Copyright (c) 2009 University of Illinois College of Law All rights reserved. http://law.bepress.com/uiuclwps Recent documents in University of Illinois Legal Working Paper Series en-us Fri, 28 Aug 2009 15:42:35 PDT 3600 http://law.bepress.com/uiuclwps/papers/art106 http://law.bepress.com/uiuclwps/papers/art106 Fri, 28 Aug 2009 15:42:22 PDT Should homeowners be required to perform community service in order to receive federal aid that reduces their mortgage debt? The U.S. requires sacrifices from bailed-out banks and auto firms; and at the other end of the wealth spectrum, welfare laws require public aid recipients to work or perform community service. But 9 million middle class homeowners-- a term used by the Treasury Department-- who took out risky mortgages are targeted to receive a free subsidy. To stem foreclosures, one Treasury Department program gives low interest rate loans, while another forgives debt. These programs require nothing in return from recipients.The mortgage crisis was fueled by unconventional loans that promoted moral hazard-- for example, teaser rates that temporarily insulated borrowers from bad credit decisions. Now, U.S. debt relief programs add a new moral hazard, according to a recent GAO report: they encourage more borrowers to fall behind on mortgage payments to qualify for a bailout.My study asks whether the U.S. can require homeowners to perform community service as a condition for debt relief. I propose 200 hours of service in programs such as Habitat for Humanity. This idea is based on my analysis of five groups of citizens who were ordered by government to perform a public service. The first group is men who labored on road duty. Tracing to the early 1800s, these state and local laws required citizens to build roads several days each year without pay. Lawyers were ordered in the 1800s to represent indigent defendants without pay. In the 1940s, the draft law allowed conscientious objectors to avoid combat by accepting mandatory assignment to jobs in charitable organizations. In the 1970s, welfare recipients were required to work on community projects if they could not find a job. The National Health Service Corps required new physicians who received tuition grants to serve the poor.My study of 441 court rulings from 1807 to 2002 focuses on recalcitrant individuals who challenged these compulsory service policies. In 83% of the cases, state and federal trial courts upheld government imposed work. In 100% of their rulings, the U.S. Constitution did not prohibit government imposed obligations. However, 37.5% of trial courts ruled in favor of individuals who raised state constitutional claims. In appellate cases, only 8% of courts ruled that a work or service obligation violated a right in the U.S. Constitution. In narrow rulings, individuals won 48% of cases before appellate courts when their challenge was based on state statutes. The results suggest that courts would not interfere with a federal policy that requires community service in return for mortgage relief. My research also shows that compulsory service requires a compelling and overarching purpose-- plus an egalitarian ethos that justifies its imposition. The mortgage relief programs satisfy these pre-conditions. In an age when the poor and powerful are required to make sacrifices, mortgage bailouts to the middle class perpetuate the spendthrift mentality that dug the nation's deep financial hole. There is wisdom in assisting millions of strapped debtors, but why is no thought given to a policy of requiring bailed-out homeowners to pay back part of their debt relief by serving their communities? If millions of homeowners who face foreclosure performed community service, moral hazard would be reduced by making them more responsible for their credit behavior, while other homeowners would be discouraged from intentionally falling behind on their loans. Michael Leroy Bankruptcy Law Civil Rights Constitutional Law Employment Practice Housing Law Judges Labor Law Law and Economics Legislation Politics Social Welfare http://law.bepress.com/uiuclwps/papers/art105 http://law.bepress.com/uiuclwps/papers/art105 Fri, 14 Aug 2009 15:59:25 PDT Currently, decrying others' profits as windfalls is popular among journalists, policy makers, law makers, industry participants, and the public at large. Once an economic gain is spotted that seems suspiciously large or too easily earned, then like the "pod people" in Invasion of the Body Snatchers, the observer must point and alert the public that this "windfall" gain deviates from an acceptable baseline. If laws are not in place to prevent this gain, then regulators should step in and correct this loophole by promulgating new laws tailored to the situation that produced the unlawful windfall. The law may prohibit the transaction altogether, constrain the terms of any future transaction, or tax the windfall gain so as to deprive the windfall recipient of all or part of the benefit and redistribute the benefit to the larger public. Currently, legislation has been introduced both to create a "Wall Street Windfall Profits Tax" to limit or create negative tax implications for executive compensation and to revive a windfall profits tax on crude oil, natural gas, and other products of the energy industry. This Article argues that this type of legislation finds its impetus not in sound economics, but in more base feelings of outrage, indignation and envy. This Article employs both a theoretical framework to create a taxonomy of windfalls and an empirical study of the use of the word "windfall" in the New York Times, the Wall Street Journal, state law cases