Analysis: Shock Purdue Pharma Ruling Spreads to Former Ann Taylor Owner's Bankruptcy​​​​​​

The surprise rejection of Purdue Pharma LP’s sweeping opioid settlement is already reverberating through the rest of the bankruptcy system, Bloomberg News reported. Ascena Retail Group, the former owner of women’s fashion brands including Ann Taylor and Lane Bryant, is the latest company to see a bankruptcy deal fall apart over its use of so-called third-party releases. The federal judge who struck down the deal last week called back to Purdue in his decision, citing U.S. District Judge Colleen McMahon’s rejection of the opioid-maker’s proposed settlement. The latest ruling shows how third-party releases, a long-controversial legal tool that can protect a bankrupt company’s executives and owners from lawsuits, are coming under increased scrutiny. Federal courts are split on whether the releases are legal, and now once-permissive jurisdictions are increasingly questioning such maneuvers. Other large companies such as opioid-maker Mallinckrodt Plc are also seeing their use of releases come under fire. “Judges have been holding their noses on this issue for a while,” said Prof. David Skeel of the University of Pennsylvania School of Law. “It seems like the Purdue decision, at least in the short run, has opened the floodgates; courts feel like they’ve been given an invitation to be skeptical.” The fresh scrutiny of releases, which are a part of virtually every large insolvency case, threatens to alter the way large corporate bankruptcies work in the U.S. and could strengthen the hand of individual investors by protecting their right to sue insiders and others liable for a company’s failure.

For further insights on this decision, be sure to read the Jan. 19 edition of Rochelle's Daily Wire.

Commentary: Puerto Rico’s Bankruptcy Exit Isn’t the Finish Line*​​​​​​

Exiting a bankruptcy that began in May 2017 and that was prolonged by hurricanes and a global pandemic should be framed as reason for optimism for all Puerto Ricans, yet it’s just as important to have a clear understanding that this restructuring plan, even if it lops off tens of billions of dollars of debt, is not a cure-all for what snared the commonwealth in an economic tailspin in the first place, according to a Bloomberg commentary. A lot of hard work still remains to put the island on a sustainable fiscal path. For one thing, it sure looks as if Puerto Rico, after more than $1 billion in costs, still couldn’t do much through bankruptcy to impair the holders of its general obligation bonds and commonwealth-backed securities. While those bonds will total only $7.4 billion now instead of $18.8 billion, investors will also get about $7 billion in cash up front and billions of dollars worth of “contingent” debt that will pay out if sales-tax collections exceed projections. It always seemed impossible that bondholders would be made whole — but this agreement isn’t all that far off. The legacy debt should be swapped out for the new obligations by March 15. Puerto Rico will still be on the hook for an average of $666 million a year over the next decade on debt service for the new general obligation bonds alone. For some context, the commonwealth’s general fund collections totaled $11.7 billion in the 2021 fiscal year, bolstered by federal disaster funds and pandemic relief aid. Debt service will remain a large slice of the government’s expenses. Meanwhile, the viability of the commonwealth’s pension system remains tenuous. The restructuring plan lays out specifics for creating a reserve trust. Still, it owes some $55 billion to current and future retirees because any accrued benefits weren’t impaired by the approved restructuring plan. Puerto Rico has been spending about $2.3 billion each year to cover such retirement payouts because its assets are depleted.

*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.

CFPB to Examine Colleges’ In-House Lending Practices​​​​​​

The Consumer Financial Protection Bureau (CFPB) announced today that it will begin examining the operations of post-secondary schools, such as for-profit colleges, that extend private loans directly to students, according to a press release. The CFPB is issuing an update to its exam procedures, including a new section on institutional student loans. As the CFPB begins its supervision, the exam procedures will inform the industry about the practices that CFPB examiners will review, including placing enrollment restrictions, withholding transcripts, improperly accelerating payments, failing to issue refunds and maintaining improper lending relationships. “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future,” said CFPB Director Rohit Chopra. “It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.” The CFPB said that it is concerned about borrowers’ experiences with institutional loans because of past abuses at schools, like those operated by Corinthian and ITT, where students were subjected to high interest rates and strong-armed debt-collection practices. Schools have not historically been subject to the same servicing and origination oversight as traditional lenders, according to the CFPB release.

Commentary: Stop Saying Student Debt Relief Is for the Rich*​​​​​​

When people debate whether to forgive some or all of the $1.75 trillion in student debt weighing on millions of American families, opponents often argue that it would be wasteful and unfair: Too many relatively well-off, well-educated people would benefit at the expense of all taxpayers, many of whom have never had the desire or opportunity to attend college, according to a Bloomberg commentary. As reasonable as this might sound, it’s the wrong way to think about a policy that could actually do a lot of good, for both individuals and the broader economy, according to the commentary. It relies on a misleading concept of who counts as rich, and ignores the extent to which the debt itself is a manifestation of unfairness. True, if one looks at the U.S. population by income, most student debt is owed by the highest-earning half of households. By one estimate, this group would receive about three quarters of the forgiven dollars (in present-value terms) if all the debt were canceled. This has led economists and politicians to label the policy “regressive.” But this analysis is flawed on many levels, according to the commentary. For one, it’s an inappropriate way to assess the policy’s regressivity. Social Security, the country’s largest safety net program, can look regressive, too — until one recognizes that low-income participants receive larger benefits compared with what they contribute in taxes. In the case of student debt cancellation, income-based evaluation ignores people’s starting positions — the household resources that determine so much in life, including whether they can attend college debt-free. In the U.S., those starting positions differ radically, in large part due to a long and ignominious history of racism that has, generation after generation, prevented Black families from building wealth.



