postings by Pamela Foohey

Rent-to-Own Dogs

posted by Adam Levitin

Just when you thought you had seen everything.... Rent-to-Own Dogs!  Apparently, it is illegal to do lease out a dog in Massachusetts.  It does seem perfectly fine, as far as I can tell, to sell a dog on installment credit in Massachusetts and to take a lien on Fido.  In other words, the rent-to-own outfit got dinged for not structuring its product as a plain old sale.  

The Failure of the United States Trustee Program in Chapter 11

posted by Adam Levitin

The United States Trustee settled with three large law firms that failed to disclose the nature of their relationship with the Sackler Family Purdue when they were engaged by Purdue in its bankruptcy. The result is that these firms will return $1 million in fees.  This action has produced headlines like "Bankruptcy Watchdog Bares Teeth at BigLaw in Purdue Ch. 11," but I have a completely different take on the story. I see this settlement as an indictment of the US Trustee Program as a complete failure in chapter 11. 

In Purdue, the UST is focused on a measly million of fees, and is AWOL on the issues that affect billions in creditor recoveries. And the story is hardly limited to Purdue.

Continue reading "The Failure of the United States Trustee Program in Chapter 11" »

FDIC Valid-When-Made Rule Amicus Brief

posted by Adam Levitin

I filed an amicus brief today in support of the challenge of eight state attorneys general to the FDIC's Valid-When-Made Rule. I've blogged about the issue before (here, here, here, here, here and here). The FDIC's Valid-When-Made Rule and its statutory framework is a bit different than the OCC's parallel rule (which also got some amicus love from me), so the arguments here are a bit different.

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A Campaign to Opt-Out

posted by Chris Odinet

Following-up on my prior post, let’s talk more about what’s at stake in this little legislative kerfuffle in the Hawkeye state, as well as how consumer advocates should seize on this moment in a different way.  

First, repealing this 521 provision in Iowa law is really all about whether states should have, to a large degree, the ability to control the interest rates charged on products and services that are offered to consumers by nonbank firms. 

Many readers of this blog may already know this history backwards and forwards – but for those who don’t, here’s the backstory. In Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., the U.S. Supreme Court interpreted the National Bank Act as giving nationally-chartered banks the ability to charge the highest interest rate allowed in the state where the bank is located to borrowers located not only in that state, but also to borrowers located in any other state.  This means, for instance, that a national bank located in Iowa can not only charge the highest interest rate allowable in Iowa to anyone located in Iowa, but it can also charge that same rate to a borrower located in Oklahoma, Louisiana, or any other state.  Even if Louisiana, Oklahoma, or another state’s laws prohibit interest at such a rate, the loan is nevertheless free from being usurious. This concept is known as “interest rate exportation.”  

After the 1978 decision in Marquette, there was a concern about the ability of state-chartered banks to compete with national banks. So, state legislatures started enacting “parity laws” that allowed their state banks to charge the maximum rates of interest allowable by any national bank “doing business” in that particular state. These parity laws were often even broader, granting to state chartered banks all of the incidental powers granted to national banks. In sum, the goal of these parity laws was to put state banks on equal footing with national banks, particularly when it came to usury.  Good so far?

Ok here comes the part dealing with this shady Iowa house bill…

In a final effort to give state-chartered banks a competitive edge, in 1980 Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA).  A portion of DIDMCA, specifically section 521 (see where this is going...) granted interest rate exportation to any state-chartered bank that was federally insured (in other words, to all FDIC-insured state-chartered banks). 12 U.S.C. 1831d. This allowed a state-chartered bank to charge out-of-state borrowers the same interest rate allowable for in-state borrowers.  Thus, a state-chartered bank located in Iowa could charge an Oklahoma borrower the Iowa-allowable interest rate, even if that rate was higher than what would otherwise be legal under Oklahoma law. 

But here’s the catch. In Section 525 of DIDMCA, Congress gave states the ability to opt-out of section 521 by enacting legislation stating the state did not want section 521 to apply. Only two jurisdictions opted out: Puerto Rico and…you guessed it…Iowa. In 1980, right after DIDMCA was passed, Iowa opted out per 1980 Iowa Acts, ch. 1156, sec. 32. To add one more bit of background, Iowa also did not enact any parity laws. In fact, a former general counsel to the Iowa Division of Banking stated in a 2002 interview that enacting such a law that delegated control over Iowa state banks to the feds would be seen as “a slap in the face” to the Iowa legislature. 

So, there you have it. This little provision in an otherwise unrelated tax bill is to OPT INTO section 521 and thereby reverse the decision Iowa’s legislature made in 1980.

Now you may say to yourself, why is this so bad? The bad part requires you know something about the rent-a-bank partnership model between certain state-chartered banks and a number of online “fintech” lenders. Since the 2008 financial crisis, a growing number of nonbank fintech firms that make loans over the internet have partnered with a handful of state-chartered banks (mostly chartered in Utah, Kentucky, and New Jersey) in order to make and market unsecured installment consumer loans. By and large the way the business model works is that although the loan application is submitted through the nonbank’s website or smartphone app, it is the partner bank that actually advances the funds. The marketing and underwriting process are both performed by the nonbank. Then, very shortly after, the bank sells the loan along with others (or some interest in those loans) to the nonbank fintech company or an affiliate. The fintech or another firm then sells the interest to a pre-arranged wholesale buyer or sponsors a securitization of a large pool of loans for sale as securities in the capital markets. 

The bank’s role is merely passing, and it typically retains no material economic interest in the loans. However, so the argument goes, because the loan is originated by an insured state-chartered bank, it can export the interest rate of its home state to borrowers located in ANY state (with state usury laws preempted by DIDMCA section 521). And sometimes these loans can be quite expensive (rates of 160% APR or more e.g., CashNet USA, Speedy Cash, Rapid Cash, Check n' Go, Check Into Cash). You can get more info on these partnerships and check out some nifty maps provided by the folks at the National Consumer Law Center here. 

So, here’s how I think consumer advocates can turn the tables. There are a number of states that have aggressively gone after these rent-a-bank schemes (adding a lawsuit by AG of DC to the mix here) and a group of state AGs are currently suing the OCC on account of its true lender rule. In other words, a number of states do not want this kind of high cost, fintech-bank lending happening in their jurisdiction. 

Here’s my suggestion to those states: why not just pass your own opt out of DIDMCA Section 521? 

As mentioned above, many of these online lenders in high-cost rent-a-bank schemes favor partnering with FDIC-insured, state-chartered banks rather than national banks. Opting out of DIDMCA would deprive these schemes of their regulatory arbitrage. Without the ability to import the interest rate law of another state into a given jurisdiction, it would force these online firms to apply for a lending license and otherwise abide by the jurisdiction’s usury limit. DIDMCA allowed states to opt out of Section 521, and the statute didn’t give a deadline to do it. So, here’s a call to states like Colorado and others who are going after these usury and regulatory evasive business models…take away the linchpin of the business model. Opt-out of section 521!

And as for those of us back here in the Hawkeye state, here’s to hoping that the Iowa legislature doesn’t (pardon the Peloton pun) get so easily taken for a ride.

Of Usury, Preemption, and Fancy Stationary Bikes

posted by Chris Odinet

Greetings, Slipsters! I’m thrilled to be here guest blogging, and I thank the editors for having me. So with that, let me get started…

Usury, preemption, and pandemic fitness are all colliding here in Iowa. 

