Dodd-Frank required the CFPB to conduct a study on the use of pre-dispute arbitration clauses (PDAA's) in consumer financial markets. Sec. 1028(a). It also gave the CFPB authority to issue regulations on the use of arbitration clauses in other consumer finance markets "if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers." Sec. 1028.
The CFPB posted a public inquiry on arbitration terms in Aprils 2012 and released preliminary research results in December 2013. It issued its final report in March 2015. In a press release accompanying the report, the CFPB noted that "very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements." Also, "more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court."
In May 2015, 58 Democratic Congressmen signed a letter to CFPB Director Richard Cordray urging the CFPB to promulgate rules prohibiting PDAA's. Last week, the House Appropriations Committee adopted an amendment offered by Reps. Steven Womak (R-Ark,) and Tom Graves (R-Ga.) to a 2016 appropriations bill for funding for agencies that regulate financial services. The amendment conditions CFPB appropriations on completion of a new study on PDAA's. The American Banker's Association wrote to support the amendment, calling the CFPB's study "a deeply flawed piece of research that excludes critical information, misinterprets key data...."
The fight over PDAA's is hot, but based on the data, it's not clear what stake consumers have in the outcome. The CFPB"s study concluded that arbitration was important in only 8% of the 562 class action cases it studied. The defendants moved to compel arbitration in 94 of the 562 class actions. The CFPB study does not support the conclusion that PDAA's are a tool to crush consumer redress, or have been particularly effective in eliminating consumer class action litigation.
Monday, June 22, 2015
Friday, June 19, 2015
Reg A+ is Effective Today; Still Waiting for Crowdfunding Rules
The SEC's rules to facilitate Regulation A+ become effective today. The rules implement Title IV of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Title IV Small Company Capital Formation raised the cap on the amount of securities that can be sold in a 12 month period from $5 million (under Reg A) to $50 million (under new Reg A+), subject to disclosure requirements (e.g., a certified audit) not required for ordinary Reg A offerings.
Market watchers are not expecting that the newly effective Reg A+ rules will have much of an impact on start ups and small businesses that don't already have the cash necessary to comply with its requirements. The big development yet to occur is SEC adoption of final rules for Title III of the JOBS Act titled Crowdfunding. In Title III, Congress directed the SEC to write rules implementing an exemption from securities laws for crowdfunding via the internet, and rules for a funding portal by which internet-based platforms could facilitate a market for securities without registering with the SEC as brokers. The SEC published proposed rules for comment in October 2013 and the public comment period closed in February 2014. The SEC announced that the final rules will be released in October 2015.
Crowdfunding sites are already operating to offer securities for accredited investors only under Regulation D. Some commentators see a bleak future for crowdfunding for non-accredited investors under the rules the SEC has proposed. The SEC estimates that to raise $100K via non-accredited investor crowdfunding, an issuer would have to incur around $39K in fees for accountants, lawyers and the funding portal. To raise $1 million the estimated costs tops $150K. An offering under Reg D, although restricted to accredited investors, is relatively light on required disclosure and much cheaper. So, if/when the SEC promulgates the final crowdfunding rules, it may be that only the most desperate issuers will use it.
Market watchers are not expecting that the newly effective Reg A+ rules will have much of an impact on start ups and small businesses that don't already have the cash necessary to comply with its requirements. The big development yet to occur is SEC adoption of final rules for Title III of the JOBS Act titled Crowdfunding. In Title III, Congress directed the SEC to write rules implementing an exemption from securities laws for crowdfunding via the internet, and rules for a funding portal by which internet-based platforms could facilitate a market for securities without registering with the SEC as brokers. The SEC published proposed rules for comment in October 2013 and the public comment period closed in February 2014. The SEC announced that the final rules will be released in October 2015.
Crowdfunding sites are already operating to offer securities for accredited investors only under Regulation D. Some commentators see a bleak future for crowdfunding for non-accredited investors under the rules the SEC has proposed. The SEC estimates that to raise $100K via non-accredited investor crowdfunding, an issuer would have to incur around $39K in fees for accountants, lawyers and the funding portal. To raise $1 million the estimated costs tops $150K. An offering under Reg D, although restricted to accredited investors, is relatively light on required disclosure and much cheaper. So, if/when the SEC promulgates the final crowdfunding rules, it may be that only the most desperate issuers will use it.
