Aurelius v. The Control Board: What is Going On? (Part II)

posted by Mitu Gulati

First, thanks to all of you who emailed and commented with possible answers as to what the Aurelius strategy in challenging the constitutionality of the Puerto Rican Control Board might be (the subject of Part I).  My favorite answer was the simple: “Create Chaos”.  That was followed by another answer: “Once the sheep start panicking, they become easy pickings for the wolves.”  I’m not sure that I understand either strategy, but that’s why I’m not running a multi-billion dollar hedge fund (if I were an investor, I suspect that I’d be one of the sheep trying to avoid being eaten by the wolves).

Second, I want to ask the “What is going on?” question from a different direction this week.  I’ve read or skimmed almost all of the anti-Aurelius briefs in the Aurelius v. The Control Board case now (for background on this, see here). Two things puzzle me about them.  I should say at the outset though that my being puzzled may stem directly from not understanding how these fancy constitutional law cases play out.

  1. Puzzle One: None of the anti-Aurelius briefs provide a clear and coherent explanation of exactly what would be at stake for Puerto Rico, financially, if the Control Board were to be deemed unconstitutional. More crassly, they don’t answer the following question at the outset: How much is it going to cost Puerto Rico if Aurelius wins? 

I'm a realist in thinking about what courts do in tough cases (as contrasted with the “legalist” who thinks doctrine does the overwhelming majority of work in predicting outcomes in all cases).  To my reading, the research tends to show that courts care a great deal about the social costs or policy implications of their decisions.  Yes, of course, they care about doctrine too.  But judges care a great deal about the impact of their decisions on real people (and how their decisions will be viewed in hindsight).

So, if a decision ruling that the Control Board is unconstitutional would impose a huge additional cost on the people of Puerto Rico (who have already suffered so much), and the law isn’t crystal clear, would it not be good legal strategy for the anti-Aurelius lawyers to emphasize that?  Clearly, I’m wrong, since that’s not what the all-star group of lawyers on the anti-Aurelius side have done.  But it puzzles me.

My thinking on this borrows heavily from my brilliant political scientist colleague, Georg Vanberg (see "Financial Crises and Constitutional Compromise”).

  1. Puzzle Two: Isn’t it a high-risk strategy to base key parts of one’s argument (as some of the anti-Aurelius briefs do) on cases that are, for want of a better word, “odious”? The cases here are the Insular Cases, that are an embarrassment. My guess is that many lawyers would at least balk at, if not outright refuse, to cite cases like Plessy or Korematsu as their primary support. And most judges, I’d think, would be mortified at having to turn to those cases for support for their decisions (and would like to be shown less yucky ways to getting to the right outcome by the lawyers).

There is a cool article here on the “Anti-Canon” in constitutional law, by Jamal Greene. Getting more specific, in terms of judges who are likely to be faced with these the Aurelius case on appeal, Judge Torruella of the First Circuit has a wonderful set of articles on the yucky Insular cases (and a thundering speech delivered at Harvard Law, where the key ideas for these awful cases were developed in the early 1900s).  A little more distant: Judge Lynch of the First Circuit has a fascinating recent piece talking about Korematsu (a star member of the Anti-Canon).

Odious Debts: A New Book

posted by Mitu Gulati

Classes are over, which means that I get to finally open some of the fun books that I've been meaning to read. Most of what I read is too low brow for me to have the courage to mention here. Plus, Mark tells me that the books in question have to have at least a distant relationship to credit and law.

A couple of days ago, Mark and I talked about Barak Richman's wonderful "Stateless Commerce".

Here is my next recommendation: Jeff King, The Doctrine of Odious Debt in International Law: A Restatement.

Jeff, who teaches at University College in London, was one of the pioneers in the rejuvenation of the Odious Debt literature in 2003-04, when Saddam's government in Iraq was overthrown.  Indeed, it was his co authored article for a Canadian think tank - the Center for International Sustainable Development Law, that jump-started the literature.  Now, thanks to Jeff and his co authors (and to Saddam too, I guess), there is a large and robust modern literature on the topic.  Along the way, in the years that have followed, Correa in Ecuador and Maduro in Venezuela have helped keep interest in the Odious Debt idea alive through their shenanigans. Indeed, Mr Maduro may end up rivaling Saddam in his contributions to the revival of this doctrine whose origins go back to the days of the Czarist regime in Russia in the early 1900s. As an illustration, sovereign debt gurus Ugo Panizza and Ricardo Hausmann have a nice recent piece in Project Syndicate on the relevance of Odious Debt concepts in the context of Venezuelan debt (they have an idea for an Odiousness rating system).

