“In many cities, however, and especially in Athens, the poorer citizens had towards the rich a double hostility, that of envy, and that of traditionalism. The rich were supposed – often with justice – to be impious and immoral; they were subverting ancient beliefs, and probably trying to destroy democracy. It thus happened that political democracy was associated with cultural conservatism, while those who were cultural innovators tended to be political reactionaries. Somewhat the same situation exists in modern America, where Tammany, as a mainly Catholic organization, is engaged in defending traditional theological and ethical dogmas against the assaults of enlightenment. But the enlightened are politically weaker in America than they were in Athens, because they have failed to make [...]]]> Who said the following, and when?

“In many cities, however, and especially in Athens, the poorer citizens had towards the rich a double hostility, that of envy, and that of traditionalism. The rich were supposed – often with justice – to be impious and immoral; they were subverting ancient beliefs, and probably trying to destroy democracy. It thus happened that political democracy was associated with cultural conservatism, while those who were cultural innovators tended to be political reactionaries. Somewhat the same situation exists in modern America, where Tammany, as a mainly Catholic organization, is engaged in defending traditional theological and ethical dogmas against the assaults of enlightenment. But the enlightened are politically weaker in America than they were in Athens, because they have failed to make common cause with the plutocracy. There is, however, one important and highly intellectual class which is concerned with the defense of the plutocracy, namely the class of corporation lawyers. In some respects, their functions are similar to those that were performed in Athens by the Sophists”

The answer follows the jump.

Bertrand Russell, History of Western Philosophy (1945) [quote is from Chapter 10]. Note how Russell’s political frame – probably outdated by the early 1940s – is impossible to apply in our vastly more complicated society.  Additionally, I’ve come to believe, reading Urofsky’s uneven but sometimes brilliant new biography of Brandeis, that the idea of a corporation lawyer in the sense of a lawyer for the situation was largely the invention of that famous progressive jurist.

Louis K. Bonham, counsel to the defendant, has done so.  He reports that the case has now been dismissed – but for want of personal jurisdiction.  According to the docket, Judge Miller’s decision issued on October 23.  It rests on the observation that the only contact that the defendant had with Texas was the airing of [...]]]> I’ve  posted on a lawsuit out of Texas, in which a law student plaintiff sued a lawyer defendant for failing to live up to a “promise” to pay $1,000,000 to any television viewer who could prove him wrong about his theory of a case.  I opined the case was a classic example of puffery, unlikely to reach the merits on that ground.   I challenged readers to prove me wrong.

Louis K. Bonham, counsel to the defendant, has done so.  He reports that the case has now been dismissed – but for want of personal jurisdiction.  According to the docket, Judge Miller’s decision issued on October 23.  It rests on the observation that the only contact that the defendant had with Texas was the airing of a television broadcast: personal jurisdiction on these grounds would make him subject to national jurisdiction where it wasn’t otherwise anticipated.

Incidentally, the underlying motion documents suggest that plaintiff’s claim was even weaker on the merits than I’d argued, as the unedited transcript of of the boast is different than the version in the complaint.  Here’s what plaintiff asserted was said:

NBC’s Ann Curry asked whether there was enough time for [Mason's client] to commit [a crime]. An unidentified person said, “The defense says no.”

“I challenge anybody to show me,” Mason said. “I’ll pay them a million dollars if they can do it.”

But here’s what was actually said:

… And from there to be on the videotape in 28 minutes. Not possible. Not possible. I challenge anybody to show me, and guess what? Did they bring in any evidence to say that somebody made that route, did so? State’s burden of proof. If they can do it, I’ll challenge ‘em. I’ll pay them a million dollars if they can do it.

NBC Transcript, p. 3

This kind of qualifying language makes it even more obvious that the statement was a mere puff. Congrats to Mr. Bonham on his win!

(H/T: TNC)

When Does This Get Pierced?

If you’ve made it through the content of complaints, some data about who gets sued, and descriptive statistics about wins and losses, you basically are pot committed to this veil piercing project. In this post, I’m going to exploit that commitment by describing the results of our statistical analysis of two different kinds of success that plaintiffs may achieve in veil piercing cases: (1) on motions; and (2) at the case level. If you don’t care to follow me beyond the jump, here’s the bottom line (from our abstract):

“Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing claims than corporations; undercapitalization is strongly associated with success while conclusory grounds like [...]]]>

When Does This Get Pierced?

If you’ve made it through the content of complaints, some data about who gets sued, and descriptive statistics about wins and losses, you basically are pot committed to this veil piercing project. In this post, I’m going to exploit that commitment by describing the results of our statistical analysis of two different kinds of success that plaintiffs may achieve in veil piercing cases: (1) on motions; and (2) at the case level. If you don’t care to follow me beyond the jump, here’s the bottom line (from our abstract):

“Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing claims than corporations; undercapitalization is strongly associated with success while conclusory grounds like “façade” and “sham” are not; and defendants’ legal sophistication is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than plaintiffs suing companies employing many workers. This results holds even when controlling for legally-relevant variables. Contrary to both theory and previous empirical work, we also find that judicial liberalism is inversely related to the likelihood of plaintiff success.”

