Category: Contract Law & Beyond


Fiduciary Duty and Financial Aid


The financial aid scandal, sparked by NY Attorney General Andrew Cuomo’s investigation (and possibly a shut-out competitor) has already led to some settlements with lenders and universities. The basic thrust of Cuomo’s investigation is that if lenders pay administrators referral fees (whether direct or indirect) to steer students to take certain loans, that conduct is a deceptive trade practice, “in violation of New York Executive Law ‘ 63(12) and General Business Law 349 and 350 and other relevant state law.”

Universities are falling over themselves to settle with NY, as is the lending industry, in light of some bad facts: the companies have sought to influence financial aid administrators with stock, Broadway tickets, and other goodies. So this question is, literally, academic: is the alleged conduct by the university employees a violation of a fiduciary duty (loyalty) owed to students?

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Commercial Law and the Law School Curriculum

signing contract.jpgThe Uniform Commercial Code contains some articles whose reach into the law is so ubiquitous that virtually any lawyer likely needs at least some passing familiarity with their rules (e.g. Article 2’s rules regarding sales and warranties). Other articles, like Article 9 dealing with secured transactions, are fundamental to extremely broad categories of practice such as commercial transactions and bankruptcy. On the other hand, other portions of the Code deal with subjects so technical that even those specializing in the area don’t study the rules. For example, my office-suite mate is an expert in corporate and securities law. On the other hand, she recently confessed to me that she had never even dealt with (let alone studied) the rules contained in Article 8 regarding the sale of investment securities.

Which leads me to wonder how much U.C.C. coverage a decent law school curriculum needs to provide. For example, both payment systems (essentially Article 4) and negotiable instruments (Article 3) are included on most bar exams. On the other hand, an afternoon’s worth of study with a hornbook is sufficient to learn enough negotiable instruments law to pass the bar. It strikes me that payment systems is really only of practical use in this day and age if you are going to be in-house counsel at a bank. Negotiable instruments has a much broader appeal, but I still wonder how useful it is outside of a fairly narrow commercial practice.

Which leads to my questions. Should law schools offer U.C.C. courses in esoteric subjects simply because they are on the bar? How many schools offer payment systems courses? (As far as I know the course was not offered at Harvard while I was there; is this standard or an anomaly?)


The Thin Line Between Pirate and Repo Man, Arrrg Matey!

pirate.gif“Great things are done,” says Blake, “when men and mountains meet;/ This is not done by jostling in the street.” The results when repo men and the sea meet, it would seem, are also not the sort of things done by “jostling in the street.” Under Article 9, a creditor can repossess the collateral of a defaulting debtor so long the repo is done without a “breach of the peace.” What happens, however, when the collateral is a ship? In theory, the sea is governed by a web of international conventions supplemented by the customs and principles of admiralty law. In his fascinating book The Outlaw Sea: A World of Freedom, Chaos, and Crime, William Langewiesche reveals that the reality is considerably messier. The vastness of the oceans continues to provide a level of anonymity that is surprising in our information soaked age, and mobility allows ships to decamp to friendly or corrupt (or both) jurisdictions with ease. In many ways, it is still the wild, wild West. (Perhaps Pirates of the Carribean is a better metaphor.)

Enter F. Max Harberger, who — according to an L.A. Times story sent me by one of my students — is essentially in the business of stealing ships for creditors whose debts are due. The legality of what he does is far from clear, although in fairness he is frequently repoing ships that have been illegally seized by port officials in the developing world who are easily bribed. A $10 million ship can apparently be seized with a $100 bribe to a justice of the peace. Consider the following repo:

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The Power of Badly Written Judicial Opinions

judge.jpgLast week I taught Justice Traynor’s opinion in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.. The opinion is a classic example – perhaps caricature would be a better word – of neoclassical contract law. The issue in the case was the admissibility of parole evidence to construe the terms of a written contract. The traditional rule is that such evidence is not admissible if the terms of the contract are clear on their face. Traynor ruled, however, that parole evidence was admissible so long as the language of the contract is “reasonably susceptible” to the interpretation offered by the party seeking to introduce the evidence. The holding in Pacific Gas is a major relaxation of the parole evidence rule, to be sure, but that is not why Traynor’s opinion makes it into virtually every published contracts case book. Rather, the case is there for the dicta.

