This Document Contains Chapters 19 to 21 Chapter 19: Environmental Law OVERVIEW This chapter continues the unit’s coverage of business regulation by focusing on environmental law. It begins with an explanation of the origins, sources, and enforcement mechanisms that make up environmental law, then covers the major federal environmental statutes in the areas of air, water, and solid waste disposal that impact businesses. The chapter also covers the laws that impose liability on private individuals for environmental cleanup costs. KEY LEARNING OUTCOMES Outcome Accreditation categories Identify the levels and sources of environmental law. Knowledge Describe the primary objectives and provisions of major federal statutes that protect the environment; Knowledge Provide examples of various industries regulated by the air and water pollution regulations laws and regulations related to disposal of waste and hazardous materials and the liability of parties under the federal environmental cleanup statutes. Knowledge, Analysis TEACHING OUTLINE A. Impact of Environmental Law on Business [P.537] Points to emphasize: • Environmental laws have broad coverage and an understanding of environmental law is important in limiting a company’s liability and maintaining regulatory compliance. • Governments at the federal, state, and local level have broadened environmental regulation and liability for environmental cleanups for large industrial plant owners as well as local businesses. • Certain federal statutes create strict liability for owners of property that is contaminated even if the owner did not contribute to the contamination. B. Origins and Sources of Environmental Law [P.537] Points to emphasize: • The origins of environmental protections were primarily based on the common law doctrine of nuisance to protect a party’s individual property rights, while the federal government left regulation of the environment to state and local authorities. • Modern environmental protection statutes at both the federal and state level have largely supplanted any common law protections and are designed to (1) ensure that government agency decisions have as minimal as possible impact on the environment, (2) promote clean air and water through regulation and permitting, (3) regulate the use and disposal of solid and hazardous waste, (4) clean up property or waterways that are contaminated with hazardous waste, and (5) protect wildlife and endangered species. C. Government Enforcement [P.538] Points to emphasize: • Federal environmental laws are primarily administered, implemented, and enforced by the U.S. Environmental Protection Agency (EPA). • The EPA has broad powers to implement and enforce environmental laws through promulgation of rules, permitting, issuing advisory opinions, investigating potential violations, as well as traditional enforcement tools. • In addition to the EPA and other federal agencies, each state has its own environmental agency to implement and enforce state environmental statutes, and in certain municipalities, a local environmental agency may exist to enforce local ordinances. • Citizen Suits Provisions and Watchdog Groups: Citizens suits provisions are laws that authorize private individuals or watchdog groups (citizen interest organizations) to file non-profit environmental enforcement lawsuits. o When an environmental statute authorizes citizen suits, it generally requires notice to the agency with jurisdiction over the matter and allows the agency to decide whether to initiate agency action instead of allowing the citizen suit to go forward. Case 19.1: Friends of the Earth v. Gaston Copper Recycling Corp., 29 F.3d 387 (4th Cir. 2011) [P. 540]. Facts: Gaston owned a metals smelting facility in South Carolina and operated it until 1995. After 1995, Gaston continued to treat contaminated storm water at the facility and to release this treated water into a lake on Gaston's property. However the lake’s water overflow discharged into other waterways and spread pollutants that resulted from the contact of rainwater with scrap metal stored by Gaston on its property. Friends of the Earth (Friends) are an environmental citizen action group whose members include owners of property affected by the Gaston pollutants. Friends sent Gaston the statutorily required notice letter that alleged violations of the Clean Water Act. Friends brought a citizen suit and Gaston was fined $2.3 million. Issue: Was the imposition of the citizen suit fine authorized by the statute even though much of the penalty was related to pollutants that were not identified in the original notice letter? Ruling: No. The court held that the notice letter provision in the statute has the legislative objective of citizen suit provisions bringing a polluter into regulatory compliance. That objective would be frustrated if courts were to impose civil fines on a polluter based on violations that were unknown to the violator at the time of the letter notice. However, the court upheld several fines that were related to the allegations contained in the notice letter from Friends. Case Questions 1. Did Gaston escape a substantial civil fine based on a statutory technicality? Answer: It is easy to use the words technicality, but this was a case where the court looked to the broad purpose of the citizen suit statute (compliance) and decided the fine for violations outside the original notice were inconsistent with that purpose. 2. What could Friends have included in the notice letter that might help them prevail in a future case where the true extent of the violations is unknown? Answer: Perhaps Friends could have been broader about the violations or could have waited to continue the lawsuit until a second notice letter was issued. D. National Environmental Policy Act [P.539] Points to emphasize: • The National Environmental Policy Act (NEPA) of 1969 was one of the first attempts at comprehensive legislation to address environmental regulation, with a focus on planning and prevention. • NEPA Coverage and Procedures: NEPA establishes a process that must be followed by federal agencies in making decisions that may reasonably impact the environment or when Congress passes a law that requires federal funding. o Procedural Steps: Federal agencies are required to incorporate NEPA procedural steps into their decision-making process by identifying the purpose and need for a promised project, possible alternatives, and environmental impact. o Once the procedural steps are accomplished, the agency must categorize the action into once of three classifications based on its level of environmental impact: (1) Categorical Exclusion (little or no impact), or (2) Environmental Assessment (unknown impact), or (3) Environmental Impact Statements (potentially significant impact). • The NEPA process gives public notice and affords consumer interest groups, businesses, and private citizens a chance to influence the agency’s decision or directly force compliance via citizen suits provisions. Concept Summary: National Environmental Policy Act [P.541] E. The Clean Air Act [P.542] Points to emphasize: • The Clean Air Act is aimed at improving outdoor air quality based on National Ambient Air Quality Standards (NAAQS) that set permissible levels of certain air pollutants; the basic structure of the statute focuses on pollution from either stationary sources (manufacturing plants) or mobile sources (mobile vehicles). • Stationary Sources of Air Pollution: Fixed-site emitters of air pollutants; State legislatures are required to determine the best way to achieve the NAAQS for stationary sources in the form of a mandated State Implementation Plan (SIP) that must be submitted to the EPA. • Market-Based Approaches: A market-based approach embraces an economic incentive theory and was instituted by the 1990 CAA amendments to give businesses a choice of methods of complying with pollution standards. o Critics of the market-based approach argue that it results in clean air being treated as a commodity rather than as a natural resource. • Mobile Sources of Air Pollution: Nonstationary sources of air pollutants; The EPA has issued standards to limit mobile source emissions through its Transport and Air Quality Program regulating (1) tailpipe emissions, (2) fuel economy standards, (3) performance standards, and (4) fuel composition and distribution. o Tailpipe Emissions: States can either adopt the federal standards or use the California standards that require an inspection and maintenance program to ensure that car manufactures limit exhaust emissions. o Fuel Economy Standards: Corporate Average Fuel Economy (CAFE) standards set out average mile per gallon requirements for motor vehicles to reduce energy consumption by increasing the fuel economy of cars and light trucks. o Performance Standards: Requires that motor vehicle manufacturers obtain a Certificate of Conformity from the EPA, intended to make sure that manufactures have designed the motor vehicle’s emissions systems to last a certain period of time. o Fuel Composition and Distribution: The EPA uses a registration system to ensure that any fuel product is tested and certified as safe for public health and is used in compliance with CAA regulations. Concept Summary: The Clean Air Act [P.544] F. Water Pollution Control [P.545] Points to emphasize: • Water pollution and conservation regulation is addressed by a combination of federal, state, and local statutes and rules. • The Clean Water Act: A federal statute that is implemented and enforced by the EPA to set and regulate water quality standards. o Water Quality Regulation: States set and monitor water quality standards for the navigable waterways within their state’s borders, subject to EPA review. o Permitting: Pollution emission into the waterways is regulated through the EPA’s National Pollution Discharge Elimination System, which establishes permitting procedures, issued as either individual permits or general permits, required regardless of the quality of the receiving water or actual pollution. • Existing sources of pollution are required to install the best practical control technology, whereas new applicants are required to employ the best available technology in order to obtain a permit. • Liability for Oil Spills: Congress increased the EPA’s authority to prevent and respond to disastrous oil spills in water sources through the Oil Pollution Act of 1990, which also caps the liability of responsible parties at $75 million per spill, plus removal costs. o Deepwater Horizon (BP) Oil Spill: The largest off-shore oil spill in U.S. history, resulting in the death of 11 people, an estimated 210,000 gallons of oil per day leaking into the Gulf of Mexico, and the filing of over 100 lawsuits. Case 19.1: In Re: Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico, on April 20, 2010 Dec. 12, 2012, MDL 2179 United States District Court, E.D. Louisiana. [P. 547]. Facts: After the Deepwater Horizon explosion and spill affected the health and economic well-being of Gulf Coast residents, hundreds of lawsuits were filed against BP. In August 2010, the Judicial Panel on Multidistrict Litigation centralized all federal actions in the U.S. District Court for the Eastern District of Louisiana pursuant to federal statutes. Eventually, hundreds of cases with thousands of individual claimants would be consolidated with this Multidistrict Litigation. The parties engaged in an extraordinary amount of discovery within a compressed time period to prepare for trial. The court ordered a Fairness Hearing in order to determine approvability of the negotiated Settlement Agreement. Some plaintiffs argued that it was not fair that BP would obtain a broad class-wide release as well as a signed Individual Release from each claimant that accepts a payment pursuant to the Settlement Agreement. Issue: Was the proposed Settlement Agreement fair to all plaintiffs? Ruling: Yes. The court ruled that the proposed Settlement Agreement was fair and approved it. The court pointed out that the agreement included extensive compensation for individual and business losses including compensation for claims related to property damage, economic losses for fisheries and other small business on the coast line, rebuilding wetlands, vessel repair, and other compensation for losses caused by the spill. Case Questions: 1. Do you agree with the court that the public interest is served best by settlement in these kinds of cases? Why or why not? Answer: On the one hand, the settlement reduces the burden on courts, litigants, and the public in general since it also gets the money to those who need it as quickly as possible. On the other hand, if the plaintiffs are not being fairly compensated, that has a negative impact on public policy because the polluters were not sufficiently deterred. 2. What is a fair sum to pay business owners who suffered damages through loss of tourism because of the spill? Isn’t it impossible to determine how much a particular business could have made? Answer: This question is intended to spur discussion on how speculative damages can be. Would businesses need a forensic accountant to prove damages? How accurate can one be in forecasting tourism revenue when so many factors are at play? Determining a fair sum for business owners affected by loss of tourism due to a spill involves estimating lost revenue based on historical earnings, industry benchmarks, and expert assessments. While it’s challenging to pinpoint exact losses, reasonable compensation can be based on well-documented financial impacts and projections. • Drinking Water: The Safe Drinking Water Act is a federal statute that sets minimum quality and safety standards for every public water system and every source of drinking water in the U.S. Concept Summary: Water Pollution Control [P.548] G. Regulation of Solid Waste and Hazardous Materials Disposal [P.548] Points to emphasize: • Although the handling, proper disposal, and liability for cleanup of abandoned solid waste and hazardous materials is regulated by federal law, states play a crucial role in enforcement. • Resource Conservation and Recovery Act (RCRA): Federal statute intended to regulate active and future facilities that produce solid waste and/or hazardous materials using a “cradle-to-grave” procedure for handling waste. o The RCRA bans the open dumping of solid waste and authorizes the EPA to set standards for municipal waste landfill facilities. o Waste that is (or becomes) hazardous is also regulated by the RCRA, including a mandatory tracking system to ensure accountability and a permit system imposed for facilities that will treat, store, or dispose of hazardous waste. o Universal waste is included under the RCRA, but the EPA has issued federal rules that make compliance easier for business owners who are disposing of universal waste in the ordinary course of operations. • Toxic Substance Control Act (TSCA): A federal statute that gives the EPA broad jurisdiction to control risks that may be posed by the manufacturing, processing, use, and disposal of chemical compounds. o The TSCA’s scope is very broad and has both reporting and regulatory components. Concept Summary: Regulation of Solid Waste and Hazardous Materials [P.550] H. Comprehensive Environmental Response Compensation and Liability Act [P.550] Points to emphasize: • The Comprehensive Environmental Response Compensation and Liability Act (CERCLA) is a statute enacted by Congress is 1980 to confront the problem of toxic waste contamination that had been generated prior to the enactment of waste control statutes and then abandoned by the polluter. • Superfund: Another name for the CERCLA derived from its main provisions on the notion that cleanup operations for abandoned toxic waste sites were to be funded by a self-sustaining quasi-escrow fund to be administered by the federal government. o In 1986, the CERCLA was amended by the Superfund Amendments and Reauthorization Act (SARA), which contained a new requirement for states to establish emergency response commissions to draft and implement emergency procedures in the event of a hazardous chemical accident; for business to disclose the presence of certain chemicals within a community; and to impose an affirmative obligation on businesses to notify authorities of any spills or discharges of hazardous materials. o Removal and Remedial Responses: The Superfund law addresses hazardous substance cleanup in two ways: (1) removal (for imminent releases), whereby local authorities respond pursuant to their Superfund emergency plan; and (2) remedial (long-term cleanup projects), whereby the EPA is to determine suitability for placement on the National Priority List (Figure 19.1: Superfund Sites P.551). o Liability of Principally Responsible Parties (PRPs): The Superfund law imposes broad strict liability standards for cleanup costs on PRPs and PRPs are held jointly and severally liable. • There are three classes of PRPs: (1) any current owner of the site, (2) any owner or operator of the site at the time when the hazardous substances were disposed at the site, and (3) any business that accepts hazardous substances for transport to the site and selected the site. o Consent Decrees: Government officials negotiate with PRPs to determine contributions for cleanup: if an agreement is reached, the parties enter into a binding agreement called a Consent Decree; if the negotiations fail, the government typically files a Superfund lawsuit to collect cleanup costs from PRPs. o Allocation of Liability: When the EPA enters into a consent decree with a PRP, the PRP has the right to sue third parties to recover a portion of cleanup costs related to the polluter’s action. Case 19.3 Goodrich Corp. v. Town of Middlebury, 311 F.3d 154 (2d Cir. 2002) [P.553] Facts: For decades, two public landfills accepted industrial waste, including municipal solid waste from various municipalities, and the EPA declared the landfills to be Superfund sites. The EPA identified and entered into consent decrees with various PRPs, all corporations who had disposed of waste in the landfills, who subsequently formed a coalition and sued the municipalities for contribution to the cleanup costs. A court- appointed special master’s conclusions about which parties contributed how much waste was not followed by the district court when instead, they allocated much of the liability to the municipalities that ran the landfills. The municipalities appealed. Issue: Did the district court abuse its discretion in its allocation of remediation costs? Ruling: No. The allocation of costs in such complicated proceedings may produce varying results; the court chose a method of allocation that was proper based on the evidence. For the court to abuse its discretion, it would have to have committed an error of law or be clearly wrong in its finding of facts. Answers to case questions: 1. Suppose the coalition sues the companies that transported the waste? Are they liable as a PRP? Why or why not? Answer: Companies that transported waste can be held liable as a PRP under the Superfund law. Any business that accepts hazardous substances for transport to the site and selected the site can be held jointly and severally liable as a PRP. 2. Do you think that courts should have broad discretion when engaging in Superfund allocation analysis? Why or why not? Answer: One could argue that courts should have broad discretion when engaging in Superfund allocation analysis because the court is in the best position