Following the failure of Silicon Valley Bank, a lot of other regionals have experienced depositor runs and serious pressure on their stock prices. But there's actually a lot of variation among regionals, and the solutions to SVB's problems don't necessarily fit the other regionals' problems, as the case of First Republic Bank shows.

(more…)

In the wake of the Third Circuit's LTL Management decision many commentators wrote off the Texas Two-Step as dead. Turns out it's not, it's just playing out in a different key with a new filing in SDTX.

(more…)

Alex Jones filed for Chapter 11 bankruptcy himself today. So what is Mr. Jones hoping to accomplish with the bankruptcy filing? I see three possible goals, but I'm skeptical that he'll achieve more than one of them.

First, by filing for bankruptcy, Jones buys himself a bit of time and breathing space. The automatic stay stops all litigation and collection activity against him. It's not indefinite, but it takes the heat off for a bit. That might help him avoid any collection activities by the Sandy Hook victims' families while his motions for a new trial and remittur are pending.  (As far as I can tell, the Connecticut 20-day post-judgment window for appeal has run, but I guess these are not "appeals" since they are motions to the same court?)

Second, the bankruptcy filing moves the action from Connecticut to a Texas bankruptcy court. Jones might be hoping he finds the bankruptcy court more favorably inclined. I'm skeptical. If his behavior in the bankruptcy court matches how he's behaved in other courtrooms, he's not going to find the judge very sympathetic.

Third, Jones will be looking to get a discharge of his debts—including the Sandy Hook defamation judgment. If a debt is discharged, it cannot be collected after the bankruptcy; the creditor gets only what it is able to collect as part of the bankruptcy process. That would mean that Jones's future income would be free from the creditor's claim; only his present, non-exempt assets would be available for repaying creditors. While those present assets include (I presume) all of the IP of the Jones empire (by virtue of his ownership of the companies that hold them), Jones might have concluded that salvaging his current assets are a lost cause and that he'd do best to focus on freeing up his future income. 

The hitch here is that there is an exception to the bankruptcy discharge for "willful and malicious injury by the debtor to another or the property of another." If the behavior that produced the Sandy Hook judgment was "willful and malicious," then Jones will not be able to protect his future income through bankruptcy.  While the Sandy Hook judgment was for defamation, intentional infliction of emotional distress, and unfair trade practices—things that sound willful and malicious—it was a default judgment, meaning that there was never any actual hearing of the merits of the case; Jones just didn't respond to the suit. If there is a discharge objection raised (as there surely will be), then Jones will have a chance to litigate not the actual judgment, but the "willful and malicious" issue, but that effectively means he has an opportunity to litigate the case he previously forfeited. I'm skeptical that he'll prevail (he certainly loses on willful, but maybe he's got a shot at malicious?), but he at least gets another roll of the dice.

Now this extra dice roll isn't risk free. By filing for bankruptcy, Jones will have to come clean about all of his current assets. If he fails to do so, he risks federal prosecution for bankruptcy crimes.  Additionally, while Jones has filed for Chapter 11, where the default setting is that the debtor retains control of his assets as a debtor in possession, there is the possibility of the appointment of a trustee to take over his assets. There will surely be a motion made for the appointment of a trustee given allegations of Jones hiding assets. Jones will get to fight the motion, but I think a trustee being appointed is a real likelihood. If a trustee is appointed, the trustee will act to avoid various pre-bankruptcy transfers made by Jones in an attempt to shield his assets (and if there is no trustee appointed, then a creditors' committee will seek authorization to do so). Either way, I cannot imagine that Jones will be able to retain effective control of the case for very long. 

Bankruptcy offers Jones a glimmer of hope–maybe he can get a discharge for the Sandy Hook verdict, if the court finds his behavior wasn't willful and malicious–but if I were a betting man, I wouldn't put my money on Jones. Yet as long as he comes clean to the bankruptcy court about his assets, etc., there's little downside to him for trying this last Hail Mary move to stave off the Sandy Hook creditors.

Announcement that slipsters might be interested in:

Financial Restructuring Roundtable

Call for Papers

The Financial Restructuring Roundtable (formerly the West Coast Bankruptcy Roundtable) will be held in person on April 6, 2023 in New York City. Spearheaded by Tony Casey, Samir Parikh, Robert Rasmussen, and Michael Simkovic, this invitation-only event brings together practitioners, jurists, scholars, and finance industry professionals to discuss important financial restructuring and business law issues. 

(more…)

One of the students in my 1L Contracts class pointed me to this delightful article from the New York Times — delightful because this is going to be so fun for us to discuss in class (here)

Here is the story as I understand it. A Danish artist, Jens Haaning, was commissioned by a Danish museum (the Kunsten Museum of Modern Art) to reproduce a couple of his prior works, where he had framed piles of real euros and kroner to symbolize wages and work in Austria and Denmark.  To do the reproduction work, the artist was paid 10,000 kroner and then also given a bunch of cash (532, 549 kroner) to put in the installation pieces.

