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Puerto Rico’s Bankruptcy Case Casts a Shadow on Billions in Municipal Bonds

ABI Bankruptcy Brief

May 23, 2019

 
ABI Bankruptcy Brief
 
NEWS AND ANALYSIS

Puerto Rico’s Bankruptcy Case Casts a Shadow on Billions in Municipal Bonds

Moody’s said last week that it is reviewing $14 billion of municipal special-revenue bonds, because the bonds’ issuers are rated several notches higher than the cities where they operate, Barron's reported. It has an Aa3 rating on the electric utility that serves Sheffield, Ala., while the city of Sheffield itself is rated A3, three tiers below that. Analysts at Fitch are reviewing their ratings on seven series of special-revenue bonds, including the debt issued by the Chicago Board of Education. The court ruling that caused the reviews is part of Puerto Rico’s sprawling bankruptcy case. It concerns roughly $6 billion of debt owed by the Puerto Rico Highways and Transportation Authority, or PRHTA. The PRHTA bonds are backed by transportation-related revenue such as gas taxes, highway tolls and vehicle license fees. The Commonwealth hasn’t made payments on that debt since mid-2017, when the island’s Financial Management & Oversight Board approved a plan to divert PRHTA revenue into its general revenue account. In short, the ruling undermines the market’s view that special-revenue bonds were reliable safe harbors in a municipal bankruptcy. The bonds have provided higher recoveries than other bonds in previous municipal bankruptcies, Moody’s said.



U.S. Card Delinquency Starts to Tick Upward

U.S. card delinquency among the Top 100 U.S. issuing banks gained another five basis points in the first three months of 2019, CardTrak.com reported. Robert McKinley, Senior Analyst for CardTrak, CardFlash and CardData, noted that the explosion in the issuance of sub-prime credit cards to consumers with credit scores below 660, and the possibility of rising unemployment in late 2019 and through 2020, is especially concerning to U.S. issuers. Major credit card issuers have begun to tighten underwriting and boost loan-loss reserves, according to RAM Research.

Trump Administration Unveils New $16 Billion Aid Package for American Farmers Hit in Trade War

The Trump Administration announced a new $16 billion farm aid package to offset losses from the U.S. trade war with China, the Washington Post reported. According to Agriculture Secretary Sonny Perdue, “China is going to pay for this $16 billion through tariffs coming in” and that “the revenue we’re receiving is what the president has intended to fund the farmers who are being hurt by these retaliatory tariffs.” It will be the second bailout for farmers connected to Trump’s tariff showdowns with China, Mexico and other countries. The Trump administration announced $12 billion in emergency measures last July. Perdue acknowledged today that U.S. farmers have been hit hard by the escalating trade fight with Beijing, and accused China of targeting the president in advance of his 2020 re-election bid.



The "Family Farmer Relief Act of 2019" has been introduced in both the Senate (S. 897) and the House (H.R. 2336) to increase the debt limits from $3.2 million to $10 million for family farmers looking to file for chapter 12 protection. To view the full bill text of both pieces of legislation, please click here.

In related news, the new round of tariffs will cost the typical American household an extra $831 annually, according to research from the New York Federal Reserve. Tariffs on $200 billion of U.S. imports from China subject to earlier 10 percent levies increased to 25 percent beginning May 10, 2019, after a breakdown in trade negotiations. A previous New York Fed study found that the 2018 tariffs imposed an annual cost of $419 for the typical household. Click here to read more.

SEC Accuses Major U.S. Landlord of Running ‘Ponzi Scheme-Like’ Scam

The federal government accused one of the nation’s largest landlords of running a “Ponzi scheme-like” effort using cash from small investors and of misleading banks to obtain bigger loans by using fake loan documents, the Wall Street Journal reported today. The Securities and Exchange Commission filed civil charges against Robert C. Morgan, who amassed an empire of more than 140 properties and 34,000 units across 14 states, according to the website of his firm, Morgan Management. The Justice Department yesterday also unveiled criminal charges accusing Morgan of conspiracy to commit bank fraud, wire fraud and money laundering. The SEC said Morgan raised $110 million from more than 200 mostly small investors beginning in 2013, promising them a target return of 11 percent. Morgan used most of the cash as a “fraudulent slush fund” to pay previous investors, the SEC said. In one instance, the SEC said cash was used to pay off an $11 million loan that Morgan allegedly obtained by falsifying financial information on a property in Pennsylvania. (Subscription required.)

Dismissal of Suit Against Debt-Collection Firm Was Premature, Third Circuit Rules

The U.S. Court of Appeals for the Third Circuit has reopened a suit claiming a law firm specializing in consumer collections tacked unauthorized charges onto the amounts owed by debtors, the New Jersey Law Journal reported. The appeals court said a U.S. District Court judge in Camden, N.J., dismissed the suit against Lyons, Doughty & Veldhuis of Mount Laurel without giving the plaintiff’s lawyer a chance to respond to an argument made on the firm’s behalf. And the Third Circuit judges disagreed with the assertion by lawyers for Lyons Doughty that any error made by the judge below was a harmless one. The suit, filed in January 2017 by Nestor Saroza on behalf of himself and others similarly situated, claims that Lyons Doughty inflated the amount owed, in violation of the Fair Debt Collection Practices Act. When the firm sued Saroza in Hudson County Superior Court for a $9,971 balance on his Capital One credit card, it added an unitemized charge of $82 for filing and service costs onto the amount owed, in violation of the FDCPA, Saroza’s suit claimed. Lyons Doughty filed a motion to dismiss, or, in the alternative, a motion for summary judgment. The motion referenced a consumer agreement stating that Capital One was entitled to recover its court costs from Saroza. The motion raised two claims — that Saroza failed to allege that the matter concerned a consumer debt, as required by the FDCPA, and that a collection letter sent to Saroza, which added the $82 fee to the amount owed by Saroza, was accurate because of the Capital One statement. But Lyons Doughty later withdrew the second claim, leaving only the aspect of the Lyons Doughty motion to dismiss based on Saroza’s failure to allege a consumer debt.

ABI Podcast #230 Features Experts Discussing the SCOTUS Decision in Tempnology

ABI Editor-at-Large Bill Rochelle talks with Bankruptcy Judge Kevin Carey (D-Del.; Wilmington), Paul Hage of Jaffe Raitt Heuer & Weiss (Southfield, Mich.) and Lindsay Milne of Bernstein Shur (Portland, Maine) about the Supreme Court's decision in Mission Product Holdings Inc. v. Tempnology, LLC (17-1657). On May 20, the Court held that rejection of an executory trademark license does not bar the licensee from continuing to use the mark. Ms. Milne represented the party that prevailed in the Supreme Court. Click here to listen to the podcast.

For further analysis of the case, past petitions and brief, please click here.

Former ABI President Releases EP on Spotify/iTunes

As chair of Pachulski Stang Ziehl & Jones’s postconfirmation practice group, Andy Caine oversees the entire spectrum of claims and avoidance litigation for debtors, creditors' committees, trustees, liquidation or post-confirmation trusts, and defendants, from “mega cases” to smaller, individual matters. He served as ABI President from 2002-03. Andy is also an accomplished musician, singer and songwriter. He has just released an EP of his work on Spotify and iTunes.

Click here to listen on Spotify.

Click here to listen on iTunes.

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New on ABI’s Bankruptcy Blog Exchange: FDIC, Payday Lenders Agree to Settle Choke Point Lawsuit

As part of the deal, the agency summarized its policy on account terminations and issued a letter acknowledging that some employees “acted in a manner inconsistent with FDIC policies with respect to payday lenders,” according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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