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Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

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Saturday, April 11, 2009

Pawn business holding up in recession

A The big U.S. banks may be on federal life support due to subprime loans, but the consumer "nonrecourse secured loan" business (a/k/a the pawn shop) appears to be holding up pretty well.  Cash America International, Inc., the nation's largest chain of pawn shops, which also has a substantial payday loan business, has announced that its first quarter earnings for 2009 should "significantly exceed" its earlier guidance.  Cash America attributes the strong performance to an uptick in its pawn business and reduced losses in its payday loan) usiness.

The company is still looking for lower year-over-year earnings, though, because it got a big boost last year from tax stimulus checks in 2008, and no equivalent payments are expected this year.

[Frank Snyder]

April 11, 2009 in In the News | Permalink | TrackBack (0)

Relive your 1L Contracts class at home! With better looking people!

A After what has seemed to most Contracts professors an unconscionably long time, the TV series The Paper Chase has finally come out on video.  Technically, it's called "season one" although there was only one season on the original CBS program in 1978-79.  Three additional seasons were run on Showtime starting in 1983, which allowed the protagonist, "Mr. Hart," to graduate Harvard in only four years.

On the Amazon web site (linked above) you can see a riveting clip dealing with (among other things) whether one who performs the service requested by a reward offer can recover if he was unaware of the reward.  The growing tension among the students who offer different answers is . . . palpable. 

It doesn't get any better than this.

[Frank Snyder; h/t Scott Burnham]

April 11, 2009 in Film | Permalink | TrackBack (0)

Friday, April 10, 2009

Bailouts may lead to fiduciary troubles

Aaa The federal bailouts of General Motors, Chrysler, and various banks may raise some interesting questions of fiduciary duties. The Wall Street Journal is reporting today that the federal government is pressuring the automakers to reach deals with bondholders before the feds put the companies into managed bankruptcies. The Treasury is offering creditors 15 cents on the dollar, far less than the 70 cents some senior lenders think they would get in bankruptcy.

Aaa What’s interesting is that four TARP-funded banks are among GM’s biggest creditors. Among them, J.P. Morgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley own $4.3 billion of GM debt. Since taxpayers are on both sides of that transaction, it may not matter much to the public how much GM money gets transferred over to the TARP-funded banks. After all, if the banks get more money from GM, they’ll need less from Uncle Sam; if they get take less money, GM will need less federal money.

But while it probably makes little difference to taxpayers, it makes a huge difference to the shareholders of the banks and the automakers. The four banks’ shareholders, chief among whom is billionaire Warren Buffett, might get $645 million if they took the Treasury offer, but as much as $3 billion if they stick through bankruptcy.

Which leads to the fiduciary duty questions. The GM and Chrysler boards of directors owe fiduciary duties to their companies. But companies that approach insolvency also can acquire fiduciary duties to creditors.  So the GM and Chrysler directors will have to walk a fine line; helping the feds to force a bad deal on creditors might trigger fiduciary claims by creditors.

Meanwhile, the boards of the four TARP-funded banks have their own fiduciary duties. They’re obliged to act in their interests of their own institutions, and that generally means they should try to maximize the amount of money they get out of the car companies. If the banks let the feds talk them into taking less than they otherwise would have received, they may face their own fiduciary duty claims from shareholders.  Stay tuned for how this plays out.

[Frank Snyder]

April 10, 2009 | Permalink | Comments (0) | TrackBack (0)

More on Webb v. McGowin

Aaa_2 When lumberman James Greeley McGowin died in 1934, his heirs stopped payments that the old man had been making to Joe Webb.  The resulting case, as everyone who reads this blog knows, is Webb. v. McGowin.

Bbb_2 Two of the heirs who cut off the pension were Norman Floyd McGowin (left) and Earl Mason McGowin (right).  Floyd succeeded his father as the president of the W.T. Smith Lumber Co., while Earl (a Rhodes Scholar) was a long-time company vice president.  Both were Oxford graduates, Alabama state legislators, and prominent conservationists.  As it happens, the Forest History Foundation has some oral history interviews of Floyd and Earl.  They don't mention Webb, but they do give some sense of what things were like at the mill in the 1920s.  Turns out that walking around the plant to interact with the employees was one of old man McGowin's regular activities:

He was a man who would get up early every morning. He loved to walk all over the property. He would walk into each of the mills each morning and then come back home for breakfast. He made a habit of that. He could call the name of any employee there. Even to this day [1976] people all speak of him.

