More on the Delaware Judgment Arbitrage Case (Alberta Securities Comm’n v. Ryckman)

Over at Letters Blogatory, friend of the blog Ted Folkman has published his take on Alberta Securities Commission v. Ryckman, the recent Delaware decision that (as I wrote last week) provides a good example of judgment arbitrage. Thank you again, Ted, for bringing the case to my attention.

Judgment arbitrage is a term I coined for a particular strategy for enforcing unenforceable judgments. It is a method of forum-shopping that allows creditors to exploit a quirk in American law that allows them to enforce foreign-country judgments in a forum where they would not otherwise be able to. There’s more discussion of the strategy in my Ryckman postthis symposium piece, and the original article where I lay out the theory.

In Ryckman, the creditor sought to collect Delaware assets in satisfaction of a Canadian judgment. The twist here was that the creditor first got its Canadian judgment recognized in Arizona, hopped a plane east, and then sought to use what was at that point technically an Arizona judgment to collect assets in Delaware. It was undisputed that the underlying Canadian judgment—a fine imposed by a Canadian agency—was not enforceable in Delaware, yet the Delaware court ordered enforcement anyway, because it was enforcing the Arizona judgment. It did so in the name of Full Faith and Credit, falling back on an articulation of that principle that I believe to be an incomplete. (There is a growing consensus, which I discuss at pp. 487-91 of the article, that FF&C does not compel states to grant full credit categorically to sister-state judgments.)

Ryckman is a good example of arbitrage. The creditor was able, with minimal friction, to profit from a major difference between Arizona and Delaware law governing the recognition of foreign judgments. Merriam-Webster defines arbitrage as “the practice of buying something (such as foreign money, gold, etc.) in one place and selling it almost immediately in another place where it is worth more.” The Canadian judgment wasn’t simply more valuable in Delaware for having transited Arizona first; it would have been completely worthless under Delaware law otherwise. The cost of unlocking additional assets for the creditor via the Arizona judgment was a little legal complexity and paperwork. It’s the essence of arbitrage.

Ted’s post disputes that the case is really arbitrage because the debtor, not the creditor, was the one to choose Arizona as the recognition forum—after all, he moved his domicile there. I find this point logically appealing, but my read of the law is that many courts wouldn’t place much stock in it…

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Delaware Endorses “Judgment Arbitrage”

A Delaware court has just issued a clear endorsement of the controversial enforcement strategy I call “judgment arbitrage.” I commend the slip opinion (hereto anyone interested in the enforcement of judgments across state or national borders. The case is Alberta Securities Commission v. Ryckman, 2015 WL 2265473.

As I argued in a 2013 article in the Harvard International Law Journal, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” judgment arbitrage is a three-step enforcement strategy that allows a party to enforce a foreign judgment in a U.S. jurisdiction where it would otherwise have been barred from doing so.

It’s uncontested that this is exactly what has just happened in Delaware. Here are the facts:

  • Ryckman, who lived in Alberta, was fined about $500,000 Canadian by the Alberta Securities Commission (ASC) for violating Alberta securities laws. The ASC obtained a judgment (the “Canadian Judgment”) in this amount against Ryckman, who then moved his residence to Arizona.
  • The ASC sought recognition and enforcement of the Canadian Judgment in Arizona.
  • The Arizona state trial court ordered recognition and enforcement of the Canadian Judgment (now the “Arizona Judgment”). Ryckman appealed, and the Arizona appellate court affirmed. The Arizona Judgment simply embodies the Canadian Judgment, but is domestic rather than foreign.
  • The ASC later sought enforcement of the Arizona Judgment in Delaware, where Ryckman is believed to have assets.
  • Delaware recognition law is so different from Arizona’s that the Delaware court would have rejected the Canadian Judgment had it been presented with it. This is undisputed; the ASC concedes that the Canadian Judgment would not be enforceable in Delaware for two independent reasons:
    1. The Canadian Judgment constitutes a fine or penalty, and
    2. The applicable Delaware statute of limitations has run.

