Coyle on Studying the History of a Contract Provision

The way many of us teach interpretation in Contract Law, there is little role for history (admittedly, this is just based on casual observation). The meaning of a clause is a function of the words that make up that clause.  The parties to the transaction are assumed to have drafted it to document the key aspects of their transaction, to balance risks and rewards blah blah.  If a dispute arises, we might have an argument as to whether a strict textualist reading of the words accurately represent what the parties really meant by them or whether we need to also examine the context of the relationship. What we do not ever do, however, is to delve into the history of the clause from before these parties contemplated using it – that is, of what prior drafters of the original versions of this clause might have meant in using it.

The foregoing makes sense in a world in which the contracts for each deal are drafted from scratch. But does anyone draft contracts from scratch?  What if we live in a world where 99.9% of contracts are made up provisions cut and paste from prior deals; provisions that are assumed to cover all the key contingencies, but not necessarily understood (or even read)? In this latter world, where there are lots of provisions that the parties to the transaction never fully focused on (let alone understood), might there be an argument – in cases where there are interpretive disputes -- for the use of a contract provision’s history? Might that history not sometimes be more relevant than the non-understandings of the parties as to what they did or did not understand they were contracting for? (Among the few pieces that wrestle with this question are these two gems: Lee Buchheit's Contract Paleontology here and Mark Weidemaier's Indiana Jones: Contract Originalist here)

I’m not sure what the answer to the foregoing question is. But it intrigues me.  And it connects to a wonderfully fresh new body of research in Contract Law where a number of scholars have been studying the production process for modern contracts.  The list of papers and scholars here is too long to do justice to and I’ll just end up making mistakes if I try to do a list.  But what unites this group of contract scholars is that for them it isn’t enough to assume that contracts show up fully formed at the time of a deal, purely the product of the brilliant minds of the deal makers who anticipate nearly every possible contingency at the start.  Instead, understanding what provisions show up in a contract, and in what formulation, requires understanding the contract production process. (Barak Richman's delightful "Contracts Meet Henry Ford" (here) is, to my mind, foundational).

It is perhaps too early to tell whether this research will catch on and revolutionize contract law. I hope it does, but I’m biased.

One of my favorite papers in this new body of contract scholarship showed up recently on ssrn. It is John Coyle’s “A History of the Choice-of-Law Clause” (here). I have rarely found a piece of legal scholarship so compelling.  The paper is not only a model of clarity in terms of the writing, but it is brave. It is completely unapologetic in not only taking on an entirely new mode of research (a painstaking documentation of the historical evolution of the most important terms in any and every contract), but in coming up with a cool and innovative research technique for unpacking that history (this project would have been impossible to do without that innovation).

The Fifth Circuit Finds a Way to Make It Even Harder to Discharge Student Loans in Bankruptcy

On Tuesday, the United States Court of Appeals for the Fifth Circuit released an opinion that, if anything, makes it even more difficult to discharge student loans in bankruptcy. Writing for a three-judge panel in a case called In re Thomas, Judge Edith Jones reaffirmed the court's commitment to the existing case law and added yet another judicial gloss to the words of the statute. The opinion was a missed opportunity to return to a reasonable standard that allows debtors to discharge student debt in appropriate cases while still protecting the public fisc.

The debtor was over 60 years old, part of the trend of older filers in bankruptcy court. She had taken out $7,000 in student loans for two semesters of community college. Within a year after leaving community college, the debtor developed diabetic neuropathy, which left her unable to work at any job that required standing for any period of time. The debtor had to leave a retail job, a restaurant job, and a job at UPS. She lost a previous job at a call center after it was acquired by another company who then fired her within three months for wearing headphone and listening to music during her lunch break, a determination that probably not so coincidentally meant the debt was ineligible for unemployment insurance.

How NOT to Regulate ISAs

Income-sharing agreements or ISAs are becoming an increasingly popular way to finance higher education. The key problem that ISAs face as a product is uncertainty about their regulatory status. Are ISAs “credit” for various statutory purposes? Or are they something else? Into the regulatory void comes a bipartisan bill, introduced by Senators Mark Warner, Marco Rubio, and Chris Coons, that would set forth a regulatory framework for ISAs. The problem is that the regulatory framework proposed is shamefully bad: it would give a green light to discriminatory financing terms and tie the CFPB’s hands from further regulating ISAs.

