COURT DATES SET FOR LAWSUIT OVER CONSTITUTIONALITY OF PUERTO RICO DEBT LAW
The judge asked to consider the constitutionality of a new Puerto Rico law that allows government-owned entities to restructure debt outside of federal bankruptcy court wants each side to make its case by October, Bloomberg News reported today. Saying that the new law depressed the value of $1.6 billion in power utility debt they hold, bond funds affiliated with Franklin Resources Inc. and Oppenheimer Rochester Funds sued Puerto Rico in June, contending that the Public Corporation Debt Enforcement and Recovery Act violates the U.S. Constitution. The law would let a commonwealth court restructure debt in processes similar to chapter 9 and chapter 11 of the U.S. Bankruptcy Code. Puerto Rico has asked U.S. District Judge Francisco A. Besosa in San Juan to dismiss the suit and declare the law constitutional. The bond funds filed a summary judgment motion this week, taking the position that undisputed facts require Judge Besosa to declare the law void, regardless of the specific circumstances under which it's applied. The judge told Puerto Rico to file papers by Sept. 12 supporting its claim that the law is constitutional. The bond funds are to file opposing papers by Oct. 6. Read more.
On ABI's latest podcast, ABI Executive Director Sam Gerdano talks with Sonia Colón and Javier Vilariño Santiago of Ferraiuoli LLC in Puerto Rico about the financial distress facing the Puerto Rico Electric Power Authority (Prepa). Puerto Rico's status as a U.S. territory does not permit Prepa to file for chapter 9 municipal bankruptcy or for chapter 11 relief. The Puerto Rican legislature in June passed the Public Corporate Debt Enforcement and Recovery Act as a way to restructure municipal debt outside of federal bankruptcy court. Bond funds of Prepa filed a lawsuit in July against the new law claiming that it is unconstitutional. Looking for a possible remedy on Capitol Hill, Rep. Pedro Pierluisi (D.-P.R.) on July 31 introduced H.R. 5305 to treat Puerto Rico as a state to allow a chapter 9 filing for the adjustment of municipal debt. Colón and Vilariño discuss Puerto Rico's new law, the case filed against it and prospects for passage of H.R. 5305. Click here to listen.
COMMENTARY: BONDS, NOT BAILOUTS, FOR "TOO BIG TO FAIL" BANKS
On Aug. 3 the Portuguese government announced a 4.9 billion Euros ($6.55 billion) bailout for Banco Espirito Santo, another reminder that the "too big to fail" doctrine still prevails six years after the financial crisis, according to a commentary in yesterday's Wall Street Journal. At least in this case, junior bondholders -- those who invested less than a year ago -- and shareholders were forced to take a haircut. That's progress for those who argue that economic recovery is impeded when monetary and fiscal authorities rescue private institutions from the consequences of their decisions. Too big to fail remains unresolved in the U.S. Last week the Federal Reserve and the Federal Deposit Insurance Corp. said that not one of the nation's 11 largest banks could fail without threatening the broader financial system. The news came after regulators reviewed the banks' "living wills," the emergency plans required under the 2010 Dodd-Frank law. Instead of living wills or government bailouts, the commentary proposes that banks issue a class of bonds to privately secure the financial system against a cascade of failures. Called Class R or "Reorganization" bonds, they would function like any other corporate-debt instrument in normal times, meaning that bondholders would have no control over the corporation. In the event of the firm's imminent failure, according to the commentary, Class R bondholders would form a committee to develop contingency plans to appoint a new board of directors and reorganize senior management. In bankruptcy, the existing board of directors would be dismissed, the equity of the firm would be eliminated and the Class R bonds would immediately be converted to equity. The Class R bondholders might take a haircut, but they would also become the owners of the bank, free of claims from prior management or shareholders. Read the full commentary. (Subscription required.)
INVESTORS PROFIT FROM FORECLOSURE RISK ON HOME MORTGAGES
The recovery in housing is fueling a niche market for newly minted bonds that are backed by the most troubled mortgages of them all: those on homes on the verge of foreclosure, the New York Times reported today. Vulture hedge funds are not the only investors swooping in to try to profit from the last remnants of the housing crisis -- mutual funds are as well. And one of the biggest sellers of severely delinquent mortgages to investors is a U.S. government housing agency. So far this year, there have been 28 deals backed by $7 billion worth of nonperforming loans sold to investors, according to Intex Solutions, a structured finance cash-flow modeling firm. Last year, Intex said, there were 72 deals backed by $11.6 billion worth of nonperforming loans. Regulatory records show that over the last two years mutual funds either offered or advised by firms like JPMorgan Chase, SEI Investments, Weitz Investments and Edward Jones have been buying unrated bonds with names like Bayview Opportunity Master Fund IIa Trust NPL, Kondaur Mortgage Asset Trust and Stanwich Mortgage Loan Trust NPL. The catalyst for the emergence of this unusual market was a decision by the Housing and Urban Development Department to begin selling some of the most severely delinquent mortgages guaranteed by the Federal Housing Administration to avoid losses to United States taxpayers. Since 2010, HUD has sold 101,290 soured home loans with a combined unpaid balance of $17.6 billion in more than a dozen auctions, and more distressed sales are planned. Read more.
