Harvey's Hit on Energy

Prognosticators are starting to talk about the effect of Harvey on Houston's oil and gas business which accounts for about a third of Houston's economy.  To understand the potential impact,of Harvey on the US energy sector it's important to distinguish between oil production and oil refinery capacity.

Based on the latest reports from Energy Information Administration, about 17% of total US crude oil production and 5% of domestic dry natural gas comes out of the Gulf of Mexico region.  48% of US crude oil production in 2016 came from "tight oil resources" where oil is extracted from rock formations like shale.  About a decade ago, oil production from the Gulf accounted for about 30% of total US output.  The shale revolution reduced Houston's importance in oil production, and the resulting impact of Harvey on the nation's oil production capacity.

Houston remains an important center for oil refinery operations, both for petroleum and natural gas processing.  Oil refineries in the Gulf of Mexico have a capacity of 8.6 million barrels of oil per day, about 45% of the nation's refining capacity.  Harvey is responsible for taking about 2.2 million barrels per day of capacity offline.

The expansion of tight oil production makes the US oil supply less vulnerable to hurricanes.  But, hasn't changed our vulnerability to flooding and accompanying refinery shut downs in the Gulf region.  On Monday, gasoline futures were up nearly 5%, likely in anticipation of gas shortages and gas price hikes.

The US Energy Information Administration has the latest data and a cool interactive map showing Gulf area energy infrastructure with real time storm information.

Student Wins Due Process Suit Against PSU

A Penn State student accused of sexual misconduct, found responsible, and suspended under Penn State’s Code of Student Conduct Title IX procedures won a case against Penn State to enjoin enforcement of his suspension.   The student, identified in the court proceeding as John Doe, argued that Penn State deprived him of his constitutional right to due process of law by failing in several instances to follow its own procedures and denying him a meaningful opportunity to be heard.  He asked the court for an order preventing Penn State from suspending him from classes in Fall 2017 pending trial on the merits.  The court granted the motion, holding that he showed a likelihood of success on his denial of due process claim, that imposition of the suspension would cause him irreparable harm, and that the balance of harms weighed in favor of injunctive relief. 

Another Penn State student, identified in the case as Jane Roe, reported to her residence hall coordinator that Doe had attempted to kiss her, touched her with his hands under her clothes, and digitally penetrated her vagina, all without her consent. The university Title IX Compliance Specialist responsible for investigating the incident,  informed Doe that he was being charged with “nonconsensual digital penetration based solely on the residence hall coordinator’s report of Roe’s statements.”  Doe disputed Roe’s account of the incident, claiming instead that it was Roe who had attempted to kiss him and that he had rejected her advances.  Roe never provided the investigator a written statement.

Roe reported orally to the investigator that she had a medical examination one week after the incident and that she had provided blood stained clothing to University Police.  The investigator included a summary of this conversation with Roe in the Investigative Report.  Doe submitted a written response to the Report in which he asserted among other things that: 1) one of the witnesses whose statement was recounted in the report told him that Roe had pursued a physical relationship with Doe;  2) another witness contradicted Roe’s statements to University Police about her feelings for Doe; and 3) Roe’s statements about the incident were inconsistent.  The investigator redacted all of these statements from Doe’s written response.

Penn State Title IX procedure  does not permit either the accused or complaining student with a right to cross examine the other.  It permits questioning of witnesses“only through the hearing authority.”  Questions that ask for “new information” at the hearing are not permitted unless the information was: (1) not available during the investigation; and (2) is relevant to establishing whether or not the Respondent is responsible for misconduct.” 

Doe submitted 22 questions for Roe at the hearing most of which challenged the credibility of Roe’s statement that she had a medical examination after the incident.  The hearing chair refused to ask Roe 18 of the questions on grounds that questions about the post-event medical examination would present “new information” and were not relevant on the issue of Roe’s consent.  

