ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, March 17, 2009

ContractsProf Represent!

On the AIG bonus contracts, from the SF Chronicle:

Some attorneys are asking why the government, which owns 80 percent of AIG, didn't pressure the company to withhold payments while it investigated ways to stop them.

"There wasn't any hurry to pay them out," says Miriam A. Cherry, an associate professor of contract law at the University of the Pacific. Cherry says it would have been better to force AIG employees to bring a case explaining why they were entitled to the bonuses.

Once in the hands of employees, those payments will be very hard to claw back. AIG reportedly told Treasury Secretary Timothy Geithner that if it didn't pay out the bonuses that were due on Sunday, it could wind up paying twice as much. Under a Connecticut law, employees can collect double damages plus attorneys fees if an employer withholds wages and the employee can prove bad faith. Cherry says she is not sure whether bonuses would qualify for wages under this law.

AIG paid additional bonuses to workers in other parts of its insurance empire, but they are not generating as much outrage as bonuses paid to employees of its Financial Products division, which wrote contracts that essentially guaranteed securities backed by pools of loans including subprime mortgages.

Losses on those securities grew so large that in September 2008, the Federal Reserve agreed to provide an $85 billion credit facility to AIG in exchange for nearly 80 percent of its stock. The government has injected a total of $173 billion into AIG, more than it has put into any other financial firm.

Neither AIG nor the Obama administration has disclosed which Financial Products division employees got bonuses and why. New York Attorney General Andrew Cuomo has said he will subpoena AIG to find out who got the money.

According to the Wall Street Journal, 400 employees were set to receive bonuses ranging from $1,000 to $6.5 million. The bonus pool included retention bonuses that AIG agreed to pay employees in early 2008 to prevent them from quitting.

It's hard to imagine how anyone in the division that drove AIG to the brink of bankruptcy could have earned a performance bonus for 2008.

"The dismal performance of the financial products unit was apparent in the earlier part of 2008," says Lucian Bebchuk, Director of the program on Corporate Governance at Harvard Law School.

"Similarly, it is hard to justify the bonuses as essential for retention, as they were not made contingent on executives' staying with the company. The executives who recently received the bonus payments are now free to leave AIG with the bonuses in their pockets," Bebchuk adds.

"To make its claim more credible," he says, the company should disclose the terms and dates of the contracts.

Without knowing the details, lawyers say it is hard to gauge AIG's chances of getting the money back.

"If the bonuses have been earned, I don't think there is any good contract remedy for getting them back," said Frank Snyder, a law professor with Texas Wesleyan University. "Some of my colleagues have suggested using a doctrine called changed circumstances or frustration of purpose" under the theory that things have changed so much the contract can be undone. "But that doesn't apply when one party has done all the things they have to do."

Snyder says that if AIG had been allowed to go bankrupt, the contracts might have been undone in bankruptcy court. But "the government didn't let them go under, so the company is stuck with the contracts it has."

Theoretically, AIG's nongovernment shareholders could try to sue the board for violating its duty of care, but "I'm sure AIG (like most companies) has a provision that says you can't sue directors for violating duty of care," he adds.

Snyder says AIG's best chance of getting back the money is through public pressure: "The government is capable of starting a criminal investigation to get money from people they think shouldn't have gotten paid."

Read the rest of the article here

[Meredith R. Miller]

March 17, 2009 | Permalink | TrackBack (0)

Monday, March 16, 2009

From the Populist Outrage File: Blame it on the Contracts

Considerable populist outrage is being directed towards AIG, which is planning to pay around $120 million in bonuses to employees.  Some of these employees were "executives in the same business unit that brought the company to the brink of collapse last year."  Good use of bailout money?  AIG and the Treasury say that the firm has no choice:

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

Renegotiation of union contracts is possible (indeed, union concessions are expected in this economy).  Why are executive contracts iron clad?

