Thoughts on Nortel (from Bob Rasmussen)

posted by Stephen Lubben

The following post comes to us from Professor Rasmussen at USC:

Nortel Bankruptcy Sets a Dangerous Precedent For the Future of Lending

Lenders are no fools. They care deeply about the promises they receive in return for the money they hand over to the borrower.  And if a 2015 ruling in the long-running Nortel Networks bankruptcy case is allowed to stand, it could lead to more restrictive lending to borrowers in the future.

For decades, our commercial law has allowed enterprises to divvy up promises as they see fit. Companies often conduct business through multiple, related entities. This allows lenders to extend credit knowing they’ll receive repayment for their loans from particularly asset-rich subsidiaries, that are not on the hook for all of the debts of the business. This adroit use of the corporate structure allows borrowers to get funds at a lower cost and, in the extreme, can mean securing a loan or not — which can be the difference in a business being able to operate.

Until recently, a lender taking a promise from a subsidiary of a business could rest assured that its only other competition to the subsidiary’s assets would be the other creditors. A recent case, however, threatens to overturn this accepted wisdom and bring uncertainty to financing of large enterprises.

Continue reading "Thoughts on Nortel (from Bob Rasmussen)" »

Puerto Rico: Legislative Update

posted by Stephen Lubben

It appears that the House legislation has bogged down.  Two or three issues keep coming up, none of which make a whole lot of sense:

First, "bailouts."  I'm not sure if people making this argument actually believe it or are just using a convenient, politically toxic buzzword. But the claim that extending chapter 9 to include some or all of Puerto Rico constitutes a "bailout" can't really be taken seriously. A bailout involves (a) the use of taxpayer money to (b) help investors avoid realizing risks they voluntarily agreed to take.

Neither is applicable here. Instead, this is the basic insolvency process doing its thing. Namely, losses will be allocated pro rata if bankruptcy applies.  But no taxpayer money is involved, and in no case are investors being saved from their own poor investment choices.

Second, expanding chapter 9 does not raise takings or other scary "retroactivity" problems. If it did, then Congress could never have enacted chapter 9 in the first place. After all, there was no chapter 9 until there was a chapter 9.

More generally, it is quite clear that unsecured bondholders do not have a valid takings claim (under the Fifth Amendment) as a result of the enactment of a new bankruptcy law, in any context. For example, if a secured creditor is owed $1,000 and has a lien on a house worth $400, a new bankruptcy law that discharges the $600 unsecured portion of the claim raises no constitutional issues. That's Congress' power under the Bankruptcy Clause in action. A law that resulted in the creditor obtaining substantially less than $400 on the secured portion might raise a constitutional question, because the secured portion of a claim is "property" for these purposes. But that still does not prevent the rescheduling of secured debt, just the complete elimination of it.

And finally, no, no, no this does not open the door to Illinois filing for chapter 9. Illinois is a state, with full 11th Amendment and 10th Amendment powers. Puerto Rico is a territory of uncertain legal status. Apples ≠ Oranges.

 

Still Not Deleveraging American Homeowners

posted by Alan White

The Federal Housing Finance Agency has finally announced a program to reduce principal balances of distressed home mortgages held by Fannie Mae and Freddie Mac, eight years into the foreclosure crisis. Too little, too late would be an understatement to describe this initiative. According to the agency’s announcement, they expect about 33,000 homeowners to be eligible to have their mortgage debt reduced to the value of their homes. According to the Zillow negative equity report, more than 6 million homeowners have mortgage debt exceeding their home value, and almost a third of all homeowners are effectively underwater, meaning that their equity is less than 20% of the home value, making it difficult to sell or refinance.

Aggregate value of homes in the US rose from $10.9 trillion in 1998 to $28.3 trillion in 2006, then declined to $19.5 by the beginning of 2012, recovering somewhat in the past three years. This one-third decline in home values was not accompanied by a one-third decline in mortgage debt. Residential mortgage debt peaked at 10.6 trillion in 2006, and then declined to 9.5 trillion by the end of 2012, just a 10% easing. The overhang of home mortgage debt remains a huge impediment to consumer spending, wealth accumulation and the closing of the racial wealth gap in the United States. It is regrettable that the FHFA continues to take such a narrow view of its role as the regulator of our secondary mortgage market utilities and fails to pursue the social values that our taxpayer-backed housing finance system ought to advance.

