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?"

Continue reading "What Is a Wire Transfer?" »

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.

Continue reading "The CFPB's Proposed Overdraft Regulation" »

Cross-Border Insolvency Forum Shopping Naivete

posted by John Pottow

by Ted Janger and John Pottow

Recently, two U.S. law professors and a third from Singapore offered unsolicited advice to the United Nations Commission on International Trade Law (“UNCITRAL”) regarding that organization’s ongoing efforts to harmonize and modernize the law of cross-border insolvencies.  They wrote an open letter (the “Letter”) to the Secretariat—joined by a number of other academic signatories—that calls upon UNCITRAL to abandon one of the core principles of its Model Law on Cross Border Insolvency (the “MLCBI,” adopted as chapter 15 of the U.S. Bankruptcy Code): that, other things being equal, a cross-border bankruptcy case should be based where the debtor is located. 

This principle is implemented by according special deference and comity to the insolvency case located at the debtor’s center of main interest (the “COMI”).  The debtor’s COMI is the jurisdiction where it carries out its activities and, hence, is the jurisdiction that is known and readily apparent to third parties.  It therefore is predictable.  The COMI principle thus has a lot to recommend it.  In most cases it will enhance the legitimacy of bankruptcy outcomes by simultaneously furthering administrative convenience, increasing transparency, vindicating creditor expectations, and respecting national sovereignty.  Like most rules of private international law, it is rooted in common sense.

Notwithstanding COMI’s many virtues, the Letter’s authors recommend jettisoning COMI in favor of a regime of unfettered forum choice and jurisdictional competition; the main proceeding entitled to deference in a multinational insolvency should be freely selected by the debtor.

Continue reading "Cross-Border Insolvency Forum Shopping Naivete " »

Check Fraud: It's Time to Jettison Price v. Neal

posted by Adam Levitin

Check fraud has been on the rise, even as check usage continues to decline. There's lots of different types of check fraud, however. Sometimes it's as simple as a thief stealing a blank check, filing it in, and forging the drawer's signature. Sometimes a legitimate check is intercepted in the mail, and the payee's name (and maybe amount) get washed off and replaced by that of the fraudster or a friendly party. Sometimes a legitimate check is copied—while in transmission or even after receipt and possibly even after deposit—but with the payee then changed prior to deposit. And once a check has been copied once, it can be copied multiple times, and each copy can be deposited (and possibly deposited multiple times with remote deposit capture). It can be hard to figure out how the fraud happened, however, as the payor bank often doesn't receive a paper (or at least the original paper) check. Instead, the payor bank might simply be presented with an image of the check or perhaps a paper reconversion of an image of the deposited check. And with remote deposit capture, the depositary bank might itself not have a paper check. 

The problem this variety of fraud creates is that it makes it hard to know which legal rule should apply, and the uncertainty of legal rules might reduce banks' incentive to take care to protect against fraud.

Continue reading "Check Fraud: It's Time to Jettison Price v. Neal" »

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