The cheeky artist sent in a couple of blank canvases titled "Take the Money and Run", which seem to describe exactly what he did.  (The Times article literally has multiple photos of guests to the museum admiring the blank canvases — or at least looking at them with interest).

The artist says that he gave them art — symbolizing taking the money and running, (a modern critique of capitalism?). The museum director, Mr. Lasse Anderson (representing the capitalist museum?), appears neither amused nor pleased. He says: breach of contract.  

It is simply not possible to make this stuff up.  Maybe Tess and Dave will do an episode about this case for their brilliant Promises, Promises podcast?

I very much want the artist to win the contract suit. But if the museum director is right that the contract was for a reproduction of the prior piles of cash pieces (which seems likely from what the Times piece tells us), Jens will probably have to give the moolah back.  But not until after having gotten international notoriety as the cheekiest artist of modern times. And maybe that's all he was going for after all. Win win. 

I can only begin to imagine the kind of fun opinion someone like Richard Posner might have written on a case like this.

Many thanks to Maggie Rosenberg, 1L at U Virginia.

"All fintech is regulatory arbitrage, to some degree," Felix Salmon writes at Axios. And he's right. In the last couple of days we've seen two striking examples. First, the CFPB entered into a consent order with the provider of Income Share Agreements, a type of education financing. The consent order makes clear that the CFPB will be treating ISAs as student loans–that is credit–and therefore subject to the Truth in Lending Act and Equal Credit Opportunity Act.

And then we saw crypto-Twitter blow up over Coinbase's spat with the SEC regarding what is a security. Coinbase is the largest crypto exchange in the United States. It wants to offer a cryptocurrency lending product called Lend. According to Coinbase, the SEC told Coinbase that it thinks the product is a security and that it will sue if Coinbase offers the product without first registering it. After Coinbase got a Wells Notice from the SEC, Coinbase got huffy and decided to take its case to Twitter with a thread by it's CEO calling the SEC's behavior "sketchy".

There's a lot of confusion about the Coinbase matter, so I'm going to spell out what the stakes are, how I think the product works, and then why (assuming that I have the product's operation correct) Lend is obviously a security.

(more…)

Mark Weidemaier & Mitu Gulati

Earlier today we had a great time recording a Clauses and Controversies episode about the Province of Buenos Aires restructuring, which should post sometime next week. Our guest was Bloomberg reporter Scott Squires, who knows the Argentine context inside out and has also taken a deep dive into the mechanics and details of this restructuring. We got to talk about the PBA’s various shenanigans, and one aspect of our conversation continues to confuse us all. PBA offered to pay past due interest to creditors who consented to the restructuring; non-consenters did not receive the payment.

In the post linked above we wondered whether this payment, when added to PBA’s various threats, made the deal coercive. And we wondered why creditors, despite receiving fairly generous financial terms, were willing to accept this treatment. One answer we got from multiple sources is that it is simply too difficult and time consuming to deal with the trustee. Basically, it’s hard to get the trustee to act. First, holders of 25% in principal amount must instruct it to bring suit, then they have to negotiate the trustee’s indemnity, etc. And all this takes time. Meanwhile, the so-called “no action” clause in the indenture blocks individual bondholders from filing suit unless and until the trustee fails to act for 60 days. Perhaps any challenge the PBA’s conduct required quick, forceful legal action, but bondholders upset by the deal couldn’t muster the required 25% support or viewed the delay inherent in this process as a deal-breaker.

This would all make sense, were it not for the unusual drafting of another contract term. The clause played an important role in a lawsuit initially filed by Goldentree, one of PBA’s biggest creditors. Goldentree later changed course and were viewed as one of the drivers of the eventual deal. But the lawsuit was premised on the ability of individual bondholders to circumvent the trustee, found in this language (emphasis ours):

[E]ach Holder of Debt Securities shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on (including Additional Amounts) its Debt Security on the stated maturity date for such payment expressed in such Debt Security (as such Debt Security may be amended or modified pursuant to Article Eleven) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.

Our issuer-side friends have scoffed at this reading, telling us that the “no action” clause plainly requires all bondholder litigation to go through the trustee, at least until the bond has matured. That may be the common understanding. But that reading isn’t easy to square with the language above, which can plausibly be read to give individual investors the right to sue for missed coupon payments. Investors have a right to get “principal and interest on . . . the stated maturity date for such payment.” This is an unusual formulation. It is natural to say that principal comes due on the maturity date. But interest? Does interest “mature?” Our issuer-side friends would say, we assume, that the use of “stated maturity date” reinforces their understanding of the effect of the no action clause. But that reading seems to ignore the language “for such payment” (underlined above). This seems quite clearly to refer to individual payments, and the clause refers to both principal and interest. And it seems perfectly reasonable to interpret all of this to mean that, on the date when the interest is due, the interest obligation matures. Under this reading, investors can always sue for missed payments. It is other litigation—such as an acceleration in response to a cross-default trigger—that must go through the trustee.

