postings by Adam Levitin

CFPB Bitter-Enderism

posted by Adam Levitin

Retired Harvard Law Professor Hal Scott has a curious op-ed in the Wall Street Journal suggesting that despite (or because) of the Supreme Court's recent ruling in CFPB v. CFSA that the CFPB's funding is both unauthorized by statute and unconstitutional on account of the Federal Reserve System running a deficit currently (and projected through 2027).

It's a bizarre and incorrect argument, and were it coming from anyone other than Scott it could be dismissed as harmless and uninformed flibflab, but Scott is a personage with serious financial regulatory credentials, who is very tied in to the upper crust of anti-financial regulatory circles, such that one has to wonder if this is a trial balloon for a U.S. Chamber of Commerce or Bank Policy Institute-supported challenge. 

In any event, let me quickly explain why Scott is wrong on both the statutory and constitutional arguments.

Continue reading "CFPB Bitter-Enderism" »

Further Thoughts on CFPB v. CFSA

posted by Adam Levitin

I have some further thoughts on the CFPB v. CFSA decision on Bloomberg Law: decision not only benefits consumers but ultimately benefits many financial services businesses by ensuring both a level of stability in regulation and the preservation of the "legal infrastructure" that the CFPB has created over the past 13 years, such as safe harbors, inflation adjustments, and advisory opinions. 

 

Not All Third-Party Releases Are the Same

posted by Adam Levitin

My friend Professor Tony Casey has been the most vocal academic defender of non-consensual non-debtor releases in bankruptcy. I obviously disagree with Tony on both the legality and policy substance, but Tony's repeatedly taken me to task in scholarship (here and here) and various social media platforms (here and here) for having supposedly changed my view of the issue.

Tony's charge that I've flip-flopped is based on a 2019 blog post in which I defended then presidential candidate Elizabeth Warren's work in Dow Corning, which Tony thinks is a non-consensual non-debtor release case. 

Unfortunately, Tony's misread Dow Corning and therefore sees a contradiction where none exists.  I have never taken issue with consensual releases of creditors' claims against non-debtors as part of a global settlement (although what constitutes adequate consent is a separate issue). Instead, my concern has always been with mandatory, non-consensual release of claims against non-debtors. Dow Corning released third-parties, but it was not a non-consensual release case. Unlike in, say, Purdue Pharma, where the non-debtor releases purport to bind all creditors irrespective of consent, the dissenters in Dow Corning were allowed to opt-out and pursue their remedies.

Continue reading "Not All Third-Party Releases Are the Same" »

CFPB v. CFSA Analysis

posted by Adam Levitin

The Supreme Court upheld the constitutionality of the CFPB's funding mechanism in its 7-2 decision in CFPB v. CFSA. Although I can't say I love the opinion's reasoning, the Court got to the right result, as Patricia McCoy and I urged in an amicus brief. The ruling does have some interesting omissions and politics, but its ultimately impact will be the normalization of the CFPB, something that's good for consumers and businesses alike.

Continue reading "CFPB v. CFSA Analysis" »

FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate?

posted by Adam Levitin

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

Continue reading "FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate? " »

The Texas Three-Step

posted by Adam Levitin

Johnson & Johnson is preparing to take a third crack at addressing its toxic talc liabilities through bankruptcy in what we might call a "Texas Three-Step". And as with J&J's previous attempts, this one has some pretty glaring issues.Yet because of J&J's ability to forum shop and even picks its judge, it will likely be able to sidestep adjudication of many of the issues and avoid appellate review entirely. Instead, J&J's strategy is going to be to ram a seriously deficient plan through with the assistance of its hand-picked judge and then avoid appellate review through the equitable mootness doctrine. It's a strategy that might work. And if it does, it is a sign that the bankruptcy system is seriously broken.

Continue reading "The Texas Three-Step" »

The New Usury: The Ability-to-Repay Revolution in Consumer Finance

posted by Adam Levitin

I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.

 

Stuffing the Chapter 11 Ballot Box with "Junk" Claims

posted by Adam Levitin

A recent, disturbing, and truly scandalous development in Chapter 11 mass tort cases is the phenomenon of debtors trying to stuff the ballot box with "junk" claims, that is claims that should by all lights be disallowed as unenforceable and therefore ineligible to vote on a plan. Debtors have recognized that they can strategically co-opt part of the mass tort bar to push through plans:  debtors offer small payments to claims that ought to be disallowed (and thus to the attorneys representing those claims on contingency fee) in order to get those claimants to vote in favor of a plan that forces a low-ball payment on the legitimate tort claimants. While debtors have to pay a bit for the "junk" claims' votes, they come out ahead in the end because by flooding the electorate with the junk claims, they can overwhelm the voting power of the legitimate claims and stick the legitimate claimants with a much lower payment than otherwise.  

