The Texas Two-Step as Fraudulent Transfer

Judge Judith Fitzgerald (ret.) and I have a post about the Texas Two-Step bankruptcy process up at the Harvard Bankruptcy Law Blog, which has been running a series on the phenomenon.  And the Slips' own John A.E. Pottow has a capstone post on the same topic.    

The tl;dr read version of my post with Judge Fitzgerald is that the real fraudulent transfer vulnerability of the Texas Two-Step is the incurrence of an obligation by the BadCo in the divisive merger, not the transfer of assets to the GoodCo. Focusing on the the incurrence of an obligation not only avoids the problem of the Texas divisive merger statute deeming the merger not to be a transfer of assets (as there is a separate provision in the statute about liabilities that doesn't parallel the asset provision), but it also avoids the problem that there is no longer a transferor entity in existence.  If we're right (and we are), then it means that the liabilities follow normal state law successor liability principles, which should put the liability on GoodCo, which is continuing OldCo's enterprise.

Dual Insulation? The Fifth Circuit's Factual Misunderstanding of CFPB Funding

I know I’m carrying around some extra weight.  But I don’t think it’s quite double insulation.  That sounds like something you need if you’re going on a polar expedition or are really concerned about the heating bill.  But the concept of "dual insulation" plays a big role in the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, which held the CFPB’s funding mechanism to be unconstitutional because it is not an annual appropriation from Treasury.   

In this post, I’ll discuss some of the background on the case, the poorly understood nature of the CFPB’s funding (factual mistakes about which loomed large in the Fifth Circuit’s decision), and the challenge the Fifth Circuit faced in trying to differentiate the CFPB’s funding from that of a host of other federal regulatory agencies (that’s where dual insulation comes in).

US Chamber of Commerce vs CFPB

One would have thought that after a dozen years the challenges to the CFPB’s constitutionality would have been over and that the Supreme Court’s decision in Seila Law would have put the matter to rest. But there are still a trio of suits pending that bring constitutional challenges to the Bureau, including one recently filed in the Eastern District of Texas by the US Chamber of Commerce and some banking and business associations. That’s the suit I’m going to focus on. 

The Chamber’s suit alleges that a recent change in the CFPB’s examination manual—guidance for CFPB examiners that the Bureau happens to make public as a courtesy—that indicates that examiners are to consider discrimination in non-credit services to be an unfair, deceptive, or abusive act or practice is a “legislative rule.” A legislative rule must comply with the Administrative Procedure Act, including adequate notice-and-comment, being based in law, and not being arbitrary and capricious. As a kicker, however, the Chamber’s suit adds in a count that the Bureau’s funding is unconstitutional. What's likely to happen?

 

Chase's 50% Venmo Transaction Fee

I teach about the $40 latte--a $5 latte with a $35 overdraft fee--and think I know how to avoid that. But I was pretty shocked when I looked at my Chase credit card statement today and saw the card card equivalent of an outrageous overdraft fee:  $20 in cash advance fees and $0.25 in cash advance interest for two credit-card funded Venmo transactions totaling $40. A 50% fee?  WTF.

What made this even more shocking was that Chase has never previously charged me fees or interest for Venmo transactions. As recently as July, I have Venmo'd without paying anything more than Venmo's 3% fee for credit-card funded transactions, and my card issuer has not sent me any change of terms notices in the interim. Puzzled, I decided to figure out what was going on. 

3M's Aearo Technologies' Bankruptcy: the Hoosier Hop

3M's earphone subsidiary, Aearo Technologies, filed for bankruptcy today in the Southern District of Indiana. This is looking like a really interesting case: it looks like a new generation of the Texas Two-Step strategy. Let's call it the Hoosier Hop. Here's the story.

Venmo's Unfair and Abusive Arbitration Opt-Out Provision

Venmo's changing the terms of its arbitration agreement, and the manner in which it is doing so is unfair and abusive to consumers. The CFPB and state attorneys general need to take action here to protect consumers.

Here's the story.  Last night I got an email from Venmo entitled "Upcoming Changes to Venmo." Nothing in the email's title (which is all I see on my devices) signals that there is a change in contractual terms, and I would have just deleted it without reading but for seeing consumer finance list-serv traffic light up about it.  So I looked at the email, and in the body it does explain that there are changes to the Venmo arbitration clause. It also tells me that I can opt-out of the Agreement to Arbitrate "by following the directions in the Venmo User Agreement by June 22, 2022".  The Venmo User Agreement is hyperlinked.  It is a 95 page document. The hyperlink takes me to the very top of the agreement, but the arbitration agreement starts on page 70.  It takes a lot of scrolling to get there, and nothing is particularly prominent about the arbitration agreement's text.

