postings by Stephen Lubben

Puerto Rico as a State?

posted by Stephen Lubben

The House of Representatives has just voted to make the District of Columbia a state. Obviously the Senate half of the process might have to wait until next year, at least.

What about Puerto Rico? Obviously there is the question of whether the people of the Commonwealth want statehood. But if at least a majority do want statehood, it would seem to make sense address the issue at the same time that DC goes up.  

And of course, given that this is Credit Slips, we might also wonder what would happen to PROMESA, if statehood were to happen. Do we wait until the process is over, or end it "now," leaving the creditors to negotiate with a debtor that now has the benefit of the Eleventh Amendment?  Interesting things to mull over, but potentially at issue as soon as early next year.

Fun with CLOs

posted by Stephen Lubben

Frank Partnoy has an important and unsettling piece in The Atlantic about how CLOs (securitized syndicated loans, in short) might be at the core of the next bank meltdown, which he sees coming as soon as later this year. Because 2020 was starting to get dull ... 

Puerto Rico and the Oversight Board

posted by Stephen Lubben

The Supreme Court's opinion is out today, and the short answer is that the Board's appointment did not violate the Appointments Clause of the Constitution (Article II, Section 2, Clause 2), and thus the First Circuit is reversed.

But take a look at Justice Sotomayor's concurrence. She is all but inviting the Commonwealth to argue that Congress had no power to enact PROMESA in the first instance, given that it had arguably given up much of its power over Puerto Rico back in the 1950s. It is an argument I had hoped the Court would take up in connection with the Recovery Act.

In short, more interesting legal questions to come (maybe).

State Bankruptcy

posted by Stephen Lubben

So Senate Majority Leader Mitch McConnell says States should be able to file for bankruptcy, to get out of their pension obligations. He'd rather that than give them a federal bailout, given current conditions.

I have long argued that States don't need bankruptcy, because they have stronger sovereign immunity (under the Eleventh Amendment) than most actual sovereigns. But put that to one side.

Why does McConnell think that such a bankruptcy will be limited to single class of creditors? Indeed, I doubt such a bankruptcy system would be consistent with the Bankruptcy Clause.

And quite frankly, I suspect bondholders understand this (even if anti-union activists don't). That is why you never see the municipal bond managers advocating for "State bankruptcy." The bankruptcy of any of the 50 states would look more like Puerto Rico's, where haircuts to bondholders are most definitely on the table. The only question is "how much?"

The end of the UFCA?

posted by Stephen Lubben

Governor Cuomo has signed into law New York's version of the Uniform Voidable Transactions Act (UVTA). Does this mean I don't have to talk about the UFCA in my bankruptcy classes anymore?

It also means that both California and NY are on the UVTA, which may be the beginning of the end for the UFTA.

Juno?

posted by Stephen Lubben

IMG_7564On Friday night I landed at JFK, after a very nice international insolvency conference at the University of Miami, and took a "Juno" home. Little did I know it would be my last time using the app. 

On Monday Juno announced it was shutting down, and on Tuesday it (and several affiliates) filed chapter 11 petitions. It blamed its demise on "burdensome local regulations and escalating litigation defense costs." The company has been marketing itself for several months, and its parent (Gett) intends to continue in the US as a business only ride service, operating in partnership with Lyft.

Now here's a question. The company notes that it "operated in New York, New York, where its headquarters are located." Where did it file its case?  Delaware.  Why?

Comments are open.

In the meantime, I guess I'm stuck with Lyft. And their drivers who insist on picking me up across the street from my apartment building.

 

It makes a fine Halloween gift!

posted by Stephen Lubben

image from www.e-elgar.comOn sale now, my latest book:  American Business Bankruptcy, A Primer. Suitable for use as supplemental reading in all sorts of bankruptcy classes, and even some corporate finance classes that cover financial distress (especially those using a certain textbook).

I also think it would be a good read for junior attorneys who (shockingly) neglected to take bankruptcy in law school. And don't forget the international attorneys who want a quick way to learn about American law. It also stabilizes wobbly tables and kills flies.

In short, it makes a great gift for everyone on your shopping list! Buy several copies today. And tomorrow too.

Puerto Rico (A Quick Take, Part II)

posted by Stephen Lubben

Coen, Andrew. The Bond Buyer; New York, N.Y., 30 Sep 2019:

Assured Guaranty, which insures a large amount of Puerto Rico debt, came out against the plan.

