For those of you writing on student loans, you may be interested in a new call for papers for a conference I am working to organize. On November 30, 2018, the Rappaport Center for Law and Public Policy, Boston College Law School, and the National Consumer Law Center will hold a daylong symposium on Post-Secondary Education Non-completion and Student Loan Debt on the Law School campus. Our call for papers is out and we are accepting submissions through midnight on Sunday, June 17, 2018. We are especially interested in proposals that examine some aspect of the interaction among student debt, college completion, and/or resulting socioeconomic outcomes. Do consider submitting.
Millions of American workers are parties to arbitration agreements that require them to bring claims against their employers in individualized arbitration proceedings (rather than as part of a class or collective action, as authorized by some federal and state laws regulating the workplace). In Epic Systems v. Lewis, a 5:4 majority of the Supreme Court held today that these agreements must be enforced even though the federal National Labor Relations Act declares it an unfair labor practice for an employer to interfere with the ability of employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The decision is not unexpected, but it is consequential given the number of affected employees.
The case—really, several consolidated cases—was weird for a number of reasons. The NLRB had concluded that employers who insisted on individualized arbitration were engaged in unfair labor practices. Then, in September 2017, the Board fell under Republican control, and many wondered whether it would continue to defend that position. It did, but the administration worked hard to undermine it. In fact, the Solicitor General, which had previously supported the Board in seeking Supreme Court review, later filed a brief disagreeing with it on the merits.
As I said, the decision wasn’t unexpected, with Justice Gorsuch writing an opinion joined by Justices Roberts, Kennedy, Alito, and Thomas (who also wrote a separate concurrence). The most novel aspects of the case stemmed from the arguable conflict between the NLRA and the Federal Arbitration Act (FAA), which requires enforcement of arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.” From prior cases, it was relatively clear that, but for the NLRA, these arbitration agreements would have to be enforced. On the other hand, the NLRA protects employees’ right to engage in “concerted activity,” and it’s no stretch to read that protection to extend to the right to participate in aggregate forms of litigation—say, to collect unpaid wages. The majority saw no conflict, essentially reading the NLRA to protect the right to engage in collective bargaining, but not collective litigation.
The text hardly compels that reading, but, as I said, it’s not much of a surprise. By thin majorities, the Supreme Court has consistently allowed businesses to use arbitration to defeat potential liability in class (or collective) action proceedings. We’ve talked about that trend here on Credit Slips before. So it’s hard to be surprised by today’s result.
While Acting Director Mick Mulvaney is apparently on a tear to defang the Consumer Financial Protection Bureau, some of his actions have flown under the radar. In this and future guest blog posts, I will shine light on one key initiative that largely has gone unnoticed: namely, the twelve Requests for Information that Mr. Mulvaney launched on January 26. These notices, dubbed "RFIs," seek public comment on scaling back every core function of the CFPB, from enforcement and supervision to rulemaking and consumer complaints.
Although the RFIs provide the veneer of public participation, in reality they are slanted toward industry. Many are couched in such vague language that consumers and consumer advocates cannot tell which rollbacks are gaining traction behind closed doors. Just last week, Mr. Mulvaney raised new concerns that the RFI process is infected with bias when he personally pressed bankers attending a meeting of the National Association of Realtors to file responses to the RFIs.To inject some balance into this RFI process, financial regulation and consumer law scholars have been working over the past three months to draft responses to the RFIs. Three of those responses have been filed to date and more are on the way. In this post, I talk about the first response, involving civil investigative demands (CIDs) by the Bureau.
First, some background: In the Dodd-Frank Act, Congress gave the Bureau broad powers to enforce federal consumer financial protection laws. As part of those powers, Congress bestowed on the Bureau the authority to issue CIDs, which are requests for documents and information issued during CFPB investigations. These CIDs have contributed to the Bureau's stellar enforcement track record and resulted in $11.8 billion in ordered relief for over 29 million consumers to date.
