postings by Adam Levitin

House Judiciary Testimony on Chapter 11 Abuses

posted by Adam Levitin

I'm testifying before the House Judiciary Committee on Wednesday at a hearing entitled "Confronting Abuses of the Chapter 11 System."  My written testimony can be found here. It touches on six topics:

  1. Non-debtor releases
  2. Judge-picking
  3. Lack of appellate review (especially equitable mootness)
  4. Increased use of sub rosa plans
  5. Increasingly brazen fraudulent transfers
  6. Payday before mayday executive bonuses

By the way, since my draft article on Purdue has been public, I've heard from a number of attorneys, including folks I had not previously known, confirming various insights in the paper and wanting to tell me their own stories.  I have really appreciated that and learned a lot from it.  I have not seen this scale of a reaction to a paper previously. So if you've got your own tale of aggressive restructuring transactions being blessed by a hand-picked judge and then evading appellate review, I'm eager to hear them (and won't attribute them to you). 

The Texas Two-Step: The New Fad in Fraudulent Transfers

posted by Adam Levitin

There's a new fad in fraudulent transfers. It's called the Texas Two-Step. Here's how it goes. A company has a lot of tort liabilities (e.g., asbestos, talc, benzene, Roundup). The company transforms into a Texas corporate entity (the particular type doesn't matter). The new Texas entity then undertakes a "divisive merger" that splits the company into two companies, and it allocates the assets and liabilities as it pleases among the successor entities.

The result is that one successor entity ends up saddled with the tort liabilities (BadCo) and the other with the assets (GoodCo).  The companies then convert to whatever type of entity the want to be going forward for corporate governance (or venue) purposes, and the BadCo files for bankruptcy, while GoodCo keeps chugging away. The tort victims find themselves creditors in the bankruptcy of BadCo and get bupkes, while the bankruptcy plan inevitably includes a release of all claims against GoodCo. Pretty nifty way to hinder, delay, or defraud creditors if it works, right?

Well, that's the question:  does this work?  We've only seen two Texas Two-Steps to date. There have been a few Texas Two-Steps to date (and one might be a Wilmington Waltz). First was BestWall's asbestos bankruptcy. BestWall (formerly part of Georgia Pacific) is a subsidiary of Koch Industries, and its bankruptcy is pending in the Western District of North Carolina. No plan has been confirmed, but the case has been dragging on since 2017 and the asbestos victims have been enjoined from suing any of the non-bankrupt Koch entities. Plan exclusivity has long-lapsed, but the court won't dismiss the case and doesn't seem willing to consider any alternatives. Even if the Two-Step isn't completely successful in the end, it will surely reduce whatever settlement the Koch entities have to pay.

Then there's DBMP (CertainTeed), another asbestos case, again in the Western District of North Carolina. Same story going on there; there's an adversary proceeding pending about the preliminary injunction. Also in WDNC, before the same judge is Aldrich Pump. Same judge as DBMP, and again a preliminary injunction. And then pending in Delaware is Paddock Enterprises, LLC, the rump of Owens-Illinois. The UST filed an examiner motion over the divisive merger transaction. Denied.

In any case, the Two-Step looks promising enough that Johnson & Johnson is supposedly considering using it for its talc liabilities.

Continue reading "The Texas Two-Step: The New Fad in Fraudulent Transfers" »

Second Circuit Holds Many Private Student Loans Are Dischargeable in Bankruptcy

posted by Adam Levitin

The 2d Circuit this week joined the 5th and 10th Circuits in holding that the discharge exception in 11 U.S.C. § 523(a)(8)(A)(ii) for "an obligation to repay funds received as an educational benefit, scholarship, or stipend" doesn’t cover private student loans, only things like conditional grants (e.g., a ROTC grant that has to be repaid if the student doesn't enlist). It's another important student loan decision. At this point ever circuit to weigh in on the issue has said that private student loans aren't covered under 523(a)(8)(A)(ii).  Instead, a private student loan, if it's going to be non-dischargeable, would have to fit under 523(a)(8)(B), but that provision doesn't cover all private student loans. It only covers "qualified educational loans," which are loans solely for qualified higher education expenses (itself a defined term).

In this case, the debtor alleged that the loan was not made solely to cover his cost of attending college, and the loan was disbursed to him directly. The creditor, Navient, did not claim that the loan qualified as a "qualified educational loan," and instead relied on the 523(a)(8)(A)(ii) exception.The Second Circuit wasn't having any of it.

