Chicago Fed Predicts Detroit Filing to Impact Muni Markets for Years

ABI Bankruptcy Brief | October 24, 2013

October 24, 2013

NEWS AND ANALYSIS

CHICAGO FED PREDICTS DETROIT FILING TO IMPACT MUNI MARKETS FOR YEARS

As the hearing to consider Detroit's chapter 9 eligibility is underway in bankruptcy court, a commentary in the November edition of the Chicago Fed Letter found that the filing has had little impact on the cost of municipal financing outside of Michigan, but it has the potential to set a number of precedents with far-reaching consequences. Apart from Michigan municipalities, the market reaction to the Detroit bankruptcy filing has been negligible, the commentary found. In the week following the Detroit Emergency Manager's June 14, 2013, proposal to subordinate general obligation (GO) bonds, the difference (spread) between the yield on the nationwide Standard & Poor's (S&P) Municipal Bond General Obligation Index (SAPIGO) and the yield on ten-year U.S. Treasury bonds declined 8 basis points. The SAPIGO-ten-year U.S. Treasury bond yield spread did increase by 9 basis points the day after Detroit's chapter 9 filing on July 18 but quickly returned to its pre-bankruptcy level. In contrast, the spread between the yield on the S&P Municipal Bond Michigan General Obligation Index (SAPIMIG) and the yield on SAPIGO increased 14 basis points following the EM proposal. The spread further jumped by 29 basis points on the day after Detroit's bankruptcy filing and has remained elevated since, suggesting that the filing has had a material impact on borrowing costs of Michigan municipal issuers. To date, Detroit's bankruptcy filing has had little impact on the cost of municipal financing outside of Michigan, but the case has the potential to set a number of precedents, such as with the treatment of pension and other post-employment benefit obligations vis-a-vis bonded debt, the degree of protection afforded by state constitutions, and the value of the unlimited tax pledges approved by the electorate. The commentary contends that the resolution of these issues in court will change the shape of municipal financial markets for years to come. Click here to read the full commentary.

FIRMS FIGHT HOWREY ESTATE ON UNFINISHED BUSINESS CLAIMS

As the Howrey estate rakes in settlements, a handful of firms are still trying to tear down a controversial bankruptcy doctrine that has vexed the legal industry for years, The Recorder reported today. Six firms that hired former Howrey partners urged Bankruptcy Judge Dennis Montali yesterday to dismiss the claims filed against them by the now-defunct firm's bankruptcy trustee, Allan Diamond. Suing under the unfinished business doctrine, Diamond is seeking to recover profits from the work that former Howrey partners brought with them to their new firms, arguing that it is property of the estate. But the law firm defendants insist that the claims go against legal ethics rules, which favor clients' unfettered freedom to hire and fire legal counsel. The law in Washington D.C., which governs Howrey's partnership agreement, also shuns rules that restrict clients' ability to choose their counsel, said Pillsbury Winthrop Shaw Pittman partner David Keyko, who argued on behalf of his firm. Hogan Lovells, Jones Day and Haynes and Boone argued their motions to dismiss independently before Montali. Earlier in the day, Pillsbury, Neal Gerber & Eisenberg and Kasowitz, Benson, Torres & Friedman presented a joint motion to dismiss the unfinished-business claims against them. The coalition shrunk this week when Ropes & Gray, Venable and Shearman & Sterling informed the court that they had settled with Diamond, who has netted more than $2 million in settlements this week. Read more. (Subscription required.)

REPORT: MOST AMERICANS ACCUMULATING DEBT FASTER THAN THEY'RE SAVING FOR RETIREMENT

A new report has found that a majority of Americans with 401(k)-type savings accounts are accumulating debt faster than they are setting aside money for retirement, further undermining the nation's troubled system for old-age saving, the Washington Post reported today. Three in five workers with defined contribution accounts are "debt savers," according to the report released today, meaning that their increasing mortgages, credit card balances and installment loans are outpacing the amount of money they are able to save for retirement. Currently, workers with retirement savings accounts put aside more than 11 percent of their pay for retirement -- 5 percent in their own accounts, and 6.2 percent in Social Security. Despite that -- and despite the $2.5 trillion the report says employers have poured into defined contribution accounts from 1992 to 2012 -- the retirement readiness of most Americans has been slipping, according to the report by HelloWallet, a Washington, D.C.-based firm that offers technology-based financial advice to workers and conducts research of economic behavior. The report found that the amount of money that households nearing retirement are dedicating to pay down debts has increased 69 percent over the past two decades. Households headed by people ages 55 to 64 now spend 22 cents of each dollar to pay off old loans -- about the same percentage as younger people, according to the report. Read more.

