Alison Frankel

Detroit’s eligibility problem: Can state officials OK its bankruptcy?

Alison Frankel
Jul 22, 2013 23:16 UTC

The biggest municipal bankruptcy proceeding in U.S. history is less than a week old but it’s already promising to generate enough legal controversy to gainfully employ the platoons of lawyers vying for a role in the Chapter 9 case. A state court judge in Lansing, Michigan, has teed up a fight over Michigan Governor Richard Snyder’s right to authorize Detroit’s petition for Chapter 9 protection. That’s a novel procedural question, as I’ll explain below. I don’t think doubts about Snyder’s authorization will stop U.S. Bankruptcy Judge Steven Rhodes from pushing Detroit’s Chapter 9 proceeding forward – but they may well impact Rhodes’s eventual determination of the city’s eligibility for Chapter 9 protection.

The issue, as in the bankruptcies of the California cities of Stockton and San Bernardino, is state constitutional safeguards for the pension benefits of municipal workers. Anticipating that the city would try to cut retirement benefits, two sets of pension beneficiaries, as well as Detroit’s two retirement systems, sued in Ingham County Circuit Court before Detroit entered Chapter 9, in an attempt to block the city’s bankruptcy. Their argument, in a nutshell, is that Michigan’s governor is bound to uphold the state constitution, which includes a provision barring the impairment of pension rights for state workers, so he cannot authorize a bankruptcy filing that contemplates any pension reductions. Detroit’s emergency manager, Kevyn Orr of Jones Day, filed for Chapter 9 before any ruling in the three state-court pension suits. But last week, after the Chapter 9 petition, the pensioners returned to court to argue that because the petition was filed under improperly granted gubernatorial authority, it must be withdrawn.

On Friday, Ingham County Judge Rosemarie Aquilina agreed. Aquilina, who sits in the state capital of Lansing, ruled that Governor Snyder’s authorization of a Chapter 9 petition that “threatens to diminish or impair accrued pension benefits” was a violation of the state constitution. She ordered Snyder to instruct Orr to withdraw the petition and barred him from granting Orr permission to file any other Chapter 9 petition that didn’t safeguard pension rights.

Over the weekend, Detroit’s lawyers at Jones Day responded with a motion in federal bankruptcy court to extend Chapter 9′s automatic stay of litigation to suits against the governor, Michigan Treasurer Andy Dillon, and other city and state officials – including a stay of the pension suits before Judge Aquilina. The state attorney general, Bill Schuette, also filed a state court appeal of Aquilina’s rulings.

From developments on Monday, it seems like Rhodes, the federal bankruptcy judge, will have the next word on whether the Chapter 9 goes forward. He ordered a hearing Wednesday on Detroit’s motion to extend the stay of litigation, which is opposed by the city pension funds’ counsel at Clark Hill. Judge Aquilina, meanwhile, adjourned a hearing in one of the pension challenges to the Chapter 9 filing. The Michigan appeals court, according to Reuters, has not acted on the AG’s filing.

Appeals court restricts Dodd-Frank protection for whistle-blowers

Alison Frankel
Jul 18, 2013 18:59 UTC

If Khaled Asadi, a former GE Energy executive who lost his job after alerting his boss to concerns that GE might have run afoul of the Foreign Corrupt Practices Act, had sued his old employer in New York or Connecticut, things might have worked out differently for him. Several federal trial judges in those jurisdictions have ruled that whistle-blowers who report corporate wrongdoing internally are protected by the Dodd-Frank Act of 2010, even though the statute defines whistle-blowers as employees who report securities violations to the Securities and Exchange Commission. But Asadi, who worked in GE Energy’s office in Amman, Jordan, filed a claim that the company had illegally retaliated against him in federal district court in Houston. And on Wednesday, the 5th Circuit Court of Appeals – with hardly a nod to contrary lower-court decisions in other circuits – ruled that Asadi is not a whistle-blower under Dodd-Frank because he talked to his boss and not the SEC.