Return of the RAL

posted by Katie Porter

Shutterstock_271430072It's tax time, and here comes another Porter blog post about refund anticipation loans (RALs). I've written several times before about RALs, but was given a reprieve the last few years by changes in policy that made them nearly extinct. (See here for Slipster Nathalie Martin's post on that development in 2011).

But RALs are proving as hard to kill as a zombie--or as difficult as effectively regulating payday loans, as scholars from JJ White to Chris Peterson to Nathalie Martin have noted. RALs are back and "free." Or that is the pitch, as Kevin Wack reports in the American Banker (subscription req'd.) The new RALs work like this: the lending bank charges a fee of $35 or so for each approved loan to the tax preparers. The preparers are forbidden by contract from passing that cost along to borrowers. Hence, the loan is free to consumers. There is no fee and no interest charged. But of course nothing stops the tax preparer from raising fees across the board or for certain kinds of taxpayers who are most likely to pursue an RAL--such as those receiving an earned income tax credit. The consumer groups have pushed back. They note that tax preparation fees are often opaque already and consumers do not receive a final cost until the end making it difficult to be sure that preparers are hewing to their promises to not pass along RAL fees charged by lenders.

It'll be interesting to see if RALs regain a big hold in the marketplace. In the early 2000s, over 10 million taxpayers paid to get their own money back sooner. In the last few years, that number had dropped to about 30,000. While one would think that direct deposit, efile services, and computer tax software would all be pushing against the RAL market making a comeback, I predict RAL numbers are back in the millions by 2020 unless regulators change course again.

Puerto Rico Restructuring Options That Don't Rely on Congress

posted by Mark Weidemaier

The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring. 

We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.

Puerto Rico: PROMESA draft bill, title III revised

posted by Stephen Lubben

I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:

  • The bill now clearly provides for reference of cases from the district court to the bankruptcy court
  • There is no longer a requirement that the oversight board have an office in D.C. But the board can have offices outside of the territory it is overseeing. As Jacoby has previously noted, this opens up the possibility that cases could be filed outside of the territory, which for present purposes of course means Puerto Rico. The most obvious locale would be New York, where an board office might make sense for negotiations with bondholders.
  • I don't see a provision comparable to §921(b), which would allow for the selection of a specific judge to preside over the case.
  • The provisions regarding professional compensation and retention are no longer incorporated into title III, so title III becomes more like chapter 9 in this respect.
  • Those parts of chapter 9 that are not incorporated into title III are largely set forth within title III itself – e.g., §§929, 941, 943. Title III is chapter 9+ in all but name. The bill expressly provides that it will not be codified in title 11, however.
  • I wonder if all the implications of the definition of "trustee" in title III to mean "the board" have been thought through. For example, do they intend this to apply with regard to section 926, which is incorporated into title III?
  • The relationship between the board and the debtor during the case generally seems like it will be quite confusing. Under proposed section 315, the board will act on behalf of the debtor throughout the case, but in other instances the bill speaks as though the debtor itself will be taking action in the case.

New York Professional Responsibility Rules vs. Delaware Corporate Law?

posted by Adam Levitin

The Caesars examiner's report makes for interesting reading. Of particular interest for our readers might be its discussion of the role of the lawyers, namely those at Paul Weiss, who simultaneously represented the Caesars holding company, its operating subsidiary, and the holding company's private equity sponsor.  As the report notes, it is not unusual for a law firm to simultaneously represent at a parent and a sub or a sponsor and a portfolio company. But the examiner's report argues that things change in one of the entities is insolvent because then the real party interest in that firm are the creditors, not the shareholders, and that means there is a real conflict of interest between the insolvent (or potentially insolvent) sub and the holding company (and private equity sponsor). 

Although the examiner's report ultimately concludes that there's probably not much basis for finding liability against Paul Weiss (which might not have even know of the insolvency), something jumped out at me:  the lurking conflict between Delaware corporate law and NY Rules of Professional Conduct.  

Here's the problem.  While the examiner's report is correct in describing creditors as the real party in interest in an insolvent company, that's not how Delaware corporate law treats things. In North American Catholic Educational Programming Foundation, Inc. v. Gheewala, the Delaware Supreme Court made very clear that even if a firm is insolvent, the duties of the directors still run to the firm and its shareholders, not to the creditors. (Were it otherwise, we'd have a lot of interesting litigation every time a firm got anywhere near insolvent, and risk averse directors would be well-counseled to file for bankruptcy the second insolvency appeared on the horizon.)

