postings by Adam Levitin

Congratulations to Pamela Foohey!

posted by Adam Levitin

Congratulations to Pamela Foohey on being named to the American Bankruptcy Institute's 40 Under 40 list for 2019!  Pamela joins Credit Slips own Dalié Jiménez (class of 2018) as an honoree

And it's been a great news day for our former co-blogger Katie Porter, who was not only the subject of an American Banker article, but was put on a SCOTUS short list

The Clock Is Ticking for the Sacklers

posted by Adam Levitin

It's funny how what goes on in one bankruptcy case can sometimes point to looming issues in another. The PG&E plan exclusivity fight suggests an interesting dynamic looming in Purdue:  Purdue's own plan exclusivity could expire, which would completely upend the dynamic of negotiations with the Sackler family for a plan contribution in exchange for a non-consensual release of creditors' claims against them.  

As I see it, the Sacklers have no more than 18 months (and perhaps as few as 4 months) to cut their deal. If the Sacklers fail to reach a deal before plan exclusivity lapses, a state AG (or anyone else) could easily propose a plan that assigns all of the bankruptcy estate's litigation claims against the Sacklers to a trust for opioid victims or sells off the claims to a litigation vehicle.  The trust (or litigation vehicle) will then go and litigate against the Sacklers, and any recoveries will go to opioid victims. Critically, if this happens, the Sacklers will not be able to get a third-party release from Purdue's creditors.  They can still settle the fraudulent transfer claims of the bankruptcy estate, but they won't be shielded from creditors' direct claims.  

Now, I'm not sure how strong those direct claims really are, and thus how important a third-party release is for the Sacklers. They might decide that the asking price isn't worth paying. And the AGs might prefer to get half a loaf, rather than nothing; if so, they don't want plan exclusivity to lapse either--it's a great threat until it actually has to be played. Again we see the standard bankruptcy dynamic of one party threatening to push the other out the window, and the other party threatening to jump. Mutual defenestration.   

More generally, though, I wonder if Purdue will be able to get a pro forma extension of exclusivity given the enormous conflict of interest of its Sackler-controlled management. This seems like exactly the sort of case where plan exclusivity should not be extended because its main effect is to give the conflicted equity owners time to play for a lower settlement figure for their own liability.  In other words, plan exclusivity is benefitting the Sacklers personally, not necessarily the estate. That's akin to letting out-of-the-money equity sit around in bankruptcy and gamble on resurrection while burning up estate assets on administrative expenses. Yes, it's a mess of a case, but letting Purdue maintain plan exclusivity hardly seems like the right way to deal with that problem. A better outcome might require letting someone else be in the drivers' seat.

[Update: It seems that there actually is someone else in the drivers' seat already. Purdue's board of directors has been transformed over the past year. It now has a majority of independent directors and they seem to have some degree of insulation from the Sacklers, who continue to be the majority shareholders. There's not a lot of visibility on this because it is a private company, but the "informational brief" filed by Purdue explains some of this--the two branches of the Sackler family each appoint up to two Class A or Class B directors, but that there are also four other directors chosen by jointly by Sackler family members. Critically, there is a Special Committee of the board (comprised of a star-studded cast of restructuring professionals). The Special Committee has no Class A or Class B directors on it, and the Special Committee handles all matters relating to the Sacklers. It seems from a Shareholder Agreement (which I do not believe is public) that the Sacklers lack the ability to get rid of the Special Committee or do things like bylaw amendments, etc. to keep control.

That said, what I cannot tell from the public documents is what sort of board vote would be needed to proceed with a bankruptcy plan. Is it a simple majority? Unanimous? Is it even a vote of the full board, or just the Special Committee? The Informational Brief does not indicate whether matters encompassing more than to the Sacklers are solely the purview of the Special Committee. All of which is to say that from the public documents I have seen, I can't tell if the Sacklers have been totally pushed out of any management influence or if it is just that their influence has been substantially diminished. In any event, to the extent there's new management in charge, the case for terminating exclusivity is much weaker. Additionally, the case for a creditors' committee bringing fraudulent transfer actions derivatively looks a lot weaker.]

Speaking of which, why haven't we seen a motion to dismiss for cause filed at this point?  My guess is because it doesn't obviously help any one.  

Amicus Brief on Valid-When-Made

posted by Adam Levitin

I have filed an amicus brief regarding "valid-when-made" in Rent-Rite Super Kegs West, Ltd. v. World Business Lenders, LLC. The brief shows pretty conclusively that there was no such doctrine discernible in the law when either the National Bank Act of 1864 or the Depository Institutions Deregulation and Monetary Control Act of 1980 were enacted, and that subsequent cases consistent with the doctrine are based on a misreading of older law. 

The Sky Is Falling: Securitization, Chicken Little Edition

posted by Adam Levitin

It's been quite a week for "valid-when-made (up)".  Not only did FDIC and OCC race to court to defend the doctrine in the context of a 120.86% small business loan, but there's a Bloomberg story out about a set of class action usury law suits (here and here) against the credit card securitization trusts used by Capital One and Chase. The story suggests that these suits threaten the $563 billion asset-securitization market and also the $11 trillion mortgage securitization market. That claim is so readily disprovable, it's laughable. 

Here's the background. New York has a 16% usury cap under Gen. Oblig. Law 5-501. The National Bank Act § 85 provides that that cap does not apply to national banks that are based in other states (such as Delaware), but the National Bank Act only covers banks. The securitization trusts are not banks, but are common law or Delaware statutory trusts. The class action suits argue that under the 2d Circuit's Madden v. Midland Funding, LLC precedent, it is clear that New York usury law applies to the trusts; they cannot shelter in National Bank Act preemption because they are not national banks. 

Obviously, the banks see it the other way, and have invoked valid-when-made as part of their defense. They're wrong, but what irks me is that financial services industry lawyers and trade associations are claiming that if these class action suits succeed the sky will fall for securitization and that the Bloomberg article didn't really question this claim: Bloomberg's headline is that the entire $563 billion ABS securitization market is at risk, and bank attorneys suggest in the article that the $11 trillion mortgage securitization market is at risk too. 

