Bankruptcy Brief

House Approves Family Farmer Relief Act of 2019 (H.R. 2336)

The U.S. House of Representatives today passed the Family Farmer Relief Act of 2019 (H.R. 2336). ABI testified in June in support of the bipartisan and bicameral bill, and it is also supported by the American College of Bankruptcy, the American Farm Bureau and the American Farmers Union. Rep. Antonio Delgado (D-N.Y.) introduced the bill on April 18, 2019. The current debt limit for chapter 12 filings is $4.3 million. H.R. 2336 would raise this limit to $10 million. Farm size has increased substantially since 1986; meanwhile, net farm income has declined since 2013. “For more than 30 years, chapter 12 has provided a durable tool to deal with the cyclical economic challenges faced in American agriculture, roiled by fluctuating land values, swings in commodity prices, weather calamities and adverse trade policies made by government,” said ABI Executive Director Samuel J. Gerdano. “Chapter 12 has not only assisted family farmers in their efforts to successfully reorganize debts in bankruptcy court, it has perhaps more significantly provided a framework that encouraged stakeholders to reach agreement on debt restructuring outside the expense of the formal bankruptcy process.” In a letter to the House Judiciary Committee, the American Bankers Association (ABA) had urged that Congress proceed with caution on approving the increase, emphasizing the importance of having ready capital available to farmers at low interest rates. The ABA also cited the 2018 Farm Bill as having greatly strengthened the farm economy since its passage. A bipartisan companion bill is pending in the Senate.

Commentary*: I’m a Private Equity Investor. Here’s Why We Need to Rein In Private Equity

If you look at our economy from 30,000 feet, it’s easy to believe President Donald Trump’s boasts that we’re living in boom times. But if you get closer to the ground, where too many good jobs are being replaced by precarious ones, where large-scale employers waver at the brink of going under, and where the faux boom’s profits are overwhelmingly going to the wealthy, you can see a practice escalating across the economy, a practice that has already had disastrous effects on workers generally and with the potential to take down hundreds of thousands more jobs and put investors and consumers alike in jeopardy, according to a commentary in Fortune. That practice is the unchecked and reckless overuse of heavy burdens of debt, and then of bankruptcy laws, by some private-equity (PE) firms and hedge funds to the overwhelming detriment of employees and retirees. That’s why we all need to pay attention to a new bill introduced this week by Sen. Elizabeth Warren and other members of Congress that would curtail the threat financial predators pose and remove the incentives for them to further harm our economy, according to the commentary. It would also eliminate a tax abuse that Trump even campaigned he would eliminate — namely, the so-called carried-interest loophole. Though the existence of private-equity firms and hedge funds is taken for granted today, the PE boom really took off in the mid-1980s. Before Gordon Gekko and his maxim that “greed is good,” things worked differently. Private-equity investors had a specialization then that they focused on, says the commentary, and when they invested, they invested for the long term.



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Commentary*: Elizabeth Warren's Private-Equity Proposal Encourages Abuses

Sen. Elizabeth Warren’s “Stop Wall Street Looting Act of 2019” is designed to curtail abuses by private equity funds. Most of the resulting commentary has focused on whether private equity is good or bad, or whether the Act would be effective. However you feel about those things, a more important point is the Act seems designed to encourage the abuses it decries, according to a Bloomberg commentary. In a typical PE deal, a fund combines the equity capital from its investors with a lot of borrowed money to buy a public company and take it private. The fund may sell some of the company’s non-core assets and restructure what’s left to create a company that in five or 10 years can be sold back to the public markets. The fund’s main reward is a percentage, often 20 percent, of the total collected from sales minus the initial equity investment. It also collects management fees from investors in the fund as well as for services provided to the company it controls. One of Warren’s main complaints is that PE firms initially sell too much of an acquired firm, leaving the surviving entity smaller and less viable. So she proposes a 100 percent tax on the fees that PE funds collect from the companies they control. It’s possible that in response, a PE fund would merely bill its investors, who are the ultimate payers in either case, but either way it creates a strong incentive for PE funds to sell more assets, and keep fewer. The PE fund will prefer to sell businesses and assets rather than incur the costs of managing them, if it cannot charge to recoup those costs. Moreover, money from sales is not confiscated. This makes any struggling company — especially one with hard-to-predict pension, litigation or regulatory problems — radioactive, according to the commentary. (Subscription required.)



