September 7, 2012
Bankruptcy Versus Contract - The Legal Version of Animal Face-Off?
When I was in law school, plenty of people told me to take Bankruptcy Law. Their pitch was something along the lines of "Bankruptcy Law trumps everything." I think someone even told me, "When God wants to do something, he looks at the Bankruptcy Code first." Of course, I didn't believe them. I didn't take Bankruptcy Law. And when all of the telecom-related bankruptcies erupted while I was practicing media and telecommunications law in Washington, DC, I learned a lot of bankruptcy law on the fly. And you know what? Those people in law school were right. Bankruptcy law really did beat everything! I was fascinated. I was awed! So, it should be no surprise that when I read of the recent rumble involving bankruptcy law, contract law *and* the U.S. Constitution, I was intrigued. And you should be, too. Prof. Scott Pryor over at the Faculty Lounge sets up the battle as follows.
Two clauses of Article I of the U.S. Constitution are relevant to the intersection of property, contract remedies, and bankruptcy in the American context. First, Section 10, clause 1 provides that "No State shall pass any Law impairing the Obligation of Contracts" while Section 8, clause 4 empowers Congress "To establish uniform Laws on the subject of Bankruptcies throughout the United States." Oh, and we can't forget about the Tenth Amendment, which, when it comes to the system of dual state-federal sovereignty in the United States, preserves (at least sometimes) the States from federal interference.
Taken together we can conclude that (i) states cannot impair remedies for breach of contract (i.e., cannot discharge contract debts) but that (ii) the federal government can provide for discharge of debts while (iii) neither can take away one's property and, finally, (iv) when it comes to debts of municipalities, the federal bankruptcy powers cannot interfere with them without the consent of their State.
So what? Let's consider the bankruptcy of the City of Stockton, California. Like many municipalities (and states, for that matter) Stockton owes its retired employees far more in pensions than it can hope to pay. (Check the news report here and see here for my previous post on the topic. For a slightly different take on the immediate cause of Stockton's financial crisis, check the NYT article here.)
Stockton filed bankruptcy to avoid paying the benefits it had contracted to pay but could no longer afford. But wait, the retirees argued, Stockton is an instrumentality of the State of California and, as we have seen, the U.S. Const. Art. 1, Sec. 10 specifically prohibits the states from messing around with contracts. While admitting that the federal government's constitutional bankruptcy power can discharge most contractual obligations, the retirees asserted that it cannot be permitted to do so in Stockton's case without contradicting the constitutional text. The irresistible force meets the immovable object.
You'll have to read the rest of Prof. Pryor's post to reach the exciting, but perhaps temporary, conclusion of Bankruptcy Law v. Contract Law. It's almost as exciting as Gorilla v. Leopard. Almost. (And if you're not familiar with the old Discovery & Animal Planet Series, Animal Face-Off, check it out over at Netflix. Hippo versus Shark was a personal fave. Online game version here.)
[Heidi R. Anderson]
Panel on Military Contractors at American University's Washington College of Law
Coming Wednesday, September 12, 2012 at American University's Law School:
A panel discussion featuring:
Laura Dickinson, Oswald Symister Colclough Research Professor of Law, George Washington University. Author, Outsourcing War and Peace: Protecting Public Values in an Era of Privatized Foreign Affairs (Yale Univ. Press 2011)
Capt. Chad Fisher, U.S. Army. Chief, Branch IV, Government Appellate Division, U.S. Army Legal Services Agency; counsel for the United States in Ali.
Lt. Col Peter Kageleiry, Jr., U.S. Army. Senior Appellate Attorney, U.S. Army Defense Appellate Division; counsel for the Defendant-Appellant in Ali.
Steve Vladeck, Professor of Law and Associate Dean for Scholarship, Washington College of Law
On July 18, the highest court in the U.S. military justice system—the circuit-level Article I Court of Appeals for the Armed Forces (“CAAF”)—issued the most significant ruling on the scope of U.S. military jurisdiction in the past 25 years. In its unanimous decision in United States v. Ali, 71 M.J. 256 (2012), CAAF upheld a 2006 amendment to the federal military code that authorizes the trial by court-martial of “persons serving with or accompanying an armed force in the field,” including civilian contractors, during most overseas (and some domestic) military deployments. In so holding, CAAF distinguished a long line of Supreme Court decisions rejecting military jurisdiction over civilians both because the defendant in this case is a non-citizen and because his offense took place during a “contingency operation.” This panel of experts—including the opposing counsel before CAAF in Ali—will debate the merits of the court’s decision and seek to assess its potentially significant implications going forward with regard to contractor liability, the future of military jurisdiction in general, and the power of the military over civilians in particular.
