The Undead Norm of Unenforceability in Sovereign Debt

True story: two years ago, U.S. hedge fund NML Capital seized an Argentine navy vessel in Ghana. NML recently won an important series of rulings in US courts on defaulted sovereign bonds issued by the Latin American nation.

True story: two years ago, U.S. hedge fund NML Capital seized an Argentine navy vessel in Ghana. NML recently won an important series of rulings in US courts on defaulted sovereign bonds issued by the Latin American nation.

As the Argentina sovereign debt litigation hurtles towards its thrilling conclusion (or at least a new phase), I’ve sketched this proposal for a new paper and welcome any thoughts:

The Undead Norm of Unenforceability in Sovereign Debt

Historically, sovereigns have repaid their debts not because they feared court orders if they didn’t but to preserve their good name in global capital markets. Courts played along, tolerating transgressions of their enforcement authority even beyond what sovereign immunity would require. This dance has allowed courts to lend their expressive support to the fiction of enforceability while avoiding the downsides—for courts and markets—that aggressive attempts at enforcement against foreign sovereigns would bring. However, in NML v. Argentina, the latest round of litigation over Argentina’s 2001 default, the SDNY signaled a shift: it issued an unprecedented injunction prohibiting the world payments network from processing Argentina’s bond payments unless the sovereign also tendered payment in full to a group of holdout creditors. This ultimately pushed Argentina into default in July 2014, prompting some legal scholars and the financial press to declare that the episode would seriously impair future efforts to restructure sovereign debt.

In The Undead Norm of Unenforceability in Sovereign Debt, I intend to argue that the NML decision (which was upheld on appeal) is poised to close the gap between the rhetoric of obligation and the reality of enforcement, but only temporarily, and that the systemic effects many fear are unlikely to materialize. NML provides a clear example of some of the dangers I write about in Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk: standard terms in private, foreign-law contracts—in this case, a provision known as the pari passu clause—are driving macroeconomic events to a degree that no one anticipated.

However, the magnitude of the harm here will probably be contained. The near-term systemic impact has not been (and was unlikely to be) great in part because, unlike Greece (whose bonds I use as an example in Boilerplate Shock), Argentina is not a member of a monetary union. On a longer horizon, the effects seem even likelier to dissipate. Argentina’s contract-driven default is just the type of salient event that will prod the market to update boilerplate terms, in this case probably by restricting the reach of pari passu in future bond issues and perhaps in existing ones (by adding Collective Action Clauses, for example, which virtually eliminate the holdout problem). This should allow restructurings to continue on the flexible, ad hoc basis on which they currently occur—which is to say, without excessive judicial interference at the enforcement stage. Far from demonstrating that the norm of unenforceable sovereign debt is dead, this episode suggests it can’t be killed.

For this article, I’ll be standing on the shoulders of a rich literature on the Argentina dispute and drawing on research I’ve done at the intersection of commercial law, private international law, and financial regulation. In Boilerplate Shock, for example, I argue that currency and governing law clauses in Eurozone sovereign bonds are magnifying systemic risk in ways no one imagined when they selected those contract terms. In Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States, I argue that fragmentation in the U.S. judgment enforcement regime post-Erie renders that system ripe for manipulation by savvy judgment creditors via a process I call “judgment arbitrage.”

Undead shares many commonalities with these two articles (particularly Boilerplate Shock). Perhaps most important, together they posit that private contracts—combined with choice of law rules and expansive conceptions of jurisdiction that make it possible to secure and actually enforce judgments based on them—are driving international economic events to a degree that no one anticipated. This is mainly a story of cascade effects, amplified by standardization: the interpretation of a given contract term impacts other actors (whose rights are determined by similar contracts) in the relevant market, and where that market is systemically significant, it can affect the global financial system.

