April 24, 2010
Can a Discussion of Contract Theory Up Front Allay the Usual First-Year Angst About Consideration (and Everything Else)?
Posted by Jeff Lipshaw
After a fair amount of writing on contract theory, I've been assigned to teach contracts next year (for the first time since I taught the first semester of the full year offering at Wake Forest in 2005). I have been fiddling with the essay that follows, and asking myself whether its attempt to allay first year angst, and particularly that angst that seems to appear just after the second or third case on consideration, might actually allay angst. I invite comments.
Welcome to law school and to the year we will spend together learning contract law.
The law of contracts falls under the general category of "private law," meaning that agencies of the government (courts, legislatures, etc.) do not necessarily set rules for legal or illegal conduct (as, say, in criminal or environmental or civil rights law), but instead enforce the obligations of individual parties to each other. Tort law deals with non-voluntary obligations - the private rights of one party to seek recompense from another for a relationship that it's likely neither party ever wanted. Our relationship in a tort case, for example, arises from the fact that you hit me with your automobile, or the product you manufactured and sold to me was dangerously defective. Intentional torts aside, normally when there's an injury giving rise to a tort claim, we didn't mean for it to happen.
Contract law deals with enforcing the rights of the voluntary agreements of private parties. It is a subject with which many law students struggle. The subject matter is probably unlike almost anything you have studied; the classic "Socratic" method of teaching (remember Kingsfield in The Paper Chase taught contract law) can be disorienting; and there is a certain unreality to the whole enterprise. I'm going to tell you here why I think that's so, and I will repeat it when we get together for the first time.
The approach to the study of law through the reading of assembled cases, still the predominant method of instruction, and particularly in the first year, is something invented at Harvard by C.C. Langdell in the late 1800s. The teaching through cases, however, was about something more than instruction. The view of the great pioneers, Langdell and Samuel Williston, for example, was that law could be approached as a science - that the underlying principles of the law existed "out there" and could be discerned, as a botanist discerns the structure of a plant, by examination of the raw material, namely, judge's opinions. But think about what that means. We're pretty sure, in the physical sciences, there is indeed a coherent and regular structure waiting to be discovered. We are probably less sure about that in the social sciences. Whether it's true about "the law" is, in my mind, very much an open question.
Nevertheless, we still tend to teach subjects in the law in the way Langdell and others envisioned it: that there is a coherent structure out there waiting to be found. Moreover, our hope is that coherent structure is correct, that it leads to the right or just results. So the traditional course in contract law is to proceed through a series of cases that reveal to us how the law sees the formation, enforceability, execution, interpretation, breach, and recompense regarding private agreements.
But there's a troubling paradox in that presumption of coherent structure. As one noted contract law scholar has observed: "participants within the legal system use private law as an instrumentality to their subjective ends, while scholars try, objectively, to make sense of it as a system. Put another way, how can the legal result in a particular dispute be discoverable as a truth statement and, hence, constitutive of an objectively correct result, when parties themselves approach the law not as a matter of truth but as argumentation in favor of their preferred outcome." We'll explore this idea over the course of the year, but I think it's key to the usual "lost at sea" feeling that first year students have about the law generally, and about contract law specifically.
[UPDATE: I'm persuaded by a number of the comments, here and offline, to tone down the angst aspect. Jeremy Telman has an alternative and thoughtful pedagogical approach over at Contracts Prof Blog - suggesting he benefits from not having a "systematic" approach to contract theory. As I mentioned to Jeremy in an e-mail, my systematic theory (if you call it that) is that you really can't find a systematic theory within the doctrine. But the way the doctrine itself is presented presumes a systematic theory. That's the real dilemma. Anyway, the essay continues after the break.]
Case law arises when judges try to resolve disputes in which the parties have a stake in the action. Each party wants to argue that its position is the just and correct one. The law isn't the reality of the underlying transaction - it’s how someone who sees the transaction goes about making a model of it. Sometimes a particular model matches the reality well and sometimes it doesn't. Sometimes the model matches our intuition about the underlying game is really played, and sometimes it doesn't. Most importantly, sometimes one model gives an advantage to one person over another.
I suggest to you that learning contract law is a little bit like learning a game or a sport for the first time in at least two ways. First, you watch the sport and kind of think you understand it but in fact it has all sorts of rules and customs that turn out to be arbitrary, and you just have to learn them, not because there's a deep reason for them, but because they are the rules and customs. There's no inherent reason why you can't move a knight in chess along a diagonal, run to third base after you hit the ball in baseball, or receive a pass in soccer if you are the only offensive player between a defender and the goalie. We will see rules like that in contract law.
Second, rules in a game can be arbitrary, but they usually need to be coherent. In other words, the rules need to fit together and not contradict each other. What we will see as we study contract law is that many times the rules of contract law are NOT coherent; they do contradict each other.
