Credit Slips | A Discussion On Credit, Finance & Bankruptcy
A blog on all things about credit, bankruptcy, consumers, and financial institutions. We are fourteen academics who will use this space to discuss and debate issues not just for specialists but for anyone who cares about creating good policies in these areas.
Today is the twelfth anniversary of the Credit Slips launch date. I always like to mark the date because it is hard to believe that it has been that long. When we started, Barack Obama was a senator, and Elizabeth Warren was blogging (for us and others). The solar system had nine planets. Worldcom was the largest bankruptcy in U.S. history, and we were trying to parse the meaning of the not-always-clear bankruptcy amendments in 2005. OK, we are still trying to do the latter.
In January I wrote about Aurelius seeking a do-over. In a carefully reasoned thirty-five page decision, the district court has denied the do-over. Put more legally, the court held that PROMESA's method of establishing the Puerto Rico Oversight Board did not run afoul of the Constitution's Appointments Clause. The Oversight Board is an instrumentality of Puerto Rico, concluded the court, not officers of the United States.
In June 2018, the U.S. Supreme Court decided Sveen v. Melin, a case applying Contracts Clause* jurisprudence to a state revocation-on-divorce statute and preexisting insurance contract. It isn't like the Supreme Court hears a Contracts Clause case every week, every term, or even every decade. Given its relevance to many Credit Slips topics, such as a financially distressed government unit without bankruptcy access or mortgage/foreclosure crises, it seems worth fostering a conversation about the case here.
Unlike many key precedents, this case did not involve a "police power"/emergency justification for impairing existing contracts. A timeline:
1997: Sveen & Melin marry.
1998: Sveen purchases a life insurance policy naming Melin as primary beneficiary and his children from a prior marriage as contingent beneficiaries (he has other policies naming them primary beneficiaries).
2002: The state of Minnesota enacts a statute that automatically revokes the designation of a spouse as the beneficiary upon the dissolution or annulment of the marriage. This is not an unusual statute, for better or worse; the statute comes from a uniform law project. The statute does not prevent the parties from agreeing to a different result and seeking to override the revocation.
2007: Sveen & Melin divorce.
2011: Sveen dies, leading to a dispute over who should receive the life insurance proceeds. As stated above, the policy names Melin. But, say Sveen's children, the 2002 law automatically revoked that designation when Sveen and Melin divorced.
The Court of Appeals for the Eighth Circuit held that retroactive application of the 2002 statute to the 1998 policy violated the Contracts Clause. The Supreme Court reversed 8-1, with Justice Gorsuch dissenting. (For the perspective of a family law expert, I would recommend Professor Naomi Kahn's analysis.)
The case did not bring about heightened Contracts Clause enforcement for which some hoped and advocated; the Court declined Melin's invitation to revisit the prevailing test for Contracts Clause violations. At least in this context, only Justice Gorsuch expressed an appetite for more rigorous Contracts Clause enforcement - or, stated conversely, making it easier for the Court to invalidate state laws on this basis.
Adhering to the existing test, the majority decision reinforces that one needs more than an assertion of an impairment of an existing contract for a Contracts Clause violation. The impairment of a contractual relationship brought about by the state law must be substantial. Relevant to substantiality, says the court based on prior case law, are "the extent to which the law undermines the contractual bargain, interferes with a party's reasonable expectations, and prevents the party from safeguarding or reinstating his rights."
Even a substantial impairment may be valid if it has been drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose, says the court. In other words, the prevailing test requires consideration of policy justification. In this case, Professor James Ely's amicus brief supporting Melin calls the government's asserted interest justifying the revocation-on-divorce statute "astonishingly slight." An amicus brief of gender equality organizations, also supporting Melin, argued in depth that the Minnesota statute, as applied retroactively, cannot satisfy this element.
The Supreme Court majority decision avoids dealing with the justification portion of the test, however, by resolving the case on substantiality: likening the law to a minimal paperwork burden upheld in prior cases, the 2002 state law's impairment of the 1998 insurance contract was not substantial, said the majority, and thus application of the law to this preexisting contract did not violate the Contracts Clause. For reasons not worth getting into here, I agree with many of Justice Gorsuch's critiques of the majority reasoning. An important takeaway, in any event, is that substantiality is itself contextual. The statute essentially negates the central element of an existing contract, yet that was not sufficient to establish substantiality - presumably because the statute leaves open the possibility of overriding the default rule, allowing a party to safeguard or reinstate rights? That makes me wonder about the range of inquiries that might be deemed relevant to substantiality as applied to, say, laws that change the right to debt repayment or retiree pension or health care obligations.
