PropertyProf Blog

Job Posting: Director of Property Rights Initiative at New America

The non-partisan think tank New America has a new job posting that might be of interest to property-minded folk. Details are at the link below. The website describes the position, in part, as follows:

"New America seeks a director for a new initiative devoted to the study of, and advocacy for, property rights. The individual we seek will already have substantial experience in the field of property rights, as a global development professional, civil servant, journalist, or academic. He or she will also be a strong, clear writer and editor, with a desire not only to advance the state of property rights research, but also to parse such research for a non-specialist audience, in the United States and around the world. The successful candidate will also have a good understanding of the impact of new technologies on property rights, which will be a particular focus of the initiative.

"The director of the initiative will have substantial voice in shaping it...."

http://newamerica.jazz.co/apply/DjVy7a/Director-Of--Property-Rights-Initiative

 

Newman on the Economics of Indigenous Property Rights

Dwight Newman (Saskatchewan) has posted The Economic Characteristics of Indigenous Property Rights: A Canadian Case Study (Nebraska Law Review) on SSRN. Here's the abstract:

Legal and economic scholars have increasingly drawn attention to the impact of property rights issues on economic prosperity for Indigenous communities around the world. In the context of a constitutional provision entrenching Indigenous rights in a state whose resource industries have an international strategic significance, Canadian courts have been and are currently engaged in a process of creatively developing the parameters of various Indigenous rights, including Indigenous property rights. This Article will argue that in doing so, they have developed certain characteristics on those property rights that seemingly undermine Indigenous communities’ own opportunities to make economically beneficial choices concerning uses of their own lands for resource development. The Article will ultimately suggest that this case study raises concerns about the idea of courts focused on public law considerations being positioned so as to develop the private law characteristics of Indigenous property rights. To do so, focusing first on the Supreme Court of Canada’s landmark Aboriginal title decision in the Tsilhqot’in case, Part II of this Article engages first in the complex legal doctrinal task of trying to unpack certain aspects of just what the Court actually said on Aboriginal title and its parameters. Part III builds upon that description of the nature of the Aboriginal title property right and related writing by economic scholars to consider the economic implications of characteristics of that property right, which exhibits — relative to what would have been possible with different drafting of the judicial rules — uncertainties of scope and incentivization of attempts to create further uncertainty, simultaneous imposition of roles to multiple decision-makers on uses of the property and of surprisingly fragmented ownership characteristics, and significant restrictions on alienability of property rights. These characteristics may lead to significant economic consequences both in the context of Indigenous communities contracting with outsiders (such as with resource development proponents) and in the context of members’ own use of the land. The latter parts of Part III try to show the practical consequences for specific resource developments that might be considered by Indigenous communities, such as in the context of a mining development. Part IV, engaging with broader law and economics scholarship on the efficiency of common law adjudication processes, tries to offer some explanations of why the courts are developing these rights in ways that have these economic characteristics, in part by showing how the context in which they are operating is distinct from traditional common law contexts in which scholars have shown why courts have developed legal doctrines that fit more closely with economic efficiency. Part V tries to offer some policy responses that could help to promote the development of more economically functional property rights for Canadian Indigenous communities. Although the particular discussion is situated within Canadian legal doctrine, it will also conclude by referencing broader implications, both for American resource investors and for analogous contexts elsewhere in the world, including for the possibility that courts are not best situated to develop the shape of Indigenous property rights when their adjudicative processes are structured in certain ways.

The Takings Clause and the Contracts Clause: Friends or Foes?

I’ve been doing a lot of research lately on how property law and the law governing debt recomposition interact—specifically in the context of the Puerto Rican debt crisis. Two major concepts that keep coming up in my research are the Takings Clause and the Contracts Clause.

Property law professors routinely teach eminent domain and Takings Clause concepts in class. In fact, it’s rare to attend a property law conference these days without at least several panels being devoted to such topics. But, I’ve not spent much time thinking about the Contracts Clause—or how it’s different from/similar to the Takings Clause.

Let me make this a little more concrete [BEWARE: this is going to be long-winded] . . . the Supreme Court recently struck down Puerto Rico’s Recovery Act. For those who haven’t been following this as obsessively as I have, Puerto Rico has been going through a bit of a debt spiral of late (to the tune of about $72 billion). Rather than waiting for Congress to do something about it, back in June 2014 Puerto Rican lawmakers decided to take things into their own hands and passed something called the Public Corporation Debt Enforcement and Recovery Act. The new law essentially created a bankruptcy-like process for the island to restructure its debt (I am summarizing, of course. For a more in-depth discussion, the good folks over at CreditSlips have some great descriptions and analysis).

