Virtual Conference on Income Share Agreements

As many of you know, I direct the Student Loan Law Initiative at UCI Law, a partnership with the the Student Borrower Protection Center (SBPC). We recently announced a series of grants supporting empirical work on student loan law, including Slipster Adam Levitin!

Our partner, SPBC has also been very busy. As income share agreements have become a growing fixture in the student loan law marketplace, SBPC has put on a virtual conference series taking a deep dive into the legal underpinnings of ISAs and arguing that the the existing consumer protection framework already applies to these financial products. Each week has had a 90-min panel and a paper. The final panel in the series, on ISAs and State Law, is happening today at 2pm ET/11am PT (join live by clicking on "register" at the top right).

The first panel focused on the definition of credit and tackled the question of how to classify ISAs under federal consumer financial law. Oregon Attorney General Ellen Rosenblum delivered the keynote. The paper was written by Joanna Peart and Brian Shearer. Joanna was the former Enforcement Chief of Staff and Acting Principal Deputy Enforcement Director for the Consumer Financial Protection Bureau. Brian is the Legal Director of Justice Catalyst.

The second panel focused on the fair lending risks inherent in ISAs. FTC Commissioner Rohit Chopra was the keynote for the day’s event and the paper was written by Stephen Hayes and Alexa Milton. Stephen Hayes is a partner and Alexa Milton is an associate at Relman Colfax.

Today's final panel focuses on the application of state consumer lending and consumer finance laws to ISAs. The accompanying paper was written by Ben Roesch, an attorney at Jensen Morse Baker. Today's panel will be moderated by Jillian Berman from Marketwatch and also include panelists from the Oregon Department of Justice and National Consumer Law Center, among others.

Even if you cannot make this week’s panel live, all the expert panel discussion and papers will be available on the conference website: emergingrisks.org. And if you're interested in more student loan law research, join our mailing list.

Most of What You Read about the Bankruptcy Filing Rate Is Wrong

A popular narrative is that bankruptcy filing rates are increasing dramatically. That is not true. If you want to know what is happening with the bankruptcy filing rate during covid-19, the best source is Ed Flynn's analyses over at the American Bankruptcy Institute (current analysis here with a historical archive here). Here some facts, using my own data as well as Flynn's very useful numbers:

1. Total bankruptcy filings have had some modest gains in recent weeks after falling off the cliff early in the crisis, but total filings remain down 33% on a year-over-year basis.
2. The number of chapter 11s filings has been very artificially inflated by counting affiliate filings. If one only counts the "parent" and "solo" filings, the chapter 11 rate actually declined in July!
3. The decline in chapter 13 filings has been much deeper than the decline in chapter 7 filings.

Before expanding on each of these points and like I wrote in an earlier post with the same theme, I am not Pollyannaish about the economy. Things are as bad as they seem. My plea is for accuracy. An understanding of whether and when people turn to the bankruptcy system to help them deal with their business or personal issues makes that system more effective.

OCC Suggests "Fair Access" Rulemaking to Require Banks to Finance the Oil and Gas Industry

Just when you think it can't get more ridiculous... The Office of Comptroller of the Currency, which hasn't taken racially discriminatory lending seriously, is concerned about banks' discriminatory refusal to serve the oil and gas industry. In fact, the OCC is so concerned that it is suggesting legal theories so farfetched that would be laughed out of a courtroom if it actually tried to act on them. 

The underlying issue here is that banks seem have gotten cold feet about financing fossil fuels. Why? Any number of reasons, including that their investors don't like it (ESG), that global warming threatens their own balance sheets, that oil and gas prices right now are so low that investment in the sector might not be a good business move, and that there's huge risk to fossil fuel projects' value based on the 2020 election outcome. But Senator Dan Sullivan of Alaska wants to drill in the Arctic and has expressed concern about banks' unwillingness to fund global warming to the OCC.