So we find ourselves playing the contract game, and frustrated as hell when the game rules seem to be both arbitrary at times and not coherent at times. Arbitrary: did the offeree accept the offer in exactly the terms proposed by the offeror? (Under "classic" approaches to contract law, if not, it is an ineffective acceptance.) Not coherent: Was this an enforceable contract or a gratuitous promise? (Under "classic" approaches to contract law, this requires that there be something called "consideration" and there are at least three or four different rules, not always consistent, for making that determination.) (In England, barristers are not allowed to sue clients for their fees. Why?)
I am going to propose a working hypothesis that I hope dispels some of the usual "first year contracts class" angst, but it means engaging in some hard thinking about both the practice and theory of law. Here’s the proposition in theoretical terms: The reason we get frustrated is that when we play (i.e. practice) the contract law game, like any game, we very much want it to be coherent. But in reality the contract is an attempt to model an understanding in language. As the psychologist and cognitive scientist Steven Pinker observes, reality is continuous and flowing, but language is digital. Our thoughts and understandings contain pictures and concepts and metaphors, but, by and large, the medium of contract law is words and sentences. Moreover, reality presents us with situations all the time that appear to our minds as paradoxes and contradictions that the digital medium of language doesn't seem to be able to resolve.
In short, contracts, besides being games we play, are models of something else. In physical science, two physicists each propose a model of an atom. Physicist Alice’s model looks like a solar system, in which the electrons revolve around the nucleus. Physicist Bob’s model looks like a pomegranate, with the electrons stuffed into it like seeds. Some models are better than others; some models conflict with each other; the beauty of many models lies in the eye of the beholder. If we are using the pomegranate model to explain the atom, talking about orbits and quantum jumps isn't going to make a lot of sense. We will see similar conflicts in the way contract law wants to characterize (or, in my words, model) the underlying transactions. Does any contract act as a perfect model of the underlying transaction? The answer to that seems intuitive - like any other kind of model, a lot is going to depend on the complexity of the thing it's trying to model! And if it's a perfect model of a really complex thing, maybe it's not a model any more!
I’ll propose just one example of the theory and practice implications of the model problem, and then we’ll begin the course. This is going to involve three “hypotheticals” (hypotheticals or “hypos” are stories law professors invent to demonstrate a problem or a distinction).
Hypothetical #1: You have been accepted to the Ginormous State University Law School. The school demands you pay your tuition before you start class as the way of demonstrating that you plan to attend. You send a check to the school for $35,000. Do you have a legally binding and enforceable contract to attend the law school?
Hypothetical #2: You have always been an admirer of the Ginormous State University Law School, and have amassed a great fortune. You send a letter to the dean, stating that you intend to endow a professorial chair in the amount of $3,500,000. Immediately after sending the letter, you have second thoughts. Do you have a legally binding and enforceable contract to endow the chair?
Hypothetical #3: In Hypothetical #2, the dean receives your letter and, knowing that the endowment will permit $175,000 per year to be drawn for the payment of salary, hires the renowned contracts professor William Sammiston, who moves to Ginormous City and takes up his duties. You have had second thoughts about endowing the chair. Do you have a legally binding and enforceable contract?
Hypotheticals 1 and 2 have clear answers under a model of contract law often called the “classical view.” The model turned out not to accord with at least some legal scholars’ and judges’ intuitions when applied to Hypothetical 3, at least in part because the model’s results seemed to be arbitrary and unjust. The result was that they proposed a new model. Which model is the law? Are they mutually exclusive? Could both models be the law at the same time? If we apply the new model in Hypothetical 3, are we then also required to keep the system coherent by applying it in Hypotheticals 1 and 2?
To make matters even more confusing, not only are judges looking for the right model, but often one model gives an advantage to one side or the other. The clients in the dispute would like the law to see the issue the same way they do. So the lawyers in the case argue that, if the judge has a choice of models, the one that ought to be applied is the one that favors the lawyer’s client! And it helps in that argument to show that the application of the model isn’t arbitrary and is coherent!
In law school, you will learn hundreds, if not thousands, of rules and models. Your practice will require that you know how to work within them, and your technical success as a lawyer will depend on your skills in recognizing and applying them. You’ll find, however, that the frustrations caused by the imperfect match between language and reality don’t end in law school. From time to time, you and your clients will continue to be frustrated as hell when the rules that seem to apply to your situation also seem arbitrary and incoherent. That’s when you will step back and consider the theory as well.
And now we will dig in.
Accountant Sanctioned For Conflict Of Interest
The Idaho Supreme Court affirmed sanctions imposed by the State Board of Accountancy against an accountant who had engaged in a personal relationship with a client while jointly advising the client and her spouse in the preparation of a joint tax return. The relationship had started before an extension was obtained and the return filed. The ethical complaint was filed by the spouse. The board ordered that the accountant pay a fine and costs. The board also required the accountant to take four hours of ethics training.
The court found that the board had reasonably concluded that the conduct ran afoul of ethical rules governing conflicts of interest. However, the board was not entitled to attorneys fees for the prosecution of the charges of misconduct. (Mike Frisch)
April 23, 2010
Suspension For Domestic Battery
An Illinois hearing board has recommended a two-year suspension without automatic reinstatement of an attorney for two incidents of domestic violence as well as misconduct in a probate case. The hearing board described the behavior:
On June 7, 1997, Respondent got into an argument with his wife while in a Batavia, Illinois, restaurant, El Taco Grande. Respondent, who was intoxicated at the time, slapped his wife on the right side of her face causing redness and swelling. Batavia police officers were called to the scene and Respondent’s wife signed a complaint prepared by the officers.