Veil Piercing Motions

Let’s start with the motions level. We ran a logistic regression, where the dependant variable is plaintiff succeeding at the motions level – - either advancing the veil piercing case (e.g., getting VP discovery), or actually winning – - and a number of our variables of interest reach statistical significance (at p ≤ 0.05 (two-tailed)), including judge ideology, defendant firm size, voluntary creditor-based causes of action, and the presence of the shell, façade, and undercapitalization grounds for piercing in the complaint.* Generally, and in accord with our theory, we get much better model performance when we look at motions-level success than at case-level success.

What does this mean?  Well, consider the effect of being a veil piercing target with more (or less) employees.  For example, the figure indicates that the probability of successfully asserting a veil piercing motion against companies with less than 300 employees being is around 0.80. For companies with more than 2100 employees, that number drops below 0.20.  These results hold when controlling for variables like “being an LLC, or not”, “being incorporated in Delaware, or not”, asserting “informalities as a ground in the complaint, or not”, etc.

By contrast, we find that as a judge’s ideology moves in a conservative direction, the mean likelihood of having successful interstitial veil piercing activity increases.  Motions in cases with very liberal judges have a mean predicted probability of being successful of under 50%, while that probability is around 75% for moderate district court judges and near 95%  for conservative district court judges.  This is, in a word, surprising!

Discrete factors also correlate with success on veil piercing motions.

The bottom portion of the figure to the left contains the plots for the substantive effect of the three veil piercing grounds (in complaints) that have a statistically significant effect on veil piercing motion success: shell, façade, and failure to adequately capitalize (or undercapitalization).  The addition of façade and shell grounds to a veil piercing complaint each provide strong negative effects on the likelihood of veil piercing motions in that case, with a shell ground decreasing the likelihood of veil piercing motion success by over 39%, on average, and a façade ground doing the same by nearly 53%, on average.  Stated undercapitalization grounds have the opposite, albeit more modest, effect.  The addition of an undercapitalization ground to a veil piercing complaint makes an interstitial veil piercing motion 14% more likely to be successful.  We also find (but do not illustrate) that corporations owned by artificial shareholders are more likely to be subject to successful veil piercing motions than LLCs owned by artificial shareholders.

Here’s what this suggests to me: facade and shell grounds in complaint signal/reflect a case that is pretty thin — the grounds are totally conclusory — such claims fall away in cases at higher-than-usual rates.  By contrast, undercapitalization signals a strong case — one that evidences a certain about of seriousness about the veil piercing claim.   With respect to voluntary creditors (i.e., contract claims) recall that plaintiffs can bring both voluntary and involuntary creditor claims in the same complaint.  Still, the expectation from theory was that voluntary creditors ought to win less often than involuntary ones.  We don’t find that.  We find instead that complaints with voluntary creditor causes of action in them are more likely to be associated with veil piercing claims that survive longer.

The corporation-LLC finding is expected.  LLCs are designed to be more informal.  They ought to be pierced less often.

Case Level Success

As I discussed in an earlier post, figuring out what veil piercing success at the case level means is a little bit complicated. We decided to treat veil piercing at the case level as successful if: (1) the veil has been affirmatively pierced by a court through veil piercing motion activity OR (2) when, after veil piercing has been litigated on the record (through motion activity), the case settles while veil piercing is still “alive” in the case (i.e., having never been dismissed or denied).  In the paper, we provide alternative set of results based on the coding of veil piercing success both more narrowly (excluding all settlements) and more broadly (including all settlements where veil piercing is still “alive,” regardless of the affirmative presence of veil piercing motions in the case).

We again find that employee size has an important relationship to success.  Very small firms have a probability of case level veil piercing of around 20%; that number quickly approaches zero as firm size increase. Similarly, the more conservative a district court judge is, the more likely the case he is presiding over is to have a case-level veil piercing success.  This result, of course, mirrors that in the veil piercing motion context.  While the most liberal judge’s case has around a 15% probability of having ultimate veil piercing success, the most conservative judge’s case has around a 30% probability.

Individual factors also matter.  When companies are incorporated in different states from where they operate (holding their size constant) the presence of such sophistication decreases (by about 10%) the likelihood that the firm’s veil will be pierced.  The inclusion of undercapitalization as a ground increases (by about 10%) the likelihood of there being a successful case-level veil piercing.

The last post in this series will discuss these results.

* * *

FN*  We generally do not find statistical significance at the motions level for our variables regarding entity choice,  shareholder identity, defendant sophistication, judge gender or race, appellate court control, or the increased incidence of success when failure to observe formalities, inadequate capitalization, and domination and control were cited as veil piercing grounds against corporations compared to LLCs

“This year the LSA is soliciting proposals for projects in the early stage of development that could be presented at work-in-progress sessions. We would be interested in developing a proposal for such a session focused on law and entrepreneurship, so please feel free to submit such projects to us.

