Thursday, April 23, 2009

Is DIP Financing Starting to Pick Up?

Bankruptcy filings have increased during this financial crisis, but debtors in possession have had trouble finding financing. That may be until now. Last week the Wall Street Journal's website reported that a few firms had choices in selecting lenders for their bankruptcies.

As Jonathan Spagat reported last week in General Growth Files for Bankruptcy the REIT filed for bankruptcy, but it had its choice in selecting lenders. In fact "a number of lenders expressed interest in providing the loan."

The WSJ Online article goes on to say that two other firms had lending choices over the past two months. Potential lenders for Aventine Renewable Energy Holdings, Inc. even had lenders go to court and fight for the opportunity to lend. Chemtura Corp, a chemical company, had two lenders to decide from. The company eventually picked Citigroup, Inc.

Increases in DIP lending may be good news for the economy and lawyers. It may indicate that banks are starting to lend again and lawyers may become busy with bankruptcy cases.

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Wednesday, April 22, 2009

Helio Castroneves Acquitted of Tax Evasion

Helio Castroneves was acquitted Friday of all five tax evasion charges stemming from his alleged formation of foreign shell corporations to hide certain racing revenue. ESPN reported that the case really ended up coming down to testimony from Castroneves's father regarding the original formation of the foreign corporations. He claimed his son never had any control or ownership interest in the corporations and that Helio had no control over their initial formation. The jury obviously believed Helio and his father regarding the tax evasion but was still hung on one conspiracy charge. The Government likely will not pursue the conspiracy issue any further though. Helio could have faced up to six years in prison had he been convicted.

Both Helio's sister, who is his business manager, and Alan Miller, Helio's attorney responsible for his financial planning and structuring, were acquitted of their tax evasion charges as well.
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Friday, April 17, 2009

Assessing TARP Strategy report from COP

Elizabeth Warren, the chair of the Congressional Oversight Panel (created to oversee the expenditure of TARP funds, and to “review the current state of financial markets and the regulatory system”) was on The Daily Show with John Stewart this week to talk about TARP and the recent report on TARP strategy released by the Panel.

On April 7, six months after the passage of the Emergency Economic Stability Act, the Congressional Oversight Panel released a report titled “Assessing TARP Strategy.” The report, relying on historical responses to past banking crises, reviews methods for evaluating the programs created to assuage the current financial crisis. The Panel identified 4 elements that were critical to historical banking crises programming: Transparency, Assertiveness, Accountability, and Clarity.

The first half of Stewart’s interview with Warren illustrated that some of these elements don’t seem to be a part of the current programs. Warren stumbled her way through questions about how much money has been spent, and what exactly that investment was worth – rather, what it wasn’t worth. She did manage, though, to point out that this general uncertainty was due in large part to Paulson’s “don’t ask, don’t tell,” policy of distribution in relation to the first $350 billion of expenditures. Warren said the Panel is calling for more transparency, more accountability, and more clarity; they want a better articulation of policy and an explanation of what exactly is going on in the current expenditure programs.

Warren also took the opportunity to advocate a need for smart regulation to bring about economic stability and prosperity. She noted that before the great depression our economic history followed a boom and bust cycle every 10-15 years. After the implementation of regulations like the FDIC, SEC, and Glass-Steagall, though, we had a long period with no financial crisis. But those regulations began to unravel, according to Warren, and we ended up where we are today. (Bonus: check out this post on Geithner’s regulatory plan).

So check out the the interview (part 1, part 2), and the report and let me know what you think...
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Credit Default Swaps Making Corporate Reorganization Impossible?

The Financial Times reports that credit default swaps may be undermining companies’ attempts to reorganize in bankruptcy. When a debtor company attempts to reorganize, the success of the reorganization often depends on creditors agreeing to reduce, extend the repayment period of, or otherwise modify the outstanding debt owed to them by the reorganizing debtor. A creditor would be willing to do this because the modified debt would lead to a larger repayment than the amount the creditor would receive in the event of a liquidation of the debtor company.