In its first RFI, the Bureau invited past recipients of CFPB CIDs and their lawyers to comment on whether the current CID process is too burdensome to industry. The questions in the RFI give a glimpse into Mr. Mulvaney's agenda. They ask whether whether the CFPB should tip off CID recipients by improving their "understanding of investigations" and disclosing investigation documents to the public, contrary to settled practice. The RFI hints at hampering the Bureau's ability to collect evidence by asking whether the "nature and scope of requests included in Bureau CIDs" was too broad. And it asks whether the timeframes for responding to CIDs should be shortened.
In their response, Professors Prentiss Cox at Minnesota and Christopher Peterson at Utah, both seasoned former enforcement regulators, explain why the CFPB has exercised its CID powers wisely and argued against curtailment. As they pointed out, nothing in the CFPB's CID authority is new. That authority closely tracks the longstanding CID powers of the Federal Trade Commission and state attorneys general. Courts, moreover, have repeatedly stressed that agencies need broad and flexible CID authority, because CIDs are directed at those who are best in the know and least interested in providing information. Since the CFPB cannot know the exact nature of possible violations in advance--witness the shocking breadth of misconduct at Wells Fargo--the Bureau needs to be able, when circumstances dictate, to issue CIDs on a broad range of topics to a wide set of subjects. Rigid limits on how many topics can be raised, how many documents can be sought, or how many CIDs can be issued in a single investigation would hamstring the CFPB's ability to protect American consumers through large, complicated investigations. This is especially alarming because the CFPB's enforcement priority to date has been to obtain large amounts of relief from large offenders. In Cox' and Peterson's view, "[l]imits on the complexity and number of topics in CIDs could have the unintended consequence of privileging the entities most determined to obfuscate responses so as to prevent the Bureau from discovering the worst abuses."
Laws that are not enforced are laws only in name. We can learn a lesson from Wells Fargo, which even Mr. Mulvaney deemed important enough to hold to account. However the Bureau's new leaders recalibrate their enforcement priorities, they should leave the CID process alone, so that the Bureau can mount full, effective inquiries whenever leadership does deem a case worth investigating.
Credit Slips is pleased to welcome back Professor Patricia McCoy as a guest blogger. Professor McCoy is the Liberty Mutual Insurance Professor of Law at Boston College Law School. She is a nationally known scholar, writing in the area of consumer financial regulation area. Professor McCoy worked at the Consumer Financial Protection Bureau during its earliest days, and I understand some of her guest posts will offer her perspective on the current state of the CFPB. We look forward to her contributions.
Though none of it is earth-shaking, there has been a lot of news out of Venezuela recently, so it seemed an appropriate time for an update. The election looms. Henri Falcón leads some polls, though those are presumably unreliable indicators, given what Reuters slyly labels Maduro’s “institutional advantages.” A Falcón victory would increase the odds of a restructuring in the near future. A Maduro win might prompt additional U.S. sanctions; the Wall Street Journal (here, also linked above) speculates that these might finally target oil exports.
Speaking of PDVSA and oil exports: We’ve discussed before the risk that creditors will seize assets related to oil exports, and also the fact that most well-managed firms adopt transaction structures that block such efforts. PDVSA is… not a well-managed firm. Bloomberg reports that it has done very little to protect oil-related assets. According to this CNBC report, Conoco Phillips--which recently won a $2 billion arbitration award against PDVSA--has asked a court in the Dutch Antilles for “control” of PDVSA facilities there, including oil storage facilities. Details are scarce at this point, and it’s not entirely clear to me what this means. I assume the merits have not been decided yet. But PDVSA seems to recognize the risk. Bloomberg (linked above) reports that the company is now trying to carry out “ship-to-ship transfers off the coat of Venezuela.”
One puzzling aspect of the Venezuelan crisis is that holders of bonds and promissory notes have largely been sitting on the sidelines. In a couple of earlier posts, Mitu and I speculated about why this might be. But perhaps this inaction is coming to an end. This lawsuit (filed May 5) seeks to recover roughly $25 million due under notes issued to SNC-Lavalin. Though for a relatively small amount, we will see whether this lawsuit prompts other creditors to enter the fray. Meanwhile, bondholders have begun to organize, though they may not have much to do until there is a government is in place that wants to talk restructuring.
