ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, April 3, 2009

Peevyhouse and John Wunder Down Under

Bbb This week I'm teaching those two student rabble-rousers, Peevyhouse v. Garland Coal Co. and Groves v. John Wunder Co.  The issue in both cases, of course, is whether the owner of property can get the cost of rectifying the defective performance if that cost exceeds the actual economic loss it suffered.  The Australian High Court has recently dealt with the same issue, and it comes down on the John Wonder side of the coin.

In the case, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the Court held that a building tenant had a right to have a building's lobby restored to its original condition at a cost of A$1.38 million, even though the actual loss in building value from the defective performance was only A$38,000.  Nick Christopoulos and Jack Fan of Clayton Utz offer a summary of the case here.  (Free registration required.)

[Frank Snyder]

April 3, 2009 in Recent Cases | Permalink | Comments (1) | TrackBack (0)

Thursday, April 2, 2009

Speaking of McQuade v. Stoneham . . .


Some of us who teach Contracts also teach Business Associations, so we like to run occasional things of interest to B.A. teachers beyond, of course, Jeremy’s regular limericks.

One of the great casebook staples is McQuade v. Stoneham (1934), a battle over control of the New York Giants baseball team. The case set down the rule that any agreement among shareholders and directors that would bind directors in the exercise of their discretion would be void. Above we see the dramatis personae of the case, Francis X. McQuade, Charles Stoneham, and John J. McGraw in happier days, meeting with other baseball luminaries in November, 1920.

Front row, left to right: McQuade, Harry Frazee (Red Sox), Col. Jacob Ruppert (Yankees), George Grant ;McGraw, and Barney Dreyfuss (Pirates).

Back row: Sam Breadon (Cardinals), Stoneham, L.C. Ruch (Phillies), Bill Veeck (Cubs); Charles Ebbets (Dodgers); Charles Comiskey (White Sox).  Contracts folks will recognize that last name, Comiskey, as the guy whose literal approach to contracts conditions has been explored on this site by Keith Rowley.

[Frank Snyder]

April 2, 2009 in Famous Cases | Permalink | TrackBack (0)

Wednesday, April 1, 2009

"Pay for Performance" sponsor explains legal reasoning . . . sort of

Bbb The sponsor of the "Pay for Performance Act of 2009" gives his reasoning in a Huffington Post piece today.  Freshman Rep. Alan Grayson (left), who introduced the bill, is a Harvard Law grad who was a staff clerk at the D.C. Circuit and used to do government contracts work at the Fried, Frank ifirm n D.C., but his explanation for why his bill is reasonable contains some dubious legal reasoning.  His basic argument is that "the taxpayers are owners [of these covered institutions], and owners of companies set salaries for their employees."

Setting aside whether the bill is a good idea -- lots of folks are lining up on either side -- Grayson's legal analysis is wrong.  The "taxpayers" (to pick nits, it's the 'government," not the "taxpayers" that owns the stake) certainly have an ownership interest in those entities where the government has taken a capital stake.

But it's not true that "owners" of public companies "set salaries for their employees."  It is the directors of a company who are responsible for making decisions on employment and compensation -- the owners' only remedy is to fire the directors.  That's not a nit-picky distinction.  There's a solid line of cases going back to McQuade v. Stoneham (1934) which hold that any attempt by shareholders to bind directors to whom they can employ and at what compensation is void.  Directors are free to ignore commands from their majority shareholders, and are, in fact, required to do so if they believe that the action isn't in the firm's best interest.

None of this is to say that the government can't do this -- that's one for the Con Law folks, probably -- but it is curious that a highly trainsed lawyer has offered a pretty dubious legal analysis in support of it.

[Frank Snyder]

[NOTE:  Edited to remove erroneous description of the scope of the act.  F.S.]

