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It has been almost eight years since Congress first proposed and created the National Bankruptcy Review Commission (“Commission”) as part of the 1994 Amendments to the Bankruptcy Code (“Code”) to make recommendations on bankruptcy law. In establishing the Commission, Congress “pronounced that it was ‘generally satisfied with the basic framework established in the current Bankruptcy Code,’ [and] counsel[ed] that the Commission’s recommendations ‘not disturb the fundamental tenets of current law.’”

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CASE ANALYSIS
TO ARBITRATE OR NOT TO ARBITRATE, THAT IS THE QUESTION

Brian S. Behar
Behar, Gutt & Glazer, P.A.
bsb@bgglaw.net

Summary: As the rising costs of litigation spiral out of control, parties will continue to contractually obligate themselves to alternative dispute resolution mechanisms, including arbitration. The question of the enforcability of arbitration clauses in the face of a bankruptcy filing by one of the contracting parties, and the tension that exists between the Bankruptcy Code and the Federal Arbitration Act, will continue to be debated in the Courts.

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Trustee Immunity. Standing Chapter 13 trustee enjoyed absolute quasi-judicial immunity for scheduling and noticing confirmation hearing, which immunity extends to failure to give notice of such confirmation hearing. Curry v. Castillo (In re Castillo), 2002 U.S. App. LEXIS 15006 (9th Cir. July 26, 2002).

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Eleventh Circuit Permits Stripdown of Home Mortgage in Chapter 13 Plan
Wilbur G. Silberman
Gordon, Silberman, Wiggins & Childs, P.C.
Email: wsilberman@gswc.com

Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203 (2002). In a matter of first impression for the Eleventh Circuit Court of Appeals, this Court Rules that Chapter 13 Debtors may bifurcate undersecured home mortgage into secured and unsecured claims, but there are requirements.

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SUA SPONTE

Bankruptcy and Politics – Strange Bedfellows!

It has been almost eight years since Congress first proposed and created the National Bankruptcy Review Commission (“Commission”) as part of the 1994 Amendments to the Bankruptcy Code (“Code”) to make recommendations on bankruptcy law. In establishing the Commission, Congress “pronounced that it was ‘generally satisfied with the basic framework established in the current Bankruptcy Code,’ [and] counsel[ed] that the Commission’s recommendations ‘not disturb the fundamental tenets of current law.’” Report of the National Bankruptcy Review Commission, Volume 1, Preface, p. iv (October 20, 1997). In setting forth the framework for its recommendations, the Commission indicated:

The recommendations are as diverse as the bankruptcy system itself, but they have been designed with a common theme: to improve the integrity, the accountability and the efficiency of that system. Above all else, the recommendations address the need to maintain – and, in some instances, to restore – balance. A bankruptcy system that does not balance the interests of creditors and the interests of debtors will have neither their confidence nor, of even greater importance, the confidence of the American people.

Id. at i.

The Commission further stated in addressing bankruptcy legislation generally:

Balance is essential. Without it, the American bankruptcy system can be neither equitable nor efficient. The laws enacted over the last 100 years have had balance as their goal and their common theme, spoken or unspoken, trying to provide both fair treatment for creditors and a fresh start for debtors. Yet the twin objectives are often in conflict with each other. The interests of secured creditors often diverge from those of unsecured creditors and, in turn, from the interests of government taxing authorities.

Id. at vi.

In the Fall of 1997, just prior to the submission of the Commission’s report and without reviewing or considering the recommendations of the Commission, Representative George Gekas (R-PA) introduced major bankruptcy legislation aimed primarily at overhauling the process by which individual debtors may obtain bankruptcy relief and a fresh start. The legislation, as proposed, and continued to be proposed and reintroduced since that time, has been criticized by many bankruptcy organizations, professionals, jurists and academicians as being unfair and unbalanced. The legislation, if passed, in essence, would result in a swinging of the pendulum in favor of creditors at the expense and detriment of individual debtors. Moreover, the legislation significantly restricts the ability of the courts to utilize their discretion in making decisions in a variety of areas.