“Assured Guaranty does not support this plan of adjustment as it is premised on a number of terms that violate Puerto Rico law, its constitution and PROMESA," said Assured spokesperson Ashweeta Durani.

Are we sure the first and second "violations" are relevant for these purposes?

Puerto Rico (A Quick Take)

posted by Stephen Lubben

So the debt restructuring plan is out. The New York Times indicates that the Oversight Board aimed to put the Commonwealth's debt at "less than" the average of the ten most indebted states. Not exactly a "fresh start" there, is it? Why not peg the debt to that of the average state?

Nonetheless, we can expect the bondholders to complain about even the relatively modest haircut they are slated to take, and they will surely note that the pensioners are taking less of a cut. Of course, the pensioners are in some sense funding the bondholder's recovery, since they are a key factor in keeping the Commonwealth's economy alive.

Normally we say that the liquidation baseline does not work in chapter 9 cases, because there is no real way to "liquidate" a municipality. But if the bondholders push too hard, they may test that assumption with regard to Puerto Rico. Lightly populated Caribbean islands do not support large debt loads, or even 63% recoveries to bondholders.

Alix v. McKinsey Update

posted by Stephen Lubben

Judge Furman has dismissed the federal RICO charges, and the case may be headed to state court. Our chances of actually finding out if McKinsey flouted rule 2014 (and § 327) are looking increasingly dim:

OPINION AND ORDER re: 88 JOINT MOTION to Dismiss by all defendants. filed by McKinsey Holdings, Inc., Kevin Carmody, Alison Proshan, McKinsey Recovery & Transformation Services U.S., LLC, Jon Garcia, Seth Goldstrom, Robert Sternfels, McKinsey & Company Inc. United States, Dominic Barton, McKinsey & Co., Inc. If Alix's allegations in this case are true (as the Court has assumed they are for purposes of this motion), they are certainly troubling. Moreover, Alix and AlixPartners may well have good reason to be upset about Defendants' alleged misconduct and may indeed have genuinely public-spirited reasons for seeking to deter it going forward. But that is not enough to state a claim for relief, much less a claim under the civil RICO statute, which provides a remedy only to those whose injuries directly resulted from a defendant's scheme. Defendants' motion to dismiss is accordingly GRANTED as to Alix's federal claims and those claims the First, Second, Third, and Fourth Causes of Action are dismissed with prejudice. The Court defers ruling on Defendants' motion to dismiss Alix's state-law claims until it confirms, following the parties' supplemental briefing in accordance with the schedule set forth above, that it has diversity jurisdiction over those claims. The Clerk of Court is directed to terminate the Individual Defendants Dominic Barton, Kevin Carmody, Jon Garcia, Seth Goldstrom, Alison Proshan, Robert Sternfels, and Jared D. Yerian as parties and to terminate ECF No. 88. SO ORDERED., (Jon Garcia, Seth Goldstrom, Alison Proshan, Robert Sternfels, Jared D. Yerian, Dominic Barton and Kevin Carmody terminated.) (Signed by Judge Jesse M. Furman on 8/19/19) (yv) (Entered: 08/19/2019)

Ouch. (Puerto Rico Edition)

posted by Stephen Lubben

The First Circuit responds to the Oversight Board's request for a stay until the Supreme Court can rule on their cert. petition, with regard to the Constitutionality of the Board's appointment (emphasis added):

ORDER entered by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge: In accordance with Federal Rule of Appellate Procedure 41(b), this Court ordered the withholding of its mandate in this case for a period of 90 days so as to allow the President and the Senate to appoint members of the Financial Oversight and Management Board for Puerto Rico in accordance with the Appointments Clause. With that 90-day stay set to expire on May 16, 2019, the Board informs us that the President has announced his intent to nominate the current members to serve out their terms, but that the nominations have not yet gone to the Senate. The Board has also filed, apparently with no sense of any urgency, a petition for certiorari. The Board seeks a further stay of our mandate, this time under Federal Rule of Appellate Procedure 41(d)(1), which would stay the mandate indefinitely until the Supreme Court's final disposition of the case. That request is denied. Instead, the stay of our mandate is extended sixty (60) days, until July 15, 2019.

Puerto Rico, the Board, and the Appointments Clause

posted by Stephen Lubben

As many will have seen in the press, the First Circuit has said that PROMESA's Oversight Board was appointed in violation of the Appointments Clause. In short, while PROMESA allowed President Obama to appoint members of the Board without Senate confirmation, the Court says such confirmation was required.