Let's be clear. This is utter nonsense on a Chicken Little scale. These class action law suits affect only part of the $123 billion credit card securitization and the very small $30 billion unsecured consumer loan securitization markets. Even then they do not threaten to kill off these markets, but merely limit what loans can be securitized to those that comply with the applicable state's usury laws. They do not affect mortgage securitization at all and are unlikely to have much, if any impact on auto loan securitization or student loan securitization. To suggest, as the Bloomberg article does, that these class action suits affect the securitization markets for cellphone receivables or time shares (where is there a usury claim even possible in those markets?) is embarrassingly ridiculous. The sky isn't falling, Turkey Lurkey. Full stop. 

Continue reading "The Sky Is Falling: Securitization, Chicken Little Edition" »

FDIC and OCC Race to Court to Defend 120.86% Interest Rate Small Business Loan

posted by Adam Levitin

FDIC and OCC filed an amicus brief in the district court in an obscure small business bankruptcy case to which a bank was not even a party in order to defend the validity of a 120.86% loan that was made by a tiny community bank in Wisconsin (with its own history of consumer protection compliance issues) and then transferred to a predatory small business lending outfit. Stay classy federal bank regulators. 

[Update: based on additional information--not in the record unfortunately--this is clearly a rent-a-bank case, with the loan purchaser having been involved in the loan from the get-go.]

FDIC and OCC filed the amicus to defend the valid-when-made doctrine that the bankruptcy court invoked in its opinion. FDIC and OCC claim it is "well-settled" law, but if so, what the heck are they doing filing an amicus in the district court in this case? They doth protest too much.

What really seems to be going on is that FDIC/OCC would like to get a circuit split with the Second Circuit's opinion in Madden v. Midland Funding in order to get the Supreme Court to grant certiorari on the valid-when-made question in order to reverse Madden. The lesson that should be learned here is that while Congress seriously chastised OCC for its aggressive preemption campaign by amending the preemption standards in the 2010 Dodd-Frank Act, that hasn't been enough, and going forward additional legislative changes to the National Bank Act are necessary. Indeed, the FDIC and OCC action underscores why FDIC and OCC cannot be trusted with a consumer protection mission, even for small banks (currently they enforce consumer protection laws for banks with less than $10 billion in assets). The FDIC and OCC are simply too conflicted with their interest in protecting bank solvency and profitability, even if it comes at the expense of consumer protection. Moving rulemaking and large bank enforcement to CFPB was an important improvement, but what we are seeing here is evidence that it simply wasn't enough. 

More on the background to the story from Ballard Spahr. Needless to say, I completely disagree with the historical claim by FDIC/OCC (and echoed by Ballard Spahr) about "valid-when-made". Valid-when-made-up is more like it.  

Purdue and the Sacklers and the Limits of Fraudulent Transfer Law

posted by Adam Levitin

One of the major issues in the Purdue Pharma bankruptcy is how much the Sackler family, which (indirectly) controls Purdue will contribute in order to get releases from opioid liability. (Relatedly, are such non-debtor releases allowed outside of the asbestos context, where they are specifically authorized by statute? Second Circuit law says "sometimes.") 

The question I have is why the Sacklers would contribute anything? Do the Sacklers themselves really have any opioid liability?  As far as I'm aware, the only suits filed so far against the Sacklers or their non-Purdue entities are for fraudulent transfers or unjust enrichment.  

The former claim allege that the Sacklers received assets that were transferred from Purdue with actual intent to hinder, delay, or defraud creditors. It is not a "fraud" claim involving a misrepresentation, but a claim based on intentional evasion of creditors. It's sometimes also called fraudulent conveyance or voidable transfer.  (There are also constructive fraudulent transfer allegations, but that's just a bunch of valuation questions.) The later claim is really a Hail Mary sort of claim, but the fraudulent transfer suits have some legs, and given that they are alleging actual fraudulent transfers, the crime/fraud exception to attorney-client privilege shouldn't apply under the Supreme Court's recent Husky Electronics ruling. (Also some states have criminal fraudulent transfer statutes, although none of have used them vis-à-vis the Sacklers...the statutes are pretty weak.  Maybe there's an argument for a federal bankruptcy criminal under 18 USC 152(7) as well, but a lot more facts would need to be known.) Without attorney-client privilege, the actual fraudulent transfer case gets a lot easier. But what it does mean practically?  

It means that the Sacklers will probably keep some, but not all of the funds they received from Purdue during the statute of limitations period (and everything they got outside of the limitations period). The situation underscores two problems with  fraudulent transfer statutes and the need for legislative fixes.

Continue reading "Purdue and the Sacklers and the Limits of Fraudulent Transfer Law" »

Private Equity's Abuse of Limited Liability

posted by Adam Levitin

One of the central features of the Stop Wall Street Looting Act that was introduced by Senator Elizabeth Warren and a number of co-sponsors is a targeted rollback of limited liability.

This provision, more than any other, has gotten some commentators’ hackles up, even those who are willing to admit that there are real problems in the private equity industry and welcome some of the other reforms in the bill. (See also here and here, for example.)

The idea that limited liability is a sine qua non of the modern economy is practically Gospel to most business commentators.  These commentators assume that without limited liability, no one will ever assume risks, such that any curtailment of limited liability is a death sentence for the private equity industry.

They're wrong. Limited liability is a substantial, regressive cross-subsidy to capital at the expense of tort creditors, tax authorities, and small businesses. Limited liability is a relic of the underdeveloped financial markets of the Gilded Age and operates as an implicit form of leverage provided by law. But it’s hardly either economically efficient or necessary for modern business activity. It's a fairly recent development in the western world, there are numerous exceptions to it, and a number of notable firms have prospered without it (JPMorgan & Co., Lloyds of London, American Express, and many leading law law firms).