Traynor begins his analysis of the question with an anthropological and philosophical aria attacking the very notion of plain meaning. Those who believe in it, we are informed, are the victims of a primitive faith in the totem power of words. (He drops a footnote at this point discussing Egyptian mythology.) Words, he tells us, do not have absolute referents, a fact that he takes to be fatal to the notion of plain meaning. You can have a lot of fun in class with this language. If one is inclined, I suppose that you can follow Traynor down the wooded path to the Golden Bough, or, if you are less anthropologically ambitious, talk about the meaning of meaning. You can also have a great deal of fun comparing the soaring linguistic theorizing of Traynor’s dicta with the much more modest holding in the case. If we really believe that the absence of absolute referents drives a stake through the primitive totem of plain meaning, how exactly do we engage in the inquiry about whether written terms are “reasonably susceptible” of a particular interpretation? I have a sneaking suspicion that it involves judges – perhaps even Justice Traynor – reading the words of the contract and deciding what they mean.

Pacific Gas is a godsend to contract professors, and I can’t help but think that Traynor really wrote the opinion for us. I am grateful. Still, at the risk of looking the gift horse in the mouth, I do wonder if it is good judging. My understanding is that contrary to the doomsayers (including Alex Kozinski) who insist that Pacific Gas is the end of the parole evidence rule in California, Golden State judges continue to exclude extrinsic evidence in the face of clear written terms. Pacific Gas didn’t result in revolution, simply confusion. Given the wild whipsawing between dicta, rule, and holding in the opinion, this is not really all that surprising. My judge always insisted, “We’re not writing for the ages here; we’re writing for the parties.” The craft-oriented modesty of this approach appeals to me. I also suspect that it generally makes for much better law. And yet, I can’t help but note that Traynor’s opinion has been intellectually influential precisely because it is so poorly written. Getting into the case books is another way of influencing the law, and I suspect that the results of Traynor’s thoughts on totem and absolute referents wouldn’t have had nearly the currency that they do had he written a law review article instead.


Hypothecating Your Kidneys

kidney.jpgCurrently, 42 U.S.C. 274e(a) makes it “unlawful for any person to knowingly acquire, receive, or otherwise transfer any human organ for valuable consideration.” There are, of course, arguments that this prohibition ought to be dropped and that allowing the sale of say kidneys would dramatically increase supplies. On the whole, I find myself persuaded by the pro-kidney selling arguments. I am curious, however, about the other legal consequences of making kidneys saleable. Consider bankruptcy.

When a person files for bankruptcy, the law automatically creates a bankruptcy estate consisting of “all legal or equitable interests of the debtor in property as of the time of the commencement of the case.” 11 U.S.C. 541(a)(1). Of course, the homestead exemption allows debtors to keep some property, but the size of the bankruptcy estate matters a great deal because it provides a baseline for computing the rights of creditors in bankruptcy. If kidneys were saleable, they would seem to follow under the language of 541. In the absence of a specific provision in the homestead exemption, a debtor who wanted to hang on to his or her kidneys in a Chapter 7 would have to forego protecting some otherwise exempt asset to keep them. Do you want to keep your car or your kidneys? Of course such a choice might not be such a bad thing. After all, the debtor got in bankruptcy at least in part by borrowing money, and their ability to do so is enhanced by the presence of assets to satisfy the debt. Kicking kidneys into the bankruptcy estate would presumably enhance the credit worthiness of a lot of marginal debtors with few other valuable assets. Normally, of course, the trustee in bankruptcy gets to liquidate the debtor’s non-exempt assets, regardless of the debtor’s wishes. Would the Bankruptcy Code require the force sale of organs?

This, of course, leads to the question of whether or not folks should be able to hypothecate (ie grant an security interest in) their kidneys. Perhaps they already can.

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Shechem and Consideration

biblepage.jpgI have been thinking about the value of the Bible as a pedagogical tool. I am not much of a fan of the notion that the common law somehow rests on the Judeo-Christian tradition or that the Ten Commandments are the basis of our modern legal system. To be sure, I do think that the Bible has had its influence on our law, but if one is seeking for origins of the common law, I think that feuding norms among the pagan barbarians of northern Europe is a better bet. Still, the Bible is full of law, and I think that this law is useful for its very strangeness. (Also, as a Mormon, I labor under some religious guilt due to the fact that Brigham Young and other early Mormon authorities taught repeatedly that lawyers were the spawn of Satan and essentially on the road to hell. I take comfort in the fact that God is clearly a lawyer.)

