Creative Destruction in Small Business Bankruptcy

Two distantly related items caught my eye this morning, as both reinforce the need for "creative destruction" as a response to all-too-common small business failure.

The first was a NYT piece on the travails of a female entrepreneur in China. It tells a heart-wrenching story of a system in which the state brutally represses honest but unfortunate debtors, including via the infamous blacklist that prevents defaulters from using air and train travel (effectively curtailing re-entry into business, even if financial and economic factors might otherwise allow this). This is a story about what it looks like when there is no bankruptcy backstop, no reset button to start fresh and undertake a new venture with the hard lessons of failure firmly in mind.

The other item explores the transition from such an unforgiving system--in Spain--after the introduction of a discharge for (most) small business debt. The linked Bank of Spain working paper offers further evidence of the salutary effects of small business bankruptcy that discharges individual entrepreneurs and encourages them to restart. The reform fostered the "creative destruction" of these entrepreneurs' ventures, with the failed firms exiting the market (rather than lingering as productivity-depressing zombies), which "leads to technological change and higher productivity growth" as "the introduction of the fresh start policy promoted firm creation among Spanish micro-firms, especially in companies with a high share of intangible assets, which are likely to be involved in innovation activities, and in sectors with high productivity." Nicely linking the two contrasting accounts from China and Spain, the Bank of Spain paper concludes, "This finding also suggests that a starkly pro-creditor personal bankruptcy law with no real fresh start, like the Spanish one before 2015, may be an important barrier to entry for small businesses." Indeed.

It still surprises me that lawmakers around the world continue to resist this long-established truth for small business, powerfully undermining the most important driver of economic development worldwide. Worse yet, the mere introduction of a personal bankruptcy law with a debt discharge is not enough--the system actors have to actually support a fresh-start policy rather than actively undermining it, which turns out to have been the disappointing result of the first two years of such a system in Shenzhen, China. One hopes that national legislatures, like small entrepreneurs, can learn from failure and move forward with proper personal bankruptcy laws when given a fresh opportunity to do so.

New Resource on Uniform Commercial Code Reform for Digital Assets including Crytocurrency

Earlier this fall I linked to a variety of resources, including webinars, on amendments to the Uniform Commercial Code to account for various types of digital assets. The scope includes but is not limited to commercial transactions involving cryptocurrency.

To add to these resources, a version of the amendments that includes official comments is now available.  

Because there will not be a uniform effective date, and some states have gotten an early start by implementing prior drafts of the amendments (see prior post), these could swiftly become relevant to transactions and disputes, including those that land in bankruptcy court. 

Getting Ready for Uniform Commercial Code Reform?

IAs digital assets and emerging technologies become common in commercial transactions, state commercial law must rise to the challenge - that's the driving force behind a new set of amendments to the Uniform Commercial Code, including Article 9 governing secured transactions in personal property - such as in virtual currencies and nonfungible tokens.

No state has enacted the amendments yet,* but prior reforms to Article 9, at least, have been remarkably successful at achieving broad enactment. Consider, for example, the visual of the 2010 amendments to Article 9. Blue=enacted!

How to track developments? Here are some publicly available resources courtesy of the Uniform Law Commission:

First, here is where to find the actual amendments as finally approved by the Uniform Law Commission and the American Law Institute. 

Second, here is a summary. Note the mention at the bottom of transition rules for lenders who followed existing law in perfecting security interests, etc. (by the way, there is not a prospective uniform effective date for these amendments). 

Third, videos! Here's one highlighting the changes for digital assets. And here's another on other matters covered in the amendments. 

Fourth, here's where proposed bills and enactment information will be tracked.

*According to the digital assets video, some states adopted earlier versions of part or all of these amendments (New Hampshire, Iowa, Nebraska, Indiana, Arkansas, and Texas) but are expected to update those to conform with the final versions. Wyoming and Idaho went their own way on commercial transactions in digital assets.  

SBRA technical amendment = technical foul?

A great Arabic folk idiom describes an all-too-common occurrence: Literally, "he came to apply eye liner to her, but blinded her." [اجا يكحلها عماها  izha ikaHil-ha, ^cama-ha] In other words, someone attempted to improve a situation but ended up ruining it. I believe I've encountered an example in the "technical amendment" made by the CARES Act to the Small Business Reorganization Act of 2019.

As Bob pointed out almost exactly two years ago, the original SBRA definition of a "small business debtor" was designed to keep out large public companies and their subsidiaries, but the language was ... inelegant. The first of two subsections (laid out in Bob's post) excluded companies subject to reporting requirements under the Securities Exchange Act of 1934 (that is, a company with shares widely held by "the public," as defined by the SEC), while an immediately following exclusion applied to such a company that was an affiliate of a debtor (that is, another company already in bankruptcy). Well, whether you're an affiliate of a debtor or not, if you try to file under subchapter V, and you're subject to the '34 Act reporting requirements, you're excluded by the first subsection, so isn't this second provision redundant?

Yes, but ... in 2020, the CARES Act came to put eye liner on this section and blinded it. Rather than fixing this by saying what seems to have been the intention--that an affiliate of a public reporting company cannot file under subchapter V--instead, a "technical amendment" changed the final provision entirely by simply excluding an affiliate of an "issuer, as defined in section 3 of the Securities Exchange Act of 1934." [the same language was inserted in both sections 101(51D)(B)(iii) and 1182, so this change is not temporary]

The problem, it seems to me, is that the definition of "issuer" in the '34 Act includes far more than a big, public reporting company--it includes any company that issues so many as one share of stock (or other "security"). The '34 Act is generally about trading of public securities, but that's not the only thing it's about, and the definition of "issuer" in the '34 Act is simply reproduced from the '33 Act, with far broader application.

