Friday, February 29, 2008
This past week my Contracts class examined mass market transactions, the contract of adhesion and the doctrine of unconscionability. Yesterday Overlawyered featured a post on Judge Easterbrook's opinion in IFC Credit Corp. v. United Business & Industrial Federal Credit Union. The case is jammed with scintillating issues of commercial law-- a veritable bag of chips with no diminishing marginal returns. Of note for Contracts students is this excerpt on the enforceability of non-negotiated terms in a standard form agreement (citation omitted):
Ever since Carnival Cruise Lines, Inc. v. Shute enforced a forum-selection clause printed in tiny type on the back of a cruise-ship ticket, it has been hard to find decisions holding terms invalid on the ground that something is wrong with non-negotiable terms in form contracts. As long as the market is competitive, sellers must adopt terms that buyers find acceptable; onerous terms just lead to lower prices. If buyers prefer juries, then an agreement waiving a jury comes with a lower price to compensate buyers for the loss-though if bench trials reduce the cost of litigation, then sellers may be better off even at the lower price, for they may save more in legal expenses than they forego in receipts from customers.
There is no difference in principle between the content of a seller's form contract and the content of that seller's products. The judiciary does not monitor the content of the products, demanding that a telecom switch provide 50 circuits even though the seller promised (and delivered) 40 circuits. It does not matter that the seller's offer was non-negotiable (if, say, it offered 40-circuit boxes and 100-circuit boxes, but nothing in between); just so with procedural clauses, such as jury waivers. As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention. Making the institution of contract unreliable by trying to adjust matters ex post in favor of the weaker party will just make weaker parties worse off in the long run.
For the last statement, Judge Easterbrook cites to the court's opinion in Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., (Posner, J. 1992):
The idea that favoring one side or the other in a class of contract disputes can redistribute wealth is one of the most persistent illusions of judicial power. It comes from failing to consider the full consequences of legal decisions. Courts deciding contract cases cannot durably shift the balance of advantages to the weaker side of the market; they can only make contracts more costly to that side in the future, because [the other side] will demand compensation for bearing onerous terms.
All true. Yet, I doubt that the next edition of Farnsworth, et al, Contracts will omit the section on contract "fairness."
Wednesday, February 27, 2008
What makes an individual objectively attractive has occupied our minds for centuries. Countless previous studies of what constitutes beauty have found that symmetry is the key factor; the most recognizable illustration of this is Leonardo Da Vinci’s Vitruvian Man. The Golden Ratio, Fibonacci Sequence and Divine Proportion all indicate the same thing: There is a formula for symmetry in nature and those who closely follow this formula are beautiful. For instance, both Marilyn Monroe and Audrey Hepburn had proportions which followed the Golden Ratio – despite their difference in physique.
The link between beauty and intelligence is also found in symmetry. In embryonic development, only the strongest embryos are able to maintain the best symmetry. While DNA has a symmetrical blueprint to start, only these stronger embryos retain their symmetry in the face of environmental influences such as stress, pathogens or mutation. This means symmetric individuals may have a better genetic potential to resist diseases and may have better health overall. Intelligence fits into this in the same way; intelligence is the neurological equivalent of symmetry in the body. The more symmetrical an individual, the higher their “general intelligence” was found to be. The results were tested in a group who gauged intelligence strictly based on a photo of an individual’s face. For unknown reasons, the results were more favorable with men than with women – perhaps this is the human version of the “peacock effect,” where the males display their desirable qualities more readily to attract a mate.
If beauty is found in symmetry and symmetry is indicative of intelligence, then it would follow that aesthetic discrimination in the workplace is proper. I doubt anyone will admit to going this far, but maybe beauty is more than just in the eye of the beholder.
Tuesday, February 26, 2008
How much would you pay for a high tech startup with an unproven online sales system that was consuming capital at $3 million per month but had never made a sale? Before you answer, step into the time machine. It's 1999. Internet mania is everywhere and everyone wants a piece of the web. John Kelley was CEO of HA-LO Industries, an old tech manufacturer of promotional swag: coffee mugs, sun visors and the like emblazoned with a company logo and destined for giveaway ignominy. John Kelley decided that HA-LO would pay $240 million to acquire Starbelly.com, Inc. That's how the story started. The story ended last week in The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, before Judge Easterbrook and the Seventh Circuit Court of Appeals. What happened in between is a sobering look at big stakes high and hangover.
