Author: Lawrence Cunningham

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Happy 4th to The Persons of the Divided States of America

shredded flag“Person means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated business association, joint venture, governmental entity, or other organization.”

That is from the definitions section of a commercial agreement I happened to be reading today for a consulting assignment.  That type of definition appears in millions of commercial contracts–purchase agreements, merger agreements, loan agreements, leases, licenses, you name it.

In the commercial world, among business lawyers and clients, it is commonly assumed that whenever we reference persons we mean to include every form of organization people have created.   That familiar usage might make the holdings in cases such as Holly Hobby or Citizens United seem natural, with corporations having many of the same rights and duties as people have.

On the other hand, we use the term this way in the business context where the issues being addressed concern commercial obligations and powers, liabilities and indemnities and purchases and sales–not free speech or free exercise of religion.  Moreover, the presence of such definitions in these agreements, despite ubiquity, underscores that it is more natural for persons to be seen only as natural persons, not organizations.

Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons.  But for some purposes, they should be treated as natural persons are and for others they should not.  (See here for some additional thoughts on Hobby Lobby drawing on the example of Berkshire Hathaway.)

Context is key and hard liners tend to forget context.  In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.

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What Berkshire Hathaway Teaches About Hobby Lobby

Eleven years ago tomorrow, the abortion issue led Berkshire Hathaway, the huge conglomerate Warren Buffett built and now owned by one million different shareholders, to end its shareholder-directed charitable contribution program. Under the program, Berkshire’s board earmarked an amount for charitable giving and then let the company’s class A shareholders designate the charities to which their share went. In twenty-two years, the program distributed $197 million to thousands of different charities.

Berkshire terminated the program on July 3, 2003 because activists boycotted products of one of its subsidiaries to protest giving to organizations they opposed on religious grounds: some designated Planned Parenthood, which facilitates a woman’s choice to abort an unwanted pregnancy, while others gave to Catholic Social Services, which opposes abortions.

Berkshire stood for neither position, of course, because it is a business organization whose mission is to increase its intrinsic economic value, which has nothing to do with religion. Berkshire’s board chose to terminate the program because the boycotts hurt Berkshire’s business and its personnel while offering shareholders only a slight convenience and tax advantage.

The scenario speaks to the debate that erupted this week between foes in the abortion debate thanks to the Supreme Court’s decision in the Hobby Lobby case. The issue in that case, narrower and more technical than accompanying rhetoric suggests, was whether the word persons in a federal statute about religious freedom includes corporations owned by a small number of people with a specific set of religious beliefs. If so, then regulations implementing Obamacare cannot require them to fund birth control devices in conflcit with their religious beliefs.

A majority of the Court concluded that closely-held corporations are persons for the purpose of the statute because they are readily seen as merely a convenient legal form through which individuals do business. The dissent complained that only individuals can have religious beliefs and therefore corporations, whether closely held or otherwise, aren’t persons for purposes of the federal law.

The Berkshire example is instructive on both opinions. Buffett has always boasted that Berkshire, though using the corporate form, adopts a partnership attitude. The shareholder charitable contribution program epitomized this attitude. It gave the decision to the owners, as is done in partnerships and closely held corporations, not the board, the practice in public corporations. Those owners, moreover, were the class A shareholders, a subset of Berkshire’s shareholder body made up of people with larger and older stakes—including hundreds who really were Buffett’s original partners.

Berkshire shareholders, class A and class B, readily agree on a wide variety of business and ownership topics. For example, in a vote earlier this year on the company’s dividend policy, 98 percent ratified the existing—and unusual—no-dividend practice. But put a question about hot-button religious or political  issues of the day such as abortion and expect deep divisions.

Berkshire’s shareholders may be able to act like partners or closely-held shareholders on business issues while the charitable giving program proved they were unable to do so on others. For the Court in Holly Lobby, this perspective supports the majority’s holding about the nature of close corporations while validating the dissent’s appetite for a sharp boundary between them and the typical business organization.

Lawrence A. Cunningham is the author of the upcoming Berkshire Beyond Buffett: The Enduring Value of Values and editor of The Essays of Warren Buffett: Lessons for Corporate America. He teaches business-related courses at George Washington University Law School.

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Trashing, Defending, and Deferring to Yeshiva University

University bashing is in fashion, from the broad-gauged film Ivory Tower to particular attacks on given schools. Some critiques usefully expose problems that need correcting with constructive solutions on offer.  But others seem to trash the academy for other reasons, as with a recent diatribe against Yeshiva University, which seems more calculated to exacerbate the school’s problems than help it find solutions.