In any event the Stop Wall Street Looting Act rolls back limited liability solely for private equity general partners in a surgical manner such that doesn’t affect limited liability more broadly. All the Stop Wall Street Looting Act will do is reveal which private equity firms have real managerial expertise, and are thus able to thrive without limited liability, and those that don’t and require the legal subsidy to be profitable. Far from undermining the private equity industry, it is a restoration of a central tenet of honest American capitalism: reward should be commensurate with risk.

Continue reading "Private Equity's Abuse of Limited Liability" »

How NOT to Regulate ISAs

posted by Adam Levitin

Income-sharing agreements or ISAs are becoming an increasingly popular way to finance higher education. The key problem that ISAs face as a product is uncertainty about their regulatory status. Are ISAs “credit” for various statutory purposes? Or are they something else? Into the regulatory void comes a bipartisan bill, introduced by Senators Mark Warner, Marco Rubio, and Chris Coons, that would set forth a regulatory framework for ISAs. The problem is that the regulatory framework proposed is shamefully bad: it would give a green light to discriminatory financing terms and tie the CFPB’s hands from further regulating ISAs.

Continue reading "How NOT to Regulate ISAs" »

Playing with Fire: The CFPB's Proposed Repeal of the "GSE Patch"

posted by Adam Levitin
CFPB recently put out an advance notice of proposed rulemaking to amend the Qualified Mortgage (QM) Rule by letting the "GSE Patch" expire.  What the Bureau is proposing is potentially very dangerous.  While I haven’t liked some of the Bureau's other proposed rules (including under the Cordray Directorship), none of them were an all-out ideological gamble with the economy. This one, in contrast, is really playing with fire.  

Continue reading "Playing with Fire: The CFPB's Proposed Repeal of the "GSE Patch"" »

Biden's Involvement in the Detroit Bankruptcy?

posted by Adam Levitin

In the Democratic Primary debate last night, former Vice-President Joe Biden claimed to have been deeply involved in the Detroit bankruptcy: 

Q (Tapper): What do you say to progressives who worry that your proposals are not ambitious enough to energize the progressive wing of your party, which you will need to beat Donald Trump?

A (Biden): ... Number three, number three, I also was asked, as the mayor of Detroit can tell you, by the president of the United States to help Detroit get out of bankruptcy and get back on its feet. I spent better part of two years out here working to make sure that it did exactly that.

What on earth is Joe Biden talking about? I followed the Detroit bankruptcy case fairly closely and never once heard of any involvement from Biden. A google search for "Biden Detroit bankruptcy" shows an involvement consisting of all of one lunch with the Mayor of Detroit.  Maybe Biden was deeply involved behind the scenes, but I doubt it, as the federal government simply didn’t do anything to help out Detroit. Perhaps he was referring to the GM/Chrysler bankruptcies? If so, there was important federal involvement as a lender, but Joe Biden was not an important player in those cases either as far as I know.

If others know more, it would be interesting to hear, but as far as I can tell, Biden is claiming credit for things that he had no involvement in.  

What Is "Credit"? AfterPay, Earnin', and ISAs

posted by Adam Levitin
A major issue in consumer finance regulation in mid-20th century was what counted as “credit” and was therefore subject to state usury laws and (after 1968) to the federal Truth in Lending Act. Many states had a time-price differential doctrine that held that when a retailer sold goods for future payment, the differential between the price of a cash sale and that of credit sale was not interest for usury law purposes. State retail installment loan acts began to override the time-price doctrine, however, and the federal Truth in Lending Act and regulations thereunder eventually made clear that for its purposes the difference was a “finance charge” that had to be disclosed in a certain way. 
 
Today, we seem to be coming back full circle to the question of what constitutes “credit.” We’re seeing this is three different product contexts: buy-now-pay-later products like Afterpay; and payday advance products like Bridgit, Dave, and Earnin’; and Income-Sharing Agreements or ISAs (used primarily for education financing). Each of these three product types has a business model that is based on it not being subject to some or all “credit” regulation. Whether those business models are well-founded legally is another matter.
 
Let me briefly recap what is “credit” for different regulatory purposes and then turn to its application to the types of products.

Continue reading "What Is "Credit"? AfterPay, Earnin', and ISAs" »

Elizabeth Warren & the Dow Corning Bankruptcy: Nothing to See

posted by Adam Levitin

The Washington Post has a story about Senator Elizabeth Warren’s involvement in the Dow Corning bankruptcy that implies that Senator Warren was somehow working against the interests of personal injury victims. That’s rubbish, and it’s frankly irresponsible reporting that fundamentally fails to understand the bankruptcy process and leaves out a critical fact.

Bankruptcies are complicated, so let me relate the Dow Corning story and then what we know of Senator Warren’s minimal involvement. Bottom line is that this is a complete nothing burger, much like the previous Washington Post story with the shocking headline (much mocked, and now amended) that then-Professor Warren had billed [a below-market] rate of $675/hr for her legal work

Here's the properly related story in a nutshell: Senator Warren did some minimal work in support of a deal to ensure compensation for tort victims that was supported by the overwhelming majority (94%) of those tort victims and that was approved by a federal court. That’s a good thing that deserves praise, not some implicit shade.  Alas, the Post doesn't bother to mention the tort victim support for the plan. 

Continue reading "Elizabeth Warren & the Dow Corning Bankruptcy: Nothing to See" »

Libra and Financial Inclusion

posted by Adam Levitin

Facebook’s proposed Libra cryptocurrency project has truly stirred up a hornet’s nest of controversy.  Critics have generally focused on Libra as a currency and the power of Facebook in society and its appropriation of users’ privacy.  

I think that discussion misses a key point.  Libra will be, first and foremost, a payment system.  It will be a payment system that happens to operate using a currency index, rather than a single country’s currency, and clear using blockchain rather than other clearing software, but it’s still a payment system, that is a system for moving value between parties.  The payment system aspect is what both makes me incredibly skeptical about Libra’s financial inclusion claims and about Libra’s prospects for success. 

