"Middle Class Faux"?

I did some digging into Joe Biden's previously unexplored roll call vote on floor amendments to BAPCPA. They were ugly then and have not improved with age. My full take is in The American Prospect. 

Consumer Bankruptcy, Done Correctly, To Help Struggling Americans

Today, Senator Elizabeth Warren unveiled her new plan to reform the consumer bankruptcy system. The plan is simple, yet elegant. It is based on actual data and research (including some of my own with Consumer Bankruptcy Project co-investigators Slipster Bob Lawless, former Slipster, now Congresswoman Katie Porter, and former Slipster Debb Thorne). Most importantly, I believe it will make the consumer bankruptcy system work for American families. And, as a bonus, it will tackle the bad behavior that big banks and corporations currently engage in once people file, like trying to collect already discharged debts, and some non-bankruptcy financial issues, such as "zombie" mortgages.

In short, the plan provides for one chapter that everyone files, combined with a menu of options to respond to each families' particular needs. It undoes some of the most detrimental amendments that came with the 2005 bankruptcy law, including the means test. In doing so, it sets new, undoubtedly more effective rules for the discharge of student loan debt, for modification of home mortgages, and for keeping cars. It also undoes "smaller" amendments that likely went unnoticed, but may have deleterious effects on people's lives. Warren's plan gets rid of the current prohibition on continuing to pay union dues, the payment of which may be critical to allowing people who file bankruptcy to keep their jobs and keep on their feet. Similarly, the plan eliminates problems debtors face paying rent during their bankruptcy cases, which can lead to eviction.

One chapter that everyone files means that the continued racial disparities in chapter choice my co-authors and I have documented will disappear. No means test, combined with less documentation, as provided by Warren's plan, means that the most time-consuming attorney tasks will go away. Attorney's fees should decrease. Warren's plan also provides for the payment of fees over time. People will not have to put off filing for bankruptcy for years while they struggle in the "sweatbox." Costly "no money down" bankruptcy options should disappear. People will have the chance to enter the bankruptcy system in time to save what little they have, which research has shown is key to people surviving and thriving post-bankruptcy.

A Cautionary Tale: Argentina’s Pari Passu Debt Debacle

Mark Weidemaier & Mitu Gulati

Tim Harford of the Financial Times has a brilliant new podcast, Cautionary Tales (here). A recent episode, “Danger, Rocks Ahead!,” centers on the wreck of the Torrey Canyon, an enormous oil tanker manned by an experienced crew and captain. Sailing under clear skies, but under a deadline, the ship ran aground on an infamous reef, The Seven Stones, off the southwest coast of the U.K. Harford recounts the series of decisions leading to the disaster, each small misjudgment slowly reducing the margin of error, until none was left. The lesson for Harford is about path dependence. Having committed to a course of action, people often don’t react and adapt when new information reveals flaws in the plan. Thus the experienced Torrey Canyon crew drove their ship onto the rocks when it should have been trivially easy to recognize and avoid the looming catastrophe.

Okay – so this is perhaps not the only metaphor for Argentina, but it fits, and we wanted to mention the Cautionary Tales podcast to Credit Slips readers. Harford’s story about the Torrey Canyon also made us wonder whether Argentina’s debt debacle of 2001-2016 might offer a cautionary tale for the country’s current crisis. We think it does. In fact, one might understand the legal disaster that unfolded over 2001-2016 as the product of a series of misjudgments by Argentine officials. These misjudgments slowly reduced the country’s margin for error and gradually persuaded the U.S. federal judges overseeing litigation against the country that Argentina no longer warranted their sympathy.

We won’t recount the details of Argentina’s decade-long, and ultimately disastrous, battle with holdout creditors. The FT’s Joseph Cotterill recounted the entire saga at FT Alphaville, see, e.g., here), and Bloomberg’s Matt Levine wrote about the 2016 settlement (see here, here and here). We’ll focus instead on the mistakes made along the way.

