postings by Dalié Jiménez

Aurelius v. Puerto Rican Control Board (and "What Possibly Could be the Logic Behind Puerto Rico Being in the First Circuit?")

posted by Mitu Gulati

Last Monday, December 3, the First Circuit heard an oral argument that I have been looking forward to for ages.  The case involves an infamously aggressive hedge fund making an audacious challenge to the constitutionality of the Puerto Rican Control Board—an argument that is framed (hilariously, I think) as rescuing the Puerto Rican people from tyranny.  The events that followed did not disappoint in terms of drama. 

Though complex to answer, question in the case is easily put: Did the process by which the Puerto Rican Control Board was put in place violate the Appointments Clause of the US constitution? 

The lawyering was superb, which was not surprising, given that two legendary former SGs, Ted Olson and Don Verrilli, were at the lectern. But the First Circuit judges were ready and raring to go, and it barely took a minute before they launched into tough questions.  Judge Juan Torruella was especially on target; he knows the intricacies of the history and case law relating to Puerto Rico’s status better than almost anyone else and it was a treat to listen to his exchanges with the superstar lawyers.  (There were other lawyers making arguments as well, but the First Circuit panel was primarily interested in the Olson-Verrilli positions.)The audio file is available here, and is well worth a listen.

Before the arguments began, I was inclined to think that the First Circuit would take the safe route by affirming the district court and rejecting Aurelius’ challenge.  After all, this seems to be a case destined for the Supreme Court.  But after hearing the oral argument, I no longer think that. I’m predicting instead a reversal of the trial court (FWIW, my co-author, Joseph Blocher, with whom I’ve written about Puerto Rico’s Right of Accession, is not so sure after listening to the same oral argument and he is much better at predicting case outcomes than I am).  The judges seem to think that there was probably a violation of the Appointments clause, but that they would be have to be careful in crafting their ruling so as to cabin any possible negative consequences for Puerto Rico and its debt restructuring process. (For other discussions of the oral argument, along with predictions about how the case is likely to come out, see on this, making predictions, see here (article in Bond Buyer) and here (post on the PuertoRicoControlBoardWatch blog)).

Below, I’ll set out my oversimplified view of the primary arguments on either side.  But before going there, I couldn’t help but wondering why it is that Puerto Rico is in the First Circuit, with the Puerto Rican lawyers having to all trek up to Boston to make their arguments.  Is there some special relationship with the states that make up the First Circuit to Puerto Rico such that the judges from there have a nuanced understanding of Puerto Rico’s bizarre place within the US constitutional structure? Given that Puerto Rico already has no senators to push for judges with special expertise in, and concern for, the people of the Commonwealth, it seems to add insult to injury to force the cases from Puerto Rico to go on appeal to a set of appellate court judges in the north east of the mainland who will likely have little connection to the island (with rare exceptions such as Judge Torruella). I’ve been thinking about this lately because of a conference my colleague, Marin Levy, hosted last week where one of the very interesting papers was about “Are Federal Courts National Courts?” At the conference, the general sentiment in the room of was that there is some value to having federal judges with some specialized local knowledge of the issues.  Really, though? Do the judges from the states that comprise the First Circuit have specialized local knowledge about Puerto Rico? 

I've digressed. Back to the basics of the Aurelius oral argument.

Continue reading "Aurelius v. Puerto Rican Control Board (and "What Possibly Could be the Logic Behind Puerto Rico Being in the First Circuit?")" »

Venezuelan Bonds: The Game is Afoot

posted by Mitu Gulati

Venezuela began defaulting on its bonds about fifteen months ago and is now in default on almost all of its outstanding bonds (except one that is backed by collateral).  The creditors, for these many months, have shown remarkable forbearance in refraining from accelerating the bonds and seeking judgments. 

The restraint on the part of the creditors for these past many months, I suspect, was not out of any especially benevolent feelings the creditors have towards the Venezuelan government.  Part of the explanation has to do with the different interest rates that applies to unpaid claims if one has an ordinary unpaid claim versus one that has been converted into a judgment (the latter is significantly lower).  On the flip side, the legal protections that apply to a judgment are much stronger (no need to worry about CACs or Exit Consents, and one can grab assets before anyone who has refrained from judgement).  Plus, the reality of most sovereign debt restructurings is that unpaid claims on interest usually don’t get paid out to anyone anyway (since the sovereign can’t even pay the base claims).  For those who want to know more about this, Mark and I talked about these matters here and here, when we were teaching our class on the Venezuelan sovereign debt some months ago.

Once one set of creditors accelerates though, then that puts everyone else who has not done so at a disadvantage because these first guys have an advantage in the litigation/attachment game.  And before today, only a few arbitration claim holders and one Promissory Note had begun the litigation game.  This had been causing anxiety among the bondholders I’ve been chatting with, but they had not made the move to coordinate into blocks of sufficient size to demand acceleration (most of the bonds have a requirement for acceleration of 25% of the holders in principal amount).

Today’s news from Reuters is big though. A group of hedge funds has put together the necessary number of bonds in the Venezuelan bond due 2034.  This is a rather special bond, if memory serves, because an attempt by the sovereign to force a restructuring can be blocked by 15% of the holders (in principal amount) rather than the typical requirement of 25%.  Bottom line: this bond is more litigation friendly.

Continue reading "Venezuelan Bonds: The Game is Afoot" »

Almost Citizens -- by Sam Erman

posted by Mitu Gulati

For those of you, who like me have been following the Puerto Rican debt drama, this wonderful new book by Sam Erman of USC might be of interest.  There are many wonderful and insightful stories in this book that I was altogether unaware of, despite having spent a lot of time reading about Puerto Rico's bizarre constitutional status.  Ultimately though, the most intriguing and insightful aspect of the book, to me, was the connection that Sam draws between the strange "foreign in a domestic sense" status of Puerto Rico and the events surrounding Reconstruction from the same period of time.

Sam was supposed to come to Duke last year to present this to the seminar that I run on Race, Law & Politics with Guy Charles, but we got hit by a snow storm on the day of his talk.  My initial thought had been to cancel the discussion and move on to the next paper.  But the students in the seminar (and Guy) had liked the draft of the book so much that they asked whether we might have a session to discuss it despite the fact that Sam was not going to be able to make it to Durham any longer.  We ended up having a fun discussion with my two wonderful con law colleagues, Walter Dellinger and Joseph Blocher. Indeed, that was perhaps our best session of the term (notwithstanding my general distaste for con law discussions). 

Next week, I hope to -- after talking to Walter and Joseph more -- do a little post on the recent oral argument in the first circuit about the constitutionality of the Puerto Rican Control Board.  That case, if it comes out the way I think it might, could turn the apple cart upside down.  But I need to listen to that oral argument tape again.

Here is the official book blurb for Sam's book:

"Almost Citizens lays out the tragic story of how the United States denied Puerto Ricans full citizenship following annexation of the island in 1898. As America became an overseas empire, a handful of remarkable Puerto Ricans debated with U.S. legislators, presidents, judges, and others over who was a citizen and what citizenship meant. This struggle caused a fundamental shift in constitutional jurisprudence: away from the post-Civil War regime of citizenship, rights, and statehood and toward doctrines that accommodated racist imperial governance. Erman’s gripping account shows how, in the wake of the Spanish–American War, administrators, lawmakers, and presidents, together with judges, deployed creativity and ambiguity to transform constitutional law and interpretation over a quarter century of debate and litigation. The result is a history in which the United States and Latin America, Reconstruction and empire, and law and bureaucracy intertwine."