The Board has decided to appeal to the Supreme Court, and the First Circuit's decision is on hold for 90 days. But what happens in 90 days?

In short, chaos. The title III "bankruptcy" cases for Puerto Rico and its affiliates are all run by the Board. Without the Board, the cases would seem to grind to a halt. If they remain that way for an extended period of time – and who really thinks this Congress and this President are going to get their act together in 90 days? – the District Court may have little choice but to dismiss the cases.

The appeal was brought by old-friend Aurelius. They presumably assume that they will get better treatment outside of title III.

But is that right? Maybe Congress will decide to enact a streamlined insolvency process for Puerto Rico, one that "cuts to the chase." After all, even the current President (hardly a friend to the Commonwealth) once suggested it might be necessary to simply cancel Puerto Rico's debt

Congress has a lot of power under the Bankruptcy Clause – and perhaps even more under the Territories Clause. Be careful what you wish for, and all that.

CDS Strikes Again (Aurelius and Windstream)

posted by Stephen Lubben

Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.

Windstream is a corporate group in the telecommunications sector. In 2013 it issued some senior unsecured notes due in 2023. Under the indenture for those notes, specific legal entities in the Windstream group agreed not to engage in any sale-leaseback transactions, presumably to maintain legal title to the groups’ assets available for the noteholders to collect against.

But the indenture did not prohibit the creation of new affiliated entities, nor did it bind such new entities to the prohibition on sale-leasebacks. Windstream did exactly that – popping up a new holding company to enter into the lease, and dropping down a new REIT subsidiary to be the owner of the leased assets. A clear end-run around the probable “intent” of the parties (whatever that means in the context of a bond indenture), but not against the express terms of the indenture, which legions of New York Court of Appeals decisions suggest is the only place to look for intent when reading an indenture.

Nonetheless, Aurelius Capital Master, Ltd., a fund managed by Aurelius Capital Management, LP and its affiliates, instructed the indenture trustee to bring suit against Windstream for breaching the terms of the indenture. As the holder of more than 25% of the notes, the Aurelius fund was entitled to give the trustee such instructions.

As many Slips readers will already appreciate, Aurelius is well-known in the restructuring community for its fondness for a robust sort of litigation. To put it mildly. And it is alleged that Aurelius has fully hedged its Windstream position with CDS, meaning that it can afford to be quite aggressive, because damage to Windstream will actually increase the value of the CDS position.

I’ll try to condense this as much as possible, but readers can see that we are headed into one of my longest posts in a while …

Continue reading "CDS Strikes Again (Aurelius and Windstream)" »

Alix-McKinsey Update

posted by Stephen Lubben

Lots of news in the restructuring area this week, and I hope to blog about Puerto Rico and Windstream before the week is out. But first, a quick update about everyone's favorite professional retention litigation.

As predicted, arbitration has proved to be somewhat less than satisfying in this matter. We still don't really know if McKinsey violated the Code/Rules on disclosure, and nobody has really addressed why it took the Wall Street Journal to notice that McKinsey's retention applications were extremely light on disclosures, relative to other bankruptcy professionals.

The U.S. Trustee is crowing about the $15 million dollars that McKinsey has agreed to pay – although at $5 million per chapter 11 case, that won't go very far will it?

And McKinsey's press release shows that it has an altogether different take on the settlement agreement:

Following a successful mediation overseen by Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas, McKinsey & Company has reached an agreement with the United States Trustee Program regarding McKinsey’s prior disclosures in a set of bankruptcy cases from 2001 to 2018. The settlement does not opine in any way on the adequacy of McKinsey’s prior disclosures and, as Judge Isgur noted, the proposed settlement resolves “good faith disputes concerning the application of Bankruptcy Rule 2014.” McKinsey has agreed to this settlement in order to move forward and focus on serving its clients.

In reaching the agreement, McKinsey did not admit that any of its disclosures were insufficient or noncompliant, and the settlement does not in any way constitute an admission of liability or misconduct by McKinsey or any of its employees, officers, directors or agents.

McKinsey thanks Judge Isgur for his help in putting the historical disagreements regarding disclosures with the Trustee behind us. With Judge Isgur’s guidance, this process has also provided additional clarity for the filing of future disclosures. McKinsey will be filing additional disclosures in the Westmoreland case and looks forward to working with the bankruptcy courts to continue to deliver value to debtors and stakeholders.

