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Lending Club bankruptcy remote vehicle

Started by Peter, April 04, 2016, 11:00:00 PM

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Pleas indicate your level of concern with the lack of a bankruptcy remote vehicle for LC retail investors.

For those of you who have not followed other threads on this subject or don't know what a BRV is (which included me until a few weeks ago) a BRV protects investors in the event of a LC bankruptcy wherein the notes are held by a third party trustee in escrow for lenders (or similar functional arrangement). At present, the borrowers owe LC the money, not the investors, therefore in a LC failure preferred investors and secured debt holders would be entitled to these cash flows before lenders would be.


I wonder... is LC's lack of a BRV reason enough to sway investors away from LC towards Prosper?
I have accounts at both but am now wondering if I should halt reinvestment at LC and funnel the funds toward Prosper. Is anyone doing this? And if so, what are your underlying reasons?

Rob L

I opened a Prosper account a few months ago; about half the size of my LC account now.
If a BRV were in place I would probably have invested the entire amount in LC. The other way to look at it is that LC would have 50% more money.
I don't know what others call it, but I use the term "risk of ruin". For my LC account it is quite conceivable might lose it all.
Prosper somewhat less,but still not zero.



Well we have 27 votes which break down roughly as I expected but there have been 160 views indicating 133 abstentions. I think we have to count those as very low concern or IQ.


First time posting on this blog. Great topic. I voted and am in the second rank; seriously considering not investing any more funds with LC until a satisfactory solution is presented by LC.


The servicing agreement alone fails to protect us lenders since there is slim (no) chance that the loans (notes) will be considered separate from LC's bankruptcy estate in the event of a Chapter 7 or 11.  The loan service agreement may assure that borrower payments will be processed, but the money will be channeled by the bankruptcy court to other creditors and equity holders before it ever gets to us lenders.  Ergo, the institutional investors insist on a BRV.

I can fathom no reason why "small" or retail investors shouldn't be equally protected.  All of the retail money on this platform certainly should aggregate to the size of an institution.  What are we, 10% of the platform,?  More?  Less?


I spent 12 years in IT for the US Courts, specifically serving the US Bankruptcy Court, 9th Circuit, Western District of Washington. 

The Department of Justice's US Trustee Program represents "The State" or "The Prosecution" in a Bankruptcy case.  It also oversees asset liquidation and distributes funds.  This is the arm of the government which will seize and liquidate assets.

What I saw in my service, the order of priority for payouts in practice - if not law - is:

1) The US Federal Government - debts to the Feds are never discharged in bankruptcy proceedings.  This means IRS debt, student loan debt etc.  Money owed Uncle Sam never goes away until paid in full.

2) Secured Creditors - debts secured by assets like an inventory of goods, real estate or something else that can be sold off to pay debtors' obligations

3) Unsecured Creditors - these are employees (maybe their paychecks bounced), the unfortunate suppliers of inventory of goods (the stuff the debtor sells for profit), the office's janitorial service, the power company, the water company, the phone company, the insurance companies, the food vendor for yesterday's company meeting  etc.  Basically, this is anyone that sent a bill and hasn't been paid.

4) Shareholders - those that own a percentage of the debtor's organization... they never get anything.

So from my experience, absent LC signing a "reaffirmation agreement," or some other legal shielding, it'd be up to the Court to decide our status. 

If I had to make a bet, I'd say LC's lawyers would zealously  argue we're unsecured creditors.  If there's an argument that we're a Secured Creditor, it's beyond my imagination, but not necessarily beyond possible.  Maybe some other department in the Executive Branch would submit a motion on our behalf.


PS: A "reaffirmation agreement" is a written promise to pay a debt, keeping it out of bankruptcy proceedings.  There is one meeting that debtors must attend.  It's called the 351 meeting, or the meeting of creditors. 

Nordstrom, Bloomingdales and other unsecured debtors will send pretty people to lurk in the halls well before the 351 meeting, hoping to ambush the debtor, get the debtor to sign a reaffirmation agreement.  Lawyers warn debtors about this, but some people have trouble heeding warnings.  This tactic works better than I thought it would.

PPS: I see the 351 meeting is now called a 341 meeting.  That happened after I left service in 1999.

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