Professionals Must Now Disclose Their Interests in the PR Cases

President Biden has just signed the "Puerto Rico Recovery Accuracy in Disclosures Act of 2021’’ or ‘‘PRRADA’," which requires professionals to make chapter 11-style disclosures when they file fee applications in the PROMESA title III cases. Failure to comply not only can result in loss of fees in the Puerto Rico cases, but such failure to disclosure must also be disclosed in other chapter 11 cases going forward. Presumably the prior failure to comply with statutory disclosure requirements should factor into the decision to authorize retention in chapter 11.

The Blurring of Tech and Finance

I have an op-ed in ProMarkets about how Apple leverages control of the iPhone's NFC chip to push the dominance of its platform into new areas that let it hoover up more consumer data. The NFC (near field communication) chip is what lets the iPhone do contactless payments for ApplePay.  Apple strictly controls access to the NFC chip--it doesn't let AndroidPay use it, for example. But the NFC chip's uses extend beyond payments.  Apple is now using it to let the iPhone operate as a car key and a hotel room key. The catch? If you're a car manufacturer or hotel and you want this cool technology to work with your product, you're going to need to share some of the consumer data with Apple. 

What we're seeing here is an example of the increased blurring between tech companies and financial services companies, tied together by troves of consumer data.  This is a development that ultimately challenges the traditional regulatory boundaries of FTC and CFPB and is going to raise all sorts of issues for antitrust, consumer protection, and data privacy for years to come.

A Better Way to Deal with Student Loan Debt

My Georgetown colleague Jake Brooks and I have an op-ed in Politico about the best way to address the student loan debt problem. We argue that existing proposals for outright student debt relief, whether $10k, $50k, or everything, are problematic, at least standing on their own, particularly because they fail to address the student loan problem going forward. Instead, we see income-driven repayment (IDR) plans as a key part of addressing the problem. 

Clauses and Controveries: From Commercial Bank Loans to Blue Bonds

Mark Weidemaier and Mitu Gulati

After a short hiatus (we like to say we are between seasons), the Clauses and Controversies podcast has resumed. This week's episode, From Commercial Bank Loans to Blue Bonds, features Antonia Stolper from Shearman & Sterling:

Sovereign debt markets have evolved significantly over the years, from syndicated bank loans, to bonds, to the current infatuation with ESG lending. Antonia Stolper (Shearman & Sterling) joins us to talk about the evolution of sovereign debt practice over the course of her eminent career. We also talk about Belize's recent debt restructuring, where some say creditors agreed to significant additional reductions in exchange for promises by Belize to invest the savings in environmental conservation projects. Antonia helps us understand what actually happened in this deal and what its implications might be for future sovereign restructurings.

New Year, New Data in Your Credit Score

During 2021, reports from the CFPB and consumer advocates spotlighted the role of credit scoring in people's financial growth or stagnation and decline. These reports emphasized racial and ethnic disparities in credit scores and in complaints about errors in credit reports. Congressmembers introduced three draft bills aimed at improving credit reporting. Given the problems with traditional credit reports and scores, along with barriers to access to credit and other opportunities faced by the credit invisible, the idea of alternative credit scoring was raised repeatedly last year -- in reports, news stories, and in the draft bills. Seemingly in reaction, starting now, Experian is adding data about "buy now, pay later" loans to credit reports. Soon after Transunion announced that it was “well on [its] way” to including the same data.

Sara Greene and I have a new paper about credit reporting and scores, "Credit Scoring Duality," that focuses on the benefits and potential problems of adding alternative data to credit scoring models. Adding more data to credit scores, at first, may seem appealing. More data = better, more accurate scores? However, the use of this alternative data will not necessarily make the credit invisible or people with low credit scores more attractive. Much of the additional data proposed suffer from the same demographic disparities as the data already incorporated into credit scores. That is, in general, the people supposedly helped by inclusion of alternative data are likely to perform below-average on these inputs. Beyond replicating already present disparities, Greene and I worry that pointing to alternative credit scoring as a solution will distract from larger, systemic issues that are shown by disparities in credit scores. For more details, see our draft paper.

Bankruptcy Filing Rate Is Lowest Since Bankruptcy Code's Enactment--The Question Is Why

There will be around 400,000 total bankruptcy filings in 2021. That figure is historically low. The table to the right shows annual filing figures since 2010, which was the post-2005 peak. The 400,000 filings this year is a 75% reduction from 2010. 

The 400,000 filings in 2021 will be a rate of 1.21 bankruptcy filing per 1,000 persons (using the mid-year, July population estimate). That is the lowest annual rate since the enactment of the Bankruptcy Code. In 1980, the first full calendar year of filings under the new law, there were 1.22 filings per 1,000 persons. In absolute numbers, there were 122,000 more filings in 2021 than in 1980, but there also are over 100 million more people living in the U.S.

Every calendar year since 1980 has had a higher bankruptcy filing rate. Absent some surprisingly high number of filings in December, this year will put an end to that. Ed Flynn's numbers over at the American Bankruptcy Institute show that at least through December 12, the situation has not changed.

Why are bankruptcy filings so low in the midst of a pandemic that has caused so much economic upheaval? Anyone who claims to have an answer to that question is either lying or overconfident. I certainly don't have an answer, but I have some hypotheses suggested by the data, with emphasis on "hypotheses." Below the fold, I explain those hypotheses and conclude with some thoughts about how much lower the filing rate can get.

FDIC Power Struggle

Remember when there were two dueling claimants for the title of CFPB Director? Well, we're now seeing a repeat of that conflict play out with the FDIC.

The FDIC is governed by a five member board, consisting of the FDIC Chair, a Vice-Chair, the CFPB Director, the Comptroller of the Currency, and at-large director. By statute, no more than three of the board members may be from the same political party. The Chair, Jelena McWilliams, is a Trump appointee. The vice-chair position is vacant. The other three directors are all Democratic appointees. That means that three of the four directors on the board are Democrats, but the chair is a Republican. So who is calling the shots at the FDIC?

The issue just came up because the three Democratic appointees voted to direct the FDIC's Executive Secretary to transmit a Request for Information for publication in the Federal Register (which provides the notice required under administrative law of a proposed action). That vote and instruction only appear in a statement released on the CFPB's website. The FDIC's website (presumably controlled by Chair McWilliams) states that no such action was approved by the FDIC.

What's going on here?

Contract Ambiguity: Paying Versus Still Owing a Debt

I've been meaning for some time to tell this brain-candy story involving an amazing ambiguity in a Chinese debt-related contract. Now that my career-first research semester is drawing to a close and the holiday break is upon us, I thought now's the time to tell it.

To set up the story, the equivalent of the legal-cultural Latin phrase pacta sunt servanda (debts are to be paid) in Chinese is 欠债还钱 (qiàn zhài huán qián) [the phrase continues, but this is the key bit]. It means "If you owe a debt, return the money." Here's where the craziness comes in: Most Chinese characters have one and only one single-syllable pronunciation. That syllable might have many diverse meanings, but how that character sounds is consistent.

