Copyright (c) 2010 All rights reserved. http://works.bepress.com/robert_rhee Recent documents in Robert Rhee en-us Wed, 03 Mar 2010 08:26:31 PST 3600 http://works.bepress.com/robert_rhee/22 http://works.bepress.com/robert_rhee/22 Wed, 06 Jan 2010 07:17:28 PST Robert J. Rhee Corporations & Business http://works.bepress.com/robert_rhee/21 http://works.bepress.com/robert_rhee/21 Wed, 06 Jan 2010 07:17:18 PST This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America's acquisition of Merrill Lynch and the impact of a flawed merger execution on the board's subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of the crisis was Bank of America's acquisition of Merrill Lynch. While this acquisition was pending, Merrill Lynch was accruing losses at an astonishing rate, so much so that Bank of America considered exercising the merger agreement's material adverse effect clause to abort the deal. The board of directors ultimately decided against doing this, but only after the government, fearing the injection of more systemic risk into the financial system if the deal fell through, threatened to fire the board and management. This episode, unique in modern business history, provides an object lesson on the public-private nature of corporate governance during a national crisis. This topic is important, and thus far has not been developed in either the judicial or scholarly literature, presumably because this country has not experienced a crisis of this scale since the 1930s. The Bank of America Merrill Lynch episode serves as a contextualizing vehicle to advance a theory of public necessity exemption to fiduciary duty. A board's action to nationalize corporate governance and purpose per public necessity is authorized by Delaware law, specifically section 122(12) of the Delaware General Corporation Law, which thus far has received scant attention. This Article constructs around this statute a framework for recognizing a fiduciary exemption based on the board's determination that the firm, being uniquely situated to avert or mitigate the public crisis, should provide aid. Simply stated, public necessity, a well established concept borrowed from tort law, excuses the destruction of private property (in the case of corporate law, transfer of assets to other parties or causes). When the board perceives that the stake in the public welfare is great enough, the shareholder primacy norm can and sometimes does fail the stress test of a crisis. Robert J. Rhee Corporations & Business http://works.bepress.com/robert_rhee/19 http://works.bepress.com/robert_rhee/19 Thu, 03 Dec 2009 11:16:12 PST This essay suggests that a deficiency in legal education is a contributing cause of the regulatory failure. The most scandalous malfeasance of this new era, the Madoff Ponzi scheme, evinces the failure of improperly trained lawyers and regulators. It also calls into question whether the prevailing regulatory philosophy of disclosure of disclosure is sufficient in a complex market. This essay answers an important question underlying these considerations: What can legal education do to better train business lawyers and regulators for a market that is becoming more complex? One answer, it suggests, is a simple one: law schools should teach a little more business and a little less law. Robert J. Rhee Corporations & Business http://works.bepress.com/robert_rhee/20 http://works.bepress.com/robert_rhee/20 Thu, 03 Dec 2009 11:15:50 PST Limited liability is considered a "birthright" of corporations. The concept is entrenched in legal theory, and it is a fixed reality of the political economy. But it remains controversial. Scholarly debate has been engaged in absolute terms of defending the rule or advocating its abrogation. Though compelling, these polar positions, often expressed in abstract arguments, are associated with disquieting effects. Without limited liability, efficiency may be severely compromised. With it, involuntary tort creditors bear some of the cost of an enterprise. Most other proposals for reforming limited liability have been incremental, such as modifying veil piercing. However, neither absolutism nor marginalism is inevitable. Reform can be sweeping and yet maintain fidelity to the core idea of limited liability. This Article stakes a middle ground in the debate: liability should be limited against all creditors, but cost externalization to tort creditors can be substantially minimized, if not eliminated, through mandatory bonding that in the aggregate capitalizes a compensation fund. A bond would be minimally burdensome on individual firms, but business enterprise is made to bear risk more fully. Importantly, bonded limited liability is practically administrable and politically feasible. The idea is based on well developed intellectual foundations of enterprise liability and risk retention. This scheme is not only economically more efficient, but also promotes