The Commonwealth and the GOs, part 2

posted by Stephen Lubben

In my last post, I noted that the joint committee-Board objection to the 2012 and 2014 Puerto Rico GOs was at least plausible, and thus is likely headed for more extensive litigation. As Mark and Mitu have also noted, it also matters a good deal that the objectors also have arguments for why the claim on the bonds is not replaced by a similar claim for unjust enrichment or the like (although we might wonder if such a claim would enjoy the special constitutional priority the GOs do, if we think that priority really matters in a sovereign/muni bankruptcy process).

This past weekend, the FT's John Dizard quoted a hedge fund type as saying that the objectors' argument about the Building Authority's leases (see my prior post) was "nonsense." Not a lot of deep analysis there, but it does confirm there is a fight ahead. And we can assume that the Commonwealth's words will be used against it – after all, at the time of issuance, Puerto Rico and its agents undoubtedly said lots about how assuredly valid these bonds were.

The obvious conclusion is that the objectors have made this move as an opening shot in a broader play to negotiate a haircut with the GOs. After all, they look like they are almost done dealing with the COFINA debt, the other big chunk outstanding.

Sure. But what I find really interesting is the more subtle point that with this move, the objectors have also opened up some space between the GOs as a class. That is, presumably the non-challenged GOs will not have to take as severe of a haircut if $6 billion has already been knocked off the GO total. If I'm a holder of 2011 GOs (which I'm not, btw), I might then start to think that I don't really mind if the objectors win. And thus intra-GO warfare might break out.

Some asset managers are also going to face challenges if they have 2011 GOs in one fund, and 2014 GOs in another. And then there is Assured Guaranty Municipal Corp., which insured both the 2011 and 2012 (but not the 2014) ... 

The Commonwealth and the GOs, part 1

posted by Stephen Lubben

While there has been some press coverage of the recent attempts to annul some $6 billion of Puerto Rican general obligation bonds – essentially all such debt issued starting in 2012 onward – the move has not received much deep coverage. Yesterday I took some time to read the claims objection filed in the Commonwealth's article III case, and in this post I'm going to consider the arguments against the bonds' validity. In a further post, I will consider what is going on here from a strategic perspective.

The objection was jointly filed by the creditors' committee and the Financial Oversight and Management Board for Puerto Rico, but the Board only joined in one of the two main arguments that are put forth. (There is a third argument in the objection – about OID and unmatured interest under section 502 fo the Code – that I'm not going to talk about because its rather pedestrian by comparison).

In sum, the committee argues that GO bonds issued in 2012 and 2014 violated two provisions of Puerto Rico's constitution, and thus the bonds should be deemed void. The Board joins in the objection with regard to the first constitutional provision, but not the second. If successful, this objection would eliminate $6 billion of the $13 billion in GO bonds currently outstanding.

More details after the break.

Continue reading "The Commonwealth and the GOs, part 1" »

Jay Alix, McKinsey Redux

posted by Stephen Lubben

A quick note on this ongoing issue, in which Jay Alix (the individual) claims that McKinsey has gained bankruptcy work and market share by flouting the requirements of the Code. Reports are out this morning that some judges have sent this matter to mediation. I don't get that.

The basic issue is that McKinsey, under the most charitable interpretation, was extremely aggressive in deciding what needed to be disclosed to the bankruptcy court. This is basically a legal or policy question as to how to interpret section 327 et al.  How is that a proper subject for mediation? Can the parties really agree on the scope of disclosure? 

I know mediation is all the rage these days in large chapter 11 cases, but there are some issues that simply need to be addressed by the court.

Maybe it's not a new problem after all

posted by Stephen Lubben

Consider:

Seldom are business bankruptcy cases initiated under Chapters I to VII, inclusive, as well as under Chapters X and XI, where all or substantially all of the assets have not been pledged as collateral for the payment of debts. This pledging of assets tends to create serious questions in connection with the administration of the estates. In cases where the debtor is engaged in business, the receiver or trustee is quite often without free assets with which to carry on operations. There is no money in hand and no means of raising funds necessary to take care of fixed and direct charges essential for the maintenance of the business, without impinging upon the rights of the secured creditors. Debtors who might otherwise be reorganized in the public interest are unable to continue in business long enough to develop alternate means of financing and negotiate accommodations with their creditors.

Charles Seligson, Major Problems for Consideration by the Commission on the Bankruptcy Laws of the United States, 45 Am. Bankr. L.J. 73, 87-88 (1971).

No comment

posted by Stephen Lubben

In this morning's email:

Moody's Investors Service downgraded its Probability of Default Rating (PDR) for American Tire Distributors, Inc. ... following the company's announcement that it had initiated Chapter 11 bankruptcy proceedings...

