OCC Preemption Brief Regarding the Illinois Interchange Statute

Earlier this year Illinois passed a law that provides that “

an issuer, a payment card network, an acquirer bank, or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction if the merchant 

informs the acquirer bank or its designee of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.

” The statute defines interchange fees as "a fee established, charged, or received by a payment card network for the purpose of compensating the issuer for its involvement in an electronic payment transaction." In other words, no interchange fees may be levied on taxes or tips.

 

Compliance with the statute would be an administrative and technological hot mess for card networks. Not surprisingly, the banking industry has challenged the law, and the OCC has weighed in with an amicus brief.  I’m not going to address the policy merits of the Illinois statute here. Instead, my interest is the National Bank Act preemption analysis in the OCC’s brief. Although I think the OCC gets the preemption analysis correct in the end, it makes a concerning claim on the way. 

 

If You're Gonna File in Texas, You Gotta Have Your Votes in Hand

J&J’s at it again with a third talc bankruptcy filing, this time in SDTX.  To paraphrase Marx, the first time was tragedy, the second time farce, and now the third time is fubar. 

Why fubar? tl;dr is that J&J's betting the case on the purported authority of a small Mississippi plaintiffs' firm to unilaterally change the votes of its joint clients from "no" to "yes". 😮🤯

Elon's Brazilian Corporate Law Surprise

Elon Musk has just learned that Brazil doesn't give a lot of credence to the fictions of corporate asset partitioning:  affiliated companies can be liable for each other's involuntary obligations.  This shouldn't be a surprise; Mariana Pargendler's work has made clear that Brazil's got a very different approach to corporate law than the US. In particular, limited liability isn't so strongly fetishized. Now if we only had some sort of legal doctrine in the US that ignored limited liability...

Revisiting How Many People Have Filed Bankruptcy

Belisa Pang has an important new paper out about repeat filers, "The Bankruptcy Revolving Door."  Using new techniques and as well as a database of credit reports, she estimates the percentage of bankruptcy filers who are repeat filers is 36%. In 2023, she estimates the figure was 46%. The paper also explores the reasons for repeat filings. It should be required reading for anyone in the consumer bankruptcy space.

Pang's estimate is much higher than the official statistic from the bankruptcy court records which ask filers to disclose repeat filings in the last eight years. According to the FJC database, 19% of filers since 2014 have checked the box that they filed bankruptcy in the last eight years. For the research data from the Consumer Bankruptcy Project, we collects the date of the last filing. Despite the official language asking about bankruptcy in the last eight years, 16% of those who report a repeat filing are reporting a prior case from more than eight years ago. Thus, I wondered how many prior bankruptcies are actually going unreported. I spot-checked some of our own research data. Using Pang's methodology, I found it was pretty easy to locate cases that do not disclose a repeat filing on the bankruptcy forms, but the court's computer system (PACER) has flagged as a repeat filing. 

Pang's paper caused me to revisit my estimate of how many living Americans have filed bankruptcy. When I did the calculations, I came up with a conservative estimate of 1 in 10. The precise number was 11.1% but because of the heroic assumptions I was making, especially with the repeat filing rate, I called it 1 in 10 to be conservative. In my calculation, I used an assumption, based on the then-current FJC records, that 15.2% of filers are repeat filers. Pang's much higher figure means my estimate is a bit too high. If I plug 36% into the numbers I used then, I come up with 9% of the public having filed bankruptcy. If the repeat filing rate is 46%, the percentage drops to 8% percent. So, it is maybe in 1 in 11 or 1 in 12. That is still not a small number.

Conference Opportunities at Boston U. and Cornell

Credit Slips friends have made us aware of two upcoming academic conferences that might be of interest to our readers. First, the seventh annual Consumer Law Scholars Conference will be held at Boston University on March 6-7, 2025. Abstracts are due on September 6, 2024. More information, including on how to submit an abstract is available at their official call for papers web page. 

The second conference aims to bring together mass-tort and bankruptcy scholars at Cornell on September 20. Speakers and papers are already set as set forth in their official event poster. This is a symposium of the Cornell Law Review such that we should expect a law review issue about how these topics will continue to collide.