Thus, corporate reorganizations are made possible because lenders have an interest in keeping their debtors from being liquidated. However, when lenders take out credit-default swaps on debtor companies as insurance on their loans, the lenders stands to receive full or partial payment of the debt from the CDS dealer if the debtor defaults. This payout from CDS increases the total return to the lender in a debtor’s liquidation; thus, lenders holding CDS-backed debt are less willing to accept reduced and/or extended payments from debtors, and corporate reorganizations become more difficult, if not impossible, to structure.

Should the bankruptcy law be modified to somehow fix this severing of a lender's and debtor's interests? Could a bankruptcy court revive a CDS-backed lender's incentive to compromise by modifying CDS contracts or by increasing the benefits of a reorganization? Or could the CDS dealer who inherits the lender's anti-liquidation interest somehow be brought into the equation?
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Thursday, April 16, 2009

Links Roundup

  • Former NY Gov. Eliot Spitzer weighs in on the 7th Circuit Jones v. Harris case. That case was first mentioned on this blog in early March. Chicago-Kent Professor William Birdthistle, who authored a brief of amici curiae with several other law professors for the Jones v Harris case, is quoted in the Wall Street Journal commenting on a similar case from the 8th Circuit, Gallus et al. v Ameriprise Financial Inc., which makes reference to both the Posner and Easterbrook opinions in Jones.
  • “Accountability Lies with All of Us” - Tom Wilson, CEO of Allstate, wrote this Op-Ed in yesterday’s NY Times, advocating that “we must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.”
  • Hot on the heels of Northwestern’s offer to graduating students to extend their University-sponsored health care coverage, UCLA has announced that it is establishing a new LLM program for the 2009-2010 school year – the “Transition to Practice” program, which will “focus on enhancing the practical skills and development of the new lawyer.” Ironically, we have heard this idea somewhere before … for further debate on whether an apprenticeship should simply be part of the J.D. curriculum, you can click here, here, or here.
  • OMG, GGP – As Jon mentioned below, General Growth Properties filed for bankruptcy this morning. They are represented in bankruptcy by Marcia Goldstein of Weil Gotshal and James Sprayregen of Kirkland & Ellis. See extended coverage from Crain’s Chicago Business and the Trib.
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HUGE Opportunity for Corporate and IP Law Students!

Quaver Battery Management System, a student group in the Stuart School of Business, is offering law students the opportunity to draft their incorporation documents, two contracts, and three provisional patents. This is a truly unique opportunity for students to get direct transactional experience with a dynamic start-up. The docs are time sensitive so please respond ASAP if you are interested! More information below ...

Quaver Battery Management System is a student group in the Stuart School of Business. The focus is on coming up with solutions to implementing the electric car infrastructure and creating viable market entry points for this new and exciting industry. The team of ten and growing students in the Stuart School competed in Pittsburgh this Spring at the Carnegie Mellon McGinnis Venture Competition in the field of Sustainable Technology. The team has a diverse background in engineering, management and the automotive industry, and are currently represented in the Finance, Environmental Management and MBA programs.

Currently the team is being considered to present to the Department of Energy, and has also met with the city and a number of potential clients/ investors. After over 6 months of work, we are close to closing our first deal and need help with incorporation, two contracts, and three provisional patents. If you are interested please contact the team leader, John Brophy, at or at 773-517-5897. All of these are time sensitive so if you have time as soon as Friday to have a first meeting please let me know. Thanks!
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General Growth Files for Bankruptcy

Proclaimed as one of the biggest real estate collapses in history, Chicago's own General Growth Properties filed for bankruptcy this morning. More information can be found here. Read More......