ISDA Promotes a Race to the Bottom

posted by Stephen Lubben

Frustrated that Congress did not decide to collapse the CFTC and SEC as part of Dodd-Frank, and facing the reality that the SEC is still working on its rules under Title VII of Dodd-Frank, ISDA, the swaps industry trade group, is out with a white paper that urges the adoption of a "safe harbor."

This is not the infamous bankruptcy safe harbors, but rather a rule that would be adopted by both regulators. The basic idea is that compliance with one regulator's rule is "good enough." That is, swaps traders could choose which regulator they want.

What could possibly go wrong?

Excuse Me?

posted by Stephen Lubben

Barry Ritholtz has a generally sensible column about the ten-year anniversary of the financial crisis, but the bankruptcy stuff really makes no sense at all. Start with this proposition:

I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts.

How precisely would that work? A prepack involves pre-bankruptcy solicitation of votes from creditors – largely bondholders if we are talking about a SIFI's holding company. Under the securities laws, the solicitation will take at least 20 days. That is about 19 days more than will be required for the run on the SIFI to be fully commenced.

And then we have:

I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest.

So this is not a prepack at all. If we are bidding on assets post-bankruptcy, there is no pre-bankruptcy plan for creditors to vote on. Indeed, until we see how the sale goes, there is no plan at all.

In short, we are just doing chapter 11, Lehman style. Maybe with a bit more pre-planning, which could not hurt. But if you assume better facts, you are bound to think you have found a better way

I continue to doubt that bankruptcy has much to offer with regard to a SIFI failure – which is really much more a question of ex ante regulation, and post default politics.

Available at finer booksellers everywhere (and Amazon too!)

posted by Stephen Lubben

CoverMy new book is out – the Law of Failure.

The sub-title is "A Tour Through the Wilds of American Business Insolvency Law," which pretty much tells the whole story. I try to cover all business insolvency law – not just the Bankruptcy Code. State laws, and federal laws like Dodd-Frank's OLA are covered too. All in a concise little volume.

In my research I discovered that many states have specialized receivership and other insolvency laws for specific types of businesses. And some states – I'm looking at you New Hampshire – still have corporate "bankruptcy" statutes on the books from the days when there was no federal bankruptcy law, or (as was the case with the early Bankruptcy Act) the law did not extend to all types of businesses. Can any of these laws really work? It is hard to say, since the Supreme Court has not dealt with a bankruptcy preemption issue in a very long time.

I welcome discussion on this question, or the book in general, from Slips readers, either below or via email.

Jay Alix v. McKinsey Update

posted by Stephen Lubben

As my summer of poutine, donairs, and nippy waters winds down, a quick post to note that the long-expected motion to dismiss has been filed in the battle between the chapter 11 financial advisors. A McKinsey spokesperson also provided the following statement, which gives some insight into how they intend to respond to this case:

“Jay Alix has waged a years-long crusade against McKinsey & Company to stifle competition in the bankruptcy advisory market. His attempt to bootstrap a disclosure dispute into a RICO action is devoid of any legal basis and obviously intended to do nothing but inflict reputational damage. Courts have previously upheld the appropriateness of McKinsey’s disclosures. This lawsuit is just one more part of Mr. Alix’s anticompetitive campaign to push out of the market a competitor whose deep expertise and unmatched scale deliver superior bankruptcy outcomes.”

Thoughts: initial thoughts on the Alix-McKinsey lawsuit

posted by Stephen Lubben

The compliant alleges some damming stuff. McKinsey brushes it all off as an anti-competitive ploy. It seems to me that the biggest risk to McKinsey is that the failure to disclose can itself be the basis for an order to disgorge fees.

McKinsey 2Even if McKinsey might have been retained in these cases if it had made disclosure up front – I don't necessarily agree with the Alix complaint that the alleged connections would have been, in all cases, fatal to their retention – failure to disclose is itself a serious problem. Bankruptcy professionals always have to disclose more than what is required by section 327's adverse interest/disinterested standard, because ultimately what counts as a problem for section 327 purposes is a question for the court, not the professional, to decide.

And I wonder why the courts approved McKinsey's retention applications in the first place. And where was the US Trustee? It is alleged that many of their retention applications stated that McKinsey had no relevant conflicts to disclose.  As in none. For a company of the size and importance of McKinsey, that frankly is not plausible. 

