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.
I want to return to the Stormy Daniels-Donald Trump-Michael Cohen Three-Way Contract. It's actually really interesting from a contract doctrine perspective (besides being of prurient interest). The continued media coverage and scholarly commentary seems to be missing a key point, namely that this is a contractual ménage à trois, not a typical pairing. The fact that there are three parties, not two to the contract actually matters quite a bit doctrinally.
Let’s start with a point on which I think everyone agrees. For there to be a contract, there needs to be mutual assent. This assent may be manifested in different ways—it may be manifested expressly, say through a signature, or implicitly, say through performance or, in rare cases, through silence.
The complication we have in this contract is that it is a 3-party contract, not the standard 2-party contract. That’s a problem because basically everything in contract doctrine is built around 2-party contracts. Traditional contract doctrine is monogamous and doesn't really know what to do with three-ways, especially when one party has a performance problem. It's not, for what it's worth, that multi-party contracts are rare--they're not. In fact, they're the common arrangement in corporate finance where a contract will involve numerous affiliates. But traditional contract doctrine developed in an era in which these multi-party contracts were rarer (indeed, look at how the Bankruptcy Code is not drafted with the contemplation of multi-entity debtors!) and there's always been a wink-wink, nod-nod about the separateness of corporate affiliates.
If Trump & Stormy had a monogamous contract
If Stormy (Peggy Peterson=PP) and Donald (David Dennison=DD) had a traditional, monogamous contract, this would be very easy. Let’s imagine that's the case: DD paid PP $130k and gave her certain releases in exchange for her providing him with a release (teehee...). In that case, under the Restatement (Second) of Contracts the fact that DD didn’t sign wouldn’t matter a whit in terms of his ability to enforce the contract against PP because there would be assent through performance by Dennison in the form of the $130K payment. The lack of a DD signature would matter, however, to the extent PP wanted to enforce the contract against him because it would raise a Statute of Frauds problem (this is not a contract that can be performed within a year as the obligations are on-going), as the party to be charged didn’t sign the contract. (See also California Civ. Code § 1624). I don’t think any of this is controversial analysis.
The Trump-Stormy-Cohen Three-Way and Donald’s Performance Problem
The problem is that this is a 3-party contract. It calls for EC to pay PP; PP to give DD releases and turn over certain materials to DD; and for DD to give PP releases.
Notice that EC only contributes to the deal, but does not receive any benefit. Yes, there is language that indicates that EC and DD are on "one side" of the contract, and PP on the other, but I don’t think that really does anything—presumably DD would have been able to sue EC if EC had failed to perform. Likewise, EC cannot provide PP the litigation releases she was supposed to get in the contract; only DD can provide them. And PP can only give litigation releases to DD, as she has no claim against EC. I think it’s hard to run away from the fact that EC and DD are separate entities and that this is a 3-way contract, although I'll return to an agency law argument below.
Here’s why that matters. It seems that EC and PP both performed their legs of the contract. But David Dennison/Donald Trump has a “performance problem.” There’s nothing that indicates that DD performed. In this case performance (release of litigation claims) is not distinguishable from non-performance (retention of litigation claims). The only way that DD/Trump could clearly provide those releases would be by executing the contract, but he didn’t.
So this forces us to answer the question of whether PP’s acceptance of EC’s component of the consideration is enough to bind her to a 3-way contract with both EC and DD? This is the question that I have not seen adequately addressed in existing commentary, perhaps because there isn't a clear answer from existing law.
My own 2¢ are that we do not have enough here for a contract, but I emphasize that there really isn’t clear law on this. My thinking is that from PP’s perspective, the deal was a package—$130K plus litigation releases in exchange for her releases and compromising materials. We know that she assented to a package deal, not to just one component of the deal, and that the assents were supposed to be a mutual exchange. Her only revealed preference was for the package deal. Her assent was conditioned upon the assent of both of the other parties, not just EC's assent. As it happened, she got EC’s assent and the $130k, but there is no indication that she ever got DD’s assent or the litigation releases from him. Thus, I think Stormy has a quite plausible argument that there was never a contract formed because there wasn’t assent from all the parties. Doctrinally I think this makes sense—if there is a to be a contract among A, B, and C, it would not be sufficient for just A & B to agree to the contract, even if they exchanged value, if the deal were dependent upon C's contributions; instead, C would have to assent for the deal to be effective.
