Disarming Holdouts in Sovereign Debt Restructurings

posted by Mark Weidemaier

The pari passu litigation against Argentina—discussed extensively here on Credit Slips, on FT Alphaville, and elsewhere—caused many people to worry that future government debt restructurings would become more difficult. Some have their eye on Venezuela as the next to default, though the country and its troubled state-owned oil producer PDVSA stubbornly continue to pay external creditors despite dire economic and humanitarian circumstances. Wherever the next crisis occurs, there will be interest in devising ways to avoid the fate that befell Argentina.

A quick re-cap: federal courts in New York (i) interpreted the pari passu clause in Argentina’s contracts to forbid the country to keep current on its restructured debt unless it also paid holdout creditors in full and (ii) implemented this ruling through an injunction preventing financial and other intermediaries from helping Argentina continue making payments. Some worry that this remedy, if widely applied, could make it impossible to restructure.

So…what to do? Here’s a new proposal from Lee Buchheit (Cleary Gottlieb) and Mitu Gulati (Duke). It’s cute. And it has a clever name: the Cryonic Solution.

Continue reading "Disarming Holdouts in Sovereign Debt Restructurings" »

Police Misconduct in Bankrupt Cities

posted by Melissa Jacoby

Bankruptcy filings by major cities have reinvigorated attention to municipal bankruptcy. As chapter 9 and its application have become more like chapter 11, a wide range of creditors are being swept into the process. As written before, city cases now have classes of general unsecured creditors. Those classes also have been including plaintiffs in civil rights lawsuits alleging unconstitutional police conduct. The proposed payouts vary.  San Bernardino's bankruptcy plan, which seeks to release the liability of non-debtor officers as well as the debtor, has been proposing a 1% payout. The confirmation hearing is currently set for October 2016.  Some cities with systemic police practice problems - Ferguson, Chicago - also are known to have pervasive financial difficulties. I am not suggesting or predicting they will end up in bankruptcy, but it is another reminder that civil rights advocates need to be up to speed on the impact of chapter 9, if only to be able to bargain in its shadow as other types of creditors do.

I have just posted a paper on this topic (revised and updated from a version posted earlier this summer). It walks through the issues and gives three brief case studies. Feedback from the Credit Slips readership would be very welcome, and/but please also pass along the link to civil rights lawyers who do § 1983 litigation. Here is the brief abstract:

When a financially distressed city files for bankruptcy, recovery for civil rights violations is at risk. This article examines the impact of bankruptcy on civil rights claims, with an emphasis on allegations of police misconduct resulting in lawsuits under 42 U.S.C. § 1983. We walk through how a bankruptcy filing affects civil rights plaintiffs, starting with the immediate injunction against litigation and debt collection activity, and ending with the legal release of debt and a restructuring plan. Using primary source materials, we offer three brief case studies: Detroit, Vallejo, and San Bernardino. We conclude with suggestions on where to go from here in research and advocacy.

John Oliver and Consumer Law YouTube Videos

posted by Dalié Jiménez

I'm trying something new this year. My consumer bankruptcy policy seminar students will read many great articles by many wonderful academics on this blog, as well as others, but this year, their "reading" will also include a great deal of YouTube.

90% of the videos are John Oliver segments from his excellent show on HBO, Last Week Tonight. They cover particular "products" (student loans, credit reports, debt buying, payday loans, auto loans, retirement plans and financial advisors) and middle class issues (minimum wage, wage gap, wealth gap, paid family leave).

I thought Credit Slips readers might enjoy seeing them all in one place. Here they are in no particular order. Let me know if I've missed any!

Uber Helps Me Revise My Contracts Syllabus

posted by Mark Weidemaier

I've been meaning to post about this recent decision, by Judge Rakoff in the Southern District of New York, denying motions by Uber and its CEO Travis Kalanick to compel arbitration of a class action lawsuit. More coverage here (Bloomberg) and here (Law360). The lawsuit alleges that Uber suppresses price competition among drivers in violation of the antitrust laws. The court's opinion covers some arcane issues of arbitration law, such as the defendants' argument that the plaintiff had to arbitrate the question whether an arbitration agreement existed. (Answer: No.*) But mostly, the opinion is about contract law--or rather, about how not to design a system for forming contracts on-line.

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Clawing Back Tuition Payments

posted by Dalié Jiménez

Are tuition payments for an adult child's education, while the parents are insolvent, constructively fraudulent? As the WSJ reported this week, Bankruptcy Judge Hoffman (D. Mass.) recently held that they are not. But other courts have disagreed. In fact, there seem to be courts on both sides of this (although apparently, no circuit decisions yet).

In this latest case, In re Palladino, the debtors made tuition payments for their adult daughter's college education. There was no question that the debtors were insolvent when they made payments or that they did so within the last two years. The only question was whether the debtors received "reasonably equivalent value" (REV) under section 548 of the Bankruptcy Code (and Massachusett's UFTA). That section defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 548 (a)(2)(A). Courts have interpreted REV as requiring an economic benefit, which could be indirect, but has to be "concrete" and "quantifiable."

Here, the court explained that

[The Palladinos] believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough ... A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.

Opn. at 8 (emphasis mine).

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Conference and Call for Papers: Consumer Protection and Economic Development, 25 Years of the International Association of Consumer Law

posted by Nathalie Martin

A Conference celebrating the 25th year of International Association FO Consumer law will be held July 16 to 19, in Porto Alegre (UFRGS), Brazil. The The purpose of the Conference is to provide a forum where leading international scholars, practitioners, representatives of the consumer organization, public authorities and business representatives can join to present and discuss together the fundaments, the challenges and the future of consumer protection worldwide.

