Central Bank Alter-Ego Theory Rejected

posted by Mark Weidemaier

Fed resThis ruling, handed down today by the Second Circuit, may spell the end of one phase of the NML litigation. For some time, the plaintiffs have been trying to find a way to seize assets held by Argentina's central bank. Their latest effort sought an order declaring that Banco Central is an alter ego of Argentina, at least insofar as U.S. law is concerned. The effect of such an order would be to eliminate the bank's claim to be treated as a separate legal entity, making it liable for the government's debts. I understand that Banco Central has already moved most if not all of its assets out of the U.S., and earlier Second Circuit rulings already protect funds held at the Federal Reserve Bank of New York. But the plaintiffs could have taken the order to another country where Banco Central has assets and (conceivably) parlayed it into an order allowing them to attach bank funds. 

This was always a long shot for the plaintiffs. Even if they had gotten their requested relief, officials in other jurisdictions would not be obliged to let them seize bank funds. After today's ruling, though, the plaintiffs face additional practical and legal barriers. Their complaint alleged that Argentina effectively controlled Banco Central by determining who served as an officer of the bank, by borrowing from the bank, and by coordinating with the bank in implementing an inflationary monetary policy. The Second Circuit held that these allegations, even if true, didn't establish that the bank was the government's alter ego. The slippery slope here is fairly obvious. It is common, after all, for there to be a degree of coordination between governments and central bankers. I doubt the Second Circuit was eager to create a precedent that might imply that central bank assets in the United States are at risk. Technically, today's ruling doesn't prevent the plaintiffs from raising the alter ego theory in other jurisdictions (perhaps where the standard for alter ego liability is different). But given today's ruling I would imagine the fight will shift to other fronts.

Yep, 800,000 Bankruptcy Filings This Year

posted by Bob Lawless

My blogging has been light the past few months as we have been working on the eighth edition of what will now be LoPucki, Warren & Lawless, Secured Transactions: A Systems Approach. For you secured transactions teachers out there, we have returned a first set of page proofs and everything looks on track for publication later this year well in advance of the spring semester.

To get back into the blogging swing of things, I go to where else . . . bankruptcy filing data. Back in January, I predicted that total 2015 bankruptcy filings for the U.S. would be "somewhere around 800,000." Revisiting that prediction, the numbers seem right on track to meet it.

Continue reading "Yep, 800,000 Bankruptcy Filings This Year" »

Venue (Again)

posted by Stephen Lubben

Some thoughts on the latest dustup over venue in big chapter 11 cases, on Dealb%k.

Puerto Rico Seeks Help From the Supreme Court

posted by Melissa Jacoby

CertPetitionPuerto Rico is asking the U.S. Supreme Court to review the First Circuit decision that Puerto Rico's Recovery Act is preempted and thus unconstitutional. Here's the petition. In addition to parsing the legal issues, the petition is framed around Puerto Rico's financial emergency, the need for the Supreme Court to step in notwithstanding the lack of circuit split (or even a dissent to the First Circuit ruling). It makes sense that Puerto Rico would challenge a ruling making it harder for the Commonwealth, in a nebulous legal zone, to write laws to solve its problems. The difficulty with the financial crisis framing is that even if (1) the Supreme Court agreed to hear the matter, (2) heard the matter quickly, (3) decided the matter quickly, and (4) actually reversed the First Circuit - a chain of tough "even ifs"  - public corporations in Puerto Rico will not be able to start using the law because another formidable constitutional challenge is still alive: whether the Recovery Act can survive scrutiny under the Contracts Clause. That hotly contested fight would be fact intensive in a way that the preemption dispute was not. A fix from the federal government must come from one of the other two branches. Speaking of which, the persuasive argument against H.R. 870/S.1774 continue to be underwhelming. For example, the fact that chapter 9 would not be a complete solution for, say, PREPA, is really beside the point.

If the Supreme Court agreed to review the First Circuit's decision, then fellow Slipster Stephen Lubben's work on Puerto Rico and the Bankruptcy Clause would become even more important than it is already. While I am not on board with Stephen's conclusions regarding preemption, his research and arguments are central to this debate. So check out his article if you haven't already.

New personal insolvency laws cover (almost) all of Europe

posted by Jason Kilborn

This summer saw a flurry of legislative activity in Europe with respect to personal bankruptcy. New laws emerged in Cyprus, Romania, Hungary, and (though it is not an EU Member State) Russia. These laws differ substantially among each other and from earlier models, which will give me a lot to write about in the coming years, but it is notable that the list of non-adopters in Europe is rapidly dwindling. Only Bulgaria, Malta, and the newest EU Member State, Croatia, lack such a law, and at least in Croatia, the subject has been on the legislative docket recently. It will really be interesting to see what happens if the rest of the Balkans and Turkey are approved as the latest applicants to join the EU and fall under pressure to adopt personal insolvency regimes. Will Turkey give us the first Islamic consumer bankruptcy law? Interesting times.