to balance the equities in the interests of justice. It can also be argued that this broad discretion should not be boundless because the court often is without direct and extensive knowledge in certain complex matters. In these instances, the use of a special master is appropriate. It can be argued that the court should give at least some deference to the special masters recommendation because the master knows more about the particular circumstances of a given case and is therefore in the best position to allocate liability. Ultimately, however, the court is in the best position to take these ‘expert conclusions’ and balance the equities in the totality of the circumstances. • Defenses to Liability: Congress provides defenses to liability for parties that meet certain criteria. o Secured Creditors: Lenders/owners may avoid liability so long as the lender was (1) an owner by virtue of the contaminated property being used as collateral for a loan, and (2) not participating in the management of the facility prior to foreclosure. o Innocent Landowners: A current owner of a site may avoid liability so long as the owner establishes that she purchased the property without knowledge of the contamination and conducted all appropriate inquiries into the previous ownership using a reasonable amount of investigation to determine if any contamination is present. o Prospective Purchasers: The Small Business Liability Relief Act (2002) provided a defense to liability for a party that purchased the property with knowledge of the contamination so long as the owner agrees to take reasonable steps to limit the impact of the contamination, prevent further contamination, and to notify authorities of any imminent or actual pollutant release. Self-Check: PRP Liability: Who has PRP liability? [P. 554] Solutions for Managers: Avoiding Environmental Liability in Land Acquisitions [P.555] Concept Summary: Superfund Response [P.555] I. Wildlife Protection [P.556] Points to emphasize: • Wildlife and aquatic life are protected by a series of specialized federal statutes, including the Endangered Species Act. Table 19.1: Major Environmental Laws [P.556] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 558] 1. RCPC must be cautious about any potential contamination of the property and any potential regulatory concerns related to operating the facility including how hazardous waste is disposed. This includes the Clean Air Act (if the factory will emit pollutants), the Clean Water Act (if the factory will discharge pollutants into a river, the Resource Conversation and Recovery Act, and Superfund may all impact RCPC’s decision-making process and planning. [Ties to Impact of the Environment on Business and Table 19.1: Major Environmental Laws]. 2. Under the Clean Air Act, RCPC’s plan to modify may trigger a requirement for a new source permit. If the modifications are substantial, RCPC will be required to incorporate state of the art technology to reduce any pollutants that will be emitted in the manufacturing process. [Ties to Stationary Sources if Air Pollution]. 3. Under the CAA’s market-based approach, RCPC would be permitted to purchase clean air credits via the permitting process. The CAA allows emission trading whereby businesses may buy and sell pollution allowances. RCPC could also attempt to offset the pollution emission by reducing another pollutant in greater measure than the pollutant at issue. [Ties to Market-Based Approaches]. 4. Under the Clean Water Act, RCPC will require a permit to operate its factory. Because it is a new permit, the CWA requires RCPC to employ best available control technology. This requires the permit applicant to install the technologically available methods on the market regardless of costs. [Ties to The Clean Water Act: Permitting]. 5. RCPC should engage a qualified firm to perform an environmental transaction screen. This screen helps to discover any potential contamination problems associated with the land. If the screen reveals a potential problem, further (more expensive) tests are required to ascertain any existing contamination. [Ties to Solutions for Managers: Avoiding Environmental Liability]. Manager’s Challenge [P.558] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 19.1: Clean Water Act: Sierra Club v. El Paso Gold Mines, Inc. [P.559] 1. Does the Sierra Club have an actionable claim under the Clean Water Act? Why or why not? Answer: The Sierra Club does have an actionable claim under the CWA’s citizen suits provisions because the alleged pollutants were being discharged into a waterway. 2. If El Paso wanted to use the land for mining activity, would they be required to obtain a permit? If so, what would need to be done in order to obtain the permit? Answer: If El Paso wanted to use the land for mining activity, they would be required to obtain a permit as regulated through the EPA’s National Pollution Discharge Elimination System. In order to obtain the permit, El Paso would be required to install the best practical control technology for any existing sources of pollution. Case Summary 19.2: Superfund: U.S. v. Southeastern Pennsylvania Transportation Authority [P. 559] 1. Do any of the prior owners of the rail yard have PRP liability? Answer: Any owner of the site at the time when the hazardous substances were disposed at the site has PRP liability. 2. Could SEPTA or Amtrak have taken action to avoid liability? Explain. Answer: SEPA or Amtrak could have taken action to avoid liability. Prior to the purchase, they could have conducted all appropriate inquiries into the previous ownership using a reasonable amount of investigation to determine if any contamination is present. If such an investigation yielded no contamination, they could avoid liability as an innocent landowner. Moreover, had they found contamination, they could have avoided liability as a prospective purchaser so long as they agreed to take reasonable steps to limit the impact of the contamination, prevent further contamination, and notify authorities of any imminent or actual pollutant release. Case Summary 19.3: Resource Conservation and Recovery Act: William Paxton v. Wal-Mart Stores, Inc. [P.559] 1. What federal statute(s) could apply to this case? Explain. Answer: The Resource Conservation and Recover Act (RCRA) could apply to this case because it is intended to regulate active and future facilities that produce solid waste and/or hazardous materials. Additionally, the Toxic Substances Control Act (TSCA) could apply to this case if the disposed products contained chemical compounds. 2. Citing the RCRA “cradle-to-grave” procedure, do you think Wal-Mart was contributory in violation of the statute? Why or why not? Answer: Citing the RCRA “cradle-to-grave” procedure, it would be unlikely that Wal-Mart was contributory in violation of the statute because though universal waste is included under the RCRA, the EPA has issued federal rules that make compliance easier for companies like Wal-Mart who are disposing of universal waste in the ordinary course of operations. Case Summary 19.4: Clean Air Act: Beverly E. Black and James A. Black v. George Weston & Stroehmann Bakeries, Inc. [P.560] 1. What standard is used to determine whether or not the discharges constitute a violation of the Clean Air Act? Answer: The National Ambient Air Quality Standards (NAAQS) are used to determine whether or not the discharges constitute a violation of the Clean Air Act. 2. What common law doctrine could the Blacks have possibly pursued in an attempt to compel Stroehmann to cease polluting? Answer: The Blacks could have possibly pursued the common law doctrine of nuisance in an attempt to compel Stroehmann to cease polluting. Case Summary 19.5: Citizen Suits: No Spray Coalition, Inc. v. City of New York [P.560] 1. What would No Spray have to prove in order to have an actionable claim under the CWA? Answer: In order to have an actionable claim under the CWA, No Spray would have to prove that the use of the pesticides was outside the category of uses for which the EPA has approved the pesticides. Here, they would have to show that the spraying would have “unreasonable adverse effects on the environment.” 2. Explain the significance of citizen suits provisions and watchdog groups in the context of the immediate case. Answer: Citizen suits provisions and watchdog groups are significant in environmental law because they allow citizens and groups to contribute to the enforcement of environmental statutes and policy by directly forcing compliance. In the context of the immediate case, No Spray’s concerns kept the City and the EPA in check by assuring that their actions were consistent with environmental policy. The authority to challenge any actions that may have an adverse affect on the environment via citizen suits provisions allow watchdog groups like No Spray to essentially oversee enforcement and work in tandem with the EPA and other administrate agencies in handling a broad range of environmental concerns. Quick Assessment Questions (QAQs) 1. What is the primary administrative agency charged with administering, implementing and enforcing federal environmental laws? a. Department of Natural Resources b. Department of Environmental Policy c. Environmental Enforcement Agency d. Environmental Protection Agency e. None of the above Answer: d 2. Which major environmental law establishes a process that must be followed by federal agencies in making decisions that may reasonably impact the environment? a. National Environmental Policy Act b. Clean Air Act c. Clean Water Act d. Resource Conservation and Recover Act e. Comprehensive Environmental Response Compensation and Liability Act Answer: a 3. Which of the following can be a principally responsible party under the