*The Contracts Clause in Article I Section 10 of the U.S. Constitution provides "[n]o State shall... make any ... Law impairing the Obligation of Contracts..."
It seems fairly clear that, if Trump's latest nominee to the Supreme Court, Brett Kavanaugh, is sworn in, the Court's trend of resolving virtually all statutory disputes on the basis of "plain meaning" will be cemented in place. An analysis of Kavanaugh's bankruptcy-specific jurisprudence seems unnecessary in light of his fairly clear comments, nicely summarized by Anthony Gaughan over at the Faculty Lounge blog. His rejection of legislative history and search for intent/purpose does not bode well for bankruptcy and consumer-protection disputes, such as Obduskey v. McCarthy & Holthus LLP, the FDCPA case on the Court's docket for next year. Perhaps the words in these statutes are less clear and meaningful than those in the Constitution, but it seems likely that a Justice Kavanaugh would retreat to the comfortable confines of statutory language as frequently as possible to maintain his vision of a passive and unthreatening judiciary. Dust off your Webster's and probably also your Garner!
First, Mariner has found an interesting regulatory loophole. The Truth in Lending Act prohibits the issuance of "live," unsolicited credit cards. That provision, however, only applies to devices that can be used for multiple extensions of credit, not single use items like a check. So Mariner can mail out live checks to consumers (it presumably prescreens a population to target), without running afoul of the federal prohibition on mailing live, unsolicited credit cards. That's a creative way of reaching customers without having an extensive and expensive brick-and-mortar presence. It also avoids some of the adverse selection problems of internet-based lending.
Second, there is no federal preemption obstacle to states prohibiting the issuance of live, unsolicited checks used to create a credit balance. Mariner seems to be the only major firm doing this, and it doesn't have any preemption argument I can see.
Third, no one should be shocked that large financial institutions provide the money behind Mariner. Large banks don't do small dollar lending themselves; there are too many regulatory and repetitional issues, but they will provide the financing for small dollar lenders, whether by providing lines of credit or by making equity investments in them. And this has political consequences: the lobby opposing the regulation of small dollar lenders isn't just finance companies, but also the large financial institutions that are funding them. Consider how that might affect efforts to close the unsolicited live check loophole on either the federal or state level.
The Great Recession, the CFPB's creation, the rise of debt buying, changes in the debt collection industry, and advances in data collection have encouraged more research recently into issues of access to justice in the context of consumer law and consumer bankruptcy. This spring, the consumer bankruptcy portion of the Emory Bankruptcy Development Journal's annual symposium focused on access to justice and "vindicating the rights of all consumers." Professors Susan Block-Lieb, Kara Bruce, Alexander Sickler, and I spoke at the symposium about how a range of consumer law, finance, and bankruptcy topics converge as issues of access to justice.
We recently posted our accompanying papers (detailed further below) to SSRN. My essay overviews what we know about the barriers people face entering the consumer bankruptcy system, identifies areas for further research, and proposes a couple ideas for improving access to bankruptcy. Susan Block-Lieb’s essay focuses on how cities can assist people dealing with financial troubles. And Kara Bruce’s and Alex Sickler’s co-authored essay reviews the state of FDCPA litigation in chapter 13 cases in light of Midland Funding v. Johnson and explores alternatives to combat the filing of proofs of claim for stale debts.
In my essay, Access to Consumer Bankruptcy, I discuss what we know about the barriers that people face to filing bankruptcy, with the goal of identifying where more research is needed versus where focusing on implementing improvements is likely to be more productive. People face both internal and external barriers to filing bankruptcy. For people to use the bankruptcy system, they must understand that filing is a way to deal with their financial issues. But not everyone will think of money troubles as legal problems. If their problems remain "alegal," they may do nothing, try to negotiate on own, or turn to third parties for help. As I detail, we know little about how people think about their financial problems as legal problems.
