A reporter for StreetsBlog wrote a story today summarizing and discussing my draft article:
It’s #1 on most of them, and has recorded 959 downloads in the same window. The reception has been deeply gratifying, particularly considering the article’s focus on what I regard as an urgent problem—I call it a public health emergency—that’s been overlooked by law. It can be found here.
A draft of my latest Article, Should Law Subsidize Driving?, is now up on SSRN. I’m happy that it has begun to attract a readership in its first 24 hours (about 120 downloads). The Article conducts a law and economics analysis of every field of law that touches on driving, and infuses it with the best work from half a dozen other fields from public health to traffic engineering, before concluding that law subsidizes driving extravagantly and pervasively. This creates immense negative externalities that are not tracked with any comprehensiveness or rigor.
The Article also introduces a novel term, automobile supremacy, to describe the systematic discrimination that law practices—in hidden, often unintentional or counterintuitive ways—against not just other forms of transportation but virtually all other social objectives in service of the car.
It’s my most ambitious work yet, and parts of this draft will almost certainly be edited down and shifted to a book project. Feedback is most welcome.
Should Law Subsidize Driving?
A century ago, captains of industry and their allies in government launched a social experiment in urban America: the abandonment of mass transit in favor of a new personal technology, the private automobile. Decades of public and private investment in this shift have created a car-centric landscape with Dickensian consequences.
In the United States, motor vehicles are now the leading killer of children and the top producers of greenhouse gases. They rack up trillions of dollars in direct and indirect costs annually, and the most vulnerable—children, the poor, and people of color or with disabilities—pay the steepest price. The appeal of cars’ convenience and the lack of meaningful alternatives has created a public health catastrophe.
Many of the automobile’s social costs originate in the individual preferences of consumers, but an overlooked amount is encouraged—indeed enforced—by law. Yes, the U.S. is car-dependent by choice. But it is also car-dependent by law.
This Article conceptualizes this problem, and offers a way out. It begins by identifying a submerged, disconnected system of rules that furnish indirect yet extravagant subsidies to driving. These subsidies lower the price of driving by comprehensively reassigning its costs to non-drivers and society at large. They are found in every field of law, from traffic law to land use regulation to tax, tort, and environmental law. Law’s role is not primary, and at times it is even constructive. But where it is destructive, it is uniquely so: law not only inflames a public health emergency but legitimizes it, extending its longevity.
The Article urges a teardown of this regime. It also calls for a basic reorientation of relevant law towards consensus social priorities, such as health, prosperity, and equity.
“We have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.” -George Orwell, 1939
I’m delighted to share a new article by yours truly on corporate governance and shareholder activism, The Golden Leash and the Fiduciary Duty of Loyalty, that will be published in the UCLA Law Review.
The “golden leash” is a controversial form of third-party compensation under which activist hedge funds supplement the salaries of directors they nominate to the board, in exchange for increasing the value of the company. A director compensated pursuant to such an arrangement stands to earn millions of dollars rather than the $250,000 paid to a typical director of a large public company, though the more richly compensated director usually works much harder and takes a lot of public abuse.
I offer a qualified defense of the golden leash, situating it in the context of other, more mainstream structures that depend on a more relaxed, porous conception of the fiduciary duty of loyalty than is commonly applied in the context of the golden leash. I also offer thoughts on how a properly disclosed golden leash can not only work for shareholders but improve procedural corporate governance more broadly.
The abstract follows. I welcome any comments on the draft.
Over at Letters Blogatory, friend of the blog Ted Folkman has published his take on Alberta Securities Commission v. Ryckman, the recent Delaware decision that (as I wrote last week) provides a good example of judgment arbitrage. Thank you again, Ted, for bringing the case to my attention.
Judgment arbitrage is a term I coined for a particular strategy for enforcing unenforceable judgments. It is a method of forum-shopping that allows creditors to exploit a quirk in American law that allows them to enforce foreign-country judgments in a forum where they would not otherwise be able to. There’s more discussion of the strategy in my Ryckman post, this symposium piece, and the original article where I lay out the theory.
In Ryckman, the creditor sought to collect Delaware assets in satisfaction of a Canadian judgment. The twist here was that the creditor first got its Canadian judgment recognized in Arizona, hopped a plane east, and then sought to use what was at that point technically an Arizona judgment to collect assets in Delaware. It was undisputed that the underlying Canadian judgment—a fine imposed by a Canadian agency—was not enforceable in Delaware, yet the Delaware court ordered enforcement anyway, because it was enforcing the Arizona judgment. It did so in the name of Full Faith and Credit, falling back on an articulation of that principle that I believe to be an incomplete. (There is a growing consensus, which I discuss at pp. 487-91 of the article, that FF&C does not compel states to grant full credit categorically to sister-state judgments.)
Ryckman is a good example of arbitrage. The creditor was able, with minimal friction, to profit from a major difference between Arizona and Delaware law governing the recognition of foreign judgments. Merriam-Webster defines arbitrage as “the practice of buying something (such as foreign money, gold, etc.) in one place and selling it almost immediately in another place where it is worth more.” The Canadian judgment wasn’t simply more valuable in Delaware for having transited Arizona first; it would have been completely worthless under Delaware law otherwise. The cost of unlocking additional assets for the creditor via the Arizona judgment was a little legal complexity and paperwork. It’s the essence of arbitrage.