Here's the flyer
Here's the website[JT]
Welcome to the Blogosphere: Bill of Health
The Petrie-Flom Center is excited to announce our latest venture – the launch of a new blog, titled Bill of Health, edited by Petrie-Flom faculty co-director, I. Glenn Cohen, and Petrie-Flom executive director, Holly Fernandez Lynch. The blog will go live Wednesday, September 5, 2012, and can be accessed at http://blogs.law.harvard.edu/billofhealth/.
Our goal is to provide a one-stop shop for readers interested in news, commentary, and scholarship in the fields of health law policy, biotechnology, and bioethics. You can expect to find regularly updated posts reacting to current events, testing out new scholarly ideas, reviewing the latest books, and announcing conferences, events, and job openings. We also hope to cultivate a strong community of commenters, so that the blog becomes an interactive discussion forum.
A widely collaborative effort, Bill of Health features content from Petrie-Flom affiliates, as well as leading experts from Harvard and beyond. Institutional collaborators include HealthLawProfs Blog, the Yale Interdisciplinary Center for Bioethics, and the Robert Wood Johnson Foundation’s Public Health Law Research program at Temple. We’ve also lined up a stellar cast of bloggers so far, including:
Katharine Van Tassel
In addition, we’ll be joined by some great guest bloggers, including Mark Hall, Allison Hoffman, Adam Kolber, Jon Kolstad, Kristin Madison, Anup Malani, Arti Rai, Annette Rid, Chris Robertson, Nadia Sawicki, Seema Shah, Talha Syed, Dan Wikler, and Susan Wolf, as well as a several Petrie-Flom graduate student affiliates. Read more about our team here.
Please take a moment to stop by and check out Bill of Health
For more information, contact:
Holly Fernandez Lynch, firstname.lastname@example.org, 617.384.5475
September 6, 2012
My colleague, Alan Morrison (pictured), is keeping us up-to-date on the news from the world of the cotton trade. We posted on Monday about a Wall Street Journal article about an epidemic of broken contracts affecting the cotton trade. On Tuesday, the WSJ published this follow-up story.
In our last post on the subject, we suggested that it was irrational for parties to breach the contracts at issue because contracts law damages are created to eliminate any economic incentive to do so. We noted that the best explanation for why parties might nonetheless breach is a faulty enforcement mechanism. In this case, the problem is that the arbitral body associated with the International Cotton Association (ICA) is unable to enforce its awards in all cases.
On Tuesday, the WSJ reported that the ICA is now cracking down on parties that do not pay the arbitral body's judgments. Currently, such parties are placed on a "default list," warning other parties that these are entities that may not abide by their contractual obligations. However, the default list has been ineffective because a lot of entities in the trade continue to do business with entities on the default list. In addition, entities evade the consequences of their prior defaults by reorganizing their businesses or renaming them.
According to the WSJ, the ICA has set up a task force of investigators to try to establish connections between entities on the default list and new entities that are carrying on the defaulters' businesses under new names. Other possible solutions include new insurance vehicles to protect traders in the event of defaults or increased transparency in the arbitration process. Currently (and rather shockingly), the ICA provides only aggregate data about the number of cases and total awards. It also discloses default lists.
Is the Indiana Tech Offer an Offer to Enter Legal Relations?
The National Jurist reports on the soon-to-be-established Indiana Tech Law School's "unique early decision application process." The start-up law school will accept early applications from September 15th October 31st. Those who apply early will pay a reduced application fee, and the school pledges to get back to them with an answer within three weeks. According to Dean Peter Alexander, accepted students will have one week to withdraw their applications from other law schools and will pay a $300 deposit to Indiana Tech. "Any applicant who accepts his or her seat through the early decision program is also representing that they will not submit a later application to any other law school.”