No One Wants to Serve on House Financial Services?

posted by Adam Levitin

The Washington Post reports today that many of the incoming Democratic freshman representatives do not want to serve on the House Financial Services Committee, traditionally a plum assignment because it facilitates representatives' ability to fund-raise for their reelection.  I'm proud to say that the member-elect who is proudly bucking the trend is our former co-blogger, Katherine Porter, and I can confidently say that her interest in the committee has nothing to do with fund-raising and everything to do with its jurisdiction.  

There are a lot of good reasons an incoming member might not want to serve on HFS--the member might have expertise or interest that more closely tracks the jurisdiction of another committee.  But I worry that the lack of interest also reflects a really problematic trend on the left. While many progressive politicians like to decry abuses in the financial services industry, they often have little to no understanding of the industry and aren't interested in gaining one.  The industry and its regulation are complex.  Its often not as intuitively understandable as, say, issues of criminal justice reform.  But its consequences are at least as far-reaching, both because all Americans depend on financial services and because of the influence of financial services on the whole political process.  Any politician who is concerned about social inequality ought to be deeply engaged with financial regulation.  It's not the low-hanging fruit, perhaps, but it's where the future of the middle class will be decided.  

Sadly, this phenomenon isn't limited to progressive politicians.  It's endemic on law school faculties.  I recall several years ago hearing colleagues bemoaning the financial crisis foreclosure crisis, but having absolutely no clue about what led up to it and what was contributing to it.  They did, however, have lots of strong normative views on methods of Constitutional interpretation.  The irony here is that my colleagues very much understand that dry, technical legal rules can have enormous social consequences.  But they prefer to engage primarily with social justice, rather than economic justice issues, even though the two are intimately linked.  I suspect this is part of the general phenomenon of the legal academy having disengaged with its traditional bread-and-butter---commercial law.  But it meant that much of the progressive establishment was asleep at the wheel (if not financially co-opted) when financial deregulation occurred in the 1990s and 2000s. 

To be sure, there's a small cadre of progressive thought-leaders and politicians (most notably some of our former co-bloggers) who have taken the time to understand the financial system in depth, and they've contributed in an out-sized manner to financial regulatory debates.  But the fact remains that most progressives don't want to touch financial and commercial regulation.  And we're all the worse off for it.  

Maybe it's not a new problem after all

posted by Stephen Lubben

Consider:

Seldom are business bankruptcy cases initiated under Chapters I to VII, inclusive, as well as under Chapters X and XI, where all or substantially all of the assets have not been pledged as collateral for the payment of debts. This pledging of assets tends to create serious questions in connection with the administration of the estates. In cases where the debtor is engaged in business, the receiver or trustee is quite often without free assets with which to carry on operations. There is no money in hand and no means of raising funds necessary to take care of fixed and direct charges essential for the maintenance of the business, without impinging upon the rights of the secured creditors. Debtors who might otherwise be reorganized in the public interest are unable to continue in business long enough to develop alternate means of financing and negotiate accommodations with their creditors.

Charles Seligson, Major Problems for Consideration by the Commission on the Bankruptcy Laws of the United States, 45 Am. Bankr. L.J. 73, 87-88 (1971).

Procedural Justice and Corporate Reorganization

posted by Pamela Foohey

I just posted to the Social Science Research Network my response -- Jevic's Promise: Procedural Justice in Chapter 11 -- to Jonathan Lipson's recent article about Czyzewski v. Jevic Holding Corp. and structured dismissals. In his article, The Secret Life of Priority: Corporate Reorganization After Jevic, Lipson frames Jevic as about process, as compared to its usual frame as about priority. Drawing from this frame, my response focuses on Jevic's implications for procedural justice and corporate reorganization.

The process values that Lipson identifies--particularly participation and procedural integrity--align with research about what people want from the justice system's procedures. This procedural justice research also teaches that the process of adjudication is as important as the final outcome. Combining Lipson's arguments with procedural justice research, I argue that corporate reorganization's process has been co-opted in the name of value preservation. I also rely on Slipster Melissa Jacoby's recent work conceptualizing corporate bankruptcy as a public-private partnership, which she's blogged about here and here, in arguing that Jevic's emphasis on process should embolden bankruptcy courts to more rigorously assess chapter 11's procedures. In the response, I provide two examples.

Continue reading "Procedural Justice and Corporate Reorganization" »

Developing Personal Insolvency Crises in China and India

posted by Jason Kilborn

What is it like to be desperately insolvent with no access to a relief system like the bankruptcy discharge? Many, many people are likely to find out in the coming months in China and India in light of recent developments in these mammoth markets. Neither country currently offers individuals effective relief from financial distress, though both have been actively but languidly considering the adoption of such relief for a long time. That relief can't come soon enough, though I'm not optimistic about its arrival anytime in the near future.

In China, the government is stepping up its efforts to all but eliminate P2P lending platforms, the only reliable source of finance for most individuals and small businesses. I'm afraid Bob Lawless's "paradox of consumer credit" will apply here: a rapid constriction in the supply of consumer/small business credit will lead to a spike in financial distress that can't be avoided by refinancing ... leading to even greater need for an individual bankruptcy remedy that China still lacks. To be sure, many of these P2P lending networks have been ponzi schemes, victimizing innocent investor-lenders and needing to be shut down, but I fear an over-correction here. Resolving 1.22 trillion RMB ($176 billion) in loans extended by 50 million investor-lenders to goodness knows how many small borrowers will be no small feat, especially with no formal insolvency framework to organize the effort. 

Meanwhile in India, the hot mess of corporate debt has begun to cool off, leaving debt buyers hungry for even riskier loans to purchase and pursue. So they're refocusing on defaulted consumer debt. The short-term target is debt secured by homes and cars, likely to produce greater returns from the collateral, but what of the inevitable deficiencies? Unsecured personal liability for deficiency judgments will certainly be on the to-do list of these buyers in the near term, and they are already making plans for the longer term to expand to unsecured education and credit card loans.

While India and China have both made admirable progress in reforming their business insolvency systems, the tragedy unfolding in the consumer and small business sectors cries out for serious attention. These debtors are not deadbeats whom authorities can be content to leave to their chosen fates; they are the victims of global economic volatility, the lifeblood of developing economies, and the center of harmonious societies. China and India would advance and humanize their development in a massive way by finally addressing the gaping hole in their insolvency frameworks to add proper treatment for individual debtors.

Expanding the Supreme Court to Depoliticize It

posted by Adam Levitin

I've got an op-ed in The Hill that calls for an expansion of the Supreme Court as a way to depoliticize it.  And to be clear, I'm not calling for Court-packing by Dems.  That would only require adding a couple of seats.  I'm calling for a major structural change in the Court—an expansion plus a shift to sitting in panels.  And I'm perfectly fine if the majority of the initial picks went to President Trump, as I think that the structural change would be very healthy for the Court and the political process, and with a larger Court, there will be much more frequent turnover among Justices.  

I'm sure my proposal will be some skepticism (to say it lightly), whether because folks think this is a barely closeted Court-packing scheme (but why bother with this when there's a much simpler way to pack the Court), or because they somehow think that there's something sacred or efficient about 9 Justices (clearly those folks have never been to a SCOTUS oral argument, but I suspect those are also the same folks with the naive idea that judges ever merely apply the law as written).  

