postings by Mark Weidemaier

A Series of Proposals to Restructure Venezuelan Debt

posted by Mark Weidemaier

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.

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

posted by Mark Weidemaier

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.

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

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

posted by Mark Weidemaier

[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...)

Continue reading "Stormy Daniels, Donald Trump, and the Role of Arbitration in Ensuring Silence" »

Why Not Accelerate and Sue Venezuela Now?

posted by Mark Weidemaier

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.

Continue reading "Why Not Accelerate and Sue Venezuela Now?" »

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" »

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" »

The Pari Passu Strategy in Venezuela

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Should Venezuela worry that holdout creditors will use the strategy that NML Capital and other holdouts successfully used against Argentina? In this article, The Pari Passu Fallacy—Requiescat in Pace, Lee Buchheit and Andrés de la Cruz at Cleary Gottlieb argue not. Lee in particular has made no secret of his distaste for the “ratable payment” interpretation of the pari passu clause. (As many readers know, he is also Mitu’s longtime collaborator.) When interpreted to require ratable payments, the pari passu clause requires a government to pay holdouts in full if it intends to pay restructuring participants in accordance with the terms of their debt instruments. In Argentina’s case, the injunction resulted in another massive default, as the government refused to pay holdouts but could not find a way around the injunction.

Lee and Andrés argue that NML’s pari passu strategy was essentially killed by the person who gave it life, the late Judge Griesa. To oversimplify a bit, the judge’s initial decision--and a decision years before in Brussels in a case involving Peru and Elliott Associates--strongly implied that selective nonpayment is enough to violate the pari passu clause. That is, a government violates the clause simply by paying some equally-ranked creditors but not others. And, crucially, he remedied this breach by issuing an injunction barring everyone with any connection to the United States from cooperating in the continuing violation of the pari passu clause. Without that remedy, Argentina would simply have defied his ruling and continued to stiff holdout creditors.

Continue reading "The Pari Passu Strategy in Venezuela" »

Venezuela Errata: Airline Deposits and Administration Posts

posted by Mark Weidemaier

By Mitu Gulati and Mark Weidemaier

The new semester has begun, and we are excited about the International Debt class we teach together, with students from both UNC and Duke thinking about the Venezuelan debt crisis. Their first task—and ours—is figuring out how much Venezuela owes, to whom, and under what contract terms. This year, we have been especially unreasonable, asking students, in just a few weeks, to find, read, and code all relevant contract terms for the entire unmatured bond debt of Venezuela and PDVSA. And the bond debt is only part of the story. For instance, another category of debt, which we haven’t encountered before, consists of local currency (bolivar) bank deposits of international airlines that fly routes to and from Venezuela, which the airlines are not-so-patiently waiting to convert into other currencies.

Continue reading "Venezuela Errata: Airline Deposits and Administration Posts" »

The Hausmann Addendum to the Roosevelt Corollary to the Monroe Doctrine

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Ricardo Hausmann, Harvard economist and former Venezuelan Planning Minister, has been a thorn in the side of the Maduro administration. His blog posts at Project Syndicate condemning the Maduro administration’s continued payment of bondholders while the people of Venezuela starve may well have deterred new lending to the regime. Among other things, Hausmann-induced opprobrium at Goldman Sachs’s infamous "hunger bond"—now trading at a deep discount--has scared many in the market. For more background, check out Cardiff Garcia’s FT podcast interview with Hausmann.

Hausmann’s latest Project Syndicate post goes well beyond complaining about the ethics of Wall Street bond investors. Hausmann first sets out his view of the political realities, in which Maduro’s manipulation of elections and co-option of the military negate any realistic chance for the political opposition to overthrow the regime, notwithstanding U.S. economic sanctions. Given the severe humanitarian crisis, astonishing depletion of national wealth, rampant inflation, widespread corruption, and other harms inflicted or exacerbated by the Maduro regime, Hausmann advocates military action by the United States and like-minded nations. The other nations presumably include countries like Peru, Colombia, Honduras, Argentina, and Chile, all signatories to the Lima declaration condemning the Maduro regime. 

Continue reading "The Hausmann Addendum to the Roosevelt Corollary to the Monroe Doctrine" »

Implications of the Third Circuit’s Crystallex Decision

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

On Wednesday, the Third Circuit granted Venezuela a victory in its ongoing settled-but-not-settled litigation with Crystallex. The case deals with a limited issue: Whether Delaware law imposes liability for the fraudulent transfer of an asset on an entity that is not itself a debtor.  We want to use this post to speculate a bit about the implications the decision may have for the bigger Venezuelan debt drama. If the new decision is important, it is because it signals something about the receptivity of US courts toward claims that Venezuela, PDVSA, and perhaps US entities like CITGO are “alter egos.” We disagree a bit about that question. But first, some background on this aspect of the Crystallex case.

