20 August 2014

Pushing the Envelope in San Bernardino

What's an executory contract and why should I care? Executory contracts are an important species of assets in the world of bankruptcy law. Any contract on which both parties still owe duties to the other are classified as "executory." Thus, if you sell your car to me in return for my promise to pay the purchase price in installments we have an executory contract. As soon as you deliver the car to me, however, the contract is no longer executory because you no longer have any duties, only I do (the duty to pay).

All of this is a long way to explain why collective bargaining agreements are executory contracts. Both the employer and the bargaining unit of employees owe the duties described in the CBA to each other.

And the conclusion that CBA's are executory is a big deal in bankruptcy, especially municipal bankruptcy, because the Bankruptcy Code permits a debtor like the city of San Bernardino, to reject its CBA with, let's say, its firefighters union. Which is precisely what San Bernardino has proposed to do. Read about it here.

But note the reason why San Bernardino is making this move: to cut benefits. The explosive growth in public employee benefits in California occupies a chunk of my article, Municipal Bankruptcy: When Doing Less Is Doing Best (download here). San Bernardino is not seeking to cut accrued benefits because that would incur the wrath of CalPERS, which would be something akin to a death wish. Even seeking to cut future benefits will provoke strong union opposition but the city should prevail. ... which suggests that it's time for the union and the city to make a deal.

19 August 2014

The Trial Before The Trial in Detroit

Although the hearing on confirmation of Detroit's plan of adjustment is not officially scheduled to begin until August 29, a crucial witness testified and was cross-examined yesterday. Apparently economist Robert Cline would have unable to appear during the scheduled hearing and was permitted by the court go go out of turn, so to speak. This is not entirely a surprise since Judge Rhodes had originally scheduled the trial to begin on August 18 and pushed it back only because of a decision by the Sixth Circuit Court of Appeals. (Read about that decision and the one-week delay here.)

In any event, witness Cline testified on one-half of the requirement that a plan be feasible. Feasibility comes in two pieces: Will the city have enough income? And does it propose to pay enough for required municipal services? For a thorough discussion of the first half of the test read  Who Bears the Cost? The Necessity of Taxpayer Participation in Chapter 9 (download here). For the initial piece of my analysis of the second part of feasibility, read Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9 (download here).

The principal objector, Syncora, attacked Cline's conclusion that the city would raise enough tax revenue because he failed to consider how Detroit might in fact be able to generate more tax revenue. In other words, Syncora believes Detroit is trying to low-ball its creditors. This argument does not actually go to a plan's feasibility. Instead, it pertains to yet another requirement of confirmation, that a plan be in the best interests of creditors. If you want to know about best interests (and more) read the first in my trifecta of municipal bankruptcy articles, Municipal Bankruptcy: When Doing Less Is Doing Best (download here).

18 August 2014

More Good Advice for the Prime Minister of India

Go here to read an article in the Hindustan Times reporting on the pleas by one of the directors of the Reserve Bank of India (the equivalent of a combined U.S. Federal Reserve Bank and Federal Deposit Insurance Corporation) for enactment of a bankruptcy code in India. I've made the same plea for years (here, here, here, and here) but to no avail. The former Congress-led coalition government wasn't paying attention. Perhaps, however, the more business-minded BJP majority will listen.

Seriously, a market economy needs a system by which to move assets from entities that are losing money to ones that can deploy them in more productive ways. Business bankruptcy is not "moral" in the commonsense way morality is commonly taken. Business bankruptcy is primarily about efficiency--producing more as cheaply as possible. A market economy is well-tuned when as many people as possible can satisfy as many of their subjective desires as possible (backed by money, not force). Whether a market economy produces a virtuous people can be doubted.

What can't be doubted is that India has moved past its constitutional preambulatory statement that it is a "socialist republic." Socialist countries didn't need bankruptcy for business firms, or so it was thought. (China is proving that even nominally socialist countries need a system of bankruptcy but that's a story for another day.) Market economies most certainly need a transparently legal mechanism by which to take ownership of firms away from those whose competence has been tried and  found wanting by the market.