You may submit a proposal to any of us via email, but as a default matter, please send your proposal to Gordon Smith by [...]]]> Gordon Smith, Brian Broughman, and Darian Ibrahim are organizing a “conference within a conference” at the  Law & Society Association annual meeting on Law, Entrepreneurship & Society.  The meeting will be in Chicago, Illinois on May 27-30, 2010 this year. I attended last year’s entrepreneurship panel at LSA, and it was great.  Gordon reports:

“This year the LSA is soliciting proposals for projects in the early stage of development that could be presented at work-in-progress sessions. We would be interested in developing a proposal for such a session focused on law and entrepreneurship, so please feel free to submit such projects to us.

You may submit a proposal to any of us via email, but as a default matter, please send your proposal to Gordon Smith by November 30, 2009.”

To Our Readers:

The backlog of papers to be announced in this eJournal has become unacceptably large. To ensure that our readers and authors get rapid access to the current research in this area we are temporarily increasing the distribution of this eJournal to up to five issues per week. We know this puts a bigger burden on our readers to digest the material, but we also believe our readers and authors would rather have the information sooner than later.

Sincerely, Bernard S. Black and Ronald J. Gilson Directors, LSN

Law and psychology is hot!

There’s value in this approach, not least because opinions shape reality. But there’s a problem too.  Not only are opinions unrepresentative, but they come late in cases.  The result is an extreme form of selection.  It’s not clear (to me, anyway) what the null hypothesis regarding the effect of independent variables  ought to be for late-stage dispositions.

Dockets offer the promise of a different approach: asking which factors correlate [...]]]> If you look at opinions, winning in a veil piercing case is pretty easy to define: did the court agree to pierce the veil, reaching through an entity to its shareholders. If you were inclined, you could model success at those terminal moments in cases, asking which factors (described in the opinions) correlated with courts agreeing to pierce.

There’s value in this approach, not least because opinions shape reality. But there’s a problem too.  Not only are opinions unrepresentative, but they come late in cases.  The result is an extreme form of selection.  It’s not clear (to me, anyway) what the null hypothesis regarding the effect of independent variables  ought to be for late-stage dispositions.

Dockets offer the promise of a different approach: asking which factors correlate with success or failure early in cases.  Further, assuming that adjudicated motions teach the parties about the strength of their cases, and that they settle strategically, we can even start to learn from the timing and incidence of settlement.

In this post, I’m going to relay some descriptive statistics about the veil piercing successes that plaintiffs achieved in our data. (I’m continuing to pull the data and some text from our paper.)  To those who are getting annoyed by all of these posts, I’m sorry!  I’ve been living with this project for a long time — I’m excited to finally share it publicly.

We coded 550 motions raising veil piercing problems, and 580 non-veil piercing motions, in our 690 cases.  Overall, about half of all veil piercing motions result in plaintiffs advancing their veil piercing claims (but not ending the case), about fifteen percent involve judicial determinations against the veil piercing claim, twenty percent success on the merits (if defaults are included), and the remainder of motions were pending at the time of settlement. (Recall that 2 of 3 cases overall ended in settlement).

Excluding defaults, and dropping pending motions, veil piercing litigation is a story of wild early success: plaintiffs prevailed — in one form or another – on approximately 85% of all veil piercing motions in our dataset.  Many cases had their veil piercing claims still “alive” at the time of settlement.  Indeed, using the most liberal definition, which includes settlement after motion practice as victory, 78% of cases resulted in plaintiffs realizing some value from their veil piercing claims.

But very few cases actually led to veil piercing, on the merits, outside of defaults: only 37 cases, out of 690, contained a judicially-enforced veil piercing on the merits.  That’s around 6%.

Moving parties were less likely to win non-veil piercing discovery motions  than veil piercing discovery (a 67% success rate versus 90% in resolved motions) and plaintiffs were less successful at fighting off motions to dismiss (61% plaintiff prevail rate versus 88%) and summary judgment (62% versus 90%).  One explanation for this effect is that veil piercing motions (i.e., demanding VP discovery, or fighting of a motion to dismiss) are somehow not selected out of cases to the same degree that ordinary motions are: defendants either are too attached to them (think they are going to win when they won’t) or plaintiffs insufficiently so (think they lack settlement leverage when they have it).

The advantage of looking at success and failure at the motion-by-motion level is that it promises a chance to move the problem of selection back in cases to a moment where we wouldn’t reasonably expect for plaintiffs and defendants to have a realistic sense of their chances. We can fairly hypothesize that some independent variables — judicial demographics, plaintiffs and defendant characteristics, legal rules and planning — will affect the parties’ respective successes and failures on (say) the grant rate in motions to dismiss.  As I’ll discuss in penultimate post in this series, that intuition turns out to be basically correct.

Confused?  Read the paper!

Citation studies as a proxy for judicial quality are all the rage.  I concur with Larry that the effort spent often seems disproportionate to the result.  Selection is the culprit here, not just academic modesty: it’s hard to imagine that any truly dramatic effects of judicial character, or legal rule, would not be washed away by parties’ ability to settle strategically.