Continue reading "Implications of the Third Circuit’s Crystallex Decision" »

Battle of the Bonds: PDVSA Versus Venezuela

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

Over at Bloomberg, Katia Porzecanski notes that investors in Venezuelan debt are “worried they’re getting ghosted.” Overdue coupons are piling up, and no one is sure whether it is because the government is done paying or because U.S. sanctions have made financial intermediaries slow to process payments. Meanwhile, the government has maintained radio silence about the restructuring it purported to announce six weeks ago. The fact that a few PDVSA coupons have been paid in the meantime prompts Porzecanski to ask whether Venezuela is capitalizing on bondholder inertia to “quietly, selectively default,” and whether the government “may ultimately prioritize PDVSA’s debt over its own.” This Reuters article by Dion Rabouin answers the latter question in he affirmative, opining that Venezuela is more likely to default on its own bonds than on PDVSA’s, for two related reasons. First, PDVSA’s oil revenues are the government’s main source of foreign currency; second, a PDVSA default may prompt creditors to seize oil-related assets abroad, potentially including CITGO.

Continue reading "Battle of the Bonds: PDVSA Versus Venezuela" »

(Updated) About That Mysterious Crystallex Settlement

posted by Mark Weidemaier

[Update: Here is the unsealed letter describing the settlement between Crystallex and Venezuela. As expected, it reveals nothing of note, simply explaining that the settlement's terms require confidentiality and redacting portions discussing the settlement itself. Also, note that the first paragraph of the original post (below) has been edited for clarity.]

We have covered Crystallex’s attempt to enforce its $1.2 billion judgment against Venezuela a bunch here on Credit Slips (for example, here, here, here, here, and here). In late November, the parties reached a settlement, shortly before a December 5 hearing in Crystallex's lawsuit seeking to attach assets belonging to PDVSA. The hearing was to address Crystallex's argument that PDVSA is the government's alter ego, and PDVSA’s cross motion to dismiss. A ruling in Crystallex’s favor would have let it look to PDVSA’s assets to satisfy its judgment against the government. As noted in the Financial Times, a pro-Crystallex ruling might also have had broader implications, potentially letting “holders of defaulted Venezuelan sovereign bonds ... seek to seize PDVSA assets, potentially including those of Citgo.”

Continue reading "(Updated) About That Mysterious Crystallex Settlement" »

Commerce Without Law

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

We are gearing up to teach our joint class on sovereign debt next term and, as usual, are mulling over background readings to provide context for the work we ask of students—which typically involves designing a restructuring plan. To do this, students must read many long bond indentures and other financial contracts. Occasionally, we show students historical examples of such contracts, often from the era of absolute sovereign immunity, when sovereigns couldn’t be sued in national courts. Often, students ask why lawyers bothered with such extensive documents when there were no courts to interpret and enforce them. Which gives us an opportunity to talk about reputational and other non-legal mechanisms for enforcing promises, which we and many others have written about, probably more than is, strictly speaking, necessary.

Nothing in the sovereign debt literature, however, is as interesting and immediate as Barak Richman’s new book, Stateless Commerce, which explores how a robust system of international commerce can work for hundreds of years without any state involvement. His exemplar, building on classic work by Lisa Bernstein, is the diamond trade. In theory, opportunistic breach of contract should be endemic, given the ease of theft, the highly subjective nature of quality assessments, and the need for credit to acquire such expensive products. So one might expect the trade to flourish only if there are strong legal institutions capable of rigorously enforcing deals. Instead, the enormously profitable global diamond market has operated for decades largely independent of the state.

Continue reading "Commerce Without Law" »

Domination Isn't (Always) Fraud: Venezuela Edition

posted by Mark Weidemaier

I made a joke in the comments to Mitu’s post about whether the arrest of Citgo executives strengthened the argument for treating Citgo as Venezuela’s alter ego. The joke wasn’t very good; I called Venezuela a “typical activist shareholder.” But Mitu generously took it seriously, asking whether this is the kind of behavior creditors should have expected. His question highlights some interesting legal questions. One is whether a creditor who knows about shareholder misconduct before voluntarily dealing with a corporation should be able to enforce its claims against shareholder assets. A second has to do with the legal standard for finding a corporation and its shareholder to be alter egos.  

Continue reading "Domination Isn't (Always) Fraud: Venezuela Edition" »

Old Wine in New Bottles: Geopolitics and Venezuela's Debt

posted by Mark Weidemaier
Mark Weidemaier & Mitu Gulati
 
Robin Wigglesworth and John Paul Rathbone have an insightful piece in the Financial Times on how China, Russia, and the US are jockeying for position in Venezuela, which needs debt relief. The other governments are in a position to either facilitate or impede this, with conditions. Very roughly speaking, Russia wants regional influence, China wants oil, and the US wants regime change (ideally, while limiting Russian and Chinese influence in the region).
 
