Student Loan Forgiveness

posted by Adam Levitin
Sometimes it’s helpful to read media stories on separate topics against each other because of the disconnects they underscore. That’s been on my mind today with federal student loan debt.

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Predictably Reliable

posted by Adam Levitin

Law360 has a nice Q&A with Chief Judge Michael Kaplan of the New Jersey bankruptcy court. The interviewer rightly asked Judge Kaplan why New Jersey has recently become a Chapter 11 filing destination. Judge Kaplan's answer is telling:  

What do filers look for? They look for predictability, and we have a body of work that you can look at to get a sense, whether it be third-party releases, whether it be bidding procedures, whether it be outlook on examiners or mediation. I believe we have really gained exposure, probably initially with the LTL Management case. Not my work on that case as much as our clerk's office, our chambers, how we can handle a deluge of filings and the multiple committees and the scheduling.

Judge Kaplan is partially right here. Filers are absolutely looking for predictability. But that's only half of the story. They are looking for a venue that is predictably favorable. If you're shopping around for third-party releases, you aren't going to file in the 5th Circuit, where you can predictably not get one. As I've explained at length, the predictability trope that is sometimes used to defend venue shopping is really about predictability giving the debtor the outcomes it wants on major issues: appointment of an examiner, third-party releases, retention of right to investigate avoidance actions, etc.  And with LTL Management, particularly with his denial of the motion to dismiss in LTL 1.0 and then reluctant granting of the motion to dismiss in LTL 2.0, Judge Kaplan made clear the sort of reception large debtor firms could expect in Trenton.  One might even say it's predictable. 

Securitization Trusts Are Subject to the Consumer Financial Protection Act

posted by Adam Levitin

The CFPB won a significant case this week that could shake things up in the securitization world. In CFPB v. National Collegiate Master Student Loan Trust, the 3d Circuit held that a securitization trust is a "covered person," for the purposes of the Consumer Financial Protection Act, putting it within the enforcement ambit of the CFPB.  While securitization trusts themselves are basically passive holding entities for loans, they contract with third-parties (servicers) to manage the loans. That contracting was enough for the Third Circuit to find that the trusts are "engaged" in "extending credit or servicing loans," and language in the opinion suggests that merely holding the loans would be sufficient. The opinion means that securitization trusts—and therefore securitization investors—face the possibility of liability for servicer wrong-doing.

The Proposed Credit Card Interchange Settlement

posted by Adam Levitin

The Bleak House of Cards Litigation over credit card interchange fees still isn't ending, but it's hit an interesting inflection point. We're nearly two decades into the case and over a decade from the original proposed settlement. Now there's a proposed injunctive relief class settlement. The settlement's headline figure is $30 billion in savings, but on closer inspection, it's a farcically weak settlement. Credit card interchange fees after the settlement will be 25% higher than when the litigation began. That sort of result is what's called litigation failure.

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About 44% of Chapter 11s are Subchapter V Cases

posted by Bob Lawless

As many readers will know, Congress created subchapter V to streamline the chapter 11 process and to make it work better for small businesses. It became effective in March 2020, just as the pandemic hit, and was available to businesses with less than $2,500,000 in debts. Congress raised the debt limit to $7,500,000 to make it available to more businesses, and that higher debt limit will sunset on June 21, 2024, unless Congress acts. By all accounts, subchapter V is working as designed, helping small-business owners to continue their businesses. Both the National Bankruptcy Conference and the American Bankruptcy Institute's Task Force on Subchapter V have recommended that Congress make the $7,500,000 debt cap permanent. 

How much does it matter? How many chapter 11 filers use subchapter V? The answer to those questions is more difficult than it should be.  The readily available bankruptcy statistics from the U.S. Courts do not report subchapter V cases, although they should. To answer those questions, I downloaded the integrated bankruptcy petition database from the Federal Judicial Center, which contains every bankruptcy petition filed.