Ah, but what about the fact that Stormy took the $130k? The fact that she took it doesn’t mean that there is a contract because we aren't in a two-party contract situation. But it also doesn’t mean that she gets to keep the money. In theory, EC/Cohen could recover the $130k as unjust enrichment (provided that Stormy got back her compromising materials), but that’s an equitable claim, and EC/Cohen does not have clean hands in this contract given how it was engineered from the get-go to give Trump plausible deniability.
Could Cohen/EC Be Trump/DD’s Agent?
A number of folks have argued that Cohen/EC is Trump’s agent. If so, then TeamDonald should probably win on the issue of whether there is a contract. (There’s still public policy issues, but that’s a separate question). As a factual matter, that’s gotta be right. But I think it is a loser of a legal argument for two reasons. First, it isn’t clear on what grounds EC/Michael Cohen would be acting as DD’s agent. There’s certainly no express authority (indeed, Cohen has disclaimed it), and any argument about implied authority or apparent authority isn’t going to prevail on a motion to dismiss, which means Stormy is going to get to discovery. Second, and more importantly, if EC/Michael Cohen is acting as DD/Trump’s agent in the contract, then there’s a serious election law problem (and if Stormy's isn’t the only one around, but is part of a larger patterns, perhaps a RICO issue as well). Oh, and if there’s a criminal election law violation, that payment to Stormy would be either wire fraud or mail fraud. I don’t think TeamDonald wants to go anywhere near this argument.
If You Receive, You’ve Gotta Give: Silent Acceptance Through Section 69
Perhaps, though, there is an argument of acceptance by silence, appropriately discussed in Restatement (2d) section 69 (!): Trump or his agent (meaning his attorney, not EC) received the compromising materials from Stormy and didn’t object and had reason to know of the expectation of compensation for them. In other words, no receiving without giving. One doesn’t see many section 69 cases (well, I suppose it depends what one watches), but maybe TeamDonald has an argument here, even though I’ve always thought acceptance by silence looks more like an estoppel type argument. But for TeamTrump to prevail on a section 69 argument, DD would have to have known of the deal at hand, which is precisely what Trump denies, not least because if Trump knew about the deal, then it looks all the more as if EC/Cohen was acting as Trump's agent, creating a serious election law problem. So I would expect TeamDonald to avoid this argument as quite dangerous to them overall (if they even think of using it).
Earlier, we posted about whether holders of Venezuelan bonds would be better off accelerating and obtaining judgments sooner rather than later. In a nutshell, here was the point:
When a restructuring comes (and it will), the two primary weapons the restructurer is likely to use are CACs and Exit Consents. A bondholder who obtains a money judgment, as best we can tell, escapes the threat of either CACs or Exit Consents being used against her.
We heard from a number of people with questions prompted by the post. Here are some of them, and our conjectures as to answers.
Is there really no precedent for using contract terms to “unwind” a judgment?
We don’t know of any. As mentioned in our earlier post, it is clear that some contract rights survive the judgment. This includes the pari passu clause, according to Judge Griesa’s opinion in the NML litigation, which allowed bondholders with money judgments to assert a new claim for injunctive relief under that clause.
On the other hand, the pari passu clause isn’t a great analogy here. Among other reasons, it was used in the NML litigation to give a new remedy to creditors who already held money judgments. What we’re looking for is a case where other parties (either the judgment debtor or other creditors) used contract rights to negate or modify a judgment obtained through litigation. We know of no authority examining the use of CACs or Exit Consents, so we looked a bit farther afield. What about acceleration rights?
Bonds issued under a trust indenture, like PDVSA’s bonds, typically allow a creditor minority (usually 25%) to instruct the trustee to accelerate. After acceleration, the trustee usually conducts the litigation, but there are some situations in which individual bondholders can sue. Importantly, a typical indenture also allows a creditor majority to rescind a declaration of acceleration. What if such a rescission happens after one or more individual bondholders have obtained money judgments?