About two weeks ago, I was alerted to a single strike-through amendment buried in a tax bill currently being considered by the Iowa legislature. This simple little change that eliminates three numbers (“521”) would likely go unnoticed by most lawmakers (or, more realistically—all lawmakers). However, this little change could have a profound impact on Iowa’s ability to prevent high cost, predatory lending from spilling into its borders through website portals and smart phone apps. And, if you stay with me for this bit of guest blogging, you’ll never believe what’s supposedly (so I’m told) behind it all! 

The bill is HSB 272. Most of the bill contains routine tax code clean-ups and modifications. Indeed, the bill itself is sponsored by the Iowa Department of Revenue. But, take a look at the relevant part of Section 5:

1980 Iowa Acts, chapter 1156, section 32, is amended to read as follows: SEC. 32.  The general assembly of the state of Iowa hereby declares and states . . . that it does not want any of the provisions of any of the amendments contained in Public Law No. 96-221 (94 stat. 132), sections 521, 522 and 523 to apply with respect to loans made in this state . . .

If you clicked on the link above and read the entirely of Section 5, you’d probably have to go through the text quite a few times before you’d see what’s being stricken out. The singular change is just the reference to section 521 of Public Law No. 96-221 (94 stat. 132). Otherwise, everything else in this existing statute stays the same. 

So what’s this about? 

The only clue as to what this stricken language actually deals with is the reference to “loans made in this state.” In truth, this single little strikethrough will allow FDIC-insured state-chartered banks located in other states to make loans under the usury laws of their home states to the residents of Iowa. This kind of lending usually comes in the way of partnerships between a handful of state-chartered banks and so-called “fintech” nonbank lenders making triple digit loans, hardly any different from payday financing. This partnership lending practice has also been the subject of recent lawsuits, including a summer 2020 settlement by the Colorado AG. If you’re interested in a deep dive on the rent-a-bank model and the unique legal and policy problems it creates, check out forthcoming articles here (by Adam Levitin) and here (by me!).

The icing on the cake, however, is that the rationale (again, as I’ve been told) advanced by proponents of the bill is that without this amendment, Iowans will not be able to finance the purchase of Pelotons. That’s right. Pelotons!

Here’s the connection: Peloton currently partners with Affirm, a fintech online lender, in order to help consumers finance the purchase of these roughly $3,000 stationary bikes (bike + membership). Interestingly, both firms generally promote 0% down, 0% APR, 0% hidden fees in their financing package. Of course, if you scroll down to the bottom of the promotional website and read the tiny 10.5 point, gray font print, you’ll notice: 

Your rate will be 0–30% APR based on credit, and is subject to an eligibility check. Options depend on your purchase amount, and a down payment may be required. Affirm savings accounts are held with Cross River Bank, Member FDIC. Savings account is limited to six ACH withdrawals per month. Affirm Plus financing is provided by Celtic Bank, Member FDIC. Affirm, Inc., NMLS ID 1883087. Affirm Loan Services, LLC, NMLS ID 1479506. California residents: Affirm Loan Services, LLC is licensed by the Department of Financial Protection and Innovation. Loans are made or arranged pursuant to California Financing Law license 60DBO-111681 (emphasis added).

As you can see, Affirm also plays the rent-a-bank game by partnering with FDIC-insured Utah state bank, Celtic Bank. While 30% APR may not seem like the most expensive loan term in the world, it opens the door to much higher cost lending by firms like Elevate Credit, Opportunity Financial, and more--all of whom use the rent-a-bank model. 

This is about much more than Pelotons…stay tuned for more (including how I think consumer advocates can turn the tables on this strategy!).

UPDATE: It appears that HSB 272 isn't going anywhere: no legislative movement since a canceled House subcommittee hearing on April 6. Meanwhile, a duplicate tax bill has been filed in the Senate, but it does not contain the DIDMCA opt-out (SSB 1268).

Abolish the OCC?

posted by Adam Levitin

I've been saying for quite a while that the OCC is a "problem agency" that is seriously in need of reform. An article in Politico today underscores the problem. The OCC—under a civil servant acting Comptroller—has begun an active lobbying campaign to protect its so-called "True Lender" Rule. Not only is this highly irregular, but it also suggests that the OCC just doesn't "get it." As I explain below, this isn't a one off flub by the agency, but it is part of the agency's DNA, and isn't likely to be changed simply by putting in a good Comptroller. Fixing the OCC may require something more than a personnel change at the top. 

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Evictions in Violation of CDC Moratorium May Violate Fair Debt Collection Practices Act

posted by Adam Levitin

The CFPB today released an important interim final rule that puts some real teeth behind the CDC's COVID eviction moratorium. Some jurisdictions (badly in need of a refresher on the Supremacy Clause) seem to be taking the CDC moratorium as merely advisory, rather than as binding law. The CDC moratorium applies only to "landlords" and "owners" of residential property.  It has criminal and civil penalties, but no private right of action, and I am unaware of the CDC having brought any enforcement actions under the moratorium. 

The CFPB's rule broadens the scope of the prohibition. Instead of covering "landlords" and "owners," the CFPB rule covers "debt collector" as defined under the FDCPA. That's a term that can include attorneys. The CFPB rule requires debt collectors to inform tenants of their rights under the CDC moratorium upon filing an eviction notice or eviction action. The rule also prohibits falsely representing that the tenant is ineligible for relief under the moratorium. 

Here's why the CFPB rule matters. First, it brings a bunch of additional parties into the scope of the prohibition. Unless the landlord is a DIY type, there's likely to be an attorney involved, and the CFPB rule regulates the behavior of those attorneys. And second, there's a private right of action under the FDCPA with actual damages, statutory damages, and attorneys' fees. What's more, one can bring a class action under the FDCPA, which starts to change the economic calculus of litigation. How many attorneys are going to want to assume this risk to further a foreclosure for a client? I suspect that an informed attorney will be much more inclined to counsel the client to follow the CDC moratorium.

That said, will eviction attorneys be properly informed of the risks they run? And will they gamble that there won't be CFPB or private enforcement? I suspect it will only take a couple of enforcement actions before word gets around that there are real risks with non-compliance. 

Bankruptcy on Last Week Tonight with John Oliver

posted by Pamela Foohey

Bankruptcy LWT - 1The consumer bankruptcy system has made it to late-night television! The main segment on Last Week Tonight with John Oliver this week focused on bankruptcy. As described: "John Oliver details why people file for bankruptcy, how needlessly difficult the process can be, and the ways we can better serve people struggling with debt." Twenty minutes about consumer bankruptcy!

Per usual, it's a well-researched, understandable, and fast-moving segment, with dashes of dark humor. My favorite references Julianne Moore's character in Magnolia. To the well-research part: It is supported by a host of papers about consumer bankruptcy, including the work of several current and former Slipsters. Among them is Portraits of Bankruptcy Filers (forthcoming Georgia Law Review), the most recent article based on Consumer Bankruptcy Project (CBP) data, co-authored with Slipster Bob Lawless and former Slipster Debb Thorne. In Portraits, we rely on data from 2013 to 2019 to describe who is using the bankruptcy system, providing the first comprehensive overview of bankruptcy filers in thirty years.   

Also referenced are Life in the Sweatbox, former Slipster Angela Littwin's The Do-It Yourself Mirage: Complexity in the Bankruptcy SystemSlipster Bob Lawless, Jean Braucher, and Dov Cohen's Race, Attorney Influence, and Bankruptcy Chapter Choice, and the ABI Commission on Consumer Bankruptcy's report. The segment closes by highlighting the Consumer Bankruptcy Reform Act of 2020 (and includes a bonus at the end, which you'll have to watch to find out what that's about).