Despite what has appeared to have been almost overwhelming bipartisan support for the legislation, now some five years later, the passage of the legislation remains questionable. What is odd, however, about the most recent failed attempt to bring the conference bill to the floor of the House of Representatives is the fact that the stumbling block really has nothing to do with bankruptcy per se or any of the criticisms proffered against passage of the legislation – rather the only significant issue tying up the legislation is the battle over abortion rights in the context of dischargeability. At the forefront of this dispute was Representative Henry Hyde (R-IL) and Senator Charles Schumer (D-NY). While many onlookers never thought an agreement would be reached among these two gentlemen, in late July a compromise was worked out, thereby permitting the approval and submission of the conference report to the House of Representatives for a vote.

From all accounts and based on prior history (after all, all prior bills that reached the floors of the House and the Senate received overwhelming support and passage), it was believed that passage was almost certain. Nevertheless, on the evening of July 29, 2002, Representative Chris Smith (R. N.J.) indicated that he was not comfortable with the compromise reached on the abortion/dischargeability issue and was not prepared at this time to vote in favor of the bill. Rather than risk uncertainty or a lack of overwhelming votes supporting passage of the conference report, the bill was pulled off the House Floor and is not likely to surface again until after Congress reconvenes after the Labor Day Holiday recess.

Throughout the process, the Commercial Law League of America and its Bankruptcy Section, like the Commission and others, have been strong advocates for a fair and balanced system that takes into account the interests of creditors and the interests and needs of debtors. This is particularly important in light of the changed financial conditions that we now face. At the time that the legislation was initially proposed, bankruptcy fillings were at an all time low. Businesses were generally operating profitably and there was significant confidence in the economy and the stock markets. Since the events of last September, confidence has been significantly shaken – concerns over terrorism, safety and homeland security, along with financial accountability throughout the corporate world, have become the central themes highlighting the front pages of the news. Even though the large corporate bankruptcies, such as Enron, K-Mart, Global Crossings and World Com, have become daily news events, what is less known amongst the general public, but equally prevalent, is the rise in individual bankruptcies across the country. Moreover, the potential ramifications from these large cases have not yet been felt by all those parties in interest that have business relations with the large corporate debtors. Landlords, employees, vendors and security holders each will be impacted by the reorganizations, or liquidations, of these entities. A bankruptcy system that does not provide a mechanism to achieve fairness and balance under such circumstances is likely to further erode the confidence of the American people.

Maybe, thus far, the passage of the bankruptcy legislation has been hanging on a political thread – abortion rights – but what better a time to reflect and to reconsider the wisdom of passing fair and balanced legislation. The League and its Bankruptcy Section can and will continue to recommend that Congress consider the impact flowing from passage of the current legislation.

It’s not too late for your voice to be heard. The League’s website (www.clla.org) contains numerous position papers and analyses of the legislation, as well as contact information for your representatives. It is important that Congress not only hear from the League and its Bankruptcy Section, but also hear from the individual voices of its members. If you don’t get involved and let your voice be heard now, who knows what strange bedfellows politics will ultimately create!

Judith Greenstone Miller
Raymond & Prokop, P.C.
26300 Northwestern Highway
4th Floor - P.O. Box 5058
Southfield, MI 48086-5058
Phone: 248-357-3010
Fax: 248-357-2720
jmiller@raypro.com
www.raypro.com

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CASE ANALYSIS

TO ARBITRATE OR NOT TO ARBITRATE, THAT IS THE QUESTION.

Summary: As the rising costs of litigation spiral out of control, parties will continue to contractually obligate themselves to alternative dispute resolution mechanisms, including arbitration. The question of the enforcability of arbitration clauses in the face of a bankruptcy filing by one of the contracting parties, and the tension that exists between the Bankruptcy Code and the Federal Arbitration Act, will continue to be debated in the Courts. The Fifth Circuit Court of Appeals continues to be a leading circuit on this issue, and has followed up its noteworthy decision on the topic, Matter of National Gypsum Co., 118 F.3d 1056 (5th Cir. 1997), with the recent decision of Gandy v. Gandy (In re Gandy), 2002 WL 1609758, 2002 U.S. App. LEXIS 14652 (5th Cir. July 22, 2002). The case is another example of the bankruptcy system jealously guarding its jurisdiction and goals in refusing to compel a pre-petition contractual agreement that would otherwise require arbitration.

