Banking and Finance Law Commons^™

Debt-Buyer Lawsuits And Inaccurate Data, Peter A. Holland

Faculty Scholarship

Pursuant to secret purchase and sale agreements (also known as forward flow agreements), the accounts that banks sell to debt buyers are often sold “as is,” with explicit and emphatic disclaimers that the debts may not be owed, the amounts claimed may not be accurate, and documentation may be missing. Despite their full knowledge that the accuracy and completeness of the data has been specifically disclaimed by the bank, when they sue consumers, debt buyers tell courts that the information obtained from the bank is inherently reliable and accurate. In order to avoid a fraud on the courts, the contents …

Securitization Of Aberrant Contract Receivables, Thomas E. Plank

Chicago-Kent Law Review

Originators of traditional receivables, such as automobile loans, use securitization and structured finance debt transactions to obtain financing at lower net costs than traditional secured financing. The typical securitization or structured finance debt transaction combines (i) a sale of receivables to a separate, bankruptcy remote, special purpose legal entity (an “SPE”) and (ii) a loan to the SPE secured by the receivables. This combination produces lower net financing costs because the SPE’s lender can obtain repayment of its loan from the receivables while avoiding the costs that the Bankruptcy Code imposes on direct secured lenders to originators that could become …

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

Derivatives And Collateral: Balancing Remedies And Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

A People’S History Of Collective Action Clauses, Mark C. Weidemaier, Mitu Gulati

Faculty Scholarship

For two decades, collective action clauses (CACs) have been part of the official-sector response to sovereign debt crisis, justified by claims that these clauses can help prevent bailouts and shift the burden of restructuring onto the private sector. Reform efforts in the 1990s and 2000s focused on CACs. So do efforts in the Eurozone today. CACs have even been suggested as the cure for the US municipal bond market. But bonds without CACs are still issued in major markets, so reformers feel obliged to explain why they know better. Over time, a narrative has emerged to justify pro-CAC reforms. It …

Clearinghouses As Liquidity Partitioning, Richard Squire

Faculty Scholarship

To reduce the risk of another financial crisis, the Dodd-Frank Act requires that trading in certain derivatives be backed by clearinghouses. Critics mount two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. This Article’s observation that clearinghouses engage in liquidity partitioning answers both. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short-term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the …

Rolling Back The Repo Safe Harbors, Edward R. Morrison, Mark J. Roe, Christopher S. Sontchi

Faculty Scholarship

Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code's normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could …

Rollover Risk: Ideating A U.S. Debt Default, Steven L. Schwarcz

Faculty Scholarship

This article examines how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. To that end, the article differentiates defaults caused by insolvency from defaults caused by illiquidity. The latter, which are potentiated by rollover risk (the risk that the government will be temporarily unable to borrow sufficient funds to repay its maturing debt), are not only plausible but have occurred in the past. Moreover, the ongoing controversy over the federal debt ceiling and the rise of the shadow-banking system make these types of defaults …

Contract Hope And Sovereign Redemption, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

Sovereign immunity has served as a partial substitute for bankruptcy protection, but it has encouraged a minority of creditors to pursue unorthodox legal remedies with spillover effects far beyond the debtor-creditor relationship. The attempt to enforce Argentina’s pari passu clause in New York is an example of such a remedy, which relies primarily on collateral damage to other creditors and market infrastructure to obtain settlement from a debtor that would not pay. The District Court decision, now on appeal before the Second Circuit, may not make holding out more attractive in future restructurings – but it would make participation less …

Improving The Lives Of Individuals In Financial Distress Using A Randomized Control Trial: A Research And Clinical Approach, Lois R. Lupica, Dalie´ Jimenez, D. James Greiner, Rebecca L. Sandefur

Faculty Publications

This Article describes an ambitious Randomized Control Trial (RCT) in the area of consumer debt collection. Randomized trials are the same kind of evaluation that the law requires (or at least strongly encourages) before new drugs and medical devices may be sold to the public. Although they have not yet gained widespread popularity in the evaluation of legal systems, randomized trials are uniquely effective ways of assessing whether any benefits observed after implementation of legal or educational assistance programs are really due to those programs as compared to other factors, such as unusual levels of competence or motivation of program …

Economics Of Bankruptcy – Introduction, Edward R. Morrison

Faculty Scholarship

This essay surveys important contributions to the economics of bankruptcy. It is an introductory chapter for a forthcoming volume (from Edward Elgar Press) that compiles the work of legal scholars as well as economists working in the field of corporate finance. The essay begins with the foundational theories of Baird, Jackson, and Rea and then collects scholarly work extending, testing, or revising those theories. At various points I identify questions that merit further study, particularly empirical testing.