and congressional history to analyze the rhetorical power of the term in popular and legal discourse. Though the term "windfall" originally referred to fruits literally falling off trees due to the vagaries of the wind and no action on the part of the recipient, the term windfall is currently commonly used to refer to marketplace gains between freely negotiating parties. In addition, courts sparingly use the term "windfall" to refer to double recoveries and recoveries where no underlying loss has occurred. In popular discourse, however, speakers employ the term to convey a sense that a marketplace gain of another is undeserved somehow. This overuse of the term "windfall" reflects a misunderstanding not only of what a windfall is, but also a misunderstanding of the appropriateness of law to rewrite existing bargains and to limit private parties' abilities to freely bargain without other considerations. Any defensible argument that redistributing luck by redistributing windfalls falls apart once the so-called windfall gains are the product of industry, innovation, ambition and bargaining. This Article argues against the temptation to label private gains as windfalls that are subject to recapture. Christine Hurt Contracts Corporations Law and Economics http://law.bepress.com/uiuclwps/papers/art104 http://law.bepress.com/uiuclwps/papers/art104 Fri, 10 Jul 2009 13:49:17 PDT Should homeowners be required to perform community service in order to receive federal aid that reduces their mortgage debt? The U.S. requires sacrifices from bailed-out banks and auto firms; and at the other end of the wealth spectrum, welfare laws require public aid recipients to work or perform community service. But 9 million middle class homeowners-- a term used by the Treasury Department-- who took out risky mortgages are targeted to receive a free subsidy. To stem foreclosures, one Treasury Department program gives low interest rate loans, while another forgives debt. These programs require nothing in return from recipients.The mortgage crisis was fueled by unconventional loans that promoted moral hazard-- for example, teaser rates that temporarily insulated borrowers from bad credit decisions. Now, U.S. debt relief programs add a new moral hazard, according to a recent GAO report: they encourage more borrowers to fall behind on mortgage payments to qualify for a bailout.My study asks whether the U.S. can require homeowners to perform community service as a condition for debt relief. I propose 200 hours of service in programs such as Habitat for Humanity. This idea is based on my analysis of five groups of citizens who were ordered by government to perform a public service. The first group is men who labored on road duty. Tracing to the early 1800s, these state and local laws required citizens to build roads several days each year without pay. Lawyers were ordered in the 1800s to represent indigent defendants without pay. In the 1940s, the draft law allowed conscientious objectors to avoid combat by accepting mandatory assignment to jobs in charitable organizations. In the 1970s, welfare recipients were required to work on community projects if they could not find a job. The National Health Service Corps required new physicians who received tuition grants to serve the poor.My study of 441 court rulings from 1807 to 2002 focuses on recalcitrant individuals who challenged these compulsory service policies. In 83% of the cases, state and federal trial courts upheld government imposed work. In 100% of their rulings, the U.S. Constitution did not prohibit government imposed obligations. However, 37.5% of trial courts ruled in favor of individuals who raised state constitutional claims. In appellate cases, only 8% of courts ruled that a work or service obligation violated a right in the U.S. Constitution. In narrow rulings, individuals won 48% of cases before appellate courts when their challenge was based on state statutes. The results suggest that courts would not interfere with a federal policy that requires community service in return for mortgage relief. My research also shows that compulsory service requires a compelling and overarching purpose-- plus an egalitarian ethos that justifies its imposition. The mortgage relief programs satisfy these pre-conditions. In an age when the poor and powerful are required to make sacrifices, mortgage bailouts to the middle class perpetuate the spendthrift mentality that dug the nation's deep financial hole. There is wisdom in assisting millions of strapped debtors, but why is no thought given to a policy of requiring bailed-out homeowners to pay back part of their debt relief by serving their communities? If millions of homeowners who face foreclosure performed community service, moral hazard would be reduced by making them more responsible for their credit behavior, while other homeowners would be discouraged from intentionally falling behind on their loans. Michael Leroy Biography Law and Economics http://law.bepress.com/uiuclwps/papers/art103 http://law.bepress.com/uiuclwps/papers/art103 Mon, 24 Nov 2008 08:36:06 PST Just three years ago, Congress enacted controversial amendments to the Bankruptcy Code. The proponents claimed that the changes would drive the "can pay" debtors (of which there were supposedly many) from the bankruptcy courts with tough new income-based eligibility requirements. And indeed, after the enactment of the amendments, the number of people filing for bankruptcy plunged. In this Article - the initial report of the 2007 Consumer Bankruptcy Project - the authors analyze the first national, random sample of post-amendments bankruptcy