Preliminary Injunctions After Harrington v. Purdue Pharma

posted by Adam Levitin

The Supreme Court's opinion in Harrington v. Purdue Pharma left open a lot of questions about the extent of its scope. We now have one of the first opinions exploring those questions. Judge Craig Goldblatt of the Delaware bankruptcy court faced a request for a preliminary injunction in the bankruptcy of right-wing social media platform Parler. Judge Goldblatt concluded that "authority to 'extend the stay' survives Purdue Pharma." I'm skeptical. 

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Man Bites Dog, or Debt Collector Restructures Its Distressed Debt

posted by Jason Kilborn

I couldn't let this one pass without noting it. The largest debt collection company in Europe has found itself on the other end of the dunning letter. Swedish debt collection company Intrum has achieved majority (barely) support for a deal with bondholders to swap 10% of its $5.8 billion debt for equity and push out the maturity of remaining notes. Intrum found itself in this mess after "years of borrowing heavily in the low-interest era to buy portfolios"--that is, to buy bunches of distressed debt owed by strapped borrowers all over Europe, which Intrum would then squeeze for repayment at a higher rate than Intrum had paid. Or so Intrum hoped. Apparently this investment strategy went sour after "a slowdown in its business." Hmmm. What an interesting euphemism! Borrowers resisting collection pressure more resolutely now? I wonder if the growing wave of personal insolvency procedures across Europe has contributed to this "slowdown" for Intrum's debt collection efforts. Good news for borrowers is bad new for the debt collector!  

The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement

posted by Adam Levitin

This term's Supreme Court decisions have completely remade administrative law, both by eliminating Chevron deference and by effectively eliminating the Administrative Procedures Act's statute of limitations. In Loper Bright Enterprises v. Raimondo, the Court held that as a constitutional matter federal courts could not give deference to federal agencies' interpretations of ambiguous statutes. And then the Court opened the door to APA challenges to virtually every existing federal regulation, no matter how old, with Corner Post Inc. v. Board of Governors of the Federal Reserve System, a statutory ruling that the APA's six-year statute of limitations runs from the date a plaintiff is allegedly injured by the regulation, rather than from the date of the regulation's finalization. That means that a business that is incorporated tomorrow has at least six years to challenge any regulation that affects it, and maybe more depending on when it is affected. In other words even New Deal or Progressive era regulations could be challenged tomorrow and there would be no deference to the agency's long-standing interpretation of the statute authorizing the regulations. I pity my colleagues who teach admin law--their course lost at least a credit hour's worth of material. Maybe they'll decide to take up commercial law....

These decisions are, taken together, a major rolling back of the administrative state. But these decisions will affect different agencies differently, and the Court's rulings may have some unintended consequences. To wit, many federal agencies have both rulemaking and enforcement powers. In some instances, enforcement is dependent on rulemaking, as the agency lacks a general statutory prohibition to enforce, but can only enforce its particular rules. The EPA is (I think) an example of this type of agency. It doesn't have a general statutory prohibition of "don't pollute." OSHA and the FDA and NLRB and Dept. of Commerce. For agencies in this category, Loper Bright Enterprises and Corner Post clip not only the agencies' rulemaking power, but also their enforcement power, because they will have to defend the rules they are enforcing. 

In other instances, however, the enforcement powers are independent of rulemaking, as there is a broad statutory prohibition that the agency can enforce without rules. This is where federal financial regulators sit.  In these cases, Loper Bright Enterprises and Corner Post will have a hydraulic effect:  agencies are going to do what they're going to do, so if they can't do it through rulemaking, they'll do it through enforcement and supervision. In other words, what the Supreme Court did was to supercharge regulation by enforcement in the financial regulatory space.

Continue reading "The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement " »

Upcoming Public Events for Unjust Debts

posted by Melissa Jacoby

P&PMore upcoming events open to the public - in person and virtual - for the new book Unjust Debts, including tonight in Washington DC. Join the conversation!


Purdue Pharma Decision: a Big Win for Mass Tort Victims

posted by Adam Levitin
Mass tort victims won a big victory in the Supreme Court today with its 5-4 decision to reverse confirmation of the Purdue Pharma bankruptcy plan because it included impermissible nonconsensual releases of nondebtors. The case is a victory for tort victims not just in Purdue Pharma but across the board. The decision will not prevent the global resolution of mass torts in bankruptcy, but will simply eliminate the "bankruptcy discount."
Before Purdue Pharma non-debtors could piggyback on a bankruptcy case to get 100% resolution of their own liability to the debtor’s creditors based on contributing enough to get 75% of tort victims to consent. Now the price of 100% resolution will be the price necessary to get 100% of tort victims to consent and the price of 95% resolution will be the price necessary to get 95% of victims to consent, etc. In other words, non-debtors will get what they pay for, but there’s no longer a bankruptcy discount for mass tort settlements with nondebtors.  That’s a major win for tort victims.