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Student Loan Forgiveness

posted by Adam Levitin
Sometimes it’s helpful to read media stories on separate topics against each other because of the disconnects they underscore. That’s been on my mind today with federal student loan debt.

Continue reading "Student Loan Forgiveness" »

Predictably Reliable

posted by Adam Levitin

Law360 has a nice Q&A with Chief Judge Michael Kaplan of the New Jersey bankruptcy court. The interviewer rightly asked Judge Kaplan why New Jersey has recently become a Chapter 11 filing destination. Judge Kaplan's answer is telling:  

What do filers look for? They look for predictability, and we have a body of work that you can look at to get a sense, whether it be third-party releases, whether it be bidding procedures, whether it be outlook on examiners or mediation. I believe we have really gained exposure, probably initially with the LTL Management case. Not my work on that case as much as our clerk's office, our chambers, how we can handle a deluge of filings and the multiple committees and the scheduling.

Judge Kaplan is partially right here. Filers are absolutely looking for predictability. But that's only half of the story. They are looking for a venue that is predictably favorable. If you're shopping around for third-party releases, you aren't going to file in the 5th Circuit, where you can predictably not get one. As I've explained at length, the predictability trope that is sometimes used to defend venue shopping is really about predictability giving the debtor the outcomes it wants on major issues: appointment of an examiner, third-party releases, retention of right to investigate avoidance actions, etc.  And with LTL Management, particularly with his denial of the motion to dismiss in LTL 1.0 and then reluctant granting of the motion to dismiss in LTL 2.0, Judge Kaplan made clear the sort of reception large debtor firms could expect in Trenton.  One might even say it's predictable. 

Securitization Trusts Are Subject to the Consumer Financial Protection Act

posted by Adam Levitin

The CFPB won a significant case this week that could shake things up in the securitization world. In CFPB v. National Collegiate Master Student Loan Trust, the 3d Circuit held that a securitization trust is a "covered person," for the purposes of the Consumer Financial Protection Act, putting it within the enforcement ambit of the CFPB.  While securitization trusts themselves are basically passive holding entities for loans, they contract with third-parties (servicers) to manage the loans. That contracting was enough for the Third Circuit to find that the trusts are "engaged" in "extending credit or servicing loans," and language in the opinion suggests that merely holding the loans would be sufficient. The opinion means that securitization trusts—and therefore securitization investors—face the possibility of liability for servicer wrong-doing.

The Proposed Credit Card Interchange Settlement

posted by Adam Levitin

The Bleak House of Cards Litigation over credit card interchange fees still isn't ending, but it's hit an interesting inflection point. We're nearly two decades into the case and over a decade from the original proposed settlement. Now there's a proposed injunctive relief class settlement. The settlement's headline figure is $30 billion in savings, but on closer inspection, it's a farcically weak settlement. Credit card interchange fees after the settlement will be 25% higher than when the litigation began. That sort of result is what's called litigation failure.

Continue reading "The Proposed Credit Card Interchange Settlement" »

A Trump Bankruptcy:  Further Thoughts

posted by Adam Levitin

A lot of the debtor-creditor relationship can be characterized by creditors threatening to push debtors out the window and debtors threatening to jump.  Ted Janger reminded me of this defenestration dynamic today regarding the Trump civil fraud judgment.  In my previous post, my assumption had been that the New York Attorney General’s goal was to foreclose on some of Trump’s marquee properties, but Ted suggested that the goal might simply be to trigger cross-default clauses, compounding Trump’s liquidity problems and forcing him into bankruptcy. In other words, bankruptcy might be the goal of the New York Attorney General, rather than a defensive strategy for Trump.  “I’ll jump,” “No, I’ll push.” 

Continue reading "A Trump Bankruptcy:  Further Thoughts" »

A Trump Bankruptcy?

posted by Adam Levitin

Will Donald Trump file for bankruptcy? It's certainly a possibility as Trump struggles to come up with a supersedeas bond for staying the NY Attorney General's civil fraud judgment against him while he takes an appeal.