And here is the holding:

  • The Delaware court orders enforcement of the Arizona Judgment. Now that the ASC has domesticated the Canadian Judgment in Arizona, its foreignness is irrelevant. It’s just an Arizona judgment. The court ignores the Canadian Judgment.
  • The court holds that this result is compelled by (1) the Full Faith and Credit Clause of the U.S. Constitution and (2) the Delaware out-of-state judgment registration statute (the Uniform Enforcement of Foreign Judgments Act).

This is a major decision in the law of recognition and enforcement, and a clear example of judgment arbitrage. The court here reached a conclusion that, to my mind, deepens the already considerable doctrinal and theoretical confusion around the issue. I suggested legislation was desirable to address the possibility of judgment arbitrage, but many doubted the phenomenon even existed. In fairness, who could blame them? At that time I was unable to “identify a single real-world example of judgment arbitragethat is, a creditor receiving a judgment in a foreign country and then enforcing it in a U.S. state where it would otherwise have been barred from enforcing. An online symposium was held on the article, and the title of the critique summed up this good-natured skepticism well: Is There Really Judgment Arbitrage? (Yes, I replied.)

The linchpin of the strategy, I argued, was to insert a third jurisdiction between the foreign court (where the merits judgment is rendered) and the enforcement court (where it’s ultimately collected). The purpose of this middle jurisdiction is to recognizeand thereby domesticatethe foreign judgment, stripping it of its foreign character and transforming it into a U.S. judgment that other American courts will treat as an ordinary sister-state judgment. This step is key, because many scholars and courts believe that American courts are obligated to enforce sister-state judgmentsincluding recognition judgmentsunder the Full Faith and Credit Clause and state and federal registration statutes. No such requirement exists for foreign-country judgments.

Judgment arbitrage is best represented graphically (these charts appear at p. 477 of “Ending Judgment Arbitrage”). Here is a typical cross-border judgment enforcement lawsuit, in simplified formit occurs in two jurisdictions:

Classic Cross-Border Litigation

And here is judgment arbitragenote the addition of a third jurisdiction:

Judgment Arbitrage

I refer to this three-stage dance as “judgment arbitrage,” because of the relative frictionlessness of sidestepping a hostile U.S. recognition law in favor of a more lenient recognition forum. (Some cases have suggested there isn’t even a jurisdictional nexus required to choose this middle forum.) And once the foreign judgment has been domesticatedhere, once the Canadian Judgment was rechristened the Arizona Judgment—the process of enforcing it is essentially mechanical.

As I discussed in an October 2014 post, a Pennsylvania court decision (citing “Ending Judgment Arbitrage”) endorsed the possibility of judgment arbitrage. The circumstances of that case left the court’s holding open to future narrowing. After all, the “arbitrage” element was not directly teed up: the two states involved (NY & PA) used the same recognition statute.

But that is not the case here. Arbitrage was directly presented in the Delaware case, where Delaware recognition law would have rejected the Canadian Judgment. Yet the court squarely held that Delaware was obligated to enforce, because the Canadian Judgment was recognized in Arizona before the creditor came to Delaware. That the Alberta Securities Commission probably did not diabolically plot its litigation strategy in a smoke-filled room but instead simply followed the asset trail of a nonpaying debtor is irrelevant to the holding. The court noted the ASC’s lack of an “improper purpose” in pursuing this strategy, but the cases it cited on that subject establish a very high standard for such a purpose. The arbitrage may have been unintended here, but it was real and it was effectiveoutcome-determinative, in fact.

Alberta Securities Commission v. Ryckman is now the leading example of judgment arbitrage on the books. As the court notes, this means there is now a split among states. Delaware and Pennsylvania now hold that Full Faith and Credit and mechanical registration statutes compel the enforcement of sister-state recognition judgments, and the District of Columbia holds that they do not. It will be very interesting to see how other states proceed.

h/t Ted Folkman, who brought this decision to my attention.