And in some respects Chapman, though completely owned by the lumber company (including the churches and schools) had some progressive ideas, including mandatory health insurance for the workers.

The [physician's] office and the equipment facilities were, of course, donated by the company. But there was a medical fee, as I remember, of about seventy-five cents a month for a single man and a dollar and a quarter a month for a married man and his family. That gave them full medical attention. There were no further costs except for medicine. The doctor was also available for house calls.

Incidentally, the McGowin family still seems to be flourishing in Chapman.  Maybe some of you folks in Alabama might want to investigate to see if there are any oral history memories of Webb around, hmm?

[Frank]

April 10, 2009 in Famous Cases | Permalink | TrackBack (0)

Consequential damages for breach of insurance contracts

Aaa Some interesting things have been going on in the Empire State with respect to consequential damages for breach of an insurance contract.  A new client alert from lawyers Laurie A. Kamaiko and Steven P. Nassi of New York's Edwards Angell Palmer & Dodge LLP, Consequential Damages: New Developments In New York Case Law Regarding An Insured´s Right To Recover Extra Contractual Damages, offers a rundown of developments.

[Frank Snyder]

April 10, 2009 in Commentary | Permalink | TrackBack (0)

Thursday, April 9, 2009

Courtney Love to sue over alleged looting of Cobain estate

A Singer Courtney Love is apparently getting ready to sue a group of people over money she says was looted from the estate of her dead husband, Kurt Cobain. (Left: The couple and their daughter in 1993).

Love says some $550 million was stolen from the $800 million estate of the former Nirvana singer, and plans to sue for breach of contract, fraud, breach of fiduciary duties, RICO, and mortgage fraud.

[Frank Snyder]

April 9, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

State says it won't pay on interest rate swap

A The state of Alabama says it isn’t going to pay J.P. Morgan Chase & Co. any money it allegedly owes under an interest rate swap deal between its school authority and the bank.  The swap was apparently part of a bond issue deal put together for the Alabama Public School & College Authority. The state says the deal wasn’t lawful under state law and is asking the U.S. federal court in Montgomery to rescind the contract.

The state's threat to refuse to pay has raised concerns with bond rating services.  S&P has put th PSCA on a negative credit watch.

[Frank Snyder]

April 9, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Breaching conditions of an open-source license

A Last December the U.S. Court of Appeals for the Federal Circuit ruled in Jacobsen v. Katzer, 535 F.3d 1373 (Fed Cir. 2008), that a user who violated the conditions of a web-linked open-source software license was liable not only for breach of contract but for copyright violations.  That decision raises a lot of interesting issues, which are dealt with by lawyers Jonathan Moskin, Howard Wettan, and Adam Turkel from the New York office of White & Case LLP in Open Source After 'Jacobsen v. Katzer.'

[Frank Snyder]

April 9, 2009 in Recent Cases | Permalink | TrackBack (0)

Wednesday, April 8, 2009

911 call for breach of Chinese food warranty

A A nice little exam question was on the news in the DFW area this morning.  Seems a woman ordered some fried rice from an A&D Buffalo's restaurant (left) in Fort Worth.  She ordered extra shrimp with the rice.  After picking up her order and leaving the store, she returned to complain that there were not enough shrimp in the fried rice.  When the restaurant refused to give her either more shrimp or refund her money, she called 911 to request a police officer.  The 911 tape is here.

This raises a nice little Article 2 question.  First, of course, takeout food is a good covered by Article 2 of the Uniform Commercial Code.  (Five points if you spotted that.)  Failing to provide the extra shrimp was probably a breach by the restaurant.  The question is what remedy the woman can get (besides a visit from a police officer)?  That depends, of course, on whether she rejected the food or whether she accepted it and then attempted to revoke her acceptance.