Slipsters are familiar with the Odious Debt debate, I suspect, since Anna G was one of its pioneers.  Plus, it is fascinating.  Basically, it is a doctrine of international law that says that the debts of "odious" regimes that are utilized for the private illicit purposes of the rulers (and where the creditors almost surely knew this was the case), do not have to be repaid by successor governments. The problem with this doctrine though -- to my mind, and to that of many others like Andrew Yianni, Anna, Mark W, Anupam Chander, Adam Feibelman, Sarah Ludington, Lee Buchheit, Eric Posner, Paul Stephan  -- is that it simply does not exist anywhere in international law (or that the basis for it is very very thin). There are some bits and pieces of historical precedent that one could arguably cobble together; but it strikes me as implausible that any modern court would accept the existence of a doctrine of Odious Debt today -- it is just too outlandish for them to do so without a more solid signal from the international community. At least, that was my view until Jeff's book showed up.

Jeff, in his superb book, argues otherwise -- he thinks there is much more of a basis for a doctrine of Odious Debt (and he very politely calls me out for having my head up my backside).  And while I can't quite bring myself to go over completely to his side, I found myself nodding in agreement with a great deal of his analysis. It is nuanced, careful and thoughtful.  Darn it! I don't think I've changed my mind, but that might simply be because I'm too stubborn.

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Aurelius v. Puerto Rico's Control Board: What's the Game?

posted by Mitu Gulati

While most of the sovereign debt world is focused on Mr. Maduro’s shenanigans in Venezuela, a fascinating litigation is playing out in federal district court in Puerto Rico.  Aurelius, a hedge fund known to many of us because of the role it played in the legendary pari passu litigation against Argentina, is challenging the constitutionality of the Control Board that was put in place to run Puerto Rico’s debt restructuring (and, essentially, key aspects of its fiscal affairs). 

Elsewhere, Joseph Blocher and I have written about why this suit is exciting for us in the context of our other work on Puerto Rico’s problematic (okay, shameful) second-class status.  Specifically, this Aurelius case, has the potential to get the federal courts to confront the question of what the legal validity today is of a set of infamous cases from the early 1900s (the Insular Cases). We hope that the courts, when faced with arguments that derive their authority from these cases, will clearly say – and there is enough of a basis for them to do so – that the actions and developments of the past 100 years have effectively overruled these cases. These cases, for anyone unfamiliar, are a set of stunningly racist cases produced by many of the same judges who ruled in favor of “separate but equal” in Plessy v. Ferguson.  Oversimplifying, these cases ruled that Puerto Rico and its people, partly because they were not deemed to be civilized enough in the early 1900s, constituted an “unincorporated” territory (that is, so very foreign that they were not on their way to eventual statehood).

So, in a sense, I find myself in the bizarre position that while I am not rooting for Aurelius to win, I hope that their lawsuit ends up getting the Insular Cases condemned, once and for all, as an awful relic of an ugly past.  That said, what puzzles me about this case though is its economics, particularly from the perspective of Aurelius.  What do they get by undermining the Control Board? My assumption here is that a ruling that the Control Board is unconstitutional and that all of the actions it has taken so far are void will be hugely expensive for Puerto Rico’s debt restructuring effort.  After all, one of the key aspects of the Control Board is that it has been given the power to solve the traditional collective action problem that bedevils every sovereign or quasi-sovereign debt restructuring.  Remove the Control Board, and we go back to square one where the creditors are fighting with each other about who has what level of priority and how to avoid giving the holdouts a disproportionate share of the pie. End result: Lawyers get paid a lot, but both the people of Puerto Rico and the creditors (including Aurelius) have a much smaller pie to divide up.

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Commerce Without Law

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

We are gearing up to teach our joint class on sovereign debt next term and, as usual, are mulling over background readings to provide context for the work we ask of students—which typically involves designing a restructuring plan. To do this, students must read many long bond indentures and other financial contracts. Occasionally, we show students historical examples of such contracts, often from the era of absolute sovereign immunity, when sovereigns couldn’t be sued in national courts. Often, students ask why lawyers bothered with such extensive documents when there were no courts to interpret and enforce them. Which gives us an opportunity to talk about reputational and other non-legal mechanisms for enforcing promises, which we and many others have written about, probably more than is, strictly speaking, necessary.