The arbitration agreement itself has a summary at the top that includes a few bullet points, one of which is "Requires you to follow the Opt-Out Procedure to opt-out of the Agreement to Arbitrate by mailing us a written notice." The term Opt-Out Procedure is a hyperlink to a form that can be printed (but not completed on-line).

What's so ridiculous about requiring a hand-written form to be sent through the mail is that Venmo will surely digitize the form. That means someone's gotta open the mail and do the data entry. Why not have the customer do that himself? Or for that matter, just have a check box on my Venmo account for opting out of the arbitration agreement? The only reason to use the paper form and posts is to make it harder for consumers to opt-out of the arbitration provision.

What Venmo's doing is unfair and abusive and therefore illegal under the Consumer Financial Protection Act. It's perfectly legal for Venmo to have an arbitration clause, and there is no requirement that consumers have a right to opt-out of arbitration, although a change in terms on an existing contract is a bit more complicated. Be that as it may, Venmo is the master of its offer, and by giving consumers a right to opt-out, but raising barriers to the exercise of that right, Venmo is engaging in an unfair or abusive act or practice. Venmo is trying to have its cake and eat it too, but pretending that consumers have a choice about arbitration, but not actually giving them one.

That's "unfair" under the Consumer Financial Protection Act because the practice makes it likely that consumers will lose their right to proceed as part of a class action. That is a substantial injury to consumers in aggregate. The ridiculous opt-out procedure makes this injury "not reasonably avoidable by consumers." The consumer would have to click on no less than two hypertext links, starting with an email the title of which gives no indication what is at stake, and then navigating through a 95 page agreement to find the second link. After that, the consumer must print, fill out, and mail a form. Whatever one thinks of the benefits of arbitration, there's no benefit to consumers or competition from making the opt-out difficult. To my mind, this is a very clearly unfair act or practice. It's also an "abusive" act or practice under the Consumer Financial Protection Act. Because the terms of the opt-out make it so difficult for a consumer to actually exercise the opt-out, the terms of the opt-out "take unreasonable advantage of —the inability of the consumer to protect the interests of the consumer in...using a consumer financial product or service."  (One might also even be able to argue that it is a deceptive practice--the opt-out right has been buried in fine print and hypertext links.) 

Both the CFPB and state attorneys general have the ability to enforce the UDAAP provisions of the CFPA against nonbanks like Venmo. I hope the CFPB and state AGs get on Venmo about this. It presents a good opportunity for the Bureau to make clear what it expects in terms of fairness for contract term modification and opt-out rights.

What Happens If a Cryptocurrency Exchange Files for Bankruptcy?

Exchanges play a key role in the cryptocurrency ecosystem, but no one seems to have given any consideration to so far is what happens when a cryptocurrency exchange that provides custodial services for its customers ends up in bankruptcy. We’ve never had such a crypto-exchange bankruptcy in the US—Mt. Gox, for example, filed in Japan—but it’s certainly a possibility.  These exchanges are not banks, so they are eligible for Chapter 11 if they have any US assets or incorporation, and they face substantial risks from hacking and their own proprietary trading in extreme volatile assets.

So what happens to a customer if an exchange files for bankruptcy?  I think it ends very badly for the customers, as explained below the break. I do not think customers understand the legal nature of the custodial relationships, and exchanges have no incentive to make the legal treatment clear to customers. In fact, the exchanges are lulling the consumers with language claiming that the consumer "owns" the coins, when in fact the legal treatment is quite likely to be different in bankruptcy. In bankruptcy, it is likely to be treated as a debtor-creditor relationship, not a custodial (bailment) relationship. That means that customers are taking on real credit risk with the exchanges, which is a particular problem because of the opacity of the exchanges and their lack of regulation.

