Alex Jones's Bankruptcy

Alex Jones filed for Chapter 11 bankruptcy himself today. So what is Mr. Jones hoping to accomplish with the bankruptcy filing? I see three possible goals, but I'm skeptical that he'll achieve more than one of them.

First, by filing for bankruptcy, Jones buys himself a bit of time and breathing space. The automatic stay stops all litigation and collection activity against him. It's not indefinite, but it takes the heat off for a bit. That might help him avoid any collection activities by the Sandy Hook victims' families while his motions for a new trial and remittur are pending.  (As far as I can tell, the Connecticut 20-day post-judgment window for appeal has run, but I guess these are not "appeals" since they are motions to the same court?)

Second, the bankruptcy filing moves the action from Connecticut to a Texas bankruptcy court. Jones might be hoping he finds the bankruptcy court more favorably inclined. I'm skeptical. If his behavior in the bankruptcy court matches how he's behaved in other courtrooms, he's not going to find the judge very sympathetic.

Third, Jones will be looking to get a discharge of his debts—including the Sandy Hook defamation judgment. If a debt is discharged, it cannot be collected after the bankruptcy; the creditor gets only what it is able to collect as part of the bankruptcy process. That would mean that Jones's future income would be free from the creditor's claim; only his present, non-exempt assets would be available for repaying creditors. While those present assets include (I presume) all of the IP of the Jones empire (by virtue of his ownership of the companies that hold them), Jones might have concluded that salvaging his current assets are a lost cause and that he'd do best to focus on freeing up his future income. 

The hitch here is that there is an exception to the bankruptcy discharge for "willful and malicious injury by the debtor to another or the property of another." If the behavior that produced the Sandy Hook judgment was "willful and malicious," then Jones will not be able to protect his future income through bankruptcy.  While the Sandy Hook judgment was for defamation, intentional infliction of emotional distress, and unfair trade practices—things that sound willful and malicious—it was a default judgment, meaning that there was never any actual hearing of the merits of the case; Jones just didn't respond to the suit. If there is a discharge objection raised (as there surely will be), then Jones will have a chance to litigate not the actual judgment, but the "willful and malicious" issue, but that effectively means he has an opportunity to litigate the case he previously forfeited. I'm skeptical that he'll prevail (he certainly loses on willful, but maybe he's got a shot at malicious?), but he at least gets another roll of the dice.

Now this extra dice roll isn't risk free. By filing for bankruptcy, Jones will have to come clean about all of his current assets. If he fails to do so, he risks federal prosecution for bankruptcy crimes.  Additionally, while Jones has filed for Chapter 11, where the default setting is that the debtor retains control of his assets as a debtor in possession, there is the possibility of the appointment of a trustee to take over his assets. There will surely be a motion made for the appointment of a trustee given allegations of Jones hiding assets. Jones will get to fight the motion, but I think a trustee being appointed is a real likelihood. If a trustee is appointed, the trustee will act to avoid various pre-bankruptcy transfers made by Jones in an attempt to shield his assets (and if there is no trustee appointed, then a creditors' committee will seek authorization to do so). Either way, I cannot imagine that Jones will be able to retain effective control of the case for very long. 

Bankruptcy offers Jones a glimmer of hope--maybe he can get a discharge for the Sandy Hook verdict, if the court finds his behavior wasn't willful and malicious--but if I were a betting man, I wouldn't put my money on Jones. Yet as long as he comes clean to the bankruptcy court about his assets, etc., there's little downside to him for trying this last Hail Mary move to stave off the Sandy Hook creditors.

New Resource on Uniform Commercial Code Reform for Digital Assets including Crytocurrency

Earlier this fall I linked to a variety of resources, including webinars, on amendments to the Uniform Commercial Code to account for various types of digital assets. The scope includes but is not limited to commercial transactions involving cryptocurrency.

To add to these resources, a version of the amendments that includes official comments is now available.  

Because there will not be a uniform effective date, and some states have gotten an early start by implementing prior drafts of the amendments (see prior post), these could swiftly become relevant to transactions and disputes, including those that land in bankruptcy court. 

DOJ and DOE New Guidelines for Supporting Student Loan Discharge in Bankruptcy = More Student Loan Discharges?