Yet, I think a SCOTUS expansion is coming in any future Democratic administration for a very simple reason:  Republicans overplayed their hand and upset the basic equilibrium of the Court.  Democrats were far from happy with the Court before Trump, but the Court was basically a wash:  it made both Dems and Reps unhappy on certain issues.  As long as no side overreached, the Court was able to maintain a level of legitimacy.  If the Court now veers right, that will be lost, and all bets are off about preserving its current form.  There are lots of ways the Court could be remade; I'm trying to find one that creates a healthier judicial system.  And note that it only takes 50 votes in the Senate, not a Constitutional amendment, to expand the Court, but that it can't be dialed back without vacancies or a Constitutional amendment.  

For Cause Removal of the CFPB Director?

posted by Adam Levitin

Mick John Michael Mulvaney's callow pursuit of a CFPB name change raises an intriguing question:  what should be done with a CFPB Director who spends all of his or her time showboating with political issues rather than actually carrying out the law?  

The CFPB Director is removable only for cause, as the PHH case confirmed. Back with Richard Cordray was Director, Republicans reportedly were attempting to assemble a dossier to justify his for-cause removal.  In the case of Cordray, the gist of the allegations was that he overstepped his authority by daring to issue non-binding regulatory guidance about indirect auto lending or was profligate in the renovations of the CFPB's 1960s-era headquarters building. But here's the thing.  The "for cause" removal statute has actual statutory language, and it does not explicitly include either overstepping authority or profligacy.  Instead, it covers "inefficiency, neglect of duty, or malfeasance in office."  There's some imprecision in these words, but the statutory language seems aimed at failure to act, rather than over-zealous action.  This interpretation makes sense because the courts are available to prevent against over-zealous actions, but only the President can take care that the law is in fact faithfully executed.  

As long as Donald Trump is President, the for cause removal language is of little importance.  Kathleen Kraninger is about to be confirmed as the CFPB Director, and her five-year term will extend past 2020, which means she might potentially serve under a Democrat President's administration.  If Kraninger operates similar to Mulvaney, focusing on things like the name of the agency and internal restructuring designed to undermine the agency's effectiveness, rather than on carrying out the agency's mission, that "for cause" dismissal language could actually have some bite.  

Let me be clear.  Historically, for cause dismissal has never been used.  I am unaware of any past case approving the actual for cause dismissal of an agency head (but let me know if I missed one).  Yet I think the implicit political rules have changed over the last few years such that this is no longer something that is beyond the Pale.  If Kraninger follows in the footsteps of Mulvaney, then at the very least, a Democratic President in 2021 would have a credible threat of for cause removal of Kraninger (and there would certainly be political pressure for the President to act).  This counsels for Kraninger to take a more energetic approach to carrying out the CFPB's statutory mission than that pursued by Mr. Mulvaney, who has gotten hung up on the statutory name and political headlining at the expense of the agency's mission

The Cost of the CFPB Name Change

posted by Adam Levitin

Mick John Michael Mulvaney's wanted to change the CFPB's name to the Bureau of Consumer Financial Protection (BCFP), and indeed, the Bureau has already changed its signage and the name it uses on some of its communications.  But the name change has not had full effect yet, and it is now reported that it would not only cost the CFPB more than as much as $19 million, but it could cost regulated firms as much as $300 million.  

It's worth comparing that $300 million cost to industry for Mulvaney's vainglorious renaming project to the funds that the Bureau has recovered from wrongdoer's on Mulvaney's watch.

Continue reading "The Cost of the CFPB Name Change" »

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.

Reflections on the foreclosure crisis 10th anniversary

posted by Alan White

Before it was the global financial crisis, we called it the subprime crisis. The slow, painful recovery, and the ever-widening income and wealth inequality, are the results of policy choices made before and after the crisis. Before 2007, legislators and regulators cheered on risky subprime mortgage lending as the "democratization of credit." High-rate, high-fee mortgages transferred income massively from working- and middle-class buyers and owners of homes to securities investors.

After the crisis, policymakers had a choice, to allocate the trillions in wealth losses to investors, borrowers or taxpayers. U.S. policy was for taxpayers to lend to banks until the borrowers had finished absorbing all the losses. The roughly $400 billion taxpayers lent out to banks via the TARP bailout was mostly repaid, apart from about $30 billion in incentives paid to the mortgage industry to support about 2 million home loan modifications, and $12 billion spent to rescue the US auto industry. The $190 billion Fannie/Freddie bailout has also returned a profit to the US Treasury.  Banks recovered quickly and are now earning $200 billion in annual profits. Of course, equity investors, particularly those wiped out by Lehman and many other bankruptcies, or by the global downturn generally, lost trillions as well. The long-term impact, however, was to shift corporate debt to government balance sheets, while leaving households overleveraged.

Thomas Herndon has calculated that 2008-2014 subprime mortgage modifications added $20 billion to homeowner debt (eroding wealth by $20 billion). In other words, all the modification and workout programs of the Bush and Obama administrations did not reduce homeowner debt by a penny. In fact, mortgage lenders added $20 billion (net) fees and interest onto the backs of distressed homeowners. During the same period, $600 billion in foreclosure losses were written off by private mortgage-backed securities investors, implying a similar or greater loss in wealth for foreclosed homeowners. These data include only the private-label side of the housing finance market; adding the debt increase and wealth losses for Fannie and Freddie homeowners could conceivably double the totals.

Nearly 9 million homes were foreclosed from 2007 to 2016. While some were investor-owned, even those often resulted in the eviction of tenant families. Four and one-half million homeowners still remain underwater, i.e. owe more mortgage debt than the value of their home.

 While baby boomers' housing wealth was decimated by foreclosures and increasing mortgage debt, millennials piled on student loan debt, closing the door to home buying and asset building. A recovery built on incomplete deleveraging, and new waves of consumer debt buildup, contains the seeds of the next crisis. While various pundits bemoan the resurgent federal fiscal debt, we would do well to address policies that continue to stoke unsustainable household debt.

My Favorite Two Sentences From a Recent Case . . .

posted by Mitu Gulati

Over the past few days, I've been struggling with trying to understand a new NY case involving secured debt. The fact that I had to struggle to understand the transaction made me feel insecure enough (on occasion,  I purport to teach corporate debt), but then when I tried to delve deeper into the case by looking at the underlying contracts (the "Collateral Pledge" Agreement - yuck), I got even more confused and insecure because I found the darn thing utterly incomprehensible.  Indeed, a whole half of that document seemed like it had been drafted for an entirely different type of transaction and the crucial provision that I was looking for didn't even seem to be there. But since I couldn't understand it, I couldn't be sure.  Maybe that provision was buried in some other provision that I couldn't figure out . . .

Then, while wallowing in insecurity, I came across this from a recent bankruptcy case out of the Third Circuit (thank you. Third Circuit blog for making me feel better):

The Third Circuit affirmed a ruling leaving in place a tenant’s favorable lease terms after the landlord declared bankruptcy and was purchased free and clear. Best line: “The Lease is long and neither simple nor direct. Indeed, it is an almost impenetrable web of formulas, defined terms, and cross-references–a ‘bloated morass,’ in the words of the Bankruptcy Court.”

I'm turning now to reading the briefs for the Aurelius v. Puerto Rican Control Board/Commonwealth of Puerto Rico case (oral argument on Monday).  As compared to that Collateral Pledge Agreement, these briefs read like a beautiful novel.  The briefs on both sides are beautifully written, in clear, short and comprehensible sentences.  Maybe litigators should be the ones drafting contracts?