Nothing in the sovereign debt literature, however, is as interesting and immediate as Barak Richman’s new book, Stateless Commerce, which explores how a robust system of international commerce can work for hundreds of years without any state involvement. His exemplar, building on classic work by Lisa Bernstein, is the diamond trade. In theory, opportunistic breach of contract should be endemic, given the ease of theft, the highly subjective nature of quality assessments, and the need for credit to acquire such expensive products. So one might expect the trade to flourish only if there are strong legal institutions capable of rigorously enforcing deals. Instead, the enormously profitable global diamond market has operated for decades largely independent of the state.

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Alter Ego and Alter Id, Venezuela Edition

posted by Anna Gelpern

Venezuela is really really careening sideways into chaotic default. We know this not just because it has been missing payments and the ISDA Determinations Committee said so, but also because the government seems to be in a hurry to hand out what assets it might have to what claimants might show up on its doorstep with a credible threat to do ... something. ... or just to make them go away and buy another five minutes of delusional gambling for resurrection.

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OLC Legal Opinion and the Missing Legislative History

posted by Adam Levitin

The OLC's Legal Opinion on the CFPB succession is out. It's available here.  Three observations. 

First, the OLC opinion dispenses with the idea that only the FVRA, not the CFPA governs succession. That's an important point in terms of how the issue will likely be argued. The White House isn't bound to argue the OLC's analysis, but this strongly indicates that the White House isn't going to argue that the CFPA doesn't provide for succession.  

Second, the opinion argues that the FVRA exists as an alternative to the CFPA. The basis for this analysis is some of the FVRA's legislative history, prior OLC opinions, and a single circuit court opinion. The problem with the OLC's analysis, however, is that both the part of the legislative history cited, the previous OLC opinions (both about 28 USC 508 and OMB) and the circuit court opinion on the NLRB General Counsel deal with the effect of the FVRA on existing statutes. As I noted in a prior post, the Senate Report on the FVRA is very clear that existing statutes are treated differently than future statutes under the FVRA. For existing statutes, the FVRA is an alternative to the succession mechanism detailed in the statute. The Senate report specifically mentions this for the Attorney General, the OMB, and the NLRB General Counsel positions. Congress was of course able to do this because a later statute can always override an earlier one.  

But for future statutes, the FVRA is either exclusive or does not apply.  As the Senate report notes: 

"[W]here Congress provides that a statutory provision expressly provides that it supersedes the Vacancies Reform Act, the other statute will govern. But statutes enacted in the future purporting to or argued to be construed to govern the temporary filling of offices covered by this statute are not to be effective unless they expressly provide that they are superseding the Vacancies Reform Act." S. Rep. 105-250, 1998 WL 404532 at *15 (emphasis added).  

This would have to be the case because one Congress cannot tie the hands of a future Congress.  At most they can set up a default rule, but Congress if passed a law providing that one statute would always provide an alternative method of appointment no matter what any future Congress wanted to do, a future Congress would not have to repeal such a statute to avoid its application to a new office, only make clear that it did not apply to the new office.  In other words, the different treatment of existing and future statutes makes a lot of sense.  The CFPB is, of course, under a future statute, unlike all of the cases the OLC has addressed in the past.  That would suggest that the OLC's past opinions, on which it heavily relied in this opinion, were of limited value.  Yet strangely the above quoted language received no mention in the OLC opinion. I don't know if the OLC just overlooked it or what, but I think it really undermines the legislative history part of the OLC's argument, as well as the OLC's reliance on its past opinions and on the 9th Circuit opinion regarding the NLRB General Counsel. Instead, what we're left with is the statutory text, and that's ambiguous on its own. Once one plugs in this bit of legislative history, however, then I think it seems that the OLC just got it wrong. 

Third, check out the last paragraph in Part III of the OLC opinion. It really doesn't flow from the prior paragraphs or, for that matter, fit in Part III.  Part III is about whether the CFPB's independent status changes anything. But the final paragraph is about the legislative history of the CFPA's succession provision and whether that indicates that the FVRA applies. That's an issue that more properly relates to the Part I of the opinion, which is also discussing the same provision. This is just a guess, but my sense is that the final paragraph in Part III was a last minute addition to the memo. If so, it means that OLC wrote Part I without having properly dug through the legislative history....

