Category: Admiralty


B Corps for Bankers

Claire Hill and Richard Painter’s new Better Bankers, Better Banks aims to find a way forward by looking backward – and by casting a few sidelong glances as well. It is valuable for what it has to say about the view in all directions.

Begin from where we are – the point from which Hill and Painter would like to see forward movement. Where we are now is a world in which, even seven years out from the crash of ’08, banking scandal is near boring in its ubiquity. From Libor in 2012 to Euribor, forex, commodity and precious metal cornering thereafter, the story of financial markets of late seems an unending parade of horribles.

How do we get out of this seeming cesspool? Here is where Hill and Painter look backward and sideways.

First let’s look back. Time was when ‘bankers’ – Hill and Painter employ the term broadly to cover all folk who hold ‘other folks’ money’ – invested not only our money, but their money too. By organizing as general partnerships whose partners were jointly and severally liable for losses, they kept, as the current idiom has it, ‘skin in the game.’ This of course aligned their interests with client and institutional interests – to some extent, anyway. (Names like ‘Jay Gould’ should remind us that ‘some extent’ wasn’t the ‘full extent.’) And so there were limits on how much by way of other folks’ money the bankers were likely to fritter away.

Now let’s look sideways. There appears to be growing consensus, in the face of such scandals as those just rehearsed, that our regulatory and law enforcement regimes’ penchant for penalizing banks rather than bankers just isn’t cutting it. Compared to the gains to be had from wrongful behavior unlikely to be caught, even five or twelve billion dollar settlements between banks and their regulators are chump change. Oughtn’t we, then, focus our efforts upon the human agents through whom the banks act? After all, five billion – or five years in jail – are more likely to pinch if you’re human.

Hill and Painter like what they see in both directions. They find limitations, however, in how effective the enforcement of finance-regulatory provisions can be. These, they believe, are just too easy to game – a fact that might partly account for regulators’ going after the banks rather than the bankers in the first place. Why not, then, take yet another sidelong glance in another direction – that of contemporary moves to simulate better regulation through private ordering? Are there not means, for example, of appealing to socially responsible investors by committing to operate as a socially responsible business – e.g., as a ‘B Corp’ or ‘Benefit Corp’?

Indeed there are, and though they do not discuss these new business forms, Hill and Painter valuably adapt, in effect, the idea behind them to financial firms. Herewith the authors’ novel suggestion to introduce a practice of what they call ‘Covenant Banking.’ The idea is for financial firms whose owners or managers are comfortable with the idea to undertake ‘skin in the game’ commitments on the part of their managers. Managers would voluntarily assume some liability for losses, thereby partly replicating the ancien regime of pre-corporate partnership banking. Investors could then choose between what kinds of institutions through which they invest – the more risk-averse perhaps working through covenant banks, the more risk-cavalier working through today’s more familiar casinoish firms.

It would be hard not to like this proposal. What’s not to like? Like recent proposals for Wall Street voluntarily to maintain ‘naughty lists‘ of bankers who have gotten themselves into trouble, it imposes nothing, yet offers something – the prospect of ‘better bankers,’ hence ‘better banks,’ for at least some investors. It simply expands the field of choice, and who in these times doesn’t like choice?

If I have any reservations about Hill and Painter’s proposal or their brief in its favor, they have to do with the prospect of some people’s possibly taking the authors to claim or to promise more than they actually intend.

To begin with, we should note that wrongs such as those alleged in connection with Libor, Euribor, forex, and commodity and precious metal cornering are not wrongs of excessive risk-taking. They are wrongs of sheer fraud and manipulation. It isn’t the case that ‘skin in the game’ on the part of the relevant fraudsters in these cases ‘would’ have helped; the ‘skin’ seems to have been at the core of the ‘game’ from the start, and was indeed part of the problem – the fraudsters profited precisely by illicitly betting their own money on what they controlled. Hill and Painter, then, should not be taken to be targeting this form of market abuse through their proposal.

