Law on Rice

Senate bill S1288 unanimously cleared the Senate Commerce and Economic Development Committee on February 15, 2010.  There’s a good write up of the bill at the Arizona Capitol Times Blog.

My bar exam study materials say that the multistate bar exam (“MBE”) test writers “love” to give the following fact pattern: Anders promises CharterBank that if CharterBank will give credit to BabyCo, then Anders will pay CharterBank if BabyCo defaults. This situation is known as a suretyship.

CharterBank neglects to tell Anders that it advanced the credit to BabyCo. What result?

Technically, Anders can’t be forced to pay if BabyCo defaults. That’s because Anders made an offer for a unilateral contract to CharterBank, and under most states’ law, the offeree (CharterBank) must give prompt notice to the offeror (Anders) that it accepted the offer by full performance. Failure to give notice means that a court should discharge the contract.

In reality, I think Anders would have a hard time arguing he didn’t have notice because he would likely be a BabyCo insider, but still… it’s not hard to imagine a real life situation where it could work out like this.

I’m trying to kill a little time, and I’m trying to distract myself a little.

Maybe you’ll find this interesting. The following Wall Street Journal piece adds a little to the debate about the effectiveness of BAPCPA. It says:

Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

“That suggests it was largely ineffective,” Ronald Mann, a law professor at Columbia University, said of the 2005 overhaul. “I don’t think anybody who’s knowledgeable about the bankruptcy system thought the statute was well crafted.”

The article is a good read with many personal stories. Read it here.

I’m in Las Vegas, the downturn’s epicenter. Or at least one of them. As Southwest flight 1552 descended through the lights flickering off the sea of master planned communities created by people with names like Del Webb, I closed my book on property law. And I thought about my own corner of the downturn. I think I am kind of fortunate to be living through it, to be experiencing it.

I “own” a townhome in Seattle, and like most people, owning a home means a lot to me. It means I’m connected to a community. It means I am safe in it’s walls. It also means that I have a mortgage payment.

So when I say I own a townhome, it’s more precise to say that I share my ownership interest with a large, secured creditor. A creditor that will require payment of his secured interest before he’ll let me out of the deal.

It’s the system we’ve designed as a nation, it works, it’s fair, and it’s breathtaking when it all turns south.

While I’m not being foreclosed on, now I know what all my clients were so afraid of when I was working on the debtors’ side.

Property, like justice, is a feeling.

Would I go through this to know what my clients went through? Yes.

Eisenhower growls when I try to take “his” Kong chew toy. Growl he must because it’s the only way he can protect it. It can’t be protected in a court of law because he doesn’t know how to hire an attorney, or even know how to read a Nolo book. But if he did, and he sued me, would he win?

I’m studying property law with fresh eyes. And those eyes don’t see something I though I saw before: property. As I study it anew, it’s becoming clear to me that property law isn’t about things, it’s about people.

More precisely, the law of property is about my relationship with other people. The law says that when I park my car in the Red Robin parking lot for dinner, nobody else gets to drive it away. That the law says this might seem uninteresting, but it’s really remarkable that our ancestors put the laws in place and that we continue to respect them today.

If I couldn’t trust that my legal rights were protected, chaos would reign. I might not even go to Red Robin. And I’d miss out on the Bleu Burger.

Yesterday, Federal Reserve Board Governor Frederic Mishkin argued that there are two types of asset bubbles: benign and malignant. (Actually, I’m helping him with the analogy.) He says that the recent bubble was systemic in that it caused heavy leveraging (a “credit bubble”) and later deleveraging. By comparison, he says that the prior asset bubble (the dot com boom), was relatively harmless (a non-credit bubble).

As a matter of economics, I can only assume he’s right. A systemic asset bubble is obviously worse than a non-systemic asset bubble. I think all would agree on this point.

But who cares?

My professor has started to wear me down. I am a fierce believer in the power of markets. But he’s convincing me that markets may not have the primacy I thought they once did. Maybe the market is only a tool to make a big nation work. Surely it’s an extremely efficient and important tool, but maybe it really is subordinate to the overall need for us to make sure that people can eat, grow, and live together on fair terms.

And if that’s the case, then the only difference between Mr. Mishkin’s credit and non-credit bubble is that one is worse than the other. But both are bad. Both tear at the seams of the system we’ve put together. Both tear at the fabric that we’ve chosen to unite each other–the market.

* For the record, I do believe that Mr. Mishkin is really just trying to calm the nerves of those who argue for tightened monetary policy because they smell another bubble. That said, I think his arguments fail for all the aforementioned reasons–especially now. Most economic decision makers have a strained credibility with the public (to say the least). Best to spend that credibility wisely on sounder arguments, in my opinion.

Today I’ve been thinking about bankruptcy in a different way. In the past, I’ve thought of it as a kind of social safety net. And it is that.

But maybe it’s more important than that. Maybe it’s a way to maintain order in society by giving over extended people a way out of crushing debt so they can get back to work, staying on the grid rather than simply dropping off the grid.

I’m reading Sheila Bair’s comments to the House Financial Services Committee. She says something provocative:

The priority protection given to secured creditors under both the bankruptcy code as well as the FDIC’s resolution mechanism creates incentives to rely excessively on short term, secured financing. Too many creditors have looked to the value of their collateral — as opposed to the credit worthiness of their counterparties — in making credit decisions.

I’m still in school, so I’m just now beginning to understand the struggle between secured and unsecured creditors, just now beginning to understand what a fascinating struggle it is.

But Ms. Bair’s comments add a new dimension for me: does the Bankruptcy Code encourage creditors to focus on the wrong aspects of the overall credit risk? By extension, did it help fuel the asset bubble?

“The biggest long-term threat is that people are becoming and have become disheartened,” said Peggy Noonan in yesterday’s Wall Street Journal editorial (click here). On this point, I think she’s right. This economic disaster is more massive than anyone in modern history has ever dealt with; it is and will be hard. But economics is largely about psychology, and I don’t feel like our primary leader, President Obama, is much of a cheerleader.

Yesterday, Mr. Obama said, without cracking a smile in five minutes and twenty one seconds, “today, I’m pleased to offer some better news. While not a cause for celebration, it is certainly reason to believe that we are moving in the right direction.” Oh, wow. That sounds great. I can’t wait to break ground on that new factory I was thinking about. Mr. Obama didn’t stop there. He went on to give me a dry, boring explication of the gross domestic product and our economy with incessant reminders, qualifiers, and equivocations that times are going to be hard in the future.

I miss Bill Clinton. He made me feel good about America. He made me feel like we were going somewhere, and that I was playing on the winning team. He made me want to invest in the future, made me want to take a risk. Compared to Clinton, President Obama feels like he’s simply the Analyst in Chief.

Oh, I know he’s doing great work in the face of a massive disaster. I just want him to do it with a smile. I want him to remind me that America’s best days are still in front of it. I think it would make his job a lot easier.

I have a new idea that I’m sketching out here without too much thought: what if we had specialized financial institution courts? They would be highly trained courts with broad equitable powers.

These specialized courts would spur innovation and secure America’s lead as a financial powerhouse. You see this with the Delaware Courts of Chancery.

They would have jurisdiction over large financial institutions that pose a “systemic risk.” Congress would give them jurisdiction, and control their freedom of movement.

People would complain that courts move too slowly to solve high speed financial disasters, but I would solve that with a powerful stay that looks like a localized bank holiday. It would be not unlike the automatic stay imposed by bankruptcy courts under 11 U.S.C. 362(a).

Sure, they would be the playthings of lawyers, but at least there would be due process protection.

I think it’s a great idea conceptually. There are, of course, a million and a half ideas to work out.