I don’t know the strength of Trump’s possible arguments for an appeal, but the legal arguments might be beside the point. If Trump wins the election, the entire dynamic of the litigation changes. Is the New York Attorney General really going to enforce a judgment against the President-elect, particularly one who is likely to be vengeful once in office? Maybe, given that we will likely be facing an period of extended lawfare, but the calculus for enforcement or settlement shifts in Trump’s favor if he wins election. That means that Trump’s best move might be trying to run the clock until Election Day:  7 months and 17 days.  And maybe not even that long. The optics of pursuing the collection on the eve of the bankruptcy will make it look very political and might generate sympathy for Trump. So Trump might only need to run the clock, say, 6 months. That’s where bankruptcy comes in.

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Alabama Supreme Court and Section 366

posted by Adam Levitin

By sheer coincidence, the first problem I taught in my financial restructuring class today was about a bankrupt fertility clinic that is behind on its electric bill and is having trouble coming up with the funds to provide adequate assurances to the power company that it will pay its future bills: if the electricity is cut off, all the frozen zygotes and embryos will thaw and become unviable. 

I found myself wondering how this would play out in Alabama now. Suppose the debtor could not provide adequate assurances. Would the DIP/trustee or utility face some sort of liability for wrongful death if what one of my students termed "the biological material" melted?  I assume the Barton doctrine would provide some level of protection to the DIP or trustee. (I also assume the bankruptcy judge would have broad immunity for his or her official acts.) I'm not sure if the power company could even have liability, but given the potential scale of liability, it's probably not worthwhile cutting off the power, even if the risk of liability is very small.

I know that similar sorts of issues can emerge in hospital or nursing home bankruptcies, where there are patients who have to be transferred to other facilities in the event that the debtor is liquidating, but that's addressed by 11 USC 704(a)(12). Maybe an embryo that is frozen at a fertility clinic is now a "patient" at a "health care facility." Otherwise, I'm not sure what would create a duty for the trustee/DIP to preserve the embryos. 

What Is a Wire Transfer?

posted by Adam Levitin

Heads up payment nerds: we have what promises to be the most interesting payments litigation involving a Citibank wire transfer since...the last payments litigation involving a Citibank wire transfer.

In the latest case, the NYAG has sued Citibank for violating the Electronic Fund Transfer Act in connection with wire transfer transactions for consumer customers. The EFTA offers consumers substantial protection against unauthorized electronic fund transfers, both in terms of process and substantive liability limitations. The  NYAG alleges Citibank has not been providing these required protections to consumers who have had their accounts drained by unauthorized wire transfer orders.  

Now you might be saying, "I feel bad for the consumers, but come on, everyone knows that the EFTA doesn't apply to wire transfers." And you might even point to the EFTA definition of an "electronic fund transfer" as excluding "any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer." And you'd be right—both the NYAG and Citibank agree that the EFTA does not apply to wire transfers.  The issue in the case is "what is the wire transfer?"

Continue reading "What Is a Wire Transfer?" »

The CFPB's Proposed Overdraft Regulation

posted by Adam Levitin

The CFPB proposed overdraft regulation came out today. It's a big deal. If it becomes effective, it will dramatically reduce overdraft fees at large banks.

Currently fees for “courtesy” overdraft—where the financial institution is not contractually obligated to allow the overdraft, as opposed to contractual overdraft lines of credit—are not “finance charges,” so the overdraft is not “credit” for purposes of the Truth in Lending Act/Regulation Z because credit requires either a finance charge or a requirement of repayment in over four installments. That means that TILA disclosure requirements do not currently apply to any courtesy overdrafts. 

The CFPB is proposing changing this for overdrafts that don't fall within a dollar amount safe harbor.

Continue reading "The CFPB's Proposed Overdraft Regulation" »

Check Fraud: It's Time to Jettison Price v. Neal

posted by Adam Levitin

Check fraud has been on the rise, even as check usage continues to decline. There's lots of different types of check fraud, however. Sometimes it's as simple as a thief stealing a blank check, filing it in, and forging the drawer's signature. Sometimes a legitimate check is intercepted in the mail, and the payee's name (and maybe amount) get washed off and replaced by that of the fraudster or a friendly party. Sometimes a legitimate check is copied—while in transmission or even after receipt and possibly even after deposit—but with the payee then changed prior to deposit. And once a check has been copied once, it can be copied multiple times, and each copy can be deposited (and possibly deposited multiple times with remote deposit capture). It can be hard to figure out how the fraud happened, however, as the payor bank often doesn't receive a paper (or at least the original paper) check. Instead, the payor bank might simply be presented with an image of the check or perhaps a paper reconversion of an image of the deposited check. And with remote deposit capture, the depositary bank might itself not have a paper check. 

