CFPB Enforcement Paralyzed

Normally we say that a law is as strong as its enforcement. On February 7, however, the Consumer Financial Protection Bureau raised questions about the enduring strength of the consumer financial laws in its third Request for Information under Acting Director Mick Mulvaney. This time, the topic is CFPB enforcement. It is not hard to guess where this third "RFI" is headed, insofar as only two new enforcement orders have been entered under Mr. Mulvaney to date. In contrast, from the CFPB's inception through November 2017 (when Mr. Mulvaney took office), the Bureau brought a total of 200 public enforcement actions.

Savings Plans and Chapter 13

David Jones, Chief US Bankruptcy Judge of the Southern District of Texas, has just posted a nifty empirical study of the effects of savings plans on the success of Chapter 13 filings. And, yes, part of the cool study is figuring out how to measure what counts as success in a bankruptcy filing.  The study takes advantage of a natural experiment in the Texas courts and has a bunch of fascinating findings, including about the impact of lawyers and legal culture on the choices that end up being made by the subjects of the bankruptcy proceedings.

Part of the reason I know about this study is that David was doing a graduate degree at Duke (in the judicial masters program) and I got to see the project at its inception stage in the thesis workshop that I run with Jack Knight. All of the credit goes to David though (and his wonderful advisor, John de Figueiredo) -- a fact that will be obvious to my fellow slipsters who know that I don't know squat about Chapter 13. But this is a fun study in terms of the design and findings regardless of whether you love Chapter 13 (okay, I realize that everyone else who reads this blog probably does in fact like or love Chapter 13).  It takes a basic fact about the inevitable fluctuations in expenses that almost everyone has to deal with, and tests what happens when these provision is made for these fluctuations ahead of time (versus when it is not).  Savings plans do indeed seem to make a difference; but a bunch of other factors also appear to matter - some of them quite surprising.  Clearly, as David emphasizes at the end of the paper, there is a lot here that is worthy of further investigation (and maybe legislative change).

The abstract for the draft on ssrn (that is forthcoming in the American Bankruptcy Institute's journal) reads:

This paper examines the effects of debtor savings on the viability of chapter 13 bankruptcy plans. The paper further examines the impact of lawyer culture, debtor participation in the bankruptcy process, and judicial activism in the use of the savings program by chapter 13 debtors. Using a data set of randomly selected chapter 13 bankruptcy cases filed in the Southern District of Texas, the analysis demonstrates that while savings has a direct positive impact on the success of chapter 13 plans, the degree of that success is significantly influenced by the views held by debtors' lawyers, chapter 13 trustees, and judges.

 

Dunning at the Drive-Thru

The CFPB announced the first new enforcement action since Mulvaneyshchina.  It's a settlement with an installment lender, Security Group, Inc. (d/b/a under a lot of different names) over unfair debt collection practices.  We now know just how badly a firm has to behave to get in trouble with the Mulvaney CFPB:  

If I'm reading this correctly, it sounds as if the debt collectors drove up to drive-thru windows at a fast food restaurants where the consumers worked and dunned them through the drive-thru window.  I imagine it went something like this:  "Where my money, ya lousy deadbeat? Oh, and can I have an Extra Value Meal #2 with a large Coke, please?"  

So now we know:  under the Mulvaney CFPB, there's no dunning at the drive-thru.  And debtor's kids seem to be off-limits too, at least the young ones.  It's good to know that there are still some lines that can't be crossed.    

The Weinstein Co. Chapter 11 Hearing #5

The fifth hearing in The Weinstein Co. chapter 11 occurred on June 5, 2018. The hearing included discussion about when the sale to Lantern Capital, approved by the court in early May, will actually close. Among other regulatory and transactional hurdles, TWC's lawyers mentioned that it still is not resolved which contracts will be included in the sale, but they hoped the sale would close within the month.

As for matters that resulted in a ruling, I'll briefly mention two.

1. Sustaining a United States Trustee objection, the court denied the motion for Harvey Weinstein's October 15, 2015 employment contract to be filed under seal, as the standards of 11 U.S.C. § 107 were not satisfied. That contract is now available on the bankruptcy court docket. The document was filed by the Geiss plaintiffs (stemming from alleged sexual misconduct, discussed below) but TWC was the party advocating for sealing.
2. The court approved the Geiss parties' motion to lift the automatic stay to permit the Geiss action to go forward against TWC, alongside other defendants, in the Southern District of New York, allowing liquidation of those claims. The SDNY district judge presiding over the Geiss action directed the plaintiffs to file the lift-stay motion; hearing transcripts illustrate his aim to minimize duplication of efforts. Part of TWC's argument against lifting the stay was the classic matter of distraction. Applying the relevant case law to the facts, the court observed that while closing the sale was a complicated matter, TWC was neither reorganizing in a traditional sense or seeking to stabilize its operations at this time. And, as in other cases, the distraction argument may be weakened when separate lawyers are handling the non-bankruptcy litigation. Seyfarth Shaw was representing TWC in the Geiss litigation, at least prior to the bankruptcy (leading the firm to successfully seek payment of its prepetition claim out of an insurance policy, over the creditor committee's objection - seek dkt #1000).

Speaking of professionals, initial interim fee applications for TWC's professionals for March 19-April 30, 2018 were not on the June 5 agenda, but are on the court docket. TWC has NY counsel and local counsel. Just to give you a sense, Cravath's fee application includes over 3,200 hours billed by 27 attorneys (dkt #929). Richards, Layton & Finger's fee application includes over 1,200 hours billed by 16 attorneys (dkt #932). Plus paraprofessionals at these two firms. Billing separately, of course, are FTI Consulting (dkt #870) and Moelis, the investment banker (dkt #946).

The next hearing in TWC's bankruptcy is scheduled for June 22, 2018. The SDNY Geiss action, in the motion to dismiss phase, is also very much worth watching.

The Government-by-Grift Mentality

Mick Mulvaney's entirely classless and petty firing of the CFPB's Consumer Advisory Board (CAB) has been amply covered elsewhere. Having served on the CAB from 2012-2015, however, I've got to comment on the statement by Mulvaney's henchman that “The outspoken members of the Consumer Advisory Board seem more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

Put aside that this statement is gratuitously offensive to a bunch of hard working folks who volunteer their time and expertise. The "junkets" I enjoyed from my CAB service involved flying coach with numerous connecting flights, staying at the Days Inn, being transported around in busses, attending full-day working meetings held in windowless rooms at community college campuses in small cities around the US, and then paying for my own dinner. But I sure made out with the free coffee, pastry, and box lunch. 

What's remarkable here is that Mulvaney's flunky believes that people serve in government or on advisory boards for the perks and self-enrichment.  In a world of Pruitt's first class flights, mattress, and security detail, Carson's dining room set, and Mnuchin and his Marie Antoinette jaunting off to see the eclipse on a military flight, not to mention the President and his emoluments plus tax-payer-funded vacations at his Mar-a-Lago timeshare, well, it's just natural to assume that's how everyone operates.  It's a new twist on "government for the people."  It's really sad that it doesn't enter the Mulvaney's dude's head that maybe some of us actually act out of true volunteerism and a desire to make the country a better place. 

