Big Boys of BK

Lots of Chapter 11 news today.



Kodak finally filed last night.  It had been in trouble for a long time (I think I'm one of the few fossils remaining who uses film.), but it was trying to reshape itself as a printer company.  To do so, it was relying on a revenue stream from its patent portfolio (At one time that portfolio rivaled the likes of Bell Labs and IBM.).  Unfortunately, Kodak didn't account for aggressive (i.e. predatory) behavior by some major license users, including Apple and Research in Motion (I have to say I don't use much of anything from Apple.  I hate black boxes, so I didn't care much for the products, and I didn't care for the culture, either.  Seemed too much like a religious cult.  I see people walking around festooned with 500 i-Crap products, and I wonder why anyone needs to be so simultaneously plugged-in and cocooned from the world.  They remind me of Neo in The Matrix before he's released from his pod.  RIM, though, hurts.  I've rocked the Crackberry for over a half-dozen years now.).  The big users decided to stop paying for the licenses, forcing Kodak to litigate.  They wouldn't buy the patents outright, either, at least not for more than a dime on the dollar.  So Kodak is in Chapter 11, where it might be able to force a few things.



American Airlines, on the other hand, might be getting forced.  It's nearly two months since it filed, and American has barely gotten off square one.  As I blogged the day it filed, American's big motivation was to take down the labor contracts and pensions.  It hasn't, and everyone (including Your Truly) is confused about the delay.  Confused about it, but still willing to take advantage of it.  Delta and US Airways are making noises about rival bids, and others are getting into the game.  If American doesn't have a reorganization plan in front of creditors in two months, it's looking at getting parted out.



And of course we can't let the day go by without some more mess from MF Global, this time with a heapin' helpin' of JPMorgan Chase.  It seems that back in October, right before it filed, MF Global was selling piles of assets to raise cash.  Problem was, it was selling them through JPMorgan, which decided to do a by-the-book slowdown of the transactions.  Consequently, MF Global had neither the assets nor the cash and couldn't meet the inevitable margin calls.  Welcome to bankruptcy.  Now the creditors and trustee are finally getting around to asking JPMorgan where the money went, because it certainly hasn't been turned over.



JPMorgan's involvement in "where did it go" scenarios is getting to be a habit, and it's long past time someone pulled the curtain back and took a look.  Somebody needs to look at where Washington Mutual's assets went, because they were there until JPMorgan stepped in.  And unless something drastic has happened this week, JPMorgan is still sitting on piles of cash involved in investment schemes from five and six years ago (I have to be careful here.  I've had two, executive-VP-level in-house counsel lie to me about the creation and handling of those accounts, so it's hard to say what the "official" records look like any more.  And I've had outside counsel threaten me with bar discipline for daring to represent anyone opposing JPMorgan.  But then that's SOP for Utah.  The Bar doesn't care if an attorney makes a groundless threat like that so long as he is representing a 1% client and he makes it against an attorney with a 99% client.).  Any wonder I refer to the place as "JPMorgoth"?  We'll see if anybody decides to use the big microscope this time or if JPMorgan skates again.

Just Because You Bought It...

...doesn't mean it's yours.  There's a big brouhaha in the MF Global bankruptcy.  It seems the trustee's definition of the bankruptcy estate (and hence the assets available for him to liquidate) includes gold and silver bullion that traders and investors parked, or at least thought they were parking, with the firm and received warehouse receipts for.  And they are WAY unamused they can't get their bling.


A little background.  First, warehouse receipts.  I'm Joe Farmer, and I just brought in my corn harvest.  I decide to store it at the grain elevator for a couple of weeks.  I take it to the elevator, physically deposit it there, and get a receipt for X amount of corn.  When I want it back, I turn in the receipt, pay the handling charges, and get my corn back.  Substitute any storable thing you care to name, it's the same, basic process.


Second, other people's property in a bankruptcy estate.  If you lend your friend $100, and he declares bankruptcy, chances are you'll never see old Ben Franklin again.  If you let your friend use your car, though, and he declares bankruptcy, the trustee can't just take your car.  The bankruptcy estate doesn't include things the debtor possesses but someone else owns.


And that's what the warehouse receipt people are saying.  They have receipts for specific bars of precious metals that they bought and that were supposed to be stored in the MF Global facility.


Problem the First: Unlike Joe Farmer, extremely few of these people actually lugged any gold bricks to MF Global for storage.  Some put money directly into an MF Global account for purchase and storage, and took a "warehouse receipt" in return.  Others were brokers themselves and were making purchases for customers.  Either way, they weren't really following warehousing procedures (How often do you ask the warehouse to buy the stored item for you?), so off the bat we have a question of whether these "warehouse receipts" are warehouse receipts.


Problem the Second (and here's where it gets painfully apparent that a brokerage is not a warehouse): Back in 2005 the CFTC adopted Rule 1.25, which allows certain commodities investors to invest clients' deposit accounts (as opposed to investment accounts) so long as an asset of "equal value" is substituted in (As an aside, if I as an attorney were to do this with a client account, I'd be doing the perp walk in nothing flat.  In Investment World, though, it's perfectly OK.  For the investment house, that is.).  This fact was undoubtedly disclosed somewhere in the "storage agreement," and unless I miss my bet, that condition wasn't entirely one-sided.  If MF Global could invest the deposits, it could defray some of its costs instead of passing them on to the depositors (Remember those handling charges I mentioned?  Running a grain elevator isn't free.).  I certainly wouldn't be surprised if that was how MF Global pitched it.


So instead of the gold and silver sitting in the warehouse, MF Global pulled it and replaced it with "assets," namely paper instruments with all the value of papier de la toilette, or some such.  Needless to say, a bunch of the gold and silver is nowhere to be found.  Which means a bunch of those "warehouse receipts" don't stand for anything.  Which is perfectly OK since, by the receipts' own terms, the bullion could be swapped out.  Which leaves the "warehouse receipts" looking less like warehouse receipts and more like mislabeled investment contracts.  Which is exactly how the bankruptcy trustee is treating them.  If the depositors want it any different, they'll have to take the trustee to court and force it.  Good luck with that.