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Op-Ed*: Puerto Rico’s Political Meltdown

Puerto Rico Governor Ricardo Rosselló announced late Wednesday that he’ll resign, effective Aug. 2, amid widespread protests and a text-message imbroglio. The question is whether it even matters given the general corruption of the island’s political class, according to an op-ed in the Wall Street Journal. The immediate cause for the protests was a 900-page report by the Center for Investigative Journalism last week publishing messages between Mr. Rosselló and his aides that denigrate female politicians, gays, fat people and Puerto Ricans in general. Also fueling the revolt are federal corruption charges two weeks ago against former members of his administration. The economy has been in a downward spiral since 2006, and more than 500,000 have fled. For decades high taxes and inflexible labor laws have depressed investment and incentives to work. Politicians awarded public workers even more generous compensation financed by tax hikes and government debt. By 2016 the commonwealth had amassed $74 billion in debt — more than 100% of gross national income — plus nearly $50 billion in pension obligations. Yet Mr. Rosselló has fought and flouted reform. The oversight board has slashed spending, but the governor has sued to block the board’s labor and fiscal reforms, and the First Circuit Court of Appeals heard arguments this week over its authority. The truth is that bondholders will be scalped under the board’s restructuring plan to preserve public services and retiree pensions. But the debt reductions must be paired with government reforms or nothing will change, according to the op-ed.



*The views expressed in this op-ed are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Op-Ed*: Everyone Claims They’re Worried About Global Finance, but Only One Side Has a Plan

Global finance has become a popular target from both the left and, more recently, the right, particularly the nationalist right. Renationalizing finance is a pressing task for any transformative government. But so far, only the left has any tangible plans on how finance can be brought down to earth and tamed toward more humane ends, according to a New York Times op-ed. Spin a globe, and you’ll see a colorful mosaic of states snug in their national borders. But the world of finance has long ceased to work this way. There are nearly 200 sovereign countries, but globally only a few dozen banks matter. We don’t live in a world of islands but inside what has been described as a “matrix of interlocking corporate balance sheets.” Financial institutions operate across territories with little respect for borders, wreaking havoc on the ability of countries to plan for a sustainable future. Despite recent criticism from some nationalist conservatives, the right has largely ignored the problem, according to the op-ed. President Trump tapped Goldman Sachs heavily to staff his cabinet and plans no walls for the movement of money over borders. The systematic defunding of the IRS means that even routine audits are becoming rare, let alone the investigation of taxable income held offshore. Rather than extend tax surveillance outward, the 2017 Trump tax plan slashed the corporate tax at home. Even when the problems are acknowledged by the right, the details are foggy and more time is spent targeting the “cosmopolitan elite” than offering effective, concrete solutions. By contrast, on the left, ideas are crackling. Elizabeth Warren recently announced her “economic patriotism” agenda, with financial reform at its heart. Other proposals from what The Guardian called the “new left economics” target venerable institutions of financial management. And central banks — long seen as bastions of economic orthodoxy — are being called upon to help avert an environmental catastrophe, as climate change poses imminent risks to financial stability that need to be factored in to central bank models, according to the op-ed.



