New York Times Article on Stanford Sexual Assault Procedures Displays Shocking Ignorance of Relevant Federal Law

Today's New York Times carries a front-page article entitled "A Majority Ruled It Was Rape.  That Isn't Enough at Stanford."  The article, which extends for two full pages inside the (ever-shrinking) front section, faults Stanford University for failing to discipline a student who was accused of sexual assault by another student, after two separate panes concluded, each by a 3-2 vote, that the accused had in fact committed a sexual assault upon the accused.

Stanford's procedures for evaluating charges of sexual assault against a student established, at the time, 5-person panels to examine the "evidence" (which I put in quotes because what they review would not be "admissible evidence"in a properly conducted trial in the United States, which is a matter for another day).  The university required that at least 4 of the 5 panel members find against the accused before discipline could be meted out.   In this case, the first panel found 3-2 against the accused.  The accuser appealed to some other body on campus which agreed in part with her complaints about the first proceeding, and then a second panel was convened, which delivered the same 3-2 result.  So the accused was not disciplined.

According to the article, Stanford currently requires panels of only three persons now but now requires unanimity of the three to find an accused culpable.

The thrust of the article, obviously, is that it is unfair to accusers (predominantly female) that their accusations have to convince more than a simple majority to redress their grievances. The article concludes with a quote from the accuser that sums up the reporters' sentiments: "I am certain that this is not how the Title IX process is meant to work."

The accuser's "certainty" -- which has evidently been adopted by the reporters who turned her grievance into a front-page article -- is completely erroneous.  Put simply, a requirement of a unanimous verdict is exactly how Title IX proceedings do work. Indeed, the title of the article, to have been accurate, ought to have read: "A Majority Ruled It Was Rape.  That Isn't Enough -- Anywhere." (Of course, that would not have made for a good front-page story.)

All Title IX claims are adjudicated as civil cases in federal court. In all such cases, a party can request a jury trial.  Pursuant to Federal Rule of Civil Procedure 48, a jury verdict in a civil case requires the jury -- which may not be less than six people, in contrast with Stanford's three-person panels -- to reach a unanimous result. Thus, the "Title IX process" to which the accuser refers is, in fact, "meant to work" by means of unanimous verdicts. Falling short of unanimous agreement leaves the status quo in place and the accuser's grievances uncompensated.

This, it is worth emphasizing, is not a special rule for Title IX cases reflective of some patriarchal bias to protect male perpetrators.  It is the rule applied to all federal claims of any nature whatsoever. It is utterly non-discriminatory, measured by any non-gendered standard,

Sadly for Times readers, the article shows no awareness of this unanimity requirement in adjudication of Title IX grievances in the courts. As a result, the article likely misleads many readers into believing that Stanford, and other universities alluded to in the article, are acting "wrongly" or being "unfair," toward (predominantly female) accusers when, in fact, their standards are as non-discriminatory as they could be, mirroring as they do, the general standards of federal civil litigation.  (Indeed, those who are accused may have a colorable claim that the use of three-person panels to mete out punishment violates due process or Title IX or both, because the risks of bias and error are believed to increase to impermissible levels when juries are less than six persons, as the comments to FRCP 48 bear out.)

It's grotesquely embarrassing that neither of the reporters, nor any editor who vetted the article before it was published, displays any awareness of the fact that the premise of their story is completely at odds with the way the law that the story is written about actually works in practice.  I have a good deal of sympathy / empathy for journalists in the competitive environment they must operate in, when the pressure to generate stories that hold on to the attention of the declining subscriber base is so overwhelming.  But those feelings are easily overcome when the journalists in question set out on a social justice crusade and cast aspersions at other members of our society who, it turns out, actually know more about what they are doing than the reporters sanctimoniously faulting them.

It's also worth considering, although the authors failed to, that the existence of a 4-vote minimum might influence how panelists decide to vote.  Knowing that a 3-2 vote has no consequences for the accused may cause a voter to vote differently than if that third vote determines the accused's fate. I think it is a faulty premise to think that the third voter was sure the accused had committed a sexual assault.

There are many, many more things one could fault about the way sexual assault allegations are handled on college campuses. I could write hundreds of blog posts about the problems, starting with, why does anyone familiar with the "hostile environment" case law think that one student's allegations against another regarding a brief sexual encounter are a Title IX issue in the first place?  What about that implicates the "interstate commerce" power whereby Title IX was enacted?  Considering how ultra-leftist campuses are, and how feminist voices dominate discourse concerning gender matters on campuses, how can anyone seriously contend that a college campus is a hostile environment for women?  I hope that the incoming administration will make clear early on that such incidents do not implicate Title IX at all, and universities need not do more than refer such matters to the local law enforcement authorities for investigation and prosecution as justified,.  Further, I would hope that the incoming Congress would resolve the issue for the foreseeable future by defining "hostile environment" to make clear that there must be repeated, persistent and substantial acts towards a group of persons before a "hostile environment" is created.

But, regardless of what the future holds, as of now, the notion that Title IX requires a simple majority to believe an accuser is wholly at odds with federal law and in truth amounts to no more than a case of special pleading by persons who are ignorant as to the law.

Second Circuit Oral Argument in Momentive Performance Solutions - Synopsis and Commentary

I listened to the oral argument before the Second Circuit in Momentive Performance Solutions, the appeal taken by the first lien creditors from Judge Drain’s confirmation decision (1) denying their claim for a make-whole and (2) imposing a Till-justified formula rate of interest that left their claims with a market value of 82 cents on the dollar.  The argument was held the morning after the national election, which must have posed quite a distraction; nonetheless, unlike large numbers of students nationwide who were apparently reduced to sniffling and sobbing incapacity by the outcome, the lawyers showed up well prepared and the argument was brisk.  (Parenthetically, I was surprised that only 30 minutes was allotted to the entire argument, which is half of the lowest amount I ever experienced.  I speculate that this is one of the steps the circuit has had to take to address its ever-growing backlog of cases.)

