postings by Melissa Jacoby

New (From the Archives) Paper on Determinants of Personal Bankruptcy

posted by Melissa Jacoby

This working paper is a longitudinal empirical study of lower-income homeowners, including a subset of bankruptcy filers, produced with an interdisciplinary team of cross-campus colleagues, including Professor Roberto Quercia, director of UNC's Center for Community Capital. We just posted this version on SSRN for the first time yesterday in light of continued interest in its questions and findings. The abstract does not give too much detail (see the paper for that), but here it is:

Personal Bankruptcy Decisions Before and After Bankruptcy Reform

Abstract

We examine the personal bankruptcy decisions of lower-income homeowners before and after the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Econometric studies suggest that personal bankruptcy is explained by financial gain rather than adverse events, but data constraints have hindered tests of the adverse events hypothesis. Using household level panel data and controlling for the financial benefit of filing, we find that stressors related to cash flow, unexpected expenses, unemployment, health insurance coverage, medical bills, and mortgage delinquencies predict bankruptcy filings a year later. At the federal level, the 2005 Bankruptcy Reform explains a decrease in filings over time in counties that experienced lower filing rates.

New Paper: Consumer Protection After the Global Financial Crisis

posted by Melissa Jacoby

Historian Ed Balleisen and I have just posted a paper of interest to Credit Slips readers who are interested in consumer protection, financial crises, and inputs into post-crisis policymaking more generally. I will let the abstract speak for itself:

Consumer Protection After the Global Financial Crisis

Edward J. Balleisen & Melissa B. Jacoby

Abstract

Like other major events, the Global Financial Crisis generated a large and diffuse body of academic analysis. As part of a broader call for operationalizing the study of crises as policy shocks and resulting responses, which inevitably derail from elegant theories, we examine how regulatory protagonists approached consumer protection after the GFC, guided by six elements that should be considered in any policy shock context. After reviewing the introduction and philosophy of the Bureau of Consumer Financial Protection, created as part of the Dodd-Frank Act of 2010, we consider four examples of how consumer protection unfolded in the crises’ aftermath that have received less attention. Our case studies investigate a common set of queries. We sought to identify the parties who cared sufficiently about a given issue to engage with it and try to shape policy, as well as the evolving nature of the relevant policy agenda. We also looked for key changes in policy, which could be reflected in various forms—whether establishing an entirely new regulatory agency, formulating novel enforcement strategies, or deflecting policy reforms.


The first of our case studies focuses on operations of the Federal Trade Commission in the GFC’s aftermath. Although the Dodd-Frank Act shifted some obligations toward the CFPB, we find that the FTC continued to worry about and seek to address fraud against consumers. But it tended to focus on shady practices that arose in response to the GFC rather than those that facilitated it. Our second case study examines the Congressional adoption of a carveout from CFPB authority for auto dealers, which resulted from strong lobbying by car companies worried about a cratering sales environment, and the aftermath of the policy. Here, we observe that this carveout allowed a significant amount of troubling auto lending activity to continue and expand, with potentially systemic consequences. Loan servicer misbehavior, particularly in the form of robosigning, is the focus of our third case study. Although Dodd-Frank did not explicitly address robosigning, the new agency it created, the CFPB, was able to draw on its broad authority to address this newly arising problem. And, because the CFPB had authority over student loan servicers, the agency could pivot relatively quickly from the mortgage context to the student loan context. Our fourth and final case study is the rise and fall of Operation Choke Point, an understandably controversial interagency program, convened by the U.S. Department of Justice, which, with the GFC fresh in mind, attempted to curtail fraudulent activities by cutting off access to online payment mechanisms. Here, we see an anti-fraud effort that was particularly vulnerable to a change in presidential administration and political climate because its designers had invested little effort in building public awareness and support for the program.

The Article concludes with an overall assessment and suggestions for other focal points for which our approach would be useful. The examples span a range of other domestic and global policy contexts.

 

 

 

Seeking nominations for the Grant Gilmore Award

posted by Melissa Jacoby

GilmoreThe American College of Commercial Finance Lawyers seeks nominations for scholarly articles to be considered for the Grant Gilmore Award. It is not awarded every year, but when it is, the main criteria is "superior writing in the field of commercial finance law."  I am chairing the award committee this year, so please email me or message me on Twitter before December 14 to ensure your suggestion is considered. Especially eager to get suggestions of articles written by newer members of the academy that might otherwise be missed.

What Skews the Public-Private Balance in Corporate Bankruptcy Cases?

posted by Melissa Jacoby

In a prior Credit Slips post, I shared a paper, Corporate Bankruptcy Hybridity, positing that bankruptcy should be conceptualized as a public-private partnership. The second section of Corporate Bankruptcy Hybridity identifies factors that have skewed the Bankruptcy Code's ideal balance between public and private interests and values. Preemptively I'll note it is not new to observe the increased privatization of bankruptcy and the qualitatively different nature of the oversight and ethics (see, e.g., Mechele Dickerson). More novel, I hope, is the articulation of a broader set of factors contributing to the skew. The list is illustrative, not exhaustive.

Continue reading "What Skews the Public-Private Balance in Corporate Bankruptcy Cases?" »

In the Zone: The Weinstein Co. Chapter 11 Hearings #9-13

posted by Melissa Jacoby

Since my last Credit Slips post about The Weinstein Co. chapter 11, there have been five public hearings/status conferences (some of which were telephonic). Disparate observations from those hearings below.

Continue reading "In the Zone: The Weinstein Co. Chapter 11 Hearings #9-13" »

Corporate Bankruptcy as a Public-Private Partnership

posted by Melissa Jacoby

I have just posted on the Social Science Research Network a forthcoming article called Corporate Bankruptcy Hybridity. Although the article has several intersecting objectives, today's post focuses on the first aim: conceptualizing corporate bankruptcy as a public-private partnership.  A public-private partnership, most plainly stated is "a legal hybrid which possesses some characteristics of a purely private corporation and others of a purely government.... however it is structured, it is formed to accomplish a public purpose."* As writings of scholars outside of bankruptcy make clear, the fact that a system relies in part on private actors and private funds does not absolve the system of its obligation to the public's broader constitutional, democratic, and welfare aims. In other words, even if a system is driven by a particular public purpose, other public objectives remain salient.

Reframing the system in this fashion explicitly rejects the common assumption that bankruptcy is best understood as a species of private law, as well as the belief that a workable theory requires that the bankruptcy system have only one public purpose.

In addition to enhancing scholarly debates, considering corporate bankruptcy a public-private partnership has real-world implications - most notably, helping reformers (statutory and otherwise) think creatively about the institutional actors and structures that can respond to identified problems, such as the problems carefully documented in the ABI Commission to Study the Reform of Chapter 11. The range of interventions described and prescribed in administrative law and related privatization scholarship is considerably broader than in reform projects such as the National Bankruptcy Review Commission or the ABI Chapter 11 Commission Report.