The problem this variety of fraud creates is that it makes it hard to know which legal rule should apply, and the uncertainty of legal rules might reduce banks' incentive to take care to protect against fraud.

Continue reading "Check Fraud: It's Time to Jettison Price v. Neal" »

What's 43 Years Among Friends?

posted by Adam Levitin

One of my recent blog posts took issue with the historical claims in a Supreme Court amicus brief filed by several eminent law professors in the Purdue Pharma appeal. One of the professors, Tony Casey at University of Chicago Law School, fired back with a comment, and I responded at length in the comments section, but I think the exchange is worth elevating to a stand-alone blog post. 

To recap, the good amici jumped all over my claim that the Framers could not have conceived of nonconsensual nondebtor releases as being within the scope of the Bankruptcy Power. To this end, they cited a couple of English cases from 1618-1620. My original post pointed out that these were not contemporaneously reported decisions; they remained unknown until 1932 when a modern scholar "reported" the cases from his own reassembly of various Chancery documents. Moreover, the decisions were not even bankruptcy decisions, but compositions, not operating under any bankruptcy statute. 

Professor Casey responded:  

I really don't understand the argument here. First, how can you say releases were "incomprehensible" to the framers given that Lord Bacon was granting them? Even if the opinion is unreported, I just can't see the leap to arguing that no one designing a judicial system could have thought of or comprehended this thing that the Lord Chancellor had done multiple times. Second, the point about these not being "bankruptcy" cases is semantic. These were part of compositions that look just like Chapter 11 cases today. Third, even if you are right about everything else, our main point was about your 1986 claim. You write this [in your blog post], "because there was no reported decision of these cases until 1932, they do not undercut the fact that Anglo-American bankruptcy law had no notion of nonconsenusal nondebtor releases in until 1986." How do you get from 1932 to 1986? Finally, we point out other historical pedigree including cases from the 1940s.

Okay. Let's try this again.

 

Continue reading "What's 43 Years Among Friends? " »

Something Doesn't Add Up in NY Times Article

posted by Adam Levitin

The NYTimes has an article about how many consumers and small businesses have been getting their deposit accounts shut down and lines of credit cut off without explanation.

Something here doesn't add up. Banks have an obligation under the Equal Credit Opportunity Act and Regulation B thereunder to provide customers with "adverse action" notices if they terminate a line of credit. Those notices either have to provide an explanation of why or a notice of how the customer can get an explanation (for small businesses, that notice can be in the application itself). ECOA/Reg B apply not just to consumer credit, but business credit as well. Now, ECOA/Reg B does not cover deposit accounts, but if a bank cuts off both a deposit account and a line of credit, it would have to provide an adverse action notice about the line of credit.

So something here doesn't add up. Either banks have been failing to comply with ECOA or customers have checked their mail or haven't been forthright with the journalists. Large scale non-compliance with this sort of ECOA provision seems unlikely, as this is an easy-to-automate rule, where the cost-savings from noncompliance would be minimal. So, I suspect that something funny is going on on the consumer end, although, to be fair, an ECOA adverse action notice doesn't have to be particularly illuminating about why the bank took the adverse action.

ALI's Choice Architecture

posted by Adam Levitin

I received a dunning notice from the American Law Institute today, reminding me that my dues were 90 days overdue. Now, you might conclude from this that I'm generally not paying my bills as they come due or that I'm a deadbeat by nature, but the truth is that I've been on the fence about whether I want to remain a member of the organization. That's another matter, however. My interest is that ALI had a default setting for me to make a $125 contribution in addition to my $125 dues.

ALI Dues-Redacted

In other words, the default setting was for me to pay 2x what I actually owe. The symmetry of the $125 numbers makes it much more deceptive because it seems more like an itemization and a total, rather than two separate charges.

To be sure, I could easily opt-out by unchecking the pre-checked box, and there's bolded language telling me about it (albeit in a visually separate box...), but is this sort of choice architecture really needed? I don't think it formally violates anything in the Restatement of Consumer Contracts, but opt-out mechanisms in consumer contracts just aren't a good look, any more than auto-renew features. If I want to give ALI an extra $125, I will, but I don't want to be tricked into doing so. Do better ALI.