Read the rest of this post . . . .
HA-LO agreed to purchase Starbelly for about $100 million in cash with the balance of the purchase price to be paid to Starbelly shareholders in HA-LO stock. HA-LO didn't have that kind of cash laying around so it did what everyone was doing. It hired Credit Suisse First Boston (CSFB) as its investment banker and Ernst & Young (EY) as its business consultant. Kelley got himself a seat at the cool kids' table.
CSFB went to work. It tried to renegotiate the price. It figured out how to structure HA-LO's payments to avoid violating HA-LO's pre-existing loan covenants. It found new lenders willing to finance HA-LO's acquisition cash requirements. It reached a standstill agreement with Starbelly shareholders to prevent them from exercising control over HA-LO as its new stockholders. CFSB also issued a "fairness opinion" in which it stated that the "merger consideration is fair to HA-LO from a financial point of view." Fairness opinions like the one issued by CFSB were and are required (or at least strongly recommended) by the Delaware Supreme Court since 1985 as a means by which corporate management can assure corporate shareholders that a proposed acquisition is in their best interests.
CSFB's fairness opinion was issued pursuant to a contract with HA-LO, styled an engagement letter. The terms of the engagement letter required CFSB to issue its opinion based on a valuation of Starbelly provided to it by HA-LO management. HA-LO asked EY for its independent assessment of the value of Starbelly. EY told HA-LO that HA-LO management's projections as to the value of Starbelly were " unrealistic" and that Starbelly was unlikely to generate anything close to the revenue stream HA-LO management had projected for it. Kelley ignored EY's valuation and instead supplied his own valuation for CSFB to use as the basis for its fairness opinion.
CSFB's fairness opinion was dated as of January 27, 2000. In April 2000, it was sent to shareholders who approved the merger which closed in May 2000. One year later, after the dot.com bubble had burst, HA-LO filed for bankruptcy. Starbelly's technology had flopped as EY predicted. HA-LO buckled under the strain of Starbelly's relentless losses and its own gigantic acquisition debt service. All that survived HA-LO's bankruptcy was a liquidating trust that set about to sue on behaof of HA-LO just about every solvent thing HA-LO had ever touched.
The Trust sued CSFB. It alleged that CSFB was negligent in issuing its fairness opinion based solely on HA-LO management's valuation of Starbelly. The district court held in favor of CSFB and the Seventh Circuit affirmed. CSFB did what the engagement letter required it to do-- issue its opinion based on the valuation data provided by HA-LO management. Its contract in the end protected it from liability.
Judge Frank Easterbrook for the Seventh Circuit cut to the quick-- contract beats tort any day of the week:
"CSFB did not write an insurance policy against managers' errors of business judgment. Compelling investment banks to provide business-risks insurance as part of a fairness opinion would just make investors worse off, as that would increase the price of each opinion. Investors would pay ex ante for any benefit received ex post -- and the bar would pocket a substantial portion of the transfer payments. "
The question left unanswered at the end of the story is the one I find most compelling. Why did Kelley do it? What drives a man to ignore Ernst & Young's bottom line in favor of a dream of dot.com corporate swag domination?
The case is available on the Seventh Circuit's website. Enter case number 06-3842.
Saturday, February 23, 2008
Read the rest of this post . . . .Then, this week, the Wall Street Journal Law Blog discussed another high-profile attorney, who “accidentally” sent an e-mail to more than a dozen reporters in the wake of comments made by a state attorney general. According to WSJ, Sheila Birnbaum, Skadden Arps’ products-liability guru, mistakenly sent reporters an “internal” email. Birnbaum was upset because of a press release issued by Mississippi AG Jim Hood’s office following a settlement agreement, which led a federal judge to dismiss her client’s (State Farm’s) lawsuit against Hood. AG Hood claimed that State Farm’s allegations “were shown to be false” because the judge agreed to dismiss the case.
Birnbaum (apparently) wrote, “This is so over the top. Can we ask that he be held in contempt of court for misrepresenting a settlement agreement and order of the court[?]” The e-mail did not go to co-counsel, instead going to the AG’s office and more than a dozen reporters. Birnbaum told AP she thought she was responding internally to an e-mail from Hood’s office and didn’t realize she was sending it to reporters. “I’m embarrassed that I pressed the wrong button,” she said. “That e-mail shouldn’t have gone out.”
