Obamacare Cost Continues to Soar While Senate Votes to Create Eliminate Taxes Used to Illusion of Fiscal Neutrality

The AP reports "Medical claims costs — the biggest driver of health insurance premiums — will jump an average 32 percent for Americans’ individual policies under President Barack Obama’s overhaul, according to a study by the nation’s leading group of financial risk analysts." Going on, they write: "the overwhelming majority will see double-digit increases in their individual health insurance markets, where people purchase coverage directly from insurers. ...  By 2017, the estimated increase would be 62 percent for California, about 80 percent for Ohio, more than 20 percent for Florida and 67 percent for Maryland. Much of the reason for the higher claims costs is that sicker people are expected to join the pool, the report said."

The AP also reports the Administration's response:  the study "focused only on one piece of the puzzle and ignored cost relief strategies in the law such as tax credits to help people afford premiums and special payments to insurers who attract an outsize share of the sick. "

Those are not "cost relief strategies"; they are cost-shifting strategies.  There is no such thing as a free lunch. That is economics 101.  Someone, somewhere is paying or will one day be required to pay for those tax credits and "special payments to insurers".  All of this is just redistribution: some people are going to be able to buy more medical care from healthcare providers, while others are going to have less purchasing power or reduced savings to fund the tax credits and "special payments to insurers." 

One of the study's authors responded correctly that they "did not attempt to estimate the effect of subsidies, insurer competition and other factors that could mitigate cost increases. She said the goal was to look at the underlying cost of medical care."  That's exactly right.  The tax credits and "special payments to insurers" are just mechanics to obscure the cost, by diffusing the cost away from the purchase of healthcare and bury it in various government programs and insurance company rate increases, which can then be thunderously attacked by politicians looking to secure their electoral future.  Someone needed to strip away those efforts to obscure things and get at the true cost of the political decision that was made in passing Obamacare.

The other big expansion of access to health care effected by Obamacare was the expansion of Medicaid, which per the Supreme Court decision required state consent.  Many states, although none governed by Democrats, have chosen not to consent for fear of being stuck with the bill for a large unfunded entitlement should the federal government in the future reduce its initial subsidies of that expansion.  To induce them to expand access to health care, the Administration has been bargaining to allow those states to direct the Medicaid expansion funds to private insurance companies, even though this will be more expensive than simply expanding Medicaid.  The states like this because they don't have to expand something that they have to fund.  Obviously insurers like it because they get government funded premiums.  And the Administration justifies this because Medicaid is such a poor method of health coverage that people are better off getting private insurance coverage.  But the bottom line is Obamacare just got more expensive again.

And while it keeps getting more expensive, the Senate has voted in its budget (the first one it has passed since it passed Obamacare) to eliminate the tax on medical devices that Obamacare imposed in order to create enough revenue to make the overall act appear fiscally neutral by CBO standards, thereby complying with the "paygo" law that requires all incremental spending to be paid for.  So, in every respect, the fears of those who warned that Obamacare rested on false projections and data and would never be able to deliver on the promises it made within the budget that it proposed, are being proven true.

Second Circuit Decision in Momentive: Half a Loaf is Better Than None, But Even the American HomePatient Approach Does Not Conform to the Fair and Equitable Standard

On Friday, the Second Circuit panel that heard the senior secured lenders’ appeal in MPM Silicones issued its opinion affirming the lower courts’ holdings in all but one respect, that being the interest rate applicable to a cramdown / cram-up of the senior secured claims under 11 U.S.C. § 1129(b)(2)(A)(I).  The court held that the lower courts’ application of the Till formula had been incorrect as a matter of law.  Unfortunately, the error was limited, in the court’s analysis, to a conclusion that market evidence was irrelevant to an evaluation of a proposed cramdown interest rate, given that capital providers in the market would be seeking to make a profit, which, the lower courts believed, was not permissible under Till and the 2d Circuit’s predecessor, Valenti.  “We therefore conclude that the lower courts erred in categorically dismissing the probative value of market rates of interest.”  Opinion at 22.  Rather, the panel reiterated (per the majority opinion in 203 N. LaSalle, (which logically supersedes the plurality in Till), that “the best way to determine value is exposure to a market.”    

However, the court unfortunately did not evict the Till formula from chapter 11 altogether, nor did it resolve the contradiction between the sub-par recoveries Till tends to generate and the century of case law interpreting the “fair and equitable” standard to require 100% recovery for secured claims protected thereby.  Instead, in cursory terms, the panel announced that the Sixth Circuit’s two-step approach set forth in American Homepatient, just months after Till itself was handed down, constituted the best approach to evaluating a proposed interest rate under § 1129(b)(2)(A)(I).  Thus, they remanded to the bankruptcy court “so that the bankruptcy court can ascertain if an efficient market rate exists and, if so, apply that rate, instead of the formula rate.”  This indicates a superficial grasp of the precedents, given that 203 N. LaSalle (in a similar sticking-it-to-a-secured-creditor scenario) did not say “the best way to determine value is exposure to an efficient market” it just said "a market."  

