The crypto industry has been spreading a tale of federal bank regulators persecuting crypto and forcing banks to "debank" crypto companies. Like the grossly mischaracterized Operation Choke Point, the crypto debanking narrative is utter and self-serving bs. At best, the actual evidence shows the FDIC expressing very normal and reasonable risk management concerns—that is, the FDIC was just doing its job. There is zero evidence that the FDIC ever threatened or directed banks not to do business with crypto companies.

The simple truth is that crypto companies were debanked by the market, not regulators. Banking crypto poses a unique, correlated credit risk that should rightly concern any bank's risk committee. Crypto companies present a risk of correlated chargebacks that makes them all potential Fyre Festivals, so banks with prudent risk management practices determined that it was a value negative proposition to provide banking services to crypto companies. That's the invisible hand of the market at work, not the invisible hand of the Deep State.

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This past year's American Bankruptcy Law Journal symposium at the National Conference of Bankruptcy Judges' Annual Meeting addressed the role of bankruptcy law in the larger U.S. legal system. The ABLJ recently published the related academic papers from that symposium. You can find them on the front page of the ABLJ site now. One of which I was honored to write.

My contribution, The Periphery of Bankruptcy Law: The Importance of Non-Bankruptcy Issues in Consumer Bankruptcy Cases, focuses on the range of state law exemption issues, UCC security interest issues, and federal and state consumer protection legal issues that appear in consumer bankruptcy filings to highlight how bankruptcy courts are one of the leading venues where people's non-bankruptcy legal problems may be litigated. In the piece, I write about how attorneys, trustees, and judges can provide people with a legal process to deal with their financial problems that they find meets their beliefs about what the bankruptcy process will offer them. Doing so will benefit individual debtors and the bankruptcy system, as a whole. As Slipster Bob Lawless has calculated, one in eleven Americans will file bankruptcy at some point during their lives. The chapter 11 cases of large companies and some non-profits make headline news. The public's perception of the bankruptcy system matters to the legal system's integrity.

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For more than a century, most lawyers who showed up at the Supreme Court for arguments were one shotters.  But starting in the mid 1980s, a new breed of lawyer emerged.  The SCOTUS superstar; someone who was a specialist in making arguments to SCOTUS, showed up repeatedly, and usually possessed the most elite of legal credentials possible.  No prizes for guessing the gender and race of most of these SCOTUS superstars.  (Aside — SOOTUS superstars also existed in the early 1800s, but probably for different reasons).

A number of scholars have documented the rise of this new type of lawyer and legal specialty – included here are Kevin McGuire, Richard Lazarus, and H.W. Perry.  There has also been interesting work on the question of the impact of this new type of lawyer (they win more and are much better than others at getting cert granted – as work by Adam Feldman & Alexander Kappner has shown).

There has thus far, however, been little attention paid to the dynamics of the gender disparity among SCOTUS superstars.  Megan Lemon's excellent new paper, Pathways to the Podium, does just that using a combination of qualitative and quantitative data.  The findings from the interviews Megan did with a number of these superstars are fascinating.  One of the implications of Megan's study seems to be that men are able to more easily and quickly achieve and monetize their superstardom.  

Some time ago, Mitu and I had an exchange (here are parts 1, 2, 3, and 4) about judgments and collective action clauses (CACs). The question was this: Assume that a bondholder “rushes in” to court (in Steven Bodzin’s apt phrase) and gets a judgment before its fellow bondholders can vote, pursuant to the CAC, to restructure the debt. Does the “rush in” creditor escape the restructuring? The subtext was and remains Venezuela, where a number of bondholders already have obtained judgments. As Mitu put it:

For the better part of two decades the hopes and dreams of the official sector for an orderly sovereign debt workout mechanism … have resided, pretty much exclusively, in the widespread use of collective action clauses (CACs) … A concern, all through this period, however, has been that clever holdouts will figure out some loophole to bypass the CACs.

