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.
Ukraine and Russia have been battling it out in English courts over whether Ukraine must repay a $3 billion Russian loan from 2013. The loan was unusual both in structure and in substance. For example, although essentially a bilateral loan, it was structured as a tradable Eurobond and held by the Russian sovereign wealth fund. The indenture trustee has been suing to enforce the loan. In March 2017, the High Court of Justice granted summary judgment for Russia. Although Ukraine had a number of plausible defenses to enforcement of the loan, the judge rejected them all. Here's Bloomberg, with coverage of that decision and of the ensuing appeal. Today, the Court of Appeal reversed that decision, sending the case back for discovery and a trial. Here's the decision, which Russia will appeal according to this Financial Times report.Perhaps the most noteworthy aspect of the appeal is why Ukraine won. Among other arguments, Ukraine argues that the loan was the product of duress--an argument that requires it to show that the loan resulted from illegitimate pressure applied by the Russian government. I have been skeptical of this argument, in part because my sense is that national judges would prefer not to rule on the legitimacy of Russia's conduct with regard to Ukraine. And indeed, in granting summary judgment for Russia, Mr. Justice Blair ruled that this question was non-justiciable. However, the Court of Appeal disagreed, sending the case back for trial on the duress issue, seemingly with directions to judge Russia's conduct against standards supplied by international law:
It is true that Russia and Ukraine are sovereign states, which means that the test for what might count as morally or socially unacceptable in the context in which they interact with each other is not the usual one appropriate to relations between private parties... Although moral and social standards are more attenuated in the relations between states on the international plane than is the case in a purely domestic commercial context, international law sets out reasonably determinate standards of conduct applicable between states on the international plane. In our view, there is no reason why the law of duress should not treat these as providing an appropriate test of illegitimate pressure in the present case (par. 160).
A couple of other noteworthy aspects of the Court of Appeal's opinion:
- On whether Ukraine, if ultimately successful, must pay restitution: A party who avoids a contract on the basis of duress may have to return any benefits it received from the contract. This isn't always required, however, and there are substantive reasons why it might not be required here, given Russia's conduct. In a seemingly-offhand, but pointed, comment, the Court of Appeal added a procedural reason for denying restitution. Russia had not "brought an alternative restitutionary or unjust enrichment claim to recover the US$3 billion which was paid to Ukraine, should it transpire that the Notes are vulnerable to being avoided as a contract on grounds of duress."
- The no set off clause: The loan contract forbids Ukraine to set off amounts owed by Russia against the $3 billion due under the bonds. The Court of Appeal correctly noted that this clause would not apply if Ukraine wins on its duress argument, implying that, because of this, it wouldn't do Russia much good to assert a claim in restitution anyway. (Even if it owed restitution, Ukraine could use one of its many claims against Russia as a set off.)
- Potential for a stay: If the Court of Appeal's decision is upheld on appeal, the dispute will go back for a trial. That means judicial proceedings related to the case will continue for a long time, potentially years. But we could be in for a long delay even if Russia successfully appeals the duress ruling. That's because of a separate ruling by the Court of Appeals (beginning at par. 182 in the linked opinion). The court concluded that, if English courts indeed lacked power to adjudicate Ukraine's duress defense, then the right thing to do would be to stay further proceedings. After all, it isn't very sporting for Russia to argue that English courts must enforce its contract rights while refusing to consider Ukraine's defenses. That's especially so when there are alternate forums available in which all of the issues could be resolved together. The two states could agree, for instance, to submit the dispute to the ICJ.
Anyway, the decision is big news. If nothing else, it buys Ukraine additional time, potentially a lot. And it paves the way for a sensational trial, in which the key issue will be whether Russia acted unlawfully in making the loan. I suspect it also marks the last time we will see government-t0-government loans structured as ordinary Eurobonds enforceable in national courts. In a sense, Russia is getting exactly what it asked for: a loan treated like any other commercial loan. But of course, that's not really what Russia wanted. What it wanted was to have the benefits of both official and private creditor status, without the downsides of either.
I'm very excited to announce the publication of a new book, Consumer Finance: Markets and Regulation. The book (also available on Amazon) is the first consumer finance textbook in existence. It's the product of several years of teaching a course I call Consumer Finance. The course, and the book, largely track the regulatory ambit of the CFPB: payments, credit, and consumer financial data.