As one of my essay’s main contributions, I analyze a sample of narratives accompanying consumers' complaints about financial products and services submitted to the CFPB, thereby beginning to explore how people connect their financial problems to bankruptcy. Although the narratives provide a necessarily select and narrow view of how people think about bankruptcy, at present, the narratives are one of a handful of data sources that includes people with financial troubles before they file bankruptcy. What makes the narratives particularly interesting is that consumers are not prompted to think about bankruptcy when they submit their complaints. If consumers mention bankruptcy in their narratives, they do so because bankruptcy is naturally on their minds. As such, the narratives offer a unique view into how people think about financial troubles as bankruptcy issues.
Susan Block-Lieb's essay, Cities as a Source of Consumers’ Financial Empowerment, steps into the question of access to justice at the point when people are beginning to understand their problems are legal issues and are deciding how best to address their problems. Filing bankruptcy is one avenue that people may consider. They also may turn to other legal avenues or involve third parties. Block-Lieb’s essay focuses on how cities can assist people dealing with financial troubles decide how best to try to resolve their problems.
The second part of my essay focuses on the external barriers that people face filing bankruptcy. I overview the ever-increasing body of research about consumer bankruptcy’s “local legal culture,” systemic racial bias, and the link between attorneys’ fees and bankruptcy chapter choice. Based on this review, though more research always is useful, I conclude that it is time to place more attention on thinking about how to begin to remedy issues with access to bankruptcy—particularly the racial disparity in use of chapter 7 and chapter 13—and provide a couple modest suggestions.
Finally, Kara Bruce’s and Alex Sickler’s essay, Private Remedies and Access to Justice in a Post-Midland World, takes on the question of access to justice from inside the consumer bankruptcy system, once people have filed. Using FDCPA litigation in chapter 13 bankruptcy as a lens into how bankruptcy laws and procedures themselves can improve people’s access to justice, they consider what the rise and fall of these FDCPA claims shows about the role private litigation in improving access to justice within consumer bankruptcy.
On June 22, at its 6th hearing, and about 6 weeks after the court's sale approval, TWC essentially acknowledged it cannot close the sale to its stalking horse bidder on the terms requested and approved by the court, and certainly not by the end of June as represented at hearing #5. TWC therefore will be seeking court approval for Lantern to acquire the company for less money than the agreement and court order specified. By the creditors' committee's calculation, TWC is seeking a 11% reduction in the cash price, but that estimate is one of several points of contention between it and TWC. Given the dates and deadlines in various financing orders and deals, TWC said the issue absolutely positively must be resolved in early July - while the presiding judge is out of the country. The parties did not embrace the presiding judge's suggestion of a popular federal court tool: mediation by a fellow sitting judge. So a key outcome of the June 22 hearing is that a different Delaware bankruptcy judge will preside over a July 11 hearing on changing the TWC/Lantern deal. That judge already has held a quickly-scheduled telephonic status conference today, June 25 (see dockets ##1106, 1107).
No one at the June 22 hearing disputed that general unsecured creditors would be directly affected by TWC's request to change the terms of the sale. But the judge implied some skepticism by asking whether, say, "very secured" creditors have reason to care. The answer depends, it seems to me, on how "very secured" is determined, due to allocation issues among entities in the TWC corporate family. If there was ever a case to highlight why one should resist the assertion of a single waterfall, it is this one.
The Supreme Court handed down a disastrous antitrust opinion in Ohio v. American Express. In a 5-4 opinion the Court's conservative majority held that the district court failed to properly define the relevant market because it looked only at the merchant-side of Amex's business, not the also the consumer side. The case has far-reaching implications for any so-called "two-sided" markets--basically platform markets that connect buyers and sellers. Justice Breyer wrote a lengthy and very lucid dissent that tries furiously to cabin the scope of the majority's opinion (explicitly arguing that most of it is dicta).
I'm not going to try to parse through the analysis in the case here, but suffice it to say Justice Thomas's opinion reads like the sort of just-so arm-chair law-and-economic analysis that the academy has largely moved beyond. Justice Breyer scores a lot of points in his dissent. Damningly, he points out some findings of fact by the District Court that the majority simply wouldn't address, most notably that Amex was able to raise prices 20 times over 5 years without losing appreciable market share and that most of the price increases were retained by Amex, not passed through to its cardholders. Under any market definition, that should be pretty convincing evidence of an exercise of market power.