In an  expose-style that seems to blow the school’s financial challenges out of proportion, Steven Weiss, who acknowledges having been expelled from Yeshiva in 2002, portrays Yeshiva’s leadership since that year variously as gullible, myopic, conflicted, or greedy.  This piece stung because I am a graduate and former faculty member of Yeshiva’s law school (Cardozo) and I know and have worked with some of the people vilified in the story.  While I am not familiar with all of the factual background of the University’s recent experience, Weiss’s story seems awfully one-sided and therefore the story, as much as the facts about Yeshiva, causes concern.

I share Weiss’s praise for Yeshiva’s former president, Rabbi Norman Lamm, whom I knew, worked with, and admired.  Lamm, and later his VP for business affairs, Sheldon Socol, led Yeshiva from the brink of bankruptcy in 1975 to fiscal soundness and renewed its status for academic excellence and cultural distinction.  (Rabbi Lamm told me how, when he was about to declare bankruptcy, his hand shook so intensely that he could not sign the papers.)

But Weiss then makes a foil out of Lamm,  painting a golden era that ended after 2002 when he passed the baton to Richard Joel, the current president, who has faced a different set of challenges that entices Weiss’s wrath.  In Weiss’s telling, after Lamm’s retirement and Joel’s succession, it’s been all downhill for Yeshiva and its students.  Joel, whom I knew as an able administrator and gentleman when he served as Dean of Business Affairs at Cardozo, certainly has a different style than the rabbi-scholars such as Lamm who preceded him.  But Weiss exaggerates in inexplicably inflammatory tones how this style difference has played out, in a story misleadingly headlined “How to Lose $1 Billion: Yeshiva University Blows Its Future on Loser Hedge Funds.” Read More

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Maya Angelou’s Multi-Million Dollar Bout with Butch Lewis

Maya cardThe number one best-selling book on in this week’s New York Times best seller list is one first published in 1969: “I Know Why the Caged Bird Sings,” by Maya Angelou, the renowned poet and professor at Wake Forest University who passed away three weeks ago. Since she published that autobiography, Angelou’s acclaimed poetry has been published widely by Random House and initially reached a distinguished, though small, audience.

How that audience grew to a multi-million dollar phenomenon, and how her book is again number one, includes a fascinating story of entrepreneurship and law of general interest and especially for those interested in contract law. As a tribute to the distinguished author for literary, commercial and spiritual success, herewith an account of that saga, from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

In 1994, Butch Lewis, the former prize fighter and promoter of famous boxers such as Muhammad Ali and Joe Frazier, conceived the idea of popularizing Angelou’s poetry by including it in Hallmark greeting cards and similar media. Lewis first met Angelou in early 1994 when the scrappy fighter asked the elegant poet to take a trip to Indiana with him to visit his boxing client, Mike Tyson, in prison. During the trip, Angelou and Lewis discussed how she might expand her readership by publishing her works in greeting cards. After negotiations, the two signed an informal letter agreement on November 22, 1994.

Angelou promised to contribute poetry exclusively to Lewis and he promised to promote its publication in greeting cards. The exclusivity feature was important, since it meant Angelou could not market her poetry without Lewis and Lewis need not fear that his efforts would be undercut by a last-minute switch to a competing promoter.  Aside from exclusivity, the letter recited only basic terms, such as how they would later agree on what poetry to include, that Lewis would fund promotion, and how revenues would be shared—first to reimburse Lewis’ investment and expenses, then to split the rest equally. The letter said it would be binding until the two drew up a formal contract. Though Lewis prepared one in March 1997, it was never signed.

Lewis began marketing efforts immediately, though it took until March 1997 for Lewis and Hallmark to finalize terms—a three-year deal, covering any new poem Angelou produced during that time. In exchange, Hallmark would pay Angelou and Lewis a $50,000 advance against royalties, which would be paid at a flat 9% rate of total sales, with a guaranteed minimum of $100,000. Angelou’s greeting cards would be administered through Hallmark’s Ethnic Business Center, targeted to an African-American audience.