Did leaving the store without examining the rice constitute acceptance?  Obviously if she ate any of the rice it would constitute acceptance, since that would constitute an act inconsistent with the restaurant's ownership of the meal.  If she didn't, though, would taking the goods home without having inspected them constitute acceptance?  Or would she have a reasonable time after getting the meal home to inspect the rice and reject it?  If her reasonable inspection time hadn't run, she probably made an effective rejection, since she returned almost immediately after discovering the missing crustaceans.  That would mean that the restaurant was wrong not to take back the fried rice and give her a refund.

But if it was unreasonable not to inspect the goods before taking them out of the store (perhaps because there's no way for the restaurant at this point to tell whether she actually ate the shrimp and is now acting in bad faith) then she's accepted them.  We'd have to take into consideration the usual custom and practice of people who get takeout food from Chinese restaurants, and perhaps such things as whether health codes permit return of food that has left the restaurant.  In any event, if she accepted the goods she had no right to return them unless (1) she accepted the goods on the reasonable assumption that the restaurant would cure the failure (on which we might want to take evidence of prior course of dealing), or (2) the lack of extra shrimp substantially impaired the value of the whole deal to her.  (Discuss!).

If the fried rice was accepted and the diner did not have the right to revoke, specific performance probably wouldn't be available, since her remedy at law would presumably be adequate.  That remedy would amount to contract damages.  She paid $1.62 for the extra shrimp, which means her reliance and restitution damages would probably each be $1.62.  Her expectation damages might possibly be higher if the the fried rice with the extra shrimp was an unusually good bargain that she couldn't get at that price elsewhere.  Now all she needs to do is find a lawyer to bring the case.

Who says contract law is too complex and cumbersome for average people to use?

[Frank Snyder]

April 8, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

When relational contracts go bad

Aaa TAaawo major players in the technology field are going toe-to-toe in Delaware chancery court over reciprocal licensing agreements for each other’s technology.  NVIDIA Corp., which says it has a license to use Intel Corp. processors in its “MCP chipsets,” was sued last month by Intel (complaint here).  Intel is seeking a declaratory judgment that NVIDIA has no right to use its processors in NVIDIA products

NVIDIA last week responded. Its answer claims that back in 2004 each party licensed the other’s technology.  The goal, it says, was to allow each company to compete head-to-head against the other in the growing field of graphics processing.  Now that NVIDIA’s products are trouncing Intel’s in the marketplace (says NVIDIA), Intel is using the litigation to try to regain a competitive advantage. In its counterclaims argue that the litigation is part of Intel‘s effort to “eliminate a competitive threat.”  NVIDIA has filed counterclaims (here) for, among other things, breach of contract and breach of the duty of good faith.

[Frank Snyder]

April 8, 2009 | Permalink | TrackBack (0)

Tuesday, April 7, 2009

Good faith effort, no guarantees

This is almost certainly April Fool's joke, but it's a good story that raises a number of issues and will certainly get students' attention.  It beings like this:

In Stuttgart, Germany, a court judge must decide on a case of honorable intentions in a situation where a man hired his neighbor to get his wife pregnant.

See if you can spot the mutual mistake issue . . .

[Frank Snyder h/t Wayne Barnes]

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

Employee bonuses as "unjust enrichment"

Aaa Some contract law types have floated the idea of "unjust enrichment" law as a means of clawing back compensation paid to employees at failing firms.  A union-affiliated investment advising company is now raising just that theory in a call to Bank of America to go after some of the $3.6 billion in employee compensation that Merrill Lynch & Co. paid to employees in December 2008, just before its acquisition by BAC.

CtW Investment Group, in an open letter to BAC directors, is demanding that the company recoup individual bonuses of over $1 million paid to 696 Merrill employees.  CtW (sic) argues:

[T]hese bonus payments, which came at the expense of Bank of America and its shareholders, constitute “unjust enrichment” under Delaware Law. The Delaware Supreme Court has defined unjust enrichment as “the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.”  Schock v. Nash, 732 A.2d.217,232 (Del. 1999).

The Schock opinion is here.

[Frank Snyder]

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

Closed or open?