There is also a pretty embarrassing factual mistake in Justice Thomas's opinion. He writes "Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex does not.” Visa and MasterCard don’t make ANY money from interest. Their issuer banks do, but their issuer banks are not the networks. If the Court can't get this level of factual description right, it doesn't leave me with much confidence in its ability to parse the economics.
I don't think this ruling completely shuts the door on credit card antitrust litigation, but it makes it harder--plaintiffs will have to plead facts about the consumer half of the card market. Given that only a fraction of interchange fees actually get passed through to consumers in the form of rewards, I think it's still possible for plaintiffs challenging anti-steering rules to make a case—indeed, I don't see what prevents the state plaintiffs in the case from simply repleading their case, as the decision that now stands is simply that they did not prove their case because they didn't prove market power. There's no double-jeopardy issue in civil suits, and res judicata here only covers the question of market definition.
As anyone familiar with bankruptcy would have predicted, the dire predictions of disaster for municipalities seeking bankruptcy protection have proven to be ... let's just say exaggerated. Bloomberg is out with a notable story this morning on Jefferson County's healthy return to the bond market, carrying an investment-grade rating of AA- within five years of emerging from municipal bankruptcy. This squares with similar accounts of consumers rehabilitating their credit within two to four years of a chapter 7 liquidation-and-discharge (see, for example, here and here). Let's all file this in our "lying liars and their bankruptcy impact lies" file and be prepared to continue to counter this, among the many, many other, bankruptcy scare myths to be debunked.
Over the past few weeks, at conferences with judges and policymakers in Varna (Bulgaria), Seoul, and Beijing, I've been confronted with a surprising degree of skepticism about personal insolvency systems and fear of opportunistic individuals abusing the ability to evade their debts (especially while hiding assets). I've pointed out the interesting progression identifiable in Europe in recent years of a marked relaxation of such fear of abuse, especially in places like France and most recently Slovakia, which have gone all the way to adopting a very US-like open-access system to immediate discharge. For the real skeptics--and they are numerous in Bulgaria and China, both of whom are considering adopting their first personal insolvency laws--these arguments seem to fall on more or less deaf ears. Detractors put me in a no-win situation by offering one of two rejoinders: (1) the incidence of discovered abuse is low in these systems because debtors are crafty or anti-abuse institutions are weak, or (2) anti-abuse institutions like the means test and restrictive access hurdles are successfully dissuading abusers from seeking access, so we need more--not less--of this kind of effort (which I've criticized as wasteful, unnecessary, and counterproductive). A common third response is the classic "we're different" position--that is, any comparative empirical evidence from elsewhere is irrelevant to the new, entirely unique context of [insert skeptical country's name here].
I've considered launching into some kind of research project to address this skepticism, but I don't think it will help. The situation reminds me of the two most common resistant reactions to empirical research: (1) we already knew that, or (2) that can't be true. The haters are gonna hate, it seems to me. So if the lighthouse is no good, we need to come up with a different approach to assuaging the concerns of policymakers, especially in China, that rampant abuse will not infect a new personal insolvency system and undermine public confidence and payment morality.
I've come to believe institutions are our best strategy. An Insolvency Service or other administrative organ dedicated to rooting out fraud and processing these (mostly) low-value cases in a quick, efficient, low-cost, and minimally formal way seems to be a win-win. It reassures the skeptics that a cop is on the beat, and it avoids allowing formalities, especially court formalities, to bog down these cases. Obviously an agency can get caught up in its own procedures, too (and substance matters, as well, as evidenced by the extremely inefficient German procedure and the hunt for the slightest hint of abuse in the UK's DRO procedure), but it seems to me that diverting personal bankruptcy cases away from the courts somehow is key (including by getting a private trustee to do all the work and engaging the courts only when (rarely) necessary, as in the US and UK).
But an entirely new agency structure is also expensive, in terms of both monetary expenditure (both initial and ongoing) and personnel development (both recruitment and training). I wonder whether this cure is worse than the disease, and it offers another powerful lever of resistance by abuse-fearing policymakers.
I would greatly welcome any thoughts that others have about the proper way to achieve the closely related goals of (1) assuring skeptics that abuse can and will be laid bare (to the extent reasonably possible) and (2) moving personal insolvency cases through processing quickly and efficiently to a reinvigorating discharge. Many places are struggling with this issue, so I hope a crowdfunding strategy might produce some innovative ideas.