filers. Contrary to the advocates' claim that high-income filers would be driven from the system and, by implication, that those remaining would have more modest incomes, the data show no change in the income levels of bankruptcy filers after the amendments. These findings thus cast doubt on the suggestion that those purged from the bankruptcy courts - approximately 800,000 in 2007 alone based on trend extrapolation - were high-income deadbeats; they instead appear to have been ordinary American families in serious financial distress. The data also show that debtors filing for bankruptcy in 2007 have even greater debt loads than their counterparts from 2001, a development that seems to track a national trend of increasing consumer debt. The findings thus align with at least two predictions of some legal scholars. The first is that the bankruptcy reform bill was not aimed at high-income abusers but was instead a general assault on all debtors, regardless of their financial circumstances. The second is that debtors are waiting longer - and incurring more debt - before ultimately seeking bankruptcy relief, consistent with the so-called "sweat box" theory of credit card lending. Robert M. Lawless Bankruptcy Law Law and Economics http://law.bepress.com/uiuclwps/papers/art102 http://law.bepress.com/uiuclwps/papers/art102 Fri, 21 Nov 2008 13:50:51 PST When a person should begin taking Social Security retirement benefits is a critical question for planning one's retirement. This article explains the various factors at play in determining the optimum starting point, including: longevity considerations; spousal implications, whether for a previously employed or a previously unemployed spouse; the impact of post-retirement employment; the availability of health insurance prior to Medicare eligibility for the worker and the worker's spouse; alternative sources of retirement income, including distributions from retirement savings plan assets and lifetime liquidation of nonretirement assets (and the pertinent income tax ramifications); and anticipated investment strategies. Richard L. Kaplan Law and Economics http://law.bepress.com/uiuclwps/papers/art101 http://law.bepress.com/uiuclwps/papers/art101 Fri, 21 Nov 2008 13:32:00 PST To be effective in working with clients, witnesses, judges, mediators, arbitrators, experts,jurors, and other lawyers, attorneys must have a good understanding of how people think and make decisions, and must possess good people skills. Yet, law schools have tended to teach very little, directly, about human behavior, and current critiques of legal education do not focus on the importance of psychological insights to attorneys. In particular, lawyers and legal education have not taken full advantage of the great strides that have been made in the field of scientific psychology in recent decades. Similarly, psychologists are not doing as much as they might to apply their discipline to all aspects of law. Law and psychology texts and courses often focus primarily on criminal rather than civil law and practice, and place their emphasis on the psychology of juries, eyewitness testimony, interrogation, and trials. This Article begins to fill some of the gaps that exist in the application of psychology to legal practice, focusing on psychological insights that are important to the endeavor of interviewing and providing initial counseling to clients in civil cases. Law students commonly graduate from law school understanding little if anything about perception, memory, communication, cognitive heuristics, or decision-making. While good lawyers ultimately pick up some of this information through experience, there is no reason to leave new lawyers to flounder based on a lack of understanding of these psychological principles. Further, even experienced lawyers can benefit from more explicit study of psychology. While the best lawyers may have intuited some of what will be discussed here, some of the findings are counterintuitive, and even experienced lawyers can improve their approach to interviewing and counseling by drawing on relevant psychology. Jennifer Robbennolt Law and Economics http://law.bepress.com/uiuclwps/papers/art100 http://law.bepress.com/uiuclwps/papers/art100 Fri, 21 Nov 2008 08:47:56 PST State regulation of insurance companies has been criticized for many years because of the burden imposed on insurers by having to comply with the laws of many jurisdictions. These higher costs are passed on to consumers. The problems with the current regulatory structure are prompting calls for increased federal regulation of insurance. However, all proposals to federalize insurance regulation create opportunities for abuse at the hands of the federal government and fail to utilize the benefits of a federal system. This article shows how many of the problems of the current system can be addressed without resorting to a large scale intrusion of federal regulators into insurance markets. The proposed solution calls for minimal federal intervention to provide for jurisdictional competition between states that would be allowed to charter insurers that could operate nationally with only the single license granted by the charter. This single-license approach addresses the most salient concerns of proponents of federal optional chartering. It also has the potential for triggering competition and innovation in insurance products and rates while preserving a meaningful role for state regulation. Henry N. Butler Law and Economics http://law.bepress.com/uiuclwps/papers/art99 http://law.bepress.com/uiuclwps/papers/art99 Fri, 21 Nov 2008 07:51:36 PST This article examines