ALI's Choice Architecture

I received a dunning notice from the American Law Institute today, reminding me that my dues were 90 days overdue. Now, you might conclude from this that I'm generally not paying my bills as they come due or that I'm a deadbeat by nature, but the truth is that I've been on the fence about whether I want to remain a member of the organization. That's another matter, however. My interest is that ALI had a default setting for me to make a $125 contribution in addition to my $125 dues.

In other words, the default setting was for me to pay 2x what I actually owe. The symmetry of the $125 numbers makes it much more deceptive because it seems more like an itemization and a total, rather than two separate charges.

To be sure, I could easily opt-out by unchecking the pre-checked box, and there's bolded language telling me about it (albeit in a visually separate box...), but is this sort of choice architecture really needed? I don't think it formally violates anything in the Restatement of Consumer Contracts, but opt-out mechanisms in consumer contracts just aren't a good look, any more than auto-renew features. If I want to give ALI an extra $125, I will, but I don't want to be tricked into doing so. Do better ALI.

What's 300 Years Among Friends?

It often doesn't end well when law professors play at being legal historians. The Purdue Pharma Supreme Court appeal is a case in point. 

A group of prominent bankruptcy law professors filed an amicus brief in support of the appellee, Purdue Pharma. Their brief takes direct aim at my amicus brief in support of the appellant, the United States Trustee. Specifically, the good professors challenge my claim that nonconsensual nondebtor releases were entirely unknown in Anglo-American law until the Johns Manville case in 1986. They write: 

One amicus has argued that releases would have been “incomprehensible to the Framers” and “were entirely unknown in American bankruptcy” prior to 1986. Adam J. Levitin Amicus Br. 4-5. This is a puzzling claim that misses the mark by at least 367 years.

Third-party releases have been known and comprehended in bankruptcy law as means to achieve global resolution since at least 1619, when the Lord Chancellor used his injunctive powers to release third-party sureties from the non-debtor claims in exchange for compelled contributions to a bankruptcy composition. See Tiffin v. Hart (1618-19), in John Ritchie, Reports of Cases Decided by Francis Bacon 161 (London 1932). Similar to the releases at issue in the present, the injunction in Tiffin was directed at dissenting creditors to facilitate a resolution that had been approved by the majority. Ibid.; see also Finch v. Hicks (1620), in Ritchie, Reports, at 166-167 (enjoining creditors from pursuing actions at common law against non-debtor sureties of an insolvent individual).

So, according to Purdue's amici, I'm wrong on the history because I failed to account for a 1619 case. But there's a HUGE problem with their argument...

The Section 1071 Small Business Lending Data Collection Rule

The Senate voted 53-44 to overturn the CFPB's section 1071 small business lending data collection rule under the Congressional Review Act. If the House can ever function, I'd expect that there are the votes there too to overturn the rulemaking, but it's all sort of a show given that President Biden is threatening a veto and there aren't the votes to override a veto.

So three thoughts on this. First, doing a CRA resolution that has no chance of passing is a huge waste of the most precious commodity in DC, namely Senate floor time. But perhaps that is the point. More time on CRA resolutions, less time available for confirming judges, etc. I'm surprised we don't see continuous filing of CRA resolutions as itself a delay tactic in the Senate.

Second, imagine for a second that the CRA resolution passed. The CFPB would be precluded from promulgating another rule that is "substantially the same" without new Congressional authorization. But section 1071 would still stand. Is there any way the CFPB could do any data collection rule that is not "substantially the same," in terms of requiring production by small business lenders of data about the borrowers and loans? If so, then it suggests that "substantially the same" must actually be quite narrowly construed (e.g., if rule 1.0 asked about LTV and rule 2.0 did not, they are not "substantially the same"), which has important implications for the CFPB's ability to undertake a new arbitration rulemaking.

Third, assuming that the resolution fails, we will then have data collection regimes for mortgages and small business loans. That data is important for monitoring against discriminatory lending. Doesn't it seem strange to limit the data collection to just those markets? Why not extend it to the most obvious market, where there have long been concerns about discriminatory lending, namely auto lending, as some have previously suggested?