Lewis sent Angelou the proposed Hallmark agreement. By then, however, Angelou’s views of Lewis had curdled. For the Hallmark pitch, Lewis prepared sample cards and brought these for Angelou’s approval. Angelou found the display of caricatures of African-Americans distasteful and unreflective of her poetry’s meaning. Her impression of Lewis worsened when the two crossed paths in Las Vegas in 1997, where Angelou was appalled by Lewis’s behavior, which included punctuating his conversations by “grabbing his crotch.” Read More

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Happy Father’s Day (Kids)!

My wife and daughters brought me the paper and breakfast in bed this morning! What a treat. And today we are doing something I love: windsurfing with the whole family!

For me, though, the idea of Father’s Day is to celebrate my daughters, and my wife, not me, as they are sources of endless joy.

Every best wish to all Dads out there, and their families, for a special day of celebration.

 

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The Impossible Donald Trump Puts Big Name on Chicago Tower

Chicago’s skyline is now polluted by the letters T R U M P adorning a showy luxury building the egomaniacal scion put up during the financial crisis.   While locals led by Mayor Rahm Emanuel recoil at the Donald’s bad taste in design, lawyers and citizens alike should recall some of the poor judgment, tone deafness, and ignorance of the law he displayed during the long construction process.  As told in my book aimed at new or aspiring law students, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, Donald Trump thought the so-called “Great Recession” of 2008-09 so calamitous to count as an “Act of God.” He was in the midst of building what would be one of Chicago’s tallest skyscrapers, rivaling the old Sears (now Willis) Tower, a combination luxury hotel and condominiums.

To finance the project, Trump borrowed $640 million from lenders led by Deutsche Bank in February 2005. By the end of 2008, Trump had only sold condos netting him $204 million along with others under contract that would yield another $353 million. That left him facing a shortfall of nearly $100 million when he was obligated to repay his lenders $40 million per month. Trump cited the Great Recession as an excuse to delay making monthly payments. The banks refused to accept the excuse from timely payment, so Trump, a prolific litigant, went to court.

Circumstances had changed, he observed, and law has long recognized excuse from contract for some kinds of surprising supervening events loosely called forces majeure, from the French meaning “superior forces,” or Acts of God.   If you rent a banquet hall for your wedding, and it burns down with no one at fault, you and the hall are both excused from the agreement; when Hurricane Katrina destroyed New Orleans in September 2005, contracts to buy or sell homes and businesses there were excused.   Recognized forces majeure include fire, flood, lightening, famine, and deep freezes that destroy the subject matter of a contract. Death excuses promises made to render personal service to others. People are not held to deals when it becomes objectively impossible to perform them, at least so long as they did not have reason to foresee the risk and did not address it in their contract.

Trump would stress that man-made calamities can also excuse bargains when, though something is possible to perform, it would be idle to perform it given a deal’s purpose. A rental agreement for a hotel room to watch a parade can be excused if the parade is cancelled, though the room could be occupied, under the aptly-named doctrine “frustration of purpose”—unless, of course, the contract states otherwise.  [See Comments this post below.] Read More

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Lawsuit: Resentful Daughter versus Dad for Law School Tuition

If a father tells his daughter he will pay her law school tuition, and she accordingly matriculates and completes her studies, and the father then repudiates, saying he lied, does the daughter have legal recourse against the father? That is the supposed real-life situation reported over at Above the Law, commenting on the anonymous daughter’s query to Slate’s Dear Prudence. The latter, in turn, says she consulted Prof. Randy Barnett of Georgetown, who reportedly opined that the daughter would have no claim.  I am not so sure.

The case reminded me of Zimmerman v. Zimmerman,* where a daughter sued her father to recover college tuition incurred (to attend Adelphi University) and future law school tuition to be incurred.  A New York state appellate court suggested four alternative routes for a daughter to recover tuition bills already incurred (though rejecting all claims for future tuition): contract, promissory estoppel, maintenance & support, or fraudulent representation.

The contract claim failed in Zimmerman, however, as the promised performance would extend beyond one year, putting it within the statute of frauds. In New York, as in most states, that requires such a promise to be in writing. Prudence reports that this was the same conclusion Prof. Barnett reached, as this father’s promise was not memorialized in writing either.

But the Zimmerman court upheld the daughter’s claim under promissory estoppel, which took the case out of the statute of frauds.  A writing was required if the daughter had also contractually committed to complete college.  But the jury found that the father made his promise without any return promise from the daughter.  So the father had the right to terminate his obligations upon reasonable notice. Under that view of the case, which is by no means inevitable in promissory estoppel cases, his promise was capable of performance within one year and therefore no writing was required.