April 1, 2009 in Commentary, Current Affairs, In the News, Legislation | Permalink | Comments (0) | TrackBack (0)

Not everyone likes "Pay for Performance"

Bbb While the House of Representatives debates whether financial institutions that received TARP money ought to be compelled to adopt "pay for performance" criteria for compensation, the American Federation of Government Employees is urging Congress to jettison the concept when it comes to federal workers.  The 600,000-member AFGE says the Department of Defense's pay-for-performance initiative is "misguided" and "wrought with unfairness."

[Frank Snyder]

April 1, 2009 in Current Affairs, In the News, Labor Contracts | Permalink | TrackBack (0)

US Supreme Court Decides 14 Penn Plaza

Today, in an opinion written by Justice Thomas, a 5-judge majority of the United States Supreme Court held that "a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law."  So, essentially, a union can waive an individual employee's right to sue in court for discrimination.  

You can find all the action here.

[Meredith R. Miller]

April 1, 2009 | Permalink | TrackBack (0)

Congress Expands Attack on Bonuses

Bush In yet another ContractsProf Blog exclusive (this must be our lucky day!), we break news of bonuses paid to members of the executive branch during the Bush administration.  It turns out, our first MBA President decided to follow the familiar business model.  A well-advised executive will not let federal regulations on compensation narrow the potential talent pool.  One can comply with such regulations and yet still compensate key employees appropriately through bonuses and deferred compensation.  And that is what the Bush administration apparently did.  Unfortunately, all information relating to the bonuses is classified and congressional investigators have thus far been unable to discover their extent.  

But now the democratic Congress is madder than heck and is seeking to recoup the bonuses as void on grounds of public policy or in the alternative, as one Congressman put it "to tax them back in to the stone age."  A spokesperson for former President Bush refused to get into specifics, but he did defend the policy in general terms:

Look, you are not going to lure people away from jobs that pay them seven or eight figures with jobs that pay them six figures and offer no downside protection.  You push the wrong button in Washington, and you may never work again, if you know what I mean.  So we had to sweeten a pie a bit for the Cheneys, the Gonzalezes, the Rumsfelds, the Addingtons, the Brownies, the Feiths.  Those people don't come cheap, but we believe the American people certainly got their money's worth from this administration.  In any case, for Congress now to seek to take back the money paid to these hard-working, dedicated public servants would be a slap in the face to all good citizens who give up comfortable lives and put their careers on hold in order to enter public service.  To do so would also violate the sanctity of contracts.

But Congress is not backing down.  Among other things, congressional leaders have pointed out that, according to former Vice President Dick Cheney, the Vice President's office is really part of the legislature and not part of the executive.  Speaker Nancy Pelosi is believed to be working on a compromise.  "If Cheney and his people got bonuses," she explained, "then all legislators should get bonuses as well.  We're trying to make this into a win-win."

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

New Issue of Constitutional Commentary

Conscom-logo The ContractsProf Blog is pleased to provide this news exclusive.  Using our powerful connections and heightened sleuthing powers, we have discovered that Constitutional Commentary has a special issue coming out today on dissenting opinions in Contracts Clause cases.  More exciting still, the journal will be changing its name for the special issue, and if the focus on dissents excites reader interest, the change will be come permanent.  

The new name for the journal will be Constitutional Dissentary.  In keeping with the new theme, the journal is considering moving its headquarters from the University of Minnesota to either Crapo, Maryland or Flushing, Queens.





April 1, 2009 in Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 31, 2009

On Twitter and Links to Two Recent Cases Holding Class Action Waiver = Unconscionable

First, a recent SDNY (Griesa) decision holding that an arbitration clause in a student loan agreement was unconscionable.  The arbitration clause included a class action waiver.  Fensterstock v. Education Finance Partners.

Second, a recent 9th Circuit decision holding unconscionable the class action waiver in T-Mobile's service agreement with wireless card customers.  Chalk v. T-Mobile.

