Counting Healthcare Chapter 11 Filings: Are There More Than Expected?

This post is co-authored with my student, Kelsey Brandes, rising 3L, IU Maurer School of Law

Reports of hospitals, physician practices, healthcare systems, and clinics filing for bankruptcy have become seemingly increasingly well publicized in recent years. At the beginning of this year, Pew released a study detailing why rural hospitals are in greater financial jeopardy in non-medicaid expansion states in the wake of the ACA. This may foreshadow more hospital closures and possibly more bankruptcy filings. With this in mind, one of my students at Indiana University Maurer School of Law, Kelsey Brandes (with whom I'm co-posting), decided to survey healthcare businesses that had filed chapter 11 between the beginning of 2008 and the end of 2017 with the goal of assessing how many healthcare businesses filed chapter 11 and why they filed, as based on their disclosure statements and other filings.

This survey found that, after combining jointly-administered cases, on average, 38 healthcare organizations filed per year during the study's ten year period, as shown by year on this graph.

Is Cryptocurrency What Makes Ransomware Possible?

The story about Baltimore's entire municipal IT system being held hostage by ransomware has two angles that might be of interest to Slips readers. 

First, among the services that are affected is the city's lien recordation system (the city is treated as a county; confusingly there is a separate Baltimore county). That means you can't readily get a lien search, and that's gumming up property transactions.  To me this underscores the risk of electronic property records. They are vulnerable to disruption in a way paper is not. One has to worry about fire and water with paper, but we know how to deal with those risks pretty well. Electronic systems are vulnerable in other ways.  Indeed, if a system can be taken hostage, what prevents data from being altered without Baltimore's knowledge?  I don't want to be a Luddite here, but the convenience of electronic systems comes with some scary risks. 

Second, the payment demanded is in Bitcoins. Ransomware seems very dependent upon cryptocurrencies (particularly Bitcoin). Did ransomware even exist before Bitcoin? (That's a serious question. Maybe someone knows.) The only reason to take data hostage is to get paid. But payment is the dangerous moment for the hostage-taker:  if the payment can be traced to the hostage-taker, the long arm of the law can likely get him too.  This means that a bank-based payment system doesn't work well for the ransomware model. Banks are required to "know their customer," and while false fronts can be used that still creates a possible route for law enforcement, as the beard may know who hired him, etc.  Prepaid cards and cash present similar problems because they have to be physically delivered.  But crypto, ah, crypto seems perfectly made for ransomware, particularly when the hostage takers are overseas.     

If I'm right about this, it leaves me wondering first, why there isn't much more stringent regulation of crypto-currency markets for AML? Not all the players can base themselves off-shore. Even if an exchange is in Ruritania, US consumers need to have a wallet provider. Someone's going to be doing business in the US and using a US bank. If the US can squeeze state actors with its AML regime, why can't it similarly squeeze crypto markets into compliance?   

Second, is there any positive social value to crypto currencies? They seem to be used primarily for two purposes:  money-laundering (I'm including ransom payments in this bucket) and speculation.  Other than the occasional odd case, they aren't being used to hedge, for payments, or for any other socially beneficial purpose that I can tell. Maybe I have this wrong, but I'm having trouble seeing why crypto currencies should be tolerated by the law. 

Payday Rule Comments

Because the ALI Consumer Contracts Restatement plus grading hasn't given me enough to do this week, I thought I would gin up some brief comments on the CFPB's proposed repeal of the Payday Rule.  My comments are here.   

Podcast on ALI Consumer Contracts Restatement

I did a podcast for the Consumer Finance Monitor Podcast about the American Law Institute's Consumer Contracts Restatement project.  It's not often that you will see me on the same side of an issue as the podcast's host, Alan Kaplinsky, an attorney at Ballard Spahr who represents financial services firms.  Indeed, I suspect the next time Alan is sitting across a table from me asking me questions, it will be at a deposition.  Given what a great radio voice Alan has, that might almost be fun. But our collaboration on this podcast goes to an important, but hard to understand thing about why both consumer groups and business groups are opposed to the Restatement.  

