin-
istration of bankruptcy cases. Beyond that, it can trap unwary debtors in
highly prejudicial ways. Finally, it tends to undermine the confidence of the
parties and public in the bankruptcy process. Accordingly, further examina-
tion of this issue is warranted and important.

Presently, neither the HANDBOOK FoR Cxarren 7 TRUSTEES, supra note 135, nor the UNITED
Srares Tausee MaNuat, supra note 137, provides any guidance to United States Trustees or to
chapeg trustees in dealing with the problems identified in this sudy.

200Se¢ Michelle 8, Jacobs, People from the Foomotes: The Missing Element in Client-Centered Coa
selling, 27 Gowen Gare L. Rev. 345 (1997); Gary 8. Goodpaster, The Human Arts of Lauyering: Inter-
viewing and Counseling, 27 J. Lecat Epuc. 5 (1975).

71See Gilda Tuoni, Two Models For Trial Advocacy Skills Training in Law Schools - A Critique, 25
Lov. LA. L. Rev. 111 (1991); Thomas F. Geraghty, Foreword: Teaching Trial Advocacy in The 90s And
Beyond, 66 Notre Dane L. Rev. 687 (1991).

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FIGURE 1
FEDERAL BANKRUPTCY APPELLATE STRUCTURE
FOR CORE PROCEEDINGS
iscreti i riew:
Supreme Court
Second-Tier
In iat jiew:
a Court of Appeals —
First-Tier i
Intermediate Review: Intermediate Review:
(Possibility 1) (Possibility 2)

District Court BAP.

SL

Initial Determination:
Bankruptcy Court

A comparison of BAPs to district courts suggests that BAPs
have more of the features of quality appellate review than do the
district courts. First, bankruptcy appellate panels are collegial bodies
that decide cases in three-judge panels. Indeed, bankruptcy judges
who serve on BAPs themselves believe that reviewing cases in panels
of judges benefits decisionmaking.” By contrast, bankruptcy appeals
to district courts are heard by a single district judge.

Second, the bankruptcy judges who comprise bankruptcy
appellate panels are (by virtue of their appointment as bankruptcy

62. Ralph R. Mabey, The Evolving Bankruptcy Bench: How Are the “Units” Faring?, 47 B.C.
L, REV. 105, 123 (2005).

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2008] Misbehavior and Mistake in Mortgage Sei 141

Mortgage Study, which was funded by the National Conference of
Bankruptcy Judges’ Endowment for Education.'”?

The Mortgage Study sample contains 1,733 Chapter 13 bankruptcy
cases filed by homeowners. The sample includes cases from forty-four
judicial districts in twenty-three states and the District of Columbia, which
represented 61% of all Chapter 13 cases filed in 2006."% The sample
captures variations in local bankruptcy practices and represents all large
mortgage lenders and servicers. In each district, the sample was constructed
by selecting every fifth case filed in April 2006 in which the debtor owned a
home.'* If a case was converted from another chapter or if the debtor did
not own a home, that case was excluded and the next case that met the
selection criteria was included in the sample. Thus, the sample roughly
reflects the proportional size of Chapter 13 filings among all judicial districts
in the sample."

The sample is not representative of all homeowners in bankruptcy for
two reasons, First, the sample includes only Chapter 13 bankruptcy cases
and excludes Chapter 7 cases. Prior studies have confirmed that the
percentage of homeowners in Chapter 13 bankruptcy is much higher than in
Chapter 7 bankruptcy.'”” The exclusive focus on Chapter 13 enhances the
data’s usefulness to examine bankruptcy as a home-saving device.’
Chapter 13 is particularly attractive to homeowners who are in default on
their mortgage loans because it permits them to retain their homes by curing
arrearages over time through repayment plans.'° Although the data are only

123. The Endowment for Education is a nonprofit and nonpartisan organization. in funding the
grant, the Endowment does not endorse or express any opinion about the methodology utilized, any
conclusions, opinions, or results contained in this Article, or any other findings based on the
research funded by the Endowment.

124, Am. Banks. Inst., Annual Non-business Filings by Chapter (2000-2006), http://www abi
world.org/AM/AM Template. cfin?Section=Home&CONTENTID=47461&TEMPLATE=/CM/Cont
entDisplay.cfm

125. All homeowners were included in the sample, regardless of whether they had mongages.
In the sample, 96% of homeowners had outstanding mortgage debt when they filed bankruptcy.

126. For example, the sample contains only two cases from Wyoming, a district with few
Chapter 13 filings. At the other extreme, the sample contains 164 cases from the Northem District
of Georgia because that district has a large number of Chapter 13 cases.

127. Data from the Consumer Bankruptey Project III (CBP) indicate that home ownership is
much more prevalent among Chapter 13 debtors than Chapter 7 debtors In the CBP's core sample
of 1,250 cases filed in 2001 in five judicial districts, 30% of Chapter 7 cases were filed by
homeowners. In contrast, 75% of Chapter 13 debtors owned their homes when they filed
bankruptcy. The CPB data are on file with the author.

128, Scarce data exist on how homeowners fare in bankruptcy. See Melissa B. Jacoby,
Bankruptcy Reform and Homeownership Risk, 2007 U. ILL. L. REV. 323, 345 (“Although scholars of
mortgage debt and foreclosure generally are aware that some bankruptcy filers own homes, chapter
13°s specific anti-foreclosure function has not received sufficient scholarly attention.”). The most
extensive study to date was based on cases filed in 2001 and did not rely on proofs of claim or
home-loan documents. See Bahchieva et al., supra note 1, at 94 (detailing the sources of data
collected for the 2001 study).

129, See 11 U.S.C. § 1322(b)(3), (b)(5) (2006) (providing for a bankrupicy-repayment plan to
cure a default on a debtor’s primary residence).

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5760
1999) CONSUMER BANKRUPTCY PAPERS 701

Under what circumstances should a debtor estimate that
funds will be available for distribution to creditors?#76
Should the debtor determine whether the “nature of the
debt” is consumer or business based on the preponderance of
the number of debts, the preponderance of the amount of the
debts or some other test?!77

Should a debtor disclose all types of insurance, including
health, dental, long term care, disability, home, renter, auto
and life, or only insurance in which the debtor has some
equity, such as whole life or prepaid insurance?!78

Should a debtor disclose a pension interest even if it would
not be property of the estate under 11 U.S.C. § 541(c)?179
Should a debtor disclose a month to month lease or other
verbal rental arrangement?!80

What detailed income and expense information should a
debtor in business disclose?38+

Should the debtor sign the schedules and statement of finan-
cial affairs within a fixed time, such as 15 days, before they
are filed?182

Should the debtor disclose payments to secured creditors
and on executory contracts, or only to unsecured
creditors?183

‘No bankrupt will itemize every possession; none should, Every bankrupt must do
‘enough itemizing to enable the trustee to determine whether to investigate
further[.]

Payne v, Wood, 775 F.2d 202, 205-07 (7th Cir. 1985).

Nevertheless, this standard for disclosing assets is too vague to provide any functional guidance to
consumer debtors. Another court suggested an equally vague standard, “There are, however, no bright-
line rules for how much itemization and specificity is required, What is required is reasonable particulari-
zation under the circumstances.” Mohring, 142 BR. 389, 395 (Bankr. ED. Cal. 1992). The instructions on
Official Bankruptcy Form 6 simply state, “{L]ist all personal property of the debtor of whatever kind” and,
“if additional space is needed in any category, attach a separate sheet{]"

Official Bankruptcy Form 1, voluntary petition. As noted in the discussion on test question 16,
supra at 673-74, this is a more acute problem in chapter 13 cases.

17)See supra note 176. See supra vest question 17, at 674.

TM8Official Bankruptcy Form 6, schedule B, line 9. See supra test question 4, at 666. Payne v. Wood,
775 B.2d 202 (7th Cir. 1985).

‘79Official Bankruptcy Form 1, schedule B, line 11. See supra test question 5, at 666-67. See also the
conflicting decisions discussed supra note 56,

189Official Bankruptcy Form 1, schedule G. See supra test question 7, at 668.

*81Official Bankruptcy Form 1, schedules I and J. See supra test question 8, at 668.

2@Offical Bankruptcy Forms 6 and 7. See supra test questions 18 and 19, at 675-76.

*©Official Bankruptcy Form 7, statement of financial affairs, question 3. See question and text accom
Panying note 95.

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146 Texas Law Review (Vol, 87:121

Requiring this trio of documentation (itemization, note, and mortgage)
permits all parties in a bankruptcy case—debtor, trustee, and other
creditors—to ensure the accuracy and legality of the claim. Without docu-
mentation, parties cannot verify that the claim is correctly calculated and that
it reflects only amounts due under the terms of the note and mortgage and
permitted by other applicable law.’ A lack of documentation hampers ef-
forts to ensure that any payments on mortgage claims are made in accord
with the Bankruptcy Code.

The documentation requirements for mortgage proofs of claim are
unambiguous and long-standing.'*' Nevertheless, these laws are not con-
sistently respected. A majority of claims (52.8%) lacked one or more re-
quired attachments. Figure | illustrates the findings for mortgagees’ proofs
of claim on loans secured by a debtor’s home.'*? The data show that in a
majority of instances mortgages do not provide the required documentation.

Figure 1: Percentage of Proofs of Claim
Missing Required Documentation

60%
50%
Ce —————_—— -
30% --
20% -
‘i - z _|
0% 4

Hemization Missing Note Missing. Security Interest One or More Pieces of

Missing Documentation

11,168 Proofs of Cam Missing

‘A majority of claims (83.9%) had the itemization attached to them.
Despite the applicable, clear instruction on Form 10, the remaining claims
(16.1%) did not have any itemization attached. For the one in six claims not

150. For example, some states have specific laws that govern foreclosure costs and fees. See,
e g., MICH. COMP. LAWS § 600.2431 (2007) (capping attorneys fees in a nonjudicial foreclosure at
zo more than $75 if the mortgage does not specifically contract for such attorneys fees).