Tuesday, June 16, 2015
No Fees to Defend Fees
In Baker Botts LLP v. ASARCO LLC, the Supreme Court held that law firms that represented the debtor in possession (DIP) cannot recover from the estate for fees incurred defending their fee petition. Two firms representing the DIP had successfully litigated a fraudulent transfer claim against ASARCO's parent corporation and obtained a judgment in favor of the estate worth around $7-10 billion. The parent objected to the fees and after a six day trial, the court awarded the firms about $120 million for legal services, a $4.1 million enhancement for exceptional performance, and over $5 million for time spent defending their fee petition. The parent corporation appealed and the Fifth Circuit reversed on the award of fees for defending fees. It held that absent express statutory authority, each party pays his own attorney's fees (the "American Rule"), and although the Bankruptcy Code provides for payment of fees for legal services rendered to the estate, it does not provide a statutory basis to shift to the estate the fees incurred defending a fee petition.
Justice Thomas wrote the opinion for the majority (Thomas, Roberts, Scalia, Kennedy, Alito). Justice Sotomayor concurred in part and concurred in the judgment. Justices Breyer, joined by Ginsburg and Kagan, dissented. Justice Thomas invoked the Court's general jurisprudence regarding attorneys' fee awards under the American Rule. Under the Bankruptcy Code, the bankruptcy court may "award...reasonable compensation for actual, necessary services rendered by" such lawyers but only after "notice to the parties in interest and the United States Trustee, and a hearing....." 11 U.S.C. sec.330(a)(1). The U.S. Trustee regulates and monitors the fee petition process and requires compliance with its guidelines for compensation which impose timekeeping and reporting standards for professionals who submit fee petitions. The Court held that the phrase "reasonable compensation for actual, necessary services rendered" in section 330(a)(1) limits recovery of fees to those rendered for services to the DIP. In contrast, the law firms' claim for attorneys' fees were incurred in representing themselves in the fee petition process.
The law firms, of course, saw it differently. They argued that the litigation over the propriety of their fees was part of "services rendered" to the estate. The Court called that argument "untenable" and noted that the dissent rejected it too. The balance of the opinion addressed the arguments made by the United States as amicus curiae. The government conceded that defense of a fee application is not "service to the estate." But, it argued that such fees should be borne by the estate because costs incurred in defending fees affect the net compensation an attorney receives. This is the effect of the American Rule in every context in which it applies.
The United States argued that the unique nature of bankruptcy litigation justified a "judicial exception" to the American Rule. Outside of bankruptcy, a dispute about attorneys' fees is a private matter between the lawyers and the client. In a bankruptcy proceeding, the court supervises attorneys' fees (and other professional fees), with notice to and an opportunity to be heard from "parties in interest" who may raise their own objections to the fees on the merits or for strategic reasons. Justice Thomas concluded that whether bankruptcy litigators are especially vulnerable to fee dilution due to abusive litigation over their fees, "Congress has not granted us 'roving authority... to allow counsel fees...whenever [we] might deem them warranted. (citation omitted). Our job is to follow the text even if doing so will supposedly undercut a basic objective of the statute.'"
Justice Thomas wrote the opinion for the majority (Thomas, Roberts, Scalia, Kennedy, Alito). Justice Sotomayor concurred in part and concurred in the judgment. Justices Breyer, joined by Ginsburg and Kagan, dissented. Justice Thomas invoked the Court's general jurisprudence regarding attorneys' fee awards under the American Rule. Under the Bankruptcy Code, the bankruptcy court may "award...reasonable compensation for actual, necessary services rendered by" such lawyers but only after "notice to the parties in interest and the United States Trustee, and a hearing....." 11 U.S.C. sec.330(a)(1). The U.S. Trustee regulates and monitors the fee petition process and requires compliance with its guidelines for compensation which impose timekeeping and reporting standards for professionals who submit fee petitions. The Court held that the phrase "reasonable compensation for actual, necessary services rendered" in section 330(a)(1) limits recovery of fees to those rendered for services to the DIP. In contrast, the law firms' claim for attorneys' fees were incurred in representing themselves in the fee petition process.