For example, a few days ago I gave a brief lecture on the history of contract to my students. One of the points I wanted to make is that contract law is a relatively late development. Early legal systems seem to go to work immediately on issues like ownership of land, inheritance, and crime. Contract comes only later. I illustrated the point by noting that there is an enormous amount of law in the Pentateuch governing everything from ritual purity to what oxen may or may not eat while plowing the fields. There is not much in there, however, on contracts. To be sure there are rules about debt, and covenant, which is a vaguely contract-y idea, figures prominently in Biblical stories. Still, you’ll search Exodus to Deuteronomy in vain for anything like a general theory of contract.

Here is another possible example: Understanding the usefulness of consideration as a formality can be tricky. Fuller argued that forms serve an evidentiary function, but what exactly do we mean by an evidentiary function? Consider the following story from the Book of Joshua. At the end of his life, Joshua gathers the Children of Israel together at Shechem and offers them a choice: Will they promise to serve the God of Israel or not? The Children of Israel insist that they want to covenant to follow Yahweh, and Joshua then leads them through various formalities to make the commitment binding. The text says:

So Joshua made a covenant with the people that day, and made statutes and ordinances for them at Shechem. . . . And he took a great stone, and set it up there under the oak in the sanctuary of the Lord. And Joshua said to all the people, “Behold, this stone shall be a witness against us; for it has heard all the words of the Lord which he spoke to us; therefore it shall be a witness against you, lest you deal falsely with your God.” (Joshua 24:25-27 (RSV))

Why the rock? It is a formality that Joshua goes through to make the promise binding, and its purpose is to provide future evidence of the covenant. Should any Israelite in the future try to serve other gods, then Yahweh can insist that he or she has promised to serve only him. Should the erring Israelite have a convenient lapse of memory, then God can point to the rock. “Look,” he can say, “that rock stands there under the oak tree because you made the promise at Shechem with Joshua.” The formality reduces the problem of proving the contract ex post.

I love this story because of its strangeness. (I always imagine Dell and Microsoft entering into a licensing agreement and setting up a sacred rock someplace in Seattle to memorialize the deal.) Furthermore, it is precisely the strangeness of the story that makes it useful for thinking about the law. Our problem is that we forget how weird our own laws are and therefore can have a hard time seeing clearly what they are doing. In this sense, the Bible is pedagogically useful precisely because it has lost most of its salience in our culture. Most students (even in southern Virginia) are unlike to have the story of the Shechem Covenant at their fingertips. It sounds wierd to them, and that is useful.

Or it may simply be my perverse love of legal anachronism.


Going to Church to Sue Your Neighbor

puritan_men.jpgOf late I have been doing research on the resolution of civil disputes — tort, contract, and property cases — in ecclesiastical courts. Of course there are still religious communities that handle all intra-member litigation “in house.” I am surprised, however, how common this was among Americans in the 17th, 18th, and 19th centuries. It turns out that many American denominations are descended from either Calvinists or Anabaptists. Despite various nasty theological disputes in the 16th century, both groups were enthusiastic about the idea of church discipline and thought that one of the things that true Christian churches needed to do was excommunicate members who misbehaved. It was only a hop, skip, and a jump from this basic commitment to discipling members to a literal reading of passages in Matthew and Paul’s Letters to the Corinthians where the New Testament insists that disputes between brethren ought to be brought before the church rather than being taken before the ungodly. The result is that groups like the Quakers, the early Baptists, and the Mormons were all at one time or another quite aggressive about disciplining church members who sued other church members in secular court. However, rather than simply punishing members for hiring a lawyer, these disciplinary proceedings became a way in which congregations took jurisdiction over the underlying dispute, provding an ultimate settlement on the merits.

