HOUSE JUDICIARY COMMITTEE HEARING EXAMINES CHAPTER 11 REFORM, SAFE HARBORS
The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing yesterday titled "Exploring Chapter 11 Reform: Corporate and Financial Institution Insolvencies; Treatment of Derivatives." ABI members Prof. Michelle Harner, the official reporter for ABI's Commission to Study the Reform of Chapter 11, Bankruptcy Judge Christopher Sontchi (D. Del.), Seth Grosshandler of Cleary Gottlieb (New York) and Jane Vris of Millstein & Co. (New York) are among the witnesses that testified at the hearing. Grosshandler serves as co-chair of the Commission's Advisory Committee on Financial Contracts, and Judge Sontchi serves a a committee member. Judge Sontchi recommended a narrowing of the § 546(e) safe harbor as to officer and director preference and fraudulent conveyance defenses. He also recommended a scaling back of the safe harbor for repurchase agreements. Grosshandler testified that substantially narrowing the safe harbor would have significant negative effects on counterparties and markets. To access all of the prepared statements from the hearing, please click here.
ANALYSIS: PITFALLS OF REVERSE MORTGAGES MAY PASS TO BORROWERS' HEIRS
A growing number of children of elderly borrowers are learning that their parents' reverse mortgages are now threatening their own inheritances, according to an analysis in today's New York Times. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes that does not need to be paid back until they move out or die, have long posed pitfalls for older borrowers. Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages. Some lenders are moving to foreclose just weeks after the borrower dies, many families say. The complaints are echoed by borrowers across the country, according to a review of federal and state court lawsuits against reverse mortgage lenders. Read more.
PROPOSED HOUSING BILL WOULD CREATE A CO-OP OF MORTGAGE LENDERS
Rep. Maxine Waters (D-Calif.), the ranking member of the Financial Services Committee, unveiled a proposal today to make the mortgage lending system more like a public utility, by creating a co-op of lenders that would be the sole issuer of mortgage-backed securities guaranteed by the government, the New York Times reported today. Such a system would significantly differ from those proposed by the major bills in the Senate, which would allow banks and bond guarantors to participate independently in the market. Both Waters's proposal and the Senate ones would establish a new federal regulator. The Waters bill would require private backers to take the first 5 percent loss before the government guarantee kicks in. By contrast, the latest Senate bill, by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and ranking member Mike Crapo (R-Idaho), requires private capital to take the first 10 percent loss. Some economists say that during the housing crisis, Fannie Mae and Freddie Mac, which were formally taken over by the government in 2008 and now back the overwhelming majority of home mortgages, sustained a 4 percent loss, though the amount is in dispute. Setting the right levels of loss is a balancing act: The higher the loss requirement for the system's private backers, the more expensive mortgages would be for home buyers, but the less vulnerable taxpayers would be in another crisis. Waters's proposal would set the same guidelines for minimum down payments -- 3.5 percent for a first-time buyer and 5 percent for everyone else -- as the Johnson-Crapo bill, but would allow the regulator to lower those requirements at its discretion. Read more.
ANALYSIS: $1 TRILLION NATIONWIDE STUDENT LOAN DEBT WIDENS U.S. WEALTH GAP
Nearly 37 million U.S. students saddled with $1 trillion in student debt may never catch up with their wealthy peers who began life after college free from the burden of student loans, the Associated Press reported today. Graduates who can immediately begin building equity in housing or stocks and bonds get more time to see their investments grow, while indebted graduates spend years paying the principal and interest on the loans. The standard student loan repayment schedule is 10 years but can be much longer. The median 2009 net worth for a household without outstanding student debt was $117,700, nearly three times the $42,800 median net worth of a household with outstanding student debt, according to a report. About 40 percent of households led by someone 35 or younger have student loan debt, a 2012 Pew Research Center analysis of government data found. Student debt is the only kind of household debt that rose through the Great Recession and now totals more than either credit card or auto loan debt, according to the Federal Reserve Bank of New York. Both the number of borrowers and amount borrowed ballooned by 70 percent from 2004 to 2012. Read more.