And the answer is . . . in 2023, forty-five percent of chapter 11 debtors used subchapter V. That was 1,854 of the 4,121 chapter 11 cases in 2023. Unfortunately, the database does not have the subchapter V variable for years before 2023. Well it does, but the variable is not reliable for years before 2023. The rest of the post, "below the fold," explains the rest of my math.

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A Trump Bankruptcy:  Further Thoughts

posted by Adam Levitin

A lot of the debtor-creditor relationship can be characterized by creditors threatening to push debtors out the window and debtors threatening to jump.  Ted Janger reminded me of this defenestration dynamic today regarding the Trump civil fraud judgment.  In my previous post, my assumption had been that the New York Attorney General’s goal was to foreclose on some of Trump’s marquee properties, but Ted suggested that the goal might simply be to trigger cross-default clauses, compounding Trump’s liquidity problems and forcing him into bankruptcy. In other words, bankruptcy might be the goal of the New York Attorney General, rather than a defensive strategy for Trump.  “I’ll jump,” “No, I’ll push.” 

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A Trump Bankruptcy?

posted by Adam Levitin

Will Donald Trump file for bankruptcy? It's certainly a possibility as Trump struggles to come up with a supersedeas bond for staying the NY Attorney General's civil fraud judgment against him while he takes an appeal.

I don’t know the strength of Trump’s possible arguments for an appeal, but the legal arguments might be beside the point. If Trump wins the election, the entire dynamic of the litigation changes. Is the New York Attorney General really going to enforce a judgment against the President-elect, particularly one who is likely to be vengeful once in office? Maybe, given that we will likely be facing an period of extended lawfare, but the calculus for enforcement or settlement shifts in Trump’s favor if he wins election. That means that Trump’s best move might be trying to run the clock until Election Day:  7 months and 17 days.  And maybe not even that long. The optics of pursuing the collection on the eve of the bankruptcy will make it look very political and might generate sympathy for Trump. So Trump might only need to run the clock, say, 6 months. That’s where bankruptcy comes in.

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Alabama Supreme Court and Section 366

posted by Adam Levitin

By sheer coincidence, the first problem I taught in my financial restructuring class today was about a bankrupt fertility clinic that is behind on its electric bill and is having trouble coming up with the funds to provide adequate assurances to the power company that it will pay its future bills: if the electricity is cut off, all the frozen zygotes and embryos will thaw and become unviable. 

I found myself wondering how this would play out in Alabama now. Suppose the debtor could not provide adequate assurances. Would the DIP/trustee or utility face some sort of liability for wrongful death if what one of my students termed "the biological material" melted?  I assume the Barton doctrine would provide some level of protection to the DIP or trustee. (I also assume the bankruptcy judge would have broad immunity for his or her official acts.) I'm not sure if the power company could even have liability, but given the potential scale of liability, it's probably not worthwhile cutting off the power, even if the risk of liability is very small.

I know that similar sorts of issues can emerge in hospital or nursing home bankruptcies, where there are patients who have to be transferred to other facilities in the event that the debtor is liquidating, but that's addressed by 11 USC 704(a)(12). Maybe an embryo that is frozen at a fertility clinic is now a "patient" at a "health care facility." Otherwise, I'm not sure what would create a duty for the trustee/DIP to preserve the embryos. 

The Consumer Debt Default Judgments Act

posted by Melissa Jacoby

MapConsumer debt has been a difficult topic for uniform state law movements, but here's one more attempt recently approved by the Uniform Law Commission and the American Bar Association, and introduced in Colorado last week.  You can access the materials here. Meanwhile, here is ULC's summary:

Numerous studies report that default judgments are entered in more than half of all debt collection actions. The purpose of this Act is to provide consumer debtors and courts with the information necessary to evaluate debt collection actions. The Act provides consumer debtors with access to information needed to understand claims being asserted against them and identify available defenses; advises consumers of the adverse effects of failing to raise defenses or seek the voluntary settlement of claims; and makes consumers aware of assistance that may be available from legal aid organizations. The Act also seeks to provide a uniform framework in which courts can fairly, efficiently, and promptly evaluate the merits of requests for default judgments while balancing the interests of all parties and the courts.