Of course, the article elaborates on these points, and I hope to highlight other objectives of Corporate Bankruptcy Hybridity in future posts. But in the meantime, I'd love it if you downloaded and read the article.

* This definition comes from an article published in 1969 by Robert Amdursky.

Silver Linings Playbook: The Weinstein Co. Chapter 11 Hearings #7 & #8

posted by Melissa Jacoby

Sale closedSince I last wrote on Credit Slips about The Weinstein Co. chapter 11, the sale of the company to Lantern Capital has  closed. Shortly after it closed, it was announced that Harvey Weinstein's brother Bob Weinstein was resigning from the TWC board of directors, along with several others. (If you read the investigative news reporting on TWC last fall through winter, you may be wondering why there hadn't been earlier board turnover. I have no good answer). Also of potential interest is that, after the closing of the sale, Lantern was immediately sued in California state court by another investment firm for breaching written and oral agreements connected with due diligence that allegedly gave Lantern a bidding advantage in buying TWC. 

The seventh public court hearing, on July 11, 2018, paved the way for the sale to close. It was then and there that Judge Sontchi, filling in for Judge Walrath, approved an amendment to the sale agreement reducing the sale price. The judge telegraphed early in hearing #7 that he viewed other pending objections (dealing with executory contracts and default cure amounts, which still remain pending) as collateral attacks on the prior sale order. The objection that would have prompted a bona fide evidentiary hearing, from the creditors' committee, had been settled.  Although hearing #8 on July 18 was extremely brief, it is clear there's much left to be worked out behind the scenes in this case - most notably, how to allocate the money.

Keeping up with the Appointments Clause: Puerto Rico bankruptcy update

posted by Melissa Jacoby

In January I wrote about Aurelius seeking a do-over. In a carefully reasoned thirty-five page decision, the district court has denied the do-over.  Put more legally, the court held that PROMESA's method of establishing the Puerto Rico Oversight Board did not run afoul of the Constitution's Appointments Clause. The Oversight Board is an instrumentality of Puerto Rico, concluded the court, not officers of the United States.

Keeping up with the Contracts Clause: the Supreme Court's decision in Sveen v. Melin

posted by Melissa Jacoby

In June 2018, the U.S. Supreme Court decided Sveen v. Melin, a case applying Contracts Clause* jurisprudence to a state revocation-on-divorce statute and preexisting insurance contract. It isn't like the Supreme Court hears a Contracts Clause case every week, every term, or even every decade. Given its relevance to many Credit Slips topics, such as a financially distressed government unit without bankruptcy access or mortgage/foreclosure crises, it seems worth fostering a conversation about the case here.  

Continue reading "Keeping up with the Contracts Clause: the Supreme Court's decision in Sveen v. Melin" »

Hurry Up and Wait: The Weinstein Co. Chapter 11 Hearing #6

posted by Melissa Jacoby

All Credit Slips readers are old enough to remember when a quick going-concern sale of The Weinstein Company was said to be imperative. So much so that even the seemingly skeptical creditors' committee ultimately went along, thus making the request to sell the company to Lantern Capital uncontested.

On June 22, at its 6th hearing, and about 6 weeks after the court's sale approval, TWC essentially acknowledged it cannot close the sale to its stalking horse bidder on the terms requested and approved by the court, and certainly not by the end of June as represented at hearing #5. TWC therefore will be seeking court approval for Lantern to acquire the company for less money than the agreement and court order specified. By the creditors' committee's calculation, TWC is seeking a 11% reduction in the cash price, but that estimate is one of several points of contention between it and TWC. Given the dates and deadlines in various financing orders and deals, TWC said the issue absolutely positively must be resolved in early July - while the presiding judge is out of the country. The parties did not embrace the presiding judge's suggestion of a popular federal court tool: mediation by a fellow sitting judge. So a key outcome of the June 22 hearing is that a different Delaware bankruptcy judge will preside over a July 11 hearing on changing the TWC/Lantern deal. That judge already has held a quickly-scheduled telephonic status conference today, June 25 (see dockets ##1106, 1107).

As an outside observer not privy to the negotiations, I have no idea whether this deal will close. Perhaps due to lack of imagination, I have never understood how a potential purchaser could be deemed the highest and best bid for a company without a basic understanding what contracts and licenses were included. Meanwhile, especially if it was true that some competing bidders could not meet the deadline due to inability to get information from TWC in a timely fashion, significantly changing the deal without resuming some competitive process seems troubling.

No one at the June 22 hearing disputed that general unsecured creditors would be directly affected by TWC's request to change the terms of the sale. But the judge implied some skepticism by asking whether, say, "very secured" creditors have reason to care. The answer depends, it seems to me, on how  "very secured" is determined, due to allocation issues among entities in the TWC corporate family. If there was ever a case to highlight why one should resist the assertion of a single waterfall, it is this one.

 

 

The Weinstein Co. Chapter 11 Hearing #5

posted by Melissa Jacoby

The fifth hearing in The Weinstein Co. chapter 11 occurred on June 5, 2018. The hearing included discussion about when the sale to Lantern Capital, approved by the court in early May, will actually close. Among other regulatory and transactional hurdles, TWC's lawyers mentioned that it still is not resolved which contracts will be included in the sale, but they hoped the sale would close within the month.

As for matters that resulted in a ruling, I'll briefly mention two.

  1. Sustaining a United States Trustee objection, the court denied the motion for Harvey Weinstein's October 15, 2015 employment contract to be filed under seal, as the standards of 11 U.S.C. § 107 were not satisfied. That contract is now available on the bankruptcy court docket. The document was filed by the Geiss plaintiffs (stemming from alleged sexual misconduct, discussed below) but TWC was the party advocating for sealing.
  2. The court approved the Geiss parties' motion to lift the automatic stay to permit the Geiss action to go forward against TWC, alongside other defendants, in the Southern District of New York, allowing liquidation of those claims. The SDNY district judge presiding over the Geiss action directed the plaintiffs to file the lift-stay motion; hearing transcripts illustrate his aim to minimize duplication of efforts. Part of TWC's argument against lifting the stay was the classic matter of distraction. Applying the relevant case law to the facts, the court observed that while closing the sale was a complicated matter, TWC was neither reorganizing in a traditional sense or seeking to stabilize its operations at this time. And, as in other cases, the distraction argument may be weakened when separate lawyers are handling the non-bankruptcy litigation. Seyfarth Shaw was representing TWC in the Geiss litigation, at least prior to the bankruptcy (leading the firm to successfully seek payment of its prepetition claim out of an insurance policy, over the creditor committee's objection - seek dkt #1000).

Speaking of professionals, initial interim fee applications for TWC's professionals for March 19-April 30, 2018 were not on the June 5 agenda, but are on the court docket. TWC has NY counsel and local counsel. Just to give you a sense, Cravath's fee application includes over 3,200 hours billed by 27 attorneys (dkt #929). Richards, Layton & Finger's fee application includes over 1,200 hours billed by 16 attorneys (dkt #932). Plus paraprofessionals at these two firms. Billing separately, of course, are FTI Consulting (dkt #870) and Moelis, the investment banker (dkt #946).