Book Rec: Range (or Yet Another Paean to Learning from Failure)

With summer upon us, I thought others might be searching for good new reading, as I was when I took up a smart friend's longtime recommendation to read Range: Why Generalists Triumph in a Specialized World. So much good stuff in here. Perhaps contrary to the topic of the book, my brain is constantly in "insolvency policy" mode, so I was particularly interested in the many passages about famous people's meandering struggles to find their passion that catapulted them to success.

Among my favorites was a description of Nike co-founder Phil Knight's entrepreneurship philosophy: [155] "his main goal for his nascent shoe company was to fail fast enough that he could apply what he was learning to his next venture. He made one short-term pivot after another, applying the lessons as he went." This is exactly the advice offered to country after country hoping to develop more effective SME-friendly bankruptcy regimes ... as they unfortunately continue to stick to Old English draconian policies of imposing various restrictions and disabilities on post-bankruptcy entrepreneurs. Range offers yet another extended analysis of why this mindset is so persistent and so counterproductive. We need to let people fail, learn from whatever caused that failure (either mistakes or general economic volatility ... or COVID) and get back on their feet quickly to move on to other ventures.

Dissecting the Increase in Chapter 11 Filings

I just finished teaching an intensive one-week course at Cardozo School of Law designed to introduce students broadly to bankruptcy and reorganization. The course covered debt collection, consumer bankruptcy, large public-company reorganization, small business reorganization (including the SBRA), municipal bankruptcy, cannabis and bankruptcy, third-party releases, and even a bit on chapter 15.  A theme throughout the week was changes in filings during the pandemic. To impress upon students that chapter 11 filings indeed are up, but that doesn't mean they are up everywhere across the country, I created this map. It details year-over-year increases or decreases in chapter 11 filings  based on jurisdiction.

I relied on data from the American Bankruptcy Institute / Epiq detailing total chapter 11 filings in 2019 and 2020. The map thus includes non-commercial chapter 11 filings. Historically, based on data from the Administrative Office of the United States Courts, a very small percentage of chapter 11 filings are non-business-debt filings--historically, about 6%. The more important caveat is that the map counts each filing as a case, even if the case is that of a "child" company filing with a "parent." See Slipster Bob Lawless's prior post about how parent/child filings can make it seem like commercial filings are rising much more than they actually are. Regardless, across the country, in 2020, chapter 11 filings generally are down. And where chapter 11 filings have increased, they seemingly have increased a lot.

Fantastic SBRA Resource from Judge Bonapfel

As Credit Slips readers know, the Small Business Reorganization Act added subchapter V to chapter 11 of the Bankruptcy Code earlier this year. My go-to resource on subchapter V has been a thorough summary written by Judge Paul Bonapfel of the U.S. Bankruptcy Court for the Northern District of Georgia. It is available for free on the court's web site, and with Judge Bonapfel's permission, I wanted to spread the word about the guide's availability. Judge Bonapfel has just done a November 2020 update of these materials with all of the recent cases. The update is a new chapter at the end of the materials that functions like a pocket part (for those of you who remember pocket parts!). Thank you Judge Bonapfel for this great service to the profession!

Commercial and Contract Law: Questions, Ideas, Jargon

In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

Thank you as always for your input, especially during such chaotic times.

Update on Churches Filing Chapter 11 Bankruptcy

As parts of the country are counting ballots, I thought I'd post about counting church chapter 11 cases. The headlines about churches and other religious organizations filing chapter 11 still focus predominately -- almost exclusively -- on Catholic Diocese filings. As of June 2020, 27 Catholic religious organizations have filed chapter 11, as detailed on a site put together by Professor Marie Reilly. But Catholic religious organizations' filings are a very small sliver of churches filing bankruptcy, as my prior research has shown. The last time that I updated my count of religious organization chapter 11 cases was at the end of 2017, and the last time I updated denominations and demographics of the congregations that file was in 2013. Since then, I've continued to track religious organizations' chapter 11 filings, using the same methodology, through the end of 2019. 

Preliminary results are in. Highlights: churches, synagogues, mosques, and other religious organizations are still filing bankruptcy, and the denominations and demographics of the congregations that filed have remained basically the same.*

As shown on the graph to the right, between 2014 and 2019, an average of 59 religious organizations filed chapter 11 each year.** This is lower than the average of 87 cases between 2006 and 2013 that I've previously reported, but it is consistent with a decline and leveling off of consumer bankruptcy filings overall during this period. As I've noted, in the past, religious organization chapter 11 filings tracked personal bankruptcy filings, not business bankruptcy filings. This continues to be true.

Find tables with congregation denominations and demographics, and some more detailed discussion after the jump.

Congressional testimony on Small Business Lending regulation

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

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

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

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

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

 

No More Bailouts

I have a new white paper out from the Roosevelt Institute's Great Democracy Initiative. The paper, which is co-authored with Lindsay Owens and Ganesh Sitaraman, proposes a standing emergency economic stabilization authority to provide an off-the-shelf immediately available response to common problems that recur in national economic crises.

The motivation for the white paper is that in the past dozen years we've been through two rounds of massive ad hoc bailouts. We shouldn't be doing this on the fly. Instead, we need to have a suite of programs ready to go. Think of this as an "in case of emergency, break glass" approach.