Preliminary Injunctions After Harrington v. Purdue Pharma

The Supreme Court's opinion in Harrington v. Purdue Pharma left open a lot of questions about the extent of its scope. We now have one of the first opinions exploring those questions. Judge Craig Goldblatt of the Delaware bankruptcy court faced a request for a preliminary injunction in the bankruptcy of right-wing social media platform Parler. Judge Goldblatt concluded that "authority to 'extend the stay' survives Purdue Pharma." I'm skeptical. 

Man Bites Dog, or Debt Collector Restructures Its Distressed Debt

I couldn't let this one pass without noting it. The largest debt collection company in Europe has found itself on the other end of the dunning letter. Swedish debt collection company Intrum has achieved majority (barely) support for a deal with bondholders to swap 10% of its $5.8 billion debt for equity and push out the maturity of remaining notes. Intrum found itself in this mess after "years of borrowing heavily in the low-interest era to buy portfolios"--that is, to buy bunches of distressed debt owed by strapped borrowers all over Europe, which Intrum would then squeeze for repayment at a higher rate than Intrum had paid. Or so Intrum hoped. Apparently this investment strategy went sour after "a slowdown in its business." Hmmm. What an interesting euphemism! Borrowers resisting collection pressure more resolutely now? I wonder if the growing wave of personal insolvency procedures across Europe has contributed to this "slowdown" for Intrum's debt collection efforts. Good news for borrowers is bad new for the debt collector!  

The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement

This term's Supreme Court decisions have completely remade administrative law, both by eliminating Chevron deference and by effectively eliminating the Administrative Procedures Act's statute of limitations. In Loper Bright Enterprises v. Raimondo, the Court held that as a constitutional matter federal courts could not give deference to federal agencies' interpretations of ambiguous statutes. And then the Court opened the door to APA challenges to virtually every existing federal regulation, no matter how old, with Corner Post Inc. v. Board of Governors of the Federal Reserve System, a statutory ruling that the APA's six-year statute of limitations runs from the date a plaintiff is allegedly injured by the regulation, rather than from the date of the regulation's finalization. That means that a business that is incorporated tomorrow has at least six years to challenge any regulation that affects it, and maybe more depending on when it is affected. In other words even New Deal or Progressive era regulations could be challenged tomorrow and there would be no deference to the agency's long-standing interpretation of the statute authorizing the regulations. I pity my colleagues who teach admin law--their course lost at least a credit hour's worth of material. Maybe they'll decide to take up commercial law....

These decisions are, taken together, a major rolling back of the administrative state. But these decisions will affect different agencies differently, and the Court's rulings may have some unintended consequences. To wit, many federal agencies have both rulemaking and enforcement powers. In some instances, enforcement is dependent on rulemaking, as the agency lacks a general statutory prohibition to enforce, but can only enforce its particular rules. The EPA is (I think) an example of this type of agency. It doesn't have a general statutory prohibition of "don't pollute." OSHA and the FDA and NLRB and Dept. of Commerce. For agencies in this category, Loper Bright Enterprises and Corner Post clip not only the agencies' rulemaking power, but also their enforcement power, because they will have to defend the rules they are enforcing. 

In other instances, however, the enforcement powers are independent of rulemaking, as there is a broad statutory prohibition that the agency can enforce without rules. This is where federal financial regulators sit.  In these cases, Loper Bright Enterprises and Corner Post will have a hydraulic effect:  agencies are going to do what they're going to do, so if they can't do it through rulemaking, they'll do it through enforcement and supervision. In other words, what the Supreme Court did was to supercharge regulation by enforcement in the financial regulatory space.

Upcoming Public Events for Unjust Debts

More upcoming events open to the public - in person and virtual - for the new book Unjust Debts, including tonight in Washington DC. Join the conversation!

• Monday July 8, 7pm ET: Politics & Prose, with Vicki Shabo, Senior Fellow at New America
• Wednesday, July 17, 3pm ET VIRTUAL: Roosevelt Institute, with think tank director Hannah Kroch-Blegley
• Thursday, July 18, 5:30 PM: Fletcher Free Library, Burlington VT, with Vermont State Treasurer Mike Pieciak
• Sunday, July 21, 10:30 AM: Temple Beth Shalom, Brigantine NJ (contact me for registration information). 
• Friday August 16, 12pm PT/3pm ET VIRTUAL: Berkeley Judicial Institute/Berkeley Civil Justice Research Initiative, with Professor Abbye Atkinson

 

Purdue Pharma Decision: a Big Win for Mass Tort Victims

Mass tort victims won a big victory in the Supreme Court today with its 5-4 decision to reverse confirmation of the Purdue Pharma bankruptcy plan because it included impermissible nonconsensual releases of nondebtors. The case is a victory for tort victims not just in Purdue Pharma but across the board. The decision will not prevent the global resolution of mass torts in bankruptcy, but will simply eliminate the "bankruptcy discount."