The law firms, of course, saw it differently. They argued that the litigation over the propriety of their fees was part of "services rendered" to the estate. The Court called that argument "untenable" and noted that the dissent rejected it too. The balance of the opinion addressed the arguments made by the United States as amicus curiae. The government conceded that defense of a fee application is not "service to the estate." But, it argued that such fees should be borne by the estate because costs incurred in defending fees affect the net compensation an attorney receives. This is the effect of the American Rule in every context in which it applies.
The United States argued that the unique nature of bankruptcy litigation justified a "judicial exception" to the American Rule. Outside of bankruptcy, a dispute about attorneys' fees is a private matter between the lawyers and the client. In a bankruptcy proceeding, the court supervises attorneys' fees (and other professional fees), with notice to and an opportunity to be heard from "parties in interest" who may raise their own objections to the fees on the merits or for strategic reasons. Justice Thomas concluded that whether bankruptcy litigators are especially vulnerable to fee dilution due to abusive litigation over their fees, "Congress has not granted us 'roving authority... to allow counsel fees...whenever [we] might deem them warranted. (citation omitted). Our job is to follow the text even if doing so will supposedly undercut a basic objective of the statute.'"
Tuesday, December 18, 2012
I Am Not Going to Tell You Again
The New York Court of Appeals decided that Warren County, NY did enough to notify a delinquent taxpayer before foreclosing on his property. In MacNaughton v. Warren County, the court considered the lament of the owner of a piece of undeveloped real property in Warren County who lost the property at a tax foreclosure sale. The MacNaughtons lived in New Jersey. They moved in 1993, their forwarding order at the post office expired in 1994, the last year they paid any property tax. In 1998 the county sent a notice of foreclosure to the MacNaughton's last known address by mail which was returned as "undeliverable-- forwarding order expired." The county began foreclosure procedings and sold the property at auction in 1999 for $3,700. The MacNaughton's learned of the sale in 2003, and two years later sued the county claiming that the sale was void as a violation of their due process and equal protection rights. They lost at trial and on appeal and before New York's highest court.
In Jones v. Flowers (2006), the U.S. Supreme Court considered what process is due to a delinquent taxpayer before a foreclosure sale. It held "that when mailed notice of a tax sale is returned unclaimed, the [taxing authority] must take additional reasonable steps to attempt to provide notice to the properyt owner before selling his property, if it is practicable to do so" but that the steps required "must be such as one desireous of actually informing the absentee might reasonably adopt to accomplish it."
The New York court distinguished Jones and held that the county did enough. It would have been futile in this case to send notice of foreclosure to "occupant" at the MacNaughton's last known address. Moreover, MacNaughtons did not show that had the county would have discovered their current address if it had consulted the post office. (New York law tax foreclosure law changed to become more tax payer protective since the foreclosure sale, and under the new law, the county would have been required to check with the post office for the MacNaughton's current address.)
The MacNaughton's were peeved that Warren County personally served notice of foreclosure sale on Warren County residents whose mailed notices were returned as undeliverable but for out of county taxpayers, did nothing to locate them. The Court of Appeal's simply noted that MacNaughton's equal protection claim was without merit.
Didn't the MacNaughton's wonder about the taxes on their property in Warren County when they received no bill, and paid no tax year after year? It's not relevant in the cosntitutional due process analysis (what process the county owes the taxpayer), but MacNaughton's clearly could have saved themselves a heap of aggravation by making sure the county had their current address.
In Jones v. Flowers (2006), the U.S. Supreme Court considered what process is due to a delinquent taxpayer before a foreclosure sale. It held "that when mailed notice of a tax sale is returned unclaimed, the [taxing authority] must take additional reasonable steps to attempt to provide notice to the properyt owner before selling his property, if it is practicable to do so" but that the steps required "must be such as one desireous of actually informing the absentee might reasonably adopt to accomplish it."
The New York court distinguished Jones and held that the county did enough. It would have been futile in this case to send notice of foreclosure to "occupant" at the MacNaughton's last known address. Moreover, MacNaughtons did not show that had the county would have discovered their current address if it had consulted the post office. (New York law tax foreclosure law changed to become more tax payer protective since the foreclosure sale, and under the new law, the county would have been required to check with the post office for the MacNaughton's current address.)