As I suggest above and in the Boilerplate Shock abstract, I think the risk of contract-driven systemic failure (which I call “boilerplate shock”) is far more manageable today in the case of Argentina than in the Eurozone sovereign lending market. Let’s hope the risk does not materialize in Europe either; we already live in pretty exciting times.

Photo: Reuters/NYT

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Manhattan DA Brings Criminal Charges Against Out of State Payday Lender

In a groundbreaking move that is being watched nationwide, Manhattan District Attorney Cyrus Vance brought criminal charges this week against MyCashNow.com, an online payday lender based outside New York that offers loans over the internet.

I discussed the case with Law360 (paywall), which has some interesting implications that I elaborate on here.

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It’s Not Every Day that the Supreme Court Gets Sued

Meredith Miller at the ContractsProf blog has written a fun post about this breach of contract lawsuit against the U.S. Supreme Court,* which was recently settled. The dispute centered on $750,000 of work that the contractor claims it shouldn’t have had to do and thus should be compensated for. This work stemmed from a need to remake windows for frames that had appeared to be rectangular but were in fact trapezoids. Best of all, this deception was actually an optical illusion intended by the architect! It appears to have fooled everyone, from the Court to the contractors.

Trapezoids win, 9-0.

This made for an interesting contract dispute…

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Petty Tyrants Rejoice

Today, Yelp appears to have removed almost 1,000 reviews of the Union Street Guest House, many of which were negative and stemmed from the controversy that was the subject of my post this morning. As of about 4:15PM ET, the hotel’s average Yelp review was up to 2.5 stars, from 1.5, and there were 15 total reviews, down from almost 1,000 as recently as yesterday.

I can’t say I like this outcome. Much like the original dispute between consumers and the Union Street Guest House, any grievance over Yelp’s decision is likely to sound in contract law. While I argued that that body of law would probably produce a “pro-consumer” result (by prohibiting USGH from enforcing its policy), I think in any dispute over Yelp’s decision contract law would not be of much help to consumers.

Henry VIII was a not-so-petty tyrant.

Henry VIII was a not-so-petty tyrant.

Review controversies are a flashpoint for Yelp. Both the company and individual Yelpers have been sued repeatedly over reviews, often by business owners annoyed by what they regard as unfairly negative or even defamatory reviews (or alternatively, for fluffy Yelping by the friends and family of competitors). A few weeks ago, a businessman-plaintiff notched some progress against Yelp in a California appeals court.

Some of this litigation turns on fine distinctions that only matter to those who follow this stuff – for example, the California lawsuit alleges that the company misrepresented the accuracy and efficacy of its review filter, not that it improperly filtered reviews in the first place – but to the average consumer or business, that will seem like hair-splitting. The key question for most people is the scope of Yelp’s discretion in deleting or promoting reviews.

Yelp’s discretion is vast, by design. The company is publicly held and, as one would expect, it appears to use seasoned lawyers to draft important disclosures and agreements.

Yelp’s Terms of Service are characteristically broad for a social media company. They tell users that “you hereby irrevocably grant us . . . rights to use Your Content for any purpose(emphasis mine). Just to make the definition of “use” completely clear, they specify that “[b]y ‘use’ we mean use, copy, publicly perform and display, reproduce, distribute, modify, translate, remove, analyze, commercialize, and prepare derivative works of Your Content” (emphasis mine). In other words, the right “to use . . . Your Content” includes the right “to remove” your reviews, or for that matter do just about anything else they want to with them. Well then.

It’s possible these terms could be held to be unenforceably vague or unconscionably broad in some instances, but I doubt that would happen here. (If Yelp sought to “use” your profile picture to market pornography, you might have a case.) So if a private citizen or regulator complains about Yelp deleting Union Street Guest House reviews, you can expect the company to cite these terms while gesturing in the direction of higher principles, like improving accuracy by working to ensure that its reviews are written only by actual customers. If you were to note that many reviews of actual customers appear to have been deleted as well – which I strongly suspect has happened in this case, given that (as sorting by date reveals instantly) Yelp has removed all reviews posted between April 3, 2014 and August 5, 2014, inclusive – they would surely lean on their prerogative, under the ToS, to delete any of Your Content. This is before considering the effect of any statutory privileges that may protect Yelp.