The End of Bankruptcy

 

 

 

 

Credit Slips/IACCL

The End of Bankruptcy

“Bob Rasmussen, call the Chapter 11 Desk.” Two recent decisions, one on each side of the Atlantic, have enshrined contract bankruptcy—or at least the defeat of bankruptcy law by contract.  Although the context for both was international, in principle they could work for domestic cases as well and at last achieve the demise of bankruptcy law proclaimed in the above-titled 2002 article by Rasmussen and Douglas Baird. The analysis is complex, so this brief note will focus on results and implications.

The cases are Bakhshiyeva in London [Bakhshiyeva -and- Sberbank of Russia, et al., [2018] EWHC 59 (Ch).] and Sun Edison in Manhattan [In re SunEdison, 577 B.R. 120 (2017). Their common ground is that a choice of law clause in a contract may trump the applicability of bankruptcy law to that contract. In the hands of any competent lawyer, the result may be party autonomy in the application of bankruptcy law to contractual obligations, making bankruptcy law largely irrelevant.

More on "Undue Hardship" and Student Loans in Bankruptcy

Following up on Bob's post earlier this week about the Department of Education's request for information (RFI) regarding evaluating "undue hardship" claims in adversary proceedings to discharge student loans, a group of 23 academics, including myself, also submitted written comments in response. The effort was spearheaded by Slipster Dalié Jiménez. Matthew Bruckner (Howard Law), Brook Gotberg (Missouri Law), and Chrystin Ondersma (Rutgers Law) also were part of the drafting team.

Our primary recommendation is that the Department establish ten categories of borrower circumstances under which the Department would agree to the borrower’s discharge of federal student loans. As with the ABI Commission on Consumer Bankruptcy's comments (and the National Bankruptcy Conference's comments), our categories are designed to offer objective criteria for when the Department should agree to a discharge of student loans. The overall aim of the proposal is to establish clear, easy-to-verify, dire circumstances that merit the Department’s acquiescence to a student loan discharge and thereby promote the efficient use of taxpayer funds. To this end, we also recommend that the Department accept "reasonable proof" that a borrower fits into one of the ten categories without engaging in formal litigation discovery. Our response also calls on the Department to collect and release more data about federal student loans.

OCC Payday Lending Bulletin

The Office of Comptroller of the Currency put out a Bulletin this week encouraging banks to make short-term small-dollar installment loans to their customers—basically bank payday loans.  The OCC seems to envision 2-12 month amortizing, level-payment loans, but they're meant to be a payday substitute.  

I suspect many readers of this blog will react with indignation and possibly shock (well, maybe nothing's shocking these days), but I think the issue is more complicated.  Depending on what one sees as being the policy problem posed by payday lending, bank payday lending might make a lot of sense.  Specifically, if one sees the policy issue with payday lending as being its high costs, then bank payday lending (like postal banking) holds out the promise of lower-cost loans. If, however, one sees the policy issue as being about payday borrower’s inability to repay even the principal on their loans, then bank payday lending (or postal payday lending) isn’t a solution at all, but a whitewash. Yet, as we'll see, there's surprising convergence between these positions on the ground in regulatory-land.

Student Loans and Other Doings for the ABI Consumer Bankruptcy Commission

The American Bankruptcy Institute's Commission on Consumer Bankruptcy has been hard at work (Full disclosure: I am the Commission's reporter.) Yesterday, the Commission submitted written comments to the Department of Education's request for information (RFI) on the "undue hardship" standard for the discharge of student loans in bankruptcy. As the Commissions make clear in the cover letter, our comments respond to the RFI and thus focus on what can be accomplished at the regulatory level. Recommendations for statutory change will appear in our final report. Indeed, we had intended to release only the complete set of recommendations at the end of our work, but given the Department of Education's RFI, the Commission voted to release its recommendations that were responsive.

The Commission's recommendations fall into two broad categories. First, the Commission advocates for the adoption of bright-line rules that will identify persons for whom repayment of student loans will be an undue hardship, such as an existing governmental determination of disability or income below 150% of the federal poverty line. Second, the Commission made a number of recommendations around the judicially crafted Brunner test that courts use to determine undue hardship. You can read the full set of recommendations from the link above.

Shakespeare Meets ALJs: Much Ado About Nothing

In a recent oral argument before the U.S. Supreme Court, conservatives urged the Court to outlaw the use of administrative law judges (ALJs) in agency enforcement actions.  The Consumer Financial Protection Bureau is paying notice. On January 31, 2018, the CFPB reprised the ALJ debate in its second Request for Information under Acting Director Mick Mulvaney. This RFI asked:  should the CFPB shift course to litigate all of its enforcement cases in federal court and none before ALJs? Suffice it to say, there is less here than meets the eye.

Call for Papers on College Completion and Student Debt

For those of you writing on student loans, you may be interested in a new call for papers for a conference I am working to organize. On November 30, 2018, the Rappaport Center for Law and Public Policy, Boston College Law School, and the National Consumer Law Center will hold a daylong symposium on Post-Secondary Education Non-completion and Student Loan Debt on the Law School campus. Our call for papers is out and we are accepting submissions through midnight on Sunday, June 17, 2018. We are especially interested in proposals that examine some aspect of the interaction among student debt, college completion, and/or resulting socioeconomic outcomes. Do consider submitting.

Epic Systems and the Atomization of Employment Disputes

Millions of American workers are parties to arbitration agreements that require them to bring claims against their employers in individualized arbitration proceedings (rather than as part of a class or collective action, as authorized by some federal and state laws regulating the workplace). In Epic Systems v. Lewis, a 5:4 majority of the Supreme Court held today that these agreements must be enforced even though the federal National Labor Relations Act declares it an unfair labor practice for an employer to interfere with the ability of employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The decision is not unexpected, but it is consequential given the number of affected employees.

The case—really, several consolidated cases—was weird for a number of reasons. The NLRB had concluded that employers who insisted on individualized arbitration were engaged in unfair labor practices. Then, in September 2017, the Board fell under Republican control, and many wondered whether it would continue to defend that position. It did, but the administration worked hard to undermine it. In fact, the Solicitor General, which had previously supported the Board in seeking Supreme Court review, later filed a brief disagreeing with it on the merits.

How to Tie CFPB Enforcement Up in Knots

While Acting Director Mick Mulvaney is apparently on a tear to defang the Consumer Financial Protection Bureau, some of his actions have flown under the radar. In this and future guest blog posts, I will shine light on one key initiative that largely has gone unnoticed:  namely, the twelve Requests for Information that Mr. Mulvaney launched on January 26. These notices, dubbed "RFIs," seek public comment on scaling back every core function of the CFPB, from enforcement and supervision to rulemaking and consumer complaints. 

Although the RFIs provide the veneer of public participation, in reality they are slanted toward industry. Many are couched in such vague language that consumers and consumer advocates cannot tell which rollbacks are gaining traction behind closed doors. Just last week, Mr. Mulvaney raised new concerns that the RFI process is infected with bias when he personally pressed bankers attending a meeting of the National Association of Realtors to file responses to the RFIs. 

Welcome (Back) to Patricia McCoy

Credit Slips is pleased to welcome back Professor Patricia McCoy as a guest blogger. Professor McCoy is the Liberty Mutual Insurance Professor of Law at Boston College Law School. She is a nationally known scholar, writing in the area of consumer financial regulation area. Professor McCoy worked at the Consumer Financial Protection Bureau during its earliest days, and I understand some of her guest posts will offer her perspective on the current state of the CFPB. We look forward to her contributions.