[Meredith R. Miller]

March 16, 2009 in In the News | Permalink | Comments (3) | TrackBack (0)

Saturday, March 14, 2009

Contract Written in Blood is Not Enforced

This from James Levy at Legal Writing Prof Blog:

Get this - the AP reports that two friends went to a combination karaoke bar/sushi restaurant when one of them decides he wants to write an agreement promising the other that he'll pay back the $170k he owes. No pen? No problem! The first guy asks the waiter for a pin (maybe he asked for a "pen" but the waiter misunderstood?) - which for some odd reason the waiter happens to have on him - and he then "pricks" his finger so that he can write the contract in his own blood!

Maybe your experience with this kind of thing is different than mine - but whenever I stab myself with a pin, it never even draws enough blood to write my own 3 character first name, much less an entire contract.
It's the visual that I can't feature. That was either one heck of a pin-prick (in the same way that the "chainsaw scene" in Scarface was one heck of a paper-cut) or the guy was a hemophiliac. And out of curiosity, what was the waitstaff thinking while one of their patrons was gettin' medieval on his own self right there in the restaurant? Nowadays you can't even smoke inside a restaurant but when did it become OK to take a blood oath?

And all that's aside from the fact that promisor went to a lot of trouble, not to mention taking the risk of contracting hepatitis C, when in the end the California appeals court ruled the contract is unenforceable.

[Meredith R. Miller]

March 14, 2009 in In the News | Permalink | TrackBack (0)

Tuesday, March 10, 2009

Business Associations Limerick of the Week: Wilkes v. Springside Nursing Home, Inc.

I am heading off for a conference this week and am behind in preparations, so this will be a short post and probably the last for the week from me.

Wilkes sets out the standard for fiduciaries in the context of a close corporation in Massachusetts. In doing so, it departs from an earlier Massachusetts precedent, Donahue v. Rodd Electrotype. While Donahue treated close corporations like partnerships and thus treated shareholders with all the rigor demanded by Cardozo's punctilio, Wilkes held that standard too demanding. Rather, when challenged by a minority shareholder, the remaining shareholders must show that their actions were inspired by a legitimate business purpose and that the actions taken were narrowly tailored to minimize the harm to the minority shareholder. In short, the court recognized the legitimacy of shareholders looking out for their "selfish ownership interest" in the company.

In this case, the defendants breached their fiduciary duty to Wilkes by freezing him out and depriving him of the benefits of his status as a shareholder

Wilkes v. Springside Nursing Home, Inc.

A freeze may be allowed
Where a proper purpose 's avowed.
But minority rights
May be extinguished like lights
'Neath a selfish ownership shroud.

[Jeremy Telman]

March 10, 2009 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, March 9, 2009

Terminator IV: Attack of the Litigious Producer

ArnoldYeah, that's right, Arnold. While you're off governing California, your franchise is in the courts! According to this article in The Daily Express (which, according to its website, is "the World's Greatest Newspaper"), Moritz Bowman, one of the producers of the forthcoming "Terminator Salvation" (which looks awesome, by the way), is suing fellow producers, Derek Anderson and Victor Kubicek, alleging that they did not pay him his full producing fee and hijacked the production in July 2008. Although the New York Times reports that the producing fee in question was $5 million, the Daily Express reports that the law suit seeks $200 million in damages.

In my view, Mr. Bowman is barking up the wrong tree with his lawsuit. It's obvious to me that Anderson and Kubicek are really cyborgs disguised as humans and bent on the destruction of the human race by cornering the market in high-end sci-fi special effects movies. That leaves Mr. Bowman only two options.

1. Get in touch with John Connor. And do it quick. Contact Linda Hamilton's agent. She'll know where to find him.

2. Transport yourself back in time and make certain that the Bowman/Anderson/Kubicek alliance is void ab initio.

[Jeremy Telman]

March 9, 2009 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Saturday, March 7, 2009

Breaking: NYT Declares Death of Contract

In What Contract? in the NYT Real Estate section, reporter Michael M. Grynbaum begins:

COULD the days of the iron-clad contract be numbered?

It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.

But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate. Buyers are demanding concessions from developers on apartments that they say have lost up to 30 percent in value. Others are hoping to back out of their contracts entirely, while keeping their down payments in the process.