Somewhat related: I learned of the Chalk decision from Ross Runkel via Twitter.  I thought Twitter would be a good way to broadcast to my students current links about Contracts, Business Organizations and other law stuff (coincidentally, if you are so inclined, you can follow my links on these topics @Prof_Miller).  The students don't seem much interested (yet?), but I am coming to realize that, yes, there are other good uses for Twitter (including, if you are in L.A., keeping tabs on your favorite Korean taco truck).

[Meredith R. Miller]

March 31, 2009 | Permalink | TrackBack (0)

AIG Bonuses: Enter Force Majeure -- Stage Left

While lots of folks are scrambling around looking for contract-law defenses to retention payments such as those given employees at failed AIG, Congress is looking at resolving the issue by introducing a new player: force majeure.  The Pay for Performance Act of 2009 would amend the Emergency Economic Stabilization Act of 2008 (which authorized the Troubled Assets Relief Program), to retroactively ban payments of non-performance-related bonuses and "excessive cmpensation" for firms that receive TARP payments.  The rules govern not just executives, but all employees at such firms.  Here's the key language:

PROHIBITION:  No financial institution that has received or receives a capital investment under [TARP] or with respect to the Federal National Mortgage Association, the Federal Home Loan Montage Corporation, or a Federal home loan bank . . . , may, while that capital investment remains outstanding, make a compensation payment to any executive or employee under any pre-existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement--

(A) provides for compensation that is unreasonable or excessive, as defined in standards established by the Secretary in accordance with paragraph (2); or

(B) includes any bonus, retention payment, or other supplemental payment that is not directly based on performance-based measures set forth in standards established by the Secretary in accordance with paragraph (2).

The law directs the Treasury Secretary to develop standards for deciding whether compensation is excessive and to set up guidelines for what types of performance bonuses are reasonable.

That will take some help.  Treasury is looking for data and mapping analyists, financial analysts, financial economists, and risk analyists.  Pay goes as high as $133,000.  Details here.

[Frank Snyder]

March 31, 2009 in Current Affairs, Help Wanted, In the News | Permalink | Comments (3) | TrackBack (0)

Over at our sister ship . . . .

Over at Legal Profession Blog, Jeff Lipshaw (Suffolk) uses the AIG implosion to meditate on contract theory.  As usual, he's got his own unique take on things.  Check out My Iconoclastic Approach to Contract Theory (or Its Ultimate Failure) - The Financial Crisis Edition.

The same blog also has a story (with a link) to a new New York Court of Appeals decision on the role of contract language in dealing with disputes among attorneys over contingent fees.

[Frank Snyder]

March 31, 2009 in Commentary | Permalink | TrackBack (0)

Contracts Can Be Rewritten, Says NY Times

Dskeel Today's New York Times has a headline that would not have been news to Karl Llewellyn, "Contracts Now Seen as Being Rewritable."  But this is probably news and definitely fit to print because it provides space on page 1 of Business Day (above the fold!) for contracts prof David A. Skeel (left) to point out that it is now employment contracts that are viewed as "eminently rewritable."  The article goes on to discuss additional wrinkles in the path of contracts law: in the current financial crisis, the federal government is re-writing contracts, and municipal governments filing bankruptcy under Chapter 9 are being excused from performing their union contracts.  

Law students and recent graduates are also learning that employment contracts can be re-written.  I have now heard from many quarters of recent graduates who are being told by BigLaw that they will have to start late and take a salary cut.  And those recent graduates are the lucky ones.  Other offers of employment are being rescinded entirely.

[Jeremy Telman]

March 31, 2009 in In the News, Labor Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, March 30, 2009

Behind the scenes at AIG

A One of the interesting thing about the AIG explosion is how little most of us who are chattering in the media about the bailout and the bonuses (including me) actually know about why the whole thing blew up.  If you haven't read it (and I don't think we've remarked on it here yet), a great place to start is The AIG Bailout by Bill Sjostrom (No. Kentucky).

Unlike most of us (we?) contract law types, Bill understands "credit default swaps" and he takes the reader through the decisions that led The World's Largest Insurance Company into the abyss.  He also takes a crack at what needs to be done to salvage what's there.  Here's the abstract:

On February 28, 2008, American International Group, Inc. (AIG), the largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $200 billion. AIG's stock currently trades at less than $1.00 per share.

