Bankruptcy Brief

CFPB CITES PROBLEMS WITH CREDIT CARDS, MORTGAGES AND CREDIT REPORTS

The Consumer Financial Protection Bureau (CFPB) reported yesterday that it is finding problems with credit cards, credit bureau reporting and mortgages, CongressDaily reported today. Specifically, the CFPB said that it found that credit card holders under the age of 21 were raising their credit limits without the consent of their co-applicants, inaccurate information reported to credit bureaus was causing consumers to be charged too much or denied credit, and clear mortgage disclosures with proper rates and timely information regarding payments was not being provided to homeowners. The bureau said that the findings have prompted a compliance review and sparked fines totaling $435 million in refunds to 5.7 million consumers. Click here to read the CFPB's fall summary report.

COMMENTARY: AFTER BAILOUT, LARGE BANKS ALLOWED TO DOMINATE THE MORTGAGE BUSINESS

The broken mortgage market is the unintended consequence of the banking bailout and the regulatory response in the aftermath of the financial crisis, according to a commentary in the New York Times yesterday. In the third quarter, both Wells Fargo and JPMorgan Chase reported that they earned robust profits from the mortgage business. It would be foolish to blame Wells Fargo and JPMorgan for this situation, according to the commentary, but the government allowing takeovers without forcing weak competitors to get healthy quickly leads to an oligopoly. Instead, the two companies’ main competitors, Citigroup and Bank of America, are pulling out. Read the full commentary.

OBAMA SUGGESTS "SECRETARY OF BUSINESS" IN A SECOND TERM

President Barack Obama signaled that if he wins a second term, he would appoint a Secretary of Business to oversee newly consolidated government agencies, including the Small Business Administration, the Wall Street Journal reported on Tuesday. "We should have one Secretary of Business, instead of nine different departments that are dealing with things like giving loans to SBA or helping companies with exports," Obama said on Monday. Read more. (Subscription required.)

COMMENTARY: "TOO BIG TO FAIL" REMAINS VERY REAL

While it is tempting to think that very large financial institutions are no longer too big to fail thanks to the Dodd-Frank Act and regulation, this idea is completely at odds with the facts, according to an op-ed by Prof. Simon Johnson of the M.I.T. Sloan School of Management in Monday's New York Times. In a high-profile paper prepared recently at the behest of the Securities Industry and Financial Markets Association, the lobbying group for the securities industry, Federal Financial Analytics Inc., argues that "too big to fail" has effectively been ended. In theory, “too big to fail” should have been removed by the recent reforms or eliminated by the passage of time. But as a practical matter — looking at what investors really believe — “too big to fail” is still with us, according to Johnson. This implicit government guarantee lowers the funding costs for very large financial institutions because investors are convinced that debt issued by these firms is less risky than, for example, debt issued by small and medium-size banks. In effect, the government is providing a form of insurance that encourages financial institutions to become even bigger — and thus even more likely to be protected by some combination of the Federal Reserve, the Treasury and other agencies. This is an unfair, nontransparent government subsidy that encourages excessive risk-taking, according to Johnson, and creates a very large potential downside for the nonfinancial side of our economy. Read the full op-ed.

HURRICANE SANDY ESTIMATED TO COST INSURERS UP TO $20 BILLION

Hurricane Sandy may cost the insurance industry up to $20 billion, which would put this week's devastating storm second only to 2005's Hurricane Katrina for insured losses, according to a new damage estimate, the Wall Street Journal reported today. Disaster-modeling firm Eqecat Inc. said insured losses likely range from $10 billion to $20 billion and said that the total cost of the storm, including damage that was not insured by private companies, would be between $30 billion and $50 billion. In addition, the closure of major roads, tunnels and the New York City subway system are likely to drive claims higher, the firm said. Read more. (Subscription required.)

TRANSCRIPT OF CHAPTER 11 COMMISSION’S 10/17 HEARING NOW AVAILABLE

A full transcript of ABI's Chapter 11 Reform Commission’s hearing on 10/17 at the LSTA Conference in New York is now available. The transcript can be downloaded by clicking here.

The next public hearing will be Saturday from noon-2 p.m. ET at the 24th Annual TMA Annual Conference in Boston. For future Commission hearings, please click here.

MEMBERS ENCOURAGED TO WEIGH IN ON REAPPOINTMENT OF BANKRUPTCY JUDGE JUDITH WIZMUR

The current 14-year term of office for Judith H. Wizmur, U.S. Bankruptcy Judge for the District of New Jersey at Camden, is due to expire on Sept. 4, 2013. The U.S. Court of Appeals for the Third Circuit is considering the reappointment of the judge to a new 14-year term of office. Members of the bar and the public are invited to submit comments for consideration by the Court of Appeals regarding the reappointment of Bankruptcy Judge Wizmur. All comments should be directed to one of the following addresses: by e-mail at [email protected] or by mail to the Office of the Circuit Executive, 22409 U.S. Courthouse, 601 Market St., Philadelphia, PA 19106-1790. Comments must be received no later than noon on Monday, December 3, 2012.

ABI IN-DEPTH

LATEST CASE SUMMARY ON VOLO: SHAFFER V. U.S. DEPARTMENT OF EDUCATION (IN RE SHAFFER; 8TH CIR.)