The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19.

Many businesses may require bankruptcy proceedings to assist in recovery from the CV Recession. In my view, the best legal approach to any Chapter 11 reforms necessitated by the emerging CV-induced economic crisis lies in building up from the Small Business Reorganization Act (SBRA) to cover more Small and Medium Enterprises (SME), rather than trying to adjust the general provisions of Chapter 11, the home of bankruptcies like General Motors and American Airlines. Our database at the Business Bankruptcy Project shows that in 2018 more than half of the businesses that filed in Chapter 11 in the Southern District of New York would fall under the temporary SBRA cap, $7.5 million.

Most immediately, the recently voted funds for small business must be available in bankruptcy reorganization cases. We must remove any barrier to using them in that way. I start the study of Chapter 11 by reminding students that the clerk at the bankruptcy court does not hand out money. Bankruptcy does not produce funding, although it can help facilitate it in important ways. Thus there is no legal reform that will avoid the need for very substantial financing with implications far beyond reorganization procedures. Bankruptcy cannot help unless it can be used in connection with rescue funding.

The Bailout Cronyism and Corruption Have Already Begun

We need to bail out the economy, and it's not going to be cheap. The government is going to have to carry the economy for 18-24 months. There's no way of avoiding that. But we don't need to be stupid or corrupt about the way we do it. And stupidity and corruption is unfortunately so hardwired into the Trump administration's DNA that it is being reflected in virtually every proposal out of the administration. 

Start with Treasury's ill-advised proposal to send checks out to every man, woman, and child in the United States. Beside being operationally difficult and misdirecting much of the aid, it is first and foremost a political move. These are serious times. They call for serious responses, not political maneuvers.  

And now, we learn that Treasury Secretary Steven Mnuchin is proposing turning to Goldman Sachs executives to provide assistance in administering the bailout. It's hard to think of anything more politically tone-deaf other than perhaps delegating the bailout to Wells Fargo.

More importantly, Goldman is objectively not the right institution to help. Goldman does virtually no small business lending, and their consumer lending is a small portfolio of loans to affluent individuals. It’s not even at the top of the bracket in commercial lending generally. Goldman is primarily an investment bank that does M&A and securities underwriting; they're not known as commercial bankers. The challenges in the bailout response are restructuring and commercial banking issues, including a lot of operational problems. That's just not where Goldman's strengths lie. So why Goldman? Just more cronyism.

This should be a bright flag to ever member of Congress that Steven Mnuchin cannot be trusted to lead the bailout efforts. If he does, we're looking at something a lot worse than HAMP 2.0. A key part of any bailout is going to be its governance. There's inevitably going to be a fair amount of discretion involved in the bailout efforts. We need the bailout to be led by serious people. Sadly, there are not many serious people in any position of authority in the Trump administration. That suggests that Congress needs to come up with a governance structure for any bailout funds that is new and independent of the Trump administration.

I don't mean by this that it needs to be a bunch of people who share my political views. There are plenty of competent and serious people from both parties who aren't in the Trump administration. Hopefully this is a time that Senator McConnell recognizes that he can't turn the keys over the Trumpists; the effectiveness of a bailout is going to depend on whether Congress gets the governance structure right. We need to take a serious problem serious and not see it as an opportunity for self-enrichment and political gain. 

 

The Small Business Reorganization Act of 2019 and COVID-19

Professor Ted Janger of Brooklyn Law School sent me a proposal for a small change to the Bankruptcy Code that might significantly help small businesses affected by the COVID-19 pandemic. His idea merits consideration. In Ted’s words:

Obviously, it is too early to tell how all of this will play out, but the U.S. bankruptcy system will inevitably play an important role in whether small businesses hurt by COVID-19 ultimately survive. Chapter 11 was built to help sound businesses that experience a sudden shock, but it is often too cumbersome for even medium-sized businesses. In a law that took effect in February, Congress made it easier for small businesses to benefit from chapter 11. That law is only available, however, to businesses with less than $2.7 million in debt. It will, therefore, apply to only 42% of the businesses that file. In the wake of COVID-19, Congress should raise the debt ceiling to $10 million to help more small businesses and soften the inevitable fallout that will come from COVID-19 related business disruptions.

Federal Reserve Emergency Lending as a Coronavirus Response

Senator Elizabeth Warren has put out a plan for mitigating the economic fallout from the coronavirus. Of particular note is that she is proposing having the Federal Reserve use its emergency lending power to support businesses affected by the coronavirus in order to ensure that they are able to provide paid health care leave to affected employees and avoid mass layoffs.  

This post addresses whether the Fed has the legal authority for such lending, what precedent exists, how it differs materially from the 2008 bailouts, and why it's a good idea. (Full disclosure: I consulted with the Warren campaign on this plan.)  

Trump Administration Declares Open Season on Consumers for Subprime Lenders

The Trump administration has just proposed a rule that declares open season on consumers for subprime lenders. The Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (on whose board the CFPB Director serves) have released parallel proposed rulemakings that will effectively allowing subprime consumer lending that is not subject to any interest rate regulation, including by unlicensed lenders.

Small Biz Reorg Act Sleeper Innovations

Two aspects of the Small Business Reorganization Act of 2019 intrigued me as I looked more closely at this important new twist on Chapter 11 for the other 99%.

