Aditi Bagchi

“Zombie Debt”: Obligation without Liability? — Aditi Bagchi

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Post by Aditi Bagchi

John Oliver recently purchased and forgave about $15 million in medical debt.  (See https://www.youtube.com/watch?v=hxUAntt1z2c)  His objective was to draw attention to the dubious practices of debt collectors, as well as their “right” to buy information about people who once owed money and to try to collect money from them, even if the debt is no longer legally binding because the statute of limitations has expired.  (What I will refer to as expired debt is also known as “zombie debt.”)  If a debtor makes or promises an additional payment or admits obligation, the statute of limitations may actually be extended and the dead debt may be revived.

There is a fair amount of legislation to protect consumers from debt collectors.  Debt collectors may not discuss debt with debtors’ friends or family and they may not threaten to sue on debt that has expired.  Individuals have the right to demand that debt collectors not call at work or that they cease direct communications with the debtor all together.  A lot of the worst practices by debt collectors are already illegal.

But not all of it.  Why not flat out ban the sale of expired debt?  Why not impose hefty fines on any attempted sale of such debt, including transmission of debtors’ information?  And why not heftier fines on any attempt to collect expired debt?

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Who is Entitled to a Fair Price? — Aditi Bagchi

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Post by Aditi Bagchi

Making waves recently was a ruling by the Delaware Court of Chancery that Michael Dell and the private equity firm Silver Lake paid too little for Dell when they bought the company in 2013 in a leveraged buyout. See http://courts.delaware.gov/Opinions/Download.aspx?id=241590. Vice Chancellor J. Travis Laster concluded in an appraisal proceeding that shares were worth about $17.62 rather than the $13.75 that shareholders were paid.

The court arrived at this result without finding that Mr. Dell and management breached their fiduciary duties. To the contrary, they appear to have taken many “praiseworthy” steps in the sales process. No one else came forward with a clearly better offer. The court found, however, that there were structural problems with the accuracy of the market valuation of the company, including some inherent conflicts of interest but, more importantly, limitations in the valuations by potential classes of buyers, including shareholders (short-termism), private equity (high return expectations), and strategic acquirers (integration risk). The result is that the company was found to be worth more than anyone was willing to pay for it.

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How Not to Read Bonds — Aditi Bagchi

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Post by Aditi Bagchi

In 2001, Argentina defaulted on about $92 billion worth of bonds.  It subsequently restructured these bonds, and 93% of bondholders accepted the 30 cents on the dollar that Argentina offered.  But some hedge funds bought the original bonds at a discount and held out on repayment.  They were able to persuade Judge Griesa in New York that a pari passu clause in the original bonds prohibited Argentina from treating new bonds differently than the original bonds, and the judge actually issued an injunction prohibiting Argentina from making payments on the new bonds – effectively locking Argentina out from capital markets.

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Impairing State Contractual Commitments – How Sacred Should Contracts Be? — Aditi Bagchi

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Post by Aditi Bagchi

In early May, the Illinois Supreme Court unanimously struck down a 2013 state pension reform law.  That statute reduced various public pension benefits in an effort to reduce overwhelming debt in the public pension system.  The Court affirmed a lower court ruling that the bill violated the pension protection clause in the Illinois state constitution, which provides that “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”  The Court read the clause to prevent the legislature from any downward revision of a public employee’s pension benefits after the first day of her employment.

Illinois argued that the clause should be read to subject its public pensions to the same limitations as other contractual relationships, including modification or elimination by the state’s police power.  The Court rejected that argument, holding that, especially where the state is itself a party to the contract in question, the hurdle for a substantial impairment of contract is very high and had not been met in this case.

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We’re all connected! Regulating Contracts for Electricity — Aditi Bagchi

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Post by Aditi Bagchi

The Supreme Court has agreed to review a federal appellate court decision overturning demand response regulation from the Federal Energy Regulatory Commission.  The issue on appeal is not one of private law but of federal jurisdiction.  The federal agency has authority to regulate the wholesale market but states retain authority over retail markets.  The problem is that there is no clear line between those markets.  The FERC regulation is designed to reduce wholesale prices but it does so by way of rebates for reduced retail demand.  The question is whether the regulation technically governs wholesale sales (whose prices are reduced) or retail sales (that don’t happen as a result of its incentives).

The jurisdictional lines in the Federal Power Act force the analytically unfortunate question of whether FERC Rule 745 governs wholesale or retail markets.  But the exercise of jurisdictional line-drawing may offer a lesson for common law regulation of contract as well.

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Should There be a Federal Policy on Arbitration? — Aditi Bagchi

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Post by Aditi Bagchi

The Federal Arbitration Act can be read merely to protect arbitration clauses from hostile judges.  That is, it may merely require neutrality with respect to arbitration.  Alternatively, it can be understood, together with the slew of federal cases overturning allegedly ‘hostile’ state decisions, as affirmatively friendly to arbitration.

In the recent 7th Circuit decision, Andermann v. Sprint Spectrum L.P, Judge Posner takes the former view.  He observes that it is not clear that arbitration should be preferred, but more importantly, there is no reason to treat arbitration terms differently than other contract terms.  Whatever Posner’s ultimate view about the utility of arbitration, he appears more committed to a strong default of neutral enforcement of contract without reference to public policies that might favor or disfavor particular terms.  As long as parties formally agree on arbitration, arbitration carries the mantle of freedom of contract.

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Arbitration and Opportunism — Aditi Bagchi

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A few weeks ago the Sixth Circuit decided Shy v. Navistar Int’l, Corp., in which a retiree trust fund sued Navistar for allegedly manipulating its corporate structure to avoid payments to the fund required under a consent decree. Navistar paid large sums to the fund for several years, culminating in a $71.6 million payment in 1999. Thereafter the payments abruptly stopped. The fund claims Navistar created a variety of entities to shield its substantial profits from the reach of the consent decree.

At issue in the federal case was not the merits of the fund’s breach of contract claim but its right to pursue the claim in court, given an arbitration provision that covered disputes over the “information or calculation[s]” provided by Navistar. The district court had found that the arbitration term applied but that Navistar had waived its right to insist on arbitration as a result of its conduct in litigation. The appellate court agreed that the arbitration term applied but reversed the finding of waiver. A dissenting judge argued that the arbitration term did not apply, but that even if it did, Navistar waived arbitration by failing to raise it until its prospects in litigation began to fade.

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