Holiday Reading Recommendation and a Research Question on the 1MDB Case

posted by Mitu Gulati

The 1MDB case has been on the front pages of the financial papers on a number of occasions recently. The reason: The US justice system is investigating the scam and senior executives from everyone’s favorite ethical investment back, Goldman Sachs, including Lloyd Blankfein, have been caught up in it. And this leads me to my recommendation for holiday reading, if you like reading financial fraud books. The book is The Billion Dollar Whale, by Bradley Hope and Tom Wright of the WSJ. At first, I thought that the book was about the London Whale, but it turns out to be about the rise and fall of a Wharton educated Malaysian named Jho Low – a fascinating character who appears to have engineered one of the biggest financial frauds of the century, while also throwing the most ostentatious parties ever. If you want more background, there is a fun discussion of the book on my favorite financial podcast, Slate Money (Emily Peck, Anna Szymanski and Felix Salmon are a brilliant, and often hilarious, combination). Indeed, I picked up the book after listening to their podcast on it.  There is also a short, but on the money, review in the New Yorker by Sheelah Kolhatkar. Among the many colorful characters involved in the version of the story told in The Billion Dollar Whale are Gary Cohn (of Goldman and the Trump’s economic advisory team), Leo DiCaprio, and the Wolf of Wall Street (both the movie and the main character, Jordan Belfort).

Continue reading "Holiday Reading Recommendation and a Research Question on the 1MDB Case" »

Boulder Summer Conference on Consumer Financial Decision Making

posted by Bob Lawless

One of my favorite conferences is the Conference on Consumer Financial Decision Making held every summer in Boulder, Colorado, and I am not the only one who feels that way. Next year's conference will occur from May 19-21, 2019. Professor John Lynch from the University of Colorado wrote me two weeks ago to remind everyone that the submission deadline is December 7. My other commitments have been keeping me busy so blame me for posting here so close to the deadline -- did I mention that John wrote me two weeks ago?

The conference is very interdisciplinary. The call for submissions says, "a very high level of opportunity for conversation and interaction around the ideas presented." They are not kidding. If you are a Credit Slips reader, the sessions will be of interest to you. The conference presentations are great. The poster session is fascinating. Whether you are a presenter or not, you will learn a lot. When I have presented, the comments I have received are some of the best feedback I get on a project. The proceedings are at the posh St. Julien Hotel. And, when conference sessions are not occuring, you are in Boulder, Colorado, in May.

To submit, you need to send in an extended abstract of no more than one page in length. Rather than post further details here, I will just link you to the instructions on the web page where you can submit an abstract. More information about the 2019 conference is available on the main conference web page.

American Bar Association: exempt lawyers from FDCPA

posted by Alan White

The American Bar Association, at the urging of its debt collection lawyer members, is supporting HR 5082, which would partly exempt lawyers from the Fair Debt Collection Practices Act. Misrepresenting the bill as a technical clarification, the ABA is throwing its support, despite the consumer bar's opposition, behind legislation that would insulate collection lawyers from federal civil liability for venue abuse, sewer service, suits to collect time-barred or bankrupted debts, and garnishment of exempt wages and savings. Under an Administration undermining consumer protection and the rule of law at every turn, the ABA could deploy its lobbying clout in service of far more worthy causes.

 

Update on Catholic Dioceses's Chapter 11 Filings, Fall 2018 Edition

posted by Pamela Foohey

A few weeks ago, Marie Reilly (Penn State Law, University Park) posted to SSRN a new paper, Catholic Dioceses in Bankruptcy, which details the outcomes of the eighteen chapter 11 cases filed by Catholic dioceses and religious institutes since 2004. The paper discusses some of the issues that I have blogged about individually over the past few years -- of note, RFRA and fraudulent conveyances, as well as the long-running Minneapolis and Saint Paul diocese case that ended in a settlement agreement which increased payout to sexual abuse claimants by $50 million from the debtor's original proposed plan. The paper also includes a succinct overview of how canon law, business organizational law, and property law interact in these cases. In short, if you are looking for a primer on broader issues that might emerge in future chapter 11 cases filed by dioceses, or simply interested in how a few area of law converge in these cases, this paper is worth a read.

The last chapter 11 filing that Reilly's paper discusses is that of Crosier Fathers and Brothers in Minnesota in June 2017. Since then, one more archdiocese filed chapter 11 -- San Juan at the end of August 2018. The Archdiocese of Agana (in Guam) also announced that it expects to file by January 2019. Like other dioceses, Agana's stated need to file stems from its struggles with more than 180 sexual abuse claims. But the Archdiocese of San Juan's case presents a couple unique issues.

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Congratulations to Former Slipster and (Congresswoman-Elect) Porter!

posted by Bob Lawless

The New York Times, the Associated Press, The Hill, and many other media outlets are reporting that former Credit Slips blogger Katie Porter has won her election for California's 45th Congressional District. Anyone who knows Katie's work knows that she will fight for middle-class households. As happy as I am for Katie and for the country, it is bittersweet to lose a great co-author and research collaborator.  

We also have been remiss in not congratulating another former blogger, Senator Elizabeth Warren, on her reelection. It is hard to believe that this modest little blog now has two former bloggers in Congress.

Lead into Gold? Sears' Possible Post-Petition Sale of Intracompany Debt

posted by Adam Levitin

Sears is supposedly considering trying to raise liquidity through the post-petition sale of intracompany debt. The details of the debt and the proposed transaction aren't clear, but as a general matter, the post-petition sale of intracompany debt (or Treasury stock) seems problematic to me as with any lead into gold transaction.  Here's the issue:  if the debt is sold, is it still intracompany debt or does it become general unsecured debt? 

The viability of Sears' strategy depends on the answer to this question.  If it is still intracompany debt post-sale, it's not going to sell for very much; if it is general unsecured debt, it's much more valuable.  (This is putting aside the weird arbitrage with the CDS settlement auction market that gets warped by the CDS volume exceeding the reference debt volume.) 

In most bankruptcies, intracompany obligations between affiliated debtors are either subordinated or cancelled outright.  Nothing in the Bankruptcy Code compels this, but it's pretty standard. It tends to follow from a separate classification of intracompany obligations (again, not compelled by the Code) and from the difficulty in determining net intracompany obligations--deemed consolidation for voting and distribution is standard operating procedure in large bankruptcies. If the leaden intracompany claims can be transformed into golden general unsecured claims, it's a huge siphoning of value away from other general unsecured creditors.  General unsecured creditors are paid pro rata on their claims, so an increase in the size of the general unsecured claim pool dilutes recoveries on the debt.  

So would a sale of intracompany obligations transform them into arms' length obligations?

Continue reading "Lead into Gold? Sears' Possible Post-Petition Sale of Intracompany Debt" »

Matthew Whitaker as a Mini-Trump?

posted by Adam Levitin

It seems no surprise that President Trump has named Matthew Whitaker as Acting Attorney General:  it turns out that he's a Mini-Trump.  There are two rather remarkable parallels to Trump in Whitaker's history.  First, his involvement with the  operation known as World Patent Marketing closely parallels Donald Trump's involvement with the fraud known as Trump University. And second, both have used charities as their own personal piggybanks. Classy.  

Continue reading "Matthew Whitaker as a Mini-Trump?" »

Tempnology and Janger Too!

posted by Bob Lawless

The Supreme Court granted cert today in the bankruptcy case of Mission Product Holdings v. Tempnology, LLC. It sounds like another one of those cases only bankruptcy nerds can love, but it has potentially broad implications. On its face, it is about trademark licenses, but the Supreme Court could fix some case law about all contracts in bankruptcy. Several Credit Slips bloggers (including me) signed a "law professors" amicus brief in support of certiorari. 