A simple explanation for Argentina’s legal disaster is that a few U.S. federal judges interpreted an obscure term in Argentina’s bond contracts (the pari passu clause) in an unexpected way and fashioned a novel and unprecedented equitable remedy that ultimately forced Argentina to settle. There’s some truth to this story, but it focuses attention on the outcome—the ship hitting the reef—rather than on the series of missteps that turned that outcome from a remote possibility to a near certainty.

A more complete story needs to highlight the failure of various actors on the Argentine side to take some simple, cheap steps that might have avoided disaster. There were plenty of warning signs along the way. But Argentine officials repeatedly failed to take note and adapt.

600,000 student loan borrowers getting nowhere

Student loan borrowers who plan to apply for Public Service Loan Forgiveness (PSLF)  after ten years of income-based payments are simply not getting their

https://fsaconferences.ed.gov/conferences/library/2019/2019FSAConfSession18.pdf

payments counted. Between January 2012 and August 2018 nearly one million borrowers submitted an approved public service employer certification. As of August 2019 there are 600,000 of these approved borrowers with ZERO "qualifying" payments towards the required 120.  

 

In the same presentation USED asserts that most (80%) of borrowers who already applied for forgiveness believing they had completed the required ten years of payments had actually entered repayment less than ten years before applying. This explanation suggests that all is well except that borrowers simply need to wait a few more months to apply. The zero qualifying payments problem proves that the PSLF failure goes much deeper, for the reasons I described in a prior post.

Hinrichsen on Iraq’s Debt Restructuring

Iraq’s debt restructuring a decade and a half ago was one of the few things that went right with the US incursion into that country in 2003.  Thanks to a combination of an expensive war with Iran, mismanagement and corruption on the part of Saddam and his henchmen, and the debilitating effect of international sanctions on the economy, Iraq in 2003 found itself with one of the largest sovereign defaulted debt stocks in history.  Worse, thanks to the sanctions regime, much of the unpaid debt had, by the time of Saddam’s removal, matured into judgements and attachment orders.  That makes a debt restructurer's job much more difficult than in a normal sovereign restructuring.  And unlike other defaulting sovereigns in the past, who had precious few assets available for creditors in foreign jurisdictions to seize, the new Iraq had oil revenues that it desperately needed to use in order to try and get back to some semblance of normalcy and growth.

The fascinating story of how the debt was accumulated and then restructured has been told in bits and pieces.  But economic historian Simon Hinrichsen is the first, to my knowledge, to attempt to tell the full story. His draft article, “Tracing Iraqi Debt Through Defaults and Restructurings”, hot off the presses, is available on the LSE Econ History website here.  Among the most interesting aspects of the story are the use of UN Security Council Resolutions and US Executive Orders to immunize Iraqi oil assets (hence, neutralizing the risk of attacks by holdout creditors) and the attempted resuscitation of the ancient doctrine of Odious Debts. The former succeeded and the latter failed.  Many of these same issues are going to come up again when Venezuela embarks on its post-Maduro restructuring (see here and here).  I wonder how they will play out.

Simon's abstract is as follows:

In 1979 Iraq was a net creditor to the world, due to its large oil reserves and lack of external debt. Fifteen years later, its government debt-to-GDP was over 1,000%. At the time of the U.S. invasion in 2003, Iraq was saddled with around $130 billion in external debt that needed to be restructured. How does a country incur so much debt, so fast, and how does it get out of it? In answering this question, the paper makes two key contributions. First, I reconstruct the build-up of Iraqi debt through the 1980s and 1990s using mainly secondary sources. This paper is the first to create a debt series going back to 1979. The rise in Iraqi indebtedness was a consequence of global geopolitical trends in the 1980s where political lending trumped solvency concerns. Second, through primary sources and interviews with key actors involved, I use oral history to tell the story the Iraqi restructuring. It was one of the largest in history, yet no clear and detailed historical account exists. The restructuring was permeated by politics to inflict harsh terms on creditors at the Paris Club, at a time when creditor-friendly restructurings were the norm. In going for a politically expedient deal, however, the restructuring missed an opportunity to enshrine a doctrine of odious debt in international law