The book is divided into two parts. The first part covers the question of "who regulates" consumer financial products and services. It covers regulation by private law (including arbitration agreements), state regulation, and then spends a lot of time going through the ins-and-outs of the CFPB's rulemaking, supervision, and enforcement powers and specifically UDAAP. Much of this part of the book is what I think of as "applied" administrative law. The second part of the book covers specific consumer financial product markets and their regulation: deposits and payments, credit and collections, and financial data. While some chapters focus on particular products (e.g., auto loans or student loans or mobile wallets), others focus on topics of broader applicability (e.g., usury or fair lending or credit cost disclosure).
Although the book is marketed as a "casebook," it hardly is. There are maybe 20 cases in the whole book. Instead, most of the book is expository material plus non-case materials, such as litigation complaints, regulatory materials, or transactional documents (e.g., arbitration agreements, parts of a deposit account agreement, a uniform note and mortgage). Each chapter ends with a problem set. It's possible to teach the book either solely through the problem sets or as a lecture course without the problem sets or some combination thereof. There's also a handsome companion statutory supplement.
If you're interested in teaching consumer credit policy or electronic payments and data security issues, this is a course and a book for you. (Don't take my word, however--ask Bob Lawless, who generously taught a draft version of the book last year and is teaching the published version of the book this semester.)Many of us who study consumer credit have taught consumer bankruptcy law—that was, prior to 2010, where the regulatory action was. It was back-end regulation through the discharge, and bankruptcy was the only window in the financial lives of the middle class. That's changed, and our teaching and scholarship needs to adapt. (See here for how I think the teaching of bankruptcy law needs to adapt.) The action today is on the front-end through the CFPB (even under current management), and the CFPB and private data sets have generated a lot of data about households' finances that just wasn't available a decade ago. Teaching consumer credit policy through bankruptcy was always a bit awkward because it only touched on the loans that went bad, and never got into the lending process itself. It was all very roundabout. In a consumer finance course, one gets address the policy issues directly and in the context of the actual regulations. For example, it's hard to bring a discussion of payday loans into a consumer bankruptcy course, but a consumer finance course is tailor-made for it.
There's a lot of path dependence in what we teach in law schools--we have notes for our old courses, there are books already available, etc. But there are moments when changes in the regulatory landscape call out for a change in the curriculum. This is such a moment. In 1933 no one was teaching securities regulation in law schools. Today it's a standard offering. The creation of the CFPB should have the same transformative effect. Just as securities regulation became a regulator topic in the curriculum by the 1940s, so too, I'm hoping will consumer finance become a standard offering in the next few years.
Let me emphasize (as this has been a source of confusion) this is NOT a consumer law book. It is a consumer finance law book and that's a separate and different area, even if there is some overlap. Consumer finance law is the regulation of retail financial services. That is to say, it's more of a banking law book than a consumer law book. I've never personally understood the design of the traditional consumer law course. It's always been an odd grab-bag of subjects: TILA, Magnusson-Moss, odometer fraud, telemarketing regulations, etc. There's no jurisdictional coherence to the course, and to the extent that there's an intellectual cohesiveness, it's provided by a focus on protecting the consumer from rapacious business practices.
Prior to 2010, consumer finance law was not a cohesive field either. There were nearly twenty relevant federal statutes plus a bevy of state laws (and regulations thereunder), spread out over numerous agencies. The creation of the CFPB changed all that and brought an intellectual coherence to the field. Now most (although not all) of federal consumer finance regulation is part of the CFPB's bailiwick. (The Higher Education Act and the Military Lending Act and some rules under the FTC Act are the major exceptions.) There is a jurisdictional coherence to designing a course to track the regulatory domain of the CFPB (with some extensions to cover student loans). This also generates intellectual coherence for the course, in that the regulatory issues are kept more narrowly focused on financial products, rather than on goods and services.
Consumer finance law also fills in a major gap in the financial regulation curriculum. The traditional banking law course is primarily a prudential regulation course--what are banks allowed to do and how do we regulate them to prevent them from failing. There will usually be a class session or two spent on consumer financial services with some mention of TILA and the CFPB, but it's pretty superficial coverage. (I should know--that's what I'm teaching this semester...) There's an enormous regulatory apparatus for retail financial services, and it's been largely ignored in the law school curriculum in the past. It shouldn't be.
