Wednesday, October 28, 2015

Super Chapter 9: Treasury's Plan for Puerto Rico

Last week the Treasury Department provided its recommendation for a federal response to Puerto Rico's debt problem. It says that Congress should pass the chapter 9 extension bill for the benefit of Puerto Rico's municipal debtors who are responsible for about a third of the total debt. Congress should also authorize a "broader legal framework" that goes beyond relief for municipalities and that would cover all of Puerto Rico's debt. This process should be reserved exclusively for U.S. territories (states could not use it). The framework would provide the basic protections of a bankruptcy proceeding:  a stay on creditor collection action, priority for new, private short-term finance, and voting by creditor class on any proposed restructuring. Treasury does not mention cram down, but that would surely be included among the "basic protections" of bankruptcy.

Regarding a judicially supervised bankruptcy proceeding, Treasury notes that more than 20 creditor groups have already formed, making it "very difficult" for the Puerto Rican government to negotiate a voluntary restructuring in time to prevent a complete collapse. Without an orderly process, the alternative is default followed by "numerous creditor lawsuits and years of litigation" which would "depress the local economy, increase costs, and make long-term recovery harder to achieve."

The proposal has been dubbed a "super chapter 9."  One observer who is an economics professor and a Puerto Rican bondholder said that super chapter 9 legislation would be a de facto amendment of the Puerto Rican Constitution by Congressional fiat and an affront to the sovereignty of the Puerto Rican people.

At a Senate  Committe on Energy and Natural Resources hearing last Thursday, the reaction of senators was a mixed bag. Senator Warren used the occasion to urge Treasury to "step up and show more leadership," It's not clear what she had in mind for Treasury to do, but she did challenge the department to be "just as creative" in finding solutions as it was when several investment banks failed or were near failure during the 2008 financial crisis.  Senator Sanders said that Treasury should call a meeting with the unions and "all the players" in Puerto Rico including creditors (who he called "vulture funds") and just work something out.  Sanders and Warren both emphasized that any solution should not protect investors at the expense of  Puerto Rican workers.  Senator John Barasso (R.Wyo) asked about the impact of a haircut for bondholders on the people of his state-- whose pensions are invested in mutual funds that hold Puerto Rican bonds.  Short answer is if the bond investors take a hit, the pain will be felt by voters in Wyoming. The webcast of the hearing is available here.

Except for US Government Backed Debt

The Congressional budget deal includes a rider that would permit cellphone robocalls to collect debt owed to or guaranteed by the government, including federally guaranteed student loans, FHA mortgages and federal taxes.  The rider would amend the Telephone Consumer Protection Act (TCPA) that bans such calls except with the advance written consent of the borrower. The Obama administration supports the rider.  The Department of Education argues that with the ability to robocall borrowers, it will be in a better position to help borrowers avoid late payments. The FCC administers the TCPA.  It has declined to comment on the budget rider.

Friday, October 16, 2015

Losing by Winning: Campbell-Ewald v. Gomez

The Supreme Court heard argument yesterday in Campbell-Ewald v. Gomez.  The question  is whether defendants in class action litigation can make the case moot by offering the plaintiff class representatives cash for all damages they could possibly win in court.  Defendants' argued that because they've made the offer for full compensation, plaintiffs have nothing at stake in the litigation (the case is "moot") even though they reject the offer.  The Constitution in Article III limits the power of the judicial branch to deciding "cases or controversies."  Issues where the litigants have no stake in the outcome of the proceeding are neither.

The class action litigation for which Gomez is the plaintiff class representative involved alleged violation of the Telephone Consumer Protection Act.  Gomez, claims that he and 100,000 other people received text messages from one of the defendants in violation of the Act.  The Act provides damages to consumers of $500 per violation. The defendants offered to pay Gomez triple the $500 for each text he received.  That's just not good enough for Gomez's lawyers who want a right to pursue damages plus attorneys fees on behalf of the plaintiff class.  The defendants raised the mootness issue all the way to the Ninth Circuit, which held that Gomez still had the requisite stake in the case.

Based on their questions, the justices understand the significance of this case to the plaintiffs-side class action bar. Justice Sotomayor made her view clear-- the plaintiffs are entitled to their day in court and their lawyers are entitled to class certification and fees.  She quipped to counsel for defendants:  "What's an Article III determination is whether [the plaintiff] is entitled to the relief that they asked for.  May well be they're not. But they are entitled to have the Court say it, not you." Justice Breyer asked counsel for the plaintiff class why the defendant couldn't just tender cash to the court and let the court distribute the cash to people who received the improper text messages.  Plaintiffs' counsel answered that even then the case would not be moot because the plaintiff would not have a judgment.  Breyer's response was not sympathetic-- "Give him a judgment-- who cares?"  Obviously, it's the lawyer who wants the  class certified who cares.  His chance for attorneys fees, typically calculated as a percentage of the settlement, is all that is at stake.  Justice Roberts nailed it:  "Oh well, that's the whole thing, right? This is all about class certification."

Here's Ronald Mann's fascinating roundup of the argument on this issue on Scotusblog.   Mann thinks that key voters Breyer and Kennedy might favor a middle ground position which would recognize a way for a defendant to moot a class action case (and save attorneys fees) by conceding liability and paying full damages in cash into the court.  But he's not predicting how the Court will rule.