Welcome to Chris Odinet

posted by Bob Lawless

On behalf of the other Credit Slips bloggers and myself, I would like to welcome Professor Chris Odinet as a guest blogger. Chris is a professor at the University of Iowa College of Law and is part of a new generation of scholars in the consumer finance space that our readers should know about. He already has an impressive list of scholarly publications and part of important conversations in consumer finance, especially fintech. Welcome, Chris, to Credit Slips.

Bankruptcy Filings Are Still Super Low--Don't Believe the Headlines

posted by Bob Lawless

Headlines recently appeared in the usual places about a big March jump in bankruptcy filings. It is true that March 2021 total bankruptcy filings were 43,425 (according to the Epiq Systems data) and that was a 39.1% increase from February 2021. That looks like a big jump. Of course, March is a longer month, and in fact this March had four more business days than February--almost an entire extra work week. Calculating the filing rate per business day, the March 2021 filing rate was a 14.9% increase from February 2021.

That still feels notable, but let's be careful--very careful. Bankruptcy filings are at historically low levels. When any data series hits a trough and starts creeping back to an old base rate, the increases will feel really big although we are really only getting back to what we had experienced previously. The February filing rate was 1.13 filings per 1,000 persons, the lowest since January 2006 when bankruptcy filings fell to almost nothing after the surge to beat the effective date of the 2005 bankruptcy amendments. (To give you a sense of the surge, the October 2005 rate was 25.53 filings per 1,000 persons.)

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Human Rights Watch on Imprisonment for Debt

posted by Jason Kilborn

What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years--with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

Greensill "Secured" Lending

posted by Stephen Lubben

Slips readers will be interested in Matt Levine's column today, which takes a deep dive into the recently failed Greensill's lending against “prospective receivables,” which is kind of like lending against my prospective estate in Scotland. Both look a lot like unsecured lending.

Book Recommendation: Caesars Palace Coup

posted by Jason Kilborn

A fun new book applies a revealing Law & Order analysis to the multi-billion-dollar, knock-down-drag-out reorganization of Caesar's Palace. In The Caesars Palace Coup, Financial Times editor, Sujeet Indap, and Fitch news team leader, Max Frumes, open with a detailed examination of the personalities and transactions that preceded the Caesars bankruptcy case, leading to the second (and, for me, more interesting) part of the book, tracking step-by-step the harrowing negotiations, court proceedings, and examiner report that led to the ultimate reorganization.

There is so much to like in this book. Its primary strength is its Law & Order backstory, peeling back the onion of every major player, revealing how they got to where they were in their careers in big business management, high finance, or law, and revealing their thoughts and motivations as the deals and legal maneuvers played out. Four years of painstaking personal interviews have paid off handsomely in this fascinating account of the inner workings of big money and big law reorganization practice. On a personal note, I was treated to a bit of nostalgia, as the book opens with and later features Jim Millstein, an absolute gem of a person who taught me about EBITDA when my path fortunately crossed with his at Cleary Gottlieb in New York City in the late 1990s. It also features the Chicago bankruptcy court in my backyard, which seldom hosts such mega cases as Caesars', and the story in the second half of this book reveals part of the reason why. Cameo appearances include some of my favorite academics, such as Nancy Rapoport, as fee examiner, and Slipster, Adam Levitin, as defender of the Trust Indenture Act. On that latter point, the book alludes to (but does not particularly carefully explain) the key role of the Marblegate rulings on the TIA, which is described in a bit more depth in a vintage Credit Slips post. Again, the book's most valuable contribution is a behind-the-scenes look at the motivations and machinations behind a salient instance of collateral stripping, adding to the literature on this (disturbing) trend.

For would-be, currently-are, or has-been (like me) business managers, investment bankers, hedge fund managers, and reorganization lawyers, this book is a fascinating under-the-hood analysis of every stage of a financial business restructuring (not much about the operational side). For anyone interested in the thoughts and motivations of the Masters of the Universe who control so much of our world and its most famous companies, this book offers a brutally honest peek at how the sausage is made. It's not always pretty, but it is both entertaining and enlightening.

Not Cool, Bank of America

posted by Adam Levitin

I used my phone to remotely deposit a check today at Bank of America. Before I was able to proceed with the transaction, however, Bank of America required me to agree to new terms and conditions for mobile deposits. The terms and conditions were presented to me on my smartphone (roughly a 4''x 2'' screen). I could have pressed "accept" before I scrolled through any of the terms, but I actually went and scrolled through.  It took several scrolls before I got to the end—these were not a short list of terms and conditions, and there was no indication of what had changed. I have no idea there was only a minor amendment or something substantial. More disturbingly, I was given no option of printing or emailing myself the new terms and conditions to which I agreed; I have no idea where (if anywhere) I can access those terms that I have supposedly "agreed" to.  

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The Haitian Independence Debt

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

The Haitian Independence Debt of 1825 is perhaps the most odious in the history of sovereign debt. France agreed to grant recognition to the Haitian state in exchange for a massive indemnity payment, ostensibly intended to compensate French plantation owners for losses suffered during Haitian revolution. With French gunboats lurking in port and offshore, the French imposed a massive and unpayable debt burden equal to roughly 5 times the annual French budget.

Surprisingly, the literature on odious debt pays fairly little attention to this episode. Perhaps this because the doctrine of odious debt was developed with a view towards borrowing by a despot who is subsequently overthrown. Must the populace repay money borrowed to oppress it? Thus, when Haiti does show up in the odious debt literature, the question typically involves debts incurred by the despotic Duvalier regimes. The Independence Debt, by contrast was incurred in the context of a colony escaping the control of an imperial power, and the modern odious debt literature generally ignores this context. We discuss this in a recent Clauses and Controversies podcast with the wonderful Gregoire Mallard, that should be out soon.

This semester, we asked students in our international debt class what they would say if either the French or the Haitian governments came to them today, asking for advice on whether Haiti had a viable legal claim arising from these 1825 events.

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A Heroes Jubilee

posted by Alan White

Millions of heroes of the pandemic--health care workers, law enforcement and first responders, National Guard troops, public school teachers, and social workers--are suffering needless financial hardship because of student loans. Years ago Congress passed, and president Bush signed into law the Public Service Loan Forgiveness program. After repaying student loans for ten years while working in public service, these workers are entitled to have their remaining debt canceled by the Education Secretary.  In a continual insult to these heroes, the Education Department and its contractor continue to reject 98% of PSLF applications, for absurd bureaucratic reasons I have elaborated on elsewhere.

Another act of Congress, the HEROES Act of 2003 gives Education Secretary Cardona clear legal authority to fix this failure and cancel hundreds of thousands of student loans now. The HEROES Act allows the Education Secretary to waive any regulation or even statute as necessary to ensure that no individual or class of people experiencing hardship because of a national emergency suffers financial harm because of the emergency. With a few simple waivers of unnecessary rules, the Education Department could implement PSLF loan cancellations for hundreds of thousands or even millions under existing legal authority.