Both consumer and business groups are uncomfortable with the ALI acting as a private legislature, unchecked by any constituency.  But the real issue is that for consumer advocates, the Restatement is a bad project because it would bind all consumers to contractual terms that they do not agree with or even know about.  

In contrast, the concern for business groups is that the Restatement gives that small subset of consumers who litigate somewhat stronger tools.  These tools aren't strong enough to change the balance of power, but they are enough to be a pain for businesses, specifically a jettisoning of the parol evidence rule (i.e., it doesn't matter what the written contract says, the salesman's representations are admissible evidence) and a contract defense of deception that will apply to some contracts where UDAP would not (again, you've gotta worry about the sales rep's communications).  In other words, the concerns here aren't symmetrical, so this is not a situation where the Restatement is a moderate neutral position.  It's bad for all consumers, and it creates more litigation problems for businesses without creating meaningful consumer protections.   

 

ALI Consumer Contracts Restatement--More Problems with the Legal Research

More problems are emerging with the legal research underlying the American Law Institute's Consumer Contracts Restatement project.  The Consumer Contracts Restatement has been the subject of scholarly criticism for a while because of its novel quantitative empirical approach (case counting).  The Restatement stands on six empirical studies of consumer contracts.  While the current draft claims that these studies merely serve as confirmation for the Restatement's positions, which were supposedly arrived at through the traditional method of reading and distilling the law from the cases, all of the early drafts of the Restatement said nothing about this traditional method and only relied on the empirical studies, which now conveniently arrive at exactly the same positions.  

The first two scholarly works to examine the legal research underlying the Restatement were one by Professor Gregory Klass at Georgetown Law and another by yours truly with seven other ALI members.  These studies were basically looking for "false positives"--cases claimed to be relevant by the Restatement that aren't.  Both studies found an incredibly high rate of false positives--over 50% in some instances.  The Restatement had included in its case count, among other things, completely irrelevant cases, such as business-to-business cases, cases not involving common law contract disputes, duplicate cases, and vacated cases.  These types of errors were pretty shocking in what should be a document based on unimpeachable legal research.  A nice summary write-up of these studies by Professor Martha Ertman can be found over at JOTWELL (the Journal of Things We Like Lots).  

Now Professor William Widen at the University of Miami has done some digging on the Restatement's treatment of pay-now, terms-later contracts. Professor Widen's preliminary research has found that there's also a false negative problem--the Restatement has missed a number of state Supreme Court cases, many of which are contrary to its position.  Additionally, the Restatement seems to have missed a substantial number of state Supreme Court cases that make clear that providing "notice" in consumer contracts means actual knowledge, not merely notional notice.  In short, there is increasing evidence of serious problems with the legal research underlying the Restatement, both false positives and false negatives.  My sense is that with more time, research will adduce even more false negatives.  Given that the ALI likes to present itself as the gold standard of legal research, these problems should give ALI membership pause when considering approving the Restatement.  

ALI Consumer Contracts Restatement-What's at Stake

The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project.  Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.  

Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms.  In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.  

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers....

A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project. 

So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!

ALI Engages in Cheap Intimidation Tactics in Its Attempt to Ram Through the Consumer Contracts Restatement

As Credit Slips readers know, I've been fighting the American Law Institute's Consumer Contracts Restatement project for several years.  I think it started with good intentions, but it's unfortunately turned into a remarkably anti-consumer project.  The ALI has accused yours truly of a copyright violation for making the draft Restatement available through Dropbox to other ALI members in the context of a link in a letter urging those ALI members to vote against the Restatement.    

ALI's actions on this are the pettiest sort of bullying to try and quash the "vote no" campaign against a project that would seriously harm consumer rights.  ALI filed a DMCA takedown notice with Dropbox that resulted in Dropbox preventing me from sharing all my files, not just the one file in question. (Damages, damages...) ALI even went so far as to freeze me out of its website, which prevented me from reading comment letters about the draft or filing motions to amend it.  