*The views expressed in this op-ed are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Study Finds Just 54% of U.S. Student Loan Borrowers Make Consistent Payments

Just 54 percent of U.S. student-loan borrowers are making consistent payments, instead alternating between months of larger payments or no payment at all, according to a study from the JPMorgan Chase Institute that underscores the burden of educational expenses for millions of Americans, Crains Cleveland reported. Among borrowers who started making payments, as many as 59 percent might be making no payment at any given time, the institute said in a report released Wednesday in Washington, D.C. The payment status changes reflect income swings and show that families are less consistent paying student loans than those for cars and homes. Student-loan balances outstanding have more than doubled in the past decade to about $1.5 trillion, held by almost a fifth of the population, Federal Reserve Bank of New York data show. Though the typical family paid 5.5 percent of take-home income toward student loans in months where a payment was made, the financial burden weighs the most on young and low-income households, according to the report by institute President Diana Farrell, a former economic adviser to President Barack Obama, and fellow researchers Fiona Greig and Erica Deadman. The institute found that one in four borrowers under 25 spends 16.8 percent or more of take-home pay on student loans, while households making $50,000 or less spent 14.7 percent or more.

Analysis: Is the Future of Banking All Bitcoin and Blockchain?

At the beginning of July, news broke of Deutsche Bank staff being sent home as 18,000 job cuts began unraveling. Taking a look at what is happening in the world of banking that has led to job cuts, and concerns for the traditional way of doing things in finance, posits a question: Just how far are we from a future predicated on Bitcoin and blockchain in banking? Beyond the high-rise glass structures in the city center, there are signs of a new way of managing and controlling your money on a day-to-day basis: challenger banks, according to an analysis in Forbes. Challenger banks are defined as small, recently created retail banks that compete directly with the longer-established banks in the country, sometimes by specializing in areas underserved by the “big four” banks. These banks, also called App-banks, are usually highly customer focused and made to be as user-friendly and as easy to operate on a day-to-day basis as they can. In comparison with traditional banks, challenger banks try and play to general user frustrations from the big institutional banks. Indeed, the banking legacy and way of doing things has become so stagnant that the wants of the banks and the needs of the customers almost do not line up anymore — especially on a day-to-day basis, according to the analysis. Challenger banks could be the fresh start customers have been wanting, but, in comparison, cryptocurrencies and blockchain could be an entirely fresh system.

U.S. Retail Sales Ease Fears over Economy; Rate Cut Still Seen

U.S. retail sales increased more than expected in June, pointing to strong consumer spending, which could help to blunt some of the drag on the economy from weak business investment, Reuters reported. The report from the Commerce Department on Tuesday did not change market expectations that the Federal Reserve will cut interest rates this month for the first time in a decade. But coming on the heels of solid employment growth in June and a pick-up in underlying inflation, the signs of strong consumer spending further reduced the possibility of the U.S. central bank cutting rates by 50 basis points at its July 30-31 policy meeting, as markets had initially anticipated. Fed Chairman Jerome Powell last week told lawmakers the central bank would “act as appropriate” to protect the economy against risks stoked by a trade war between the U.S. and China, as well as slowing global growth. Retail sales increased 0.4 percent last month as households stepped up purchases of motor vehicles and a variety of other goods, including furniture and building materials. Data for May was revised slightly down to show retail sales gaining 0.4 percent instead of rising 0.5 percent as previously reported. Economists polled by Reuters had forecast retail sales edging up 0.1 percent in June. Compared to June of last year, retail sales advanced 3.4 percent.

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House Judiciary Committee to Hold Hearing Next Wednesday Examining SBRA, HAVEN Act, Chapter 12, Student Debt and More

The House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law will hold a hearing next Wednesday at 2 p.m. EDT titled "Oversight of Bankruptcy Law and Legislative Proposals." Robert J. Keach of Bernstein Shur (Portland, Maine), a former ABI President and co-chair of the ABI Commission to Study the Reform of Chapter 11, will testify on ABI's behalf. The hearing will examine a number of bills and priority issues important to business and consumer bankruptcy practice. Most of the bills enjoy bipartisan and bicameral support in Congress. The following are the legislation and issues to be discussed:

- The Small Business Reorganization Act (S. 1091) takes into account recommendations from ABI's Chapter 11 Commission to remove barriers to bankruptcy for financially struggling small and medium-sized businesses.

- The Family Farmer Relief Act of 2019 (H.R. 2236; S. 897) is supported by ABI to raise the debt cap to $10 million for family farmers seeking chapter 12 protection.

