Companies as Commodities

Like copper, corn, or crude oil, companies increasingly trade like commodities. Some investors — certain holders of debt, activist shareholders, and controlling shareholders, especially private equity funds — are focused solely on returns. In practice, this means that they care about the fate of the companies in which they invest no more than they care about the fate of any tonne of copper, bushel of corn, or oil barrel they happen to trade. These investors are so immune to reputational concerns that they will even prefer that the companies in which they invest fail if failure maximizes their return on investment. This Article identifies and labels these “going-concern-neutral” (GCN) investors. By virtue of their singular focus on return on investment, GCN investors are not bound by the same norms and relationships as other stake-holders in a company. This disconnect allows GCN investors to transfer an out sized share of company value to themselves. As a result, GCN investing typically increases the costs and risk faced by other stakeholders.This Article then uses property theory to understand GCN investing and the conflicts in the use of company value that it creates. Although it is contested whether GCN investors are properly understood as true owners of firms and their assets, accepting that premise to leverage the tools of property theory leads to significant insights. Analyzing these investors’ ownership claims through an exclusion framework reveals unseen nuances in the relationships between GCN investors and other stakeholders. Next, four property-law concepts — the right to destroy, waste, nuisance, and the tragedy of the commons — provide a rich source of analogies. These analogies reveal that the law has long used a number of so-called governance rules to manage property where there are several competing users. These rules restrict the rights of owners in order to address externalities and to promote welfare maximization. Although companies have been commoditized into mere property, the governance rules that restrict property ownership in other contexts do not yet apply to ownership of companies. It is time to consider interventions that would align the benefits and burdens of ownership of commoditized companies with ownership of other as-sets

Companies as Commodities

Like copper, corn, or crude oil, companies increasingly trade like commodities. Some investors-certain holders of debt, activist shareholders, and controlling shareholders, especially private equity funds-are focused solely on returns. In practice, this means that they care about the fate of the companies in which they invest no more than they care about the fate of any tonne of copper, bushel of corn, or oil barrel they happen to trade. These investors are so immune to reputational concerns that they will even prefer that the companies in which they invest fail if failure maximizes their return on investment. This Article identifies and labels these going-concern-neutral ( GCN ) investors. By virtue of their singular focus on return on investment, GCN investors are not bound by the same norms and relationships as other stakeholders in a company. This disconnect allows GCN investors to transfer an outsized share of company value to themselves. As a result, GCN investing typically increases the costs and risk faced by other stakeholders. This Article then uses property theory to understand GCN investing and the conflicts in the use of company value that it creates. Although it is contested whether GCN investors are properly understood as true owners of firms and their assets, accepting that premise to leverage the tools of property theory leads to significant insights. Analyzing these investors\u27 ownership claims through an exclusion framework reveals unseen nuances in the relationships between GCN investors and other stakeholders. Next, four property-law concepts-the right to destroy, waste, nuisance, and the tragedy of the commons-provide a rich source of analogies. These analogies reveal that the law has long used a number of so-called governancer ules to manage property where there are several competing users. These rules restrict the rights of owners in order to address externalities and to promote welfare maximization. Although companies have been commoditized into mere property, the governance rules that restrict property ownership in other contexts do not yet apply to ownership of companies. It is time to consider interventions that would align the benefits and burdens of ownership of commoditized companies with ownership of other assets

Contract-Wrapped Property

For nearly two centuries, the law has allowed servitudes that “run with” real property while consistently refusing to permit servitudes attached to personal property. That is, owners of land can establish new, specific requirements for the property that bind all future owners—but owners of chattels cannot. In recent decades, however, firms have increasingly begun relying on contract provisions that purport to bind future owners of chattels. These developments began in the context of software licensing, but they have started to migrate to chattels not encumbered by software. Courts encountering these provisions have mostly missed their significance, focusing instead on questions of contract doctrine, such as whether opening shrink wrap constitutes assent to be bound. Property concepts never enter their analysis. The result of this oversight is that courts have de facto recognized equitable servitudes on chattels—a category that our legal system has long forbidden. Yet because courts are often unfamiliar with property-law principles, and because lawyers have failed to make property-based arguments, individual contracts cases are remodeling the architecture of property rights without anyone realizing it.This Article identifies the unexpected emergence of servitudes on chattels via contract law. It explores the consequences of that development and argues that we should see it as deeply troubling. By unwittingly reestablishing equitable servitudes on chattels—something our legal system rejected long ago for good reason—this change in law threatens to undo longstanding precedent, disrupt settled expectations, and effectively recognize a new form of property. More generally, elevating contract over other private law doctrines disrupts the private law’s equilibrium in which a complementary suite of doctrines developed to promote economic liberty while curtailing opportunistic impulses. While the pathologies that have flourished internally in modern contract doctrine have been well studied by scholars, the way in which contract law is threatening to consume property and other areas of private law has received less attention. Using servitudes on personal property as a window into the larger problem of contract-dominated private law, this Article explores the private law’s role in shaping environmental conservation, autonomy, innovation, and the legitimacy of the law itself. Those values are all in jeopardy as if contract law is allowed to encroach on property and to erode the very concept of ownership