Did Pennsylvania Just Endorse “Judgment Arbitrage”?

The process of recognizing and enforcing foreign-country judgments has emerged as a critical issue in international business. Human rights groups see foreign and domestic courts as playing an indispensable role in holding multinational corporations accountable when they operate in developing countries, while those businesses worry that vulnerable foreign legal systems are being exploited to shake them down for political purposes. Somewhat more prosaically (but in my view more significantly on a day-to-day basis), the cross-border share of global capital flows has become enormous and with it has grown the need to more clearly define the standards that determine whether a judgment rendered in one country can be enforced against assets located in another. Judgment enforcement tends to be dictated by sources of domestic law and in the US is normally governed by state law.

In a recent decision in a judgment enforcement case, Standard Chartered Bank v. Ahmad Hamad Al-Gosaibi & Bros. Co., the Pennsylvania intermediate state appellate court held that a New York judgment recognizing a foreign money judgment was enforceable in Pennsylvania. This is significant in part because of the scope of the ruling: the court held that a foreign-country money judgment, once recognized by a single US court, is – poof! – rendered enforceable by a court in any other. The force of this holding is all the more potent considering that New York lacked personal jurisdiction over the judgment debtor. So a court can render a judgment compelling a party over which it lacks jurisdiction to pay a bunch of money, and then another court – in this case, one that appears to have jurisdiction – must enforce it.

This is a strong endorsement of the possibility of what I have called “judgment arbitrage.” In “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States” (which the court cited), I explain the implications of the fact that the law governing the process of collecting on a foreign judgment in the United States formally consists of two stages – recognition and enforcement – that do not need to occur in a single forum or under a single forum’s law. I posit judgment arbitrage as a natural, rational exploitation of that system: a judgment creditor can be expected to seek recognition in one US state and enforcement in a second where doing so serves its interests. (While creditors normally bring recognition and enforcement actions in a single proceeding, they are not obligated to.) Where, for example, the bulk of the debtor’s assets are located in a state where the recognition law is less creditor-friendly, the creditor may choose to bring a recognition action in a pro-creditor jurisdiction and then an enforcement action where those assets lie. That does not appear to be what happened here – New York and Pennsylvania use the same recognition statute, the 1962 Uniform Foreign Money-Judgments Recognition Act – but while the court notes this fact it does not condition its holding on the identity of the two states’ recognition laws.

When I developed the theory of judgment arbitrage, some questioned whether it really exists. My intuition, informed by my experience practicing transnational litigation, was that judgment creditors litigating enormous judgments are very sophisticated actors who would probably consider the option where it’s available, and so I set out to try and see if I could find a case where it had been used successfully. (I did not encounter sister-state judgment arbitrage while in practice.) The article cites (at p. 478) a practice manual that endorses its use, but I couldn’t find a reported case where it had actually been approved. I had noted in the article (e.g., at p. 478-80) that by definition judgment arbitrage is the kind of phenomenon for which it is hard to find traditional legal sources, because it will tend to result in confidential settlements rather than reported decisions, and further explained this challenge in a symposium the journal later held on the article. Although I was confident in my analysis of the relevant legal sources, it would have been nice to be able to point to something more concrete to demonstrate the availability of judgment arbitrage.

The Standard Chartered decision is a pretty solid data point in favor of judgment arbitrage. The opinion does a few things I had said courts might do when confronted with an enforcement action implicating three forums: a foreign merits forum (F1, here Bahrain), a US state recognition forum (F2, here New York), and a US state enforcement forum (F3, here Pennsylvania). Specifically, it endorses the enforcement by F3 of an F2 judgment recognizing the original F1 foreign judgment. And in so doing, the decision offers an energetic and thorough defense of the duty states possess to enforce one another’s judgments under the Full Faith & Credit Clause, both as a matter of constitutional law and public policy. It even says that Pennsylvania will enforce a sister-state recognition judgment where doing so would contradict Pennsylvania public policy, in the name of national unity. It emphasizes that this includes cases when the merits are litigated abroad, in F1. This is consistent with my argument in “Ending Judgment Arbitrage” (see, e.g,. pp. 488-91) that while the judicial duty to enforce sister-state judgments is far from absolute as a matter of constitutional law (the Supreme Court said in Pink v. AAA Highway that it is “not an inexorable and unqualified command”), courts often construe it to be very robust. This court not only doesn’t push back on the scope of that obligation, it offers a powerful and clear endorsement of it – and specifically of the duty to enforce sister-state judgments where the underlying judgment originates in a foreign country.