*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.

Weekly Jobless Claims Rise to 286,000 Amid Omicron Surge​​​​​​

New applications for jobless benefits rose sharply last week amid surging cases of COVID-19, according to data released today by the Labor Department, The Hill reported. In the week ending Jan. 15, seasonally adjusted initial claims for unemployment insurance rose to 286,000, a gain of 55,000 from the previous week’s revised level of 231,000. The four-week moving average of new claims also rose to 231,000 after several weeks of rising applications. The steep increase in claims raises concerns about the economic impact of the omicron variant, which has weighed on the economy through much of the winter. Economists say persistent staffing troubles, declines in face-to-face consumer activity and school closures could wipe out much of the quarter’s growth and job gains. Claims had already been rising ahead of last week as a resilient labor market finally buckled beneath the omicron surge. Weekly claims had lingered below pre-pandemic levels and hit a nearly 60-year low before the new variant appeared to spur a spike in layoffs.

Commentary: Something Has to Give in the Housing Market. Or Does It?*​​​​​​

Two years into the pandemic, rundown bungalows command bidding wars, buyers keep snatching up places they’ve never seen, and homebuilders can’t find enough cabinet doors for everyone who wants a new home. The median price for an American home is up nearly 20 percent in a year. The for-sale inventory is at a new low. And the hopeful buyers left on the sidelines have helped drive up rents instead. All of this may feel unsustainable — the tight inventory, the wild price growth, the dwindling affordability. Surely something’s got to give. But what if that’s not exactly true? Or, at least, not true anytime soon for renters locked out of homeownership today or anyone worried about housing affordability, according to a New York Times commentary. “It’s not a bubble, it really is about the fundamentals,” said Jenny Schuetz, a housing researcher at the Brookings Institution. “It really is about supply and demand — not enough houses, and huge numbers of people wanting homes.” Neither side of that ledger has a quick fix. And there’s little evidence to suggest the nation is in a hurry to correct the imbalance. “My pessimistic view is that the economy is perfectly capable of running with unaffordable housing,” said Daryl Fairweather, the chief economist at Redfin. This was evident over the last decade, she said, when affordability worsened even as the economy continued to grow. And that reality has enabled politicians and the public to largely neglect the issue of housing affordability. More housing construction will help — and it has been increasing — but the U.S. has been underbuilding for so long that it’ll take years to meet demand. Today, first-time home buyers in once-affordable markets have competition from all kinds of sources that didn’t exist a generation ago — from global capital, from all-cash “iBuyers” that size up homes by algorithm, from institutional investors renting single-family homes, and from smaller-scale investors running Airbnbs.



*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.

Next Wednesday’s abiLIVE Webinar to Examine How to Restructure Financially Distressed Colleges and Universities​​​​​​

The headwinds of shrinking enrollment, increased competition and downward pressures on tuition are causing many institutions in higher education to address their economic viability. A special abiLIVE next Wednesday, sponsored by ABI’s Financial Advisors and Investment Banking Committee, will feature a panel of experts in the field discussing how distressed colleges and universities can best be restructured. Register for FREE by clicking here.

Volunteer Today to Become a Preliminary-Round Judge for the Duberstein National Bankruptcy Moot Court Competition!
The Duberstein National Bankruptcy Moot Court Competition will be held in New York Feb. 26-28. The Duberstein Competition, now in its 30th year, is a result of a longstanding partnership between the American Bankruptcy Institute and St. John’s University School of Law. It is widely recognized as one of the nation’s preeminent moot court competitions. After moving to a virtual platform in 2021 due to the COVID-19 pandemic, the Duberstein Competition will return to being an in-person competition in 2022. Forty-six teams from law schools across the country will compete through written briefings and oral arguments. This year’s problem, which was once again developed by Hon. John T. Gregg (U.S. Bankruptcy Court W.D. Mich.; Grand Rapids, Mich.) and Paul R. Hage (Jaffe Raitt Heuer & Weiss; Southfield, Mich.), presents two hotly contested issues for argument: (1) whether a seller of goods is entitled to reduce its preference exposure pursuant to 11 U.S.C. § 547(c)(4) by the value of goods sold, even though the debtor in possession paid for such goods in full pursuant to 11 U.S.C. § 503(b)(9); and (2) whether a trustee must timely perform the obligations of a debtor under 11 U.S.C. § 365(d)(3) by paying rent due prior to the rejection of an unexpired nonresidential real property lease but allocable to the period after the effective date of rejection.

The competition fact pattern is available here.

The Duberstein Competition is looking for volunteer judges for the preliminary rounds on Saturday, Feb. 26, and Sunday, Feb. 27. To volunteer to serve as a preliminary-round judge, please register here. For inquiries regarding serving as a preliminary-round judge, please contact Paul R. Hage.

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