World Bank Group's Proposals on Small Business Insolvency

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.

Tripling Down on Plain Meaning: Bankruptcy and the Kavanaugh Appointment

It seems fairly clear that, if Trump's latest nominee to the Supreme Court, Brett Kavanaugh, is sworn in, the Court's trend of resolving virtually all statutory disputes on the basis of "plain meaning" will be cemented in place. An analysis of Kavanaugh's bankruptcy-specific jurisprudence seems unnecessary in light of his fairly clear comments, nicely summarized by Anthony Gaughan over at the Faculty Lounge blog. His rejection of legislative history and search for intent/purpose does not bode well for bankruptcy and consumer-protection disputes, such as Obduskey v. McCarthy & Holthus LLP, the FDCPA case on the Court's docket for next year. Perhaps the words in these statutes are less clear and meaningful than those in the Constitution, but it seems likely that a Justice Kavanaugh would retreat to the comfortable confines of statutory language as frequently as possible to maintain his vision of a passive and unthreatening judiciary. Dust off your Webster's and probably also your Garner!

File This Under Calling BS on Bankruptcy Fearmongering

As anyone familiar with bankruptcy would have predicted, the dire predictions of disaster for municipalities seeking bankruptcy protection have proven to be ... let's just say exaggerated. Bloomberg is out with a notable story this morning on Jefferson County's healthy return to the bond market, carrying an investment-grade rating of AA-  within five years of emerging from municipal bankruptcy. This squares with similar accounts of consumers rehabilitating their credit within two to four years of a chapter 7 liquidation-and-discharge (see, for example, here and here). Let's all file this in our "lying liars and their bankruptcy impact lies" file and be prepared to continue to counter this, among the many, many other, bankruptcy scare myths to be debunked.

Combatting Fear of Abuse--A Sisyphean Task?

Over the past few weeks, at conferences with judges and policymakers in Varna (Bulgaria), Seoul, and Beijing, I've been confronted with a surprising degree of skepticism about personal insolvency systems and fear of opportunistic individuals abusing the ability to evade their debts (especially while hiding assets). I've pointed out the interesting progression identifiable in Europe in recent years of a marked relaxation of such fear of abuse, especially in places like France and most recently Slovakia, which have gone all the way to adopting a very US-like open-access system to immediate discharge. For the real skeptics--and they are numerous in Bulgaria and China, both of whom are considering adopting their first personal insolvency laws--these arguments seem to fall on more or less deaf ears. Detractors put me in a no-win situation by offering one of two rejoinders: (1) the incidence of discovered abuse is low in these systems because debtors are crafty or anti-abuse institutions are weak, or (2) anti-abuse institutions like the means test and restrictive access hurdles are successfully dissuading abusers from seeking access, so we need more--not less--of this kind of effort (which I've criticized as wasteful, unnecessary, and counterproductive). A common third response is the classic "we're different" position--that is, any comparative empirical evidence from elsewhere is irrelevant to the new, entirely unique context of [insert skeptical country's name here].

Please support empirical study of decision making in business insolvency

Leiden University in the Netherlands has established an impressive strength in insolvency law studies. For example, following his retirement, the eminent Bob Wessels left his massive collection of literature on the subject to a foundation, which permanently lent the collection to the school as the Bob Wessels Insolvency Law Collection. Credit Slips readers can support the efforts of Leiden researchers without parting with their libraries by simply responding to a 15-minute online questionnaire. Niek Strohmaier is a Ph.D. candidate at Leiden conducting a study on judgment and decision making within the areas of business rescue and insolvency law. As he puts it, "We offer a novel perspective on these fields by utilizing the interdisciplinary nature of our research team and by adopting a social sciences approach with empirical research methods." If there's one thing that Credit Slips can rally around, it's empirical research! So I'm hoping we can show Niek our community spirit by responding to his survey at this link (https://leidenuniv.eu.qualtrics.com/jfe/form/SV_51GewBINfBAyfzv). The survey has received a good response from the professional membership of INSOL Europe, but I hope we can supercharge this qualitative data collection with responses from North America and elsewhere, as well. Thanks for your help!