Facts: The facts in In Re Gandy can be stated simply. The Bankruptcy Court, which was affirmed by the District Court, refused to compel a dispute to be arbitrated pursuant to a pre-petition arbitration agreement. Prior to the commencement of a bankruptcy filing by the Debtor, the parties were involved in a state court lawsuit brought by the Debtor, which challenged certain asset liquidation of a limited partnership in which the Debtor maintained an interest. In that state court case, the Debtor sued the Defendants for, among other things, breach of fiduciary duty, negligence, fraud, and breach of contract. The Defendants filed a Motion to Compel Arbitration, which was granted by the state court. On the same date as the entry of that state court Order, the Debtor filed a Chapter 11 bankruptcy petition. The Debtor also filed an adversary proceeding against the Defendants, and removed the prior state court proceeding. The actions were consolidated, and the Debtor filed a Third Amended Complaint, which included causes of action to avoid transfers pursuant to Bankruptcy Code §§ 544, 548, and 550, as well as bringing a claim for civil conspiracy, insider fraud, and substantive consolidation. The Defendants filed a Motion to Compel Arbitration and to Stay Proceeding Pending Arbitration.

Discussion: In affirming the lower court’s decisions, the Fifth Circuit first noted that a Bankruptcy Court’s refusal to stay arbitration, although interlocutory in nature, is nevertheless immediately appealable, pursuant to §16 of the Federal Arbitration Act. Additionally, the question of whether the Bankruptcy Court has discretion to deny the Motion to Stay Pending Arbitration is a question of law subject to de novo review, and the determination of whether an adversary proceeding involves a “core” proceeding is also subject to a de novo review. The decision by the Bankruptcy Court whether to exercise its discretion to stay the matter and compel arbitration is subject to the abuse of discretion standard.

The Fifth Circuit recognized that there are two separate, distinct and, at times, conflicting goals of the Federal Arbitration Act and the Bankruptcy Code. The FAA seeks to compel arbitration agreements by making them valid, irrevocable, and enforceable. On the other hand, the Bankruptcy Code has as its goals the centralization of the resolution of purely bankruptcy issues, the need to protect creditors and reorganizing Debtors from piecemeal litigation, and the undisputed power of the Bankruptcy Court to enforce its own Orders.

The Fifth Circuit recognized the case law that has developed on the topic of whether to compel arbitration that, with “non-core” matters, Bankruptcy Courts have no discretion to refuse to compel arbitration. With regard to “core” matters, the Bankruptcy Court does have jurisdiction where to compel arbitration would conflict with the purpose of the Bankruptcy Code.

Applying this standard to the Gandy case, the Fifth Circuit affirmed the lower court’s decision to refuse to compel arbitration. The Fifth Circuit noted that the causes of action advanced by the Debtor in the adversary proceeding derive exclusively from the Trustee’s “strong arm powers,” as recognized under Bankruptcy Code § 544, which allows a Trustee to avoid a transfer that an unsecured creditor could have avoided under applicable state law. In addition, the Debtor sought relief under Bankruptcy Code § 548, which allows a Debtor to avoid any fraudulent transfer made by the Debtor within one year prior to the filing of the bankruptcy petition, as well as remedies under Bankruptcy Code § 550, which includes the ability to recover the transferred property or its value. The Fifth Circuit found that all of these types of claims are “core” proceedings under 28 U.S.C. § 157.
The Fifth Circuit reiterated its holding in National Gypsum that where a Debtor asserts bankruptcy causes of action under Bankruptcy Code §§ 544, 548, and 550, which are, in essence, created by the Bankruptcy Code for the benefit of the creditors of the bankruptcy estate, “the importance of the federal bankruptcy forum provided by the Code, is at its zenith.”