At the time of this incident there was a criminal statute in Illinois, 720 ILCS 5/12-3.2(a)(1) outlawing domestic battery. By the actions described above, Respondent knowingly and without legal justification caused bodily harm to his wife. Accordingly, on June 16, 1997, the State’s Attorney of Kane County filed a complaint against Respondent...in the Circuit Court of Kane County, Illinois. The complaint charged Respondent with committing the offense of domestic battery in violation of 720 ILCS 5/12-3.2(a)(1). On July 31, 1997, Respondent pleaded guilty and was ordered to pay a fine to the clerk of the Circuit Court of Kane County in the amount of $200.
Illinois Supreme Court Rule 761(a) requires that Respondent report his conviction to the Administrator of the Attorney Registration and Disciplinary Commission in writing. At no time has Respondent notified the Administrator of his conviction in writing.
On February 13, 2007, Respondent got into an argument with his 17-year-old daughter while at their home in Aurora, Illinois. Respondent squirted his daughter with a water bottle and in an ensuing struggle, when his daughter attempted to wrest the bottle from him, Respondent slapped her and scratched her neck. Respondent’s daughter stated that she would telephone the police. Respondent threatened to "beat the shit out of" her if she called the police. Respondent’s daughter then telephoned the police.
After the police arrived, Respondent’s daughter signed a sworn statement attesting to the facts of the incident set forth above. At that time, an Aurora police officer prepared and signed a complaint against Respondent, placed him under arrest, and transported him to the Aurora Police Department, where he was held overnight.
At the time of this incident there were criminal statutes in Illinois, 720 ILCS 5/12-3.2(a)(1) and 720 ILCS 5/12-3.2(a)(2), which outlaw domestic battery and outlaw making contact of an insulting or provoking nature, respectively. By the actions described above, Respondent knowingly, and without legal justification, caused bodily harm to his daughter. Accordingly, on February 14, 2007, the State’s Attorney of Kane County filed a two-count complaint against Respondent...in the Circuit Court of Kane County, Illinois. The complaint charged Respondent with violating 720 ILCS 5/12-3.2(a)(1) and 720 ILCS 5/12-3.2(a)(2). Respondent’s daughter declined to cooperate with the Kane County State’s Attorney’s Office and on August 16, 2007, the State dismissed Respondent’s criminal matter nolle prosequi.
I have omitted from the above-quoted findings the references to exhibits and case information. (Mike Frisch)
Disturbing Behavior Alleged
The Illinois Administrator has filed a complaint charging a lawyer with inappropriate actions towards clients. As usual, the complaint is pled in great and specific detail. One charge:
..[the client] went to Respondent’s Springfield home and signed the paperwork hiring Respondent’s firm to represent him.
At all times alleged in this count, Respondent had a fiduciary duty to [the client] which required that he not abuse his position of authority and trust, and that he place the best interests of his client above his own self-interests.
...Respondent left a voice message on [the client's] home telephone. In the message, Respondent asked [him] to call him and let him know the date of a doctor’s appointment. Respondent further said in the message, "if you get an hour or two, and if you like, you can come over. I’m home today and this weekend and I can talk to you about how I lost weight and you can help me with something, too." Respondent asked [the client] to return the call to his home telephone.
...[the client] telephoned Respondent’s home. During the conversation with [him], Respondent began talking about a sexual experience he once had had, and described it to [the client] in explicit detail. Respondent told [the client] that he would like to have the same experience with [him]. [The client] told Respondent that he was having trouble understanding what Respondent was saying, and he ended the conversation.
...The conversation...disturbed[the client]. He told his wife about the conversation, and they decided to call Respondent back. [The client] telephoned Respondent a few minutes later, and [his] wife listened to the conversation with [him] on the speaker phone. During the conversation, [the client] told Respondent he had not understood what Respondent was saying and asked Respondent "what the other thing was that he [Respondent] wanted me to do." Respondent told [the client] that he was "interested in experiencing something and that [the client] would not have to reciprocate or anything." When [the client] asked what Respondent was talking about, Respondent again related in explicit detail an experience of oral sex that he had once had.
[The client] told Respondent that he was "not that way" and was not interested in such an encounter with Respondent. [The client] ended the conversation.
...Respondent left a voice message on[the client's] cell phone, stating that he was "not that way" either, that he just wanted to have the experience, and that if [he] knew of anyone who would like to have such an experience, to give them Respondent’s telephone number.
...[the client]still disturbed by the tenor of Respondent’s messages, then hired new counsel.
And from a client in a workers compensation matter:
Approximately two weeks after their first meeting, Respondent began calling [the client] approximately twice a week. Each time Respondent telephoned, the conversation began with a discussion of business and ended with Respondent telling [the client], who lived in Jacksonville, Illinois, that if she came to Springfield, he would take her out for something to eat, fill up her gas tank, give her money, and massage her back.