Approaching the Middle of the Beginning of the End in Venezuela

Though none of it is earth-shaking, there has been a lot of news out of Venezuela recently, so it seemed an appropriate time for an update. The election looms. Henri Falcón leads some polls, though those are presumably unreliable indicators, given what Reuters slyly labels Maduro’s “institutional advantages.” A Falcón victory would increase the odds of a restructuring in the near future. A Maduro win might prompt additional U.S. sanctions; the Wall Street Journal (here, also linked above) speculates that these might finally target oil exports.

Illegal Repo Practices

The Washington Post has an interesting piece about the coming of big data to the auto repossession world. But of particular note is the end of the article, wherein the repo man profiled says that he will return ransom the defaulted borrower's personal goods found in the car back to the buyer for a $50 flat fee (with child car seats given back for free). 

That's probably illegal. The auto lender's security interest extends only to the car, not to personalty that happens to be in the car (were it otherwise, it would violate the FTC Credit Practices Rule).  So the repo man, as the lender's agent, holds that personalty in the car as a bailment; there's no security interest interest in it.  The repo man can't simply destroy it or throw it away--that'd be conversion, and ransoming it back would seem to be some flavor of tort, making the repo many vulnerable to a trover action (for value) or replevin action (for the stuff itself), as well as a UDAP violation.

Now it's possible that there's contractual language in the loan agreement authorizing a storage and inventory fee or the like. But auto loan agreements aren't standardized and that language won't be in all agreements, so a blanket policy like the one described in the article surely isn't right.

As it happens state law in a handful of states (Connecticut, Florida, Maine) authorizes repo man storage fees, but I can't find anything like that in the Ohio Revised Code.  So the repo's practice looks like it's illegal to me.  

Whether or not anyone's going to litigate over this is another matter--Ohio's UDAP statute authorizes recovery of attorneys' fees, which changes the economics of litigation, and there are statutory damages of up to $5K, so with 25,500 repos last year alone there might be enough dollars at stake for a class action to make sense here (and the statute of limitations should cover more than that), but only if there's a defendant who can pay the damages.  I doubt the repo company has the assets to do so, but perhaps the lenders are liable for the repo man's actions.  And I suspect there are arbitration clauses on most auto loan agreements, so that will, at the very least, shield the lenders and perhaps also the repo man.  

Hearing #4 was held in The Weinstein Co. bankruptcy and you won't believe what happened next

Actually, if you are in and of the corporate restructuring world, you will believe what happened next. Major objections were were resolved by the parties, and the court approved the sale of The Weinstein Co. to Lantern Capital.

Resolving objections without litigation is perceived positively in bankruptcy-land, not to mention in federal courts more generally. Some cash proceeds of the sale will be held back for the next phases of the case, and that is an important development. What, then, makes the situation seem less than satisfying, at least to this outside observer?

Thoughts: initial thoughts on the Alix-McKinsey lawsuit

The compliant alleges some damming stuff. McKinsey brushes it all off as an anti-competitive ploy. It seems to me that the biggest risk to McKinsey is that the failure to disclose can itself be the basis for an order to disgorge fees.

Even if McKinsey might have been retained in these cases if it had made disclosure up front – I don't necessarily agree with the Alix complaint that the alleged connections would have been, in all cases, fatal to their retention – failure to disclose is itself a serious problem. Bankruptcy professionals always have to disclose more than what is required by section 327's adverse interest/disinterested standard, because ultimately what counts as a problem for section 327 purposes is a question for the court, not the professional, to decide.

And I wonder why the courts approved McKinsey's retention applications in the first place. And where was the US Trustee? It is alleged that many of their retention applications stated that McKinsey had no relevant conflicts to disclose.  As in none. For a company of the size and importance of McKinsey, that frankly is not plausible. 

The allegations in paragraphs 120 to 122, which I have cut out in the image, are deeply troubling. In short, Jay Alix alleges that McKinsey recommended law firms to clients, and the law firms in turn recommended McKinsey for retention in the case. Not only might this be illegal, as Alix says, but this sort of relationship would have to be disclosed in the McKinsey (and law firms) retention applications even if not illegal.

Battle of Giants

I have been studying chapter 11 professionals since before the turn of the century, but today we have a first. Jay Alix, as assignee of AlixPartners LLP, has filed a 150 page complaint against McKinsey & Co., Inc. and others, alleging RICO violations in connection with McKinsey's alleged violations of section 327 and rule 2014.  This apparently comes out of the Wall Street Journal's report last week that McKinsey was suspiciously light and vague in its disclosures in bankruptcy court, as compared with other, similar professionals.

The alleged conspiracy goes back to cases during my time in practice – that is, long, long ago. It will be interesting to watch this develop.

Call for Papers: The Consumer Financial Protection Bureau

On Friday, January 4 from 10:30-12:15 pm, the section on Commercial & Related Consumer Law and the section on Creditors’ and Debtors’ Rights are hosting a joint panel at the 2019 AALS Annual Meeting in New Orleans. We are also issuing a call for papers. 

The topic of the panel is: The Consumer Financial Protection Bureau: Past, Present, and Future. 

The Consumer Financial Protection Bureau was created following the 2008 financial crisis with the intended goal of making markets for consumer financial products and services work for all Americans. Congress granted the Bureau broad powers to enforce and regulate consumer financial protection laws and entrusted it with a number of consumer-facing responsibilities. This program will examine the tumultuous history of the CFPB, from its creation as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, its actions over Director Richard Cordray’s tenure, the legal fight over who currently leads the Bureau, and the actions of the interim director named by President Trump. Panelists will also discuss the possible future of the CFPB and the “lessons learned” from its history and what they tell us about future fights to ensure consumers are protected in the financial products marketplace.

Confirmed speakers include:

• Patricia McCoy, Liberty Mutual Insurance Professor of Law at Boston College Law and first Assistant Director for Mortgage Markets at the CFPB.
• Kathleen Engel, Research Professor of Law, Suffolk University School of Law, member of Consumer Financial Protection Bureau Board.
• Deepak Gupta, founding principal of Gupta Wessler PLLC and a former Senior Litigation Counsel and Senior Counsel for Enforcement Strategy at the CFPB. Gupta also represents Leandra English in English v. Trump.

Proposed abstract or draft papers are due by August 15, 2018 and should be submitted using this form to ensure blind review. Members of both sections’ executive committees will review and select papers for the program. The author(s) of the selected paper will be notified by September 28, 2018.

For more information, see the full description of the a call for papers here.

Please direct any questions about this Call to Professors Dalié Jiménez and Lea Krivinskas Shepard.

Loans and Liens: The Weinstein Company Chapter 11 Hearing #3

The third hearing in the The Weinstein Company chapter 11 took place on April 19, 2018 (prior 2 hearings here and here). The hearing focused on final court approval of a $25 million loan to fund the debtor during its chapter 11 (or, really, until a standalone 363 sale) ("DIP loan"). Apparently a competing offer for the DIP loan discussed at Hearing #1 never fully materialized. Prior to the chapter 11 petition, TWC had no single lender/syndicate claiming a so-called blanket lien on substantially all assets (the lender leading the now-approved DIP loan had a prepetition security interest in movie distribution rights held by TWC Domestic, and lenders with prepetition security interests in other assets also are participating in the DIP loan). As indicated in the visual accompanying this post, the DIP financing order states that TWC seeks to grant its DIP lenders a security interest in nearly all property. There are some important exclusions from the collateral package, however, including "claims arising out of or related to sexual misconduct or harassment or employment practices." 