Continue reading "Libra and Financial Inclusion" »

The Meaning of "Abusive" in the UDAAP Triad

posted by Adam Levitin

On June 25, the CFPB will be holding a symposium on the meaning of "abusive" in the Consumer Financial Protection Act.  "Abusive" is an expansion of the traditional FTC Act couplet of "unfair or deceptive" acts and practices (UDAP) to a triad of "unfair, deceptive, or abusive" acts and practices (UDAAP). Although the Bureau has operated for the past eight years without defining the term "abusive", it has indicated in its long-term rulemaking agenda that it intends to undertake a rulemaking to define "abusive"—presumably in response to US Chamber of Commerce complaints about legal uncertainty chilling business.

The symposium will have two panels, one of academics, one of practitioners.  Credit Slips will be well represented on the first panel by me and our former guest blogger, Patricia McCoy.  We'll be joined by Howard Beales of GW University's Business School, and the inimitable Todd Zywicki of Scalia Law School.    

My (lengthy) written submission (a/k/a everything you wanted to know about "abusive" but were afraid to ask) is here.  Bottom line, there's no reason for the Bureau to undertake a definitional rulemaking, its legal authority to do so is suspect, it cannot bind state AG's to any definition... but if it does do so, there's no scienter requirement, no cost-benefit analysis required, and "taking unreasonable advantage" sounds in unjust enrichment.   

Is Cryptocurrency What Makes Ransomware Possible?

posted by Adam Levitin

The story about Baltimore's entire municipal IT system being held hostage by ransomware has two angles that might be of interest to Slips readers. 

First, among the services that are affected is the city's lien recordation system (the city is treated as a county; confusingly there is a separate Baltimore county). That means you can't readily get a lien search, and that's gumming up property transactions.  To me this underscores the risk of electronic property records. They are vulnerable to disruption in a way paper is not. One has to worry about fire and water with paper, but we know how to deal with those risks pretty well. Electronic systems are vulnerable in other ways.  Indeed, if a system can be taken hostage, what prevents data from being altered without Baltimore's knowledge?  I don't want to be a Luddite here, but the convenience of electronic systems comes with some scary risks. 

Second, the payment demanded is in Bitcoins. Ransomware seems very dependent upon cryptocurrencies (particularly Bitcoin). Did ransomware even exist before Bitcoin? (That's a serious question. Maybe someone knows.) The only reason to take data hostage is to get paid. But payment is the dangerous moment for the hostage-taker:  if the payment can be traced to the hostage-taker, the long arm of the law can likely get him too.  This means that a bank-based payment system doesn't work well for the ransomware model. Banks are required to "know their customer," and while false fronts can be used that still creates a possible route for law enforcement, as the beard may know who hired him, etc.  Prepaid cards and cash present similar problems because they have to be physically delivered.  But crypto, ah, crypto seems perfectly made for ransomware, particularly when the hostage takers are overseas.     

If I'm right about this, it leaves me wondering first, why there isn't much more stringent regulation of crypto-currency markets for AML? Not all the players can base themselves off-shore. Even if an exchange is in Ruritania, US consumers need to have a wallet provider. Someone's going to be doing business in the US and using a US bank. If the US can squeeze state actors with its AML regime, why can't it similarly squeeze crypto markets into compliance?   

Second, is there any positive social value to crypto currencies? They seem to be used primarily for two purposes:  money-laundering (I'm including ransom payments in this bucket) and speculation.  Other than the occasional odd case, they aren't being used to hedge, for payments, or for any other socially beneficial purpose that I can tell. Maybe I have this wrong, but I'm having trouble seeing why crypto currencies should be tolerated by the law. 

Payday Rule Comments

posted by Adam Levitin

Because the ALI Consumer Contracts Restatement plus grading hasn't given me enough to do this week, I thought I would gin up some brief comments on the CFPB's proposed repeal of the Payday Rule.  My comments are here.   

Podcast on ALI Consumer Contracts Restatement

posted by Adam Levitin

I did a podcast for the Consumer Finance Monitor Podcast about the American Law Institute's Consumer Contracts Restatement project.  It's not often that you will see me on the same side of an issue as the podcast's host, Alan Kaplinsky, an attorney at Ballard Spahr who represents financial services firms.  Indeed, I suspect the next time Alan is sitting across a table from me asking me questions, it will be at a deposition.  Given what a great radio voice Alan has, that might almost be fun. But our collaboration on this podcast goes to an important, but hard to understand thing about why both consumer groups and business groups are opposed to the Restatement.  

Both consumer and business groups are uncomfortable with the ALI acting as a private legislature, unchecked by any constituency.  But the real issue is that for consumer advocates, the Restatement is a bad project because it would bind all consumers to contractual terms that they do not agree with or even know about.  

In contrast, the concern for business groups is that the Restatement gives that small subset of consumers who litigate somewhat stronger tools.  These tools aren't strong enough to change the balance of power, but they are enough to be a pain for businesses, specifically a jettisoning of the parol evidence rule (i.e., it doesn't matter what the written contract says, the salesman's representations are admissible evidence) and a contract defense of deception that will apply to some contracts where UDAP would not (again, you've gotta worry about the sales rep's communications).  In other words, the concerns here aren't symmetrical, so this is not a situation where the Restatement is a moderate neutral position.  It's bad for all consumers, and it creates more litigation problems for businesses without creating meaningful consumer protections.   

 

ALI Consumer Contracts Restatement--More Problems with the Legal Research

posted by Adam Levitin

More problems are emerging with the legal research underlying the American Law Institute's Consumer Contracts Restatement project.  The Consumer Contracts Restatement has been the subject of scholarly criticism for a while because of its novel quantitative empirical approach (case counting).  The Restatement stands on six empirical studies of consumer contracts.  While the current draft claims that these studies merely serve as confirmation for the Restatement's positions, which were supposedly arrived at through the traditional method of reading and distilling the law from the cases, all of the early drafts of the Restatement said nothing about this traditional method and only relied on the empirical studies, which now conveniently arrive at exactly the same positions.  