First, I thought the new SBRA procedure might be a fairly snooze-worthy Chapter 13 on protein supplements (i.e., not even steroids) because the current Chapter 13 debt limit (aggregate) is $1,677,125, while the new SBRA aggregate debt limit is less than double this, at $2,725,625 [note to the ABI: please update the figures in your online Code for the April 2019 indexation]. A couple of obvious and another non-obvious point cut in opposite directions here, it seems to me. First, Chapter 13 is not available to entities (e.g., LLCs), and for individuals, the Chapter 13 debt limits are broken out into secured and unsecured, while the SBRA figure is not. So the SBRA is significantly more hospitable to any small business debtor with only $500,000 in unsecured debt or, say, $1.5 million in secured debt. Flexibility is a virtue, so maybe the SBRA is just a meaningfully more flexible Chapter 13? No, as Bob's post reminded me. In the "conforming amendments" section at the end of the new law is hidden an important modification to the definition of "small business debtor" in section 101(51D), which will now require that "not less than 50 percent of [the debt] arose from the commercial or business activities of the debtor." So no using the SBRA provisions to deal more flexibly with an individual debtor's $500,000 in unsecured debt or a $1.5 million mortgage or HELOC if it's not related to business activity.

Second, this last point is the really intriguing aspect of SBRA for me. For the first time in recent memory, we see a crack in the wall that has insulated home mortgages from modification in bankruptcy. Sections 1322(b)(2) and 1123(b)(5) still prohibit the modification of claims secured by the debtor's principal residence, but the SBRA at last provides an exception to this latter provision: An SBRA plan may modify the debtor's home mortgage (including bifurcation into secured and unsecured portions?!) if "the new value received in connection with the granting of the security interest" was not used to acquire the home, but was "used primarily in connection with the small business of the debtor." A small crack it may be, but this sleeper provision strikes me as an important opening for serious discussion of modification of other non-acquisition home mortgage modifications in Chapter 13, for example. This would be a game changer after the HEL and HELOC craze of the earlier 2000s. It will doubtless provide further evidence that the HELOC market will not evaporate or even change appreciably as small business debtors begin to modify their home-secured business loans. Of course, that depends on a robust uptake of the new procedure. We shall see in 2020.

Amicus Brief on Valid-When-Made

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

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

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

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

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

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

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

How Many New Small Business Chapter 11s?

The Small Business Reorganization Act of 2019 adds a new subchapter V to chapter 11 for small businesses. The new subchapter gives small businesses the option of choosing a more streamlined -- and hence cheaper and quicker -- procedure than they would find in a regular chapter 11. Perhaps most significantly, the absolute priority rule, which requires creditors to be paid in full before owners retain their interests, does not apply. For those interested in more detail, the Bradley law firm has a good blog post summarizing the key points of the new law, which takes effect in February 2020 (and if I have the math correct -- February 19 to be exact).

A point of discussion has been how many cases will qualify to be a small-business chapter 11. Using the Federal Judicial Center's Integrated Bankruptcy Petition Database, my calculation is that around 42% of cases filed since October 1, 2007, would have qualified. The rest of this post will explain how I came to that estimate as well as discuss year-to-year variations and chapter 11 filings by individuals.

Lowdermilk on Family Farmers in Financial Trouble - new paper!

Jamey Mavis Lowdermilk has just posted an article of interest to Credit Slips readers -- lawyers, judges, journalists, policymakers, and more. The article uses a case study of a chapter 12 family farm bankruptcy in North Carolina to ask bigger questions about farming finances and how public policy on farming is set. Extending the early work of now-Representative Katie Porter, Lowdermilk brings her own perspective and expertise to this topic. Before law school, Lowdermilk obtained a masters degree in applied economics and statistics with a specific interest in agriculture as well as rural development, and held a variety of positions related to farms, forestry, and credit. During law school, she started this chapter 12 project in my advanced bankruptcy seminar. After law school, Lowdermilk continued to work on the project and revise the paper for publication as a law review article. Several wonderful bankruptcy judges graciously offered feedback as her first footnote documents. Please check it out!

Seeking nominations for the Grant Gilmore Award

The American College of Commercial Finance Lawyers seeks nominations for scholarly articles to be considered for the Grant Gilmore Award. It is not awarded every year, but when it is, the main criteria is "superior writing in the field of commercial finance law."  I am chairing the award committee this year, so please email me or message me on Twitter before December 14 to ensure your suggestion is considered. Especially eager to get suggestions of articles written by newer members of the academy that might otherwise be missed.

World Bank Group's Proposals on Small Business Insolvency

At long last, the World Bank Group's insolvency and debt resolution team has finally released to the public its report on the treatment of the insolvency of micro-, small-, and medium-sized enterprises, Saving Entrepreneurs, Saving Enterprises : Proposals on the Treatment of MSME Insolvency. The team worked for over a year on this report, concluding with a meeting of its Insolvency & Creditor/Debtor Regimes Task Force in May in Washington, D.C., where the report and its proposals were vetted. There was a surprising degree of consensus on the proposals developed here, and the final version reflects a fairly widely shared viewpoint on three key points.

Available at finer booksellers everywhere (and Amazon too!)

My 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.

Corporate Bankruptcy as a Public-Private Partnership

I have just posted on the Social Science Research Network a forthcoming article called Corporate Bankruptcy Hybridity. Although the article has several intersecting objectives, today's post focuses on the first aim: conceptualizing corporate bankruptcy as a public-private partnership.  A public-private partnership, most plainly stated is "a legal hybrid which possesses some characteristics of a purely private corporation and others of a purely government.... however it is structured, it is formed to accomplish a public purpose."* As writings of scholars outside of bankruptcy make clear, the fact that a system relies in part on private actors and private funds does not absolve the system of its obligation to the public's broader constitutional, democratic, and welfare aims. In other words, even if a system is driven by a particular public purpose, other public objectives remain salient.