Finance has long been both a tool of, and a pretext for, foreign intervention in Latin America. For example, historian Emily Rosenberg and others have written about “dollar diplomacy”—the US government’s early-20th century practice of tying loans to control over customs and taxing authorities. The practice was justified by narratives about the benefits of financial expertise and professionalization, but of course it also served to protect the interests of US lenders while limiting the influence of European powers. Venezuela is no stranger to this history, having endured heavy-handed and often brutal interventions by western powers in the early 1900s.

Continue reading "Old Wine in New Bottles: Geopolitics and Venezuela's Debt" »

Confusion in Venezuela; Alter Egos in Delaware

posted by Mark Weidemaier

Confusion reigns. Venezuela might plan to default, but maybe it's just pretending so it can buy bonds back on the cheap. Then again, it could be a "giant money laundering operation." If there are restructuring talks, U.S. investors can attend, and listen. Except that the talks will likely be hosted by a drug "kingpin," and investors can't have any "transactions or dealings, directly or indirectly" with that person. And don't ask whether PDVSA's late(ish?) payment was a credit event, or what the CDS payout will be on bonds that have experienced a credit event despite having been paid in full.

Thankfully, the law is clear, right? Here's PDVSA motion to dismiss the lawsuit Crystallex has filed in federal court in Delaware, alleging that PDVSA is Venezuela's alter ego and seeking to enforce an arbitration award against the government by attaching PDVSA's equity stake in the ultimate U.S. parent of CITGO. Here's a summary of the arguments the parties have made thus far. The case matters, first, because if successful Crystallex will sever PDVSA's indirect ownership stake in CITGO. It also matters because, as we've discussed here repeatedly, any debt restructuring will implicate questions of alter ego liability. For instance, many restructuring proposals begin by urging Venezuela to withdraw PDVSA's right to exploit oil reserves, so as to better insulate oil-related assets from creditors. This short article explains some of the issues of alter ego liability raised by these and other proposals.

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

CFPB Arbitration Rule Overturned

posted by Mark Weidemaier

By a 51-50 vote, with Vice President Pence breaking the tie, the Senate has voted to overturn the Consumer Financial Protection Bureau's rule forbidding the use of contract terms (in covered consumer loan products) barring consumers to bring or participate in class actions. The affirmative vote was supported by the usual narratives: Class actions make credit more expensive, arbitration is a better and more efficient means for resolving consumer disputes, class action lawyers are greedy parasites, etc. The truth of these narratives is irrelevant, it seems. For instance, though it is possible arbitration might be used to efficiently and effectively vindicate consumer rights, there isn't much evidence that it does so in practice, and there is evidence to the contrary. As a mechanism for collecting consumer debts, the history of arbitration is uglier still. And even if the availability of class actions increases the cost of credit--emphasis on if--it's not obvious this would be bad. If class actions deter lender misconduct--not that there's any history of bank misconduct!--, and if this increases some lenders' costs and ultimately the cost of their financial products, then... I don't know. Who cares, I guess? Why should consumers victimized by fraudulent lender conduct subsidize cheaper credit for others? The contrary narrative--that class actions are just so darn expensive to defend that banks settle even the bogus ones for large sums of money--is so implausible that it should not be taken seriously without credible supporting evidence.  

Catalonian Bonds, Anyone?

posted by Mark Weidemaier

Joint post by Mitu Gulati and Mark Weidemaier.

Sovereign bonds issued under the government's own law are supposed to be riskier than bonds issued under foreign (typically, English or New York) law. The logic is simple: Local-law bonds can be restructured with the stroke of a legislator's pen; with foreign bonds, it's not so easy. One would expect that difference in risk to show up in bond yields, which should be higher for local-law bonds, especially in times of uncertainty. There's quite a bit of research to back up that intuition (e.g., Bradley et al. (2017), Nordvig (2015), Chamon et al. (2014), Clare & Schmidlin (2014), Choi et al. (2014)). 

Catalonian bond yields have been rising, thanks to jitters over the secession vote. But Nicolas Schmidlin, a fund manager (who worked on this topic as a graduate student and wrote the paper linked above), noticed something odd about bond yields.