Wednesday, April 15, 2009

NBA Might Need New Collective Bargaining Agreement

The Sports Business Journal reported this week that despite a collective bargaining agreement between NBA players and owners that runs through the end of the 2010-2011 season, a new agreement will likely have to be agreed upon.

Because of the poor economic climate and the expected low business numbers league-wide, a new agreement seems forthcoming. But, collective bargaining agreements, like most normal union labor contracts, rarely are easy to negotiate or agree upon for that matter. On the contrary, they are often difficult to hammer out, and in this economic climate there is little chance players, looking for as many incentives as possible, and owners, looking to save as much as possible, will see eye to eye on anything.
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Investors Push Towards Madoff Bankruptcy

Five of Bernard Madoff’s investors filed a petition to force Madoff into an involuntary Chapter 7 bankruptcy on Monday. The petition comes after U.S. District Judge Louis Stanton of the Southern District Court of New York ruled on Friday that bankruptcy would be the best way for investors to reclaim their lost assets and lifted a stay obtained by the Securities and Exchange Commission (SEC) to block any litigation against Madoff. Although the SEC and Department of Justice fought the lifting of the stay claiming that an involuntary bankruptcy would only delay recovery and add to administrative costs, Judge Stanton stated that those concerns were “speculative” and “outweighed by the benefits to Mr. Madoff's victims of a bankruptcy trustee's orderly and equitable administration of his individual estate." The number of investors included as creditors under the petition will undoubtedly increase as five is merely the minimum number of creditors required to file an involuntary bankruptcy under the U.S. Bankruptcy Code. Read More......

Tuesday, April 14, 2009

Bankruptcy Law Ineffective?

A recent article on MSNBC suggests that a federal law, which was enacted in 2005 to make it more difficult for Americans to file for bankruptcy, is failing.

The article is referring to the Bankruptcy Abuse and Consumer Protection Act of 2005, which aimed to prevent Americans from abusing the bankruptcy system. Essentially, this Act imposes additional requirements on Americans who wish to be eligible for bankruptcy filings. For example, the Act requires applications to pass a "mean" income test in certain situations, complete credit counseling, and provide tax returns and proof of income.

In an attempt to show that this Act is ineffective, the article presents a prediction that bankruptcies through the next year could level off at 1.6 million - the same number which prompted the creation of the new bankruptcy law. Similarly, the article says that the law has "failed" to steer people away from Chapter 7, as these filings currently account for 69% of all bankruptcy filings - a number that is only slightly slower from the proportion of Chapter 7 filings in 2004, which leveled off at 71%.

However, these statistics do not show that the 2005 Act is "failing." In 2009, Americans face one of the greatest economic crises in US history. Thus, one would expect the amount of 2009 filings to be much greater that that of previous years. The fact that the amount of 2009 bankruptcy filings is still less than that of 2004 - even if only slightly less - indicates that the Act is effective.
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Thursday, April 9, 2009

Insurance & Asset Protection

We learn in Business Organizations and other law school electives that corporations and LLCs protect their owners' assets. But how can the corporation or LLC protect its assets? David F. Rolewick of Rolewick & Gutzke, P.C. writes in the ISBA's Section on Corporations, Securities, and Business Law Forum "that insurance is first line of defense."

Insurance can protect against many potential liabilities and may come in the form of general liability, directors' and officers' liability, as well as umbrella insurance. Mr. Rolewick even provides a chart of different types of available insurance at the end of his article. He goes on to say that insurance policies may pay to defend litigation even if the litigation is over an issue excluded from the policy. However, he notes that the insurance company may reserve its right to "enforce the exclusion in a separate action." Still, having the litigation expenses covered may be invaluable because Mr. Rolewick points out that defending litigation may be a client's biggest exposure.

In conclusion, when setting up a LLC or a corporation to protect a client's asset, a practitioner may be wise to have the client consider insurance to protect the new entity's assets as well.
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News Roundup

Here are links to some interesting recent stories:

Today, Barclay's sold subsidiary iShares to private equity group CVC Capital. The price tag was somewhere between $4.2 and $4.41 billion, depending on if you are Financial Times or The Wall Street Journal.