Superfund law? a. Current owners of contaminated property b. A waste hauler that transports waste to a contaminated property c. Previous owners of contaminated property d. a and c e. a, b and c Answer: e 4. Environmental law and regulation is a concern only for large industrial plant owners who produce smokestack pollution or dump waste into waterways. Answer: False 5. Prospective purchases are always liable for Superfund liability when they purchase the property with knowledge of the contamination. Answer: False 6. Watchdog groups derive the authority to file lawsuits related to the enforcement of environmental statutes by virtue of citizen suits provisions. Answer: True Chapter 20: Antitrust and Regulation of Competition OVERVIEW Continuing with the unit’s focus on regulatory law, this chapter covers government regulation of competition and antitrust law. Students are first introduced to the historical context and origins of competition regulation. The chapter then provides a broad-based overview of the statutory scheme in federal antitrust law and examines how antitrust laws are applied to various anti-competitive practices. KEY LEARNING OUTCOMES Outcome Accreditation category Understand the fundamental purpose and source of law for antitrust regulation, and identify the main federal statutes that make up antitrust law. Knowledge Distinguish and explain the differences between the per se standard and the rule of reason standard, and give examples of the primary ways that businesses use horizontal and vertical restraints of trade. Knowledge, Analysis, Critical thinking Recognize when a business has achieved a monopoly and explain the restrictions for a monopoly business under antitrust law. Analysis Explain why the U.S. v. Microsoft case is an important part of antitrust law. Knowledge, Analysis TEACHING OUTLINE A. Background, Purpose, and Source of Antitrust Law [P.563] Points to emphasize: • The purposes of antitrust law are to prevent, punish, and deter certain anticompetitive conduct and unfair business practices that existed at the beginning of the industrial revolution era. • Modern day antitrust enforcement is concerned with protecting the competitive process rather than protecting individual competitor companies, ultimately benefiting the consumers. B. Federal Statutes and Enforcement [P.563] Points to emphasize: • Antitrust laws are exclusively federal statutes enforced by the Department of Justice and the Federal Trade Commission (FTC), with the Sherman Act as the primary governing statute. • The Federal Trade Commission Act of 1914, administered solely by the FTC, is a catchall enactment that has been construed to include all the prohibitions of other antitrust laws. • Antitrust laws also permit an aggrieved party to file a private enforcement action against an alleged antitrust violator, sometimes for triple damages, intended to provide a financial deterrent to antitrust infraction and to compensate parties injured through anticompetitive behavior. C. Sherman Antitrust Act [P.564] Points to emphasize: • The Sherman Act is divided into two parts prohibiting (1) contracts, combinations, and conspiracies in restraint of trade, and (2) monopolization. • Only a monopoly that has been acquired or maintained through prohibited conduct is illegal. • Per Se Standard versus Rule of Reason Standard: Two standards used by federal courts in deciding whether or not a certain transaction or action violates the Sherman Act. o The per se standard occurs when concerted activities are blatantly anticompetitive as articulated in the body of case law, and the violator has no defense. o Rule of Reason: An alternative standard used by federal courts that contemplates a scale in which the court weighs any anticompetitive harm suffered against marketwide benefits of their actions. • Per Se Sherman Act Violations: Restraints: Certain per se violations are through the use of horizontal restraints (agreements between competitors), and through the use of vertical restraints (agreements between noncompetitors acting in concert with another party along the chain of commercial supply. • Horizontal Restraints: The most common types of prohibited horizontal restraints are horizontal price fixing, allocation of markets or customers, and boycotts. o Meeting of the Minds: A crucial component of a horizontal restraint is some meeting of the minds among the parties, satisfied through circumstantial evidence regarding the timing of any communications between the parties and their subsequent restraining actions. Teaching Tip: Making connections Instructors are always looking for ways to connect the material in the course to the wider institutional curriculum (both business and general education or core courses). I will typically take time to point out the title page from Wealth of Nations reproduced on P. 567 of the text and say a word or two about Smith’s influence on the development of public policy and law. If time permits, it is also a useful exercise to run a search on a legal database to see how frequently Smith’s work is still cited by modern courts. o Frequent meetings and conversations by competitors, followed by restraining actions are circumstantial evidence of anticompetitive collusion. o Price-Fixing: Agreement between competitors to fix actual prices and agreements that affect prices are generally illegal per se. • Although price-leading may appear to be price-fixing, the element of agreement is usually not satisfied, because the competitors are not taking these actions in concert. • In the past decade, the Supreme Court has narrowed the use of the per se standard and expanded the use of the rule of reason analysis in certain cases of horizontal price fixing. o Market Allocation: Agreement between competitors to divide up markets or geographic regions is illegal per se. o Boycotts: Concerted refusal to sell or buy from an individual, firm, or group—may be illegal per se or by use of the rule of reason, depending on specific facts. Case 20.1 Texaco, Inc. v. Dagher, et al., 547 U.S. 1 (2006) [P.568] Facts: Texaco and Shell formed a joint venture, Equilon, to consolidate their operations in the western U.S., whereby they agreed to share expenses and profits from the jointly controlled new entity. Although Equilon engaged in the refinement of crude oil into gasoline, the actual end product was sold to retailers under the brand names of Texaco and Shell at a mutually agreed upon price. The retailers of Texaco and Shell products brought a class action lawsuit against Texaco and Shell, alleging that creating the joint venture was a per se violation of the Sherman Act because it amounted to a horizontal price-fixing scheme. Issue: Was the joint venture agreement a per se violation of the Sherman Act? Ruling: No. Per se liability applies only to agreements that are so plainly anticompetitive that no study of the industry is needed to establish their illegality. Applying the rule of reason standard, the joint venture agreement was not horizontal price-fixing because the challenged pricing policy was simply price-setting by a single entity, Equilon, and not a pricing agreement between competing entities with respect to their competing products. Answers to case questions: 1. Does this case mean that competitors may simply create a joint venture to avoid any liability for price-fixing? Answer: This case does not mean that competitors may simply create a joint venture to avoid any liability for price-fixing because even if a transaction is not considered a per se violation, the actions or transaction in question must also meet the rule of reason standard. If competitors create a joint venture with the sole purpose of price-fixing, the anticompetitive harm would outweigh the marketwide benefit of their action, thus a court would find the competitors actions in violation of the Sherman Act. The Equilon partnership did not avoid liability for price-fixing by taking on the form of a joint venture, rather it was not liable for price-fixing because antitrust plaintiffs failed to demonstrate that the joint venture was in fact unreasonable and anticompetitive. Additionally, the Sherman Act prohibits business entities from gaining monopoly power by merging their company with a competitor where the action will substantially lessen competition or tend to create a monopoly. 