15 posts from February 2018

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

posted by Pamela Foohey


NumberNRYesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Continue reading "Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy" »

Churches Are Still Filing Bankruptcy

posted by Pamela Foohey

Not only are religious organizations still filing under chapter 11. As in prior years, they continue to file under chapter 11 in line with fluctuations in consumer bankruptcy filings. Find a couple graphs below to show this. But first, some background.

In my prior work, I analyzed all the chapter 11 cases filed by religious organizations from the beginning of 2006 through the end of 2013. (I define any organization with operations primarily motivated by faith-based principles as religious.) I found that these chapter 11 cases were filed predominately by small, non-denominational Christian churches, which mainly were black churches (80% of more of their members are black). And, also, that the timing of the filings tracked consumer bankruptcy cases (chapters 7, 11, and 13), not business bankruptcy filings, but lagged by one year. That is, if consumer bankruptcy filings decreased in a given year, religious organizations' chapter 11 filings decreased in the next year. I linked this result to how religious organizations' leaders came to think about using bankruptcy to deal with their organizations' financial problems.

NumbersSince my original data collection, four years has passed. I thus recently identified all the religious organizations that filed under chapter 11 between the beginning of 2014 through the end of 2017. During these four years, religious organizations continued to file, but in smaller numbers per year, as shown in this graph (note: I count jointly-administered cases as one case).

Continue reading "Churches Are Still Filing Bankruptcy" »

Strip, Swap, Restructure

posted by Mark Weidemaier

Mitu and I have been posting jointly of late about restructuring options for PDVSA and Venezuela. Alas, I’ll have to write this one myself, because it’s time to talk about an idea that Mitu and Lee Buchheit have proffered for restructuring much of PDVSA’s debt. Their proposal has important similarities to one by Adam Lerrick (also described briefly here and in more detail in the Financial Times), so I’ll cover both.

Both proposals are laudably clear-eyed about some fundamental aspects of the Venezuelan debt crisis. First, if it ever made sense to view PDVSA and the Republic as separate credits, that time is long past. Second, for a restructuring plan to be feasible, it must simplify an enormously complicated debt stock and encompass more than bond creditors. Thus, while neither creates a mechanism for encompassing all of PDVSA’s liabilities, both the Lerrick and Buchheit/Gulati proposals envision a restructuring of both bond debt and the pesky promissory notes that PDVSA has issued to trade creditors. The latter instruments are especially problematic from a restructuring perspective, because they lack contract-based mechanisms for modifying their terms. Finally, both proposals recognize that something must be done to protect oil-related assets, including future receivables, from holdouts.

These shared assumptions result in similar proposals. The difference is in the details, which turn out to be important. Let’s call the Lerrick proposal Strip, Swap, Restructure.

Continue reading "Strip, Swap, Restructure" »

Wacky Warehouse Lien Scam

posted by Adam Levitin

The US Trustee's office just prevailed in a sanctions case against a law firm with a most creative fee scam.  To oversimplify (and leave out certain other issues of bad behavior), the law firm steered debtors who owned cars in which they had zero equity into an arrangement in which the debtor's car would be towed for an (unpaid) fee by an affiliated firm and then stored in Indiana. The existing auto lender would never be notified of any of this. The affiliate would then assert a warehouseman's lien for the unpaid fee and foreclose on the car, and use the sale proceeds to pay back the fee and pay the debtor's bankruptcy filing fee to the law firm, with the auto lender getting nothing. 

Continue reading "Wacky Warehouse Lien Scam" »

Financial Education Isn't Consumer Protection

posted by Adam Levitin

The CFPB is out with its Strategic Plan for FY 2018-2022, also known (without any apparent irony) as The Five Year Plan.  Lots to chew on in this doozy, starting with this:

If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.