My guess is that a student who applies to the early decision process is actually doing nothing more than locking in a safe school at a savings of $25, because of the reduced application fee. A student could apply early, get accepted, and make no deposit. She could apply to ten other schools and then come crawling back to Indiana Tech in April or really any time before classes start in August. My guess is there will still be a seat for her. Or she could make the deposit and still apply to other schools notwithstanding her representation that she was not doing so. And if she gets admitted at an accredited school, she will go there and lose the $325 she invested at Indiana Tech.
Indiana Tech might think that such conduct reflects poorly on the character and fitness of the student, but that would be a misreading of the nature of a contractual obligation (assuming that this is a contractual obligation), at least according to Justice Holmes. As this is not a relational contract but a one-off transaction, the deal here is nothing more than a promise to perform or to pay damages. Indiana Tech is better off to the tune of $325 for the student's fleeting interest in the Indiana Tech enterprise (less the administrative costs of processing the application, but those costs are mostly already built in). The student has made her Holmsian choice and has learned her first lesson in contracts law before even cracking a casebook.
September 5, 2012
Money Well Spent on “America’s Favorite Pastime”
As reported here by mlb.com, ESPN and Major League Baseball (MLB) have entered into an eight-year, $5.6 billion agreement, which includes TV and radio rights to MLB programming both in the U.S. and internationally, keeps baseball on the network through 2021 and includes a record-setting increase in annual rights fees (doubled to $700 million from $360 million annually).
And there was much rejoicing.
ESPN's president said, “Baseball remains the national pastime," but the truth is, baseball has long been eclipsed by other sports and then by video games based on other sports and then by video games about killing people, and then by video games about killing zombies. Meanwhile, there was recently talk of MLB becoming a wholly-owned subsidiary of Justin Bieber, Inc. Commissioner Bud Selig commented that "today is a very historic day for baseball." Taken in the context of a sport that is so hung up on statistics that every day is considered "historic" (Wow, Lou, that's the first time that a rookie switch-hitter has struck out looking from both sides of the plate in the same inning -- what a historic day!), Selig's comments seems to be downplaying the deal.
According to the New York Times, ESPN's rival networks, Fox, TBS, NBC and CBS, are still contenders in the baseball airing arena, as ESPN did not manage to grab the division series or league championship series games. There's still some history out there to be made.
[JT and Christina Phillips]
New in Print
Andrew S. Gold, Contracts with and without Degradation, 40 Cap. U. L. Rev. 657 (2012)
Daniel P. Graham, et al., Federal Circuit Year-in-Review 2011: Certainty and Uncertainty in Federal Government Contracts Law, 41 Pub. Cont. L.J. 473 (2012)
Woodrow Hartzog, Chain-Link Confidentiality, 46 Ga. L. Rev. 657 (2012)
Hugh Barrett McClean, Maj., U.S. Air Force. Defense Base Act Iinsurance: Allocating Wartime Contracting Risks between Government and Private Industry, 41 Pub. Cont. L.J. 635 (2012)
Michael D. Paul, Marsh USA Inc. v. Cook: One Final Step Wway from Light, 43 St. Mary's L.J. 791 (2012)
Margaret Jane Radin, Reconsidering Boilerplate: Confronting Normative
and Democratic Degradation. 40 Cap. U. L. Rev. 617 (2012)
Gabriel D. Soll and Tara L. Ward, "In- or Out-": The Jurisdictional Confusion over Challenges to Agency Decisions to In-Source Contracted Work, 41 Pub. Cont. L.J. 583 (2012)
Alexander Stremitzer, Standard Breach Remedies, Quality Thresholds, and Cooperative Investments, 28 J.L. Econ. & Org. 337 (2012)
Zheng Sophia Tang, Effectiveness of Exclusive Jurisdiction Clauses in the Chinese Courts--A Pragmatic Study, 61 Int'l & Comp. L.Q. 459 (2012)
Aaron E. Woodward, Maj., U.S. Air Force, The Perverse Effect of the Multiple Award Schedules' Price Reductions Clause. 41 Pub. Cont. L.J. 527 (2012)
September 4, 2012
Size May Not Matter, But Placement Does
The Wired article reports on research by Lisa Shu, a psychologist and Visiting Professor of Management and Organizations at Northwestern University's Kellogg School of Management. While earlier research showed that signing (as opposed to printing) our names generally promotes more honesty, Professor Shu's research showed that signing at the top of a document, before one started making factual statements, significantly enhances honesty. In some studies, signing at the bottom has the same effect on honesty as not signing at all.