Legal Malarkey from the White House about the CFPB Putsch

posted by Adam Levitin

We now have a CFPB succession crisis with a Director and a Pretender. The White House did a press briefing this morning to put out its case for why Mick Mulvaney is the rightful acting Director of the CFPB. I expected that the White House would argue that the Federal Vacancies Reform Act controls the succession, not the Consumer Financial Protection Act.  Curiously, the White House made a different argument.  The White House's argument is not that the Consumer Financial Protection Act does not provide a succession mechanism. The White House appears to acknowledge that it does.  Instead, the White House contends that the Federal Vacancies Reform Act stands as an alternative to the CFPA, and the choice between which mechanism to use is the President's. This argument appears underresearched and just not well-thought through.  The White House's position fails textually, on the legislative history, and as a matter of logic. 

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The Myriad Irregularities of the Mulvaney "Appointment"

posted by Adam Levitin

I want to emphasize just how irregular and probably illegal the Trump administration's attempt to make OMB Direct Mick Mulvaney the acting Director of the CFPB really is.  

First, there's the problem that it's hard, nay impossible, to read the Federal Vacancies Reform Act and Consumer Financial Protection Act and the relevant legislative history and come away thinking that the FVRA clearly controls.  At most, there's ambiguity; I can't imagine a competent attorney writing a legal opinion that says anything more than that.  

Second, even if one believes that the FVRA governs or even might govern, it does not mandate Mulvaney's appointment as acting Director.  Instead, the default setting under the FVRA is that the CFPB's Deputy Director would become the acting Director. Thus, if one believes there is statutory ambiguity, the prudent position would be to let the CFPB Deputy Director serve as acting Director, and proceed expeditiously to nominate a permanent Director for the Bureau. President Trump could have sent the Senate a nomination for a CFPB Director today. He didn't. Instead, he decided to put in place a cabinet member who already has substantial duties without running a second federal agencies. (Of course, Mulvaney's plan, it seems, is to only run one agency and shut down the other, so maybe it isn't actually double duty.) I'd be quite surprised if the President nominates anyone to be a permanent Director--the plan is to keep Mulvaney in place for as long as possible. That's not a good faith approach to the issue.  

Third, there's a Mulvaney-specific problem. Mulvaney is a cabinet officer who serves at the pleasure of the President.  That role is inconsistent with that of the head of an independent agency who can be removed only for cause.  By wearing two hats, Mulvaney would inherently compromise the CFPB's independence from the White House. And given that the CFPB Director is also an FDIC Director, the problem exists there too.  Serving in the executive branch in an at-will cabinet position and a for-cause independent agency position simultaneously seems unconstitutional, as a separation of powers violation:  when agencies engage in rulemaking, they are exercising the legislative power. That's a power that's forbidden to the executive. And putting that aside, can one really imagine that having the Treasury Secretary also serving simultaneously as the Federal Reserve Chair and SEC Chair would be permissible? Even if the FVRA were to apply, choosing Mulvaney is problematic. 

What we see here, then, is an approach that disregards the rule of law. But that shouldn't come as any surprise in this administration. 

 

Regulatory SPAM

posted by Adam Levitin

The Washington Post has an interesting piece about the huge volume of "SPAM" comments that the FCC received regarding the net neutrality rule. This all seemed very familiar to me:  the CFPB received an enormous number of comments about the payday rule. Many were utter spam comments, but the most problematic would attach random academic articles.  That meant that the Bureau's staff, when analyzing the comments, had to spend time on deliberate wild goose chases. (I'm aware of this because a number of the random articles were my own.) I wasn't sure what to make of the volume of frivolous comments; now I'm wondering if there was a giant spamming of the bureau. Are there legal consequences for such actions? It certainly feels icky, along the lines of inflammatory news stories fed by a foreign government to affect our elections. 

Domination Isn't (Always) Fraud: Venezuela Edition

posted by Mark Weidemaier

I made a joke in the comments to Mitu’s post about whether the arrest of Citgo executives strengthened the argument for treating Citgo as Venezuela’s alter ego. The joke wasn’t very good; I called Venezuela a “typical activist shareholder.” But Mitu generously took it seriously, asking whether this is the kind of behavior creditors should have expected. His question highlights some interesting legal questions. One is whether a creditor who knows about shareholder misconduct before voluntarily dealing with a corporation should be able to enforce its claims against shareholder assets. A second has to do with the legal standard for finding a corporation and its shareholder to be alter egos.  