The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders' equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was undertaken, and questions its necessity. Finally, considering a likely legacy of AIG is increased regulation of credit default swaps, the Article describes the current regulatory landscape for CDSs, advocates restoring Securities and Exchange Commission power to regulate them, but cautions against regulating before the CDS market has had a chance to self-correct. 

[Frank Snyder]

March 30, 2009 | Permalink | TrackBack (0)

Weekly Top 10

Logo_social After a long hiatus, we’re back with the Weekly Top 10. It's a little heavy on commercial law this week, but there are some very nice contracts pieces that have hit the web in the last couple of months.  Following are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending March 30, 2009).

1 Rethinking Free Speech and Civil Liability, Daniel J. Solove (Geo. Washington) & Neil M. Richards (Washington U.).

2 Bankruptcy Reform and the Financial Crisis, Melissa B. Jacoby (No. Carolina).

3 Limitation of Sales Warranties as an Alternative to Intellectual Property Rights: An Empirical Analysis of iPhone Warranties' Deterrent Impact on Consumers, Marc Lane Roark (Missouri)

4 A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, Debra Pogrund Stark (John Marshall) & Jessica M. Choplin (DePaul).

5 True Sale of Receivables: A Purposive Analysis, Kenneth C. Kettering (New York LS).

6 Intent to Contract, Gregory Klass (Georgetown).

7 Rational Ignorance, Rational Closed-Mindedness, and Modern Economic Formalism in Contract Law, Shawn J. Bayern (Duke)

8 Analytical Jurisprudence and the Concept of Commercial Law, John Linarelli (La Verne).

9 The Sale of the Century and its Impact on Asset Securitization: Lehman Brothers, Stephen J. Lubben (Seton Hall) & Chip Bowles (Greenebaum Doll & McDonald).

10 Public Procurement: Focus on People, Value for Money and Systemic Integrity, Not Protectionism, Steven L. Schooner & Christopher R. Yukins (Geo. Washington).

[Frank Snyder]

March 30, 2009 in Recent Scholarship | Permalink | TrackBack (0)

Business Associations Limerick of the Week: Cheff v. Mathes

Muffler Cheff has great facts, although the facts do not really affect the opinion.  Holland Furnace, it turns out, was a thoroughly corrupt business that was also losing money.  Its means of selling furnaces was to send a crew over to people's houses to "inspect" the furnaces.  The inspectors would often find (or perhaps create) problems and then sell the unsuspecting homeowner a new furnace.  Arnold Maremont, who owned a muffler business (and a lot of modernist art), took an interest in taking over Holland furnace and started buying up shares.

Maremont had a reputation for buying corporations and then liquidating them.  The principals of Holland feared he would do the same to them or at least streamline their business model by selling furnaces the way he sold mufflers -- through retailers -- thus eliminating much of Holland's workforce.  Incumbent Holland management decided to use corporate funds to buy back Holland's stock from Maremont, a defensive measure known as greenmail.  Dissatisfied shareholders filed a derivative action, claiming the payments were improper because motivated by a desire to maintain control of the corporation rather than by the best interests of its shareholders.  

The trial court bought this argument, but its finding was reversed on appeal.  Although the trial court applied the right standard, management's conduct in this case was justified, in the court's view, by the real threat to the corporation's well-being posed by the prospect of Maremont's takeover.  The court deferred to Holland's management's business judgment as to the long-term best interests of the firm.  The deference was misplaced in this instance, because the fraudulent scheme described was discovered, leading to the demise of Holland Furnace.  

Cheff v. Mathes

Cheff, who controlled Holland Furnace,
Said, "Pay Maremont greenmail to spurn us."
The court was not peeved
Because Cheff believed
"That Maremont will buy us and churn us."

[Jeremy Telman]

March 30, 2009 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)