Jim Shenwick's response to New York Times op-ed "Don't Let Judges Fix Loans"

Dear Mr. Schwartz:

I read your op-ed in the New York Times called “Don’t Let Judges Fix Loans” and as an experienced bankruptcy attorney, I thought your piece was both misguided and inaccurate. It is clear that from reading your op-ed that, although you may be a professor of law and management at Yale, you are not a bankruptcy practitioner and don’t understand bankruptcy law or process.

First, you indicate that the proposal would swamp Bankruptcy Courts. However, in 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), there were over two million bankruptcy filings. Right now, there are approximately one million bankruptcy filings per year. Accordingly, there is sufficient capacity in the Bankruptcy Courts for an additional million filings.

Secondly, if filings were to increase dramatically, Congress could budget for additional bankruptcy judges and court staff. You should note that as part of BAPCPA, Congress increased the number of bankruptcy judges in the U.S. Bankruptcy Court for the District of Delaware from two to six.

Your next argument is that lenders will win many of these valuation contests, because they will have more expertise and resources than individual homeowners. This argument is also specious and not supported by the reality of bankruptcy practice. The most common motion in bankruptcy when real estate is part of the case is a motion for relief from the automatic stay. In those cases, an appraiser is retained by the debtor and another appraiser is retained by the secured creditor. The cost of an appraisal of residential property is approximately $500 to $750. Even if a debtor could not afford an appraisal, they could get a broker price opinion letter which would be free. They could also use various free websites to support their valuation. In fact, the cost of an appraisal is reasonable and in the grasp of most debtors, and bankruptcy judges deal with issues of valuation on a routine basis.

Your final argument is that the proposed legislation would worsen economic uncertainty-whatever that means. The reality is that based on generally accepted accounting principles and other accounting and bankruptcy standards, banks should write down their assets to realistic values. While this may create a short term hit to bank bottom lines, it would create a sounder financial system in the long run.

Yale Law and Business School and your students deserve sounder arguments than those presented in your op-ed piece.