Half a Loaf Is Better Than None

We should be grateful, I guess, that the Circuit at least modestly diminished Till in the chapter 11 context.  It could have been worse; the court could have perpetuated the mistakes so many lower courts made, namely reaching the conclusions that (1) without briefing, argument or explanation, and  while interpreting a section of the code where the “fair and equitable” standard does not appear, a plurality of the Supreme Court meant to overrule more than 100 years of its own decisions interpreting that standard to require 100% recovery on claims protected thereby before anyone junior can receive any distribution from the estate, and (2) creditors are not permitted to recover any amount that might constitute a profit or even a contribution margin, compared to some formula developed on a “seat of the pants” basis in random consumer bankruptcy cases in complete disregard of actual arms’-length transactions by willing lenders and borrowers.

Further, although the court should have developed the following point to a fuller extent, it is heartening to see that the court implicitly treated a 100% valuation as at least a parallel focus for the lower court: citing its own Valenti opinion, they wrote: “the goal of the cramdown rate is to put the creditor in the same economic position that it would have been in had it received the value of its allowed claim immediately.”  So, it is conceivable that the court on remand and its brethren in the future will have to look not only at the first step in the American Homepatient approach, i.e., are the credit markets efficient, but, even if they conclude “no”, and turn to the Till formula, they may have to add a sufficiently high risk premium to produce a 100% valuation “immediately” in the words of the Valenti opinion. In which case, economically, if not conceptually, the “Till in chapter 11” case law will die a deserved if unofficial death.

The American Homepatient Approach is Impractical

It would be truly amazing if the very first appellate panel to consider the question whether Till should apply to chapter 11, without the benefit of any development of the issue by lower courts, professionals in the field, or academic analysis (and frankly without having had a steady stream of large chapter 11 cases flowing through its docket), managed to hit the nail on the head with its proposed solution.  But I guess the American Homepatient judges were just idiots savants in the field of business reorganization. That they failed to recognize that chapter 11 has this magic phrase “fair and equitable” that was not at issue in Till is something only pedants might notice.

I think the Second Circuit selected American Homepatient as the governing framework for no reason other than it was the only alternative to a full adoption of Till that was readily available, and it enabled them to get the opinion out the door, nearly one year after oral argument and two years since the case landed on their docket.

But however practical it may have been for the panel to paste American Homepatient into the opinion and hit “upload”, it is not a practical solution for chapter 11 cases generally.  First, the term “efficient market” is not a practical concept, nor is it something bankruptcy judges understand or are equipped to investigate.  It is an academic construction, and it literally means “perfect efficiency” --  perfect information, perfect rationality of participants, no limitations of any kind (including cash constraints or regulation), no barriers to entry, no economies of scale, no profits above marginal cost, frictionless transacting, and no arbitrage of any kind.  That is why it is an academic concept. In the real world, none of those conditions, let alone all of them, occur consistently.  And there does not seem to be any point in establishing a factual inquiry that can only come out one way.  That would be a rule of law. 

As I’ve written before, I believe the source of the reference to “efficient market” in Till was a colloquy between Justice Breyer and counsel for SCS Credit in which Justice Breyer inquired why the contract rate on the Tills’ debt did not change as the overall interest rate environment changed, and SCS Credit’s counsel said the rate had been fixed at the usury rate threshold, not floating.  As Breyer wound up in the plurality, it is likely this realization influenced his rejection of the “contract rate” theory proffered by SCS, but the footnote represents an effort to leave the door open to a third solution, the “efficient market” one.  But as the word “efficient” is not a realistic description of any relevant market, the footnote should have used “competitive” or “robust” or “normally functioning” or some other commercially attainable adjective, not one of the ultimate “ivory tower” constructions of the 20^th century.

In addition, a conceptual problem not noticed by these appellate courts is that in the context of financial markets, the term “efficient market” relates to secondary trading, not primary issuance. It arose initially out of Eugene Fama’s summer job, when he was asked to use his bright mind to find a pattern in stock movements that would help brokers make money.  He couldn’t. Instead he inferred that, having found empirical evidence that there were no systematic arbitrage opportunities in the stock market, given that that is one characteristic of an efficient market, then therefore the stock market must be efficient. That in turn led to the creation of index funds and him getting the Nobel Prize for Economics, among other things. Of course, over time subsequent researchers have found persistent strategies for outperformace, among which are small-cap stocks outperforming large-caps and momentum strategies beating pure fundamentals, whereupon some really clever soul pointed out that capitalization-weighted index funds are the ultimate momentum strategy, but I digress.

Second, bankruptcy judges have demonstrated that they do not understand what an efficient market is or how to think about that question.  (Indeed, this is a problem shared by their Article III colleagues. Per Justice White: "The legal culture's remarkably rapid and broad acceptance of the ECMH [efficient capital markets hypothesis] has not been matched by an equally broad and deep understanding." and "Confusion and contradiction are inevitable when traditional legal analysis is replaced with economic theorization [sic] by the federal courts.").  See generally Geoffrey Christopher Rapp, Proving Markets Inefficient: The Variability of Federal Court Decisions on Market Efficiency in Cammer v.Bloom and Its Progeny, 10 U. Miami Bus. L. Rev. 303 (2014)
Available at: http://repository.law.miami.edu/umblr/vol10/iss2/2.