 

Yadav on Dodgy Debt Buybacks

I’ve long been fascinated by debt buybacks by issuers, in large part because they seemed to occupy a loophole in the securities disclosure laws.  A company could do a buyback of bonds and, because bondholders are not owed fiduciary duties by the company, there was no requirement for disclosure. That means that the company, to the extent it was in possession of secret information (the discovery of a gold mine, for example), could screw over the bondholders by buying back their securities before the news got out and the price went up.  Of course, the gold mine situation doesn’t occur all that often. But in the area that I do most of my research in, sovereign bonds, there are often large asymmetries of information between issuers and creditors. And yet, one rarely sees large scale buybacks of debt. (for the classic piece on sovereign buybacks, by Bulow and Rogoff, see here).

For years though, I’ve thought that this topic was of interest to no more than the three or four people in the legal academy who found bonds interesting (Marcel Kahan, Bill Bratton and a couple of others).  But just a few days ago I came across a wonderful new article by Yesha Yadav on precisely this topic. The draft article, “Debt Buybacks and the Myth of Creditor Power” is available here.  Yesha argues that the dramatic increase in corporate debt buybacks in recent years (apparently in the trillions of dollars) should be concerning not just because of the aforementioned disclosure loophole, but because these buybacks undermine corporate governance (when they are done in order to strip covenants) and allow shady behavior by banks seeking to increase the value of their loans at the expense of bondholders.

The story Yesha tells is more than plausible and she gives lots of vivid examples that support her arguments.  Since my particular interest is in flaws in the bond contract drafting process, the questions that her article raised for me have to do with why private contracting has not fixed the problem she identifies.  After all, the parties involved in these deals are super rich and sophisticated (with the fanciest of Wall Street law firms at their beck and call).

Perhaps Preferential Transfer Litigation is Not Worth the Cost- two tiny adjustments in that direction.

Although the primary thrust of the Small Business Reorganization Act of 2019 which was signed by the President on August 23 is to provide relief to reorganizing small businesses, the act has two provisions that are intended to provide  some relief from the threat of questionable and small dollar bankruptcy preference claims. One of the preference aspects of this new law requires bankruptcy trustees and post confirmation trustees and debtors in possession and others who initiate preference actions to: consider, before commencing suit, an alleged preference recipient’s statutory defenses based on “reasonable diligence in the circumstances; and taking into account a party’s known or reasonably knowable affirmative defenses.” (punctuation added) The second preference aspect of the new law amends a bankruptcy venue provision that, if applied to preference suits, may reduce the number of small (under $25,000) preference cases filed.

Although the avoidance of preferences has been part of US Bankruptcy law for over two hundred years and has generated considerable litigation, there is virtually no empirical research into the actual operation and impact of American preference law. 

Bankruptcy and Mindfulness

The practice of mindfulness and other types of meditation are growing on the coasts and within the law school and lawyer communities. Perhaps these practices can provide meaningful benefits to bankruptcy clients, bankruptcy lawyers and bankruptcy professors and judges. The essence of "mindfulness for lawyers" efforts begins with the notion that the adversary system can take a toll on home life, friendships and our own notions of who we want to be. A meditation practice can help us concentrate and be the best lawyers we can be and also the best friends and family members we want to be; and perhaps even help us to be the kind of persons we want to be. It is a mix of focusing more fully on the present, mixing that with lovingkindness to ourselves and others, and observing what is going on in our minds, all without judgment.

Consumer bankruptcy debtors, creditors, practitioners and judges are constantly faced with problems for which the legal system is at best a partial solution. In most cases there are a few true winners and a host of partial winners, partial losers and complete losers. Mindfulness can help us keep a focus on the matter in front of us and also help us maintain our passion for life and practice.  On the business bankruptcy side, our duty of loyalty combined with the zealous representation ethic can allow the day-to-day fighting to change our character and perhaps even our values. In every community there are a host of ways of starting such a practice.  The book 10% Happier by Dan Harris is an easy entry point and in most communities there is a Mindfulness Based Stress Reduction course available.  More and more law schools and bar associations are providing such opportunities. Mindfulnessinlawsociety.com and themindfullawstudent.com are excellent resources.  I am enjoying teaching mindfulness to law students as well as faculty and staff at Saint Louis University Law School. 