Exogenous shocks open windows – of limited scope – which may help us penetrate this fog.  There’s one ongoing today that I think could in several years allow us to test one of the most important, but obscure, questions about judicial performance.  Although there have been a few studies about the usage, hiring, and quality of law clerks, I haven’t seen work that [...]]]>

Judge food.

Citation studies as a proxy for judicial quality are all the rage.  I concur with Larry that the effort spent often seems disproportionate to the result.  Selection is the culprit here, not just academic modesty: it’s hard to imagine that any truly dramatic effects of judicial character, or legal rule, would not be washed away by parties’ ability to settle strategically.

Exogenous shocks open windows – of limited scope – which may help us penetrate this fog.  There’s one ongoing today that I think could in several years allow us to test one of the most important, but obscure, questions about judicial performance.  Although there have been a few studies about the usage, hiring, and quality of law clerks, I haven’t seen work that really convinces me that clerks change judicial performance (rather than match it).  That question of influence is pretty important for all kinds of reasons — not least because if law clerks were really influencing their judges, we might want to spend a little bit more time thinking about their roles, ethics, hiring, etc.

So what’s the shock?  I think that the period of 2008-2011 will prove, in retrospect, to be bumper years for clerk quality.  Anecdotally, I’ve heard that the clerkship market has never been more competitive: Yale grads have been encouraged to take state court clerkships (the horror); judges in popular jurisdictions are receiving literally four to five thousand applications per clerk year; individuals who before might have taken firm jobs are instead throwing their hats in the ring; magistrate judges are taking clerks previously destined for district judges; alumni in practice for five years are going back into the clerk market and competing with fresh-faced 3Ls.  As an organ of the government, the judiciary simply eats better brains when the economy stinks.

Assuming the effect is real (which we could test by looking at placement statistics), I’d propose that eight to ten years from now – in 2018 or thereabouts – we test whether opinions arising from this bumper-clerk period are cited at a higher rate than opinions from the ordinary market periods immediately preceding and following.  The hypothesis would be that if clerks influence judges to write better opinions, better clerks will produce to more citable opinions.  Notably, we can’t perform this same analysis on the effect of past recessions, as (1) they reportedly didn’t have the same effects on the clerkship market; and (2) opinion collection practices were really sporadic before 1995.  It’s 2018 or bust.  Mitu et al., I call dibs!

Starting with the [...]]]> As I described yesterday, Christy Boyd and I have collected a representative sample of veil piercing complaints and have written up some of our analysis of that data in Disputing Limited Liability. Before talking about the meat of the project — the wins and losses — I’ll describe another piece of information that you can extract from complaints but not opinions: who gets sued.  In the 690 cases in our sample, plaintiffs sought to pierce the veil of 870 entities.  With the generous support of Temple’s Law Library, we purchased information about those entities from Dunn & Bradstreet, including the number of employees and revenues per firm, corporate structure, and organizational home.  After the flip, I’ll give you a taste of our findings.

Starting with the basics, approximately eighty-five percent of the entities to be pierced are corporations and thirteen percent are LLCs, meaning that just over two percent compose other forms.  The following figure examines the ownership of such entities, looking only at the domestic corporations and LLCs, and ignoring other entities entirely.

The shareholder makeup of LLC and Corporations to be pierced. This Figure drops other entities (including mostly foreign companies) from the analysis. "Entity Mix" refers to groupings of individual and entity shareholders, or LLCs and Corporations together as shareholders.

Notably, natural people own about equal percentages of the LLCs and Corporations in our data: 70%.  The remainder consists of artificial owners.  This implies, of course, that most veil piercing plaintiffs in our sample seeks to pick the pocket of ordinary people.  Cases in which veil piercing looks more like a bankruptcy consolidation are rare.

Now, you might ask where such companies were incorporated and/or organized.  Based on the work of Jens Dammann and his co-authors, we had believed coming into our analysis that companies might change their legal home depending on a jurisdiction’s treatment of veil piercing claims.  (They would migrate away from liberal jurisdictions and toward strict ones.)  Thus, identifying the state of organization/incorporation was important for our project’s later inferential analysis.

Both of the above figures display the the incorporation/organization choices for entities with a non-trial number of observation in the data.  As you can see, Illinois is a surprisingly prominent entrant.  The reason?  ERISA veil piercing practice by Chicago firms! Otherwise, the picture isn’t all that interesting.  But what happens if we ask whether firms are incorporated/organized in a different jurisdiction from the one that they are doing business in?

The black portion of the bar chart indicates the number of entities in the state that are both incorporated/organized there and that operate there. Light grey indicates that the entity is only incorporated/organized in the state but does not operate there or vice versa. Dark grey shows the number of entities that are operating in the state but for which we do not have data on their state of incorporation/organization.

Here we see that Delaware, which attaches to a very large number of the entities to be pierced, is the operating home to very few.  Such firms are both larger and more legally sophisticated than the mean.  By contrast Illinois, which produces lots of entities to be pierced, is basically represented by very small mom & pop businesses.