The allegations in paragraphs 120 to 122, which I have cut out in the image, are deeply troubling. In short, Jay Alix alleges that McKinsey recommended law firms to clients, and the law firms in turn recommended McKinsey for retention in the case. Not only might this be illegal, as Alix says, but this sort of relationship would have to be disclosed in the McKinsey (and law firms) retention applications even if not illegal.

Battle of Giants

posted by Stephen Lubben

I have been studying chapter 11 professionals since before the turn of the century, but today we have a first. Jay Alix, as assignee of AlixPartners LLP, has filed a 150 page complaint against McKinsey & Co., Inc. and others, alleging RICO violations in connection with McKinsey's alleged violations of section 327 and rule 2014.  This apparently comes out of the Wall Street Journal's report last week that McKinsey was suspiciously light and vague in its disclosures in bankruptcy court, as compared with other, similar professionals.

The alleged conspiracy goes back to cases during my time in practice – that is, long, long ago. It will be interesting to watch this develop.

Coming Soonish to a Bookstore Near You

posted by Stephen Lubben

Assuming you still have those in your town. If not, also available for preorder now is my forthcoming book, entitled The Law of Failure.  It is my attempt to consider all of American business insolvency law as a whole. Not just bankruptcy but also assignments, receiverships, and even oddball things like Nevada's campground receivership provisions.

The Economic Growth, Regulatory Relief, and Consumer Protection Act

posted by Stephen Lubben

Or EGRRCPA, for short. That is the official name of S. 2155, a bill which seems to be tearing Senate Democrats apart. Republicans are uniformly in favor of the bill, which Bloomberg describes as "another faulty bank-reform bill." Some Democrats see it as needed regulatory relief for small banks, while others, including the one who used to blog here, see S. 2155 as a rollback of keys parts of Dodd-Frank for big banks that remain too big to fail.

It is both. Indeed, if the bill were stripped of its title IV, I think most people could live with it. But title IV is a doozy.  

Most notably, it raises the threshold for additional regulation under Dodd-Frank from $50 billion in assets to $250 billion. Banks with more than $50 billion in assets are not community banks.

The banks in the zone of deregulation include State Street, SunTrust, Fifth Third, Citizens, and other banks of this ilk. In short, with the possible exception of State Street, this is not a deregulatory gift to "Wall Street," but rather to the next rung of banks, all of which experienced extreme troubles in 2008-2009, and all of which participated in TARP.

My prime concern – given my area of study – is that these banks will no longer be required to prepare "living wills." That is, they will not have to work with regulators on resolution plans.

How then do we expect to use Dodd-Frank's orderly liquidation authority if they fail? It would be impossible without advanced planning. Same for the misguided attempts at "chapter 14." I have real doubts about the wisdom of "bankruptcy for banks," but if it is ever to work, it will require lots of advanced planning (and luck).

And we can't use the normal FDIC approach of finding another, bigger bank to take them over, because that would simply create another colossus, like Wells Fargo. Certainly we don't want that.

Maybe a bailout then? Is that the "new" plan?

Chapter 11 Locale

posted by Stephen Lubben

For nearly two decades, the fact that many really large chapter 11 cases file in two districts has been a point of controversy.  On the one hand, the present system makes some sense from the perspective of debtor’s attorneys, and many DIP lenders, who value the experience and wisdom of the judges in these jurisdictions and the predictability that filing therein brings.  On the other hand, for those not at the core of the present system, it reeks of an inside game that is opaque to those on the outside.  And it is not clear the judges outside the two districts could not handle a big case; indeed, most could.

Where big chapter 11 cases should file is an issue again, at least among bankruptcy folks, given the possibility that the pending Cornyn-Warren venue bill might pass as part of some bigger piece of legislation, perhaps the pending S. 2155 (whose Title IV is so misguided it certainly warrants a separate post).

I have long been frustrated by the discussion of chapter 11 venue.  On the one hand, the present system has developed largely by accident, with little thought for the broader policy implications.  On the other, there is certainly some merit in concentrating economically important cases before judges who are well-versed in the issues such cases present.  The issue calls for careful study, but, as with most political issues these days, we are instead presented with a binary choice.

I have often contemplated concentrating the biggest chapter 11 cases among a group of bankruptcy judges, trained in complexities of multi-state or even global businesses.  A small panel of such judges could be formed in various regions around the country, such that the parties would never have to travel further than to a neighboring state for proceedings.  Geographically larger states – i.e., California and Texas – might comprise regions all by themselves.