For readers interested in this topic generally, we’d recommend a September 2016 article in Butterworths Journal of International Banking and Financial Law called “Trust Indentures and Sovereign Bonds: Who Can Sue,” by Lee Buchheit and Sofia Martos, both experts in the field. The article also includes this fascinating quote from the commentary to the American Bar Foundation’s model indenture provisions:
By the terms of the indenture, an acceleration of maturity can always be annulled by the holders of a majority in amount of the debentures. The procuring of a judgment by a few debentureholders on the basis of the accelerated maturity and a subsequent rescission of acceleration would present a most difficult problem whose solution is not to be found in any decided case.
A most difficult problem indeed! It apparently wasn’t clear to the drafters of the ABF model indenture provisions whether a creditor majority could de-accelerate a bondholder’s claim after it has been reduced to judgment, and we haven’t found anything since to clarify the question. But perhaps some of our readers know of something we have missed? (For readers with access to the ABF Commentaries, the quote is on pp. 234-35).
What about my interest rate? What am I earning on unpaid interest and principal if I get a judgment?
This is what investors seem to really care about – and perhaps for good reason, because interest rates differ as a function of whether one obtains a judgment. These differences may explain why investors would prefer to defer litigation. With the important caveat that we are not experts on these questions, our sense is that, after an investor reduces her claim to a judgment, that claim will accrue interest at an unattractive rate.
More particularly, if the bond says (and most do) that interest will accrue at the contractual rate "until the principal is paid in full," then:
Interest continues to accrue on principal post-maturity/acceleration at the contract rate, and
Interest will accrue on unpaid amounts of interest post-maturity/acceleration at the 9 percent NY statutory rate (until judgment). Once a judgment is handed down, the judgment will bear interest at the federal statutory rate (which is more like 3 percent -- it floats based on US Treasury rates).
The differences between contract and statutory interest can be dramatic, especially post-judgment. That can provide some incentive to delay litigation, although delay can also backfire.
There were echoes of this tension after Argentina’s default. Those who followed that crisis may recall significant differences in the strategies holdout creditors pursued. For example, Dart got judgments early, thereby protecting itself from Argentina’s possible use of Exit Consents. NML, by contrast, waited somewhat longer, often to spectacular effect. Some readers may recall the infamous FRANs, which yielded spectacular returns to NML. (The FRANSs are described by Matt Levine of Bloomberg here; also note the fun graph depicting the significance of computing interest at the contract rather than the statutory rate).
Ultimately, waiting proved advantageous for NML, although it might have regretted its decision if Argentina had used Exit Consents to modify the bond contracts before judgment. But then, perhaps the fact that Dart had already obtained money judgments discouraged the use of Exit Consents…?
At this stage, it is hard for us to see Venezuela abjuring the use Exit Consents. That said, if enough holders get judgments, the value of using Exit Consents diminishes. And if the end result is that Exit Consents are not used, then the ones to gain the most will be those who waited longest.
It is both. Indeed, if the bill were stripped of its title IV, I think most people could live with it. But title IV is a doozy.
Most notably, it raises the threshold for additional regulation under Dodd-Frank from $50 billion in assets to $250 billion. Banks with more than $50 billion in assets are not community banks.
The banks in the zone of deregulation include State Street, SunTrust, Fifth Third, Citizens, and other banks of this ilk. In short, with the possible exception of State Street, this is not a deregulatory gift to "Wall Street," but rather to the next rung of banks, all of which experienced extreme troubles in 2008-2009, and all of which participated in TARP.
My prime concern – given my area of study – is that these banks will no longer be required to prepare "living wills." That is, they will not have to work with regulators on resolution plans.
Coverage of Federal Reserve Chairman Jerome Powell's Congressional testimony highlighted his optimism about economic growth and its implications for future interest rate hikes. Less widely covered were his brief remarks on the student loan debt crisis. Citing the macroeconomic drag of a trillion-and-a-half dollar student loan debt, chairman Powell testified that he "would be at a loss to explain" why student loans cannot be discharged in bankruptcy. According to Fed research, Powell noted, nondischargeable student loan debt has long-term negative effects on the path of borrowers' economic life.
There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues. For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell. So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract. As a preliminary matter, though, I apologize for the clickbait title.
Let's start with the facts as we know them.
(1) There is a purported contract among three parties: Peggy Peterson, David Dennison, and Essential Consultants, LLC (EC). The contract says that these aren't the parties' real names, but that their real names are revealed in a side agreement.