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Mr. Maduro Writes an Exam Question on Veil Piercing

posted by Mitu Gulati

It is that time of the year; where one of the excuses I use to escape Thanksgiving dinners that have degenerated into to food fights over our current president is: "I have to go write my exam questions".

This year though, for those writing Corporations exams, Mr. Maduro has written an exam question whose facts I could not have imagined.  I don't know the answer, but this is a topic that Mark W has written a brilliant article on already (even he didn't quite imagine these facts though) and Anna G has thought about too (and maybe has an article in the offing). So, I'm throwing this out in the hope that they might answer it.

Put simply, the question is:

Has the risk of the corporate veil of PDVSA (Venezuela's state-owned oil company) being pierced increased significantly after Mr. Maduro fired six of the top executives of Citgo, the refining arm of PDVSA (Citgo a Delaware corp, wholly owned by PDVSA).  Officially, the charges are of corruption; but it is quite possible that they are trumped up (at least, let us assume that for purposes of the hypothetical exam question). Reality, the NYT suggests, is that Mr. Maduro is trying to use the arrests of the executives (four of whom are US citizens) to build political support. His administration has described the alleged corruption as "putrid" (that's a new one).

As background, creditors of Venezuela who have been defaulted on, have already been trying to get at PDVSA's assets, by arguing that PDVSA and the Republic are, for all purposes, one and the same and should be viewed that way.  And at least one such creditor, Crystallex (a Canadian company) has made considerable progress in its suit.

Put another way: Have Crystallex's chances of victory suddenly increased?

My two cents is a Yes. The more Mr. Maduro uses these subsidiaries as his playthings for non-corporate purposes (and particularly purposes that were not disclosed to creditors ex ante), the more likely is a court likely to decide the veil piercing is appropriate. After all, if Mr. Maduro won't respect that separate status of the subsidiaries, why should the court?

Old Wine in New Bottles: Geopolitics and Venezuela's Debt

posted by Mark Weidemaier
Mark Weidemaier & Mitu Gulati
 
Robin Wigglesworth and John Paul Rathbone have an insightful piece in the Financial Times on how China, Russia, and the US are jockeying for position in Venezuela, which needs debt relief. The other governments are in a position to either facilitate or impede this, with conditions. Very roughly speaking, Russia wants regional influence, China wants oil, and the US wants regime change (ideally, while limiting Russian and Chinese influence in the region).
 
Finance has long been both a tool of, and a pretext for, foreign intervention in Latin America. For example, historian Emily Rosenberg and others have written about “dollar diplomacy”—the US government’s early-20th century practice of tying loans to control over customs and taxing authorities. The practice was justified by narratives about the benefits of financial expertise and professionalization, but of course it also served to protect the interests of US lenders while limiting the influence of European powers. Venezuela is no stranger to this history, having endured heavy-handed and often brutal interventions by western powers in the early 1900s.

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CFPB Directorship Succession: What the Dodd-Frank Act's Legislative History Tells Us

posted by Adam Levitin

With the announcement by CFPB Richard Cordray that he will be leaving the agency by the end of the month, the question arises who will succeed Cordray as Director. Numerous news outlets have run stories that President Trump is planning on naming OMB Director Mick Mulvaney as acting CFPB Director, with the expectation that Mulvaney will delegate his authority to some individual who doesn't have to go through Senate confirmation. There's just one catch: the President lacks the legal authority to appoint Mulvaney, or anyone else, as acting Director of the CFPB.  

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Why Didn't Puerto Rico Use its "Local Law" Advantage to Reduce its Debt?

posted by Mitu Gulati

Good academic workshops are hard to run. I know, because this is a task that I have failed at, and continue to fail at, repeatedly.

For that reason though, it is a treat to see someone else run their workshop successfully. I was at one recently that was spectacularly run: Jill Hasday's Public Law workshop at the University of Minnesota. The setting is intimate: a small group of students and faculty gathers in the late afternoon (without wine -- which I usually think of as being key) and they take apart whatever paper is the focus of the discussion. Indeed, after about an hour, the paper that is being discussed almost becomes secondary to the idea that the participants have by then honed in on as being central.  My colleague, Joseph Blocher, and I were lucky enough to have our paper "Puerto Rico and the Right of Accession" be deconstructed last week and it was a special treat for the both of us.  We have a concrete measure for whether a workshop was good (taken from our dear friend, Steve Choi): Did it help generate ideas for a new paper?  This workshop gave us at least three.  That's more than any other workshop I've been to. I don't know how Jill inspires her students or what magic potion her colleagues who attend take, but I want the secret sauce to use next semester at my workshop series with Guy-Uriel Charles.