...Respondent telephoned [the client] and told her he had called to see how she was doing. Respondent offered to give her money and told her that if she came to Springfield and "bent over," he would massage her back, legs and feet, pay for her gasoline, take her to dinner and give her $100. He told her he could "rock her world." Respondent’s comments disturbed [her].
...[the client] reported the conversation to a member of the law office’s clerical staff. [Another firm attorney] then discussed the matter with [the client] and [he] took over handling her case.
One thing that disturbs me is that the complaint identifies both of the clients by name. I have been contacted by Illinois bar complainants twice in the past who have expressed dismay at being publicly identified in an Illinois bar complaint. (Mike Frisch)
False Claims To Obtain Legal Business Leads To CensureThe Colorado Presiding Disciplinary Judge approved a conditional admission and publicly censured an attorney who made "false and/or misleading statements regarding his law firm's eligibility for inclusion in E.I. Du Pont de Nemours and Company's Diverse Legal Supplier Program." In addition, the attorney made false biographical representations in an e-mail concerning his transition team experience. (Mike Frisch)
Admission Denied For Domestic Violence
The Nebraska Supreme Court has denied the application for admission of a 2008 graduate of the University of Nebraska Law School. The State Bar Commission had recommended denial of the application.
The applicant had been a police officer prior to attending law school. He had an intimate relationship with a woman who twice filed for but was denied a protection order against him. He later arrested her for driving under the influence. She claimed he had waited in his car outside a bar she was in in order to follow her. She also said that he used his authority to intimidate her. He claimed he pulled her over without knowing it was her. His sergeant backed up her story and noted prior complaints against him for hanging around the bar in question, which was not his assigned beat. He also appeared as the witness against her at a license revocation proceeding, demonstrating what the presiding officer in that case called "horrendous judgment."
There were other charges of sexual assault involving other women. In one instance, he was acquitted by a jury of third degree sexual assault. Another victim was an attorney with the county attorneys office, who sought a protection order that was granted for one year. A fourth victim (who was a law school classmate) was granted a domestic abuse protection order.
The court concluded:
[The applicant's] behavior demonstrates a pattern of abhorrent behavior towards women. Three women in the past 9 years have sought protection orders against him. He has not admitted that his behavior is inappropriate and has not demonstrated any remorse. The Commission was correct in determining that [he] does not meet the standards of character required for admission to the bar and that he should not be allowed to take the state bar examination.
April 22, 2010
Montana Unauthorized Practice Commission Dissolved
The Supreme Court of Montana has responded to a petition by its Commission on the Unauthorized Practice of Law by entering an opinion and order dissolving the commission effective April 20, 2010. The original petition had proposed rule changes that were submitted for public comment. The court noted that an array of persons and organizations had filed "voluminous, thoughtful comments...Indeed, we cannot recall a matter on which there has been more comment by members of the public on a matter before [the court]."
The committee had responded to the comments by filing a motion to dissolve under an agreement that has complaints of unauthorized practice handled by the state Attorney General's Office of Consumer Protection. Lawyers who are licensed elsewhere will be referred to the Office of Disciplinary Counsel by the Attorney General.
The court concluded (contrary, I believe, to the holdings of many state high courts) that it lacks the authority to regulate or even define the unauthorized practice of law. Further, the parameters of unauthorized practice are not clearly defined ("...we are mindful of the movement towards nationalization and globalization of the practice of law, and with the actions taken by federal authorities against state attempts to localize, monopolize, regulate, or restrict the interstate or international provision of legal services.").
The court commended the commission for it's "excellent, and often frustrating, work..." along with the State Bar and Attorney General for establishing a "better way for handling complaints of unauthorized practice."
Vouching For Police Witness Credibility Leads To Reversal Of Conviction
The New Jersey Appellate Division has reversed a conviction for third degree possession of a controlled dangerous substance, concluded that the trial court had improperly allowed the defendant to be impeached by a 17 year old prior conviction. The court also held that the prosecutor had improperly vouched for the credibility of a police officer in summation:
While we agree with the State that the proescutor's remark here that a police officer had no incentive to lie is less egregious than the comments in [prior cases] that the officers would be fired if they lie, such distinction is of no moment. The remarks in question are of the very same character as those the [New Jersey] Supreme Court subsequently deemed improper in [a later case]. Therefore, the State's effort to minimize the harmful effect of the prosecutor's remarks by comparing them to those of [the earlier cases] is unpersuasive.
The remarks were made in response to the argument of defense counsel that the police version of events made no sense, to paraphrase: What kind of idiot would the defendant have to be to approach two people who were clearly identified as police and drop coccaine right in front of them? Defense counsel promptly objected to the prosecutor's " police had no motive to lie" rebuttal. (Mike Frisch)
Life Imitates Art
The Maryland Court of Appeals has affirmed a conviction for rape and related offenses, concluding that the trial court had improperly admitted DNA evidence at trial. The court's opinion begins as follows:
The writers for the NBC television series Law & Order Special Victims Unit would be hard pressed to author an episode full of more issues invoolving DNA than found in this case in which the Anne Arundel County police , in 2006, matched DNA of the Appellant...retrieved from his discarded McDonoald's cup to the DNA found in two separate rape victims' forensic medical examinations in 1994 and 2002.