Page 42 of the DIP financing order gives the unsecured creditors committee only until April 27 to investigate validity, perfection, and enforceability of various prepetition liens, although that date can be extended "for cause." As is typical in such agreements these days, TWC stipulated that it will not challenge prepetition loans made by the postpetition lenders. The order and agreement also require immediate payout of the DIP loan from sale proceeds (pp 55 & 138 of docket #267). If I'm reading the DIP lending agreement correctly, it also gives certain prepetition lenders the right to be paid immediately out of sale proceeds (p138 of docket #267). For reasons Credit Slips readers have heard many times before, I don't understand why paying prepetition debts at that juncture is in the best interest of the bankruptcy estate.

Meanwhile, Peg Brickley and Jonathan Randles of The Wall Street Journal have reported three TWC executives "took home more than $12 million in pay, loans, reimbursements" in the year before the bankruptcy, including after sexual misconduct allegations became public. This reporting comes from the schedules and statements of financial affairs filed just a few days ago.

Other updates:

Please support empirical study of decision making in business insolvency

Leiden University in the Netherlands has established an impressive strength in insolvency law studies. For example, following his retirement, the eminent Bob Wessels left his massive collection of literature on the subject to a foundation, which permanently lent the collection to the school as the Bob Wessels Insolvency Law Collection. Credit Slips readers can support the efforts of Leiden researchers without parting with their libraries by simply responding to a 15-minute online questionnaire. Niek Strohmaier is a Ph.D. candidate at Leiden conducting a study on judgment and decision making within the areas of business rescue and insolvency law. As he puts it, "We offer a novel perspective on these fields by utilizing the interdisciplinary nature of our research team and by adopting a social sciences approach with empirical research methods." If there's one thing that Credit Slips can rally around, it's empirical research! So I'm hoping we can show Niek our community spirit by responding to his survey at this link (http://leidenuniv.eu.qualtrics.com/jfe/form/SV_51GewBINfBAyfzv). The survey has received a good response from the professional membership of INSOL Europe, but I hope we can supercharge this qualitative data collection with responses from North America and elsewhere, as well. Thanks for your help!

Farewell to Signatures...

Here's what all of the commentary I've read has overlooked.  Signatures are utterly irrelevant to consumers except to the extent that the slow down the transaction. (Ok, they also require those germaphobes among us to touch a shared pen when we were doing just great with a contactless NFC transaction). The signature requirement has ZERO effect on consumer liability.  Federal law already limits consumer liability on unauthorized credit card transactions to $50.  But that $50 liability only applies if (1) it is an "accepted card" and (2) the card issuer has provided a means to identify the cardholder, and those limitations mean that consumers are rarely, if ever, actually liable for unauthorized credit card transactions.  Put another way, the statute says $50, but it is basically saying $0.    

Congressional Review Act Confusion: Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)

Part of the legacy of Newt Gingrich and his Contract with America (can I get damages for breach?) is the Congressional Review Act.  The CRA creates a mechanism whereby Congress can override an agency rulemaking on a simple majority vote in both houses, meaning that it is not subject to the filibuster in the Senate. Congress has only used this tool infrequently, most notably with the CRA resolution overriding the CFPB's arbitration rule. 

Some members of Congress have now turned their CRA sights on various regulatory "guidance" that they find objectionable. This guidance is not formally binding and enforceable law, but other sorts of communications from agencies that help regulated entities understand agency expectations, interpretations, and policies. Among this guidance is the CFPB's Indirect Auto Lending Guidance. I suspect that most of the folks who rail against it have never actually bothered to read it. It's a short document. Most of it is spent explaining what indirect auto lending is. In brief, you can get a car loan from a direct lender who makes the loan directly to you or you can get the loan from the dealer. If you get the loan from the dealer, the dealer will typically turn around and sell the loan to the real lender.  (The exception are buy-here-pay-here used car dealers who keep the loans.)  These indirect lenders include captive finance companies of auto manufacturers, but also banks (e.g., Santander has a large business in this space). The indirect lenders compete for dealer business, not for consumer business, and therein lies the problem. The indirect lenders set a "buy rate"--the minimum interest rate and other terms on the loan at which they will purchase it, but then allow dealers to markup the loan above the buy rate (this is the "dealer reserve," which looks an awful lot like the now-prohibited yield spread premiums on mortgages paid to mortgage brokers).  This sets up a situation in which dealers might engage in discriminatory markups in violation of the Equal Credit Opportunity Act. The question is whether the indirect lenders face any liability for such discriminatory markups.  

The CFPB's Indirect Auto Lending Guidance notes that this is a possibility as indirect lenders can potentially qualify as "creditors" under ECOA. The guidance then goes on to say that because there are compliance risks, here are some things that indirect lenders should consider doing as part of their compliance programs.  Critically, the guidance doesn't actually say that the CFPB believes that dealers ar "creditors" under ECOA, only that it is possible that they could be, nor does it require that dealers do anything.

It's not clear if there are the votes in Congress to pass the CRA resolution, but even if there are, there are still a bunch of legal questions about whether such a resolution can validly be passed in regard to the Indirect Auto Lending Guidance and what its impact would be. These are discussed below the break. My short answer is that it is very questionable whether the CRA has any application of the Indirect Auto Lending Guidance and even if it does, it is unlikely to have much impact as it doesn't invalidate ECOA or ECOA enforcement actions against indirect lenders. This then raises the question of why the (GOP) wants to spend political capital pursuing a rather pointless resolution.  

Tax Reform and Nonprofit Bankruptcy

It's Tax Day! When the new tax bill was debated late last year, a few reports noted an unintended consequence of the bill's expansion of the standard deduction might be decrease people's charitable contributions, in turn harming nonprofits. After the bill passed, I continued to hear comments about the increased standard deductions' potential to cause financial problems for nonprofits, and saw estimates of a loss of $2 billion to the sector. Financial problems, of course, make me think of bankruptcy. And nonprofits make me think about religious organizations, which are the nonprofits I've studied the most in the context of bankruptcy. Tax Day seems like an appropriate day for some thoughts about the tax reform's possible connection to nonprofits' chapter 11 filings, particularly churches' chapter 11 filings.

A Series of Proposals to Restructure Venezuelan Debt

Mitu Gulati and Mark Weidemaier

About two weeks ago, we held a small conference at the University of North Carolina School of Law: How Best to Restructure the Venezuelan Debt. The conference focused on proposals developed this semester by students in our joint UNC-Duke class on international debt finance. Some proposals started fresh; others took an existing idea and built on it. Four student groups presented their work and got feedback from a group of about twenty experienced lawyers, bankers and policy-makers. This was—to our minds—an exceptional group, extraordinarily knowledgeable about sovereign debt markets and with particular insight into Venezuela. Included were Lee Buchheit, Chanda DeLong, Brett House, Fulvio Italiani, Hongtao Jiang, Ruth Krivoy, Trevor Messenger, Siobhan Morden, Katia Porzecanski, and a list of others who we will leave unnamed for confidentiality reasons. We are immensely grateful to all of them for their generosity to us and our students.