The cool thing about this variable is that enables us to get, for each entity in the dataset, a very rough, but very clean, approximation of its legal sophistication.

We also collected information about employment.  Of the firms to be pierced,  fifty-five percent employed ten individuals or less.  Twenty-six percent reported 11-50 employees; six percent had 51-100 employees; seven percent had 501-1000 employees; and four percent had more than 1001 employees.  That last statistic is pretty striking, from a particular point of view. It’s often remarked that in the history of the United States, no one has successfully pierced a public company.  (We have no idea if this is actually true. But it feels true.)  But we observe around 50 cases in our data where someone tried to pierce a firm with more than 1000 employees – some firms employed more than 30,000 workers and were public.  If it’s true that public companies are immune from veil piercing, it’s not for lack of trying.  That might lead you to think of plaintiffs lawyers asserting veil piercing complaints as the Don Quixotes of the commercial litigation bar.  If you take as your measure of success a merits based judicial determination that the veil ought to be pierced, you’d be right.  But, as I hope to convince you in my next post on this topic, that’s the wrong way to think about success.

Putting aside Mauer’s denial, the interesting thing about this is whether it’s actually wrong to steal signs. There’s no rule against it, and so the answer is: it depends on the players’ perceptions of the situation. If you run afoul of the norm (i.e., a batter looking behind him) then you are likely to face informal sanctions in the form of a baseball to the body. Mauer’s sign-stealing, by contrast, seems acceptable: (1) it was a crucial game; and (2) the Tigers didn’t protect their signs despite knowing a man was on second. But it isn’t so acceptable that he [...]]]> Via Deadspin comes this great video of Joe Mauer, apparently reading the catcher’s signs and relaying them to batter Jason Kubel.

Putting aside Mauer’s denial, the interesting thing about this is whether it’s actually wrong to steal signs. There’s no rule against it, and so the answer is: it depends on the players’ perceptions of the situation. If you run afoul of the norm (i.e., a batter looking behind him) then you are likely to face informal sanctions in the form of a baseball to the body. Mauer’s sign-stealing, by contrast, seems acceptable: (1) it was a crucial game; and (2) the Tigers didn’t protect their signs despite knowing a man was on second. But it isn’t so acceptable that he can admit it publicly. That is: Mauer’s sign stealing was at once lawful, permitted in the social context, and publicly wrongful.

(H/T: Reader CDP. For more on the history of sign-stealing in baseball, check out The Echoing Green: The Untold Story of Bobby Thomson, Ralph Branca and the Shot Heard Round the World)

David Post argues that heightened perceptions of political extremism are a function of more coverage, not more extremism.

I call it the ESPN Effect – mistaking filtered reality for reality . . .  My very, very strong suspicion is that there has never been a time when there weren’t truly crazy people on all sides of the political spectrum doing their truly crazy things. Maybe 1% or so, or even 0.1% — which is a very large number, when you’re talking about a population of, say, 100 million.  They didn’t get through the filters much in the Old Days, but they do now.  All this talk about how extreme “the debate” is becoming – how, exactly, does anyone get a bead [...]]]>

More Newsboys Equals More News

David Post argues that heightened perceptions of political extremism are a function of more coverage, not more extremism.

I call it the ESPN Effect – mistaking filtered reality for reality . . .  My very, very strong suspicion is that there has never been a time when there weren’t truly crazy people on all sides of the political spectrum doing their truly crazy things. Maybe 1% or so, or even 0.1% — which is a very large number, when you’re talking about a population of, say, 100 million.  They didn’t get through the filters much in the Old Days, but they do now.  All this talk about how extreme “the debate” is becoming – how, exactly, does anyone get a bead on what “the debate” really is?  In reality?

I wonder if the same effect is in play with respect to complaints about law schools and the state of the employment market.  That’s not to say that the former are effective or the latter anything but abysmal.  But the question is whether law schools are worse today at their core mission than they were a generation ago, or the legal job market materially different than it was in the last bad recession (1991).  One possibility is that they are: the academic turn in law school, and the outsourcing turn in practice, combine to make today just worse than yesterday.   I don’t buy the former claim – at all – but am open-minded about the latter.

Another possibility: Above the Law didn’t exist in 1991.  Neither did the clerkship notification blog.  Or the Prawfs thread on the academic market.  Or various law school boards. Each site provides tons of useful information, but may enable us to mistake filtered reality — it’s the end of the law as we know it – for reality – it’s bad, but it’s not distinctly or structurally bad.  Call it the “ATL effect”: all legal market news will seem more dramatic today than it did in 1990.  From bonuses to layoffs, every day is more special than the last.

“Counsel On Call is currently interviewing attorneys with at least one year of solid electronic document review experience for a contract assignment in downtown Chicago. Must have worked as a litigation associate in a large law firm 2+ years. Experience with products liability litigation strongly preferred. Full time, requires a three month commitment. Top tier school and top 1/3 of class required…”

Wow. ]]> Read the last few dozen posts at the Temporary Attorney Blog.  I doubt there are more than a dozen law professors who’ve done temporary document work, so it ought to be a real eye opener.  Especially now that the market has changed.  From a recent job-opening.