Bankruptcy also has the salutary effect of getting nonperforming loans off the balance sheets of banks, which is why the RBI cares about the problem. Underperforming businesses are bad for the economy. Nonperforming loans to underperforming businesses are bad for banks. Bad banks are bad for a nation's fiscal and monetary system, which is bad for the economy, Etc.

Here's hoping Prime Minister Modi reads my blog.

15 August 2014

Delay in Start of Detroit Bankruptcy Trial (And More Time to Read My Latest Article)

Reuters reports here that Judge Steven Rhodes has pushed back to August 29 the start of the mammoth hearing on confirmation of Detroit's plan of adjustment. Although Reuters doesn't mention it, I'm confident that part of the reason is to give all parties time to digest my latest foray into Chapter 9 municipal bankruptcy, Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9 (Part 1) (download here).

Seriously, the delay gives arch-opponent Syncora (here, here, here, and here) more time to prepare (and Detroit more time to make a deal).

The delay also gives the rest of you time to read my initial piece, Municipal Bankruptcy: When Doing Less Is Doing Best (download here), and my soon-to-be-published second salvo, Who Bears the Cost? The Necessity of Taxpayer Participation in Chapter 9 (download here).

14 August 2014

"Service Feasibility," Detroit, and Part 1 of a New Article

Go here to read a Bloomberg report that to the effect that Judge Steven Rhodes has recognized the standing of three suburban Michigan counties to challenge the feasibility of Detroit's plan of adjustment. What's the big deal you wonder? Those who understand the intricacies of the Supreme Court's "standing" jurisprudence might be surprised that two parties that are not creditors and thus have no right to vote on Detroit's plan would nonetheless have standing to challenge it. After all, doesn't clause 1 of Section 2 of Article III of the United States Constitution provide that federal courts may hear only "cases and controversies"? And doesn't a case or controversy carry an implicit notion that a party's pecuniary interests are at stake? And if Macomb, Wayne and Oakland counties aren't creditors, then what pecuniary interest justifies their participation in Detroit's bankruptcy? And just what can these counties proffer that relates to the plan's "service feasibility", anyway?

For an answer to the second question go to my recently published first third of an article that will be presented at Campbell Law Review's symposium on municipal bankruptcy in October. The article's working title is Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9. You can download it here. The first part of the article tries to answer two questions: To what traditional or contemporary municipal services are residents legally entitled? And how much funding for these legal duties must a plan of adjustment provide? (If you want a running start on the notion of feasibility in municipal bankruptcy, go here to read an article that will be published this fall in the Widener Law Journal: Who Bears the Cost? The Necessity of Taxpayer Participation in Chapter 9.)

For an answer to the first question--Who has standing to object to a plan's feasibility?--well, you'll simply have to wait until the entire article is published. But if you want a hint, recall two things: bankruptcy court's are not Article III courts and the "public rights" doctrine.

12 August 2014

Rights and Powers at Creation

Yesterday I took the time to sketch my argument for why some form of private property would have existed even without the Fall. You can read it here. In brief, created human nature plus the dominion mandate plus numerical and geographic expansion would have led to some form of private ordering which, in turn, would have entailed some form of private property. My use of the word "some" indicates that we can never know the precisely what form the rights of possession, exclusion, and disposition would have taken, only that there would have been something more than mere Franciscan "use".

Pushback in the form of a thoughtful question didn't take long. My original inquisitor, Brad Littlejohn, commented that "I'm mystified by your use of the term 'primary right' in the way you use it. Your description of the derivation of private property looks to me very much like an elaborated version of the Thomist logic, but then you go and call what looks very much to me like a secondary right a 'primary right.'"

Given the press of other matters (including finishing a paper on the rights of municipal residents in municipal bankruptcy), my reply will be brief. It may, however, be of sufficient interest to others to warrant posting on my blog.

In short, rather than writing in this connection of rights at creation, I should have begun with powers before proceeding to rights. I began with the social practice of contracting, worked forward to (post-Fall) legal remedies for breach of contract, and then back to a pre-Fall notion of private property. Entering into promissory agreements—the social practice of contracting—is an example of exercising a power.