I've written about envelope pushing and Mick-Mulvaney-Think previously, but there's two new things here.  First there's the claim that going beyond the Bureau's statutory responsibilities violates the will of Congress.  (Note the unusual addition of "the White House" to the formulation.)  Narrowly that's uncontroversial, but the way Mulvaney-Think approaches the Bureau's statutory responsibilities, if there isn't a statutory clearly and directly prohibiting something, then there's no prohibition. Standards-based regulation is gone, even if that is exactly what Congress (and the White House when the bill was signed into law) demanded.

Second, there is a curious solicitousness for the rights of states and Indian tribes.  The CFPB has never previously been accused of trampling the rights of states, but the inclusion of states is all the more confusing given the Bureau's newfound commitment to protecting the sovereignty of Indian tribes. The only relevance of Indian tribes to the CFPB is that a few of them partner with "fintechs" in rent-a-tribe schemes to avoid state regulation, particularly state usury laws. It would seem that upholding state sovereignty and rights would require cracking down on rent-a-tribe schemes; the idea that a tribe has immunity for commercial activities extending outside of tribal lands is clearly wrong--were it so all of federal law could be subverted. It looks like someone forgot to remove the "states rights" talking point from the usual GOP talking points deck because someone didn't realize that it conflicts with the new tribal rights talking point.  Oops.  

But let's turn the the actual plan itself, not just the opening rhetoric. I'm only going to focus here on item number 1:  more financial education. This might qualify as Worst. Consumer. Protection. Idea. Ever. 

Continue reading "Financial Education Isn't Consumer Protection" »

Letting the Money Changers Back in the Temple

posted by Alan White

Screen Shot 2018-02-12 at 2.36.55 PMGolden Valley Lending, Inc. is a payday lender that charges 900% interest on consumer loans sold over the internet. Golden Valley relies on the dubious legal dodge of setting up shop on an Indian reservation and electing tribal law in its contracts to evade state usury laws. In April 2017 the Consumer Financial Protection Bureau filed an enforcement action asserting that Golden Valley and three other lenders were engaged in unfair debt collection practices because they violated state usury laws, and also failed to disclose the effective interest rates, violating the federal Truth in Lending law (enacted in 1969).  Screen Shot 2018-02-12 at 2.35.39 PM

 Mick Mulvaney, President Trump’s interim appointee to direct the CFPB, has now undone years of enforcement staff work by ordering that the enforcement action be dropped.  The advocacy group Allied Progress offers a summary of Mulvaney’s special interest in protecting payday lenders, in South Carolina and in Congress, and the campaign contributions with which the payday lenders have rewarded him.

 

 

Catch Veinte Dos

posted by Mitu Gulati

A few days ago, Mark and I put up a post on the possibilities of using Chapter 15 bankruptcy for Venezuela's state-owned company, PDVSA.  In response, we received a number of terrific comments, both via email and in the comments section.

One of the particularly interesting points that was made to us (both in email and in one of the comments), that we had not raised was the following: 

PDVSA is not just a Venezuelan company; it is the Venezuelan company -- the company responsible for generating 95% of the foreign currency earnings of the entire country.  Placing the fate of PDVSA into the hands of a bankruptcy judge poses an existential risk to the economy and to the government as the sole owner of the company unless, of course, the government can control the outcome of the insolvency proceeding.  But insolvency proceedings in which the equity owner of the bankrupt enterprise can control the outcome are not proceedings likely to be recognized or enforced by foreign courts.

Catch Veinte Dos?

The foregoing also brings up a slightly different question that Bob Rasmussen asked when he was visiting us last week, which was whether the bankruptcy proceeding could be conducted in a manner such that the 100% equity holder (who would normally have to turn over control to the debt holders in an insolvency) could retain all or almost all of the equity.  After all, it does seem clear that Venezuela is not going to accept giving up full control of PDVSA.  Bob did have some very interesting thoughts as to how this might be done in a purely domestic context.  The question that remained though was whether something similar could be engineered for the foreign state-owned company context that wasn't going to give up any control of the process.  But more on this later

 

Trump’s “Draining the Swamp” Scorecard: One Year In

posted by Mitu Gulati

Donald Trump came into office promising, among other things, to “drain the swamp” and get rid of all that corruption.  One year in, how are things looking in terms of swamp draining? 