- Honoring American Veterans in Extreme Need Act of 2019 (HAVEN Act) (H.R. 2938; S. 679) would exclude VA and DoD disability payments from the monthly income calculation used for bankruptcy means testing. The law currently allows Social Security benefits to be excluded from the calculation, but not veterans disability payments. ABI's Veterans’ Affairs Task Force member Holly Petraeus is scheduled to testify.

- Puerto Rico Recovery Accuracy in Disclosures Act of 2019 (PRRADA) (H.R. 683; S. 1675) would impose certain requirements on the payment of compensation to professional persons employed in voluntary cases commenced under PROMESA.

- The subcommittee will also be looking at the issue of student loan debt treatment in bankruptcy, which was the subject of the first set of reform recommendations in the Final Report of the ABI Commission on Consumer Bankruptcy. Commissioners Prof. Dalié Jiménez of the UC Irvine School of Law and Ed Boltz of the Law Offices of John T. Orcutt, P.C. (Durham, N.C.) will be testifying on the issue.

For further information on the hearing and to obtain forthcoming witness testimony, please click here.

Senator Warren to Introduce Bill Cancelling Up to $50,000 in Student Debt for Most Borrowers

Sen. Elizabeth Warren (D-Mass.) plans to introduce legislation in the coming weeks that mirrors her presidential campaign proposal to cancel at least a portion of the student debt held by many of the nation’s 44 million borrowers, MarketWatch.com reported. House Majority Whip James Clyburn (D-S.C.) will introduce companion legislation in the House of Representatives. Warren’s office hasn’t yet released a draft of the legislative text, but the bill is slated to propose cancelling up to $50,000 in student debt for the bulk of student loan borrowers, her office announced. Under the proposal Warren released as part of her presidential campaign in April, borrowers with a household income of less than $100,000 would have $50,000 of their student debt cancelled and borrowers with an income between $100,000 and $250,000 would be eligible for some student debt cancellation — though not the full $50,000. Borrowers earning $250,000 or more would receive no debt cancellation. Her campaign estimated that the plan would cost $640 billion.



In related news, only a small percentage of companies help their employees with student loan payments, despite it being a sought-after perk. But that could change dramatically if a proposed tweak to the Tax Code gains momentum in Congress, the Wall Street Journal reported on Tuesday. There is no doubt that employees would welcome some kind of loan-relief benefit. A recent survey by YouGov commissioned by health care company Abbott Laboratories found that 64 percent of adults with student loan debt say that finding a company with student loan benefits is important. Yet last year, only about 4 percent of employers offered student loan repayment assistance as a workplace benefit, data from the Society for Human Resource Management show. Many HR managers say the biggest obstacle is the tax treatment that student loan repayment assistance currently gets. Employers have to pay a payroll tax on the contributions, while employees who receive such assistance have to report it as taxable income. To remove that snag, lawmakers in both houses of Congress earlier this year reintroduced bipartisan legislation that would permit employers to contribute up to $5,250 annually tax-free toward an employee’s student loans. The bills would accomplish this by expanding the section of the Tax Code that currently allows companies to provide tax-free tuition-reimbursement assistance in that amount to workers seeking to further their education. (Subscription required.)



A special ABI Podcast will be released later this month looking at the Consumer Commission’s recommendations on student loan debt and bankruptcy.

Risky Borrowing Is Making a Comeback, but Banks Are on the Sidelines

A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back, the New York Times reported on Tuesday. This time, the money is bypassing the traditional, and heavily regulated, banking system and flowing through a growing network of businesses that have stepped in to provide loans to parts of the economy that banks abandoned after 2008. With almost $15 trillion in assets, the shadow-banking sector in the U.S. is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble. But new problems arise when the industry depends on lenders that compete aggressively, operate with less of a cushion against losses and have fewer regulations to keep them from taking on too much risk. Recently, a chorus of industry officials and policymakers — including Federal Reserve Chair Jerome H. Powell — have started to signal that they’re watching the growth of riskier lending by these nonbanks. “We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. “Where the banks retreated, shadow banks stepped in.” Lately, that lending is coming from companies like Quicken Loans, loanDepot and Caliber Home Loans. Between 2009 and 2018, the share of mortgage loans made by these businesses and others like them soared from 9 percent to more than 52 percent, according to Inside Mortgage Finance. While they don’t have a nationwide regulator that ensures safety and soundness like banks do, non-banks say that they are monitored by a range of government entities, from the Consumer Financial Protection Bureau to state regulators.