Orwellian Debt Collection in China

Trying to get a handle on the potential for a workable personal bankruptcy procedure in China, I've repeatedly encountered evidence that the most important element might be lacking: attitude. Successful personal insolvency systems around the world differ in design and operation, but the system architects and operators generally share a sense that default is an inevitable aspect of consumer/entrepreneurial risk, and mitigating the long-term effects of such defaults is good for debtors, creditors, and society. I don't get the sense, based on my admittedly superficial outsider perspective, that this foundation is ready in China. Indeed, quite the opposite. 

For example, for the past few years, the Supreme People's Court has run a "judgment defaulter's list" of individuals who have failed (been unable?) to satisfy judgments against them. More than 3 million names were on this list already by the end of 2015, and getting on this list means more than just public shaming; it's also a "no-fly" list, preventing defaulters from buying airplane tickets, in addition to a "no-high-speed-train" and "no-hotel-stay" list, and also a "no-sending-your-kids-to-paid-schools" list. By mid-2016, about 5 million people had been preventing from buying these services in China as a result of being on the list. This initiative is just the start of a planned "Social Credit System," which will aggregate electronic data (including not only payment history, but also buying habits, treatment of one's parents, and who one's associates are) to produce a "social credit score" for all individuals. This score will affect all manner of life events, such as access not only to loans, but also to housing access, work promotions, honors, and other social benefits. The potential problems with data integrity (including inaccurate data), among many other challenges, are discussed in this fascinating paper by Yongxi Chen and Anne Sy Cheung of the Univ. of Hong Kong. 

Seventh Circuit Victorious Again in Merit Mgmt

If you're challenging a Seventh Circuit ruling in a bankruptcy case on appeal to the Supreme Court, especially if (retired) Judge Posner was in the majority, you've got a challenge ahead. The Court's announcement this morning of its judgment in Merit Management Group v. FTI Consulting demonstrates this yet again. Long story short: paying for stock via a bank transfer (rather than a bag of money) is still a transfer from the buyer to the seller, not the buyer's and seller's banks, and therefore not "by or to ... a financial institution." That is, such transfers are not protected by the securities safe harbor provision in section 546(e) and are subject to avoidance as constructive fraudulent conveyances and/or preferences. The seeming silver-bullet arguments to the contrary in this battle of "plain meanings" apparently remained unarticulated and unavailing (see footnote 2 in the Court's opinion, suggesting someone up there might be reading CreditSlips!). Other big winners in addition to the Illinois-based Seventh Circuit are University of Illinois College of Law professors Charles Tabb and Ralph Brubaker, both of whom are cited prominently and approvingly in the opinion. Congratulations, Illinois!

New Saudi Bankruptcy Law ... A Boon for SMEs?!

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

Jayfest and Bankruptcy Cases in the Supreme Court

Most of us Credit Slipsters enjoyed an absolutely fabulous symposium over the weekend celebrating the illustrious career of one of our own, Jay Westbrook. The Texas Law Review will publish a selection of several of the papers presented at the symposium (and TLR editors pulled off an amazing feat of organization in coordinating the travel and other logistics for this major event--kudos to them). All of the presentations were cutting-edge and extremely impressive, and many are available on the SSRN profiles of the authors listed in the symposium program. I want to highlight just one that I thought would be of particularly broad interest to Credit Slips readers.

The always impressive Ronald Mann described his recently released book, Bankruptcy and the U.S. Supreme Court. In his characteristically insightful and probing way, Mann looks into the private papers of the Justices for evidence of how and why they decide bankruptcy cases as they do. In his fascinating presentation at the symposium, he challenged conventional explanations of why the Court has construed the law to provide generally narrow relief (not only because of their boredom with the subject matter and/or a supposed adherence to narrow construction of statutory language) and offered provocative explanations based on, among other things, the presence (or absence) of a federal agency to advance a case for broader relief. The introduction of this new book immediately brought to my mind another recent and impressive analysis of Supreme Court bankruptcy jurisprudence, Ken Klee's Bankruptcy and the Supreme Court: 1801-2014. But Mann's latest contribution really seems to add something valuable, illuminating, and entertaining. Readers of this great new book will not find themselves, as Mann described one Justice's reaction to an oral argument, "in sleepy distress." Check it out, and watch for what will be a value-packed Texas Law Review symposium issue.

