The Case Against Delaware

The state of Delaware has just won a major dispute with New Jersey in the Supreme Court, over a vigorous dissent by Justice Scalia. The dispute concerned New Jersey's plan to build a "huge gas-processing plant on the Jersey side of the Delaware River." As the NYT reports,

New Jersey has threatened to pull state pension funds from Delaware banks. Delaware officials, meanwhile, talked about calling up its National Guard to guard its border. . . . [A] New Jersey legislator wondered aloud about recommissioning the battleship New Jersey, now a museum on the Camden waterfront, just in case.

The majority agreed . . . that New Jersey could not authorize activities “beyond the exercise of ordinary and usual riparian rights in the face of contrary regulation by Delaware.” Justice Antonin Scalia . . . professed to be flabbergasted by the majority’s reasoning. What was so “extraordinary” about a wharf to unload liquefied natural gas, he asked. “Would a pink wharf, or a zig-zagged wharf qualify? How about one for the transfer of “tofu and bean sprouts”?

It all reminds me of a classic 2002 article by Jon Chait charging Delaware with persistent disregard for other states' interests. . . .

The practice of charging road tolls is an archaic holdover blighting much of the Northeast. But Delaware has taken it to a grotesque extreme. Whereas the I-95 tolls amount to less than five cents per mile in New Jersey and four cents per mile in Maryland, in Delaware they cost an exorbitant 18 cents per mile. Which isn't surprising because, in a deeper sense, Delaware's tolls epitomize the state's entire ethos. The organizing principle of Delaware government is to subsidize its people at the rest of the country's expense.

[But not] all the instruments of Delaware's rapacity take the form of meddlesome, high-handed government exacting inflated costs on out-of-state visitors. When need be, the state's avarice can also be fed by the exact opposite. An example of this latter technique is Delaware's enticement of much of the banking industry to relocate within its borders. It did so in 1981 not only by offering special tax breaks--the standard formula that states and localities use to woo industry--but by eviscerating its usury laws, which limit the interest a bank can charge for loans or credit cards.

[S]till, perhaps the prime example of what Louis D. Brandeis called the regulatory "race to the bottom" is Delaware's biggest scam: incorporation fees. It so happens that in excess of 300,000 corporations--including half of the Fortune 500-- incorporate in wee Delaware. . . . Delaware propaganda suggests it is primarily a function of the state's efficient bureaucracy and legal system, which includes a chancery court (a chamber specializing in business disputes). This is partly true, but it ignores the overriding factor:. . . its laws are specifically crafted to appeal to the interests of corporate executives.

All of this is deliberate state policy. A hundred years ago, in fact, the great trusts preferred to incorporate in New Jersey, not Delaware. It was only when New Jersey, under the progressive-era governorship of Woodrow Wilson, altered its laws to take account of interests (other than management) that corporations began to flee across the Delaware River.

Jon Chait's laments will be no surprise to those who run the "race to the bottom" blog. (As Tim Glynn notes, "Delaware’s jurists are willing to go beyond the traditional norms of judicial behavior to advance Delaware’s interests.") Nevertheless, I may just end up on Delaware's side in this particular dispute. New Jersey's proposal doesn't exactly sound enviro-friendly--and as one who commutes through the chemical tanks of Kearny, NJ on a daily basis, I'm not exactly confident in the state's environmental record.

Posted by Frank Pasquale at 06:21 PM | Comments (2) | TrackBack

Flying the Stratified Skies

Travel has always served to remind us of the divisions our "classless society" tries so hard to downplay. Sam Walton may have driven an old truck, but you'd be hard-pressed to find most top executives or trust-funders flying in less-than-first-class digs. As the song in Chitty-Chitty Bang-Bang put it,

O the posh posh traveling life, the traveling life for me

Pardon the dust of the upper crust - fetch us a cup of tea

Port out, starboard home, posh with a capital P. . .

Admittedly, for those of us crushed into coach, there was always a happy flipside to the narrative: the profligates up front were paying so much more for their seats, effectively subsidizing the rest of us.

But that subsidy effect has been on the wane in recent years. And now wealthy fliers have found a new way to effectively assure that the rest of us are subsidizing them:

Corporate jets pay a fraction of the taxes and fees that commercial airliners do. The F.A.A. estimates that private planes, which include both corporate jets and weekend fliers, account for 16 percent of the air traffic control system’s overhead but contribute only 3 percent of the fees earmarked to run the system.

***

The Air Transport Association has . . . created a Web-based ad campaign featuring a fictional traveler, Edna, complaining about the fee disparity while the computer screen displays waves of corporate jets filling the skies before and after sporting events like the Kentucky Derby and the Masters golf tournament.

It's enough to wilt the mint in your julep. As the campy YouTube ad sloganeers, travelers like "wearing big wigs, not subsidizing them!" Edna (pictured above) wonders "Why should the rest of us pay ten times more using the same services?"

Fortunately, the FAA has heard her pain, and is planning on "sharply increasing the fuel tax for private jets and also hitting corporate fliers with extra charges to land at any of the country’s 30 most congested airports."

Posted by Frank Pasquale at 09:45 AM | Comments (1) | TrackBack

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

"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:

The saga began in 2003 when the vessel's Greek owner died and his company did not keep up payments on a $3.3-million mortgage.

Bahamian court records show that an American businessman who had used the vessel to haul 235 used cars from the northeastern United States to Haiti did not pay the charter fee, contributing to the loan default.

Once the ship arrived in the Haitian port of Miragoane, the businessman bribed judicial officials to seize the vessel and sell it to him in a rigged auction, according to court records.

Meanwhile, a violent rebellion threatened to topple President Jean-Bertrand Aristide, making it impossible for the lender or the owner's relatives to contest the sale.

The condition of the Aztec Express further complicated matters. Its main engines were out of commission, having been idle and untended for months.

Hardberger was hired by the New Jersey-based mortgage holder. He flew to Haiti and drove with an armed bodyguard to Miragoane.

He gathered two important pieces of information. Watchmen stationed on the Aztec Express sold fuel from the vessel on the black market. Second, port authorities had a cellphone, but they could use it only at the harbor's soccer field, where cellular service was reliable.

Hardberger managed to get the guards off the ship by offering to buy fuel. When they came down to the dock to discuss the transaction, off-duty Haitian riot police hired by Hardberger held them at bay.

MEANWHILE, an oceangoing tugboat also hired by Hardberger slipped into port and backed up to the Aztec Express. Under a full moon, the crew began cutting the anchor chains with blowtorches.

In case harbor officials noticed and tried to call for help on their cellphone, Hardberger had paid a witch doctor $100 to cast spells on the port's soccer field. The witch doctor marked the field with gray powder, a clear warning to believers in voodoo, the nation's dominant religion. No call ever went out.

Once the freighter was freed, the tug hauled the ship out of port and headed for the Bahamas, where British-based maritime laws give a high priority to lenders' claims.

Anarchy, it would seem, is alive and well and sailing the seven seas.

Posted by Nate Oman at 10:29 AM | Comments (4) | TrackBack