The next hearing in TWC's bankruptcy is scheduled for June 22, 2018. The SDNY Geiss action, in the motion to dismiss phase, is also very much worth watching.

Hearing #4 was held in The Weinstein Co. bankruptcy and you won't believe what happened next

posted by Melissa Jacoby

Actually, if you are in and of the corporate restructuring world, you will believe what happened next. Major objections were were resolved by the parties, and the court approved the sale of The Weinstein Co. to Lantern Capital.

Resolving objections without litigation is perceived positively in bankruptcy-land, not to mention in federal courts more generally. Some cash proceeds of the sale will be held back for the next phases of the case, and that is an important development. What, then, makes the situation seem less than satisfying, at least to this outside observer?

Continue reading "Hearing #4 was held in The Weinstein Co. bankruptcy and you won't believe what happened next" »

Loans and Liens: The Weinstein Company Chapter 11 Hearing #3

posted by Melissa Jacoby

CollateralThe third hearing in the The Weinstein Company chapter 11 took place on April 19, 2018 (prior 2 hearings here and here). The hearing focused on final court approval of a $25 million loan to fund the debtor during its chapter 11 (or, really, until a standalone 363 sale) ("DIP loan"). Apparently a competing offer for the DIP loan discussed at Hearing #1 never fully materialized. Prior to the chapter 11 petition, TWC had no single lender/syndicate claiming a so-called blanket lien on substantially all assets (the lender leading the now-approved DIP loan had a prepetition security interest in movie distribution rights held by TWC Domestic, and lenders with prepetition security interests in other assets also are participating in the DIP loan). As indicated in the visual accompanying this post, the DIP financing order states that TWC seeks to grant its DIP lenders a security interest in nearly all property. There are some important exclusions from the collateral package, however, including "claims arising out of or related to sexual misconduct or harassment or employment practices." 

Page 42 of the DIP financing order gives the unsecured creditors committee only until April 27 to investigate validity, perfection, and enforceability of various prepetition liens, although that date can be extended "for cause." As is typical in such agreements these days, TWC stipulated that it will not challenge prepetition loans made by the postpetition lenders. The order and agreement also require immediate payout of the DIP loan from sale proceeds (pp 55 & 138 of docket #267). If I'm reading the DIP lending agreement correctly, it also gives certain prepetition lenders the right to be paid immediately out of sale proceeds (p138 of docket #267). For reasons Credit Slips readers have heard many times before, I don't understand why paying prepetition debts at that juncture is in the best interest of the bankruptcy estate.

Meanwhile, Peg Brickley and Jonathan Randles of The Wall Street Journal have reported three TWC executives "took home more than $12 million in pay, loans, reimbursements" in the year before the bankruptcy, including after sexual misconduct allegations became public. This reporting comes from the schedules and statements of financial affairs filed just a few days ago.

Other updates:

Continue reading "Loans and Liens: The Weinstein Company Chapter 11 Hearing #3" »

"Drinking water from a fire hose:" The Weinstein Company Chapter 11 Hearing #2

posted by Melissa Jacoby

Sale AdNestled in a review of an album by Spinal Tap bassist Derek Smalls (a/k/a Harry Shearer), the April 10 edition of Variety magazine published a notice of sale of The Weinstein Company. The notice includes a bid deadline of April 30, a sale hearing on May 8, and the soothing assurance to bidders that a buyer would incur "NO SUCCESSOR LIABILITY" (bolded and all-caps) for the heinous acts TWC apparently tolerated and facilitated over many years. The notice anticipates that a buyer might agree to remain liable for some TWC obligations, however, perhaps contemplating valuable licensing contracts.

The Variety notice is a consequence of the second TWC hearing on April 6 (for the first hearing, see here). By the end, objections to the bidding procedures order had been resolved, resulting in docket #190, the order approving the procedures, including a $9.3 million breakup fee and escalating expense reimbursement for the stalking horse bidder if the sale is delayed. The number of times sexual harassment, sexual assault, or rape were mentioned at the hearing: zero.

Counsel to the newly-appointed five-member creditors' committee told the court that getting up to speed in this case (no pun intended) was "drinking water from a fire hose." And a battle is brewing over whether bids should be allocated among the various asset categories (again, given the stated complexity) - something the stalking horse bidder seems to resist. Meanwhile, at least one counterparty to a licensing agreement asserts that its contract was rescinded prior to the filing. Assuming it loses that fight, the party worries it will have insufficient time to consider whether the asset buyer is providing adequate assurance of future performance.

This case invites the caustic lament, "if only the Bankruptcy Code drafters had established a fair and transparent process to deal with all of these issues!" When Harry Shearer decides to send his imaginary-band bassist into a quiet retirement, maybe he will make a film about chapter 11. After all, fairness rocks.

 

Was Charleston Gazette-Mail a good case for an Ice Cube Bond?

posted by Melissa Jacoby

Based only this news report, the answer appears to be yes - an Ice Cube Bond would have honored the claimants' need for speed without allowing them to shift all the risk to the bankruptcy estate. The news article indicates that sale proponents referred to the holdback request as a "Hail Mary." In the foundational Lionel case, the dissenting Second Circuit judge used that characterization for a request to reverse the sale order, not to hold back proceeds. An Ice Cube Bond arguably reduces the possibility of Hail Mary arguments because it allows analysis of entitlements to be determined at a less pressured pace.

 

H/T Ted Janger

 

Notes on Complexity: The Weinstein Company Chapter 11 Hearing #1

posted by Melissa Jacoby

Some rarely-heard terms at The Weinstein Company's March 20 chapter 11 first-day hearing: sexual harassment, sexual assault, rape.

A more common utterance among TWC representatives: complex. The industry, the capital structure, the lending arrangements. All complex. Complex complex complex complex complex.

Part of the complexity, TWC said, comes from the fact that some collateral is governed by the Uniform Commercial Code while other collateral (certain intellectual property) is governed by other law. Yes - secured transactions professors keep saying this mixture is difficult to handle especially at the remedial/recovery stage. Another part of the complexity, according to TWC, is that the property interests have been sliced and diced into... hold on, this sounds familiar. 

What if anything is hiding behind this complexity? If TWC and the sale proponents get their way, the mystery likely will be buried.  The company and other proponent of a quick sale (which includes the sale of avoidance actions) says this sale needs to be done ASAP. 

TWC does not look like a melting ice cube now. It melted in the fall of 2017. Claimants need as much, if not more, protection in manufactured ice cube cases as in real ones, especially if the capital structure is so, well, complex. Complexity and speed are not the best of friends. If claimants are going to be denied full process, quick sale proponents need to post an Ice Cube Bond. Otherwise, a sale of TWC should happen through a plan, with all of the constitutional and statutory hurdles that were supposed to be necessary for the extraordinary exercise of federal court power that TWC seeks.

TWC's representatives also emphasized how business judgment should be respected. From the outside, it looks like TWC terminated Harvey Weinstein only when the news media blew their cover on the track record of heinous allegations. Sure, there is a new CRO, but are all who were complicit in the cover up really out of the picture now? 