Summarized by William Joanis of JoanisLaw

The Eighth Circuit ruled that the debtor met the burden of proving by preponderance of evidence that educational loans were discharged on basis of undue hardship. The court employed a "totality of circumstances" test (i.e., past, present and future resources, reasonableness of living expenses, and other relevant facts, etc.). While the court noted that each loan needed to be evaluated separately, this issue was not properly raised on appeal.

There are nearly 700 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: RECAP OF DISCUSSIONS AT THE NCBJ ANNUAL CONFERENCE

The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog post highlights some of the topic discussions from the panels at last week's NCBJ annual meeting.

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

Despite the "free and clear" language of Sect. 363(f), purchasers of assets in 363 sales may still be liable for injuries to unidentifiable future claimants. (In re Grumman Olson Indus, SDNY).

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

HAVE YOU TUNED IN TO BLOOMBERG LAW'S VIDEO PODCASTS?

Bloomberg Law's video podcasts feature top experts speaking about current bankruptcy topics. The podcasts are available via Bloomberg Law's YouTube channel so that you can access the programs from your computer or device of your choice! Click here to view the Bloomberg Law video podcasts.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 37 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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November
- U.S./Mexico Restructuring Symposium
     November 7, 2012 | Mexico City, Mexico
- Professional Development Program
     November 9, 2012 | New York, N.Y.
- Detroit Consumer Bankruptcy Conference
     November 12, 2012 | Detroit, Mich.
- Winter Leadership Conference
     November 29 - December 1, 2012 | Tucson, Ariz.

December
- Forty-Hour Bankruptcy Mediation Training
     December 4-8, 2012 | New York, N.Y.

2013

January
- Western Consumer Bankruptcy Conference
     January 21, 2013 | Las Vegas, Nev.
- Rocky Mountain Bankruptcy Conference
     January 24-25, 2013 | Denver, Colo.

February
- Caribbean Insolvency Symposium
     February 7-9, 2013 | Miami, Fla.
- Kansas City Advanced Consumer Bankruptcy Practice Institute
     February 17-19, 2013 | Kansas City, Mo.
- VALCON 2013
     February 20-22, 2013 | Las Vegas, Nev.

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!

Available now for pre-order in ABI's Bookstore is the Survival Guide for the New Lawyer: What They Didn't Teach You in Law School. The Survival Guide provides real-world guidance on the everyday aspects of practicing law, with a special emphasis on bankruptcy law. Full of anecdotal examples and hard-earned advice, this Guide is perfect for the aspiring lawyer fresh out of law school, or for any firm that wants to give its associates a leg up on the competition. Click here to pre-order, and be sure to log in first to obtain the ABI member discount!

GET PUBLISHED IN AN ABI NEWSLETTER! RETOOLED DESIGN RAISES EACH AUTHOR'S PROFILE

Don't miss your chance to be published! In addition to a colorful new design and better mobile integration, ABI newsletters now provide authors with greater exposure through their submissions. The new ABI newsletter design showcases each author's photo and a link to their firm's website. Each article will be promoted via ABI social media networks and will also be available in relevant search results when colleagues are doing their research through search.abi.org. For more information on writing for an ABI newsletter, click here.

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.

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

Consumer collateral should be valued at liquidation value in chapter 13 confirmations, even when the debtor retains the 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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2014

September
- Southwest Bankruptcy Conference
    Sept. 4-6, 2014 | Las Vegas, Nev.
- abiLIVE Webinar: Understanding Make-Whole and No Call Provisions
    Sept. 9, 2014 |
- Golf & Tennis Outing
    Sept. 9, 2014 | Maplewood, N.J.
- CARE Financial Literacy Conference
    Sept. 11-13, 2014 | Dallas, Texas
- ABI Workshop: Lending to Distressed Companies
    Sept. 15, 2014 | Alexandria, Va.
- Lawrence P. King and Charles Seligson Workshop on Bankruptcy & Business Reorganization
    Sept. 17-18, 2014 | New York, N.Y.

October
- abiWorkshop: Government Contracting and Bankruptcy
    Oct. 6, 2014 | Alexandria, Va.
- Midwestern Bankruptcy Institute
    Oct. 16-17, 2014 | Kansas City, Mo.
 

- Views from the Bench
    Oct. 24, 2014 | Washington, D.C.
- Claims-Trading Program
    Oct. 30, 2014 | New York, N.Y.
- International Insolvency & Restructuring Symposium
    Oct. 30-31, 2014 | London

November
- Complex Financial Restructuring Program
    Nov. 6, 2014 | Philadelphia
- Corporate Restructuring Competition
    Nov. 6-7, 2014 | Philadelphia
- Chicago Consumer Bankruptcy Conference
    Nov. 11, 2014 | Chicago, Ill.
- Detroit Consumer Bankruptcy Conference
    Nov. 11, 2014 | Troy, Mich.

December
- Winter Leadership Conference
    Dec. 4-6, 2014 | Palm Springs, Calif.
- 40-Hour Mediation Training Program
   Dec. 7-11, 2014 | New York, N.Y.