A concurring judge in Zimmerman, not eager to embrace those two rationales, supposed that the father’s promise to cover his daughter’s college tuition might have reflected his acceptance of his duty to provide her maintenance and support (citing Matter of Roe v. Doe, 29 N.Y.2d 188). If so, the daughter’s obligation to Adelphi was his obligation to Adelphi.  Even if college tuition is part of such parental obligations, however, the Dear Prudence case concerns law school, almost certainly outside that ambit.

But perhaps the most compelling theory of recovery is one the dissent in Zimmerman picked up on as an alternative to contract, which is the tort of fraudulent misrepresentation.  If the Dear Prudence father is to be believed today that his promise was a lie, then this theory is a strong one, though the dissent in Zimmerman rejected both this tort route to recovery as well as the other grounds.

Prof. Barnett reportedly told Dear Prudence that the daughter might threaten suit to induce a settlement. I would not give that advice if I also concluded that the suit would be frivolous. But based on Zimmerman, I think there is a credible basis for suit.  Were I a litigator rather than a deal lawyer, I might even take the case on a contingency basis.

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* 86 A.D. 525, 447 N.Y.S.2d 675 (1st Dept. 1982).

 

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A Toast to 50 Cent’s New Series: Power

The rap artist 50 Cent, whose real name is Curtis Jackson, is producing a new series on STARZ called Power. Famed for his entrepreneurial skills in hip-hop and business, not to be overlooked is his important contribution to contract law and knowledge.  Thanks to an intense dispute with his girlfriend a decade ago, students and lawyers have been treated to a saga 50 Cent endured that illuminates the nature of contracts—of legally enforceable bargains. In a tribute to his latest venture, herewith an account of this case from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012).

Jackson secured his first recording contract in October 2003. It came with a $300,000 advance.  To boost his professional image as a rapper, he bought a Hummer and a Connecticut mansion once owned by boxer Mike Tyson. The mansion boasted a state-of-the-art recording studio and the rapper hired a full-time caretaker and professional cleaning crew to maintain it.    In 2004 Jackson bought another house in Valley Stream, the small village in New York’s Nassau County where his grandmother lived; in December 2006, he added to his real estate holdings a $2 million house at 2 Sandra Lane, Dix Hills, on Long Island, New York. By then, he had sold tens of millions of recordings, toured the world, and amassed hundreds of millions of dollars in net worth, as chronicled in his 2005 autobiographical film, “Get Rich, or Die Tryin.”  

This success came after hard knocks. Jackson had dealt crack cocaine as a teenager. In 1995, at age 20, he was released from jail and became involved with Shaniqua Tompkins in his hometown of Jamaica in Queens, New York. The two had a son, Marquise, out of wedlock in 1996. Jackson and Tompkins had no money and no real home—living with his grandmother or hers.     In May 2000, Jackson nearly died when he was shot nine times during a gangland ambush. He was in the hospital for weeks, followed by months of rehab spent at his mother’s house, near the Pocono Mountains in Pennsylvania. Though before the shooting Jackson had been negotiating with Columbia Records, the record company stopped returning his calls.

Jackson, however, persevered. In November 2001, he launched a recording company, Rotten Apple Records. The rising rap star Eminem brought Jackson’s 2002 self-produced record to the industry’s attention.  As a result, Interscope Records offered Jackson the 2003 deal that propelled him to fame and fortune. With money flowing in and Jackson leading the high life, Tompkins asserted her right to a share. But Jackson’s relationship with Tompkins was tumultuous. They did not always live together and fought often, sometimes physically.

When Jackson bought the Dix Hills house in 2006, both agreed it was the best place to raise Marquise, then almost 10-years-old, and Tompkins pled with Jackson to put it in her name. Though Jackson promised to do so, he never did. After the relationship soured, Jackson tried to evict Tompkins from the Dix Hills house.  During that battle, the house burned to the ground under circumstances that authorities considered suspicious. The house had been insured against fire, but the policy lapsed for non-payment of the premium a few weeks before. In response to Jackson’s eviction lawsuit, Tompkins asserted a claim of her own: that the two had a contract entitling her to $50 million. Read More

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New Book: Berkshire Beyond Buffett

As people speculate about what will happen to Berkshire Hathaway after Warren Buffett is no longer around, I’ve written what I hope to be the definitive book explaining how Berkshire will continue to prosper, thanks to the culture that Buffett has forged at Berkshire.