What's 300 Years Among Friends?

posted by Adam Levitin

It often doesn't end well when law professors play at being legal historians. The Purdue Pharma Supreme Court appeal is a case in point. 

A group of prominent bankruptcy law professors filed an amicus brief in support of the appellee, Purdue Pharma. Their brief takes direct aim at my amicus brief in support of the appellant, the United States Trustee. Specifically, the good professors challenge my claim that nonconsensual nondebtor releases were entirely unknown in Anglo-American law until the Johns Manville case in 1986. They write: 

One amicus has argued that releases would have been “incomprehensible to the Framers” and “were entirely unknown in American bankruptcy” prior to 1986. Adam J. Levitin Amicus Br. 4-5. This is a puzzling claim that misses the mark by at least 367 years.

Third-party releases have been known and comprehended in bankruptcy law as means to achieve global resolution since at least 1619, when the Lord Chancellor used his injunctive powers to release third-party sureties from the non-debtor claims in exchange for compelled contributions to a bankruptcy composition. See Tiffin v. Hart (1618-19), in John Ritchie, Reports of Cases Decided by Francis Bacon 161 (London 1932). Similar to the releases at issue in the present, the injunction in Tiffin was directed at dissenting creditors to facilitate a resolution that had been approved by the majority. Ibid.; see also Finch v. Hicks (1620), in Ritchie, Reports, at 166-167 (enjoining creditors from pursuing actions at common law against non-debtor sureties of an insolvent individual).

So, according to Purdue's amici, I'm wrong on the history because I failed to account for a 1619 case. But there's a HUGE problem with their argument...

Continue reading "What's 300 Years Among Friends? " »

The Section 1071 Small Business Lending Data Collection Rule

posted by Adam Levitin

The Senate voted 53-44 to overturn the CFPB's section 1071 small business lending data collection rule under the Congressional Review Act. If the House can ever function, I'd expect that there are the votes there too to overturn the rulemaking, but it's all sort of a show given that President Biden is threatening a veto and there aren't the votes to override a veto.

So three thoughts on this. First, doing a CRA resolution that has no chance of passing is a huge waste of the most precious commodity in DC, namely Senate floor time. But perhaps that is the point. More time on CRA resolutions, less time available for confirming judges, etc. I'm surprised we don't see continuous filing of CRA resolutions as itself a delay tactic in the Senate.

Second, imagine for a second that the CRA resolution passed. The CFPB would be precluded from promulgating another rule that is "substantially the same" without new Congressional authorization. But section 1071 would still stand. Is there any way the CFPB could do any data collection rule that is not "substantially the same," in terms of requiring production by small business lenders of data about the borrowers and loans? If so, then it suggests that "substantially the same" must actually be quite narrowly construed (e.g., if rule 1.0 asked about LTV and rule 2.0 did not, they are not "substantially the same"), which has important implications for the CFPB's ability to undertake a new arbitration rulemaking.

Third, assuming that the resolution fails, we will then have data collection regimes for mortgages and small business loans. That data is important for monitoring against discriminatory lending. Doesn't it seem strange to limit the data collection to just those markets? Why not extend it to the most obvious market, where there have long been concerns about discriminatory lending, namely auto lending, as some have previously suggested?

Rite Aid Pulls a Purdue Pharma to (Sorta) Pick Its Judge

posted by Adam Levitin

Last night I did a post about the Rite Aid bankruptcy. I assumed that the first affiliate to file was Lakehurst and Benson Corp. because that case had the lowest number of any case up on the public docket. But it seems that not all petitions had been posted to the public docket at that time, and instead the first to file was Rite Aid of New Jersey, Inc. (RANJ), which turns out to be a more interesting story than Lakehurst's petition.

Like Lakehurst, RANJ is a New Jersey corporation that is listed in NJ corporate records (both incorporation and UCC filings) as being based in Pennsylvania. So New Jersey venue is appropriate under the venue statute. But on its petition, RANJ, unlike Lakehurst, lists a principal place of business in New Jersey, specifically, "820 Beaverton Road, West Trenton, New Jersey 08628." That would seem to trigger the New Jersey local bankruptcy rules to have the case automatically assigned to one of the two judges in the Trenton vicinage.

But what happens when you plug that address into Google?  You get... nothing. Google does not know of a Beaverton Road anywhere in New Jersey.  Hmmm.