The Miscalculations Underlying Miller & Zywicki's Payday Loan Paper

Earlier this month Professors Todd Zywicki and Thomas Miller, Jr. wrote an op-ed in the Wall Street Journal arguing against payday loan regulation, based on their new empirical paper. Miller & Zywicki wrote:

Our findings will startle the rule writers at the CFPB. Contrary to the research cited in the CFPB’s 2017 rule, which claimed that “loans are almost always made at the maximum rate permitted,” we found that neither fees paid nor loan amounts inexorably rose to maximum allowable levels when those allowable levels were reasonable.

The implication is that there must be price competition among payday lenders with supply and demand setting prices, vitiating the need for regulation.

The problem is that Miller and Zywicki have incorrectly calculated the maximum fees permitted in numerous states. They wrongly assume that the effective rate charged for the first $100 of credit also applies to higher amounts. In fact, in many states, there is either a tiered, decreasing rate or a rate plus a flat fee included in any loan. As a result, Miller & Zywicki calculate the maximum permitted fees as being substantially higher than they in fact are in every state in which they find lenders are not pricing up to the legal limit.

Once this error is corrected, Miller and Zywicki’s figures actually confirm a truth that has long been obvious to anyone who has ever looked at payday loan pricing: there is no price competition, as lenders virtually always price up to the legal limit.

If my (lengthy) analysis below the break is correct, Professors Miller and Zywicki ought to retract both their op-ed and their paper. This is the sort of error for which op-eds and research papers are properly retracted. While Professors Miller and Zywicki might be opposed to payday regulation on ideological grounds, they surely do not want to base their claims on erroneous calculations of state fee caps.

The Blurring of Tech and Finance

I have an op-ed in ProMarkets about how Apple leverages control of the iPhone's NFC chip to push the dominance of its platform into new areas that let it hoover up more consumer data. The NFC (near field communication) chip is what lets the iPhone do contactless payments for ApplePay.  Apple strictly controls access to the NFC chip--it doesn't let AndroidPay use it, for example. But the NFC chip's uses extend beyond payments.  Apple is now using it to let the iPhone operate as a car key and a hotel room key. The catch? If you're a car manufacturer or hotel and you want this cool technology to work with your product, you're going to need to share some of the consumer data with Apple. 

What we're seeing here is an example of the increased blurring between tech companies and financial services companies, tied together by troves of consumer data.  This is a development that ultimately challenges the traditional regulatory boundaries of FTC and CFPB and is going to raise all sorts of issues for antitrust, consumer protection, and data privacy for years to come.

A Better Way to Deal with Student Loan Debt

My Georgetown colleague Jake Brooks and I have an op-ed in Politico about the best way to address the student loan debt problem. We argue that existing proposals for outright student debt relief, whether $10k, $50k, or everything, are problematic, at least standing on their own, particularly because they fail to address the student loan problem going forward. Instead, we see income-driven repayment (IDR) plans as a key part of addressing the problem. 

FDIC Power Struggle

Remember when there were two dueling claimants for the title of CFPB Director? Well, we're now seeing a repeat of that conflict play out with the FDIC.

The FDIC is governed by a five member board, consisting of the FDIC Chair, a Vice-Chair, the CFPB Director, the Comptroller of the Currency, and at-large director. By statute, no more than three of the board members may be from the same political party. The Chair, Jelena McWilliams, is a Trump appointee. The vice-chair position is vacant. The other three directors are all Democratic appointees. That means that three of the four directors on the board are Democrats, but the chair is a Republican. So who is calling the shots at the FDIC?

The issue just came up because the three Democratic appointees voted to direct the FDIC's Executive Secretary to transmit a Request for Information for publication in the Federal Register (which provides the notice required under administrative law of a proposed action). That vote and instruction only appear in a statement released on the CFPB's website. The FDIC's website (presumably controlled by Chair McWilliams) states that no such action was approved by the FDIC.

What's going on here?

Non-Debtor Releases

I have an op-ed in Bloomberg Law about the abuse of non-debtor releases. Many chapter 11 attorneys argue that non-debtor releases are an essential all-purpose deal lubricant and that the excesses of a few cases—Purdue Pharma, Boy Scouts—shouldn't result in throwing out the baby with the bath water. I disagree. There's no question that non-debtor releases can grease a deal (and let's put aside the questionable practice of attorneys negotiating plans that give them releases as well). But so what? There's also a little thing called due process. It's only within the tunnel vision of chapter 11 that reorganization trumps all. Hopefully the Nondebtor Release Prohibition Act, which passed out of the House Judiciary Committee last month will become law and clarify the matter. 