The Fifth Circuit did not think problematic the fact that some of the claims of the Debtor involved the Debtor’s pre-petition legal or equitable rights. While the Debtor’s Complaint sought the avoidance of fraudulent transfers, and implicated non-bankruptcy contractual and tort issues, once the Debtor sought relief under the Bankruptcy Code, she became a Debtor-in-possession vested with certain rights and abilities to deal with her contracts and property in a manner that she could not have done absent the bankruptcy filing.

Even though the Debtor’s bankruptcy causes of action predominate the lawsuit and were “core” in nature, the Fifth Circuit found that this does not end the analysis. The Bankruptcy Court could exercise its jurisdiction, and deny enforcement of the arbitration proceeding only when enforcement would conflict with the purposes of the Bankruptcy Code. The Court noted that not only are the Debtor’s claims derived from the Bankruptcy Code, but the resolution of these claims implicates matters central to the purposes and policies of the Bankruptcy Code, namely the expeditious and equitable distribution of the assets of the Debtor’s estate. The Court noted that, if taken as true, some of the factual issues involved concern transfers to off-shore trusts, and that the Bankruptcy Court had already entered a Temporary Restraining Order against further movement of assets. The Fifth Circuit noted that in view of these developments, the expertise and power of the Bankruptcy Court, including compulsory jurisdiction and contempt, and ancillary jurisdiction with respect to possible foreign proceedings, the scale was tipped in favor of the dispute being resolved by a Bankruptcy Court over the most experienced arbiter. In addition, the Fifth Circuit noted that one of the Defendants had filed a Proof of Claim in the bankruptcy, and that the filing of such invokes the special bankruptcy rules concerning objections to claims, estimation of claims, and the rights afforded a claimant to distribution of assets of the estate. Further, the Court noted that the Debtor’s claim of substantive consolidation is an extreme remedy recognized only in the Bankruptcy Code.

Finally, although it was suggested that part of the causes of action could be separated and handled by arbitration, the Court noted that parallel proceedings would be wasteful and inefficient, potentially leading to different results and subject the parties to dichotomous obligations.

Brian S. Behar
Behar, Gutt & Glazer, P.A.
2999 NE 191st Street #800
Aventura, FL 33180
Phone: 305-931-3771
Fax: 305-931-3774
bsb@bgglaw.net

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CASE LAW UPDATE

Trustee Immunity. Standing Chapter 13 trustee enjoyed absolute quasi-judicial immunity for scheduling and noticing confirmation hearing, which immunity extends to failure to give notice of such confirmation hearing. Curry v. Castillo (In re Castillo), 2002 U.S. App. LEXIS 15006 (9th Cir. July 26, 2002).

Assignment of ERISA Welfare Plans. Claims for welfare benefits under ERISA are assignable, provided no contractual provision prohibits assignment, and pass to bankruptcy estate. Class action plaintiff had standing to pursue suit, despite trustee’s failure to fully comply with statutory mandates for abandonment. Morlan v. Universal Guaranty Life Ins. Co., 2002 U.S. App. LEXIS 15005 (7th Cir. July 26, 2002).

Administrative Expense Claims. Pre-petition, employees agreed to stay-on bonus plan as part of debtor’s effort to close 34 stores to remain liquid. Amounts due were to be paid on date of actual closing or on employee’s release by employer. In the interim, debtor sought Chapter 11 relief. Employees sought full payment as administrative expense. Court disagreed; it is not relevant when amounts were to be paid, but when services were rendered. Employees’ actions also did not benefit estate; prior to bankruptcy there was no estate and, in liquidating inventory and closing stores, conduct was actually detrimental to estate once it was created. Former Employees of Builders Square Retail Stores v. Hechinger Inv. Co. (In re Hechinger Inv. Co.), 2002 U.S. App. LEXIS 15015 (3d Cir. July 25, 2002).

Sovereign Immunity. Where State filed answer and motion for summary judgment in dischargeability proceeding, participated in dispute before bankruptcy court, and learned of court’s preliminary leanings in favor of debtor, State held to have waived sovereign immunity. Arizona v. Bliemeister (In re Bliemeister), 2002 U.S. App. LEXIS 14536 (9th Cir. July 19, 2002).