The one question that Jill, Daniel Schwarcz and at least two students asked that keeps bugging me is: Why didn't Puerto Rico use the fact that the overwhelming majority of its bonds were governed by its own local law to directly restructure it?  Couldn't Puerto Rico have passed a set of laws to enable it to engineer a sharp reduction of its debt?  Greece did precisely that in March 2012; and it faced constitutional protections of property and prohibitions on expropriation very similar to what Puerto Rico would have (as an aside, the challenges to the Greek restructuring of 2012 -- and there have been dozens of suits filed -- have failed so far).  Indeed, the US did something like this with the gold clauses in the 1930s, to jumpstart the economy and get it out of the depression (actions that withstood legal challenge in a set of famous cases such as U.S. v. Perry).

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Venezuela's Debt: Is the Game Afoot?

posted by Mitu Gulati

Mitu Gulati & Mark Weidemaier

The confusion over the status of Venezuelan debt over the past week has been remarkable. The government and its oil company, PDVSA, have, variously, defaulted, promised to pay, paid, claimed the money got stuck in bank purgatory, gotten a Russian bailout, triggered CDS contracts, hosted sham restructuring talks (with gift bags!), and more. All while humanitarian conditions worsen. The charade of being able to meet debt obligations may be nearing its end. The prevailing narrative is that investors are willing to be patient as long as they think the government wants to pay. But the investor mix may also be changing. Have the vultures (i.e. distressed debt investors) arrived?  

Two recent articles suggest that the answer is close to being a yes. In this article, from a couple of days ago, Landon Thomas of the NYT reports that, while more traditional investors are beginning to pull out, others who specialize in distress scenarios, like David Martinez of Fintech (a “mysterious” figure, Landon tells us), are entering. The next day, Bloomberg’s Katia Porzecanski published an interview with Jay Newman, formerly of Elliott Associates and infamous for leading the pari passu litigation against Argentina, who seemed very knowledgeable about the legal risks in Venezuelan bonds. (He is ostensibly retired, but one wonders if Venezuelan debt might tempt him out of retirement).

The Bloomberg story highlights an interesting difference of opinion. The markets seem to view PDVSA bonds as significantly safer than Republic bonds. Jay Newman views the former as near-worthless. Why the difference?

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Whitford on Law School Financial Aid

posted by Melissa Jacoby

WhitfordAlthough technically emeritus and making history as a named plaintiff in a gerrymandering case before the U.S. Supreme Court, our commercial law colleague Professor Bill Whitford remains worried about law schools in a way in a way that connects with an issue well known to Credit Slips: student loans. Whitford's latest analysis of law school financial aid is forthcoming in the Journal of Legal Education but is available to us now on SSRN.

Audio Recordings of Bankruptcy Court: News from Delaware

posted by Melissa Jacoby

DelawareSeveral Credit Slips posts from earlier this year (here and here) focused on the virtues of courts releasing digital audio recordings of hearings, and specified the Judicial Conference authority for doing so. Over the summer, I found about three dozen bankruptcy courts for which at least one audio recording had been posted on a court docket in the prior year, albeit with significant variation in frequency of posting. 

It is great to be able to report that the U.S. Bankruptcy Court for the District of Delaware has joined the group of bankruptcy courts using this technology  (announcement here with the details). Proceedings before Judge Carey are the first to be posted, with other judges' hearings potentially to follow. 

 

 

Confusion in Venezuela; Alter Egos in Delaware

posted by Mark Weidemaier

Confusion reigns. Venezuela might plan to default, but maybe it's just pretending so it can buy bonds back on the cheap. Then again, it could be a "giant money laundering operation." If there are restructuring talks, U.S. investors can attend, and listen. Except that the talks will likely be hosted by a drug "kingpin," and investors can't have any "transactions or dealings, directly or indirectly" with that person. And don't ask whether PDVSA's late(ish?) payment was a credit event, or what the CDS payout will be on bonds that have experienced a credit event despite having been paid in full.