2. Why did the retailers allege that forming this joint venture was anticompetitive behavior? Answer: The retailers alleged that forming this joint venture was anticompetitive behavior because Texaco and Shell mutually agreed upon a price, thus ending any price competition between the two companies. The retailers believed that Equilon essentially resulted in one company being able to manipulate prices, resulting in limited choices. Self-Check: Horizontal Restraint: What type of horizontal restraint is at issue? [P.568] • Vertical Restraints: The pivotal element to establish a per se vertical price fixing violation is an agreement to a specific retail price. o Nonprice Restraints: Relationships between the buyer and seller related to an exclusive franchise and/or a specified territory is governed by the rule of reason and the Clayton Act. o Tying Agreements: Sellers that tie a second product to the first product are acting illegally per se if the seller possesses sufficient market power as to render the tie-in as coercive. • Courts apply a soft per se analysis in determining the legality of a tying arrangement. Concept Summary: Restraints of Trade [P.570] D. Antitrust Law and Professional Sports [P.571] Points to emphasize: • Major League Baseball: Exempted from Sherman Act since 1922. SCOTUS re-examined the exemption in Flood v. Kuhn. Case 20.2: Flood v. Kuhn, 407 U.S. 258 (1972), [P. 571] Facts: Flood was a professional baseball player who was traded by the St. Louis Cardinals to the Philadelphia Phillies. For a variety of reasons, Flood was unhappy with the trade and refused to report to his new team while forfeiting a significant salary. Flood sent a letter to the Commissioner of Major League Baseball (Kuhn) demanding free agency. Kuhn declined to grant Flood free agency on the basis of the “reserve clause” in Flood’s contract. As a practical matter, the clause allowed a team to retain the rights of a player indefinitely. Therefore, the clause prevented Flood from negotiating with another team and gave St. Louis the right to trade him to a new team or renew his contract. Issue: Are the reserve clauses in the contracts illegal under the Sherman Act? Ruling: No. The U.S. Supreme Court held for Kuhn and upheld the exemption primarily based on the doctrine of stare decisis. Although the Court acknowledged that it is reasonable to conclude that baseball is now engaged interstate commerce, they did not reverse their earlier decisions because of what the Court concluded was Congress’s “positive inaction” to their earlier decisions exempting Major League Baseball from the antitrust laws. Case Questions 1. Should stare decisis be such a powerful doctrine that it trumps modern societal realities (such as baseball’s growing use of interstate commerce via radio and television)? Answer: This question is intended to spur discussion on the topic of the limits of stare decisis. It allows students to connect the concept of antitrust with a topic covered in earlier chapters. Stare decisis provides stability and consistency in the law, but it should not necessarily override modern societal realities. Courts may adapt or revisit precedents to reflect significant changes in technology and commerce, ensuring that legal principles remain relevant and effective. 2. As a public policy matter, do you agree that Major League Baseball should have an exemption from antitrust laws? Why or why not? Answer: Congress did act in response to this case by limiting the anti-trust exemption through passage of the Curt Flood Act, but it took 26 years. On one hand, the dynamics of major league baseball as a business operation are different. On the other hand, one could reasonably argue that the exemption is a result of powerful lobbying (and political donations) from concerned parties such as team owners. • The Curt Flood Act of 1998: The passage of the Curt Flood Act of 1998 added a new provision to existing antitrust statutes that applied only to professional baseball players and eliminated the broad antitrust exemption for baseball. • National Football League: The Supreme Court has declined to provide the National Football League with a baseball-type exemption since the first challenge in 1957 • In 2010, the U.S. Supreme Court gave its latest guidance on the topic in American Needle, Inc. v. National Football League where they rejected the NFL’s single-entity theory for their licensing contract for merchandising, and held that they were subject to the Sherman Act. E. Monopolization [P.572] Points to emphasize: • The Sherman Act does not prohibit a business entity from becoming a monopoly, but it does outlaw affirmative action toward monopolizing or attempting to monopolize a part of trade or commerce. • In order for a business entity to violate Section 2 of the Sherman Act, they must have posses not only monopoly power, but also must have an overt intent to monopolize. • Monopoly Power: A business entity that has the power to fix prices or to exclude competitors in a given market is said to have monopoly power, as determined by the entity’s share of the relevant market. • The Microsoft Case: In U.S. v. Microsoft, the district court ordered Microsoft to reorganize its operating system entity separate and apart from its entity responsible for its Internet browser software when they found that Microsoft employed illegal anticompetitive means to maintain and further their monopoly of the operating systems market. o The appellate court affirmed the finding by the trial court, but vacated the order that required the company to break apart and reversed and remanded on the findings that Microsoft illegally attempted to monopolize the browser market, ruling that the appropriate standard was the rule of reason analysis. o The Consent Order: Before the new trial, the Department of Justice and many of the states settled the case by entering into a consent order requiring Microsoft to provide competitors with information to making competing products work seamlessly with its Windows operating system. • In 2002, the settlement was approved as the court ruled that the consent order was in the public interest, ending the legal battle. • Intent to Monopolize: This analysis requires a court to examine whether or not the alleged monopolizer has engaged in a course of conduct that would reasonably lead one to conclude that the entity has purposefully furthered or attempted to maintain monopoly power. • Attempted Monopolization: The Sherman act prohibits attempts by a business to gain monopoly power as determined by a three-part test: (1) the entity must have had a demonstrable and specific intent to archive a monopoly; (2) the entity must have acted in an anticompetitive manner designed to injure its actual or potential competition; and (3) a dangerous probability that monopoly power would in fact be achieved exists. F. Clayton Act [P.574] Points to emphasize: • The Clayton Act (and its amendments) is a preventative statute that curbs certain anticompetitive practices that are not specifically covered by the Sherman Act. • Tying Arrangements and Exclusive Dealing: The Clayton Act prohibits tying arrangements and exclusive dealing agreements involving the sale or leasing of commodities. o Only exclusive dealing agreements that may “substantially lessen the competition or tend to create a monopoly” violate the Clayton Act. • Mergers and Acquisitions: The Clayton Act prohibits business entities from acquiring the stock or assets of their competitor where the action will substantially lessen competition or tend to create a monopoly. G. The Federal Trade Commission Act [P. 575] • Designed as a “catch-all” device which prohibits all unfair and deceptive methods of competition. Any anticompetitive conduct which falls outside the scope of other antitrust laws may still violate the FTCA. • The law also gave broad powers to the Federal Trade Commission to investigate any complaints or instances of unfair competition. • Search Bias: FTC Investigates Google. In January 2013, after a nearly two year investigation, Google and the FTC agreed to a settlement in which Google agreed to provide a mechanism to assure that competitors are not being excluded or demoted unfairly in search results. H. Hart-Scott-Rodino Antitrust Improvements Act of 1976 [P.575] Points to emphasize: • The Hart-Scott-Rodino Act is a preventative statute that requires business entities that are contemplating mergers involving dollar amounts of a certain size to give advance notice to the FTC and the Department of Justice of their intention. I. Robinson-Patman Act [P.575] Points to emphasize: • The Robinson-Patman Act is a federal antitrust law enacted in 1936 amending the Clayton Act provisions to provide for a broader regulatory authority to curb price discrimination. o Price Discrimination: Section 2(a) of the act makes it illegal for a business entity to discriminate price “between different purchasers of commodities of like quality or grade,” when the discrimination results in an effect that may substantially lessen competition or tend to create a monopoly, or injure, destroy, or prevent competition with any person who either grants or knowingly receives a benefit of such discrimination. • To violate section 2(a), a business entity must have made two or more sales to different purchasers at different prices. END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice 1. The Sherman Antitrust Act prohibits any contract, combination, or conspiracy to restrain competition. The MDC-SurgiPro agreement would violate the Sherman Act. However, the fact that SurgiPro agreed to consider the plan, but did not commit an overt act, is significant. To violate the statute, the parties must agree to the plan and then to commit an overt act. No agreement or overt act has yet occurred. [Ties to Sherman Antitrust Act]. 2. The agreement proposed by MDC is a price-fixing scheme which is a form of horizontal restraint. This is a per se violation of the Sherman Act. [Ties to Horizontal Restraints: Price Fixing]. 3. The agreement by the parties to sell and buy in certain regions of the country violates the Sherman Act. The MDC-Surgipro agreement in this question is called market allocation and is prohibited by the statute as anticompetitive horizontal restraint. [Ties to Horizontal Restraints: Market Allocation]. 4. A court would apply the per se standard. Market allocation is a horizontal restraint and when competitors (such as MDC and SurgiPro) divide markets by territory, this is a blatant act of anticompetitive behavior because the agreement eliminates competition. The MDC-SurgiPro market allocation scheme is a per se violation of the Sherman Act. [Ties to Per Se Standard versus Rule of Reason Standard and Horizontal Restraints]. 5. SupplyCo.’s refusal to sell to MDC would be considered a boycott that would ordinarily be prohibited under the Sherman Act. Although this arrangement could be considered a unilateral boycott that is permitted under the Colgate doctrine, the boycott was not truly unilateral because SurgiPro. induced SupplyCo. to boycott a SurgiPro competitor. [Ties To Boycotts]. 