 

Before Purdue Pharma non-debtors could piggyback on a bankruptcy case to get 100% resolution of their own liability to the debtor’s creditors based on contributing enough to get 75% of tort victims to consent. Now the price of 100% resolution will be the price necessary to get 100% of tort victims to consent and the price of 95% resolution will be the price necessary to get 95% of victims to consent, etc. In other words, non-debtors will get what they pay for, but there’s no longer a bankruptcy discount for mass tort settlements with nondebtors.  That’s a major win for tort victims.

 

Procedural Justice and Chapter 11 Venue

The good people at Bloomberg News asked if I wanted to elaborate on a post I did about procedural justice and chapter 11 forum shopping. The resulting opinion piece is here: "Bankruptcy Venue Shopping Breaks Perceptions of Judicial Fairness." It should not be behind a paywall.

The piece builds on the procedural justice literature about the noninstrumentalist concerns that drive perceived legitimacy of a legal system. It is easy to find a court decision legitimate when the court rules in your favor, or as a nonparty, you agree with it. For the legal system to work, parties have to respect decisions they don't agree with. Fortunately, social scientists have told us a lot about what drives perceptions of judicial legitimacy.

Spoiler alert: picking your own judge ain't it.

Unjust Debts on the Road

First, thanks to Bob Lawless for his post about my new book. It has been great to engage with people about Unjust Debts so far, and especially appreciated the book making a new Financial Times best books list (links to that and other coverage here). Wanted to note a few upcoming book events for Credit Slips readers:

• June 27 (TONIGHT): Greenlight Bookstore, Brooklyn NY, in conversation with Zephyr Teachout. Information and RSVP here. 
• July 1 (VIRTUAL): Commonwealth Club World Affairs, in conversation with Senator Elizabeth Warren. Information and registration here. 
• July 8: Politics & Prose, Washington DC, in conversation with Vicki Shabo. Information here. 

Alex Jones, Chapter 7, and the Means Test

I'm embarrassed to have fallen into an analytical trap that yet again reveals the absurdity of the means test. When I saw that Alex Jones was converting his personal Chapter 11 case to Chapter 7 liquidation, I wondered, "how in the world could Alex Jones pass the means test?!" Well, a quick look at section 707(b) reminded me that some pigs are more equal than others: the means test applies only to debtors "whose debts are primarily consumer debts." The $1.5 billion defamation debt obliterates the means test ... because of course Alex Jones's personal bankruptcy case is not an abuse of the system (!). Further evidence in support of the thesis of Melissa's new book, it seems.

Long-run (positive) effects of personal debt relief

Empirical papers on the long-run effects of a personal bankruptcy relief system (i.e., discharge) are rare, so this fascinating new paper caught my eye. The first personal insolvency discharge system in continental Europe appeared in Denmark in 1984, and this paper takes advantage of that long lifespan to mine some rather unique data. The results are unsurprising but very useful in the ongoing debate about the salutary effects of such procedures: "debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling." So the benefits of debt relief are not only substantial but robust, as debtors learn their lesson (if there was one to learn) about managing their finances, and they capitalize (literally) on their fresh start. Perhaps most important, the cause of these effects seems to be largely the desired result of any personal discharge system--getting debtors out from under the debilitating thumb of hopelessly unserviceable creditor demands and reactivating them as engaged workers and taxpayers: "The net transition of workers into employment accounts for two thirds of the increase in earned income." Great contribution to the literature on personal insolvency and well worth a read.

Second Time as Farce: the Absurdity of the New Anti-CFPB Arguments

Karl Marx's famously quipped how historical figures appear twice, "the first time as tragedy, the second time as farce." So too with the legal arguments about the constitutionality of the CFPB's funding: we are firmly in farce territory at this point. 

Nevertheless, over at Ballard Spahr's Consumer Finance Monitor blog my friend Alan Kaplinsky doesn't seem to get the joke and has earnestly taken issue with my criticisms of Hal Scott's claim that the CFPB's funding is unauthorized both by statute and under the Constitution. I find the legal arguments involved here so thin that I wouldn't bother with a second blog post about them, other than that they've found a welcoming audience from some members of Congress (yes, I can hear the remarks from the peanut gallery...).  So let's go through this again.