A side note on the Telephone Consumer Protection Act:  In August 2014,Capital One and three collection agencies agreed to pay $75.5 million to settle and end a class action alleging that the companies used an automated dialer to call consumer's cell phones without their consent in violation of the Act.  The proposed agreement would pay about $20-40 per class member (about 21 million people).  The class consisted of all people who received an automatic dialer call to collect credit card debt between January 2008 and June 2014.  About 30% of the fund, $22.5 million, went to the attorneys for the class.  After the Capital One case settled, the FTC enacted new rules which now require an for-profit business to acquire "prior express written consent" before making any call or text using autodialers or prerecorded voices to cellphones.

Thursday, October 15, 2015

Puerto Rico and US Treasury Consider a Treasury-Assisted Workout

WSJ reported  yesterday that Puerto Rican government representatives and US Treasury Department officials talked about a plan to workout Puerto Rico's $72 billion debt problem.   According to WSJ, the plan involves creation of a "lockbox" account set up and presumably controlled by Treasury into which some of Puerto Rico's tax revenue would be deposited.  Puerto Rico would issue a superbond which Treasury will administer.  I presume that the new bond would be secured by the funds on deposit in the account and backed by the issuer, but not the U.S. Treasury.  To make the deal work, most or all creditors would have to agree to exchange current debt on a "cents on the dollar" basis, reducing the total principal balance of Puerto Rico's debt.  The "haircut" in exchange for the superbond could be an attractive option relative to the alternative.

Yesterday, Treasury confirmed that it met with Puerto Rico's governor to talk about the federal government's possible role in providing assistance.  It denied that the federal government was talking about undertaking any of Puerto Rico's obligations, or in any way providing a "bailout."

The idea of a US-assisted workout for Puerto Rico's public debt is intriguing.  But, it faces long odds. An obvious issue is achieving consent among a diverse group of creditors with different investment strategies and payout priorities-- always a challenge in restructuring debt outside of bankruptcy. Another issue is the challenge of collecting tax from Puerto Ricans.  The territory has a large untaxed underground economy and local taxing authorities are not always transparent in the way they account for tax revenues.  If Puerto Ricans don't pay their own taxes now, compliance is not likely to improve when the tax collector is the IRS.

Thursday, October 8, 2015

Plaintiffs' Lawyer Protection Bureau

Andy Pincus, partner at Mayer Brown called out the CFPB's proposed framework for arbitration terms for putting the interests of trial lawyers ahead of consumers.  His essay appears is on the U.S.Chamber of Commerce page.

He notes that based on the CFPB's own study, 251 settlements with 34 million class members yielded a total of $1.1 billion from defendants, for an average payment of about $32 per consumer.  Plaintiffs' lawyers in these cases yielded about $1 million per case in fees.  He notes with understatement:  "No wonder these lawyers are so eager to be able to bring class actions."  He also takes the CFPB to task for offloading to plaintiffs' lawyers their responsibility to protect consumers through rule making and enforcement actions.  

Wednesday, October 7, 2015

Almost the End for Class Action-Barring Arbitration Terms?

Yesterday, the CFPB published an outline of its proposed framework for regulation of arbitration agreements in contracts for consumer financial products like credit cards, auto leases and loans, residential mortgages and prepaid cards. Under the proposal, arbitration clauses in consumer financial contracts could be enforceable against an individual litigant, but must expressly state that they are not enforceable against a plaintiff class. CFPB Director Richard Cordray called arbitration terms a "free pass" for companies who use them to escape liability for profitable practices that harm consumers

The CFPB's March 2015 study  estimated that terms which expressly prohibit judicially supervised class action currently appear in tens of millions of contracts.  What about the economic impact of consumer protection regulation that opens consumer financial services providers to a barrage of class action lawsuits, including claims of disparate impact discrimination?  Apparently, that is someone else's problem:  "The Bureau understands that class lawsuits have been subject to significant criticism that regards them as an imperfect tool that can be expensive and cumbersome for all parties. However, the Bureau notes that Congress, state legislatures, and the courts have mechanisms for managing and improving class procedures over time."

Any final rule on consumer arbitration terms would apply to contracts made more than 180 days after the effective date of the regulation.  The CFPB's proposal is still subject to a review by a small business panel under the consultative process required by the Small Business Regulatory Enforcement Act.

Thursday, October 1, 2015

EMV Liability Shift Deadline is Today

Today is the day.  Liability for "card present" fraud shifts to the party who is the least EMV compliant in the transaction.  I warned you this was coming last month.  I've got my chip card ready to go.  So far, the only place that takes it is Target.

1.2 billion credit and debit cards and 12 million terminals need to be upgraded to be EMV compliant, and that is going to take awhile.  About 40% of retail locations will be EMV compliant by the end of 2015.  About 60% of credit cards and 25% of debit cards will be compliant by the end of 2015.  It costs about $3.50 to issue a new EMV compliant card.  And, the average cost for an EMV compliant point of sale terminal is between $500-$1,000.  (Source is

33 Million Still Uninsured

According to Census Bureau reports issued in September, 33 million people, 10.4% of the U.S. population didn't have health insurance coverage during 2014.  4.5 million of these uninsured were children.  The reports show that most of these uninsured people could have had access to coverage under the Affordable Care Act or otherwise, but they chose not to sign up. has great graphics and story that offers an analysis.   The Census Bureau's Sept. 16 press release with links to its reports is here.  Excluding immigrants and people in the "medicaid gap" who are low income but don't qualify for a subsidy, about 22 million people are uninsured and more than a third of them are young adults between 19 and 34.

The Census Bureau reports that in 2014, there were 46.7 million people in poverty (14.8%).  The 2014 data shows no statistically significant difference in either number or rate from 2013 estimates, The percentage of people without health insurance coverage during 2014 was 10.4%, down from 13.3% in 2013.