The other thing that's different in a consumer finance class is that the focus is not just on the consumer. It's also on the businesses that provide financial services to consumers and the risks they assume and how they address them. One can't teach students in a meaningful way about the problem of the unbanked without talking about the economics of deposit accounts and the risks bank face from extended overdrafters. If you want to talk about funds availability, you've got to get into the problem of check kiting. And if you want to explain the covenants in a mortgage, you've got to consider the problem of occupancy fraud. The book tries to deal with both sides of the coin, consumers and businesses.
So that's my pitch. And remember, if you want an unconflicted second opinion, ask Bob!
I'm pleased to announce that the second edition of my casebook, Business Bankruptcy: Financial Restructuring and Modern Commercial Markets, is now in print and available for purchase from quality establishments such as Amazon.
If you haven't used the book, here's the pitch. It's a financial restructuring book. (The publisher insists on it being called "Business Bankruptcy" to align with existing course categories.) My take is that bankruptcy—that is in-court restructuring—is only one part of the financial restructuring picture, and that one really can't understand bankruptcy law very well without understanding first what is and isn't possible in terms of liquidations and restructurings out-of-court. If you don't know what can be done in terms of restructuring, say bond debt or syndicated loans outside of bankruptcy, it just won't be clear what bankruptcy brings to the table in terms of legal tools. Thus, the first third of the book is about out-of-court restructuring. I believe it's the only book around with that sort of coverage of out-of-court restructuring issues, but I strongly believe that students are well-served by this coverage, both intellectually and as preparation for practice, as bankruptcy lawyers don't just do Chapter 11 work.If you're looking to teach a combined 7/13/11 course, this isn't the book for you. I've stopped teaching consumer bankruptcy and haven't written anything in the area for a while. The reason is simple: I just don't think there's anything especially exciting going on in that space. Historically, consumer bankruptcy was an interesting area to teach and study because it was the window into the financial lives of consumers and the only place in the law school curriculum where consumer credit policy issues really reared their head. This is what made the work of Sullivan, Warren & Westbrook so exciting and relevant.
Today, consumer bankruptcy remains a valuable empirical window into the lives of a subset of financially distressed consumers, but it's not the place where consumer credit policy is happening. We've moved from regulating consumer credit on the back-end, through the bankruptcy discharge, to regulating it on the front-end through the CFPB. Accordingly, I've changed what I teach to being a stand-alone Consumer Finance course (more about that in the next post) and a financial restructuring class that focuses on business restructuring. I've been really happy with this change because it lets me both go deeper into Chapter 11 than the combined 7/13/11 course and to go deeper into consumer credit policy issues than one can do if one has to teach the means test, the hanging paragraph, and discharge, etc. To be sure, there is "one Code to rule them all," and there are some topics that might seem easier to teach in a consumer context than a business context (e.g., fraudulent transfers), but so many of the policy issues concerning consumers are just unrelated to those relating to business reorganization.
If you're still with me at this point, here's what you can expect in the second edition. The basic design of the book is the same--it's still built around problem sets at the end of each chapter (similar in that regard to Warren, Westbrook, Porter and Pottow), with the remainder being expository text, cases, and case studies that give the larger story behind particular litigation moments. (I'm particularly proud of the Texas Rangers case study, not least because it's such a fabulous story.) The most obvious difference from the first edition is that the second edition is substantially slimmed down. The new skinny look (well, it's still a big book at 1,008 pages including the table of contents, index, etc., but that's around a 10% reduction from the first edition) is primarily a function of cutting of superfluous cases (why have three when one will do?) and the excising of statutory materials from the text. I realized that if you give students the statute in the text, they won't use their supplements, and supplements are really the way to go because their consecutive section number enables users to readily find the relevant statutory provision.