The argument focused almost entirely on the Till issue.  The parties rested on their briefs regarding the make-whole issue. Tactically that was a wise choice because the Third Circuit came out with its game-changing opinion in EFII, upholding the contractual make-whole in that case and, in its extensive analysis of precedent, giving the back of its hand to Judge Drain’s make-whole reasoning in MPM.   As one of the appellants’ counsel in MPM was also the counsel who argued for the creditors in EFII, probably they had walked away from the argument before the Third Circuit with a sense that they would prevail, and in turn, that likely informed the strategy brought to the oral argument in MPM.  The parties have since submitted letter briefs to the Second Circuit on the relevance of the EFII decision. I would not be surprised to see the Circuit certify the question to the New York Court of Appeals if they have any doubts at all about Judge Ambro’s analysis of New York law.   

As a reminder, the cramdown interest rate holding in MPM was the most extreme statement of the Till-in-chapter-11 to date:  that bankruptcy courts are required in all chapter 11 confirmations to apply a formula rate.

The panel was Judges Barrington Parker, Rosemary Pooler and Jose Cabranes.

What follows is a lightly paraphrased transcription of the key exchanges between the panel and counsel, interspersed with my “color commentary”

At the 2:22 mark, after the usual formalities, Judge Parker invited appellant counsel to state the rule that should have been applied by the bankruptcy court. 

Counsel for appellants replied, it is the rule laid down by the Sixth Circuit in American Homepatient, that the market rate should be applied in chapter 11 cases where there exists an efficient market; where there is no efficient market, the formula rate endorsed by the Till plurality should be applied.

Turning on my color commentary microphone, I think this was a tactical and strategic mistake.  What counsel should have said was: “it is the rule that is encapsulated by the statutory term of art, ‘fair and equitable’, which the Supreme Court has consistently held to mean that secured creditors get paid in full, every dollar of their claim.   It has nothing to do with ‘efficient markets’, a concept which did not exist when the ‘fair and equitable’ rule was promulgated by the Supreme Court and is not mentioned in any legislative materials related to its codification in section 1129(b)(2).”

The problems with counsel’s invocation of American Homepatient and "efficient market" are manifold. On a substantive or strategic level, it concedes that Till applies in chapter 11 when, as I have pointed out in my article and in prior blog posts, Till should not be seen as applying to chapter 11 at all.  First, the operative statutory language of chapter 11 cramdown, “fair and equitable,” is not found in chapter 13 at all (nor was it discussed in Till; nor do any of the cases applying Till to chapter 11 contain a judicial endeavor to reconcile it to the Court’s prior precedents interpreting “fair and equitable”). Second, in the briefing and argument for Till, the prevailing party, the solicitor general and, most importantly, the justices all took the position that chapter 11 was not relevant to the task of defining the proper approach to chapter 13 cramdown (the only person who argued for looking at chapter 11 was the losing party). Logically, then, if chapter 11 cramdown law was not relevant to Till, Till is not relevant to chapter 11 cramdown.  Third, do you seriously think that the Supreme Court overthrows a century of precedents saying secured creditors get paid in full without any briefing or argument on the topic?  Last, the Court in Till was motivated by practical concerns unique to chapter 13 cases, in particular, the need to find an approach that would be cost-efficient for disputes over small sums of money, whereas in a chapter 11 case, the amounts at stake justify case-specific, non-formulaic inquiries.

Furthermore, arguing for courts to decide whether markets are efficient is a tactical error because it immediately generates concerns about how courts will do that competently. Indeed, as I pointed out in my article, it is counter-intuitive, to say the least, to conclude that the Till plurality -- which said that “the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors, an inquiry far removed from such courts usual task of evaluating debtors financial circumstances and the feasibility of their debt adjustment plans” nonetheless intended said judges to determine whether U.S lending markets are efficient, a task more typically associated with DOJ, the Federal Trade Commission or other financial regulators perhaps. 

And this concern is exactly what came to Judge Parker’s mind, for he asked:

Judge: How do you know there is an efficient market?   Both here and in general. 

Counsel: In general, that is a determination for the bankruptcy court to make.   

Judge:  What is an efficient market?

Counsel:  A market where there is a debtor that has market weight and market strength.  This was a multibillion dollar company advised by one of the best investment banks in the country, that undertook, with the aid of that advisor, a broad and competitive marketing campaign to refinance the secured lenders, that had offers to do so from the three of the largest lenders in the country and also had raised fresh capital from its equity sponsor, Apollo, which manages over $25 billion in capital.  Not every case will have facts like these.  This is an extraordinary case.  Whether there is or isn’t an efficient market in some future case is not something we need to decide today but can be left to the future. 

Turning my commentary mike on again: Now, maybe here we can see the appellants’ strategy is, understandably, just to win this case, which has unusual facts in their favor, even if it isn’t intellectually satisfying. In fact, one might say, they have a duty to focus exclusively on that, not on fixing the law nationwide.  The trouble with that is, as we shall see, appellate courts don’t have to think that way.  And they may actually think that it is their job to think about the rule that should be applied to all cases.

Which is why it is optimal for creditors’ counsel in a Till-in-chapter-11 litigation to stick to the statutory text and not start talking about “efficient markets.“  This way, if a judge asks about “efficient markets”, you can say “whether a market is efficient is not an inquiry a bankruptcy judge needs to undertake when applying the ‘fair and equitable’ test.“  When you say that, now the appellate judges like you, because you’re making a concern go away.  So you continue “For over a century, bankruptcy courts have adjudicated whether a plan confirmation is ‘fair and equitable’ without the need to figure out whether the lending markets of the day were efficient.  Often, but not always, they have looked at market evidence.  There is extensive precedent that guides them as to how to value companies, collateral, proposed debt securities.  The Supreme Court, when it chose to review the lower courts’ interpretation of the statutory standard has never felt the need to discuss the efficiency of any market.  These time-honored practices should continue.  Whether the U S lending markets are efficient need not be raised at all, but, if it is raised, at most it goes to the weight of any market evidence.  We should understand the reference to ‘efficient markets’ in Till footnote 14 not to state the minimum condition needed for application of a market rate, but rather an example given, for purposes of illustration, to contrast with the non-existent market for refinancing chapter 13 debts that was an obvious concern for the plurality. “

The argument continued. As I said, the panel was not bound to acquiesce in the appellant’s strategy of positioning their case as extraordinary. 