So what does this mean big picture?

Continue reading "Second Circuit Holds Many Private Student Loans Are Dischargeable in Bankruptcy" »

Sacklers Withdraw Their Threatened Sanctions Motion

posted by Adam Levitin

The Sacklers decided not to proceed with their threatened sanctions motion. Their counsel wrote to the case distribution list:

After having heard from several parties that the motion served yesterday may be counterproductive to the deal, we are withdrawing the email we sent yesterday serving the Rule 9011 motion.  It was not our intention to do anything counterproductive to concluding the deal, and we take seriously the views that have been expressed to us.  The motion has not been and will not be filed. 

Not every day you see a party put out a 201 page sanctions motion and then to yank it back the next day. 🤦🏻‍♂️🤦🏻‍♂️🤦🏻‍♂️  Wonder what the billing was for this episode?

Why Aren't All Judicial Recusal Lists Public?

posted by Adam Levitin

Judges sometimes have to recuse themselves from hearing cases because of financial or personal interests. Some of those conflicts can be spotted in advance, and judges will have standing recusal lists filed with the clerk of the court to keep those cases from being assigned to them in the first place. Of course, these recusals can be weaponized:  if there are two judges in a district, and I know that the son of one is a partner at local law firm, I can hire that firm as my co-counsel and ensure that the case will go before the other judge.

I got interested in this issue precisely because it enables judge-picking in two-judge divisions or districts. Some courts have their recusal lists up on the court's website. Others do not publish it. I was surprised today to be rebuffed when I asked the clerk's office for the Bankruptcy Court for the Southern District of Texas about getting the recusal list for the two judges who presided last year over half of the large, public company bankruptcies in the entire nation.

I wasn't given an explanation of why it isn't publicly available. As far as I can see, it should be. Parties should have a right to know why their case got assigned to a particular judge, not least because if the case assignment was the result of another party deliberately conflicting out a judge that might be grounds for seeking some sort of relief.  Perhaps there's some sort of privacy concern I don't see, but it strikes me that as a matter of course, all judicial recusal lists should be public and published. 

But this also brings up another matter, which is the variation in practice among courts on a range of issues. It's beyond me why there isn't much greater uniformity in administrative practices among clerks' offices. As I've been crawling through courts' websites, I've been struck by the lack of uniformity on all sorts of things (e.g., some courts' ECF systems include time stamps, and others don't). The decentralized nature of the court administration doesn't strike me as optimal or even the result of a lot of thinking, but more the outgrowth of traditional local fiefdoms. It doesn't make a lot of sense in an internet-driven age with national practices. 

The Sacklers Try to Strong Arm the Non-Consenting States with a Threat of Sanctions

posted by Adam Levitin

Every time I think the Purdue Pharma bankruptcy couldn't get crazier, it does. The latest development is that some of the Sacklers (the Raymond branch) are seeking sanctions against five of the holdout non-consenting states for allegedly false statements in the states' proofs of claim. It's a blatant litigation tactic. The clear motivation for this motion is to bully the non-consenting states into dropping their opposition to the plan (and the release of the Sacklers) in exchange for the Sacklers dropping the sanctions motion. It’s absolutely outrageous.

Continue reading "The Sacklers Try to Strong Arm the Non-Consenting States with a Threat of Sanctions" »

Let Consumers Control Their Financial Data

posted by Adam Levitin

I have an op-ed out in The Hill about who should control consumer financial data. Consumer financial data is basically the most valuable type of consumer data you can find because it is so easy to monetize. Not surprisingly, banks have been very reluctant to let consumers share their data with nonbanks (or other banks). Fortunately, there's a tool for addressing this issue. Section 1033 of the Dodd-Frank Act gives consumers a right to control their financial data. What's still needed, however, is a CFPB rulemaking implementing section 1033. The shape of a future 1033 rule will be key for setting forth the parameters for competition in consumer financial services for the next generation. There are certainly security and privacy issues that need to be addressed, but it should be no surprise that I am strongly in favor of broad data portability.

Purdue Retaliates Against the Parent of an Opioid Victim Who Dares to Speak Out

posted by Adam Levitin

Another recent Purdue docket item caught my notice. It is an order approving a settlement between Peter Jackson, the parent of a teenage opioid overdose victim, and Purdue and the Personal Injury Ad Hoc Committee regarding discovery requests that Purdue and the PI Ad Hoc Committee served on Mr. Jackson. It's a minor episode in the overall bankruptcy, but shows just how nasty Purdue is willing to get to push through its plan.