Naturally, the island’s bondholders didn’t greet this new law with open arms. A group of them quickly filed a lawsuit in late summer 2014 arguing that the Recovery Act was unconstitutional. They raised a number of claims, including that the Act was preempted by the U.S. Bankruptcy Code. Now, despite the way oral arguments seemed to go, on June 13, 2016 SCOTUS struck down the Recovery Act in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust et al., holding that it was preempted by the federal bankruptcy code (specifically, Section 903).

But the part that got me thinking didn’t have anything to do with the Bankruptcy Clause—instead, I got interested in some of the other claims that the bondholders made, but that were not decided by the Court. They asserted in their complaint that “The operation of the Act, as enacted by the Commonwealth and signed into law by the Governor, threatens to improperly impair Plaintiffs' rights . . .  in contravention to . . .  the Takings Clause, and the Contract Clause.” See Amended Complaint, Franklin California Tax-Free Trust et al., 2014 WL 4954576 (D. Puerto Rico) (Trial Pleading). So, basically, modifying the creditor’s debt would violate the Contracts Clause and the Takings Clause—so Puerto Rico can’t do it – because both constitutional rights apply—or something like that—Right?

THE CONTRACTS CLAUSE

The Contract Clause (Article I, Section 10, Clause 1) states that “[n]o state shall . . . pass any . . . law impairing the obligation of contracts . . . .”

By its very terms, it only applies to the states (i.e., feds, this isn’t a problem for you). The Contracts Clause has a storied history—ebbing and flowing from importance to obscurity. In the early days of the republic (often called the Critical Period, being that time during which the Articles of Confederation were in effect) it was precisely due to a fear of state governments interfering with the rights of creditors that the provision was ultimately included in the federal constitution. As background, after the American Revolution many citizens of the new country found themselves horribly in debt. As a result, various state legislatures began passing laws to ease their pain (which creditors didn’t like very much). Drafters of the constitution found these “invasions into the contracts of private parties” harmful to commerce and the general course of business so they decided to put a limitation in place. See Ogden v. Saunders, 25 U.S. 213, 354 (1827) (for some angry commentary by Chief Justice Marshall).  As with so many other provisions in the federal constitution, numerous state constitutions contain parallel contracts clauses as well.

THE TAKINGS CLAUSE

The Takings Clause (in the Fifth Amendment), on the other hand, provides that “private property [shall not] be taken for public use, without just compensation.”

Going back to the early days of the Republic, Thomas Jefferson and his buddies who were opponents of a strong central government advocated for the Bill of Rights (which contained the Fifth Amendment), but they weren’t the first to come up with the idea of protecting private property from the government. The Magna Carta had a similar idea going on, and the concept was already fairly prominent in various state constitutions during the period of the Articles of Confederation. 

Initially, the Takings Clause only applied to the federal government (i.e., states, not your problem). Chief Justice Marshall stated in Barron v. Mayor and City Council of Baltimore, 32 U.S. 243 (1833) that “The provision in the fifth amendment to the constitution of the United States, declaring that private property shall not be taken for public use, without just compensation, is intended solely as a limitation on the exercise of power by the government of the United States; and is not applicable to the legislation of the states.”

But that all changed with the ratification of the Fourteenth Amendment in 1868. In Chicago Burlington and Quincy R.R. v. City of Chicago, 166 U.S. 226 (1897) the Court stated: “‘Whatever may have been the power of the states on this subject prior to the adoption of the fourteenth amendment to the constitution, it seems clear that, since that amendment went into effect, such limitations and restraints have been placed upon their power in dealing with individual rights that the states cannot now lawfully appropriate private property for the public benefit or to public uses without compensation to the owner.”

To the point about the recomposition of debt, SCOTUS later developed the regulatory takings doctrine in Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922), which provides that the government need not physically dispossess a person from his property in order for a takings claim to be raised. Rather, the government could restrict or regulate the use of property to such a degree that the state action was tantamount to a physical taking.