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Regulatory Déjà vu All Over Again

posted by Adam Levitin

A new CMBS issuance is set to test whether regulators will treat the 5% retained credit risk under Dodd-Frank as loans or bonds.  The difference matters because there are different capital charges for loans and bonds.  If regulators treat the retained credit risk as bonds (which matches the technical form of the retained interest), then the risk retention requirement will be much more onerous.  If they treat the retained credit risk as loans, it is just as if the bank securitized only 95% of the loans, rather than 100%.  

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Can a Nonprofit Startup Fix the Pro Se Problem in Bankruptcy?

posted by Dalié Jiménez

For the past four years, Jim Greiner, Lois Lupica, and I have been working on the Financial Distress Research Project (FDRP)*, a large randomized control trial trying to find out what works to help individuals in financial distress. As part of the project, a large number (70+ at last count) of student volunteers have created self-help materials aimed at these individuals, using the latest learnings in adult education, psychology, public health, and more. Part of our work has focused on creating a set of materials to help pro se filers through a no asset Chapter 7 bankruptcy (I blogged about the student loan AP materials here).

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Remembering Alan Resnick

posted by Katie Porter

One of the hardest things about teaching, whether in an informal setting or in a classroom, is telling someone that they are . . . ahem, WRONG. Or at least not right. Or could use improvement. Or there is an opportunity to improve. Something like that. . . . Professor Alan Resnick, a beloved bankruptcy scholar and practitioner, had a gift of helping others improve their work. He would generously and gently offer suggestions, always making those around him feel hope that the could improve. Whenever one worked with Alan, they felt profound gratitude that the bankruptcy world had his intellect and commitment.

Alan-Resnick-rsAlan had a remarkable talent for drafting legislation, rules, and statutes. When I tried my hand at writing a simple amendment to a statute a few years ago, Alan reviewed my work. Rather than sending me a tangled redline that would have at least temporarily crushed my spirit, he picked up the phone, and kindly offered to "support" my effort. He spent hours that day teaching me considerations in drafting. Put another way, Alan rescued me from sure disaster. Over his 40 years of service to the bankruptcy world, his keen eye and amazing knowledge of bankruptcy law prevented hundreds of instances of poor drafting. This was not mere technical work. Alan's insight, which he passed along to those he taught and knew, was that any good idea could fail if the written law did not accurately and fully capture the idea. He truly was the guardian of the written Bankruptcy Code and Bankruptcy Rules.

Alan Resnick passed away on July 28 of complications from multiple myeloma. I lost a close family member to this cancer, and I find comfort in knowing that Alan undoubtedly brought his incredible spirit and optimism to battling this disease. Alan's family continues to work to find a cure for multiple myeloma.

We at Credit Slips welcome comments remembering Alan, as a person and a professional. I especially remember his laugh, which lightened many intense debates about bankruptcy policy.  Anyone who was lucky enough to hear Alan talk about the drafting mess of BAPCPA, the bankruptcy reform in 2005, observed both his passion for bankruptcy's purpose of a fresh start and his ability to find humor in a dark time. His memory reminds us to keep perspective and keep fighting the good fight. May he rest in peace, and may we honor Alan's memory by continuing to urge Congress to remedy every misplaced comma, incorrect cross reference, and hanging paragraph in the Bankruptcy Code that limits help for struggling families and failing businesses.

Payday Lending Regulation: The Substitution Effect?

posted by Adam Levitin

A common argument made against regulating small dollar credit products like payday loans is that regulation does nothing to address demand for credit, so consumers will simply substitute their consumption from payday loans to other products:  overdraft, title loans, refund anticipation loans, pawn shops, etc. The substitution hypothesis is taken as a matter of faith, but there's surprisingly little evidence one way or the other about it (the Slips' own Angie Littwin has an nice contribution to the literature).  

The substitution hypothesis is prominently featured in a New York Times piece that is rather dour about the CFPB"s proposed payday rulemaking. Curiously, the article omits any mention of the evidence that the CFPB itself has adduced about the substitution hypothesis. The CFPB examined consumer behavior after banks ceased their "deposit advance programs" (basically bank payday lending) in response to regulatory guidance. There's a lot of data in the report, but the bottom line is that it finds little evidence of substitution from DAPs to overdraft, to payday, or even to bouncing checks. The one thing the CFPB data examine is substitution to pawn shop lending.  A recent paper by Neil Bhutta et al. finds evidence of substitution to pawn lending, but not to other types of lending, when payday loans are banned. I'd suggest that we're more likely to see a different substitution:  from short-term payday loans (45 days or less) to longer-term installment loans. That's not necessarily a bad thing...if the regulations are well-crafted to ensure that lenders aren't able to effectively recreate short-term payday loans through clever structuring of installment loans. For example, a lender could offer a 56-day loan with four bi-weekly installment payments, but with a "deferral fee" or "late fee" offered for deferring the first three bi-weekly payments. That's the same as four 14-day loans that rollover, and the "late fee" wouldn't be included in the APR.  That's perhaps an even better structure for payday lenders than they currently have.) The bigger point here is this:  even if we think that there will be substitution, not all substitution is the same, and to the extent that the substitution is to more consumer-friendly forms of credit, that's good.

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