One of my clearest memories from the week of on-campus interviews at the beginning of my 2L-year was a question many students were asking;  “what does it mean that Dewey Ballantine is merging with LeBoeuf & Lamb? “  Both firms distributed documents to dispel rumors.  In essence, they read,   “don’t worry, we’re still hiring the same number of Summer Associates.” I’ve been thinking about this as I read that Dewey & LeBoeuf has negotiated an extension on its current debt, giving it time to get its house in order.

The Economist covered Dewey’s troubles last week (article also available at 2012 WLNR 8835899).  That article discusses why it can be difficult for professional partnership businesses (such as law firms) to escape downward debt spiral, because the firm can’t meet obligations by liquidating assets (a professional corporation’s only real assets are the professionals), and can’t resort to the market for funding, as a public company would.

The comparison of law firms and public companies is a fascinating one, especially this year.  In January, a public company, Quindell Portfolio, filed for a license to purchase British personal injury firm Silverbeck Rymer.  This moment has been anticipated for some time, after Britain’s Legal Services Act of 2007, which, among a series of other reforms, allowed law firms to be owned in part by non-lawyers.  See UK ST 2007 c. 29 Pt 5 s. 71 et seq (Research Note: run the bolded portion of this citation as a find to deliver the document on Westlaw.  The “Arrangement of Act” link delivers the Act’s table of contents.).    Approval of the sale by the relevant regulatory agencies is still pending.

In the United States, only the District of Columbia allows any profits from the practice of law to flow to non-lawyers (see D.C. Rule of Professional Conduct 5.4(b)).  In recent years, though, there has been increasing discussion of changing the rules to allow for greater non-lawyer participation in firm ownership and governance, including in the halls of the American Bar Association.  See 22 No. 1 Experience 5.  For more material on these debates, try the following search from the Secondary Sources page on WestlawNext:

Search: alternative /3 law legal /3 practice firm business /3 structure organization

Result: 45 Documents

Filters: You can use the filters on the left to look specificially at law review articles or CLE materials (i.e. ALI-ABA and PLI).

Almost half of the results are from the past 5 years, which suggests increased interest in a change from the partnership model.  One day, Dewey & LeBoeuf may be remembered as one of the last firms to face down a debt crisis without the ability to look to the public for aid.

Recently, I was listening to NPR and to Carl Richards, a financial adviser, telling his story regarding how he stopped making his mortgage payments. Given the current economic times, this is not a unique story. I was particularly struck by his remarks repeated here in the New York Times:

At first, I dismissed the idea of a short sale. Late that summer, I sat down with a really close friend in Las Vegas, someone I looked up to. He cut to the heart of the matter right away: Why, he wanted to know, were we still making the payments?

Because I have a moral obligation, I said. You pay your debts.

He proceeded to explain that I didn’t have a moral obligation to the bank. I had a moral obligation to my family. I had a contractual obligation to the bank, along with a clear moral obligation to be honest in my dealings. What he was asking was this: Which is more important? Your contractual obligation to the bank or your obligation to your family to preserve your ability to make a living?

His statement got me thinking of two separate issues – One, does the law impose a moral or ethical obligation for the continued performance of obligations under a contract or can we breach them intentionally without incurring punitive liability? Second, and perhaps an even more interesting question for attorneys:  does a corporate attorney or in-house counsel, given that a corporation’s underlying goal is maximizing shareholder value, have an affirmative ethical obligation to advise his/her corporate clients to intentionally breach a contract when it is economically advantageous for the corporation to breach and pay damages rather than continue performance under the contract?

MORAL OBLIGATIONS

In general (of course there are always exceptions) not only is it okay to intentionally breach agreements, but our legal tradition encourages this behavior under the well accepted doctrine of “Efficient Breach”. Under this principle, per Blacks’ Law Dictionary, the efficient breach theory provides, “[t]he view that a party should be allowed to breach a contract and pay damages, if doing so would be more economically efficient than performing under the contract.” I ran a search in the ALLCASES database:

INTENTIONAL! WILLFUL! +2 BREACH! /5 CONTRACT! AGREEMENT /P BAD-FAITH GOOD-FAITH /P MORAL! ETHICAL!