THE CLAUSES WORKING TOGETHER (OR NOT)

So now, when a state government takes an action that causes an impairment or modification of a contract, an aggrieved party can asset claims under both the Takings Clause and the Contracts Clause. That got me wondering—are they really, practically different? Do they produce different outcomes? Are those outcomes consistent? Do courts do a good job (or even try) when it comes to differentiating between the two?

I’m still working on the answers to those questions, but what does seem clear to me is that there doesn’t appear to be very clean lines here. The law is a bit…well…cloudy.

Take the Contracts Clause, for instance. Contemporary cases have held that just because a law impairs a contact doesn’t necessarily mean that it’s prohibited. Cases like U.S. Trust v. New Jersey, 431 U.S. 1 (1977) and Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) hold that this clause still has to be squared with “the inherent police power of the State to safeguard the vital interests of its people.” See Energy Reserves Group, Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410 (1983). The Supreme Court noted in U.S. Trust that “an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose.” So the prohibition isn’t all that prohibitive after all.

In the context of the Takings Clause, courts have held that various government actions, despite limiting or restricting the use of property, nevertheless do not raise a takings claim. Regulations related to providing for the general welfare, for instance, are perfectly permissible. The court in Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 105 (1978) stated that where the government “reasonably conclude[s] that ‘the health, safety, morals, or general welfare’ would be promoted by prohibiting particular contemplated uses of land,” there is no requirement to compensate the owner. Joe Singer points out in Justifying Regulatory Takings, 41 Ohio N.U. L. Rev. 601 (2015) that:

Key examples of laws that promote the public welfare are zoning and environmental laws and consumer protection laws such as building codes. The Supreme Court has upheld against takings challenges laws that impose height limits and setback requirements, as well as zoning laws that segregate residential, commercial, farming, institutional, and industrial uses. The Court has upheld public accommodation laws and implicitly approved fair housing and employment discrimination laws. It has allowed minimum wage and maximum hours laws and workplace safety laws to operate without challenge.

Both clauses are, in a sense, concerned with protecting the sanctity of property rights (be they tangible—like land or personalty—or intangible—like those arising from a contract creating debt). One obvious difference is that with the Takings Clause it’s still possible for state governments to “take” property as long as they do so for a public purpose and just compensation is paid. Under the Contracts Clause, however, states are flat out prohibited from impairing a contract right. But, as indicated above, both of these commands can ring a bit hollow. States can pass laws that break contracts when it's “necessary and reasonable” and states can regulate property without causing a taking when its “justified.” And if a state is prohibited from impairing a contract, then can they just turn around and claim they're doing it under the Takings Clause? Can a public purpose be "necessary and reasonable" for Contracts Clause purposes and yet not "justified" for Takings Clause purposes? What about the other way around? Are these standards different or are they the same thing?

So what does all this mean for the distinction between the two? Can they always be raised together in the face of state action? What are the defining features/lines that make them wholly separate concepts—or is it better to think of them as being interlocking (like how Justice Kennedy describes the Equal Protection and Due Process Clauses in Obergefell v. Hodges)? I hope to formulate some answers to these questions (or at least sound a bit more like I know what I’m talking about) in the months ahead. Your thoughts are welcome and appreciated in the comments below.

Reiss on Housing and Sustainability

David Reiss (Brooklyn) has posted Ensuring that Homeownership is Sustainable (Westlaw Journal of Bank and Lender Liability) on SSRN. Here's the abstract:

This short article argues that the Federal Housing Administration has suffered as a result of many of the same unrealistic underwriting assumptions that led to problems for many lenders during the 2000s. It, too, was harmed by a housing market as bad as any since the Great Depression. As a result, the federal government announced in 2013 that the FHA would require the first bailout in the agency’s history. While facing financial challenges, the FHA has also come under attack for the poor execution of policies designed to expand homeownership opportunities.

Leading commentators have called for the federal government to stop having the FHA do anything but provide liquidity to the low end of the mortgage market. These critics rely on a few examples of agency programs that were clearly failures, but they do not address the FHA’s long history of undertaking comparable initiatives. In fact, the FHA has a history of successfully undertaking new homeownership programs. However, it also has operational flaws that should be addressed before it undertakes similar future homeownership initiatives. 

June in Germany: Kein Law and Econ in Deutschland

The law and econ movement has influenced large swaths of American law, particularly in the area of property law. People may disagree whether the vast influence law and economics has had for the past seventy-ish years over property law is for better or worse, but the impact law and econ has had on property law is indisputable. In fact, the influence is so strong, it can be challenging to contemplate a property regime with absolutely no reliance on law and econ.

