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Red Lion Reports

Law, Life and Learning at Penn State Law School and Beyond

Updated: 2018-03-25T07:02:47.591-07:00


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[...]

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 consu[...]

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[...]

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.

GM Ignition Switch Plaintiffs Litigation: Not So Free and Clear


In an opinion issued yesterday, the Second Circuit provides a scintillating account of the astonishing events leading up to GM’s flop into bankruptcy in 2009 and its “surgical” sec. 363 sale of assets to New GM  “free and clear” of liabilities of Old GM.   The 2d Cir. decides whether plaintiffs who learned of failed GM ignition switches in 2014 could sue New GM under a successor liability theory, or were stuck with just Old GM as a defendant because of the 2009 section 363 sale.  I won't give away the exciting conclusion.  The opinion is here

Erin Andrews's Stalker Gets No Forgiveness in Bankruptcy


Erin Andrews’s claim against the stalker guy who videotaped her through a hotel door peephole got a $55 million judgment jointly against the stalker (Barrett) and the hotel.  Barrett filed for bankruptcy to discharge his debt to her (51% of the $55 million, the hotel was liable for the balance). Erin objected to discharge of her claim on grounds that under section 523(a)(6) it was for “willful and malicious injury.”  (Section 526(a) is  my personal favorite exception to discharge, however  sec. 523(a)(4) “fraud or defalcation while acting in a fiduciary capacity” is a close second).  Anyhoo—the bankruptcy court agreed with Ms. Andrews.  Creeper Barrett gets no forgiveness in bankruptcy.

How Are Americans Really Doing Financially?


FINRA Investor Education Foundation released the results of a study on the financial status of people living in the United States. View the report titled "Financial Capability in the United States 2016" to see findings nationally and by state.  The percentage of survey responders who report no difficulty covering their monthly bills increased from 36% in 2009 to 48% in 2015.  Those who report having emergency funds on hand increased from 35% in 2009 to 46%.  The percentage of responders who fall into the "high" financial literacy category (could answer 4 of 5 basic financial questions correctly) dropped from 42% in 2009 to 37% in 2015.   (Test your financial literacy skills by trying to answer these three questions correctly (no peeking at the answers).

Education makes a difference in financial resilience.  Almost half  of the responders with a high school education or less say they could not raise $2,000 in 30 days in case of an emergency.  Among responders with a college degree, the percentage was 18%.

Harrisburg's Parking Bonds Drop to Junk


In more bad news for Harrisburg, the  bonds issued by the Pennsylvania Economic Development Financing Authority (PEDFA) to fund parking operations in Harrisburg dropped to the top rank  of speculative grade,  BB+ , per S&P.  The parking system failed to make the revenue the bonds required for the past two years and is likely to fall short this year.  The parking bonds were part of a fiscal recovery plan for Harrisburg following a near insolvency crisis from its failed incinerator project.  Under a court approved plan, PEDFA took over Harrisburg's parking system under a long term lease.  In 2013, it issued about $285 million in bonds backed by parking revenue and used the cash to help pay off creditors.

Twinkies and Ho Ho's Find a New Owner


The current owner of Hostess Brands will announce later today an agreement to sell control of the company to an affiliate of the Gores Group for about $725 million.  Four years ago Hostess's former parent filed for bankruptcy, but Twinkies and Ho Ho's survived. The snack cake business got snapped up by corporate turnaround firms, who did just that by arranging a sale to Gores Group.

These iconic treats have an unlimited shelf life, both in the market and in kids' lunch bags.

Amazon is Crushing Mall Stores


Retail stores are closing at the highest rate since the 2010, and industry observers think the worst is yet to come.  Department store retailers and national chains that sell clothing got hit the worst.  Amazon, with its easy online interface and next day delivery, is growing.  It's easy to comparison shop online so department stores can't raise prices to cover overhead as sales volume drops. So  stores close.

In 2015, the states that were hid hardest by retail store closings were Arizona, California, Florida, Pennsylvania and Ohio.  

2d Circuit Rejects Class Action Settlement in Case against Visa and Mastercard


Here is the 2d Circuit opinion dismissing the $5 billion plus settlement of class action litigation by retailers against Visa and Mastercard over swipe fee policies.  The problem with the settlement was that some retailers in the class of plaintiffs were not adequately represented.  Judge Leval wrote:  “This is not a settlement, it is a confiscation.”