Analysis: U.S. Tax Changes to Favor Companies over Lenders in Next Downturn

Companies that fund their businesses with highly leveraged loans and bonds are set to benefit from changes to the U.S. Tax Code that will allow them to raise cheap new financing by guaranteeing the debt with foreign assets, although the move could penalize existing lenders, according to a Reuters analysis. As well as offering cheaper borrowing costs, the analysis said that the tax change could be a lifeline for distressed companies that allows them to survive the next downturn by accessing new funds backed by foreign collateral at market rates, rather than paying punitive pricing. The changes could weaken existing lenders’ positions if companies run into trouble, as they could be barred from making direct claims on the revenue generated by foreign assets and subsidiaries. The Treasury Department and the Internal Revenue Service (IRS) published final regulations to section 956 of the Tax Code in May that allows U.S. companies to guarantee debt with revenue from foreign entities without incurring U.S. taxes. This has previously been an obstacle to pledging overseas assets and revenue. “If the borrower has the ability and desire to do their homework … the spectrum of possibilities, especially for corporations, is much larger as to what they can do without incurring tax in the U.S.,” said Elena Romanova, a partner at law firm Latham & Watkins. Access to new collateral to raise financing in the $1.2 trillion loan market to repay debt or fund operations is expected to be cheaper and could even help distressed companies avoid bankruptcy.


 

Law Students Press SCOTUS to Make Legal Tools Free Nationwide

More than 100 law students, along with nearly 100 solo and small-firm practitioners and legal educators, are urging the U.S. Supreme Court to eliminate copyright protection for state annotated codes of law and certain other state and local legal materials, the National Law Journal reported. The case Georgia v. Public.Resource.Org is unusual in that both parties, and all of the friends of the court, including the law students, want the justices to take up and decide the case — but for different reasons. The justices are scheduled to take their first look at the case in their private conference scheduled for today. At the center of Georgia’s petition at the Supreme Court is the “government edicts” doctrine, a judicially created exception to copyright protection for certain works that have the force of law. The doctrine dates to the 1800s, and three high court opinions have held that judicial opinions are not copyrightable. The justices have not addressed it since, but it has been applied by lower courts also to exempt statutes from copyright protection. Georgia asked the justices to reverse a decision last year by the U.S. Court of Appeals for the Eleventh Circuit. The appeals court, applying the government edicts doctrine, invalidated the state’s copyright in the Official Code of Georgia Annotated. Georgia had sued nonprofit Public.Resource.Org for alleged infringement after it posted volumes of the annotated code online. The annotated code contains such materials as summaries of judicial decisions and state attorney general opinions. The code without annotations is free to the public.

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Analysis: Remington's Bankruptcy Draws Spotlight on Private Equity's Financial Engineering