If you want to see such a system, look no further than Deutschland. Law and economics has not made it to Germany. For the foreseeable future, if law and econ comes knocking at the country’s door, my guess is that border patrol will turn it away.

No where is the lack of law and econ in German law better seen than in the subject of waste. We all know about waste—the doctrine of waste precludes a current possessor of property from taking actions (or inactions) that might harm the predesignated future owner of the property. And we all know about Melms and how Pabst Blue Ribbon gained its glory in property law textbooks throughout the United States by furthering the concept of ameliorative waste. But here are a few things you might not have known:

(1) Almost every legal system has a Melms-like fact pattern. The Romans talk about converting land into vineyards for grapes. The English talk about converting a house into a pub. The French follow the Romans and the god of Bacchus. The Americans follow the English and beer-making. It’s almost shocking how, for more than one thousand years, society has always had the desire to change land from something residential into something alcoholic. With this random trivia in mind, I looked into German law. What do the Germans have? Nichts. Zilch. Nada. Nothing even remotely similar. I have proposed the basic Melms hypo to at least half a dozen German law scholars from Passau to Hamburg and their response has been, uniformly, “that fact pattern would never happen in Germany.” Full stop. Part of the reason it may never happen is because of the strong recording system in Germany, the Grundbuch, the details of which will be in a forthcoming post. Some of it may because due to the waste policy in German law. Who knows. But Germany is where the common fact pattern ends.

(2) German law rejects Melms. For usufruct law (usufructs being the civil law analog to life estates), the German BGB provides that the usufructuary may not alter the economic purpose of the property. BGB section 1030 provides that “An object can be burdened in such a way, that the person for who benefit this burden occurs is entitled to the use of the object and to take the fruits.” Section 1036 describes the type of use the usufructuary can make: “(1) The holder of a right of usufruct is entitled to possession of the object. (2) In the exercise of his right to use the holder must maintain the economic purpose for which the object was used and must exercise his right in a normal economic way.” Finally, section 1037 provides that “[t]he holder of a right of usufruct is not entitled to transform or actually change the object.” Bottom line, the usufructuary (=life tenant) ain’t altering anything big or anything that doesn’t fit with the economic purpose of the property. If the land has a mansion on it, nothing but a mansion is going on it.

(3) There is no give in the interpretation of BGB sections 1030 and 1037. German courts have narrowly interpreted BGB section 1037 such that any substantial change is prohibited. For example, the Landesgerichte court in Siegen, Germany held in 2014 that a usufructuary could not add a carport onto a house because the addition of the carport was more than an inconsequential addition and thus was an unlawful transformation.

(4) Leading me back to law and econ, German law would not allow a transformation of property that increased the value of the property. In 1983, a German court found a usufructuuary could not convert a single-family building into three flats because that would be a transformation of the property and alter the purpose of the property. A double whammy under the BGB. There was no discussion in the case about the fact a three-flat building could be more financially valuable than a one-family building It’s unclear that argument was even raised, though admittedly, German cases are not the most transparent cases in the world. But German commentaries cite the case for the proposition that a usufructuary cannot alter property even if that alteration increases the property’s value. You might think there would be something more definitive on the topic, something a la Melms, but there is not. It’s almost as if the law and econ idea is so foreign and antithetical to German law, that the argument never really comes up.

At this point, you may think waste is a small example, but looking in other areas of German property law, you don’t see law and econ anywhere. Take co-ownership. The German law of co-ownership (Miteigentum) has a detailed set of rules about how co-owned property can be used and managed. If all co-owners cannot agree, majority wins. So if there are 4 co-owners, each owning 25% of the property, and 3 vote one way, the 3 win. Simple. But German law places restrictions on what the majority can do. The majority cannot vote on any “substantial change” to the property. See BGB section 745. Even if the change will increase the value of the property, the 3 can’t do it. Yes, they can always partition, but German law excludes co-owners from making any profitable changes that are “substantial” if everyone is not on board. What does substantial mean? There are not a lot of cases on it, but it appears between the cases and commentaries that “substantial” is interpreted fairly broadly as to restrict co-owners’ ability to alter property. For example, building a parking garage on what had previously been a parking lot would be a substantial change. Further, anything that is expensive is a substantial change. A whole lot gets captured under the “substantial change” language meaning co-owners cannot do much without everyone’s consent, regardless of whether the end result behooves them all.