Abstracting back from Yelp’s rights to first principles, it seems sensible, on one hand, for a company to limit reviews to actual customers (if that’s what Yelp is trying to do); one can see why Yelp wouldn’t want a ton of random people with no connection to a place commenting on it. Cf. hearsay. On the other hand, it’s a shame that reviews that discuss an official policy of the establishment aren’t allowed unless someone has patronized it. And what does “patronize” mean, anyway? Buy something? Stay the night? Surely a review site would want to let someone who walked in, or called, and was denied service because of his appearance or accent say as much in a review. How to answer these questions is up to Yelp. Whatever their internal policies, I suspect they have to make a lot of judgment calls. In the end, a contract-based analysis is unlikely to do a lot of “pro-consumer” work here.

But not all is lost. If you patronized Union Street Guest House and wrote one of those now-deleted reviews, you can feel a sense of pride in “Your Content” being nobly sacrificed in the war against petty tyranny.

The Risks of Finding a Father for Your Child on Craigslist

[cross-posted from The Conglomerate]

The Risks of Finding a Father for Your Child on Craigslist
Posted by Greg Shill

Before returning to the legal boundaries of monetary policy, I wanted to briefly highlight some interesting contract and regulatory issues lurking just beneath the surface of an unusual Kansas state court order declaring a sperm donor to be the legal father of a child, against the wishes of all persons involved.

The facts of the case, decided last month and covered nationally (news accountorder (PDF)), are straightforward and undisputed:

In 2009, a Topeka man answered a Craigslist ad soliciting sperm donations. The ad was placed by a lesbian couple, Jennifer Schreiner and Angela Bauer. The man supplied a donation. Schreiner became pregnant and delivered a baby. Schreiner began receiving Kansas welfare benefits for the child. Seeking child support payments, the state sued the sperm donor to establish paternity. The state argued that the donor—who lacks any relationship with the child or the couple (now estranged) beyond supplying the donation—was the child’s legal father, and therefore must pay child support.

This is where the case gets interesting as a matter of private ordering and trade regulation.

Prior to the donation, all persons involved—the donor and both members of the couple—signed a non-paternity agreement in which the donor waived his parental rights and was released from his parental obligations.

Both mothers opposed the state’s campaign to declare the donor the child’s legal father.

Nevertheless, the court granted the state’s paternity petition, which means it can now seek to compel the donor to provide child support. The paternity finding also appears to give the donor a good shot at asserting parental rights (though he seems unlikely to try).

Justifying its decision to ignore the wishes of both parents and the donor, the court intoned:

A parent may not terminate parental rights by contract, however, even when the parties have consented.

Well, maybe this case is a morality tale about those who would seek a father for their child on Craigslist. A warning from a heartland state to those who would selfishly try to contract around their sacred parental obligations. A sign that courts place the welfare of the child above all else. Right?

Haha, of course not!

Kansas law makes it easy to conclusively terminate the parental rights and obligations of sperm donors by contract. Care to guess what you need to do, besides sign a contract?

Pay a doctor.

The court explained:

Through K.S.A. 23-2208(f) [PDF], the Kansas legislature has afforded a woman a statutory vehicle for obtaining semen for [artificial insemination] in a manner that protects her and her child from a later claim of paternity by the donor. Similarly, the legislature has provided a man with a statutory vehicle for donating semen to a woman in a manner that precludes later liability for child support. The limitation on the application of these statutory vehicles, however, is that the semen must be “provided to a licensed physician.” [FN1] (emphasis added)

The parties failed to do this.