The first two scholarly works to examine the legal research underlying the Restatement were one by Professor Gregory Klass at Georgetown Law and another by yours truly with seven other ALI members.  These studies were basically looking for "false positives"--cases claimed to be relevant by the Restatement that aren't.  Both studies found an incredibly high rate of false positives--over 50% in some instances.  The Restatement had included in its case count, among other things, completely irrelevant cases, such as business-to-business cases, cases not involving common law contract disputes, duplicate cases, and vacated cases.  These types of errors were pretty shocking in what should be a document based on unimpeachable legal research.  A nice summary write-up of these studies by Professor Martha Ertman can be found over at JOTWELL (the Journal of Things We Like Lots).  

Now Professor William Widen at the University of Miami has done some digging on the Restatement's treatment of pay-now, terms-later contracts. Professor Widen's preliminary research has found that there's also a false negative problem--the Restatement has missed a number of state Supreme Court cases, many of which are contrary to its position.  Additionally, the Restatement seems to have missed a substantial number of state Supreme Court cases that make clear that providing "notice" in consumer contracts means actual knowledge, not merely notional notice.  In short, there is increasing evidence of serious problems with the legal research underlying the Restatement, both false positives and false negatives.  My sense is that with more time, research will adduce even more false negatives.  Given that the ALI likes to present itself as the gold standard of legal research, these problems should give ALI membership pause when considering approving the Restatement.  

ALI Consumer Contracts Restatement-What's at Stake

posted by Adam Levitin

The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project.  Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.  

Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms.  In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.  

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers....

A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project. 

So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!

ALI Engages in Cheap Intimidation Tactics in Its Attempt to Ram Through the Consumer Contracts Restatement

posted by Adam Levitin

As Credit Slips readers know, I've been fighting the American Law Institute's Consumer Contracts Restatement project for several years.  I think it started with good intentions, but it's unfortunately turned into a remarkably anti-consumer project.  The ALI has accused yours truly of a copyright violation for making the draft Restatement available through Dropbox to other ALI members in the context of a link in a letter urging those ALI members to vote against the Restatement.    

ALI's actions on this are the pettiest sort of bullying to try and quash the "vote no" campaign against a project that would seriously harm consumer rights.  ALI filed a DMCA takedown notice with Dropbox that resulted in Dropbox preventing me from sharing all my files, not just the one file in question. (Damages, damages...) ALI even went so far as to freeze me out of its website, which prevented me from reading comment letters about the draft or filing motions to amend it.  

Fortunately, there's a good way to deal with bullies, and that's get a lawyer.  ALI restored my website access after hearing from my righteous copyright counsel, and has in fact since made the draft Restatement publicly available, even while still insisting (on a completely factually misinformed basis, but ALI never bothered to ask me) that what I did was somehow outside of fair use and refusing to rescind the DMCA takedown notice. It's become clear that ALI desperately needs to finish its Restatement of Copyright so it can understand how fair use actually works.    

The fact that ALI is making the draft publicly available now just shows what nonsense its claim was—it was nothing but a cheap intimidation tactic. ALI ought to be ashamed for acting this way. Is this kind of thug behavior really how the nation's preeminent law reform organization rolls?  

Middle Class Homeowners Are the Biggest Winners from Student Loan Forgiveness

posted by Adam Levitin

A lot of the criticism of Senator Elizabeth Warren’s student loan forgiveness proposal has focused on how it's not fair to give loan forgiveness to current borrowers when past borrowers repaid their debts.  That criticism overlooks the enormous boost Senator Warren's proposal would give to the real estate market. Many previous borrowers are homeowners, and homeowners are going to be one of the major beneficiaries of any student loan debt forgiveness as their home equity value will increase because of the increase in housing demand from deleveraged student borrowers.  

By my calculations Senator Warren's proposal for $640 billion in student loan forgiveness could readily translate into $1 trillion of increased home equity value plus an additional $320 billion to $680 billion in GDP growth. That's an amazing win-win-win for student loan debtors, for homeowners, and for those in the home building and furnishing trades.  

Continue reading "Middle Class Homeowners Are the Biggest Winners from Student Loan Forgiveness" »

About the Student Loan Forgiveness Price Tag...

posted by Adam Levitin

Senator Warren's student loan forgiveness proposal has a lot of scolds moaning about the immorality of debt forgiveness, the unfairness to those who paid their debts, and complaining about the price tag. It's pretty obvious that none of those folks know anything about how the federal student loan system works. If they did, they'd know the we crossed the debt forgiveness Rubicon long, long ago. There is already enormous debt forgiveness baked into the federal student loan program.

The only real difference between Senator Warren's proposal and the existing forgiveness feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. It's not a matter of principle in any way, shape, or form.  

Continue reading "About the Student Loan Forgiveness Price Tag..." »

Student Loan Borrowing Is Different

posted by Adam Levitin

Education finance and student loan forgiveness have been getting a lot of attention the last couple of days because of our former co-blogger's loan forgiveness proposal.  I'm not going to address the merits of that proposal here.  Instead, I want to make a simple point that many of the critics of Senator Warren's proposal don't seem to understand:  student loan borrowing is materially different from other types of borrowing, such that the borrower has no idea what s/he is getting into.

When I borrow to buy a car or a home, it is a one-and-done deal with a single loan product.  With the car or home, I also know what I’m getting and I know what it costs.  These aren’t perfect markets, but the work on a broad level.  Education finance does not.  That’s why criticisms of student debt relief plans that claim that borrowers know what they’re getting into or the sacredness of the contract just irk me.  Student borrowers have no clue what they’re getting into and if a party doesn’t really understand a deal, it’s hard to see why it should be treated as sacrosanct. (Not to mention, as any good bankruptcy lawyer knows, basically all deals are made subject to the possibility of a bankruptcy discharge.). There is a fundamental market failure in student lending and that is that borrowers simply don't materially understand the nature of the obligations they are assuming...and probably can't.  