I wonder, however, if there was something more than theology and the perennial quest for low-cost dispute resolution at issue here. In particular, early Americans seem to have been a litigious lot. Roger Williams, for example, described one of his neighbors as “the salamander always delighting to live in the fire of contention as witnesses his several suits in law.” (In the folk cosmology of early America, the salamander was a creature that could live the heart of a fire.) Many of his compatriots seems to have shared this trait. That being the case, litigation was, if not a major life activity for many early Americans, at the very least was a very significant one. By shifting the forum in which this activity occurred from secular to ecclesiastical courts, religious groups were able create yet another bond with their members. Home is not only where the heart it. It is also where you litigate, particularlly if you are a salamander.

Finally, there seems to have been theatrical component to the interaction between litigation and religion. Brigham Young, for example, delivered a facinating sermon in 1856 denouncing litigation not only for the way in which it created discord among litigants but also as a demoralizing spectacle that tempted people to the courthouse to watch the show. Indeed, his denunciation of litigation sounds in many ways like contemporary denunciations of the theatre by Evangelical Protestants. The Mormon reaction to courts was much like the Mormon reaction to theatres (or dancing, another moral bugbear of the Second Great Awakening): rather than prohibiting it, they brought it in-house. Hence, dances were held in temples and church houses, plays were sponsored by ecclesiastical associations, and litigation was brought before “judges in Israel.” Once within the religious fold, however, litigation continued to be a spectacle and a show. Religious groups, however, radically changed the moral content of the performance. The amoral tourney of wits between trickster lawyers was transformed into a passion play of confession, repentance, and reconciliation as parties in ecclesiastical cases were frequently required as part of their settlements to perform acts of public atonement before their congregations.


Shylock and Article 9 of the U.C.C. (with some thoughts on bankruptcy)

shylock.gifShakespeare’s A Merchant of Venice (1598) is often misidentified as an anti-Semitic play about a contract. This is not technically correct, as the transaction at the heart of the drama seems to be a secured loan. (Albeit an anti-Semitic one.) Furthermore, contrary to Shakespeare’s conclusion, I believe that the security agreement is most likely enforceable, at least under Article 9 of the Uniform Commercial Code, a point that I hope to make to my secured transactions class. Here is Shylock’s description of the loan agreement between himself and Antonio, a Venetian merchant:

SHYLOCK: This kindness will I show; go with me to a notary; seal me there your single bond, and – in merry sport – if you repay me not on such a day, in such a place, such sum or sums as are expressed in the condition, let the forfeit be nominated for an equal pound Of your fair flesh, to be cut off and taken In what part of your body pleaseth me. (I.3.141-149)

It seems fairly clear from the passage that there is a debt. Antonio promises to pay “such sum or sums as are expressed in the condition.” However, without a valid security interest Shylock has only a personal right of action against Antonio. Indeed, even if Antonio promises the pound of flesh, all that Shylock gets in the event of a failure to deliver the bloody bond is a right to money damages. Section 9-109, however, teaches us that Article 9 governs “a transaction, regardless of form, that creates a security interest in personal property . . . by contract.” Such seems to be the case here. Indeed, Shylock casts the transaction in the form of a bond, ie a promise to deliver the pound of flesh, with a condition, ie payment of the debt, that defeats the bond, a classic pre-Code security arrangement, and the “pound of . . . fair flesh” falls under 9-102(a)(44)’s definition of “goods” (“all things that are moveable when a security interest attaches”), bringing it within the personal property requirement of 9-109.

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The One Ring and Economic Duress

ring.jpgIn my contracts class, I use the One Ring as a explanatory prop in several doctrinal areas, such as the availability of specific performance. It is convenient, then, that Tolkien’s stories may be moving from one Red Book to another, as the dispute between Peter Jackson and New Line over the fantasy franchise’s profits has just heated up. According to the director:

Wingnut Films has bought a lawsuit against New Line, which resulted from an audit we undertook on part of the income of The Fellowship of the Ring. Our attitude with the lawsuit has always been that since it’s largely based on differences of opinion about certain accounting practices, we would like an independent body – whether it be a judge, a jury, or a mediator, to look at the issues and make an unbiased ruling. We are happy to accept whatever that ruling is. In our minds, it’s not much more complex than that and that’s exactly why film contracts include right-to-audit clauses. [DH Notes: What a Holmesian view of contract law!]