The sudden demand has sent lawyers scurrying to uncover avant-garde legal tactics for ducking out of a deal. Downtown conversions like 75 Wall Street and new developments like One Hunters Point in Long Island City are facing suits from buyers seeking to break contracts on the basis of a once-obscure consumer protection law.

Read more here. The article is adorned with an illustration of a burning contract. Perhaps I should ask my dean if I can teach torts next year.

[Meredith R. Miller]

March 7, 2009 in In the News | Permalink | TrackBack (0)

Thursday, March 5, 2009

Ambiguity and Trade Usage in Texas: XTO Energy v. Smith Production

Oil_wellSmith Production, Inc was the operator under two joint operating agreements (JOAs) governing exploration and production on and oil and gas lease. Chevron was one of the four non-operating owners. As required under the JOAs, Smith gave Chevron notice of its intent to drill four wells on the lease. The JOAs gave non-operating owners 30 days after receipt of notice to tell Smith whether or not they wanted to participate in the cost of proposed operations. If they chose not to participate, a "non-consent provision" in the JOAs, sometimes called a non-consent penalty, provided that non-consenting non-operating owners cede their rights to the proceeds from an operation up to certain caps provided for in the JOAs.

Chevron first told Smith that it did not wish to participate in the costs of the proposed wells. The other three non-operating owners informed Smith that they did. Then, a week after telling Smith it did not want to participate, Chevron stated that its earlier non-consent had been sent in error, but Smith would not change Chevron's status from non-consenting to consenting. XTO Energy succeeded to Chevron's interest in the lease and sued, arguing that the language in the JOAs was ambiguous with respect to a party's ability to change its election within the 30-day window parties have to respond to notice of new operations. The trial court ruled for Smith, finding the JOAs unambiguous. It also excluded XTO's expert testimony relating to trade custom and usage. In XTO Energy, Inc. v. Smith Production, Inc., 2009 WL 442003, No. 14-07-00069-CV (Tex. App. Hous., Feb. 24, 2009), Texas's Court of Appeals for the 14th District affirmed. The first footnote in the opinion indicates that the court here construes a standard form contract, so its holding may have significance for future litigants.

On ambiguity, the Court noted:

There is no language in the JOAs expressly allowing an electing party to change its election once it has notified the proposing party of the election. Nor is there language expressly disallowing such a change in election.

However, the Court found that permitting a change in election was inconsistent with other portions of the JOAs. The Court found reasonable Smith's proffered interpretation, according to which the JOAs provide that each party's Notice Period expires when it makes its election. The Court rejected as unreasonable XTO's reading of the JOAs, according to which a party is entitled to change its election so long as the other parties have not materially changed their positions in reliance on the original election.

The Court did not reach the issue of whether exclusion of expert testimony as to custom was erroneous, as it concluded that any error would have been harmless. The Court noted that the excluded testimony would not have satisfied the relevant standard in any case:

XTO's expert did not show that the alleged custom and usage to which he testified is so general and universal that the parties to the JOAs are charged with knowledge of its existence to such an extent to raise a presumption that they dealt with reference to it.

Justice Eva Guzman filed a dissenting opinon on the ambiguity issue. Among other things, Justice Guzman noted that the JOAs referred to the 30-day notice period as "fixed," suggesting at least a triable ambiguity regarding the ability of non-operating owners to change their election throughout the 30-day period.

[Jeremy Telman]

March 5, 2009 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 4, 2009

Would You Attempt to Hurdle Contract, Propery and Health Law to Become a Grandparent?


I have heard that the parental yearning for grandchildren is a strong one.  Based on the recent case of Speranza v. Repro Lab, it is evidently stronger than I initially realized.

In 1997, Mark Speranza deposited a number of semen specimens with Repro Lab.  Repro Lab is a tissue bank licensed by the State of New York.  The sperm was frozen and stored in Repro's nitrogen vaults. 