A lawyer for the motion picture guilds said at the hearing that the guilds have had "difficulty" with the debtor pre-bankruptcy, and that the case calls for "adult supervision."  Another objector (docket #68)  said at the hearing that it heard from third parties that TWC had been "flagrantly" breaching agreements and misdirecting payment - a state of affairs feared to be the tip of the iceberg, but there had not yet been time to do a full investigation. 

A particularly interesting portion of the hearing involved debtor-in-possession financing. Among other reasons, TWC said it preferred to allow an existing lender to offer the DIP financing because that lender understood the complexity of the business and collateral package. Is chapter 11 practice now at a place where a DIP argues with a straight face that, for continuity purposes, it is better off borrowing money at higher interest rates and higher fees, from an existing lender with incentives that unlikely to align with the best interests of the estate overall? That did not go unchallenged, however. In addition to allowing another potential lender to be heard, the court asked a series of reasonable questions that indicated concerns about the cost of the proposed deal for the bankruptcy estate, and then took a brief recess. Then the proposed lender reported to the court the fees would be reduced.  The court approved the financing on an interim basis to avoid irreparable harm but will be looking at this issue fresh when TWC seeks the final order for financing.

The U.S. Trustee is having a creditors committee formation meeting this week. That committee has a lot to investigate.

The TWC enterprise might be complex. But that's not what this case is about.

 

 

 

 

 

Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

posted by Melissa Jacoby

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Continue reading "Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation" »

Call for Commercial Law Topics (and Jargon!)

posted by Melissa Jacoby

For the spring semester, I am offering advanced commercial law and contracts seminar for UNC students, and have gathered resources to inspire students on paper topic selection as well as to guide what we otherwise will cover. But given the breadth of what might fit under the umbrella of the seminar's title, the students and I would greatly benefit from learning what Credit Slips readers see as the pressing issues in need of more examination in the Uniform Commercial Code, the payments world, and beyond. Some students have particular competencies and interests in intellectual-property and/or transnational issues, so specific suggestions in those realms would be terrific. Comments are welcome below or you can write us at bankruptcyprof <at> gmail <dot> com. 

We also are going to do a wiki of commercial law jargon/terminology. So please also toss some terms our way through the same channels as above (or Twitter might be especially useful here: @melissabjacoby).

Thank you in advance for the help!

Whitford on Law School Financial Aid

posted by Melissa Jacoby

WhitfordAlthough technically emeritus and making history as a named plaintiff in a gerrymandering case before the U.S. Supreme Court, our commercial law colleague Professor Bill Whitford remains worried about law schools in a way in a way that connects with an issue well known to Credit Slips: student loans. Whitford's latest analysis of law school financial aid is forthcoming in the Journal of Legal Education but is available to us now on SSRN.

Audio Recordings of Bankruptcy Court: News from Delaware

posted by Melissa Jacoby

DelawareSeveral Credit Slips posts from earlier this year (here and here) focused on the virtues of courts releasing digital audio recordings of hearings, and specified the Judicial Conference authority for doing so. Over the summer, I found about three dozen bankruptcy courts for which at least one audio recording had been posted on a court docket in the prior year, albeit with significant variation in frequency of posting. 

It is great to be able to report that the U.S. Bankruptcy Court for the District of Delaware has joined the group of bankruptcy courts using this technology  (announcement here with the details). Proceedings before Judge Carey are the first to be posted, with other judges' hearings potentially to follow. 

 

 

Bankruptcy, Illness, and Injury: More Data

posted by Melissa Jacoby

A while back, political scientist Mirya Holman and I wrote a book chapter making sense of existing (and dueling) studies of the relationship between medical problems and bankruptcy, and presenting new findings from the 2007 Consumer Bankruptcy Project on debtors who entered into payment plans with their medical providers and fringe and informal borrowing for medical bills. Given the enduring interest in household management of out-of-pocket expenses associated with illness and injury, we recently posted an unformatted version of the chapter so it can be useful to more researchers and advocates.  Download it here.

Rights of Secured Creditors in Chapter 11: New Paper

posted by Melissa Jacoby

ABITed Janger and I have posted a paper of interest to Credit Slips readers called Tracing Equity. We still have time to integrate feedback, so please download it and let us know what you think.

As the image accompanying this post suggests, the project was inspired in part by recommendations of the American Bankruptcy Institute's Chapter 11 Commission. Discussion of those proposals starts on page 51 of the PDF.

One of the main insights of Tracing Equity is that both Article 9 of the Uniform Commercial Code and the Bankruptcy Code distinguish between (1) lien-based priority over specific assets and their identifiable proceeds, and (2) unsecured claims against the residual value of the firm. By our reasoning, even attempts to obtain blanket security interests do not give secured lenders an entitlement to the going-concern and other bankruptcy-created value of a company in chapter 11. We explain why our read of the law is normatively preferable and, indeed, is baked into corporate and commercial law more generally--part of a large family of rules that guard against undercapitalization and judgment proofing.

Looking forward to your thoughts.

 

 

Puerto Rico Bankruptcy: More on Audio

posted by Melissa Jacoby

Standing Order 8As my last post mentioned, release of hearing audio recordings does not appear to be standard practice in the District of Puerto Rico district court. But that isn't for lack of authority within that court. Standing Order 8, adopted in 2011, expressed with some pride that the District of Puerto Rico would be the "first in the entire Nation" after the pilot program (discussed in prior post) to make audio files available through PACER. The order makes clear that the recording is not the official record, preserving the role of court reporters. The use of the technology is left to the discretion of the presiding judge. The court's website indicates this order remains in effect.

Ideally recordings of the Puerto Rico hearings would be released for free on the court's website. But even if posted only on PACER for a flat fee, opting into this practice would increase accessibility. 

Puerto Rico Bankruptcy: Audio Recordings?

posted by Melissa Jacoby

As noted as an update in the prior post, May 17 is the first hearing in Puerto Rico's PROMESA restructuring cases (which also have new case numbers). However much interest these cases hold for the professional bankruptcy world, they are of critical importance to Puerto Rico residents. The idea of a government unit being bankrupt is frightening, with the anxiety heightened when the extent to which one's elected officials remain in charge is unclear. Sensitive to the number of stakeholders and high public interest, the courthouse has overflow space reserved for the first hearing. But even a capacious courthouse imposes natural limits on the in-person population.

If the court released audio recordings of hearings for free on its website, as happened in the Detroit bankruptcy, that would provide a window into the federal court process that could help build trust and legitimacy. Ordering and using hearing transcripts is critical to many parties and their lawyers, but that process is not a feasible form of education and access for others. In addition to being prohibitively expensive for residents to acquire, especially on an expedited basis, written transcripts provide insufficient contextual cues for those less familiar with federal courts and lawyers.