The cuts themselves went far beyond 10% of the book, for while I was cutting on the one hand, I was also adding materials on the other. Most importantly, there is now a much clearer thematic structure that emphasizes a set of limitations that exist on out-of-court liquidations and restructurings and shows how bankruptcy law addresses these limitations, sometimes successfully, sometimes less so. To that end, I've added more materials on out-of-court restructurings and new summary chapters that provide an overview of the bankruptcy process and that compare the treatment of problems in out-of-court and in-court restructurings. I've also added in more transactional materials, such as various covenants, to go with things like a RSA and bond indenture. There are general improvements—typos corrected, problem sets updated, etc. Lastly, the chapter ordering has been reshuffled. The first edition had an idiosyncratic structure that shuffled avoidance actions off to the end of the book; this edition tracks a more traditional ordering of topics (although if you buy into my original thinking, it's still totally possible to teach the materials in that order). The teacher's manual is also being updated (and will be ready for use in the spring semester).
So, if you've bought into my vision of teaching business reorganization separately from consumer bankruptcy and for giving more than passing coverage to out-of-court restructuring, I'd urge you to try the book.
In a prior Credit Slips post, I shared a paper, Corporate Bankruptcy Hybridity, positing that bankruptcy should be conceptualized as a public-private partnership. The second section of Corporate Bankruptcy Hybridity identifies factors that have skewed the Bankruptcy Code's ideal balance between public and private interests and values. Preemptively I'll note it is not new to observe the increased privatization of bankruptcy and the qualitatively different nature of the oversight and ethics (see, e.g., Mechele Dickerson). More novel, I hope, is the articulation of a broader set of factors contributing to the skew. The list is illustrative, not exhaustive.
- Barriers to appellate review (including equitable mootness) + case concentration at the trial court level: Seemingly unrelated procedural developments can create the conditions to ensure or upset the bankruptcy law's balance. Part II.B of Corporate Bankruptcy Hybridity addresses how the difficulty of appealing important developments in corporate bankruptcy cases combines with extensive concentration of larger chapter 11 cases to reduce, through several pathways, the fulfillment of public values in the bankruptcy system. This is not a venue reform paper. It is, however, a paper, that articulates structural effects of case concentration when that concentration is not the product of intentional system design. As for equitable mootness, one some days I think its days may be numbered, as circuit judges try to square it with other Supreme Court guidance, and yet it is only one of many barriers to appellate review of bankruptcy matters.
- Shuffling DIP responsibilities: Parts II.C and D of Corporate Bankruptcy Hybridity mix another set of known chapter 11 ingredients - the rise of Chief Restructuring Officers, routine granting of derivative standing to committees, arm-in-arm posturing of DIPs/stalking horse buyer/dominant lender early in cases - into a a different cocktail. Is a DIP still the vigilant defender of the estate, or has that been parcelled out to other parties with inferior information and unaligned incentives? Has the unpopularity of trustees in chapter 11 essentially eliminated a disciplining backstop in chapter 11? In the paper, I worry that "offloading estate responsiblity while benefitting from debtor-in-possession status, largely free of fear of trustee appointment, again distorts the system's balance and ability to honor public values."
Again, you can find the paper here and your thoughts are welcome as always. I learn a lot from Credit Slips readers.
Since my last Credit Slips post about The Weinstein Co. chapter 11, there have been five public hearings/status conferences (some of which were telephonic). Disparate observations from those hearings below.
- Shaping public beliefs about a criminal charge through the bankruptcy court. On August 2, 2018, multiple criminal defense lawyers for Harvey Weinstein participated in an emergency telephonic status conference relating to the use of electronic documents. HW's criminal defense team seemed to use the hearing to magnify efforts to discredit an alleged rape victim in the media and even to amplify their allegations of prosecutorial misconduct. It is unlikely that the narrow issue before the bankruptcy court required the breadth of assertions of HW's legal team. At least based on my listening, the criminal defense lawyers were insufficiently responsive to the court's repeated efforts to limit the scope of their assertions (they almost certainly would have been less able to do what they did at an in-person event). Telephonic hearings are an important convenience, and yet their challenges are heightened when they involve conventional technology coupled with lawyers who don't expect to appear in future cases in that court. Did I hear some of you thinking or saying "well of course, this is what criminal defense lawyers do"? Whether or not that's true or good, this event is further reinforcement that what happens in chapter 11 is way more than mere fiddling with an indebted firm's capital structure.