The Washington Post has an interesting piece about the coming of big data to the auto repossession world. But of particular note is the end of the article, wherein the repo man profiled says that he will return ransom the defaulted borrower's personal goods found in the car back to the buyer for a $50 flat fee (with child car seats given back for free).
That's probably illegal. The auto lender's security interest extends only to the car, not to personalty that happens to be in the car (were it otherwise, it would violate the FTC Credit Practices Rule). So the repo man, as the lender's agent, holds that personalty in the car as a bailment; there's no security interest interest in it. The repo man can't simply destroy it or throw it away--that'd be conversion, and ransoming it back would seem to be some flavor of tort, making the repo many vulnerable to a trover action (for value) or replevin action (for the stuff itself), as well as a UDAP violation.
Now it's possible that there's contractual language in the loan agreement authorizing a storage and inventory fee or the like. But auto loan agreements aren't standardized and that language won't be in all agreements, so a blanket policy like the one described in the article surely isn't right.
As it happens state law in a handful of states (Connecticut, Florida, Maine) authorizes repo man storage fees, but I can't find anything like that in the Ohio Revised Code. So the repo's practice looks like it's illegal to me.
Whether or not anyone's going to litigate over this is another matter--Ohio's UDAP statute authorizes recovery of attorneys' fees, which changes the economics of litigation, and there are statutory damages of up to $5K, so with 25,500 repos last year alone there might be enough dollars at stake for a class action to make sense here (and the statute of limitations should cover more than that), but only if there's a defendant who can pay the damages. I doubt the repo company has the assets to do so, but perhaps the lenders are liable for the repo man's actions. And I suspect there are arbitration clauses on most auto loan agreements, so that will, at the very least, shield the lenders and perhaps also the repo man.
Actually, if you are in and of the corporate restructuring world, you will believe what happened next. Major objections were were resolved by the parties, and the court approved the sale of The Weinstein Co. to Lantern Capital.
Resolving objections without litigation is perceived positively in bankruptcy-land, not to mention in federal courts more generally. Some cash proceeds of the sale will be held back for the next phases of the case, and that is an important development. What, then, makes the situation seem less than satisfying, at least to this outside observer?
- At Hearing #3, TWC reported that around 60 parties were interested in buying the company. By Hearing #4, the number of qualified bids capable of outdoing the stalking horse had dwindled to zero; the auction was cancelled. That might be just the way things work out sometimes. But it is hard not to wonder whether various aspects of the process chilled serious bidders. For example, in addition to the breakup fee owed to Lantern, there are considerable uncertainties about exactly what Lantern has agreed to buy. TWC has many executory contract rights that it seeks to assume and then assign to Lantern. Many contract counterparties have filed objections relating to whether contracts were already terminated, whether TWC is even working with the correct version of the contract in the sale documents, the amounts counterparties are owed, etc. At Hearing #4, TWC announced that contract counterparties have agreed to postpone a hearing on those objections until after entry of the sale order. It wouldn't be shocking if other bidders, including the much-discussed Kagan, expected more certainty about what is being acquired before meeting the qualified bid standard.
- You may have read that the sale to Lantern will bring in $310 million in cash. At Hearing #4, though, a lawyer for the creditors' committee said the dollar figure likely will be closer to $260 million. And, upon sale consummation, a big chunk of that lesser pile of cash will go immediately out the door to pay a major prepetition loan, the DIP loan, and TWC's investment banker, although subject to disgorgement. Lantern rejected the creditors committee's request to allocate its bid among the dozens of entities comprising the TWC corporate family, but the estate will not have the luxury to do the same. Other creditors with security interests in assets of particular entities are not getting cashed out immediately but expect to be repaid from sale proceeds, along with an unknown number of other claimants (the deadline for filing proofs of claim is not yet set).