This latter incident has been reported as a “mistake” similar to the Pepper Hamiltion error. I am not sure I am buying it. Actually, I am pretty sure I don’t. When a supposedly errant e-mail makes public the exact point you would have wanted to see reported in the first place, it makes me skeptical it was, in fact, errant. It’s possible it’s what my father would call a “nice miss,” but this seems a little too good for that. This has the smell of TV-style politics. Maybe I have become too much of a cynic, but if you are going to send a very private e-mail to a very public party, this is the way to do it.
Thursday, February 21, 2008
I've had enough of living on cough drops. I pass through life wondering where my next Kleenex will come from. I'm tired of my cold. I'm tired of the weather.
I was going to post an I'm sick and sick of winter kind of thing. I looked out the window of my office and saw something that changed my mind -- the woods. Here's a poem I loved as a child and can recite by heart.
I feel better and I hope you will too.
Stopping By The Woods on A Snowy Evening
Whose woods these are I think I know.
His house is in the village though;
He will not see me stopping here
To watch his woods fill up with snow.
My little horse must think it queer
To stop without a farmhouse near
Between the woods and frozen lake
The darkest evening of the year.
He gives his harness bells a shake
To ask if there is some mistake.
The only other sound's the sweep
Of easy wind and downy flake.
The woods are lovely, dark and deep.
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
Sunday, February 17, 2008
I was shocked the other day when NPR informed me that there were four school shootings in one week. I had heard about one here and one there, but in the hubbub of life I had not stopped to count. By the end of the day on Feb. 14th there had been five shootings from the 7th to the 14th. That ties the record for the most shootings in any one year since 1968.
Hearing the news report took me back to when I first heard of the Columbine massacre in 1999. I was attending college in PA and in some ways, though the shooting was another time zone away in CO, it felt like my whole world stopped as we were gripped by the news. Now, I must be a bit numb to school shootings when it takes news of four in one week to jar me.
I don't want to turn this into a commentary on our society and what's happening to it, etc. I just didn't want to let another day go by without acknowledging that these tragedies are happening, in rapid order. I want to express my own grief, that my heart is hurting for those who have lost and hurting for us as a nation that this is the reality we find ourselves living. I encourage those of you out there reading this post to pause for a moment and realize that this is indeed happening in our midst. And let's not just grieve, but instead ask ourselves what we as individuals can do to reach out and touch those around us.
Psalm 27:13 "I am still confident of this: I will see the goodness of the Lord in the land of the living." Click here for a song that may speak to you if you find yourself dismayed.
Friday, February 15, 2008
According to RealityTrac, an on-line foreclosure tracking site, judicial foreclosures in the Land of Lincoln in 2007 totaled just under 100,000, a 25% increase from 2006 and a 94% increase from 2005. (Illinois ranks in the top ten states for home mortgage foreclosures). Gov. George Blagojevich described Illinois' home foreclosure situation as an "epidemic." (A tad hyperbolic, Gov. B? Mortgage default, unlike, say, HIV, is neither contagious nor epidemic). Homeowners considering their options are invited to take a dip in a "Homeowners Assistance Pool" funded with a $200 million initial commitment from four of the largest mortgage lenders in Illinois. Borrowers who qualify can swap their high interest loans for 30 year fixed-rate mortgages with rates between 5.75 and 8%. (Today's rate for a 30 year fixed mortgage is between 5.76 and 5.92). So who's likely to jump in? Governor B said applicants would have to carry a minimum credit score of 580. Hey, no running on the pool deck! Qualifed pool borrowers will be required to participate in a mortgage counseling program.
The Wolverine State points the finger of blame (and regulation)at retail loan initiators. The Michigan House passed legislation that subjects loan officers to background checks and requires them to register with the state. If you call yourself a "loan officer" in Michigan, you either comply with the new regulation or face penalties of $15,000, one year in jail, or both. So, "hey baby, I'm a loan officer" is out as a pick-up line in Ann Arbor.