Continue reading "Purdue Retaliates Against the Parent of an Opioid Victim Who Dares to Speak Out" »

District Judge to Purdue: "You Don't Get to Choose Your Judge"

posted by Adam Levitin

"[Y]ou don't get to choose your judge." That's what US District Judge Colleen McMahon wrote to Purdue Pharma, in response to an ex parte letter Purdue had written to her addressing a possible motion to withdraw the reference to the bankruptcy court for a third-party release and injunction. 

The irony here is incredible. I suspect that Judge McMahon does not realize that judge picking is precisely what Purdue Pharma did to land its case before Judge Drain, rather than going on the wheel in Bowling Green and risking landing a judge who does not believe that there is authority to enter third-party releases.

The problem with judge picking is that it creates an appearance of impropriety. And judge picking is the original sin in Purdue's bankruptcy. It has tainted everything in the case. It will mean that however much money the Sacklers pay, there will always be the suspicion that they would have had to pay a lot more had the case been randomly assigned to another judge, who might not have stayed litigation against them for nearly two years.

Continue reading "District Judge to Purdue: "You Don't Get to Choose Your Judge"" »

Collins v. Yellen: the Most Important (and Overlooked) Implication

posted by Adam Levitin

The Supreme Court's decision in Collins v. Yellen has garnered a fair amount of attention because it resulted in a change in the leadership at the Federal Housing Finance Agency and largely dashed the hopes of Fannie and Freddie preferred shareholders in terms of seeing a recovery of diverted dividends. But the commentary has missed the really critical implication of the decision:  the Biden administration can undertake a wholesale reform of Fannie and Freddie by itself without Congress.

Continue reading "Collins v. Yellen: the Most Important (and Overlooked) Implication" »

What's Up With Oral Opinions in Bankruptcy?

posted by Adam Levitin

I've been reading a lot of bankruptcy court transcripts this past year, and I've noticed how frequently judges issue rulings orally from the bench. Sometimes these rulings are clearly drafted out, complete with pincites, etc. Yet these decision are never published. The only way to find them is to dig through the transcripts, which are usually not available on the free public dockets, but only in PACER. 

I've got a trio of concerns about this practice as well as some general questions about why this practice exists that I'm hoping our readership (particularly judges) can answer. 

Continue reading "What's Up With Oral Opinions in Bankruptcy?" »

Venue Reform: Once More Unto the Breach

posted by Adam Levitin

Chapter 11 venue reform is back and not a moment too soon. The perennial problem of forum shopping has devolved into naked judge picking with what appears to be competition among a handful of judges to land large chapter 11 case. The results are incredible: last year 57% of the large public company bankruptcies ended up before just three judges, and 39% ended up before a single judge. When judges compete for cases, the entire system is degraded. Judges who want to attract or retain the flow of big cases cannot rule against debtors (or their private equity sponsors) on any key issues. If they do, they are branded as "unpredictable" and the business flows elsewhere. The result is that we are seeing a weaponization of bankruptcy and procedural rights, particularly for nonconsensual or legacy creditors being trampled.  

Recognizing this problem, Rep. Zoe Lofgren (D-CA) and Ken Buck (R-CO) introduced the bipartisan Bankruptcy Venue Reform Act of 2021, H.R. 41931. The bill would require debtors to file where their principal place of business or principal assets are located—in other words in a location with a real world connection with the debtor's business. 

Continue reading "Venue Reform: Once More Unto the Breach" »

Collins v. Yellen

posted by Adam Levitin
The Supreme Court ruled today in Collins v. Yellen, a case brought by Fannie Mae and Freddie Mac preferred shareholders that challenged both the constitutionality of the FHFA Director's appointment and the 2012 amendment to Treasury's stock purchase agreement with Fannie and Freddie that provided for all of Fannie and Freddie's profits to be swept into Treasury. The preferred shareholders are miffed because they believe that those dividends should be paid to them first, never minding the fact that but for the Treasury stock purchase, Fannie and Freddie would have been liquidated in receivership, resulting in the preferreds being wiped out. 
 
