6 posts from November 2019

Bankruptcy Future Claims—Elizabeth Warren Edition

posted by Adam Levitin

Welcome to Credit Slips, the rarified world of “self-described bankruptcy nerds.” Today we’re looking at Future Claims—Elizabeth Warren Edition.

Now, it’s not every day that our humble group blog gets discussed in the New York Times. But as our former-co-blogger Elizabeth Warren continues to rise in the polls, the media and her opponents are taking a renewed interest in the bankruptcy consulting work she did when she was a law professor. Just recently, the New York Times ran a lengthy article on her past consulting workthat even referred our little “bankruptcy nerd” blog. (You might note that we now also offer sovereign debt, financial regulation, and side salads. Come for the bankruptcy, stay for the pie.)

The NY Times piece discussed several cases that Elizabeth worked on, but it failed to clearly articulate the core bankruptcy principle that Elizabeth was fighting for that runs throughout most of the cases highlighted in the article and how Elizabeth’s work was consistently about making the economy and the bankruptcy system work for employees of companies in distress, retirees, and folks injured by a company’s product. To suggest otherwise is ridiculous and fundamentally misunderstands how the bankruptcy system is supposed to work.  

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Purdue Pharma Examiner?

posted by Adam Levitin

The US Trustee should move for the appointment of an examiner in Purdue Pharma's bankruptcy. That's what Jonathan Lipson, Stephen Lubben, and I wrote in a letter to the US Trustee for Region 2 this week.

Purdue is a case that seems to cry out for an examiner.  There is unique public interest in the case because it is so central to the story of the opioid crisis—the major domestic public health challenge of the last decade. In particular, there are real questions about exactly what Purdue and its owners knew about the problems with opioids and when.  Was Purdue was deliberately pushing a product it knew to be harmful? Did its owners, the Sackler family, siphon off substantial funds that could go to remediate opioid harms through fraudulent transfers, as alleged? And can Purdue's current management or the Official Creditors Committee be relied upon to get to the bottom of these questions?  

An examiner--particularly one wielding subpoena power and the power to administer oaths--could go a long way to establishing just what went on at Purdue, and that will help set the stage for a resolution that will be more broadly accepted as legitimate because everyone will be operating on a common factual basis from the examiner's findings. Moreover, an examiner's report is in effect a public accounting of what happened at Purdue. Absent such a public accounting, bankruptcy can become a whitewash:  no trial, no public introduction of evidence, no finding of guilty or not guilty, just claims estimation, a plan and a vote, and then some cash being paid out. That's fine for your run-of-the-mill bankruptcy case. There's really no public interest in why Shloyme's 7th Avenue Garmento Emporium ended up in the chapter. But when a case involves a major public health issue like Purdue, it's reasonable to demand more from the bankruptcy system. Purdue (and possibly other constituencies) will surely object to an examiner motion, be it from the Trustee or from other parties in interest, but I have trouble thinking of a case for which an examiner would be more appropriate.  

 

Interpreting Argentina’s “Uniformly Applicable” Provision and Other Boilerplate

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Over the past week, we’ve discussed various uncertainties over how to interpret the new “uniformly applicable” standard added to aggregated Collective Action Clauses starting in 2014 (here and here). Anna Gelpern’s recent post neatly clarifies some of the issues and provides crucial background on the “uniformly applicable” provision. Oversimplifying, the “uniformly applicable” standard was an attempt to assuage creditor fears that sovereigns would exploit aggregated voting to discriminate among bondholder groups. The intent of the clause was to ensure bondholders got roughly—but as Anna points out, not literally—the same treatment. Our prior posts have focused on how the text of the standard might be stretched to forbid certain unanticipated restructuring scenarios, especially when courts perceive the sovereign to be acting irresponsibly or vindictively. That’s precisely the situation in which courts are willing to stretch the meaning of contract text. It’s what happened to Argentina in the pari passu litigation.

In this post, we focus on the broader question of how courts should approach the interpretation of bond clauses like this one. When presented with disputed but plausible interpretations of a text, courts normally try to uncover the intent of the contracting parties and interpret the contract consistently with that intent. (This is a generalization, but accurate enough for our purposes.) But bonds and other (largely) standardized contracts are different. For the most part, the point of standard language is to ensure standard meaning. That goal isn’t served, and can be undermined, when courts inquire into the subjective intentions of the parties to any particular contract. But if their intent isn’t relevant, whose is? Greg Klass, in a new article “Boilerplate and Party Intent,” offers an insightful way of thinking about these problems.