Indeed, are non-debtor releases actually so important for practice? Chapter 11 lived with them for years before Mansville and even after Mansville it was years before they started being used in non-asbestos cases. Indeed, can anyone actually point to a case where a debtor would have had to liquidate and jobs would have been lost but for non-debtor releases? Perhaps there is such a case, but if so, it's the exception.

Take Purdue Pharma. What would have been the alternative to boughten releases for the Sacklers?  Perhaps a liquidating plan, but I'm not sure that it would have resulted in any job loss, just a going-concern sale. And the estate could have sold its own litigation claims against the Sacklers or put them into a litigation trust. To be sure, one might argue that the boughten releases for the Sacklers are a better deal economically for the estate, and that's the proper measure when considering a settlement of estate claims, but I do not see how the estate—or any bankruptcy judge—can constitutionally impose a settlement of creditors' direct claims against non-debtors. It doesn't comport with due process and it's pretty clearly an uncompensated taking.

I'm sure some readers will disagree, and comments are welcome. Further affiant sayeth not. 

Scholars' Letter in Support of Saule Omarova

President Biden has nominated Cornell Law Professor Saule Omarova to be the next Comptroller of the Currency. While the Office of the Comptroller of the Currency is not a well-known government agency outside of bank regulation circles, it is among the most important in financial regulation because it is the prudential regulator of national banks—the largest banks in the United States. The OCC is also the primary consumer protection regulator of all national banks with less than $10 billion in net assets, and the Comptroller is a member of the FDIC board. In short, this is a position with substantial influence over the banking industry. 

This week, numerous scholars of financial regulation (including me) sent a letter in support of the nomination to the Chair and Ranking Member of the Senate Banking Committee. We believe that Professor Omarova would make an outstanding Comptroller, and we hope that she will receive a fair hearing even from those who might disagree with her on policy questions. Professor Omarova is a lawyer's lawyer with impeccable credentials for the job. After completing a PhD and JD, she worked at the leading banking law firm and then in the GWBush Treasury Special Advisor to then Under Secretary Randal Quarles, now the Fed's Vice-Chair for Supervision. Her scholarship is careful, restrained, and masterful, and her co-authors include the top banking attorney in the US.  Not only is Professor Omarova's knowledge of banking regulation unsurpassed within the academy, but she would bring a welcome change to the OCC as the first Comptroller who wasn't a either a banker, bank lawyer, or bank lobbyist when nominated. Her independence is much needed at an agency that has often seen banks as its customers, rather than as its regulatory charges. 

Unfortunately, some of the financial services industry opposition to Professor Omarova has veered into xenophobic and McCarthyite dog whistling based on Professor Omarova having grown up in the former Soviet Union. The hypocrisy in this anti-immigrant prejudice is astounding given the way that the same folks who are claiming that Professor Omarova is suspect because of her childhood in the Soviet Union have celebrated another former Soviet bloc immigrant-turned-bank regulator. The dog-whistling has gotten so bad that in a remarkable press release Senate Banking Committee Chair Sherrod Brown (D-Oh) threw down the gauntlet at the "Red Scare" character assassination coming not just from bank lobbyists, but from the Committee's Ranking Member, Senator Pat Toomey (R-Pa). 

The banking industry's decision to proceed through dog whistling suggests that it is reluctant to have it out over the substantive policy positions supported by Professor Omarova. But if you want to see a more sober and measured take on Professor Omarova from a law firm with numerous financial services industry clients, see Gibson Dunn's take here. What the law firm's take for its clients—rather than for political theater—suggests is that the sky won't fall with Comptroller Omarova, but that she will take a more skeptical view of bank activities outside of traditional core activity areas. In other words, it won't be business as usual. And that's the banking industry's real concern here. 

Further Thoughts on Coinbase: Two Mysteries

I've been puzzling over two mysteries in the Coinbase saga:  first, why does Coinbase care so much if Lend is deemed a security, and second, why did the SEC want the list of Coinbase customers who had signed up in advance for Lend. I don't know that I've got all of this sussed out, but I figure I'll put my thinking out into the Internets and see if others have thoughts.