Judge: What concerns me is, let’s assume this is an outlier, where you have a powerful body of evidence for the existence of a market.  We haven’t spoken on this yet and judges in this circuit are going to be looking at this as a precedent for all of their chapter 11 cases. I remember in the antitrust context, the exercise of analyzing a market was expensive and extensive, with expert witnesses and so forth.  How are we going to spare the chaos that this might cause those judges?

Counsel – this is what bankruptcy judges do for a living.  Valuation.  I am not asking the court to set a rule for small cases. This is a rule that will apply where there are two parties with equal power and weight coming at each other.  I am not asking the court to formulate a rule for what is an efficient market.

Color commentary:  this appears to be a tactical move to minimize the judges’ concerns about cost and competence while preserving the position that their particular case is indisputably one where the market was efficient.  Understandable for people who have a mega-case practice, but intellectually indefensible for a statute that does not establish different rules for different-size cases.  The intellectually defensible approach is never to open the door to “efficient markets” in the first place, just say that the century of “fair and equitable” litigation shows bankruptcy courts know how to figure out the market value of a stream of payments.  The legal error here was in thinking that the stream of payments did not have to amount to 100 cents on the dollar.

Counsel: I’m running out of time. Final point: If you look at Till, look at section V of the opinion where the plurality takes on the dissent and says the market for subprime loans is anything but competitive.  Why, if the Supreme Court intended that a formula rate should always be applied in chapter 11, why did the court take on the dissent in that issue? 

I don’t understand this point or find it meaningful.  There are plenty of things to say about Till’s lack of relevance to chapter 11 but this would not make my top 10.   I think it would have been wiser to end on the textual difference between the cramdown sections of chapters 11 & 13: the former has the statutory term of art “fair and equitable” and the latter does not.

Counsel for other secured party / appellant:  1129(b)(2)(A) says a plan’s stream of payments must have a PV of at least 100 cents on dollar.  Their own financial statements carry our debt at 82 cents on the dollar, exactly what our witness testified to at trial.  That’s just math.

Judge again: Tell me the rule you are urging on us.

Counsel: It is the same as first counsel argued.

Color commentary: I guess this was prepared and pre-agreed, but in a perfect world, second counsel would have seen the judges weren’t exactly enamored of the rule proposed by first counsel and gone with “you don’t even need to get into market efficiency to decide this, judges.  Just say Till does not apply in chapter 11 and courts should continue using tried and true valuation approaches for determining whether a proposed steam of payments is worth 100 cents on the dollar.”

Judge: If it’s efficient let it set the rate; if not let the judge apply the formula and let the judge decide which it is.

Counsel 2: That’s right. What Judge Drain held was all the profit had to be extracted from the interest rate. No, what Till and Valenti meant by profit was not the rate that produces a market value of 100 cents on the dollar; they meant about the excess profits caused by an inefficient market.  In Till it was a usury rate. This case had competitive refinancing.

Color commentary:  You know, this sounds perfectly reasonable when you hear it uncritically, but it’s not accurate. In Till, it was clear that the creditor did not get 100 cents on the dollar.  WHY DO YOU THINK THEY APPEALED?  Plus, this has already been argued to the bankruptcy judge and to the district judge. Neither one bought it. So maybe try something else.

Judge:  How will it work? The Judge will hold a hearing and experts will testify there is an efficient market?

Counsel: We propose at least where the evidence is clear the was an efficient market and the market rate was easily identifiable, that is the rate that applies. This court set forth a categorical rule the other way [formula rate always].

Opposing Counsel (This is in a separate recording due to an intermission).

 

Counsel for Appellees:  On Till issue, appellants focus on what market demands.  But proper place to begin is with “present value” as enunciated in Till which “the Supreme Court” made clear should follow the same approach across the Code. 

Turning on my mike:  This argument embeds three fallacies: 1) that the plurality opinion in Till speaks for “The Supreme Court”; (2) that the highly generalized dictum at the very outset of the opinion – “essentially the same approach” --  is entitled to be given meaningful weight; and (3) of course, that Till has any bearing on chapter 11, which is governed by the “fair and equitable” standard, which is not present in chapter 13 and which the SG and the Justices all said was not relevant to Till.  Unfortunately, these fallacies go largely unchallenged in this oral argument and indeed, the last one appears to have been unwisely invited by appellants’ argument.

Judge:  Yes, but you have footnote 14.

Counsel: the proper way to interpret fn 14 is to make it consistent with the holding of Till and not the flawed premise that the Supreme Court was trying to interpret market rates.  They held that “present value” equals the time value of money plus a risk premium.  Those factors are meant to exclude profit and transaction costs that would show up in a market rate.  Bankruptcies are not like markets; they are court-administered plans.  In such plans, profits and costs are not included.  The language of “super profits” that appellants try to limit Till to is not in Till at all.  Valenti said any degree of profit is impermissible because a court administers the plan and not the market. 

Second point is, how do you know when you have efficient market? Will a bankruptcy court know it when it sees it. This court actually grappled with that here. It held 4-day hearing.  Experts etc.  Based on that evidence, the so called efficient market is not in the needed amount. Semi-confidential, opaque process. Not how an efficient market works.  Affirmed by District court.  Clear error question and should be affirmed. 

Commentator here again:  This is also fallacious in numerous ways and illustrates the appellants’ mistake of fighting on the “Till” and “efficient market” battlefields instead of the “fair and equitable” and “century of precedent saying secured creditors have to be paid in full” battlefields. 

First, as I wrote in 2014, if you look closely at footnote 14, you will see it says nothing about the “prime plus” formula at all.  It does not say “it might make sense first to ask what rate an efficient market might produce, and then adopt the formula approach.”  It just says, “it might make sense to look at what rate an efficient market might produce”.  Period. No reference to a formula fallback. Unlike the American Homepatient approach, I think the phrase “might make sense” was intended just to indicate the chapter 11 issue was being left open for future analysis, and not to impose an "efficient market" hurdle that had to be overleaped to get out of the "prime plus" formula. 

Also, notice how footnote 14 only contrasts chapters 11 and 13, rather than asserting resemblances between them: “the same is not true in the Chapter 11 context … In the Chapter 13 context, by contrast ….” (emphasis added).  I find it hard to discern any intention of the justices to signal in the footnote an endorsement of applying their chapter 13 approach to chapter 11 cases, when the footnote only works to distinguish them. If anything, footnote 14 is a caution not to apply the prime plus formula in chapter 11s.