SCOTUS, following its ruling in Seila Law v. CFPB, held that the FHFA Director must be removable at will by the President. In light of this finding of unconstitutionality in the appointment of the FHFA Director, the Court remanded for consideration of damages from past profit sweeps. Future profit sweeps are permitted, however, as the Director is now clearly removable at will by the President.
 
While some media is pitching the outcome as a mixed ruling, it really isn't for the preferred shareholders. The preferreds took it on the nose here, and the market gets it: Fannie Mae preferred shares tumbled in value by 62% after the decision.
 

Continue reading "Collins v. Yellen" »

Fake Lender Rule Repeal

posted by Adam Levitin

The House is schedule to take up a vote on repealing the OCC's "Fake Lender Rule," that would deem a loan to be made by a bank for usury purposes as long as the bank is a lender of record on the loan. Under the rule, issued in the waning days of the Trump administration, the bank is deemed to be the lender if its name is on the loan documentation, irrespective any other facts. Thus, under the rule, it does not matter if the bank was precommitted to selling the loan to a nonbank, which undertook the design, marketing, and underwriting of the loan. The bank's involvement can be a complete sham, and yet under the OCC's rule, it loan would be exempt from state usury laws because of the bank's notional involvement. The Fake Lender Rule green lights rent-a-bank schemes, which have proliferated as the transactional structure of choice for predatory consumer and small business lenders. 

Fortunately, the Fake Lender Rule can still be overturned under the Congressional Review Act, which allows certain recently made rules to be overturned through a filibuster-free joint resolution of Congress. Such a joint resolution passed the Senate 52-47 last month. Now the House is poised for its own vote. While the Senate vote was largely on partisan lines, some Republicans did join with Democrats to vote for the repeal. The dynamics in the House are somewhat different, as certain Democratic members have been opposed to the bill, but the fact that a vote is scheduled suggests that there should be the votes for repeal. 

The repeal of the Fake Lender has been endorsed by a group of 168 scholars from across the country, including yours truly and many Slipsters. You can read our letter urging the repeal here

Judge Shopping in Bankruptcy

posted by Adam Levitin

Several months ago, I did a long post about how Purdue Pharma's bankruptcy was the poster child for dysfunction in chapter 11.The gist of the argument is that the procedural checks and balances that make chapter 11 bankruptcy a fair and credible system have broken down because of a confluence of three trends:

  1. increasingly aggressive and coercive restructuring techniques;
  2. the lack of appellate review for many key issues; and
  3. the rise of “judge-shopping” facilitated by bankruptcy courts’ local rules.

I've written it up into a full length paper, forthcoming in the Texas Law Review and available here.

While writing the paper I was surprised to learn just how bad and concentrated the judge shopping has become in chapter 11. There are 375 bankruptcy judges nationwide. Yet last year, 39% of large public company bankruptcy filings ended up before a single judge, Judge David R. Jones in Houston. A full 57% of the large public company bankruptcy cases filed in 2020 ended up before either Jones or two other judges, Marvin Isgur in Houston and Robert D. Drain in White Plains. 

I discuss the implications of the supercharged judge shopping in the paper, but let me say here what no no practicing attorney (or US trustee) is able to say, because I don't have to worry about appearing before these judges in the future: these judges should be recusing themselves from hearing any case that bears indicia of being shopped into their courtroom, if only to avoid an appearance of impropriety. 

NRA Bankruptcy Petition Dismissed

posted by Adam Levitin

The NRA's bankruptcy petition was dismissed as filed in bad faith. I'm predicting that the court's opinion will be in the next edition of every bankruptcy textbook as the case really is a textbook example of bad faith.  The court found that there was substantial evidence in the record that the NRA filed for bankruptcy for the purpose of gaining an advantage in its litigation with the NY Attorney General, namely depriving the NY Attorney General of the remedy of dissolution, rather than for any other purpose.  

So what does this mean?

Continue reading "NRA Bankruptcy Petition Dismissed" »

CDC Eviction and Foreclosure Moratorium Held Illegal

posted by Adam Levitin

Today Judge Dabney Friedrich (a Trump appointee) ruled that the CDC's eviction and foreclosure moratorium exceeded the agency's statutory authority. This ruling has me wroth. It exemplifies the heartless disingenuousness of that masquerades as "textualism." Judge Friedrich treats the moratorium—an extraordinary response to extraordinary circumstances—as if it were a garden variety statutory interpretation exercise along the lines of "no vehicles in the park". Judge Friedrich looks at the statutory text and decides that it is "unambiguous," although the substance of her own analysis shows that it is anything but. And voila, that produces the result that the landlords and mortgagees get to create a public health risk by evicting tenants and mortgagors from their dwellings.

