October 12, 2010
Spiritual Exercises and the Contemporary Academy
To Protect and Disempower
I've been fiddling with my teaching materials this fall, substantially increasing the amount of time I devote to historical and theoretical materials, I've been juxtaposing "freedom of contract" cases like Lochner v. New York and Muller v. Oregon, with earlier cases restricting the contracting power of free African-Americans (Bryan v. Walton, 14 Ga. 185 (1853)) and married women (Goulding v. Davidson, 26 N.Y. 604 (1863)), with more modern incapacity cases (Ortelere v. Teachers' Retirement Fund; Ex parte Odem, 537 So. 2d 919 (Ala. 1988)) and recent consumer protection decisions. It's been a really enjoyable and fruitful conversation in class.
So I'm interested in the guest blogging that Timothy Sandefur is doing over at the Volokh Conspiracy blog. Sandefur is the author of The Right to Earn A Living: Economic Liberty And The Law and Cornerstone of Liberty: Property Rights in 21st Century America. He's one of the leaders of the movement to rehabilitate the old "freedom of contract" notion, and he's got some very interesting ideas. There's a very lively discussion in the comments. Check it out.
TV Commercials as Offers?
The folks at Chrysler are trying to sell trucks, and they're pitching a 60-day return-it-if-you-don't-like-it policy in a new commercial that raises some interesting contract law questions.
In Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116, (S.D.N.Y. 1999), aff'd 210 F.3d 88 (2d Cir. 2000), a popular teaching case -- the court held that a TV commercial encouraging people to collect "Pepsi Points" to get a Harrier fighter jet was not, as a matter of law, an offer, even if Pepsi was serious about giving away a Harrier. That's not (in my view) one of the stronger parts of the opinion, since a reasonable person would presumably think that if he or she collected and sent in 75 Pepsi Points, Pepsi would be obliged to send them a T-shirt. In this case, would customers reasonably think that if they buy a new Dodge Ram, they can bring it back for any reason?
Thanks to Celia Taylor (Denver) for the link.
Mortgage Foreclosure Volume Straining System
Apropos the previous post on Cogswell v. CitiFinancial Mortgage Co,, the crush of mortgage foreclosures is putting a severe strain on the system. Megan McArdle of The Atlantic offers some thoughts on the subject.
Surprise: Mortgage Transaction Goes Wrong
The buyer of a mortgage whose seller (Citi) failed to deliver the note caused the buyer damages as a matter of law, according to the Seventh Circuit in Cogswell v. CitiFinancial Mortgage Co., 2010 U.S. App. LEXIS 20490 (7 th Cir. October 5, 2010).
The breach portion of the case is interesting, as it discusses whether the sale of the mortgage by Citi necessarily included a duty (not expressed in the written agreement) to deliver the note. Because the buyer could not produce the note, it was unable to foreclose the mortgage. The court found that whether the contract required delivery of the note was a factual question, and remanded to the district court for a determination..
Next, Citi argued that even if it breached the agreement by failing to deliver the note, there were several alternative methods for the buyer to prove its ownership, so the breach did not cause the damages. Judge Diane Sykes, writing for a unanimous panel, noted that the buyer had litigated the foreclosure issue all the way up the Illinois state courts and lost because it could not produce the note. Under those circumstances, Citi’s breach caused the damages as a matter of law.
Happy Columbus Day!
October 11, 2010
Today in History -- October 12
1492 – Genoese explorer Christopher Columbus makes landfall in the Caribbean. Columbus is best known today as the namesake of the law school at Catholic University of America.
1693 – The first round of the witchcraft trials in the Court of Oyer and Terminer at Salem, Massachusetts – presided over by the Royal lieutenant governor and the Crown attorney – come to an end.
1773 – America’s first insane asylum – the Public Hospital for Persons of Insane and Disordered Minds – opens in Williamsburg, Virginia. Two hundred years later Justice Breitel will note, in Oretelere v. Teachers’ Retirement Board, that psychiatry has come a long way since them.
