SCOTUS National Bank Act Preemption Ruling

The Supreme Court issued an important ruling about the National Bank Act's preemption standard today that precludes broad, categorical preemption of state consumer financial laws, but instead requires a fact-specific analysis.This decision opens the way to more expansive state consumer financial regulation that affects banks.

NIL and Bankruptcy

Bankruptcy lawyers are familiar enough with issues presented but NOLs. And NILs (name, image, likeness rights) have existed for as long as the modern Bankruptcy Code. But those rights have usually come up in the context of debtors with established, valuable brands (e.g., Mike Tyson). Now college atheletes can enter into NIL deals, and for many of them the value isn't yet established and there might not even be licensing deals yet. That situation poses the question of to what extent unlicensed NIL rights are property of the bankruptcy estate, and not of the debtor?

CFPB Bitter-Enderism

Retired Harvard Law Professor Hal Scott has a curious op-ed in the Wall Street Journal suggesting that despite (or because) of the Supreme Court's recent ruling in CFPB v. CFSA that the CFPB's funding is both unauthorized by statute and unconstitutional on account of the Federal Reserve System running a deficit currently (and projected through 2027).

It's a bizarre and incorrect argument, and were it coming from anyone other than Scott it could be dismissed as harmless and uninformed flibflab, but Scott is a personage with serious financial regulatory credentials, who is very tied in to the upper crust of anti-financial regulatory circles, such that one has to wonder if this is a trial balloon for a U.S. Chamber of Commerce or Bank Policy Institute-supported challenge. 

In any event, let me quickly explain why Scott is wrong on both the statutory and constitutional arguments.

Further Thoughts on CFPB v. CFSA

I have some further thoughts on the CFPB v. CFSA decision on Bloomberg Law: decision not only benefits consumers but ultimately benefits many financial services businesses by ensuring both a level of stability in regulation and the preservation of the "legal infrastructure" that the CFPB has created over the past 13 years, such as safe harbors, inflation adjustments, and advisory opinions. 

 

Not All Third-Party Releases Are the Same

My friend Professor Tony Casey has been the most vocal academic defender of non-consensual non-debtor releases in bankruptcy. I obviously disagree with Tony on both the legality and policy substance, but Tony's repeatedly taken me to task in scholarship (here and here) and various social media platforms (here and here) for having supposedly changed my view of the issue.

Tony's charge that I've flip-flopped is based on a 2019 blog post in which I defended then presidential candidate Elizabeth Warren's work in Dow Corning, which Tony thinks is a non-consensual non-debtor release case. 

Unfortunately, Tony's misread Dow Corning and therefore sees a contradiction where none exists.  I have never taken issue with consensual releases of creditors' claims against non-debtors as part of a global settlement (although what constitutes adequate consent is a separate issue). Instead, my concern has always been with mandatory, non-consensual release of claims against non-debtors. Dow Corning released third-parties, but it was not a non-consensual release case. Unlike in, say, Purdue Pharma, where the non-debtor releases purport to bind all creditors irrespective of consent, the dissenters in Dow Corning were allowed to opt-out and pursue their remedies.

CFPB v. CFSA Analysis

The Supreme Court upheld the constitutionality of the CFPB's funding mechanism in its 7-2 decision in CFPB v. CFSA. Although I can't say I love the opinion's reasoning, the Court got to the right result, as Patricia McCoy and I urged in an amicus brief. The ruling does have some interesting omissions and politics, but its ultimately impact will be the normalization of the CFPB, something that's good for consumers and businesses alike.

FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate?

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

The Judgment Holder Problem in Sovereign Debt Workouts

Some time ago, Mitu and I had an exchange (here are parts 1, 2, 3, and 4) about judgments and collective action clauses (CACs). The question was this: Assume that a bondholder “rushes in” to court (in Steven Bodzin’s apt phrase) and gets a judgment before its fellow bondholders can vote, pursuant to the CAC, to restructure the debt. Does the “rush in” creditor escape the restructuring? The subtext was and remains Venezuela, where a number of bondholders already have obtained judgments. As Mitu put it:

For the better part of two decades the hopes and dreams of the official sector for an orderly sovereign debt workout mechanism … have resided, pretty much exclusively, in the widespread use of collective action clauses (CACs) … A concern, all through this period, however, has been that clever holdouts will figure out some loophole to bypass the CACs.

In theory, rushing in to court could be that loophole. I doubt it is a big loophole, or one that is likely to be used with any frequency. But the possibility has concerned official sector actors. And in fact, several bondholders have proceeded to judgment against Venezuela, and one has tried to do the same against Sri Lanka. This worried the U.S. government enough to submit a fairly extraordinary brief asking the court to stay the lawsuit in deference to Sri Lanka’s restructuring negotiations.

My colleague Andy Hessick and I just posted a new paper, The Judgment-Holder Problem in Sovereign Debt Workouts, which uses a Venezuelan debt restructuring as an example in thinking through this topic. The abstract is below the jump, but our primary argument goes something like this:

• Existing analyses focus on the legal doctrine of merger and bar. They ask whether the bond “merges into” a court’s judgment and posit that, if it does, bondholders are not bound by a restructuring concluded through the CAC.
• This is not a helpful way to think about the problem. The doctrine of merger and bar (better understood as claim preclusion) is largely irrelevant. Instead, one needs to ask two separate questions, both of which have clear answers.
• First, does a modification vote conducted pursuant to the CAC also modify a previously-entered judgment of a federal court? The answer is clear: No. A judgment creditor may enforce the judgment even if this allows it to recover more than the issuer is obliged to pay restructuring participants.
• However, question one isn’t as important as it seems. Question two is more important: Can restructuring participants modify the bond to impair a judgment creditor’s ability to enforce a judgment? Despite some legal uncertainties, which we discuss in the paper, we think they can, and we explain why.

tl;dr – A bondholder who cannot block a restructuring vote and races to obtain a court judgment can rest assured that the judgment will remain intact despite the restructuring vote. Whether it will be able to enforce the judgment is another matter entirely.

Abstract below:

The Texas Three-Step

Johnson & Johnson is preparing to take a third crack at addressing its toxic talc liabilities through bankruptcy in what we might call a "Texas Three-Step". And as with J&J's previous attempts, this one has some pretty glaring issues.Yet because of J&J's ability to forum shop and even picks its judge, it will likely be able to sidestep adjudication of many of the issues and avoid appellate review entirely. Instead, J&J's strategy is going to be to ram a seriously deficient plan through with the assistance of its hand-picked judge and then avoid appellate review through the equitable mootness doctrine. It's a strategy that might work. And if it does, it is a sign that the bankruptcy system is seriously broken.