What makes German law so interesting to me is that there are lots of similarities with the American common law system—German civil law has servitudes and mortgages and takings and all of the other topics we talk about in the American common law system. And in many cases, there are very similar results. But one area where stark differences can be noticed is in the total lack of influence the law and economics movement has had on German law.

Cupp on Animal Rights and Property Law

Richard Cupp (Pepperdine) has posted Animals as More Than "Mere Things," but Still Property: A Call for Continuing Evolution of the Animal Welfare Paradigm (University of Cincinnati Law Review) on SSRN. Here's the abstract:

Survival of the animal welfare paradigm (as contrasted with a rights-based paradigm creating legal standing for at least some animals) depends on keeping pace with appropriate societal evolution favoring stronger protections for animals. Although evolution of animal welfare protection will take many forms, this Article specifically addresses models for evolving conceptualizations of animals’ property status within the context of animal welfare. For example, in 2015 France amended its Civil Code to change its description of companion animals and some other animals from movable property to “living beings gifted with sensitivity,” while maintaining their status as property. This Article will evaluate various possible approaches courts and legislatures might adopt to highlight the distinctiveness of animals’ property status as compared to inanimate property. Although risks are inherent, finding thoughtful ways to improve or elaborate on some of our courts’ and legislatures’ animals-as-property characterizations may encourage more appropriate protections where needed under the welfare paradigm, and may help blunt arguments that animals are “mere things” under the welfare paradigm. Animals capable of pain or distress are significantly different than ordinary personal property, and more vigorously emphasizing their distinctiveness as a subset of personal property would further both animal welfare and human interests.

Save the Date: State & Local Government Law Works-in-Progress Conference

For anyone writing in the area of property and local government law, here's an announcement from the University of Houston Law Center, courtesy of Kellen Zale:

The University of Houston Law Center will be hosting the 5th Annual State & Local Government Law Works-in-Progress Conference on Friday, October 7, 2016 and Saturday, October 8, 2016.  Scholars and practitioners writing in areas related to state and local government law are invited to attend and/or present works in progress. A formal call for papers will follow during the summer.  Registration will take place in late August, and the deadline for papers and abstracts will be in mid-September.  The conference will provide an opportunity for state and local government law scholars and practitioners to present works-in-progress and receive feedback from colleagues.  Questions should be directed to Kellen Zale at [email protected].

June in Germany: German Basic Law and Eminent Domain

Thanks to the support of the University of Passau, I’m spending the better part of my June doing research in Germany. Now that I’ve had my fill of schwein (pig), radler (lemon-y beer), and, of course, weinerschnitzel, and I’ve driven on the autobahn, and I’ve been hiking through scenic Bavaria, it’s time to get to posting about German property law.

Today we start with eminent domain. Germany, like the United States, constitutionally protects private property from being taken by the State. The German Basic Law, i.e. the German Constitution, provides in article 14(1) that “[p]roperty . . . shall be guaranteed,” property “entails obligations,” and property’s “use shall also serve the public good.”

“Public good” is interpreted by German courts to mean that the use must create a public advantage, regardless of whether that advantage is created by the State or a private entity. While that interpretation is like the Supreme Court’s interpretation of the Fifth Amendment in the U.S. Constitution, unlike the U.S., economic development is an insufficient public good. In other words, Kelo isn’t happening in Germany. In fact, some German courts have interpreted the public use requirement in the German Basic Law to require a public necessity in order for expropriation to occur.

In order for the State to take property, the State must pay compensation. Under Article 14(3) of the German Constitution, the compensation required is an “equitable balance between the public interest and the interests of those affected.” Thus, the U.S. notion of “just” compensation is not required; instead there is a balancing test which, of course, means that compensation in Germany for a takings could be lower than fair market value. This may seem objectionable at first to an American audience, but keep in mind that less property can be taken in Germany because of the more limited interpretation of public good under the German Basic Law. (Side note: a number of countries use public use/good and compensation to balance one another, i.e. the broader the definition of public use, the higher the compensation required and vice versa. Whether this works better/worse/or just differently than the U.S. approach is worthy of discussion, but that will be for another post.)

Finally, article 14(3) of German Basic Law requires that any taking be made “pursuant to a law,” which essentially means that legislation must set forth the necessary takings procedure. In practice, this works pretty similarly to the U.S. notion of procedural due process.