The following is based on work with my super co author, Stephen Choi, of NYU Law School.

To answer (at least partially) the question posed at the start, we have analyzed data on Securities and Exchange Commission (SEC) enforcement actions under the Foreign Corrupt Practices Act – the primary U.S. statute that gets at, among other things, bribes to influence foreign officials with payments or rewards. 

We report data that compares SEC enforcement actions against public companies and subsidiaries of public companies under the FCPA from both the final year of the Obama administration and the first year of the Trump administration. We focus on public companies and subsidiaries of public companies because these are the larger economic actors that affect the economy. The Department of Justice also has authority to bring actions, but there were 0 actions brought by the DOJ against public companies and subsidiaries of public companies during the period we examined (although the DOJ has brought several actions against non-U.S. reporting issuers including a number of prominent foreign companies).

Image1

Figure I, we think, speaks for itself. On the graph, actions brought during the Trump months (from January 20, 2017 to January 31, 2018—roughly Trump’s first year) are in red, those during the Obama months (January 1, 2016 to January 19, 2017) are in blue. As compared to SEC enforcement activity under the Obama administration, the SEC under the Trump administration, appears to have taken a pause from FCPA swamp cleaning activities. For those who saw our report on partial year information (up to the end of September 2017) here, some months ago – the story has only become clearer with the passage of more time).  

The data is from the Securities Enforcement Empirical Database (SEED),a collaboration between NYU and Cornerstone Research.  It tracks SEC FCPA actions from January 1, 2016 to January 31, 2018. SEED defines a public company as a company with stock that trades on the NYSE, NYSE MKT LLC, NASDAQ, or NYSE Arca stock exchanges at the start date of the SEC enforcement action (note that this includes both U.S. incorporated and foreign incorporated companies). 

There, of course, are caveats as to what else might be going on.

Continue reading "Trump’s “Draining the Swamp” Scorecard: One Year In" »

Student loans - the debt collector contracts

posted by Alan White

Twelve senators have just written EWKHto Education Secretary Betsy DeVos questioning why the Education Department continues to award lucrative contracts to debt collection firms, and criticizing the seriously misaligned incentives embedded in those contracts.

While most federal student loan borrowers deal with loan servicing companies like PHEAA, Navient and Nelnet, defaulting borrowers in an unlucky but sizeable minority (roughly 6.5 million) have their loans assigned to debt collectors like Collecto, Inc., Pioneer Credit Recovery, and Immediate Credit Recovery Inc. Borrowers assigned to collection firms immediately face collection fees of 25% added on to their outstanding debt. The collection firms harvest hundreds of millions of dollars in fees, mostly from federal wage garnishments, tax refund intercepts, and new consolidation loans borrowers take out to pay off old defaulted loans. Wage garnishments and tax refund intercepts are simply involuntary forms of income-based repayment, programs that could be administered by servicers without adding massive collection fees to student debt. Similarly, guiding defaulted borrowers to consolidation loans, and putting them into income-driven repayment plans, are services that servicing contractors can and do provide, at much lower cost. In short, the debt collector contracts are bad deals for student loan borrowers and bad deals for taxpayers.

 According to a Washington Post story, one of the collection firms to be awarded a contract this year had financial ties to Secretary DeVos, although she has since divested those ties. In other news, the current administration apparently reinstated two collection firms fired under the prior administration for misinforming borrowers about their rights. More in-depth analysis of the collection agency contract issue by Center for American Progress here.