- Bankruptcy is often about shared pain, but it is already clear that general unsecured creditors are not going to be treated equally in this case. The sale order disclaims Lantern's responsibility for previous sexual harassment and assault. But Lantern is eager to remain liable for many of the unsecured debts arising from executory contracts. Counterparties on those contracts will be entitled to 100%. Essentially, claims of women arising from sexual harassment and assault are being subordinated to claims of those who were not harassed and assaulted.
- While the creditors' committee was working around the clock to accommodate the timeline demanded by the stalking horse bidder and DIP lender, TWC insisted on deposing one of the committee's senior lawyers, James Stang, whose prior experience includes representing tort claimant committees in Catholic diocese bankruptcies. The deposition topic apparently related to the committee's preference for buyers who would bring more to the table for those who allege sexual harassment and assault. Presumably TWC's lawyers will seek reimbursement in 100% dollars for the time they spent going down this discovery rabbit hole; that's even more money diverted away from women harmed by the company.
- TWC raises issues of extensive corporate wrongdoing, and very few people were fired and replaced prior to the bankruptcy. But no one sought to dismiss the chapter 11 for lack of good faith or to request appointment of a chapter 11 trustee.
In any event, by the time of Hearing #4, no one spoke on the record against entry of the sale order. Maybe all major differences truly had been reconciled. Or maybe the threat of losing the stalking horse bidder, which might trigger a default on its DIP loan, was sufficient to quell continued dissent.
Whatever one's reactions to what has happened so far, the next phases of the TWC bankruptcy are, of course, very important. Many potential causes of action could bring money into the estate, and also could affect how those funds are distributed. Also, in a twist on the so-called "gifting" doctrine in chapter 11, perhaps Hollywooders whose contracts will be honored by Lantern will donate some of their recoveries to sexual harassment and assault claimants, or to the Time's Up legal defense fund. Much in the case has yet to unfold.
The compliant alleges some damming stuff. McKinsey brushes it all off as an anti-competitive ploy. It seems to me that the biggest risk to McKinsey is that the failure to disclose can itself be the basis for an order to disgorge fees.
Even if McKinsey might have been retained in these cases if it had made disclosure up front – I don't necessarily agree with the Alix complaint that the alleged connections would have been, in all cases, fatal to their retention – failure to disclose is itself a serious problem. Bankruptcy professionals always have to disclose more than what is required by section 327's adverse interest/disinterested standard, because ultimately what counts as a problem for section 327 purposes is a question for the court, not the professional, to decide.
And I wonder why the courts approved McKinsey's retention applications in the first place. And where was the US Trustee? It is alleged that many of their retention applications stated that McKinsey had no relevant conflicts to disclose. As in none. For a company of the size and importance of McKinsey, that frankly is not plausible.
The allegations in paragraphs 120 to 122, which I have cut out in the image, are deeply troubling. In short, Jay Alix alleges that McKinsey recommended law firms to clients, and the law firms in turn recommended McKinsey for retention in the case. Not only might this be illegal, as Alix says, but this sort of relationship would have to be disclosed in the McKinsey (and law firms) retention applications even if not illegal.
I have been studying chapter 11 professionals since before the turn of the century, but today we have a first. Jay Alix, as assignee of AlixPartners LLP, has filed a 150 page complaint against McKinsey & Co., Inc. and others, alleging RICO violations in connection with McKinsey's alleged violations of section 327 and rule 2014. This apparently comes out of the Wall Street Journal's report last week that McKinsey was suspiciously light and vague in its disclosures in bankruptcy court, as compared with other, similar professionals.
The alleged conspiracy goes back to cases during my time in practice – that is, long, long ago. It will be interesting to watch this develop.
On Friday, January 4 from 10:30-12:15 pm, the section on Commercial & Related Consumer Law and the section on Creditors’ and Debtors’ Rights are hosting a joint panel at the 2019 AALS Annual Meeting in New Orleans. We are also issuing a call for papers.
The topic of the panel is: The Consumer Financial Protection Bureau: Past, Present, and Future.
