Children as Payment Devices??!!

Photo by M.ADA.
The depths to which overwhelming debt will push some people are vividly illustrated by a story covered by CNN this weekend.The headline zeroed in on the public-interest and human-rights angle, decrying a Saudi judge's ruling refusing to annul an arranged marriage of an 8-year-old girl to a 47-year-old man. The part most interesting to me was a passing comment on the reason why this girl's father had arranged the marriage of his young daughter: to settle his debts with the 47-year-old man, "a close friend" of his. Whatever one might think about arranged marriages, child marriages, or marriage in general, using this institution as a means of settling debts doesn't strike me as consonant with the ideas behind the institution in any religious tradition. Using children as payment devices can't be consistent with what either G*d or the Prophet had in mind . . .

French Tortoise Beats U.S. Hare?

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Do we not learn or do we not care? Over 2600 years after Aesop told his famous fable of the tortoise and the hare, we in the U.S. continue to insist that explosive speed punctuated by spectacular slowdowns is the best model for our economy, rather than a slow-and-steady approach to constant growth. Apparently, France has internalized the notion that "slow and steady wins the race." The W$J today has an intriguing story about how France has been spared the worst of the current global economic meltdown thanks, perhaps counterintuitively, to its restrictions on mortgage lending, a dominant public employment sector, and lack of reliance on a few sectors to drive impressive year-on-year economic growth. These characteristics of the French economic model have been criticized mercilessly by economists in recent years, but now who's eating crow? Or rather, who SHOULD be eating crow, as I'm sure few economists are abandoning their disproven theoretical models (which is ironically one reason why many are apparently finding it hard to find jobs)--after all, empirical data about what has ACTUALLY happened to the world economy seems to be less important to most economists than what their models predict SHOULD have happened (if you haven't heard the joke about the economist and the can opener, check it out). The final paragraphs of the article, of course, conclude with dire warnings from an economist that France will "return to a pattern of slower growth" after the world economy recovers. These guys just don't get it. Perhaps WE're the ones who should consider embracing "slower growth" to avoid having to recover from the next inevitable economic breakdown caused by our maniacal focus on above average growth.

Is Congress Afraid or Unwilling to Compare?

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I recently found yet another striking illustration of the stark contrast between U.S. and European legislative efforts to explore comparative (foreign) solutions.

When the U.S. Congress was considering the wholesale revision of the Bankruptcy Act in the early 1970s, the Bankruptcy Commission report contained a section on "Contemporary Bankruptcy Experiences in Other Nations." I was excited to see this early openness to comparative analysis . . . until I read the two-paragraph section. After a number of observations on how different the "legal, economic, and social conditions" are in the U.S. and elsewhere, and without saying anything about the approach(es) taken by foreign systems, the report concluded glibly "the bankruptcy experience of other countries is not a useful resource." [H.R. Doc. No. 93-137, Pt. I, at 66 (1973)] Sigh. Granted, at least in my area of interest (consumer bankruptcy), there wasn't much to compare in the early 1970s, but one might have expected a bit more effort from U.S. policymakers . . .

In contrast, when Denmark set out to consider adopting the first consumer insolvency law in Continental Europe, it took careful account of comparative lessons to be learned. Like the U.S. commission's report, the 1982 report of the Danish commission assigned to explore this issue contains a section on "Foreign Law." [Betænkning on Gældssanering, nr. 957 (1982)] This section, though, is not two paragraphs, and it doesn't dismiss all foreign legislation as "not a useful resource." Instead, it undertakes an impressively sophisticated analyis of consumer bankruptcy legislation and practice in England, Ireland, the U.S., Canada, and New Zealand (11 pages). Though the approaches of these "Anglo-American" systems was ultimately rejected as inconsistent with Danish-Continental legal philosophy and practice, at least they considered--quite carefully and sensitively--relevant foreign models.

Note that the language of all of the systems considered by the Danes was English. So there's one less excuse for the U.S. Commission's failure to consider these comparative models. But it gets better! Midway through the Danish report's comparative consideration of U.S. law, it directs the reader to consider a lengthy passage from the legislative history of the U.S. Bankruptcy Code, enacted a few years earlier. The entire page-and-a-half passage is reproduced in English! The message is clear and impressive: Any educated reader of this Danish report would read English well enough as to not require a translation of the legislative history of the U.S. law. Stunning. Granted, a country with a language not widely in use, like Danish, might be expected to take seriously the notion of English proficiency, but the contrast between the attitudes and abilities of the Danish and U.S. bankruptcy commissions is shocking.

Unlike in the early 1970s, U.S. legislators now have a wealth of comparative analysis of both legislation and practice in European bankruptcy systems, especially consumer bankruptcy. Doug Boshkoff pioneered this area of research with his 1982 empirical article on the discharge process in England (Limited, Conditional, and Suspended Discharges in Anglo-American Bankruptcy Proceedings, 131 U. Pa. L. Rev. 69 (1982)). The rapidly developing consumer insolvency systems in Continental Europe have also been explored in detail in recent years (see, e.g., here and here).

So when Congress returned to the drafting table to revise (many would say deform) the consumer bankruptcy law in 2005, did they consider comparative experience then? I searched in vain for any comparative reference in the legislative history of BAPCPA (the 2005 reform law's acronym). So is Congress afraid, or does it just not care . . . ?