The Evergreen State is offering free therapy for home mortgage borrowers facing foreclosure. Earlier this week Gov. Christine Gregoire signed legislation that provides $1.5 million in state funds for financial counseling for borrowers in trouble and consumer education programs for potential homebuyers. So, Washington taxpayers, how does that make you feel?
The Golden State is going straight to the last phase of therapy-- forgiveness. A bill to conform California state tax law to federal law by allowing taxpayers to exclude forgiven mortgage debt from their taxable incomes breezed through the Senate Revenue and Taxation Committee yesterday. If it passes, one source estimates the bill will result in revenue losses of $5 million in fiscal year 2007-08, $7 million in 2008-09, and $1 million in 2009-10. About 8,300 taxpayers would benefit from the measure. The bill's sponsor, Sen. Mike Machado (D) described the bill as "something the legislature can do to help mitigate the pain that the mortgage crisis is causing." Percodan works for pain, I'm told. This kind of pain relief just spreads the pain around.
Wednesday, February 13, 2008
Judge Sneed was on the Ninth Circuit for almost 35 years, but before that he was a well respected (and brilliant) tax academic. He taught at Texas, Stanford, Cornell and was dean at Duke for 2 years. In the announcement, it is noted that he was offered a job as an assistant professor at Texas upon graduation from the law school there.
One of my favorite cases, Olk, that I cover in the basic tax course was written by Judge Sneed. It involved the issue of whether tips, called tokes, paid over to crap dealers should be included in the dealer's income. The case gets the right result (it clearly is income) but, on account of attempting to reconcile an earlier Supreme Court case on the definition of gifts, does so with some very questionable reasoning. In his defense, it is likely that Judge Sneed thought the Supreme Court would grant certiorari in the case and clarify the law. Instead, the Supreme Court passed and thus I have the students read Judge Sneed's opinion.
Unfortunately, I never met Judge Sneed, but I wish I had and I am sorry to hear the news of his passing.
The group entitled to relief under Project Lifeline is larger than that covered under Hope Now. People who are 90 days or more delinquent on their mortgage payments are eligible for the 30 day pause in the foreclosure process. Hope Now's rate freeze relief was limited to some holders of subprime mortgages. Project Lifeline includes holders of prime and home equity loans, not just a subset of subprime products.
Borrowers 90 days or more delinquent on their mortgage payments likely are already in the process of losing their homes to foreclosure. Paulson speculated on why homeowners in this group have not already sought a modification of their loans. "Perhaps they are hoping to find a way to get current on their mortgage payments, or perhaps they don't think any solution is possible. For whatever reason they have not yet taken action; our hope is that today's announcement will reach them, and they will reach out immediately for help – especially now that the foreclosure process is upon them."
The idea that a 30 day pause in foreclosure activity will make a significant difference to people who are already three months late on their mortgage payments seems farfetched. Borrowers might have been confused about the terms of their mortgage at closing. The consequence of default is not confusing. Borrowers plainly understand that if they don't make mortgage payments, the lender will take their house. Those with income to make payments and equity in the home already have incentive to bargain for a modification. Homeowners who have no equity in their homes (because they didn't make a down payment or they did but their home value sunk below their mortgage obligation when the housing bubble burst) will walk away from their home and their mortage. The pause will be wasted on them.
Tuesday, February 12, 2008
Bigamy is illegal in Britain. However, the British government after two years of study takes the view that all the legal wives of a Muslim citizen are entitled to government benefits. Islamic Shariah law permits Muslim men to have up to four wives at a time. The British government has refrained from enforcing anti-bigamy statutes against Shariah men who lawfully married multiple wives in another country and then emmigrate to Britain. (While a married man cannot obtain a spouse visa to bring a second wife into Britain, some multiple partners may be able to enter the country via other legal routes such as tourist visas, student visas or work permits.) The bigamy tolerance policy now appears to extend welfare benefits to multiple wives as well.
Read the rest of this post . . . .
The Washington Times reported the story yesterday. The conclusion of a panel of four government departments (Treasury, the DWP, HM Revenue and Customs, and the Home Office) was not reported to the British press but rather was uncovered by newspaper reporters about a month ago. Last week, Archbishop of Canturbury Rowan Williams, spiritual leader of the world's 77 million Anglican faithful stirred outrage in England when he allowed that some aspects of the Islamic faith tradition could be accommodated within the British legal system.