Too many bankruptcy judges doing "Till in chapter 11 'analysis'"adopt what I have called elsewhere the “loan market as Santa Claus” paradigm.  The borrower comes in with a wish list in its chapter 11 plan.   It wants to stay highly leveraged while paying debt service in crumb-sized increments for a really long time.  Heads equity wins, tails lenders lose.   Every expert agrees: “there ain’t nobody in their right mind who would make that loan on a par basis.”  So, the bankruptcy judge sagely frowns and says, “well, that must mean the loan market is not efficient!  Borrower, there are no dissatisfied customers in my court!  Go ahead and give that lender prime plus 3 on your wildly overleveraged cash flow! That’s fair and equitable!”)

In my article, I analogized this to a person who says, “you know, I could really build up my nest egg if I could pick up some Facebook shares at half price. I’ll put in an order right now for 5,000 shares at that price."  Pause.  "Why, it didn’t clear!  There must be something wrong with this market!”

Less sarcastically, the point is, very simply, you cannot tell anything about “the market” by looking at one participant, one transaction or one set of terms.  Rather, you would look at the market-wide volume of transactions, the number of firms competing to offer capital, the cost of finding them, the bid-ask spreads and so forth.  But on as broad and deep a scale as one can reasonably encompass.  Then, if you concluded, “yeah, we have some well-functioning capital markets in this country,” you would go on to say, “OK, if someone wanted to raise money on the value of this collateral, given this cash flow, what are the best terms they could get from these well-functioning capital markets?” Which is what CFOs are paid to find out.  But I have yet to see a bankruptcy court do anything like that. The vast majority seem to fall for the “I’m not getting what I need, it must be the market’s fault” spiel, and wind up saying silly things like “I find as a fact that the credit market in the U.S. is not efficient”, when they have not the slightest clue what that means.  And systematically their decisions only serve to encourage debtors to propose deliberately off-market repayment terms, to elicit such a finding from an unsophisticated decisionmaker.

Third, it is indeed ironic (and the irony reinforces my belief that the Second Circuit just grabbed at American Homepatient because it was handy, not because it had any compelling analytic foundation) that we now have two circuits telling bankruptcy judges to figure out “market efficiency” as if they were the FTC or something, in order to accommodate a plurality opinion that elsewhere calls market analysis a task “far removed from the usual tasks of bankruptcy judges.”  Bankruptcy judges, even the ones who may be able to comprehend some of the thousands of research papers on market efficiency, don’t have the professional education and training or the staff to assess whether the United States credit markets are efficient.  It is unfortunate for judges in these circuits that such an impossible inquiry is left in their inboxes.  “Please handle. Thx.  2d Cir.  P.S. Let’s touch base at the retreat!”

In some cases, it may be moot, because the forces driving the reorganization may not want to hang around and wait for ivory tower concepts to be debated by economics Ph.D’s (note to self: get one!) while dozens of meters tick at $1000/hour. They may often just opt for the commercially reasonable solution of raising the money.  But the risk is that too many judges issue silly opinions saying “The U.S. capital markets are not efficient” and then it will be the lenders who wind up throwing in the towel until some appellate court realizes that …

Neither American Homepatient nor Till Conforms to the Fair and Equitable Standard.

As I’ve written before, and as any reader can verify, chapter 11 contains the “fair and equitable” standard and chapter 13 does not.  That standard has been black letter law for over 100 years. It means that a plan has to provide 100% recovery to anyone protected by it before anyone junior can receive or retain anything.  Whether it produces 100% or not is a question of fact, not of rule or formula.  Changing that standard is for Congress, not courts.  The Till court was free to adopt a formula for payouts because the fair and equitable standard did not appear in the statute there at issue.  When the standard appears, as it does in all chapter 11 cramdowns, courts must ignore Till completely, not just as the rule of decision, but also as the fallback.  All they should ask is whether the plan payout is worth 100 cents on the dollar.  It does not matter whether the capital markets are efficient.  That entire field of study was barely in existence when Congress enacted the Bankruptcy Code in 1978.  No reference to it appears in the cramdown sections of the Code or their legislative history. As the majority in 203 N. LaSalle interpreted the relevant statute , they did not say “the best way to determine value is exposure to an market” they did not say "an efficient market."

Whether a particular capital market is efficient or not is analytically irrelevant to the application of section 1129(b)(2) and courts should kick its ivory tower butt out of Code jurisprudence altogether, because such academic, costly and overwrought inquiries are inconsistent with the goal of efficiently administering bankruptcy cases themselves. A further irony: making bankruptcy judges investigate "credit market efficiency' makes them less efficient.