FDIC SAYS INSURANCE FUND'S GROWTH UNLIKELY TO ALTER BANK RATES

The Federal Deposit Insurance Corp. said that it is unlikely to change the rates banks pay for insurance that guarantees customer deposits even as the fund continues to stay on track to meet deadlines for its health, Bloomberg News reported yesterday. The federal backstop, funded by assessments on banks, was at $37.9 billion by June 30, up from a deficit of $20.9 billion at the end of 2009 as bank failures surged during the credit crisis. The FDIC predicted that it will spend $4 billion to cover bank shutdowns in the next five years, a projection that has declined another $1 billion since April as the industry improves, according to a report issued yesterday updating the fund's health. The fund returned to a positive balance in 2011, and the FDIC anticipates that its income from assessments on banks will drop from about $12.4 billion in 2012 to about $10 billion this year as conditions improve and because growth in the assessment base has been more sluggish than expected, according to the report. The fund still has less than its required reserve ratio of 1.15 percent of the deposits it insures, and the FDIC expects to reach that goal by 2019 -- an extension of one year from earlier estimates because of a "more conservative projection of future assessment revenue." The reserve ratio was at 0.63 percent by June 30, the agency said. The Dodd-Frank Act of 2010 required the FDIC to increase the target ratio even higher to 1.35 percent by Sept. 30, 2020. Read more.

HIGH-END SPENDERS SHRUG OFF ECONOMIC HEADWIND

Despite continued weak employment data and gridlock in Washington, D.C., consumers are showing surprising signs of confidence, opening their wallets to buy big-ticket items ranging from washing machines to boats, the Wall Street Journal reported today. The average household in the top 20 percent of earners has seen its income rise more than 6 percent since 2008, before adjusting for inflation, according to data from the Census Bureau; among the top 5 percent, the increase has been nearly 8 percent. Households in the middle of the income distribution have seen just a 2 percent gain, on average, while incomes for the poorest Americans haven't returned to their pre-recession peak. Even so, the average American household spent $51,442 in 2012, surpassing for the first time its prerecession peak, the Labor Department said last month. Read more. (Subscription required.)

ATTENDING NCBJ'S 87TH ANNUAL CONFERENCE NEXT WEEK IN ATLANTA? DOWNLOAD THE CONFERENCE APP AND BE SURE TO ATTEND ABI'S SESSIONS!

If you are attending the National Conference of Bankruptcy Judges 87th Annual Conference in Atlanta next week, be sure to tap into the following resources and programs:

Have you downloaded the official NCBJ Conference app for Apple iOS or the Google Android devices? Built by ABI, the app contains the conference schedule, materials, hotel map, speaker info, access to the conference Twitter feed and more. You can customize it to remind you when your favorite session is about to start.
To download the app for iOS devices from iTunes, please click here.

To download the app for Android devices from the Google Play store, please click here.

Also, ABI will be sponsoring a number of great programs on Nov. 1 at the conference:

-Topics for the ABI/NCBJ Roundtables include: Single Asset Real Estate Cases, Streamlining the Process- National Chapter 13 Plan- Good or Bad? Part 1, What to Do after the Sale? Structured Dismissals, Liquidating Trusts and Chapter 7 Conversion, Chapter 7 & Hot Topics, Current Labor and Employment Issues in Bankruptcy Cases, Where the Work Is: Does the Restructuring Profession Need to Be Restructured?, Streamlining the Process- National Chapter 13 Plan- Good or Bad? Part II, Chapter 11 Professional Issues: Proper Disclosure and Retention and Addressing the New Rules of the Road on Compensation. The programs require pre-registration through the NCBJ.