In response, the Acting Comptroller of the Currency, Brian Brooks, wrote a letter to Senator Sullivan that can only be described as verging on legal malpractice in the service of political expediency while pushing a vision of economic regulation that looks like communist China. 

Acting Comptroller Brooks argues that 12 U.S.C. § 1(a):

requires the OCC to ensure that banks provide "fair access" to financial services. Decisions by major banks to deny the oil and gas sector, among other targeted industries, access to financial services may violate that statute. Accordingly, the OCC will examine the possibility of issuing regulations defining fair access to provide clarity to banks and customers alike.

Let's take a look at 12 U.S.C. § 1. The relevant section states:  

There is established in the Department of the Treasury a bureau to be known as the “Office of the Comptroller of the Currency” which is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.

12 USC 1 is a general expressive statement of the general purposes of the OCC. It's not even a "be excellent to each other" sort of exhortation. It is not by any stretch a provision creating any substantive rights or obligations. If OCC tried to use this as the basis for a "fair access" rulemaking, as Brooks suggests, the rulemaking would get thrown out by a court on an APA challenge in a hot minute. 12 USC 1 authorizes the OCC to do precisely nothing. 

Whatever 12 USC 1 is, it is not a roving commission for the OCC to undertake rulemakings about "fair access" and "fair treatment", etc. It is not a free-standing authorization to undertake any sort of rulemaking. It is very plainly not a delegation by Congress. Furthermore, the suggestion that "Decisions by major banks to deny the oil and gas sector ... access to financial services may violate that statute" is risible. 12 USC 1 is at most an obligation on the OCC, not on banks. It's embarrassing to see the OCC put forth such a legal argument.  

Note that what Brooks is proposing is the flip-side of the allegations made against Operation Chokepoint, namely that regulators were discouraging banks from lending to certain disfavored industries. Now Brooks is talking about forcing banks to lend to certain favored industries. That sounds like ... communist China. It makes my head spin. 

(btw, where are the conservatives who bitch about affordable housing goals and the CRA? Aren't they up in arms that a financial regulator is talking about forcing banks to lend to someone?)  

But let's say that I'm wrong and Brooks is right. Consider the implications. Imagine what a Comptroller with a different political tinge might have with provisions such as "fair treatment of customers" and "fair access to financial services". Who needs UDAAP when you've got "fair treatment"? Who needs CRA, when you've got "fair access"? If Brooks wants to weaponize 12 USC 1, he might want to first recognize that "fair" is a word that progressives can do a lot more with than he can.  

Of Sheep, Twyne's Case, and a Better Story

Professor Emily Kadens has just published a great paper that explodes the myths about Twyne's Case. We all know Twyne as the case where an insolvent farmer gave away his sheep, thereby leading to a Star Chamber decision that laid the foundation for modern fraudulent conveyance law. It turns out most all of the story we know isn't true. Even better, the actual story is much more interesting and instructive.

Kadens did an incredible amount of archival research, going through the depositions and other original records from the case. Obstacles included documents that had been partially eaten by rats, a point I need to remember the next time I want to complain about difficulties with my own research.

Pearce, who was the debtor, had resisted writs of execution from the undersheriff who had come to seize his property, which was a lot more than just a few sheep. And, it was not Pearce himself, but his laborers and community members who did the resisting. Confrontations occurred over three days.  After an unsuccessful foray to Pearce's farm on the first day, the undersheriff made somewhat of a surprise attack on the second day to seize cattle at a more distant place called Holden Field (the picture to the right, courtesy of Kadens). The undersheriff pastured the cattle overnight at Pole Meadow (pictured below the fold, again courtesy of Kadens). The next day, the undersheriff attempted to drive the cattle to market, but Pearce's allies interceded and took the cattle.

For Your Bankruptcy Class or Presentation

OK, bankruptcy mavens. What is this a map of? Answer below the fold.