Coinbase and the SEC

"All fintech is regulatory arbitrage, to some degree," Felix Salmon writes at Axios. And he's right. In the last couple of days we've seen two striking examples. First, the CFPB entered into a consent order with the provider of Income Share Agreements, a type of education financing. The consent order makes clear that the CFPB will be treating ISAs as student loans--that is credit--and therefore subject to the Truth in Lending Act and Equal Credit Opportunity Act.

And then we saw crypto-Twitter blow up over Coinbase's spat with the SEC regarding what is a security. Coinbase is the largest crypto exchange in the United States. It wants to offer a cryptocurrency lending product called Lend. According to Coinbase, the SEC told Coinbase that it thinks the product is a security and that it will sue if Coinbase offers the product without first registering it. After Coinbase got a Wells Notice from the SEC, Coinbase got huffy and decided to take its case to Twitter with a thread by it's CEO calling the SEC's behavior "sketchy".

There's a lot of confusion about the Coinbase matter, so I'm going to spell out what the stakes are, how I think the product works, and then why (assuming that I have the product's operation correct) Lend is obviously a security.

Massachusetts Throws in the Towel with Credit Acceptance Corporation

In 2020 the Massachusetts Attorney General brought one of the most significant consumer finance cases in years, a suit against subprime auto lender Credit Acceptance Corporation.  If you haven’t heard of CAC, it’s a one of the largest subprime auto lenders, and its stock has been one of the hottest growth stocks in recent years.  CAC is an indirect lender, meaning that it doesn't make the loan directly to the consumer, but instead purchases the loan from the dealer (who will not make the loan until the purchase is lined up).  

The suit contained a couple of really revolutionary claims, and Massachusetts was initially successfully, winning summary judgment on one count this spring and defeating the motion to dismiss on all challenged counts. The suit recently settled and for a surprisingly low amount and with virtually no meaningful prospective relief. CAC certainly had some possible defenses, but Massachusetts really seemed to be in a strong position, so it's a bit of a head scratcher what happened. 

Now Is the Time for Bankruptcy Venue Reform

Judges Joan Feeney and Steven Rhodes and Professor Jay Westbrook and I have an op-ed supporting bankruptcy venue reform running in The Hill. Forum shopping has long been a problem in chapter 11, but with mass tort cases like Purdue and Boy Scouts of America, we're seeing it have effects on an previously unprecedented scale. It's time to do something about for the good of the system. 

Does Purdue Have a 203 N. LaSalle Problem?

I was really struck by a line in the Purdue Pharma plan objection of the Distributors, Manufacturers and Pharmacies (DMP). They called the Sacklers mere "out-of-the-money shareholders."  That's 100% accurate. And it has important implications, one of which is in their objection, and one of which is not.  The point the DMP were making is that the release of the Sacklers has no reorganizational benefit to Purdue—it does nothing for Purdue's business.  This isn't like a release of litigation against folks who will remain officers and directors of a reorganized company and will be distracted by on-going litigation.  It's a good point.  But I think there's actually a stronger one. 

If one thinks of the Sacklers as out-of-the-money shareholders, then their release creates a 203 N. LaSalle Street P'Ship problem. 

Purdue Continues to Peddle Malarkey About Why It's in White Plains

Purdue Pharma continues to peddle some malarkey about why it filed for bankruptcy in White Plains, New York.  In response to my House Judiciary testimony yesterday, Purdue told the Stamford Advocate:

Purdue Pharma Inc., the general partner of Purdue Pharma LP, has been a N.Y. corporation since its incorporation on Oct. 1, 1990. White Plains is about 15 miles from our corporate headquarters and is the closest federal bankruptcy courthouse. Thus it was the most appropriate place for us to file.

Let’s get real. Purdue—and that really means the Sacklers, who were still in control when Purdue's bankruptcy filing strategy was worked out—filed in White Plains because it wanted its case to be heard by Judge Robert Drain. If Judge Michael Wiles—who has held that bankruptcy courts do not have the power to issue third-party releases—had been the judge sitting in White Plains, there’s no chance Purdue would have gone anywhere near White Plains. On top of that, Purdue’s claim about convenience doesn’t pass the smell test. Convenience to corporate headquarters is never a real consideration in bankruptcy filings. If it were, would GM and Chrysler have filed in NY? Would Nieman Marcus or Belk have filed in Houston? Would anybody ever file in Delaware?