Google, however, in its artificial intelligence, does know of an "820 Bear Tavern Road, Ewing, New Jersey 08628." A look on the map indicates that Ewing is right next to West Trenton (and the post office doesn't actually care about the name of the town, just the ZIP...)

Bear Tavern Road

So it looks as if some Kirkland associate (do we really think Cole Schotz did the drafting?) had a bit of fauna mix up: "Beaverton" is actually "Bear Tavern".  If that's the case, what is actually at 820 Bear Tavern Road?  Well, it's the address of the Corporate Trust Company, a business that serves as the registered agent for other businesses.

You might be thinking at this point that Rite Aid is starting to look a lot like Purdue Pharma, where the White Plains venue was based on the address of the registered agent, not the actual business. (At least Rite Aid had the decency not to change registered agents in order to get a favorable address...)

Last time I checked, a registered agent is just an agent for service of process and the like. It is not a principal place of business, which is what matters for bankruptcy law: by definition the agent isn't the principal. In fact, RANJ has represented to the State of New Jersey that its principal business address is "30 Hunter Lane, Camp Hill, PA17001." And RANJ has made the same representation to the State of New York.

Now let's be clear: Rite Aid of New Jersey, Inc. is a New Jersey corporation, which means a New Jersey venue is technically proper, but the case should not have automatically been assigned to a Trenton judge under the NJ local rules, as there isn't any real claim for a Trenton vicinage. (It isn't clear how cases are assigned within a vicinage.) In any event, RANJ should have listed its actual Pennsylvania business address on its petition. If it had done so, it would not have had a 1 in 2 chance at getting Judge Kaplan, but would have had a 7 in 8 chance that the case would be assigned to another judge. And Kirkland no doubt knew what it was doing--someone made a deliberate decision to (mis)list the address of the registered agent as the principal place of business.

In short, this looks like yet another case of judge-picking. I recognize that parties are very hesitant to raise judge-picking before the picked judge, as it implies that at least the debtor thinks that the judge is not impartial. Nevertheless, I hope that there will be some probing questions about the judge-picking.

What's Rite Aid Doing in Trenton?

posted by Adam Levitin

The big news this past week in bankruptcy was the resignation of Judge David R. Jones of the Southern District of Texas bankruptcy court after his romantic involvement with an attorney at Jackson Walker, who represented Chapter 11 debtors before him was revealed. That story is still unfolding (to be seen if there is bar discipline or even criminal charges), but let's not beat around the bush:  the real story is venue.

Specifically, the Jones scandal appears to go straight to the heart of Houston's meteoric rise as the premier Chapter 11 filing destination: Kirkland and Ellis would file large cases, sometimes with no obvious venue hook, in SDTX, where the cases would end up before one of two judges on a complex case panel:  Judge Jones or Judge Marvin Isgur, who was Jones's former law partner. In other words, file in Houston and you've got a 50% chance of getting Judge Jones, and even if you get Judge Isgur, the two judges worked very closely, mediating each others cases, for example.

Now that's all normal exploitation of the rules, but where a lot of questions emerge is from Kirkland having Jackson Walker as co-counsel. That's something Kirkland only did in Houston, meaning that Jackson Walker was really more like local counsel. It's quite strange as local counsel is not required under SDTX rules and, in any case, Kirkland has its own Houston office with restructuring partners. Other large firms filing cases in Houston have not had on local counsel. This story probably isn't over yet.

Now, having left a hot mess behind in Houston, now Kirkland is moving on...to Trenton, New Jersey, where once again there seems to be some venue funny business with Rite Aid

Continue reading "What's Rite Aid Doing in Trenton?" »

No Virginia, There Really Is No Such Thing as "the Fed"

posted by Adam Levitin

Once again, the WSJ is publishing nonsense about the CFPB. It's really painful to see conservative admin law types write about federal agency structures when they don't understand the basic facts. The WSJ ran an op-ed by Adam White, a think-tanker at AEI and George Mason, that tries to take on the claim that if the CFPB's funding is unconstitutional, so is that of the Board of Governors of the Federal Reserve System. But Mr. White runs into trouble with his argument in his first paragraph when he refers to the "Federal Reserve" and "the Fed." The problem: there is no legal entity called "the Federal Reserve." We refer to it that way colloquially, but it's actually more complicated, and the complication really matters here. 

"The Fed" is actually "the Federal Reserve System," which consists of twelve private regional reserve banks and a federal government agency called the Board of Governors of the Federal Reserve System. The Board is a full-fledged federal regulatory agency. It makes rules, engages in supervision of financial institutions, brings enforcement actions, and undertakes administrative adjudication. In short, it does all the same type of things as the CFPB.