In theory, rushing in to court could be that loophole. I doubt it is a big loophole, or one that is likely to be used with any frequency. But the possibility has concerned official sector actors. And in fact, several bondholders have proceeded to judgment against Venezuela, and one has tried to do the same against Sri Lanka. This worried the U.S. government enough to submit a fairly extraordinary brief asking the court to stay the lawsuit in deference to Sri Lanka’s restructuring negotiations.

My colleague Andy Hessick and I just posted a new paper, The Judgment-Holder Problem in Sovereign Debt Workouts, which uses a Venezuelan debt restructuring as an example in thinking through this topic. The abstract is below the jump, but our primary argument goes something like this:

• Existing analyses focus on the legal doctrine of merger and bar. They ask whether the bond “merges into” a court’s judgment and posit that, if it does, bondholders are not bound by a restructuring concluded through the CAC.
• This is not a helpful way to think about the problem. The doctrine of merger and bar (better understood as claim preclusion) is largely irrelevant. Instead, one needs to ask two separate questions, both of which have clear answers.
• First, does a modification vote conducted pursuant to the CAC also modify a previously-entered judgment of a federal court? The answer is clear: No. A judgment creditor may enforce the judgment even if this allows it to recover more than the issuer is obliged to pay restructuring participants.
• However, question one isn’t as important as it seems. Question two is more important: Can restructuring participants modify the bond to impair a judgment creditor’s ability to enforce a judgment? Despite some legal uncertainties, which we discuss in the paper, we think they can, and we explain why.

tl;dr – A bondholder who cannot block a restructuring vote and races to obtain a court judgment can rest assured that the judgment will remain intact despite the restructuring vote. Whether it will be able to enforce the judgment is another matter entirely.

Abstract below:

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Check fraud has been on the rise, even as check usage continues to decline. There's lots of different types of check fraud, however. Sometimes it's as simple as a thief stealing a blank check, filing it in, and forging the drawer's signature. Sometimes a legitimate check is intercepted in the mail, and the payee's name (and maybe amount) get washed off and replaced by that of the fraudster or a friendly party. Sometimes a legitimate check is copied—while in transmission or even after receipt and possibly even after deposit—but with the payee then changed prior to deposit. And once a check has been copied once, it can be copied multiple times, and each copy can be deposited (and possibly deposited multiple times with remote deposit capture). It can be hard to figure out how the fraud happened, however, as the payor bank often doesn't receive a paper (or at least the original paper) check. Instead, the payor bank might simply be presented with an image of the check or perhaps a paper reconversion of an image of the deposited check. And with remote deposit capture, the depositary bank might itself not have a paper check. 

The problem this variety of fraud creates is that it makes it hard to know which legal rule should apply, and the uncertainty of legal rules might reduce banks' incentive to take care to protect against fraud.

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I received a dunning notice from the American Law Institute today, reminding me that my dues were 90 days overdue. Now, you might conclude from this that I'm generally not paying my bills as they come due or that I'm a deadbeat by nature, but the truth is that I've been on the fence about whether I want to remain a member of the organization. That's another matter, however. My interest is that ALI had a default setting for me to make a $125 contribution in addition to my $125 dues.

In other words, the default setting was for me to pay 2x what I actually owe. The symmetry of the $125 numbers makes it much more deceptive because it seems more like an itemization and a total, rather than two separate charges.

To be sure, I could easily opt-out by unchecking the pre-checked box, and there's bolded language telling me about it (albeit in a visually separate box…), but is this sort of choice architecture really needed? I don't think it formally violates anything in the Restatement of Consumer Contracts, but opt-out mechanisms in consumer contracts just aren't a good look, any more than auto-renew features. If I want to give ALI an extra $125, I will, but I don't want to be tricked into doing so. Do better ALI.

As I have previously blogged, SVB Financial Group seems to be trying to do venue by declaration. Consider the grounds for venue under 28 USC 1408 and how they apply to SVBFG:  

• Location of principal place of business for majority of past 180 days.  All of SVBFG's regulatory filings in the last 180 days said its address—principal place of business—is in Santa Clara, CA.
• Location of principal assets for majority of past 180 day. The majority of its assets for the last 180 days—Silicon Valley Bank—were in Santa Clara.
• Location of domicile for majority of past 180 day.  SVBFG is incorporated in Delaware and always has been. 
• Location of pending affiliate's case's venue for majority of past 180 day. SVBFG does not have any affiliate cases pending, much less in SDNY.