6. Because this merger would give MDC an 80% market share, the transaction would have to comply with provisions of the Clayton Act (designed to prevent a monopoly strategy) and approval of the U.S. Department of Justice under the Hart-Scott-Rodino Act (allows DOJ to veto merger transaction). [Ties to Clayton Act and Hart-Scott-Rodino Act]. Manager’s Challenge [P.577] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 20.1: Predatory Pricing: Covad Communications Co. v. BellSouth Corp. [P.578] 1. Who prevails and why? Answer: Covad has a viable claim in regards to their anticompetitive “price squeeze” complaint because BellSouth’s predatory pricing could be seen as overt intent use market domination to eliminate a competitor. 2. What section of the Sherman Act is at issue here? Answer: Section 2 of the Sherman Act covering monopolization is at issue here because BellSouth is allegedly using market domination to eliminate a Covad. 3. How should the court apply the statute to this case? Answer: In applying section 2 of the Sherman Act to this case, the court should determine first whether BellSouth holds monopoly power and then examine whether BellSouth has engaged in a course of conduct that would reasonably lead one to conclude that the entity has purposefully furthered or attempted to maintain monopoly power. Case Summary 20.2: Tying: Data General Corporation, et al., v. Grumman Systems Support Corporation [P.578] 1. Is this tying arrangement a violation of antitrust laws? Explain your answer. Answer: This tying arrangement is not a violation of antitrust laws because in applying a soft per se analysis, the agreement involves integrated components of a larger business system. 2. Is this an example of a horizontal or vertical restraint? Answer: Data General’s tying agreement is an example of a vertical restraint because Grumman is on a different distributional level in the chain of commercial supply. Case Summary 20.3: Anticompetitive Action: Greyhound v. International Business Machines Corporation [P.578] 1. Who prevails and why? Explain your answer. Answer: Greyhound would likely prevail because IBM’s change in practice was evidence that they willfully acquired and maintained monopoly power. IBM had the specific intent to attempt to monopolize the submarket and used anticompetitive conduct to accomplish that purpose. 2. Are there any similarities between this case and the Microsoft case? Answer: Yes this case is similar to the Microsoft case because both Microsoft and IBM used their monopoly in their respective niches to eliminate competition from a more popular alternative. Case Summary 20.4: Horizontal Restraints: Tanka v. University of Southern California [P.579] 1. Who prevails and why? Answer: The University of Southern California prevails because the transfer rule did not apply to interconference transfers, thus it did not have a significant anticompetitive effect. 2. Should the rule of reason be used in this analysis? Explain. Answer: Yes the rule of reason standard should be applied in this analysis because intercollegiate athletic practices are too unique to be assessed using a strict per se standard. Case Summary 20.5: Per Se: In Re: Cardizem CD Antitrust Litigation [P. 579] 1. Who prevails and why? Explain your reasoning. Answer: The court held that the agreement was a per se illegal under the Sherman Act. The agreement whereby HMR paid Andrx not to enter was an illegal restraint that violated antitrust laws. 2. What type of illegal restraint is being alleged by the plaintiffs in this case? Answer: Horizontal market allocation (among competitors in the same market). Quick Assessment Questions (QAQs) 1. Which of the following is the primary governing statute of antitrust law that prohibits restraints of trade and monopolization? a. The Robinson-Patman Act b. The Federal Trade Commission Act c. The Sherman Act d. The Celler-Kefauver Antimerger Act e. The Hart-Scott-Rodino Act Answer: c 2. Which of the following statutes specifically prohibits business entities from acquiring the stock or assets of their competitors where the action will substantially lessen competition or tend to create a monopoly? a. The Robinson-Patman Act b. The Federal Trade Commission Act c. The Clayton Act d. The Antimerger Act e. None of the above Answer: c 3. Which standard(s) of Sherman Act violation applies when concerted activates are blatantly anticompetitive? a. Rule of reason standard b. Palpable standard c. Reasonable standard d. Per se standard e. None of the above Answer: d 4. The Sherman Act specifically prohibits a business entity from becoming a monopoly. Answer: False 5. Vertical restraints are per se violations through agreements between competitors. Answer: False 6. Antitrust laws are exclusively covered by federal law. Answer: True Chapter 21: Creditors’ Rights and Bankruptcy OVERVIEW This chapter covers the legal issues surrounding the relationship between creditors and borrowers, and the various alternatives for companies that are facing insolvency. The chapter includes coverage on creditor’s rights, non-statutory options for debtors, and relief under the bankruptcy code. The section on the statutory bankruptcy options includes a discussion on the 2005 amendments to the code (BAPCPA) which made it more difficult for those seeking relief under Chapter 7 to obtain protection. KEY LEARNING OUTCOMES Outcome Accreditation category Distinguish between unsecured creditors and secured creditors and determine the rights of each set of creditors including secured transactions for personal property under UCC Article 9. Knowledge, Analysis Explain the various non-statutory options and legal ramifications for a business facing financial distress. Knowledge Distinguish the various bankruptcy options under Chapter 7, Chapter 11, and Chapter 13 and give examples of what type of debtor qualifies for each. Knowledge, Analysis Understand the rights, protections, and obligations of both creditors and debtors under federal bankruptcy laws. Knowledge TEACHING OUTLINE A. Creditors’ Rights [P.581] Points to emphasize: • Laws that protect creditors’ rights come primarily from common law and statutory law at the state level, and the level of protection varies in part based on whether or not the credit was secured. • Unsecured Creditors: Give loans based on the borrower’s creditworthiness without the security of collateral. o In the case of default, an unsecured creditor’s exclusive remedy is to bring a lawsuit against the borrower and obtain a judgment from the court. • Secured Creditors: Can retain the collateral given to secure a borrower’s loan. o Secured Transactions under Article 9 of the UCC: No lawsuit is necessary under the UCC if there is a security agreement and the interest has been perfected. • Security Agreement: Specifies the parties, describes the collateral, articulates the obligations of the debtor, and states the remedies available to the secured party in the event of default; if the agreement is silent on a particular matter, Article 9 acts as a gap filler. • Perfection: Procedure for the secured party to establish priority in the collateral over other creditors as provided by Article 9. • Real Estate: A creditor uses real estate as collateral with a mortgage, and in the case of default, the debtor goes into foreclosure and the creditor sells the real estate to cover his losses. • Sureties and Guarantors: A debtor can obtain a loan with collateral or creditworthiness by getting a third party to pay off the loan for him (surety), or to pay off the loan if he defaults (guarantor). • Personal Guaranties for Business Loans: A business without credit can get a loan by using a creditworthy individual as a personal guaranty. Self-Check: Creditor Status: Determine the status of each creditor. [P.585] Concept Summary: Creditors’ Rights [P.585] B. Alternatives for Insolvent Borrowers [P.585] Points to emphasize: • Once a business becomes insolvent, it can file for bankruptcy, dissolve itself out of existence or, if it wants to stay in business, work out terms of accord and satisfaction to pay creditors. • Out of Existence (“lights-out option”): A nonstatutory option where the venture simply ceases operations without paying creditors—often used if the debtor has no assets, no personal guarantees exist, and the debt is not substantial enough to make legal methods to collect economically viable for creditors. • Workout: Accord and Satisfaction: A workout is the process of a debtor meeting a loan commitment by satisfying altered repayment terms to turn around a business when the principles wish to continue operations of a business that is underperforming and in poor financial condition. o An accord and satisfaction is a legal contract between a debtor and creditor whereby the creditor agrees to accept a sum less than owed in exchange for releasing the debtor from all legal liability. C. Bankruptcy [P.586] Points to emphasize: • Debtors can seek protection from creditors via federal statutes known as the bankruptcy code. • The bankruptcy code was amended in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act, which imposed additional requirements on those seeking protection. • Automatic Stay: An immediate protection for debtors filing for bankruptcy that legally prohibits creditors from either initiating or continuing any debt collection action against the debtor or her property. • Bankruptcy Trustee: Upon filing for bankruptcy, a trustee is appointed by the bankruptcy court in most cases to protect the remaining bankruptcy assets, known as the estate, and reduce it to cash for distribution. o The trustee has the legal power to void fraudulent or preferential transfers made to certain creditors or insiders before filing for bankruptcy. • Debtor’s Options: When filing for protection under the bankruptcy