19 posts from March 2017

Ukraine's Loss: A Skid, Not a Crash

posted by Anna Gelpern

Mark posted a lucid analysis of Ukraine's loss to Russia in London yesterday (full 107-pp opinion here). The case will surely be appealed, and will drag on for a while, alongside the many other legal, political and military disputes between Russia and Ukraine. It will settle, if ever, as part of a grand-ish bargain between the two countries. For now, neither has any reason to fold, so I am not holding my breath for quick resolution.

While we wait, I wanted to think about what this ruling might mean for sovereign debt workouts, and for Ukraine's recently-restructured bonds.

Continue reading "Ukraine's Loss: A Skid, Not a Crash" »

Consumer Rights to Know Regarding Adverse Action

posted by Adam Levitin

Four core federal consumer financial laws—the Truth in Lending Act (and Reg Z), the Electronic Fund Transfer Act (and Reg E), the Real Estate Settlement Procedures Act (and Reg X) and the Equal Credit Opportunity Act (and Reg B)—all have a mechanism whereby a consumer has a right to know why a financial institution denied a claim of an error or a credit application.  I've often puzzled over how much work these provisions really do--TILA and EFTA and RESPA are attempts at informal dispute resolution, while ECOA is a way of policing discriminatory lending (if the creditor cannot come up with a plausible reason for the denial, there's a problem).  But at the end of the day, there's no guaranty of any relief for consumers from these provisions.  

Today, however, I started to understand these provisions better because of the mess that's going on with student loan forgiveness.  The federal government has a major loan forgiveness program for those who work 10 years in public service or at non-profits. Apparently some applications for loan forgiveness eligibility have been denied without any explanation. That really puts borrowers at a loss--they can't tell if the problem is simply a missing form or incorrect paperwork or that they truly aren't eligible or that's the government's loan servicing agent has made a mistake.  That's a pretty awful situation because without more information, a consumer cannot figure out if there's a simple, low-cost way to resolve the issue, if the only solution is through litigation, or if the consumer is truly in the wrong.  

On a related note, the potential revocability of the loan forgiveness eligibility letters strikes me as teeing up the mother of all promissory estoppel cases. 

Ukraine's Defenses to Russian Bond Claims Rejected

posted by Mark Weidemaier

The judge hearing Russia's lawsuit to enforce its $3 billion loan to Ukraine issued an opinion today, rejecting Ukraine's defenses to the lawsuit. Bloomberg and the Financial Times both have coverage of the decision. We've discussed the loan quite a bit here on Credit Slips, and also Ukraine's defenses to enforcement (e.g., here, and here, and here). The lawsuit is fascinating, in part because Ukraine's defenses ask the judge to use traditional contract law doctrines to police what is clearly an international dispute between sovereigns who have been engaged in armed conflict. As I have explained in more detail elsewhere, Ukraine's contract-law arguments were actually quite plausible, though by no means a sure thing. Among others, the defenses included duress (always a bit of a stretch, in my view), lack of capacity, and what would typically be called prevention and impracticability under U.S. law (characterized as implied terms of the contract by Ukraine).

Continue reading "Ukraine's Defenses to Russian Bond Claims Rejected" »

Supreme Court Strikes Down State No-Surcharge Law

posted by Adam Levitin

The Supreme Court ruled today in Expressions Hair Design v. Schneiderman.  The Court unanimously ruled for the merchant plaintiff that was challenging New York State's no-surcharge law on the basis that a law criminalizing credit surcharges (but not cash discounts) was impermissibly vague.  The Court declined to rule on the plaintiff's First Amendment challenge because the Second Circuit Court of Appeals had held that New York law regulated conduct, not speech, so the Court of Appeals had never considered whether there was a First Amendment violation if the pricing was a form of speech.  The Supreme Court determined that the law regulates speech and remanded the First Amendment issue to the Court of Appeals.  

Five Justices were on the majority opinion with a pair of concurrences driven by procedural concerns (Alito + Sotomayor) or a fear that the case will be used as a precedent for attacking economic regulation via the First Amendment (Breyer).  