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Procedural Justice and Chapter 11 Venue

posted by Bob Lawless

The good people at Bloomberg News asked if I wanted to elaborate on a post I did about procedural justice and chapter 11 forum shopping. The resulting opinion piece is here: "Bankruptcy Venue Shopping Breaks Perceptions of Judicial Fairness." It should not be behind a paywall.

The piece builds on the procedural justice literature about the noninstrumentalist concerns that drive perceived legitimacy of a legal system. It is easy to find a court decision legitimate when the court rules in your favor, or as a nonparty, you agree with it. For the legal system to work, parties have to respect decisions they don't agree with. Fortunately, social scientists have told us a lot about what drives perceptions of judicial legitimacy.

Spoiler alert: picking your own judge ain't it.

Unjust Debts on the Road

posted by Melissa Jacoby

Unjust_debts_finalFirst, thanks to Bob Lawless for his post about my new book. It has been great to engage with people about Unjust Debts so far, and especially appreciated the book making a new Financial Times best books list (links to that and other coverage here). Wanted to note a few upcoming book events for Credit Slips readers:

  • June 27 (TONIGHT): Greenlight Bookstore, Brooklyn NY, in conversation with Zephyr Teachout. Information and RSVP here
  • July 1 (VIRTUAL): Commonwealth Club World Affairs, in conversation with Senator Elizabeth Warren. Information and registration here
  • July 8: Politics & Prose, Washington DC, in conversation with Vicki Shabo. Information here

Alex Jones, Chapter 7, and the Means Test

posted by Jason Kilborn

I'm embarrassed to have fallen into an analytical trap that yet again reveals the absurdity of the means test. When I saw that Alex Jones was converting his personal Chapter 11 case to Chapter 7 liquidation, I wondered, "how in the world could Alex Jones pass the means test?!" Well, a quick look at section 707(b) reminded me that some pigs are more equal than others: the means test applies only to debtors "whose debts are primarily consumer debts." The $1.5 billion defamation debt obliterates the means test ... because of course Alex Jones's personal bankruptcy case is not an abuse of the system (!). Further evidence in support of the thesis of Melissa's new book, it seems.

Long-run (positive) effects of personal debt relief

posted by Jason Kilborn

Empirical papers on the long-run effects of a personal bankruptcy relief system (i.e., discharge) are rare, so this fascinating new paper caught my eye. The first personal insolvency discharge system in continental Europe appeared in Denmark in 1984, and this paper takes advantage of that long lifespan to mine some rather unique data. The results are unsurprising but very useful in the ongoing debate about the salutary effects of such procedures: "debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling." So the benefits of debt relief are not only substantial but robust, as debtors learn their lesson (if there was one to learn) about managing their finances, and they capitalize (literally) on their fresh start. Perhaps most important, the cause of these effects seems to be largely the desired result of any personal discharge system--getting debtors out from under the debilitating thumb of hopelessly unserviceable creditor demands and reactivating them as engaged workers and taxpayers: "The net transition of workers into employment accounts for two thirds of the increase in earned income." Great contribution to the literature on personal insolvency and well worth a read.

Second Time as Farce: the Absurdity of the New Anti-CFPB Arguments

posted by Adam Levitin

Karl Marx's famously quipped how historical figures appear twice, "the first time as tragedy, the second time as farce." So too with the legal arguments about the constitutionality of the CFPB's funding: we are firmly in farce territory at this point. 

Nevertheless, over at Ballard Spahr's Consumer Finance Monitor blog my friend Alan Kaplinsky doesn't seem to get the joke and has earnestly taken issue with my criticisms of Hal Scott's claim that the CFPB's funding is unauthorized both by statute and under the Constitution. I find the legal arguments involved here so thin that I wouldn't bother with a second blog post about them, other than that they've found a welcoming audience from some members of Congress (yes, I can hear the remarks from the peanut gallery...).  So let's go through this again.