Not so with the key character in the above phrase. The character 还 can convey the sound huán, in which case it means "return," or more frequently, it carries the sound hái, which means "still" (that is, carrying on, as in "I still love him despite his sometimes beastly behavior").

Non-Debtor Releases

I have an op-ed in Bloomberg Law about the abuse of non-debtor releases. Many chapter 11 attorneys argue that non-debtor releases are an essential all-purpose deal lubricant and that the excesses of a few cases—Purdue Pharma, Boy Scouts—shouldn't result in throwing out the baby with the bath water. I disagree. There's no question that non-debtor releases can grease a deal (and let's put aside the questionable practice of attorneys negotiating plans that give them releases as well). But so what? There's also a little thing called due process. It's only within the tunnel vision of chapter 11 that reorganization trumps all. Hopefully the Nondebtor Release Prohibition Act, which passed out of the House Judiciary Committee last month will become law and clarify the matter. 

Indeed, are non-debtor releases actually so important for practice? Chapter 11 lived with them for years before Mansville and even after Mansville it was years before they started being used in non-asbestos cases. Indeed, can anyone actually point to a case where a debtor would have had to liquidate and jobs would have been lost but for non-debtor releases? Perhaps there is such a case, but if so, it's the exception.

Take Purdue Pharma. What would have been the alternative to boughten releases for the Sacklers?  Perhaps a liquidating plan, but I'm not sure that it would have resulted in any job loss, just a going-concern sale. And the estate could have sold its own litigation claims against the Sacklers or put them into a litigation trust. To be sure, one might argue that the boughten releases for the Sacklers are a better deal economically for the estate, and that's the proper measure when considering a settlement of estate claims, but I do not see how the estate—or any bankruptcy judge—can constitutionally impose a settlement of creditors' direct claims against non-debtors. It doesn't comport with due process and it's pretty clearly an uncompensated taking.

I'm sure some readers will disagree, and comments are welcome. Further affiant sayeth not. 

What attorneys' general talk about when they talk about bankruptcy

Surely not the only thing that state attorneys' generals talk about when they talk about bankruptcy, but a common thing. To wit: 43 sign a letter advocating for a change to venue law in federal bankruptcy cases. Press release here.  

 

Shocking Business Bankruptcy Law

Another quick announcement that I have posted a draft essay on some under explored intersections between big business bankruptcy and big shocks here. The abstract is short, yes, but so is the essay. It also discusses ice cream. Thanks for reading! 

Who extracts the benefits of big business bankruptcy?

The Deal has a new podcast called Fresh Start hosted by journalist Stephanie Gleason. Stephanie and I recently chatted about big bankruptcies with litigation management at their core and the stakes those cases raise. We covered a lot of ground along the way, including non-debtor releases and the SACKLER Act, notice and voting, forum shopping, equitable mootness, the homogeneity of the restructuring profession, bankruptcy administrators and the United States Trustee system, and the skinny clause of the Constitution at the heart of all of this. We begin by reminiscing about the mass tort and future claims discussion during the deliberations of the National Bankruptcy Review Commission, for which Elizabeth Warren was the reporter, and how much has changed. Check it out here.

Does J&J Have a Patriot Coal Problem?

J&J has put its Talc subsidiary into bankruptcy in North Carolina. Trick is, the only basis for venue in North Carolina is that the talc assets were put into a Texas LLC this past Tuesday, and then that Texas LLC converted into a North Carolina LLC the same day.  

Put to one side the problematic question of how the talc assets (and liabilities) ended up in the Texas LLC – what is the reason for the conversion to a North Carolina LLC?  It seems to be a rather transparent attempt to manufacture jurisdiction in North Carolina.

Arguably venue should be transferred to Texas. Perhaps the Western District of Texas – not that other Texas district – since J&J's only clear connection with Texas is incorporation ... 

Five reasons to read Unsettled by Ryan Hampton

Ryan Hampton, author of a book about the Purdue Pharma bankruptcy published earlier this month, is a "national addiction recovery advocate, community organizer, author, and person in long-term recovery" who also was a member of the Purdue Pharma bankruptcy official unsecured creditors' committee. On Purdue's committee, Hampton and three other personal injury claimants sat alongside five institutional/corporate creditors, at least some of which were defendants in other opioid crisis lawsuits.  This is a quick post to recommend that the bankruptcy world read Unsettled for at least the five following reasons: 

More on Belize: Marine Conservation is Nice; Deeper Haircuts Are Better

A couple of additional thoughts on Belize’s debt workout, especially the relatively novel aspect involving the pre-funding of a marine conservation trust. The deal has featured prominently in the financial press lately, with great coverage in the FT (here by Robin Wigglesworth and here by Tommy Stubbington), Bloomberg (here), and elsewhere. For details, see Mitu’s posts here and here. Mitu has a relatively optimistic take, which I’m mostly on board with. It would be wonderful if countries could both ease debt burdens and increase investment in marine conservation and other forms of sustainable growth. It would be even more wonderful if investors paid for some of this by granting significant debt relief. But even if that’s what happened with Belize—and I’m not entirely sure that it is—the Belize deal may not be replicable at a scale that would matter.

The plan is for Belize to repurchase and retire its outstanding international bond. Reports suggest that negotiations over the repurchase price were stalled at around 60 cents on the dollar. Ultimately, investors agreed to take 55. In return for that concession, Belize will prefund a $23.4 million trust to support future marine conservation projects. One potential takeaway is that investors agreed to the additional 5 cent reduction after being presented with the debt-for-nature idea, perhaps in part because intense media coverage created pressure to demonstrate their ESG bona fides.

The first point to note here is that the additional 5 cents per dollar is very large in comparison to the concessions investors seem willing to make to achieve ESG goals in other contexts.

The Super Cool Belize "Debt for Coral Reefs" Restructuring

This blog post draws on ideas developed with Ugo Panizza (Professor of International Economics, Graduate Institute) that form part of a paper we are working on. I am to blame for any errors though. 

In 2020, the stock of public debt in debt in developing and emerging market economies surpassed $19 trillion and reached 63% of the group’s GDP (up from 55% in 2019). Such levels of debt significantly increase the risk of multiple devastating debt crises hitting the global economy at the roughly the same time; a situation not seen since the Latin American debt crisis of the 1980s. This is a scary prospect at a time when nations need to scale-up investment in climate change and sustainable growth.

The recent restructuring of Belize’s sovereign debt is an example of how a country can address a debt crisis while preserving investment that can promote sustainable growth. Hard hit by covid-19, Belize is restructuring its sovereign debt for the fifth time in two decades. So, why is this debt restructuring so exciting?

Scholars' Letter in Support of Saule Omarova

President Biden has nominated Cornell Law Professor Saule Omarova to be the next Comptroller of the Currency. While the Office of the Comptroller of the Currency is not a well-known government agency outside of bank regulation circles, it is among the most important in financial regulation because it is the prudential regulator of national banks—the largest banks in the United States. The OCC is also the primary consumer protection regulator of all national banks with less than $10 billion in net assets, and the Comptroller is a member of the FDIC board. In short, this is a position with substantial influence over the banking industry. 