151. See, eg, FED. R. BANKR. P, 3001 advisory committee's notes (indicating that the
requirements for mortgage proofs have remained largely identical since at least 1983)

152. These data come from the proof of claim initially filed in each case and do not reflect any
attachments that may have been added if mortgagees filed amended claims. The purpose here is to
‘measure compliance with the clear obligations of the rules in the first instance, not to determine
whether creditors responded if a party objected or requested information.

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5774

RaFAEL I, PARDO 8

AWARDS AND PROFESSIONAL ORGANIZATIONS

Institute for Higher Education Law and Govemance Fellow, Houston Higher
Education Finance Roundtable, University of Houston Law Center, May 2008

American Bankruptcy Law Journal Fellow, Annual Meeting of the National
Conference of Bankruptcy Judges, November 2005

Member, Bar of the United States Supreme Court, 2009 — present
Member, Society of Empirical Legal Studies, 2007 — present
Member, American Bankruptcy Institute, 2003 ~ present
Member, Washington State Bar Association, 2002 ~ present

PERSONAL
Born: Havre, Montana
Languages: Spanish (fluent) and French (proficient)
Interests: classical piano, mountaineering, squash

8/25/2010

DEF01899


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706 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

motivate consumer debtors and their attorneys to file complete and accurate
bankruptcy papers. One suggestion is a new bankruptcy rule that would give
the trustee or the United States Trustee the authority to file, without an
attorney, a simple paper identifying the deficiencies in the debtor's papers.
The filing of such a paper would then have the effect of placing a hold on the
debtor's discharge.2°> This hold could then be released upon an order of the
court obtained upon a motion filed by the debtor establishing that the papers
have been remedied (or are not in need of remedy.) The court would then
grant relief upon such terms as it deems just.

Thus, for example, if it appears to the trustee that the debtor has not
disclosed, say, pension or insurance interests, the trustee could file a check-
box form pleading identifying those deficiencies. That filing would then sig-
nal the court not to issue the discharge. The debtor would then be required
to file an amended schedule B, and file either a motion or a stipulation to
obtain an order permitting the discharge to be issued. In that process, the
court could condition the order upon just terms, such as a reduction in attor-
ney fees under § 329(a), or costs in favor of the trustee against either the
debtor or the attorney as appropriate. If the court determines that the
trustee's filing violated Bankruptcy Rule 9011, the court could impose sanc-
tions under that rule.

Such a procedure would have several advantages. First, it would be inex-
pensive and prompt. Second, it would restore meaning to that part of the
bankruptcy bargain that states that full disclosure by the debtor is a major
condition of the discharge?” Third, the availability of such a simple process
might strongly motivate the accurate and complete disclosures that the law
requires in the first instance. Fourth, because the process could not be in-
voked by a creditor, it would protect the debtor against creditor
harassment.7°8

Another suggestion is to create a specific process for the trustee, the
United States Trustee or any party in interest to file a motion to compel the
debtor to amend. This rule might further require the imposition of costs in

Sin Detroit, one mechanism that trustees occasionally use in these circumstances is to continue the
meeting of creditors to give the debtor an opportunity to correct the deficiencies. Reportedly, this can be
effective in motivating correction of the problem.

However, trustees are under a mandate from the United States Trustee program to close no asset
cases promptly and are evaluated accordingly. Hanooox FoR CHAPTER 7 TRUSTEES, Supra note 135, at
6-14 and 10-1; United States Department of Justice, Untrep States TRUSTEE MaNuAL, volume 2, page
43-44 (October 1996). As a result of this unforvunate disincentive, a trustee may decide to conclude the
reconvened meeting even if the problems with the papers have not been fully remedied.

Obviously, che United Scates Trustee would bave to allow some leeway in this mandate for cases in
‘which the trustee invokes the suggested new process.

27See Fidelity National Title las. Co. v. Franklin (In re Franklin), 179 BR. 913, 927.

%*This consideration is the basis for the cucrent limitation permitting only the United States Trustee
to bring a motion to dismiss for substantial abuse under § 707(b). Ser supra note 122.

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162 Texas Law Review [Vol. 87:121

debtor’s schedule, I termed the gap in the “creditor’s favor.” In these
instances, the creditor was asserting that more dollars were owed in the mort-
gage debt than the debtor believed were owed. Conversely, if the scheduled
amount of mortgage debt exceeded the amount on the mortgagee’s claim, I
termed the gap in the “debtor's favor.” Here, the gap between the schedule
and the claim resulted from the debtor’s overreporting the amount of
mortgage debt.

Figure 3 shows what fraction of claims fell into each of three
categories—creditor’s favor, debtor’s favor, and no discrepancy—based on
the existence of discrepancies between the claims and the scheduled amounts
of debt. Debtors and creditors agreed on the amounts owed for only 74 of
1,675 loans (4.4%). For the vast majority of loans (95.6%), the debtor and
mortgagee did not agree on the amount of mortgage debt. In about one-
quarter of instances (25.2%), the debtor’s scheduled amount exceeded the
mortgagee’s claim. However, the majority of claims exceeded the debtor’s
calculation. Seven in ten (70.4%) claims asserted that the mortgage debt was
greater than what the debtor listed on the schedule.

Figure 3: Percentage of Claims by Type of Gap

0% a

No Discrepancy Debtor's Favor Creditor’s Favor

1,675 loans

Figure 3 shows that, as an initial matter, the debtor and creditor do not
agree on the amount of the debt in the vast majority of cases. The mere

the amount of the debt. These are usually placeholders, akin to listing the debt as “unknown.”
Second, loans were eliminated if the schedules and claims were not attempting to calculate the same
thing. ‘This usually occurred because onc party listed only the arrearage amount and the other
calculated the entire outstanding mortgage debt—both arrearage and principal. These cases were
excluded from the gap analysis because the disagreement was in large part a result of the parties
not trying to communicate the same debt. In a very small number of instances, when both the
creditor and the debtor clearly provided only the arrearage amount, the cases were used in the gap
analysis because the discrepancy in calculation can be fairly compared. Finally, twelve loans were
removed as outliers, Two criteria were used to identify these situations. Six loans were eliminated
because the gap between the claim and the scheduled debt exceeded 200% of the amount of the
scheduled debt. An additional six loans were deemed outliers because the gap exceeded $100,000
in absolute dollars and the gap was greater than 50% of the amount of the scheduled debt.

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5638

2008) INVESTIGATING APPELLATE STRUCTURE 1813

Panel B: Citing Reference Data by Type of Citing Court for Positively Cited First-
Tier Bankruptcy Appellate Opinions

Citing References

Citing Court: All Federal Courts Median Mean N
BAP Opinions 6.00 7.27 94
District Court Opinions 2.00 3.25 106

t-test of difference in means: = -6.5107 (p < 0.0001)***
Wilcoxon rank-sum test: 2 = -6.257 (p < 0.0001)***

Citing Court: Court of Appeals Median Mean N
BAP Opinions 0.00 0.45 94
District Court Opinions 0.00 0.19 106

t-test of difference in mean: 2.7414 (p = 0.0067)**
Wilcoxon rank-sum test: z = -2.560 (p = 0.0105)*

Citing Court: Bankruptcy Appellate Panel Median Mean N
BAP Opinions 1.00 2.01 94
District Court Opinions 0.00 0.15 106

t-test of difference in means

.7270 (p < 0.0001)***

Wilcoxon rank-sum test: z = -9.368 (p < 0.0001)***
Citing Court: District Court Median Mean N

BAP Opinions 0.00 057 94

District Court Opinions 1.00 0.99 106

t-test of difference in means: f = 2.0821 (p = 0.0386)*
Wilcoxon rank-sum test: z = 3.194 (p = 0.0014)**

Citing Court: Bankruptcy Court Median Mean N
BAP Opinions 3.00 4.23 94
District Court Opinions 1.00 1.92 106.
t-test of difference in means: .2142 (p < 0.0001)***
Wilcoxon rank-sum test: z = -4.593 (p < 0.0001)***
Citing Court: Extracircuit Federal Courts Median Mean N
BAP Opinions 1.50 2.52 94
District Court Opinions 1.00 151 106

-3.0581 (p = 0,0025)**
3.337 (p = 0.0008)***

t-test of difference in mean:
Wilcoxon rank-sum test: z

Source: First-Tier Database
Note: *** p< 0.001, ** p $0.01, * p< 0.05.

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2008) INVESTIGATING APPELLATE STRUCTURE 1819
Table 8 (continued)
all Bankruptcy Distriet_ = BAP Court of i
Federal Court Court Citations’ Appeals Citations”
Court Citations? Citations Citations‘
Citations*
N 200 200 200 200 200 200
Log 473.506 427.097 = -238.131 209.440 130.134 —-359.980
likelihood
McFadden's | 0.063 0.050 0.034 0.242 0.124 0.053
R

Source: First-Tier Database

Note: *** p< 0.001, ** p< 0.01, * p < 0.05. Incidence rate ratios presented with 95%
confidence intervals in parentheses.

* Zero-truncated negative binomial regression model.

® Negative binomial regression model.

© We have fitted a negative binomial regression model that does not include all of the
independent variables in the table for the reasons set forth in supra note 161.

4Pojsson regression model. When fitting a negative binomial regression model, the
likelihood ratio test for alpha—the overdispersion parameter—was not significant (chi-
squared = 2.52, df= 1, p = 0.056), thus indicating that the Poisson model is preferred.