After the student presentations, our visiting guests offered their perspectives about the Venezuelan debt crisis. It was a treat for us and our students to hear such experts—all of whom have given a great deal of thought to the crisis—discuss solutions to one of the most complicated restructuring problems in recent history. Not all of the discussion was intended for public consumption, but we have permission to post this video of a terrific conversation between Lee Buchheit and Brett House.

After incorporating feedback from the conference, our students have posted their proposals on SSRN. We are really proud of their work. We pushed them hard, at least as hard as we have pushed any prior class, and they responded in spades. Like every proposal, these have flaws (and some are more plausible than others on the risk-reward continuum). But with that caveat, each represents an immense amount of work and contains new ideas:

PDVSA’s Hail Mary: A Chapter 15 Bankruptcy Solution (Samantha Hovaniec, Ryan Nichols, Matthew Taylor, Heather Werner & Rich Gittings)

Lien-ing on PDVSA: The Positive Side of Negative Pledge (Matt Cramer, Kelsey Moore, Andrea Kropp & Charlie Saad)

The Enduring Legality of Exit Consents: A Realist’s Guide (Steven Diaz, Stephanie Funk, Isabelle Sawhney, Gavin Kim & Austin Rogers)

Oil For Debt: A Unique Proposal For the Unique Problem that is Restructuring Venezuela’s Debt (Aditya Mitra, Andres Ortiz, Bernard Botchway, Evaristo Pereira, Shane O’Neil & Will Curtis)

These papers build on a long line of students papers on topics related to sovereign debt restructuring, some of which have made it to publication. Last year, Dimitrios Lyratzakis and Khaled Fayyad got their proposal, Restructuring Venezuela’s Debt Using Pari Passu, published in the Duke Journal of Comparative and International Law. And sometimes, when the proposals are especially creative or insightful, they manage to get the attention of reporters at the Financial Times, Bloomberg, Reuters, and elsewhere.

"Drinking water from a fire hose:" The Weinstein Company Chapter 11 Hearing #2

Nestled in a review of an album by Spinal Tap bassist Derek Smalls (a/k/a Harry Shearer), the April 10 edition of Variety magazine published a notice of sale of The Weinstein Company. The notice includes a bid deadline of April 30, a sale hearing on May 8, and the soothing assurance to bidders that a buyer would incur "NO SUCCESSOR LIABILITY" (bolded and all-caps) for the heinous acts TWC apparently tolerated and facilitated over many years. The notice anticipates that a buyer might agree to remain liable for some TWC obligations, however, perhaps contemplating valuable licensing contracts.

The Variety notice is a consequence of the second TWC hearing on April 6 (for the first hearing, see here). By the end, objections to the bidding procedures order had been resolved, resulting in docket #190, the order approving the procedures, including a $9.3 million breakup fee and escalating expense reimbursement for the stalking horse bidder if the sale is delayed. The number of times sexual harassment, sexual assault, or rape were mentioned at the hearing: zero.

Counsel to the newly-appointed five-member creditors' committee told the court that getting up to speed in this case (no pun intended) was "drinking water from a fire hose." And a battle is brewing over whether bids should be allocated among the various asset categories (again, given the stated complexity) - something the stalking horse bidder seems to resist. Meanwhile, at least one counterparty to a licensing agreement asserts that its contract was rescinded prior to the filing. Assuming it loses that fight, the party worries it will have insufficient time to consider whether the asset buyer is providing adequate assurance of future performance.

This case invites the caustic lament, "if only the Bankruptcy Code drafters had established a fair and transparent process to deal with all of these issues!" When Harry Shearer decides to send his imaginary-band bassist into a quiet retirement, maybe he will make a film about chapter 11. After all, fairness rocks.

 

Trump’s Bank Regulators

ProPublica’s new web site “Trump Town” tracks political appointees across federal agencies. In light of the president’s promises to “drain the swamp”, it is interesting to peruse some of the Treasury Department appointees responsible for bank regulation. I previously wrote about Secretary Mnuchin and Comptroller Joseph Otting and their connections to subprime mortgage foreclosure profiteers. Lower-level political appointees at Treasury seem to come mostly from one of three backgrounds – lawyers and lobbyists for banks, real estate investors (and sometimes Trump campaign officials), or former staffers for Republican members of Congress. Here are some examples:

Junk Cities: Insolvency Crises in Overlapping Municipalities

I have a new paper out on municipal insolvency. It's called "Junk Cities:  Resolving Insolvency Crises in Overlapping Municipalities," 107 Cal. L. Rev (forthcoming 2019).  The paper is co-authored with Aurelia Chaudhury and David Schleicher. The launching point for the paper is the observation that there are frequently overlapping local government jurisdictions--cities, counties, school districts, water districts, park districts, hospital districts, sewer and sanitary districts, forest preserves, etc. These overlapping jurisdictions share a common revenue source--the same set of taxpayers. This means that they have correlated exposure to economic downturns or population declines. It also means that they face a common pool problem in terms of revenue generation, and they frequently lack coordination mechanisms whether formal or informal (such as political "machines").

The correlated economic exposure plus the common pool problem for revenues increases the likelihood of simultaneous financial crises for these overlapping jurisdictions. Chapter 9 bankruptcy, unfortunately lacks the tools to deal with the inter-governmental coordination problem. The techniques used for handling multi-entity debtors in Chapter 11--joint administration, deemed consolidation for voting and distribution purposes, and (in the extreme) full substantive consolidation do not work for municipalities that lack common corporate control and have much clearer separation of assets and liabilities.  Chapter 9 does not currently have the capacity for considering a shared revenue source that is not an asset per se.  Our paper identifies the nature of the overlapping municipal financial crisis problem, discusses why Chapter 9 is inadequate, and proposes a number of solutions ranging from incremental doctrinal improvements in Chapter 9 to the adoption of a "Big MAC Combo" (or perhaps a "supersize Big MAC") mechanism for coordinating the finances of overlapping municipalities. The abstract is below the break. 

Counting the millions of evictions

The Eviction Lab, a project led by sociologist Matthew Desmond (author of Evicted), have performed the invaluable and impressive task of gathering landlord-tenant eviction records from every county in the nation for the past 16 years. The sobering results, released today (NY Times story) paint a picture of widespread housing insecurity in the wealthiest nation in the world. Each year nearly a million renter households are evicted by court order, and more than twice that number are summoned to court to face eviction. 

© evictionlab.org

The project's web page offers a variety of data reports at the state level, and the promise of many more critical analyses to come. Among the questions that researchers may explore using these data include the rate of housing loss for African-American and Latino families, the impact of the 2008 mortgage foreclosure crisis, and foreclosures generally, on renter households, the efficacy of state and local rental housing subsidy programs, whether gentrification results in displacement, and the location of neighborhoods facing high concentrations of evictions and housing abandonment.

 Security of housing tenure is not only a fundamental human right, but a necessary condition for the protection of other political and socio-economic rights. Millions of evictions are the sad and now visible legacy of decades of cuts to public and subsidized housing and basic income support for the poor.

Was Charleston Gazette-Mail a good case for an Ice Cube Bond?