Ted’s post disputes that the case is really arbitrage because the debtor, not the creditor, was the one to choose Arizona as the recognition forum—after all, he moved his domicile there. I find this point logically appealing, but my read of the law is that many courts wouldn’t place much stock in it…
A Delaware court has just issued a clear endorsement of the controversial enforcement strategy I call “judgment arbitrage.” I commend the slip opinion (here) to anyone interested in the enforcement of judgments across state or national borders. The case is Alberta Securities Commission v. Ryckman, 2015 WL 2265473.
As I argued in a 2013 article in the Harvard International Law Journal, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” judgment arbitrage is a three-step enforcement strategy that allows a party to enforce a foreign judgment in a U.S. jurisdiction where it would otherwise have been barred from doing so.
It’s uncontested that this is exactly what has just happened in Delaware. Here are the facts:
- Ryckman, who lived in Alberta, was fined about $500,000 Canadian by the Alberta Securities Commission (ASC) for violating Alberta securities laws. The ASC obtained a judgment (the “Canadian Judgment”) in this amount against Ryckman, who then moved his residence to Arizona.
- The ASC sought recognition and enforcement of the Canadian Judgment in Arizona.
- The Arizona state trial court ordered recognition and enforcement of the Canadian Judgment (now the “Arizona Judgment”). Ryckman appealed, and the Arizona appellate court affirmed. The Arizona Judgment simply embodies the Canadian Judgment, but is domestic rather than foreign.
- The ASC later sought enforcement of the Arizona Judgment in Delaware, where Ryckman is believed to have assets.
- Delaware recognition law is so different from Arizona’s that the Delaware court would have rejected the Canadian Judgment had it been presented with it. This is undisputed; the ASC concedes that the Canadian Judgment would not be enforceable in Delaware for two independent reasons:
- The Canadian Judgment constitutes a fine or penalty, and
- The applicable Delaware statute of limitations has run.
And here is the holding:
- The Delaware court orders enforcement of the Arizona Judgment. Now that the ASC has domesticated the Canadian Judgment in Arizona, its foreignness is irrelevant. It’s just an Arizona judgment. The court ignores the Canadian Judgment.
- The court holds that this result is compelled by (1) the Full Faith and Credit Clause of the U.S. Constitution and (2) the Delaware out-of-state judgment registration statute (the Uniform Enforcement of Foreign Judgments Act).
This is a major decision in the law of recognition and enforcement, and a clear example of judgment arbitrage. The court here reached a conclusion that, to my mind, deepens the already considerable doctrinal and theoretical confusion around the issue. I suggested legislation was desirable to address the possibility of judgment arbitrage, but many doubted the phenomenon even existed. In fairness, who could blame them? At that time I was unable to “identify a single real-world example of judgment arbitrage“—that is, a creditor receiving a judgment in a foreign country and then enforcing it in a U.S. state where it would otherwise have been barred from enforcing. An online symposium was held on the article, and the title of the critique summed up this good-natured skepticism well: Is There Really Judgment Arbitrage? (Yes, I replied.)
The linchpin of the strategy, I argued, was to insert a third jurisdiction between the foreign court (where the merits judgment is rendered) and the enforcement court (where it’s ultimately collected). The purpose of this middle jurisdiction is to recognize—and thereby domesticate—the foreign judgment, stripping it of its foreign character and transforming it into a U.S. judgment that other American courts will treat as an ordinary sister-state judgment. This step is key, because many scholars and courts believe that American courts are obligated to enforce sister-state judgments—including recognition judgments—under the Full Faith and Credit Clause and state and federal registration statutes. No such requirement exists for foreign-country judgments.
Judgment arbitrage is best represented graphically (these charts appear at p. 477 of “Ending Judgment Arbitrage”). Here is a typical cross-border judgment enforcement lawsuit, in simplified form—it occurs in two jurisdictions:
And here is judgment arbitrage—note the addition of a third jurisdiction:
I refer to this three-stage dance as “judgment arbitrage,” because of the relative frictionlessness of sidestepping a hostile U.S. recognition law in favor of a more lenient recognition forum. (Some cases have suggested there isn’t even a jurisdictional nexus required to choose this middle forum.) And once the foreign judgment has been domesticated—here, once the Canadian Judgment was rechristened the Arizona Judgment—the process of enforcing it is essentially mechanical.
As I discussed in an October 2014 post, a Pennsylvania court decision (citing “Ending Judgment Arbitrage”) endorsed the possibility of judgment arbitrage. The circumstances of that case left the court’s holding open to future narrowing. After all, the “arbitrage” element was not directly teed up: the two states involved (NY & PA) used the same recognition statute.
But that is not the case here. Arbitrage was directly presented in the Delaware case, where Delaware recognition law would have rejected the Canadian Judgment. Yet the court squarely held that Delaware was obligated to enforce, because the Canadian Judgment was recognized in Arizona before the creditor came to Delaware. That the Alberta Securities Commission probably did not diabolically plot its litigation strategy in a smoke-filled room but instead simply followed the asset trail of a nonpaying debtor is irrelevant to the holding. The court noted the ASC’s lack of an “improper purpose” in pursuing this strategy, but the cases it cited on that subject establish a very high standard for such a purpose. The arbitrage may have been unintended here, but it was real and it was effective—outcome-determinative, in fact.
Alberta Securities Commission v. Ryckman is now the leading example of judgment arbitrage on the books. As the court notes, this means there is now a split among states. Delaware and Pennsylvania now hold that Full Faith and Credit and mechanical registration statutes compel the enforcement of sister-state recognition judgments, and the District of Columbia holds that they do not. It will be very interesting to see how other states proceed.
h/t Ted Folkman, who brought this decision to my attention.