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5773

RAFAEL I. PARDO 7

PROFESSIONAL ACTIVITIES ne
Member, AALS Committee on Research, August 2010 - present

Panelist, American Bankruptcy Institute Media Teleconference on United
Student Aid Funds v. Espinosa, No. 08-1134 (U.S, Mar. 23, 2010), March
2010, http://www abiworld.org/webinars/2010/Espinosa_Supreme_Court/
index.html

‘Academic Member, Editorial Advisory Board, American Bankruptcy Law
Journal, January 2010 — present

Chair-Elect, AALS Section on Creditors’ and Debtors’ Rights, January 2010 -
present

Volunteer Attomey, King County Bar Association Debt Clinic, April 2009 —
present

Secretary and Treasurer, AALS Section on Creditors’ and Debtors’ Rights,
January 2009 ~ January 2010

Presenter, Washington Bankruptcy Judges Conference, Blaine, WA, September
2008

Panel Moderator, Third Annual Conference on Empirical Legal Studies, Comell
Law School, September 2008

Presenter, Annual Fall Symposium of the Ninth Circuit Bankruptey Appellate
Panel, Ashland, OR, August 2008

Discussant, “Microinitiatives,” Globalization & Justice: Interdisciplinary
Dialogues, Seattle University, February 2008

Program Faculty, Federal Judicial Center, Workshop for Bankruptcy Judges Il,
Austin, TX, September 2007

Program Faculty, Federal Judicial Center and Administrative Office of the U.S.
Courts, National Bankruptcy Administrators Conference, Asheville, NC, July
2007

‘Newsletter Editor, AALS Scction on Creditors’ and Debtors’ Rights, January
2007 ~ May 2008

‘Member, Board of Directors, Consumer Education and Training Services
(“CENTS”), Seattle, WA, October 2006 ~ present

Guest Blogger, Concurring Opinions, http://www concurringopinions com,
August 2006,

Program Faculty, Thirtieth Annual Seminar on Bankruptcy Law and Practice,
Stetson University College of Law, December 2005

Member, Southeastem Association of Law Schools (SEALS) Young Scholars
Committee, April 2005 ~ September 2005

Consultant, New Orleans Legal Assistance Corporation, New Orleans, LA,
September 2004 ~ September 2005

Advisory Board, Bankruptey Litigation Skills Symposium, American Bankruptcy
Institute/Tulane Law School, April 2004 ~ May 2005

8/25/2010

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1764 VANDERBILT LAW REVIEW (Vol. 61:6:1745

L. Rev. 1809, 1351-62 (1096) (arguing, based upon social choice theory, that the Supreme Court

“would desire intra- but not inter-circuit stare decisis,” since such a regime “avoids the
irrationality that would result from cyclical preferences within particular circuits, while, at the
same time, reducing the likelihood that legal doctrine that results from path manipulation in a
given circuit will be replicated across the circuits.”). But cf. O'Hara, supra note 17, at 772
(arguing that the absence of stare decisis across circuits is justified on the ground that “an
agreement to follow another circuit's precedents will not save the judges in a particular circuit
much time”). In the case of appeals of core bankruptcy matters, there are, anomalously, two
levels of intermediate appeals. Perhaps, then, in order for issues properly to percolate up to the
courts of appeals, there ought to be no horizontal stare decisis at the first intermediate level—
that is, at the level of the BAPs and district courts.

Second, given that the BAPs and district courts lie at the same hierarchical level, it might
not make sense for horizontal stare decisis rules to apply to BAPs but not district courts.
Perhaps, once again, horizontal stare decisis should not apply at all. One might argue, to the
contrary, that horizontal stare decisis should apply to both courts. See Chemerinsky, supra note
4, at 129.

‘Third, perhaps bankruptcy law and society would be better served by a system other than
the traditional appellate hierarchy, at the lower levels of appeals of core bankruptcy matters.
Civil law systems rely far less on precedent than does the common law system dominant in the
United States. See supra note 15 and accompanying text. Civil law judiciaries decide cases based
largely upon the proper interpretation of the governing “code.” Insofar as bankruptcy turns upon
the content of a code—the “Bankruptcy Code’—bankruptey seems to provide an ideal setting for
application of such judicial review. Cf. Lawrence Ponoroff, The Dubious Role of Precedent in the
Quest for First Principles in the Reform of the Bankruptcy Code: Some Lessons from the Civil Law
and Realist Traditions, 74 AM. BANKR. L.J. 173, 216 (2000) (arguing for “a softer, more nimble,
rrule of precedent {that] would improve the quality of outcomes in particular bankruptcy cases”).
Interestingly, while Ponoroff facially argues in favor of increased reliance on a civil law
jurisprudential approach in the bankruptcy context, his arguments do not seem to accord so well
with the principles underlying the structure of judicial review in civil law systems. Dean
Ponoroff laments:

‘The opportunity for two levels of appeal as a matter of right has contributed

to the crush of reported decisions, a phenomenon that, in my view, has

hampered pragmatic and considered decisionmaking in the bankruptcy

courts. That problem is compounded by the disturbing rise in adherence to

textual or plain meaning methods of interpretation in bankruptcy cases,

particularly in the decisions of the circuit courts of appeal|s}
Id. at 181 (footnotes omitted). Ponoroff thus seems more concerned with allowing different
interpretations of the Bankruptcy Code to percolate up through the judiciary. He also seems to
embrace more of a realist conception of bankruptcy law than a civil law conception, explaining
that “{a] more forward-looking, and less technical and ‘busy,’ code would abate the pressure to
textualist grounds that typically prove the most
difficult to distinguish in subsequent cases.” Id. at 216. Indeed, Ponoroff acknowledges that he
endorses “a different style of judging, one that eschews a strict adherence to precedent, but not
by any means civilian, to the extent that style is perceived as the unimaginative and rote
n of positive legal rules to particular fact situations performed by a cadre of mid-level
ly places greater responsibility
on the decisionmaker to reason analogically from code principles, as well as from subsidiary
sources such as custom, usages, settled jurisprudential doctrine, and equity.” Id. at 223-24.

To the possible objection that the fact that the higher levels of bankruptcy judicial review—
courts of appeals and the Supreme Court—rely upon the standard appellate hierarchy, one can
point to the coexistence of Louisiane’s civil law system within the United States judicial system
as an example of how such a eystem can function. See, eg., Shelp v. Nat'l Sur. Corp., 333 F.2d
431, 439 (5th Cir. 1964) (in determining Louisiana law under Erie, federal courts should apply
precedential rules that Louisiana's highest court would apply); Alvin Rubin, Hazards of a

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674 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 73

when the schedules suggested otherwise.85 (17 of
152 cases)

71% of chapter 13 debtors improperly estimated
that no funds would be distributed to creditors.8
(34 of 48 cases)

17. Is the statement that the debts are primarily consumer
debts consistent with schedules D, E and F?

The petition requires the debtor to state, by checking the appropriate
box, whether the “nature of debt” is “non-business/consumer” or “business.”87
As noted, pursuant to the selection criterion for this study, all 200 debtors
stated that the nature of the debt was consumer debt.8° This question com-
pares that statement with the information regarding the debts disclosed in
schedules D, E and F.

2% of debtors who indicated primarily consumer debt
should have indicated primarily business debt®? (4 of
200 cases)

“indeed, the schedules in all 152 chapter 7 cases suggested that all of them should have been estimated
to be no asset cases.

fn face, che plans in all forty-eight chapter 13 cases provided for distribution of funds to unsecured
creditors.

Official Bankruptcy Form 1. ‘The term “consumer deht” is defined in 11 USC. § 101(8) as “debe
incurred by an individual primarily for a personal, family, or household purpose.” No further official in-
structions are provided for this disclosure. Some cases addressing the difficulties that can arise in distin-
gushing between consumer and business debt are cited supra note 66.

Inaccuracies in statement of whether the nature of the debt is business or consumer have been
reported previously. Jennifer Conners Prasies, Caught in a Cycle of Neglect: The Accuracy of Bankruptcy
Statistics, 101 Com. LJ. 307, 334 (Winter 1996) (reporting error rates of 7.5, 13 and 26% for business
cases in chapter 7, 11, and 13, respectively); Hon. Lisa Hill Fenning & Craig A. Hare, Measuring Chapter
LL: The Real World of $00 Cases, 4 Ant. BANKR. Inst. L. Rev. 119, 123 (1996) C[The proportion of
business chapter 11 cases is 79 higher than the number of business cases reported in the Administrative
Office demographic data for our district. The understatement in the official statistics results primarily
from a lack of adequate instructions to debtors on how to classify their cases”).

The Administrative Office of the United States Courts is aware that on this point, “the information
provided by some debtors is inaccurate.” Conmission REPORT, supra note 2, Appendix C-1, Report of
the Bankruptcy Statistics Task Force of the Administrative Office of the United States Courts, § 5, at 10.
The task force explained, “Many small-apitalized debtors derive most of their income from their own
businesses, and their business and personal assets and debts are often interewined and not easily distin-
guishable, particularly if they do not maintain sound records.” Jd. As a result, the task force recommended
changing the form to ask about the filing of federal tax schedule C or K, incorporation or business licenses,
as well as verification of this information by the trustee. Id.

See supra note 43 and accompanying text.

"Because the selection criterion for the study was the debtor's statement that the nature of the debe
‘was consumer debe, these four cases were not excluded, even though the debtar’s statement was incorrect.
Including these cases allowed the study to measure how often the statement regarding the nature of the
debt was inaccurate. Further observations regarding these four cases are made supra note 66.