Technically the opinion is narrow, as it addressed only an as-applied challenge based on a pricing regime in which two prices are simultaneously listed, with neither labeled a surcharge or discount, but I suspect that the effect of the opinion will be much broader.  If, on remand, the plaintiff's First Amendment argument is accepted (and I suspect it will be), the opinion will be pretty important in terms of development of payment systems.  Prior to today there were two obstacles to effective price discipline on consumer payment choice:  state no-surcharge laws and credit card networks' merchant rules.  The state no-surcharge laws are gone now, leaving only the card networks' merchant rules.  MasterCard and Visa had previously agreed to substantially rollback their rules on surcharging in an overturned class action settlement.  It's going to be hard for them to argue against making that concession now, unless they are willing to admit that it wasn't previously made in good faith because they knew that surcharging wouldn't be used on any scale in the presence of state no-surcharge laws.  

Congratulations to Deepak Gupta, who quarterbacked this litigation!  

Jevic Commentary

posted by Melissa Jacoby

Just a cross-posting note: Jonathan Lipson and I comment on the U.S. Supreme Court's Jevic decision at the Harvard Law School Corporate Bankruptcy Roundtable.

$45 Million for Stay Violations

posted by Alan White

How much in punitive damages is enough to punish unlawful conduct and deter its repetition? $45 million was one bankruptcy court's opinion, in the case of a wrongful home foreclosure and eviction in knowing violation of the automatic stay.

The court described the plaintiff-debtors’ treatment by defendant Bank of America as Kafkaesque, and found their deeply emotional testimony (one of them attempted suicide during the ordeal) completely credible, awarding more than $1 million in actual damages for the loss of housing and emotional distress. The court also noted that Bank of America had repeatedly settled cases with federal and state regulators for hundreds of millions, and even billions, of dollars, in recognition of serious and repeated compliance failures, including some related directly to servicing home mortgages.  

The fascinating 107-page opinion grapples at length with the dilemma of awarding enough punitive damages to effectively deter the defendant while avoiding an unseemly windfall to the plaintiffs. The solution: the decision awards $40 of the $45 million punitive award to consumer advocacy organizations and the five public California law schools. Citing an Ohio case, state statutes and several law review articles, the court proposes this split award technique as an appropriate step forward in the federal common law of §362(k) punitive damages. An interesting appeal is sure to follow.

Inter-Creditor Duties in Sovereign Debt

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier

As we discussed in a couple of earlier posts, we have been thinking recently about the use of exit consents to restructure sovereign debt, especially in the context of Venezuela and PDVSA, the state oil company. Though focused on corporate workouts, Bill Bratton and Adam Levitin's new paper, The New Bond Workouts, raises questions that also matter in the sovereign context. Bratton and Levitin give a detailed account of the Second Circuit's Marblegate opinion, a 2-1 decision that seems to authorize very aggressive use of the exit consent technique. (Creditors were essentially given a choice between accepting the restructuring plan or being left with claims against an entity that was nothing more than an empty shell.) Bratton and Levitin generally approve of the Second Circuit's decision, but also suggest that courts should revive the doctrine of intercreditor good faith to police against coercive workouts of bond debt.

Continue reading "Inter-Creditor Duties in Sovereign Debt" »

Exchange Offers and Hardball

posted by Stephen Lubben

Over at Dealb%k.  (BTW, I don't pick the pictures).

Jevic

posted by Stephen Lubben

Third Circuit is reversed. Opinion is here.

Bankruptcy Fees in the Trump Budget

posted by Bob Lawless

Thanks a tweet to the sharp-eyed Drew Dawson at the University of Miami, I saw this article in Politico that among the surprises in Trump's budget is an increase in bankruptcy filing fees (see item 5). Well, this seemed important to those of us in the bankruptcy world so I thought I would check it out. It proved surprisingly more difficult in this day and age than one would think to get a PDF copy of the Trump budget outline, but I finally found one. I am not sure the characterization of an increase in "bankruptcy filing fees" is entirely accurate.