Would welcome Credit Slips posters and readers chiming in on this act in the comments, especially if you were involved in the drafting process and/or if will be weighing in on this act with their state legislatures.

And for previous recent coverage of other uniform acts being urged on state legislatures, see here and here.

What Is a Wire Transfer?

posted by Adam Levitin

Heads up payment nerds: we have what promises to be the most interesting payments litigation involving a Citibank wire transfer since...the last payments litigation involving a Citibank wire transfer.

In the latest case, the NYAG has sued Citibank for violating the Electronic Fund Transfer Act in connection with wire transfer transactions for consumer customers. The EFTA offers consumers substantial protection against unauthorized electronic fund transfers, both in terms of process and substantive liability limitations. The  NYAG alleges Citibank has not been providing these required protections to consumers who have had their accounts drained by unauthorized wire transfer orders.  

Now you might be saying, "I feel bad for the consumers, but come on, everyone knows that the EFTA doesn't apply to wire transfers." And you might even point to the EFTA definition of an "electronic fund transfer" as excluding "any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer." And you'd be right—both the NYAG and Citibank agree that the EFTA does not apply to wire transfers.  The issue in the case is "what is the wire transfer?"

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A Uniform Law Project of Note: Special Deposits Act

posted by Melissa Jacoby

Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too - especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.

 

Special deposit act

 

 

 

 

 

 

 

 

 

A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.

Catching Up on the Digital Asset Amendments to the Uniform Commercial Code

posted by Melissa Jacoby

It has been a while since I last posted resources on amendments to the Uniform Commercial Code that would govern transactions in digital assets, including security interests. The take-up of these amendments, including a new Article 12, has not been as swift and sweeping as some might have hoped. To put it mildly, some in the cryptocurrency world have lobbied hard against enactment based on what seems to be a misinterpretation (to help set things straight, I recommend reading and listening to professors Juliet Moringiello and Carla Reyes). Currently, 11 states have enacted the amendments. Article 12

 

 

 

 

 

 

 

 

 

Thorny choice of law issues flowing from non-uniform enactment inevitably will land in bankruptcy courthouses, as so many legal quandaries do. For example, choice of law will affect whether or not a lender has a perfected security interest in the debtor's interest in cryptocurrency, an issue that can arise in a wide variety of bankruptcies. Here is a collection of Uniform Law Commission resources in case you need them.

Rapoport on Judicial and Legal Ethics

posted by Melissa Jacoby

Just wanted to make sure Credit Slips readers are aware of Professor Nancy Rapoport's new paper forthcoming in the Emory Bankruptcy Developments Jounrnal, accessible here. The abstract:

In late 2023, news stories picked up stories about a lawsuit alleging that Bankruptcy Judge David Jones of the United States Bankruptcy Court for the Southern District of Texas had been hearing cases in which his live-in romantic partner was appearing as counsel. The Fifth Circuit began disciplinary proceedings, and Judge Jones resigned from the bench. The scandal has affected more than just these two people: it implicates law firms, and potentially implicates other lawyers or judges who might have known more than they were saying. This article explores who had a duty to disclose this particular “connection,” and under what authority.

Again, paper available here:

The CFPB's Proposed Overdraft Regulation

posted by Adam Levitin

The CFPB proposed overdraft regulation came out today. It's a big deal. If it becomes effective, it will dramatically reduce overdraft fees at large banks.

Currently fees for “courtesy” overdraft—where the financial institution is not contractually obligated to allow the overdraft, as opposed to contractual overdraft lines of credit—are not “finance charges,” so the overdraft is not “credit” for purposes of the Truth in Lending Act/Regulation Z because credit requires either a finance charge or a requirement of repayment in over four installments. That means that TILA disclosure requirements do not currently apply to any courtesy overdrafts. 

The CFPB is proposing changing this for overdrafts that don't fall within a dollar amount safe harbor.

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