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2008} Misbehavior and Mistake in Mortgage Servicing 13

Data were drawn ftom the public court records filed in each case.’
Like other leading studies of consumer bankruptcy, we coded data from
debtors’ schedules." Filed under penalty of perjury, these schedules may
provide more complete and reliable evidence of debtors’ financial situations
than survey or interview methods.'”” For each case, we coded the debtor’s
income; the debtor’s valuation of the home; and any information about
mortgage obligations on the debtor’s principal residence,'* including total
debt, any arrearages, and the amount of monthly payments.""?

The innovation of the Mortgage Study was to code mortgage creditors’
proofs of claim and supporting documentation. These files give more
information on home loans than is available from debtors’ schedules, Data
came from four documents, when available: (1) the proof of claim itself; (2)
an itemization of the amount claimed; (3) a copy of the mortgage that
secured the obligation; and (4) a copy of the note evidencing the debt. From
these documents, we coded the type and terms of each loan; the names of the
mortgagee, originating lender, and servicer, the amount of the initial

135, Most documents were obtained from the Public Access to Court Electronic Records
(PACER) service. We thank the chief judges of each district in the Mortgage Study, with the sole
exception noted below, for granting us a research waiver of PACER fees. The Souther District of
Texas denied our application for a fee waiver, stating that st had a blanket policy against such
waivers, notwithstanding the wniten policy of the Judicial Conference of the United States that
individual researchers associated with educational institutions are eligible for waivers if they can
show cause, See U.S. Judicial Conference, Electronic Public Access Fee Schedules, (effective Mar.
11, 2008), available at http://pacer.psc.uscourts.gov/documents/epa_feesched.pdf. When PACER
did not appear to contain complete court files, we obtained paper records. For example, in the
Eastem and Middle Districts of Noth Carolina, proofs of claim are not available on PACER. We
thank Edward Boltz, of the Law Offices of John T. Orcutt, and Reid Wilcox, Clerk of the
Bankruptcy Court for the Middle District of North Carolina, for their help in obtaining these
documents,

136. See Culhane & White, supra note 42, at 767 (mentioning that their study data iacluded
information from debtors’ Schedule I and J filings); Scott F. Norberg & Andrew J. Velkey, Debtor
Discharge and Creditor Repayment in Chapter 13, 39 CREIGHTON L. REV. 473, 486 n.25 (2006)
(identifying their data as collected from debtors” Schedule I filings); Teresa A. Sullivan, Elizabeth
Warren & Jay Lawrence Westbrook, Less Stigma or More Financial Distress: An Empirical
Analysis of the Extraordinary Increase in Bankruptcy Filings, 59 STAN. L. REV. 213, 219 (2006)
(describing financial data used in the study as drawn from “schedules filed with the court”).

137. See MANN, supra note 25, at 61 (suggesting that one of the problems with the Federal
Reserve's Survey of Consumer Finance data 1s that those surveyed often underreport their
spending); David B. Gross & Nicholas S. Souleles, Do Liguidity Constraints and Interest Rates
Matter for Consumer Behavior?: Evidence from Credit Card Data, 117 QJ. ECON. 149, 151 1.2
(2001) (asserting that 2 1995 survey understates household borrowing on bankeards because survey
participants “substantially underreport the bankcard debt”).

138, Real property that was not the debtor's principal residence was ignored, as were any
corresponding proofs of claum for such properties. No debtor in the sample was permitted to have
more than one principal residence.

139. We coded data from each debtor's docket; petition; Schedules A, C, D, I, and J; Form
B22; and Chapter 13 plan. These documents were available and complete in over 99% of sampled
cases; there are very few missing observations. We coded only the onginal version of the
schedules, including any separate or later filed schedules that were not included in the original
schedules. We did not code amendments to schedules because we were interested in the debtors’
initial ability to gauge the amount of their mortgage debts.

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populated mostly by specialists with bankruptcy expertise®? who
themselves could be characterized as nonpolitical.%

When one considers the type of jurist produced by the judicial
selection process for bankruptcy judges in conjunction with their term
of appointment, the standard for their removal, and the treatment
afforded to their compensation, it would appear that bankruptcy
judges have achieved a considerable degree of judicial independence.
Accordingly, while the district court seems to enjoy some advantage
over BAPs with respect to this final attribute identified as improving
the quality of appellate review, the advantage is not likely to be
substantial. We summarize the differences in the attributes of the
BAPs and district courts below in Table 1.

TABLE 1
‘STRUCTURE OF DISTRICT COURTS AND BANKRUPTCY APPELLATE PANELS

First-Tier | Number | Bankruptcy | Other | Traditional | Judicial
Appellate of Expertise | Lawfinding | Appellate | Independence

Court Judges Ability | Hierarchy

District Single Unlikely Some Weak Strong

Court judge

Bankruptcy | Panel of Yes Some Strong Moderate

Appellate | three

Panel judges

B. Hypotheses

Insofar as BAPs exhibit more of the features associated with
quality appellate review than do federal district courts, the discussion
in Part I suggests that BAPs will provide a higher quality of

92, See Mabey, supra note 62, at 107 (“Most of the bankruptcy judges were bankruptcy
practitioners in their prior careers.”).

93. Of, Resnik, supra note 91, at 670 (“Turn first to the advantages of judicial appointment
of judges. As a few details of current practices illustrate, the judiciary has selected a high-quality
and relatively nonpolitical corps of judges... ..”).

94. This state of affairs can be traced to congressional efforts in the 1970s to elevate the
status of bankruptcy judges. Congress established in 1970 the Commission on the Bankruptcy
Laws of the United States to evaluate the then-existing bankruptcy system and to suggest
recommendations for ita reform. Pub. L. No. 91-354, 84 Stat. 468 (1970). In ite report, the
Commission envisioned that improvements in the appointment, tenure, and compensation of
bankruptey judges would enhance their “real and apparent judicial independence.” COMM'N ON
‘THE BANKR. LAWS OF THE U.S., REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE
UNITED STATES, H.R. Doc. No. 93-137, pt.1, at 95 (1973).

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counts based on the actual values of all of the independent variables
included in the fitted models.

The models indicate that a statistically significant relationship
exists between the type of first-tier appellate court that issued the
opinion and the total number of positive citing references as well as
positive citing references by bankruptcy courts, BAPs, district courts,
courts of appeals, and extracircuit federal courts. A BAP opinion
increased the expected number of total positive citations over a five-
year period by approximately 154% [84, 251], holding all other
variables constant. If we focus on the type of citing federal court,
holding all other variables at their mean, BAP opinions are predicted
to receive approximately (1) 2.0 [1.1, 3.0] more bankruptcy court
citations; (2) 1.3 [0.8, 1.7] more BAP citations; (3) 0.2 [0.1, 0.3] more
court of appeals citations; and (4) 0.6 [0.04, 1.2] more citations by
extracircuit federal courts.

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$47 million, including funding a $5 million foreclosure-redress fund for
consumers who lost their homes in part due to unwarranted charges or
difficulties in obtaining information from Fairbanks." Despite this victory,
the FTC did not pursue any other major enforcement activities against
servicers for several years until it reached a settlement with EMC Mortgage
Corporation and its parent company, Bear Stearns, about mortgage-servicing
practices that allegedly violated several consumer-protection laws.'"' The
U.S. Department of Housing and Urban Development (HUD) also has
authority to address servicing misbehavior. It enforces RESPA, which
obligates mortgage servicers to provide certain information to homeowners
upon receiving a “qualified written request.”""? While a failure to respond to
a qualified written request can give rise to a private right of action, there is
no empirical evidence on how frequently this law is used to help
consumers.''? Forty percent of consumer complaints to HUD concern
servicing issues,'* yet HUD does not routinely investigate these complaints
or collect data from servicers on compliance issues.''*

In 2007 and 2008, the U.S. Trustee filed several complaints against
Countrywide for alleged wrongdoing in servicing bankruptcy cases.''*

mortgage_servicing/contenv/ftc_complaint pdf (claiming that Fairbanks Capital engaged in “unfair
‘or deceptive acts or practices” in violation of the Federal Trade Commission Act, the Fair Debt
Collection Practices Act, and the Fair Credit Reporting Act); First Amended and Consolidated Class
Action Complaint at 3, Curry v. Fairbanks Capital Corp., No. 03-10895 (D. Mass. Dec 1, 2003),
available at bitp://www.consumerlaw.org/initiatives/mortgage_servicing/content/Consohidated
Class_Complaint pdf ( “Fairbanks has engaged in a nationwide scheme of illegal, unfair, unlawful,
and deceptive practices that violate both federal and state law.”).

110. See Settlement Agreement and Release at 12, 25-27, Curry v. Fairbanks Capital Corp.,
No. 03-10895 (D. Mass. Nov. 14, 2003), available at hurp://www.consumerlew.org/initiatives!
mortgage_servicing/contenv/settlement pdf (providing for the creation of a $40-million-dollar
Redress Fund and for additional benefits to class members).

111, Bear to Pay $28 Million to Settle Loan Complaint, N.Y. TIMES, Sept. 10, 2008, at C4; see
also Fed. Trade Comm'n v. EMC Mortgage Corp., No. 4:08-CV-338 (E.D. Tex. Sept. 9, 2008)
(stipulated final judgment and order).

U2. 12 US.C. § 2605 (2006).

113, Consumers themselves, or their attommeys (including bankruptcy attorneys), may not be
aware of the law. Also, consumers often do not hire attomeys until foreclosure is imminent, at
which time a qualified written request and its sixty-day response window may not be an expedient
option.

