Developers of digital tokens can find themselves in an existential crisis. Security or not a security? Commodity or not a commodity? To register or not to register? Bitcoin, Ethereum, Aave, and the like are cryptocurrencies available on a decentralized network and are generally viewed as commodities not necessarily subject to the heavily regulated environment of securities. However, navigating the regulatory environment to determine whether your digital token should be classified as a security or a commodity is not always a straight road. Take XRP, for example, which was once one of the most valuable digital tokens after Bitcoin and Ethereum. After the Securities and Exchange Commission filed a lawsuit against Ripple Labs, accusing it of selling unregistered securities, XRP’s value tumbled. Ripple Labs has taken the position that its digital token, XRP, is a commodity, similar to some other popular digital tokens and that it, therefore, did not need to register with the SEC. The final determination in the Ripple Labs case will be a turning point in the regulatory road for developers and their counsel.
Non-fungible tokens (NFTs) have gotten a lot of media attention of late, with breathless reports of multi-million dollar purchases of items one might never have expected to command such staggering sums. The objects sold have included digital artworks (such as drawings, music, and short videos) and even an autographed tweet by Twitter’s founder. Talk of an NFT “gold rush” abounds and does not seem overstated at the moment. But perhaps just as intriguing and unsettled as this new marketplace are the many legal issues that it raises.
Special Purpose Acquisition Companies (SPACs) have been in such widespread use over the last year or two that an uptick in SPAC-related litigation appears inevitable. Indeed, the increase is already beginning. After a brief overview of SPACs, this article will identify some of the key litigation risk areas for these entities and the individuals who govern them.
SPACs have no commercial operations when they are formed. They are shell companies that exist to raise capital through an IPO to merge with a private operating company and take it public. Taking the private company public is often referred to as a “de-SPAC transaction.” The IPO funds are held in a trust account until that de-SPAC transaction occurs. After the target has been selected, the proposed merger is put to a shareholder vote. Prior to a merger, shareholders can opt to redeem their shares if they do not approve of the target or the terms of the deal.
If you thought Lehman Brothers Holdings Inc. (“LBHI”) was done suing lenders as a result of its settlements with RMBS trustees years ago, think again. LBHI recently filed a new wave of lawsuits against approximately 60 defendants, mostly mortgage brokers, in the bankruptcy proceedings currently pending in the U.S. Bankruptcy Court for the Southern District of New York, and more may still be to come. As it did with the nearly 190 mortgage originators that it sued in 2018 in the same bankruptcy proceedings (the “2018 Adversary Proceedings”), LBHI seeks the remedy of contractual indemnification, alleging breaches of representations and warranties at the time certain loans were sold or brokered.
In its semi-annual monetary policy report to Congress last Friday, the Fed expressed anxiety regarding the amount of debt taken on by American companies. Even “before the outbreak of the pandemic,” business debt was “already elevated.” Now, amidst the pandemic, “business leverage now stands near historical highs.”
The Fed took a sanguine view of “near-term risks,” stating that low interest rates and other factors provide cause for optimism in the short term. But the Fed appears more worried about longer-term risks, citing “considerable” insolvency concerns at small, medium, and even some large firms. If bankruptcies do result, then the economic pain can be expected to spread to securitized corporate debt—also known as collateralized loan obligations, or CLOs—and trigger litigation over the quality of the underlying bonds.
Business interruption insurance claims keep coming, cutting across a broad array of industries. The entertainment and media sectors are certainly not immune from pandemic-related losses. Last month, ViacomCBS became the latest entertainment entity to file such a claim, suing its insurer, Great Divide Insurance Co., for breach of contract and breach of the implied covenant of good faith and fair dealing. In the suit, filed in the U.S. District Court for the Central District of California, ViacomCBS seeks damages and declaratory relief for what it alleges is the insurance company’s failure to cover losses on ViacomCBS’ Television Production Portfolio policy, which provides more than $55 million in production-related coverage of various types. The lawsuit cites losses related to canceled and delayed productions and live events, such as the Kids’ Choice Awards, which was delayed and ultimately aired virtually, as were many other productions during the early months of the pandemic. ViacomCBS accuses its insurer of interpreting the governing policy in “an overly narrow and wrongful manner” and refusing to acknowledge coverage for various losses while improperly limiting the coverage available for other losses. ViacomCBS also alleges that Great Divide has acted in a manner inconsistent with policy language and industry custom and practice by refusing to acknowledge that ViacomCBS is “entitled to a third annual period of coverage without modification of the policy wording or cancellation or reduction of any of the policy’s coverages, except rate revision, as necessary.” It asserts that the insurer has instead offered only to continue the policy if the parties agree to an addition of an exclusion applicable to losses relating to COVID-19.
As the pandemic began unfolding about a year ago, we wrote about the risk that the high volume of corporate debt might make it the next market bubble to burst. The issuance of corporate debt only accelerated in 2020 compared to 2019, growing by 17% and setting a new record in volume. S&P Global Ratings has predicted that corporate debt issuance in 2021 will remain robust, decreasing by only 3% compared to a frenetic 2020 (which would still be up 14% over 2019 levels).
The ratio of corporate debt to GDP might be at an all-time high, registering at over 46% in the second half of 2020. Factoring in the debt of smaller companies not listed on stock exchanges drives that ratio even higher, at nearly 75% before the pandemic arrived. For those watching the relationship of credit cycles and recessions—in which the ratio of debt-to-GDP plummets immediately after a recession and then rises until the next recession—the current ratio might be ominous. The cycle peaked at about 43% on the eve of the savings and loan crisis in the early 1990s, at about 45% before the dot.com recession in the early 2000s, and again at about 45% before the financial crisis.
U.S. student loan borrowers owe approximately $1.7 trillion on their student loans. About 92% of that amount consists of federal student loans (debt owed to the U.S. government), with the remainder owed to a growing market of private lenders. Despite the fact that default rates have increased consistently since 2003, a substantial marketplace developed for student loan asset-backed securities (SLABS). That marketplace, and the world of student loans more generally, are now being buffeted by a confluence of factors creating great uncertainty about what the future holds. These factors include the prospect of forthcoming student loan legislation, continuing concerns about the effects of COVID-19 on the larger economy, and structural changes affecting securitizations and the underwriting of student loans.
One would think that, as we approach 2021, litigation related to residential mortgage loans originated and sold well over a decade ago would be ancient history. Nevertheless, some suits filed years ago remain active, and, even more surprisingly (and disturbingly), new lawsuits related to loans sold prior to 2008 may be on the way. Here is a look at the current RMBS (residential mortgage-backed securities)-related litigation landscape.
When mortgage-related litigation, including residential mortgage-backed securities (RMBS) lawsuits, erupted after the last financial crisis (the Great Recession of 2008), the litigants recognized that some of their disputes presented issues of “first impression.” That is, the parties’ arguments required judicial analysis and interpretation of contractual provisions and other issues that had not been litigated in a mortgage industry context. Even now, more than a decade later, some key issues remain subject to contradictory legal rulings or still lack definitive rulings from appellate courts.
Other key issues, though, were vigorously litigated by the parties and resolved (to one degree or another) by some courts. This post will examine some of those subjects, which might prove critical to future litigation involving other securitized assets, such as commercial mortgage-backed securities (CMBS).