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.
Category: Secured Lending
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Seeking nominations for the Grant Gilmore Award
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What Skews the Public-Private Balance in Corporate Bankruptcy Cases?
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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.
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In the Zone: The Weinstein Co. Chapter 11 Hearings #9-13
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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.
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Timing and Process in Crystallex v. PDVSA
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[Updated with Crystallex's brief opposing the stay.]
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.
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Corporate Bankruptcy as a Public-Private Partnership
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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.
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MoviePass Bankruptcy Watch
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The financial travails of MoviePass and its parent company Helios & Matheson caught my eye today. I almost never go to see movies in theaters, so MoviePass was an unfamiliar business to me, but the basic idea is that the consumer pays an upfront subscription fee and then MoviePass provides an unlimited number of tickets for the consumer (although one per show, and more recently with various additional restrictions): basically an all-you-can-eat buffet model applied to movies. The buffet model requires the Jack Sprats of the world to subsidize their wives: those who go to the counter once and get low-cost foods are subsidizing those who make multiple trips for the foie gras, etc. The buffet model can work for a few reasons. First, there is a limit to how much anyone (except Joey Chestnut) can eat. Second, people often go to restaurants in groups, which means that there will be some Jack Sprat wives in the mix. Third, there are sales of other items (drinks, liquor) that can offset the buffet to the extent it's a loss leader. And fourth, the buffet can be priced high enough that it won't lose too much money.
MoviePass doesn't seem to have many of these factors working in its favor. People can watch a lot more movies in a month than they can make trips to a buffet table in an evening. There's going to be an adverse selection of heavy users among subscribers, and they don't bring along Jack Sprat wives–the extra business of friends who come to the theater doesn't go to MoviePass, but to the theaters. And MoviePass doesn't have much in the way of other sale items to offset losses on tickets. OK, so we've got a really bad business model that will only work if lots of people sign up, but don't actually go to the movies. This strikes me as different from other subscription models, like gyms. People are likely to overestimate their likelihood of going to the gym. My guess is that they are much less likely to overestimate how often they'll go to the movies.
Well, this is all very interesting, but what does it have to do with Credit Slips? Three things, I think, one dealing with payment systems and secured lending, and the other two dealing with bankruptcy, which seems to be where this is all headed (assuming that MoviePass is not run out of a bankruptcy remote entity).
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Wacky Warehouse Lien Scam
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The US Trustee's office just prevailed in a sanctions case against a law firm with a most creative fee scam. To oversimplify (and leave out certain other issues of bad behavior), the law firm steered debtors who owned cars in which they had zero equity into an arrangement in which the debtor's car would be towed for an (unpaid) fee by an affiliated firm and then stored in Indiana. The existing auto lender would never be notified of any of this. The affiliate would then assert a warehouseman's lien for the unpaid fee and foreclose on the car, and use the sale proceeds to pay back the fee and pay the debtor's bankruptcy filing fee to the law firm, with the auto lender getting nothing.
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Call for Commercial Law Topics (and Jargon!)
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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!
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Venezuelan Debt: Call a Spade a Spade
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Adam Lerrick, of the American Enterprise Institute, has offered an intriguing approach to the Republic of Venezuela/PDVSA debt problem. Call a spade a spade. The distinction in the market between Republic of Venezuela and PDVSA bonds has always been artificial and the market has normally perceived it as such. Only recently have market participants begun trying to figure out which bonds — PDVSA or Republic of Venezuela — will be more likely candidates for a debt restructuring and therefore which should trade higher in the market.
PDVSA accounts for 95 percent for the foreign currency earnings of the entire country. Without PDVSA, there is no credit standing behind Republic bonds. At base, there is only one public sector credit risk in the country and Lerrick invites us to acknowledge this fact.
He proposes that the Republic assume the indebtedness of PDVSA and proceed to restructure that debt as part of a generalized Republic debt workout. As part of this process — and to discourage potential holdouts from the Republic's offer to exchange PDVSA bonds and promissory notes — he suggests that the Government take back PDVSA's concession to lift and sell Venezuelan oil. This risk has always been prominently disclosed in the PDVSA offering documents and should not come as a surprise to anyone.
Lerrick's proposal adds to the growing list of suggestions for how a future Venezuelan debt restructuring (and there almost certainly will be such a debt restructuring) may be accomplished without holdout creditors devouring the process. No one wants to repeat the experience of Argentina.
Recently, in the context of trying to work out the knotty problem of how to restructure Venezuela’s promissory notes, Lee Buchheit and I made a similar suggestion along these lines. (our friends, Bob Lawless and Bob Scott, two gurus of this world of secured financing and contracts, were invaluable in helping us figure this structure out — all blame for errors is ours, of course).
The structure we suggest differs from the Lerrick proposal mainly on the question of what should happen to the PDVSA oil assets, including receivables for the sale of oil. We suggest that PDVSA pledge those assets to the Republic in consideration for the Republic's assumption of PDVSA bond/promissory note liabilities (as opposed to transferring title to the assets back to the Republic). Such a pledge is expressly permitted by the terms of the PDVSA bonds and promissory notes and should operate to shield the assets from attachment by holdout creditors.
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Rights of Secured Creditors in Chapter 11: New Paper
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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.