Sweet Opportunity to Grab Hershey


The Hershey Co. (NYSE-HSY) appears to be too sweet to resist for Mondolez (NASDAQ-MDLZ), owner of Oreo, Nabisco and Cadbury brands.  On Thursday, Mondolez sent a tasty offer to Hershey that valued the company at a 10% premium over its market price.  Hershey's board turned the offer down with a thump, noting in the press release that it "provided no basis for further discussion."  But Hershey's stock price spiked above the per share offer price, which may indicate that investors think sweeter bids are on the way, either from Mondolez, or another snack food suitor.

ABA Gets Spanked by NACIQI for Failure to Implement Student Achievement Standards


The American Bar Association Council on Legal Education is the accrediting agency for US law schools. Yesterday, the federal higher education accreditor watchdog, the National Advisory Committee on Institutional Quality and Integrity (NACIQI) , voted to suspend the ABA’s authority to accredit new law schools for one year due to the ABA’s lack of attention to student achievement/bar outcomes/employment and failure to assess student-loan default rates in assessing programs.  At the same meeting NACIQI voted to remove the recognition of the Accrediting Council for Independent Colleges and Schools (ACICS) for one year (pending correction of several shortcomings) primarily because of its failure to halt Corinthian’s and other for-profit colleges’ student admissions/financial aid practices.  This is an embarrassment to the ABA and to the legal academy.  The ABA has one year to comply with NACIQI's expectations regarding its accreditation practices. 

Federal Court Strikes CFPB's Investigation of For-Profit College Accreditor


Yesterday was a bad day for the CFPB.  The case is CFPB v. Accrediting Council for Independent Colleges and Schools (ACICS).   The CFPB issued a Civil Investigative Demand (CID) to ACICS in August.  After ACICS's lawyers objected, the CFPB sued ACICS in DC federal district court for enforcement of the CID.  ACICS responded that it would not comply with the CID on grounds that investigation of college accreditation processes is outside the scope of the CFPB's authority. The court agreed with ACICS. A court's role in deciding whether to order compliance with an administrative CID is limited to determining whether the information requested in the CID is relevant to an investigation for "a lawfully authorized purpose."  The court must accord the agency that issued the CID with deference as to the scope of their authority and their estimation of the relevance of the information they request.The court applied the provisions of the Dodd-Frank Act that set out the authority of the CFPB, inter alia, to take action "to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service."  The Act authorizes the CFPB to issue a CID to a person it believes possesses or controls information relevant to a violation of federal consumer financial laws. The CID must specify both the conduct the CFPB believes is a violation and the federal consumer financial law that conduct would violate.In the CID it issued to ACICS, the CFPB identified the purpose of its investigation:  "to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges."(Emphasis added.)  ACICS argued that none of the federal consumer financial laws within the CFPB's authority address or implicate the process of accrediting for-profit colleges.  The CFPB argued that because it has statutory authority to investigate for-profit schools in relation to their lending and financial advisory services (activity covered by consumer financial laws), it also has authority to investigate whether an accreditor of a for-profit school engaged in any unlawful act relating to accreditation of such a school.The court called the CFPB's assertion of authority "a bridge too far."  ACICS asserted that is not involved in the financial aid decisions of the schools it accredits. Although the CFPB may be entitled to investigate whether this assertion is true, the CFPB's stated purpose and the information it demanded was not limited to the narrow question of ascertaining the existence or scope of ACICS's role in accredited schools' financial aid decisions.  Rather, the CFPB's investigation of ACICS was directed to its accreditation process generally, a subject outside the CFPB's statutory enforcement authority.Senator Elizabeth Warren (D) has publicly criticized ACICS for approving accreditation of several for-profit colleges, including Corinthian, which has since closed.  Senator Lamar Alexander (R) Chair of the Senate Comimttee on Health, Education,Labor, & Pensions wrote to CFPB director Richard Cordray reuqesting that the CFPB withdraw the CID and asserting that "[determining the role of accreditors for federal purposes is a congressional responsibility, not yours."  Of the 14 campuses formerly owned by Corinthian that were the subject of the CFPB investigati[...]