The Department of Justice, in coordination with the Department of Education, has announced a new process for its handling of bankruptcy cases in which debtors seek an undue hardship student loan discharge. This new guidance has been a long time coming. In 2016, the DOE issued a request for information regarding evaluating undue hardship claims. Slipster Dalié Jiménez and I (along with co-authors) submitted a response that urged the DOE to establish clear, easy-to-verify circumstances under which it would support (or not object to) debtors' requests for student loan discharges. Subsequently we published articles expanding on and updating our proposals, always focusing on how the DOE could craft guidelines that would provide specific, objective criteria for when the DOE would not object to a requested discharge, thereby removing the guess work from discharge requests, and hopefully encouraging the filing of more student loan discharge adversary proceedings.

The new guidelines will go a long way in helping people obtain student loan discharges. They incorporate key aspects of what consumer advocates and academics have highlighted as important to promote discharges for people who will benefit from student debt relief. I predict that, over time, more consumer debtors will request and receive undue hardship discharges.

In short, the new process requires the debtor to submit an attestation form with information that will allow the DOJ and DOE to assess the three prongs of the Brunner test. At first glance, this may seem like a rehashing of the Brunner standard, thus providing the DOJ and DOE with significant wiggle-room to decide whether to support discharge. But upon digging into the requirements to meet each prong, it becomes more clear that the DOJ and DOE, overall, has adopted clear, objective criteria for its decision-making. This should provide debtors and attorneys with confidence in how the DOJ and DOE will respond to student loan discharge requests. Details about how the DOJ and DOE will handle assessing each of the prongs, plus some ruminations on how this guidance may play out, after the break.

Credit Slips Now on Mastodon

Nine years ago, Credit Slips announced its new Twitter feed. Credit Slips is now also on Mastondon, at @creditslips.mastodon.lawprofs.org. We'll put links to our posts on Mastodon as they are published, as well as boost Credit Slips authors. For now, we'll also continue adding posts to our Twitter feed. Come find us on Mastodon! 

Binance's Custodial Arrangements: Whose Keys? Whose Coins?

For months, cryptocurrency FTX (and its majority owner, Sam Bankman-Fried) have been the lender of last resort in crypto markets and pretty much the only distressed acquirer around. Now we learn that FTX has itself failed and is getting scooped up in a distressed acquisition by Binance. Does this remind anyone of Bank of America's purchase of Merrill Lynch and Countrywide in 2008? We'll see if the transaction closes, but at the very least it poses the question of whether Binance stands on any stronger ground than FTX? Binance's revenue has been way down this year, but who really knows its financial condition? It's not a public company, so there's limited visibility into its financial condition.

Here's what I do know about Binance, however, and it gives me real pause: Binance.us's Terms of Use disclose absolutely nothing about its custodial arrangement for crypto holdings. From the documents on Binance.us's website, it is impossible to determine the legal relationship between Binance.us and its customers and hence the type of counterparty risk they have from dealing with the exchange. That's scary.

The Texas Two-Step as Fraudulent Transfer

Judge Judith Fitzgerald (ret.) and I have a post about the Texas Two-Step bankruptcy process up at the Harvard Bankruptcy Law Blog, which has been running a series on the phenomenon.  And the Slips' own John A.E. Pottow has a capstone post on the same topic.    

The tl;dr read version of my post with Judge Fitzgerald is that the real fraudulent transfer vulnerability of the Texas Two-Step is the incurrence of an obligation by the BadCo in the divisive merger, not the transfer of assets to the GoodCo. Focusing on the the incurrence of an obligation not only avoids the problem of the Texas divisive merger statute deeming the merger not to be a transfer of assets (as there is a separate provision in the statute about liabilities that doesn't parallel the asset provision), but it also avoids the problem that there is no longer a transferor entity in existence.  If we're right (and we are), then it means that the liabilities follow normal state law successor liability principles, which should put the liability on GoodCo, which is continuing OldCo's enterprise.

Dual Insulation? The Fifth Circuit's Factual Misunderstanding of CFPB Funding

I know I’m carrying around some extra weight.  But I don’t think it’s quite double insulation.  That sounds like something you need if you’re going on a polar expedition or are really concerned about the heating bill.  But the concept of "dual insulation" plays a big role in the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, which held the CFPB’s funding mechanism to be unconstitutional because it is not an annual appropriation from Treasury.   

In this post, I’ll discuss some of the background on the case, the poorly understood nature of the CFPB’s funding (factual mistakes about which loomed large in the Fifth Circuit’s decision), and the challenge the Fifth Circuit faced in trying to differentiate the CFPB’s funding from that of a host of other federal regulatory agencies (that’s where dual insulation comes in).