As part of his agreement with Repro Lab, on July 30, 1997, Mark filled in and signed a form document entitled, "Ultimate Disposition of Specimens," which contained several options for the disposition of the specimens by the tissue bank in the event of Mark's death.  Mark checked off the provision stating that in the event of his death: "I authorize and instruct Repro Lab to destroy all semen vials in its possession." The document concludes: "[t]his agreement shall be binding on the parties and their respective assigns, heirs, executors and administrators."

Just six months later, Mark died from cancer.  Thereafter, Mark's parents, in the administration of his estate, discovered that he had deposited sperm at Repro.  The parents sought a declaration that they were the legal owners of the sperm.  They sought to have a surrogate inseminated, with the hope of producing a grandchild for them.

The lab continued to store the sperm for a yearly fee, but refused to turn them over to the parents based upon the document Mark had signed.

A New York trial court dismissed the action.  The Appellate Division (Saxe, J.) affirmed on different grounds.  The court first reasoned that the parents faced regulatory impediments, namely because Mark fit the definition of a sperm "depositor" rather than a "donor."  Based upon this distinction, Repro had not examined and screened Mark's blood and semen and, therefore, could not release the sperm specimens for insemination of a surrogate.

Then, the court held that, even setting aside these regulatory hurdles, the parents' argument for reformation of the contract between the Mark and Repro law was without merit.  It reasoned:

Plaintiffs assert that Mark's purpose in storing the sperm was to assure his ability to have a child. The contract, however, is not that vague. It represents a determined choice that the sperm should be available to him so he could protect his ability to procreate if he survived. It does not protect any possibility that his genetic or biological issue could be created after his death; indeed, the directive that his semen be destroyed in the event of his death precludes such a possibility. Since the document conveys a clear intent that the specimens be destroyed upon Mark's death, which intent is not contrary to the asserted intent to assure his ability to have a child while he was alive, it cannot be said that the instrument contains an erroneous expression of the intention of the parties. Accordingly, nothing in plaintiffs' submissions would justify reforming the contract so as to permit them to fulfill their wish after his death, contrary to his express wishes.

Nor does defendant's alleged conduct, in accepting yearly storage fees without revealing the existence of the contract directing the destruction of the specimens in the event of Mark's death, and without initially informing plaintiffs that the specimens could not, under applicable law, be turned over to them, provide plaintiffs with a legal right to claim ownership of the specimens. Whatever remedies Mark's estate might be entitled to seek for the asserted contract breach created by defendant's failure to destroy the specimens, the breach would not engender in Mark's estate a right to an ownership interest. Simply put, under applicable regulations as well as the terms of the contract between Mark and defendant, the specimens are not assets of the estate over which the administrators have possessory rights.

Rather, the legal obligations with regard to the possession and handling of the semen specimens are dictated solely and completely by the applicable Department of Health regulations. At this point, the proposed use of Mark's semen would fundamentally violate 10 NYCRR 52-8.6(g), which requires that a semen donor be "fully evaluated and tested" prior to the use of his semen "by a specific recipient, other than his current or active regular sexual partner." Since the purpose of this statute is to protect the surrogate mother, and thereby the general public, from disease, we cannot countenance avoidance of the regulations' dictates, even though we recognize the joy that ignoring those regulations could bring to plaintiffs.

Speranza v. Repro Lab Inc., 2009 NY Slip Op 01543 (App. Div. 1st Dep't Mar. 3, 2009).

[Meredith R. Miller]

March 4, 2009 in Recent Cases | Permalink | TrackBack (0)

Arbitration Agreements Must Specify Kentucky to Be Enforceable in Kentucky Courts

KyAlly Cat, LLC v. Chauvin, 2009 WL 160581, No. 2008-SC-00377-MR (Kentucky, Jan 22, 2009) involves a Home Owners Limited Warranty (HOLW) that provided for arbitration of disputes relating to a condominium unit. Dr. Stephanie Russell, the sole member of Ally Cat, LLC purchased a condo unit for use as a medical clinic, and she signed the HOLW. Her unit leaked, so she sued for fraud, concealment, tortious misconduct, negligence, breach of contract and professional negligence against various entities identified in the opinion as the Real Parties in Interest. The latter moved to compel arbitration, and that motion was granted at the trial level and affirmed on appeal. Ally Cat appealed to the Supreme Court of Kentucky, contending among other things that the trial court had no subject-matter jurisdiction to order the parties to arbitrate because the HOLW did not specify that arbitration must occur in Kentucky.