A distinct but related point has to do with the lead-up, not to 2012 and after, but to 2008. It is still common to hear that year’s cataclysm blamed upon venal behavior or ‘excessive risk-taking’ by ‘bankers.’ And such behavior clearly occurred – it always does. But a very strong case can be made – I think I and others have made it – that the principal causes of 2008 were more radical than mere vice or recklessness on the part of some bankers. They are endemic to capitalism itself absent serious and sustained effort on the part of the polity to distribute capital’s returns – or capital itself – far more equitably than we’d managed before 1929 or between 1970 and 2008. ‘Better bankers’ would certainly be better than worse bankers; better still would be better distributions of that with which bankers bank.

Finally, there is a danger in underselling what proper law enforcement, adequately funded and staffed, can do where finance-regulation is concerned. When Wall Street contributes more to political campaigns than most other industries, when DOJ officials openly admit to having feared to prosecute bankers for fear of rattling markets, and when regulators like the CFTC and the SEC are chronically understaffed and underfunded, we should be skeptical of suggestions that ‘gameability’ of the rules is the sole – or even principal – reason for old fashioned law enforcement’s not having eradicated rulebreaking by financiers. Indeed, as Hill and Painter themselves note, a rule change at the NYSE in 1970 played a critical role in the move from partnership to incorporated form among Wall Street investment banks. If that is so, could a legal re-imposition of some variant of the old rule not itself make for ‘better bankers’?

None of these caveats should be taken as more than what they are – mere caveats. There is much, much to be learned from a reading of Hill and Painter, and much is quite plausibly promised by their Covenant Banking. And since, as before noted, their proposal is made in effect to the banks rather than the polity, it seems to be all upside, no down. Let, then, those bankers intrigued by the Hill/Painter proposal give it a go. One might even imagine some funds offering their services in A and B flavors, so to speak – in Covenant and Noncovenant forms. In such case consistently better performance by one kind over the other might in future foment a stampede to the winning kind, and with it a privately worked transformation.


A New Maritime Law Agency

120px-Oregon_-_sinking_-_Currier&Ives_(1883)One frustration of teaching Admiralty is that much of the law governing ships is obsolete.  Some of the foundational statutes include the Limitation of Liability Act (1851) and the Jones Act (1920), which have been widely criticized as out of date.  Though the federal courts have broad common lawmaking power in this area, many of the Supreme Court’s decisions also rest on legal and factual assumptions that are faulty. (I might give some examples in a subsequent post.)

Why is this the case?  Part of the answer is that admiralty is not a priority for either Congress or the Court.  The decline of maritime commerce (in relative terms) explains this, though there is also some contingency at work.  The BP oil spill from 2010 exposed many flaws in the regulatory regime, but the Administration’s decision to develop a one-off remedy via a compensation fund rather than seeking a legislative response to the crisis kept everything frozen in amber.

Another answer is that maritime law missed out on the administrative law revolution of the 1930s.  There is a Federal Maritime Commission (an early version of which was run by Joseph Kennedy), but the FMC’s  jurisdiction is narrow.  Administrative agencies, of course, play a crucial role in updating statutes (with the help of Chevron deference) and raise the profile of problems with current law.  It is difficult to imagine environmental law without the EPA or communications law without the FCC (consider net neutrality as an example).  It’s probably time for Congress to make the Federal Maritime Commission a full-fledged agency.


Controlling Ghosts

According to a story in The Economist that Deven just flagged, shippers are experimenting with the use of “ghost” vessels without crews to move cargo.  Reasons include greater safety and lower costs, in part because crews make errors and good crews are expensive.  The article has a short section on “rules of the sea” and offers the view of one engineer that there shouldn’t be any legal problems where humans control the vessels from shore.

As it happens, I discuss a version of this issue in Robotics and the New Cyberlaw (at *131):

Craig Allen, a maritime law scholar, recently considers whether unmanned submarines with autonomous capabilities qualify for the full panoply of writes generally afforded vessels in international waters.  International law [e.g., UNCLOS VII, Art. 94(1)] premises these rights on the ability of a flag state to retain, again, “effective control” over the behavior of the vessel and crew.  This has been taken to mean that there are one or more people in charge of the vessel who are beholden to the flag nation in the right ways. The question of whether autonomous systems are beholden to the United States is not (merely) academic: A nation such as China has a strategic incentive to disqualify underwater American military equipment that patrols its sea shelf, such that international bodies may have to confront the question sooner rather than later.