Academic Attempts to Revive the Corpse of Relative Priority

It being a rainy day and wishing to procrastinate some unappealing chores, I spent some time this afternoon looking to see whether the article I had published two years ago concerning the lack of statutory foundation for application of Till v SCS Credit Corp to chapter 11 reorganizations had been cited in the meantime. I know it was cited in the MPM Silicones  briefing to the Second Circuit (thank you counsel) but otherwise  I found four citations.  One, in a brief in the litigation at the Second Circuit between the Elliott hedge funds and Argentina puzzled me and doesn't really have much to do with the main thrust of the article so I won't mention it here.



Two of the rest are by students so I'll take first the article by Bruce Markell entitled, "Fair Equivalents and Market Prices: Bankruptcy Cramdown Interest Rates" published last year in the Emory Bankruptcy Developments Journal. To its credit, the article is the first piece I have seen, other than my own analysis, that explicitly recognizes that the payout to a dissenting class of creditors under a chapter 11 plan must be judged by the "fair and equitable" standard.  But, and this is a theme that runs throughout my criticism of his work, he fails to take on the full argument, namely that the term of art "fair and equitable" is missing from the plan confirmation standard of chapter 13 (unless some acknowledgment of this point is buried in one of the 240 footnotes).  Which I have always contended is the critical reason why Till does not translate to chapter 11. It wasn't analyzing the words found in chapter 11.

Second, and more disingenuously, Markell does not provide a full discussion of the cases and authorities relevant to assessing the significance of market comps to the valuation called for by the "fair and equitable " Rule, and omits other unfavorable sources.   For example, there is no mention of  RFC v. Denver & Rio Grande Western Railroad Co., 328 U.S. 495 (1946) and its companion case Insurance Group Committee v. Denver &Rio Grande Western Railroad Co., 329 U.S. 607 (1947) which explicitly held that a creditors was entitled to receive "full compensation" on its prepetition claim and if that meant large profits, so be it.   And consulted market prices while so holding. 

So when Markell sits there and claims it's a "fact" that  "rates for new loans have components not appropriate for a cramdown, such as initiation costs and profit components.^"  That's just nonsense based on the Supreme Court's precedents.  And his only citation is to Valenti, the Second Circuit case on chapter 13s which of course are not governed by the "fair and equitable" standard he purports to be interpreting.  Ignores the Supreme Court case on the relevant statutory term, cites a lower court on a different section of the Code. Nice.

Nor, is there any mention of the Supreme Court's holding in 203 N. LaSalle, that the fair and equitable rule required a market check before a debtor could cramdown a new equity capital plan on the secured creditor. Why should the rule be any different for debt?  Markell does not address these inconvenient challenges.  

Even his presentation of the precedent he does acknowledge is disingenuous.  He lays out a homey matrix.  The case law, he says, teaches three "apothegms":  don't pay too little; don't pay too much and don't expect precision.  Of course, these homey admonitions don't appear in the text of the Supreme Court's opinions.  You know what does? "Full compensation".  Which is a little more precise than "don't pay too much and don't pay too little".  Those seem like disingenuous borrowings from the old "relative priority" doctrine that  Case v Los Angeles Lumber, killed off in 1940..  That was the whole point of the Supreme Court forcefully re-stating the absolute priority rule back then, to create a rule of 100% payout to senior creditors before juniors got anything.  . There had been widespread complaints that reorganization cases in the wake of the 1929 crash had been slow and inefficient and favored insiders, because the courts and the main players had all been operating on the notion of "relative priority" in which payouts were negotiated based on norms that everybody gave up a little, everybody kept a little and the relative priorities of senior to junior are mostly maintained.  In Case, in his first opinion since joining the bench, and prompted by future Justice Robert Jackson, then acting as SG, Justice Douglas, threw fire and brimstone at the old norms and said in essence, absolute priority means absolute.  And that was carried forth into the current Code, quite explicitly in the legislative history as the Supreme Court has recognized on multiple occasions. Markell seems to be aiming to get courts to think, hey, less than full value is OK, and it helps even out the recovery disparity. Spread the wealth, you know.. It's not OK. The court must aim for 100 cents and, of course, there are no guarantees, but a court can't intentionally aim lower. 

Markell's article also propagates the fallacious argument that (my paraphrase) "there is no market for cramdown loans because they're, you know, nonconsensual." This is surpassingly superficial and sophomoric. You know what?  There is no market for inheritances, or gifts, or divorce settlements, but tax courts and family courts use market transactions and comparable companies to value illiquid interests in businesses transferred via bequest, gift or divorce.  There's no bargaining or consent in any of those contexts either.  There's no market in tax certiorari proceedings, which are pretty nonconsensual too, but the courts look at recent market transactions in comparable properties in figuring out the value of your property; they don't just go "well, it's $X per bedroom in this town." This is basic human reasoning: research; compare and contrast, reason by analogy.  It's not so hard that it needs to be replaced with a formula.