This week, numerous scholars of financial regulation (including me) sent a letter in support of the nomination to the Chair and Ranking Member of the Senate Banking Committee. We believe that Professor Omarova would make an outstanding Comptroller, and we hope that she will receive a fair hearing even from those who might disagree with her on policy questions. Professor Omarova is a lawyer's lawyer with impeccable credentials for the job. After completing a PhD and JD, she worked at the leading banking law firm and then in the GWBush Treasury Special Advisor to then Under Secretary Randal Quarles, now the Fed's Vice-Chair for Supervision. Her scholarship is careful, restrained, and masterful, and her co-authors include the top banking attorney in the US.  Not only is Professor Omarova's knowledge of banking regulation unsurpassed within the academy, but she would bring a welcome change to the OCC as the first Comptroller who wasn't a either a banker, bank lawyer, or bank lobbyist when nominated. Her independence is much needed at an agency that has often seen banks as its customers, rather than as its regulatory charges. 

Unfortunately, some of the financial services industry opposition to Professor Omarova has veered into xenophobic and McCarthyite dog whistling based on Professor Omarova having grown up in the former Soviet Union. The hypocrisy in this anti-immigrant prejudice is astounding given the way that the same folks who are claiming that Professor Omarova is suspect because of her childhood in the Soviet Union have celebrated another former Soviet bloc immigrant-turned-bank regulator. The dog-whistling has gotten so bad that in a remarkable press release Senate Banking Committee Chair Sherrod Brown (D-Oh) threw down the gauntlet at the "Red Scare" character assassination coming not just from bank lobbyists, but from the Committee's Ranking Member, Senator Pat Toomey (R-Pa). 

The banking industry's decision to proceed through dog whistling suggests that it is reluctant to have it out over the substantive policy positions supported by Professor Omarova. But if you want to see a more sober and measured take on Professor Omarova from a law firm with numerous financial services industry clients, see Gibson Dunn's take here. What the law firm's take for its clients—rather than for political theater—suggests is that the sky won't fall with Comptroller Omarova, but that she will take a more skeptical view of bank activities outside of traditional core activity areas. In other words, it won't be business as usual. And that's the banking industry's real concern here. 

ED announces PSLF overhaul, aims to boost 2% approval rate

Education Department Secretary Cardona today announced a remarkably bold, yet sadly incomplete, emergency suspension of regulatory barriers to the Public Service Loan Forgiveness program. The Secretary is using statutory authority to suspend, temporarily, some of the needless regulatory hurdles (as I and others have advocated) that have produced a 98% rejection rate for the program for the past five years. On the other hand, today’s announcement does not appear to address all of the hurdles, and some details remain vague. The Department estimates it can immediately approve 22,000 additional loan cancellations, increasing the approval rate from 2% to 5%, and another 27,000 need only obtain employment certifications for periods in which they already made payments, bumping the approval rate up another 3% to 4%. Another 550,000 borrowers may receive several years of additional credit towards the ten-year required total payment period, lining them up for discharges in future years.

In its biggest improvement the Department will allow all payments made on all loan types and all repayment plans to count towards the 120 month required total. Less clear is how the Department is addressing the two remaining hurdles. Many borrowers find payments are not counted because the payment is not within 15 days before or after the due date or is not in the exact amount the servicer requires. Early or lump-sum multi-month payments don’t receive full credit. The Department’s press release says the waiver will address this issue, but does not say how, or to what extent. Extending the window by 15 or 30 days, or the payment amount tolerance by 10% or 20%, will not do.  UPDATE: at negotiated rulemaking today, USED announces they will stop counting payments, and instead count time in repayment. If true this is a HUGE improvement. They mentioned in some cases borrower payment counts now go from zero to 120.

Borrowers also face a third hurdle, having to get employer certifications that their jobs qualify as public service covering each and every one of the 120 qualifying months. The Department’s servicer has rejected many certifications, the Department has failed to establish a universal database of qualifying employers, and some borrowers simply have difficulty filling gaps of long-ago employment. The Department says it will improve its employer database and audit prior rejections, but does not propose as I have recommended to allow borrower self-certification of qualifying employment.

The Cheekiest Artist of Modern Times?

One of the students in my 1L Contracts class pointed me to this delightful article from the New York Times -- delightful because this is going to be so fun for us to discuss in class (here)

Here is the story as I understand it. A Danish artist, Jens Haaning, was commissioned by a Danish museum (the Kunsten Museum of Modern Art) to reproduce a couple of his prior works, where he had framed piles of real euros and kroner to symbolize wages and work in Austria and Denmark.  To do the reproduction work, the artist was paid 10,000 kroner and then also given a bunch of cash (532, 549 kroner) to put in the installation pieces.

The cheeky artist sent in a couple of blank canvases titled "Take the Money and Run", which seem to describe exactly what he did.  (The Times article literally has multiple photos of guests to the museum admiring the blank canvases -- or at least looking at them with interest).

The artist says that he gave them art -- symbolizing taking the money and running, (a modern critique of capitalism?). The museum director, Mr. Lasse Anderson (representing the capitalist museum?), appears neither amused nor pleased. He says: breach of contract.  

It is simply not possible to make this stuff up.  Maybe Tess and Dave will do an episode about this case for their brilliant Promises, Promises podcast?

I very much want the artist to win the contract suit. But if the museum director is right that the contract was for a reproduction of the prior piles of cash pieces (which seems likely from what the Times piece tells us), Jens will probably have to give the moolah back.  But not until after having gotten international notoriety as the cheekiest artist of modern times. And maybe that's all he was going for after all. Win win. 

I can only begin to imagine the kind of fun opinion someone like Richard Posner might have written on a case like this.

Many thanks to Maggie Rosenberg, 1L at U Virginia.

Scott & Kraus on the Private Law Podcast -- Magnifique!

Last year, when I was in zoom teaching hell and desperately looking for videos or podcasts with my contracts heroes to try and give my students a window into the magic of contract law and theory, I was unable to find anything at all that I could use for class from Bob Scott and Jody Kraus.  Lots of erudite law journal articles, yes. But I hate lengthy law review articles. I wanted to hear them talk and answer questions. 

My prayers have been answered, thanks to Felipe Jimenez's wonderful Private Law Podcast (here). The episode posted today is about Bob and Jody's wonderful and special collaboration that has given the world of contract law so much. And Felipe is brilliant in his gentle but insightful questioning (as an aside, if you are a fan of contracts theory, you might also like the episode with Brian Bix; I loved it).

Thank you, Felipe. Thank you, Bob and Jody. 

Hawkins & Penner--Marketing Race and Credit in America

Past Credit Slips guest blogger, Jim Hawkins from the University of Houston, and his student, Tiffany Penner, alerted me to their recent publication in the Emory Law Journal entitled, "Advertising Injustices: Marketing Race and Credit in America." The paper takes an interesting approach to the issue of how consumer credit gets marketed in the United States. They visited fringe lending establishments as well as the web sites of these establishments and mainstream banks and looked at the persons used as models in their advertisements.