A broad, one-time effort to extend PSLF relief to all those eligible could happen in a few simple steps. First, the federal loan servicing contractors could identify ALL borrowers who entered repayment more than ten years ago and who are not currently in default, and send every one of them an invitation to fill out a simple form asking if they have been working in public service. Second, the existing maze of paperwork created by the Department’s rules could be waived in favor of a simple one-page form. The PSLF applicant need only certify under penalty of law that they worked full–time for at least ten years and still work in a qualifying job. The form’s checklist of jobs should include the words of the statute: 

a full-time job in emergency management, government, ... military service, public safety, law enforcement, public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations...), public education, social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy on behalf of low-income communities at a nonprofit organization), early childhood education (including licensed or regulated childcare, Head Start, and State funded prekindergarten), public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or [a job] at a [501(c)(3) tax exempt organization].

Any borrower signing and returning the form should immediately have all federal student loans cancelled. The Department should provide adequate funding to its contractors to fully administer this PSLF jubilee.

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Addressing Credit Invisibility Through Federal Contracting Power

posted by Adam Levitin

The Biden administration could substantially reduce the number of "credit invisible" and "thin file" consumers without legislation, simply through a determined use of federal contract regarding multi-family mortgages and wireless spectrum licenses. By requiring credit reporting as a condition of federal purchase of multi-family mortgages or sale of wireless spectrum, the Biden administration could ensuring credit reporting for a lot of renters and all cellphone contracts, which would help millions of Americans start to come into the credit system and escape the Catch-22 of credit invisibility. This would be a major step toward achieving economic equity in the United States. 

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Consumers and Price Volatility: Texas Electricity Prices

posted by Adam Levitin

Some Texas consumers who didn't lose power are now finding themselves socked with massive electric bills, as high as $17,000. The reason? They were paying variable kW/h pricing for their electricity at wholesale rates, without any sort of price collar. The Washington Post explains

The state’s unregulated market allows customers to pick their utility providers, with some offering plans that let users pay wholesale prices for power. Variable plans can be attractive to customers in better weather, when the bill may be lower than fixed-rate ones. Customers can shift their usage to the cheapest periods, such as nights. But when the wholesale price increases, the variable plan becomes the worst option.

This story jumped out at me for two reasons.

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Does Delaware Get the Final Say?

posted by Stephen Lubben

I've been doing some reading on officer and director fiduciary duties to creditors, and I am surprised that how much the academic and practitioner consensus seems to have settled on the notion that, in light of the Delaware caselaw following Gheewalla, it is essentially impossible for creditors to bring a fiduciary action against a board. Namely, because Delaware caselaw has held that such claims are derivative (with all the procedural limits thereon) and have narrowed the duty to apply, if at all, to cases of actual insolvency, most claims will not be viable. Moreover, most authors implicitly assume that these claims are subject to the internal affairs doctrine (i.e., that they are subject to Delaware law no matter where the case is brought).

That analysis seems right to me only if we are sure that these sorts of claims arise out of the corporate form. But if creditor fiduciary duty claims instead arise out the debtor-creditor relationship itself, then it is not clear to me Delaware gets to decide these issues. Indeed, more often New York would seem to provide the relevant law (if the debtor-creditor relationship is subject to New York law). Of course, some might argue that the debtor-creditor relationship is purely contractual, but it strikes me that the source of these claims is a greatly under-discussed issue.

NRA Bankruptcy: Enter Kirkland?

posted by Adam Levitin

The latest development in the NRA bankruptcy is the NRA's motion to retain Kirkland & Ellis as special counsel.  The retention seems to be for appellate issues, and the partner submitting the retention affidavit is an appellate specialist, not a bankruptcy lawyer. Yet this raises the question why Kirkland, which has long represented the NRA in various matters, is not the NRA's bankruptcy counsel. Kirkland has one of the top chapter 11 practices in the US. You'd think that they'd be the first place the NRA would turn if it was thinking about bankruptcy.🧐

Oh yeah, in the spirit of economy, Kirkland is giving the NRA a 15% discount from its normal rates. I get that it's a nonprofit, but there's something ironic about giving a solvent debtor a discount, but charging full freight to the ones that are broke. Also, does that count as a charitable contribution? 

Update:  Maybe I wrote too soon. The notice address given for Kirkland is for Ryan Bennett a restructuring lawyer out of Chicago, not part of the DC-based appellate practice. Maybe that was just for handling the retention application, however. 

Is the NRA Out of Bullets?

posted by Adam Levitin

The NRA's Gone to Texas bankruptcy just keeps getting wilder and wilder. First an NRA board member files a motion for an examiner. Then the NRA's largest creditor files a motion for the case to be dismissed as a bad faith filing (or in the alternative seeking a trustee). Then the NYAG also  files a motion seeking the dismissal of the case as a bad faith filing or in the alternative requesting a trustee be appointed. And then to top it off, the US Trustee files an objection to the retention of the NRA's counsel as not disinterested only to have one of the NRA's largest trade creditors file a motion for the Official Creditors' Committee set up by the US Trustee to be reconstituted (and basically alleging bias by the US Trustee's office against NRA management). This is turning in the bankruptcy version of the shoot out at the OK Corral. 

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Is the NRA Board Shooting Itself in the Foot By Doing Nothing?

posted by Adam Levitin

In my previous blog post on the NRA bankruptcy, I was focused on the bankruptcy implications of the incredible examiner motion filed by an NRA board member against the NRA. But as I think about it more, it's also got some important corporate governance implications: did the NRA board violate its fiduciary duties?  

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NRA Examiner Motion

posted by Adam Levitin

As I predicted, things were not going to go so smoothly for the National Rifle Association in bankruptcy. Today, the Hon. Phillip Journey, a Kansas state judge who was recently elected to the NRA's board of directors, filed an examiner motion in the case. There are some bombshells in Judge Journey's motion, including that the NRA board was never informed of the bankruptcy filing or the creation of the venue-hook subsidiary! 

That cause me to go back and look at the NRA's bankruptcy petition. There's no board authorization of the filing attached! Instead, there's an authorization by the NRA's special litigation committee. The special litigation committee's purported authority to file the NRA for bankruptcy is language in its enabling resolution about undertaking actions to "reorganize or restructure the affairs of the Association". Is that a grant of authority for a chapter 11 filing? I'm skeptical. I would have expected express language about filing "for bankruptcy under title 11 of the United States Code" or the like. "Reorganize or restructure the affairs" could include a lot of things other than bankruptcy, and given the importance of bankruptcy for corporate governance, this doesn't seem like the sort of power to be given by implication. 

Fairness and Flexibility: Understanding Corporate Bankruptcy’s Arc

posted by Stephen Lubben

I don't post most of my law review articles here, but my latest might be of some interest to Slips readers generally. In Fairness and Flexibility: Understanding Corporate Bankruptcy’s Arc, out now in the University of Pennsylvania Journal of Business Law, I trace the long history of American business reorganization law, starting with antebellum mortgage foreclosures under state statute, up to the present Restructuring Support Agreements (RSAs). I ultimately urge more judicial oversight of current practices – which I argue evidence an extreme of "flexibility" – lest chapter 11 face an even more extreme reform backlash because of increasing unfairness.

Eviction Moratoria Save Lives: the Evidence

posted by Adam Levitin

Once in a while you see an empirical paper that makes you say "wow." That's my first reaction to an NBER paper out from some economists and a sociologist at Duke and UNC. The paper, entitled "Housing Precarity & the Covid-19 Pandemic: Impacts of Utility Disconnection and Eviction Moratoria on Infections and Deaths Across US Counties" has an absolute bombshell finding:  eviction and utility disconnect moratoria save lives.  A lot of them.  