Some Brits are miffed to put it mildly. See the coverage in the London Daily Mail, Telegraph and the comments of hundreds of British taxpayers. Some estimate the cost of providing welfare benefits to multiple Muslim wives at up to 20 million per year.
There are two ways most people try to motivate others: encouragement/praise and disparagement/criticism. Undoubtedly, we have all experienced both and probably feel strongly about what form of motivation is most effective. Effective motivation will be tailored to the individual, the context and immediate purpose. While there are countless iterations of how different motivation-styles manifest, I am focusing on two in particular: the “angry coach” and the “cheerleader.”
The Angry Coach: Many of us may have experienced the angry coach, he may have been an actual coach, or he may have been an employer or even colleague. The angry coach motivates by disparaging his team-members, he believes that by publicly criticizing a team-member, he will motivate that team-member to prove him wrong. The angry coach believes that this form of motivation will cause the team-member to strive to prove that he is not the “worthless waste of space” the angry coach has accused him of being. Often, even successful performance is not enough to outwardly please the angry coach.
The Cheerleader: The superior form of motivation, in my opinion, is the “cheerleader.” No pom-poms are necessary for this cheerleader; he is an encourager who motivates by positive affirmations and constructive criticism. The cheerleader criticizes behind closed-doors with the purpose of helping the team-member to recognize a weakness or area of improvement and to offer advice on how to improve. A cheerleader will help the team-member to reach his full potential, without expressly pushing anyone down. The cheerleader seeks to promote the best efforts of the team members.
Both motivation styles will certainly have their appropriate venues, but generally speaking, motivation is most effective when it is individualized. As students, our class-mates are our colleagues, and we may find ourselves in positions where we need to help spur each other along to reach our full potential. The “golden rule” applies here for me, I know that I am motivated by the cheerleader and not the angry coach, so I choose to be a cheerleader. Who motivates you?
Saturday, February 9, 2008
One thing that is kind of amazing (to me) is that, with Mitt Romney’s campaign "suspension,” the candidates don’t look that different. (Okay, maybe Ron Paul, but his numbers, beyond fundraising, do not indicate that much support.) All the candidates support biofuels, for example, although McCain and Ron Paul openly oppose ethanol subsidies, which I applaud. All are open to nuclear power as an option, although Clinton and Obama note that storage must be resolved before nuclear power would be a viable option, another point with which I agree.
Clinton, Huckabee, McCain, and Obama support a cap-and-trade program, which would cap greenhouse-gas emissions from a defined set of polluters, e.g., fossil-fuel electricity generators, and allow permit holders to sell or trade the permits it holds allowing pollution in excess of the plant’s emissions. Clinton and Obama want to cut emissions to 80% below 1990 levels by 2050. McCain’s plan would seek to reduce emissions to about 30% of 2004 levels by 2050. Huckabee says he supports such a program, but has not mentioned any specific targets. Ron Paul does not support cap-and-trade programs.
All but Ron Paul support some increase in fuel-economy standards for automobiles. All of the candidates support clean-coal initiatives (Ron Paul supports all coal use).
So what does all this mean?
Well, I am not a one-issue voter anyway, but even if I were, no one currently in the mix stands out as having a particularly unique view of or approach to energy. Before he dropped out of the race, Bill Richardson’s plan was probably the most comprehensive. His plan indicated an understanding of the issues that far outweighs that of the other candidates, not shocking given that he was Secretary of the U.S. Department of Energy in the Clinton Administration. Richardson’s plan was very aggressive, and would have faced some big fights on a number of fronts. But that’s not all bad.
As it stands, I reserve judgment. The remaining candidates are engaging in the energy debate and talking about many of the issues that, in my view, must be addressed for U.S. energy policy. None are stepping too far out of the mainstream in their proposals, which is also not shocking at this stage. The energy policies of the front-runners (read: not Ron Paul) are acceptable to me, at least as far as they have been developed. So I will be looking at two main issues moving forward: (1) Have the candidates started to develop a real proposal to advocate or are they still talking only about goals?; and (2) How committed is the candidate to implementing their new energy policy?
Politicians have been talking about energy independence since at least 1975. I hope to find that the candidates are committed to moving beyond mere talk. We shall see.