A power is the ability to effect a change; a right is something we have by virtue of our nature or, in the pre-Fall world, something we acquire after we've exercised a power. Thus, if we exercise the power to contract we (or at least one party to the agreement) acquires the right to what was promised; what the law calls the expectation interest. Such a right is, in my idiosyncratic vocabulary, a primary right. Once vested with such a primary right, there arises a secondary right of rectification if the expected state of affairs does not come to pass. In a sinless world, such defeated expectations may have been exceedingly rare if not nonexistent but they are common enough in the world as we know it.

The power to engage in the social practice of contracting entails, I argued, some form of private property; otherwise, how could I promise to deliver my almost ripe cantaloupes in exchange for your yet-unharvested pumpkins? In other words, I must have rights to possess, exclude others from possessing, and then delivering what I am growing in order to agree to deliver it to you at some future date. This concatenation of rights (always cabined by the goal of eschatological rest) are also, in my view anyway, primary.

I have no doubt I may be using my terms inconsistently with The Tradition and for that I beg forgiveness. Yet at the lease I hope I have made matters clear(er).

11 August 2014

Private Property and Natural Law

Props to Brad Littlejohn for taunting me to respond to his post Recovering the Catholic Doctrine of Private Property (Pt. 1). As I tell my Contracts students, you can't eat dirt so I take the position that contracts are more important than property. For some reason, my Property-teaching colleagues haven't been amused. Nonetheless, I have a few thoughts on the place of "property" in a Christian understanding of natural law. I begin with the social practice of contracting and then move to the law of contracts before returning to the notion of property.

Let's start with some helpful self-promotion. In my piece, Consideration in the Common Law of Contracts: A Biblical-Theological Critique (download here), I begin my argument with the proposition that several orthodox Christian doctrines undergird the social practice of contracting. I start with human dependence--entailed by our finite embodied form--and innate sociability (male and female and the family), warranted by the so-called dominion mandate, and oriented to eschatological rest. Apart from sin, we thus see the building blocks for what would have been a complex and interconnected world-wide web of exchanges. Each individual would have had particular gifts in the sense of skills the products of which (in goods or services) would have benefited a neighbor whether near or far. Markets, thus, are not properly a post-Fall phenomenon. Even in a sinless world, markets would have come into existence "naturally" with the growth in numbers of the human race and its dispersion across the globe.

Even if motivated by love, not avarice, exchanges would have occurred on a large scale. But that scale suggests a coordination problem. In traditional societies goods and services are allocated based on tradition and elders of the community. It strikes as unlikely that such a mechanism would have continued as the sole means of distribution as the Adamic family grew to many millions and extended from Eden to South America. Uncorrupted traditional forms of distribution would certainly have characterized an unfallen world but a market-component would have also have played a role. This power to effect change in relationships by contracting characterizes the first-order realm of primary rights (about which more below).

Yet, markets must have rules. Not rules of rectification for wrongs but coordination rules through the help of which even the unfeignedly good-hearted can better live. Thus something by which persons seeking to exercise dominion more effectively would come into existence. Such rules would have then, as largely they are now, been matters of prudence, not principle, like driving on the right-hand or left-hand side of the road.

Enter sin or, as the economists call it, opportunism. You can read my article Principled Pluralism and Contract Remedies (download here) for how I ground politically the secondary right of rectification for breach of contract. In short, I find the need for state-sponsored remedies for breach of contract in the Fall and the warrant for providing them in the Noachic covenant. Here I may suggest the piece I published as part of a symposium on Christianity and liberalism, Looking for Bedrock: Accounting for Human Rights in Classical Liberalism, Modern Secularism, and the Christian Tradition (download here).

In my Looking for Bedrock piece, following in part Nicholas Wolterstorff (and my own readings, including the O'Donovans) I conclude that rights are every bit as fundamental as right-order. It's not an either-or, and it makes little sense to assert that's the case. (For links to my nearly-interminable series of posts on Wolterstorff's book, Justice: Rights and Wrongs, start here and work backwards.) Right-order-only folks need to come down from the clouds and stop romanticizing an imagined happy-clappy Medieval hierarchy. Either that, or read some of Martha Nussbaum's careful ethnographic studies of traditional Indian cultures.