The 5th Circuit opinion, written by Judge Jennifer Elrod for a panel that also included Judge Stephen Higginson and U.S. District Judge Brian Jackson (sitting by designation), highlights the tension between whistle-blower provisions in Dodd-Frank and the Sarbanes-Oxley Act of 2002. SOX, as you recall, directs employees to report possible wrongdoing up the corporate chain of command. SOX whistle-blowers must exhaust administrative remedies before they can sue and may only recover back pay. Dodd-Frank, on the other hand, directs whistle-blowers to bring their concerns to the SEC and permits them to sue for double the pay they lost through corporate retaliation. You can see why employees would rather bring claims under Dodd-Frank than SOX: They can get to court without clearing as many procedural obstacles and can recover twice as much money. You can also see why defendants argue that employees who went to their bosses instead of reporting to the SEC don’t qualify as Dodd-Frank whistle-blowers.

The SEC tried to solve this problem in 2011, when it implemented its final rule on Dodd-Frank whistle-blowers. In the provisions that dealt with anti-retaliation protection, the commission incorporated a reference to Sarbanes-Oxley, holding that Dodd-Frank gives employees a private cause of action against their employers if they have suffered retaliation for reporting violations to the SEC, cooperating with an SEC investigation or “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”

UBS ‘likely’ to settle with FHFA before January trial: bank co-defendants

Alison Frankel
Jul 17, 2013 19:03 UTC

Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.

The judge overseeing almost all of the FHFA MBS suits, U.S. District Judge Denise Cote, denied UBS’s motion to dismiss in 2012. The bank, she said, was splitting hairs: Congress clearly intended to give FHFA a chance to evaluate its potential causes of action and believed it was doing so when it extended the statute of limitations. The judge subsequently applied the same reasoning to other banks’ motions to dismiss FHFA suits on timeliness grounds, but she also granted UBS permission to take the issue to the 2nd Circuit Court of Appeals. Cote said that whichever way the appeals court ruled, its decision would help resolve the FHFA litigation. If she were reversed, FHFA’s claims would be drastically narrowed; if she were upheld, the banks would be more inclined to settle.

In April, as you probably recall, a three-judge 2nd Circuit panel affirmed Judge Cote. In the appeal, UBS stood alone among the FHFA bank defendants as a party, though the other banks filed an amicus brief endorsing UBS’s position that Congress failed to extend the statute of repose. Since the 2nd Circuit’s ruling, UBS and FHFA have been engaged in whirlwind discovery, which is scheduled to close in September. Judge Cote has set an inviolable January trial date for FHFA’s case against UBS.

The next great benchmark manipulation case?

Alison Frankel
Jul 16, 2013 19:27 UTC

Last spring, when U.S. District Judge Naomi Reice Buchwald of Manhattan decimated the consolidated private litigation over banks’ manipulation of the London Interbank Offered Rate, the only claims that remained upright in the rubble of her ruling were those brought under the Commodity Exchange Act, which makes tampering with the price of exchange-traded commodities or futures illegal. Buchwald’s opinion cited a plethora of Manhattan federal court decisions that permitted victims of futures price manipulation to move forward with their suits, including three consolidated class actions involving rigged prices for oil futures. I suspect we’re going to be hearing a lot more about those cases over the next several months. Even as the class action bar tries to persuade the 2nd Circuit Court of Appeals to reinstate the Libor antitrust claims that Buchwald dismissed, plaintiffs lawyers are gearing up for the next big litigation: claims that BP, Royal Dutch Shell, Statoil and other unidentified conspirators violated commodity and antitrust laws by reporting false prices for North Sea Brent crude oil to the price-setting agency Platts.

Lowey Dannenberg Cohen & Hart filed the first class action, in federal court in Manhattan, on May 22, just days after investigators from the European Commission raided oil company offices in a probe of alleged collusion to distort prices for crude oil and biofuels during the half-hour window in which Platts sets prices. Five more class actions have since hit the docket in Manhattan and one in federal court in Louisiana, all naming BP, Statoil and Shell as defendants. (EC investigators also collected information from Platts, a division of McGraw Hill, but it has not been targeted in the private suits.) Last Thursday, Lowey Dannenberg petitioned the Judicial Panel on Multidistrict Litigation to consolidate the cases before U.S. District Judge Andrew Carter, who’s been assigned to oversee all of the New York filings.

The complaints are light on specific details of the alleged collusion, but with Britain’s Serious Fraud Office and the U.S. Federal Trade Commission reportedly investigating crude oil price-setting along with the European Commission, class action lawyers should eventually be able to piggyback on regulatory findings. Plaintiffs lawyers seem to have filed now because they’re worried about the statute of limitations for claims of alleged price-fixing that go back to 2002. Several of the complaints, in fact, assert that the statute should be tolled because the defendants conspired to cover up their conspiracy.