SVBFG's claim to SDNY venue seems to be based on the location of its principal assets. Those principal assets are as of today the equity of two of its non-debtor subsidiaries. But for almost all of the past 180 days, the principal assets were the equity in the bank. Not only is SVBFG trying to ignore the 180 days rule (which exists precisely to prevent this sort of gaming), but its argument that its assets are located in NY is simply wrong.  

Both of the SVBFG subsidiaries are Delaware entities according to SVBFG's last annual report. The subsidiaries might have their principal offices in Manhattan, but that's irrelevant. The corporate stock is not located in Manhattan (I really hope they aren't suggesting that the DTC's holding of stock certificates does the trick–if so, everyone can file in Manhattan). When a parent owns a subsidiary's stock, the stock either has no location as an intangible or is located where the subsidiary is domiciled.  Nothing else makes sense.

To see why, consider the following: suppose a car is my principal asset. It's titled in Delaware, but currently illegally double-parked in Manhattan. In that case SDNY venue would be proper. There's direct ownership of a physical asset that has a location and that's enough for the venue statute. It's no different than owning a building in Manhattan. But now imagine that my principal asset is not the car, but stock in a Delaware corporation, and the corporation's sole asset is a car that's illegally double-parked in Manhattan. In this scenario, I do not directly own the asset that is in Manhattan. To impute it to me would render the venue statute meaningless.  Congress knows how to talk about indirect ownership when it wants. It didn't in the venue statute. The statute is about the principal assets of the debtor, not the debtor's non-debtor subsidiaries. Trying to bootstrap in this way is akin to LTL trying to bootstrap on non-debtor J&J's "distress." Bankruptcy law has clear boundaries—debtor vs. non-debtor—but if it's going to be ignored, then what are the "rules"? 

While I'm thumping on the venue issue, what of the "no harm, no foul" argument? I don't know what the harm is of SDNY venue at this point. This isn't an obvious issue like Boy Scouts going to Delaware to avoid 5th Circuit law on non-debtor releases. But I can say this with confidence: Sullivan & Cromwell clearly thought there was some benefit to their client in having SDNY venue, rather than Delaware or California venue. It's not that these other venues are somehow not equipped to handle a case like this (and notice how insulting that argument is to most of the 375 bankruptcy judges in the country…). Delaware and (Central District) of California have both done large bank holding company bankruptcies:  WaMu and IndyMac. Perhaps S&C simply doesn't want to take the Acela to Wilmington and stay at the Hotel Dupont, just as the California-based creditors don't want to fly out to LaGuardia. But it's also possible that there's some substantive legal issue S&C is concerned about that led it to file the case in SDNY. The very fact that the debtor ordered "off-menu" when there were two good, legitimate, alternative venue choices should set everyone's spidey sense tingling. I was pleased that the court has not put in "venue is proper" language in its orders so far; we'll have to see if there's an objection. That might turn on whether other parties can suss out a potential disadvantage to being in SDNY and want to risk the possibility that the judge takes umbrage with a venue motion, even if it's about governing law, rather than a question of getting a fair shake. 

Last year, I savored a bit of schadenfreude watching my con law scholar colleagues despair about their field after cases like Dobbs v. Women's Health Organization or West Virginia v. EPA. Con law scholars see themselves as the royalty of the legal academy, far above those folks who do blue collar law like bankruptcy and commercial law or grubby stuff like banking and money. And that's fine–we always laughed at them as slightly clueless toffs, not realizing (or wanting to admit) that their field is largely a battle of normative opinions, without any quasi-objective touchstone or clearly right or wrong answers. In contrast, we can point to things like express deadlines and numerical ratios that must be maintained and efficiency principles like "least cost avoider". That's what's made the Supreme Court's recent jurisprudence so delicious–it shows what every non-con law scholar has long known–that con law is as much politics as it is law. There was a certain joy in watching the con law field realize that the emperor had no clothes.  