- A "procedural mess": contracts, contracts, and more contracts. The quoted language is from the presiding judge with respect to the pending disputes over TWC contracts that may - or may not - be part of the bundle of assets that Lantern obtains from TWC through this bankruptcy. As prior Credit Slips posts have recounted, the sale of TWC to Lantern closed without resolution of the scope of contracts to be assumed and assigned and cure amounts. At a hearing on August 23, 2018, it became clear that many hurdles have yet to be overcome on these issues. It probably is not a good sign when the parties cannot even agree on whether they have been in contact with each other to negotiate. In addition to the question of whether some contracts remained executory at the bankruptcy filing date (e.g., did Lantern buy the asset side without further obligation), some counterparties have been saying all along that their contracts were validly terminated prepetition and thus never entered into TWC's bankruptcy estate. The parties also may not be aligned over the extent to which it is imperative to resolve these disputes on a relatively short timeline. On August 23, the court agreed with contract counterparties that these matters needed to be teed up differently than Lantern had proposed. On September 7, TWC filed a three-hundred-plus-page list of contracts it is seeking to assume (dkt #1457).
- "A thin estate." Are any general unsecured creditors going to get paid in TWC's bankruptcy? Will the estate run out of money before the committee gets the chance to investigate other potential causes of action to bring more money into the estate? Based on the assertions of the unsecured creditors' committee lawyer at a hearing on September 5, who also used the phrase "in the zone of administrative insolvency," the answers to these questions are veering toward "no" and "yes." Will anyone else step into fund important litigation activity and recovery?
- Sexual misconduct lawsuits proliferate. As reported by the lawyer for the creditors' committee on September 5, sexual misconduct lawsuits, involving many women and identifying TWC and affiliates as defendants, are pending in in a variety of places (New York, California, United Kingdom, at the very least) and types of courts. Further complicating the ability to manage these actions comprehensively is the fact that federal law prohibits bankruptcy judges from hearing and deciding personal injury tort claims. On September 5, the bankruptcy court agreed to lift the automatic stay to permit Alexandra Canosa's lawsuit pending in the Southern District of New York to continue for claim liquidation purposes, as it had with the Geiss class action.
Student loan debt has jumped from $1 trillion to $1.5 trillion in the last 5 years. The Education Department's official default rates seriously understate the share of young borrowers who default, or are not able to repay their loans. In the face of the growing student loan debt crisis, the Administration's corrupt policy is to undo the Obama administration's gainful employment rule for colleges, grease the wheels for fraudulent for-profit schools, curb loan relief to victims of school fraud, and sabotage consumer protection enforcement by the CFPB and state regulators (by asserting preemption) against student loan servicers who mislead and abuse borrowers. This article sums it up nicely.
Exciting news for consumer law scholars. To the best of my knowledge, the first ever conference in the United States dedicated expressly to scholarship in the field of consumer law is happening in February 2019 at the new Berkeley Center for Consumer Law and Economic Justice. Details from the call for papers:
The Berkeley Center for Consumer Law and Economic Justice, its director Ted Mermin, and co-organizers Abbye Atkinson, Kathleen Engel, Rory Van Loo, and Lauren Willis are pleased to announce the inaugural Consumer Law Scholars Conference (CLSC), which will be held the afternoon and evening of February 21 and all day February 22, 2019, in Berkeley, CA.
The conference will support in-progress scholarship, foster a community of consumer law scholars, and build bridges with scholars in other disciplines who focus on consumer issues. The bulk of the conference will consist of paper workshop sessions at which discussants, rather than authors, introduce and lead discussions of the papers. Everyone who attends a session will be expected to have read the paper; everyone is a participant. The conference will also feature keynotes by leading practitioners and prominent policymakers, as well as time to discuss ideas and collaborate informally.
Details about how to submit a work-in-progess and logistics after the break.If you would like to workshop an unpublished paper, please submit: (1) a title, (2) a short abstract that grounds your work in relevant literature, and (3) an outline to Ted Mermin ([email protected] law.berkeley.edu) by October 5, 2018. We will announce accepted abstracts in early November.
Potential topics may range across the full breadth of issues involving consumers in the marketplace, including, e.g.: student loan servicing and debt cancellation; online product endorsement; racial, ethnic and other disparities in treatment by lenders and by merchants; debt collection; public health disclosures; credit reporting; commercial speech and the First Amendment; the proposed Restatement of Consumer Contracts; the CFPB in theory and practice; issues of federalism, preemption, and sovereign immunity in small-dollar lending regulation; UDA(A)P and disclosure laws; consumer behavior; fintech; and the application of consumer law to abuses in the criminal justice system.