“Counsel On Call is currently interviewing attorneys with at least one year of solid electronic document review experience for a contract assignment in downtown Chicago. Must have worked as a litigation associate in a large law firm 2+ years. Experience with products liability litigation strongly preferred. Full time, requires a three month commitment. Top tier school and top 1/3 of class required…”

Wow.

]]> http://www.concurringopinions.com/archives/2009/09/if-you-do-one-thing-today.html/feed 20 http://www.concurringopinions.com/archives/2009/09/amendable-illusory-contracts.html http://www.concurringopinions.com/archives/2009/09/amendable-illusory-contracts.html#comments Sun, 27 Sep 2009 17:26:39 +0000 Dave Hoffman http://www.concurringopinions.com/?p=20697 A set of golf club membership contracts provide that they “may be amended from time to time.”  Signatories, who plunked down $185,000 refundable deposits to join once the clubs were operational, want to exercise the refund clause.  The clubs respond that they can exercise their amendment ability and keep the deposits.  Lawsuits result.

This seems clearly wrong.  The amendment clause should be interpreted in light of commercial reasonableness, or the contracts are voidable as illusory.  If “may be amended from time to time” means that the Club has the sole discretion to change both signatories’ obligations to the detriment of the members, then we’ve got a pretty clear example of a contract in name only.  Rather, I imagine that the amendment language, reasonably interpreted in light [...]]]> A set of golf club membership contracts provide that they “may be amended from time to time.”  Signatories, who plunked down $185,000 refundable deposits to join once the clubs were operational, want to exercise the refund clause.  The clubs respond that they can exercise their amendment ability and keep the deposits.  Lawsuits result.

This seems clearly wrong.  The amendment clause should be interpreted in light of commercial reasonableness, or the contracts are voidable as illusory.  If “may be amended from time to time” means that the Club has the sole discretion to change both signatories’ obligations to the detriment of the members, then we’ve got a pretty clear example of a contract in name only.  Rather, I imagine that the amendment language, reasonably interpreted in light of commercial norms, is limited to non-material terms -which would not include the refundability of the deposits.  Indeed, the members argue that refundability was a “relatively unusual stipulation [that] was a big part of the appeal of joining.”

What do you think?

(H/T Atrios)

No idea? Here’s some help.

Answers follow the jump.

According to a new study, seven percent of U.S. workers are self-employed, and eleven percent of manufacturing workers are at small firms.   The [...]]]> Quick: what percent of the U.S. manufacturing workforce labors in workplaces of twenty employees or less. What percent of all workers are self-employed?

No idea? Here’s some help.

• 18 percent of the British manufacturing workforce labors in small firms, and 15 percent of all workers are self-employed.
• 13  percent of the German manufacturing workforce labors in small firms, and 12  percent of all workers are self-employed.
• 31 percent of the Italian manufacturing workforce labors in small firms, and 26 percent of all workers  are self-employed.
• 18  percent of the French manufacturing workforce labors in small firms, and 9  percent of all workers are self-employed.

Answers follow the jump.

According to a new study, seven percent of U.S. workers are self-employed, and eleven percent of manufacturing workers are at small firms.   The US, contrary to common belief, is not a nation of small businesses.  We’re basically last in small-business employment, research, and enterprise  among the sample of countries studied.

This finding leads me to question the common claim that the large-firm, Delaware-centric, focus of corporate law scholarship and teaching ignores the real world.  To the extent that most employees are found at larger firms, and (compared to other countries) our economy is not really founded on small firm development, the relative paucity of law about the governance of small firms makes some sense.

Now this isn’t to say that economic growth theory ought to focus on established, larger firms. This summer, I was at a conference in which I heard the claim that a very, very small number of new firms (less than 100) drive most of economic growth in the country.  Studies of entrepreneurship, if this theory holds, ought to focus on increasing the number of these small, high-growth firms by figuring out what makes them tick.   Doctrinal reforms (tort, tax, etc.) might be crucial.

That data supporting such a focus on exceptionally high-growth small  firms feels weak to me.  The best case I can see is anecdotal, and summed in this video about the explosive growth in  social media. And to think, social media is all about men checking out pictures of women. Warning: before starting the video, turn off your sound. It will be mildly less irritating.

(H/T: Growthology)

This decade’s version has its charms, however.

I asked Jonathan Lipson, who previously owned the credit crisis for us, for his thoughts on a really interesting story involving the Philadelphia Inquirer’s bankruptcy process.  His (pretty cool, even for non-bankruptcy geeks) thoughts follow:

Like other markets for company control, the one created by Chapter 11 of the Bankruptcy Code is largely about information:  If you control the story, there’s a good chance you will control the outcome.

So it’s not surprising that The Philadelphia Inquirer has used its own storied assets—the paper and website–to try to sell readers on management’s plan to save the company from rapacious hedge funds and, in their words, “keep it local.”