code, the debtor chooses one of three main options under the code: Chapter 7 (liquidation of debtor’s assets and discharge of debts), Chapter 11 (reorganization), or Chapter 13 (debt adjustment and repayment of consumer debt). o Chapter 7: Liquidation and Discharge: The debtor agrees to have most of her property liquidated and then the cash distributed to creditors in exchange for her debts being discharged by the court. • Bankruptcy Petition: The proceedings are started in the bankruptcy court by filing either a voluntary petition (filed by the debtor if debtor’s income is less than the average income of her home state) or involuntary bankruptcy petition (filed against the debtor by a group of three or more creditors with an unsecured aggregate claim of at least $11,625). • Automatic Stay: Creditors must suspend all collection activity as of the day the petition was filed. • Order for Relief: Once the court determines the validity of the petition, an order for relief is granted, the automatic stay effectively becomes permanent, and the bankruptcy proceeds. • Appointment of Trustee: The court appoints an interim trustee once the relief is granted, and a permanent trustee is elected at the first meeting of the creditors. • Meeting of Creditors and Administering the Estate: The meeting of creditors is called within 30 days of the order of relief and then the trustee takes possession of the bankruptcy estate, separates exempt and nonexempt property, recovers any improper transfers of funds before the filing of the petition, sells or otherwise disposes of the property, and distributes the proceeds to creditors. • In the case where the debtor is an individual, the debtor is entitled to hold onto certain exempt assets (no exempt assets for Chapter 7 bankruptcy of a business entity). • Distribution and Discharge: The trustee distributes the proceeds to secured credits first and then unsecured creditors are paid from the remaining proceeds of the estate in an order of priority set by the bankruptcy code (Table 21.1: Order of Priority for Unsecured Creditors [P.590]). • Some debts are nondischargeable, including claims for federal, state, and local taxes; certain debts for luxury goods; alimony, maintenance, and child support; debts related to willful or malicious injury to a person or property, or court-ordered punitive damages; and student loans unless the debtor can prove “undue hardship.” Case 21.1 In re Jones, 392 B.R. 116 (E.D. Pa. 2008) [P.591] Facts: At age 52, Jones held a bachelor’s degree, a J.D. (although he failed to pass the bar examination), and two master’s degrees. He borrowed heavily for his education and, at the time of the bankruptcy petition, had defaulted on 18 student loans worth $140,000 of debt. Although Jones’s undergraduate and law school debts were discharged in a previous bankruptcy hearing, he argued that to pay the remaining debt would cause him “undue hardship,” and asked the court to discharge the loan. Issue: Can Jones have his student loan debt discharged for “undue hardship?” Ruling: No. As a healthy, educated, employable man, paying the money back would not amount to “undue hardship.” Answers to case questions: 1. If Jones had been unable to work due to illness or injury, would that be sufficient to meet the “undue hardship” standard set out by the court? Answer: If Jones had been unable to work due to illness or injury, depending on the circumstances, that could be sufficient to meet the “undue hardship” standard set out by the court. (1) If Jones were unable to work, he would not be likely to maintain a “minimal” standard of living for himself and his dependents if forced to repay the loans. (2) If the illness or injury were serious, additional circumstances would exist indicating that his state of affairs is likely to persist for a significant portion of the repayment period. (3) Lastly, Jones would have to demonstrate that he has made a good faith effort to repay the loans in order to meet the final prong of the “undue hardship” standard set out by the court. 2. Note that one court did not find undue hardship enough to discharge student loans for a “46-year-old part-time legal secretary, raising her 14-year-old child and living with her sister, and who had psychiatric problems and had twice attempted suicide” [In re Brightful, 267 F.3d 324 (3d Cir. 2001)]. Why would Congress and courts be reluctant to allow the discharge of student loans without meeting this difficult test? Answer: Congress and courts would be reluctant to allow the discharge of student loans without meeting this difficult test because student loan programs are not designed to turn the government into an insurer of educational value. Since the decision of whether or not to borrow for a college education lies with the individual, it is the student, not the taxpayers that should accept the consequences of the decision to borrow. When a student loan borrower accepts money from the government, she strikes a bargain, and like all bargains, it entails a risk. It therefore should be for each student individually to decide whether the risks of future hardship outweigh the potential benefits of a deferred-payment education. o Chapter 11: Reorganization: A temporary protection for a corporation from creditors while the corporation goes through a planning process to pay creditors and continue business without the need to terminate the entity completely, with the underlying notions of avoiding lost jobs and unpaid creditors. • A petition is filed either voluntarily or involuntarily, the automatic stay provision is triggered and, if the petition is proper, the order of relief then sets the reorganization process in motion. • In a Chapter 11 case, a debtor-in-possession (DIP) tries to rehabilitate the company and partially compensate creditors. • DIP Powers: The bankruptcy code gives the DIP power to void prepetition preferential payments, to cancel or assume prepetition contracts, and to avoid any obligation or transfer of property that the debtor would otherwise be obligated to perform. • The bankruptcy code sets forth standards and procedures under which a collective bargaining contract can be rejected if the debtor has first proposed necessary contractual modifications to the union and the union has rejected them without good cause. • Reorganization Plan: Generally field by the debtor, which articulates a specific strategy and financial plan for emerging from financial distress, and submitted to the court for approval before it becomes binding on the creditors. o Creditors are given the opportunity to accept or reject the plan, but the cram down provision allows the court to require the creditors to accept the plan even over their objections so long as the plan is fair, equitable, and feasible from the court’s perspective. • Chapter 11 filings may be converted during any stage to a Chapter 7 filing. o Chapter 13: Repayment Plan (“wage-earner plan”): An individual can develop a repayment plan in Chapter 13 bankruptcy in order to use his income to slowly pay back debts while not having to liquidate assets. • Bankruptcy Abuse Prevention and Consumer Protection Act: The major provisions of the BAPCPA are: (1) a means test for the debtor; (2) proof requirement of the debtor’s income; (3) higher priority for alimony and support payments by the debtor; and (4) a credit counseling requirement for the debtor. o Means Test: If the applicant’s current monthly income is more than the median income for that state, the applicant is not eligible for Chapter 7. Case 21.2 is an analysis using the means test. Case 21.2: Ransom v. FIA Card Services, 131 S.Ct. 716 (2011) Facts: Ransom filed for Chapter 13 bankruptcy relief with $82,500 worth of unsecured credit card debt. Despite the fact that he owned his car outright (no debt), Ransom listed his reasonably necessary living expenses and claimed a standard amount provided for in the bankruptcy code for a car: $471 per month and $210.55 for maintenance costs. Issue: Is Ransom entitled to the car ownership deduction even if he owns a car outright? Ruling: No. The Court ruled that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 required courts to apply a means test to help ensure that debtors who can pay back their creditors actually do so with the help of the bankruptcy code. Since Ransom had no actual loan or lease payment due, he was not entitled to claim a car-ownership deduction. Case Questions 1. Does the Court’s decision encourage responsible actions by the debtor? Does this encourage debtors to take on new debt instead of driving an old car as Ransom suggested? Answer: This is an interesting question of unintended consequences. The Court’s ruling is clear that the statute does not allow the deduction. But it may induce debtors to owe debt on a car rather than a more responsible step of owning a car outright and using his assets to pay off his debts. 