I asked the inimitable Professor Ted Janger of Brooklyn Law School (and former Credit Slips guest blogger) to write with his thoughts on the case. Ted had a lot to do with the professors' brief. Here is what he wrote:

The split in the lower courts arose when the First Circuit inexplicably resuscitated the questionable proposition, first articulated in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), that rejection of an intellectual property license rescinds that license and terminates the licensee’s rights. Congress reversed Lubrizol for copyright and patent by enacting section 365(n), and in 2012, the Seventh Circuit rejected the reasoning of Lubrizol for trademarks, in Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012). While there remained some question as to the continued vitality of Lubrizol outside the patent and copyright context, the holding was, at best moribund. At least, that is, until the First Circuit’s decision in Tempnology.

Continue reading "Tempnology and Janger Too!" »

For-profit college chain files (for receivership)

posted by Alan White

Education Corporation of America filed a legal action in federal district court last week claiming financial distress, seeing to enjoin its creditors and restructure its debt. Sounds like Chapter 11, right? But no. ECA can't file a bankruptcy petition, because that would immediately cut off its main funding source, federal student grants and loans. ECA and its subsidiary Virginia College LLC were already facing disaster under the Obama administration's gainful employment rule, but Secretary DeVos suspended that rule giving poorly performing trade schools a new lease on life. At the same time ECA was facing loss of federal student aid because their accreditor, ACICS, was derecognized by the Education Department under the prior administration for its weak oversight of deeply flawed for-profit schools, like Corinthian College. Unsurprisingly, Secretary DeVos is reconsidering the ACICS decision as well. In a story that seems to be repeating for many for-profit colleges, and even law schools, enrollments are plummeting due to a combination of consumer information about poor student outcomes and reluctant but inevitable enforcement by accreditors and regulators. ECA's proposed plan is to close some of its schools and continue operating others. Its very creaVirginiaCollegeYPtive complaint asks the court for a nationwide injunction against its landlords and creditors and appointment of a receiver, among other things. Here is the court's temporary restraining order enjoining all landlords and creditors nationwide for 10 days.

While I am generally not in favor of bankruptcy discrimination, the ineligibilty of bankrupt colleges for taxpayer funding is eminently sensible. Given the weakness of institutional gatekeeping and the political challenges to shutting down predatory schools, and the for-profit college business model in which taxpayer grants and loans are used to prepay tuitions for students who are frequently misled about career chances, we don't need bankruptcy to give these failing schools a new lease on life.

UPDATE: After hearing and briefing, the District Court on November 5 dismissed ECA's action, finding there is no justiciable case or controversy. On December 5 ECA announced it will close all 75 campuses, leaving as many as 20,000 students with potential student loan discharge or school defense claims.

CLO Yawn

posted by Adam Levitin

There's a big story in the NY Times about how the financial structures being used to finance many corporate loans—so-called Collateralized Loan Obligations or CLOs—look very similar to those used to finance mortgages during the housing bubble.  Yup.  That's true. CLOs are a securitization structure, like MBS.  (If you want to know more gory details, see here.)  But that's really where the similarities end.  While the financing transactions are similar, the asset class being securitized is fundamentally different in terms of the risk it presents, and that's what matters.  The financing channel might be more vulnerable to underpricing than other financing channels because of opacity and complexity, but is the underlying asset class that matters in terms of societal impact.  This is for (at least) four reasons. 

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CFPB "Abusive" Rulemaking?

posted by Adam Levitin

Acting BCFP CFPB Director Mick John Michael Mulvaney announced this week that the CFPB would be undertaking a rulemaking to define "abusive," the third part of the UDAAP triad. The CFPB's key organic power is to prohibit unfair, deceptive, and abusive acts and practices.  Unfair and abusive have statutory definitions, whereas deceptive does not, but "abusive" is a new addition to the traditional UDAP duo of unfair and deceptive.  Mr. Mulvaney suggests that a definitional rulemaking is necessary so that regulated entities will know what the law is. 

Actually, it's very clear what "abusive" means, at least as applied by the CFPB to date.

Continue reading "CFPB "Abusive" Rulemaking?" »

Trump socialism and housing finance

posted by Alan White

Various tax law scholars have commented on the tax fraud allegations in the recent New York Times story. Equally important is the story's reminder that our housing finance system, and the real estate fortunes it has spawned, have depended for nearly a century on the largess of government.

Fred Trump, the president's father, built the fortune that Donald Trump inherited after avoiding or evading millions in estate and gift taxes.  Fred's fortune was almost entirely due to his savvy exploitation of federal government housing subsidies. When Roosevelt's New Dealers struggled to put the economy back on its feet, they invented the FHA mortgage insurance program, and Fred Trump was one of FHA's first profiteers. As recounted in Gwenda Blair's wonderful book, Fred went from building one house at a time to building Huge middle-class apartment complexes when he was first able to tap into government-backed FHA loans.  Screen Shot 2018-10-15 at 10.40.49 AM

 In his fascinating 1954 testimony before the Senate Banking Committee (begins at p. 395), Fred Trump explains how he purchased the land for the Beach Haven apartments for roughly $200,000, put the land in trust for his children and paid gift taxes on a $260,000 land valuation, and then obtained a a $16 million FHA mortgage to build the apartments.  Fred's corporation owning the buildings netted $4 million from the loan proceeds above and beyond the construction costs, and the land belonging to the Trump childrens' trust was valued by the City tax assessors at $1.3 million as a result of the FHA mortgage transaction and apartment construction. In other words, Fred Trump parlayed his $200,000 investment into a $4 million cash profit for his business and a $1.3 million ground lease producing $60,000 annual income for his children. In his testimony he conceded that this would have been impossible without the FHA government loan guarantee.

Peter Dreier and Alex Schwartz have written a nice exposé of the irony in President Trump's proposals to slash the very government housing finance subsidies to which he owes his personal fortune.

More on PSLF fail

posted by Alan White

The US Education Department is assigning the complex task of monitoring the employment and the on-time payments of Public Service Loan Forgiveness aspirants to its worst-performing servicer. USED has contracted with servicing company FedLoan, affiliate of the Pennsylvania Higher Education Assistance Agency (PHEAA), to administer the Public Service Loan Forgiveness program. PHEAA/FedLoan has performed its contract obligations poorly. At the end of 2017 the Department ranked FedLoan 9th out of 9 servicers based on a combination of delinquency rates and customer satisfaction survey results.  Based on this poor performance, US Ed will allocate only 3% of new loan servicing to FedLoan. However, all public servants who are applying for Pubic Service Loan Forgiveness are assigned to FedLoan for loan servicing.

FedLoan's application of the Department's "every month by day 15" payment rule has led to truly absurd impediments to public servants qualifying for PSLF. Borrowers who make an extra monthly payment, and therefore cause all subsequent payments to be posted to the month BEFORE the payment was made, are told those payments don't count, because they are not made in the month they are due. Other borrowers find that while they continue making on-time payments and are trying to correct FedLoan's recordkeeping errors, FedLoan will place their account in administrative forbearance. Administrative forbearance means that no payments are due, so that even if the borrower continues making a payment called for by their income-based repayment plan, the payment will not count towards the 120 needed to qualify for forgiveness.

The servicers are paid for each month they continue to service a loan (more for a performing loan, less for a delinquent loan.) While this makes some sense as a contract design, it does create a disincentive for servicers to approve public service loan forgiveness and other discharges (like permanent disability.)  Servicing contracts also create incentives for servicers to put borrowers into forbearance rather than income-based repayment. The PSLF fail comprises a combination of regulatory failure, contract design failure and contract supervision failure.