Continue reading "No Virginia, There Really Is No Such Thing as "the Fed"" »

CFPB v. Community Financial Services of America

posted by Adam Levitin

With oral argument in CFSA v. CFPB scheduled for tomorrow, it's no surprise that some unfounded claims about the CFPB are getting thrown around by the usual anti-regulation suspects, like the WSJ editorial page and George Will. Given that there's more attention than usual being paid to the Bureau, I figure it's the least I can do to flag what's wrong about these claims. Specifically, I want to address the claim that the Bureau is some uniquely ultra-power federal agency and that its funding has "dual insulation" from Congressional control. 

Most Powerful Agency, Ever?

Is the CFPB really the most powerful government agency ever? Puhlease. Federal agencies aren't Pokemon cards with a CP level that can be compared, but even so, it's just ridiculous to claim that the CFPB is the most powerful federal agency around. Its ambit is noticeably narrower than that of the Federal Reserve Board, for example. (There's a reason that Jerome Powell, the Fed Chair, is a household name, while Rohit Chopra, the CFPB Director, is not.) 

Let's get the headline number up. There are 33 million businesses in the United States. The CFPB has some form of regulatory authority over only around 40,000 of them. That 40,000 consists of ~23,000 payday lenders, ~4,800 credit unions, ~4,600 banks ~4,500 debt collection agencies, ~500 nonbank auto lenders, and 410 consumer reporting agencies, and some sundry other entities.  In other words, only 0.1% of all businesses in the United States are under any CFPB jurisdiction (and even that is quite limited, as we will see). That fact alone should be the end to the "most powerful agency, ever," nonsense. 

Continue reading "CFPB v. Community Financial Services of America" »

Nondebtor Releases and the Future of Mass Torts

posted by Adam Levitin

Certain members of the bankruptcy academy and bar seem to have their knickers in a twist over the Supreme Court’s grant of certiorari to review the nonconsensual nondebtor releases in Purdue. Conventional wisdom is that SCOTUS is going to find that there's no statutory authority whatsoever for nonconsensual nondebtor releases outside of the asbestos context (expressio unius and Congress doesn't hide elephants in mouseholes....).

Let's be clear: nonconsensual nondebtor releases are not necessary to resolve mass tort cases.

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Unhappy Campers and Their Credit Cards

posted by Adam Levitin

This story about the failure of a company that ships duffel bags to/from sleep-away camps has an interesting payment systems meets bankruptcy angle that got me particularly excited given that I'm teaching payment systems this fall:

Parents are disputing the Camp Trucking fees with their credit card companies, but so far there haven’t been any resolutions. “We told them they’ll probably become creditors in a liquidation and get 20 cents on the dollar in five years,” said Mr. Aboudara [a camp network director].

Credit cards offer better purchase protection than any other payment medium, but it's not absolute, and this situation seems to fall into one of TILA's crevasses. 

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Treasury in the Red... with Yellow

posted by Adam Levitin

Freight company Yellow is on the verge of bankruptcy. It's not a company whose financial distress would normally stand out but for the fact that it received $700M in national security loans from the US Treasury in 2020, and, oh man, are taxpayers going to take it on the chin. 

The Treasury financing was one of a eleven of national security loans made as part of the CARES Act, and it accounted for 95% of the total dollar amount of those loans.  These weren't PPP loans, but were supposed to play a sort of analogous role, ensuring that companies critical to national security would be able to keep operating. There are really two loans from Treasury to Yellow:  a Tranche A loans and a Trache B loan. 

The Tranche A loan is for $300M and is secured by a junior lien on Yellow's accounts receivable, cash, and various other squishy stuff. Tranche B is for $400M and is secured by the vehicle fleet it financed—something like 1,100 tractors, 1,600 trailers, and 140 containers.  Both loans are cross-collateralized with each other, meaning that the collateral for Tranche A supports Tranche B and vice-versa. The Tranche A and Tranche B loans sit behind approximately $1B of pre-existing debt in the form of (1) a revolver that's secured by the accounts receivable and cash and (2) a term loan (Apollo) secured by Yellow's terminals and rolling stock (other than those financed by Tranche B). Treasury also took an approximately 30% equity stake in Yellow.

There's no way to sugar coat this:  Treasury's screwed on the Yellow loans.