Playing with Fire: The CFPB's Proposed Repeal of the "GSE Patch"

CFPB recently put out an advance notice of proposed rulemaking to amend the Qualified Mortgage (QM) Rule by letting the "GSE Patch" expire.  What the Bureau is proposing is potentially very dangerous.  While I haven’t liked some of the Bureau's other proposed rules (including under the Cordray Directorship), none of them were an all-out ideological gamble with the economy. This one, in contrast, is really playing with fire.  

Biden's Involvement in the Detroit Bankruptcy?

In the Democratic Primary debate last night, former Vice-President Joe Biden claimed to have been deeply involved in the Detroit bankruptcy: 

Q (Tapper): What do you say to progressives who worry that your proposals are not ambitious enough to energize the progressive wing of your party, which you will need to beat Donald Trump?

A (Biden): ... Number three, number three, I also was asked, as the mayor of Detroit can tell you, by the president of the United States to help Detroit get out of bankruptcy and get back on its feet. I spent better part of two years out here working to make sure that it did exactly that.

What on earth is Joe Biden talking about? I followed the Detroit bankruptcy case fairly closely and never once heard of any involvement from Biden. A google search for "Biden Detroit bankruptcy" shows an involvement consisting of all of one lunch with the Mayor of Detroit.  Maybe Biden was deeply involved behind the scenes, but I doubt it, as the federal government simply didn’t do anything to help out Detroit. Perhaps he was referring to the GM/Chrysler bankruptcies? If so, there was important federal involvement as a lender, but Joe Biden was not an important player in those cases either as far as I know.

If others know more, it would be interesting to hear, but as far as I can tell, Biden is claiming credit for things that he had no involvement in.  

Third Circuit Affirms Crystallex Attachment Order

Today, the U.S. Court of Appeals for the Third Circuit affirmed the order allowing jilted Canadian mining company Crystallex to attach PDVSA's equity stake in PDV-Holding (the corporate parent of CITGO). Here's the unanimous opinion. (For prior coverage of the attachment ruling see here.) It's possible proceedings in the District Court might be delayed further if Venezuela seeks Supreme Court review, while the district judge resolves outstanding procedural questions (see here), or because of lingering uncertainty about whether the U.S. sanctions now in place will prevent an actual execution sale. So it's not exactly over. But on the core question--whether Venezuela's control over PDVSA was so extensive as to make the entity the government's alter ego--the Court of Appeals resoundingly rejected Venezuela's argument: "Indeed, if the relationship between Venezuela and PDVSA cannot satisfy the Supreme Court’s extensive-control requirement, we know nothing that can."

India to Issue its First Foreign Currency Sovereign Bond?

Mitu Gulati & Mark Weidemaier

The two of us are beginning a project to build a dataset of foreign currency sovereign bonds and their contract terms. The dataset of bond issuances has a conspicuous absence: India.

Turns out India has never issued a foreign currency sovereign bond. Some state-owned enterprises have ventured onto the foreign markets in search of investors, but not the sovereign. This is a bit puzzling because India certainly has the economic growth and financial prospects to attract foreign investors. Countries like the Philippines, Turkey, Argentina, Mexico, Brazil, Russia, and China regularly tap the international markets. Indeed, closer to home, many of India’s smaller neighbors, such as Sri Lanka, Pakistan and even little Maldives, have tapped the foreign currency sovereign markets. We also know from our research that there is considerable appetite for Indian sovereign issuances from big investors in places like Singapore and Canada. The interest is such that foreign funds buy Indian domestic currency issuances despite the inflation risks they pose. Presumably, these funds would jump at the opportunity to buy a foreign currency issuance.

So, why not India?  Or, perhaps we should ask: Why now India? There are conflicting reports, but the government appears to be considering issuing an international, foreign-currency bond, likely yen- or euro-denominated. In a recent budget speech, the Finance Minister of India announced the plan (see here, for a recent Bloomberg story). Other reports, however, indicate that the office of Prime Minister Narendra Modi has developed cold feet about the plan (see Bloomberg here). The Economic Times of India (here; and also this Money Control article) also describes how the senior bureaucrat who was in charge of the issuance has been transferred from the Finance Ministry to a less prominent position and is seeking to retire early.