Continue reading "Student Loan Borrowing Is Different" »

The Second Circuit Got It Right in Madden v. Midland Funding

posted by Adam Levitin

Professor Peter Conti-Brown of the Wharton School has written a short article for Brookings decrying the Second Circuit’s 2015 Madden v. Midland Funding decision. Professor Conti-Brown doesn’t like the Madden decision for two reasons. First, he thinks its wrong on the law. Specifically, he thinks it is contrary to the National Bank Act because it "significantly interferes" with a power of national banks—the power to discount (that is sell) loans. Second, he's worried about Madden from a policy standpoint both because he fears that it is unduly cutting of access to credit for low-income households and because he thinks it is reinforcing the large bank’s dominance in the financial system and impairing the rise of non-bank “fintechs”. I disagree with Professor Conti-Brown on the law and think that attacking Madden is entirely the wrong way to address the serious policy question of what sort of limitations there ought to be on the provision of consumer credit. As for fintechs, well, I just don't see any particular reason to favor them over banks, and certainly not at the expense of consumers.  

Continue reading "The Second Circuit Got It Right in Madden v. Midland Funding" »

Plan Optionality: Extreme Edition (A Pick-Your-Own-Adventure Restructuring with Shopko)

posted by Adam Levitin

I've seen some Chapter 11 plans that include some optionality, such as allowing the debtor, based on subsequent market conditions or litigation outcomes to undertake a transaction or change the way a class is paid.  Such optionality has always troubled me because I don't think a disclosure statement can provide "adequate information" in the face of debtor optionality--a hypothetical investor might understand that the debtor has options A or B, but the uncertainty about which option will be selected makes it hard to make an "informed judgment about the plan":  the investor might like option A, but dislike option B--without knowing the likelihood of A or B, how can the investor make such an informed decision?  To be sure, it is possible to get two disclosure statements approved, one for option A and one for option B, but then creditors would be able to vote separately on each plan, rather than voting on a plan that gives the debtor optionality.  

A disclosure statement I looked at today, however, takes such optionality to an extreme I've never previously seen.  Specifically, Shopko's proposed disclosure statement is for a plan that "contemplates a restructuring of the Debtors through either (a) a sponsor-led Equitization Restructuring or (b) an orderly liquidation under the Asset Sale Restructuring."  As explained:  

The Plan includes a "toggle" feature which will determine whether the Debtors complete the Equitization Restructuring or the Asset Sale Restructuring. The Plan thus provides the Debtors with the necessary latitude to negotiate the precise terms of their ultimate emergence from chapter 11.  

In other words, what is being disclosed is "we might liquidate or we might reorganize, our pick."  The plan has, of course, two separate distributional schemes, depending on which restructuring path is chosen.   I really don't get how such a single disclosure statement for a single plan with optionality can be approved given the huge difference between these two paths.  A creditor can't know what outcome it is voting on and might like one, but not the other.  Maybe others have seen this move before, but I suspect this will be a first for the Bankruptcy Court for the District of Nebraska.  

P2P Payments Fraud

posted by Adam Levitin

AARP has a nice piece (featuring yours truly) about the consumer fraud risks with peer-to-peer (p2p) payment systems like Zelle and Venmo.  

Both Zelle and Venmo expressly state in their terms of use that they are not for commercial use, yet there is certainly a healthy segment of their use that is commercial.  Some of it is sort of "relational" commercial--paying a music teacher or a barber--someone whom the payor knows, so there's a social mechanism for dealing with disputes and which protects against fraud.  But there is also some use for making commercial payments outside of a relational context--paying for goods purchased on the Internet--and that is very vulnerable to fraud.  

I wish p2p payments systems would do a bit more to highlight to consumers their prohibition on commercial use, including flagging the fraud risk, but I suspect that they have no interest in doing so--while the systems disclaim commercial use, they nonetheless benefit from it, and have little reason to discourage it.  

Nonpartisan Supreme Court Expansion

posted by Adam Levitin

My latest argument for a substantial nonpartisan expansion (i.e., not a partisan "packing") of the Supreme Court, which would require the Court to sit in randomly assigned panels, is up on Bloomberg Law.   Among other benefits, it would enable the court to hear more cases, so the bankruptcy world might finally rid itself of some of the lingering circuit splits (e.g., equitable mootness or actual vs. hypothetical test for assumption). 

Senate Banking Committee Testimony on Housing Finance

posted by Adam Levitin

I'll be testifying on Tuesday at a Senate Banking Committee hearing on housing finance that is focused on Chairman Crapo's reform outline.  My written testimony may be found here.  Suffice it to say, I'm skeptical.  I argue that a multi-guarantor system is a path to disaster and that the right approach is a single-guarantor system with back-end credit-risk transfers.  Oh wait, we already have that system in all but name.  The system has been totally reformed since 2008.  So why are we looking to do anything major with housing finance reform?  Hmmm.  

Restatement of Consumer Contracts—On-Line Symposium

posted by Adam Levitin

The Yale Journal on Regulation is holding an on-line symposium about the draft Restatement of the Law of Consumer Contracts, which is scheduled for a vote at the American Law Institute's annual meeting this May.  The launching point for the symposium are a pair of articles in JREG that take sharp issue with the empirical studies that underlie the draft Restatement.

The American Law Institute (ALI) is a self-appointed college of cardinals of the American legal profession.  It's a limited size membership organization that puts out various publications, most notably "Restatements" of the law, which are attempts to summarize, clarify, and occasionally improve the law.  Restatements aren't actually law, but they are tremendously influential.  Litigants and courts cite them and they are used to teach law students.  In other words, this stuff matters, even if its influence is indirect. 

The draft Restatement of Consumer Contracts is founded on a set of six quantitative empirical studies about consumer contracts.  This is a major and novel move for a Restatement; traditionally Restatements engaged in a qualitative distillation of the law.  Professor Gregory Klass of Georgetown has an article that attempts to replicate the Reporters' empirical study about the treatment of privacy policies as contracts.  He finds pervasive problems in the Reporters' coding, such as the inclusion of b2b cases in a consumer contracts restatement.  

