9 posts from November 2017

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).

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

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?

Continue reading "Venezuela's Debt: Is the Game Afoot?" »

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.

Continue reading "Confusion in Venezuela; Alter Egos in Delaware " »

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. 

Continue reading "Lularoe, Other Multi-Level Marketing Companies, and Bankruptcy Filings" »

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" »

Venezuela is Defaulting, Maybe . . . Maybe Not

posted by Mitu Gulati

The news out of Venezuela with regards to its debt situation has been keeping investors (who love the high returns, but dislike the uncertainty) in a tizzy, to put it mildly. But today's news was perhaps the most bizarre yet.  Mr. Maduro, on the one hand, announced that PDVSA (the big state-owned oil company that produces 95% of Venezuela's foreign currency earnings) was making its latest payment to creditors (due today) and, on the other hand, announced that a restructuring was being planned immediately.

What? Why? How?

If the plan is to restructure because there is no money, then why were the payments today (and a few days ago) made? That makes no sense to my little brain.

And how in the world is there going to be a restructuring when there are US sanctions prohibiting just that? Through some Russian proxy? Or Chinese? Via a loophole in the sanctions regime?

Katia Porzecanski, sovereign debt guru, has a super article up on this puzzle already at Bloomberg (with co authors Patricia Laya, Ben Bartenstein, and Christine Jenkins).

(More on) Sticky Shipping Contracts

posted by Mitu Gulati

A few days ago, I put up a post about a very interesting recent article by Richard Kilpatrick on highly sticky (and inefficiently so) shipping contracts. The focus of Richard's article was on the failure of these standard-form ship contracts to pre-specify the allocation of financial responsibility among the various parties (ship owner, chartering party, etc.) when refugees need to be picked up and the ship's pre-planned journey gets diverted. Refugees needing to be rescued at sea has, as we know, become a huge international issue over the last couple of years.  In that post, I wondered aloud about what the explanation for the stickiness in the ship contracts might be. Theory, after all, would suggest that in a market with highly sophisticated repeat players, inefficient contract clauses would get reformed quickly -- yet they do not. Richard, whom I had never corresponded with before this, was kind enough to send me his thoughts on the question. With his permission, since his thoughts on this are fascinating -- especially the bit at the bottom about how these same parties are simultaneously highly innovative (with ship technology) and highly conservative (with contracts) -- I'm reproducing them below.

From Richard:

I’ve thought about these same questions over the past months and certainly agree that there is a more work to be done in understanding and exposing why there is continued reliance on these antiquated contract forms. In the charterparty context, this is especially surprising given that new iterations of similar forms have been promulgated by the same organization (BIMCO) that drafted the ‘46 form. One answer that invariably comes up is that the shipping industry is deeply conservative and resistant to change. At a recent Singapore Shipping Law Forum, a bunch of us legal and industry people discussed this phenomenon in the context of international conventions on carriage of goods. The Hague Rules governing bills of lading were drafted in the 1920’s (and revised very minimally in the 1960’s via the Visby amendments). These rules desperately need updating because containerization and multimodalism has completely changed the shipping landscape. The subsequent "Hamburg Rules" largely failed. And while the recently drafted "Rotterdam Rules" attempt to rectify some of these problems, they are already viewed by some observers as unlikely to catch-on. Only 4 countries have ratified them so far (including Cameroon in Oct 2017): http://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/rotterdam_status.html .

At least in part, this appears to be because the industry folks, including their fancy shipping lawyers, don't like change. Note also that the shipping industry is constantly evolving in other ways, particularly in its reliance on technology. Larger and more sophisticated vessels are constantly entering the market, and ports (as well as the vessels themselves) are increasingly being operated by computers rather than traditional labor. So I think it is fair to say there is a very traditional view towards regulation and liability allocation, but a relatively innovative approach towards operations. This creates an increasingly widening gap between the legal framework and the realities of business practice.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad