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NEWS AND ANALYSIS
SENATE POISED TO END FILIBUSTER ON NOMINEES
Majority Leader Harry Reid announced today his intention to force a vote on Monday to change the Senate’s longstanding rule permitting extended debate on executive branch nominees. The rule change would permit the majority to approve nominations with a simple majority vote. This so-called “nuclear option” would be a profound change in a fundamental Senate rule. Most immediately, the rule change would allow the Senate’s Democratic Majority to confirm Richard Cordray as Director of the Consumer Financial Protection Bureau, along with two nominees to the NLRB. Cordray was renominated after his recess appointment by President Obama was cast into doubt by a D.C. Circuit decision holding that the NLRB Nominees were recess appointed (on the same day in January 2012) in an unconstitutional manner.
HOUSE HEARING EXAMINES IF DODD-FRANK ACT'S "ORDERLY LIQUIDATION AUTHORITY" IS UNCONSTITUTIONAL
Arguing that due process rights “are vaporized” under the Dodd-Frank Act (DFA), witnesses told the House Financial Services Subcommittee on Oversight and Investigations on Tuesday that aspects of the DFA might be unconstitutional, the National Law Journal reported yesterday. Members of the subcommittee focused on the law’s all new—and as yet untested—orderly liquidation authority. Intended as a third way between bankruptcy and bailout, the provision gives the Federal Deposit Insurance Corp. (in conjunction with other regulators) the ability to take over an institution whose failure might pose a risk to the financial stability of the United States. Columbia Law School professor Thomas Merrill testified that DFA raises serious constitutional issues—almost sure to lead to litigaion the first time the provision is invoked, with potentially disastrous consequences. “It’s very likely to cause the whole process to go off the rails and become chaotic,” he said. “My concern is that the constitutional issues will work against the purpose [of the provision]…at a time when it’s least appropriate to bring them to the fore.” But Pepper Hamilton partner Timothy McTaggart argued that the law likely would pass constitutional muster, pointing out that fewer than 170 laws enacted by Congress between 1789 and 2002 were held unconstitutional. “A difference in policy choice as reflected in enacted legislation does not make the legislation unconstitutional,” he said. To date, no court has held Dodd-Frank to be unconstitutional, but a case pending before the U.S. District Court for the District of Columbia, State National Bank of Big Spring v. Lew, may provide the first test. Former White House Counsel C. Boyden Gray is co-counsel in the case, brought by a Texas community bank, the Competitive Enterprise Institute, the 60 Plus Association and several states. He testified before the subcommittee that Dodd-Frank “violates the Constitution’s system of checks and balances” and gives “regulators effectively unlimited power.” Read more.
Click here to read the prepared witness testimony.
COMMENTARY: HOW TO AVOID THE NEXT MF GLOBAL SURPRISE
When MF Global went bankrupt in October 2011, thousands of its customers in the United States discovered that their overseas investments were not as safe or secure as they had assumed—and that they no longer had access to their funds, according to an editorial in yesterday's Wall Street Journal by MF Global Trustee James Giddens. The company faced extraordinary liquidity demands in its final, chaotic days, including margin calls on massive European sovereign-debt bets taken by CEO Jon Corzine and others. Desperate for funds, management improperly raided segregated customer money held by the company's broker-dealer in the U.S., resulting in a $900 million shortfall, according to Giddens. Once MF Global U.K. was put into liquidation, British administrators determined that under U.K. law virtually no money had been actually segregated for customers—which added an additional $700 million shortfall in customers' foreign accounts. Another problem in MF Global—and to some extent in Lehman Brothers—was the company's large, complicated legal structure. The trustee for the MF Global holding company had a different constituency of lenders and general creditors than Giddens did as trustee for the customers and creditors of the U.S. broker-dealer. Trustees with differing priorities led to confusion and further delay. Going forward, Giddens said that there is a need for clear and consistent cross-border rules regarding the protection of money in customer accounts. Clearer rules would pave the way for quicker and more efficient return of customer property when the next MF Global or Lehman occurs. Read more. (Subscription required.)
SENATORS NEAR DEAL ON STUDENT LOAN RATES
Senators are near a deal to provide a long-term fix to student loan rates, but that compromise will likely rest on a score from the Congressional Budget Office (CBO), as well as members' ability to sell the compromise to skeptical members in both parties, The Hill reported today. The potential agreement would look broadly similar to a competing proposal offered by a group of Republicans and Democrats and comes one day after Senate Democrats failed to muster enough support for a one-year freeze of lower interest rates. A bipartisan group of senators pushing a competing student loan proposal met with Senate Majority Whip Dick Durbin (D-Ill.) yesterday, as well as Sens. Tom Harkin (D-Iowa) and Jack Reed (D-R.I.). Harkin and Reed were strong proponents of the one-year freeze, which was broadly rejected by Republicans on the Senate floor on Tuesday.
The senators pushing the competing proposal at the meeting were Sens. Joe Manchin (D-W.Va.), Angus King (I-Maine), Lamar Alexander (R-Tenn.) and Richard Burr (R-N.C.). Members at that meeting agreed on a framework of a bill and now are waiting for a CBO score to determine if the measure is close enough to deficit-neutral to assuage Democrats who had blasted the original proposal, which would have reduced the deficit by $1 billion. Read more.
COMMENTARY: GOOD AND BAD BANK CAPITAL
Three years after President Obama signed Dodd-Frank, U.S. financial regulators have taken their first significant step toward protecting taxpayers from giant bank failures, according to an editorial today in the Wall Street Journal. Under a proposal released on Tuesday from the Federal Deposit Insurance Corp., the eight largest U.S. financial houses would be required to hold more capital. Specifically, the FDIC and their regulatory colleagues at the Federal Reserve and Comptroller of the Currency proposed to increase the leverage ratio at giant bank holding companies to 5 percent from 3 percent, and to 6 percent for the insured deposit-taking banks inside these holding companies. The proposal is still a major step toward taxpayer protection, according to the editorial, and might require the giants to increase capital by close to $90 billion by 2018, or to shrink their balance sheets to operate more safely with the level of capital they hold today. Read more. (Subscription required.)
ANALYSIS: HOW STOCKTON’S BANKRUPTCY MAY CHANGE THE WAY WE ANALYZE MUNICIPAL CREDIT RISK
The bankruptcy of Stockton, Calif., and the forthcoming legal battle has the potential to permanently change the way municipal credit risk is viewed both in California and on a national level, according to a recent briefing paper prepared by Thornburg Investment Management. Bankruptcy Judge Christopher M. Klein on April 1 accepted the city of Stockton’s petition to proceed with chapter 9 bankruptcy. The interesting aspect of the Stockton case revolves around the treatment of pension obligations. Pensions are protected by California statute, to the detriment of bondholders. Because of this protection, public employees in Stockton and throughout California have traditionally been unwilling to make material concessions when negotiating with troubled municipalities. In fact, this issue is pervasive across the country. In general, public labor unions have seldom made material concessions because of a perceived protection of future benefits. Unfortunately for the public employees in Stockton and around the country, the bankruptcy case will be heard in federal court and the status of the pensions will play a key role. Should Judge Klein rule in favor of pension holders, protecting their benefits above the claims of bondholders, it would essentially subordinate bondholders to the claims of public workers. A ruling of that type would immediately decrease the credit quality of all municipal bonds. In the future, public employees would have no incentive to negotiate with stressed municipalities, knowing that their benefits are protected. The result could be an increase in chapter 9 filings as municipalities lose the flexibility to control future expenses. On the other hand, should Judge Klein rule that public employees must take a haircut in line with other creditors, municipal bondholders will benefit. Click here to read the full analysis.
COMMENTARY: TO CATCH A CREDITOR
Earlier this year the Federal Trade Commission completed a multiyear study of credit-report errors and found that nearly 20 percent of consumers had errors in at least one of their credit files, and that 13 percent saw an improvement in their scores when the errors were corrected, according to an op-ed in today' New York Times. A 2012 study by The Columbus Dispatch analyzed 30,000 complaints to the FTC; of those, 1,500 people reported that their files included someone else’s information. Nearly a third said that the credit agencies did not correct the errors, despite being asked to do so. Most egregious, almost 200 people said their reports showed them as deceased. While federal law requires credit bureaus to conduct a reasonable investigation of consumer complaints, the marketplace can penalize credit bureaus that investigate too aggressively, according to the op-ed. Credit bureaus are heavily dependent on lenders for both revenue and the information the bureaus package and sell; if a credit bureau presses a lender too hard, the lender could patronize a different bureau and withhold data about its customers. In contrast, consumers have little power over credit-reporting agencies. Consumers cannot, for example, block credit bureaus from obtaining information about their transactions. Read more.
ABILIVE WEBINAR NEXT WEEK TO FOCUS ON THE § 1111(b) ELECTION, PLAN FEASIBILITY AND CRAMDOWN ISSUES
Utilizing a case study, ABI's panel of experts will explore issues surrounding a lender’s decision on whether or not to make an election under § 1111(b), plan feasibility and voting. The abiLIVE panel will also walk attendees through the necessary mathematical analyses used to analyze these issues. The webinar will take place on July 15 from 1-2:15 p.m. ET. Special ABI member rate available! Click here to register.
NEW abiLIVE WEBINAR ON AUGUST 20: HOW WILL THE NEW U.S. TRUSTEE FEE GUIDELINES IMPACT YOU?
The new U.S. Trustee Fee Guidelines will affect all attorneys and firms who work on larger chapter 11 cases filed on or after November 1st. ABI's Ethics & Professional Compensation Committee will present a panel of experts, including Cliff White, the Director of the U.S. Trustee Program, to discuss some of the ways the new guidelines may change day-to-day operations in firms, issues relating to the new market rate benchmarks, and how these changes might alter insolvency practice. Register today to hear government, attorney and academic perspectives on this important and timely topic.
ABI GOLF TOUR UNDERWAY; NEXT STOP IS THE SOUTHEAST BANKRUPTCY CONFERENCE NEXT WEEK
The next stop for the ABI Golf Tour is the famed Golf Club of Amelia Island course on Amelia Island, Fla., in conjunction with the Southeast Bankruptcy Conference next week. Final scoring to win the Great American Cupsponsored by Great American Groupis based on your top three scores at seven scheduled ABI events, so play as many as you can before the tour wraps up at the Winter Leadership Conference in December. See the Tour page for details and course descriptions. The ABI Golf Tour combines networking with fun competition, as golfers "play their own ball." Including your handicap means everyone has an equal chance to compete for the glory of being crowned ABI's top golfer of 2013! There's no charge to register or participate in the Tour.
ABI IN-DEPTH
NORTON JUDICIAL EXCELLENCE AWARD NOMINATIONS OPEN
Nominations are now open for the 8th Annual Judge William L. Norton Judicial Excellence Award, to be presented during the ABI luncheon at the annual meeting of the National Conference of Bankruptcy Judges on Nov. 1, 2013. The award is presented by ABI and Thomson Reuters each year to the current or retired bankruptcy judge whose career embodies the same continued dedication and outstanding contributions to the insolvency community as the award’s namesake, Judge Norton. Nominations are considered by a committee made up of representatives from the Norton treatise and past ABI presidents. Nomination forms are available from Clay Mattson at Thomson Reuters (clay.mattson@thomsonreuters.com) and should be submitted by July 29.
NEW ABI "BANKRUPTCY IN DEPTH" ON-DEMAND CLE PROGRAM LOOKS AT PRINCIPLES OF PROPERTY OF THE ESTATE: DEMYSTIFYING EQUITABLE INTERESTS
In this 90-minute seminar, Profs. Andrew Kull of Boston University School of Law and Scott Pryor of Regent University School of Law provide an in-depth analysis of a legal principle that has become, in their words, "a long-lost area of the law": § 541 of the Bankruptcy Code. Seeking to demystify what is meant by "property of the estate" and, in particular, the distinction between legal or equitable interests of the debtor in property, Kull and Pryor describe the legal entanglements that ensue when legal title belongs to one person but the equitable title belongs to someone else. The cost of the seminar, which includes written materials and qualifies for 1.5 hours of CLE, is $95. To order or to learn more, click here.
ASSOCIATES: ABI'S NUTS & BOLTS ONLINE PROGRAMS HELP YOU HONE YOUR SKILLS WHILE SAVING ON CLE!
Associates looking to sharpen their bankruptcy knowledge should take advantage of ABI's special offer of combining general, business or consumer Nuts & Bolts online programs. Each program features an outstanding faculty of judges and practitioners explaining the fundamentals of bankruptcy, offering procedures and strategies tailored for both consumer and business attorneys. Click here to get the CLE you need at a great low price!
NEW CASE SUMMARY ON VOLO: PERRY V. KEY AUTO RECOVERY (IN RE PERRY; 9TH CIR.)
Summarized by Hilda Montes de Oca of the U.S. Bankruptcy Court for the Central District of California
Affirming the bankruptcy court, the Ninth Circuit Bankruptcy Appellate Panel (BAP) held that the bankruptcy court did not abuse its discretion when it declined the debtor’s request for a hearing on his second motion for reconsideration and instead entered an order denying the second motion for reconsideration because the debtor did not set the second motion for reconsideration for hearing as required under the Local Bankruptcy Rules for the Central District of California. The BAP also held that the bankruptcy court did not abuse its discretion when it declined to consider the “new evidence” presented by the debtor in support of his second motion for reconsideration because the debtor could have submitted the “new evidence” from 2004 earlier to the bankruptcy court.
There are more than 900 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: CORKER-WARNER BILL: A GREAT STARTING POINT IN THE GSE REFORM DEBATE
The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog post discusses how the Corker-Warner legislation may be a bridge between the advocates of a purely private market and those who favor some role for the federal government in housing.
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
When will the dowward trend of consumer bankruptcy filings turn around?
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 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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