(2) Peggy Peterson is really Stormy Daniels (the nom-de-porn of Stephanie Clifford). EC is a shell company created by Michael Cohen, Donald Trump's lawyer and fixer. And David Dennison is allegedly Donald J. Trump.
(3) The contract says is a settlement agreement in which Peterson (PP) and Dennison (DD) engage in a mutual release of litigation claims and Essential Consultants kicks in $130k to Peterson. In other words, PP is supposed to give DD a litigation release in exchange for a litigation release from DD and $130k from Essential Consultants.
(4) The contract provides that disputes between PP and DD are to be resolved in confidential arbitration.
(5) The contract provides that DD may obtain a preliminary restraining order against PP to prevent her from breaching her obligations of confidentiality under the releases.
(6) The contract provides for DD having the option of either actual damages or stipulated damages of $1 million if PP breaches.
(7) The only public copy of the contract is signed by PP and EC, but not by DD. The signatures are notarized, indicating the date on which they were signed.
(8) Stormy Daniels was paid $130K by EC. The ultimate source of the funds for EC LLC remains unclear.
(9) EC commenced an ex parte arbitration action to obtain a preliminary restraining order against PP. An arbitrator granted the request, but there does not appear to be any court order confirming the award.
(10) Stormy Daniels brought suit in California state court seeking a declaratory judgment that the contract was void as unconscionable/against public policy and unenforceable because it lacks a signature from David Dennison.
So what are we to make of this mess?
First, it's important to note that this is not the classic bilateral contract situation: there are three, not two contractual parties. The contract does refer to Dennison and Essential Consultants "on the one part" and Peterson "on the other," but Dennison and Essential are very clearly not the same party, and the contract does not specify anything about their relationship.
Second, the choice of names here is amusing, but I don't think it's coincidental. Why on earth would someone use the names Peggy Peterson and David Dennison? I think it is law-school-note shorthand for Plaintiff (PP) and Defendant (DD). If I'm right, I'm guessing that this is not the only contract that Michael Cohen (the principal of Essential Consultants and Donald Trump's lawyer) has written with Peggy and Dennison. Indeed I'd wager that Stormy Daniels isn't the only "Peggy Peterson" out there, particularly as some the terms of this contract don't seem to have any relation to the claims (as far as we know them) that Stormy Daniels might have about Trump, such as claims about "unacknowledged children". There's a tantalizing hint here that there might be another Trump settlement agreement regarding paternity claims.
Is the contract enforceable?
Certain contracts are subject to states' Statutes of Frauds, which are requirements that there be a writing that indicates a contract that is signed by the parties. I'm pretty sure the Statute of Frauds applies here both because of the dollar amount of the contract and because it cannot be performed in a year as it involves a permanent obligation of confidentiality. There's no statutory exception for partial performance, but in at least some other contexts California courts have found a partial performance exception to the statute of frauds. So maybe Stormy can't win on a Statute of Frauds argument, but she can still argue that there was no agreement ever formed because of the lack of a signature by DD.
It's axiomatic that parties have to assent to a contract. The signature goes to the question of whether there is any indication of assent to the contract by DD. One way to express assent would be a signature, but it's absence is not inherently fatal. Another way of showing assent would be performance. Has DD taken any actions that indicate performance? It's not clear. There's no way to tell if litigation claims have been released by DD because all that means is that DD wouldn't bring litigation--but that's also consistent with retaining the claims and choosing not to act on them. But DD might have taken receipt of pictures, text messages, etc. under the contract. The acceptance of a benefit might be enough to indicate acceptance. And then there are estoppel type arguments that DD/EC could raise against PP. The facts aren't clear, but I think Stormy has at least a plausible case that there is no enforceable contract with DD. (This assumes that there isn't another copy of the contract signed by DD, but if so, there's a question of when it was signed...)
What about the argument that Michael Cohen was Trump's agent and was signing for him. Cohen could have signed for Trump as his agent, but there's no indication that he did. The signature is for EC LLC, not for DD. Cohen can sign in multiple capacities, of course, but he didn't. EC LLC could be signing for Trump, but if so it creates a serious campaign finance law violation problem as it would mean that the $130K payment was a payment on behalf of Trump (which of course it was). Given the political benefit to Trump of keeping Stormy quiet (and the timing of the agreement, on the eve of the election), this would readily be seen as a campaign contribution, and if so it would have been above legal contribution limits (violation by Cohen), and it would be undisclosed, another violation (by Trump). EC LLC/DD are kind of precluded from raising this argument, then, without creating more problems for themselves with the campaign finance laws.