Reframing the system in this fashion explicitly rejects the common assumption that bankruptcy is best understood as a species of private law, as well as the belief that a workable theory requires that the bankruptcy system have only one public purpose.

In addition to enhancing scholarly debates, considering corporate bankruptcy a public-private partnership has real-world implications - most notably, helping reformers (statutory and otherwise) think creatively about the institutional actors and structures that can respond to identified problems, such as the problems carefully documented in the ABI Commission to Study the Reform of Chapter 11. The range of interventions described and prescribed in administrative law and related privatization scholarship is considerably broader than in reform projects such as the National Bankruptcy Review Commission or the ABI Chapter 11 Commission Report.

Of course, the article elaborates on these points, and I hope to highlight other objectives of Corporate Bankruptcy Hybridity in future posts. But in the meantime, I'd love it if you downloaded and read the article.

* This definition comes from an article published in 1969 by Robert Amdursky.

Tax Reform and Nonprofit Bankruptcy

It's Tax Day! When the new tax bill was debated late last year, a few reports noted an unintended consequence of the bill's expansion of the standard deduction might be decrease people's charitable contributions, in turn harming nonprofits. After the bill passed, I continued to hear comments about the increased standard deductions' potential to cause financial problems for nonprofits, and saw estimates of a loss of $2 billion to the sector. Financial problems, of course, make me think of bankruptcy. And nonprofits make me think about religious organizations, which are the nonprofits I've studied the most in the context of bankruptcy. Tax Day seems like an appropriate day for some thoughts about the tax reform's possible connection to nonprofits' chapter 11 filings, particularly churches' chapter 11 filings.

New Saudi Bankruptcy Law ... A Boon for SMEs?!

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

Yesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Churches Are Still Filing Bankruptcy

Not only are religious organizations still filing under chapter 11. As in prior years, they continue to file under chapter 11 in line with fluctuations in consumer bankruptcy filings. Find a couple graphs below to show this. But first, some background.

In my prior work, I analyzed all the chapter 11 cases filed by religious organizations from the beginning of 2006 through the end of 2013. (I define any organization with operations primarily motivated by faith-based principles as religious.) I found that these chapter 11 cases were filed predominately by small, non-denominational Christian churches, which mainly were black churches (80% of more of their members are black). And, also, that the timing of the filings tracked consumer bankruptcy cases (chapters 7, 11, and 13), not business bankruptcy filings, but lagged by one year. That is, if consumer bankruptcy filings decreased in a given year, religious organizations' chapter 11 filings decreased in the next year. I linked this result to how religious organizations' leaders came to think about using bankruptcy to deal with their organizations' financial problems.

Since my original data collection, four years has passed. I thus recently identified all the religious organizations that filed under chapter 11 between the beginning of 2014 through the end of 2017. During these four years, religious organizations continued to file, but in smaller numbers per year, as shown in this graph (note: I count jointly-administered cases as one case).

Call for Commercial Law Topics (and Jargon!)

For the spring semester, I am offering advanced commercial law and contracts seminar for UNC students, and have gathered resources to inspire students on paper topic selection as well as to guide what we otherwise will cover. But given the breadth of what might fit under the umbrella of the seminar's title, the students and I would greatly benefit from learning what Credit Slips readers see as the pressing issues in need of more examination in the Uniform Commercial Code, the payments world, and beyond. Some students have particular competencies and interests in intellectual-property and/or transnational issues, so specific suggestions in those realms would be terrific. Comments are welcome below or you can write us at bankruptcyprof <at> gmail <dot> com. 

We also are going to do a wiki of commercial law jargon/terminology. So please also toss some terms our way through the same channels as above (or Twitter might be especially useful here: @melissabjacoby).

Thank you in advance for the help!

Rights of Secured Creditors in Chapter 11: New Paper

Ted Janger and I have posted a paper of interest to Credit Slips readers called Tracing Equity. We still have time to integrate feedback, so please download it and let us know what you think.

As the image accompanying this post suggests, the project was inspired in part by recommendations of the American Bankruptcy Institute's Chapter 11 Commission. Discussion of those proposals starts on page 51 of the PDF.

One of the main insights of Tracing Equity is that both Article 9 of the Uniform Commercial Code and the Bankruptcy Code distinguish between (1) lien-based priority over specific assets and their identifiable proceeds, and (2) unsecured claims against the residual value of the firm. By our reasoning, even attempts to obtain blanket security interests do not give secured lenders an entitlement to the going-concern and other bankruptcy-created value of a company in chapter 11. We explain why our read of the law is normatively preferable and, indeed, is baked into corporate and commercial law more generally--part of a large family of rules that guard against undercapitalization and judgment proofing.

Looking forward to your thoughts.

 

 

Secured Credit, Churches, and Reorganization

Chapter 11's ability to empower true reorganization has received much criticism of late in light of an increasingly held assumption that most Chapter 11 cases end in a 363 sale of the debtor's assets. Around this time last year, the American Bankruptcy Institute and the University of Illinois College of Law co-hosted a symposium dedicated to discussing secured creditors’ rights and role in modern Chapter 11. Papers from the symposium (including by Slips contributors) very recently became available here.