Limited Liability Property

This Article offers a theory of secured credit that aims to answer fundamental questions that have long percolated in the bankruptcy and secured transactions literatures. Are security interests property rights, contract rights, or something else? Why do secured creditors enjoy a priority right that, in bankruptcy, requires them to be paid in full before other debt holders recover anything? Should we care that secured credit creates distributional unfairness when companies cannot pay their debts? This Article argues that security interests are best understood as a form of “limited liability property.” Limited liability—the privilege of being legally shielded from liability that would normally apply—has long been considered the quintessential feature of equity interests. But limited liability is in fact a critical feature of security interests as well. When examined closely, security interests enable their holders to assert several privileges of ownership without bearing any of ownership’s concomitant burdens. In seeking to explain security interests, this Article offers a comprehensive account of capital investment more generally, systematically examining the various property-like interests held in corporate capital structures. Though critics have bemoaned the inequity associated with the priority right in bankruptcy—a secured debtholder can get all its assets back in the event of a bankruptcy while unsecured creditors like unpaid employees get nothing—this priority right is an inevitable consequence of recognizing security interests as a form of direct ownership. The real problem lies in the scope of secured debt holders’ limited liability protections. While equity holders enjoy limited liability, in return they are paid only after other claims in the event of insolvency. Secured lenders, by contrast, collect first, and are thus arguably overprotected. Understanding security interests as limited liability property, then, offers a more elegant way to understand capital investment at the theoretical level while also helping us recognize when and where our system of secured debt may need reform

Multidistrict Litigation: A Surprising Bonus for Pro Se Plaintiffs and a Possible Boon for Consumers

Conventional wisdom says that pro se plaintiffs almost invariably fare worse than represented plaintiffs. However, there exists in federal court a procedural regime under which pro se plaintiffs effectively receive attorneys and therefore experience success rates similar to their represented peers: multidistrict litigation. Multidistrict litigation is a procedure for consolidating multiple federal civil cases sharing common questions of fact into a single proceeding in one federal district court for coordinated pre-trial proceedings and discovery. This paper takes an empirical look at all federal civil cases terminating between 2006 and 2008 to determine what effect multidistrict litigation has on case outcome and finds that for all kinds of plaintiffs, consolidation into an MDL proceeding dramatically increased the chance that their case would settle. While pro se plaintiffs rarely reach settlement when they proceed on their own, in multidistrict litigation, there is no statistically significant difference in the settlement rates of pro se and represented plaintiffs. After exploring possible explanations for why multidistrict litigation equalizes the results of pro se and represented plaintiffs, this paper turns to those plaintiffs who do have attorneys but are unlikely to have attorneys of the same quality as their adversaries, consumers, and argues that they too are likely to benefit from the multidistrict litigation process for many of the same reasons as pro se plaintiffs. Finally, this paper suggests ways to improve the multidistrict litigation process in light of these findings

Limited Liability Property

This Article offers a theory of secured credit that aims to answer fundamental questions that have long percolated in the bankruptcy and secured transactions literatures. Are security interests property rights, contract rights, or something else? Why do secured creditors enjoy a priority right that, in bankruptcy, requires them to be paid in full before other debt holders recover anything? Should we care that secured credit creates distributional unfairness when companies cannot pay their debts? This Article argues that security interests are best understood as a form of “limited liability property.” Limited liability—the privilege of being legally shielded from liability that would normally apply—has long been considered the quintessential feature of equity interests. But limited liability is in fact a critical feature of security interests as well. When examined closely, security interests enable their holders to assert several privileges of ownership without bearing any of ownership’s concomitant burdens. In seeking to explain security interests, this Article offers a comprehensive account of capital investment more generally, systematically examining the various property-like interests held in corporate capital structures. Though critics have bemoaned the inequity associated with the priority right in bankruptcy—a secured debtholder can get all its assets back in the event of a bankruptcy while unsecured creditors like unpaid employees get nothing—this priority right is an inevitable consequence of recognizing security interests as a form of direct ownership. The real problem lies in the scope of secured debt holders’ limited liability protections. While equity holders enjoy limited liability, in return they are paid only after other claims in the event of insolvency. Secured lenders, by contrast, collect first, and are thus arguably overprotected. Understanding security interests as limited liability property, then, offers a more elegant way to understand capital investment at the theoretical level while also helping us recognize when and where our system of secured debt may need reform