When private-equity firm Cerberus Capital Management bought Remington in 2007, sales were strong and the future bright, according to a New York Times analysis. A decade later, Remington couldn’t escape its debts and had to file for chapter 11 protection. In order to buy Remington, Cerberus created a new entity, a holding company. Instead of Cerberus buying a gun company, it put money into the holding company, and the holding company bought Remington. The entities were related, but each could borrow money independently. In 2010, Cerberus had the holding company borrow $225 million from an undisclosed group of lenders, most likely hedge funds. Because this loan was risky — the lenders would be paid only if Remington made a lot of money or was sold — the holding company offered a generous interest rate of around 11 percent, much higher than a typical corporate loan. When the interest payments were due, the holding company paid them not in cash but with paid-in-kind (PIK) notes. The holding company spent most of the $225 million buying back its own stock, effectively transferring all the borrowed cash to Cerberus. In April 2012, Cerberus had Remington borrow hundreds of millions of dollars and use it to buy the holding company’s debt, effectively transferring responsibility for the principal and the interest payments onto Remington. Because the operating company borrowed the money with a normal loan — and not with PIK notes — interest payments were required in cash. Suddenly Remington was carrying hundreds of millions of dollars in debt that, if it could not be paid, would cause the business to go bankrupt. After the 2016 election, researchers at Cerberus saw an omen in their data. Applications through the National Instant Criminal Background Check System, which are known as “NIC checks,” were dropping by double-digit percentages. A plunge in NIC checks foreshadows a corresponding plunge in gun sales, which is what happened in the months that followed. Remington’s profit slid toward zero. Remington had been loaded with debt; now it couldn’t pay the interest. Banks controlling the debt made a proposal: They would exchange the money they were owed for an ownership stake in Remington via a “debt-for-equity swap” in chapter 11 bankruptcy. This arrangement would allow Remington to stay running, albeit under distant ownership, until a plan could be drawn up for its future, such as a sale or a liquidation of assets.

Puerto Rico Governor Requests Fiscal Board Be Removed as Representative in Restructurings

While Gov. Ricardo Rosselló praised the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) for providing tools to facilitate the island’s debt restructuring, he said that the panel should not meddle in the government’s affairs and should be removed as representative of the debtors in the commonwealth’s bankruptcy process, Caribbean Business reported today. Rosselló testified at a U.S. House Natural Resources Committee hearing today that was analyzing PROMESA and the operations of the oversight board it established. He said a “naïve and problematic” narrative exists that the island’s government is not doing its job, that the government refuses to carry out structural reforms, and that the oversight board is the solution to address said mismanagement. He listed structural reforms the government has implemented such as in education, energy, and an earned income tax credit.



Disputing this view, Puerto Rico Oversight Board Chairman José Carrion said in a New York Post commentary that years of local government fiscal mismanagement created a debt burden of more than $70 billion. That amount, plus $60 billion in unfunded pension liabilities, reflect a culture of government officials making promises they couldn’t afford and a decade of recession combining to engulf the island in a sea of red ink. The oversight board, appointed by Congress, is imposing budgetary discipline and making the case for deep economic reforms, according to Carrion. Thus far, the board has successfully renegotiated some of the island’s debt, and is working on agreements with the other creditors. There are several reforms Puerto Rico could take on, including welfare-to-work measures and making Puerto Rico an employee-at-will state. Unfortunately, the current government isn’t implementing all of these reforms, despite the fact that they could make Puerto Rico much easier to do business in and present a better case for attracting investments.



The House hearing comes a day after the Board filed more than 200 clawback actions targeting payments of more than $4 billion to creditors by the government, made while the commonwealth was in the zone of insolvency. Click here to read the prepared statements from today’s hearing.

Latest ABI Podcast Features New SIPC CEO Discussing Recovery Efforts in Madoff Case

ABI Editor-at-Large Bill Rochelle talks with Josephine Wang, who was named president and CEO of the Securities Investor Protection Corp. (SIPC) on April 1. Wang joined the legal staff of SIPC in 1983 and was promoted to General Counsel in 2004. She supervised the appeal by SIPC in the Second Circuit on the question of whether a trustee can recover fraudulent transfers from subsequent recipients abroad. Ruling that fraudulent transfer claims can reach recipients abroad, the appeals court reversed the district court. The reversal revived 88 lawsuits brought by the trustee in the Madoff case aiming to recover more than $3 billion. Listen to Wang discuss the Second Circuit’s “extraterritoriality” opinion, other key developments in the Madoff liquidation and SIPC's ongoing work to recover funds for victims of the Ponzi scheme.