I was lucky enough to moderate a couple of the symposium panels. As I was listening to the discussion, I noticed that what I was hearing about secured creditors and 363 sales did not match  what I had observed in my study of how religious organizations (mainly smaller churches) currently use Chapter 11. To accompany the release of the symposium papers, I wrote a short piece describing how secured creditors influenced religious organizations' Chapter 11 cases in ways that did not lead to widespread sales, but rather, plans and settlements.

Coming to Law -- Churches in Bankruptcy Edition

Credit Slips contributor Pamela Foohey has just posted her most recent work in her series of articles on churches in bankruptcy. I have been a big fan of this research project since Pamela was a fellow at the University of Illinois. She tells us not only about bankruptcy but also about the ways in which these churches look like most any small business. Most impressively, the work builds on existing literature on how people come to law to solve their problems and expands that literature into a new and nonobvious setting, suggesting this literature may have deep explanatory power to help us understand more about how people perceive and use law. It is exactly what we need more of in the law reviews -- scholarship using rigorous social science to help us understand what actually happens in the legal system.

Pamela's most recent paper, "When Faith Falls Short: Bankruptcy Decisions of Churches," relies on structured interviews with church leaders and and their lawyers. One of the most surprising things is the church leaders did not see their problems as legal. Foreclosure may have beckoned, but the leaders had to be brought to law. They turned to social and professional networks both to get information about the law and for support that bankruptcy was the correct thing to do. There is much more in Pamela's paper. Get it before SSRN runs out of electrons to send it to you.

Rethinking “Small” Business Bankruptcies

It may surprise some, but approximately 90% of all chapter 11 debtors have less than $10 million in assets or liabilities, less than $10 million in annual revenues, and 50 or fewer employees (see data on small and medium-sized enterprises (SMEs) in the ABI Commission Report, here). These companies are the heart of chapter 11. Nevertheless, most of the media and caselaw coverage discusses only the megacases—e.g., Caesars, American Airlines, Tribune Company, etc.—representing approximately 2-3% of chapter 11 debtors. It is time to change the focus of the conversation.

When a small business closes its doors, an entire community feels the impact. Consider the following description of the ripple effects of the closing of a small mine in Lincoln County, Montana:

In addition to the workers and families directly impacted by the loss of jobs, the ripple effects of the loss of that income will impact local businesses at every level. Restaurants, stores and other shops depend upon local consumers to keep themselves afloat, the dollars that are paid to those employees find their way into the hands of a number of additional places, keeping a small local economy alive.  (Full story here.)

Similar stories occur most everyday in towns across America (see, e.g., here).

Let’s Not Just Create Jobs, Let’s Save Them, Too

In his State of the Union speech on Tuesday, President Obama talked a lot about job creation. I am all for growing the economy and creating more U.S. jobs, but I also am for saving jobs and keeping people employed at U.S. companies, even if those companies fall upon hard financial times. Strikingly, approximately 18,500 people lost their jobs when Hostess closed its doors; 34,000 people lost their jobs when Circuit City suffered the same fate; and over 9,900 people were let go as a result of four casinos in Atlantic City closing in the past twelve months.

It is undeniable that chapter 11 changes people’s lives. It can save an employee’s job, continue a customer relationship for a vendor, and preserve a tenant for a landlord. It also can, however, devastate all of these relationships in what feels like a nanosecond—relationships that many people rely on to support their families or their own business operations. As I suggested in an earlier post, I believe that the human face of chapter 11 often gets lost in all of the noise concerning the rate of return to creditors, disputes among institutional creditors, and whether a company should be sold quickly, or at all, through the chapter 11 process.

Attorneys' Advice on Representing Religious Organizations in Chapter 11

As part of my study of religious organizations' Chapter 11 cases, I interviewed attorneys who represented a variety of churches and other faith-based institutions in their reorganization cases. Some of my findings are presented in this new paper. In short, the interviews confirm my previous conclusion based on an analysis of documents filed in religious organizations' Chapter 11 cases: reorganization oftentimes can be beneficial for these debtors.

Of the 52 Chapter 11 cases discussed by attorneys, 23% ended in a confirmed reorganization plan, and another 40% resulted in an agreement between the debtor and its creditors. When I interviewed the attorneys, 71% of their clients were still operating, though a couple churches were in the midst of foreclosure. When asked what "special considerations" other attorneys should be aware of in future representations, attorneys focused on six issues:

Doesn't Anyone Want to Talk About Jurisdiction This Week?

With the Second Circuit's ruling in the Argentina/NML case and the now-urgent need to get secured transactions and bankruptcy into the 1L curriculum, Credit Slips has yet to give attention to Wellness International Network, Limited,  issued on Aug 21 by the Seventh Circuit. Luckily, on this issue, I don't mind getting the ball rolling, and then stepping out of the way. 