Pre-Revolutionary Chinese Debt: An Investment for the Truly Stable Genius

Mark Weidemaier & Mitu Gulati

About a year ago, an unusual securities action was brought against a pastor at one of the largest Protestant churches in the country and a financial planner. The accusation was that the two, Kirbyjon Caldwell and Gregory Smith, had duped elderly investors into buying participation rights in bonds issued by the pre-revolutionary Chinese government. The bonds have been in default since 1939. Here is the SEC’s press release; Matt Levine at Bloomberg talked about the case here. Among other things, the SEC accused Caldwell and Smith of violating the registration requirements of the federal securities laws and of committing fraud.

This case got a fair amount of attention because Mr. Caldwell is no ordinary pastor. He leads one of the largest congregations in the country, with roughly 14,000 members, and was a spiritual adviser to George W. Bush and Barack Obama (see here).

The core of the fraud case seems to be that Caldwell and Smith promised investors safe, quick returns. Allegedly, the plan was to sell the bonds for a profit or to get the Chinese government to pay up. From the SEC’s perspective, this was like promising to squeeze water from a stone; since the communist takeover in 1949, Chinese governments have steadfastly refused to pay the bonds.

It all sounds rather daffy. Also, weirdly specific. It can’t be easy to persuade people to open their pocketbooks for antique Chinese sovereign bonds. Still, we were struck by the SEC’s characterization of the bonds, in both the press release and the complaint, as “defunct” and as “collectible memorabilia with no meaningful investment value” (here and here). The characterization presumes the answer to a question that has long fascinated us, which is whether a sufficiently motivated claimant could enforce these bonds against China.

Ramming Bow Contracts

Have you heard of Ramming Bows? Or did you know that they describe a category of boilerplate contract provisions?  Until a couple of weeks ago, I had not either.  That was when I came across Glenn West’s two delightful blog posts at the Weil Gotshal & Manges site (here and here). Glenn is a senior partner in the Private Equity/M&A practice at Weil. And in his spare time, he writes wonderfully witty blog posts and articles about wide range of legal issues; many of which are about the bizarre world of sophisticated boilerplate contracting.  Even if you have no interest in contract law, let alone boilerplate contracts, I suspect that you will enjoy his writing.  It is insightful about the way in which contracts get produced and evolve in the real world and, even better, is funny.

What Is "Credit"? AfterPay, Earnin', and ISAs

A major issue in consumer finance regulation in mid-20th century was what counted as “credit” and was therefore subject to state usury laws and (after 1968) to the federal Truth in Lending Act. Many states had a time-price differential doctrine that held that when a retailer sold goods for future payment, the differential between the price of a cash sale and that of credit sale was not interest for usury law purposes. State retail installment loan acts began to override the time-price doctrine, however, and the federal Truth in Lending Act and regulations thereunder eventually made clear that for its purposes the difference was a “finance charge” that had to be disclosed in a certain way. 

 

Today, we seem to be coming back full circle to the question of what constitutes “credit.” We’re seeing this is three different product contexts: buy-now-pay-later products like Afterpay; and payday advance products like Bridgit, Dave, and Earnin’; and Income-Sharing Agreements or ISAs (used primarily for education financing). Each of these three product types has a business model that is based on it not being subject to some or all “credit” regulation. Whether those business models are well-founded legally is another matter.

 

Let me briefly recap what is “credit” for different regulatory purposes and then turn to its application to the types of products.

Elizabeth Warren & the Dow Corning Bankruptcy: Nothing to See

The Washington Post has a story about Senator Elizabeth Warren’s involvement in the Dow Corning bankruptcy that implies that Senator Warren was somehow working against the interests of personal injury victims. That’s rubbish, and it’s frankly irresponsible reporting that fundamentally fails to understand the bankruptcy process and leaves out a critical fact.

Bankruptcies are complicated, so let me relate the Dow Corning story and then what we know of Senator Warren’s minimal involvement. Bottom line is that this is a complete nothing burger, much like the previous Washington Post story with the shocking headline (much mocked, and now amended) that then-Professor Warren had billed [a below-market] rate of $675/hr for her legal work. 