US Chamber of Commerce vs CFPB

One would have thought that after a dozen years the challenges to the CFPB’s constitutionality would have been over and that the Supreme Court’s decision in Seila Law would have put the matter to rest. But there are still a trio of suits pending that bring constitutional challenges to the Bureau, including one recently filed in the Eastern District of Texas by the US Chamber of Commerce and some banking and business associations. That’s the suit I’m going to focus on. 

The Chamber’s suit alleges that a recent change in the CFPB’s examination manual—guidance for CFPB examiners that the Bureau happens to make public as a courtesy—that indicates that examiners are to consider discrimination in non-credit services to be an unfair, deceptive, or abusive act or practice is a “legislative rule.” A legislative rule must comply with the Administrative Procedure Act, including adequate notice-and-comment, being based in law, and not being arbitrary and capricious. As a kicker, however, the Chamber’s suit adds in a count that the Bureau’s funding is unconstitutional. What's likely to happen?

 

Help us Brainstorm how the Bankruptcy System Could be Fairer to Low-income People and People of Color

This past month, Nathalie (Martin) and I gave a talk at the Tenth Circuit Bench and Bar Conference on Credit, Race, Class, and Bankruptcy. After recounting some of the historical reasons for persistent wealth, income, and debt gaps among different races and ethnicities, we shared these slides to show that wealth and debt inequalities persist to this day.

In one news story that was only a month or so old, one family’s home appraisal in Maryland jumped almost $300,000 when the family covered all evidence that a Black family lived in the house. This was just one of several articles in the last two years alone. We found similar examples from Florida, Colorado, California, and Ohio, all within the last two years.

After that, we began a conversation about how the bankruptcy system and rules might unintentionally have a disparate impact on all low-income people, including many persons of color. As one example, we displayed this form from the bankruptcy court in Connecticut, which essentially announces the dismissal of chapter 7 cases with little explanation of why, before a debtor can even respond:

After groups in our session shared about problems, they came up with a list of things we could do within the system to help make it fairer for low-income people and persons of color, even without amending the Bankruptcy Code. Several judges shared things they already do to help low-income persons, including creating alternative systems for communicating with the court and for filling documents, for pro se persons without PACER, as well as creating a fund for translators for pro se debtors.

We seek more input on this topic from our CreditSlips readers. What have you seen happen in bankruptcy court, by way of local practice or rule, that could have a disparate impact on low-income people, many of whom are persons of color? In what ways might we tweak the system, even a little, to help ameliorate this impact? We appreciate your thoughts in the chat or to either of us by email. We plan to gather everything we learn and write about it. As most of us know, the little things are often the big things when it comes to equity justice.

New Book Alert: Delinquent

The University of California Press has published Delinquent: Inside America's Debt Machine by Elena Botella. 

Botella used to be "a Senior Business Manager at Capital One, where she ran the company’s Secured Card credit card and taught credit risk management. Her writing has appeared in The New Republic, Slate, American Banker, and The Nation."

Here's the description from the publisher between the dotted lines below: 

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A consumer credit industry insider-turned-outsider explains how banks lure Americans deep into debt, and how to break the cycle.

Delinquent takes readers on a journey from Capital One’s headquarters to street corners in Detroit, kitchen tables in Sacramento, and other places where debt affects people's everyday lives. Uncovering the true costs of consumer credit to American families in addition to the benefits, investigative journalist Elena Botella—formerly an industry insider who helped set credit policy at Capital One—reveals the underhanded and often predatory ways that banks induce American borrowers into debt they can’t pay back.

Combining Botella’s insights from the banking industry, quantitative data, and research findings as well as personal stories from interviews with indebted families around the country, Delinquent provides a relatable and humane entry into understanding debt. Botella exposes the ways that bank marketing, product design, and customer management strategies exploit our common weaknesses and fantasies in how we think about money, and she also demonstrates why competition between banks has failed to make life better for Americans in debt. Delinquent asks: How can we make credit available to those who need it, responsibly and without causing harm? Looking to the future, Botella presents a thorough and incisive plan for reckoning with and reforming the industry.

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Looking forward to reading this book! Also expecting to see more from the University of California Press of direct interest to Credit Slips readers in the years ahead. 

Chase's 50% Venmo Transaction Fee

I teach about the $40 latte--a $5 latte with a $35 overdraft fee--and think I know how to avoid that. But I was pretty shocked when I looked at my Chase credit card statement today and saw the card card equivalent of an outrageous overdraft fee:  $20 in cash advance fees and $0.25 in cash advance interest for two credit-card funded Venmo transactions totaling $40. A 50% fee?  WTF.