The court found that Penn State made “significant and unfair deviations from policy” during the investigation and hearing.   The hearing chair's exclusion of 18 of Doe’s questions was an unfair deviation because information about Roe’s alleged post-incident medical examination was part of the Investigative Report and not “new information.” Nor were the questions irrelevant on the issue of Doe's responsibility for the misconduct.  Although questions regarding the medical examination were not relevant to the issue of whether Roe consented to the alleged sexual conduct, they were relevant to the question of Roe’s credibility. 

Similarly, the court found that the investigator’s redaction of Doe’s written response to the Investigative was an unfair deviation from Penn State's procedures.  Penn State argued that redaction was appropriate because the investigator concluded that under Penn State procedure, Doe’s challenge to Roe’s credibility was irrelevant to the question of his responsibility for the misconduct.   The court “view[ed] with skepticism” the role of the investigator as the arbiter of the relevance of evidence, a role Penn State’s procedure gives to the Title IX hearing panel.  The investigator’s unilateral decision to redact Doe's responsive statement on relevance grounds has a “funneling effect.” It narrows the evidence that comes before the hearing panel, and limits the information the hearing panel may consider.    

This case is important for several reasons.  The court called into question as a matter of constitutionally required due process the conflicting roles of the investigator as both a neutral fact reporter and arbiter of the relevance of evidence.  The court rejected Penn State’s position that a challenge to the credibility of the complaining student is not relevant to a determination of the accused student’s responsibility for the misconduct.  In a sexual misconduct case where the two eyewitnesses’ testimony conflicts, the adjudicators’ decision about the responsibility of the accused student turns entirely on its assessment of the credibility of the witnesses.  Unlike a defendant in a criminal case, an accused student in disciplinary hearing does not have a constitutional right to challenge by cross-examination the credibility of a witness supporting the charge against him.  However, when the outcome of a disciplinary case depends entirely on witness credibility, the accused student is entitled to some ability to challenge his accuser’s credibility.      

The case is John Doe v. The Pennsylvania State University,  (M.D. Pa. August 18, 2017).

What's Next for Puerto Rico?

Puerto Rico's governor on Wednesday requested relief under a federal statute that provides a process for orderly resolution of its debts.  Here's a USA Today story that answers some basic questions about what is likely to happen next.

Amazon Passes Walmart in Value

Amazon laps Walmart-- twice.  Based on share value, Amazon is worth over $430 billion.  Walmart is worth $220 billion.  It's the "Amazon effect" and its big.  General merchandise retail stores like Macy's, Target, and Kohl's are struggling to keep pace with customer's preference for online shopping. The general merchandise retail sector lost 35,000 jobs last month and 90,000 jobs since last October.  Amazon just announced that it was hiring 30,000 part time workers, 25,000 for its warehouses and 5,000 in customer service.

The Emoluments Clause

Is Donald Trump entitled to conduct his businesses as usual while he is president?  Or, are the people entitled by the Constitution to a president who serves free of conflicts of interests created by his other full time job?  The answer to this question may lie in part in the US Constitution "emoluments clause," Article I, section 9, clause 8:  No Title of Nobility shall be granted by the United States:  And no Person holding an Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State."  The Heritage Guide to the Constitution provides an interesting explanation of the origins and purposes of this clause.  With regard to the prohibition on accepting an "emolumnent" from a foreign government or sovereign without consent of Congress, Alexander Hamilton noted in The Federalist No. 22:  "One of the weak sides of republics, among their numerous advantages, is that they afford too easy an inlet to foreign corruption."  The founders were worried that economic entanglements between American government officials (persons holding an office of profit or trust) could undermine the republic.

Constitutional scholars and legal ethicists are debating about what exactly the emoluments clause prohibits, who is entitled to enforce it, and what remedy a court could order if it found Trump's conduct a violation of the clause.  It's not clear whether a foreign corporation should be treated as a "King, Prince, or foreign State."  Nor is it clear whether a payment received in an arms' length transaction for services rendered-- for example, payment for a stay by a foreign official at a hotel connected to Trump-- is a "present" or "Emolument."  Another clause in the constitution makes bribery an impeachable offense for the president, but the emoluments clause doesn't say what the consequences are for violating it, and because it doesn't specifically mention the president, some argue that it may not apply to the president at all.