Second, neither Judge Drain nor any other judge on record has demonstrated a sound understanding of what an efficient market is. They all seem to think that a market is not efficient if a debtor cannot get the amount of money it wants on the terms that make its plan feasible.  (And that was before we had negative interest rates!). As I said before, although there is not complete academic consensus of what an efficient market is, there is ZERO support for that definition, which I call “the loan market as Santa Claus”.  I used the example of someone who wants to buy Facebook stock at $25 when (back when) it was trading at $50.  By bankruptcy court logic, that would make the US stock market inefficient.  This is ridiculous.  The efficiency of a market has to be assessed as a whole, across all its transactions, not just on one would-be participant’s attempt to do one transaction.

Third, since the debtor controls the marketing process and has an incentive to make it look inefficient so that it can fall back to the more favorable formula rate, the bankruptcy judge ought not hold the deficiencies of that process against the creditors.  That is an obvious conflict of interest.

Fourth, as appellant counsel will point out later, the depiction of Judge Drain’s opinion as having been a factual assessment subject to clear error review is inaccurate. Judge Drain clearly set up a legal rule – no profit, no transaction costs – and then found facts only within the parameters set up by that rule. 

Mike off.

Counsel:  appellants rely on American Homepatient which they say would create a purported split if this court affirms Judge Drain.  American Homepatient is a strange case for them because even there the lenders lost.

Judge:  But there are SIGNIFICANT DIFFERENCES between chapter 11 and chapter 13, both in the in real world and in the CODE PROVISIONS. [Emphasis mine]. Why not have different tests at least for finely tuned chapter 11s.

Comment: YES!  This judge gets it!  Sadly, appellants’ counsel will not take this remark up when he makes his reply.  But this was the path to victory here.  Mike off.

Counsel:  The Supreme Court says you can’t do that.  “Essentially the same approach” remark.  Footnote to that remark cites 1129 B.  That is my doctrinal answer. 

Judge: yes, but then it put in fn 14. Your categorical approach is not quite faithful to a complicated case.

 

Counsel:  again fn 14 should be read to consistent with Till.

Comment:  if you have staked out the principle that Till is not a chapter 11 case because “the fair and equitable” standard does not appear in chapter 13 nor in Till and because the SG and the Justices all agreed that chapter 11 analogies were not pertinent to Till, then you can readily smack this contention down. However, if you have conceded Till is governing, as appellants here did, then you have much less ability to reply to this argument.  Mike off.

Judge:  you are being categorical but this case is more nuanced.

Counsel:  More nuanced is how counsel talked about fn 14 in proceedings below.  You can look to efficient market and that informs the formula rate. 

Judge: Are you suggesting that examination of market factors can be used in evaluating formula rate.

Counsel: Yes, that is something we agree with.  Bankruptcy Court is free to look at market evidence to define risk premium. 

Judge: Sounds like you are all getting pretty close.

Counsel: I think we are Your Honor.  The evidence below was evaluated on that basis and the judge made a decision after hearing it – in fact Judge Drain increased risk premium after hearing it -  and that is not clear error. It is the approach the 5^th and 11^th Circuits took. That is what we ask this court to do here. 

Comment:  I have written up both the Fifth and Eleventh Circuit opinions and this is a gross overstatement.  The Fifth Circuit case (Texas Grand Prairie) was, as MPM is apparently turning out to be, a case where creditors’ counsel conceded ab initio that Till governed.  The court made clear it was bound by that and left a dictum at the end suggesting that it was not itself wedded to it.  The 1th Circuit case (Seaside Engineering) was obviously a case in which the Till point was barely briefed, argued or discussed. The amount at stake in the entire case was a pittance and there were over a dozen other issues. That is not persuasive in the Second Circuit in a mega-case.

But this colloquy shows how conceding Till applies puts the creditor at a terrible disadvantage rhetorically. There is a large battlefield to fight cramdown on. And issues about how to apply Till are a small patch on that field.  The strategically minded creditor would force its opponent to fight on the entire field.  Start methodically with the statute – fair and equitable -- review the precedent thereunder holding that it means paying secured creditors in full, and then at the end say: (1) Till is not a chapter 11 case and did not construe the relevant term. (2) Nor did the parties or the Justices think they were making a ruling for chapter 11 cases, as their briefs, the oral argument transcript and fn 14 indicate. (3) Till did not attempt to reconcile itself to either (a)  the preceding century of precedent interpreting fair and equitable,  or (b) decades of perfectly satisfactory practice where bankruptcy judges determined whether secured creditors were paid in full without having to resort to notions of an efficient market, and it is an insult to the Supreme Court to think that they meant to overrule that body of precedent without any discussion of it and after having said at oral argument that it wasn’t relevant. Then sit down and now the adversary has to fight on that entire battlefield.

Mike off.

Judge: you are running low on time. Just so I am perfectly clear – your ideal approach is a slightly hybrid approach You take T-Bill rate and you make adjustments necessary and the adjustments can involve looking at market rate to be sure the bankruptcy judge gets it right.  Do I understand that your view is the market rate is in some circumstances appropriate?

Counsel:  No, our submission is the formula rate is the approach. In determining the risk premium, the judge should look at all evidence which could include exit financing.  Since Till, they do not cite a single case in which a judge has applied an efficient market rate”.  Every other court has applied the formula rate.  Lending has not come to a halt.

Judge: We generally don’t like to pick and choose among other circuits’ approaches. We have here a very sophisticated bankruptcy bar and we are trying to determine with the help of you all the best and most careful approach to addressing the complex cases here that the rest of the country doesn’t often see.  Last question: do you think bankruptcy courts are competent to address question of market efficiency?

Counsel: That’s very complicated.  The one thing that is clear is you can’t account for transaction costs and profits.  

Judge: You’re out of time but that is not the question I asked. Opposing counsel said he thought the courts in SDNY could handle it. 

Counsel: no one has found an efficient market rate.  Bankruptcy courts are capable of looking at all the evidence   And come up with a risk premium. 