What made this even more shocking was that Chase has never previously charged me fees or interest for Venmo transactions. As recently as July, I have Venmo'd without paying anything more than Venmo's 3% fee for credit-card funded transactions, and my card issuer has not sent me any change of terms notices in the interim. Puzzled, I decided to figure out what was going on. 

Getting Ready for Uniform Commercial Code Reform?

IAs digital assets and emerging technologies become common in commercial transactions, state commercial law must rise to the challenge - that's the driving force behind a new set of amendments to the Uniform Commercial Code, including Article 9 governing secured transactions in personal property - such as in virtual currencies and nonfungible tokens.

No state has enacted the amendments yet,* but prior reforms to Article 9, at least, have been remarkably successful at achieving broad enactment. Consider, for example, the visual of the 2010 amendments to Article 9. Blue=enacted!

How to track developments? Here are some publicly available resources courtesy of the Uniform Law Commission:

First, here is where to find the actual amendments as finally approved by the Uniform Law Commission and the American Law Institute. 

Second, here is a summary. Note the mention at the bottom of transition rules for lenders who followed existing law in perfecting security interests, etc. (by the way, there is not a prospective uniform effective date for these amendments). 

Third, videos! Here's one highlighting the changes for digital assets. And here's another on other matters covered in the amendments. 

Fourth, here's where proposed bills and enactment information will be tracked.

*According to the digital assets video, some states adopted earlier versions of part or all of these amendments (New Hampshire, Iowa, Nebraska, Indiana, Arkansas, and Texas) but are expected to update those to conform with the final versions. Wyoming and Idaho went their own way on commercial transactions in digital assets.  

Fake and Real People in Bankruptcy

This draft essay, Fake and Real People in Bankruptcy, just posted on SSRN, is considerably less far along than Unbundling Business Bankruptcy Law, posted last week. Fake and Real starts with a Third Circuit case that tends to be less well known: it upheld the dismissal of an individual bankruptcy filer whose primary asset was a home he had built with his own hands. Perhaps you will find that story relevant to current debates about what is permissible in large chapter 11 cases. Like Unbundling Business Bankruptcy Law, Fake and Real reflects some of my in-depth research on The Weinstein Company.  

Here is the abstract: 

This draft essay explores how the bankruptcy system is structurally biased in favor of artificial persons - for-profit companies, non-profit enterprises, and municipalities given independent life by law - relative to humans. The favorable treatment extends to foundational issues such as the scope and timing of permissible debt relief, the conditions to receiving any bankruptcy protections, and the flexibility to depart from the Bankruptcy Code by asserting that doing so will maximize economic value. The system's bias contributes to the "bad-apple-ing" of serious policy problems, running counter to other areas of law have deemed harms like discrimination to be larger institutional phenomena. These features also make bankruptcy a less effective partner in the broader policy project of deterring, remedying, and punishing enterprise misconduct.

Unbundling Business Bankruptcy Law

A long-in-process draft article has just become available to be downloaded and read here. Comments remain welcome.  The Weinstein Company bankruptcy features prominently in this draft article. 

Every contract in America contains an invisible exception: different enforcement rules apply if a party files for bankruptcy. Overriding state contract law, chapter 11 of the federal Bankruptcy Code gives bankrupt companies enormous flexibility to decide what to do with its pending contracts. Congress provided this controversial tool to chapter 11 debtors to increase the odds that a company can reorganize. To promote this objective while also preventing abuse and protecting stakeholders, Congress embedded this tool and others in an integrated package deal, including creditor voting. The tool was not meant as a standalone benefit for solvent private parties to pluck from the process for their own benefit, like an apple from a tree.

In recent decades, the chapter 11 package deal has been unbundled in practice, typically on grounds of economic urgency. While scholars and policymakers have attended to the quick going-concern sales of companies featured in unbundled bankruptcies, they have not sufficiently explored the challenges associated with a contract-intensive business.

To help fill that gap, this draft article illustrates how the ad hoc procedures used to manage quick sales of contract-intensive businesses can undercut two major chapter 11 objectives: maximizing economic value and fair distribution. They amount to a wholesale delegation of a substantial federal bankruptcy entitlement to a solvent third party. In addition to the impact on economic value and distribution, this draft article also explores a Constitutional problem with this practice: it arguably exceeds the scope of the federal bankruptcy power.