But let's assume that the examiner's report is correct that for the purposes of New York Rules of Professional Conduct there would be a conflict of interest such that the attorneys could not simultaneously represent both the parent and the insolvent sub.  Presumably whatever attorneys would represent the sub would have to look to the interests of the creditors of the sub under NYRPC.  How on earth would that work, when the sub's directors are responsible to the shareholder (i.e., the parent) under Delaware law?  If the examiner's report's interpretation of NY RPC is correct, then I don't see how any NY barred lawyer can represent a Delaware corporation that might be insolvent. (Of course, the solution to all of this might be simply be that there is a violation of NY RPC, but it isn't really actionable by any body, and no bar committee is going to look at this too closely.) 

Sorry Paul, but the Bailout WAS about the Banks

posted by Adam Levitin

Paul Krugman claims that "Many analysts concluded years ago" that the big banks were not at the heart of the financial crisis and that breaking them up would not protect us from future crises.  Incredibly, his claim is linked to an article by ... Paul Krugman.  Maybe a Nobel Prize comes with a license to cite oneself as Gospel authority, but I don't believe that Krugman's Nobel Prize was for his expertise on bank regulation. 

So what's wrong with Krugman's claim?  Let's go piece by piece. 

Claim 1.  "Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial."

Wrong.  The actual loan origination was generally not carried out by Wall Street institutions.  It was carried out by mortgage companies, mortgage brokers, and commercial banks (I can only think of only two large commercial banks that are "Wall Street institutions--Citi and JPMorgan).  But this is silly.  It's like saying that the banks didn't do the origination, their loan officers did.  The mortgage companies, mortgage brokers, and commercial banks were just origination agents for a Wall Street-based securitization machine.  The Wall Street institutions provided the funding for the predatory lending--warehouse lines of credit from commercial banks and then the ultimate funding from securitizations organized by Wall Street.  Absent securitization there just isn't that much predatory mortgage lending.  The proof is the disappearance of all of the subprime mortgage companies with the implosion of the securitization machine.  And for the cherry on top, let me note that Krugman ignores the direct ownership of some of the mortgage companies and commercial bank originators by Wall Street institutions.  Lehman, Bear Stearns, Goldman, AIG...all owned origination entities.  

Claim 2.  "The crisis itself was centered not on big banks but on 'shadow banks' like Lehman Brothers that weren't necessarily that big."

Continue reading "Sorry Paul, but the Bailout WAS about the Banks" »

Further Debate About Debt Collection Reform and Credit Availability

posted by Jason Kilborn

The Center for Responsible Lending has produced a nice, new empirical paper reflecting on and refuting the notion that certain debt collection reforms restrict the flow of consumer credit. The analysis is careful and impressive, and the natural laboratory experiment they found is fun and intriguing. In a nutshell, North Carolina in 2009 and Maryland in 2012 imposed new restrictions on debt buyers suing consumer debtors on purchased accounts (both states now require actual documentation of the debts and their ownership to support such suits). On cue, in the period leading to these reforms, the credit lobby predicted gloom and doom in terms of restricted access to credit, especially to sub-prime borrowers, if such liberal nanny-laws were adopted. Several years later, the CRL decided to look back and test this. Comparing the change in the number and dollar volume of new credit lines in North Carolina and Maryland in the two years before and after each of the reforms (coincidentally, periods of general economic contraction and recovery, respectively), and comparing these differences with comparable data for selected peer states and the nation as a whole, did the reforms seem to have a noticeable effect of reduced access to credit in these states?  The simple answer, of course, is no (i.e., less contraction in North Carolina than elsewhere during a recession, and more expansion in Maryland than elsewhere during recovery). The more nuanced answer means the debate will rage on.

Continue reading "Further Debate About Debt Collection Reform and Credit Availability" »

Puerto Rico: The Commonwealth Plays Hardball

posted by Stephen Lubben

The question is whether it is playing against the House of Representatives, and its heavy handed PROMESA draft bill, or its creditors.

In any event, according to the Financial Times, Puerto Rico's legislature has passed a law giving its governor "the power to declare a state of emergency and halt payments to creditors until January 2017."

There is a long history of these sorts of laws in the United States, most from the Nineteenth Century, although there were a few in the Great Depression too.  Most were eventually struck down as violations of the Contracts Clause, but collection against Puerto Rico itself might run up against whatever sovereign immunity the Commonwealth might posses.