The book, Berkshire Beyond Buffett: The Enduring Value of Values, will be released in October, as we put the finishing touches on it this summer.

Available for pre-ordering now at amazon (and B&N, BAM and elsewhere), the book has been endorsed by Adam Grant of Penn’s Wharton School, and author of Give and Take, in the following terms:

How did Warren Buffett build such a great firm as Berkshire Hathaway? To unravel this mystery, Lawrence Cunningham takes a deep dive inside the cultures of Berkshire’s subsidiaries, highlighting the value of integrity, kinship, and autonomy — and revealing how building moats around the castles may help the firm outlast its visionary founder.

Bob Hagstrom, best-selling author of the 1995 book, The Warren Buffett Way, has endorsed Berkshire Beyond Buffett in this way:

Lawrence Cunningham is well known to the Berkshire community, as Buffett’s pick for cataloging and organizing his famous annual reports in The Essays of Warren Buffett: Lessons for Corporate America. Now Cunningham takes us in a new direction, inside the companies that make up Berkshire.  Berkshire Beyond Buffett is an insightful and important book.

Tom Murphy, the legendary businessman who built ABC before selling it to Walt Disney, has generously contributed the foreword to the book–itself worth the price!   As Tom explains:

Berkshire’s trajectory has been so seamless that Warren’s professional transition has gone almost unnoticed. The man who began business life as a precocious “stock picker” has morphed into chief executive of one of the largest collections of businesses in the world. Larry’s book astutely chronicles this development.

Berkshire’s scale and Buffett’s stature make the book timely and relevant, as suggested by news coverage this morning by Bloomberg Business Week of the company’s $30 billion commitment to renewable energy.  The book is based in part on interviews and surveys I conducted with dozens of Berkshire executives, including many chief executives of the fifty subsidiary companies whose cultures and histories I recount in the book.  The following is from the book jacket, courtesy of Columbia University Press:

Berkshire Hathaway, the $300 billion conglomerate that Warren Buffett built, is among the world’s largest and most famous corporations. Yet, for all its power and celebrity, few people understand Berkshire, and many assume it cannot survive without Buffett. This book proves that assumption wrong.

In a comprehensive portrait of the distinct corporate culture that unites and sustains Berkshire’s fifty direct subsidiaries, Lawrence A. Cunningham unearths the traits that assure the conglomerate’s perpetual prosperity.  Riveting stories recount each subsidiary’s origins, triumphs, and journey to Berkshire and reveal the strategies managers use to generate economic value from intangible values, such as thrift, integrity, entrepreneurship, autonomy, and a sense of permanence.

Rich with lessons for those wishing to profit from the Berkshire model, this engaging book is a valuable read for entrepreneurs, business owners, managers, and investors, and it makes an important resource for scholars of corporate stewardship. General readers will enjoy learning how an iconoclastic businessman transformed a struggling textile company into a corporate fortress destined to be his lasting legacy.

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JP Morgan Summer Reading List

The 15th Bi-Annual JP Morgan Reading List is out, with a characteristically rich selection of ten recommended titles in several categories (business, sports, art, adventure, science, cooking, philanthropy, and personal growth). Among the fine books, I’d heartily endorse as number one Col. Chris Hadfield’s An Astronaut’s Guide to Life on Earth, a gripping and engaging account of space travels with lessons for life.

A notable new feature this year is a retrospective on the 15th anniversary.  The editors explain:

The Reading List began as a way for us to share timely, thoughtful and relevant titles that piqued our interest. . . . [T]his year we have reached the 15-year mark.  To celebrate this anniversary, we asked some of our favorite authors from previous lists to share with us their thoughts on writing, imagination, inspiration and the creative process.  Here are their fascinating responses . . . .

Among those 15 authors are Malcolm Gladwell (Tipping Point), Jim Collins (Good to Great), Tom Friedman (The World is Flat), George Taber (Judgment of Paris), and yours truly (How To Think Like Benjamin Graham and Invest Like Warren Buffett).

I speak to how my work on a given topic often needs to reach different audiences using different media.  In addition to (1) books such as the one they featured for a general audience, I gave the examples, concerning investors and financial oversight, of (2) a white paper for a professional group, (3) an article for academic researchers, (4) a textbook for my students, and (5) blog posts here at Concurring Opinions for the widest audience of all.