PDVSA's Debt Restructuring: The Chapter 15 Option

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

This past week, Bob Rasmussen of USC Law gave a talk at Duke on “Puerto Rico and the Netherworld of Sovereign Debt Restructuring.” Luckily for us, he also took a detour to UNC to talk to our International Debt students about whether PDVSA might use Chapter 15 of the Bankruptcy Code to restructure its debts. Our foil for that discussion was a recent paper by Rich Cooper (Cleary Gottlieb) and Mark Walker (Millstein & Co.) proposing Chapter 15 as a possible solution to PDVSA’s woes. This is one of a number of extant restructuring proposals for Venezuela and PDVSA; Lee Buchheit (working with Mitu) has published several others (here, here, and here). The Cooper and Walker proposal is the only one to explore the Chapter 15 possibility in detail, and it thoughtfully makes the case for that restructuring option. In very condensed form, the proposal is for Venezuela to pass a new bankruptcy law governing PDVSA and other public sector entities, for PDVSA to restructure its debts using that process, and then for PDVSA to ask courts in the U.S. to recognize that bankruptcy under Chapter 15.

Continue reading "PDVSA's Debt Restructuring: The Chapter 15 Option" »

Bankruptcy's Lorelei: The Dangerous Allure of Financial Institution Bankruptcy

posted by Adam Levitin

I have a new (short!) paper out, Bankruptcy's Lorelei:  The Dangerous Allure of Financial Institution BankruptcyThe paper, which builds off of some Congressional testimony from 2015, makes the case that proposals for resolving large, systemically important financial institutions in bankruptcy are wrongheaded and ultimately dangerous. At best they will undermine the legitimacy of the bankruptcy process, and at worst they will result in crash-and-burn bankruptcies that exacerbate financial crises, rather than containing them.  The abstract is below.

The idea of a bankruptcy procedure for large, systemically important financial institutions exercises an irresistible draw for some policymakers and academics. Financial institution bankruptcy promises to be a transparent, law- based process in which resolution of failed financial institutions is navigated in the courts. Financial institutions bankruptcy presents itself as the antithesis of an arbitrary and discretionary bailout regime. It promises to eliminate the moral hazard of too-big-to-fail by ensuring that creditors will incur losses, rather than being bailed out. Financial institutions bankruptcy holds out the possibility of market discipline instead of an extensive bureaucratic regulatory system.

This Essay argues that financial institution bankruptcy is a dangerous siren song that lures with false promises. Instead of instilling market discipline and avoiding the favoritism of bailouts, financial institution bankruptcy is likely to simply result in bailouts in bankruptcy garb. It would encourage bank deregulation without the elimination of moral hazard that produces financial crises. A successful bankruptcy is not possible for a large financial institution absent massive financing for operations while in bankruptcy, and that financing can only reliably be obtained on short notice and in distressed credit markets from one source: the United States government. Government financing of a bankruptcy will inevitably come with strings attached, including favorable treatment for certain creditor groups, resulting in bankruptcies that resemble those of Chrysler and General Motors, which are much decried by proponents of financial institution bankruptcy as having been disguised bailouts.

The central flaw with the idea of financial institutions bankruptcy is that it fails to address the political nature of systemic risk. What makes a financial crisis systemically important is whether its social costs are politically acceptable. When they are not, bailouts will occur in some form; crisis containment inevitably trumps rule of law. Resolution of systemic risk is a political question, and its weight will warp the judicial process. Financial institutions bankruptcy will merely produce bailouts in the guise of bankruptcy while undermining judicial legitimacy and the rule of law.

English v. Trump Amicus Brief

posted by Adam Levitin

Slipsters/Slips Guest Bloggers Kathleen Engel, Dalié Jiménez, Patricia McCoy and I submitted an amicus brief (with numerous other co-signors) to the DC Circuit in support of appellant Leandra English in English v. Trump, which, despite its caption is not about assault and battery, but about who is the rightful acting Director of the CFPB.  We believe that the text, legislative history, and order of enactment of the relevant statutes makes clear that the Consumer Financial Protection Act, not the Federal Vacancies Act control.  We further argue that there are particular problems with the OMB Director serving as the acting Director of the CFPB given that OMB has certain oversight roles vis-à-vis CFPB, but is also in other case specifically precluded from exercising control over CFPB.  