A draft version of Professor Klass's study inspired me and a number of other advisors to the Restatement project to attempt our own replication study of the empirical studies of contract modification and clickwrap enforcement.  We found the same sort of pervasive problems as Professor Klass.  While the ALI Council completely ignored our findings, we wrote them up into a companion article to Professor Klass's.  

Some of the pieces posted to the symposium so far have been focused on replication study methodology (sort of beside the point given the very basic nature of the problems we identified) or defenses of the Reporters including mixed statutory-contract decisions in their data sets (which is no defense to inclusion of b2b cases or duplicate cases or vacated cases, etc.). But Mel Eisenberg has contributed an important piece that highlights some of the substantive problems with the draft Restatement, namely that it guts consumer protections.  For example, it would require findings of both procedural and substantive unconscionability for a contract to be unconscionable, while many states only require substantive unconscionability. Not surprisingly, I am unaware of any consumer law expert (other than the Reporters) who supports the project.  

But this thing that should really be a wake up call that something is very, very off with this Restatement project is the presence of outside opposition, which is virtually unheard of in the ALI process.  Every major consumer group (also here, here, and here), weighed in in opposition as well as 13 state attorneys general (and also here), and our former co-blogger (and also former ALI Vice-Chair), Senator Elizabeth Warren.  Nor has the opposition been solely from consumer-minded groups.  The US Chamber of Commerce and the major trade associations for banking, telecom, retailers, and insurers are also opposed (albeit with very different motivations).  Simply put, it's hard to find anyone other than the Reporters (and the ALI Council, which has a strong tradition of deference to Reporters) who actually likes the draft Restatement.  

So, if you're an ALI member, get informed.  If you know an ALI member, make sure that s/he is informed.  This is coming for a vote in May and if enacted would be bad policy, based on the legal equivalent of "junk science."  This isn't what the ALI should be doing.  

Is SB 901 Constitutional?

posted by Adam Levitin

PG&E filed a notice that it was preparing to file for bankruptcy in around 15 days.  Companies don't usually make this sort of announcement willingly; it's an invitation to a creditor run.  PG&E filed the notice because it's required to under a recently enacted California law, SB 901.  SB 901 requires public utilities to file notice of changes of control at least 15 days in advance, and "change of control" is defined to include filing a bankruptcy petition.  That strikes me as really problematic--it is a state law conditioning and interfering with the exercise of a federal right.  (Imagine how this would work with a financial institution bankruptcy process...)  I can't believe that the law would hold up if challenged.  Yet PG&E filed the notice.  Maybe there's just not a meaningful run possibility for a power utility.

Credit Bidding and Sears

posted by Adam Levitin

The Sears' auction is a really valuable teaching moment, I think (and perfectly timed for the start of the semester)—does Sears have going concern value that merits a sale of substantially all assets as a going concern, or is an immediate liquidation the value maximizing move?  

I don't have an opinion on that issue, but something strikes me as rather strange about ESL's bid for a sale of substantially all assets.  Very little of the now $5B in consideration offered is cash, less than 20%.  Instead, a large chunk is in the form of debt assumption and another large chunk is in the form of a credit bid.  It's the credit bid that looks odd to me.  ESL seems to be trying to credit bid three different loan facilities, including a second lien facility.  Here's the thing--ESL should only be able to credit bid against its collateral and then only in the amount of its collateral. I don't know what exactly is covered by the liens on each of the facilities, but I suspect that the assets being sold include things that are not covered by the liens. That would seem to create a Free-Lance Star problem for ESL.  And then there's the problem of the valuation.  In order to know what ESL can credit bid, we need to know to what extent it is secured.  To wit, consider a second lien facility.  If the collateral is worth $100 and the first lien debt is for $80 and the second lien debt for $30, the second lien debt shouldn't be able to credit bid $30 because it would only recover $20 from the sale in foreclosure.  The second lien's credit bid should be capped at $20.

Continue reading "Credit Bidding and Sears" »

Federal Student Loans and the Shutdown

posted by Adam Levitin

Is the Department of Education doing anything to assist furloughed federal employees with federal student loan obligations?  Federal contractors with such obligations?  You'd think that ED might instruct its servicers to treat delinquencies for furloughed federal employees and contractors differently than regular delinquencies.  That would be the right thing to do.  

SCRA and the Coast Guard in the Shutdown

posted by Adam Levitin

The Coast Guard apparently briefly had some advice for furloughed guardsmen that included "Bankruptcy is a last option."  The leaped out at me as strange.  What about the Servicemembers Civil Relief Act, a special act that provides protection for active duty military members and their dependents against collection actions?  Shouldn't SCRA hold creditors at bay, such that they don't need to consider bankruptcy for the foreseeable future?

Continue reading "SCRA and the Coast Guard in the Shutdown" »

The Implication of Reasonable Consumers Not Reading Contracts of Adhesion

posted by Adam Levitin

A final installment to this evening's blog storm (you can tell that I'm procrastinating on exam grading...).

The Consumer Financial Protection Act prohibits "unfair" acts and practices.  "Unfair" is defined as an act or practice that causes or is likely to cause substantial injury to consumers, that is not reasonably avoidable by consumers, and the harm of which is not outweighed by benefits to consumers or competition.  

Now consider that the reasonable consumer does not read prolix contracts in detail.  The reasonable consumer might look at a top-level disclosure, say the Schumer Box for a credit card, or maybe the TRID for a mortgage, but I don't think it's controversial to say that the reasonable consumer isn't going to get into the fine print that follows.  The reasonable consumer isn't going to bother doing this because (1) the consumer might not understand the fine print, (2) the consumer can't negotiate the fine print, and (3) the consumer knows there's a good chance that all of the competitors have similar or worse fine print, so a search for better fine-print terms is might be futile (and might come at the expense of worse top-line terms).  Only a fanatic or a masochist reads every line of a cardholder agreement.