The court rejected claims predicated in the Maryland DNA Collection Act as well as the Fourt Amendment.
Chief Judge Bell, joined Judge Greene, dissented, and would hold that the court majority improperly relied on the doctrine of abandonment. The dissenters would find that a warrant was required. (Mike Frisch)
April 21, 2010
A Small Claim
The Wisconsin Supreme Court imposed a public reprimand of an attorney who had "overlitigated" a small claims case, took a position that created a conflict of interest by arguing that he, but not the clients, should not be sanctioned for litigation misconduct and pursing frivolous contentions. The court described the conduct as found by the hearing referee:
Attorney...continued to pursue the small claims litigation——over a bill of less than $500——despite clear warnings from the trial court and the court of appeals that his arguments were "silly" and that further discovery would be "frivolous on its face." Indeed, at one point the circuit court advised Attorney... that if he pursued discovery on his third motion for sanctions the court would "anticipate putting you [Attorney] in jail for it." The referee made the following findings:
The Findings clearly indicate that Attorney...was very aggressive in this case and refused to accept the decision of the trial court and decisions of the Court of Appeals. His action in the case was clearly frivolous. He had a fixation on his interpretation of the Wisconsin Consumer Act and would not tolerate any other position but his. In the disciplinary hearing he spent more time on substantiating his position in the small [claims] case than defending himself on the five counts in the Disciplinary Complaint. He clearly violated Count 1, and I so find.
We adopt these findings.
The court sustained a number of other misconduct findings, including:
...we agree that Attorney...violated ethical standards when he accused defense counsel of harassing [his clients] M.O. and R.O., pilfering them financially, and denying their day in court. For example, Attorney...stated, "Defendants' counsels had to resort to fraud, perjury, threats of violence, and intentional misstatements to obtain their void judgments." A review of the record reflects that both Attorneys Drosen and Stein denied making any threats of violence towards Attorney.... Attorney...claimed that Stein "shook his fist" in the [his] face of Attorney...and "mumbled" words about the prospects of collecting money from his client. Attorney Stein denied this occurred.
The referee agreed that by describing the alleged conduct as "threats of violence" Attorney...mischaracterized to the court what had occurred. The referee stated, and we agree that:
The statement made in the motion for sanction[s] [filed] on [July 5, 2005] that the defense attorneys had made threats of violence against [him] has no foundation.
A three-judge panel concluded that a Virginia attorney had violated Rules 1.2(a) and 1.4(b) but determined that the appropriate disposition was a "dismissal for exceptional circumstances."
The order contains a handwritten description of those circumstances: (1) the "nature of the situation caused high emotions that had an affect on [the attorney's] judgment;" (2) no prior complaints; (3) the attorney removed the client's name from litigation promptly after the client had objected; and (4) the client is pursuing a civil remedy.
High emotions and a civil suit hardly strike me as exceptional circumstances to avoid discipline in the wake of findings that two ethics rules were violated. (Mike Frisch)
Commentary on the Goldman Case Turns to Contract Theory
Posted by Jeff Lipshaw
Erik Gerding over at Conglomerate continues his fine work on the Goldman matter, with posts on the question I discussed yesterday, the social utility of derivative contracts that don't act as a hedge to a real transaction, and what might constitute a misrepresentation in arm's-length negotiation between the investors and the Portfolio Selection Agent, ACA.
As to the first, I think Erik has framed the issue well. I'm curious about Lynn Stout's proposal (which I've not read) to make unenforceable over-the-counter derivatives where neither party has an insurable interest in an underlying transaction. Would the unenforceability of the transactions really end them? I'm thinking of Lisa Bernstein's iconic study of diamond brokers in Manhattan who seal their deals with mazal v'broche (luck and blessing) and don't want courts to interfere. Would an exchange really be able to deal with counter-party risk in a hedge transaction where one side is a speculator and the other is a real hedger? Moreover, I don't know enough about the standardized kinds of derivatives to know if they work to hedge most of the common exposures, but I do know that there are generally accepted accounting principles (FAS 133 - Accounting for Derivative) that require the separate reporting, in essence, for derivative transaction that are pure speculation, and those would apply to public companies regardless whether the derivatives were OTC or exchange-traded.