Comment:  That is the end of the appellees’ argument but you can see how, if the creditor concedes Till governs, then the creditor is limited to fighting about issues like the last colloquy focused on – what is an efficient market; can a bankruptcy judge analyze that competently (not one of them has so far) and does the rate selected by the bankruptcy court exclude transaction costs and profit?  That’s a very favorable setting for the debtor but a very defensive position for the creditor.

Mike off.

Reply by appellant counsel:  this decision is not a clear error -- it turns on a rule of law. What the rule of should be is what American Homepatient said -- if there is an efficient market, that controls. This is an easy case.  The debtor went out and got multiple alternative offers of exit financing.  What Judge Drain said was not “there isn’t an efficient market”. He said “I don’t care if the market is efficient.  I care that it has yielded a rate which reflects profits and transactions costs, contrary to Till and Valenti.  Read Till again -- I agree its text controls. [Emphasis mine].   I urge court to look at 203 N LaSalle and Radlax in which it has said how you determine value is exposure to a market. That is how you get to the right answer. Our bankruptcy judges are sophisticated and can handle the task of determining efficient market.   They look at market evidence in valuations all the time.

Judge: Why were the findings below clearly erroneous?

Counsel: I don’t say they are.  He [Judge Drain] said the market rate does not matter, that the 6rh Cir had misread Till.  But all the other courts in this district, prior to Judge Drain, have said, where there is efficient market, that rate controls. His rejection of that is legal error.

Final comment:  Well, here, counsel (1) immediately after hearing the panel say, we generally don’t pick and choose among other circuits’ approaches, starts off by saying, you should pick the Sixth Circuit approach to this issue; (2) concedes explicitly Till controls; and (3) fails to pick up on the panel judge’s statement that there are significant differences between the worlds of chapter 11 and 13 and the text of their two cramdown statutes. This last point is especially odd because their brief does in fact make that argument and it ought not to have been left in the oral argument locker room. On the plus side, he did manage to squeeze in a sentence about pre-Till endorsement of market checks in cramdown and obliquely gave the best evidence that bankruptcy judges can assess market efficiency when he stated that the other bankruptcy judges in the Second Circuit were holding that they would apply market rates if there were an efficient market.

 

But overall, the oral argument strikes me as a missed opportunity for the secured creditors and on balance favorable for the debtor. It seems to me a majority of the panel arrived looking for a way to rule for the creditors (why else ask both of them what rule of law they wanted the court to promulgate?) and walked away without a lot of assistance in that endeavor.

Synopsis of Oral Argument in Jevic

The Supreme Court heard oral argument today in Czyzewski v Jevic Holding Corp, which presents the question of the power of a bankruptcy court to approve a settlement that effects a distribution of proceeds of property of the estate that does not follow the absolute priority rule.  $1.7 million of distributions in this case skipped over the priority unsecured claims of the petitioners, and went to the general unsecureds.  The Third Circuit held that a court could approve such a settlement given extraordinary circumstance, which followed the lead of the Second Circuit (Iridium), but conflicted with the Fifth Circuit (Aweco), which is why the Court took the matter on.

As an initial matter, there was some confusion about the relationship between the question presented, which covers a settlement that violated the absolute priority rule (a question on which there was a conflict in the circuits), and the emphasis on this case being a "structured dismissal" such that the distribution occurred only at the end (implying that there is no conflict in the circuits about the terms of a structured dismissal, and a dispute over that question might not have been granted cert).

Without resolving that, the argument moved on with a question by Justice Breyer - what forbids a distribution outside of a plan not adhering to absolute priority.  Counsel responded that the structure of the Code contemplates either a plan confirmation in which absolute priority is relevant (actually in the case of priority unsecured claims, it isn't it's 1129(a)(9).or a liquidation in which the priorities are also followed.

Justice Ginsburg points out, there is a third path, a dismissal in which everyone goes back to their pre-existing  position. Counsel said, that's right, in which case the bankruptcy estate ceases to exist and, in principle, makes no distribution of estate assets at all.

Justice Kennedy chimes in that section 349, governing dismissal, contains a clause that says "unless the court, for case, orders otherwise," which literally appears to allow the court to order something out of the ordinary in a dismissal order.  Counsel responds that the authorities which have analyzed that phrase show it was meant only to protect the interests of persons who changed their position irrevocably in reliance on the existence of the bankruptcy., not carte blanche for the bankruptcy court. Justice Kennedy makes some inconclusive remarks alluding to the tension between the broad "for cause" phrase and the "careful scheme" of priorities elsewhere in the Code.  The Chief Justice asks where the legislative history is found and counsel points him to the House Report.

Justice Kagan asks counsel to state the holding she would like the Court to reach.  Counsel says, the case does not turn on the fact of a "structured dismissal"; the disregard of absolute priority is unlawful at any stage of the case.

Justice Alito pounces: it can never be lawful? Counsel responds, only in section  510 has Congress authorized bankruptcy courts to change priorities.  Counsel then goes on, you don't ned to reach the issue of whether "critical vendor" payments are lawful.  Those payments were authorized by this Court over a century ago, under the Doctrine of Necessity.  The doctrine justifies them because they preserve reorganization prospects.  But here, given that it was a structured dismissal, there was no prospect of reorganization,.

The Solicitor General, supporting the petitioners, was up next.  the rule you should adopt is that "a bankruptcy court can never resolve a bankruptcy by ordering the distribution of estate assets in a manner that violates the Code's absolute priority system without the consent of the impaired priority claim holder."

Chief Justice Roberts:  you don't allow for the "extraordinary circumstances" exception that the Third Circuit endorsed?  SG:  no, that's too big a loophole, given how many cases are administratively insolvent,  and encourages self-serving posturing to make the desired record.  Justice Breyer clarifies that the SG is not proposing to ban critical vendor payments.

Justice Alito asks her to address the "for cause" language in section 349(b), and basically she reiterates her "not permitted" position. which is not,what I think Justice Alito was asking for.  I think he wanted an analysis of the scope of that clause.

Justice Kagan and counsel clarify whether the desired holding would overrule Iridium in the 2d Circuit, and counsel says, depends on whether you limit your holding to situations in which the case is resolved and dismissed or not.

Justice Kennedy asks what happens in practice in structured dismissals and the SG, who I assume does not know, responds  that deals are often reached but it is unlawful to shove an unconfirmable plan through the structured dismissal doorway.