Note, btw, that even if there's no contract, it doesn't mean that Stormy gets to keep the $130k. She should be returning the $130K and EC/DD would return any items they took from her.
There's also Stormy's void-as-against-public policy argument. I'm not going to opine on that--everything gets weird when dealing with the public's interest in the Presidency.
What about the arbitration proceeding?
EC LLC brought an arbitration proceeding against PP to get a preliminary restraining order. As a starting matter, let's be clear about terminology. Arbitration is before an arbitrator, not a judge. That's just a private party delegated to resolve a dispute. Even if the arbitrator happens to be a retired judge (as was the case here), it's still an arbitrator, not a judge. And that means that the arbitrator has no power herself to enforce any arbitration award. If you win an arbitration award, you still have to go to court to get the court to enforce the order, and that creates an opportunity for the losing party in the arbitration to challenge the award. The grounds for challenging arbitration awards are pretty limited and narrow--a simple mistake of law or fact by the arbitrator isn't going to do it--but if the arbitrator lacked authority to arbitrate in the first place, it's a different matter.
As far as I can tell, there has been no attempt to enforce the arbitration award of the preliminary restraining order. In other words, EC (Michael Cohen) got an ex parte award from an arbitrator, but no court order to enforce it. My search for dockets on Bloomberg Law involving "Peggy Peterson" or "EC LLC" didn't turn up any actions to enforce the award. And frankly, I'm not surprised. I don't think this award is enforceable because the arbitrator had no authority to even hear the matter, much less grant the relief she granted. The arbitration provision governs only disputes between PP and DD, not disputes involving EC, and the preliminary relief provision is only for DD, not for EC. EC has as much standing to seek preliminary injunctive relief via arbitration as Sasquatch.
Wait, you might say, isn't EC LLC a third-party beneficiary of the arbitration rights? Nuh-uh. EC is a named party to the contract, so it gets the benefits spelled out in the contract and nothing more; a third-party beneficiary is, by definition, not a party to the contract.
Ok, but isn't EC LLC really just the same thing as David Dennison/Donald J. Trump? Isn't it an agent/alter ego/creature of Trump? Well, yeah, of course it is, but just as above, Michael Cohen/EC LLC can't run with that argument because it sets up some pretty serious campaign finance law violations, the sort of thing that cost John Edwards his law license and which carry real criminal penalties.
In other words, what's happened is that Michael Cohen made some threats but hasn't attempted to follow through by seeking to confirm the arbitrator's award, probably because it's not likely to be confirmable and also because it isn't likely to do any good at this point.
fwiw, if Stormy wants to challenge the arbitration clause, she needs to do so specifically, rather than challenging the entire contract or else the contract should go to the arbitrator to decide on enforceability, although, as Mark Weidemaier notes, the contract lacks a provision specifying that the arbitrator makes that decision. I believe that even in its absence under Buckeye Check Cashing that the arbitrator still makes that decision, but it's possible that Buckeye Check Cashing assumed the existence of such a delegation clause.
What comes next?
So where we're left is the question of whether Donald Trump et al. will even respond to Stormy Daniels complaint in her lawsuit or will take a default judgment. My money is on the default judgment. Trump's likely to lose if he litigates, and doesn't really have any upside to winning. He can't put the genie back in the bottle at this point. (What more does she have to reveal? She's already said that they had boring sex one time, that's it. Some have speculated, based on the agreement, that there are pictures, but I think that's just boilerplate or holdovers from other Trump settlements. If Stormy had nude pictures of Trump, she'd have been paid a helluva lot more than $130k for them.) The more he fights, the more attention Stormy gets. I'm not sure what Trump's end-game is here, but at this point it seems that trying to enforce the contract is kind of beside the point. Stormy's going to tell her tale, and Trump's best move is to hope that we're all so inured to scandal that it's a yawn.