As to the second, I'm curious. Erik notes Goldman has asserted that the investors in the synthetic CDO, ABACUS, were able to negotiate at arm's-length with ACA, the portfolio manager. He then observes, "But to bargain at arm's length you need to know that is what you are doing.* In other words, you need to know if the party who is making requests to you ("I want this collateral - not that.") is on your side or not." I'm on record as believing that one side can create misrepresentation by half-truth even in an arm's-length negotiation between two sophisticated parties (or at least that the "anti-reliance" provisions in the agreement don't bar such a claim as a matter of law). I think, however, the idea that the CDO investors are entitled to some disclosure of the motives or agendas of the other side in an arm's-length negotiation without a trace of fiduciary obligation is beyond the pale. If I understand Erik's position most charitably, it's that it wasn't clear at the outset that the ACA-investor relationship was arm's-length. I think parties in arm's-length negotiations are entitled to the presumption that the other side isn't lying, but beyond that, it's caveat emptor! In other words, if you go into any deal thinking, without any express agreement to that effect, that the broker, the issuer of the fairness opinion, the transfer agent, or the Portfolio Selection Agent is "on your side," you're a fool, and deserve whatever consequences your foolishness entails. And that's even before reading this in the Risk Factors:
- Goldman Sachs does not provide investment, accounting, tax or legal advice and shall not have a fiduciary relationship with any investor. In particular, Goldman Sachs does not make any representations as to (a) the suitability of purchasing Notes, (b) the appropriate accounting treatment or possible tax consequences of the Transaction or (c) the future performance of the Transaction either in absolute terms or relative to competing investments. Potential investors should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to ascertain the suitability of the Transaction, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with the Transaction as they deem appropriate to evaluate the merits and risks of the Transaction.
- Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.
- Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore. Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the issuer thereof, any Reference Entity or any obligation of any Reference Entity.
As I said, I'd like to be a fly on the wall when the investors get deposed on the question whether they thought about those provisions!
And here's an agency question: if ACA was an "agent," who was the principal? Goldman? The issuer? I suspect it wasn't the investors! I'm thinking about all those ordinary house hunters who think that the Selling Broker (i.e., the Realtor® they think is their agent because they walked into an office and got shown houses) is their agent, when legally, unless the buyer is smart enough to retain the Realtor® as a buyer's agent, the Selling Broker is a sub-agent of the Listing Broker (i.e., the broker who listed the house for the seller), arguably with fiduciary obligations running back to the seller!
UPDATE: This case is a godsend, given that my syllabus for Securities Regulation starting in forty-five minutes is "Elements of a 10b-5 Claim." So further to Erik's "whose side is ACA on" question, doesn't the iconic Santa Fe Industries v. Green case apply? Recall what the Supreme Court did - it refused to allow a securities claim where the allegation was that the company in a Delaware short-form merger employed a scheme or artifice to appropriate the difference between the $150 offer price and the higher value of the assets. The company had gotten a Morgan Stanley fairness opinion of $125 per share, so it was adding a premium on top of that. There was full disclosure, so the offer wasn't deceptive. Was it manipulative? The Supreme Court said, perhaps, but we're not going to federalize a state law fiduciary breach claim based on the facts here. Could you have a Rule 10b-5 claim based on a fiduciary breach? Yes, but it would have to be based on a material non-disclosure.
It seems to me that Erik's "whose side are you on" is the same kind of bootstrapping that Santa Fe prohibited. The real question is whether ACA had any kind of fiduciary obligation to the investors, and requiring the disclosure of "motivations," whether of Goldman or of ACA, is equivalent to making a securities claim out of the "motivations" of Santa Fe in tendering for its own shares at a price that might have been shortchanging its own shareholders.
[*UPDATE: Erik has clarified that the GS "defense documents" made it clear that ACA and the CDO investors were able to negotiate at arm's-length with Paulson. I'm scouring the documents now, but it looks like ACA did indeed negotiate (whether forcefully or not) with Paulson, but I don't think the CDO investors negotiated with Paulson - that would significantly weaken the SEC's case! In each case, I think my point about the "who is on your side" issue still stands.]
April 20, 2010
An update from the California Bar Journal on the to date unsuccessful efforts of a UCLA professor to get access to bar passage information:
A UCLA professor’s ongoing effort to obtain data about bar examination applicants hit a wall last month when a judge ruled that he has no right to the information. San Francisco Superior Court Judge Curtis E.A. Karnow denied a petition by economist and law professor Richard Sander, finding that turning over information about would-be lawyers who take the bar exam would reverse “decades of legal development.”
Sander was joined by the First Amendment Coalition and former State Bar governor Joe Hicks in a lawsuit that asks for bar records for use in evaluating law school admission policies. They are seeking applicants’ race, law schools attended, year graduated from law school, bar pass rate, law school grades and LSAT scores. The Committee of Bar Examiners and the Board of Governors rejected Sander’s request in 2007 and the Supreme Court declined to hear the matter last year. The bar groups contend that releasing the data would violate their promises to law students of privacy and limited use of the records.
Sander wants to use the data to test his “mismatch theory,” which concludes that affirmative action actually hurts minority students. He believes students of color who are admitted to top schools because of race-based standards have trouble competing with non-affirmative action students. They would do better, he believes, at less competitive schools. The First Amendment Coalition is seeking the records for use by scholars, researchers, government officials and members of the public.
Karnow split the case in two, but because he determined that the public (including Sander) is not entitled to the data, the second phase – to address privacy and burden issues – became moot. He found that the public has no right to State Bar admissions data under common law, Proposition 59 or a new California rule of court.
Karnow affirmed an earlier tentative decision after a hearing where James Chadwick, representing the First Amendment Coalition, cited several court rulings that he said supported his contention that Sander is entitled to public documents. But the judge said Sander and the other plaintiffs “are unable to articulate a principled definition of the notion save and except an overbroad definition that includes all information in the possession of a public agency.”