114. Guttentag, supra note 19.

115. For example, on its Web site, HUD lists eight categories of complaints that consumers can.
file. None of the categories include mortgage servicing. U.S. Dep’t of Housing and Urban Dev.,
Complaints, http:/www.hud.gov/complaints (last updated Oct. 6, 2006) {hereinafter U.S. Dep't of
Housing and Urban Dev., Complaints}. In addition, HUD does not make available any data sets on
mortgage-servicing abuse. See U.S. Dep’T OF HOUSING AND URBAN DEV., DATA SETS AVAILABLE
FROM HUD USER 4-10, available at http:/www buduser.org/Datasets/datasets06.pdf (describing
the data sets that are available from HUD).

116. See Peg Brickley, Countrywide Deal with Critic is Disputed, WALL ST. ., Aug. L1, 2008,
at A3 (reporting that the Justice Department has brought actions in Pittsburgh, Atlanta, Ohio, and
Florida for purported misbehavior by Countrywide in consumer bankruptcy cases); Carrie
Teegardin, Couple Lose Home in Countrywide Dispute, but May Yet Win, ATLANTA J.-CONST.,

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2008) INVESTIGATING APPELLATE STRUCTURE 1781

resolved by the circuit courts.’ Last, Professor Frank Cross’s
comprehensive empirical study of decisionmaking by the courts of
appeals has documented that litigant effects are not a major
determinant of circuit court decisions, both generally and in particular
types of cases (i.e., criminal decisions and labor decisions).1?°

We also recognize that our data potentially include a forum-
selection bias because attorneys in circuits that have BAPs may be
more likely to prefer appeals relating to certain subject matters to be
heard by BAPs than by district courts, or vice versa.1° Thus, it is
possible that there are some issues that BAPs never or only rarely
hear. (Assuming that bankruptcy cases are at some level homogenous
nationwide, that will not be the case for district courts, because there
are circuits in which district courts hear substantially all appeals from
bankruptcy court rulings.) More generally, it is possible that BAP and
district court dockets vary substantially. While we cannot eliminate
this possibility, we have looked for evidence of such a bias and have
found no such evidence.'*! Thus, while recognizing that such a bias

128, Even if the group of appeals resolved by the circuit courts are nonrandom such that our
results would not hold if the circuit courts also decided those cases that were not appealed
beyond the first level of intermediate review, such theorizing is an exercise in futility. Simply
put, we cannot measure the outcomes of circuit court decisions that do not exist. In other words,
because we look to measure quality of appellate review that the circuit court perceives, we ought
not to fret about those cases that will never see light of day in the circuit court.

129, CROSS, supra note 95, at 123-47.

130, Because the Judicial Code mandates that, in circuits with BAPs, bankruptcy appeals
will be heard by the BAP unless one of the parties to the appeal elects to have the district court
hear the appeal, 28 U.S.C. § 158(c)(1) (2000 & Supp. V 2005), the dynamic of any potential
selection bias at work in the BAP perhaps should be understood as the product of the subset of
appeals where the forum preferences of the parties to the appeal have aligned. Although there
could be instances where all parties prefer to have the appeal heard by the district court, there
would also be instances where only one party had such a preference. Thus, a BAP docket is
unique in that all of its appeals theoretically involve litigants with a consistent forum preference.
We say “theoretically” since it is conceivable that a party with an inconsistent forum preference
may have failed, in a timely fashion, to elect a district court to hear the appeal.

181. Because we do not differentiate between district courts from circuits with BAPs (BAP
circuits) and those from circuits without BAPs (non-BAP circuits) in our analyses, there is
concern that any potential selection bias at work in BAP circuits could be masked by those
observations from non-BAP circuits. Approximately 31% of the observations in the first-tier
database and 36% of the observations in the second-tier database consisted of district court
opinions from non-BAP circuits. See infra Appendix tbl.1. We conducted bivariate statistical
analyses to ascertain whether selection bias existed in the BAP circuits by focusing on those
circumstances in which one would expect to see such bias have a disproportionate effect—
namely, (1) the subject matter of the appeal and (2) affirmance rates by the court of appeals. For
neither of these circumstances did we find evidence of selection bias.

First, we examined whether a statistically significant relationship exists in BAP circuits
between the subject matter of the appeal and the first-tier appellate court to hear the appeal. To
do so, we classified observations according to whether the subject of the appeal fell into one of the
four most frequently occurring subjects of appeal heard by first-tier appellate courts. For the

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CHART 3. FEE PAID PREPETITION — CHAPTERS 7 AND 13

$0 $200 © $400» $600» $800 $1,000 $1,200 $1,400 $1,600
Fee Paid Per Question 9

3. The Income, Expenses, Assets and Liabilities
An analysis was made of whether other available financial data in each
case could be correlated with the number of problems and errors in each case.
Charts 4 (Income), 6 (Assets) and 7 (Liabilities) showed no significant corre-
lations. Chart 5 (Expenses) shows a slight direct correlation between ex-
penses and errors, but the basis for this was not further examined. In any
event, the correlation does not appear to have much functional significance.

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mortgagees’ claims and consequently risk overpaying those creditors. In so
doing, debtors increase their burdens in confirming and completing their
Chapter 13 plans. This outcome, however, saves debtors the litigation and
negotiation costs of seeking clarification from the mortgagees. When
mortgagees’ claims are challenged, debtors face increased costs for their
attorneys’ time in this work. Proofs of claim with unexplained or
impermissible fees, or without adequate documentation, drive up the expense
of bankruptcy relief, a consequence that financially strapped families can ill
afford.

Despite these costs, debtors may benefit substantially by challenging
mortgage claims. Bloated claims make it more difficult for a family to
confirm repayment plans. Because arrearages must be paid in full, every
dollar of savings is a direct benefit to a family who would have to dismiss its
Chapter 13 case and surrender its home if the original arrearage amount were
allowed to stand. Improved accuracy by mortgage servicers in bankruptcy
cases could save litigation costs in response to motions for relief ftom the
stay that are based on incorrect accounting.

Scrutinizing proofs of claim to ensure that only valid fees are included
in arrearage claims can help reduce the burdens that debtors face in making
all payments required to complete their Chapter 13 plans. Reduced arrear-
ages could improve the success rate of debtors in completing Chapter 13
plans and receiving discharges. Better outcomes in Chapter 13 could help
encourage more debtors to consider this alternative, which could in tum
boost recovery to all creditors. Further, ensuring that the mortgagee's
accounting is accurate at the time of the confirmation can help prevent
disputes about the amount of mortgage debt that remains to be paid after the
bankruptcy case is complete.

Debtors would benefit substantially if consumer bankruptcy attorneys
incorporated a routine review of mortgage claims in the scope of their
representation. Given the recent escalation in attorneys fees that occurred
after the Bankruptcy Abuse Protection and Consumer Protection Act
(BAPCPA),”® it is discouraging to suggest that the solution lies in passing
the costs of claims review along to debtors. The structural changes suggested
in the prior subpart would reduce the costs of claims review in various ways,
and in some instances they would change the incentives of debtors attomeys
to monitor the accuracy of claims.

Taking those suggestions a step further, attorneys need to be educated
about how challenging mortgage claims can potentially benefit their
practices. While challenging a claim does not per se generate revenue for an
attorney, claims review can reveal other causes of action. Most obviously, if

268. Gov'T ACCOUNTABILITY OFFICE, DOLLAR COSTS ASSOCIATED WITH THE BANKRUPTCY
ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, at 25, 26 fig.7 (2008) (reporting
analysis that showed that the Chapter 13 standard fee had increased after BAPCPA in nearly all
Judicial districts for which information was collected).

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2008) INVESTIGATING APPELLATE STRUCTURE 1765

It is only the final criterion—the question of judicial
independence—on which district courts have some advantage over
bankruptcy appellate panels. Judicial independence has been
considered to be a function of life tenure and the guarantee of
nonreduction in salary. Both attributes are enshrined in the Article III
status conferred on district judges, whereas bankruptcy judges who sit
on bankruptcy appellate panels do not get the benefit of either
attribute because of their non-Article III status.”

On this basis, one might readily conclude that district judges
enjoy judicial independence while bankruptcy judges do not. But this
would be a facile conclusion that improperly casts the assessment of
judicial independence as an all-or-nothing proposition—that is,
judicial independence is attainable only through life tenure and the
guarantee of nonreducible remuneration. Careful consideration of the
matter, however, suggests that the difference may be narrower than
that generally perceived by courts and commentators.

A more felicitous account reveals that the term of appointment
for bankruptcy judges, the standard for their removal from office, the
treatment of their compensation, and the manner of their
appointment afford bankruptcy judges a moderate amount of judicial
independence. First, although bankruptcy judges are not granted life

Civilian Venturer in Federal Court: Travel and Travail on the Erie Railroad, 48 La. L. REV. 1369
(1988). But see John Burritt McArthur, Good Intentions Gone Bad: The Special No-Deference Erie
Rule for Louisiana State Court Decisions, 66 LA. L. REV. 313 (2006). Indeed, the notion that
bankruptcy courts do not consider themselves bound by rulings of single district judges in multi-
judge districts—and therefore presumably do at some point consider themselves bound once a
number of district judges in the same district reach the same conclusion—resembles the
“jurisprudence constante” under which precedent develops in Louisiana and other civil law
systems. See, e.g., Kathryn Venturatos Lorio, The Louisiana Civil Law Tradition: Archaic or
Prophetic in the Twenty-First Century, 63 LA. L. REV. 1, 6 (2002) (describing jurisprudence
constante as a doctrine under which “a case may be used to discern a pattern [of decisions] that
may aid in interpretation”); Stearns, supra, at 1357 n.143 (discussing jurisprudence constante);
cf, RICHARD A. POSNER, THE FEDERAL COURTS: CRISIS AND REFORM 257 (1985) (proposing, “as a
special rule of stare decisis, the practice that when the first three circuits to decide an issue have
decided it the same way, the remaining circuits defer to that decision”). Any potential difficulties
in integrating a civil law precedential model into the larger common law-based federal court
system would be mitigated by the fact that the vast majority of bankruptcy cases are not
appealed beyond the first level of intermediate appellate review. See Bussel, supra note 13, at
1091; ef. Chemerinsky, supra note 4, at 122 (noting that “{bJankruptcy law matters seem to fit in
between , . . two poles” in that “bankruptcy statutes are filled with ambiguities that require court
interpretation,” while there also “probably exist particular types of disputes where the law-giving
function of the court is less important and alternative dispute resolution would be potentially
more efficient”). But see Bussel, supra note 13, at 1097 (‘I would have difficulty understanding
why Congress would intend BAPs and district courts to serve merely as rest-stops on the road to
real appellate review.”).
74, See supra notes 36-38 and accompanying text.