Ice Cube Bonds: New Paper on 363 Sales and Chapter 11

FAC UT ARDEAT, begins The Flamethrowers by Rachel Kushner. It means "made to burn," the narrator learns (from that "gasbag . . . Chesil Jones"). Whether your preferred hurry-up 363 sale metaphor involves flames, ice, or a wagon full of rotting salmon, Ted Janger and I have just posted a draft of an article reframing the problems with pre-plan going-concern sales, and reallocating the risk associated with such sales. The abstract:

Financially-distressed companies can melt like ice cubes. In Chrysler’s Chapter 11 bankruptcy, the finding that the debtor was losing $100,000,000 per day justified the hurry-up sale of the company to Fiat.  This assertion -- that the firm is a rapidly wasting asset -- is frequently offered, and accepted, in support of quick sales under section 363(b) of the Bankruptcy Code. This raises a policy question:  is this speed and streamlined process a “bug” or “feature?” Do these hurry-up going-concern sales create a speed premium and maximize value for the bankruptcy estate, or do they facilitate collusive deals between incumbent managers, senior creditors and potential purchasers? The answer is, “a little bit of both.” It is, therefore, crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock-in a favored deal. To accomplish this sorting and reduce transactional leverage, we seek to allocate the increased risks of foregone process to the beneficiaries of the sale. We propose that a reserve – the Ice Cube Bond – be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited section 363 sales as a useful way to quiet title in complex assets and preserve value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code.

Perhaps Ice Cube Bonds is the long weekend reading material you were hoping would come your way? We'd value your feedback.

Match image courtesy of Shutterstock.

Stripping Down Bankruptcy Jargon

A Credit Slips commenter recently asked that blog posts explain (or at least spell out) acronyms and specialist terminology. This inspired me to report back on a corporate bankruptcy terminology set that University of North Carolina Law students collaboratively produced last year (technically, a wiki) in business bankruptcy, an advanced transition-to-the-profession seminar. In both comments and emails, Credit Slips readers helped me expand the list of terms (and also offered great ideas for practical writing projects). So thanks again for your contributions, and thanks also to the Spring 2012 seminar alumni - some of whom are practicing bankruptcy law or clerking for bankruptcy courts right now, or headed there soon - who tackled the collaborative vocabulary project, and the entire seminar and its experimental elements, with such great spirit and a 100% perfect attendance record! So, some observations. 

In Defense of Bankruptcy Courts (or, Is Bankruptcy Really That Exceptional?)

Although not always acknowledged expressly, exceptionalism is pervasive in bankruptcy scholarship. Some work makes no attempt to contexualize bankruptcy within the federal courts, apparently assuming its unique qualities (for example, the disinterest in most bankruptcy venue scholarship about venue laws applicable to other multi-party federal litigation). But other projects are more deliberate in their exceptionalist pursuits.

Representation and Realities of (Bankruptcy) Court Work

The Yale Journal of Law and the Humanities held a symposium on "Courts: Representing and Contesting Ideologies of the Public Sphere" in 2011, and recently published papers from this event. Some of the contributions to this symposium, especially the piece by Judith Resnik and Dennis Curtis, and the commentary by William Simon, emphasize the potential disconnect between representations of law and justice that might adorn courthouses and the nature of the actual work that goes on inside. Although these scholars did not discuss the bankruptcy court in depth (Simon does mention that scholars have long seen bankruptcy as deviating from traditional models of adjudication), each side of the disconnect may be quite interesting for our purposes.

Article 9 and Bankruptcy Judges

A prior post addressed a proposed amendment to Article 9's official comments stating that the date of an Article 9 filing relates back to the initial filing date even if the debtor did NOT authorize the filing at that time. This post returns to that topic for two reasons. First, although it is risky to generalize, I sense that bankruptcy judges may still be unaware of this proposed amendment. This is relevant because bankruptcy judges often are on the "front lines" of Article 9 interpretation. Second, I have heard, indirectly, that at least some people want this amendment to lend approval to some lenders' current practice to routinely file without authorization during the loan application process. In other words, the loan is likely to be given within a few days, so no harm no foul. Maybe I misheard or misunderstood?  

Recommended reading: Broome on Article 9 Financing Statements

A few weeks ago I wrote about the importance of giving priority to an Article 9 financing statement only from the date on which the debtor  actually authorizes the filing, and a proposed official comment contrary to this position. My colleague Lissa Broome has just posted on SSRN an article she has written about another dimension of the issue: when secured parties file financing statements with an indication of collateral that is far broader than what the debtor authorized in the security agreement. She discusses recent cases that do not deter this activity as well as potential implications, including the chilling effect on future lending transactions.

When the debtor's signature was eliminated as a requirement for a valid financing statement in Revised Article 9, the drafters justified the change by technology: medium neutrality and facilitating paperless filing. Functionally, though, the implications go far beyond technology when you combine this change with the opportunity to file all-asset financing statements AND the broadest possible reading of the first to file or perfect rule discussed a few weeks ago.

Promoting Integrity in the UCC Article 9 Recording System

On January 1, 2011, Larry files a UCC-1 financing statement against David indicating David's equipment as collateral. At this point, David doesn't even know Larry, has not given him a security interest, and has not authorized this filing. On February 1, 2012, David meets and borrows money from Larry and signs a security agreement listing equipment as collateral (which, under UCC 9-509, automatically authorizes the filing of a financing statement against equipment). What is the relevant date for determining Larry's priority? The language of Article 9 itself strongly implies that February 1, 2012 is the relevant date. UCC 9-509 makes clear that financing statements are not valid unless authorized by the debtor - a pretty minimal burden to cloud the debtor's title. But a little-discussed 2010 amendment to the official comments of Article 9 says otherwise: to the drafters, if the filing is later authorized, Larry gets the benefit of the 1/1/2011 filing date for purposes of the "first-to-file-or-perfect" rule and other priority rules or competitions. 