Such an approach would ensure that cases would capture some of the benefits of the present system, without the drawbacks of having a Seattle-based company file its bankruptcy case on the East Coast.  Comments are open, what do readers think about developing a nationwide group of "big case" judges?

Tax "Reform"

posted by Stephen Lubben

Key takeaways for Slips readers from a Moody's report, dated today:

The legislation is credit negative to the US sovereign, owing to the reality that the cuts do not pay for themselves, and Moody's estimates the cuts will add $1.5 trillion to the national deficit over ten years. Higher deficits will put further pressure on the federal government's finances, which are already facing prospects of increased costs of entitlements. Unless fiscal policy reverses course, Moody's estimates that the federal government's debt-to-GDP ratio will rise by over 25 percentage points over the next decade, to above 100%. Combined with rising interest rates, debt affordability for the US will weaken significantly.

The net impact to state and local governments is negative. While the new $10,000 limit on state and local tax (SALT) deductions does not directly impact state or local tax receipts, it will blunt the effect of lower federal rates for many taxpayers. Because the state and local provisions raise the effective tax cost for many taxpayers, public resistance to tax increases will likely rise, and that in turn will constrain local governments' future revenue flexibility. In addition, if larger federal deficits caused by the tax cuts result in attempts to cut entitlement spending, states will be pressured to backfill cuts to federal funds from their own budgets.

The SALT change, combined with the higher standard deduction and tighter limit on the mortgage interest deduction, also reduces the tax incentive for home ownership, which is likely to slow home construction and sales, and moderately suppress home values and property tax growth in higher-price markets.

 

So, Is the High Yield Market Efficient?

posted by Stephen Lubben

My inbox is being bombarded with law firm commentary on the Court of Appeals for the Second Circuit's decision that cramdown interest rates should be determined by "market rates," rather than by formula, when the relevant debt market is efficient. A good summary of the commentary can be found over at the Harvard Bankruptcy Roundtable.

And then we have a Bloomberg story this morning, filled with hand wringing about what might happen if a particular mutual fund were to sell a particular bond position – where the fund owns less than 20% of the issue. Nevertheless, the suggestion is that such a sale could have big, market moving effects. That does not sound like a very efficient market.

Given that the high yield market is apt to be the most relevant market to a chapter 11 case, what precisely, then, has the Court of Appeals achieved?

Academic News

posted by Stephen Lubben

The second edition of my Corporate Finance textbook is now available at finer booksellers, and Amazon too.  The companion website has also been updated – professors can get the password from their Aspen reps.

I Also Do Weddings

posted by Stephen Lubben

Blog administrator's note: I hope Stephen does not get mad at me, but I have moved the video "below the fold" as it wants to autoplay whenever Credit Slips loads. Click on the "continue reading" link to see a CBS video featuring Stephen and problems from the Alfred Angelo bankruptcy with women who may not get their wedding dresses.

Continue reading "I Also Do Weddings" »

Some Further Thoughts on the "CHOICE Act"

posted by Stephen Lubben

Over at Dealb%k.

The Choice Act and Bailouts

posted by Stephen Lubben

Over at Dealb%k.

Clearinghouses in OLA?

posted by Stephen Lubben

In this short paper, I question whether derivatives clearinghouses can be "resolved" under Dodd-Frank's title II "Orderly Liquidation Authority." That, of course, presupposes that OLA is still around when and if a clearinghouse failed.

If not, we'd better think about what a chapter 7 filing of a clearinghouse would look like. As discussed in the paper, most clearinghouses are "commodities brokers" for purposes of the Code, and thus can't file under chapter 11.

Thoughts and Frustrations – Jevic

posted by Stephen Lubben

Over at Dealb%k.

Exchange Offers and Hardball

posted by Stephen Lubben

Over at Dealb%k.  (BTW, I don't pick the pictures).

Jevic

posted by Stephen Lubben

Third Circuit is reversed. Opinion is here.

Dodd-Frank: Executive Order O'Rama

posted by Stephen Lubben

The new Executive Order is out. At heart, it says nothing. The press will probably make it into a big deal. 

Update:  I should clarify that I have no doubt the administration plans to gut Dodd-Frank. The order simply says "we plan to gut Dodd-Frank," and thus I don't find it particularly interesting.

Dodd-Frank and the New Order

posted by Stephen Lubben

Apparently just in time for another missive from the White House – and a bit of a tantrum from the House – I've got a new Dealbook up where I suggest that Orderly Liquidation Authority and title II might be a first target. I also argue that there is no real plan for what to do after OLA is gone.