So, the upshot is that you are free to find a father for your child on Craigslist—and you can even count on the State of Kansas to keep him out of your child’s life in the future—so long as you hire a doctor to do the procedure. Similarly, you can spend your free time fathering children on Craigslist without losing sleep over child support suits—as long as you kick some of the action upstairs to an M.D.

It’s not just Kansas; California, Illinois, and as many as 10 other states [FN2] follow the same law, the Uniform Parentage Act of 1973.

I’m not a family law expert, but it seems to me that a complete list of legitimate and unique public policy concerns that are implicated when a couple and a third-party sperm donor settle their parental obligations by contract looks something like this:

  1. Ensuring that the state can identify who can be held legally responsible for supporting the child.

Nevertheless, let’s assume there are also truly compelling public health reasons to involve a physician in artificial insemination. After speaking with a few doctors, I’m skeptical that this is the case, but even if it were here are ten points that I think are worth considering:

  1. Should a mother who became pregnant by artificial insemination be forced to share parental rights with a stranger who donated sperm simply because she decided not to hire a doctor for the procedure?
  2. Conversely, should the scope of a sperm donor’s rights and responsibilities as a father turn on the decision whether to enlist a doctor to oversee the procedure?
  3. Should the adequacy of a child support scheme turn on whether couples using sperm donors choose to hire a doctor?
  4. There are sound public policy reasons to be concerned about voluntariness in agreements that waive paternity. But if this case is really about ensuring voluntariness, why is enlisting doctors the solution? Establishing consent during contract formation is not some novel problem. Hiring a doctor is a novel solution, but as an evidentiary device it is not very probative.
  5. Hiring doctors for artificial insemination is not cheap. A single attempt through a physician’s office costs about $3,000, and sometimes multiple attempts are necessary. Unsurprisingly, theAmerican Fertility Association (a trade group for the fertility industry) applauded the court’s decision.
  6. This rule looks even more like an attempt to extract rents when you consider that for many people, the price of artificial insemination without physician assistance may be zero.
  7. If the state interest in the use of doctor-assisted artificial insemination is so compelling, maybe the law should simply require it on penalty of criminal sanction. I have never even heard this idea floated, probably because it would be perceived (rightly) as an excessive intrusion on various important freedoms…
  8. yet while they do not provide criminal sanctions, about 13 states are willing to provide unbelievably harsh “family-law sanctions.” If a woman declines to hire a doctor, she is placing herself and her child in eternal jeopardy; at any time, the donor or the state can move to declare the donor to be the legal father, which would put the donor in a position to seek full parental rights—even if he is a stranger. (The same is true in reverse re: child support.) It is unsurprising that both mothers opposed the state’s petition.
  9. Although facially neutral, this rule is almost certainly discriminatory in practice. It means that lesbian couples must either hire a doctor or adopt—there is no other way they can safely preclude the donor from being granted parental rights. And of course this is just one of many unofficial taxes gays and lesbians must pay, especially in states like Kansas that do not allow them to marry. It seems to me that there’s a good argument the law should fail rational basis or equal protection review, but I will leave that brief to the con law scholars.
  10. Finally, beyond any constitutional infirmity, this law should serve as a reminder that protectionist regulations—which often take the form of onerous occupational licensing restrictions and NIMBY zoning rules—frequently have regressive distributional consequences, because they tend to favor powerful incumbents. And although probably not the case here, such laws can harm the broader economy as well by stifling innovation.

I welcome your comments. And I hope my doctor friends still talk to me.

* * * *

[FN1] It should be noted that under the letter of the statute as well as a 2007 Kansas Supreme Court decision (PDF) on this issue, the court did not have an obvious alternative to finding for the state. The problem, such as there is one, is with the statute.

[FN2] An accurate count is not possible without doing a full 50-state survey. As I have written about previously, the Uniform Law Commission’s Enactment Status Maps are often unreliable or imprecise (see FNs 163 & 188).

Should Legal Scholars Refrain from Writing about Macroeconomics?