World Bank Group's Proposals on Small Business Insolvency

posted by Jason Kilborn

At long last, the World Bank Group's insolvency and debt resolution team has finally released to the public its report on the treatment of the insolvency of micro-, small-, and medium-sized enterprises, Saving Entrepreneurs, Saving Enterprises : Proposals on the Treatment of MSME Insolvency. The team worked for over a year on this report, concluding with a meeting of its Insolvency & Creditor/Debtor Regimes Task Force in May in Washington, D.C., where the report and its proposals were vetted. There was a surprising degree of consensus on the proposals developed here, and the final version reflects a fairly widely shared viewpoint on three key points.

Continue reading "World Bank Group's Proposals on Small Business Insolvency" »

No comment

posted by Stephen Lubben

In this morning's email:

Moody's Investors Service downgraded its Probability of Default Rating (PDR) for American Tire Distributors, Inc. ... following the company's announcement that it had initiated Chapter 11 bankruptcy proceedings...

Million public servants counting on broken PSLF program

posted by Alan White

Screen Shot 2018-09-29 at 7.16.15 AMThis week we learn from the GAO that more than 1 million public servants have applied to certify their work and their student loan payments as qualifying for Public Service Loan Forgiveness. The number seems to be growing by about 300,000 annually. These teachers, child care workers, firefighters, soldiers, police officers, nurses, prosecutors, and public defenders, are facing a gauntlet of needlessly complex and exacting rules to receive the debt relief Congress promised them.

According to the GAO report, 40% of the tens of thousands of rejected applicants were found not to have made the required 120 monthly payments. The Department of Education's regulations for the program, 34 CFR 685.219, require that there be 120 "separate" monthly payments, that every payment be made within fifteen days of the due date, in the required amount, and under a qualifying repayment plan. This creates all sorts of problems, for example, when a servicer delays posting a timely payment until day 16, or a borrower has an emergency and makes 2 payments in a lump sum, or especially for borrowers who receive employer or law school assistance in making their payments. The "every month by day 15" rule was not written by Congress. The statute, Section 455(m) of the Higher Education Act, requires only that public servants have made 120 monthly payments under a qualifying plan. A less procrustean payment rule would be an easy regulatory fix.

Only Federal Direct loans qualify, not private or guaranteed loans. However, borrowers can use a Direct Consolidation loan in many cases to convert ineligible student loans into eligible loans.

The statute also requires that the public servant have been in a qualifying full-time job "during the period in which the borrower makes each of the 120 payments. . . ."  This requirement has also been interpreted strictly by the Department, and may create problems for public servants changing jobs or job assignments, teaching for only part of the year, and so forth. It also appears that some simple technology fixes could go a long way towards fixing the problems. For example, a public servant's monthly loan statement could show a running total of months earned towards the 120 total required, perhaps with two check boxes for timely payment, and qualifying work.

Another obvious fix is to provide assistance for public servants whose applications were rejected, to calculate exactly what they need to do to finish making 120 qualifying payments and receive their discharge. The problems with this program are being widely reported.  What is needed now are solutions from Congress, the Education Department, and the servicer (PHEAA/FedLoan.)  

 

 

 

ISDA Promotes a Race to the Bottom

posted by Stephen Lubben

Frustrated that Congress did not decide to collapse the CFTC and SEC as part of Dodd-Frank, and facing the reality that the SEC is still working on its rules under Title VII of Dodd-Frank, ISDA, the swaps industry trade group, is out with a white paper that urges the adoption of a "safe harbor."

This is not the infamous bankruptcy safe harbors, but rather a rule that would be adopted by both regulators. The basic idea is that compliance with one regulator's rule is "good enough." That is, swaps traders could choose which regulator they want.

What could possibly go wrong?

Public Service Loan Forgiveness Fail

posted by Alan White

20,521 applications rejected as ineligible. 96 borrowers approved.  Those are the early results for the Public Service Loan Forgiveness program. PSLF promised student borrowers with federal Direct Loans who worked in qualifying public service jobs that they would have their loan balances discharged after 10 years of income-based repayment. The first cohort of PSLF borrowers applied beginning in the Fall of 2017, so these results reflect the first year of borrower attempts to receive the benefits they were promised. The three eligibility requirements were to work in a qualifying public service job, make all income-based payments for 10 years, and have a federal Direct loan. The Education Department's report does not break down the rejections by failed eligiblity criteria. It has been widely reported that what U.S. Ed. considers a "public service" job has been a moving target, and servicers have misled borrowers about the program, but that surely cannot explain these dismal results. Perhaps some Congressional oversight is in order.

Excuse Me?

posted by Stephen Lubben

Barry Ritholtz has a generally sensible column about the ten-year anniversary of the financial crisis, but the bankruptcy stuff really makes no sense at all. Start with this proposition:

I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts.

How precisely would that work? A prepack involves pre-bankruptcy solicitation of votes from creditors – largely bondholders if we are talking about a SIFI's holding company. Under the securities laws, the solicitation will take at least 20 days. That is about 19 days more than will be required for the run on the SIFI to be fully commenced.

And then we have:

I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest.

So this is not a prepack at all. If we are bidding on assets post-bankruptcy, there is no pre-bankruptcy plan for creditors to vote on. Indeed, until we see how the sale goes, there is no plan at all.

In short, we are just doing chapter 11, Lehman style. Maybe with a bit more pre-planning, which could not hurt. But if you assume better facts, you are bound to think you have found a better way

I continue to doubt that bankruptcy has much to offer with regard to a SIFI failure – which is really much more a question of ex ante regulation, and post default politics.

Ukraine Wins Appeal in Russian Bond Case

posted by Mark Weidemaier

Ukraine and Russia have been battling it out in English courts over whether Ukraine must repay a $3 billion Russian loan from 2013. The loan was unusual both in structure and in substance. For example, although essentially a bilateral loan, it was structured as a tradable Eurobond and held by the Russian sovereign wealth fund. The indenture trustee has been suing to enforce the loan. In March 2017, the High Court of Justice granted summary judgment for Russia. Although Ukraine had a number of plausible defenses to enforcement of the loan, the judge rejected them all. Here's Bloomberg, with coverage of that decision and of the ensuing appeal. Today, the Court of Appeal reversed that decision, sending the case back for discovery and a trial. Here's the decision, which Russia will appeal according to this Financial Times report.

Continue reading "Ukraine Wins Appeal in Russian Bond Case" »

Levitin's Consumer Finance: Markets and Regulation

posted by Adam Levitin

I'm very excited to announce the publication of a new book, Consumer Finance:  Markets and Regulation.  The book (also available on Amazon) is the first consumer finance textbook in existence. It's the product of several years of teaching a course I call Consumer Finance.  The course, and the book, largely track the regulatory ambit of the CFPB:  payments, credit, and consumer financial data. 

The book is divided into two parts.  The first part covers the question of "who regulates" consumer financial products and services.  It covers regulation by private law (including arbitration agreements), state regulation, and then spends a lot of time going through the ins-and-outs of the CFPB's rulemaking, supervision, and enforcement powers and specifically UDAAP.  Much of this part of the book is what I think of as "applied" administrative law.  The second part of the book covers specific consumer financial product markets and their regulation: deposits and payments, credit and collections, and financial data.  While some chapters focus on particular products (e.g., auto loans or student loans or mobile wallets), others focus on topics of broader applicability (e.g., usury or fair lending or credit cost disclosure). 