Nobody Told Us

posted by Alan White

Yesterday Senator Warren rightly excoriated former Fed consumer regulator, now industry lawyer Leonard Chanin after he claimed that, prior to the 2008 crisis, the Federal ReservScreen Shot 2016-04-06 at 9.31.46 AMe Board had only anecdotal evidence that subprime mortgages were a problem. Mr. Chanin served for many years as counsel for the Fed's Consumer and Community Affairs division. In fact, three times a year, from 1996 until 2007, members of the Fed's consumer advisory council called for regulation of subprime mortgages.  The Fed held regular hearings where witnesses told Mr. Chanin and his colleagues that 1) subprime foreclosures were a serious and growing problem and 2) Congress gave the Fed legal authority to do something about it. Here are a couple of instances in which I can recall having personally warned them. 

The Loany for the Loony: Looniest Consumer Finance Argument of the Year

posted by Adam Levitin

There are lots of silly or unsupported arguments made about consumer finance; too often commentators rely on their priors and read evidence through the light of their priors (here too). But sometimes you read a piece that just causes your jaw to drop with the stupidity ridiculousness of its argument.  I think we should recognize these loony arguments with an annually award that I'm proposing calling the Loanys (rhymes with Tonys, get it?).  The point of these nominations is not the ultimate policy merits of a position, but the strength of the particular argument made.  Thus, advocacy for or against a bad product is not itself grounds for a Loany nomination.  The argument itself has to be laughably bad, as in it doesn't even pass the straight face test.  CreditSlips contributors, including yours truly, are, of course, eligible for the Loanys.  

So without further ado, my Loany nominee is Achim Griese’s recent op-ed in the American Banker in opposition to overdraft regulation.  This was a piece with such a thin argument that I had to reread it a couple of times to make sure I wasn't missing something. So what was this Loany-worthy argument?  Here it is in a nutshell: 

There's no need to engage in substantive (i.e., price) regulation of overdraft fees because overdraft isn't one of the top complaints in the CFPB's complaint database.

Continue reading "The Loany for the Loony: Looniest Consumer Finance Argument of the Year" »

Learn about Teaching Consumer Law in Beautiful Santa Fe May 20-21, 2016

posted by Nathalie Martin

Pueblo acrhitecure ins anta feOn May 20-21st, the Center for Consumer Law at the University of Houston Law Center will present “TEACHING CONSUMER LAW IN OUR POPULAR CULTURE AND SOCIAL MEDIA.” Sponsored by the University of New Mexico School of Law, this is the only Conference in the world dedicated to the teaching of consumer law.

Snow in santa fe

This year’s Conference features 25 speakers, including the respected U.S. consumer law scholars, as well as presenters from nine other countries. Topics include discussions of new and innovative teaching techniques, substantive consumer law updates, a detailed discussion of the CFPB, empirical studies on consumer law issues, and numerous presentations of consumer law in other countries, such as Iraq, Japan, Nigeria, the EU, Nigeria, Denmark, and China.
 
The Conference will be held in Santa Fe, New Mexico, one of the most unique cities in American. A Conference brochure and registration form will be available shortly. In the meantime, please save the date. To view the tentative schedule and register , click here.
 
Richard Alderman and I look forward to seeing you in Santa Fe.

 

 

 

 

 

Puerto Rico: PROMESA draft bill, title III (initial thoughts)

posted by Stephen Lubben

Some quick thoughts on the "bankruptcy" part of the proposed bill:

  • If we read Ry. Labor Execs.’ Ass’n v. Gibbons, 455 U.S. 457 (1982) carefully, especially its discussion of the Commerce Clause, I'm not sure it really matters that this is proposed under Congress' territories powers, rather than the Bankruptcy Clause.
  • Proposed title III incorporates all of the same provisions that section 901 of the Code incorporates into chapter 9, other than section 301.
  • The proposed title also incorporates section 327 to 331, so apparently the court will have oversight of professionals under the procedure.
  • Speaking of courts, I see no provisions to move cases under title III to the local bankruptcy court. In short, these cases will stay with the district judges. It's unclear which district, as Jacoby notes.
  • Presumably the lack of a reference concept is driven by the same considerations that keeps the district courts involved in the various proposed "chapter 14" procedures for financial institutions. On the other hand, the district judges in almost every district tend to be from public law backgrounds, and largely have no experience with insolvency law.