As Retiree Health Care Bills Mount, Some States Have a Solution: Stop Paying

States across the U.S. are testing how far they can reduce health benefits for their retirees as a way of coping with mounting liabilities and balancing budgets, the Wall Street Journal reported. The cuts are a response to dramatic increases in medical costs, budget shortfalls and the introduction of new accounting rules forcing governments to be more public about how much they owe. Officials also face fewer legal hurdles to cutting retiree health benefits than they face with public pensions, which enjoy ironclad legal protections in many states. North Carolina, which will end future-retiree health care coverage for new workers hired in 2021, is not the only state to take more drastic measures. Kansas is now asking retirees to pay the full cost of their health care, pushing their monthly premiums to as much as $1,000. In Iowa, the state last year capped the contribution its flagship university makes to retirees’ health care, cutting the liability by $465 million. U.S. states as a group have promised hundreds of billions more in retiree health benefits than they have saved up. The gap for so-called post-employment benefits, which mainly consist of retiree health care, amounts to roughly $600 billion, according to government data compiled by Eaton Vance Corp. That is on top of the $1.4 trillion states need to pay for promised pension benefits, according to The Pew Charitable Trusts.

Developers See More Office Spaces in Malls as Retailers Close

As retailers close, developers are converting the space into offices to bring in stable rent and generate foot traffic for remaining stores, the New York Times reported. The biggest beneficiaries of the conversions are co-working enterprises, like WeWork, which provide shared work spaces primarily to entrepreneurs, freelancers and start-ups. The highest concentration of co-working spaces in retail nationally is in malls, according to an August study by global property company Jones Lang LaSalle. The same study predicted that co-working space in retail in general would grow at an annual rate of 25 percent through 2023.

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The Student-Debt Crisis Hitting Hardest at Historically Black Colleges

Historically black colleges and universities helped lift generations of African-Americans to economic security. Now, attendance has become a financial drag on many of their young graduates, members of a new generation hit particularly hard by the student-debt crisis, the Wall Street Journal reported today. Students of these institutions, known as HBCUs, are leaving with disproportionately high loans compared with their peers at other schools, a Wall Street Journal analysis of Education Department data found, and are less likely to repay those loans than they were a decade ago. Among key findings of the Journal’s examination of 2017 data, the latest available:

• HBCU alumni have a median federal-debt load of about $29,000 at graduation — 32 percent above graduates of other public and nonprofit four-year schools.

• The majority of HBCU grads haven’t paid down even $1 of their original loan balance in the first few years out of school.

• America’s 82 four-year HBCUs make up 5 percent of four-year institutions, but more than 50 percent of the 100 schools with the lowest three-year student loan repayment rates.

Though HBCUs typically cost less than other public and nonprofit four-year schools, these colleges have long trailed those peers on measures of debt and repayment. Now they are trailing by far greater margins. Many HBCUs see a mandate in giving opportunity to disadvantaged youth, who often start out with fewer financial resources and a diminished ability to pay. Read more. (Subscription required.)

ABI’s Commission on Consumer Bankruptcy recently released its Final Report of recommendations to improve the consumer bankruptcy system, and student loan debt was one of the issues addressed in the report. To obtain a copy of the report and to watch the special briefing by Commission leadership to discuss the Final Report, please click here.

Sears Sues Lampert, Claiming He Looted Company and Drove It into Bankruptcy

Sears Holdings Corp. sued longtime Chairman Eddie Lampert, his hedge fund ESL Investments, and former directors including Treasury Secretary Steven Mnuchin, accusing them of allowing the retailer to be looted of billions of dollars before its October 2018 bankruptcy filing, Reuters reported today. The lawsuit, made public today, was filed by the restructuring team winding down what remains of the pre-bankruptcy Sears following Lampert’s $5.2 billion purchase in February of most of its assets. Sears accused Lampert of ordering the creation of bogus financial plans showing that the retailer would turn itself around even as it racked up huge losses, enabling the transfer of five major assets including Land’s End and Sears Hometown Outlet for his benefit.