Continue reading "Second Time as Farce: the Absurdity of the New Anti-CFPB Arguments" »

Unjust Debts -- A New Book from Melissa Jacoby

posted by Bob Lawless

Today is the publication date for Unjust Debts: How Our Bankruptcy System Makes America More Unequal from University of North Carolina law professor and Slipster, Melissa Jacoby. This book will be the talk of the bankruptcy community. Be the first in your firm or organization to have a copy. The book is available on Amazon or (better yet) 

Bankruptcy touches most every aspect of modern-day financial life. Professor Jacoby questions whether bankruptcy works as an effective second chance for everyday Americans while documenting the many ways the system allows powerful individuals and corporations to escape commitments. As such, she shows how the bankruptcy system contributes to inequality. For those who work in the bankruptcy system, her thesis may be controversial. For those who are not immersed in that system, the book will be eye opening.

SCOTUS National Bank Act Preemption Ruling

posted by Adam Levitin

The Supreme Court issued an important ruling about the National Bank Act's preemption standard today that precludes broad, categorical preemption of state consumer financial laws, but instead requires a fact-specific analysis.This decision opens the way to more expansive state consumer financial regulation that affects banks.

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NIL and Bankruptcy

posted by Adam Levitin

Bankruptcy lawyers are familiar enough with issues presented but NOLs. And NILs (name, image, likeness rights) have existed for as long as the modern Bankruptcy Code. But those rights have usually come up in the context of debtors with established, valuable brands (e.g., Mike Tyson). Now college atheletes can enter into NIL deals, and for many of them the value isn't yet established and there might not even be licensing deals yet. That situation poses the question of to what extent unlicensed NIL rights are property of the bankruptcy estate, and not of the debtor?

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CFPB Bitter-Enderism

posted by Adam Levitin

Retired Harvard Law Professor Hal Scott has a curious op-ed in the Wall Street Journal suggesting that despite (or because) of the Supreme Court's recent ruling in CFPB v. CFSA that the CFPB's funding is both unauthorized by statute and unconstitutional on account of the Federal Reserve System running a deficit currently (and projected through 2027).

It's a bizarre and incorrect argument, and were it coming from anyone other than Scott it could be dismissed as harmless and uninformed flibflab, but Scott is a personage with serious financial regulatory credentials, who is very tied in to the upper crust of anti-financial regulatory circles, such that one has to wonder if this is a trial balloon for a U.S. Chamber of Commerce or Bank Policy Institute-supported challenge. 

In any event, let me quickly explain why Scott is wrong on both the statutory and constitutional arguments.

Continue reading "CFPB Bitter-Enderism" »

Further Thoughts on CFPB v. CFSA

posted by Adam Levitin

I have some further thoughts on the CFPB v. CFSA decision on Bloomberg Law: decision not only benefits consumers but ultimately benefits many financial services businesses by ensuring both a level of stability in regulation and the preservation of the "legal infrastructure" that the CFPB has created over the past 13 years, such as safe harbors, inflation adjustments, and advisory opinions. 


Not All Third-Party Releases Are the Same

posted by Adam Levitin

My friend Professor Tony Casey has been the most vocal academic defender of non-consensual non-debtor releases in bankruptcy. I obviously disagree with Tony on both the legality and policy substance, but Tony's repeatedly taken me to task in scholarship (here and here) and various social media platforms (here and here) for having supposedly changed my view of the issue.

Tony's charge that I've flip-flopped is based on a 2019 blog post in which I defended then presidential candidate Elizabeth Warren's work in Dow Corning, which Tony thinks is a non-consensual non-debtor release case. 

Unfortunately, Tony's misread Dow Corning and therefore sees a contradiction where none exists.  I have never taken issue with consensual releases of creditors' claims against non-debtors as part of a global settlement (although what constitutes adequate consent is a separate issue). Instead, my concern has always been with mandatory, non-consensual release of claims against non-debtors. Dow Corning released third-parties, but it was not a non-consensual release case. Unlike in, say, Purdue Pharma, where the non-debtor releases purport to bind all creditors irrespective of consent, the dissenters in Dow Corning were allowed to opt-out and pursue their remedies.

Continue reading "Not All Third-Party Releases Are the Same" »

CFPB v. CFSA Analysis

posted by Adam Levitin

The Supreme Court upheld the constitutionality of the CFPB's funding mechanism in its 7-2 decision in CFPB v. CFSA. Although I can't say I love the opinion's reasoning, the Court got to the right result, as Patricia McCoy and I urged in an amicus brief. The ruling does have some interesting omissions and politics, but its ultimately impact will be the normalization of the CFPB, something that's good for consumers and businesses alike.