A loan has certain key terms.  And there are on any given day, numerous loans that have some or all of those key terms:  for some the rate, but also one needs to know  the maturity, the covenants, the collateral, the prepayment right, etc.  But the variations on each variable are small.  There are thousands of people in the financial markets with expert knowledge of thees matrices of these variables on outstanding loans.  The LSTA and market participants have worked to standardize heavily the forms of the credit documentation and have largely succeeded, except in certain financial definitions.  Rating agencies routinely rate loans routinely, and the thousands of variations wind up being subsumed into a handful of ratings:  BBB,  BB-,  B-, CCC+ etc.  Prices and yields can be mapped against those ratings.  In fact, outstanding loans are marked to market pretty much every day, with the exception of certain loans (typically revolvers and Term Loan As with low leverage that are not particularly relevant to this question) held by Federally regulated institutions. But Term Loan Bs, 1.5 lien loans, 2d lien loans, where the rubber meets the road for cramdown purpose are held by funds that per regulation or agreement with their investors and lenders, mark to market every day, typically relying on a service that disseminates the same valuation to all holders of a given loan.  And then one can deduce that, to the extent the proposed exit loan shares characteristics of a given class of outstanding loans, it will likely be priced similarly by the market.  Further, there are thousands of loans brought to the loan market as new issues every year and they are priced, quite simply, by reference to similar loans that have recently been issued.  An exit financing is just one more of those and the market has easily absorbed them over the past decades.  The fact that it's a "cramdown loan" is not relevant to its valuation by anybody at any time.  To argue to the contrary is a  naive and completely false argument.

So when Markell, out of thin air and, as far as I know, zero experience in the real world of holding and trading debt, says (without citation)  "the market for bonds or loans generally is not the same market as reorganization debt, given that reorganization debt has at least an implicit assumption that the debt will be held to term and not traded"  he is just blowing smoke, It's utter nonsense.

A reader might be interested in a roundtable discussion of Markell's article which can be found here, but I warn you, it's three academics, none of whom has a clue about the real world of arranging loans to companies emerging from chapter 11.  



The second article is by a student at Cardozo Law Schol, Emma Guido, entitled "Till v SCS Credit Corporation: A "Prime-Plus-Plus" Method  Tilling [sic] Courts to Consider Efficient Market Evidence."  Ms Guido essentially advocates a compromise which is use Till and also look at the market when there is an efficient market;  sensibly, she does not go all academic on what "efficiency" is. Rightly, she acknowledges that loans have risks and the Till formula does not adequately capture them.  The article has all the benefits and limitations of a compromise approach.   It does not display the striking errors and ball-hiding of Markell's piece. Of the three articles, I think this is the best. I think it still falls short of the simple approach. Ignore Till, get rid of the confusing word "efficient" and stick with tried and true chapter 11 practices that just say, courts should hear evidence from people who know what they 're doing in raising debt capital at the time of the confirmation hearing about how the loan will be valued, and why, and make the best estimate possible. As they do in every other litigated valuation they adjudicate. .



Another substantive discussion occurs in an article published by a then-student at Seton Hall Law School, Thomas Green, in an article entitled "An Analysis of the Advantages of Non-Market-Based Approaches for Determining Cramdown Rates: A Legal and Financial Perspective."    Perhaps this is because my co-author was a Seton Hall Law School alumna and both had studied with Professor Stephen Lubben there.  And this article quotes Lubben's textbooks often so presumably reflects some input from him.

The article is a fine product for a student note, albeit somewhat lengthy and fairly high-level. It is a lot like the article I thought I was going to write on Till, until I read the briefs and oral argument at the Supreme Court and realized that everyone who thought Till was meant to change chapter 11 practice was completely wrong. The article contains, for instance, a 16 page discussion of the Efficient Capital Markets Hypothesis, which links to the two words "efficient market" in the dicta in footnote 14 in the plurality opinion in Till.  The thrust is, federal courts have routinely used the "ECMH" in securities cases adjudicating "fraud on the market" claims (glib again:  this overlooks the enormous and costly disputes in those cases over every aspect of the evidence and the analysis), so let's compare the ECMH to "cramdown loans".  Oops, Doesn't work well.  Why not? Well, there's not as much liquidity and then is that whole "taint of bankruptcy" thing. and then also "fraud on the market" cases involve secondary market trading whereas.the debt being issued when a company comes out of a bankruptcy is more of a "primary" issuance.  So, the author concludes, a judicial formula is indeed the best way to go.

But as I've written before, and as Markell also forthrightly points out, there is a huge gap between what lay people mean by "efficient" and what Economics textbooks mean by "efficient".  This makes the use of the term "efficient markets" a potential source of confusion in courts. As the author writes, quoting Justice White, "The legal culture's remarkably rapid and broad acceptance of the ECMH is not matched by an equivalent degree of understanding." In economics, efficiency, is a state of perfection rarely encountered in transactions between humans and probably not very stable. It means no or imperceptible transaction costs,essentially liquidity, enormous transparency.  Even so, economists have had to admit that there is no real-world example of a capital market that is perfectly efficient. At most as the author notes, they have concluded that movements in large cap equities in the U.S are consistent with the "semi-strong" expression of the ECMH.