Releasing digital recordings does not appear to be standard practice in the District of Puerto Rico. Might this be an opportune moment for an experiment, or at least an exception?*

Continue reading "Puerto Rico Bankruptcy: Audio Recordings? " »

Puerto Rico Bankruptcy: Week One

posted by Melissa Jacoby

[May 10 update: a hearing has now been scheduled for May 17] 

It is nearing the one-week anniversary of the biggest government bankruptcy in U.S. history: the Commonwealth of Puerto Rico.

  1. The debtor(s) and cases: So far, Puerto Rico's Oversight Board has filed the equivalent of a bankruptcy petition for the Commonwealth (17-1578) and COFINA (17-1599). Bond insurers have filed the equivalent of an adversary proceeding (17-1584). The Oversight Board has retained Prime Clerk, so dockets will be available to those who don't have access to PACER, Bloomberg Law, etc. In Detroit's bankruptcy, digital recordings of nearly all hearings were posted for the public, usually within 24 hours; I hope the same will be true for Puerto Rico, but so far I have not seen an indication either way on the District of Puerto Rico's PROMESA web page.
  2. Presiding judge: PROMESA greatly restricted Chief Justice Roberts' choice of presiding judge by excluding bankruptcy judges. Thus, it is especially a relief that a wonderful district judge with bankruptcy court experience has accepted Chief Justice Roberts' request to preside. Judge Swain will sit by designation in the District of Puerto Rico
  3. Venue: The Oversight Board filed in the District of Puerto Rico, rather than New York, which was also a venue option. Filing in San Juan makes hearings accessible for more residents (creditors or not) who are deeply affected by the Commonwealth's financial situation. Curiously, a New York Times story attributes to the Oversight Board's outside counsel the proposition that the presiding judge "has the option of holding proceedings" in Manhattan as well as in San Juan. I don't read the Judicial Code and Federal Rules of Bankruptcy Procedure, particularly 5001, to be so flexible (PROMESA makes the Federal Rules of Bankruptcy Procedure applicable to these actions). Absent venue transfer or an emergency, it is reasonable to expect hearings to take place in Puerto Rico.
  4. Eligibility: PROMESA did not adopt the municipal bankruptcy eligibility test wholesale, although it incorporated parts. It sounds like some creditors may challenge eligibility and/or whether the Oversight Board satisfied the restructuring duties set forth in PROMESA. It is hard to imagine these cases getting dismissed on such grounds, but we will get a better sense from the parties' pleadings when and if they are filed.
  5. What else is formally pending: The docket does not yet reflect the magnitude of the case to come. As in municipal bankruptcy, Puerto Rico's filings created no bankruptcy estate and the debtors do not need federal court approval for decisions and expenditures to the same extent as, say, chapter 11 debtors. Thus far, the court docket is populated primarily by requests for notice and pro hac vice admission by lawyers. Also pending is a motion for the appointment of a retiree committee. Retiree committees have been common in municipal bankruptcies, but there remains the question of who will pay the committee's expenses in this case. Another twist is that the motion asks the court to restrict the member appointment discretion of the United States Trustee, requiring that the committee be constituted from a preexisting ad hoc committee. Yet another indication, perhaps, that this case will be a challenge from top to bottom.

Judge Selection in Municipal Bankruptcy and PROMESA

posted by Melissa Jacoby

In light of the timeline on the Puerto Rico debt situation, I have just posted on SSRN a contribution to the ABLJ/ABA symposium last fall. The paper examines PROMESA's judicial selection requirements applicable to a Puerto Rico Title III filing (the equivalent of a bankruptcy), and puts them in the context of municipal bankruptcy history.  This paper can be downloaded here.

Jevic Commentary

posted by Melissa Jacoby

Just a cross-posting note: Jonathan Lipson and I comment on the U.S. Supreme Court's Jevic decision at the Harvard Law School Corporate Bankruptcy Roundtable.

Brooklyn Law School Conference on Public Debt

posted by Melissa Jacoby

AboutthesymposiumOn March 1, 2016, Credit Slips commenced a virtual symposium on Puerto Rico's financial crisis. Where do things stand today, a year later? And what governance lessons can be learned from municipal bankruptcy cases like Detroit for the public debt problems of tomorrow? Thanks to a fortuitously timed conference at Brooklyn Law School, a subset of Slipsters will be considering these very questions on Friday March 3, 2017. Check out the agenda and join us in Brooklyn - register here today.

Swindlers and Crooks Doing Backflips: New Balleisen Book on Fraud

posted by Melissa Jacoby

BalleisenBookNot a moment too soon, Princeton University Press has just released Fraud: An American History from Barnum to Madoff by historian & Duke University Vice Provost Ed Balleisen. (Some readers might be familiar with his earlier book on bankruptcy in Antibellum America).

As I learned when reviewing an earlier draft, Fraud is meticulously researched and completely fascinating, with plenty of careful attention to law and regulatory structures. The book's other virtues are well encapsulated by Kirkus:

"Balleisen casts a gimlet eye on the passing parade of hucksters and charlatans, peppering a narrative long on theory with juicy asides that build toward a comprehensive catalog of ‘Old Swindles in New Jargon’. . . . Ranging among the disciplines of history, economics, and psychology, Balleisen constructs a sturdy narrative of the many ways in which we have fallen prey to the swindler, and continue to do so, as well as of how American society and its institutions have tried to build protections against the con. But these protections eventually run up against accusations of violating ‘longstanding principles of due process,’ since the bigger the con, the more lawyers arrayed behind it."--Kirkus

Although it starts in the 19th Century, the book's breadth includes our recent "deregulatory" decades and the impact of that approach on fraud containment.  A book for our life and times for sure.

 

Chapter 9's Cabinet of Constitutional Curiosities: Ongoing Constitutional Violations

posted by Melissa Jacoby

Just a handful of modern big-city bankruptcies have revealed foundational questions about chapter 9's fit within federal courts and constitutional jurisprudence. Given that chapter 9 no longer is simply an adjustment of bond debt, bankrupt cities restructure a wide range of claims in their plans, including those arising from long-lingering disputes; to this point, a Ninth Circuit panel just heard oral argument on a dispute from Stockton's exercise of its eminent domain power twelve years before Stockton filed its chapter 9 petition, only to put the case on hold pending rehearing en banc of a chapter 11 equitable mootness dispute. But my commentary today focuses on the impact of events and decisions during a bankruptcy case. If cases no longer must be prepackaged, a city's decisionmakers have a longer period of automatic stay protection during which to act in ways that might generate controversy, causes of action, or both.

Recall, for example, Detroit's headline-making residential water shutoff policies and practices. The bankruptcy court used informal control to coax the city into increasing protections for low-income residents. In response to an adversary proceeding requesting more formal intervention, the bankruptcy court held it did not have the power to enter an order enjoining the policy or directing changes. But Judge Rhodes' analysis included a significant caveat: in a follow-up written ruling, Judge Rhodes held that section 904 of the Bankruptcy Code does not shield a municipal debtor from injunctions of ongoing constitutional violations:

The Court concludes that § 904 does not protect the City from the bankruptcy court's jurisdiction over the plaintiffs' constitutional claims because the City does not have the "governmental power" to violate the due process and equal protection mandates of the Constitution [citations omitted]. The City must comply with those constitutional mandates [citation omitted]. Accordingly, the Court concludes that those claims, unlike the plaintiffs' other claims, do survive the City's § 904 challenge.