Lawyers are the Big Winners in "No-Injury" Class Actions


In a no-injury class action case, the plaintiff class alleges that the defendant violated a legal requirement under a statute (typically a consumer protection statute), and sues for "statutory damages"-- provided as the penalty for violation, even though the violation doesn't cause any actual injury or loss to anyone.  Law professor Joanna Shepherd studies 432 no-injury class action settlements and trial awards from 2005-2015.  Her study showed that about 60% of the total monetary award paid by defendants in these cases was allocated to the plaintiff class, and 39.7% to attorneys fees.  But, much of the money allocated to members of the plaintiff class is never claimed.  Actual consumers typically receive less than 9% of the total. The unclaimed money goes to a "cy pres" fund which gets distributed to not for profit organizations.   Lawyers for the plaintiff class recover over 4 times the amount actually distributed to the class.  Professor Shepherd concludes:  "A result in which plaintiffs recover less than 10 percent of the award, with the rest going to lawyers or unrelated groups, clearly does not achieve the compensatory goals of class actions.  Instead, the costs of no-injury class actions are passed on to consumers in the form of higher prices, lower product quality, and reduced innovation."

Rethinking Expiration Dates to Reduce Food Waste


Here is an interesting op ed by a lawyer and director of the Harvard Law School Food Law and Policy Clinic.  The author explains the inconsistent ways states regulate "sell by," "best by" and "expires on" dates on food.  She supports federal regulation to make use of these labels consistent, and clearly indicate to consumers whether and when they need to worry about the safety of their food-- which in turn will reduce food waste in the US. She writes:

Date label confusion harms consumers and food companies, and it wastes massive amounts of food, which harms the planet. The U.S. wastes 160 billion pounds of food, or nearly 40% of food produced in this country, annually. Twenty-five percent of our freshwater is used to grow food we throw away. What gets tossed out goes into landfills, releasing hazardous methane into an already stressed atmosphere. Making date labels clear and uniform offers a relatively low-cost way to eliminate confusion and save consumers money, and it would make a big dent in the unnecessary waste of wholesome food.

Follow the Money: The Connection between Terrorism and Banking


Two developments on this topic:1.  Yesterday the 2d Circuit handed down its decision in In re Arab Bank, PLC Alien Tort Statute Litigation,  The plaintiffs were non-US citizens who sought compensation for injuries caused by terrorist attacks in Israel between January 1995 and July 2005.   The plaintiffs brought their claims under the Alien Tort Statute (ATS), 28 U.S.C. sec. 1350 ("[t]he district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States and federal common law").  Their claims were against Arab Bank, PLC, which has its headquarters in Jordan and branches around the world, for its alleged role in facilitating the banking activities of organizations who caused plaintiffs' injuries.  Arab Bank's branch in New York provides clearing and correspondent banking services to foreign financial institutions.    The Second Circuit's opinion provides fascinating details about how Arab Bank allegedly and knowingly maintained accounts that customers used to raise funds for terrorist organizations, laundered funds for a purported charitable organization that was really a front for a terrorist organization, and maintained accounts for known  terrorists and supporters.  The plaintiffs also alleged that Arab Bank knowingly and actively organized banking services to transfer funds from terrorist groups to the families of suicide bombers, routing transfers through its New York branch to convert Saudi currency to Israeli currency.  Plaintiffs allege that after the accounts were funded, the Bank provided instructions to the public on how to qualify for and collect the money.The district court dismissed the claim against Arab Bank on grounds that under Kiobel v. Royal Dutch Petroleum Co., 621 F. 3d 111 (2d Cir. 2010)(Kiobel I), the ATS does not permit claims against corporations.  On appeal, the plaintiffs argued that the 2d Circuit's decision in Kiobel I was overruled by the Supreme Court when it affirmed Kiobel I three years later on other grounds, 133 S.Ct. 1659 (2013)(Kiobel II).  The legal issue in Kiobel I was the scope of liability recognized by the "law of nations" referred to in the ATS.  The panel concluded that the ATS does not permit claims against corporations because corporations have never been subject to any form of liability under customary international law of human rights.  One of the three judges on the panel, however, filed a separate opinion concurring in the judgment but disagreeing with the panel's conception of the "law of nations" as invariably precluding action against a corporate actor.   In his view, the ATS does not prohibit corporate liability per se.  Rather, because the "law of nations" does not specifically address the issue of corporate liability, the scope of liability under the ATS should be considered a question of remedy governed by domestic law.  The Supreme Court in Kiobel II affirmed the 2d Circuit's dismissal but on extraterritoriality grounds-- the alleged banking conduct does not sufficiently "touch and concern" the territory of the United States to invoke the subject matter jurisdiction of the federal courts.In In re Arab Bank, the 2d Circuit held that Kiobel II "casts a shadow" on Kiobel I.  On the question of extraterritoriality, the Court held that because corporations are "present[...]

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.

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 o[...]

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.