Over at PrawfsBlawg, Colin Miller is mulling over the value of the "open everything" exam, and getting some interesting comments.

[Frank Snyder]

April 7, 2009 in Teaching | Permalink | TrackBack (0)

Ah, that's probably why he became an American citizen

Aaa Rock drummer Mick Fleetwood and four others are suing a Portland (Me.) lawyer after they lost a contract dispute with the British Broadcasting Co.  Lawyer Paul McDonald represented Fleetwood (left -- yes, sadly, he really is that old) and his company, Bee Load, Ltd., in a suit against the BBC over the rights to archived music estimated to be worth as much as $100 million.  They lost.

The British-born Fleetwood claims his American lawyer never told him that under British law he would be personally responsible for the $4 million the BBC spent litigating the case.

[Frank Snyder]

April 7, 2009 | Permalink | TrackBack (0)

Business Associations Limerick of the Week: Revlon v. MacAndrews & Forbes

Ron Perelman, cigar-chomping CEO of Pantry Pride, wanted to acquire Revlon.  Revlon's CEO, Michel Bergerac, did everything in his power to prevent the acquisition.  The case is a great vehicle for teaching defensive measures, because Revlon's efforts to escape Perelmans' grasp were extensive: we've got a poison pill, a stock buy-back, a white knight, and a lock-up involving a no-shop provision, a cancellation fee and a crown jewel transaction. After several rounds of bidding, Revlon locked up with Forstmann Little.  The latter would acquire the company. The security of the deal was enhanced through the no-shop provision, a hefty cancellation fee and an option to purchase Revlon's key divisions (the "crown jewels") at a discount.  


Pantry Pride sought to enjoin the transaction.  The Delaware Supreme Court found that, when management has determined that the corporation is going to be sold, its duty is to maximize the sales price.  Fiduciary duties to other stakeholders must now be subordinated the duty of getting shareholders the greatest possible bang for their buck.  The court thus adds a heightened level of scrutiny in the context of defensive measures.  Just months before Revlon, the court had decided Unocal, in which it permitted an exclusive self-tender to fend off a (two-tiered, front-loaded and potentially coercive) tender offer from T. Boone Pickens.  There, the court determined that Pickens' offer was a threat to the corporation and that management had taken reasonable and proportional measures to counteract the threat.

Here, however, because Revlon was now up for sale and the lock-up with Forstmann precluded further bids that could have benefitted shareholders, there was a fiduciary breach and the transaction was enjoined.

Revlon v. MacAndrews & Forbes

If you put your firm up for sale
And entice a White Knight with a grail,
Lock-ups are out.
In this heavyweight bout,
Shareholder rights must prevail.

[Jeremy Telman]

April 7, 2009 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, April 6, 2009

Maybe the foxes are now in charge of the henhouse

At failed insurer AIG, the top individual bonus recipients got $3 million each, which was enough to get death threats and their own special piece of legislation from the United States House of Representatives.  Turns out, though, lots of other folks have been getting lots of money from failed financial institutions -- even folks who are responsible for helping to clean up the mess.

A According to the New York Times, the president’s Chief Economic Advisor, Lawrence Summers, earned a nifty $5.2 million from a major hedge fund last year, even though he was there only one day a week and is described really as "a student" asking "lots of questions" and getting "a valuable insight into the practical realities of Wall Street."  [Ed. note:  My students are wondering if there are more of those kinds of internships available.  I told them you have to go to Harvard.]  On his off-days, Summers, says the Times, "earned $2.7 million in speaking fees from Wall Street companies that received government bailout money," including Goldman Sachs, Citigroup, J.P. Morgan, and Lehman Brothers.

The same story notes that two members of the president's national security team, Michael Froman and Thomas E. Donilon, also made tidy sums out of the busted institutions.  Froman, the deputy national security advisor for international economic affairs, earned $7.4 million last year for his work at Citigroup, including a year-end bonus of $2.25 million that the president has called "shameful."  Like AIG executive Jake DeSantis, whom we mentioned here, Froman isn't returning the bonus, but is "working on" giving it to charity.  (DeSantis, who got $700,000 from AIG, was vilified in the reader comments on the Times story; no word on how they'll view Froman's $2.25 million).  Meanwhile, Donilon not only earned $3.9 million as a partner at O’Melveny & Myers, representing (among others) Citigroup, Goldman Sachs, and Apollo Management ("a private equity firm in New York that specializes in distressed assets and corporate restructuring"), but is also going to be getting a pension from Fannie Mae, where he worked for six years.