Lyda v. City of Detroit, 2014 WL 6474081 at *5 (Bankr. E.D. Mich., Nov. 19, 2014). That holding did not get the Lyda plaintiffs far because, according to the court, the allegations failed to state a constitutional claim on which relief could be granted. The adversary proceeding was dismissed. Judge Rhodes' decision rightly signaled, though, that a municipal bankruptcy petition is not a license to engage in constitutional violations without consequence. The district court had affirmed the ruling. Lyda v. City of Detroit, 2015 WL 5461463 (E.D. Mich. Sept. 16, 2015).

Last week, the Sixth Circuit reversed the portion of the bankruptcy court's decision on the relationship between section 904 and alleged ongoing constitutional harms. The reversal did not change the outcome for the parties, but generates a troubling question: can municipal bankruptcy allow a city to continue to violate constitutional rights with no redress? Surely the answer must be "no"?

Continue reading "Chapter 9's Cabinet of Constitutional Curiosities: Ongoing Constitutional Violations" »

Civil Rights and Economic Justice in a New Era

posted by Melissa Jacoby

FlyerSharing news of this post-election civil rights conference on December 2, 2016 that, notably for Credit Slips, features pathbreaking research by Professors Mechele Dickerson and Bob Lawless (in collaboration with Dov Cohen and the late Jean Braucher) on the intersection of race with debt and bankruptcy and an exploration of how this research informs policymaking and advocacy going forward. Time permitting, I will address a different intersection between race and debt: collecting judgments arising from police misconduct when cities file for bankruptcy. Thanks to Professor Ted Shaw and the Center for Civil Rights for recognizing the role debtor-creditor research can play in the quest for equality. 

Register using this link.

 

Join us for the "The NCBJ at 90"

posted by Melissa Jacoby

ABLJInfoWill you be in San Francisco for the National Conference of Bankruptcy Judges annual meeting and related events? Please mark your calendars now for Thursday October 27, 3:oo pm Pacific Time: a special educational session honoring the 90th anniversary of the NCBJ.* We (Profs. Gebbia, Simkovic, Pottow, and me, with great guidance and input from Judge Colleen Brown and Judge Mel Hoffman) will be discussing original historical research on bankruptcy courts and bankruptcy law conducted for this occasion. Early abstracts can be found on the NCBJ blog. In the meantime, Prof. Gebbia has been posting quizzes; I suspect some Credit Slips readers would ace these tests, but you won't know until you try!

So please do join us on October 27 to be part of this commemoration and conversation.

* The mission of the NCBJ, according to its website, is:

The National Conference of Bankruptcy Judges is an association of the Bankruptcy Judges of the United States which has several purposes: to provide continuing legal education to judges, lawyers and other involved professionals, to promote cooperation among the Bankruptcy Judges, to secure a greater degree of quality and uniformity in the administration of the Bankruptcy system and to improve the practice of law in the Bankruptcy Courts of the United States.

 

Police Misconduct in Bankrupt Cities: Ninth Circuit Update

posted by Melissa Jacoby

"But Chapter 9 has awakened, and we do not presume further disputes over its interpretive and practical complexities will remain long at rest."

So says a panel of the U.S. Court of Appeals for the Ninth Circuit in Deocampo v. Potts (14-16192), filed since the last Credit Slips posting about civil rights debts in municipal bankruptcy. My working paper is newly revised to discuss the Ninth Circuit's ruling. Just a few points here.

The Ninth Circuit reached the right result in holding that the Vallejo bankruptcy did not relieve the police officer defendants of their individual liability for 1983 violations (excessive force). The court also held that Vallejo's state law obligation to indemnify the police officer defendants was not discharged by the city's bankruptcy, arising as it did after the city received its discharge.

Another element of the opinion should alarm civil rights advocates, however. For example, although it does not decide the issue, the panel suggests a surprising (especially for the Ninth Circuit) level of openness to explicit non-debtor releases of police officers in municipal bankruptcy restructuring plans. Surely everyone involved with the pending San Bernardino case is paying close attention.

Police Misconduct in Bankrupt Cities

posted by Melissa Jacoby

Bankruptcy filings by major cities have reinvigorated attention to municipal bankruptcy. As chapter 9 and its application have become more like chapter 11, a wide range of creditors are being swept into the process. As written before, city cases now have classes of general unsecured creditors. Those classes also have been including plaintiffs in civil rights lawsuits alleging unconstitutional police conduct. The proposed payouts vary.  San Bernardino's bankruptcy plan, which seeks to release the liability of non-debtor officers as well as the debtor, has been proposing a 1% payout. The confirmation hearing is currently set for October 2016.  Some cities with systemic police practice problems - Ferguson, Chicago - also are known to have pervasive financial difficulties. I am not suggesting or predicting they will end up in bankruptcy, but it is another reminder that civil rights advocates need to be up to speed on the impact of chapter 9, if only to be able to bargain in its shadow as other types of creditors do.

I have just posted a paper on this topic (revised and updated from a version posted earlier this summer). It walks through the issues and gives three brief case studies. Feedback from the Credit Slips readership would be very welcome, and/but please also pass along the link to civil rights lawyers who do § 1983 litigation. Here is the brief abstract:

When a financially distressed city files for bankruptcy, recovery for civil rights violations is at risk. This article examines the impact of bankruptcy on civil rights claims, with an emphasis on allegations of police misconduct resulting in lawsuits under 42 U.S.C. § 1983. We walk through how a bankruptcy filing affects civil rights plaintiffs, starting with the immediate injunction against litigation and debt collection activity, and ending with the legal release of debt and a restructuring plan. Using primary source materials, we offer three brief case studies: Detroit, Vallejo, and San Bernardino. We conclude with suggestions on where to go from here in research and advocacy.

Essential Resources on Burdens of Proof in Bankruptcy Litigation: Property Exemptions and Beyond

posted by Melissa Jacoby

Shutterstock_380908687Deliberations of the Advisory Committee on Bankruptcy Rules have generated great materials relevant to burdens of proof in bankruptcy litigation that judges and lawyers should read and keep on their shelves, whether physical or virtual. Judge Christopher Klein's Suggestion 15-BK-E, submitted in July of 2015, posited that Rule 4003(c) (which gives the objecting party the burden of proof in property exemption disputes) exceeds the authority of the Rules Enabling Act "with respect to claims of exemption that are made under state law that does not allocate the burden of proof to the objector." The document includes a detailed court decision, In re Tallerico, setting forth the reasoning. In a memorandum starting on page 67 of the agenda book downloadable here,  Assistant Reporter/Professor/prior Credit Slips guest Michelle Harner takes a deep dive into the intersection of burdens of proof and the Rules Enabling Act. The Harner memo considers two key Supreme Court decisions that present different standards. The first is Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000), which played a central role in Judge Klein's submission and court decision. The second is Hanna v. Plumer, 380 U.S. 460 (1965). Harner concludes that Hanna is more on point in the event of a conflict between a federal bankruptcy rule and state law. And, as Harner explains, the Supreme Court in Hanna "rejected the argument that a rule is either substantive or procedural for all purposes" (p78), walks through the questions to be considered, and seeks to apply them to the exemption issue at hand. It looks like the Bankruptcy Rules Committee will not be proposing changes to Rule 4003(c) at this time, but this memo should live on, alongside the case law, as an essential resource for judges and lawyers who encounter disputes over the propriety of burdens of proof in federal rules. 