With that we've come full circle. Human beings, even sinless ones, had primary rights. Those rights were and are grounded in our human nature both as images of God and as finite, embodied, social beings. Human cultures, even ones untainted by sin, would have needed coordination rules. Rights of the sort we humans have, and would have had, are primary. Such rights would have included contract and property. And such primary rights would have entailed rules. These rules would not have needed to address the wrong of opportunistic breach but some would have been in place regardless of the presence of sin.

"Property" as use alone would have been insufficient to build a sinless human culture. Some sort of rights to possess, exclude, and convey would have been appropriate. No doubt these rights would not have appeared as extensive or as absolute as we see today in commodified Western culture. Yet I believe that primary rights would have included some sort of property given the divine mandates to grow and develop human society and culture. Property is therefore not entirely adventitious.

08 August 2014

Bankruptcies Are Falling! Bankruptcies Are Falling!

No one would blame folks for believing that the lackadaisical recovery from the Great Recession--slow job growth and even slower income growth--would entail a relatively high number of bankruptcy filings. Nonetheless, such folks would be wrong.

As I've explained to students who take my courses in Bankruptcy law, individual filings are a trailing economic indicator. In other words, as the economy improves, consumer credit increases. Why? Because boom times produce irrational exuberance and consumers believe they can borrow more and more because the good times won't end. And, as consumer debt increases, so does the possibility of what quaintly used to be called financial embarrassment. And with such embarrassment comes the utility of personal bankruptcy.

The bottom line: without growth in consumer debt, consumer bankruptcies fall.

And, with the anemic recover has come not an anemic increase in consumer debt but an inflation- (and population-) adjusted decrease. Go here to read a more analytic post by Bob Lawless that further explains this seemingly anomalous state of affairs.

06 August 2014

It's Still Impossible! Or, At Least It Should Be

Impossibility or impracticability? In other words, when should courts let a contract party off the hook? When it's physically impossible to perform? Or when it's really, really hard (read: expensive) to perform? Go here to download the latest foray into this morass of contract law where you can read Mission Impracticable: The Impossibility of Commercial Impracticability by Jennifer Camero.

Today, a contract party will raise the defense of commercial impracticability when the cost of performance has unexpectedly shot through the roof. Perhaps an oil embargo has driven up the cost of fuel. Perhaps a canal has been closed, which forces ships to take a much longer--and much more expensive--route. 

Professor Camero does a fine job of laying out in brief compass the history of the doctrine(s) of impossibility and its modern bastard child, commercial impracticability. (For those who want to read more about impossibility's historical and putatively Puritan-theological origins, download an article I co-wrote, The Puritan Revolution and the Law of Contracts by going here.)

Professor Camero next illustrates both the judicial inconsistency in applying the law which, in turn, is a function of the barely-coherent expression in both the contemporary common law and Article 2 of the Uniform Commercial Code. (For the truly curious, you are welcome to read my article Clear Rules Still Produce Fuzzy Results: Impossibility in Indian Contract Law , which addresses the sad failure of Indian courts to apply a straightforward statute by downloading it here.)

She goes on to demonstrate that even the seemingly more precise solution to the problem of when a contract party should be released is unavailing. Judges enamored of neo-classical economics hold that the party who is the superior risk bearer (or cheaper insurer) should be held to perform come hell or high water. The contract party that is more at-risk, so to speak, should be given a pass.  As I regularly explain to my students, however, the "superior-risk-bearer" test calls for more than even a well-informed court can deliver. And I'm pleased to read that Professor Camero agrees.

Next, Professor Camero shows that the "can't we all get along" solution to the problem of impracticability--one where the court "reforms" the contract to make the contract parties share in the unexpectedly high cost of performance--also fails. Judicial competence is a problem here as it is with identifying the superior risk bearer and, besides, forced sharing is simply un-American.

Many years ago I reviewed many of these points in one of my first published pieces, Mission Possible: A Paradigm for Analysis of Contractual Impossibility (download here). I came to no conclusion 14 years ago but I have today. While I'm not certain Professor Camero and I fully agree, we're very close and she provides an excellent contractual provision by which the parties can provide the court with the means by which to excuse performance. After all, if the parties agree in advance that one may be let off under certain circumstances, and if the parties tell the court how to make the decision, then the fundamental problem of how to deal with an extraordinary change in the cost of performance is resolvable.