Based only this news report, the answer appears to be yes - an Ice Cube Bond would have honored the claimants' need for speed without allowing them to shift all the risk to the bankruptcy estate. The news article indicates that sale proponents referred to the holdback request as a "Hail Mary." In the foundational Lionel case, the dissenting Second Circuit judge used that characterization for a request to reverse the sale order, not to hold back proceeds. An Ice Cube Bond arguably reduces the possibility of Hail Mary arguments because it allows analysis of entitlements to be determined at a less pressured pace.

 

H/T Ted Janger

 

Coming Soonish to a Bookstore Near You

Assuming you still have those in your town. If not, also available for preorder now is my forthcoming book, entitled The Law of Failure.  It is my attempt to consider all of American business insolvency law as a whole. Not just bankruptcy but also assignments, receiverships, and even oddball things like Nevada's campground receivership provisions.

Orwellian Debt Collection in China

Trying to get a handle on the potential for a workable personal bankruptcy procedure in China, I've repeatedly encountered evidence that the most important element might be lacking: attitude. Successful personal insolvency systems around the world differ in design and operation, but the system architects and operators generally share a sense that default is an inevitable aspect of consumer/entrepreneurial risk, and mitigating the long-term effects of such defaults is good for debtors, creditors, and society. I don't get the sense, based on my admittedly superficial outsider perspective, that this foundation is ready in China. Indeed, quite the opposite. 

For example, for the past few years, the Supreme People's Court has run a "judgment defaulter's list" of individuals who have failed (been unable?) to satisfy judgments against them. More than 3 million names were on this list already by the end of 2015, and getting on this list means more than just public shaming; it's also a "no-fly" list, preventing defaulters from buying airplane tickets, in addition to a "no-high-speed-train" and "no-hotel-stay" list, and also a "no-sending-your-kids-to-paid-schools" list. By mid-2016, about 5 million people had been preventing from buying these services in China as a result of being on the list. This initiative is just the start of a planned "Social Credit System," which will aggregate electronic data (including not only payment history, but also buying habits, treatment of one's parents, and who one's associates are) to produce a "social credit score" for all individuals. This score will affect all manner of life events, such as access not only to loans, but also to housing access, work promotions, honors, and other social benefits. The potential problems with data integrity (including inaccurate data), among many other challenges, are discussed in this fascinating paper by Yongxi Chen and Anne Sy Cheung of the Univ. of Hong Kong. 

The underutilized student loan bankruptcy discharge

A common misconception is that student loans are never dischargeable in bankruptcy. There is a bankruptcy discharge exception for some qualified student loans and educational benefit repayment obligations. The discharge exception does not, however, apply to all loans made to students. Jason Iuliano argues in a new paper that bankruptcy courts have interpreted the discharge exception too broadly, applying it to loans for unaccredited schools, loans for tutoring services, and loans beyond the cost of attendance for college. His paper presents a compelling argument based on the plain language of the statute, the legislative history and policy in support of a narrow reading of 11 USC §523(a)(8).

The Bankruptcy Court for the Southern District of Texas recently adopted the narrow reading of §523(a)(8)(A)(ii) in Crocker v. Navient Solutions, LLC , Adv. 16-3175 (Bankr. S.D. Tx Mar. 26, 2018). The court denied Navient's motion for summary judgment, finding that the bar exam study loan from SLMA at issue was not within the discharge exception for qualified student loans or educational benefit repayments.

In another class action complaint filed last year against Sallie Mae and Navient, plaintiffs claim that servicers are systematically defrauding student loan debtors about their bankruptcy discharge rights. According to the complaint in Homaidan v. Sallie Mae, Inc. (17-ap-01085 Bankr. EDNY), servicers illegally continued collecting private student loans that were fully discharged in debtor bankruptcies because they were not qualified educational loans. The servicers exploited the common misconception that "student loans" writ large are excluded from bankruptcy discharge. The defendants' motion to dismiss or compel arbitration is pending.

Professor Iuliano has also demonstrated in a prior paper that even student loans covered by the bankruptcy discharge exception can still be discharged based on showing "undue hardship," and that courts are far more likely to approve undue hardship discharges than many debtors (and lawyers) may realize.

Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough

This weekend a mini-scandal erupted over the law firm Munger, Tolles requiring its summer associates to sign pre-dispute arbitration clauses. Munger, Tolles was rightly shamed into rescinding the practice, but one suspects that Munger, Tolles isn't the only firm doing or contemplating doing this. 

I believe law schools have a particular duty to stand up here and protect their students. Law students seeking firm jobs are at an incredibly disadvantage in terms of both market power and knowledge. The students are often heavily leveraged and desperate to land a high-paying job with a large law firm in order to service their educational debt, and even when debt doesn't drive them, a summer associate position at a large firm is often seen as a stepping stone to career success. Law students really have no bargaining power in terms of their contractual relationship with summer employers.  It's take-it-or-leave-it, and leave-it isn't an option for law students.  Law students also lack knowledge about the importance of an arbitration clause in terms of the procedural and substantive rights they will surrender and knowledge about the firm culture they are stepping into and the likelihood it will result in a dispute of some sort (e.g., sexual harassment).  Whatever one thinks of the virtues of arbitration generally, this strikes me as a very clear cut case of pre-dispute arbitration agreements  being inappropriate.  I don't think it's a stretch to call such arbitration provisions unfair and unconscionable both procedurally and substantively.  (Does anyone think the firms are doing this for the summer associates' benefit?) 

I believe that the appropriate response for law schools in light of the situation is to refuse access to on-campus interviewing to any firm that requires its summer associates to sign an arbitration clause. Schools have done this when their students civil rights were being threatened both under don't-ask-don't-tell and in the era when firms would often refuse interviews to women and people of color. The right to have one's grievances heard before a court (including for race and gender discrimination!) is also a civil right.  It is a civil right that is fundamental to the whole endeavor of law schools, and schools should be just as vigilant to protecting their students civil rights in this instance as they have in the face of discrimination. 

Notes on Complexity: The Weinstein Company Chapter 11 Hearing #1

Some rarely-heard terms at The Weinstein Company's March 20 chapter 11 first-day hearing: sexual harassment, sexual assault, rape.

A more common utterance among TWC representatives: complex. The industry, the capital structure, the lending arrangements. All complex. Complex complex complex complex complex.

Part of the complexity, TWC said, comes from the fact that some collateral is governed by the Uniform Commercial Code while other collateral (certain intellectual property) is governed by other law. Yes - secured transactions professors keep saying this mixture is difficult to handle especially at the remedial/recovery stage. Another part of the complexity, according to TWC, is that the property interests have been sliced and diced into... hold on, this sounds familiar. 

What if anything is hiding behind this complexity? If TWC and the sale proponents get their way, the mystery likely will be buried.  The company and other proponent of a quick sale (which includes the sale of avoidance actions) says this sale needs to be done ASAP. 

TWC does not look like a melting ice cube now. It melted in the fall of 2017. Claimants need as much, if not more, protection in manufactured ice cube cases as in real ones, especially if the capital structure is so, well, complex. Complexity and speed are not the best of friends. If claimants are going to be denied full process, quick sale proponents need to post an Ice Cube Bond. Otherwise, a sale of TWC should happen through a plan, with all of the constitutional and statutory hurdles that were supposed to be necessary for the extraordinary exercise of federal court power that TWC seeks.

TWC's representatives also emphasized how business judgment should be respected. From the outside, it looks like TWC terminated Harvey Weinstein only when the news media blew their cover on the track record of heinous allegations. Sure, there is a new CRO, but are all who were complicit in the cover up really out of the picture now? 