For readers who haven't been following along: Stephanie Clifford, aka Stormy Daniels, is an adult film star who allegedly had a sexual relationship with Donald Trump in the mid-2000s. She recently sued Trump and other defendants, seeking to invalidate a settlement agreement in which she was paid to keep silent about the details of the alleged relationship. Here is her complaint, which includes the settlement agreement as an exhibit. And here is some coverage of background details.
The settlement agreement includes an arbitration clause, which should prompt some reflection about the use of arbitration to silence victims of sexual assault (a topic that has attracted attention in the wake of revelations about Harvey Weinstein). On the other hand, people are often too quick to blame arbitration for unrelated problems, so I hope this (long-ish) post can offer a bit of clarity. The short version: Whoever drafted the agreement between Stormy Daniels and "David Dennison" gets an A for cynicism, but would have to beg for a C in my arbitration class. (I’m guessing the draftsperson would fail professional responsibility...)
First, some factual background:
The settlement agreement uses pseudonyms, Peggy Peterson and David Dennison. In exchange for a payment of $130,000, “Peterson” agrees among other things not to disclose confidential information about Dennison, their “alleged sexual conduct,” and other matters. She also agrees to arbitrate “any and all claims or controversies” arising between her and Dennison. The agreement designates two potential institutions to administer the arbitration: JAMS and Action Dispute Resolution Services.
Peterson (i.e., Daniels) signed the contract (through her lawyer), but Dennison did not. Instead, the contract was signed by Michael Cohen (a lawyer for Trump), on behalf of an entity named Essential Consultants, which allegedly was formed to hide the source of the hush money. There is a blank for Dennison’s signature, but it is empty.
The settlement agreement requires all parties to keep the alleged relationship confidential. Formally, this has nothing to do with the arbitration agreement. Parties to an arbitration agreement do not have confidentiality obligations (unlike the arbitrator and any administering institution, which do). The arbitration hearing will be private; unlike a court hearing, members of the public cannot attend. But the parties can tell whatever they want to whomever they want, unless they have separately agreed to maintain confidentiality. Thus, Daniels’s confidentiality obligations, if she has any, stem from the non-disclosure provisions of the agreement, not from the arbitration clause.
In the event of a breach of the non-disclosure provisions, the agreement allows either party to obtain an injunction forbidding further disclosure without notice (!!) to the party alleged to have made the disclosure.
It has been reported that Cohen recently obtained such an injunction from an arbitrator in a proceeding administered by ADRS. And in fact, here is a copy of what appears to be the arbitrator’s interim award. (I must say, this is not exactly a high water mark in the history of arbitration…)
Daniels’s complaint alleges that, because Donald Trump did not sign the agreement, she has no contract with him. She also alleges that any contract is unconscionable and/or void as against public policy. Some of these arguments target the confidentiality provisions. There are indeed potent arguments against enforcement of non-disclosure agreements in such cases. However, there is a problem with these arguments (from Daniels’s perspective). If Donald Trump is entitled to invoke the benefits of the arbitration clause, then the arguments must be resolved by the arbitrator (in a private hearing). Put differently, Daniels needs to do more than come up with legally sound arguments against enforcement of the contract and its non-disclosure provisions. If she wants to put pressure on Trump, she needs to come up with legally sound arguments that don’t have to be resolved in arbitration.
From “Dennison’s” perspective, by contrast, a well-drafted arbitration agreement will send as much of the dispute as possible to arbitration. There, Dennison can count on a private hearing. And if the arbitrator rules that the non-disclosure portions of the agreement are enforceable, courts will probably enforce that ruling. Here, then, is the link between arbitration and confidentiality. Although arbitration itself imposes no confidentiality obligations, it can help parties who value confidentiality maintain it, at least if they expect arbitrators to enforce non-disclosure agreements.
It’s here that Dennison’s lawyers may have dropped the ball. Courts always decide whether an arbitration agreement exists. Thus, the court hearing Daniels’s lawsuit against Trump should not refer it to arbitration before deciding, at minimum, whether Daniels is a party to an arbitration agreement. Unfortunately for Daniels, that seems to be a pretty easy call. She is clearly a party to an arbitration agreement; it is just that the agreement doesn’t seem to be with Donald Trump.
