Tuesday, June 7, 2016

The Property of Debt

Debt_2

I’ve been thinking a lot lately about the property law aspects of debt (don’t let your head hit the keyboard as you fall into a deep slumber from reading that, now!). Most of my interest in this topic comes from my obsession with the Puerto Rican debt crisis. Unless you’ve shut yourself off from social media (or any media, for that matter) you likely at least know that the island, a U.S. territory serving as home to 3.5 million American citizens, is flat broke. They’ve defaulted on multiple interest payments to their bondholders, tried to enact their own bankruptcy-like law (overview by Stephen Lubben at Senton Hall here)--currently pending a decision from SCOTUS, and right now Congress is trying to pass a super special insolvency procedure to help out the island (for a little Citizens United flavor, take a look at this dark money ad urging the defeat of the bill). I’ll have a post on this topic, and the takings claims posed by the bondholders, next week.

But back to debt as property . . . The Supreme Court has long held that rights in debt (contract rights) constitute property. See Omnia Commercial Co. v. U.S., 261 U.S. 502 (1923); see also Lynch v. United States, 292 U.S. 571, 579 (1934) (“Valid contracts are property.”). And we freely buy, sell, and trade such rights all the time. Indeed, that’s what the secondary mortgage market and the private label mortgage market are all about! Buying and selling mortgage debt at discounted rates, typically (in the Fannie/Freddie context) to provide more liquidity to the residential housing market and thereby increasing the availability of credit.

But people buy debt for other reasons as well—to make money! There was a great (and, per usual, hilarious) discussion on John Oliver’s HBO show, Last Week Tonight, this past Sunday on the topic of “Debt Buyers.” Here’s the video:

 

In the show he points out a bunch of things about the debt buying industry—prominently discussing the shady practices of some of the industry’s less than wholesome characters. In fact, he sends a team with a hidden camera to the industry’s trade conference in Las Vegas. One of the panel presenters at the conference notes cavalierly that, despite state law requirements that debt buyers disclose to consumers that their obligation to pay the debt may be extinguished by the statute of limitations: “Who’s going to read and understand the words on this letter? The unsophisticated consumer? . . . I depose these plaintiffs in these lawsuits and they don’t even read the letter.” What a jerk! I bet he wasn’t too happy to see his remarks go viral.

But back to the point . . . the general idea of the show was to basically talk about how bad the debt buying business can be: how bad guys go after poor, unsuspecting consumer debtors and ruin their lives. But it strikes me that the issue of how one gets into debt and the ability of someone other than the original creditor to enforce the credit right are entirely different. Putting aside the former, is there anything wrong with selling debt like we sell tangible personal and real property? From a debtor’s perspective, does it really matter whether the original counterparty to the contract is the party now trying to enforce it? We could assume that there might be something particular about that specific obligee that makes contracting with him, from the obligor's perspective, special. In those cases we have doctrines of assignability. But, in the context of pure debt (the right to collect on an amount owed) in an arms-length transaction, it does not seem much different than a market for anything else.

But are there policy reasons why we should prohibit (or at least discourage) this type of market from becoming more robust (if it isn’t already – spoiler: it is already)? Chain of title problems certainly loom large in these transactions. As the segment above indicates, often all that is exchanged between the debt seller and debt buyer is the purchase price and an Excel spreadsheet with minimal information about the obligations owed. There’s also little due diligence done on the buyer’s end – such as ascertaining whether the debt is even still collectable. Perhaps one could argue that the nature of this particular type of “property” (specifically how it can impact vulnerable consumer debtors when owned by unscrupulous collectors) merits thinking differently about whether the debt buying business is just another property market. Maybe there are just too many bad guys or, if there aren't that many, the damage that the few cause is just too great.

My home state of Louisiana has a really interesting way of dealing with debt sales once litigation on the debt has commenced. We call it the “right of litigious redemption.” It basically works like this: Original Creditor commences a lawsuit against Debtor. As the litigation proceeds, Original Creditor realizes that he cannot (or does not want to) carry the lawsuit through to the end because it is too time consuming or is eating up too many resources (or for whatever reason). Instead, Original Creditor “sells” the lawsuit to Buying Creditor for a discounted purchase price. Now, Buying Creditor is the plaintiff against Debtor in the litigation. Under Louisiana law, Debtor can now pay to Buying Creditor an amount equal to the discounted purchase price he paid Original Creditor, and in doing so completely extinguish the lawsuit! Voila! Just like that. You can see how this is a great deal for Debtor. If the debt he owes to Original Creditor is $20,000, but Buying Creditor only paid Original Creditor $7,000 for it, then Debtor is essentially relieved of paying $13,000 worth of debt! The supposed policy reason for doing this has to do with wanting to discourage a robust market for the buying and selling of lawsuits from developing. To my knowledge, no other state in the U.S. has such a law (please correct me if I’m wrong in the comments below).

So what about property markets in debt? Good? Bad? Or . . . like most things, a little bit of both?

http://lawprofessors.typepad.com/property/2016/06/the-property-of-debt.html

Law & Economics, Law Reform, Mortgage Crisis, Personal Property, Recent Cases | Permalink

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