Unjust Debts -- A New Book from Melissa Jacoby

Today is the publication date for Unjust Debts: How Our Bankruptcy System Makes America More Unequal from University of North Carolina law professor and Slipster, Melissa Jacoby. This book will be the talk of the bankruptcy community. Be the first in your firm or organization to have a copy. The book is available on Amazon or (better yet) Bookshop.org. 

Bankruptcy touches most every aspect of modern-day financial life. Professor Jacoby questions whether bankruptcy works as an effective second chance for everyday Americans while documenting the many ways the system allows powerful individuals and corporations to escape commitments. As such, she shows how the bankruptcy system contributes to inequality. For those who work in the bankruptcy system, her thesis may be controversial. For those who are not immersed in that system, the book will be eye opening.

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.

The New Usury: The Ability-to-Repay Revolution in Consumer Finance

I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.

 

Stuffing the Chapter 11 Ballot Box with "Junk" Claims

A recent, disturbing, and truly scandalous development in Chapter 11 mass tort cases is the phenomenon of debtors trying to stuff the ballot box with "junk" claims, that is claims that should by all lights be disallowed as unenforceable and therefore ineligible to vote on a plan. Debtors have recognized that they can strategically co-opt part of the mass tort bar to push through plans:  debtors offer small payments to claims that ought to be disallowed (and thus to the attorneys representing those claims on contingency fee) in order to get those claimants to vote in favor of a plan that forces a low-ball payment on the legitimate tort claimants. While debtors have to pay a bit for the "junk" claims' votes, they come out ahead in the end because by flooding the electorate with the junk claims, they can overwhelm the voting power of the legitimate claims and stick the legitimate claimants with a much lower payment than otherwise.  

Student Loan Forgiveness

Sometimes it’s helpful to read media stories on separate topics against each other because of the disconnects they underscore. That’s been on my mind today with federal student loan debt.

Predictably Reliable

Law360 has a nice Q&A with Chief Judge Michael Kaplan of the New Jersey bankruptcy court. The interviewer rightly asked Judge Kaplan why New Jersey has recently become a Chapter 11 filing destination. Judge Kaplan's answer is telling:  

What do filers look for? They look for predictability, and we have a body of work that you can look at to get a sense, whether it be third-party releases, whether it be bidding procedures, whether it be outlook on examiners or mediation. I believe we have really gained exposure, probably initially with the LTL Management case. Not my work on that case as much as our clerk's office, our chambers, how we can handle a deluge of filings and the multiple committees and the scheduling.

Judge Kaplan is partially right here. Filers are absolutely looking for predictability. But that's only half of the story. They are looking for a venue that is predictably favorable. If you're shopping around for third-party releases, you aren't going to file in the 5th Circuit, where you can predictably not get one. As I've explained at length, the predictability trope that is sometimes used to defend venue shopping is really about predictability giving the debtor the outcomes it wants on major issues: appointment of an examiner, third-party releases, retention of right to investigate avoidance actions, etc.  And with LTL Management, particularly with his denial of the motion to dismiss in LTL 1.0 and then reluctant granting of the motion to dismiss in LTL 2.0, Judge Kaplan made clear the sort of reception large debtor firms could expect in Trenton.  One might even say it's predictable. 

Securitization Trusts Are Subject to the Consumer Financial Protection Act

The CFPB won a significant case this week that could shake things up in the securitization world. In CFPB v. National Collegiate Master Student Loan Trust, the 3d Circuit held that a securitization trust is a "covered person," for the purposes of the Consumer Financial Protection Act, putting it within the enforcement ambit of the CFPB.  While securitization trusts themselves are basically passive holding entities for loans, they contract with third-parties (servicers) to manage the loans. That contracting was enough for the Third Circuit to find that the trusts are "engaged" in "extending credit or servicing loans," and language in the opinion suggests that merely holding the loans would be sufficient. The opinion means that securitization trusts—and therefore securitization investors—face the possibility of liability for servicer wrong-doing.