Continue reading "CDC Eviction and Foreclosure Moratorium Held Illegal" »

Rent-to-Own Dogs

posted by Adam Levitin

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

The Failure of the United States Trustee Program in Chapter 11

posted by Adam Levitin

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

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

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

FDIC Valid-When-Made Rule Amicus Brief

posted by Adam Levitin

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

Continue reading "FDIC Valid-When-Made Rule Amicus Brief" »

Abolish the OCC?

posted by Adam Levitin

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

Continue reading "Abolish the OCC? " »

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

posted by Adam Levitin

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

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

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

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

Not Cool, Bank of America

posted by Adam Levitin

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

Continue reading "Not Cool, Bank of America" »

Addressing Credit Invisibility Through Federal Contracting Power

posted by Adam Levitin

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

Continue reading "Addressing Credit Invisibility Through Federal Contracting Power" »

Consumers and Price Volatility: Texas Electricity Prices

posted by Adam Levitin

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

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

This story jumped out at me for two reasons.

Continue reading "Consumers and Price Volatility: Texas Electricity Prices" »

NRA Bankruptcy: Enter Kirkland?

posted by Adam Levitin

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

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

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

Is the NRA Out of Bullets?

posted by Adam Levitin

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

Continue reading "Is the NRA Out of Bullets? " »

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

posted by Adam Levitin

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

Continue reading "Is the NRA Board Shooting Itself in the Foot By Doing Nothing?" »

NRA Examiner Motion

posted by Adam Levitin

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

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

Eviction Moratoria Save Lives: the Evidence

posted by Adam Levitin

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

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

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

Here's the key graphic: 

Evictions

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

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

NRA Bankruptcy

posted by Adam Levitin

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

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

Continue reading "NRA Bankruptcy" »

CBRA Op-Ed

posted by Adam Levitin

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

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

Mick Mulvaney for Hypocrite Laureate?

posted by Adam Levitin

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

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

The Kraninger Discount

posted by Adam Levitin

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

Continue reading "The Kraninger Discount" »

"Madden-Fix" Amicus

posted by Adam Levitin

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

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

The OCC Is a Problem Agency

posted by Adam Levitin

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

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

Continue reading "The OCC Is a Problem Agency" »

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

posted by Adam Levitin

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

The Unconvincing Case for a Public Credit Registry

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

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

The Consumer Bankruptcy Reform Act of 2020

posted by Adam Levitin

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

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

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

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

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

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

Restructuring Support Agreements and the "Proceduralist Inversion"

posted by Adam Levitin

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

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

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

posted by Adam Levitin

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

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

Purdue's Poison Pill and the Broken Chapter 11 System

posted by Adam Levitin

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

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

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

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

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

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

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

posted by Adam Levitin

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

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

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

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

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

Trump's Personal Guaranties and Liquidity

posted by Adam Levitin

The revelations about Donald Trump's taxes might hold in them an explanation for why he didn't divest from his businesses when he became President, despite the obvious political problems that was going to create:  he couldn't afford divesting.  

Trump seems to have personally guarantied hundreds of millions of dollars of corporate borrowing. That's not uncommon for someone in his position, but I would imagine that at least some of those personal guaranties have key man provisions that require him to remain involved with the business. If he doesn't, the loan (and guaranty) might be in default and callable. And there are surely cross-default clauses in some of the borrowings, so it wouldn't be just one loan that could come due, but a bunch of them. It's pretty clear that in 2016 Trump didn't have the liquidity (and perhaps not even the assets) to deal with that sort of situation. 

Now let's be clear. There might have been other motivations for Trump to retain control over his businesses. But to that list, we should add the possibility that he had boxed himself in and couldn't divest even if he had wanted to without ending up broke. 

Congressional testimony on Small Business Lending regulation

posted by Adam Levitin

I am testifying later today (virtually) before the House Small Business Committee on "Transparency in Small Business Lending."  My written testimony is here.

Here's the background: consumer credit is governed by an extensive regulatory regime, starting with disclosure regulation, but extending to some substantive term regulation, and regular supervision (inspections) of lenders. There is no equivalent system for business lending.