Although I have some questions about the magnitude of the effects--questions that come from how different government agencies Latino or Hispanic heritage sometimes as an ethnicity and sometimes as a racial identity--the core finding of the paper seems right. The models used in the advertisements send a signal about whether the financial service is "for people like you." How those people differ between mainstream banks and fringe lenders will not surprise anyone who has paid even a bit of attention to the structural racism that defines our economy. Hawkins and Penner close the paper with some thoughts on how the Equal Credit Opportunity Act and the Community Reinvestment Act might help fix the problems they identify.

UPDATE (9/26): My apologies to Ms. Penner for misidentifying her in the original title to this post.

SBRA technical amendment = technical foul?

A great Arabic folk idiom describes an all-too-common occurrence: Literally, "he came to apply eye liner to her, but blinded her." [اجا يكحلها عماها  izha ikaHil-ha, ^cama-ha] In other words, someone attempted to improve a situation but ended up ruining it. I believe I've encountered an example in the "technical amendment" made by the CARES Act to the Small Business Reorganization Act of 2019.

As Bob pointed out almost exactly two years ago, the original SBRA definition of a "small business debtor" was designed to keep out large public companies and their subsidiaries, but the language was ... inelegant. The first of two subsections (laid out in Bob's post) excluded companies subject to reporting requirements under the Securities Exchange Act of 1934 (that is, a company with shares widely held by "the public," as defined by the SEC), while an immediately following exclusion applied to such a company that was an affiliate of a debtor (that is, another company already in bankruptcy). Well, whether you're an affiliate of a debtor or not, if you try to file under subchapter V, and you're subject to the '34 Act reporting requirements, you're excluded by the first subsection, so isn't this second provision redundant?

Yes, but ... in 2020, the CARES Act came to put eye liner on this section and blinded it. Rather than fixing this by saying what seems to have been the intention--that an affiliate of a public reporting company cannot file under subchapter V--instead, a "technical amendment" changed the final provision entirely by simply excluding an affiliate of an "issuer, as defined in section 3 of the Securities Exchange Act of 1934." [the same language was inserted in both sections 101(51D)(B)(iii) and 1182, so this change is not temporary]

The problem, it seems to me, is that the definition of "issuer" in the '34 Act includes far more than a big, public reporting company--it includes any company that issues so many as one share of stock (or other "security"). The '34 Act is generally about trading of public securities, but that's not the only thing it's about, and the definition of "issuer" in the '34 Act is simply reproduced from the '33 Act, with far broader application.

Coral Reef Protection in Exchange for Debt Relief: Could it Really Work?

Belize, as of this writing, is undertaking a restructuring of its sovereign bonds. Hard hit by covid and general economic woes, this is that nation’s fifth debt restructuring over the past decade and a half. This time though, Belize is trying to do something different with its restructuring.  Something that just might contain lessons for other emerging market nations struggling with covid related economic downturns.

Using funding from the environmental group, The Nature Conservancy (TNC), Belize is doing a bond buyback, offering investors around 50% of face value.  Once purchased, the bonds are to be cancelled.  Belize has collective action clauses in the so-called superbond in question, so the deal will be binding on all holders of its external debt if a supermajority of creditors (75%) agree to the deal.  The dynamics of collective action clauses have been examined in excruciating detail elsewhere and I won’t get into that here. What interests me, and has intrigued many in the financial press (e.g., see here,  here, here, here, and here) is Belize’s attempt to tie a promise to behave in a greener fashion in the future to its request for debt relief from investors.

Specifically, Belize is promising investors that it will, in conjunction with TNC set aside a significant portion of the funds that it will save from doing the restructuring for environmental protection endeavors in the future (Belize's gorgeous coral reefs feature prominently in most accounts of the deal). As explained by a Belizean official:

As an integral part of the offer to repurchase the bonds, Belize will commit to its bondholders to transfer an amount equal to 1.3% of the country’s 2020 GDP to fund a Marine Conservation Endowment Account to be administered by a TNC affiliate. After a period in which the Endowment Account will retain its investment earnings in order to reach a targeted aggregate size, the annual earnings on the Account will thereafter be used, in perpetuity, to fund marine conservation projects in Belize identified by TNC and approved by the Government of Belize.

I have at least four questions that strike me as relevant to figuring out whether this strategy can work for other nations also facing covid related debt restructuring needs.

Further Thoughts on Coinbase: Two Mysteries

I've been puzzling over two mysteries in the Coinbase saga:  first, why does Coinbase care so much if Lend is deemed a security, and second, why did the SEC want the list of Coinbase customers who had signed up in advance for Lend. I don't know that I've got all of this sussed out, but I figure I'll put my thinking out into the Internets and see if others have thoughts.

Coinbase and the SEC

"All fintech is regulatory arbitrage, to some degree," Felix Salmon writes at Axios. And he's right. In the last couple of days we've seen two striking examples. First, the CFPB entered into a consent order with the provider of Income Share Agreements, a type of education financing. The consent order makes clear that the CFPB will be treating ISAs as student loans--that is credit--and therefore subject to the Truth in Lending Act and Equal Credit Opportunity Act.

And then we saw crypto-Twitter blow up over Coinbase's spat with the SEC regarding what is a security. Coinbase is the largest crypto exchange in the United States. It wants to offer a cryptocurrency lending product called Lend. According to Coinbase, the SEC told Coinbase that it thinks the product is a security and that it will sue if Coinbase offers the product without first registering it. After Coinbase got a Wells Notice from the SEC, Coinbase got huffy and decided to take its case to Twitter with a thread by it's CEO calling the SEC's behavior "sketchy".

There's a lot of confusion about the Coinbase matter, so I'm going to spell out what the stakes are, how I think the product works, and then why (assuming that I have the product's operation correct) Lend is obviously a security.

Bypassing the Indenture Trustee?

Mark Weidemaier & Mitu Gulati

Earlier today we had a great time recording a Clauses and Controversies episode about the Province of Buenos Aires restructuring, which should post sometime next week. Our guest was Bloomberg reporter Scott Squires, who knows the Argentine context inside out and has also taken a deep dive into the mechanics and details of this restructuring. We got to talk about the PBA’s various shenanigans, and one aspect of our conversation continues to confuse us all. PBA offered to pay past due interest to creditors who consented to the restructuring; non-consenters did not receive the payment.

In the post linked above we wondered whether this payment, when added to PBA’s various threats, made the deal coercive. And we wondered why creditors, despite receiving fairly generous financial terms, were willing to accept this treatment. One answer we got from multiple sources is that it is simply too difficult and time consuming to deal with the trustee. Basically, it’s hard to get the trustee to act. First, holders of 25% in principal amount must instruct it to bring suit, then they have to negotiate the trustee’s indemnity, etc. And all this takes time. Meanwhile, the so-called “no action” clause in the indenture blocks individual bondholders from filing suit unless and until the trustee fails to act for 60 days. Perhaps any challenge the PBA’s conduct required quick, forceful legal action, but bondholders upset by the deal couldn’t muster the required 25% support or viewed the delay inherent in this process as a deal-breaker.