But there's karma in the universe, and Silicon Valley Bank is sticking it right back the banking law scholars. I don't usually teach the core prudential regulation banking law class, but I really feel for colleagues who do. The response to Silicon Valley Bank is banking law's Dobbs moment. In 2010, in the wake of the 2008 crisis, Congress erected an enormous legal edifice to govern financial institutions–the Dodd-Frank Act. And we saw in the course of a weekend that it was all an expensive and wasteful Potemkin village. What good does it do to have a massive set of regulations…if they aren't enforced? To have deposit insurance limits…if they are disregarded? Dodd-Frank is still on the books, but its prudential provisions are as good as dead. Why should anyone follow its requirements now, given that they'll be disregarded as soon as they're inconvenient? And why should the public have any confidence that they are protected if the rules aren't followed? Indeed, did anyone even look at SVB's resolution plan or was it all a show? 

I really don't know how one can teach prudential banking regulation after SVB. How can you teach the students the formal rules—supervision, exposure and concentration limits, prompt corrective action, deposit insurance caps—when you know that the rules aren't followed? This is going to be a real challenge for folks who teach banking regulation. So, I invite our con law colleagues to snicker back at us. 

P.S. Anna Gelpern will say that I'm being naive–as she noted in a great 2009 article, the rules always get tossed out the window in financial crises and then there's a lot of finger wagging and new rules that are followed until the next crisis, when they aren't. And she's right. But the cycle of rules-crisis disregard-new rules had its own internal credibility:  this time I mean it! That internal credibility required there to be a certain time lag between crises, enough that a new king would arise over Egypt, who did not know Joseph, that is a new crew of regulators who could not be counted on to act the same way as in the past. When it's the same crew as from the last crisis, the internal credibility of "this time I mean it!" doesn't fly. 

When President Biden announced the rescue of Silicon Valley Bank depositors, he emphasized that "investors in the banks will not be protected.  They knowingly took a risk and when the risk didn’t pay off, investors lose their money.  That’s how capitalism works." Unfortunately, that's not how US law works. 

There seems to be a gap in the Federal Deposit Insurance Act that is going to protect some investors in Silicon Valley Bank’s holding company, SVB Financial Group. The holdco’s equity in the bank will be wiped out in the FDIC receivership, but the FDIC doesn’t have any automatic claim on the holdco. This is basic structural priority/limited liability:  creditors of a subsidiary have no claim on the assets of a parent.

What's worse is that the holdco, which filed for bankruptcy today, has substantial assets including around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.

There isn't any provision in the Federal Deposit Insurance Act that subordinates the claims of insiders—like corporate affiliates or executives—that exceed the insured deposit limit to other creditors. So once FDIC guaranteed all deposits, it necessarily guaranteed the deposits of the holdco and other insiders. 

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Silicon Valley Bank's holding company, SVB Financial Group, filed for Chapter 11 bankruptcy this morning…in the Southern District of New York. Who knew that Park Avenue South was in the heart of Silicon Valley?

Seriously, the venue here looks problematic. SVB Financial Group's petition lists its principal place of business as 387 Park Avenue South, Manhattan. There's a SVB location there with about 20,000 square foot of space. That's sure doesn't seem like a corporate headquarters for the 16th largest bank holding company in the US. Instead, it seems to be more of a bank branch. But the petition does bear the signatures, under penalty of perjury, of SVB Financial Group's CRO and, not so clearly under penalty of perjury, of SVB Financial Group's attorney at Sullivan & Cromwell. 

Curiously, SVB Financial Group has been telling federal bank regulators a different story about where it's located. On its Bank Holding Company Report, Systemic Risk Report, Consolidated Financial Statement, and Parent Company Only Financial Statement for Large Bank Holding Companies—documents filed with the Federal Reserve Board—SVB Financial Group said its address is 3003 Tasman Drive, Santa Clara, California. Hmmm.

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