Fortunately, there's a good way to deal with bullies, and that's get a lawyer.  ALI restored my website access after hearing from my righteous copyright counsel, and has in fact since made the draft Restatement publicly available, even while still insisting (on a completely factually misinformed basis, but ALI never bothered to ask me) that what I did was somehow outside of fair use and refusing to rescind the DMCA takedown notice. It's become clear that ALI desperately needs to finish its Restatement of Copyright so it can understand how fair use actually works.    

The fact that ALI is making the draft publicly available now just shows what nonsense its claim was—it was nothing but a cheap intimidation tactic. ALI ought to be ashamed for acting this way. Is this kind of thug behavior really how the nation's preeminent law reform organization rolls?  

Round 2 -- Do the Euro CACs Have to be Used if There is a Need to Restructure a Euro Area Sovereign's Debt?

The intriguing question raised by Mark Weidemaier’s superb new paper posted a few weeks ago (here) was whether, if a Euro area country hits a debt crisis, it would be mandatory for it to use the Euro CACs that are now part of the majority of Euro area sovereign bonds.  Mark’s paper says no (for more, see also Tyler Zellinger, here; and Buchta, Shan, Plambeck & Shufro, here).

About ten days ago, this question came up at a conference at the EUI organized by Franklin Allen, Elena Carletti and Jeromin Zettelmeyer. The plan for the conference hadn’t been to discuss this particular topic, but CACs and restructurings in the Euro area more broadly. But Mark’s paper had just come out and it turned out that almost everyone there had strong views about it; particularly in the context of thinking about Italian sovereign debt.

The panel of CAC/sovereign debt experts was: Yannis Manuelides, Anna Gelpern, Aitor Erce and Giampaolo Galli.  And the discussion – helped by interventions from experts in the audience who included Jeromin Zettelmeyer, Ignacio Tirado, Richard Portes, Lee Buchheit and Elena Carletti -- was fascinating.  Bottom line:  While experts have strong views about this topic, there is zero clarity in terms of what the policy intent was -- we are all reading the tea leaves.  Mark’s view is that the existing Euro CACs are but an option; and he makes a strong argument for that position (one that I buy).  Ignacio, however, is equally convinced of the opposite position; that the Euro area countries are stuck using the CACs if they hit a debt crisis and need to restructure (this does not mean that he thinks this is the efficient solution; just the legal mandated one).  And I have learned over the years that Ignacio is a very careful thinker and knows his European treaty law better than almost anyone.  Yannis, for his part, was – as he always is – nuanced and took a position somewhere in between.  Put differently, he refused to say whether he agreed with Mark or Igancio.  Anna too, didn’t take a side on this (although she knows the history of what was originally intended by the policy makers better than anyone).  Perhaps most interesting – especially since I had not heard his views before – was the wonderfully gracious and wise Giampaolo Galli (Economics Dept, Cattolica University, Roma), who talked explicitly and in detail about the debt situation in Italy.  For those who don't know him yet, here is his Wikipedia page (it is an understatement to say that he has had an impressive career).

My reason for putting up this post is that Giampaolo has just posted his conference draft, “Collective Action Clauses and Sovereign Debt Restructuring Frameworks: Why and When is Restructuring Appropriate” to ssrn.com (here).  The draft both addresses the question raised by Mark in a nuanced way (while also reporting the views of those in the legal department of the Italian Treasury) and goes further to ask whether the primary task of the Italian government now should be thinking of restructuring techniques or figuring out ways to improve growth and get spending under control.  Giampaolo argues persuasively that focus should be on the latter problems and not the former.  Clever restructuring techniques, he explains, may eventually be needed. But they are not the solution to the problem with the giant Italian debt.

Given the strong disagreements on this matter, and the utter lack of clarity as to what was intended by Euro area policy makers in the first place, it sure would be helpful to have some kind of legislative history as to what was intended when the Euro CACs were adopted in late 2012.   Alternatively, maybe the European authorities could tell us what they were thinking?  Or what they are thinking now about what they should have been thinking then?