Continue reading "Catalonian Bonds, Anyone?" »

Do Sanctions Prevent Venezuela From Restructuring CAC Bonds?

posted by Mark Weidemaier

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

At the end of last week, press reports noted that Mr. Maduro has given the green light for restructuring talks to begin with holders of Venezuelan debt. Curiously, the Russians may lead the talks. One question is whether bondholders subject to US jurisdiction can participate in a restructuring given recent sanctions levied by the Trump administration. Press accounts suggest that the sanctions were intended to prevent this. Bloomberg reports the sanctions were "designed to prevent investors from engaging in liability management, and, if Venezuela can't pay its debt, a restructuring." The Financial Times reports likewise, quoting a senior analyst who thinks the sanctions will work: "If these sanctions stay in place, then Venezuela cannot restructure."

We accept that the sanctions were intended to block a restructuring. But they don't seem to actually do this. There is a rather large loophole that would allow Venezuela to employ a common restructuring technique.

Continue reading "Do Sanctions Prevent Venezuela From Restructuring CAC Bonds?" »

How Easily Can Creditors Reach Venezuelan Oil Receivables?

posted by Mark Weidemaier

Among emerging market countries that have needed to restructure in recent decades, Venezuela is uniquely dependent on external commercial ties, especially oil exports to the United States by state oil company PDVSA. Because of this, many wonder whether holdout creditors pose a unique threat to the country's restructuring prospects. Unlike, say, Argentina, which could keep most valuable assets away from creditors, Venezuela must worry that holdouts will seize oil receivables. PDVSA's assets include money due from U.S. customers. These intangible assets are located in the United States, where courts can easily divert them to satisfy judgments obtained by holdouts. Note that this logic assumes that courts treat PDVSA as Venezuela's alter ego--a topic discussed several times on this blog--but the assumption is plausible.

But even if we assume that courts will ignore the boundaries between PDVSA and the government, is the risk of asset seizure really so great? The scenario described above presumes that Venezuela structures oil sales to U.S. entities in implausibly straightforward ways. Suppose, for instance, that PDVSA sells oil directly to U.S. buyers in exchange for a promise to pay on delivery. In that case, sure; creditors of both PDVSA and the government will have a field day. But while I am no expert on how PDVSA structures its operations, I would be stunned if things were so simple.

Continue reading "How Easily Can Creditors Reach Venezuelan Oil Receivables?" »

Venezuela is Like... PDVSA's Alter Ego, and Vice Versa?

posted by Mark Weidemaier

And so it begins. As Anna notes, Venezuela is in dire straits, yet its stubborn insistence on paying bondholders puts it in the running for "world's slowest train wreck." When the wheels finally leave the tracks, expect a free-for-all in which competing claimants (bondholders, arbitration claimants, etc.) fight to recover as much as possible, both from the government and from state-owned oil company PDVSA. The major players will include creditors holding billions of dollars in arbitration awards against Venezuela. These creditors, unlike those holding government or PDVSA bonds, need not fear a debt restructuring. They will, however, have to find attachable assets that can be seized to satisfy their claims.

Enter Canadian mining company Crystallex, which has been trying to enforce a $1.2 billion arbitration award against Venezuela, so far without success. A few days ago, it tried a new tack--one with broader implications for any restructuring of Venezuela's or PDVSA's debt. Crystallex asked a federal court in Delaware to attach the shares of PDV Holding, Inc., a Delaware company that is the ultimate U.S. parent of CITGO petroleum. PDV Holding is owned by PDVSA, which, in turn, is owned by Venezuela.

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Kindred Nursing Centers--More on Arbitration and State Contract Law

posted by Mark Weidemaier

Today, the U.S. Supreme Court decided Kindred Nursing v Clark, an arbitration case in which the Kentucky Supreme Court declined to enforce arbitration agreements between a nursing home and two patients. The agreements had been executed by relatives holding powers of attorney granting broad authority to enter contracts, but the Kentucky Supreme Court held that a power of attorney must specifically grant the authority to agree to arbitration. It was clear--as it often is--that the U.S. Supreme Court would reverse. The Kentucky rule just can’t be squared with governing federal arbitration law. Put simply, state law can't say that a broadly-worded power of attorney grants authority to enter contracts generally, except for arbitration clauses. Not surprisingly, then, the U.S. Supreme Court reversed in a 7 to 1 opinion authored by Justice Kagan.* The dissent wasn’t on the merits, either; Justice Thomas does not believe the Federal Arbitration Act applies to proceedings in state court.

I teach contracts and arbitration law, among other classes, and I find it increasingly frustrating to teach arbitration cases. So many involve plausible applications of contract law (like Kindred) but get the arbitration law flatly wrong. Others involve questionable applications of contract law or related doctrines, seemingly to avoid the effect of arbitration law. Here’s a recent case by the Maryland Court of Appeals, Cain v Midland Funding, which falls into the latter camp.

Continue reading "Kindred Nursing Centers--More on Arbitration and State Contract Law" »

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