I suspect that remote piloting of vessels will only be the first step—just as so-called “platooning,” where a professional controls multiple vehicles following closely behind, is likely to precede broader deployment of driverless cars.  I wonder whether even the initial deployment will not have some level of autonomy that kicks in where, for instance, contact with the ship is severed.  Certain classes of military drones return to base if they lose contact with the pilot.  Moreover, there are already smaller research vessels that navigate the “high seas,” where these obligations pertain, and collect or relay data without human intervention.  In any event, this issue of effective control—whether in tort, criminal, or apparently maritime law—is one of the ways robotics will pose challenges for law and institutions in the near term.


What is a Vessel?

So naturally I was interested in Monday’s oral argument on the question of what counts as a vessel for certain purposes in admiralty.  This is a fun exercise in class, as you quiz students about things like floating casinos or sofas.  (Why the Supreme Court decided to take this issue is a mystery.)  The main takeaway for me, though, is that it shows how uncomfortable the Justices are when they must make common law.  The Chief Justice’s comment about searching for a clear test is not the mentality of a common-law judge who concentrates on the factual context and embraces uncertain boundaries most of the time.  (Basically, the definition of a vessel is one of those “totality of the circumstances” kind of situation.)

This lack of common-law experience is not surprising, as admiralty is the only true area of federal common law.  And none of the current Justices have ever served on a state court or done much with maritime jurisdiction.  We’ll see what they come up with in Lozman.  That will be an excellent addition to my Spring Admiralty syllabus!


The 100th Anniversary of the Titanic

Naturally, on this day my thoughts turn to the litigation surrounding Titanic.  Among the leading examples are:

1.  Oceanic Steam Nav. Co. v. Mellor, 233 U.S. 718 (1914).  The Supreme Court, in an opinion by Justice Holmes, held that Limitation of Liability Act applied to tort claims brought in the United States against the vessel’s owner.

2.  R.M.S. Titanic, Inc. v. Abandoned and Wrecked Vessel, 435 F.3d 521 (4th Cir. 2006). This opinion rejected the application of the law of finds to objects recovered from the site.

3.  R.M.S. Titanic, Inc. v. Abandoned and Wrecked Vessel, 286 F.3d 194 (4th Cir. 2002).This opinion addressed the salvor’s attempt to sell certain artifacts from the site.

4.  R.M.S. Titanic, Inc. v. Haver, 171 F.3d 943 (4th Cir. 1999).  This opinion examined the salvor’s effort to claim exclusive rights to the site.

5.  Marex Titanic, Inc. v. The Wrecked and Abandoned Vessel, 2 F.3d 544 (4th Cir. 1993).  This one resolved a dispute between rival salvors.


Unseaworthiness and Product Liability

I thought I’d make the following observation for those of you who study or work on product liability issues.  The maritime equivalent of product liability is the unseaworthiness action, which is based on the vessel owner’s provision of a defective ship. (There is also a contract version of unseaworthiness.) Much like product liability, the unseaworthiness tort action evolved from nothing, to negligence, and then to strict liability, which is the current rule.  I don’t know enough about the details of what makes a ship unseaworthy to know if there are some useful analogies or insights in that doctrine for product liability, but it’s worth a look.


The Greatest Supreme Court Opinion?

This week in my Admiralty class I taught my favorite case–Moragne v. States Marine Lines, Inc., 398 U.S. 375 (1970). This unanimous opinion, written by Justice John Marshall Harlan, held that a wrongful death action existed in general maritime law. Moragne overruled The Harrisburg, an 1886 case that followed the common law and said that there was no wrongful death remedy in admiralty. Many scholars believe that this is the best Supreme Court opinion, if by best you mean”most professional.”