The most relevant portion of the new paragraph (an addition to comment 4 to 9-322) reads as follows:

Your Favorite Business Bankruptcy/Restructuring Lingo: A Word of Thanks

Just a word of gratitude to readers for providing great responses to the prior call for corporate bankruptcy lingo. Thanks to your help, UNC Law's advanced business bankruptcy students are collaboratively examining such terms through a wiki and this will help them make an even smoother transition into the professional world. If any new lingo comes to mind, don't hesitate to pass it along! 

Revamping the Advanced Bankruptcy Class

Thanks, Bob, for welcoming me back. I'd like to start with a quick poll. Credit Slips readers, off the top of your head, what short writings (say 5 pages or fewer) should law students be doing that would be directly relevant to business bankruptcy practice? They can be related to business cases of any size, and can be litigation, counseling, or transactionally oriented. If you'd prefer to write me directly than to comment below, I welcome your thoughts at [email protected]. Feel free to forward my inquiry to bankruptcy listserves for which this would be appropriate. Thanks for sharing your expertise!

More on the Small Business Bankruptcy Designation

A few days ago, I posted on the small-business designation in chapter 11 and how it appears to be honored in the breach. That post prompted further discussion on a listserv for bankruptcy professionals, which in turn led to a summary and some interesting comments from Michael Good on his own blog. Good is a bankruptcy lawyer in the Los Angeles area and does a lot of work with financially distressed small businesses. Whether you agree with Good, his post is worth a read, especially the part where he discusses how the traditional law firm business model might pushes lawyers away from pursuing clients who might have small business 11s.

The Disappearing Small Businesses (Designation) in Bankruptcy

The 2005 bankruptcy law was not just about consumers. It made a number of changes to businesses bankruptcies, including the expansion of safe harbors for derivative claimants about which Stephen Lubben has written extensively (e.g., here). Other changes were to small business bankruptcies--not to make it easier for small businesses to get through chapter 11 but to make it more difficult. Small business bankruptcy filers got new duties and extensive new reporting requirements, both of which can lead to dismissal for debtors who fail to meet them. As I was preparing to teach these requirements this year, I came across a little surprise about the difference between this law on the books and the law on the ground that I thought I would share.

White House Dinner Crashers' Bankruptcy

Some of the news reports on the White House dinner crashers (Tariq and Michaela Salahi) have noted that they own a winery that filed for Chapter 11 (reorganization) bankruptcy and then converted to Chapter 7 (liquidation) bankruptcy. My prurient interest was engaged, so I tracked down the petitions and relevant filings (linked below).  What follows is my attempt to sort out the Salahi family's business doings, as well as some musings about where we should really look for bankruptcy abuse--small business filings where the business is the alter ego of the owner, but where corporate law might not allow veil piercing.  In these cases the sophisticated creditors get personal guarantees, but the tax authorities, tort creditors, and unsophisticated creditors get screwed by the corporate form.

As far as I can tell, however, from the PACER filings, this part of the story has been misreported.  There are two separate, but apparently affiliated entities that filed for bankruptcy separately.  First, Oasis Vineyards, Inc., filed for Chapter 11 in December of 2008.  Oasis Vineyards has three shareholders:  Mr. Salahi (5%), his mother (40%, also president of Oasis Vineyards), and his father (55%).  The petition schedules assets of $333K and liabilities of $1.9M.  Tariq Salahi, a Salahi Family limited partnership, Oasis Enterprises, Inc., and Salahi's parents are listed as codebtors (cosignors or guarantors) of various obligations.

In April 2009, the US Trustee filed a motion to convert the case to Chapter 7 liquidation or have it dismissed because the debtor failed to file its monthly operating reports and had not filed a plan of reorganization.  (This is pretty standard; it appears that several monthly operating reports were subsequently filed simultaneously.)  The court has postponed ruling on the motion to convert or dismiss because of the death of the debtor's counsel.

Second, Oasis Enterprises, Inc., a/k/a Oasis Winery, of which Tariq Salahi is the president and sole shareholder, filed for Chapter 7 bankruptcy in February 2009.  That case is still pending.  The scheduled assets are $339K and liabilities oare $982K. The petition states that Oasis Enterprise's income fell from $1.7M in 2007 to a mere $35,000 in 2008.  Ouch.  In 2008, a bank repossessed a $150K Aston-Martin car (resulting in a $85K deficiency) and a $90K Carver 350 Mariner Boat from Oasis Enterprises (resulting in a $56K deficiency judgment).

Repealing Marquette

Senator Sheldon Whitehouse has introduced, with Senator Dick Durbin, the Empowering States' Right to Protect Consumers Act of 2009 (S. 255). The statute would repeal the thirty-one year old Marquette decision, which was the United States Supreme Court ruling that held federal law preempted state law regulating interest rates. A later decision in 1996 (Smiley v. Citibank) expanded the scope of federal preemption, holding states also lacked the power to regulate the fees charged on credit cards, and the bill would repeal Smiley as well.

Marquette effectively deregulated most consumer interest rates and led to the expansion of consumer borrowing for the past thirty years. After the Smiley decision, bank fees started to climb. Much of the "gotcha" marketing mentality from the credit card industry can be attributed to the freedom Smiley gave banks to exploit credit card fees as a revenue stream.

Some persons think interest rate and fee caps are bad idea. Fair enough. The Whitehouse bill, however, is not an interest rate cap. It merely returns the power to the states to regulate consumer lending to their citizens and harnesses the states as "laboratories of democracy" (as the saying goes). Let the states experiment with interest rate and fee caps, and we will find the right balance between exploitative market practices and overly restrictive government regulation.