Top Obama Economic Adviser Lawrence Summers sees an end to our current economic free fall. Summers did not, however, provide insight about when a rebound would happen and how strong it would be.

As the stress tests on banks wrap up, Reuters reports that no banks will close as a result of the tests.

According to the Housing and Urban Development Secretary, banks receiving TARP assistance will be required to participate in the
government’s mortgage modification initiatives. You can check out that story here.

And finally, Wells Fargo had a good day.
The bank rallied global stocks today when it announced expectations of $3billion in net income for the first quarter. The AP suggests that it may just be an anomaly.

CONTINUE the rest of your post here.
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Wednesday, April 8, 2009

Short Selling Under Attack Again?

The SEC seems to be moving ahead with plans to place restrictions on short selling. Short selling occurs when Party A borrows a share of a stock from Party B for a fee and sells the borrowed stock to Party C. At some date in the future, Party A must buy a share of the borrowed stock on the market and give it to Party B. If the price of the stock went down between the time of the sale to Party C and the time of Party A’s purchase of the stock on the market, Party A makes a profit. Some people believe that short selling is bad for the market because short sellers only profit when stock prices go down, and, thus, they have an incentive to spread false rumors about the companies whose stock they short to drive down the stock’s price. Also, in times of high market volatility, increased short selling in a stock could cause a sell-off panic. To combat these problems, the Commission is seeking comment on a proposed circuit-breaker rule and two proposed versions of the uptick rule. A circuit breaker rule would freeze short selling of a specific stock if its price falls a certain amount in a single trading session and the uptick rule would only allow a short sale after a stock’s price has moved up at least one tick. Although short sellers face much opposition, the SEC is sure to receive many comments against these proposals because many commentors believe that short selling is essential for price discovery. For an in-depth discussion of the proposals, see Jim Hamilton’s and Floyd Norris's blogs. Read More......

Tuesday, April 7, 2009

Rethinking the Legal Profession?

I just caught this opinion piece from last week's NY Times - it has some interesting thoughts on how law schools need to adapt their curricula to better reflect the new realities of the legal profession.
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Monday, April 6, 2009

What are the Toxic Assets Actually Worth?

As reported, FASB changed the mark-to-market pricing rules last Thursday, giving banks more discretion in reporting the value of mortgage-backed securities. Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market. But even in a "normal" market, what are the alleged toxic assets actually worth?

Treasury Secretary Timothy Geithner seems to think that these assets may actually be valuable one day, and has implemented a plan to provide “nonrecourse” loans to institutions that buy up the unwanted assets.

University of Illinois College of Law Professor Larry Ribstein, on the other hand, has declared Geithner's plan an elaborate "shell game." The government subsidizes private equity companies to buy the assets at inflated values. Instead of just giving them wheelbarrows of money, they get non-recourse loans for most of the purchase price. When we find out that the assets are actually worth what the banks really think they’re worth (as opposed to how they’re currently booked) the taxpayers, who provided most of the money, will bear most of the loss.

Unfortunately, he may be right. USC Business School has released a preliminary report, titled The Pricing of Investment Grade Credit Risk during the Financial Crisis, written by Joshua Coval and Erik Stafford (Harvard) and Jakub Jurek (Princeton). An overview of the paper can be found here. The paper presents three uneasy conclusions:

  1. Many banks are now insolvent. "...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."
  2. Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. "...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."
  3. We're making it worse. "...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning."
So, what is the solution? Profesoor Ribstein says we should let the banks sell the assets for what they're worth but not make them reduce their capital for regulatory purposes.

