Analysis: For CFOs, Defaults Can Offer Valuable Lessons

Defaults, which include bankruptcy filings, can be opportunities, not only for investors who hold senior debt, but for finance chiefs who can steer a company through the shoals of often-complicated restructurings, the Wall Street Journal reported on Tuesday. “I think it’s an excellent experience for a CFO to go through a distressed period,” said Charles Goldstein, managing director and leader of the restructuring- and litigation-services group at consulting firm Protiviti.  Katie Scherping said she agreed to join Denver-based Quiznos as CFO in 2013 only if the sandwich chain took the appropriate steps toward a bankruptcy filing. She had worked through a restructuring at another company, and “completely understood the benefits of a chapter 11.” Up through last week, 74 U.S. public and private companies had defaulted this year, according to S&P Global Ratings, surpassing the number in each of the past five years and accounting for two-thirds of the global total. By comparison, there were 201 global corporate defaults during the financial crisis in 2009 by this point in the year. S&P expects a further increase in defaults — which, in addition to bankruptcies, include missing an interest payment, exchanging debt or undertaking another kind of restructuring. The debt-rating company expects problems to continue in the energy and natural-resources industries, which have accounted for 53 percent of worldwide defaults this year. That’s one reason why CFOs need to “anticipate and be opportunistic about” refinancing or exchanging debt, said Diane Vazza, managing director for S&P Global Ratings’ global fixed income research group.

Suing a Debt Collector? Now It Can Buy Your Lawsuit

Can a debt collector accused of crossing the line avoid liability by buying a consumer’s legal claim out from under her? A federal judge in Las Vegas said yes, according to a Bloomberg Businessweek analysis. In March 2015, Patricia Arellano of Las Vegas received a notice from Clark County Collection Service (CCCS), a private debt collector seeking $370 in overdue medical bills. Arellano didn’t respond. CCCS went to court and obtained a default judgment against her. The bill grew to about $800, with costs and fees. Next, Arellano sued CCCS under the federal Fair Debt Collection Practices Act. She alleged that the company had been misleading about how much time she had to fight the collection effort. She also alleged that CCCS's name illegally implied that it was affiliated with the government of Clark County, Nev., when in fact it was not. Seeking to enforce its judgment, CCCS obtained a “writ of execution” under which the sheriff of Clark County was obliged to sell off Arellano’s property, but not just her physical property: The writ also covered her pending legal claim against CCCS. In an auction held last November on the steps of the Clark County courthouse, Arellano’s claim against CCCS under the Fair Debt Collection Practices Act was sold for $250. CCCS was the buyer. A few months later, CCCS asked a federal judge to dismiss the fair-debt collection claim on the theory that CCCS didn’t want to sue itself. Arellano opposed the motion. U.S. District Judge Jennifer Dorsey noted that the case “presented an interesting situation” and then ruled for CCCS, effectively killing Arellano’s lawsuit.

Commentary: Clawing Back Tuition Payments

Bankruptcy Judge Melvin Hoffman (D. Mass.) recently held that tuition payments made for an adult child's education while the parents are insolvent are not constructively fraudulent, but there seem to be courts on both sides of this issue (although apparently no circuit decisions yet), according to a Credit Slips commentary yesterday. In the case of In re Palladino, the debtors made tuition payments for their adult daughter's college education. There was no question that the debtors were insolvent when they made payments or that they did so within the last two years. The only question was whether the debtors received reasonably equivalent value (REV) under § 548 of the Bankruptcy Code (and Massachusett's UFTA). That section defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." Sect. 548(a)(2)(A). Courts have interpreted REV as requiring an economic benefit, which could be indirect, but has to be "concrete" and "quantifiable."


To read more about bankruptcy and student loan debt, be sure to pick up a copy of ABI’s Graduating with Debt: Student Loans under the Bankruptcy Code.
 

Homes Going into Foreclosure Hit 11-Year Low in July

Foreclosure starts decreased in July to their lowest level since May 2005, according to ATTOM Data Solutions, the new parent company of RealtyTrac, HousingWire.com reported yesterday. Banks started on the public foreclosure process on 36,863 residential properties nationwide in July, a decrease of 5 percent from last month and 19 percent from last year. Banks completed the foreclosure process through repossession on 27,907 properties in July, down 8 percent from last month and down 41 percent from last year to the lowest level since January 2015. Other reports show that foreclosure inventory declined in June, but completed foreclosures, while down from last year, increased from last month, according to CoreLogic, a property information, analytics and data-enabled solutions provider. The state with the highest foreclosure rate in July was Delaware, with one in every 570 housing units in foreclosure.

Study: SEC Enforcement Actions Trail Last Year's Record Numbers​

Enforcement activity at the Securities and Exchange Commission has slowed, according to a new study, Investment News reported yesterday. In the current fiscal year, the agency is behind its record-setting pace of fiscal 2015, a Cornerstone Research report shows. The agency has filed 508 enforcement actions through the first three quarters of fiscal 2016, a decrease of 8 percent from last year. At the current rate, the agency will file approximately 735 actions in fiscal 2016, compared to 807 in fiscal 2015. The SEC follows the government's fiscal year, which begins on Oct. 1 and ends on Sept. 30. The drop-off was pronounced in the third quarter (April 1 through June 30) at 160 cases, compared to 238 in the same quarter last year.


Click here to read the full report.

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