CFPB Challenges TCF Bank's "Opt-In" Sales Strategy for Overdraft Protection

The CFPB's enforcement action against Minnesota-based TCF National Bank is the latest chapter in the American consumer's love hate relationship with "overdraft protection."

Leaving aside the the handful of people who kite checks as a profession, checking account customers, particularly those who maintain low balances, worry about bouncing checks.  It's embarrassing.  And, it's expensive.  Banks offered "overdraft protection" as a form of automatic short term credit. The bank pays the otherwise bouncing check, book a loan to the customer in the amount of the check and charge an "overdraft fee" for the service.  For customers with a linked savings account, the bank  automatically transfers funds from the savings account to cover the overdraft, usually for free (depending on minimum balance) or at a nominal account transfer fee. 

Overdraft protection was truly a deep backup in case of a mistake about an account balance, or an emergency.  Customers who used paper checks learned to record each check in the register, deduct the amount of the check from the account balance, and reconcile the register balance with their paper bank statement when  it arrived in the monthly mail.  (Shout out to my mother who took pride in this anxiety-packed monthly ritual until I just  recently persuaded her to stop). 

Then came the debit card as a deposit account access device.  Unlike a checkbook, a debit card has no register.  New debit card customers, particularly young customers who never used paper checks for payment, had no habit of maintaining account balance records.  Banks continued to offer overdraft protection as a standard and automatic account feature, in the package along with stop payment services, for a per transaction fee.  But,the expensive consequence of bouncing a check came as a surprise to debit account customers (and their parents), who in retrospect, would have preferred the embarrassment of a declined transaction to a $35 overdraft charge on a $5 transaction at Taco Bell.  With the rise in debit card use among consumers, overdraft transactions rose and overdraft fees became a significant revenue source for banks.  Outraged consumers complained to their elected representatives, and consumer advocate groups took the view that banks were fiendishly using overdraft protection on debit cards to exploit low-balance customers by hiding both the existence and the cost of the service they provided. 

In 2010, federal regulations were enacted to prohibit banks from charging overdraft fees on ATM wintdrawals and debit card point of sale (POS) transactions unless the bank obtained the consent of the customer to the overdraft protection. To impose a charge for an overdraft, the bank had to show that the customer "opted in" to the service.  Banks responded by informing existing and new customers about overdraft protection and requiring the customer to click to "opt in." 

According to the CFPB, TCF National Bank responded by implementing an aggressive sales program to induce customers to "opt in" to overdraft protection.  According to the CFPB's press release issued yesterday,  66% of TCF's customers opted in, about 3 times more than the opt in rate at other banks.  The CFPB alleges that TCF tricked its customers into opting in, by deliberately obscuring the optional nature of overdraft protection among other mandatory "I agree" boxes on the account opening online forms, by obscuring what "opting in" would mean (fees) and by over-emotionalizing the value of overdraft protection by explaining it as an emergency source of funds.  The CFPB's case seems to be that TCF sold overdraft protection too hard.  The key evidence seems to be TCF's impressive success in getting customers to "opt in." 

I don't think consumers are quite as gullible as CFPB presumes when it comes to bank services and the fees that come with them. The CFPB, in 2015, posted a two page Consumer Advisory explaining "You've got options when it comes to overdraft."  Not that complicated.

Who's Got to Watch the Clock?

When a debt collector files a claim in a consumer bankruptcy case that is time-barred under state statute of limitations law, whose problem is it? Does the burden of raising the statute of limitations defense fall on the trustee in the consumer debtor's bankruptcy case who must affirmatively object to the claim as not "allowable" because of the time bar?  Or, should the burden fall on the debt collector creditor because the act of filing a time barred claim in a bankruptcy case violates the Fair Debt Collection Practices Act's (FDCPA) prohibition on false or deceptive debt collection practices?