Although the book is marketed as a "casebook," it hardly is.  There are maybe 20 cases in the whole book.  Instead, most of the book is expository material plus non-case materials, such as litigation complaints, regulatory materials, or transactional documents (e.g., arbitration agreements, parts of a deposit account agreement, a uniform note and mortgage).  Each chapter ends with a problem set.  It's possible to teach the book either solely through the problem sets or as a lecture course without the problem sets or some combination thereof.  There's also a handsome companion statutory supplement.

If you're interested in teaching consumer credit policy or electronic payments and data security issues, this is a course and a book for you.  (Don't take my word, however--ask Bob Lawless, who generously taught a draft version of the book last year and is teaching the published version of the book this semester.) 

Continue reading "Levitin's Consumer Finance: Markets and Regulation" »

Levitin's Business Bankruptcy, 2d Edition

posted by Adam Levitin

I'm pleased to announce that the second edition of my casebook, Business Bankruptcy:  Financial Restructuring and Modern Commercial Markets, is now in print and available for purchase from quality establishments such as Amazon

If you haven't used the book, here's the pitch.  It's a financial restructuring book.  (The publisher insists on it being called "Business Bankruptcy" to align with existing course categories.)  My take is that bankruptcy—that is in-court restructuring—is only one part of the financial restructuring picture, and that one really can't understand bankruptcy law very well without understanding first what is and isn't possible in terms of liquidations and restructurings out-of-court.  If you don't know what can be done in terms of restructuring, say bond debt or syndicated loans outside of bankruptcy, it just won't be clear what bankruptcy brings to the table in terms of legal tools.  Thus, the first third of the book is about out-of-court restructuring.  I believe it's the only book around with that sort of coverage of out-of-court restructuring issues, but I strongly believe that students are well-served by this coverage, both intellectually and as preparation for practice, as bankruptcy lawyers don't just do Chapter 11 work. 

Continue reading "Levitin's Business Bankruptcy, 2d Edition" »

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.

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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" »

Trump Administration's Student Loan Policy

posted by Alan White
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Student loan debt has jumped from $1 trillion to $1.5 trillion in the last 5 years. The Education Department's official default rates seriously understate the share of young borrowers who default, or are not able to repay their loans. In the face of the growing student loan debt crisis, the Administration's corrupt policy is to undo the Obama administration's gainful employment rule for colleges, grease the wheels for fraudulent for-profit schools, curb loan relief to victims of school fraud, and sabotage consumer protection enforcement by the CFPB and state regulators (by asserting preemption) against student loan servicers who mislead and abuse borrowers. This article sums it up nicely.  

New Consumer Law Conference - Call for Papers

posted by Pamela Foohey

Exciting news for consumer law scholars. To the best of my knowledge, the first ever conference in the United States dedicated expressly to scholarship in the field of consumer law is happening in February 2019 at the new Berkeley Center for Consumer Law and Economic Justice. Details from the call for papers:

The Berkeley Center for Consumer Law and Economic Justice, its director Ted Mermin, and co-organizers Abbye Atkinson, Kathleen Engel, Rory Van Loo, and Lauren Willis are pleased to announce the inaugural Consumer Law Scholars Conference (CLSC), which will be held the afternoon and evening of February 21 and all day February 22, 2019, in Berkeley, CA.

The conference will support in-progress scholarship, foster a community of consumer law scholars, and build bridges with scholars in other disciplines who focus on consumer issues. The bulk of the conference will consist of paper workshop sessions at which discussants, rather than authors, introduce and lead discussions of the papers. Everyone who attends a session will be expected to have read the paper; everyone is a participant. The conference will also feature keynotes by leading practitioners and prominent policymakers, as well as time to discuss ideas and collaborate informally.

Details about how to submit a work-in-progess and logistics after the break.

Continue reading "New Consumer Law Conference - Call for Papers" »

Available at finer booksellers everywhere (and Amazon too!)

posted by Stephen Lubben

CoverMy new book is out – the Law of Failure.

The sub-title is "A Tour Through the Wilds of American Business Insolvency Law," which pretty much tells the whole story. I try to cover all business insolvency law – not just the Bankruptcy Code. State laws, and federal laws like Dodd-Frank's OLA are covered too. All in a concise little volume.

In my research I discovered that many states have specialized receivership and other insolvency laws for specific types of businesses. And some states – I'm looking at you New Hampshire – still have corporate "bankruptcy" statutes on the books from the days when there was no federal bankruptcy law, or (as was the case with the early Bankruptcy Act) the law did not extend to all types of businesses. Can any of these laws really work? It is hard to say, since the Supreme Court has not dealt with a bankruptcy preemption issue in a very long time.

I welcome discussion on this question, or the book in general, from Slips readers, either below or via email.

Timing and Process in Crystallex v. PDVSA

posted by Mark Weidemaier

[Updated with Crystallex's brief opposing the stay.]

In an earlier post, I noted some open questions that had to be answered before Crystallex could execute on PDVSA’s 100% ownership stake in PDV Holding (PDV-H). To recap: The federal district judge in Delaware let Crystallex attach the PDV-H shares on the theory that PDVSA is the Venezuelan government’s alter ego. The open questions relate both to timing (e.g., should there be a stay of execution pending appeal?) and process (how should an execution sale proceed)? A lot turns on the answers to these questions, as I’ll discuss below. First, however, here’s a simplified figure showing PDVSA’s corporate structure for readers who haven’t been following the dispute closely.

VZ-PDVSA-CITGO

Continue reading "Timing and Process in Crystallex v. PDVSA" »

Pets and Financial Distress

posted by Pamela Foohey

Last weekend, The New York Times published an opinion piece about animal shelters, Are We Loving Shelter Dogs to Death? It highlighted the sad reality that nationwide shelters are horribly overcrowded. According to the piece, a "big part" of shelters' overcrowding "is poverty: An estimated one-quarter of shelter animals are there after their owners have surrendered them because of family dysfunction or financial pressure." For instance, a family might not have enough money for vet bills. Or a family must relocate to less expensive housing that does not accept pets. The example in the piece that stood out to me most was families' inability to pay fees and fines related to their pets being picked up by animal control.

Reading the piece -- particularly the parts about fines -- led me to wonder more about pets and financial distress and bankruptcy. And to a broad question for Credit Slips readers. What have been your experiences regarding pets and financial distress, both pre-bankruptcy and in bankruptcy?

Facebook: the new Credit Reporting Agency?

posted by Adam Levitin

Facebook, it seems, has developed a system of rating users trustworthiness. It's not clear if this is just a system for internal use or if users' trustworthiness scores are for sale to third parties, but if the latter, then would sure seem that Facebook is a Consumer Reporting Agency and subject to CRA provisions of the Fair Credit Reporting Act (FCRA).

FCRA defines a CRA as

any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

A consumer report is, in turn, defined as:

any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for [credit, insurance, employment or government license].
 
Thus, if Facebook is selling information about a consumer's general reputation—trustworthiness—to third parties that might reasonably be expected to use it for credit, insurance, or employment, it's a CRA, and that means it's subject to a host of regulatory requirements as well as civil liability, including statutory damages for willful noncompliance.
 
Facebook is hardly the only tech company that might be a CRA--I've written about this in regard to Google previously.  While Facebook has a bunch of money transmitter licenses and knows it is in the consumer finance space on payments, I suspect it hasn't thought about this from the data perspective.  Indeed, I don't think tech companies think about the possibility that they might be CRAs because we think of CRAs as being firms like Equifax that specialize in being CRAs, but FCRA's definition is broader.  If I collect data on you that I sell to third parties for employment or insurance or credit purposes, I'm a CRA.  Once one plays in consumer data, it's pretty easy to fall into the world of consumer finance regulation. Welcome to a very different Social Network, Mr. Zuckerberg.
 