Custodial Requirements For Customer Funds, Jerry W. Markham

Faculty Publications

A series of bankruptcies by large financial institutions in recent years resulted in massive shortages of customer funds. The first of those failures, Refco, Inc. (Refco), occurred in 2005 after the exposure of a massive fraud by its officers. That debacle was followed in 2007 by the failure of Sentinel Management Group, Inc. (Sentinel), which had used several hundred million dollars of customer assets to leverage the firm's trading position. The failure of Lehman Brothers Holdings Inc. (Lehman or Lehman Brothers) during the Financial Crisis in 2008 was the largest bankruptcy in U.S. history and resulted in extensive litigation over …

Ring-Fencing, Steven L. Schwarcz

Faculty Scholarship

“Ring-fencing” is often touted as a regulatory solution to problems in banking, finance, public utilities, and insurance. However, both the precise meaning of ring-fencing, as well as the nature of the problems that ring-fencing regulation purports to solve, are ill defined. This article examines the functions and conceptual foundations of ring-fencing. In a regulatory context, the term can best be understood as legally deconstructing a firm in order to more optimally reallocate and reduce risk. So utilized, ring-fencing can help to protect public-benefit activities performed by private-sector firms, as well as to mitigate systemic risk and the too-big-to-fail problem inherent …

Rejection Of Nonresidential Leases Of Real Property In Bankruptcy: What Happens To The Mortgagee's Security Interest? , William E. Winfield

Pepperdine Law Review

No abstract provided.

Standing To Sue A Carrier's Killers , Davis J. Howard

Pepperdine Law Review

No abstract provided.

Mandatory Class Action Lawsuits As A Restructuring Technique, Bryant B. Edwards, Jeffrey A. Herbst, Selina K. Hewitt

Pepperdine Law Review

No abstract provided.

Can A Secured Creditor Be Denied The Right To Credit Bid When The Creditor’S Collateral Is Sold Pursuant To A Chapter 11 Plan Of Reorganization?, Marshall E. Tracht

Articles & Chapters

CASE AT A GLANCE

A bankruptcy plan can only be confirmed over the objection of a secured creditor if the plan is found to be “fair and equitable.” The fair and equitable standard requires, at a minimum, that (i) the creditor may retain its lien on its collateral; (ii) the collateral will be sold subject to the creditor’s right to credit bid its debt; or (iii) the creditor will receive the “indubitable equivalent” of its claim. The Supreme Court must decide whether a plan can provide for the sale of collateral without granting the creditor the right to credit bid …

Misbehavior And Mistake In Bankruptcy Mortgage Claims: Some Caveats Regarding The Porter Study, Gregory S. Crespi

Faculty Journal Articles and Book Chapters

This Article reviews the comprehensive empirical study of the bankruptcy mortgage foreclosure process conducted by Professor Katherine Porter and subsequently published in 2008 in the Texas Law Review. The results of her study, which analyzed 1,768 proof of claim submissions filed in a sample of 1,733 Chapter 7 bankruptcy proceedings, strongly suggest that there is a pervasive failure on the part of mortgage creditors to meet all of the formal documentation requirements for filing such bankruptcy claims. This documentation failure arguably impedes many mortgage debtors or bankruptcy trustees from reviewing these claims for their accuracy.

Porter's conclusion that the itemization …

Bankruptcy, Backwards: The Problem Of Quasi-Sovereign Debt, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

This Feature considers the debts of quasi-sovereign states in light of proposals to let them file for bankruptcy protection. States that have ceded some but not all sovereign prerogatives to a central government face distinct challenges as debtors. It is unhelpful to analyze these challenges mainly through the bankruptcy lens. State bankruptcy posits an institutional fix for a problem that remains theoretically undefined and empirically contested. I suggest a way of mapping the problem that does not work back from a solution. I highlight the implications of sovereign immunity, immortality, concurrent authority, macroeconomic policy, and democratic accountability for quasi-sovereign debt …

Cars In Chapter 13: Does Negative Equity Destroy The Jurisdiction Of The Hanging Paragraph, David G. Carlson

Articles

Roughly speaking, the “hanging paragraph” to Bankruptcy Code 1325(a), enacted in 2005, requires that a debtor pay the full debt on any automobile acquired within 910 days before bankruptcy – a boon for car financiers. Prior to 2005 the debtor had to pay only the appraised value of the car – usually a lesser amount. But the privilege bestowed on car financiers by the hanging paragraph depends on the financier providing “purchase money” credit. About one-third of the time, however, the financier advances funds to repay a prior car loan as part of the “trade-in” of an old vehicle for …

A Test Case In International Bankruptcy Protocols: The Lehman Brothers Insolvency, Jamie Altman

San Diego International Law Journal

Part II of this Article, explains the competing theories underlying bankruptcy systems: universalism and territorialism. Part III details various statutory solutions to international bankruptcy problems. Next, Part IV analyzes the provisions of the Lehman Protocol in depth. Part V then examines the precedent upon which the Lehman Protocol relies. Part VI assesses potential threats to the Protocol?s success. This leads to Part VII, which contains suggestions for future protocols. Finally, Part VIII concludes.