Rite Aid Pulls a Purdue Pharma to (Sorta) Pick Its Judge

Last night I did a post about the Rite Aid bankruptcy. I assumed that the first affiliate to file was Lakehurst and Benson Corp. because that case had the lowest number of any case up on the public docket. But it seems that not all petitions had been posted to the public docket at that time, and instead the first to file was Rite Aid of New Jersey, Inc. (RANJ), which turns out to be a more interesting story than Lakehurst's petition.

Like Lakehurst, RANJ is a New Jersey corporation that is listed in NJ corporate records (both incorporation and UCC filings) as being based in Pennsylvania. So New Jersey venue is appropriate under the venue statute. But on its petition, RANJ, unlike Lakehurst, lists a principal place of business in New Jersey, specifically, "820 Beaverton Road, West Trenton, New Jersey 08628." That would seem to trigger the New Jersey local bankruptcy rules to have the case automatically assigned to one of the two judges in the Trenton vicinage.

But what happens when you plug that address into Google?  You get... nothing. Google does not know of a Beaverton Road anywhere in New Jersey.  Hmmm.

Google, however, in its artificial intelligence, does know of an "820 Bear Tavern Road, Ewing, New Jersey 08628." A look on the map indicates that Ewing is right next to West Trenton (and the post office doesn't actually care about the name of the town, just the ZIP...)

So it looks as if some Kirkland associate (do we really think Cole Schotz did the drafting?) had a bit of fauna mix up: "Beaverton" is actually "Bear Tavern".  If that's the case, what is actually at 820 Bear Tavern Road?  Well, it's the address of the Corporate Trust Company, a business that serves as the registered agent for other businesses.

You might be thinking at this point that Rite Aid is starting to look a lot like Purdue Pharma, where the White Plains venue was based on the address of the registered agent, not the actual business. (At least Rite Aid had the decency not to change registered agents in order to get a favorable address...)

Last time I checked, a registered agent is just an agent for service of process and the like. It is not a principal place of business, which is what matters for bankruptcy law: by definition the agent isn't the principal. In fact, RANJ has represented to the State of New Jersey that its principal business address is "30 Hunter Lane, Camp Hill, PA17001." And RANJ has made the same representation to the State of New York.

Now let's be clear: Rite Aid of New Jersey, Inc. is a New Jersey corporation, which means a New Jersey venue is technically proper, but the case should not have automatically been assigned to a Trenton judge under the NJ local rules, as there isn't any real claim for a Trenton vicinage. (It isn't clear how cases are assigned within a vicinage.) In any event, RANJ should have listed its actual Pennsylvania business address on its petition. If it had done so, it would not have had a 1 in 2 chance at getting Judge Kaplan, but would have had a 7 in 8 chance that the case would be assigned to another judge. And Kirkland no doubt knew what it was doing--someone made a deliberate decision to (mis)list the address of the registered agent as the principal place of business.

In short, this looks like yet another case of judge-picking. I recognize that parties are very hesitant to raise judge-picking before the picked judge, as it implies that at least the debtor thinks that the judge is not impartial. Nevertheless, I hope that there will be some probing questions about the judge-picking.

What's Rite Aid Doing in Trenton?

The big news this past week in bankruptcy was the resignation of Judge David R. Jones of the Southern District of Texas bankruptcy court after his romantic involvement with an attorney at Jackson Walker, who represented Chapter 11 debtors before him was revealed. That story is still unfolding (to be seen if there is bar discipline or even criminal charges), but let's not beat around the bush:  the real story is venue.

Specifically, the Jones scandal appears to go straight to the heart of Houston's meteoric rise as the premier Chapter 11 filing destination: Kirkland and Ellis would file large cases, sometimes with no obvious venue hook, in SDTX, where the cases would end up before one of two judges on a complex case panel:  Judge Jones or Judge Marvin Isgur, who was Jones's former law partner. In other words, file in Houston and you've got a 50% chance of getting Judge Jones, and even if you get Judge Isgur, the two judges worked very closely, mediating each others cases, for example.