Bookshelf image courtesy of Shutterstock.com

 

Puerto Rico: PROMESA and Presiding Judges

posted by Melissa Jacoby

Shutterstock_419380498H.R. 5278, containing debt restructuring authority and an oversight board for Puerto Rico, inched closer to passage after yesterday's approval by the House Natural Resources Committee. A combination of Rs and Ds rejected amendments that would have unraveled the compromise (scroll here for the amendments and their fates). They indicated an appreciation for the automatic stay, for the downsides of exempting classes of debt from impairment, and even for the assumption of risk taken by recent bond purchasers (bond disclosures quoted!). The discussion reflected the creditor-versus-creditor elements of the problem and the need for a legal mechanism to discourage holdouts and encourage compromise. Even though they have been asked not to call it "bankruptcy" (or to say "control board"), it was clear they know the restructuring provisions come from Title 11 of the U.S. Code.   

Given that derivation, many judges on the merit-selected bankruptcy bench could admirably handle the first-ever PROMESAnkruptcy, drawing on their directly-relevant experiences with large chapter 11s, if not chapter 9s.  

But section 308 of H.R. 5278 prevents that, and the Natural Resources Committee, in light of its jurisdiction, may not have been in the best position to appreciate the resulting risks. 

Continue reading "Puerto Rico: PROMESA and Presiding Judges" »

Puerto Rico: Debt Restructuring and Takings Law

posted by Melissa Jacoby

ConstitutionPer the last words of my PROMESA post, click here for an interview with Professor Charles Tabb, who discusses the (limited) impact of the Takings Clause on debt restructuring and moratorium legislation. 

Constitution image courtesy of Shutterstock.com

Puerto Rico: PROMESAnkruptcy

posted by Melissa Jacoby

301The House Natural Resources Committee has released draft legislation - with the acroynym PROMESA - in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. The contents continued to shift over the past few days but a recent version is here. PROMESA spans many topics, including an oversight board, employment law, infrastructure, and beyond. Without detracting from the importance of this range of topics, this is Credit Slips, so these initial observations focus on debt restructuring provisions principally housed in Title III of the bill.

  1. PROMESAnkruptcy: The new territorial debt restructuring law would not be in title 11 (home of the Bankruptcy Code). But as shown in the visual, section 301 incorporates many key title 11/Bankruptcy Code provisions, including automatic stay, financing, majority voting rules, cramdown, discharge, and the discharge injunction. Other sections of PROMESA repurpose title 11 provisions with slight tweaks, while still others expressly depart from current bankruptcy law and make new rules. For the lawyers, also note that the Federal Rules of Bankruptcy Procedure also apply (section 308). Still, the drafters don't want to call it bankruptcy or chapter 9. Okay. I commend the drafters for recognizing the importance of a mechanism to bind holdouts and I'll call it whatever they want, within reason. PROMESAnkruptcy may sound a little funny, but let's be clear that Puerto Rico's dire situation is no joke. 

Continue reading "Puerto Rico: PROMESAnkruptcy" »

Puerto Rico: The Recovery Act's Potential Second Wind

posted by Melissa Jacoby

 

This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.

Continue reading "Puerto Rico: The Recovery Act's Potential Second Wind " »

Puerto Rico: Help Still Wanted

posted by Melissa Jacoby

BranchFor the past two weeks, Credit Slips posts have considered the role of the Executive Branch in facilitating a Puerto Rico debt restructuring in the absence of Congressional action. That constraint is hereby relaxed, and thus future posts may well include the role of Congress and the judiciary in various combinations. For example, whatever one's view of the GM and Chrysler bankruptcies, they show that the administration can shape a restructuring by working within the framework of formal bankruptcy law. Imagine, for example, that Congress adopts the most modest of the proposals, H.R. 870, which merely fixes the unfortunate exclusion of Puerto Rico municipalities from ordinary chapter 9. The administration could put together post-filing financing packages with the stream of loan proceeds conditioned on the inclusion of various covenants, including those imposing fiscal reforms.  

Meanwhile, March 22 is drawing near. On that date, the United States Supreme Court will review a legal challenge to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. Below the jump are reminders and new points about the role of this court fight in Puerto Rico's debt crisis and why Congress and the Executive Branch are not off the hook. 

Continue reading "Puerto Rico: Help Still Wanted" »

Puerto Rico: LoPucki's Virtual Bankruptcy Proposal

posted by Melissa Jacoby

Hard to believe it has been over a year since a creditor representative opposing H.R. 870 characterized chapter 9 municipal bankruptcy as "the Wild West" in Congressional testimony. Whatever uncertainties bankruptcy law contains (and, sure, they are not trivial), our symposium reveals that the true legal wilderness in government debt restructuring lies beyond the boundaries of title 11. 

Enriching the collective brainstorm is a proposal by the always-innovative UCLA law professor Lynn M. LoPucki published in the Huffington Post. Here's the link, and here's a quote:  

LoPuckiVirtual9

 

 

 

 

 

The full story offers plenty of caveats and risks for creditors - including that this approach could be considerably less protective of creditors' interests than bankruptcy - so do read the whole thing. Although the piece does not expressly mention the Executive Branch, prior Credit Slips posts (such as here) have illustrated the potential combination of the Administration's use of soft powers to promote restructuring efforts formally initiated by Puerto Rico - again, potentially without the creditor protections normally associated with bankruptcy and without other pieces of financial reform that many have advocated. 

 

 

[UPDATED] Puerto Rico: More Views, Including on the Role of the Obama Administration

posted by Melissa Jacoby

Watch here at 1pm ET to see former Treasury official Brad Setser, now senior fellow at the Council on Foreign Relations, talk about Puerto Rico (along with Cate Long, Dick Ravitch, and Aaron Kuriloff). [March 9 UPDATE: transcript available here]

Read here for proposals of Puerto Rico governor candidate Ricardo Rosselló Nevares, including Treasury assisting with interim financing, with an analogy to GM and Chrysler during the 2008 financial crisis (see point 6 in the document).

[March 9 UPDATE: lest anyone need reminding of what can happen when a majority of creditors cannot bind holdouts, check out Anna Gelpern's recent assessment of the Argentina settlement]  

 

Puerto Rico Symposium: Of Wills and Ways

posted by Melissa Jacoby

JigsawDebt relief without Congress? No one promised it would be pretty.  