2. How did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affect this case? Answer: The Court indicated that the purpose of the means test was guiding their analysis. The purpose of the means test is not a broad-based publicly policy choice to encourage savings. Rather, it is intended to be protection of a debtor’s ability to retain the car throughout the plan period. If he has a car, he has no need for this protection. o Proof of Income: Debtors must provide the bankruptcy trustee copies of recent tax returns and pay stubs or other income verification on a timely basis and, if the debtor has failed to file a tax return for the previous year, she may be required to file a return as a condition of bankruptcy approval. o Alimony and Support: The BAPCPA gives alimony and support obligations a higher priority than certain other creditors. o Credit Counseling: Prior to filing for bankruptcy, the debtor must complete a short credit-counseling seminar and must also complete a longer course, known as Credit Education, prior to actually receiving a discharge of debts. Table 21.2: Bankruptcy Options [P.594] Concept Summary: Bankruptcy and Alternatives [P.594] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [p. 596] 1. Creditor Status Rights IRS Unsecured No collateral, but rights under the bankruptcy code. Ag Industries Secured creditor Perfected security interest in YEC’s inventory. Landlord As to YEC: Unsecured As to Moss and Whippany: Secured Although there is no security interest, the personal guarantees of Moss and Whippany secures the lease. If YEC defaults, Moss and Whippany have personal liability for amounts owed to the landlord by YEC. Office Leasing Company Secured through equipment lease Right to equipment repossession, but considered an unsecured creditor for any debts owed by YEC. Company Credit Card Unsecured General rights as an unsecured creditor. Whippany Unsecured General rights as an unsecured creditor. 2. If the principals believe the business is still viable and the insolvency is temporary, their best non-statutory option would be to work out an accord and satisfaction agreement with as many creditors as possible. This non-statutory option may be employed while YEC takes action to resolve the financial crisis. The only statutory option would be to seek relief under chapter 11 (reorganization) under the bankruptcy code. The automatic stay provisions would allow YEC time to work out a plan to emerge from Chapter 11 without the financial pressures from creditors. Note that Chapter 13 is not available for businesses. [Ties to Workout: Accord and Satisfaction and Bankruptcy]. 3. If the principals do not believe that the business can continue or is too deep in debt to recover, the only non-statutory option is an out-of-existence strategy. This is risky here because of the personal guarantees of the principals to the landlord. The only statutory option for YEC is to seek a discharge of all debts under Chapter 7 of the bankruptcy code. All dischargeable debt is extinguished except for the personal guarantees of the principal. The personal guarantees would only be discharged if Moss or Whippany declared personal bankruptcy. [Ties to Out of Existence and Bankruptcy]. 4. Ag Industries would be the only Article 9 creditor because the debt is secured through a perfected interest in YEC’s inventory. None of the other creditors hold secured debt. [Ties to Secured Creditors]. 5. This question is intended to spur discussion on the ethical decision-making process for business decisions and corporate social responsibility. Possible discussion angles: a) principles –based approach vs. consequences-based approach (utilitarian), b) primary and secondary stakeholders, c) free market vs. regulated markets. [Ties to Chapter 5: Business, Societal, and Ethical Contexts of Law]. 6. YEC could stop the eviction by filing a petition for Chapter 11. YEC would be protected by the bankruptcy code’s automatic stay provision which restrict creditors from taking any action against the debtor until the bankruptcy court has made a determination on the debtor’s eligibility for relief. [Ties to Bankruptcy: Automatic Stay]. 7. Under Chapter 7, YEC’s debts to Ag Industries, the Landlord, the Office Leasing Company, Credit Card, and the personal loan from Whippany are all dischargeable. YEC’s debt to the IRS is not dischargeable because it is tax debt. Assuming any money is left in the bankruptcy estate, secured creditors (Ag Industries) are paid first and in full so long as the value of the collateral equals or exceeds the amount of their security interest. Unsecured creditors are paid second with any remaining assets. Any unpaid wages of any YEC employees earned with 90 days of the bankruptcy would be paid prior to claims from general unsecured creditors (e.g., Company Credit Card). [Ties to Chapter 7: Liquidation and Discharge]. Manager’s Challenge [P.597] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 21.1: Voidable Transfers: In re Fehrs [P.597] 1. Why do you think Fehrs sold the lot to her son? Answer: It seems apparent that Fehrs transferred the property to her son for $1 with the intent to defraud creditors from the property when she eventually filed for bankruptcy. 2. What can the trustee do to make sure Axtman gets all he is owed? Answer: The trustee can void the transfer of the property from Fehrs to her son and reduce it to case to make sure Axtman gets all he is owed. Case Summary 21.2: Automatic Stay: Ellison v. Comm’r of Internal Revenue Service [P.597] 1. Will Ellison not have to pay these taxes or can they be discharged? Answer: Ellison will have to pay these taxes because claims for federal, state, and local taxes within two years of the petition filing are nondischargeable debts. 2. Does the IRS have any defense to pursuing the debt during the automatic stay period? Answer: No, an automatic stay halts creditors, including government agencies, from all collection efforts, including litigation. 3. If Ellison wins, what does that say about the power of automatic stay? Answer: If Ellison wins, that indicates that the power of automatic stay is an absolute legal prohibition from creditors either initiating or continuing any debt collection action against the debtor or her property. Case Summary 21.3: Nondischargeable Debts: In re Fedderson [P.598] 1. Should the ice cream machine debt be discharged? Answer: Yes, the ice cream machine debt should be discharged because the purchase was purely for commercial purposes and therefore not a luxury good. 2. Should it matter to the court that Fedderson should have known that he would be insolvent in two months and that trying to stop financial catastrophe with an ice cream machine was foolish? Answer: Yes, Fedderson must demonstrate that the debt was not incurred in contemplation of discharge in bankruptcy and thus a fraudulent debt. However, evidence of Fedderson’s intent to repay, or non-fraudulent intent, which raises substantial doubt regarding the existence of the presumed intent, can be sufficient to rebut the presumption. Case Summary 21.4: Chapter 11 and Collective Bargaining Agreements: In re Northwest Airlines Corp. [P.598] 1. What is the name of the power that Northwest is asking the court to exercise? Answer: Northwest is asking the court to exercise the strong-arm clause. 2. What must the court find about the union’s rejection to permit unilateral enforcement? Answer: A collective bargaining contract can be rejected if the debtor has first proposed necessary contractual modifications to the union and the union has rejected them without good cause. 3. Should it matter that Northwest easily reached agreements with both pilots’ and mechanics’ unions? Answer: The fact that Northwest easily reached agreements with both pilots’ and mechanics’ unions indicates that the proposal is likely fair and equitable and that Northwest is bargaining in good faith. Case Summary 21.5: Means Test: In re Richie [P.599] 1. Should Ms. Richie be forced to relocate or work in another field in order to use bankruptcy laws? Answer: Richie should be forced to make a legitimate and good faith attempt to pay something to her creditors before seeking discharge of her debts, as failure to do so is not treating her creditors fairly. Here, Richie filed bankruptcy immediately after graduate school and therefore could not have possibly made a real attempt to seek sufficient employment. It was her choice to go into a small field and search in a small area and therefore it is not too burdensome considering the circumstances to force her to at least make a real attempt to relocate or work in another field before resorting to bankruptcy protections. 2. How might this case reinforce the point that calling the 2005 act the “Consumer Protection Act” is a misnomer? How might it detract from it? Answer: This case reinforces the point that calling the 2005 act the “Consumer Protection Act” is a misnomer because it did not protect Richie by any means, rather it required her to convert to a Chapter 13 petition whereby she would have to pay all or much of her debt. In this sense, the act provided protection for creditors over the consumer. Congressional sponsors of the bill voiced that the act protected consumers in the context that it makes them more responsible with debt. However, this case indicates that in practice, the act actually burdens the consumer and extends further protections to creditors. Quick Assessment Questions (QAQs) 1. Credit cards are an example of what type of debt? a. Surety debt b. Promissory debt c. Secured debt d. Unsecured debt e. Personal debt Answer: d 2. Which chapter of the bankruptcy code provides temporary protection for a corporation from creditors while the debtor continues to operate the business? a. Chapter 7 b. Chapter 9 c. Chapter 11 d. Chapter 13 e. None of the above Answer: c 3. Which of the following debts are nondischargeable? a. Student loans b. Local taxes c. Child support d. a and b e. a, b and c Answer: e 4. In a secured transaction a creditor must perfect her security interest in the collateral in order to be fully protected under the UCC. Answer: True 5. An automatic stay halts only unsecured creditors from initiating or continuing any debt collection action against the debtor or her property. Answer: False 6. The bankruptcy trustee has the legal power to void any transfer of money that the debtor made for the benefit of insiders. Answer: True Solution Manual for The Legal Environment of Business: A Managerial Approach: Theory to Practice Sean P. Melvin, Michael A. Katz 9780078023804
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