GM judge aims to prevent insider trading by distressed debt funds

Alison Frankel
Jul 15, 2013 20:50 UTC

Remember the shocking ruling a couple of years ago by U.S. Bankruptcy Court Judge Mary Walrath in the bankruptcy of Washington Mutual Inc? In September 2011, Walrath refused to approve a hard-fought $7 billion reorganization plan for WMI because of concerns that four distressed debt hedge funds might have traded WaMu notes based on confidential information they or their lawyers obtained in negotiations to resolve the bankruptcy. The hedge funds were outraged by Walrath’s decision, which they said was wrong on both the facts and the law. Ultimately, however, they agreed to make the whole mess go away by kicking about $30 million of their expected recovery to WMI shareholders, who had first raised the insider trading accusations.

But Walrath’s ruling continues to loom over the twilit world of distressed debt trading, most notably right now in a heated fight over noteholders’ claims to about $2.7 billion from the bankruptcy estate of General Motors. In an order late last month authorizing the appointment of a mediator, U.S. Bankruptcy Judge Robert Gerber of Manhattan said explicitly that noteholders participating in the mediation must establish screening procedures to insure that confidential information doesn’t fall into the hands of traders in the securities. Gerber was even more explicit in a June 11 hearing on the prospective mediation: If hedge funds that own the notes trade them based on developments in the settlement negotiations, they risk being found in contempt of court. Gerber’s warnings establish some bright-line boundaries in a generally opaque market.

The incredibly complex GM dispute centers on notes issued in late 2008 and early 2009 by a subsidiary called Nova Scotia Financing Company, whose only assets were intercompany loans to GM Canada. Investors who bought up the notes knew they had great leverage against GM, which was desperate to keep its Canadian business out of bankruptcy. So as GM finalized its petition for Chapter 11 bankruptcy in the United States, it reached a deal in which the Nova Scotia noteholders would drop their claims against GM Canada in exchange for a $367 million consent fee and a promise that GM would back their $2.7 billion claim against its estate. (I’m leaving out reams of ancillary details, but you get the gist.)

‘Company Doe’ cites gay marriage ruling to block consumer group appeal

Alison Frankel
Jul 12, 2013 19:11 UTC

Well, that didn’t take long.

Two weeks ago, the U.S. Supreme Court held in Hollingsworth v. Perry that an advocacy group opposing same-sex marriage could not stand in the shoes of California officials to appeal a trial court ruling that the state’s ban was unconstitutional. Yesterday, the firm that argued in the Supreme Court for same-sex couples, Gibson, Dunn & Crutcher, filed a letter brief at the 4th Circuit, arguing that under Perry, three public interest groups do not have standing to appeal a trial court ruling against the Consumer Products Safety Commission.

The issue of the consumer groups’ standing is just the latest development in this precedent-setting litigation over the Consumer Product Safety Improvement Act of 2008. Among other things, the 2008 law required the CPSC to establish a publicly accessible database for reports of unsafe products. In 2011, an unidentified local government agency submitted an incident report to the commission, which alerted the company that makes the purportedly problematic product. The company responded that the incident report was materially inaccurate and should not be published. There was considerable back-and-forth between the company and the commission, in which the commission suggested revisions to the incident report that the company rejected as materially inaccurate. In October 2011, the company sued to enjoin the commission from publishing its third version of the incident report, arguing that it would suffer irreparable harm from a baseless and inflammatory accusation.

You’ve probably noted my repeated references to “the company” and wondered what company I’m talking about. You’ve also probably wondered what the allegedly unsafe product is, and what’s in the inflammatory local government report on it. Keep on wondering. Gibson Dunn filed the injunction suit in federal court in Greenbelt, Maryland, on behalf of “Company Doe.” Through two years of subsequent litigation, the identity of the company and the nature of its product have remained a secret. U.S. District Judge Alexander Williams permitted Company Doe to try its case anonymously, with all factually-specific filings under seal.