Nondischargeability and the Sacklers

In the wake of today's House Judiciary Committee hearing, I got a text from an attorney who pointed out that if the Sacklers themselves filed for bankruptcy, creditors could raise non-dischargeability challenges under section 523, including for "willful and malicious injury by the debtor to another entity or to the property of another entity" or, or under section 1141(d)(6) for false claims acts violations. But with a non-debtor release, there's no opportunity or process to raise non-dischargeability challenges.

In other words, the Sacklers will be able to get greater a type of relief by piggybacking on Purdue's case that they could if they were debtors themselves.  Bruh. 

If that isn't a strong indication that the Bankruptcy Code does not contemplate non-debtor releases outside of the asbestos context, I'm not sure what is.

Is DOJ Supporting the Purdue Pharma Plan? Or Not?

The Department of Justice appears to be mumbling out of both sides of its mouth in the Purdue Pharma bankruptcy.  On July 19, DOJ filed a "statement" regarding the release of the Sacklers. Not an "objection," but a statement that sure reads a lot like an objection.  Then today we learn that DOJ did not bother to vote its multi-billion dollar claim. The plan deems a vote not cast to be an acceptance. 

So which one is it?  Is DOJ for the plan or against it?  Or trying to keep its head down and avoid political heat while not really derailing anything?  Whatever position DOJ wants to take, this approach is not exactly a profile in courage.  (And failing to vote is not exactly in keeping with DOJ's brand... And failing to exercise governance rights on a multi-billion dollar asset? Bruh.)

I'll be very curious to see if DOJ actually argues anything at the confirmation hearing or joins in any appeal. The appellate point is key--there's a long-shot chance that the district court or 2nd Circuit might stay the effective date of the plan--but I think the odds of that are close to zero unless DOJ is among the parties making such a motion. If DOJ fails to seek a stay of the plan going into effect, it will be hard to see DOJ's "statement" as anything more than political posturing.

House Judiciary Testimony on Chapter 11 Abuses

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

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

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

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

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

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

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

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

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

Second Circuit Holds Many Private Student Loans Are Dischargeable in Bankruptcy

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

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

So what does this mean big picture?

Sacklers Withdraw Their Threatened Sanctions Motion

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

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

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

Why Aren't All Judicial Recusal Lists Public?

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

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

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

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

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

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

Let Consumers Control Their Financial Data

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

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

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

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

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

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

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

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

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

What's Up With Oral Opinions in Bankruptcy?

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

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

Venue Reform: Once More Unto the Breach

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

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

Collins v. Yellen

The Supreme Court ruled today in Collins v. Yellen, a case brought by Fannie Mae and Freddie Mac preferred shareholders that challenged both the constitutionality of the FHFA Director's appointment and the 2012 amendment to Treasury's stock purchase agreement with Fannie and Freddie that provided for all of Fannie and Freddie's profits to be swept into Treasury. The preferred shareholders are miffed because they believe that those dividends should be paid to them first, never minding the fact that but for the Treasury stock purchase, Fannie and Freddie would have been liquidated in receivership, resulting in the preferreds being wiped out. 

 

SCOTUS, following its ruling in Seila Law v. CFPB, held that the FHFA Director must be removable at will by the President. In light of this finding of unconstitutionality in the appointment of the FHFA Director, the Court remanded for consideration of damages from past profit sweeps. Future profit sweeps are permitted, however, as the Director is now clearly removable at will by the President.

 

While some media is pitching the outcome as a mixed ruling, it really isn't for the preferred shareholders. The preferreds took it on the nose here, and the market gets it: Fannie Mae preferred shares tumbled in value by 62% after the decision.

 

Fake Lender Rule Repeal

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

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

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

Judge Shopping in Bankruptcy

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

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

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

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

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

NRA Bankruptcy Petition Dismissed

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

So what does this mean?

CDC Eviction and Foreclosure Moratorium Held Illegal

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

Rent-to-Own Dogs

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

The Failure of the United States Trustee Program in Chapter 11

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

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

FDIC Valid-When-Made Rule Amicus Brief

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

Abolish the OCC?

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

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

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

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

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

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

Not Cool, Bank of America

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

Addressing Credit Invisibility Through Federal Contracting Power

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

Consumers and Price Volatility: Texas Electricity Prices

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

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

This story jumped out at me for two reasons.

NRA Bankruptcy: Enter Kirkland?

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

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

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

Is the NRA Out of Bullets?

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

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

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

NRA Examiner Motion

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

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