Kentucky courts had previously held that a provision of the Kentucky Arbitration Act, KRS 417.200, requires that arbitration clauses include language stating that the arbitration is to be held in Kentucky before a Kentucky court can enforce an arbitral award. They had done so only when asked to enforce such awards that had already been granted after out-of-state arbitrations. In this case, the arbitration had not yet taken place. Nonetheless, the Supreme Court of Kentucky held that "[s]ubject matter jurisdiction to enforce an agreement to arbitrate is conferred upon a Kentucky court only if the agreement provides for arbitration in this state." This ruling was based on the language of 417.200 which specifically relates to agreements "providing for arbitration in this state." The Court found that the phrase would be rendered meaningless if limited to cases, like those decided earlier, in which parties sought to enforce out-of-state arbitral awards. The Court declined to address what it would have done if the parties, despite the faulty HOLW, had actually arbitrated in Kentucky.

The Court also found that the HOLW was faulty in other, less interesting ways. For example, it was not signed by any of the Real Parties in Interest, and Dr. Russell signed only in her individual capacity and not on behalf of Ally Cat, LLC. In addition, the HOLW is phrased merely as an acknowledgment of receipt of certain policies, not as an assent to their terms. In short, faulty drafting prevented the HOLW from qualifying as "the making of an agreement" under KRS 417.050.

[Jeremy Telman]

March 4, 2009 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 3, 2009

Take Notice, Elmer Fudd: Chinese Rabbit Still Available

ChinaWe reported recently about an environmentalist who sought to prevent the sale of public lands for oil and gas exploration by bidding on the land himself. That tactic, which Nate Oman dubbed "environmentalism by breach of contract," now has its imitators. Today's Wall Street Journal reports that Mr. Cai Mingchao, a Chinese collector who bid $40.4 million for two bronze sculptures (including a rabbit) now says that the sculptures were looted from Beijing's Imperial Summer Palace during a French and British attack in the 19th century and should be returned there. Mr. Cai told the Journal that he never intended to pay for the sculptures on which he bid.

The sculptures were auctioned off along with the rest of the collection of Yves Saint Laurent and his partner Pierre Berge. The Journal reports that winning bids are binding contracts but reports that Christie's will not reveal its intentions. The Journal offers the options of (a) a suit against Mr. Cai to enforce the contract; (b) resale to the next highest bidder (which is not, of course inconsistent with (a)); or (c) return of the sculptures to Mr. Berge. The option of returning the sculptures to China does not appear to be on the table.

[Jeremy Telman]

March 3, 2009 in In the News | Permalink | Comments (1) | TrackBack (0)

Business Associations Limerick of the Week: Galler v. Galler

Like the case memorialized in last week's Limerick, this is a case about the enforceability of a shareholders' agreement. Like Owen v. Cohen, this case offers the opportunity to develop the Catskills shtick theme in the Limericks for Lawyers.

The Galler brothers, Benjamin and Isadore (Izzy to me) each owned 47.3% shares in a wholesale drug business. They entered into a shareholders' agreement in 1955 that would guarantee each family two seats on the corporation's four-member board, even if one of the brothers died. It also provided for dividends and a death benefit to the widow of either brother. Ben had a heart attack while the agreement was being negotiated. When he died two years later, Isadore and his son Aaron refused to honor the agreement. In a close corporation in which minority shareholders excluded from the agreement do not object, the test for the enforceability of such agreements is simple reasonableness.