Back to the Future (Again): Horatio Gadfly and Those Imperial Chinese Bonds

FT Alphaville has had a long line of quirky and brilliant reporters over the years, something that I've always enjoyed (Joseph Cotterill, Tracy Alloway, Colby Smith, Cardiff Garcia and more). And I've especially liked the pieces that do deep dives into obscure and arcane sovereign debt matters.

The latest such piece is from Izabella Kaminska, on the the topic of antique imperial Chinese bonds and the possibilities for recovery (from about ten hours ago, here).  The likelihood of using purely legal methods and recovering on these today is near zero.  But near zero is not zero and periodically, as a means to get students engaged on the thorny questions of statutes of limitations and sovereign immunity, Mark Weidemaier and I will assign them the task of figuring out which of the defaulted imperial sovereign bonds have the best chance of recovery. The assignment is usually framed in terms of a set of bonds that Mr. Horatio Gadfly inherited (here) (Joseph Cotterill's hilarious piece on Mr. Gadfly's adventures is here)).

This past semester, a group of our students -- Michael Chen, Charlie Fendrych, and Andres Paciuc, dug deep and found a small subset of bonds that maybe, just maybe, had a long shot. Their fun paper, "The Emperor's Old Bonds" (soon to appear in print in the Duke Journal of Comparative and International Law) is here.

Izabella's article today makes a deeper point, which is that these legal claims -- while implausible if viewed in purely legal terms -- can acquire muscle as a function of political context.  Is this such a time?  Maybe.  Coronavirus, trade talks, election rhetoric, Taiwan, and given that some of Trump's supporters have lots of these old Chinese bonds and Trump is . . . well, Trump may have changed the equation from what it has been for the past century.  Steve Bannon, of all people, has talked about imperial Chinese bonds on his War Room show multiple times (e.g., this War Room episode at about 40:50. . . Aiyiyiyi . . . here).  

If you are intrigued and want to go down the rabbit hole, this question of politics and antique Chinese bonds has come up before -- see Tracy Alloway's piece on Bloomberg (here), Cardiff Garcia on NPR (here) and Mark Weidemaier on creditslips (here and here). 

Izabella is (I hope) not done with her writing on this topic and there might be more on Alphaville soon (today's teaser was in the main paper).  This topic connects to so many other fun topics relating to historic wrongs too -- like the fact that the British museum holds the Elgin Marbles and the British crown holds the Koh-i-Noor diamond (US museums undoubtedly have lots of these sorts of items as well). If Chinese imperial bonds need to get paid, maybe it is time to give the Elgin Marbles and the Koh-i-Noor back? Come to think of it, maybe it is time to give them back regardless of the bonds? Sovereigns are infinitely lived, which means that their obligations are too -- if someone can figure out a way to get around the statutes of limitations.

The US Government Mumbles Something in Support of Venezuela

Mark Weidemaier & Mitu Gulati

Judicial outcomes are determined by a variety of factors beyond precedent, statutory text, and other purely legal inputs. One factor, especially in cases involving foreign governments, is the preference of the U.S. government. In the middle of the 20th century, the government’s preferences often were dispositive, because the State Department had final say over whether U.S. courts could exercise jurisdiction over foreign states. The State Department eventually tired of being caught in the middle of  these disputes and Congress passed the buck to the judiciary, which now makes immunity determinations in accordance with the Foreign Sovereign Immunities Act.

Still, U.S. administrations periodically put a thumb on the scale in favor of a foreign state. On occasion, this happens even when relations with the foreign state aren’t especially friendly. Foreign sovereign immunity tends to be reciprocal, and the government worries that an overly assertive approach by U.S. courts will prompt courts in other countries to retaliate by asserting expansive jurisdiction over the United States. Still, what’s happening in the Crystallex litigation is a bit unusual. Until now, U.S. sanctions have been the primary tool by which the government has protected Venezuelan assets in the United States. Thus, the U.S. largely sat idle while the federal judiciary ruled that Venezuela and state-oil company PDVSA were alter egos, such that assets formally belonging to PDVSA could be attached by creditors of the Republic itself. Because of that holding, the District Court in Delaware is currently busy trying to figure out whether and how to conduct an execution sale of PDVSA’s equity in PDV Holding, the ultimate parent company of Citgo. (For more, see here and here).