Now that's all normal exploitation of the rules, but where a lot of questions emerge is from Kirkland having Jackson Walker as co-counsel. That's something Kirkland only did in Houston, meaning that Jackson Walker was really more like local counsel. It's quite strange as local counsel is not required under SDTX rules and, in any case, Kirkland has its own Houston office with restructuring partners. Other large firms filing cases in Houston have not had on local counsel. This story probably isn't over yet.

Now, having left a hot mess behind in Houston, now Kirkland is moving on...to Trenton, New Jersey, where once again there seems to be some venue funny business with Rite Aid

Judges as Mediators

With rising interest in the topic of judges as mediators, I am recirculatating the article published last year on this topic. The article reviews prominent accountability measures for judges and how these systems may not operate effectively when judges serve as mediators, especially when lawyers and parties have strong disincentives to object as needed. Given the objective of maintaining the legitimacy of the court system to the public, the appearance of impropriety is a major basis of concern throughout judicial ethics, whether or not there is evidence of actual inpropriety. Again, here is the article. 

The Lasting Economic Effects of Slavery

Nicholas Brown has written the latest piece in a fascinating Reuters series documenting how the effects of slavery remain with us today. Brown's article, entitled "American Dreams," follows two families over 150 years. One family is the descendants of enslavers, and the other is the descendants of those who they enslaved. It is a case study of how slavery, the Jim Crow era, and racial discrimination put the two families on very different economic paths. It brings home the lingering effects of these shameful parts of U.S. history in ways that aggregate statistics about wealth disparity often do not. Credit Slips readers will be particularly interested in how bankruptcy helped the white family (and not because I am quoted there). We say that our blog's mission is to discuss credit, finance, and bankruptcy issues, and if you are here, you likely have those interests as well. I strongly recommend Brown's article.

No Virginia, There Really Is No Such Thing as "the Fed"

Once again, the WSJ is publishing nonsense about the CFPB. It's really painful to see conservative admin law types write about federal agency structures when they don't understand the basic facts. The WSJ ran an op-ed by Adam White, a think-tanker at AEI and George Mason, that tries to take on the claim that if the CFPB's funding is unconstitutional, so is that of the Board of Governors of the Federal Reserve System. But Mr. White runs into trouble with his argument in his first paragraph when he refers to the "Federal Reserve" and "the Fed." The problem: there is no legal entity called "the Federal Reserve." We refer to it that way colloquially, but it's actually more complicated, and the complication really matters here. 

"The Fed" is actually "the Federal Reserve System," which consists of twelve private regional reserve banks and a federal government agency called the Board of Governors of the Federal Reserve System. The Board is a full-fledged federal regulatory agency. It makes rules, engages in supervision of financial institutions, brings enforcement actions, and undertakes administrative adjudication. In short, it does all the same type of things as the CFPB.

CFPB v. Community Financial Services of America

With oral argument in CFSA v. CFPB scheduled for tomorrow, it's no surprise that some unfounded claims about the CFPB are getting thrown around by the usual anti-regulation suspects, like the WSJ editorial page and George Will. Given that there's more attention than usual being paid to the Bureau, I figure it's the least I can do to flag what's wrong about these claims. Specifically, I want to address the claim that the Bureau is some uniquely ultra-power federal agency and that its funding has "dual insulation" from Congressional control. 

Most Powerful Agency, Ever?

Is the CFPB really the most powerful government agency ever? Puhlease. Federal agencies aren't Pokemon cards with a CP level that can be compared, but even so, it's just ridiculous to claim that the CFPB is the most powerful federal agency around. Its ambit is noticeably narrower than that of the Federal Reserve Board, for example. (There's a reason that Jerome Powell, the Fed Chair, is a household name, while Rohit Chopra, the CFPB Director, is not.) 

Let's get the headline number up. There are 33 million businesses in the United States. The CFPB has some form of regulatory authority over only around 40,000 of them. That 40,000 consists of ~23,000 payday lenders, ~4,800 credit unions, ~4,600 banks ~4,500 debt collection agencies, ~500 nonbank auto lenders, and 410 consumer reporting agencies, and some sundry other entities.  In other words, only 0.1% of all businesses in the United States are under any CFPB jurisdiction (and even that is quite limited, as we will see). That fact alone should be the end to the "most powerful agency, ever," nonsense.