Argentina’s “uniformly applicable” standard offers a good example of the difficulty. The government officials responsible for negotiating sovereign bond deals generally want to adhere to a set of “market standard” non-financial terms. They have only a vague sense of the specific language of most contract terms. Likewise, many investors have told us that they paid little attention to the “uniformly applicable” language in Argentina’s bonds until Argentina went into crisis. They knew the bonds had CACs and, more concretely, that the clauses featured aggregation provisions. But, beyond that, they didn’t know the details. So a search for the intent of the parties—defined as the bondholder and the government—won’t turn up much of value. (In theory, underwriters are part of the equation, but their incentives are to get the deal done – and using standard forms helps get deals done.)

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Imagine Riding the Ceteris Pari-bus into the Sunset ... in Argentina

posted by Anna Gelpern

Imagine sovereign debt without Argentina -- no Paris Club, no pari passu, no CACs, no SDRM ... even sovereign immunity might look totally different. History teaches that whatever happens in Argentina's imminent bond restructuring (revisiting, reprofiling, rejiggering, revamping --the difference is overblown) is likely to have consequences beyond the long-suffering Republic. The fact that Argentina has an actual government with authority over the economy and some capacity to execute a restructuring (unlike, say, Venezuela) justifies wading into the small print of its bond disclosure--as Mark and Mitu have done. Their able interventions free me to focus on two under-covered points. Methinks that (1) the single-minded focus on voting thresholds is misguided, and that (2) it helps to think of "uniformly applicable" as the latest incarnation of pari passu, which goes to show that inter-creditor equity remains a perennial problem in sovereign debt.

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What's Wrong with PSLF and How to Fix It

posted by Alan White

The Public Service Loan Forgiveness program has so far rejected roughly 99,000 out of 100,000 student loan borrower applicants. Poor Education Department oversight, poor contract design and implementation, and widespread servicing contractor failures are as much to blame as problems in the legislative and regulatory program design. Making this program work to provide loan relief for potentially millions of public servants requires a comprehensive set of fixes. US Ed. could start by enforcing its contracts and compensating its contractors properly, and by relaxing its needlessly strict 15-day on-time payment rule, while Congress could give borrowers credit for all payments made under any repayment plan. In our new white paper summarizing federal agency reports, attorney general and borrower lawsuits, consumer complaints, and contract documents, my research assistant and I survey the various reasons nearly all applications have been denied, and we propose contractual, regulatory and legislative reforms needed to fix PSLF.

Can Argentina Discriminate Against Bonds Issued Under Macri?

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

We hope readers will forgive our trafficking in rumors, but this one is interesting and raises some fun and wonky questions about the relationship between Argentina’s different bonds. We talked about those differences in our last post. Basically, bonds issued 2016 or later are easier to restructure than bonds issued in the country’s 2005 and 2010 debt exchanges. This Bloomberg article explains the differences. Interestingly—and here’s the underlying driver of the rumor—the exchange bonds were issued during the presidencies of Cristina Kirchner and Nestor Kirchner, while Mr. Macri was in office when the 2016 and later bonds were issued. The rumor—relayed to us by some of our friends in the investor community—is that the new government has signaled that it might restructure the Macri bonds, or perhaps just default on them, while leaving the Kirchner bonds untouched.

We’re skeptical that the government really intends to do this, for two reasons. First, the plan sounds insane. That’s not exactly proof that the new Kirchner government won’t do it. But maybe some officials just believe that the government can improve its negotiating position if it seems willing to consider crazy stuff. That might not be sound negotiation theory or whatever, but maybe some in the new government take this view.

The second reason for our skepticism is that we’re not sure Argentina’s bond contracts give it a practical way to engage in this type of discrimination. But this question is actually quite complicated and highlights some ambiguities in Argentina’s bonds. Contractual ambiguities are our caviar and champagne, so that’s what we want to talk about here.

Could the government simply default on the Macri bonds while continuing to pay the Kirchner bonds? Sure, but doing so would eventually trigger the cross-default provisions of the Kirchner bonds. Here is a summary of the relevant provisions, which we extract from the 2010 prospectus. The discussion is simplified, but includes the key details:

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