Workshop versions of the papers will be due January 21, 2019. There is no commitment (or opportunity) to publish, though editors of the California Law Review will be in attendance. We reserve the right to cancel workshops if the paper draft is not provided sufficiently in advance for meaningful review by participants.
Conference participants will be expected to read the papers in advance. Thus, please calendar at least two days of preparation time in advance of the conference.
Other logistics: The Berkeley Center for Consumer Law and Economic Justice will provide dinner on Thursday and breakfast and lunch on Friday. Participants will cover their own travel and lodging expenses. (Berkeley Law has a very small amount available for those who could not otherwise attend.) A block of rooms will be reserved at the newly renovated Graduate Berkeley hotel, around the corner from the law school.
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.
In an earlier post, I noted some open questions that had to be answered before Crystallex could execute on PDVSA’s 100% ownership stake in PDV Holding (PDV-H). To recap: The federal district judge in Delaware let Crystallex attach the PDV-H shares on the theory that PDVSA is the Venezuelan government’s alter ego. The open questions relate both to timing (e.g., should there be a stay of execution pending appeal?) and process (how should an execution sale proceed)? A lot turns on the answers to these questions, as I’ll discuss below. First, however, here’s a simplified figure showing PDVSA’s corporate structure for readers who haven’t been following the dispute closely.
- Formally, Venezuela has no U.S. assets related to CITGO; PDVSA owns the PDV-H shares. The court’s alter ego determination lets Crystallex attach these shares as if they belonged to Venezuela.
- PDV-H's only asset is a 100% stake in CITGO Holding, which is itself a holding company for CITGO and other operating subsidiaries. The CITGO Holding shares have already been pledged as collateral for other PDVSA debt: 50.1% to holders of the infamous PDVSA 2020 bonds and 49.9% to Rosneft in connection with a Nov. 2016 loan.
- Crystallex has filed a separate lawsuit seeking to invalidate these collateral pledges as fraudulent transfers. If it does not succeed, then a PDVSA default on the 2020 bonds and Rosneft loan might prompt foreclosure on the CITGO Holding shares. If that happens, PDV-H might wind up an empty shell. That doesn’t necessarily make PDV-H worthless to Crystallex. If Venezuela wants to retain control of CITGO, it will have some incentive to strike a deal (though any deal would at that point have to encompass multiple creditors). But it is a complicating factor.
- Finally, if the execution process results in the sale of more than 50% of PDV-H, this would seem to violate covenants in PDVSA’s 2020 bonds and constitute a change of control triggering repurchase obligations under separate notes issued by CITGO and CITGO Holding. Even if PDVSA kept current on the 2020 bonds and its obligations to Rosneft, the sale of a majority stake in PDV-H might entitle these creditors to force a sale of Citgo Holding shares--again leaving Crystallex with shares in a holding company that holds nothing. Similarly, an execution sale involving more than 50% of PDV-H might prompt holders of CITGO Holding and CITGO notes to foreclose on these entities' assets--a result that would impair the value of the collateral pledged to the 2020 bondholders and to Rosneft.
PDVSA has appealed the district court’s order allowing Crystallex to attach its interest in PDV-H. An appeal doesn’t normally stop the prevailing party from executing on its judgment. PDVSA claims the rule is different here, because its appeal challenges the district court’s rejection of its claim to sovereign immunity, but the district judge has rejected that argument. So, unless PDVSA gets a stay of execution, it risks losing control of PDV-H, and therefore CITGO, before its appeal is heard.
Normally, a party who wants to stay execution posts a supersedeas bond. However, as the Wall Street Journal notes, PDVSA doesn’t want to do that; possibly it can’t. It’s not (or not just) that the amount of the bond would be too large; the district judge has discretion over the amount. Instead, PDVSA argues that no bond is necessary. PDVSA argues that Crystallex needn’t worry that it will transfer its stake in PDV-H to a new entity. The attachment, combined with U.S. sanctions forbidding U.S. parties to participate in such a transfer, effectively eliminate this risk. But even if that is so, the argument doesn’t fully address the purpose of the bond requirement, which is to preserve the status quo during appeal. From Crystallex’s perspective, an additional risk of delay is that the PDV-H shares will decline in value. The attachment doesn’t protect against that risk. Perhaps a better argument for PDVSA is that the sanctions also forbid most new financing transactions involving PDVSA. Because of this, it might not even be possible for PDVSA to find a U.S. surety willing to provide the bond. In any event, here is PDVSA's brief asking the district judge to grant a stay of execution pending appeal. Crystallex has yet to respond.