There you have it—a brief primer on takings in Germany. Over the next couple of weeks we’ll look at other classic property doctrines under German property law, so if there’s a burning question you have about the Bürgerliches Gesetzbuch (the German Civil Code), fire away. No guarantees you’ll get an answer—there is, afterall, a lot of radler here to consume—but I’ll see what I can do.

Now Germany is about to play Ukraine in Euro 2016, so time to do as the Germans and head for the biergarten.

ABA Professors' Corner: Recent Developments in Lien Priority

Professors' Corner's free monthly webinar featuring a panel of law professors, addressing topics of interest to practitioners of real estate and trusts/estates
Sponsored by the ABA Real Property, Trust and Estate Law Section, Legal Education and Uniform Laws Group​

Tuesday, June 14, 2016
12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific
Mortgages and Condo/Homeowners Association Liens:
Recent Developments in Lien Priority

Speakers:

Wilson Freyermuth, John D. Lawson Professor of Law and Curators’ Teaching Professor, University of Missouri
Christopher K. Odinet, Horatio C. Thompson Assistant Professor, Southern University Law Center
Moderator: Tanya Marsh, Professor of Law, Wake Forest University

In all states, common interest ownership law permits a condominium, cooperative, or homeowners association to assert a lien upon a lot or unit within the community when its owner fails to pay the common expense assessment allocated to that lot or unit. In some states that have adopted statutes comparable to the Uniform Condominium Act or the Uniform Common Interest Ownership Act, the association has a limited priority for some portion of the unpaid assessments (typically, six or nine months’ worth).

In the wake of the mortgage crisis, the issue of whether (and to what extent) an association’s lien should have priority over other liens has produced a great volume of litigation as well as aggressive efforts by federal regulators to negate or pre-empt state law priority rules. Our speakers will address recent judicial, statutory, and regulatory developments, including:  (1) the rationales for (and against) association lien priority; (2) whether the association’s lien priority constitutes a true lien priority or merely a payment priority; (3) whether the association’s limited priority is recurring or can be asserted on a one-time-only basis; (4) whether the association’s priority extends to interest, attorneys’ fees, and other costs of collection; (5) the effect of the federal Housing and Economic Recovery Act (HERA) on state law association lien priority rules; and (6) FHA’s proposed rule under which reverse mortgage loans would be ineligible for assignment in states that provide the association with limited lien priority.

Register for this FREE webinar at http://ambar.org/ProfessorsCorner

The Property of Debt

I’ve been thinking a lot lately about the property law aspects of debt (don’t let your head hit the keyboard as you fall into a deep slumber from reading that, now!). Most of my interest in this topic comes from my obsession with the Puerto Rican debt crisis. Unless you’ve shut yourself off from social media (or any media, for that matter) you likely at least know that the island, a U.S. territory serving as home to 3.5 million American citizens, is flat broke. They’ve defaulted on multiple interest payments to their bondholders, tried to enact their own bankruptcy-like law (overview by Stephen Lubben at Senton Hall here)--currently pending a decision from SCOTUS, and right now Congress is trying to pass a super special insolvency procedure to help out the island (for a little Citizens United flavor, take a look at this dark money ad urging the defeat of the bill). I’ll have a post on this topic, and the takings claims posed by the bondholders, next week.

But back to debt as property . . . The Supreme Court has long held that rights in debt (contract rights) constitute property. See Omnia Commercial Co. v. U.S., 261 U.S. 502 (1923); see also Lynch v. United States, 292 U.S. 571, 579 (1934) (“Valid contracts are property.”). And we freely buy, sell, and trade such rights all the time. Indeed, that’s what the secondary mortgage market and the private label mortgage market are all about! Buying and selling mortgage debt at discounted rates, typically (in the Fannie/Freddie context) to provide more liquidity to the residential housing market and thereby increasing the availability of credit.

But people buy debt for other reasons as well—to make money! There was a great (and, per usual, hilarious) discussion on John Oliver’s HBO show, Last Week Tonight, this past Sunday on the topic of “Debt Buyers.” Here’s the video:

 

In the show he points out a bunch of things about the debt buying industry—prominently discussing the shady practices of some of the industry’s less than wholesome characters. In fact, he sends a team with a hidden camera to the industry’s trade conference in Las Vegas. One of the panel presenters at the conference notes cavalierly that, despite state law requirements that debt buyers disclose to consumers that their obligation to pay the debt may be extinguished by the statute of limitations: “Who’s going to read and understand the words on this letter? The unsophisticated consumer? . . . I depose these plaintiffs in these lawsuits and they don’t even read the letter.” What a jerk! I bet he wasn’t too happy to see his remarks go viral.