The court found the agreement in question here reasonable in terms of the amount to be paid, the terms for payment (contingent upon a specified earned surplus), and duration. The last of these factors is interesting in this case. The agreement provided that it was to last for the lifetimes of the Galler brothers and their wives. The court's rendition of the facts of the case suggests that Ben's widow, Emma, was a generation younger than he was. Perhaps the in-laws weren't crazy about Ben's taste in women. Perhaps Emma was a second wife, viewed as an interloper or a gold-digger.

It is interesting to explore with students why the business's minority shareholder (a long-time employee of the firm) raised no objections to the agreement.

The following Limerick issues from beyond the grave, from Izzy and Ben's yiddische mama.

Galler v. Galler

Is Emma an utter schllemiel?
Izzy, hear this appeal!
She who life to you gave,
Oy! She'll turn in her grave!
Abide by the '55 deal!

[Jeremy Telman]

March 3, 2009 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, March 2, 2009

Is the Substantial Performance Doctrine Rendered Quaint by Statute?

Benjamin_cardozoI can't imagine not teaching Jacob & Youngs v. Kent, a Limerickworthy case if ever there was one. Still, I'm happy that the Supreme Court of Connecticut has rejected a lower court ruling that threatened to eliminate the doctrine of substantial performance in the context of a home renovation contract that was not completed to the homeowner's complete satisfaction -- at least in Connecticut. The case, Hees v. Burke Construction, 290 Conn. 1, 961 A.2d 373 (Conn. 2009), addresses the question of whether Connecticut's Home Improvement Act precludes a home improvement contractor from reducing breach of contract damages by the unpaid balance due under the contract. That Act provides in relevant part as follows:

No home improvement contract shall be valid or enforceable against an owner unless it: (1) Is in writing, (2) is signed by the owner and the contractor, (3) contains the entire agreement between the owner and the contractor, (4) contains the date of the transaction, (5) contains the name and address of the contractor and the contractor’s registration number, (6) contains a notice of the owner’s cancellation rights in accordance with the provisions of chapter 740, (7) contains a starting date and completion date, and (8) is entered into by a registered salesman or registered contractor. . . .

The Supreme Court of Connecticut held that the Act does not preclude recovery by the contractor, reversing the lower court's judgment for plaintiffs.

Plaintiffs engaged Burke Construction to undertake about $350,000 in home improvements. After about 30 change orders, the contract price rose closer to $400,000. Plaintiffs paid $330,531, but then refused to make a tenth payment. At that point, there was an unpaid balance of $16,472, and after giving plaintiffs notice that it considered them in breach, Burke terminated the contract. Plaintiffs sued alleging that Burke had breached by not completing all of the work. Burke counterclaimed alleging breach of contract, quantum meruit and foreclosure of its mechanic's lien. The case was referred to a referee, who found for plaintiffs and awarded them damages for costs incurred in completing work that defendant had left undone. The referee denied Burke's counterclaims because the contract included no right of rescission and was thus unenforceable against the plaintiffs under the Act. The trial court adopted the referee's report.

On appeal, Burke contended that it was entitled to offset plaintiffs' damages by the amount due under the contract and that the Act did nothing to change that standard rule of contracts damages. The Supreme Court agreed.

The Court determined that the statutory language was ambiguous on the subject of its intended scope. The Act prevents contractors from relying on a contract that is inconsistent with the statute in an action brought by the contractor, but it is not clear that contractors could not rely on such a contract in a case in which they are alleged to have breached the agreement. However, after a review of the legislative history behind the act and case law decided under it, the Court concluded that the referee's interpretation of the Act was untenable.

The Court observed that homeowners would be awarded "an unwarranted windfall" if it were to permit plaintiffs to recover damages for a breach of contract but then were not to permit defendants to recover amounts due under that same contract.

Justice Schaller provided a niftier solution in a concurring opinion. Preferring to avoid a distinction between "affirmative" and defensive uses of the Act, Justice Schaller argued that plaintiff conceded the validity of the contract by suing for its breach. There was thus no need to consider the Act at all.

[Jeremy Telman]

March 2, 2009 in Recent Cases | Permalink | Comments (0) | TrackBack (0)