The Senate Health, Education, Labor and Pensions Committee held a hearing today titled "Strengthening the Federal Student Loan Program for Borrowers." To view the witness list and read the prepared statements, please click here.
For additional perspectives on the student loan debt crisis, be sure to attend ABI's Student Loan Debt Crisis Symposium on May 30 at the Georgetown University Law Center. To register or for more information, please click here.
REPORT: SHAREHOLDERS CHALLENGED 94 PERCENT OF U.S. PUBLIC-COMPANY DEALS LAST YEAR
Cornerstone Research, a litigation consulting firm, reported that shareholders challenged 94 percent of U.S. public-company deals last year, up from 44 percent in 2007, the Wall Street Journal reported today. The average deal now faces five lawsuits, often filed in different state and federal courts. The vast majority of these cases settle with no bump in the deal price. Instead, companies agree to disclose more details and pay shareholders' attorneys' fees, which averaged $500,000 last year, according to Cornerstone. In return, they can close their mergers without the threat of long court battles. Critics say that the system benefits plaintiffs' lawyers, who collect hundreds of thousands of dollars in fees, and defendant companies, who get peace of mind for what amounts to a rounding error in deals that are often valued in the billions. Out of more than 380 challenged deals since 2011, only four -- about 1 percent -- yielded more money for shareholders in court, according to Cornerstone. Some critics warn that the increase in litigation may actually hurt shareholders by burying real cases of misconduct within a flood of filings. Read more. (Subscription required.)
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ABI MEMBERS WELCOME TO ATTEND TOMORROW'S "THE LEGACY OF MR. PONZI: THE MADOFF AND STANFORD CASES" PROGRAM PRESENTED BY THE AMERICAN COLLEGE OF BANKRUPTCY
The American College of Bankruptcy First Circuit Fellows will present "The Legacy of Mr. Ponzi: the Madoff and Stanford Cases" program from 1-4 p.m. ET on Friday, March 28, at the Boston College Law School in Newton, Mass. The program will include a panel discussion featuring the Madoff trustee, a co-Liquidator of Stanford International Bank, and reporters from the New York Times and Associated Press who covered the Madoff and Stanford cases. There is no charge to attend the program. For more information or to register, please click here.
NEXT WEEK: LEADING SCHOLARS TO PRESENT RESEARCH AND PROPOSALS FOR POTENTIAL CHAPTER 11 REFORMS AT THE ABI ILLINOIS SYMPOSIUM ON CHAPTER 11 REFORM
Advancing the dialogue on important reform issues in conjunction with ABI's Commission to Study the Reform of Chapter 11, ABI and the University of Illinois College of Law have assembled leading scholars to present academic papers on issues related to the Commission's work. Scholars will present papers and debate the consequences of the increased importance of secured credit to modern restructuring law to members of the Commission and fellow scholars at the ABI Illinois Symposium on Chapter 11 Reform at the Kirkland & Ellis Conference Center in Chicago on April 3-5. The papers presented at the Symposium will be published in a forthcoming issue of the University of Illinois Law Review.
For a schedule containing a list of all presenters and commentators at the Symposium and to register, please click here.
NEW CASE SUMMARY ON VOLO: STOEBNER V. SAN DIEGO GAS & ELECTRIC CO. (IN RE LGI ENERGY SOLUTIONS INC.; 8TH CIR.)
Summarized by Lars Fuller of Baker & Hostetler LLP
The Eighth Circuit affirmed the BAP's allowance of new value as a preference offset, but reduced the amount of preference liability based on an incorrect calculation by the BAP. In an issue of first impression, the Eighth Circuit ruled that in three-party relationships where the debtor's preferential transfer to a third party benefits the debtor's primary creditor, new value to the debtor can come from the primary creditor, even if the third party is a creditor in its own right and is the only defendant against whom the debtor has asserted a claim of preference liability.
There are more than 1,200 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: SOME QUESTIONS ABOUT THE NEW YORK FED'S TBTF RESEARCH
A recent blog post poses a few questions about the New York Federal Reserve's recent report titled "Evidence from the Bond Market on Banks' 'Too-Big-to-Fail' Subsidy," which concluded that the top 5 banks (the ones assumed to be "too big to fail") have lower funding costs than smaller banks.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
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