[cross-posted from The Conglomerate]

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Should Legal Scholars Refrain from Writing about Macroeconomics?
By Greg Shill

Greetings, Glommers! (and hello, Janet and Mario*!)

It’s an honor to join this extremely sharp and thoughtful community of corporate and commercial law scholars for the next two weeks.  The Conglomerate has long been one of my favorite law blogs and it’s truly a privilege to walk among these folks for a time (if a bit daunting to follow not just them but Urska Velikonja and her excellent guest posts).  Thanks to Gordon, David, and their Glom partners for inviting me to contribute.

By way of biographical introduction, I’m currently a Visiting Assistant Professor at the University of Denver Sturm College of Law, where I teach International Business Transactions and International Commercial Arbitration.  Last year, I did a VAP at Hofstra Law School (and taught Bus Orgs and Contracts).  I am on the tenure-track market this year.

In the next few weeks, I’ll be exploring a number of issues related to law and global finance.  I have a particular interest in currencies and monetary law, or the law governing monetary policy.  Two of my current projects (on which more soon) address legal aspects of critical macroeconomic policy questions that have emerged since 2008: U.S. monetary policy and the Eurozone sovereign debt crisis.

Without further ado, I will take a page from Urska and kick off my residency here with a somewhat meta question: should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?

One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market (“quantitative easing”), devalue or change a currency—as fundamentally driven by political and economic factors, not law.  And of course they are.  But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.

Some concrete examples of the types of questions I’m talking about would be:

  • Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment?  More generally, what are the Fed’s legal constraints?
  • What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?

When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy.  Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis.  For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008.  Leading economics commentators do too.  Yet commentary on “Fed law” is grossly underdeveloped.  With the exception of a handful of impressive works (e.g., by Colleen Baker and Peter Conti-Brown), legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd.

A different sort of abstention characterizes legal scholarship on the euro crisis.  Unlike the question of Fed power, there is a burgeoning literature on various “what-if” euro break-up scenarios.  But this writing tends to focus on the impact on individual debtors and creditors, not on the cumulative impact on the global financial system.  Again, the macro element is missing.

It is curious that so many legal scholars would voluntarily absent themselves from monetary policy debates.  The subtext is that monetary policy questions are either normatively or descriptively beyond the realm of law.  If that is scholars’ actual view, I think it is misguided.  But maybe the silence is not as revealing as all that.

  1. One issue is sources.  You will not find a lot of useful caselaw on the Fed’s mandate or the Federal Reserve Act of 1913, and the relevant statutes and regulations are not very illuminating.  Further, it’s a secretive institution and that makes any research (legal or otherwise) on its inner workings challenging.
  2. Another issue is focus.  Arguably the natural home of legal scholarship on domestic monetary issues, for example, should be administrative law.  But the admin scholarly gestalt is not generally as econ-centric as, say, securities law.  Meanwhile, securities scholars tend to focus on microeconomic issues like management-shareholder dynamics.
  3. A final possibility, at least in the international realm, is historical.  After World War II, Bretton Woods established a legal framework intended to minimize the chance that monetary policy would again be used as a weapon of war.  The Bretton Woods system collapsed over forty years ago, the giants of international monetary law (Frederick MannArthur Nussbaum) wrote (and died) during the twentieth century, and now even some of the leading scholars who followed in their footsteps have passed away.  At the same time, capital now flows freely across borders and global financial regulation has become less legalized in general.  These factors plus the decline of exchange-rate regulations (most countries let their currencies float) may have undermined scholars’ interest in monetary law.  But as the ongoing euro saga demonstrates, international monetary law and institutions remain as critical as ever.

These are some possible explanations for why legal scholars have largely neglected questions of monetary law, but I’m sure I’ve overlooked others.  What do you think?

*Pictured are Janet Yellen and Mario Draghi, chiefs, respectively, of the Federal Reserve and the European Central Bank.