Anyway, reading further, the clause says that an investor’s right to “such payment” – i.e., the interest that was due – and to institute suit” cannot be impaired “without the consent of such Holder.” That would at least arguably have enabled individual bondholder suits for past interest.

Again, many of our contacts in the market think this reading is nonsense and ignores the purpose and history of this clause. And we don’t really have a strong opinion as to which reading is correct. But we do think the reading above—which is presumably the reading underlying Goldentree’s suit—is plausible. Certainly there is a fairly straightforward argument to that effect based on the text of the clause, and text seems to matter quite a bit to judges applying New York law. It never ceases to amaze us how many seemingly settled questions—at least in the eyes of market participants—are not well reflected in contract language.

I love this story — a bank erroneously sends money to a bunch of lenders who are angry with the bank and the debtor for other reasons. The bank discovers the computer error and asks for its money back. The angry lenders refuse to give back what was clearly an erroneous deposit. There is litigation. And the court says to the lenders who received the erroneous deposit: You can keep the money.  

I remember telling my students in Contracts about it when the news was first reported, and the matter had not been to court yet. I told them that this was an easy case and that the lenders would have to give the money back.  If memory serves, I told them something along the lines of: "If a bank erroneously deposits money in your account, you don't get to keep it. You have to give back what is not yours. Finders are not automatically keepers." I was wrong, to put it mildly.

Elisabeth de Fontenay has a delightful piece on this that is coming out soon in the Capital Markets Law Journal (here). Among other things, Elisabeth asks the deeper question of why it is that lenders and borrowers these days seem to be asserting what look to be highly opportunistic claims on a much more frequent basis than in the past. It used to be — or so the veteran lawyers in this business tell me —  that reputation and norms constrained these repeat players from misbehaving. Not these days.

Of course, there is more to the story, like why the judge (Jesse Furman) ruled the way he did. Turns out that there was a wormy precedent directing him and he was not willing to turn the usual judicial cartwheels to produce the "fair" outcome. Or maybe, in terms of weighing bad behavior on the two sides, he found shenanigans on both sides and decided to just follow precedent? Or maybe Judge Furman hates the big banks? I'm kidding (I think very highly of Judge Furman), but he has decided a number of big commercial cases recently that have caused drama (e.g., here (Windstream) and here (Cash America)).

The abstract for Elisabeth's paper is here:

The Citibank case dealt with a $900 million payment sent in error to the lenders of Revlon, Inc., in the midst of a fraught dispute over the loan restructuring. Surprising most market participants, the court ruled that the lenders who refused to return the funds to the administrative agent were entitled to keep the money. The case (currently on appeal) attracted commentary primarily due to the sheer size of the payment error, and the corresponding risks posed by “back-office” functions at financial institutions. But Citibank also highlights the widening gap in leveraged finance between the wishes and expectations of market participants and the actual outcomes they achieve under either (1) common-law default rules or (2) heavily negotiated contracts. In particular, the case raises questions such as (1) whether New York law remains an appropriate default choice for financing transactions; (2) whether the common-law of contracts does or should continue to have relevance for financing transactions among sophisticated parties; and (3) whether parties truly can contract for their desired outcomes when opportunistic behavior is prevalent in the market.

For more, Matt Levine of Bloomberg has a hilarious piece, here. It talks about the back office disaster in India and how this goof actually happened (as an aside, the firm involved on the Indian side is a highly respected one — this was no fly by night operation).  Matt also talks about the wonderfully named Banque Worms case.  One could not make this stuff up even if one wanted to.

I'm hoping that my favorite business law podcaster, Andrew Jennings (here), will do an episode on this soon.

The NRA's bankruptcy petition was dismissed as filed in bad faith. I'm predicting that the court's opinion will be in the next edition of every bankruptcy textbook as the case really is a textbook example of bad faith.  The court found that there was substantial evidence in the record that the NRA filed for bankruptcy for the purpose of gaining an advantage in its litigation with the NY Attorney General, namely depriving the NY Attorney General of the remedy of dissolution, rather than for any other purpose.  

So what does this mean?

(more…)

Today Judge Dabney Friedrich (a Trump appointee) ruled that the CDC's eviction and foreclosure moratorium exceeded the agency's statutory authority. This ruling has me wroth. It exemplifies the heartless disingenuousness of that masquerades as "textualism." Judge Friedrich treats the moratorium—an extraordinary response to extraordinary circumstances—as if it were a garden variety statutory interpretation exercise along the lines of "no vehicles in the park". Judge Friedrich looks at the statutory text and decides that it is "unambiguous," although the substance of her own analysis shows that it is anything but. And voila, that produces the result that the landlords and mortgagees get to create a public health risk by evicting tenants and mortgagors from their dwellings.

(more…)