Ouch. (Puerto Rico Edition)

The First Circuit responds to the Oversight Board's request for a stay until the Supreme Court can rule on their cert. petition, with regard to the Constitutionality of the Board's appointment (emphasis added):

ORDER entered by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge: In accordance with Federal Rule of Appellate Procedure 41(b), this Court ordered the withholding of its mandate in this case for a period of 90 days so as to allow the President and the Senate to appoint members of the Financial Oversight and Management Board for Puerto Rico in accordance with the Appointments Clause. With that 90-day stay set to expire on May 16, 2019, the Board informs us that the President has announced his intent to nominate the current members to serve out their terms, but that the nominations have not yet gone to the Senate. The Board has also filed, apparently with no sense of any urgency, a petition for certiorari. The Board seeks a further stay of our mandate, this time under Federal Rule of Appellate Procedure 41(d)(1), which would stay the mandate indefinitely until the Supreme Court's final disposition of the case. That request is denied. Instead, the stay of our mandate is extended sixty (60) days, until July 15, 2019.

Middle Class Homeowners Are the Biggest Winners from Student Loan Forgiveness

A lot of the criticism of Senator Elizabeth Warren’s student loan forgiveness proposal has focused on how it's not fair to give loan forgiveness to current borrowers when past borrowers repaid their debts.  That criticism overlooks the enormous boost Senator Warren's proposal would give to the real estate market. Many previous borrowers are homeowners, and homeowners are going to be one of the major beneficiaries of any student loan debt forgiveness as their home equity value will increase because of the increase in housing demand from deleveraged student borrowers.  

By my calculations Senator Warren's proposal for $640 billion in student loan forgiveness could readily translate into $1 trillion of increased home equity value plus an additional $320 billion to $680 billion in GDP growth. That's an amazing win-win-win for student loan debtors, for homeowners, and for those in the home building and furnishing trades.  

The Student Loan Tax

Democrats’ policy proposals have sparked a vital and overdue debate on our system to pay for post-secondary education, and how that system burdens and redistributes income. The existing system combines a small share of taxpayer funding (via the Pell Grant) with a large share from the student loan tax. The student loan tax requires the students themselves to pay a percentage of their income for 20 to 25 years, collected not by the IRS but by private contractors for the US Education Department. The Clinton and Obama administrations converted a clunky loan system involving banks and state guarantee agencies into a direct federal “loan” program. The federal government issues funds to colleges and universities, and then outsources to collection contractors to tax the earnings of college grads and noncompleters. Although not all students participate in income-dependent repayment, greater numbers are expected to do so if nothing changes. Not only are student loans different, they are looking less and less like loans at all.

The current system is a tax on future earnings, rather than a true loan program, for several reasons. First, the income-dependent payment programs tie “borrower” payments to their disposable income, and cancel debt at the end of 20 or 25 years. Second, borrowers who are declared in default end up having wages garnished at a fixed percentage of income, as well as tax refunds intercepted, both of which are essentially taxes on earned income (or cancellation of earned income tax credits.) Third, a few (and so far badly administered) loan forgiveness programs allow students to stop repayment after 10 years if they remain in low-paying and socially valued jobs.

When we talk about canceling student loan debt, we are really just talking about how much of college students’ future earnings we will tax. As I have noted previously, some, especially graduate degree holders, repay far more than the cost of their own education, because of above-cost interest rates. Others benefiting from various “forgiveness” programs repay less, at least on a present-value basis.

The problem with costing out a one-time loan cancelation program is that each year a new cohort of students is assigned nearly $100 billion in new federal loans to repay. The combined federal payments under the major loan and grant programs (DL, Perkins and Pell) total about $125 billion annually. The issue going forward is whether to tax individuals and corporations in the present year, or the students in future years, and in what combination. There is also the problem of the disappearing role of states in funding public higher education, a topic I will write about separately.