Trump Budget Screen Grab

Above is a screenshot from p. 30 of the document (clicking on it should bring up a full-sized image in a popup window). Keep in mind this is an outline of the underlying budget document. What appears to be proposed in an increase in the quarterly U.S. Trustee fee for chapter 11 filers and not a general increase in all bankruptcy filing fees or even the chapter 11 filing fee. Of course, the paragraph does characterize it as an increase in bankruptcy filing fees so maybe there is such a broad increase in the budget itself.

Does anybody know for certain?

Scotexit and Allocating the UK's Debt

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier.

Scotland voted 62% in favor of remaining in the EU in last June's Brexit vote. Now, with nationalism on the rise in Britain, Scotland has begun to rethink the decision to stay in the UK. Fears of a so-called "hard exit," in which Britain foregoes easy access to the common market, have Scottish leaders like Nicola Sturgeon demanding another referendum on Scottish independence. Which has us wondering: What happens to the (rather large) pile of UK debt if one of its members decides to exit?

It seems like voters in Scotland ought to care about the answer, if given another chance to vote on UK membership. More broadly, one would think voters would want some idea how the UK's assets and liabilities would be divvied up. Things like the public debt, the crown jewels, pension obligations to veterans, the nuclear arsenal, Balmoral castle, and so on. The UK has a lot of stuff. How should it be divided?

Continue reading "Scotexit and Allocating the UK's Debt" »

New ABI Commission on Consumer Bankruptcy

posted by Jason Kilborn

The American Bankruptcy Institute announced this morning that it has convened a commission to study and propose reforms of the US consumer bankruptcy system. In light of the success of ABI's Chapter 11 commission, we can expect big things from this commission on Chapters 7 and 13. Some major names in consumer bankruptcy are among the 15 members of the commission, and Credit Slips is well represented, with Bob Lawless as Reporter and Katie Porter on the membership roster, along with one more super-prominent academic, professor-cum-judge-cum-professor Bruce Markell, now of Northwestern. I wish the commission had consulted Bob about its name. He would have pointed to his empirical work on small business debtors to suggest that this be called a personal bankruptcy commission, rather than consumer, but perhaps the inclusion of a good deal of small business debtors and business-related debts is taken as a given. Anyway, best wishes to the commission--we'll eagerly await its first reports and calls for comments!

Bankruptcy and Non-Bankruptcy Options for PDVSA

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and  Mitu Gulati.

We have talked before about the possibility that Venezuelan state-owned oil company PDVSA will need to restructure. With oil prices still low, the early-2017 gloom about the company's economic prospects hasn't lifted. True, the company and its sovereign owner have managed to stave off default for a while now; perhaps this can continue. But restructuring is a real possibility. In our international debt finance class this year, we have been asking students to think about how a restructuring might work.  

For PDVSA the options basically come down to bankruptcy and the use of exit consents. We talked about the latter option--basically a voluntary exchange offer in which participating bondholders also vote to eliminate contractual protections in the old bonds, making them less attractive to hold--in an earlier post. For many corporations, bankruptcy would be the preferred option, if only to benefit from the automatic stay of creditor collection efforts. But PDVSA's bankruptcy options are limited. It is a Venezuelan company, and Venezuelan bankruptcy law is not ideal for debtors seeking to restructure. Plus, in order to be worth anything, a Venezuelan bankruptcy proceeding would need to be recognized in the United States, likely under Chapter 15 of the Bankruptcy Code. It isn't clear that a Venezuelan proceeding would merit such recognition. Nor is it clear that PDVSA meets eligibility requirements under US bankruptcy law. Still, bankruptcy offers the only mechanism for imposing restructuring terms on dissenting creditors, and that is what PDVSA most needs (with regard to its bond debt, anyway).

Euro-Area Redenomination Risk and the Gold Clause Cases

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier.

Odds seem to be against a Marine Le Pen victory in the French presidential election, though a victory by Emmanuel Macron is hardly assured. And there continues to be chatter about redenomination risk in Europe, to the point that, according to a recent Deutsche Bank estimate, even short-term German bonds were factoring in a 5% risk of redenomination. Last week, in our class on international debt finance, we discussed the so-called Gold Clause cases from the 1930s. Though ancient history in some respects, the cases offer important lessons for some of the debates regarding redenomination risk. First, though, some background.