The paper suggests that had eviction and disconnect moratoria been in place since the start of the pandemic, deaths would be down by over 55!!!! That's 246,000 deaths that shouldn't have happened. From the abstract

We find that policies that limit evictions are found to reduce COVID-19 infections by 3.8% and reduce deaths by 11%. Moratoria on utility disconnections reduce COVID-19 infections by 4.4% and mortality rates by 7.4%. Had such policies been in place across all counties (i.e., adopted as federal policy) from early March 2020 through the end of November 2020, our estimated counterfactuals show that policies that limit evictions could have reduced COVID-19 infections by 14.2% and deaths by 40.7%. For moratoria on utility disconnections, COVID-19 infections rates could have been reduced by 8.7% and deaths by 14.8%.

Here's the key graphic: 

Evictions

The methodology is a regression analysis on COVID infection/death rates and a county-level housing insecurity measure—that means that the paper is not connecting actual deaths and actual evictions. And one might question if the controls adequate capture everything. People more methodologically expert than me need to kick the tires here. But at a first glance, the directional findings here are very strong (over 99% chance of a correlation in all of the key specifications and models) and the point estimates are huge. Even if the findings are off by a factor of 100, we're talking about 2,460 unnecessary deaths, a staggering number from a pre-COVID perspective (close to the 9/11 direct death toll). If the paper is right, the CDC's eviction moratorium might have done more to save lives than any other single action taken during the pandemic. 

This paper should be a real spur for states to tighten up their renter protections and utility disconnect regulations during the pandemic. It should also be a call for the CDC to not only extend its eviction moratorium at least until the fall, but to expand it to cover utility disconnects and mobile home repossessions. 

NRA Bankruptcy

posted by Adam Levitin

The National Rifle Association filed for bankruptcy in the Northern District of Texas (Dallas). The NRA's press release says that the purpose of the bankruptcy is to enable the NRA to change from being a New York corporation to a Texas corporation. This is critical to the NRA because the NY Attorney General, who regulates NY non-profits, is seeking to have the NRA dissolved for financial malfeasance. Notably, the NRA states that it "will propose a plan that provides for payment in full of all valid creditors’ claims. The Association expects to uphold commitments to employees, vendors, members, and other community stakeholders." In other words, the NRA's petition is not driven by financial exigencies, but to avoid the reach of the New York Attorney General. As the press release boasts, the NRA is "dumping New York."

This is going to be one heck of an interesting case. There are already so many glaring issues (or should I say "targets"?): venue, good faith filing, disclosures, the automatic stay the trustee question, fiduciary duties to pursue claims against insiders, executory employment contracts, the fate of Wayne LaPierre, and the generally overlooked governance provisions of the Bankruptcy Code. I'll take quick aim at these all below. 

Continue reading "NRA Bankruptcy" »

Dissecting the Increase in Chapter 11 Filings

posted by Pamela Foohey

Ch 11 2019 2020 ComparisonI just finished teaching an intensive one-week course at Cardozo School of Law designed to introduce students broadly to bankruptcy and reorganization. The course covered debt collection, consumer bankruptcy, large public-company reorganization, small business reorganization (including the SBRA), municipal bankruptcy, cannabis and bankruptcy, third-party releases, and even a bit on chapter 15.  A theme throughout the week was changes in filings during the pandemic. To impress upon students that chapter 11 filings indeed are up, but that doesn't mean they are up everywhere across the country, I created this map. It details year-over-year increases or decreases in chapter 11 filings  based on jurisdiction.

I relied on data from the American Bankruptcy Institute / Epiq detailing total chapter 11 filings in 2019 and 2020. The map thus includes non-commercial chapter 11 filings. Historically, based on data from the Administrative Office of the United States Courts, a very small percentage of chapter 11 filings are non-business-debt filings--historically, about 6%. The more important caveat is that the map counts each filing as a case, even if the case is that of a "child" company filing with a "parent." See Slipster Bob Lawless's prior post about how parent/child filings can make it seem like commercial filings are rising much more than they actually are. Regardless, across the country, in 2020, chapter 11 filings generally are down. And where chapter 11 filings have increased, they seemingly have increased a lot.

The Argentine 2020 Restructuring Drama: An Insider's Perspective

posted by Mitu Gulati

There has been much discussion of the recent (2020) Argentine restructuring on creditslips, including by Anna Gelpern (here) and Mark Weidemaier (here), two people who know more about these matters than pretty much anyone else anywhere.  And significant portions of that discussion have been critical (or at least questioning) of the wisdom of two of the strategies that Argentina attempted to utilize during its recent restructuring: Pac Man and Re-designation.  These criticisms also showed up in the financial press, in articles by Anna Szymanski (here) and Colby Smith (here), among others.

Yesterday, two of the key players on the Argentine restructuring team, Andres de la Cruz and Ignacio Lagos (both of Cleary Gottlieb) put out on ssrn a spirited defense of the Pac Man and Re-designation strategies.  The article, “CACs at Work: What Next?” is available here (and should be forthcoming in the Capital Markets Law Journal soon).  To cut to the chase, Andres and Ignacio argue that their strategies were misunderstood by commentators and, in the end, were actually embraced by investors.

Continue reading "The Argentine 2020 Restructuring Drama: An Insider's Perspective" »

CBRA Op-Ed

posted by Adam Levitin

I have an op-ed about the Consumer Bankruptcy Reform Act running on CNBC's site. Given that both collection moratoria and benefit extensions keep getting dribbled out in one to three month bites, we will definitely see an expiration of both as the pandemic wanes, and neither is sufficient for many households to address their arrearages.

Consider this (not in the op-ed): there's now 4.78% of mortgages that are 90+ delinquent. That's the third-highest level since 1978. Part of that is that there are virtually no foreclosures happening, but a lot of it is that the delinquencies aren't being cured. Once a household runs 90+ delinquent, cure gets very difficult—the arrearage is just too big. We are going to be looking at a lot of foreclosures down the road. Add to that a rental delinquency rate somewhere between 18% (Census numbers) and 23% (Nat'l Multifamily Housing Council numbers), and we've got a real mess looming. Unfortunately, it won't just be an economic problem or a personal tragedy for many families. It will be a political problem that will have long-term ramifications, just like the 2008 foreclosure crisis.  

Mick Mulvaney for Hypocrite Laureate?

posted by Adam Levitin

Remember Mick Mulvaney?  He was a Tea Party Congressman who became head of OMB for Trump and was then named acting CFPB Director and ultimately acting Chief of Staff for Trump before being appointed special envoy to Northern Ireland.  Well he’s resigned in protest over the sacking of the Capitol. 

I'm glad to hear that Mick is opposed to mob violence. But Mick has always been a virutoso of hypocrisy, but here he’s outdone himself. Let's not forget that Mick Mulvaney personally did far worse damage to our country than all of the Trumpist rioters.

Get your copy today!

posted by Stephen Lubben

The third edition of my Corporate Finance textbook is out and available for use in the Spring Semester. Among other new features, the new edition has a new case study (iHeart) and extensive coverage of CLOs, which are important players in finance before and after the onimage from images-na.ssl-images-amazon.comset of financial distress. Professors can contact me directly for access to a Dropbox folder that is chock full of class materials and background readings.

The Kraninger Discount

posted by Adam Levitin

The CFPB has been chugging out enforcement actions and settlements at a fairly fast clip the last several months. Part of that might be businesses deciding to settle because they think they're going to get a better deal with Director Kraninger than under any Director appointed by President Biden. And here's the thing:  they might well be right because there is a clearly observable "Kraninger Discount" in CFPB enforcement statistics. Director Kraninger has suspended nearly 18% of civil monetary penalties and 11% of consumer redress. That's nearly 7x and 3x the rate penalty and redress suspensions under Director Cordray.