 

 

Supreme Court Grants Cert To Decide Fate of Repossessed Cars in Bankruptcy

Yesterday, the SCOTUS granted certiorari in City of Chicago v. Fulton, 19-357, to resolve a circuit split about whether a creditor's inaction in not returning property repossessed pre-petition can violate the automatic stay. The split arises predominately from chapter 13 cases in which, pre-petition, creditors repossessed or cities impounded debtors' cars. As the petition for cert stated, this issue is of significant practical importance. As Slipster Bob Lawless, former Slipster Debb Thorne, and I set forth in our new paper based on Consumer Bankruptcy Project data, Driven to Bankruptcy (Wake Forest Law Review, forthcoming 2020), bankruptcy courts deal with more than a million cars in every year. Creditors will have repossessed, but not disposed of some of those cars, and cities (for instance, Chicago) and municipalities will have impounded some of those cars.

In our new paper, we note that bankruptcy seems to be an important tool for some people to keep their cars, including getting their cars back from creditors and impound yards. As will be decided by the Supreme Court in addressing the issues regarding the automatic stay raised by the circuit split, if debtors need to request that bankruptcy courts order creditors or cities to return their cars after they file bankruptcy, the usefulness of filing bankruptcy will decrease, potentially significantly. Stated differently, people need their cars now -- to get to work, to get food, to get their kids to daycare, to get to the doctor. For some households, one of the biggest benefits of filing bankruptcy seems to be that their creditors must turn over repossessed and impounded cars as soon as the debtor files . The question now is -- is that actually what the Code provides? 

The Community in Which Consumer Debtor Lawyers Reside

Just as tax and estate planning lawyers are part of a network of helpers that includes accountants and financial planners, consumer debtor attorneys should ideally be part of a network of able and responsible helpers. Sadly, since prospective consumer debtors lack financial resources, the availability and quality of their non lawyer helpers is suspect.  There is a network of credit counseling agencies but critics have long attacked the effectiveness and loyalty of their services. Many CDFI's and some neighborhood centers provide quality help, but they are very limited in number.  One of several reasons for these weaknesses is the "chicken and egg" dilemma, that the career line for these potential helpers is very limited and thus the training system for their preparation is likewise very limited.  

Hope for Helping the Prospective Payday Loan Customer

Short term (payday) loans and high interest consumer installment loans continue to deplete low income households of micro dollars and their communities of macro dollars. Although the CFPB seems intent on supporting the depletions, a good number of states have provided some relief.  Even in states without interest rate limitations there are a couple of ideas that can help.

Who Teaches Bankruptcy Law?

A survey some years ago showed that bankruptcy was one of the law school courses most often taught by adjuncts rather than full time teachers. This has several impacts on the teaching of bankruptcy law. Full time teachers often have contact with one another and may meet at AALS or other professional meetings but  the adjuncts who teach bankruptcy may not have much interaction with other bankruptcy teachers. In addition,  although some of the adjuncts are judges, more of the lawyer- adjuncts are likely to be business bankruptcy lawyers and fewer to be consumer lawyers. Another survey years ago indicated that there were a number of chapter 11 courses being taught, but almost no advanced courses in consumer bankruptcy. At one time there was a sub-committee of the ABA Business Bankruptcy Committee focused on the teaching of bankruptcy in which full time and adjunct teachers met to talk about these topics. Recently the ABA created a new committee to study the role of adjuncts in legal education.

David Lander Is Back!

Welcome to occasional guest blogger, David Lander, currently a professor of practice at Saint Louis University School of Law. In addition to his current and past academic postings, David has practiced consumer bankruptcy law with legal services organizations as well as business bankruptcy law at the Greensfelder Law Firm. Long-time readers will know that this mix of experience gives David a perspective that few others have. Welcome back, David!