So this will be a chapter 9 preceding in all but name, with the oversight board acting for the debtor, whether the debtor likes it or not, in front of district judge who will be reading up on chapter 9 on the fly. In short, we are reinventing the wheel in a new, more complicated way.

Puerto Rico: Debt Restructuring and Takings Law

posted by Melissa Jacoby

ConstitutionPer the last words of my PROMESA post, click here for an interview with Professor Charles Tabb, who discusses the (limited) impact of the Takings Clause on debt restructuring and moratorium legislation. 

Constitution image courtesy of Shutterstock.com

Recheck the Math on Reverse Mortgages

posted by Katie Porter

Tara Twomey is just a keen observer of the consumer finance world, and she recently alerted me to a trend. Reverse mortgages are being aggressively hawked as a valuable financial planning tool, and the media is picking up the story. Even the reverse mortgage industry rag is excited at its publicity rash. While I'm all for consumer finance journalism, these articles often report on studies that bear little resemblance to most Americans' situations.

Shutterstock_196374512First a quick definition of reverse mortgages: a loan secured by a home that pays the homeowner money based on accumulated home equity with loan repaid in the future. In its most straightforward form, the homeowner gets a lump sum of cash and must repay the loan when she dies (presumably out of the proceeds of the house that is sold upon her death.)  Reverse mortgages are a complex product marketed specifically to older Americans. (If you doubt the complexity, read Tara's great article that ponders how a reverse mortgage should be treated in a homeowner's bankruptcy.) Precisely for this reason, FHA requires counseling for its reverse mortgage, called a Home Equity Conversion Mortgage (HECM).

While we can hope that homeowners receive adequate information and make fully-informed decisions, the chatter about reverse mortgages is starting out their inquiry into reverse mortgages with some questionable math. The problem isn't the math itself, of course, but the assumptions. In a typical example featured in these stories, the couple owns a $400,000 home and has retirement savings of $1 million. Yeah, you read that right--tax-deferred, non-social security retirement savings of a cool mil'. Reality: about one-third of Americans have no retirement savings/pension at all. Even among those in the 55-64 year age bracket, one in five has zero dollars in retirement savings. Zero--to state the obvious--is a long way from $1 million. Even after excluding those with no savings,  the typical account balance of near-retirement households was only $104,000. Again, a long way from $1 million.

Long ago, when Elizabeth Warren was building support for the CFPB, she argued there needed to be a dedicated "cop on the beat" for consumers. Check out the press release, CFPB Study Finds Reverse Mortgage Advertisements Can Create False Impressions, for evidence that the CFPB is hard at work in educating consumers. While its study identified more fundamental confusion about reverse mortgages, those attracted to the financial promises in reverse mortgage research or ads should check the math against their own means.

Thoughts on MetLife

posted by Stephen Lubben

Over at Dealb%k.

Puerto Rico: PROMESAnkruptcy

posted by Melissa Jacoby

301The House Natural Resources Committee has released draft legislation - with the acroynym PROMESA - in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. The contents continued to shift over the past few days but a recent version is here. PROMESA spans many topics, including an oversight board, employment law, infrastructure, and beyond. Without detracting from the importance of this range of topics, this is Credit Slips, so these initial observations focus on debt restructuring provisions principally housed in Title III of the bill.

  1. PROMESAnkruptcy: The new territorial debt restructuring law would not be in title 11 (home of the Bankruptcy Code). But as shown in the visual, section 301 incorporates many key title 11/Bankruptcy Code provisions, including automatic stay, financing, majority voting rules, cramdown, discharge, and the discharge injunction. Other sections of PROMESA repurpose title 11 provisions with slight tweaks, while still others expressly depart from current bankruptcy law and make new rules. For the lawyers, also note that the Federal Rules of Bankruptcy Procedure also apply (section 308). Still, the drafters don't want to call it bankruptcy or chapter 9. Okay. I commend the drafters for recognizing the importance of a mechanism to bind holdouts and I'll call it whatever they want, within reason. PROMESAnkruptcy may sound a little funny, but let's be clear that Puerto Rico's dire situation is no joke. 