Friday, February 8, 2008
I am admittedly fond of Justice Clarence Thomas and the unique role he plays on the Court. He's the only Justice who feels no need to ask questions from the bench during oral argument and doggedly continues to argue for a strict interpretation of the Commerce Clause. As with the other eight Justices, he is no doubt a substantive player.
With that said, as I researched and wrote a recent article I found myself asking, "CT, what were you thinking?!" The case is Good News Club v. Milford Central School, 533 U.S. 98 (2001). The issue was whether a religious club could conduct its activities after school on school premises. The Court held under the Free Speech Clause that the Club's speech (focused on, inter alia, the teaching of moral values) was allowable content within the forum, and that denying the Club access to the space was unconstitutional viewpoint discrimination.
Okay, so far so good, but in Footnote Four things got sticky. Justice Thomas, writing for the majority, made the following statement: "In any event, we conclude that the Club's activities do not constitute mere religious worship, divorced from any teaching of moral values." Id. at 112 n.4 (emphasis added). This statement raises the unspoken question: What if the Court HAD found the Club's activities to be "mere religious worship?" What a can of worms has been opened! Who gets to determine what is allowable religious speech and what is forbidden "mere religious worship?" What will be the effect of this brief, yet provocative and potentially powerful statement?
One need look no further than the Second and Ninth Circuits to see that courts are seizing upon this language. They are at least flirting with relying on FN4 to uphold state regulations and procedures that forbid the exercise of "religious services" and "religious worship services" in public spaces. See Bronx Household of Faith v. Bd. of Educ. of N.Y., 492 F.3d 89 (2d Cir. 2007); Faith Ctr. Evangelistic Church Ministries v. Glover, 480 F.3d 891 (9th Cir. 2007). The trend emerging from these two cases puts religious groups in a quandary as their protection under the Free Speech Clause is eroded by application of FN4 in Good News Club.
Perhaps I will address my suggested solution in a later post. For now, chew on what you, as a lower court judge, would do with FN4 and how you would define "mere religious worship." Talk about a hot potato, but is it too hot to touch? Apparently some judges are willing to take the risk that when the music stops playing they will be the one holding the potato.
See my working paper on this topic.
Stay safe and warm, Josh.
The more cases I read, the more emotionally detached I have been able to become. During the first semester of law school, I struggled with classes like criminal law, because of the stories the cases told, after all, they were not mere stories. As a law student, though, it is essential to look past the emotion and recognize the legal principles. This does not mean the cases are stripped of their human element, but rather, an appreciation of the magnitude of the tragedy must be set-aside for the sake of learning. Yet, in setting aside the emotion, it can be easy to forget that each case in our casebooks represents real people, real stories and real tragedies.
Hammontree v. Jenner came to my life again this week, but this time, it was not printed on the pages of a book. My dear friend, her husband and their 18-month old son were driving to church when a man driving a car next to them on the highway had a heart-attack. His car veered into their mini-van causing the van to roll three times. Their precious son was killed by the accident, her husband grieves, and she remains in critical condition – unaware of her loss. It was an accident, no one is to blame.
The heaviness of the week has made school feel unimportant and trivial. Perhaps there is wisdom to be gleaned in that. It is true that law school is not the most important element of life, yet it is also true that as lawyers, we will play a significant role in people’s lives at moments they suffer tremendous hardship, loss and tragedy. People do not go to court for fun. Lawyers advocate, lawyers counsel, and lawyers facilitate understanding. Hammontree v. Jenner used to be just a case to me, but now it impresses upon me the reality of the material we study. There are human beings behind each page we read, and remembering this simple truth instills in me renewed reverence and sensitivity for this profession. To be dedicated to studying the law while maintaining my appreciation for how fragile life can be is the balance I seek.
Wednesday, February 6, 2008
For searchers: an excerpt from Ash Wednesday, T. S. Eliot
Although I do not hope to turn again
Although I do not hope
Although I do not hope to turn
Wavering between the profit and the loss
In this brief transit where the dreams cross
The dreamcrossed twilight between birth and dying
(Bless me father) though I do not wish to wish these things
From the wide window towards the granite shore
The white sails still fly seaward, seaward flying
And the lost heart stiffens and rejoices
In the lost lilac and the lost sea voices
And the weak spirit quickens to rebel
For the bent golden-rod and the lost sea smell
Quickens to recover
The cry of quail and the whirling plover
And the blind eye creates
The empty forms between the ivory gates
And smell renews the salt savour of the sandy earth
This is the time of tension between dying and birth
The place of solitude where three dreams cross
Between blue rocks
But when the voices shaken from the yew-tree drift away
Let the other yew be shaken and reply.