private equity firms as an example of partnership-type, or "uncorporate," structures in the governance of large firms. Other examples include publicly traded partnerships, real estate investment trusts, hedge funds and venture capital funds. These firms can be seen as an alternative to the corporate form in dealing with the central problem of aligning managers' and owners' interests. In the standard corporate form, shareholders monitor powerful managers by voting on directors and corporate transactions, suing for breach of fiduciary duty and selling control. These mechanisms deal with managerial agency costs by relying on other agents, including auditors, class action lawyers, judges, independent directors and shareholder intermediaries such as mutual and pension funds. Uncorporations substitute other devices for corporate-type monitoring, including more closely tying managers' economic well-being to the firm's fortunes and greater assurance of distributions to owners. Continued concerns with managerial agency costs, the inadequacy of regulatory responses such as the Sarbanes-Oxley Act, changing costs and benefits of public ownership, leverage and capital lock-in all contribute to the rise of uncorporate structures in large firms. Political considerations may, however, constrain these developments. Larry E. Ribstein Law and Economics http://law.bepress.com/uiuclwps/papers/art98 http://law.bepress.com/uiuclwps/papers/art98 Thu, 20 Nov 2008 14:02:58 PST The creation of ICANN was sought by the United States government to promote international cooperation in the governance of the Internet based on a bottom-up system in which government intervention was limited, if not eliminated. However, as the Internet has become a global phenomenon, this initiative has faced increasing opposition from the international community. As we have shown in this article, the evolution of ICANN reveals how it slowly departed from its mere technical role into a more political one, in which all groups and constituencies try to impose their preferences. During the reform movement initiated from inside ICANN, different constituencies tried to exploit the situation by gaining power positions in the new structure. The political strength of different groups and constituencies reversed some of the initial reforms and produced a totally new structure. Reform attempts from inside ICANN were challenged by the international community. These efforts concentrated on changing the main structure of ICANN into a multilateral organization controlled by international governments and removing the direct control of ICANN from the United States government. In the end, even though the proposals seem to look for different structures to regulate domain names and numbers on the Internet, they represent a political struggle between opposite points of view. Andres A. Gallo Law and Economics http://law.bepress.com/uiuclwps/papers/art97 http://law.bepress.com/uiuclwps/papers/art97 Thu, 20 Nov 2008 13:48:14 PST Open standards are widely considered to have significant economic and technological benefits. This has led many governments to consider mandating open standards for document formats. Document formats are how a computer stores memos or spreadsheets. Governments are moving away from Microsoft's proprietary DOC format to open standard document formats, such as the OpenDocument Format (ODF) and Office Open XML (OOXML). The belief is that by shifting to open standards, governments will benefit from choice, competition, and the ability to seamlessly substitute different vendor implementations.This paper suggests that governments seeking the benefits of open standards need to consider the role of interoperability. Without multiple interoperable implementations, i.e., "running code", users will not gain the advantages of competition and substitutability. To highlight the issues around interoperability, we examined the interoperability issues around ODF and OOXML.This research assesses interoperability among different software implementations of each document formats. For example, the implementations for ODF included KOffice, Wordperfect, TextEdit, Microsoft Office, and Google Docs. A set of test documents was used to evaluate the performance of other alternative implementations.Our analyses show that there are significant issues with interoperability among various implementations. Users face numerous issues when transferring files between different implementations. While the best implementations may result in formatting problems, the worst implementations actually lose information, e.g., information found in pictures, footnotes, comments, tracking changes, and tables. Our findings include specific scores for each implementation. There was considerable variation among how well each implementation performed. For ODF, the compatibility scores ranged from a raw score of 151 (100%--weighted percent) to 48 (55%--weighted percent).We consider several implications of these results including the lack of perfect compatibility between implementations, the lack of good implementations outside of Windows, and the surprisingly good overall performance of OOXML implementations. The interoperability issues are troubling and suggest the need for improved interoperability testing for document formats. The results also highlight the importance of interoperability for open standards in general. Without interoperability, governments will be locked-in to the dominant implementations for either standard and in the process lose many of the benefits that might accrue from adopting an open standard in the first instance. Rajiv Shah Law and Economics