But back to the point . . . the general idea of the show was to basically talk about how bad the debt buying business can be: how bad guys go after poor, unsuspecting consumer debtors and ruin their lives. But it strikes me that the issue of how one gets into debt and the ability of someone other than the original creditor to enforce the credit right are entirely different. Putting aside the former, is there anything wrong with selling debt like we sell tangible personal and real property? From a debtor’s perspective, does it really matter whether the original counterparty to the contract is the party now trying to enforce it? We could assume that there might be something particular about that specific obligee that makes contracting with him, from the obligor's perspective, special. In those cases we have doctrines of assignability. But, in the context of pure debt (the right to collect on an amount owed) in an arms-length transaction, it does not seem much different than a market for anything else.

But are there policy reasons why we should prohibit (or at least discourage) this type of market from becoming more robust (if it isn’t already – spoiler: it is already)? Chain of title problems certainly loom large in these transactions. As the segment above indicates, often all that is exchanged between the debt seller and debt buyer is the purchase price and an Excel spreadsheet with minimal information about the obligations owed. There’s also little due diligence done on the buyer’s end – such as ascertaining whether the debt is even still collectable. Perhaps one could argue that the nature of this particular type of “property” (specifically how it can impact vulnerable consumer debtors when owned by unscrupulous collectors) merits thinking differently about whether the debt buying business is just another property market. Maybe there are just too many bad guys or, if there aren't that many, the damage that the few cause is just too great.

My home state of Louisiana has a really interesting way of dealing with debt sales once litigation on the debt has commenced. We call it the “right of litigious redemption.” It basically works like this: Original Creditor commences a lawsuit against Debtor. As the litigation proceeds, Original Creditor realizes that he cannot (or does not want to) carry the lawsuit through to the end because it is too time consuming or is eating up too many resources (or for whatever reason). Instead, Original Creditor “sells” the lawsuit to Buying Creditor for a discounted purchase price. Now, Buying Creditor is the plaintiff against Debtor in the litigation. Under Louisiana law, Debtor can now pay to Buying Creditor an amount equal to the discounted purchase price he paid Original Creditor, and in doing so completely extinguish the lawsuit! Voila! Just like that. You can see how this is a great deal for Debtor. If the debt he owes to Original Creditor is $20,000, but Buying Creditor only paid Original Creditor $7,000 for it, then Debtor is essentially relieved of paying $13,000 worth of debt! The supposed policy reason for doing this has to do with wanting to discourage a robust market for the buying and selling of lawsuits from developing. To my knowledge, no other state in the U.S. has such a law (please correct me if I’m wrong in the comments below).

So what about property markets in debt? Good? Bad? Or . . . like most things, a little bit of both?

Contreras on Liability Rules, Genetic Information, and Property Law

Jorge Contreras (Utah) has posted Genetic Property (Georgetown Law Journal) on SSRN. Here's the abstract:

Under U.S. law there is no property interest in mere facts. But with respect to factual data relating to human genes, a de facto property regime has emerged in all but name. The level of control that individuals have exerted over genetic data exhibits the classic hallmarks of Blackstonian property: the right to exclude, the right to destroy, dead hand control, divisibility, and alienability. This degree of control has arisen through an expansive interpretation of the ethical requirement of informed consent. Notwithstanding the ongoing evolution of federal research regulations that permit some data-based research to proceed without extensive consent requirements, actions sounding in state property law pay little heed to compliance with these regulatory procedures. The resulting property-like regime over genetic data has enabled individuals to bring litigation disrupting and even halting valuable biomedical research and leading to the destruction of valuable research resources.

Looking to Calabresi’s and Melamed’s seminal analysis of property and liability rules, I propose that the property-like treatment of genetic data be replaced by a combination of existing and new regulations of researcher conduct (liability rules) to protect individuals from abusive research practices. This approach would shift the landscape from one in which data-based research cannot occur without the consent of individual research participants, to one in which research is presumptively allowed, but researchers face liability for overstepping the bounds of permitted activity.