And the really big winner is . . .

Aaa . . . (surprise!) one of the leading business figures who campaigned for creation of the the Troubled Assets Relief Program and now serves a member of the president's economic team:  Warren Buffett.  The Sacramento Bee looked at public filings and concluded that the World's Wealthiest CEO might also be the biggest individual beneficiary of TARP funds.  Buffett's Berkshire Hathaway Co. (of which he owns about half) owns major stakes in several TARP-funded banks, including Wells Fargo, Goldman Sachs, US Bancorp, American Express, and Bank of America.  A whopping 30 percent of Berkshire’s publicly disclosed stock holdings are in TARP institutions—investments that might have become entirely worthless had the companies been allowed to go into bankruptcy rather than be bailed out.  Indeed, Buffett bet on enactment of TARP to actually add another few billion to his holdings in the troubled institutions while the program was being debated.

Perhaps coincidentally, the former CFO of General Re Corp., a Berkshire Hathaway subsidiary, was sentenced last week to eighteen months in prison for her role in the conspiracy between GenRe and AIG to manipulate AIG's balance sheets, a scam that cost AIG more than half a billion dollars.  AIG, as it happens, was GenRe's biggest client

[Frank Snyder]

April 6, 2009 | Permalink | TrackBack (0)

Weekly Top Ten

Ssrn Two new papers hit our top ten list this week, Ethan Leib's Contracts and Friendships, which debuts at number 3, and a timely piece from Steve Schooner and Christoper Yukins on one of the lurking problems in the recent stimulus packages, which checks in at number 8.  Following are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending April 5, 2009.  (Last week's rank in parentheses.)

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

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

3 (-)  Contracts and Friendships, Ethan J. Leib (UC-Hastings).

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

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

6 (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)

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

8 (-)  Tempering ‘Buy American’ in the Recovery Act -- Steering Clear of a Trade War, Steven L. Schooner & Christopher R. Yukins (Geo. Washington).

9 (6)  Intent to Contract, Gregory Klass (Georgetown).

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

[Frank Snyder]

April 6, 2009 | Permalink | TrackBack (0)

. . . and still more bonus news

Law.com has a story today on the boom in litigation relating to executive bonuses, which is going both ways.  Shareholders, public officials are going after companies that pay bonuses they promised, while employees are going after those that aren't paying what they promised.

[Frank Snyder]

April 6, 2009 | Permalink | TrackBack (0)

Add "rising prosperity," delete "free markets" and "rule of law"

Aaa At last November’s G-20 summit in Washington -- where the leaders unanimously pledged themselves to continue free trade in spite of the looming recession -- the group included the following passage in its closing communique:

We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems.”

A new year, a new meeting.  And a new closing communique:

We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.

As Reuters notes, this version drops the “free” out of “markets” and pulls back on the “commitment.” It also drops the references to “rule of law,“ “private property,“ “efficient” regulation, and “open trade and investment.”   Perhaps coincidentally, the World Bank recently released a report showing that 17 of the G-20 nations, led by the U.S., have adopted new protectionist measures against foreign trade.

[Frank Snyder]

April 6, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Another Take on Bonuses

This was sent to me by Valpo Law alumnus, Jeffrey Gordon, whose blog can be found here.

Non Sequitur

Lots of ink is now being spilled over the sanctity of contracts, which seems to cover executive compensation but not the compensation of ordinary employees.  There is a piece on Salon.com by Glenn Greenwald.  There is another by Dean Baker over at the Los Angeles Times.  And more from Joel Wendland at Political Affairs.net.

[Jeremy Telman]

April 6, 2009 in In the News, Labor Contracts | Permalink | Comments (0) | TrackBack (0)