In a Western District of New York case, the Court stated that:

“mortgagor could not recover punitive damages for breach of contract under New York law absent proof of public wrong, moral turpitude or wanton dishonesty…” See, Katz v. Dime Sav. Bank, FSB, 992 F.Supp. 250 (W.D.N.Y., 1997). Another Court in New York held that, “Courts have consistently held punitive damages to be unavailable where the nature of the conduct amounted to nothing more than willful breach of contract, bad faith or simple negligence.”

See, Aniero Concrete Co., Inc. v. New York City Const. Authority, 2000 WL 863208, 30 (S.D.N.Y.,2000).

Another California Court elaborating on policy considerations stated:

“The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises. Therefore, ‘willful’ breaches have not been distinguished from other breaches … The restrictions on contract remedies serve purposes not found in tort law. They protect the parties’ freedom to bargain over special risks and they promote contract formation by limiting liability to the value of the promise. This encourages efficient breaches, resulting in increased production of goods and services at lower cost to society … Because of these overriding policy considerations, the California Supreme Court has proceeded with caution in carving out exceptions to the traditional contract remedy restrictions.”

See, Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal.4th 85, 98, 900 P.2d 669, 676-677, 44 Cal.Rptr.2d 420, 427 – 428 (Cal.,1995).

Another California Court, citing to an article, stated that:

“One commentator, in lamenting the rather unpersuasive rationales offered by courts, noted that “the unexplained judicial reluctance to impose tort liability upon those who, in bad faith, breach contractual obligations is not only understandable but reflects a perceived awareness of, and faithfulness to, one of the most poorly kept secrets in legal history: Bad faith breach of contract, if defined as an intentional breach motivated by crass economic self-interest, has been, despite a clamoring of moral credos to the contrary, a judicially accepted staple of our system of commercial law…. [A] close scrutiny of commercial law doctrine, and the briefest scrutiny of commercial practice, makes it transparently clear that our system not only sanctions such bad faith breaches, but, with limitations, actually encourages them…. The social policy begins with a recognition that if breaches are too harshly sanctioned, there will be deterrence not only of breach but of the execution of contracts. Therefore, damages must not be so oppressive as to discourage the formation of binding commercial agreements. But far more important is an awareness that intentional breaches of contract often promote the economic efficiency of society. To the extent the promisor’s pecuniary gains from breach exceed the promisee’s pecuniary injuries, the costs of production have been reduced. Were legal liability to exceed the promisee’s pecuniary injuries, an efficient reallocation of resources would be discouraged at societal expense.” (Diamond, The Tort of Bad Faith Breach of Contract: When, If at All, Should It Be Extended Beyond Insurance Transactions? (1981) 64 Marq.L.Rev. 425, 433, 436–437, fns. omitted.)”

See, Rogoff v. Grabowski, 200 Cal.App.3d 624, 629, 246 Cal.Rptr. 185, 188 (Cal.App. 2 Dist.,1988).

I also ran a search in the ALLCASES database for efficient breach casaes: EFFICIENT /3 BREACH. Looking through some of these cases, it appears that the principle of “Efficient Breach” is well recognized in our legal system and we as a society are indeed okay with intentional breaches of agreements even if they are simply for no reason other than financial benefit to the breaching party. In pure economic terms, “If the net gain to the breacher exceeds the loss to the non-breaching party, the result is efficient, because the world is wealthier.” CONTRACTS-HB § 14.36. But then, what about the tortuous interference with a contract cause of action? A Utah Court framed the issue well by stating:

“We are persuaded by the efficient breach arguments discussed above. When an efficient breach occurs, a breaching party may retain its profits in excess of a plaintiff’s losses as long as the plaintiff is made whole. As was stated in Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir.1985), such a standard is beneficial to both parties because the nonbreaching party receives what it bargained for and the breaching party is able to retain its profits made through its more efficient business practices. In the realm of tortious interference with contract or economic relations, “[i]t would be inconsistent to require the party inducing the breach to disgorge its excess profits while permitting the breaching party to retain its excess profits.” Marcus, Stowell & Beye Gov’t Secs., 797 F.2d at 232.” TruGreen Companies, L.L.C. v. Mower Brothers, Inc. 199 P.3d 929, 935 (Utah,2008)

DUTY to BREACH

So, do corporate attorneys, general-counsels and other attorneys representing corporations have an affirmative duty to advise their corporate clients based on the doctrine of efficient breach to affirmatively breach contracts? The available materials were scant.  But, I did uncover the following:

A recent Delaware Court stated, “corporation’s purpose is to maximize the value of the company’s shares, subject to the constraint that the corporation must meet all its legal obligations…” See, In re Massey Energy Co., 2011 WL 2176479, 20 (Del.Ch.) (Del.Ch.,2011). Given this fundamental purpose for a corporation’s existence, do attorneys have an affirmative duty to advocate efficient breaches of contracts when representing corporate clients? “An attorney has an obligation to act in his or her client’s best interests. It is possible to imagine situations where breaching a settlement may be in the client’s best interests, as when the breach is efficient.” See, Kusters, Civil Liability for Attorneys to Adverse Parties when a Settlement Agreement is Breached in California, 56 Hastings L.J. 1277, 1293 (2005). In another article, the author wrote that, “[t]he court viewed the defense lawyers’ decision to conceal the medical report not as a violation of legal duty to an opposing party, but rather as a tactical or strategic move similar to advising a client in a particular situation concerning “efficient breach”–that breaking a contract in a particular situation would be less costly than performing.” See Camton and Knowles, Professional Secrecy and its Exceptions: Spaulding v. Zimmerman Revisited, 83 Minn. L. Rev. 63, 75 (1998).

The Reference Attorneys continue to receive a healthy number of calls focusing on financial reform, and, specifically, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  The paramaters of Dodd-Frank continue to evolve.  Check out the Fox Rothschild Alert , a JD Supra document.  To review the proposed rule referenced in this alert, see  75 FR 70152-01.  Track its progress by setting up a WestClip in the FR database for RIN 3038-AC96.  For more information on RINs, see our earlier posting, Anatomy of a RIN.

Earlier posts addressing the financial crisis highlighted Westlaw’s “Financial Crisis” tab and the “Finance and Banking” folder. The “Dodd-Frank Wall St. Reform” tab is another excellent option. The tab contains the latest federal agency updates, links to key provisions, and a broad selection of primary and secondary sources.  Here are a few notable resources:

First, we found the citation referenced above by selecting the CFTC Federal Register database and running a simple key terms query:

See also, the Dodd-Frank Reform and Consumer Protection Act (PLIREF-DEFREF):  an excellent overview of the Act, including specific chapters on the “Volcker Rule” and the new Bureau of Consumer Financial Protection.

Wall Street Reform-USCCAN (WALLST-USCCAN) is a great option for Dodd-Frank legislative history.

On WestlawNext, you’ll find the Dodd-Frank treatise and other excellent resources from the Finance & Banking content page.

The Federal Register tweets.  While that is exciting for a variety of reasons, I found a recent tweet most helpful.  A few calls have come in about Public Law 111-209.  What is Public Law 111-209?  According to @Federal Register, PL 111-209 (HR 5502) amends “gift card provisions effective date.”

Pulling up PL 111-209 (also cited as 2010 HR 5502 or 124 Stat 2254) indicates that it amends the “gift card provisions effective date” of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD for short).

While I love short public laws (and this is a short public law), I couldn’t figure out the significance of this change in effective date.   (After all, this tiny little public law garnered its own tweet.)

A little more research indicates that PL 111-209 is also popularly known as the ECO-Gift Card Act.  Prior to the passage of PL 111-209, the implementation of the gift card rules of CCARD was scheduled for August 22, 2010.  In a function of the law of unintended consequences, this August 22nd deadline would have led to the destruction of millions of plastic gift cards that would have no longer complied with the disclosure requirements CCARD.  According to one of its sponsors, the ECO-Gift Card Act will prevent 100 million of those plastic gift cards from ending up in the landfill (or ocean) prematurely.  That is the equivalent of eight football fields filled 12 feet deep with plastic cards.

PL 111-209 gives retailers until Jan. 31, 2011 (well after the Christmas shopping season) to get those *old* gift cards off of their shelves and get the new, compliant gift cards and gift certificates into place.

It’s worth noting that the ECO-Gift Card Act passed both the House and Senate unanimously.  Our legislators may not agree on a lot, but they apparently don’t care for wasted plastic.

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With the passage of the Dodd-Frank bill last week the Reference Attorneys have received an increasing number of  questions about financial reform.  Did you know there are many databases on Westlaw specific to the financial crisis?  Accessible from either the Finance & Banking folder in the Directory or its own “Financial Crisis” tab, these databases include cases, trial filings, news resources, sections of the Federal Register, law reviews, and legislation all pertaining to the financial crisis.