However, we have always said that we do not want to discuss The Hobbit [the long-anticipated prequel to the Lord of the Rings] with New Line until the lawsuit over New Line’s accounting practices is resolved. This is simple common sense – you cannot be in a relationship with a film studio, making a complex, expensive movie and dealing with all the pressures and responsibilities that come with the job, while an unresolved lawsuit exists.

We have also said that we do not want to tie settlement of the lawsuit to making a film of The Hobbit . . .

[O]ur Manager Ken Kamins got a call from the co-president of New Line Cinema, Michael Lynne, who in essence told Ken that the way to settle the lawsuit was to get a commitment from us to make the Hobbit, because “that’s how these things are done”. Michael Lynne said we would stand to make much more money if we tied the lawsuit and the movie deal together and this may well be true, but it’s still the worst reason in the world to agree to make a film.

Several years ago, Mark Ordesky [of New Line] told us that [the studio had] rights to make not just The Hobbit but a second “LOTR prequel”, covering the events leading up to those depicted in LOTR. Since then, we’ve always assumed that we would be asked to make The Hobbit and possibly this second film, back to back, as we did the original movies . . .

However last week, Mark Ordesky called Ken and told him that New Line would no longer be requiring our services on the Hobbit and the LOTR ‘prequel’. This was a courtesy call to let us know that the studio was now actively looking to hire another filmmaker for both projects.

Ordesky said that New Line has a limited time option on the film rights they have obtained from Saul Zaentz (this has never been conveyed to us before), and because we won’t discuss making the movies until the lawsuit is resolved, the studio is going to have to hire another director.

There are some interesting legal issues arising out of this fact pattern. But one has to suspect that both parties here are calculating: Jackson that he stands to make more in the lawsuit that he would in a prequel (therefore, his decision to take issues off the table); New Line, that it is better to delay the lawsuit’s settlement and accept the risk of a mildly less successful movie. The hypothetical I wonder about is whether Jackson could sign the settlement agreement and then assert a defense of economic duress, claiming that he had no choice but to settle to obtain the new movies (sort of like Austin v. Loral). The only problem: his (presumably less than rosy) financial circumstances would have been the fault of King Kong’s disappointing earnings, not New Line’s breach.


Number four lawsuit target in all of Kazakhstan; or, Kazakhs Gone Wild

It was bound to happen, wasn’t it? From CNN:

Two fraternity boys want to make lawsuit against “Borat” over their drunken appearance in the hit movie. . . . The lawsuit claims that in October 2005, a production crew took the students to a bar to drink and “loosen up” before participating in what they were told would be a documentary to be shown outside of the United States. . . . After a bout of heavy drinking, the plaintiffs signed a release form they were told “had something to do with reliability issues with being in the RV,” Taillieu said. The film “made plaintiffs the object of ridicule, humiliation, mental anguish and emotional and physical distress, loss of reputation, goodwill and standing in the community,” the lawsuit said.

In a lot of ways, this story echoes the complaints made about that other cultural icon, Girls Gone Wild. It’s widely known that that dubious company makes its products by paying minor compensation to inebriated women in exchange for permission to photograph them in various states of undress. The process is highly manipulative and coercive. It was examined in a very critical Los Angeles Times piece, which dwelt on the low age of the women, the alcohol consumption prior to signing a release form, and the subsequent embarrassment of the participants, many of whom did not believe that their image would be used in particular ways. The process has led to a number of lawsuits, which seem awfully similar to the Borat suit. As the LA Times story notes:

It seems like Francis spends a lot of money on lawyers. I guess that comes with the territory of filming strangers who take off their clothes. More than a dozen women have sued him, alleging that his company used images of them exposing their bodies on “Girls Gone Wild” videos, box covers and infomercials without their permission. Only a few have convinced the courts that they were unwitting victims. For the most part, judges and juries have sided with Francis’ 1st Amendment argument that the plaintiffs’ images were captured in public places and that the company was free to use them as it pleased, particularly in light of the fact that the women had signed waivers.

It is said that Borat is brilliant social satire; and we can take judicial notice of the fact that Girls Gone Wild is merely exploitative trashiness. Still, isn’t there an underlying similarity between the allegations, the likely defense, and the concerns at issue?

If we’re opposed to a media producer who plies young women with alcohol in order to exploit their images for prurient purposes, shouldn’t we have the same concerns about a media producer who plies young men with alcohol in order to exploit their images in satire?