As you may recall, Brian Tierney, who owns an advertising firm in the Philadelphia suburbs, [...]]]>

Our Roving Bankruptcy Correspondent

I asked Jonathan Lipson, who previously owned the credit crisis for us, for his thoughts on a really interesting story involving the Philadelphia Inquirer’s bankruptcy process.  His (pretty cool, even for non-bankruptcy geeks) thoughts follow:

Like other markets for company control, the one created by Chapter 11 of the Bankruptcy Code is largely about information:  If you control the story, there’s a good chance you will control the outcome.

So it’s not surprising that The Philadelphia Inquirer has used its own storied assets—the paper and website–to try to sell readers on management’s plan to save the company from rapacious hedge funds and, in their words, “keep it local.”

As you may recall, Brian Tierney, who owns an advertising firm in the Philadelphia suburbs, acquired The Inquirer and its related properties (The Daily News and Philly.com, their collective website), from the McClatchy papers in 2006 for about half a billion dollars.

Like several other newspapers, including The Chicago Tribune, The Inquirer could not service its massive acquisition debt.  Thus, in February 2009, the paper (and its affiliates) filed a Chapter 11 case in Philadelphia.  In August, management filed a proposed reorganization plan where Tierney (who manages the papers and owns some equity) and some of his supporters would buy the papers out of bankruptcy, for about $90 million, leaving most large creditors—i.e., the ones holding the acquisition debt–with a very small recovery.  The management buyout would be subject to higher and better offers.

According to the official Creditors’ Committee in the case, the Inquirer’s “keep it local” campaign is designed to make sure there are no better offers.  Management’s ad campaign warns of dire consequences “[i]f out-of-towners were to seize control.”  Allegedly hailing from such illiterate venues as New York, Beverly Hills “and even Lausanne, Switzerland, these out of towners would feel little commitment to, or understanding of, [Philadelphia’s] local non-profit needs.”

This may be true.  But, of course, The Inquirer is at least purportedly a for-profit venture.  Thus, the more realistic concern is that outside investors would further cut an already thin staff, and perhaps eliminate The Daily News entirely in order to boost their own dividends and management fees. “Keeping it local” is, at least in part, about preserving jobs in Philadelphia.

Not surprisingly, the Creditors’ Committee—which wants higher and better bids for the paper–has objected to the advertising campaign, and filed a motion asking the Court to enjoin it.  “This entire campaign is designed to dissuade otherwise interested bidders, who will think twice before participating in the auction . . . . This is bid chilling, plain and simple.”

Three things are ironic about all of this.

The Committee Objection

First, the Committee’s objection is as interesting for what it omits as what it says.  Thus, while it gets at the basic issue—bid chilling—it misses the easiest objection, which is that the ad campaign is a bald attempt to solicit votes on a reorganization plan before a disclosure statement for the plan has been approved.

At the risk of asking CoOp readers to become bankruptcy geeks, the basic idea here is that a plan (such as management’s) can only be approved if a sufficient number and amount of creditors vote for it.  But they cannot vote on it without having first received a court-approved “disclosure statement”.  Until the court approves a disclosure statement, you are not supposed to solicit votes on a plan.  So, if management wants to tell the story that its plan beats any alternative, it can only do so through an approved disclosure statement.  Not adjacent the editorial page.

While management has filed a disclosure statement, it has not, so far as I can tell, been approved.

Maybe the Committee omitted the argument because of the Third Circuit’s controversial 1988 opinion in a case known as Century Glove.  There, Judge Roth gave a fairly relaxed interpretation to these rules, holding in essence that a creditor with a competing plan could solicit particular creditors to oppose the debtor’s plan and support its own instead.  Century Glove, Inc. v. First Am. Bank of New York, 860 F.2d 94, 101 (3d Cir.1988)

But even Century Glove acknowledged that the Bankruptcy Code “bars certain solicitation activities, regardless of the intent of the actor. Whether that provision is violated is not a matter left to the discretion of the bankruptcy court, but is a matter of fact and law.”  860 F.2d, at 97.  The point of Century Glove was to permit creditors and debtors to negotiate about potential plans notwithstanding the requirement that there be a disclosure statement in place.  That’s not what’s happening here.

To be sure, the ad campaign contains the disclaimer you’d expect: “The statements and information contained herein are . . . not intended to solicit and are not provided for the purpose of soliciting or otherwise obtaining approval of a plan of reorganization.”  (Interestingly, the disclaimer does not print from the web).  And, it goes to the world—not just creditors.  Still, it’s hard to see what it is if not a request to support management’s plan.

Similarly, but perhaps not surprisingly, the Committee does not identify any actual or potential bidders who might be chilled here.  This may be because they don’t exist.  Newspapers are not exactly hot investments these days.  Moreover, it is difficult to imagine hedge fund managers in Switzerland (or Beverly Hills) saying “you know, let’s not bid for The Inquirer.  True, it could make us rich.  But that ad campaign has really made us think twice.”