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Panel C: Court of Appeals Opinions by Fiscal Year and First-Tier Court Reviewed
Fiscal | Reviewing District Column Reviewing Column
Year Court Percentage BAP Percentage
1998 42 30.6 13 39,39
1999 “4 32.12 9 2727
2000 st 37.23 n 33.33
Total 137 100.00 33 100.00

Source: Second-Tier Database
Note: Column percentages may not total 100% due to rounding.

Panel D: Court of Appeals Opinions by Circuit and First-Tier Court Reviewed

Circuit District Column BAP Column Total Column

Court Percentage Percentage Percentage
First 3 2.19 3 9.09 6 3.53
Second 14 10.22 2 6.06 16 9.4L
Third 7 SL 0 0.00 7 4.12
Fourth 8 5.84 0 0.00 8 471
Fifth 23 16.79 0 0.00 23 13.53
Sixth 15 10.95 2 6.06 7 10.00
Seventh 16 11.68 0 0.00 16 9.41
Eighth 10 7.30 2 6.06 12 7.06
Ninth 26 18.98 23 69.70 49 28.82
Tenth 8 5.84 1 3.03 9 5.29
Eleventh 6 4.38 0 0.00 6 3.53
District of 1 0.73 0 0.00 1 0.59
Columbia
Total 137 100.00 33 100.00 170 100.00
Source: Second-Tier Database
Note: Column percentages may not total 100% due to rounding.

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174 Texas Law Review [Vol. 87:121

as a basis for the disallowance of claims. This reform would ratchet up the
consequences for failing to attach a note or security interest. In effect, a
creditor who could not validate the existence of the purported debt with a
note (or could not adequately explain why a note was unavailable) could not
receive more in bankruptcy than it would have been entitled to had it been
put to its proof in a judicial-foreclosure lawsuit.** In this way, the
bankruptcy process would be at least as rigorous as the state-law foreclosure
schemes.

Another strategy is to squarely impose the burden of reviewing
mortgage claims on trustees. The Bankruptcy Code already states that a
trustee shall, “if a purpose would be served, examine proofs of claims and
object to the allowance of any claim that is improper.”* Many trustees
apparently believe that no purpose would be served by objecting to claims
without the documentation required by law. For example, while notes were
missing from 40% of claims, trustees filed only one or two objections that
maised that issue.”

The U.S. Trustee Program could, in its program handbook, mandate the
review of mortgage claims as an official duty of panel and standing trustees,
and trustees could be evaluated, in part, on their fulfillment of this duty. This
solution is informal, requiring no legislative reform. The proposal merely
Posits that the U.S. Trustee Program would ensure that trustees carry out the
statutory mandate in a rigorous fashion. This solution eliminates the need to
create incentives for debtors attorneys to make claims objections in the first
instance. The U.S. Trustee Program could use standards and procedures that
parallel those used when auditing debtors’ schedules. If the Chapter 13
trustees’ examinations revealed serious or systernatic misconduct, the prob-
lems could be referred to the U.S. Trustee for enforcement activity. In 2007,
the U.S. Trustee took a step in this direction by becoming involved in
litigation over alleged wrongdoing by mortgage servicers.**

A complementary tactic to these enforcement strategies would improve
the clarity of claims. The varying formats and levels of detail in the item-
izations dramatically increase the costs of reviewing claims, rendering it pro-
hibitively expensive and inefficient for the high-volume consumer bank-
tuptcy system. If itemizations were standardized, it would be easier to train

255. See supra note 154 and accompanying text.

256. 11 U.S.C. § 704(a)(5) (2006).

257. See supra text accompanying note 152.

258. See, e-g., Statement of the U.S, Tr. Regarding This Court's Order Requiring Countrywide
Home Loans, Inc., fand Barrett Burke Wilson Castle Daffin & Frappier, L.L.P. Anomeys and
Personnel} to Appear and Show Cause Why [They] Should Not Be Sanctioned for Filing a Motion
for Relief From Stay Containing Inaccurate Debt Figures and [naccurate Allegations Conceming
Payments Received from the Debtor, fn re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008) (No. 05-
90374) (evidencing the United States Trustee’s willingness to become involved in litigation).
However, the U.S. Trustee may have limited authority to pursue creditors for abusive claims
practice because its powers are circumscribed by statute. See supra notes 116-18 and
accompanying text.

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Another limitation on charges is found in the general law of contracts.
Even if the parties’ agreement does not contain a reasonableness requirement
for default fees, egregious charges could be challenged as unconscionable as
a matter of contract Jaw.'® For example, the overnight delivery charge of
$137 in Table 1 may meet this standard. A court could rule that this charge
violated public policy. It is quite possible, of course, that the $137 represents
the sum of many charges, rather than one mailing. Alternatively, perhaps it
reflects a data-entry error and should have been $13, or $17, or $37, The
crucial problem is that the bankruptcy system did not flag this item as a
potential cause for concern and seek to determine if this charge was legally
permissible.

Federal bankruptcy law imposes additional legal constraints on the
charges that debtors must pay their mortgage companies. Many claims in the
sample included a flat “bankruptcy fee” in the proof of claim.'” The
propriety of this practice is unclear. Some courts have held that, to the extent
these fees are for creditors’ attorneys fees, it is impermissible to include them
in claims.'* Instead, creditors must file fee applications pursuant to Federal
Rule of Bankruptcy Procedure 2016.'% Other courts have reached a contrary
conclusion and permitted attorneys fees in claims.” Some courts have
modified this approach, requiring that the disclosure of the attorneys fees be
“specific,” or ruling that while including fees is prima facie permissible, a
fee application will be required only if the debtor objects to the fees.”
These inconsistent rulings make it more difficult for both servicers and

196. See generally U.C.C. § 2-302 (2004) (acknowledging the authority of courts to void
unconscionable portions of a contract).

197. In the remainder of this subpart, I use the term “bankruptcy fee” as shorthand to describe
these fees. I did not include any fees that were identified as related to actual post-petition litigation,
such as a motion for relief from the stay or an objection to confirmation.

198. See, e.g., Tate v. NationsBanc Mortgage Corp., 253 B.R. 653, 655-56 (Bankr. W.D.N.C.
2000) (culing that a creditor cannot “hide” attorneys fees for preparing a proof of claim in the claim
itself without court approval).

199. See In re Ezzell, No. 07-34780, slip op. at 5-6 (Bankr. S.D. Tex. Jan. 14, 2008)
(disallowing attomeys fees for failure to comply with Rule 2016); Tate, 253 B.R. at 665 (ruling that
a creditor's atternpts to claim attomeys fees under a proof of claim is a violation of Rule 2016); see
also FED. R. BANKR. P. 2016 (setting forth the application requirements for an entity seeking
compensation for services from the bankruptcy estate).

200. See, e.g., Atwood v. Chase Manhattan Mortgage Co. (In re Atwood), 293 B.R. 227, 232
(B.AP. 9th Cir. 2003) (rejecting Zate's reasoning and holding that a proof of claim satisfies the due
process requirements for recovering attomeys fees).

201. See, e.g., In re Madison, 337 B.R. 99, 103, 103-04 (Bankr. N.D. Miss. 2006) (“{T]he
attomey fees, costs and charges must be itemized so that any interested party may object if so
desired.”}; Powe v. Chrysler Fin. Corp. (In re Powe), 281 B.R. 336, 347 (Bankr. S.D. Ala, 2001)
(Concluding that fees labeled “attorneys fee” or “aty fee” were not specific enough to provide the
requisite notice of the nature of the fee).

202. See, eg, In re Plant, 288 B.R. 635, 644 (Bankr. D. Mass. 2003) (holding that there is no
need for a creditor to incur the time and expense of preparing a fee application absent a challenge by
a debtor).

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is performed by internal employees and not by licensed attorneys, the
corresponding fees cannot be claimed under the “reasonable attorneys fees”
provision of the security agreements or notes.” Arguably such expenses are
mere costs of servicing a mortgage that the servicer was previously
compensated for by the owners of the note.”"? Without better disclosure,
bankruptcy courts cannot even ensure that creditors are respecting the
bankruptcy law that governs attorneys fees.

Delinquency and default fees can be a substantial source of profit for
servicers.”!! The requirement that an itemization be attached to a bankruptcy
claim could be a valuable check to the financial incentives of mortgage
servicers to overreach and to charge unreasonable or illegal fees. However,
the itemizations suffer two fatal defects—a lack of standardization and a lack
of detail—that inhibit any meaningful review of the amount of mortgagees’
claims. By describing charges in vague generalities, creditors can eviscerate
the purpose of the proof-of-claim process, which is to ensure that creditors
offer evidence of their debts.