Here are some passages that support judgment arbitrage (all pages cite to the slip opinion):

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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

Ted Folkman Blogs about “Ending Judgment Arbitrage” at Letters Blogatory

At Letters Blogatory, international judicial assistance guru Ted Folkman has written a thoughtful and interesting response to my article, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” 54 Harvard International Law Journal 459 (2013). I have replied in the comments.

Harvard International Law Journal/Opinio Juris Symposium on “Judgment Arbitrage”

Yesterday, the Harvard International Law Journal and the blog Opinio Juris hosted a symposium on my article, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” which was published in the Harvard International Law Journal last fall. The article is about the domestication of foreign judgments in the United States and focuses on an example of extreme forum shopping that I call “judgment arbitrage,” in which plaintiffs can exploit differences in state law to make it easier for them to enforce foreign judgments in states that otherwise would have rejected them.

Professor Christopher Whytock, an expert on international litigation at UC Irvine, wrote a very thoughtful response to the article. I replied.

I want to thank Chris for contributing, and also to make a quick note here about the value of these types of exchanges.

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My article on Eurozone sovereign debt, “Boilerplate Shock,” will be published in the Tulane Law Review

Pleased to share the news that my article on euro-area sovereign bonds,Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk,” will be published in the Tulane Law Review. Thanks very much to those of you who have provided feedback thus far (I welcome more of it, by email or in the comments). Here’s the abstract:

Scholars generally assess the usefulness of standard-form commercial contracts from the standpoint of the firms that use them. But these firm-centric accounts overlook the cumulative impact of standardization on a given market. Where the market in question is critical to the financial system, this oversight can be quite dangerous.

This article examines the coordinated use of two standard contract terms in European sovereign bonds, a market that many observers considered the greatest source of global economic instability in the five years following the 2007-09 financial crisis. These terms require that the bonds be paid in euro and that any dispute be resolved under foreign law. According to the existing scholarly consensus, these terms are benign, but a closer look reveals this view to be dangerously inaccurate. This conclusion has powerful implications not only for the multitrillion-dollar sovereign lending market, but for the future of securities contracts and financial regulation more generally.

Specifically, tenuous assumptions about the boilerplate terms that govern these debts reveal a perilous gap in financial regulation: when standard terms in private contracts become ubiquitous, they have the potential to inflict severe and unexpected harm on the broader financial system. Currently, the law lacks even a vocabulary to describe this dangerous externality, let alone a mechanism to manage it. By proposing a new rule that would address the problem of what might be called “boilerplate shock” in the Eurozone, the article argues for expanding the focus of financial regulation to encompass the potential of private contracts to become incubators of systemic risk.

Keywords: sovereign debt, financial regulation, systemic risk, securities regulation, monetary law, commercial law, contract design, boilerplate, bond, conflict of laws, eurozone, private international law, sovereign default, euro, european union, emu, lex monetae, isda, derivative, law of money, currency

JEL Classification: K00, K22, K23, K33, K41, E42, E44, E52, E58, E62, F02, F33, F34, F42.

More Monies, More Problems

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More Monies, More Problems
Posted by Greg Shill
[cross posted from The Conglomerate]

I expressed concern in my last post that uniform contract terms could destabilize securities markets in unexpected ways. In a recent paper, I dub this risk “Boilerplate Shock.” The paper uses boilerplate terms in Eurozone sovereign bonds as a case study, but I argue that any market in which a lot of securities are governed by uniform contract terms is vulnerable to boilerplate shock. In this post, I will focus on the Eurozone and my proposed solution to the risk of boilerplate shock there.