Furthermore, as the author observes on a couple of occasions, the ECMH is something that aspires only to characterize secondary market trading, not primary security issuance.  It's apples and oranges, or, more aptly, analyzing the trading of orange juice in the commodity markets vs buying an orange tree. Unfortunately, he does not make the leap  (which, I understand, would have ruined the article) to say "the ECMH has nothing to tell us about market efficiency in the context of exit financing, so let's look elsewhere."  Instead, he claims, it is the cornerstone of "footnote 14" and thus a court-imposed formula should set the price of "cramdown loans".

Personally, I think it's a obvious non sequitur to go from "Efficient Capital Markets Hypothesis" to "Judge sets the rate".  I think the entire approach to the ECMH confuses the question.  To me, the approach is simply what judges have been doing for decades: value the paper like any other economic asset -- a building, a patent, a business -- using the best evidence available. Often, that will be the market. Sometimes not.    

The author completely fails to discuss what I have pointed out are the two biggest errors that the courts applying Till in chapter 11 have committed.  First, the opportunity for gamesmanship, exacerbated by the fact that judges do not grasp the meaning of the word efficiency. I called this in the article "the loan market as Santa Claus" fallacy  It plays out in all of these cases and the author even holds one up as a shining example of "how an efficient market analysis should work".
I understand he is a student, so I fault his faculty advisor for not having the common sense to see the absurdity of the reasoning.

In 20 Bayard Views LLC, he writes, the judge deemed the criterion of efficiency to be whether "other creditors are willing to lend on terms similar to those of the replacement notes under the plan.".NO! That bears no relation to anything in the ECMH or common sense.  It's just backward reasoning,  The ECMH would say, the prices that clear the market are the ones that are efficiently determined.  Not one single individual's bid.  I analogized this in my article to someone saying "I want to buy Facebook stock for $35 / share" when it was trading at $50. The investor's personal bid tells you nothing about efficiency of the $50.   Also it leaves the debtor a loophole big enough to drive its whole business through. Obviously, if a debtor knows that is the standard, the first thing they do is propose off-market terms.  Then those terms are "not available" in the market.  As the judge here noted: relying on testimony from the creditors that no one in the market would make a 100% LTV loan, he intoned,. "the market is inefficient" NO! The market was efficient --  that's the sane result. Those loans lose money  --  that's inefficient.  It's insane to hold that case up as an example to be followed.

In contrast, the creditor gave the sensible explanation:  "Look, if you want to pay us off, you can raise some senior debt, some mezzanine and some equity, and your all-in cost is somewhere around 11.68%.  It's expensive but you can do it. The market will fill that order for an arms-length price."  This reality-based explanation was lost on deaf ears unfortunately.

The second giant error the article shares with many courts is that  there is no discussion of any of the century of Supreme Court cases interpreting the "fair and equitable" rule (none of which mentions the "Efficient Capital Markets Hypothesis" by the way).  That means no discussion of what those cases have consistently held, which is that senior secured creditors get paid in full up to the value of their collateral, period, and that one should look at the market to determine whether a proposed plan is "fair and equitable".  Which only makes sense. Think about it: if a debtor can not raise new equity capital for its reorganization without a market check, why is the market somehow forbidden territory for the debt it wants to issue coming out of bankruptcy?  It's absurd to have opposite rules for the two types of capital

The article also offers a "policy argument" for the formula rate that consists of three points:  (1) saves money on professionals; (2) it's predictable; (3) "hey, creditors knew they could get screwed in bankruptcy when they made the loan, so it's fair to screw them."  To be fair, his more scholarly language is: "In sum, a bankruptcy petition inherently triggers numerous uncertainties, and the Code expressly contemplates multiple scenarios where a creditor’s expectations may be undermined."

This is glib and mistaken. The Code contains provisions that undermine a creditor's state-law contractual expectations.  The Code does not contain any provisions that undermine the Constitutional protection of the value of a secured claim as of the petition date, or else those provisions would be un-Constitutional.  

As for "Saves money on professionals", true, but so does a lottery, a coin flip, etc.   Any and every rule that eliminates a trial will save money on professionals.  But then there is that pesky Fifth Amendment thing about due process and takings of property.

"Predictable"?  In my 30 years of practice, I had not noticed that the rule "you get paid in full if you're oversecured" was confusing anyone.. See Case v Los Angeles Lumber.

Anyway, regardless of the disagreement over the analyses, it was a privilege to be cited in the several articles.







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Default interest is at least 4000 Years Old

From my favorite blog, Marginal Revolution, the terms of a debt instrument 4,000 years ago in Anatolia (Turkey):

Unanimous Supreme Court Delivers Direct Blow to "No Platform" Extremists on College Campuses

In today's opinion in Matal v Tam, the Supreme Court unanimously (with only Justice Gorsuch abstaining, as the case was briefed and argued during the Obama administration), invalidates the "anti-disparagement" clause of the Lanham Act on First Amendment grounds. Although the 8 justices split, 4-4, on one aspect of the reasoning, all 8 of them agree that the First amendment bars the federal government from conditioning registration of a trademark on a criterion that the mark not be offensive to a person or a group.  Given the current environment on college campuses and in similar once-lively fora for debate, this opinion is a welcome re-affirmation of the fundamental civil liberty of free speech in the face of so-called "political correctness" which has given primacy in debate to the offense-taking of countless self-proclaimed marginalized groups.  No longer can extremists stifle ideological opposition or scientific inquiry at a government-run educational institution by claiming it is hurtful or bully the institution into withholding a "platform" from a speaker they consider offensive, the so called "no platform" demand (you can read here an absurdly pro-extremist explanation of what "no-platforming" means: http://rationalwiki.org/wiki/No_platform.