1793 – The cornerstone of Old East, the oldest state university building in the United States, is laid at Chapel Hill, North Carolina.
1823 – Charles Mackintosh sells the first of his newfangled waterproof raincoats. They become popular.
1870 – The president of Washington College, Robert Edward Lee, dies of a stroke at Lexington, Virginia. The college will honor him by adding his name to that of the school.
2001 – Former British Lord Chancellor Quintin Hogg, Baron Hailsham of St. Marylebone, dies at age 94.
Trapped Chilean Miners Contract to Share Proceeds of Selling their Stories
Do Noncompetes Discourage Workers from Improving their Productivity?
Over at Prawfsblog, Orly Lobel (San Diego) blogs about a new study she's done with her colleague On Amir (UCSD-Business). They're studying the issue whether imposing post-employment noncompete clauses on employees makes them less likely to spend time improving their skills since they won't have as much chance to exploit them. It makes some intuitive sense -- a noncompete makes an employer more willing to invest in training but would decrease the motivation for employees to improve their own skills. Reducing the ability of employees to leave for greener pastures may also make them less interested in excelling in their current job. That might mean that noncompetes aren't an unalloyed good for employers.
So what do Amir and Lobel find? The answers, it turns out, are complicated. The whole paper, Innovation Motivation: Behavioral Effects of Post-Employment Restrictions is worth reading. You can find it here.
Miller on Strategic Default
With the deflation of the housing markets, buyers who bought homes in the expectation their prices would rise have now frequently seen their "investments" go under water. With the recession, many simply can't afford the payments and default. But some of those who bet wrong on the market rise but who are affluent enough to afford the payments anyway are choosing to default on their mortgages, sticking lenders with real estate worth less than the outstanding mortgage balances.
In an article forthcoming in the Cornell Real Estate Journal, Strategic Default: The Popularization of a Debate Among Contract Scholars, Meredith Miller (Touro) takes a look at the moral and economic aspects of the problem, but argues that the focus on the morality or efficiency of individual transactions is misplaced. Instead, she argues that the problem is so widespread that the governnment should pursue a systemic solution. Here's the abstract:
A June 2010 report estimates that roughly 20% of mortgage defaults in the first half of 2009 were “strategic.” “Strategic default” describes the situation where a home borrower has the financial ability to continue to pay her mortgage but chooses not to pay and walks away. The ubiquity of strategic default has lead to innumerable newspaper articles, blog posts, website comments and editorial musings on the morality of homeowners who can afford to pay but choose, instead, to walk away. This Article centers on the current public discourse concerning strategic default, which mirrors a continuing debate among scholars regarding whether the willful breach of a contract has a moral element.
For those scholars that maintain that it is possible to describe and prescribe contract law with a general, unifying theory, the debate is primarily one between promise-based theories and economic theory. This debate between promissory and economic theory reflects a perpetual volley concerning whether contract law should reflect the primacy of morality or efficiency.
The argument of those that support strategic default reads like a case for efficient breach. Many of these commentators argue that the mortgage contract simply presents home borrowers with a choice: pay or surrender the property in foreclosure. If a homeowner is deep underwater, she is better off defaulting and the lender is no worse off relative to the bargain (after all, the lender agreed to foreclosure as a remedy). However, those who argue in favor of strategic default are counteracting a prevailing social norm that it is fundamentally immoral to willfully breach a contract. Many of the blog comments and even newspaper editorials have reflected a general sense that the homeowners who strategically default are acting shamefully.
The public discussion further mirrors the academic debate about whether encouraging efficient breach enables the greatest public good or, instead, undermines the very convention of contracting. On the one hand, strategic default serves as an example of how encouragement of breach of contract may lead to a breakdown of confidence in the marketplace and, in turn, could inhibit market activity. On the other, it is difficult to muster sympathy for lenders, whose imprudent loans are a large piece of the systemic problems that precipitated the housing crisis.