-ABI luncheon in the Imperial Ballroom from 12:45-2:30 p.m. ET featuring Prof. Jeffrey Rosensweig, global and economics forecaster and expert on global investing and business strategy.

-Hearing from 2:30-4:30 p.m. ET of ABI's Commission to Study the Reform of Chapter 11. The hearing will take place in Room A601-602, and focus on corporate governance issues in bankruptcy. Witnesses set to testify at the hearing include:

Dennis F. Dunne of Milbank, Tweed, Hadley & McCloy, LLP (New York) will testify about the role of committees in chapter 11.
William K. Snyder of Deloitte CRG (Dallas) is testifying on the role of the chief restructuring officer (CRO) in chapter 11.
Brady C. Williamson of Godfrey & Kahn, SC (Madison, Wisc.) will testify about the use of examiners in corporate bankruptcy cases.
Mark A. Gittelman of PNC Bank (Philadelphia) is testifying on structural changes in the court systems, including creating a national bankruptcy court venue for mega cases.
Prof. Anne Lawton of Michigan State University College of Law (East Lansing, Mich.) will testify about special accommodations for small and middle market cases.
W. Clarkson McDow, United States Trustee (ret.) Region 4 (Columbia, S.C.) will testify about the U.S. Trustee's role in chapter 11 cases.
For more, please visit http://commission.abi.org.

- Be sure to visit ABI's booth (#5) and C.A.R.E's booth (#6) to learn about new promotions, products and more!

RENEW YOUR ABI MEMBERSHIP BY DEC. 31 AND SAVE!

Beginning in January 2014, ABI will institute its first dues increase to the regular dues rate in six years. The $20 increase will ensure that ABI can continue to provide you with the latest and most effective tools available in insolvency information and education. You can lock in 2013 rates, and additional discounts, for up to three years by using a multi-year renewal option (save $75!). You can also save 10 percent on future dues by opting into the automated dues program. To renew your membership and save, please go to renew.abi.org.

RISKY TIMES FOR SECURED LENDERS AND SERVICERS TO BE FOCUS OF FIRST ABI WORKSHOP PROGRAM- ATTEND IN PERSON OR VIA LIVE WEBSTREAM!

You will not want to miss the abiWorkshops series' inaugural program, "Risky Times for Secured Lenders and Servicers." The program is cosponsored by TMA (Chesapeake), IWIRC (D.C./Greater Maryland) and RMA (Potomac), and will be held on Nov. 6 from 9 a.m. to 3 p.m. ET in the ABI Headquarters Conference Center in Alexandria, Va. The abiWorkshops series provides attendees two great ways of participating: You can register to attend in person at the ABI Conference Center, or you can participate via a live webstream! Topics that will be covered on the Nov. 6 program include:

- Living with the New CFPB Mortgage Servicing Rules
- Business Lending: Navigating What Lies Ahead
- Business Lending: Recent Legal Developments

For more information or to register for the "Risky Times for Secured Lenders and Servicers" abiWorkshop on Nov. 6, please click here.

EXPERTS TO EXAMINE STUDENT LENDING AND BANKRUPTCY AT ABI WORKSHOP PROGRAM ON NOV. 15

Experts will tackle the hot topic of student lending issues in bankruptcy on the abiWorkshops series' new program, "You Can't Discharge Student Loans in Bankruptcy - Or Can You?" The program will be held on Nov. 15 from 9 a.m. to 3 p.m. ET in the ABI Headquarters Conference Center in Alexandria, Va. The abiWorkshops series provides attendees two great ways of participating: You can register to attend in person at the ABI Conference Center, or you can participate via a live webstream! Topics that will be covered on the Nov. 15 program include:

- Student Lending Today: Who Borrows, How Much, Delinquency & Default Trends
- Repayment Options: Income Based Repayment and New Lender/Servicer Programs
- Litigation under Sect. 523(a)(8): What Proofs Are Needed? Evidence Demonstration

For more information or to register for the "You Can't Discharge Student Loans in Bankruptcy - Or Can You?" abiWorkshop on Nov. 15, please click here.