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Axos Bank--More Sketchiness?

posted by Adam Levitin

The Washington Post has a big piece up about Axos Bank being the lender-of-last-resort for Donald Trump. But those us who work in the consumer finance space, know of Axos as a notorious bank partner in rent-a-bank arrangements. Axos is the bank parter of World Business Lenders, an outfit that charges small businesses incredibly high rates of interest (268%!), deceptively disclosed as daily percentage rates rather than annual rates. And of course these loans are backed by personal guaranties from the owners, so they are in many ways like consumer loans. 

Axos is a federal savings association, regulated primarily by the OCC, and headquartered in San Diego, California. So you'd think that Axos would only be able to export California interest rates, which would not in most circumstances allow for interest rates anywhere above 10% on business loans. But there's a set of OCC opinion letters from the 1990s that says that the relevant usury rate is the rate in the state in which the branch of the bank making the loan is located, not the location of the bank for chartering purposes. That's how Chase is an Ohio charter, but can charge Delaware rates. As for Axos, it claims that it makes its loans out of its Nevada branch, and Nevada law does not generally have a usury rate for written contracts, so Axos claims it can charge what it wants. 

The OCC opinion letters are only about national banks, not federal savings associations, which is an opening for the OCC, if it cared to do something about this problem. Plus, even for national banks, the opinion letters are hardly ironclad legal reasoning and could readily be repealed without notice-and-comment rulemaking. In other words, the OCC could solve rent-a-bank tomorrow if it wanted to do so. 

Putting aside the legal standard, the factual application of the OCC opinion letters to Axos seems sketchy. Axos's claim to be making the loans out of its Nevada branch, which is supposedly a "full service branch", but it's located on the 4th floor of a Vegas office park building that seems to generally be virtual offices and shared office space. (Does it remind anyone of the old trick of using a Westchester, NY, virtual office for getting bankruptcy venue in White Plains?) To be sure, there's an Axos sign on the building, but the 4th floor of an office park is a very strange place to locate a "full service branch"--it doesn't exactly invite walk-in business. Whether the loans are really being made out of the Nevada branch--meaning, I'd think, that the personnel involved in the underwriting are all in Vegas--is the sort of thing I would hope an OCC examiner would examine.... 

SEC Coinbase Suit

posted by Adam Levitin

The SEC has finally brought its long-anticipated lawsuit against Coinbase. The suit alleges that Coinbase has operated as an unregistered securities broker, an unregistered securities exchange, and an unregistered securities clearing agency, and that it has made unregistered sales of securities, namely of its staking-as-a-service products. The litigation hinges entirely on one key question: are any of several tokens listed or products offered by Coinbase “securities.” If the tokens and products are not securities, then Coinbase has no problem. And if they are securities, Coinbase almost assuredly loses.

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The Debt Limit Is Unconstitutional—But It's Not What You Think!

posted by Adam Levitin

Anna Gelpern, Stephen Lubben and I have an article in The American Prospect entitled The Debt Limit Is Unconstitutional—but Not for the Reason You Think. Various commentators—and members of Congress—have suggested that the President “invoke the 14th Amendment” to declare the debt limit unconstitutional. They're right to argue that the debt limit is unconstitutional, but the constitutional problem isn't the 14th Amendment. Instead, it's Article I of the Constitution, namely Congress's power to enter into contracts. The tl;dr version is that Congress has a power to make binding commitments for the United States and the President is constitutionally obligated to perform those commitments. If the Treasury lacks the funds, then the President must borrow. No specific authorization is needed. Instead, it is implicit every time Congress appropriates funds to perform a binding commitment.

Relocating the constitutional problem with the debt limit isn't merely an academic exercise. It has two implications.

First, it changes the nature of the legal debate and puts the administration on much, much firmer legal footing. The 14th Amendment argument is weak because it simply is not a prohibition on defaulting. It's a prohibition on repudiation, and a default is not a repudiation. An Article I argument reframes the issue as being about the validity of the debt ceiling, rather than the ability to default. In other words, it goes to question of whether the House GOP has holdup power, rather than whether the administration is under some cryptic constitutional limitation that it must affirmatively "invoke."

Second, it means that the President not only can, but must disregard the debt limit in order to fulfill his own constitutional duty to "Take Care" that the laws are faithfully executed. In other words, breaching the debt limit is not merely an option, but a legal requirement if Treasury is short of funds. Once Congress has appropriated funds, the President must carry out the authorized spending.

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