BP, buyer’s remorse and the future of mass tort settlements

Alison Frankel
Jul 11, 2013 22:27 UTC

The oil giant BP has recently done a very good job of casting itself as the victim of greedy plaintiffs lawyers looking to get rich by submitting unwarranted claims for businesses that weren’t actually harmed by the Deepwater Horizon oil spill. Did you see the company’s full-page advertisements to that effect in The Wall Street Journal and The New York Times? Or maybe you read smart pieces by Paul Barrett of BloombergBusinessweek (“How BP Got Screwed on Gulf Oil Spill Claims”) or Joe Nocera of the Times (“Justice, Louisiana Style”), who both pointed out that the court-appointed lawyer serving as the administrator of BP’s multibillion-dollar class action settlement is himself a onetime plaintiffs lawyer – as is the New Orleans federal judge overseeing the deal. (Lawyers representing BP claimants, I should note, dispute just about everything BP says about the judge and the administrator.)

Nocera made the rhetorical point that lots of people don’t particularly mind that a multinational oil company responsible for a perceived environmental tragedy might have to fork over some extra billions. According to Nocera, we should nevertheless be troubled by BP’s “fleecing,” if for no other reason than the disincentive BP’s experience offers to future defendants facing an onslaught of claims. Nocera credits BP with behaving honorably after the oil spill, setting up an out-of-court claims facility to get more than $6 billion quickly into the hands of injured property owners and businesses. “Yet its efforts to do right by the Gulf region have only emboldened those who view it as a cash machine,” Nocera said. “The next time a big company has an industrial accident, its board of directors is likely to question whether it really makes sense to ‘do the right thing’ the way BP has tried to.”

BP’s rock-star appellate lawyer, Theodore Olson of Gibson, Dunn & Crutcher, made a similar argument in a brief to the 5th Circuit Court of Appeals, which heard BP’s arguments for mercy earlier this week. BP went to the appeals court after U.S. District Judge Carl Barbier approved the class action administrator’s interpretation of how business economic losses should be calculated under the settlement. In the oil company’s view, Barbier and the administrator, Patrick Juneau, have essentially rewritten settlement terms to invite claims by businesses that suffered no losses attributable to the oil spill. The BP deal “could serve as a positive landmark in American jurisprudence because of its ambitious size, its innovative nature, and the speed with which it was negotiated to compensate injured parties,” Gibson Dunn wrote. “Instead, it is poised to become an indelible black mark on the American justice system.

Fannie, Freddie shareholders demand lost dividends from U.S. in new class action

Alison Frankel
Jul 10, 2013 21:29 UTC

In August of 2012, the U.S. Treasury and the Federal Housing Finance Agency announced that they had amended the terms of Treasury’s investment in Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders under FHFA’s conservatorship. After Fannie and Freddie went into conservatorship in the economic crisis of 2008, Treasury invested more than $100 billion in a new class of senior preferred stock that guaranteed the government first dibs on a percentage of Fannie or Freddie profits. Those seemed like a distant hope in 2008, but by 2012, Fannie and Freddie were, in fact, making money. Preferred shareholders junior to the government believed the mortgage lenders were generating enough profits to pay Treasury’s dividend and leave something for them as well. But in August, FHFA and the government – without consulting Fannie and Freddie junior preferred shareholders – disclosed that under a newly executed “net worth sweep,” Treasury would be receiving all of the profits kicked out by Fannie Mae and Freddie Mac, then and in the future.

On Wednesday, junior preferred shareholders filed a class action in the U.S. Court of Federal Claims, asserting that the August 2012 agreement between FHFA and the Treasury amounted to an illegal seizure of their property in violation of the Takings Clause of the Fifth Amendment of the U.S. Constitution. The preferred shareholders, represented by Boies, Schiller & Flexner and Kessler Topaz Meltzer & Check, point to the $66.3 billion dividend Fannie and Freddie paid to the government in the second quarter of 2013, arguing that more than $60 billion of that money was misappropriated from them.

The new shareholder class action follows an injunction suit filed Sunday in federal court in Washington by Perry Capital and its lawyers at Gibson, Dunn & Crutcher. The Perry suit, which claims that the August 2012 agreement between Treasury and FHFA “enriches the federal government through a self-dealing pact, and destroys tens of billions (of dollars) of value in the companies’ preferred stock,” seeks a declaratory judgment that the amended agreement violates the Administrative Procedures Act, as well as an injunction against implementing the new agreement. In addition, the mutual fund Fairholme Funds and several insurance companies that own Fannie Mae and Freddie Mac junior preferred shares filed a Takings Clause case on Tuesday night in the Court of Federal Claims. Cooper & Kirk, which represents the Fairholme plaintiffs, raises allegations that parallel those in the new class action but brought the case only on behalf of the named shareholders.