Although Sander argued that he has a right of access to data about applicants for the bar exam, Karnow said that traditional First Amendment rights do not extend to a variety of non-adjudicatory items, such as grand jury transcripts, preliminary drafts of orders and judges’ private deliberations and conferences. He said the question becomes whether the data sought by Sander “fall[s] within the scope of documents in the possession of the judicial branch traditionally subject to public disclosure. They plainly do not.”
He also rejected Sander’s argument that Prop 59, the 2004 public records initiative, requires public access to every document in possession of the courts. Such an interpretation represents a “stunning shift” from what the judge called the traditional test. “Sander provides no evidence,” he wrote, “that the voters meant the proposition to have such a remarkable reach in modifying the state Constitution and decades of legal development.”
Finally, the judge addressed Rule of Court 10.500, enacted by the Judicial Council at the request of the legislature to require the judicial branch to allow inspection and copying of judicial records. Despite the council’s express rejection of expanding the rule to cover the State Bar, Sander asked the court to interpret it broadly. “It is a heady suggestion, but I must decline,” Karnow wrote. The underlying legislation did not require the Judicial Council to enact rules governing the bar, he said, and even if it did so, a trial court does not have the ability to re-write a rule.
The State Bar’s counsel, Michael von Loewenfeldt, said he was pleased but unsurprised by the ruling. “California case law regarding access to judicial records is very clear,” von Loewenfeldt said. “Public access is limited to documents that reflect decisions of the courts or that were submitted to the courts during an adjudicatory process. The internal admissions database of the State Bar contains highly sensitive and confidentially collected information about all bar applicants. It is the antithesis of a public record; indeed, lawyers who pass the bar cannot even learn their own bar examination scores.”
Sander said he will appeal Karnow’s ruling.
"Committed Relationship" Creates Appearance Of Impropriety
The Florida Judicial Ethics Advisory Commission recently opined on the following issues:
1. Whether an impropriety or appearance of impropriety would exist if a judge were to serve as the chief judge in a judicial circuit while being in a committed relationship with one of the general magistrates serving in that circuit when the judge serving as the chief judge had no role or influence in the hiring of said general magistrate.
2. If the answer to question number one is "yes," whether the impropriety or appearance of impropriety continue to exist if the judge's first act upon becoming chief judge in the circuit was to execute an administrative order formally transitioning all supervisory authority over all of the general magistrates to another circuit court judge.
The committee's reasoning:
We conclude that the judge's contemplated conduct as described in issues one and two above violates Fla. Code Jud. Conduct, Canon 2. Notwithstanding the judge's good-faith intention to properly perform chief judge duties, there is a significant likelihood that reasonable persons would perceive that the performance of the chief judge administrative duties would be influenced by a close personal relationship with a general magistrate -- particularly with regard to decisions concerning the general magistrate's continued employment and compensation.
We further conclude that the appearance of impropriety would not be dissipated by the entry of an administrative order by the chief judge delegating supervisory responsibilities over the general magistrate to another judge. Pursuant to Fla. R. Jud. Admin. 2.215(b), the chief judge is responsible to the chief justice of the supreme court for the proper exercise of the administrative duties set forth in Fla. R. Jud. Admin. 2.215. That responsibility would remain even if the chief judge assigned a portion of those duties to another judge. Furthermore, the chief judge would have the power to rescind or modify the administrative order at any time.
We find support for our decision from Fla. JEAC Op. 02-02. There, our committee determined that it would be a violation of Fla. Code Jud. Conduct, Canon 2 for the spouse of the administrative judge of the family division to be employed by the court administrator's office as a case manager in the family law division. We found that the pivotal issue was the appearance of impropriety that could occur as the result of the fact that the spouse's employment as case manager was directly involved and related to the family law division and its operation. We noted that although the inquiring judge indicated that the judge would have no supervisory control or decision-making authority over the spouse's employment, promotion or termination, it was unclear to the committee how an administrative judge of the family law division would have no input regarding the duties and performance of a family law division case manager.
The inquiring judge suggests a willingness, upon election to the chief judge position, to immediately request the Supreme Court to reassign the oversight duties associated with general magistrates to another judge. We cannot speculate as to whether the Supreme Court would grant such a request and, accordingly, decline to address this issue.
The opinion is No. 2010-08 and is linked here. (Mike Frisch)
Judge Removed But Not Disciplined For Workplace Incivility
The North Carolina Supreme Court has ordered the removal of an elected district court judge who had already resigned from office. The court concluded that the judge had engaged in willful misconduct and disqualified him from future judicial office. He also was deemed ineligible for retirement benefits.
The initial issue involved the judge's service as a member of various corporate boards of directors. That issue was first raised with the judge at an education program for new judges. The judge sought to amend the rules that prohibited such service but was rebuffed by the Supreme Court. He nonetheless continued to serve on corporate boards and received significant compensation. An investigation was initiated by the Judicial Standards Commission. The commission concluded (and the court here agreed) that the judge made untrue statements for the purpose of misleading the commission's investigation.