The MacNaughton's were peeved that Warren County personally served notice of foreclosure sale on Warren County residents whose mailed notices were returned as undeliverable but for out of county taxpayers, did nothing to locate them. The Court of Appeal's simply noted that MacNaughton's equal protection claim was without merit.
Didn't the MacNaughton's wonder about the taxes on their property in Warren County when they received no bill, and paid no tax year after year? It's not relevant in the cosntitutional due process analysis (what process the county owes the taxpayer), but MacNaughton's clearly could have saved themselves a heap of aggravation by making sure the county had their current address.
Thursday, May 24, 2012
Global Growth is Good News for Lawyers
The U.S. Department of Commerce Bureau of Economic Analysis recently reported some interesting data on the operations of U.S. multinational companies at home and in foreign countries. Worldwide capital expenditures by US multinational corporations increased 3.9 % in 2012 to $621 billion. The rate of increase in capital expenditure abroad by majority-owned foreign affiliates outpaced spending by US parent companies in the US. (Capital expenditures in the US by US parent companies increased 3.3 % ($447 billion), whereas capital expenditures abroad by majority-owned foreign affiliates increased 5.5% ($173 billion)). Similarly, the rate of increase in sales by majority-owned affiliates (8.6%, $5,197 billion) outpaced the increase in sales by US parent companies in the US (6.8%, $9,843 billion).
An important motivation for capital expansion abroad used to be to access cheap labor. This new data shows that companies are investing abroad to access fast growing local markets, primarily India, China, Eastern Europe and Brazil. See generally: Kevin B. Barefoot and Raymond J. Mataloni Jr., Operations of US Multinational Companies in the United States and Abroad, Preliminary Results from the 2009 Benchmark Survey.
The big thing for business now is real global competition as multinational companies scramble to sell goods and services to customers in foreign markets. Actually doing business in foreign countries is considerably more complicated than simply manufacturing goods abroad for sale at home. Building market share in a foreign country requires understanding of all of the same factors that support profitable business at home—customers, supply chain, costs, labor, regulation, politics, and taxes, to name a few. Growth in foreign markets is low hanging fruit, but profitable growth is not any easier over there then it is over here.
And that is very good news for US lawyers who are ready for global business.
An important motivation for capital expansion abroad used to be to access cheap labor. This new data shows that companies are investing abroad to access fast growing local markets, primarily India, China, Eastern Europe and Brazil. See generally: Kevin B. Barefoot and Raymond J. Mataloni Jr., Operations of US Multinational Companies in the United States and Abroad, Preliminary Results from the 2009 Benchmark Survey.
The big thing for business now is real global competition as multinational companies scramble to sell goods and services to customers in foreign markets. Actually doing business in foreign countries is considerably more complicated than simply manufacturing goods abroad for sale at home. Building market share in a foreign country requires understanding of all of the same factors that support profitable business at home—customers, supply chain, costs, labor, regulation, politics, and taxes, to name a few. Growth in foreign markets is low hanging fruit, but profitable growth is not any easier over there then it is over here.
And that is very good news for US lawyers who are ready for global business.
Thursday, March 15, 2012
Red Lion Returns
It's not news by any standard, but this story stirred the Red Lion from slumber. For one moment, I am in solidarity with runway models who kicked off ridiculous shoes in exasperation over the absurdity of it all.
Friday, December 10, 2010
Fear of Foreclosure
The prominence of foreclosure in economic news and the skimpy coverage of the breakdown of foreclosure process in the popular press shows the literary force of the word: "foreclosure." It has the visceral impact of a word like "rape," connoting a violent, destructive, faceless goon that comes out of the darkness to destroy the weak and helpless. People are getting "foreclosed on," foreclosure is destroying neighborhoods and cities, and the nation is in a foreclosure crisis. Foreclosure is Voldemort.
Legally, foreclosure is tame and boring. It's a mopping-up operation that has for centuries been relegated to the losers bracket among lawyers, and the museum of antiquities in law. It's no wonder that the reporters don't explain the residential real property foreclosure process, or why law professors roll their eyes when I start to say that joblessness, default, unchecked speculation, arrogance and bad judgment are far scarier than foreclosure. Who wants to think about dirty socks and dust bunnies under the bed when the alternative is to imagine a scary monster?
What do you think? What explains the fear of foreclosure?
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