The Lanham Act has, since its inception,, prohibited registration of trademarks that "may disparage persons, living or dead, institutions, beliefs or national symbols, or bring them into contempt or disrepute"  The language obviously begs for a "facial" First Amendment challenge, at least since the flag-burning cases.

A rock band named The Slants applied to register their band's name as a trademark, Consistent with the Act (the Court so finds, or holds), the examiner at the Patent and Trademark Office, having received various complaints, found that "there is ... a substantial composite of persons who find the term in the application for mark offensive" (emphasis added).  Justice Alito's opinion excerpts several further uses of the word "offensive" in the rejection of the application.

The government -- recall again that this was briefed and argued under the we're-so-woke-and-sensitive Obama administration --  advanced three arguments to defend the clause: that issuance of a trademark amounts to "government speech";  that  trademarks are a form of "government subsidy" and last that a "government program" should be judged by different standards than other infringements on civil liberties.

All Justices agree that the registration of a trademark is not "government speech".  Humorously, Justice Alito quotes numerous trademarks and asks rhetorically if each one of them is the government speaking, and then, if tartly observes, if they really are the government speaking, it is just babbling. He further notes, if registration of a mark is government speech, then is registration of a copyright government speech?  Given the universe of things that are said in books and plays and songs, the absurdity of the government's position becomes evident.

The Court next considers whether registration of a trademark is a government subsidy.  Previously, the Court had allowed the government to withhold funds from activities it does not want to promote, even where the Court had acknowledged the applicant for the funds had a constitutional right to conduct the activity -- for example, abortion funding.  The government's argument was overly broad, defining any economic benefit from the registration as a "subsidy".

Here, the justices split on their reasoning  -- and in curious ways.  Justice Kennedy, writing for himself and the three female (and most progressive Justices) disposes of all the government's remaining argument with a strongly worded opinion that the disparagement clause is a form of "viewpoint discrimination" that requires heightened scrutiny and fails plainly that test.  He closes with a heartening paragraph:  "A law that can be directed against speech found offensive to some portion of the public can be turned against minority and dissenting views to the detriment of all.  The First Amendment does not entrust that power to the government's benevolence.  Instead our reliance must be on the substantial safeguards of free and open discussion in a democratic society."

Frame that, college presidents! (Seriously-- it helpfully appears on its own page)

Justices Alito, Breyer, and Thomas and Chief Justice Roberts agree with their colleagues.  "the disparagement clause discriminates on the basis of viewpoint.... Giving offense is a viewpoint."

But, they also opine, that, quite simply, a trademark registration isn't a subsidy.  To the extent money changes hands, it is the applicant paying the government.  An economic benefit from a government registration is not a subsidy - look how many programs there are where governments hand out licenses, which are just a form of registration.  Someone can easily derive a benefit from having a license - for example to operate a business or to drive a commercial vehicle. That would not enable the government to control what that person could say in public.

Then they consider the "this is a special government program" argument and also find it lacking in precedent.  The only precedents mentioned involve the government as employer and the touchy issue of forced collection of union dues among its employees.  The opinion here is a little terse, but the basic message is, that context bears no resemblance to this one and even if it did, this one involves viewpoint discrimination, so, no.

Justice Alito's coalition goes on to consider whether the "disparagement clause" could stand muster as a light regulation of "commercial speech" and conclude it does not. Here, these Justices -- note the inclusion of Justice Breyer -- take on directly the "politically correct" justification for speech restriction:

"no matter how the point is phrased, its unmistakable thrust is this: the government has an interest in preventing speech expressing ideas that offend. And, as we have explained, that idea strikes at the heart of the First Amendment. Speech that demeans on the basis of race ethnicity, gender, religion, age, disability, or any other similar ground is hateful, but the proudest boast of our free speech jurisprudence is that we protect the freedom to express ' the thought that we hate' [quoting Holmes]"

More analytically, these Justices conclude that the "disparagement clause" is not "narrowly tailored" as even restrictions on commercial speech must be, because -- to the extent it is not enforced discriminatorily, -- it bars what I call "anti-bad guy" speech, such as "down with racists" and so forth.  Justice Alito says, so read, the law under examination is not even an anti-disparagement clause but a "happy talk" clause.  In addition, the line between commercial and non-commercial speech is "not always clear" and they are unwilling to risk that free speech be abridged merely by "affixing the commercial label" to "any speech that may lead to political or social 'volatility'."   Stuff that, no-platformers.

A good day for liberal values as the primacy of free and open exchange of ideas over political correctness and the claim of offense is reaffirmed by all 8 Supreme Court justices, and there is no reason to believe Justice Gorsuch would see it any other way.