The Consumer Financial Protection Bureau was created following the 2008 financial crisis with the intended goal of making markets for consumer financial products and services work for all Americans. Congress granted the Bureau broad powers to enforce and regulate consumer financial protection laws and entrusted it with a number of consumer-facing responsibilities. This program will examine the tumultuous history of the CFPB, from its creation as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, its actions over Director Richard Cordray’s tenure, the legal fight over who currently leads the Bureau, and the actions of the interim director named by President Trump. Panelists will also discuss the possible future of the CFPB and the “lessons learned” from its history and what they tell us about future fights to ensure consumers are protected in the financial products marketplace.
Confirmed speakers include:
- Patricia McCoy, Liberty Mutual Insurance Professor of Law at Boston College Law and first Assistant Director for Mortgage Markets at the CFPB.
- Kathleen Engel, Research Professor of Law, Suffolk University School of Law, member of Consumer Financial Protection Bureau Board.
- Deepak Gupta, founding principal of Gupta Wessler PLLC and a former Senior Litigation Counsel and Senior Counsel for Enforcement Strategy at the CFPB. Gupta also represents Leandra English in English v. Trump.
Proposed abstract or draft papers are due by August 15, 2018 and should be submitted using this form to ensure blind review. Members of both sections’ executive committees will review and select papers for the program. The author(s) of the selected paper will be notified by September 28, 2018.
For more information, see the full description of the a call for papers here.
The third hearing in the The Weinstein Company chapter 11 took place on April 19, 2018 (prior 2 hearings here and here). The hearing focused on final court approval of a $25 million loan to fund the debtor during its chapter 11 (or, really, until a standalone 363 sale) ("DIP loan"). Apparently a competing offer for the DIP loan discussed at Hearing #1 never fully materialized. Prior to the chapter 11 petition, TWC had no single lender/syndicate claiming a so-called blanket lien on substantially all assets (the lender leading the now-approved DIP loan had a prepetition security interest in movie distribution rights held by TWC Domestic, and lenders with prepetition security interests in other assets also are participating in the DIP loan). As indicated in the visual accompanying this post, the DIP financing order states that TWC seeks to grant its DIP lenders a security interest in nearly all property. There are some important exclusions from the collateral package, however, including "claims arising out of or related to sexual misconduct or harassment or employment practices."
Page 42 of the DIP financing order gives the unsecured creditors committee only until April 27 to investigate validity, perfection, and enforceability of various prepetition liens, although that date can be extended "for cause." As is typical in such agreements these days, TWC stipulated that it will not challenge prepetition loans made by the postpetition lenders. The order and agreement also require immediate payout of the DIP loan from sale proceeds (pp 55 & 138 of docket #267). If I'm reading the DIP lending agreement correctly, it also gives certain prepetition lenders the right to be paid immediately out of sale proceeds (p138 of docket #267). For reasons Credit Slips readers have heard many times before, I don't understand why paying prepetition debts at that juncture is in the best interest of the bankruptcy estate.
Meanwhile, Peg Brickley and Jonathan Randles of The Wall Street Journal have reported three TWC executives "took home more than $12 million in pay, loans, reimbursements" in the year before the bankruptcy, including after sexual misconduct allegations became public. This reporting comes from the schedules and statements of financial affairs filed just a few days ago.
- The 341 meeting of creditors, held April 24, was quickly continued to May 2 because the aformentioned schedules and statement of financial affairs had just been filed. Unlike in consumer bankruptcies, large corporate cases routinely obtain extensions to file these documents - even, it seems, when debtors/lenders/stalking horse bidders are simultaneously pushing for quick sales.
- The New York Attorney General has made an official legal appearance in the TWC bankruptcy. TWC is among the named defendants in a February 2018 lawsuit alleging violations of civil rights and human rights laws.
- The office of New York City's Mayor has asked the bankruptcy judge to take into consideration whether proposed successors will maintain operations in NYC, emphasizing the city's commitment to gender equity and fighting sexual harassment.
- If it goes forward, the May 4 auction of the company will be in New York rather than Delaware as originally announced.
- A bankruptcy court hearing on May 8 will consider Harvey Weinstein's request to access emails for his defense in various criminal investigations.