What do you think we should do?
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Thursday, April 2, 2009

Update on Castroneves Tax Evasion

Here's an update on Helio Castroneves' tax evasion case. Apparantly Helio is in the hole for more than $2.3 million now. And, according to Joann Levitt, the IRS agent and the Government's last witness, the case hinges on whether Castroneves actually secretly owned the Panamanian shell corporation, Seven Promotions. According to Levitt he did, and the $2.3 million owed as a result of $5 million "earned" by Seven Promotions was money simply never reported on Castroneves' tax returns. More news to come in the next few weeks as the case should be put in front of a jury sooner rather than later. Castroneves, in fact, will miss the IndyCar season opener April 5 in St. Petersburg, Florida because of the recent delay in the case proceedings. Read More......

Accounting Rule Change May Improve Asset Valuation

Today the Financial Accounting Standards Board (FASB) relaxed its mark-to-market rule for certain assets. Now companies will be able to use "'significant' judgment" in pricing these assets. However the companies must provide increased information on how they value them.

The mark-to-market rule requires companies to value certain assets at their fair value or market rate--what others are willing to pay for them. However, when no one wants to buy those assets their price falls. The company must then value those assets at the fallen price on their books. This is what happened with mortgage backed securities. When they stopped trading, the entities that held them had to mark down their value on their balance sheets. However FASB now allows businesses to use their own judgment and decide what the assets are worth. The intention is to record these assets at their true value.

But value is based on how much someone is willing to pay for whatever is being valued. If the asset is not priced according to the demand for it, the value may be misleading. Even though a business' balance sheet may look better under this rule, that improvement may be artificial.
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Wednesday, April 1, 2009

Credit-Default Swaps to the Rescue?

Oliver Hart, professor of economics at Harvard University, and Luigi Zingales, professor of finance at University of Chicago's Booth School of Business make the case that credit-default swaps could be the key to getting banks out of the very trouble these instruments helped create. In short, the professors state that to prevent systemic risk, large financial institutions should have to increase their capital reserves when assets the institutions hold lose value, and that the best way to track the value of these assets is provided by the market through credit default swaps. But could turning CDS prices into a trigger for a mechanism that lowers the likelihood of default corrupt the effectiveness of CDS asset pricing? And didn't these swaps already fail to accurately value mortgage-backed securities in the first place? Read More......

2009 Spring Speaker Series

Chicago-Kent Corporate Law Society is proud to present the 2009 Spring Speaker Series! This year's Spring Speaker Series will bring together prominent practitioners and professionals to offer their perspectives and insights on the current economic and financial crisis.

Our first speaker event is this Thursday, April 2, at 4:00 pm in Room C50.

We will be joined by Ed Carter (JD '78, IIT BS, '74), Asst. Illinois Attorney General and Supervisor of the Illinois AG's Financial Crimes Prosecution Unit, and Patrick Coffey (JD '84), a partner at Locke Lord Bissell & Lidell. These two distinguished attorneys, one specializing in prosecution and the other in defense, will be discussing the topic: "White Collar Crimes in the Post-Madoff Era."

The next event will be next Tuesday, April 7, at 4:00 pm in Room C50.

Adjunct Chicago-Kent Professor Richard Mason, a partner at McGuire Woods, along with veteran bankruptcy and restructuring attorney Robert Nachman, a member at Dykema, will address "The Wave of Bankruptcies Arising from the Financial Meltdown."

The third event will be our keynote address, taking place on Thursday, April 16 at 4:30 pm in Room C50.

Paul Forrester (JD '85), a respected securities and finance attorney from Mayer Brown, and Adolfo Laurenti, Senior Economist at Mesirow Financial, will offer their views on "The Economic Crisis: Mistakes Made and Lessons Learned."

The culmination of the CLS Spring Speaker Series is an Alumni Reception immediately following the final speaker, at 5:30 pm in the 10th Floor Reception Room here at Kent. Food and drinks will be served at the reception, which will be a great opportunity for students to talk with professors and network with alumni.

Please click here for more information, or contact Professor Tom Hill at Read More......