CFPB Data Collection

posted by Adam Levitin

I've got an op-ed in the American Banker about the CFPB's data collection, which has become the latest inside-the-Beltway attack on the CFPB.  

The problem is that the CFPB's data collection critics (and here and here and here, among others) don't understand the first thing about the nature of the data collected by the CFPB.  Newt Gingrich, for example, worries about the civil liberties implications of the CFPB seeing your credit card bill. I'd be worried about that too, but that's not the data the CFPB's getting.  Nor is it getting metadata that can be used to reidentify accounts. Nor is the data that the CFPB collects useful to cybercriminals--it lacks account numbers, expiry dates, PINs, etc. And almost all of it is already commercially or publicly available and already collected by other government agencies.  But shoot first, ask questions later is how things often play out with attacks on the CFPB.  Would it be too much to ask for factually-grounded policy discourse every once in a while?

The Agency That's Got Your Back

posted by Adam Levitin

Nice piece in Time Magazine on the CFPB here

More Argentine discovery shenanigans

posted by Mark Weidemaier

Much has been going on, although little has actually happened, in the litigation against Argentina. For instance, the court has allowed the plaintiffs to file an amended complaint seeking an injunction blocking payments on the recently-issued BONAR 2024s (USD-denominated, Argentine law bonds). That may prove important, for it's a step toward blocking Argentina from issuing any foreign currency debt, anywhere within the great orange blob known as "places-that-are-not-New-York." But no injunction yet; Argentina has not yet filed an answer to the complaint. 

Plaintiffs have also continued efforts to find executable Argentine assets. I'm interested in the role that sovereign immunity plays in the debt markets, and a development yesterday captured my attention. Readers may recall that, in a 2014 case involving Argentina, the U.S. Supreme Court considered the extent to which a creditor holding a money judgment can use U.S. discovery rules to force disclosure of a sovereign's assets around the globe. The Court ruled against Argentina, thereby opening the door to potentially expansive discovery into the nature and location of the sovereign's assets worldwide. After losing in the Supreme Court, Argentina persisted in refusing to turn over much of the discovery requested by plaintiffs. Yesterday, the district judge sanctioned Argentina by ordering that "any property of the Republic of Argentina in the United States except diplomatic or military property is deemed to be used for commercial activity." (No paper order is available on the court's docket yet.)

U.S. law permits creditors of a foreign state to seize only assets that are "used for a commercial activity" in the country. The district court's order deems all Argentine assets (other than military or diplomatic assets) to satisfy this criterion. In one sense, this is a complete end-run around the statute. By restricting enforcement to commercial assets, the law minimizes the ability of private creditors to create diplomatic headaches for the U.S. government. On the other hand, the sanctions order is analogous to a so-called adverse inference, where the court treats certain facts as established because the sovereign's discovery misconduct has made the facts impossible to prove. There is some authority for adverse inferences as a sanction for a sovereign's litigation misconduct. Right or wrong, however, the result of yesterday's order is an even wider embargo on Argentina's ability to conduct transactions in the U.S.

Russian Bankruptcy ... and Unconstitutional Homestead Exemption?!

posted by Jason Kilborn

BankZapadnyiI've finally finished my paper on the new Russian personal bankruptcy law (comments welcome), which is slated to go into effect on October 1 of this year. One side story from that paper will give a real chuckle to lawyers from Texas, Florida, and the other states with unlimited homestead exemptions. It turns out that the Russian Constitutional Court has been battling for years with the legislature about the unlimited exemption in "residential premises"  that represent the debtor's single suitable place of permanent abode. The Court has held this unlimited exemption to be unconstitutional at least twice, in 2007 and then again in 2012, yet the legislature continues to ignore these rulings and leave the law as is.

In the context of a case involving a 900 square meter apartment, the Court in 2007 concluded that the unlimited homestead exemption "disproportionately limited the creditor's rights" and was an "unfair, inadequate, unacceptable limitation on constitutional rights" to protection from the courts (!). The Court was especially concerned that this exemption was subject to abuse by debtors who might run up debts and then invest their money in a high-value exempt home (who would do such a thing?). In the 2012 case, the Court expressed its frustration with the legislature's ignoring its multiple earlier rulings on the "arbitrary" homestead exemption. It seems to have concluded that protecting anything more than the debtor's absolute minimum subsistence living space (about 18 square meters, as I understand it) is a violation of creditors' rights.  Wow.