A lawyer for the motion picture guilds said at the hearing that the guilds have had "difficulty" with the debtor pre-bankruptcy, and that the case calls for "adult supervision."  Another objector (docket #68)  said at the hearing that it heard from third parties that TWC had been "flagrantly" breaching agreements and misdirecting payment - a state of affairs feared to be the tip of the iceberg, but there had not yet been time to do a full investigation. 

A particularly interesting portion of the hearing involved debtor-in-possession financing. Among other reasons, TWC said it preferred to allow an existing lender to offer the DIP financing because that lender understood the complexity of the business and collateral package. Is chapter 11 practice now at a place where a DIP argues with a straight face that, for continuity purposes, it is better off borrowing money at higher interest rates and higher fees, from an existing lender with incentives that unlikely to align with the best interests of the estate overall? That did not go unchallenged, however. In addition to allowing another potential lender to be heard, the court asked a series of reasonable questions that indicated concerns about the cost of the proposed deal for the bankruptcy estate, and then took a brief recess. Then the proposed lender reported to the court the fees would be reduced.  The court approved the financing on an interim basis to avoid irreparable harm but will be looking at this issue fresh when TWC seeks the final order for financing.

The U.S. Trustee is having a creditors committee formation meeting this week. That committee has a lot to investigate.

The TWC enterprise might be complex. But that's not what this case is about.

 

 

 

 

 

Stormy Daniel's Three-Way (Contract) & Donald Trump's Performance Problem

I want to return to the Stormy Daniels-Donald Trump-Michael Cohen Three-Way Contract.  It's actually really interesting from a contract doctrine perspective (besides being of prurient interest). The continued media coverage and scholarly commentary seems to be missing a key point, namely that this is a contractual ménage à trois, not a typical pairing. The fact that there are three parties, not two to the contract actually matters quite a bit doctrinally.

 

Let’s start with a point on which I think everyone agrees.  For there to be a contract, there needs to be mutual assent. This assent may be manifested in different ways—it may be manifested expressly, say through a signature, or implicitly, say through performance or, in rare cases, through silence. 

 

The complication we have in this contract is that it is a 3-party contract, not the standard 2-party contract.  That’s a problem because basically everything in contract doctrine is built around 2-party contracts.  Traditional contract doctrine is monogamous and doesn't really know what to do with three-ways, especially when one party has a performance problem.  It's not, for what it's worth, that multi-party contracts are rare--they're not. In fact, they're the common arrangement in corporate finance where a contract will involve numerous affiliates. But traditional contract doctrine developed in an era in which these multi-party contracts were rarer (indeed, look at how the Bankruptcy Code is not drafted with the contemplation of multi-entity debtors!) and there's always been a wink-wink, nod-nod about the separateness of corporate affiliates. 

 

Venezuelan Debt: Further Thoughts on “Why Not Accelerate and Sue Venezuela Now?”

Mitu Gulati and Mark Weidemaier

Earlier, we posted about whether holders of Venezuelan bonds would be better off accelerating and obtaining judgments sooner rather than later. In a nutshell, here was the point:

When a restructuring comes (and it will), the two primary weapons the restructurer is likely to use are CACs and Exit Consents. A bondholder who obtains a money judgment, as best we can tell, escapes the threat of either CACs or Exit Consents being used against her.

We heard from a number of people with questions prompted by the post. Here are some of them, and our conjectures as to answers.

The Economic Growth, Regulatory Relief, and Consumer Protection Act

Or EGRRCPA, for short. That is the official name of S. 2155, a bill which seems to be tearing Senate Democrats apart. Republicans are uniformly in favor of the bill, which Bloomberg describes as "another faulty bank-reform bill." Some Democrats see it as needed regulatory relief for small banks, while others, including the one who used to blog here, see S. 2155 as a rollback of keys parts of Dodd-Frank for big banks that remain too big to fail.

It is both. Indeed, if the bill were stripped of its title IV, I think most people could live with it. But title IV is a doozy.  

Most notably, it raises the threshold for additional regulation under Dodd-Frank from $50 billion in assets to $250 billion. Banks with more than $50 billion in assets are not community banks.

The banks in the zone of deregulation include State Street, SunTrust, Fifth Third, Citizens, and other banks of this ilk. In short, with the possible exception of State Street, this is not a deregulatory gift to "Wall Street," but rather to the next rung of banks, all of which experienced extreme troubles in 2008-2009, and all of which participated in TARP.

My prime concern – given my area of study – is that these banks will no longer be required to prepare "living wills." That is, they will not have to work with regulators on resolution plans.

How then do we expect to use Dodd-Frank's orderly liquidation authority if they fail? It would be impossible without advanced planning. Same for the misguided attempts at "chapter 14." I have real doubts about the wisdom of "bankruptcy for banks," but if it is ever to work, it will require lots of advanced planning (and luck).

And we can't use the normal FDIC approach of finding another, bigger bank to take them over, because that would simply create another colossus, like Wells Fargo. Certainly we don't want that.

Maybe a bailout then? Is that the "new" plan?

Fed chair Powell to Congress - make student loans dischargeable in bankruptcy

Coverage of Federal Reserve Chairman Jerome Powell's Congressional testimony highlighted his optimism about economic growth and its implications for future interest rate hikes. Less widely covered were his brief remarks on the student loan debt crisis. Citing the macroeconomic drag of a trillion-and-a-half dollar student loan debt, chairman Powell testified that  he "would be at a loss to explain" why student loans cannot be discharged in bankruptcy. According to Fed research, Powell noted, nondischargeable student loan debt  has long-term negative effects on the path of borrowers' economic life.

Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck

There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues.  For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell.  So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract.  As a preliminary matter, though, I apologize for the clickbait title.  

Let's start with the facts as we know them.

Stormy Daniels, Donald Trump, and the Role of Arbitration in Ensuring Silence

[Edited to correct names; too many aliases involved in this one]

For readers who haven't been following along: Stephanie Clifford, aka Stormy Daniels, is an adult film star who allegedly had a sexual relationship with Donald Trump in the mid-2000s. She recently sued Trump and other defendants, seeking to invalidate a settlement agreement in which she was paid to keep silent about the details of the alleged relationship. Here is her complaint, which includes the settlement agreement as an exhibit. And here is some coverage of background details.

The settlement agreement includes an arbitration clause, which should prompt some reflection about the use of arbitration to silence victims of sexual assault (a topic that has attracted attention in the wake of revelations about Harvey Weinstein). On the other hand, people are often too quick to blame arbitration for unrelated problems, so I hope this (long-ish) post can offer a bit of clarity. The short version: Whoever drafted the agreement between Clifford and "David Dennison" gets an A for cynicism, but would have to beg for a C in my arbitration class. (I’m guessing the draftsperson would fail professional responsibility...)

Chapter 11 Locale

For nearly two decades, the fact that many really large chapter 11 cases file in two districts has been a point of controversy.  On the one hand, the present system makes some sense from the perspective of debtor’s attorneys, and many DIP lenders, who value the experience and wisdom of the judges in these jurisdictions and the predictability that filing therein brings.  On the other hand, for those not at the core of the present system, it reeks of an inside game that is opaque to those on the outside.  And it is not clear the judges outside the two districts could not handle a big case; indeed, most could.