Continue reading "The Kraninger Discount" »

"Madden-Fix" Amicus

posted by Adam Levitin

I filed an amicus brief today in Becerra v. Brooks, the challenge brought by the California, Illinois, and New York attorneys general against the OCC's "Madden-fix" rule. Consider it a stocking stuffer for the Acting Comptroller, Brian Brooks, and a bit of goodwill toward mankind. 

Many thanks to my able counsel, Ted Mermin and Eliza Duggan from the Berkeley Center for Consumer Law & Economic Justice! 

The OCC Is a Problem Agency

posted by Adam Levitin

It's time to say it loud and clear: the OCC is a problem agency.

Here's a list of only some of the issues from the past year: the fair access rule, toleration of rent-a-banks, the valid-when-made rule, the true lender rule (that the FDIC notably didn't copy), the fintech charter, Figure's bank charter application, failure to deal with BoA's fair housing issues; failure to take JPM's unauthorized overdrafts seriously, even a ridiculous interpretation of preemption standards that came out today. (Does this laundry list of problems remind anyone of the FHLBB or OTS?)  

Continue reading "The OCC Is a Problem Agency" »

Regulatory Comments to the OCC on the Fair Access to Financial Services Rule

posted by Adam Levitin

I submitted comments to the OCC about its proposed rulemaking regarding Fair Access to Financial Services. I previously blogged on the topic here and here. There are a LOT of problems in this poorly thought-through rulemaking, starting with whether there is even statutory authority, continuing to its myriad inconsistencies with safety-and-soundness (and thank goodness for President Trump, who provides many helpful examples), going on to First Amendment problems, and then wrapping up with an antitrust analysis that would flunk any antitrust course—it doesn't even define a relevant product market! Sigh. 

74 Law Professors Sign Letter in Support of the Consumer Bankruptcy Reform Act

posted by Pamela Foohey

Last week, Senator Elizabeth Warren (D-MA) and Representative Jerrold Nadler (D-NY) introduced the Consumer Bankruptcy Reform Act of 2020 (CBRA). As Slipster Adam Levitin detailed, the CBRA proposes a single chapter structure designed to streamline the consumer bankruptcy process. This morning, 74 bankruptcy and consumer law professors sent to Senator Warren a letter in support of the CBRA.

As the letter states, the signatories support the CBRA because it "provides a thoughtful, workable, and comprehensive response to the problems that plague the current consumer bankruptcy system." Before I discuss the letter further, a disclosure: I spearheaded this letter and circulated it among bankruptcy and consumer law scholars for signature.

In detailing our support of the CBRA, the letter points out the key ways in which the current consumer bankruptcy system can fail to provide effective relief and can shut people out because they cannot afford an attorney. Adam's recent post discusses research about substantial regional differences in the use of bankruptcy and the disparate use of chapter 13 by Black households--and the consequences of these differences on bankruptcy's uniformity and on access to justice. The CBRA will simplify the filing process, reduce fees, and address racial and gender disparities. Its new chapter 10 will allow people to address their most pressing concerns, whether that be keeping homes, keeping cars, staying in rental property, or discharging debts. It also provides for a discharge of student loan debt. And it addresses debt collection in bankruptcy cases by expanding the FDCPA and giving the CFPB some supervision and enforcement authority in consumer bankruptcy cases.

Importantly, as noted at the end of the letter, the new single chapter is not a free ride. People who can pay will not be able to walk away from their obligations. Overall, the CBRA will address systemic issues and other problems that plague the current consumer bankruptcy system. Find the full letter from law professors here.

The New Thing in Contract Research - The Contract Production Process

posted by Mitu Gulati

Cathy Hwang and Matt Jennejohn, two of the brightest young stars of the contract world, just put up a paper summarizing their view of one of the exciting new directions that contract research is taking. They describe it as the study of contractual complexity ("The New Research on Contractual Complexity", is their title). But I don't like the term "contractual complexity" at all, since I simply cannot take seriously the idea that anything that lawyers do is all that complex.  Convoluted, confused and obscure, yes.  But complex? Hell no.  What I see their wonderful paper as being about is the new research on the production of contracts.  As they point out, it all starts from the foundations laid in a set of important papers by the brilliant Barak Richman.  Barak has long been puzzled as to why contract scholars have generally had little interest in how contracts are produced -- even though key assumptions about the production process form the backbone for theories and doctrines of contract interpretation (something that contract scholars, old and new, do care deeply about).

And now we have an entire cool new set of papers by folks like Rob Anderson, Jeff Manns, Dave Hoffman, Tess-Wilkinson Ryan, Michelle Boardman, Julian Nyarko, John Coyle, Mark Weidemaier, Adam Badawi, Elisabeth de Fontenay, Anna Gelpern and, of course, Cathy and Matt (and more).  Some using fancy empirical techniques well beyond my capacity (yes, those are complex), others use cool experiments (again, complex and beyond my skill level) and still others use interviews (yup, complex).

Three cheers for the study of how contracts are produced -- complex ones, confused ones and all the rest.

The ssrn link to Cathy and Matt's paper from the Capital Markets Law Journal is here

Their abstract reads:

In the last few years, the academic literature has begun catching up with private practice. In this essay, we review the growing literature on contractual complexity and outline its key insights for contract design and enforcement. Our purview is broad, capturing new theories and new empirical tools that have recently been developed to understand contractual complexity. We also propose avenues for future research, which we extend as an invitation to academics and practitioners as an opportunity to further the collective knowledge in this field. 

Fantastic SBRA Resource from Judge Bonapfel

posted by Bob Lawless

As Credit Slips readers know, the Small Business Reorganization Act added subchapter V to chapter 11 of the Bankruptcy Code earlier this year. My go-to resource on subchapter V has been a thorough summary written by Judge Paul Bonapfel of the U.S. Bankruptcy Court for the Northern District of Georgia. It is available for free on the court's web site, and with Judge Bonapfel's permission, I wanted to spread the word about the guide's availability. Judge Bonapfel has just done a November 2020 update of these materials with all of the recent cases. The update is a new chapter at the end of the materials that functions like a pocket part (for those of you who remember pocket parts!). Thank you Judge Bonapfel for this great service to the profession!

The Unconvincing Case for a Public Credit Registry

posted by Adam Levitin
Public provision—whether public options or public monopoly—has become all the rage in some progressive circles. I’d like to claim early mover status in this regard—back in 2009 I wrote a piece calling for public provision in payments, and in 2013 I wrote a piece underscoring the importance of public options and public provision in housing finance. One public provision proposal I haven’t previously commented on, but which has been troubling me for a while is the idea of a public credit registry. I’m sympathetic to consideration of public provision as a tool in the regulatory toolbox, and the idea is supported by a bunch of folks whom I very much respect, but I just don’t see the case here at all.  Public provision just isn’t a solution to most of the market failures in credit reporting. Moreover, even if there were a case, of all the possible priorities in consumer finance regulation, this seems really far down the list and a poor use of limited agency resources. 

Continue reading "The Unconvincing Case for a Public Credit Registry" »

The Consumer Bankruptcy Reform Act of 2020

posted by Adam Levitin

Today Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI) and Representatives Jerrold Nadler (D-NY) and David Cicilline (D-RI) introduced the Consumer Bankruptcy Reform Act of 2020. This is the first major consumer bankruptcy reform legislation to be introduced since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Whereas BAPCPA introduced a number of major, but targeted reforms to consumer bankruptcy law (and also a few business bankruptcy provisions as well), the CBRA is a much more ambitious bill:  it proposes a wholesale reform of the structure of consumer bankruptcy law with an eye toward reduces the costs and frictions that prevent consumers from being able to address their debts in bankruptcy.