Sally Yates Should be Disbarred

I/m no fan of President Trump or his immigration policy, bit I don't know if there has ever been as massive and blatant a departure from professional responsibility as Sally Yates' instruction to all DOJ lawyers this week not to defend their client in pending lawsuits because, while conceding that the client had taken an action that was "lawful on its face", she did not believe the "policy choice embodied in [the relevant] executive order is wise or just. "

Apparently Sally Yates not only considers herself superior to the duly elected President of the United States in determining what the right policy choice is, like "Super-President Sally Yates," but she also apparently considers herself superior to all of the thousands of attorneys in the DOJ regarding the scope of professional responsibility to their client.  And you thought Donald J Trump was the biggest narcissist in town.

Yates' letter to the attorneys tries to draw an "on its face /  as applied" distinction.  That's ridiculous. The order had been applied for less than 48  hours, and had already been tweaked to clarify its non-applicability to green card holders.  Any lawyer with more than a week of courtroom experience would know how to defend the order in general while indicating the possibility that the policy might wind up being further modified based on observations about what transpired when it was put into effect. Concerns about one day's worth of application does not justify letting a default judgment be entered on the policy in general. She also  claims that attorneys at the DOJ have a collective responsibility to do justice.  That's equally ridiculously overbroad. Such a responsibility to do justice is congruent with the parameters of the lawyer's professional responsibility, it doesn't mean the lawyer can breach his or her professional responsibility to the client. There is a world of difference between electing not to prosecute an individual for a low-level crime, or choosing not to go along with a questionable entrapment, and letting a default judgement be entered that binds the United States of America globally and indefinitely.  The DOJ is not a free-floating fourth branch of government whose policy preferences supersede the elected branches'.

Here we have a lawyer-client relationship; a fast-moving lawsuit against the client; and the legal position of the client is, by her own admission, defensible, and she orders all lawyers under her supervision to intentionally and knowingly default in their representation of the client.  That has to be unprecedented.  Although I can imagine that, in the hundreds of years of lawyer-client relationships in the Anglo-American legal system, on occasion a lawyer has experienced some personal conflict with carrying out his or her representation of a client, the only ethical action in that context would be to seek to resign the representation, which would be conditioned upon someone else being able to take over the representation without harm to the client's interests.  This is hornbook law as instructed in classes of professional responsibility and, even in matters of public policy, there are precedents for it. For example, after President Carter's failed invasion of Iran in 1980.  Cyrus Vance resigned as his Secretary of Sate (after, not before).  He acted on his conscience but only at a time that did not derogate from the interests of the United States of America.

But here, she goes light-years beyond resolving her own conflict with the position of the client and, incredibly, instructs every lawyer working under her supervision to stop representing the client as well.  This is a lawyer's version of a coup d'etat.  I can't even imagine what the lawyers handling those cases must have thought when they received her instructions.

"Hey, boss says stop working on the 7 nation immigration ban litigation."
"What? Has it been withdrawn or was there a settlement of some kind?"
"Nope"
"Has someone found a Supreme Court case that clearly says the order is unConstitutional?"
"Nope."
"Then, what for?"
"Boss says she doesn't feel like it's a good policy."
"And I'm supposed to go in there and tell the judge to just default the United States of America because that's just how my boss feels?"
"I guess."
"'Cause, you know, I've got cases, I've got precedents, I can make an argument here."
"Toss 'em. Boss says we're to stand down, not defend the client in this case."
"And that's not malpractice?"
"Hope not."
"Will I be protected from disbarment because I was following my boss' instructions?"
"Doubt it."

Honestly, I think, were I in such a position, I would have had no choice but to disregard her instruction, figuring she was deranged or something like that. The lawyer's duty is to the client. If your superior is blatantly telling me to commit malpractice, I don't think there is, either in the short-term or long-term, any alternative but to continue to do my job ethically and hope that somehow the deranged superior winds up removed from her position. If she instructed me to withhold material evidence, it wouldn't protect me were I to do so, I don't see how this is any different.

And what about the several judges around the nation who expect to walk into court and receive a robust presentation of the cases and authorities so they can render the best-informed decision? Obviously they would have to appoint someone from the private sector, a la what happened in the DOMA litigation, to represent the position of the United States of America appropriately, and until that appointment occurred and the person selected was able to prepare a case, the judges would have to place the cases on hold, which hardly does the interests of any person affected by them any good at all.

Imagine if you were a criminal defendant and you had a public defender assigned to you.  The weekend before your trial is about to start, your attorney meets you and says, "I just wanted to let you know that I'm not going to make any argument on your behalf next week, not going to put on any witnesses, cross-examine anybody, or offer any other proof."
"Why?"
"I just think you're a bad guy. and you deserve to go to jail."
"Well if that's the way you feel, I want a new lawyer."
"Nope, I 'm going to be your lawyer, I'm just not going to do anything."

I know lately it feels like we've entered a bizarro universe, but I would hope that the professionals among us would not lower standards in response. If she felt as she says she did, she should have resigned in protest.  But, for instructing other attorneys to breach their professional responsibility to the client, she deserves to be disbarred.

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.