This would all make sense, were it not for the unusual drafting of another contract term. The clause played an important role in a lawsuit initially filed by Goldentree, one of PBA’s biggest creditors. Goldentree later changed course and were viewed as one of the drivers of the eventual deal. But the lawsuit was premised on the ability of individual bondholders to circumvent the trustee, found in this language (emphasis ours):

[E]ach Holder of Debt Securities shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on (including Additional Amounts) its Debt Security on the stated maturity date for such payment expressed in such Debt Security (as such Debt Security may be amended or modified pursuant to Article Eleven) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.

Our issuer-side friends have scoffed at this reading, telling us that the “no action” clause plainly requires all bondholder litigation to go through the trustee, at least until the bond has matured. That may be the common understanding. But that reading isn’t easy to square with the language above, which can plausibly be read to give individual investors the right to sue for missed coupon payments. Investors have a right to get “principal and interest on . . . the stated maturity date for such payment.” This is an unusual formulation. It is natural to say that principal comes due on the maturity date. But interest? Does interest “mature?” Our issuer-side friends would say, we assume, that the use of “stated maturity date” reinforces their understanding of the effect of the no action clause. But that reading seems to ignore the language “for such payment” (underlined above). This seems quite clearly to refer to individual payments, and the clause refers to both principal and interest. And it seems perfectly reasonable to interpret all of this to mean that, on the date when the interest is due, the interest obligation matures. Under this reading, investors can always sue for missed payments. It is other litigation—such as an acceleration in response to a cross-default trigger—that must go through the trustee.

Anyway, reading further, the clause says that an investor’s right to “such payment” – i.e., the interest that was due – and to institute suit” cannot be impaired “without the consent of such Holder.” That would at least arguably have enabled individual bondholder suits for past interest.

Again, many of our contacts in the market think this reading is nonsense and ignores the purpose and history of this clause. And we don’t really have a strong opinion as to which reading is correct. But we do think the reading above—which is presumably the reading underlying Goldentree’s suit—is plausible. Certainly there is a fairly straightforward argument to that effect based on the text of the clause, and text seems to matter quite a bit to judges applying New York law. It never ceases to amaze us how many seemingly settled questions—at least in the eyes of market participants—are not well reflected in contract language.

Personal Insolvency in Asia and Currency Comparison

While Shenzhen has gotten all the good press since its March launch of the first personal bankruptcy regime in Mainland China, a number of other Asian regimes have also been on the move. I recently examined the rapidly developing personal insolvency system in Singapore, and others have done great work on the unique processes in Japan and Korea. As an outsider, I struggle to capture the real feeling of life under these procedures. The challenge is expressed brilliantly by my favorite article on the difficulty of examining legal phenomena that are utterly foreign to the examiner, a paper that sought to answer the question "what was it like to try a rat?" This struggle is particularly acute in a new paper I've just posted on the fascinating evolution of Shenzhen's new law from its roots in a little-known 2008 consumer insolvency law in Taiwan. The Taiwan law is still in effect, of course (as amended in important respects), and the rocky experience of its first decade offers important lessons for personal insolvency policymakers in Asia and beyond. In both Taiwan and Shenzhen, a potential continuing challenge that intrigues me is among the most important and impactful in any such law--the measure of "necessary" household expenses to be budgeted to debtors for the purgatory period of three years (in Taiwan, it's six!) preceding a discharge. Both Taiwan and Shenzhen chose the social assistance minimum income; basically, the poverty level. Taiwan recently increased this by 20% after years of criticism of forcing bankrupt debtors into the extreme austerity of living within these tight budgets. Shenzhen has decided not to go beyond the poverty level, at least for now.

Expressing the strictures of these poverty levels in useful comparative terms is really difficult for me. Official exchange rates are quite misleading when the question is "what is it like to try to make do on X [local currency units] for three years in [X country]?" Purchasing power parity exchange rates likely get closer to the mark, but with China, I'm not even sure that approach captures the pain (or ease) that debtors in the "discharge examination period" must endure. The figures I'm wrestling with are 1950 yuan in Shenzhen and about 18,000 new Taiwan dollars (15,000 x 1.2) in Taipei (less in the outlying areas). I vaguely understand these to correspond to about US$465 and US$600, respectively, per month, but this just seems untenable to me. How could anyone survive on these amounts for 36 months in Shenzhen or 72 months in Taipei? Granted, both sets of figures are per person, so a debtor caring for parents and/or children might end up with several multiples of these figures per month, but even then, supporting a family of four on US$1860 per month for three years in a major city like Shenzhen still strikes me as so austere as to dissuade people from seeking relief. Am I just out of touch with the reality of modern financial struggles generally (I know some low-income Americans also strain to make ends meet on somewhat similar budgets), or am I not understanding something about life in big-city China, or are the figures just not reflecting the feeling of life within these limits? Any insight would be greatly appreciated.

Massachusetts Throws in the Towel with Credit Acceptance Corporation

In 2020 the Massachusetts Attorney General brought one of the most significant consumer finance cases in years, a suit against subprime auto lender Credit Acceptance Corporation.  If you haven’t heard of CAC, it’s a one of the largest subprime auto lenders, and its stock has been one of the hottest growth stocks in recent years.  CAC is an indirect lender, meaning that it doesn't make the loan directly to the consumer, but instead purchases the loan from the dealer (who will not make the loan until the purchase is lined up).  

The suit contained a couple of really revolutionary claims, and Massachusetts was initially successfully, winning summary judgment on one count this spring and defeating the motion to dismiss on all challenged counts. The suit recently settled and for a surprisingly low amount and with virtually no meaningful prospective relief. CAC certainly had some possible defenses, but Massachusetts really seemed to be in a strong position, so it's a bit of a head scratcher what happened. 

Might PBA Creditors Take a Lesson From the Black Widow?

Mark Weidemaier and Mitu Gulati

We’ve had lots of interesting responses to our earlier post on debt restructuring shenanigans engaged in by the Province of Buenos Aires. Many on the creditor side are miffed. Two issues raised by these responses seemed worth another post. So here we go.

Why not use the Black Widow Strategy?

At first, we didn’t understand the reference. But Google helped. Black Widow is the new Marvel movie starring Scarlett Johansson, who is suing Disney because it, and its subsidiary Marvel, did not do an exclusive release of the movie in theaters before selling it on the new Disney Plus streaming service (here). Instead of suing Marvel for breach of contract, she is suing Disney for tortious interference with contract. This is a standard move for parties bound, like Ms. Johansson, by an arbitration clause they would prefer to avoid. By suing a related third party, they get to proceed in court—unless the third party can argue that it is a third party beneficiary or otherwise entitled to invoke the arbitration agreement.