Chapter 11 Quarterly Fees. Title and check cashing loans Debtor made to consumers were “disbursements” within the meaning of 28 U.S.C. § 1930 and were, therefore, subject to quarterly fees required to be paid by Chapter 11 debtors to the U.S. Trustee. Cash Cow Servs. of Florida, LLC v. United States Trustee (In re Cash Cow Servs. of Florida, LLC), 2002 U.S. App. LEXIS 14040 (11th Cir. July 12, 2002).

Preferential Transfers/Payments Made According to Ordinary Business Terms. Party claiming that payments were made according to ordinary business terms must show payments in question fall somewhere in the range of payment practices of the relevant industry; creditor should provide evidence of credit arrangements of other debtors and creditors in similar market, preferably both geographic and as to product. Gulf city Seafoods, Inc. v. Ludwig Shrimp Co., Inc. (Matter of Gulf City Seafoods, Inc.), 2002 U.S. App. LEXIS 13914 (5th Cir. July 11, 2002).

Timeliness of Complaint Objecting to Discharge. Rule 4004(a), fixing time within which complaint objecting to discharge must be filed, is not jurisdictional; if not raised in answer or responsive pleading, timeliness objection to complaint is waived. In re Kontrick, 2002 U.S. App. LEXIS 13596 (7th Cir. July 8, 2002).

Catherine E. Vance, Esq.
Columbus, Ohio
614-336-3861
Email: vance76@earthlink.net

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Eleventh Circuit Permits Stripdown of Home Mortgage in Chapter 13 Plan

In a matter of first impression, the Court of Appeals for the 11th Circuit ruled in American General Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203 (2002) that Chapter 13 debtors may, under certain circumstances, bifurcate undersecured home mortgages into secured and unsecured claims.

In May, 1997, Richard and Doreen Paschen (“Debtors”) bought a home in Columbus, Georgia. In 1999, they obtained a second mortgage loan from American General Finance, Inc. (“AGF”) in the amount of $12,377.08, which was secured by the equity in the home. Their financial situation deteriorated causing them to file a Chapter 13 petition. The plan sought to bifurcate the AGF loan into secured and unsecured claims, as the equity did not support the full loan. The debtors valued the secured portion at $2,752.00, and their plan provided for payment of the claim in installments. The opinion does not mention how the unsecured claims were treated. AGF objected to confirmation contending that the value attributed to the secured claim was insufficient and, further, that § 1322(b)(2) did not permit the bifurcation of a lien of an interest in debtor’s primary residence even when the loan is short term to be paid within the term of the plan and there is no security other than the debtor’s principal residence.

The bankruptcy court held against AGF, stating that § 1322(c)(2) provides an exception to subsection (b)(2) when the last payment on the original payment schedule is due before the final payment under the plan and there is no collateral for the loan other than the principal residence of the debtor.

The bankruptcy court confirmed the plan as modified by valuing the secured portion of the lien at $6,000, to be paid with 12 percent interest over 60 months. The district court affirmed, and the case went to the Eleventh Circuit.

The Court of Appeals, relying on United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989), held that under § 506(a) of the Bankruptcy Code a claim is secured only to the value of the collateral and is unsecured as to the balance, and that § 1325(a)(5) allows the stripping down to the value of the collateral. AGF argued that under Nobleman v. American Sav. Bank, 508 U.S. 324 (1993) superseded by new subsection (c) and discussed at length in In Re Eseve, 184 B.R. 287 (Bankr. M.D. Tenn. 1985), the U.S. Supreme Court excluded mortgages secured only by debtor’s principal residence from the “strip down.” AGF tried to convince the Court that the exception in § 1322(c)(2) only permitted modification to the schedule of payments, and did not allow “strip down.” It cited legislative history in an effort to prove its point. The Eleventh Circuit rejected this argument citing the case of U.S. v Steele, 147 F.3d 1316 (11 Cir. 1997), and again from Ron Pair Enters., supra, that the clear wording of the statute does not allow for any interpretation other than the clear meaning of the words, that the prefatory language “Notwithstanding paragraph 2 of this subsection” means that subsection (b)(2) is to be ignored. The Court went on to say that under § 1325(a)(5), concerning the confirmation of a plan, there can be no doubt as to the meaning of § 1322(c)(2), as § 1325(a)(5) provides for the write down.