Professor Shu thinks that most people want to be honest and that signing in advance gives them a reminder or a nudge. Some people will never lie and some people will lie in a cavalier way. The placement of the signature block affects the people in between. The challenge is how to operationalize Professor Shu's insights. If one wants people to sign documents before they fill them out, placing the signature block at the top is not necessarily effective.
It is dangerous to generalize based on one's own idiosyncratic habits. That caveat aside, I don't think I would sign a blank document before I had filled anything in. And I don't think that is because I went to law school. It's just an extension of the reasoning that leads me to sign personal checks only after I have filled in all the relevant information. So, even if the signature block were at the top of a document, I still would sign last.
Weekly Top Tens from the Social Science Research Network
September 3, 2012
Cotton Contract Breaches on the Rise
Commodity prices fluctuate. That's why parties lock in prices well in advance -- the protect themselves against unpredictable variations in the prices of raw materials. But as reported in the Wall Street Journal (sorry-subscription required), since 2010, up to 205 of cotton contracts have been either breached or renegotiated.
As the WSJ puts it, cotton may change hands as many as seven times on its route from "seed to sweater." Parties at various places along that transactional chain assume various positions to hedge against the risks of fluctuation. But if contracts are broken, they may be left without product with which to cover their positions.
The WSJ tells of a typical case in which a farmer pledged cotton at 75 cents/lb. but then claimed to have lost the contract (or not signed it) after the price climbed to $1.30/lb. According to the economic assumptions that inform contracts damages, the farmer should have had no incentive to breach his original contract. He may get $1.30 up front, but the other party would have to cover at the same price. It will sue him for the difference, leaving both parties in as good a position as they would have been in had the promise been kept. But both parties are actually worse off because of the litigation costs, and if the buyer had unavoidable transactions costs related to cover, those get added on to the damages the farmer had to pay. Moreover, as these are repeat players in an economic community, there are reputational harms for such sharp dealing, as indicated in the WSJ article through a quotation from a farmer who won a suit against a trading house. "I'll never sell to [them] again."
When prices dropped this year, buyers started walking away from their deals. The middlemen are getting squeezed at both ends.
So why are parties breaching their contracts? In part, it may be because the contracts are enforceable only through an international arbitral body whose awards are not always enforced.
Here are some interesting tidbits gleaned from the WSJ article:
- 242 arbitration cases were filed with the International Cotton Association in 2011, up from 73 in 2010
- So far this year, 175 new arbitrations have been filed
- The Association has awarded $317 million this year, up from $76.7 million in 2011
- Enforcement of such arbitral awards in problematic, with $251 million outstanding from 520 companies that owe on judgments going back to 1998
If I were an international cotton dealer who wanted to hedge against the possibility of a suit, I would just arrange to have all of my cotton shipped via the Peerless (right).
Contracts Limerick of the Week: Vassilkovska v. Woodfield Nissan
The case is pretty plain vanilla. Vassilkovaska bought a car from Woodfield Nissan, Inc. (Woodfield). A dispute ensued over allegedly misleding terms in the finance agreement, and Vassilkovska sued in state court. However, Vassilkovska had also signed a separate arbitration agreement. The terms of the arbitration agreement provided that Vassilkovska had to arbitrate any "dispute" she had with Woodfield and provided for certain exceptions. The court found that the exceptions covered every sitution in which Woodfield would sue Vassilkovska and none in which Vassilkovska would sue Woodfield. As a result, the court found that there was no consideration for Vassilkovska's agreement to arbitrate. She promised to arbitrate; Woodfield promised nothing.
In the process of selling a car,
Woodfield took things too far.
Of compelled arbitration,
The parties must be on a par.
The last line should not of course be taken to indicate that there must be "adequate" consideration; only that both sides must give consideration that induces a reciprocal promise.
A student asked why Woodfield would have opted for a separate arbitration agreement over an arbitration clause in a purchase or finance agreement. I admit that I am stumped. Can anybody think of a reason why there could be an advantage to a separate arbitration agreement?