Comparative Insolvency Conferences of Note

I thought Credit Slips readers might be interested in using some holiday down-time to catch up on a couple of recent comparative insolvency conferences with particularly cutting-edge presentations, some of which are or will be available for viewing online (and many of the papers are available on SSRN or elsewhere).

First, on Nov. 23-24, the Notary College of Madrid offered its spectacular hall to host an international conference on consumer credit information privacy and regulation (day one) and the treatment of insolvency for SMEs and consumers (day two). The second day offered a particularly interesting presentation by one of the leaders of the EU Commission's initiative for a Directive on harmonization of European laws on preventive restructuring and second chance discharge relief (followed by a bit of constructively critical commentary by an American who fancies he knows something about European personal insolvency). Recordings of the entire conference were just posted to YouTube--most of the recordings are in Spanish, but the EU Directive and critical commentary presentations are in English after a short Spanish intro (nos. 8 and 9 of the 10 recordings). Congratulations to the architects of this fabulous event, who also made impressive presentations: Matilde Cuena Casas (Univ. Complutense de Madrid), Ignacio Tirado Martí (Univ. Autónoma de Madrid), and David Ramos Muñoz (Univ. Carlos III de Madrid).

Second, the following week offered a special, rare treat with the conference, Comparative and Cross-Border Issues in Bankruptcy and Insolvency Law, hosted by the Law Review of the Chicago-Kent College of Law. The line-up of panels on both comparative and cross-border issues was particularly impressive, and we were treated to a keynote by Jay Westbrook refining his latest thinking about cross-border coordination. The conference was live streamed, and the recordings are promised in the near future, but for now, the livestream page still has (scroll down to Day 1) the recoding of Adrian Walters's terrific paper on restrictive English interpretation of the notion of international cooperation. Again congratulations to the organizers of this fabulous event (who, again, gave very impressive presentations of their own): Adrian Walters, Chicago-Kent College of Law, and Christoph Henkel, Mississippi College School of Law.

Merit v. FTI and the Missing Silver Bullet Argument?

On November 6, the Supreme Court will hear arguments in a case only a lawyer--and probably only a commercial or bankruptcy lawyer--could love, Merit Management Group v. FTI Consulting. Simplifying quite a bit, the issue is whether a payment by wire transfer (or presumably a check) is "made by" the bank who implements the funds transfer, or the customer who initiates the transfer. The issue arises from the safe harbor for securities contract-related settlement payments, insulating such transfers from avoidance (clawback) by a bankruptcy trustee, and the question whether a money transfer made by wire from the buyer of stock to the purchaser(s) was "made by or to ... a financial institution." 11 USC § 546(e). Several circuit courts have held the safe harbor applies even if the bank-transferor is a simple conduit, performing nothing more than the ministerial task of moving the money (so to speak) from buyer's account to seller's bank. The 7th Circuit held to the contrary in this case, noting that a letter might be said to be "sent by" either the sender or the Postal Service, but the former interpretation is more sensible and consonant with likely congressional intent in this context (again, vastly simplifying to prevent boring readers to death). 

Ordinarily I would leave it to those smarter than I to blog about these kinds of big-money cases, but after I was asked to write a little squib for the ABA about it, the extremely perceptive Henry Kevane of the famous insolvency firm Pachulski Stang in San Francisco saw my little piece and called me to ask about an argument relevant to the case. Did anyone point out, Henry asked me, that the definition of "financial institution" in section 101(22)(A) includes the bank's customer within the ambit of "financial institution" in cases where the bank is "acting as agent or custodian for a customer ... in connection with a securities contract"? Well, no, no one appears to have made this seemingly dispositive observation! A transferor bank implementing a wire transfer would certainly be acting as the customer's (account holder's) agent, and the whole point of the case is that the payment was made "in connection with a securities contract" (the same language in section 546(e)). If the Bankruptcy Code oddly defines the customer and the bank as both being a "financial institution" in this context, then regardless of who made the payment, it was made "by" and "to" a financial institution, since the same logic would apply on the recipient side, too. Hmmmmmmmm.