And then, as Anna Szymanski describes in her piece for Reuters that went up earlier today (here), the U.S. government filed a "statement of interest" in the matter.

Should Chapter 11 Protect the Sacklers?

My colleague, Ralph Brubaker, and Gerald Posner have a New York Times op-ed assailing how the Sacklers are using Purdue Pharma's chapter 11 to shield themselves from personal liability. The bankruptcy world knows this tactic under the labels of third-party or nondebtor releases.

When they first appeared on the scene, third-party releases seemed like another example of the pragmatic problem-solving that the bankruptcy system excels at doing. Parties contribute money to the pot that goes to pay creditors, often victims of some tort. That money increases the amount that victims receive without having to suffer the time, expense, and uncertainty of having to file lawsuits. The release incentivizes the released parties to contribute in the first place. No contribution, no release.

Like many good ideas in the bankruptcy system, third-party releases were supposed to be the rare case but have become commonplace in chapter 11 practice. As Brubaker and Posner point out, if third parties like the Sacklers need protection from tort liability associated with Purdue Pharma, they can always file bankruptcy themselves. They want the protection of the bankruptcy court without subjecting their own assets and affairs to the scrutiny of the bankruptcy court. At the least, that needs to change. 

Some Confusion About Argentina’s Power to Reverse an Acceleration

Mark Weidemaier and Mitu Gulati

As negotiations between the Argentine government and its creditors have gotten increasingly acrimonious, some have begun talking about litigation. Because Argentina’s bonds have collective action clauses, it can impose restructuring terms on dissenting creditors as long as it has the support of a supermajority. Even if it doesn’t have supermajority support to do the cram down, it still has weapons.

One important weapon that often gets overlooked in discussions of the cram down power is the power to rescind or reverse a decision by creditors to accelerate the debt. In effect, this is a power to create a standstill. Argentina’s bonds have some relatively unusual provisions in this regard. One possible interpretation of these provisions is that Argentina is about to lose the ability to reverse an acceleration. We think this interpretation is wrong, but we have heard it raised with some frequency and want to address it here.

PDVSA’s 2020 Bonds: When and Why Does Venezuelan Law Matter?

Mark Weidemaier and Mitu Gulati

In 2016, the Maduro government bought some time through a debt exchange in which holders of maturing bonds issued by state oil company PDVSA swapped them for new bonds due in 2020. The new bonds were collateralized by a 50.1% interest in the U.S. parent company of Citgo. Now that the U.S. no longer recognizes the Maduro administration, the new Venezuelan government sued in the Southern District of New York asking to invalidate the bonds and the collateral pledge. It points to Venezuelan law requiring legislative approval for contracts in the “national public interest,” which didn’t happen here. For background, see our posts from last October, here and here.

The initial briefs have been filed, and not surprisingly the parties disagree about the relevance of Venezuelan law. The PDVSA 2020 bonds are governed by New York law. Venezuela argues that this does not matter, that Venezuelan law determines whether the bonds are valid. The indenture trustee argues that Venezuelan law is irrelevant, that New York law is all that matters, and that under New York law the bonds are enforceable. We’ve seen similar disputes a lot of late, including in connection with debt issued by Ukraine, Mozambique, and Puerto Rico. A government issues foreign-law debt that it later claims was unlawful under its own law. What law governs the dispute?

We have been mulling this question for some time now. At first, we thought it was straightforward, and we suspect many market participants feel the same way. But it is more complicated than a simple foreign versus domestic binary. The end result is this paper, Unlawfully-Issued Sovereign Debt.