The lack of protections for businesses is because they are presumed to be more sophisticated entities, but the range of financial and legal sophistication among businesses varies considerably. In particular, small businesses are often much more similar to consumers, and in fact their borrowing is often based on the owner's personal credit and guarantied by the owner and collateralized by the owner's personal property.

This leaves small businesses vulnerable to abusive practices that were prohibited in the consumer credit markets in the 1960s, 70s, and 80s:  disclosure of credit costs in non-standardized and misleading terms (e.g., quoting daily interest rates, rather than annual percentage rates, as required for consumer credit by the Truth in Lending Act), and confessions of judgment (prohibited for consumers by the FTC Credit Practices Rule). 

The Committee's chairwoman, Rep. Nydia Velázquez, has proposed a bill that would extend some consumer credit protections to loans for under $2.5 million made to small businesses, as well as create a system for regulating brokers of small business loans. The bill is an important step forward. While there are some tweaks I'd like to see to it, I very much hope it advances and becomes law. 

 

OCC Suggests "Fair Access" Rulemaking to Require Banks to Finance the Oil and Gas Industry

posted by Adam Levitin

Just when you think it can't get more ridiculous... The Office of Comptroller of the Currency, which hasn't taken racially discriminatory lending seriously, is concerned about banks' discriminatory refusal to serve the oil and gas industry. In fact, the OCC is so concerned that it is suggesting legal theories so farfetched that would be laughed out of a courtroom if it actually tried to act on them. 

The underlying issue here is that banks seem have gotten cold feet about financing fossil fuels. Why? Any number of reasons, including that their investors don't like it (ESG), that global warming threatens their own balance sheets, that oil and gas prices right now are so low that investment in the sector might not be a good business move, and that there's huge risk to fossil fuel projects' value based on the 2020 election outcome. But Senator Dan Sullivan of Alaska wants to drill in the Arctic and has expressed concern about banks' unwillingness to fund global warming to the OCC.

In response, the Acting Comptroller of the Currency, Brian Brooks, wrote a letter to Senator Sullivan that can only be described as verging on legal malpractice in the service of political expediency while pushing a vision of economic regulation that looks like communist China. 

Acting Comptroller Brooks argues that 12 U.S.C. § 1(a):

requires the OCC to ensure that banks provide "fair access" to financial services. Decisions by major banks to deny the oil and gas sector, among other targeted industries, access to financial services may violate that statute. Accordingly, the OCC will examine the possibility of issuing regulations defining fair access to provide clarity to banks and customers alike.

Let's take a look at 12 U.S.C. § 1. The relevant section states:  

There is established in the Department of the Treasury a bureau to be known as the “Office of the Comptroller of the Currency” which is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.

12 USC 1 is a general expressive statement of the general purposes of the OCC. It's not even a "be excellent to each other" sort of exhortation. It is not by any stretch a provision creating any substantive rights or obligations. If OCC tried to use this as the basis for a "fair access" rulemaking, as Brooks suggests, the rulemaking would get thrown out by a court on an APA challenge in a hot minute. 12 USC 1 authorizes the OCC to do precisely nothing. 

Whatever 12 USC 1 is, it is not a roving commission for the OCC to undertake rulemakings about "fair access" and "fair treatment", etc. It is not a free-standing authorization to undertake any sort of rulemaking. It is very plainly not a delegation by Congress. Furthermore, the suggestion that "Decisions by major banks to deny the oil and gas sector ... access to financial services may violate that statute" is risible. 12 USC 1 is at most an obligation on the OCC, not on banks. It's embarrassing to see the OCC put forth such a legal argument.  

Note that what Brooks is proposing is the flip-side of the allegations made against Operation Chokepoint, namely that regulators were discouraging banks from lending to certain disfavored industries. Now Brooks is talking about forcing banks to lend to certain favored industries. That sounds like ... communist China. It makes my head spin. 

(btw, where are the conservatives who bitch about affordable housing goals and the CRA? Aren't they up in arms that a financial regulator is talking about forcing banks to lend to someone?)  

But let's say that I'm wrong and Brooks is right. Consider the implications. Imagine what a Comptroller with a different political tinge might have with provisions such as "fair treatment of customers" and "fair access to financial services". Who needs UDAAP when you've got "fair treatment"? Who needs CRA, when you've got "fair access"? If Brooks wants to weaponize 12 USC 1, he might want to first recognize that "fair" is a word that progressives can do a lot more with than he can.  

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