Here's the properly related story in a nutshell: Senator Warren did some minimal work in support of a deal to ensure compensation for tort victims that was supported by the overwhelming majority (94%) of those tort victims and that was approved by a federal court. That’s a good thing that deserves praise, not some implicit shade.  Alas, the Post doesn't bother to mention the tort victim support for the plan. 

Venezuelan Debt: Soft Power Matters

Mark Weidemaier and Mitu Gulati

Last week, we did a post about a set of creative but long shot defenses that Venezuela’s Interim Government has invoked to defend against lawsuits by creditors holding defaulted debt. Basically, the government wants a stay of creditor enforcement efforts. The plaintiffs want summary judgment—i.e., a relatively quick entry of judgment, without a trial or significant fact-finding. The Interim Government’s defenses have equitable appeal but questionable (although not zero) legal merit. The defenses included the contract law defense of Impossibility and the customary international law defenses of Necessity and Comity. Impossibility rarely works, especially when the defendant’s argument boils down to, “I’m out of money and need time to work out a deal with my creditors.” Necessity and Comity may not even apply in cases arising from a sovereign’s default. However, the Interim Government’s legal team persuasively emphasized their client’s impossible situation—recognized as the legitimate representative of the country but unable to access its resources.

Judges have power, and much of this power is of the “soft” variety that comes, not from the ability to resolve substantive disputes, but from professional status and authority and from the ability to control process. Here, the judge has given the Interim Government a bit of the relief it wanted, in the form of a relatively favorable scheduling order.

Equal Treatment in Sovereign Restructurings

Mitu Gulati & Mark Weidemaier

Last Friday, the Venezuelan government (at least, the representatives of that government recognized by the U.S.) issued a set of broad principles it intended to follow when it conducted the debt restructuring that is going to be necessary as soon as Mr. Maduro is given the proverbial boot from office.  One of those principles is going to be “equal treatment” of the various claims denominated in foreign currency – PDVSA bonds, promissory notes, Venezuelan sovereign bonds, arbitral awards and so on.  For those who are familiar with sovereign restructurings, the use of this broad equal treatment principle is going to be familiar (for example, Greece used it in 2012 when faced with an array of different types of debt instruments).

Our question is why.  The different debt instruments that Venezuela has – PDVSA bonds, sovereign bonds, Prom Notes, etc. – have different legal terms.  Some have stronger creditor rights and others have weaker ones. And that probably means that the current investors paid different amounts to buy them.  If investors paid different amounts for stronger versus weaker legal rights, doesn’t it stand to reason that the ones with the stronger rights should be offered a higher payout in a restructuring? And if they are not paid different amounts, isn’t that an invitation to the ones with stronger rights to engage in holdout behavior?

In Greece, for example, both the local-law governed Greek sovereign bonds and the foreign-law ones were offered the same deal.  Almost of the local-law bondholders took the deal, but relatively few of the foreign ones did. End result: Greece paid out the foreign-law bonds that refused the offer in full.  The same was true for a bunch of the Greek guaranteed debt. 

In Barbados, in the restructuring that is ongoing, the domestic-law bonds have taken the offer made by the government. But that same offer has been turned down the foreign-law bondholders; presumably because they think their instruments are worth more because of their stronger legal rights.  Wouldn’t it be efficient to offer the foreign holders more rather than getting mired in years of litigation?

There is undoubtedly a logic to the equal treatment principle.  We are wondering what it is. Efficiency? Maybe the logic is that if, for example, Venezuela were to offer the sovereign bonds requiring 100% of the creditors to approve of the restructuring a few cents more on the dollar than the ones requiring 75%, the whole process would get mired in disputes over whose bonds had stronger or weaker legal rights? Or maybe the logic is that investors will either hold out or not. Put differently, maybe there really is no marginal investor (i.e., one who, in exchange for a few extra pennies, might choose not to hold out and sue). Investors either have an appetite for litigation (in which case they aren’t interested in accepting restructuring terms) or they don’t (in which case there is no need to compensate them for rights they don’t have the appetite to assert). But again, we are speculating.

As a final puzzle, why are some bonds exempt from the equal treatment principle? The restructuring guidelines say that bonds backed by collateral will receive different treatment. But why? Why is a right to collateral different from a 100% voting right? Perhaps it is because some collateral pledges are relatively easy to enforce, such as the pledge of shares in U.S. entities. The PDVSA 2020 bonds are the primary example here. By contrast, a 100% voting right ensures the right to sue but doesn’t do much to help an investor enforce the judgment. However, the guidelines released by the Guaido team may have in mind something more than just the 2020s.