Why mention tortious interference in the context of the Province of Buenos Aires’ recent exchange offer? Tortious interference is an old common law tort action. It is typically brought against a non-party who induces one of the contracting parties to breach. Since it is a tort, one has to show causality and, in some circumstances, also that the non-party not only interfered but did so with some improper motive or by some improper method. (And defining what counts as improper has proven difficult). A senior lawyer who hated Ecuador’s original exit exchange in 2000 once commented that he was inclined to organize a tortious interference action and believed he would win. The logic then and now is that, by inducing participating creditors to vote to impair the rights under the contract they are exiting, the issuer is inducing a breach of that contract.

But we are less confident that tortious interference is a helpful way of thinking about behavior like PBA’s.

Why Are Creditors OK With The Province of Buenos Aires’ Dodgy Use of Exit Amendments?

Mitu Gulati and Mark Weidemaier

For the most part, the financial press has not scrutinized the details of the ongoing restructuring by the Province of Buenos Aires (PBA), which is nearing completion. The details are worth considering. Some aspects of the exchange offer might have crossed the line between good and bad faith and might have been subject to legal challenge. But this turns out be an uncertain area of law.

The basic transaction is structured as an exit exchange, and this technique raises some legal uncertainties even if we ignore the dodgy particulars of PBA’s restructuring. A debtor in financial distress needs to negotiate a debt reduction with its creditors. The debt contracts allow creditors to consent to reduce the amounts owed them, but only on condition that a majority or supermajority vote in favor. Let’s say, hypothetically, this requires the support of 90% of creditors. And let us say that the debtor has managed to persuade only 60% of creditors to support its restructuring proposal. So the debtor would seem to be out of luck.

Enter the exit exchange.

Investors in Province of Buenos Aires Bonds Might Want to Look at their Prescription Clauses

Mark Weidemaier & Mitu Gulati

The Province of Buenos Aires (PBA) is about to conclude its much delayed exchange offer. The exchange offer has been revised over and over and has featured many restructuring techniques detested by investors (Pac Man, re-designation, hard-nosed exit consents). But it seems as if the exchange may finally go through.

Rather than write about redesignation or any of the more salient features of the exchange, we want to discuss a more obscure feature, which differs in the two types of bond contracts PBA is offering. (Investors don’t have a choice; those with old bonds (from 2006) get one set of provisions and those with newer bonds (from 2015) get another.) This post is about the different prescription provisions being offered to the two types of bondholders, old and new.

Recommended Reading: Bannon and Keith on Remote Court

Virtual court proceedings, an important public health intervention, have prompted many a judge and lawyer to envision heavy use of virtual hearings in more ordinary times - including in bankruptcy courts, which carry the highest federal court case load and feature financially distressed parties. The benefits of remote court are often touted, but what about the costs? Can "virtual justice" be achieved? To explore these issues, check out an article by Alicia Bannon and Douglas Keith of NYU's Brennan Center for Justice published in the Northwestern University Law Review.  

Here is the abstract: 

Across the country, courts at every level have relied on remote technology to adapt the justice system to a once-a-century global pandemic. This Essay describes and assesses this unprecedented journey into virtual justice, paying particular attention to eviction proceedings. While many judges have touted remote court as a revolutionary innovation, the reality is more complex. Remote court has brought substantial time savings and convenience to those who are able to access and use the required technology, but it has also posed hurdles to individuals on the other side of the digital divide, particularly self-represented litigants. The remote court experience has varied substantially depending on the nature of the proceedings, the rules and procedures courts put in place, and the relevant court users’ resources and tech savvy. Critically, the challenges posed by remote court have often been less visible to judges than the efficiency benefits. Drawing on these lessons, this Essay identifies a series of principles that should inform future uses of remote technology. Ultimately, new technology should be embraced when—and only when—it is consistent with fair proceedings and access to justice for all.

Afsharipour on "Women and M&A"

I'm writing to second Melissa's wonderful post (below) on Afra Afsharipour's recent article.  My thanks to Melissa for pointing out this super piece.

There is a rich literature on the question of the gender gap in the legal profession, with wonderful work by scholars such as Elizabeth Gorman, Ronit Dinotvitzer, Fiona Kay, Joyce Sperling and others. One of the gaps in this literature that I've found over the years though is the lack of in-depth analyses of particular practice areas or individual firms.  Many of the analyses look at the gender gaps in the fractions of law students, junior associates and partners and stop there (I am guilty as charged on this). But, of course, we know (or at least suspect) that there is likely tremendous variation across fields. Understanding that variation might help us better understand what causes the gender gap and how to remedy it.

Recommended reading: Afsharipour on Women and M&A

For many reasons and no reasons, blogging on Credit Slips during the COVID-19 pandemic has not come easy, or at all, for me (Twitter, a different story). Rejoining the Credit Slips conversation by recommending scholarship relevant to bankrupty-land even if not directly about bankruptcy-land. 

Today's recommendation is an empirical study, Women and M&A, by Professor Afra Afsharipour.  

Chapter 11 has become the forum for lots of mergers and acquisition activity, including and particularly in sales outside of plans. Some think that's great and others are skeptical (I have work in progress that further tallies the costs of unbundling chapter 11's package deal, or what I call bankruptcy a la carte). While Professor Afsharipour's article does not focus on M&A in bankruptcy, the law firms appearing in the study will be familiar names in the larger chapter 11 practice world. 

Many readers likely will have a prediction about the demography of the people taking the lead in M&A. Check out how your prediction compares to Professor Afsharipour's findings and why her findings matter. Read more about and download the article here.  

In Memoriam: Walter W. Miller, Jr. (1932–2021)

Wally Miller, my bankruptcy professor at BU Law back in the 1990s, has passed away. He is quite directly the reason why I became interested in bankruptcy.

Now Is the Time for Bankruptcy Venue Reform

Judges Joan Feeney and Steven Rhodes and Professor Jay Westbrook and I have an op-ed supporting bankruptcy venue reform running in The Hill. Forum shopping has long been a problem in chapter 11, but with mass tort cases like Purdue and Boy Scouts of America, we're seeing it have effects on an previously unprecedented scale. It's time to do something about for the good of the system. 

Thoughts on Student Loans and the FRESH Start Act

A new bill from Senators Durbin and Cornyn promises a way out of student loan debt through a change in the bankruptcy laws. The Fresh START Through Bankruptcy Act of 2021 makes one principal change. After 10 years from the date they first came due, federal student loans would be freely dischargeable. Before 10 years, student loans would be dischargeable only if the debtor could show undue hardship, which is the standard currently. Private student loans would remain nondischargeable at all times except upon a showing of undue hardship. This is not the bill I would write, but it's a step in the right direction.

How could the bill be improved? First, ten years is too long. It is the entire regular repayment period for a federal student loan. Do we really think that debtors should have to struggle for ten years before becoming eligible for a student-loan discharge. For example, from our "Life in the Sweatbox" paper, 60% of the people who reported they struggled for at least two years before bankruptcy said they went without medical attention and 47% said they went without a prescription they needed. 

Does Purdue Have a 203 N. LaSalle Problem?