Update:  Having just read Alan White's post about Thomson Reuters selling data to ICE, it makes me wonder more generally about the applicability of the FCRA to any firm that sells browsing history to parties that use it for credit, insurance, or employment.  I suspect that's a more aggressive of a reading of FCRA than a court would accept, but the statutory language is pretty broad, and perhaps it gets a party to discovery.

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.

Westlaw: A Digital Deportation Machine?

posted by Alan White

Lawyers and legal academics may be surprised to learn that Thomson Reuters, owners of the Westlaw electronic law library, sells its data to the Immigration and Customs Enforcement Agency, and reserves the right in its privacy policy to share browsing history and search terms with law enforcement agencies. My colleague Sarah Lamdan explores the ethical issues for lawyers and the legal publishers in a recent paper, "When Westlaw Fuels ICE Surveillance: Ethics in the Big Data Policing Era." 

Some Thoughts on the Alter Ego Ruling in Crystallex

posted by Mark Weidemaier

I have had a bit of time to digest the district court’s ruling that PDVSA is Venezuela’s alter ego, and here are some preliminary thoughts. The opinion is 75 pages and covers a lot of ground, but I’ll focus on perhaps the most important and least technical question: Is the case a one-off or a harbinger? Put differently, assuming the ruling stands after appeal and further proceedings in the district court, does it definitively establish that PDVSA is Venezuela’s alter ego? If so, the ruling could have important consequences for a future attempt to restructure the debts of both entities.

The answer isn’t clear. Or rather, it depends whether one wants a formal or a functional answer. Formally, the decision is a one-off; it need not have implications for future alter ego determinations. Functionally, however, the decision creates real risks for PDVSA and the government.

Continue reading "Some Thoughts on the Alter Ego Ruling in Crystallex " »

Court Lets Crystallex Attach Equity in CITGO Parent

posted by Mark Weidemaier

[Edit: Here is the opinion, with redactions related to the OFAC license.]

Just a quick post for now, as the court is keeping its opinion under seal for the time being. Crystallex, a creditor of Venezuela, has been trying to enforce its claims by attaching PDVSA's equity interest in PDV Holding, the ultimate U.S. parent of CITGO. For more background, there have been a number of posts already here on Credit Slips. The district judge overseeing the action in Delaware has just granted Crystallex's request.

I'll have more to say once the opinion becomes public, although portions will undoubtedly be redacted in that version. The secrecy seems to be associated with an OFAC license obtained by a third party (presumably the entity financing this litigation), which Crystallex believes authorizes attachment notwithstanding U.S. sanctions against Venezuela. Those sanctions require OFAC authorization for "attachment of an equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest" (see FAQ 596) and define "Government of Venezuela" broadly to include PDVSA. I assume the redactions will mostly affect this part of the opinion.

Even more important, the opinion will have to explain why Crystallex, a creditor of Venezuela, can attach PDVSA's property. Presumably the reason is that the court has found the two entities to be alter egos. If so, that's an important ruling that may have much broader consequences in any attempted restructuring of PDVSA or Republic debt.

Edit: I should add that the fact that the court has issued the writ does not necessarily mean Crystallex will immediately be allowed to execute. Leaving aside any delay associated with appeal, the district judge has previously distinguished the decision to issue the writ from the decision to allow execution. Any attempt to execute the writ will also raise new questions. For instance, must there be an attempt to sell the shares? If not, how should the shares be valued (since Crystallex is only entitled to receive the amount of its judgment plus interest)?

Older Americans’ Rising Bankruptcy Filings

posted by Pamela Foohey

Older Americans (age 65 and over) are increasingly likely to file bankruptcy and now comprise a larger proportion of the people who file bankruptcy -- and the effects are not small. Using data from the Consumer Bankruptcy Project, in a new working paper just posted to SSRN -- Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society -- my co-authors (past Slipster Debb Thorne, Slipster Bob Lawless, and past Slipster Katie Porter) and I find a more than two-fold increase between 1991 and now in the rate at which older Americans file bankruptcy. We further find an almost five-fold increase in the percentage of older persons in the bankruptcy system. The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect.

In the paper, we link older Americans’ increased filing rates with the shrinking social safety net. A story published today in the New York Times (on actual paper and on the front page!) does an exceptional job of both describing our study and detailing the ways in which the risks of aging have been off-loaded onto older Americans: “vanishing pensions, soaring medical expenses, inadequate savings.” The story also highlights the financial and life travails of a few older Americans who filed bankruptcy. Their struggles stem from declining income, lost insurance, and unmanageable medical expenses.   

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MoviePass Bankruptcy Watch

posted by Adam Levitin

The financial travails of MoviePass and its parent company Helios & Matheson caught my eye today. I almost never go to see movies in theaters, so MoviePass was an unfamiliar business to me, but the basic idea is that the consumer pays an upfront subscription fee and then MoviePass provides an unlimited number of tickets for the consumer (although one per show, and more recently with various additional restrictions):  basically an all-you-can-eat buffet model applied to movies.  The buffet model requires the Jack Sprats of the world to subsidize their wives:  those who go to the counter once and get low-cost foods are subsidizing those who make multiple trips for the foie gras, etc.  The buffet model can work for a few reasons. First, there is a limit to how much anyone (except Joey Chestnut) can eat.  Second, people often go to restaurants in groups, which means that there will be some Jack Sprat wives in the mix.  Third, there are sales of other items (drinks, liquor) that can offset the buffet to the extent it's a loss leader.  And fourth, the buffet can be priced high enough that it won't lose too much money.

MoviePass doesn't seem to have many of these factors working in its favor.  People can watch a lot more movies in a month than they can make trips to a buffet table in an evening. There's going to be an adverse selection of heavy users among subscribers, and they don't bring along Jack Sprat wives--the extra business of friends who come to the theater doesn't go to MoviePass, but to the theaters.  And MoviePass doesn't have much in the way of other sale items to offset losses on tickets.  OK, so we've got a really bad business model that will only work if lots of people sign up, but don't actually go to the movies.  This strikes me as different from other subscription models, like gyms.  People are likely to overestimate their likelihood of going to the gym. My guess is that they are much less likely to overestimate how often they'll go to the movies. 

Well, this is all very interesting, but what does it have to do with Credit Slips?  Three things, I think, one dealing with payment systems and secured lending, and the other two dealing with bankruptcy, which seems to be where this is all headed (assuming that MoviePass is not run out of a bankruptcy remote entity). 

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Jay Alix v. McKinsey Update

posted by Stephen Lubben

As my summer of poutine, donairs, and nippy waters winds down, a quick post to note that the long-expected motion to dismiss has been filed in the battle between the chapter 11 financial advisors. A McKinsey spokesperson also provided the following statement, which gives some insight into how they intend to respond to this case:

“Jay Alix has waged a years-long crusade against McKinsey & Company to stifle competition in the bankruptcy advisory market. His attempt to bootstrap a disclosure dispute into a RICO action is devoid of any legal basis and obviously intended to do nothing but inflict reputational damage. Courts have previously upheld the appropriateness of McKinsey’s disclosures. This lawsuit is just one more part of Mr. Alix’s anticompetitive campaign to push out of the market a competitor whose deep expertise and unmatched scale deliver superior bankruptcy outcomes.”

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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