05 August 2014

Detroit: Another Step Forward

Reuters reported here on Monday that Detroit and seven of the creditors that had appealed to the Sixth Circuit Court of Appeals have asked that court to "suspend" proceeding on the appeals. These creditors have cut deals with the city and so see no reason to challenge the city's right to be in bankruptcy. No word on the two "outsiders," Syncora and Federal Guaranty Insurance Company

Only 17 days to the beginning of the hearing on confirmation of Detroit's plan of adjustment. I expect some further wheeling and dealing but I suspect that unless Syncora and Federal Guaranty essentially cave in, of significant creditors, only they will be in opposition to confirmation.

03 August 2014

"Just Relationships"

You can go here to download an article co-authored by one of today's best thinkers on the broad topic of political theory, Hanoch Dagan. (You can read some earlier comments on one of his articles here, here, and here.) In a broad sense Dagan is a pluralist when it comes to matters of theory. In other words, it's a mistake to make a single principle, whether individual autonomy, utilitarian welfare maximization, or distributive justice, the ne plus ultra of theoretic thought about political arrangements. For what it's worth, I agree, as I observed here in connection with my piece, Principled Pluralism and Contract Remedies (which you can download here).

In any event, in this article Dagan and co-author Avihay Dorfman (did I mention that both are on the law faculty at the University of Tel Aviv?) conclude that neither of the most common standard account of political justice suffice and their conception of relational justice provides a necessary corrective:
We argue, contrary to [justice in terms of formal equality], that relational justice picks out relationships of substantive or genuine equality and freedom and, contrary to [democratic egalitarianism], that relational justice is not exhausted by the ideal of people interrelating particularly [i.e., solely] as citizens.
To summarize very briefly, justice implemented solely by the state and justice defined solely in terms of just individual interactions is incomplete. The former "takes individuals to be patients and holds state institutions responsible to respect them as such." Such infantalizing (my word) of persons is substantively unjust. 

Conversely, political egalitarianism (what I would characterize as autonomy theorists), presupposes that "every person is entitled to be respected as a citizen and therefore has the special standing to produce, on equal terms, the norms under which he or she lives." This approach is simply incoherent as the current culture (and legal) wars (here) over same-sex marriage and religious accommodations make clear. Egalitarianism also treats people only as individuals, something which is contrary to our actual lived experiences as members of multiple, inter-related social entities.

A just society, according to the authors, must treat its members "in terms of frameworks of relationships between self-determining individuals who respect each other as the persons they actually are." With such a goal they believe that the state can recede, at least a little, and "frameworks of relationships" (rather than naked individuals) can assume a more meaningful place.

Nice sounding, I suppose, but still state-centric for enforcement and autonomy-centered for its substance. The authors apply their reasoning to the rights of the disabled in the workplace setting but I see no principled end to their recognition of the rights of individuals-in-frameworks in private settings. In short, I conclude that this article does little work as a critique of contemporary socio-political expression. The conceptual move from either a patient-centered or individual-centered perspective is fine but has little traction with regard to the increasing hyper-legalization of contemporary Western life.

01 August 2014

"Jersey Boys"

A week ago we went to one of the few local theaters still showing Jersey Boys, a film directed by Clint Eastwood. Although it's fast fading from the world of multiplex theaters (we saw it at the landmark Commodore Theater in Portsmouth), and even though it's reviews have been mixed, we thoroughly enjoyed the movie. Perhaps remembering the songs of the Four Seasons from the transistor radios of our youth had something to do with it but the story is well told in four acts, each introduced by one of the band members.

The text of the Broadway production and screen play of the film were largely written by Bob Gaudio, one of the band members. Bob and lead singer Frankie Valli were partners apart from other members of the group. Thus, one can expect that the story is rather sympathetic to their side of the conflicts within the group. The film nonetheless appears to be fair to all interests.

We especially appreciated that the Four Seasons and Frankie Valli were played by Broadway cast members rather than film actors. Not recognizing any of them from other roles lent an aura of authenticity to their top-notch performances.

The film was not a profound examination of the human condition but it was enjoyable. We would certainly recommend seeing it.