ANALYSIS: TEN STATES STRUGGLING WITH DELINQUENT DEBT
A recent report from the Urban Institute found that more than one-third of Americans with credit histories faced debt collections in 2013, 247WallSt.com reported yesterday. Nearly 50 percent of Nevadans with a credit history had debt in collections as of 2013, the highest percentage in the nation. On average, these residents had $7,198 of debt in collections, defined as being at least 180 days past due, also the most in the nation. By comparison, 35 percent of Americans nationwide had debt in collection, with an average delinquent debt of $5,178. While high average levels of delinquent debt did not appear to be concentrated in any particular region, southern states were much more likely to have a higher share of people with debt in collections. Eight of the 10 states, according to the analysis, are located in the southern U.S. In all of the states with the highest percentage of residents with delinquent debt, the median household income was below the U.S. median of $51,371. Four of these states -- Alabama, Kentucky, Mississippi, and West Virginia -- were among the five lowest states by median income. Additionally, these states tended to have higher proportions of people who live below the poverty line when compared to the national benchmark. Read more.
For a look at the composition of U.S. household debt, be sure to check out ABI's Chart of the Day.
SAN DIEGO PENSION DIALS UP THE RISK TO COMBAT A SHORTFALL
A large California pension manager is using complex derivatives to supercharge its bets as it looks to cover a funding shortfall and diversify its holdings, the Wall Street Journal reported today. The new strategy employed by the San Diego County Employees Retirement Association is complicated and potentially risky, but officials close to the system say it is designed to balance out the fund's holdings and protect it against big losses in the event of a stock-market meltdown. San Diego's approach is one of the most extreme examples yet of a public pension using leverage -- including instruments such as derivatives -- to boost performance. The strategy involves buying futures contracts tied to the performance of stocks, bonds and commodities. That approach allows the fund to experience higher gains -- and potentially bigger losses -- than it would if it owned the assets themselves. The strategy would also reduce the pension's overall exposure to equities and hedge funds. The pension fund manages about $10 billion on behalf of more than 39,000 active or former public employees. Read more. (Subscription required.)
COMMENTARY: WELCOME TO THE WORLD OF "PENSION SMOOTHING"
President Barack Obama on August 8 signed a $10.8 billion transportation bill that extends a "pension-smoothing" provision for another 10 months, according to a commentary in today's Wall Street Journal. In short: companies can delay making mandatory pension contributions, but because those payments are tax-deductible, some businesses will pay slightly higher tax bills, which will help pay for the legislation. Companies with 100 of the country's largest pensions were expected to contribute $44 billion to their plans this year, but that could be slashed by 30 percent next year, estimated John Ehrhardt, an actuary at consulting firm Milliman. The government's moves could undermine its own efforts to shore up the pension system, according to the commentary. Some worry about the strain it could put on the government agency tasked with protecting the retirement of 44 million workers. "To use the federal pension insurance program to pay for wholly unrelated spending initiatives is just bad public policy," said Brad Belt, former executive director of the Pension Benefit Guaranty Corporation, the government's pension insurer. "It has adverse implications for the funding of corporate pension plans." Companies have struggled to keep up with mounting pension bills since 2008. Currently, the largest pensions have a $252 billion funding deficit, which has increased by $66 billion since the beginning of the year, estimated Ehrhardt. Read the full commentary. (Subscription required.)
NEW TO THE LAW PROFESSION? LAW FIRM RECENTLY ADD NEW ASSOCIATES TO THE RANKS? BE SURE TO PRE-ORDER ABI'S SURVIVAL GUIDE FOR THE NEW LAWYER!
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NEW CASE SUMMARY ON VOLO: PICARD V. FAIRFIELD GREENWICH; PICARD V. SCHNEIDERMAN (2D CIR.)
Summarized by David Banker of Lowenstein Sandler LLP
The U.S. Court of Appeals for the Second Circuit held that Irving Picard, the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and of the bankruptcy estate of Bernard L. Madoff (the "Madoff Trustee"), was not entitled to declaratory or injunctive relief where he sought to block the settlement of three lawsuits against "feeder funds," none of which involved BLMIS or the Madoff estate as a party. The court of appeals held that declaratory and injunctive relief to stay the settlements involving these "feeder funds," which funds were also defendants in fraudulent conveyance actions commenced by the Madoff Trustee, was not justified where the settlements involved neither suits against BLMIS and the Madoff estate nor estate property within the meaning of the Bankruptcy Code's automatic stay provisions, the SIPA and two district court orders related to the BLMIS and Madoff estates. The Court of Appeals also ruled that injunctive relief under section 105 of the Bankruptcy Code was not warranted on the grounds that Picard could not show that the BLMIS estate was likely to suffer irreparable harm if the settlements went forward as planned.
Don't miss Irving Picard's keynote, "Tales from the Madoff Bankruptcy," at ABI's 34th Annual Midwestern Bankruptcy Institute on Oct. 16-17 in Kansas City, Mo. Click here to register.
There are more than 1,400 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: EFH CREDITORS WANT ANSWERS FROM IRS
A recent blog post reported that creditors threatened with big losses in Energy Future Holdings Corp.'s bankruptcy case are demanding answers about the tax issues that they say are driving the big Dallas power seller's strategy for restructuring its $42 billion debt load.
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