The stay issue is important enough that PDVSA has separately asked the Third Circuit to issue a writ of mandamus requiring the district judge to stay execution on the PDV-H shares.
What should an execution process look like? Remember that Crystallex isn’t entitled to the PDV-H shares; it is simply owed the amount of its $1.2 billion judgment plus interest. The execution process is the tool for getting it paid. Depending on the nature of that process, Crystallex could wind up holding none, some, or all of PDV-H. PDVSA could conceivably retain a majority interest in PDV-H; conversely, it could lose a majority stake. As noted above, the latter outcome also might cause defaults on other PDVSA, CITGO Holding, and CITGO debt, prompting various creditors to foreclose on these entities’ assets.
Delaware law (sec. 324) appears to envision a relatively informal procedure when a creditor executes on shares in a corporation. The sale will be conducted by the sheriff (here, the U.S. Marshals) after publishing notice of the sale in the newspaper for two consecutive weeks. Crystallex proposes to make the process more robust by “identifying and notifying” unspecified potential buyers and publishing additional notice of the sale in “national (and potentially international) publications” (pp. 3-4).
I guess that's one way to sell an oil company. I mean, Craigslist might be better, but this is, like, a way to do it. Viewed cynically, the process envisioned by Crystallex looks designed to deter competing buyers and to allow Crystallex (which has signaled it plans to credit bid) to obtain full control of PDV-H. What that control is worth will depend, as noted above, on whether Crystallex also succeeds in invalidating the pledge of CITGO Holding shares to Rosneft and the holders of PDVSA’s 2020 bonds, as well as on how creditors react to the triggering of change of control provisions in CITGO Holding and CITGO debt.
Not surprisingly, a range of other parties are now asking to intervene, either to support PDVSA’s request for a stay, to express views on the sale process, or both. Here are briefs by BlackRock and other holders of PDVSA 2020 bonds, by Rosneft, and by Citgo. The CITGO brief envisions an execution process managed by financial advisors, designed to identify the number of shares that must be sold to satisfy Crystallex’s judgment. Of course, if that winds up being a minority stake, PDVSA and its subsidiaries avoid many of the adverse consequences of a change in control. And Crystallex winds up locked into a minority ownership position.
In one sense, the dispute here is simply a high-dollar-value example of a common problem. State laws governing execution sales are poorly-designed to maximize asset value, can be exploited by creditors, and can have unfortunate spillover effects for third parties. That's true whether the asset is a family's home or a multi-billion dollar oil company. (Consider the implications for neighborhoods of cheap, hasty home foreclosure sales.) The problems are compounded for complex assets, which are more typically sold--for better or worse--in bankruptcy. Time will tell whether bankruptcy is in the cards for CITGO. For the moment, I hope the district judge will put the breaks on the execution process--if not until PDVSA's appeal is resolved, then at least until the judge can gather enough information to understand how each party is trying to exploit the process and to oversee a reasonable sale procedure.
Last weekend, The New York Times published an opinion piece about animal shelters, Are We Loving Shelter Dogs to Death? It highlighted the sad reality that nationwide shelters are horribly overcrowded. According to the piece, a "big part" of shelters' overcrowding "is poverty: An estimated one-quarter of shelter animals are there after their owners have surrendered them because of family dysfunction or financial pressure." For instance, a family might not have enough money for vet bills. Or a family must relocate to less expensive housing that does not accept pets. The example in the piece that stood out to me most was families' inability to pay fees and fines related to their pets being picked up by animal control.
Reading the piece -- particularly the parts about fines -- led me to wonder more about pets and financial distress and bankruptcy. And to a broad question for Credit Slips readers. What have been your experiences regarding pets and financial distress, both pre-bankruptcy and in bankruptcy?