Malls Under Pressure as More Stores Close

Strong retail numbers last year from department stores Macy’s Inc. and Nordstrom Inc. raised hopes that the beleaguered mall industry would finally rebound. But recent developments this year are pointing to more trouble ahead, the Wall Street Journal reported. A number of struggling retailers are closing stores and being more selective about where to open ones, dimming prospects for many mall owners and investors. U.S. retailers have already closed 5,994 stores so far this year, compared with 5,864 closures for all of last year, according to Coresight Research. The net store closings, or the number of closings minus openings this year, stands at 3,353. Payless ShoeSource Inc., Gymboree Group Inc. and Charlotte Russe Holding Inc. are among the retailers to announce plans to close stores after earlier attempts at restructuring failed. An unexpected rebound in brick-and-mortar stores last year suggested that malls might enjoy a bit of a comeback, too. Consumer spending was strong, and shopping centers benefited from the expansion of beauty chains like Sephora and Ulta. Macy’s and Nordstrom made new investments in their stores to create a more appealing experience for shoppers. But retail sales have slipped more recently, falling 0.2 percent in February from a month earlier after gaining 0.7 percent in January. Retail sales fell 1.2 percent in December. The mortgage for Destiny USA, one of the largest malls in the country, was recently moved to a special servicer that deals with defaults or renegotiations of loan terms. The servicer said that it expects the mall owner, Pyramid Management Group, to default when the mortgage is due in June. (Subscription required.)



Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

Commentary: Fed Should Buy Muni Bonds to Fight the Next Recession

U.S. state governments suffered major damage from the last recession 10 years ago. During the second quarter of 2009, the final months of the downturn, personal income taxes tumbled 27 percent from a year earlier. At the same time, expenses grew as enrollment for Medicaid and state unemployment insurance soared, while crumbling asset prices suddenly left public pension systems with massive shortfalls relative to their liabilities. Over the past decade, the slow-but-steady economic expansion has covered up these issues but hasn’t erased them, according to a Bloomberg commentary today. State government employment remains below its pre-financial crisis peak. Public pension plans are still largely in a sea of red ink, with an overall shortfall of $1.4 trillion at the state level, and even those with an acceptable level of assets are just one bear market away from the brink. And it’s no secret that the U.S. has fallen terribly behind in funding its roads, bridges, airports and public transit systems, according to the commentary. As the Federal Reserve contemplates what the next recession might look like, and what tools it has available to combat it, the fiscal health of U.S. states is likely to emerge as a significant roadblock to any economic recovery. The easy answer would be directing more cash from the federal government to the states, according to the commentary. But the 2009 stimulus program already transferred an unprecedented amount of money into state coffers, and the results were middling at best. In the current political climate, and with U.S. deficits already running close to $1 trillion, it’s anyone’s guess whether a similar package could come together. That means it might be up to the Fed to get involved in the $3.8 trillion municipal-bond market to give states a much-needed boost, according to the commentary. The central bank can only do so much during a downturn to get companies and individuals to borrow. But by directly backing states, it will immediately allow them to make payroll, start on new infrastructure projects, or both.

CTreasury Issues Rules on Tax Breaks for Opportunity Zones

The Trump administration released regulations yesterday that could help venture capitalists, Native American tribes and entrepreneurs benefit from a new tax incentive meant to encourage investment in struggling communities, the New York Times reported. Backers of that incentive, known as Opportunity Zones, had complained to the administration in recent weeks that its regulations could end up steering most of that money into real estate development rather than to start-up businesses that are more likely to create well-paying jobs. The rules released yesterday appeared to ease many of those fears. But critics said that the administration had not done enough to make sure that the program achieved its goals. Under the 169-page proposed regulation, the second in a series of rules meant to clarify the 2017 tax law that created the zones, investors can take advantage of the tax breaks in several ways. The new methods are particularly important for investors who hope to fund new coffee shops, grocery stores or possibly, as administration officials conceded yesterday, marijuana dispensaries in states that have legalized the drug.

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