Smart Contracts and the Illusion of Automated Enforcement

This Essay explores the barriers to deploying smart contracts in the consumer finance space: the humans themselves, existing consumer protection laws, and the other businesses which have financial contracts with consumers but that cannot deploy smart contracts. These three barriers render perfectly automated enforcement all but impossible. Nevertheless, there may be room for modifiable smart contracts in the consumer finance space – although these contracts may be only marginally more efficient than traditional contracts

Corporate Stewardship

Harnessing strategies both ancient and modern — hostages, surety, gatekeepers, and blame — this Article proposes a new tool for achieving more efficient corporate compliance. It begins with the premise that a handful of well-known factors, including agency costs, misaligned time-horizons, cognitive biases, and insufficiently deterrent legal regimes sometimes cause companies to ignore important public safety obligations even when those obligations are cost-effective and welfare-maximizing. The result is systemic undercompliance with certain regulatory obligations. Despite the seriousness of this problem, currently available options for motivating compliance mostly fail to make public-safety regulations sufficiently salient to the individuals who perform the regulated tasks.This new tool is called stewardship. To use it, regulators would require companies engaged in high-risk activities to appoint an internal gatekeeper, called a steward, who would agree to be personally liable should specific preventative measures fail to occur, or worse, specific harms occur. This executive would become the steward of the community’s social welfare with respect to that particular, pre-identified risk. Unlike other forms of responsible officer liability, the steward would consent ex ante to being personally liable — civilly, and perhaps even criminally — should they fail to guide the corporation away from harmful conduct. Recognizing that companies will not always follow their steward’s guidance, stewards can avoid liability by reporting out and cooperating with regulators if they suspect their employer is failing to meet its compliance obligations. In this way, stewardship is a mandatory reporting regime. These interlocking incentives make stewardship an unusually effective strategy for deterring harm ex ante, and a more efficient option for imposing liability ex post. And while the idea of imposing individual liability for collective harms may seem radical at first, our legal system already exhibits nascent forms of this regulatory approach — most notably in the Sarbanes-Oxley Act, the Internal Revenue Code, anti-money laundering and state labor laws. But unlike these broad regulatory regimes, stewardship works on both an industry-wide and project-by-project basis. Therefore, it is a tool for even the most local regulators.Beyond improving compliance, stewardship is potentially transformative in two ways. First, if and when a corporation causes significant harm, regulators would have a clear target for enforcement actions. Easier enforcement would in turn mitigate the perception of lawlessness that arises when there is no significant enforcement response to obvious wrongs. Second, stewardship facilitates efficient regulation by allowing regulators to focus on their end-goals instead of process and documentation requirements. The resulting system would thus more effectively prevent serious harms while at the same time impose less onerous requirements on businesses

Error-Resilient Consumer Contracts

When firms contracting with consumers make mistakes, people get hurt. Inaccurate billing, misapplied payments, and similar problems push lucky consumers into Kafkaesque customer service queues—and unlucky ones off the financial cliff. Despite significant regulatory interventions, firms contracting with consumers continue to struggle to accurately bill customers, update accounts, and process payments. Firms largely rely on technology, especially databases and software, to discharge these servicing obligations. This technology must accommodate firms’ innovations in their contracts, shifting governmental regulations, and consumers’ unpredictable behavior. Given the complexity of servicing, even when firms invest significantly in technology, it will inevitably produce mistakes. When firms skimp on their servicing technology, errors that harm consumers become even more likely. And even if it were possible to build perfect servicing technology, the costs that firms would pass on to consumers may outweigh the benefits. The challenge, then, is how to reduce customer harm, accepting that perfect servicing is neither possible nor desirable. This Article argues that structural improvements to consumer contracts can make them more resilient to errors. Far from being new, these structural improvements have long been recognized in contract theory. But the resulting theoretical insights have not been applied to modern consumer financial contracts. Specifically, modularity and formalities improve resilience by mitigating the complexity of servicing, regulation, and consumer behavior. While mitigating complexity may reduce errors ex ante, the bigger payoff is in simplifying customer redress if and when errors occur. Intervening in the structure of consumer financial contracts is an underappreciated tool for achieving substantive consumer protection

A New Uniform Code of Consumer Credit

This Essay provides an overview and criticism of predatory lending laws then proposes a new Uniform Code of Consumer Credit (UCCC) to work alongside the Truth in Lending Act. The proposed UCCC would provide a complete and behaviorally informed system of consumer financial protection that strives to keep credit affordable and to encourage innovative credit products. The Essay argues that a uniform law will create sufficient state-to-state consistency to reduce the need for federal preemption and thereby bring the benefits of federalism - protection from agency capture, legislative responsiveness and experimentation at the state level - into consumer financial protection. Finally, it suggests five starting principles for drafting a UCCC: legal realism, the jurisprudence of unfair and deceptive acts and practices, rationalizing consumer credit contracts with the law of contracts, incentives for safe and affordable credit, and effective remedies