Blessèd sister, holy mother, spirit of the fountain, spirit of the garden
Suffer us not to mock ourselves with falsehood
Teach us to care and not to care
Teach us to sit still
Even among these rocks
Our peace in His will
And even among these rocks
And spirit of the river, spirit of the sea,
Suffer me not to be separated
And let my cry come unto Thee.
Bankrate.com has put together a summary of the major presidential candidates' views on the "subprime mortgage crisis" -- the villians, the victims and what the US government ought to do about it. What the candidates say about the complicated confluence of financial and economic events known in political circles as the "subprime crisis" starkly reveal their views on the respective roles of government, the market and individuals in a just society.
Tuesday, February 5, 2008
In LaSalle Bank NA v. Shearon, 2008 WL 268449 (Jan. 28, 2008), a New York trial court held that a home mortgage borrower might very well get his house for free plus a check from the mortgagee for his trouble.
Shearon, a first time homeowner, borrowed $355,000 to purchase his dream house on Staten Island. LaSalle Bank acquired the loan from the original lender. When Shearon defaulted, LaSalle moved to foreclose. Shearon counterclaimed alleging that the original lender violated a stack of NY "anti-predatory lending" laws. In particular, Shearon claimed that the lender: 1) approved "excessive finance (106% of the home purchase price) which Shearon used to finance the closing costs (a no no under NY law); 2) failed to conduct "due dilligence" regarding Shearon's ability to repay the loan; 3) intentionally sold Shearon a sub-prime loan with "excessively high interest rates;" 4) failed to provide federally mandated disclosures; 5) forged Shearon's signature on loan related documents; and 6) used "repeated and continuous coercive and concerted tactics" which "forced Shearon to close on the loans and the property or face significant and dire financial consequences."
The New York Supreme Court of Richmond County (a NY trial court) granted summary judgment for Shearon on his defense and counterclaim against LaSalle Bank. Here is the sound of hammer down on subprime lenders in New York:
In this case, the defendant David Shearon demonstrated by a preponderance of the evidence that the Lender violated the anti-predatory lending statutes of New York's Banking Law. Therefore, David Shearon may be entitled to receive: actual, consequential and incidental damages, as well as all of the interest, earned or unearned, points, fees, the closing costs charged for the loan; and a refund of any amounts paid. . . . The finding of intentional violation renders the home loan agreement (mortgage) void, and strips the lender from having a right to collect, receive or retain any principal, interest, or other charges whatsoever with respect to the loan, as well as giving the borrower the ability to recover any payments made under the agreement.
Friday, February 1, 2008
Kelly's post about the life settlement backed securities market and the ensuing commentary, shakes up a conflict that runs through the legal academy on the subject of securitization. Some folks are agnostic about securitization by blissful ignorance. I suspect that among those of us who know something about what is going on, we divide into two camps: securitization lovers and securitization haters.
The disagreement is over the social value of "securitization"-- a term given to a transaction designed to separate an operating company's financial assets (payment obligations such as accounts receivable, vehicle leases, mortgage obligations, or life settlement contracts) from the risk assoicated with operating the company. A person (the obligor) incurs an obligation to pay the company over time for goods or services or contract rights or whatever. The company sells this obligation (the right to receive a stream of payments) to a third party. The third party issues securities to investors backed by the obligations.
The reason the company sells the obligations to a third party issuer rather than issuing its own securities directly to investors is to take advantage of the "remoteness" of the legally distinct third party from the operating company. The third party does nothing but hold the obligations it acquires and issue securities. Its value rests exclusively on the value of the obligations. It is immune from the ordinary operating risks borne by the company. As we say, it is "bankruptcy remote." If the company files for bankruptcy, the obligations are the third party's and not part of the company's bankruptcy estate. So, the rules that compel creditors of a debtor in bankruptcy to wait for payment, or take less payment from the debtor/company, will not affect the third party or its investors.