Our brainstorm (remember the ground rules) has included Levitin's MacGyver-inspired local currency, eminent domain, and liberally-interpreted exchange stabilization, Weidemaier's use of COFINA doubts to wedge open the door for a Executive Branch/Puerto Rico partnership, and, thanks to economist Arturo Estrella, a long menu of options with examples, summarized succinctly as "where there is a will, there is a way" (p. 1) (english report at bottom of this page). Could the federal government underwrite new bonds in an exchange offer, asks Pottow? Be the mediator with a big stick, asks Lubben?  Might a holdout creditor be liable to shareholders if it rebuffed a reasonable deal, asks Jiménez? (scroll to the comments). Marc Joffe notes the potential analogy of the City of Hercules tender offer (as well as the fact that Levitin's local currency suggestion has a history from the Depression). 

Lawless reminds us of the risks associated with discriminatory treatment of Puerto Rico's debt and access to legal tools. Of course, there is a long history here. Maria de los Angeles Trigo points to UT professor Bartholomew Sparrow's study of the Insular cases. And while most expect debt relief will be conditioned on some sort of fiscal oversight, it needs to be designed in a way to avoid the foibles of the past.

Returning to Lubben's mediation theme, let's push the brainstorming a step farther: could Treasury appoint a federal judge, such as Chief District Judge Gerald Rosen (E.D. Mich.), to oversee the mediation, and demand that all creditors participate in good faith until released? Even in the absence of legal authority for this move, would creditors formally object or fail to show up? 

Thanks to participants and readers for active involvement so far, and please keep your thoughts and reactions coming this way.  

Puzzle photo courtesy of Shutterstock.com

Credit Slips Presents: A Virtual Symposium on Puerto Rico

posted by Melissa Jacoby

TablePuerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.

Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action? 

On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.

Continue reading "Credit Slips Presents: A Virtual Symposium on Puerto Rico" »

Who "Presides" over Chapter 13 Plan Confirmation Hearings?

posted by Melissa Jacoby

Shutterstock_329900393Temple Law Review will soon publish a volume honoring Bill Whitford, based on a conference from last fall. That event was particularly special for an additional reason: it turned out to be the last opportunity, for many of us, to spend time with another inspiring leader in our field, Jean Braucher

My own short contribution, on judicial oversight in chapter 13 bankruptcies, has just been posted here. We will share the word when the entire volume is available - including, I believe, a piece from Jean.

Gavel image courtesy of Shutterstock

Municipal Bankruptcy After Detroit

posted by Melissa Jacoby

ArrowsA new commentary stemming from my draft article Federalism Form and Function in the Detroit Bankruptcy is now posted on the Columbia Law School Blue Sky Blog. The post frames the current skirmishes over other municipalities' access to chapter 9 at least in part as a referendum on the procedural tools used by the court to supervise the Detroit bankruptcy. For two prior Credit Slips posts on the article, see here and here.

Arrow image courtesy of Shutterstock.com

Puerto Rico Seeks Help From the Supreme Court

posted by Melissa Jacoby

CertPetitionPuerto Rico is asking the U.S. Supreme Court to review the First Circuit decision that Puerto Rico's Recovery Act is preempted and thus unconstitutional. Here's the petition. In addition to parsing the legal issues, the petition is framed around Puerto Rico's financial emergency, the need for the Supreme Court to step in notwithstanding the lack of circuit split (or even a dissent to the First Circuit ruling). It makes sense that Puerto Rico would challenge a ruling making it harder for the Commonwealth, in a nebulous legal zone, to write laws to solve its problems. The difficulty with the financial crisis framing is that even if (1) the Supreme Court agreed to hear the matter, (2) heard the matter quickly, (3) decided the matter quickly, and (4) actually reversed the First Circuit - a chain of tough "even ifs"  - public corporations in Puerto Rico will not be able to start using the law because another formidable constitutional challenge is still alive: whether the Recovery Act can survive scrutiny under the Contracts Clause. That hotly contested fight would be fact intensive in a way that the preemption dispute was not. A fix from the federal government must come from one of the other two branches. Speaking of which, the persuasive argument against H.R. 870/S.1774 continue to be underwhelming. For example, the fact that chapter 9 would not be a complete solution for, say, PREPA, is really beside the point.

If the Supreme Court agreed to review the First Circuit's decision, then fellow Slipster Stephen Lubben's work on Puerto Rico and the Bankruptcy Clause would become even more important than it is already. While I am not on board with Stephen's conclusions regarding preemption, his research and arguments are central to this debate. So check out his article if you haven't already.

Picking a Judge to Preside over a Municipal Bankruptcy

posted by Melissa Jacoby

GavelLast week I introduced to Credit Slips readers my draft article on federal court oversight of Detroit's bankruptcy. An easily overlooked element of what I called The Detroit Blueprint is non-random judge selection, required by Congress for municipal bankruptcy cases.

Departing from the random assignment norm in the federal judiciary, section 921(b) of the Bankruptcy Code requires the chief judge of the applicable circuit court of appeals to select the judge who will preside over a municipal bankruptcy. In 1997, the National Bankruptcy Review Commission unanimously recommended eliminating section 921(b).  That Commission's Final Report observed that the fear prompting the provision - random draw of a judge unable to handle the case - was no longer salient. Congress did not take up this recommendation. What difference did section 921(b) make in Detroit?

Continue reading "Picking a Judge to Preside over a Municipal Bankruptcy" »

Consumer Financial Protection Clinic Position

posted by Melissa Jacoby

Here's an opportunity to supervise a consumer financial protection clinic that has done some great work - information on the position and how to apply here

Chapter 9 and Federal Courts: The Detroit Blueprint

posted by Melissa Jacoby

BlueprintAmong its other effects, the Puerto Rico debt crisis has dramatically increased the number of public figures and politicians whose verbal repertoire includes the term "chapter 9." Bondholders' resistance to chapter 9 access for Puerto Rico municipalities is fueled in part by an earlier public debt crisis: Detroit. As suggested in my Credit Slips posts, Detroit made some new law but its major lasting legacy is procedural. I just posted a draft article, based on original empirical research, documenting that procedural blueprint, Federalism Form and Function in the Detroit Bankruptcy. It shows the paths by which the federal court became a major institutional actor throughout Detroit's restructuring.

After reading scholarship and case law on chapter 9, one might envision that, because of the Tenth Amendment to the U.S. Constitution and federalism principles, presiding judges are essentially locked in a closet for much of the duration, released only when the parties affirmatively seek an adjudicator. That's never entirely accurate, but to say it is inaccurate regarding Detroit is the understatement of the year.

Although The Detroit Blueprint will have broader ripple effects, I am dubious that its most significant elements could or would be implemented in, say, a PREPA bankruptcy. Detroit should not be an impediment to changing the Bankruptcy Code to cure the wrongful omission of Puerto Rico municipalities. More on that, and additional perspectives from the article, in future posts.  
 

Image courtesy of Shutterstock

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