Continue reading "Puerto Rico: PROMESAnkruptcy" »

Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?

posted by Jason Kilborn

After a delay of nearly 15 months, the Second Circuit this past Friday finally released its opinion in the Tribune Co. Fraudulent Conveyance Litigation. Briefly, the case concerned attempts by creditors to claw back payments to former shareholders in the Tribune Company's ill-fated LBO, which led to its 2008 bankruptcy. The theory of recovery was that buyout payments to former shareholders were made for less than reasonably equivalent value (to the company) while the company was insolvent (or thus rendered insolvent), so contemporaneous creditors could sue the former shareholders for return of the value they received as constructively fraudulent transfers. While the bankruptcy trustee (in this case, the Creditors Committee, by delegation) had the power to pursue these claims (under section 544(b)), it chose not to, most likely because section 546(e) prohibited it from doing so. But when the two-year statute of limitations for pursuing those actions passed, the claims supposedly reverted to the individual creditors (more on this below), who took up those claims with the explicit permission of the bankruptcy court. Fast-forward to last week ... I am not surprised that the Second Circuit stuck to its historically broad construction of the "settlement payment" safe harbor in section 546(e) and held that state law fraudulent conveyance actions by creditors are barred by that provision just as a similar action by a "trustee" would be. More interesting, in my view, is the "why are we even talking about this" discussion of whether those creditors had any right to be pursuing those claims in the first place.

Continue reading "Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?" »

California Cracks Open the Court Doors for Foreclosed Homeowners

posted by Katie Porter

As California Monitor, my staff and I fielded tens of thousands, probably hundreds of thousands, questions from homeowners. The hardest conversations were the easiest from a legal perspective. If someone's home was foreclosed in California, we advised there was little, if any, likely recourse. The California Homeowner Bill of Rights created a new remedy for consumers, but for homeowners before its January 2013 effective date, the options were nearly nil.

The California Supreme Court, in a decision that surprised many, staked out a clear right for homeowners to contest in court whether the foreclosing party had proper rights in the mortgage to allow it to foreclose. In Yvanova v. New Century Mortgage Corp, the court reversed the Court of Appeals and remanded to allow the plaintiff to present her action alleging wrongful foreclosure. The court was careful to stay away from the merits, making no ruling on whether the plaintiff could prove the assignment was void. But, I this the court engaged in a bit of chicanery in declaring that its "ruling in this case is a narrow one." Yvanova is a big change from the developing body of lower court cases in California denying a borrower standing to file a claim based on violations of the the terms of a pooling and servicing agreement. 

The LA Times story identifies a number of open questions that must be answered to know if any homeowners will actually win damages in wrongful foreclosure cases based on pre-Homeowner Bill of Rights' actions. For one thing, the statute of limitations for wrongful foreclosure is uncertain in California--partly because the state has had so few cases. While I think the court is correct on the law in Yvanova, the wheels of justice may have turned too slowly to help people. As a case study, the opinion may best be used as evidence of the importance of faster, legislative remedies for consumers such as the Homeowner Bill of Rights over developing the common law. The opinion is well-done, however, and merits a read, particularly for its quotation from the Miller opinion: "Banks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank's deed of trust."

Puerto Rico: Reading the SCOTUS Tea Leaves

posted by John Pottow

I, too, join the cohort of surprised observers from this week's argument.  For me, the biggest takeaway is not so much that the Justices were engaging in textual sport, it's that they wanted to engage in those gymnastics.  That is, everyone seemed to get how unjustifiable the legal status quo is: it's clear the law is dumb, it's probable that Congress made a mistake, and so the Court had a very roll-up-their-sleeves attitude that struck me as, "What can we do to mitigate matters while being able to sleep at night that we are following an at-least-plausible reading of the text?"  The subtext to that is that they were not searching for the most natural reading of the text but the reading that did the least harm that could fix a problem.  (Surely a different colloquy would have ensued had the Late Justice Scalia been present!)

Note this is not "judicial activism" in my mind, because if it were true activism, they would just make up a doctrinal canon saying they can ignore the text when "manifestly unsound," or maybe open up the absurdity doctrine so wide you could drive a Jones Act tanker through it.  I see this as remarkably pragmatic.  We have to follow the text.  If you can get us a reading that we can live with, we'll do it.  That's why they kept pressing on what is the justification for this law.  Their lack of enthusiasm to any proffered makeweight (treat triple tax-exempt bonds differently from PR vs USVI?!) was telling.  If you're a judge, especially a Justice, I suspect you don't feel bad interpreting a law in a creative way if everyone but the self-serving litigants seems to suggest it's pointless.  In fact, you probably feel good.