Among the reasons this is worth reading (even if you don’t care about admiralty):

1.  Moragne goes into the history of wrongful death and explains why the common law did not provide a remedy.  The answer is that the “felony-merger” doctrine in England held that all property owned by a convicted murderer went to the Crown.  Thus, there could be no recovery by a private party.  Even though no such doctrine existed here, our courts blindly adopted the English rule.

2.  The Court grounds its decision to overrule its precedent by doing an exhaustive review of the erosion of the “no wrongful death” rule, by looking at state statutes, Acts of Congress, international law, and academic criticism.

3.  The Court explains why Congress’s decision to create a wrongful death remedy in international waters (in the Death on the High Seas Act) does not preclude the creation of a judicial equivalent in territorial waters where state law does not do so.  That part of the opinion involves a thoughtful discussion of federalism, statutory interpretation, and the evolution of the admiralty remedy of unseaworthiness (which I’ll talk more about next week).

4.  The Court then concludes by offering a detailed explanation about why stare decisis does not counsel in favor of sticking with precedent in this instance, largely because the current rules promotes uncertainty and leads to all sorts of inconsistent outcomes in similarly situated cases.

Take a look sometime–you’ll be glad you did.


The Steamboat Magnolia

Speaking of Admiralty, I want to highlight a terrific symposium that the Saint Louis University Law Journal did on “Teaching Admiralty” in its Winter 2011 Issue.  There are many fantastic essays here, but my favorite was Joel Goldstein’s piece on The Steamboat Magnolia, which is a case that many people (including me) now use to introduce the course.  See Jackson v. The Steamboat Magnolia, 61 U.S. (20 How.) 296 (1857). It’s a fascinating case that delves deeply into constitutional law and jurisprudence–you should read it.





Another Interesting Case That You’ve Never Heard Of

I am in the process of revising my admiralty syllabus, and one case that I’m going to teach next year is Kotch v. Board of River Boat Pilots Com’rs for the Port of New Orleans 330 U.S. 552 (1947).  It’s a fascinating case and I thought I’d give you a summary.

Large ships that enter a harbor or a major river generally must be steered by a pilot.  A pilot is a local person who knows where all of the sandbars, rocks, and channels are in a particular locale.  The captain of the vessel lacks this knowledge and would founder or crash without a pilot in command. Louisiana had a law providing that a new pilot could only be licensed if a current pilot took him on as an apprentice.  Some people who were denied an apprenticeship sued claiming that the pilots in the state were only hiring their relatives and friends.  This kind of cronyism, it was alleged, violated the Equal Protection Clause.

The Supreme Court, in a 5-4 vote, rejected this claim.  Justice Hugo Black wrote for the majority and said that there was a rational basis for allowing pilots broad discretion to select their apprentices because “[a] pilot does not require a formalized technical education so much as a detailed and extremely intimate, almost intuitive, knowledge of the weather, waterways and conformation of the harbor or river which he serves.”  As a result, “the advantages of early experience under friendly supervision in the locality of the pilot’s training, the benefits to morale and esprit de corps which family and neighborly tradition might contribute, the close association in which pilots must work and live in their pilot communities and on the water, and the discipline and regulation which is imposed to assure the State competent pilot service after appointment, might have prompted the legislature to permit Louisiana pilot officers to select those which whom they would serve.”

Justice Rutledge dissented and said that “[i]f Louisiana were to provide by statute in haec verba that only members of John Smith’s family would be eligible for the public calling of pilot, I have no doubt that the statute on its face would infringe the Fourteenth Amendment.” The Court’s decision approves “as constitutional state regulation [a statute] which makes admission to the ranks of pilots turn finally on consanguinity. Blood is, in effect, made the crux of selection.”

This is one of the few Supreme Court cases that directly addresses the legality of nepotism, and I think that it deserves further study.


AALS Panel on Admiralty and Maritime Law

As the AALS Section Chair for Admiralty and Maritime Law, I am sorry to announce that our panel at the upcoming Annual Meeting is cancelled.  This was due to the illness of one of the panelists and the ongoing labor dispute at the hotels where the conference will be held.