Living Wills And Pre-Commitment, Adam Feibelman

American University Business Law Review

No abstract provided.

Why Banks Are Not Allowed In Bankruptcy, Richard M. Hynes, Steven D. Walt

Washington and Lee Law Review

Unlike most other countries, the United States uses different Procedures to resolve insolvent banks and nonbank firms. The Bankruptcy Code divides control over nonbank firms among the various claimants, and a judge supervises the resolution process. By contrast, the FDIC acts as the receiver for an insolvent bank and has almost complete con trol. Other claimants can sue the FDIC, but they cannot obtain injunctive relief and their damages are limited to the amount that they would have received in liquidation. The FDIC has acted as the receiver of insolvent banks since the Great Depression, and the concentration of power …

Assessing The Chrysler Bankruptcy, Mark J. Roe, David Skeel

Michigan Law Review

Chrysler entered and exited bankruptcy in forty-two days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo-sale of its main assets to a new government-funded entity. The unevenness of the compensation to prior creditors raised concerns in capital markets, which we evaluate here. We conclude that the Chrysler bankruptcy cannot be understood as complying with good bankruptcy practice, that it resurrected discredited practices long thought interred in the …

Simultaneous Distress Of Residential Developers And Their Secured Lenders An Analysis Of Bankruptcy & Bank Regulation , Sarah Pei Woo

Fordham Journal of Corporate & Financial Law

No abstract provided.

The Tenth Annual A. A. Sommer, Jr. Lecture On Corporate, Securities, & Financial Law, Elisse B. Walter

Fordham Journal of Corporate & Financial Law

No abstract provided.

Ask The Professor: Portfolio Margining – How Will Dodd-Frank Impact Its Utilization?, Ronald Filler

Articles & Chapters

This article analyzes the background and current status of portfolio margining, how it has evolved over the past several years, and how the recent Dodd-Frank Act will impact its utilization and effectiveness. Portfolio margining allows a broker-dealer to analyze a client's total overall portfolio from a risk-based analytical model, establishing the proper minimum initial margin requirements for the entire portfolio applying certain parameters. To be a more effective tool, changes to the U.S. Bankrupcty Code were needed. The Dodd-Frank Act made those legislative changes. It's now up to the regulators to make portfolio margining an even more effective and utilized …

Saving Up For Bankruptcy, Ronald J. Mann, Katherine Porter

Faculty Scholarship

Bankruptcy is a numbers game. Policymaking, public perception, and the scholarly literature are captivated with the number of annual bankruptcy filings, which hit one million in 2008. The number of annual bankruptcy filings has become a barometer of economic health, reflecting an implicit assumption that bankruptcy is a useful proxy for financial distress.

But at the level of the individual family, the causative relation between financial distress and bankruptcy filings is unclear. On the one hand, only a fraction of those in serious financial distress will ever file for bankruptcy. For example, a study by Michelle White examined a group …

Home Foreclosures: Will Voluntary Mortgage Modification Help Families Save Their Homes? Part Ii? : Hearing Before The H. Comm. On The Judiciary Subcomm. On Commercial And Administrative Law, 111th Cong., Dec. 11, 2009 (Statement Of Associate Professor Adam J. Levitin, Geo. U. L. Center), Adam J. Levitin

Testimony Before Congress

The results to date from MHAP are deeply disappointing. Even the most optimistic view of HAMP and HARP’s potential would now project the programs as having only a minor impact on the foreclosure crisis. Until and unless the problems of unemployment; negative equity, and servicer capacity, incentives, and contract restrictions are addressed, we are unlikely to see noticeably different results. These issues cannot be addressed within the current structure of HAMP.

Unfortunately, none of the solutions for foreclosures due to unemployment are particularly satisfying, and without addressing unemployment, foreclosures will remain at elevated levels. Bankruptcy presents possible solutions to negative …

The End Of The (Virtual) World, Joshua A.T. Fairfield

West Virginia Law Review

No abstract provided.