equity and greater social justice. Robert J. Rhee Corporations & Business http://works.bepress.com/robert_rhee/18 http://works.bepress.com/robert_rhee/18 Fri, 17 Jul 2009 09:46:06 PDT The chapter argues that financing extreme catastrophic loss will become more problematic as catastrophes become more frequent and severe. An effective strategy must increase the level of participation in the spreading of risk and loss. Currently, risk spreading is done largely through insurers and government as they are the default aggregators of private and public capital. An enlargement of participation may mean the disintermediation of the traditional insurance and public compensation functions, thus allowing more direct and efficient participation between those are exposed to risk and those who are willing to bear it. This chapter also argues that tax policy should consider catastrophe risk and compensation as a way to positively influence risk-taking behavior. Currently, tax policy focuses on the equity and fairness of taxation of individual income, but these considerations are also at the heart of public financing of catastrophes. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/17 http://works.bepress.com/robert_rhee/17 Fri, 17 Jul 2009 09:46:05 PDT Although the pure economic loss rule has been remarkably durable in the common law, it suffers from a theoretical deficit. The rule has not been properly framed within the broader context of Anglo-American political economy. Any theory must recognize that the rule fundamentally deals with business risk and economic organization. Two conceptions of risk are important: risk to economic assets essential to the production function (loss of a factor of production), and risk to outcomes (loss of production). This Article proposes a production theory of the pure economic loss rule, which is rooted in the neoclassical economic understanding of the relationship between uncertainty and profit. The theory is simply stated: tort law protects one's factors of production, but not outcomes. The emphasis on the loss of an economic asset departs from the requirement of loss of one's property, the traditional basis for recovery of consequential economic loss. Ownership is not and should not be the touchstone of recovery. Rather, society has a normative preference for economic production, and tort law protects an asset essential to the production function, irrespective of ownership. The pure economic loss rule is a market abstention doctrine. It reflects a bright line judicial policy against corrective legal action when economic loss represents not a market failure in precaution but instead is a necessary condition of the engagement of enterprise under Knightian uncertainty. Thus, the production theory resolves a classic, longstanding riddle of the common law--that is, why consequential economic loss is recoverable upon the loss of an asset, but pure economic loss is not upon a poor economic outcome. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/15 http://works.bepress.com/robert_rhee/15 Fri, 17 Jul 2009 09:46:04 PDT This short paper focuses on the problem of reference class in evidentiary assessment as it relates to probability and weight of evidence. The reluctance to inject mathematical formalism into the factfinding function is justified. Objective probability requires a reference class from which a proportion is derived. Probability assessments change with the reference class. If a proposition is subject to proportional comparison against two or more different references, their selection is often an inductive process. The advantage of objectivity and methodological rigor is illusory. A legal dispute is the search for a plausible understanding of the truth, and an overtly mathematized process runs the risk of substantially substituting particularized inquiry with aggregate assessment, a notion inimical to transactional causation between conduct and injury. In special circumstances, however, when such inquiry cannot advance the goal of error minimization, a rule of law consistent with a class proposition may advance the notion of statistical justice. But as a general matter the juridical process should not confuse aggregate assessment with individual justice. Robert J. Rhee Miscellaneous http://works.bepress.com/robert_rhee/16 http://works.bepress.com/robert_rhee/16 Fri, 17 Jul 2009 09:46:04 PDT In toxic tort litigation, a plaintiff has no cause of action for increased risk of harm unless that risk is proven by a preponderance of the evidence to lead to a future physical injury. This rule of law is based on an antiquated concept of uncertainty, and evinces the law's detachment from the knowledge gained from other intellectual disciplines and the everyday workings of the world. This article argues that freedom from increased risk should be a legally cognizable interest, the violation of which gives rise to an independent cause of action. When analyzed under finance theory, increased risk harms a person by increasing costs, reducing economic asset value, and imposing a negative value option. The resulting damage for increased risk can be quantified more accurately by applying securities and derivatives pricing techniques used in the financial markets. Lastly, this article suggests that the rules of liability and damages proposed here create the singular circumstance in law where the application of a statute of limitations would be a suboptimal solution for defendants. The statute of limitations imposes a barrier to informational efficiency for both parties. Accordingly, it should be eliminated in increased risk tort cases. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/13 http://works.bepress.com/robert_rhee/13 Fri, 17 Jul 2009 09:46:03 PDT This chapter discusses insurance case law arising from acts of terrorism, including those arising from the September 11 attacks. It analyzes the Terrorism Risk Insurance Act of 2002 (TRIA), as amended by the Terrorism Risk Insurance Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007, as well as the administrative program created by the legislation. Examples are provided and NAIC Policyholder Disclosure Notice forms are included. Policy considerations surrounding TRIA are also discussed including insurance industry strategies, the difficulties of assessing terrorism risks, the effect of TRIA subsidized insurance on the market, and the benefits and problems such subsidized insurance engender. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/14 http://works.bepress.com/robert_rhee/14 Fri, 17 Jul 2009 09:46:03 PDT September 11 changed the American economy and the global insurance market. The insurance industry no longer covers terrorism risk for "free." The traditional insurance mechanism alone cannot spread the risk of repeated catastrophic losses. Beyond the Terrorism Risk Insurance Act of 2002 lingers the questions of a longterm solution and government's role therein. Government can assume different roles: reinsurer, wealth (re)distributor, regulator, or a combination thereof. This article suggests that the government should foster a regulatory and tax environment in which the private sector can develop a capital market solution for terrorism risk. Securitization is an alternative to reinsurance and can transfer risk to the global capital markets. Presently, this concept is just a theoretical possibility. Legal reforms must first reduce the cost of securitization and enhance the investment appeal, making terrorism bonds more price competitive with reinsurance. Even if such reforms are sown, a bond market will take many years to grow. Such a market, however, is impossible without the regulatory precursors, which are needed now. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/11 http://works.bepress.com/robert_rhee/11 Fri, 17 Jul 2009 09:46:02 PDT This paper constitutes a compilation of summary entries on catastrophic loss, alternative risk transfer, and the Terrorism Risk Insurance Act of 2002 and the Terrorism Risk Insurance Extension Act of 2005, along with references and further reading. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/12 http://works.bepress.com/robert_rhee/12 Fri, 17 Jul 2009 09:46:02 PDT The economic models of bargaining and tort law have not been integrated into a coherent theory that reflects the operational realities of the dispute resolution process and the negligence standard. Applying a theory of bargaining based on asset pricing principles of financial economics, this Article argues that there is systematic devaluation of tort claims in the civil litigation system. This results because in essence the parties value different tort transactions, even when they are tied together in a common dispute and view the facts and laws similarly. For the party that can mitigate the risk exposure, the discount to value presents an arbitrage opportunity in which the bargaining process represents a superior pricing in the private market than the public judicial forum, which presumably applies the Hand Formula. Under this analysis, the fault standard is both an instrument of valuation and a cost-shifting mechanism. The conventional view of cost allocation is misleading. When we properly account for the cost of the risk-adjusted discount, we see that the plaintiff bears the substantial portion of the cost of resolution. Negligence creates the greatest litigation risk, and the resulting devaluation of the asset incentivizes defendants to settle at rates lower than the public price. These functionalities connect the historical origins of negligence to its "unexpected persistence" today. As long as bargaining is the primary method of dispute resolution, tort law is structurally incapable of maintaining the judicial standard of care. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/9 http://works.bepress.com/robert_rhee/9 Fri, 17 Jul 2009 09:46:00 PDT From a financial economic perspective, the governing condition of a meritorious civil action is the uncertainty of outcome. Expectation and outcome deviate, and the spread is the measure of uncertainty (or variance). During litigation each party has an option to settle or select trial. The decision standard can be seen as an option strike price and a finding of liability as an "in-the-money" call option. This apparent optionality suggests the application of an option pricing model to legal valuation, and a small but growing body of scholarship endorses this concept. However, option theory is not the only concept. Under an asset pricing model, the value of an asset is the sum of its expected cashflow discounted by its risk. Uncertainty is the key variable in the values of an option and an asset, but risk has a bipolar effect on value. Greater risk increases option value, but decreases asset value. At issue is the essential nature of a disputed right: is a lawsuit conceptually an option or an asset? This article argues that the essential nature of a lawsuit is best viewed as an asset. Uncertainty diminishes lawsuit value consistent with the prediction of asset pricing principles. This article shows that expected value, which has been a durable concept in law and economic literature, does not equal true economic value. The assumption of risk neutrality assumes away the most difficult aspect of the valuational analysis and fails to account for a risk-adjusted discount reflecting the quality of the forecast. Thus, two cases with the same expected value are not valuational equivalents if the variance of returns is perceived differently, and this article analyzes how parties account for different perceptions of risk in valuation. Robert J. Rhee Economics of Dispute Resolution http://works.bepress.com/robert_rhee/7 http://works.bepress.com/robert_rhee/7 Fri, 17 Jul 2009 09:45:59 PDT This essay inquires into the political economy and system of governance that have made catastrophes more frequent and severe. The system of governance that is designed to mitigate risk and respond to catastrophes can be ineffective, or worse, increase the risk of harm through unintended consequences. Human influence must be considered a source of collateral risk, the kind that leads to a systemic crisis or exacerbates one. This essay concludes with some brief proposals, discussion topics more than completed ideas, which may facilitate further academic and political dialogue on effective governance and public risk management. They include a catastrophe tax, the elimination of subsidies for bad risks, reduction of coordination costs, and a clearer understanding of a public-private partnership. Robert J. Rhee Insurance & Torts http://works.bepress.com/robert_rhee/8 http://works.bepress.com/robert_rhee/8 Fri, 17 Jul 2009 09:45:59 PDT Conventional wisdom says that economic surplus is created when the cost of litigation is foregone in favor of settlement, a theory flowing from the Coase Theorem. The cost-benefit analysis weighs settlement against the expected value of litigation net of transaction cost. This calculus yields the normative proposition that settlement is a superior form of dispute resolution and so most trials are considered errors. While simple in concept, the prevailing economic model is flawed. This article is a theoretical inquiry into the selection criteria of settlement and trial. It applies principles of financial economics to construct a pricing theory of legal disputes. In addition to probability and transaction cost, dispute risk must capture the concepts of weight of evidence, volatility of case disposition and confidence in assessment. In much the way cost of capital, a measure of financial risk, affects the valuation of firms, the risks associated with litigation and settlement imply a cost of resolution of which transaction cost is but one. By focusing on transaction cost, the standard model underestimates true economic cost. Valuation under uncertainty implies a risk premium or discount. Because the expenditure of transaction cost reduces uncertainty, transaction cost and risk adjusted valuation are in dynamic tension. Under this approach, settlement and litigation are different pricing mechanisms in the absence of market pricing, and are imperfect substitutes operating under uncertainty. Accordingly, this article rejects the normative axiom that litigation is inferior to settlement, a conclusion that has broad policy implications in the administration of justice. Robert J. Rhee Economics of Dispute Resolution http://works.bepress.com/robert_rhee/6 http://works.bepress.com/robert_rhee/6 Fri, 17 Jul 2009 09:45:58 PDT This conference paper suggests that the problem of corporate ethics cannot be reduced to the autonomous person. Although the greatest influence on action and choice is one's moral constitution, it