In any case, the real play here may be for the banks that lent Tierney the half-billion dollars in 2006 to do what’s called “credit bid” for the assets.  This essentially means they would foreclose on the newspapers unless someone paid them in full.  Explaining whether that is likely to happen, and what it would mean, would tax the endurance of even the most-die-hard CoOp reader.

Venue Choice

The second thing to note is that the whole case could be viewed as an ironic data point in the raging academic debate about venue choice in Chapter 11 cases.

The venue rules which govern where a company can file a Chapter 11 case are quite liberal. They permit a debtor to file where any company in the group is incorporated.  So it is usually not hard to find a connection to New York or Delaware, which happen to have the two most popular bankruptcy courts, so far as Chapter 11 cases are concerned.  Thus, the Chicago Tribune case is in Delaware, not Chicago; GM and Chrysler are in Manhattan, not Detroit.

UCLA law professor Lynn LoPucki has argued that, as with corporate law in Delaware, there has been a “race to the bottom” in the selection of courts that hear large Chapter 11 cases.  According to LoPucki, the Manhattan and Wilmington bankruptcy courts have captured most of the large bankruptcy cases because, among other things, company managers and bankruptcy professionals in those cities believe they can get away with anything in those courts, no matter how harmful to investors or employees.  These courts permit this sort of behavior because they want the notoriety and excitement of large and complex cases.

Others, in particular Penn law professor David Skeel, have responded that venue choice in Manhattan and Delaware isn’t evidence of anything nefarious.  It’s just the market for Chapter 11 cases.  These courts have the most sophisticated lawyers and judges, and (thus) produce the best results under the circumstances.

There is no doubt that the largest cases often do end up in Manhattan or Wilmington—and not in Philadelphia, or wherever the debtor’s “local” operations are.  What we can infer from that, however, is a more complex proposition.  I have avoided wading into the debate, in part because I am not sure it really asks the right questions.

But if you do think Chapter 11’s venue rules are too liberal, and the process would better serve investors and employees if conducted in the “local” venue of the debtor, then you may want to think about what’s been going with The Inquirer.

Here, we have expensive lawyers from large, far-away firms (Proskauer-Chicago and O’Melveny-Los Angeles, respectively), representing the company and Creditors’ Committee, locked in what appears to be a scorched-earth battle to control the fate of these papers.  Insiders and professionals may do well in this process.  The newspapers—and the “locals”?  Not so much.

Who Cares?

The third irony is that all this squabbling may not matter much.  Even if Tierney and his group want to keep the papers afloat—and even if that is the best deal going—they may not succeed.

If we are to believe Philadelphia’s Mayor, Michael Nutter, the city is on the brink of experiencing its worst financial shock in modern history due to shenanigans in the state legislature that have left Pennsylvania the only state in the union without a budget.  If the worst comes to pass—and it might—Nutter says he will have to eliminate 3000 jobs and severely curtail city services.

If Harrisburg tells Philadelphia to drop dead, it is hard to see who will be left to read any newspapers, whether the owners live in Philadelphia or Lausanne.

Paul Secunda:

[A]s long as you do not have concerns about people knowing your looking, you might as well go forward with all the approaches: get known, file a FAR, and target letters/emails to appointment committees. Although I think letters are by far the least effective method (no one wants to be added to a long stack of paper), you just never know.

And that, my friends, sums up the lateral market in general: you just never know – sometimes you try to put yourself “out there” without actually being “out there,” and other times you do nothing proactive and are “out there” anyway.

or Darian Ibrahaim:

To lateral candidates, do not write directly to schools you’re interested in, and [...]]]> Who has the better approach to the lateral hiring “market”?

Paul Secunda:

[A]s long as you do not have concerns about people knowing your looking, you might as well go forward with all the approaches: get known, file a FAR, and target letters/emails to appointment committees. Although I think letters are by far the least effective method (no one wants to be added to a long stack of paper), you just never know.

And that, my friends, sums up the lateral market in general: you just never know – sometimes you try to put yourself “out there” without actually being “out there,” and other times you do nothing proactive and are “out there” anyway.

or Darian Ibrahaim:

To lateral candidates, do not write directly to schools you’re interested in, and do not go through the AALS process. You do not want to appear anxious to escape your current situation, even if you are. The best way to get the word out that you’re open to a move is to let your well-respected friends at other schools know that. These folks will inevitably be contacted by appointments committees looking for people who might be moveable. Also, the standard advice about going to conferences, publicizing your papers all holds true. If you’re doing good work, getting yourself out there, and are at a school from which one would reasonably assume you are extractable, you’ll get calls.

My view: Darian is correct on the tactics.  And he’s equally right about the appropriate move for entry-level faculty: “write directly to schools you’re interested in.”  This is a real change.  When I was on the entry market in 2003, I had no sense that it was appropriate to write to schools directly, though I lacked a mentor so I could have missed many tricks.  Now, writing directly to committees is apparently almost necessary (though not sufficient).

[Update: An earlier version of this post credited David Zaring for Darian Ibrahim's post.  I have no idea how I made that mistake.  Sorry guys!]