This is a long post with an extended overview of the bill. The bill's sponsors have a one-page version or a two-page summary, but I figure you're here at the Slips because you just can't get enough bankruptcy law, and we're happy to oblige. Let me start with a disclosure, though. I was privileged to provide assistance with the bill, along with several other Slipsters. That means I know what's in it, and I think it's a really good and important piece of legislation that I hope will become law. 

A New Chapter 10 for Consumer Bankruptcy (Eliminating Consumer 7s and Chapter 13) 

Whereas consumer bankruptcy has long existed in two primary flavors—liquidations (chapter 7) and repayment plans (chapter 13)—the CBRA proposes a single chapter structure (a new chapter 10).  Under the CBRA, individual debtors would no longer be eligible for chapter 7, and chapter 13 would be repealed in its entirety. All individual debtors with debts of less than $7.5 million would be eligible for chapter 10; those with larger debts would have to file for 11 (or 12 if they qualify).  It's important to keep this structure in mind when evaluating the CBRA. While the CBRA takes elements from chapters 7 and 13, the CBRA is not trying to replicate existing 7 or 13. That means if you come to CBRA with a mindset of "wait, that's not how we do it in 13," well, yeah, that's kind of the point. 

The CBRA is a huge bill (188-pages) with a lot of provisions. In addition to the new chapter 10, it also contains amendments to numerous provisions in chapters 1, 3, and 5 of the Bankruptcy Code, as well to certain federal consumer financial protection statutes. I'm not going to try to cover everything in detail, but I want to cover how chapter 10 would work, as well as some of the highlights from other provisions. This is a very long post, but I think it's important for there to be a clear statement of how chapter 10 would work because there will undoubtedly be some misinterpretations of the bill, and I'd like to see consideration of the bill be on its actual merits.  

Continue reading "The Consumer Bankruptcy Reform Act of 2020" »

Puerto Rico News

posted by Stephen Lubben

The President today announced he was appointing the following people to the PROMESA oversight board. It is not immediately clear which slots these people are filling (that is, who nominated these people).  There are three open (presidential) slots at present, but one of the people below is already on the board:

  • Andrew George Biggs, of Oregon [existing board member]
  • Dr. Betty A. Rosa, Ph.D., of New York
  • John E. Nixon, of Utah

Restructuring Support Agreements and the "Proceduralist Inversion"

posted by Adam Levitin

I'm usually fussing about bank regulation issues here on the Slips, but I do try to make time for my first love, business bankruptcy. Ted Janger and I have a short piece about restructuring support agreements out in the Yale Law Journal's on-line supplement. It's a response to David Skeel's excellent article about RSAs. Suffice it to say that we are a bit more skeptical that Skeel about the benefits of RSAs, which we see as a mixed bag that require some policing.

What's particularly fascinating to me and Ted, however, is the way that Skeel's article illustrates the way that "camps" of bankruptcy scholar have effectively swapped positions over time. The "bankruptcy conservatives"—law-and-economics camp—was historically associated with a concern about procedure over outcomes and criticized the "bankruptcy liberals"—the traditionalist camp—as too concerned about distributional outcomes. Yet now it is bankruptcy liberals who are urging adherence to procedural protections, while it is the bankruptcy conservatives who are cheering on procedurally suspect devices because of their effects. 

Figure's National Banking Charter Application: Illegal and Bad Policy

posted by Adam Levitin

It's not every day that I write a letter in opposition to the issuance of a bank charter. But that's what I just did. Here is my comment letter to the Office of the Comptroller of the Currency in opposition to the charter application for Figure, which is seeking to operate an uninsured national bank. Not only is that not legally permitted, but issuing such a charter would be jaw-droppingly terrible policy from both a safety-and-soundness and consumer protection standpoint. I often disagree with the OCC only policy issues, but chartering an uninsured national bank goes far beyond any reasonable policy position. 

There are lots of reasons to be concerned about Figure's application on its own, but what really worries me is that Figure will be the camel's nose under the tent. If it's possible to get a national banking charter without being an insured depository or subject to the Bank Holding Company Act or the Community Reinvestment Act, ever tech company and its mother is going to be lining up to become a national bank. 

Purdue's Poison Pill and the Broken Chapter 11 System

posted by Adam Levitin

Jonathan Lipson and Gerald Posner have an important op-ed about the Purdue bankruptcy in the NYT and how the DOJ settlement with Purdue is likely to benefit the Sacklers. What's going on in Purdue is troubling, but not just for its own facts. Purdue illustrates a fundamental breakdown of the checks and balances in the corporate bankruptcy system.

The basic problem is that debtors can pick their judges in a system that precludes any meaningful appellate review. That lets debtors like Purdue push through incredibly inappropriate provisions if they can get a single non-Article III judge of their choice to sign off. This happening in as high-profile and important a case as Purdue should be an alarm bell that things have gone off the rails in large chapter 11 practice. Where Purdue goes, chapter 11 practice in other cases will surely follow. 

Purdue is perhaps the most extreme illustration of the confluence of three trends in bankruptcy each of which is problematic on its own, but which in combination are corrosive to the fundamental legitimacy of the bankruptcy court system.  

  • First, there is a problem of debtors attempting to push ever more aggressive and coercive restructuring plans.
  • Second, there is the lack of effective appellate review of many critical bankruptcy issues.
  • And third, there is the problem of forum shopping, particularly its newest incarnation, which is about shopping for individual judges, not just judicial districts.

Put together this means that debtor are picking their judge, knowing that certain judges will be more permissive of their aggressive restructuring maneuvers and that there will never be any meaningful appellate review of the judges, who are free to disregard even clear Supreme Court decisions. A single judge of the debtor's choosing is effectively the only check on what the debtor can do in chapter 11. That is a broken legal system.  

Continue reading "Purdue's Poison Pill and the Broken Chapter 11 System" »

Commercial and Contract Law: Questions, Ideas, Jargon

posted by Melissa Jacoby

In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

Thank you as always for your input, especially during such chaotic times.

Debt Relief on Day One

posted by Alan White

In a comprehensive review of existing student loan cancellation laws, Demos, the Student Borrower Protection Center, and the UCI Student Loan Law Initiative have compiled an impressive report and road map for the incoming Administration. The roadmap authors review the closed school, false certification, and disability discharges, public service loan forgiveness, income-driven repayment loan cancellation, borrower defenses to repayment, and protections for servicemembers and veterans, all of which have been sabotaged by Secretary Devos, and all of which could be marshaled to cancel millions of student loan debts. 

To be clear, these are existing debt cancellation programs enacted by past Congresses, and signed by past Presidents Republican and Democrat. Their full implementation would result in billions of dollars in debt relief to disproportionately low-income and minority workers and their families. While I remain skeptical of the ability of any Education Secretary to deliver on these programs given the contracting-out model under which federal loans are administered, and sympathetic to proposals for across-the-board loan cancellation, this detailed road map helps us imagine a new way forward.

The OCC Stands Up for Fossil Fuels, Gun Makers, Opioid Manufacturers, and Payday Lenders

posted by Adam Levitin

Those wascally wabbits at OCC are back at it again in the waning light of the Trumpshchina. The OCC has proposed a rule on "Fair Access to Financial Services." 