The Proposed Credit Card Interchange Settlement

The Bleak House of Cards Litigation over credit card interchange fees still isn't ending, but it's hit an interesting inflection point. We're nearly two decades into the case and over a decade from the original proposed settlement. Now there's a proposed injunctive relief class settlement. The settlement's headline figure is $30 billion in savings, but on closer inspection, it's a farcically weak settlement. Credit card interchange fees after the settlement will be 25% higher than when the litigation began. That sort of result is what's called litigation failure.

About 44% of Chapter 11s are Subchapter V Cases

As many readers will know, Congress created subchapter V to streamline the chapter 11 process and to make it work better for small businesses. It became effective in March 2020, just as the pandemic hit, and was available to businesses with less than $2,500,000 in debts. Congress raised the debt limit to $7,500,000 to make it available to more businesses, and that higher debt limit will sunset on June 21, 2024, unless Congress acts. By all accounts, subchapter V is working as designed, helping small-business owners to continue their businesses. Both the National Bankruptcy Conference and the American Bankruptcy Institute's Task Force on Subchapter V have recommended that Congress make the $7,500,000 debt cap permanent. 

How much does it matter? How many chapter 11 filers use subchapter V? The answer to those questions is more difficult than it should be.  The readily available bankruptcy statistics from the U.S. Courts do not report subchapter V cases, although they should. To answer those questions, I downloaded the integrated bankruptcy petition database from the Federal Judicial Center, which contains every bankruptcy petition filed.

And the answer is . . . in 2023, forty-five percent of chapter 11 debtors used subchapter V. That was 1,854 of the 4,121 chapter 11 cases in 2023. Unfortunately, the database does not have the subchapter V variable for years before 2023. Well it does, but the variable is not reliable for years before 2023. The rest of the post, "below the fold," explains the rest of my math.

A Trump Bankruptcy: Further Thoughts

A lot of the debtor-creditor relationship can be characterized by creditors threatening to push debtors out the window and debtors threatening to jump.  Ted Janger reminded me of this defenestration dynamic today regarding the Trump civil fraud judgment.  In my previous post, my assumption had been that the New York Attorney General’s goal was to foreclose on some of Trump’s marquee properties, but Ted suggested that the goal might simply be to trigger cross-default clauses, compounding Trump’s liquidity problems and forcing him into bankruptcy. In other words, bankruptcy might be the goal of the New York Attorney General, rather than a defensive strategy for Trump.  “I’ll jump,” “No, I’ll push.” 

A Trump Bankruptcy?

Will Donald Trump file for bankruptcy? It's certainly a possibility as Trump struggles to come up with a supersedeas bond for staying the NY Attorney General's civil fraud judgment against him while he takes an appeal.

I don’t know the strength of Trump’s possible arguments for an appeal, but the legal arguments might be beside the point. If Trump wins the election, the entire dynamic of the litigation changes. Is the New York Attorney General really going to enforce a judgment against the President-elect, particularly one who is likely to be vengeful once in office? Maybe, given that we will likely be facing an period of extended lawfare, but the calculus for enforcement or settlement shifts in Trump’s favor if he wins election. That means that Trump’s best move might be trying to run the clock until Election Day:  7 months and 17 days.  And maybe not even that long. The optics of pursuing the collection on the eve of the bankruptcy will make it look very political and might generate sympathy for Trump. So Trump might only need to run the clock, say, 6 months. That’s where bankruptcy comes in.

Alabama Supreme Court and Section 366

By sheer coincidence, the first problem I taught in my financial restructuring class today was about a bankrupt fertility clinic that is behind on its electric bill and is having trouble coming up with the funds to provide adequate assurances to the power company that it will pay its future bills: if the electricity is cut off, all the frozen zygotes and embryos will thaw and become unviable. 

I found myself wondering how this would play out in Alabama now. Suppose the debtor could not provide adequate assurances. Would the DIP/trustee or utility face some sort of liability for wrongful death if what one of my students termed "the biological material" melted?  I assume the Barton doctrine would provide some level of protection to the DIP or trustee. (I also assume the bankruptcy judge would have broad immunity for his or her official acts.) I'm not sure if the power company could even have liability, but given the potential scale of liability, it's probably not worthwhile cutting off the power, even if the risk of liability is very small.

I know that similar sorts of issues can emerge in hospital or nursing home bankruptcies, where there are patients who have to be transferred to other facilities in the event that the debtor is liquidating, but that's addressed by 11 USC 704(a)(12). Maybe an embryo that is frozen at a fertility clinic is now a "patient" at a "health care facility." Otherwise, I'm not sure what would create a duty for the trustee/DIP to preserve the embryos. 