Justice Sotomayor returns to the initial question  about the apparent distinction between the broad "all contexts" question presented for certiorari and the emphasis on the "structured dismissal" context.
She affirms that there is a difference between holding that no settlement proceeds can be distributed outside the absolute priority rules, and saying no dismissal can be entered that circumvents that rule.

After counsel responds, Justice Ginsburg responds, are you saying a settlement can never be carried out if it calls for a distribution?  the SG responds:  a settlement should be limited to just liquidating a claim, unless the proper consents are obtained to a distribution.

Justice Alito asks the SG to explain how 1129(a)(9) and 507 factor in to the analysis.  Counsel points out that 1129(a)(9) permits a claim holder to agree to some treatment other than cash.  But 507 does not contemplate any deviation.

After the SG summed up, counsel for the debtor -respondent took over.  The initial question came from Justice Sotomayor, who observes that the structured dismissal took away a legal right away from the priority unsecured claim holders, the right to sue third parties.   Counsel for some reason fails to address her question but continues with his argument.  When he gets to the point where he says "this is a rare case", she stops him and disagrees: "every structured settlement of this kind is trying to exclude one set of creditors".  Again, counsel fails to respond directly, but begins talking about the fact that the petitioners had received $6 million via the first day order   -- "far more" than the $1.7 million that bypassed them under the structured dismissal  -- on their pre-petition priority claims for wages and benefits.  Justice Breyer dismisses that as irrelevant.  He too focuses on the claims against third parties. If the transcript is correct, counsel concedes the structured dismissal did in fact kill off those claims.

Then, counsel asserts that there is nothing in the Bankruptcy Code for bankruptcy judges to approve settlements. The bankruptcy judge only needs to get involved if there is disposition of estate assets under 363(b).  But under 363(b), judges have discretion.  Justice Breyer asks if they can reverse the order of priority.  Counsel says, in general they can't, but as the Second Circuit held in Iridium, there are rare exceptions.  This case is one of them.

Justice Kennedy pipes up: this case is not rare at all. It's just a chapter 7 case in waiting.
Discussion occurs of the first day payments among Justice Ginsburg, Chief Justice Roberts and counsel.

Justice Breyer compliments counsel for the "very good point" that in a chapter 7 the secured creditors would have taken everything and petitioners would have been no better off.  But then he poses a hypothetical involving buried treasure and asks if the court has power to dispose of it in a wild deviation from the priority scheme.  Counsel distinguishes between cases where the disfavored creditor would have received a distribution and those where it would not, if the scheme was followed.

Justice Kagan distinguishes between a Code that requires rigid adherence to its priorities and a Code that allows a bankruptcy judge to enact a "pareto-superior" outcome, one in which no one is worse off, but someone is better off.  Then says the only question is which of these Codes did Congress enact?   Counsel says, anytime you're in 1129, rigid. Anytime you're in 363(b), there is room for the "pareto-superior"outcome.

Justice Sotomayor says, then bypassing creditors will become the ordinary situation, not the extraordinary.  Counsel responds, bypasses are only legitimate if the bypassed creditor is not losing anything by virtue of being bypassed, where they would have had no recovery.

Justice Kagan re-asks, where is this in the Code, and expresses skepticism that 349(b) brings it in.
Counsel re-states his 363(b) argument and says the question is whether there is 363(b) discretion or whether the absolute priority applies all the time (editorial note: it is absolute, after all).

Justice Breyer and counsel have a rather muddled exchange, at the end of which Justice Breyer says "then I'm back with Justice Kagan. I'm pretty worried about that provision. [363(b)].

Helpfully (in my view), Chief Justice Roberts steps in and says "the reasonableness of your position is directly related to how extraordinary the circumstances are.  I mean, you're suggesting that the main criteria in approving under 363(b) is pretty much what the priorities are under chapter 11." Counsel agrees.  The Chief Justice continues, observing that it matters how "tight" a hold the priority scheme has on 363(b) vs does it merely  "inform the discretion" of the bankruptcy judge.  In the latter case, these scenarios will cease to be extraordinary.  He asks counsel to address that, but counsel resorts to re-stating his argument more or less ab initio.   The Chief presses him, so he relies on the statement in Iridium that conformity to absolute priority is the most important criterion.

Justice Kagan returns to the question of whether all that is happening is the "confirmation" of an unconfirmable plan, by calling it something else and reviewing it under a different section of the code.  Counsel responds, again somewhat obliquely, by suggesting (in my words) that Petitioners could have been more helpful about ways to make the plan confirmable, as opposed to just insisting on their rights.

Justice Sotomayor follows up by saying there is a difference between a settlement of an individual claim and a settlement that works like a plan. And says the second type would not be an "extraordinary" circumstance.  Counsel responds rather broadly that 363(b) discretion varies based on the facts of the case and might vary based on whether  you are at the start or end of the case.

Counsel then reviews with Justice Sotomayor that the funds in the case came in as a global settlement from an outside third party that, fearing liability on an avoidance action, insisted that the estate release that cause of action; that, in turn, gave the unsecured creditors leverage to demand some of the settlement, because otherwise they would have logically been able to pursue the avoidance action under a plan.

Counsel restates his argument at a high level of generality. Justice Breyer comes back and asks, even if we agree that a judge can authorize a debtor to "sell" a lawsuit, where do we find the authority to vary from absolute priority in distributing the proceeds?  Counsel sums up by saying:  363(b) discretion is, as Iridium says, restricted, but not obliterated, by absolute priority, and at least here, where no one is harmed by the deviation from absolute priority, it is within the court's discretion to authorize such a deviation.

Counsel for petitioners was given two minutes to reply, but the justices did not interrupt her and the argument ended.