Jevic and the Supremes

posted by Stephen Lubben

My own conflicted thoughts on Jevic, over at Dealb%k.

A Note On Setoff and Recoupment

posted by Stephen Lubben

For Slips readers that might not otherwise see it, I wanted to highlight this post on the Delaware Corporate & Commercial Litigation Blog, about a recent state supreme court decision on the distinction between setoff and recoupment, and the applicability of the statute of limitations to the former.

Preliminary Thoughts

posted by Stephen Lubben

On the new reality. Over at Dealb%k.

Do the Distressed Debt Traders Know About This?

posted by Stephen Lubben

N.C. Gen. Stat. § 23-46:  

It shall be unlawful for any individual, corporation, or firm or other association of persons, to solicit of any creditor any claim of such creditor in order that such individual, corporation, firm or association may represent such creditor or present or vote such claim, in any bankruptcy or insolvency proceeding, or in any action or proceeding for or growing out of the appointment of a receiver, or in any matter involving an assignment for the benefit of creditors.

Venezuela

posted by Stephen Lubben

John Dizard has a useful, and clearly written, piece on the lay of the land in this morning's FT. What puzzles me is why PDVSA, the national oil company,  has not done a UK scheme of arrangement or a US prepack to exchange the bonds, instead of messing around with an exchange offer. But the entire situation is rather opaque.

What is the point of that?

posted by Stephen Lubben

Perhaps as a result of GM, I've been thinking about notice issues in connection with insolvency. Thus, I was a bit surprised to see these three notices, all related to Lehman cases pending in Hong Kong (and schemes of arrangement in those cases), which appeared in this morning's Financial Times.


Credit Slips ImageNote that in the title the notice is addressed to the "Scheme Creditors," as "defined below." Yet below, we are told that Scheme Creditors are "as defined in the Scheme."  So unless you are an insolvency fanatic – I plead guilty – and going to run down the documents and read them, this published notice has told you absolutely nothing.

They might as well run an add that says "A company is insolvent. You might be a creditor. Or maybe not.  Good luck."

Puerto Rico’s Oversight Panel is Here

posted by Stephen Lubben

Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.

GM & Ignition Switches

posted by Stephen Lubben

My take on the Second Circuit's opinion – which Levitin has also written about (and I agree with him that the used car analysis is a bit "off") – is over on Dealb%k.  In short, I think that GM mostly has itself to blame for the inability to "discharge" these claims in its chapter 11 case. But the basic point that the federal Bankruptcy Code can override state law successor liability claims remains, despite what some state (and federal) courts have previously held.

A few thoughts on Brexit and Restructuring

posted by Stephen Lubben

Over at Dealb%k.

Further Thoughts on Puerto Rico v. Franklin California Tax-Free Trust

posted by Stephen Lubben

The opinion is a good reminder that oral argument impressions don't always carry over to the final written product. In short, both the majority and dissent approach this as a simple matter of statutory construction, and in that regard the majority opinion is simply a more clearly articulated version of the First Circuit's opinion.

Neither the majority or dissent address the 10th Amendment implications of saying that states have to use chapter 9 if they want to reorganize their municipalities. After this opinion, there is no other option. This might suggest that the 10th Amendment concerns that once hovered around chapter 9 are effectively gone.

I find the majority's approach to the placement of the 1946 addendum to section 903 unconvincing, but of course I've already written that I saw section 903 as only coming into force when a state accepts the chapter 9 "bargain."

Is there any other provision of the Code in one of the operative chapters (7 and onward) that applies even when there is no eligible debtor? Here we have Justice Thomas telling us that part of section 903 applies to Puerto Rico right now, while the opening paragraph of the section is apparently hanging around "just in case."  

The end result is that Puerto Rico now faces the unattractive choice of attempting an Argentina/Greece style workout (with likely lesser sovereign immunity than either of those debtors had) or swallowing PROMESA, along with its oversight board.

The composition of the former is an issue that Puerto Ricans might understandably worry about, especially since the board, and not the Commonwealth, has final say on what a reorganization plan looks like. Indeed, it is not so much a matter of "final say," as whether the oversight board will listen to Puerto Rico at all. There is no formal requirement in PROMESA that they do so. Nonetheless, given the alternatives, Puerto Rico might decide it has to hold its nose and take PROMESA.

The only thing we know for sure is that Puerto Rico is headed for a default on July 1. One branch of the decision tree has been taken away.

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