The whole point of introducing a bankruptcy remote entity into the finance transaction is to achieve bankruptcy remoteness for the ultimate investors, a benefit direct investors in the operating company do not enjoy. The benefit for the company is a reduced cost of capital relative to alternative finance structures. When the company is better off, its creditors and shareholders are better off. Or so the argument goes.
The third party's investors have the peace of mind that comes with bankruptcy remoteness. But the company's unsecured creditors feel differently. If the company succeeds, its unsecured creditors are happy. If the company fails and defaults, its unsecured creditors find the company's cupboard is bare when they try to foreclose on assets to satisfy their claims. True, the company received cash for the obligations from the third party when it sold them. But the cash is typically long gone to feed hungry secured creditors and stave off bankruptcy. When an operating company files for bankruptcy, its unsecured creditors usually end up holding the bag.Their suffering is made all the worse because the third party and its investors are sitting in a very comfortable bankruptcy remote catbird seat.
Before the emergence of securitization as a means of raising capital in the late 1980's, if a company with payment obligations wanted cash without issuing equity securities, it would borrow cash from a third party lender who would take a security interest in the obligations as collateral. From the company's perspective, both a sale of obligations for cash and a loan backed by obligations as collateral yield the same result: Both deploy illiquid assets (obligations) for liquid assets (cash).
The financial effects on the company of a sale of or loan against obligations are the same. But, the bankrutpcy effects are different. If the company pledges rather than sells its obligations to a third party then fails and files for bankruptcy, the obligations are still the company's and thus property of the company's bankruptcy estate (albeit subject to a security interest in favor of the third party). The third party lender becomes a secured creditor in the company's bankruptcy case, subject to all the heartache the debtor's bankruptcy can dish up to its creditors. Some observers of bankruptcy law think that the point of subjecting secured creditors to forced "compromise" in bankruptcy is to shift some of their wealth and power to unsecured creditors (and other groups) who have a stake in the survival of the debtor as a going concern. Under this view, what bankruptcy law forces secured creditors to give up does and should inure to the benefit of unsecured creditors, and so it seems, for the good of us all.
Unsecured creditors and the securitization hating academics who love them object to the idea that parties can by private agreement escape this effect by choosing a different transactional form (sale rather than loan) . Securitization haters believe that bankruptcy courts should and do have the power under the Bankruptcy Code to recharacterize a transaction the parties meant to be a sale to a bankruptcy remote entity as a secured loan from the third party to the company.
The fight among academics is ostensibly about what Congress meant to accomplish by the Bankruptcy Code. Most of us have in fact long given that up as utterly futile. So, we argue over whether securitizations maximize social welfare, or whether they are an inefficient drain on social welfare and are appropriately regulated by bankruptcy courts through recharcterization.
While bankruptcy academics snark about this, the securitization industry has put down roots deep into the economy. So far, only one bankruptcy court has recharacterized a securitization for the benefit of creditors, in In re LTV Steel (2001). Wall Street swooned. Since then, the sheer volume of securitized transactions has grown so large relative to the economy that if a bankruptcy court recharacterized a securitization today, the market would seize up. The economic fallout would make the current mortgage crisis look like a little after dinner indigestion.
The popular spin on securitization in the press these days is that securitization of mortgage backed obligations is to blame for the crisis in the mortgage market and corresponding instability in capital markets. Underbelly has an fresh perspective: Blaming 'securitization' for the recent mess is like blaming 'options' for the various meltdowns in the 90s--or like blaming airplanes for air crashes. Yes, it happened on their watch, but securitizations don't kill people, people k-- but you've heard that one before.
The voice of Underbelly, Buce Palookaville, concedes that two aspects of securitization transactions may have contributed to the current gloom. First, loan brokers (playing the role of the company in my hypothetical transaction) lured by up front commissions, apparently got stupid by greed and stopped caring about the quality of the obligations they generated. (This same kind of breakdown in underwriting infected corporate control deals in the 1980's and 1990's).
Second, there is nobody to blame when a securitization goes bad. When a loan tanks, the loan officer responsible for it is subject to humiliation at the bank and shunning at the country club. When a company fails after securitizing away its cash generating assets, the swarm of lawyers, bankers and rating agencies that put the deal together are in the wind. Securitization failures are failures without fault. And the blamelessness of it all shakes us lawyers to our cores.