The questions are all over the lot.  I could envision the Court saying cert was improvidently granted if it takes too long to reach a consensus.  Justice Alito and Sotomayor both raised this question.   I think that is unlikely. I think some of the Justices are trying to analyze the question presented and not limit themselves to the "structured dismissal" context.  There seem to me to be at least two justices, Breyer and Kagan, who don't see the statutory authority for respondents' position, even though they both seem to think it generated a "pareto-superior" outcome in this particular case.  Justice Sotomayor seems quite distrustful of the respondents' position.  Justice Kennedy's lone substantive question suggest he shares her skepticism. The Chief seems open-minded but seems to me unlikely to fall on his sword if a consensus scan be forged in favor of a different result.  I suspect Justice Ginsburg is in the same place.  Justice Alito seems the most inclined to support the debtors' position.  Justice Thomas did not speak and I have no idea how he would view this, since the legislative history behind 349(b) would not seem likely to interest him.  The Code is silent on the specific question and I don't know how he, as a literalist, would tend to rule when that is the case.  My bottom line is I expect the petitioners to win, although my confidence in that conclusion is low.

Zacks Investments Having Trouble Making Up its Mind About Aramark

I went into Fidelity's website to research the stock of Aramark, the food services provider.  Under the "News and Events" tab, these were the four most recent items:

Zacks Investment Research, Inc. downgrades ARAMARK from HOLD to SELL. Investars Analyst Actions - private – 12/01/2016

Zacks Investment Research, Inc. upgrades ARAMARK from SELL to HOLD. Investars Analyst Actions - private – 11/30/2016

Zacks Investment Research, Inc. downgrades ARAMARK from HOLD to SELL. Investars Analyst Actions - private – 11/29/2016

Zacks Investment Research, Inc. upgrades ARAMARK from SELL to HOLD. Investars Analyst Actions - private – 11/25/2016  I understand algorithms are driving most of these sites' output, but this is one algorithm that needs some re-writing.  This would be absurd "analysis" for pretty much any equity in the US markets, but Aramark is a low-vol stock to begin with (beta 0.66) and, during the time Zacks was playing tug of war with itself, the stock only moved within a band of less than 5%.  Embarrassing.

The Puerto Rico Oversight Board Has Been Appointed (Sell on the News).

Yesterday, August 31, President Obama appointed the 7 voting members of the oversight board for Puerto Rico under the law colloquially known as Promesa.  The board has a broad charter and a ridiculously impossible task in front of it. 

Back in June, in a moment of weakness, I told a friend of mine at a hedge fund, “Sure, you can try to put my name on one of the lists of nominees.”  Then came August and his liaison in D.C. with the office of the relevant Congressional figure emailed me and said “You’re on the list” from that leader to the Administration.  Lest I get too arrogant, he took pains to let me know that most of the initial proposed appointees from the GOP side had been vetoed by the Administration; clearly I was not an “A-list” candidate inside the Beltway.  So I began educating myself on the law and the island’s predicament, and as I did, I became more and more fearful: “God, what if I do get appointed?  This thing is a disaster!”  So, while I felt obligated to live up to my undertaking, I was deeply relieved last night when said friend and said liaison let me know I had been passed over.  They explained, as the Wall Street Journal reported today, that the Administration had insisted on at least two of the GOP nominees being natives of Puerto Rico or having close ties there, and also (not reported in the WSJ) that the “Anglos” on the GOP side, Biggs of AEI and Skeel of U. Penn, had been cleared in the first round, so ultimately my presence on the list was, in retrospect, some sort of a gesture to my friend and his liaison as opposed to something that had a realistic chance of coming to fruition.  For which I am grateful.

Personal anecdotes aside, let’s look at the nominees’ backgrounds, keeping in mind that the underlying problem pits a consistently Democratic government debtor against a large number of institutional creditors.  As Mary Williams Walsh of the Times, whose reporting I think has been reasonably balanced, reports (my additions are in parenthesis):

The Republicans named to the board are:

■ Andrew G. Biggs, a resident scholar at the American Enterprise Institute (Mr. Biggs was also deputy commissioner for Social Security in the 2^nd Bush administration and appears to be also a resident scholar at the free-market-oriented think tank, The Mercatus Center).

■ José B. Carrión III, president of Hub International, an insurance brokerage in Puerto Rico (This is a little misleading.  Hub International is a worldwide insurance brokerage (owned by private-equity firm Hellman & Friedman and headquartered in Chicago); Mr. Carrion is head of the Caribbean region, not the global company).

■ Carlos M. García, founder and chief executive of BayBoston Managers, a private equity firm. (Per his LinkedIn page, I found this:” Previously, he was appointed by the Governor of Puerto Rico as Chairman, President and CEO of the Government Development Bank for PR, the fiscal agent, financial advisor and bank of the Government of Puerto Rico. Mr. Garcia also chaired the Fiscal Restructuring and Stabilization Board created by law to safeguard Puerto Rico's credit rating. During his public service tenure (2009-2011), the Government of Puerto Rico improved its credit ratings and coordinated with federal regulators the implementation of a financial rescue plan for its banking system.”   I note that the Development Bank is one of the institutions whose restructuring is under the aegis of the Oversight Board).

■ David A. Skeel Jr., a University of Pennsylvania law professor with expertise in bankruptcy (His bio page from Penn’s website).

The Democrats are:

■ Arthur J. Gonzalez, a senior fellow at the New York University School of Law and a former chief judge of the United States Bankruptcy Court for the Southern District of New York (I assume Judge Gonzalez is well known to readers of this blog).

■ José Ramon González, president and chief executive of the Federal Home Loan Bank of New York.  (According to a press release from FHLBNY, like Mr. Garcia, he was also CEO of the Government Development Bank for Puerto Rico, one of the debtors whose restructuring he will now be overseeing.  The FHLBNY is a federally chartered cooperative whose members are mortgage lending banks in New York, New Jersey and Puerto Rico.  It is exempt from all taxation and its securities are given preferential regulatory treatment for risk-capital weightings under bank regulations.  These subsidies are stated to have been intended to assist it in its mission to support affordable housing (notwithstanding that prices have appreciated beyond many working families’ ability to purchase.))

■ Ana J. Matosantos, president of Matosantos Consulting and a former director of the California Department of Finance From a biography I found on the web: “Ana Matosantos has a number of firsts on her resume. She was the youngest, the first Latina and the first openly gay person to hold the position of Department of Finance director.

“She was also the first finance director to serve two governors of different parties.

“Matosantos grew up in Puerto Rico, the daughter of a businessman and a high school administrator, and received a bachelor's degree in political science and feminist studies from Stanford University in 1997. After graduating, she spent two years working at the San Francisco-based Equal Rights Advocates, a public interest law firm that focuses on women’s rights.