Case sparked by plaintiffs lawyer? Nothing wrong with that: 7th Circuit

Alison Frankel
Jul 9, 2013 18:47 UTC

Until fate, in the person of a private investigator, brought her together with a Mississippi whistle-blower lawyer named Timothy Matusheski, Debra Leveski didn’t even know she could sue her former employer, the for-profit university ITT Educational Services, for supposedly duping the federal government. Leveski spent about 10 years working at ITT’s campus in Troy, Michigan, first as a recruitment officer, then in the financial aid office. She left the company in 2006 as part of the settlement of a sexual harassment suit she brought against ITT. Less than six months later, Leveski received a letter from an investigator working for Matusheski, who at the time specialized in False Claims Act suits against for-profit universities, which had come under scrutiny for allegedly enrolling students simply to receive federal student aid funding. Intrigued, Leveski called the investigator and eventually met with Matusheski.

The Mississippi lawyer told me that when his investigator first reached out to Leveski, his intention was just to find out something from her about ITT’s financial aid procedures. (He knew from public records in her harassment suit that she had worked in the company’s financial aid office.) “After listening to her talk,” he said, “I said she had a potential claim under the False Claims Act and she should ask her attorney about it.” According to Matusheski, Leveski consulted her lawyer, who sent her back to him. Leveski then did some research on FCA cases, including a previously dismissed FCA case against ITT, and on Matusheski. In July 2007, the Mississippi lawyer filed an FCA case against ITT in federal court in Indianapolis, naming Leveski as the relator.

Does this chain of events raise your suspicions about the validity of Leveski’s suit? What if I told you that Matusheski advertised to find former financial aid and recruiting officers from for-profit institutions? Or that the whistle-blower lawyer brought a series of FCA suits on behalf of former employees he tracked down through their unrelated employment suits?

Do surveillance court’s secret rulings violate U.S. Constitution?

Alison Frankel
Jul 8, 2013 22:19 UTC

The more we find out about the mostly secret inner workings of the U.S. Foreign Intelligence Surveillance Court, the more questions we should all have about the intersection of national security and Fourth Amendment restrictions on unreasonable searches by government authorities. Based on recent comments by U.S. Supreme Court Justices Elena Kagan and Stephen Breyer, the court is primed for an inevitable constitutional review of the National Security Agency’s program of gathering phone and Internet data from foreign suspects and U.S. citizens alike under provisions of the Patriot Act and the Foreign Intelligence Surveillance Act. That debate will surely center on the Fourth Amendment, but a lesser-known argument that has popped up in some cases challenging FISA wiretaps raises different constitutional objections to the NSA’s widespread data collection. And just as it was in California’s ban on gay marriage, Article III of the Constitution could be the linchpin of any Supreme Court decision on the legality of the NSA program.

First, I want to recap a pair of terrific Sunday pieces in which The Wall Street Journal and The New York Times reported on the ex parte legal precedent the FISC is setting, outside the view of anyone but the government officials asking the court to bless widespread data collection. The Journal’s piece, by Jennifer Valentino-DeVries and Siobhan Gorman, focused on the FISC’s broad interpretation of the word “relevant” in classified orders dating back to the mid-2000s. According to the Journal, the 11 judges on the surveillance court have moved away from the Supreme Court’s standard that government requests for information are “relevant” if they present a “reasonable expectation” that the information will be related to an ongoing investigation. Instead, the FISC apparently reasoned that anti-terror investigations are so different from ordinary criminal cases that a much broader category of information falls under the umbrella of relevance. The FISC’s secret widening of the definition of relevance, according to the Journal, seems to be the justification for the NSA’s collection of phone and Internet data from U.S. citizens under Section 215 of the Patriot Act.

The New York Times’s Eric Lichtblau reported that the FISC’s classified rulings “reveal that the court has taken on a much more expansive role by regularly assessing broad constitutional questions and establishing important judicial precedents, with almost no public scrutiny.” In addition to expanding an exception to the Fourth Amendment’s warrant requirements when the government can identify “special needs” in terror cases, he wrote, the surveillance court has made new law governing intelligence related to cyberattacks and nuclear proliferation, serving as a “parallel Supreme Court” that will “most likely shape intelligence practices for years to come.”