Individualized review of “other” fees on claims highlights some
instances of suspicious fees. While the data admittedly do not permit
concrete findings of servicer misconduct, courts that have conducted
evidentiary hearings to determine the validity of servicing fees have invali-
dated charges similar to these and sanctioned creditors for misbehavior.”
The key point that can be substantiated by the itemization data is that
servicers fail to provide the necessary information to allow debtors or
trustees to review the claims. The resulting situation permits servicers to
overcharge debtors without fear of challenge. These problems suggest that
the bankruptcy system may be harboring mortgage-servicing abuse, rather
than functioning as a system to protect homeowners from imper-missible
charges.

Anecdotal reports suggest that creditors proffer similarly vague
itemizations to borrowers facing state-law foreclosure.”'? Indeed, given the
additional safeguards inherent in the bankruptcy process, the data may
understate the difficulty that nonbankrupt homeowners face in reviewing

constitute an “appearance” by the lender, which is a prerequisite to the borrower's becoming
obligated to pay the lender’s costs and expenses. Id.

209. See id, at 177 (“If-all the lender is doing is ‘monitoring’ the bankruptcy, that is, receiving
court notices, reading them, keeping them, and so forth, then these activities do not constitute the
practice of law and should not be compensable as an attorney fee.”).

210. See id. (concluding that routine administrative services are generally not compensable
under any reading of typical mortgage provisions that permit the recovery of costs).

211. See Gretchen Morgenson, Can These Mortgages Be Saved?, N.Y. TIMES, Sept. 30, 2007,
§3, at 1 ("Borrower advocates fear that fees imposed during periods of delinquency and even
foreclosure can offset losses that lenders and servicers incur.”).

212. See supra subpar I(D) (discussing the Jones v. Wells Fargo and In re Parsley cases).

213. See Morgenson, supra note 211, at 8 (reporting that a payoff-demand statement that
Countrywide provided to a borrower had line items identified only as “fees due” and “additional
fees and costs” that totaled $8,525),

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A fifth factor that many commentators identify as an
ingredient of judicial quality is judicial independence.” It is said that
judges who enjoy greater independence are less likely to be swayed by
irrelevant, nonjudicial concerns. The American Founding Fathers
subscribed to this view,” and accordingly vested Article III judges
with presumptive life tenure and the guarantee of nonreduction in
salary.2?

TI. INVESTIGATING APPELLATE STRUCTURE AND
‘THE PERCEIVED QUALITY OF APPELLATE REVIEW

At its essence, an appeal involves a claim that a trial court
committed some form of error—for example, failure to follow proper
procedure or improper application of the law. Accordingly, we might
say that one of the primary functions of an appellate court, if not the
principal function, is to ascertain whether the alleged error truly
occurred. As we have already discussed, theorists have posited various
attributes that improve the quality of appellate review. While
plausible that some of these factors may contribute more than others
to improving the quality of appellate review, it seems reasonable to
conclude that, on balance, as between two different appellate
tribunals, the one that has more of the theorized features of quality
appellate review will perform the appellate function better.

Kornhauser, An Economic Perspective on Stare Decisis, 65 CHI-KENT L. REV. 63, 67-73 (1989)

(Giscussing reliance by a court on earlier decisions by that court, even if wrongly decided, as an
optimization problem and as varying depending upon institutional structure).

‘There are other social benefite that rules of stare decisis provide—certainty, predictability,

ta avoid

the greater decisionmaking proficiency of

interpretation and application of law as consequentialist justifications for stare decisis)
Kornhauser, supra note 12, at 74-78 (discussing fairness, competence, and certainty
justifications for stare decisis), These benefits, however, are not the result of the courts
necessarily reaching correct conclusions. Indeed, these benefits would inhere if courts uniformly
reached bed decisions. See Kornhauser & Sager, eupra note 3, at 108 (contrasting consistency,
‘soundness, and coherence).

20. See, eg., Daniel Berkowitz & Karen Clay, The E/fect of Judicial Independence on
Courts: Evidence from the American States, 25 J. LBG. STUD. 399, 422-24 (2006) (Ending a strong
correlation between judicial independence and court quality); Jonathan Remy Nash, Prejudging
Judges, 108 COLUM. L. REV. 2168, 2171 (2006) (characterizing judicial independence and judicial
‘accountability as “competing demands upon the judiciary"). But see Daniel M. Klerman, Legal
Infrastructure, Judicial Independence, and Economic Development 1 (Univ. 8. Cal. Lew Seb.
Legal Studies Research Paper Series, Paper No. CO6-1, 2006), available at
ttpussrn.com/abstract=877490 (There is some evidence that judicial independence is
associated witb economic growth, but the evidence is mixed and causation is unclear.’).

21. See THE FEDERALIST NOS. 78, 79, 81 (Alexander Hamilton); id. NOS. 47, 48, 51 (James
Madison).

22, U.S. CONST. art. IIL, §1.

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2008) Misbehavior and Mistake in Mortgage Servicing 137

rejected what one court termed the mortgage servicers’ “dog ate my
homework” excuses for such problems.” These courts have emphasized two
main harms: (1) damage to the judicial process when a court is asked to rule
‘on incorrect or baseless facts, and (2) the danger that a family will lose its
home without just cause and in violation of the Bankruptcy Code.

In Jones v. Wells Fargo Home Mortgage,” the court identified a variety
of accounting errors and impermissible behavior by a mortgage company,
including miscalculations of both pre-petition and post-petition obligations
and attempts to collect impermissible fees.* Wells Fargo also applied
payments in violation of the debtor’s confirmed Chapter 13 plan, which
increased the interest charged above what was actually due.” The court
noted that Wells Fargo’s actions “resulted in such a tangled mess that neither
Debtor, who is a certified public accountant, nor Wells Fargo’s own
Tepresentative could fully understand or explain the accounting offered.”"”
In another protracted dispute, a court that initially was concerned about
whether Countrywide lacked a basis for a motion for relief from the stay or
may have misapplied plan payments eventually heard hours of evidence on
the propriety of servicers’ and attorneys’ practices in bankruptcy cases.'”
The court stated that it was “very disheartened” by the conduct of
Countrywide and its attorneys, and emphasized that the court’s determination
that the standard for sanctions had not been met should not be interpreted as
its condoning the servicing practices evidenced in the case.”

The misapplication of plan payments purportedly results from the
operation of servicers’ computer software rather than human intent.
Nonetheless, courts have held that the failure to comply with an order of a

96. In re Gorshtein, 285 B.R. 118, 126 0.4 (Banks. S.D.N.Y. 2002).

97. 366 B.R. $84 (Bankr. E.D. La. 2007).

98. id. at 591-98. Pethaps most egregiously, Wells Fargo charged the debtor for sixteen
property inspections during the bankruptcy case, but its representative “could not lista single reason
why an inspection would have been ordered post-pettion, nor could she detail any reason why
continuous monthly monitoring of the property was necessary or reasonable.” Id. at $98, 597-98.

99. Id. at $89.

100. id. at 590-91. As a remedy, the court imposed a sanction award of $67,202.45 and
ordered Wells Fargo to umplement an accurate accounting system for cases in the court's
junsdiction. Jones v. Wells Fargo Home Mortgage (/n re Jones), Case No. 03-16518, Adv. No. 06-
(01093, 2007 WL 2480494, at *8 (Bankr. E.D. La. Aug. 29, 2007) (supplemental memorandum
opinion).

101, See In re Parsley, 384 B.R. 138, 181-82 (Bankr. S.D. Tex. 2008) (criticizing the practices
of the servicer and its attorneys but determining that the standard for sanctions had not becn met); In
re Parsley, No, 05-90374, slip op. at 1 (Bankr. S.D. Tex. Feb. 12, 2007) (order requiring
Countrywide to appear and show cause) (finding that the servicer and its attorneys failed to
sufficiently review the debtor's payment history before filing its motion for relief from the stay, and
ordering that representatives of the servicer and its attomeys appear to show cause for why they
should not be sanctioned).

102. Parsley, 384 BAR. at 183.

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type of first-tier appellate court and circuit court affirmance, we would
have expected to see first-tier appellate dispositions fully affirmed by
the court of appeals approximately 70% of the time. Our analysis
confirms that there is less than a 0.05 probability that random chance
alone would have yielded a difference as large as the one witnessed.'4!

Hypotheses 2 through 7 generally predict that, with the
exception of district courts, other federal courts will positively cite to
BAP opinions more than they positively cite to district court opinions.
For district courts, we hypothesize that they will cite more often to
district court opinions than BAP opinions. Finally, we predict that
extracircuit citations to BAP opinions will exceed extracircuit citations
to district court opinions. As an initial matter, BAP opinions had a
higher propensity to be positively cited by other federal courts than
district court opinions. Approximately 91% of the BAP opinions in the
first-tier database had been positively cited by federal courts, whereas
slightly less than two-thirds (65%) of the district court opinions had
received similar treatment. In the absence of a relationship between
the type of first-tier appellate opinion and positive citation thereto by
other federal courts, we would have expected to see approximately
three-quarters (75%) of the first-tier appellate opinions positively
cited. Our analysis confirms that there is less than a 0.0001
probability that random chance alone would have yielded a difference
as large as the one witnessed. It would thus appear that the type of
first-tier appellate opinion has some influence on a federal court’s
decision to cite that opinion.

We can further elaborate on this relationship by examining the
number of citing references to the opinions according to the type of
federal court making the citing reference. We note that 53% of the
observations in the first-tier database that have positive citing
references are district court opinions.“? Assuming a random, or at

dispositions—that is, approximately 89%—during the ten-year period beginning on July 1, 1996,
and ending on June 30, 2006. Id.