All this said, don't get too excited for reversal yet.  The bondholders had some good textual counters in their briefs that didn't make oral argument.  But the irritation of the engaging Justices with the law, coupled with the simmering undercurrent of subjugation inherent in the territory's second-class status, suggests this really could be an interesting opinion.

Puerto Rico: The Recovery Act's Potential Second Wind

posted by Melissa Jacoby

 

This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.

Continue reading "Puerto Rico: The Recovery Act's Potential Second Wind " »

Lessons for Puerto Rico from ... Arkansas?

posted by Jason Kilborn

I did not realize that a US state had defaulted on its bonds, offering a historical comparative example of the difficulties facing Puerto Rico, its creditors, and mostly its citizens if the mess there is not subjected to an orderly, judicially supervised debt cleanup process of some kind. In a new working paper from the Cleveland Fed, O. Emre Ergungor tells the interesting story of the Depression-era default by Arkansas on various road construction bonds and its messy and politically charged path to a workout. A couple of apparent lessons are troubling. First, reaffirming the aphorism that $#!@ rolls downhill, most of the pain was suffered by Arkansas citizens and ordinary creditors, with bondholders pulling every available lever to ensure a soft landing for themselves. Ergungor sums up this lesson nicely: "in the absence of a dedicated judicial process for preserving the governmental functions of a state in debt renegotiations, sovereignty offers meager protections for the interests of the general public." Second, in a prophetic warning about bailouts, Ergungor describes the intervention of the federal Reconstruction Finance Corporation to provide liquidity for a refinancing of the workout bonds years later. As one would expect, a Chicago Tribune article took the feds to task for helping Arkansas in this way, insisting that the RFC chief "ought to be willing to to do as much for Illinois, Indiana, Michigan, Iowa, and all the rest of the states." I know Illinois would surely appreciate some federal support for its current behemoth pension burden. If the Executive intervenes in the Puerto Rico situation today, will we see another Tribune article like the one that criticized selective federal intervention for Arkansas? Does it matter that, technically, it is Puerto Rico's sub-units that are in distress, not the Territory itself? I struggle to understand even what all the issues are in the Puerto Rico debate, but Ergungor's paper helps me to put at least the financial problems in some useful context.

Puerto Rico: Further Supreme Court Thoughts

posted by Stephen Lubben

So Noah Feldman has a column up on Bloomberg that suggests that section 903(1) of the Code should clearly apply to the Commonwealth. It's a sensible argument, if you read that section entirely in isolation and know nothing about the overall structure of the Bankruptcy Code.

And while I say that intending a bit of the obvious snark – what else could be expected, he’s suggesting that my analysis is essentially daft – it is important to remember that the Supreme Court is not made up of bankruptcy experts. Thus, his column provides a fairly clear analysis of how Puerto Rico might still lose, despite the apparent leanings of the Justices in yesterday’s oral argument.

So if there is a non-frivolous argument for preemption of the Recovery Act, why do I think the Court might still overturn the First Circuit? It could happen one of two ways.

Continue reading "Puerto Rico: Further Supreme Court Thoughts" »

Puerto Rico: Supreme Court Argument

posted by Stephen Lubben

The transcript can be found here.  Based on my initial read, it seems like the First Circuit might be reversed, which opens up all the issues Jacoby noted earlier (namely, will the statute pass Contracts Clause review – assuming the Clause even applies to the Commonwealth).

Does the White House Stand for Consumer Protection or for Predatory Lending?

posted by Adam Levitin

Does the Obama White House truly stand for consumer financial protection, or will it support Wall Street when it thinks no one is looking?  That's the question that the Supreme Court served up today.  The Supreme Court is considering whether to hear an appeal in a critical consumer protection case called Midland Funding v. Madden. This is one of the most important consumer financial protection case the Supreme Court has considered in years. (See here for my previous post about it.)

The Court will only take the appeal if at least four Justices are in favor of hearing it.  Today the Supreme Court requested the opinion of the Solicitor General about whether to take the case.  That's a good indication that there's currently no more than three Justices who want to hear the appeal and another one or more who are unsure (it will take five to overturn the lower court decision in the case).  If four Justices wanted to hear the case, there'd be no reason to ping the Solicitor General. 

The request for the Solicitor General to weigh in on the case puts the White House in the position of having to decide whether it wants to stand up for consumer financial protection or to fight for Wall Street.

Continue reading "Does the White House Stand for Consumer Protection or for Predatory Lending?" »

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