Yannis Manuelides Paper on the Limits of the "Local Law Advantage" in Eurozone Sovereign Bonds

Sovereign debt guru and Allen & Overy partner, Yannis Manuelides has a new paper (here) out on the “local law advantage” in Euro area sovereign bonds.  This paper, along with Mark Weidemaier’s paper from the beginning of the summer (here – and a prior creditslips discussion about it here), helps shed light the thorny question of which European local-law sovereign bonds should be valued more by investors: Ones with CACs or ones without them.  Given that there are billions of euros worth of these bonds with and without CACs being traded every day, one might have thought that there would be clear answers to these questions from the issuing authorities themselves.  There are not.  Further, some of the folks at the various government debt offices take the bizarre (to me) view that answering this question might somehow scare the market.

Evaluating Venezuela’s Guidelines for Debt Restructuring

Mark Weidemaier & Mitu Gulati

As reported in the Financial Times, Reuters, and elsewhere, Juan Guaido’s economic and legal team has released a report setting out guidelines for a restructuring of Venezuelan debt. The report, attached here, describes a process that can only happen if/when Maduro loses power and the U.S. government lifts the current sanctions regime, which effectively forbids most transactions in Venezuelan debt. The report is a brief three pages, but it offers intriguing clues about what a restructuring might look like.

Proposals to restructure the Venezuelan debt must accommodate certain basic realities:

- The country is experiencing a dire humanitarian crisis, which demands immediate attention.

- The debt stock is utterly, needlessly complex. Venezuela has somewhere in the range of $200 billion in external liabilities. Virtually all creditors are unsecured, and every creditor’s repayment prospects are tied directly to the government’s ability to monetize one asset: oil. For all practical purposes, every creditor is in the same position. Yet the debt is spread across multiple obligors (the government, PDVSA, etc.) and a bewildering array of obligations (bonds, promissory notes, trade credits, arbitration awards, and who knows what else).

- The government therefore needs time—time to focus on humanitarian needs, time to rehabilitate the oil sector, time to stabilize the political situation, time to determine the full scope of its debts, time for a new government to come up with a credible economic plan for recovery, time to persuade key foreign companies that they won’t be expropriated again if they come back and help in the recovery, and time to come to terms with its creditors. But…

- It may not have much time. Many creditors have been patient. But a few have already reduced claims to judgment and initiated attachment proceedings against crucial government assets, including U.S. oil operations. It is surprising that the litigation floodgates have not opened, but that could happen any day now.

- The next government is going to be highly vulnerable to creditor lawsuits, and particularly so in the United States. It cannot right its economy without selling oil abroad (and sales in the U.S. are typically the cheapest, given refineries and distances). But these sales generate assets in foreign jurisdictions, where creditors will try to seize them. This vulnerability, paired with the complexity of its debt stock, makes Venezuela more akin to Iraq than to more recent crises.

- Finally, the U.S. government may prove a fickle ally. The most effective way to buy time for a Venezuelan restructuring would be for the U.S. and other key jurisdictions to block creditors from attaching Venezuelan assets while the government was engaged in good faith restructuring negotiations. This is what happened for Iraq, but will the Trump administration be able to collaborate with other key nations (China, Russia) to produce a solution similar to that designed for Iraq?  We don’t know.

These facts make for a very messy debt restructuring scenario. But that doesn’t mean the restructuring plan must be complicated. To the contrary, the proposal released by Mr. Guaido’s team attempts to simplify. (Note that the plan does not address debts owed to other nations, presumably including state-owned companies):

Timing and credibility: As noted, Venezuela needs time to address pressing humanitarian needs and, more broadly, to get its house in order. It also needs to persuade its creditors that it has accurately estimated its liabilities and repayment capacity. But the byzantine debt stock created by the Maduro regime, combined with the government’s long-standing refusal to engage with the IMF, means that creditors have little reason to accept the government’s estimates. Not surprisingly, then, the proposal envisions that the IMF will both provide emergency humanitarian assistance and play its usual role in assessing the country’s growth and repayment prospects.