Continue reading "CFPB v. CFSA Analysis" »

FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate?

posted by Adam Levitin

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

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The Judgment Holder Problem in Sovereign Debt Workouts

posted by Mark Weidemaier

Some time ago, Mitu and I had an exchange (here are parts 1, 2, 3, and 4) about judgments and collective action clauses (CACs). The question was this: Assume that a bondholder “rushes in” to court (in Steven Bodzin’s apt phrase) and gets a judgment before its fellow bondholders can vote, pursuant to the CAC, to restructure the debt. Does the “rush in” creditor escape the restructuring? The subtext was and remains Venezuela, where a number of bondholders already have obtained judgments. As Mitu put it:

For the better part of two decades the hopes and dreams of the official sector for an orderly sovereign debt workout mechanism … have resided, pretty much exclusively, in the widespread use of collective action clauses (CACs) … A concern, all through this period, however, has been that clever holdouts will figure out some loophole to bypass the CACs.

In theory, rushing in to court could be that loophole. I doubt it is a big loophole, or one that is likely to be used with any frequency. But the possibility has concerned official sector actors. And in fact, several bondholders have proceeded to judgment against Venezuela, and one has tried to do the same against Sri Lanka. This worried the U.S. government enough to submit a fairly extraordinary brief asking the court to stay the lawsuit in deference to Sri Lanka’s restructuring negotiations.

My colleague Andy Hessick and I just posted a new paper, The Judgment-Holder Problem in Sovereign Debt Workouts, which uses a Venezuelan debt restructuring as an example in thinking through this topic. The abstract is below the jump, but our primary argument goes something like this:

  • Existing analyses focus on the legal doctrine of merger and bar. They ask whether the bond “merges into” a court’s judgment and posit that, if it does, bondholders are not bound by a restructuring concluded through the CAC.
  • This is not a helpful way to think about the problem. The doctrine of merger and bar (better understood as claim preclusion) is largely irrelevant. Instead, one needs to ask two separate questions, both of which have clear answers.
  • First, does a modification vote conducted pursuant to the CAC also modify a previously-entered judgment of a federal court? The answer is clear: No. A judgment creditor may enforce the judgment even if this allows it to recover more than the issuer is obliged to pay restructuring participants.
  • However, question one isn’t as important as it seems. Question two is more important: Can restructuring participants modify the bond to impair a judgment creditor’s ability to enforce a judgment? Despite some legal uncertainties, which we discuss in the paper, we think they can, and we explain why.

tl;dr – A bondholder who cannot block a restructuring vote and races to obtain a court judgment can rest assured that the judgment will remain intact despite the restructuring vote. Whether it will be able to enforce the judgment is another matter entirely.

Abstract below:

Continue reading "The Judgment Holder Problem in Sovereign Debt Workouts" »

The Texas Three-Step

posted by Adam Levitin

Johnson & Johnson is preparing to take a third crack at addressing its toxic talc liabilities through bankruptcy in what we might call a "Texas Three-Step". And as with J&J's previous attempts, this one has some pretty glaring issues.Yet because of J&J's ability to forum shop and even picks its judge, it will likely be able to sidestep adjudication of many of the issues and avoid appellate review entirely. Instead, J&J's strategy is going to be to ram a seriously deficient plan through with the assistance of its hand-picked judge and then avoid appellate review through the equitable mootness doctrine. It's a strategy that might work. And if it does, it is a sign that the bankruptcy system is seriously broken.

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The New Usury: The Ability-to-Repay Revolution in Consumer Finance

posted by Adam Levitin

I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.


Stuffing the Chapter 11 Ballot Box with "Junk" Claims

posted by Adam Levitin

A recent, disturbing, and truly scandalous development in Chapter 11 mass tort cases is the phenomenon of debtors trying to stuff the ballot box with "junk" claims, that is claims that should by all lights be disallowed as unenforceable and therefore ineligible to vote on a plan. Debtors have recognized that they can strategically co-opt part of the mass tort bar to push through plans:  debtors offer small payments to claims that ought to be disallowed (and thus to the attorneys representing those claims on contingency fee) in order to get those claimants to vote in favor of a plan that forces a low-ball payment on the legitimate tort claimants. While debtors have to pay a bit for the "junk" claims' votes, they come out ahead in the end because by flooding the electorate with the junk claims, they can overwhelm the voting power of the legitimate claims and stick the legitimate claimants with a much lower payment than otherwise.  

Continue reading "Stuffing the Chapter 11 Ballot Box with "Junk" Claims" »


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