November 6, 2010
My Life Would Not Be Very Interesting if Everyone Agreed With Me
Roger Donway has written a reply to my “Capitalist or Socialist” post that you can find here. I’ll ignore the name-calling, except for the assertion that I engage in “superficial scholarship” when I critique the statement that “[e]veryone should be free to do as they choose, so long as they don't infringe upon the equal freedom of others” without acknowledging that the slogan is not intended to serve as “some sort of self-defining axiom.” In fact, my point is precisely that the slogan fails qua slogan because definitions of infringement and “equal freedom” can vary so widely. To be fair, Donway goes on to opine that I am also wrong to assert the statement is empty in this way because it does in fact imply equality before the law. However, this seems to be a non-sequitur because the slogan is often trotted out as part of a defense of what the law should be.
Donway goes on to critique my questioning of property rights as being properly justified on the basis of the individual having “earned” the assets they possess. He suggests that while it may be true in some “absurdly broad context” that if I trace the dominoes of cause and effect back from my acquisition I will eventually find that I am soon out of the picture, I have contributed “intermediate ingredients” that should be respected. None of this, of course, answers the question as to why those inputs should justify anything approaching exclusive ownership, and Donway conveniently forgets to mention that I acknowledge that there may be very sound utilitarian arguments for recognizing some version of property rights consistent with libertarian mores. I believe my acknowledgement of the power of utilitarian arguments also addresses the myriad of questions Donway poses in challenging the “puppy-bowl theory of wealth.”
Finally (at least in terms of addressing criticisms), Donway seems particularly frustrated by my daring to assert that there may be no such thing as free will. Suffice it to say that it is quite possible that more philosophical ink has been spilled on this point than all the above combined, and I seriously doubt that I can add much to that debate here. I recognize that in this day and age there may be no more sacrilegious assertion than that there is no such thing as free will. That doesn’t mean the assertion is false, it just means I don’t expect to convince anyone of the possibility.
On a more positive note, I must commend Donway for his overarching point that philosophy matters to business law. He writes:
One firm belief that I bring to the Business Rights Center is this: Philosophy matters. Without a theoretical defense of the fundamentals—individual liberty, private property, freedom of contract—exposés of alleged injustices against businessmen will not be highly persuasive. Readers may concede that, yes, here was an act of prosecutorial misconduct, and, yes, there was an instance of taking the “insider trading” doctrine too far. But the reader’s reaction to such unjust prosecutions will be limited and spiritless, unless he believes in the right of businessmen to conduct their businesses as they see fit, free from all limits but a ban on force and fraud. Absent that, the reader will naturally think that such injustices are but minor missteps in a crusade that is fundamentally beneficial.
While no one should be surprised to hear that I likely would have used different examples to make the point, I believe the point is spot on. I likewise agree with the suggestion that to the extent my arguments are bad (and I certainly am under no delusions regarding the vastness of my room for improvement here), I may suffer from not having “discovered satisfying refutations of them.” I’ll leave it to you to guess whether I consider Donway's critiques to provide some.
November 5, 2010
Truck Sales Up: Signs of an Improving Market or a Short Memory?
Truck sales outpaced car sales by the highest margin in fiver years, with trucks, SUVs, and minivans representing 56% of the market. According to some reports, this uptick in large vehicle sales could be an indication that the market is improving. Others, as the Wall Street Journal explains, are less confident that increased vehicle sales are signaling much about an improving economy. After all, car and light truck sales are still under 12 million units annually, as compared to the 16 million range seen in the better economic times not so long ago.
One possible "upside": Improved larger vehicles sales tends to help the Detroit automakers, and with the large taxpayer stake in General Motors, this could mean a larger IPO, and thus a better return on "our" investment. So we have that going for us, which is nice.
When gas prices passed $4 per gallon in 2008, large vehicle sales took a big hit. Although gas prices have not come back down to the sub-$2 per gallon prices that fueled the last SUV boom, prices have remained relatively stable, and relatively low (under $3 per gallon) for the past year or so, which I suspect has also helped people ease back into their large vehicle habit. This, of course, comes with its own risk: if gas prices go up, the economy remains stagnent, and people with these big new SUV payments freak out, the economy will take another big digger.
Ultimately, I am skeptical that the modest improvement in vehicles sales is telling us much about the economy, other than perhaps things aren't quite as bad as they were. One thing that is clear: the U.S. consumer has a very, very short memory.
November 4, 2010
Scholarly Panel Discussions via Skype
In difficult economic times, is this the wave of the future?
November 3, 2010
No More Government Motors?
The federal government plans to cuts its stake in General Motors from 61% to 35 %. Apparently this cutting the size of government thing really took hold after yesterday's election.
According to the New York Times,
In a regulatory filing, G.M. disclosed that the Treasury Department planned to cut its ownership stake to about 35 percent, down from almost 61 percent. That has long been an important marker for the company, which has sought to shed a “Government Motors” stigma that it believes has weighed down car sales.