I was really struck by a line in the Purdue Pharma plan objection of the Distributors, Manufacturers and Pharmacies (DMP). They called the Sacklers mere "out-of-the-money shareholders."  That's 100% accurate. And it has important implications, one of which is in their objection, and one of which is not.  The point the DMP were making is that the release of the Sacklers has no reorganizational benefit to Purdue—it does nothing for Purdue's business.  This isn't like a release of litigation against folks who will remain officers and directors of a reorganized company and will be distracted by on-going litigation.  It's a good point.  But I think there's actually a stronger one. 

If one thinks of the Sacklers as out-of-the-money shareholders, then their release creates a 203 N. LaSalle Street P'Ship problem. 

Purdue Continues to Peddle Malarkey About Why It's in White Plains

Purdue Pharma continues to peddle some malarkey about why it filed for bankruptcy in White Plains, New York.  In response to my House Judiciary testimony yesterday, Purdue told the Stamford Advocate:

Purdue Pharma Inc., the general partner of Purdue Pharma LP, has been a N.Y. corporation since its incorporation on Oct. 1, 1990. White Plains is about 15 miles from our corporate headquarters and is the closest federal bankruptcy courthouse. Thus it was the most appropriate place for us to file.

Let’s get real. Purdue—and that really means the Sacklers, who were still in control when Purdue's bankruptcy filing strategy was worked out—filed in White Plains because it wanted its case to be heard by Judge Robert Drain. If Judge Michael Wiles—who has held that bankruptcy courts do not have the power to issue third-party releases—had been the judge sitting in White Plains, there’s no chance Purdue would have gone anywhere near White Plains. On top of that, Purdue’s claim about convenience doesn’t pass the smell test. Convenience to corporate headquarters is never a real consideration in bankruptcy filings. If it were, would GM and Chrysler have filed in NY? Would Nieman Marcus or Belk have filed in Houston? Would anybody ever file in Delaware?

Nondischargeability and the Sacklers

In the wake of today's House Judiciary Committee hearing, I got a text from an attorney who pointed out that if the Sacklers themselves filed for bankruptcy, creditors could raise non-dischargeability challenges under section 523, including for "willful and malicious injury by the debtor to another entity or to the property of another entity" or, or under section 1141(d)(6) for false claims acts violations. But with a non-debtor release, there's no opportunity or process to raise non-dischargeability challenges.

In other words, the Sacklers will be able to get greater a type of relief by piggybacking on Purdue's case that they could if they were debtors themselves.  Bruh. 

If that isn't a strong indication that the Bankruptcy Code does not contemplate non-debtor releases outside of the asbestos context, I'm not sure what is.

Puerto Rico and the Professionals

It is Congress week on Slips. On Thursday I will be testifying in front of the Senate Committee on Energy and Natural Resources in support of S. 375, Puerto Rico Recovery Accuracy in Disclosures Act of 2021 or PRRADA. The bill, which has already passed the House, would supplement PROMESA's existing requirements that professionals file fee applications with various disclosure requirements that are familiar from chapter 11. My written testimony is here.  

Is DOJ Supporting the Purdue Pharma Plan? Or Not?

The Department of Justice appears to be mumbling out of both sides of its mouth in the Purdue Pharma bankruptcy.  On July 19, DOJ filed a "statement" regarding the release of the Sacklers. Not an "objection," but a statement that sure reads a lot like an objection.  Then today we learn that DOJ did not bother to vote its multi-billion dollar claim. The plan deems a vote not cast to be an acceptance. 

So which one is it?  Is DOJ for the plan or against it?  Or trying to keep its head down and avoid political heat while not really derailing anything?  Whatever position DOJ wants to take, this approach is not exactly a profile in courage.  (And failing to vote is not exactly in keeping with DOJ's brand... And failing to exercise governance rights on a multi-billion dollar asset? Bruh.)

I'll be very curious to see if DOJ actually argues anything at the confirmation hearing or joins in any appeal. The appellate point is key--there's a long-shot chance that the district court or 2nd Circuit might stay the effective date of the plan--but I think the odds of that are close to zero unless DOJ is among the parties making such a motion. If DOJ fails to seek a stay of the plan going into effect, it will be hard to see DOJ's "statement" as anything more than political posturing.

House Judiciary Testimony on Chapter 11 Abuses

I'm testifying before the House Judiciary Committee on Wednesday at a hearing entitled "Confronting Abuses of the Chapter 11 System."  My written testimony can be found here. It touches on six topics:

1. Non-debtor releases
2. Judge-picking
3. Lack of appellate review (especially equitable mootness)
4. Increased use of sub rosa plans
5. Increasingly brazen fraudulent transfers
6. Payday before mayday executive bonuses

By the way, since my draft article on Purdue has been public, I've heard from a number of attorneys, including folks I had not previously known, confirming various insights in the paper and wanting to tell me their own stories.  I have really appreciated that and learned a lot from it.  I have not seen this scale of a reaction to a paper previously. So if you've got your own tale of aggressive restructuring transactions being blessed by a hand-picked judge and then evading appellate review, I'm eager to hear them (and won't attribute them to you). 

The Department of Education Can Help With Student Loans in Bankruptcy

With the Second Circuit's decision last week regarding private student loans, student loan discharge in bankruptcy is in the news. As Slipster Adam Levitin blogged, the "big picture" effect of this decision--and the 5th and 10th Circuits--is unclear. They could affect a broad swath of private student loans and they possibly could bring more bankruptcy filings to deal with a portion of people's student loan debt. Regardless, though, federal student loans remain presumptively non-dischargeable.

If the people who file bankruptcy with both private and federal student loans (which, I suspect, likely is many people with student loans), debtors will need to bring undue hardship discharge requests. A possible additional effect of these decisions may be to increase undue hardship requests, provided that debtors and attorneys think they are worth making. Research by Jason Iuliano (Utah Law) suggests that debtors may be more successful in these actions than the general public or even many consumer bankruptcy attorneys presume.

For federal students loans, the Department of Education plays a crucial role in undue hardship discharge requests. I recently published an essay in Minnesota Law Review Headnotes, co-authored with Aaron Ament and Daniel Zibel, who co-founded the National Student Legal Defense Network, regarding how the Ed Department should update its internal guidance for determining whether to contest a borrower’s request for an undue hardship discharge. The Ed Department presently seems to be wasting resources going after debtors with little ability to repay, regardless of whether their student loans are discharged. In the essay, we provide two options for how the Department can update its approach to bankruptcies to ensure that it calibrates its actions to make the promise of a fresh start more real for student borrowers.

The Texas Two-Step: The New Fad in Fraudulent Transfers

There's a new fad in fraudulent transfers. It's called the Texas Two-Step. Here's how it goes. A company has a lot of tort liabilities (e.g., asbestos, talc, benzene, Roundup). The company transforms into a Texas corporate entity (the particular type doesn't matter). The new Texas entity then undertakes a "divisive merger" that splits the company into two companies, and it allocates the assets and liabilities as it pleases among the successor entities.