But here’s where things get complicated. Even if not a party to the agreement, Donald Trump can invoke the benefits of the arbitration clause if the parties intended to let him do so. Based on my quick read, this seems an entirely plausible interpretation (assuming Trump is David Dennison). But Trump hardly wants to litigate his entitlement to invoke the arbitration clause in public court proceedings. In his ideal world, this issue, too, would be resolved in arbitration. So, too, would disputes over the validity of the arbitration agreement itself—for instance, disputes over whether the arbitration agreement is part of an invalid scheme to circumvent public policy, and disputes over whether the arbitration agreement imposes impermissibly high costs on Daniels (as it arguably does).
Arbitration law allows parties to refer such questions to arbitration. Put differently: if Daniels is a party to an arbitration agreement (as she surely is), then that agreement, if properly drafted, can force her to arbitrate virtually every other issue in dispute. To accomplish this, however, the agreement must provide “clear and unmistakable evidence” of the intent to arbitrate issues that would normally be assigned to a judge. A good way to do that is to include language providing that the arbitrator will have exclusive authority to resolve “any disputes over the validity, scope, or enforceability of this arbitration clause.” But you won’t find language like this anywhere in the settlement agreement. At best, “Dennison” can point to language in the rules of the designated arbitration institutions (like Rule 11 of the JAMS Comprehensive Arbitration Rules). But there are good arguments against treating such language as “clear and unmistakable” evidence of the intent to arbitrate challenges to the validity or scope of the arbitration agreement itself. For one thing, these institutional rules are intended to permit, but not necessarily to require, arbitration of such issues. For another, in such a complicated contract—seemingly created largely for the purpose of obfuscation—it’s not clear that incorporation by reference satisfies the “clear and unmistakable” standard.
Bottom line: Ethics aside, this is a sloppily drafted arbitration clause. The court should decide whether Daniels is party to an arbitration agreement. The court should decide whether Trump is entitled to the benefits of that agreement. And the court should decide whether that agreement is enforceable or is an invalid scheme to circumvent public policy--for instance, by obscuring the fact that a party to (or beneficiary of) the agreement is now President of the United States.
For nearly two decades, the fact that many really large chapter 11 cases file in two districts has been a point of controversy. On the one hand, the present system makes some sense from the perspective of debtor’s attorneys, and many DIP lenders, who value the experience and wisdom of the judges in these jurisdictions and the predictability that filing therein brings. On the other hand, for those not at the core of the present system, it reeks of an inside game that is opaque to those on the outside. And it is not clear the judges outside the two districts could not handle a big case; indeed, most could.
Where big chapter 11 cases should file is an issue again, at least among bankruptcy folks, given the possibility that the pending Cornyn-Warren venue bill might pass as part of some bigger piece of legislation, perhaps the pending S. 2155 (whose Title IV is so misguided it certainly warrants a separate post).
I have long been frustrated by the discussion of chapter 11 venue. On the one hand, the present system has developed largely by accident, with little thought for the broader policy implications. On the other, there is certainly some merit in concentrating economically important cases before judges who are well-versed in the issues such cases present. The issue calls for careful study, but, as with most political issues these days, we area instead presented with a binary choice.
I have often contemplated concentrating the biggest chapter 11 cases among a group of bankruptcy judges, trained in complexities of multi-state or even global businesses. A small panel of such judges could be formed in various regions around the country, such that the parties would never have to travel further than to a neighboring state for proceedings. Geographically larger states – i.e., California and Texas – might comprise regions all by themselves.
Such an approach would ensure that cases would capture some of the benefits of the present system, without the drawbacks of having a Seattle-based company file its bankruptcy case on the East Coast. Comments are open, what do readers think about developing a nationwide group of "big case" judges?
Following up on Alan White's post from this morning about the Education Department's draft notice about debt collection laws applicable to student loan debt collectors that prompted a Twitter moment, some more student loan news from the Education Department. Last week, it posted a less Twitter-popular request for information on evaluating undue hardship claims in adversary proceedings seeking discharge of student loan debt. The summary in the request:
"The U.S. Department of Education (Department) seeks to ensure that the congressional mandate to except student loans from bankruptcy discharge except in cases of undue hardship is appropriately implemented while also ensuring that borrowers for whom repayment of their student loans would be an undue hardship are not inadvertently discouraged from filing an adversary proceeding in their bankruptcy case. Accordingly, the Department is requesting public comment on factors to be considered in evaluating undue hardship claims asserted by student loan borrowers in adversary proceedings filed in bankruptcy cases, the weight to be given to such factors, whether the existence of two tests for evaluation of undue hardship claims results in inequities among borrowers seeking undue hardship discharge, and how all of these, and potentially additional, considerations should weigh into whether an undue hardship claim should be conceded by the loan holder."