141. For the details of these results, see infra Appendix tbl.4.

142. The first-tier database contained 202 observations in which a federal court positively
cited to the opinion issued by the first-tier appellate court. In conducting our bivariate analyses,
we exclude extreme outliers (i.e., those observations involving extreme values in the tails of the
distribution of the positive citing reference data). We define an extreme outlier to be any
observation with a total number of positive citations that falls above the third quartile of the
Positive citing reference data (7 citations) by more than three times the interquartile range for
such data (5 citations). See infra Appendix tbl.3 (describing distribution of positive citing
references to Girst-tier opinions). Accordingly, we excluded any observations with more than 22
positive citing references. Pursuant to this measure, we eliminated 2 observations from our
analysis—both BAP opinions—leaving us with a total of 200 observations for analysis.
Accordingly, approximately 99% of the first-tier appellate opinions in our sample that were cited

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672 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. '73

question tests whether these disclosures are consistent.2°
In 12.5% of cases, the debtor's disclosure about the fee
paid was not consistent with the attorney's disclosure.
(25 of 200 cases)

15. Are there other problems with the fee disclosures?

Other problems with the debtor's disclosure in response to question 9 of
the statement of financial affairs and with the attorney's disclosure in the
Rule 2016(b) statement were noted and catalogued as they were found.

10% of cases had other fee disclosure problems. (20 of
200) These are further described as follows:
Seven attorney statements indicated that the
source of the fee was “wages,” but the debtor dis-
closed no wages in schedule J.
Five attorney statements indicated that the balance
due from the debtor was a negative amount. In
four of these cases, the attomey stated that the
debtor had paid $495; that the debtor had agreed
to pay $0; and that the balance due was "-$495.”
In the other case the stated balance due was
“$650.8
Two attorney statements regarding the attorney
fees were inconsistent with the statements of the
attorney fees in the chapter 13 plans.
Six cases had other similar problems.8?

"Literally taken, these requirements are slightly different, in that the debtor may bave to disclose
payments for debt consolidation services that the attorney might not have to disclose. Nevertheless,
experience indicates that it is rare for the debtor's attorney to provide such debt consolidation services
apart from the services provided in preparation for the bankruptcy. Most often, the consumer debtor goes
toa bankruptcy attorney for legal services in filing a bankruptcy. In that event, the disclosures should be
‘identical.

"These five cases were filed by the same attorney.

The following problems were found, once each in different cases:

(1) The debtor's attorney did not file a Rule 2016(b) statement.
(2) The Rule 2016(b) statement disclosed a fee paid that was greater than fee

agreed.
(3) The debtor's response to question 9 stated that the attomey fee was paid on a
date after the petition was filed, but the attomey’s Rule 2016(b) statement
stated that the fee was paid before the petition was filed.
(4) The debtor's response to question 9 disclosed that the debtor paid Attorney A,
but the Rule 2016(b) statement disclosed that the debtor paid Attorney B.
(8) The debtor's response to question 9 did not state amount of fee paid.
(©) The Rule 2016(b) statement indicated that the source of fee was “N/A.
In addition, the study revealed that in 46% of the chapter 7 cases, a balance on the attomey fees
remained due when the bankruptcy was filed. (70 of 152 cases) Although the fee balance may constitute

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2008) Misbehavior and Mistake in Mortgage Servicing 169

concluded “that the vast majority of Chapter 13 debtors and their attorneys
do little or nothing about these illegal fees and charges.”

Among the objections that were filed, there were no observable patterns.
The objections came from a variety of districts." While many districts had
only one objection, no district had more than seven objections. It appears
that no jurisdiction has a strong local practice of reviewing and objecting to
claims that would distinguish it from national norms.

Debtors filed more than two-thirds of all objections (forty-four
objections); Chapter 13 trustees filed the remaining objections. Debtors’
objections usually alleged substantive problems with the claims. The most
common basis for objection was a disagreement about the amount of the
claim. These situations alleged a variety of wrongs: the claim contained
excessive fees; the escrow amount was incorrect; the attomeys fees were not
itemized; or the mortgagee double-charged for property tax. In a few
instances, the debtor contested the inclusion of any arrearages in the claim
because the debtor believed the loan was current. Chapter 13 trustees
typically focused on procedural problems with claims. The trustees’ most
frequent basis for objection was simply that a claim was a duplicate of a
previously filed claim. Trustees’ other objections were for egregious or
facial errors. The sample contains trustee objections because a claim was for
a borrower other than the bankruptcy debtor and because a claim was filed
after the bar date for filing claims. The tiny number of objections makes it
difficult to develop any useful model of why objections were filed in these
cases and not in other claims with documentation deficiencies, unidentified
fees, or discrepancies with debtors’ schedules.

Neither the few high-profile cases about mortgage-servicing abuse nor
the anecdotal allegations of widespread problems with the reliability of
mortgage claims appear to have sparked more scrutiny of claims. The formal
objection process for deficient or incorrect claims is largely dormant. The
written law that governs claims does not appear in reality to translate into a
functional check on mortgage-servicing abuse. Many mortgage claims fail to
comply with the bankruptcy rules and procedures; many also request
unidentified or suspicious fees or reflect a serious discrepancy between
debtors’ and creditors’ records. Yet no objection was filed in response to
96% of all claims, despite these problems. While Congress has emphasized
the importance of a reliable bankruptcy system that gamers the public’s trust,
creditors face no meaningful consequences when they disregard the law and
this public policy and submit incomplete or unsubstantiated claims for
judicial approval.

235. O. Max Gardner III, Mortgage Securitization, Servicing, and Consumer Bankruptcy, 2 GP
SOLO LAW TRENDS & NEWS, Sept. 2005, hitp://www.abanet.orp/genpractice/newsletter/lawtrends!
0509/business/mortgagesecuritization.html.

236. Twenty-five of the forty-four judicial districts had at least one claim objection

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144 Texas Law Review [Vol. 87:121

mortgage debt; and the amount of mortgage debt, including arrearages, when
the bankruptcy was filed. We also coded any objections to mortgage
creditors’ proofs of claim and any amended claims. For cases with only one
mortgage loan, we coded 152 data points; when debtors had more loans,
there were more data points to capture.'“° Combining data from creditors’
and debtors’ pleadings, the Mortgage Study database offers a rich and
detailed picture of bankrupt families’ mortgages.

Data were coded into a specially designed database: We deployed
several standard procedures to ensure the data’s accuracy. First, if the initial
coding, which occurred six months after a case’s filing, did not locate a
mortgagee’s proof of claim or an objection to any filed proof of claim, we
rechecked the court records a year later to locate any records that were filed
later or were missed in the initial coding. These were added to the database.
To reduce concerns about coding reliability, we used only three coders, each
of whom either has a law degree or prior experience on academic bankruptcy
projects. All coders received individual training on practice cases to develop
consistent coding practices. Coders referred to a written manual while
coding and noted any unusual situations or questions. We individually
reviewed the coding in each of these flagged cases. We also performed two
types of error checks on the data. First, we ran error traps to improve the
accuracy of the database and corrected any identified errors.’*’ Second, a
random sample of 10% of the cases—approximately 175 cases—was recoded
blindly, without reference to the prior coding. We then compared each
variable of each case between the initial coding and the recoding, noted any
discrepancies, and checked for mistakes in the initial coding. The data were
99% accurate, and no systematic errors were identified between coders.'

The final data were transferred to Microsoft Excel and SPSS for
Windows for analysis. All dollar figures are presented as reported in court
records without adjustment for inflation.

Ill. Findings

The Mortgage Study data permit multiple analyses of the reliability of
mortgage claims. The overall pattern of findings is disturbing. Many
creditors do not comply with applicable law governing claims. Routinely,
fees are not identified with specificity, making it impossible to determine if
these charges are legal. In most instances, mortgagees believe the debt is

140. The exact number of data points actually coded varied across cases based on several
factors, including the number of home loans, the type of loan, and the quantity of documentation
attached to the proof of claim.

141. Two examples illustrate this type of check: (1) we reviewed any proof of claim dated
before April 2006, when the cases were filed; and (2) we checked for any dollar figures that began
with a decimal point or exceeded $1 million.

4142. The error rate was 1.04%. To calculate the error rate, we compared the original coding to
the recoding, determined the number of errors in the initial coding, and divided this number by the
umber of data points.

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citation). We do not find, however, either at the median or the mean,
any association between the type of first-tier appellate opinion and the
number of positive citing references that examine the opinion (i.e.,
contain an extended discussion of the cited opinion usually more than
a printed page of text). Figure 3 illustrates some of these results.'46

FIGURE 3
AVERAGE NUMBER OF POSITIVE CITING REFERENCES TO
FirST-TIER APPELLATE OPINION BY DEPTH OF TREATMENT

District Court Opinion
Mentioned o73
Depth of Cited 194
Treatment Discussed 048
Examined ff 0.08
0 1 2 3 4 8 6
Average Number of Citations
BAP Opinion
Mentioned 4.0
Depth of Cited $22
Treatment Hi ucsed 080
Examined } 0.05

2 3 4 5 6
‘Average Number of Citations

o-+

1

We tracked the number of citing references that directly quoted
the first-tier appellate opinion as yet another metric for evaluating the
perceived correctness of the first-tier appellate opinions in our study.
First, we find evidence to support our hypothesis that a greater
likelihood exists that positive federal citing references will have
quoted BAP opinions as opposed to district court opinions.
Approximately 65% of the federal courts that positively cited BAP
opinions also directly quoted those opinions, whereas only 38% of
district court opinions with positive federal citing references were
directly quoted. If no relationship existed between the type of first-tier

146. For a full accounting of these results, see infra Appendix tbl.6.

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