ABI GOLF TOUR UNDERWAY; LAST STOP FOR 2013 IS WINTER LEADERSHIP CONFERENCE IN DECEMBER

The 7th and final stop for the 2013 ABI Golf Tour is on Dec. 5 at the Trump National Golf Club, held in conjunction with ABI’s Winter Leadership Conference. Final scoring to win the Great American Cup — sponsored by Great American Group — is based on your top three scores from the seven ABI events. See the Tour page for details and course descriptions. The ABI Golf Tour combines networking with fun competition, as golfers "play their own ball." Including your handicap means everyone has an equal chance to compete for the glory of being crowned ABI's top golfer of 2013! A 22-handicapper won the tour event at July’s Southeast Bankruptcy Workshop. There's no charge to register or participate in the Tour.

ABI IN-DEPTH

NEW "BANKRUPTCY IN DEPTH" VIDEO PREVIEWS UPCOMING SUPREME COURT BANKRUPTCY CASES

In this "Bankruptcy In Depth" video, ABI Resident Scholar Kara Bruce and Eric Brunstad of Dechert LLP (Hartford, Conn.) preview the bankruptcy cases that the Supreme Court will consider during its 2013 term. Brunstad, who has argued many cases before the Court and is an expert in bankruptcy appellate practice, discusses in depth Law v. Siegel, which questions whether the court may use its general equitable authority under §105 of the Bankruptcy Code to surcharge a debtor's exempt assets, and Executive Benefits Insurance Agency v. Arkison (In re Bellingham), which will address the bankruptcy court's authority to adjudicate Article III matters. He also provides a candid view of what it is like to argue a case before the Court and an in-depth analysis of the issues involved with the upcoming cases. Click here to watch a preview of the forthcoming ABI "Bankruptcy In Depth" video.

ABI LAUNCHES SIXTH ANNUAL WRITING COMPETITION FOR LAW STUDENTS

Law school students are invited to submit a paper between now and March 4, 2014 for ABI's Sixth Annual Bankruptcy Law Student Writing Competition. ABI will extend a complimentary one-year membership to all students who participate in this year's competition. Eligible submissions should focus on current issues regarding bankruptcy jurisdiction, bankruptcy litigation, or evidence issues in bankruptcy cases or proceedings. The first-place winner, sponsored by Invotex Group, Inc., will receive a cash prize of $2,000 and publication of his or her paper in the ABI Journal. The second-place winner, sponsored by Jenner & Block LLP, will receive a cash prize of $1,250 and publication of his or her paper in an ABI committee newsletter. The third-place winner, sponsored by Thompson & Knight LLP, will receive a cash prize of $750 plus publication of his or her paper in an ABI committee newsletter. For competition participation and submission guidelines, please visit http://papers.abi.org.

NEW CASE SUMMARY ON VOLO: IN RE W.R. GRACE & CO., ET AL. (3D CIR.)

Summarized by Weston Eguchi of Willkie Farr & Gallagher LLP

Affirming the district court's ruling, the Third Circuit Court of Appeals held that (a) § 524(g) broadly encompasses all asbestos-related actions against the debtors, including claims for indemnification and contribution like those asserted by the appellants; (b) appellants' indemnification and contribution claims were sufficiently similar to direct personal injury claims of asbestos plaintiffs to be classified together under § 1122; (c) provisions of trusts that appellants alleged were discriminatory toward indirect claims did not violate § 1123(a)(4)'s requirement that a plan provide the same treatment for each claim or interest in a class; and (d) trusts did not violate § 524(g)'s requirement that the channeling injunction be "fair and equitable" to future claimants because appellants' assertions (that there must be certainty of the amount and procedure for distributions and that participation of asbestos claimants attorneys' on the trust advisory committee was unfair to indirect claimants) were irrelevant and baseless.

There are more than 1,000 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: CALCULATE COST OF EQUITY TO TRULY MEASURE A BANK'S PERFORMANCE

The Bankruptcy Blog Exchange is a free ABI service that tracks more than 80 bankruptcy-related blogs. A recent blog post found that the financial crisis demonstrates the need to reincorporate risk considerations into performance measurements. The post proposes that this can be accomplished by focusing not on return on equity (ROE), but on the spread between ROE and an institution's cost of equity.

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.

ABI Quick Poll

Does the bankruptcy court's Section 105 power enable it to surcharge the debtor's exempt property?

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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