The Consumer Debt Default Judgments Act

Consumer debt has been a difficult topic for uniform state law movements, but here's one more attempt recently approved by the Uniform Law Commission and the American Bar Association, and introduced in Colorado last week.  You can access the materials here. Meanwhile, here is ULC's summary:

Numerous studies report that default judgments are entered in more than half of all debt collection actions. The purpose of this Act is to provide consumer debtors and courts with the information necessary to evaluate debt collection actions. The Act provides consumer debtors with access to information needed to understand claims being asserted against them and identify available defenses; advises consumers of the adverse effects of failing to raise defenses or seek the voluntary settlement of claims; and makes consumers aware of assistance that may be available from legal aid organizations. The Act also seeks to provide a uniform framework in which courts can fairly, efficiently, and promptly evaluate the merits of requests for default judgments while balancing the interests of all parties and the courts.

Would welcome Credit Slips posters and readers chiming in on this act in the comments, especially if you were involved in the drafting process and/or if will be weighing in on this act with their state legislatures.

And for previous recent coverage of other uniform acts being urged on state legislatures, see here and here.

What Is a Wire Transfer?

Heads up payment nerds: we have what promises to be the most interesting payments litigation involving a Citibank wire transfer since...the last payments litigation involving a Citibank wire transfer.

In the latest case, the NYAG has sued Citibank for violating the Electronic Fund Transfer Act in connection with wire transfer transactions for consumer customers. The EFTA offers consumers substantial protection against unauthorized electronic fund transfers, both in terms of process and substantive liability limitations. The  NYAG alleges Citibank has not been providing these required protections to consumers who have had their accounts drained by unauthorized wire transfer orders.  

Now you might be saying, "I feel bad for the consumers, but come on, everyone knows that the EFTA doesn't apply to wire transfers." And you might even point to the EFTA definition of an "electronic fund transfer" as excluding "any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer." And you'd be right—both the NYAG and Citibank agree that the EFTA does not apply to wire transfers.  The issue in the case is "what is the wire transfer?"

A Uniform Law Project of Note: Special Deposits Act

Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too - especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.

 

 

 

 

 

 

 

 

 

 

A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.

Catching Up on the Digital Asset Amendments to the Uniform Commercial Code

It has been a while since I last posted resources on amendments to the Uniform Commercial Code that would govern transactions in digital assets, including security interests. The take-up of these amendments, including a new Article 12, has not been as swift and sweeping as some might have hoped. To put it mildly, some in the cryptocurrency world have lobbied hard against enactment based on what seems to be a misinterpretation (to help set things straight, I recommend reading and listening to professors Juliet Moringiello and Carla Reyes). Currently, 11 states have enacted the amendments.

 

 

 

 

 

 

 

 

 

Thorny choice of law issues flowing from non-uniform enactment inevitably will land in bankruptcy courthouses, as so many legal quandaries do. For example, choice of law will affect whether or not a lender has a perfected security interest in the debtor's interest in cryptocurrency, an issue that can arise in a wide variety of bankruptcies. Here is a collection of Uniform Law Commission resources in case you need them.

Rapoport on Judicial and Legal Ethics

Just wanted to make sure Credit Slips readers are aware of Professor Nancy Rapoport's new paper forthcoming in the Emory Bankruptcy Developments Jounrnal, accessible here. The abstract:

In late 2023, news stories picked up stories about a lawsuit alleging that Bankruptcy Judge David Jones of the United States Bankruptcy Court for the Southern District of Texas had been hearing cases in which his live-in romantic partner was appearing as counsel. The Fifth Circuit began disciplinary proceedings, and Judge Jones resigned from the bench. The scandal has affected more than just these two people: it implicates law firms, and potentially implicates other lawyers or judges who might have known more than they were saying. This article explores who had a duty to disclose this particular “connection,” and under what authority.

Again, paper available here:

The CFPB's Proposed Overdraft Regulation

The CFPB proposed overdraft regulation came out today. It's a big deal. If it becomes effective, it will dramatically reduce overdraft fees at large banks.