For example, the database FC-BILLTXT contains full-text versions of all pending Congressional bills since 1994 pertaining to either the subprime mortgage crisis or the financial reform.  There is also a database called FC-MISC, which contains miscellaneous materials such as agency or party statements, speeches, comments, and bill drafts as they appeared prior to their introduction.

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There has been a flurry of  Congressional news this week with the enactment of the Financial Reform Bill, and the Senate passing the extension of jobless benefits.  When researching active or recently passed legislation it is important to understand which version you are interested in, either the engrossed, enrolled or introduced version, and how to access other versions.

In Westlaw, a find by citation for the Wall Street reform Bill 2009 CONG US HR 4173, will pull up all the versions as separate results.  When you are in any of these bills you can click on the Graphical Bills link on the left side of the screen.  To open up a map that not only shows all of the versions, but also links to legislative history organized by category.

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Congress passed this bill yesterday afternoon.  The Dodd-Frank “Wall Street Reform and Consumer Protection Act” is not law yet, close, but not quite yet. The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) was passed by the U.S. House of Representatives on December 11, 2009 and the Restoring American Financial Stability Act of 2010 (S. 3217) was passed by the U.S. Senate on May 20, 2010. The Congressional Conference Committee on Financial Regulatory Reform has reconciled the two bills and the final legislation has been named the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) (H.R. CONF. REP. 111-517).  The House approved the Act on June 30th and the Senate voted and passed it on July 15.   The bill is now on its way to President Obama who is expected to sign the legislation into law soon.

The Dodd-Frank “Wall Street Reform and Consumer Protection Act of 2010 will reform the regulation of the financial industry and will protect consumers and investors. The Act is over 2000 pages long and the news databases are a great place to get the gist of the new impending law. For example, try the following search:

Database: ALLNEWSPLUS Query: da(after 6/24/2010) & PR,CA,TI(FINAN! WALL-STREET /5 REFORM! REGULAT! STABILITY) & “WALL STREET REFORM AND CONSUMER PROTECTION ACT”

The full text of the House Conference Committee Report at 2010 WL 2671804: H.R. CONF. REP. 111-517

Update: On July 21, 2010, President Obama signed the new legislation into law.

Enrolled version can be found at:  2009 CONG US HR 4173

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It is a cuss-out on capitol hill (see Sen. Carl Levin Holds a Hearing on the Causes of the Financial Crisis, Panel 1)!  The reform issue is extremely contentious and has every financial institution worried.  Therefore, many law firms that service those institutions are keeping their eyes to the nation’s capitol.  That also means the Reference Attorneys are getting the frequent “where do I start?” calls.

If you happen to be the lucky (unlucky) summer associate that seems to be available, you may get the daunting task of collecting material that may help associates and partners keep abreast of the mayhem in D.C. related to Wall Street reform.  No reason to panic, the late shows are not the only place where you will find helpful information (although they may help you stay sane).

To get a foothold, it is a good idea to run a general search through a news database (ALLNEWS, ALLNEWSPLUS, RALLNEWSPLUS). A workable search would be something like: “Wall St.” financ! /3 reform debate.  Also, using a date restriction will make your hits manageable (maybe back to November of last year since the House passed their form of Wall Street reform back in December).  Then run locates for terms that will help you narrow the material to the gold nuggets such as:  senate house /3 bill report committee hearing testimony.  Since your results will be in reverse chronological order, make sure to peruse more than just the first page.

You will find topics will be clumped because the issue of the day will be reported by several news organizations in different ways.  No doubt, you will find several gems, such as the bill numbers for the Senate Bill (2009 CONG US S 3217) and the House Bill (2009 CONG US HR 4173) as well as terms you would like to explore further like the “Volcker Rule” and “Goldman Sachs.”

At this point you have some dangerous leads that need to be explored.  Use the terms you have found and run searches using the federal legislative history tab along with the databases like USCCAN-REP and FED-LH.

Did one of your news or legislative searches do you good?  Then keep running it.  For example, the Volcker Rule (section 619) is an important piece of the reform legislation and after running a search in the news and the legislative history databases I have saved a Westclip.  This will pick up any discussion about the “Volcker Rule” alerting me when there are new articles on the subject.

Legal research is a combination of art and science, so there really is no “right” way to go about working your way through the financial reform debate.  However, I hope I have made it clearer on how the process can work for you.