Thankfully, the law is clear, right? Here's PDVSA motion to dismiss the lawsuit Crystallex has filed in federal court in Delaware, alleging that PDVSA is Venezuela's alter ego and seeking to enforce an arbitration award against the government by attaching PDVSA's equity stake in the ultimate U.S. parent of CITGO. Here's a summary of the arguments the parties have made thus far. The case matters, first, because if successful Crystallex will sever PDVSA's indirect ownership stake in CITGO. It also matters because, as we've discussed here repeatedly, any debt restructuring will implicate questions of alter ego liability. For instance, many restructuring proposals begin by urging Venezuela to withdraw PDVSA's right to exploit oil reserves, so as to better insulate oil-related assets from creditors. This short article explains some of the issues of alter ego liability raised by these and other proposals.

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Lularoe, Other Multi-Level Marketing Companies, and Bankruptcy Filings

posted by Pamela Foohey

Several days ago, Stephanie McNeal at BuzzFeed News published a short piece on Lularoe's intersection with consumer bankruptcy filings. I've blogged about multi-level marketing (MLM) companies' potential role in bankruptcy filings a couple times. So when BuzzFeed sent me a list of twenty-four chapter 7 and chapter 13 bankruptcy filings from the past two years in which the debtor listed Lularoe as a part of its DBA or FDBA, I was intrigued. Much of what I could glean from the sample of those petitions and schedules I reviewed is in the short piece. The debtors' reports of past years' income from their Lularoe businesses show a precipitous decline in income, some schedules include unsecured loans from online lenders (seemingly to fund purchases of inventory), and most schedules include a large amount of credit card debt. The debtors also are overwhelmingly married with children, and the couples together owe quite a bit in student debt (over $50,000 on average).

Of course, as the story notes, there likely are many more filings stemming, in part, from Lularoe businesses, and these cases very likely are not representative of all the cases. But it was interesting to review them nonetheless. Lularoe reminds me very much of Rodan + Fields and Herbalife, two other well-known MLMs. Which led me to run the same search that BuzzFeed ran for Rodan + Fields and Herbalife. 

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Puerto Rico, its Control Board and the "Two-Step Plan" Story

posted by Mitu Gulati

It is rare that the ideas in academic articles fundamentally change the world. A package of pieces by Clay Gillette and David Skeel (starting with "Governance Reform and the Judicial Role in Bankruptcy" in 2014, followed by a NY Times Op Ed in 2015,  and concluding with "A Two-Step Plan for Puerto Rico" in 2016) have arguably done just that though. The context, as many slipsters have written about, was the enormous financial crisis that Puerto Rico has been mired in for multiple years now. The three Gillette-Skeel articles were the foundation for the institution of a federal control board to displace the local elected authorities in the Commonwealth of Puerto Rico and, in their place, run Puerto Rico's debt restructuring.

Oversimplifying, the idea is that there are occasions when an electoral system becomes so dysfunctional in its running of the local government's operation that a more command-based system needs to be put in place temporarily. Clay has an aptly titled piece "Dictatorships for Democracy" that also explicates this idea. In political economy terms, the problem that Clay and David attack in their pieces is the one where the local competition among electoral candidates is, for whatever reason, consistently delivering severely sub-optimal local governance -- a consistently bad electoral equilibrium that eventually produces a severe government bankruptcy. And the way to get out of the bad equilibrium, they argue, is a temporary dictatorship (aka control board) that is not beholden to the kinds of political interests that were causing the dysfunction.

The question of why the local government system in Puerto Rico produced such immense fiscal mismanagement is a complicated one.  I am inclined to put a big portion of the blame for bad governance on the fact that Puerto Rico has not been allowed to meaningfully govern itself in the same fashion as the states for over a century ("foreign in a domestic sense" and all that). That said, it is hard to argue with the observation that, whatever the reason, Puerto Rico seems to be stuck in a bad governance equilibrium that it needs to be pushed out of. And Clay and David have provided one solution that might just work. (My preferred solution would be that Puerto Rico be allowed meaningful governance rights at the federal level, but no one in Washington DC seems to be willing to give them that).

Two things got me thinking about their idea over the past few days, and induced me to write this post.  First, the hearing on the legal challenge to the constitutionality of the control board is coming up soon (based on a challenge from a NY hedge fund).  Second, there was an interesting article Simon Davis-Cohen of The Nation (a lengthy piece about Clay and David and their ideas) that appeared about a week or so ago. Davis-Cohen's article, to my mind, manages to be both admiring of the ideas and goals that Clay and David have and also question the whether they are appropriate in the Puerto Rican context.

Continue reading "Puerto Rico, its Control Board and the "Two-Step Plan" Story" »

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