Currently fees for “courtesy” overdraft—where the financial institution is not contractually obligated to allow the overdraft, as opposed to contractual overdraft lines of credit—are not “finance charges,” so the overdraft is not “credit” for purposes of the Truth in Lending Act/Regulation Z because credit requires either a finance charge or a requirement of repayment in over four installments. That means that TILA disclosure requirements do not currently apply to any courtesy overdrafts. 

The CFPB is proposing changing this for overdrafts that don't fall within a dollar amount safe harbor.

Cross-Border Insolvency Forum Shopping Naivete

by Ted Janger and John Pottow

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

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

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

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

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

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

What's 43 Years Among Friends?

One of my recent blog posts took issue with the historical claims in a Supreme Court amicus brief filed by several eminent law professors in the Purdue Pharma appeal. One of the professors, Tony Casey at University of Chicago Law School, fired back with a comment, and I responded at length in the comments section, but I think the exchange is worth elevating to a stand-alone blog post. 

To recap, the good amici jumped all over my claim that the Framers could not have conceived of nonconsensual nondebtor releases as being within the scope of the Bankruptcy Power. To this end, they cited a couple of English cases from 1618-1620. My original post pointed out that these were not contemporaneously reported decisions; they remained unknown until 1932 when a modern scholar "reported" the cases from his own reassembly of various Chancery documents. Moreover, the decisions were not even bankruptcy decisions, but compositions, not operating under any bankruptcy statute. 

Professor Casey responded:  

I really don't understand the argument here. First, how can you say releases were "incomprehensible" to the framers given that Lord Bacon was granting them? Even if the opinion is unreported, I just can't see the leap to arguing that no one designing a judicial system could have thought of or comprehended this thing that the Lord Chancellor had done multiple times. Second, the point about these not being "bankruptcy" cases is semantic. These were part of compositions that look just like Chapter 11 cases today. Third, even if you are right about everything else, our main point was about your 1986 claim. You write this [in your blog post], "because there was no reported decision of these cases until 1932, they do not undercut the fact that Anglo-American bankruptcy law had no notion of nonconsenusal nondebtor releases in until 1986." How do you get from 1932 to 1986? Finally, we point out other historical pedigree including cases from the 1940s.

Okay. Let's try this again.

 

Something Doesn't Add Up in NY Times Article

The NYTimes has an article about how many consumers and small businesses have been getting their deposit accounts shut down and lines of credit cut off without explanation.

Something here doesn't add up. Banks have an obligation under the Equal Credit Opportunity Act and Regulation B thereunder to provide customers with "adverse action" notices if they terminate a line of credit. Those notices either have to provide an explanation of why or a notice of how the customer can get an explanation (for small businesses, that notice can be in the application itself). ECOA/Reg B apply not just to consumer credit, but business credit as well. Now, ECOA/Reg B does not cover deposit accounts, but if a bank cuts off both a deposit account and a line of credit, it would have to provide an adverse action notice about the line of credit.

So something here doesn't add up. Either banks have been failing to comply with ECOA or customers have checked their mail or haven't been forthright with the journalists. Large scale non-compliance with this sort of ECOA provision seems unlikely, as this is an easy-to-automate rule, where the cost-savings from noncompliance would be minimal. So, I suspect that something funny is going on on the consumer end, although, to be fair, an ECOA adverse action notice doesn't have to be particularly illuminating about why the bank took the adverse action.

Let's End Bankruptcy Judge Shopping

Credit Slips bloggers Adam Levitin, Stephen Lubben, and I joined eight other academics in putting our names to a letter calling for the Southern District of Texas to end its practice of having a "complex chapter 11" panel composed of two bankruptcy judges. This procedure ensures that large corporate debtors filing chapter 11 know their cases will be heard by one of these two judges rather than being randomly assigned among the judges on the court. Congress has authorized up to six bankruptcy judges for the Southern District of Texas. Although I do not speak for Levitin and Lubben, I wanted to elaborate on my reasons for signing the letter.

Corporate bankruptcy venue abuse remains overdue for reform as explained by Credit Slips bloggers just a few times both on and off the blog. For some examples, see here, here, here, here, here, and here. The problem with the complex chapter 11 panel is even worse because it creates the appearance of being able to pick your own judge. Whatever benefits there are from having a specialized panel for large cases, and I am sure there are some, they are not worth the corrosive effect on public confidence in an impartial system of justice. Because the bankruptcy court created the complex chapter 11 panel as a local administrative procedure, the same court could end it with a stroke of a pen.

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.