If I'm right that a reasonable consumer doesn't bother reading the details in contracts of adhesion, then notice what the "unfairness" prohibition is doing:  it is requiring that the terms of the contract be substantively fair.  Any hidden tricks or traps, like the double cycle grace period language I highlighted in my previous post, are going to be unfair.  Add in the prong of "abusive" that deals with taking unreasonable advantage of consumers' lack of understanding, and I think the Consumer Financial Protection Act is effectively requiring that consumer finance contracts must be "conscionable" or else have all of the tricks and traps made very clear to the consumer.

That's actually pretty remarkable. That's a light year beyond prohibiting "unconscionable" contracts.  It's an really affirmative fairness requirement for contract terms. It's also exactly what it should be.  Contracts should be a mechanism for mutual (subjective) welfare enhancement, not for one party to hoodwink the other. I wonder how many compliance lawyers are looking at consumer finance contracts in light of the fact that a reasonable consumer doesn't read fine print.  They should be.  

A final thought:  where does this leave arbitration agreements?  Arguably they fall into the problem unfair and abusive category (although there may be some argument about consumer benefit).  Yes, the CFPB's arbitration rulemaking was overturned by the Congressional Review Act.  But the rulemaking was undertaken under a specific power.  Query whether that prevents a rulemaking that is substantially the same under the UDAAP power.  No one really knows.  

UDAAP Violation in BofA Credit Cardholder Agreements?

posted by Adam Levitin

Heads up Kathy Kraninger:  you might want to look at whether Bank of America is engaged in an unfair or abusive act or practice in its credit cardholder agreements.  Here's the deal.  

The Credit CARD Act of 2009 prohibits so-called "double cycle billing" on credit cards:

Prohibition on double-cycle billing and penalties for on-time payments.  ...[A] creditor may not impose any finance charge on a credit card account under an open end consumer credit plan as a result of the loss of any time period provided by the creditor within which the obligor may repay any portion of the credit extended without incurring a finance charge, with respect to—

(A) any balances for days in billing cycles that precede the most recent billing cycle; or

(B) any balances or portions thereof in the current billing cycle that were repaid within such time period.

The prohibition in clause (A) is on calculating the average daily balance to which the APR is applied based on balances other than in the current billing cycle.  That was the practice of double cycle billing:  the average daily balance was the average of not just the current billing cycle but of the current and previous billing cycles.  So even if you had no charges this billing cycle and had paid off the balance, you'd still have a positive average daily balance because of the previous month and thus pay interest.  

The prohibition in clause (B) is supposed to get at "trailing interest"—no interest should accrue on balances to the extent they are paid off on time.  If you charged $100, but repaid $90 on time, you should only be paying interest on $10, not on $100.  But notice how it's drafted. It only applies if there is a loss of a grace period; there is no grace period required.   If there is no grace period, you can be charged interest on the $100, even if you repaid $90 on time.  

So consider, then, this term from Bank of America's current credit card holder agreements:

We will not charge you any interest on Purchases if you always pay your entire New Balance Total by the Payment Due Date. Specifically, you will not pay interest for an entire billing cycle on Purchases if you Paid in Full the two previous New Balance Totals on your account by their respective Payment Due Dates; otherwise, each Purchase begins to accrue interest on its transaction date or the first day of the billing cycle, whichever date is later.

Did you get that?  You only have a grace period allowing for interest-free repayment if you have paid in full the two previous billing cycles.  Otherwise, you're going to be charged interest even if you pay the current cycle's balance in full.

Continue reading "UDAAP Violation in BofA Credit Cardholder Agreements?" »

Are Convenience Check Loans Underwritten to Ability-to-Repay?

posted by Adam Levitin

In my previous post, I complained that convenience check loans weren't underwritten based on ability-to-repay.  That's not to say that there's no underwriting whatsoever.  But it's important to recognize that prescreening for direct mailing for convenience check loans is not the same as underwriting the loans based on ability-to-repay.  For example, Regional Management, on the companies that offers convenience check loans says in its 10-K that:

Each individual we solicit for a convenience check loan has been pre-screened through a major credit bureau or data aggregator against our underwriting criteria. In addition to screening each potential convenience check recipient’s credit score and bankruptcy history, we also use a proprietary model that assesses approximately 25 to 30 different attributes of potential recipients.

That's dandy, but a credit score is a retrospective measure of credit worthiness. It doesn't say anything about whether a borrower has current employment or income, and it doesn't generally capture material obligations like rent or health insurance.

Continue reading "Are Convenience Check Loans Underwritten to Ability-to-Repay?" »

Usury 2.0: Toward a Universal Ability-to-Repay Requirement

posted by Adam Levitin

There's bi-partisan legislation pending that would prohibit the practice of installment lenders sending out unsolicited live convenience check loan:  you get an unsolicited check in the mail.  If you cash it, you've entered into a loan agreement.  

The debate about check loans has turned on whether consumers understand what they're getting into.  The legislation's sponsors say consumers don't understand all the terms and conditions, while the installment lender trade association, the American Financial Services Association, argues that there's no problem with live check loans because all the terms are clearly disclosed in large type font.  

This debate about consumer understanding and clarity of disclosure totally misses the point.  The key problem with check loans is that they are being offered without regard for the consumer's ability to repay.  For some consumers, check loans might be beneficial.  But for other they're poison.  The problem is that check loans are not underwritten for ability-to-repay, which is a problem for a product that is potentially quite harmful.  Ability to repay is the issue that should be discussed regarding check loans, not questions about borrower understanding.  Indeed, this is not an issue limited to check loans.  Instead, it is an issue that cuts across all of consumer credit.  Rather than focus narrowly on check loans, Congress should consider adopting a national ability-to-repay requirement for all consumer credit (excluding federal student loans).  

Continue reading "Usury 2.0: Toward a Universal Ability-to-Repay Requirement" »

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.  

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" »

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?" »

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. 

Continue reading "CLO Yawn" »

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.

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