Where big chapter 11 cases should file is an issue again, at least among bankruptcy folks, given the possibility that the pending Cornyn-Warren venue bill might pass as part of some bigger piece of legislation, perhaps the pending S. 2155 (whose Title IV is so misguided it certainly warrants a separate post).

I have long been frustrated by the discussion of chapter 11 venue.  On the one hand, the present system has developed largely by accident, with little thought for the broader policy implications.  On the other, there is certainly some merit in concentrating economically important cases before judges who are well-versed in the issues such cases present.  The issue calls for careful study, but, as with most political issues these days, we are instead presented with a binary choice.

I have often contemplated concentrating the biggest chapter 11 cases among a group of bankruptcy judges, trained in complexities of multi-state or even global businesses.  A small panel of such judges could be formed in various regions around the country, such that the parties would never have to travel further than to a neighboring state for proceedings.  Geographically larger states – i.e., California and Texas – might comprise regions all by themselves.

Such an approach would ensure that cases would capture some of the benefits of the present system, without the drawbacks of having a Seattle-based company file its bankruptcy case on the East Coast.  Comments are open, what do readers think about developing a nationwide group of "big case" judges?

Education Department Request for Information on Student Loan Discharge in Bankruptcy

Following up on Alan White's post from this morning about the Education Department's draft notice about debt collection laws applicable to student loan debt collectors that prompted a Twitter moment, some more student loan news from the Education Department. Last week, it posted a less Twitter-popular request for information on evaluating undue hardship claims in adversary proceedings seeking discharge of student loan debt. The summary in the request:

"The U.S. Department of Education (Department) seeks to ensure that the congressional mandate to except student loans from bankruptcy discharge except in cases of undue hardship is appropriately implemented while also ensuring that borrowers for whom repayment of their student loans would be an undue hardship are not inadvertently discouraged from filing an adversary proceeding in their bankruptcy case. Accordingly, the Department is requesting public comment on factors to be considered in evaluating undue hardship claims asserted by student loan borrowers in adversary proceedings filed in bankruptcy cases, the weight to be given to such factors, whether the existence of two tests for evaluation of undue hardship claims results in inequities among borrowers seeking undue hardship discharge, and how all of these, and potentially additional, considerations should weigh into whether an undue hardship claim should be conceded by the loan holder."

Responses must be received by May 22, 2018.

Why Not Accelerate and Sue Venezuela Now?

Mark Weidemaier and Mitu Gulati

People have been asking for months when investors will accelerate PDVSA and Venezuela bonds that have fallen into default. Rumor has it that some investors have already done so. But there seems to be a consensus that investors aren't in a hurry. U.S. sanctions prohibit a debt restructuring, and few investors are eager for the legal battle that would follow acceleration. But we’re wondering if this view misses something important and unique to the Venezuelan crisis. It seems to us that investors who file suit may be able to negate most of the Republic's and PDVSA's restructuring tools, significantly enhancing leverage when a restructuring finally does occur and making it easier to hold out. So we’re a bit puzzled why some of the more aggressive investors aren’t already rushing to get judgments.

Preempting the states: US Ed to shield debt collectors from consumer protection

As if the power to garnish wages without going to court, seize federal income tax refunds and charge 25% collection fees weren't enough, debt collectors have now persuaded the Education Department to free them from state consumer protection laws when they collect defaulted student loans. Bloomberg News reports that a draft US Ed federal register notice announces the Department's new view that federal law preempts state debt collection laws and state enforcement against student loan collectors. This move is a  reversal of prior US Ed policy promoting student loan borrower's rights and pledging to "work with federal and state law enforcement agencies and regulators" to that end, as reflected in the 2016 Mitchell memo and the Department's collaboration with the CFPB.

Customer service and consumer protection will now take a back seat to crony profiteering by US Ed contractors. This news item has prompted a twitter moment.

Merit Mgmt. Group LP v. FTI Consulting Inc.

The Supreme Court weighed in today on one of the the most important circuit splits in the bankruptcy world, namely the scope of one of the section 546(e) safe harbors from avoidance actions in bankruptcy.  Section 546(e) has two safe harbors, one for "settlement payments" and the other for transfers "made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract … commodity contract… or forward contract…”. This latter safe harbor had been read (ridiculously) broadly by some of the courts of appeals, as every non-cash transaction has to go through some sort of financial institution.  Specifically, imagine a transaction in which funds are moving from A to D, but go through intermediary financial institutions B and C:  A-->B-->C-->D.  Can D shelter in the fact that the transfer went through financial institutions B and C?  

The Supreme Court unanimously said no, and I think they clearly got the right result, although I fear the methodology the court used may ultimately be unhelpful for those who think that fraudulent transfer law has an important role to play in policing the fairness of financial markets and preventing against excessively risky heads-I-win, tails-you-lose gambles.  

Seventh Circuit Victorious Again in Merit Mgmt

If you're challenging a Seventh Circuit ruling in a bankruptcy case on appeal to the Supreme Court, especially if (retired) Judge Posner was in the majority, you've got a challenge ahead. The Court's announcement this morning of its judgment in Merit Management Group v. FTI Consulting demonstrates this yet again. Long story short: paying for stock via a bank transfer (rather than a bag of money) is still a transfer from the buyer to the seller, not the buyer's and seller's banks, and therefore not "by or to ... a financial institution." That is, such transfers are not protected by the securities safe harbor provision in section 546(e) and are subject to avoidance as constructive fraudulent conveyances and/or preferences. The seeming silver-bullet arguments to the contrary in this battle of "plain meanings" apparently remained unarticulated and unavailing (see footnote 2 in the Court's opinion, suggesting someone up there might be reading CreditSlips!). Other big winners in addition to the Illinois-based Seventh Circuit are University of Illinois College of Law professors Charles Tabb and Ralph Brubaker, both of whom are cited prominently and approvingly in the opinion. Congratulations, Illinois!

The Student Loan Sweatbox

Student loan debt is growing more rapidly than borrower income.  The similarity to the trend in home loan debt leading to the subprime mortgage bubble has been widely noted. Student loan debt in 1990 represented about 30% of a college graduate’s annual earnings; student debt will surpass 100% of a graduate’s annual earnings by 2023.  Total student loan debt also reflects more students going to college, which is a good thing, but the per-borrower debt is on an unsustainable path. Unlike the subprime mortgage bubble, the student loan bubble will not explode and drag down the bond market, banks and other financial institutions. This is because 1) a 100% taxpayer bailout is built into the student loan funding system and 2) defaults do not lead to massive losses. Instead, this generation of students will pay a steadily increasing tax on their incomes, putting a permanent drag on home and car buying and economic growth generally. Student loan defaults do not result in home foreclosures and distressed asset sales. They result in wage garnishments, tax refund intercepts and refinancing via consolidation loans, and mounting federal budget outlays. In many cases, borrowers in default repay the original debt, interest at above-market rates, and 25% collection fees. In other words, defaulting student loan borrowers will remain in a sweatbox for most of their working lives. Proposals to cut back on income-driven repayment options will only aggravate the burden, further shifting responsibility for funding education from taxpayers to a generation of students.

Central Bank Immunity - Don't Miss

This is an important intervention about a massively important topic that comes up over and over again in sovereign restructurings, and will come up in more and more interesting ways in the next few years.

Short version here.