People have been asking for months when investors will accelerate PDVSA and Venezuela bonds that have fallen into default. Rumor has it that some investors have already done so. But there seems to be a consensus that investors aren't in a hurry. U.S. sanctions prohibit a debt restructuring, and few investors are eager for the legal battle that would follow acceleration. But we’re wondering if this view misses something important and unique to the Venezuelan crisis. It seems to us that investors who file suit may be able to negate most of the Republic's and PDVSA's restructuring tools, significantly enhancing leverage when a restructuring finally does occur and making it easier to hold out. So we’re a bit puzzled why some of the more aggressive investors aren’t already rushing to get judgments.
To explain: Almost every restructuring option available to the government and its state oil company involves exploiting modification provisions in the bond contracts. Most Republic bonds have CACs, which let a supermajority of bondholders in a given series modify payment terms for the entire group, leaving no holdouts. For bonds without CACs--i.e., all PDVSA and a small subset of Republic bonds--the exit consent technique has a smaller bondholder majority accept new bonds and vote to modify the old ones in ways that discourage (but do not eliminate) holdouts.
The problem, as we see it, is that contractual modification provisions do not work against investors who hold money judgments. It isn’t that a money judgment extinguishes all contract-based rights. Readers of this blog may remember the “me too” plaintiffs from the Argentine debt drama. These were holdouts, many holding money judgments, who wanted injunctions similar to the one entered in favor of NML. Judge Griesa gave them what they wanted, rejecting Argentina’s argument that their contract rights under the pari passu clause had “merged” into the judgment they had gotten through litigation. (Here’s his opinion, from June 2015.) We disagreed with him on the wisdom of granting the injunction in the first place, but he was probably correct on this question. Some contract rights are plainly intended to persist, even after one party has successfully sued for breach. And a lawsuit based on those rights often involves an entirely different claim than the one that produced the judgment.
But the question here is different: It is whether a party who has lost a breach of contract lawsuit can later reduce the amount of the judgment by modifying the contract. The answer, we think, must be no. To use the Republic’s CACs as an example: those permit a vote to “modify, amend, or supplement the terms of the Notes,” including a vote to “reduce the principal amount,” so long as the relevant voting threshold is reached. But investors holding money judgments are no longer seeking to recover principal under the bonds; they have an independent right to the amount of money specified in the judgment. Even if the CAC (like the pari passu clause) survives a judgment, it doesn't seem to permit a modification of that right. And even if it did, courts have limited power to set aside judgments; a retroactive modification of rights, even if permitted by contract, doesn’t seem to be one of them.
If the sanctions weren't in place, we wouldn't be talking about such questions. Litigation takes time, and a vote modifying the bonds would likely occur before entry of a judgment. Knowing this, prospective holdouts would favor bonds that are hard to modify. But here, the sanctions give holdouts plenty of time, although (presumably) not forever. So we’re wondering why holdouts aren’t being a bit more aggressive at pressing their claims. We’re also wondering whether they really have reason to prefer Republic bonds without CACs, as press reports indicate, and as would be true in a normal debt crisis. Anna has already expressed skepticism that differences among the Republic bonds will matter in a restructuring. This is another reason for skepticism. What good is a CAC if holdouts already have money judgments?
As if the power to garnish wages without going to court, seize federal income tax refunds and charge 25% collection fees weren't enough, debt collectors have now persuaded the Education Department to free them from state consumer protection laws when they collect defaulted student loans. Bloomberg News reports that a draft US Ed federal register notice announces the Department's new view that federal law preempts state debt collection laws and state enforcement against student loan collectors. This move is a reversal of prior US Ed policy promoting student loan borrower's rights and pledging to "work with federal and state law enforcement agencies and regulators" to that end, as reflected in the 2016 Mitchell memo and the Department's collaboration with the CFPB.
Customer service and consumer protection will now take a back seat to crony profiteering by US Ed contractors. This news item has prompted a twitter moment.
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