The filing with securities regulators on Wednesday suggests that G.M. has a market value of about $41 billion, short of the valuation needed for taxpayers to make money on the government bailout. But government officials have emphasized that Treasury will sell its stake over time, and a rising stock price after the initial sale will help its return.
Okay, so I guess it won't happen immediately.
November 2, 2010
In Search of Ferdinand...
1932. The economy was mired in a continuing depression, and the denizens of political office saw its recovery as the key to their fate. An outgoing Republican President cautiously blamed excesses on Wall Street; a successor Democrat elected in hopes of sweeping change was continuously cautioned against overreaching reform. The head of a major railway went so far as to warn the chair of the Senate Banking Committee against Congressional scrutiny of the markets:
The disclosures to date are causing the rank and file out through this country to distrust all banks, the good along with the bad; hoarding is starting in again; withdrawals are becoming very heavy; the whole financial structure seems to be sitting on dynamite. ["Hellhound", p. 214].
Against this backdrop were held the famed Pecora Hearings, the New Deal inquiry both placing financial reform in the popular conscience and laying the groundwork for the federalizing of securities regulation in this country. To fans of financial law, the story of the closing months of the lengthy Senate investigation is epic yet largely undetailed. Hence the import of Michael Perinos' new book, "The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance." Professor Perino of St. John's Law School succeeds in dramatizing the clash pitting Ferdinand Pecora, the bold former NY prosecutor, against a parade of Wall Street titans in a pivotal ten days of hearings emblematic of the new confrontation between Washington and the securities markets. Along the way, the Professor aptly describes the conflux of personalities, politics and luck that produce any noteworthy historical tale.
The book is a great read and a ready source of historical testimony by Charles E. Mitchell, Richard Whitney, J.P. Morgan, Jr., and others. Kudos to Professor Perino (a former NY litigator himself) for contributing a riveting account of a singular time in the history of business regulation.
November 1, 2010
Separating Limited Liability from Individual Liability in Corporations and LLCs
When we delve into limited liability in my business associations courses, the discussion often turns to the scope of that limited liability and how it should be applied. We talk about how hard it can be to pierce the corporate veil (and LLC veil), especially where the shareholders/members respect the formalities of the respective entity.
Students are sometimes troubled by the idea that an entity not paying its bills could have a primary owner who has ample financial resources who still escapes liability. We discuss the options, before the default, that were available to help avoid such an outcome. For example, I note that lenders and other creditors can always ask for a personal guarantee if they aren't comfortable accepting the risk of the entity's ability to pay. (Less comforting is the third-party tort victim.)
I try to make clear that, although a shareholder will not be held liable to creditors in most instances solely by virtue of their status as shareholders, a shareholder can be liable by virtue of their status as individuals. The classic example is the shareholder and employee of a local company, Bread, Inc., who drives his bread truck into a pedestrian causing severe injuries. The company may be liable for his actions an an employee and the driver may be liable directly because of his actions as the driver, not by virtue of being a shareholder.
A couple recent cases provide good reminders of exactly this point. In a recent U.S. District Court of Maryland decision, a group of employees sued their employer and the president of the company individually for violation of the Fair Labor Standards Act (FLSA) and state wage law violations. Pearson v. Professional 50 States Protection, LLC, Civil Action No. RDB-09-3232, slip op. (D. Md. Oct. 26, 2010) (pdf here). The company president sought summary judgment on his liability, claiming that the only way he could be held liable was if the court pierced the LLC veil (and that such a claim was not adequately pleaded). The court disagreed, explaining that the FLSA holds all employers liable and that an employer could include the entity and the individual. ("There is substantial authority for courts to hold liable as employers individuals with varying amounts of equity and control over the entities and activities before the courts in FLSA cases.") Furthermore, the court noted that "an officer who is liable as an employer under the FLSA is liable in her individual capacity."
Similarly, a recent Connecticut LLC case also explained that an LLC member may be liable individually in tort for personal involvement in a tort even though the LLC may also be liable. Sturm v. Harb Dev., LLC, 298 Conn. 124 (2010) (pdf here). In that case, the plaintiffs sued a construction LLC and a member individually for substandard construction of their home. The court again explained, "[A] director or officer who commits the tort or who directs the tortious act done, or participates or operates therein, is liable to third persons injured thereby, even though liability may also attach to the corporation for the tort.” For a good and more detailed description of this case and other LLC liability issues, see here.
Now that LLCs are the entity of choice, I like using LLC cases for this discussion. Of course, from time to time this can make the discussion even more murky because courts don't often carefully distinguish the entity types. Case in point: the Sturm case discussed above. The court repeatedly referenced the LLC as the "corporation." The court explained that in Connecticut, "A limited liability company is analogous to a corporation for purposes of piercing the corporate veil." Still, I'd much prefer if, after this determination is made, the court would refer to the entity as the "LLC" or the "company." A little precision on this point would be much appreciated in the classroom. I suspect it might help in practice, too.
October 31, 2010
"An Ironic Uprising"