The Bootstrap Trap

posted by Adam Levitin

I just had the pleasure of reading Duke Law Professor Sara Sternberg Greene's paper The Bootstrap Trap.  I highly recommend it for anyone who is interested in the intersection of consumer credit and poverty law.  The paper is chok full of good insights about the problems that arise when low-income households strive for the goal of self-sufficiency, which results in the replacement of a public welfare safety net with what Professor Sternberg Green describes as a private one of credit reporting and scoring systems.  The paper shows off Professor Sternberg Greene's training in sociology with some amazing interviews, particularly about the perceived importance of credit scores in low-income consumers' lives.  

Other respondents referred to their credit reports or scores as “the most important thing in my life, right now, well besides my babies,” as “that darned thing that is destroying my life,” and as “my ticket to good neighborhoods and good schools for my kids.” Many respondents believed that a “good” credit score was the key to financial stability.

One respondent, Maria, told a story about a friend who was able to improve his score. She said, “He figured out some way to get it up. Way up. I wish I knew what he did there, because I would do it. Because after that, everything was easy as pie for him. Got himself a better job, a better place to live, everything better.” Maria went to great lengths to try to improve her score so that she, too, could live a life where everything was “easy as pie.”

Credit scores have become a metric of self worth and the perceived key to success.  

Continue reading "The Bootstrap Trap" »

Mick-Mulvaney-Think

posted by Adam Levitin

A couple of weeks ago there appeared a remarkable memo written by Mick Mulvaney (who claims to be the Acting Director of the CFPB) to the CFPB staff. The Financial Institutions practice group at Davis Polk, one of the top financial institution practices nationwide, seems to have elevated the ideas expressed in the memo into what one might call “Mick-Mulvaney-Think.”

The basic idea behind Mick-Mulvaney-Think is “a deep commitment to the rule of law as a philosophical concept and as an important brake on agency discretion in the administrative state.” In other words, agencies should not undertake any discretionary actions, but only enforce clear violations of express statutory prohibitions. There are two problems with this idea.

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Jayfest and Bankruptcy Cases in the Supreme Court

posted by Jason Kilborn

Most of us Credit Slipsters enjoyed an absolutely fabulous symposium over the weekend celebrating the illustrious career of one of our own, Jay Westbrook. The Texas Law Review will publish a selection of several of the papers presented at the symposium (and TLR editors pulled off an amazing feat of organization in coordinating the travel and other logistics for this major event--kudos to them). All of the presentations were cutting-edge and extremely impressive, and many are available on the SSRN profiles of the authors listed in the symposium program. I want to highlight just one that I thought would be of particularly broad interest to Credit Slips readers.

The always impressive Ronald Mann described his recently released book, Bankruptcy and the U.S. Supreme Court. In his characteristically insightful and probing way, Mann looks into the private papers of the Justices for evidence of how and why they decide bankruptcy cases as they do. In his fascinating presentation at the symposium, he challenged conventional explanations of why the Court has construed the law to provide generally narrow relief (not only because of their boredom with the subject matter and/or a supposed adherence to narrow construction of statutory language) and offered provocative explanations based on, among other things, the presence (or absence) of a federal agency to advance a case for broader relief. The introduction of this new book immediately brought to my mind another recent and impressive analysis of Supreme Court bankruptcy jurisprudence, Ken Klee's Bankruptcy and the Supreme Court: 1801-2014. But Mann's latest contribution really seems to add something valuable, illuminating, and entertaining. Readers of this great new book will not find themselves, as Mann described one Justice's reaction to an oral argument, "in sleepy distress." Check it out, and watch for what will be a value-packed Texas Law Review symposium issue.

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