In the end, to the extent that questions of morality are nuanced and contextual, the example of strategic default elucidates the futility of either morality or efficiency as a unifying descriptive or normative theory of contract law. Indeed, it suggests that instead of focusing on individual contracts between borrowers and lenders, a more fruitful public discourse should be reframed to focus on appropriate systemic reforms to prevent the practices that played a part in devastating outcomes for the housing industry, families and communities. Because the concerns about strategic default – neighborhood depreciation and market collapse – are systemic, the solutions should be driven by those concerns, rather than shaming individual borrowers who decide to walk away.
Second CIrcuit Oveturns Dismissal in DiFolco v. MSNBC
The U.S. Court of Appeals for the Second Circuit has ruled in favor of former MSNBC entertainment reporter Claudia DiFolco (left) in her breach of contract action against the network. The decision is DiFolco v. MSNBC Cable, L.L.C., No. 09-2821-CV, 2010 U.S. App. LEXIS 20739 (2d Cir., Oct. 7, 2010).
A Manhattan district judge tossed the case for failure to state a claim, ruling that DiFolco had resigned her job and therefore could not complain of breach of contract. In dismissing the case, the district judge relied on several emails that were referred to in the complaint, although not included in the pleadings. Construing New York law, Senior Judge Roger Minor held that considering the emails on a motion to dismiss was proper, but disagreed that the emails showed conclusively that she had resigned.
A specimen of DiFolco's reporting on the Obama Inauguration parties is on YouTube.
Happy Birthday, Hans Kelsen
October 10, 2010
Today in History -- October 11
1614– Adriaen Block and 12 Amsterdam merchants petition the States General for a charter to found the New Netherland Co. The company will get a three-year charter to control all trade between English Virginia and French Canada. Its charter won’t be renewed because plans are underway for the even more ambitious Dutch West India Co.
1844 – Ketchup tycoon Henry John Heinz is born at Pittsburgh. He will start his career selling vegetables from a wheelbarrow at age 8.
1852 – Australia’s oldest university, the University of Sydney, is inaugurated. Three years later it will open the country’s first law school .
1872– Future U.S. Chief Justice (and Columbia Law School dean) Harlan Fiske Stone is born at Chesterfield, New Hampshire.
1899 – The Western League of Professional Base Ball Clubs changes its name to "American League," the first step in its ultimate plan to create a new major league to rival the National League.
1976 – George Washington, who has been dead for 177 years, is promoted to General of the Armies by Congress. He declines to comment.
2007 – With all indicators pointing to an extended period of explosive economic growth in the United States, the Dow Jones Industrial Average hits a record 14,198.10 points.
Weekly Top Ten
Simone Sepe's latest paper hasn't even been out a month, but it's already rocketed to the top of the list. Sepe (right) has previously focused on corporate law, but this paper is a welcome venture into more important territory--contract law. Following are the top ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the sixty days ending October 10, 2010
1 Good Faith and Contract Interpretation: A Law and Economics Perspective, Simone M. Sepe (Arizona)
2 Cracking the Code to Writing Legal Arguments: From IRAC to CRARC to Combinations in Between, Gerald Lebovits (St. John’s)
4 Regulating Systemic Risk, Steven L. Schwarcz (Duke) & Iman Anabtawi (UCLA).
5 Arbitration as Delegation, David Horton (Loyola-L.A.)
6 A Moral Rights Theory of the Private Law, Andrew S. Gold (DePaul)
7 The Conundrum of Covered Bonds, Steven L. Schwarcz (Duke)
8 Legal Opinion: The Right to Property from a Human Rights Perspective, Christophe Golay (Independent) & Ioana Cismas (Geneva Academy of International Humanitarian Law and Human Rights,)
9 Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S., Jennifer G. Hill (Sydney), Ronald W. Masulis (New South Wales-Business) & Randall S. Thomas (Vanderbilt)
10 Controlling Creditor Opportunism, Jonathan C. Lipson (Wisconsin)