The Court then discussed the contrary ruling in Witt v. United Cos. Lending Corp. (In re Witt) 113 F.3d. 508 (4th Cir. 1997). It strongly wrote that the Witt case was wrongly decided; that in addition to the prior reasoning, Witt does not even follow the rule of the “last antecedent.” The “last antecedent” rule is that when construing a statute, the “qualifying words, phrases, and clauses are to be applied to the word or phrase immediately preceding and are not to be construed as extending to and including others more remote.” See United States v. Correa, 750 F.2d 1475, 1481 n.10 (11th Cir. 1985). Thus, the Court determined that if Congress intended the position of AGF relative to the words “as modified” in § 1322(c)(2) it would have constructed the phrase to be “payments as modified on the claim,” rather than the stated wording of “payment of the claim as modified.” (Emphasis supplied.)

The opinion concluded by noting that the Witt case stands alone in its interpretation of the statute, that the plain language of § 1322(c)(2) allows bifurcation followed by modification of claims on home mortgages which mature before the completion of debtor’s chapter 13 plan. The question now is whether this case will be appealed, and if so will the U.S. Supreme Court accept it. Congress could adopt a technical amendment to clarify the issue, but this is rather questionable. I doubt that the conferees from the House and Senate who are having such a difficult time with discharge language in the application to offenses against abortion clinics would consider anything else at this time. It certainly would be helpful not to have to seek an answer from the Supreme Court especially under § 1322 since the last payment must be due before the expiration of the plan, and the plan cannot exceed five years. Perhaps the issue will not occur frequently, but one never knows. Certainly, on short-term mortgages, it is a weapon for the debtor.

Wilbur G. Silberman
Gordon, Silberman, Wiggins & Childs, P.C.
1400 South Trust Tower
Birmingham, AL 35203
Phone: 205-328-0640
Fax: 205-254-1500
Email: wsilberman@gswc.com

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Washington Hot News

August 21, 2002 - California privacy law.

California continues to be the leader in privacy protections for consumers. Recently, a breakthrough occurred on S.B. 773, considered by some to be DOA, which allows consumers to dictate how much information they want banks, insurers, and financial institutions to share.

The bill, the California Financial Information Privacy Act, which is opposed by financial institutions, allows individuals to fill out a one-page form stating whether or not they want to allow the sharing of personal and financial information with affiliates, with the financial companies the institutions contract with, or with non-affiliated companies and if they wish to restrict the sharing of their information to the greatest extent the law allows. The bill was expected to be heard in the California Banking Committee August 21 and, if approved, will go to the floor. As is always the case, if passed, California's law could be considered the first domino in the series in the strengthening of privacy laws. The legislation is available at http://www.leginfo.ca.gov.

August 15, 2002 - Bankruptcy filings increase.

For the second straight year, bankruptcy filings have increased. An 8.6% increase resulted in 1.5 million cases filed in the FY ending June 30. Of those, 1.47 million were personal bankruptcies and 39,201 were business (a 5.6% increase).

August 13, 2002 - Predictions regarding Congressional privacy legislation: not likely soon, but legislation inevitable.

Although there are numerous privacy bills bouncing around Congress, it is unlikely that Congress will enact comprehensive privacy legislation by the end of this session (the last major federal privacy legislation passed was the Health Insurance Portability and Accountability Act of 1996 and the Gramm-Leach-Bliley Financial Services Modernization Act of 1999).

However, in light of the snowballing of legislation by state and local government and demands of foreign governments, eventual legislative action on the federal level is inevitable. Justification for the prediction is based on several factors. Possibly the least obvious is the differences in cultural attitudes that is currently making it difficult for Americans and Europeans to come to terms on privacy policies.

A more obvious problem, pushing toward Congressional action, is the difficulty in complying with myriad privacy regulations at the state and local level. For example, the California state constitution declares that privacy is a fundamental human right and a 2001 Vermont law mandates an opt-in before personal financial information and medical information may be disclosed. Differing levels of privacy protection may actually force industry to appeal to Congress for uniformity.