This is why the policy choices are not binary (full debt cancellation and free college, i.e. 100% taxpayer financing, versus the status quo.) A notable benefit of our expanded policy debate is some real attention to the distributive consequences of major changes in higher education funding. We could, for example, offer new and less onerous income-dependent repayment, taxing a lower percentage of earnings, setting a higher exemption than the poverty level, or shortening the 20-year repayment period. We could, as some have proposed, reduce student repayment even further for borrowers engaged in public service or national service, although as we have seen, defining eligibility categories creates big process costs. We can, and should, abolish “default” and re-evaluate payment obligations for borrowers who did not complete their college education. We could examine the pros and cons of IRS or private contractor collection. The value of elements of our existing system is the ability to apply income progressivity as measured both by students’ pre-college family income as well as their post-graduation income to allocate the burden of their college costs.

How Chaotic Would an Italian Debt Restructuring Be? (Not Very)

Mark Weidemaier & Mitu Gulati

Wolfgang Munchau’s column in the FT yesterday identifies a possible Italian debt crisis as one of the biggest worries for the Eurozone. This makes sense, given Italy’s huge debt stock (upwards of 130% of GDP), seemingly irresponsible politicians, and low growth. An Italian debt restructuring would be the biggest in history, yet it might prove necessary. Munchau highlights the economic consequences of a debt restructuring (e.g., for Italian and other European banks) and also asserts that Europe’s “legal systems are not prepared.” The general sense is that an Italian debt crisis will be a disaster.

It won’t be good, that is for sure. But if planned properly, an Italian debt restructuring can be done relatively smoothly. Why? Because Italy has an enormous “local law advantage,” combined with an enormous set of captive (aka local) holders who have been, to quote an old friend in the sovereign restructuring business, “rolling over their Italian bonds since Hadrian died.”

One might ask, Didn’t Greece have the same local law advantage and wasn’t that a chaotic restructuring? Our reply is that the source of chaos in the Greek case was the unwillingness of key institutions to acknowledge that the debt was unsustainable until very late in the process. The restructuring itself was relatively smooth (for more, see here). In any case, the restructurers this time can learn from the Greek experience. Plus, the local law advantage is significantly bigger in Italy.

Students in our joint class on sovereign debt worked intensely this semester on what an Italian debt restructuring might look like, and they have recently posted their work to ssrn.com. From our informal conversations with European colleagues and friends, we understand that lawyers at various official sector institutions take the position that they do not have the power to do the things our students suggest. But we have yet to hear convincing reasons for this position. Indeed, our impression is that these lawyers are mostly worried that they will spook investors if they publicly acknowledge having the power to restructure (on the theory that investors might take this as a sign that restructuring is likely).

About the Student Loan Forgiveness Price Tag...

Senator Warren's student loan forgiveness proposal has a lot of scolds moaning about the immorality of debt forgiveness, the unfairness to those who paid their debts, and complaining about the price tag. It's pretty obvious that none of those folks know anything about how the federal student loan system works. If they did, they'd know the we crossed the debt forgiveness Rubicon long, long ago. There is already enormous debt forgiveness baked into the federal student loan program.

The only real difference between Senator Warren's proposal and the existing forgiveness feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. It's not a matter of principle in any way, shape, or form.  

Student Loan Borrowing Is Different

Education finance and student loan forgiveness have been getting a lot of attention the last couple of days because of our former co-blogger's loan forgiveness proposal.  I'm not going to address the merits of that proposal here.  Instead, I want to make a simple point that many of the critics of Senator Warren's proposal don't seem to understand:  student loan borrowing is materially different from other types of borrowing, such that the borrower has no idea what s/he is getting into.

When I borrow to buy a car or a home, it is a one-and-done deal with a single loan product.  With the car or home, I also know what I’m getting and I know what it costs.  These aren’t perfect markets, but the work on a broad level.  Education finance does not.  That’s why criticisms of student debt relief plans that claim that borrowers know what they’re getting into or the sacredness of the contract just irk me.  Student borrowers have no clue what they’re getting into and if a party doesn’t really understand a deal, it’s hard to see why it should be treated as sacrosanct. (Not to mention, as any good bankruptcy lawyer knows, basically all deals are made subject to the possibility of a bankruptcy discharge.). There is a fundamental market failure in student lending and that is that borrowers simply don't materially understand the nature of the obligations they are assuming...and probably can't.