Hungary following the way of Iceland

Not to be continually negative about what is going in in the world, but today the International Monetary Fund (IMF) announced what has been coming together over the last week or so. The IMF, European Union and the World Bank have put togother a $25.1 billion bailout package for Hungary. We've seen our markets here in the United States go down, up and down (today up 889.35 to 9,065.12). Sure, I like to complain about the battering my accounts have taken, just like everyone else. As bad as we've seen our markets, though, emerging economies are really having a tough time riding the storm of these markets. Hungary is not alone. The IMF also has tentative agreements with Iceland and Ukraine. And, the IMF is in discussions with other countries as well. The IMF typically imposes restrictions on monies it loans, which for Hungary may include health care and local government support limitations.

Much of the word out of the IMF sounds familiar. We must restore investor confidence in the financial markets. Without that, the economies struggle, both here in the United States and in countries like Hungary. There is also a similar vein in the actions underway across Europe to make sure that the banking systems are stable. So, our market ups and downs have an even greater impact abroad. Thankfully, in the end, it seems like world leaders have realized the inter-twined nature of the economies and are attempting quick action.

Hungary's bailout is $25.1 billion. Sure, we are talking about an entire country needing a bailout. Just the thought of country bailouts is imposing. This amount, though, pales by comparison to the $122.8 billion the Treasury has extended to AIG alone (see Explaining the Financial Crisis to Students). Keeping focus on the financial magnitude of government intervention, AIG is receiving close to five times what the whole country of Hungary will receive. To borrow a concept recently used by Jim Chen over at Moneylaw to refer to a greater magnitude of financial measurement, we might say "Now that's a lot of Smoots!" Of course, we might wonder if $25.1 billion will be enough for Hungary (or, whether AIG will stop at $122.8 billion).

Dominique Strauss-Khan, Managing Director of the IMF, spoke recently about the need of the IMF to be in a position to act quickly to respond to financial crises in emerging markets. It seems that the IMF's proactive stance was a wise route. One can hope that these early interventions by the IMF will help ease the ride of this financial crisis in developing countries. Time will tell in the end, just how much intervention will be needed in developing economies.

— JSM

The Joy of Comparative Commercial Law

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Thanks so much to the Commercial Law blog folks for inviting me to be their guest for a while! I am thrilled to have a chance to discuss topics outside my primary area of scholarship, though I am delighted to have been granted license to talk about bankruptcy and comparative insolvency law, as well. In my first post, then, I thought I'd mention something at the intersection of commercial law stricto sensu, bankruptcy, and my love for all things comparative law.

In the course of researching for the book I'm co-authoring on international bankruptcy, I got to explore the different approaches to the treatment of secured creditors in bankruptcy around the world. I have to admit that I was surprised to find that in many countries, when the rubber really meets the road (i.e., in the borrower's bankruptcy), secured creditors are not the king of the hill, as in U.S. law. Quite a few bankruptcy laws subordinate secured claims to (1) administrative claims arising in the reorganization/liquidation process (e.g., fees for trustees, lawyers, appraisers, auctioneers, etc.), (2) taxes and other public debts, (3) employee wage and benefit claims, and even certain kinds of other unsecured claims (in the Czech Republic before January of this year, secured creditors enjoyed priority in insolvency cases in only 70% of the value of their collateral, with the remaining 30% reserved for unsecured creditors!). One of my favorite curious subordination laws is section 134(4) of the new Russian Bankruptcy Law, which subordinates secured claims to two kinds of unsecured claims if they arose before conclusion of the security agreement: (1) compensatory tort claims for personal injury and associated "moral harm" (emotional damages) and (2) claims for compensation for the use of intellectual property. One wonders whether the unique IP exception was designed to buttress Russia's bid to join WIPO or some other international IP or trade pact.

Along similar lines, I sheepishly admit that after teaching Secured Transactions for years, I was unaware of the substantial differences between "fixed" and "floating" charges (consensual liens) in English law. As a gross over-generalization, a "floating" charge is a blanket lien, generally on all of an enterprise's property, which "crystallizes" into a "fixed" charge and divests the debtor of unfettered control over the property upon default--for a more detailed exploration of the not-altogether-clear distinction between fixed and floating charges, see here. Floating charges are often subordinated to a variety of different unsecured claims in places like England, Australia, Bermuda, and the Cayman Islands, and in England, floating charges created after 15 September 2003 are subordinated to general unsecured claims as to a percentage of the collateral proceeds, capped at £600,000 [this clause has been edited--see comments]. Indeed, in Sweden, the equivalent of floating charges (företagshypotek on immovables and företagsinteckning on movables) created after 1 January 2004 are limited to 55% of the value of the debtor-company’s unencumbered assets (with the remaining value reserved for unsecured claims).

These kinds of significant limitations on secured creditors' rights are anathema in the United States, and given my U.S. training, I had been a strident "secured creditors über alles"-type guy. Having been exposed to these very different approaches from countries that I regard as populated by reasonable-minded, intelligent, generally commerce-friendly people, however, really opened my mind and made me think twice. For more of this kind of mind-opening study, take a look at the proceedings from a recent World Bank conference on secured transactions and insolvency law reform here.

We have a lot to learn from our friends around the world, and it's so darned FUN to travel (at least mentally) to exotic places with unfamiliar commercial and insolvency law systems. I hope to share some of my joy in the travel-and-learning process during my visit. Thanks again for having me!