does not follow that the agent's behavior is the same within or without the firm. Ethics is a function of corporate form. The theory of agency cannot dismiss the firm as a fiction or metaphorical shorthand since that which does not exist should not be able to cause ethical breakdowns in corporate action. Thus, the theory of the firm, which emphasizes profit and wealth maximization, should incorporate a richer, more realistic account of the economics and ethics of agency. Robert J. Rhee Corporations & Business http://works.bepress.com/robert_rhee/4 http://works.bepress.com/robert_rhee/4 Fri, 17 Jul 2009 09:45:56 PDT Private resolution and public adjudication of disputes are commonly seen as discrete, antipodal processes. There is a generally held understanding of the dispute resolution processes. The essence of private dispute resolution is that the parties can arrange the disputed rights and entitlements per agreement and without judicial intervention. In public adjudication, however, the sovereign mandates the substantive and procedural laws to be applied, many of which cannot be changed by either a party's unilateral decision or both parties' mutual consent. Neither approach allows a party an option to unilaterally alter important aspects of the process, such as the standards of proof and the attorney fee rules. This understanding is commonly accepted and rarely challenged, but it is curious nonetheless.This Article proposes that we move towards procedural optionality, the idea that there can be nuanced mechanisms to allow unilateral, private choice in public adjudication. To show the potential efficacy of this concept, this Article proposes a scheme in which parties can unilaterally shift fees as long as they contractually bond their good faith by assuming a higher standard of proof. These rules are not ordinarily subject to an option of the parties. Uniform application of the law satisfies the concern of fairness and predictability, but this also comes at a real cost. Private choice to alter these rules can better address the problems of frivolous suits and nonprosecution of meritorious but low value claims - two problematic bookends in the spectrum of litigation. By properly structuring party options, the law can create greater convergence of private incentives and social interest. More efficient disputes resolution results, as measured by increased enforcement of and compliance with the substantive laws at lower cost. Lastly, this Article concludes by examining some policy implications of procedural optionality for substantive and procedural laws. Robert J. Rhee Economics of Dispute Resolution http://works.bepress.com/robert_rhee/3 http://works.bepress.com/robert_rhee/3 Fri, 17 Jul 2009 09:45:55 PDT A number of commentators have observed the decline of the Socratic method. This is unfortunate as the Socratic method can be an effective teaching tool. But this article recognizes that the Socratic method can be monochromatic. This article argues that the Socratic method should not be conceived simply as a method to teach analytic skills. Rather, once learned, it can be a concrete analytic tool for the students to use without the help of professors. In other words, it is an end to itself rather than a means. To do this, we can adopt George Polya's heuristic for teaching mathematical problem solving Robert J. Rhee Miscellaneous http://works.bepress.com/robert_rhee/2 http://works.bepress.com/robert_rhee/2 Fri, 17 Jul 2009 09:45:54 PDT This article examines negligent infliction of emotional distress, one of the most controversial and least uniform fields of tort law. A review of the judicial and scholarly literature has shown that traditional tort analysis fails. In its stead, the common law has not found an alternative theory of liability that balances the competing interests. Rather, the approach has been to create rules of law based on probabilistic templates. Its dual purpose is to preclude individualized analysis and to limit aggregate liability. This article rejects the current doctrines as inherently arbitrary and proposes a complete overhaul of the law. To find a more principled solution, the notion of duty must be reconceptualized beyond arbitrary divisions and foreseeability of risk. Because of the unpredictable nature of mental injuries and its consequences on the application of the rules of law, the concepts of duty and foreseeability must be distinguished in finer gradations. The formulation of duty should be a dynamic calculus that considers the plaintiff's interests, the defendant's culpability, and the social policy considerations. When such analysis is engaged, it is entirely possible for a more principled theory to coexist with the practical policy of limiting liability. This approach requires that the rules of liability and damage be adjusted to reflect the interests and culpabilities at issue. Robert J. Rhee Insurance & Torts