August 7, 2002 - GLB/Privacy update.

A. Dismissal of Challenge to FTC Financial Privacy Regulations Upheld

Credit reporting agency Trans Union, LLC failed to convince the U.S. Court of Appeals in Washington, D.C. that regulations promulgated by the FTC to implement the privacy provisions of the Gramm-Leach-Bliley (GLB) Act unlawfully restrict its ability to disclose and reuse consumer information. Summary judgment in favor of the FTC was affirmed.

Trans Union unsuccessfully argued that:
(1) a credit reporting agency was not subject to the FTC's rulemaking authority under the GLB;
(2) the FTC's definition of "personally identifiable financial information" (PIFI) was overbroad;
(3) the regulations' restrictions on reuse of information were inconsistent with the GLB; and
(4) the challenged regulations infringed Trans Union's First Amendment rights.

A "credit reporting agency" (CRA) was a "financial institution" subject to the FTC's regulatory authority under the GLB, the court held. The FTC's enforcement authority was established by a "catchall" provision in the GLB's enforcement section. Financial institutions that were not identified as subject to the jurisdiction of the federal banking agencies or the other agencies and authorities listed in the Act fell within the FTC's jurisdiction. Because CRAs were not among the entities listed under the jurisdiction of the other agencies and authorities, they were within the FTC's jurisdiction so long as they were financial institutions.

i. Personally Identifiable Financial Information
The GLB restricted financial institutions' disclosure of "nonpublic personal information" (NPI) provided by consumers. The GLB defined NPI as "personally identifiable financial information" (PIFI) but was silent on the meaning of PIFI. The appellate court rejected two challenges to the FTC's definition of PIFI. First, the FTC was authorized to define PIFI under this GLB and its definition was entitled to deference, given the GLB's silence on its definition and given the broad rulemaking authority the Act conferred on the agency.

Second, the FTC's definition was permissible. The agency defined the term as any information: (1) provided by a consumer to a financial institution to obtain a financial product or service, (2) about a consumer resulting from any transaction involving a financial product or service between a financial institution and the consumer; or (3) otherwise obtained by the financial institution about a consumer in connection with providing a financial product or service to that consumer was permissible. The FTC interpreted "financial" to encompass any information that was "requested by a financial institution for the purpose of providing a financial product or service."

ii. "Reuse" Regulation
Trans Union next contended that a "reuse" regulation improperly prohibited CRAs from reusing account numbers for marketing purposes in violation of the GLB. According to Trans Union, CRAs were expressly exempted from restrictions on marketing account numbers. Trans Union argued that the exemption was continued in an exception for CRAs in a GLB provision that otherwise established a flat prohibition on disclosure by a financial institution of consumer account numbers. The FTC did not interpret the exception as an exemption. Instead, the agency concluded that, under the provision, financial institutions were permitted to disclose an account number to a CRA in connection with a credit or insurance transaction that was initiated by the consumer only if the transaction consisted of a firm offer of credit or insurance.

B. Financial Privacy Hearing Possible
The Senate Banking Committee may hold a hearing on financial privacy issues in September.
Sen. Shelby (R-Ala), the author of two privacy related bills (S. 536, S. 324), has indicated he was never satisfied with the consumer privacy protections included in the Gramm-Leach-Bliley Act. There are also a number of other financial privacy bills including S.30, S.450, H.R.2720, H.R. 2730.

The competing financial privacy proposals would expand the provisions of the GLB, which required that rules be promulgated governing how much personal data can be shared among banks and their affiliates. Using differing approaches, the bills would allow consumers to block their financial institutions from sharing certain personal financial information with third parties.

Some of the strongest privacy provisions are sponsored by Shelby, including those in S.536, which would require financial institutions to obtain a customer's consent to share information.
Legislation introduced August 2, 2001, by Rep. Sessions (R-TX), H.R. 2730, preempts states' efforts to pass stricter privacy standards than those in GLB.

David Goch
Washington Legislative Counsel, CLLA
Webster, Chamberlain & Bean
150 North Michigan Avenue, Suite 600
Chicago, IL 60601
dgoch@wc-b.com

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©2002, Commercial Law League of America