The result is that one successor entity ends up saddled with the tort liabilities (BadCo) and the other with the assets (GoodCo).  The companies then convert to whatever type of entity the want to be going forward for corporate governance (or venue) purposes, and the BadCo files for bankruptcy, while GoodCo keeps chugging away. The tort victims find themselves creditors in the bankruptcy of BadCo and get bupkes, while the bankruptcy plan inevitably includes a release of all claims against GoodCo. Pretty nifty way to hinder, delay, or defraud creditors if it works, right?

Well, that's the question:  does this work?  We've only seen two Texas Two-Steps to date. There have been a few Texas Two-Steps to date (and one might be a Wilmington Waltz). First was BestWall's asbestos bankruptcy. BestWall (formerly part of Georgia Pacific) is a subsidiary of Koch Industries, and its bankruptcy is pending in the Western District of North Carolina. No plan has been confirmed, but the case has been dragging on since 2017, and the asbestos victims have been enjoined from suing any of the non-bankrupt Koch entities. Plan exclusivity has long-lapsed, but the court won't dismiss the case and doesn't seem willing to consider any alternatives. Even if the Two-Step isn't completely successful in the end, it will surely reduce whatever settlement the Koch entities have to pay.

Then there's DBMP (CertainTeed), another asbestos case, again in the Western District of North Carolina. Same story going on there; there's an adversary proceeding pending about the preliminary injunction. Also in WDNC, before the same judge is Aldrich Pump. Same judge as DBMP, and again a preliminary injunction. And then pending in Delaware is Paddock Enterprises, LLC, the rump of Owens-Illinois. The UST filed an examiner motion over the divisive merger transaction. Denied.

In any case, the Two-Step looks promising enough that Johnson & Johnson is supposedly considering using it for its talc liabilities.

15 Years of Credit Slips

Today marks fifteen years of the Credit Slips blog. We started modestly on this date in 2006 while we were in the throes of doing all the tedious ground work for what would be the 2007 version of the Consumer Bankruptcy Project. After 15 years, I think I can reveal that I had originally proposed--and I am not making this up--a different name for the blog. Proof of the bona fides of that big reveal are to the right, which was the original mockup of the blog banner. Much, much wiser heads prevailed. The blog got a different name, and Credit Slips was launched. Many thanks to all of our bloggers over the years, both regulars and guests, but especially many thanks to our readers who have helped us create this little corner of the Internet that we will keep going as long as you'll have us.

The Emperor's Old Bonds

Andres Paciuc, Mike Chen & Charlie Fendrych, have just published their delightful paper on Chinese Imperial Debt in the Duke Journal of Comparative and International Law. This is a version of a paper that they did for my sovereign debt class with Mark Weidemaier a few years ago. Bravo! The paper is available here.

Here is the abstract:

Recent news articles have suggested that Trump’s trade war may finally provide relief to American holders of defaulted, pre-1950s Chinese bonds. Here, we examine the hurdles set before these bondholders, namely establishing jurisdiction over the People’s Republic of China as a sovereign and the long-lapsed statute of limitations. We also evaluate the Chinese government’s possible recourse.

Our investigation yielded key takeaways. First, to establish jurisdiction in the U.S., the bond must be denominated in U.S. Dollars or state a place of performance within the country. Second, to overcome the long-expired statute of limitations and win an equitable remedy, it must be shown that the PRC violated an absolute priority or pari passu clause and is a “uniquely recalcitrant” debtor. Finally, despite China’s commitment to the odious debt doctrine, the doctrine is unlikely to provide meaningful legal protection in an otherwise successful suit. Overall, it is a difficult suit to bring. However, through our investigations, we have discovered one issue in particular which holds the greatest danger—or perhaps the greatest promise: the Chinese Government 2-Year 6% Treasury Notes of 1919.

Second Circuit Holds Many Private Student Loans Are Dischargeable in Bankruptcy

The 2d Circuit this week joined the 5th and 10th Circuits in holding that the discharge exception in 11 U.S.C. § 523(a)(8)(A)(ii) for "an obligation to repay funds received as an educational benefit, scholarship, or stipend" doesn’t cover private student loans, only things like conditional grants (e.g., a ROTC grant that has to be repaid if the student doesn't enlist). It's another important student loan decision. At this point ever circuit to weigh in on the issue has said that private student loans aren't covered under 523(a)(8)(A)(ii).  Instead, a private student loan, if it's going to be non-dischargeable, would have to fit under 523(a)(8)(B), but that provision doesn't cover all private student loans. It only covers "qualified educational loans," which are loans solely for qualified higher education expenses (itself a defined term).

In this case, the debtor alleged that the loan was not made solely to cover his cost of attending college, and the loan was disbursed to him directly. The creditor, Navient, did not claim that the loan qualified as a "qualified educational loan," and instead relied on the 523(a)(8)(A)(ii) exception.The Second Circuit wasn't having any of it.

So what does this mean big picture?

Sacklers Withdraw Their Threatened Sanctions Motion

The Sacklers decided not to proceed with their threatened sanctions motion. Their counsel wrote to the case distribution list:

After having heard from several parties that the motion served yesterday may be counterproductive to the deal, we are withdrawing the email we sent yesterday serving the Rule 9011 motion.  It was not our intention to do anything counterproductive to concluding the deal, and we take seriously the views that have been expressed to us.  The motion has not been and will not be filed. 

Not every day you see a party put out a 201 page sanctions motion and then to yank it back the next day. 🤦🏻‍♂️🤦🏻‍♂️🤦🏻‍♂️  Wonder what the billing was for this episode?

Why Aren't All Judicial Recusal Lists Public?

Judges sometimes have to recuse themselves from hearing cases because of financial or personal interests. Some of those conflicts can be spotted in advance, and judges will have standing recusal lists filed with the clerk of the court to keep those cases from being assigned to them in the first place. Of course, these recusals can be weaponized:  if there are two judges in a district, and I know that the son of one is a partner at local law firm, I can hire that firm as my co-counsel and ensure that the case will go before the other judge.

I got interested in this issue precisely because it enables judge-picking in two-judge divisions or districts. Some courts have their recusal lists up on the court's website. Others do not publish it. I was surprised today to be rebuffed when I asked the clerk's office for the Bankruptcy Court for the Southern District of Texas about getting the recusal list for the two judges who presided last year over half of the large, public company bankruptcies in the entire nation.

I wasn't given an explanation of why it isn't publicly available. As far as I can see, it should be. Parties should have a right to know why their case got assigned to a particular judge, not least because if the case assignment was the result of another party deliberately conflicting out a judge that might be grounds for seeking some sort of relief.  Perhaps there's some sort of privacy concern I don't see, but it strikes me that as a matter of course, all judicial recusal lists should be public and published. 

But this also brings up another matter, which is the variation in practice among courts on a range of issues. It's beyond me why there isn't much greater uniformity in administrative practices among clerks' offices. As I've been crawling through courts' websites, I've been struck by the lack of uniformity on all sorts of things (e.g., some courts' ECF systems include time stamps, and others don't). The decentralized nature of the court administration doesn't strike me as optimal or even the result of a lot of thinking, but more the outgrowth of traditional local fiefdoms. It doesn't make a lot of sense in an internet-driven age with national practices.