“She considered law school, but instead began her state government career as a consultant to the Senate Committee on Health and Human Services and as the human services consultant to the Senate Committee on Budget and Fiscal Review. Matosantos moved to the executive branch in 2004 as a member of the Health and Human Services Agency, where she served as an assistant secretary for programs and fiscal affairs and associate secretary for legislative affairs. In 2007, she became deputy legislative secretary for Health and Human Services and Veterans Affairs in the office of Governor Arnold Schwarzenegger where she worked on the administration’s comprehensive health care reform proposal.

“From April 2008 to December 2009, Matosantos was the chief deputy director for budgets.

Republican Governor Arnold Schwarzenegger appointed Matosantos, a Democrat, finance director in 2009. She was reappointed director by Governor Jerry Brown in January 2011 and 10 months later was arrested on suspicion of driving under the influence, pleaded no contest to driving while over the legal limit for alcohol and was sentenced to three years’ probation.

“She resigned her post in September 2013.” 

I write this post to point out that none of the appointees has any private sector restructuring experience, with the exception of a couple of “estate neutral” assignments Judge Gonzalez handled since leaving the bench.  (With all due respect to Professor Skeel (whose academic work I am sure is first-rate) and any other academic out there, I’ve never seen a full-time academic who could survive in a practice in a given debt restructuring situation.  Totally different mindsets and, after a point, skill sets.)

Indeed, with the exception of Mr. Carrion and Mr. J Gonzalez’s work at a government-subsidized lender, none of the appointees has any extended private sector experience of any kind.  

Last, notwithstanding that two of them held an executive office at the local development bank, none of them has any successful experience in economic development.  Most of the total years of employment of the board members come in government, government-subsidized, or not-for-profit institutions.  Yet, I would submit, the two things the island needs are economic development not dependent on infusion of funds from outside sources, and debt restructuring.

I point particularly to Ms. Matosantos.  Even though she appears to have been in office during the period California handed out IOUs to its suppliers, there is no comparison between what a giant economy like California can do to turn itself around and attract talented entrepreneurs and what a modest Caribbean island can do, especially when there is no restriction of emigration from the island to Florida, New York or other destinations on the mainland. 

Although I am sure all of them are well-intentioned, most have some kind of relevant expertise, and a couple appear to have a generally attractive philosophical outlook, overall the appointments seem to be lacking in key respects. Having studied the challenge that confronts them, I was dubious before the appointments were announced that the board could pull a comprehensive, consensual restructuring together; I am even more pessimistic now. 

I have not held and do not hold any positions in the debt of any of the debtors subject to PROMESA, including, as far as I know, mutual funds that might hold their debt. Nor do I have any business or real estate interests on the island.

Eleventh Circuit Panel Makes Cursory (and Erroneous) Ruling on "Till in Chapter 11"

A few  weeks ago, a panel of the Eleventh Circuit issued an opinion, In re Seaside Engineering & Surveying, Inc., No. 14-11590, denying an appeal of a chapter 11 confirmation order, that includes, among several issues considered, a brief holding relying on [a misreading of]  Till v SCS Credit Corp.  The entire section of the opinion dealing with Till is only 7 sentences and 12 lines long. The case involved a tiny amount of money - the debtor's business was valued at only $200,000 -  and I suspect the court did not receive in-depth advocacy on the topic. 

Here is the entire section of the opinion dealing with Till:

"E.  Interest Rate on Promissory Notes Exchanged Pursuant to the Second Amended Restructuring Plan.  Vision did not receive an immediate cash payment for its interest in Seaside; rather, Vision received promissory notes accruing with an interest rate of 4.25%. Vision argues that this rate does not adequately compensate for the highly prospective nature of the notes. This Court reviews the adequacy of the interest rate for clear error. In re Brice Rd. Devs., 392 B.R. 274, 280 (B.A.P. 6th Cir .2008).The Supreme Court adopted the formula approach for determining the interest rate payable to creditors in bankruptcy proceedings. Till v. SCS Credit Corp., 541 U.S. 465, 478–79, 124 S.Ct. 1951, 1961, 158 L.Ed.2d 787 (2004). “Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate․ Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly.” Id. Here, the bankruptcy court applied this formula, adding a 1% adjustment to the prime rate of 3.25%. The 1% adjustment is within the range suggested by the Supreme Court in Till, 124 S.Ct. at 1962, and therefore the bankruptcy court committed no clear error."

On the face of the text excerpted, one can see clear error.  The Supreme Court did not, in Till, adopt "the formula approach for determining the interest rate payable to creditors in bankruptcy proceedings".  That statement is wrong in two ways.  First, Till had three opinions, none of which commanded a majority of the Justices.  Thus, the "formula approach" is not what the "Court adopted" because the divided Court adopted nothing. (read the syllabus of the case if you think I am wrong; you will note that the only thing identified as being "of the Court" is the judgment (vacating and remanding).  Everything else is merely an opinion of the various Justices.)  The "formula approach" was just what the four Justices in the middle of the spectrum of opinions happened to agree on,  nothing more or less.  The only holding that can be divined in Till is that the "forced loan" approach cannot be used to determine the value, as of the effective date, of deferred payments in a chapter 13 plan.

Second, and more substantive, Till was a chapter 13 case and there is nothing in the opinion that purports to impose the plurality's "formula approach" in all other "bankruptcy proceedings" as the Seaside opinion says. As I have written before, and as anyone who looks at the text of the Bankruptcy Code with a fresh eye can see, cramdown in a chapter 11 case like Seaside is governed by a different standard than cramdown in a chapter 13 case like Till. The cramdown section of chapter 11 mandates scrutiny pursuant to the century-old "fair and equitable" standard, which does not appear in chapter 13.  Courts adjudicating chapter 11 cramdown battles need to follow the precedent interpreting "fair and equitable"; courts adjudicating chapter 13 cramdowns are not subject to that standard because that language is not found in chapter 13.  Moreover, as I recounted last year, when one looks at the briefs and argument before the Court in Till, one sees that the Tills, the Solicitor General and the Justices all rejected the idea that chapter 11 precedent had any bearing on the question before the Court in Till.  

Courts should not be looking at Till at all in adjudicating chapter 11 cramdowns.