The court also considered an incident between the judge and the Chief District Court Judge. The chief judge denied his request to relieve him of a court assignment to attend a corporate board of directors meeting. The judge went to her chambers where he "became agitated and raised his voice." He called her "a media hound" and a "political hack" who should "leave [him] the hell alone." The judge made accusations of improper conduct by the chief judge and caused her to feel threatened. The court stated:
Standing alone, Respondent's words and actions during the confrontation...did not necessarily merit a recommendation for discipline by the Commission. While a district court judge must respect the Chief District Judge's duties and authority, the nature of the relationship between coworkers may at times produce episodes of contention, disagreement, and frustration. Despite the inappropriate nature of Respondent's actions during his confrontation with [the Chief Judge], discipline is not normally imposed for a single incident of improper behavior towards a coworker.
The web page of the Ohio Supreme Court reports:
The Supreme Court of Ohio’s Board of Commissioners on Grievances & Discipline has issued an advisory opinion about whether a lawyer’s notes must be turned over to a client when requested.
Opinion 2010-2 addresses the following question: “Are a lawyer’s notes of an interview with a current or former client considered client papers to which the current or former client is entitled upon request?”
The opinion finds that it depends upon whether “the notes are items reasonably necessary to the client’s representation” pursuant to Prof. Cond. Rule 1.16(d), which requires the lawyer to exercise his or her professional judgment.
For example, the opinion states that: “A lawyer’s notes to himself or herself regarding passing thoughts, ideas, impression, or questions will probably not be items reasonably necessary to a client’s representation. … But, a lawyer’s notes regarding facts about the case will most likely be an item reasonably necessary to a client’s representation.”
The opinion also states that a lawyer may ethically redact portions from the note not reasonably necessary or prepare a note for the client that contains only the necessary items needed for representation.
Goldman: Sorkin Gets It Right on the Facts and the Issue
Posted by Jeff Lipshaw
Regardless of one's stance (normatively speaking) on the the Goldman Sachs civil suit, it's tough to find reporting or commentary that gets the nuanced facts right. And because everything depends on the metaphor (see Erik Gerding's recent post - oh, and by the way, isn't cool to see how the way our minds categorize and analogize makes such a difference in the real world?), seeing that entire industry as a kind of casino makes a difference in things like duty and materiality. So kudos today to Andrew Ross Sorkin in the New York Times for getting it right. (Erik is also quoted extensively.)
Moreover, Sorkin frames what I think is the real issue: is there a social value to this kind of derivative trading? That's a question whose answer I don't know. I know there is social value, for example, in currency derivatives. It allows companies that want to be conservative lock in their profits against currency devaluation, while foregoing the possibility of speculative currency gains. It does mean, however, that the conservative company either needs to have a counter-bettor that is either another company with a similar but reversed conservative position, or a pure speculator. So that's the question: what, if any, is the conservative strategy to lock in non-casino gains that products like synthetic CDOs serve?
April 19, 2010
Actions Speak Louder Than Words
The Pennsylvania Supreme Court reinstated an attorney who had been disbarred in 1997 (retroactive to 1994) for a criminal conviction that involved having a client misrepresent herself as a different client and continue that deception through plea and sentence. He had been sentenced to probation and community service. An earlier petition for reinstatement had been denied.
After disbarment, the petitioning attorney "put his savings into opening a Christian school to provide a quality education to children in impoverished neighborhoods." He has served as headmaster of the school since 1995 and "guided hundreds of students." He also has been involved in community advocacy for the poor. His witnesses included attorneys, a judge, the assistant DA who prosecuted him and two former Pittsburgh Steelers-- Franco Harris and Mel Blount.
If reinstatement is about demonstrating present good character through actions rather than words, the petitioner has made the showing of moral rehabilitation necessary for return to practice. (Mike Frisch)
Making Matters Worse
The Pennsylvania Supreme Court adopted the recommendation of its Disciplinary Board to suspend an attorney for one year.
The attorney had been informally admonished and ordered to pay the complainant $2,000. The attorney sent the check to the wrong address (where the complainant had not been for some time) and then delayed payment, replacing the first check with one that had been written on insufficient funds. The attorney was aware of the correct address. The attorney also told disciplinary counsel that the payment had been made and had failed to advise that the check had not been negotiated.
Eventually, the complainant got paid the full amount plus $20, but not in time to avoid this sanction. (Mike Frisch)
The Georgia Supreme Court agreed to a hearing panel reprimand of an attorney who had allowed a paralegal to conduct a real estate transaction in which her clients were the sellers. The paralegal included a phony charge of $2,000, which was embezzled.
The attorney had failed to supervise the transaction and the operation of the firm's accounts, which were only reconciled on a quarterly basis. The attorney admitted that her trust account records "did not reflect at all times the exact balance held for each client and third person."
The real estate transaction was not properly closed which led to a foreclosure notice and adverse credit reports. The attorney addressed these problems and repaid the amount that the paralegal had stolen. The paralegal was convicted of offenses that included felony theft. (Mike Frisch)