One major problem is that no one really knows how to deal with sovereign debt obligations denominated in a currency that still exists but is no longer used by the debtor. A partial breakup of the European Monetary Union would trigger some question marks in commercial law and private international law (among other things).

In the Eurozone sovereign lending market, bond contracts typically contain standardized language specifying:

(a)  choice of governing law (often foreign), and
(b)  currency of payment (euros).

The combined effect of these clauses, I argue, is to render any country that departs the euro more likely to default on its debt. Whatever the impact of the departure itself, a forced default would make things much worse for Europe and the world economy.

Leading scholars have concluded or strongly suggested that a sovereign that changes currencies can redenominate (convert) its bonds to its new currency even where the contract is governed by foreign law (e.g., Philip Wood (p. 177), Michael Gruson (p. 456), Arthur Nussbaum (pp. 353-59), Robert Hockett (passim)). As a descriptive matter, I believe this to be a mistaken interpretation of New York (and probably English) private international law and commercial law (see “Boilerplate Shock” pp. 47-67). But normatively, I agree: a sovereign should be able to redenominate its bonds under certain circumstances. Among other things, the alternative would make currency union breakups far more dangerous than they already are.

In brief:

  • The prevailing consensus underestimates the risk that a departing Eurozone member’s attempt to redenominate its sovereign bonds into a new currency will be ruled a default.
  • Since the bonds of other struggling euro countries are largely governed by the same boilerplate terms ((a) and (b) above), this misapprehension has the potential to be particularly damaging. In addition to surprising the market (which appears to incorporate this consensus), it is likely to spread beyond the immediate debtor to the bonds of similarly situated countries that have issued under the same terms.
  • Same for CDSs (which are likewise often governed by foreign law, usually New York).
  • Thus, given the widespread use of terms (a) and (b), a ruling that a departing country cannot pay its euro-denominated contracts in a new currency could cause the market to demand unsustainable premiums from other weak debtors.
  • This could cause Eurozone countries to lose market access. Greece is not TBTF in any sense, but some of its neighbors are—and are also too big for the EU (including the ECB) and IMF to bail out. Italy (the world’s 9th largest economy) and Spain (13th) come to mind.

Thus, if my commercial law/private international law analysis is right, these boilerplate contracts could end up playing quite a big role in the event of any euro breakup.

To mitigate this risk of boilerplate shock, I suggest a new rule of contract interpretation. The proposal is detailed at pp. 67-71 of the article. I suggest commercially significant jurisdictions adopt it by statute. Here is a quick summary.

Any sovereign that:

  1. Belongs to an international monetary union, and
  2. Issues bonds in the currency of that monetary union subsequent to the adoption of this rule, and
  3. Leaves the monetary union and introduces its own currency,

shall retain the right to redenominate its bond obligations into its new currency, UNLESS the sovereign has affirmatively waived the right to redenominate its bonds.

You’ll notice this is a default rule—merely a presumption of the right to redenominate—not a mandatory rule. It is also prospective-only: it does not apply to existing issuances. It also does not protect sovereigns that issue in foreign currency (e.g., Argentina), only those that are monetary union members and issue in the common currency (e.g., France).

The reason for these limitations is to minimize unintended consequences and near-term disruption to the market, but also to embody the relatively modest objectives of the rule. It is an information-forcing default rule that is intended to facilitate better risk management by parties. It is not a “save the world” rule.

The challenge, as I’ll discuss in my next post on the paper, is not that redenomination would be ruled impermissible when it ought to be available (otherwise, that might suggest a mandatory “pro-redenomination” rule). It is that the likely effect of these boilerplate terms—to prohibit redenomination—was almost certainly not bargained for and is largely unknown to parties. This market failure has, in turn, created latent risks to the broader financial system and the existing legal tools are poorly suited to address them.

Image: © Disney, “Duck Tales”

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.