Continue reading "Euro-Area Redenomination Risk and the Gold Clause Cases" »

New Article from the Consumer Bankruptcy Project: Attorneys’ Fees and Chapter Choice

posted by Pamela Foohey

Many of us on Credit Slips have been part of the Consumer Bankruptcy Project (CBP), a long-term research project studying people who file chapter 7 and 13 bankruptcy. Several years ago, some of us blogged about the writings from the last CBP iteration in 2007.  In 2013, the CBP was relaunched as an ongoing data collection effort. The CBP’s current co-investigators – myself, Bob Lawless, Katie Porter, and Debb Thorne – recently posted “No Money Down” Bankruptcy, the first article analyzing data from the Current CBP (data from 2013-2015), combined with 2007 CPB data. The article focuses on the timing of when debtors are required to pay their bankruptcy attorneys to report on the increasingly prevalent phenomenon of debtors paying nothing in attorneys’ fees before filing chapter 13.

This nationwide phenomenon raises questions about how people are accessing bankruptcy and the extent of the benefits they receive from the system. The phenomenon also explains some prior findings about the intersection of race and bankruptcy filings. And it adds to our knowledge about regional disparities in the percentage of people who file chapter 7 versus chapter 13 bankruptcies.

Continue reading "New Article from the Consumer Bankruptcy Project: Attorneys’ Fees and Chapter Choice" »

A Century of... Not Much for Puerto Rico

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier   

March 2 was the hundredth anniversary of the Jones Act, which gave United States citizenship to many inhabitants of Puerto Rico. An act of benevolence? Hardly. The U.S. needed soldiers. The infamous insular cases ensured that, while tens of thousands from Puerto Rico could fight in the U.S. military, they would remain "foreign in a domestic sense." 

Today, Puerto Rico and its municipalities are mired in debt--over $100 billion counting pension obligations. A bizarre exception to the bankruptcy laws prevented it from restructuring much of this debt, although no one seems to know exactly why the exception exists (aside, perhaps, from the fact that Puerto Rico has no representation in Congress). 

Continue reading "A Century of... Not Much for Puerto Rico" »

Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask

posted by Adam Levitin

There's a great new paper available on out-of-court restructuring and the Trust Indenture Act.   The New Bond Workouts is up on SSRN.  From the abstract it sounds pretty darn amazing—a new, empirically based analysis of bond restructurings that rediscovers a long-forgotten intercreditor duty of good faith: 

Continue reading "Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask" »

Arbitrating the Discharge

posted by Bob Lawless

The Second Circuit currently has a pending case (Anderson v. Credit One Bank, No. 16-2496) that raises the question of whether an alleged violation of the bankruptcy discharge injunction is subject to a predispute arbitration agreement. Professors Ralph Brubaker and Bruce Markell have joined me on an amicus brief explaining why the answer has to be "no." You can download the brief from SSRN. (UPDATE 3/3: The link was broken but should be fixed now.)

Bankruptcy specialists know the "discharge" means the forgiveness of prebankruptcy debts. The "discharge injunction" comes from section 524 of the Bankruptcy Code, which states that the entry of a discharge shall operate as an injunction against attempts to collect prebankruptcy debts. Indeed, one of the things the brief tries to make clear is that the "discharge" and "discharge injunction" are different concepts. Historically, filing bankruptcy gave rise to a discharge, but there was no enforcement of that discharge in the federal court that issued it. Rather, the debtor could plead the discharge as an affirmative defense in a state-court collection action.

Continue reading "Arbitrating the Discharge" »

Brooklyn Law School Conference on Public Debt

posted by Melissa Jacoby

AboutthesymposiumOn March 1, 2016, Credit Slips commenced a virtual symposium on Puerto Rico's financial crisis. Where do things stand today, a year later? And what governance lessons can be learned from municipal bankruptcy cases like Detroit for the public debt problems of tomorrow? Thanks to a fortuitously timed conference at Brooklyn Law School, a subset of Slipsters will be considering these very questions on Friday March 3, 2017. Check out the agenda and join us in Brooklyn - register here today.

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