The gist of the rule is that banks cannot deny service to business based on the bank's opinion of "the person's legal business endeavors, or any lawful activity in which the person is engaging or has engaged."  Instead, the bank may deny service only based on "quantified and documented failure to meet quantitative, impartial, risk-based standards established in advance by the covered bank".  

This means that if a bank has moral qualms about financing the fossil fuel industry, opioid manufacturers, firearm manufacturers, payday lenders, reproductive health services, pornographers, gay conversion therapy, fur farming, makers of drug paraphernalia, the private prison industry, or businesses involved in the deportation of immigrants, to give a range of examples of businesses that pose serious reputational risk to banks (and very direct financial risk in some instances), well, too bad. Unless the bank can show that the borrower doesn't meet quantitative, impartial, risk-based underwriting standards, it must lend because these are all legal industries. Is it like that any bank will ever have "quantitative, impartial, risk-based underwriting standards" regarding a particular disfavored industry? The standard for denial of service is near impossible to meet, as it seems to require some sort of empirically grounded underwriting by industry that banks are unlikely to have. 

Put another way, the OCC's proposed rule says reputation risk doesn't matter. That's insane. It's a quite reasonable business decision for a bank to say that it doesn't want to be known as the bank that financed school shootings or consumer lending products that it would never offer itself. A bank might reasonably fear that it would lose a chunk of its deposit base if it became known as the go-to bank for a controversial industry. If you don't think reputation risk matters, look at the law firms that have been dropping President Trump's election appeals like a hot potato. They are terrified that they are going to lose other clients who don't want to be associated with those efforts. All the more so with a bank, where depositors are literally financing the loans.  

Continue reading "The OCC Stands Up for Fossil Fuels, Gun Makers, Opioid Manufacturers, and Payday Lenders" »

Update on Churches Filing Chapter 11 Bankruptcy

posted by Pamela Foohey

As parts of the country are counting ballots, I thought I'd post about counting church chapter 11 cases. The headlines about churches and other religious organizations filing chapter 11 still focus predominately -- almost exclusively -- on Catholic Diocese filings. As of June 2020, 27 Catholic religious organizations have filed chapter 11, as detailed on a site put together by Professor Marie Reilly. But Catholic religious organizations' filings are a very small sliver of churches filing bankruptcy, as my prior research has shown. The last time that I updated my count of religious organization chapter 11 cases was at the end of 2017, and the last time I updated denominations and demographics of the congregations that file was in 2013. Since then, I've continued to track religious organizations' chapter 11 filings, using the same methodology, through the end of 2019. 

Preliminary results are in. Highlights: churches, synagogues, mosques, and other religious organizations are still filing bankruptcy, and the denominations and demographics of the congregations that filed have remained basically the same.*

RI Ch 11 Thru 2019As shown on the graph to the right, between 2014 and 2019, an average of 59 religious organizations filed chapter 11 each year.** This is lower than the average of 87 cases between 2006 and 2013 that I've previously reported, but it is consistent with a decline and leveling off of consumer bankruptcy filings overall during this period. As I've noted, in the past, religious organization chapter 11 filings tracked personal bankruptcy filings, not business bankruptcy filings. This continues to be true.

Find tables with congregation denominations and demographics, and some more detailed discussion after the jump.

Continue reading "Update on Churches Filing Chapter 11 Bankruptcy" »

Personal Bankruptcy Arrives in China in March 2021

posted by Jason Kilborn

The process I noted in an earlier post has come to fruition, and the Shenzhen special economic zone will introduce the first personal bankruptcy law in China, effective March 1, 2021. It will apply to a quite limited number of people (a total of about 12.5 million residents in Shenzhen three years ago, as of 2017, and one must have been a Shenzhen resident for three years to qualify for the new bankruptcy procedure), though by people, I mean real people, as it is not restricted to merchants or even business-related debts. This is a really powerful and bold step forward, and many have expressed concern about the payment-morality effects of such a liberal procedure for escaping from one's debts (the common phrase "lao lai" 老赖 means "debt dodger" or someone who evades responsibility).

That's why a discovery in the final text of the new law really struck me today. I was comparing the language from an early 2015 draft, the June 2020 draft, and the final version, adopted on August 26, 2020. The new word for "discharge" used for years in the earlier drafts was "mian ze" (免责), loosely, "free/excuse from responsibility." But between June and August, that term was replaced in over a dozen instances by a slightly different term, "mian chu" (免除), again loosely, "exemption/remission." In the couplet forming this new term, the character for "responsibility/duty" (ze 责) was replaced by a much less morally laden character carrying the meaning "get rid of, remove" (chu 除), which is more or less redundant with the meaning of the common first character (mian 免, excuse/waive). Neutralizing the concept of a discharge of debt to remove connotations of excusing someone from duty and replacing this with a sterile, redundant notion of simply removing (technical) liability struck me as an interesting rhetorical move.

I don't know if any ordinary Chinese person would perceive a difference here, but the US played this rhetorical game in the Bankruptcy Code by replacing the judgmental term "bankrupt" with the neutral term "debtor." This latest move to re-coin the new Chinese word for discharge seems to me to follow along those same lines. [Incidentally, I checked the Enterprise Bankruptcy Law, and neither term figures prominently in that law, which doesn't confer any discharge at all, so the Shenzhen authorities had to come up with a more or less new term.]

If you have a better sense of the potential emotional/rhetorical impact of this change, let me know what you think (I'm probably making too much of it, but it was an interesting twist).

SDNY Upholds Pledge of Collateral for PDVSA 2020s

posted by Mark Weidemaier

Today, Judge Failla of the Southern District of New York issued an opinion rejecting PDVSA's request for a declaration invalidating the PDVSA 2020 bonds. These bonds, which we've written about before (e.g., here, here and, here) are backed by a pledge of 50.1% of the equity in Citgo Holding. The argument for invalidating the bonds contends that the 2016 exchange offer and collateral pledge was a contract in the "national public interest," which, under Venezuelan law, required but did not receive the approval of the National Assembly. PDVSA argued, first, that under the act of state doctrine, the court had to defer to a series of National Assembly resolutions declaring the exchange offer invalid. It also argued that Venezuelan law governed disputes over the validity of the contract, even though the governing law clause in the bonds specified New York law.

The district judge rejected these arguments in a lengthy and thoughtful opinion. (There is one clear but fairly tangential mistake, when the opinion implies on p. 59 that PDVSA is neither a "foreign state" nor an agency or instrumentality of a foreign state for purposes of the Foreign Sovereign Immunities Act.*) On the governing law question, the judge ultimately decided that New York law applied because--to oversimplify a bit--New York had a significant connection to the transaction. The bonds were negotiated and paid in New York, etc. For more on this conflict of laws issue, see here.

I'd expect to see an appeal, although whether that will benefit PDVSA (even if just by giving it more time) will probably depend on whether the district judge or court of appeals issues a stay of the current order. [edit: And of course on further developments in the U.S. sanctions regime.]

*Technically, the court said only that neither party argued that PDVSA was such an entity. The court made this point to help it distinguish FSIA cases that supported PDVSA's position. But this is no distinction at all. It is beyond dispute that PDVSA is an agency or instrumentality of Venezuela (or is indistinguishable from the government if treated as its alter ego). In either case, the FSIA unquestionably applies to PDVSA, so it is not obvious why cases under the FSIA would be irrelevant to the dispute.

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