I seriously wonder if the Constitutional Court will strike down the new personal bankruptcy law as a violation of creditors' rights, especially because it demands (theoretically) less of debtors than most European personal insolvency regimes. Time will tell ...

Russian bank image courtesy of Marina Zezelina / Shutterstock.com

Prime, Subprime, Deep Subprime, Suprime-Like . . . and hold it, my fav "Aspriring Prime"

posted by Katie Porter

What's in a name? A lot of heartache, potentially, as Johnny Cash explained in A Boy Named Sue.

The consumer finance industry is awash in labels for lending. Despite the lack of data, and clear analysis, that left certain people (apparently nearly all of Wall Street) surprised about the housing crisis, the lending industry is still defining success for itself. Shutterstock_268949369Kevin Wack at American Banker examines the "slippery" definition of subprime, giving examples of Equifax recalibrating the "subprime" and "deep subprime" labels to different places on the credit score range. The result: instantly, the percentage of subprime auto loan originations falls from 36% to 28%.

Labels themselves do not predict default risk (we hope the actual underwriting, including credit score, does that work). But labels do matter. Consistent use of terms such as "prime" and "subprime" help government and researchers study trends and make consistent, reliable determinations about markets. They make sure that various regulators are looking at similar loans, and they help the public evaluate their credit standing.

Maybe this is a project for the Financial Stability Oversight Council, which devoted one-page to consumer protection in its 100-page 2015 report. In what I take as a sign that FSOC should tackle this issue, there is even a heading on "Data Gaps."

Donald Trump Speaks the Truth

posted by Adam Levitin

I never thought I'd write this, but Donald Trump speaks the truth, at least as far as bankruptcy is concerned. 

There's plenty to criticize regarding Donald Trump, but I really wish the media would back off the bankruptcy angle of his career, or at least be smarter about it.  

Continue reading "Donald Trump Speaks the Truth" »

The Empiricist Strikes Back

posted by Katie Porter

The Washington Post had a story yesterday about the Department of Education's look at how student loan servicers deal with the Servicemembers Civil Relief Act and its protection to members of the Armed Forces. Senator Elizabeth Warren is drawing on her years of empirical research to question the methodology and the resulting conclusions of the study. (In a warning strike for the Empiricist, Senator Warren and some colleagues asked just why it was taking a large government agency well over a year to conduct a study--a credible claim from someone who conducted several large empirical studies, largely with the help of a few research assistants.)Shutterstock_184208507

As a professor, Warren conducted several large empirical studies, each gathering hundreds of variables on a sample of  more than 1,000 families in bankruptcy. She is miffed that the Department of Education only conducted a detailed review of 55 cases (out of a universe of 20,000). A prior DOJ investigation concluded that 60,000 servicemembers paid too much interest on their student loans, resulting in a $97 million settlement with Sallie Mae and its former subsidiary Navient. Yet, the Department of Education apparently uses a very different legal standard for determining compliance with Servicemembers Civil Relief Act than the Department of Justice. Not surprisingly, with a tiny sample and a narrow analysis, the Department of Education concluded all was well and good.

But as Senator Warren well understands as an empirical researcher, what you find depends on where your look--and if you have your eyes open! Her staff report details other concerns in a report , which reads more like something you'd find on SSRN or in a social science journal than the typical sound-bites of Washington press releases.  Senator Warren had to defend her research methodology and findings, and she always rose to the occasion. Having an Empiricist in Congress means you can expect someone reading your report, not accepting the conclusions. Senator Warren is bringing her research acumen to the government's work--where like in the scholarly world, there are not-so-good studies and good studies. Our servicemembers deserve a hard look at whether their legal rights are being protected, while they are protecting our rights.

 

 

Picking a Judge to Preside over a Municipal Bankruptcy

posted by Melissa Jacoby

GavelLast week I introduced to Credit Slips readers my draft article on federal court oversight of Detroit's bankruptcy. An easily overlooked element of what I called The Detroit Blueprint is non-random judge selection, required by Congress for municipal bankruptcy cases.

Departing from the random assignment norm in the federal judiciary, section 921(b) of the Bankruptcy Code requires the chief judge of the applicable circuit court of appeals to select the judge who will preside over a municipal bankruptcy. In 1997, the National Bankruptcy Review Commission unanimously recommended eliminating section 921(b).  That Commission's Final Report observed that the fear prompting the provision - random draw of a judge unable to handle the case - was no longer salient. Congress did not take up this recommendation. What difference did section 921(b) make in Detroit?

Continue reading "Picking a Judge to Preside over a Municipal Bankruptcy" »

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