The issue was before the Supreme Court yesterday in Midland Funding v. Johnson.  A transcript of the oral argument is here.  The Eleventh Circuit in 2014 held that when a debt collector files a time -barred claim in a bankruptcy case it violates the FDCPA.  Every other circuit court that has considered this question has held the opposite.

The case presents a clash between two federal statues, the Bankruptcy Code and the FDCPA.   The Code  defines "claim" broadly and deliberately to bring within the jurisdiction of the bankruptcy court all of the debtor's liabilities, even unmatured, contingent, unliquidated or disputed liabilities, so that all such claims can be addressed and potentially forgiven in his bankruptcy case.  In a bankruptcy case, a debt that may be subject to one or more defenses is still a "claim."  It is common for the debtor to identify a creditor, give that creditor notice of his bankruptcy case, and invite the creditor to file a claim even if the debtor intends to object to it.  The debtor's goal is to obtain court-ordered discharge (forgiveness) of as much liability (or potential liability) as possible. And, no "claim" can be discharged in a bankruptcy case if the creditor holding it did not receive notice and an opportunity to be heard (due process).  The Eleventh Circuit and all courts considering this issue have held that a creditor on a debt subject to a statute of limitations defense holds a "claim" under the Code.

The Eleventh Circuit held that although a time-barred debt is a "claim" under the Bankruptcy Code, the debt is "unenforceable" under the FDCPA so that when a debt collector asserts such a claim in a bankruptcy case, it violates the FDCPA, which prohibits "false, deceptive, or misleading representation" or "unfair or unconscionable means" to collect a debt.

At the oral argument yesterday, several of the justices asked the debt collector's attorney why debt collectors file time barred claims in the first place.  The Eleventh Circuit noted in its opinion:  "A deluge has swept through U.S. Bankruptcy courts of late.  Consumer debt buyers-- armed with hundreds of delinquent accounts purchased from creditors-- are filing proofs of claim on debts deemed unenforceable under state statutes of limitations."  Creditors have always filed claims in consumer bankruptcy cases that are or might be subject to defenses.  But, large scale debt collectors like Midland Funding can locate debtors and assert claims more efficiently than ever before.

The Fourth Circuit, in Dubois v. Atlas Acquisitions held in favor of the debt collector-- filing a time barred claim in a consumer's bankruptcy case does not violate the FDCPA.  It noted that a contrary ruling would create an incentive for debt collectors to refrain from filing claims in consumer bankruptcy cases to avoid the risk of violating the FDCPA (which provides consumers with a statutory penalty and a right to recover attorneys fees).  The Fourth Circuit noted that this effect runs contrary to the purpose of the claims process in a bankruptcy case.

Observers at the oral argument yesterday generally noted that based on the questions of the justices, it appeared that five were concerned about the implications of a consumer friendly decision.  The Court will decide the case by the end of June.

Compensation at Wells Fargo Now

Wells Fargo Bank is putting the pieces together after the sales team compensation scandal in September 2016.  Post scandal, the OCC announced that it would review sales incentive practices at all the large and midsize banks it supervises.  Bankers have been watching what Wells Fargo would do to appease the OCC and other critics of its performance-based pay strategies.  Wells Fargo's new plan doesn't eliminate incentive pay entirely. But, the new plan draws Wells Fargo in line with compensation plans that are common throughout the retail banking industry. 

Sales quotas based on account opening data are gone. Compensation is based primarily on salary. Bank tellers' compensation is 95% salary.  Entry level bankers' get incentive pay based on the performance of their team, not individual sales results. 

What will the reputational damage and tilt in compensation toward base pay and team results mean for Wells Fargo's ability to recruit and retain the best bankers?  American Banker reports that pay cuts for current employees are in the offing and morale is low.